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Business Law
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© Emile Woolf International ii The Institute of Chartered Accountants of Pakistan

Certificate in Accounting and Finance
C
Business Law
Contents
Page
Section A: Mercantile Law

Chapter
1 Introduction to the legal system 1
2 Introduction to the law of contract 17
3 Lawful consideration and objects, and capacity of parties 47
4 Free consent and void agreements 79
5 Performance of a contract 109
6 Discharge of a contract and remedies for breach of contract 135
7 Specific types of contracts 167
8 Agency 219
9 Partnership Act 253
10 Negotiable Instruments Act 301
Section B: Company Law
11 Introduction to company and incorporation process 335
12 Memorandum and articles 359
13 Management 379
14 Issue of shares and distribution of profits 417
15 Meetings and resolutions 453
16 Accounts and investments 481
503
© Emile Woolf International iii The Institute of Chartered Accountants of Pakistan

© Emile Woolf International iv The Institute of Chartered Accountants of Pakistan
1
Business Law
CHAPTER
Introduction to the legal system
Contents
1 Introduction to the law and its types
2 The process of legislation as per the Constitution
3 Objective based questions and answers
1 The Institute of Chartered Accountants of Pakistan

Business Law
1 INTRODUCTION TO THE LAW AND ITS TYPES

Section overview
 Definition of Law
 Definition of Mercantile Law
 Why Chartered Accountants study law
 Where to apply law in practical life
 Sources of law in Pakistan
 Civil law and criminal law
 Basic structure of Constitution of Islamic Republic of Pakistan
1.1 Definition of Law

Law means a set of rules or a system of rules of conduct designed and enforced by the state to
control and regulate the conduct of people.
Law is not stagnant. As circumstances and conditions in a society change, laws are also changed
as per the requirements of the society.
The word law may have different meaning for different situations. It is often preceded by an
adjective to give it a clearer meaning e.g. Civil Law, Criminal Law, Business Law etc.
1.2 Definition of Mercantile Law

Business Law is the part of civil law which deals with the rights and obligations of persons dealing
with each other. It includes laws relating to contracts, partnership, sale of goods, negotiable
instruments etc.
1.3 Why Chartered Accountants study law

The intention of studying law in Chartered Accountancy is not to become an expert lawyer dealing
with complex legal issues.
The objective of studying law in Chartered Accountancy is to be aware when legal problems arise,
be able to judge when outside assistance is required, evaluate the financial implications of law and
also communicate with the lawyers.
1.4 Where to apply law in practical life

A general knowledge of some important legal principles and how they apply to certain problems
will help in avoiding conflict with the people around us. Civil law involves the problems that impact
on people’s everyday life like debts, tenancy issues, sale of goods etc. One should know the law
to which he is subject because generally ignorance of law is neither excuse nor defence.
1.5 Sources of law in Pakistan

The law consists of rules that regulate the conduct of individuals, businesses, and other
organizations within society.
The legal system is derived from English common law (Equity) and is based on the Constitution of
Pakistan 1973 as well as Islamic law (Sharia). Thus we can say that in Pakistan the main sources
of law are following:
Legislation
It is the law created by the Parliament and other bodies to whom it has delegated authority. It
includes the Act of Parliament, the Ordinance promulgated by the President of Pakistan and the
delegated legislations.

Section A: Mercantile Law - Chapter 1: Introduction to the legal system
Precedent (case law)

Precedents are judgments or decisions of a superior court which are binding on the subordinate
courts.
Customs
Certain customs, practices and beliefs are so vital and intrinsic part of a social and economic
system that they are treated as if they were laws e.g. Sharia laws.
Agreement
Parties in their agreement stipulate terms for themselves which constitute law for the contracting
parties.
1.6 Civil law and criminal law

There are several branches of the law. Each deals with a different area of law and legal
relationships. Two major branches of the law are civil law and criminal law.
S.no Civil law Criminal law
1 Definition and explanation Criminal law is concerned with conduct

that is considered so undesirable that the
Civil law sets out the rights and duties of
State punishes persons who transgress.
persons as between themselves. The
person whose rights have been affected
can claim a remedy from the wrongdoer. Legal action may be brought by the State
against individuals who are accused of
A violation of the civil law is a tort (a being in breach of the criminal law. It is the
wrongdoing), but is not a crime. responsibility of the State (and not private
individuals) to bring these legal actions, in
criminal trials.
A civil case might therefore be identified
as: Tanveer v Khatri where a case is A criminal case might therefore be
brought to the civil court by Tanveer (the identified as: State v Khatri where a case
‘plaintiff’) who is making a claim against is brought to the criminal court by the
Khatri (the defendant). State against Khatri (the “accused”).
2 Purpose
The purpose is to provide a means The purpose is to regulate the society by
whereby an injured party can obtain the threat of punishment.
compensation.
3 Harm caused
The claimant sues the defendant for harm The State (Government) prosecutes the
caused. accused (the defendant) whether or not
the harm was caused.
4 Burden of proof
If the claimant can prove the wrong on the If the state can prove the offence beyond
balance of probabilities, his litigation is all reasonable doubt, the prosecution is
successful and the defendant is held successful and the accused is found guilty
liable. and convicted.
5 Remedy
The civil court may order the defendant to The criminal court may sentence the
pay damages or it might order some other defendant to a fine or it might impose
remedy such as specific performance or some other fine such as imprisonment or
injunction. death sentence.

Business Law
Example 01: Civil law

 property disputes (Transfer of property Act)
 work-related disputes (employment law)
 accusations of negligence (negligent behaviour) (Tort)
 claims by consumers against manufacturers or service providers
 commercial disputes between business entities (commercial law)
 copyright disputes
 claims of defamation of character (Tort)
 disputes about an alleged breach of contract (Contract Act)
Example 02: Criminal law

 Pakistan Penal Code
 Anti-Money Laundering Act
 Prevention of Electronics Crimes Act
Application on business
Many of the legal aspects of commercial and business law are aspects of the civil law, but the
criminal law may also apply. For example fraud and money laundering are criminal activities that
may occur in business.
It is also important to remember that the same action may be in breach of the criminal law and
also a tort in civil law. In such a situation, the action may give rise to:
 criminal prosecution by the State; and
 civil action by a private person, claiming a remedy such as damages.
Example 03: Criminal law and Civil law

Suppose that a train company operates a train service, and there is a major accident involving loss
of life and injury to passengers. The State may claim that the train company or its senior managers
are guilty of a breach of the criminal law and bring a case in the criminal court.
Individuals who have been injured in the crash and individuals who have lost a relative killed in the
crash may bring civil actions against the train company, demanding compensation.
Business managers must therefore be aware of both the criminal law and civil law implications of
their activities.
Example 04: Criminal law and Civil law

Question: Distinguish between civil law and criminal law giving two examples of each.
Answer:
Civil law regulates the disputes in respect of rights and obligations between persons dealing with
each other. The court does not punish the wrong doers but imposes a settlement, either by awarding
damages or granting injunctions or other orders.
Examples of civil laws are company law, rent law, commercial law, family laws and employment
law.
Criminal law is a body of law:
 defining conduct prohibited by law against the community at large;
 regulating how suspects are investigated, charged and tried and;
 establishing punishments for convicted offenders / accused.
Criminal law deals with crimes such as murder, violence, terrorism, theft, robbery etc.

1.7 Basic structure of Constitution of Islamic Republic of Pakistan

Introduction
The Constitution of the Islamic Republic of Pakistan was approved by the Parliament on April 10, 1973
and ratified on August 14, 1973. The Constitution is the supreme law and sets the governing principles
of the country and contains the articles covering fundamental rights, state's structure, political system,
mandate of different levels of government, mandate and separate powers of cabinets, judiciary etc. The
Parliament cannot make any laws which is against the Constitution.
The Constitution contains preamble, twelve parts, two hundred eighty articles and five schedules briefly
introduced as follows:
Preamble
It defines the objectives of the provisions of the Constitution. It identifies that the Muslims will be enabled
to live in accordance with the teachings of Quran and Sunnah while provisions be made for minorities
to practice their religion and culture. It also entails guarantee for fundamental rights, safeguarding
depressed classes, securing independence of judiciary, safeguarding sovereign rights.
Part I – Introductory [Articles 1–6]
It identifies the country as Islamic Republic of Pakistan divided into four territories and defined the
religion of the state. It also includes provisions such as elimination of all sorts of exploitation, rights of
individuals to be dealt in accordance with the law, loyalty to the state and abiding by the Constitution
and the defining high treason along with its punishment.
Part II – Fundamental Rights and Principles of Policy [Articles 7–40]
It begins with the definition of the State and continues with detailing of the laws regarding fundamental
right and principles of policy. Fundamental rights include laws that deem void which are inconsistent
with fundamental rights, safeguards regarding arrest and detention; prohibition of slavery; child labour
and all forms of forced labour; right to enter lawful profession and trade; right to education and safeguard
against discrimination etc.
The second part contains policies such as discouraging prejudices and discrimination, providing free
and compulsory education and fostering goodwill and friendly relations among all nations etc.
Part III – The Federation of Pakistan [Articles 41–100]
It includes the eligibility of President of Pakistan, term of office, powers vested in the position, removal
of the President, job responsibilities and limitations such as exercising functions in accordance with the
advice of the Cabinet or Prime Minister.
This part also includes information about the composition, duration and meetings of the Parliament and
senate, qualifications and disqualifications for membership of the Parliament, introduction and passing
of bills etc.
Part IV – Provinces [Articles 101-140A]
It includes entails composition and function of the provincial governments and governor. It also includes
the financial procedure such as Provincial Consolidated Fund and public account and procedure relating
to annual budget statement and ordinances etc.
Part V – Relations between Federation and Provinces [Articles 141–159]
It includes distribution of legislative powers, administrative relations between Federation and Provinces
such as obligation of Federation and Provinces and inter-provincial trade etc. It also entails special
provisions relating to Council of common interests, National Economic Council, broadcasting and
telecasting etc.
Part VI – Finance, Property, Contracts and Suits [Articles 160–174]
It includes distribution of revenues between the federation and the provinces and other financial
provisions such as exemption and imposition of certain taxes. It also entails borrowing by Federal and
Provincial government; appointment, powers and functions of Auditor General of Pakistan. This part
also includes provisions regarding property, contracts, liabilities and suits.

Business Law
Part VII – The Judicature [Articles 175–212]

It encompasses establishments, jurisdictions and functions of courts (Supreme Court, High Courts and
Federal Shariat Court), appointment of judges and general provisions such as contempt of court,
remuneration of judges, Supreme Judicial Council etc.
Part VIII – Elections [Articles 213–226]
It includes the formation and duties of Chief Election Commissioner and Election Commissions along
with electoral laws and conduct of elections.
Part IX – Islamic Provisions [Articles 227–231]
It includes provisions relating to the Holy Quran and Sunnah along with composition and functions of
the Islamic Council.
Part X – Emergency Provisions [Articles 232–237]
It includes proclamation of emergency on account of war or internal disturbance etc., power to suspend
fundamental rights during emergency period, revocation of proclamation etc.
Part XI – Amendment of Constitution [Articles 238–239]
It includes amendment of Constitution by Parliament through Constitution Amendment Bill.
Part XII – Miscellaneous [Articles 240–280]
It includes establishment and constitution of Public Service Commission, command and functions of
Armed Forces etc. Moreover, it comprises definition and administration of tribal areas; protection to
President, Governor, Minister; national language etc.
Schedules
First Schedule Laws exempted from the operation of Article 8(1), 8(2), 8(3b), and 8(4)
Second Schedule Election of President
Third Schedule Oaths of Office
Fourth Schedule Legislative Lists
Fifth Schedule Remuneration and Terms and Conditions of Service of Judges

2 THE PROCESS OF LEGISLATION AS PER THE CONSTITUTION

Section overview
 Governing Structure
 Process of Legislation
 Delegated Legislation
2.1 Governing Structure

Pakistan has a Federal Parliamentary System of government, with the President as the Head of State
and popularly elected Prime Minister as Head of Government. The Federal Legislature is a bicameral
Majlis-e-Shoora (Parliament), composed of the President, National Assembly (Lower House) and
Senate (Upper House).
President
 The President of Pakistan is Pakistan’s Head of State and is considered a symbol of unity.
 President must be a Muslim.
 President is elected for a five year term by Senate, National Assembly and members of
Provincial Assemblies.
 President is eligible for re-election, but no individual may hold the office for more than two
consecutive terms.
 The majority party in the National Assembly usually nominates and elects a person as the
President.
 The President approves the statutes passed by the National Assembly and thereafter by the
Senate.
 He guides the Prime Minister in the matters of national importance.
Prime Minister
 The Prime Minister must be nominated and elected by a majority of members in the National
Assembly. That individual is then appointed as Prime Minister by the President.
 The Prime Minister is assisted by the Federal Cabinet. A council of ministers whose
members are appointed by the President on the advice of the Prime Minister.
 Federal Ministers are supported by secretaries and other government officers appointed in
each department for ensuring that policies formulated by the government are acted upon.
Senate
 The Senate is a permanent legislative body with equal representation from each of the four
Provinces with representatives elected by the members of their respective Provincial
Assemblies.
 The role of the Senate is to promote national cohesion and harmony and to alleviate fears
of the smaller provinces regarding domination by any one province because of its majority,
in the National Assembly.
 There are also representatives from Islamabad Capital Territory.
 Members are elected for a period of six years. Half the members retire after three years and
are replaced by the equal number of newly elected senators.
 Senate is a permanent institution. The election of all members is not held at the same time
and so it continues to be present on a permanent basis.

Business Law
 The Chairman of the Senate under the constitution is next in line to act as President if the
office becomes vacant and until such time a new President can be formally elected.
 The members elect from themselves a chairman and a Deputy Chairman.
 All statutes passed by the National Assembly are also approved by the Senate with the
exception of money bills.
National Assembly
 The seats for the national assembly are determined on the basis of population of provinces.
 The members on general seats are elected for a period of five years on the basis of direct
votes by the voters registered. There are also reserved seats for women and non-Muslims.
 The members elect from themselves Speaker, Deputy Speaker and Prime Minister.
 The most important function of the National Assembly is law making and formulation of
policies.
2.2 Process of Legislation

 When National Assembly is in session a bill in respect of any matter may originate in either
house.
Scenario 1:
 If it is passed by the house in which it is originated then it is transmitted to the other
house, and
 If the bill is also passed by the other house (without any amendment) then it is
presented to the President for assent.
Scenario 2:
 If the bill is transmitted to a House and is passed with amendments it shall be sent
back to the House in which it originated and
 if that House passes the Bill with those amendments it shall be presented to the
President for assent.
Scenario 3:
 If a bill transmitted to a House is rejected or not passed within ninety days or a Bill
sent to a House with amendments is not passed by that House with such amendments
 The bill at the request of the house in which it originated shall be considered in the
joint sitting of both the house i.e. National Assembly and the Senate and
 If it is passed by the votes of the majority of the members present and voting in the
joint sitting it shall be presented to the President for assent.
Scenario 4:
 When the President has returned a Bill to the Parliament it shall be reconsidered by
the Parliament in Joint Sitting and
 If it is again passed with or without amendment by the Parliament by the votes of the
majority of the members of both Houses present and voting.
 It shall be presented to the President for assent.
 The President shall within ten days assent to the bill or return it to the Parliament for
reconsideration (in case of a bill other than money bill) of any provision or any amendment
therein.
 In case a bill is pending in the National Assembly or passed by it, is pending in the Senate.
The bill shall lapse on the dissolution of National Assembly. But if the bill is pending in the
Senate not passed by the National Assembly shall not lapse on dissolution of the National
Assembly.

Money bills
A money bill shall originate in the National Assembly and after it has been passed by the Assembly
it shall (without being transmitted to the Senate) be presented to the President for assent.
The Ordinance
 The President if deems necessary to take immediate action, he has power to make an
Ordinance when the National Assembly is not in session.
 Such Ordinance promulgated thus, shall have the same force and effect as an Act of the
Parliament.
 The Ordinance shall stand repealed after one hundred and twenty days if it is not presented
or passed
 by the National Assembly in case of Money Bill and
 by both houses if it is other than Money Bill.
The chart below shows the process of legislation
Process of Legislation
When National When National Assembly

Assembly is in session is not in session
President
Money bills All other bills
National National Ordinance

Assembly Senate
Assembly
President
Sent for reconsideration to

Parliament (joint sitting of National
Assembly and Senate)
Assent Reject /
Amend
Act / Law

Business Law
Example 05: Money bill

Question: Briefly describe the process of legislation in case of a money bill when:
 National assembly is in session
 National assembly is not in session
Answer:
Legislation in case of a money bill when National assembly is in session:
A money bill shall originate in the National Assembly and after it has been passed by the Assembly
it shall, without being transmitted to the Senate, be presented to the President for assent.
Legislation in case of a money bill when National assembly is not in session:
When National assembly is not in session and President deems necessary to take immediate action,
he has the power to issue an Ordinance.
Such Ordinance promulgated thus, shall have the same force and effect as an Act of the parliament.
However, the Ordinance shall stand repealed after 120 days if it is not presented or passed by the
National assembly.
Example 06: The Ordinance

Question: How is a law promulgated when national assembly is not in session? Is such law in any
way different from an Act of parliament? What is its tenure?
Answer:
If the President deems necessary to take an immediate action, he has the power to promulgate an
Ordinance if the Senate or National Assembly is not in session. Such Ordinances have the same
force and effect as an Act of the Parliament. The Ordinance stands repealed after one hundred
twenty days if it is not passed by the National Assembly or by National Assembly and Senate both
as the case may be. However, National Assembly may extend it for another period of one hundred
twenty days. Thereafter it will stand repealed.
Example 07: System of government and role of Senate in process of legislation

Question: Specify Pakistan’s system of government and identify Senate’s role in the legislation
process.
Answer:
System of government:
Pakistan has a Federal Parliamentary System of government, with the President as the Head of
State and Prime Minister as Head of Government. The Federal Legislature is a bicameral Majlis-e-
Shoora(Parliament), composed of the President, National Assembly(Lower House) and Senate
(Upper House).
Role of Senate:
The role of the Senate is to approve all statutes passed by the National Assembly with the exception
of money bills.

2.3 Delegated Legislation

In Delegated Legislation power is given to an Executive (a minister or public body to make
subordinate or delegated legislation for specified purposes only) e.g. local authorities are given
statutory powers to make bye-laws which apply within a specific locality.
Control over delegated legislation
 Parliament has some control over delegated legislation by restriction and defining the power
to make rules.
 Rules made under delegated power to move legislation may be challenged in the courts on
the grounds that it is ultra vires. In other words that it exceeds the prescribed limits or has
been made without due compliance. If the objection is valid the court declares it void.
Advantages of delegated legislation

 Time
Parliament does not have time to examine matters in detail
 Expert opinion
Much of the content of delegated legislation is technical and is better worked out in
consultation with professional, commercial or industrial groups outside Parliament.
 Flexible
Delegated legislation is more flexible than an Act of Parliament. It is far simpler to amend a
piece of delegated legislation than to amend an Act of Parliament.
Disadvantages of delegated legislation

 The main criticism of delegated legislation is that it takes law making away from the
democratically elected members. Power to make law is given to unelected civil servants and
experts working under the supervision of a government minister.
 Because delegated legislation can be produced in large amounts the volume of such law
making becomes unmanageable and it is impossible to keep up-to-date.
Example 08: Delegated legislation

Question: Briefly describe how delegated legislation takes place and also describe how control is
exercised over delegated legislation.
Answer:
In delegated legislation power is given to an executive (a minister or public body to make
subordinate or delegated legislation) for specified purpose only. For example, local authorities are
given statutory powers to make bye-laws which apply within a specific locality.
Control over delegated legislation is exercised in following ways:

(i) Parliament exercises control over delegated legislation by restricting or defining power to
make rules
(ii) Rules made under delegated power to move legislation may be challenged in the courts
on the grounds of being ultra vires (exceeding the authority).

Business Law
3 OBJECTIVE BASED QUESTIONS

01. The President is the head of the state and he is elected for a five-year term by
(a) Senate and National Assembly
(b) National Assembly and the members of Provincial Assemblies
(c) Senate and the members of Provincial Assemblies
(d) Senate, National Assembly and the members of Provincial Assemblies
02. In a criminal case, what is the normal burden of proof place upon the prosecution?
(a) Beyond any doubt
(b) Beyond all reasonable doubt
(c) Beyond any reasonable doubt
(d) Balance of probabilities
03. In a civil case of Talal vs Kashif where a case is brought to the civil court by Mr. Talal who is filing
a suit against Mr. Kashif. State the legal position
(a) Mr. Talal is plaintiff and Mr. Kashif is the defendant
(b) Mr. Talal is defendant and Mr. Kashif is the plaintiff
(c) Mr. Talal is accused and Mr. Kashif is the complainant
(d) Mr. Talal is complainant and Mr. Kashif is the accused
04. The criminal law aims to:
(a) Compensate injured parties
(b) Recover property which has been taken from the true owner
(c) Enforce legal obligations
(d) Penalize wrongdoers
05. Those rules and principles that govern and regulate social conduct and observance of which
can be enforced in courts of law, is known as:
(a) Law
(b) Rules
(c) Policies
(d) Customs

06. Property disputes, work related disputes, copyright disputes and claims by consumer against
manufacturer are examples of
(a) Administrative law
(b) Labour law
(c) Constitutional law
(d) Civil law
07. Person found guilty of a crime is the
(a) Plaintiff
(b) Respondent
(c) Convict
(d) Defendant
08. Pakistan has a Federal Parliamentary system of government. The federal legislature is a
bicameral Majlis e Shoora (Parliament), composed of
(a) President, Governor and Prime Minister
(b) President, National Assembly and Provincial Assembly
(c) President, National Assembly and Senate
(d) President, Prime Minister and National Assembly
09. The Prime Minister is assisted by a Federal Cabinet. A council of ministers whose members are
appointed by the President on the advice of the
(a) Chief Justice
(b) Governor
(c) Attorney General
(d) Prime Minister
10. If the Ordinance is not presented or passed by the National Assembly in case of money bill and
by both houses if it is other than money bill, it shall stand repealed after
(a) One hundred and twenty days
(b) Ninety days
(c) Sixty days
(d) One hundred days

Business Law
11. All statutes passed by the National Assembly are also approved by the Senate before proceeding
to the President for his assent with the exception of
(a) Treasury bill
(b) Money bill
(c) Social security bill
(d) Industrial relation bill
12. The Senate is the permanent legislative body with equal representation from each of the four
Provinces with representative elected by the members of their respective
(a) Chief Minister
(b) Governor
(c) High Court
(d) Provincial Assembly
13. A money bill shall originate in the National Assembly after it has been passed by the National
Assembly it shall (without being transmitted to the Senate) be presented to the
(a) President of Pakistan
(b) Chief Justice of Pakistan
(c) Chief of the Army Staff
(d) Governor of the Province
14. With criminal law, the state establishes acceptable standards of behaviour, and represents the
interest of _________.
15. It is the responsibility of the State (and not private individuals) to bring breach of the criminal law
in __________.
16. In Senate, eight senators shall be elected from the Federally Administered Tribal Areas as may
be prescribed by the ______________.
17. The President shall within ___________ assent to the bill or return it to the Parliament for
reconsideration of any provision.
18. A violation of the civil law is a _____________, but is not a crime.

3 OBJECTIVE BASED ANSWERS

01. (d) President is elected for a five year term by Senate, National Assembly and
members of Provincial Assembly.
02. (b) In criminal case, the guilt of an accused person needs to be proved beyond all
reasonable doubt.
03. (a) In a civil case the one who is filing a suit is known as plaintiff and against whom
the case is filed is known as defendant.
04. (d) The criminal law is not to compensate injured parties but to punish and penalize
the wrongdoers.
05. (a) Law is a set of rules and system of rules designed and enforced by the state to
control the conduct of people.
06. (d) The civil law primarily deals with disputes between individuals and organizations.
07. (c) When an accused found guilty of a crime he is known as a convicted person.
08. (c) President is the head of state, National Assembly is the lower house and Senate
is the upper house.
09. (d) Prime Minister is the head of the Government.
10. (a) One hundred and twenty days.
11. (b) A Money Bill shall originate in National Assembly then directly be presented to
the President for assent.
12. (d) The Provincial Assemblies are responsible for electing the senators from their
respective provinces.
13. (a) The President has got the powers to sign any piece of legislation.
14. Society as a whole
15. Criminal Trials
16. President of Pakistan
17. Ten (10) days
18. Tort (a wrongdoing)

Business Law

CHAPTER
Business Law
Introduction to the law of contract
Contents
1 Introduction to contract
2 Offer
3 Acceptance and rules of revocation
4 Objective based question and answers

Business Law
1 INTRODUCTION TO CONTRACT
Section overview
 Definition of a contract
 Essentials of a valid contract
 Classifications of contract
1.1 Definition of a contract

The law governing contracts between persons is the Contract Act, 1872.
Definition: Contract [Section 2(h)]

An agreement enforceable by law is a contract.
A contract is an agreement which legally binds the parties. The analysis of the above definition
reveals that a contract has following two elements:
Contract
Agreement Enforceability
Offer Acceptance Legal obligation
These two essentials are discussed below:
Definition: Agreement [Section 2(e)]

Every promise and every set of promises forming the consideration for each other is an agreement.
The analysis of the above definition reveals that an agreement comes into existence only when
one party makes a proposal or offer to the other party and the other party signifies his acceptance
thereto. Thus, an agreement can be an accepted proposal.
Definition: Promise [Section 2(b)]

When the person to whom the proposal is made signifies his assent to it, the proposal is said to be
accepted. A proposal, when accepted becomes a promise.
The person making the proposal is called the promisor and the person accepting the proposal is
called the promisee.
Definition: Proposal [Section 2(a)]

When one person signifies to another his willingness to do or to abstain from doing anything, with
a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.

Section A: Mercantile Law - Chapter 2: Introduction to the law of contract
Enforceability
Every contract is an agreement, but every agreement is not always a contract. An agreement
creating a legal obligation is said to be enforceable by law. The parties to an agreement must be
bound to perform their promises and in case of default by either of them, must intend to sue. For
an agreement to be enforceable by law there should be legal obligation instead of social, moral or
religious obligation.
Example 01: Enforceability

 Adeel offers to sell his furniture to Babar for Rs. 50,000. Babar accepts this offer. In this
agreement if there is default by either party, an action for breach of contract can be enforced
through a court of law provided all the essential elements of a valid contract are present in
this agreement.
 Adeel invites Babar to dinner. Babar accepts the invitation but fails to turn up. Here, Adeel
cannot sue Babar for damages because the parties to this agreement do not intend to create
legal obligations.
Thus, the law of contract covers such agreements where the parties intend to create legal
obligations. In social, domestic, moral and religious obligation the usual presumption is that the
parties do not intend to create legal obligations.
1.2 Essentials of a valid contract [Section 10]

The essentials of a valid contract are shown below:
These essentials are discussed below:

Offer and acceptance
There must be an agreement between parties to create a valid contract. An agreement involves a
valid offer and its acceptance.
Example 02: Offer and acceptance

Adeel offers to buy bike from Babar for Rs. 50,000 to which Babar responds positively. Here Adeel
has made an offer and Babar has accepted it.

Business Law
Legal relationship
A contract to become valid must have a legal relationship. In case of social or domestic
agreements, the usual presumption is that the parties do not intend to create legal relationship but
in commercial or business agreements, the usual presumption is that the parties intend to create
legal relationship unless otherwise agreed upon.
Example 03: Legal relationship

Adeel invited Babar on a dinner at his home. Babar accepted the invitation. It is a social agreement.
If Adeel fails to serve dinner to Babar then Babar cannot go to court for enforcing the agreement
and similarly if Babar did not turn up then Adeel cannot go to court for enforcing the agreement.
Competency of parties [Section 11]

The parties to an agreement must be competent to contract. In other words, the person must:
 be of the age of majority
 be of sound mind; and
 not be declared as disqualified from contracting by any law to which he is subject.
Example 04: Competency of parties

Maria (a minor) borrowed Rs. 100,000 from Laila and executed mortgage of her property in favour
of the lender. This is not a valid contract because Maria is not competent to contract.
Consideration [Section 23]

An agreement must be supported by lawful consideration. Gratuitous (without consideration)
promises are not enforceable at law. Consideration requires not only presence of consideration but
also lawfulness of consideration.
Example 05: Consideration

Adeel offers to buy computer from Babar for Rs. 50,000 to which Babar responds positively. Here
Adeel’s promise to pay Rs. 50,000 is the consideration for Babar’s promise and Babar’s promise
to sell the computer is the consideration for Adeel’s promise.
Free Consent [Section 14]

An agreement must be made between parties by free consent. In other words, the consent must
not be obtained from following:
 Coercion
 Undue influence
 Fraud
 Misrepresentation
 Mistake
Example 06: Free consent

 Adeel beats Babar and compels him to sell his bike for Rs. 20,000. Here, Babar’s consent
has been obtained by coercion because beating someone is an offence under the Pakistan
Penal Code.
 Azam having advanced money to his son, Babar during his minority, upon Babar’s coming of
age obtains, by misuse of parental influence, a bond from Babar for a greater amount than
the sum due in respect of the advances. Azam employs undue influence.

Lawful Object [Section 23]

The object of an agreement must be lawful. An object is said to be unlawful when:
 It is forbidden by law
 Is of such a nature that if permitted would defeat the provisions of any law
 It is fraudulent
 It involves an injury to the person or property of another
 The court regards it as immoral, or opposed to public policy
Example 07: Lawful object

 Abid, Bakar and Farhan enter into an agreement of the division among them of gains
acquired, or be acquired, by them by fraud. The agreement is void, as its object is unlawful.
 Ameer promises to obtain for Babar an employment in the public service, and Babar
promises to pay Rs. 10,000,000/- to Ameer. The agreement is void as the consideration for
it is unlawful.
 Anjum, who knows that Kanwar has stolen goods amounting to Rs. 500,000, receives
Rs.100,000 from Kanwar in consideration of not exposing him. This agreement is illegal.
Not expressly declared as void [Section 24 to 30]

An agreement which is not enforceable by law is called void agreement. There are certain
agreements which have been expressly declared as void such as:
 Agreement, the consideration or object of which is partly unlawful
 Agreement made without consideration
 Agreement in restraint of marriage
 Agreement in restraint of legal proceedings
 Agreement in restraint of trade
 Uncertain agreements
 Wagering agreement
Example 08: Expressly declared as void

 Azam and Babar carried on business in a certain locality in Karachi. Azam promised to stop
business in that locality if Babar paid him Rs 1,000 per day. Azam stopped his business but
Babar did not pay him the promised money. It was held that Azam could not recover anything
from Babar because the agreement was in restraint of trade and was thus void (restraint of
trade).
 Arslan promises to pay Rs 10,000 to Habib if it rained today, and Habib promises to pay Rs
1,000 to Arslan if it did not. The agreement is void because the happening and non-
happening is dependent on future uncertain event (wager).
Certainty [Section 29]

An agreement may be void on the grounds of uncertainty. The meaning of the agreement must be
certain or capable of being certain.

Business Law
Example 09: Certainty

 Salim agrees to sell to Babar "a hundred ton of oil". There is nothing whatever to show what
kind of oil was intended. The agreement is void for uncertainty.
 Dawood, who is a dealer in coconut oil, agrees to sell to Babar "one hundred ton of oil." The
nature of Dawood's trade affords an indication of the meaning of the words, and has entered
into a contract for the sale of one hundred tons of coconut oil.
 Salim agrees to sell to Babar "all the grain in my granary at Peshawar." There is no
uncertainty here to make the agreement void.
 Salim agrees to sell to Babar "one thousand mounds of rice at a price to be fixed by Kashif."
As the price is capable of being made certain, there is no uncertainty here to make the
agreement void.
 Salim agrees to sell to Babar "my white horse for Rupees five hundred or Rupees one
thousand." There is nothing to show which of the two prices are to be paid. The agreement
is void.
Possibility of performance [Section 56]

The terms of the agreement must be capable of being performed. An agreement to do an act
impossible in itself is void.
Example 10: Possibility of performance

Anjum agrees with Sajid to discover treasure by magic. The agreement is void.
Legal formalities [Section 25]

An oral contract is a perfectly valid contract, except in certain cases where a contract must comply
with the necessary formalities as to writing, registration etc.
Example 11: Legal formalities

 An oral agreement for arbitration about present disputes is unenforceable because the law
requires that such arbitration agreement must be in writing.
 Adeel verbally promises to sell his book to Babar for Rs. 1,000/-. It is a valid contract because
the law does not require it to be in writing.
1.3 Classifications of contract

The different classifications of contract are shown below:
Enforceability
Formation
Performance
•Express •Valid contracts •Executed

contracts •Void agreement contract
•Implied •Void contract •Executory
contracts •Voidable contract
•Quasi contracts contract
•Illegal
agreement
•Unenforceable
agreement

The above classifications of contract are briefly discussed below:
Express
A contract created by words i.e. verbally or in writing
contracts
A contract created by conduct of a person or the circumstances of a
Implied contracts
particular case.
Contractual rights and obligations are imposed by law under certain
Quasi contracts
circumstances rather than decided by parties.
Example 12: Express contract

Adeel offers (on telephone) to sell his car to Babar for certain sum and Babar in reply informs Adeel
that he accepts the offer, there is an express contract.
Example 13: Implied contract

Abid a shoe shiner starts polishing the shoes of Sajid in his presence, and Sajid allows him to do
so, there is an implied contract.
Example 14: Quasi (Constructive) contract

Jazib leaves his goods at Zahra’s house by mistake. Zahra treats them as her own and uses them.
It is a quasi-contract and Zahra is bound to pay for the goods.
Valid contract An agreement which is enforceable by law.

Void agreement An agreement which is not enforceable by law [Section 2(g)].
A contract which ceases to be enforceable by law becomes void when it
Void contract
ceases to be enforceable [Section 2(j)].
Voidable An agreement which is enforceable by law at the option of the aggrieved
contract party [Section 2(i)].
Illegal
An agreement the object of which is illegal.
agreements
Unenforceable An agreement which is otherwise valid but due to some technical lacking,
agreement such as writing etc. remains unenforceable.
Example 15: Valid contract

Amjad agrees to sell his Suzuki Mehran 2008 model to Habib for Rs. 450,000/-. It is a valid
contract.
Example 16: Void agreement

Maria (a minor) borrowed Rs. 100,000 from Laila and executed mortgage of her property in favour
of the lender. This is a void agreement because Maria is not competent to contract and Laila cannot
legally enforce this agreement against Maria.
Example 17: Void contract

A music hall was rented out for a series of concerts. The hall caught fire before the date of first
concert. The contract was valid at the time of its formation but became void when hall caught fire.

Business Law
Example 18: Voidable contract

Azam threatens to kill Babar if he does not sell his BMW for Rs 1 million to Azam. Babar contracted
to sell his BMW to Azam and receives the payments. Here, Babar’s consent has been obtained by
coercion. Hence, this contract is voidable at the option of Babar but Azam has no right to insist that
contract shall be performed.
Example 19: Illegal agreement

Anjum, who knows that Kanwar has stolen goods amounting to Rs.500,000, receives Rs.100,000
from Kanwar in consideration of not exposing him. This agreement is illegal.
Example 20: Unenforceable agreement

An oral agreement for arbitration about present disputes is unenforceable because the law requires
that such arbitration agreement must be in writing. Once this agreement is written and signed it
can be enforceable.
Executed A contract where both the parties have performed their respective
contract promises.
Executory A contract in which something remains to be done. It may be unilateral or
contract bilateral.
A contract is which a promise on one side is exchanged for an act on the
Unilateral
other side. In such contract one party to a contract has performed his part
contract
and performance is outstanding against the other party.
A contract in which a promise on one side is exchanged for a promise on
Bilateral contract
the other.
Example 21: Executed contract

A bookseller sells a book on cash payment. It is an executed contact because both the parties have
done what they were to do under the contract.
Example 22: Executory contract (unilateral)

Mohsin advertises a reward of certain sum to anyone who finds his missing son. Babar knowing the
offer finds the missing boy and brings him, the reward is still unpaid. This is unilateral contract.
Example 23: Executory contract (bilateral)

Jazib agrees to teach Ghalib after two months and Ghalib promises to pay at end of course. This is
executory bilateral contract.

2 OFFER
Section overview
 Definition and essentials of proposal / offer

 Types of offer
 Lapse of an offer
2.1 Definition and essentials of proposal / offer
Definition: Proposal / offer [Section 2(a)]

When one person signifies to another his willingness to do or to abstain from doing anything, with
a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.
Thus, an offer is a proposal by one person to another for entering into a legally binding agreement
with him.
The essentials of an offer are shown below:

Two persons
For a valid offer there needs to be two persons. A person cannot make an offer to himself. The
person making the proposal is called offeror and the person to whom offer is made is called offeree.
Example 24: Two persons

Amjad offers to sell his Suzuki Mehran 2008 model to Habib for Rs. 450,000/-. It is a valid offer.
Amjad is offeror and Habib is offeree.

Business Law
Certain and definite

A valid offer is one which is certain and definite. Thus, no contract can come into existence if offer
is uncertain.
Example 25: Certain and definite

Salman purchased a horse from Irfan and promised to buy another, if the first one proves lucky.
Salman refused to buy the second horse. Irfan could not enforce the agreement, it being loose and
vague.
Contractual intention
An offer must be made with an intention to create a contract.
Example 26: Contractual intention

 Adeel invites Babar to dinner. It does not create legal relations, so there is no valid offer.
 Three friends agreed to enter a newspaper competition and share any winnings. It was held
that they intended to create legal relations so there was a contract.
Communication [Section 4]
The offer must be communicated to the offeree. The communication is complete when it comes to
the knowledge of the person to whom it is made. In case an offer is made by post, its
communication will complete when the letter reaches the offeree. An offer can be made by words
spoken or written or through conduct of the person.
Example 27: Communication

 Mohsin says to Noor that he is willing to sell his motor cycle to him for Rs. 20,000. This is an
offer communicated expressly.
 A shoe shiner starts shinning one’s shoes, without being asked to do so, in such
circumstances that any reasonable man could guess that he expects to be paid for this, this
is an offer communicated impliedly.
Objective of consent
An offer must be made with a view to obtain the consent of the other person to proposed act or
abstinence.
Example 28: Objective of consent

Mohsin says to Noor that he is willing to sell his motor cycle to him for Rs. 20,000. This is an offer
with a view to obtain the consent of the other person to proposed act of selling the motor cycle.
Conditional
An offer may be subject to some condition. It is on the sole discretion of the person to whom such
offer is made to either accept or reject it. A conditional offer lapses when condition is not accepted.
Example 29: Conditional

Arslan offers to sell his furniture to Amjad for Rs. 250,000/- on the condition that advance payment
is made within three days of the offer. If Amjad does not pay within three days, he cannot accept
the offer.
Negative confirmation
An offer cannot be in the form of negative confirmation i.e. if it is not accepted within a specific time
then it will be presumed to have been accepted.

Example 30: Negative confirmation

Azam wrote to Babar to sell his book adding that if he did not reply within 5 days, the offer would
be considered accepted. There is no contract.
Invitation of an offer
An offer is different from an invitation of an offer. The intention in invitation of an offer is to circulate
information of his readiness to do the transaction. Such intentions are not offers and do not
tantamount to promise on acceptance.
In other words, an invitation of an offer means an intention of a person to invite others with a view
to enter into an agreement.
Example 31: Invitation of an offer

 Iqbal displays goods for an auction sale. It is not an offer. Offer will come from buyer in form
of bid.
 Goods were displayed in a departmental store for sale and self-service system was there.
One customer selected an item. Here the display of goods is an invitation to offer and
selection by the customer is an offer to buy.
Communication of special conditions

When there are special terms and conditions in an offer these must be specifically communicated
to the other party.
Example 32: Communication of special conditions

 Adeel asks Mohsin to send the reply of his offer by email but Mohsin sends reply by letter.
Adeel may reject such acceptance.
 Azam was expecting reply by email but did not prescribe any method of communication of
acceptance and Babar sends acceptance by letter being customary practice in their trade.
The acceptance is valid.
2.2 Types of offer

Following are the different types of offer:
Specific Offer If an offer is made to definite or a particular person or specific group of

persons it is said to be specific offer. Such offer can be accepted only by
that definite person or that specific group of persons.
If an offer is made to the world or public then it is said to be general offer.
Such offer can be accepted by any person. The contract is made with
General offer
person who having the knowledge of the offer comes forward and acts
according to the conditions of the offer.
If two parties ignorant of each other’s offer made similar offers to each other
Cross offers
they are called cross offers. Cross offers are not equal to acceptance.
Standing / Open / If an offer is of on-going nature it is said to be a standing offer. A contract
Continuing offer / is entered only when the person signifies his acceptance on the basis of
Tender the tender.
.
Example 33: Specific Offer

Azam offers to buy bike from Babar for Rs.50,000. This is specific offer and only Babar can accept
it.

Business Law
Example 34: General Offer

Azam advertised in the newspaper that he would pay Rs. 50,000 to anyone who traces his dog.
Babar, who knew about the reward traced that dog and sent a message to Azam that he had found
his dog. It was held that Babar was entitled to receive the amount of reward.
Example 35: Cross offers

Adeel of Karachi sends by post to Naeem of Lahore offering to sell his bike for Rs. 50,000. The
letter is posted on 1st December and on same day, Naeem of Lahore sends a letter by post to Adeel
of Karachi offering to buy Adeel’s bike for Rs.50,000. These two are cross offers and there is no
contract unless one of these offers is accepted by the other party.
Example 36: Standing / Open / Continuing offer / Tender

Sajid required a large quantity of certain goods during a year and offered this by an advertisement.
Adeel supplied those goods at a specific rate. Every supply of Adeel is an acceptance of the standing
offer of Sajid.
2.3 Lapse of an offer

An offer is lapsed in the following ways:
Revocation [Section 5]
An offer may be revoked before its acceptance by the offeree.
Example 37: Revocation

Azam, at an auction gives the highest bid to buy Babar’s goods. He withdraws the bid before the
fall of hammer. The offer is revoked and cannot be accepted.
Non-acceptance / Rejection
An offer comes to an end if it is not accepted by the offeree. An offer is said to be rejected if the
offeree expressly rejects.
Example 38: Non-acceptance / Rejection

Ameer offers to sell his cycle to Ghalib and keeps the offer open for ten days. Ghalib refuses after
three days. The offer terminates although the period of ten days has not yet expired.
Counter offer
An offer comes to an end if the counter offer is made.
Example 39: Counter offer

Wajid offered to sell a farm to Hamid for Rs. 1,000. Hamid offered Rs. 950. Wajid refused the offer.
Subsequently Hamid offered Rs. 1,000. Held, there was no contract as Hamid by offering Rs. 950
had rejected the original offer.
Lapse of time [Section 6(2)]
An offer will come to an end if it is not accepted within the time specified or within a reasonable
time where no time is specified. “What is the reasonable time?” is a question of fact depending
upon the subject matter and circumstances.

Example 40: Lapse of time

Maria applied for shares of a company in June but allotment was made in November. Maria refused
to accept the shares. It was held that Maria could refuse to take shares because the offer had
lapsed after the expiry of a reasonable time.
Death or insanity
An offer comes to an end by the death or insanity of the offeror if the fact of his death or insanity
comes to the knowledge of the acceptor before acceptance.
Example 41: Death or insanity

Zain requested Dawood, to give credit to Yasir and guaranteed payment up to Rs. 100,000. Zain
died and Dawood in ignorance of this fact continued to give credit to Yasir, Dawood sued Zain’s
legal representatives on the guarantee. Held, that the legal representatives were liable.
Non-fulfilment of condition precedent
An offer comes to an end when the acceptor fails to fulfil the conditions precedent to the offer.
Example 42: Non-fulfilment of condition precedent

Jazib offers to sell his scooter to Babar, for Rs. 40,000 if Babar joins the ABC Club within a week.
Babar did not join the Club within a week, the offer stands terminated.
Non-acceptance according to requirement
An offer comes to an end if it is not accepted according to the requirement (if any) of the offeror.
Example 43: Non-acceptance according to requirement

Azam offers to sell his car to Babar. Azam requests Babar to give acceptance by telephone. Babar
sends acceptance by letter. The offer terminates.
Subsequent illegality or destruction
An offer comes to an end if it becomes illegal or the subject matter is destroyed before its
acceptance.
Example 44: Subsequent illegality or destruction
 Akmal offers to sell 10 bags of rice to Babar for Rs. 2,000. Before its acceptance, a law
banned the sale of rice. The offer terminates.
 Asif offers to sell his horse to Zahid. The horse dies before the acceptance of offer by Zahid.
The offer terminates.

Business Law
Example 45: Revocation of proposal

Question: Identify the circumstances under which a proposal may be revoked under the Contract
Act, 1872.
Answer:
A proposal may be revoked at any time before the communication of its acceptance is complete as
against the proposer, but not afterwards. A valid proposal comes to an end upon happening of any
one of the following:
 by communication of notice of revocation by the proposer.
 by the lapse of time prescribed in such proposal for its acceptance, or if no time is prescribed,
by the lapse of a reasonable time, without communication of the acceptance.
 by failure of the acceptor to fulfil a condition precedent to acceptance.
 by the death or insanity of the proposer, if the fact of his death or insanity comes to the
knowledge of acceptor before acceptance.
 if a counter proposal is made by the acceptor to the proposer.
 if the proposal is not accepted in some usual or reasonable manner, where no mode is so
prescribed.
 subsequent illegality or destruction of subject matter.
 rejection of proposal by the offeree.

3 ACCEPTANCE AND RULES OF REVOCATION

Section overview
 Meaning and essentials of acceptance

 Timing of revocation
 Communication of revocation
3.1 Meaning and essentials of acceptance [Section 2(b)]

When the person to whom the proposal is made signifies his assent to it, the proposal is said to be
accepted.
Thus, an acceptance means assenting to an offer made. An offer when accepted becomes a
promise.
The essentials of acceptance are shown below:

Absolute and unconditional [Section 7]
An offer should be accepted without any condition. If any condition is imposed on an offer then it
turns out to be counter offer instead of acceptance.
Example 46: Absolute and unconditional

Laila offered to Maria her scooter for cash of Rs. 40,000. Maria accepted the offer and tendered
Rs. 39,000 cash down, promising to pay Rs. 1,000 by the evening. There is no contract, as the
acceptance was not absolute and unqualified.

Business Law
Communication
The acceptance may be complete when it is communicated to the offeror. An offer can be accepted
by words spoken or written or through conduct of the person. Further, a valid acceptance is
communicated either by the offeree himself or any person authorized by him to communicate to
the offeror.
Example 47: Communication

 Adeel offered to sell his house to Saima. Anum who was aware of such offer said that she is
ready to buy Adeel’s house. There is no contract with Anum.
 Azam sold his business to Babar without informing his customers. Jazib sent an order for the
supply of goods to Azam by name. Babar received the order and supplied the goods. It was
held that there was no contract because Jazib never made any offer to Babar.
Postal rule
The communication of acceptance by post is complete as against the proposer when it is put in a
course of transmission. In case of acceptance made by post, the proposer becomes bound as
soon as the letter of acceptance is posted even if such letter is lost or delay.
The communication is complete as against the acceptor when it comes to the knowledge of the
proposer. In case of acceptance by post, the acceptor becomes bound when the letter of
acceptance is actually received, before that acceptor may revoke his acceptance.
Example 48: Postal rule

Adeel offers, by letter, to sell a van to Kashif for Rs. 100,000. The letter reaches Kashif on 8th
March. Kashif accepts by a letter sent by post on 9th March. The letter reaches Adeel on 11th
March. The communication of the acceptance is complete:
 As against Adeel, when the letter is posted i.e. on 9 th March
 As against Kashif, when the letter is received by Adeel i.e. on 11 th March
Contracts over telephone / telex / fax

A contract by telephone / telex / fax is treated on the same principle as an oral agreement made
between two parties when they are face to face with each other. In such cases, the contract will
complete only when the acceptance is received by the proposer and not when it is transmitted by
the acceptor.
The offeree must make sure that his acceptance is received, heard and understood by the offeror;
otherwise there is no contract.
Reasonable time
A valid acceptance is when it is accepted within the time specified or within a reasonable time
where no time is specified.
Example 49: Reasonable time

Maria applied for shares of a company in June but allotment was made in November. Maria refused
to accept the shares. It was held that Maria could refuse to take shares because the offer had
lapsed after the expiry of a reasonable time.
Reasonable mode
Acceptance should be made in the manner specified or in a usual manner where no mode is
specified.
If the proposal prescribes a manner in which offer is to be accepted and the acceptance is not
made in that manner. The offeror shall, in this case, when the acceptance is communicated to him,
insist that his proposal shall be accepted in the prescribed manner and not otherwise. If the offeror
fails to insist within a reasonable time it is deemed that he has accepted the performance.

Example 50: Reasonable mode

Azam makes an offer to Babar and asks him to accept the offer by telegram. Babar sends his
acceptance by post. It is not a valid acceptance as acceptance was not made in prescribed manner.
Awareness of proposal
The acceptor must be aware of the proposal at the time of acceptance of the proposal.
Example 51: Awareness of proposal

Azam offered a reward for anyone who finds his lost dog. Babar, in ignorance of the offer, finds and
returns the dog. Babar cannot claim the reward.
Before lapse of an offer

The acceptance must be given before the offer lapses or is withdrawn.
Example 52: Before lapse of an offer

 Azam, at an auction gives the highest bid to buy Babar’s goods. He withdraws the bid before
the fall of hammer. The offer is revoked and cannot be accepted.
 Azam offers to sell 10 bags of rice to Babar for Rs. 2,000. Before its acceptance, a law
banned the sale of rice. The offer terminates and cannot be accepted.
Negative confirmation
A proposal is not considered accepted if the offeree remains silent. It cannot be in the form of
negative confirmation i.e. if it is not accepted within a specific time then it will be presumed to have
been accepted.
Example 53: Negative confirmation

Azam wrote to Babar to sell his book adding that if he did not reply within 5 days, the offer would
be considered accepted. Babar did not reply and a week has passed. There is no contract as silence
cannot be considered as acceptance.
3.2 Timing of revocation [Section 5]
Timing of revocation of an A proposal may be revoked at any time before acceptance or the
offer communication of its acceptance is complete as against the
proposer, but not afterwards.
Timing of revocation of an An acceptance can be revoked at any time before the

acceptance communication of the acceptance is complete as against the
acceptor i.e. when acceptance comes to the knowledge of the
offeror, but not afterwards.
Example 54: Timing of revocation

Adeel offers by letter to sell his house to Kashif. Kashif accepts the offer by a letter posted on 4th
May. The letter reaches Adeel on 6th May.
 Adeel may revoke his offer before Kashif posts his letter of acceptance, i.e. 4th May but not
afterwards.
 Kashif may revoke his acceptance before the letter of acceptance reaches Adeel, i.e. 6th
May but not afterwards.

Business Law
3.3 Communication of revocation [Section 4]

The rules regarding the communication of revocation are as under:
As against the person When it is put in a course of transmission so as to be out of the

who makes it power of the sender of the revocation.
As against the person to When it comes to the knowledge of the receiver of revocation.
whom it is made
Example 55: Communication of revocation

Talal offered by a letter on October 1st, to sell goods to Bilal in Multan. Bilal received the offer on
11th October and gave his acceptance. On 18th October Talal wrote a letter revoking his offer. The
letter was received by Bilal on 20th October. Held, the revocation was of no effect until it reached
Bilal. A contract was made on 11th October when Bilal accepted the offer.
Example 56: Essentials of a valid acceptance

Question: Under the provisions of the Contract Act, 1872 list the essentials of a valid acceptance.
Answer:
Under the Contract Act, 1872 essentials of a valid acceptance are as follows:
acceptance must be absolute and unqualified;
 it must be communicated either in writing or by word of mouth or by performance of some
act;
 acceptance must be in the prescribed mode/reasonable mode;
 the acceptance must be given within the time specified or within a reasonable time when no
time is specified;
 mere silence is not acceptance. It cannot be in the form of a negative confirmation. The
acceptor should expressly accept the offer;
 acceptance must be given only by that person to whom the offer has been made;
 the acceptor must be aware of the proposal at the time of acceptance of the proposal;
 the acceptance must be given before the offer lapses or is withdrawn.
Example 57: Acceptance must be absolute and unconditional

Question: Murad offered his car to Sanum for Rs. 400,000. Sanum accepted the offer and enclosed
a pay order of Rs. 150,000 with a promise to pay the balance in monthly instalments of Rs. 62,500
each.
Under the provisions of the Contract Act, 1872 explain whether it is a valid contract.
Answer:
An acceptance should be unconditional assent by the offeree to all the terms of the offer. In this
case, since the offer has been accepted with a variation it would be regarded as a qualified
acceptance. Therefore, a contract between Murad and Sanum has not been formed.
However, if Murad accepts the counter offer made by Sanum then it would be a binding contract.

Example 58: Acceptance must be absolute and unconditional

Question: Batool offered to sell her flat to Saqib for Rs. 4,200,000. Saqib accepted the offer and
sent a cheque of Rs. 1,500,000 with a stipulation to pay the balance in 24 equal monthly
instalments of Rs. 112,500 each. Explain whether it is a valid contract.
Answer:
An acceptance should be unconditional assent by the offeree to all the terms of the offer. In this
case, since the offer has been accepted with a variation it would be regarded as a qualified
acceptance. Therefore, a contract between Batool and Saqib has not been formed.
However, if Batool accepts the counter offer made by Saqib then it would be a binding contract.

Question: Bader, who is the owner of Mashoor Associates, sent one of his employees Aftab in
search of his pet horse which had been missing for 5 days. Bader advertised a reward of Rs. 20,000
in a newspaper for anyone who finds his missing horse. Aftab, unaware of the newspaper
advertisement, traced the horse. Subsequently, on knowing about the reward Aftab claimed it from
Bader.
Under the provisions of the Contract Act, 1872 identify the type of offer which was made by Bader.
Also state whether Aftab would be able to claim the amount of reward under the circumstances.
Answer:
It is the case of a general offer as it was made to the public. A contract is made with the person
who having the knowledge of the offer comes forward and acts according to the conditions of the
offer.
However, under the given circumstances, Aftab cannot claim the amount of reward from Bader as
there was lack of communication of the offer and Aftab did not know about the reward when he
found the missing horse. Aftab could have accepted the offer only when he knew about it because
an offer accepted without its knowledge does not confer any legal rights.
Example 60: Communication of offer, acceptance and revocation

Question: On 3 September 2018 Saleem offered, by a letter, to sell his laptop to Ghazi for Rs.
50,000. Ghazi received the letter on 5 September 2018. On 6 September 2018 Ghazi posted the
letter of acceptance to Saleem. The letter reached Saleem on 8 September 2018. Saleem wrote a
letter of revocation of his offer and posted it to Ghazi on 5 September 2018. The letter reached
Ghazi on 7 September 2018.
Under the provisions of the Contract Act, 1872 briefly describe when the communication of the
offer and acceptance and the revocation of the offer was completed as against Saleem and Ghazi
under the above circumstances and whether a binding contract was created between Saleem and
Ghazi.
Answer:
Communication of offer was completed on 5 September 2018 i.e. when it came to the knowledge
of Ghazi. Communication of acceptance was completed as against Saleem when the letter was
posted i.e. on 6 September 2018 and as against Ghazi it was completed when the letter of
acceptance reached Saleem i.e. on 8 September 2018. The communication of revocation of offer
was completed as against Saleem on 5 September 2018 i.e. when the letter of revocation was
posted, and as against Ghazi on 7 September 2018, when the letter of revocation was received by
him.
Since Ghazi had posted his letter of acceptance on 6 September 2018 and revocation of offer was
communicated to him on 7 September 2018, his acceptance was valid Saleem cannot revoke his
offer after 6 September 2018, when the communication of acceptance was completed as against
him. Therefore, a binding contract had been created between Saleem and Ghazi.

Business Law

Question: Ahmed being interested in purchasing Adil’s DHA property sent him this letter on 01
March 2019, “I have heard that you are selling your DHA property. I am very much interested in
purchasing it. Will you please consider selling the same to me? What is the highest price you have
been offered so far?” Adil replied, “The highest quote for the property till now is Rs. 35 million.”
Ahmed replied, “I agree to buy your DHA property for Rs. 36 million.” Subsequently, Adil received
an offer from Hamid quoting Rs. 38 million for the said property. What will be Adil’s liability towards
Ahmed if he wishes to make the sale to Hamid?
Answer:
The first letter from Ahmed and Adil’s response on it were merely ‘asking for information’ and
‘providing information’ respectively and not offer and acceptance. The second letter from Ahmed
sent as a reply to Adil was itself an offer and not the acceptance of an offer. Since this offer had
not been accepted by Adil, there is no binding contract between the parties. Accordingly, there is
no liability if Adil sells his bungalow to Hamid.


01. The Law of Contract is
(a) Whole law of obligations
(b) Law of only contractual obligations
(c) Law of judgements of the courts
(d) Law of quasi-contracts
02. The Law of Contract is
(a) Law of agreements
(b) Law of agreements which creates legal obligation
(c) Law of all agreements
(d) Law of personal and social agreement
03. A contract in which nothing remains to be done by either party is called
(a) Executed
(b) Executory
(c) Unilateral
(d) Voidable
04. Legal relationship, in relation to law of contact, means
(a) Lawful relationship
(b) Relationship permissible by law
(c) Legal rights and obligations
(d) All rights and obligations
05. Voidable contract is voidable at the option of
(a) Both parties of contract
(b) One party of the contract
(c) None of the parties of the contract
(d) Aggrieved party of a contract

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06. Which of the following statements is true:
(a) Voidable contract is valid at the time of making it
(b) Contract is void if an essential of free consent is missing in it
(c) All void agreements are illegal
(d) All illegal agreements are not necessarily void
07. Which of the following statement is true
(a) Void agreement and void contract are one and same
(b) Void agreement creates legal rights and obligation between parties
(c) Void contracts remain valid until they are declared void
(d) Any transaction based on void contract will also be void
(a) Agreements between husband and wife constitute a contract
(b) Agreement between friends cannot be enforced
(c) Agreements between friends creating legal relationship can be enforced
(d) All agreements are contract
09. Void agreement can be enforced
(a) By one of the parties
(b) By aggrieved party
(c) By none of the parties
(d) By the party entitled to do so
10. An agreement to be enforced in the court must have
(a) Legal enforceability
(b) Mutual consent between the parties
(c) Lawful consideration
(d) All of the above

11. An agreement is a voidable contract when it is
(a) Enforceable if certain conditions are fulfilled
(b) Enforceable by law at the option of the aggrieved party
(c) Enforceable by both the parties
(d) Not enforceable at all
12. An agreement not enforceable by law is said to be
(a) Void
(b) Voidable
(c) Valid
(d) Unenforceable
13. A Contract
(a) May be void as originally entered into
(b) May become void subsequent to its formation
(c) Cannot become void under any circumstances
(d) May become void at the will of a party
14. A contract in which a promise on one side is exchanged for a promise on the other is called
(a) Executed
(b) Bilateral
(c) Unilateral
(d) Voidable
(a) Valid contract is always valid
(b) Valid contract is not valid from the time it was made
(c) Valid contract may become void later on
(d) Valid contract is necessarily void agreement

Business Law
16. A ________ may be defined as an agreement which creates rights and obligations between the
parties.
17. ___________ are those which are not made in writing or by the words of mouth.
18. Every _____________ is an agreement but every agreement is not always a __________.
19. Contract becomes void when it ceases to be ____________ by law.
20. Every promise and every set of promises forming the _______________ for each other is an
agreement.
21. Lawful offer is
(a) Promise
(b) Legal relation
(c) Proposal
(d) Presentation
22. Which of the following result/results in an offer?
(a) A declaration of intention
(b) An invitation to offer
(c) An advertisement offering reward to anyone who finds the lost dog of the advertiser
(d) An offer made in a joke
23. A letter of acceptance, for a lawful and legal matter, sufficiently stamped and duly addressed is
put into course of transmission. There is
(a) A contract voidable at the option of acceptor
(b) A contract voidable at the option of offeror
(c) No contract at all
(d) A valid contract

24. An offer is not different from
(a) Advertisement
(b) Price list
(c) Proposal for doing or not doing something
(d) Display of the goods
25. A makes an offer to B on 10th by a letter which reaches B on 12th. B posts letter of acceptance
on 14th which reaches A on 16th. The communication of acceptance is complete as against A
on
(a) 12th
(b) 14th
(c) 16th
(d) 10th
26. Offer is simply a
(a) Mere expression of willingness to do or not to do some thing
(b) Intention to create legal relationship
(c) Intention to get assent of other party for offered act or abstinence
27. An offer cannot be made
(a) By the words of mouth
(b) By the conduct of party
(c) By the circumstances
(d) To the offeror himself
28. An offer is said to be revoked
(a) By non-fulfilment of condition precedent to acceptance
(b) Acceptance is not in prescribed mode, but offeror does not reject it
(c) Acceptance is not given within reasonable period of time, but offeror does not object
(d) Misunderstanding has arisen between offeror and offeree

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29. Acceptance must be given in:
(a) Usual manner
(b) Prescribed manner
(c) Any manner suitable to the offeree
(d) More effective manner
30. Which of the following statements is true
(a) A proposal may be revoked at any time before the communication of its acceptance is
complete as against the offeree.
(b) Acceptance may be revoked at any time, before the communication of acceptance is
complete as against the acceptor
(c) An offer initially rejected may subsequently be accepted
(d) Letter of offer may be sent after letter of acceptance
31. A person cannot make an offer
(a) To a person of sound mind
(b) To his friend
(c) To himself
(d) To the citizen of a foreign country
32. An offer gets legal consequences
(a) As soon as it is made
(b) As soon as it is communicated
(c) As soon as it is revoked
(d) As soon as it is accepted
33. Implied acceptance is inferred
(a) From the silence of offeree
(b) From the conduct of the offeree
(c) From the written statement of the offeree
(d) From the oral statement of the offeree

34. Abdullah offered by letter to sell Karim his motorbike for Rs. 5,000. Karim wrote back saying he
accepted the offer and would pay in two instalments at the end of the two following months. Is
there a contract?
(a) No, because Karim is trying to amend the contractual terms. Abdullah can be assumed to
revoke the offer
(b) Yes, there has been as offer and acceptance and a binding contract applies
(c) No, Karim’s response constitutes a counteroffer and is effectively a rejection of Abdullah’s
offer
(d) Yes, Karim’s response is merely a clarification of contractual terms.
35. General offer can be accepted
(a) By any member of the public who had notice of the offer
(b) By all members of the public
(c) By any member of public who did not have notice of the offer
(d) By a particular member of the public
36. If goods were displayed in a departmental store for sale and self-service system was there. One
customer selected an item. Here the display of goods is _________ and selection by the
customer is an offer to buy.
37. If an offer is made to a definite or a particular person, such offer can be _________ only by that
definite or particular person or that specific group of persons.
38. In case of acceptance made by post, the __________ becomes bound as soon as the letter of
acceptance is posted even if such letter is lost or delayed.
39. An offer will come to an end within a reasonable time when no time is specified. “What is the
reasonable time?” is a question of fact depending upon the ____________ and ___________.
40. When the mode of acceptance is not prescribed, the acceptance must be given in ________.

Business Law
01. (b) The law of contract is the law regulating the contractual obligations between the
parties.
02. (b) The contract law has nothing to do with social, moral and religious obligations.
03. (a) A contract where both the parties have performed their respective promises is
known as executed promises
04. (c) Legal rights and obligations and it do not include any domestic or social rights and
obligations
05. (d) Only the injured party has an option to set aside the contract in case of voidable
contract
06. (a) Voidable contract is valid at the time of making it and only an aggrieved party can
set aside the contract.
07. (c) Void contract is a perfectly valid contract at the time of formation of a contract
08. (c) Agreements between friends creating legal relationship can be enforced because
even though it is an agreement between friends, but the nature of the contract is
not of a social or domestic relationship.
09. (c) By none of the parties because void agreement is void ab-initio i.e. void from the
beginning
10. (d) Legal enforceability along with mutual and free consent between the parties and
lawful consideration is must for an agreement to be enforced
11. (b) Enforceable by law at the option of the aggrieved party
12. (a) Void because an agreement which cannot be enforced by law is not a valid contract.
13. (b) A contract may become void subsequent to its formation because a contract can
never be void from the time of its formation
14. (b) A bilateral contract is a contract in which a promise on one side is exchanged for a
promise on the other.
15. (c) A void contract is perfectly valid at the beginning, but it ceases to be enforceable
later on.
16. Contract.
17. Implied Contracts
18. Contract, contract
19. Enforceable
20. Consideration
21. (c) An offer is a proposal by one person to another for entering into a legally binding
agreement with him

22. (c) An advertisement offering reward to anyone who finds the lost dog of the advertiser
and this is known as general offer
23. (d) A valid contract because this rule is known as a postal rule
24. (c) An offer is a proposal for doing or not doing something.
25. (b) 14th because the communication of acceptance as against offeror is complete when
the offeree posts letter of acceptance.
26. (c) Intention to get assent of other party for offered act or abstinence.
27. (d) For a valid offer there is needs to be two persons. A person cannot make an offer
to himself
28. (a) By non-fulfilment of condition precedent to acceptance because it is necessary on

the part of offeree to fulfil the condition precedent to acceptance
29. (b) Prescribed manner because an offer come to an end if it is not accepted according
to the prescribed manner (if any)
30. (b) Acceptance may be revoked at any time, before the communication of acceptance
is complete as against the acceptor
31. (c) To himself because for a valid offer there needs to be two persons at least.
32. (d) Offer has no legal consequence or value unless it is accepted
33. (b) The implied acceptance may be complete when it is communicated to the offeror
through conduct of the offeree.
34. (c) No, Karim’s response constitutes a counteroffer and is effectively a rejection of
Abdullah’s offer. This is also known as bargaining
35. (a) By any member of the public because it is not a specific or particular offer so it can
be accepted in any member of the public.
36. An invitation of offer
37. Accepted
38. Proposer/Offeror
39. Subject matter, circumstance
40. Usual mode

Business Law

CHAPTER
Business Law
Lawful consideration and objects, and

capacity of parties
Contents
1 Consideration
2 Lawful / unlawful object and consideration
3 Competent to contract

Business Law
1 CONSIDERATION
Section overview
 Definition and essential elements of consideration

 Agreements without consideration
 Privity of contract
1.1 Definition and essential elements of consideration
Definition: Consideration [Section 2(d)]

When at the desire of the promisor, the promisee or any other person who has done or abstained
from doing, or does or abstains from doing, or promises to do or to abstain from doing something,
such act or abstinence or promise is called a consideration for the promise.
When a party to an agreement promises to do something, he must get something in return. This
something in return is consideration. The analysis of the above definition reveals that a
consideration may be the value by which promise is bought. Consideration may be following:
 An act i.e. doing something
 An abstinence or forbearance i.e. abstaining or refraining from doing something.
 A promise in return (of another promise)
Example 01: Consideration

 Azam promises Babar to guarantee payment of price of the goods which Babar sells on credit
to Misbah. Here selling of goods by Babar to Misbah on credit is consideration for Azam’s
promise.
 Adeel asks Habib not to sue Arslan for a year for his debts and promises in case of default
of Arslan, Adeel would be liable. Here Habib not filing a suit for a year is abstinence, which is
a sufficient consideration for Adeel.
 Ameer promises to deliver iPhone to Burhan and Burhan promises to pay Rs. 85,000 on
delivery. Here the consideration for Ameer will be Rs. 85,000 on delivery and consideration
for Burhan will be delivery of goods.
The essentials of consideration are shown below:

Section A: Mercantile Law - Chapter 3: Lawful consideration and objects, and capacity of parties
Desire of the promisor

An act or abstinence of promise constituting consideration must have been done or made at the
desire or request of the promisor. Thus, an act done at the desire of a third party or without the
desire of the promisor cannot constitute a valid consideration.
Example 02: Desire of the promisor

Adeel saves Arslan’s goods from fire without being asked to do so. Adeel cannot demand payment
for his services.
Move / from promisee or any other person

In return consideration may be from the promisee himself or by any other person even by stranger.
Example 03: Move / from promisee or any other person

Arif transferred certain property to his daughter Humera with a direction that Humera should pay
Noman annuity. On the same day Humera executed a deed in writing in favour of Noman and agreed
thereby to pay the annuity. Later, Humera refused to pay the annuity on the plea that no
consideration had moved from Noman. Here Noman is entitled to maintain suit because a
consideration not necessarily move from the promisee, it may move from any other person (by Arif
in this case).
Consideration may be past, present or future

The consideration may be past (done or abstained from doing), present (does or abstains from
doing) or future (promises to do or to abstain from doing). The consideration which has moved
before the formation of agreement is said to be past consideration. The consideration which
moves simultaneously with the promise is called present consideration. The consideration which
moves after the formation of agreement is called future consideration.
Example 04: Consideration may be past, present or future

 Akram renders some service to Wasim in the month of August. In September Wasim
promises to compensate Akram an amount of Rs. 10,000 for the services he rendered to
him. Past services amount to past consideration. Akram can recover Rs. 10,000 from Wasim.
 Waqar sells his car for Rs. 1 million and delivers the car at the time of payment. Here the
consideration is moving simultaneously with the promise and is called present consideration.
 Akhtar promises to deliver certain goods to Shoaib after 5 days and Shoaib promises to pay
after 5 days from the date of delivery. Consideration in this case is future consideration.
Consideration to have some value

There is no requirement for the adequacy of consideration but it should have some value. There
should be something in return and this something in return need not necessarily be equal in value
to something given.
Example 05: Consideration to have some value

Adeel, with his free consent, agrees to sell his car worth Rs. 3 million for Rs. 1 million to Saima. The
contract is valid.
Something which the promisor is not already bound to do

The consideration must be something which the promisor is not already bound to do because a
promise to do what a promisor is already bound to do adds nothing to the existing obligation.
Example 06: Something which the promisor is not already bound to do

Hamid was summoned to give evidence in a court where Sajid was in litigation. Sajid promised to
pay certain amount to Hamid for giving the evidence. Later, Sajid refused to pay. Hamid sued and
failed. Held, the consideration was not valid as it was Hamid’s duty to give evidence.

Business Law
Consideration must be real

The consideration must be real and not illusory.
Example 07: Consideration must be real

 Azam engages Babar to work as an accountant in his office and promises to make him
happy. This promise is not enforceable because the consideration is not real but illusory.
 Azam promises to put life into Babar’s dead wife and Babar promises to pay Rs. 1 million.
This agreement is void because consideration is impossible to perform and not real.
 Azam engages Babar to work as an accountant in his office and promises to pay him Rs.
75,000 per month. This is a real consideration for both the parties.
Lawful
The consideration must neither be unlawful nor opposed to public policy.
Example 08: Lawful

 Azam promises Babar to pay Rs. 100,000 to beat Sarfaraz. Babar beats Sarfaraz and claims
Rs. 100,000 from Azam. Azam refuses to pay. Babar cannot recover because the agreement
is void on the ground of unlawful consideration.
 Azam promises Babar to obtain an employment in the public service and Babar promises to
pay Rs. 100,000 to Azam. The agreement is void on the ground of unlawful consideration.
1.2 Agreements without consideration

An agreement without consideration is void except under the following cases:
Natural love and affection [Section 25(1)]
Agreements made on account of natural love and affection without consideration will be valid if:
 expressed in writing,
 registered under the law,
 made on account of natural love and affection, and
 between parties standing in a near relation to each other.
Example 09: Natural love and affection

Azam, for natural love and affection; promises to give his son, Babar, Rs. 10,000. Azam puts his
promise to Babar into writing and registers it. This is a valid contract.
Promise to compensate past voluntary services [Section 25(2)]

Such promise made without consideration is valid if:
 it is a promise to compensate and
 the person who is to be compensated has already done something voluntarily or has done
something which the promisor was legally bound to do.
Example 10: Promise to compensate

 Ameer finds Bushra's purse and gives it to her. Bushra promises to give Ameer Rs.5,000.
Now this promise of Bushra is a contract.
 Azam supports Babar’s infant son. Babar promises to pay Azam’s expenses in so doing. This
is a contract.

Time barred debt [Section 25(3)]

A promise to pay time barred debt is enforceable if:
 it is made in writing,
 it is signed by the debtor or his agent, and
 it relates to a debt which could not be enforced by a creditor because of law of limitation.
Example 11: Time barred debt

Adeel owes Rs. 1,000 to Kashif but the debt has become time barred. Adeel signs a written promise
to pay Kashif Rs. 900 of this time barred debt. It is a valid contract.
Gifts
The gifts which are accepted by the donee are called completed gifts and are valid.
Example 12: Gift

Arif transferred some property to Haseeb by a duly written and registered deed as a gift. This is a
valid contract even though no consideration was given by Haseeb.
Contract of agency [Section 185]

A consideration is not necessary for a contract of agency.
Example 13: Contract of agency

Arslan promises to sell Faisal’s house on his behalf. An agreement between Arslan and Faisal is
valid even without consideration.
Contract of bailment
A consideration is not necessary for a contract of bailment i.e. gratuitous contract of bailment.
Example 14: Gratuitous bailment

Zaheer lends a laptop to Imran to prepare assignment without any charge. This is a valid contract.
Charitable subscription
Where the promisee on the strength of the promise makes commitments i.e. changes his position
to the detriment.
Example 15: Charitable subscription

 Hussain promised to subscribe Rs. 5,000 to a fund started for construction of Community
Hall. A contractor was entrusted with the construction, which in now in process. Hussain is
liable to pay the amount.
 Zahra promised to subscribe Rs. 5,000 to a fund started for rebuilding a mosque but no steps
had been taken to carry out the repairs. Held, Zahra was not liable to pay any amount.
Contract of guarantee [Section 127]

Consideration received by the principal debtor is sufficient for the surety and it is not necessary to
result in some benefit to the surety himself.
Example 16: Contract of guarantee

Babar requests Arslan to sell and deliver to him goods on credit. Arslan agrees to do so, provided
Adeel will guarantee the payment of the price of the goods. Adeel promises to guarantee the
payment in consideration of Arslan’s promise to deliver the goods. This is sufficient consideration
for Adeel’s promise.

Business Law
1.3 Privity of contract

Privity of contract means the relationship subsisting between the parties who have entered into
contractual obligations. Therefore, only parties to the contract may sue or may be sued under the
contract. However, there are few exceptions (not examinable) to this rule, when a stranger to
contract (non-party to the contract) may sue for enforcement of legal rights or obligations arising
under the contract.
Example 17: Agreement without consideration

Question: Mohsin promised Ahsan that he will pay his university fee. Later Mohsin suffered losses
in his business and refused to pay the fee. Mohsin is of the view that since the agreement was
without consideration, it does not constitute a valid contract. However, Ahsan believes that the
agreement is enforceable under law as it meets certain other conditions. You are required to
narrate the conditions which Ahsan may be referring to.
Answer:
The conditions under which the said contract is enforceable are:
 Mohsin and Ahsan stand in near relation to one another.
 The agreement is out of natural love and affection.
 The said contract is in writing.
Example 18: Validity of an agreement made without consideration

Question: Describe the circumstances under which an agreement made without consideration is
considered valid and binding under the Contract Act, 1872.
Answer:
An agreement without consideration is considered valid in any of the following circumstances:
(i) it is expressed in writing and registered under the law for the time being in force for the
registration of documents and is made on account of natural love and affection between
parties standing in a near relation to each other.
(ii) it is a promise to compensate wholly or in part, a person who has already voluntarily done
something for the promisor, or something which the promisor was legally compellable to do.
(iii) it is a promise, made in writing and signed by the person to be charged therewith, or by his
agent generally or specially authorized in that behalf, to pay wholly or in part a debt which is
barred by the law for the limitation of suits.
(iv) any gift which is actually made as between the donor and the donee.
(v) no consideration is necessary to create an agency.
(vi) remission by the promisee of the performance of the promise. A creditor can agree to give up
either the whole or part of his claim or may agree to extend time for the performance of the
promise and no consideration is required for such an agreement.
(vii) a promise to contribute to charity, though gratuitous, would be enforceable, provided the
promisee on the faith of such promise undertakes a liability not exceeding the amount so
promised.

Question: Mrs. Ikram was searching for a house for her family in city’s posh locality. Her grandfather
Nadeem had promised to pay her Rs. 1.0 million by way of a gift for the purchase of the house.
After finalizing the deal with one of the estate brokers, Mrs. Ikram asked Nadeem to pay her Rs.
1.0 million as promised. Nadeem, however, refused to pay the amount. Mrs. Ikram filed a suit
against her grandfather Nadeem for the enforcement of the promise made by him. Advise under
what circumstances Mrs. Ikram would be able to recover the amount from Nadeem.

Answer:
An agreement made without consideration is void. However, Mrs. Ikram may claim the amount of
Rs. 1.0 million from her grandfather Nadeem, by proving either gift or love and affection.
In case of a gift it needs to be completed. The rule ‘No consideration no contract’ does not apply to
completed gifts.
An agreement made on account of natural love and affection without consideration will be valid if
it is expressed in writing, registered under the law, made on account of natural love and affection,
and between parties standing in a near relation to each other.
However, in the given scenario, Nadeem only made a promise to pay Rs. 1.0 million by way of a gift
and did not actually pay the amount. Similarly, the promise was not made in writing and was not
registered, therefore, the promise cannot be enforced in both of the above circumstances and Mrs.
Ikram cannot recover anything from her grandfather Nadeem.

Question: Muneer wanted to complete his bachelor’s degree from Europe. His paternal uncle
Furqan Butt had promised him to pay Rs. 2 million by way of a gift, at the time of his admission to
a college in Europe. After getting admission to one of the renowned colleges in Europe, Muneer
asked Furqan Butt to pay him Rs. 2 million as promised. However, Furqan Butt refused to pay the
amount and Muneer filed a suit against Furqan Butt for the enforcement of his promise. Discuss
the circumstances in which Muneer may be able to recover the amount from Furqan Butt.
Answer:
An agreement made without consideration is void. However, Muneer may claim the amount of Rs.
2 million from his uncle Furqan Butt, by proving either of the following two conditions.
(i) gift
(ii) love and affection
Completed gift:
In case of a gift it needs to be completed. The rule ‘No consideration no contract’ does not apply to
completed gifts.
Love and affection:
An agreement made on account of natural love and affection without consideration will be valid if
it is:
 expressed in writing,
 registered under the law,
 made on account of natural love and affection, and
 between parties standing in a near relation to each other.
However, in the given scenario, Furqan Butt only made a promise to pay Rs. 2 million by way of a
gift and did not actually pay the amount. Similarly, the promise was not made in writing and was
not registered, therefore, the promise cannot be enforced in both of the above circumstances and
Muneer cannot recover anything from his uncle Furqan Butt.

Business Law
2 LAWFUL / UNLAWFUL OBJECT AND CONSIDERATION

Section overview
 Circumstances where object or consideration is unlawful

 Where object or consideration is partly unlawful
 Agreements opposed to public policy
2.1 Circumstances where object or consideration is unlawful
Definition: Legality of object and consideration [Section 23]

The consideration or object of an agreement is lawful unless:
 It is forbidden by law
 It is of such a nature that if permitted would defeat the provisions of any law
 It is fraudulent
 It involves an in injury to the person or property of another
 The court regards it as immoral, or opposed to public policy
The analysis of above definition is given below:

Forbidden by law
If the law of the state prohibits an object or the consideration of an agreement then such
agreements are void. An act is forbidden by law when it is punishable by the law of the country.
The effects of such agreements are following:

 The collateral transactions to such an agreement also become tainted and hence cannot
be enforced.
 No action can be taken for the recovery of money paid or property transferred under such
an agreement and for the breach of any such agreement.
Example 21: Forbidden by law

 Ameer promises to obtain for Faqeer an employment in the public service, and Faqeer
promises to pay Rs.1,000/- to Ameer. The agreement is void as the consideration for it is
unlawful.
 Abid, Sajid and Amjad agreed to divide the cash obtained by tax refund on the basis of fake
documents. Held, the object was unlawful and agreement is void. They also agreed to invest
the amount in the business of Abid for mutual benefit for a year. After a year when Sajid and
Amjad demanded their share, Abid refused to pay. Held, the collateral transaction to invest
was also void and they could not sue for the recovery or breach.
Defeats the provisions of any law

If the object or the consideration of an agreement is of such nature that, if permitted, it would defeat
the provisions of any law, the agreement is void.
Example 22: Defeats the provisions of any law

Qadir fails to pay his loan and his house is auctioned for recovery. According to law, the defaulter
(Qadir) is prohibited to bid so he appoints an agent to bid for him and later transfer the house. The
agreement is void as the transaction, in fact, is a purchase by the defaulter, and would so defeat
the object of the law.

Fraudulent
Where the object of an agreement is fraudulent the agreement is void.
Example 23: Fraudulent

 Abid, Sajid and Amjad enter into an agreement of the division among them of gains acquired
by them by fraud. The agreement is void, as its object is unlawful.
 Azam, being agent for a landed proprietor, agrees for money, without the knowledge of his
principal, to obtain for Babar a lease of land belonging to his principal. The agreement is
void, as it implies a fraud of concealment by Azam, on his principal.
Involves or implies injury

The object of an agreement will be unlawful if it tends to injure a person or the property of another.
Property can either be movable or immovable.
Example 24: Involves or implies injury

Abid promised to pay Rs.100,000 to Sajid on agreeing to publish a defamatory article against
Arslan. It was held that Sajid could not recover the amount because the agreement was void as it
involves injury to a person.
Court regards it as immoral or opposed to public policy

Where the object or consideration of an agreement is such that the court regards it as immoral or
opposed to the public policy then the agreement is void.
Example 25: Court regards it as immoral or opposed to public policy

 Abid, who is guardian of Tanveer, promises to exercise his influence, as such, with Tanveer
in favour of Farhan, and Farhan promises to pay Rs 1,000 to Abid. The agreement is void,
because it is immoral.
 A married woman was given money to obtain divorce from her husband and the marry the
lender. Later, the woman refused to take divorce. The agreement is void, though the taking
such divorce may not be punishable under the law.
2.2 Where object or consideration is partly unlawful [Section 24, 57 and 58]
Non–separable promises
When an agreement contains things to do legal as well as illegal and the legal part cannot be
separated from illegal part, the whole agreement is illegal and void.
Example 26: Non-separable promises

Azam promises to superintend, on behalf of Babar, a legal manufacture of indigo, and an illegal
traffic in other articles. Babar promises to pay to Azam a salary of Rs. 30,000 a month. The whole
agreement is unlawful and void because it cannot be ascertained as to what was due on account
of legal manufacture and what was due on account of illegal trafficking.
Separable promises
When an agreement contains things to do legal as well as illegal and the legal part can be
separated from illegal part, the legal part is a contract and the illegal part is a void agreement.
Example 27: Separable promises

Azam and Babar agree that Azam shall sell Babar a house for Rs.10,000,000 but that, if Babar
uses it as a gambling house, he shall pay Rs.50,000,000 for it. The first set for reciprocal promises,
namely, to sell the house and to pay Rs.10,000,000 for it, is a contract. The second set is for an
unlawful object, namely, that Babar may use the house as a gambling house and is a void
agreement.

Business Law
Alternative promise being illegal

In the case of an alternative promise, one branch of which is legal and the other illegal, the legal
branch alone can be enforced.
Example 28: Alternative promise being illegal

Akram and Wasim agree that Akram shall pay Wasim Rs.1,000 for which Wasim shall afterwards
deliver to Akram either rice or smuggled opium. This is a valid contract to deliver rice, and a void
agreement as to the opium.
2.3 Agreements opposed to public policy

An agreement is said to be unlawful if the court regards it as opposed to public policy. Following
are the agreements which are held to be opposed to public policy:
Trading with enemy
A person cannot enter into an agreement with an alien enemy during the period of war on the
ground of public policy. This is because the further performance of the agreement involves
commercial interaction with the enemy and the continued existence of agreement would confer
upon the enemy an immediate or future benefit. Contracts entered before the declaration of war
are either suspended or terminated during the period of war.
Example 29: Trading with enemy

Imran agrees to buy goods from Narendra, a citizen of a country at war with Pakistan. The
agreement is void.
Stifling prosecution
Criminals should be prosecuted and punished; hence an agreement for stifling prosecution is
illegal. It is in public interest that if a person has committed crime he must be prosecuted and
punished.
Example 30: Stifling prosecution

Anjum, who knows that Kanwar has stolen goods amounting to Rs.500,000, receives Rs.100,000
from Kanwar in consideration of not exposing him. This agreement is illegal being opposed to
public policy.
Sale of public offices
The agreements of sale of public offices are illegal as such agreements, if enforced, would led to
inefficiency and corruption on public life. Similarly, an agreement to pay money to a public servant
to induce him to act corruptly or to retire and thus make way for the appointment of promisor are
void on the ground of public policy.
Example 31: Sale of public offices

Ameer promises to obtain for Faqeer an employment in the public service, and Faqeer promises
to pay Rs.1,000/- to Ameer. The agreement is void as the consideration for it is unlawful.
Restraint of parental rights

An agreement which prevents a parent to exercise his right of guardianship is void. A father is
entitled by law to the custody of his child. He cannot enter into an agreement which is inconsistent
with his duties arising out of such custody.
Example 32: Restraint of parental rights

Asif entered into an agreement with his in-laws to never meet his children if they pay him Rs. 5
million. The agreement is void.

Restraint of personal liberty

An agreement which unduly restricts the personal liberty of a person is void as law generally allows
all persons with a freedom to enter into any contract they please.
Example 33: Restraint of personal liberty

An employer and employee agree that employee cannot enter into any contract for five years
whether personal or professional in nature. The agreement is void as it unduly restricts the
personal liberty of a person.
Agreement to create monopoly

An agreement to create monopoly is void as this will impair consumer sovereignty and result in
high prices for law quality of goods and services.
Example 34: Agreement to create monopoly

Five nearby fuel stations agree to charge price above the price fixed by regulatory authority. The
agreement is void.
Marriage brokerage agreement

An agreement in which a person promises for reward to procure marriage for another is void being
opposed to public policy.
Example 35: Marriage brokerage agreement

Asif offered Basit to pay him Rs. 1 million if he procures a woman to marry his brother. The
agreement is void.
Example 36: Legality of object

Question: What is an agreement? When is an agreement considered to be void? State the
circumstances under which the object of an agreement is considered to be unlawful.
Answer:
Every promise and every set of promises, forming the consideration for each other, is an
agreement.
An agreement not enforceable by law is said to be void.
Circumstances in which an object of an agreement is considered unlawful if:
(i) it is forbidden by law; or
(ii) is of such a nature that, if permitted, it would defeat the provisions of any law; or
(iii) is fraudulent; or
(iv) involves or implies injury to the person or property of another; or
(v) the court regards it as immoral or opposed to public policy.
Example 37: Legality of consideration

Question: Asif stole cash and merchandise from the ABC Store. Basit, the owner of store, initiated
legal proceedings against him. Asif contacted Basit with an offer to return the stolen cash and
merchandise if Basit withdraws the suit. Basit accepted the offer. Is it a valid agreement? Discuss.
Answer:
No, the agreement is void as its object is unlawful and constitutes stifling the criminal prosecution.

Business Law
Example 38: Withdrawal of legal proceedings

Question: Naeem was a treasury manager in Raheel Associates (RA). Naeem robbed Rs. 100,000
cash from the business. Raheel, the owner of the business, instituted legal proceedings against
Naeem. Naeem agreed to return the cash and Raheel agreed to withdraw the proceedings against
him. Naeem fulfilled his part of the promise.
Under the provisions of the Contract Act, 1872 explain whether Raheel is bound to withdraw the
proceedings against Naeem.
Answer:
The agreement between Naeem and Raheel is void as its object is unlawful and constitute stifling
the criminal prosecution. Raheel, therefore, is not bound to fulfil his part of the promise.

3 COMPETENT TO CONTRACT
Section overview
 Who are competent to contract?

 Agreements with a minor
 Agreements by persons of unsound mind
 Agreements with persons disqualified by law
3.1 Who are competent to contract? [Section 11]

Every person is competent to contract:
 who is of the age of majority according to the law to which he is subject, and
 who is of sound mind, and
 who is not disqualified from contracting by any law to which he is subject.
This chart shows the persons who are incompetent to contract:
Incompetent to contract
Disqualified by
law
• Alien enemies
Minor Unsound mind • Foreign sovereigns
and ambassadors
• Convicts
• Insolvent
3.2 Agreements with a minor

In Pakistan a minor is a person who has not attained majority which is:
 21 years where a guardian of a minor’s person or property is appointed by the court of law
under the Guardians and Wards Act, 1890; or
 18 years in other cases.
The law pertaining to agreements with a minor is given below:
Void agreement
An agreement with a minor is void ab initio.
Example 39: Void agreement

Dawood, a minor mortgaged his house in favour of Mohsin to secure a loan of Rs. 20,000. Dawood
received the amount. Mohsin filed a suit for recovery of money and sale of mortgaged property in
case of default. Held that the agreement with minor was void so Mohsin cannot recover the money
or sell the minor’s mortgaged property.

Business Law
Rule of estoppel does not apply

Where an infant / minor represents fraudulently or otherwise that he is of the age of majority and
induces another to enter into a contract with him, even then, he will not be liable.
Example 40: Rule of estoppel does not apply

Momin, a minor fraudulently shows that he is of full age and contracts with Noor to sell his house.
Momin refuses to perform the contract on the ground that he is a minor. Noor cannot sue Momin.
Ratification not allowed

Ratification is approving or accepting something which has happened already. It is necessary that
the minor must be competent to contract at the time of entering in the contract. Therefore, an
agreement with a minor cannot be ratified subsequently after he attains majority.
Example 41: Ratification not allowed

Maria, a minor borrowed some money and wrote a pro-note for it. On attaining majority, Maria wrote
a second pro-note to settle the first note. It was held that the second pro-note is also void.
Contract by minor and adult jointly

If a minor enters into an agreement jointly with a major person then such agreement can be
enforced against the major person who has jointly promised to perform.
Example 42: Contract by minor and adult jointly

Hussain (aged 16) and Burhan (aged 26) jointly agree to pay certain amount and executed a bond.
The court held that only Burhan is liable.
Minor may be admitted to benefits of partnership [Section 30 – Partnership Act]

A minor can be admitted for the benefits of partnership with the consent of all the partners. He
cannot be a partner until he attains majority.
Example 43: Minor may be admitted to benefits of partnership

Saima, Kashif and Anum are partners in a firm. In order to obtain capital from Maria, a minor, they
make a contract with Talal who is guardian of Maria. Maria can be admitted to the benefits of the
firm.
Minor as an agent [Section 184]
A minor can be agent but cannot be a principal. However, if anyone acts on behalf of minor
principal, he will be personally liable.
Example 44: Minor as an agent

Azam appoints Mohsin, a minor, as his agent to sell his house. Mohsin makes an agreement with
Babar. The agreement is valid.
Minor and insolvency

A minor cannot be declared insolvent because he is incompetent to contract.
Example 45: Minor and insolvency

Maryam, a minor buys medicines from Zain. Maryam has no property. Maryam cannot be held liable
for payment. She cannot be declared insolvent.
Minor can be beneficiary
A minor can file a suit but cannot be sued.
Example 46: Minor can be beneficiary

Aslam, a minor delivered some goods under an agreement to Parveen. Parveen refused to make
the payment. The court held that minor could recover the price.

Agreements on behalf of minor by parents or guardian

If the parent of a minor entered into an agreement on behalf of a minor being within the scope of
the authority and for the benefit of the minor then such agreements can be enforced by or against
the minor.
Example 47: Agreements on behalf of minor by parents or guardian

Rizwan is guardian of Momin, a minor. Rizwan entered in a contact with Babar to sell Momin’s
property on his behalf to provide for education and living expenses of Momin. This contract may be
enforced by Momin or Babar, for their respective contractual rights.
Minor and necessaries [Section 68]
A person who supplied necessaries to a minor is entitled to be reimbursed from the property of
such minor. Such claim is against the property of the minor and not against the minor personally.
Example 48: Minor and necessaries

 Habib supplied necessaries of life to Arslan, a minor. Habib can recover the value from
Arslan’s property.
 Habib supplies necessaries to the wife and children of Arslan, a minor. Habib can recover
expenses from Arslan’s property.
 Habib supplied a coat with diamond buttons to Arslan, a minor. Habib cannot demand the
price of coat from Arslan’s property.
 A minor purchased 11 coats. He had sufficient clothes at that time. It was held that coats
were not necessaries of life and minor was not liable to pay for them.
3.3 Agreements by persons of unsound mind [Section 12]

A person is said to be of sound mind for the purpose of making a contract:
 if at the time when he makes it,
 he is capable to understand the terms of the contract,
 to form a rational judgment as to its effect upon his interests.
Thus, if a person is not capable of both, he is said to have suffered from unsoundness of mind.
Example 49: Unsound mind

The examples of persons having an unsound mind include:
 specific persons/idiots (permanent insanity with no interval of saneness)
 lunatics (mental strain or disease with possibly some intervals of sanity)
 drunken persons (the excessive use of certain substances may cause temporary impotence
of mind)
Position of agreements with a person of unsound mind

The positions of such agreements are given below:
 An agreement with a specific person/idiot is void.
 If a lunatic enters into a contract while he is of unsound mind, an agreement during this
period is void.
 If a lunatic enters into a contract while he is of sound mind, an agreement during this period
is valid.
 A person delirious from fever or drunken person cannot enter into a contract while such
delirium or drunkenness lasts and he is not able to understand the terms of the contract or
form a rational judgment.
 A person of unsound mind can enforce a contract for his benefits.

Business Law
 A person, who supplied necessaries to a person of unsound mind or his dependant, is

entitled to be reimbursed from the property of such person of unsound mind. Such claim is
against the property of the person of unsound mind and not against the person personally.
 A person who is usually of unsound mind but occasionally of sound mind may make a
contract when he is of sound mind.
 A person who is usually of sound mind but occasionally of unsound mind may not make a
contract when he is of unsound mind.
Example 50: Position of agreements with a person of unsound mind

 Salim agreed to sell property worth Rs.25 million for Rs.12 million. His mother proved that
he was an idiot by birth. The agreement was held to be void.
 A patient in a lunatic asylum who is at intervals of sound mind may contract during those
intervals.
 A sane man who is so delirious from fever or who is so drunk that he cannot understand the
terms of a contract or form a rational judgment as to its effect on his interest cannot enter
into contract while such delirium or drunkenness lasts.
Burden of proof
The rules regarding the burden of proof are following:
 If a person is usually of sound mind then burden of proof, that he was of unsound mind at
the time of making contract, lies on the person who questions the validity of contract.
 If a person is usually of unsound mind then burden of proof that he was of sound mind at
the time of making the contract lies on the person who wants to enforce the contract.
Example 51: Burden of proof (occasionally of unsound mind)

Farhan is a lunatic, usually of sound mind and occasionally of unsound mind. He entered into a
contract with Sajid and now wants to set aside the contract on ground of unsoundness of mind. The
burden of proof that Farhan was of unsound mind at the time of making the contract lies on Farhan.
Example 52: Burden of proof (occasionally of sound mind)

Abid is a lunatic, usually of unsound mind and occasionally of sound mind. He entered into a
contract with Sajid and now wants to set aside the contract on ground of unsoundness of mind. The
burden of proof that Abid was of sound mind at the time of making the contract lies on Sajid.
3.4 Agreements with persons disqualified by law

There are some disqualifications imposed on certain persons in respect of their capacity to contract
which are discussed below:
Alien enemies
An alien is a person who is the citizen of a foreign country. He can enter into a contract and be
sued during peace time but if a war is declared then an alien enemy can neither enter into a contract
nor be sued during the period of war. Contracts entered before the declaration of war are either
suspended or terminated during the period of war.
Example 53: Alien enemies

Imran agrees to buy goods from Narendra, a citizen of a country at war with Pakistan. The
agreement is void.
Foreign sovereigns and ambassadors

Such persons have immunity unless they choose to submit themselves to the jurisdictions of our
courts. They have a right to enter into a contract but can claim the privilege of not being sued.

Example 54: Foreign sovereigns and ambassadors

Emily, a diplomat got a house on rent from Momin on behalf of the country to which she belongs.
Momin sued for recovery of arrears of rent. It was held that no action can be brought against Emily.
Convicts
A convict while under imprisonment is incapable of contracting but this disability comes to an end
after the expiry of the sentence or when he is on parole.
Example 55: Convicts

Wajid, during imprisonment enters into an agreement with Sajid to sell his land. The agreement is
void.
Insolvent
A person declared as insolvent cannot enter into a contract as his property is dealt with by official
assignee or official receiver.
Example 56: Insolvent

Sajid, an insolvent, promises to sell his car to Babar. The agreement is void. The property will be
dealt by official assignee.
Companies
A company is an artificial person and a contract entered into by a company will be valid only if it
is within the powers granted to it by the Memorandum of Association.
Example 57: Companies

XYZ Limited makes an agreement with Anwar to sell some property which the company is not
authorized by its memorandum to sell, the agreement is void.
Example 58: Agreement with a minor

 Question: Shoaib, aged 15, is the son of a billionaire businessman, Ijaz Munsif. Last month Shoaib
drove his father’s 2018 Model BMW to a vintage car exhibition arranged by Volkswagon Club of
Pakistan. At the exhibition he saw a vintage Mercedes-Benz and entered into a contract with the
seller for the purchase of the car. The seller, knowing Ijaz Munsif’s status, delivered the car to Shoaib
at his house. The seller requested for payment for the car but Shoaib refused to pay. The seller is
now requesting for full payment by Ijaz Munsif. Discuss whether the seller would succeed in
recovering the payment from Shoaib or Ijaz Munsif.
Answer:
 Shoaib, being a minor, lacks the capacity to enter into a legally binding contract with the seller.
Therefore, Shoaib is not bound by the contract and the contract is void ab-initio. A minor can only
be bound by a contract, if he has been supplied with necessaries suited to his condition in life. His
liability in such a case would be limited to the extent of his property, if any. In this case, the vintage
car cannot be regarded as a necessary good. Therefore, the seller cannot enforce payment for the
vintage car against Shoaib.
 The seller can only claim for the return of his car through an order of restitution. Similarly, Ijaz
Munsif cannot be held liable for the price of the car which his son Shoaib bought. He would have
been held liable if his son had either entered into a contract jointly with him or the contract was for
the supply of necessaries to Shoaib.

Business Law
Example 59: Agreements with disqualified persons

 Question: Under the provisions of the Contract Act, 1872 ‘Every person is competent to contract
who is of the age of majority according to the law to which he is subject, and who is of sound mind’.
Describe the circumstances in which a person may not be able to enter into a contract, despite
meeting the above conditions.
Answer:
 Following persons are disqualified from entering into the contract though they are major and of
sound mind:
(i) Alien enemies: If a war is declared with the enemy country then alien enemy of Pakistan
can neither enter into a contract nor be sued during the period of war.
(ii) Foreign sovereigns and ambassadors: As such persons have immunity. They have a right to
enter into a contract but can claim the privilege of not being sued.
(iii) Convicts: A convict while under imprisonment is incapable of contracting.
(iv) Insolvent: A person declared as insolvent cannot enter into contract as his property is dealt
with by official assignee or official receiver.
(v) Companies: A company is an artificial person and a contract entered into by a company is
invalid if it is not within the powers granted by the Memorandum of Association.


01. Any lawful act will constitute consideration if it is done
(a) At the desire of promisee
(b) Voluntarily
(c) At the desire of promisor
(d) At the desire of third party
02. Consideration in order to be legally valid
(a) Must be adequate
(b) Need not be adequate
(c) Must be equal in terms of value
(d) Must be in-equal to promise
03. Agreements made on account of natural love and affection without consideration will be valid
if it fulfils following conditions
(a) Expressed in writing
(b) Registered under the law
(c) Between parties standing in a near relation to each other
04. Consideration which is moved simultaneously with the promise is known as
(a) Present consideration
(b) Past consideration
(c) Future consideration
(d) Instant consideration
(a) Consideration must always be given by the promisee
(b) Consideration must be given by third party on behalf of promisee
(c) Consideration must be given by the agent of promisee
(d) Consideration may be given by promisee or any other person on his behalf

Business Law
(a) Act done at the request of the third party will form consideration for the promisor
(b) Act done by the promisee voluntarily constitutes consideration for the promisor
(c) Act done by third party will constitute consideration
(d) Act done at the request of promisor will constitute consideration for the promisee
07. Agreement made without consideration is
(a) Void
(b) Unlawful
(c) Unenforceable
(d) Voidable
(a) Future consideration or Executory consideration is one and same
(b) Past consideration is not as good as present consideration
(c) A promise to accept lesser fulfilment of promise requires consideration
(d) Consideration affects validity of completed gift.
09. Akram makes an agreement for buying raw material from Bilal on 1st January. The raw material
is to be supplied by Bilal on 20th January and Payment is to be made by Akram on 15th March.
What is the legal status of this contract?
(a) This contract is not valid as consideration has not being supplied
(b) This contract is valid as consideration is present consideration
(c) This contract is not valid because past consideration is not recognized by law
(d) This contract is valid as consideration is future consideration
10. According to the Contract Act which consideration is not valid
(a) Past consideration
(b) Present consideration
(c) Future consideration
(d) Illusory consideration

11. Consideration must be given at the desire of
(a) Promisee
(b) Promisor
(c) Both of them
(d) Third party
12. The promisor is bound to donate money
(a) If he has made promise to donate
(b) If he has charitable bent of mind
(c) If the promisee has undertaken some liability on the basis of such promise
(d) Under none of the above condition
13. Consideration must be something which the promisor
(a) Is already bound to do
(b) Is not already bound to do
(c) May voluntarily do
(d) Must not do
14. A promise to compensate, wholly or in part, a person who has voluntarily done something for
the promisor is
(a) Enforceable
(b) Not enforceable
(c) Void
(d) Voidable
15. Consideration
(a) Must move from the promisee
(b) May move from the promisee or any other person
(c) Must move from the third party
(d) May move from the promisor

Business Law
16. According to the rule, any act or promise will be valid consideration if such act has been done
or promise is made at the desire or request of the ______________.
17. In agreement promisor makes promise for doing or not doing something. Such promise will
have some value. According to the Contract Act it is not necessary that the value of promise
should be ___________.
18. A promise to pay _____________ is enforceable, if it is made in writing and It is signed by the
debtor or his agent.
19. Inadequacy of consideration does not affect validity of contract, but whatever consideration is
being given it must be ___________.
20. In the case of charitable subscription, where the _________ on the strength of the promise
makes commitment i.e. changes his position to the detriment.
21. It is necessary that in a valid contract
(a) Consideration must be lawful
(b) Object must be lawful
(c) Both of these must be lawful
(d) Anyone of these may be lawful
22. An agreement is immoral if
(a) Court regards it immoral
(b) People thinks it immoral
(c) Society does not recognize it as moral
(d) It is below the standard of moral
(a) No action is allowed in illegal agreement
(b) Partial action is allowed in illegal agreement
(c) One party of illegal agreement may be allowed to take action on it
(d) Law may allow action on such agreement

24. Criminals should be prosecuted and punished. An agreement for stifling prosecution is
(a) Valid agreement
(b) Voidable contract
(c) Unenforceable agreement
(d) Illegal agreement
25. Agreements oppose to public policy are those,
(a) Which are not liked by the public
(b) Which are against their personal interest
(c) Which injure the interest of public at large
(d) Which do not favour public
26. Agreement made with alien-enemy during the period of war is
(a) Void agreement
(b) Illegal agreement
(c) Voidable agreement
(d) Unenforceable agreement
27. Object of an agreement is said to be unlawful if it is
(a) Not Punishable by law
(b) Forbidden by law
(c) Not prohibited by special legislation
28. Which of the following agreement is valid
(a) Agreement to pay money for procuring wife
(b) Agreement to pay money in consideration for breaking a marriage
(c) Agreement to procure employment in public office in consideration of money
(d) Agreement to adopt a child duly made under Pakistan’s law

Business Law
29. Every contract is made for a lawful object or lawful purpose. The object of a contract is form on
the basis of promises made by the parties. The contract to be legally valid must contain lawful
object which includes
(a) If it is not forbidden by law
(b) If it is not defeating the provisions of any law
(c) If it is not fraudulent
30. An agreement is said to be unlawful if the court regards it as oppose to public policy. Which
one of the following is not against the public policy?
(a) Stifling prosecution
(b) Sale of public offices
(c) Trading with alien friend
(d) Marriage brokerage agreement
31. Mr. A, in consideration of Rs. 100,000/- from Mr. B agrees to publish defamatory material
against Mr. Talal, a famous lawyer, in order to damage his goodwill and reputation. This
agreement is void because
(a) It is fraudulent
(b) It is immoral and against public policy
(c) It involves an injury to a person
(d) It defeats the provision of any law
32. Mr. T agrees to buy share at premium in a joint stock company through a broker Mr. S who has
given the false impression to the public that shares were useful of being purchased at a
premium. Later on he found that broker has sold his own shares to him and not purchased any
shares from the market. What is the status of this agreement?
(a) The agreement is valid as it is a business transaction
(b) The agreement is void because the consent is obtained by coercion
(c) The agreement is valid because it is in the favour of Mr. T
(d) The agreement is void because it was aimed at cheating the public

33. Mr. P had advanced money to Mrs. D, a married woman, to enable her to obtain divorce from
her husband. Mrs. D agreed that as soon as she gets divorced she will marry Mr. P. What is
the legal status of this agreement?
(a) This agreement is valid as marriage is a lawful contract
(b) This agreement is valid as this is made with the free consent of the parties.
(c) This agreement is void because it is a marriage brokerage agreement
(d) This agreement is void on account of undue influence.
34. Due to unlawful object agreement is
(a) Enforceable
(b) Voidable
(c) Unenforceable
(d) Void
35. The collateral transaction to an illegal agreement is
(a) Valid
(b) Not to be enforced
(c) Voidable
(d) Not affected at all
36. An agreement made with an alien enemy during the period of war is ___________.
37. A person enters into an agreement whereby he is bound to do something which is against his
public or professional duty. This agreement is void on the ground of_____________.
38. An agreement to create _____________ is void as this will impair consumer sovereignty and
result in high prices for low quality of goods and services.
39. An agreement which prevents a parent to exercise his right of __________ is void.
40. An act is forbidden by law when it is _________________ by the law of the country.

Business Law
41. An agreement by an idiot is
(a) Voidable
(b) Enforceable
(c) Invalid
(d) Void ab-initio
42. An agreement made with a minor is:
(a) Void
(b) Void ab-initio
(c) Voidable
(d) Unenforceable
43. Agreement made with a minor for basic necessities is
(a) Valid
(b) Voidable
(c) Unenforceable
(d) Void, but money involved is recoverable from estate of minor
44. There are some disqualifications imposed on certain persons in respect of their capacity to
contract. Choose the incorrect one from the following
(a) Convict
(b) Alien enemy
(c) Solvent
(d) Foreign sovereign
45. Minor can be appointed as an agent, because
(a) Creation of agency does not require any consideration
(b) Agent makes agreement on behalf of principal
(c) The minor has not attained the age of majority
(d) Agreement made by minor is void, therefore principal is on safe side

46. A person is said to be of sound mind if
(a) He is mentally fit for making decisions
(b) He is capable of understanding contract and forming rational judgement about it
(c) He has been declared as of a sound mind by the Doctor
(d) He can make contract and can obtain benefit
47. Alien enemy cannot make agreement with Pakistani citizen because
(a) He is not allowed to do so, by the Government of his country
(b) Agreement made by him may not be in his interest
(c) He is legally disqualified from making contract
(d) Agreement may not be in the interest of citizen of Pakistan
48. A convict may be debarred from making agreement
(a) For one month only
(b) For ever
(c) For a particular period of time
(d) When he was convicted of an offence
49. Contractual capacity of the person is affected by
(a) His age
(b) His soundness of mind
(c) By law to which he is subject
(d) By all above factors
(a) Corporation or company can enter into a contract
(b) Foreign Ambassador can be sued in by Pakistani citizen for enforcing rights of
agreement
(c) Married woman can make agreement regarding joint property of husband and wife
(d) Lunatic has no contractual capacity at all

Business Law
51. A minor becomes liable for basic necessities supplied to him
(a) After attaining age of majority
(b) After minor makes promise to pay for
(c) From his personal property if any
(d) He is not at all liable
(a) Minor cannot be appointed as an agent
(b) Minor is not allowed to plead his minority always
(c) An agreement with a minor is void
(d) Minor can ratify void agreement, when he becomes major
53. Which of the following statement is false
(a) Minor cannot become partner in a firm
(b) Education loan taken by the minor is recoverable from his property
(c) Minor can be declared as an insolvent
(d) An agreement with a minor is void
54. A person is usually of unsound mind, but occasionally of sound mind
(a) He may enter into a contract when he is of sound mind
(b) He may not make a contract even when he is of sound mind
(c) He cannot enter into a contract at all
(d) None of the above
55. Contract entered before the declaration of war are
(a) Either suspended or terminated during the period of war
(b) Executory contract
(c) Voidable
(d) Void ab initio

56. Every person is _____________who is of the age of majority, is of sound mind and is not
disqualified by any law.
57. If a parent of a minor entered into an agreement on behalf of a minor being within the scope of
the authority and for the benefit of the minor then such agreements can be enforced by or
against _________.
58. The examples of person having ___________include specific persons / idiots, lunatic and
drunken persons.
59. If a person is usually of unsound mind then the __________ that he was of sound mind lies on
the person who confirms it.
60. A person declared as insolvent is an incompetent to contract and he cannot enter into a contract
as his property is dealt with by _______________.

