BusinessLaw Studytext

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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
Business Law
C
Contents
Page
Syllabus objective and learning outcomes v
Section A: Mercantile Law
Chapter
1 Introduction to the legal system 1
2 Introduction to the law of contract 25
3 Offer and acceptance 37
4 Capacity of parties 47
5 Consideration 55
6 Free consent 65
7 Legality of object and consideration and agreements opposed 85
to public policy
8 Void agreements 93
9 Contingent contracts 103
10 Quasi contracts 109
11 Performance of a contract 117
12 Discharge of a contract 137
13 Remedies for breach of contract 153
14 Indemnity and guarantee 163
15 Bailment and pledge 181
16 Agency 203
17 Partnership Act 229
© Emile Woolf International iii The Institute of Chartered Accountants of Pakistan

Business Law
Page
18 Negotiable instruments Act 255
Section B: Company Law
Chapter
19 Company 291
20 Incorporation of Company 305
21 Share Capital – Types and Variations 325
22 Share Capital – Prospectus 335
23 Mortgages and Charges 347
24 Meetings 359
25 Management 375
26 Investments and dividends 393
27 Accounts and Audit 403
Index 419
© Emile Woolf International iv The Institute of Chartered Accountants of Pakistan

S
Business Law
Syllabus objective
and learning outcomes
CERTIFICATE IN ACCOUNTING AND FINANCE

BUSINESS LAW
Objective
To give students an understanding of the legal system and commercial laws; and build a
knowledge base of corporate laws.
Learning Outcome
The candidate will be able to demonstrate:

1 Basic knowledge of the legal environment.
Comprehension of law governing contracts, partnership and negotiable
2
instruments.
Knowledge of the legal terminology of company law and the basics of company
3
incorporation.
4 Familiarity with the provisions governing the issuance of shares.
5 Knowledge of the management of companies.
Familiarity with investment by companies, financial accounts and distribution of
6
profit.
7 Knowledge of the appointment of auditors and their responsibilities and duties.
© Emile Woolf International v The Institute of C hartere d Accountants of Pakistan

Business Law
Grid Weighting
Introduction to legal system 5
Mercantile law
Contract Act 1872 15
Partnership Act 1932 10
Negotiable Instrument Act 1881 10
Companies Ordinance 1984
Sections 1 to 51 of the Companies Ordinance, 1984 10
Sections 142 to 204A of the Companies Ordinance, 1984 15
Total 100

Syllabus
Contents Level Learning Outcome
Ref
A Introduction to the Legal System

Sources and process of legislation
1 Sources of law and an 1 LO 1.1.1: Briefly describe sources of
introduction to the law in Pakistan
Constitution of Pakistan LO 1.1.2: Describe the basic structure
of the constitution of the Islamic
Republic of Pakistan
2 Process of legislation and 1 LO 1.2.1: Define legislation and
legal system in Pakistan describe its forms.
LO 1.2.2: Briefly describe the process
of legislation as per the Constitution.
LO 1.2.3: Identify the structure of the
courts in Pakistan
.
B Mercantile law
Contract Act 1872
1 All sections 2 LO 2.1.1: Discuss the provisions of the
act with respect to the following and
demonstrate comprehension in simple
scenario based problems)
 communication, acceptance and
revocation of proposals
© Emile Woolf International vi The Institute of Chartered Accountants of Pakistan

Syllabus objective and learning outcomes
Syllabus
Ref
contracts, voidable contracts and

void agreements
Contingent contracts
performance of contracts
breach of contract
indemnity and guarantee
bailment and pledge
contract of agency
C Partnership Act 1932
1 Chapter I – Preliminary 2 LO 2.2.1: Define the terms
2 Chapter II - The nature of 2 LO 2.3.1: Understand and describe the
partnership partnership relationship and its creation
and identify which mode determines
existence of a partnership.
3 Chapter III - Relations of 2 LO 2.4.1: Determine the rights and
partners to one another duties of partners of the firm over
property of the firm in given situations.
4 Chapter IV - Relations of 2 LO 2.5.1: Describe the relationship of
partners to third parties partners with third parties.
LO 2.5.2: Identify the implied authority
of the partner in relation to third parties,
liability of a partner for acts of the firm
and liability of the firm for wrongful acts
of a partner in given situations.
LO 2.5.3: Identify the rights and
liabilities of a minor admitted to the
benefits of partnership:
D Negotiable Instruments Act 1881
1 Definitions and meanings LO 2.6.1: Define and explain terms.
(Section 1 to 25) LO 2.6.2: Explain types of negotiable
instruments.
2 Discharge of liability LO 2.7.1: Identify how the maker of a
(Section 82 to 90) negotiable instrument is discharged
from his liability under given scenarios.
3 Provisions relating to LO 2.8.1: Describe crossing of cheques
cheques (Section 122A to LO 2.8.2: Differentiate between a
131C) cheque crossed generally and a
cheque crossed specially and their
payment modes.
© Emile Woolf International vii The Institute of Chartered Accountants of Pakistan

Business Law
Syllabus
Ref
E Companies Ordinance 1984

Preliminary and incorporation (Sections 1 to 51)
1 Definitions (Section 2) 1 LO 3.1.1: Define the terms which are
relevant to the areas covered in the
syllabus
2 Meaning of "subsidiary" and 2 LO 3.2.1: Explain subsidiary and
"holding company" holding company and when a company
(Section 3) becomes a subsidiary or holding
company of another company.
LO 3.2.2: Apply the concept of
subsidiary in simple scenarios.
3 Powers and functions of the 1 LO 3.3.1: Demonstrate familiarity with
Commission (Section 12) the powers and functions of the
Commission.
4 Memorandum of association 2 LO 3.4.1: Describe the memorandum of
(Section 15 to 25) association and state its purpose.
LO 3.4.2: List the clauses of
memorandums of association of various
types of companies.
LO 3.4.3: Describe the purpose and
procedure of alteration to different
clauses of a memorandum of
association.
5 Articles of association 2 LO 3.5.1: Define the articles of
(Section 26) association and state its purpose.
LO 3.5.2: State the information which
should be contained in the articles of
various companies.
6 Registration of 2 LO 3.6.1: Describe the procedure of
memorandum and articles of registration of the memorandum and
association articles of association
(Section 30 to 36) LO 3.6.2: Describe the effects of
registration of the memorandum and
articles of association.
7 Provisions with respect to 2 LO 3.7.1: Describe with examples the
names of companies prohibitions with regard to the selection
(Section 37 to 41) of the name of a company.
LO 3.7.2: Identify the actions and
procedures needed to be taken by
company and registrar, if a company is
registered by a prohibited name.
© Emile Woolf International viii The Institute of Chartered Accountants of Pakistan

Syllabus
Ref
8 Association not for profit 1 LO 3.8.1: Comprehend the nature of

(Section 42) association not for profit.
9 Companies limited by 1 LO 3.9.1: Understand the provisions
guarantee (Section 43) regarding divisible profit and dividing
the undertaking into shares or interest.
F Allotment of shares, registration of charge etc. (Sections 52 to 136)
1 Prospectus, allotment, issue 1 LO 4.1.1: Define a prospectus and
and transfer of shares and explain its purpose.
debentures, deposits, etc. LO 4.1.2: Understand the requirements
(Section 52 to 57) relating to a prospectus as laid down in
Section 52, 53 (1), (5) and (8)
LO 4.1.3 Describe the matters that are
to be specified in a a prospectus as
required under clause 1 to 7 and 17, 18
19, 24, 26 and 27 of Section 1 of Part I
of Second Schedule.
LO 4.1.4: Describe the reports that are
to be included in a prospectus as
required under Section 2 of Part I of
Second Schedule.
LO 4.1.5: Understand the provisions
regarding statement and consent of
expert.
2 Share capital and 1 LO 4.2.1: Describe the nature of shares
debentures and share certificates
(Section 89 to 95 and 108) LO 4.2.2: Describe the classes and
kinds of shares
LO 4.2.3: Describe with simple
example the condition of fully paid
shares.
LO 4.2.4: State with simple examples
the kinds of alterations can be made to
the share capital.
LO 4.2.5: State the rules on prohibition
of purchase of a company’s own or its
holding company’s shares.
LO 4.2.6: Understand the meaning of
variation of shareholders’ right.
LO 4.2.7: Demonstrate familiarity with
the procedure for cancellation of
variation of shareholders’ right.
© Emile Woolf International ix The Institute of Chartered Accountants of Pakistan

Business Law
Syllabus
Ref
3 Registration of mortgages, 1 LO 4.3.1: Discuss the meaning of

charges etc. mortgage/charge with simple examples,
(Section 121, 129, 132 and and the duty of company and the
136) procedure for registration of charges.
LO 4.3.2: State the right of an
interested party in respect of a
registration of mortgage/charge.
LO 4.3.3: State the duty and procedure
of payment or satisfaction of
mortgage/charge.
LO 4.3.4: Demonstrate familiarity with
the right to inspect the instrument
creating a mortgage/charge.
LO 4.3.5: Discuss the consequences of
registered and unregistered
mortgages/charges.
G Management and administration (Sections 142 to 204A)
1 Registered office, 2 LO 5.1.1: Discuss with simple
publication of names etc. examples the provisions with regard to
(Section 142 to 145) having a registered office, publication of
name and publication of paid-up capital.
2 Commencement of business 1 LO 5.2.1: State the conditions to be
by a public company fulfilled before commencement of
(Section 146) business by a company.
LO 5.2.2: State the applicability and
non-applicability of the conditions on
different kinds of company.
3 Meeting and proceedings 1 LO 5.3.1: State the timing, matters and
(Section 157 to 173) reports relating to statutory meetings.
LO 5.3.2: State the timing, matters and
reports relating to an annual general
meeting using simple examples.
LO 5.3.3: State who can call an annual
general meeting.
LO 5.3.4: State the timing, matters and
reports relating to an extraordinary
general meeting
LO 5.3.5: State who can call an
extraordinary general meeting.
LO 5.3.6: State the quorum for a
general meeting
© Emile Woolf International x The Institute of Chartered Accountants of Pakistan

Syllabus
Ref
LO 5.3.7: State the entitlement of a

member in respect of appointment of
proxy and conditions applicable
thereon.
LO 5.3.8: Describe the provisions
relating to minutes of meetings
4 Directors 1 LO 5.4.1: Explain and apply in given
(Section 174 to 197A) scenarios, the legal provision with
respect to directors’:
Eligibility
Number
Elections
Vacation of office
Powers, duties and liabilities
LO 5.4.2: State the legal restrictions on
a company with reference to loans to
directors
5 Chief executive 1 LO 5.5.1: Explain the appointment of
(Section 198 to 204A) first chief executive and subsequent
chief executives using simple
examples.
LO 5.5.2: State the conditions
applicable on appointment, removal,
engagement in any business
LO 5.5.3: State the provisions relating
to appointment of a secretary
H Investments, accounts etc. (Sections 208 to 251)
1 Investment in associated 2 LO 6.1.1: Describe the conditions
companies and undertakings applicable to a company for making
(Section 208) investment in associated companies
and undertakings.
2 Investment of companies to 1 LO 6.2.1: Discuss with simple
be held in its own name examples as to how a company can
(Section 209) hold its investment in names other than
its own name.
3 Disclosure of interest by 1 LO 6.3.1: Explain the requirements of
directors (Section 214) disclosure of interest by director in
contract / arrangement entered into by
or on behalf of the company.
© Emile Woolf International xi The Institute of Chartered Accountants of Pakistan

Business Law
Syllabus
Ref
4 Interest of other officers etc. 1 LO 6.4.1: Explain the requirements of

(Section 215) disclosure of interest by officers in
contract / arrangement entered into by
or on behalf of the company.
5 Interested director not to 1 LO 6.5.1: Describe the participation of
participate or vote in interested director in the proceedings of
proceedings of directors directors in contract / arrangement
(Section 216) entered into by or on behalf of the
company
6 Accounts (Section 230, 233, LO 6.6.1: List the books of accounts to
236, 241 and 242 ) be kept by company
LO 6.6.2: Explain the major
requirements with respect to the annual
accounts and the balance sheet.
LO 6.6.3: Describe the contents of a
directors’ report
LO 6.6.4: Describe the authentication
of balance sheet and profit and loss
account
LO 6.6.5: Discuss requirements of filing
of balance sheets and profit and loss
accounts with the registrar.
7 Dividend LO 6.7.1: Explain the requirement
(Section 248 to 251) relating to declaration of dividend and
identify certain restrictions on
declaration of dividend.
LO 6.7.2: Describe the provisions
applicable to payment of dividend.
I Audit (Sections 252 to 257)
1 Audit (Section 252 to 257) 2 LO 7.1.1: Explain the provisions
applicable to
 Appointment and remuneration of
auditors
 Qualification and disqualification of
auditors
 An auditor’s right to access the
record and information
 An auditor’s duty to report and
contents thereof
 Signature of an audit report
© Emile Woolf International xii The Institute of Chartered Accountants of Pakistan

Business Law
CHAPTER
1
Introduction to the legal system
Contents
1 Introduction to legal system
2 Legislation
3 Structure of courts in Pakistan
4 Chapter review
© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

Business Law
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to give students an understanding of the legal system
and commercial laws; and build a knowledge base of corporate laws.
Introduction to the legal system
LO 1 On the successful completion of this paper, candidates will be able to
demonstrate a basic knowledge of the legal environment
LO 1.1.1 Briefly describe sources of law in Pakistan
LO 1.1.2 Describe the basic structure of the constitution of the Islamic Republic of
Pakistan
LO 1.2.1 Define legislation and describe its form
LO 1.2.2 Briefly describe the process of legislation as per the Constitution.
LO 1.2.3 Identify the structure of the courts in Pakistan
Exam context
By the end of this chapter students will be able to:
 Briefly describe the sources of law in Pakistan
 Understand the civil and criminal law
 Explain the purpose and constituents of Parliament
 Explain the procedure followed for enactment of any law in Pakistan
 Discuss the structure of the courts in Pakistan
References to Legal Acts

Section number references embedded in the learning materials refer to the following legal
acts unless otherwise stated:
Act Chapters
Contract Act 1872 3-16
Companies Ordinance 1984 19-27

Section A: Mercantile Law - Chapter 1: Introduction to the legal system
1 INTRODUCTION TO LEGAL SYSTEM
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
 Doctrine of Binding Precedent
 Civil law and criminal law
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 more clear 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, sales 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 of the more 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.

Business Law
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:
1. Legislation
2. Precedent
3. Custom
4. Agreement
Legislation
It is the law created by the Parliament of a country and other bodies to whom it
has delegated authority.
Precedent
Precedent is a judgment or decision of a court which are binding on the
subordinate courts.
Customs
With the passage of time as the society develops this source of law diminished its
tendency as a source of law. In Pakistan, the customary law has been replaced
by the Shariat Law.
Agreement
Parties in their agreement stipulate terms for themselves which constitute law for
the contracting parties.
1.6 Doctrine of binding precedent

The Doctrine of binding precedent means that a judge is bound to apply
decisions from earlier cases to the facts of the case before him provided certain
conditions are satisfied. A precedent is established in the following
circumstances.
 The judicial decision that creates a precedent must be based on a
proposition of law or principle of law. A precedent cannot be based simply
on a question of fact. It is not the actual decision in a particular case that
creates the precedent: the precedent is established by a principle of law or
proposition of law of the decision.
 This proposition or principle of law must have been used by the judge in
reaching his decision in the particular case. (The reason for reaching a
decision in a particular way is called the ‘ratio decidendi’.)
 A judicial decision may also include a statement of law that was not a part
of the ratio decidendi in the case. Any such statement of the law is
irrelevant to the decision and such statements are sometimes called ‘obiter
dicta’, which means ‘said by the way’. Statements of the law that are obiter
dicta do not form part of the binding precedent. However, they may be
treated as a persuasive authority, and taken into consideration by judges
in later cases.
Judges who must decide on subsequent cases are required to identify the judicial
precedent (if any) that applies in the case.

 There are comprehensive law reports on decisions in earlier cases, and

judges should refer to these and look for a similar case that sets a
precedent. If a precedent is discovered that was set by a court of equal or
higher status, the judge dealing with the current case should normally
follow this precedent.
 There are rules for establishing the legal principle from the details of an
earlier case, and applying the principle to the facts of the current case.
 The legal principle must form part of the judge’s ratio decidendi.
 The facts in the case must be materially the same as in the case that is
used as the precedent. If a judge decides that the material facts in a later
case are different, he or she can ‘avoid’ (ignore) the precedent set by the
earlier case in reaching a decision.
 However, a precedent established by a lower court does not necessarily
have to be applied by a higher court, although in practice it is unusual for a
higher court to overrule the precedent set by a lower court, if the precedent
is long-established.
Types of precedent
Original precedent is one which creates and applies a new rule.
Binding precedent is one which is required to be followed
Persuasive precedent is one which is not required to be followed e.g. a decision
by lower court, decision by courts of other countries.
Declaratory precedent is the application of an already existing rule of law.
How can precedents be altered or avoided?

Precedents can sometimes be altered or avoided by judges.
 Overruling a precedent. A precedent established by a lower court can be
overruled by a higher court. The higher court sets aside the decision of the
lower court, and the precedent ceases to apply.
 Making a distinction between cases. A judge may avoid a precedent by
identifying facts in the current case that make it different from a previous
case. If the facts are sufficiently different, the judge in the current case does
not have to follow the precedent of the previous case. Judges who do not
wish to apply a precedent in a particular case may therefore try to identify
distinguishing features in the case, and use these to justify a decision that
ignores the precedent.
Advantages and disadvantages of binding precedent

There are several advantages in a system of law based on binding precedent.
 It can save time and expense. When a new legal dispute arises, time can
be saved by considering how the court is likely to make its decision based
on the relevant precedent. This may persuade one party to the dispute to
reach an out-of-court settlement. If the case goes to court, the existence of
a precedent means that the legal arguments do not have to be repeated in
the current case, because they are already established.
 Another important advantage of precedent and case law is that judicial
decisions should be consistent in all cases of a similar nature, because
judges are required to treat similar cases in the same way, as established

Business Law
by the precedent. Consistency in judicial decisions is an important

characteristic of a good system of law, because individuals and
organisations who become involved in legal disputes can often know what
to expect if they take their dispute to court. (They may dispute the facts of
the case, but the legal principles should be well-established.)
 Flexibility in the law. Judges are able to interpret the existing law,
including statute law, by creating new precedents. This gives some
flexibility to the law, because judges are able to develop new law without
the need for new legislation by statute.
There are also some disadvantages with binding precedent and case law.
 The large number of precedents. There are a large number of reported
legal cases that can be cited as precedents in a current case. Lawyers can
therefore argue about which precedents should apply in a particular case.
When there is uncertainty about which precedents should apply, there will
be uncertainty about the outcome of the legal dispute. This is a weakness
in the law.
 Unjust precedents. In some cases, a precedent might be unfair or unjust.
Unless the precedent is overruled by a higher court, unfair decisions will be
continued in future cases. The law is weakened when it is seen to be unfair.
 The judiciary makes the law. Although judges are interpreting the law
when they create new precedents, they are also in effect making new law.
It could be argued that the judiciary should not make new law, but should
do no more than interpret the established law.
1.7 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:
 criminal law
 civil law
Criminal law
Criminal law establishes conduct that the State considers unacceptable, and
which it wishes to prevent. Individuals or organisations that act contrary to the
criminal law are threatened with punishment by the State, in the form of
imprisonment and/or fines.
With criminal law, the State establishes acceptable standards of behaviour, and
represents the interests of society as a whole in doing so.
Legal action may be brought by the State against individuals who are accused of
being in breach of the criminal law. It is the responsibility of the State (and not
private individuals) to bring these legal actions, in criminal trials.
Civil law
The civil law is a branch of the law that primarily deals with disputes between
individuals and organisations (such as companies), and it regulates relationships
between them regarding their rights and obligations. A violation of the civil law is
a tort (a wrongdoing), but is not a crime. The civil law provides for remedies for
civil wrongs (torts), but these do not include imprisonment.

Civil law may be established by statute or by case law (common law),

codification, interpretation of the law, consideration, and so on.
Example: 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)
Legal proceedings in the civil law are initiated by an individual or private person
against another. (In contrast, a criminal prosecution is brought to court by the
State.) For example, an individual may bring a civil action against another
person, claiming a wrongdoing by that person and seeking a settlement (for
example, seeking money compensation in the form of ‘damages’.)
A civil case might therefore be identified as: Tanveer v Khatri where a case is
brought to the civil court by Tanveer (the ‘plaintiff’) who is making a claim against
Khatri (the claimant).
Criminal law or civil law?

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: 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.
The burden of proof
Another important difference between criminal law and civil law is the burden of
proof that is required by a court.
 In criminal cases, the burden of proof is much greater than in civil law
cases. The guilt of an accused person needs to be proved ‘beyond all
reasonable doubts.
 In contrast, in civil cases the court needs to be satisfied ‘on the balance of
probabilities’ that a person is liable.

Business Law
This means that an individual accused of a crime might be found not guilty in a
criminal court, but the same individual may be sued in a civil court for the same
may be found liable.

2 LEGISLATION
Section overview
 President
 Prime Minister
 Senate
 National Assembly
 Process of Legislation
 Delegated Legislation
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).
2.1 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.
2.2 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.
2.3 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.

Business Law
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 the Federally Administered Tribal
Areas and 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.
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.
Composition of Senate
Khyber Federal
Punjab Sindh Balochistan Fata Total
Pakhtonkhwa Capital
General 14 14 14 14 8 2 66
Women 4 4 4 4 1 17
Technocrats 4 4 4 4 1 17
Minority 1 1 1 1 4
104
Fourteen shall be elected by members each Provincial Assembly

Four women shall be elected by members of each Provincial Assembly
Four technocrats including Ulema shall be elected by the members of each
Provincial Assembly.
Eight shall be elected from the Federally Administered Tribal Areas in such
manner as the President may by order prescribe.
Two on general seats and one woman and one technocrat including aalim
shall be elected from the Federal Capital in such manner as the President
may by order prescribe.
Four non-Muslims, one from each Province, shall be elected by the
members of each Provincial Assembly.
2.4 National Assembly
The seats for the national assembly are determined on the basis of
population of provinces.
The members are elected for a period of five years on the basis of direct
votes by the voters registered.
The members elect from themselves Speaker, Deputy Speaker and Prime
Minister.
© Emile Woolf International 10 The Institute of C hartere d Accountants of Pakistan

The most important function of the National Assembly is law making and
formulation of policies.
Composition of National Assembly

Khyber Federal
Punjab Sindh Balochistan Fata Total
Pakhtonkhwa Capital
General 148 61 35 14 12 2 272
Women 35 14 8 3 60
Minority 10
342
2.5 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.

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 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.
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 is

Assembly is in session 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
2.6 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

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 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.

3 STRUCTURE OF COURTS IN PAKISTAN
Section overview
 Supreme Court
 High Courts
 Criminal Courts
 Civil Courts
 Federal Shariat Court
 Alternate Dispute Resolution
The structure of courts in Pakistan has the following basis levels:
Supreme court
Federal
High courts Shariat
Court
Criminal courts Civil courts
Session Magistrate District

Civil court
court court court
3.1 Supreme Court

The Supreme Court of Pakistan is the highest appellate court of the country and
court of last resort. It is the final arbiter of the law and the Constitution. Its
orders/decisions are binding on all other courts in the country. All executive and
judicial authorities are bound to act in aid of the Supreme Court. The Constitution
contains elaborate provisions on the composition, jurisdiction, powers and
functions of the Court. The Constitution assigns the Supreme Court a unique
responsibility of maintaining harmony and balance between the three pillars of
the State, namely, the Legislature, the Executive and the Judiciary. As guardian
of the Constitution, the Court is required to preserve, protect and defend this
basic document.
Jurisdiction of Supreme Court

The Supreme Court exercises original, appellate and review jurisdiction. It
possesses exclusive original jurisdiction for the settlement of intergovernmental
disputes between Federal and Provincial Government(s) or Provincial
Governments inter se. Under this jurisdiction, the Court pronounces declaratory
judgments. The Supreme Court can also exercise original jurisdiction, with

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respect to the enforcement of fundamental rights, if the case involves an issue of

public importance. The Court also exercises advisory jurisdiction, where under
the President may obtain its opinion on a question of law. Under its appellate
jurisdiction, the Court entertains appeals against orders and decisions of High
Courts and other special courts/tribunals.
Criteria to be Judge of Supreme Court

 A person with five years’ experience as a Judge of a High Court or
 Fifteen years standing as an advocate of a High Court
is eligible to be appointed as Judge of the Supreme Court.
3.2 High Courts

There is one High Court in each province, and one in the federal capital,
Islamabad, including:
 Lahore High Court, Lahore, Punjab
 Sindh High Court, Karachi, Sindh
 Peshawar High Court, Peshawar, Khyber Pakhtunkhwa
 Balochistan High Court, Quetta, Baluchistan
 Islamabad High Court, Islamabad,
The High Court has supervisory role over other Courts subordinate to it. It may
issue a writ of habeas corpus which is an order for the release of a person
wrongfully detained, and also prerogative orders against inferior courts, tribunals
and other bodies such as local authorities in so far as they have a duty to
exercise a discretion fairly.
Criteria to be Judge of High Court

 Ten years’ experience as an advocate of a High Court or
 Ten years’ service as a civil servant including three years’ experience as a
District Judge or
 Ten years’ experience in a judicial office.
There are three types of prerogative order.
1. Mandamus
2. Prohibition
3. Certiorari
1. Mandamus
Mandamus requires the court or other body to carry out a public duty.
E.g. a tribunal may be ordered to hear an appeal which it has wrongly
refused to do.
2. Prohibition
It prevents a court or tribunal from exceeding its jurisdiction.

3. Certiorari
Certiorari orders a court or tribunal which has taken action to submit the
record of its proceedings to the High Court for review. It is exercised when
an inferior court has acted illegally, exceeding its jurisdiction or reached its
decision contrary to the principles of natural justice, without giving the
person concerned the right to know of and reply to the case against him.
Areas of jurisdiction of the High Court

Following are the few areas of jurisdiction of the High Court
Original civil jurisdiction
Appellate civil jurisdiction
Appellate criminal jurisdiction
Supervisory jurisdiction
Constitutional jurisdiction
3.3 Criminal Courts

The criminal courts structure is given below:
Courts Staff Jurisdiction
Supreme Court Chief Justice
of Pakistan Discussed earlier
Justice
High Court Chief Justice
Supervisory control
Justice
Sessions Court Sessions Judge All other offences not covered in
Judicial Magistrate Jurisdiction, but
sentence of death is passed subject
Additional to the confirmation of High Court.
Sessions Judge Cases of enforcement of law relating
to Hudood are also tried by sessions
judges.
Assistant Sessions Offences with punishment not
Judge exceeding seven years.
Magistrates Offences with punishment of
Court Judicial Magistrate imprisonment for a term not
1st Class exceeding three year, fine not
exceeding Rs. 15,000 and whipping.
Offences with punishment of
Judicial Magistrate imprisonment for a term not
2nd Class exceeding one year, fine not
exceeding Rs. 5,000.
Offences with punishment of
Judicial Magistrate imprisonment for a term not
3rd Class exceeding one month, fine not
exceeding Rs. 100.
Provincial Government on
Special Judicial recommendation of High Court
Magistrate confer upon any person powers of
Judicial Magistrate.

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Sessions Judge
Each province consists of sessions / divisions and every session division shall be
a district or consists of districts. The Provincial Government established a Court
of Session for every sessions / division and appoints a judge of such court called
session judge.
Additional Sessions Judges

The Provincial Government may also appoint Additional Sessions Judges and
Assistant Sessions Judges to exercise jurisdiction in one or more such courts.
Magistrates’ courts
Magistrates’ Courts are the subordinate criminal courts. In addition, they also
exercise certain family law, administrative law and minor civil functions.
District Magistrate
In every district, the Provincial Government appoints a Magistrate of first class,
who is called the District Magistrate.
Subordinate Magistrate
The Provincial Government appoints as many persons as it thinks fit besides the
District Magistrate as Magistrates of the first, second or third class in any district
and defines local areas within which such persons may exercise all or any of the
powers as invested.
Criminal court Appeals
Magistrates Courts
Assistant Sessions Court
Conviction for Sedition Sessions Court

Conviction for more
(trouble making) than 4 years
High Court
Division Bench of High Court
Supreme Court of Pakistan

3.4 Civil Courts

Courts Staff Jurisdiction
Supreme Chief Justice Writ Jurisdiction in issues of public
Court of
Justices importance.
Pakistan
Chief Justice Supervisory Control
High Court Company Bench
Justices
Banking Court
District Judge
District Certain suits of unlimited value of
Additional District
Court subject matter.
Judge
Suit of unlimited value of subject
Civil Judge 1st Class
Civil Court / matter.
Rent Suit having value of subject matter not
Civil Judge 2nd Class
Controller / exceeding Rs. 50,000.
Family Court Suit having value of subject matter not
Civil Judge 3rd Class
exceeding Rs. 5,000.
Additional District Judge
In every district of a Province, there is a Court of District Judge which is the
principal court of original jurisdiction in civil matters. Government in consultation
with the High court, appoints as many Additional District Judges as may be
necessary. An additional district judge discharges such functions of a District
Judge as the District Judge assigns him and has the same powers like that of
District Judge.
Civil Judge
Civil Judges function under the superintendence and control of District Judge and
all matters of civil nature originate in the courts of Judges. The District Judge
may, however, withdraw any case from any Civil Judge and try it himself.
Appeals against the judgments and decrees passed by the Civil Judges in cases
where the value of the suit does not exceed the specified amount lie to the
District Judge.
Civil court Appeals

Civil Courts
Suits value below Rs.200,000
District Court
Suit value above
Rs. 200,000
High Court / Company Bench /

Banking Court
Division Bench of High Court

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Family Courts
These courts deal with matrimonial cases. Most divorce cases are heard in the
family court, family property cases and proceedings relating to children etc.
Company Courts
 The court having jurisdiction under the Companies Ordinance, 1984 is the
High court having jurisdiction in the place at which the registered office of
the company is situated.
 The Federal Government may empower any civil court to exercise all or
any of the jurisdictions by this ordinance.
 In each High Court one or more benches known as the company bench are
constituted by the chief justice of High Court.
 All the matters coming before the court under this Ordinance are disposed
of within ninety days from the date of presentation.
Industrial Tribunal
Industrial Tribunals were established by the Industrial Relation Act, 2008. They
have a wide jurisdiction over most disputes between employee and employer.
 Redress of individual grievances
 Complaints of unfair dismissal
 Pay claims
 Questions as to the terms of employment
 Appeals against health and safety notices.
Terms to remember
Juveniles: Any offence, other than one punishable with death or transportation for
life, committed by any person under the age of fifteen years. The age is
calculated at the date when he appears or brought before the court, may be tried
by a District Magistrate working under the Reformatory Schools Act, 1897.
Decision reversed: If an appeal court gives its judgment in favour of the party
making the appeal (the appellant) the original decision is said to be reversed.
Court of first instance: It is the court where the case is originally heard in full.
Appellate Court: It is the court to which an appeal is made against the judgment or
the sentence.
3.5 Federal Shariat Court

Courts Staff
Chief Justice
Justices
Chief Justice
Federal Shariat Court
Justices

Composition of Federal Shariat Court

 The Federal Shariat Court consists of not more than eight Muslim Judges
including the Chief Justice who are appointed by the President in
accordance with Article 175A.
 Out of the number not more than three shall be Ulema having at least
fifteen years’ experience in Islamic law, research or instruction and not
more than four each, one of them
 is or
 has been or
 is qualified
to be a Judge of High Court.
 The judges hold office for a period of three years. However, the President
may, extend such period.
Process
 The Court may either
 of its own motion or
 on the petition of
- citizen of Pakistan or
- the Federal / Provincial Government
 examine and
 decide
the question whether or not any law or provision of the law is repugnant to
the Injunctions of Islam.
 If Federal Shariat court decides that a law or the provision of any law is
repugnant to the Injunctions of Islam, it shall set out in its decision:
 The reasons for its holding that opinion and
 The extent to which such law or provision is so repugnant
 And specify the day on which decision shall take effect.
 Provided that no such decision shall take effect before the expiration of the
period within which an appeal may be preferred to the Supreme Court or
where an appeal has been so preferred, before the disposal of such
appeal.
Appeal to Supreme Court

 A party aggrieved by the final decision of the court within sixty days of such
decision may prefer an appeal to the Supreme Court.
 An appeal on behalf of the Federation or a Province may be preferred
within six months of such decision.
3.6 Alternate Dispute Resolution

Alternate Dispute Resolution is any type of procedure or combination of
procedures voluntarily used to resolve issues in controversy, other than court
based adjudication.

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ADR is generally classified into following types:
Negotiation
In negotiation the participation is voluntary and there is no third party who
facilitates the resolution process or imposes a resolution.
Mediation
In mediation there is a third party a mediator is a person who facilitates the
resolution process but does not impose a resolution on the parties.
Arbitration
Arbitration is settlement of a dispute by an independent person usually chosen by
the parties themselves.
Conciliation
It is a process in which conciliator meets with the parties separately to resolve the
grievances.
Advantages of ADR
Speedy
Arbitration is often faster than litigation in court.
Cheaper and Flexible

Arbitration can be cheaper and more flexible for businesses.
Privacy
The public and the press have no right to attend a hearing before an arbitrator.
Appeal
In most legal systems, there are very limited avenues for appeal of an arbitral
award.
Service of an expert
The parties may choose the person who is an expert in the particular commercial
field that they are in to settle their dispute.
Disadvantages of ADR
Appeal
Limited Avenue for appeal means that an erroneous decision cannot be easily
overturned.
Expensive
In countries where the cost of court action is not so high this might be more
expensive to go to arbitration.
Applicability of law
Rules of applicable law are not necessarily binding on the arbitrators, although
they cannot disregard the law.

Delay
When there are multiple arbitrators on the panel, manage their schedules for
hearing dates in long cases can lead to delays.
Arbitration in Islamic way

Islamic arbitration is known as Takhim.
Qualification to be an arbitrator
 Must be a Muslim
 Male
 Knowledge in Sharia and
 Free from any defects that could affect his ability to arbitrate.

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4 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
 Briefly describe the sources of law in Pakistan
 Understand the civil and criminal law
 Explain the purpose and constituents of Parliament
 Explain the procedure followed for enactment of any law in Pakistan
 Discuss the structure of the courts in Pakistan

CHAPTER
Business Law
2
Introduction to the law of contract
Contents
1 Introduction to the law of contract
2 Chapter review

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INTRODUCTION
Learning outcomes
Introduction to the law of contract
demonstrate knowledge of laws relating to Contract Act.
LO 2.1.1 Discuss the provisions of Act with respect to validity of a contract
LO 2.1.1 Demonstrate comprehension in simple scenario based problems
The learning outcome 2.1.1 is covered from chapter 2 to 16.
Exam context
 Understand the meaning of a contract
 Discuss the essentials of a valid contract
 Explain the different classifications of contract
Act Chapters

Section A: Mercantile Law - Chapter 2: Introduction to the law of contract
1 INTRODUCTION TO THE LAW OF CONTRACT
Section overview
 Definition of a contract
 Essentials of a valid contract
 Classifications of contract
1.1 Definition of a contract
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
Legal
Offer Acceptance
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.

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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.
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: Enforceability
 A, offers to sell his furniture to B or Rs. 50,000. B 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.
 A invites B to dinner. B accepts the invitation but fails to turn up. Here, A
cannot sue B 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
The essentials of a valid contract are shown below [Section 10]:
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: Offer and acceptance

A offers to buy bike from B for Rs.50,000 to which B responds positively.
Here A has made an offer and B has accepted it
Offer and acceptance is discussed in detail in Chapter 3.

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.

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Example: Legal relationship

A invited B on a dinner at his home. B accepted the invitation. It is a social
agreement. If A fails to serve dinner to B than B cannot go to court for enforcing
the agreement and similarly if B did not turn up than A cannot go to court for
enforcing the agreement.
Competency of parties
As per section 11 the parties to an agreement must be competent to contract. In
other words, the person must be of
 The age of majority
 Person of sound mind and
 Not declared as disqualified from contracting by any law to which he is
subject.
Example: Competency of parties

A (Minor) borrowed Rs. 100,000 from B and executed mortgage of his property in
favour of the lender. This is not a valid contract because A is not competent to
contract.
Competency of parties is discussed in detail in Chapter 4.

Consideration
As per 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: Consideration
A offers to buy IPAD from B for Rs. 50,000 to which B responds positively.
Here A’s promise to pay Rs. 50,000 is the consideration for B’s promise and B’s
promise to sell the IPAD is the consideration for A’s promise.
Consideration is discussed in detail in Chapter 5.

Free Consent
As per 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: Free consent

 A beats B and compels him to sell his bike for Rs. 20,000. Here, B’s consent
has been obtained by coercion because beating someone is an offence under
the Pakistan Penal Code.
 A having advanced money to his son, B during his minority, upon B’s coming
of age obtains, by misuse of parental influence, a bond from B for a greater
amount than the sum due in respect of the advances. A employs undue
influence.
Free consent is discussed in detail in Chapter 6.

Lawful Object
As per 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: Lawful object

 A, B and C 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.
 A promises to obtain for B an employment in the public service, and B
promises to pay Rs.10,000,000/-to A. The agreement is void as the
consideration for it is unlawful.
 A, who knows that B has stolen goods amounting to Rs.500,000, receives
Rs.100,000 from B in consideration of not exposing A. This agreement is
illegal.
Lawful object is discussed in detail in Chapter 7.

Not declared as void
As per 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

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Example: Not declared as void

 A and B carried on business in a certain locality in Karachi. A promised to
stop business in that locality if B paid him Rs 1,000 per day. A stopped his
business but B did not pay him the promised money. It was held that A could
not recover anything from B because the agreement was in restraint of trade
and was thus void (restraint of trade).
 A promises to pay Rs 10,000 to B if it rained today, and B promises to pay Rs
1,000 to A if it did not. The agreement is void because the happening and
non-happening is dependent on future uncertain event (wager).
Void agreements are discussed in detail in Chapter 8.

Certainty
As per 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.
Example: Certainty
 A agrees to sell to B "a hundred ton of oil." There is nothing whatever to show
what kind of oil was intended. The agreement is void for uncertainty.
 A, who is a dealer in coconut oil, agrees to sell to B "one hundred ton of oil."
The nature of A'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.
 A agrees to sell to B "all the grain in my granary at Peshawar." There is no
uncertainty here to make the agreement void.
 A agrees to sell to B "one thousand mounds of rice at a price to be fixed by
c." As the price is capable of being made certain, there is no uncertainty here
to make the agreement void.
 A agrees to sell to B "my white horse for Rupees five hundred or Rupees one
thousand." There is nothing to show which of the two prices are to be given.
The agreement is void.
Possibility of performance
As per 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: Possibility of performance

A agrees with B to discover treasure by magic. The agreement is void.
Legal formalities
As per 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: Legal formalities

An oral agreement for arbitration about present disputes is unenforceable because
the law requires that such arbitration agreement must be in writing.

1.3 Classifications of contract

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

• Implied agreement • Executory
contracts • Void contract contract
• Quasi contracts • Voidable
contract
• Illegal
agreement
• Unenforceable
agreement
The above classifications of contract are briefly discussed below:
Express contracts A contract created by words i.e. verbally or in writing
Implied contracts A contract created by conduct of a person or the

circumstances of a particular case.
Quasi contracts An obligation imposed by law.
Valid contract An agreement which is enforceable by law.
Void agreement An agreement which is not enforecable by law.

Section 2(g)
Void contract A contract which ceases to be enforceable by law

Section 2(j) becomes void when it ceases to be enforceable.
Voidable contract An agreement which is enforceable by law at the

Section 2(i) option of the aggrieved party.
Illegal agreements An agreement the object of which is illegal.
Unenforceable An agreement which is otherwise valid but due to

agreement some technical lacking, such as writing etc. remains
unenforceable.
Executed contract A contract where both the parties have performed

their respective promises.
Executory contract A contract in which something remains to be done.

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Unilateral contract A contract is which a promise on one side is

exchanged for an act on the other side. In such
contract one party to a contract has performed his
part and performance is outstanding against the other
party.
Bilateral contract A contract in which a promise on one side is

exchanged for a promise on the other.
Example: 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.
Example: Void agreement

A (Minor) borrowed Rs. 100,000 from B and executed mortgage of his property in
favour of the lender. This is a void agreement because A is not competent to
contract and B cannot legally enforce against A.
Example: Voidable contract

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

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

An oral agreement for arbitration about present disputes is unenforceable because
the law requires that such arbitration agreement must be in writing.

2 CHAPTER REVIEW
Chapter review
 Understand the meaning of a contract
 Discuss the essentials of a valid contract
 Explain the different classifications of contract

Business Law

CHAPTER
Business Law
3
Contents
1 Offer
2 Acceptance
3 Revocation of offer and acceptance
4 Chapter review

Business Law
INTRODUCTION
Learning outcomes
demonstrate knowledge of laws relating to offer and acceptance of a
contract.
LO 2.1.1 Discuss the provisions of Act with respect to offer and acceptance of a
contract
Exam context
 Define the offer and acceptance along with their essentials
 Discuss briefly the law relating to the communication of offer, acceptance and revocation
 Discuss the circumstances in which an offer lapses
Act Chapters

Section A: Mercantile Law - Chapter 3: Offer and acceptance
1 OFFER
Section overview
Definition of proposal / offer

Essentials of an offer
Types of offer
1.1 Definition of proposal / offer [Section 2(a)]
Definition:
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.
1.2 Essentials of an offer

The essentials of an offer are shown below:

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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.
Certain and definite
A valid offer is one which is certain and definite. Thus, no contract can come into
existence if offer is uncertain.
Contractual intention
An offer must be made with an intention to create a contract.
Communication
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. [Section 4]
Objective of consent
An offer must be made with a view to obtain the consent of the other person to
proposed act or abstinence.
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.
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.
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: Invitation of an offer

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 they must be specifically
communicated to the other party.

1.3 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.
General offer If an offer is made to the world or public than it is said to
be general offer. Such offer can be accepted by any
person. The contract is made with person who having
the knowledge of the offer comes forward and acts
according to the conditions of the offer.
Cross offers If two parties ignorant of each other’s offer made similar
offers to each other 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
Continuing offer / offer. A contract is entered only when the person
Tender signifies his acceptance on the basis of the tender.
.
Example: Specific Offer

A offers to buy bike from B for Rs.50,000.
Example: General Offer

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

A of Karachi sends by post to B of Lahore offering to sell his bike for Rs.50,000.
The letter is posted on 1st December and on same day, B of Lahore sends a letter
by post to A of Karachi offering to buy A’s bike for Rs.50,000.
Example: Standing / Open / Continuing offer / Tender

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

Business Law
2 ACCEPTANCE
Section overview
 Meaning of acceptance
 Essentials of acceptance
2.1 Meaning of acceptance

When the person to whom the proposal is made signifies his assent to it, the
proposal is said to be accepted. [Section 2(b)]
Thus, an acceptance means assenting to an offer made. An offer when accepted
becomes a promise.
2.2 Essentials of acceptance

The essentials of acceptance are shown below:

Absolute and unconditional
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. [Section 7]
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.

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.
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.
Reasonable time
A valid acceptance is when it is accepted within the time specified or within a
reasonable time where no time is specified.
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.
Awareness of proposal
The acceptor must be aware of the proposal at the time of acceptance of the
proposal.
Before lapse of an offer
The acceptance must be given before the offer lapses or is withdrawn.
Negative confirmation
A proposal is not accepted if the offeree remains silent. In cannot be in the form
of negative confirmation i.e. if it is not accepted within a specific time than it will
be presumed to have been accepted.

Business Law
3 REVOCATION OF OFFER AND ACCEPTANCE
Section overview
 Timing of revocation
 Communication of revocation
 Lapse of an offer
3.1 Timing of revocation

According to Section 5 of the Contract Act:
Timing of revocation of an offer A proposal may be revoked at any time

before acceptance or the 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

acceptance before the communication of the
acceptance is complete as against the
acceptor i.e. when acceptance comes to
the knowledge of the offeror, but not
afterwards.
3.2 Communication of revocation

The rules regarding the communication of revocation are as under [Section4]:
As against the person who When it is put in a course of transmission

makes it so as to be out of the power of the revoker.
As against the person to whom When it comes to the knowledge of the

it is made revokee.
3.3 Lapse of an offer

An offer is lapsed in the following ways:
Revocation
An offer may be revoked before its acceptance by the offeree. [Section 5]
Lapse of time
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. [Section
6(2)]
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.
[Section 6(4)]

Non-fulfilment of condition precedent

An offer comes to an end when the acceptor fails to fulfil the conditions precedent
to the offer. [Section 6(3)]
Counter offer
An offer comes to an end if the counter offer is made.
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.
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.
Subsequent illegality or destruction
An offer comes to an end if it becomes illegal or the subject matter is destroyed
before its acceptance.

Business Law
4 CHAPTER REVIEW
Chapter review
 Define the offer and acceptance along with their essentials
 Discuss briefly the law relating to the communication of offer, acceptance and
revocation
 Discuss the circumstances in which an offer lapses

CHAPTER
Business Law
4
Capacity of parties
Contents
1 Competent to contract
2 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Capacity of parties
demonstrate knowledge of laws relating to competency / capacity of
parties.
LO 2.1.1 Discuss the provisions of Act with respect to competency / capacity of parties
Exam context
 Explain the capacity to contract and persons who are incompetent to contract
 Discuss the position of agreements entered by person incompetent to contract
Act Chapters

Section A: Mercantile Law - Chapter 4: Capacity of parties
1 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
1.1 Who are competent to contract?

According to Section 11 of the Contract Act 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
 is not disqualified from contracting
by any law to which he is subject.
The below 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
• Inslovent
1.2 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.
Position of agreements by a minor

The law pertaining to agreements with a minor is given below:
 An agreement with a minor is void.

Business Law
 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, he
will not be liable
 Since ratification has a retrospective application it is necessary that the
minor must be competent to contract at the time when the contract is
entered into. Therefore, an agreement with a minor cannot be ratified
subsequently after he attains majority.
 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.
 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. [Section 30
of the Partnership Act]
 A minor can be agent but cannot be a principal but if anyone acts on behalf
of minor principal, he will be personally liable. [Section 184]
 A minor cannot be declared insolvent because he is incompetent to
contract.
 A minor can file a suit but cannot be sued.
 If the parent of a minor entered into 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.
 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. [Section 68]
1.3 Agreements by persons of unsound mind

Meaning of sound mind
According to Section 12 of the Contract Act, 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: Meaning of sound mind

The examples of persons having an unsound mind include:
 specific persons/idiots
 lunatics and
 drunken persons.
Specific persons/idiots
A person who is so mentally deficient by birth as to be incapable of ordinary
reasoning or rational conduct is said to be a specific person.

Lunatic
A person affected by lunacy is said to be 'lunatic'. A person can become lunatic at
any stage of his life.
Position of agreements with a person of unsound mind
The positions of such agreements are given below:
 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.
 An agreement with a specific person is void.
 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
 A person who supplied necessaries to a person of unsound mind or his
defendant 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 not against the person personally.
Position of a person who is usually of unsound mind but occasionally of sound mind
A person who is
 usually of unsound mind but
 occasionally of sound mind
may make a contract when he is of sound mind
Example: Position of a person who is usually of unsound mind but occasionally of

sound mind
A patient in a lunatic asylum who is at intervals of sound mind may contract during
those intervals.
Position of a person who is usually of sound mind but occasionally of unsound 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: Position of a person who is usually of sound mind but occasionally of

unsound mind
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 or in drunkenness or in delirium from
fever then the burden of proof that he was of unsound mind lies on the
person who questions the validity of contract.

Business Law
 If a person is usually of unsound mind then the burden of proof that he was
of sound mind lies on the person who confirms it.
1.4 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 than an alien enemy
can neither enter into a contract or be sued during the
period of war. Contracts entered before the declaration of
war are either suspended or terminated during the period
of war.
Foreign Such persons have immunity unless they choose to
sovereigns and submit themselves to the jurisdictions of our courts. They
ambassadors have a right to enter into a contract but can claim the
privilege of not being sued.
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.
Insolvent A person declared as insolvent cannot enter into a
contract as his property is dealt with by official assignee
or official receiver.
Note
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 by the Memorandum of Association.

2 CHAPTER REVIEW
Chapter review
 Explain the capacity to contract and persons who are incompetent to contract
 Discuss the position of agreements entered by person incompetent to contract

Business Law

CHAPTER
Business Law
5
Consideration
Contents
1 Consideration
2 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Consideration
demonstrate knowledge of laws relating to consideration of a contract.
LO 2.1.1 Discuss the provisions of Act with respect to consideration of a contract
Exam context
 Define consideration and essentials of a valid consideration
 Discuss the contracts where there is no consideration
Act Chapters

Section A: Mercantile Law - Chapter 5: Consideration
1 CONSIDERATION
Section overview
 Definition of consideration
 Essential elements of consideration
 Agreement, the consideration or object of which is partly unlawful
 Stranger to contract
 Agreements without consideration
1.1 Definition 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 is in return of 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 of something
 An abstinence or forbearance i.e. abstaining or refraining from doing
something.
 A return promise
Example: Consideration
 A promises B to guarantee payment of price of the goods which B sells on
credit to C.
Here selling of goods by B to C on credit is consideration for A’s promise.
 A asks B not to sue C for a year for his debts and promises in case of default
of C, A would be liable.
Here B not filing a suit for a year is abstinence, which is a sufficient
consideration for A.
 A promises to deliver iPhone to B and B promises to pay Rs. 85,000 on
delivery.
Here the consideration for A will be Rs. 85,000 on delivery and consideration
for B will be delivery of goods

Business Law
1.2 Essentials elements of consideration

The essentials of consideration are shown below:
These are discussed below.

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: Desire of the promisor

A saves B’s goods from fire without being asked to do so. A 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: Move / from promisee or any other person

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

 A renders some service to B in the month of August. In September B
promises to compensate A an amount of Rs. 10,000 for the services he
rendered to him. Past services amount to past consideration. A can recover
Rs. 10,000 from Y.
 A 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.
 A promises to deliver certain goods to B after 5 days and B promises to pay
after 5 days from the date of delivery. Consideration in this case is future.
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.
Consideration must be real
The consideration must be real and not illusory.
Example: Consideration must be real

 A engages B 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.
 A promises to put life into B’s dead wife and B promises to pay Rs. 1 million.
This agreement is void because consideration is impossible to perform and
not real.
 A engages B 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.

Business Law
Something which the promisor is not already bound to do

It may be an act, abstinence, forbearance or a return promise e.g. compromise of
a disputed claim, composition with creditors.
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.
Lawful
The consideration must neither be unlawful nor opposed to public policy.
Example: Lawful
 A promises B to pay Rs. 100,000 to beat C. B beats C and claims Rs.
100,000 from B. A refuses to pay. B cannot recover because the agreement
is void on the ground of unlawful consideration.
 A promises B to obtain an employment in the public service and B promises
to pay Rs. 100,000 to A. The agreement is void on the ground of unlawful
consideration.
1.3 Agreement, the consideration or object of which is partly unlawful

If a party of a single consideration for one or more objects, or any one or any part
of any one of several conditions for a single object, is unlawful, the agreement is
void. [Section 24]
Example: Agreement, the consideration or object of which is partly unlawful

A promises to superintends, on behalf of B, a legal manufacture of indigo, and an
illegal traffic in other articles. B promises to pay salary to A of Rs. 10,000 per
month. The agreement is void as the object of A’s promise and the consideration
for B’s promise being in party unlawful.
1.4 Stranger to contract

Generally a stranger to a contract cannot sue, while a stranger to consideration
can sue. This rule is known as the doctrine of privity of contract. Privity of contract
means the relationship subsisting between the parties who have entered into
contractual obligations. It implied a mutuality of will and creates a legal bond
between the parties to a contract.
Exceptions
The following are the exceptions to the rule that a stranger to a contract cannot
sue:
 When an arrangement is made in connection with marriage, partition or
other family arrangements and a provision is made for the benefit of a
person, he may sue although he is not a party to the contract.
 The person who becomes an agent of third party by acknowledgement or
estoppel, may be sued by such third party.
 Where a benefit under a contract has been assigned (other than one
involving personal skill), the assignee can enforce the contract subject to all
equities between the original parties to the contract.

 Where a charge in favour of a person has been created on specific

immovable property, such charge is enforceable at the instance of the
person beneficially interested, though he may not be a party to the
document creating the charge.
1.5 Agreements without consideration

According to Section 25 of the Contract Act, 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 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.
Example: Natural love and affection

A, for natural love and affection; promises to give his son, B, Rs. 10,000. A puts his
promise to B into writing and registers it. This is a 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: Promise to compensate

 A finds B's purse and gives it to him. B promises to give A Rs.5,000. Now this
promise of B is a contract.
 A supports B’s infant son. B promises to pay A’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.

Business Law
Gifts
The gifts which are accepted by the donee are called completed gifts and are
valid.
Example: Gift
X transferred some property to Y by a duly written and registered deed as a gift.
This is a valid contract even though no consideration given by Y.
Contract of agency
A consideration is not necessary for a contract of agency. [Section 185]
Contract of bailment
A consideration is not necessary for a contract of bailment i.e. gratuitous contract
of bailment.
Example: Gratuitous bailment

Zaheer lends an IPAD to Imran for his work without any charge.
Charitable subscription
Where the promise on the strength of the promise makes commitments i.e.
changes his position to the detriment.
Contract of guarantee
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. [Section 127]
Example: Contract of guarantee

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

2 CHAPTER REVIEW
Chapter review
 Define consideration and essentials of a valid consideration
 Discuss the contracts where there is no consideration

Business Law

CHAPTER
Business Law
6
Free consent
Contents
1 Consent – Consensus-ad-idem
2 Coercion
3 Undue influence
4 Fraud
5 Misrepresentation
6 Mistake
7 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Free consent
demonstrate knowledge of laws relating to free consent of a contract.
LO 2.1.1 Discuss the provisions of Act with respect to free consent of a contract
Exam context
 Discuss the meaning of consent
 Explain when a consent is said to be free
 Understand the effects and meaning of coercion, undue influence, fraud and
misrepresentation
 Discuss the laws relating to the effect of mistake on contracts

Act Chapters

Section A: Mercantile Law - Chapter 6: Free consent
1 CONSENT – Consensus-ad-idem
Section overview
 Definition of consent
 Effect of absence of consent
 Definition of free consent
 Effect of absence of free consent
1.1 Definition of consent
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 ideur.
1.2 Effect of absence of consent

The effect of absence of consent is that the agreement is not valid and is not
enforceable by law. [Section 19]
Example: Effect of absence of consent

X has one Alto and one Coure. He wants to sell Coure. Y does not know that X has
two cars. Y offers to buy X’s Alto for Rs. 400,000. X 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.
1.3 Definition of 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
1.4 Effect of absence of free consent

The effect of absence of free consent is that the contract becomes voidable if the
consent is obtained by coercion or undue influence or fraud or misrepresentation
at the option of the party whose consent was so caused but if the consent is
obtained by mistake then agreement may be void-ab-initio or contract is not
voidable depending upon the nature of the mistake. [Section 19A]

Business Law
2 COERCION
Section overview
 Definition of coercion
 Effects of coercion
2.1 Definition of 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: Coercion
 A beats B and compels him to sell his bike for Rs. 20,000. Here, B’s consent
has been obtained by coercion because beating someone is an offence under
 A, on board an English ship causes B to enter into an agreement by an act
amounting to criminal intimidation under the Pakistan Penal Code. A
afterwards sues B for breach of contract at Karachi. A 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.
Example: Coercion
 A threatens to kill C, B’s daughter, if B refuses to sell his house to him. B
agrees to sell his house. Here, B’s consent has been obtained by coercion
though C is not a party to the contract.
 A threatens to kill B if B refuses to sell his house to C. B agrees to sell his
house. Here, B’s consent has been obtained by coercion though A is not a
party to the contract.
2.2 Effects of coercion

The effects of coercion are given below: [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: Effects of coercion

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

Business Law
3 UNDUE INFLUENCE
Section overview
 Definition of undue influence

 Nature of relationship
 Effect of undue influence
 Difference between coercion and undue influence
3.1 Definition of undue influence
Definition: Undue influence [Section 16]

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.
Thus the analysis of the above definition reveals that an undue influence means
dominating in a relationship the will of the other person to obtain an unfair
advantage. A contract is said to be induced by undue influence:
 Where the relations between the parties are such that
 one of them in a position to dominate the will of the other and
 uses that position to obtain an unfair advantage over the other.
3.2 Nature of 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. parent and child
 stands in a fiduciary relation to the other e.g. already indebted
 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: Undue influence

 A having advanced money to his son, B during his minority, upon B’s coming
of age obtains, by misuse of parental influence, a bond from B for a greater
amount than the sum due in respect of the advances. A employs undue
influence.
 A, a man enfeebled by disease or age, is induced, by B’s influence over him
as his medical attendant, to agree to pay B an unreasonable sum for his
professional services. B employs undue influence.
 A being in debt to B, the money lender of his village, contracts a fresh loan on
terms which appear to be unconscionable. It lies on B to prove that the
contract was not induced by undue influence.
 A 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 a unusually
high rate of interest. A 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.