Business Law

01. (c) Any act or promise will be valid consideration if such act has been done at the
request of the promisor.
02. (b) There is no requirement for the adequacy of consideration, but it should have some
monetary value.
03. (d) An agreement made on account of natural love and affection will be valid if it is
expressed in writing, registered and it is made between the parties in a near relation
04. (a) If the two acts of making promise and getting consideration are done
simultaneously, the consideration is known as Present consideration
05. (d) Consideration may be given by promisee or any other person on his behalf. Under
the law it is not important that who has given a consideration.
06. (d) Any act or promise will be valid consideration if such act has been done at the
request of the promisor.
07. (a) An agreement without consideration is void
08. (a) Future consideration or Executory consideration is one and same. The
consideration which moves after the formation of agreement is called future
consideration.
09. (d) This contract is valid as consideration is future consideration.
10. (d) The consideration may be past, present or future.
11. (b) An act or abstinence of promise constituting consideration must have been done
or made at the request of the promisor
12. (c) If the promisee has undertaken some liability on the basis of such promise because
the promisee on the strength of the promise has made commitments.
13. (b) The consideration must be something which the promisor is not already bound to
do.
14. (a) Promise made without consideration is valid if the person who is to be compensated
has done something voluntarily
15. (b) Consideration may be from the promisee himself or by any other person even by
stranger
16. Promisor.
17. Adequate.
18. Time barred debt
19. Real
20. Promisee.

21. (c) The object and consideration of an agreement both must be lawful
22. (a) When the object or consideration of an agreement is considered as immoral in the
opinion of the court such agreement will be void.
23. (a) No action is allowed in illegal agreement because action can only be taken in the
court of law when the agreement is legal.
24. (d) It is in public interest that if a person has committed crime, he must be punished
hence this type of agreement is illegal
25. (c) Doctrine of public policy apply only in those areas where the damage to public
interest is substantial.
26. (a) An agreement with alien enemy is against the national interest as no one is allowed
to make an agreement with the citizens of enemy country.
27. (b) If the object of any agreement is to do any of such act which is in contravention of
the law, such agreements are void.
28. (d) Agreement to adopt a child duly made under Pakistan’s law because adoption
made by due process of law is valid.
29. (d) An agreement is lawful when it is not forbidden by law, it is not fraudulent, and it is
not the defeating the provisions of any law.
30. (c) A person cannot enter into an agreement with an alien enemy on the ground of
public policy
31. (c) Publishing any defamatory material involves damaging the goodwill and reputation
of a person which is void.
32. (d) Any agreement made with an object of defrauding another will be void on account
of illegality.
33. (c) This agreement is void on account of immorality. An agreement in which a person
promises for reward to procure marriage for another is void being opposed to public
policy.
34. (d) If the object of the agreement is unlawful then such agreement is void
35. (b) The collateral transactions to such an agreement also become tainted and hence
cannot be enforced.
36. Void ab initio
37. Public policy
38. Monopoly
39. Guardianship
40. Punishable

Business Law
41. (d) An idiot is a person who is so mentally deficient by birth as to be incapable of

ordinary reasoning.
42. (a) An agreement with a minor is not a valid contract hence it is a void agreement.
43. (d) A person who supplied necessaries to a minor is entitled to be reimbursed from the
property of such minor.
44. (c) A person declared as insolvent cannot enter into a contract according to the law.
45. (b) Agent makes agreement on behalf of principal and he cannot be held personally
liable. He is only acting on behalf of the principal.
46. (b) He is capable of understanding contract and forming rational judgement about it.
47. (c) He cannot enter into a contract with Pakistani citizens because he is legally
disqualified from entering into contract.
48. (d) When he was convicted of an offence, but this disability comes to an end after the
expiry of the sentence or when he is on parole
49. (d) His age, soundness of mind and qualification by law is compulsory for him to have
contractual capacity.
50. (a) Being an artificial legal person, the company is legally entitled to enter into a
contract in its own name
51. (c) From his personal property if any. A minor can never be held liable personally even
for necessities supplied to him.
52. (c) An agreement with a minor is not a valid contract hence it is a void agreement
53. (c) Minor can be declared as an insolvent is false statement. A minor is already an
incompetent person and an incompetent person cannot be declared as an insolvent
54. (a) He may enter into a contract when he is of sound mind because when he is of
sound mind, he is capable to enter into a contract according to the law
55. (a) Contract entered before the declaration of war are either suspended or terminated
during the period of war.
56. Competent to contract
57. The minor
58. An unsound mind
59. Burden of proof
60. Official assignee or official receiver

CHAPTER
Business Law
Free consent and void agreements
Contents
1 Consent: Coercion and undue influence
2 Consent: Fraud and misrepresentation
3 Consent: Mistake
4 Expressly declared void agreements

Business Law
1 CONSENT: COERCION AND UNDUE INFLUENCE

Section overview
 Consent – Consensus-ad-idem
 Coercion
 Undue Influence
1.1 Consent – Consensus ad idem
Definition: Consent [Section 13]

Two persons are said to consent when they agree upon the same thing in the same sense.
Thus, the analysis of the above definition reveals that both the parties must be at the same
frequency of mind at the time of entering into a contract i.e. Consensus ad idem.
Effect of absence of consent [Section 19]
The effect of absence of consent is that the agreement is not valid and is not enforceable by law.
Example 01: Effect of absence of consent

Azam has one Alto and one Coure. He wants to sell Coure. Babar does not know that Azam has two
cars. Babar offers to buy Azam’s Alto for Rs. 400,000. Azam accepts the offer thinking it to be an
offer for his Coure. Here, there is no identity of minds in respect of the subject matter. Hence, there
is no consent at all and hence there is no agreement.
Free consent
Definition: Free consent [Section 14]

The consent is said to be free when it is not caused by:
 Coercion or
 Undue influence or
 Fraud or
 Misrepresentation or
 Mistake
Effect of absence of free consent [Section 19A]

The effect of absence of free consent is that the contract becomes voidable except in case of
mistake when the contract may be void or valid depending upon the nature of the mistake.
Example 02: Effect of absence of free consent

A widow was threatened to adopt a boy otherwise her husband’s dead body would not be allowed
to be removed for cremation. The widow adopted the boy but later applied for cancellation of
adoption. Held, that the adoption agreement was voidable at the option of the widow as her consent
was not free and was caused by coercion.

Section A: Mercantile Law - Chapter 4: Free consent and void agreements
1.2 Coercion
Definition: Coercion [Section 15]
Coercion is the:
 committing or
 threatening to commit any act
which is forbidden by Pakistan Penal Code or
 unlawful detaining or
 threatening to detain,
any property with an intention of causing any person to enter into an agreement.
The analysis of the above definition reveals that coercion may be compelling a person to enter into
a contract under pressure or a threat.
Example 03: The act forbidden by Pakistan Penal Code

Azam beats Babar and compels him to sell his bike for Rs. 20,000. Here, Babar’s consent has been
obtained by coercion because beating someone is an offence under the Pakistan Penal Code.
Example 04: Unlawful threatening to detain the property

The government threatens to seize the property of Azam to recover the fine due from Babar, the
son of Azam. Azam paid the fine. Held that fine was recovered by coercion.
It is immaterial that Pakistan Penal Code is or is not in force in place where coercion is employed.
If the suit is filed in Pakistan, the provisions of Pakistan Penal Code shall apply.
Example 05: Coercion

Ameer, on board an English ship causes Faqeer to enter into an agreement by an act amounting to
criminal intimidation under the Pakistan Penal Code. Ameer afterwards sues Faqeer for breach of
contract at Karachi. Ameer has employed coercion, although his act is not offence by the law of
England and PPC was not in force at the time when or place where the act was done.
Coercion may be exercised from any person, and may be directed against any person, even a
stranger.

 Ameer threatens to kill Salma, Basit’s daughter, if Basit refuses to sell his house to him. Basit
agrees to sell his house. Here, Basit’s consent has been obtained by coercion though Salma
is not a party to the contract.
 Asif threatens to kill Babar if Babar refuses to sell his house to Salman. Babar agrees to sell
his house. Here, Babar’s consent has been obtained by coercion though Asif is not a party to
the contract.
Effects of coercion [Section 19, 64 and 72]

The contract becomes voidable at the option of the party whose consent was so caused. The
burden of proof lies on the party who rescinds the contract.
 The party rescinding a voidable contract shall, if he has received any benefit from another
party, restore such benefit i.e. restitution.
 A person to whom money has been paid or anything delivered by coercion must repay or
return it.
Example 07: Effects of coercion

Azam threatens to kill Babar if he does not sell his BMW for Rs 1 million to Azam. Babar contracted
to sell his BMW to Azam and receives the payments. Here, Babar’s consent has been obtained by
coercion. Hence, this contract is voidable at the option of Babar but Azam has no right to insist that
contract shall be performed.

Business Law
1.3 Undue influence
Definition: Undue influence [Section 16 (1)]

A contract is said to be induced by undue influence where the relations subsisting between the
parties are such that one of the parties is in a position to dominate the will of the other and uses
that position to obtain unfair advantage over the other.
Position to dominate in a relationship

A person is in a position to dominate the will of another where he:
 holds the real or apparent authority over the other e.g. tax officer and taxpayer, police officer
and accused being investigated.
 stands in a fiduciary relation to the other e.g. parent and child, guardian and minor, advocate
and client.
 makes a contract with a person whose mental capacity is temporarily or permanently
affected by reason of age, illness or mental or bodily distress e.g. medical attendant and
patient.
Example 08: Position to dominate

 Azam having advanced money to his son, Babar during his minority, upon Babar’s coming of
age obtains, by misuse of parental influence, a bond from Babar for a greater amount than
the sum due in respect of the advances. Azam employs undue influence.
 Ameer, a man enfeebled by disease or age, is induced, by Asif’s influence over him as his
medical attendant, to agree to pay Asif an unreasonable sum for his professional services.
Asif employs undue influence.
Presumption of position to dominate

In the relationships of father and son, guardian and minor, employer and employee, trustee and
beneficiary, teacher and student, doctor and patient, solicitor and client, fiancé and fiancée and
contract by or with Pardanasheen lady (completely secluded), it is presumed that a person is in a
position to dominate the will of another person. The burden of proof lies on the person who is in
the position to dominate.
Example 09: Presumption of undue influence

Ameer, a man enfeebled by disease or age agrees with Asif, his medical attendant, to pay Asif a
large sum for his professional services. The burden of proof that undue influence was not exercised
lies on Asif as he is presumed to be in a position to dominate.
Rebutting presumption
The presumption of undue influence can be rebutted by showing that:
 the dominant party has made a full disclosure of all the facts to the weaker party before
making the contract
 the price was adequate
 the weaker party was in receipt of competent independence advice before entering into the
contract.
Example 10: Rebutting presumption

Qaiser, a teacher sold an agricultural property to his student, Maqbool. Later, Maqbool filed a suit
to cancel the transaction. Qaiser showed that he had provided complete facts relating to property
to Maqbool, the price was market based, Maqbool had obtained advice from property dealers of his
choice before finalising the contract. Held, the contract was valid and consent was not caused by
undue influence.

No presumption of position to dominate

In the relationships of landlord and tenant, creditor and debtor, husband and wife, principal and
agent, there is no presumption that a person is in a position to dominate the will of another person.
The burden of proof lies on the person who wants to set aside the contract on the basis of undue
influence.
Example 11: No presumption of undue influence

 Asif, an agent agreed to sell stock of Sajid (the principal) @2% commission. Later, Asif
demanded 5% commission being the market rate and on account that his consent was
obtained by undue influence. There is no presumption of position to dominate and burden of
proof lies on Asif.
 Adeel applies to a banker for a loan at a time when there is stringency in the money market.
The banker declines to make the loan except at an unusually high rate of interest. Adeel
accepts the loan on these terms. This is a transaction in the ordinary course of business, and
the contract is not induced by undue influence.
Effect of undue influence [Section 19 & 19A]

The contract becomes voidable at the option of the party whose consent was so caused. The
contract may be set aside either absolutely or if the party who was entitled to avoid it has received
any benefit, upon such terms and conditions as to the Court may seem just.
Example 12: Effect of undue influence

Kanwar, a money lender advanced money to Sajid, an agriculturist in emergency situation and by
undue influence made him to execute a bond of double the amount with high interest rate. The
Court may set aside the bond, ordering Sajid to repay original amount with such interest as may
seem just.
Difference between coercion and undue influence

S.no Coercion Undue influence
1 Consent
Consent is obtained by giving a Consent is obtained by dominating the will.
threat of an offence or committing an
offence.
2 Nature of pressure
It involves physical pressure. It involves moral pressure.
3 Relationship
Parties to a contract may or may not Parties to a contract are related to each other
be related to each other. under some sort of relationship.
4 Reason
The objective is to compel a person The objective is to obtain an unfair advantage.
to enter into a contract.
5 Criminal liability
Criminal liability is incurred, therefore Criminal liability is not incurred.
it is illegal.
6 On whom
Coercion may be employed on a Undue influence may only be employed on the
stranger party whose consent is desired.
7 By whom
It can be exercised by a stranger to It can only be exercised by a party to the
the contract. contract and not by a stranger.

Business Law
S.no Coercion Undue influence

8 Onus of proof
The onus of proof is on the party who The onus of proof is on the party in a position to
wants to relieve himself of the dominate the will of the other party.
consequences of coercion.
9 Restoration of benefit
The aggrieved party has to restore The party avoiding the contract may or may not
the benefit received. restore benefit.

Question: Arif told Bano, his wife, that he would divorce her, if she does not transfer her personal
assets to him. She agreed to transfer her assets to him. Can Bano avoid the contract?
Answer:
Yes, Bano can avoid the contract as her consent was caused by coercion.

Question: Jamal threatened Rafia to murder her son Atif if she did not sell her house to Mujahid.
Rafia did as she was told. Under the provisions of the Contract Act, 1872 comment on the validity
of the above contract.
Answer:
The contract in the above situation is voidable at the option of Rafia as her consent is not free and
has been obtained by coercion.
Example 15: Undue influence

Question: Haroon was engaged to be married to Ghazala. Haroon wanted to establish his own
business and therefore he entered into a contract with Ghazala for providing him all her jewellery
and apartment by way of a gift and in return Haroon agreed to give her a small share in business
profit. After some time, Ghazala filed a suit against Haroon, requesting for setting aside the gift
deed as it was not made with her free will. Discuss whether Ghazala would succeed in her
contention.
Answer:
Ghazala may succeed to recover her jewellery and apartment from Haroon on the presumption of
undue influence. A contract is said to be induced by undue influence where the relation subsisting
between the parties is such that one of the parties is in a position to dominate the will of the other
and uses that position to obtain unfair advantage over the other. Haroon in this case is a fiancé of
Ghazala and is in a position to dominate her will.
When the consent to an agreement is caused by undue influence, the agreement is voidable at the
option of the party whose consent is so caused. Therefore, the contract is voidable at the option of
Ghazala.
The Court may set aside the contract either absolutely or, in case if Ghazala has received any benefit
under the contract, upon such terms and conditions as the Court may seem just. The burden of
prove that the above contract, which on the face of it appears to be unconscionable, was not
induced by undue influence lies on Haroon, as he is the one who is in a position to dominate
Ghazala’s will.

2 CONSENT: FRAUD AND MISREPRESENTATION

Section overview
 Fraud
 Misrepresentation
2.1 Fraud
Definition: Fraud [Section 17]
Fraud means and includes any of the following acts committed:
 by a party to a contract, or with his connivance, or by his agent
 with an intent to deceive another party thereto or his agent to enter into a contract.
Fraudulent acts
Intentional false A false representation of a fact made knowingly or without belief in its truth
assertion is fraud.
The active concealment of a fact by one having knowledge or belief of the

Active
fact such as, where steps are taken by a seller concealing some material
concealment of
facts so that the buyer even after a reasonable examination cannot trace
facts
the defects, will amount to fraud.
Intentional non -
A promise made without any intention of performing it constitutes to fraud.
performance
Intention to
Any act with an intention to deceive is considered to be fraudulent.
deceive
Certain acts or Under certain situations, law declares certain acts and omissions to be
omissions fraudulent.
Example 16: Intentional false assertion

Azam sells to Babar locally manufactured goods representing them to be imported goods charging
a higher price, it amounts to fraud.
Example 17: Active concealment of facts

Zia a furniture dealer conceals the cracks in furniture sold by him by using some packing material
and polishing it in such a way that the buyer even after reasonable examination cannot trace the
defect, it would amounts to fraud through active concealment.
Example 18: Intentional non-performance

Buying goods under a contract of sale with an intention of not paying the price is fraud.
Example 19: Intention to deceive

A company issued a prospectus containing a statement that company paid dividend between 2001
and 2007 implying that company has been profitable. In fact, the company suffered losses in those
years and paid dividend out of reserves. Held, there was an intention to deceive.

Business Law
Example 20: Certain acts or omissions

Ameer sold his house to Basit for Rs. 10 million. The house was mortgaged with Salman for Rs. 10
million. Ameer did not inform Basit about it, although it was his legal obligation to do so. Later,
Salman claimed Rs. 10 million from Basit. Basit can avoid contract as Ameer is guilty of fraud.
Essentials of fraud
The fraud must be committed by a party to a contract or by anyone with his

Party to a
connivance or by his agent. Thus, the fraud by a stranger to the contract
contract
does not affect its validity.
It means that a false representation is made with the knowledge of its
False falsehood. It will equal to fraud if a true representation is made but becomes
representation untrue at the time of formation of contract the fact is known to the party who
made the representation.
Representation A mere opinion does not amount to fraud. A representation must relate to a
as to fact fact then it amounts to fraud.
Actually A deceit, which does not deceive is not fraud. The fraud must have actually
deceived deceived the other party who has acted on the basis of such representation.
Suffered loss Loss has been suffered by the party who acted on the representation.
Example 21: Essentials of fraud

Abid knows that his watch is made in Pakistan but tells Babar that it has been made in Japan.
Babar buys the watch for a large sum. The fraud was committed by party to the contract (Abid), it
was false representation as to fact (origin of product), representation related to fact and there was
clearly intention to deceive and Babar suffered loss by paying a large sum.
Effects of fraud [Section 19]

The effects of fraud are as follows:
 The contract becomes voidable at the option of the party whose consent was so caused.
 The party whose consent was so caused may insist on performance of the contract.
 The party whose consent was so caused is entitled to claim damages.
Example 22: Effects of fraud

Abid knows that his watch is made in Pakistan but tells Babar that it has been made in Japan.
Babar pays amount for the watch and Abid delivers it next day. Babar committed one of his client,
Arslan, a made-in-Japan watch based on contract with Abid. On delivery, Babar discovered the fraud
committed by Abid. The contract is voidable at the option of Babar. Babar may rescind the contract
or may perform the contract and (in addition) may claim damages (for being unable to perform
contract with Arslan).
Exceptions to rescind the contract

A party cannot rescind the contract where:
 silence amounts to fraud and the aggrieved party had the means of discovering the truth
with ordinary diligence
 the party gave the consent in ignorance of fraud
 the party after becoming aware of the fraud takes a benefit under the contract
 an innocent third party before the contract is rescinded acquires for consideration and in
good faith some interest in the property passing under the contract,
 the parties cannot be restored to their original position.

Example 23: Exception to rescind the contract

Kamran bought a car from Habib for Rs. 1,200,000. Habib did not tell that car was fully repainted.
Kamran cannot rescind the contract. Although Habib’s silence amounted to fraud, the repainting
of car could have been discovered by ordinary diligence.

Burhan Limited bought majority shares of Hussain Limited in order to gain control over new
technological research being undertaken by Hussain Limited. Later, Burhan Limited discovered that
financial statements were materially overstated (which he did not check) and he had paid
unnecessarily higher price for shares. Under the Contract Act, he cannot rescind the contract as his
purchase of shares was in ignorance of fraud.

Anum Limited bought majority shares of Sanam Limited on the basis of financial statements which
were materially misstated. After discovering the fraud, Anum Limited transferred high value
properties of Sanam Limited to itself on low prices to cut its losses. Anum Limited now cannot
rescind the contract on account of fraud because it has taken benefit under the contract after
discovering the fraud.

Ahmad sold certain goods to Omer by fraud. Omer sold the same to Ali who acquired it in good
faith and for consideration. Later, Omer discovered the fraud. He cannot rescind the contract.

Ahmad sold wheat of certain quality to Hassan by fraud which Hassan and his family consumed.
Later, Hassan discovered the fraud regarding quality of wheat. Hassan cannot rescind the contract
as parties cannot be restored to their original position. Though, Hassan may claim for damages.
Silence as to fraud [Section 17]

Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not
fraud, unless the circumstances of the case are such that parties stands in fiduciary relationship or
where silence itself is equivalent to speech.
Example 28: Silence as to fraud

 Ameer sells by auction to Bano a horse which Ameer knows to be unsound. Ameer says
nothing to Bano about the horse's unsoundness. This is not fraud by Ameer.
 Ameer sells by auction to Bano a horse which Ameer knows to be unsound. Ameer says
nothing to Bano about the horse's unsoundness. Bano is Ameer's daughter and has just come
of age. Here, the relation between the parties would make it Ameer's duty to tell Bano if the
horse is unsound. This is fraud by Ameer
 Ameer sells by auction to Bano a horse which Ameer knows to be unsound. Bano says to
Ameer, "If you do not deny it, I shall assume that the horse is sound." Ameer says nothing.
Here Ameer's silence is equivalent to speech. If the horse turns out to be vicious, Ameer can
be held liable for fraud.
2.2 Misrepresentation
Definition: Misrepresentation [Section 18]

Misrepresentation means and includes:
Unwarranted statement
When a person makes a positive statement that a fact is true when his information does not
warrant it to be so, though he believes it to be true this amounts to misrepresentation.

Business Law
Breach of duty
Any breach of duty which without an intent to deceive, gains an advantage to the person committing
it, or anyone claiming under him, by misleading another to his prejudice or to the prejudice of
anyone claiming under him.
Inducing mistake about subject matter (Innocent misrepresentation)
A party to an agreement induces (however innocently) the other party to make a mistake as to the
nature or quality of the subject of the agreement.
Example 29: Unwarranted statement

Anwar sold a mine to Munawar and told certain facts about the mine which were incorrect. Anwar
believed them to be true. Later, Munawar discovered the real facts. This is a misrepresentation.
Example 30: Breach of duty

Azhar told Mazhar that the monthly sale of his business was Rs. 50 million before the contract was
signed. Sales was decreased to Rs. 35 million. Azhar did not inform Mazhar about the decrease.
Held, there was misrepresentation.
Example 31: Inducing mistake about subject matter

The seller told the buyer that the bike is free from defects but there was a built-in defect in it. There
is a misrepresentation.
Essentials of misrepresentation
The representation must be made by a party to a contract or by anyone with

Party to a
his connivance or by his agent. Thus, the representation by a stranger to
contract
the contract does not affect the validity of the contract.
There must be a false representation and it must be made without the

False
knowledge of its falsehood i.e. the person making it must honestly believe it
representation
to be true.
Representation A mere opinion does not amount to misrepresentation. A representation

as to fact must relate to a fact if it amounts to misrepresentation.
The objective is to induce the other party to enter into contract without the
objective
intention of deceiving the other party.
Actually acted The other party must have acted on the faith of the representation.
Effects of misrepresentation [Section 19]

The effects of misrepresentation are following:
 the contract becomes voidable at the option of the party whose consent was so caused.
 The party whose consent was so caused may insist on performance of the contract.
Example 32: Effects of misrepresentation

Azam sold a machine to Babar under misrepresentation that it is made-in-Germany. The contract
is voidable at the option of Babar. Babar may rescind the contract or may perform the contract. The
court may or may not order for damages to be paid.

Exceptions to rescind the contract

A party cannot rescind the contract where:
 the party whose consent was caused by misrepresentation had the means of discovering
the truth with ordinary diligence;
 the party gave the consent in ignorance of misrepresentation
 the party after becoming aware of the misrepresentation takes a benefit under the contract
 an innocent third party before the contract is rescinded acquires for consideration and in
good faith some interest in the property passing under the contract,
 the parties cannot be restored to their original position.

Ahmad sold wheat of certain quality to Hassan under misrepresentation which Hassan and his
family consumed. Later, Hassan discovered the misrepresentation regarding quality of wheat.
Hassan cannot rescind the contract as parties cannot be restored to their original position.
Difference between fraud and misrepresentation
S.no Fraud Misrepresentation
1 Intention
Implies an intention to deceive. Representation is innocent without intent to
deceive.
2 Remedies
It is civil wrong and aggrieved party Aggrieved party can only avoid the contract
can claim damages in addition to but damages are only payable at discretion of
Cancellation of contract. court.
Example 34: Fraud

Question: Under the provisions of the Contract Act, 1872 describe the term “Fraud”.
Answer:
“Fraud” means and includes any of the following acts committed by a party to a contract, or with
his connivance, or by his agent with intent to deceive another party thereto or his agent, or to induce
to enter into the contract.
(i) The suggestion, as a fact of that which is not true, by one who does not believe it to be
true;
(ii) The active concealment of a fact by one having knowledge or belief of the fact;
(iii) A promise made without any intention of performing it;
(iv) Any other act fitted to deceive;
(v) Any such act or omission as the law specially declares to be fraudulent.
Explanation: Mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud, unless the circumstances of the case are such that, regard being had to them,
it is the duty of the person keeping silence to speak, or unless his silence is in itself, equivalent to
speech.

Business Law
Example 35: Misrepresentation – When rescission is not allowed

Question: Shafiq bought Abad’s motorcycle factory in Faisalabad on Abad’s representation that fifty
thousand motorcycles are assembled at his factory annually. Shafiq later found that the factory has
a capacity to manufacture thirty five thousand motorcycles only per annum. Shafiq now wants to
rescind the contract on the ground that his consent was obtained by misrepresentation. Under the
provisions of the Contract Act, 1872 list the circumstances under which Shafiq may not be able to
rescind the contract.
Answer:
Shafiq may not be able to rescind the contract under the following circumstances:
 If Shafiq had the means of discovering the truth with ordinary diligence; or
 Abad’s misrepresentation was not the basis for Shafiq’s consent; or
 After becoming aware of the misrepresentation Shafiq may have taken benefit under the
contract; or
 If an innocent third party had acquired for consideration and in good faith some interest in the
property; or
 Shafiq and Abad cannot be restored to their original positions.
Example 36: Misrepresentation

Question: Ghaffar purchased a piece of land from Sharif who is an engineer by profession. During
the discussion prior to the purchase, Sharif had told Ghaffar that in his opinion, the land would be
able to support 2,500 mango trees. However, only 2300 trees could eventually be planted on the
land. Under the provisions of the Contract Act, 1872 discuss whether Ghaffar can claim damages
on the grounds of fraud.
Answer:
Sharif’s statement that in his opinion the land could support 2,500 mango trees clearly indicated
that he was not sure about it and was just giving an opinion. Therefore, unless Ghaffar can show
that the statement was made with the intention to deceive him, he cannot claim damages on the
grounds of fraud.
Example 37: Fraud

Question: Mughal and Dawood are trading in rice. Dawood entered into a contract with Mughal for
the purchase of 50 tons of rice. Dawood had private information of change in prices which would
have affected Mughal’s willingness to enter into the contract. When Mughal, through his own
resources, came to know about the prices, he accused Dawood of fraud and repudiated the
contract. Under the provisions of the Contract Act, 1872 explain whether Mughal is justified in
repudiating the contract.
Answer:
No, Mughal is not justified in repudiating the contract. Dawood is not bound to disclose the
information to Mughal as the relationship existing between them is not that of ‘utmost good faith’
(i.e. fiduciary relationship). Mere silence as to facts likely to affect the willingness of a person to
enter into a contract is not fraud, unless there is a duty to disclose such fact or where silence is
equivalent to speech.
Example 38: Fraud

Question: Sultan bought electronic appliances worth Rs. 700,000 from Zameer on thirty days’
credit. At the time of purchase, Sultan knew that he was in insolvent circumstances. Discuss the
validity of the contract.
Answer:
A promise made without any intention of performing it tantamount to fraud. Therefore, in this case
since Sultan had no intention of performing the contract, he committed a fraud and the contract is
voidable at the option of Zameer.

3 CONSENT: MISTAKE
Section overview
 Mistake of law
 Mistake of fact
3.1 Mistake of law

Mistake of Pakistan law [Section 21]
Everyone is deemed to be conversant with the law of his country, and therefore, mistake of law is
no excuse and it does not give right to the parties to avoid the contract.
Example 39: Mistake of Pakistani Law

Azam and Babar make a contract which is based on erroneous belief that a particular debt is barred
by Pakistani Law of limitation. The contract is valid.
Mistake of foreign law [Section 21]

Mistake of foreign law stands on the same footing as the ‘mistake of fact’. Here the agreement is
void in case of bilateral mistake only.
Example 40: Mistake of foreign law

Andrew, a Pakistani, agrees to export a particular medicine to Boris, a foreign national. Unknown
to both of them, the law of that country has banned the sale and purchase of that particular
medicine. This is a mistake of foreign law and the agreement is void.
3.2 Mistake of fact

Bilateral mistake [Section 20]
Where both the parties to an agreement are under a mistake as to a matter of facts essential to
the agreement, the agreement is void.
An erroneous opinion as to the value of the thing which forms the subject matter of the agreement
is not to be deemed a mistake as to a matter of facts.
Bilateral mistake as to the subject matter
A bilateral mistake as to the subject matter includes the mistakes as to the existence of subject
matter, quantity of subject matter, quality of subject matter, price of subject matter, identity of
subject matter, and title of subject matter.
Example 41: Bilateral mistake as to the subject matter

 Atif agrees to buy from Babar a certain horse. It turns out that the horse was dead at the
time of bargain though neither party was aware of the fact. The agreement is void because
there is bilateral mistake as to the existence of subject matter.
 Asif agrees to buy from Bakar all his horses believing that Bakar has three horses but Bakar
actually has two horses. The agreement is void because there is bilateral mistake as to the
quantity of subject matter
 Arif agrees to buy a particular horse from Baqir. Both believe it to be a race horse but it turns
to be a cart horse. The agreement is void because there is bilateral mistake as to the quality
of the subject matter.
 Ameer agrees to buy a particular horse from Basit who mentioned (due to typing error) in his
letter the price as Rs 1,150 instead of 5,150. The agreement is void because there is bilateral
mistake as to the price of the subject matter.

Business Law
 Azam agrees to buy from Babar a certain horse. Babar has one race horse and one cart
horse. Azam thinks that he is buying race horse but Babar thinks that he is selling cart horse.
The agreement is void because there is bilateral mistake as to the identity of subject matter.
 Adeel agrees to buy a particular horse from Mazhar. That horse is already owned by Adeel.
The agreement is void because there is bilateral mistake as to the title of the subject matter.
Bilateral mistake as to the possibility of performance

Where the parties believe that an agreement is capable of performance and actually it is not then
it is said to be a bilateral mistake as to the possibility of performance due to which agreement is
void.
Example 42: Bilateral mistake as to the possibility of performance

Azam agrees to sell to Babar a specific cargo of goods supposed to be on its way from England to
Karachi. It turns out that, before the date of the bargain, the ship conveying the cargo had been
cast away and the goods lost. Neither party was aware of facts. The agreement is void.
Unilateral mistake [Section 22]

A contract is not voidable merely because it was caused by one of the parties to it being under a
mistake as to matter of facts.
Example 43: Unilateral mistake

Azam buys a painting believing it to be worth Rs 100,000 while in fact it is worth only Rs 10,000.
This is unilateral mistake and the contract is valid.
Exceptions
Following are the exceptions where agreement is void on the basis of unilateral mistake:
 Mistake relating to the identity of the person
 Mistake relating to the nature of the contract
Example 44: Mistake relating to the identity of the person
Asif knew that on account of his criticism of the plays in the past, he would not be allowed entry to
the performance of a play at the theatre. The managing director of the theatre gave instructions
that ticket should not be sold to Asif. Asif, however, obtained a ticket through one of his friends. On
being refused admission to the theatre, he sued for damages for breach of contract. It was held
that there was no contract between the theatre company and Asif as the theatre company never
intended to contract with Asif.
Example 45: Mistake relating to the nature of contract

An old illiterate man was induced to sign a cheque by means of a false representation that it was
a mere guarantee. It was held that he was not liable for the cheque because he never intended to
sign a cheque.
Example 46: Mistake

Question: Explain what effects following have on the validity of the contract:
(a) Unilateral mistake of law in force in Pakistan
(b) Unilateral mistake as to matter of fact
(c) Mutual mistake of foreign law
Answer:
The effects on the validity of the contract are given below:
(a) In case of unilateral mistake of law in force in Pakistan the contract is not voidable.
(b) In case of unilateral mistake of fact the contract is not voidable
(c) In case of mutual mistake of foreign law the agreement is void.

4 EXPRESSLY DECLARED VOID AGREEMENTS

Section overview
 Agreements in restraint of trade

 Wagering agreements
 Other void agreements
4.1 Agreements in restraint of trade [Section 27]

Every agreement by which anyone is restricted from exercising a lawful profession, trade or
business of any kind, is to that extent void.
Example 47: Agreements in restraint of trade

Azhar and Mazhar carried on business in a certain locality in Karachi. Azhar promised to stop
business in that locality if Mazhar paid him Rs. 1,000. Azhar stopped his business but Mazhar did
not pay him the promised money. It was held that Azhar could not recover anything from Mazhar
because the agreement was in restraint of trade and was thus void.
Following are the exceptions where agreements in restraint of trade are not considered as void:
Exception: Sale of goodwill
One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a
similar business within specified local limits, so long as the buyer, or any person deriving title to
the goodwill from him, carries on a like business therein, provided that such limits are reasonable.
Example 48: Sale of goodwill

 Adeel sells his bakery to Badar with goodwill of Rs. 100,000 and agrees not to open a bakery
anywhere in Pakistan. The agreement is unreasonable and so void.
 Salman sells his business of imitation jewellery in Multan to Dawood and promises that for
two years he will not deal in imitation jewellery in Multan. The promise is held valid and
enforceable.
Exception: Partners’ agreements [Section 11, 36, 54 & 55 of Partnership Act]

The Partnership Act allows following agreements as an exception to the agreement in restraint of
trade:
Existing Subject to contract between partners, a partner may not carry on any
partner business competing with that of the firm while he is a partner.
An outgoing partner may agree with his partners that he will not carry on any
Outgoing
business similar to that of the firm for a specified period and for specified local
partner
limits.
Partners may, upon or in anticipation of the dissolution of the firm, make an
Dissolution of
agreement that some or all of them will not carry on a business similar to that
firm
of the firm for a specified period and for specified local limits.
Sale of Partner(s) may upon the sale of the goodwill of a firm, make an agreement
goodwill that partner(s) will not carry on any business similar to that of the firm for a
specified period and for specified local limits.
Example 49: Partners’ agreement

Shabir joins the firm of Bashir and Munir, who deal in spare parts at the Mall, Lahore. Shabir agrees
that after leaving the firm, he will not carry on similar business at the Mall for 2 years. The restraint
is enforceable as it is reasonable.

Business Law
Trade combinations
An agreement between different firms in the nature of a trade combination in order to maintain a
price level and avoid under selling is not void.
Example 50: Trade Combinations

 An agreement by two persons to avoid competition is void because it tends to create
monopoly.
 An agreement among some manufacturing companies not to sell goods below a minimum
price and to divide the profits in a certain proportion is not void because such agreement
was made to regulate the business and not to restrain it.
Service Agreements
During the employment, agreement of services often contains a clause by which an employee is
prohibited from working anywhere else. Such a clause in service agreement by which an employer
restricts the employee from engaging in any competing business or accepting any other
employment is not restraint of trade. Further, where legitimate interest or goodwill or trade secret
of employer is involved an employer may restrict his employee even after the end of employment
but such restriction should be just and reasonable.
Example 51: Service Agreements

 An employee who possesses certain trade secrets, agreed not to carry on the similar
business during 5 years after the termination of service. It is a valid agreement because
restraint is intended to protect an employer against an employee making use of trade secrets
learned by him in the course of his employment.
 An agreement to restrain an employee from competing for 5 years after the period of service.
It is void because restraint is intended to avoid competition.
4.2 Wagering agreement [Section 30]

An agreement between two persons under which money or money’s worth is payable, by one
person to another on the happening or non-happening of a future uncertain event is called a
wagering agreement. An agreement by way of wager is void.
Example 52: Wagering agreement

Arslan promises to pay Rs. 10,000 to Arif if it rained today, and Arif promises to pay Rs. 1,000 to
Arslan if it did not. The agreement is void.
Effects of Wagering Agreement
The effects of wagering agreements are following:

 Such agreements are void
 No suit can be filed to recover the amount won on any wager.
 Transactions which are collateral to wagering agreements may also be void.
Example 53: Effect of wagering agreement

Habib agreed with Arslan that he will buy refrigerator from Arslan for Rs. 80,000 if Habib won a
wager within next week. The wagering agreement is void. The agreement to buy refrigerator, being
collateral to wagering, is also void.
Transactions which are not held wagers
 Prize competitions which are games of skill e.g. picture puzzles, athletic competitions.
 An agreement to contribute to a plate or prize of the value of Rs. 500 and above to be
awarded to the winner of a horse race.

 If there is intention of actually receiving and delivering goods (or shares) at a future date,
this is not wagering agreement. If only price difference or fluctuation is to be paid or
received, this is wagering agreement; and
 Contract of insurance
Example 54: Transactions which are not held wagers

An agreement to enter into a wrestling event in which winner was to be rewarded by the entire sale
proceeds of tickets is not a wagering agreement.
4.3 Other void agreements

Agreements in restraint of legal proceedings [Section 28]
Every agreement by which any party is restricted from enforcing his right under a contract by the
usual legal proceedings or which limits the time within which he may enforce his right is void.
Example 55: Agreements in restraint of legal proceedings

 Anwar agrees to sell sugar to Bashir and both agree that in case of breach of contract by any
party, none of them will go to the court. The agreement is void.
 Azam gives Babar Rs. 100,000 as a loan for 1 year and agrees that if Babar fails to return
the loan, Azam must sue within 2 years otherwise Babar will not be liable. The agreement is
void.
Exceptions
 An agreement between two or more persons who agree that any dispute which may arise
between them shall be referred to arbitration, is valid.
 An agreement whereby parties agree not to file an appeal in upper court of law, is valid.
 Parties making contract to select one court of law between two courts equally competent.
Example 56: Exception to agreements in restraint of legal proceedings

 Adeel sells 50 clocks to Kashif. Both agree that any dispute will be referred to arbitrator. It
is a valid contract.
 Atif sells sports goods from Sialkot to Naeem in Lahore. In case of dispute they may sue in
Sialkot’s court or Lahore’s court. Both agree that they will sue in Lahore’s court only. The
agreement is valid.
Agreements in restraint of marriage [Section 26]

Every agreement in restraint of the marriage of any person other than a minor is void. This is
because the law regards marriage and married status as the right of every individual.
Example 57: Agreements in restraint of marriage

Bushra promises with Azam for good consideration that she will not marry Salman. It is a void
agreement.
Uncertain agreements [Section 29]

An agreement the meaning of which is not certain or capable of being made certain are void.
Example 58: Uncertain agreements

 Salim agrees to sell to Babar "a hundred ton of oil". There is nothing whatever to show what
kind of oil was intended. The agreement is void for uncertainty.
 Dawood, who is a dealer in coconut oil, agrees to sell to Babar "one hundred ton of oil." The
nature of Dawood's trade affords an indication of the meaning of the words, and that he has
entered into a contract for the sale of one hundred tons of coconut oil.

Business Law
 Salim agrees to sell to Babar "all the grain in my granary at Peshawar." There is no
uncertainty here to make the agreement void.
 Salim agrees to sell to Babar "one thousand mounds of rice at a price to be fixed by Kashif."
As the price is capable of being made certain, there is no uncertainty here to make the
agreement void.
 Salim agrees to sell to Babar "my white horse for Rupees five hundred or Rupees one
thousand." There is nothing to show which of the two prices are to be paid. The agreement
is void.
Agreements contingent on impossible events [Section 32]

Contingent agreements to do or not to do anything, if an impossible event happens are void
whether the impossibility of the event is known or not to the parties to the agreement at the time
when it is made.
Example 59: Agreements contingent on impossible events

Azam agrees to pay Rs. 1,000 if Babar marries Salma (a Muslim woman) who is already married
to Dawood. This agreement is void.
Agreements to do impossible acts [Section 56]

An agreement to do an impossible act is void.
Example 60: Agreements to do impossible acts

Azam agrees with Babar to discover treasure by magic. The agreement is void.
Agreements to enter into an agreement in the future

An agreement to enter into an agreement in the future is void.
Example 61: Agreements to enter into an agreement in the future

Azam agrees with Babar to enter into an agreement in the future, and no further terms are
identified. Azam and Babar are not bound to enter into agreement with each other.
Effect on agreement collateral to void agreement

When an agreement is void, other agreement which is collateral to it is also void and is not
enforceable by law if the other party has knowledge about it.
Example 62: Effect on agreement collateral to void agreement

Habib agreed with Arslan that he will buy refrigerator from Arslan for Rs. 80,000 if Habib received
cash from Sajid in an agreement in which he will discover gold by magic for Sajid. The agreement
to buy refrigerator, being collateral to void agreement to do impossible act, is also void.
Example 63: Wager

Question: Two wrestlers Goga and Sheeda agreed to play a wrestling match on the condition that if
any of them would fail to appear for the match, he would have to pay Rs. 5,000 to the other party.
The winner was to receive Rs. 20,000 out of the sale proceeds of the tickets. Goga failed to appear
in the match and Sheeda sued him for Rs. 5,000. Goga however, refused to pay claiming that being
wagering in nature, the contract is not enforceable by law.
Under the provisions of the Contract Act, 1872 describe whether Sheeda can recover the amount
from Goga.

Answer:
All agreements knowingly made to further or assist the entering into, effecting or carrying out, or to
secure or guarantee the performance, of any agreement void being in nature of wager, are void.
But in this case, Goga and Sheeda were not going to win or lose in terms of money as a result of
wrestling match (i.e. uncertain event). The winning amount had not to be given out of their pockets,
but had to be paid from the gate money which was provided by the public. As for the condition of
payment for non-appearance, no uncertain event provided the equal chances of winning or losing.
Therefore, Sheeda is entitled to recover the amount from Goga as the agreement between Goga
and Sheeda is not a wagering agreement and therefore, it is enforceable at law.
Example 64: Agreement in restraint of trade and legal proceedings

Question: Until recently Mansoor and Arif were independently engaged in the business of selling
sweets at Multan railway station. Mansoor incurred a loss due to competition. Arif, in view of his
friendship with Mansoor, agreed to move his business to the old city area.
They reached an agreement that Arif would not engage in any competing business with Mansoor.
It was also agreed that in case of a breach, none of them would have recourse to a court of law for
the enforcement of their rights.
Subsequently, due to economic downturn, Arif in addition to the old city area has also started to
sell sweets at Multan railway station. Mansoor, in order to restrain Arif from selling sweets has filed
a suit against him.
Under the provisions of the Contract Act, 1872 analyse the above situation and explain the
following:
(i) whether Arif is justified in starting sweets business at Multan railway station.
(ii) what would be your answer in (i) above, if Mansoor had bought the goodwill of Arif’s
business.
(iii) whether Mansoor is justified in filing a suit in the court of law.
(iv) what would be your answer in (iii) above, if both Arif and Mansoor had agreed to refer their
disputes to arbitration and not to the court of law.
Answer:
Part (i) Agreement in restraint of trade
Yes, Arif is justified in starting a sweets business at Multan railway station. As any agreement by
which anyone is restricted from exercising a lawful profession, trade or business of any kind, is void
to that extent.
Part (ii) Exception:
Arif in this case would not be justified to start similar business at Multan railway station. An
agreement which restrains the seller of a goodwill from carrying on a business is valid if all the
following conditions are fulfilled:
 Such restriction must relate to a similar business.
 Such restriction must be within specified local limits.
 Such restriction must be for the time so long as the buyer or any person deriving title to the
goodwill from him carries on a like business in the specified local limits.
 Such specified local limits must be reasonable to the Court having regard to the nature of the
business.
Part (iii) Agreement in restraint of legal proceedings:
Yes, Mansoor is justified in filing a suit against Arif. Every agreement, by which any party is
restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal
proceedings in the ordinary tribunals, is void to that extent.

Business Law
Part (iv) Exception: [S.28 of the Contract Act, 1872]

An agreement between Arif and Mansoor to refer to arbitration any dispute which may arise
between them is not void. However, if Mansoor or Arif are not satisfied with the arbitration award,
they cannot be restricted to go to the court of law. This right cannot be excluded by the agreement.
Example 65: Wager

Question: On 1 July 2018 Basit agreed to buy 500 grams of silver from Taimure after two months
at a price of Rs. 65 per gram. On the due date the price of silver was Rs. 62 per gram. Under the
provisions of the Contract Act, 1872 discuss the validity of the above contract if both Basit and
Taimure had an intention to settle the transaction by paying the difference between the contract
price and the market price without making any delivery.
Answer:
The contract being wagering in nature, is not a valid contract. As both Basit and Taimure had no
intention of giving or taking delivery of goods and were only interested in earning profit by way of
fluctuations in silver prices.


01. Relation between the parties must exist to use
(a) Fraud
(b) Undue influence
(c) Coercion
(d) Mistake
02. Undue influence implies
(a) It involves moral pressure
(b) Criminal liability is incurred
(c) Pressure of money
(d) Physical pressure on the party
03. Coercion may be directed upon
(a) The party whose consent is being caused
(b) Any other party
(c) Either (a) or (b)
04. Fraud exists, if it is shown that false statement has been made
(a) Knowingly
(b) Without belief in its truth
(c) Recklessly without caring it be true and false
(d) All of the above, if done, with an intention to deceive
05. Undue influence is legally not presumed in case of
(a) Guardian and ward
(b) Creditor and debtor
(c) Solicitor and client
(d) Trustee and beneficiary

Business Law
06. Which of the following is not true
(a) Undue influence must be exercised by or against the party to a contract
(b) Coercion can be exercised by a stranger to the contract
(c) A contract is not voidable if it was caused by a mistake as to any law in force in
Pakistan
(d) Duty to speak does not make silence as fraud
07. A person threatens to commit a suicide, if his wife and son did not contract with his brother to
release certain disputed property in his favour. What is the legal status of this agreement?
(a) The contract was caused by coercion
(b) The contract was caused by undue influence
(c) The contract was caused by moral pressure
08. When party standing in fiduciary relationship make an agreement, legally it will be presumed
that the party in a dominating position, must have caused the consent of other through undue
influence which includes
(a) Father and son
(b) Doctor and patient
(c) Teacher and student
09. Bilal is a manufacturer of colour television sets. He gives an advertisement that in his opinion
television sets manufactured by him is the best available in the market. Such statement
(a) Will amount to misrepresentation
(b) Will amount to active concealment
(c) Will amount to fraud
(d) Will not amount to fraud
10. Unlawful detaining or threatening to detain any property with an intention of causing any person
to enter into a contract is
(a) Misrepresentation
(b) Bilateral mistake of fact
(c) Fraud
(d) Coercion

11. Mr. A has two horses, one is black and another is white. He makes an agreement to sell one
horse to Mr. B. Mr. A believes that he is making an agreement for selling white one, whereas
Mr. B thinks that he is buying black horse. Is there any contract between Mr. A and Mr. B
(a) Yes but the contract is void on account of unilateral mistake regarding material fact.
(b) Yes but the contract is void on account of unilateral mistake of foreign law.
(c) Yes but the contract is void on account of bilateral mistake regarding material fact.
(d) Yes but the contract is void on account of unilateral mistake of Pakistan law.
12. A young widow was forced to adopt the boy, under threat of preventing the dead body of her
husband from being removed and getting cremated. Can widow set aside adoption deed?
(a) No because the adoption deed was made by her free will
(b) No because the adoption deed was made by fraud
(c) Yes because the adoption deed was made by undue influence
(d) Yes because the adoption deed was made by coercion
13. Coercion is the committing or threatening to commit any act which is forbidden by
(a) Pakistan Penal Code
(b) The Contract Act
(c) The Partnership Act
14. Which of the following does not affect free consent of parties
(a) Fraud
(b) Misrepresentation
(c) Undue influence
(d) Unsoundness of mind
15. Which one is not a fraud
(a) Non-disclosure of material facts, known to the party
(b) Silence maintained by the party where silence is equivalent to his speech
(c) Active concealment of facts having knowledge
(d) A promise made without any intention or performing it

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16. The aggrieved party in case of _____________ cannot rescind the contract, if he had the
means of discovering the truth by ordinary diligence
17. Two or more persons are said to consent when they agree upon the same thing in the same
sense. In law, this is called _______________.
18. The fraud must be committed by a party to a contract or by anyone with his _________ or by
his agent.
19. The term unilateral mistake means where only one party to the agreement is under a mistake
and a contract is not voidable but according to the exception the agreement is void where a
unilateral mistake relates to the ____________ and ____________.
20. A promise made without the intention of performing it amounts to _________.
21. In case of sale of goodwill, restraint to similar business for the seller of goodwill is valid if it is
for
(a) Specified local limits
(b) Particular period of time
(c) Restriction must be reasonable
22. Which one of the following is not void
(a) Agreement to marry a particular person
(b) Agreement not to marry at all
(c) Agreement to prevent the person from getting married
(d) Agreement to marry in heaven
23. Which one of the following is not a restraint to trade
(a) Agreement to sell all produce to a certain party with a stipulation that buyer is bound to
accept whole quantity
(b) Agreement to stop rival shop-keeper in particular locality from doing business in
consideration of money
(c) Agreement to sell all produce to a certain party and the buyer is free to rejects the goods
(d) Partial restraint in trade

24. In case of sale of goodwill of business, the vendor of goodwill may be lawfully restricted from
doing similar business
(a) Anywhere in that particular area
(b) Within specified local limits
(c) Within that particular district
(d) Within that particular province
25. Agreements in restraint of legal proceedings include
(a) Agreements which tend to prevent course of justice
(b) Agreement to refer present dispute to an arbitration
(c) Agreement to settle dispute out of the court
(d) Agreement to refer future dispute to arbitration
26. Which one of the following agreements is restraint to legal proceedings
(a) Agreement for curtailing period of limitation prescribed by Limitation Act
(b) Agreement to select one court from two courts having jurisdiction on that matter
(c) Agreement whereby neither party shall appeal against the decision of trial court
(d) Agreement to settle dispute out of the court
27. Which of the following agreements is valid
(a) Agreement limiting the time allowed by the law of limitation
(b) Agreement which contains vague or ambiguous terms which cannot be made certain
(c) Agreement, meaning of which seems to be uncertain but is capable of being made
certain
(d) Agreement to agree in future
28. Parties of wagering agreement do not have
(a) Any interest in the happening or non-happening of future uncertain event
(b) Interest in the non-happening of the events
(c) Some other interest in the happening of the event
(d) Some other interest in the non-happening of the event

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29. Which one of the following is void agreement
(a) Agreement to buy ticket of lottery sponsored by the Government
(b) Agreement to pay more than Rs. 500/- to the winner of a horse race
(c) Crosswords puzzle based on application of skill and talent
(d) Athlete competition
30. Void agreement do not create any rights and obligations between parties and cannot be
enforced in the court either by the parties in addition, there are many agreement which have
also expressly being declared as void by the law, which of the following is not a void agreement
(a) Agreement in restraint of trade
(b) Agreement in restraint of marriage
(c) Agreement in restraint of marriage of a minor
(d) Agreement in restraint by way of wager
31. Agreements made with a primary objective of regulating business or conditions of a business
are valid. These agreements may take a form of trade association, chamber of commerce and
business association etc. which of the following arrangement is void in relation to trade
combination
(a) Firms voluntarily reducing competition by dividing market
(b) To regulate the market of their product
(c) To create monopoly in the market
(d) Fixing prices and standardizing goods
32. In anticipation of huge sale of sweets during Eid festival all sweet makers of Islamabad make
an agreement that they will not sell sweets below Rs.1000/- per Kg. State the legal position of
this agreement
(a) This agreement is a valid agreement
(b) This agreement is not creating monopoly in the market thus it is valid
(c) This agreement tends to create monopoly in the market thus it is void
(d) This agreement is voidable at the option of one party

33. Mr. Bilal agreed to work with Dr. Abdullah at ABC Hospital for a period of six months to treat
the patients of coronavirus. The contract provided that during the term of agreement Mr. Bilal
will not practice in any other hospital. However after one month of service, Mr. Bilal left the
hospital and joined another hospital. State the legal position.
(a) Mr. Bilal can join any other hospital of his own choice any time
(b) Mr. Bilal cannot join any other hospital of his own choice even after the end of agreement
(c) Mr. Bilal can join any other hospital of his own choice before the end of agreement
(d) Mr. Bilal cannot join any other hospital of his own choice before the end of agreement
34. Wagering agreement is one in which money is to be paid by one to another party or vice versa
on the happening or non-happening of future uncertain event. In wagering agreement either of
the party is to win or to lose. The following constitutes the essential of wagering agreement.
(a) Mutual gain or loss
(b) Uncertain event
(c) No control of the parties, on the happening of the event.
35. According to the relevant section of the Contract Act, agreement by way of wager is void. Which
of the following transaction is not included in wagering agreement?
(a) Transactions of lotteries
(b) Gambling transaction
(c) Purchase of shares and debentures
36 Rahul and Kumar are two rival shopkeepers in Ramswami colony of Karachi. They make an
agreement that if Rahul closes his shop from the colony, Kumar will pay him Rs.20000/-. Later
on Kumar refuse to pay. Now Rahul wants to file a suit against Kumar in a court of law. Rahul
cannot recover this amount from Kumar as the agreement is __________________.
37 Mr. Rehman was appointed as an agent for selling the goods produced by Mr. Raheem. On a
condition that Mr. Rehman will not deal in goods of any other manufacturer. This restraint is
______________.
38. Every agreement in restraint of the ____________ of any person other than a minor is void.

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39. Ms. Sofia agreed to sing at the theatre of Mr. Andrew for three months and will not sing
elsewhere. It was held that she can be ___________.
40. To enforce an agreement in the court its meaning must be certain or capable of being made
certain. Any uncertainty in the meaning of agreement will create uncertainty regarding rights
and obligations. Such uncertain rights and obligations cannot be claimed in the
_____________.


01. (b) Parties to a contract are related to each other under some sort of relationship
02. (a) Undue influence implies unfair use of dominating position and some kind of mental
and moral pressure.
03. (c) Coercion may be exercised from any person and may be directed against any
person, even a stranger
04. (d) If an act is done, with an intention to deceive because fraud is an intentional
misrepresentation of the facts.
05. (b) There is no presumption that a person is in position to dominate the will of another
person in case of creditor and debtor.
06. (d) Duty to speak does not make silence as fraud because it is the duty of the person
keeping silence to speak.
07. (a) The threat to commit a suicide is an offence under Pakistan Penal Code.
08. (d) The person who is in a dominating position is presumed to obtain unfair advantage
over the other.
09. (d) Will not amount to fraud because it is a mere expression of opinion for making self-
praise of his own goods.
10. (d) A contract is set to be caused by coercion when it is obtained by unlawful detaining
or threatening to detain the property
11. (c) Yes, but the contract is void on account of bilateral mistake regarding material fact
i.e. identity of the subject matter (horse).
12. (d) Yes because the adoption deed was made by coercion because coercion implies use
of physical force or threat to cause consent.
13. (a) A contract is said to be caused by coercion when it is obtained by committing or

threatening to commit any act which is forbidden by Pakistan Penal Code
14. (d) Unsoundness of mind comes within the ambit of contractual capacity and not in free
consent of parties.
15. ( b) Generally silence, maintained by the party on material facts of subject matter does
not amount to fraud.
16. Fraud or misrepresentation.
17. Consensus-ad-idem
18. Connivance
19. Nature of contract, identity of a person.
20. Fraud.
21. (d) One who sells the goodwill of the business may agree with the buyer to refrain from
carrying on a similar business, provided that such restrictions are reasonable

Business Law
22. (a) A promise to marry a particular person does not imply restraint of marriage.
23. (a) Agreement to sell all produce to a certain party with a stipulation that buyer is bound
to accept whole quantity
24. (b) Provided the restriction is reasonable, restriction can be made with the consent of
both the parties.
25. (a) Jurisdiction of court of law cannot be restricted by any agreement.
26. (a) Any agreement which limits time period within which one can enforce his rights is
void.
27. (c) Agreement, meaning of which seems to be uncertain but is capable of being made
certain.
28. (a) They simply look at the possibility of happening of the event for their gain or loss.
29. (a) Agreement to buy ticket of lottery sponsored by the Government. A lottery is a game
of chance. An agreement to buy a lottery ticket is void.
30. (c) Agreement in restraint of marriage of a minor. Agreement, which prevents a minor
from getting married, is valid.
31. (c) It is because monopolistic practices in the market may lead to exploitation of
customers.
32. (c) This agreement tends to create monopoly in the market thus it is void.
33. (d) Mr. Bilal cannot join any other hospital of his own choice before the end of agreement
because the agreement was valid and Dr. Abdullah can restraint Mr. Bilal from
practicing at any other hospital.
34. (d) Mutual gain or lose, uncertain event and no control over the event are considered
essential elements of a wagering agreement.
35. (c) Transaction of real and genuine sale and purchase of share and other securities in a
stock exchange is not of a wagering nature.
36. Void ab initio
37. Valid.
38. Marriage
39. Restrained.
40. Court of law.

CHAPTER
Business Law
Performance of a contract
Contents
1 Meaning and types of performance of a contract
2 Persons who can perform and demand performance
3 Time, place and order of performance
4 Assignment of contracts and appropriation of payments

Business Law
1 MEANING AND TYPES OF PERFORMANCE OF A CONTRACT

Section overview
 Meaning and types

 Essentials of a valid tender / attempted performance
 Effect of refusal
1.1 Meaning and types

A contract creates an obligation, which continues till the contract has been discharged by
performance. Performance of the contract is one of the vital modes of discharge of the contract.
The parties to a contract must either perform, or offer to perform their respective promises, unless
such performance is dispensed with or excused under the provisions of Contract Act, or of any
other law.
There are two types of performance, actual performance and attempted performance.
Actual performance [Section 37]

When the promisor has made the performance in accordance with the terms of the contract and it
is accepted by the promisee it is called an actual performance.
Example 01: Actual performance

Azam contracted to deliver to Babar at his warehouse on 1st November, 500 bales of cotton of a
particular quality. Azam brought the cotton of requisite quality to the appointed place on the
appointed day during the business hours, and Babar took the delivery of goods. This is an actual
performance.
Attempted performance (tender) [Section 38]

When the promisor has made an offer of performance but the offer of performance of promisor is
not accepted by the promisee it is called an attempted performance. Attempted performance is
also known as tender.
Example 02: Attempted performance

appointed day during the business hours, and Babar refused to take the delivery of goods; it is a
case of attempted performance because Azam has done what he was required to do under the
contract.
1.2 Essentials of a valid tender / attempted performance

The essentials of a valid tender are as below:
Unconditional
Tender is said to be unconditional when it is made in accordance with the terms of the contract.
Example 03: Essential – Unconditional

Anum, who is a debtor of ABC Limited, offers to pay the amount due if ABC Limited also allots her
500 shares at par value. It is not a valid tender of money due to condition specified by Anum.

Section A: Mercantile Law - Chapter 5: Performance of a contract
Proper Time
Tender must be made at the stipulated time or during business hours. Tender of goods or money
before the due date is also not a valid tender.
Example 04: Essential – Proper Time

Adeel ordered a cake from Shangrilla Bakers for his daugher’s birthday on 17 th August. Shangrilla
Bakers brought the cake on 15th August for delivery. Adeel is not bound to accept the cake as the
tender is not made at a proper time.
Proper Place
Tender must be made at the stipulated place or at business place.
Example 05: Essential – Proper Place

Azam is tenant of Babar. He offers him rent at a marriage party. Babar is not bound to accept as
the tender is not made at a proper place.
Proper Person
It must be made to the promisee or his duly authorized agent. In case of several joint promisees,
a tender made to one of them has the same legal consequences as tender to all of them.
Example 06: Essential – Proper Person

Akram was liable to deliver the goods to Babar or his agent Azam but Akram delivered goods to
Habib. It is not a valid tender.
Reasonable Opportunity
Promisee must have reasonable opportunity for examining that the goods offered are the same as
per the terms of the contract.
Example 07: Essential – Reasonable Opportunity

Kamran delivered the goods to Waqas at 2 pm as agreed but did not allow him any time for
inspection of goods. It is not a valid tender.
Whole Obligation
A valid tender is for the whole obligation. However, a minor deviation from the terms of the contract
may not render the tender invalid.
Example 08: Essential – Whole Obligation

Waqas is debtor of Babar. Waqas offers to pay in instalments to Babar while the contract stipulated
payment in full. It is not a valid tender.
Fixed amount and legal tender

In case of tender of money the amount must be fixed and in legal tender.
Example 09: Essential – Fixed amount and legal tender

 Tendering Rs. 5,000 currency note to a bus conductor for a ticket of Rs. 20 is not a valid
tender.
 Tendering a cheque of Rs. 20 to a bus conductor for a ticket of Rs. 20 is not a valid tender.

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1.3 Effect of refusal
Effect of refusal to accept a valid tender of goods and services

Where the promisor offers to deliver the goods or services but the promisee refuses to accept, the
following rules apply:
 Goods or services need not be offered again.
 Promisor may sue the promisee for non-performance and claim damages.
 Promisor is discharged from his liability i.e. he is not liable for non-performance.
Example 10: Effect of refusal to accept a valid tender of goods and services
Naeem properly tendered goods to Asim in accordance with the terms of contract but Asim refused
to accept the goods. Naeem does not have to deliver goods later and can sue Asim for damages
caused by non-acceptance of goods.
Effect of refusal to accept a valid tender of money

Where the promisor offers to pay the amount but the promisee refuses to accept the same, the
following rules apply:
 Promisor is not discharged from his liability to pay the amount
 Promisor will not be liable for interest from the date of a valid tender
Example 11: Effect of refusal to accept a valid tender of money

Naeem properly tendered Rs. 75,000 to Asim in accordance with the terms of contract but Asim
refused to accept the amount. Naeem would still be liable to pay Rs. 75,000 to Asim later but will
not be liable to pay any interest due to delay in payment.
Effect of refusal to perform [Section 39]

When a party to a contract has refused to perform or disabled himself from performing his promise
in its entirety, the promisee may put an end to the contract, unless he has signified, by words or
conduct, his willingness in its continuance.
Example 12: Effect of refusal to perform

 Asma, a singer enters into a contract with Babar, the manager of a theatre, to sing at his
theatre two nights in every week during the next two months, and Babar engages to pay her
Rs.100 for each night's performance. On the sixth night, Asma wilfully absents herself from
the theatre. Babar is at liberty to put an end to the contract.
 Asma, a singer enters into a contract with Babar, the manager of a theatre, to sing at his
theatre two nights every week during the next two months and Babar engages to pay her at
the rate of Rs.100 for each night. On the sixth night, Asma wilfully absents herself. With the
assent of Babar, Asma sings on the seventh night. Babar has signified his acquiescence in
the continuance of the contract, and cannot now put an end to it, but is entitled to
compensation for damage sustained by him through Asma's failure to sing on the sixth night.

Example 13: Conditions of valid tender

Question: In accordance with the contract entered into by Masoom and Mubarak, Masoom has
offered to deliver 300 Rolex watches to Mubarak on 1 March 2015. Under the provisions of the
Contract Act, 1872 advise Masoom about the conditions which must be satisfied for constituting a
valid offer of performance.
Answer:
In order to constitute a valid offer, Masoom must fulfil the following conditions:
 The offer must be unconditional;
 It must be made at a proper time and place, and under such circumstance that Mubarak may
have a reasonable opportunity of ascertaining that Masoom is able and willing there and then
to deliver 300 Rolex watches;
 Mubarak (the promisee) must have a reasonable opportunity of satisfying himself that the
watches offered are the Rolex watches and are 300 in numbers which Masoom (the
promisor) was bound by his promise to deliver.
Example 14: Tender and essentials of tender

Question: Mehboob, a promisor and Saulat, a promisee, entered into a valid contract. However,
when Mehboob made an offer of performance, Saulat refused to accept the same. Briefly state the
rights and responsibility of Mehboob against such refusal. Also state the essentials of a valid offer
of performance under the provisions of Contract Act, 1872.
Answer:
Rights and responsibilities of Mehboob:
Mehboob would not be responsible for non-performance; he will not lose his rights to claim
damages under the contract, for instance he will be entitled to compensation and contract will
become voidable at his option; in case of performance by Saulat on Mehboob’s demand, Mehboob
will be responsible to perform his promise.
Essentials of a valid offer of performance:
(i) it must be unconditional;
(ii) it must be made at a proper time and place, and under such circumstances that the person
to whom it is made may have a reasonable opportunity of ascertaining that the person by
whom it is made is able and willing there and then to do the whole of what he is bound by
his promise to do;
(iii) if the offer is an offer to deliver anything to the promisee, the promisee must have
reasonable opportunity of seeing that the thing offered is the thing which the promisor is
bound by his promise to deliver.
An offer to one of several joint promisees has the same legal consequences as an offer to all of
them.

Business Law
2 PERSONS WHO CAN PERFORM AND DEMAND PERFORMANCE

Section overview
 Persons who can perform

 Persons who can demand performance
 Rules regarding the performance of joint promise
2.1 Persons who can perform [Section 40 to 42]

Promisor
If a contract is of personal nature or it was agreed that promise will be performed by the promisor
himself, then such promise must be performed by the promisor.
Example 15: Promisor

 Arif promises to marry Bisma, Arif must perform this promise personally.
 Azam promises to paint a picture for Babar, Azam must perform the promise personally.
Promisor’s agent
If the intention of parties is that the promise can either be performed by the promisor himself or any
person employed by him then such contracts can be performed by the promisor himself or an agent
employed by him.
Example 16: Promisor’s agent

Azam promises to pay Babar a sum of money. Azam may perform this promise either by personally
paying the money to Babar, or by causing it to be paid to Babar by another, and if Azam dies before
the time appointed for payment, his representatives must perform the promise, or employ some
proper person to do so.
Legal representatives
Unless a contrary intention appears or the contract is of personal nature, on death of promisor, his
legal representative can perform the contract.
Example 17: Legal representatives

 Azam promises to marry Bushra. Azam dies. Azam’s legal representatives cannot perform
this promise being a contract of personal nature.
 Azam promises to deliver goods to Babar on a certain day on payment of Rs. 1,000. Azam
dies before that day. Azam’s representatives are bound to deliver the goods to Babar and
Babar is bound to pay Rs. 1,000 to Azam’s representatives.
Third party
With the consent of the promisee a contract can be performed by a third party. When a promisee
accepts performance of the promise from a third person, he cannot afterwards enforce it against
the promisor.
Example 18: Third party

Kamran borrows Rs. 200,000 from Babar and promises to repay within a month. Akmal, the father
of Kamran, pays Rs. 200,000 to Babar. Kamran is discharged from his liability.

Joint promisor
Unless a contrary intention appears, in case of several promisor the following persons must
perform the promise:
 All the promisors jointly in case of all the promisors are alive
 Representatives of the deceased promisor jointly with the surviving promisor(s) in case of
death of any of the joint promisors
 Representatives of all of them jointly in case of death of all joint promisors.
Example 19: Joint promisor

Azam and Babar jointly promise to repay a loan of Rs.10,000 on a specified day. Azam dies before
that specified day. Azam's representative jointly with Babar must perform the promise on the
specified day.
Aslam, Bashir and Sahil jointly promise to pay Rs. 3,000 to Dawood. Aslam, Bashir and Sahil must
contribute Rs. 1,000 each. If Aslam dies, then legal representative of Aslam are liable to pay Rs.
1,000 along with Bashir and Sahil.
2.2 Persons who can demand performance [Section 40 to 42]

Promisee
Under a contract only a promisee can demand the performance of the promise.
Example 20: Promisee

Azam promises Babar to pay Rs.10,000 to Arif. It is only Babar who can demand performance and
not Arif.
Promisee’s agent
If the intention of parties is that performance can be demanded from any person authorised by the
promisee then performance can be demanded by promisee’s agent.
Example 21: Promisee’s agent

Paresh promises Babar to pay Rs.10,000. It was agreed between parties that Azam, the agent of
Babar is authorised to demand the payment. Either Azam or Babar may demand performance.
Legal representative
Unless a contrary intention appears from the contract or the contract is of a personal nature, on
death of the promisee, his legal representative can demand performance.
Example 22: Legal representative

Azam promise to marry Bushra on the specified day. Bushra dies before the specified day. The legal
representatives of Bushra cannot demand performance of the promise from Azam because the
contract is of personal nature.
Third party
A third party can also demand the performance of the contract in some exceptional cases like
beneficiary in case of trust or the person for whose benefit the provision is made in family
arrangements.
Example 23: Third party

Azam transfers property to Babar under trust for the benefit of Majid. Majid can demand the
performance of contract from Babar.

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Joint promisees
In case of several promisees, unless a contrary intention appears, the performance can be
demanded by the following persons:
 All the promises jointly in case all the promisees are alive
 Representatives of deceased promisee jointly with the surviving promisees in case of
death of any of joint promisees
 Representatives of all of them jointly in case of death of all joint promisees
Example 24: Joint promisees

Azam promises Babar and Paresh jointly to repay loan of Rs.10,000 on a specified day. Babar dies
before that specified day. Babar's representative jointly with Paresh can demand the performance
from Azam on specified day. If both Babar and Paresh die before that specified day, the
representatives of Babar and Paresh jointly can demand the performance from Azam on the
specified day.
2.3 Rules regarding the performance of joint promise [Section 43 to 45]

The rules regarding the performance of joint promises are as follows:
Joint and several liability of joint promisors
When two or more persons make a joint promise, the promisee may, in the absence of express
agreement to the contrary, compel anyone or more of such joint promisors to perform the whole of
the promise.
Example 25: Joint and several liability of joint promisors

Azam, Babar and Saqlain jointly promise to pay Dawar Rs. 3,000. Dawar may compel either Azam
or Babar or Saqlain to pay him Rs. 3,000.
Right to claim contribution

Each of two or more joint promisors may compel every other joint promisor to contribute equally
with himself to the performance of the promise, unless a contrary intention appears from the
contract.
Example 26: Right to claim contribution

Azam, Babar and Saqlain jointly promise to pay Dawar a sum of Rs. 3,000. Saqlain is compelled
to pay the whole. Azam is insolvent, but his assets are sufficient to pay one-half of his debts. Saqlain
is entitled to receive Rs.500 from Azam's estate and Rs.1,250 from Babar.
Sharing of loss in contribution

If anyone of two or more joint promisors makes default in such contribution, the remaining joint
promisors must bear the loss arising from such default in equal shares.
Example 27: Sharing of loss in contribution

Azam, Babar and Saqlain are under a joint promise to pay Dawar Rs.3,000. Saqlain is unable to
pay anything and Azam is compelled to pay the whole. Azam is entitled to receive Rs.1,500 from
Babar.
Release of one joint promisor

Where two or more persons have made a joint promise, a release of one of such joint promisors
by the promisee, does not discharge the other joint promisor or joint promisors; neither does it free
the joint promisor so released from responsibility to the other joint promisor or joint promisors.

Example 28: Release of one joint promisor

Azam, Babar and Saqlain jointly promise to pay Dawar Rs.3,000. Dawar releases Azam from his
liability and sues Babar and Saqlain for payment, Here, neither Babar and Saqlain are released
from their liability to Dawar nor is Azam released from his liability to Babar and saqlain for
contribution.
Devolution of joint rights [Section 45]

When a person has made a promise to two or more persons jointly, then, unless a contrary intention
appears from the contract, the right to claim performance rests, as between him and them, with
them during their joint lives, and, after the death of any of them, with the representative of such
deceased person jointly, with the survivor or survivors and after the death of the last survivor, with
the representatives of all jointly.
Example 29: Devolution of joint rights

Azam, in consideration of Rs.5,000 lent to him by Babar and Saqlain, promises Babar and Saqlain
jointly to repay them that sum with interest on a day specified. Babar dies. The right to claim
performance rests with Babar's representative jointly with Saqlain during Saqlain's life, and, after
the death of Saqlain, with the representatives of Babar and Saqlain jointly.
Example 30: Joint promisor and promisee

Question: Binyamin borrowed Rs. 1 million from Hatim and Tahir jointly and promised to repay the
amount on March 1, 2011. With reference to the Contract Act, 1872, state who can claim
performance in the following situations.
(a) Both Hatim and Tahir are alive on due date
(b) Hatim dies before due date
(c) Both Hatim and Tahir die before the due date
Answer:
Unless a contrary intention appears from the contract, the right to claim performance rests:
(a) with Hatim and Tahir jointly
(b) after the death of Hatim, with the representative of Hatim jointly with Tahir
(c) after the death of both Hatim and Tahir, with the representative(s) of both, jointly.
Example 31: Devolution of liabilities

Question: Sohail and Afaq lent Rs. 2.0 million to Mohsin, Laila and Faizan jointly. On due date Laila
became insolvent. Without informing Sohail, Afaq wants Mohsin to repay the full amount to him.
Under the provisions of Contract Act, 1872 explain:
(a) whether Mohsin can be compelled to pay the full amount to Afaq; and
(b) what rights are available to Mohsin, if he repays the full amount.
Answer:
Part (a)
Afaq alone cannot compel Mohsin to make payment unless a contrary intention appears from the
contract. The right to claim performance rests with all the promisees jointly and a single promisee
cannot demand performance.
Part (b)
Mohsin may compel every other joint promisor to contribute equally with himself to the
performance of the promise, unless a contrary intention appears from the contract.
Therefore, Faizan must share the loss arising from default of Laila equally with Mohsin.

Business Law
Example 32: Performance of joint promise

Question: Faheem, Saleem and Jameel jointly borrowed Rs. 50 million for a business project from
a common friend Kamal. They jointly promised to repay the borrowed amount. Under the provisions
of the Contract Act, 1872 comment on the following:
(a) in the absence of express agreement, what would be the rights and liabilities of joint
promisors. Also explain their rights and liabilities if Kamal releases Jameel from the joint
liability.
(b) how the liability would devolve in case of death of one or more of the joint promisor.
Answer:
Part (a) Any one of Joint promisors may be compelled to perform
In absence of express agreement to the contrary, Faheem, Saleem and Jameel are jointly liable to
fulfil the promise. However, Kamal, may compel anyone (Faheem/Saleem/Jameel) or more of
them to perform whole of the promise.
Each joint promisor (Faheem/Saleem/Jameel) may compel every other joint promisor to contribute
equally with himself to the performance of the promise. If anyone of joint promisor
(Faheem/Saleem/Jameel) or more of them makes default in such contribution, the remaining joint
promisors must bear the loss arising from such default in equal share.
Effect of release of one joint promisor

If Kamal releases Jameel, it will not discharge the other joint promisors Faheem and Saleem;
neither would it free Jameel from responsibility to Faheem and Saleem.
Part (b) Devolution of Joint Liabilities

In case of death of one or more of joint promisors, the liability would devolve as follows:
 to representatives of the deceased promisor jointly with the surviving promisor(s) in case of
death of any of the joint promisors; and
 to representatives of all of them jointly in case of death of all joint promisors.

3 TIME, PLACE AND ORDER OF PERFORMANCE

Section overview
 Time and place of performance

 Effects of failure to perform within the stipulated time
 Reciprocal promises
3.1 Time and place of performance [Section 46 to 50]

The various rules regarding the time and place of performance are given below:
Prescribed or sanctioned by the promisee

Where the time, manner and/or place are prescribed by the promisee, the performance of the
contract must be at the specified time, manner and place.
Example 33: Prescribed or sanctioned by the promisee

 Azam promises to deliver goods at Babar’s warehouse on 1st March before 1 PM. Azam
delivers goods before time. Azam has performed the contract.
 Babar owes Azam Rs. 100. It was agreed that Babar will send a cheque for Rs. 100 by post.
The debt is discharged as soon as Babar sends cheque by post to Azam.
 Azam and Babar are mutually indebted. Azam and Babar settle an account by setting off one
item against another, and Babar pays Azam the balance found to be due from him upon such
settlement. This amounts to payment by Azam and Babar, respectively, of the sums which
they owed to each other.
 Azam owes Babar Rs. 2,000. Babar accepts some of Azam's goods in reduction of the debt.
The delivery of the goods operates as a part payment.
 Azam desires Babar, who owes him Rs. 100, to send him a cheque for Rs.100 by post. The
debt is discharged as soon as Babar posts a letter containing the cheque duly addressed to
Azam.
Not prescribed by promisee

When time is not prescribed by the promisee, the contract must be performed within a reasonable
time, on a working day and within the usual hours of business. The question “what is a reasonable
time” is, in each particular case, a question of fact.
When place is not prescribed by the promisee, the contract must be performed at proper place
e.g. at warehouse or shop, and not at a public meeting. The question “what is a proper time and
place” is, in each particular case a question of fact. Generally, the promisor must ask the promisee
where he would like the contract to be performed, and to perform it at such place.
Example 34: Not prescribed by promisee

 Azam promises to deliver goods at Babar’s warehouse on 1st January. Azam brings the goods
to Babar’s warehouse but after the usual hour of business. Thus, the goods are not received.
Azam has not performed his promise.
 Azam promises to deliver 1,000 kg of jute to Babar on 1st May. Babar agrees to specify the
place of delivery later. Babar must apply to Azam to decide a reasonable place for
performance of contract.
 Azam agreed to deliver rice to Babar on 1st June but no place was fixed for delivery. Azam
must ask for the place of delivery of rice.

Business Law
3.2 Effects of failure to perform within the stipulated time [Section 55]
Time is essence of a contract means that it is necessary for the parties to a contract to perform
their respective promises within the specified time.
When is the time the essence of the contract?
In the following cases, time is considered to be the essence of contract:
 Where the parties have expressly agreed to treat the time as the essence of the contract; or
 Where the nature and the intention of parties were such that the performance within a limited
time was necessary.
Even where a time is specified for the performance of a certain promise, ‘time may not be of the
essence of the contract’ and above factors should be considered.
Example 35: When is the time the essence of the contract?

Adeel ordered Yum Bakers for a Birthday cake to be delivered on 22nd February. The nature of
transaction clearly indicates that time is the essence of the contract.
Consequences where time is essence

In case the performance is not made within time fixed and time is essence:
 The contract (or so much of it as remains unperformed) becomes voidable at the option of the
promisee. He may rescind the contract and sue for the breach caused by non-performance.
 In case delayed performance is accepted, the promisee is not entitled to claim compensation
for any loss caused by delay, unless the promisee gives notice to the promisor of his intention
to claim compensation.
Example 36: Consequences where time is essence

 Asma, a singer, enters into a contract with Babar, the manager of a theatre, to sing at his
theatre two nights in every week for the next two months. Babar agrees to pay her Rs 100
for each performance. On the sixth night, Asma wilfully absents herself from the Theatre.
In this case, Babar has the following two options:
He may rescind the contract and claim compensation for the loss occasioned to him by
Asma's failure to sing on the sixth night.
He may permit Asma to sing on the seventh night and claim compensation for loss
from Asma by giving a notice to Asma of his intention to do so.
 Azam agreed to deliver 20 books to Babar on 12th May 2011 in which delivery time was
important as books were required for an exhibition. Azam failed to deliver by that time. The
contract is voidable at the option of Babar.
Consequences where time is not essence

In case the performance is not made within time fixed and time is not essence:
 The contract is not voidable at the option of promisee unless the delay in performance is also
beyond reasonable time.
 In case delayed performance is accepted, the promisee is not entitled to claim compensation
for any loss caused by delay, unless the promisee gives notice to the promisor of his intention
to claim compensation.
Example 37: Consequences where time is not essence

 Azam promises to deliver a car to Babar on 1st May. Azam delivers it on 9th May. Babar will
have to accept the delivery. Babar can claim damages only if he gives proper notice.
 Mahad promised to supply bricks to Nadeem on 4th May. Mahad delivers on 8th May.
Nadeem accepts the delayed delivery. Later, Nadeem cannot claim damages.

Example 38: Effects of failure to perform within the stipulated time

Question: Golden Foods (GF) agreed to supply 2,500 cans to Riaz Grocery Stores (RGS). According
to the agreement, the date of delivery was 31 August 2017. However, on the due date GF refused
to supply the cans.
(a) Under the provisions of the Contract Act, 1872 discuss the rights of RGS in the above
situation assuming that time was the essence of the contract.
(b) What would be your answer to (a) above, if GF supplied the cans on 12 September 2017
and RGS accepted the performance; but suffered a loss on account of delayed supply?
Answer:
Part (a) Rights when time is essence of the contract
Time being essence of the contract, following would be the rights of Riaz Grocery Stores (RGS) under
the circumstances:
 Contract would be voidable at the option of RGS (promisee);
 RGS may insist that Golden Foods (GF) should deliver the product and to claim compensation
on account of the delayed supply;
 RGS may decide not to accept performance beyond the stipulated time and claim
compensation for any damages which it may have sustained due to non-fulfilment of the
contract by GF.
Part (b) Effect of acceptance of performance at a time other than that agreed upon:
Riaz Grocery Stores (RGS) is not entitled to claim compensation for any damages which it may have
sustained through the non-fulfilment of the contract where performance beyond the stipulated time
is accepted, unless at the time of acceptance RGS gives notice to GF of its intention to claim
damages.
3.3 Reciprocal promises [Section 2(f)]

Promises which form the consideration or part of the consideration for each other are called
'reciprocal promises'.
Example 39: Meaning of reciprocal promises

In a contract for sale, Azam promises to deliver the goods to Babar at a fixed price and Babar
promises to give promise for the payment of the price. Such promises are called reciprocal
promises.
The reciprocal promises have following types:

Mutual and independent
When the promises are to be performed by each party independently, without waiting for the other
party to perform is called Mutual and independent.
Example 40: Mutual and independent

Azam promises to sell 100 bales of cotton to Babar, to be delivered next day. Babar promises to
pay within a month. Azam does not deliver the bales of cotton. Babar’s promise to pay need not be
performed and Azam must make compensation.
Mutual and dependent

When the performance of one party depends on the prior performance of the other party it is called
Mutual and dependent.
Example 41: Mutual and dependent

Azam agreed to build a house for Babar for a fixed price to be paid after the house is built. Azam’s
promise to build the house must be performed before Babar’s promise to pay for it.

Business Law
Mutual and concurrent

When the promises are to be performed simultaneously i.e. at the same time it is called Mutual
and concurrent.
Example 42: Mutual and concurrent

Azam agreed to deliver goods to Babar at a price to be paid by Babar on delivery. Azam need not
to deliver goods unless Babar is ready to pay the price and Babar need not to pay unless Azam is
ready to deliver goods on payment.
The rules regarding the performance of reciprocal promises are as follows:

Simultaneous performance [Section 51]
When a contract consists of reciprocal promises to be simultaneously performed, the promisor
need not perform his promise unless the promisee is ready and willing to perform his reciprocal
promise.
Example 43: Simultaneous performance

 Azam and Babar contract that Azam shall deliver goods to Babar to be paid for by Babar on
delivery. Azam needs not deliver the goods unless Babar is ready and willing to pay for the
goods on delivery. Babar needs not pay for the goods, unless Azam is ready and willing to
deliver them on payment.
 Azam and Babar contract that Azam shall deliver goods to Babar at a price to be paid in
instalments, the first instalment to be paid on delivery. Azam need not deliver unless Babar
is ready and willing to pay the first instalment on delivery. Babar needs not pay the first
instalment, unless Azam is ready and willing to deliver the goods on payment of the first
instalment.
Order of performance [Section 52]

Where the order in which reciprocal promises are to be performed is expressly fixed by the contract,
they must be performed in that order, and where the order is not expressly fixed by the contract,
they must be performed in the order which the nature of the transaction requires.
Example 44: Order of performance

 Azam and Babar contract that Azam shall build a house for Babar at a fixed price. Azam's
promise to build the house must be performed before Babar's promise to pay for it.
 Azam and Babar contract that Azam shall make delivery of his stock-in-trade to Babar at a
fixed price, and Babar promises to give security for the payment of the money. Azam's
promise need not be performed until the security is given, because the nature of the
transaction requires that Azam should have security before he delivers up his stock.
Preventing the performance [Section 53]

When a contract contains reciprocal promises, and one party to the contract prevents the other
from performing his promise, the contract becomes voidable at the option of the party so prevented;
and he is entitled to compensation from the other party for any loss which he may sustain in
consequence of the non-performance of the contract.
Example 45: Preventing the performance

Azam and Babar contract that Babar shall execute certain work for Azam, for Rs.1,000. Babar is
ready and willing to execute the work accordingly, but Azam prevents him from doing so. The
contract is voidable at the option of Babar; and, if he elects to rescind it, he is entitled to recover
from Azam compensation for any loss which he has incurred by its non-performance.

Non-performance in case of mutual and dependent reciprocal promises [Section 54]

Where the performance of one party depends on the prior performance of the other party and the
party who is liable to perform first, fails to perform it, then such party cannot claim the performance
from the other party and must make compensation to the other party for any loss which the other
party may sustain by the non-performance of the contract.
Example 46: Non-performance in case of mutual and dependent reciprocal promises

 Azam contracts with Babar to execute certain builder's work for a fixed price, Babar supplying
the timber necessary for the work. Babar refuses to furnish any timber. Azam need not
execute the work, and Babar is bound to make compensation to Azam for any loss caused
to him by the non-performance of the contract.
 Azam contracts with Babar to deliver to him, at a specified price, certain merchandise on
board of a ship which cannot arrive for a month, and Babar engages to pay for the
merchandise within a week from the date of the contract. Babar does not pay within the
week. Azam's promise to deliver need not be performed, and Babar must make
compensation.
 Azam promises Babar to sell him 1000 bales of merchandise to be delivered next day, and
Babar promises Azam to pay them within a month. Azam does not deliver according to his
promise. Babar's promise to pay need not be performed, and Azam must make
compensation.
Promise to do legal and illegal things [Section 57]

Where persons reciprocally promise, firstly, to do certain things which are legal, and, secondly,
under specified circumstances, to do certain other things which are illegal, the first set of promises
is a contract, but the second is a void agreement
Example 47: Promise to do legal and illegal things

Azam and Babar agree that Azam shall sell Babar a house for Rs.10,000,000 but that, if Babar
uses it as a gambling house, he shall pay Rs.50,000,000 for it. The first set for reciprocal promises,
namely, to sell the house and to pay Rs.10,000,000 for it, is a contract. The second set is for an
unlawful object, namely, that Babar may use the house as a gambling house and is a void
agreement.
Example 48: Rules regarding performance of reciprocal promises

Question: Briefly explain five rules regarding performance of reciprocal promises under the
provisions of Contract Act, 1872.
Answer:
(i) Simultaneous performance
When a contract consists of reciprocal promises to be simultaneously performed, the promisor
need not perform his promise unless the promisee is ready and willing to perform his reciprocal
promise.
(ii) Order of performance
Where the order in which reciprocal promises are to be performed is expressly fixed by the contract,
they must be performed in that order, and where the order is not expressly fixed by the contract,
they must be performed in that order which the nature of the transaction requires.
(iii) Preventing the performance
When a contract contains reciprocal promises, and one party to the contract prevents the other
from performing his promise, the contract becomes voidable at the option of the party so prevented;
and he is entitled to compensation from the other party for any loss which he may sustain in
consequence of the non-performance of the contract.

Business Law
(iv) Mutual and dependent reciprocal promises

Where the performance of one party depends on the prior performance of the other party and party
who is liable to perform first, fails to perform it, then such party cannot claim the performance from
the other party and must make compensation to the other party for any loss which the other party
may sustain by non-performance of the contract.
(v) Promise to do legal & illegal things
Where persons reciprocally promise, firstly, to do certain things which are legal, and secondly, under
specified circumstances, to do certain other things which are illegal, the first set of promises is a
contract, but the second is a void agreement.
Example 49: Reciprocal promises

Question: Maimar promised to manufacture and deliver to Nasir, remote-controlled toy helicopters
of agreed specifications in first week of March 2011. Nasir in turn promised to pay for them by
second week of March 2011. Maimar did not deliver the toys according to his promise. Should Nasir
keep his promise and what remedy, if any, is available to him?
Answer:
No, Nasir need not perform his promise to pay and Maimar must compensate Nasir for any loss
which Nasir may sustain due to Maimar’s non-performance.

4 ASSIGNMENT OF CONTRACTS AND APPROPRIATION OF PAYMENTS

Section overview
 Assignment of contracts
 Appropriation of payment
4.1 Assignment of contracts

Assignment of a contract means transfer of contractual rights and liabilities to a third party.
Assignment of a contract may take place in the following ways:
Assignment by act of parties
Assignment by act of parties takes place when the parties to a contract themselves make the
assignment. Such an assignment is subject to the following rules:
 If it is a contractual obligation/right involving personal skill or ability then it cannot be
assigned.
 If the contract expressly or impliedly provides that the contract shall be performed by the
promisor only, then such obligation cannot be assigned
 If the contract does not expressly or impliedly provides that the contract shall be performed
by the promisor only, then the promisor or his representative may employ a competent
person to perform such obligation but even then the promisor remains liable to the promisee
for proper performance.
 By Novation the promisor may transfer his liability to a third party with the consent of the
promisee and the transferee.
 Actionable claims i.e. claim to any debt or to any beneficial interest in movable property can
always be assigned by an instrument in writing. Notice of such assignment is also required
to be given to the debtor.
Example 50: Assignment by act of parties

 Azam promises to marry Bushra. Here, neither Azam nor Bushra can assign their right
because the contract is of personal nature.
 Azam owes Babar Rs. 100,000 and Qasim owes Azam Rs. 100,000. Here Azam cannot
compel Babar to recover the amount from Qasim. However, he can transfer his liability to
Qasim with the consent of Babar and Qasim. Babar can also transfer his right to a third party
to recover the amount from Azam.
 Azam lends money to Babar. Azam transfers the debt by an instrument in writing (i.e. an
actionable claim) to Zahid. The notice of the transfer is provided to Babar. Zahid demands
money from Babar who doesn’t pay the amount. Zahid can sue Babar claiming the payment
of the debt without obtaining consent from Azam.
Assignment by operation of law

Assignment by operation of law takes place when the law intervenes. Such assignment takes place
in the following cases:
 In case of death of any party the rights and obligation (other than those of personal nature)
of the deceased party pass on to his legal representatives.
 In case of insolvency of any party the rights and obligations (other than those of personal
nature) of the insolvent party pass on to the Official Receiver or Assignee.

Business Law
Example 51: Assignment by operation of law

 Atif, a singer, took an advance of Rs. 200,000 from Opera Five to perform for them at their
annual event. Atif died few days before the event. The legal representative do not have
obligation to perform at the event but must return the amount of advance.
 Sajid owes Majid Rs.100,000. Majid goes bankrupt. The official assignee of Majid may
recover the amount from Sajid.
Example 52: Assignment of contract

Question: What is meant by ‘Assignment of contracts’ under the Contract Act, 1872? State any four
rules subject to which a contract may be assigned by act of parties.
Answer:
Assignment of contracts means transfer of contractual rights and liabilities to a third party.
Assignment by act of parties

Assignment by act of parties takes place when the parties to a contract themselves make the
assignment. Such an assignment is subject to the following rules:
(i) If it is a contractual obligation/right involving personal skill or ability than it cannot be
assigned.
(ii) If the contract expressly or impliedly provides that the contract shall be performed by the
promisor only then such obligation cannot be assigned.
(iii) If the contract does not expressly or impliedly provide that the contract shall be performed by
the promisor only then the promisor or his representative may employ a competent person to
perform such obligation but even than the promisor remains liable to the promisee for proper
performance.
(iv) By Novation the promisor may transfer his liability to a third party with the consent of the
promisee and the transferee.
4.2 Appropriation of payment

Appropriation of payment means allocation of payment to a particular debt. The various rules
regarding appropriation of payments are given below:
Debt to be discharged is indicated [Section 59]
Where a debtor, owing several distinct debts to one person, makes a payment to him with either
express or implied intimation that the payment is to be applied to the discharge of some particular
debt, the payment, if accepted, must be applied accordingly.
Example 53: Debt to be discharged is indicated

 Azam owes to Babar, among other debts; the sum of Rs. 567. Babar writes to Azam and
demands payment of this sum. Azam sends to B Rs. 567. This payment is to be applied to
the discharge of the debt of which Babar had demanded payment.
 Azam owes Babar, among other debts, Rs.1,000 related to invoice # 27, which falls due on
the first June. He owes Babar no other debt of that amount. On the first June, Azam pays to
Babar Rs.1,000. The payment is to be applied to the discharge of the invoice # 27.
Debt to be discharged is not indicated [Section 60]

When debt to be discharge is not indicated, the creditor has option to apply the payment to any
lawful debt due from the debtor even if it is a time barred debt but he cannot apply the payment to
a disputed debt.
Example 54: Debt to be discharged is not indicated

Azam owes several debts to Babar, one of them of Rs. 100,000 is time barred. Azam sends Rs.
200,000 to Babar without indicating the debt which is to be appropriated. Babar may appropriate
Rs. 100,000 against the time barred debt.

Neither party makes an appropriation [Section 61]

The payment shall be applied in discharge of the debts in order of time whether or not they are
time barred. In other words, all payments shall be applied towards the payment of first debt till it
gets extinguished. Similarly, all subsequent payments applied towards second debt till it gets fully
paid and so on and so forth. If the debts are of equal standing, the payment shall be applied in
discharge of each, proportionately.
Example 55: Neither party makes an appropriation

Azam owes Babar three debts, Rs. 150,000 (18 April), Rs. 300,000 (18 April) and Rs. 400,000 (25
April). Azam sends Rs. 90,000 to B on 20th May. It will be appropriated against the two debts of 18
April proportionately, as Rs. 30,000 and Rs. 60,000.
When principal and interest both are due

If principal amount and mark-up both are due, then mark-up is settled first and then principal
amount is settled.
Example 56: When principal and interest both are due

Azam owes Rs. 100,000 as principal amount and Rs. 20,000 as interest. Azam sends Rs. 30,000
to Babar. Babar can apply Rs. 20,000 towards interest and Rs. 10,000 towards principal amount.
Example 57: Appropriation of payments

Question: Following is the statement of sums payable by Nisar to Mairaj on 4 March 2017:
Date of invoice Rupees Remarks

01/01/2016 200,000 Guaranteed by Imran.
08/06/2016 150,000
350,000
Nisar sent a cheque for Rs. 100,000 on 5 March 2017. As there were no instructions from Nisar,
Mairaj adjusted the payment against the amount of Rs. 150,000. The guarantor (Imran) objected
to such appropriation and claimed that adjustment should be made in the order of the date of
invoices. Under the provisions of the Contract Act, 1872 discuss whether the objection of Imran is
justified.
Answer:
Imran’s objection is not valid. In the absence of any intimation from the debtor or circumstances
indicating to which debt payment is to be applied, the creditor is free to use his discretion and apply
it to any lawful debt actually due and payable to him from the debtor.

Business Law
Example 58: Appropriation

Question: Following is the statement on August 4, 2011 of sums payable by Ubaid on account of
cloth supplied by Bilal:
Date of transaction Rupees Remarks
01/01/2008 37,000 Time barred under Limitation Act.
02/03/2009 20,000
30/08/2010 50,000 Guaranteed by Wasim.
28/04/2011 63,000
170,000
Ubaid sent a cheque for Rs. 70,000 on August 5, 2011. There being no instructions from Ubaid,
Bilal adjusted the payment against the following:
Date of transaction Rupees
01.1.2008 37,000
02.3.2009 20,000
28.4.2011 13,000
70,000
The guarantor (Wasim) objected to such appropriation and claimed that since the amount of Rs.
37,000 was time barred, it should not be adjusted and the full amount guaranteed by him should
be fully adjusted.
(a) Is the objection of Wasim valid?
(b) Discuss how the above payment of Rs. 70,000 should be applied under each of the
following independent circumstances, according to the provisions of the Contract Act,
1872:
(i) The following words were written on the back of the cheque: (20,000 + 50,000 = 70,000)
(ii) No instructions about appropriation of payment were given by Ubaid. Bilal did not make
any appropriation either.
Answer:
Part (a)
The payment is correctly applied by Bilal and the objection of Wasim is not valid. In the absence of
any intimation from debtor or circumstances indicating to which debt payment is to be applied, the
creditor is free to use his discretion and apply it to any lawful debt actually due and payable to him
from the debtor whether its recovery is or is not barred by the law in force for the time being as to
the limitation of suits.
Part (b) (i)

The payment should be applied in discharging the following debts:
Debt of Rupees
March 2, 2009 20,000
August 30, 2010 50,000
70,000
As Ubaid has written the break-up of payment at the back of the cheque, it implies that payment
should be applied to discharge those particular debts.
Part (b) (ii)

The payment should be applied in discharging the debts in the order in which they became due. It
is irrelevant whether the debts are or are not barred by the law in force for the time being as to
limitation of suits.


01. Contract is said to be performed when
(a) One party fulfils his promise

(b) Both promisors perform their respective promises
(c) Law dispenses with performance
(d) One of the promisor makes attempted performance
02. Valid tender requires
(a) To be unconditional
(b) To be made at proper place and time
(c) To be made for whole quantity / obligation
(d) All of the above factors
03. Mr. A agrees to supply 100 bags of tea to Mr. B @ Rs.1000/- per Bag on a particular date. Mr.
B was to pay subsequently after the supply of tea. On due date Mr. A supplies tea and Mr. B
makes payment. But, if on due date, Mr. A takes the contracted quantity of tea to Mr. B’s
godown and Mr. B refuses to accept the delivery. State the legal position.
(a) 1st case is attempted performance and 2nd is voidable contract
(b) 1st case is voidable contract and 2nd is attempted performance
(c) 1st case is actual performance and 2nd is attempted performance
(d) 1st case is attempted performance and 2nd is actual performance
04. Which one of the following is not a joint promise:
(a) Several joint promisors with a single promisee
(b) Single promisor with several joint promisees
(c) Several joint promisors with several joint promisees
(d) Single promisor with single promisee
05. Mr. X borrowed sum of Rs. 100,000/- from Mr. Y for two years. After one year Mr. X dies and
Mr. Z, who is a legal representative inherits property of Rs. 60,000/- from him. On the due date
of repayment Mr. Y will call upon Mr. Z to repay. But the capacity of Mr. Z is limited up to the
value of Rs. 60,000/-. State the legal position.
(a) Mr. Z is liable to pay only Rs.60,000/-
(b) Mr. Z is liable to pay only Rs.100,000/-
(c) Mr. Z is liable to pay only Rs.40,000/-
(d) Mr. Z is liable to pay only Rs.160,000/-

Business Law
06. For the performance of joint promise
(a) All joint promisors are jointly liable
(b) All of them are severally liable
(c) All joint promisors are individually liable
(d) All joint promisors are jointly and severally liable
07. Contract should be performed
(a) By promisor
(b) By his legal representative
(c) By the agent of promisor
(d) Any of the above
08. Mr. A and Mr. B have borrowed sum of Rs.10,000/- from Mr. C. On due date both parties i.e.
Mr. A and Mr. B are jointly liable to pay. If before the payment Mr. A dies, who will be liable to
pay Rs.10,000/-?
(a) Mr. B is liable to pay Rs.10,000/-
(b) Mr. B is liable to pay Rs.15,000/-
(c) The legal representative of Mr. A along with Mr. B is liable to pay Rs.10,000/-
(d) The legal representative of Mr. A is liable to pay Rs.10,000/-
09. Contractual Liability involving personal skill
(a) Can be assigned
(b) Cannot be assigned
(c) Must be assigned
(d) Should be assigned
10. When the time is an essence of a contract, promisor fails to perform his promise on time,
(a) Contract becomes voidable at the option of promisee
(b) Contract becomes void
(c) Contract becomes unenforceable
(d) Promisor must pay compensation to the promise

11. Which one is not a reciprocal promise
(a) Mutual and separate promises
(b) Mutual and independent promises
(c) Mutual and dependent promises
(d) Mutual and concurrent promises
12. Payment received by the creditor must be appropriated for discharging debt
(a) Which has been borrowed at last
(b) According to instruction given by the debtor
(c) In a logical sequence of the debts
(d) Which has been borrowed at first
13. Mr. X promises to sell standing timber to Mr. Y. As per the terms of a contract Mr. X will cut and
cord the timber, whereupon Mr. Y will take it away and pay for it. Mr. X cord’s only a part of
timber and neglects to cord the rest. Mr. Y wants to initiate legal proceedings. Suggest him the
legal action.
(a) Mr. Y may avoid contract
(b) Mr. Y may claim compensation from Mr. X
(c) Mr. Y does not have any legal remedy
(d) Mr. Y may avoid the contract and claim compensation from Mr. X
14. Mr. Karam owes several debts to Mr. Karim, which are of distinct amount and payable on
different dates. One of the debts has become time-barred which Mr. Karim cannot legally
recover from Mr. Karam. On a particular date Mr. Karam makes a payment, but does not give
any instruction. State the legal position with regard to the appropriation of payment.
(a) Mr. Karim has no right to apply this payment for time-barred debt
(b) Mr. Karam’s instruction has to be followed
(c) Mr. Karim has to obtain court’s advice
(d) Mr. Karim has a right to apply this payment for time-barred debt
15. Mr. B owes to Mr. A Rs.10,000. Mr. A ask Mr. B to deposit this amount in Mr. A’s Bank account.
Mr. B deposits the amount in Mr. A’s account. After sometime bank has stopped functioning
and Mr. A has no information regarding transfer of money to his account. Mr. A is claiming that
Mr. B is still liable to pay him the amount. Is Mr. B liable?
(a) Mr. B has followed the instruction of Mr. A so he is discharged from his obligation
(b) Mr. B has committed fraud so he is not discharged from his obligation
(c) Mr. B has committed negligence so he is not discharged from his obligation
(d) Mr. B is liable because he failed to perform reasonable care

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16. When a party to a contract has refused to perform or disabled himself from performing his
promise in its entirety, the promisee may put an end to the contract, unless he has signified, by
________ or ________, his willingness in its continuance.
17. Where person ____________ promise, firstly, to do certain things which are legal, and
secondly, under specified circumstances, to do certain other things which are illegal. The legal
position is that the first set of promises is a contract and the second is a void agreement.
18. Mr. A and Mr. B contract that Mr. B shall execute certain work for Mr. A for Rs.10,000/-. Mr. B
is ready and willing to execute the work accordingly, but Mr. A prevents him from doing so. The
contract is voidable at the option of Mr. B and if he elects to ________ it, he is entitled to recover
compensation for any loss which he has incurred.
19. In case of joint promise, the promisee may compel anyone of the___________, to perform
whole of the promise.
20. In case, the time of performance is not specified, the promisor must perform his promise within
_________________.


01. (b) Both promisors perform their respective promises. After having made promises, the
parties are legally bound to fulfil what they have promised to perform.
02. (d) Tender must be unconditional, be made at proper place and time and be made for whole
quantity.
03. (c) 1st case is actual performance and 2nd is attempted performance. Under both ways of
performance, the promisors get released from their obligations in that contract and the
contract comes to an end.
04. (d) Single promisor with single promisee. Contract is nothing but a bundle of promises,
when the promise is made by one promisor and accepted by one promisee, this is
known as single promise
05. (a) Mr. Z is liable to pay only Rs.60000/-. The liability of a legal representative of the
deceased promisor is limited to the value of property he inherits from the deceased and
not more than that
06. (d) All joint promisors are jointly and severally liable. When two or more persons jointly
make a promise, they are jointly and severally liable to perform the promise.
07. (d) Contract is to be performed by promisor or by his legal representative or by his agent
08. (c) The legal representative of Mr. A along with Mr. B is liable to pay Rs.10000/-. In case
of death of any one of joint promisors, his legal representative along with remaining
promisors will perform the promise
09. (b) If it is a contractual obligation involving personal skill or ability than it cannot be assigned
10. (a) Contract becomes voidable at the option of promisee. Being an aggrieved party, it
depends upon the promisee either to continue the contract or to rescind the contract.
11. (a) Mutual and separate promises. The promise made by one party forms consideration for
the promise of another party. Such promises are known as reciprocal promises.
12. (b) According to instruction given by the debtor. In such case appropriation must be made
according to those instructions given by the debtor.
13. (d) Mr. Y may avoid the contract and claim compensation from Mr. X. if one party prevents
another from performing a promise the contract becomes voidable at the option of the
party so prevented. He can also claim compensation
14. (d) Mr. Karim has a right to apply this payment for time-barred debt. When the debtor does
not give any instruction, the creditor has a discretion to apply such payment for
discharging any lawful debt even for time barred debt
15. (a) Mr. B has followed the instruction of Mr. A so he is discharged from his obligation. Mr.
B has not committed any fraud or negligence, so he is discharged from his obligation
16. Words , conduct
17. Reciprocally
18. Rescinds
19. Joint promisors
20. Reasonable period of time

Business Law

06
CHAPTER
Business Law
Discharge of a contract and remedies for

breach of contract
Contents
1 Discharge of a contract
2 Remedies for breach of contract

Business Law
1 DISCHARGE OF A CONTRACT
Section overview
 Meaning and modes of discharge of a contract

 Discharge by performance
 Discharge by agreement or by consent
 Discharge by operation of law
 Discharge by impossibility of performance
 Discharge by lapse of time
 Discharge by actual breach of contract
 Discharge by anticipatory breach of contract
1.1 Meaning and modes of discharge of a contract

 A contract is said to be discharged when contractual relations between the parties to a
contract are terminated or comes to an end.
 In other words, when the parties to a contract have either performed or are freed from the
task of performing their respective obligations as arising from the contract.
The chart below shows the various ways in which a contract is said to be discharged:
1.2 Discharge by performance

Performance of a contract is one of the most common ways of discharging a contract. A contract
can be discharged by performance in any of the following ways:
Actual performance [Section 37]

When the promisor has made the performance in accordance with the terms of the contract and is
accepted by the promisee it is called an actual performance and contract comes to an end.

Section A: Mercantile Law - Chapter 6: Discharge of a contract and remedies for breach of contract
Example 01: Actual performance

appointed day during the business hours, and Babar took the delivery of goods. Azam has
discharged his obligations under the contract by actual performance.
Attempted performance (tender) [Section 38]

When the promisor has made an offer of performance but the offer of performance of promisor is
not accepted by the promisee it is called an attempted performance / tender.
Effect of tender is that the contract is deemed to be performed. Promisor is discharged from his
liability of non-performance. His rights against the promisee are unaffected.
Example 02: Attempted performance

appointed day during the business hours, and Babar refused to take the delivery of goods; it is a
case of attempted performance because Azam has done what he was required to do under the
contract and his obligation under the contract comes to an end.
1.3 Discharge by agreement or by consent

The rights and obligations created by an agreement can be discharged without being performed
through formation of another agreement between the parties due to which the rights and obligations
in the original agreement comes to an end. A contract can be discharged by mutual agreement in
any of the following ways:
Novation [Section 62]

Novation means the substitution of a new contract for an old one. The new agreement extinguishes
the rights and obligations that were in effect under the old agreement.
A novation ordinarily arises when a new individual assumes an obligation to pay that was incurred
by the original party to the contract. In the case of a novation, the original debtor is totally released
from the obligation, which is transferred to someone else. The nature of the transaction is
dependent upon the agreement between the parties. A novation also takes place when the original
parties continue their obligation to one another, but a new agreement is substituted for the old one.
Example 03: Novation

 Akram owes money to Bashir under a contract. It is agreed between Akram, Bashir and
Shazim that Bashir shall now accept Shazim as his debtor; instead of Akram. The old debt
of Akram to Bashir no longer exists and a new debt from Shazim to Bashir has been
contracted.
 Azam owes Babar Rs.10,000. Azam enters into an agreement with Babar, and gives Babar
a mortgage of his (Azam's) estate for Rs.5,000 in place of the debt of Rs. 10,000. This is a
new contract and extinguishes the old.
Rescission [Section 62]

Rescission is the cancellation of a contract by mutual agreement of parties.
Example 04: Rescission

Asif promises Beenish to sell and deliver 500 Bales of cotton on 1st November at her warehouse
and Beenish promises to pay for goods on 1st December. Asif does not supply the goods. Beenish
may rescind the contract.

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Alteration [Section 62]

Alteration means a variation made in the language or terms of a contract with mutual agreement.
When this occurs the original contract is discharged and a new contract is created. The parties in
alteration remain same.
Example 05: Alteration

Zahid promises to sell and deliver 500 bales of cotton, on 1st November and Yasir promises to pay
for goods on 1st December. Afterwards, Zahid and Yasir mutually decide that the goods shall be
delivered in five equal instalments at Zahid's warehouse. Here, original contract has been
discharged and a new contract has come into effect.
Remission [Section 63]

Remission means accepting a less amount than the initial amount agreed.
Example 06: Remission

Anum owes Bilal Rs.5,000. Sohail pays to Bilal Rs.1,000, and Bilal accepts them in satisfaction of
his claim on Anum. This payment is a discharge of the whole claim.
Waiver
Waiver is a unilateral act of one person that results in the surrender of a legal right. Thus, it amounts
to releasing a person of certain legal obligation under a contract.
Example 07: Waiver

Adeel promises to paint a picture for Saleem. Saleem afterwards requested Adeel not to do so.
Adeel, if agreed is no longer bound to perform the promise.
Promisee’s refusal / neglect [Section 67]

If any promisee neglects or refuses to afford the promisor reasonable facilities for the performance
of his promise, the promisor is excused by such neglect or refusal as to any non-performance
caused.
Example 08: Promisee’s refusal / neglect

Adeel contracts with Sajid to repair Sajid’s house. Sajid neglects or refuses to point out to Adeel
the places in which his house requires repair. Adeel is excused for the non-performance of the
contract caused by such neglect or refusal.
1.4 Discharge by operation of law

A contract may be discharged by operation of law in any of the following cases:
Death
On the death of the promisor a contract involving the personal skill or ability is discharged. In other
contracts, the rights and liabilities of the deceased person pass on to his legal representatives.
Example 09: Death

Ahmad (an artist) promises to paint a picture for Bilal by June 22, 2013 for Rs. 100,000. Ahmad
dies before completing the picture. Here it is a contract involving personal skill and on death of
Ahmad the contract will be discharged.

Insolvency
When a person’s debts exceeds his assets, he is adjudged insolvent and his property stands
vested in the Official Receiver or Official Assignee appointed by the court. Such person cannot
enter into contracts relating to his property, and cannot sue or be sued.
Therefore, on declaration of a person as an insolvent, the person is discharged from his liabilities
incurred prior to his adjudication.
Example 10: Insolvency

Aslam took a loan from Burhan amounting to Rs. 1 million payable in June 2013. On March 2013
Aslam was declared as insolvent by relevant court. After the order of adjudication he is discharged
from his liabilities as the amount will be paid by the Official Assignee / Official Receiver.
Material alteration
A contract is discharged if the terms of the contract are materially altered without getting prior
consent of parties. A material alteration is one which changes following in a significant manner
legal identity of the contract, or character of the contract or rights and liabilities of the parties to the
contract.
An alteration which is not material or which is made after getting prior consent does not affect the
validity of the contract.
Example 11: Material alteration

Anum gives a promissory note amounting to Rs. 50,000 to Bilal payable on August 16, 2013. Bilal
subsequently, endorses the same note in favour of Sohail after altering the date from August 16,
2013 to August 23, 2013. Here, change of date is a material alteration and has discharged Anum
from the instrument because it was made without her consent.
Same identity
When the promisor becomes the promisee, the other parties are discharged e.g. negotiation back
in case of negotiable instrument i.e. creditor to himself becomes a debtor of the same loan.
Example 12: Same identity

Azam gives a promissory note to Babar. Babar endorses the note in favour of Sarfaraz who in turn
endorses in favour of Azam. Here, Azam is both the promisor and the promisee and hence the other
parties are discharged.
1.5 Discharge by impossibility of performance

When a contract is valid at the time of formation and becomes impossible to perform subsequently
it is called effected by supervening impossibility.
Effects of supervening impossibility [Section 56]
The effects of supervening impossibility are as follows:
 A contract becomes void when an act becomes impossible after the formation of the
contract.
 A contract becomes void when an act becomes unlawful by reason of some event beyond
the control of promisor.
 A promisor is liable to compensate the promisee for any loss which arose due to non-
performance of promisor when the promisor hides the impossibility of performance.
 A person is bound to restore any benefit received or compensated under a contract when
such agreement or contract becomes void.

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Example 13: Effects of supervening impossibility

Atif contracts to sing for C-Studio at a concert for Rs. 500,000 which is paid in advance. Atif is too
ill to sing. Atif must refund Rs.10,000 to C-Studio.
Grounds of supervening impossibility

A contract is discharged by supervening impossibility in the following cases:
If the subject matter of the contract is destroyed after the formation of the
Destruction of
contract without any fault of either party then a contract is said to be
subject matter
discharged.
If a contract is of personal nature then on the death / incapacity / illness of
Death or personal
a person a contract is said to be discharged. This rule is also called
incapacity
doctrine of frustration.
At the time of declaration of war the contracts with alien enemies are either
Declaration of war
suspended or declared as void.
Particular state of
The contract is discharged if that particular state of thing which forms the
things ceases to
basis of a contract ceases to exist or occur.
exist or occur
Example 14: Destruction of subject matter

A music hall was rented out for a series of concerts. The hall caught fire before the date of first
concert. It was held, the contract has become void on the ground of supervening impossibility.
Example 15: Death or personal incapacity (doctrine of frustration)

Atif agreed to sing on a specified day. Atif fell seriously ill and could not perform on that day. The
contract was discharged.
Example 16: Declaration of War

Zahid contracts to take in cargo for Yasir at a foreign port. Zahid's government afterwards declares
war against the country in which the port is situated. The contract becomes void when the war is
declared.
Example17: Particular state of things cease to exist or occur

Alex and Boris contract to marry each other. Before the time fixed for the marriage, Alex goes mad.
The contract becomes void.
Not an excuse of supervening impossibility

Impossibility of performance is, as a rule, not an excuse from performance. It means that a person
should perform his promise if he has promised to do so unless the performance becomes
absolutely impossible.
A contract is not discharged by the supervening impossibility in the following cases:
If the performance of a contract becomes difficult, more costly or less

Difficulty of
beneficial than that agreed at the time of its formation, a contract will not
performance
be discharged.
Commercial When the contract becomes commercially unviable or non-profitable it is

impossibility not said to be discharged.

Default of a third On default of a third party, on whose work the promisor is relying, a
party contract is not said to be discharged.
Strikes, lockouts
Unless otherwise agreed by the parties to the contract, a contract is not
and civil
discharged on the grounds of strikes, lockouts and civil disturbances.
disturbances
Partial A contract is not discharged simply on the grounds of partial impossibility

impossibility of some of the objects of the contract.
Example 18: Difficulty of performance

Asim agreed to supply gold within a specified time. He failed to supply in time because of
government's restriction on the transport of gold from collieries. Here Asim will not be discharged
because the gold was available in the open market from where Asim could have obtained it.
Example 19: Commercial impossibility

Ajay, a furniture retailer, agreed to supply certain furniture to Sanjay at an agreed rate. Afterwards,
there was a sharp increase in the rates of the timber and rates of wages. Since, it was no longer
profitable to supply at the agreed rate, Ajay did not supply. Ajay will not be discharged on the ground
of supervening impossibility.
Example 20: Default of a third party

Alex entered into a contract with Boris for the sale of goods to be manufactured by Catherine, a
manufacturer of those goods. Catherine did not manufacture those goods. Alex will not be
discharged and will be liable to Boris for damages.
Example 21: Strikes, lockouts and civil disturbances

Austin agreed to supply to Bashir certain goods to be imported from America. The goods could not
be imported due to riots in that country. It was held that this was no, excuse for non-performance
of the contract.
Example 22: Partial impossibility

HB agreed to let out a boat to Harry (a) for viewing a naval review of on the occasion of coronation
of King Edward VII, and (b) to sail around the fleet. Owing to the King’s illness, the naval review was
abandoned but the fleet was assembled. The boat, therefore, could be used to sail around the fleet.
Held, the contract was not discharged.
Supervening illegality /Change of law

If the performance of the contract becomes unlawful due to a change in the law after the formation
of the contract then the contract is said to be discharged.
Example 23: Supervening illegality /Change of law

Azam agreed to sell his land to Babar. After the formation of the contract, the Government issued
a notification and acquired the land. The contract was discharged.

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1.6 Discharge by lapse of time

A contract may be discharged by lapse of time.
Limitation period
If a contract is not performed within the period of limitation then it is discharged as the parties
cannot legally enforce their rights.
After the expiry of the limitation period, the debt becomes time barred and hence cannot be
recovered through court of law.
Example 24: Limitation period

Anum sold goods to Bilal amounting to Rs. 10,000 on a credit of 1 year on January 1, 2012. On due
date i.e. December 31, 2012 Bilal defaulted in payment. In the given scenario Anum can file suit
against Bilal by December 31, 2015.
1.7 Discharge by actual breach of contract [Section 38]

If a party refuses or fails to perform his part of the contract then the contract is said to be discharged
due to breach.
Actual breach of contract occurs when a party to a contract refuses or fails to perform his part of
the contract at the time fixed for performance. Actual breach of contract occurs in the following two
ways:
Due date of performance
If any party to a contract refuses or fails to perform his part of the contract at the time fixed for
performance, it is called an actual breach of contract on due date of performance.
Example 25: Due date of performance

Azhar agreed to sell to Basit 10 tons of wheat @ Rs.8,000 per ton to be delivered in two equal
instalments on 20th November and on 21st November. On 20th November, Azhar refused to deliver
the goods. It is an actual breach of contract on due date of performance.
Course of performance
If any party has performed a part of the contract and then refuses or fails to perform the remaining
part of the contract, it is called an actual breach of contract during the course of performance.
Example 26: Course of performance

Azam agreed to sell to Babar 10 tons of wheat @ Rs.8,000 per ton to be delivered in two equal
instalments on 20th November and 21st November. On 20th November, Azam delivered 5 tons and
refused to deliver remaining 5 tons. It is an actual breach of contract during the course of
performance.
Consequences of actual breach

The consequences of actual breach depend upon whether the time was the essence of the contract
or not. The consequences in both the cases have been covered in previous chapter.
1.8 Discharge by anticipatory breach of contract [Section 39]

Anticipatory breach of contract occurs when before the performance is due, the party acts in such
a way that the contract may not be performed. A party may intend not to perform the contract in
the following two ways:

Refusal to perform promise

When a party to a contract has expressly refused to perform his promise.
Example 27: Refusal to perform promise

Aslam, a farmer agrees to sell to Boris his entire crop of 10 tons of wheat @ Rs. 8,000 per ton to
be delivered on 20th November. On 1st November, Aslam informs Boris that he is not going to supply
the goods. Aslam has committed anticipatory breach of contract by express repudiation.
Disabled to perform promise

When a party to a contract has disabled himself from performing his promise in its entirety.
Example 28: Disabled to perform promise

Akram, a farmer agrees to sell to Ben his entire crop of 10 tons of wheat @ Rs. 8,000 per ton to be
delivered on 20th November. On 1st November, Akram contracted to sell his entire crop to Chandra
@ Rs. 10,000 per ton. Akram has committed anticipatory breach of contract by implied repudiation.
Options to the aggrieved party

In case of anticipatory breach, the aggrieved party has the following two options:
Options to the aggrieved party Calculation of damages
Rescind the contract and claim damages for Damages will be equal to the difference
breach of contract without waiting until the due between the price prevailing on the date of
date for performance or breach and the contract price. [Section 73]
Treat the contract as operative and wait till the Damages will be equal to the difference
due date for performance and claim damages between the price prevailing on the due date
if the promise still remains unperformed of performance and the contract price.
Consequences of treating contract as operative
If the aggrieved party treats the contract as operative and waits till the due date for performance,
the consequences of anticipatory breach will be as follows:
 The promisor may perform his promise on or before the due date of performance and the
promisee will be bound to accept the performance.
 The promisor may take advantage of the discharge by supervening impossibility arising
between the date of breach and the due date of the performance and in such a case, the
promisee shall lose his right to sue for damages.
Example 29: Consequences of treating contract as operative

Azam, a farmer agrees to sell to Babar his entire crop of 10 tons of wheat @ Rs. 8,000 per ton to
be delivered on 20th November. On 1st November, Azam informs Babar that he is not going to supply
the goods. Babar decided not to rescind the contract on 1st November and to wait till 20th November.
On 19th November, the entire crop was destroyed by fire without the fault of either party. Since the
contract becomes void on the ground of impossibility of performance, Babar had lost the right to
sue Azam for damages.
Example 30: Anticipatory breach of contract

Question: On 11 February 2019, Isfandyar agreed to sell his house to Javed for Rs. 15 million. On
19 February 2019, Javed came to know that Isfandyar has finalized a deal for the same house with
Jenny. Discuss the option(s), if any, available to Javed.
Answer:
Isfandyar has committed anticipatory breach of contract so Javed has following options:
 He may either treat the contract as rescinded and claim damages from Isfandyar for
breach of contract immediately without waiting until the due date of performance, or
 He may elect not to rescind but to treat the contract as still operative and wait for the time
of performance and then hold Isfandyar responsible for the consequences of non-
performance.

Business Law
Example 31: Discharge of a contract by mutual agreement

Question: What is meant by discharge of a contract? Briefly describe the modes of discharging a
contract by mutual agreement under the provisions of the Contract Act, 1872.
Answer:
A contract is said to be discharged when contractual relations between the parties to a contract are
terminated or come to an end.
Discharge by agreement:
A contract can be discharged by mutual agreement in any of the following ways:
(i) Novation: Novation means the substitution of a new contract for an existing one. This new
contract may be between the same parties with new terms, or between new parties with
old or new terms.
(ii) Rescission: Rescission is the cancellation of a contract by mutual agreement.
(iii) Alteration: Alteration means a variation made in the language or terms of a contract with
mutual agreement. When this occurs the original contract is discharged and a new contract
is created. The parties in alteration remain same.
(iv) Remission: Remission means acceptance of a lesser amount or lesser degree of
performance than what was contracted for in full discharge of the contract. 0
(v) Waiver: Waiver is a unilateral act of one person that results in the surrender of a legal right.
Thus, it amounts to releasing a person of certain legal obligation under a contract.
(vi) Promisee’s refusal/neglect: If any promisee neglects or refuses to afford the promisor
reasonable facilities for the performance of his promise, the promisor is excused by such
neglect or refusal as to any non-performance caused thereby.
Example 32: Contract to do act afterwards becoming impossible or unlawful

Question: Lalchi Traders agreed to supply cotton yarn to Farzi Textile Limited at a fixed price for one
year. Three months after the formation of the contract the price of yarn increased sharply, making
it commercially unviable for Lalchi Traders to continue the supply at the agreed price. Therefore,
they terminated the contract on the ground of difficulty/impossibility of performance.
Under the provisions of the Contract Act, 1872 briefly describe:
(i) whether the contract would be discharged under the above circumstances.
(ii) what would be your decision if Lalchi Traders were importing yarn and Government has
imposed a ban on its import.
Answer:
(i) A contract to do an act which, after the contract is made, becomes impossible, or, by reason
of some event which the promisor could not prevent, becomes void when the act becomes
impossible, or unlawful.
However, events that make the contract extremely more difficult, costly or less beneficial or
commercially unviable or non-profitable then that agreed at the time of its formation, but not
impossible, are not accepted as an excuse for non-performance.
Therefore, in the given scenario, Lalchi Traders pleas shall not be acceptable and in the event
of non-performance they will be held liable for the breach of contract and the consequential
damages.
(ii) A contract is discharged, if after its formation, a law or regulation is adopted that makes
performance impossible/ illegal. Therefore, due to the imposition of ban on the import of yarn
by the Government, Lalchi Traders would be discharged from their liability to perform the
contract.

Example 33: Discharge by supervening impossibility

Question: State the grounds in which a contract is discharged by supervening impossibility.
Answer:
A contract is discharged by supervening impossibility in the following cases:
Destruction of subject matter
If the subject matter of the contract is destroyed after the formation of the contract without any
fault of either party then a contract is said to be discharged.
Death or Personal incapacity (Doctrine of Frustration)
If a contract is of personal nature then on the death / incapacity / illness of a person a contract is
said to be discharged.
Declaration of war
At the time of declaration of war the contracts with alien enemies are either suspended or declared
as void.
Change of law
If the performance of the contract becomes impossible or unlawful due to change in law after the
formation of the contract than the contract is said to be discharged.
Particular state of things ceases to exist or occur
The contract is discharged if that particular state of thing which forms the basis of a contract ceases
to exist or occur.
Example 34: Circumstances not covered by supervening impossibility

Question: Under the provisions of the Contract Act, 1872, list any five circumstances in which the
parties to the contract are not absolved from the performance of their contractual obligations on
the ground of supervening impossibility.
Answer:
Following are the circumstances under which the parties to the contract are not absolved from the
performance of their contractual obligations on the ground of supervening impossibility:
 Difficulty of performance due to some uncontemplated events or delays.
 Commercial impossibility like non-realisation of higher profits, increase in prices of raw
material or other inputs due to any reason, or a sudden depreciation of currency.
 Default by a third person on whose work the promisor relied.
 Strikes, lock-outs and civil disturbances unless the parties have specifically agreed in this
regard at the time of the contract.
 Failure of one of the objects in a contract with several objects.
 Self-induced impossibility.
Example 35: Effect of alteration of contract

Question: Talib was indebted to Bashir for Rs. 10,000. On Talib’s request Bashir agreed to accept
Jahangir as his debtor, in place of Talib. Jahangir failed to make payment on due date. Under the
provisions of Contract Act, 1872 you are required to explain whether Bashir can now demand
payment from Talib.
Answer:
If the parties to a contract agree to substitute a new contract for it, the original contract need not
be performed.
Since Bashir accepted Jahangir as his debtor in place of Talib, so now he cannot demand payment
from Talib. Consent of all the parties is essential.

Business Law
Example 36: Contract to do act afterwards becoming impossible or unlawful

Question: Imran Traders entered into a one-year contract with Minhas Oils Limited for the supply of
gravels for their extraction project in Badin at a fixed price of Rs. 30,000 per dumper. Six months
after the contract, the diesel prices increased sharply, making it non-profitable for Imran Traders to
continue the supply at the agreed price. Therefore, they terminated the contract on the ground of
impossibility of performance. Describe whether the contract is discharged in the above situation.
Answer:
A contract to do an act which, after the contract is made, becomes impossible, or, by reason of
some event which the promisor could not prevent, becomes void when the act becomes impossible,
or unlawful.
However, events that make the contract extremely difficult, costly or less beneficial or commercially
unviable or non-profitable then that agreed at the time of its formation, but not impossible, are not
accepted as an excuse for non-performance.
Therefore, in the given scenario, Imran Traders excuses shall not be acceptable and in the event of
non-performance they will be held liable for the breach of contract and the consequential damages.

2 REMEDIES FOR BREACH OF CONTRACT

Section overview
 Meaning of remedy
 Remedies for breach
 Kinds of damages
 Rules regarding amount of damages
 Remoteness of damages
2.1 Meaning of remedy

A remedy can be defined as a manner in which a right is enforced or satisfied by a court when
some harm or injury, recognized by society as a wrongful act, is inflicted upon an individual.
Remedies can be categorized into the following types:
Common law remedies
Damages and action for the price are more frequently sought remedies for breach of contract, since
they arise as of a right. The object of such a remedy is not to punish the party at fault but to
compensate the aggrieved party (pecuniary loss) as far as money can do so.
Equitable remedies
Equitable remedies are the court ordered action that directs parties to do something (specific
performance) or not to do something (injunction). In other words, equitable remedies are only
appropriate in specialised circumstances e.g. where monetary damages would be inadequate
compensation for the breach of an agreement.
Quantum meruit claim
Quantum meruit claim is categorized as a claim in quasi contract. Quantum meruit is likely to be
sought where one party has already performed part of his obligations and the other party then
repudiates the contract. When the aggrieved party elects to treat the contract as terminated, he
may claim a reasonable amount for the work done.
2.2 Remedies for breach

Parties to a lawful contract are bound to perform their respective obligations. But when one of the
parties refuses to perform his obligations he is said to have committed a breach of the contract.
The various remedies available to an aggrieved party are as follows:
1. Rescission of contract [Section 39 and 75]
Rescission is the putting an end to a contract. Rescission means a right not to perform your
obligation. In such a case, the aggrieved party is discharged from all the obligations under the
contract and is entitled to claim compensation for the damage which he has sustained because of
the non-performance of the contract.
The court may also grant rescission where the contract is voidable at the option of the aggrieved
party. In some cases, rescission may not be possible, for example, when parties cannot be restored
to their original position or where the third party has acquired rights in good faith.
Example 37: Rescission of Contract

Anum agrees to supply 10 tons of wheat to Bilal on 20th November. Bilal promises to pay for the
goods on its receipt. Anum does not supply the goods on the due date. Here, Bilal is discharged
from the liability of paying the price. Bilal is entitled to rescind the contract and to claim
compensation for the damage which he has sustained because of non-supply of goods on the due
date.

Business Law
Example 38: Rescission of contract not possible

Ahmad sold wheat of certain quality to Hassan by fraud which Hassan and his family consumed.
Later, Hassan discovered the fraud regarding quality of wheat. Hassan cannot rescind the contract
as parties cannot be restored to their original position.
2. Restitution
It means return of the benefit received by one party to the contract from the other under a void
contract or a contract that has been rescinded. When a contract becomes void it needs not to be
performed by either party.
Example 39: Restitution

Akram pays Babar Rs. 1 million in consideration of Babar’s promising to marry Sana (Akram’s
daughter). Sana is dead at the time of promise. The agreement is void but Babar must repay Akram
Rs. 1 million.
3. Damages [Section 73]

Damages are monetary compensation allowed for loss suffered by the aggrieved party due to
breach of a contract. The object of awarding damages is not to punish the party at fault but to
compensate the aggrieved party (pecuniary loss) as far as money can do so.
Example 40: Damages

Naveed promised to deliver food at an event organised by Adeel for 80 persons for Rs. 85,000. Just
an hour before the event, Naveed informed that he would not be able to deliver the food. Adeel
arranged the food from another caterer which did cost him Rs. 93,000. Adeel may claim damages
of differential amount i.e. Rs. 8,000 from Naveed.
4. Action for price

Action for price is also a monetary compensation and is applicable when one party has performed
his part of contract and now wants to recover the price of goods/services delivered or provided.
Example 41: Action for price

Arslan provided services to Habib in accordance with the contract between them. Later, Habib
refused to pay. Arslan may file a suit for recovery of contractual amount for his services.
5. Specific performance
Suit for specific performance is an equitable doctrine that compels a party to execute the
agreement according to its terms where monetary damages would be inadequate compensation
for the breach of an agreement.
Specific performance is a discretionary remedy, which is allowed only in a limited number of cases
some of them are listed below:
 Monetary compensation is not adequate
 Actual damage cannot be ascertained due to non-performance
 It is probable that compensation in money on non-performance cannot be obtained
 There is a contract for the sale of rare commodities
 There is a contract for the sale of land / building / apartment / houses
Example 42: Specific performance

Azam agreed to sell an old unique painting to Babar for Rs. 500,000. Subsequently, Azam refused
to sell the painting. Here, due to unique subject matter, monetary compensation is not adequate
and Babar may file suit against Azam for the specific performance of the contract.

Example 43: Specific performance

Azam agrees to sell two rare Pakistani Handmade carpets to Babar for Rs. 2 million. In case of
breach by Azam, Babar may compel Azam to perform the contract specifically, because there is no
standard for ascertaining the actual damages which would be caused by the non-performance by
Azam.
Following are the cases where suit for specific performance is not maintainable where:
 Monetary compensation are considered as an adequate remedy
 Contract is of personal nature, e.g. contract of services
 Court cannot supervise the performance of the contract e.g. construction of building
 One of the parties is a minor
 Contract is inequitable to either party
Example 44: Specific performance not maintainable

Habib contracted to supply a machine to Ashraf for Rs. 20,000. Later, due to increase in prices,
Habib refused to perform the contract. The same machine is available in market for Rs. 24,000
now. Ashraf cannot file a suit for specific performance as monetary compensation of Rs. 4,000
would be an adequate remedy.

Tanveer, an artist, agreed to perform at an event organised by Sajid. Later, due to some heated
arguments between them, Tanveer stated that he will not perform at Sajid’s event. Sajid cannot
enforce specific performance as contract is of personal nature.

Din Construction Limited (DCL) contracted to build a commercial centre for Asad. Later, DCL
refused to build the centre as they were focusing on more profitable opportunities now. Asad wants
to enforce specific performance alongwith guarantee that DCL will not compromise the
construction quality. The suit for specific performance is not maintainable as court cannot enforce
the performance of this contract.
6. Injunction
Suit for injunction is also an equitable remedy demanding court’s stay order. Injunction means an
order of the court which abstains from wrong doing. Where a party to a contract does something
which he promised not to do, the court may issue an order prohibiting him from doing so.
Thus, injunction is a preventive relief. It is particularly appropriate in case of anticipatory breach of
contract where damages would not be an adequate relief.
Example 47: Injunction

 Azam agreed to play cricket for Apple Cricket Club during the contract period of 3 years.
During the contract period, Azam made a contract with Orange Cricket Club and refused to
play cricket for Apple Cricket Club. Here, Azam could be restrained by injunction from doing
so.
 Sahiba, a film actress, agreed to act exclusively for Y Films for a year and for no one else.
During the year she contracted to act for Z Films. Here, she could be restrained by injunction
from doing so.

Business Law
7. Quantum meruit
The term Quantum Meruit means “as much as earned or deserved.” In case of breach of contract
the application or non-application of the term quantum meruit varies depending upon the terms of
the contract. Further, the divisibility or indivisibility of performance of the contract may also be taken
into account.
The aim of such an award is based on an implied agreement to pay for what has been done.
Quantum Meruit is likely to be sought where one party has already performed part of his obligations
and the other party then repudiates the contract. Provided the injured elects to treat the contract
as terminated, he may claim a reasonable amount for the work done.
Example 48: Quantum Meruit

 Qasim as owner of a magazine engaged Paul to write a book to be published by instalments
in his magazine. After a few instalments were published, the publication of the magazine
was stopped. It was held that Paul could claim payment for the part already published.
 Alisha, a singer contracts with Babar, the manager of a theatre, to sing at his theatre for two
nights in every week during the next two months, and Babar engages to pay her Rs. 100 for
each night's performance. On the sixth night, Alisha wilfully absents herself from the theatre,
and Babar, in consequence rescinds the contract. Babar must pay Alisha for the five nights
on which she had sung.
2.3 Kinds of damages

Following are the different kinds of damages:
1. Ordinary Damages [Section 73]
Ordinary damages are those which arise naturally in the usual course of things from the breach
itself. These damages can be recovered if the following two conditions are fulfilled:
 The aggrieved party must suffer by breach of contract, and
 The damage must be a direct consequence of the breach of contract
Example 49: Ordinary Damages

On 1st December; Qasim contracted to sell and deliver 50 tons of wheat @ Rs. 8,000 per ton to
Yousaf on 1st January. On 20th December Yousaf, afterwards, contracted to sell those goods to
Haris at Rs. 10,000 per ton. Qasim failed to deliver goods on 1st January when the price of the
wheat was Rs. 9,500 per ton. Yousaf is entitled to recover Rs. 75,000 [i.e. (Rs. 9,500 – Rs. 8,000)
x 50). Yousaf is not entitled to recover Rs. 100,000 as profit which would have arisen to Yousaf
from the sale to Haris because the profit is the indirect consequence of the breach of contract.
2. Special damages [Section 73]

Special damages can be recovered for the loss which the parties:
 Knew about
 At the time they made the contract
 As likely to result from such breach of contract
Special damages are due to special losses which are in the reasonable contemplation of the parties
at the time of formation of contract. Subsequent knowledge of the special circumstances will not
create any special liability on the guilty party.
Example 50: Special Damages

Azam, a builder; contracts to erect and finish a house by the first of January, in order that Babar
may give possession of it at that time to Qasim, to whom B has contracted to let it. Azam is informed
of the contract between Babar and Qasim. Azam builds the house so badly that, before the first of
January it falls down, and has to be rebuilt by Babar, who, in consequence, loses the rent which he
was to have received from Qasim, and is obliged to make compensation to Qasim for the breach
of his contract. Azam must make compensation to Babar for the cost of rebuilding the house, for
the rent lost, and for the compensation made to Qasim.

Example 51: Special Damages

Azam delivers to Babar, a common carrier; a machine to be delivered without delay, to Azam's mill
informing that his mill has stopped for want of the machine. Babar unreasonably delays the delivery
of machine, and Azam, in consequence, loses a profitable contract with the Government. Azam is
entitled to receive from Babar, by way of compensation, the average amount of profit, which would
have been made by the working of the mill during the time that delivery of it was delayed, but not
the loss sustained through the loss of the Government contract.
3. Exemplary (vindictive) damages

Exemplary (vindictive) damages are those which are awarded with a view to punish the wrong doer
and not primarily with an idea of awarding compensation to the injured party. The court may award
these damages in case of:
 a breach of promise to marry, where damages shall be calculated on the basis of mental
injury sustained by the aggrieved party.
 wrongful dishonour of a cheque by a banker. In case of wrongful dishonour of a cheque, the
rule is smaller the amount of the cheque, larger will be the amount of damages awarded. A
trader may recover such damages as wrongful dishonour of cheque shall adversely affect
his goodwill but a non-trader whose cheque is wrongfully dishonoured will have to prove the
loss of goodwill before claiming such damages.
Example 52: Exemplary (vindictive) damages

ABC Bank refused to honour the cheque issued by Alpha Traders (AT) to its suppliers despite the
fact that sufficient funds were available in AT’s account. AT filed a suit for damages stating that
wrongful dishonour has adversely affected its goodwill. The court may award exemplary damages.
Example 53: Exemplary (vindictive) damages

ABC Bank refused to honour the cheque issued by Alpha Training Centre (ATC) despite the fact that
sufficient funds were available in ATC’s account. ATC filed a suit for damages stating that wrongful
dishonour has adversely affected its goodwill. The court may award exemplary damages provided
that ATC proves the loss of goodwill.
4. Nominal damages
Nominal damages are awarded where the injured party has sustained damage of a short but not
of a substantial nature to be reckoned.
 Where the breach is technical and injured party has no intention of performing his part of
the contract
 Where the injured party has not suffered any actual damage or fails to prove that he has
 Where damage is due to the fault of the injured party
Example 54: Nominal Damages

 Azam promise to sell cement to Babar for Rs. 200 per bag. Azam does not supply. At the
time of breach, the market rate of the cement is the same. Babar is entitled to nominal
damages.
 Sahil contracted to buy a Hillman car from a car dealer Qasim but later refused to buy. Qasim
sold the same car to another customer and suffered no loss. Qasim sued for loss of profit.
Held, he could recover nominal damages.
5. Damages for inconvenience and uneasiness

If a party has suffered physical inconvenience and discomfort due to breach of contract, that party
can recover the damages for such inconvenience and discomfort.

Business Law
Example 55: Damages for inconvenience and uneasiness

Hakim with his wife and children booked a ticket for a midnight train, to be transported to a
particular place where he lived. They were, however, transported to a wrong place and they had to
walk several miles on a drizzling night and as a result, his wife caught cold and he had to incur
some medical expenses., It was held that he could recover compensation for inconvenience and
not for medical expenses for the sickness of his wife because it was very remote consequence.
6. Liquidated damages vs. Penalty clause [Section 74]

When the parties to a contract at the time of formation of contract, specify a sum which will become
payable by the party responsible for breach, such specified sum is called Liquidated Damages.
This amount represents a genuine attempt to work out what the loss would be in the event of such
a breach.
If a contract states that a particular sum is to be paid on breach of the contract and that sum is not
the genuine pre-estimate of the loss that would be suffered in the event of breach or that the sum
is disproportionate to the actual loss likely to result due to breach this is penalty clause. The court
can decrease but not increase the penalty stipulation.
The liquidated damages clause is enforceable. On the contrary, the enforceability of penalty clause
is at the discretion of the court.
Example 56: Liquidated damages vs. Penalty clause

Dawood sold tyres to Naveed who contracted not to re-sell them, or offer them for sale, at a price
below Dawood’s list price. Naveed agreed to pay a sum of Rs. 500 by way of liquidated damages
for every breach of the agreement. Later, Naveed sold tyres at less than the list price. Dawood filed
a suit for damages for breach. Held, the sum fixed by the parties was a genuine pre-estimate of the
damages and not a penalty.

Azam contracts to pay Rs. 20,000 as liquidated damages to Babar, if he fails to pay Rs. 500,000
for goods supplied on a given day. Azam fails to pay on that day, Babar can recover damages not
exceeding Rs. 20,000.

Azam contracts with Babar to pay B Rs. 2 million, if he fails to pay Babar Rs. 1 million on a given
day. The double amount is disproportionate to the likely actual loss. This is a penalty clause. Azam
fails to pay Babar Rs. 1 million on that day. Babar is entitled to recover from Azam such
compensation as the Court considers reasonable.

Azam undertakes to repay Babar a loan of Rs. 1,000,000 by five equal monthly instalments with a
stipulation that, in default of payment of any instalment, the whole shall become due. This
stipulation is not by way of penalty and contract may be enforced according to its terms.

Azam borrows Rs. 1,000,000 from Babar and gives him a bond of Rs. 2,000,000 payable by five
yearly instalments of Rs. 400,000, with a stipulation that, in default of payment of any instalments,
the whole shall become due. This is a stipulation by way of penalty

Stipulation for Interest [Section 74]

Two parties may agree to give a specific rate of interest in case of breach of contract.
Example 61: Stipulation for Interest

Zahid delivered goods to Yasir and Yasir promised to pay within 30 days. It was also agreed that in
case of delay in payment, Yasir shall pay 10 per cent interest on amount due. The contract is
enforceable.
Example 62: Stipulation for Interest

Azam gives Babar a bond for the repayment of Rs. 1,000,000 with interest at 12 per cent, at the
end of six months, with a stipulation that in case of default, interest shall be payable at the rate of
75 per cent, from the date of default. This is a stipulation by way of penalty, and Babar is only
entitled to recover from Azam such compensation as the Court considers reasonable.
Forfeiture of Security Deposit (or Earnest Money) [Section 74]

A clause in a contract which provides for forfeiture of security deposit in the event of failure to
perform is in the nature of a penalty. In such cases, the court may award reasonable compensation
only but in case where contract is made with the government, in case of breach the government
can forfeit the whole amount of the deposit as security.
Example 63: Forfeiture of Security Deposit (or Earnest Money)

Anwar paid security deposit of Rs. 1 million for supplying a specialised machinery to Saleem. Anwar
could not supply the machinery. Saleem forfeited the deposit. The court may award reasonable
compensation only and Saleem has to return remaining amount.
2.4 Rules regarding amount of damages

 The object of awarding damages is not to punish the party at fault
 The injured party is to be placed in the same position as money can do if the contract had
been performed
 The aggrieved party can recover actual loss suffered by him arising naturally.
 The fact that damages are difficult to assess does not prevent the injured party from
recovering.
 Where no real loss arises nominal damages are awarded.
 If the parties fix any amount as damages in case of breach of contract then the court will
allow only reasonable amount.
 It is the duty of the injured party to minimise the damage suffered.
Example 64: Rules regarding amount of damages

Bilal contracted to pay Rs. 500,000 to Jamal for procuring raw materials for a specific order from
government. Bilal clearly stated that in case order is not fulfilled he will lose profit of Rs. 200,000.
Jamal did not deliver the raw materials. Bilal could buy the raw materials from market for Rs.
600,000 but did not do that and filed a suit for recovery of special damages of Rs. 200,000. He
can recover only Rs. 100,000 as it was duty of Bilal to minimise the damage suffered due to breach
and he could do so by procuring material from the market.
2.5 Remoteness of damages

There are some losses which clearly result from the defendant’s breach of contract but are
considered too remote from the breach for it to be fair to expect the defendant to compensate the
claimant for them.

Business Law
Example 65: Remoteness of damages

A taxi driver is booked to take a passenger to the airport in time for a certain flight to Karachi where
the passenger expects to complete a deal worth Rs. 1 million. If the tax driver breaches the contract
by arriving late, the taxi firm may be liable for expenses such as any extra cost for getting the next
flight but is unlikely to be expected to compensate the passenger for the loss of Rs. 1 million.
Example 66: Compensation for loss caused by breach of contract

Question: Saleem entered into a contract for the purchase of 5 vehicles from Phony (Private)
Limited (PL) which were to be delivered in the month of February. Saleem also entered into another
contract for onward sale of these vehicles to Jabbar Limited (JL). However, PL refused to deliver the
vehicles as contracted. Saleem had to buy the vehicles from another supplier at an extra cost of Rs.
2 million for supplying these to JL. Saleem also had to pay compensation of Rs. 0.6 million to JL
due to delay in supply. Under the provisions of the Contract Act, 1872 analyse the above situation
and comment whether Saleem is entitled to receive any compensation from PL.
Answer:
Saleem is entitled to receive from Phony (Private) Limited (PL), compensation for any loss or
damage caused to him which naturally arose in the usual course of things from such breach i.e. Rs.
2 million. However, such compensation cannot be claimed for any remote and indirect loss or
damage sustained by reason of the breach unless the parties knew about such consequences when
they made the contract. Hence, PL would only be liable to pay the amount of Rs. 0.6 million claimed
by JL if PL knew about this arrangement at the time of entering into the contract.
Example 67: Right to rescind a contract

Question: Bushra entered into a contract with Akhtar, the manager of a radio programme, to
conduct a show, twice a week, during the next three months. Bushra did not appear for the sixth
show. She conducted the next show but soon thereafter Akhtar rescinded the contract and informed
her that her services were no longer required as she failed to conduct the sixth show.
Narrate the rights of Akhtar and Bushra in the above situation.
Answer:
Akhtar cannot rescind the contract as he has affirmed the contract when he allowed Bushra to
conduct the seventh show. However, he may be entitled to compensation for damage sustained by
him through Bushra’s failure to conduct the sixth show.
If Akhtar puts an end to the contract then it will amount to breach of contract and remedies of
breach of contract would be available to Bushra.
Example 68: Principles of determining compensation

Question: Describe the principles of determining compensation for loss or damages caused due to
breach of contract.
Answer:
The party who suffers from breach of contract is entitled to receive compensation for any loss or
damage caused to it, which naturally arose from the usual course of things from such breach, or
which the parties knew, when they made the contract to be likely to result from such breach.
Such compensation is not to be given for any remote or indirect loss or damage sustained by reason
of the breach.

Example 69: Rules relating to award of damages

Question: What do you understand by the terms ‘Ordinary damages’, ‘Special damages’ and
‘Exemplary damages’? Briefly describe the rules relating to the award of each of the above types of
damages under the Contract Act, 1872.
Answer:
Ordinary damages:
Ordinary damages are those which arise naturally in the usual course of things from the breach
itself.
Special damages:
Special damages are due to special losses which are in the reasonable contemplation of the parties
at the time of formation of contract.
Exemplary damages:
Exemplary (vindictive) damages are those which are awarded with a view to punish the wrong doer
and not primarily with an idea of awarding compensation to the injured party.
Rules relating to award of above damages:

Ordinary Damages
These damages can be awarded if the following two conditions are fulfilled:
 The aggrieved party must suffer by breach of contract, and
 The damage must be a direct consequence of the breach of contract
Special damages
Special damages can be awarded for the special loss which the parties:
 Knew about
 At the time they made the contract
 As likely to result from such breach of contract
Exemplary damages
The court may award these damages in cases such as:
 a breach of promise to marry, where damages shall be calculated on the basis of mental
injury sustained by the aggrieved party.
 wrongful dishonour of a cheque by a banker. In case of wrongful dishonour of a cheque,
the smaller the amount of the cheque, larger will be the amount of damages awarded. A
trader may recover such damages as wrongful dishonour of cheque shall adversely affect
his goodwill but a non-trader whose cheque is wrongfully dishonoured will have to prove
the loss of goodwill before claiming such damages.

Business Law

01. Contract is said to be discharged by mutual agreement when:
(a) Change in a contract is made without free consent of the parties
(b) Change in a contract is made by one of the parties
(c) Old contract is substituted by new contract
(d) New contract is substituted by old one
02. Mr. A agreed to supply 100 tonnes of iron-ore to Mr. B on 1st January. On the due date of
supply he took stipulated quantity of iron-ore to Mr. B’s Residence at 12:00 am. This is the case
of attempted performance. This offer of performance or attempted performance is
(a) Valid because the promisor is fulfilling the terms of the contract
(b) Invalid because the place and time of supply is not reasonable
(c) Valid because the performance is unconditional
(d) Invalid because the time of supply is not reasonable
03. Rescission occurs under which circumstance
(a) By mutual agreement
(b) When contract become illegal
(c) When contract is performed by both parties
(d) When law declares it as void
04. Acceptance of lesser performance by promisee is
(a) Void
(b) Invalid
(c) Valid
(d) Not allowed
05. Mr. X borrows sum of Rs.10,000/- from Mr. Y on promissory note for six months. On the due
date Mr. X is unable to pay and makes out another promissory note along with the amount of
interest. Existing promissory note is terminated and now how much Mr. X amount is liable to
pay to Mr. Y?
(a) It amounts to novation and Mr. X is liable to pay Rs.10000/-
(b) It amounts to novation and Mr. X is liable to pay Rs.10000 + Interest
(c) It amounts to alteration and Mr. X is liable to pay Rs.10000/-
(d) It amounts to alteration and Mr. X is liable to pay Rs.10000 + Interest

06. Remission means
(a) Giving up some rights in favour of promisor
(b) Acceptance of a lesser performance than due in contract
(c) Avoidance of contract by one party
(d) Avoidance of contract by both the parties
07. Attempted performance is equal to actual performance
(a) In case of payment of money
(b) In other cases except payment of money
(c) In case of supply of goods only
(d) In all above cases
08. Mr. A entered to an agreement with Mr. B for selling 100 tonnes of wheat at specified price to
him on 15th March. But, before the due date of delivery the President of Pakistan has passed
an Ordinance, debarring the individuals from supplying more than 5 tonnes of wheat. State the
legal position of the contract between Mr. A and Mr. B.
(a) The contract between Mr. A and Mr. B comes to an end because its performance has
becomes unlawful.
(b) The contract between Mr. A and Mr. B comes to an end because the subject matter of
the contract is destroyed.
(c) The contract between Mr. A and Mr. B comes to an end because of the personal
incapacity of the party.
(d) The contract between Mr. A and Mr. B comes to an end because certain state of things
gets changed.
09. Contract will not be discharged on account of supervening impossibility in case of:
(a) Change in law
(b) Death of promisor in the contract of personal nature
(c) Failure of third party relied upon by the promisor
(d) Non-existence of particular state of thing essential for the performance of a contract
10. Supervening impossibility means
(a) Subsequent impossibility
(b) Initial impossibility
(c) Irrelevant impossibility
(d) Relevant impossibility

Business Law
11. Abdullah agreed to supply raw material worth Rs.10,000/- to Mukesh on credit on 10th January
2015. The period of credit has not been fixed. Now on 10th January 2020 Abdullah is claiming
his amount. After constant denial from Mukesh, Abdullah is planning to file suit for the recovery
of his amount. Is the suit maintainable?
(a) Abdullah is legally entitled to recover the amount as it is his legal right
(b) Abdullah is not legally entitled to recover the amount due to the incapacity of Mukesh
(c) Abdullah is not legally entitled to recover the amount because the contract has
become time barred
(d) Abdullah is legally entitled to recover the amount because he has given the credit for
lawful purpose
(a) Partial impossibility does not invalidate a contract
(b) Impossibilities due to conduct of third party will discharge contract
(c) Commercial impossibility affects validity of a contract
(d) Difficulty in performance is a valid ground of supervening impossibility
13. Hanzhalah hired a room in some hotel of Lahore to witness PSL Final Match on 22nd March
but due to the emergency declared by government in the wake of Pandemic Coronavirus, the
match was cancelled. Examine the legality of this contract
(a) Hanzhalah is liable to pay the rent to the hotel
(b) Hanzhalah is excused from the obligation of paying rent to the hotel
(c) Hanzhalah is liable to pay the rent along with interest
(d) Hanzhalah is excused from the obligation due to the personal incapacity
14. Mr. Y draws a bill of exchange on Mr. Z for Rs.10,000/-. Mr. Z accepts the bill and returns it
back to Mr. Y. Mr. Y who as a drawer makes changes in the amount of that bill and raises it to
Rs.20,000/-. Can Mr. Y claim this amount from Mr. Z?
(a) Yes, he can claim the amount as he is the drawer of the bill.
(b) Yes, he can claim the amount as Mr. Z is liable to him
(c) No, he cannot claim the amount as there was material alteration
(d) No, he cannot claim the amount as there was lapse of time

15. The contract is a mutual exchange of promises between two parties when both the promisor
do what they have promised to do, the contract is set to be performed and contract comes to
an end. Performance of contract may be of two types
(a) Legal performance and illegal performance
(b) Conditional performance and unconditional performance
(c) Attempted performance and offer of performance
(d) Actual performance and attempted performance
16. Mr. B chartered Mr. A’s ship and agreed to load it with a cargo at Karachi within 45 days. On
the arrival of the ship at Karachi, Mr. B was unable to supply cargo. Mr. A did not accept the
refusal and continued demanding the cargo. Before the expiry of 45 days war was broken and
performance of the contract became impossible. State the legal position.
(a) Contract is not discharged and Mr. A can demand the performance of the contract
(b) Contract is discharged and Mr. A is not entitled to claim compensation
(c) Contract is discharged and Mr. A is entitled to claim compensation
(d) Contract is not discharged and Mr. A cannot demand anything
17. In case of anticipatory breach, an aggrieved party has the following options
(a) He can declare contract as discharged
(b) He can wait till the date of performance
(c) He can claim compensation
(d) Either (a) or (b)
18. Mr. X promise to sell and deliver 500 bales of cotton, on 9th November and Mr. Y promises to
pay for goods on 9th December. Afterwards Mr. X and Mr. Y mutually decide that the goods
shall be delivered in five equal instalments. Here original contract has been discharged due to
____________.
19. When one person unilaterally surrender his legal right, this amount to releasing a person of
certain legal obligations under a contract. In this way the contract is discharged by
___________.
20. Mr. A took a loan from Mr. B amount to Rs. 1 Million payable in June 2018. On March 2018
Mr. A was declared as insolvent by the relevant court of law. After the adjudication he is
discharged from his liabilities as now the amount will be paid by ___________.

Business Law
21. Actual breach of contract occurs when a party to a contract refuses or fails to perform his part
of the contract at the time fixed for the performance. If any party has performed a part of the
contract and then refuses or fails to perform the remaining part of the contract it is called
_______________of contract during the course of performance.
22. If the aggrieved party treats the contract as operative and waits till the due date for performance,
the promisor may take advantage of the discharged by supervening impossibility arising
between the date of _________ and the due date of the _____________.
23. The main object of awarding damages is
(a) To compensate monetary losses of aggrieved party
(b) To punish the party responsible for breach of contract
(c) To honour the petition of aggrieved party
(d) To put aggrieved party in a better position
24. In a breach of contract of sale, general rule for measuring damage is
(a) Difference between contract price and market price
(b) Difference between purchase price and selling price
(c) Difference between selling price and market price
(d) Difference between cost price and selling price
25. Breach of contract occurs, when
(a) Promisor does not perform his promise
(b) Promisor refuses to perform his promise
(c) Promisor disabled himself from performing promise
26. Nominal damages are granted with a view to
(a) Compensate actual losses of aggrieved party
(b) Recognize right of aggrieved party to claim for damage in case of breach of contract
(c) Compensate nominal loss, suffered by aggrieved party
(d) Record the fault of party making breach of contract

27. In case of liquidated damage provided in contract
(a) Damages for actual loss will be awarded

(b) Damages for actual loss to the maximum of liquidated damage will be awarded
(c) Amount of liquidated damages, as fixed will be awarded
(d) None of these are applicable
28. Mr. B agreed to supply spare parts of machine to Mr. A on 5 th September at particular price.
Mr. B fails to deliver spare parts on due date. There is a breach of contract and Mr. A filed a
suit against Mr. B for the compensation of loses. Mr. A claimed that due to non-availability of
spare parts, the machine could not function, so Mr. A claimed (i) depreciation on machine (ii)
fixed expenses such as salary and (iii) loss of profit due to non-function of machine. State the
legal position.
(a) Mr. A can only claim depreciation on machine
(b) Mr. A can only claim fixed expenses such as salary
(c) Mr. A cannot claim any amount
(d) Mr. A can claim depreciation on machine and fixed expenses only such as salary
29. Order of specific performance compels the party making breach of contract
(a) To pay adequate compensation to an aggrieved party
(b) To perform what he has promised to perform
(c) Not to perform what he has promised to perform
30. Compensation granted for indirect and remote losses is known as
(a) Punitive damages
(b) Liquidated damages
(c) Special damages
(d) Nominal damages
31. Mr. A agrees to sell 200 bags of sugar to Mr. B on 11th November at Rs.500/- per bag. Mr. B is
to make payment on the delivery of sugar bags. Before the due date the price of sugar has
increased to Rs. 600/- per bag. Mr. A refuse to supply sugar to Mr. B. There is a breach of
contract Mr. B is
(a) Not entitled to claim any amount
(b) Entitled to claim Rs. 600/- per bag of sugar
(c) Entitled to claim Rs. 100/- per bag of sugar
(d) Not entitled to claim Rs.100/- per bag of sugar

Business Law
32. Amount of compensation fixed by the parties, keeping in view probable losses which may arise
out of breach of contract is known as
(a) Liquidated damages
(b) Ordinary damages
(c) Special damages
(d) Nominal damages
33. Mr. A’s wife brought tin fish from ABC super market. After consuming it the poisoning was
caused and she died. Mr. A is entitled to recover from the ABC super market
(a) Expenses for employing nurse during her illness
(b) Medical expenses
(c) Financial loss caused by the death of his wife
34. Compensation granted for indirect and remote losses is known as
(a) Punitive damages

(b) Compensatory damages
(c) Special damages
(d) Vindictive damages
35. Mr. A entered into an agreement for constructing house for Mr. B and to give complete
possession on 1st January. Mr. B makes an agreement with Mr. C for renting out that house to
him from 2nd January. This fact is in the knowledge of Mr. A. The house was badly constructed
and collapsed before 1st January. Mr. B is entitled to get compensation for
(a) Cost of reconstructing the house

(b) Loss of rent
(c) Compensation, which Mr. B was to pay Mr. C for not renting out the house
36. Mr. Khan, a famous superstar of cricket makes an agreement with some sports goods company
for not using the bats except manufactured by that company. On some occasions the company
finds him using cricket bats manufactured by some other company. There is a breach of
contract on the part of Mr. Khan. The sports goods company may
(a) Claim damages as it is an adequate remedy
(b) Claim damages on the basis of quantum meruit
(c) Not claim an injunction from the court
(d) May claim an injunction from the court

37. Actual losses include
(a) Direct and natural loses arising out of breach
(b) Only direct loses
(c) Only reasonable loses
(d) Usual loses
38. The rule of common law is that where a party sustains loss by reason of____________, he is
to be placed in the same situation, with respect to damages as if the contract has been
performed.
39. ________________ are those damages, which will be sanctioned by the court for those losses,
which do arise in the natural course from the breach of contract.
40. ________________refer to those that may be caused by breach of contract, which the party
knew, when they made a contract, to be likely to result from breach of it.
41. The ________________ is an order issued by the court directing upon the party making breach
of contract and instructing him to perform what he has undertaken to perform.
42. _____________ is a preventive relief, which is provided to an aggrieved party where damages
would not be an adequate relief. It is the negative form of order of specific performance.

Business Law

1. (c) A contract is formed when the parties are mutually agreed. In a same way both the
parties of a contract by mutual agreement can discharge that contract.
2. (b) Attempted performance to be legally effective, must be made within usual business
hours and at a reasonable place.
3. (a) Rescission is the cancellation of a contract by mutual agreement of parties
4. (c) Remission means accepting a less amount than the initial amount agreed
5. (b) It amounts to novation and Mr. X is liable to pay Rs.10000 + Interest. It discharges an
existing contract and brings new contract into existence.
6. (b) Acceptance of a lesser performance than due in contract. Sometimes, the promisor
may perform only a part of his promise and promisee accepts it for the performance of
the whole promise.
7. (b) In other cases, except payment of money.
8. (a) The contract between Mr. A and Mr. B comes to an end because its performance has
becomes unlawful. Change of law, after the formation of a contract, if renders
performance of contract unlawful, such contract is discharged.
9. (c) Failure of third party or his inability will not be considered sufficient ground for
discharging a contract.
10. (a) When a contract is valid at the time of formation and becomes impossible to perform
subsequently it is called effected by supervening impossibility
11. (c) Abdullah is not legally entitled to recover the amount because the contract has
become time barred. If the contract is not performed and no action is taken by the
promisee within the period of limitation, he is deprived of his remedy at law.
12. (a) The contract may be made for achieving more than one objectives. In case one object
fails, contract will not be discharged.
13. (b) Hanzhalah is excused from the obligation of paying rent to the hotel. The contract
cannot be performed due to the reasons beyond the control of both parties.
14. (c) Material alterations include all those alterations which in a significant way affect rights
and duties of the parties
15. (d) Actual performance and attempted performance. When both the promisor do what
they have promised to do, the contract is set to be performed
16. (b) During intervening period between anticipatory breach and actual breach if
supervening impossibility takes place, the promisee loses his right to claim
compensation.
17. (d) The promisee can wait till the due date of performance for claiming damages or the
promisee can immediately recent the contract and sue the promisor for
compensation.

18. Alteration.
19. Waiver
20. Official assignee/ official receiver.
21. An actual breach
22. Breach, performance.
23. (a) The basic idea of providing compensation to the aggrieved party is to put him in the
same financial position as he would have been if the contract had been performed.
24. (a) Difference between contract price and market price.
25. (d) When the party does not fulfill his obligation or refuses to fulfill it or disabled himself
from fulfilling it is known as breach of contract
26. (b) Nominal damages are awarded, when the court is of the opinion that aggrieved party
has not suffered real loss.
27. (b) Damages for actual loss to the maximum of liquidated damage will be awarded. The
court will make assessment of actual loss and grant damage for compensating that
loss.
28. (d) Mr. A can claim depreciation on machine and fixed expenses only such as salary.
Compensation may be granted only for depreciation, fixed expenses and salary. The
loss of profit is a remote and indirect loss.
29. (b) To perform what he has promised to perform. Specific performance means actual
carrying out of a contract as agreed.
30. (c) Special damages are due to special losses which are in the reasonable contemplation
of the parties at the time of formation of contract
31. (c) Entitled to claim Rs. 100/- per bag of sugar. Natural and direct losses may, vary
situation to situation depending on nature of transaction and prevailing circumstances.
32. (a) When a parties to a contract at the time of formation of contract, specify a sum, such
sum is called liquidated damages
33. (d) Being an aggrieved party Mr. A can claim expenses, medical expenses and financial
loss by the death of his wife.
34. (c) Special losses are those losses which do arise from special circumstances, which are
attached to a contract
35. (d) The aggrieved party, Mr. A can claim cost of rebuilding the house, loss of rent and
compensation to third party.
36. (d) If a party has made a promise for not doing something, to prevent such party from
doing that act and order of injunction may be claimed by an aggrieved party.

Business Law
37. (a) Direct and natural loses arising out of breach. These damages are granted for the
losses, which are direct and general in nature.
38. Breach of contract
39. Ordinary damages
40. Special damages
41. Specific performance.
42. An injunction.

07
CHAPTER
Business Law
Specific types of contracts
Contents
1 Quasi contracts
2 Contingent contract and contract of indemnity
3 Contract of guarantee
4 Pledge

Business Law
1 QUASI CONTRACTS
Section overview
 Quasi contract
 Application of Quantum Meruit
1.1 Quasi contract

A Quasi contract is an obligation imposed by law in absence of any agreement between the parties.
A quasi-contract is not an actual contract, but is a legal substitute formed to impose equity between
two parties. The concept of a quasi-contract is that of a contract that should have been formed,
even though in actuality it was not. The other name for Quasi contracts is constructive contracts.
The types of Quasi contracts are listed below:
1. Supply of necessaries [Section 68]
If a person incapable to enter into contract or his dependent is supplied by another person
necessaries suited to his conditions in life the person supplying such necessaries is entitled to be
reimbursed his price from the property of such incompetent person.
Example 01: Supply of necessaries

 Azam supplies Habib, a lunatic, with necessaries suitable to his condition in life. Azam is
entitled to be reimbursed from Habib's property.
 Waseem supplies the wife and children of Saeed, a lunatic, with necessaries suitable to their
condition in life. Waseem is entitled to be reimbursed from Saeed's property.
2. Payment by interested person [Section 69]

A person, who is interested in the payment of money which another is bound by law to pay, and
who therefore pays it, is entitled to be reimbursed by the other.
Thus the essential requirement of this section is:
 The payment made should be bona fide for the protection of one’s interest
 The payment should not be a voluntary one
 The payment must be such as the other party was bound by law to pay
Example 02: Payment by interested person
Babar holds land in Sindh, on a lease granted by Azam, a Zamindar. The revenue payable by Azam
to the Government being in arrears, his land is advertised for sale by the Government. Under the
revenue law, the consequence of such sale will be the annulment of Babar's lease. Babar, to prevent
the sale and the consequent annulment of his own lease, pays the Government the sum due from
Azam. Azam is bound to make good to Babar the amount so paid.

Azam pays arrears of rent of Babar voluntarily to avoid dispute between Babar and his landlord.
Azam cannot recover from Babar as he has no interest in the payment.

Bilal imported goods and stored in Anum’s warehouse without paying the custom duty. The custom
authorities recovered custom duty from Anum. Anum can recover the amount from Bilal.

Section A: Mercantile Law - Chapter 7: Specific types of contract
3. Person enjoying benefit of non-gratuitous act / goods [Section 70]

Where a person lawfully does anything for another person, or delivers anything to him, not
intending to do so gratuitously and such other person enjoys the benefit thereof, the latter is
bound to make compensation to the former in respect of, or to restore, the thing so done or
delivered.
Following conditions must be satisfied before any right of action arises under this section:
 The thing must have been done lawfully
 The person doing the act should not have intended to do it gratuitously
 The person for whom the act is done must have enjoyed the benefit of the act.
Example 05: Person enjoying benefit of non-gratuitous act / goods

 Awais, a tradesman, leaves goods at Afaq's house by mistake. Afaq treats the goods as his
own. He is bound to pay Awais for them.
 Azam saves Babar's property from fire. Azam is not entitled to compensation from Babar, if
the circumstances show that he intended to act gratuitously.
 Akram, a coolie, takes the luggage of Bisma at the railway station to her cabin without
asking. Bisma does not object to it. Akram can get reasonable charges for his services.
4. Finder of goods [Section 71]

A person who finds goods belonging to another, and takes them into his custody, is subject to the
same responsibility as a bailee under contract of bailment. He is bound to take as much care of
the goods as a man of ordinary prudence would, under similar circumstances, take of his own
goods. He must also take reasonable steps to trace its owner - if he does not, he will be guilty of
wrongful conversion of the property. Until the true owner is found, he has right to retain possession
of the goods.
A finder of goods may sell the goods when the goods are of perishable nature or when the lawful
charges for finding the true owner amount to two-third or more of the value of the goods.
Example 06: Finder of goods

Adeel found a diamond ring at wedding reception of Bilal. Adeel told Bilal and other guests about
it with an intention to find the true owner. If he is not able to find the owner he can retain the ring
as bailee.
5. Payment by mistake or under coercion [Section 72]
A person to whom money has been paid, or anything delivered by mistake or under coercion, must
repay or return it.
Example 07: Payment by mistake or under coercion

 Anum and Bilal jointly owe Rs. 100 to Saima. Anum alone pays the amount to Saima, and
Bilal, not knowing this fact, pays Rs. 100 over again to Saima. Saima is bound to repay the
amount to Bilal.
 A railway company refuses to deliver up certain goods to the consignee, except upon the
payment of an undue charge for carriage. The consignee pays the sum charged in order to
obtain the goods. He is entitled to recover so much of the charge as was excessive.
1.2 Application of Quantum Meruit

Quantum meruit
The term Quantum Meruit means “as much as earned or deserved.” In case of breach of contract
the application or non-application of the term quantum meruit varies depending upon the terms of
the contract. Further, the divisibility or indivisibility of performance of the contract may also be taken
into account.

Business Law
The aim of such an award is based on an implied agreement to pay for what has been done.
Quantum Meruit is likely to be sought where one party has already performed part of his obligations
and the other party then repudiates the contract. Provided the injured elects to treat the contract
as terminated, he may claim a reasonable amount for the work done.
Quantum meruit applies in the following cases:
1. Void agreement or contract that becomes void [Section 65]
When an agreement is discovered to be void, or when a contract becomes void, any person who
has received any advantage under such agreement or contract is bound to restore it, or to make
compensation for it to the person from whom he received it.
Example 08: Void agreement or contract that becomes void

 Akram pays Babar Rs. 1,000 in consideration of Babar’s promising to marry Sana, Akram’s
daughter. Sana is dead at the time of the promise. The agreement is void, but Babar must
repay Akram Rs. 1,000.
 Azam contracts with Babar to deliver to him 250 kg of rice before May. Azam delivers 130
kg only before the agreed time, and none after. Babar retains the 130 kg. He is bound to pay
Azam for them.
 Alisha, a singer contracts with Boris, the manager of a theatre, to sing at his theatre for two
nights in every week during the next two months, and Boris engages to pay her Rs. 50,000
for each night's performance. On the sixth night, Alisha wilfully absents herself from the
theatre, and Boris, in consequence rescinds the contract. Boris must pay Alisha for the five
nights on which she has sung.
 Atif contracts to sing for Bisma for Rs. 100,000 which are paid in advance. Atif is too ill to
sing. Atif is not bound to make compensation to Bisma for the loss of the profits which Bisma
would have made if Atif had been able to sing, but must refund to Bisma Rs. 100,000 paid
in advance.
2. Person enjoying benefit of non-gratuitous act / goods [Section 70]

Where a person lawfully does anything for another person, or delivers anything to him, not
intending to do so gratuitously and such other person enjoys the benefit thereof, the latter is bound
to make compensation to the former in respect of, or to restore, the thing so done or delivered.
Example 09: Person enjoying benefit of non-gratuitous act / goods

 Azam, a tradesman, leaves goods at Babar's house by mistake. Babar treats the goods as
his own. He is bound to pay Azam for them.
 Asim saves Bashir's property from fire. Asim is not entitled to compensation from Bashir, if
the circumstances show that he intended to act gratuitously.
3. Act preventing completion of performance

If a party does not complete the contract or prevents the other party from completing it, the
aggrieved party can sue on quantum meruit.
Example 10: Act preventing completion of performance

Shakeel, an owner of a magazine engaged Hamid to write a book to be published by instalments
in his magazine. After a few instalments were published, the publication of the magazine was
stopped. It was held that Hamid could claim payment for the part already published.
4. Divisible contract
The party at default may sue on a quantum meruit if the contract is divisible and the party not at
default has enjoyed benefits of the part performance.

Example 11: Divisible contract

Asif hired Basit to construct a house for Rs. 1 million but Basit abandoned this contract after having
done the work worth Rs. 0.5 million. Afterwards, Asif got the work completed. Basit could not
recover anything for the work done because he was entitled to the payment only on the completion
of the work.
5. Indivisible contract performed completely but badly

If it is an indivisible contract which has been completely performed but with faults then the party at
default may claim the amount agreed after deducting any amount which the other party has paid
to remove faults.
Example 12: Indivisible contract performed completely but badly

Arif agreed to decorate Basit's flat for a lump sum of Rs. 200,000. Arif did the complete work but
Basit complained of faulty workmanship. It costs Basit another Rs. 30,000 to remedy the defect. It
was held that Arif could recover only Rs. 170,000 from Basit.
6. Express or implied contract to render services but no remuneration is pre-settled

When there is an express or implied contract to render services but no remuneration is pre-settled
in such a case reasonable remuneration is payable.
Example 13: Express or implied contract to render services but no remuneration is pre-settled
Azam asked Babar, a plumber, to fix water leakage problem in Azam’s house. Babar did so. No
service charges were decided between them. Babar is entitled to reasonable amount for his
services.
Example 14: Types of quasi contract

Question: Under the provisions of the Contract Act, 1872 briefly describe various types of quasi-
contracts.
Answer:
Supply of necessaries:
If a person incapable to enter into contract or his dependent is supplied by another person
necessities suited to his conditions in life, the person supplying such necessities is entitled to be
reimbursed the price from the property of such incompetent person.
Payment by interested person:

A person, who is interested in the payment of money which another is bound by law to pay, and
Person enjoying benefit of non-gratuitous act/goods:

Where a person lawfully does anything for another person, or delivers anything to him, not intending
to do so gratuitously and such other person enjoys the benefit thereof, the latter is bound to make
compensation to the former in respect of, or to restore, the thing so done or delivered.
Finder of goods:
A person who finds goods belonging to another, and takes them into his custody, is subject to the
same responsibility as a bailee.
Payment by mistake or under coercion:

A person to whom money has been paid, or anything delivered by mistake or under coercion, must
repay or return it.

Business Law
Example 15: Conditions for claiming amounts under quasi contract

Question: Under certain special conditions, obligations resembling those created by a contract are
imposed by law although the parties have never entered into a contract. In view of the provisions of
the Contract Act, 1872 describe the conditions which must be fulfilled for claiming the amount in
each of the following cases:
(i) Baqir supplied a jacket to Sultan in order to save him from cold weather. Sultan who was
a minor agreed to pay Rs. 2,000 for the jacket although its market price was Rs. 1,500.
(ii) Rohi, who paid the electricity bill of Saulat without being asked, is now demanding
payment from Saulat.
(iii) Sami, a coolie picked up the goods purchased by Nadia from the supermarket and took
them to her car. Nadia did not object to it. Sami demanded service charges from Nadia.
Answer:
(i) Claim for necessaries supplied to person incapable of contracting, or on his account:
Baqir can recover the amount from Sultan if following conditions were satisfied:
 the jacket supplied was the necessity suited to Sultan’s condition in life.
 Baqir can recover the reasonable market value of Rs. 1,500 only from Sultan’s property.
He cannot recover Rs. 2,000 which Sultan had agreed to pay to Baqir as Sultan, being an
incompetent person was not in the capacity to contract.
(ii) Reimbursement of person paying money due by another in payment of which he is interested:
Rohi can recover the amount of electricity bill from Saulat only if the following two conditions were
satisfied:
 Rohi who made the payment had interest in such payment.
 the payment must be such which Saulat was bound by law to pay.
(iii) Obligation of person enjoying benefit of non-gratuitous act:
Sami can recover the amount of service charges from Nadia if following conditions were satisfied:
 Sami had lawfully done the service for Nadia, i.e. Nadia had the option to accept or reject
the services rendered by Sami.
 Sami did not have an intention to act gratuitously and Nadia had enjoyed the benefits of
the service so provided by Sami.

Question: Sami rented his house to Qurban for a period of one year at an agreed sum of Rs. 10,000
per month. After the first two months, Qurban defaulted in making payment of the rent. Baqir, a
neighbour, being concerned with the strained relationship between Sami and Qurban, paid the rent
with good intention. Subsequently, on Qurban’s refusal to reimburse the amount, Baqir filed a suit
against him on the grounds that he made the payment to Sami which Qurban was legally bound to
make and being a quasi-contract Baqir is entitled to the reimbursement.
Explain whether Baqir is justified in his suit.
Answer:
To constitute a quasi-contract and be entitled for reimbursement, following conditions must be
satisfied:
(a) the person who made the payment must have his own interest in the payment; and
(b) the other person must be bound by law to pay.
Baqir does not seem to have any interest in the payment and therefore, he is not justified in his
suit.


Question: Mohsin acquired a piece of agricultural land in Moro, Sindh from a local landlord, Qasim
Soomro, on a lease term of twenty years. The revenue payable by Qasim Soomro on his land to the
Provincial Government was in arrears. As a result, the land was advertised for sale by the Provincial
Government. Mohsin, in order to prevent the sale of land, paid the sum due by Qasim Soomro to
the Provincial Government.
Under the provisions of Contract Act, 1872 explain whether Mohsin can recover such amount from
Qasim Soomro.
Answer:
To constitute a quasi-contract and be entitled for reimbursement, following conditions must be
satisfied:
(i) the person who made the payment must have his own interest in the payment; and
(ii) the other person must be bound by law to pay.
In the given scenario, Qasim Soomro was legally bound to pay the land revenue to the Provincial
Government and Mohsin, being interested in such payment, as his lease would have been annulled
upon sale of land by the provincial government, is entitled to recover the amount from Qasim
Soomro.
Example 18: Finder of goods

Question: Yasmin stayed at Hotel Fragrance, during the exhibition of her famous jewellery brand.
After she left, the house-keeping staff found a precious branded ring from a drawer which was
handed over to the hotel manager. Meanwhile, Ahmed who was staying at the hotel, stole the ring
and escaped. Hotel manager tried to contact Yasmin but she had already proceeded on a year -
long tour at an unknown destination.
Under the provisions of Contract Act, 1872 discuss what action(s) can be taken by the hotel
management in this scenario and what would be their rights when the ring is recovered.
Answer:
Responsibility of Hotel Management as finder of goods
The contract which exists between Yasmin and the Hotel Management is a bailment contract.
Yasmin in this case is the bailor while the Hotel Management is the bailee, being finder of lost
goods.
Ahmed has wrongfully deprived the Hotel Staff of the possession of the goods bailed. Now, the
Hotel Management may use such remedies as the owner, might have used as if no bailment had
been made and may bring a suit against Ahmed.
Rights of Hotel Management in case ring is recovered

(i) Repayment by Yasmin of necessary expenses
Under the conditions of bailment, where the goods are to be kept or carried, and the Hotel
Management is to receive no remuneration, Yasmin shall repay to the Hotel Management the
necessary expenses incurred by them for the purpose of the bailment.
(ii) Right to retain

The Hotel Management has no right to sue Yasmin for compensation for the trouble and expense
voluntarily incurred by them to preserve the ring, but they may retain the ring against Yasmin until
they receive such compensation.
(iii) Right of sale

If Yasmin after returning from the tour refuses to pay the lawful charges to the Hotel Management
in respect of the ring; Hotel Management may sell the ring, being commonly a subject of sale, if the
lawful charges in this respect amount to two third of the ring’s value.

Business Law
2 CONTINGENT CONTRACT AND CONTRACT OF INDEMNITY

Section overview
 Contingent contract
 Difference between contingent contract and wagering agreement
 Contract of indemnity
 Rights of indemnity holder
 Time of commencement of the indemnifier’s liability
2.1 Contingent contract
Definition: Contingent contract [Section 31]

A ‘contingent contract’ is a contract.
 to do or
 not to do something
if some event, collateral to such contract
 does or
 does not happen.
Insurance contracts and contracts of indemnity and guarantee provide the best example of
contingent contracts.
Example 19: Definition

Akram contracts to indemnify Basit upto Rs. 1 million in consideration of Rs. 20,000 annual
premium if Basit’s house is burnt. This is a contingent contract.
Characteristics of contingent contracts

The following are the characteristics of contingent contracts:
 the performance of a contingent contract depends upon the happening or non-happening
of some future event.
 the event must be collateral to the contract
 the event must be uncertain
Example 20: Characteristics of contingent contracts

Javed contracts to pay Rs. 50m to Farhan (a contractor) for constructing a building, provided the
construction is approved by an architect. It is a contingent contract because the consideration of
the promise to pay Rs. 50m is the construction of the building, and the event, namely, approval by
an architect is a collateral event.
Example 21: Not a contingent contract

Azam agrees to construct a building for Babar for Rs. 5 million, on the terms that no payment shall
be made till the completion of the work. This is not a contingent contract because the uncertain
event (i.e. Azam’s completing the work) is not collateral to the contract but is the very thing
contracted for and is thus an integral part of the contract.

2.2 Difference between contingent contract and wagering agreement
Wagering Agreement
An agreement between two persons under which money or money’s worth is payable, by one
person to another on the happening or non-happening of a future uncertain event is called a
wagering agreement. An agreement by way of wager is void.
Example 22: Wagering agreement

Arslan promises to pay Rs. 10,000 to Arif if it rained today, and Arif promises to pay Rs. 1,000 to
Arslan if it did not. The agreement is void.
Effects of Wagering Agreement
The effects of wagering agreements are following:

 Such agreements are void
 No suit can be filed to recover the amount won on any wager.
 Transactions which are collateral to wagering agreements may also be void.
Example 23: Effect of wagering agreement

Habib agreed with Arslan that he will buy refrigerator from Arslan for Rs. 80,000 if Habib won a
wager within next week. The wagering agreement is void. The agreement to buy refrigerator, being
collateral to wagering, is also void.
The differences
Following are the few differences between contingent and wagering agreement:
Contingent contract Wagering agreement
Validity
It is void and illegal.
It is a valid contract.
Interest of parties
Parties are not interested in the occurrence or
In a contingent contract parties have real
interest in the occurrence or non-occurrence of non-occurrence of the event except for the
the event e.g. insurable interest in the property winning or losing the amount.
insured.
Uncertain event
The uncertain event is the sole determining
The future uncertain event is merely collateral.
factor of the agreement.
Reciprocal promises
It consists of reciprocal promises. It may or may not consist of reciprocal
promises.
2.3 Contract of indemnity

Definition: Contract of indemnity [Section 124]
A contract by which one party promises to save the other from loss caused to him by the conduct
of the promisor himself, or by the conduct of any other person.

Business Law
Parties in contract of indemnity
Indemnifier The indemnifier (or promisor) is the person who promises to make good
(Promisor) the loss.
Indemnified /
The indemnified (also referred to as the indemnity holder or promisee)
Indemnity holder
is the person whose loss is to be made good.
(Promisee)
Example 24: Definition and parties in contract of indemnity

Amjad contracts to indemnify Babar against the consequences of any proceedings which Qasim
may take against Babar in respect of a certain sum of Rs. 200/-. This is a contract of Indemnity.
In the above example Amjad is the indemnifier and Babar is the indemnity holder.
2.4 Rights of indemnity holder [Section 125]

A promisee is entitled to recover the following amounts from the promisor provided that he acts
within the scope of his authority:
 All damages which he may be compelled to pay in any suit in respect of any matter to which
the promise to indemnify applies;
 All costs which he may be compelled to pay in
 bringing or
 defending such suits.
But the indemnified should not have acted against the order of the promisor and acted as
any prudent man would act under similar circumstances in his own case, or with the authority
of the indemnifier and
 All sums which he may have paid under the terms of any compromise of any such suit. The
compromise should not be contrary to the orders of the indemnifier and should be a prudent
one or authorized by the indemnifier.
Example 25: Rights of indemnity holder

Naeem promised to compensate Waqas for any loss that he may suffer by filing a suit against
Saleem. The court orders Waqas to pay Saleem damages of Rs. 50,000. The cost of suit Rs. 10,000
was also incurred. Waqas is entitled to recover Rs. 50,000 being damages he was compelled to
pay. In addition, Waqas may also recover Rs. 10,000 being cost of suit provided that he had acted
prudently or with the authority of Naeem.
Example 26: Rights of indemnity holder

Kamal promised to compensate Lateef for any loss that he may suffer in defending a suit. Lateef
made a compromise with claimant although Kamal had ordered otherwise. Lateef cannot recover
the amount from Kamal as the compromise was contrary to the orders of indemnifier.
2.5 Time of commencement of the indemnifier’s liability

The Contract Act is silent on the time of commencement of the indemnifier’s liability under the
contract of indemnity. On the basis of judicial pronouncement of courts, it can be said that the
liability of an indemnifier commences as soon as the liability of the indemnity holder becomes
absolute and certain. In other words, if the indemnity holder has incurred an absolute liability even
though he has himself paid nothing, he is entitled to ask the indemnifier to indemnify him.
Example 27: Time of commencement of the indemnifier’s liability

Abid promises to compensate Burhan for any loss that he may suffer by filing a suit against Qasim.
The court orders Burhan to pay Qasim damages of Rs. 50,000. As the loss has become certain,
Burhan may claim the amount of loss from Abid and give it to Qasim.

Example 28: Contingent contract

Question: Vazir said to Saulat, “I will buy speed boats worth Rs. 10,000,000 from you, if you obtain
the licence for me to operate the boats at Clifton beach”. Saulat agreed and applied for the licence
and deposited Rs. 100,000 as processing fee. However, before the issuance of licence, the city
government imposed ban on the issuance of new licences. Saulat wants Vazir to buy the speed
boats as he had made necessary efforts to arrange for the licence. However, Vazir refuses to buy
the speed boats from Saulat.
Under the Contract Act, 1872 identify the type of contract between Vazir and Saulat. Also state
whether Vazir is now bound to purchase the speed boats from Saulat.
Answer:
The contract between Vazir and Saulat is a contingent contract whose performance is based on the
happening of certain event collateral to the contract, i.e. arranging of license for Vazir. If such event
has not happened the performance of the contract does not become due. It does not matter at all
that Saulat had applied for the license and also paid processing fee of Rs. 100,000 to the
authorities. Thus Vazir is not bound to purchase the boats from Saulat.

Question: Zubair agrees to construct a bungalow for Ubaid for Rs. 20 million on the condition that
payment will only be made after Muneer, an architect, certifies that the bungalow has been
constructed in accordance with the layout plan. Under the provisions of the Contract Act, 1872
describe the nature and validity of the above contract.
Answer:
It is a contingent contract as the condition i.e. certification of the construction in accordance with
the layout plan by a third party is collateral to the contract. Although it is a valid contract, the
performance can only be enforced by Zubair after happening of the collateral event. i.e. certification
by Muneer.

Question: Asim agreed to construct a bungalow for Ali at a cost of Rs. 50 million. However, it was
agreed that payment would only be made on completion of the project. Is this a contingent contract
under the Contract Act, 1872? Give reasons. Also list the requisite characteristics of a contingent
contract.
Answer:
No, this is not a contingent contract as the condition i.e. construction of a bungalow is not collateral
to the contract; but in itself forms a consideration and is thus an integral part of the contract.
Essentials of a contingent contract

The following are the essential characteristics of a contingent contract:
(i) the performance of such a contract depends upon the happening or non-happening of
some future event;
(ii) the event must be uncertain;
(iii) the event must be collateral i.e. incidental to the contract.

Business Law
Example 31: Contract of indemnity

Question: Majid and Soomro went to a money lender. Majid said to the money lender, ‘Let Soomro
have a loan of Rs. 50,000, I ensure that you will be paid’. Identify and describe the type of contract
and state Majid’s responsibility in the contract.
Answer:
This is the case of indemnity. A contract of indemnity is a contract by which one party promises to
save the other from loss caused to him by the conduct of the promisor himself or by conduct of any
other person.
In this case, Majid is the indemnifier and money lender is the indemnity holder. Majid is responsible
to make good any loss which may have been caused to the money lender due to either his own
default or the default of Soomro.

3 CONTRACT OF GUARANTEE
Section overview
 Definition, parties and essentials

 Kinds of guarantee and Nature of surety’s liability
 Rights of surety
 Discharge of surety
 Difference between contract of indemnity and contract of guarantee
3.1 Definition, parties and essentials
Definition: Contract of guarantee [Section 126]

A contract of guarantee is a contract to perform the promise or discharge the liability of a third
person in case of his default.
Parties in a contract of guarantee [Section 126]
Principal debtor The person in respect of whose default the guarantee is given.
Creditor The person to whom guarantee is given.
Surety The person who gives guarantee.
Example 32: Definition and parties

Adeel and his friend Saima enter in a shop and Adeel says to shopkeeper “Supply the goods
required by Saima and if she does not pay you, I will.” It is a contract of guarantee. Saima is principal
debtor, the shopkeeper is creditor and Adeel is surety.
Consideration in a contract of guarantee [Section 127]

Consideration received by the principal debtor is sufficient for the surety and it is not necessary to
result in some benefit to the surety himself.
Example 33: Consideration in a contract of guarantee

Basit requests Arif to sell and deliver to him goods on credit. Arif agrees to do so, provided Qasim
will guarantee the payment of the price of the goods. Qasim promises to guarantee the payment
in consideration of Arif’s promise to deliver the goods. This is sufficient consideration for Qasim’s
promise.
Essentials of a contract of guarantee

The essentials of a contract of guarantee are discussed below:
1. Tripartite agreement [Section 126]
A contract of guarantee is a tripartite agreement between the principal debtor, creditor and surety.
There are three contracts in contract of guarantee:
 Contract between creditor and the principal debtor
 Contract between surety and the principal debtor
 Contract between surety and creditor

Business Law
Example 34: Tripartite agreement

Amir takes a loan of Rs. 5,000 from Yousaf on the guarantee of Zahid. The agreement between
Amir & Yousaf is the principal contract and the secondary contract between Yousaf & Zahid is a
contract of guarantee. The liability of Zahid will arise if Amir fails to repay the loan. Later, Zahid can
recover the amount from Amir.
2. Writing not necessary [Section 126]

A guarantee may either be oral or written.
Example 35: Writing not necessary

Azam sells and delivers goods to Babar on the verbal guarantee of Sarfaraz. It is a valid contract of
guarantee.
3. Essentials of a valid contract including consideration [Section 127]

Like other contracts, a contract of guarantee must fulfil essentials of a valid contract. It must be
supported by some consideration. It is not necessary that there is direct consideration between the
surety and creditor. The consideration received by the principal debtor is sufficient for the surety.
Examples 36: Essentials of a valid contract including consideration

 Basil requests Aryan to sell and deliver to him goods on credit. Aryan agrees to do so,
provided Cheema will guarantee the payment of the price of the goods. Cheema promises
to guarantee the payment in consideration of Aryan’s promise to deliver the goods. This is a
sufficient consideration for Cheema’s promise.
 Asif sells and delivers goods to Babar. Qasim afterwards requests Asif to forbear to sue Babar
for the debt for a year and promises that if he does so, Qasim will pay for them in default of
payment by Babar. Asif agrees to forbear as requested. This is a sufficient consideration for
Qasim’s promise.
 Arif sells and delivers goods to Bilal. Shahid, afterwards, without consideration, agrees to pay
for them in default of Bilal. The agreement is void.
4. Misrepresentation [Section 142]

A guarantee must not be obtained by misrepresentation.
Example 37: Misrepresentation

Hakim was invited to give a guarantee for the honesty of Laeeq’s servant. Laeeq had previously
dismissed his servant for dishonesty but did not disclose this fact to Hakim. Later, the servant
committed embezzlement. Hakim was held not liable.
5. Concealment / fraud [Section 143]

A guarantee must not be obtained by fraud.
Example 38: Concealment / fraud

Amjad employed Bashir to recover money. Bashir misappropriates the money. Later, Amjad asks
Qasim for surety. Qasim being unaware of Bashir’s previous record gives guarantee for Bashir.
Bashir again misappropriates. Qasim ’s guarantee is invalid because Amjad concealed the facts.

3.2 Kinds of guarantee and Nature of surety’s liability

Kinds of guarantee
Guarantee may be classified under the following two categories:
1. Specific guarantee
When a guarantee extends to a single transaction or debt, it is called a specific or simple guarantee.
The liability of the surety comes to an end when the guaranteed debt is duly discharged or the
promise is duly performed.
Examples 39: Specific guarantee

Ali guarantees payment to Basil of the price of the five bags of flour to be delivered by Basil to
Qasim and to be paid for in 3 months. Basil delivers five bags to Qasim, Qasim pays for them. This
is a contract of specific guarantee.
2. Continuing guarantee [Section 129]

When a guarantee extends to a series of transactions, it is called a continuing guarantee. A surety’s
liability continues until the revocation of the guarantee.
Examples 40: Continuing guarantee

Amjad, in consideration that Babar will employ Qasim in collecting the rent of Babar’s zamindari
promises Babar to be responsible, to the amount of Rs. 5,000, for the due collection and payment
by Qasim of those rents. This is a continuing guarantee.
Nature of surety’s liability

1. It is co-extensive with principal debtor [Section 128]
The liability of a surety is equal to that of the principal debtor unless otherwise agreed.
Examples 41: It is co-extensive with principal debtor

Afaq guarantees to Badar the payment of a loan to be given to Cheema. On default by Cheema,
Afaq is liable not only for the amount of the loan, but also for any interest and charges which may
have become due on it.
2. Limitation of surety’s liability

The liability of surety may be made less than that of the principal debtor by an express contract to
that effect.
Examples 42: Limitation of surety’s liability

Azam delivered good of Rs. 40,000 to Babar on guarantee of Sarfaraz upto the amount of Rs.
30,000. Babar is liable for Rs. 40,000 but in case of his default, Sarfaraz is liable for Rs. 30,000
only.
3. Initiation of surety’s liability

The liability of the surety arises immediately at the time of default by the principal debtor. The
creditor can sue the surety without suing the principal debtor.
Examples 43: Initiation of surety’s liability

Azam delivered good of Rs. 40,000 to Babar on guarantee of Sarfaraz. Babar defaulted. Azam may
sue Sarfaraz for the amount without suing Babar first.
4. Condition precedent to surety’s liability

Where a person gives a guarantee upon a contract that a creditor shall not act upon it until another
person has joined in it as co-surety, the guarantee is not valid if that person does not join.

Business Law
Examples 44: Condition precedent to surety’s liability

Azam delivered goods of Rs. 40,000 to Babar on guarantee of Sarfaraz. The guarantee was
conditional on Zahid also joining as co-surety. Zahid did not join as co-surety. Sarfaraz is not liable
under the contract.
3.3 Rights of surety

The rights of surety are shown below:
Rights of surety
Against /
Against / towards Against / towards
towards
principal debtor creditor
co-sureties
Right to
Right to Right to Right to Right to
claim
subrogation indemnity securities claim set off
contribution
Rights against / towards principal debtor
Right to After making a payment and discharging the liability of the principal
subrogation debtor, the surety is clothed with all the rights of the creditor, which he
[Section 140] can himself exercise against the principal debtor.
In every contract of guarantee there is an implied promise by the
principal debtor to indemnify the surety; and the surety is entitled to
Right to indemnity recover from the principal debtor all payments properly made under the
[Section 145] guarantee. After the surety makes payment, he is entitled to recover
from the principal debtor whatever amount he has paid rightfully
including the amount of interest.
Example 45: Right of subrogation

Zahid borrowed money from Yasir on the guarantee of Wajid and mortgaged his house to Yasir.
Zahid failed to pay and Wajid paid. Now, Wajid can enforce the mortgage of the house against
Zahid.
Example 46: Right to indemnity

 Babar is indebted to Saleem, and Azam is surety for the debt. Saleem demands payment
from Azam and, on his refusal, sues him for the amount. Azam defends the suit, having
reasonable grounds for doing so, but is compelled to pay the amount of the debt with costs.
He can recover from Babar the amount paid by him for costs, as well as the principal debt.
 Babar is indebted to Saleem, and Azam is surety for the debt. Saleem demands payment
from Azam and, on his refusal, sues him for the amount. Azam defends the suit, not having
reasonable grounds for so doing, and has to pay the amount of the debt and costs. He can
recover from Babar the amount of debt, but not the sum paid for costs, as there was no real
ground for defending the action.

Rights against / towards creditor
A surety is entitled to the benefit of every security which the creditor has
against the principal debtor at the time when the contract of suretyship
Rights to
is entered into, whether the surety knows of the existence of such
securities [Section
security or not and if the creditor loses or without the consent of the
141]
surety parts with such security, the surety is discharged to the extent of
the value of the security.
Right to claim set The surety has a right to claim set off if any which the principal debtor
off had against the creditor.
Example 47: Right to securities

 Qasim advances to Babar, his tenant, Rs. 2,000 on the guarantee of Asim. Qasim has also a
further security for Rs.2,000 by a pledge of Babar’s furniture. Qasim cancels the pledge.
Babar becomes insolvent, and Qasim sues Asim on his guarantee. Asim is discharged from
liability to the amount of the value of the furniture.
 Shahid, a creditor, whose advance to Basit is secured by a decree, receives also a guarantee
for that advance from Amjad. Shahid afterwards takes Basit’s goods in execution under the
decree, and then without the knowledge of Amjad, withdraws the execution. Amjad is
discharged.
 Anis, as surety of Burhan makes a bond jointly with Burhan to Chandan to secure a loan from
Chandan to Burhan. Afterwards, Chandan obtains from Burhan a further security for the
same debt. Subsequently Chandan gives up the further security. Anis is not discharged.
Example 48: Right to claim set-off

Ashfaq supplies furniture of Rs. 200,000 to Bano on the guarantee of Qasim. Bano claims that
some furniture is defective and refuses to pay Rs. 20,000. Qasim can ask for adjustment of Rs.
20,000.
Rights against co-sureties to claim contribution [Section 146, 147 and 138]
When a debt is guaranteed by two or more sureties, they are called co-sureties. The co-sureties
are liable to contribute, as agreed, towards the payment of the guaranteed debt. When one of the
co-sureties makes payment to the creditor, he has a right to claim contribution from the other co-
surety or co-sureties. Following are the rules of contribution between co-sureties:
 In the absence of any contract, all co-sureties are liable to contribute equally in case of
default by principal debtor.
 If co-sureties have agreed to guarantee different sums then co-sureties are liable to
contribute equally, subject to the maximum amount guaranteed by each one.
 Where there are co-sureties, a release by the creditor of one of them does not discharge the
others, neither does it free the surety so released from his responsibility to the other sureties.
Example 49: Right to claim contribution

 Asim, Babar and Cheema are sureties to Dawar for a sum of Rs.3,000 lend to Ehsan. Ehsan
makes default in payment. Asim, Babar and Cheema are liable, as between themselves to
pay Rs.1,000 each.
 Asim, Babar and Cheema are sureties to Dawar for a sum of Rs.1,000 lent to Ehsan, and
there is a contract between Asim, Babar and Cheema that Asim is to be responsible to the
extent of one-quarter, Babar to the extent of one quarter, and Cheema to the extent of one
half. Ehsan makes default in payment. As between the sureties, Asim is liable to pay Rs.250,
Babar Rs.250 and Cheema Rs.500.

Business Law
Example 50: Guarantee of different sums

Asim, Babar and Cheema as sureties for Dawar, enter into three separate bonds, of different
amounts - Asim for Rs. 10,000, Babar for Rs. 20,000 and Cheema for Rs. 40,000, conditioned for
Dawar’s duly accounting to Ehsan.
 Dawar makes default to the extent of Rs. 30,000 then Asim, Babar and Cheema are each
liable to pay Rs. 10,000.
 Dawar makes a default to the extent of Rs. 40,000 then Asim is liable to pay Rs. 10,000
and Babar and Cheema are liable to pay Rs. 15,000 each.
 Dawar makes a default to the extent of Rs. 70,000 then Asim, Babar and Cheema are
liable to pay full penalty of his bond.
3.4 Discharge of surety

The ways in which a surety is discharged are shown below:
These modes are discussed below.

Discharge of surety by revocation
Notice A specific guarantee can be revoked by notice if the liability has not yet
arisen. In case of continuing guarantee, a surety can be discharged as
[Section 130] to future transactions by notice to the creditor.
Death of surety The deceased surety’s estate will not be liable for any transactions
entered into between the creditor and the principal debtor after the death
[Section 131] of the surety, even if the creditor has no notice of the death.
Novation Novation means the substitution of a new contract of guarantee for an

old one. The new contract extinguishes the rights and obligations that
[Section 62] were in effect under the old contract.

Example 51: Revocation by notice – specific guarantee

Azam lends Babar a certain sum on the guarantee of Chohan. Chohan cannot revoke the guarantee.
But if Azam has not yet given the sum to Babar, then Chohan may revoke the guarantee by giving
a notice.
Example 52: Revocation by notice – continuing guarantee

Azam sells goods to Babar and Saleem guarantees payment up to Rs. 1 million. Azam had delivered
goods of Rs. 50,000 only so far. Saleem revoked his guarantee by notice. Saleem is liable up to Rs.
50,000 and not for future transactions.
Example 53: Death of surety

Azam sells goods to Babar and Saleem guarantees payment up to Rs. 1 million. Azam had delivered
goods of Rs. 50,000 only so far. Saleem died. Saleem’s property is liable up to Rs. 50,000 and not
for future transactions.
Example 54: Novation

Babar is indebted to Saleem, and Azam and Awais are sureties for the debt. All parties mutually
made a new contract in which Azam guaranteed the whole amount and guarantee by Awais was
extinguished. Awais is no more liable under the contract.
Discharge of surety by the conduct of the creditor
Alteration If an alteration is made without the consent of the surety then the surety
[Section 133] is discharged as to the transactions, subsequent to the alteration.
Release of
principal debtor The surety is discharged by any contract between the creditor and the
principal debtor, by which the principal debtor is released.
[Section 134]
A contract between the creditor and the principal debtor, by which the
Arrangement creditor makes a composition with, or promises to give time to, or not to
[Section 135] sue, the principal debtor, discharges the surety, unless the surety
assents to such contract.
Example 55: Alteration

 Azam becomes surety to Cheema for Babar's conduct as a manager in Cheema's bank.
Afterwards, Babar and Cheema contract, without Azam's consent, that Babar's salary shall
be raised, and that he shall become liable for one-fourth of the losses on overdrafts. Babar
allows a customer to overdraw, and the bank loses a sum of money. Azam is discharged
from his surety ship by the variance made without his consent, and is not liable to make
good this loss.
 Qasim agrees to appoint Basit as his clerk to sell goods at a yearly salary, upon Amjad's
becoming surety to Qasim for Basit's duly accounting for money received by him as such
clerk. Afterwards, without Amjad's knowledge or consent, Qasim and Basit agree that Basit
should be paid by a commission on the goods sold by him and not by a fixed salary. Amjad
is not liable for subsequent misconduct of Basit.
 Chohan contracts to lend Bashir Rs. 5,000 on the first March. Ashfaq guarantees repayment.
Chohan pays Rs. 5,000 to Bashir on the first January. Ashfaq is discharged from his liability
as the contract has been varied in as much as Chohan might sue Bashir for the money before
the first of March.

Business Law
Example 56: Release of principal debtor

 Asif gives guarantee to Qasim for goods to be supplied by Qasim to Bahadur. Qasim supplies
goods to Bahadur, and afterwards Bahadur becomes embarrassed and contracts with his
creditors (including Qasim's) to assign to them his property in consideration of their releasing
him from their demands. Here, Bahadur is released from his debt by the contract with Qasim,
and Asif is discharged from his surety ship.
 Azam contracts with Babar to grow a crop of wheat on Azam's land and to deliver it to Babar
at a fixed rate, and Salman guarantees Azam's performance of this contract. Babar diverts a
stream of water which is necessary for irrigation of Azam's land, and thereby prevents him
from raising the wheat. Salman is no longer liable for his guarantee.
 Asif contracts with Bashar for a fixed price to build a house for Asif within a stipulated time,
Bashar supplying the necessary timber. Ishtiaq guarantees Asif's performance of the
contract. Bashar omits to supply the timber. Ishtiaq is discharged from his surety ship.
Example 57: Arrangement

Babar purchased a car from Saleem on guarantee of Saima. Saleem gave Babar more time for
payment. Held, the giving of time to Babar for payment discharged Saima from her liability.
Discharge of surety by invalidation of contract
Misrepresentation/ Any guarantee which has been obtained by means of

Fraud misrepresentation made by the creditor or keeping silence as to
material circumstances, or with his knowledge and assent, concerning
[Section 142 & 143] a material part of the transaction, is invalid.
If the creditor does any act which is inconsistent with the rights of the
Act or omission surety, or omits to do any act which his duty to the surety requires him
[Section 139] to do, and the eventual remedy of the surety himself against the
principal debtor is impaired, the surety is discharged.
Failure of co-surety Where a person gives a guarantee upon a contract that a creditor shall
to join surety not act upon it until another person has joined in it as co-surety, the
[Section 144] guarantee is not valid if that other person does not join.
Example 58: Fraud

Azam engages Babar as a clerk to collect money for him. Babar fails to account for some of his
receipts and Azam, in consequence calls upon Siraj to furnish security for his duly accounting. Siraj
gives guarantee for Babar's duly account. Azam does not inform Siraj about Babar’s previous
conduct. Babar, afterwards, makes default. Azam is not liable because the guarantee was obtained
by concealment of facts.
Example 59: Act or omission

Babar contracts to build a ship for Shahid for a given sum, to be paid by instalments as the work
reaches certain stage. Aabish becomes surety to Shahid for Babar's due performance of the
contract. Shahid, without the knowledge of Aabish, pre-pays to Babar the last two instalments.
Aabish is discharged by this prepayment.
Examples 60: Failure of co-surety to join surety

Azam delivered good of Rs. 40,000 to Babar on guarantee of Sarfaraz. The guarantee was
conditional on Zahid also joining as co-surety. Zahid did not join as co-surety. Sarfaraz is not liable
under the contract.

Circumstances where surety is not discharged

 Where a contract to give time to the principal debtor is made by the creditor with a third
person, and not with the principal debtor, the surety is not discharged.
 Patience on the part of the creditor to sue the principal debtor or to enforce any other remedy
against him, does not, in the absence of any provision, in the guarantee to the contrary,
discharge the surety.
 Where there are co-sureties, the release by the creditor of one of them does not discharge
the other nor does it free the surety so released from his responsibility to the other sureties.
Example 61: Circumstances where surety is not discharged

 Azam lends Rs. 1 million to Babar for 1 year on the guarantee of Saleem. Azam promises
Zahid (a third party), a friend of Babar, to give more time to Babar to return the Loan. Saleem
is not discharged from his liability.
 Babar is indebted to Saleem, and Azam and Awais are sureties for the debt. Saleem released
Awais as surety. The liability of Azam is not discharged by release of co-surety.
3.5 Difference between contract of indemnity and contract of guarantee

The following table summarises the key differences between the contract of indemnity and contract
of guarantee as explored above.
S.no Contract of indemnity Contract of guarantee

1 Number of parties
There are two parties indemnifier and There are three parties principal debtor,
indemnity holder. creditor and surety.
2 Number of contracts
There is only one contract. There are three contracts.
3 Object
The indemnifier undertakes to save the The surety undertakes for the payment of
indemnity holder from any loss. debts of principal debtor in case of his
default.
4 Nature of liability
The liability of indemnifier is primary and The liability of surety is secondary and
unconditional. conditional and co-extensive.
5 Commencement of liability
The liability arises only on the happening The liability arises only on the non-
of a contingency. performance of an existing promise or
non-payment of an existing debt.
6 Right to sue
The indemnifier cannot sue a third party A surety, on discharging the debt of
in his own name because of absence of principal debtor, can sue the principal
privity of contract between him and third debtor in his own name.
party.
Example 62: Contract of guarantee vs. contract of indemnity

Question: Basit and Rahim go into a shop. Basit says to the shopkeeper, ‘Let him (Rahim) have the
goods and if he does not pay you, I will’. Under the provisions of the Contract Act, 1872 identify and
describe:
(i) the type of the above contract and whether Basit would be liable in case of Rahim’s default.
(ii) what would be your answer, if Basit said to the shopkeeper, ‘Let him (Rahim) have the
goods, I will see you are paid’.

Business Law
Answer:
(i) Contract of guarantee:
The above contract is a contract of guarantee. Contract of guarantee is a contract to perform the
promise, or discharge the liability, of a third person in case of his default.
In this case, Basit is the surety whereas Rahim and shopkeeper are respectively the ‘principal
debtor’ and ‘creditor’.
Since a guarantee may either be oral or written, in case of Rahim’s default, Basit would be liable to
pay to the shopkeeper.
(ii) Contract of Indemnity:
This is the case of indemnity. A contract of indemnity is a contract by which one party promises to
save the other from loss caused to him by the conduct of the promisor himself or by conduct of any
other person.
In this case, Basit is the indemnifier and shopkeeper is the indemnity holder. Yes, Basit is liable to
make good any loss which may have been caused to the shopkeeper due to either his own default
or the default of Rahim.
Example 63: Rights of surety

Question: Bunny extended a credit of Rs. 500,000 to Sohail on the surety of Majid and Rahat. On
the date of payment, Sohail defaulted and Majid settled the debt.
Under the provisions of the Contract Act, 1872 briefly describe the rights available to Majid and
Rahat against Sohail and Bunny and also between themselves.
Answer:
Rights of surety (Majid and Rahat) against principal debtor (Sohail):
Right to indemnity:
In every contract of guarantee there is an implied promise by the principal debtor to indemnify the
surety. Therefore, Majid and Rahat are entitled to recover from Sohail whatever amount they have
rightfully paid including the amount of interest.
Right to subrogation:
After making payment and discharging the liability of Sohail, Majid and Rahat are invested with all
the rights of creditor (Bunny), which he had against Sohail.
Rights of surety (Majid and Rahat) against creditor (Bunny):

Rights to securities
Majid and Rahat are entitled to the benefit of every security which Bunny has against Sohail at the
time when the contract of suretyship is entered into, whether Majid and Rahat are aware of the
existence of such security or not and if Bunny loses, or, without the consent of Majid and Rahat,
parts with such security, Majid and Rahat are discharged to the extent of the value of the security.
Right to claim set off

Majid and Rahat have a right to claim set off if any which Sohail had against Bunny.
Rights against co-sureties (Majid and Rahat):

Right to claim contribution
Since Majid paid the full amount to Bunny in settlement of Sohail’s debt, he has a right to claim
contribution from the other co-surety Rahat. Following are the rules of contribution between Majid
and Rahat:
 In the absence of any contract, Majid and Rahat are liable to contribute equally in case of
Sohail’s default.
 If Majid and Rahat have agreed to guarantee different sums than they are liable to
contribute equally, subject to the maximum amount guaranteed by each one of them.
 If Bunny releases one of the co-sureties, for instance Majid, it does not discharge Rahat,
neither does it free Majid from his responsibility to Rahat.

Example 64: Right of subrogation

Question: Under the provisions of the Contract Act, 1872 explain the term ‘right of subrogation’.
Answer:
When the surety pays off the debt on default of the principal debtor or performs a guaranteed duty,
he is invested with all the rights and remedies which the creditor had against the principal debtor.
This is called the right of subrogation.
Example 65: Liabilities of co-sureties bound in different sums

Question: Abid has obtained a loan of Rs. 800,000 from Saqib. Loan was given on the surety of
Munib, Hamid and Suleman with maximum limits of Rs. 150,000, Rs. 250,000 and Rs. 400,000
respectively. Abid repaid Rs. 200,000 and defaulted. Comment and compute the amount payable
by each surety.
Answer:
Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their
respective obligations permit. Hence the remaining amount would be payable as follows:
Munib Rs. 150,000 Rs. 150,000

Hamid Rs. 150,000 + 150,000 x 1/2 Rs. 225,000
Suleman Rs. 150,000 + 150,000 x 1/2 Rs. 225,000
Total Rs. 600,000
.
Example 66: Surety’s right to benefit of creditor’s securities

Question: Shafiq obtained a loan from Qasim on the surety of Anwar. Qasim also obtained a charge
over Shafiq’s car at the time of disbursement of loan. However, Anwar was unaware of this security.
Qasim gave up the charge over the car and Shafiq defaulted. Comment on the position of Anwar.
Answer:
Anwar is entitled to the benefit of every security which Qasim has against Shafiq at the time when
the contract of suretyship is entered into, whether Anwar knows of the existence of such security or
not. However, if Qasim obtained charge over Shafiq’s car after the contract of suretyship was
entered into then giving up the charge will not discharge/reduce Anwar’s liability.
Example 67: Revocation of guarantee

Question: Mujeeb obtained a generator on lease for a period of six years from Munaf at an annual
rent of Rs. 120,000. Fareed executed a contract of guarantee in favour of Munaf guaranteeing due
payment of rent by Mujeeb. In the third year, Mujeeb defaulted in payment. Munaf sued Fareed and
got a decree. Fareed, thereafter, gave a notice to Munaf revoking his guarantee for the remaining
period of lease. Under the provisions of the Contract Act, 1872 identify the nature of Fareed’s
guarantee and explain whether Fareed would be discharged under the above circumstances.
Answer:
The guarantee provided by Fareed is in the nature of ‘Specific guarantee’ and not a ‘Continuing
guarantee’ because “lease for six years” is an entire or indivisible consideration and not a
fragmented one.
Fareed therefore is not competent to revoke his guarantee. His liability would come to an end with
the duly discharge of guaranteed debt/performance of the promise.

Business Law
Example 68: Co-sureties

Question: Salim gave a loan of Rs. 100,000 to Ahmed carrying a mark-up of 10% per annum. Amir
and Rehan agreed to act as Ahmed’s sureties. In the light of Contract Act, 1872 determine, along
with reasons, how much each surety would be liable (in Rupees) in the following independent
scenarios:
(i) Ahmed defaulted and Salim being aware of weak financial position of Rehan, asked Amir
and Rehan to pay 75% and 25% of the default respectively.
(ii) Salim without discussing with Rehan released Amir from the suretyship. Ahmed defaulted
and Salim asked Rehan to pay the entire amount.
Answer:
Part (i)
When two or more persons are co-sureties for the same debt, either jointly or severally, in the
absence of any contract to the contrary, they are liable, as between themselves, to pay an equal
share of the whole debt, or of that part of it which remains unpaid by the principal debtor.
Accordingly, the liability will be divided in ratio of 50:50 and not 75:25 and Amir and Rehan would
be liable for Rs. 55,000 each.
Part (ii)
Where there are co-sureties, a release by the creditor of one of them does not discharge the other;
neither does it free the surety so released from his responsibility to the other sureties. Accordingly,
Amir and Rehan will still be liable for Rs. 55,000 each.

Question: Bashir supplies goods worth Rs. 100,000 each month to Anwar under a contract which
is due to expire on December 31, 2009. Ameen has guaranteed that he will compensate Bashir in
case of default by Anwar.
On August 29, 2008 the amount due to Bashir is Rs. 325,700. Ameen intends to revoke his
guarantee. Can he do so? Discuss.
Answer:
The guarantee given by Ameen is a continuing guarantee. It can be revoked by Ameen (surety) at
any time as to future transactions but he will remain liable to Bashir for Rs. 325,700.

Question: Raheel leased a building from Atif, on five years term, for a rent of Rs. 200,000 per
annum and the payment was guaranteed by Kamal. Raheel defaulted in payment of the rent in the
third year. Atif sued Kamal and recovered the rent from him. Later, Kamal gave a notice to Atif for
revoking his guarantee for the remaining period of lease.
Under the Contract Act, 1872 discuss whether Kamal is justified in doing so.
Answer:
No, Kamal is not competent to revoke his guarantee. Where a guarantee is given for an entire
consideration, the contract is not divisible and the guarantee is considered as a specific guarantee.
In this case also, the contract is not one of a continuing guarantee because “lease for five years” is
an entire or indivisible consideration and not a fragmented one.
Example 71: Liabilities of co-sureties bound in different sums

Question: Amin, Imran and Shahid agreed to act as sureties for Emmad to Saleem and agreed to
pay Rs. 20,000, Rs. 30,000 and Rs. 40,000 respectively in case of default by Emmad. On such
surety Saleem lent Rs. 90,000 to Emmad. Emmad repaid Rs. 6,000 only. Saleem called upon the
sureties to pay the balance of Rs. 84,000. Discuss keeping in view the Contract Act, 1872 how
much should each surety pay.

Answer:
Co-sureties who are bound in different sums are liable to pay equally as far as limits of their
respective obligations permit.
Therefore, the co-sureties should pay:
Amin Rs. 20,000
Imran Rs. 30,000
Shahid Rs. 34,000
Total Rs. 84,000

.
Example 72: Rights of surety

Question: Faiz had sold goods on credit to Gulzar for Rs. 5 million on guarantee of Haseeb. Gulzar
has also mortgaged his shop as a security against the above amount. Haseeb was unaware of this
mortgage and honoured his guarantee when Gulzar failed to make the payment. What rights are
available to Haseeb under the Contract Act, 1872?
Answer:
Haseeb upon payment of guaranteed amount is invested with all rights which Faiz (the creditor)
had against Gulzar (the principal debtor).
Haseeb the surety is entitled to the benefit of every security which Faiz (the creditor) has against
Gulzar (the principal debtor) at the time when the contract of suretyship is entered into whether
Haseeb knows of the existence of such security or not.
He is entitled to recover from Gulzar (the principal debtor) whatever sum he has rightfully paid
under the guarantee, but no sums which he has paid wrongfully.