3.3 Effect of undue influence

The contract becomes voidable at the option of the party whose consent was so
caused. The burden of proof is on the party who was in a position to dominate
the will of the other party not all cases [Section 19].
In the following relationships it is presumed that a person is in a position to
dominate the will of another person:
Father and son
Guardian and ward
Employer and Employee
Trustee and beneficiary
Teacher and student
Doctor and patient
Solicitor and client
Fiancé and fiancée
Pardanasheen lady (Completely secluded)
In the following relationship there is no presumption that a person is in a position
to dominate the will of another person:
Landlord and tenant
Creditor and debtor
Husband and wife (non parda observing)
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
price was adequate
weaker party was in receipt of competent independence advice before
entering into the contract.
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. [Section 19A]

Business Law
3.4 Difference between coercion and undue influence

S.no Coercion Undue influence
1 Definition
A contract is said to be caused A contract is said to be induced by
by coercion when it is obtained undue influence:
by:  Where the relations between
 committing or threatening to the parties are such that
commit any act
 one of them in a position
 which is forbidden by to dominate the will of
Pakistan Penal Code the other and
or
 uses that position to
 unlawful detaining or obtain an unfair
threatening to detain. advantage over the
other.
2 Consent
Consent is obtained by giving a Consent is obtained by dominating
threat of an offence or the will.
committing an offence.
3 Nature of pressure
It involves physical pressure. It involves moral pressure.
4 Relationship
Parties to a contract may or may Parties to a contract are related to
not be related to each other. each other under some sort of
relationship.
5 Reason
The objective is to compel a The objective is to obtain an unfair
person to enter into a contract. advantage.
6 Criminal liability
Criminal liability is incurred, Criminal liability is not incurred.
therefore it is illegal.
7 On whom
Coercion may be employed on a Undue influence may only be
person other than a party whose employed on the party whose
consent is desired, for instance consent is desired.
his son.
8 By whom
It can be excercised by a It can only be exercised by a party
stranger to the contract. to the contract and not by a
stranger.
9 Onus of proof
The onus of proof is on the party The onus of proof is on the party in
who wants to relieve himself of a position to dominate the will of the
the consequences of coercion. other party.
10 Restoration of benefit
The aggrieved party has to The party avoiding the contract may
restore the benefit received. or may not restore benefit.

4 FRAUD
Section overview
 Definition of fraud
 Essentials of fraud
 Effects of fraud
 Silence as to fraud
4.1 Definition of 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 intent
 to deceive another party to it or his agent, or
 to induce to enter into a contract
By false assertion
A false representation of a fact made
 Knowingly or
 Without belief in its truth
Example: False assertion

A sells to B locally manufactured goods representing them to be imported goods
charging a higher price, it amounts to fraud.
Active concealment
The active concealment of a fact by one having knowledge or belief of the fact
such as, where steps are taken by a seller concealing some material facts so that
the buyer even after a reasonable examination cannot trace the defects, it will
amount to fraud,
Example: Active concealment

Z 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.
Empty promise
A promise made without any intention of performing it constitutes to fraud.

Business Law
Example: Empty promise

Buying goods under a contract of sale with an intention of not paying the price is
fraud.
Declared act
Any such act or omission as the law specially declares to be fraudulent
Fitted act
Any other act fitted to deceive.
4.2 Essentials of fraud

The essentials of fraud are shown below:
Party to a contract
The fraud must be committed by a party to a contract or by anyone with his
connivance or by his agent. Thus, the fraud by a stranger to the contract does not
affect its validity.

False representation
It means that a false representation is made with the knowledge of its falsehood.
It will equal to fraud if a true representation is made but becomes untrue at the
time of formation of contract the fact is known to the party who made the
representation.
Representation as to fact
A mere opinion does not amount to fraud. A representation must relate to a fact
than it amount to fraud.
Actually deceived
A deceit, which does not deceive is not fraud. The fraud must have actually
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.
4.3 Effects of fraud

The effects of fraud are as follows [Section 19]:
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.
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.
4.4 Silence as to fraud

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.
[Section 17]

Business Law
Example: Silence as to fraud

A sells by auction to B a horse which A knows to be unsound. A says nothing to B
about the horse's unsoundness. This is not fraud by A.
B is A's daughter and has just come of age. Here, the relation between the
parties would make it A's duty to tell B if the horse is unsound.
B says to A, "If you do not deny it, I shall assume that the horse is sound." A says
nothing. Here A's silence is equivalent to speech. If the horse turns out to be
vicious. A can be held liable for fraud.
Note
In the early 80’s the Federal Shariat Court decided that provision regarding position of
silence in Contract Act is not in conformity with the teachings of Islam.

5 MISREPRESENTATION
Section overview
 Definition of misrepresentation
 Essentials of misrepresentation
 Effects of misrepresentation
5.1 Definition of 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.
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.

Business Law
5.2 Essentials of misrepresentation

The essentials of misrepresentation are shown below:
Party to a contract
The representation must be made by a party to a contract or by anyone with his
connivance or by his agent. Thus, the representation by a stranger to the contract
does not affect the validity of the contract.
False representation
There must be a false representation and it must be made without the knowledge
of its falsehood i.e. the person making it must honestly believe it to be true.
Representation as to fact
A mere opinion does not amount to misrepresentation. A representation must
relate to a fact if it amounts to misrepresentation.
Object
The objective is to induce the other party to enter into contract without the
intention of deceiving the other party.
Actually acted
The other party must have acted on the faith of the representation.

5.3 Effects of misrepresentation

The effects of representation are following [Section 19]:
 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.
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.

Business Law
6 MISTAKE
Section overview
 Mistake
 Types of mistakes
6.1 Mistake
Where both the parties to an agreement are under a mistake as to matters of
facts essential to the agreement, the agreement is void [Section 20].
6.2 Types of mistakes

The types of mistakes are shown below:
Types of mistakes
Mistake of
Mistake of fact
law
Pakistan Foreign
Bilateral Unilateral
law law
Subject Possibility of Identity of Nature of

matter performance person contract
Mistake of Pakistan law

A contract is not voidable because it was caused by a mistake as to any law in
force in Pakistan. [Section 21]
Mistake of foreign law

A mistake as to the law not in force in Pakistan has the same effect as a mistake
of fact i.e. void. [Section 21]
Bilateral mistake
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. [Section
20]

Example: Bilateral mistake

 A buys' a painting believing it to be worth Rs 100,000 while in fact it is worth
only Rs 10,000. The contract is not void.
 A agrees to sell to B 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.
 Bilateral mistake as to the subject matter

A bilateral mistake as to the subject matter includes the following mistakes
as to the:
 existence of subject matter
 quantity of subject matter
 quality of subject matter
 price of subject matter
 identity of subject matter
 title of subject matter
Example: Bilateral mistake as to the subject matter

 A agrees to buy from B 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.
 A agrees to buy from B all his horses believing that B has two horses but B
actually has three horses. The agreement is void because there is bilateral
mistake as to the quantity of subject matter
 A agrees to buy a particular horse from B. 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.
 A agrees to buy a particular horse from B who mentioned 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.
 A agrees to buy from B a certain horse. B has one race horse and one cart
horse. A thinks that he is buying race horse but B thinks that he is selling cart
horse. The agreement is void because there is bilateral mistake as to the
identity of subject matter.
 A agrees to buy a particular horse from B. That horse is already owned by A.
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.

Business Law
Unilateral mistake
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. [Section 22]
Example: Unilateral mistake

A buys' a painting believing it to be worth Rs 100,000 while in fact it is worth only
Rs 10,000.
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: Mistake relating to the identity of the person

A 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 A. A, 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 A as the theatre company never
intended to contract with A.
Example: Mistake relating to the nature of contract

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

7 CHAPTER REVIEW
Chapter review
 Discuss the meaning of consent
 Explain when a consent is said to be free
 Understand the effects and meaning of coercion, undue influence, fraud and
misrepresentation
 Discuss the laws relating to the effect of mistake on contracts

Business Law

CHAPTER
Business Law
7
Legality of object and consideration
and agreements opposed
to public policy
Contents
1 Legality of object, consideration and agreements
opposed to public policy
2 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Legality of object, consideration and agreements opposed to public policy
demonstrate knowledge of laws relating to legality of object and
agreements opposed to public policy.
LO 2.1.1 Discuss the provisions of Act with respect to legality of object and agreements
opposed to public policy
Exam context
 Explain the cases where the object or consideration of an agreement are said to be
unlawful
 Name various types of agreements which are considered to be opposed to public
policy

Act Chapters

Section A: Mercantile Law - Chapter 7: Legality of object and consideration and agreements opposed to public policy
1 LEGALITY OF OBJECT, CONSIDERATION AND AGREEMENTS OPPOSED

TO PUBLIC POLICY
Section overview
 Circumstances where object or consideration is unlawful

 Agreement, the consideration or object of which is partly unlawful
 Agreements opposed to public policy
1.1 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
 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.
Example: Forbidden by law

 A promises B to drop a prosecution which he has instituted against B for
robbery, and B promises to restore the value of the things taken. The
agreement is void, as its object is unlawful.
 A promises to obtain for B an employment in the public service, and B
promises to pay Rs.1,000/-to A. The agreement is void as the consideration
for it is unlawful.
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.
 In case of an agreement containing the promise, some part of which is legal
and other part illegal, the legal position is as under: [Section 57 & 58]
 If the illegal part cannot be separated than the whole agreement is
illegal.

Business Law
 If the illegal part can be separated than court will enforce the legal
part and will reject illegal party.
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: Defeats the provisions of any law

A's estate is sold for arrears of revenue under the provisions of an Act of the
Legislature, by which a defaulter is prohibited from purchasing the estate. B,
upon an understanding with A, becomes the purchaser, and agrees to convey
the estate to A, upon receiving from him the price which B has paid. The
agreement is void as the transaction, in fact, 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: Fraudulent
 A, B and C 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.
 A, being agent for a landed proprietor, agrees for money, without the
knowledge of his principal, to obtain for B a lease of land belonging to his
principal. The agreement between A and B is void, as it implies a fraud by
concealment by A, 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: Involves or implies injury

A promised to pay Rs.100,000 to B on agr eeing to publish a defamatory
article against C. It was held that B could not recover the amount because the
agreement was void as it involves injury to C.
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: Court regards it as immoral or opposed to public policy

 A, who is B's mukhtar, promises to exercise his influence, as such, with B in
favour of C, and C promises to pay Rs 1,000 to A. The agreement is void,
b ec au se it is immoral.
 A agrees to let her daughter to hire to B for concubinage. The agreement is
void because it is immoral, though the letting may not be punishable under

1.2 Agreement, the consideration or object of which is partly unlawful

A contract may contain several distinct promises or a promise to do several
distinct acts of which some are legal and others illegal, or a part of which is legal
and a part of which is illegal. In case of an agreement containing the promise,
some part of which is legal and other part(s) illegal, the legal position is as follows
[Section 24]:
 If the illegal part cannot be separated than the whole agreement is illegal.
 If the illegal part can be separated than court will enforce the legal part and
will reject illegal party.
Promise to do legal and 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. [Section 57]
Example: Promise to do legal and illegal things

A and B agree that A shall sell B a house for Rs.10,000,000 but that, if B
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 B may use the house as a gambling house and is a void agreement.
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. [Section 58]
Example: Alternative promise being illegal

A and B agree that A shall pay B Rs.1,000 for which B shall afterwards
deliver to A either rice or smuggled opium.
This is a valid contract to deliver rice, and a void agreement as to the opium.
1.3 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.
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.

Business Law
Example: Stifling prosecution

A, who knows that B has stolen goods amounting to Rs.500,000, receives
Rs.100,000 from B in consideration of not exposing A This agreement is illegal.
Maintenance and champerty

Maintenance is an agreement where a person promises to maintain a suit in
which he has no interest.
Example: Maintenance and champerty

A promises to pay B Rs.100,000 if B files a suit against C.
Champerty is an agreement whereby one party agrees to assist another in

recovering property and in turn is to share in the proceeds of the action.
In Pakistan, Maintenance and champerty are not absolutely void. They may be
treated valid if they fulfil certain conditions if:
(i) It is reasonable
(ii) With bona fide intention
 If funds are supplied then maintenance and champerty both may be
valid
 But if professional services have been provided then only
maintenance may be valid and not champerty.
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.
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.
Restraint of personal liberty

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

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

2 CHAPTER REVIEW
Chapter review
 Explain the cases where the object or consideration of an agreement are said to
be unlawful
 Name various types of agreements which are considered to be opposed to public
policy

Business Law

CHAPTER
Business Law
8
Void agreements
Contents
1 Void agreements
2 Agreements in restraint of trade
3 Wagering agreements
4 Other void agreements
5 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Void agreements
demonstrate knowledge of laws relating to void agreements.
LO 2.1.1 Discuss the provisions of Act with respect to void agreements
Exam context
 Discuss briefly expressly declared void agreements
 Discuss the exceptions to such void agreements
 Explain wagering agreement

Act Chapters

Section A: Mercantile Law - Chapter 8: Void agreement
1 VOID AGREEMENTS
Section overview
 Meaning of void agreements

 Void agreements
1.1 Meaning of void agreement

An agreement not enforceable by law is said to be void. All agreements may not
be enforceable by law. The agreements which are not enforceable by law right
from the time when they are made are called void-ab-initio. [Section 2(g)]
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
1.2 Void agreements

Contract Act declares certain agreements to be void. Such agreements are listed
below:
1. Agreements by or with persons incompetent to contract [Section 11]
2. Agreements made under mutual mistake of fact [Section 20]
3. Agreements made under mutual mistake of foreign law [Section 21]
4. Agreement, the object or consideration of which is unlawful [Section 23]
5. Agreement, the consideration or object of which is partly unlawful [Section
24]
6. Agreement made without consideration [Section 25]
7. Agreements in restraint of trade [Section 27]
8. Wagering agreement [Section 30]
9. Agreements in restraint of legal proceedings [Section 28]
10. Agreements in restraint of marriage [Section 26]
11. Uncertain agreements [Section 29]
12. Agreements contingent on impossible events [Section 32]
13. Agreements to do impossible acts [Section 56]
14. Agreement to enter into an agreement in future
Note
 Agreements from 1 to 6 have been discussed in earlier chapters.
 From 5 to 11 are those agreements which are specifically or expressly declared
as void under the Contract Act.

Business Law
2 AGREEMENTS IN RESTRAINT OF TRADE
Section overview
 Meaning of agreements in restraint of trade

 Exceptions of agreements in restraint of trade
2.1 Meaning of agreements in restraint of trade

Every agreement by which anyone is restricted from exercising a lawful
profession, trade or business of any kind, is to that extent void. [Section 27]
Example: Agreements in restraint of trade

A and B carried on business in a certain locality in Karachi. A promised to stop
business in that locality if B paid him Rs 1,000. A stopped his business but B did
not pay him the promised money. It was held that A could not recover anything
from B because the agreement was in restraint of trade and was thus void.
2.2 Exceptions of agreements in restraint of trade

Following are the exceptions where agreements in restraint of trade are not
considered as void:
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. [Section 27]
Partner’s agreements
The Partnership Act allows following agreements as an exception to the
agreement in restraint of trade:
 Existing partner
Subject to contract between partners, a partner may not carry on any
business competing with that of the firm while he is a partner. [Section 1]
 Outgoing partner
An outgoing partner may agree with his partners that he will not carry on
any business similar to that of the firm for a specified period and for
specified local limits. [Section 36]
 Dissolution of the firm
Partners may, upon or in anticipation of the dissolution of the firm, make an
agreement that some or all of them will not carry on a business similar to
that of the firm for a specified period and for specified local limits. [Section
54]
 Sale of goodwill
Partner(s) may upon the sale of the goodwill of a firm, make an agreement
that partner(s) will not carry on any business similar to that of the firm for a
specified period and for specified local limits. [Section 55]

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: 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 not to compete with the
employer 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: 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 a servant from competing for 5 years after the
period of service.
It is void because restraint is intended to avoid competition.

Business Law
3 WAGERING AGREEMENT
Section overview
 Meaning of wagering agreement

 Effects of wagering agreement
3.1 Meaning of 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 event. An agreement by way of wager
is void. [Section 30]
Example: Wagering agreement

A promises to pay Rs 10,000 to B if it rained today, and B promises to pay Rs
1,000 to A if it did not.
Example: Transactions which are not held wagers:

 Prize competitions which are games of skill, e.g. picture puzzles, athletic
competitions. For example, 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 contract.
 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.
 Stock market transaction in which the delivery of shares is intended to be
given.
 Contracts of insurance.
3.2 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.

4 OTHER VOID AGREEMENTS
Section overview
 Agreements in restraint of legal proceedings

 Agreements in restraint of marriage
 Uncertain agreements
 Agreements contingent on impossible events
 Agreements to do impossible acts
 Agreements to enter into an agreement in future
4.1 Agreements in restraint of legal proceedings

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. [Section 28]
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 lf
law, is valid.
 Parties making extract to select one court of law between two courts
equally competent.
Exception
An agreement restraining the marriage/to hear case, is valid of a minor is valid.
4.2 Agreements in restraint of marriage

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. [Section 26]
Example: Agreements in restraint of marriage

A promises with B for good consideration that she will not marry C. It is a void
agreement..
4.3 Uncertain agreements

An agreement the meaning of which is not certain or capable of being made
certain are void. [Section 29]
Example: Uncertain agreements

 A agrees to sell to B "a hundred ton of oil." There is nothing whatever to show
what kind of oil was intended. The agreement is void for uncertainty.
 A, who is a dealer in coconut oil, agrees to sell to B "one hundred ton of oil."
The nature of A'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.

Business Law
A agrees to sell to B "all the grain in my granary at Peshawar." There is no

uncertainty here to make the agreement void.
A agrees to sell to B "one thousand mounds of rice at a price to be fixed by
C." As the price is capable of being made certain, there is no uncertainty here
to make the agreement void.
A agrees to sell to B "my white horse for Rupees five hundred or Rupees one
thousand." There is nothing to show which of the two prices are to be given.
4.4 Agreements contingent on impossible events

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. [Section 32]
Example: Agreements contingent on impossible events

A agrees to pay Rs. 1,000 if B marries C (a Hindu) who is already married to D. This
agreement is void.
4.5 Agreements to do impossible acts

An agreement to do an impossible act is void. [Section 56]
Example: Agreements to do impossible acts

A agrees with B to discover treasure by magic. The agreement is void.
4.6 Agreements to enter into an agreement in the future

An agreement to enter into an agreement in the future is void.

5 CHAPTER REVIEW
Chapter review
 Discuss briefly expressly declared void agreements
 Discuss the exceptions to such void agreements
 Explain wagering agreement

Business Law

CHAPTER
Business Law
9
Contents
1 Contingent contracts
2 Chapter review

Business Law
INTRODUCTION
Learning outcomes
demonstrate knowledge of laws relating to contingent contracts.
LO 2.1.1 Discuss the provisions of Act with respect to contingent contracts

Exam context
 Define the term contingent contracts
 Discuss the rules relating to the performance of contingent contracts
 Explain the extent of impossibility of the contingency affects the performance of the
contract
 Differentiate between contingent contract and wagering agreement
Act Chapters

Section A: Mercantile Law - Chapter 9: Contingent contracts
1 CONTINGENT CONTRACTS
Section overview
Definition of contingent contract

Characteristics of contingent contracts
Rules regarding contingent contract
Difference between contingent contract and wagering agreement
1.1 Definition of 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: Definition of contingent contract

A contracts to pay B Rs.10,000 if B’s house is burnt. This is a contingent contract.
1.2 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
1.3 Rules regarding contingent contracts

The rules regarding the enforcement of contingent contract are given below:
Contracts contingent upon the happening of an uncertain future event
A contract, the performance of which is contingent on the happening of an
uncertain future event, cannot be enforced by law unless and until that event has
happened. If the event becomes impossible, such contracts become void.
[Section 32]

Business Law
Example: Contracts contingent upon the happening of an uncertain future event

 A makes a contract with B to buy B's horse if A survives C. This contract
cannot be enforced by law unless and until C dies in A's life time.
 A makes a contract with B to sell a horse to B at a specified price if C to
whom the horse has been offered, refuses to buy him. The contract cannot be
enforced by law unless and until C refuses to buy the horse.
 A contract to pay B a sum of money when B marries C. C dies without being
married to B. The contract becomes void.
Contracts contingent upon the non-happening of a certain future event

A contract the performance of which is contingent on the non-happening of a
certain future event can be enforced when the happening of that event becomes
impossible and not before. [Section 33]
Example: Contracts contingent upon the happening of a certain future event

A agrees to pay B a sum of money ifa certain ship does not return. This ship is
sunk. The contract can be enforced when the ship sink.
Contracts contingent upon the future conduct of a living person
If the future event on which a contract is contingent is the way in which a person
will act at an unspecified time, the event shall be considered to become
impossible when such person does anything which renders it impossible that he
should so act within any definite time or otherwise than under further
contingencies. [Section 34]
Example: Contracts contingent upon the future conduct of a living person

A agrees to pay B a sum of money if B marries C. C marries D. the marriage of B to
C must now be considered impossible, although it is possible that D may die, and
that C may afterwards marry B.
Contracts contingent upon the happening of an uncertain specified event within a
fixed time
Contingent contracts to do or not to do anything if a specified uncertain event
happens within a fixed time become void if at the expiration of the time fixed such
event has not happened or if before the time fixed such event becomes
impossible. [Section 35]
Example: Contracts contingent upon the happening of an uncertain specified event

within a fixed time
A promises to pay B a sum of money if a certain ship returns within a year. The
contract may be enforced if the ship returns within the year, and becomes void if
the ship is burnt within the year.
Contracts contingent upon the non-happening, of an uncertain specified event
within a fixed time
A contract of performance of which is contingent on the non-happening of a
specified uncertain event within a fixed time may be enforced by law:
 When the time fixed has expired and such event has not happened or
 If (before the expiry of the time fixed) it becomes certain that such event will
not happen. [Section 35]

Section A: Mercantile Law - Chapter 9: Contingent contracts
Example: Contracts contingent upon the non-happening of an uncertain specified

event within a fixed time
A promises to pay B a sum of money if a certain ship does not return within a
year. The contract may be enforced if the ship does not return within the year, or
is burnt within the year.
Agreements contingent upon impossible events
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. [Section 36]
Example: Agreements contingent upon impossible events

 A agrees to pay B Rs. 1,000 if two straight lines should enclose a space.
 A agrees to pay B, Rs. 1,000 if B will marry A's daughter C. C was 'dead at
the time of the agreement. The agreement is void.
1.4 Difference between contingent contract and wagering agreement

Following are the few differences between contingent and wagering agreement:
Contingent contract Wagering agreement
Validity
It is a valid contract. It is void and illegal.
Interest of parties
In a contingent contract parties have Parties are not interested in the
real interest in the occurrence or non- occurrence or non-occurrence of the
occurrence of the event e.g. insurable event except for the winning or losing
interest in the property insured. the amount.
Uncertain event
The future uncertain event is merely The uncertain event is the sole
collateral. determining factor of the agreement.
Reciprocal promises
It consists of reciprocal promises. It may or may not consist of reciprocal
promises.

Business Law
2 CHAPTER REVIEW
Chapter review
 Define the term contingent contracts
 Discuss the rules relating to the performance of contingent contracts
 Explain the extent of impossibility of the contingency affects the performance of
the contract
 Differentiate between contingent contract and wagering agreement

CHAPTER
Business Law
10
Quasi contracts
Contents
1 Quasi contracts
2 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Quasi contracts
demonstrate knowledge of laws relating to Quasi contracts.
LO 2.1.1 Discuss the provisions of Act with respect to Quasi contracts
Exam context
 Explain Quasi contracts
 Discuss the kinds of Quasi contracts
Act Chapters

Section A: Mercantile Law - Chapter 10: Quasi contracts
1 QUASI CONTRACTS
Section overview
 Meaning of Quasi contract

 Kinds of Quasi contracts
 Application of Quantum Meruit
1.1 Meaning of 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.
1.2 Kinds of Quasi contracts

The kinds of Quasi contracts are listed below:
 Supply of necessaries
 Payment by interested person
 Person enjoying benefit of non-gratuitous act / goods
 Finder of goods
 Payment by mistake or under coercion
These Quasi contracts are discussed below:
Supply of necessaries
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. [Section 68]
This has been discussed in detail in chapter 4.
Example: Supply of necessaries

 A supplies B, a lunatic, with necessaries suitable to his condition in life. A is
entitled to be reimbursed from B's property.
 A supplies the wife and children of B, a lunatic, with necessaries suitable to
their condition in life. A is entitled to be reimbursed from B's property.
Payment by interested person

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.
[Section 69].
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

Business Law
 The payment must be such as the other party was bound by law to pay
Example: Payment by interested person

B holds land in Sindh, on a lease granted by A, a Zamindar. The revenue payable by
A 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 B's lease. B, to prevent the sale and the consequent annulment of his
own lease, pays the Government the sum due from A. A is bound to make good to
B the amount so paid.
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. [Section 70]
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: Person enjoying benefit of non-gratuitous act / goods

 A, a tradesman, leaves goods at B's house by mistake. B treats the goods as
his own. He is bound to pay A for them.
 A saves B's property from fire. A is not entitled to compensation from B, if the
circumstances show that he intended to act gratuitously.
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. 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. [Section 71]
This has been discussed in detail in chapter 15.
Example: Finder of goods

A found a diamond ring at a wedding reception of B. A told B 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.
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. [Section 72]
Example: Payment by mistake or under coercion

 A and B jointly owe Rs 100 to C. A alone pays the amount to C, and B, not
knowing this fact, pays Rs 100 over again to C. C is bound to repay the
amount to B.

 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.
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.
1.3 Application of Quantum Meruit

Quantum meruit applies in the following cases:
 Void agreement or a contract that becomes void
 Person enjoying benefit of non-gratuitous act / goods
 Act preventing the completion of contract
 Divisible contract
 Indivisible contract performed completely but badly
 Express or implied contract to render services but no remuneration is pre-
settled
Void agreement or contract that becomes void
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. [Section 65]
Example: Void agreement or contract that becomes void

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

Business Law
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. [Section 70]
Example: Person enjoying benefit of non-gratuitous act / goods

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

C, an owner of a magazine engaged P 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 P could claim payment
for the part already published.
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: Divisible contract

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

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

A agreed to decorate B's flat for a lump sum of Rs 200,000. A did the complete
work but B complained of faulty workmanship. It costs B another Rs 30,000 to
remedy the defect. It was held that A could recover only Rs 170,000 from B.
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.

2 CHAPTER REVIEW
Chapter review
 Explain Quasi contracts
 Discuss the kinds of Quasi contracts

Business Law

CHAPTER
Business Law
11
Performance of a contract
Contents
1 Performance of a contract
2 Reciprocal promises
3 Appropriation of payment
4 Assignment of contracts
5 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Performance of a contract
demonstrate knowledge of laws relating to performance of a contract.
LO 2.1.1 Discuss the provisions of Act with respect to performance of a contract
Exam context
 Understand the meaning of performance of a contract
 Explain the term tender and effect of refusal to accept a tender
 State who can perform and demand performance
 State briefly provisions of Act relating to the time and place of performance
 Explain reciprocal promises and rules regarding their performance
 Summarize the rules laid down in the Act as to the appropriation of payments
 Understand the meaning and modes of assignment of contract

Act Chapters

Section A: Mercantile Law - Chapter 11: Performance of a contract
1 PERFORMANCE OF A CONTRACT
Section overview
 Meaning of performance
 Types of performance
 Types of tender
 Essentials of a valid tender
 Effect of refusal to perform
 Persons who can perform and demand performance
 Rules regarding the performance of joint promise
 Time and place of performance
 Time as essence of contract
1.1 Meaning of performance

A contract creates an obligation, which continues till the contract has been
discharged by actual performance. Performance of the contract is one of the vital
modes of discharge of the contract. A contract is said to have been performed
when the parties to a contract either perform or offer to perform their respective
promises.
Obligations of parties to contracts

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 this Act, or of any other law.
1.2 Types of performance

There are two types of performance as follows:
Actual performance
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.
[Section 37]
Example: Actual performance

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

Business Law
Example: Attempted performance

A contracted to deliver to B at his warehouse on 1st November, 500 bales of
cotton of a particular quality. B refused to take the delivery of goods; it is a
case of attempted performance because A has done what he was required to
do under the contract.
1.3 Types of tender

There can be two types of tender as follows:
Tender of goods or services

Where the promisor offers to deliver the goods or services but the promisee
refuses to accept.
Effects
 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.
Tender of money
Where the promisor offers to pay the amount but the promisee refuses to accept
the same.
Effects
 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

1.4 Essentials of a valid tender

The essentials of a valid tender are shown below:
 Unconditional
Tender is said to be unconditional when it is made in accordance with the
terms of the 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.
 Proper Place
Tender must be made at the stipulated place or at business 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.
 Reasonable Opportunity
Promisee must have reasonable opportunity for examining that the goods
offered are the same as per the terms of the contract.