Business Law
4 PLEDGE
Section overview
 Bailment
 Types of bailment
 Rights of pledgor and pledgee
 Pledge by non-owners
 Difference between pledge and bailment
4.1 Bailment [Section 148]

The bailment is the delivery of goods by one person to another for some purpose, upon a contract
that they shall, when the purpose is accomplished, be returned or otherwise disposed of according
to the directions of the person delivering them.
The word “Bailment” is derived from a French word “Baillier” which means to deliver. The analysis
of the above law also reveals that if a person already having had possession of the goods of
another, contracts to hold them as a bailee, he thereby becomes the bailee, and the owner
becomes the bailor of such goods, although they may not have been delivered by way of bailment.
Example 73: bailment

 Nargis delivers a piece of cloth to Munir, a tailor, to be stitched into a suit. There is a contract
of bailment between Nargis and Munir.
 Asim lends a laptop to Basit to be returned after the examination. There is a contract of
bailment between Asim and Basit.
 An insurance company places a damaged insured car of Ahmad in possession of Rashid, a
repairer. Ahmad is the bailor, the insurance company is the bailee, and Rashid is the sub-
bailee.
Essential elements of bailment

The essential elements of bailment are:
1. Agreement
A bailment is usually created by agreement between the bailor and the bailee. It may be gratuitous
i.e. without consideration or non-gratuitous i.e. with consideration. The agreement may be express
or implied. In case of finder of goods the bailment is implied by law.
2. Delivery of goods
A bailment involves delivery of goods by bailor to bailee. In this connection, the following points
may be noted:
 The delivery must be voluntary e.g. the delivery of jewellery by its owner to a thief who shows
a revolver does not create a bailment because the delivery is not voluntary.
 Delivery may be actual or constructive
 Actual delivery is when goods are physically transferred by one person to another e.g.
delivery of a car to mechanic for the purpose of repair.
 Constructive or symbolic delivery may be made by doing something which has the
effect of putting the goods in the possession of the intended bailee or any person
authorized to hold them on his behalf. This means possession is transferred to the
bailee without actually handing over the goods physically e.g. the delivery of a railway
receipt amounts to delivery of the goods.

3. Purpose
The delivery of goods from bailor to bailee must be for some purpose such as personal service,
safe custody, some work to be done upon or transportation.
4. Return of specific goods
In contract of bailment the goods are either returned or disposed of as per the instructions of bailor
after the purpose is achieved.
Example 74: Essential elements of bailment

Nargis delivers a piece of cloth to Munir, a tailor, to be stitched into a suit. There is a contract of
bailment between Nargis and Munir.
 It was an express agreement with consideration as Nargis has to pay stitching cost.
 The delivery of cloth was voluntary and actual.
 The purpose was to stitch the cloth into a suit.
 After the stitching, the cloth/suit will be returned by Munir to Nargis.
4.2 Types of bailment

The various types of bailment are:
Bailment on the basis of reward
Type Meaning
Gratuitous It is a contract of bailment where no consideration passes between the

bailment bailor and the bailee.
Non-gratuitous It is a contract of bailment where some consideration passes between

bailment the bailor and the bailee.
Example 75: Gratuitous bailment

Zaheer lends his laptop to Imran for his work without any charge. This is gratuitous bailment as no
consideration is involved.
Example 76: Non-gratuitous bailment

Azam hires a car from Babar at hourly rate of Rs. 500. This is non-gratuitous bailment as
consideration is passing from Babar to Azam.
Bailment on the basis of benefit
Type Meaning
Bailment for the exclusive A contract of bailment which is executed only for the benefit of
benefit of bailor the bailor.
Bailment for the exclusive A contract of bailment which is executed only for the benefit of
benefit of bailee the bailee.
Bailment for the mutual A contract of bailment which is executed for the mutual benefit
benefit of bailor & bailee of the bailor and the bailee.

Business Law
Example 77: Bailment for the exclusive benefit of bailor

Zahid who is going out of station to attend a conference delivers his tablet to Yasir for proper care.
The bailment is for exclusive benefit of Zahid i.e. bailor.
Example 78: Bailment for the exclusive benefit of bailee

Zaheer lends a laptop to Imran for Imran’s assignment for a day without any charge. The bailment
is for exclusive benefit of Imran i.e. bailee.
Example 79: Bailment for the mutual benefit of bailor & bailee
Azam hires a car from Babar at hourly rate of Rs. 500. This bailment is for mutual benefit of Azam
(he uses the car) and Babar (earning of hire charges).
There can be two more types of bailment:

Type Meaning
Sub-bailment A sub-bailee is a person to whom the actual possession of goods is
transferred by someone who himself is not the owner of goods but has a
present right to possession of them as bailee of the owner. Where the bailee
sub-bails the goods with the authority of the owner, the relationship between
the owner and the sub-bailee is that of bailor and bailee.
Pledge (pawn) The bailment of goods as security for payment of a debt or performance of a
[Section 172] promise is called pledge or pawn.
The bailor (person who delivers the goods as security for payment of a debt
or performance of a promise) is called pawnor or pledgor.
The bailee (person to whom the goods are delivered as security for payment
of a debt or performance of a promise) is called pawnee or pledgee.
Any kind of movable property, i.e., goods, documents, or valuables may be
pledged. But delivery is necessary to complete a pledge. The delivery may
be actual or constructive.
Example 80: Sub-bailment

An insurance company places a damaged insured car of Ahmad in possession of Rashid, a repairer.
Ahmad is the bailor, the insurance company is the bailee, and Rashid is the sub-bailee.
Example 81: Pledge

Babar lends Azam Rs. 90,000 and keeps his Rolex watch as security for payment of the debt, the
bailment of watch is a pledge. Azam is pawnor and Babar is pawnee in this contract.
4.3 Rights of Pledgor and Pledgee
Rights of pledgor
Right to get
back goods On the performance of promise, or repayment of loan and interest, if any,
the pawnor is entitled to get back the goods pledged.
[Section 177]
Right to redeem If the pawnor makes default in payment of the debt or performance of the
debt promise at the stipulated time, he may still redeem the goods pledged at
[Section 177] any subsequent time before the actual sale of them. In this case he must
pay, in addition, any expenses which have arisen from his default.
Right to see The pawnor has a right to see that the pawnee preserves the goods
pledged and properly maintains them.

Example 82: Right to get back goods

Azam borrows Rs. 100,000 for a period of 1 month on an interest of 1% per month (Rs 1,000 ) from
ABC Bank and kept his laptop as security. On repayment of principal amount and interest, Azam
has right to get back his laptop.
Example 83: Right to redeem debt

ABC Bank and kept his laptop as security. On due date Azam could not pay. Bank announced
auction for sale of laptop for recovery of debt. Before the auction, Azam may pay the amount and
get back his laptop.
Example 84: Right to see

Alisha borrows Rs. 100,000 for a period of 1 month on an interest of 1% per month (Rs 1,000 )
from ABC Bank and kept her jewellery as security. Alisha has right to check whether her jewellery
is being properly kept by the bank.
Rights of pledgee
Right of retainer The pawnee may retain the goods pledged for:
[Section 173]  Payment of the debt or the performance of the promise
 For the interest of the debt and
 All necessary expenses incurred by him in respect of the
possession or for the preservation of the goods pledged.
Right of retainer for It is the presumption that when the pawnee lends money to the same
other advances pawnor after the date of the pledge the right of the retainer over the
pledged goods extends to subsequent advances also unless otherwise
[Section 174]
agreed upon. If the goods are separately secured then such
presumption will not prevail.
Right to
extraordinary The pawnee is entitled to receive from the pawnor extraordinary
expenses expenses incurred by him for the preservation of the goods pledged.
[Section 175]
Right against true When the pawnor has obtained possession of the goods pledged by
owner, when the him under a voidable contract but the contract has not been rescinded
pawnor’s title is at the time of the pledge, the pawnee acquires a good title to the goods,
defective provided he acts in good faith and without notice of the pawnor’s defect
of title.
Rights where If the person makes default in payment of the debt or performance of
pawnor makes the promise then the pawnee can exercise the following rights:
default [Section
 Right to sue: The pawnee may file a suit against the pawnor
176]
upon the debt or promise and may retain the goods pledged as
a collateral security.
 Right to sell: The pawnee may sell the goods pledged after
giving pawnor a reasonable notice of the sale. He can recover
from the pawnor any deficiency arising on the sale of the goods
by him. However, he shall have to hand over the surplus to the
pawnor, if any, realized on the sale of the goods

Business Law
Note
Other duties of pawnee and pawnor are same as duties of bailor and bailee
Example 85: Right of retainer

ABC Bank and kept his laptop as security.
ABC Bank has a right to keep laptop of Azam in its custody until the loan amount i.e. Rs. 100,000
and mark up i.e. Rs. 1,000 is paid in full.
Example 86: Right to extra ordinary expenses

Hafsa pledged gold with Babar against a loan of Rs. 100,000 at a mark-up of 15% per annum.
Being concerned with the growing incidences of burglary in the city, Babar insured the gold. At the
time of repayment, Babar claimed the cost of insurance cover in addition to the principal sum due
and interest.
Here, the claim of Babar is valid as the expenses were made for the preservation of the goods
pledged.
Example 87: Right against true owner, when the pawnor’s title is defective
Azam purchased a ring from Babar and gave fake cheque. Before the discovery of fraud the ring
was pledged with Saleem. The pledge was held to be valid. Saleem has right of being paid before
he returns the ring.
Example 88: Rights where pawnor makes default

ABC Bank granted a loan of Rs. 10 million to XYZ Limited against the pledge of shares of a listed
company. XYZ Limited defaulted on repayment of the loan. The market value of the shares at the
time of default was Rs. 9 million.
Here, ABC Bank can file a suit for the recovery of the defaulted amount and retain the pledged
shares or after giving reasonable notice to XYZ Limited may sell the shares of the listed company
to recover the defaulted amount and sue XYZ Limited for the remaining amount.
4.4 Pledge by non-owners

The general rule is that it is the owner who can ordinarily create a valid pledge. But in the following
cases even a non-owner can create a valid pledge.
1. Pledge by mercantile agent [Section 178]

The pawnee of goods from a mercantile agent, who has no authority from the principal to pledge,
gets a good title to the goods if:
 The agent is in possession of the goods or documents of title to the goods with the consent
of the owner and pledges the goods while acting in the ordinary course of business of a
mercantile agent
 The pawnee acts in good faith and is not aware of lack of authority of agent.
Example 89: Pledge by mercantile agent

A French company sent to their agents in London certain pictures for exhibition only but the agent
pledged them. The pledge was held to be valid.
2. Pledge by person in possession under voidable contract [Section 178A]

When a person has obtained possession of the goods under a voidable contract and he pledges
those goods before the contract has been rescinded, the pawnee of such goods acquired a goods
title to them provided the pawnee acts in good faith and without notice of the pawnor’s defect of
title.

Example 90: Pledge by person in possession under voidable contract

Altaf purchases a piano from Haris by fraud. Altaf has a voidable title to the goods. Before Haris
rescinds the contract, Altaf pledges the piano to Farooq, who acted in good faith and is ignorance
of the fraud. It is a valid pledge.
3. Pledge by seller in possession after sale [Section 30 of the Sales of Goods Act]
Where a seller having sold goods, continues to be in possession of the goods or of the documents
of title to the goods and pledges them either himself or through a mercantile agent to a person who
pledges them in good faith and without notice of the sale, it will be a valid pledge.
Example 91: Pledge by seller in possession after sale

Arjumand sells certain goods to Khurram and promises to deliver the goods the next day. Before
delivery Arjumand pledges the goods with Jahan who acts in good faith and without notice of the
prior sale to Khurram. It will be a valid pledge.
4. Pledge by buyer in possession before sale [Section 30 of the Sales of Goods Act]
Where a person having bought or agreed to buy goods obtains with the consent of the seller,
possession of the goods or documents of title to the goods and pledges them either himself or
through an agent, the pawnee who acts in good faith and without notice of any right of the original
owner in respect of the goods. The pledge of goods will be valid.
Example 92: Pledge by buyer in possession before sale

Akbar agrees to buy a car from Zaheer if his mechanic approves. Akbar obtains possession of the
car and pledges it with Nadir. The pledge is valid.
5. Pledge with limited interest

If a person pledges goods in which he has only a limited interest, the pledge is valid to the extent
of that interest. Thus, a person having a lien over the goods may pledge them to the extent of his
interest.
Example 93: Pledge with limited interest

Alamgir delivers some cloth to Jahangir to make a suit and agree to pay Rs. 150 as sewing charges.
Jahangir pledged the suit with Khurram for Rs. 300. The pledge is valid up to Rs. 150. Alamgir can
recover the suit on payment of Rs. 150 to Khurram.
6. Pledge by co-owner in possession

One of the several co-owners of goods in possession thereof with the assent of the other co-owners
may create a valid pledge of the goods if the pawnee acts in good faith and without notice about
the co-owners.
Example 94: Pledge by co-owner in possession

Alamgir and Jahangir jointly own a car. Alamgir keeps the car with himself with Jahangir’s consent.
Alamgir pledges it with Homayoun. Jahangir never gave his consent for such pledge. The pledge is
valid.

Business Law
4.5 Difference between pledge and bailment

Following are the few differences between pledge and bailment:
Pledge Bailment
Nature of contract
The bailment of goods as security for The bailment is the delivery of goods by one person
payment of a debt or performance of a to another for some purpose, upon a contract that
promise is called pledge. they shall, when the purpose is accomplished, be
returned or otherwise disposed of according to the
directions of the person delivering them.
Name of parties
pawnor and pawnee Bailor and bailee
Purpose
The purpose of pledge is security for the
performance of a specific promise, i.e. the Bailment is for safe custody, transportation etc.
payment of a debt or performance of a
promise
Right to use
Pawnee has no right to use the goods Bailee can use if terms of bailment so provide.
pledged.
Right to sell
Pawnee can sell the goods pledged after Bailee can either retain the goods or sue the bailor
giving notice to the pawnor in case of for his dues.
default by the pawnor.
Example 95: Finder of goods and bailment

Question: Danish while buying a smart phone from one of the retailers, found a satellite phone on
the market floor. Danish in spite of considerable search could not find the owner of the phone. He
gave the phone to the retailer for safe custody till the real owner is found. Under the provisions of
the Contract Act, 1872 explain the type(s) of contractual relationships, if any, between Danish, the
retailer and the real owner of the phone.
Answer:
The contract which exists between Danish and the retailer is a bailment contract. Danish in this
case is the bailor while the retailer is the bailee.
The contract which exists between Danish and the real owner is a Quasi Contract, an obligation
imposed by law in absence of any agreement between the parties, and on taking the custody of the
satellite phone, as a finder of lost goods, Danish is subject to the same responsibility as those of a
bailee under contract of bailment.
Example 96: Right to extra ordinary expenses

Question: Shahid pledged gold with Mehreen against a loan of Rs. 100,000 at a mark-up of 15%
per annum. Being concerned with the growing incidences of burglary in the city, Mehreen insured
the gold. At the time of repayment, Mehreen claimed the cost of insurance cover in addition to the
principal sum due and interest thereon.
In the light of Contract Act, 1872 briefly explain whether Mehreen is justified in her claim.
Answer:
The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the
preservation of the goods pledged.
Therefore, Mehreen is entitled to claim the cost of insurance, in addition to the principal and
interest.

Example 97: Pledge by non-owners

Question: Define pledge. Also describe the conditions in which a pledge made by a non-owner is
considered to be a valid pledge.
Answer:
Pledge:
The bailment of goods as security for payment of a debt or performance of a promise is called
“Pledge”. The bailor in this case is called “Pawnor”. The bailee is called the “Pawnee”.
Following are the conditions in which a valid pledge can be made by non-owners:
Pledge by a mercantile agent:
If the agent is in possession of the goods or documents of title to the goods with the consent of the
owner, any pledge made by him while acting in the ordinary course of business of a mercantile
agent shall be valid provided:
 the pawnee acts in good faith and
 the pawnee has not at the time of the pledge, notice that the agent has no authority to pledge.
Pledge by person in possession under voidable contract

When the pawnor has obtained possession of the goods pledged by him under a voidable contract
but the contract has not been rescinded at the time of pledge, he can make a valid pledge provided
the pledgee acts in good faith and without notice of the pawnor’s defect of title.
Pledge where pawnor has only a limited interest

Where a person pledges goods in which he has only a limited interest, the pledge is valid to the
extent of that interest.
Example 98: Rights of pawnee and pawnor

Question: Sobia borrowed Rs. 300,000 from Meher against a gold necklace as security. She agreed
to return the amount to Meher after one month. However, on due date Sobia defaulted in payment.
In view of the provisions of the Contract Act, 1872 identify and describe the type of contract Sobia
and Meher entered into. Also enumerate the rights available to Sobia and Meher in the above
circumstances.
Answer:
The above contract is in the nature of pledge. Pledge is the bailment of goods as a security for the
payment of a debt or performance of a promise. Sobia in this case is the ‘Pawnor’ and Meher is the
‘Pawnee’.
Rights of Meher (Pawnee):

• Meher may bring a suit against Sobia for recovery of the debt.
• She can retain the necklace pledged as a collateral security.
• She may sell the necklace on giving a reasonable notice of the sale.
If the proceeds of such sale are less than Rs. 300,000 (i.e. the amount due in respect of the debt),
Sobia is still liable to pay the balance.
Rights of Sobia (Pawnor)

• Sobia was unable to pay in time but she may redeem the necklace pledged at any
• subsequent time before its actual sale.
• But in such a case Sobia must pay, in addition, any expenses which have arisen from her
default.
• In case of sale of necklace by Meher, if the proceeds are greater than Rs. 300,000,
Sobia is entitled to receive the excess amount from Meher.

Business Law
Example 99: Rights of pawnor

Question: Ramla borrowed Rs. 100,000 from Ovais for a period of three months and kept her
jewellery with Ovais as a security. On due date, Ramla defaulted in repayment. In view of the
provisions of Contract Act, 1872 describe the remedies available to Ovais under the circumstances.
Answer:
Pawnee’s right where pawnor makes default:
On default in payment of debt by Ramla, Ovais may:
(a) bring a suit against Ramla upon the debt and retain the goods pledged as a collateral
security; or
(b) he may sell the jewellery pledged on giving Ramla reasonable notice of the sale.
If the proceeds of such sale are less than the amount due in respect of the debt, Ramla would still
be liable to pay the balance.
If the proceeds of the sale are greater than the amount so due, Ovais shall pay over the surplus to
Ramla.


01. Quasi-contract means
(a) Obligations imposed by law resembling those created by contract
(b) Obligation partly created by contract and partly by law
(c) Obligation partially enforceable by the law
(d) Obligation imposed by contract
02. Quasi-contract are based on
(a) Surrounding circumstances
(b) Naturally created rights and obligation
(c) Principal of equity and justice
(d) Principal of reasonableness and fairness
03. In case, articles of necessaries are supplied to the person having no contractual capacity or to
his dependent, the supplier is entitled to be reimbursed
(a) From the property of that incapable person
(b) From the property of dependent
(c) Personal liability of that capable person
(d) From none of these
04. Compensation for non-gratuitous act is valid provided
(a) Party doing act has an intention to get compensation
(b) The person for whom the act is done must have got benefit
(c) Act done by the party is lawful
05. In case, necessaries are supplied to the person having no contractual capacity, which of the
following is recoverable from his property
(a) Market price
(b) Contracted price
(c) Reasonable price
(d) Cost plus price

Business Law
06. Finder of goods is under legal obligation for taking
(a) Reasonable care of the goods
(b) Required care of the goods
(c) Little care of the goods
(d) That much care, which he can take
07. When one party under a mistake of fact or mistake of law pays money to another party, which
is not due by contract, then
(a) Another party should refuse to repay it
(b) Another party must repay it to the party paying it
(c) Another party may repay it to the party paying it
(d) Another party may refuse to repay it
08. Quasi-contract implies creation of legal rights and obligations between parties without making
any formal contract which one of the following is not the type of Quasi-contract
(a) Supply of necessaries to the person having no contractual capacity
(b) Supply of necessaries to the person having no contractual capacity or to his

dependent
(c) Obligation to pay for non-gratuitous act or service
(d) Obligation to pay for gratuitous act or service
09. Mr. A has lost his pet dog. Not being able to find it out he announces that whosoever finds it
and returns it back to him, he will suitably reward him. Mr. D found that dog and took custody
of it. On tracing Mr. A, Mr. D claimed expenses which he incurred for the maintenance of dog
and reward. State the legal position
(a) Mr. A is bound to pay only reward to Mr. D
(b) Mr. A is bound to pay only expenses to Mr. D
(c) Mr. A is bound to pay both reward and expenses to Mr. D
(d) Mr. A is bound to pay nothing to Mr. D
10. Mr. X supplied rice and wheat worth Rs.20000/-, Mr. Y supplied a mobile phone worth Rs.
30000/- and Mr. Z lent Rs.50000/- for the purchase of necessaries to the wife and children of
Mr. M, a lunatic. Mr. M has assets worth Rs. 100000/-. Can Mr. X, Mr. Y and Mr. Z recover
anything from Mr. M?
(a) Mr. X, Mr. Y and Mr. Z can recover their full money.
(b) Mr. X, Mr. Y and Mr. Z cannot recover their full money.
(c) Mr. X and Mr. Y can recover their full money.
(d) Mr. X and Mr. Z can recover their full money.

11. Mr. X is employed as a managing director in a company. After he rendered service for some
time, it is found that the board of directors was not competent to appoint him as such. Can Mr.
X recover anything from the company?
(a) Mr. X cannot recover compensation for the work done by him
(b) Mr. X can recover compensation for the work done by him on quantum meruit basis
(c) Mr. X cannot recover compensation as the contract is indivisible
(d) Mr. X cannot recover compensation as his appointment is invalid
12. Mr. X agreed to construct a house for Mr. Y for Rs.100,000/-. After having done three fourth of
the work, he abandons the contract. Mr. X afterward claims 75% payment from Mr. Y. Can Mr.
X recover anything from Mr. Y?
(a) Mr. X cannot recover anything from Mr. Y because the contract is indivisible.
(b) Mr. X can recover something from Mr. Y because the contract is indivisible.
(c) Mr. X cannot recover anything from Mr. Y because the contract is divisible.
(d) Mr. X can recover something from Mr. Y because the contract is divisible.
13. Mr. A picked up a diamond from the floor of Mr. B’s shop and handed it over to Mr. B to keep it
till owner is found. Mr. B did his best to find out the owner but true owner could not be found.
After some time Mr. A offered Mr. B the lawful charges incurred by Mr. B and asked him to
return the diamond to him. Mr. B refuse to do so. Discuss the legal position
(a) Mr. B must return the diamond to Mr. A because Mr. A was entitled to retain it.
(b) Mr. B must not return the diamond to Mr. A because Mr. A was not entitled to retain it.
(c) Mr. B must not return the diamond to Mr. A because Mr. A was not the owner of the
shop.
(d) Mr. B must return the diamond to Mr. A because Mr. B was the owner of the shop.
14. In case of non-gratuitous act or service, the obligation to pay arises if the following condition is
satisfied.
(a) The thing must have been done or delivered lawfully
(b) The person who had done or delivered the thing must not have intended to do so
gratuitously
(c) The person for whom the act is done must have enjoyed the benefit of the act

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15. In Quasi-contract, there are
(a) Legal formalities
(b) Legal obligations
(c) Contractual obligations
(d) None of these
16. A person to whom money has been paid, or anything delivered by ___________ or
____________, must repay or return it.
17. A person, who is interested in the _____________ which another is bound by law to pay, and
18. ______________is subject to rights and obligations, when he finds the goods and takes
custody of those goods.
19. In Quasi-contract, there are _____________ imposed by law.
20. In case, the obligation of quasi-contract is not discharged aggrieved party is entitled to same
_______________as in the case of breach of contract.
21. Contingent contracts are
(a) Always valid
(b) May be valid
(c) May be voidable
(d) May be unenforceable
22. Performance of contingent contract depends on
(a) Happening of some future event
(b) Non-happening of some future event
(c) Happening or Non-happening of some uncertain event
(d) Happening or Non-happening of some uncertain event collateral to such contract

(a) All contacts of indemnity are contingent contracts
(b) All contracts are contingent contract
(c) All quasi contracts are contingent contract
(d) Some of the quasi-contract are contingent contract
24. Agreement to pay money without having any other interest on the happening or non-happening
of some future event is
(a) Contingent contract
(b) Insurance contract
(c) Wagering agreement
(d) Quasi contract
25. Contingent contracts are
(a) Absolute contracts
(b) Partly absolute contracts
(c) Conditional contracts
26. Which one of the following statement is true
(a) All contingent contracts are not wagering in nature
(b) Contingent contracts and wagering contracts are one and same
(c) Contingent contracts are absolute contracts
(d) Contingent contracts are not conditional contract
27. Contingent contract is based on an event
(a) Which is uncertain
(b) Which is certain to happen
(c) Which is partly uncertain
(d) Which is partly certain

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28. A contract of insurance is a
(a) Contract of guarantee
(b) Contingent contract
(d) Unilateral agreement
29. A contingent contract is
(a) Forbidden by law
(b) Immoral
(c) Opposed to public policy
30. Mr. X agrees to pay a certain sum to Mr. Y, if Mr. Y brings on earth a star from the sky. It is
(a) Valid contract
(b) Void agreement
(c) Voidable contract
(d) Void contract
31. Mr. A contract to pay Mr. B sum of Rs.20000. If his house gets on fire. It is
(a) Wagering agreement
(b) Contingent contract
(c) Unilateral agreement
(d) Bilateral agreement
32. Parties of a contract do not have any interest in the subject matter, in.
(a) Contingent contract
(b) Quasi contract
(d) Insurance contract

33. The contract of guarantee is a contract in which a person perform the promise or discharge the
liability of
(a) The contractor
(b) Stranger
(c) Third party
34. A continuing guarantee may at any time be revoked by the surety as to future transaction by
giving notice to
(a) The creditor
(b) Principal debtor
(c) Without giving any notice to any person
35. A contract by which one party promises to save the other from loss caused to him by the
conduct of the promisor himself or by the conduct of any other person is called
(a) Guarantee contract
(b) Bailment contract
(c) Indemnity contract
(d) Quasi contract
36. On 15th March, 2019 Mr. X promises to compensate Mr. Y for any loss that he may suffer by
filing a suit against Mr. Z. The court orders Mr. Y to pay Mr. Z damages of Rs. 500,000 on 30 th
June, 2019. Mr. Y is now claiming the amount from Mr. X immediately even though he himself
has paid nothing. State the legal position
(a) Mr. Y cannot claim the amount of loss from Mr. X
(b) Mr. Y can claim the amount of loss from Mr. X
(c) Mr. Z can claim the amount of loss from Mr. X
(d) Mr. Y & Mr. Z can claim the amount of loss from Mr. X
37. Mr. X & Mr. Y go into a shop. Mr. X says to the shopkeeper, “Let Mr. Y have the goods. I will
see you are paid.” State the nature of contract between Mr. X & Mr. Y.
(a) The contract between the Mr. X & Mr. Y is a voidable contract.
(b) The contract between the Mr. X & Mr. Y is a bailment contract.
(c) The contract between the Mr. X & Mr. Y is an indemnity contract.
(d) The contract between the Mr. X & Mr. Y is a guarantee contract

Business Law
38. A contract of guarantee is a contract to perform the promise, or discharge the liability of a third
person in case of his default when a guarantee extends to a series of transactions it is called
(a) Continuing guarantee
(b) Fidelity guarantee
(c) Special guarantee
(d) Particular guarantee
39. Mr. X gave his godown to Mr. Y on a lease for 10 years on a lease rent of Rs. 100,000 per
annum. Mr. Z guaranteed that Mr. Y would fulfill his obligation and in case of his failure to fulfill
his obligation, Mr. Z would be responsible. Is this a contract of specific guarantee or continuing
guarantee?
(a) This is not a contract of specific guarantee as it extends to 10 years.
(b) This is a contract of continuing guarantee as it extends to 10 years.
(c) This is a contract of specific guarantee because the contract is an indivisible transaction.
(d) This is a contract of continuing guarantee because the contract is a divisible transaction
40. In the absence of any contract to the contrary, the death of surety operates as a revocation of
a continuing guarantee as to the future transaction taking place after the death of a surety. After
the death of surety, who is liable to pay for the past transactions of the surety?
(a) The co-surety remains liable for the past transactions.
(b) The legal representatives remains liable for the past transactions.
(c) No one would be held liable for the past transactions.
(d) The surety’s estate remains liable for the past transactions.
41. Mr. A is indebted to Mr. B, and Mr. C is the surety for the debt. Mr. B demands payment from
Mr. C and on his refusal, sues him for the amount. Mr. C defends the suit, having reasonable
grounds for doing so, but is compelled to pay the amount by the court. What amount can Mr. C
recover from Mr. A?
(a) Mr. C cannot recover from Mr. A the amount paid by him.
(b) Mr. C can recover from Mr. A the amount paid by him for costs.
(c) Mr. C can recover from Mr. A the amount paid by him for costs along with the principal
debt.
(d) Mr. C cannot recover from Mr. A the amount paid by him for costs along with the principal
debt.

42. Mr. Abdullah contracts to indemnify Mr. Bilal against the consequences of proceedings which
Mr. Casim may take against Mr. Bilal in respect of a certain sum of money. Mr. Casim obtains
judgment against Mr. Bilal for the amount. Without paying any portion of the decree amount,
Mr. Bilal sues Mr. Abdullah for its recovery. Will Mr. Bilal succeed?
(a) No, Mr. Bilal will not succeed because Mr. Abdullah has paid nothing.
(b) Yes, Mr. Bilal will succeed because Mr. Abdullah has paid the amount.
(c) Yes, Mr. Bilal will succeed because the liability becomes absolute.
(d) No, Mr. Bilal will not succeed because the liability is conditional.
43. Mr. B owes to Mr. C a debt guaranteed by Mr. A. The debt becomes payable. Mr. C does not
sue Mr. B for a year after the debt has become payable. Mr. B then becomes insolvent.
Thereafter, Mr. C sues Mr. A for the debt. Will Mr. C succeed?
(a) Mr. C may not succeed because he is filing a suit after one year.
(b) Mr. C must not succeed because he is filing a suit after one year.
(c) Mr. C must succeed because the surety is not discharged.
(d) Mr. C must not succeed because the surety is discharged.
44. Any variance made without the surety’s consent, in the terms of the contract between principal
debtor and the creditor, discharges the surety as to transactions
(a) Subsequent to the variance.
(b) Prior to the variance.
(c) From the formation of the contract.
(d) None of the above.
45. Mr. T advances to Mr. D Rs. 5,000/- on the guarantee of Mr. L. The loan carries interest at 10%
per annum. Mr. D becomes financially embarrassed subsequently. Mr. T took the advantage of
the situation discussed with Mr. D and increased the interest to 16% per annum and does not
sue Mr. D for one year after the loan becomes due. Mr. D becomes insolvent. Can Mr. T sue
Mr. L?
(a) Mr. T can sue Mr. L because a surety is not discharged.
(b) Mr. T cannot sue Mr. L because a surety is discharged.
(c) Mr. T can sue Mr. L because Mr. L is liable as a surety.
(d) Mr. T cannot sue Mr. L because the guarantee contract is invalid.

Business Law
46. Mr. C advances to Mr. B his tenant, Rs. 2,000 on the guarantee of Mr. A. Mr. C has also a
further security for Rs. 2,000 by a mortgage of Mr. B’s furniture. Mr. C cancels the mortgage.
Mr. B becomes insolvent and Mr. C sues Mr. A on his guarantee. State the legal position.
(a) Mr. A is completely discharged from the liability.
(b) Mr. A is not completely discharged from the liability.
(c) Mr. A is discharged from the liability to the amount of the value of the furniture.
(d) Mr. A is not discharged from the liability to the amount of the value of the furniture.
47. A surety is not discharged from his liability, if
(a) Terms of contract are varied without his consent.
(b) The creditor gives time to the principal debtor without his consent.
(c) The creditor releases the other co-surety
(d) The creditor releases the principal debtor.
48. Liability of surety is co-extensive with that of liability of the ____________.
49. After making a payment and discharging the liability of the principal debtor, the surety is clothed
with all the rights of the creditor, which he can himself exercise against the principal debtor.
This right of surety is known as _____________.
50. Where a contract to give time to principal debtor is made by the creditor with a ____________,
and not with the principal debtor, the surety is not discharged.
51. If co-sureties have agreed to guarantee different sums then co-surety are liable to contribute
equally, subject to the ____________ guaranteed by each one.
52. The deceased surety’s estate will not be liable for any transaction entered into between the
creditor and the principal debtor after the death of surety, even if the ___________has no notice
of the death.
53. The bailment of goods as security for payments of debt or performance of a promise is called
(a) Mortgage
(b) Special bailment
(c) Sub bailment
(d) Pledge

54. Mrs. X delivered her old gold set to her cousin, Mr. Y, a goldsmith for the purpose of making
new one out of it. This is a contract of bailment because
(a) There is a contract between the two
(b) Gold set was delivered to the goldsmith
(c) Ownership has not been transferred
55. A bailment involves delivery of goods by bailor to bailee. The delivery must be voluntary.
Delivery of goods may be made by doing something which has the effect of putting the goods
in the possession of the intended bailee or his authorized agent. This kind of delivery is known
as
(a) Actual delivery
(b) Gratuitous delivery
(c) Non-gratuitous delivery
(d) Constructive delivery
56. An insurance company places a damaged insured car of Mr. A in possession of Mr. R, a
repairer. What is the relationship between Mr. A, Mr. R and the insurance company?
(a) Mr. A is the bailee, Mr. R is the sub-bailee and the insurance company is the bailor
(b) Mr. A is the bailor, Mr. R is the sub-bailee and the insurance company is the bailee
(c) Mr. A is the bailee, Mr. R is the bailor and the insurance company is the sub-bailee
(d) Mr. A is the sub-bailee, Mr. R is the bailor and the insurance company is the bailee
57. Pawnee is the person to whom the goods are delivered as security for payment of a debt or
performance of a promise. He may retain the goods pledged for
(a) Payment of a debt
(b) For the interest of the debt
(c) All necessary expenses for the preservation of the goods
58. Mr. A pledged gold with Mr. B against loan of Rs. 500,000/- at a markup of 15% per annum.
Mr. B, having apprehension about the safety of the gold, not only insures the gold but also buys
a strong safe at a cost of Rs. 25,000/-. At the time of repayment, Mr. B claimed the cost of
insurance and safe in addition to the principal sum due. State the legal position.
(a) Mr. B can claim from Mr. A the principal amount due and interest
(b) Mr. B can claim from Mr. A the principal amount due, insurance and interest
(c) Mr. B can claim from Mr. A theprincipal amount due, cost of safe and interest
(d) Mr. B can claim from Mr. A the principal amount due, cost of safe, insurance and interest

Business Law
59. A gratuitous bailment is one which is
(a) Supported by consideration
(b) Not supported by consideration
(c) Not enforceable by law
(d) Void
60. A sub-bailee is the person to whom the actual possession of goods is transferred by someone
who himself is not the owner of goods but has a present right to possession of them. Where
the bailee sub-bails the goods with the authority of the owner, the relationship between the
owner and the sub-bailee is that of
(a) Bailor and bailee
(b) Bailor and sub-bailee
(c) Bailee and pawnee
(d) Bailee and pawnor
61. On 1st January 2019, Mr. X borrows Rs. 100,000/- from Mr. Y, on the security of shares. On 1st
June 2019, Mr. X borrows another sum of Rs. 50,000/-. Mr. X repays the first debt in full. Can
Mr. Y retain the shares against his claim for the repayment of the second loan?
(a) Mr. Y cannot retain the shares because the first debt is satisfied
(b) Mr. Y can retain the shares against his claim because the first debt is satisfied
(c) Mr. Y can retain the shares against his claim for the repayment of the second loan
(d) Mr. Y cannot retain the shares for the repayment of the second loan
62. According to the general rule, only the true owner can pledge the goods but in some cases
even a non-owner can make a valid pledge. Choose the incorrect one from the following:
(a) Pledge by person in possession under voidable contract

(b) Pledge by seller in possession after sale
(c) Pledge by bailee in possession of goods
(d) Pledge by co-owner in possession
63. Mr. Karim, a doctor, by the exercise of undue influence persuades Mr. Abdul, his patient to sell
a valuable gold watch to him for Rs. 5,000/-. Mr. Karim obtained the possession of the watch
and pledges it with Mr. Khan, who does not know about the defective title of Mr. Karim. Is this
a valid pledge?
(a) This is a valid pledge because Mr. Karim is in the possession of the watch after sale
(b) This is a valid pledge because Mr. Karim is in the possession of the watch before sale
(c) This is a valid pledge because Mr. Karim is in the possession of the watch under a
voidable contract
(d) This is a valid pledge because Mr. Karim is in the possession of the watch under a valid
contract

64. A bailment is usually created by agreement between the bailor and the bailee, it may be
gratuitous i.e. without consideration or non-gratuitous i.e. with consideration. The various types
of bailment on the basis of benefit are listed below. Choose the incorrect one.
(a) Bailment for the exclusive benefit of the bailor
(b) Bailment for the exclusive benefit of the bailee
(c) Bailment for the exclusive benefit of the sub-bailee
(d) Bailment for the mutual benefit of the bailor and bailee
65. XYZ Bank granted a loan of Rs. 10 Million to ABC limited against the pledge of shares of a
listed company. ABC limited defaulted on the repayment of the loan. The market value of the
shares at the time of default was Rs. 9 Million. What is the remedy available to XYZ Bank?
(a) XYZ Bank can only file a suit for the recovery of the defaulted amount
(b) XYZ Bank can only file a suit for the recovery of the remaining amount
(c) XYZ Bank cannot file a suit for the recovery of the defaulted amount
(d) XYZ Bank can file a suit for the recovery of the defaulted and remaining amount
66. The pawnee of goods from mercantile agent, who has no authority from the principal to pledge,
gets a good title to the goods if the following conditions are satisfied. Choose the incorrect one.
(a) The agent is in possession of the goods with the consent of the owner
(b) The agent pledges the goods while acting in the ordinary course of the business
(c) The pawnor acts in good faith
(d) The pawnee acts in good faith
67. Mr. Kapoor, a famous producer of a film borrowed Rs. 100,000/- from a film distributor and
agreed to deliver the final prints of the films when ready. Is this a valid agreement of pledge?
(a) This is a valid pledge because Mr. Kapoor agreed to deliver the final prints when ready
(b) This is not a valid pledge because Mr. Kapoor has not transferred the ownership
(c) This is a valid pledge because Mr. Kapoor has made a written contract of pledge
(d) This is not a valid pledge because Mr. Kapoor has not transferred the possession
68. The person who delivers the goods as security for the payment of a debt and performance of
a promise is called a pawnor or a pledger. It is the duty of the pawnor, to pay extraordinary
expenses to the pawnee which he has incurred for the _____________ of the goods.

Business Law
69. Any kind of movable property i.e. goods, documents or valuables may be pledged. But
________ is necessary to complete a pledge.
70. In bailment, there must be a delivery of goods. It means that the possession of goods must be
transferred. Delivery may be ____________ or ________________.
71. The general rule is that it is the _____________ who can ordinarily create a valid pledge.
72. The _____________ may sell the goods pledged after giving _________ a reasonable notice
of the sale.


1. (a) In Quasi Contract, the parties do not go into the process of offer &
acceptance, rather a relationship resembling with that of a contract is
established.
2. (c) According to this principle, nobody will be allowed to be enriched at the

expense or cost of another person.
3. (a) From the property of that incapable person. The supplier of necessaries is
legally entitled to recover the cost of such supplies.
4. (d) The person who gets benefit of non-gratuitous act or service is liable to
compensate the person doing such act or rendering services.
5. (c) Supplier of necessaries is legally entitled to recover the reasonable cost of

such supplies
6. (a) To take reasonable care of goods, as he would have taken in case of his own goods.
7. (b) Another party must repay it to the party paying it. That person is under legal
obligations to return it to the person paying.
8. (d) The person doing the act should not have intended to do it gratuitously.
9. (c) Mr. A is bound to pay both reward and expenses to Mr. D. Being a finder of
goods, Mr. D is entitled to claim both expenses & reward.
10. (d) Mr. X and Mr. Z can recover their full money because Mr. X & Mr. Z supplied
necessaries but Mr. Y cannot recover anything because he has not supplied
necessaries.
11. (b) Mr. X can recover compensation for the work done by him on quantum meruit
basis i.e. As much as earned or deserved.
12. (a) Mr. X cannot recover anything from Mr. Y because the contract is indivisible.
In this type of contract one cannot recover anything if the contract is indivisible.
13. (a) Mr. B must return the diamond to Mr. A because Mr. A was entitled to retain it
against the whole world except the true owner.
14. (d) The person who gets benefit of non-gratuitous act or service is liable to
compensate the person doing such act or rendering services.
15. (b) A Quasi-contract is an obligation imposed by law in absence of any

agreement between the parties.
16. Mistake, Coercion
17. Payment of money
18. Finder of goods.
19. Obligations.

Business Law
20. Compensation
21. (b) May be valid. That depends upon the situation of contingent contract that it
may be valid or it may not be
22. (d) Happening or Non-happening of some uncertain event collateral to such contract. The
performance of the contingent contract depend on the happening or non-happening of
an uncertain event in future and that event must be collateral to the main contract.
23. (a) All contacts of indemnity are contingent contracts. In indemnity contract one party
promises to save the other from loss upon the happening of any specific event
24. (c) Wagering agreement. Wagering agreement is one in which money is to be paid by
one to another party without having any other interest. It is void
25. (c) The performance of a contingent contract depends upon the happening or non-
happening of some condition.
26. (a) If the object of a contingent contract is valid then it is perfectly a valid contract and not
a wagering agreement.
27. (a) Which is uncertain. The event must be uncertain, and contingency will arise only if it’s
happening or non-happening is quite uncertain
28. (b) Contingent contract. Insurance contract is a contract whereby the insurance company
in consideration of payment of premium from the insured promises to compensate his
losses arising out of insured cause.
29. (d) None of the above. Contingent contract is perfectly a valid contract and it is a contract
which is conditional in nature
30. (b) Void agreement. Any agreement which is impossible to perform is void from the
beginning i.e. void ab-initio.
31. (b) Contingent contract. Payment of money by Mr. A will be made on breaking of fire in
the house of Mr. B. the performance of this agreement depends on breaking of fire in
Mr. B’s house
32. (c) Wagering agreement. The parties in a wagering agreement simply look at the
possibility of happening of the event for their gain or loss.
33. (c) A contract of guarantee is a contract to perform the promise of a third party in case of
his default
34. (a) A surety can be discharged by giving notice to the creditor in case of continuing
guarantee.
35. (c) The term indemnity means to make good the loss or to compensate the party.
36. (b) If the indemnity holder has incurred an absolute liability even though he himself has
paid nothing, he is entitled to ask the indemnifier to indemnify him.
37. (c) A contract of indemnity is said to be implied when it is to be inferred from the conduct
of the parties.

38. (a) When a guarantee extends to a series of transactions it is called continuing

guarantee.
39. (c) This is a contract of specific guarantee because the contract is an indivisible
transaction. The lease for 10 years is entirely an indivisible transaction and cannot be
classified as a series of transaction.
40. (d) The surety’s estate remains liable for the past transactions, which have already taken
place before the death of surety.
41. (c) After the surety makes payment, he becomes a creditor of the principal debtor and
can recover any amount he has paid rightfully.
42. (c) As the liability has become certain, Mr. Bilal can claim the amount from Mr. Abdullah.
43. (c) Patience on the part of a creditor to sue the principal debtor or to enforce any other
remedy against him does not discharge the surety.
44. (a) If an alteration is made without the consent of the surety then the surety is discharged
as to the transactions, subsequent to the alteration.
45. (b) If an alteration is made without the consent of the surety then the surety is discharged
as to the transactions, subsequent to the alteration.
46. (c) Mr. A is discharged from the liability to the amount of the value of the furniture.
47. (c) Where there are co-sureties, the release by the creditor of one of them does not
discharge the other surety.
48. Principal debtor
49. Subrogation
50. Third person
51. Maximum amount
52. Creditor
53. (d) The Pledge is the bailment of the goods for the security of a debt.
54. (d) A bailment is the delivery of goods by one person to another for the accomplishment
of some purpose.
55. (d) A delivery is said to be constructive where it is made by doing anything which has the
effect of putting goods in the possession of the intended bailee.
56. (b) A sub-bailee is the person to whom the actual possession of goods is transferred by
bailee. Where the bailee sub-bails the goods, the relationship between the owner and
the sub-bailee is that of bailor and bailee.
57. (d) It is the right of the pawnee to retain the goods for the payment of the debt, for the
interest of the debt and for all the necessary expenses incurred by the pawnor for the
preservation of the pledged goods.
58. (d) The pawnee has a right to claim payment of the debt, interest of the debt and all
necessary expenses incurred by the pawnee in respect of the possession or for the
preservation of the goods pledged.

Business Law
59. (b) Gratuitous bailment is a type of bailment where no consideration passes between the
bailor and the bailee.
60. (a) Where the bailee sub-bails the goods with the authority of the owner, the relationship
between the owner and the sub-bailee is that of bailor and bailee
61. (c) The right of the pawnee of the retainer over the pledged goods extends to
subsequent advances also unless otherwise agreed upon.
62. (c) The bailee in possession of goods of the bailor cannot sale or pledge the goods
63. (c) Where a person has obtained possession of the goods and he pledges those goods
before the contract has been rescinded, the pawnee acquired a good title if he acts in
good faith.
64. (c) On the basis of benefit, bailment can be made for the exclusive benefit of bailor and
bailee and for the mutual benefit of bailor and bailee.
65. (d) XYZ bank can file a suit for the recovery of the defaulted amount or after giving
reasonable notice to ABC Limited may sell the shares to recover the defaulted
amount and sue ABC Limited for the remaining amount.
66. (c) The pawnor is acting in bad faith and he is deliberately and intentionally concealing
the fact that he has no authority to pledge.
67. (d) In order to create a valid pledge there must be delivery of goods. It means that the
possession of goods must be transferred.
68. Preservation .
69. Delivery
70. Actual, constructive
71. Owner
72. Pawnee, pawnor

CHAPTER
Business Law
Agency
Contents
1 Role of an agent
2 Rights and duties of the agent and principal
3 Termination of agency
4 Personal liability of an agent

Business Law
1 ROLE OF AN AGENT
Section overview
 Definition of an agent: the principal-agent relationship

 Types of agent
 Difference between Sub-agent and Co-agent
 Legal problems with agency relationships
 Creation of agency
 Authority of an agent
1.1 Definition of an agent: the principal-agent relationship
Definition: Agent and Principal [Section 182]

An agent is a person employed to do any (lawful) act for another or to represent another in dealing
with a third person.
The person for whom such act is done or who is so represented is called the principal.
All types of business may use agents. An agent is a person who acts on behalf of someone else
(a ‘principal’) to arrange a transaction with a third party. The transaction creates a legal contract,
and the contract is between the principal and the third party.
 There is a legal relationship between the agent and the principal. The nature of this
relationship is explained later.
 The agent acts on behalf of the principal, by negotiating with a third party. Under normal
circumstances, there is no legal agreement between the agent and the third party. However,
the agent may negotiate the terms of a contract between the principal and the third party.
Example 01: Definition

Pasha appoints Azam to buy 10 bags of sugar on his behalf. Pasha is ‘principal’ and Azam is ‘agent’
and the contract between the two is ‘agency’.
 When the contract is made, it is between the principal and the third party.
Example 02: Principal and third party

Pasha appoints Azam to buy 10 bags of sugar on his behalf. If in pursuance of contract of agency,
Azam purchases the bags of sugar from Tariq, a wholesale dealer in sugar, on credit, then Pasha
and Tariq are in direct contractual relations and the contract of purchase is enforceable both by
and against Pasha.
 Any person who is of the age of majority and who is of sound mind may employ an agent.
Example 03: Who may employ an agent?
Azam (an adult) entered into a contract on behalf of Parveen (a minor) with Tariq. Tariq can enforce
the contract against Azam and not Parveen.
 As between the principal and third persons any person may become an agent. Thus even a
minor or a person of unsound mind can be appointed as agent. It is so because the act of
the agent is the act of the principal and therefore the principal is liable to third parties for the
acts of a minor agent.

Section A: Mercantile Law - Chapter 8: Agency
Example 04: Who may be an agent?

Azam (a minor) entered into a contract on behalf of Parveen (an adult) with Tariq. Tariq can enforce
the contract against Parveen.
 No consideration is necessary to create an agency.
Example 05: Consideration not necessary

Arslan promises to sell Faisal’s house on his behalf. An agreement between Arslan and Faisal is
valid even without consideration.
An agent may act for a principal in arranging just one transaction. However, it is common in
business for an agent to act regularly on behalf of a principal, arranging large numbers of different
business transactions and contracts.
However, it might be useful to have a simple example of an agent-principal relationship in mind.
One example is using an agent appointed for the sale of goods. The agent will act on behalf of the
owner (the principal) and try to find a buyer (a third party). If the agent is successful and the goods
are sold, the contract for the sale and purchase of the goods is between the seller and the buyer.
The agent does not enter into a contract with the buyer (the third party) although he has an
agreement with the principal (from which he will earn a fee).
1.2 Types of agent

Following are the different types of agent:
Commercial agent An agent who regularly buys or sells goods on behalf of a principal. For
or mercantile agent example, a company in Karachi might have an agent in Lahore, who
arranges the sale of the company’s goods with buyers in Lahore.
Broker A broker is an intermediary who arranges trades or transactions on

behalf of clients (principals). An example is a stock broker, who arranges
the purchase or sale of stock market investments on behalf of a client.
Auctioneer An auctioneer is an agent who is authorised to sell property of a principal

at auction.
Del credere agent A del credere agent is one who in consideration of an extra commission,
guarantees his principal that the persons with whom he enters into
contract on behalf of the principal shall perform their obligation. He
occupies the position of both a guarantor and an agent.
Company directors It is important to be aware that company directors act as agents for their
and managers company; therefore the rules of agency law apply to the actions carried
out by directors on behalf of the company. Employees, particularly
senior managers, might also act as agents for their employer.
Partners in a It is also important to be aware that business partners act as agents for
business their partnership business. The rules of agency law therefore apply to
partnership the powers conferred on a partner to bind the partnership to contractual
agreements and obligations.

Business Law
Sub-agent A sub-agent is the person employed by the original agent to act under
his control in the business of agency.
[Section 191 to 193]
The general rule is that an agent is not entitled to delegate his authority
to another person without the consent of his principal. This is because
when the principal, appoints a particular agent to act on his behalf, he
relies upon the agent's skill, integrity and competence.
However, an agent may appoint a sub-agent and delegate the work to
him if:
 The principal has expressly permitted delegation of such power.
 It is ordinary custom of trade that a sub-agent may be employed.
 The nature of work is such that a sub-agent is necessary e.g. a
manager of a shop may employ sales assistant.
 The acts to be done are purely immaterial.
 Unforeseen emergencies arise rendering appointment of the sub-
agent necessary.
Where a sub-agent is properly appointed
In such a case:
 The principal is bound by the acts of the sub-agent as if the sub-
agent was an agent originally appointed by the principal.
 The agent is responsible to the principal for the acts of the sub-
agent.
 The sub-agent is responsible for his acts to the agent, but not to
the principal, except in case of fraud or wilful wrong.
Where a sub-agent is not properly appointed
Where the appointment of a sub-agent is made without authority and
without any justification the following consequence arises:
 The agent stands as a principal towards such a sub-agent
 The principal is not represented by such sub-agent and hence he
is not liable for the acts of the sub-agent.
 The agent is responsible for the acts of the sub-agent to the
principal as well as to the third parties.
 The sub-agent is not responsible to the principal at all. He cannot
be held liable by the principal even for fraud or wilful wrong. He is
responsible for his acts only to the agent.
Co-agent or A co-agent or a substituted agent is a person who is named by the agent,

substituted agent on an express or implied authority from the principal, to act for the
principal. He is not a sub-agent but an agent of the principal for such act
[Section 194]
of the business of the agency as to be entrusted to him. He is the agent
of the principal, though he is named, at the request of the principal, by
the agent.
In selecting a co-agent for his principal an agent is bound to exercise the
same amount of discretion as a man of ordinary prudence would
exercise in his own case and if he does this then he is not responsible
to the principal for the acts or negligence of his co-agent.

Example 06: Appointment of a sub-agent is allowed

The stock exchange member brokers generally appoint clerks to transact business on behalf of
their clients. This is allowed as it is custom of trade to that effect.
Example 07: Appointment of a sub-agent is allowed

Pasha appointed Azam manager of his departmental store. The nature of work is such that
appointment of sub-agents is necessary. Azam may appoint cashier and sales assistant
accordingly.
Example 08: Sub-agent properly appointed

Paras appointed Atif as his mercantile agent. Atif appointed a sub-agent, Akram and due to volume
of business, such appointment was necessary. Akram acted negligently. Paras is liable to third
parties by the acts of Akram. Atif is liable to Paras for negligent acts of Akram. Akram is not liable
to Paras but to Atif.
Example 09: Sub-agent not properly appointed

Paras appointed Atif as his mercantile agent. Atif appointed a sub-agent, Akram improperly. Akram
acted negligently. Paras is not liable to third parties by the acts of Akram. Atif is liable to Paras as
well as third parties for negligent acts of Akram. Akram is only liable to Atif.
Example 10: Selecting co-agent

Parvez instructs Arif, a merchant, to buy a ship for him. Arif employs a ship surveyor of good
reputation to choose a ship for Parvez. The surveyor makes the choice negligently and the ship
turns out to be unseaworthy and is lost. The surveyor is liable to Parvez. Asif is not liable to Parvez
for the act of the surveyor.
1.3 Difference between Sub-agent and Co-agent

S.no Sub-agent Co-agent / substituted agent
1 Control
A sub-agent works under the control of A co-agent works under the instructions of
the agent. the principal.
2 Contract
There is no contract between sub-agent There is a contract between co-agent and
and the principal. the principal.
3 Responsibility
The agent is responsible to the principal The agent is not responsible to the principal
for the act of the sub-agent. for the act of the substituted agent if the
agent while selecting the substituted agent
exercised the same amount of discretion as
a man of ordinary prudence would exercise
in his own case
4 Termination
A sub-agent is automatically terminated Co-agent is not affected by the termination
if the authority of the agent is revoked by of the original agency.
the principal.
5 Remuneration
Remuneration to sub-agent is paid by Remuneration to co-agent is paid by the
the agent. principal.

Business Law
Example 11: Difference between sub-agent and co-agent

Paras directs Adeel, his solicitor, to sell his estate by auction and to employ an auctioneer for the
purpose. Adeel names Aslam, an auctioneer, to conduct the sale. Aslam is not sub-agent, but is
agent of Paras for the conduct of sale.
Example 12: Difference between sub-agent and co-agent

Parveen authorises Asif, a merchant in Multan, to recover the moneys due to Parveen from Talha.
Asif instructs Arslan, a solicitor, to take legal proceedings against Talha for the recovery of money.
Arslan is not a sub-agent, but a full-fledged agent of Parveen.
1.4 Legal problems with agency relationships

There are several possible legal problems with agency arrangements. In particular, there may be
some doubt about the validity of a contract that an agent makes with a third party on behalf of a
principal. For example:
 A person might claim to act on behalf of a principal P, and a third party might enter into an
agreement believing the contract to be with P. However, P might deny that the person is in
fact his agent.
 A person might be the agent of P with authority to make certain agreements on behalf of P.
However, the agent might make an agreement with a third party and in doing so go beyond
the limits of his authority as agent. The principal P might then refuse to accept the agreement
as legally binding. An example of this is where a manager makes an agreement on behalf
of the company he works for, and the company refuses to honour the agreement on the
grounds that the manager did not have the authority to make the agreement.
1.5 Creation of agency

An agency relationship does not have to be a written agreement between the principal and the
agent, although it will certainly help to remove much of the uncertainty if there is a written agency
agreement. There are ways in which an agency relationship, recognised in law, can be
established:
Agency by express appointment (by agreement) [Section 186]
The most common method of creating an agency relationship is by agreement and mutual consent.
The principal appoints an agent (to carry out a particular task or to undertake a particular function)
and the agent agrees to act for the principal.
Written In many cases, the relationship is established formally, in writing. This written
agreement agreement would be a contractual agreement between principal and agent.
An agency agreement may also be established by verbal agreement

Verbal
(although both parties may need to provide proof of a verbal agreement in the
agreement
event that one party subsequently denies that the agreement ever took place).
The principal may wish to give the agent the power to execute deeds. (A deed
Power of is a form of written legal document, and it is executed by signature.) In these
attorney cases, the agent must be appointed by a deed. When an agent is appointed
by deed, he is ‘given a power of attorney’ to act for the principal.
When an agency is created by agreement, the agreement will usually specify

the ways in which the agent has authority to act on behalf of the principal. The
Scope of
agreement should therefore make it clear, between the principal and the
authority
agent, what the agent is allowed to do on behalf of the principal (and so what
he is not allowed to do).

Example 13: Agency by express appointment (by agreement)

Paras appoints Adeel as his agent to sell his house. It is an express agreement. Paras writes a
power of attorney in favour of Adeel authorizing him to sell his house. It is a written express
agreement.
Agency by ratification [Section 196]

An agency relationship may be created retrospectively, by ratification. This may happen when a
person who does not actually have actual authority as an agent negotiates with a third party,
claiming to be an agent of a named principal. The agent may negotiate a transaction between the
third party and the so-called principal.
At this stage, there is no agency relationship. However, the person who has been named as
principal might then choose to accept the contract with the third party. This gives validity in
retrospect to the actions of the person claiming to act as agent of the named principal, and an
agency relationship is created by ratification. (‘Ratification’ means ‘giving approval to’ or ‘giving
validity to’ something.)
If the actions of a person claiming to be an agent are not ratified by the person named as principal,
and there is no proof that an agency arrangement exists by agreement, the contract is between
the agent personally and the other party.
If the other party suffers a loss due to breach of contract by the so-called agent, he would have to
take action against the so-called agent to recover any losses suffered, because the so-called agent
is actually the other party to the contract.
Effect of ratification
 Ratification is established from the time of formation of contract between the ratifier of the
act and the person who did the act.
 A contractual relationship is established between the ratifier and the third party.
Requisites of valid ratification [Section 198 to 200]
Following are the requisites for a valid ratification:
 An act to get ratified should be done on behalf of the person who wants to ratify it.
 Since ratification has a retrospective application it is necessary that the ratifier must be in
existence at the time when the contract is entered into and also at the time of ratification.
 Since ratification has a retrospective application it is necessary that the ratifier must be
competent to contract at the time when the contract is entered into and also at the time of
ratification.
 Only lawful acts can be ratified.
 There cannot be ratification of partial transaction, for a ratification to be effective whole
transaction must be ratified.
 The person ratifying the transaction must have complete knowledge of the transaction in
question else ratification will not be valid.
 No act can be ratified which may result in damage to third party.
 Ratification must be made within a reasonable time, what is the reasonable time is a question
of facts.
Example 14: Agency by ratification

Azam insures Pasha’s goods without his authority. If pasha ratifies Azam’s act, the policy will be as
valid as if Azam had been authorised to insure the goods.

Adeel without authority buys goods for Paras. Afterwards Paras sells them to Tariq on his own
account. Paras’s conduct implies a ratification of the purchase made for him by Adeel.

Business Law

Anum without authority lends Palwasha’s money to Talal. Afterwards, Palwasha accepts interest
from Talal. Palwasha’s conduct implies a ratification of the loan.

Azam bought goods on behalf of Pasha above the price authorized by Pasha. Pasha objected the
purchase but sold the goods. Held, he had ratified the purchase by selling the goods.
Example 18: Effect of ratification

Ajmal, the managing director of a company, purporting to act as agent on company’s behalf, but
without its authority, accepted an offer by Tariq. Tariq subsequently withdrew the offer, but the
company ratified Ajmal’s acceptance. Held, Tariq was bound. The ratification related back to the
time of Ajmal’s acceptance and so prevented the subsequent revocation by Tariq.
Example 19: Requisites of valid ratification

Aslam was authorised by Parvez to buy wheat at a certain price. Acting in excess of his authority,
Aslam purchased wheat from Tanveer at a higher price in his own name. He did not profess to buy
wheat on behalf of Pervez. Subsequently Parvez ratified the act of Aslam but later refused to take
delivery of the wheat. Tanveer brought an action against Parvez. Held, the contract could not be
ratified because Aslam did not purport to act as an agent of Parvez.

Asif entered in to a contract with Tahir on behalf of a hotel company intended to be formed. The
company, when duly formed, ratified the contract. After some time it went into liquidation. Tahir
sued Asif upon the contract. Asif pleaded that the liability has passed to the company by ratification.
The company was not in existence at the time of making the contract and cannot ratify the contract.

Asma has an authority from Pasha to buy certain goods at the market rate. She buys at a higher
rate but Pasha accepts the purchase. Afterwards Pasha comes to know that the goods purchased
by Asma for Pasha belonged to Asma herself. The ratification is not binding on Pasha as person
ratifying the transaction must have complete knowledge of facts of the transaction.

Tariq holds lease from Paras. Ashfaq, an unauthorised person, gives notice of termination to Tariq.
The notice cannot be ratified by Pasha, so as to be binding on Tariq. No act can be ratified which
may result in damage to third party.
Agency by estoppel [Section 237]

‘Estoppel’ is a word used in law to mean ‘stop’ or prevent’.
An agency relationship may be created when someone has led others to believe that a person has
the authority to act on his behalf. An express agency agreement does not in fact exist, but it may
seem to other people that it does. If a third party then agrees a transaction with the person who
appears to be an agent, the ‘principal’ can be prevented (‘estopped’) from denying that an agency
agreement does not exists. In other words, the principal cannot reject the agreement by saying
that the person who was apparently acting as an agent was not in fact an agent.
In this situation, the agent has ‘ostensible authority’ or ‘apparent authority’, even though he does
not have actual authority to act as an agent.

For a third party to rely on the existence of an agency by estoppel, the following conditions must
apply.
 A person (the principal) must give a clear representation to others that someone has the
authority to act as his agent. The representation must be made by the principal. If a person
claims to be an agent but the principal has given no representation to others that this person
is an agent, an agency by estoppel cannot exist.
 This representation must have been made to the third party who then relies on the existence
of the agency relationship.
 The third party who then negotiates the transaction with the ‘agent’ must have relied on the
existence of the agency relationship in reaching a decision about the transaction.
If these circumstances apply, a third party who suffers losses resulting from the situation can hold
the principal as liable, and take legal action against the principal.
In a simple situation, suppose that a father regularly pays the debts of his daughter to a particular
shop. He may be denied (estopped) from denying that she acts as his agent, so that if he decides
that he will not pay a particular bill to the shop for his daughter, he may nevertheless be legally
obliged to do so.
Example 23: Agency by estoppel
Majida allowed her son to drive a car for her and promised to pay expenses of maintenance. The
son caused an accident and injured his wife. Held, the wife could sue the mother as the son was an
implied agent of the mother.

Parvez terminated the services of his agent Anum. No notice to this effect was given by Parvez.
subsequently; Anum purchased some goods from Talal on behalf of Parvez. It was held that Parvez
was liable to pay the price to Talal.

Arif is a servant of Parveen. Arif buys goods on credit from Tanveer and Parveen pays for them
regularly. Arif buys the goods from Tanveer on credit for personal use. Parveen is liable to Tanveer
for payment.
Agency by necessity
Agency by necessity occurs in circumstances where there is no agreement between the parties,
but an emergency requires that one party (the agent) has to take action to protect the interests of
the other party (the principal).
A typical situation that might create agency by necessity happens when one person (the agent) is
in possession of property belonging to another person (the principal), and as a result of an
unexpected emergency, the agent takes action to protect or safeguard the property of the principal.
Unless the agent takes action, the principal will lose the property, or the property will suffer
significant damage.
For agency by necessity to exist, the following conditions must apply.
 There must be a real emergency.
 It must be impossible for the person acting as the agent to contact the owner of the property
and obtain instructions.
 The person acting as agent by necessity must act as far as possible, in the best interests of
the principal.
 In most cases involving agency by necessity, the person acting as agent by necessity is in
charge of goods or other assets owned by the principal, and there is an emergency in relation
to those assets or goods.

Business Law
Example 26: Agency by necessity

Pasha consigned butter to Tariq by ABC Transportation it was delayed in transit. Being perishable,
ABC Transportation sold the butter to avoid loss to Pasha after he could not be contacted. Pasha
held bound by the sale and ABC Transportation are agent by necessity.

Pasha consigned Furniture to Tariq by ABC Transportation it was delayed in transit. ABC
Transportation sold the furniture assuming that it would not fetch good price at the point of
destination. There was no real emergency, ABC Transportation cannot be considered agent by
necessity.

A horse was sent by a train. When it arrived at the station of destination, nobody took its delivery.
The railway company, therefore, had to feed the horse. Held, the railway company was an agent of
necessity and could recover the amount spent on feeding the horse.
Agency by operation of law

Sometimes an agency arises by operation of law.
 When a company is formed its first directors are its agents by operation of law.
 A partner is agent of the firm for the purposes of the business of the firm.
Example 29: Agency by operation of law
Atif, a partner of PQR firm contracts with Talal to buy machinery for the firm. The firm (all the
partners) are liable to Talal for the contract entered into by one of the partners, Atif.
Example 30: Agency by operation of law

The application of incorporation of Pioneer (Private) Limited was filed to Registrar and it enlisted
Adeel and Aqeel as first directors. On incorporation of Pioneer (Private) Limited, Adeel and Aqeel
shall be deemed to be first directors of the company and may enter into contract on behalf of the
company.
1.6 Authority of an agent

Agent’s authority and the power to bind the principal [Section 188]
A principal does not give an agent unlimited authority to enter into any contract on behalf of the
principal. There are limits on the authority of an agent that restrict the type of agreement that the
agent can enter into, and the principal is only bound to honour agreements that the agent makes
within the limits of his authority.
When a third party deals with an agent who does not have the authority to make the transaction,
the principal may or may not be bound by such transaction as it depends upon the knowledge of a
third party regarding the authority of an agent.
Example 31: Agent’s authority and the power to bind the principal
An agent Akmal is acting on behalf of a principal Paras. He enters into a contract with another party
Tariq, stating that he is acting as agent for Paras. However, Akmal has actually acted outside his
authority. Paras refuses to carry out the terms of the contract. In this situation, the agent Akmal
would be liable to both the third party Tariq and to the principal for breach of warranty of authority.
However, there might be problems in identifying the authority of a particular agent. These arise
mainly when an agent makes an agreement with another party, and the other party genuinely
believes that the agent has the necessary authority, but in fact the principal has not given the agent
that authority.

The authority of an agent to act on behalf of the principal may be any of the following types of
authority:
 Express authority
 Implied authority
 Ostensible authority (apparent authority)
Express authority [Section 186]
An agreement is ‘express’ if both parties by words spoken or written agree to create an agency
relationship. A written agency agreement may give the agent express authority.
Express authority is not unlimited power to do anything on behalf of the principal. The principal
should specify what task or tasks the agent is required to perform, and what power and authority
the agent can exercise.
If the agent subsequently acts outside the limits of his express authority, this will affect the
contractual relationship between the principal and the third party. In such a situation, express
authority does not exist, but there may be implied authority or ostensible authority. The legal
consequences will depend on whether the third party knew that the agent was acting outside the
limit of his authority.
Example 32: Express authority

Paras appointed Azam as his agent to sell his house by a written power of attorney. Azam sold the
house to Tariq. Azam had express (actual) authority and the transaction is binding on Paras.
Example 33: Express authority

Paras appointed Atif as his agent to sell goods at his shop by a verbal agreement. Atif sold the
goods. Atif had express (actual) authority and the transaction is binding on Paras.
Implied authority [Section 187]

Implied authority is authority of an agent in excess of his express authority i.e. which is inferred
from the circumstances of the case. The scope of an agent’s authority may be increased by implied
authority.
Unless the third party has knowledge to the contrary, he is entitled to assume that an agent holding
a particular position has all the powers that are normally given to a person in such a position.
Example 34: Implied authority

The purchasing director of a company may order a quantity of goods from a supplier. In doing so,
the director might exceed the scope of his express authority, because the company policy might be
that purchases above a certain value must be made by the managing director. Unless the supplier
has knowledge that the purchasing director has exceeded the limits of his authority, he is entitled
to assume that the director does have the authority to purchase the goods. The company must
accept that in the circumstances the purchasing director had implied authority.
Ostensible authority (apparent authority) [Section 188]

Ostensible authority, also called apparent authority, is an aspect of agency by estoppel.
Ostensible authority arises in two ways.
 Where a person makes a representation to third parties that another person has the authority
to act as his agent, even though he has not actually been appointed as agent.
 Where a person has previously represented to a third party that another person has the
authority to act as his agent and:
 the authority was subsequently taken away/ended, but
 the third parties who previously dealt with the agent have not been informed of this fact.
A person who is agent by estoppel has the ostensible authority that would be assumed for any
such agent. The existence of ostensible authority is therefore found in cases of agency by estoppel.

Business Law
Example 35: Ostensible authority (apparent authority)

Paras writes to Talal that Azam is authorised to sell his car. Paras privately instructs Azam not to
sell the car. Azam sells the car to Talal for Rs. 400,000. The sale is binding on Paras. Azam had
ostensible, not actual, authority to sell.

Pasha leaves certain articles with Aslam, an auctioneer asking him not to sell them below a stated
price. Aslam sells the articles to Tariq below the stated price. Tariq knows of Pasha’s instructions
to Aslam. Pasha can set aside the contract with Tariq.

Pasha leaves certain articles with Aslam, an auctioneer asking him not to sell them below a stated
price. Aslam sells the articles to Tariq below the stated price. Tariq is ignorant of Pasha’s
instructions to Aslam. Pasha cannot set aside the contract with Tariq.
Example 38: Sub-agent

Question: Zeeshan is engaged in the business of buying and selling town houses in Lahore for the
past many years and Inam is his agent. Due to the recent growth in construction business, Zeeshan
has decided to buy a small cement factory in the outskirts of Lahore and has asked Inam to
negotiate the deal with the seller. Inam who has no technical knowledge of the cement industry
has employed Saqib for his assistance.
Under the provisions of the Contract Act, 1872 briefly describe:

(i) the status of Saqib and whether Inam is justified in employing Saqib to perform his work.
(ii) Saqib’s responsibility towards Inam and Zeeshan.
(iii) Inam’s responsibility for Saqib’s acts, if employed without Zeeshan’s authority.
Answer:
Part (i) Sub-agent:
Saqib may be regarded as a sub-agent as he is appointed by, and acting under the control of Inam
(original agent) in the business of agency.
When agent cannot delegate:

Inam cannot lawfully employ Saqib to perform acts which he has expressly or impliedly undertaken
to perform personally unless it is required by the ordinary custom of trade or the work undertaken
by Inam is of such nature that it requires delegation.
In the above circumstances the appointment of a professional was necessary; therefore, Inam is
justified in Saqib’s appointment.
Part (ii) Sub-agent’s responsibility:

Saqib is responsible for his acts to Inam, but not to Zeeshan, except in case of fraud or wilful wrong.
Part (iii) Agent’s responsibility for sub-agent appointed without authority:

If Inam, without having authority to do so appoints Saqib to act as sub-agent, Then Inam stands
towards Saqib in the relation of a principal to an agent, and is responsible for Saqib’s acts both to
Zeeshan and to third persons.
Example 39: Co–agent

Question: Under the provisions of the Contract Act, 1872 describe co-agent.
Answer:
Where an agent, holding an express or implied authority to name another person to act for the
principal in the business of the agency, has named another person accordingly, such person is not
a sub-agent but an agent of the principal for such part of the business of the agency as is entrusted
to him.


Question: Noman rented his house to Ahsan under a contract terminable on three months’ notice.
Noman’s wife without discussing with Noman, sent a termination notice to Ahsan. When Noman
came to know of the situation, he ratified the act of sending of notice to Ahsan. Discuss whether
the notice given by Noman’s wife is valid.
Answer:
An act done by one person on behalf of another, without such other person's authority, which, if
done with authority, would have the effect of terminating any right or interest of a third person,
cannot be ratified. Considering the above, notice served by Noman’s wife is not valid. If Noman
wants, he will have to give fresh notice.

Question: While attending a seminar, Khizar told a group of people on his table that he is the agent
of Lucky. Lucky smiled considering it a joke. Later, Moiz who was sitting on the table sold security
cameras and surveillance system to Khizar on credit believing him to be agent of Lucky. Comment
on whether a contract of agency is established between Khizar and Lucky.
Answer:
Khizar in this situation has become agent of Lucky by estoppel. Lucky is bound by this transaction
and he is stopped from denying the existence of the agency since he gave out clear representation
to others by smiling and keeping quiet. Moiz relied on representation of existence of agency. Thus,
if he suffers a loss from the transaction, he may hold Lucky liable as principal..
Example 42: Appointment of sub-agent

Question: Under the Contract Act, 1872 state an agent’s responsibility in case he appoints a sub-
agent without having the principal’s authority.
Answer:
Where an agent, without having authority to do so, has appointed a person to act as a sub-agent,
the agent stands towards such person in the relation of a principal to an agent, and is responsible
for the acts of the sub-agent, both to the principal and to third persons.

Business Law
2 RIGHTS AND DUTIES OF THE AGENT AND PRINCIPAL

Section overview
 Duties of agent
 Rights of agent
 Duties of principal
 Rights of principal
In a normal agency agreement, the principal appoints an agent to perform a task (or several tasks, or a
particular function) on his behalf, and the agent agrees to carry out the task or the function.
The agreement between the principal and agent is a contractual agreement that should give both parties
certain rights and duties. (The duties of an agent are rights of the principal, and rights of the agent are
duties of the principal.)
An agency relationship also gives the agent certain authority and powers.
2.1 Duties of agent

The duties of an agent are as follows:
Duty to carry out mandate
Every agent should perform the work for which he has been appointed to do.
Example 43: Duty to carry out mandate

Amir, an agent, is engaged by Paras Investments. It is custom to invest from time to time, at
interest, the moneys which may be in hand. Amir omits to make such investments. Amir must
make good to Paras Investments the interest usually obtained by such investments.
Duty to follow instructions [Section 211]

It is the duty of the agent to follow all the lawful instructions of his principal. If the agent deviates
from the instructions of the principal then any loss arising will be compensated by the agent.
Example 44: Duty to follow instructions

Parvez, the principal, instructs his agent Aslam to insure the goods. Aslam neglects to do so. Aslam
is liable to compensate Parvez if the goods get damaged.
Duty to reasonable carefulness and proficiency [Section 212]

An agent should conduct the business of agency with reasonable carefulness and proficiency.
Example 45: Duty to reasonable carefulness and proficiency

Asim, an agent sells goods on credit to Tariq, without making proper enquiry about solvency of
Tariq. TAriq is insolvent at the time of sale. Asim must compensate his principal for loss.
Duty to maintain and render accounts [Section 213]

An agent should render true accounts to the principal when demanded.
Example 46: Duty to maintain and render accounts

Palwasha sends goods to her agent Amna to sell on credit. Amna must keep proper accounts of
sale and render these to Palwasha on her demand.

Duty to communicate [Section 214]

An agent should communicate to the principal in cases requiring principal’s instructions / directions.
Example 47: Duty to communicate

Parvez sends goods to his agent Afaq, in Karachi for the purpose of export. Afaq finds that some
goods are damaged. Afaq must inform Parvez and gets instructions in this regard.
Duty not to deal personally [Section 215 & 216]

An agent must not deal in his own account in the course of agency without getting prior approval
from principal.
Example 48: Duty not to deal personally

Perveen directs her agent Anjum, to buy a certain house on her behalf. Anjum buys it for himself.
Perveen can cancel the contract.
Duty to pay sums received [Section 218]

An agent is bound to pay all sums received to the principal after deducting amounts due to him in
the course of the business of agency.
Example 49: Duty to pay sums received

Paras, appointed Atif to collect rent from Talha. Atif Collected the rent and incurred Rs. 200 as
traveling expenses. Atif must remit the amount to Paras after deducting expenses.
Duty in case of principal’s death or insanity [Section 209]

When an agency is terminated by the principal death or unsoundness, the agent is bound to take
on behalf of the representatives of his late principal, all reasonable steps for the protection and
preservation of the interests entrusted to him.
Example 50: Duty in case of principal’s death or insanity

Parvez appointed Arif as his agent to buy and sell properties on his behalf. Parvez died. Arif must
take reasonable steps to ensure all property documents are protected and preserved and then
handed over to legal representatives of Parvez.
Duty not to use critical information

An agent is bound to keep the information of principal secret not only during the course of agency
but also after its termination.
Example 51: Duty not to use critical information

Abid as an agent has confidential information of business of Sajid. Sajid terminates agency. Sajid
doubts that Abid may disclose the information to competitors causing him loss. Sajid may restrain
the agent from using such information by injunction. If Abid discloses such information and Sajid
suffers a loss, Abid is bound to compensate Sajid.
Duty not to make secret profit [Section 217 & 218]

An agent must not secure secret profit from agency without getting prior consent from principal.
Example 52: Duty not to make secret profit

Parvez directs his agent Aslam, to buy a certain land. Aslam buys the land and receives a secret
commission. Aslam is liable to pay the secret commission to Parvez.
Duty not to delegate authority [Section 190]

An agent is not entitled to delegate his authority to another person without the consent of his
principal or unless under certain circumstances.

Business Law
Example 53: Duty not to delegate authority

Paras appoints Aqib as his agent to buy a certain house. Aqib delegates the authority to Tariq to
buy a house for Paras. Aqib is not authorized to delegate the authority to Tariq.
Duty in selecting sub-agent and substituted agent [Section 195]

An agent is bound to exercise the same amount of discretion as a man of ordinary prudence would
exercise in his own case while selecting a sub-agent or substituted agent.
Example 54: Duty in selecting sub-agent and substituted agent

Parveen directs Asif, her solicitor to sell his estate by auction and to employ a suitable auctioneer
for the purpose. Asif named Atif, an auctioneer without making any inquiry as to his qualification
and experience. Later, it was discovered that Atif had no experience in auctioning the type of
estate involved. Asif would be liable for the loss, if any caused to Parveen due to inexperience of
Atif.
Duty in case of emergency [Section 189]

An agent has authority in emergency to do all such acts for the purpose of protecting his principal
from loss as would be done by a person of ordinary prudence in his own case under similar
circumstances.
Example 55: Duty in case of emergency

Paras asks Azam to deliver fruits to store in Karachi from Multan. Azam finds that the fruits are
perishing and tries to communicate with Paras. Paras had gone on religious pilgrimage by then and
could not be contacted. Azam does not take any action and fruit perishes fully before reaching
Karachi. Azam is liable for the loss. He should have sold the fruit at Multan before perishing as a
person of ordinary prudence would have done for his own goods.
2.2 Rights of agent

An agent has the following rights against the principal:
Right to receive remuneration [Section 219 & 220]
The agent is entitled to his agreed remuneration or if there is no agreement to a reasonable
remuneration unless he agrees to act without it. If a transaction for which the agent claims
remuneration is the direct or indirect result of his services or efforts he is entitled to remuneration.
Example 56: Right to receive remuneration

 Parvez has employed an agent to sell a property on the terms that he would be paid
commission on the completion of sale. He produced a person ready and willing to buy but
the owners refused to sell. Held, the agent was not entitled to commission as sale had not
been completed.
 An agent was appointed to introduce a customer to purchase the principal's property. He did
introduce one customer the amount was fixed and earnest money paid. The sale fell because
of the customer's inability to find money. Held, the agent was entitled to his agreed
commission.
Right of lien [Section 221]

Subject to contract to contrary, an agent has a lien on goods, papers and other properties of the
principal received by him, until the amount due to himself for commission, disbursements and
services in respect of the same has been paid or accounted for, to him.
Example 57: Right of lien

Paras employs Asjad to sell 100 books. Asjad sells 50 books. Paras becomes insolvent. The official
receiver of Paras claims remaining 50 books from Asjad. Asjad can refuse to give the books until
he receives his commission.

Right of retainer [Section 217]

An agent has a right to retain his principal’s money in his hands for all money due to himself in
respect of:
 Remuneration as may be payable to him for acting as agent
 Advances made or
 Expenses properly incurred
by him in conducting the business of agency.
Example 58: Right of retainer

Palwasha employs Amna to sell some old furniture and agrees to pay her Rs. 200 as commission.
Amna sells the furniture for Rs. 2,000. Amna can retain Rs. 200 as her commission and pay the
balance to Palwasha.
Right of indemnify for lawful acts [Section 222]

The agent has a right to be indemnified against the consequences of all lawful acts done by him in
exercise of the authority conferred upon him.
Example 59: Right of indemnify for lawful acts

Asim, an agent refused to deliver goods of Tahmina a third party, at the instructions of Parvez
(Principal). Tahmina sued Asim for the goods to which Asim incurred expenses in defending the
suit. Asim is entitled to be indemnified from his principal.
Right of compensation
The agent has a right to be compensated for injuries caused by neglect or want of skill of the
principal.
Example 60: Right of compensation

Paras, employ Amjad as a mason for building a house. Paras puts up the scaffolding himself. The
scaffolding was un-skilfully put up. As a result, Amjad falls and gets injured. Paras must make
compensation to Amjad.
Right of stoppage in transit

An agent has a right to stop the goods in transit to the principal just like an unpaid seller if:
 he has bought goods for his principal by incurring personal liability for the price and
 the principal has become insolvent.
Example 61: Right of stoppage in transit

Afaq buys goods for his principal Parvez with his own money. Afaq delivers the goods to carrier for
transmission to Parvez. Afterwards, Afaq comes to know that Parvez has become insolvent. Afaq
can stop the goods in transit.
2.3 Duties of principal

The duties of a principal towards his agent are the rights of the agent against the principal. The
rights of an agent have already been discussed.
The principal owes the following duties to an agent:
Duty to indemnify for lawful acts [Section 222]

The principal has a duty to indemnify the agent against the consequences of all lawful acts done
by his agent in exercise of the authority conferred upon him.

Business Law
Example 62: Duty to indemnify for lawful acts

Asim, on the direction of his principal Palwasha, sells goods to Tanveer on credit. Tanveer does not
pay. Asim sues Tanveer but is compelled to pay damages. Palwasha must indemnify Asim.
Duty to indemnify against consequences of acts done in good faith [Section 223]
Where the principal employs an agent to do an act, and the agent does the act in good faith, the
principal has a duty to indemnify the agent against the consequences of that act, even though it
causes an injury to the rights of a third person.
Example 63: Duty to indemnify against consequences of acts done in good faith
Amna, at the request of Parveen, sells goods which Parveen has no right to sell. Amna does not
know this and sends the money to Parveen. Afterwards Tahir the true owner of the goods, sues
Amna and recovers the money. PArveen is liable to indemnify Amna.
Duty to compensate [Section 225]

The principal has a duty to compensate the agent for injuries sustained by him by neglect or want
of skill on the part of the principal.
Example 64: Duty to compensate

Paras, employ Amjad as a mason for building a house. Paras puts up the scaffolding himself. The
scaffolding was un-skilfully put up. As a result, Amjad falls and gets injured. Paras must make
compensation to Amjad.
Duty to pay [Section 219 & 220]

It is the duty of the principal to pay to agent the agreed remuneration or if there is no agreement to
a reasonable remuneration, unless he agrees to act without it.
Example 65: Duty to pay

An agent was appointed to introduce a customer to purchase the principal's property. He did
introduce one customer the amount was fixed and earnest money paid. The sale fell because of
the customer's inability to find money. Held, the agent was entitled to his agreed commission.
2.4 Rights of principal

The principal can enforce all the duties of the agent which are indirectly the rights of the principal.
The principal has the following rights against the agent:
Right to revoke [Section 203]

The principal can revoke the authority given to his agent except in case of irrevocable agency or
where authority has been exercised.
Example 66: Right to revoke

Parvez employs Ahmad to rent out his house. Afterwards, Parvez rents the house himself. This is
revocation of Ahmad’s authority as an agent by the principal.
Right in case of departure from direction [Section 211]

Where an agent conducts the business of agency otherwise than the instructions of the principal
then the principal:
 must be compensated by the agent for any loss sustained
 is entitled to profit (if any) that accrues from the transaction.
Example 67: Right in case of departure from direction

Paras the principal instructs his agent Amir to insure the goods. Amir neglects to do so. Amir is
liable to compensate Paras if the goods gets damaged.

Right in case of misconduct [Section 212]

The principal is entitled to compensation for any loss which is the direct consequence of agent’s:
 neglect
 want of skill or
 misconduct.
Example 68: Right in case of misconduct
Parvez asks his agent Amjad to sell goods on cash basis. Amjad sells goods on credit and the
amount becomes irrecoverable. Parvez can recover the amount from Amjad.
Right to accounts [Section 213]

It is the right of the principal that proper accounts are provided to him by the agent when he
demands.
Example 69: Right to accounts

Paras sends goods to his agent Asif to sell on credit. Asif must keep proper accounts of sale and
render these to Paras on his demand.
Right to repudiate [Section 215]

If an agent deals on his own account in the business of agency without first getting prior consent
of his principal, it is the right of the principal to repudiate the transaction.
Example 70: Right to repudiate

Palwasha directs her agent Abid, to buy a certain house on her behalf. Abid buys it for himself.
Palwasha can cancel the contract.
Right to claim benefit [Section 216]

If an agent secured secret profit during the course of agency without getting prior consent from the
principal then the principal is entitled to claim all the benefits resulting from the transaction.
Example 71: Right to claim benefit

Paras asks his agent Abid to sell his house. Abid sells the house for Rs. 1,000,000 but tells Paras
that he sold it for Rs. 800,000. Paras can recover the balance from Abid.
Right to refuse remuneration [Section 220]

If an agent has committed misconduct in the business of agency then the principal can refuse to
pay remuneration, or for that part which has been misconducting.
Example 72: Right to refuse remuneration

Paras asks his agent Abid to sell his house. Abid sells the house for Rs. 1,000,000 but tells Paras
that he sold it for Rs. 800,000. Paras can recover the balance from Abid. Paras can also refuse to
pay remuneration to Abid.
Example 73: Rights and liabilities of an agent

Question: Arif was running a meat shop in Islamabad. He wanted to attend the wedding of his sister
in Peshawar so he asked his friend, Moiz, to look after his shop during his absence. While managing
the shop, Moiz noticed that the deep-freezer in the shop was not working properly. In order to save
the meat from being spoilt, he sold it at a discount of 5% and had the freezer repaired the next
morning. Looking at customers’ positive response, Moiz continued to offer the meat at 5% discount.
Upon his return from Peshawar, Arif, being unhappy with the situation, immediately discontinued
the discount and now wants to recover the loss from Moiz.
Required:
In view of the provisions of the Contract Act, 1872, analyse the above situation and explain the
rights and liabilities of Arif against Moiz.

Business Law
Answer:
Law of Agency:
The relationship between Arif and Moiz, in the above situation, is that of an agency and presence
of consideration is not necessary for creation of an agency. The request by Arif to Moiz to look after
Arif’s shop in his absence tantamount to an express authority which may be given by words spoken
or written.
Arif’s liability against Moiz as a principal:

Since Arif asked Moiz to look after his shop during his absence, he is bound to indemnify Moiz
against all expenses incurred by Moiz on the repair of deep-freezer.
The repair of deep-freezer was a lawful act done by Moiz in exercise of the authority conferred on
him.
Further, Arif is also bound to bear the discount of 5% which Moiz offered to the customers on the
first day, on the pretext that, an agent has the authority in an emergency to do all such acts as a
man of ordinary prudence would, for protecting his principal from losses under similar
circumstances.
Rights of Arif:
However, Moiz’s action of continuing the discount of 5% on sale of meat, following the repair of
deep-freezer, was beyond the authority bestowed upon him by Arif as Arif had simply asked him to
look after his shop in his absence.
Further, an agent is bound to conduct the business of his principal according to the directions given
by the principal, or in the absence of any such directions, according to the custom which prevails in
doing business of the same kind at the place where the agent conducts such business. When the
agent acts otherwise, if any loss is sustained he must make it good to his principal and if any profit
accrues he must account for it.
In view of above, Moiz’s act of offering 5% discount after the first day cannot be justified as a lawful
act necessary for the purpose, or usually done in the course of conducting such business.
Resultantly, Arif is entitled to recover the loss incurred as a result of this 5% discount on the price
that had been originally fixed by Arif.
Example 74: Authority and duties of agent

Question: Kalim Real Estate (KRL) by misrepresenting themselves as an agent of Goofy Builders
(GB), negotiated and entered into a contract with Tameer Associates for acquisition of a piece of
land for GB.
Under the provisions of the Contract Act, 1872 explain the liability of KRL in the above situation.
Answer:
Since Kalim Real Estate (KRL) acquired a piece of land on behalf of Goofy Builders (GB), without
their knowledge or authority, KRL’s liability would be analysed under the following two
circumstances:
When GB elects to ratify KRL’s acts:
If GB ratifies KRL’s acts, the same effects will follow as if the acts had been performed by GB’s
authority.
Being agent, KRL is bound to conduct the business according to the custom which prevails in doing
business of the same kind at the place where the agent conducts such business. If KRL acts
otherwise, in case of any loss, KRL would be responsible to make good the loss to GB and if any
profit accrues, account for such profit to GB.
Similarly, KRL would be liable to compensate GB in respect of the direct consequences of their
negligence, want of skill or misconduct.

However, if KRL without the knowledge of GB deals in the business of agency on KRL’s own account,
GB is entitled to claim any benefit which may have resulted to KRL from the transaction.
When GB disown KRL’s acts:
If GB does not ratify the agency, the contract would be between KRL and Tameer Associates (TA).
If TA suffers a loss due to breach of contract, KRL would be responsible to make good the loss.
Example 75: Duties of agent and rights of principal

Question: Fauzia is working as a sales girl for a pottery store, owned by Mirza Baig, in a famous
mall. Fauzia, in the absence of Mirza Baig, often displays her own pottery items on the shelves and
uses her employer’s time, resources and facilities to sell her own items. Recently, on a surprise visit
to the store, Mirza Baig caught Fauzia selling her own items in the store. Upon investigation, it was
also revealed that on certain instances Fauzia had sold Mirza Baig’s pottery wares at a higher rate
than recommended and pocketed the difference.
Under the provisions of the Contract Act, 1872 identify the nature of contractual relationship
between Fauzia and Mirza Baig. Discuss the duties breached by Fauzia and the rights available to
Mirza Baig under the above circumstances.
Answer:
The question deals with the law of agency and the relationship between Fauzia and Mirza Baig is
that of agent and principal.
Duties breached by Fauzia (agent’s duties towards principal)

Duty to follow principal’s directions or customs:
Fauzia’s first duty was to act within the scope of her authority and perform the agency work
according to the directions given by the principal. Fauzia’s selling her principal’s items at a higher
rate than recommended rate without his consent amounts to acting beyond her authority.
Duty to carry out work with reasonable diligence and in good faith:
Fauzia’s act of using her principal’s time, resources and facilities to sell her own items in place of
her principal’s items tantamount to breach of application of reasonable diligence and good faith.
Duty not to deal on her own account (conflict of interest):

The action of Fauzia in placing her own items on the shelves indicates that her own personal interest
was allowed to conflict with the interest of her principal.
Duty not to make any secret profit out of agency:

Fauzia’s act of selling her principal’s items at a higher rate and keeping the price difference into
her own pocket amounts to making secret profit.
Rights of Mirza Baig:

Right to proper account:
Mirza Baig is entitled to get proper accounts of his money from Fauzia.
Right to receive benefits gained by agent (secret profit):

Since Fauzia was dealing on her own account in the business of agency, Mirza Baig has the right to
ask Fauzia for surrendering all the benefits which may have resulted from the transactions (secret
profit) to him. He is also entitled for the compensation of any loss caused to him due to Fauzia’s
misconduct.
Right not to pay remuneration:

Since Fauzia is guilty of misconduct, Mirza Baig is not required to pay any remuneration to Fauzia
for that part of the business which she has misconducted.
Terminate the agency:

Mirza Baig has a right to terminate the agency relationship with Fauzia.

Business Law
Example 76: Authority and duties of agent

Question: Four Wheels Limited (FWL), misrepresenting themselves to be the agents of Big Motors
(BM), persuaded Motor Manufacturers (MM) to sell them 10 luxury Jeeps customised for BM.
Discuss FWL’s liability under the above situation.
Answer:
Since Four Wheels Limited (FWL) acquired 10 luxury Jeeps, customised for BM, on behalf of Big
Motors (BM), without their knowledge or authority, FWL’s liability would be analysed under the
following two circumstances:
When BM elects to ratify FWL’s acts:

If BM ratifies FWL’s act, the same effects will follow as if the act had been performed by BM’s
authority.
Being agent, FWL is bound to conduct the business according to the custom which prevails in doing
business of the same kind at the place where the agent conducts such business. If FWL acts
otherwise, in case of any loss, FWL would be responsible to make good the loss to BM and if any
profit accrues, account for such profit to BM.
Similarly, FWL would be liable to compensate BM in respect of the direct consequences of their
negligence, want of skill or misconduct.
However, if FWL without the knowledge of BM deals in the business of agency on FWL’s own
account, BM is entitled to claim any benefit which may have resulted to FWL from the transaction.
When BM disown FWL’s act:

If BM does not ratify the agency, the contract would be between FWL and Motor Manufacturers
(MM). If MM suffers a loss due to breach of contract, FWL would be responsible to make good the
loss.
Example 77: Authority and rights of agent

Question: Explain the following as described under the Contract Act, 1872.
(a) Agent’s authority in an emergency
(b) Agent’s right of retainer
(c) Agent’s right of lien
Answer:
Part (a) Agent’s authority in an emergency
An agent has authority, in an emergency to do all such acts for the purpose of protecting his
principal from loss as would be done by a person of ordinary prudence, in his own case, under
similar circumstances.
Part (b) Agent’s right of retainer

An agent may retain, out of any sums received on account of the principal in the business of the
agency, all moneys due to himself in respect of advances made or expenses properly incurred by
him in conducting such business, and also such remuneration as may be payable to him for acting
as agent.
Part (c) Agent’s right of lien

In the absence of any contract to the contrary, an agent is entitled to retain goods, papers and other
property, whether movable or immovable, of the principal received by him, until the amount due to
himself for commission, disbursements and services in respect of the same has been paid or
accounted for to him.

Example 78: Duties of an agent

Question: Aslam appointed Zakir to recover Rs. 7.0 million from Naveed. Zakir misbehaved with
Naveed as a result of which Naveed sued Aslam. Later, Aslam sued Zakir claiming reimbursement
of the cost incurred by him in defending the suit filed by Naveed. Explain whether Aslam is justified
in his claim.
Answer:
It is the duty of an agent to act diligently as a man of ordinary prudence. He must compensate his
principal in respect of the direct consequences of his negligence. Zakir being an agent of Aslam is
responsible for his misconduct due to which Aslam had to pay Naveed. Therefore, Aslam is justified
in his suit.

Business Law
3 TERMINATION OF AGENCY
Section overview
 Termination by acts of parties

 Termination by operation of law
Agency can be terminated in the following ways:
3.1 Termination by act of parties

Mutual agreement
A contract of agency can be terminated at any time by mutual agreement of principal and agent.
Example 79: Mutual agreement
Palwasha employs Atif as her agent for 5 months. Palwasha and Atif by mutual consent can
terminate the agency before expiry of 5 months.
Revocation by the principal [Section 205 to 207]

Unless the agency is irrevocable, the principal may revoke the authority of the agent at any time
before the agent has exercised his authority so as to bind the principal. The following rules are
applicable:
Where there is an express or implied contract that the agency should be

Compensation continued for any period of time the principal must make compensation to
the agent for revocation of the agency without sufficient cause.
Reasonable notice must be given of revocation of agency where agency

Reasonable
is for a fixed period of time otherwise the damage thereby resulting to the
notice
agent must be compensated by the principal to the agent.
Express or Revocation may be expressed or may be implied by the conduct of the

implied principal.
The termination of the authority of an agent takes effect:

 As regards to the agent from the time when it becomes known to him
Termination  As regards third persons from the time it becomes known to them
Even when the agency is terminated on the death of the principal the
termination is effective when it comes to the knowledge of the third party.
Effect of The agent would be entitled to indemnity for acts done and to receive
termination remuneration for the period before termination.
Example 80: Revocation by the principal

Parvez employs Ahmad to rent out his house. Afterwards, Parvez rents the house himself. This is
revocation of Ahmad’s authority as an agent by the principal.
Example 81: Revocation by the principal

Paras appoints Adeel to sell goods on his behalf for minimum two years. Paras may not revoke
agency before completion of two years. If he does so, he has to compensate Adeel for revocation.
Adeel would be entitled to indemnity for acts already done and to receive remuneration before
termination.

Renunciation by the agent [Section 205 to 207]

An agent may renounce the business of agency at any time and in the same manner in which the
principal has the right of revocation. The following rules are applicable:
Where there is an express or implied contract that the agency should be

Compensation continued for any period of time the agent must make compensation to the
principal for renunciation of the agency without sufficient cause.
Reasonable notice must be given of renunciation of agency where agency
Reasonable
is for a fixed period of time otherwise the damage thereby resulting to the
notice
principal must be compensated by the agent to the principal.
Express or Renunciation may be expressed or may be implied by the conduct of the
implied agent.
Example 82: Renunciation by the agent

Ali is appointed as agent of Pasha for 1 year. After 6 months Ali can terminate the agency by giving
a reasonable notice to Pasha.
3.2 Termination by operation of law
Completion of business [Section 201]

An agency is automatically terminated when its business is completed.
Example 83: Completion of business

Pasha appoints Adeel as his agent to sell his house. Adeel sells the house. The agency is
terminated.
Expiry of time
When the agent is appointed for a fixed period of time the agency comes to an end after the expiry
of that time.
Example 84: Expiry of time

Asif is appointed as agent of Parveen for 1 year to sell goods on her behalf. Agency terminates after
the expiry of 1 year.
Death of the principal or agent [Section 201]

Unless the agency is irrevocable, a contract of agency is terminated on the death of the principal
or agent.
Example 85: Death of the principal or agent

Asif is appointed as agent of Parveen for 1 year to sell goods on her behalf. If either Parveen or Asif
dies, the agency terminates.
Insanity of the principal or agent [Section 201]

Unless the agency is irrevocable, a contract of agency is terminated on the insanity of the principal
or agent.
Example 86: Insanity of the principal or agent

Aqib is appointed as agent of Pasha for 1 year. If either Pasha or Aqib becomes insane, the agency
terminates.
Insolvency of the principal [Section 201]

An agency is also terminated by the insolvency of the principal.

Business Law
Example 87: Insolvency of the principal

Azam is appointed as agent of Parveen for 1 year. Parveen becomes insolvent after 6 months. The
agency comes to an end.
Destruction of subject matter

An agency is terminated automatically due to destruction of the subject-matter for which it was
created.
Example 88: Destruction of subject matter

Paras appoints Adeel to sell his horse. The horse died before Adeel could sell it. The agency
terminates.
On winding up of company
An agency is automatically terminated when the principal or agent is a company and the company
is wound up.
Example 89: On winding up of company

Zahid and Yasir were directors of ABC (Private) Limited and by virtue of their directorship they were
agents of the company. The court ordered winding up of the company. Upon completion of winding
up, the directorship and agency relationship of Zahid and Yasir with the company ends.
Principal or agent becoming an alien enemy [Section 208]

When the agent or principal becomes an alien enemy the contract of agency is terminated.
Example 90: Principal or agent becoming an alien enemy

Adnan is appointed as agent by Pasha for 1 year. Adnan lives in India and Pasha in Pakistan. War
breaks out between the two countries. The agency terminates.
Example 91: Termination of contract of agency

Question: Under the provisions of the Contract Act, 1872 analyse the following situation and
comment on the type and validity of the contract:
Arif is the sole proprietor and deals in sale of product X. On 1 January 2018, Arif entered into two
months’ contract with Abbas for the promotion and sale of product X on commission basis. On 4
February 2018, Arif died in a car accident. Abbas came to know about it on 15 February 2018.
However, Abbas continued selling the product as per the contract.
Answer:
It’s a contract of agency. The termination of the authority of Abbas as an agent takes effect when
the death of Arif becomes known to Abbas i.e. 15 February 2018. Therefore, Arif’s estate will be
liable for any sale made and commission earned until 15 February 2018. For the sale made after
15 February 2018 Abbas will be personally liable.

4 PERSONAL LIABILITY OF AN AGENT

Section overview
 Circumstances where agent is personally liable
4.1 Circumstances where agent is personally liable

It’s a general rule that an agent is not liable if he acts on behalf of the principal. However, in certain
circumstances agent is personally liable which are discussed below:
Foreign principal [Section 230]
When an agent contracts for a principal resident abroad he is presumed to be personally liable.
Example 92: Foreign principal

Akmal entered into a contract with Tariq on behalf of Peter who resides in New Zealand. Akmal will
be personally liable to Tariq in case of non-performance of contract by Peter.
Unnamed principal
If an agent declines to disclose the identity of his principal then he is personally liable to the third
party.
Example 93: Unnamed principal

Akmal entered into a contract with Tariq on behalf of an unnamed principal. Tariq asked Akmal the
name and identity of the principal to sue the principal for not delivering the goods according to
agreed specification. Akmal did not provide the details. Tariq may sue Akmal.
Principal cannot be sued [Section 230]

An agent is also presumed to incur personal liability where he contracts on behalf of a principal
who though disclosed cannot be sued.
Example 94: Principal cannot be sued

Where promoters contract for a projected company, they are held liable personally as the company
being non-existent at the time of the contract but cannot be sued.
Undisclosed Principal [Section 231]

Where an agent acts for an undisclosed principal and contracts in his own name then he is
personally liable to the third parties.
Example 95: Undisclosed Principal

Akmal entered into a contract with Tariq on behalf of someone but did not tell this to Tariq and
pretended that he is negotiating on his own behalf. Tariq may sue Akmal in case of non-
performance.
Custom
An agent is personally liable on a contract if there is any usage or custom of a market or trade to
that effect.
Example 96: Custom

A jobber may hold a stock broker personally liable as per the customs of trade in a stock
exchange.

Business Law
Agent exceeding his authority [Section 227 & 228]

Where an agent while acting in the course of business of agency exceeds his authority, he is
personally liable for the excess part if it is a separable transaction otherwise for the entire
transaction.
Example 97: Agent exceeding his authority

Parvez, being owner of a ship and cargo, authorizes Ajmal to procure an insurance for Rs. 40,000
on the ship. Ajmal procures a policy for Rs. 40,000 on the ship, and another for the like sum on the
cargo. Parvez is bound to pay the premium for the policy on the ship, but not the premium for the
policy on the cargo for which Ajmal would be liable.
Example 98: Agent exceeding his authority

Paras authorizes Abid to buy 500 sheep for him. Abid buys 500 sheep and 200 Iambs for one sum
of Rs. 10 million. Paras may repudiate the whole transaction and Abid would be personally liable
for exceeding his authority.
Improperly appointed sub-agent [Section 193]

An agent is personally liable to third parties for the acts of an improperly appointed sub-agent.
Example 99: Improperly appointed sub-agent

Paras appointed Asif as his agent specifically stating that he must negotiate personally with
customers on his behalf. Ignoring this, Asif appointed Saleem as sub-agent who caused loss to a
customer Tariq. Asif is liable for the loss caused by the act of Saleem as sub-agent.
Agent incurring personal liability

Where an agent, while acting in the course of business of agency incurs personal liability he is
personally liable on the contract.
Example 100: Agent incurring personal liability

Azam while buying goods on behalf of Paras, guaranteed the payment to Tariq in case of default
by Paras. Azam is liable as surety under the contract of guarantee.
Criminal act
Where an agent has been employed to do a criminal act, the agent is not entitled to indemnify
himself against the consequences of that act and is personally liable for it.
Example 101: Criminal act

Parvez employs Arslan to beat Tahir and agrees to indemnify him for the consequences of the act.
Arslan beats Tahir and has to pay damages to Tahir for such act. Parvez is not liable to indemnify
Arslan.
Special contract
If an agent, while acting in the course of business of agency enters into a special contract with the
third party that he will be personally liable on the contract then the agent is personally liable.
Example 102: Special contract

Azam while buying goods on behalf of Paras, agreed with Tariq that he would also be personally
liable under the contract. Due to this special contract, Azam is personally liable.

Example 103: Personal liability of an agent

Question: Under the provisions of the Contract Act, 1872 describe the circumstances in which an
agent is presumed to be personally liable on the contract to third parties.
Answer:
Following are the circumstances under which an agent is personally liable to third parties:
(i) Foreign principal: When an agent contracts for a principal resident abroad he is presumed
to be personally liable.
(ii) Principal cannot be sued: An agent is also presumed to incur personal liability where he
contracts on behalf of a principal who though disclosed cannot be sued. E.g. where
promoters contract for a projected company, they are held liable personally as the
company being non-existent at the time of the contract cannot be sued.
(iii) Agent exceeding his authority: Where an agent while acting in the course of business of
agency exceeds his authority, he is personally liable for the excess part if it is a separable
transaction otherwise for the entire transaction.
(iv) Improperly appointed sub-agent: An agent is personally liable to third parties for the acts
of an improperly appointed sub-agent.
(v) Agent incurring personal liability: Where an agent, while acting in the course of business of
agency incurs personal liability he is personally liable on the contract.
(vi) Pretended agent: A pretended agent, if the principal does not ratify his act, is personally
liable to third parties for the loss or damage incurred by them because of dealing with him.
(vii) Criminal act: Where an agent has been employed to do a criminal act, the agent is not
entitled to indemnify himself against the consequences of that act and is personally liable
for it.
(viii) Special contract: If an agent, while acting in the course of business of agency enters into a
special contract with the third party that he will be personally liable on the contract then
the agent is personally liable.
(ix) Unnamed principal: If an agent declines to disclose the identity of his principal then he is
personally liable to the third party.
(x) Custom: An agent is personally liable on a contract if there is any usage or custom of a
market or trade to that effect. e.g. stock brokerage business.