Business Law
 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.
 Fixed amount and legal tender
In case of tender of money the amount must be fixed and in legal tender.
1.5 Effect of refusal to perform

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. [Section 39]
Example: Effect of refusal to perform

 A, a singer enters into a contract with B, the manager of a theatre, to
sing at his theatre two nights in every week during the next two
months, and B engages to pay her Rs.100 for each night's
performance. On the sixth night, A wilfully absents herself from the
theatre. B is at liberty to put an end to the contract.
 A, a singer enters into a contract with B, the manager of a theatre, to
sing at his theatre two nights every week during the next two months
and B engages to pay her at the rate of Rs.100 for each night. On the
sixth night, A wilfully absents herself. With the assent of B, A sings on
the seventh night. B 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 A's failure to sing
on the sixth night.
1.6 Persons who can perform and demand performance

Persons who can perform and demand performance are shown below [Section
40 to 42]:
• Promisor
• Promisor's agent
Persons who • Legal representative
can perform • Third party
• Joint promisor
• Promisee
Persons who • Promisee's agent
can demand • Legal representative
performance • Third party
• Joint promisees

Persons who can perform
 Promisor
If a contract is of personal nature or it was agreed that promise will be
performed by the promisor himself than such promise must be performed
by the promisor.
Example: Promisor
 A promises to marry B, A must perform this promise personally.
 A promises to paint a picture for B, A 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 than such contracts can
be performed by the promisor himself or an agent employed by him.
Example: Promisor’s agent

A promises to pay B a sum of money. A may perform this promise either by
personally paying the money to B, or by causing it to be paid B by another,
and if A 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: Legal representatives

A promises to marry B, A dies. A’s legal representatives cannot perform
this promises.
 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.
 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: Joint promisor

A and B jointly promise to repay a loan of Rs.10,000 on a specified day. A
dies before that specified day. A's representative jointly with B must
perform the promise on the specified day.

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Persons who can demand performance

 Promisee
Under a contract only a promisee can demand the performance of the
promise.
Example: Promisee
A promises B to pay Rs.10,000 to C. It is only B who can demand performance and
not C.
 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.
 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: Legal representative

A promise to marry to B on the specified day. B dies before the specified day. The
legal representatives of B cannot demand performance of the promise from A
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.
 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: Joint promisees

A promises B and C jointly to repay loan of Rs.10,000 on a specified day. B
dies before that specified day. B's representative jointly with C can demand
the performance from Aon specified day. If B and C die before that
specified day, the representatives of B and C jointly can demand the
performance from A on the specified day.
1.7 Rules regarding the performance of joint promise

The rules regarding the performance of joint promises are as follows
[Section 43 to 44]:

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: Joint and several liability of joint promisors

A, B and C jointly promise to pay DRs.3,000. D may compel either A or B or
C 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: Right to claim contribution

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

A, B and C are under a joint promise to pay D Rs.3,000. C is unable to pay
anything and A is compelled to pay the whole. A is entitled to receive
Rs.1,500 from B.
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: Release of one joint promisor

A, B and C jointly promise to pay D Rs.3,000. D releases A from his liability
and sues B and C for payment, Here, neither B and C are released from their
liability to D nor is A released from his liability to B and C for contribution.
Devolution of joint rights
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. [Section 45]

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Example: Devolution of joint rights

A, in consideration of Rs.5,000 lent to him by B and C, promises B and C
jointly to repay them that sum with interest on a day specified. B dies. The
right to claim performance rests with B's representative jointly with C during
C's life, and, after the death of C, with the representatives of B and C jointly.
1.8 Time and place of performance

The various rules regarding the time and place of performance are given
below:
Time for performance is not specified
Where the time for performance is not specified in a contract and the
promisor has undertaken to perform without application by the promisee
then the contract must be performed within a reasonable time. The
question 'What is reasonable time' is a question of fact. [Section 46]
Time for performance is specified
Where the time for performance is specified in a contract and the promisor
has undertaken to perform it without application by the promisee then the
promisor must perform his promise on that particular day during the usual
hours of business and at a place where the promise ought to be performed.
[Section 47]
Place for performance is specified
Where the time for performance is specified in a contract and the promisor
has not undertaken to perform it without application by the promisee than
the promisee must apply for performance at a proper place and within
usual hours of business. [Section 48]
Place for performance is not specified
Where the place for performance is not specified in a contract and the
promise is to be performed without application by the promisee than the
promisor must apply to the promisee to appoint a reasonable place for the
performance and to perform the promise at such place. [Section 49]
Promisee prescribes the manner or time
Where the promisee prescribes the manner or time for performance then
the promise must be performed in the manner and at the time prescribed
by the promise. [Section 50]
Example: Time and place of performance

 B owes A Rs.2,000. A desires B to pay the amount to A's account with
C, a banker. B who also banks with C, orders the amount to be
transferred from his account to A's credit, and this is done by C.
Afterwards, and before A knows of the transfer, C fails. There has
been a good payment by B.
 A and B are mutually indebted. A and B settle an account by setting
off one item against another, and B pays A the balance found to be
due from him upon such settlement. This amounts to payment by A
and B, respectively, of the sums which they owed to each other.
 A owes B Rs.2,000. B accepts some of A's goods in reduction of the
debt. The delivery of the goods operates as a part payment.
 A desires B, who owes him Rs.100, to send him a note for Rs.100 by
post. The debt is discharged as soon as B posts a letter containing the
note duly addressed to A.

1.9 Time as essence of contract

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. But
if the promisor fails to do so, can the promisee rescind the contract? This
question can be answered by deciding whether in such a case time was or
was not the essence of the contract. [Section 55]
Cases where time is essence

In the following cases, time is usually considered to be the essence of
contract:
 Where the parties have expressly agreed to treat the time as the essence
of the contract.
 Where the non-performance at the specified time operates as an injury to
the party.
 Where the nature and necessity of the contract requires the performance of
the contract within the specified time.
Consequences where time is essence

In case the performance is not made where time is essence the breach will have
following consequences:
 Voidable at the option of promisee.
 Promisee is entitled to claim compensation for any loss arising to him due
to non-performance of the promise at agreed time where performance
beyond the stipulated time is not accepted.
 Promisee is not entitled to claim compensation for any loss arising to him
due to non-performance of the promise at agreed time where performance
beyond the stipulated time is accepted, unless the promisee gives notice to
the promisor of his intention to claim compensation.
Consequences where time is not essence

In case the performance is not made where time is not essence the breach will
have the following consequences:
 Not voidable at the option of promisee.
beyond the stipulated time is not accepted.
the promisor of his intention to do so.

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Example: Consequences where time is not essence

A, a singer, enters into a contract with B, the manager of a theatre, to sing at his
theatre two nights in every week for the next two months. B agrees to pay her Rs
100 for each performance. On the sixth night, A willfully absents herself from the
Theatre.
In this case, B has the following two options:
 B may rescind the contract and claim compensation for the loss occasioned
to him by A's failure to sing on the sixth night.
 B may permit A to sing on the seventh night and claim compensation
for loss from A by giving a notice to A of his intention to do so.

2 RECIPROCAL PROMISES
Section overview
 Meaning of reciprocal promises

 Types of reciprocal promises
 Rules regarding performance of reciprocal promises
2.1 Meaning of reciprocal promises

Promises which form the consideration or part of the consideration for each other
are called 'reciprocal promises'. [Section 2(f)]
Example: Meaning of reciprocal promises

In a contract for sale, A promises to deliver the goods to B at a fixed price and B
promises to give promise for the payment of the price. Such promises are called
reciprocal promises.
2.2 Types of 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.
Mutual and dependent
When the performance of one party depends on the prior performance of the
other party it is called Mutual and dependent.
Mutual and concurrent
When the promises are to be performed simultaneously i.e. at the same time it is
called Mutual and concurrent.
2.3 Rules regarding performance of reciprocal promises

The rules regarding the performance of reciprocal promises are as follows:
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. [Section 51]
Example: Simultaneous performance

 A and B contract that A shall deliver goods to B to be paid for by B on
delivery A need not deliver the goods unless B is ready and willing to
pay for the goods on delivery B need not pay for the goods, unless A is
ready and willing to deliver them on payment.
 A and B contract that A shall deliver goods to B at a price to be paid in
instalments, the first instalment to be paid on delivery. A need not
deliver unless B is ready and willing to pay the first instalment on
delivery. B need not pay the first instalment, unless A is ready and
willing to deliver the goods on payment of the first instalment.

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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 the order which the nature of the transaction requires. [Section
52]
Example: Order of performance

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

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

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

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

Promise to do legal and 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. [Section 57]
Example: Promise to do legal and illegal things

A and B agree that A shall sell B a house for Rs.10,000 but that, if B uses it
as a gambling house, he shall pay Rs.50,000 for it.
The first set for reciprocal promises, namely to sell the house and to pay
Rs.10,000 for it, is a contract. The second set is for an unlawful object, namely,
that B may use the house as a gambling house and is a void agreement.
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. [Section 58]
Example: Alternative promise being illegal

A and B agree that A shall pay B Rs.1,000 for which B shall afterwards
deliver to A either rice or smuggled opium.
This is a valid contract to deliver rice, and a void agreement as to the opium.

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3 APPROPRIATION OF PAYMENT
Section overview
 Meaning of appropriation of payment

 Rules regarding appropriation of payment
3.1 Meaning of appropriation of payment

Appropriation of payment means allocation of payment to a particular debt.
3.2 Rules regarding appropriation of payment

The various rules regarding appropriation of payments are given below:
Debt to be discharged is indicated

The payment, if accepted must be applied accordingly. [Section 59]
Example: Debt to be discharged is indicated

 A owes B, among other debts, Rs.1,000 upon a promissory note, which falls
due on the first June. He owes B one other debt of that amount. On the first
June, A pays to B Rs.1,000. The payment is to be applied to the discharge of
the promissory note.
 A owes to B, among other debts; the sum of Rs.567. B writes to A and
demands payment of this sum. A sends to BRs.567. This payment is to be
applied to the discharge of the debt of which B had demanded payment.
Debt to be discharged 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 to a disputed debt.
[Section 60]
Neither party makes an appropriation

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. [Section 61]
If principal amount and markup both are due, then mark-up is settled first and
then principal amount is settled.

4 ASSIGNMENT OF CONTRACTS
Section overview
 Meaning of assignment of contracts

 Modes of assignment of contract
4.1 Meaning of assignment of contracts

Assignment of a contract means transfer of contractual rights and liabilities to a
third party.
4.2 Modes of assignment of contracts

Assignment of a contract may take place in the following ways:
 Assignment by act of parties
 Assignment by operation of law
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 than 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 my employ a competent person to perform such obligation
but even than 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 by the debtor.
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.

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Example: Assignment
 A promises to marry B. Here, neither A can assign their obligation nor B can
assign their right because the contract is of personal nature.
 A owes B Rs.100,000 and C owes A Rs.100,000. Here A cannot compel B to
recover the amount from C. However, he can transfer his liability to C with the
consent of B and C. B can also transfer his right to a third party to recover the
amount from A.

5 CHAPTER REVIEW
Chapter review
 Understand the meaning of performance of a contract
 Explain the term tender and effect of refusal to accept a tender
 State who can perform and demand performance
 State briefly provisions of act relating to the time and place of performance
 Explain reciprocal promises and rules regarding their performance
 Summarize the rules laid down in the act as to the appropriation of payments
 Understand the meaning and modes of assignment of contract

Business Law

CHAPTER
Business Law
12
Discharge of a contract
Contents
1 Discharge of a contract
2 Discharge by performance
3 Discharge by agreement or by consent
4 Discharge by operation of law
5 Discharge by impossibility of performance
6 Discharge by lapse of time
7 Discharge by breach
8 Chapter review

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INTRODUCTION
Learning outcomes
Discharge of a contract
demonstrate knowledge of laws relating to discharge of a contract.
LO 2.1.1 Discuss the provisions of Act with respect to discharge of a contract
Exam context
 Explain the various modes in which a contract may be discharged
 Discuss the doctrine of supervening impossibility
 Explain types of breach and their consequences
Act Chapters

Section A: Mercantile Law - Chapter 12: Discharge of a contract
1 DISCHARGE OF A CONTRACT
Section overview
 Meaning of discharge
 Modes of discharge of a contract
1.1 Meaning of discharge

 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.
1.2 Modes of discharge of a contract

The chart below shows the various ways in which a contract is said to be
discharged:

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2 DISCHARGE BY PERFORMANCE
Section overview
 Actual performance
 Attempted 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:
2.1 Actual performance

If the parties to the contract perform their respective promises in accordance with
the terms of the contract then it is said to be discharged by actual performance.
[Section 37]
Example: Actual performance

A contracted to deliver to B at his warehouse on 1st November, 500 bales of cotton
of a particular quality. A brought the cotton of requisite quality to the appointed
place on the appointed day during the business hours, and B took the delivery of
goods. This is an actual performance.
2.2 Attempted performance

If the promisor has made an offer of performance as per the terms of the contract
and the promisee refuses to accept the offer of performance then the promisor is
said to be discharged by attempted performance. It is also known as tender. It is
equivalent to actual performance. In this performance, the promisor offers to
perform his obligation, but the promisee refuses to accept his performance.
[Section 38]
Effect of tender is that the contract is deemed to be performed. Promisee is
discharged from his liability of non-performance. His rights against the promise
are unaffected.
Example: Attempted performance

A contracted to deliver to B at his warehouse on 1st November, 500 bales of
cotton of a particular quality. B refused to take the delivery of goods; it is a
case of attempted performance because A has done what he was required to
do under the contract.

3 DISCHARGE BY AGREEMENT OR BY CONSENT
Section overview
 Novation
 Rescission
 Alteration
 Remission
 Waiver
 Promisee’s refusal / neglects
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:
3.1 Novation
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. [Section 62]
Example: Novation
 A owes money to B under a contract. It is agreed between A, B and C that B
shall now accept C as his debtor; instead of A. The old debt of A to B no
longer exists and a new debt from C to B has been contracted.
 A owes B Rs.10,000. A enters into an agreement with B, and gives B a
mortgage of his (A's) estate for Rs.5,000 in place of the debt of Rs.10,000.
This is a new contract and extinguishes the old.
3.2 Rescission
Rescission is the cancellation of a contract by mutual agreement of parties.
[Section 62]
Example: Rescission
A promises B to sell and deliver 500 Bales of cotton on 1st November at his
godown and B promises to pay for goods on 1st December. A does not supply the
goods. B may rescind the contract.

Business Law
3.3 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. [Section 62]
Example: Alteration
X promise to sell and deliver 500 bales of cotton, on 1st November and Y promises
to pay for goods on 1st December. Afterwards, X and Y mutually decide that the
goods shall be delivered in five equal instalments at Z's godown. Here, original
contract has been discharged and a new contract has come into effect.
3.4 Remission
Remission means accepting a less amount than the initial amount agreed.
[Section 63]
Example: Remission
 A promises to paint a picture for B. B afterwards requested A not to do so. A,
if agreed is no longer bound to perform the promise.
 A owes B Rs.5,000. C pays to B Rs.1,000, and B accepts them in satisfaction
of his claim on A. This payment is a discharge of the whole claim.
3.5 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.
3.6 Promisee’s refusal / neglects

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. [Section 67]

4 DISCHARGE BY OPERATION OF LAW
Section overview
 Death
 Insolvency
 Material alteration
 Same identity
A contract may be discharged by operation of law in any of the following cases:
4.1 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: Death
A (an artist) promises to paint a picture for B by June 22, 2013 for Rs. 100,000. A
dies before completing the picture. Here it is a contract involving personal skill and
on death of A the contract will be discharged.
4.2 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
 Sue
 Sued
Therefore, on declaration of a person as an insolvent person is discharged from
his liabilities incurred prior to his adjudication.
Example: Insolvency
A took a loan from B amounting to Rs. 1 million payable in June 2013. On March
2013 A was declared as insolvent by relevant court. After the order adjudication he
is discharged from his liabilities as the amount will be paid by the Official Assignee
/ Official Receiver.
4.3 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

Business Law
An alteration which is not material or which is made after getting prior consent
does not affect the validity of the contract.
Example: Material alteration

A gives a promissory note amounting to Rs. 50,000 to B payable on August 16,
2013. B subsequently, endorses the same note in favour of C after altering the date
from August 16, 2013 to August 23, 2013.
Here, change of date is a material alteration and has discharged A from the
instrument because it was made without his consent.
4.4 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: Same identity

A gives a promissory note to B. B endorses the note in favour of C who in turn
endorses in favour of A. Here, A is both the promisor and the promisee and hence
the other parties are discharged.

5 DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE
Section overview
 Supervening impossibility
 Grounds of supervening impossibility
 Not an excuse of supervening impossibility
 Supervening illegality
5.1 Supervening impossibility

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
The effects of supervening impossibility are as follows: [Section 56]
 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.
Example: Effects of supervening impossibility

A contracts to sing for B at a concert for Rs.10,000 which is paid in advance. A is
too ill to sing. A must refund Rs.10,000 to B.
5.2 Grounds of supervening impossibility

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.
Example: 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.
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.
Example: Death or personal incapacity (doctrine of frustration)

A agreed to sing on a specified day. A fell seriously ill and could not perform on
that day. The contract was discharged.

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Declaration of war
At the time of declaration of war the contracts with alien enemies are either
suspended or declared as void.
Example: Declaration of War

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

A and B contract to marry each other. Before the time fixed for the marriage, A
goes mad. The contract becomes void.
5.3 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:
Difficulty of performance
If the performance of a contract becomes difficult, more costly or less beneficial
then that agreed at the time of its formation, a contract will not be discharged.
Example: Difficulty of performance

A 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
A will not be discharged because the gold was available in the open market from
where A could have obtained it.
Commercial impossibility
When the contract becomes commercially unviable or non-profitable it is not said
to be discharged.
Example: Commercial impossibility

A, a furniture retailer, agreed to supply certain furniture to B 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, A did not
supply. A will not be discharged on the ground of supervening impossibility.
Default of a third party

On default of a third party, on whose work the promisor is relying, a contract is
not said to be discharged.

Example: Default of a third party

A entered into a contract with B for the sale of goods to be manufactured by C, a
manufacturer of those goods. C did not manufacture those goods. A will not be
discharged and will be liable to B for damages.
Strikes, lockouts and civil disturbances
Unless otherwise agreed by the parties to the contract, a contract is not
discharged on the grounds of strikes, lockouts and civil disturbances.
Example: Strikes, lockouts and civil disturbances

A agreed to supply to B 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.
Partial impossibility
A contract is not discharged simply on the grounds of partial impossibility of some
of the objects of the contract.
5.4 Supervening illegality

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: Change of law

A agreed to sell his land to B after the formation of the contract, the Government
issued a notification and acquired the land. The contract was discharged.

Business Law
6 DISCHARGE BY LAPSE OF TIME
Section overview
 Limitation period
6.1 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 banned and hence
cannot be recovered through court of law.
Example: Limitation period

A sold goods to B amounting to Rs. 10,000 on a credit of 1 year on January 1,
2012. On due date i.e. December 31, 2012 B defaulted in payment.
In the given scenario A can file suit against B by December 31, 2015.

7 DISCHARGE BY BREACH
Section overview
 Actual breach of contract

 Anticipatory breach of contract
If a party refuses or fails to perform his part of the contract then the contract is said to
be discharged due to breach. A breach of contract may occur in the following two ways:
7.1 Actual breach of contract

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. [Section 38]
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: Due date of performance

A agreed to sell to B 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, A
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: Course of performance

A agreed to sell to B 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, A
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 may be
summarized as follows:
Time is essence
In case of actual breach where time is of the essence, the breach will have the
following consequences: [Section 55]
 Voidable at the option of promisee
beyond the stipulated time is not accepted

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the promisor of his intention to claim damages.
Time is not essence
In case of actual breach where time is not essence the breach will have the
following consequences: [Section 55]
 Not Voidable at the option of promisee
the promisor of his intention to claim damages.
Example: Time is not essence

A, a singer, enters into a contract with B, the manager of a theatre, to sing at his
theatre two nights in every week for the next two months. B agrees to pay her
Rs.100 for each performance. On the sixth night, A wilfully absents herself from the
Theatre.
In this case, B has the following two options:
 B may rescind the contract and claim compensation for the loss occasioned
to him by A's failure to sing on the sixth night.
 B may permit A to sing on the seventh night and claim compensation for loss
from A by giving a notice to A of his intention to do so.
7.2 Anticipatory breach of contract

Anticipatory breach of contract occurs when before the performance is due the
party acts in a way that the contract may not be performed. [Section 39]
A party may be intended not to perform the contract in the following two ways:
Refusal to perform promise
When a party to a contract has refused to perform his promise
Example: Refusal to perform promise

A, a farmer agrees to sell to B his entire crop of 10 tons of wheat @ Rs. 8,000 per
ton to be delivered on 20th November. On 1st November, A informs B that he is not
going to supply the goods. A 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: Disabled to perform promise

ton to be delivered on 20th November. On 1st November, A contracted to sell his
entire crop to C @ Rs. 10,000 per ton. A 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 will be equal to the
damages for breach of contract difference between the price prevailing
without waiting until the due date for on the date of breach and the contract
performance or price. [Section 73]
Treat the contract as operative and Damages will be equal to the
wait till the due date for performance difference between the price prevailing
and claim damages if the promise still on the due date of performance and
remains unperformed 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: Consequences of treating contract as operative

ton to be delivered on 20th November. On 1st November, A informs B that he is not
going to supply the goods. B 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, B had lost the right to sue A for damages.

Business Law
8 CHAPTER REVIEW
Chapter review
 Explain the various modes in which a contract may be discharged
 Discuss the doctrine of supervening impossibility
 Explain types of breach and their consequences

CHAPTER
Business Law
13
Remedies for breach of contract
Contents
1 Remedies for breach of contract
2 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Remedies for breach of contract
demonstrate knowledge of laws relating to remedies for breach of a
contract.
LO 2.1.1 Discuss the provisions of Act with respect to remedies of a contract
Exam context
 Discuss the various remedies available to a party in case of breach of a contract
 Explain the circumstances when rescission is granted by court
 Explain the circumstances when specific performance is granted by court
 Understand the different kinds of damages

Act Chapters

Section A: Mercantile Law - Chapter 13: Remedies for breach of contract
1 REMEDIES FOR BREACH OF CONTRACT
Section overview
 Meaning of remedy
 Remedies for breach
 Kinds of damages
 Rules regarding amount of damages
 Remoteness of damages
1.1 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
 Equitable remedies
 Quantum meruit claim
Common law remedies
Damages and action for the price are common law remedies and are more
frequently sought when a remedy is needed 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 or not to
do something. 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. Specific performance and
injunction are equitable remedies.
Quantum meruit claim
Quantum meruit claim is categorized as a claim in quasi contract. 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.
1.2 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

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2. Restitution
3. Damages
4. Specific performance
5. Injunction
6. Quantum meruit
Rescission of contract
Rescission is the putting an end to a contract. Rescission means a right not to
perform your obligation. In case of breach of a contract, the promisee may put an
end to the contract. 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.
[Section 39 and 75]
Example: Rescission of Contract

A agrees to supply 10 tons of wheat to B on 20th November. B promises to pay for
the goods on its receipt. A does not supply the goods on the due date. Here, B is
discharged from the liability of paying the price. B 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.
When is rescission granted?
The court may grant rescission in the following two cases:
 Where the contract is voidable at the option of the aggrieved party
 Where the contract is unlawful for causes not apparent on its face and
defendant is more to blame than the plaintiff
When is rescission not granted?

The court may not grant rescission in the following cases:
 Where the aggrieved party has expressly or impliedly ratified the contract
 Where owing to the change of circumstances, the parties cannot be
restored to their original positions
 Where the third party has acted in good faith and for consideration
 Where only part of a contract is sought to be rescinded and such part is not
severable from the rest of the contract
Restitution
It means return of the benefit received by one party to the contract from the other
under a void contract. When a contract becomes void it needs not to be
performed by either party.
Example: Restitution
A pays B Rs. 1,000 in consideration of B’s promising to marry C (A’s daughter). C is
dead at the time of promise. The agreement is void but B must repay A Rs.1,000.
Damages
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. [Section 73]
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 ascertain 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
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: Specific performance

A agreed to sell an old painting to B for Rs. 500,000. Subsequently, A
refused to sell the painting. Here, B may file suit against A for the specific
performance of the contract.
A agrees to sell two rare Pakistani Handmade carpets to B for Rs. 2 million.
In case of breach by A, B may compel A to perform the contract specifically,
because there is no standard for ascertaining the actual damages which
would be caused by the non-performance by A.
Injunction
Suit for injunction is also an equitable remedy demanding courts 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: Injunction
A agreed to play cricket for Apple Cricket Club during the contract period of 3
years. During the contract period, A made a contract with Orange Cricket
Club and refused to play cricket for Apple Cricket Club. Here, A could be
restrained by injunction from doing so.

Business Law
 X, a film actress, agreed to act exclusively for Y for a year and for no one
else. During the year she contracted to act for Z. Here, she could be
restrained by injunction from doing so.
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.
This has been discussed in detail in Chapter 10.
Example: Quantum Meruit

 C as owner of a magazine engaged P 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 P could claim
payment for the part already published.
 A, a singer contracts with B, the manager of a theatre, to sing at his theatre
for two nights in every week during the next two months, and B engages to
pay her Rs 100 for each night's performance. On the sixth night, A wilfully
absents herself from the theatre, and B, in consequence rescinds the
contract. B must pay A for the five nights on which she had sung.
1.3 Kinds of damages

Following are the different kinds of damages:
Ordinary Damages
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: [Section 73]
 The aggrieved party must suffer by breach of contract, and
 The damage must be a direct consequence of the breach of contract
Example: Ordinary Damages

On 1st December; X contracted to sell and deliver 50 tons of wheat @ Rs. 8,000 per
ton to Y on 1st January. On 20th December y, afterwards, contracted to sell those
goods to Z at Rs 10,000 per ton. X failed to deliver goods on 1st January when the
price of the wheat was Rs 9,500 per ton. Y is entitled to recover Rs 75,000 [i.e. (Rs
9,500 - Rs 8,000) x50). Y is not entitled to recover Rs 1,00,000 as profit which
would have arisen to Y from the sale to Z because the profit is the indirect
consequence of the breach of contract.

Special damages
Special damages can be recovered for the loss which the parties [Section 73]
 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.
Example: Special Damages

 A, a builder; contracts to erect and finish a house by the first of January, in
order that B may give possession of it at that time to C, to whom B has
contracted to let it. A is informed of the contract between B and C. A builds
the house so badly that, before the first of January it falls down, and has to
be rebuilt by B, who, in consequence, loses the rent which he was to have
received from C, and is obliged to make compensation to C for the breach of
his contract. A must make compensation to B for the cost of rebuilding the
house, for the rent lost, and for the compensation made to C.
 A delivers to B, a common carrier; a machine to be delivered without delay, to
A's mill informing that his mill has stopped for want of the machine. B
unreasonably delays the delivery of machine, and A, in consequence, loses a
profitable contract with the Government. A is entitled to receive from B, 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.
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.
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

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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.
Example: Damages for inconvenience and uneasiness

H 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.
Liquidated damages
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. [Section 74]
Penalty
If a contract states that a particular sum is to be paid on breach of the contract
and [Section 74]
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.
Stipulation for Interest

Two parties may agree to give a specific rate of interest in case of breach of
contract. [Section 74]
Forfeiture of Security Deposit (or Earnest Money)

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. [Section 74]
1.4 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.
1.5 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.
Example: 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.

Business Law
2 CHAPTER REVIEW
Chapter review
 Discuss the various remedies available to a party in case of breach of a contract
 Explain the circumstances when rescission is granted by court
 Explain the circumstances when specific performance is granted by court
 Understand the different kinds of damages

CHAPTER
Business Law
14
Indemnity and guarantee
Contents
1 Contract of indemnity
2 Contract of guarantee
3 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Indemnity and guarantee
demonstrate knowledge of laws relating to indemnity and guarantee.
LO 2.1.1 Discuss the provisions of Act with respect to indemnity and guarantee
Exam context
 Define a contract of indemnity
 Discuss the rights of indemnity holder
 Define contract of guarantee and its types
 Discuss the nature and extent of surety’s liability
 Understand the rights of surety
 Explain the various ways in which the surety is discharged

Act Chapters

Section A: Mercantile Law - Chapter 14: Indemnity and guarantee
1 CONTRACT OF INDEMNITY
Section overview
 Definition of contract of indemnity

 Parties in a contract of indemnity
 Rights of indemnity holder
 Time of commencement of the indemnifier’s liability
1.1 Definition of 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.
1.2 Parties in a contract of indemnity
Indemnifier (Promisor)
The indemnifier (or promisor) is the person who promises to make good the loss.
Indemnified / Indemnity holder (Promisee)

The indemnified (also referred to as the indemnity holder or promisee) is the
person whose loss is to be made good.
Example: Indemnified / Indemnity holder (Promisee)

A contracts to indemnify B against the consequences of any proceedings which C
may take against B in respect of a certain sum of Rs 200/-. This is a contract of
Indemnity.
In the above example A is the indemnifier and B is the indemnity holder.
1.3 Rights of indemnity holder

According to Section 125 of Contract Act, 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 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.

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1.4 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: Time of commencement of the indemnifier’s liability

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

2 CONTRACT OF GUARANTEE
Section overview
 Definition of contract of guarantee

 Parties in a contract of guarantee
 Essentials of a contract of guarantee
 Kinds of guarantee
 Revocation of a continuing guarantee
 Nature of surety’s liability
 Rights of surety
 Discharge of surety
 Circumstances where surety is not discharged
 Difference between contract of indemnity and contract of guarantee
2.1 Definition of contract of guarantee
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.
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. [Section 127]

B requests A to sell and deliver to him goods on credit. A agrees to do so, provided
C will guarantee the payment of the price of the goods. C promises to guarantee
the payment in consideration of A’s promise to deliver the goods. This is sufficient
2.2 Parties in a contract of guarantee
Principal debtor
The person in respect of whose default the guarantee is given. [Section 126]
Creditor
The person to whom guarantee is given. [Section 126]
Surety
The person who gives guarantee. [Section 126]

A and his friend B enter a shop and A says to Z “Supply the goods required by B and
if he does not pay you, I will.” It is a contract of guarantee.

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2.3 Essentials of a contract of guarantee

The essentials of a contract of guarantee are shown below:
Tripartite agreement
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
Consent of parties
Consent is an essential for all the contracts similarly all three must have
consented in a contract of guarantee.
Existence of a debt
A contract of guarantee requires an existing debt or a promise whose
performance is guaranteed which is enforceable at law. If no such liability exists
then there cannot be a contract of guarantee. The principal debtor can be a
minor; in this case surety will be liable personally.
Essentials of a contract
All the essentials required in a contract must exist in a contract of guarantee.

Examples: Essentials of a contract

 B requests A to sell and deliver to him goods on credit. A agrees to do so,
provided C will guarantee the payment of the price of the goods. C promises
to guarantee the payment in consideration of A’s promise to deliver the
goods. This is a sufficient consideration for C’s promise.
 A sells and delivers goods to B. C afterwards requests A to forbear to sue B
for the debt for a year and promises that if he does so, C will pay for them in
default of payment by B. A agrees to forbear as requested. This is a sufficient
 A sells and delivers goods to B. C, afterwards, without consideration, agrees
to pay for them in default of B. The agreement is void.
Misrepresentation
According to Section 142 of Contract Act, a guarantee must not be obtained by
misrepresentation.
Fraud
According to Section 143 of Contract Act, a guarantee must not be obtained by
fraud.
2.4 Kinds of guarantee

Guarantee may be classified under the following two categories:
1. Specific guarantee
2. Continuing guarantee
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: Specific guarantee

A guarantees payment to B of the price of the five bags of flour to be delivered by B
to C and to be paid for in 3 months. B delivers five bags to C, C pays for them. This
is a contract of specific guarantee.
Continuing guarantee
According to Section 129 of Contract Act, 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: Continuing guarantee

A, in consideration that B will employ C in collecting the rent of B’s zamindari
promises B to be responsible, to the amount of Rs. 5,000, for the due collection
and payment by C of those rents. This is a continuing guarantee.

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2.5 Revocation of a continuing guarantee

A continuing guarantee can be revoked in the following ways:
Notice
A continuing guarantee may at any time be revoked by the surety as to future
transactions, by notice to the creditor. [Section 130]
Examples: Notice
A, in consideration of B’s discounting, at A’s request, bills of exchange for C,
guarantees to B, for 12 months, the due payment of all such bills to the
extent of Rs. 5,000. B discounts bills for C to the extent of Rs. 2,000.
Afterwards at the end of three months. A revokes the guarantee. This
revocation discharges A from all the liability to B for any subsequent
discount. But A is liable to B for Rs. 2,000 on default of C.
A guarantees to B to the extent of Rs. 10,000, that C shall pay all the bills
that B shall draw upon him. B draws upon C, C accepts the bill. A gives notice
of revocation, C dishonours the bill at maturity. A is liable upon his guarantee.
Death of surety
The death of the surety operates, in the absence of any contract to the contrary,
as a revocation of a continuing guarantee regarding future transactions. [Section
131]
Other modes of revocation of continuing guarantee

A continuing guarantee is also revoked in following ways:
novation [Section 62]
alteration [Section 133]
release or discharge of the principal debtor by creditor [Section 134]
compounding of creditor with the principal debtor [Section 135]
creditor’s act or omission impairing surety eventual remedy [Section 139]
loss of security [Section 141]
2.6 Nature of surety’s liability
Nature of surety’s liability - it is co-extensive

The liability of a surety is equal to that of the principal debtor unless otherwise
agreed. [Section 128]
Examples: Nature of surety’s liability – it is co-extensive

A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is
dishonoured by C, A is liable not only for the amount of the bill, but also for any
interest and charges which may have become due on it.
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.

Initiation 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.
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.
2.7 Rights of surety

The rights of surety are shown below:
Rights of surety
Against /
Against / towards Against / towards
towards
principal debtor creditor
co-sureties
Rigth to
Right to Right to Right to Right to
claim
subrogation indemnity securities claim set off
contribution
Rights against / towards principal debtor
Right to subrogation
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. [Section 140]
Right to indemnity
In every contract of guarantee there is an implied promise by the principal debtor
to indemnify the surety; and the surety is entitled to recover from the principal
debtor all payments properly made under the 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. [Section 145]

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Examples: Right to indemnity

 B is indebted to C, and A is surety for the debt. C demands payment from A
and, on his refusal, sues him for the amount. A 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 B the amount paid by him for costs, as
well as the principal debt.
 C lends B a sum of money, and A at the requests of B accepts a bill of
exchange drawn by B upon A to acute the amount. C the holder of the bill
demands payment of it from A, and on A’s refusal to pay sues him upon the
bill. A, not having reasonable grounds for so doing, defends the suit, and has
to pay the amount of the bill and costs. He can recover from B the amount of
bill, but not the sum paid for costs, as there was no real ground for defending
the action.
Rights against / towards creditor
Rights to securities
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 is entered into,
whether the surety knows of the existence of such security or not and if the
creditor loses or without the consent of the surety parts with such security, the
surety is discharged to the extent of the value of the security. [Section 141]
Examples: Right to securities

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

The surety has a right to claim set off if any which the principal debtor had
against the creditor.

Rights against co-sureties
Right to claim contribution

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: [Section 146 & 147]
 In the absence of any contract, all co-sureties are liable to contribute
equally in case of default by principal debtor.
Examples: Right to claim contribution

 A, B and C are sureties to D for a sum of Rs.3,000 lend to E. E makes
default in payment. A, B and C are liable, as between themselves to
pay Rs.1,000 each.
 A, B and C are sureties to D for a sum of Rs.1,000 lent to E, and there
is a contract between A, Band C that A is to be responsible to the
extent of one-quarter, B to the extent of one quarter, and C to the
extent of one half. E makes default in payment. As between the
sureties, A is liable to pay Rs.250, B Rs.250 and C Rs.500.
 If co-sureties have agreed to guarantee different sums than co-sureties are

liable to contribute equally, subject to the maximum amount guaranteed by
each one.
Examples: Guarantee of different sums

 A, B and C as sureties for D, enter into three separate bonds, of
different amounts - A for Rs.10,000, B for Rs.20,000 and C for
Rs.40,000, conditional for D’s duly accounting to E.
 D makes default to the extent of Rs. 30,000 than A, B and C are
each liable to pay Rs. 10,000.
 D makes a default to the extent of Rs. 40,000 than A is liable to
pay Rs. 10,000 and B and C are liable to pay Rs. 15,000 each.
 D makes a default to the extent of Rs. 70,000 than A, B and C
are liable to pay full penalty of his bond.
 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. [Section 138]

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2.8 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 surety can be discharged by giving notice to the creditor in case of continuing
guarantee, as to future transactions, by notice to the creditor. [Section 130]
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 of the surety, even if
the creditor has no notice of the death. [Section 131]
Novation
Novation means the substitution of a new contract of guarantee for an old one.
The new contract extinguishes the rights and obligations that were in effect under
the old contract. [Section 62]
Discharge of surety by the conduct of the creditor
Alteration
If an alteration is made without the consent of the surety then the surety is
discharged as to the transactions, subsequent to the alteration. [Section 133]
Examples: Alteration
 A becomes surety to C for B's conduct as a manager in C's bank.
Afterwards, B and C contract, without A's consent, that B's salary shall
be raised, and that he shall become liable for one-fourth of the losses
on overdrafts. B allows a customer to overdraw, and the bank loses a
sum of money. A is discharged from his surety ship by the variance
made without his consent, and is not liable to make good this loss.
 C agrees to appoint B as his clerk to sell goods at a yearly salary, upon
A's becoming surety to C for B's duly accounting for money received by
him as such clerk. Afterwards, without A's knowledge or consent, C
and B agree that B should be paid by a commission on the goods sold
by him and not by a fixed salary. A is not liable for subsequent
misconduct of B.
 C contracts to lend B Rs. 5,000 on the first March. A guarantees
repayment. C pays Rs. 5,000 to B on the first January. A is discharged
from his liability as the contract has been varied in as much as C might
sue B for the money before the first of March.
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]

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Examples: Release of principal debtor

 A gives guarantee to C for goods to be supplied by C to B. C supplies
goods to B, and afterwards B becomes embarrassed and contracts
with his creditors (including C's) to assign to them his property in
consideration of their releasing him from their demands. Here, B is
released from his debt by the contract with C, and A is discharged from
his surety ship.
 A contracts with B to grow a crop of wheat on A's land and to deliver it
to B at a fixed rate, and C guarantees A's performance of this contract.
B diverts a stream of water which is necessary for irrigation of A's land,
and thereby prevents him from raising the wheat. C is no longer liable
for his guarantee.
 A contracts with B for a fixed price to build a house for A within a
stipulated time, B supplying the necessary timber. C guarantees A's
performance of the contract. B omits to supply the timber. C is
discharged from his surety ship.
Arrangement
A contract between the creditor and the principal debtor, by which the creditor
makes a competition with, or promises to give time to, or not to sue, the principal
debtor, discharges the surety, unless the surety assents to such contract.
[Section 135]
Discharge of surety by invalidation of contract
Misrepresentation/ Fraud
Any guarantee which has been obtained by means of misrepresentation made by
the creditor or keeping silence as to material circumstances, or with his
knowledge and assent, concerning a material part of the transaction, is invalid.
[Section 142 & 143]
Examples: Fraud
A engages B as a clerk to collect money for him. B fails to account for some
of his receipts and A, in consequence calls upon C to furnish security for his
duly accounting. C gives guarantee for B's duly account. A does not inform C
about B’s previous conduct. B, afterwards, makes default. C is not liable
because the guarantee was obtained by concealment of facts.
Act or omission
If the creditor does any act which is inconsistent with the rights of the surety, or
omits to do any act which his duty to the surety requires him to do, and the
eventual remedy of the surety himself against the principal debtor is impaired, the
surety is discharged. [Section 139]

Examples: Act or omission

 B contracts to build a ship for C for a given sum, to be paid by
instalments as the work reaches certain stage. A becomes surety to C for
B's due performance of the contract. C, without the knowledge of A, pre-
pays to B the last two instalments. A is discharged by this prepayment.
 C lends money to B on the security of a joint and several promissory
note, made in C's favour by B, and by A as surety for B, together with a
bill of sale of B's furniture, which gives power to C to sell the furniture,
and apply the proceeds in discharge of the note. Subsequently, C sells
the furniture, but, owing to his misconduct and wilful negligence, only a
small price is realized. A is discharged from liability on the note.
Failure of co-surety to join surety

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 other person does not join. [Section 144]
2.9 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. [Section 138]
2.10 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 There are three parties principal
and indemnity holder. debtor, creditor and surety.
2 Number of contracts
There is only one contract. There are three contracts.
3 Object
The indemnifier undertakes to The surety undertakes for the
save the indemnity holder from payment of debts of principal debtor
any loss. in case of his default.
4 Nature of liability
The liability of indemnifier is The liability of surety is secondary
primary and unconditional. and conditional and co-extensive.

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S.no Contract of indemnity Contract of guarantee

5 Commencement of liability
The liability arises only on the The liability arises only on the non-
happening of a contingency. performance of an existing promise
or non-payment of an existing debt.
6 Right to sue
The indemnifier cannot sue a A surety, on discharging the debt of
third party in his own name principal debtor, can sue the
because of absence of privity of principal debtor in his own name.
contract between him and third
party.

3 CHAPTER REVIEW
Chapter review
 Define a contract of indemnity
 Discuss the rights of indemnity holder
 Define contract of guarantee and its types
 Discuss the nature and extent of surety’s liability
 Understand the rights of surety
 Explain the various ways in which the surety is discharged

Business Law

CHAPTER
Business Law
15
Bailment and pledge
Contents
1 Nature of bailment
2 Duties and rights of bailor and bailee
3 Termination
4 Finder of goods
5 Pledge
6 Chapter review

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INTRODUCTION
Learning outcomes
Bailment and pledge

demonstrate knowledge of laws relating to contract of bailment and
pledge.
LO 2.1.1 Discuss the provisions of Act with respect to contract of bailment and pledge
Exam context
 Define bailment and its characteristics
 State the rights and duties of bailor and bailee
 Describe briefly the various ways by which an bailment may be terminated
 Explain the rights and obligations of a finder of goods
 Define pledge and discuss the circumstances where pledge can be made by non-
owners
 Differentiate between pledge and bailment
Act Chapters

Section A: Mercantile Law - Chapter 15: Bailment and pledge
1 NATURE OF BAILMENT
Section overview
 Meaning of bailment
 Essential elements of bailment
 Types of bailment
1.1 Meaning of bailment

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. [Section 148]
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: bailment
 X delivers a piece of cloth to Y, a tailor, to be stitched into a suit. There is a
contract of bailment between X and Y.
 A lends a laptop to B to be returned after the examination. There is a contract
of bailment between A and B.
 An insurance company places a damaged insured car of X in possession of Y,
a repairer. X is the bailor, the insurance company is the bailee, and Y is the
sub-bailee.

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1.2 Essential elements of bailment

The essential elements of bailment are shown below:
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.
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.

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.
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.
1.3 Types of bailment

The various types of bailment are shown below:
Types of bailment
On the basis of On the basis

reward of benefit
Bailment for Bailment for Bailment for

Non- the the the mutual
Gratuitous
gratuitous exclusive exclusive benefit of
Bailment
Bailment benefit of benefit of bailor and
bailor bailee bailee
Bailment on the basis of reward
Type Meaning
Gratuitous It is a contract of bailment where no consideration passes
bailment between the bailor and the bailee.
Non-gratuitous It is a contract of bailment where some consideration
bailment passes between the bailor and the bailee.

Zaheer lends an IPAD to Imran for his work without any charge.
Example: Non-gratuitous bailment

A hires a car from B.

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Bailment on the basis of benefit
Type Meaning
Bailment for the A contract of bailment which is executed only for the
exclusive benefit of benefit of the bailor.
bailor
Bailment for the A contract of bailment which is executed only for the
exclusive benefit of benefit of the bailee.
bailee
Bailment for the A contract of bailment which is executed for the
mutual benefit of mutual benefit of the bailor and the bailee.
bailor & bailee
Example: Bailment for the exclusive benefit of bailor

X who is going out of station to attend a conference delivers his tablet to Y for
proper care.
Example: Bailment for the exclusive benefit of bailee

Zaheer lends an iPhone to Imran for a day without any charge.
Example: Bailment for the mutual benefit of bailor & bailee

A hires a car from B.
There can be two more types of bailment:

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.
Example: Sub-Bailment
An insurance company places a damaged insured car of A in possession of R, a
repairer. A is the bailor, the insurance company is the bailee, and R is the sub-
bailee.
Pledge/Pawn
Term Meaning
Pledge The bailment of goods as security for payment of a debt or
performance of a promise is called pledge or pawn
Pawnor The bailor in this case is called the pawnor / pedgor
Pawnee The bailee in this case is called the pawnee / pledgee

2 DUTIES AND RIGHTS OF BAILOR AND BAILEE
Section overview
 Duties of bailor
 Duties of bailee
 Rights of bailor
 Rights of bailee
The table below shows the duties and rights of bailor and bailee:

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These are explained below:
2.1 Duties of bailor

Duty to disclose faults
According to Section 151 of Contract Act:
Gratuitous Bailment Non-gratuitous Bailment
The bailor is bound to disclose to the If the bailee suffers any loss due
bailee faults in the goods bailed: to any fault in the goods, the
 Of which the bailor is aware and bailor is liable to bailee for such
loss whether he knows those
 Which materially interfere with the faults or not.
use of them or expose the bailee to
extraordinary risks
If the bailor does not disclose such faults
and the bailee undergoes some loss due
to such faults, the bailor is liable to bailee
for such loss.

A lends a horse, which he knows to be vicious, to B. He does not disclose that the
horse is vicious. The horse runs away and B is thrown and injured. A is responsible
to B for damage sustained.
Example: Non-gratuitous bailment

A hires a car of B. The car is unsafe, though B is not aware of it, and is injured. B is
responsible to A for the injury.
Duty to bear expenses
Gratuitous bailment Non-gratuitous bailment
In case of gratuitous bailment it is the In non-gratuitous bailment it is the
duty of the bailor to indemnify bailee duty of the bailor to indemnify bailee
for all the necessary expenses which for all the extra ordinary expenses
the bailee has incurred for the which the bailee has incurred for the
purpose of bailment. purpose of bailment.
Example: Gratuitous Bailment

A leaves his car with B, a friend, for safe custody for six months. B has to pay Rs.
1,000 per month to the night watchman for keeping a watch over the car. It is the
duty of A to pay B the necessary expenses incurred by B.
Example: Non-gratuitous Bailment

A lends his horse to B, a friend, for two days. The feeding charges are to be paid
by B. But if the horse meets with an accident A will have to repay B medical
expenses incurred by B

Duty to indemnify bailee for loss in case of early termination of gratuitous bailment
In case of gratuitous bailment the bailor can terminate bailment even if it is made
for a fixed time or purpose. In such case bailor is liable to compensate bailee for
any loss in excess of benefit due to early termination. [Section 159]
Example: Duty to indemnify bailee for loss in case of early termination of

gratuitous bailment
A lends an old discharged IPhone to B gratuitously for three months. B incurs
Rs.12,000 on its repairs. If A asks for the return of the IPhone after one month, he
will have to compensate B for expenses incurred by B in excess of the benefit
derived by him.
Duty to receive back the goods
Bailor is bound to receive back the goods when the purpose is completed or on
expiry of period. In case the bailor refuses to accept the goods then he is liable to
pay the charges incurred by bailee for the safe custody of goods. [Section 164]
Example: Duty to receive back the goods

A lent an X-box to B for five days. On the expiry of five days, A refused to receive
back the x-box but two days thereafter, he agreed to receive back the X-box. During
these two days, B incurred Rs. 1,000 as software update charges. A must repay Rs.
1,000 to B.
Duty to indemnify the bailee
The bailor is liable to indemnify bailee for any loss arising due to defective title of
bailor. [Section 164]
Example: Duty to indemnify the bailee

B asks A, his friend to give him car for one hour. A, instead of his own car delivers
Z’s car to B. While B was riding, Z catches B and hands him over to the police
custody. B is entitled to recover from A all costs which he had to incur in getting out
of this situation.
Duty to bear the risk of loss
If the bailee has taken reasonable steps to protect the goods then the bailor is
bound to bear the risk of loss of goods bailed. [Section 152]
2.2 Duties of bailee

Duty to take care of the goods bailed
In all cases of bailment, the bailee is bound to take as much care of the goods
bailed to him as a man of ordinary prudence would, under similar circumstances,
take of his own goods of the same bulk, quality and value as the goods bailed.
[Section 151 & 152]
Example: Duty to take care of the goods bailed

Imran entered a restaurant for dining. His coat was taken by a waiter who hung it
on a hook behind Imran. When Imran rose to leave, the coat was gone. The
proprietor of the restaurant will be liable for the loss.

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Duty not to make any unauthorized use of goods

If the bailee uses the goods bailed in a manner which is not according to the
terms of the contract, he shall be liable to compensate bailor for any loss arising
due to inconsistent use of goods bailed. [Section 154]
Example: Duty not to make any unauthorized use of goods

A lends a laptop to B for his use only. B allows C, a member of his family, to use
the laptop. C uses with care, but the laptop accidently falls and its LCD braked. B
is liable to make compensation to A for the injury caused to the laptop.
Duty not to mix the goods bailed with his own goods
A bailee is bound to keep the goods bailed separately. He must take prior
consent from bailor to mix with his own goods. [Section 155 to 157]
Mixture without bailor’s consent
Goods being separable Goods being inseparable

If the bailee so mixes without the If the bailee so mixes without the
consent of the bailor and the goods consent of the bailor and the goods
can be separated or divided, the cannot be separated then the bailee is
bailee is liable for the: liable to the bailee for the loss of the
 Expenses of separation or goods.
division
Any damage arising from the mixture.
Example: Mixture without bailor’s consent

Goods being separable
A bails 100 bales of cotton marked with a particular mark to B. B, without A’s
consent, mixes the 100 bales with other bales of his own, bearing a different
mark. A is entitled to have his 100 bales returned and B is bound to bear all the
expenses incurred in the separation of the bales, and any other incidental
charges.
Goods being inseparable
A bails a bag of farm wheat worth Rs. 550 to B. B without A’s consent, mixes the
wheat with imported wheat of his own, worth only Rs. 250 a bag. B must
compensate A for the loss of his wheat.
If the goods of the bailor get mixed up with the like goods of the bailee, by
inadvertence of the bailee or accident or by the act of an unauthorized third party,
the mixture belongs to the bailor and the bailee in proportion to their shares.
Duty not to set up an adverse title
The bailee is not the legal owner of the goods bailed but holds the goods on
behalf of the bailor. He cannot deny the right of the bailor to bail the goods and
receive them back. He may however refuse to deliver goods back to the bailor if
there is an effective pressure such as a court order, not to return goods to the
bailor.

Duty to return the goods

It is the duty of the bailee to return the goods bailed without demand as soon as
the:
 Time for which they were bailed has expired or
 Purpose for which they were bailed has been accomplished
unless otherwise agreed upon.
If the bailee fails to do so, he is responsible for any loss, destruction or
deterioration of the goods from that time. [Section 160 & 161]
Example: Duty to return the goods

A delivered some CDs to B for watching. He pressed for their return, but B
neglected to return them although more than reasonable time had elapsed. A fire
accidently broke out on B, premises and the CDs were burnt. B was liable for the
loss although he was not negligent, because of his failure to deliver the CDs within
a reasonable time.
Duty to return increase
In the absence of any contract, it is the duty of the bailee to return to the bailor
any:
 increase or
 profit
if the goods are bailed. [Section 163]
Example: Duty to return increase

A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is
bound to deliver the calf as well to A.
2.3 Right of bailor

Right to claim damages in case of negligence
A bailor is entitled to claim damages if bailee has not taken reasonable care of
the goods bailed. [Section 152]
Right to terminate the contract in case of unauthorized use
A bailor is entitled to terminate the contract if the bailee without the consent of
bailor uses the goods for other purposes. [Section 153]
Right to claim compensation in case of unauthorized use
A bailor is entitled to claim compensation if the bailee without the consent of
bailor uses the goods for other purposes and any damage arise. [Section 154]
Right to claim separation of goods in case of unauthorized mixture
A bailor has a right to claim separation of goods bailed (if separable) if bailee
mixes the goods with his own goods without prior consent. [Section 156]
Right to claim compensation in case of unauthorized mixture of goods
A bailor has a right to claim compensation from bailee for any loss to the goods
bailed if bailee mixes the goods with his own goods without prior consent.
[Section 157]

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Right to demand return of goods

A bailor has a right to demand return of goods after the fulfilment of the purpose
or after the expiry period of bailment. [Section 160]
Right to claim compensation in case of unauthorized retention of goods
If the bailee does not return or deliver the goods according to the bailor’s
direction after the fulfilment of purpose or after the expiry of period of bailment,
the bailor has a right to claim compensation for any loss, destruction or
deterioration of the goods. [Section 161]
Right to demand increase
In the absence of any contract, the bailor has a right to demand any increase or
profit which may have accrued from the goods bailed. [Section 163]
2.4 Right of bailee

Right to claim damages
If the bailor does not disclose the fault If the bailee undergoes any loss due
in the goods of which he is aware and to any fault in the goods, the bailee
the bailee suffers some loss due to has a right to claim damages.
such faults, the bailee has a right to
claim damages.
Right to claim reimbursement of expenses
In case of gratuitous bailment the In case of non-gratuitous bailment the
bailee has a right to claim bailee has a right to claim
indemnification of all the necessary indemnification of all the extra
expenses which he has already ordinary expenses which the bailee
incurred for the purpose of bailment. has already incurred for the purpose
of bailment.
Right to be indemnified in case of early termination of gratuitous bailment

In case of gratuitous bailment the bailee has a right to claim indemnification if the
bailor terminates the contract of bailment before the expiry of fixed period or
completion of purpose. In such case bailee has a right to claim compensation for
any loss in excess of benefit due to early termination. [Section 159]
Right to recover loss in case of bailor’s defective title
The bailee has a right to be indemnified for any loss arising due to defective title
of bailor. [Section 164]
Right to recover loss in case of bailor’s refusal to take the goods back
If the bailor refuses to take back the goods then bailee has a right to be
indemnified in case he suffers any loss. [Section 164]

Right to deliver goods in case of several joint owners

In absence of any contract to the contrary, the bailee has a right to deliver back
the goods in accordance with the instructions of one joint owner without the
consent of or other of the joint owners. [Section 165]
Bailee not responsible on re-delivery to bailor without title
If the bailor has no title to the goods, and the bailee, in good faith, delivers them
back to, or according to the directions of the bailor, the bailee is not responsible
to the owner in respect of such delivery. [Section 166]
Rights of bailor and bailee against wrong-doer
If a third person wrongfully deprive the bailee of the use or possession of the
goods bailed then the bailee may use such remedies as the owner might have
used and either the bailor or the bailee may bring a suit against the third person
for such deprivation or injury.
Whatever is obtained by way of relief or compensation is any such suit in the
above case, shall as between the bailor and the bailee, be dealt with according to
their respective interests. [Section 180 & 181]
Example: Rights of bailor and bailee against wrong doer

X delivered a TV to Y for repairs. Z forcefully takes possession of TV from Y’s shop.
In this case, either X or Y may sue Z, if Y files the suit, he shall hand over the
amount received after deducting his repair charges to X.
Right of particular lien

Where the lawful charges of the bailee in respect of the goods bailed are not
paid, he may retain the goods until he receives due remuneration for the services
he has rendered in respect to them. This right of the bailee to retain the goods is
known as ‘particular lien’.
A particular lien is available to a bailee only against those goods on which some
skill and labour have been expended by him. But if the bailee does not complete
the work within the agreed time, or a reasonable time, he cannot exercise his
right of lien. Also, if he voluntarily permits the bailor to regain possession of the
goods without payment of the charges, he cannot exercise the right of lien.
[Section 170]
Example: Right of particular lien

A delivers a rough diamond to B, a jeweller to be cut and polished which is
accordingly done. B is entitled to retain the stone till he is paid for the services he
has rendered.
A gives a piece of cloth to B, a tailor, to sew it into a coat. B promises A to deliver
the coat as soon as it is finished, and to give A three months credit for the price. B
is not entitled to retain the coat.

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3 TERMINATION
Section overview
 Termination of all contract of bailment

 Termination of gratuitous bailment
3.1 Termination of all contract of bailment

All contract of bailment are terminated in the following cases:
Automatic termination
A bailment of goods is automatically terminated on:
 Expiry of the time for which goods were bailed
 Completion of purpose for which they are bailed.
Inconsistent use of goods
When the bailment is for a specific purpose and goods bailed are used
inconsistent of the purpose for which they are bailed.
Destruction of the subject-matter
A bailment is terminated when the subject-matter of the bailment is
 destroyed, or
 by reason of a change if its nature becomes incapable of use for the
purpose of the bailment.
3.2 Termination of gratuitous bailment

Death of the bailor or bailee
On death of the bailor or bailee the gratuitous bailment is terminated.
Before the expiry of the fixed period
In case of gratuitous bailment the bailor can terminate the contract of bailment
before the expiry of fixed term or completion of purpose. In such a case, the
bailor is liable to indemnify the bailee in case the loss exceeding the benefit
derived due to early termination.