Business Law

01. A Minor can
(a) Be an agent
(b) Be a principal
(c) Both
(d) None
02. An agent has authority in emergency to do all such acts as would be done by a person of
ordinary prudence in his own case under similar circumstances, for the purpose of
(a) Securing maximum benefit for himself
(b) Making secret profit
(c) Protecting his principal from loss
(d) Protecting third party from loss
03. The agent acts on behalf of the principal, by negotiating with the third party. Under normal
circumstance, there is no legal agreement between
(a) The agent and the principal
(b) The principal and the third party
(c) The agent and the third party
(d) The agent and the sub-agent
04. Where a sub-agent is properly appointed
(a) The principal is bound by the acts of the sub-agent
(b) The agent is responsible to the principal for the acts of the sub-agent
(c) The sub agent is responsible for his acts to the agent
05. The principal may wish to give the agent the power to execute deeds. In these cases, the agent
must be appointed by a deed. When an agent is appointed by deed, he is given
(a) A power of attorney
(b) A power of contract
(c) A power of deed
(d) A power of negotiation

06. An agency relationship may be created retrospectively. This may happen when a person who
does not actually have actual authority as an agent negotiates with a third party, claiming to be
an agent of a named principal. This is
(a) Agency by express appointment
(b) Agency by ratification
(c) Agency by estoppel
(d) Agency by necessity
07. Mr. B rents out his house to Mr. A and the contract is terminable on three months’ notice. Mr.
C, without Mr. B’s authority, gives notice of termination to Mr. A. Mr. B ratifies the notice and
files a suit against Mr. A. State the legal position.
(a) The notice given by Mr. C can be ratified
(b) The notice given by Mr. C cannot be ratified
(c) The notice given by Mr. C is binding
(d) The notice given by Mr. C is valid
08. For a valid ratification the principal must have contractual capacity
(a) At the time of contract
(b) At the time of ratification
(c) Both at the time of contract and at the time of ratification
(d) At any time
09. If there is no agreement regarding remuneration, an agent is
(a) Not entitled to any remuneration
(b) Entitled to a reasonable remuneration
(c) Entitled to remuneration which he thinks is reasonable
(d) Entitled to remuneration which the principal think is reasonable
10. When an agent appoints a sub-agent without having authority to do so
(a) The agent is responsible for the acts of the sub-agent
(b) The agent is not responsible for the acts of the sub-agent
(c) The Principal is responsible for the acts of the sub-agent
(d) Both the principal and the agent are responsible for the acts of the sub-agent

Business Law
11. Mr. X instructed Mr. Y, a transporter, to send the consignment of tomatoes to Karachi. After
covering the half distance, Mr. Y found that tomatoes will not bear the journey to Karachi without
spoiling and sold at half the market price for good tomatoes. This is the case of
(a) Agency by estoppel
(b) Agency by necessity
(c) Agency by ratification
(d) Agency by express agreement
12. Mr. X, the principal, instructed Mr. Y his agent to put goods in Mr. Z’s warehouse. Mr. Y puts
half of the goods in Mr. Z’s warehouse and the balance in another equally safe warehouse. All
the goods were destroyed by fire without any negligence on part of Mr. Y. Is Mr. Y liable to Mr.
X?
(a) Mr. Y is not liable for any loss of goods.
(b) Mr. Y is liable for the loss of the goods put in another warehouse
(c) Mr. Y. is liable for whole of the goods
(d) Mr. Y is not liable for the goods put in another warehouse
13. An agent has a right to retain his principal’s money in his hand for all money due to himself in
respect of remuneration as may be payable to him for acting as agent, advances made or
expenses properly incurred by him in conducting the business of agency. This right of agent is
knows as
(a) Right of lien
(b) Right of retainer
(c) Right of Compensation
(d) Right to claim benefits
14. A contract of agency can be terminated at any time by mutual agreement of principal and
agent.The termination of the authority of an agent takes effect as regards third party
(a) From the time when it becomes known to the principal
(b) From the time when it becomes known to third party
(c) From the time when it becomes known to sub-agent
(d) From the time when it becomes known to his legal representative

15. A entrusts his property to B and it became necessary for B to incur some expenses for
preserving it. B is, therefore, an agent
(a) By precedent authority
(b) By estoppel
(c) By holding out
(d) By necessity
16. An agent has a _______ on goods, papers and other properties of the principal received by
him, until the amount due to himself has been paid or accounted for, to him.
17. Ostensible authority, also called apparent authority, is an aspect of ________________.
18. Ostensible authority, also called apparent authority, is an aspect of ________________.
19. Any person who is of the age of majority and who is of sound mind can become
___________________.
20. When an agent has been employed to do a ___________________, the agent is not entitled
to indemnify himself against the consequences of that act and is personally liable for it.

Business Law

1. (a) As between the principal and third person any person may become an agent. Even a
minor or a person of unsound mind can be appointed as agent.
2. (c) An agent has authority in emergency to do all such acts for the purpose of protecting
his principal from loss.
3. (c) There is no legal agreement between the agent and the third party. However, the
agent may negotiate the terms of a contract between the principal and the third party.
4. (d) The principal is bound by the acts of the sub-agent and the sub-agent is responsible
for his acts to the agent.
5. (a) When an agent is appointed by deed, he is given a power of attorney to act for the
principal.
6. (b) The person who has been named as principal might then choose to accept the
contract with the third party. Ratification means giving approval to something.
7. (b) The notice cannot be ratified because no act can be ratified which result in third party
to damages.
8. (c) Since ratification has a retrospective application it is necessary that the ratifier must
be competent to contract at the time when the contract is entered into and also at the
time of ratification.
9. (b) The agent is entitled to his agreed remuneration or if there is no agreement to a

reasonable remuneration.
10. (a) Where the appointment of sub-agent is made without authority, the agent stands as a
principal towards such a sub-agent.
11. (b) Agency by necessity occurs when an emergency requires that one party (the agent)
has to take action to protest the interest of the other party (the principal).
12. (b) Mr. Y is liable for the loss of goods put in another warehouse because he has not
acted according to the direction of his principal.
13. (b) An agent has a right to retain his principal’s money in his hands for all money due to
himself.
14. (b) The termination of authority of an agent takes effect as against third party when it
comes to the knowledge of the third party
15. (d) Agency by necessity occurs when an emergency requires that one party (the agent)
has to take action to protest the interest of the other party (the principal).
16. Lien
17. Agency by Estoppel
18. Del Credere Agent
19. Principal
20. Criminal act

9
Business Law
CHAPTER
Partnership Act
Contents
1 The nature of partnership
2 Relations of partners to one another
3 Relations of partners to third parties

Business Law
1 THE NATURE OF PARTNERSHIP

Section overview
 Definitions
 Essential elements of a partnership
 Test of partnership
 Types of partnership
 Types of partners
 Difference between a partnership firm and a joint stock company
 Difference between a partnership firm and co-ownership
1.1 Definitions
The law governing partnership in Pakistan is the Partnership Act, 1932.
Definition: Partnership [Section 4]
“Partnership is the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all”.
Definition: Firm and partners [Section 4]

“Persons who have entered into partnership with one another are called individually “partners” and
collectively “a firm” and the name under which their business is carried on is called the “firm name”.
Definition: Act of firm [Section 2(a)]

“An act of firm means any act or omission by all the partners, or by any partner or agent of the firm
which gives rise to a right enforceable by or against the firm.”
Definition: Third party [Section 2(d)]

“Third party used in relation to form or to a partner therein means any person who is not a partner
in the firm.”
Example 01: Definitions

Aftab, Badal and Chand started a business of trading in light bulbs together under the name Solar
Traders. They decided to share profits equally and the business will be managed by Aftab only. On
first day, on behalf of Solar Traders, Aftab ordered 100 light bulbs on credit from Tanveer, a
wholesaler of electric products.
 Solar Traders is a partnership firm
 Aftab, Badal and Chand each is an individual partner in this partnership firm and
collectively these three partners are the firm with the name Solar Trader.
 Tanveer is a third party in the context of this partnership firm.
 Aftab entered into contract with Tanveer as an agent of the firm, and this contract is an
act of firm. The firm is liable to pay to Tanveer i.e. all three partners are liable.

Section A: Mercantile Law - Chapter 9: Partnership Act
1.2 Essential elements of a partnership [Section 6]

The definition of partnership indicates the following essential elements in a partnership:
Association
of two or
more
persons
Mutual
Agreement
agency
Essential
elements of
partnership
Sharing of
Business
profit
Association of two or more persons

The partnership is an association between two or more persons and all persons must be competent
to contract. Thus, there can be no partnership consisting of a single individual. If the number gets
reduced to one, for any reason, it ceases to be a partnership. The partnership Act does not say
anything about the maximum number of partners. However, in company law the following
maximum numbers are fixed:
(a) In case of a partnership firm carrying on banking business maximum number is 10.
(b) In case of a partnership firm carrying on any other business maximum number is 20.
(c) In case of a partnership firm of professional persons maximum number may exceed 20.
If the number of partners exceeds the maximum number allowed then such partnership firm
becomes an illegal association.
Example 02: Association of two or more persons

In an MBA class, 28 class fellows decided to form a partnership firm to work collectively as
marketing and advertisement advisors. Such partnership will be illegal association. They should
form a company under Companies Act, 2017.
Example 03: Association of two or more persons

After qualifying CA, 28 Chartered Accountants decided to form a partnership firm to work
collectively as Chartered Accountants. Such partnership is allowed under the law.
Agreement
A partnership is a contractual agreement between the partners. This agreement may be express
(whether written or oral) or implied. The written agreement is known as ‘partnership deed’. In
Pakistan partnership arises from contract and not from status such as, (Joint Family Business)
operation of law inheritance, or succession.
A partnership deed usually sets out the following:
 Firm name
 Place or principal place of business of the firm
 Names of any other places where the firm carries on business
 The date when each partner joined the firm
 Number of partners

Business Law
 Names in full and permanent addresses of partners

 Duration of partnership (if any)
 Purpose of the partnership
 Rights and duties of the partners.
 Amount of capital that each partner should put into the business, and keep in the business
until the partner retires or the partnership is dissolved
In Pakistan, if the partnership agreement does not specify what the rights or duties of the partners
should be in particular circumstances, the rules set out in the Partnership Act 1932 are assumed
to apply. These are the ‘default rules’ in the absence of anything else.
This means that if a partnership exists but does not have a written agreement, it will be assumed
(unless there is evidence to suggest otherwise) that the rules of the partnership agreement are
those contained in the Partnership Act.
Example 04: Agreement

Azhar and Babar started a business together and share its profit. They made a formal agreement
titled “Partnership deed” and included all possible legal clauses to avoid disputes and confusion
between them in future. It is a valid way of forming a partnership.
Example 05: Agreement

Although there is no express agreement between them, but Arslan regularly buys old furniture and
repairs it and then, his cousin Faisal sells the furniture and they both share the profit equally. The
relation between Arslan and Faisal is partnership, by implied agreement.
Carrying on business
To constitute a partnership, the parties must have agreed to carry on a business. Where there is
no business to be done, there can be no question of partnership. Business here includes any lawful
trade, occupation and profession. An agreement to carry on business at a future time does not
result in partnership unless that time arrives and the business is commenced. If the purpose is to
carry on some charitable work it will not be a partnership.
Example 06: Carrying on business

Ghaffar and Jabbar purchased a shop, incurred additional expenses to renovate it contributing in
the ratio of 50:50 and then leased out the shop on rent which was shared equally by them. It won’t
be a partnership as they are co-owners and never carried out any business.
Sharing of profits
The next essential element of partnership is that there must be an objective to make profit. The
partners may agree to share profits in any manner they like. The sharing of profits is a prima facie
evidence and not a conclusive evidence of partnership. Partners may share it equally or in any
other proportion. Further, it is not necessary that the partners should agree to share losses. It must
be noted that even though a partner may not share in the losses of the business, yet his liability
towards outsiders shall be unlimited.
A person receiving profits is not necessarily a partner, such as:
 Lender of money to persons engaged or about to engage in any business
 Servant or agent as remuneration
 Widow or child of a deceased partner as annuity
 A transferee of a partner’s interest
 A minor who is admitted to the benefits of an existing partnership
 Previous owner or part owner as consideration for the sale of goodwill or share of it.

Example 07: Sharing of profits

Amjad applied for a loan from ABC Bank for his business. It was decided that bank will get 20% of
profit or loss, in lieu of interest. There is no partnership between Amjad and ABC Bank.
Example 08: Sharing of profits

Raheem, a clerk in Kareem’s business, entered into a verbal agreement with Kareem for 10% share
of profit, rather than a fixed salary. It was further agreed that the building in which the business
was carried on should remain the property of Kareem and all work and decisions will be solely
decided by Kareem. Raheem alleges that he is a partner and claims dissolution of the firm. Kareem
denies the partnership, and alleges that Raheem is only a clerk. In view of the surrounding
circumstances of the case it is evident that Raheem is only a clerk. It is an established fact that
sharing of profits is not the sole test of partnership.
Mutual agency
There must exist a mutual agency relationship among partners. Mutual Agency relationship means
that each partner is both an agent and a principal. Each partner is an agent in the sense that he
has the capacity to bind other partners by his acts done. Each partner is principal in the sense that
he is bound by the acts of other partners.
Following two important features of the partnership need to be understood.
 A partnership does not have a legal personality. Unlike a company, it is not a legal person.
A third party entering into business transaction with a partnership does not have a
contractual agreement with the partnership; the contractual agreement is between the third
party and all the partners as individuals.
 Partners in a partnership do not have limited liability, and are personally liable for
any liabilities of the partnership business that the partnership cannot pay.
Example 09: Mutual agency
Ali, Bilal and Chand are partners in a business. Dawood an outsider deals with the firm through Ali.
As between Ali and Dawood, Ali is the principal. But as between Ali, Bilal and Chand, Ali is also the
agent of Bilal and Chand. As such Ali, Bilal and Chand can all sue Dawood. Dawood can also sue
Ali, Bilal and Chand. Furthermore Ali is accountable to Bilal and Chand because he is an agent of
Bilal and Chand.
Mutual agency relationship in case of a firm of Ali, Bilal and Chand
An act by: Ali Bilal Chand
Who is an agent Ali Bilal Chand

The contract is binding on: Ali, Bilal and Chand
.
1.3 Test of partnership [Section 6]

In determining
 whether a group of persons is or is not a firm or
 whether a person is or is not a partner in a firm regard shall be given to the real relationship
between the parties as shown by all relevant facts taken together i.e.
(a) Association of two or more persons
(b) Agreement
(c) Carrying on business
(d) Sharing of profits
(e) Mutual agency

Business Law
Example 10: Test of partnership

Question: Ahmad and Baqir, two chartered accountants, agree to carry on practice in common at
the office of Ahmad under the name “Ahmad and Baqir” for a period of seven years. The terms of
agreement entered into between them provide that Baqir should manage the office and supervise
the clerical work and that he should draw a fixed allowance of Rs. 20,000 per month in lieu of
profits. It is further agreed that losses, if any, shall be borne by Ahmad alone, and that after seven
years Ahmad would be entitled to the office and all the other equipment, and Baqir would not have
any right, or claim, in respect of them. Are Ahmad and Baqir partners?
Answer:
Yes, Ahmad and Baqir are partners. In a partnership, partners are free to agree to any term as
regards sharing of profits. Again, sharing of loss is not necessary for becoming a partner. So also,
partners may agree that on the dissolution of their partnership all the assets will belong to one
partner only.

Saleem, the licensed proprietor of a theatre, lets the use of it to Jameel for dramatic
entertainments. Saleem manages the theatre and bears all its expenses. He also incurs certain
expenses for advertising and the band. He also collects door money of which he retains half and
hands over the other half to Jameel. There is not partnership, Saleem and Jameel are sharing
revenues and not profits.

Arslan and Noman are co-owners of a house and let it to a paying guest. They divide the rent
between them. There is no business being carried on and therefore, they are not partners.

Hussain, a publisher agrees to publish at his own expense, a book written by Burhan and to pay
Burhan half the net profits. Hussain and Burhan are not partners. Hussain is simply paying Burhan
royalty by way of profits.

Ahmad and Rizwan are joint owners of a ship. Ahmad works on the ship, takes the entire
management of it and meets all the expenses. He takes two-thirds of gross earnings and pays over
the balance to Rizwan who does nothing. There is no partnership. They are sharing gross revenue
and not profits.
1.4 Types of partnership

Partnership-at-will [Section 7 & 43]
Where no provision is made between the partners for the duration of their partnership, or for the
determination of their partnership, the partnership is called partnership at will. In such partnership
there is no provision as to when the partnership will come to an end. Any partner is free to dissolve
the partnership by giving a notice in writing to all other partners of his intention to dissolve the firm.
The firm is dissolved as from the date mentioned in the notice as the date of dissolution or if no
date is mentioned as from the date of the communication of the notice.
If freedom to dissolve the firm at will is curtailed by agreement, like if the agreement provides that
the partnership can be dissolved by mutual consent of all the partners, only then will it not constitute
a partnership at will.
Example 15: Partnership-at-will

Azam and Babar are partners in a firm. There is no formal express agreement and no duration
fixed. Azam does not want to continue. This is partnership at will and he may give a reasonable
notice of his intention to dissolve the firm to Babar and firm will be dissolved from the date
mentioned in the notice.

Example 16: Partnership-at-will (exception)

Azam, Babar and Misbah are partners in a firm. The partnership deed states that firm can only be
dissolved with mut2ual consent of all the partners although no duration is fixed. Azam does not
want to continue. This is not partnership at will and he can dissolve the partnership only if Babar
and Misbah also agree.
Particular partnership [Section 8]

Where a partnership is created for any particular adventure or undertaking or for a specific time
period it is called a particular partnership. Such partnership comes to an end on the completion of
venture or on the expiry of the period.
If the partners decide to continue such a partnership even after the expiry of the specific period or
completion of specific venture then it becomes partnership at will.
Example 17: Particular partnership

Anum and Maha entered into a partnership agreement specifically for an interior designing project.
This is particular partnership and it shall come to an end on completion of the project.
Example 18: Particular partnership

Adeel and Saima entered into a partnership agreement for 10 years. This is a particular partnership.
However, on completion of 10 years, they decided to continue the partnership, now their
partnership is partnership at will.
1.5 Types of partners

Actual or ostensible partner
A partner who is actively engaged in the conduct of a business is called actual or ostensible partner.
Such a partner is an agent of all other partners for the purposes of the business of the firm. He can
bind himself and other partners for the acts done in the ordinary course of the business.
Example 19: Actual or ostensible partner

Traders. They decided to share profits equally and the business will be managed by Aftab only.
Aftab is active or ostensible partner.
Sleeping or dormant partner

A sleeping partner is not known as such as a partner to third parties dealing with the firm. He may
or may not take active part in the conduct of the business of the firm. He, like other partners, invests
capital and shares in the profits of the business. He is equally liable along with other partners for
all the debts of the firm, even though his existence is kept a secret from the outsiders dealing with
the firm.
Note
A sleeping partner is not required to give public notice of his retirement and he is not liable for any
act done by the firm after his retirement.
Example 20: Sleeping or dormant partner

Traders. They decided to share profits equally and the business will be managed by Aftab only and
the existence of Badal and Chand as partners will be kept secret from outsiders. Badal and Chand
are sleeping partners.
Nominal partner
A partner who does not contribute any capital or share in profits, but lends his name to the firm is
called a nominal partner. He along with other partners is liable to the outsiders for all the debts of
the firm.

Business Law
Example 21: Nominal partner

Azam and Babar started a law firm. They also requested a retired senior lawyer Arif to join in. Arif
stated that they can use his name as partner but he would not be able to give his time to the firm
and that he would not share in profits as well. Arif is a nominal partner and would still be liable to
outsiders for the acts of firm.
Partner in profits only

A partner may agree that a partner shall get a share of the profits only and that he shall not be
liable to contribute towards the losses. But for third parties he is liable for all the debts of the firm.
Example 22: Partner in profits only

Adeel and Kashif are partners in a firm. The terms of agreement are that they will share profit in
the ratio of 3:2 but in case of loss, all loss shall be borne by Adeel only. Here, Kashif is partner in
profits only.
Sub-partner
When a partner agrees to share his profits derived from the firm with a stranger, that stranger is
known as a sub-partner. A sub-partner is in no way connected with the firm and cannot represent
himself as a partner of the firm. He has no rights against the firm nor is he liable for the acts of the
firm.
Example 23: Sub-partner

the ratio of 3:2. Unknown to Kashif, Adeel further agrees with his friend Adnan to share half of his
individual share from partnership with Kashif. Adnan is a sub-partner.
Silent partner
Those who by agreement with other partners have no voice in the management of the partnership
business. They share profit and losses, are fully liable for the debts of the firm.
Example 24: Silent partner

Badal and Chand will not take any active part in management although their existence shall be
known to outsiders. Badal and Chand are silent partners.
Partner by estoppel or holding out [Section 28(1)]

Where a person
 Holds himself out as a partner or
 Allows others to do it
they are then stopped from denying the character he has assumed and upon the faith of which
creditors may be presumed to have acted.
Example 25: Partner by estoppel or holding out

Paras represents to Rizwan that he is a partner in the firm of Arslan, Noman and Ali, while actually
he is not a partner. On the faith of this representation Rizwan gives credit to the firm. The firm
becomes insolvent subsequently. Can Rizwan recover the money from Paras? Rizwan can make
Paras liable on the basis of holding out and Paras is estopped from denying that he is a partner in
the firm.

1.6 Difference between a partnership firm and a joint stock company
S.no Partnership firm Joint stock company
1 Formation
It is created by an agreement alone. It is created by law.
2 Registration
Registration is optional. Registration is compulsory.
3 Legal entity
It is not a separate legal entity. It is a separate entity or an artificial person
distinct from it members.
4 Nature of liability
Partners have joint and several liability i.e. Shareholders enjoy limited liability i.e.
unlimited liability. liability is restricted to the amount of
capital
5 Perpetual succession
A firm is dissolved on the death or A joint stock company continues to exist
insolvency of a partner. It has no irrespective of death or insolvency of its
perpetual succession. members or directors.
6 Agency
A partner is an agent of the firm for the Directors are agent of the company.
purpose of business of the firm. Shareholders are not agents.
7 Transfer of interest
A partner cannot transfer his interest There is no such restriction for transfer of
without getting consent from other shares.
partners.
8 Number of persons
Minimum two competent to contract Minimum one person can carry single
persons are required and a maximum of member company and no limit on
20 persons can carry partnership other shareholders for a public company.
than banking business.
9 Management
All partners can take part in the All shareholders cannot take part in the
management. management.

Business Law
1.7 Difference between a partnership firm and co-ownership

S.no Partnership firm Co-ownership
1 Formation
It is created by an agreement alone. Co-ownership is not necessarily a result
of an agreement.
2 Business
In partnership carrying on business is an Co-ownership does not necessarily
essential. If there will be end of business involve the carrying on of a business.
it will ultimately result in end of
partnership firm.
3 Number of persons
Minimum two competent to contract No limit on maximum number of co-
persons are required and a maximum of owners.
20 persons can carry partnership other
than banking business.
4 Sharing of profit
Sharing of profit is one of the essential It does not involve sharing of profit.
elements.
5 Agency
A partner is an agent of the firm for the Co-owners are not agents to one another.
purpose of business of the firm.
6 Transfer of interest
A partner cannot transfer his interest Co-owner can transfer his interest without
without getting consent from other getting consent from other co-owner(s).
partners.
Example 26: Difference between a partnership firm and co-ownership

Jazib and Ghalib jointly purchased a tea shop and incurred additional expenses for purchasing
pottery and some other materials to furnish the shop. The money was contributed half and half and
then the rented out the shop. The rent has to be shared equally by them. They are only co-owners
and not partners as they never carried on any business.
Example 27: Sharing profits is not a conclusive evidence of a partnership

Question: Sharing net profits usually creates a very strong inference that the parties have formed a
partnership. But in certain situations, the fact that the profits are shared or the parties have agreed
to share the profits will not by itself create a presumption that a partnership was intended. List such
situations as given in the Partnership Act, 1932.
Answer:
These situations are:
 The joint owners of a property who share profits or gross returns arising from the property are
not partners.
 Where the profits are received by a creditor in payment of a debt or as interest on loan.
 Where the profits are received as wages by an employee.
 Where the profits are received as an annuity by a widow or child of a deceased partner.
 Where the profits are received as consideration for the sale of property/goodwill or share
thereof.
 A transferee of a partner’s interest.
 A minor who is admitted to the benefits of an existing partnership.

Example 28: Mode of determining existence of partnership

Question: Munaf, a sole proprietor, engaged in the business of selling cooking oil to wholesalers
agreed to admit Lari in his business on the following terms:
That Lari shall not bring any capital and shall not be liable for any losses of the firm. However, he
shall be entitled to receive Rs. 150,000 on introducing any new client to the business, share 40%
of the profits and have the right to exercise all the powers of a partner in the firm.
Analyse the above situation and advise whether a partnership is constituted between Munaf and
Lari under the provisions of the Partnership Act, 1932.
Answer:
In determining whether Munaf and Lari constitute a partnership, regard shall be had to the real
relation between the parties, as shown by all relevant facts taken together.
The essentials of a partnership are:

(i) There should be a relationship by agreement between two or more persons;
(ii) They should run a business with the intention of sharing profits; and
(iii) The business should be run by all, or by any one of them acting for all.
The Partnership Act does not require that a partner must contribute money or capital. Similarly the
partners may also agree that any one of them shall not be liable for losses. Thus, in the presence
of the above essentials and the fact that Lari is entitled to exercise all the powers of a partner Munaf
and Lari are said to have constituted a partnership.
Example 29: Sharing profits is a prima facie evidence but not conclusive test
Question: The sharing of profit is a prima facie evidence but not a conclusive test of partnership’.
Under the provisions of the Partnership Act, 1932 list the circumstances in which receipt by a
person of a share of profits of a business does not of itself make him a partner with the persons
carrying on the business.
Answer:
Under the following circumstances the receipt by a person of a share of profits of a business does
not of itself make him a partner with the persons carrying on the business:
(i) where profit or payment is received by a lender of money from persons engaged or
about to engage in any business
(ii) by a servant or agent as a remuneration
(iii) by the widow or child of a deceased partner, as annuity
(iv) by the previous owner or part owner of the business, as consideration for the sale of
goodwill or share thereof
(v) by a transferee of a partner’s interest
(vi) by the persons holding a joint or a common interest in any property
(vii) by the minor who is admitted to the benefits of existing partnership
(viii) by a sub partner from a partner in the firm.

Business Law
Example 30: Mode of determining existence of partnership

Question: X has been carrying on textile business for the past few years. He has recently met Y who
is an expert in textile designing. X and Y have agreed that Y would advise X on various technical
issues and use his contacts for the benefit of the business. Y would be entitled to 35% of the profits
of the business. However, Y will not be required to bring any capital and will not take part in the day
to day affairs of the business.
Under the provisions of the Partnership Act, 1932 analyse the above situation and advise whether
partnership exists between X and Y.
Answer:
In determining whether X and Y are partners, regard shall be had to the real relationship between
the partners, as shown by all the relevant facts taken together.
A partnership exists where following conditions are complied with:

(i) There is an agreement between two or more persons;
(ii) They run a business with the intention of sharing profits; and
(iii) The business is run by all, or by any one of them acting for all.
The Partnership Act, does not require that a partner must contribute money or capital in the
partnership.
Therefore, since both X and Y have a common interest in the same business in which they are
sharing profit and have a mutual agency relationship between them, partnership does exist in the
above situation unless it can be proved that the real relationship of being partners does not exist.
Example 31: Circumstances in which a non-partner could benefit from the profits of a partnership
Question: The sharing of profit is a prima facie evidence of partnership. Under the provisions of the
Partnership Act, 1932 list any four circumstances in which a non-partner could benefit from the
profits of a partnership.
Answer:
Following are the circumstances in which a non-partner could benefit from the profits of a
partnership:
 Lender of money to persons engaged or about to engage in any business
 Servant or agent as remuneration
 Widow or child of a deceased partner as annuity
 Transferee of a partner’s interest
 A minor who is admitted to the benefits of partnership
 Previous owner or part owner as consideration for the sale of goodwill or share thereof.
Example 32: Existence of partnership

Question: Moiz, Adeeb and Mumtaz were partners in a firm. Adeeb died. Moiz and Mumtaz
continued the business and agreed to give 10% share of profits of business to the widow of Adeeb
as annuity. Discuss whether Adeeb’s widow would be deemed to be a partner in the firm.
Answer:
No, Adeeb’s widow is not a partner in the firm. The receipt by a person of a share of the profits of a
business, is a prima facie evidence of the existence of partnership. However, the receipt by the
widow of a deceased partner, as annuity, does not of itself make the receiver a partner with the
persons carrying on the business. In determining whether Adeeb’s widow is a partner in the firm
regard shall be had to the presence of mutual agency relationship among Moiz, Mumtaz and
Adeeb’s widow, which is a conclusive evidence, of the presence of partnership, and which in this
case does not exist.

2 RELATIONS OF PARTNERS TO ONE ANOTHER

Section overview
 General duties of partner

 Qualified duties of partner
 Rights of partner
 Mutual rights and liabilities
 Partnership property
The duties, rights and liabilities of the partners are shown below:
The liabilities are discussed in section 3.3 of this chapter.

Business Law
2.1 General duties of partner

These are mandatory duties of a partner that cannot be changed by an agreement amongst the
partners. These are:
Duty to be just and faithful [Section 9]
An ideal partnership is one where there is mutual trust and confidence, and spirit of helpfulness
among partners. As such every partner must be just and faithful to his co-partners. He must
observe utmost good faith and fairness towards other partners of the firm.
Example 33: Duty to be just and faithful

Saleem, Naeem, Kareem and Raheem established a partnership for refining sugar. Raheem was
considered expert in the job of buying sugar. Thus he was entrusted with the duty of purchasing
sugar for the firm. Raheem himself was a wholesale dealer in sugar. He, unknown to his co-
partners, supplied to the firm, at the market price, with sugar previously bought by himself from his
own resources when the price was lower, and he so made considerable profit. Saleem, Naeem and
Kareem sued for the profits thus made by him. Yes Raheem is accountable to the firm for the profit
thus made by him because he had failed in his duty to observe utmost good faith towards other
partners and to make fullest disclosure of all facts to them.
Duty to carry on business to the greatest common advantage [Section 9]

Every partner is bound to carry on the business of the firm to the greatest common advantage. It
implies that every partner must use his knowledge and skill for the benefit of the firm and not for
his personal gain. He must conduct the business with the best of his ability and secure maximum
benefits of the firm.
Example 34: Duty to carry on business to the greatest common advantage

Saleem, Naeem, Kareem and Raheem established a partnership for refining sugar. Raheem was
considered expert in the job of buying sugar. Thus he was entrusted with the duty of purchasing
sugar for the firm. Ajmal, cousin of Rahim, was a wholesale dealer in sugar. Raheem bought sugar
from Ajmal despite the fact that the rate was higher than the market rate for same quality. Raheem
has breached his duty to carry on business to greatest common advantage of all the partners.
Duty to render true accounts [Section 9]

Every partner must render true and proper accounts to his co-partners. It implies that each partner
must be ready to explain the accounts of the firm and produce vouchers in support of the entries.
No partner should think of making a secret profit at the expense of the firm.
Example 35: Duty to render true accounts

Badal and Chand will not take any active part in management. Aftab must render true accounts of
the firm to Badal and Chand.
Duty to provide full information [Section 9]

A partner must give full information to the other partners, in relation to everything affecting the
partnership.
Example 36: Duty to provide full information

Badal and Chand will not take any active part in management. Aftab must provide full information
of all things affecting the firm to Badal and Chand.
Duty to indemnify for loss caused by fraud [Section 10]

Every partner shall indemnify (compensate) the firm for any loss caused to it by his fraud in the
conduct of the business of the firm.

Example 37: Duty to indemnify for loss caused by fraud

Habib, Arslan and Adeel are partners in a firm. Habib sold an item to third party by fraud without
consent of Arslan and Adeel. The firm had to pay the compensation and bear the loss. Habib must
indemnify Arslan and Adeel for loss so caused to them.
Duty to be liable jointly and severally – unlimited liability [Section 25]

Every partner is liable jointly with all the other partners and also severally means separately, to
third parties for all acts of the firm done while he is a partner. The third party may take legal action
for non-payment of a debt or losses incurred as a result of a breach of contract against:
 all the partners jointly, or
 any individual partner.
The liability of all the partners is not only joint and several but is also unlimited.
Example 38: Duty to be liable jointly and severally – unlimited liability

Babar, Chandio and Dilawer are in partnership. Babar purchases equipment for the partnership
business. The equipment itself cost Rs. 20,000 and the installation costs were Rs.15,000. There is
a dispute with the supplier, and the firm refuses to pay the installation costs. The supplier decides
to sue for the unpaid Rs.15,000.
If the supplier succeeds in his action, all the partners will be liable jointly for the Rs.15,000 liability.
If the dispute goes to court, the supplier can either:
 sue all three partners jointly, or
 he can sue any individual partner, Babar, Chandio or Dilawer. If he chooses to sue Babar
personally, and succeeds with his claim, Babar will be required to pay the supplier. It will then
be for Babar to obtain from his partners Chandio and Dilawer their share of the liability that
they now owe.
Duty to act within authority [Section 19]

Every partner is bound to act within the scope of his actual or apparent authority. Where he
exceeds the authority conferred on him and the firm suffers a loss he shall have to compensate
the firm for any such loss, unless the other partners ratify i.e. accept such acts.
Example 39: Duty to act within authority

Sajid, Majid and Wajid are partner in a firm. By an agreement, they decided that no partner would
have authority to sell goods of the firm above the value of Rs. 50,000/- without the consent of other
partners. Sajid sold goods worth Rs. 70,000/- on credit without consulting other partners. The
customer defaulted. Sajid has to compensate the firm for loss caused due to him exceeding his
authority. However, Majid and Wajid may ratify his act and in that case the firm shall bear the loss.
Duty in case of emergency [Section 21]

It is the duty of the partner to do all such acts for the purpose of protecting the firm from loss as
would be done by a person of ordinary care, in his own case acting under similar circumstances.
He can even exceed his authority in order to save the firm from any loss.

Wajid, Yasir and Zahid are partner in a firm. By an agreement, they decided that no partner would
partners. Owing to a sudden slump in the market, the prices crashed. Yasir, in order to save the firm
from loss, sold all the stock worth Rs. 5,000,000 without consulting any other partner. Such an act
would bind the firm.

Business Law

Jamal, a partner receives goods at Karachi for being sent to a purchaser at Lahore. Jamal may sell
the goods at Karachi, if the goods will not bear the journey to Lahore without spoiling.
2.2 Qualified duties of partner

The qualified duties of a partner can be changed by an agreement amongst the partners. Unless,
otherwise agreed by the partners, every partner has the following duties:
Duty to attend diligently to his duties [Section 12]
Every partner is bound to attend diligently to his duties in the conduct of the business.
Example 42: Duty to attend diligently to his duties

Badal and Chand will not take any active part in management. Aftab must attend diligently to his
duties. This duty does not apply to Badal and Chand as they are silent partners according to
agreement.
Duty not to claim remuneration [Section 13(a)]

A partner is not entitled to receive remuneration for taking part in the conduct of the business. It is,
however, usual to allow some remuneration to the working partners provided there is a specific
agreement to that effect.
Example 43: Duty not to claim remuneration

Badal and Chand will not take any active part in management. Aftab is not entitled to remuneration
for his work unless specifically agreed by the partners.
Duty to contribute to the losses [Section 13]

The partners are bound to contribute to the losses sustained by the firm. An agreement to share
profits may imply an agreement to share losses also.
Example 44: Duty to contribute to the losses

the ratio of 3:2 but there is no express provision regarding sharing of loss. The agreement implies
that they will share losses in the ratio of 3:2 as well.
Duty to indemnify for wilful neglect [Section 13]

Every partner is under a duty to indemnify the firm for any loss caused to it by his wilful neglect
(i.e. failure to perform a duty or to do something which the partner should have done) in the conduct
of the business of the firm.
Example 45: Duty to indemnify for wilful neglect

Habib and Tanveer are partners in a firm. Habib was entrusted with monitoring inventory levels to
avoid stock shortages on weekly basis. Habib neglected the work for many months due to which
the firm suffered the loss. Habib must compensate the firm for loss caused due to his neglect.
Duty to use firm’s property exclusively for the firm [Section 15]
It is the duty of every partner to use the property of the firm exclusively for the purposes of the
business. No partner should use partnership property for his personal benefit.
Example 46: Duty to use firm’s property exclusively for the firm
Abid and Sajid are partners in a firm. Abid took the firm’s printer and laptop to his home for the
use of his family members till they were not useable anymore. Abid must not have used partnership
property for his personal benefit and must compensate the firm.

Duty to account for personal profits derived [Section 16(a)]

A partner must ‘account to the firm’ for any benefit obtained, without the consent of the other
partners, from any transaction involving the partnership, the partnership property, the partnership
name or the partnership’s business connection. In other words, if a partner uses the partnership
property, name or business connections to make a secret profit (a personal profit that the other
partners do not know about), the other partners can claim those profits for the partnership.
Example 47: Duty to account for personal profits derived

Tom and Jerry are in partnership. The partnership purchased an item of equipment costing
Rs.30,000. It was discovered later that the equipment had actually been purchased by Tom for
Rs.18,000, and Tom had re-sold it to the partnership without revealing that he was the owner of
the property.
In this case, since the other partner did not know that Tom had made a personal profit from the
transaction with the partnership, he can claim successfully that Tom should hand over to the
partnership the Rs.12,000 profit that he made.
If Tom had informed Jerry in advance that he was the owner of the equipment and intended to keep
the profit himself, and if Jerry agreed to this, Tom would have been able to keep all the profit for
himself.
Duty not to compete with the business of the firm [Section 16(b)]
Similarly, if a partner competes in business (as in the case of personal profit) with the partnership,
without the consent of the other partners, he is liable to account to the partnership for all the profits
that he earns from the competing business.
Example 48: Duty not to compete with the business of the firm
Azam, Babar, Yasir and Zahid are in partnership. Without informing the other partners, Zahid sets
up a sole trader’s business in competition with the partnership, and makes a profit of Rs. 50,000
by either, using firm name or property or connections of the firm. When the other partners find out
what Zahid has been doing, they can require Zahid to account to the partnership for the profits he
has made while operating in competition (and hand over the Rs. 50,000 to the partnership).
Duty not to assign his interest [Section 29]

No partner can assign or transfer his partnership interest to any other person so as to make him a
partner in the business without the consent of all other partners. He can, however, assign his share
of the profit and his share in the assets of the firm but the transferee shall not have any right to
interfere in the conduct of the business during the continuance of the firm.
Example 49: Duty not to assign his interest

Azam and Babar are partners in a firm. Azam wants to make his son, Wahab, partner in the firm in
his place. He cannot do so unless Babar also agrees to this.
2.3 Rights of partner

Right to take part in the conduct of the business [Section 12]
Every partner irrespective of the amount of capital contribution has an inherent right to take part in
the conduct of the business of the firm. Although one may agree not to participate but right of
participation should be available to each partner.
Example 50: Right to take part in the conduct of the business

Badal and Chand will not take any active part in management. The right to take part in
management is available to all of them, it is just that Badal and Chand agreed not to participate
and become silent partners.

Business Law
Right to be consulted [Section 12]

Every partner has the right to be consulted before any matter is decided. Any difference arising as
to ordinary matters connected with the business may be decided by a majority of the partners in
good faith but no change may be made in the nature of the business without the consent of all the
partners.
Example 51: Right to be consulted

Azam, Babar, Yasir and Zahid are active partners in a partnership. Azam wants to open a bank
account in ABC Bank for partnership business. However, Zahid is of the opinion that they should
have an account in XYZ Bank. The matter must be decided by the decision of majority of the
partners.
Example 52: Right to be consulted

Azam, Babar, Yasir and Zahid are active partners in a partnership. Babar, Yasir and Zahid want to
change the nature of business from retailer of yarn to manufacturer of sugar but Azam does not
agree. Unless all the partners agree, nature of business cannot be changed.
Right to have access to the books [Section 12]

Every partner has a right to have access to and to inspect and copy any of the books of the firm.
Example 53: Right to have access to the books

Badal and Chand will not take any active part in management. Badal and Chand (and also Aftab)
have right to access and inspect books of accounts of the firm.
Right to share the profits [Section 13]

In the absence of a contract to the contrary every partner has a right to share profits equally earned
by the firm.
Example 54: Right to share the profits

Adeel and Kashif started a partnership business by contributing Rs. 5 million and Rs. 7 million
respectively. However, they did not decide the profit sharing ratio. They will share profit equally.
Right to interest on capital [Section 13]

No partner is allowed to receive any interest on capital as a general rule because a partner is not
a creditor of the firm. Interest on capital is allowed only when agreed among the partners.
Where a partner is entitled to interest on the capital subscribed investment by him such interest
will be payable out of the profits, earned by the firm.
Example 55: Right to interest on capital

respectively and agreed to share profits in the ratio of 3:2. They did not decide anything regarding
interest on their respective capital. Kashif demands 10% interest should be given by the firm to
both the partners. In absence of specific agreement, there shall be no interest on capital.
Right to interest on advances [Section 13]

Where a partner makes for the purpose of the business, any payment or advance beyond the
amount of capital he has agreed to subscribe, he is entitled to interest on it at the rate of 6% per
annum or as agreed upon.
Example 56: Right to interest on advances

respectively and Adeel also advance Rs. 1 million to the firm as loan. They did not decide anything
regarding interest on this loan. Adeel demands 10% interest should be given by the firm to him on
this loan. In absence of specific agreement, interest @6% shall be paid to Adeel on his loan to the
firm.

Right to indemnity [Section 13]

Every partner has a right to claim indemnity from the firm in respect of payments made or liabilities
incurred by him:
 In the ordinary and proper conduct of the business and
 In doing such act, in an emergency, for the purpose of protecting the firm from loss, as would
be done by a person of ordinary prudence, in his own case, under similar circumstances.
Example 57: Right to indemnity

Saima and Naima are partners in a firm. Saima paid insurance premium from her own pocket in
order to protect firm’s inventory when there was chance of damage by rain water. She also paid for
shelves to keep the inventory safe. She is entitled to be reimbursed by the firm.
Right to retire [Section 32]

A partner has a right to retire.
 With the consent of all the partners or
 In accordance with an express agreement between the parties or
 Where the partnership is at will, by giving notice in writing to all the other partners of his
intention to retire.
Example 58: Right to retire

Azam, Babar, Yasir and Zahid are partners in a partnership. According to partnership deed, every
partner shall retire at the age of 65 years. Zahid has just turned 65 years old. He will be retired in
accordance with express agreement between the partners.
Right of outgoing partner to share in the subsequent profits [Section 37]

Where a partner has died or has ceased to be a partner by retirement, expulsion, insolvency or
any other cause, the surviving or continuing partners may carry on the business with the property
of the firm without any final settlement of accounts as between them and the outgoing partner. In
such a case in the absence of a contract to the contrary, legal representative of the deceased
partner or the outgoing partner, is entitled at his option to:
 Such share of the profits as in proportionate to his share in the property of the firm or
 Interest at the rate of 6% on the amount of his share in the property of the firm.
Example 59: Right of outgoing partner to share in the subsequent profits

Azam, Babar, Yasir and Zahid are partners in a partnership. Babar died on 1st May when he had
20% share in capital and in profits, however, remaining partners continued the business. The
accounts are being settled with legal representatives of Babar on 30th June. The legal
representative are entitled to profits upto 30 th April according to Babar’s share of 20%. For
subsequent profits from 1 May to 30 June, they may choose either 20% share of profit or 6%
interest on the capital of Babar.
Rights after reconstitution of firm

Where a change occurs in the constitution of a firm or a firm constituted for a fixed term continues
to carry on business after the expiry of that term, the mutual rights and duties of the partners in the
reconstituted firm remain the same as far as may be possible, as they were immediately before the
change
Example 60: Rights after reconstitution of firm

Azam, Babar, Yasir and Zahid are partners in a partnership sharing profit and losses equally. Zahid
retired and others continued the business. In reconstituted firm, Azam, Babar and Yasir shall share
the profit and losses equally too, unless otherwise agreed.

Business Law
2.4 Mutual Rights and Liabilities [Section 13]

Partners have the following mutual rights and liabilities which are subject to contract between them:
1. Duty to work without remuneration
2. Rights to share profits and losses equally
3. Right to interest on capital
4. Rights to interest on subsequent advance
5. Right to indemnity
6. Duty to indemnify for wilful neglect
These have been discussed earlier.
Example 61: Mutual Rights and Liabilities

Badar, Nazar and Zafar agreed to form a partnership. The partnership deed, inter-alia, provided that
all the three shall share the profits equally. Afterwards they carried on the partnership business for
many years, Badar receiving one-half of the net profits and the other half being equally divided
between Nazar and Zafar, to which Nazar and Zafar never objected. The partnership developed
some differences and as such Nazar and Zafar file a suit for their share of profits for the past years
on the basis of the partnership deed. Nazar and Zafar’s suit is not maintainable because by
accepting profits for past many years in a ratio different from the agreed ratio they have impliedly
consented to the variation in the contract (i.e. partnership deed).
2.5 Partnership property [Section 14]

Subject to contract between the partners, the property of the firm includes:
 All property originally brought into the common stock of the firm
 All rights or interest in the property originally so brought
 All property acquired, by purchase or otherwise, by or for the firm and all rights and interest
in any property so acquired and
 Goodwill of the business of the firm
Note
 Unless, any contrary intention appears any property purchased with partnership money
without other partners consent will be deemed to be partnership property.
Goodwill
Goodwill is an accounting concept meaning the value of an intangible asset which has a
quantifiable value in a business. An example would be the reputation the firm enjoys with its
customers. This reputation enables the firm to earn more than the normal profits earned by the
business as a whole.
Goodwill can be thought of as the value of the business as a whole less aggregate value of
identifiable net assets.
Example 62: Partnership property

Azam, Babar and Careem are partners in a business. They buy a property in the name of fictitious
person with the money of the partnership. The property is a partnership property.

Noman and Usman are partners. Noman buys shares from stock exchange in his own name with
the monies and on account of the firm. The value of shares subsequently increases by considerable
amount. Noman claims that shares are his personal property. The shares are partnership property.


Sadia and Rabia are partners. Sadia buys land with partnership money, for her sole benefit.
Thereafter, Sadia debits herself in the firm books and becomes a debtor to the firm for the amount
of the purchase money. The value of land increases subsequently by a considerable amount. Rabia
claims that the said land is property of the firm. The land is not partnership property, because there
was clearly a contrary intention.

Arslan, a partner in a firm, buys shares of a company in his own name, without the authority of the
other partners, but with the money and on account of the firm. The shares may deemed to be
partnership property.
Example 66: Personal profits earned by partners

Question: Sohail, Talha, Umair & Co., a partnership concern is engaged in trading of cloth. The firm
bought a plot of land from Shining Star Limited. After some time Talha and Umair on their own
account bought three more plots of land in the same locality and made good profits. Sohail on
becoming aware of such profits sued Talha and Umair for his share.
Under the provisions of Partnership Act 1932, explain whether Talha and Umair are liable to share
such profits with Sohail.
Answer:
No, Talha and Umair are not liable to share such profits with Sohail as this transaction was not
within the scope of the partnership.
Subject to the contract between the partners, the partner shall account for that profit and pay it to
the firm, which:
(a) he derives for himself, from any transaction of the firm, or from the use of the property or
business connection of the firm or the firm’s name; or
(b) he made for himself, from carrying on any business of the same nature as and
competing with that of the firm.
Example 67: Right of outgoing partner to share subsequent profits

Question: Obaid, Raheel and Pervez were partners in a firm. On September 1, 2009 Pervez retired
from the partnership. The remaining partners continued the business, with the property of the firm,
without final settlement of accounts as between them and Pervez.
In the light of the Partnership Act, 1932, describe the rights of Pervez, in the above circumstances.
Answer:
In the absence of a contract to the contrary, Pervez has an option either:
(a) to claim such share of the profits of the firm, earned after he ceased to be a partner, as
may be attributable to the use of his share of the property of the firm; or
(b) to claim interest at the rate of six percent per annum on the amount of his share in the
property of the firm.

Business Law
Example 68: Mutual rights and liabilities of partners

Question: Rafiq, Bari and Furqan have decided to establish a partnership business for trading in
medical equipment. In the absence of any express contract, advise them of their mutual rights and
liabilities under the provisions of the Partnership Act, 1932.
Answer:
In the absence of any express contract:
(i) every partner has a right to take part in the conduct of the business;
(ii) every partner shall have the right to express his opinion before a matter is decided. Any
difference arising as to ordinary matters connected with the business may be decided by
a majority of the partners, but no change may be made in the nature of the business
without the consent of all the partners;
(iii) every partner has a right to have access to and to inspect and copy any of the books of the
firm;
(iv) a partner is not entitled to receive remuneration for taking part in the conduct of the
business;
(v) the partners are entitled to share equally in the profits earned and shall contribute equally
to the losses sustained by the firm;
(vi) where a partner is entitled to interest on the capital subscribed by him such interest shall
be payable only out of the profits;
(vii) a partner making, for the purposes of the business, any payment or advance beyond the
amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of
six percent per annum;
(viii) the firm shall indemnify a partner in respect of payments made and liabilities incurred by
him:
 in the ordinary and proper conduct of the business, and
 in doing such act, in an emergency, for the purpose of protecting the firm from loss, as
would be done by a person of ordinary prudence, in his own case, under similar
circumstances; and
(ix) a partner shall indemnify the firm for any loss caused to it by his wilful neglect in the
conduct of the business of the firm.
Example 69: The property of the firm

Question: Kashif, Irfan and Shujaat are partners in a firm. Irfan bought a shop in his own name. He
issued a cheque from the partnership account and debited his account with the purchase price. He
rented out the shop and credited the receipts of rent in his capital account. Kashif has objected to
this practice and asked Irfan to register the shop in the firm’s name contending that the shop is
partnership’s property. Irfan disagrees.
Explain what constitutes partnership property under the Partnership Act, 1932 and whether the
shop is partnership property or not.
Answer:
Subject to the contract between the partners, the property of the firm includes:
 all property and rights and interests in property originally brought into the stock of the firm
or
 all property acquired by purchase or otherwise, by or for the firm or for the purposes and in
the course of the business of the firm.
 the goodwill of the business.
 property and rights and interests in property acquired with money belonging to the firm
unless the contrary intention appears.
The shop is not property of the firm as Irfan has bought it with the firm’s money and by debiting it
in his account, he showed his intention of taking the money as loan.

Example 70: Property of the firm

Question: In a above partnership business, Rufi intends to acquire a plot of land for the firm with
his own money. However, he is not certain whether the plot would be considered as partnership
property. Under the provisions of the Partnership Act, 1932 advise Rufi as what is considered to be
included in the partnership property and how it is to be applied.
Answer:
Subject to contract between the partners, the property of the firm includes:
 All property originally brought into the common stock of the firm;
 All rights or interest in the property originally so brought;
 All property acquired, by purchase or otherwise, by the firm or for the firm and all rights
and interest in any property so acquired; and
 Goodwill of the business of the firm;
 Unless, any contrary intention appears any property purchased with partnership money
with or without other partners consent will be deemed to be partnership property.
 Therefore, the plot of land which Rufi intends to acquire for the firm with his own money
shall become firm’s property only if partners intend to make it so.
Application of the property of the firm:

Subject to contract between the partners, the property of the firm shall be held and used by the
partners exclusively for the purposes of the business.
Example 71: Interest to be received by each partner

Question: On 1 July 2016 Abid, Rizwan and Salman started a partnership business and contributed
Rs. 200,000 each towards the firm’s capital. They also agreed to share profits in equal proportion.
Abid, in addition to his capital contribution, paid Rs. 100,000 to one of the suppliers as a security
deposit. All the partners are entitled to interest at the rate of 8% on their capital. However, during
the year, the firm incurred a loss of Rs. 80,000.
Under the provisions of the Partnership Act, 1932 state the amount of interest, if any, payable to
each partner.
Answer:
Where a partner is entitled to interest on capital such interest is required to be paid only out of
profits of the firm. During the year, since the firm has incurred a loss, all the partners are not entitled
to receive any interest on their capital. However, any partner making any payment, for the purpose
of the business, beyond the amount of his capital contribution, is entitled to interest thereon at the
rate of 6% per annum. Therefore, Abid is entitled to receive Rs. 6,000 on the amount paid as a
security deposit.
Example 72: Personal profits earned by partners

Question: Gul, Raza and Sami are partners in GRS Garments. Raza discovered that a supplier MP
offers reasonable rates for consumables stores and put forth a resolution that MP should be
included in the firm’s list of suppliers. MP is owned by Gul and managed by his brother but Gul did
not disclose this fact. When Raza and Sami became aware of the fact, they asked Gul to share with
them the profits earned by MP on transactions with GRS. Under the provisions of the Partnership
Act, 1932 discuss whether Gul is bound to share the profits as demanded by Raza and Sami.
Answer:
Subject to contract between the partners, if Gul had derived any profit for himself from any
transactions with the firm then Gul shall account for that profit and pay it to the firm. A partner has
duty to give full information to the other partners, in relation to everything affecting the partnership.

Business Law

Question: Bader and Yaseen established a distribution agency for supplying low cost medicines to
hospitals. Yaseen, by way of a verbal agreement, allowed the agency to use his ancestral land for
the business of the agency. Bader purchased a delivery van in his own name with partnership
money. Bader wants to repay the amount to the partnership and therefore a receivable has been
recorded in the partnership books.
Under the provisions of the Partnership Act, 1932 describe whether the above assets would be
considered to be the partnership property.
Answer:
Land provided by Yaseen:
Subject to contract between the partners, the land would not be treated as the partnership property.
It will become the partnership property only if the partners show an intention to make it so.
But since Yaseen, by way of an agreement, brought the property only for the use of the partnership,
the mere use of such land by the partnership would not make the land part of the partnership
property.
Delivery van:
In this case, van does not constitute partnership property because recording of receivable in
partnership books shows that the van was not acquired for the partnership.
Example 74: Mandatory duties of partners

Question: Under the provisions of the Partnership Act, 1932 state the mandatory duties of partners
which cannot be modified by an agreement amongst them.
Answer:
Following are the mandatory duties of a partner that cannot be changed by an agreement amongst
the partners:
 Duty to be just and faithful.
 Duty to carry on business to the greatest common advantage.
 Duty to render true accounts.
 Duty to provide full information.
 Duty to indemnify for loss caused by fraud.
 Duty to be liable jointly and severally – unlimited liability.
 Duty to act within authority.
 Duty in case of emergency.
Example 75: Determination of rights and duties of partners by contract between them
Question: Aftab, Rehan and Bali were partners in a law firm. The partnership deed, among other
things, provided that the profits or losses of the firm would be shared equally among the partners.
The firm continued its business for many years with Aftab receiving fifty percent share in the net
profit and Rehan and Bali each sharing twenty-five percent of the net profit. Rehan and Bali never
objected to this arrangement. Later on, partners developed some differences and Rehan and Bali
filed a suit against Aftab for the recovery of their share in profits on the basis of partnership deed.
Under the provisions of the Partnership Act, 1932 discuss whether Aftab would succeed in
defending the suit filed against him by Rehan and Bali.
Answer:
The contract between the partners may be varied by consent of all the partners, and such consent
may be expressed or may be implied by a course of dealing.
In view of above, the suit filed by Rehan and Bali against Aftab is not maintainable because by
accepting profits for the past many years in a ratio different from the agreed ratio they have
impliedly consented to the variation in the contract. i.e. partnership deed.

Example 76: Mutual rights and liabilities of partners and the firm
Question: Saima, Ahsan and Bari are partners in a law firm. Bari received an advance of Rs.
150,000 from one of firm’s clients for defending a law suit. Bari, without proceeding on client’s
request and informing other partners about the receipt of the amount, utilised the money for
personal use. Discuss the rights and liabilities of partners and that of the firm with regard to Bari’s
act.
Answer:
Bari has clearly exceeded his authority. However, Saima and Ahsan cannot repudiate Bari’s
transaction with the client. Bari’s act of receiving Rs. 150,000 from the client, for defending them
against a law suit, was done to carry on, in the usual way, business of the kind carried on by the
firm and such act binds the firm.
Further, where a partner acting within his apparent authority receives money from a third party and
misapplies it, the firm is liable to make good the loss. As a result, each of the partners is jointly and
severally liable to the client for all the acts of the firm done while they are the partners.
Similarly, where by the wrongful act or omission of Bari (not defending the client against the law
suit), a loss or injury is caused to the client or any penalty is incurred, the firm is liable to the same
extent as the partners are liable.
However, Bari would be personally liable to the other partners for Rs. 150,000 and shall indemnify
the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm.
Further consequence of his breach of duty not to act in any way prejudicial to the partnership
business; the partnership could be wound up.

Business Law
3 RELATIONS OF PARTNERS TO THIRD PARTIES

Section overview
 Agent of the firm

 Authority of partners
 Liabilities of partner and firm
 Holding out
 Rights of transferee of a partner’s interest
 Minor’s admission to the benefits of partnership
3.1 Agent of the firm [Section 18]

A partner is the agent of the firm for the purpose of the business of the firm.
Example 77: Agent of the firm

Ali, Bilal and Chand are partners in a business. Dawood an outsider deals with the firm through Ali.
As between Ali and Dawood, Ali is the principal. But as between Ali, Bilal and Chand, Ali is also the
agent of Bilal and Chand. As such Ali, Bilal and Chand can all sue Dawood. Dawood can also sue
Ali, Bilal and Chand. Furthermore Ali is accountable to Bilal and Chand because he is an agent of
Bilal and Chand.
Mutual agency relationship in case of a firm of Ali, Bilal and Chand
An act by: Ali Bilal Chand
Who is an agent Ali Bilal Chand

The contract is binding on: Ali, Bilal and Chand
.
3.2 Authority of partners

The authority of a partner means the capacity of a partner to bind the firm by his act. Since the
partnership is not a legal person, a partner acts as an agent for the other partners. The authority
of a partner may be actual or implied.
Actual authority
The authority of each partner to take decisions for the business, and enter into transactions with
other parties, may be specified in the partnership agreement. Since the partnership agreement is
a contract, its terms are the terms of a contractual agreement between the partners.
Example 78: Actual authority

Traders. They decided to share profits equally and the business will be managed by Aftab only. On
first day, on behalf of Solar Traders, Aftab ordered 100 light bulbs on credit from Tanveer, a
wholesaler of electric products. Aftab had actual authority to enter into contract with Tanveer.
Implied authority [Section 19]

The act of a partner done by him:
 as an agent of the firm
 in the course of business of the firm
 in the name of the firm, or in any other manner expressing an intention to bind the firm.
An authority to bind the firm is known as implied authority of a partner.

In a trading partnership, all the partners have the implied authority to borrow money on the
credit of the partnership, and a lender is under no particular obligation to investigate the purpose
of the loan. This means that unless a lender has knowledge that a partner does not have the actual
authority to borrow on behalf of the partnership, he can rely on the partner’s implied authority.
Every partner within the scope of his implied authority may bind the firm by the following acts:
 Buying and selling good, on behalf of the firm and giving valid receipts for them
 Receiving payments of the debts due to the firm and giving valid receipts or discharge for
them
 Contracting debts and paying debts on behalf of the firm
 Settling accounts with persons dealing with the firm
 Employing servants for the partnership of the firm
 Drawing cheques, accepting or endorsing bills of exchange and promissory notes in the
name of the firm
 Pledging movable property of the firm
 Suing on behalf of the firm and defending suits in the name of the firm

Jazib and Ghalib are partners in a firm. The partnership deed restricts the implied authority of Jazib
to borrow money in the name of firm. Jazib borrows money from Sahar Bank Limited (SBL). The
firm of Jazib and Ghalib is liable to SBL as SBL did not know of restriction.

Azam and Babar are partners. Azam with the intention to bind the firm, goes to a shop and
purchases certain articles on behalf of the firm which are generally used in the partnership
business. Here firm will be liable for the price of the goods because Azam acted within his authority.

Naima and Raima are partners in a cash business. Naima orders in firm’s name and on the firm’s
letter-head to be supplied with two bags of wheat at her residence. The firm is not liable to pay
because Naima’s act in question is beyond the scope of her implied authority for which the firm
cannot be bound.

Imran and Kamran are working in partnership as chartered accountants. Sajid gives Rs 90,000 to
Imran for investment in some good security. Imran does not tell anything to his co-partner Kamran
about it and misappropriates the money. Sajid files a suit on the firm for the recovery of his Rs
90,000. Sajid will not succeed. The firm cannot be made liable because it is no part of the ordinary
business of chartered accountants to receive money to be invested at their direction. Of course an
action will lie against Imran individually.
Example 83: Implied Authority

Adeel, a partner in the firm of chartered accountants, borrows money and executes a promissory
note in the name of the firm. The other partners won’t be liable on the note because it is not part
of the ordinary business of chartered accountants to draw, accept or indorse a promissory note.
Statutory restrictions on the implied authority of a partner [Section 19(2)]

The restrictions imposed by law are statutory restrictions and is applicable against the whole world
whether a particular person dealing with the firm has knowledge of it or not e.g. about the name of
the firm, etc.

Business Law
Following acts are not included in the implied authority of a partner unless there is any usage or
custom of trade:
 Arbitration: Submit a dispute relating to the business of the firm to arbitration
 Bank account: Open a banking account on behalf of the firm in his own name
 Compromise: Compromise or relinquish any claim or portion of a claim by the firm
 Withdrawal of suit: Withdraw a suit or proceeding filed on behalf of the firm
 Acceptance of liability: Admit any liability in a suit or proceeding against the firm
 Acquisition: Acquire immovable property on behalf of the firm
 Transfer: Transfer immovable property belonging to the firm
 Partnership: Enter into partnership on behalf of the firm.
Example 84: Statutory restrictions on the implied authority of a partner

Amjad, Babar and Zahid are partners. Zahid an active partner signed a land transfer deed on behalf
of firm (without authorisation from other partners) to improve cash flows of the firm. Such transfer
is not valid, a partner does not have implied authority to transfer immovable property belonging to
firm.
Restrictions by partnership deed [Section 20]

A restriction which is specifically written in partnership deed is effective only against the person
dealing with the firm having knowledge of it.
Example 85: Restrictions by partnership deed

The partnership deed of a trading firm placed a restriction on the authority of the partners to sell
the goods. One of the partners sells the good. If the third party did not know of the restriction the
firm is liable toward such third party and if the third party know of the restriction the firm will not
be liable.
Ratification of actions taken by a partner outside his actual authority

When a partner exceeds his authority, that is act outside his actual authority, the other partners
may approve such unauthorized act with retrospective effect. This is known as ratification.
By giving their retrospective approval to the contract made by another partner, even though it was
outside the partner’s actual authority at the time, the partners can remove any questions about
whether implied authority existed or whether the other party knew that the partner did not have the
actual authority to make the contract.
Example 86: Ratification of actions taken by a partner outside his actual authority
Sajid, Majid and Wajid are partner in a firm. By an agreement, they decided that no partner would
partners. Sajid sold goods worth Rs. 70,000/- on credit without consulting other partners. The
customer defaulted. Sajid has to compensate the firm for loss caused due to him exceeding his
authority. However, Majid and Wajid may ratify his act and in that case the firm shall bear the loss.
3.3 Liabilities of partner and firm

Liability of a partner for acts of a firm [Section 25]
In order to make a partner liable for any act of the firm, the same must have been done while he
was a partner. The liability of the partner is both joint and several, so that the creditor may compel
any one or more of the partners to discharge the whole of the debts of the firm.

Example 87: Liability of a partner for acts of a firm

Babar, Saleem and Dawood are in partnership. Babar purchases equipment for the partnership
business. The equipment itself cost Rs. 20,000 and the installation costs were Rs. 15,000. There
is a dispute with the supplier, and the firm refuses to pay the installation costs. The supplier decides
to sue for the unpaid Rs. 15,000.
If the supplier succeeds in his action, all the partners will be liable jointly for the Rs. 15,000 liability.
If the dispute goes to court, the supplier can either:
 sue all three partners jointly, or
 he can sue any individual partner, Babar, Saleem or Dawood. If he chooses to sue Babar
personally, and succeeds with his claim, Babar will be required to pay the supplier. It will then
be for Babar to obtain from his partners Saleem and Dawood their share of the liability that
they now owe.
Liability of the firm for wrongful acts of a partner [Section 26]

Where by the wrongful act or omission of a partner acting in the ordinary course of the business of
a firm, loss or injury is caused to any third party or any penalty is incurred the firm is liable to the
same extent as the partner.
In case of fraud, although the firm is liable to the third party for loss caused to the third party by
fraud committed by a partner but as between partners same must be borne by the partner
committing the fraud and cannot be shared among all the partners.
Example 88: Liability of the firm for wrongful acts of a partner

SBMQ is a partnership firm in which Shabbir, Bashir, Muneer and Qadeer are partners. Shabbir, the
only active partner, knowing the goods were stolen ones, purchased and sold them in the name of
the firm. All the partners (including sleeping partners) are liable to the owner of goods for the ‘tort
of conversion’.
Liability for misapplication by partners [Section 27]

 A partner acting within his apparent authority receives money or property from a third party
and misapplies it or
 A firm in the course of its business receives money or property from a third party, and the
same is misapplied by any of the partners while it is in the custody of the firm, the firm is
liable to make good the loss.
Example 89: Liability for misapplication by partners

Arif, Basit and Qasim are partners in an instalment sales business. Arif asked one of the customer
to deposit a security worth Rs. 100,000 in order to purchase goods on instalments. Subsequently,
Arif misappropriated the security and absconded. The other partners will be liable for the
misappropriation as security was given to Arif while he was acting within his scope of his apparent
authority.
Liability to indemnify for wilful neglect [Section 13]

Every partner is under a liability to indemnify the firm for any loss caused to it by his wilful neglect
(i.e. failure to perform a duty or to do something which the partner should have done) in the conduct
of the business of the firm.
Example 90: Liability to indemnify for wilful neglect
Habib and Tanveer are partners in a firm. Habib was entrusted with monitoring inventory levels to
avoid stock shortages on weekly basis. Habib neglected the work for many months due to which
the firm suffered the loss. Habib must compensate the firm for loss caused due to his neglect.

Business Law
Liability to share losses [Section 13]

The partners are bound to contribute to the losses sustained by the firm. An agreement to share
profits may imply an agreement to share losses also.
Example 91: Liability to share losses
the ratio of 3:2 but there is no express provision regarding sharing of loss. The agreement implies
that they will share losses in the ratio of 3:2 as well.
Liability to account for personal profits [Section 16(a)]

A partner must ‘account to the firm’ for any benefit obtained, without the consent of the other
partners, from any transaction involving the partnership, the partnership property, the partnership
name or the partnership’s business connection. In other words, if a partner uses the partnership
property, name or business connections to make a secret profit (a personal profit that the other
partners do not know about), the other partners can claim those profits for the partnership.
Example 92: Liability to account for personal profits
Tom and Jerry are in partnership. The partnership purchased an item of equipment costing
Rs.30,000. It was discovered later that the equipment had actually been purchased by Tom for
Rs.18,000, and Tom had re-sold it to the partnership without revealing that he was the owner of
the property.
In this case, since the other partner did not know that Tom had made a personal profit from the
transaction with the partnership, he can claim successfully that Tom should hand over to the
partnership the Rs.12,000 profit that he made.
If Tom had informed Jerry in advance that he was the owner of the equipment and intended to keep
the profit himself, and if Jerry agreed to this, Tom would have been able to keep all the profit for
himself.
Liability to account for profit of competing business [Section 16(b)]

If a partner competes in business (as in the case of personal profit) with the partnership, without
the consent of the other partners, he is liable to account to the partnership for all the profits that he
earns from the competing business.
Example 93: Liability to account for profit of competing business
Azam, Babar, Yasir and Zahid are in partnership. Without informing the other partners, Zahid sets
up a sole trader’s business in competition with the partnership, and makes a profit of Rs. 50,000
by either, using firm name or property or connections of the firm. When the other partners find out
what Zahid has been doing, they can require Zahid to account to the partnership for the profits he
has made while operating in competition (and hand over the Rs. 50,000 to the partnership).
Effect of admissions by a partner [Section 23]

Any admission or representation made by a partner is evidence against the firm if the following two
conditions are fulfilled:
 Such admission or representation must relate to the affairs of the firm and
 Such admission or representation must be made in the ordinary course of business.
Example 94: Effect of admissions by a partner
One of the partner of XYZ firm admitted in court that the firm has been involved in tax evasion.
Such admission by one partner is evidence against the firm.
Effect of notice to an active partner [Section 24]

Any notice to a partner operates as a notice to the firm if the following conditions are fulfilled:
 Such notice must relate to the affairs of the firm
 Such notice must be given to a working partner and not to a sleeping partner
 There must not be any fraud committed by the partner receiving the notice.

Example 95: Effect of notice to an active partner

Sajid, Abid and Majid are partners in a firm. Abid and Sajid are active partners and Majid is sleeping
partner. A legal notice was served by one of their customer to Sajid. Sajid did not tell other partners.
When the customer takes further legal action, Abid and Majid cannot plead ignorance of the notice
as it was served on one of active partners.
Example 96: Effect of notice to an active partner

Sajid, Abid and Majid are partners in a firm. Abid and Sajid are active partners and Majid is sleeping
partner. A legal notice was served by one of their customer to Abid for alleging that Abid committed
the fraud with the customer in ordinary course of business. The notice is not enough. The notice
must be served to partner who did not commit the fraud.
3.4 Holding out [Section 28]

Where a person
 Represents himself or
 Allows partners to do it, he is then estopped from denying the character he has assumed
and
 Upon the faith of which creditors may have acted.
Requirement
In order to render a person liable as a partner on the ground of estoppel or holding out:
Direct Representation
He must have by words spoken or written or by his conduct represented himself to be a partner.
Example 97: Direct Representation – partner by holding out
Paras represents to Rizwan that he is a partner in the firm of Arslan, Noman and Ali, while actually
he is not a partner. On the faith of this representation Rizwan gives credit to the firm. The firm
becomes insolvent subsequently. Rizwan can make Paras liable on the basis of holding out and
Paras is estopped from denying that he is a partner in the firm.
Indirect Representation
He must have knowingly permitted himself to be represented as a partner to the other person.
Example 98: Indirect Representation – partner by holding out
Tom, Anthony and Bred are partners in a firm. Leonardo, who is generally seen in the company of
Tom, Anthony and Bred, tells Kevin that he is also a partner in the firm. Richard, who overhears this
talk of Leonardo to Kevin and thinking Leonardo to be a partner of the firm, gives credit to the firm.
Richard can make Leonardo liable for the credit given to the firm on the basis of holding out
because for taking advantage of the doctrine of holding out it is not necessary that the
representation must be made directly to the person so giving credit.

Aamir and Baqir are partners in a firm. Zahid informs Yasir that he is also a partner in the firm of
Aamir and Baqir. Yasir conveys this information to his friend Kamran. Kamran, believing Zahid to
be a partner of the firm of Aamir and Baqir, supplies goods on credit to the firm. Can Kamran makes
Zahid liable for the payment of the price of the goods remaining unpaid? [Yes, Kamran can make
Zahid liable for the payment of the price under the doctrine of ‘holding out’ because Kamran has
acted on the faith of the representation while giving credit to the firm. For making the doctrine of
‘holding out’ applicable it is not necessary that the representation must be made directly to the
person so giving credit.].

Business Law

Anwar introduces Nadir to Zafar as his partner, when in fact he is not so, and Nadir keeps silence.
On the faith of representation Zafar gives credit to Anwar. Subsequently, Anwar becomes insolvent.
Zafar can make Nadir liable on the basis of holding out.
Knowledge of the third party
The other person must have acted on the faith of such representation and gives credit to the firm.
It does not matter whether the person representing himself or represented to be a partner does or
does not know that the representation has reached the other person giving credit.
Example 101: Knowledge of the third party
Amir tells Bilal (supplier) within the hearing of Qasim (partner) that he (Amir) is a partner in
partnership firm of Qasim. Qasim does not object to this statement of Amir. Later Bilal supplies
certain goods to Amir who pretends to act as partner with Qasim. Qasim will be liable to pay the
price. Qasim by keeping quiet had led Bilal to believe that Amir is a partner.
Example 102: Knowledge of the third party

Zamir, who is not a partner in the firm consisting of Rehman and Salman, represents to Anwar that
he is also a partner in the firm. Babar, who does not know of the representation, gives credit to the
firm of Rehman and Salman. Babar cannot make Zamir liable for the credit given to the firm on
the basis of holding out because he has not actually acted on the faith of the representation while
giving credit to the firm.
Applications of holding out partner [Section 34 & 35]
 Retiring partner
Where a retiring partner does not give a public notice of his retirement and the continuing
partners still use his name as a partner he will be personally liable on the ground of holding
out to third parties.
 A Minor on attaining majority
If a minor (who was admitted to the benefits of an existing partnership) after attaining majority
act as a partner without giving public notice, he will be liable as a partner by estoppel.
Example 103: Applications of holding out partner
A partnership firm consists of Salman, Noman, Zeeshan and Rehman. Rehman retires from the
firm, but fails to give public notice and his name continues to be used on letter heads. Is Rehman
liable to debts contracted subsequent to his retirement? Rehman is liable as a partner by holding
out to creditors who have lent on the faith of his being partner.
Exceptions of holding out
 Deceased partner
After a partner’s death if the business of the firm is continued in the old firm’s name the
continued use of that name or of the deceased partner’s will not itself makes his legal
representatives liable for any act of the firm done after his death.
 Insolvent partner
Where a partner is adjudicated as insolvent he ceases to be partner on the date on which
the order of adjudication is made whether or not the firm is dissolved. The estate of the
insolvent partner is not liable for any act of the firm and the firm is not liable for any act of
the insolvent.
Example 104: Exceptions of holding out
Rizwan, Ahmad, Ashraf and Tanveer are partners. An order is placed with Habib for supplying a
certain quality of goods to the firm on credit. Before Habib could supply the goods Tanveer died.
Habib supplied the goods after Tanveer’s death, being totally ignorant about the fact of the death.
Rizwan, Ahmad and Ashraf subsequently become insolvent. Habib cannot make Tanveer’s estate
liable for his debt. The debt accrues after the delivery of goods which has been made after Tanveer’s
death, and the estate of a decreased partner is not liable for debts of the firm contracted after his
death irrespective of no public notice of death.

3.5 Rights of transferee of a partner’s interest [Section 29]

A partner may transfer his interest in the firm by sale, mortgage or charge fully or partially.
Rights of Transferee
 He is entitled to receive the share of the profits of the transferring partner.
 On the dissolution of the firm or on retirement of the transferring partner he is entitled to
receive:
 the share of the assets of the firm to which the transferring partner is entitled.
 an account from the date of the dissolution for the purpose of ascertaining the share.
Disabilities of Transferee
 No status of a partner.
 Disability to interfere in the conduct of the business during the continuance of the firm
 Disability to require accounts.
 Disability to inspect the books of the firm.
 Disability to challenge the accounts of profits agreed to by the partners.
 Disability to sue for dissolution of the firm.
Example 105: Transfer of interest

Question: Tehram, Rahil and Zain are partners in TRZ Associates. Zain, after obtaining mutual
consent of all the partners, transferred his share of interest to Hatim. Hatim now wants to discuss
the future business strategy of the firm with Tehram and Rahil. In this regard, he has asked the
partners to provide him the firm’s cash flow forecast so that he can determine firm’s growth
potential for the next five years. Comment on Hatim’s entitlement to do the same.
Answer:
A transfer by a partner of his interest in the firm does not entitle Hatim to interfere in the conduct
of the business, or to require accounts, or to inspect the books of the firm, but entitles Hatim only
to receive the share of profits of Zain, and Hatim shall accept the account of profits agreed to by
the partners.

Question: Sameer, Fauzia and Sualat are partners in a firm. Fauzia transferred her interest in the
firm absolutely to her son Adil. In the light of the provisions of Partnership Act, 1932 would Adil be
considered a new partner in the firm? Also describe the rights and restrictions on Adil in view of
such transfer.
Answer:
Rights of transferee of a partner’s interest
Where a partner’s interest is transferred, the transferee does not become a partner and similarly
the transferor does not cease to be a partner. Therefore, Adil would not be considered as a partner
in the firm.
Rights of Adil:
Adil would be entitled only to receive the share of the profits of the firm to which Fauzia is entitled.
He would be bound to accept the account of profits agreed to by the partners.
Upon dissolution of the firm or, in case, if Fauzia ceases to be a partner, Adil would be entitled, as
against the remaining partners, to receive the share of the assets of the firm, to which Fauzia was
entitled and for the purpose of ascertaining that share he would be entitled to ask for the accounts
as from the date of the dissolution.

Business Law
Restrictions on Adil:
Adil would not be entitled, during the continuance of the partnership:
 to interfere in the conduct of the business; or
 to require accounts; or
 to inspect the books of the firm.

Question: Maqbool, Rufi and Sham are the partners in Zeeshan Builders (ZB), a firm engaged in the
business of constructing industrial and residential projects in Balochistan.
Sham is also the owner of a cottage industry in Quetta. Sham has obtained a long term loan for his
cottage industry from Dostana Bank Limited by transferring his interest in ZB to the bank by way of
a mortgage.
Under the provisions of the Partnership Act, 1932 describe the rights and disabilities, if any, of
Dostana Bank Limited in the above circumstances.
Answer:
Rights of Dostana Bank Limited:
Following rights are available to the bank:
(i) entitlement to receive the share of the profits of Sham (the transferring partner).
(ii) On the dissolution of the firm or on retirement of Sham the bank is entitled to receive:
 the share of the assets of the firm to which Sham is entitled.
 an account from the date of the dissolution for the purpose of ascertaining the share.
Disabilities of Dostana Bank Limited:

The bank shall not be treated as a partner in the firm and during the continuance of the partnership,
shall not be entitled, to:
 interfere in the conduct of the business of the firm.
 require accounts.
 inspect the books of the firm.
 challenge the accounts of profits agreed to by the partners.
 sue for dissolution of the firm.
3.6 Minor’s admission to the benefits of partnership [Section 30]

Since a minor is not capable of entering into a contract, a contract by or with a minor is void ab-
initio i.e. from the beginning. Since partnership is formed by a contract, a minor cannot enter into
a partnership agreement but with the consent of all the partners for the time being a minor may be
admitted to the benefits of partnership.
An analysis of the above provision highlights the following three conditions:
 Before admission of a minor there must be an existence of partnership
 There must be mutual consent of all the partners
 A minor can be admitted only to the benefits of partnership
Benefits of partnership include benefits, which the minor would enjoy if he was a major.
Example 108: Minor’s admission to the benefits of partnership

Musharaf enters into a partnership with Karzai, a minor, for the benefit of Karzai. The partnership
is not valid. There must be a partnership in existence before a minor can be admitted to its benefits.
Position of a minor before attaining majority

Rights
 Right to share property and profits of the firm as agreed by the partners
 Right to have access to accounts of the firm ONLY and not to the secret books
 Right not to be adjudged insolvent

Liabilities:
 Personally not liable i.e. limited liability.
 His share is liable for the acts of the firm.
Disabilities:
 No status of a partner.
 No suit against partners for profit and property except after disconnecting his relation with
the firm.
 Not entitled to have access to books other than accounts.
Position of a minor on attaining majority
On attaining majority the minor partner has to decide within six months whether he shall continue
in the firm or leave it.
These six months run from the date:
 of his attaining majority or
 when he first comes to know that he had been admitted to the benefits of partnership,
whichever is later.
Within this period he should give a public notice of his choice:
 to become or
 not to become a partner in the firm.
If he fails to give a public notice, he is deemed to have become a partner in the firm on the expiry
of the six months after obtaining majority.
Example 109: Minor admitted to benefits of partnership

Celina, a minor, was admitted to the benefits of a firm consisting of Angelina, Jennifer and Julia,
three adult partners. Within six months after attaining majority, Celina gives public notice that she
has become a regular partner. But Julia and Jennifer refuse to take her. Their refusal is not justified.
Celina becomes a full-fledged partner as she has elected to become a partner within six months of
her attaining majority, and other partners cannot refuse to take her as a partner.
Example 110: Minor admitted to benefits of partnership

Question: A, B and C, partners of a firm, admitted D, a minor to the benefits of the firm. D attained
majority on 6th March 2007. He became aware of the fact that he has been admitted to the benefits
of the firm on 16th August 2007. Being undecided about the situation he preferred to wait for some
time before announcing his decision about joining the firm.
On 27th February 2008, the firm suffered heavy losses due to an unforeseen event. A, B and C
informed D that on account of such losses, his capital in the firm has been reduced by 40%.
Discuss the rights and liabilities of D in the above situation.
Answer:
D becomes a partner in the firm after 6 months of the date on which he became aware of the fact
that he was entitled to the benefits in the firm i.e. on 16th February 2008. Therefore, he shall be
liable to share the losses of the firm, incurred thereafter. His failure to announce his decision will
have no bearing on the situation.
Where such person elects to become a partner
The following holds:
 Personal liability since the date of admission to the benefits of the firm
 Same share in the profits and property of the firm to which he was entitled as a minor.

Business Law
Where such person elects not to become a partner

The following holds:
 The status of a minor up to the date of public notice
 His share not liable for any act of the firm after the date of public notice
 Right to sue partners for share of the property and profits
Example 111: Minor’s admission to the partnership

Question: Rustum, Mahmood and Wali are partners in a firm. Wali wants to admit his sixteen year
old son Raghib as a new partner.
Under the provisions of the Partnership Act, 1932 can Raghib be admitted to the partnership
business? State the rights, liabilities and limitations of Raghib, if he is admitted to the partnership
business.
Answer:
Partnership is created by a valid contract. Since a minor is not capable of entering into a contract,
a contract by or with a minor is void ab-initio. Accordingly, a minor cannot be a partner in the firm.
However, a minor can be admitted to the benefits of partnership with the consent of all the partners
for the time being. i.e. before admission of a minor there must be an existence of partnership.
Rights, liabilities/limitations of Raghib ( minor):

The rights, liabilities and limitations of Raghib who has been admitted to the benefits of partnership
are governed by the following rules:
Rights:
(i) Right to share property and profits of the firm as agreed by the partners.
(ii) Right of inspecting and taking copies of accounts of the firms ONLY.
(iii) Right not to be adjudged insolvent.
Liabilities:
(i) Personally not liable to third parties for the debts of the firm i.e. limited liability.
(ii) His share is liable for the acts of the firm.
Limitations:
(i) No status of partner. The minor is not entitled to take part in the conduct of the business
of the firm.
(ii) No suit against partners for profit and property except after disconnecting his relation
with the firm.
(iii) Not entitled to have access to books other than accounts.
Example 112: Minor admitted to the benefits of partnership

Question: Wasim, Ahmed and Salman are partners in a firm. Salman died in a plane crash. Wasim
and Ahmed agreed to admit Salman’s minor son, Noman, to the benefits of the Partnership. Noman
attained majority on 6 June 2016. He became aware of the fact that he had been admitted to the
benefits of the Partnership on 16 July 2016.
Being undecided about joining the firm as a partner, he preferred to wait for some time.
On 10 January 2017, the firm suffered heavy losses due to a fire in one of its factories. Wasim and
Ahmed informed Noman that on account of losses, his entire capital has been wiped off and he is
required to contribute Rs. 100,000 to enable the firm to settle its liabilities.
Under the provisions of the Partnership Act, 1932 analyse the above situation and advise whether
Noman would be regarded as a partner in the firm. Also state his liabilities towards the losses, if
any.

Answer:
Noman would only be considered a partner in the firm when either he gives public notice of
becoming a partner, at any time within six months of the later of following dates:
 the date of his attaining majority; or
 the date of his obtaining knowledge that he had been admitted to the benefits of
partnership; or
If Noman fails to give such notice he shall become a partner on the expiry of the above six months.
i.e. 15 January 2017 in the given case. Since up to 10 January 2017, when the firm suffered heavy
losses, Noman’s status in the firm had not been determined, i.e. whether he is or is not a partner in
the firm, Noman would not be liable to pay additional Rs. 100,000 and would only be liable up to
the extent of his share in the firm.
Example 113: Liabilities

Question: Describe the liabilities of:
(a) a partner for the acts of the firm.
(b) the firm for wrongful acts of a partner.
(c) the firm for misapplication of money or property by a partner.
Answer:
Part (a) Liability of a partner for acts of the firm
Every partner is liable jointly with all the other partners and also severally for all acts of the firm
done while he is a partner.
Part (b) Liability of the firm for wrongful acts of a partner

Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of
a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty
is incurred, the firm is liable to the same extent as the partner.
Although the firm is liable to the third party for the loss caused to him (third party) by fraud
committed by a partner, but, as between the partners, the same must be borne by the partner
committing the fraud and cannot be shared among all the partners.
Part (c) Liability of firm for misapplication of money or property by a partner

The firm is liable to make good the loss where:
 A partner acting within his apparent authority receives money or property from a third party
and misapplies it, or
 A firm in the course of its business receives money or property from a third party, and the
money or property is misapplied by any of the partners while it is in the custody of the firm.
Example 114: Partner’s act not under implied authority

Question: The authority of a partner to bind the firm is called “Implied Authority.” List the acts which
cannot be exercised by a partner as his implied authority.
Answer:
In the absence of any usage or custom of trade to the contrary, the implied authority of a partner
does not empower him to:
(a) submit a dispute relating to the business of the firm to arbitration,
(b) open a banking account on behalf of the firm in his own name,
(c) compromise or relinquish any claim or portion of a claim by the firm,
(d) withdraw a suit or proceeding filed on behalf of the firm,
(e) admit any liability in a suit or proceeding against the firm,
(f) acquire immovable property on behalf of the firm,
(g) transfer immovable property belonging to the firm, or
(h) enter into partnership on behalf of the firm.

Business Law
Example 115: Doctrine of holding out

Question: Explain the concept of “Holding out” as described in the Partnership Act, 1932.
Answer:
If a person represents to the outside world by words spoken or written or by his conduct or by lending
his name, that he is a partner in a certain partnership firm, he becomes liable as a partner in that
firm to anyone who has on the faith of such representation granted credit to the firm, whether the
person representing himself or allowing himself to be so represented does or does not know that
the representation has reached the person so giving credit.
The doctrine of holding out or estoppel does not extend to where after a partner’s death the
business is continued in the old firm name the continued use of that name or of the deceased
partner’s name as a part thereof shall not of itself make his legal representative or his estate liable
for any act of the firm done after his death.
Example 116: Liability of a partner for acts of the firm

Question: Meher, Abid, Rani and Azra were partners in Abid Associates, a firm of town planners and
consultants. Bari Builders supply goods to Abid Associates on credit. Abid died on 5 January 2015.
Meher, Rani and Azra decided to continue the business in the old firm’s name. However, neither
the surviving partners nor the representative of Abid gave public notice to this effect.
Due to insolvency of a major client, Abid Associates was facing difficulty in making payment to Bari
Builders. When Bari Builders investigated the matter, they came to know about the death of Abid.
They have now filed suits for the recovery of outstanding balance, severally against Abid’s estate
and Meher, as the credit was extended on the faith of Abid and Meher.
In view of the provisions of the Partnership Act, 1932 explain whether Bari Builders are justified in
filing the above suits and would they succeed in recovering the outstanding amount under the above
circumstances.
Answer:
Where after a partner’s death, the business is continued in the old firm name, the continued use of
that name or of the deceased partner’s name as a part thereof shall not of itself make his legal
representative or his estate liable for any act of the firm done after his death. Bari Builders cannot
sue Abid’s estate for the recovery of the outstanding amount of the credit which was extended after
Abid’s death.
However, Bari Builders can recover the outstanding amount from Abid’s estate only if the credit was
extended to the firm before Abid’s death.
Moreover, since every partner is liable, jointly with all the other partners and also severally, for all
acts of the firm done while he is a partner, Bari Builders may file a suit against Meher for the
recovery of outstanding balance and succeed, provided Meher was a partner in the firm at the time
when credit was extended to the firm.
Example 117: General duties, implied authority and minor

Question: Raheel, Samina and Umair have agreed to constitute a partnership for carrying on a
business of printing study text for CA students in Peshawar. Raheel wants to specify the rights and
duties of partners in the partnership agreement so that these can be changed with mutual consent
of all the partners whereas Samina and Umair do not consider it necessary and believe that the
implied authority may be extended to bind the firm whenever required.
(i) Under the provisions of the Partnership Act, 1932 list the general duties of partners which
cannot be modified by an agreement amongst them.
(ii) Under the provisions of the Partnership Act, 1932 list the restrictions imposed on the
implied authority of a partner in the absence of any usage or custom of trade.
(iii) In the above partnership business, assume Umair is a minor who has been admitted to the
benefits of the partnership with the consent of Raheel and Samina. Under the provisions
of the Partnership Act, 1932 list the rights and disabilities of Umair before attaining
majority.

Answer:
Part (i) General duties of partners:
Following are the mandatory duties of a partner that cannot be changed by an agreement amongst
the partners:
 Duty to be just and faithful.
 Duty to carry on business to the greatest common advantage.
 Duty to render true accounts.
 Duty to provide full information.
 Duty to indemnify for loss caused by fraud.
 Duty to be liable jointly and severally – unlimited liability.
 Duty to act within authority.
 Duty in case of emergency.
Part (ii) Restrictions on the implied authority:

 submit a dispute relating to the business of the firm to arbitration,
 open a bank account on behalf of the firm in his own name,
 compromise or relinquish any claim or portion of a claim by the firm,
 withdraw a suit or proceeding filed on behalf of the firm,
 admit any liability in a suit or proceeding against the firm,
 acquire immovable property on behalf of the firm,
 transfer immovable property belonging to the firm, or
 enter into partnership on behalf of the firm.
Part (iii) Position of a minor before attaining majority:

Rights:
 right to share property and profits of the firm as agreed by the partners.
 right to have access to accounts of the firm and not to the secret books of the firm.
 right not to be adjudged insolvent
Disabilities:
 he will not be considered as a partner.
 cannot file suit against partners for profit and property except after disconnecting his
relation with the firm.
 not entitled to have access to books other than accounts.
Example 118: Partner by estoppel

Question: Amjad enjoys a very good credit standing in the market. Kashif, owner of Kashif
Electronics, represents Amjad as his partner. Kalim on the faith of such representation supplied
laptops to Kashif Electronics on credit. Kashif defaulted and Kalim filed a suit for the recovery of
the amount against both Amjad and Kashif.
Under the provisions of the Partnership Act, 1932 analyse the above situation and explain whether
Amjad would be liable to pay the outstanding amount to Kalim.
Answer:
Amjad would be regarded as partner by estoppel or holding out if:
 he knowingly permitted himself to be represented as a partner in the firm by Kashif.
 Kalim on the faith of such representation extended credit to the firm. It does not matter
whether Amjad does or does not know that the representation has reached Kalim.
Therefore, in such case, Amjad would be liable for the outstanding amount to Kalim.
However, Amjad would not be considered as holding out partner if he has denied Kashif’s
representation in public holding him as a partner in the firm or if he has no knowledge of Kashif’s
representation.

Business Law
Example 119: Decision making and liabilities of partners towards third parties
Question: Asghar, Babar and Careem are carrying on agricultural business in partnership. They have
agreed to share the profits in the ratio of 4:3:2 respectively. Careem is not liable for the losses of
the firm. Under the provisions of the Partnership Act, 1932 analyse and comment on each of the
following independent situations:
(i) Asghar, who is responsible for procurement, has suggested to buy seeds and pesticides
from Zubair Enterprises, a supplier of crop products, as the seeds and pesticides offered
by him are of good quality and at a very reasonable price. However, Babar is not in
agreement with Asghar.
(ii) In February 2017, the partnership incurred substantial losses due to heavy floods in the
area and the partnership assets are not sufficient to meet the firm’s liabilities. A number
of creditors have filed a suit for recovery of the amount from Careem.
Answer:
Part (i)
Subject to contract between the partners, a partner can bind the firm by his actions. However, in
case of differences, decision should be made by majority of the partners. Asghar cannot take
decision without consultation with other partners. Every partner has a right to express his opinion
before the matter is decided.
Part (ii)
Every partner is liable jointly with all the other partners and also severally to third parties for all acts
of the firm done while he is a partner. A partner may not share in the business losses, yet his liability
towards outsiders shall be unlimited. If the partnership assets are insufficient to meet the firm’s
liabilities, Careem would have to repay the amount personally. However, Careem can recover the
amount which he is called upon to pay to the creditors from Asghar and Babar.
Example 120: Liability of partner and/or firm

Question: In 2014, Majid and Ebad started a business of sale and repair of vehicles under the name
of ME Motors (MEM). Majid sold one of the vehicles which came for repair to Zahid for Rs.10 million.
Zahid on finding out that Majid did not have the legal title of the car sued MEM. Under the provisions
of the Partnership Act, 1932 discuss who would be liable for damages in the above situation.
Answer:
The act of a partner which is done to carry on, in the usual way, business of the kind carried on by
the firm, binds the firm. Further, in case a loss is sustained by a third party ME Motors (MEM) would
be liable even for the wrongful acts of Majid. Therefore, Zahid can recover the amount from MEM
or any of the partners.
However, Majid shall indemnify MEM or Ebad for any loss caused to them by his fraud in the conduct
of the firm.
Example 121: Restriction of partner’s implied authority

Question: Taqi, Saqib and Abrar are partners in a trading firm. By an agreement among themselves
they decided that no partner shall have the authority to buy or sell goods beyond the limit of Rs.
20,000 without the consent of other partners. Ignorant of this restriction, Wajid sold goods worth
Rs. 45,000 to Saqib who did not consult with the other partners. In view of the provisions of the
Partnership Act, 1932 explain whether the firm and its partners are liable to Wajid under the above
circumstances.
Answer:
Any act done by a partner on behalf of the firm which falls within his implied authority binds the
firm unless, the person with whom he is dealing knows about the restriction.
Under the given scenario, the firm and all the partners are jointly and severally liable to pay the
entire amount to Wajid as he was unaware of any such restriction on partners authority.


Question: Sahir and Sarim are lawyers who have entered into a partnership namely SS Associates.
Noreen approached SS Associates for a property dispute case. However, after seeing Sarim’s
capabilities, Noreen gave Rs. 250,000 to Sarim for investment in stocks and bonds at his discretion
on her behalf. Sarim hid the said fact from Sahir and used the money to meet his personal needs.
Subsequently, Noreen filed a suit on the firm for the recovery of Rs. 250,000. Reason out the validity
of suit filed by Noreen.
Answer:
The firm cannot be made liable since the receiving of money by Sarim for investment purposes is
not in ordinary course of a lawyer’s business and accordingly, is beyond the scope of his implied
authority as a partner.
Example 123: Liability of a partner

Question: Faizan and Mehran are partners in a trading firm and have decided that no partner shall
have the right to buy or sell goods beyond the value of Rs. 100,000 without consent of the other
partner. Due to a sudden crisis in the market, prices of a product started falling sharply. Faizan
without consulting Mehran sold all the perishable stock worth Rs. 950,000 in order to restrict the
firm’s loss. Can Mehran hold Faizan responsible for misconduct?
Answer:
A partner has authority, in an emergency, to do all such acts for the purpose of protecting the firm
from loss as would be done by a person of ordinary prudence, in his own case, acting under similar
circumstances, and such acts bind the firm. Hence, Faizan cannot be held responsible for
misconduct.
Example 124: Minor’s admission to the partnership

Question: Masoom, Rahul and Naila are partners in a trading firm. In 2016, they borrowed Rs.
500,000 from Ishtiaq for purchasing a shop in Multan. The loan was agreed to be repaid in two
years’ time. However, due to financial crises the loan could not be re-paid in time. For the purpose
of settling the loan, Ishtiaq has offered Naila to admit his seventeen-year-old son Muneer to the
partnership business. Under the provisions of the Partnership Act, 1932 discuss whether Muneer
can be admitted to the partnership business. State Muneer’s rights and liabilities if he is so
admitted.
Answer:
Partnership is created by a valid contract. Since a minor is not capable of entering into a contract,
a contract by or with a minor is void ab-initio. Accordingly, Muneer cannot be a partner in the firm.
However, Muneer can be admitted to the benefits of partnership with the consent of all the partners
and not only by Naila alone.
Rights and liabilities of Muneer (minor):

The rights and liabilities of Muneer, who has been admitted to the benefits of partnership are
governed by the following rules:
 Right to share property and profits of the firm as agreed by the partners.
 Right of inspecting and taking copies of accounts of the firms ONLY.
 Right not to be adjudged insolvent.
 Personally not liable to third parties for the debts of the firm i.e. limited liability.
 His share is liable for the acts of the firm.

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Example 125: Restrictions imposed on the implied authority of a partner

Question: Under the provisions of the Partnership Act, 1932 list down any four restrictions imposed
on the implied authority of a partner.
Answer:
(i) submit a dispute relating to the business of the firm to arbitration
(ii) open a banking account on behalf of the firm in his own name
(iii) compromise or relinquish any claim or portion of a claim by the firm
(iv) withdraw a suit or proceeding filed on behalf of the firm
Example 126: Liabilities of partner and firm

Question: Nomi, Sultan and Behram have decided to establish a partnership business to run a
departmental store. The partnership business was started in January 2015. In March 2015 Behram
received an overdraft of Rs. 100,000 from the partnership’s bank. He informed the bank that the
money would be used to construct a new cash counter in the departmental store. However, he used
the money to pay for his wife’s Dubai trip. Advise Nomi, Sultan and Behram about their rights and
liabilities and that of the firm in relation to the above transaction.
Answer:
Behram has clearly exceeded his authority. However, Nomi and Sultan cannot repudiate Behram’s
transaction with the bank. As a trading partnership, all the partners have the implied authority to
borrow money on the credit of the firm and the bank is under no obligation to find out the purpose
for which the loan has actually been used.
Further, where a partner acting within his apparent authority receives money from a third party and
misapplies it, the firm is liable to make good the loss. As a result, each of the partners is jointly and
severally liable to the bank for repayment.
However, Behram would be personally liable to the other partners for Rs. 100,000 and shall
indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of
the firm.


01. Relation of partnership
(a) Arises by legal status of the persons.

(b) Arises out of business dealings
(c) Arises out of a contract between persons
(d) Arises out of legal implications
02. Partner is
(a) Only an agent of the firm
(b) Only principal to other partners
(c) An agent as well as principal
(d) None of these
03. Mr. X, Mr. Y and Mr. Z are partners in a firm. By an agreement, they decided that no partner
would have authority to sell goods of the firm above the value of Rs. 50,000/- without the
consent of other partners. Owing to the sudden slump in the market, the prices crashed. One
partner sold all the stock worth Rs. 500,000/- without consulting other partners. Is the partner
liable for this breach of partnership agreement?
(a) The partner is liable as he is in breach of agreement
(b) The partner is liable because he is acting without the consent of other partners
(c) The partner is not liable as he is acting in order to save the firm from loss
(d) The partner is not liable as he has express authority to do so
04. Partnership firm has
(a) Separate legal entity from partners, if the firm is registered
(b) No separate legal entity
(c) Separate legal entity
(d) Separate legal entity distinct from the partner
05. Mr. A, a partner in the firm, buys shares of a company in his own name. Without the authority
of the other partners, but with the money and on account of the firm. State the legal position.
(a) The shares are the property of Mr. A
(b) The shares are the property of active partners of the firm
(c) The shares are the property of the legal representatives of Mr. A
(d) The shares are the property of the partnership firm

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06. For the debts of the firm, partners are liable
(a) Jointly
(b) Jointly and severally
(c) Severally
(d) Individually
07. A minor
(a) Can be a partner in the firm
(b) Can be held personally liable when he is admitted in the partnership
(c) Cannot be admitted to the benefits of the firm with the consent of all partners
(d) Can be admitted to the benefits of the firm with the consent of all partners.
08. A minor admitted to the benefits of the firm, towards third party
(a) He is personally liable
(b) He is liable for half of the loss
(c) He is liable only up to his share in the firm
(d) He has no liability at all
09. The property of the firm must be used
(a) For the exclusive benefit of the active partner
(b) For personal benefits of the all the partner
(c) For the purpose of business of the firm
(d) (a) & (b)
10. Mr. A, Mr. B and Mr. C are partners in an instalment sales business. Mr. A asked one of the
customers to deposit a security worth Rs. 100,000/- in order to purchase goods on instalments.
Subsequently, Mr. A misappropriated the security and absconded. Who will be liable for such
loss?
(a) Mr. A and Mr. B will be liable to compensate the loss
(b) No one is liable to compensate the loss
(c) Mr. A is liable only to compensate the loss
(d) All the partners are liable to compensate the loss

11. Restrictions on the partner by partnership deed is binding on third party provided
(a) Such restrictions are valid
(b) Are according to the provisions of the partnership Act
(c) Such restrictions have been imposed by mutual agreement.
(d) Such restrictions are in the knowledge of third party
12. Mr. A tells Mr. B (Supplier) within the hearing of Mr. C (Partner) that he (Mr. A) is a partner in
the partnership firm of Mr. C. Mr. C does not object to this statement of Mr. A. Later Mr. B
supplies certain goods to Mr. A who pretends to act as partner with Mr. C. State the legal
position
(a) Mr. C will not be held liable to pay the price
(b) Mr. A will be held liable personally to pay the price
(c) Mr. B cannot claim the price from Mr. C
(d) Mr. C will be liable to pay the price.
13. On attaining majority, the minor partner has to decide within six months whether he shall
continue in the firm or leave it. Where such minor elects to become a partner, he will be
personally liable
(a) From the date when he attained majority
(b) From the date when he gives public notice
(c) Since the date of admission to the benefits of the firm
(d) After the lapse of six months
14. Partner giving advances to the firm is entitled
(a) Not to claim any such interest on that amount
(b) To claim interest @ 6% or as agreed upon
(c) To claim interest @ 12% per annum
(d) To claim interest as decided by the third party
15. Under the implied authority the partner may not
(a) Employ servants for the business of the firm
(b) Pledge movable property of the firm
(c) Buy movable property of the firm
(d) Transfer immovable property of the firm

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16. A __________________ is not required to give public notice of his retirement and he is not
liable for any act done by the firm after his retirement.
17. The restrictions imposed by law are _________________ and is applicable against the whole
world whether a particular person dealing with the firm has knowledge of it or not.
18. Where by the wrongful act or omission of a partner acting in the ordinary course of the business
of a firm, loss or injury is caused to any third party or any penalty is incurred the _________ is
liable to the same extent as the ______________.
19. After a partner’s death if the business of the firm is continued in the old firm’s name the
continued use of that name or of the deceased partner’s will not itself makes his
____________________ liable for any act of the firm done after his death.
20. On attaining majority, the minor partner has to decide within _____________ whether he shall
continue in the firm or leave it.


1. (c) In Pakistan partnership arises from contract and not from status.
2. (c) There must exist a mutual agency relationship among partners. Mutual agency
relationship means that each partner is both an agent and a principal.
3. (c) It is the duty of the partner to do all such acts for the purpose of protecting their firm
from loss as would be done by a person of ordinary prudence, in his own case.
4. (b) A partnership does not have a legal personality. Unlike a company, it is not a legal
person.
5. (d) The shares are deemed to be partnership property. Any property purchased with
partnership money without other partners consent will be deemed to be partnership
property.
6. (b) The liability of all the partners is not only joint and several but is also unlimited.
7. (d) With the consent of all the partners for the time being a minor may be admitted to the
benefits of partnership but cannot become a partner
8. (c) A minor’s share is liable for the acts of the firm. But the minor is not personally liable
for any such act as his liability is limited.
9. (c) It is the duty of every partner to use the property of the firm exclusively for the
purposes of the business of the firm.
10. (d) The firm is liable to make good the loss means all the partners will be liable for the
misappropriation as security was given to Mr. A while he was acting within the scope
of his apparent authority.
11. (d) A restriction in partnership deed is effective only against the person dealing with the
firm having knowledge of it.
12. (d) Mr. C will be liable to pay the price. Mr. C by keeping quiet had led Mr. B to believe
that Mr. A is a partner.
13. (c) When minor elects to become a partner, he is personally liable since the date of
admission to the benefits of the firm.
14. (b) Where a partner makes for the purpose of the business, any payment or advance, he
is entitled to interest on it @ 6% per annum or as agreed upon.
15. (d) It is the restriction on the implied authority of the partner that a partner cannot transfer
immovable property of the firm without the express authority from the other partners.
16. Sleeping partner
17. Statutory restrictions
18. Firm, partner
19. Legal representative
20. Six months

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10
CHAPTER
Business Law
Negotiable Instruments Act
Contents
1 Meaning and characteristics of negotiable instruments
2 Promissory Note
3 Bill of Exchange
4 Cheque

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1 MEANING AND CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS

Section overview
 Definition of negotiable instrument

 Characteristics of negotiable instrument
 Parties to negotiable instrument
 Types of instrument
 Endorsement
 Negotiation
 Payment in due course
1.1 Definition of negotiable instrument
Definition: Negotiable instruments [Section 13 (1)]

A negotiable instrument means a:
 Promissory note
 Bill of exchange or
 Cheque
payable either to order or to bearer.
In simple terms, negotiable means transferable by delivery and instrument means a written
document by which a right is created in favour of some person. Thus negotiable instrument may
mean a written document transferable by delivery.
Thus, from the above definition it reveals that promissory note, bill of exchange and cheque can
be termed as negotiable instruments. The law relevant applicable to negotiable instruments is the
Negotiable Instruments Act, 1881.
1.2 Characteristics of negotiable instrument

The essential characteristics of a negotiable instrument are shown below:

Section A: Mercantile Law - Chapter 10: Negotiable instruments Act
Payable to order or bearer

Payable to order [Section 13]
A promissory note, bill of exchange or cheque is payable to order which is expressed to be so
payable or which is expressed to be payable to a particular person, and does not contain words
prohibiting transfer or indicating an intention that it shall not be transferable is called payable to
order.
Example 01: Payable to order

The following words on a negotiable instrument are indicating that the instrument is payable to
order:
 “Pay Azam….”
 “Pay Azam or order…..”
 “Pay Azam or Babar…..”
Payable to bearer [Section 13]

A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so
payable or on which the only or last endorsement is an endorsement in blank. If an instrument is
payable to any person whosoever bears it then it is called payable to bearer.
Example 02: Payable to bearer

The following words on a negotiable instrument are indicating that the instrument is payable to
bearer:
 “Pay Azam or bearer….”
 “Pay bearer…..”
 “Pay to bearer of this instrument…..”
Example 03: Payable to bearer

A cheque is payable to Aslam. Aslam endorses it merely by putting his signature on the back and
delivers it to Babar with the intention of negotiating it (without making it payable to Babar or
Babar’s order). In the hands of Babar the cheque is a bearer instrument.
Easy transferability [Section 13]

They are transferable from one person to another by mere delivery if payable to bearer and by
endorsement and delivery if payable to order.
Example 04: Easy transferability

Kamran bought goods from Dawood on 15th January and paid him by a bearer cheque dated 25 th
January. Dawood gave the same cheque to Waqas for supply of raw materials. Waqas may encash
the cheque on or after 25th January.
Example 05: Easy transferability

Kamal bought goods from Jamal on 15th January and made a promissory note for the amount
payable to Jamal or order. Jamal signed and endorsed (transferred) this promissory note to Khalil
to settle his dues with him. On due date, Khalil can get payment from Kamal.
Title of holder in due course [Section 9]

It means that once an instrument is received in the hands of holder in due course (a holder in good
faith) it becomes free from all defects.

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Example 06: Title of holder in due course

Ajmal gave a promissory note to Bashir. Bashir lost the instrument and it was found by Habib. Habib
cannot recover the amount on the negotiable instrument as he is not the holder in due course but
if Habib transfer the instrument to Dawood and Dawood becomes holder in due course, as he did
not know that instrument was lost, he can recover the amount on the instrument from Ajmal or all
prior parties.
1.3 Parties to negotiable instrument

Maker
The person who makes a promissory note.
Payee [Section 7]
The person named in an instrument, to whom or to whose order money is to be paid.
Drawer [Section 7]
The maker of a bill of exchange or cheque.
Drawee [Section 7]
The person on whom bill of exchange or cheque is drawn and who is directed to pay the amount.
Acceptor [Section 7]
A bill of exchange (other than a cheque) must be presented to the drawee for acceptance first, and
then presented for payment on due date. Drawee becomes acceptor when he accepts the bill duly
signing it.
Example 07: Parties to negotiable instruments

Anum signed a promissory note worded as “One month after date, I promise to pay Maha or order
sum of Rupees ten thousand for value received.” Here, Anum is maker and Maha is payee.

Maria drawn a bill of exchange on Zahra worded as “Two months after date, pay to Hussain or order
the sum of Rupees five thousand for value received.” Here, Maria is drawer, Zahra is drawee and
Hussain is payee. Once Zahra accepts this bill, she will be called acceptor.

Saima drawn a cheque on ABC Bank, payable to Bilal or order. Here, Saima is drawer, ABC Bank is
drawee and Bilal is payee.
Holder [Section 8]
A person is called holder of a negotiable instrument if he satisfies the following two conditions:
 He must be entitled to the possession of the instrument in his own name (“holder” does not
include a beneficial owner claiming through a Benamidar); and
 He must be entitled to receive / recover the amount due on the instrument from the parties
liable under the instrument
Thus a holder means the bearer of the bearer instrument and the endorsee or payee of the order
instrument.
When the note, bill or cheque is lost and not found or is destroyed, the person in possession of it
or the bearer at the time of loss or destruction shall be deemed to continue to be its holder.

Example 10: Holder

Kamran bought goods from Dawood on 15th January and paid him by a bearer cheque dated 25th
January. Dawood became holder of the cheque. Then, Dawood gave the same cheque to Waqas for
supply of raw materials. Now, Waqas became holder of the cheque.
Holder in due course [Section 9]

A person becomes holder in due course when he fulfils the following conditions:
Holder He must be a holder i.e. He fulfils the essentials of a holder.
Holder for
valuable There must be a lawful and adequate consideration.
consideration
A person should receive the instrument before its maturity. In case of
Before maturity instrument payable on demand, he must have taken the instrument within
a reasonable time of its issue.
It is the duty of every person who takes a negotiable instrument to examine
Complete and its form and contents thoroughly, for if it contains any material alteration
regular which has not been confirmed by the drawer through his signature or it is
incomplete like drawer name is missing or not properly stamped.
A person should take the instrument without any negligence on his part
and in good faith without having any reason to believe that any defect
Holder in good
existed in the title of the transferor. If there is any suspicion and he takes
faith
the instrument without making proper inquiries he cannot be said to be
acting in good faith.
Example 11: Holder in due course

Kamal transferred a bill of exchange to Jamal for goods purchased one day after its maturity. Jamal
is holder but not a holder in due course.

Anum received a bill of exchange transferred to her by her brother as gift. She is holder but not
holder in due course as she became holder without valuable consideration.

Kamal transferred a bill of exchange to Jamal for goods purchased a week before its maturity.
Jamal knew that the bill was stolen by Kamal. Jamal is not a holder in due course.

Ajmal gave a promissory note to Bashir. Bashir lost the instrument and it was found by Habib. Habib
cannot recover the amount on the negotiable instrument as he is not the holder in due course but
if Habib transfer the instrument to Dawood and Dawood becomes holder in due course if he did not
know that instrument was lost, he can recover the amount on the instrument from Ajmal or all prior
parties.

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Difference between Holder and Holder in due course

The following are differences between holder and holder in due course:
Holder Holder in due course
Meaning A holder in due course is a person who

A holder is a person who legally obtains the acquires the negotiable instrument bona fide
negotiable instrument, with his name entitled on for some consideration, whose payment is still
it, to receive the payment from the parties liable. due.
Consideration
Not necessary. Necessary.
Right to sue
A holder in due course can sue all prior parties.
A holder may not sue all prior parties.
Good faith
The instrument may or may not be obtained in The instrument must be obtained in good faith.
good faith.
Free from defects / Better title

A holder in due course gets a better title than
A holder may not get title free from defects.
that of the transferor.
Maturity
A person can become holder in due course,
A person can become holder, before or after the
only before the maturity of negotiable
maturity of the negotiable instrument.
instrument.
1.4 Types of instrument

Order instrument [Section 13]
A promissory note, bill of exchange or cheque is payable to order if either of the following two
conditions are fulfilled:
 Which is expressed to be so payable or
 Which is expressed to be payable to a particular person
and does not contain words:
 which prohibit transfer or
 indicate an intention that it shall not be transferable.
Note:
 An order instrument can be transferred by an endorsement on it and then its delivery.
Example 15: Order instrument

The following words on a negotiable instrument are indicating that the instrument is an order
instrument:
 “Pay Azam….”
 “Pay Azam or order…..”
 “Pay Azam or Babar…..”

Bearer instrument [Section 13]

A promissory note of bill of exchange or cheque is payable to bearer if either of the following two
conditions is fulfilled:
 expressed to be so payable, or
 last endorsement must be an endorsement in blank.
Note:
 A promissory note cannot be made payable to the bearer.
 A bill of exchange cannot be made payable to bearer on demand.
Example 16: Bearer instrument

The following words on a negotiable instrument are indicating that the instrument is a bearer
instrument:
 “Pay Azam or bearer….”
 “Pay bearer…..”
 “Pay to bearer of this instrument…..”
Example 17: Bearer instrument

The following words on a bill of exchange are not allowed.
 “Pay bearer Rs. 10,000 whenever he asks for.”
Inland instrument [Section 11]

A promissory note, bill of exchange or cheque which is:
 Made or drawn in Pakistan and also made payable in Pakistan, or
 Made or drawn in Pakistan upon any person resident in Pakistan, although it may be
payable in a foreign country.
is called an inland instrument.
Note:
 An inland instrument remains inland even if it has been endorsed in a foreign country.
Example 18: Inland instrument

 A promissory note made in Multan and payable in Peshawar.
 A bill of exchange drawn in Lahore on a person resident in Sadiqabad payable in Sadiqabad
or in Dubai.
 A bill of exchange drawn in Sukkur on a person resident in Toba Tek Singh although it may
be payable in Afghanistan.
Foreign instrument [Section 12]

An instrument, which is not an inland instrument, is deemed to be a foreign instrument.
Example 19: Foreign instrument

 Promissory note made in Pakistan but payable in Myanmar.
 A bill of exchange drawn in UK on a person residing in UK, and made payable in UK.
 A bill of exchange drawn in UK on a person residing in UK, and made payable in Pakistan.
 A bill of exchange drawn in Pakistan on a person residing in UK, and made payable in UK.

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Demand instrument [Section 19]

Instruments payable on demand means the instrument in which no time for payment is mentioned.
A cheque is always payable on demand. A promissory note or bill of exchange is payable on
demand where:
 It is expressed to be so or
 It is expressed to be payable “at sight” or “presentment”; or “on demand”
 No time for payment is specified; or
 The bill or note accepted or endorsed after it is overdue, as regards to person accepting or
indorsing it.
Notes
 'At sight' and presentment means on demand.
 An instrument on demand is payable immediately.
Time instrument [Section 21]
An instrument payable after a fixed time or on a specified date is called Time Instrument. A
promissory note or bill of exchange is a time instrument when it is expressed to be payable.
 After a specified period
 On a specific day
 Certain date after sight
 On the happening of event which is certain to happen e.g. death.
Note
There can be a “time bill”, “time note” but not a “time cheque” because the cheque cannot be
expressed to be payable otherwise than on demand.
1.5 Endorsement [Section 15]
Definition: Endorsement
“When the maker or holder of a negotiable instrument signs the same, otherwise than as such
maker, for the purpose of negotiation on the back or face thereof or on a slip of paper annexed
thereto, or so signs for the same purpose a stamped paper intended to be completed as a
negotiable instrument he is said to endorse the same, and is called the ‘endorser’.”
The term endorsement may be defined as signing one’s name on the negotiable instrument for the
purpose of transferring it to another person.
Essentials of valid endorsement

 It must be on instrument itself, if no space is left on the back of the endorsement, further
endorsements are signed on a slip of paper attached to the instrument called ‘allonge’.
 It must be signed by the endorser for the purpose of negotiation. Signature of the endorser
on the instrument without any additional words is sufficient.
 No particular form of words is necessary for an endorsement
 It must be completed by the delivery of the instrument. The delivery of the instrument with
the intention of passing the property in it.
 Negotiation by endorsement must be of the entire instrument. Endorsement for part of the
amount or to two or more endorsee severally is invalid.

Example 20: Endorsement

A bill is payable to the order of Imran. Imran signs on the back of the bill and does not specify the
name of the endorsee and delivers it to Saleem. This is a valid endorsement in blank by Imran to
Saleem.
Example 21: Endorsement

A bill is payable to the order of Kamran. Kamran signs on the back of the bill with words “Pay to
Bilal or order” and delivers it to Bilal. This is valid endorsement by Kamran to Bilal and Bilal is now
entitled to receive the payment of the instrument and to further negotiate the instrument by his
endorsement.
1.6 Negotiation [Section 14]
Definition: Negotiation
"When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute
that person the holder of it, the instrument is said to be negotiated.
The analysis of the definition reveals that negotiation takes place when the negotiable instrument
is transferred from one person to another and the transfer is made in such a manner so as to make
the transferee the holder of the negotiable instrument and it must be transferred free from defects.
1.7 Payment in due course [Section 10]

Means payment in accordance with the apparent tenure of the instrument in good faith and without
negligence to any person in possession of it.
Apparent tenure means the period of time as expressed in the instrument, after which it is payable.
Payment in due course, which results in discharge of a negotiable instrument, must fulfil the
following conditions.
The payment must be in accordance with the apparent tenure of the

Apparent tenure instrument. It should be made at or after maturity. A payment before
maturity is not a payment in due course so as to discharge the instrument.
The payment must be made in good faith and without negligence. It must
In good faith and
be honestly in the bona fide belief that the person demanding the payment
without
is legally entitled to it. The payer must not be guilty of any negligence in
negligence
making the payment.
The payment must be made to a person in possession of the instrument
Payment to under circumstances which do not arouse the suspicion about his title to
proper person possess the instrument and to receive payment of the amount therein
mentioned.
The payment must be made in money only, unless the holder agrees to
In money only
accept payment in any other medium i.e. by cheque or draft.
Example 22: Payment in due course

If a banker makes payment of a post-dated cheque before the date mentioned on the cheque, he
acts against the apparent tenor of the instrument. Hence the payment will not be treated as
payment in due course.

Business Law

Bill of Exchange, if paid without enquiry as to the payee or cheque with forged signature of the
drawer, will amount to negligence on the part of the payer and the payment will not be treated as
payment in due course.

Question: Sultan drew a bill of exchange on Amjad and made it payable to Bukhari or order. On
maturity another person of the same name wrongfully acquired possession of the bill and presented
it to Amjad for payment. Amjad after making due inquires and being satisfied that the presenter is
Bukhari, made payment on the bill.
Under the provisions of the Negotiable Instruments Act, 1881 discuss whether Amjad is discharged
from his liability
Answer:
Yes, Amjad is discharged from his liability on the bill.
Amjad made payment to the presenter, who was in possession of the bill, according to the apparent
tenor of the instrument, in good faith and without negligence, after making due inquiry as to his
identity.
It is therefore, a payment in due course and the acceptor is discharged.

Question: A cheque is drawn payable to 'B or order'. It is stolen and B's endorsement is forged. The
banker pays the cheque in due course. Is the banker discharged from liability? Would it make any
difference if the drawer's signature were forged?
Answer:
Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee
is discharged by payment in due course. Therefore the banker is discharged from liability as a
banker is not expected to know the signatures of payees who are not the clients of the bank.
On the other hand, a banker paying a cheque on which the drawer's signature is forged is
responsible and should bear the loss.

Question: Under the provisions of Negotiable Instruments Act, 1881 define ‘Holder in due course’
Answer:
Holder in due course - means any person who for consideration becomes the possessor (holder) of
a promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof,
if payable to order, before it became overdue, without notice that the title of the person from whom
he derived his own title was defective.

Example 27: Terms

Question: What do you understand by the terms ‘Holder’, ‘Holder in due course’ and ‘Payment in
due course’ under the Negotiable Instruments Act, 1881?
Answer:
Holder
A person is called holder of a negotiable instrument if he satisfies the following two conditions:
 He must be entitled to the possession of the instrument in his own name; and
 He must be entitled to receive / recover the amount due on the instrument from the parties
liable under the instrument
Thus, a holder is a bearer of the bearer instrument and the endorsee or payee of the order
instrument.
Explanation:
Where the note, bill or cheque is lost and not found again, or is destroyed, the person in possession
of it or the bearer thereof at the time of such loss or destruction shall be deemed to continue to be
its holder.
Holder in due course:

Holder in due course means any person who for consideration becomes the possessor of a
promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof,
if payable to order, before it became overdue, without notice that the title of the person from whom
he derived his own title was defective.
Explanation:
The title of a person to a promissory note, bill of exchange or cheque is defective when he is not
entitled to receive the amount due thereon.
Payment in due course:

Payment in due course means payment in accordance with the apparent tenor of the instrument in
good faith and without negligence to any person in possession thereof under circumstances which
do not afford a reasonable ground for believing that he is not entitled to receive payment of the
amount therein mentioned.
Example 28: Negotiation and indorsement

Question: Under the provisions of the Negotiable Instruments Act, 1881 briefly describe the terms
‘Negotiation’ and ‘Indorsement’.
Answer:
Negotiation:
When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute
that person the holder of it, the instrument is said to be negotiated.
Indorsement:
When the maker or holder of a negotiable instrument signs the same, otherwise than as maker, for
the purpose of negotiation on the back or face of it or on a slip of paper annexed thereto, or so signs
for the same purpose a stamped paper intended to be completed as a negotiable instrument he is
said to indorse the same and is called the endorser.”

Business Law
2 PROMISSORY NOTE
Section overview
 Definition of promissory note

 Parties to a promissory note
 Specimen of a promissory note
 Essential elements of a promissory note
2.1 Definition of promissory note [Section 4]
Definition: Promissory note

“A promissory note is an instrument in writing (not being a bank note or currency note) containing
an unconditional undertaking, signed by the maker, to pay on demand or at a fixed or determinable
future time a certain sum of money only to, or to the order of, a certain person, or to the bearer of
the instrument.
The analysis of the definition shows that, a promissory note is a written and signed promise to pay
a certain sum of money to a specified person or his order.
2.2 Parties to a promissory note

Following are the two main parties in a promissory note:
Maker
It is a person who makes the promissory note and promises to pay the money stated in it. The
maker is liable to pay according to tenor of the note and compensate any party to the note for
loss sustained because of his default.
Payee
It is a person to whom the amount of promissory note is payable i.e. to whom the promise to pay
is made.

2.3 Specimen of a promissory note
Date: September 15, 20XX

Rs. 10,000/- only
Three months after date I promise to pay ABC or to his order the sum of Rupees Ten Thousand,
for value received
To Sign: __________
Ashraf Zahid
Jail Road Saddar
Karachi Karachi
In the specimen Zahid is the maker and Ashraf is the payee.
2.4 Essential elements of a promissory note

The essential elements of a promissory note are shown below:
These essential characteristics are discussed below:

1. In writing
A promissory note has to be in writing. An oral promise to pay does not become a promissory note.
The writing may be on any paper, on any book. The words used must impart a clear undertaking
to pay, but it is not necessary that the word promise should be used.

Business Law
Example 29: It must be in writing

Azam signs the instruments in the following terms:
a) “I promise to pay Babar or order Rs. 500”.
b) “I acknowledge myself to be indebted to Basit in Rs.1,000 to be paid on demand, for value
received”.
Both (a) and (b) above are examples of promissory notes.
c) A promise to pay Behram a sum of Rs. 500 on telephone. This promise will not make a
promissory note because it is not in writing.
This is not a promissory note as it is not in writing.
2. Promise to pay
There must be a promise or a clear undertaking to pay. A mere acknowledgement of indebtedness
is not a promissory note, although it is valid as an agreement and may be sued upon as such.
Example 30: Promise to pay

Asif signs the instruments in following terms:
a) Mr. Bilal I owe you Rs. 1,000
b) I am liable to pay to Baqir Rs. 500
c) I have taken from Behzad Rs.2,000 and I am accountable to him for the same with interest.
The above instruments are not promissory notes as there is no clear undertaking or promise to pay.
There is only an acknowledgement of indebtedness.
If Asif signs instrument in following terms:

“I acknowledge myself to be indebted to Bano in Rs.1,000 to be paid on demand for value received.
This is a valid promissory note
3. Definite and unconditional

The promise must not depend upon the happening of some uncertain event. i.e. a contingency or
the fulfilment of a condition. If an instrument contains a conditional promise to pay, it is not a valid
promissory note and will not become valid and negotiable even after happening of the condition.
Example 31: Definite and Unconditional

Amir signs the instrument in the following terms:
a) I promise to pay Basit Rs.500 seven days after my marriage with Shahzadi.
b) I promise to pay Bilal Rs. 500 on Dawood’s death, provided Dawood leaves me enough to pay
the sum.
c) I promise to pay Babar Rs. 500 as soon as I can.
The above instruments are not valid as the payment is made dependent upon the happening of an
uncertain event which may never happen and as a result the sum may never become payable.
Exception
But a promise to pay is not conditional if the amount is made payable
 at a particular place or
 after a specified time or
 on the happening of an event which must happen, although the time of its happening may
be uncertain.

Example 32: Exception

If Ajmal signs an instrument stating “I promise to Pay Babar Rs.500 seven days after Saleem’s
death”, the promissory note is valid because it is not considered to be conditional, for it is certain
that Saleem will die one day.
4. Signed by maker
It is imperative that the promissory note should be duly authenticated by the signature of the maker.
If the maker is illiterate he may place his thumb mark.
Example 33: Signed by maker

Asif writes the instrument but does not sign thereon: “I promise to pay Bilal Rs. 5,000”. The note is
not valid promissory note.
5. Certain parties
The instrument points out with certainty as to who is the maker and who is the payee. Where the
maker and the payee cannot be identified with certainty, the instrument even if it contains an
unconditional promise to pay is not a promissory note.
A promissory note cannot be made payable to the maker himself. But if it is endorsed by the maker
to some other person or endorse in blank it will become valid.
Example 34: Certain parties

A promissory note payable to the principal of a college is regarded as payable to a certain person.
The person can be identified specifically. Hence, it will be considered a valid promissory note.
6. Sum payable must be certain

It is essential that sum of money promised to be payable must be certain and definite. The amount
payable must not be capable of contingent addition or subtraction.
Example 35: Sum payable must be certain

Azam signs instrument in following terms:
a) I promise to pay Bilal Rs.500,000 and all other sums which shall be due to him.
b) I promise to pay Babar Rs.300,000 and all fines according to rules.
The above instruments are invalid as promissory notes because the amount is not certain.
7. Sum payable must be legal tender

A promise to pay a certain amount of foreign currency or to deliver a certain quantity of goods is
not a promissory note.
Example 36: Sum payable must be legal tender

An instrument signed by Asif, “I promised to pay Kamal Rs. 50,000 and to deliver him my black
horse” is not a valid promissory note.
Example 37: Essential elements of a promissory note

Question: Based on the provisions of Negotiable Instruments Act, 1881 briefly explain whether the
following are promissory notes or not.
(i) I promise to pay Rahat on demand Rs. 5,000 at my convenience.
(ii) On demand, I promise to pay Sonu or order Rs. 5,000, for value received.
(iii) I promise to pay Adil or order Rs. 5,000 and 500 shares of Sigma Limited.
(iv) I promise to pay Mahi or order Rs. 5,000 with interest calculated at quarterly rests.
(v) I promise to pay you or your successors on demand Rs. 10,000.
(vi) I promise to pay Rafi or order Rs. 10,000 seven days after Salik’s death.
(vii) I am liable to pay Ahmad Rs. 5,000.

Business Law
Answer:
(i) It is not a promissory note as promise to pay is not “unconditional”.
(ii) It is a valid promissory note containing all the essential elements.
(iii) It is not a promissory note as the payment is not in terms of money only.
(iv) It is not a promissory note as the amount payable under it is not certain.
(v) It is not a promissory note as the payee in the instrument is not certain.
(vi) It is a valid promissory note. It is not considered to be conditional, for it is certain that Salik
will die, though the exact time of his death is uncertain.
(vii) It is not a promissory note as it lacks unconditional undertaking. There is only an
acknowledgement of indebtedness.
Example 38: Draft of the promissory note

Question: Sarwat owes Rs. 500,000 to Zain. The amount is payable on 11 August 2016. Sarwat
intends to issue a negotiable instrument to Zain in satisfaction of her debt. Under the provisions of
the Negotiable Instruments Act, 1881 advise Sarwat about the type of negotiable instrument which
may be issued to Zain, assuming that Sarwat does not want to involve a third party in making the
payment. Also prepare a draft of the said instrument. (You may make assumptions wherever you
consider necessary).
Answer:
Sarwat would issue a promissory note to Zain.

3 BILL OF EXCHANGE
Section overview
 Definition of bill of exchange

 Parties to a bill of exchange
 Specimen of a bill of exchange
 Essential elements of a bill of exchange
 Difference between promissory note and bill of exchange
3.1 Definition of bill of exchange [Section 5]
Definition: Bill of exchange

“A bill of exchange is an instrument in writing containing an unconditional order, signed by the
maker, directing a certain person to pay on demand or at a fixed or determinable future time a
certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.”
The analysis of the definition shows that, a bill of exchange is a written and signed order directing
a person to pay a certain sum of money to the bearer of the instrument or to a specified person or
his order. Generally, a bill of exchange is drawn by a creditor, who directs his debtor to pay the
money to the person specified in the instrument.
3.2 Parties to a bill of exchange

Following are the three main parties in a bill of exchange:
Drawer
It is a person who draws a bill of exchange. The drawer is liable on a bill of exchange as principal
debtor until the drawee accepts the bill.
Drawee
It is a person who is ordered to pay the amount of the bill of exchange (on whom the bill is drawn).
When drawee accepts the bill of exchange (when he gives consent to make the payment) he is
called the acceptor. The drawee is not liable until acceptance. On acceptance he becomes liable
as acceptor to pay holder on demand after maturity.

Business Law
Payee
It is a person to whom the amount of bill of exchange is payable.
3.3 Specimen of a bill of exchange
Date: September 15, 20XX

Rs. 10,000/- only
Three months after date pay to Yaseen or to his order the sum of Rupees Ten Thousand, for
value received.
Accepted
Aslam
To Sign: __________
Aslam Mohsin
Jail Road Saddar
Karachi Karachi
In the specimen Mohsin is the drawer, Aslam is the drawee and Yaseen is the payee.
3.4 Essential elements of a bill of exchange

The essential elements of a bill of exchange are shown below:
1. In writing
A bill of exchange is required to be in writing. Like promissory note, a bill of exchange also cannot
be oral.

Example 39: In writing

Azam signs the instruments in the following terms
a) “Pay Rs. 5,000 to Azam or order”. It is a valid bill.
b) An order to Behram to pay a sum of Rs. 500 on telephone. This order will not make a bill of
exchange because it is not in writing.
2. Order to pay
A bill of exchange contains an order to pay instead of a promise to pay like in promissory note.
This feature distinguishes it from promissory note. Further, a request to pay money is not
considered to be a bill of exchange.
Example 40: Order to pay

The following instruments signed by Azam are valid bills of exchange as they contain an order to
pay, though the language used is very polite:
a) Babar, please pay Rs. 50,000 to Ehsaan or order.
b) Bilal will much oblige me by paying to Dawood Rs. 30,000.
The following instruments signed by Akbar are not valid bills of exchange as they contain only a
request to pay and no order to pay:
a) Babar, please let Jazib have Rs. 50,000, and place it to my account and oblige.
b) Bushra, I shall be highly obliged if you make it convenient to pay Rs.10,000 to Ghalib.
3. Definite and unconditional

In other words, the order to pay should not depend upon a condition or upon the happening of an
uncertain event. This point has already been discussed in detail in case of a promissory note.
Example 41: Definite and unconditional

Asif draws a bill on Behram as “Pay Rs. 5,000 to Saleem as early as possible”. It is not a valid bill
of exchange on account of uncertainty.
4. Signed by drawer and drawee

The instrument must be signed by the drawer and drawee.
Example 42: Signed by drawer and drawee

Asif draws a bill on Behram as “Pay Rs. 10,000 to Saleem or order” but does not sign it. It is not a
valid bill of exchange.
5. Certain parties
All the parties must be certain i.e. indicated in a bill of exchange with reasonable certainty.
Example 43: Certain parties

Asif draws a bill as “Pay Rs. 10,000 to Jameel or order” but does not specify the name of drawee.
It is not a valid bill of exchange.
6. Sum payable must be legal tender

If the instrument contains an order to pay something other than money or something in addition to
money, it will not be valid bill of exchange.
Example 44: Sum payable must be legal tender

Azam draws a bill on Babar as “Pay Rs. 50,000 and deliver 100 bags of wheat to Saleem. It is not
a valid bill.

Business Law
7. Sum Payable must be certain

It is essential that sum of money ordered to be payable must be certain and definite. The amount
payable must not be capable of contingent addition or subtraction.
Example 45: Sum Payable must be certain

Majeed draws a bill on Naveed as “Pay to Saeed Rs. 20,000 and all other sums due to him”. It is
not a valid bill.
3.5 Difference between promissory note and bill of exchange
Following are the few differences between promissory note and bill of exchange:
Promissory note Bill of exchange
Number of parties
There are three parties i.e. the drawer, the
There are two parties i.e. the maker and the
drawee and the payee.
payee.
The maker of the note cannot be payee

The drawer and the payee may be one and the
The maker of a promissory note cannot be the
same person as where a bill is drawn as “Pay
payee for the simple reason that the same
to me or my order”.
person cannot be both the promisor and the
promisee.
Promise and order

There is an order for making the payment.
There is a promise to make the payment.
Acceptance
A bill of exchange needs acceptance by the
A promissory note requires no acceptance as it
drawee before it is presented for payment.
is signed by the person who is liable to pay.
Nature of liability The liability of a drawer of a bill of exchange is

secondary and conditional. It is only when the
The liability of the maker of a promissory note is
acceptor does not honour the bill that the
primary and absolute.
liability of the drawer arises as a surety.
Maker’s position The drawer of an accepted bill stands in

immediate relation with the acceptor and not
The maker of a promissory note stands in
the payee.
immediate relation with the payee.
Payable to bearer A bill of exchange can be so drawn provided

that it is not drawn “payable to bearer on
A promissory note cannot be drawn “payable to
demand”.
bearer”.
Notice of dishonour In case of dishonour of a bill of exchange,

notice of dishonour must be given by the
In case of dishonour of a promissory note, no
“holder” to all prior parties who are liable to pay
notice of dishonour is required to be given to the
(including the drawer and endorser).
maker.

Example 46: Specimen of bill of exchange

Question:
Identify the type of above negotiable instrument and briefly describe its essential characteristics
under the provisions of the Negotiable Instruments Act, 1881.
Answer:
Bill of Exchange:
The above negotiable instrument is a bill of exchange.
Essential characteristics of a bill of exchange:

Following are the essential characteristics of a bill of exchange:
(i) In writing: A bill of exchange is required to be in writing.
(ii) Order to pay: The drawer orders the drawee to pay money to the payee. Mere request does
not constitute an order.
(iii) Definite and unconditional: The order to pay should not depend upon a condition or upon
the happening of an uncertain event.
(iv) Signed by drawer: The instrument must be signed by the maker (drawer) and accepted by
the drawee.
(v) Certain parties: All the parties must be certain i.e. indicated in a bill of exchange with
reasonable certainty.
(vi) Sum payable must be legal tender: The order must be to pay money and money only.
(vii) Sum Payable must be certain: It is essential that sum of money ordered to be payable must
be certain and definite. However, it may include future interest or return in any other form
or is payable at an indicated rate of exchange, or is payable at the current rate of exchange
or the sum payable being subject to adjustment for profit or loss of the business of the
maker.
(viii) Time for payment: The time for payment may be on demand or at a fixed or determinable
future time.
(ix) It must be delivered: A bill of exchange is incomplete until it is delivered to the payee.

Business Law
Example 47: Type and validity

Question: In view of the provisions of the Negotiable Instruments Act, 1881 comment on the type
and validity of each of the following instruments signed by Rahul:
(i) Nauman please pay to Mahreen Rs. 100,000.
(ii) Nauman, I shall be highly obliged if you make it convenient to pay Rs. 100,000 to Mahreen.
(iii) I acknowledge myself to be indebted to Nauman in Rs. 100,000 to be paid on demand, for
value received.
(iv) I promise to pay Mahreen or order Rs. 100,000 six days after Nauman’s death.
Answer:
(i) It is a valid bill of exchange as it contains an unconditional order to pay.
(ii) It is in the nature of bill of exchange but it is not a valid bill of exchange as it contains only
request to pay and not an order to pay.
(iii) It is a valid promissory note containing all the essential elements.
(iv) It is a valid promissory note. It is not considered to be conditional, for it is certain that Nauman
will die, though the exact time of his death is uncertain.

4 CHEQUE
Section overview
 Definition of cheque
 Parties to a cheque
 Specimen of a cheque
 Essential elements of a cheque
 Method of crossing
 Types of crossing
 Crossing of a cheque after issue
 Rules relating to payment of cheques
 Revocation of banker’s authority
 Difference between cheque and bill of exchange
4.1 Definition of cheque [Section 6]
Definition: Cheque
Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise
than on demand.
The analysis of the above definition reveals that a cheque is a bill of exchange but is different in
following two characteristics:
 Drawee will always be a banker
 Always payable on demand
4.2 Parties to a cheque

Business Law
Following are the three main parties in a cheque:

Drawer
It is a person who draws a cheque.
Drawee
It is a banker who is ordered to pay the amount of the cheque.
Payee
It is a person to whom the amount of cheque is payable.
4.3 Specimen of a cheque

ABC Bank Limited Date: September 15, 20XX
Main Branch, Karachi Cheque no:______
Pay _____________________________________________________ OR BEARER
Rupees _______________________________________
Rs.
Account no: _____________
Title of account
Do not write below this line Signature
4.4 Essential elements of a cheque

The essential elements of a cheque are shown below:

 It must be in writing
 There must be an express order to pay and not a request to pay
 The order must be definite and unconditional
 It must be signed by the drawer
 The three parties (drawer, drawee and payee) must be certain.
 The order must be to pay a certain sum
 The order must be to pay money only
 It must always be drawn upon a specified banker
 It must always be payable on demand
 The rules of the Negotiable Instrument Act relating to cheque are also applicable to bank
drafts. [Section 131A]
 A cheque, of itself, does not operate as an assignment of any part of the funds to the credit
of the drawer with the banker. [Section 131C]
Example 48: Payable on demand

Adeel draws a bearer cheque on 1st July 2020. It is valid for six months. The holder of cheque may
get cash by demanding payment over the counter of the banker on whom the cheque is drawn
during this time.
4.5 Method of crossing [125A]

A cheque is said to be crossed when it bears across its face two parallel transverse lines which
are usually drawn on the left hand top corner of the cheque. It is an instance of an alteration which
is authorised by the Act. A crossing is a direction to the paying banker not to pay across the counter.
Purpose of crossing
The purpose of crossing is to direct the drawee (banker) to pay the amount of the cheque only to
a banker so that the party who receives the payment can easily be traced.
4.6 Types of crossing

1. General crossing [Section 123]
A cheque is said to be crossed generally where it bears across its face an addition of the words
“and company” or any abbreviation of it between two parallel transverse lines.
Example 49: General crossing
Effect of general crossing [Section 126]

When a cheque is crossed generally the banker on whom it is drawn shall not pay it otherwise than
to a banker.
2. Special crossing [Section 124]
A cheque is said to be crossed especially where it bears across its face an addition of:
 Name of the banker
 Parallel lines are not necessary.

Business Law
Example 50: Special crossing
Effect of special crossing [Section 126]

When a cheque is crossed specifically the banker on whom it is drawn shall not pay it otherwise
than to a banker to whom it is crossed or his agent for collection.
3. Restrictive crossing [Section 123A]

Restrictive crossing may be added with general crossing by adding the words “A/c Payee” or “A/c
Payee only”.
Example 51: Restrictive crossing
Effect of restrictive crossing

Where a cheque is crossed as “account payee”, it shall cease to be negotiable. Strictly speaking,
the amount collected on the cheque must be credited only to the account of payee.
Example 52: Effect of restrictive crossing

Kamran provided some services to Ikram. Ikram paid him by cheque drawn on ABC Bank with
“Account payee only” crossing. Kamran has only one bank account in XYZ Bank. Kamran will deposit
the cheque in his account with XYZ Bank. XYZ Bank (as collecting banker) shall get clearing of
cheque from ABC Bank (paying banker). XYZ Bank shall credit the amount in account of Kamran
from where Kamran may transfer or withdraw the amount.
4. ‘Not negotiable’ crossing [Section 130]

The addition of the words not negotiable does not restrict the further transferability of the cheque.
It only takes away the main feature of negotiability, which is transferability free from defects.
Example 53: Not Negotiable Crossing
Effect of ‘not negotiable’ crossing

The effect of the words ‘not negotiable’ on a crossed cheque is that the title of the transferee of
such a cheque cannot be better than that of its transferor.
Therefore, a holder with a defective title cannot give a good title to a subsequent holder. The object
of crossing a cheque not negotiable is to afford protection to the drawer or holder of the cheque
against miscarriage or dishonesty in the course of transit by making it difficult for the cheque so
crossed cashed, until it reaches its destination.

Example 54: Not negotiable with special crossing

Question: Under the provisions of the Negotiable Instruments Act, 1881 discuss the effect(s) of the
words ‘Not negotiable’ on a cheque crossed specially.
Answer:
The effect of the words “not negotiable” on a crossed cheque is that the title of the transferee of
such a cheque cannot be better than that of its transferor. The addition of the words not negotiable
does not restrict the further transferability of the cheque. It only takes away the main feature of
negotiability, which is transferability free from defects.
4.7 Crossing of a cheque after issue [Section 125 & 125A]

A crossing authorised by the Act is a material part of the cheque. It means that it is unlawful for
any person to obliterate, add or alter the crossing except as authorised under the Act.
A cheque may be crossed after its issue in the following manner:
Case Right to cross

Where a cheque is uncrossed The holder may cross it generally or specially.
Where a cheque is crossed The holder may cross it specially by adding the name of
generally the banker.
Where a cheque is crossed The holder may add the word “Not negotiable”.
generally or specially
Where a cheque is crossed The banker to whom it is crossed may again cross it
specially especially to another banker (his agent) for collection.
Example 55: Crossing after issue

Question: Under the provisions of the Negotiable Instruments Act, 1881 identify the person(s) who
may cross the cheque after its issue and the manner in which it may be crossed.
Answer:
 Where a cheque is uncrossed, the holder may cross it generally or specially.
 Where a cheque is crossed generally, the holder may cross it specially.
 Where a cheque is crossed generally or specially, the holder may add the words “not
negotiable”.
 Where a cheque is crossed specially, the banker to whom it is crossed may again cross it
specially to another banker, his agent, for collection.
 When an uncrossed cheque, or a cheque crossed generally, is sent to a banker for collection,
he may cross it specially to himself.
4.8 Rules relating to payment of cheques

Payment of cheque crossed specially more than once [Section 127]
Where the cheque is crossed specially to more than one banker, except when crossed to an agent
for collection, the banker to whom it is drawn shall refuse payment thereof.
Example 56: Purpose of crossing and multiple crossing

Question: Under the provisions of the Negotiable Instruments Act, 1881 describe the purpose of
crossing a cheque. Also state whether a cheque can be crossed specially more than once.

Business Law
Answer:
Purpose of crossing a cheque:
The purpose of crossing a cheque is to direct the drawee (banker) to pay the amount of the cheque
only to a banker so that the party who receives the payment can easily be traced.
Crossing of cheque specially more than once:

Yes, it is allowed when a banker in whose favour a crossing is made, once again crosses it specially
in favour of his agent (another banker) for collection.
Payment in due course of crossed cheque [Section 128]

Where the banker, on whom a cross cheque is drawn, makes a payment in due course, the paying
banker and the drawer are entitled to be positioned as if the cheque had been paid to and received
by the true owner thereof.
Payment of crossed cheque out of due course [Section 129]
Where the banker, on whom a cross cheque is drawn, makes a payment out of due course, the
paying banker shall be liable to the true owner of the cheque for any loss he may sustain owing to
the cheque having been so paid.
Protection to the banker in case of defective title [Section 131]
A collecting banker is one who receives the payment of a crossed cheque on behalf of his
customer.
If the collecting banker has collected a cheque on behalf of a person whose title to the cheque was
defective, he would be protected and would not be held liable in conversion to the true owner,
provided he proves that:
 He acted in good faith and without negligence
 The cheque was already crossed before it reached his hands and
 He received the payment on behalf of a customer and not on his own account i.e. he acted
as an agent for collection and not in the capacity of holder for value.
It may be noted that if the banker credits his customer’s account with the amount of the cheque
before receiving payment, he does not become a holder for value and the protection shall be
available to such a collecting banker as well. This protection is not available where the banker
allows the proceeds of an “Account payee crossed cheque” to be credited to any account other
than the payee and the endorsement in favour of the last payee is proved forged.
Protection to the banker crediting cheque crossed ‘account payee’ [Section 131B]
Similarly, if the collecting banker has collected a cheque which does not at the time of delivery
appear to be crossed “account payee” or to have had a crossing “account payee” which has been
obliterated or altered, the banker, in good faith and without negligence collecting payment of the
cheque and crediting proceeds thereof to a customer, shall not incur any liability by reason of the
cheque having been so crossed.
Example 57: Protection to the collecting banker

Question: A cheque is drawn payable to 'Bilal or order'. It is stolen and Bilal's endorsement is forged.
The banker pays the cheque in due course. Is the banker discharged from liability? Would it make
any difference if the drawer's signature were forged?
Answer:
Where a cheque payable to order purports to be endorsed by or on behalf of the payee (i.e. Bilal),
the drawee (i.e. the collecting banker) is discharged by payment in due course. Therefore the banker
is discharged from liability as a banker is not expected to know the signatures of payees who are
not the clients of the bank.
On the other hand, a banker paying a cheque on which the drawer's signature is forged is
responsible and should bear the loss.

4.9 Revocation of banker’s authority [Section 122A]

The duty and authority of a banker to pay a cheque drawn on him by his customer are determined
by:
 Countermand of payment;
 Notice of customer’s death;
 Notice of adjudication of the customer as an insolvent.
Example 58: Loss of cheque

Anum drawn a bearer cheque on her banker but lost it before encashment. She informed the banker
immediately the cheque number and details. Someone found that bearer cheque and is demanding
the payment. The banker must refuse.
Example 59: Death of customer

A customer died on 16th March. His legal representative informed the banker of his death on 24 th
March. The banker must refuse to honour cheques from 27 th March. However, the banker is not
liable if any payment of cheque was made from 16 th March to 26th March.
4.10 Difference between cheque and bill of exchange

Following are the few differences between cheque and bill of exchange:
Cheque Bill of exchange

Drawee A bill may be drawn on any person, including a
A cheque is always drawn on a banker. banker.
Payable on demand
A cheque can only be drawn payable on A bill may be drawn payable on demand or on
demand. the expiry of a certain period after date or sight.
Payable to bearer on demand

A cheque drawn “payable to bearer on demand” A bill drawn “payable to bearer on demand” is
is valid. absolutely void (though can be made payable
to the bearer later by endorsement in blank).
Acceptance
A cheque does not require any acceptance by A bill requires acceptance by the drawee
the drawee before payment can be demanded. before he can be made liable upon it.
Stamp
A cheque does not require any stamp. A bill of exchange must be properly stamped.
Crossing
A cheque may be crossed for the purpose of
safety. A bill of exchange cannot be crossed.
Stopping the payment

The payment of a cheque may be The payment of a bill cannot be
countermanded by the drawer. countermanded by the drawer.
Noting or protest
There is no system of Noting or protest in the A bill of exchange may be noted or protested
case of a cheque. for dishonour.

Business Law

01. A promissory note is a document in writing containing
(a) A conditional promise to pay
(b) A conditional order to pay
(c) An unconditional promise to pay
(d) An unconditional order to pay
02. If a document contains an order directing a person to pay, it is
(a) A promissory note
(b) Not a promissory note
(c) A bill of exchange
(d) A conditional promissory note
03. A promise to pay is conditional if
(a) It depends upon certain event i.e. death
(b) The promise is to pay on X’s death if he leaves the maker enough to pay
(c) It is to pay on demand
(d) It is to pay after a certain period
04. In promissory note, there are
(a) Two parties
(b) Three parties
(c) Four parties
(d) Five parties
05. Which instrument is immediately payable on demand?
(a) Cheque
(b) Promissory Note
(c) Bill of exchange
(d) All of these

06. A holder in due course gets an instrument
(a) Subject to defects
(b) Free from defects
(c) Subject to certain rights
(d) Which cannot be further negotiated
07. Addition of the words “non-negotiable” to the crossing
(a) Restricts transferability of cheque
(b) Makes no difference
(c) Does not restrict further transferability of cheque
(d) Makes the cheque invalid
08. A promissory note, cheque or bill of exchange is an inland instrument if it is
(a) Drawn in Pakistan and payable outside
(b) Drawn upon any person resident in Pakistan
(c) Drawn and payable in Pakistan
(d) Drawn and payable outside Pakistan
9. Where a cheque bears across its face the name of the banker, the crossing is
(a) General crossing
(b) Special crossing
(c) Not-negotiable crossing
(d) Restrictive crossing
10. A bill of exchange, other than a cheque, cannot be
(a) Endorsed
(b) Crossed
(c) Accepted
(d) Negotiated

Business Law
11. Where a cheque bears across its face the words “A/c Payee” or “A/c Payee Only”, the crossing
is
(a) Special Crossing
(b) Not-negotiable crossing
(c) General Crossing
(d) Restrictive Crossing
12. Mr. A sign the instruments in the following terms

(i) “I promise to pay Mr. B or order Rs. 500/-“
(ii) “I acknowledged myself to be indebted to Mr. B in Rs. 1000/- to be paid on demand, for
value received”.
(iii) Mr. A promise to pay Mr. B sum of Rs. 500/- on telephone.
(iv) “I am liable to pay to Mr. B Rs. 500/-“
Identify the correct one:
(a) I & II
(b) I & III
(c) III & IV
(d) II &IV
13. Identify the following type of crossing:
(a) General crossing
(b) Ordinary crossing
(c) Particular crossing
(d) Special crossing
14. Identify the following type of crossing:

(a) Negotiable crossing
(b) Non-negotiable crossing
(c) Special crossing
(d) General crossing
15. In a Negotiable instrument, negotiable means _____________ and instrument means a

_________________ by which a right is created in favour of some person.
16. The term _______________ may be defined as signing one’s name on the negotiable
instrument for the purpose of transferring it to another person.
17. Endorsement must be on instrument itself, if no space is left on the back of the instrument,
further endorsement are signed on a slip of paper attached to the instrument called
__________.
18. Cheque is a bill of exchange drawn on a ____________ and not expressed to be payable
otherwise than on ___________.

Business Law

1. (c) A promissory note is a written and signed unconditional undertaking to pay a
certain sum of money to a specified person or his order.
2. (c) A bill of exchange is a written and signed order directing a person to pay a certain
sum of money to the bearer of the instrument or to a specified person or his order.
3. (b) The promise must not depend upon the happening of some uncertain event.
4. (a) There are two parties in a promissory note i.e. Maker and Payee
5. (a) Cheque is bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand.
6. (b) It means that once an instrument is received in the hands of the holder in due
course it becomes free from all defects.
7. (c) The addition of the words not negotiable does not restrict the further transferability
of the cheque. It only takes away the main feature of negotiability i.e. free from
defects
8. (c) An inland instrument is made or drawn in Pakistan and also made payable in
Pakistan.
9. (b) The cheque is said to be crossed specially where it bears across its face an
addition of name of the banker and parallel lines are not necessary.
10. (b) Only a cheque can be crossed when it bears across its face two parallel
transverse lines.
11. (d) The effect of restrictive crossing is that the amount collected on the cheque must
be credited only to the account of payee.
12. (a) I and II are valid promissory notes because they fulfil all the essential elements of
the promissory note.
13. (a) A cheque is said to be crossed generally where it bears across its face an addition
of the words “and company” or any abbreviation of it between two parallel
transfers lines.
14. (c) The cheque is said to be crossed specially where it bears across its face an
addition of name of the banker and parallel lines are not necessary.
15. Transferable, written document
16. Endorsement
17. Allonge
18. Specified banker, demand

11
Business Law
CHAPTER
Introduction to company and
incorporation process
Contents
1 The features of a company
2 Definition and types of companies
3 Authorities, officials, members and resolutions
4 Association not for profit
5 Incorporation (registration) of a company

Business Law
1 THE FEATURES OF A COMPANY

Section overview
 Company as artificial legal person

 Consequences of separate personality
 Transfer of ownership and perpetual succession
 The concept of limited liability
 Law and governance of a company
1.1 Company as artificial legal person

A sole trader is an individual who owns and runs his or her own business. The law does not
recognize the business: the law recognizes only the individual who runs it. The individual is liable
for the debts of the business and is also personally liable for any breaches of the law by the
business.
A partnership is a group of individuals who own and run their own business. Each partner usually
contributes capital to the business. A partnership business is not recognised as a ‘person’ by the
law. Individual partners are personally liable, jointly with the other partners, for the debts of the
business.
Unlike sole traders and Partnerships, a company is a legal person, separate from its owners. This
is called doctrine of corporate personality i.e. the law recognises a company as a person, with legal
rights and obligations similar to those of ordinary individuals.
Example 01: Separate legal personality

Suppose Mr. Zahid set up a limited liability company ABC (SMC–PVT) Limited with 10,000 shares
of Rs. 10 each. Mr. Zahid (the individual) and ABC (SMC-PVT) Limited (the company), for the purpose
of the law, would be two separate persons – both would have separate legal existence.
A company is an ‘artificial person’, whereas individual people are ‘natural persons’. Essentially,
however, the law treats persons in the same way, whether they are artificial or natural. The
following are characteristics of company as an artificial person:
Contractual rights and obligation
As a legal person, a company may enter into contracts with other persons – individuals or other
companies.
Debts and liability
If a company incurs a debt, the company itself is liable and its owners (the shareholders) are not.
Ownership of assets / property
A company owns its own assets. Although the members (ordinary shareholders) own the company,
they do not own the assets of the company. The shareholders are simply owners of the shares in
the company. The company itself is the legal owner of its assets.
Right to receive from debtors
The debtor of the company owes the money to the company, and not to its owners.
Management by directors
Companies are managed by their directors, who should be members of the company as well (with
a few exceptions). In small companies, the shareholders and directors may be the same
individuals, but in large companies, the directors might hold a small proportion of the shares or
even no shares at all.
Liability to pay tax
A company is personally liable to pay tax on its income (profits).

Section B: Company Law - Chapter 11: Introduction to company and incorporation process
Legal obligations
If a company breaks the law, it is usually the company itself that is liable, although there are
circumstances in which its owners or its ‘officers’ (mainly directors) may be personally liable.
1.2 Consequences of separate personality

The separate legal personality of companies has several consequences:
 limited liability of the owners of business
 separation of ownership from control i.e. members and directors
 transfer of ownership and perpetual succession/perpetual existence.
1.3 Transfer of ownership and perpetual succession

Share capital and members
The capital of a company is represented by shares, and the shareholders (members) are its
owners. The term “member” and “shareholder” are used interchangeably, however, there are few
differences that have been discussed later in this chapter.
Who can own shares?
Any legal person can own shares in a company. This includes other companies. It is very common
in practice for some companies to own some or all of the shares of other companies.
Transfer of ownership
The shares can be transferred easily (by sale, gift, and inheritance) without seeking any approval
from other owners (as opposed to partnership).
Share transfer
When shares are transferred, the rights associated with the shares, such as the right to receive a
portion of any dividend paid by the company or the right to attend and vote at general meetings of
the company, are transferred to the new owner.
Perpetual succession (perpetual existence)
The change in ownership or even the death or bankruptcy of owners does not affect the existence
of company (as opposed to partnership).
1.4 The concept of limited liability

Liability of company
Limited liability applies to the shareholders of a company. It does not apply to the company itself.
A company is fully liable for all its debts and other liabilities; just as any other person is fully liable
for the debts that he or she incurs.
Liability of directors
The directors and other officers of a company act on behalf of the company (as an agent), and
provided that they act within their powers and in accordance with the law, they will not be personally
liable for debts of the company.
Liability of members
The concept of limited liability applies to the owners (members) of a company. The liability of the
owners of a company for the debts of the company is limited to the amount of their investment in
the company and they don’t have to pay any other amount in case of insolvency of the company.
Liability of members in case of partly paid shares
There is an exception to this rule of no further liability, but only when the shares issued by a
company have not yet been fully paid up.

Business Law
Example 02: Liability of members in case of partly paid shares

Suppose that a company has issued 1,000,000 shares with a face value (nominal value) of Rs. 10
each, and Rs. 7.5 of the face value has been paid (subscribed) by the shareholders. If the company
goes into liquidation, the holders of the 1,000,000 shares will be liable to subscribe the remaining
Rs.2.5 per share, and this money can be used to pay the company’s debts. This amount may be
called by the directors of the company even during the life time of the company if they so decide.
How creditors are warned?

The word ‘limited’ in the name of the company draws the fact of limited liability to the attention of
anyone dealing with it.
 This is why private limited companies in Pakistan are required to include the word “(Private)
Limited” in their name.
 It is also why public companies in Pakistan are required to include the words “Limited” in
their name.
1.5 Law and governance of a company

Relevant law
Companies are created by a process established by company law (i.e. Companies Act, 2017).
Memorandum of association
A company must also have a written constitution. The constitutional document that focuses on
external stakeholders is called memorandum of association.
Articles of association
The bye-laws which focuses on internal procedures of a company are called articles of association.

2 DEFINITION AND TYPES OF COMPANY

Section overview
 Definitions
 Types of company – according to members’ liability
 Types of company – private vs public
 Holding company and subsidiary company
2.1 Definitions
Company
Definition: Company [Section 2(17)]

“company” means a company formed and registered under the Companies Act, 2017 or the
company law.
Definition: Company law [Section 2(18)]

“company law” means the repealed Companies Act, 1913, Companies Ordinance, 1984,
Companies Ordinance, 2016 and also includes Companies Act, 2017 unless the context provides
otherwise.
Definition: Body corporate [Section 2(9)]

"Body corporate" or "corporation" includes
 a company incorporated under Companies Act, 2017 or company law;
 a company incorporated outside Pakistan, or
 a body corporate declared as body corporate in the relevant statute
but does not include
 A co-operative society registered under any law relating to the registration of co-operative
societies; or
 Any other entity, not being a company as defined in Companies Act, 2017 or any other law
for the time being, which the concerned Minister of the Federal Government may, by
notification, specify in this behalf.
The literal meaning of ‘body corporate’ is artificial legal person and therefore, every company (as
defined above) is also a body corporate.
However, the definition of body corporate is broader and in addition to companies registered in
Pakistan it also includes companies registered in foreign countries and statutory body corporates,
for example, State Bank of Pakistan constituted under State Bank of Pakistan Act, 1956.
However, for the purpose of Companies Act, 2017, a cooperative society shall not be considered
a body corporate. Federal Government may also exclude a foreign company or statutory body from
the definition of body corporate for the purposes of the Act.
Example 03: Company and body corporate

Orange Limited is a company incorporated in Pakistan and is operating branch offices around the
globe. Orange Limited is a company and also a body corporate.

Business Law
Example 04: Not a company but a body corporate

Orange Inc. is a company incorporated in USA and is operating a branch office in Pakistan. It is a
body corporate but not a company.
Example 05: Cooperative society as a body corporate

XYZ Housing Cooperative society is generally a body corporate but for the purposes of Companies
Act, it shall not be considered as a body corporate.
Example 06: Excluded from scope of body corporate by notification

Orange Inc. is a company incorporated in USA and is operating a branch office in Pakistan. It is a
body corporate but not a company. The concerned minister of Federal Government notified that
Orange Inc. shall not be considered a body corporate for the purposes of Companies Act, 2017.
Orange Inc. shall not be a body corporate for application of provisions of Companies Act, 2017.
Example 07: Body Corporate

Question: Under the provisions of the Companies Act, 2017 explain the term ‘body corporate or
corporation’.
Answer:
body corporate” or “corporation” includes—
(a) a company incorporated under this Act or company law; or
(b) a company incorporated outside Pakistan, or
(c) a statutory body declared as body corporate in the relevant statute,
but does not include—
(i) a co-operative society registered under any law relating to cooperative societies; or
(ii) any other entity, not being a company as defined in this Act or any other law for the time
being which the concerned Minister-in-Charge of the Federal Government may, by
notification, specify in this behalf.
2.2 Types of company – according to members’ liability

Company limited by shares
Definition: Company limited by shares [Section 2(20)]

“company limited by shares” means a company; having the liability of its members limited by the
memorandum to the extent of amount, if any, remaining unpaid on the shares respectively held by
them.
Most businesses that incorporate as companies are companies limited by shares. The great
advantage of this form of company is that the company is able, if the shareholders approve, to
raise additional capital by issuing new shares.
Company limited by guarantee
Definition: Company limited by guarantee [Section 2(19)]

“company limited by guarantee” means a company having the liability of its members limited by
the memorandum to such amount as the members may respectively thereby undertake to
contribute to the assets of the company in the event of its being wound up.
A company limited by guarantee may or may not have share capital.

The liability of members of company limited by guarantee not having share capital is restricted to
the amount of guarantee as mentioned in memorandum.

The liability of members of company limited by guarantee having share capital is restricted to the
amount of guarantee as mentioned in memorandum, in addition to unpaid amount on shares, if
any.
Unlimited company
Definition: Unlimited company [Section 2(71)]

“unlimited company” means a company not having any limit on the liability of its members.
This has all the advantages of a normal company except that the liability of its members is not
limited. In practice unlimited companies are fairly rare but are sometimes used by a ‘partnership
style’ business.
2.3 Types of company – private vs public

Private company (single member company)
Definition: Single member company [Section 2(65)]

“single member company” means a company which has only one member.
It is a company which consists of a single member who is also the director of the company. These
companies are governed by special rules. In these companies, “(SMC PVT) Limited” is added to
the name of the company.
Private company (other than single member company)
Definition: Private company [Section 2(49)]
“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 or debentures of the
company:
Provided that, where two or more persons hold one or more shares in a company jointly, they shall,
for the purposes of this definition, be treated as a single member.
Private companies are usually small and medium sized family owned businesses.
Example 08: Number of members in a private company
Question: A Secretary has recently joined ABC (Pvt) Ltd. She informed the CEO that the membership
of the company has crossed the maximum number provided under the Companies Act, 2017. The
data she shared with the CEO was:
Corporate members 14
Individuals 34
Joint share-holding (3,000,000 shares held by 4 members jointly) 4
Total 52
Under the relevant provisions contained in the Companies Act, 2017, suggest the course of action
in the given scenario.
Answer:
The definition of a private limited company as contained in the Companies Act 2017, along with
other conditions, limits the number of its members to fifty. In computing this number, those who
are in the employment of the company would not be counted. Moreover, where two or more persons
hold one or more shares in a company jointly, they shall, for the purposes of this definition, be
treated as a single member.
Therefore, in the given scenario, the total number of shareholders turns out to be 49 rather than
52. The total number of shareholders is thus not exceeding the limit as fixed by the Companies Act
2017 hence no action is required.

Business Law
Public company
Definition: Public company [Section 2(52)]

“public company” means a company which is not a private company.
A public company may (or may not) apply for listing on stock exchange.
Public listed company
Such form of public company whose securities are listed on an exchange and they are traded as
per regulations of that stock exchange.
Definition: Listed company [Section 2(38)]

“listed company” means a public company, body corporate or any other entity whose securities are
listed on securities exchange.
Public unlisted company

Public unlisted companies have not made an offer of their shares to general public hence their
shares are not traded on a stock exchange.
A public unlisted company however is entitled to make an offer to the general public as and when
it thinks fit unlike private companies which are forbidden to invite subscriptions from general public.
2.4 Holding company and subsidiary company
Definition: Holding company [Section 2(37)]

“holding company”, means a company which is another company‘s holding company if, but only if,
that other company is its subsidiary.
Definition: Subsidiary company [Section 2(68)]

“subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding
company), means a company in which the holding company:
(a) controls the composition of the board; or
(b) exercises or controls more than one-half of its voting securities either by itself or together
with one or more of its subsidiary companies.
For the purpose of above meaning of subsidiary company:
(i) a company shall be deemed to be a subsidiary company of the holding company even if
the control referred to in sub-clause (a) or sub-clause (b) is of another subsidiary company
of the holding company.
(ii) the composition of a company‘s board shall be deemed to be controlled by another
company if that other company by exercise of power exercisable by it at its discretion can
appoint or remove all or a majority of the directors.
Example 09: Holding and subsidiary company relationship

Hill Limited owns 40% voting securities in Stone Limited only but has the power to appoint or elect
the majority of directors due to a contractual arrangements with other shareholders. Hill Limited is
Holding company of Stone Limited.
Now if Stone Limited is a holding company of Stylish Stones Limited due to owning 80% voting
securities therein, then being the holding company of Stone Limited the Hill Limited shall also be
considered as holding company of Stylish Stones Limited.


Question: Kaghan Resham Limited” (KRL) holds 60 percent shares out of total paid up capital of
another public company named “Narran Silk Limited” (NSL). NSL further owns 14 percent shares
of “Thandiyani Icecreams Limited” (TIL). NSL has also entered into an agreement with other
shareholders of TIL to appoint four out of seven directors on the board of directors of TIL.
Explain their relationships with each other under Companies Act 2017.
Answer:
Kaghan Resham Limited (KRL) is the holding company of Naran Silk Limited (NSL) as KRL holds
more than 50 percent shares of NSL.
NSL is the holding company of Thandyani Ice-creams Limited (TIL) as NSL can appoint more than
fifty percent directors of TIL and hence control the composition of its board.
So as per the definition of the holding and subsidiary company under the Act, KRL is also the holding
company of TIL (indirectly).

Question: Masters Limited (ML) has made equity investment in Abbas Limited (AL). In the light of
Companies Act, 2017 state under what circumstances ML may classify AL as its subsidiary.
Answer:
AL may be considered as a subsidiary company of ML if:
 ML controls composition of the board of AL. The composition shall be deemed to be
controlled by ML if it can appoint or remove all or a majority of AL’s directors; or
 ML exercises or controls more than one-half of its voting securities either by itself or
together with one or more of its subsidiary companies.

Business Law
3 AUTHORITIES, OFFICIALS, MEMBERS AND RESOLUTIONS

Section overview
 The Commission (SECP)

 Registrar
 Officials in a company
 Members of a company
 Types of resolutions by members
3.1 The Commission (SECP)

Definition: The Commission [Section 2(16)]
The Commission means the Securities and Exchange Commission of Pakistan constituted under
Section 3 of Securities and Exchange Commission of Pakistan Act, 1997.
Organization
Securities and Exchange Commission of Pakistan (SECP) established under the Securities and
Exchange Commission of Pakistan Act 1997 was operationalized on 1st January 1999. SECP
replaced Corporate Law Authority, the former corporate regulatory body. It has been vested with
adequate operational, administrative and financial autonomy.
Offices
The SECP’s head office is at the Federal Capital, Islamabad and it has eight regional offices
(Company Registration Offices), one at Federal Capital, four at provincial capitals and three in
other major cities i.e. Multan, Faisalabad and Sukkur.
Powers and Functions [Section 7]
The Commission shall exercise such powers and perform such functions as are conferred on it by
or under Companies Act, 2017.
The powers and functions of the Commission under Companies Act, 2017 are in addition to the
powers and functions of the Commission under the Securities and Exchange Commission of
Pakistan Act, 1997.
SECP has been vested with lot of powers under the Companies Act 2017 and other relevant laws.
SECP has got powers to regulate the affairs of all the companies including Insurance Companies,
Banking Companies, and other companies.
Law has vested various powers to SECP and also federal government is empowered to vest its
powers to the SECP to the extent it thinks fit.
3.2 Registrar
Definition: Registrar [Section 2(57)]
“Registrar” means a registrar, an additional registrar, an additional joint registrar, a joint registrar,
a deputy registrar, an assistant registrar or such other officer as may be designated by the
Commission, performing duties and functions Companies Act, 2017.
Power and Duties
The powers and duties of registrar start from registration of companies to receiving various
documents which the companies are required to submit to the authorities under Companies Act,
2017.
He keeps the record of mortgages and charges and also keeps track of company routine
documents besides his powers to call the officers of the company including directors for information
and explanations and he is also empowered to inspect the books and records of the company. He
may seize the books and records if he believes that seizure is necessary to reach out certain facts
by SECP.

3.3 Officials in a company
Definition: Officer [Section 2(45)]

“officer” includes any director, chief executive, chief financial officer, company secretary or other
authorised officer of a company.
Definition: Board [Section 2(8)]

“board”, in relation to a company, means board of directors of the company.
The meetings of directors are called board meetings in which they make decisions on behalf of
company.
3.4 Members of a company [Section 118]
Definition: Members [Section 118]

“The subscribers to the memorandum of association are deemed to have agreed to become
members of the company and become members on its registration and every other person:
(a) to whom is allotted, or who becomes the holder of any class or kind of shares; or
(b) in relation to a company not having a share capital, any person who has agreed to become
a member of the company;
and whose names are entered; in the register of members, are members of the company.
The terms ‘shareholder’ and ‘member’ is used interchangeably but from the above definition it is
clear that ‘member’ is a broader term.
Example 12: Members of a company

Adeel is member of ABC (Guarantee) Limited which does not have share capital. Adeel has
guaranteed to contribute an amount up to Rs. 1 million if needed in case of winding up of the
company. Adeel is member of ABC (Guarantee) Limited but there are no shareholders in this
company.
Example 12: Members of a company

Maria along with other members of her family subscribed a memorandum for registration of a
company XYZ (Private) Limited. The company has been registered but shares certificates have not
been printed and allotted yet. Maria is member of the company although she does not (technically)
hold any shares yet.
Example 13: Member

Question: Under the provisions of the Companies Act, 2017 discuss how a person may become a
member of the company.
Answer:
A person may become the member of the company in any of the following ways:
 The subscribers to the memorandum of association are deemed to have agreed to become
members of the company and become members on its registration.
and in other cases:
 A person to whom shares of any kind are allotted, or who becomes the holder of any class
or kind of shares; become the member of the company or
 in relation to a company not having a share capital, any person who has agreed to become
a member of the company;
and whose names are entered; in the register of members, are members of the company.

Business Law
3.5 Types of resolutions by members

The decisions of company are made in meetings through resolutions. A meeting of members is
called general meeting.
Definition: Ordinary resolution [Section 2(46)]

“ordinary resolution” means a resolution passed by a simple majority of such members of the
company entitled to vote as are present in person or by proxy or exercise the option to vote through
postal ballot, as provided in the articles or as may be specified, at a general meeting.
Definition: Special resolution [Section 2(66)]

“special resolution” means a resolution which has been passed by a majority of not less than three-
fourths of such members of the company entitled to vote as are present in person or by proxy or
vote through postal ballot at a general meeting of which not less than twenty-one days‘ notice
specifying the intention to propose the resolution as a special resolution has been duly given:
Provided that if all the members entitled to attend and vote at any such meeting so agree, a
resolution may be proposed and passed as a special resolution at a meeting of which less than
twenty-one days’ notice has been given.
The special resolution requires more than just a simple majority and long notice of at least 21 days
to take effect. This implies that this type of resolution is required for more important matters for
members of the company and company itself.
Example 14: Special resolution

Question: Under the provisions of the Companies Act, 2017 briefly describe the term ‘Special
resolution’.
Answer:
Special resolution is a resolution which is passed by a majority of not less than three-fourths of such
members of the company entitled to vote as are present in person or by proxy or vote through postal
ballot at a general meeting of which not less than twenty-one days‘ notice has been given specifying
the intention to propose the resolution as a special resolution:
Provided that if all the members entitled to attend and vote at any such meeting so agree, a
resolution may be proposed and passed as a special resolution at a meeting of which less than
twenty-one days’ notice has been given.

4 ASSOCIATION NOT FOR PROFIT

Section overview
 Licencing of associations with not for profit objects

 Revocation of licence
 Effect of revocation of licence
4.1 Licencing of associations with not for profit objects [Section 42]
Concept
People working for useful objects of the society sometimes need protection of limited liability for
such work. Companies Act allows the registration of companies as associations not for profit if they
satisfy certain conditions to SECP.
Criteria for licence
Where it is proved to the satisfaction of the Commission that an association is to be formed as a
limited company and meets the following criteria, the Commission may, by licence for a period to
be specified, permit the association to be registered as a public limited company, without addition
of the word “Limited” or the expression “(Guarantee) Limited”, to its name.:
(i) for promoting commerce, art, science, religion, health, education, research, sports,
protection of environment, social welfare, charity or any other useful object;
(ii) such company:
 intends to apply the company‘s profits and other income in promoting its objects; and
 prohibits the payment of dividends to the company‘s members; and
(iii) such company‘s objects and activities are not and shall not, at any time, be against the
laws, public order, security, sovereignty and national interests of Pakistan,
Example 15: Association not for profit

Question: Alfalah Associates is an association of persons. It wants to register itself as a limited
company but does not wish to include the word “Limited” in its name.
In view of the provisions of the Companies Act, 2017 you are required to explain the conditions that
need to be satisfied before the Commission may issue it a licence and allow it to dispense with the
word “Limited” from its name.
Answer:
The Commission may grant a licence for a period to be specified and direct that the Alfalah
Associates be registered as a company with limited liability, without the addition of the words
"Limited", to its name, if Alfalah Associates satisfies the following conditions:
 It should be capable of being formed as a limited company.
 It should be formed for promoting commerce, art, science, religion, health, education, research,
sports, protection of environment, social welfare, charity or any other useful object.
 It applies or intends to apply its profits/income in promoting its objects.
 It prohibits the payment of any dividend to its members.
 such company’s objects and activities are not and shall not, at any time, be against the laws,
public order, security, sovereignty and national interests of Pakistan.
Conditions and regulations

The licence may be granted on such conditions and subject to such regulations as the Commission
thinks fit and those conditions shall be inserted in and deemed part of the memorandum and
articles, or in one of those documents.

Business Law
Form of memorandum and articles

Memorandum and articles of association of a company, licenced as above, shall be in accordance
with the form set out in Table F in the First Schedule and approved by the Commission.
Privileges and obligations
The association on registration as above shall enjoy all the privileges and be subject to all the
obligations of a limited company.
4.2 Revocation of licence [Section 42]

Reasons for revocation
The Commission may at any time by order in writing, revoke a licence granted with such directions
as it may deem fit, on being satisfied that:
(a) the company or its management has failed to comply with any of the terms or conditions
subject to which a licence is granted; or
(b) any of the requirements specified or any relevant regulations are not met or complied with;
or
(c) affairs of the company are conducted in a manner prejudicial to public interest; or
(d) the company has made a default in filing with the registrar its financial statements or annual
returns for immediately preceding two consecutive financial years; or
(e) the company has acted against the interest, sovereignty and integrity of Pakistan, the
security of the State and friendly relations with foreign States; or
(f) the number of members is reduced, below three; or
(g) the company is:
(i) conceived or brought forth for, or is or has been carrying on, unlawful or fraudulent
activities; or
(ii) run and managed by persons who fail to maintain proper and true accounts or they
commit fraud, misfeasance or malfeasance in relation to the company; or
(iii) run and managed by persons who are involved in terrorist financing or money
laundering; or
(iv) managed by persons who refuse to act according to the requirements of the
memorandum or articles or the provisions of Companies Act, 2017 or failed to
carry out the directions or decisions of the Commission or the registrar given in
exercise of the powers conferred by Companies Act, 2017; or
(v) not carrying on its business or is not in operation for one year; or
(h) it is just and equitable that the licence should be revoked.
Opportunity of being heard
However, before a licence is so revoked, the Commission shall give to the company a notice, in
writing of its intention to do so, and shall afford the company an opportunity to be heard.
4.3 Effect of revocation of licence [Section 43]

Requirements on revocation
On revocation of licence of a (not-for-profit) company by the Commission:
(a) the company shall stop all its activities except the recovery of money owed to it, if any;
(b) the company shall not solicit or receive donations from any source; and
(c) all the assets of the company after satisfaction of all debts and liabilities shall be transferred
to another (not-for-profit) company, preferably having similar or identical objects to those
of the company, within 90 days from the revocation of the licence or such extended period
as may be allowed by the Commission.

However, a reasonable amount to meet the expenses of voluntary winding up or making an

application to the registrar for striking the name of the company off the register may be retained by
the company.
Report to Registrar
After compliance of the requirements mentioned above, the board of the company shall file within
15 days from the date of such compliance, a report to the registrar containing relevant information
and documents.
Proceedings for winding up
Within 30 days of acceptance of the report by the registrar, submitted by the company, the board
shall initiate necessary proceedings for winding up of the company voluntarily or where it has no
assets and liabilities make an application to the registrar for striking the name of the company off
the register.
Appointment of Administrator
In case of default, the Commission may appoint an administrator to manage affairs of the company
and initiate necessary proceedings for winding up of the company.
Restriction on members and officers
Where any assets of the company are transferred, in consequence of revocation of licence, to
another (not-for-profit) company, the members and officers of the first mentioned company or any
of their family members shall not be eligible to hold any office in the later company for a period of
5 years from the date of transfer of such assets.
Example 16: Effect of revocation of licence

Question: The licence of Cancer Research Association (CRA), issued under section 42 of the
Companies Act, 2017, was revoked by the Commission as the affairs of CRA were conducted in a
manner prejudicial to public interest. Under the Companies Act, 2017 briefly discuss the effect of
revocation of licence on CRA, its members and officers.
Answer:
On revocation of licence of CRA issued under section 42, by the Commission:
(i) the company shall stop all its activities except the recovery of money owed to it, if any;
(ii) the company shall not solicit or receive donations from any source; and
(iii) all the assets of the company after satisfaction of all debts and liabilities shall be
transferred to another company licensed under section 42, preferably having similar or
identical objects to those of the company, within ninety days from the revocation of the
licence or such extended period as may be allowed by the Commission:
Provided that a reasonable amount to meet the expenses of voluntary winding up or
making an application to the registrar for striking the name of the company off the register
may be retained by the company.
(iv) The members and officers of the first mentioned company (whose assets have been
transferred) or any of their family members shall not be eligible to hold any office in the
later company (the company to whom such assets have been transferred) for a period of
five years from the date of transfer of such assets.
Example 17: Transfer of assets in case of revocation of NFP licence

The management of Shareer General Hospital (SGH) a company formed under section 42 of the
Companies Act, 2017 received show cause notice from the Commission of its intention to revoke
the licence because the Commission is satisfied that the affairs of SGH are conducted in a manner
prejudicial to public interest. SGH management was unable to defend their position and finally the
Commission revoked SGH licence on 13th January 2020 and ordered transfer of all its assets by
8th April 2020. Discuss.
SGH management transferred all the assets to Good Eye Hospital (GEH) a company formed under
section 42 of the Companies Act, 2017 on 3rd April 2020. In light of the provisions of Companies
Act, 2017 the members and officers of SGH shall not be eligible to hold any office in GEH for a
period of five years i.e. by 2nd April 2025.

Business Law
5 INCORPORATION (REGISTRATION) OF A COMPANY

Section overview
 Process of incorporation
 Registration of memorandum and articles
 Effect of registration
5.1 Process of incorporation

The process of incorporation usually involves the following steps:
 Getting availability of suitable name from the registrar of companies
 Preparing memorandum of association, articles of association of proposed company along
with supportive documents.
 File the above documents along with application form for incorporation to registrar.
 Registrar shall issue the certificate of incorporation of company upon being satisfied that
all the requirements have been complied with.
5.2 Registration of memorandum and articles [Section 16]

Filing with Registrar
There shall be filed with the registrar an application on the specified form containing the following
information and documents for incorporation of a company, namely:
(a) a declaration of compliance with all of the requirements of Companies Act, 2017 in respect
of registration;
(b) memorandum of association of the proposed company signed by all subscribers, duly
witnessed and dated;
(c) articles of association (optional for company limited by shares) signed by the subscribers
duly witnessed and dated; and
(d) an address for correspondence till its registered office is established and notified.
Revised documents / Removal of defects
Where the registrar is of the opinion that any document or information contains any matter contrary
to law or does not otherwise comply with the requirements or is not complete owing to any defect,
error or omission or is not properly authenticated, the registrar may either require the company to
file a revised document or remove the defects or deficiencies within the specified period.
Refusal by register
Where the applicant fails to remove the deficiencies conveyed within the specified period, the
registrar may refuse registration of the company.
Appeal to Commission
The subscribers of the memorandum or any one of them authorised by them in writing may, within
30 days of the order of refusal, prefer an appeal to the Commission.
An order of the Commission shall be final and shall not be called in question before any court or
other authority.
Criteria for registration
If the registrar is satisfied that all the requirements of Companies Act, 2017 and the rules or
regulations made thereunder have been complied with, he shall register the memorandum and
other documents delivered to him.

Example 18: Refusal of registration

Question: On 29 April 2012, a memorandum of association of AB Limited was filed for registration
in the office of Registrar. However, on 25 May 2012, a letter from the registrar office was received
by the subscribers to the memorandum in which the registration was refused on the ground that
the principal line of business clause stated in the memorandum was inappropriate.
Describe what course of action is available to AB Limited in the above situation, according to the
Companies Act, 2017.
Answer:
The subscribers of the memorandum of association of AB Limited or any one of them, authorised
by them in writing, may appeal to the Commission within thirty days of the order of refusal.
An order of the Commission shall be final and shall not be called in question before any Court or
other authority.
Certificate of incorporation
On registration, the registrar shall issue a certificate of incorporation that shall state:
(a) the name and registration number of the company;
(b) the date of its incorporation;
(c) whether it is a private or a public company;
(d) whether it is a limited or unlimited company; and
(e) if it is limited, whether it is limited by shares or limited by guarantee.
Certificate to be Conclusive evidence
The certificate shall be signed by the registrar or authenticated by the registrar‘s official seal.
The certificate shall be conclusive evidence that the requirements of Companies Act, 2017 as to
registration have been complied with and that the company is duly registered under the Act.
5.3 Effect of registration [Section 18]

The registration of the company has the following effects, as from the date of incorporation:
(a) the subscribers to the memorandum, together with such other persons as may from time
to time become members of the company, are a body corporate by the name stated in the
certificate of incorporation;
(b) the body corporate is capable of exercising all the functions of an incorporated company,
having perpetual succession and a common seal;
(c) the status and registered office of the company are as stated in, or in connection with, the
application for registration;
(d) in case of a company having share capital, the subscribers to the memorandum become
holders of the initial shares; and
(e) the persons named in the articles of association as proposed directors, are deemed to
have been appointed to that office.

Business Law
Example 19: Effects of registration

Question: The Registrar, after registering the memorandum and articles of association, has issued
the certificate of incorporation to Shahbaz Limited, a company with an authorized share capital of
Rs. 300 million. Under the Companies Act, 2017 briefly describe the effects of such registration.
Answer:
The registration of Shahbaz Limited has the following effects as from the date of incorporation:
 The subscribers to the memorandum, together with such other persons as may from time
to time become members of the company, are a body corporate by the name stated in
certificate of incorporation;
 The body corporate is capable of exercising all the functions of an incorporated company
having perpetual succession and a common seal;
 The status and registered office of the company are as stated in, or in connection with, the
application for registration;
 The subscribers to the memorandum become holders of the initial shares;
 The persons named in the articles of association as proposed directors, are deemed to
have been appointed to that office.


01. Which type of business structure is created by a process of incorporation
(a) Sole Proprietor
(b) Partnership
(c) Company
02. Body corporate or corporation includes
(a) A company incorporated under Companies Act, 2017 or company law
(b) A company incorporated outside Pakistan
(c) A body corporate declared as body corporate under relevant statute
03. “Men may come and men may go but the company exists”. This explains which characteristics
of the company as per the Companies Act, 2017.
(a) Separate legal entity
(b) Perpetual Succession
(c) Perpetual Liability
(d) Capacity to Sue
04. What is separate legal personality
(a) That the members in general meeting are regarded by law as a person.
(b) That the board of directors is regarded by law as a person
(c) That the company as an entity is regarded by law as a person
(d) That the managing director of the company is regarded by law as a person.
05. The effects of separate legal personality are
(a) Limited liability of the owners of the business
(b) Separation of ownership form control
(c) Transfer of ownership and perpetual succession.

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06. The concept of limited liability applies to
(a) The directors of the company
(b) To the creditors of the company
(c) To the owners (Shareholders) of the company
(d) To the Bankers of the company
07. If a limited company is unable to pay its debts, it may be forced into liquidations. The assets of
the company will then be used to pay some of its unpaid liabilities and
(a) The directors will be required to pay personally remaining unpaid debts of the company
(b) The shareholders will be required to pay personally remaining unpaid debts of the
company
(c) The debenture holders will be required to pay personally remaining unpaid debts of the
company
(d) The shareholders will not be required to pay personally remaining unpaid debts of the
company
08. Limited liability applies to
(a) All companies
(b) All public companies
(c) All limited companies
(d) All unlimited companies
09. The directors and other officers of the company act on behalf of the company, and provided
that they act within their powers,
(a) They will be personally liable for the debts of the company
(b) They will not be personally liable for the debts of the company
(c) They along with the shareholders will be personally liable for the debts of the company
(d) They along with the other officers of the company will be personally liable for the debts
of the company
10. Company law includes
(a) The Companies Act of 1913
(b) The Companies Act of 2017
(c) The Companies Ordinance of 1984

11. Public listed company means
(a) Such form of public company whose securities are listed on an exchange
(b) Such form of private company whose securities are listed on an exchange
(c) Such form of public company whose name of the members are listed on an exchange
(d) Such form of public company whose name of the directors are listed on an exchange
12. Private company other than single member company can be registered by
(a) At least2 members and it restricts the maximum number of members to fifty (50)
(b) At least 1member and it restricts the maximum numbers of members to twenty-five(25)
(c) At least 5 members and it restricts the maximum number of members to fifty (50)
(d) At least 1 member and it restricts the maximum numbers of members to fifty (50)
13. A company or body corporate which exercises or controls more than one-half of the voting
securities of any other company or controls the composition of the board of such other company
is known as
(a) Subsidiary company
(b) Co-operative company
(c) Holding company
(d) Listed company
14. License to association not for profit shall be granted by commission on the fulfilment of certain
conditions. Choose the incorrect one.
(a) It shall apply its profit, if any in promoting its objects
(b) They can pay profits to its members out of it.
(c) The payments of any dividend to its members is prohibited
(d) They will work only for useful objects of the society
15. SECP has been vested with lot of powers under the Companies Act, 2017 and it has got powers
to regulate the affairs of
(a) All the companies and insurance company
(b) Banking companies and modarabas
(c) Non-banking finance companies

Business Law
16. A company owns its own assets. Although members (ordinary shareholders) own the company,
they do not own the assets of the company. The shareholders are simply owners of the
________ in the company.
17. A company is an___________ person; whereas individual people are __________ persons.
18. With a company limited by guarantee, its owners may or may not have shares. Their liability to
the company is limited to _________ that the member guarantees to contribute in the event
that the company goes into ____________.
19. Some companies have been in existence for many years, during which time its ownership has
changed many times. The company has continued, even when its owners have changed. This
phenomenon is called _______________ or ________________.
20. _____________ is a form of public company whose securities are listed on an exchange and
they are trade as per regulations of the securities exchange.
21. Registration of company is actually the registration of its constitution i.e.
(a) Articles of association
(b) Memorandum of association
(c) Certificate of incorporation
(d) Prospectus
22. Registration of memorandum and articles means the registration of the company. The registrar
after registering the company, shall issue a certificate of incorporation, which shall state.
(a) CNIC number of the directors
(b) Date of birth of CEO
(c) Date of incorporation
(d) Address of the directors


1. (c) Companies are created by a process known as incorporation, established and
governed by the companies Act 2017.
2. (d) The word company means a setup formed and registered under the company law and
the body corporate can be regarded as any company registered under any law.
3. (b) It is common for a company to be in existence for many years, during which time its
ownership has changed many times. This phenomenon is called perpetual
succession or perpetual existence.
4. (c) Separate legal personality means that the law regards a company as a person,
separate from its owners. A company is an artificial person.
5. (d) The consequences of separate legal personality includes limited liability of members,
separation of ownership and transfer or ownership freely.
6. (c) The liability of the owners of a company for the debts of the company is limited to the
amount of their investment in the company.
7. (d) The shareholders will lose what they have invested, but will not be required to pay
anymore.
8. (c) The word limited in the name of the company draws the fact of limited liability to the
attention of anyone dealing with it.
9. (b) The directors and other officers of a company act on behalf of the company and when
they act within their powers, they will not be held personally liable.
10. (d) The repelled companies Act, 1913, Companies Ordinance, 1984 & Companies Act,
2017 comes within the meaning of Company law.
11. (a) Public listed company is a company whose shares and debentures are listed on a
stock exchange.
12. (a) Such type of company can be registered by at least 2 members and it restricts the
maximum number of members to 50.
13. (c) Holding company can be defined as a company which holds more than 50% in the
voting securities of any other company or control the composition of the board of such
other company.
14. (b) Association not for profit shall prohibit the payment of any profit or dividend to its
members.
15. (d) SECP is the corporate regulatory body which has been vested with adequate
operational, administrative and financial autonomy.
16. Shares
17. Artificial, natural
18. An amount, liquidation
19. Perpetual succession, perpetual existence
20. Listed Company

Business Law
21. (b) Memorandum of Association is the constitution of the company. It binds all the
members of the company.
22. (c) The certificate of incorporation shall state name & registration of the company, date of
incorporation, whether it’s a private or public company and whether its liability is
limited or not.

12
CHAPTER
Business Law
Memorandum and articles
Contents
1 Memorandum of association
2 Name of company
3 Registered office and principal line of business
4 Articles of association
5 General provisions as to memorandum and articles

Business Law
1 MEMORANDUM OF ASSOCIATION
Section overview
 Clauses of memorandum
 Borrowing powers to be part of memorandum
 Memorandum to be printed, signed and dated
1.1 Clauses of memorandum [Section 26 to 29]

Memorandum of association consists of various clauses which contain variety of information and
it may vary from company to company on the basis of the type of the company or the business of
the company. Following clauses usually exist in the memorandum of association of the company.
Name clause
The name of the company with the addition of the following words at the end of the name in case
of each of the following companies:
Public Company "Limited"

Private Company "(Private) Limited"
Single Member Company “(SMC-Private) Limited”
Guarantee Limited Company (Guarantee) Limited"
Unlimited Company “Unlimited”
.
Registered office clause

This clause shall state the Province or the part of Pakistan not forming part of a Province, as the
case may be, in which the registered office of the company is to be situated.
Example 01: Registered office clause

If the company proposes to have a registered office in Lahore, they will write in their memorandum
that ‘the registered office of the company shall be situated in province of Punjab’, However if the
company will have a registered office in Islamabad, it would write that ‘the registered office of the
company shall be situated in Islamabad’ reason being that Islamabad is capital territory and it is a
part of Pakistan that does not for part of any province.
Principal line of business clause

“Principal line of business” means the business in which substantial assets are held or likely to be
held or substantial revenue is earned or likely to be earned by a company, whichever is higher.
Example 02: Principal line of business clause

TSF Mills Limited is being proposed to be registered to carry on business involving manufacture and
sale of textile, sugar and flour products. The extracts from financial projection are:
Estimated Assets Estimated (Average) Revenue
Business
Rs. m % Rs. m %
Textile 500 55.6% 2,200 29.3%
Sugar 300 33.3% 4,500 60%
Flour 100 11.1% 800 10.7%
Total 900 7,500
The revenue is higher than assets and substantial revenue is being generated by Sugar business.
Therefore, the principal line of business shall be manufacture and sale of sugar.

Section B: Company Law - Chapter 12: Memorandum and articles
A company may carry on or undertake any lawful business or activity and do any act or enter into
any transaction being incidental and ancillary thereto which is necessary in attaining its business
activities. However, the principal line of business of the company shall be mentioned in the
memorandum of association of the company which shall always commensurate with name of the
company.
Example 03: Principal line of business clause

A proposed company’s principal line of business is manufacture and sale of textile products. One
of the subscriber to memorandum has suggested name “TSF Consultancy Limited”. The name is
not appropriate since it does not commensurate with the principal line of business clause.
A company shall not engage in a business which is:

(a) prohibited by any law for the time being in force in Pakistan; or
(b) restricted by any law, rules or regulations, unless necessary licence, registration,
permission or approval has been obtained or compliance with any other condition has been
made.
The existing companies (those registered before Companies Act, 2017 was effective) may continue
with their existing memorandum and the object clause be treated as the principal line of business.
Liability clause
In case of a company limited by shares and limited by guarantee, the liability clause states that ‘the
liability of the members is limited’.
In case of an unlimited company, the liability clause states that ‘the liability of the members is
unlimited’.
In case of a company limited by guarantee, an additional sentence is added to clarify the extent of
liabilities of the members of that company in the event of its being wound up.
Authorised capital clause (only for companies having share capital)
This clause contains the amount of share capital with which the company proposes to be
registered, and the division thereof into shares of a fixed amount. This is the maximum number of
shares that can be subscribed.
Example 04: Authorised capital clause

The authorised capital clause may be: “The authorised capital of the company shall be Rs. 10
million divided into 1 million ordinary shares of Rs. 10 each.”
In the same clause, every subscriber of the memorandum is required to agree at least one share
in the share capital of the company.
Each subscriber is required to write opposite to his name the number of shares he has agreed to
take in the share capital of the company.
Undertaking / Subscription clause
The company shall add an undertaking, as may be specified by the SECP, in their memorandum.
All of the above clauses are undertaken to be abide by, by the subscribers of the memorandum,
as they are the first members of the company, they write as follows:
“We, the several persons whose names and addresses are subscribed, are desirous of being
formed into a company, in pursuance of the memorandum of association, and we respectively
agree to take the number of shares in the capital of the company set opposite our respective
names.”

Business Law
Example 05: MOA – Company limited by guarantee not having share capital
Question: What are the main clauses of a Memorandum of Association of a company limited by
guarantee and not having a share capital?
Answer:
The memorandum of association of a company limited by guarantee shall include the following
clauses:
Name clause
The first clause of the memorandum is the name clause of the company which contains the name
of the company with the addition of the words Guarantee Limited in case of a company limited by
guarantee.
Registered office clause

For registered office clause the province or the part of Pakistan not forming part of a province, as
the case may be, in which the registered office of the company is to be situated.
Principal line of business clause

The principal line of business means the business in which substantial assets are held or likely to
be held or substantial revenue is earned or likely to be earned by a company, whichever is higher.
An undertaking as may be specified
Liability clause
In case of a company limited by guarantee, the liability clause states that ‘the liability of the
members is limited’. In case of a company limited by guarantee, an additional sentence is added
to clarify the extent of liabilities of the members of that company in the event of its being wound
up.
1.2 Borrowing powers to be part of memorandum [Section 30]

The memorandum and articles of a company is deemed to include (implied) power to enter into
any arrangement for obtaining loans, advances, finances or credit, and to issue other securities
not based on interest for raising resources from a scheduled bank, a financial institution or general
public.
1.3 Memorandum to be printed, signed and dated [Section 31]

The memorandum shall be:
(a) printed in the manner generally acceptable;
(b) divided into paragraphs numbered consecutively;
(c) signed by each subscriber, who shall add his present name in full, his occupation and
father‘s name or, in the case of a married woman or widow, her husband‘s or deceased
husband‘s name in full, his nationality and his usual residential address and such other
particulars as may be specified, in the presence of a witness who shall attest the signature
and shall likewise add his particulars; and
(d) dated.

2 NAME OF COMPANY
Section overview
 Prohibition of certain names

 Rectification of name of a company
 Change of name by a company
 Registration of change of name and effect thereof
 Publication of name by a company and penalty
2.1 Prohibition of certain names [Section 10]

Prohibited names
A company shall not be registered by a name which contains such word or expression, as may be
notified by the Commission or in the opinion of the registrar is:
(a) identical with or resemble or similar to the name of a company; or
(b) inappropriate; or
(c) undesirable; or
(d) deceptive; or
(e) designed to exploit or offend religious susceptibilities of people; or
(f) any other ground as may be specified.
Names requiring prior approval of SECP
Prior approval in writing of the Commission shall be required if the proposed name contains any
words suggesting:
(a) the patronage of any past or present Pakistani or foreign head of state;
(b) any connection with the Federal Government or a Provincial Government or any
department or authority or statutory body of any such Government;
(c) any connection with any corporation set up by or under any Federal or Provincial law;
(d) the patronage of, or any connection with, any foreign Government or any international
organisation;
(e) establishing a modaraba management company or to float a modaraba; or
(f) any other business requiring licence from the Commission.
Decision of Commission is final
Whenever a question arises as to whether or not the name of a company is in violation of the above
provisions, decision of the Commission shall be final.
Reservation of name
A person may make an application to the registrar for reservation of a name set out in the
application for a period not exceeding 60 days.
Where it is found that a name was reserved, by furnishing false or incorrect information, such
reservation shall be cancelled and in case the company has been incorporated, it shall be directed
to change its name. The person making application shall be liable to a penalty.
If the name applied for is refused by the registrar, the aggrieved person may within 30 days of the
order of refusal prefer an appeal to the Commission.
An order of the Commission shall be final and shall not be called in question before any court or
other authority.

Business Law
2.2 Rectification of name of a company [Section 11]

Company on its own & on direction by registrar
A company which, through inadvertence or otherwise, is registered by a name in contravention of
the Companies Act or the name was obtained by furnishing false or incorrect information:
(a) may, with approval of the registrar, change its name; and
(b) shall, if the registrar so directs, within 30 days of receipt of such direction, change its name
with approval of the registrar.
However, the registrar shall, before issuing a direction for change of the name, afford the company
an opportunity to make representation against the proposed direction.
Failure to comply with direction
If the company fails to report compliance with the direction issued within the specified period, the
registrar may enter on the register a new name for the company selected by him, being a name
under which the company may be registered under Companies Act, 2017 and issue a certificate of
incorporation on change of name.
Penalty
If a company makes default in complying with the direction issued by the registrar or continue using
previous name after the name has been changed by the registrar, it shall be liable to a penalty.
2.3 Change of name by a company [Section 12]

Procedure
A company may, by special resolution and with approval of the registrar signified in writing, change
its name.
Approval not required
The permission of the registrar shall not be required if the only change is the addition or deletion
of the word and parenthesis ‘(Private)’ or (SMC-Private) or (Limited) or (Guarantee Limited) or
(Unlimited) as the case may be upon the change in the status of a company.
2.4 Registration of change of name and effect thereof [Section 13]

New certificate of incorporation
Where a company changes its name the registrar shall enter the new name on the register in place
of the former name, and shall issue a certificate of incorporation altered to meet the circumstances
of the case and, on the issue of such a certificate, the change of name is complete.
Mentioning old name with new name
Where a company changes its name it shall, for a period of 90 days from the date of issue of a
certificate by the registrar, continue to mention its former name along with its new name on the
outside of every office or place in which its business is carried on and in every document or notice.
No effect on legal proceedings
The change of name shall not affect any rights or obligations of the company, or render defective
any legal proceedings by or against the company and any legal proceedings that might have been
continued or commenced against the company by its former name may be continued by or
commenced against the company by its new name.

Example 06: Change of name by a company

Question: Printing (Pvt.) Limited (PL) wants to change its name to Printing and Marketing (Pvt.)
Limited. Under the provisions of the Companies Act, 2017 describe the steps to be followed by PL
for changing its name and matters to be complied with after the change of name.
Answer:
The steps required for change of names are as follows:
(i) Pass special resolution and obtain written permission of the registrar for the new name
(ii) Obtain certificate of incorporation bearing the new name
After the change of its name PL shall for a period of ninety days from the date of issue of a
certificate by the registrar continue to mention its former name along with its new name on the
outside of every office or place in which its business is carried on and in every document or notice
of the company.
2.5 Publication of name by a company and penalty [Section 22 & 24]

Name on business places
Every company shall display in a conspicuous position, in letters easily legible in English or Urdu
characters its name and incorporation number outside the registered office and every office or the
place in which its business is carried on.
Certificate of incorporation
Every company shall display a certified copy of certificate of incorporation at every place of
business of the company.
Name on documents
Every company shall have its name mentioned in legible English or Urdu characters, in all bills of
exchange, promissory notes, endorsements, cheques and orders for money or goods purporting
to be signed by or on behalf of the company and in all bills of parcels, invoices, receipts and letters
of credit of the company.
Name and particulars on documents
Every company shall get its name, address of its registered office, telephone number, fax number,
e-mail and website addresses, if any, printed on letter-head and all its documents, notices and
other official publications.
Penalties
A penalty of level 1 be levied on company and its officers in default for not displaying its name in
the manner provided for by Companies Act, 2017.
An officer shall be personally liable for debt for issuing / authorizing any document without
mentioning the name of the company, unless duly paid by the company.

Business Law
3 REGISTERED OFFICE AND PRINCIPAL LINE OF BUSINESS

Section overview
 Registered office of a company

 Alteration of registered office clause in memorandum
 Alteration of principal line of business clause
 Adoption of business activity subject to approval under any law
3.1 Registered office of a company [Section 21]

Purpose
Registered office is a place which is the address of the company for receiving all of its
communications. It does not necessarily be same as head office of the company. There may be
more than one office for business of the company but registered office shall be only one.
Notify to registrar
A company shall have a registered office to which all communications and notices shall be
addressed and such address shall be notified to the registrar within a period of 30 days of its
incorporation.
Notice of change and special resolution
Notice of any change in situation of the registered office shall be given to the registrar within a
period of 15 days after the date of change:
The change of registered office of a company shall also require approval of general meeting
through special resolution if it is from:
(a) one city in a Province to another; or
(b) a city to another in any part of Pakistan not forming part of a Province;
3.2 Alteration of registered office clause in memorandum [Section 32 to 34]

Alteration
A company may by special resolution alter the provisions of its memorandum so as to change the
place of its registered office from:
(a) one Province to another Province or Islamabad Capital Territory and vice versa; or
(b) one Province or Islamabad Capital Territory to a part of Pakistan not forming part of a
Province and vice versa.
Confirmation from SECP
The alteration shall not take effect until it is confirmed by the Commission on petition.
The Commission may make an order confirming the alteration on such terms and conditions and
make such order as to costs as it thinks proper.
The Commission shall in exercising its discretion have regard to the rights and interests of the
members of the company or of any class of them, as well as to the rights and interests of the
creditors and may, if it thinks fit, give such directions and make such orders as it may think
expedient for facilitating or carrying into effect any such arrangement.

Example 07: Objection on change of registered office

Question: In the annual general meeting of Paramount Limited, a shareholder objected to the
shifting of the registered office from Multan to Lahore without obtaining confirmation from the
Commission. Explain whether the objection is valid.
Answer:
The shareholder’s objection is not valid, because an alteration to change the place of registered
office of a company from one city or town to another in the same province does not require
confirmation by the Commission.
Copy of order to company and registrar

A copy of the order confirming the alteration duly certified by an authorised officer of the
Commission shall be forwarded to the company and to the registrar within 7 days from the date of
the order.
Conclusive evidence of alteration
An altered copy of the memorandum shall within 30 days from the date of the order be filed by the
company with the registrar, who shall register the same and issue a certificate which shall be
conclusive evidence that all the requirements of the alteration and the confirmation thereof have
been complied with.
Extension in time limit
The Commission may by order, at any time on an application by the company, on sufficient cause
shown extend the time for the filing of memorandum with the registrar.
Transfer of record
Where the alteration involves a transfer of registered office from the jurisdiction of one company
registration office to another, physical record of the company shall be transferred to the registrar
concerned of the company registration office in whose jurisdiction the registered office of the
company has been shifted.
Example 08: Alteration in registered office clause

Question: The Directors of Muntaqil Limited are considering to re-locate company’s registered office
from Karachi to Islamabad to carry on business more economically.
Advise Company Secretary about the steps which must be taken to re-locate the registered office
under the provisions of the Companies Act, 2017.
Answer:
For alteration in the registered office, Muntaqil Limited shall:
 Pass a special resolution.
 Obtain confirmation from Commission
 Submit altered copy of memorandum to registrar within 30 days.
 When Muntaqil Limited actually shifts its registered office, it shall inform the registrar
within 15 days of the date of such change.
3.3 Alteration of principal line of business clause [26 & 32]

Alteration
A company may by special resolution alter the provisions of its memorandum to change its principal
line of business.
Approval from Commission not required
An alteration so as to change its principal line of business shall not require confirmation by the
Commission.
Filing of amended memorandum
Where the alteration involves change in principal line of business, the company shall file the
amended memorandum of association with the registrar within 30 days, which shall be recorded.

Business Law
Change of name may be directed by registrar

Any change in the principal line of business shall be reported to the registrar within 30 days from
the date of change, on the form as may be specified and registrar may give direction of change of
name if change does not commensurate with principal line of business of the company.
Example 09: Principal line of business and alteration therein

Question: Describe the provisions contained in the Companies Act, 2017 relating to ‘principal line
of business’ of a company.
Answer:
Principal line of business means the business in which substantial assets are held or likely to be
held or substantial revenue is earned or likely to be earned by a company, whichever is higher.
Principal line of business of the company shall be mentioned in the memorandum of association
of the company which shall always commensurate with name of the company.
Any change in the principal line of business shall be reported to the registrar within thirty days from
the date of change, on the form as may be specified and registrar may give direction of change of
name if the name does not commensurate with the principle line of business of the company.
3.4 Adoption of business activity subject to approval under any law [Section 32 to 34]
Alteration
A company may by special resolution alter the provisions of its memorandum to adopt any business
activity or any change therein which is subject to licence, registration, permission or approval under
any law.
Confirmation from SECP
The alteration shall not take effect until it is confirmed by the Commission on petition.
The Commission may make an order confirming the alteration on such terms and conditions and
make such order as to costs as it thinks proper.
The Commission shall in exercising its discretion have regard to the rights and interests of the
members of the company or of any class of them, as well as to the rights and interests of the
creditors and may, if it thinks fit, give such directions and make such orders as it may think
expedient for facilitating or carrying into effect any such arrangement.
Copy of order to company and registrar
A copy of the order confirming the alteration duly certified by an authorised officer of the
Commission shall be forwarded to the company and to the registrar within 7 days from the date of
the order.
Conclusive evidence of alteration
An altered copy of the memorandum shall within 30 days from the date of the order be filed by the
company with the registrar, who shall register the same and issue a certificate which shall be
conclusive evidence that all the requirements of the alteration and the confirmation thereof have
been complied with.
Extension in time limit
The Commission may by order, at any time on an application by the company, on sufficient cause
shown extend the time for the filing of memorandum with the registrar.

4 ARTICLES OF ASSOCIATION
Section overview
 Registration of articles
 Contents of articles – Table A
 Articles to be printed, signed and dated
 Alteration of articles
4.1 Registration of articles [Section 36]

Articles are the byelaws of the company, subordinate to the constitution of the company and further
subordinate to the Companies Act. The articles may be stricter than the Companies Act but not
vice versa.
Example 10: Articles of association

The Companies Act requires that a public company which is not listed shall have at least three
directors. Law requires minimum three directors; hence company may write in its articles that the
company shall always have not less than five directors if the members of the company want to do
so. Further the company may make various classes of its shares, the exact rights and liabilities of
each class of shareholders shall be stated in the articles of association.
Registration of articles
The articles of association signed by the subscribers to the memorandum and setting out
regulations for the company may/shall be registered with the memorandum.
 Optional for company limited by shares
 Compulsory for company limited by guarantee or unlimited company
Adopting Table A
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 the Companies Act.
Amount of share capital
In the case of an unlimited company or a company limited by guarantee, the articles, if the company
has a share capital, shall state the amount of share capital with which the company proposes to
be registered.
Number of members
In the case of an unlimited company or a company limited by guarantee, if the company has no
share capital, the articles shall state the number of members with which the company proposes to
be registered.
Applicability of Table A
 Table A is applicable in full, if articles are not registered.
 Table A is applicable to the extent not modified or excluded by articles filed by a company.
 Table A not applicable at all, if specifically excluded by articles filed by a company.
Clarity and voting rights
The articles of every company shall be explicit and without ambiguity and shall list and enumerate
the voting and other rights attached to the different classes of shares and other securities.

Business Law
Penalty
If a company contravenes the provisions of its articles of association, the company and every officer
of the company shall be liable to a penalty.
4.2 Contents of articles – Table A

The following is list of contents of Table A:
 Business
 Shares
 Transfer and Transmission of Shares
 Form for Transfer of Shares
 Bank Account Details of Transferee for Payment of Cash Dividend
 Transmission of Shares
 Alteration of Capital
 General Meetings
 Notice and Proceedings of General Meetings
 Votes of Members
 Instrument of Proxy
 Directors
 Powers and Duties of Directors
 Minute Books
 The Seal
 Disqualification of Directors
 Proceedings of Directors
 Filling of Vacancies
 Dividends and Reserve
 Accounts
 Notices
 Winding Up
 Indemnity
4.3 Articles to be printed, signed and dated [Section 37]

The articles shall be:
(a) printed in the manner generally acceptable;
(b) divided into paragraphs numbered consecutively;
(c) signed by each subscriber, who shall add his present name in full, his occupation and
father‘s name or, in the case of a married woman or widow, her husband‘s or deceased
husband‘s name in full, his nationality and his usual residential address and such other
particulars as may be specified, in the presence of a witness who shall attest the signature
and shall likewise add his particulars; and
(d) dated.

Example 11: Registration and signing of articles

Question: A team of young engineers is planning to incorporate a private limited company which
would provide machine maintenance services to large companies. The company would initially be
incorporated with a share capital of Rs. 20 million. However, the engineers are not certain about
“Registration and signing of articles of association”. Advise the team of engineers in respect of the
above matters in the light of the Companies Act, 2017.
Answer:
The company limited by shares has the option to set out its own regulations for the company and
get it registered with the memorandum of association, or adopt Table A as its Article of association.
If articles are not registered, or, if articles are registered, in so far as the articles do not exclude or
modify the regulations in Table A in the First Schedule to the Companies Act, those regulations
shall, so far as applicable, be the regulations of the company in the same manner and to the same
extent as if they were contained in duly registered articles.
The article shall be signed by each subscriber, in the presence of a witness who shall attest the
signature of the subscriber.
4.4 Alteration of articles [Section 38]

Alteration by special resolution
Subject to Companies Act and memorandum, a company may, by special resolution, alter its
articles and any alteration so made shall be as valid as if originally contained in the articles and be
subject in like manner to alteration by special resolution.
Restriction on alteration
When alteration in articles affects the substantive rights or liabilities of members or of a class of
members, it shall be carried out only if a majority of at least three-fourths of the members or of the
class of members affected by such alteration, as the case may be, exercise the option through vote
personally or through proxy vote for such alteration.
Filing to registrar
A copy of the articles of association as altered shall, within 30 days from the date of passing of the
resolution, be filed by the company with the registrar and he shall register the same and the articles
so filed shall be the articles of the company.

Business Law
5 GENERAL PROVISIONS AS TO MEMORANDUM AND ARTICLES

Section overview
 Copies of memorandum and articles to be given to members

 Effect of memorandum and articles
 Effect of alteration in memorandum or articles
 Alteration to be noted in every copy
 Form of memorandum and articles
5.1 Copies of memorandum and articles to be given to members [Section 39]

Each company shall send to every member, at his request and within 14 days on payment of fee
fixed by the company, a copy of the memorandum and the articles.
Example 12: Copies of memorandum and articles

Question: Mr. Zouk is an employee in a brokerage house and he wants to prepare some reports on
request of some potential investors for a company named as “Arizona Grill Limited”. For the
preparation of the report he requires Memorandum & Articles of association of the company.
State whether he can obtain such copies of Memorandum & Articles of Association from “Arizona
Grill Limited” and explain why?
Answer:
The Companies Act 2017 requires the company to forward a copy of Memorandum of Association
and Articles of Association on the request of a member only on payment of certain fixed fee. Any
unconcerned person cannot demand such copies from the company. So “Arizona Grill Limited” is
not bound to provide such copies to Mr Zouk.
5.2 Effect of memorandum and articles [Section 17]

Binding on Company and members
The memorandum and articles, when registered, bind the company and the members of the
company as if they had been signed by the members and, his heirs and legal representatives that
they shall observe and be bound by the memorandum and articles, unless in conflict with the
Companies Act.
Money payable to be debt
All moneys payable by a subscriber against the shares subscribed in pursuance of his undertaking
in the memorandum of association shall be a debt due from him and be payable in cash within 30
days from the date of incorporation of the company.
Example 13: Time period of payment by subscriber

Question: Ahmed, Ahmer and Akbar being the founder members of M/s Excellent (Pvt) Limited got
the certificate of incorporation of the company on 1st March 2020. They have given the undertaking
to subscribe 10,000 shares each of Rs. 10/- per share of the company. Discuss.
Answer:
As per the provisions of Companies Act, 2017 they have to deposit Rs. 100,000/- each on or before
30th March 2020.
Share cancellation in case of default

In case the share money is not deposited within the prescribed time, the shares shall be deemed
to be cancelled and the name of that subscriber shall be removed from the register and the registrar
shall give such direction to the company in each case as deemed appropriate for compliance with
the provisions of the company law.

Example 14: Effect of non-payment by a subscriber

Question: Ahmed, Ahmer and Akber being the founder members of M/s Excellent (Pvt) Limited got
the certificate of incorporation of the company on 1st March 2020. They have given the undertaking
to subscribe 10,000 shares each of Rs. 10/- per share of the company. As per the provisions of
Companies Act, 2017 they have to deposit Rs. 100,000/- each on or before 30th March 2020.
Ahmed and Ahmer deposited Rs. 100,000/- each on 5th March 2020 and 29th March 2020
respectively; however, Akber couldn’t managed to deposit the amount till 30th March 2020 due to
some domestic issues. Discuss the implications.
Answer:
In light of the provisions of Companies Act, 2017 Akber’s 10,000 shares shall be deemed to be
cancelled and his name shall also be removed from the register of members. Moreover, the
company shall have to follow the directions given by the registrar in this respect.
Report regarding receipt of subscription money

The receipt of subscription money from the subscribers shall be reported by the company to the
registrar within 45 days from the date of incorporation of the company, accompanied by a certificate
by a practicing chartered accountant or a cost and management accountant verifying receipt of the
money so subscribed.
Example 15: Intimation to the registrar

Question: Ahmed, Ahmer and Akbar being the founder members of M/s Excellent (Pvt) Limited
(EPL) got the certificate of incorporation of the company on 1st March 2020. They have given the
undertaking to subscribe 10,000 shares each of Rs. 10/- per share of the company. Ahmed and
Ahmer deposited Rs. 100,000/- each on 5th March 2020 and 29th March 2020 respectively.
EPL approached Brilliant & Co. Chartered Accountants (BC) for verification of receipt of the money
so subscribed by its subscribers i.e. Ahmed and Ahmer. The said certificate was issued by BC on
2nd April 2020. Discuss the implications.
Answer:
EPL shall have to report to the registrar about receipt of subscription money from the subscriber i.e.
Ahmed and Ahmer along will BC certificate on or before 14th April 2020 i.e. within 45 days from
the date of incorporation of EPL.
Penalty
Violation of above requirements will be considered as offence and a penalty of level 1 on the
standard scale shall be applicable.
5.3 Effect of alteration in memorandum or articles [Section 35]

If the memorandum of association or articles of association are altered and such alteration requires
the members to take more shares in the company than they already have or to undertake more
amount of guarantee than the existing amount, such alteration shall be applicable to a member
only if he gives his consent in writing either before or after the alteration.
5.4 Alteration to be noted in every copy [Section 40]

Where an alteration is made in the memorandum or articles of a company, every copy of the
memorandum or articles issued after the date of the alteration shall conform to the memorandum
or articles as so altered.
For each copy issued in contravention of above, the company and every officer of the company
who is in default shall be liable to the penalty.

Business Law
5.5 Form of memorandum and articles [Section 41]

The form of memorandum and articles of following companies shall be in accordance with Table
of First Schedule mentioned:
Type of company Document Form
Articles Table A
Company limited by shares
Memorandum Table B
Articles &
Company limited by guarantee and not having a share capital Table C
Memorandum
Articles &
Company limited by guarantee and having a share capital Table D
Memorandum
Articles &
Unlimited company having a share capital Table E
Memorandum
A company licensed under section 42 i.e. Association not for Articles &
Table F
profit Memorandum


01. Under the Companies Act, 2017 in which document would you find the principal line of business
clause?
(a) Statutory declarations
(b) Articles of association
(c) Memorandum of association
(d) Prospectus
02. A person may make an application in specified form and manner with a specified fee to the
registrar for reservation of any name. If the application is refused by registrar, aggrieved person
may prefer an appeal to Commission with in
(a) 60 days
(b) 30 days
(c) 15 days
(d) 90 days
03. Companies Act, 2017 allows the alteration of various clauses of the memorandum of
association of the company however there is difference as to the procedure or requirement of
law. Which clause cannot be altered in the lifetime of the company?
(a) Name clause
(b) Subscription clause
(c) Liability clause
(d) Registered office clause
04. A company may alter the provisions of its memorandum so as to change the place of its
registered office but which of the following condition must not be fulfilled for the alteration in the
registered office clause of the company?
(a) Company shall pass a special resolution.
(b) Company shall apply to the commission for obtaining its approval.
(c) Company shall inform the registrar within 15 days of the actual shifting of the registered
office.
(d) Physical record of the company shall be transferred to the other registrar in each and
every case.

Business Law
05. For registered office clause the province or the part of Pakistan not forming part of a province
shall be mentioned. e.g. if the company proposes to have a registered office in Islamabad, they
will write in their memorandum that
(a) The registered office will be situated in province of Sindh
(b) The registered office will be situated in province of Punjab
(c) The registered office will be situated in Islamabad
06. The first clause of the memorandum is the name clause of the company which contains the
name of the company with the addition of appropriate parenthesis. Choose the incorrect
parenthesis
(a) Abdullah (Private) Limited is a private company
(b) Rahim (Guarantee) Limited is a guarantee limited company
(c) The Lawyer (PLC) is a public limited company
(d) Khan (SMC-Private) Limited is a single member company
07. Every company shall supply within a period of 14 days, a copy of the memorandum and articles
of the company, upon the request and payment of a prescribed amount, to its
(a) Creditor
(b) Auditor
(c) Director
(d) Member
08. What type of resolution is required to change company’s name?
(a) Special resolution
(b) Ordinary resolution
(c) Ordinary resolution with 14 days’ notice
(d) Special resolution with 14 days’ notice
09. In relation to a company’s articles of association, which of the following is incorrect?
(a) The articles of association set down the internal regulations of a company
(b) Promoters may or may not submit their own form of articles when submitting the forms
necessary to form a company limited by shares.
(c) The articles of association form a contract between the members and the company and
the members among themselves.
(d) Articles of association may be changed by ordinary resolution.