4 FINDER OF GOODS
Section overview
 Rights of finder of goods

 Duties of finder of goods
Finder of goods is the person who finds some goods which do not belong to him. If he
takes them into his custody, he becomes a bailee.
4.1 Right of finder of goods

Right to lien
The finder of goods has a right of lien over the goods found until he receives the
compensation for expense incurred by him to preserve the goods and to find the
owner but he has no right to sue the owner for any such compensation incurred
by him voluntarily. [Section 168]
Right to sue for reward
The finder can sue for any specific reward which the owner has offered for the
return of the goods. He may also retain the goods until he receives the reward.
[Section 168]
Right of sale
A finder of goods may sell the goods found if [Section 169]:
 The owner cannot with reasonable diligence be found, or
 If found, he refuses to take the goods or
 Goods will perish or lose the greater part of their value, or
 The lawful charges of the finder, in respect of the goods found, amount to
two a third of their value.
4.2 Duties of finder of goods

The finder of goods is subject to same responsibility as a bailee. The duties are
given below:
Duty to take care
The finder of goods must take reasonable care of the goods found like a person
of ordinary prudence.
Duty not to use for personal purpose
The goods found must not be used for personal purpose.
Duty not to mix with its own goods
The goods found must not be mix with his own goods.
Duty to find the owner
Subject to lien, the finder of goods must return the goods to the true owner if
found.

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5 PLEDGE
Section overview
Definition
Rights of pawnee
Rights of pawnor
Pledge by non-owners
Difference between pledge and bailment
5.1 Definition
Definition: Pledge [Section 172]

The bailment of goods as security for payment of a debt or performance of a
promise is called a pledge.
The person who delivers the goods as security for payment of a debt or
performance of a promise is called pawnor or pledgor.
The 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: Pledge
If A borrows Rs. 200,000 from B and keeps his Rolex watch as security for
payment of the debt, the bailment of watch is a pledge.
5.2 Rights of pawnee

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.
Example: Right of retainer

A 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.
ABC Bank has a right to keep laptop of A in its custody until the loan amount i.e.
Rs. 100,000 and mark up i.e. Rs. 1,000 is paid in full.
Right of retainer for other advances

It is the presumption that when the pawnee lends money to the same pawnor
after the date of the pledge the right of the retainer over the pledged goods
extends to subsequent advances also unless otherwise agreed upon. If the

goods are separately secured then such presumption will not prevail. [Section
174]
Right to extraordinary expenses

The pawnee is entitled to receive from the pawnor extraordinary expenses
incurred by him for the preservation of the goods pledged. [Section 175]
Example: Right to extra ordinary expenses

A pledged gold with B 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, B
insured the gold. At the time of repayment, B claimed the cost of insurance cover in
addition to the principal sum due and interest.
Here, the claim of B is valid as the expenses were made for the preservation of the
goods pledged.
Right against true owner, when the pawnor’s title is defective

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 the
pledge, the pawnee acquires a good title to the goods, provided he acts in good
faith and without notice of the pawnor’s defect of title.
Rights where pawnor makes default
If the person makes default in payment of the debt or performance of the promise
then the pawnee can exercise the following rights: [Section 176]
 Right to sue
The pawnee may file a suit against the pawnor 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
Example: 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.

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5.3 Rights of pawnor

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 debt
If the pawnor makes default in payment of the debt or performance of the
promise at the stipulated time, he may still redeem the goods pledged at 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. [Section 177]
Right to see
The pawnor has a right to see that the pawnee preserves the goods pledged and
properly maintains them.
Note
Other duties of pawnee and pawnor are same as duties of bailor and bailee
5.4 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.
Pledge by mercantile agent
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: [Section 178]
 The agent is in possession of the goods or documents of title to the goods
with the consent of the owner
 The agent pledges the goods while acting in the ordinary course of
business of a mercantile agent
 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 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. [Section 178A]
Example: Pledge by person in possession under voidable contract

A purchases a piano from B by fraud. A has a voidable title to the goods. Before B
rescinds the contract, A pledges the piano to C, who acted in good faith and is
ignorance of the fraud. It is a valid pledge.
Pledge by seller in possession after sale

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. [Section 30 of the Sales of Goods Act]

Example: Pledge by seller in possession after sale

A sells certain goods to B and promises to deliver the goods the next day. Before
delivery A pledges the goods with C who acts in good faith and without notice of the
prior sale to B. It will be a valid pledge.
Pledge by buyer in possession before sale

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 is respect of the goods.
The pledge of goods will be valid. [Section 30 of the Sales of Goods Act]
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.
5.5 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
payment of a debt or performance of a by one person to another for some
promise is called pledge. 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.
Name of parties
pawnor and pawnee Bailor and bailee
Purpose
Bailment is for safe custody,
The purpose of pledge is security for
transportation etc.
the performance of a specific promise,
i.e. the payment of a debt or
performance of a promise

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Pledge Bailment
Right to use
Pawnee has no right to use the goods Bailee can use if terms of bailment so
pledged. provide.
Right to sell
Pawnee can sell the goods pledged Bailee can either retain the goods or
after giving notice to the pawnor in sue the bailor for his dues.
case of default by the pawnor.

6 CHAPTER REVIEW
Chapter review
 Define bailment and its characteristics
 State the rights and duties of bailor and bailee
 Describe briefly the various ways by which an bailment may be terminated
 Explain the rights and obligations of a finder of goods
 Define pledge and discuss the circumstances where pledge can be made by non-
owners
 Differentiate between pledge and bailment

Business Law

CHAPTER
Business Law
16
Agency
Contents
1 Role of an agent
2 Rights and duties of the agent and principal
3 Irrevocable agency
4 Termination of agency
5 Undisclosed agency
6 Personal liability of an agent
7 Chapter review

Business Law
INTRODUCTION
Learning outcomes
Contract of Agency
demonstrate knowledge of laws relating to contract of agency.
LO 2.1.1 Discuss the provisions of Act with respect to contract of agency
Exam context
 Define the terms agent and principal
 Discuss the general rules of agency
 Explain the various modes by which an agency may be created
 Define the different types of authorities and explain the extent
 Discuss the extent of principal’s liability and cases where agent is personally liable
 Briefly explain the rights and duties of agent and principal
 Describe briefly the various ways by which an agency may be terminated

Act Chapters

Section A: Mercantile Law - Chapter 16: Agency
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 [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.
 When the contract is made, it is between the principal and the third party.
 Any person who is of the age of majority and who is of sound mind may
employ an agent.
 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.
 No consideration is necessary to create an agency.
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.

Business Law
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

or mercantile principal. For example, a company in Karachi might have
agent 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 It is important to be aware that company directors act as
directors and agents for their company; therefore the rules of agency
managers 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
business as agents for their partnership business. The rules of
partnership agency law therefore apply to the powers conferred on a
partner to bind the partnership to contractual agreements
and obligations.

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.
The ordinary custom of trade a sub-agent may be
employed. Thus stock exchange member brokers
generally appoint clerks to transact business on
behalf of their clients. Or:
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.

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Co-agent or A co-agent or a substituted agent is a person who is

substituted agent named by the agent, on an express or implied authority
from the principal, to act for the principal. He is not a sub-
[Section 194]
agent but an agent of the principal for such act 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.
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 A co-agent works under the
control of the agent. instructions of the principal.
2 Contract
There is no contract between There is a contract between co-
sub-agent and the principal. agent and the principal.
3 Responsibility
The agent is responsible to the The agent is not responsible to the
principal for the act of the sub- principal for the act of the
agent. 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 Co-agent is not affected by the
terminated if the authority of the termination of the original agency.
agent is revoked by the principal.
5 Remuneration
Remuneration to sub-agent is Remuneration to co-agent is paid
paid by the agent. by the principal.
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 four ways in which an agency relationship, recognised in law, can be
established:
 by express appointment (by agreement)
 by ratification
 by estoppel
 by necessity.
Agency by express appointment (by agreement)

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. [Section 186]
 In many cases, the relationship is established formally, in writing. This
written agreement would be a contractual agreement between principal and
agent.
 An agency agreement may also be established by verbal agreement
(although both parties may need to provide proof of a verbal agreement in
the 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 is a form of written legal document, and it is executed by signature.)
In these 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 agreement should therefore make it clear, between the
principal and the agent, what the agent is allowed to do on behalf of the
agent (and so what he is not allowed to do).
Agency by ratification
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

Business Law
agent of the named principal, and an agency relationship is created by

ratification. (‘Ratification’ means ‘giving approval to’ or ‘giving validity to’
something.) [Section 196]
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 of the act.
 A contractual relationship is established between the ratifier and the third
party.
Requisites of valid ratification

Following are the requisites for a valid ratification: [Section 198 to 200]
 An act to get ratified should be done on behalf of the person who wants to
ratify it.
ratifier must be in existence at the time when the contract is entered into
and also at the time of ratification.
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 result in third party to damages.
 Ratification must be made within a reasonable time, what is the reasonable
time is a question of facts.
Agency by estoppel
‘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. [Section 237]

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.
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.
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.

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1.6 Authority of an agent
Agent’s authority and the power to bind the principal

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.
[Section 188]
Example: Agent’s authority and the power to bind the principal

An agent A is acting on behalf of a principal P. He enters into a contract with
another party T, stating that he is acting as agent for P. However, A has actually
acted outside his authority. P refuses to carry out the terms of the contract. In this
situation, the agent A would be liable to both the third party T 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
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. [Section 186]
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.
Implied authority
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. [Section 187]
Example: 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)

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. [Section 188]

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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.
Duty to follow instructions

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. [Section 211]
Duty to reasonable carefulness and proficiency

An agent should conduct the business of agency with reasonable carefulness
and proficiency. [Section 212]
Duty to maintain and render accounts

An agent should render true accounts to the principal when demanded. [Section
213]
Duty to communicate
An agent should communicate to the principal in cases requiring principal’s
instructions / directions. [Section 214]
Duty not to deal personally

An agent must not deal in his own account in the course of agency without
getting prior approval from principal. [Section 215 & 216]
Duty to pay sums received

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. [Section 218]

Duty in case of principal’s death or insanity

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. [Section 209]
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.
Duty not to make secret profit

An agent must not secure secret profit from agency without getting prior consent
from principal. [Section 217 & 218]
Duty not to delegate authority

An agent is not entitled to delegate his authority to another person without the
consent of his principal or unless under certain circumstances. [Section 190]
Duty in selecting sub-agent and substituted agent

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. [Section 195]
Duty in case of emergency

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. [Section 189]
2.2 Rights of agent

An agent has the following rights against the principal:
Right to receive remuneration

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. [Section 219 & 220]
Example: Right to receive remuneration

 A 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.

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Right of lien
Subject to contract to contract 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. [Section 221]
Right of retainer
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. [Section 217]
Right of indemnify for lawful acts

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. [Section 222]
Example: Right of indemnify for lawful acts

A, an agent refused to deliver goods of T a third party, at the instructions of B
(Principal). T sued A for the goods to which A incurred expenses in defending the
suit. A 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. [Section 225]
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.
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

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.
[Section 222]
Duty to indemnify against consequences of acts done in good faith

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. [Section 223]
Duty to compensate
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. [Section 225]
Duty to pay
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.
[Section 219 & 220]
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
The principal can revoke the authority given to his agent except in case of
irrevocable agency or where authority has been exercised. [Section 203]
Right in case of departure from direction

Where an agent conducts the business of agency otherwise than the instructions
of the principal than the principal: [Section 211]
 must be compensated by the agent for any loss sustained
 is entitled to profit (if any) that accrues from the transaction.
Right in case of misconduct

The principal is entitled to compensation for any loss which is the direct
consequence of agent’s [Section 212]
 neglect
 want of skill or
 misconduct.
Right to accounts
It is the right of the principal that proper accounts are provided to him by the
agent when he demands. [Section 213]
Right to repudiate
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. [Section 215]
Right to claim benefit

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. [Section 216]

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Right to refuse remuneration

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. [Section 220]

3 IRREVOCABLE AGENCY
Section overview
 Agency coupled with interest

 Revocation would cause the agent personal loss
 Authority partly exercised
When an agency cannot be terminated or put an end to by the principal, it said to be an

irrevocable agency.
3.1 Agency coupled with interest

Where the agent has himself an interest in the subject-matter of agency, the
agency is said to be coupled with interest. Such an agency is created with the
object of protecting or securing any interest of the agent.
Such agency cannot be terminated by the
 Death or
 Unsoundness of mind or
 Insolvency
of the principal.
However, it may be revoked by the principal for the agent’s misconduct in the
performance of duties. Such agency may be revoked only if the contract of
agency contains an express provision for the revocation of agency. [Section 202]
Example: Agency is coupled with interest

A gives authority to B to sell A's car and to pay himself, out of the proceeds, the
debts due to him from A. A cannot revoke this authority, nor can it be terminated by
his insanity or death.
3.2 Revocation would cause the agent personal loss

Where an agent, while acting in the course of business of agency, carries a
transaction in his own name he is personally liable to the third party, unless and
until the adventure is completed.
Example: Revocation would cause the agent personal loss

A authorize B to buy 10,000 bales of cotton on account of A, and to pay for it out of
A's money remaining in B's hands. B buys 10,000 bales of cotton in his own name
so as to make himself personally liable for the price. A cannot revoke B's authority
so far as regards payment for the cotton.
3.3 Authority partly exercised

If an agent has exercised his authority partly then the authority of the agent to the
extent of acts and obligations arising from acts already done cannot be revoked.
[Section 204]

Business Law
Example: Authority partly exercised

A authorizes B to buy 10,000 bales of cotton on account of A, and to pay for it out
of A's money remaining in B's hands. B buys 10,000 bales of cotton in A's name
and so as not to render himself personally liable for the price. A cannot revoke B's
authority so far as regards buying the cotton but can revoke B's authority to pay for
the cotton.

4 TERMINATION OF AGENCY
Section overview
 Termination by acts if parties

 Termination by operation of law
Agency can be terminated in the following ways:
4.1 Termination by act of parties
Mutual agreement
A contract of agency can be terminated at any time by mutual agreement of
principal and agent.
Revocation by the principal

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. [Section 205 to 207]
 Compensation
Where there is an express or implied contract that the agency should be
continued for any period of time the principal must make compensation to
the agent for revocation of the agency without sufficient cause.
 Reasonable notice
Reasonable notice must be given of revocation of agency where agency is
for a fixed period of time otherwise the damage thereby resulting to the
agent must be compensated by the principal to the agent.
 Express or implied
Revocation may be expressed or may be implied by the conduct of the
principal.
 Termination
The termination of the authority of an agent takes effect:
 As regards to the agent from the time when it becomes known to him
 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 termination
The agent would be entitled to indemnity for acts done and to receive
remuneration for the period before termination.

Business Law
Renunciation by the agent

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. [Section 205 to 207]
 Compensation
Where there is an express or implied contract that the agency should be
continued for any period of time the agent must make compensation to the
principal for renunciation of the agency without sufficient cause.
 Reasonable notice
Reasonable notice must be given of renunciation of agency where agency
is for a fixed period of time otherwise the damage thereby resulting to the
principal must be compensated by the agent to the principal.
 Express or implied
Renunciation may be expressed or may be implied by the conduct of the
agent.
4.2 Termination by operation of law
Completion of business
An agency is automatically terminated when its business is completed. [Section
201]
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.
Death of the principal or agent

Unless the agency is irrevocable, a contract of agency is terminated on the death
of the principal or agent. [Section 201]
Insanity of the principal or agent

Unless the agency is irrevocable, a contract of agency is terminated on the
insanity of the principal or agent. [Section 201]
Insolvency of the principal
An agency is also terminated by the insolvency of the principal. [Section 201]
Destruction of subject matter

An agency is terminated automatically due to destruction of the subject-matter for
which it was created.
On winding up of company
An agency is automatically terminated when the principal or agent is a company
and the company is wound up.
Principal or agent becoming an alien enemy

When the agent or principal becomes an alien enemy the contract of agency is
terminated. [Section 208]

5 UNDISCLOSED AGENCY
Section overview
 Meaning of undisclosed agency

 Position of an agent
 Position of third party
 Position of principal
5.1 Meaning of undisclosed agency

Where an agent while acting in the course of business of agency
 does not disclose at the time of formation of contract the existence of his
 principal or
 representative character and
 enters into the contract with third party in his own name
this is called undisclosed agency. [Section 231]
5.2 Position of agent

As the agent has entered into a contract in his own name his position is exactly
as that of a contracting party. The agent is bound by the contract. He may be
sued on it and he has the right to sue the third party.
5.3 Position of third party

The position of third party is exactly that of a contracting party. On discovering
about the existence of agency, the third party contracting with the agent may
seek his remedy against either:
 the agent or
 the principal or
 both of them.
Example: Position of third party

A enters into contract with B to sell him 100 cars and afterwards discovers that B
was acting as an agent for C. A may sue either B or C, or both for the price of
the cars.
5.4 Position of principal

As the agent was acting in the course of business of agency the principal may be
allowed to intervene in the contract provided the following requirements are
fulfilled:
Consent of third party

If the principal discloses himself before the contract is completed:
 the other contracting party may refuse to fulfil the contract

Business Law
 if he can show that he would not have entered into the contract if he had
known
 who was the principal in the contract or
 that the agent was not principal.
Example: Consent of third party

A employed B to bring a theatre ticket for him. A was banned in entering the
theatre and if A would have collected the ticket himself the management would
have refused to give the ticket. In such a case the theatre management may
subsequently refuse A to enter the theatre.
Terms unchanged
The terms of the contract between the agent and the other contracting party will
remain unchanged if the principal is allowed to intervene in the contract.

6 PERSONAL LIABILITY OF AN AGENT
Section overview
 Circumstances where agent is personally liable
6.1 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
When an agent contracts for a principal resident abroad he is presumed to be
personally liable. [Section 230]
Unnamed principal
If an agent declines to disclose the identity of his principal then he is personally
liable to the third party.
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 but cannot be sued. [Section 230]
Undisclosed Principal
Where an agent acts for an undisclosed principal and contracts in his own name
then he is personally liable to the third parties. [Section 231]
Agency coupled with interest

In case of agency coupled with interest, since the agent has himself an interest in
the property which forms the subject matter of the agency therefore the agent is
personally liable to the extent of his interest. [Section 202]
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.
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. [Section 227 & 228]
Improperly appointed sub-agent

An agent is personally liable to third parties for the acts of an improperly
appointed sub-agent. [Section 193]

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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.
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.
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.

7 CHAPTER REVIEW
Chapter review
 Define the terms agent and principal
 Discuss the general rules of agency
 Explain the various modes by which an agency may be created
 Define the different types of authorities and explain the extent
 Discuss the extent of principal’s liability and cases where agent is personally liable
 Briefly explain the rights and duties of agent and principal
 Describe briefly the various modes by which an agency may be terminated

Business Law

Business Law
CHAPTER
17
Partnership Act
Contents
1 The nature of partnership
2 Relations of partners to one another
3 Relations of partners to third parties
4 Chapter Review

Business Law
INTRODUCTION
Learning outcomes
Partnership Act 1932
demonstrate knowledge of laws relating to partnership
LO 2.2.1 Define the terms under Partnership Act, 1932
LO 2.3.1 Understand and describe the partnership relationship and its creation and
identify which mode determines existence of a partnership.
LO 2.4.1 Determine the rights and duties of partners of the firm over property of the firm
in given situations.
LO 2.5.1 Describe the relationship of partners with third parties.
LO 2.5.2 Identify the implied authority of the partner in relation to third parties, liability of
a partner for acts of the firm and liability of the firm for wrongful acts of a
partner in given situations.
LO 2.5.3 Identify the rights and liabilities of a minor admitted to the benefits of
partnership
Exam context
 Understand the concept of partnership and determine whether a group of persons has
constituted a partnership
 Explain the different types of partnerships and partners
 Explain role and relationship of partner among themselves and with outsiders
 Summarise the authority of the partner
 Describe the liabilities for acts of the firm
 Understand the status of a minor in a partnership and rules governing his rights and
liabilities

Act Chapters

Section A: Mercantile Law - Chapter 17: Partnership Act
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
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.”

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1.2 Essential elements of a partnership

The definition of partnership indicates the following essential elements in a
partnership: [Section 6]
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. But Companies Ordinance fixes the following maximum
numbers:
1. In case of a partnership firm carrying on banking business maximum
number is 10.
2. In case of a partnership firm carrying on any other business maximum
number is 20.
3. In case of a partnership firm of professional persons maximum number may
exceed 20.
If the number of partners exceeds in 1 & 2 then the partnership firm becomes an
illegal association.
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
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.
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: 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

Business Law
 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.
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.
Example: Mutual agency

A, B and C are partners in a business. D an outsider deals with the firm through A.
As between A and D, A is the principal. But as between A, B and C, A is also the
agent of B and D. As such A, B and C can all sue D. D can also sue A, B and C.
Furthermore A is accountable to B and C because he is an agent of B and C.
Mutual agency relationship in case of a firm of A, B and C
When A does an When B does an When C does an
act act act
Who is an agent A B C
Who are principals B and C A and C A and B
Note
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.
1.3 Test of partnership

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. [Section 6]
1. Association of two or more persons
2. Agreement

3. Carrying on business
4. Sharing of profits
5. Mutual agency
1.4 Types of partnership
Partnership-at-will
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. [Section 7 and 43]
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.
Particular partnership
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. [Section 8]
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.
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.

Business Law
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.
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.
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.
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 and may take active part in the conduct of the business.
Partner by estoppel or holding out

Where a person
Holds himself out as a partner or
Allows other 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. [Section 28(1)]
The holding concept is discussed in 3 section of this chapter in detail.
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 It is created by law.
alone.
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 It has limited liability i.e. liability is
liability i.e. unlimited liability. restricted to the amount of capital
5 Perpetual succession
A firm is dissolved on the death A joint stock company continues to
or insolvency of a partner. It has exist irrespective of death or
no perpetual succession. insolvency of its members or
directors.

S.no Partnership firm Joint stock company

6 Agency
A partner is an agent of the firm Directors are agent of the company.
for the purpose of business of Shareholders are not agents.
the firm.
7 Transfer of interest
A partner cannot transfer his There is no such restriction for
interest without getting consent transfer of shares.
from other partners.
8 Number of persons
Minimum two competent to Minimum one person can carry
contract persons are required single member company and and
and a maximum of 20 persons no limit on shareholders for a public
can carry partnership other than company.
banking business.
9 Management
All partners can take part in the All shareholders cannot take part in
management. the management.
1.7 Difference between a partnership firm and co-ownership

S.no Partnership firm Co-ownership
1 Formation
It is created by an agreement Co-ownership is not necessarily a
alone. result of an agreement.
2 Business
In partnership carry on business Co-ownership does not necessarily
in an essential. If there will be involve the carrying on of a business.
end of business it will ultimately
result in end of partnership firm.
3 Number of persons
Minimum two competent to No limit on maximum number of co-
contract persons are required owners.
and a maximum of 20 persons
can carry partnership other than
banking business.
4 Sharing of profit
Sharing of profit is one of the It does not involve sharing of profit.
essential elements.
5 Agency
A partner is an agent of the firm Co-owners are not agents to one
for the purpose of business of another.
the firm.
6 Transfer of interest
A partner cannot transfer his Co-owner can transfer his interest
interest without getting consent without getting consent from other
from other partners. co-owner(s).

Business Law
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.

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

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. [Section 9]
Duty to carry on business to the greatest common advantage

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.
[Section 9]
Duty to render true accounts

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. [Section 9]
Duty to provide full information

A partner must give full information to the other partners, in relation to everything
affecting the partnership. [Section 9]
Duty to indemnify for loss caused by fraud

Every partner shall indemnify means (compensate) the firm for any loss caused
to it by his fraud in the conduct of the business of the firm. [Section 10]
Duty to be liable jointly and severally – unlimited liability

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.
[Section 25]
Example: Joint and several liability

B, C and D are in partnership. Partner B 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.

Business Law
If the dispute goes to court, the supplier can either:

 sue all three partners jointly, or
 he can sue any individual partner, B, C or D. If he chooses to sue B personally,
and succeeds with his claim, B will be required to pay the supplier. It will then
be for B to obtain from his partners C and D their share of the liability that
they now owe.
Duty to act within authority

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. [Section 19]
Duty in case of emergency

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. [Section 21]
Example: Duty in case of emergency

 A, a partner receives goods at Karachi for being sent to a purchaser at
Lahore. A may sell the goods at Karachi, if the goods will not bear the journey
to Lahore without spoiling.
 X, Y and Z 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. Owing to a sudden slump
in the market, the prices crashed. One partner, 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.
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

Every partner is bound to attend diligently to his duties in the conduct of the
business. A partner is not entitled to receive remuneration for taking part in the
conduct of the business. [Section 12]
Duty to contribute to the losses

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.
[Section 13]
Duty to indemnify for wilful neglect

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. [Section 13]

Duty to use firm’s property exclusively for the firm

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. [Section 15]
Duty to account for personal profits derived

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. [Section 16(a)]
Example: 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

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.
[Section 16(b)]
Example: Duty not to compete with the business of the firm

A, B, C and D are in partnership. Without informing the other partners, D 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 D has been doing, they can require D 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

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. [Section 29]

Business Law
2.3 Rights of partner
Right to take part in the conduct of the business

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. [Section 12]
Right to be consulted
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. [Section 12]
Right to have access to the books

Every partner has a right to have access to and to inspect and copy any of the
books of the firm. [Section 12]
Right to share the profits

In the absence of a contract to the contrary every partner has a right to share
profits equally earned by the firm. [Section 13]
Right to interest on capital

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. [Section
13]
Right to interest on advances

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. [Section 13]
Right to indemnity
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. [Section 13]
Right to retire
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. [Section 32]

Right of outgoing partner to share in the subsequent profits

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. [Section 37]
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
2.4 Mutual Rights and Liabilities

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. [Section 13]
2.5 Partnership property

Subject to contract between the partners, the property of the firm includes:
[Section 14]
 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.

Business Law
Example: Partnership property

 A, B and C 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.
 A, 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.
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 (i.e. what

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
 Minors admission to the benefits of partnership
3.1 Agent of the firm

A partner is the agent of the firm for the purpose of the business of the firm.
[Section 18]
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.
Implied authority
The act of a partner done by him: [Section 19]
 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

Business Law
 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
Example: Implied Authority

 A and B are partners. A 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 A acted within his authority.
 A, 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.
Restrictions on the implied authority of a partner

Following acts are not included in the implied authority of a partner unless there
is any usage or custom of trade: [Section 19(2)]
 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.
Statutory restrictions
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.

Restrictions by partnership deed

A restriction which is specifically written in partnership deed is effective only
against the person dealing with the firm having knowledge of it. [Section 20]
Example: 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.
3.3 Liabilities of partner and firm
Liability of a partner for acts of a firm

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. [Section 25]
Example: liability of a partner for acts of a firm

B, C and D are in partnership. Partner B 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, B, C or D. If he chooses to sue B
personally, and succeeds with his claim, B will be required to pay the
supplier. It will then be for B to obtain from his partners C and D their share
of the liability that they now owe.
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, 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

Business Law
be borne by the partner committing the fraud and cannot be shared among all the
partners. [Section 26]
Example: Liability of the firm for wrongful acts of a partner

One of the partners who was an active partner in the firm, knowing that the goods
were stolen, purchased and sold them in the name of the firm. The other partner
knew nothing about this theft. In this case all the partners will be liable.
Liability for misapplication by partners

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 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. [Section 27]
Example: Liability for misapplication by partners

A, B and C are partners in an instalment sales business. A asked one of the
customer to deposit a security worth Rs. 100,000 in order to purchase goods on
instalments. Subsequently, A misappropriated the security and absconded. The
other partners will be liable for the misappropriation as security was given to A
while he was acting within his scope of his apparent authority.
Liability to indemnify for wilful neglect

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. [Section 13]
Liability to share losses

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.
[Section 13]
Liability to account for personal profits

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. [Section 16(a)]
Liability to account for profit of competing business

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.
[Section 16(b)]

Effect of admissions by a partner

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. [Section 23]
Effect of notice to an active partner

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.
[Section 24]
3.4 Holding out

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. [Section 28]
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
Indirect Representation
He must have knowingly permitted himself to be represented as a partner to the
other person.
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: Knowledge of the third party

A tells B (supplier) within the hearing of C (partner) that he (A) is a partner in
partnership firm of C. C does not object to this statement of A. Later B supplies
certain goods to A who pretends to act as partner with C. C will be liable to pay the
price. C by keeping quiet had led B to believe that A is a partner.

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Examples of applications of holding out partner

 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. [Section 35]
 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. [Section 34]
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.
3.5 Rights of transferee of a partner’s interest

A partner may transfer his interest in the firm by sale, mortgage or charge fully or
partially. [Section 29]
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.

3.6 Minor’s admission to the benefits of partnership

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. [Section 30]
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.
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.