10. If a company changes its name, then former name is required to be mentioned along with the
new name for a period of
(a) 90 days from the date of issue of the new certificate of incorporation.
(b) 120 days from the date of issue of the new certificate of incorporation.
(c) One year from the date of issue of the new certificate of incorporation.
(d) None of the above is correct
11. A company has been incorporated with a name in contravention of the relevant provisions of
the Companies Act, 2017. Now the directors have received an order from the Registrar to rectify
the name after providing an opportunity of being heard. The name is required to be
rectified/change within a period of
(a) 15 days
(b) 30 days
(c) 120 days
12. If alteration affects the substantive rights or liabilities of members or of a class of members, it
shall be carried out only if a majority of at least ____________of the members or of the class
of members affected by such alteration, vote for such alteration.
13. __________________of the memorandum of association contains the amount of share capital
with which the company proposes to be registered.
14. The _______ and _____________ of every (now it is mandatory for unlimited companies as
well (refer section 22) company shall be displayed outside companies every office or place of
business in a conspicuous position.
15. Whatever name is proposed, the final authority to decide whether or not a name is in line with
the provisions of the Companies Act, 2017 lies with the _____________.

Business Law

1. (c) The principal line of business clause is the part and parcel of MOA.
2. (b) An aggrieved person may within 30 days of the order of refusal prefer an appeal to
commission.
3. (b) Subscription clause of the memorandum of association of the company cannot be

altered in the lifetime of the company.
4. (d) Where alteration involves a transfer of registered office from jurisdiction of one
company registration office to another, only then physical record shall be transferred
to the other registrar.
5. (c) The company is required to write only the province or part of Pakistan not forming part
of the province in its memorandum of association.
6. (c) The public company must only use “Limited” at the end of the name.
7. (d) Every company, upon the request and payment of a prescribed amount by its
member, shall supply a copy of the memorandum and articles of the company.
8. (a) The company can change its name by passing a special resolution and obtaining
written permission of the registrar.
9. (d) The articles of association can be altered only by passing special resolution in the
general meeting.
10. (a) After the change of name, the former name shall also be mentioned for ninety days
from the date of issue of the new certificate of incorporation.
11. (b) The registrar may also direct the company to change its name within 30 days of the
receipt of such directions.
12. Three-fourth
13. Capital clause
14. Name, Incorporation number
15. Commission

13
CHAPTER
Business Law
Management
Contents
1 Appointment, election and removal of directors
2 Powers, duties and proceedings of directors
3 Restrictions, prohibitions and limitations
4 Chief executive and other officers

Business Law
1 APPOINTMENT, ELECTION AND REMOVAL OF DIRECTORS

Section overview
 Introduction
 Eligibility / ineligibility of certain persons to become director
 Term of directors
 Procedure for election of subsequent directors
 Nominee directors
 Fresh election of directors
 Powers of the court to declare election invalid
 Validity of acts of directors
 Casual vacancy
 Removal of directors
 Vacation of office
1.1 Introduction
Definition: Director [Section 2(25)]

“Director” includes any person occupying the position of a director, by whatever name called.
The definition above focuses on function and position and not on specific designation and the word
‘director’ in a job title does not necessarily mean that a person is legally a director.
Example 01: Definition of director

Faisal is senior employee of ABC Limited and his designation is Human Resource Director. However,
he is not appointed to board of directors and does not participate in board of directors’ decision
making. He is not a director of ABC Limited.
Example 02: Definition of director

Naveed is senior employee of ABC Limited and his designation is General Manager Operations. He
is also appointed to board of directors and participates in board of directors’ decision making. He
is director of ABC Limited.
Natural person [Section 154]

Only natural persons shall be directors of a company. A company or body corporate (even if it is
subscriber to the memorandum) shall not be a director of another company.
Example 03: Natural person

ABC Limited is holding company and owner of 80% shares of XYZ Limited. ABC Limited cannot
become director of XYZ Limited as it is not a natural persons. However, using its voting power it
may appoint/elect natural persons of its choice as directors of XYZ Limited by following the
procedures given in Companies Act, 2017.
Not to be variable representative

A director cannot claim to be variable representative of the company. It means that a director
cannot claim relief from his responsibility as a director on the basis that he is not concerned with
any particular area of the company’s business. When he is a director, he is a director in entirety.

Section B: Company Law - Chapter 13: Management
To be member
Directors must be member of the company except where law specifically allows the non-members
as directors. In the board of directors meeting, every director shall have one vote but the same
persons while sitting in a general meeting as members may have different voting rights based on
the number of shares they hold.
Authority
Directors act collectively or by majority, every decision by the directors is made in a board meeting
of the directors or by passing a resolution by circulation and every director has got one vote in
decision making. It means when appointed as a director, every director is an equal director and
there is no difference in their authority.
Fiduciary relationship
Directors of the company may well be said as agents of the company whom members have given
the right to make decisions on their behalf. They are supposed to make decisions in the best
interest of the company and its stakeholders. They must be vigilant and not be negligent in
performance of their duties.
Directors have fiduciary relationship with the company. A fiduciary relationship is generally
established only when the confidence given by one person is accepted by the other person.
No director can hold office of a director if he is declared as lacking fiduciary behaviour by the court.
Consent to act as director [ Section 167]
No person shall be appointed or nominated as a director or chief executive unless such person
has given his consent in writing to the company for such appointment or nomination. The company
shall file such consent with the registrar within 15 days of appointment or nomination.
Number of directorships [Section 155]
No person shall hold office as a director, including as an alternate director at the same time in more
than such number of companies as may be specified, however, this limit shall not include the
directorships in a listed subsidiary.
Minimum number of directors [Section 154]
A company may require a larger number of directors by its articles.
Type of company Minimum number of directors

Single member company One
Other private company Two
Public unlisted company Three
Public listed company Seven
1.2 Eligibility / ineligibility of certain persons to become director

The company may by its articles fix any conditions to become the director of the company including
holding a specific number of shares as a minimum (qualification shares) to become a director or
may be specific educational requirements.
Ineligibility [Section 153]

No person shall be appointed as a director of a company if he:
(a) is a minor;
(b) is of unsound mind;
(c) has applied to be adjudicated as an insolvent and his application is pending;
(d) is an undischarged insolvent;

Business Law
(e) has been convicted by a court of law for an offense involving moral turpitude (conduct that
is believed to be contrary to community standards of honesty, good morals, or justice, e.g.
murder, kidnapping, etc.);
(f) has been debarred from holding such office under Companies Act;
(g) is lacking fiduciary behaviour and a declaration to this effect has been made by the Court
at any time during the preceding 5 years;
Example 04: Person lacking fiduciary behaviour

Last year, the court declared Sami as lacking fiduciary behaviour as he did not disclose his interest
in transactions with the company. He cannot be appointed as a director. He may be appointed as
director once five years have elapsed after the court order.
(h) does not hold National Tax Number. The Commission may grant exemption from this
requirement;
(i) is not a member. However, this shall not apply in the case of:
 a person representing a member who is not a natural person;
 a whole-time director who is an employee of the company;
 a chief executive; or
 a person representing a creditor or other special interests through contractual
arrangements.
Example 05: Whole time director who is an employee of the company

Babar is senior employee of the company and because of his experience, he was appointed as
director and is now also involved in board of directors’ decision making. He would be termed as
whole-time director (or executive director).
Further for listed companies only, a person shall not be appointed as a director if he:
(a) has been declared by a court as defaulter in repayment of loan to a financial institution;
(b) is engaged in the business of brokerage or is a spouse of such person or is a sponsor,
director or officer of a corporate brokerage house.
Example 06: Defaulter in repayment of loan

Question: Zafar was recently appointed as a Director of HP Limited, a listed company. In March
2018 the board of directors came to know that Zafar had been declared a defaulter by the High
Court. Discuss his appointment.
Answer:
Zafar will become ineligible from being a director only if he had defaulted in repayment of a loan
to financial institution. If he has been declared a defaulter for any other reason, he would still be
eligible for appointment as director.
Example 07: Broker in securities exchange

Question: Sajid was recently appointed as a director of SE Limited, a public unlisted company. In
July 2020, the board of directors came to know that Mrs. Sajid is engaged in business of brokerage
on Pakistan Stock Exchange. Discuss the appointment of Sajid as director.
Answer:
Sajid is not ineligible for the reason that his wife is engaged in brokerage business as SE Limited is
unlisted company.

Ineligibility of bankrupt [Section 177]

If any person being an undischarged insolvent acts as chief executive or director of a company, he
shall be liable to imprisonment for a term not exceeding two years or to a fine, or to both.
1.3 Term of directors [Section 157, 158 & 161]

At incorporation
The names and number of first directors shall be decided by the subscribers of memorandum,
and their specified particulars shall be submitted along with the documents for incorporation.
Additional directors
Number of first directors may be increased by appointing additional directors in general meeting.
Retirement of first directors
The first directors shall hold office until the election of directors in the first annual general meeting
of the company.
Term of office of subsequent directors
An elected director shall hold office for a period of three years unless he earlier resigns or otherwise
ceases to hold office.
However, the term of office of directors of a company limited by guarantee and not having share
capital may be a period of less than three years as provided in the articles.
The retiring directors shall continue to perform their functions until their successors are elected.
1.4 Procedure for election of subsequent directors [Section 159]

Fixing the number of directors
The existing directors of a company shall fix the number of directors to be elected in the general
meeting, not later than 35 days before convening of such meeting. Such number once fixed shall
not be changed except with the prior approval of the general meeting in which election is to be
held.
The notice of the meeting shall expressly state, among other matters, the number of directors fixed
as above and the names of retiring directors.
Example 08: Number of directors fixed

Question: Explain whether or not the following statement is in accordance with the provisions of the
“A company may change the number of directors to be elected at least 21 days before the date of
general meeting at which the election is to be held.”
Answer:
The statement is not in accordance with the provisions of the Companies Act 2017 because the
directors shall fix the number of directors to be elected not later than thirty-five days before the
convening of the general meeting at which directors are to be elected, and the number so fixed
shall not be changed except with the prior approval of a general meeting of the company.
Notice of contesting the election

Any member (including retiring director) who seeks to contest the election of directors shall file the
notice of his intention to the company, at least 14 days before the date of meeting at which election
is to be held. However, any such person may withdraw such notice at any time before the election.
The company shall transmit such notices (of intention to contest the election of directors) to the
members not later than 7 days before the date of the meeting, in the same manner as a notice of
general meeting is given to the shareholders. In case of a listed company, it shall also be published
in at least one issue of a daily newspaper in English and Urdu language having wide circulation.

Business Law
Elected unopposed
If the number of persons offering themselves to be elected as director is not more than the number
of directors fixed for election by the directors, the directors shall stand elected unopposed.
Example 09: Elected unopposed

Existing directors fixed the number of directors at eight for the next term and only eight persons
have sent notices of interest to contest the election of directors, all applicants shall stand elected
unopposed. If more than eight persons send notice of interest to become a director, poll shall be
taken for election.
Number of votes
During a poll for election of directors every member is entitled to cast the number of votes equal to
the product of number of voting shares or securities held and the number of directors to be elected.
A member can give all his votes to any one candidate or he may divide them between more than
one candidate as he deems appropriate.
Example 10: Number of votes

Ali has got 10,000 voting shares of Rs. 10 each and he is entitled to cast vote for the purpose of
election of directors and the company has to elect eight directors for the term, he shall have 80,000
votes to cast. He may cast all the votes in favour of any one person or may so distribute as he may
like.
Result of polling
The candidate getting the highest number of votes shall be declared elected as a director then the
candidate who gets the next highest number of votes shall be so declared and so on until the total
number of directors to be elected has been so elected.
Example 11: Result of polling

ABC Limited held voting for election of directors. Five candidates contested the election for three
seats of directors. Adeel, Babar, Chandio, Dawood and Ehsan got 75000, 44000, 12000, 57000
and 17000 votes respectively. Adeel, Dawood and Babar shall be declared to be elected directors.
All directors are equal

After election as a director, every director shall have equal authority and they shall not be superior
or inferior on the basis of number of votes they got in election or on any other grounds.
Example 12: All directors are equal

ABC Limited held voting for election of directors. Five candidates contested the election for three
seats of directors. Adeel, Babar, Chandio, Dawood and Ehsan got 75000, 44000, 12000, 57000
and 17000 votes respectively. Adeel, Dawood and Babar were declared to be elected directors.
Although Adeel had got much more votes as compared to Dawood and Babar, he has no superiority
over other directors. Adeel, Dawood and Babar shall have one vote each in board meetings.
Procedure for company limited by guarantee not having share capital

In case of a company limited by guarantee and not having share capital, the procedure for election
of directors shall be mentioned in its articles.
1.5 Nominee directors [Section 164 & 165]

Nominated by creditors
In addition to directors elected, a company may have directors nominated by the company’s
creditors or other special interests by virtue of contractual arrangements.

Nominated by Government or body corporate

The directors may be nominated by a body corporate or a company or Federal Government or
Provincial Government if they have made investment in the company. Such person shall be
considered to be an elected director termed as ‘deemed to have been elected director’ and shall
be considered for the calculation of minimum number of directors required for any company. Such
nominated director shall hold office during the pleasure of the nominating body.
The number of votes as are proportionate to the number of votes required to elect the director if
they had offered themselves for election, shall stand excluded from the total number of votes
available to the nominating body at an election of director.
1.6 Fresh election of directors [Section 162]

Criteria
Where a person acquires the requisite shareholding to get him elected as a director on the board
of a company, he may require the company to hold fresh election. However, the number of directors
fixed in the preceding election shall not be decreased.
Example 13: Criteria for fresh election of directors

Question: ABC Limited, a public unlisted company, has 10 million ordinary shares and five directors.
Shahid acquired 2.5 million ordinary shares. Can he require the company to hold fresh elections?
Answer:
Yes. The total number of votes are 50 million (i.e. 10 million shares x 5 directors), the requisite
votes are 10 million (i.e. 50 million votes / 5 directors). Shahid has requisite shareholding which
gives him 12.5 million votes (i.e. 2.5 million shares x 5 directors).
Time limit and procedure

The board shall, upon receipt of such requisition, as soon as practicable but not later than 30 days,
proceed to hold fresh election of directors of the company.
A listed company for the purpose of fresh election of directors shall follow such procedure as may
be specified by the Commission.
Example 14: Fresh election of directors

Question: Recently, the company secretary of Al-Falah Sugar Mill Limited (ASML) has received a
letter from Ghalib, a shareholder whose holdings in the company’s shares has increased to 14%
during the year, seeking appointment on ASML’s board of directors. The company secretary has
informed him that he cannot be admitted on the board till the next elections become due.
Not being satisfied with the response, Ghalib has asked you to advise on the above matter and
explain the course of action available to him under the Companies Act, 2017.
Answer:
Under the Companies Act , 2017 the tenure of the board of directors is 3 years and before expiry of
the term a person can only be admitted to fill in the casual vacancy. However, as per the
requirements of Companies Act 2017, where a person acquires requisite shareholding to get him
elected as a director, he may require the company to hold fresh election of directors.
Listed company shall follow such procedure as may be specified by the SECP. The board shall, as
soon as practicable but not later than 30 days from receipt of such requisition, proceed to hold
fresh election of directors of the company. It is important to note that the number of directors fixed
in the preceding election shall not be decreased.
1.7 Powers of the court to declare election invalid [Section 160]

Appeal criteria
Members holding at least 10% of the voting power in the company may apply to the court to declare
the election of all directors or any one or more of them invalid.

Business Law
Time limit
Such appeal may be made within 30 days from the date of election.
Decision of court
The court shall declare the elections invalid if it is satisfied that there has been material irregularity
in the holding of the elections and incidental or relating matters.
1.8 Validity of acts of directors [Section 168]

Validity of acts already done
The acts of a person acting as a director are valid even if it is afterwards discovered that there was
a defect in his appointment; or he was disqualified from holding office; or he had ceased to hold
such office.
When defect is noticed
However, as soon as any such defect has come to notice, the director shall not exercise the right
of his office till the defect has been removed.
Example 15: Validity of acts of directors

Question: Junaid was elected as a director of Abid Limited in its last annual general meeting. After
a few months, it was found that Junaid’s appointment was not valid as votes by certain members
were counted twice due to an error. Few directors have challenged the validity of all meetings
attended by him and the actions taken therein. Advise.
Answer:
Any act of a director or a meeting of a director cannot be considered invalid merely on the ground
of any defect subsequently discovered in his appointment. Therefore, all the acts of Junaid during
this period are valid. However, he should not exercise right of his office with immediate effect and
any act after this cannot be considered valid.
1.9 Casual vacancy [Section 161 & 155]

Term of office
Any casual vacancy occurring among the directors may be filled up by the directors and the person
so appointed shall hold office for the remainder of the term of the director in whose place he is
appointed.
Appointment not necessary
If the number of directors of the company is equal or above the minimum number of directors
required for that company, even after the casual vacancy, such directors may not fill in the casual
vacancy and complete the term without filling such vacancy.
Example 16: Casual vacancy

Question: Abid, Qasim and Tariq were the only members of Alpha Securities Limited (ASL), a public
company and were elected as directors on 30 October 2018. Qasim expired on 2 February 2019 in
a road accident. Advise Alpha Securities Limited.
Answer:
ASL is a public company and is required to have at least three members as well as three directors.
On the death of Qasim, the number of directors of ASL has been reduced to two which is in
contravention of the provisions of the Companies Act. The casual vacancy arising due to the death
of Qasim may be filled up by Abid and Tariq and the person so appointed would hold office for the
remainder of the term of Qasim in whose place he is appointed.
Time limit
Any casual vacancy on the board of a listed company shall be filled up by the directors at the
earliest but not later than 90 days from the date of vacancy. There is no time limit specified in
Companies Act for other companies.

Example 17: Number and casual vacancy

Question: Lalazar Limited, a pubic unlisted company has a paid up capital of Rs 100 million
consisting of shares having face value of Rs 10 each. Last election of its Board of Directors was
held on April 15, 20X3 in which eight directors were elected. Four of the directors belonged to the
same family. The remaining directors were Javed, Bader, Qasim and Dawood. They secured
600,000, 350,000, 480,000 and 220,000 votes respectively. The remaining votes were equally
distributed among the four directors of the family. Javed died on May 30, 20X3 and Aslam was
appointed as a director on June 15, 20X3 to fill in the casual vacancy.
Explain the following in the light of the provisions of the Companies Act, 2017:
(a) Is Lalazar Limited in compliance with the requirements of minimum number of directors?
(b) Who is responsible to fill the casual vacancy in the Board and when would Aslam’s term of
office be completed?
Answer:
Part (a)
Every public company other than a listed company shall not have less than three directors. As
Lalazar Limited has eight directors on their board, therefore they are in compliance with the
requirements of law.
Part (b)
Any casual vacancy occurring among the directors may be filled up by the directors. Aslam shall
hold office for the remainder of the term of the director Javed in whose place he has been
appointed.
1.10 Removal of directors [Section 163]

A director may be removed from the office by the members of the company by passing a resolution.
The director shall not be considered to have been removed if votes against removal equal or
exceed as follows:
Type of director to be
Not removed if votes against removal equal to or exceed
removed
Minimum number of votes which were enough to qualify a person as
Elected director
a director in the last election of directors.
Average votes i.e.
Elected unopposed 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑡𝑒𝑟𝑚 × 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑣𝑜𝑡𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠
First directors =
Casual vacancy 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑡𝑖𝑚𝑒 𝑏𝑒𝑖𝑛𝑔
Example 18: Removal of director

Question: Aslam was elected as a director in ABC Limited one year ago; company has 2 million
shares and seven directors. He was the last one to become director by securing 1.5 million votes. A
resolution has been moved in the general meeting to remove Aslam from his position. How much
votes Aslam require to save his seat?
Answer:
At least 1.5 million votes which is the least number of votes sufficient to make a person director in
last election of directors.

Business Law

Question: A public unlisted company has four directors namely Adeel, Babar, Chand and Dawood
and in the last election they were elected by securing 80,000, 70,000, 68,000 and 63,000 votes
respectively. Ehsan who also contested election secured 57000 votes and could not be elected as
director. One of the majority shareholders has indicated to remove Babar in coming AGM. How
much votes Babar require to save his seat?
Answer:
Babar being an elected director needs 63,000 votes against his removal which is the least number
of votes sufficient to make a person director in last election of directors.

Question: Aslam was elected as a director to fill in a casual vacancy; company has 2 million shares
and seven directors. The last one to become director had secured 1.5 million votes in last election
of directors. A resolution has been moved in the general meeting to remove Aslam from his position.
How much votes Aslam require to save his seat?
Answer:
He shall not be removed from his office if the number of votes casted against the resolution equals
or exceeds the number of votes calculated as per the following formula:
(Number of directors for the term × Number of shares) ÷ Number of directors for the time being
7 × 2,000,000 ÷ 7 = 2,000,000 votes

Question: Due to a dispute among the directors of Sun Limited, a listed company, all the directors
want to remove Hameed from the directorship of the company prior to the completion of his term.
State the procedure and the conditions to be complied with if the company wants to remove
Hameed from the directorship of the company, under each of the following assumptions:
 He was elected as a director of the company.
 He became the director of the company by subscribing to the memorandum of association of
the company.
Answer:
In either case, the company may remove Hameed from the directorship by passing a resolution in
general meeting.
If Hameed was appointed by the election of directors of the company.

Hameed shall be removed if votes cast against the resolution for removal are less than the
minimum number of votes that were cast for the election of director at the immediately preceding
election of directors. However, if Hameed was elected unopposed then he shall be removed if votes
cast against the resolution for removal are less than the total number of votes for the time being
computed as a product of number of shares held by voter and number of director elected at the
time of his appointment divided by the number of directors for the time being.
If Hameed was appointed by the subscribers to the memorandum of association of the company.
Hameed shall be removed if votes cast against the resolution for removal are less than the total
number of votes for the time being computed as a product of number of shares held by voter and
number of director elected at the time of his appointment divided by the number of directors for
the time being.

Example 22: Removal of a director

Question: Baalbek Limited is an unlisted public company and has eight directors. Its paid-up capital
is Rs. 50,000,000 divided into ordinary shares of Rs. 500 each. The directors have decided to
remove Aga Kirmani from the board due to his dismal performance. Aga Kirmani was elected
unopposed on the board.
In the light of the provisions of the Companies Act, 2017 briefly describe how Aga Kirmani can be
removed from the board.
Answer:
Aga Kirmani may be removed from the board by passing a resolution in a general meeting.
However, since he was appointed unopposed, he shall not be removed from his office if the number
of votes casted against the resolution equals or exceeds the number of votes calculated as per the
following formula:
(Number of directors for the term × Number of shares) ÷ Number of directors for the time being
i.e. 8 × (50,000,000÷500) ÷ 8 = 100,000 votes
Therefore, Aga Kirmani would be removed from the board if less than 100,000 votes are casted
against the resolution.
Example 23: Removal of Directors

Question: Lalazar Limited, a pubic unlisted company has a paid up capital of Rs 100 million
consisting of shares having face value of Rs 10 each. Last election of its Board of Directors was
held on April 15, 20X3 in which eight directors were elected. Four of the directors belonged to the
same family. The remaining directors were Javed, Bader, Qasim and Dawood. They secured
600,000, 350,000, 480,000 and 220,000 votes respectively. The remaining votes were equally
distributed among the four directors of the family. Javed died on May 30, 20X3 and Aslam was
appointed as a director on June 15, 20X3 to fill in the casual vacancy.
Explain the following in the light of the provisions of the Companies Act, 2017.
The conditions required to be fulfilled if a person desires to remove the following directors:
(i) Aslam
(ii) Bader
Answer:
Removal of Directors
A company may by resolution in a general meeting remove a director appointed to fill in the casual
vacancy or a director appointed by members in a general meeting of the company.
(i) Aslam
The situation relates to the removal of director appointed to fill in the casual vacancy. Therefore,
the number of votes cast against the resolution should not be equal to or exceed the total number
of votes for the time being computed in a manner similar to the method used for directors’ election
divided by the number of directors, which in this case would be 10,000,000 x 8 ÷ 8 = 10,000,000.
(ii) Bader
Bader can be removed from his office only when the votes cast against the resolution are less than
220,000 i.e. the minimum number of votes through which the director was elected in the
immediately preceding election of directors.

Business Law
1.11 Vacation of office [Section 171]

A director shall be treated to have vacated the office of director if:
 he becomes ineligible to be appointed as director;
 he absents himself from three consecutive meetings of the board without seeking leave of
absence;
 he, his partnership firm in which he is a partner or any private company in which he is a
director,
 accepts any loan or guarantee from the company in contravention of Companies Act; or
 accepts any office of profit (other than that of chief executive or a legal or technical adviser)
without sanction of the company in a general meeting .
A company may include additional grounds for vacation of office in its articles.
Example 24: Vacation of office

Question: Kalim is a director of Behaal Limited. On 1 October 2017 Kalim went abroad on a
personal trip and returned back on 15 February 2018. He was unable to attend five board meetings
which were held during this period. Advise Kalim.
Answer:
Kalim shall ipso facto cease to hold office if he was absent for at least three consecutive board
meetings unless he has obtained leave of absence.

2 POWERS, DUTIES AND PROCEEDINGS OF DIRECTORS

Section overview
 Powers of board
 Duties of directors
 Compliance with the code of corporate governance
 Liabilities of directors and officers
 Protection to independent and non-executive directors
 Proceedings of the board
 Passing of resolution through circulation
 Records of resolutions and meetings of board
2.1 Powers of board [Section 183]

The business of a company shall be managed by the board, who may exercise all such powers of
the company as are not by Companies Act, or by the articles, or by a special resolution, required
to be exercised by the company in general meeting.
Power to be exercised by passing a board resolution
The board shall exercise the following powers by ‘passing a resolution’ in board meetings:
 to issue shares, debentures or other redeemable capital or to otherwise borrow money or
invest the funds of the company;
 to make loans. This restriction of passing a board resolution does not apply to banking
company advancing loans in ordinary course of its business;
 to approve annual and periodical accounts and to approve bonus for employees;
 to incur capital expenditure on any single item or dispose of a fixed asset in accordance
with the limit as may be specified;
 to undertake obligations under leasing contracts exceeding such amount as may be
notified;
 to declare interim dividend;
 to authorize the following to enter into any contract with the company for making sale,
purchase or supply of goods or rendering services with the company:
 a director;
 the firm of which a director is a partner or any partner of such firm; or
 a private company of which such director is a member or director;
 if the amount is material as per Generally Accepted Accounting Principles:
 to write off bad debts, advances and receivables;
 to write off inventories and other assets; and
 to determine the terms of and the circumstances in which a law suit may be
compromised and a claim or right in favour of a company may be released,
extinguished or relinquished.
 to take over a company or acquiring a controlling or substantial stake in another company;
 any other specified matter.

Business Law
Authorisation of general meeting

The board of a company shall not except with the consent of the general meeting either specifically
or by way of an authorisation, do any of the following things, namely:
 sell, lease or otherwise dispose of the undertakings or a sizeable part thereof unless the
main business of the company comprises of such selling or leasing; and
 sell or otherwise dispose of the subsidiary of the company;
 remit, give any relief or give extension of time for the repayment of any debt outstanding
against any director of the company or of its holding company; or to any of this relatives.
A listed company is not entitled to sell or otherwise dispose of the undertaking, which results in or
may lead to closure of business operation or winding up of the company, without there being a
viable alternate business plan duly authenticated by the board.
Any resolution passed (authorisation of general meeting) if not implemented within one year from
the date of passing shall stand lapsed.
Example 25: Powers of Board

Question: At the annual general meeting of Rahbar Refineries Limited (RRL), certain shareholders
have raised objections on matters related to the use of the company’s funds. In the opinion of those
shareholders the board have exceeded the authority vested upon them by the Companies Act,
2017.
Identify those powers of board which the shareholders of RRL may be referring to.
Answer:
Powers of Board.
The shareholders seem to be referring to the following powers of the board of RRL:
 Invest the funds of the company.
 Make loans.
 Incur capital expenditure on any single item or dispose of a fixed asset, in accordance with the
limits prescribed.
 Undertake obligations under leasing contracts exceeding limits prescribed.
 Declare interim dividend
 To authorize sale, purchase or supply contracts with interested companies and firms
 To approve bonus to employees
 To take over a company or acquire a controlling or substantial stake in another company
2.2 Duties of directors [Section 204]

Duties
The Companies Act mentions following duties of directors:
 a director of a company shall act in accordance with the articles of the company.
 a director of a company shall act in good faith in order to promote the objects of the
company for the benefit of its members as a whole, and in the best interests of the company,
its employees, the shareholders, the community and for the protection of environment.
 a director of a company shall discharge his duties with due and reasonable care, skill and
diligence and shall exercise independent judgment.
 a director of a company shall not involve in a situation in which he may have a direct or
indirect interest that conflicts, or possibly may conflict, with the interest of the company.

 a director of a company shall not achieve or attempt to achieve any undue gain or
advantage either to himself or to his relatives, partners, or associates and if such director
is found guilty of making any undue gain, he shall be liable to pay an amount equal to that
gain to the company.
 a director of a company shall not assign his office and any assignment so made shall be
void.
In addition to above, the Commission may provide for the extent of duties and the role of directors
as may be specified.
Breach and ratification
Any breach of duty, default or negligence by a director in contravention of the articles of the
company or any of its policy or decision of the board may be ratified by the company through a
special resolution and the Commission may impose any restriction as may be specified.
2.3 Compliance with the code of corporate governance [Section 156]

Power of Commission
The Commission may provide for framework to ensure good corporate governance practices,
compliance and matters incidental and auxiliary for companies or class of companies in a manner
as may be specified.
Duty of directors
The above would require duty of directors to act in line with good corporate governance practices.
2.4 Liabilities of directors and officers [Section 180]

Restriction on indemnification
Any provision, whether contained in the articles of a company or in any contract with a company
or otherwise, for exempting any officer or auditor of the company, from, or indemnifying him
against, any liability which by virtue of any law would otherwise attach to him in respect of any
negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the
company, shall be void except as specified below.
Example 26: Restriction on indemnification

Question: Aaqil was appointed as Chief Executive of Chalaak Limited (CL) at the time of
appointment of Adil, one of the major shareholders and founder member informed him that since
last four years CL is paying 90% cash dividend to all the shareholders, however, Adil mentioned that
he didn’t like to pay dividend to minority shareholders and advised Aaqil not to pay from this year.
Aaqil informed Adil that as per the provisions of Companies Act, 2017 Chief Executive shall be
punishable with imprisonment that may extend to two years and with fine which may extend to five
million rupees if the dividend is not paid within specified period of time after dividend has been
declared.
Adil proposed Aaqil to sign a contract with CL in which it will be clearly indicated that Aaqil will be
indemnified against all sort of liabilities if any imposed on him due to non-payment of dividend to
the minority shareholders of CL. The contract was signed on 28th March 2020 between CL and
Aaqil. Is the contract valid?
Answer:
In light of the provisions of the Companies Act, 2017 the aforesaid contract between CL and Aaqil
shall be void.
Exception
However, a company is not prohibited from indemnifying any of its director, chief executive or
officer against any liability incurred by any of them in defending any proceedings against him, in
which judgement is given by the court in his favour or in which any of them is acquitted; irrespective
of the fact that whether the proceedings against any of them were in respect of any civil or criminal
nature.

Business Law
Example 27: Exception – restriction on indemnification

Question: Asad filed criminal case against Bilal, who is working in the capacity of Chief Financial
Officer of Shining Star Limited (SSL), on the premise that Bilal has misappropriated SSL’s funds to
the tune of Rs. 10 million. Bilal appointed M/s Dayyanat-dar & Co. Legal Advisors and provided all
the evidences with respect to all the allegations raised by Asad in the said criminal case and paid
Rs. 500,000/- on account of legal fee. Based on the documentary evidences provided by Bilal the
court acquitted i.e. declared Bilal as innocent. Bilal requested SSL management to indemnify him
Rs. 500,000/- paid by him to the lawyer and provided the Legal Advisors invoice along with other
necessary documents. Can SSL indemnify Bilal in above situation.
Answer:
In the light of the provisions of Companies Act, 2017 SSL may indemnify Bilal.
2.5 Protection to independent and non-executive directors [Section 181]

When liable?
An independent director and a non-executive director shall be held liable, only in respect of such
acts of omission or commission by a listed company or a public sector company which had
occurred with his knowledge, attributable through board processes, and with his consent or
connivance or where he had not acted diligently.
Definition: Independent director [Section 166]

An independent director means a director who is not connected or does not have any other
relationship, whether pecuniary or otherwise, with the company, its associated companies,
subsidiaries, holding company or directors; and he can be reasonably perceived as being able to
exercise independent business judgment without being subservient to any form of conflict of
interest. In essence, an executive director can never be an independent director.
Definition: Non-executive director [Section 181]

A non-executive director means, a person on the board of the company who:
 is not from among the executive management team and may or may not be independent;
 is expected to lend an outside viewpoint to the board of a company;
 does not undertake to devote his whole working time to the company and is not involved in
managing the affairs of the company;
 is not a beneficial owner of the company or any of its associated companies or undertakings;
 does not draw any remuneration from the company except the meeting fee.
2.6 Proceedings of the board [Section 176]

Quorum of listed company
The quorum for a meeting of directors of a listed company shall not be less than one-third of their
number or four, whichever is greater and the participation of the directors by video conferencing or
by other audio-visual means shall also be counted for the purposes of quorum.
Quorum for other than listed company shall be as provided in the articles.
Example 28: Quorum of listed company

A listed company has seven directors. The quorum for board meetings shall be complete by
participation of at least four directors.
Example 29: Quorum of listed company

A listed company has seventeen directors. The quorum for board meetings shall be complete by
participation of at least six directors.

Casual vacancy situation

If there are not enough directors to form a quorum to fill a casual vacancy, all the remaining
directors shall be deemed to constitute a quorum for this limited purpose.
Example 30: Casual vacancy situation

A listed company has seven directors. Unfortunately four directors died in a car accident together.
The remaining three directors shall be considered valid quorum for filling in casual vacancies arising
in such situation.
Frequency of meetings
The board of a public company shall meet at least once in each quarter of a year.
2.7 Passing of resolution through circulation [Section 179]

Validity
A resolution in writing signed by all the directors/committee of directors for the time being entitled
to receive notice of a meeting shall be as valid and effectual as if it had been passed at a meeting
of directors/committee of directors duly convened and held.
Manner of circulation
Before passing it, the resolution should be circulated with necessary papers to all directors. Such
resolution shall be noted at a subsequent meeting of board/committee of directors and made part
of the minutes of such meeting.
Revocation not allowed
A directors’ agreement to a written resolution, passed by circulation, once signified, may not be
revoked.
Example 31: Directors’ resolution by circulation

Question: Haider Limited (HL), a listed company, is in the process of finalization of a financing
facility with a bank. The bank requires a copy of the board resolution for approval of the terms of
the financing. However, no board meeting is planned in the near future and few directors are out of
the country.
In the light of the provisions of the Companies Act, 2017 explain what alternative course of action
is available to HL and the steps it would be required to take
Answer:
Alternative course of action available to HL
HL can pass a resolution in writing signed by all the directors of HL for time being entitled to receive
notice of a meeting of the directors approving the terms of the financing.
However, directors’ agreement to a written resolution, passed by circulation, once signified, may
not be revoked.
Steps required for passing a resolution by circulation

 The proposed resolution shall be circulated together with necessary documents, if any, to all the
directors.
 The resolution shall be noted at a subsequent meeting of the board or the committee thereof,
as the case may be, and made part of the minutes of such meeting.
2.8 Records of resolutions and meetings of board [Section 178]

Record to be kept
Every company shall keep records comprising:
 all resolutions of the board passed by circulation; and

Business Law
 minutes of all proceedings of board meetings or committee of directors along with the
names of participants, to be entered in properly maintained books.
Authentication
Minutes recorded as above if purporting to be authenticated by the chairman of the meeting or by
the chairman of the next meeting, shall be the evidence of the proceedings at the meeting.
Copy to directors
A copy of the draft minutes of meeting of board shall be furnished to every director within 14 days
of the date of meeting.
Place for keeping record and time duration
The records must be kept at the registered office of the company from the date of the resolution,
meeting or decision simultaneously in physical and electronic form and it shall be preserved for at
least ten years in physical form and permanently in electronic form.

3 RESTRICTIONS, PROHIBITIONS AND LIMITATIONS

Section overview
 Restrictions on director’s remuneration

 Prohibition on assignment of office by directors
 Restriction on transactions involving directors
 Loan to directors
 Other prohibitions
 Disclosure of interest by director
 Interested director not to participate or vote
 Disclosure of interest by officers other than directors
3.1 Restrictions on director’s remuneration [Section 170]

Remuneration for attending meetings
The remuneration to be paid to any director for attending the meetings of the directors or a
committee of directors shall not exceed the scale approved by the company or the board of
directors, as the case may be, in accordance with the provisions of the articles.
Remuneration for extra services
The remuneration of a director for performing extra services, including the holding of the office of
chairman, is determined by the board of directors or the company in general meeting in accordance
with the provisions in the company's articles.
Example 32: Remuneration of directors

“Directors’ remuneration for performance of extra services including the holding of office of the
chairman or attending the board meeting is decided by the chief executive.”
Answer:
The statement is not in accordance with the provisions of the Companies Act 2017. The directors’
remuneration for performing extra services, including the holding of the office of chairman, is
determined by the directors or the company in general meeting in accordance with the provisions
in the articles of association of the company.
Example 33: Remuneration of directors

Question: Discuss the provisions relating to the payment of remuneration to any of the directors for
attending the board meeting and performing extra services.
Answer:
The remuneration to be paid to any director for attending the meetings of the directors or a
committee of directors shall not exceed the scale approved by the company or the directors, as the
case may be, in accordance with the provisions of the articles.
The remuneration of a director for performing extra services, including the office of the chairman,
is determined by the directors or the company in general meeting in accordance with the provisions
in the company's articles.

Business Law
3.2 Prohibition on assignment of office by directors [Section 174]

Prohibition on assignment of office
A director of any company shall not assign his office to any other person and any such appointment
shall be void ab-initio.
Appointment of alternate director is allowed
The appointment by a director, of an alternate or substitute director to act for him during his
absence from Pakistan of not less than 90 days, will not be deemed to be an assignment of office.
The alternate director so appointed vacates office when the director appointing him returns to
Pakistan.
Example 34: Assignment of office

“A director of a listed company cannot assign his office to another person under any
circumstances.”
Answer:
The statement is in accordance with the provisions of the Companies Act 2017. Any such
appointment shall be void ab initio.
Example 35: Assignment of office

Question: In light of the provisions of the Companies Act 2017 advise the directors of KM Limited
on the matter of assignment of director’s office where Faisal, one of the directors, wishes to assign
his office to Saeed as Faisal is going abroad for personal work.
Answer:
The assignment of office by a director is prohibited and void ab initio. However, the directors have
an option to appoint alternate or substitute director (with the approval of the board) if Faisal is
going abroad for a period not less than 90 days. However, Saeed shall vacate the office when Faisal
returns to Pakistan.
Example 36: Attendance at meeting and assignment of office

Question: Mr. Hameed, who is a director in ABC Limited, a listed company, is planning to move to
Europe for one year to set up his own business. In the light of Companies Act, 2017 you are required
to:
Respond to his request for advice, as regards his responsibilities, under the Companies Act 2017,
in respect of:
(a) attending the annual general meeting of the company.
(b) attending the board meetings of the company.
(c) conditions under which he may be allowed to assign his office to another person.
Answer:
Part (a) Director’s attendance at Annual general Meeting.
It is not mandatory for a director to attend the annual general meeting of the company and there
are no consequences of not attending it under Companies Act, 2017.
Part (b) Director’s attendance at Board Meeting.

If Mr. Hameed does not attend, without leave of absence from directors, three consecutive board
meetings he shall ipso facto cease to hold office.
Part (c) Restriction on assignment of office of directors

Mr. Hameed cannot assign his office to another person. However, he may appoint, with the approval
of the board, an alternate or substitute director to act for him during his absence from Pakistan.

Example 37: Various issues relating to directors

Question: Rapid Constructions Limited (RCL) is a listed company. Advise the Board of Directors of
RCL on the following matters, in the light of the provisions of the Companies Act, 2017:
(a) A request has been made by an independent director for increase in remuneration of
directors from Rs. 25,000 to Rs. 40,000 for attending the Board and sub-committee
meetings and performing extra services.
(b) Dawood, who is a director, wants to appoint his brother in his place as he is going abroad
on vacations.
(c) Asad is a director but is not a member of the company.
Answer:
Part (a)
The remuneration of a director for performing extra services, may be determined by the directors
or the company in general meeting, in accordance with the provisions in the company's articles.
Further, the remuneration for attending the Board of directors’ meetings or Committee Meetings
cannot exceed the scale approved by the company or the directors, as the case may be, in
accordance with the provisions of the articles of the company.
Part (b)
Following conditions must be complied with if Dawood’s brother is to be appointed as an alternate
director.
 The absence of Dawood should be for a period of at least 3 months
 The directors of the company approve the grant of leave to Dawood and the appointment of
alternate director.
 Dawood’s brother must be a member of RCL and should not be ineligible to be appointed as a
director of RCL in any other manner.
Part (c)
The condition for a director to be a member of the company does not apply to Asad if he is:
(i) representing the Government or an institution or authority which is a member;
(ii) an employee of the company;(whole-time director)
(iii) a Chief executive;
(iv) representing a creditor.
3.3 Restriction on transactions involving directors [Section 211]

Cash transactions
The company shall ensure that all cash transactions with its directors are conducted only through
banking channels.
Non-cash transactions
Unless prior approval is accorded by a resolution of general meeting of company (and if the director
or connected person is a director of its holding company, approval is also required to be obtained
by passing a resolution in general meeting of the holding company) no company shall enter into
an arrangement by which:
 A director of company or its holding/subsidiary/associated company or a person connected
with him acquires or is to acquire assets for consideration other than cash, from the
company; or
 Company acquires or is to acquire assets for consideration other than cash, from such
director or person so connected.
Notice for approval of resolution shall include the particulars of arrangement along with the value
of the assets involved in such arrangement duly calculated by a registered valuer.

Business Law
Example 38: Conditions for arrangement with director

Question: Ahmed is a director on the boards of Nazeer Industries Limited (NIL) and King Limited
(KL), which is the subsidiary of NIL. KL is in process of disposing off its land in Industrial Zone 1
since it wants to shift the production plant to Industrial Zone 2. Owing to the growing demand of
Zone 2, the management of KL has been finding it difficult to obtain the plot in desired zone.
Considering the difficulties of KL, Ahmed has offered to sell his plot in Zone 2 in consideration of
KL’s land in Zone 1. According to Ahmed, the fair values of both properties are approximately the
same.
Under the Companies Act, 2017 state the conditions which must be met before such transaction is
executed under the arrangement proposed by Ahmed
Answer:
KL cannot enter into such arrangement unless prior approval for the non-cash transaction is
obtained through a resolution in general meeting.
Since Ahmed is also the director of KL’s holding company, approval from shareholders of NIL is also
required to be obtained by passing a resolution in general meeting of the holding company.
The notice for approval of the resolution by KL and NIL shall include the particulars of the
arrangement along with value of the assets involved in such arrangement duly calculated by a
registered valuer.
Example 39: Transaction with director

Question: Kismet Limited (KL) has entered into an arrangement with Ahmad Laiq, the CEO of Bijli
(Private) Limited for the purchase of a specialized machinery worth Rs. 2,500,000 used in the
manufacture of electric irons. Ahmad Laiq is the brother of one of KL’s directors and also a director
in KL’s holding company. Ahmad Laiq has agreed to take 20,000 shares in KL in consideration for
the payment of machinery.
Advise whether KL can acquire the machinery from Ahmad Laiq.
Answer:
KL cannot enter into an arrangement by which it acquires asset(s) for consideration other than cash,
from Ahmad Laiq who is connected with one of KL’s directors’ and is also a director in HL’s holding
company.
The above arrangement can only be entered, if prior approval for the arrangement has been
accorded by a resolution in KL’s general meeting.
Since Ahmad Laiq is also a director in KL’s holding company, approval shall also be required to be
obtained by passing a resolution in general meeting of the holding company.
The notice for approval of the resolution by KL and holding company shall include the particulars of
the arrangement along with value of the assets involved in such arrangement duly calculated by a
registered valuer.
3.4 Loan to directors [Section 182]

Restriction
The company is not allowed, unless the transaction has been approved by members through
resolution, to:
 make a loan to a director of the company or of its holding company or any of his relatives
(spouse and minor children); or
 give a guarantee or security in connection with a loan made by any person to such a
director; or to any of his relatives.

Additional requirement for listed company

Additionally, approval of the Commission is also required in case of a listed company, for such
loans.
Exception
The above restrictions do not apply to a company which in the ordinary course of its business
provides loans or gives guarantees or securities for the due repayment of any loan.
Example 40: Loan to director

Question: The directors of Shah Limited (SL), a listed company, have offered Shams who is presently
working as General Manager Operations, to become the director of the company to fill in a casual
vacancy. Last year Shams obtained a loan amounting to Rs. 1.2 million in accordance with the
company's employment rules, out of which Rs. 0.8 million is still outstanding. Shams has agreed
to take the position of director but is not in a position to repay the loan immediately.
Discuss the requirements of the Companies Act, 2017 which Shams will need to comply with.
Answer:
The loan becomes immediately payable unless it is approved by the resolution of the general
meeting and also the approval of the Commission has been obtained as SL is a listed company.
Example 41: Interest free loan to director

Question: Azad Limited (AL) is a listed company engaged in the business of manufacturing and
supply of electrical appliances. Mr. Majnou, a director of AL, has applied for an interest free loan
from the company to be repayable in five years.
In view of the provisions of the Companies Act, 2017 describe the circumstances under which AL
may grant loan to Mr. Majnou.
Answer:
AL cannot, directly or indirectly, grant any loan to its director, Mr. Majnou unless it has been
approved by the members of AL and also approval of commission has been obtained.
Example 42: Loan to director

Question: In light of the provisions of the Companies Act 2017 advise the directors of TS Limited
on the following matter:
“The CEO has refused the personal loan application of Yasir, who is also employed as a technical
director, on the premise that grant of any loan to directors is prohibited under the law.”
Answer:
As Yasir is director, the loan to Yasir may be granted subject to following conditions:
 The loan transaction has been approved by a resolution of the members of the company.
 If TSL is listed company, prior approval from SECP is obtained.
3.5 Other prohibitions

Prohibition regarding making of political contribution [Section 184]
A company shall not contribute any amount or allow utilisation of its assets:
 to any political party; or
 for any political purpose to any individual or body.
Prohibition regarding distribution of gifts [Section 185]
A company is prohibited to distribute gifts in any form to its members in its meeting.

Business Law
3.6 Disclosure of interest by director [Section 205]

Why to disclose interest or concern
The directors are agents of the member of the company and they are in a fiduciary relationship
with all the members of the company. So they are required to make all contracts and all transaction
in good faith and in the best interest of the company. Hence if they make any transaction or enter
into any contract on behalf of the company in which they are themselves interested by any means,
they should give a complete disclosure of the fact so that their integrity is not questioned. There
must not be any conflict of interest between the company and the directors.
Example 43: Disclosure of interest

A listed company has to purchase a specific property and that property relates to the spouse of a
director; he shall be required to make a disclosure of his interest to other directors. As a director of
the company he shall be working for the company and should try to bargain at lowest possible price,
but on the other hand his spouse is owner of the property, he should also be naturally interested
that his spouse gets highest possible price for that property. You can see that conflict of interest
arises, so whenever there is such a situation, a complete disclosure from the director must be given
to the other directors and then after disclosing, interested director may not be part of the directors’
meetings in which such contract or transaction is to be discussed.
Prohibited transactions are not validated by disclosure

If directors are forbidden to make certain transactions with the company by provisions of any law,
those provisions shall prevail, and disclosure of those transactions cannot justify the contravention
of law. Even for transactions which are not prohibited, disclosure of interest must be made and
certain transactions may carry additional approval requirement.
Requirement
Every director of a company who is concerned or interested in any contract or arrangement entered
into, or to be entered into, by the company shall disclose the nature of his concern or interest at a
meeting of the board.
A director shall be deemed also to be interested or concerned if any of his relatives (spouse,
children including step children and parents), is so interested or concerned.
Timing of disclosure
The director should give the notice of his interest in transactions or arrangements:
 in first board meeting, in which such transaction or arrangement is discussed, if such
transaction requires directors’ approval;
 if he was not interested at the time of first discussion, in first board meeting held after he
becomes so interested, if such transaction requires directors’ approval;
 in first meeting held after the transaction or arrangements is entered into, if such transaction
does not require directors’ approval.
General notice
Instead of making a disclosure at separate intervals on each transaction, the director may give a
general notice regarding his directorships or memberships in other body corporate or partnership
in firms so that he may be considered as interested in any transaction, contract or arrangement
entered into with these businesses.
Such notice should be given at the directors' meeting or the concerned director may take
reasonable steps to ensure that it is brought up and read at the first meeting of the board after it is
given.
This general notice shall expire at the end of the financial year in which it is given and may be
replaced by fresh notice to be given in last month of financial year.

Example 44: General notice of ownerships and directorships

Question: What is the procedure for filing a general notice of interest by a director and what would
such a general notice include?
Answer:
Instead of making a disclosure at separate intervals on transaction by transaction basis, the director
may give a general notice regarding his directorships in other body corporate or partnership in firms
so that he may be considered as interested in any transaction, contract or arrangement entered
into with these businesses.
Such notice should be given at the directors' meeting or the concerned director may take
reasonable steps to ensure that the notice is read by the other directors.
This general notice shall expire at the end of the financial year in which it is given and may be
replaced by fresh notice to be given in last month of financial year.
3.7 Interested director not to participate or vote [Section 207]

Not to participate or vote
A director shall not, as a director, take any part in the discussion of, or vote on, any contract or
arrangement entered into, or to be entered into, by or on behalf of the company, if he is in any way,
whether directly or indirectly, concerned or interested in the contract or arrangement, nor shall his
presence count for the purpose of forming a quorum at the time of any such discussion or vote;
and if he does vote, his vote shall be void.
Not to be present
A director of a listed company who has a material personal interest in a matter that is being
considered at a board meeting shall not be present while that matter is being considered.
Approval from members
If majority of the directors are interested in, any contract or arrangement entered into, or to be
entered into, by or on behalf of the company, the matter shall be laid before the general meeting
for approval.
Exception
The above provisions shall not be applicable under the following circumstances:
 If the person is a director of a private company which is neither a subsidiary nor a holding
company of a public company;
 when the director has acted as surety of the company and the resolution under
consideration relates to the indemnification or insurance coverage of the surety director
against any loss incurred by the director for becoming surety of the company.
Example 45: Interested director not to participate or vote in proceedings of board

Question: The director of a company shall not take any part in the discussion of, or vote on, any
contract or arrangement entered into, or to be entered into, by or on behalf of the company, if he is
in any way, whether directly or indirectly, concerned or interested in such contract or arrangement.
Under the provisions of the Companies Act, 2017 briefly describe the exceptions to the above rule,
if any.
Answer:
The above rule shall not be applicable under the following circumstances:
 If the person is a director of a private company which is neither a subsidiary nor a holding
company of a public company;
 when the director has acted as surety of the company and the resolution under consideration
relates to the indemnification or insurance coverage of the surety director against any loss
incurred by the director for becoming surety of the company.

Business Law
Example 46: Disclosure of directors’ interest

Question: Faraz Limited (FL) is considering to enter into a contract with Bari Limited (BL) for the
construction of its new manufacturing facility. The Board of Directors of FL has authorized Hasan
Ali, an executive director, to negotiate the final price with BL.
Sara Ali, who is a chief executive in BL, is the spouse of Hasan Ali.
In view of the provisions of the Companies Act, 2017 briefly explain the responsibilities of Hasan
Ali towards FL under the above circumstances.
Answer:
Being a director, Hassan Ali is an agent of the shareholders of the company and stands in a fiduciary
relationship with them so he is required to make all contracts and all transactions in good faith and
in best interest of the company. In this case, Hassan Ali is deemed to be indirectly interested in the
transaction as his wife is the chief executive in BL.
Therefore, Hassan Ali should give a general notice to the effect to all other directors that he should
be regarded as concerned or interested in the transaction to be entered into with BL and such notice
shall be given at the meeting of the directors at which the question of entering into the contract or
arrangement is first to be taken into consideration.
After disclosing his interest in the transaction, Hassan Ali should not be part of the directors’
meeting in which such contract or transaction is to be discussed.
3.8 Disclosure of interest by officers other than directors [Section 206]

Other officer of a company who is directly or indirectly concerned or interested in any proposed
contract or arrangement with the company shall not enter into any such contract or arrangement
unless he discloses the nature and extent of his interest in the transaction and obtains the prior
approval of the board.

4 CHIEF EXECUTIVE AND OTHER OFFICERS

Section overview
 Chief executive
 Appointment of subsequent chief executive
 Terms of appointment
 Removal of chief executive
 Not to engage in competing business
 Other officers
4.1 Chief executive
Definition: Chief executive [Section 2(14)]

"chief executive", in relation to a company means an individual who, subject to the control and
directions of the directors, is entrusted with the whole, or substantially the whole, of the powers of
management of the affairs of the company and includes a director or any other person occupying
the position of a chief executive, by whatever name called, and whether under a contract of service
or otherwise.
Restriction on appointment (ineligibility) [Section 189]

A person who is ineligible to become a director of a company shall not be appointed or continue
as the chief executive of any company.
Example 47: Appointment as chief executive

Question: Faraya Limited (FL), an unlisted public company, is engaged in the business of
manufacturing and sale of plastic bottles in Lahore. FL is planning to appoint Gul Maher as the chief
executive of the company. During an interview with Gul Maher, he disclosed to the board that his
wife Mona is running a corporate brokerage house in Lahore.
Under the provisions of the Companies Act, 2017 explain whether FL can appoint Gul Maher as the
chief executive of the company.
Answer:
A person who is ineligible to become a director of a company or has been disqualified to be a
director of the company shall not be appointed as a chief executive of any company.
A person shall not be eligible to be appointed as a director of the company if the person himself or
the spouse of such person is engaged in the brokerage business. However, this condition shall be
applicable only in case of a listed company.
In the given scenario, FL is not a listed company. Therefore, Gul Maher is eligible to be appointed
as the chief executive of FL.
Appointment of first chief executive [Section 186]

The name of first chief executive shall be determined by subscribers of memorandum. His specified
particulars shall be submitted along with the documents of incorporation. The first chief executive
shall hold office up to the first AGM unless shorter period is fixed by the subscribers at the time of
his appointment. He may earlier resign or be removed from his office.

Business Law
4.2 Appointment of subsequent chief executive [Section 187]

Appointment time limit
The subsequent chief executive shall be appointed within 14 days of the election of the directors
themselves or occurring of casual vacancy in the office of chief executive.
Term of office
The subsequent chief executive shall be appointed for a maximum period of three years.
The chief executive appointed against a casual vacancy shall hold office till the directors elected
in the next election appoint a chief executive. The retiring chief executive can be re-appointed.
Continue until successor is appointed
Retiring chief executive shall continue to perform his services until his successor is appointed
unless:
 his office was expressly terminated; or
 non-appointment of his successor is due to any fault on his part.
Nomination by Federal government
The Government shall have the power to nominate chief executive of a company, where majority
of directors are nominated by the Government.
Example 48: Appointment of directors and chief executive

Question: A team of young engineers is planning to incorporate a private limited company which
would provide machine maintenance services to large companies. The company would initially be
incorporated with a share capital of Rs. 20 million. However, the engineers are not certain about
appointment of the first and subsequent directors and chief executive and terms of their office.
Advise the team of engineers in respect of the above matters in the light of the Companies Act,
2017.
Answer:
First directors
The number of directors and the names of the first directors shall be determined by the subscribers
of the memorandum. The number of first directors may be increased by appointing additional
directors by the members in a general meeting. The first directors shall hold office until the election
of directors in the first annual general meeting.
Subsequent directors
Subsequent directors are elected in the first general meeting of the company. The directors so
elected, hold office for a period of three years.
First Chief executive

The name of the first chief executive shall be determined by the subscribers of the memorandum
of association of the company. The first chief executive shall, unless he earlier resigns or otherwise
ceases to hold office, hold office up to the first annual general meeting of the company or, if a
shorter period is fixed by the subscriber at the time of his appointment, for such period.
Subsequent Chief Executive

Within fourteen days from the date of election of directors or the office of the chief executive falling
vacant, as the case may be, the board shall appoint any person, including an elected director, to be
the chief executive but such appointment shall not be for a period exceeding three years from the
date of appointment.

Example 49: Subsequent CEO

Companies Act, 2017. Support your answer with reasons.
“A chief executive, other than the first chief executive of the company, is appointed by the
shareholders in the annual general meeting of the company, for a period up to the next annual
general meeting.”
Answer:
The statement is incorrect. Any chief executive (other than the first chief executive of the company)
is appointed by the directors within fourteen days from the date of their election or within fourteen
days of the office of the chief executive falling vacant.
The chief executive, other than the first chief executive of the company, is appointed for a period
not exceeding three years, a chief executive appointed against a casual vacancy shall be appointed
till the directors elected in the next election appoint a chief executive.
4.3 Terms of appointment [Section 188]

Terms and conditions
The terms and conditions of appointment of a chief executive are determined by the directors or
the company in general meeting in accordance with the provisions in the articles.
Reports to board
He reports to board and he cannot exceed his authority which has been granted by board of
directors.
Status of a director
The chief executive, if not already a director, shall be deemed to be a director in addition to his
being a chief executive of the company. He shall be entitled to all the rights and privileges, and
subject to all liabilities, of being a director.
Example 50: Appointment of a Chief Executive

Question: Tabdily (Pvt) Limited (TPL) has recently been converted into a public listed company and
the directors intend to appoint a new Chief Executive of the company. Under the provisions of the
Companies Act, 2017 briefly explain the requirement(s) for the appointment of a Chief Executive.
Also state the restrictions, if any, on the appointment of a Chief Executive.
Answer:
Appointment of subsequent chief executive:
The requirements for the appointment of a Chief Executive are as under:
 Within fourteen days from the date of election of directors under the Act or the office of the
chief executive falling vacant, as the case may be, the directors of TPL shall appoint any person,
including an elected director, to be the chief executive, but such appointment shall not be for
a period exceeding three years from the date of appointment.
 On the expiry of his term of office under the Act, a chief executive shall be eligible for
reappointment.
 The chief executive retiring under the Act shall continue to perform his functions until his
successor is appointed unless non-appointment of his successor is due to any fault on his part
or his office is expressly terminated.
Restriction on appointment of chief executive

No person who is ineligible to become a director of TPL under the Act shall be appointed or continue
as the chief executive of TPL.

Business Law
Example 51: Loan and appointment as CEO

Question: Mr. Babar is currently working as a Marketing Manager in ST Limited (STL). The
management intends to appoint him as the Chief Executive of the company. He is willing to accept
the offer and has requested for a loan of Rs. 10 million. Moreover, he had also taken a loan in 2009,
of which Rs.1 million is still outstanding.
State the conditions as specified in the Companies Act, 2017 which STL would need to comply with,
in respect of the above loans.
Answer:
The loan to Babar being chief executive is loan to a director and may be granted subject to following
conditions:
 The loan transaction has been approved by a resolution of the members of the company:
 If STL is listed company, prior approval from SECP is obtained.
 In respect of the loan taken in 2009, STL must either settle the loan or STL must seek
appropriate approval from members before appointing him as chief executive.
4.4 Removal of chief executive [Section 190]

Chief executive may be removed through any of the following modes at any point in time regardless
of any provisions in the articles or in his appointment to the contrary:
 by passing a special resolution in general meeting of the company; or
 by passing a resolution in the board of directors meeting supported by at least three-fourth
of the number of directors;
 by Government/authority/person authorised by it, where more than 75% of the voting rights
are held by the Government.
Example 52: Removal of chief executive

Question: The Board of Directors of Hassam Textiles Limited (HTL) is not satisfied with the
performance of its chief executive officer (CEO) and wants to remove him from his office before the
expiry of his term on 31 August 2020.
Briefly explain the options available to HTL for removal of CEO under the above situation.
Answer:
The Chief Executive may be removed before the expiration of his term of office notwithstanding
anything contained in the article of the company or any agreement between the company and such
chief executive by:
 board resolution passed by not less than three fourths of the total number of directors for the
time being or
 the company by a special resolution.

Question: Board of directors of ABC Limited consists of 12 directors. The chief executive of ABC
Limited was appointed for a term of three years. It was specifically mentioned in his contract that
he shall not be terminated before the expiry of term of his office. The directors are not satisfied with
the performance of the chief executive and want to remove him. Can they remove the chief
executive in presence of such clauses in the contract which do not allow his early termination?
Answer:
The answer is yes. Directors may pass a resolution for his removal, if the resolution is voted in favour
by at least 9 directors (three-fourth of total number of directors). They may decide to pass a special
resolution for his removal by calling an extraordinary general meeting of the members of the
company.


Question: Bravo (Private) Limited (BPL) has two shareholders. All the directors of the company are
nominees of these two shareholders. The details are as follows:
Name of shareholders No. of shares Nominee directors
Tiara Limited (TL) – listed company 6,030,000 5
Junaid 2,970,000 *3
9,000,000 8
* including chief executive
TL wants to change the chief executive officer and appoint one of its directors as the chief executive
of BPL before the expiry of the term of the office of the existing chief executive.
In the light of the provisions of Companies Act, 2017 advise TL in the above situation.
Answer:
The directors of a company by a resolution passed by not less than three-fourths of the total number
of directors for the time being, or the company by a special resolution, may remove a chief executive
before the expiration of his term of office.
Therefore, the chief executive of BPL can be removed only if the proposal is supported by:
 at least 6 directors of the BPL, or
 by 3/4th majority of the members in the general meeting either present in person or by
way of proxy.
Since TL has only 5 nominee directors on the board of BPL and has 67% shareholdings, it cannot
remove the existing chief executive without the support of Junaid or his nominee directors.
Example 55: Removal of first chief executive

Question: Zameer is the first chief executive of Ryan Industries Limited, a public company. The
directors of the company are not satisfied with his performance. What is the term of office of
Zameer and explain how he can be removed before expiry of the above term?
Answer:
Zameer being appointed as the first chief executive of Ryan Industries Limited, will hold office up
to the first annual general meeting of the company or if a shorter period is fixed by the directors at
the time of his appointment, on expiry of such period unless he earlier resigns or ceases to hold
office.
Since the directors are not satisfied with the performance of Zameer they can remove him by a
resolution passed by not less than three-fourths of the total number of directors for the time being,
or by passing a special resolution in the general meeting of the company, notwithstanding anything
contained in the articles or in any agreement between the company and Zameer.
4.5 Not to engage in competing business [Section 191]

Restriction
In case of a public company, a chief executive, his spouse and minor children are prohibited to
engage in a business which competes with the business of the company in which he is a chief
executive or with the business of any of its subsidiary company.
Disclosure on appointment
Every person who is appointed as chief executive is required to disclose to the company in writing
the nature of such business and his interest therein.

Business Law
Example 56: Appointment of chief executive

Question: Faraya Limited (FL), an unlisted public company, is engaged in the business of
manufacturing and sale of plastic bottles in Lahore. FL is planning to appoint Gul Maher as the chief
executive of the company. During an interview with Gul Maher, he disclosed to the board that his
son Sultan, who is a business graduate, is engaged in the business of selling plastic bottles in
Multan. Gul Maher also disclosed to the board that he sometimes provides technical assistance to
Sultan without any charge.
Under the provisions of the Companies Act, 2017 explain whether FL can appoint Gul Maher as the
chief executive of the company.
Answer:
A chief executive of a public company shall not directly or indirectly engage in any competing
business with the business carried on by the company of which he is a chief executive.
A business shall be deemed to be carried on indirectly by the chief executive if the same is carried
on by his spouse or any of his minor children.
In the given scenario, Sultan is not a minor son of Gul Maher. Therefore, Gul Maher is eligible to be
appointed as the chief executive of FL.
Example 57: Objections on appointment of CEO

Question: In the first meeting of Board of Directors of Hamid Textile Mills Limited (HTML), a listed
company, the name of Mr. Imran was proposed for appointment as chief executive of the Company.
Mr. Jamal opposed the proposal on the following grounds:
(i) Mrs. Imran is the Chief Executive Officer of Fahad Textile Mills (Private) Limited.
(ii) Mr. Imran is involved in the business of stock brokerage.
(iii) Mr. Imran is not a member of HTML.
Comment on the objections raised by Mr. Jamal in the light of the provisions of the Companies Act
2017.
Answer:
Part (i)
A chief executive of a public company shall not directly or indirectly engage in any business which
is of the same nature as and directly competes with, the business carried on by the company of
which he is the chief executive. Since Mr. Imran’s wife is the Chief Executive of FTMPL, he cannot
be appointed as CEO of HTML.
Part (ii)
Moreover, no person shall be appointed as director of a listed company if engaged in the business
of brokerage, or is a spouse of such person or is a sponsor, director or officer of a corporate
brokerage house and as any person who cannot be a director cannot become chief executive.
Therefore, Mr. Imran is not eligible for becoming the CEO of HTML.
Part (iii)
A person can be appointed as chief executive even if he is not the member of the company.
4.6 Other officers

Chairman of a listed company [Section 192]
The board of a listed company shall within 14 days from date of election of directors, appoint a
chairman from among the non-executive directors.
The chairman shall be responsible for leadership of board and ensure that the board plays an
effective role in fulfilling its responsibilities. The annual financial statements shall contain a review
report by the chairman on the overall performance of board and effectiveness of role played by
board in achieving the objectives.

The chairman shall hold office for 3 years unless he earlier resigns, becomes ineligible or
disqualified or removed by the directors.
The board shall clearly define the respective roles and responsibilities of chairman and chief
executive. The Commission may specify the classes of companies for which the chairman and
chief executive shall not be the same individual.
Example 58: Chairman of the board of directors

Question: Following is the composition of board of directors of Faisal Limited, a listed company:
Independent directors Khalid, Dawood, Rehmat
Non-executive directors Salman, Arif, Ashraf
Executive directors Fasih (CEO), Kashif (Director Finance)
Under the Companies Act, 2017 advise which of the above directors are eligible to be appointed as
Chairman of the board. Also state the time frame for his appointment, duration of office and his
responsibilities.
Answer:
Since independent directors are also non-executive directors and any of the non-executive directors
(i.e. Khalid, Dawood, Rehmat, Salman, Arif, Ashraf) may be appointed as Chairman. The board of
Faisal Limited shall within fourteen days from the date of election of directors appoint a chairman
who shall hold office for a period of three years unless he earlier resigns, becomes ineligible or
disqualified under the Companies Act, 2017 or is removed by the directors.
The responsibilities of the Chairman are defined by the board. Chairman shall be responsible for
leadership of the board and ensure that the board plays an effective role in fulfilling its
responsibilities. The Chairman is required to issue a review report in every annual financial
statement of the company which shall contain a review on overall performance of the board and
effectiveness of the role played by the board in achieving the company’s objectives.
Public company required to have secretary [Section 194]
Definition: Company Secretary [Section 2(21)]

A “company secretary” means any individual appointed to perform secretarial and other duties
customarily performed by a company secretary and declared as such, having such qualifications
and experience, as may be specified.
The company secretary is responsible for advising the board on compliance of corporate laws and
for maintenance of relevant records and registers.
A public company must have a company secretary, possessing such qualification as may be
specified.
Listed company to have share registrar [Section 195]
Listed companies are further required to appoint independent share registrar to handle the transfer
of shares and all other obligations of the company as an issuer towards shareholder. In case of
listed companies all applications for transfer of shares are directed to the share registrar instead
of company. The name of share registrar of the company is mentioned in the notice of general
meetings as well.
Bar on appointment of sole purchase, sales agents [Section 196]
No company (incorporated in Pakistan or outside) which is carrying on business in Pakistan shall,
without the approval of the Commission, appoint any sole purchase, sale or distribution agent.
Exception to above rule:
Company incorporated outside Pakistan are not required to obtain the approval of the Commission
for such appointment (unless the major portion of business of such company or person is
conducted in Pakistan).

Business Law

01. The names and number of first directors shall be decided by the
(a) Members of the company
(b) Promotors of the company
(c) Subscribers to the memorandum
(d) CEO of the company
02. Subsequent Chief Executive of a company is required to be appointed by the directors within
(a) 07 days of the election of Directors
(b) 14 days of the election of Directors
(c) 21 days of the election of Directors
(d) 30 days of the election of Directors
03. Which of the following ineligibility applies only to appointment of directors in a listed company:
(a) Is a minor
(b) Is an undischarged insolvent
(c) Has been convicted by a court for an offense involving moral turpitude
(d) Has been declared by a court as defaulter in repayment of loan to a financial institution.
04. A director shall be treated to have vacated the office of director if he absents himself from
(a) Meetings held in the last three months
(b) Meeting held in the last 120 days
(c) Three consecutive meetings of the board of directors
(d) Three consecutive meetings of the members
05. A company is not allowed to contribute any amount
(a) To any social purpose
(b) To any dividend payment
(c) To any political party
(d) To any Zakat payment

06. The maximum number of director of a public company fixed by the Companies Act, 2017 is
(a) 07
(b) 10
(c) 50
(d) Not specified by the Companies Act, 2017
07. The quorum for a meeting of directors of a listed company will not be less than
(a) Two-third of their number or 4 whichever is greater
(b) One –third of their number or 4 whichever is greater
(c) One-fourth of their number or 4 whichever is greater
(d) Three-fourth of their number or 4 whichever is greater
08. A chief executive shall be a person who is vested with whole or substantially the whole, of the
powers of the management of the affairs of the company. Being a member of the board of
directors, he reports to
(a) The chairman of the company
(b) The members of the company
(c) The board of directors of the company
(d) The company secretary of the company
09. Number of directors to be elected in the forthcoming election shall be fixed by the directors at
least
(a) 21 days before election in the general meeting
(b) 35 days before election in the general meeting
(c) 60 days before election in the general meeting
10. The persons who may wish to contest the election of directors are required to give notice to the
company at least
(a) 7days before election
(b) 14days before election
(c) 21days before election

Business Law
11. Any casual vacancy on the board of a listed company shall be filled up by the directors at the
earliest but not later than
(a) 90 days from the date, the vacancy occurred.
(b) 120days from the date, the vacancy occurred.
(c) 60 days from the date, the vacancy occurred.
12. In case of any material irregularity in the election of the directors, members having 10% or more
voting power may apply to the court within
(a) 14 days of election
(b) 21 days of election
(c) 30 days of election
13. Mr. M has given a request to the company to hold fresh election of directors upon acquisition
of a sizable shareholding in the company that is public unlisted company. The directors are
supposed to proceed to hold fresh election of directors within
(a) 30 days of such application
(b) 60 days of such application
(c) Any time period as decided by the SECP
(d) One year of such application
14. A person cannot be appointed as director of a company if he is lacking fiduciary behaviour and
a declaration to this effect has been made by the court at any time during preceding
(a) 3 years
(b) 5 years
(c) Any time period as decided by the court
15. The directors of a public company shall meet at least once in
(a) Every month
(b) Each quarter of a year
(c) A year

16. No person shall hold office as director, including as an alternate director at the same time in
more than such number of companies as may be specified; however this shall not include the
directorship in a _______________.
17. In addition to the directors elected and appointed in a general meeting, the __________ may
also nominate directors on the board of the company if they are empowered to do so by virtue
of any agreement in this regard.
18. Directors are appointed for a term of ______________, however they may earlier resign from
the office and casual vacancy shall be filled by the remaining directors.
19. Instead making a disclosure at separate intervals on each transaction, the director may give a
general notice regarding his _________________in other body corporate or partnership in
firms so that he may be considered as interested in any transactions, contract or arrangement
entered into with these business.
20. Listed companies are further required to appoint independent ______________ to handle the
transfer of shares and all other obligations of the company as an issuer towards shareholder.

Business Law

1. (c) First directors shall be decided by the subscribers of memorandum and their
particulars shall be submitted along with the documents for incorporation.
2. (b) Subsequent Chief Executive shall be appointed within 14 days of the elections of the
directors.
3. (d) A person shall not be appointed as a director of a listed company if he has been
declared as defaulter in repayment of loan to a financial institution.
4. (c) If a director absents himself from the three consecutive meetings of the board of
directors, he shall be treated to have vacated the office.
5. (c) A company is not allowed to contribute any amount to any political party or for any
political purpose.
6. (d) The Companies Act, 2017 has not provided the maximum number of director for any
type of company.
7. (b) The quorum for a meeting of directors of a listed company will not be less than one –
third of their number or 4 whichever is greater
8. (c) Although being part of the board of directors, he reports to the board of directors.
9. (b) Existing directors decide the number of directors for the next term at least 35 days
before the date of meeting.
10. (b) Every person interested in contesting the election of the directors sends the notice of
his interest to the company at least 14 days before the meeting.
11. (a) The casual vacancy in a board of a listed company must be filled by the directors
within 90 days from the date of the vacancy.
12. (c) Members holding 10% of the voting power in the company may apply to the court
within 30 days of the election of the directors to declare it invalid.
13. (a) Upon receiving such requisition the board shall within 30 days, proceed to hold fresh
elections of directors of the company.
14. (b) A person cannot be appointed as director of a company for the period of 5 years from
the court order.
15. (b) The directors of a public company are required to meet at least once in each quarter
of a year.
16. Listed subsidiary.
17. Creditors
18. Three years
19. Directorships
20. Share registrar

14
CHAPTER
Business Law
Issue of shares and distribution of profits
Contents
1 Share capital
2 Prospectus
3 Commencement of business
4 Dividend

Business Law
1 SHARE CAPITAL
Section overview
 Nature of shares
 Authorised and paid up share capital
 Classes and kind of share capital
 Variation of shareholders’ rights
 Right to challenge the variation in the court
 Alteration of share capital clause in memorandum
1.1 Nature of shares [Section 60 to 62]
Definition: Share [Section 2(63)]

“share” means a share in the share capital of a company.
Shares and share certificates have several characteristics:

 A share is a form of movable property, carrying rights and obligations, and is transferable
from one person to another in the manner provided by articles.
 A share must be paid for. It must be paid for in full when it is allotted to the shareholder.
 Every share in a company having a share capital shall be distinguished by its distinctive
number.
 A certificate issued in physical form under common seal of the company or issued in book-
entry form (i.e. electronic) shall be the main evidence of the title of the person to such
shares.
 The manner of issue of a certificate of shares, form of such certificate and other matters
may be specified in articles.
Issuance of shares is the first step of offering shares by the company, then people or promoters
pay for the shares, this is termed as subscription of shares and finally shares are allotted to
respective names of applicants, this is termed as paying up of the capital.
1.2 Authorised and paid up share capital
Definition: Authorised share capital [Section 2(5)]

“authorised capital” or “nominal capital” means such capital as is authorised by the memorandum
of a company to be the maximum amount of share capital of the company.
Issued and paid up share capital

The nominal value of shares that have been issued to shareholders. This amount may be equal to
or less than authorised share capital but cannot exceed it. This is also called allotted shares.
Publication of authorised and paid up capital [Section 25]
Where any notice, advertisement or other official publication of a company contains a statement of
amount of authorised capital of the company, such notice, advertisement or other official
publication shall also contain a statement in an equally prominent position and in equally
conspicuous characters of amount of the paid up capital.
Any company which makes default in complying with the requirements of above and every officer
of the company who is party to the default shall be liable to a penalty not exceeding of level 1 on
the standard scale.

Section B: Company Law - Chapter 14: Issue of shares and distribution of profits
Fully paid shares [Section 58]

A company having share capital shall issue only fully paid shares. Many years ago, it was allowed
to issue partly paid shares but now companies can only issue fully paid shares.
Example 01: Liability of shareholders

ABC Limited, a public company has authorised share capital of 800,000 ordinary shares of Rs.10
each (Rs. 8,000,000 in total). The nominal value of the shares is Rs.10 per share. The issued share
capital is 400,000 ordinary shares. All of these, 400,000 shares are fully paid.
Authorised share capital is Rs. 8,000,000 (800,000 shares of Rs. 10). Issued share capital is
4,000,000 (400,000 shares of Rs. 10). The maximum liability of the shareholders for the unpaid
debts of the company, in the event of the company’s liquidation, is zero as all of the nominal value
is fully paid.
Nominal value
This is face value of shares, also called par value and stated value.
Market value
This is the value at which share are traded at stock exchange or otherwise. This is usually higher
than nominal value.
1.3 Classes and kind of share capital [Section 58]

The share capital of a company may be divided into several different classes, or there may be just
one class of shares. Within each class of shares, all the shares must be of the same fixed nominal
amount.
Example 02: Division into fixed amounts

The ordinary shares in a company may be divided into 500,000 shares, all of Rs.10 each. Within
the same class, there cannot be shares for differing nominal amounts and all the shares carry equal
rights and privileges.
Requirement
A company having share capital shall issue only fully paid shares which may be of different kinds
and classes as provided by its memorandum and articles.
Example 03: Different kinds and classes of share capital

A company limited by shares may have different kinds (ordinary and preference etc.) of share
capital and various classes (class A, class B etc.) under each kind.
Explanation
A company shall have more than one kind of share capital only if it has authorised capital (in
memorandum) of all those kinds.
Ordinary shares vs. preference shares
Ordinary shares Preference shares
The ordinary shareholders are The preference shareholders are
entitled to vote at general meetings usually not entitled to vote at general
Voting rights of the company. Usually, different meetings of the company or are
class of ordinary shares have entitled to vote for only on certain
different voting rights. issues as mentioned in articles.
They are entitled to residual profit They are entitled to prior right (ahead
Dividend
after payment of preference of ordinary shares) to dividend which
rights
dividend. is usually fixed and cumulative.
They are entitled to all surplus They have prior right of return of
Winding up assets after return of nominal value nominal value, but no further
to preference shareholders. participation in surplus.

Business Law
Ordinary shares Preference shares

Preference shares may be of different
Ordinary shares may be of different
classes on the basis of accumulation
classes on the basis of different
Basis of or otherwise of the dividend on
voting rights, rights disproportionate
different preference shares, on the basis of
to paid up shares, or different
classes redemption or conversion of
entitlements of dividend, right issue
preference shares into ordinary
and issue of bonus shares.
shares etc.
1.4 Variation of shareholders’ rights [Section 38]

Special resolution
The variation in shareholders’ rights shall only be made by alteration of articles by passing a special
resolution.
Restriction on alteration
If alteration affects the substantive rights or liabilities of members or of a class of members, it shall
be carried out only if a majority of at least 3/4th of the members or of the class of members affected
by such alteration vote for such alteration.
Example 04: Issue of Class C shares:

Question: Saga Limited (SL), a listed company, has two classes of ordinary shares i.e. Class A and
Class B. In order to attract foreign investors, the directors intend to issue a new class of ordinary
shares i.e. Class C, with no voting rights. Currently SL’s memorandum and articles of association do
not contain such class of shares.
Under the provisions of the Companies Act, 2017 briefly describe the steps which the directors
should take prior to issuance of Class C shares. (Procedure for issuance of shares is not required)
Answer:
SL can issue new class C shares only if it is permitted by the memorandum and articles of
association. Since SL’s articles and memorandum lack any such classification, the directors are
first required to alter the provisions of SL’s articles of association and memorandum of association
by getting a special resolution passed by general meeting.
It should however be noted that where such alteration affects the substantive rights or liabilities of
members or of a class of members, it shall be carried out only if a majority of at least three-fourths
(3/4) of the members or of the class of members affected by such alteration, as the case may be,
exercise the option through vote either personally or through proxy.
An altered copy of the articles of association shall be filed with the registrar, within thirty days from
the date of passing of the resolution. The registrar shall register the same and then the alteration
shall be effective.
1.5 Right to challenge the variation in the court [Section 59]

Criteria for application to Court
Any member or members of affected class representing at least 10% shareholding of that class
who are aggrieved by the variation of their rights may, within 30 days of the date of the resolution
varying their rights, apply to the Court for an order cancelling the resolution.
The application may be made on behalf of the shareholders entitled to make it by such one or more
of their number as they may authorise in writing in this behalf.
Basis of Court decision
The court has got the powers to declare the resolution null and void if it feels that either:
 the company withheld certain facts while getting the resolution passed, had the members
been in knowledge of those facts, they would not have passed the resolution varying the
rights of a particular class; or
 the variation is otherwise prejudicial to the interest of members.

Filing with registrar

The company is required to file a copy of the order of the court to the registrar within 15 days of
receipt of the order.
Example 05: New class of shares

Question: The directors of Pioneer Shipping Limited have decided to issue Class B ordinary shares
which would have different rights and would be issued to a group of investors. The existing paid up
capital will be classified as Class A shares.
In the light of Companies Act, 2017 explain the following:
(a) Validity of directors’ resolution regarding the issuance of Class B shares.
(b) The nature of variation in the rights and privileges that may be attached to different classes
of shares.
Ahmed and Faraz holding 9% and 10% shareholdings respectively, do not agree with the issuance
of class B shares as in their opinion this would adversely affect their interest, though a majority of
the members are in favour of the resolution.
(c) In the light of the provisions of the Companies Act, 2017 advise the course of action which
Ahmed and Faraz should take in respect of the above.
Answer:
Part (a)
The directors may issue more than one kind of share capital which may have different classes of
shares under each kind. However, the decision of the directors would only be valid if such issuance
is specifically provided in PSL’s memorandum and articles of association.
Part (b)
The variation in the rights and privileges attached to different classes of shares may be of the
following nature:
 different voting rights; voting rights disproportionate to the paid up value of share held; voting
rights for specific purposes only; or no voting rights at all;
 different rights for entitlement of dividend, right shares or bonus shares or entitlement to
receive the notices and to attend the general meetings; and
 rights and privileges for indefinite period, for a limited specified period.
Part (c)
Since Ahmed and Faraz hold more than 10% of the Class A shares, they can apply for cancellation
of resolution to the Court within 30 days of the date of resolution. However, in order to get a
favourable decision, they shall have to satisfy the Court that:
 some facts which would have had a bearing on the decision of the shareholders were withheld
by PSL in getting the aforesaid resolution passed; or
 having regard to all the circumstances of the case, the variation would unfairly prejudice the
Class A shareholders.
Example 06: Variation of shareholders’ rights

Question: Paradise Limited, upon passing a special resolution on August 20, 20X3 made
amendments in its Articles of Association affecting substantial rights associated with class “B”
shares of the company. Few aggrieved shareholders having objection on the special resolution
intend to file an application in the Court, for the cancellation of the above resolution.
Discuss the relevant provisions of the Companies Act, 2017 specifying the following:
(a) What is meant by variation of shareholders’ rights?
(b) The conditions which the aggrieved shareholders will have to comply with, to be eligible for
filing an application in the court for the cancellation of the above resolution.
(c) The matters which the Court would consider while making a decision on the above
application.

Business Law
Answer:
Part (a)
Variation of shareholders’ rights means changing of the rights i.e. reducing, enhancing or cancelling
the rights of the shareholders.
Part (b)
The following conditions would have to be complied with by the aggrieved shareholders:
 Their holding should be at least ten percent of the total class ‘B’ shares.
 Application must be filed within thirty days of the date of passing of special resolution.
Part (c)
The Court shall pass an order for cancellation of the resolution only if it is satisfied that some facts
having impact on the decision of the shareholders were withheld by the company in getting the
special resolution passed or, the variation in rights would unfairly prejudice the shareholders of the
class represented by the applicant.
1.6 Alteration of share capital clause in memorandum [Section 85]

Possible alterations
A company having share capital may, if so authorised by its articles, alter the authorised capital
clause in memorandum through a special resolution, so as to:
(a) increase its authorised capital;
(b) consolidate and divide its share capital into shares of larger amount than its existing
shares;
(c) sub-divide its shares, into shares of smaller amount than is fixed by the memorandum
(d) cancel shares which have not been taken or agreed to be taken by any person, and
diminish share capital by the amount of the shares so cancelled.
Example 07: Alteration of share capital

ABC (Pvt) Limited has got an authorised and paid up share capital of Rs. 500 million divided into 5
million shares of Rs. 100 each. The company may alter this capital by special resolution and declare
that the authorised and paid up share capital of the company is Rs. 500 Million but now it is divided
into 50 million shares of Rs. 10 each. This is division of capital into shares of a smaller amount
than originally fixed by the memorandum. Every member possessing one share shall now possess
10 shares but overall paid up value of shares will remain the same.
Example 08: Alteration of share capital

ABC (Pvt) Limited has got an authorised ordinary share capital of Rs. 500 million divided into 50
million ordinary shares of Rs. 10 each, out of total authorised capital Rs. 200 million is already
paid up. The company if so resolve in the general meeting may subdivide the unissued authorised
capital into preference and ordinary shares by stating in the authorised capital clause of the
memorandum that the authorised capital of the company is Rs. 500 Million divided into 25 million
ordinary shares for Rs. 10 each and 25 million preference shares of Rs. 10 each.
Example 09: Increase in authorized capital

Question: The directors of Sherwani Limited wish to increase the authorized capital of the company
from Rs 100 million to Rs 200 million. You are required to inform them about the relevant
provisions regarding increase in authorized capital, contained in the Companies Act, 2017.

Answer:
The company, if allowed by its articles and by passing a special resolution can alter the capital
clause of its memorandum of association so as to:
 Increase the authorized capital whenever it requires;
 Cancel that part of its authorized capital which has not been paid up till the date of cancellation
and such cancellation shall not affect the rights of paid up shareholders;
 Consolidate the share capital into shares of a larger amount; or
 Divide and subdivide the share capital into shares of an amount smaller than the one fixed by
the memorandum of association initially.
The company is required to file the resolution and the related documents i.e. altered copy of the
memorandum of association with the registrar within fifteen days of passing the same, failing which
the resolution shall not be effective and shall ultimately lapse.
Further due to the consolidation or subdivision of shares, the rights attaching to the shares shall
not be affected in any way and the new shares issued by the company shall rank equally with the
existing shares of the company.

The company shall file resolution and altered copy of Memorandum to registrar within 15 days of
passing the resolution.
No effect on rights of shareholders
In the event of consolidation or sub-division of shares, the rights attaching to the new shares shall
be strictly proportional to the rights attached to the previous shares so consolidated or sub-divided.
Where any shares issued are of a class which is the same as that of shares previously issued, the
rights attaching to the new shares shall be the same as those attached to the shares previously
held.

Business Law
2 PROSPECTUS
Section overview
 Introduction to prospectus
 Offer of securities
 Approval, issue, circulation and publication
 Expert’s opinion
 Criminal liability and compensation
2.1 Introduction to prospectus
Definition: Prospectus [Section 2(xli) – Securities Act, 2015]

“prospectus” means any document described or issued as a prospectus and includes any
document, notice, circular, material, advertisement, offer for sale document, publication or other
invitation offering to the public (or any section of the public) or inviting offers from the public for
the subscription or purchase of any securities of a company, body corporate or entity, other than
deposits invited by a bank and certificate of investments and certificate of deposits issued by non-
banking finance companies.
Purpose of prospectus
If a company wants to issue securities to general public, it has to issue a prospectus. This
prospectus provides the public with relevant information to decide whether they should invest in
the company or not.
Timing of prospectus
A company may issue a prospectus at any point of time in its life and a company may issue shares
to public in the future at any time(s). A company may issue shares to public before commencement
of business. The existence of prospectus ends after the purpose is fulfilled (it is not like
memorandum or articles that are permanent documents).
Shelf prospectus
A shelf-prospectus is a single offering document allowing companies to make multiple offerings as
disclosed in the offering document within a prescribed time and subject to prescribed conditions.
Supplement to shelf prospectus
A supplement to the prospectus invites the general public for subscription of the securities earlier
offered to the public through shelf-prospectus. The supplement to the prospectus for each offering
contains updated disclosures.
Filing with registrar before issue [Section 57 – Companies Act, 2017]
No prospectus shall be issued by or on behalf of a company unless on or before the date of its
publication, a copy thereof signed by every person who is named therein as a director or proposed
director of the company has been filed with the registrar.
In case of any contravention, the company and every person who is a party to the issue, publication
or circulation of the prospectus shall be liable to a penalty not exceeding of level 2 on the standard
scale.
Risk Factors
It is customary for the authorities to require the company to arrange and write the risk factors
separately in prospectus. All the factors that could be risky for investment in the company are
written and readers of the prospectus are specifically advised to read the same before making any
investment decision.

Role of authorities
The prospectus must be approved by SECP who review it for compliance strictly. It does not
however mean that the authorities act just to discourage the company and its promoter but it is the
duty of authorities to make sure that accurate information is provided to the prospective
shareholders or members.
2.2 Offer of securities [Section 87 – Securities Act, 2015]

Approval from Commission
No person shall make a public offer of securities unless the issuer (i.e. a company) or offeror of
the securities has submitted for approval to the Commission, and the Commission has approved
prospectus.
Validity of approval
A prospectus approved by the Commission shall be valid for a period of 60 days from the date of
such approval. The shelf prospectus shall be valid for such longer period as approved by
Commission. The time period may be extended by the Commission for reasons to be recorded in
writing.
Example 10: Approval from the Commission

ABC Limited, a listed company, has decided to issue shares to the general public. Let us consider
two scenarios:
(a) The company has submitted a copy of prospectus to the Commission for its approval. At the
same time it is planning to publish and circulate the prospectus to inform the general public.
(b) The prospectus is approved by the Commission. Due to some unavoidable reasons the
company could not circulate the prospectus. After three months the company decides to issue
those shares based on the prospectus approved by the Commission.
In case of (a) the Securities Act, 2015 does not allow a company to circulate the prospectus unless
the Commission approves the prospectus.
In case of (b) a prospectus approved by the Commission is valid for sixty days from the date of
approval or such longer period as approved by the Commission. ABC limited shall have to apply for
grant of extension for the validity of the prospectus beyond sixty days if the Commission has not
approved it for a longer period.
Liability of SECP
The Commission shall not be liable to any action in damages suffered as a result of any prospectus
approved by the Commission.
Offence
A person who, in connection with a public offer of securities, makes a false or fictitious application,
commits an offence.
Exception to Approval requirement
However, the requirement of approval does not apply:
 to securities offered by the State Bank of Pakistan.
 where the securities are offered in connection with a private offering or private placement.
 issue of shares of a subsidiary to the members of a listed holding company by way of specie
dividend or any other distribution in the prescribed manner.
 where the securities are offered by the issuer to members or employees of the issuer or
families of such members and employees.
 the securities are shares and are offered as bonus shares to any or all of the members of
the issuer.

Business Law
Example 11: Public offer without approval of Commission

Question: Under the provisions of the Securities Act, 2015 no person shall make a public offer of
securities unless the Commission has approved the prospectus submitted by the issuer or offeror
of the securities.
Discuss the exceptions to the above provision of the Securities Act, 2015.
Answer:
The requirement of submission of prospectus for public offering of securities to the Commission
and its approval is not required in the following circumstances:
(a) securities offered by the State Bank of Pakistan.
(b) securities offered in connection with a private offering or private placement.
(c) issue of shares of a subsidiary to the members of a listed holding company by way of specie
dividend or any other distribution in the prescribed manner.
(d) securities are offered by the issuer to:
 members or employees of the issuer; or
 members of the families of any such members or employees.
(e) securities are shares and are offered as bonus shares to any or all of the members of the
issuer.
2.3 Approval, issue, circulation and publication [Section 88 – Securities Act, 2015]
Approval from Commission
No person shall issue, circulate and publish prospectus including a shelf-prospectus or supplement
to the prospectus until it has been approved by the Commission.
Filing for approval
The issuer or the offeror shall submit a copy to the Commission for approval not less than 21 days
before the proposed date of publication of the prospectus.
Example 12: Issuance of prospectus

Question: The Board of Directors of Tanveer Limited, a listed company, has decided to invite general
public for the subscription of its securities and therefore, intends to issue/publish a prospectus.
Under the provisions of the Securities Act, 2015 advise the directors about the time frame within
which approval for the issuance of prospectus may be obtained and the time for which the
prospectus may remain valid after approval.
Answer:
Time frame within which approval may be obtained:
TL must apply to the Commission for approval of the issuance of prospectus to the public, by
submitting a copy of the prospectus not less than twenty one days before the proposed date of
publication of the prospectus.
Time for which the prospectus may remain valid after approval:
A prospectus approved by the Commission shall be valid for a period of sixty days from the date of
such approval. However, this time period may be extended by the Commission for reasons to be
recorded.
Publication in newspapers
Where a public offer is made in Pakistan the issuer or offeror shall publish the prospectus in full
text or in such abridged form as may be prescribed, at least in one Urdu and one English daily
newspaper.
The prospectus shall not be published in the newspapers less than 7 days or more than 30 days
before the commencement of the public subscription.

Example 13: Publication of prospectus

Question: Deo Limited (DL) has published a prospectus on March 1, 20X4. The subscription list is
due to open on April 5, 20X4.
Explain whether the company is in compliance with the provisions of the Companies Act, 2017
regarding the publication of its prospectus.
Answer:
The advertisement of a prospectus is required to be published in a newspaper not less than seven
days and not more than thirty days before the subscription list, is due to open. Since, Deo Limited
published the prospectus on March 1, 20X4, which is more than 30 days before the subscription
list was due to open i.e. April 5, 20X4. The Company is in violation of the requirements of above
provision of Law.
Availability of copies
The issuer or the offerer shall make available sufficient number of copies of the prospectus
approved by the Commission, free of charge, from the date of its publication in the newspapers till
the closing of the subscription at:
 the registered office of the issuer,
 all the securities exchanges of the country,
 all the bankers to the issue,
 the concerned share registrar,
 the concerned ballotter; and
 the concerned credit rating agency, if any.
Uploaded on website
The prospectus in full text and the shares subscription form shall be uploaded on the website of
the issuer and shall remain there from the date of its publication in the newspapers till the closing
of the subscription.

Question: On 25 February 2018 Badar Limited (BL), in a move to list its shares on Pakistan Stock
Exchange, received approval from the Commission for the publication of prospectus.
Under the provisions of the Securities Act, 2017 advise BL with regard to the publication of the
prospectus in the newspaper and its placement on the company’s website.
Answer:
BL’s prospectus, approved by the Commission, shall be published within 60 days from the date of
Commission’s approval (25 February 2018) i.e., 26 April 2018 unless the period of 60 days has
been extended by the Commission by reasons to be recorded in writing.
BL Limited shall publish the prospectus in full text or in such abridged form as may be prescribed,
at least in one Urdu and one English daily newspaper.
The prospectus shall be published in the newspaper not less than seven days or not more than
thirty days before the commencement of the public subscription.
The prospectus shall be uploaded on the website of the issuer and shall remain there from the date
of its publication in the newspapers till the closing or the subscription.

Business Law

Question: On 4 February 2020, the Commission approved the prospectus of Victory Limited (VL) for
public offer of its securities. The directors intend to publish the prospectus on 10 April 2020.
Under the provisions of the Securities Act, 2015 advise the directors with regard to the following:
(i) The time frame within which the prospectus may be published.
(ii) The requirements for publication of prospectus.
Answer:
Part (i)
Since a prospectus approved by the Commission shall be valid for a period of sixty days from the
date of such approval. Victory Limited must publish the prospectus by 3 April 2020. However, as
the directors intends to publish it on 10 April 2020 they must apply to the Commission for extension
in time limit. The application for extension must contain the reasons for extension in time.
Part (ii) Publication of the prospectus

In Newspapers
The prospectus shall be published in full text or in such abridged form as may be prescribed, at
least in one Urdu and one English daily newspaper. The prospectus shall not be published in the
newspapers less than seven days or more than thirty days before the commencement of the public
subscription.
On Website
The prospectus in full text shall be uploaded on the website of the issuer and shall remain there
from the date of its publication in the newspapers till the closing of the subscription.
Restriction
No person shall issue, circulate, publish, telecast or broadcast without the prior written approval of
the Commission, an advertisement, other than a prospectus, announcing a public offer of securities
for which a prospectus is required unless a prospectus has been published and the advertisement
gives an address in Pakistan from which it can be obtained.
Terms not to be varied
The issuer or offeror, as the case may be, shall not, at any time, vary the terms of the clauses
stipulated in its prospectus except subject to the approval of the Commission.
Example 16: Approval and publication of prospectus:

Question: The Directors of Solar Limited (SL), want to arrange finances for their factory expansion
project and have decided to issue 1,000,000 ordinary shares to general public. The directors want
the public subscription to commence not later than 7 October 2018. Mobeen, who is the company
secretary, has proposed the following schedule for the purpose:
 On 12 September 2018, a copy of the prospectus shall be submitted to the Registrar Joint
Stock Companies for approval.
 For ease of access, the copies of the prospectus shall be available for members’ inspection
at SL’s main showroom. The prospectus shall remain open for inspection from 28
September 2018 till 4 October 2018 at a fee of Rs. 50.
 The prospectus would be published in a popular fortnightly Urdu magazine on 30
September 2018.
 Public subscription would commence on 5 October 2018.
Suggest appropriate revision in the above proposal to bring it in line with the provisions of the
Securities Act, 2015.

Answer:
The prospectus is required to be approved by the Commission and not by the Registrar Joint Stock
Companies.
A copy of the prospectus shall be submitted to the Commission for approval, not less than 21 days
before the proposed date of its publication. Therefore, a copy shall be submitted to the Commission
on or before 9 September 2018 OR (8 September 2018) OR (7 September 2018) but not
afterwards.
The prospectus shall be published in at least one Urdu and one English daily newspaper and not in
an Urdu fortnightly magazine.
The date of newspaper publication of the prospectus shall not be less than 7 days before the
commencement of the public subscription. Therefore, public subscription shall not commence any
time before 7 October 2018 OR (6 October 2018) OR (5 October 2018).
Lastly, Sufficient number of copies of the prospectus shall be made available for inspection of
general public, free of charge, from the date of its publication i.e. 30 September 2018 OR (29
September 2018) OR (28 September 2018) till the closing of the subscription. i.e. 7 October 2018
OR (6 October 2018) OR (5 October 2018) at SL’s registered office and not at its showroom.
Further, the copies shall also be made available with all the securities exchanges of the country,
with all the bankers to the issue, the concerned share registrar, the concerned ballotter and the
concerned credit rating agency, if any, and should also be uploaded on SL’s website.
2.4 Expert’s opinion
Definition: Expert [Section 2(xxii) – Securities Act, 2015]

“expert” includes banker, securities advisor, engineer, valuer, accountant, lawyer and any other
person whose profession gives authority to a statement made by him.
Expert to be independent [Section 90 – Securities Act, 2015]

A prospectus shall not contain a statement purporting to be made by an expert unless the expert
is a person who is not, and has not been, engaged or interested in the formation or promotion or
management of the company.
Consent of Expert [Section 91 – Securities Act, 2015]
A prospectus that contains a statement purporting to be made by an expert or to be based on a
statement made by an expert shall not be issued, circulated or published unless:
 The expert has given, his written consent to the issue of the prospectus with the statement
in the form and context in which it is included; and
 There appears in the prospectus a statement that the expert has given and has not
withdrawn his consent.
2.5 Criminal liability and compensation

Criminal liability for defective prospectus [Section 92 – Securities Act, 2015]
A person commits an offence, who:
 makes a misleading, incorrect, untrue or deceptive statement in a prospectus; or
 omits information or a statement from a prospectus that is required to be included in the
prospectus.
Compensation for false or misleading prospectus [Section 93 – Securities Act, 2015]
Every offeror, issuer, director of an offeror or issuer or any person who has signed the prospectus
shall be liable to pay compensation to any person who acquires any of the securities, in reliance
upon the prospectus, to which the prospectus relates and suffers loss in respect of them as a result
of any incorrect, untrue or misleading statement in the prospectus or the omission from it of any
matter required to be included.

Business Law
Example 17: Compensation

Question: Sepham Limited is in process of raising money through issuance of shares and intends
to issue a prospectus.
Advise the management as to who would be liable under the Securities Act, 2015 to compensate
the investors in case there is any deficiency in the prospectus and under what circumstances this
liability would arise.
Answer:
Every issuer, director of an issuer or any person who has signed the prospectus shall be liable to
pay compensation to any person who acquires any of the securities, in reliance upon the prospectus,
to which the prospectus relates and suffers loss in respect of them as a result of any incorrect,
untrue or misleading statement in the prospectus or the omission from it of any matter required to
be included under the Securities Act, 2015.

3 COMMENCEMENT OF BUSINESS
Section overview
 Commencement of business
 Consequences of non-compliance
 Prospectus or statement in lieu of prospectus
3.1 Commencement of business [Section 19]

Minimum Subscription
Minimum subscription means the amount, if any, fixed by the memorandum or articles upon which
the directors may proceed to allotment. If no amount is fixed, the whole amount of share capital
(other than that to be issued not for cash) is minimum subscription.
Example 18: Minimum subscription

That minimum amount which is required to commence the business, for example, company would
need a building, machinery, equipment and working capital budget for starting the business,
without sufficient funds for all this, company is not able to commence its business.
Conditions for commencement of business
A public company shall not start its operations or exercise any borrowing powers unless:
(a) shares for cash have been allotted to an amount not less than the minimum subscription;
(b) every director of the company has paid to the company full amount on each of the shares
taken or contracted to be taken by him and for which he is liable to pay in cash;
(c) no money is or may become liable to be repaid to applicants for any shares which have
been offered for public subscription;
Example 19: Repayment against Prospectus

Whenever the company issues shares or debentures to the general public, it is required to get those
shares or debentures listed on an exchange before allotment of shares. The procedure is as follows:
 Company issues prospectus and fixes a date for payments from applicants against its
securities and simultaneously files an application for listing of securities to the exchange
 People deposit money into the banks as required by company
 Company waits for the listing from exchange and provides for any further information or
deficiencies as pointed out by the exchange.
 The company is given certificate of listing and it can now use the money of applicants and allot
them shares
 If listing is refused, the money from applicants must be repaid forthwith.
Until such money is repaid, company shall not be allowed to commence business.
(d) there has been filed with the registrar a duly verified declaration by the chief executive or
one of the directors and the secretary that the aforesaid conditions have been complied
with; and
(e) in the case of a company which has not issued a prospectus inviting the public to subscribe
for its shares, there has been filed with the registrar a statement in lieu of prospectus.
Exception
The above requirement does not apply to:
 to a company converted from private to a public;
 to a company limited by guarantee and not having a share capital.

Business Law
Example 20: Commencement of business

Question: Under the provisions of the Companies Act, 2017 briefly explain the exception(s) to the
following general rule:
“Companies can commence the business only after obtaining certificate of commencement of
business from the registrar”.
Answer:
Following companies can commence business without obtaining certificate of commencement of
business:
(i) A private company
(ii) A company converted from private to public
(iii) A company limited by guarantee and not having a share capital
Acceptance and registration of documents by registrar

The registrar shall, after making such enquiries as he may deem fit to satisfy himself, accept and
register all the relevant documents. The acceptance and registration of documents shall be a
conclusive evidence that the company is entitled to start its operations and exercise any borrowing
powers.
3.2 Consequences of non-compliance [Section 20]

Penalty
If any company starts its business operations or exercises borrowing powers in contravention of
above provisions, every officer or other person who is responsible for contravention shall without
prejudice to other liabilities be liable to a penalty not exceeding level 2 on the standard scale.
Status of contracts by company
Any contract made by a company before the date at which it is entitled to commence business
shall be provisional only, and shall not be binding on the company until that date, and on that date
it shall become binding.
3.3 Prospectus or statement in lieu of prospectus
Circumstances Relevant Document to be issued or filed
Inviting general public, or when company is listed

Prospectus
on stock exchange
Not inviting the public to subscribe Statement in lieu of prospectus
Repayment of all money on the basis of

Issued a prospectus but could not obtain listing on
prospectus AND filing Statement in lieu of
stock exchange
prospectus

4 DIVIDEND
Section overview
 Declaration of dividend
 Certain restrictions on declaration of dividend
 Dividend to be paid only out of profits
 Dividend not to be paid except to registered shareholders
 Directors not to withhold declared dividend
4.1 Declaration of dividend

Dividends are payments made to shareholders by a company, out of its distributable profits.
Implied power to declare dividend
Unless there are specific restrictions in the company’s memorandum and articles (e.g. association
not for profit prohibits the payment of dividend to its members), every company has an implied
power to use its profits to pay dividends to its shareholders.
4.2 Certain restrictions on declaration of dividend [Section 240]

Not to exceed amount recommended by directors
The company in general meeting may declare dividends; but no dividend shall exceed the amount
recommended by the board.
Restriction on distribution of certain gains
No dividend shall be declared or paid by a company for any financial year out of the profits of the
company made from the sale or disposal of any immovable property or assets of a capital nature
comprised in the undertaking or any of the undertaking of the company, unless the business of the
company consists, whether wholly or partly, of selling and purchasing any such property or assets,
except after such profits are set off or adjusted against losses arising from the sale of any such
immovable property or assets of a capital nature.
Example 21: Sale of immovable properties

ABC Limited incorporated on July 1, 2015 to manufacture and trade soaps. By the end of the first
half of the year it accumulated operational loss of Rs. 4 million and made gain of Rs. 52 million on
sale of a plot of land meant for a manufacturing facility. The company have Rs. 48 million (Rs. 52-
4 million) available as undistributed profit, but in this financial year, i.e. by June 30, 2016, the
company cannot use it for distribution of dividend, as the company is not in the business of buying
and selling of plot of land.
The investment properties may be carried at fair value with unrealized gain recognised in profit or
loss as per IAS 40 Investment property, but Companies Act requires that no dividend shall be
declared or paid out of unrealized gain (i.e. gain related to unsold property) on investment property
credited to profit and loss account.
Example 22: Investment property

Kashif Limited (KL) bought a property for capital appreciation (i.e. an investment property) for Rs.
50 million. At year end the property was revalued to Rs. 58 million using fair value model under IAS
40 and a gain of Rs. 8 million was recognised in profit or loss. KL cannot pay dividend out of this
gain of Rs. 8 million.

Business Law
Example 23: Restrictions imposed on declaration of dividend

Question: Under the provision of the Companies Act, 2017 briefly describe the restrictions, if any,
with regard to the declaration of final dividend by a company listed on stock exchange.
Answer:
No dividend shall be declared by a company otherwise than out of profits of the company.
No dividend shall be declared by a company for any financial year out of the profits of the company
made from the sale or disposal of any immovable property or assets of a capital nature or any of
the undertaking of the company unless the business of the company consists, whether wholly or
partly, of selling and purchasing any such property or assets, and except after such profits are set
off or adjusted against losses arising from the sale of any immovable property or assets of a capital
nature.
No dividend shall be declared out of unrealized gain on investment property credited to profit and
loss account.
Example 24: Declaration of dividend

Companies Act, 2017. Support your answer with reasons.
“There is no restriction on the declaration of dividend and the chief executive may declare dividend
in the general meeting of the company out of any kind of profit.”
Answer:
The statement is incorrect and contains the following errors.
The chief executive of the company does not declare the dividend. He informs the shareholders
about the percentage/amount of the dividend as recommended by the directors. The dividend is
approved by the members but the dividend so approved shall not exceed the amount as
recommended by the directors.
No dividend shall be declared or paid by a company out of the profits of the company made from
the sale or disposal of any immovable property or assets of a capital nature comprised in the
undertaking(s), unless the business of the company consists, whether wholly or partly, of selling
and purchasing any such property or assets, except after such profits are set off or adjusted against
losses arising from the sale of any such immovable property or assets of a capital nature.
No dividend shall be declared out of unrealized gain on investment property credited to profit and
loss account.
4.3 Dividend to be paid only out of profits [Section 241]

Form of payment
Any dividend may be paid by a company either in cash or in kind only out of its profits.
Payment in kind
The payment of dividend in kind shall only be in the form of shares of listed company held by the
distributing company.
4.4 Dividend not to be paid except to registered shareholders [Section 242]

Period and manner
Any dividend declared by a company must be paid to its registered shareholders or to their order
within such period and in such manner as may be specified.