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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.
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

4 CHAPTER REVIEW
Chapter review
 Understand the concept of partnership and determine whether a group of persons
has constituted a partnership
 Explain the different types of partnerships and partners
 Explain role and relationship of partner among themselves and with outsiders
 Summarise the authority of the partner
 Describe the liabilities for acts of the firm
 Understand the status of a minor in a partnership and rules governing his rights
and liabilities

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CHAPTER
Business Law
18
Negotiable Instruments Act
Contents
1 Meaning and characteristics of negotiable instrument
2 Promissory Note
3 Bill of Exchange
4 Cheque
5 Discharge of liability
6 Chapter review

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INTRODUCTION
Learning outcomes
Negotiable instruments Act
demonstrate knowledge of laws relating to Negotiable Instruments.
LO 2.6.1 Define and explain terms under Negotiable Instruments Act, 1881
LO 2.6.2 Explain types of negotiable instruments
LO 2.7.1 Identify how the maker of a negotiable instrument is discharged from his
liability under given scenarios.
LO 2.8.1 Describe crossing of cheques
LO 2.8.2 Differentiate between a cheque crossed generally and a cheque crossed
specially and their payment modes.
Exam context
 Define the term negotiable Instrument and different types of negotiable Instrument
 Discuss the essential characteristics of Negotiable Instrument
 Understand the effect of crossing a cheque and various types of crossing
 Indicate the cases in which banker must and may refuse to honour a cheque
 Discuss the protection granted to the collecting banker and rights of holder against the
banker
 Explain the terms Holder, Holder in due course, Acceptor for Honour, Payer for
Honour, Material alteration, Negotiation and Endorsement
 Explain the various ways in which negotiable instrument or party in a negotiable
instrument is discharged
 Define maturity and state the rules determining the maturity of negotiable instrument

Act Chapters

Section A: Mercantile Law - Chapter 18: Negotiable instruments act
1 MEANING AND CHARACTERISTICS OF NEGOTIABLE INSTRUMENT
Section overview
 Definition of negotiable instrument

 Characteristics of negotiable instrument
 Parties to negotiable instrument
 Types of instrument
 Amount on negotiable instrument
 Endorsement
 Negotiation
 Material alteration
 Payment in due course
1.1 Definition of negotiable instrument
Definition: Negotiable instruments [Section 13]

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.
1.2 Characteristics of negotiable instrument

The essential characteristics of a negotiable instrument are shown below:

Business Law
These essential characteristics are discussed below:
Payable to order or bearer
Payable to order
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. e.g. Pay A, Pay A or
order and Pay A or B.
However, there is an exception in favour of cheque. A crossed cheque "Account
Payee only" can still be negotiated further.
Payable to bearer
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 than it is called payable to bearer. Thus a note, bill or cheque in the form “Pay
to A or bearer or pay bearer is payable to bearer.
Example: Payable to bearer

A cheque is payable to A. A endorses it merely by putting his signature on the back
and delivers it to B with the intention of negotiating it (without making it payable to
B or B’s order). In the hands of B the cheque is a bearer instrument.
Easy transferability
They are transferable from one person to another by mere delivery if payable to
bearer and by endorsement and delivery if payable to order.

Transferee can sue in his own name

A bill, note or a cheque represents a debt and implies the right of the creditor to
recover something from his debtor. The creditor can either recover this amount
himself or can transfer his right to another person. In case he transfers his right,
the transferee of a negotiable instrument is entitled to sue on the instrument in
his own name in case of dishonour, without giving notice to the debtor of the fact
that he has become holder.
Example: Transferee can sue in his own name

A B
To pay To receive
A gave a cheque to B who transfers it to C. If the cheque dishonours C can sue A
in his own name without giving notice to A that he has become the holder.
Title of holder in due course

It means that once an instrument is received in the hands of holder in due course
it becomes free from all defects.
Example: Title of holder in due course

A gives a promissory note to B. B lost the instrument and it was found by C. C
cannot recover the amount on the negotiable instrument as he is not the holder in
due course but if C transfer the instrument to D and D becomes holder in due
course he can recover the amount on the instrument from A or all prior parties.
Presumptions
Following presumptions in respect of negotiable instruments, unless the contrary
is proved; [Section 118]
 Consideration
Every negotiable instrument was made, drawn, accepted, endorsed or
transferred for consideration.
 Date
Every negotiable instrument bearing a date was made or drawn on such date.
 Time of acceptance
Every bill of exchange was accepted within a reasonable time after its date and
before its maturity.
 Time of transfer
Every transfer of a negotiable instrument was made before its maturity.
 Order of endorsements
The endorsements appearing upon a negotiable instrument were made in the
order in which they appear.
 Stamp
A lost negotiable instrument was duly stamped.
 Holder in due course
A holder of negotiable instrument is a holder in due course but this presumption
would not arise where it is proved that the holder has obtained the instrument
from its lawful owner, or from any person in lawful custody thereof, by means of

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an offence, fraud or for unlawful consideration and in such a case the holder has
to prove that he is a holder in due course.
1.3 Parties to negotiable instruments
Drawee in case of need

The person whose name is given in addition to the drawee to be referred in case
of need. [Section 7 & 115]
By whom the name is given
 By the drawer while drawing the bill
 By the endorser while indorsing the bill.
When dishonoured
 Such a bill is not dishonoured until it has been dishonoured by such a
drawee in case of need.
Acceptor for honour

When a bill of exchange has been noted or protested for non-acceptance or for
better security and any person accepts it supra protest or honour of the drawer or
of any one of the endorsers, such person is called an acceptor for honour.
[Section 7, 108 to 112]
The conditions for a valid acceptance for honour are as follows:
 The bill must have been noted or protested for non-acceptance or for better
security.
 The acceptance for honour must be made with the consent of the holder.
 It must be written on the bill and it must indicate that it is an acceptance for
honour of a party who is already liable on the bill.
 It must be signed by the acceptor for honour who must not already be liable
on the bill.
Where the acceptance does not specify to whose honour it is made it shall be
deemed to be made for the honour of the drawer.
Rights and liabilities of acceptor for honour

On acceptance the acceptor for honour takes exactly the same position as the
party for whose honour he accepts. His rights and liabilities are the same with the
only difference that his liability is conditional and arises only after:
 The bill is once more presented to the drawee for payment at maturity and
has been dishonoured.
 Noting or protesting has been done for such dishonour by non-payment.
 The bill should be presented or forwarded to the acceptor for honour not
later than the next day after the date of its maturity.
If the acceptor for honour makes payment without the fulfilment of the above
conditions none will be liable to him not even the original drawer.
Right of acceptor for honour

On paying the bill, the acceptor for honour can sue the party for whose honour
the bill is accepted.

Payment for honour

The following conditions are essential for the payment for honour: [Section 113 &
114]
 Bill must have been dishonoured for non- payment
 Bill must have been noted or protested for non-payment.
 Person paying or his agent must declare before the notary public, the party
for whose honour he accepts otherwise it is deemed to be accepted for
drawer.
 Such declaration must have been recorded by the notary public.
 Payment for honour must be made for the honour of any party liable to pay
the bill.
Right of payer for honour

Any person making payment for honour is entitled to all the rights, in respect of
the bill, of the holder at the time of such payment. He may recover from the party
for whose honour he pays all sums so paid with interest thereon and all expenses
properly incurred in making such payment.
A drawee in case of need may, however, accept and pay the bill of exchange
without previous protest.
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 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 deemed to
continue to be its holder. [Section 8]
Holder in due course

A person becomes holder in due course when he fulfils the following conditions:
[Section 9]
Conditions to be holder in due course

 Holder
He must be a holder i.e. He fulfils the essentials of a holder.
 Holder for valuable consideration
There must be a lawful and adequate consideration.
 Before maturity
A person should receive the instrument before its maturity. In case of instrument
payable on demand, he must have taken the instrument within a reasonable time
of its issue.

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 Complete and regular

It is the duty of every person who takes a negotiable instrument to examine its
form and contents thoroughly, for if it contains any material alteration which has
not been confirmed by the drawer through his signature or it is incomplete like
drawer name is missing or not properly stamped.
 Holder in good faith
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 existed in the title
of the transferor. If there is any suspicion and he takes the instrument without
making proper inquiries he cannot be said to be acting in good faith.
1.4 Types of instrument
Order instrument
A promissory note, bill of exchange or cheque is payable to order if either of the
following two conditions is 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. [Section 13]
Note:
 An order instrument can be transferred by an endorsement on it and then
its delivery.
Bearer instrument
A promissory note of bill of exchange or cheque is payable to bearer if either of
the following two conditions if fulfilled:
 expressed to be so payable, or
 last endorsement must be an endorsement in blank. [Section 13]
Note:
 A promissory note cannot be made payable to the bearer.
 A bill of exchange cannot be made payable to bearer on demand.
Demand instrument
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. [Section 19 & 21]

Notes
 'At sight' and presentment means on demand.
 An instrument on demand is payable immediately.
Time instrument
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.
Maturity of negotiable instrument

‘Maturity’ means the date on which the payment of an instrument falls due. The
question of maturity arises only in the case of a promissory note or a bill of
exchange which is expressed to be payable otherwise than on demand.
An instrument payable on demand or at sight such as a cheque becomes
payable immediately on the date of issue. [Section 22 to 25]
Every Promissory note or Bill of Exchange expressed to be payable:
 On a specified day, or
 At a certain period after date, or
 At a certain period after happening of a certain event
Matures on third day after the day on which it is expressed to be payable. i.e. a
grace period of three days is allowed.
Example:
A bill of exchange is payable on 1St January, will have maturity on 4th January.
Rules for calculating maturity

 If it is made payable a stated number of months after date or after sight, or
after a certain event, it matures three days after the corresponding date of
the month after the stated number of months.
Example: Payable stated number of months

A negotiable instrument dated 30Th August 2013 is made payable three months
after date. The instrument is at maturity on the 3rd December, 2013.
 If the month in which the period would terminate has no corresponding

date, the period shall be held to terminate on the last day of such month.

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Example: Payable stated number of months

A negotiable instrument dated 30 January, 2013 is made payable at one month
after date. The instrument is at maturity on the third day after the 28th February,
2013.
 If it is made payable a certain number of days after date or after sight, or

after a certain event, the maturity is calculated by excluding the day on
which the instrument is drawn or presented for acceptance or sight or on
which the event happens. Note that only one day is to be excluded.
Example: Payable after certain number of days

A bill of exchange dated 1st March is made payable 20 days after date. The period
of 20 days will be counted from 2nd March and the bill will be at maturity on 24th
March.
 If the date on which a bill or note is at maturity is a public holiday, the

instrument shall be deemed due on the next preceding day. Thus, if the
maturity of an instrument falls on Sunday, it shall be deemed to be due on
Saturday. If the maturity falls on an emergency holiday, the instrument shall
be deemed to be due on the next succeeding business day.
 If an instrument is payable by instalments, three days of grace are to be
allowed on each instalment.
Inland instrument
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. [Section 11]
Example: Inland instrument

 A promissory note made in Multan and payable in Peshawar.
 A bill of exchange drawn in Sukkur on a person resident in Toba Tek Singh
although it may be payable in Afghanistan.
Note:
 An inland instrument remains inland even if it has been endorsed in a
foreign country.
Foreign instrument
An instrument, which is not an inland instrument, is deemed to be a foreign
instrument. [Section 12]
Example: Foreign instrument

 Promissory note made in Pakistan but payable in Myanmar.
 A bill of exchange drawn in Pakistan on a person residing outside Pakistan,
and made payable outside Pakistan.

Inchoate instrument
An incomplete or blank negotiable instrument is one which is
 properly stamped and
 signed
but where the name or amount is missing. [Section 20]
The following points should be noted in connection with inchoate instrument.
 The liability of a person who signs and delivers an inchoate instrument
arises only when the blanks are filled in and the instrument is completed.
 To make the signer liable on an inchoate instrument, it is necessary that the
instrument should be delivered to the transferee.
 The instrument must be stamped and the stamp affixed must be sufficient
to cover the amount filled in the instrument.
 If an inchoate instrument is completed and negotiated to a holder in due
course, he can claim payment of full amount covered by the stamp.
Note
The provisions in this section cannot be applied to a cheque which is not required
to be stamped.
Example: Inchoate Stamped Instrument

P owes Q some money on account of credit purchases made by him. P gives a
promissory note, after affixing a stamp on which a person can claim up to Rs.
1,000 and signing, leaving the amount blank to Q authorising him to fill it up in
accordance with the account. Q fills Rs. 1,000 while actual amount due is Rs. 500
only. Q cannot recover more than Rs. 500. But if Q transfers it to R, a holder in
due course, R can recover Rs.1, 000, the full amount from P. If however the
amount filled in by Q is Rs. 1,200 R cannot recover it as the amount is not
covered by the stamp.
Holder
A holder can recover only the amount receivable from the signer.
Holder in due course
A holder in due course can recover the whole amount made payable by the
instrument provided that
 It is covered by the stamp
Even though the amount authorized was the smaller.
Ambiguous instrument
An instrument which may be interpreted as either promissory note or bill of
exchange is called an ambiguous instrument. Its holder must elect once for all
whether he wants to treat it as a promissory note or bill of exchange. [Section 17]
Example: Ambiguous instrument

 A bill of exchange where the drawer and the drawee are the same person
 Where the drawee is a fictitious person
 Bills drawn by an agent on his principal

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1.5 Amount on negotiable instrument

If the amount stated in figures and words is different the amount stated in words
shall be the amount undertaken or ordered to be paid.
Provided that if the words are ambiguous, the amount may be ascertained by
referring to the figures. [Section 18]
1.6 Endorsement
Definition: Endorsement [Section 15]

“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 or on a slip
of paper annexed to it thereto, or so signs for the same purpose a stamped paper
intended to be completed as 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.
Kinds of endorsements
 Blank or general endorsement
If the endorser signs his name only and does not specify the name of the
endorsee, the endorsement is said to be blank. The effect of a blank
endorsement is to convert the order instrument into bearer instrument which may
be transferred by delivery. [Section 16 & 54]
Example: Blank or general 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; this is an endorsement in blank by
Imran.
 Endorsement in full or special endorsement

If the endorser, in addition to his signature, also adds a direction to pay the
amount mentioned in the instrument to or to the order of a specified person the
endorsement is said to be full. [Section 16 & 54]

Example: Endorsement in full or special endorsement

A holder of a bill of exchange wants to make an endorsement in full to B he would
write “Pay to B or order. After such an endorsement it is only the endorsee i.e. B
who is entitled to receive the payment of the instrument and to further negotiate
the instrument by his endorsement.
A blank instrument can easily be converted into an endorsement in full. The

holder of a negotiable instrument endorsed in blank may without signing his own
name by writing above the endorser’s signature a direction to pay to any other
person as endorsee, convert the endorsement in blank into an endorsement in
full, and since such holder does not sign himself on the instrument he does not
thereby incur the responsibility of an endorser.
Example: Endorsement in full or special endorsement

A is the holder of a bill endorsed by B in blank. A writes over B’s signature the word
Pay to C or order. A is not liable as an endorser but the writing operates as an
endorsement in full form B to C.
1.7 Negotiation [Section 14]
Definition:
"When a promissory note, bill of exchange or cheque is transferred free from
defects 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.
Modes of negotiation
Negotiation by mere delivery
A negotiable instrument payable to bearer is negotiable by delivery
(voluntary delivery with the intention of transferring the ownership)
It does not require signature of the transferor i.e. endorsement and
the transferee becomes the holder by mere possession.
The transferor of a bearer instrument is not liable on its dishonour
because by not signing as endorser he has not added his credit to the
instrument. [Section 47]
Negotiation by endorsement and delivery
A negotiable instrument payable to order is negotiable by the holder
by endorsement and delivery.
The negotiation of an order instrument requires two formalities
The holder should endorse it and
Then deliver to his endorsee (voluntary delivery with the
intention of transferring the ownership) [Section 48]

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1.8 Material alteration

An alteration is material which:
 Alters the character or identity of the instrument or which shakes the very
foundation of the instrument or
 Changes the rights and liabilities of the parties or
 Alters the operation of the instrument.
The following alterations are material:
 Date
 Sum payable,
 Time of payment,
 Place of payment,
 Addition of place of payment,
 Rate of interest.
In the following cases the alteration of a negotiable instrument is not material:
 A material alteration made before the instrument is issued.
 An alteration made for the purpose of correcting a mistake. e.g. The
correction of mistake in a bill dated 2031 instead of 2013.
 An alteration made to carry out the common intention of the original parties.
 An alteration made with the consent of the parties.
 An alteration which is not material.
Alterations permitted by the Act

The following alterations are permitted by the Act, and do not invalidate the
instruments.
 Filling blanks of inchoate instruments. [Section 20]
 Conversion of a blank endorsement into an endorsement in full. [Section
49]
 Crossing the cheques [Section 125]
Effect of material alteration:

Any material alteration renders the instrument void. But if an alteration is made in
order to carry out the common intention of the original parties, it does not render
the instrument void. [Section 87 & 88]
1.9 Payment in due course

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. [Section 10]
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

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.
Example: Payment in accordance with apparent tenure

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.
 The payment must be made in good faith and without negligence. It

must be honestly in the bonafide belief that the person demanding the
payment is legally entitled to it. The payer must not be guilty of any
negligence in making the payment.
Example: Payment in good faith

Bill of Exchange is paid without enquiry as to the payee or cheque with forged
signature of the drawer is paid will amount to negligence on the party of the payer
and the payment will not be treated as payment in due course.
 The payment must be made to a person in possession of the

instrument under circumstances which do not arouse the suspicion about
his title to 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
accept payment in any other medium i.e. by cheque or draft.

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
Definition: Promissory note [Section 4]

“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, 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.
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, 2013

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: __________
ABC XYZ
Jail Road Saddar
Karachi Karachi
In the specimen XYZ is the maker and ABC is the payee.
2.4 Essential elements of a promissory note

The essential elements of a promissory note are shown below:
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: It must be in writing

A signs the instruments in the following terms
a) “I promise to pay B or order Rs.500”.
b) “I acknowledge myself to be indebted to B in Rs.1,000 to be paid on
demand, for value received”.
c) A promise to pay B a sum of Rs. 500 on telephone. This promise will not
make a promissory note because it is not in writing.
In the above example (a) and (b) are promissory notes while (c) is not a promissory
note.
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: Promise to pay

A signs the instruments in the following terms:
a) Mr. B I owe you Rs. 1,000
b) I am liable to pay to B Rs. 500
c) I have taken from B 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.
Where A signs instrument in the following terms:
“I acknowledge myself to be in debited to B in Rs.1,000 to be paid on demand for
value received.
There is a valid promissory note
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: Definite and Unconditional

A signs the instrument in the following terms:
a) I promise to pay B Rs.500 seven days after my marriage with C.
b) I promise to pay B Rs. 500 on D’s death, provided D leaves me enough to pay
the sum.
c) I promise to pay B 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: Exception
If A signs an instrument stating “I promise to Pay B Rs.500 seven days after C’s
death”, the promissory note is valid because it is not considered to be conditional,
for it is certain that C will die one day.
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.
Certain parties
The instrument point 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.
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: Sum payable must be certain

A signs instrument in the following term
a) I promise to pay B Rs.500 and all other sums which shall be due to him
b) I promise to pay B Rs.500 and all fines according to rules.
The above instruments are invalid as promissory notes because the exact
amount is not certain.
Sum payable must be legal tender

A promise to pay a certain amount of foreign or to deliver a certain quantity of
goods is not a promissory note. Thus, an instrument signed by A, “I promised to
pay B Rs.500 and to deliver him my black horse” is not a valid promissory note.

Business Law
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
3.1 Definition of bill of exchange
Definition: Bill of exchange [Section 5]

“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 bear or 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.
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.
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, 2013

Rs. 10,000/- only
Three months after date pay to XYZ or to his order the sum of Rupees Ten
Thousand, for value received.
Accepted
ABC
To Sign: __________
ABC MNO
Jail Road Saddar
Karachi Karachi
In the specimen MNO is the drawer, ABC is the drawee and XYZ is the payee.

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3.4 Essential elements of bill of exchange

The essential elements of a bill of exchange are shown below:
In writing
A bill of exchange is required to be in writing. Like promissory note, a bill of
exchange also cannot be oral.
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: Order to pay

The following instruments signed by A are valid bills of exchange as they
contain an order to pay, though the language used is very polite:
a) B, please pay Rs. 500 to C or order.
b) B will much oblige me by paying to C Rs. 500.
The following instruments signed by A are not valid bills of exchange as they
contain only a request to pay and no order to pay:
a) B, please let C have Rs.500, and place it to my account and oblige,
b) B, I shall be highly obliged if you make it convenient to pay Rs.1,000 to C.

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.
Signed by drawer and drawee.

The instrument must be signed by the drawer and drawee.
Certain parties
All the parties must be certain i.e. indicated in a bill of exchange with reasonable
certainty.
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.
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.

Business Law
4 CHEQUE
Section overview
 Definition
 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
 Protection to the collecting banker
 Rights of holder against the banker
 Circumstances in which a banker must refuse to honour cheque
 Circumstances in which a banker may refuse to honour cheque
4.1 Definition of cheque
Definition: Cheque [Section 6]

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
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, 2013

Main Branch, Karachi Cheque no:______
Pay _____________________________________________ OR BEARER
Rupees _______________________________________
Rs.
Account no: _____________
Title of account
Signature
Do not write below this line

Business Law
4.4 Essential elements of a cheque

The essential elements of a cheque are shown below:
These essential characteristics are mentioned 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

4.5 Method of crossing

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 director of 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
General crossing
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. [Section 123 ]
Effect of general crossing

When a cheque is crossed generally the banker on whom it is drawn shall not
pay it otherwise than to a banker. [Section 126]
Example: General crossing
Special crossing
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. [Section 124]
Effect of special crossing

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.
[Section 126]
Example: Special crossing

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Restrictive crossing
Restrictive crossing may be added with general crossing by adding the words
“A/c Payee” or “A/c Payee only”. [Section 123A]
Effect of restrictive crossing

Strictly speaking, the amount collected on the cheque must be credited only to
the account of payee.
Example: Restrictive crossing
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. The
addition of the words not negotiable does not restrict the further transfer ability of
the cheque. It only takes away the main feature of negotiability, which is
transferability free from defects. 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. [Section 131]
Example: Not Negotiable Crossing
4.7 Crossing of a cheque after issue

A cheque may be crossed after its issue in the following manner: [Section 125]
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
generally adding the name of the banker.
Where a cheque is crossed The holder may add the word “Not
generally or specially negotiable”.
Where a cheque is crossed specially The banker to whom it is crossed may
again cross it especially to another
banker (his agent) for collection.

4.8 Protection to the collecting banker

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.
The protection afforded to the collecting banker is very valuable in view of the
fact that when one person deals with the goods of another without his
permission, he is liable to an action for conversion and in the absence of this
protection the position of the banker would not be different from that of any other
person. [Section 130]
4.9 Rights of holder against banker

The holder has no right of action against the banker for refusing to pay the
cheque because there is no privity of contract between him and the banker. But
the holder is entitled to enforce payment from the banker in the following two
cases:
 Where the holder does not present the cheque within reasonable time of its
issue and on account of the delay the drawer suffers actual damage by the
failure of the bank and is therefore discharged to the extent of such
damage. The holder in this case becomes the creditor of the banker.
 Where a banker pays a cheque crossed generally over the counter or a
cheque crossed specially otherwise than to the banker to whom the same
is crossed, he is liable to the true owner of the cheque for any loss he may
sustain owing to the cheque having been so paid. The banker can recover
from the wrong payee, if traceable.
4.10 Circumstances in which a banker must refuse to honour cheque

 Where the customer has stopped the payment of the cheque.
 When a garnishee order or any other legal order of the court prohibits
payment of cheque.
 When the banker receives notice of customers death. But a payment made
before receiving the notice of death is valid.
 When an order of adjudication has been passed against the customer by
the insolvency court.
 When the banker receives the notice of customers insanity.

Business Law
 When the customer has given a notice to the banker for the assignment of
the credit balance of his account.
 When the banker has reason to believe the holder title is defective.
 When the banker receives a notice of loss of cheque from his customer.
 When there has been material alteration in the cheque and such alteration
has not been authenticated by his customer by putting his signature.
 When the signature of the drawer does not tally with the specimen
signature kept by the bank.
 When the banker receives notice in respect of closure of account.
4.11 Circumstances in which a banker may refuse to honour cheque

 When the balance in customers account is insufficient to meet the cheque.
 When the balance in the customer’s account cannot be properly allocated
to the payment of the cheque.
 When the cheque is presented at a branch other than the one where the
customer has account.
 When the cheque is presented after banking hours.
 When the cheque has become stale.
 When the cheque is undated.
 When the cheque is post-dated.

5 DISCHARGE OF LIABILITY
Section overview
 Discharge of the negotiable instrument

 Discharge of party or parties
Discharge of liability means that the party’s liability, on instrument comes to an end.
The term “discharge” in relation to negotiable instrument has the following two
meanings:
 Discharge of the negotiable instrument
 Discharge of one or more parties from their liability
The chart below shows the various ways in which an instrument and party may get
discharged.
5.1 Discharge of the negotiable instrument

A negotiable instrument is said to be discharged when the rights against all the
parties to it comes to an end and the instrument ceases to be negotiable. No
party even a holder in due course can claim the amount of the discharged
instrument from any party. An instrument can be discharged in following ways:

Business Law
Payment in due course

The instrument is discharge by payment made in due course by the party who is
primary liable to pay. A payment by a party who is secondary liable does not
discharge the instrument because in that case the payer holds it to enforce it
against the prior endorsers and the principal debtor. [Section 82]
Negotiation back
If the party primarily liable on the instrument becomes the holder at or after its
maturity in his own right, the instrument is discharged. [Section 90]
Example: Negotiation back

A issued a note to B, B endorses it to C and C endorses it back to A.
Release
When the holder of a negotiable instrument at or after its maturity absolutely and
unconditionally renounces in writing and gives up his rights against all the parties
to the instrument, the instrument is discharged. [Section 82]
Cancellation
Where an instrument is intentionally cancelled by the holder or its agent the
instrument is discharged and ceases to be negotiable. Cancelation may take
place by;
 crossing out signatures on the instrument, or
 by physical destruction of the instrument
with the intention of putting an end to the liability of the parties to the instrument.
[Section 82]
Discharge as a simple contract
A negotiable instrument may be discharged in the same way as any other
contract for the payment of money. This includes, for example, discharge of an
instrument by novation or rescission or by expiry of limit of limitation.
5.2 Discharge of party or parties

A party or parties to a negotiable instrument is/are discharged in any one of the
following ways;
Payment
The party is discharge by payment made in due course by the party who is
secondary liable to pay. [Section 82]
Cancellation
When the holder of a negotiable instrument or his agent cancels the name of a
party on the instrument with the intent to discharge him, such party and all
subsequent parties who have a right of action against the party whose name is
so cancelled are discharged from liability. [Section 82]

Release
Where the holder of a negotiable instrument releases any party to the instrument
by any method other than cancellation, the party so released is discharged from
the liability. [Section 82]
Allowing drawee more than 48 hours

If the holder of a bill of exchange allows the drawee more than 48 hours
exclusive of public holidays, for the purpose of acceptance than all previous
parties not consenting to such allowance are discharged from liability to such
holder. [Section 83]
Non-presentment of cheque
Where a cheque is not presented by the holder for payment within a reasonable
time of its issue and the drawer suffers damage through the delay because of the
failure of the bank, he is discharge from the liability to the extent of such damage.
[Section 84]
Example: Non-presentment of cheque

A draws a cheque of Rs.1,000 and when the cheque ought to be presented, has
funds at the Bank to meet the cheque. The Bank fails before the cheque is
presented and pays 25 paisa in Rupee. The drawer is discharged to the extent of
Rs.750.
Qualified acceptance
If the holder of a bill agrees to a qualified acceptance all prior parties whose
consent is not obtained to such an acceptance are discharged from liability.
[Section 86]
The qualified acceptance can be in any of the following ways:
Conditional: the payment is dependent on the happening of an event.
Part payment: Where he undertakes the payment of part only of the sum
ordered to be paid.
Place of payment: No place of payment is specified in the order, it undertakes
the payment at a specified place and not anywhere else or where place of
payment is specified in the order it undertakes payment at some other place and
not anywhere else.
Time of payment: Payment at a time other than it is legally due.
Operation of law
This includes discharge;
 By an order of insolvency court, discharging the insolvent.
 By merger. When a judgement is obtained against the acceptor, maker or
endorser, the debt under the bill is merged into the judgement debt.
 By lapse of time i.e. when the remedy becomes time barred.
Material alteration
A material alteration of a negotiable instrument renders the same void as against
anyone who is a party to it at the time of alteration and does not consent to it,

Business Law
unless it was made in order to carry out the common intention of the original
parties. [Section 87]
Persons who become parties to the instrument after the alteration are liable
under the instrument as altered.
Discharge by payment of altered instrument

When an instrument has been materially altered but does not appear to have
been so altered, or where cheque is presented for payment which does not at the
time of presentation appear to be crossed, payment on such an instrument
discharges the party liable if he pays according to the tenure of the instrument at
the time of payment and in due course. Such a payment is a valid payment even
if it is proved that the instrument has been altered or the cheque was originally
crossed. [Section 89]
Not giving notice of dishonour

Any party to a negotiable instrument to whom notice of dishonour is not sent by
the holder is discharged from liability as against the holder unless no notice of
dishonour is required to be sent.
Non-presentment for acceptance of a bill

When a bill of exchange is payable certain period after sight, its holder must
present it for acceptance to the drawee within a reasonable time after it is drawn.
If he makes a default in making such presentment the drawer and all endorsers
who were liable towards such a holder are discharged from their liability towards
him. [Section 61]
Negotiation back
When a bill of exchange comes back to the drawer or endorser by process of
negotiation and he becomes its holder then all the parties in between are
discharged from the instrument unless the person to whom the instrument is re-
endorsed did sans recourse endorsement. [Section 90]

6 CHAPTER REVIEW
Chapter review
 Define the term negotiable Instrument and different types of negotiable Instrument
 Discuss the essential characteristics of Negotiable Instrument
 Understand the effect of crossing a cheque and various types of crossing
 Indicate the cases in which banker must and may refuse to honour a cheque
 Discuss the protection granted to the collecting banker and rights of holder
against the banker
 Explain the terms Holder, Holder in due course, Acceptor for Honour, Payer for
Honour, Material alteration, Negotiation and Endorsement
 Explain the various ways in which negotiable instrument or party in a negotiable
instrument is discharged
 Define maturity and state the rules determining the maturity of negotiable
instrument

Business Law

CHAPTER
Business Law
19
Company
Contents
1 The features of a company
2 Types of companies
3 Association not for profit
4 Securities & Exchange Commission of Pakistan
5 Chapter review

Business Law
INTRODUCTION
Learning outcomes
demonstrate knowledge of the legal terminology of company law and the
basics of company incorporation.
LO 3.1.1 Define the terms which are relevant to the areas covered in the syllabus
LO 3.2.1 Explain subsidiary and holding company and when a company becomes a
subsidiary or holding company of another company
LO 3.2.2 Apply the concept of subsidiary in simple scenarios
LO 3.3.1 Demonstrate familiarity with the powers and functions of the Commission
LO 3.8.1 Comprehend the nature of association not for profit.
LO 3.9.1 Understand the provisions regarding divisible profit and dividing the
undertaking into shares or interest.
Exam context
By the end of this chapter students will be able to understand:
 The features of a company
 Types of companies
 Holding and subsidiary companies
 Functions and powers of Securities & Exchange Commission of Pakistan
 Role and responsibilities of Court and Registrar

Act Chapters

Section B: Company Law - Chapter 19: Company
1 THE FEATURES OF A COMPANY
Section overview
 Comparison of companies with other forms of business

 The meaning of separate legal personality
 Limited liability
 Transfer of ownership and perpetual succession
1.1 Comparison of companies with other forms of business
Various forms of doing business

Companies differ significantly from other forms of business.
 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 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.
 Most companies are companies limited by shares. The capital of a
company is represented by shares, and the ‘ordinary’ shareholders are its
owners. Companies Ordinance 1984 may refer to shareholders who are
owners of the company as members of the company.
 Companies are created by a process established by The Companies
Ordinance 1984. A company must also have a written constitution
(Termed as Memorandum of Association-Explained later in this book,
Partnerships often have a constitution in the form of a partnership
agreement, but this is not a legal requirement.)
 Unlike sole traders and Partnerships, a company is a legal person,
separate from its owners. This is the doctrine of corporate
personality. The law recognises a company as a person, with legal
rights and obligations similar to those of ordinary individuals.
 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.
 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.