Mode of payment
Any dividend payable in cash may be paid by cheque or warrant (a type of crossed cheque) or in
any electronic mode to the shareholders entitled to the payment of the dividend, as per their
direction.
In case of a listed company, any dividend payable in cash shall only be paid through electronic
mode directly into the bank account designated by the entitled shareholders.
4.5 Directors not to withhold declared dividend [Section 243]

Requirement
When a dividend has been declared, it shall not be lawful for the directors of the company to
withhold or defer its payment and the chief executive of the company shall be responsible to make
the payment within such period as may be specified from the date of declaration.
Declaration of final dividend
The final dividend is proposed by directors and approved by members in AGM. Dividend shall be
deemed to have been declared on the date of the general meeting in case of a dividend
declared/approved in the general meeting.
Declaration of interim dividend
The directors may propose and pay interim dividend before end of year. Interim dividend shall be
deemed to have been declared on:
 the date of commencement of closing of share transfer for purposes of determination of
entitlement of dividend;
 the date on which dividend is approved by the board (in case of no book closure).
Example 25: Closure of share transfer books

Listed companies usually comprise of large number of member possessing shares. These shares
are readily saleable in the stock exchange and the company cannot be sure of who are its members
at any given date unless transfers of shares are suspended for some days by giving a prior notice
to the members. This procedure is commonly known as ‘Book Closure’. All of the persons who
possess the shares of the company as of the start of the book closure are considered as members
of the company and served notices of meetings and paid dividends etc. accordingly.
Consequences of delay in payment

Where a dividend has been declared by a company but is not paid within the period specified, the
chief executive of the company shall be punishable with imprisonment for a term which may extend
to two years and with fine which may extend to five million rupees.
Chief executive convicted shall from the day of the conviction cease to hold the office of chief
executive of the company and shall not, for a period of five years from that day, be eligible to be
the chief executive or a director of that company or any other company.
No offence deemed to be committed
No offence shall be deemed to have been committed in the following cases if the Commission has,
on application by company within 45 days from the date of declaration of the dividend, and after
providing an opportunity to the shareholder/other person, permitted the company to withhold or
defer payment:
 where the dividend could not be paid by reason of the operation of any law;
 where a shareholder has given directions to the company regarding the payment of the
dividend and those directions cannot be complied with;
 where there is a dispute regarding the right to receive the dividend;
 where the dividend has been lawfully adjusted by the company against any sum due to it
from the shareholder; or

Business Law
 where, for any other reason, the failure to pay the dividend or to post the warrant within the
period aforesaid was not due to any default on the part of the company.
Lawful withholding
A company may withhold the payment of dividend of a member where the member has not
provided the complete information or documents as specified by the Commission (Approval of
SECP is not required in this case).
Example 26: Payment of interim dividend

Question: On 8 September 2018, the directors of Ashanti Limited (AL), a listed company, declared
an interim dividend of Rs. 5 per share and announced book closure from 28 September 2018 to 3
October 2018, both days inclusive.
Under the provisions of the Companies Act, 2017 briefly describe when AL should pay the above
dividend. Also state any four circumstances in which AL may not be considered to have committed
an offence for non-payment of dividend.
Answer:
An interim dividend must be paid within specified period of its declaration and in the given scenario,
the dividend shall be deemed to have been declared on 28 September 2018 i.e. the date of
commencement of closing of share transfer for determination of entitlement of dividend. Hence,
AL should pay dividend within specified period of declaration.
The circumstances in which non-payment of dividend by AL shall not constitute an offence are as
under:
(i) where the dividend could not be paid by reason of the operation of any law;
(ii) where a shareholder has given directions to the company regarding the payment of the
dividend and those directions cannot be complied with;
(iii) where there is a dispute regarding the right to receive the dividend;
(iv) where the dividend has been lawfully adjusted by the company against any sum due to it
from the shareholder; or
(v) where, for any other reason, the failure to pay the dividend or to post the warrant within
the period aforesaid was not due to any default on the part of the company;
AL may also withhold the payment of dividend of a member where the member has not provided
the complete information or documents as specified by the Commission.
Example 27: Payment of dividend

Question: The Board of Directors of Giant Industries Limited (GIL), a listed company, in their meeting
held on 25 February 2020 had approved 30% interim cash dividend for the shareholders. While
approving the dividend payment, the board had authorised to adjust dividend payable to one of the
shareholders, Kamran Ahmed, against the amount due from him.
Under the provisions of the Companies Act, 2017:
(a) state when an interim dividend is deemed to have been declared and the responsibilities
of GIL regarding its payment.
(b) identify the circumstances under which the directors may withhold/adjust the payment of
dividend.
(c) list the steps which GIL would be required to take, for adjustment of dividend payable to
Kamran Ahmed against the amount due from him.
Answer:
Part (a) Declaration of interim dividend:
Interim dividend is deemed to have been declared:
 on the date of commencement of closing of share transfer for purposes of determination of
entitlement of dividend; and
 where register of members is not closed for such purpose, on the date on which such dividend
is approved by the board.

Responsibilities of GIL for the payment of dividend:

The dividend shall only be paid out of the profits. The chief executive of GIL is responsible to make
the payment of dividend to registered shareholders or to their order within such period and in such
manner as may be specified. Moreover, since dividend is payable in cash, it shall only be paid
through electronic mode directly into the bank account designated by the entitled shareholders.
Part (b) Circumstances under which GIL may withhold the payment of dividend to certain
shareholders:
 where the dividend could not be paid by reason of the operation of any law;
 where a shareholder has given directions to GIL regarding the payment of the dividend and
those directions cannot be complied with;
 where there is a dispute regarding the right to receive the dividend;
 where the dividend has been lawfully adjusted by GIL against any sum due to it from the
shareholder; or
 where, for any other reason, the failure to pay the dividend or to post the warrant within the
stipulated period was not due to any default on the part of GIL.
 where the member has not provided the complete information or documents, as specified by
the commission.
Part (c) Declaration of dividend

GIL is not required to make an application to the Commission for the adjustment of the dividend.
The dividend can be adjusted after obtaining permission of the concerned shareholder for the
adjustment of the dividend against any sum due to GIL from the shareholder.
Example 28: Payment of dividend

Question: Explain the exception to the following provisions as specified under the Companies Act,
2017.
Where a dividend is declared by a company but is not paid within the period specified in the
Companies Act, 2017, the chief executive of the company shall be punishable with imprisonment
for a term which may extend to two years and with fine which may extend to five million rupees.
Answer:
The Chief Executive will not be punishable in the following cases:
 where the dividend could not be paid by reason of the operation of any law.
 where a shareholder has given directions to the company regarding the payment of the
dividend and those directions could not be complied with.
 where there is a dispute regarding the right to receive the dividend.
 where the dividend has been lawfully adjusted by the company against any sum due to it from
the shareholder.
 where for any other reason the failure to pay the dividend or to post the warrant within the
period aforesaid was not due to any default on the part of the company.
And the commission has allowed the company to withhold or defer the payment of dividend against
an application made by the company within 45 days from the date of declaration of dividend.
Company may also withhold the payment of dividend of a member where the member has not
provided the complete information or documents as specified by the Commission.

Business Law
Example 29: Interim Dividend and consequences of non-payment

Question: On 31 July 2015, the Directors of Clove Engineering Limited (CEL), a listed company,
declared an interim dividend of Rs. 5 per share. However, before making payment of the dividend,
the company suffered huge losses due to a massive fire in the factory. The CFO has informed the
board of directors about CEL’s inability to pay the dividend in time.
Under the provisions of the Companies Act, 2017 briefly describe:
(a) When an interim dividend is deemed to have been declared by CEL.
(b) The consequences of non-payment of dividend within the stipulated time.
Answer:
(a) Declaration of interim dividend:
Interim dividend is deemed to have been declared:
 on the date of commencement of closing of share transfer for purposes of determination
of entitlement of dividend; and
 where register of members is not closed for such purpose, on the date on which such
dividend is approved by the directors.
(b) Consequences of non-payment of dividend:

Where a dividend has been declared by a company but is not paid within the stipulated time, the
chief executive of the company shall be punishable with imprisonment for a term which may extend
to two years and with fine which may extend to five million rupees.
A chief executive convicted as above shall from the day of the conviction cease to hold the office
of chief executive of the company and shall not, for a period of five years from that day, be eligible
to be the chief executive or a director of that company or any other company.
Example 30: Dividend reduction or deferral

Question: The board of directors of Dinar Ltd, a listed company, had recommended a final dividend
@ 100% for the year ended June 30, 20X3. Just a week after the notice for AGM had been
dispatched the company suffered huge losses due to certain unanticipated events and incurred
heavy liabilities. The company is now considering the following options:
(i) Reducing the dividend to 25%.
(ii) Deferring the payment of 75% of the dividend, for six months.
Explain whether the company can exercise the above options, under the Companies Act, 2017.
Answer:
Option (i)
Once the dividend is recommended by the Board of Directors, it may be reduced by approval of
members, in the AGM.
Option (ii)
When a dividend has been declared, it shall not be lawful for the directors to defer its payment
beyond specified period. Hence the company cannot defer it for six months.


01. In a company limited by shares, the share capital represents capital introduced into the
company by the company’s
(a) Directors
(b) Guarantors
(c) Auditors
(d) Members
02. Issuance of shares is the first step of offering shares by the company, then people or promoters
pay for the shares this is termed as
(a) Subscription of shares
(b) Transfer of shares
(c) Payment of shares
(d) Selling of shares
03. The issued share capital is the nominal value of the shares that have been issued to
shareholders. The issued share capital
(a) May be more than the authorized share capital
(b) Must be more than the authorized share capital
(c) May be less than the authorized share capital
(d) Must be equal to the authorized share capital
04. In Pakistan, all companies limited by shares are required to have an authorized share capital
and the amount of the authorized share capital can be increased but
(a) Only with the approval of the directors
(b) Only with the approval of the shareholders
(c) Only with the approval of the registrar
(d) Only with the approval of the creditors
05. When the shares are issued, the shareholders must
(a) Give their consent in written form
(b) Appoint two persons as their proxy
(c) Pay for the shares in full
(d) Apply for special privileges

Business Law
06. If the company goes into liquidation with unpaid debts, the shareholders will
(a) Be liable personally to contribute in the company’s debts
(b) Not be required to contribute in the company’s debts
(c) Be liable to contribute 50% of the unpaid debts
(d) Be liable to contribute 75% of the unpaid debts
07. Ordinary shares are also called
(a) Equity shares
(b) Bonus shares
(c) Founders shares
(d) deferred Shares
08. The ordinary shareholders are entitled to vote at general meetings of the company. Normally
all ordinary shareholders have
(a) Ten votes per share
(b) One vote per ten shares
(c) One vote per share
(d) As mush vote as they wish
09. A preference share normally carries as prior right (ahead of ordinary shares) to
(a) Receive a salary which is normally a fixed amount each year
(b) Receive a repayment of capital in the event of winding up
(c) Vote in the general meeting
10. What type of resolution is required to alter the capital clause of memorandum of association
(a) Ordinary resolution
(b) Special resolution
(c) Ordinary resolution of 30 days’ notice
(d) Special resolution of 30 days’ notice

11. After the alteration in capital clause of MOA, the company is required to file the resolution and
the related documents i.e. altered copy of the MOA with the registrar within
(a) 15 days
(b) 30 days
(c) 60 days
(d) 90 days
12. If the variation affects the substantive rights of any particular class of shareholders, it shall not
be deemed to have been carried out unless
(a) Two third majority of that particular class agree to the alterations.
(b) Fifty one percent majority of that particular class agree to the alterations.
(c) Three fourth majority of that particular class agree to the alterations
(d) Seventy percent majority of that class agree to the alterations
13. Any member or members of the affected class representing at least 10 percent shareholding
of that class may apply for an order against the resolution varying their rights. They will apply
to
(a) The registrar
(b) The commission
(c) The board of directors
(d) The Court
14. In case of variation in shareholders’ rights of a particular class of members, 10% or more of the
class of shareholders who are aggrieved by the variation of their rights may apply to the court,
for an order cancelling the variation within
(a) 14 days
(b) 21 days
(c) 30 days

Business Law
15. In case of variation in shareholders’ rights of a particular class of members, the court may give
its decision in favour or against the special resolution by the company. The company is required
to forward a copy of the court decision to the registrar within
(a) 14 days of receipt of the order
(b) 15 days of receipt of the order
(c) 30 days of receipt of the order
16. The Companies Act, 2017 requires companies to have an authorized amount of share capital.
Authorized share capital is the _______________of shares (in each class) that the company
may issue, it is expressed in terms of the nominal value of the shares.
17. A share represents the ____________________of a shareholder in a limited liability in the

event that the company is wound up with unpaid debts.
18. Whenever a company mentions its authorized capital in any advertisement or notice or in any
statement, it shall mention the amount of its __________ capital as well in equally conspicuous
letters and in equally prominent position.
19. There is no limit to the amount of dividends that a company can pay to its ordinary shareholders
out of its _________________.
20. In a winding up of the company, the______________________ are not entitled to receive

payment of any capital from the liquidation of its assets until all creditors have been paid and
the nominal share capital of all preference shareholders has been repaid.
21. A single offering document allowing companies to make multiple offerings as disclosed in the
offering document is known as
(a) Sale prospectus
(b) Shelf-prospectus
(c) Single Prospectus
(d) Multiple Prospectus

22. A supplement to the prospectus invites the general public for subscription of earlier offered
security (ies). The supplement to the prospectus contains
(a) New prospectus
(b) Self-prospectus
(c) Updated disclosures
23. The prospectus is issued, published or circulated with the approval of
(a) The members
(b) The board of directors
(c) The Commission
(d) The Auditors
24. The prospectus in its full text or in such abridged form, shall be published at least in
(a) One Urdu magazine
(b) One Urdu or one English fortnight newspaper
(c) One Urdu and one English magazine
(d) One Urdu and one English daily newspaper
25. Prospectus issued shall be made available, free of charge,
(a) At the registered office of the issuer
(b) With all the bankers to the issue
(c) With the concerned share registrar
(d) All the above
26. The prospectus along with the subscription form, from the date of its publication in the
newspapers, till the closing of the subscription, shall also be uploaded
(a) On the website of the securities exchange
(b) On the website of the SECP
(c) On the website of the Issuer
(d) On the website of the concerned Bank

Business Law
27. Prospectus means any document, notice, circular, material, publication or other invitation
offering
(a) To the general public
(b) To the board of directors
(c) Only to the existing shareholders
(d) Only to the existing customers
28. Although approval from the Commission is required for issue, publication or circulation of
prospectus, there are instance where prior approval is not necessary such instances include
(a) Securities offered by the State Bank of Pakistan
(b) Where securities are offered in connection with a private offering
(c) Where the securities are shares and are offered as bonus shares
29. A prospectus approved by the commission shall be valid for a period of
(a) 30 days from the date of such approval
(b) 60 days from the date of such approval
(c) 90 days from the date of such approval
(d) 120 days from the date of such approval
30. A prospectus shall not contain a statement purporting to be made by an expert unless the
expert is a person
(a) Who is not or has not been engaged or interested in the formation of the company
(b) Who is or has been engaged or interested in the formation of the company
(c) Who is engaged or interested in the promotion of the company
(d) Who is engaged or interested in the management of the company
31. If a public company opts not to issue shares to the general public initially and start the business
in such a case Company would be required to file with the registrar
(a) Statement of affairs
(b) Statement of capital
(c) Statement in lieu of prospectus
(d) Statement in lieu of advertisement

32. The prospectus is a formal document and needs
(a) Approval from the board and clearance from the auditors.
(b) Approval from the members and clearance from the creditors
(c) Approval from the Commission and clearance from the securities exchange
(d) Approval from the court and clearance from the registrar
33. Once issued and securities allotted under a prospectus
(a) It shall be sent to the registrar
(b) It shall be sent to the securities exchange
(c) Its existence will end
(d) Its existence will continue till the next AGM
34. A prospectus is required to be submitted to the SECP for approval at least
(a) 14 days before the proposed date of publication in the newspapers
(b) 21 days before the proposed date of publication in the newspapers
(c) 30 days before the proposed date of publication in the newspapers
35. Minimum time gap between the date of publication of a prospectus and the date of subscription
shall be
(a) 14 days
(b) 21 days
(c) 30 days
(d) 7 days
36. The prospectus is issued, published or circulated with the approval of the commission. The
same condition also applies on ____________ or ______________________.
37. It is customary for the authorities to require the company to arrange and write the
______________ separately and readers of the prospectus are specifically advised to read the
same before making any investment decision.

Business Law
38. ____________ includes banker, securities advisor, engineer, valuer, accountant, lawyer and
any other person whose profession gives authority to a statement made by him.
39. The prospectus in its full text or in such abridged form, shall be published at least in one Urdu
and one English daily newspaper. It shall not be published in the newspapers less than
______or more than _________ before the commencement of the public subscription.
40. The purpose of prospectus is to invite offers from public for the subscription or purchase of any
_____________ of a company.
41. For obtaining the certificate of commencement of business a public company has to meet
certain requirements. Choose the incorrect one from following
(a) The company should have allotted shares against cash equal to the amount of minimum
subscription
(b) The directors should have paid in cash to the company full amount on each of the shares
taken or contracted to be taken
(c) The members should have paid in cash to the company full amount on each of the
shares taken or contracted to be taken
(d) No money is or may become liable to be repaid to applicants for any shares
42. Before being permitted to trade, a public company must have:
(a) Obtained a certificate of incorporation only
(b) Been listed on the securities exchange
(c) Issued a prospectus
(d) Obtained a commencement of business certificate and certificate of incorporation
43. Any contract made by a company before the date at which it is entitled to commence business
shall be ___________only, and shall not be binding on the company.
44. The amount of final dividend is proposed by directors and approved by
(a) Members in AGM of the company
(b) Auditors in AGM of the company
(c) CEO in BOD meeting of the company
(d) Members in EGM of the company

45. Interim dividend may be proposed and paid before the end of the year by the
(a) Directors of the company
(b) Chairman of the company
(c) Chief Executive of the company
46. The dividend is proposed by the directors. The members may
(a) Reduce the dividend
(b) Accept the dividend
(c) Reject the dividend
47. Dividend warrants are a type of a crossed cheque and can be credited in to bank account of
(a) Creditor of the company
(b) Auditor of the company
(c) Member of the company
(d) Director of the company
48. Who is responsible in case of default regarding payment of dividend to member?
(a) Director Finance of the company
(b) BOD of the company
(c) CEO of the company
(d) Chairman of the company
49. In any case, the members of the company cannot
(a) Reject the amount of dividend proposed by directors
(b) Accept the amount of dividend proposed by directors
(c) Decrease the amount of dividend proposed by directors
(d) Increase the amount of dividend proposed by directors

Business Law
50. In case of delay in payment of dividend, Chief executive of the company may be imprisoned for
a term not exceeding two years and he may be fined for an amount
(a) Upto Rs. 50 million
(b) Upto Rs. 5 million
(c) Minimum Rs. 5 million
(d) Minimum Rs. 50 million
51. In case of default regarding period of payment of dividend, Chief executive of the company will
be fined and imprisoned for a term which may extend to two years. He shall further be ineligible
to become a director or chief executive of
(a) Any company for the next five years
(b) Any company for the next ten years
(c) Any holding company for the next five years
(d) Any subsidiary company for the next ten years
52. The directors of the company may propose and pay _____________ before end of the year.
This dividend is usually announced with quarterly or half yearly accounts of the company in
addition to the final dividend.
53. The dividends will be either in ________ or in ________ of listed company held by the
distributing company. The power to declare a dividend should be specified in the company’s
articles of association.
54. Dividend shall not be declared or paid out of ________________ on investment property
credited to profit and loss account.
55. In case of a ___________, any dividend payable in cash shall only be paid through electronic
mode directly into the bank account designed by the entitled shareholders.
56. For any financial year, dividend is not declared out of the profits from sale of __________ or
item of ____________.


1. (d) The members are the shareholders of the company. They are also the owners of the
company.
2. (a) When people or promoters pay for the shares, this is termed as subscription of shares
then finally shares are allotted to respective names of applicants.
3. (c) The issued share capital may be less than the authorized share capital, but cannot
exceed it.
4. (b) The amount of the authorized share capital has to be specified in the company’s
memorandum of association and it can be increased only with the approval of the
shareholders.
5. (c) When the shares are issued, they must be paid for in full.
6. (b) If the company goes into liquidation with unpaid debts, the maximum amount they will
lose is the amount already contributed as share capital.
7. (a) The ordinary shareholders are the owners of their company and ordinary shares are
often called ‘equity shares’.
8. (c) Normally, all ordinary shareholders have one vote per share.
9. (b) A preference shareholder has a prior right to receive repayment of capital in the event
of winding up of the company.
10. (b) The company, if allowed by the articles and by passing a special resolution can alter
the capital clause of its memorandum.
11. (a) The company is required to file the amended copy of the MOA with the registrar within
15 days of passing the resolution.
12. (c) Three fourth majority of that particular class must agree to the alteration, in order to
make that variation valid.
13. (d) Any member or members of the affected class may apply to the court for an order
against the resolution.
14. (c) The person aggrieved by the change may file an application within 30 days of passing
of the resolution.
15. (b) The company is required to file a copy of the court to the registrar within fifteen days
of the receipt of the order.
16. Maximum amount
17. Maximum liability
18. Paid up
19. Distributable profits
20. Ordinary shareholders
21. (b) A Shelf Prospectus is a single offering document allowing companies to make multiple
offerings.

Business Law
22. (c) The supplement to the prospectus contains updated disclosures and it also provides
such information as prescribed by the commission.
23. (c) The approval of prospectus is given by the commission and the commission may also
impose further conditions or restrictions.
24. (d) The prospectus shall be published at least in one Urdu and one English daily
newspaper.
25. (d) A sufficient number of copies of the prospectus as approved by the commission, shall
be made available in six different places.
26. (c) The prospectus along with subscription form shall be uploaded on the website of the
issuer.
27. (a) The prospectus is a document issued for general public and invites offers for sales of
company’s securities.
28. (d) The commission’s approval for the prospectus is a necessary requirement but there
are certain instances where commission’s approval is not necessary.
29. (b) A prospectus shall be valid for a period of 60 days from a date of such approval
30. (a) The expert is to be independent and he must not be connected with the company as a
promoter, manager or an employee.
31. (c) If the company is not issuing shares to the general public initially then the company
would be required to file a statement in lieu of the prospectus with the registrar.
32. (c) The securities exchanges in addition to the commission are also regulators who
regulate the issuance of prospectus.
33. (c) Prospectus is not like something the memorandum and article of association. Once
issued and securities allotted, its existence ends.
34. (b) The issuer, shall not less than 21 days before the proposed date of publication, submit
a copy to the commission for approval.
35. (d) The prospectus shall not be published in the newspaper less than 7 days or more than
30 days before the commencement of public subscription.
36. Shelf-prospectus, supplement to the prospectus
37. Risk factors
38. Expert.
39. Seven days, thirty days
40. Securities
41. (c) Not the members but only the directors should have paid in cash to the company full
amount on each of the shares taken or contracted to be taken
42. (d) A public company after obtaining certificate of incorporation is also required by law to
obtain certificate of commencement of business.

43. Provisional
44. (a) The amount of final dividend will be approved by the members in Annual General
Meeting of the company
45. (a) The directors of the company may proposed and pay interim dividend before the end
of the year
46. (d) The members may reduce, accept or reject the dividend as proposed by the director
47. (c) Dividend warrants can be credited into the bank account of member of the company
48. (c) In case of default regarding payment of dividend, Chief Executive of the company
may be fined
49. (d) Members cannot resolve to increase the amount of dividend as proposed by directors
50. (b) Chief executive of the company may be fined for an amount upto Rs. 5 Million along
with imprisonment for a term which may extent to two years
51. (a) Chief executive shall be ineligible to become a director or CEO of any company for
the next five years
52. Interim dividend
53. Cash, Shares
54. Unrealized gain
55. Listed company
56. Immovable property, Capital nature

Business Law

15
CHAPTER
Business Law
Meetings and resolutions
Contents
1 Company meetings
2 Conduct of meetings
3 Resolutions and records

Business Law
1 COMPANY MEETINGS?
Section overview
 Types of meetings
 Statutory meeting
 Annual general meeting (AGM)
 Extra-ordinary general meeting (EGM)
 Power of SECP to call meetings
1.1 Types of meetings

Meetings of directors
There are two types of meetings of directors, namely:
 board meetings which may be attended by all the directors; and
 meetings of committee of directors in which selected directors participate to decide for
specific tasks assigned to those committees.
Meetings of members
There are two general categories of meetings of members namely:
 General meetings in which all the members who are entitled to attend and vote at such
meetings according to articles may participate. There are three types of general meetings
namely:
 statutory meeting;
 annual general meeting; and
 extra-ordinary general meeting.
 Class meetings (any specific class of members e.g. meeting of preference shareholders).
General meetings are chaired by the chairman of the board of directors, and other directors also
attend. However, the directors do not have a right to vote at a general meeting unless they are
also a member of the company. They can, then, vote at the meeting as a member.
1.2 Statutory meeting [Section 131]

Requirement
Every public company having a share capital shall hold a general meeting of the members of the
company, to be called the “statutory meeting”.
In case first annual general meeting of a company is decided to be held earlier, no statutory
meeting shall be required.
The requirement shall not apply to a public company which converts itself from a private company
after one year of incorporation.
Time limit
The statutory meeting shall be held within earlier of:
 180 days from commencement of business; or
 9 months from the date of its incorporation.

Section B: Company Law - Chapter 15: Meetings and resolutions
Example 01: Statutory meeting

Question: Explain whether all limited companies are required to hold statutory meeting within 6
months of incorporation.
Answer:
The statement is incorrect because only public companies having share capital are required to hold
statutory meetings. Moreover, the statutory meeting is to be held within a period of 180 days, from
the date at which the company is entitled to commence business or nine months from
the date of its incorporation whichever is earlier.
Example 02: Statutory meeting

Question: Joint Limited (JL) was incorporated as a public company on 1 February 2018 and was
authorized by the registrar to commence business from 1 April 2018. The board of directors is
divided on the issue of holding first general meeting of its members.
Two directors are of the view that the meeting should be held on 30 September 2018 whereas
majority of the directors want to hold it on 30 October 2018.
In the light of the provisions of the Companies Act, 2017:
(i) Explain whether you agree with the proposal of the majority of the directors or the other
two directors.
(ii) What would be your opinion in (i) above if the directors want to hold first annual general
meeting on 25 September 2018?
Answer:
Part (i) Statutory meeting:
JL is required to hold its first general meeting (Statutory meeting) within a period of 180 days from
the date at which it was entitled to commence business or within nine months from the date of its
incorporation whichever is earlier.
Therefore, in view of the above, JL is required to hold its statutory meeting not later than 27
September 2018.
Part (ii)
If the directors decide to hold first AGM on 25 September 2018 than no statutory meeting shall be
required.
Notice
The notice of a statutory meeting shall be sent to the members at least 21 days before the meeting
along-with a copy of statutory report.
Contents of statutory report
The statutory report shall state:
(a) the total number of shares allotted, distinguishing shares allotted other than in cash, and
stating the consideration for which they have been allotted;
(b) the total amount of cash received against the shares allotted;
(c) an abstract of receipts and payments made up to a date within 15 days of date of the
report, under distinctive headings:
 the receipts from shares, debentures and other sources;
 the payments made;
 the balance remaining in hand; and
 an account or estimate of the preliminary expenses of the company showing
separately any commission or discount paid or to be paid on issue of shares or
debentures;

Business Law
(d) the names, addresses and occupations of the directors, chief executive, secretary,
auditors and legal advisers of the company and the changes, if any, since incorporation;
(e) the particulars of any contract to modified for which approval of meeting is required,
together with proposed modification;
(f) the extent to which underwriting contracts have been carried out together with the reasons
for their not having been carried out; and
(g) any commission or brokerage paid / payable for the issue of shares to any director, chief
executive, secretary or officer or to a private company of which he is a director.
The statutory report shall also contain a brief account of the state of the company‘s affairs since its
incorporation and the business plan, including any change or proposed change affecting the
interest of shareholders and business prospects of the company.
Report of the auditors
The statutory report shall, so far as it relates to the shares allotted by the company, the cash
received in respect of such shares and to the receipts and payments of the company, be
accompanied by a report of the auditors of the company as to the correctness of such allotment,
receipt of cash, receipts and payments.
Certification / Authentication
The statutory report shall be certified by the chief executive and at least one director of the
company, and in case of a listed company also by the chief financial officer.
The directors shall cause a copy of the statutory report, along-with report of the auditors as
aforesaid, to be delivered to the registrar for registration forthwith after sending the report to the
List of members at meeting
The directors shall cause a list showing the names, occupations, nationality and addresses of the
members of the company, and the number of shares held by them respectively, to be produced at
the commencement of the meeting and to remain open and accessible to any member of the
company during the continuance of the meeting.
Discussion at meeting
The members of the company present at the meeting shall be at liberty to discuss any matter
relating to the formation of the company or arising out of the statutory report, whether previous
notice has been given or not, but no resolution of which notice has not been given in accordance
with the articles may be passed.
Adjournment
The meeting may adjourn from time to time, and at any adjourned meeting any resolution of which
notice has been given in accordance with the articles, either before or after the original meeting,
may be passed, and an adjourned meeting shall have the same powers as an original meeting.
1.3 Annual general meeting (AGM) [Section 132]

Requirement and time limit
Every company (other than single member company) shall hold an AGM within 16 months from
the date of its incorporation and thereafter once in every calendar year within a period of 120 days
following the close of its financial year.
Example 03: Date of first AGM

Question: Karachi Telecommunication (Private) Limited (KTL) was incorporated on 1st March, 2019
under the Companies Act 2017. Its directors have decided to hold the first Annual General Meeting
(AGM) of the company on August 10, 2020, for placing the first audited financial statements for
the period ended March 31, 2020, for approval.

Comment on the decision of the directors, in the light of provisions contained in the Companies Act
2017.
Answer:
The decision of the directors contravenes the Companies Act, 2017 since the first financial
statement must be laid within sixteen months after the date of incorporation of the company. The
latest date for first AGM must be 30th June 2020 and not afterwards.
Example 04: Date of subsequent AGM

Suppose ABC limited is incorporated on 1st April 2020 and it opts for a financial year end of 30th
June every year. It would be required to hold its first annual general meeting in next sixteen month
time period. So it can opt to hold the first annual general meeting till 31st July 2021.
We assume that the company opted to hold the annual general meeting on 31st July 2021. From
this date onward company will be required to hold the annual general meeting within 120 days of
the close of financial year and at least once in a calendar year. Keeping all the above in view, what
shall be the latest time on which company can hold its AGM in 2022?
The next financial year will close on 30th June 2022, so till when would the company be required
to hold its AGM? It should be 28th October 2022 because it cannot wait for more than 120 days
from close of financial year.
Example 05: Date of subsequent AGM

XYZ limited, another company registered on 1st September 2020, Its financial year closes in 30th
September each year. It held its first annual general meeting on 1st November 2021 which was
well within 16 months from the date of its incorporation.
What is the latest date by which company can hold its second AGM? It must be within 120 days of
close of financial year and at least one AGM must be held in each calendar year, so latest date
should be 31st December 2022.
Extension in time
In the case of a listed company, the Commission, and, in any other case, the registrar, may for any
special reason extend the time within which any AGM, shall be held by a period not exceeding 30
days.
Example 06: AGM timeline

Question: Explain the exceptions to this provisions as specified under the Companies Act, 2017.
“Every company shall hold its annual general meeting within a period of 120 days following the
close of its financial year.”
Answer:
In the case of a listed company, the Commission and in any other case, the registrar, may for any
special reason extend the time within which any annual general meeting, shall be held, by a period
not exceeding thirty days.
Place of meeting
In case of listed company, AGM shall be held in the town in which the registered office of the
company is situated or in a nearest city.
However, at least 7 days prior to the date of meeting, on the demand of members residing in a city
who hold at least 10% of the total paid up capital or such other percentage as may be specified, a
listed company must provide the facility of video–link to such members enabling them to participate
in its AGM.
Notice: All companies
The notice of an AGM shall be sent to the members and every person who is entitled to receive
notice of general meetings at least 21 days before the date fixed for the meeting.

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Notice: Listed company

In case of a listed company, such notice shall be sent to the Commission, in addition to its being
dispatched in the normal course to members and the notice shall also be published in English and
Urdu languages at least in one issue each of a daily newspaper of respective language having
nationwide circulation.
Calling a meeting
AGM is called on the order of directors and not of the members.
1.4 Extra-ordinary general meeting (EGM) [Section 133]

All general meetings of a company, other than the AGM and the statutory meeting, shall be called
extra-ordinary general meetings.
Calling EGM by the board
The board may at any time call an EGM to consider any matter which requires the approval of the
company in a general meeting.
Calling EGM by the board on requisition of members
The board shall forthwith proceed to call an EGM, at the requisition made by the members:
 in case of a company having share capital, representing not less than 1/10th of the total
voting power as on the date of deposit of requisition; and
 in case of a company not having share capital, not less than 1/10th of the total members.
The requisition shall state the objects of the meeting, be signed by the requisitionists and deposited
at the registered office of the company.
Calling EGM by requisitionists themselves
If the board does not proceed within 21 days from the date of the requisition being so deposited to
cause a meeting to be called, the requisitionists, may themselves call the meeting, but in either
case any meeting so called shall be held within 90 days from the date of the deposit of the
requisition.
Any meeting called by the requisitionists shall be called in the same manner, as nearly as possible,
as that in which meetings are to be called by board.
Any reasonable expenses incurred by the requisitionists in calling a meeting shall be reimbursed
to the requisitionists by the company and the sums so paid shall be deducted from any fee or other
remuneration payable to such of the directors who were in default in calling the meeting.
Notice
The notice of EGM is required to be sent to the member’s at least 21 days before the date of the
meeting similarly as of the notice of AGM.
However, in case of unlisted company, if all the members entitled to attend and vote at any EGM
so agree, a meeting may be held at a shorter notice.
Example 07: Notice of EGM

Companies Act, 2017 and support your answer with reasons:
“Notice of an extraordinary general meeting should always be sent to the shareholders, at least 21
days before the date of the meeting.”
Answer:
In the case of an unlisted company if all the members entitled to attend and vote at the meeting
so agree, the EGM may be held at a shorter notice.

Example 08: EGM and notice of EGM

Question: Peach Panther Ltd (PPL) is planning to call an Extra-ordinary General Meeting (EGM) to
transact certain businesses due to an emergency faced by the company. You are required to answer
the following:
(i) Which meetings are called EGM?
(ii) What is the minimum notice period for calling an EGM? Can PPL hold such meeting on a
shorter notice?
Answer:
Part (i)
All general meetings of a company other than Annual General Meeting and Statutory Meeting shall
be called EGM.
Part (ii)
The minimum notice period for calling an EGM is 21 days. In case of emergency affecting the
business of a company other than a listed company, if all the members entitled to attend and vote
in the meeting agree, then an EGM can be held at such shorter notice.
1.5 Power of SECP to call meetings [Section 147]

Power to give directions
The Commission has power to call general meeting of the company in case of:
 There is default in conducting AGM or statutory meeting.
 The directors did not proceed to call an EGM on the requisition of members.
The Commission may give such directions in relation to the calling, holding and conducting of the
meeting and preparation of any document required with respect to the meeting as the Commission
may think fit.
One member may be quorum
The above-mentioned directions may include a direction that one member of the company present
in person or by proxy shall be deemed to constitute a meeting.
Cost of conducting the meeting
Any meeting so conducted shall, for all purposes, be deemed to be a meeting of the company duly
called, held and conducted, and all expenses incurred for such meeting shall be paid by the
company unless the Commission directs the same to be recovered from any officer of the company.

Business Law
2 CONDUCT OF MEETINGS
Section overview
 Provisions as to meetings and votes

 Voting by show of hands
 Voting by poll
 Proxies
 Representation of body corporate at meetings
 Representation of government at meetings
 Quorum of general meeting
 Court declaring a general meeting invalid
2.1 Provisions as to meetings and votes [Section 134]

The following provisions shall apply to the general meetings of a company or meetings of a class
of members of the company.
Notice
Notice of meeting is a formal document sent to each member at his registered address or other
communication address provided in Pakistan.
The notice may be served to members against an acknowledgement or by post or courier service
or through electronic means or any other specified manner.
Notice of the meeting specifying the place and the day and hour of the meeting alongwith a
statement of the business to be transacted at the meeting shall be given:
(i) to every member or class of the members of the company as the case may be;
(ii) to every director;
(iii) to any person who is entitled to a share in consequence of the death or bankruptcy of a
member, if the company has been notified of his entitlement;
(iv) to the auditors of the company.
The notice shall be sent in the manner in which notices are required to be served, but the accidental
omission to give notice to, or the non-receipt of notice by, any member shall not invalidate the
proceedings at any meeting.
Facility of video-link
In case of a listed company, if certain members who hold 10% of the total paid up capital or such
other percentage as may be specified, reside in a city, it shall be mentioned in the notice that such
members, may demand the company to provide them the facility of video-link for attending the
meeting.
Participation
Members of a company may participate in the meeting personally, through video-link or by proxy.
Ordinary business & Special business
In the case of an annual general meeting, all the businesses to be transacted shall be deemed
special, other than:
(a) the consideration of financial statements and the reports of the board and auditors;
(b) the declaration of any dividend;
(c) the election and appointment of directors in place of those retiring;
(d) the appointment of the auditors and fixation of their remuneration.

Example 09: Special business

Question: Explain the term “special business” with reference to the Companies Act, 2017. Give at
least two examples
Answer:
All businesses transacted at an extraordinary general meeting or annual general meeting, shall be
treated as “special business” except the following:
 declaration of dividend,
 consideration of the financial statements and the reports of the directors and auditors,
 election of directors,
 appointment and fixing of the remuneration of auditors.
Examples:
 Disposal of a significant business segment of company.
 Investment in associated undertaking.
Statement of material facts for special business

A statement setting out all material facts concerning special business shall be annexed to the notice
of the meeting.
In particular, the nature and extent of the interest (if any) of every director, whether directly or
indirectly shall be stated.
Where any item of business requires an approval to any document by the meeting, the time when
and the place where the document may be inspected, shall be specified in the statement.
Example 10: Special Business

Question: Unique Limited is due to hold its first annual general meeting on 20 April 2018. Under
the provisions of the Companies Act, 2017 advise the directors with regard to the types of
businesses which would be deemed to be special business and also discuss additional formalities
which are required to be complied with in respect of notice containing special business.
Answer:
In case of an annual general meeting, all businesses to be transacted shall be deemed special other
than:
(i) the consideration of financial statements and the reports of the board and auditors;
(ii) the declaration of any dividend;
(iii) the election and appointment of directors in place of those retiring; and
(iv) the appointment of the auditors and fixation of their remuneration.
Where any special business is to be transacted at a general meeting, there shall be annexed to the
notice of the meeting a statement setting out all material facts concerning such business, including,
in particular, the nature and extent of the interest, if any, therein of every director, whether directly
or indirectly. Where any item of business consists of according of an approval to any document by
the meeting, the statement shall specify the time and the place for the inspection of such
document.
Presiding the meeting

The chairman of the board, if any, shall preside as chairman at every general meeting of the
company.
If there is no such chairman, or if at any meeting he is not present within 15 minutes after the time
appointed for holding the meeting, or is unwilling to act as chairman, any one of the directors
present may be elected to be chairman.
If none of the directors is present or is unwilling to act as chairman, the members present shall
choose one of their member to be the chairman.

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Number of votes
In the case of a company having a share capital, every member shall have votes proportionate to
the paid-up value of the shares or other securities carrying voting rights held by him according to
the entitlement of the class of such shares or securities, as the case may be. However, at the time
of voting, fractional votes shall not be taken into account.
Note: please note carefully that we have used the word ‘proportionate to the paid up value of
shares’ rather than ‘equal to the paid up value of shares’. This is because of the various classes of
share capital in the company. If the company has more than one class of shares then voting rights
of one class may differ from other but whatever the difference may be the voting rights shall have
regard to the paid up value of shares.
In the case of a company limited by guarantee and having no share capital, every member shall
have one vote.
On a poll, votes may be given either personally or through video-link or by proxy or through postal
ballot.
Right to vote
A member holding shares or other securities carrying voting rights shall not be debarred from
casting his vote, nor shall anything contained in the articles have the effect of so debarring him.
Single member company
All the requirements of the Companies Act regarding calling of, holding and approval in general
meeting, board meeting and election of directors in case of a single member company, shall be
deemed complied with; if the decision is recorded in the relevant minutes book and signed by the
sole member or sole director as the case may be.
2.2 Voting by show of hands [Section 141 & 142]

Voting by show of hands
At any general meeting, a resolution put to the vote of the meeting shall, unless a poll is demanded,
be decided on a show of hands.
Declaration by chairman
On a vote on a resolution at a meeting by a show of hands, a declaration by the chairman that the
resolution:
 has or has not been passed; or
 passed unanimously or by a particular majority;
is conclusive evidence of that fact without proof of the number or proportion of the votes recorded
in favour of or against the resolution.
An entry in respect of such a declaration in minutes of the meeting recorded is also conclusive
evidence of that fact without such proof.
2.3 Voting by poll [Section 143, 144 & 145]

Demand for poll
Before or on the declaration of the result of the voting on any resolution on a show of hands, a poll:
 may be ordered to be taken by the chairman of the meeting of his own motion; and
 shall be ordered to be taken by him on a demand made in that behalf by the members
present in person or through video-link or by proxy, where allowed, and having not less
than 1/10th of the total voting power.
The demand for a poll may be withdrawn at any time by the members who made the demand.

Poll through secret ballot

When a poll is demanded on any resolution, it may be ordered to be taken by the chairman of the
meeting by secret ballot on his own motion, and shall be ordered to be taken by him on a demand
made in that behalf by the members present in person, through video-link or by proxy, where
allowed, and having not less than 1/10th of the total voting power.
Time of taking poll
A poll demanded on the election of a chairman or on a question of adjournment shall be taken
forthwith.
A poll demanded on any other question shall be taken at such time, not more than 14 days from
the day on which it is demanded, as the chairman of the meeting may direct.
Conduct and result of poll
When a poll is taken, the chairman or his nominee and a representative of the members demanding
the poll shall scrutinize the votes given on the poll and the result shall be announced by the
chairman.
The chairman shall have power to regulate the manner in which a poll shall be taken.
The result of the poll shall be deemed to be the decision of the meeting on the resolution on which
the poll was taken.
Example 11: Demand and date of poll

Question: On declaration of the result of voting in the Annual General Meeting (AGM) by the
chairman of AS Limited, a public company, few shareholders demanded a poll. The chairman
refused to hold the poll and declared the result of voting on show of hands.
In the light of Companies Act, 2017:
(a) How would you assess whether or not the Chairman’s decision of not holding a poll was
valid?
(b) Explain whether the Chairman can delay the holding of poll to a date subsequent to the
date of AGM.
Answer:
Part (a)
The chairman is required to hold a poll in case the same is demanded by members present in
person or through video-link or by proxy, where allowed and having ten percent or more of the total
voting power.
If the shareholder who demanded the poll meets the condition as mentioned above, the decision
of the Chairman of not holding the poll would be invalid.
Part (b)
The Chairman can delay the poll up to fourteen days from the day on which it is demanded for all
matters except the following:
 On the election of a chairman, the poll shall be taken forthwith.
 On a question of adjournment, the poll shall be taken forthwith.
Example 12: Polling

Question: Mr. Shakeel has significant shareholdings in various public and private companies. He is
not satisfied with some of the resolutions passed by such companies by show of hands. You are
required to advise him as regards the following:
(a) What conditions would he need to satisfy if Mr. Shakeel wishes to request for a poll?
(b) Explain whether a company is required to oblige him if he wishes to satisfy himself about
the validity of the results of voting by poll.

Business Law
Answer:
Part (a)
If Mr. Shakeel intends to make a request for a poll, the chairman of the meeting would be required
to accept his request provided the request is supported by members having at least 10% of voting
power
Part (b)
When a poll is taken, the chairman or his nominee and a representative of the members demanding
the poll i.e. Mr. Shakeel and members requesting the poll, shall scrutinize the votes given on the
poll. However, the results of the poll shall be announced by the chairman of the meeting.
2.4 Proxies [Section 137]

Right to appoint proxy
A member of a company entitled to attend and vote at a meeting of the company may appoint
another person as his proxy to exercise all or any of his rights to attend, speak and vote at a
meeting.
The appointment of proxy is not allowed in the case of a company not having a share capital unless
the articles provide otherwise.
More than one proxy for one meeting
A member shall not be entitled to appoint more than one proxy to attend any one meeting. If any
member appoints more than one proxy for any one meeting and more than one instruments of
proxy are deposited with the company, all such instruments of proxy shall be rendered invalid.
Who may be appointed as proxy?
A proxy must be a member unless the articles of the company permit appointment of a non-member
as proxy.
Notice accompanied by proxy form
Every notice of a meeting of a company shall prominently set out the member‘s right to appoint a
proxy and the right of such proxy to attend, speak and vote in the place of the member at the
meeting and every such notice shall be accompanied by a proxy form.
Proxy instrument
The instrument appointing a proxy shall:
 be in writing; and
 be signed by the appointer or his attorney duly authorised in writing, or if the appointer is a
body corporate, be under its seal or be signed by an officer or an attorney duly authorised
by it.
An instrument appointing a proxy, if in the form set out in Table A in the First Schedule shall not be
questioned on the ground that it fails to comply with any special requirements specified for such
instruments by the articles.
Time limit
The proxies must be lodged with the company not later than 48 hours before the time for holding
a meeting and any provision to the contrary in the company‘s articles shall be void.
In calculating the period, no account shall be taken of any part of the day that is not a working day.
Rights of proxy
The members or their proxies shall be entitled to do any or all the following things in a general
meeting, namely:
 demand a poll on any question; and
 on a question before the meeting in which poll is demanded, to abstain from voting or not
to exercise their full voting rights;
and any provision to the contrary in the articles shall be void.

Inspection of proxy forms

Every member entitled to vote at a meeting of the company shall be entitled to inspect during the
business hours of the company all proxies lodged with the company.
2.5 Representation of body corporate at meetings [Section 138]

Body corporate as a member
A body corporate or corporation which is a member of another company may, by resolution of its
board or other governing body authorise an individual to act as its representative at any meeting
of that other company, and the individual so authorised shall be entitled to exercise the same
powers on behalf of the corporation which he represents.
Example 13: Proxy form and representation of a company

Question: Fancy Works Limited (FWL) is in process of finalizing the prerequisites of holding its first
Annual General Meeting (AGM) to be held on 31 October 2019.
(i) Advise FWL about the matters relating to proxies which must be included in the notice of AGM.
(ii) Arbaz Limited (AL) is a member of FWL. How would AL represent itself in the AGM?
Answer:
Part (i)
The Notice of AGM of FWL shall prominently set out the member’s right to appoint a proxy and the
right of such proxy to attend, speak and vote in the place of the member at the meeting and such
notice shall be accompanied by a proxy form.
Part (ii)
AL may by resolution of its board authorize an individual to act as its representative at any meeting
of FWL. The instrument of proxy for such individual be under AL’s seal or be signed by an officer or
an attorney duly authorized by AL in this behalf.
Example 14: Representation and proxy

Question: Green Leaf Limited, a listed company, has sent a notice of the forthcoming Annual
General Meeting, to the Company Secretary of Red Rose Limited which is also a listed company.
Red Rose Limited had recently acquired 100,000 shares in Green Leaf Limited and you are required
to advise its directors about the following, in the light of Companies Act, 2017:
(a) Who can represent Red Rose Limited in the annual general meeting of Green Leaf Limited?
(b) What are the essential characteristics of an instrument of proxy to be submitted to Green Leaf
Limited and what is the deadline for its submission?
Answer:
Part (a)
A company which is a member of another company may by resolution of the board or other
governing body may authorize any of its officials or any other person to act as its representative at
the meeting of that other company.
Part (b)
The instrument appointing a proxy shall:
 be in writing and
 be under company seal or be signed by an officer or an attorney duly authorized.
The proxy shall be lodged with the company not later than forty-eight hours before the time of the
meeting.
Body corporate as a creditor
A body corporate or corporation which is a creditor of another company may, by resolution of its
board or other governing body authorise an individual to act as its representative at any meeting
of the creditors of that other company and the person so authorised shall be entitled to exercise
the same powers on behalf of the corporation which he represents.

Business Law
2.6 Representation of government at meetings [Section 139]

Power to appoint
The Federal Government (through concerned Minister-in-Charge) or a Provincial Government, as
a member of a company, may appoint such individual as it thinks fit to act as its representative at
any meeting of the company or at any meeting of any class of members of the company.
Rights of appointed individual
An individual appointed to act as aforesaid shall, for the purpose of the Companies Act, be deemed
to be a member of such a company and shall be entitled to exercise the same rights and powers,
including the right to appoint proxy, as the Federal Government or Provincial Government may
exercise as a member of the company.
2.7 Quorum of general meeting [Section 135]

Meaning of quorum
Quorum means certain minimum number of members of a company as is fixed as competent to
transact business in a general meeting of members in the absence of the other members. Any
business transacted in a meeting without quorum shall be void.
Minimum Quorum requirement
10 members present personally or through video link

Listed company representing at least 25% voting power (own or
proxy).
Other company having share 2 members present personally or through video link
capital representing at least 25% voting power (own or proxy).
Company not having share capital As provided in the articles.
Larger Quorum
A company may fix quorum larger than the above-mentioned minimum quorum by its articles.
Absence of quorum
If the required quorum is not present at the meeting within half an hour from the time appointed for
the meeting, the meeting shall be:
 dissolved, if called upon the requisition of members; and
 adjourned to the same day in the next week at the same time and place, if called by the
directors on their own.
Example 15: Quorum and absence of chairman

Question: The Board of Directors of Classic Paints Limited, a public listed company, has called an
Extraordinary General Meeting on the requisition of the shareholders holding 10% of the voting
power of the company. Approximately twenty minutes before the commencement of the meeting,
the Chairman of the Board of Directors informed the Company Secretary of his inability to attend
the meeting due to the death of a close relative.
Required:
(a) What would be the quorum of the above meeting?
(b) Mention the latest time by which the quorum of the meeting should be present. What would
be the impact if quorum is not present within the prescribed time?
(c) Who could chair the meeting in the above situation?

Answer:
Part (a)
Being a public listed company, the quorum of the meeting is not less than 10 members present
personally or through video link who represent not less than 25% of the total voting power, either
of their own account or as proxies, unless the articles provide for a larger number.
Part (b)
The quorum of the meeting should be present within half an hour from the time for the meeting
otherwise the meeting shall be dissolved as it has been called on the requisition of members.
Part (c)
Since chairman of the board of directors cannot attend the meeting therefore, anyone of the
directors present may be elected to be chairman. However, if none of the directors is present or is
unwilling to act as chairman, the members present shall choose one of the members to be the
chairman.
Quorum at adjourned meeting

If a quorum is not present within half an hour at adjourned meeting, the members present in the
meeting (either personally or through video link), not being less than two, shall be a quorum, unless
the articles provide otherwise.
Example 16: Quorum

Question: The annual general meeting of VX Limited, a listed company, was convened on 30 May
2012. However, only four shareholders turned up to attend the meeting.
Explain how VX Limited should deal with the above situation in the light of Companies Act, 2017.
Answer:
Since VX Limited is a listed company, unless the articles provide for a larger number the quorum of
an annual general meeting shall not be less than ten members present personally or through video-
link, who represent not less than twenty-five percent of the total voting power, either of their own
account or as proxies.
In VX limited only four shareholders turned up to attend the meeting and therefore the quorum
were not formed. If the quorum is not present within half an hour from the time appointed for the
meeting, the Chairman shall adjourn the meeting and the meeting shall stand adjourned to the
same day in the next week at the same time and place.
At the adjourned meeting if a quorum is not present within half an hour from the time appointed
for the meeting, the members present personally or through video-link, being not less than two,
shall be a quorum, unless the articles provide otherwise.
Example 17: Quorum incomplete and adjournment

Question: An Extraordinary General Meeting of Mastermind Technologies Limited (MTL), a listed
company, was scheduled to be held on October 31, 2009. The directors adjourned the meeting for
the next week as the quorum was not present within fifteen minutes of the scheduled time.
Based on the provisions of the Companies Act, 2017, you are required to comment on the following:
(a) The decision of the directors to adjourn the meeting, assuming the meeting was called
upon the requisition of the members.
(b) The decision of the directors to adjourn the meeting, assuming the meeting was called by
the directors.
(c) The impact of the adjournment on the validity and rights of proxies which were deposited
with the company before adjournment.
Answer:
Part (a)
The directors of the company should have waited for half an hour. If within half an hour from the
time appointed for the meeting the quorum is not present, the directors should direct to dissolve
the meeting, as the meeting is called upon the requisition of the member.

Business Law
Part (b)
The directors of the company should have waited for half an hour. The directors of the company
may adjourn the general meeting of the company if within half an hour from the time appointed for
the meeting the quorum is not present and shall adjourn the meeting to the same day in the next
week at the same time and place, as meeting is called by the directors.
Part (c)
The proxies deposited before adjournment of the meeting shall stand valid for the adjourned
meeting. A proxy shall be entitled to attend and vote instead of member appointing him and have
such rights in respect of speaking and voting at the adjourned meeting as are available to a
member.
2.8 Court declaring a general meeting invalid [Section 136]

Petition criteria
Members having not less than 10% of the voting power in the company may file a petition that the
proceedings of a general meeting be declared invalid by reason of a material defect or omission in
the notice or irregularity in the proceedings of the meeting, which prevented members from using
their rights effectively.
Time limit
The petition shall be made within 30 days of the impugned meeting.
Court order
The Court may declare such proceedings or part thereof invalid and direct holding of a fresh
general meeting, if satisfied.
Example 18: Circumstances in which proceedings of a General Meeting may be declared invalid
Question: The 21st annual general meeting (AGM) of Noke Jhoke Limited was held on 20 August
2015. Two of the shareholders, Mateen and Ragib were not satisfied with the conduct of the
meeting. One week after the meeting, they submitted a complaint to the chairman of the board of
directors, requiring him to invalidate the proceedings of the 21st AGM.
In view of the provisions of the Companies Act, 2017 explain the circumstances in which Mateen
and Ragib would succeed in their contention.
Answer:
In the given scenario, Mateen and Ragib would not succeed in their contention as they have filed
the complaint with the chairman of the board of directors.
In order to succeed, Mateen and Ragib are required to file a petition in the Court and must have
10% or more of the voting power in the company.
The petition must be made within thirty days of the impugned meeting.
The Court may declare the proceedings of a general meeting or part thereof invalid and direct
holding of a fresh meeting on the following grounds:
 By reason of any material defect or omission in the notice; or
 Irregularity in the proceedings of the meeting which prevented Mateen and Ragib from using
their rights.
Example 19: Notice of annual general meeting

Question: The annual general meeting of Alpha Limited (AL), a listed company, is scheduled to be
held in March 2020 to transact several ordinary and special businesses such as election of
directors.
Under the provisions of the Companies Act, 2017 list the information which must be included in
AL’s notice of annual general meeting to be published in the newspapers. Your answer should cover
all aspects which must either be included in or be annexed to notice of annual general meeting.

Answer:
Information to be included in the notice of general meeting
Notice of AL’s annual general meeting should:
For normal business

 specify the place, day and hour of the meeting;
 include a statement of the business to be transacted at the meeting;
 specify availability of an option of video-link facility to those members on demand who hold 10%
of the total paid up capital or such other percentage as may be specified, and who reside in a
city;
 prominently set out member’s right to appoint a proxy and the right of such proxy to attend,
speak and vote in the place of the member at the meeting;
 be accompanied by a proxy form;
For special business
 the special resolution, shall be accompanied by the draft resolution;
 a statement shall be annexed to the notice of the meeting setting out all material facts
concerning such special business, including, in particular, the nature and extent of the interest,
if any, therein of every director, whether directly or indirectly, and where any item of business
consists of the according of an approval to any document by the meeting, the time when and
the place where the document may be inspected, shall be specified in the statement;
In case of election of directors
 expressly state the number of directors fixed for election and names of the retiring directors.
Example 20: Various issues regarding a general meeting

Question: The Annual General Meeting of Trade Limited was held at 11:25 a.m. on 10 November
2015. Certain shareholders have lodged following complaints with the company secretary:
(i) Notice of the annual general meeting was not received by them although they are resident
in Pakistan and their registered addresses have also been provided to the company.
(ii) Since the meeting could not commence at the scheduled time i.e. 11:00 a.m., it became
invalid and should be called again.
(iii) A resolution passed in the meeting was approved by a show of hands. However, a poll
should have been carried out.
(iv) Mr. Hamid who voted for a resolution was represented through a proxy which was deposited
at 5:01 p.m. i.e. after office hours on 8 November 2015. Since 9 November 2015 was a
public holiday, the condition of depositing the proxy at least 48 hours before the
commencement of the meeting, was not met.
(v) Mr. Ghulam who holds 100,000 shares was represented by two proxies i.e. Mr. Cassim
(75,000 shares) & Mr. Danish (25,000 shares). Only proxy with 75,000 shares was counted
for the purpose of voting.
(vi) JKM Limited holding 20,000 shares of the company was represented by Mr. Waheed, who
is neither a director nor an employee of JKM Limited.
In the light of the provisions of the Companies Act 2017 you are required to:
(a) Comment on the validity of each of the above complaints.
(b) Describe the circumstances under which a court may declare the resolution(s) passed in
the above meeting or the entire proceedings of the meeting as invalid.

Business Law
Answer:
Part (a)
(i) The accidental omission to give notice to, or non-receipt of notice by any member shall not
invalidate the proceedings at any meeting. Therefore, if Trade Limited has sent a notices
properly and according to requirement of the law, the shareholders’ complaint is not valid.
(ii) As per the Act, if within half an hour from the time appointed for the meeting, a quorum is
not present, the meeting may either be dissolved or adjourned. Since the quorum was
present within 30 minutes, the meeting is valid.
(iii) As per the Act, at any general meeting, a resolution put to the vote of the meeting shall be
decided on show of hands, unless a poll is demanded. The concerned shareholders should
have demanded a poll on or before the declaration of the result of the voting by show of
hands and not after the meeting is concluded. Therefore, the shareholder’s protest is not
valid.
(iv) Proxy is not valid as it was not deposited 48 hours before the meeting.
(v) A member shall not be entitled to appoint more than one proxy to attend any one meeting.
In this case, Mr. Ghulam had appointed more than one proxy for the meeting and more
than one instrument of proxy was deposited with the company, therefore both the
instruments of proxy would be rendered invalid.
(vi) A company which is a member of another company may, by resolution of the directors,
authorise an individual to act as its representative at any meeting of that other company.
Therefore, Mr. Waheed’s vote is valid.
Part (b)
The court may, on a petition by members having not less than ten per cent of the voting power in
the company, that the proceedings of a general meeting be declared invalid by reason of any
material defect or omission in the notice or irregularity in the proceedings of the meeting which
prevented members from using effectively their rights, declare such proceedings or part thereof
invalid and direct holding of fresh general meeting:
However, the petition shall be made within thirty days of the impugned meeting.

3 RESOLUTIONS AND RECORDS

Section overview
 Notice of resolution
 Resolution passed at adjourned meeting
 Passing of resolution by the members through circulation
 Filing of resolution
 Records of resolutions and meetings
 Inspection of records of resolutions and meetings
3.1 Notice of resolution [Section 140]

Resolutions to be stated in notice
The notice of a general meeting of a company shall state the general nature of each business
proposed to be considered and dealt with at a meeting, and in case of special resolution,
accompanied by the draft resolution.
Resolution by members
The members having not less than 10% voting power in the company may give notice of a
resolution and such resolution together with the supporting statement, if any, which they propose
to be considered at the meeting, shall be forwarded so as to reach the company:
 in the case of a meeting requisitioned by the members, together with the requisition for the
meeting;
 in any other case, at least 10 days before the meeting; and the company shall forthwith
circulate such resolution to all the members.
Example 21: Resolution by member

Question: Mr. Dinshaw holding 13.5% shares in ABC Limited gave notice of a resolution to the
company on May 22, 20X4, proposing to appoint M & T Associates in place of the existing share
registrar of the company. The resolution was to be considered at the annual general meeting
scheduled for May 30, 20X4. The company could not circulate the proposed resolution among its
members.
Evaluate the above situation in the light of the provisions of the Companies Act, 2017.
Answer:
Any member having not less than ten percent voting power in the company may give notice of a
resolution and such resolution together with the supporting statement, if any, is required to be
forwarded in such a way so as to reach the company at least 10 days before the meeting.
Mr. Dinshaw holds 13.5% shares in the company i.e. more than 10% hence he is entitled to submit
the resolution to the company. However, since the notice given by Mr. Dinshaw did not reach the
company in the prescribed time, the company cannot be held liable for its failure to circulate the
resolution.
3.2 Resolution passed at adjourned meeting [Section 146]

Where a resolution is passed at an adjourned meeting of:
 a company;
 the holders of any class of shares in a company;
 the board; or
 the creditors of a company;
the resolution shall, for all purposes, be treated as having been passed on the date on which it was
in fact passed, and shall not be deemed to have been passed on any earlier date.

Business Law
Example 22: Date of resolution passed at an adjourned meeting

Maria Limited AGM was scheduled and conducted on 17 th August 2020 in which a resolution for
change of registered office was among the other businesses to be transacted. However, the
meeting was adjourned to 31st August 2020 and then the resolution for change of registered office
was passed. The resolution shall be deemed to be passed on 31 st August 2020 and not on 17th
August 2020.
3.3 Passing of resolution by the members through circulation [Section 149]

When resolution through circulation is allowed
Except for the ordinary businesses to be conducted in the annual general meeting, the members
of a private company or a public unlisted company (having not more than 50 members), may pass
a resolution (ordinary or special) by circulation signed by all the members for the time being entitled
to receive notice of a meeting.
Rules regarding resolution passed through circulation
 Any resolution so passed shall be as valid and effectual as if it had been passed at a general
meeting of the company duly convened and held.
 A resolution shall not be deemed to have been duly passed, unless the resolution has been
circulated, together with the necessary papers, if any, to all the members.
 A members‘ agreement to a written resolution, passed by circulation, once signified, may
not be revoked.
 A resolution so passed shall be noted at subsequent meeting of the members and made
part of the minutes of such meeting.
Example 23: Resolution by circulation

Question: The board of directors of Majestic Limited (ML) intends to change the company’s name.
They are of the view that such a change would help in rebranding and rebuilding the image of the
company. In this regard, the board has directed the company secretary to call a general meeting
on priority basis in order to obtain members’ approval.
Considering the urgency of the matter, company secretary has advised the board that required
approval under the law may be taken from the members by getting the resolution passed through
circulation.
Under the provisions of Companies Act, 2017:
(i) advise whether ML can get the resolution passed by its members through circulation;
(ii) specify the pre and post-requisites which must be taken care of, in order to ensure that the
resolution passed through circulation by members of ML is valid.
Answer:
Part (i)
The members of a private company or a public unlisted company, may pass a resolution (ordinary
or special) through circulation. Considering this provision of law, ML can obtain the members’
approval through circulation if it is not a listed company.
Part (ii)
Resolution shall be circulated, together with the necessary papers, if any, to all the members. It
shall be signed by all the members for the time being entitled to receive notice of a meeting.
Further, resolution shall be noted at subsequent meeting of the members and made part of the
minutes of such meeting.
3.4 Filing of resolution [Section 150]

Every special resolution passed by a company shall, within 15 days from the passing thereof, be
filed with the registrar duly authenticated by a director or secretary of the company.

Annexed to articles
Where articles have been registered, a copy of every special resolution for the time being in force
shall be embodied in or annexed to every copy of the articles issued after the date of the resolution.
Sent to member on request
A copy of every special resolution shall be forwarded to any member at his request on payment of
such fee determined by the company.
Example 24: Filing of resolution

Question: Tripod Limited (TL), a listed company, intends to change the place of its registered office
from Lahore to Peshawar and for this purpose it has obtained approval of the general meeting
through special resolution. The directors of TL are of the view that in order to be effective, the special
resolution should be filed with the Commission. However, the company secretary has advised to
keep the resolution at the registered office so that anyone who is interested may inspect it.
Briefly discuss the requirement(s) relating to filing/furnishing of special resolution.
Answer:
Every special resolution passed by a company shall, within fifteen days from the passing thereof,
be filed with the registrar duly authenticated by a director or secretary of the company.
Where articles have been registered, a copy of every special resolution for the time being in force
shall be embodied in or annexed to every copy of the articles issued after the date of the resolution.
A copy of every special resolution shall be forwarded to any member at his request on payment of
such fee not exceeding the amount as the company may determine.
3.5 Records of resolutions and meetings [Section 151]

Records to be kept
Every company shall keep records of:
 copies of all resolutions of members passed otherwise than at general meetings; and
 minutes of all proceedings of general meetings along with the names of participants, to be
entered in properly maintained books.
Authentication
Minutes recorded if purporting to be authenticated by the chairman of the meeting or by the
chairman of the next meeting, shall be the evidence of the proceedings at the meeting.
Minutes to be evidence
Until the contrary is proved, every general meeting of the company in respect of the proceedings
whereof minutes have been so made shall be deemed to have been duly called, held and
conducted.
Place and time of record
The records must be kept at the registered office of the company from the date of the resolution,
meeting or decision simultaneously in physical and electronic form and it shall be preserved for at
least twenty years in physical form and permanently in electronic form.
3.6 Inspection of records of resolutions and meetings [Section 152]

Open to inspection
The books containing the minutes of proceedings of the general meetings shall be open to
inspection by members without charge during business hours, subject to such reasonable
restrictions as the company may by its articles or in general meeting impose so that not less than
two hours in each day be allowed for inspection.

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Certified copy to member

Any member shall at any time after 7 days from the meeting be entitled to be furnished, within 7
days after he has made a request in that behalf to the company, with a certified copy of the minutes
of any general meeting at such charge as may be fixed by the company.
Example 25: Minutes of meeting

Question: Rapid Constructions Limited (RCL) is a listed company. Advise the Board of Directors of
RCL on the following matter, in the light of the provisions of the Companies Act, 2017:
On 5 December 2020 an urgent request has been received from Farid, a member, for inspection
and supply of minutes of the company’s fifteenth extraordinary general meeting held on 2
December 2020.
Answer:
Any member shall at any time after seven days from the meeting, be entitled to be furnished with
a certified copy of the minutes of the general meeting. Therefore, Farid cannot request for
inspection or a copy of the minutes of the meeting before 9 December 2016 as the meeting was
held on 2 December 2020.
Further, RCL is required to furnish copy of the minutes of the meeting within seven days from the
date of the request. If Farid makes the request on 9 December 2016, RCL may furnish a copy by
16 December 2016.


01. A general meeting is a meeting of the shareholders of the company who are entitled by the
company’s articles to
(a) Borrow money on behalf of the company
(b) Appoint company secretary on behalf of the company
(c) Attend and vote at such meetings
(d) Call annual general meeting
02. Generally a private company is not required to hold a statutory meeting but it shall also be required
to hold a statutory meeting if
(a) Such private company decides to liquidate the company
(b) Such private company is a subsidiary of a public company
(c) Such private company converts itself into a public company within one year of its
incorporation.
(d) Such private company converts itself into a public company within 06 months of its
incorporation.
03. The statutory meeting shall consider and approve report called statutory report which is sent to each
member, along with a notice of the statutory meeting
(a) At least twenty one days before the date of statutory meeting
(b) At least seven days before the date of statutory meeting
(c) At least thirty days before the date of statutory meeting
(d) At least fourteen days before the date of statutory meeting
04. The first annual general meeting of a company shall be held
(a) After 16 months from the date of its incorporation
(b) Within 16 months from the date of its incorporation
(c) After 18 months from the date of its incorporation
(d) Within 12 months from the date of its incorporation

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05. The SECP, in the case of a listed company and the registrar, in the case of other companies may
extend the time for holding of subsequent annual general meeting
(a) Upto a maximum of 30 days
(b) Upto a minimum of 30 days
(c) For 21 days
(d) For 15 days
06. At least 21 days’ notice of annual general meeting shall be given to members and in case of a listed
company such notice shall also be published in
(a) An Urdu or an English daily newspaper having nationwide circulation
(b) An Urdu and an English daily newspaper having nationwide circulation
(c) An Urdu and an English fortnight newspaper
(d) Any local language and an English fortnight newspaper
07. If members of a listed company, not resident in city where AGM is taking place required the company
to provide the facility of video link to attend AGM of the company, then they must fulfil the following
condition in order to make such request to be valid
(a) Holding at least 10% share capital
(b) The request must be in written form
(c) The request must be made at least seven days before such meeting
08. If the directors do not proceed to call a meeting with in 21 days of filing of the requisition by the
members, the requisitionists may call a meeting and that meeting should be held and conducted
(a) Within 21 days from the date of the deposit of the requisition
(b) Within 30 days from the date of the deposit of the requisition
(c) Within 90 days from the date of the deposit of the requisition
(d) Within 120 days from the date of the deposit of the requisition

09. When there are material defects or omission in the notice or the proceedings of the meeting is alleged
to be irregular then, following condition(s) must be fulfilled in order to declare such meeting invalid
(a) Members having 10% or more rights can apply
(b) Members can apply to the court
(c) Application must be made within 30 days of the meeting
10. If the required quorum is not present at the meeting within half an hour from the time appointed for
the meeting it shall be
(a) Dissolved in any case
(b) Adjourned in any case
(c) Held in any case
(d) Dissolved, if called upon the requisition of members
11. In any company voting is done by show of hands unless a poll is ordered by chairman of the meeting.
On show of hands every member shall exercise
(a) 1 vote per 10 shares
(b) 10 votes per share
(c) 1 vote irrespective of number of shares
(d) 10 votes irrespective of number of shares
12. A member cannot appoint more than one proxy to attend any one meeting. If more than one proxy
is appointed for any one meeting
(a) All proxies possess same voting rights
(b) All proxies possess same right to speak
(c) All appointments of proxies shall be valid
(d) All appointment of proxies shall be invalid
13. Members of the company can demand a certified copy of the minutes of general meeting, any time
after 7 days from meeting, which the company shall provide to them
(a) Within 7 working days of receipt of his request
(b) Within 14 working days of receipt of his request
(c) Within 30 working days of receipt of his request
(d) Within 60 working days of receipt of his request

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14. The records of all proceedings of the meetings must be kept at the registered office of the company
in physical and electronic form and it shall be preserved for
(a) At least 10 years in physical form and permanently in electronic form
(b) At least 20 years in physical form and permanently in electronic form
(c) Permanently in physical form and permanently in electronic form for 10 years
(d) Permanently in physical form and permanently in electronic form for 20 years
15. Members of a private company or a public unlisted company, may pass a resolution by circulation
signed by all members except
(a) For special businesses of AGM
(b) For special businesses of Statutory meeting
(c) For ordinary businesses of AGM
(d) For ordinary businesses of Statutory meeting
16. All companies, except single member companies, are required by law to hold
______________________, at which the members should be entitled to vote on certain resolutions.
17. The company shall file all the _____________________ passed by it within fifteen days of passing
the same with the registrar, such copy to be filed shall be authenticated by a director or secretary of
the company.
18. General meetings are chaired by the ________________of the board of directors, and other
directors may also attend. However, the directors do not have a right to vote at a general meeting
unless they are also a member of the company.
19. Chairman of the meeting may order a __________ to be taken instead of voting by show of hands
or after seeing the result of voting by show of hands.
20. ______________is a formal document sent to each member at his registered address or such
address which he has supplied to the company for communication purpose in case where he has no
registered address in Pakistan; so that each member must be aware of the matters to be discussed.


1. (c) An AGM is a meeting of the members of the company and they have a right to vote at
and attend such meetings.
2. (c) When a private company converts itself into a public company within one year of its
incorporation it shall also be required to hold such meeting.
3. (a) Statutory report shall be send to the members at least twenty one days before the
date of statutory meeting.
4. (b) The first AGM shall be held within 16 months from the date of its incorporation
thereafter at least once in a calendar year.
5. (a) The timing of AGM may be extended upto a maximum of 30 days.
6. (b) The notice of an AGM shall be published in an Urdu and an English daily newspaper
having nationwide circulation.
7. (d) All the mentioned conditions must be fulfilled in order to request the company for
video link facility.
8. (c) The meeting should be held and conducted within 90 days of filing of the requisition.
9. (d) In order to declare meeting invalid, members having 10% or more voting rights can
apply to court within 30 days of the meeting.
10. (d) The meeting shall be dissolved if it was called on the request of the members.
11. (c) On show of hands every member shall exercise one vote per share.
12. (d) If more than one proxy is appointed for any one meeting, all appointment of proxies
shall be invalid.
13. (a) The company shall provide the members certified copied within 7 working days of
receipt of his request
14. (b) The records must be kept for at least 20 years in physical form and permanently in
electronic form.
15. (c) Passing of resolution by the members through circulation is allowed except for the
ordinary businesses of AGM.
16. An annual general meeting (AGM)
17. Special resolutions
18. Chairman
19. Poll
20. Notice of meeting

Business Law

16
CHAPTER
Business Law
Accounts and investments
Contents
1 Accounts of companies
2 Directors’ report and statement of compliance
3 Investments

Business Law
1 ACCOUNTS OF COMPANIES
Section overview
 Books of accounts to be kept by a company

 Financial statements
 Approval and authentication of financial statements
 Filing of financial statements with registrar (after AGM)
 Quarterly financial statement of listed companies
1.1 Books of accounts to be kept by a company [Section 220]
Definition: Books and paper [Section 2(10)]

“book and paper” and “book or paper” includes books of account, cost accounting records, deeds,
vouchers, writings, documents, minutes and registers maintained on paper or in electronic form.
Definition: Books of account [Section 2(11)]

“books of account” include records maintained in respect of:
(a) all sums of money received and expended by a company and matters in relation to which
the receipts and expenditure take place;
(b) all sales and purchases of goods and services by the company;
(c) all assets and liabilities of the company; and
(d) items of cost in respect of production, processing, manufacturing or mining activities.
Requirement
Every company shall prepare and keep at its registered office books of account and other relevant
books and papers and financial statements for every financial year which give a true and fair view
of the state of the affairs of the company, including that of its branch offices, if any.
Cost accounts
In the case of a company engaged in production, processing, manufacturing or mining activities,
such particulars relating to utilisation of material or labour or the other inputs or items of cost as
may be specified, shall also be maintained.
Keeping books at place other than registered office
All or any of the books of account aforesaid and other relevant papers may be kept at such other
place in Pakistan as the board may decide and where such a decision is taken, the company shall
file with the registrar a notice in writing giving the full address of that other place within 7 days.
Example 01: Books of accounts
Question: SQL Plastics Limited is a wholly owned subsidiary of a foreign company and has its
registered office in Karachi.
(a) List the books of account the company is required to maintain.
(b) State the conditions which the directors shall be required to comply with if they want to
keep the books of account at SQL’s factory located in Peshawar.

Section B: Company Law - Chapter 16: Accounts and investments
Answer:
(a) SQL Plastic Limited must keep proper books of account and other relevant books and papers
and financial statements for every financial year which give a true and fair view of the state of the
affairs of the company. in the case of a company engaged in production, processing, manufacturing
or mining activities, such particulars relating to utilisation of material or labour or the other inputs
or items of cost shall also be maintained.
(b) As the directors of SQL Plastic Limited intend to keep the books of account at a place other than
the registered office, SQL Plastic Limited must file with the registrar a notice in writing within seven
days of the decision, giving the full address of the other place.
Records of branch offices

Where a company has a branch office in Pakistan or outside Pakistan, it shall be deemed to have
complied with the requirement, if proper books of account relating to the transactions effected at
the branch office are kept at that office and proper summarized returns are sent periodically by the
branch office to the company at its registered office or the other place where books of accounts
are kept.
Inspection by directors
The books of account and other books and papers maintained by the company within Pakistan
shall be open for inspection by any director during business hours, and in the case of financial
information, if any, maintained outside the country, copies of such financial information shall be
maintained and produced for inspection by any director.
Where such inspection is made, the officers and other employees of the company shall give to the
director making such inspection all assistance in connection with the inspection which the company
is reasonably expected to give.
Inspection by members
Members do not have absolute right to inspect books of accounts. However, the Companies Act,
or the directors or the general meeting may authorize member(s) to inspect books of accounts.
Time period
The books of account of every company relating to a period of not less than 10 financial years
immediately preceding a financial year together with the vouchers relevant to any entry in such
books of account shall be kept in good order.
Requirement for liquidator
The liquidator of the company appointed for winding up of the company is also required to maintain
the above stated books of accounts for the company during its winding up.
1.2 Financial statements [Section 223]
Definition: Financial statements [Section 2(33)]

“financial statements” in relation to a company, includes—
(a) a statement of financial position as at the end of the period;
(b) a statement of profit or loss and other comprehensive income or in the case of a company
carrying on any activity not for profit, an income and expenditure statement for the period;
(c) a statement of changes in equity for the period;
(d) a statement of cash flows for the period;
(e) notes, comprising a summary of significant accounting policies and other explanatory
information;
(f) comparative information in respect of the preceding period; and
(g) any other statement as may be prescribed.

Business Law
Requirement
The board of every company must lay before the company in AGM its financial statements for the
period, in the case of first such statements since the incorporation of the company and in any other
case since the preceding financial statements, made up to the date of close of financial year
adopted by the company.
Time limit
The first financial statement must be laid at some date not later than sixteen months after the date
of incorporation of the company and subsequently once at least in every calendar year.
The financial statements must be laid within a period of 120 days following the close of financial
year. However, in the case of a listed company the Commission, and in any other case the registrar,
may, for any special reason, extend the period for a term not exceeding 30 days.
Duration of financial year
Definition: Financial year [Section 2(34)]

“financial year” in relation to a company or any other body corporate, means the period in respect
of which any financial statement of the company or the body corporate, as the case may be, laid
before it in general meeting, is made up, whether that period is a year or not.
The period to which the statements aforesaid relate, not being the first, shall not exceed one year
except where special permission of the registrar has been obtained.
Audit
The financial statement shall be audited by the auditor of the company, and the auditor‘s report
shall be attached thereto.
The requirement of audit shall not apply to a private company having the paid up capital not
exceeding Rs. 1 million or such higher amount of paid up capital as may be notified by the
Commission.
Dispatch to members
Every company shall send audited financial statements together with the auditors‘ report, directors‘
report and in the case of a listed company the chairman‘s review report to every member of the
company and every person who is entitled to receive notice of general meeting, either by post or
electronically at least 21 days before the date of meeting at which it is to be laid before the members
of the company.
Copy at registered office
The company shall keep a copy of financial statements together with the said report at the
registered office of the company for the inspection of the members.
Filing to Authorities by Listed company
A listed company shall, simultaneously with the dispatch to members, send by post three copies
and electronically a copy of such financial statements together with said reports to each of the
Commission, registrar and the securities exchange and shall also post the same on the company‘s
website.
The reports shall be made available on the website of the company for a time period as may be
specified.
Example 02: Financial statements:

Question: Under the provision of the Companies Act, 2017 briefly describe the requirements of a
private limited company for presenting its first financial statements in the annual general meeting
and whether the financial statements are required to be audited.
Answer:
The first financial statements of a private limited company must be laid before the general meeting
not later than sixteen months after the date of incorporation of the company.

In addition to above, the financial statements must be laid within a period of one hundred and
twenty days following the close of the financial year. However, for any special reason, the registrar
may extend the period for a term not exceeding thirty days.
The first financial statements of a private limited company shall be audited by its auditor and
auditor’s report shall be attached thereto. However if the paid up capital of the private company
does not exceed one million the audit is not mandatory.
1.3 Approval and authentication of financial statements [Section 232]

Manner of authentication
The financial statements must be approved by the board of the company and signed on behalf of
the board by the chief executive and at least one director of the company, and in case of a listed
company also by the chief financial officer.
Definition: Chief financial officer (CFO) [Section 2(15)]

“chief financial officer” means an individual appointed to perform such functions and duties as are
customarily performed by a chief financial officer.
Chief executive not in Pakistan

When the chief executive is for the time being not available in Pakistan, then the financial
statements may be signed by at least two directors.
Example 03: Authentication of financial statements

Question: The chief executive of Raza Enterprises Limited (REL), a listed company, is out of the
country at the time of finalization of annual accounts. Explain the provisions related to signing and
authentication of the annual accounts as contained in the Companies Act, 2017 which REL would
have to comply with, in the above situation.
Answer:
When the chief executive is for the time being not in Pakistan, then the financial statements of the
company shall be signed by not less than two directors for the time being in Pakistan, and since it
is a listed company the financial statements shall also be signed by the CFO.
Affidavit by certain private companies

In case of a private company having a paid up capital not exceeding Rs. 1 million, the financial
statements shall also be accompanied by an affidavit executed by those who signed the financial
statements, that the financial statements have been approved by the board.
Single member company
The financial statements of a single member company shall be signed by one director.
1.4 Filing of financial statements with registrar (after AGM) [Section 233]
Requirement
After the audited financial statements have been laid before the company at the AGM and duly
adopted, a copy of such financial statements together with reports and documents required and,
duly signed (by CEO/directors), shall be filed by the company with the registrar.
Time limit
Above financial statements shall be filed within 30 days from the date of such meeting in case of a
listed company and within 15 days in case of any other company.
When members do not adopt financial statements
If the general meeting before which the financial statement is laid does not adopt the same or
defers consideration thereof or is adjourned, a statement of that fact and of the reasons therefor
shall be annexed to the said financial statements required to be filed with the registrar.

Business Law
Not applicable to
This filing requirement shall not apply to a private company having paid up capital not exceeding
Rs. 10 million or such higher amount as may be notified by the SECP.
1.5 Quarterly financial statement of listed companies [Section 237]

Time period
Every listed company shall prepare the quarterly financial statements within the period of:
 30 days of the close of first and third quarters of its year of accounts; and
 60 days of the close of its second quarter of its year of accounts.
Additional requirement for second quarter
Additional requirements for second quarter accounts:
(a) the cumulative figures for the half year i.e. six months be presented
(b) it shall be subjected to a limited scope review by the statutory auditors of the company
(c) limited scope review shall be in such manner and according to such terms and conditions
as may be:
 determined by ICAP; and
 approved by the Commission.
Example 04: Time period

Question: Adeel Limited is a listed company with financial year from 1 July to 30 June. It shall
prepare following financial statements for the year 2019 – 2020.
Financial statements Date / Time limit
For the quarter ending 30 September 2019 30th October 2019 (within 30 days)
For the quarter ending 31 December 2019 29th February 2020 (within 60 days)
For the half year ending 31 December 2019 29th February 2020 (within 60 days)
For the quarter ending 31 March 2020 30th April 2020 (within 30 days)
For the year ending 30 June 2020 28th October 2020 (within 120 days)
.
Extension in time for first quarter

However, if the company was allowed extension for annual financial statements; the company may
apply to the Commission for extension for filing accounts of first quarter and the Commission may
extend the period of filing for a period not exceeding 30 days.
Example 05: Extension of filing accounts of first quarter

Question: The board of Relax Furniture Limited (RFL) a listed company, couldn’t lay before the
company in annual general meeting its annual financial statements for the year ended 30th June
2019 that was required to be laid on or before 28th October 2019; accordingly applied to the
Commission for extension. Commission extended the period up to 27th November 2019.
Answer:
RFL was required to file its accounts for first quarter on or before 30th October 2019 i.e. Within 30
days of the close of first quarter of its year of accounts. Hence also applied to the Commission to
extend the period of filing the same due to the fact that the time period for its annual financial
statements for the year ended 30th June 2019 were also extended by the Commission.

Posted on website and electronic filing

The quarterly financial statements shall be posted on the company’s website for the information of
its members. Moreover, it shall also be transmitted electronically within the period specified above:
 to the Commission,
 to the securities exchange; and
 with the registrar.
The Commission may specify the time period for which the quarterly financial statements shall be
made available on the website of the company.
Dispatch to member on request
A copy of the quarterly financial statements shall be dispatched in physical form if so requested by
any member without any fee.
Authentication
The approval and authentication requirements of the quarterly financial statements are same as
those of annual financial statements.

Business Law
2 DIRECTORS’ REPORT AND STATEMENT OF COMPLIANCE

Section overview
 Duty to prepare directors’ report and statement of compliance

 Contents of directors’ report
 Business review section of directors’ report
2.1 Duty to prepare directors’ report and statement of compliance [Section 226]
Directors’ report
The board shall prepare a directors’ report for each financial year of the company other than a
private company, not being a subsidiary of public company, having the paid up capital not
exceeding Rs. 3 million.
Statement of compliance
The Commission may by general or special order, direct such class or classes of companies to
prepare a statement of compliance. The board shall make out and attach to the financial statement
such statement of compliance as may be specified.
2.2 Contents of directors’ report [Section 227]

Minimum contents of directors’ report
The directors shall make out and attach to the financial statements, a report with respect to:
 the state of the company‘s affairs and a fair review of its business;
 the amount (if any), that the directors recommend as dividend; and
 the amount (if any), they propose to carry to the Reserve Fund, General Reserve or
Reserve Account.
Example 06: State of the affairs

The state of the affairs may be summarised by the directors in one broad paragraph or it may be
discussed by them at length, depending upon the quality of information available to share with the
Additional contents of directors’ report for certain companies

There are additional contents are required for following companies:
 Public company
 Private company, which is a subsidiary of public company
The additional contents are:

 the names of the persons who, at any time during the financial year, were directors of the
company;
 the principal activities and the development and performance of the company‘s business
during the financial year;
 a description of the principal risks and uncertainties facing the company;
 any changes that have occurred during the financial year concerning the nature of the
business of the company or of its subsidiaries, or any other company in which the company
has interest,;
 the information and explanation in regard to any contents of modification in the auditor‘s
report;

Example 07: Auditor’s observations etc.

Auditor’s report of the company is addressed to the members of the company, if the auditor has
pointed out any observation or has in any way modified his opinion, the directors should address
the matter and provide the members with their version of situation so that the members can better
assess the situation as highlighted by the auditor’s report.
 information about the pattern of holding of the shares in the form specified;
 the name and country of origin of the holding company, if such company is a foreign
company;
 the earning per share;
 the reasons for loss if incurred during the year and future prospects of profit, if any;
 information about defaults in payment of any debts and reasons thereof;
 comments in respect of adequacy internal financial controls;
 any material changes and commitments affecting the financial position of the company
which have occurred between the end of the financial year of the company to which the
financial statement relates and the date of the report; and
Example 08: Changes and commitments

Say, the year end date of company is 30th June 2012 and directors’ report is dated for 01 st October
2012. On 3rd September company has entered into a major joint venture with a foreign company.
This joint venture is a matter that needs to be discussed in the directors’ report; similarly if
government has imposed certain additional taxation on the company between the end of financial
year and the date of directors’ report, directors’ report would have addressed this matter as well.
 any other information as may be specified.

Authentication
The directors‘ report and statement of compliance must be approved by the board and signed by
the chief executive and a director of the company.
2.3 Business review section of directors’ report [Section 227]

Business review of listed company
In the case of a listed company, the business review must, to the extent necessary for
understanding the development, performance or position of the company‘s business, include:
 the main trends and factors likely to affect the future development, performance and
position of the company‘s business;
 the impact of the company‘s business on the environment;
 the activities undertaken by the company with regard to corporate social responsibility
during the year; and
 directors‘ responsibility in respect of adequacy of internal financial controls as may be
specified.
Example 09: Business review section of directors’ report

Question: Under the provisions of Companies Act, 2017 it is the responsibility of the board to
prepare directors’ report for each financial year. The Act has further prescribed the minimum
contents of such report.
In the above context, list the matters which are required to be included in the business review
section of the directors’ report of a listed company.

Business Law
Answer:
In the case of a listed company, the business review section must, to the extent necessary for
understanding the development, performance or position of the company’s business, include:
 the main trends and factors likely to affect the future development, performance and position
of the company’s business;
 the impact of the company’s business on the environment;
 the activities undertaken by the company with regard to corporate social responsibility during
the year; and
 directors’ responsibility in respect of adequacy of internal financial controls as may be
specified.
Example 10: Circulation of notice and documents for AGM

Question: The annual general meeting of Iqra Industries Limited (IQL), a listed company, is to be
held on October 25, 20X3. In addition to the normal businesses, the company is planning to discuss
a strategic business plan for the approval of the shareholders.
Explain the requirements of Companies Act, 2017 as regards the circulation of information/
documents to various stake holders, prior to the above meeting.
Answer:
Following information/ documents are required to be circulated to various stake holders at least
21 days prior to the meeting.
Notice of meeting specifying the place and the day and hour of the meeting along with a statement
of the business to be transacted at the meeting and in respect of the special business,
statement setting out all material facts concerning the business, including, in particular the nature
and extent of the interest therein, if any, of every director.
Every notice of a meeting of a company shall be accompanied by a proxy form.
The notice shall be sent to the following:
 All the members;
 All the directors;
 Any person entitled to a share in consequence of death of a member if the interest of such
person is known to the company;
 The auditor or auditors of the company.
Copies of draft resolutions, which are proposed for consideration in the meeting. There shall be
annexed to the notice of the meeting all material facts concerning that strategic business plan.
Every company shall also send:
 copy of audited financial statements
 copy of auditors’ report
 Directors report
 Chairman’s report, in case of listed companies
The above, in case of a listed company, should be sent to the following:
 the registered address of every member of the company
 Securities & Exchange Commission
 Stock exchange
 Registrar.
The above shall also be uploaded on the company’s website

3 INVESTMENTS
Section overview
 Definition of associate companies

 Investment in associated companies
 Investments of company to be held in its own name
 Register for investments not held in own name
3.1 Definition of associate companies
Definition: Associated companies and associated undertakings [Section 2(4)]

“associated companies” and “associated undertakings” mean any two or more companies or
undertakings, or a company and an undertaking, interconnected with each other in the following
manner, namely:
 if a person who is the owner or a partner or director of a company or undertaking, or who,
directly or indirectly (through his spouse or minor children), holds or controls shares carrying
not less than twenty per cent of the voting power in such company or undertaking, is also the
owner or partner or director of another company or undertaking, or directly or indirectly, holds
or controls shares carrying not less than twenty per cent of the voting power in that company
or undertaking; or
 if the companies or undertakings are under common management or control or one is the
subsidiary of another; or
 if the undertaking is a modaraba managed by the company;
(Modaraba is an Islamic financing activity, a set up created in order to ensure interest free financing.
Modaraba Management Company is established as a public company which is licensed to float
Modarabas which are separate legal entities).
However following directorships or shareholdings shall not be considered while ascertaining the
status of companies to be associated:
 directorship of a person by virtue of nomination by the Concerned Minister of the Federal
Government or a Provincial Government or a financial institution directly or indirectly owned or
controlled by such Government; or
 directorship of a person appointed as “Independent Director”
 shares owned by the National Investment Trust or the Investment Corporation of Pakistan or a
financial institution directly or indirectly owned or controlled by the Federal Government or a
Provincial Government; or
 shares registered in the name of a central depository
Example 11: Associated companies and associated undertakings

Azam is a director in ABC Limited, a public company limited by shares, if he is also a director in DEF
Limited then both ABC Limited & DEF Limited shall be considered as associated companies of each
other due to presence of a common director (Azam) among both the companies.
Azam is also a partner in a partnership firm named GHI Enterprises, then all the above named three
businesses (‘the undertakings’) shall be considered as associated undertakings of each other. The
point to note here is that they are known as associated undertakings rather than associated
companies because all the three business involved in the relationship are not companies under the
Companies Act 2017.

Babar is director in ABC Limited and he is also owner of more than 20% shares of JKL (Private)
Limited. ABC Limited and JKL (Private) Limited shall be considered associated companies.

Business Law

ABC Limited is holding company of DEF Limited and KLM Limited.
 ABC Limited and DEF Limited shall be considered associated companies as the latter is
subsidiary of the former.
 ABC Limited and KLM Limited shall be considered associated companies as the latter is
subsidiary of the former.
 DEF Limited and KLM Limited shall be considered associated companies being under common
control of ABC Limited.

National investment Trust owns 25% shares in ABC Limited and 30% shares in XYZ Limited. ABC
Limited and XYZ Limited shall not be considered associated companies.

Saima is director in ABC Limited and she is also independent director appointed in XYZ Limited.
ABC Limited and XYZ Limited shall not be considered associated companies.
3.2 Investment in associated companies [Section 199]
Definition: Investment [Section 199]

The term “investment” shall include equity, loans, advances, guarantees, by whatever name called,
except for the amount due as normal trade credit, where the terms and conditions of trade
transaction(s) carried out on arms-length and in accordance with the trade policy of the company.
Power to make investments in general

The investment decisions are within the power of directors exercised through their board meetings.
Restriction on investment in associated company
A company shall not make any investment in any of its associated companies except under the
authority of a special resolution which shall indicate:
 the nature;
 period;
 amount of investment; and
 terms and conditions attached thereto.
An increase in the amount or any change in the nature of investment or the terms and conditions
attached thereto shall be made only under the authority of a special resolution.
Condition: agreement for loan
The company shall invest in its associated company by way of loans or advances in accordance
with an agreement in writing and such agreement shall inter-alia include:
 nature of loan;
 purpose of loan;
 period of the loan;
 rate of return;
 fees or commission;
 repayment schedule for principal and return;

 penalty clause in case of default or late repayments; and

 security, if any, for the loan
in accordance with the approval of the members in the general meeting.
Condition: return on investment
The return on such investment shall not be less than the borrowing cost of the investing company
or the rate as may be specified by the Commission whichever is higher and shall be recovered on
regular basis in accordance with the terms of the agreement, failing which the directors shall be
personally liable to make the payment
Condition: due diligence
The directors of the investing company shall certify that the investment is made after due diligence
and financial health of the borrowing company is such that it has the ability to repay the loan as
per the agreement.
Example 16: Investments

Question: Kalaam Limited (KL) is considering the following options to invest its excess funds:
(i) Acquire 8% shareholdings in Lighter Oil Limited (LOL) for Rs. 120 million. LOL is a growing
company and is expected to fetch higher returns in futures.
(ii) Grant a loan of Rs. 100 million to Monsoon (Private) Limited (MPL) for launching a new
product. The loan would carry interest at the rate prevailing in the market. KL currently holds
25% of MPL’s paid-up capital.
Under the provisions of the Companies Act, 2017 specify the condition(s) which KL must fulfil before
opting for any of the above investment options.
Answer:
Part (i)
The directors can make investment in its shares by passing a resolution in their meeting.
Part (ii)
MPL is an associated undertaking of KL as it holds 25% shareholdings in MPL. Therefore, KL can
make investment in MPL only under the authority of a special resolution passed by the members
in the general meeting. The special resolution shall be supported by an agreement in writing which
shall include the terms and conditions specifying the nature, purpose, period of loan, rate of return,
fees or commission, repayment schedule for principal and return, penalty clause in case of default
or late repayments and security, if any, for the loan in accordance with the approval of the members
in the general meeting.
The rate of return on such investment shall not be less than the borrowing cost of KL (investing
company) or the rate as may be specified by the Commission whichever is higher and shall be
recovered on regular basis in accordance with the terms of agreement, failing which the directors
shall be personally liable to make the payment.
Further, the directors of KL (investing company) shall certify that investment is made after due
diligence and that the borrower has the ability to repay the loan as per the agreement.
Example 17: Investment in associate company

Question: Ironside Limited (IL) owns 51% voting shares in Snow Storm Limited (SSL) and 52% voting
shares in Flipper (Pvt) Limited (FPL). SSL intends to make an investment of Rs. 200 million in FPL.
Under the provisions of the Companies Act, 2017:
(i) State the type of relationship, if any, which exists between SSL and FPL.
(ii) Describe the conditions which SSL must fulfil before making any investment in FPL.

Business Law
Answer:
Part (i)
SSL and FPL are associated companies as both of them are under common control of IL.
Part (ii)
SSL shall not make any investment in its associated company:
 except under the authority of a special resolution which shall indicate the nature, period and
amount of investment and terms and conditions attached thereto.
 provided that the return on investment in `the form of loan shall not be less than the higher of
borrowing cost of investing company (SSL) or such other rate as the commission may specify.
 the directors of the investing company shall certify that the investment is made after due
diligence and financial health of the borrowing company is such that it has the ability to repay
the loan as per the agreement
Exemptions and regulations

The SECP may specify certain classes of companies on which requirement of passing a special
resolution etc. shall not be applicable. The Commission has also made regulations for imposing
conditions and restrictions on making investments in associated companies.
3.3 Investments of company to be held in its own name [Section 200]

Requirement
All investments made by a company on its own behalf shall be made and held by it in its own name.
Exceptions
 The company may hold any shares in its subsidiary company in the name of any nominee
of the company, if it is necessary to do so, to ensure that the number of members of the
subsidiary company is not reduced below the statutory limit.
 Where the company has a right to appoint or get elected any person as a director of any
other company and a nominee of the company in exercise of such right has been so
appointed or elected, the shares in such other company of an amount not exceeding the
nominal value of the qualification shares which are required to be held by a director thereof,
may be registered or held by such company jointly in its own name and in the name of such
person or nominee, or in the name of such person or nominee alone.
 Company may also place its investment in securities in the name of central depository
company if it so desires and the securities are allowed to be kept in central depository
system.
Example 18: Deposit/transfer of securities into Central Depository

The shares can be transferred in the name of central depository company (CDC) and in such a case
the shares get registered in the name of central depository company as a trustee. However,
beneficial ownership remains in the name of actual owner of shares. So if company puts its invested
shares or securities in central depository it would not be in non-compliance of the Companies Act.
3.4 Register for investments not held in own name [Section 200]
Contents of the register
Where, due to exceptions discussed above, any shares or securities in which investments have
been made by a company are not held by it in its own name, the company shall forthwith enter in
a register maintained by it for the purpose at its registered office the nature, value and such other
particulars as may be necessary fully to identify such shares or securities.
Open for inspection
The register shall be open to the inspection of members without charge, and to any other person
on payment of fees fixed by company during business hours, subject to such reasonable
restrictions, as the company may impose, so that not less than two hours in each day be allowed.

Certified copies
Any member may require a certified copy of register or any part thereof, on payment of such fee
as may be fixed by the company. The certified copies requested shall be issued within a period of
07 days. A member seeking to exercise the rights must make a request to the company to that
effect.
Order by registrar for allowing inspection
In case of contravention, the registrar may by an order compel an immediate inspection of the
register or direct that copies required shall be sent to the persons requiring them.

Business Law

01. Books of accounts must be preserved in good order under the requirement of Companies Act,
2017 for a period of
(a) At least 10 years
(b) At least 15 years
(c) Maximum 20 years
(d) Maximum 10 years
02. Books of accounts must be kept at the registered office of the company, however, these books
may be kept at some other place by the decision of:
(a) The members of the company
(b) The directors of the company
(c) The creditors of the company
(d) The Auditors of the company
03. The books of accounts may be inspected by the
(a) Directors of the company during business hours
(b) Members of the company during business hours
(c) Creditors of the company during business hours
(d) Promotors of the company during business hours
04. In case of first financial statements of the company, it shall be presented before the meeting
within
(a) 12 months from the date of incorporation of the company
(b) 14 months from the date of incorporation of the company
(c) 16 months from the date of incorporation of the company
(d) 24 months from the date of incorporation of the company
05. As a token of approval of financial statements, the chief executive and at least one director of
the company put their signatures on the financial statements and in case of a listed company
also by the
(a) Company secretary
(b) Auditors of the company
(c) Chief financial officer
(d) Chief operating officer

06. The financial statements of a single member company shall be signed by
(a) Chief executive
(b) One director
(c) Chief executive and one director
(d) Chief executive and two director
07. The requirement of filing of accounts shall not apply to a private company having paid up
capital not exceeding
(a) RS 10 million or such higher amount as notified by the Commission
(b) RS 05 million or such higher amount as notified by the Commission
(c) RS 03 million or such higher amount as notified by the Commission
(d) RS 01 million or such higher amount as notified by the Commission
08. Financial statements shall be audited by the auditor of the company but this requirement of
audit is not applicable to a private company having paid up capital not exceeding
(a) Rs. 01 million or such higher amount as may be notified by the Commission
(b) Rs. 05 million or such higher amount as may be notified by the Commission
(c) Rs. 10 million or such higher amount as may be notified by the Commission
(d) Rs. 15 million or such higher amount as may be notified by the Commission
09. Directors of every company shall make out and attach to the accounts, a report containing
following particulars
(a) Statements regarding the state of the affairs of the company
(b) Particulars of any amount recommended as dividend
(c) Particulars of any amount transferred or proposed to be transferred to any reserve

account
10. The requirement of preparing a director’s report is not applicable a private company, not being
a subsidiary of public company, have the paid up capital not exceeding
(a) Rs. 1 million
(b) Rs. 03 million
(c) Rs. 05 million
(d) Rs. 10 million

Business Law
11. The directors report of a public company shall address all the material changes occurred
during the financial year which affect
(a) The business of the company
(b) Any other company in which the company has interest
(c) Any of its subsidiaries
12. Directors report and the statements of compliance must be approved by the board and signed
by the
(a) CEO
(b) Director of the company
(c) CEO and CFO of the company
(d) CEO and a director of the company
13. The quarterly financial statements of a listed company shall be transmitted electronically within
the specified period to
(a) The Commission
(b) The Securities exchange
(c) The Registrar
14. The directors of a company have decided to keep the books of account at a place other than
the registered office of the company. In this case, they are required to file a notice to the
registrar of the full address of that place within
(a) 14days of such decision.
(b) 21days of such decision.
(c) 30days of such decision.
(d) 7days of such decision.
15. Copy of audited financial statements, auditors’ report and directors’ report shall be sent to
every member at his registered address at least
(a) 14 days before the meeting
(b) 21 days before the meeting
(c) 30 days before the meeting


16. A copy of the quarterly financial statements of a listed company shall be dispatched in physical
form if so requested by any ___________ without any fee.
17. _____________________ shall be circulated along with the directors’ report and the report
shall state the name and country of origin of its holding company if such holding company is
a foreign company.
18. ________________means the process of approval of accounts for the purpose of issuance
of the same to the members of the company.
19. In the case of a company engaged in production, processing, manufacturing or mining

activates, relevant _____________ shall also be maintained.
20. The _______________ shall address any material changes and commitments affecting the
financial position of the company, which have occurred between the financial year end and
the date of the report.
21. Under the provisions of the Companies Act 2017, the power to make investments in a
company rests with the
(a) CEO of the company
(b) Directors of the company
(c) Members of the company
(d) Chairman of the company
22. Investment in associated company cannot be made by the directors themselves. They will
have to get its approval from
(a) Members in a class meeting through special resolution
(b) Members in a general meeting through ordinary resolution
(c) Members in a general meeting through special resolution
(d) Members in a BOD meeting through ordinary resolution

Business Law
23. Being a separate legal person, a company can make investments in any other company or
security. But all the investments of the company must be made and held
(a) In the name of controlling shareholders
(b) In the name of Sponsors of the company
(c) In the name of chairman of the company
(d) In the name of Company itself
24. The company shall not make an increase in amount or any variation in the nature and terms
of any investment without passing
(a) An ordinary resolution in the general meeting.
(b) A special resolution in the general meeting
(c) A resolution in the Board meeting
(d) A resolution in creditors meeting
25. The register for investments of company not held in its own name is open to inspection for the
members of the company,
(a) Free of cost for at least two hours daily
(b) Free of cost for at least five hours daily
(c) At a payment of charge for at least two hours daily
(d) At a payment of charge for at least five hours daily
26. Any member may require a certified copy of register, on fee fixed by the company. Certified
copies requested shall be issued
(a) After 7 days
(b) Within 7 days
(c) After 14 days
(d) Within 14 days
27. The term “investment” shall include
(a) Loans
(b) Advances
(c) Equity


1. (a) Books of accounts for a period of at least 10 years immediately preceding a financial
year must be preserved in good order.
2. (b) The directors of the company may opt to keep these books at some place other than
registered office of the company.
3. (a) The directors are entitled to inspect the books of the accounts during business hours.
4. (c) The first financial statements of the company shall be presented before the meeting
within 16 months from the date of incorporation.
5. (c) In case of a listed company, the financial statements shall also be signed by the chief
financial officer of the company.
6. (b) The financial statements of a single member company shall be signed by one
director.
7. (a) The requirement of filing of accounts shall not apply to a private company having paid
up capital not exceeding Rs. 10 million.
8. (a) The requirement of audit is not applicable to a private company having paid up capital
not exceeding Rs. 1 million.
9. (d) Director shall make a report containing statements regarding the state of the affairs of
the company, any amount recommended as dividend and any amount transferred to
any reserve account.
10. (b) The requirement of preparing a directors report is not applicable a private company
having the paid up capital not exceeding Rs. 3 million.
11. (d) The directors’ report of a public company shall address all the material changes
occurred during the financial year which affect the business of the company, any of its
subsidiaries or any company in which the company has interest.
12. (d) Director’s report and the statements of compliance must be approved by the board
and signed by the chief executive officer and a director of the company.
13. (d) The quarterly financial statements shall be transmitted electronically within the
specified period to the Commission, Securities exchanges and Registrar.
14. (d) The directors are required to file a notice to the registrar within 7 days of passing the
resolution in their meeting.
15. (b) Copy of audited financial statements, auditors’ report and directors’ report shall be
sent to every member at his registered address at least 21 days before the meeting.
16. Member
17. Pattern of shareholding
18. Authentication
19. Cost accounts
20. Directors’ report

Business Law
21. (b) Directors of the company can make an investment or disinvestment decision.
22. (c) Directors will have to get its approval from members in a general meeting through a
special resolution.
23. (d) All the investments of the company must be made and held in the name of the
company itself and not in the name of any other person.
24. (b) The company cannot change or vary the terms of investments without passing a
special resolution in the general meeting
25. (a) The register is open to inspection of the members free of cost for at least two hours
daily
26. (b) Certified copies of register requested shall be issued within seven days
27. (d) The expression investment shall include loans, advances, equity, guarantees by
whatever name called or any amount which is not in the nature of normal trade credit

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© Emile Woolf International, October 2020

© Emile Woolf International ii The Institute of Chartered Accountants of Pakistan

Section A: Mercantile Law

© Emile Woolf International iii The Institute of Chartered Accountants of Pakistan

1 The Institute of Chartered Accountants of Pakistan

1 INTRODUCTION TO THE LAW AND ITS TYPES

1.1 Definition of Law

1.2 Definition of Mercantile Law

1.3 Why Chartered Accountants study law

1.4 Where to apply law in practical life

1.5 Sources of law in Pakistan

2 The Institute of Chartered Accountants of Pakistan

Precedent (case law)

1.6 Civil law and criminal law

S.no Civil law Criminal law

1 Definition and explanation Criminal law is concerned with conduct

3 The Institute of Chartered Accountants of Pakistan

Example 01: Civil law

Example 02: Criminal law

Example 03: Criminal law and Civil law

Example 04: Criminal law and Civil law

4 The Institute of Chartered Accountants of Pakistan

1.7 Basic structure of Constitution of Islamic Republic of Pakistan

5 The Institute of Chartered Accountants of Pakistan

Part VII – The Judicature [Articles 175–212]

Second Schedule Election of President

Third Schedule Oaths of Office

Fourth Schedule Legislative Lists

Fifth Schedule Remuneration and Terms and Conditions of Service of Judges

6 The Institute of Chartered Accountants of Pakistan

2 THE PROCESS OF LEGISLATION AS PER THE CONSTITUTION

2.1 Governing Structure

7 The Institute of Chartered Accountants of Pakistan

2.2 Process of Legislation

8 The Institute of Chartered Accountants of Pakistan

The chart below shows the process of legislation

When National When National Assembly

National National Ordinance

Sent for reconsideration to

9 The Institute of Chartered Accountants of Pakistan

Example 05: Money bill

Example 06: The Ordinance

Example 07: System of government and role of Senate in process of legislation

10 The Institute of Chartered Accountants of Pakistan

2.3 Delegated Legislation

Advantages of delegated legislation

Disadvantages of delegated legislation

Example 08: Delegated legislation

Control over delegated legislation is exercised in following ways:

11 The Institute of Chartered Accountants of Pakistan

3 OBJECTIVE BASED QUESTIONS

(a) Senate and National Assembly

(b) National Assembly and the members of Provincial Assemblies

(c) Senate and the members of Provincial Assemblies

(d) Senate, National Assembly and the members of Provincial Assemblies

(a) Beyond any doubt

(b) Beyond all reasonable doubt

(c) Beyond any reasonable doubt

(d) Balance of probabilities

(a) Mr. Talal is plaintiff and Mr. Kashif is the defendant

(b) Mr. Talal is defendant and Mr. Kashif is the plaintiff

(c) Mr. Talal is accused and Mr. Kashif is the complainant