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1.2 The meaning of separate legal personality
Separate legal personality

It is important to understand what separate legal personality means. The law
regards a company as a person, separate from its owners. For example, suppose
that Mr X sets up a limited company, New Company with ten shares of Rs. 10
which he owns. Mr X the individual and New Company, for the purpose of the
law, would be two separate persons - both would have a 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.
 Because it is a person, a company can enter into contractual agreements
with other persons – individuals or companies.
 If a company incurs a debt, the company itself is liable and its owners (the
shareholders) are not.
 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.
 If a company is owed money, the debtor owes the money to the company,
and not to its owners.
 A company is personally liable to pay tax on its income (profits).
 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.
The effects of separate legal 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 Limited liability
Explanation
The concept of limited liability applies to the owners (shareholders) 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.
If a company is unable to pay its debts, it may be forced into liquidation. The
assets of the company will then be used to pay some of its unpaid liabilities.
However, the shareholders of the company will not be required personally to pay
the remaining unpaid debts of the company. The shareholders will lose what they
have invested, but will not be required to pay any more.
For example, if Mr X owns 100% of the share capital ofNew Company, and New
Company goes into liquidation with assets ofRs.200,000 (realisable value) and
liabilities of Rs.500,000, the company’s creditors will be unpaid for RS 300,000 of

the Rs.500,000 they are owed, when the company is liquidated. There is no
requirement on Mr X personally to pay the remaining Rs.300,000 that the
creditors are owed.
In this respect, limited companies are very different from partnerships. Limited
liability applies to all limited companies.
 This is why private limited companies in the country are required to include
the word “(Private) Limited” in their name.
 It is also why public companies in the country are required to include the
words “Limited” in their name.
The word ‘limited’ in the name of the company draws the fact of limited liability to
the attention of anyone dealing with it.
Illustration: Limited liability

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. For example, 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 help 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.
The liability of a company itself and its directors

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.
The directors and other officers of a company act on behalf of the company, 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.
1.4 Transfer of ownership and perpetual succession
Explanation
Another feature of the separate legal personality of a company is that its
shareholders can transfer their share in the ownership of the company to
someone else, but this change of ownership does not affect the company in any
way.
Shareholders can transfer some or all of their shares to another person (who may
be a natural person or an artificial person). The most common methods of share
transfer are sale, gift and inheritance. Shares can also be transferred by putting
them into trust.
 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.
 However, the transfer of shares does not affect the legal status or legal
existence of the company. The company continues to exist and its
existence is unaffected by the change in share ownership.

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In practice, it is common for shares to be transferred many times during the life of
a company. 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 ‘perpetual
succession’ or ‘perpetual existence’

2 TYPES OF COMPANIES
Section overview
 Definition of company & body corporate

 Companies limited by shares, companies limited by guarantee and unlimited
companies
 Private company and public company
 Public listed company and un-listed company
 Holding company and subsidiary company
2.1 Definition of company & body corporate
Definition: Company [Section 2(7)]

Companies Ordinance 1984 defines a company as a Company registered under
this Ordinance or any existing company.
Definition: Existing Company [Section 2(15)]
An existing company means any company registered under any act or Ordinance
governing the registration or formation of companies prior to the promulgation of
the Companies Ordinance 1984.
Generally there would be no difference in the term Company and Body Corporate
or Corporation however Companies Ordinance 1984 defines the body corporate
or corporation separately.
Definition: Body corporate [Section 2(4)]

"Body corporate" or "corporation" includes a company incorporated outside
Pakistan, but does not include
 A corporation sole; or
 A co-operative society registered under any law relating to the registration of
co-operative societies; or
 Any other body corporate, which the Federal Government may specify in this
behalf.
2.2 Companies limited by shares, companies limited by guarantee and unlimited

companies [Section 2(8), Section 2(9) and Section 15]
Explanation
Limited liability may be in the form of a company limited by shares or a company
limited by guarantee.
 With a company limited by shares, the limited liability of its owners is
restricted, in law, to the face value of the shares they own. This is the
limited liability described above.
 With a company limited by guarantee, its owners may or may not have
shares. Their share of the ownership of the company is recognised, and
they are ‘members’ of the company. Their liability to the company is limited

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to an amount that the member guarantees to contribute in the event that

the company goes into liquidation for a company not having share capital
and for a company having share capital this shall also include the amount
of share capital he subscribed to the company.
It is also possible to register a company as an unlimited company. 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.
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.
(Companies limited by guarantee are not able to raise capital in this way. A
company limited by guarantee is a form often used by charities, trade
associations and private members’ sports clubs, where the club is owned by the
members).
2.3 Private company and public company [Section 2(28)]
Private Company
Private company is of two types; Single Member Company and other than Single
Member Company
 Single Member Company – 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 implemented by Securities & Exchange
Commission of Pakistan for such companies. In these companies (SMC-
PVT) Limited is added to the name of the company.
 Private Company (Other Than Single Member Company) – Such type of
a company can be registered by at least two members and it restricts
 The maximum number of members to fifty, members jointly holding
shares shall be counted as one member,
 The right to transfer the shares by its members,
 The invitation of subscriptions from general public for its shares or
other securities.
2.4 Public listed company and un-listed company [Section 2.(30)]
Definition: Public company

Public company means a company which is not a private company it can take two
forms:
 Public listed company
 Public unlisted company
Public listed company [Section 2(20)]

Such form of public company whose securities are listed on an exchange and
they are traded as per regulations of that stock exchange. The process of listing
and public offering is explained in detail in chapter No. 3 of this book.

Public unlisted company

Public unlisted companies have not made an offer of their shares to general
public hence there 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
2.5 Holding company and subsidiary company [Section 3]
Holding Company
It means a company or body corporate which holds (directly or indirectly) more
than fifty percent (50%) in the voting securities of any other company, or has a
power to elect and appoint majority of the directors of such other company.
Holding company can be defined in context only of subsidiary company.
Subsidiary Company
It means a company or body corporate whose more than fifty percent (50%)
voting securities are held or controlled (directly or indirectly), by some other
company or such other company has a power to elect and appoint majority of the
directors of such company.
Illustration: Central Depository Company of Pakistan

Central Depository Company of Pakistan shall not be considered as holding
company of any company unless it beneficially owns more than fifty percent voting
securities of that listed company.
Example: Holding company

Hill Limited shall be considered as a holding company of Stone Limited if;
a. Hill limited owns more than fifty percent of the voting shares of Stone Limited,
b. Hill Limited has got the right to appoint majority of the directors in Stone
Limited.
How does Hill Limited get the rights to appoint majority of the directors?
Usually the power to appoint directors is associated with the holding of voting
securities (ordinary shares) however at certain times the power to appoint or elect
the directors may emanate from any contractual arrangements with other
shareholders or it may become available from the condition imposed or privilege
granted by any authority etc.
Now if Stone Limited is a holding company of Stylish Stones Limited then being the
holding company of Stone Limited the Hill Limited shall also be considered as
holding company of Stylish Stones Limited.

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3 ASSOCIATION NOT FOR PROFIT
Section overview
Association not for profit
3.1 Association not for profit [Section 42]
Concept
People working for useful objects of the society sometimes need protection of
limited liability for such work. Companies Ordinance allows the registration of
companies as associations not for profit if they satisfy certain conditions to
Securities & Exchange Commission of Pakistan.
If the Securities and Exchange Commission of Pakistan is satisfied with an
association which has been formed or is capable of being formed as a limited
liability company that it meets the conditions specified by the Companies
Ordinance, 1984, the Commission may grant a license and direct that association
be registered as a limited company without the addition of word “Limited”,
“(Private) Limited” or “(Guarantee) Limited”, as the case may be, to its name and
the association may be registered accordingly.
License
Not for profit association shall be licensed by Commission to get registered and
work as a limited liability company without using the words Limited or
(Guarantee) Limited or (Private) Limited etc.
Such association may be set up for any of the following purposes
commerce,
art,
science,
religion,
sports,
social services,
charity or
any other useful object,
Such Association shall apply its profits, if any, or other income in promoting
its objects, and
Such Association shall prohibit the payment of any dividend to its members,
License shall be granted by Commission on such conditions and subject to such
regulations as it thinks fit.Those conditions and regulations shall be binding on
the association and shall on directions of Commission be inserted in the
memorandum and articles, or in one of those documents.
The association shall on registration enjoy all the privileges of a limited company
and be subject to all its obligations, except those of using the word or words
"Limited", "(Private) Limited" or "(Guarantee) Limited", as the case may be, as
part of its name.

A license under this section may be revoked at any time by the Commission but
Commission shall provide an opportunity of being heard to the association before
such revocation.
Upon its revocation the registrar shall enter the word or words "Limited",
"(Private) Limited" or "(Guarantee) Limited", as the case may be, at the end of the
name of the association upon the register, and the association shall cease to
enjoy the exemptions and privileges granted by that license.

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4 SECURITIES & EXCHANGE COMMISSION OF PAKISTAN
Section overview
The Commission
Registrar
Court
4.1 The Commission
Definition: The Commission [Section 2(6A)]

The Commission means the Securities & Exchange Commission of Pakistan
constituted under Section 3 of Securities & 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.
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.
Functions [Section 12]

Commission has been vested with lot of powers under the Companies Ordinance
1984 and other relevant laws. Commission has got powers to regulate the affairs
of all the companies and Insurance Companies, Banking Companies, Modarbas
and Non-Banking Finance Companies etc.
Law has vested various powers to Commission and also Federal Government is
empowered to vest its powers to the Commission to the extent it thinks fit.
4.2 Registrar [Section 2(31)]
Definition:
“Registrar” means a registrar, an additional registrar, a joint registrar, a deputy

registrar or an assistant registrar, performing the duty of registration of companies
under the Companies Ordinance, 1984.
Powers 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 the Ordinance.
He keeps the record of mortgages and charges also keeps track of company
routine documents besides his powers to call the officers of the company
including directors for information and explanations and also empowered to

inspect the books and records of the company. He may seize the books and
records for a period of thirty days if he believes that seizure in necessary to reach
out certain facts by Commission.
4.3 Court
Introduction [Section 7]
Companies Ordinance 1984 advises various occasions where company needs
guidance/approvals from court for example of a company wants rectification in its
register of members and debenture holders, it need approval from court. Similarly
for reduction of capital the company needs approval of court. Further at certain
times the interested persons like shareholders or creditors etc. are allowed to file
petitions against the company for winding up or other actions.
For all the matters pertaining to the companies, the court means the high court
having jurisdiction in the area where registered office of the company is situated.

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5 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know:
 What is a company and what are the distinctive features of a company from
other forms of business.
 The various types of companies including associations not for profit and how
they differ from each other.
 The various authorities under the Ordinance including Commission, Registrar
and Court.

CHAPTER
Business Law
20
Incorporation of Company
Contents
1 Registration of a company
2 Name of company
3 Memorandum of association
4 Articles of association
5 Commencement of business and registered office
6 Chapter review

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INTRODUCTION
Learning outcomes
demonstrate knowledge of the legal terminology of company law and the
basics of company incorporation.
LO 3.1.1 Define the terms which are relevant to the areas covered in the syllabus.
LO 3.4.1 Describe the memorandum of association and state its purpose.
LO 3.4.2 List the clauses of memorandums of association of various types of
companies.
LO 3.4.3 Describe the purpose and procedure of alteration to different clauses of a
memorandum of association.
LO 3.5.1 Define the articles of association and state its purpose.
LO 3.5.2 State the information which should be contained in the articles of various
companies.
LO 3.6.1 Describe the procedure of registration of the memorandum and articles of
association.
LO 3.6.2 Describe the effects of registration of the memorandum and articles of
association.
LO 3.7.1 Describe with examples the prohibitions with regard to the selection of the
name of a company.
LO 3.7.2 Identify the actions and procedures needed to be taken by company and
registrar, if a company is registered by a prohibited name.
LO 5.1.1 Discuss with simple examples the provisions with regard to having a
registered office, publication of name and publication of paid-up capital.
LO 5.2.1 State the conditions to be fulfilled before commencement of business by a
company.
LO 5.2.2 State the applicability and non-applicability of the conditions on different kinds
of company.
Exam context
 Understand the procedure for registration of a company
 Understand the various clauses of memorandum and articles of association and
procedure for alteration in these provisions
 Understand the requirements of Ordinance regarding names of companies
 Understand the requirements regarding commencement of business and registered
office of the company.

Section B: Company Law - Chapter 20: Incorporation of Company

Act Chapters

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1 REGISTRATION OF A COMPANY
Section overview
Obligation to be registered as a company

Process of registration/incorporation
1.1 Obligation to be registered as a company [Section 14]
Companies Ordinance 1984 requires certain organisations to get themselves

registered under the Ordinance as a company, here is the detail of whom it
requires to get registered and to whom it give relaxations.
Any association, partnership or company comprising of more than twenty
persons and is formed for carrying on any business for profit, it has an obligation
to get itself registered as a company, however following are exceptions to this
general rule
Any society, body or association, other than a partnership, formed under
any other Pakistan law; or
A joint family carrying on a joint family business; or a partnership of two or
more joint families where the total number of members, excluding the minor
members, does not exceed twenty; or
A partnership formed to carry on practice as lawyers, accountants or any
other profession where practice as a limited liability company is not
permitted under the relevant laws or regulations of such practice.
Illustration: Cooperative societies and partnerships
Cooperative societies and partnerships are registered under their own respective
laws governing such organisations. Under the above provisions a cooperative
society is not required to be registered as a company but a partnership although
registered under the partnership act, is required to be registered as a company if
its number of members/partners exceeds twenty and it carries on business for
profit motive.
Illustration: Firm or chartered accountants

Institute of chartered accountants of Pakistan (ICAP) by its bye-laws does not allow
the chartered accountants to practice as a company, hence a chartered
accountants firm may have any number of partners, it shall not be required to be
registered as a company same goes with the firm of lawyers.
1.2 Process of registration/incorporation
Steps of registration
The company being a separate legal person is created by filing certain
documents with the registrar of companies who in turn registers those documents
and the registration of those documents implies that company has been
registered as a separate legal entity. Effectively following steps are involved in
formation of the company

 Getting availability of suitable name from the registrar of companies

 Preparing Memorandum of Association
 Preparing Articles of Association
 Filing the documents with the registrar and obtaining the certificate of
incorporation of company
 Filing documents necessary for obtaining certificate of commencement of
business if the company is required to obtain it
All of these documents require detailed insight so we shall discuss them one by
one in detail.

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2 NAME OF COMPANY
Section overview
Restrictions regarding names

Publication of names
2.1 Restrictions regarding names [Section 37]
Prohibited names
After striking the idea of formation of a company the first thing to do is to choose
a suitable name of the company but only choosing such a name is not sufficient
and the persons desirous of forming a company (named as promoters here-in-
after) should get the approval of the name from registrar. In case the approval is
not so obtained or the approval is not granted by the registrar, the company
cannot be established.
While selecting the name it should be considered that the name:
is not inappropriate or deceptive;
is not designed to exploit or offend the religious sentiments of the people;
is not a name identical with the name of the company already registered
and does not closely resemble with the name of the company already
registered under the Ordinance. except where the company in existence is
in the course of being dissolved and signifies its consent in granting its
name to the new company in such manner as the registrar requires
Whatever name is proposed, the final authority to decide whether or not a name
is in line with the provisions of the Ordinance lies with the Commission.
Names which require prior approval of Commission

Prior approval of Commission shall be required if the proposed name contains
any words suggesting
the patronage of any, past or present, Pakistani or foreign, Head of State;
any connection with the Federal Government or a Provincial Government
or any department or authority of any such Government;
any connection with any corporation set up by or under any Federal or
Provincial law; or
the patronage of, or any connection with, any foreign Government or any
international organization.
Rectification of names [Section 38]

Although due care is exercised at the time of registration that the company is not
registered with a name which is defective due to any reasons whatsoever but
where a company has, due to any reason, been registered with a name which is
not permitted by the Ordinance, the company may, on its own, change the name
with the approval of the registrar.
The registrar may also direct the company to change its name within thirty (30)
days of the receipt of such directions. The registrar cannot issue any direction in

this regard after the expiration of three years from the date of registration of the
name of the company.
The registrar shall give to the company an opportunity of being heard before
issuing such direction.
Change of name [Sections 39 and 40]

Companies sometimes wish to change their name due to various reasons.
Sometimes it is due to the changing requirements of business or may be when
the company is acquired by a new management and they wish to change the
name of the company.
A company can change its name by passing a special resolution and obtaining
written permission of the registrar for the new name.
The permission of the registrar shall not be required if the only change is the
addition or deletion of the word and parenthesis ‘(Private)’ on conversion of a
company to be a private or public company respectively.
Upon the change of name, the registrar shall enter the new name on the register
in place of the former name and shall issue a ‘Certificate of Incorporation on
change of name’. On the issue of this certificate, the change of name shall be
complete.
After the change of name, the former name shall also be mentioned for one year
from the date of issue of the certificate outside every office or place of business
of the company and on every document and notice of the company. It would not
be so required if the only change in name is addition or deletion of the word and
parenthesis ‘(Private)’.
The change of name shall not affect any legal proceedings that might have
commenced by or against the company under its former name. It would also not
affect the rights and obligations of the company.
Definition: Special resolution [Section 2(36)]

"Special resolution" means a resolution which has been passed
by a majority of not less than three-fourths of such members entitled to vote
as are present in person or by proxy
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 not less than twenty-one days’ notice has been given;
2.2 Publication of names [Section 143]
The name of every limited company shall be Painted or affixed on the outside of
a company’s every office or place of business in a conspicuous position.
Where the registered office is located at a place beyond the local limits of the
ordinary original civil jurisdiction of a High Court, the name shall be in one of the
vernacular languages used in that place. In case of non-compliance the company

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shall be subject to a penalty of Rupees two hundred for every day of default until
the date the company corrects the default.
The name of the company shall also be engraved in English or Urdu on the seal
of the company; and
The name shall be mentioned in English or Urdu on all documents of the
company which are purported to be the documents of the company.
In case any officer of the company uses a document purporting to be the
document of the company, it shall contain full name of the company as required
above, failure may lead to fine of Rupees two thousand rupees and personal
liability for the contents of the document until the company fully acknowledges
that document. [Section 144]

3 MEMORANDUM OF ASSOCIATION
Section overview
 Introduction to memorandum of association

 Clauses of memorandum of association
 Alteration in memorandum of association
 Registration of memorandum of association
3.1 Introduction to memorandum of association
Memorandum of association (MOA)

Company is an artificial person who must be registered in order to exist; this
existence is a process which requires certain things undertaken by the members
of the company.
MOA is the constitution of the company. It defines in brief what the company is,
what is it for, where will it be and what shall be liability of the members of the
company
It further states the amount of share capital with which the company proposes to
be registered and the persons who are the initial members of the company, the
signatories to the MOA.
Registration of company is actually the registration of its constitution, the
memorandum of association, so the memorandum when registered binds the
members of the company. It binds all the members of the company irrespective of
the fact that any members has subscribed to it or not. The person becoming
member of the company is deemed to have read and understood the
memorandum of the company and the memorandum shall be binding on him in
such a way as if he has signed the memorandum himself.
3.2 Clauses of memorandum of association [Sections 16-18]
Clauses of memorandum
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
 Registered office clause
 Objects clause
 Liability clause
 Authorised capital clause
 Subscription clause
We discuss each of these clauses at length hereunder.

Business Law
Name clause
As we discussed the company has got the availability of name certificate from the
registrar till the date of preparation of memorandum of association hence 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 word (Private) Limited in case
of a private limited company, Limited in case of a public limited company and
(Guarantee) Limited in case of a company limited by guarantee. In case of an
unlimited company, the word company is added to the name of the company.
We have already discussed the complexities about the name of the company so
we move forward to the next clause.
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 situate.
Illustration: Registered office

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.
Object clause
This clause of the memorandum clause contains the objects of the company and,
except in the case of a trading corporation the territories to which they extend.
Company cannot do anything as a business which is not written in its object
clause of the memorandum hence it must be very carefully worded, the
registration of the memorandum is also dependent upon lawfulness,
appropriateness and clarity of the objects mentioned in the memorandum of
association.
Illustration: Objects
Law requires the objects to be very clear and also if the company is not a trading
company, the objects must be confined to some territories that should be
disclosed in the memorandum. If the company is such a company which provides
services of conveyance, it shall be required to write in its memorandum very
clearly as to what will be the company’s area of operation. The company may not
cover the entire area of its operations however it cannot go beyond its defined
area for providing conveyance services.
Trading company for this clause shall include the manufacturing as well because
ultimate aim of the manufacturing is also selling the products.
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 does not form part of the memorandum of
association.

In case of a company limited by guarantee, the following additional sentences are

added, ‘that each member undertakes to contribute to the assets of the company
in the event of its being wound up while he is a member or within one year
afterwards, for payment of the debts and liabilities of the company contracted
before he ceases to be a member, and of the costs, charges and expenses of
winding up, and for adjustment of the rights of the contributories among
themselves such amount as may be required, not exceeding a specified amount;
Illustration: Liability clause of a Guarantee Limited company

In event of winding up of the company, the members of a company limited by
guarantee are required to contribute some amount to the company for meeting
winding up expenses, paying up the creditors. However if the assets of the
company are sufficient to meet all these needs, no contribution is required. If the
members are required to pay they are not liable to pay in excess of the amount
guaranteed at the time of becoming member of the company. Also a member of
the company if has left the company at least a year ago, shall not be required to
contribute any money but if one whole year has not lapsed when he left the
membership of the company then he may be required to contribute but not for
the liabilities contracted after the date he ceased to be a member.
The members of a company in winding up are called as contributory, so the
contributories are required to pay similar amounts in usual winding up, if some
amounts are recovered from one contributory then such contributory has got the
right to recover the shares from other contributories.
Authorised capital clause

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
Every subscriber of the memorandum is required to take at least one share in the
share capital of the company and each of them is required to write opposite to his
name the number of shares he has agreed to take in the share capital of the
company.
In case of a company limited by guarantee, this clause shall not be included in
case the company has no share capital
In case of an unlimited company, the authorised capital clause shall not be
inserted in the memorandum whether or not the company has a share capital.
Association or subscription clause

All of the above clauses are undertaken to be abide by, by the subscribers of the
memorandum, 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
Then they write their names addresses and other required particulars and sign
the memorandum of association in presence of at least one witness who is
required to write his own particulars as well.

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3.3 Alteration in memorandum of association [Section 21]
Alterations
Alteration in the memorandum of association can only be made if it is authorised
by the Ordinance
Ordinance allows the alterations of various clauses of the memorandum of
association of the company however there is difference as to the procedure or
requirements of law in altering various clauses of the memorandum.
We have already seen the procedure of alteration in the name clause of the
company and the procedure for change in the authorised capital clause shall be
discussed in more detail in next chapter of this study text.
Liability clause and subscription clause of the memorandum of the company
cannot be altered in the life time of the company.
Reasons of alteration in object and registered office clause

With the changing times, the company may need to update its objects or it may
want to delete any of the objects included in its objects list. The company may
want to shift its registered office for achieving economies of scale.
As per the Ordinance a company can alter the object or registered office clause
of its memorandum of association only if any of the following can be proved to
the satisfaction of the Commission.
to carry on its business more economically or more efficiently; or
to attain its main purpose by new or improved means; or
to enlarge or change the local area of its operations; or
to carry on some business, not being a business specified in its
memorandum, which may conveniently or advantageously be combined
with the business of the company; or
to restrict or abandon any of the objects specified in the memorandum; or
to sell or dispose of the whole or any part of the undertaking of the
company; or
to amalgamate with any other company or body of persons.
The alteration shall not take effect until and except in so far as it is confirmed by
the Commission on petition of the company filed for this purpose.
As we already know that the company is required to write only the province or
part of Pakistan not forming part of a province in its memorandum of association
so the company is not required to prove any of the above if it intends to shift its
registered office within a province from one place to another.
Company shall pass a special resolution of its members for alteration in these
clauses of its memorandum of association.
Alteration in registered office clause

For alteration in the registered office of the company,
Company shall pass a special resolution
Company shall obtain approval of Commission within sixty days of the date
of resolution,

 Copy of the approval of Commission shall be forwarded to the registrar of

new and old province within ninety days of receiving the order. If such
alteration is not made within ninety days, the alteration shall not be effective
however Commission may extend this time period for another ninety days.
 When the company actually shifts its registered office, it shall inform the
registrar of within 28 days of the date of such shifting.
The company would not be required to obtain confirmation or approval from
Commission if it shift its registered office from Islamabad to any city of Punjab or
from any city of Punjab to Islamabad, however it should be considered as a
change of a province and approval of Commission would be required of if the
registered office of the company is shifted from Islamabad to any other province
or vice versa.
Alteration in object clause

For alteration in the capital clause of the company,
 Company shall pass a special resolution and shall acquire approval of
Commission within sixty days of the date of resolution,
 Copy of the approval of Commission shall be forwarded to the registrar
within ninety days of the receipt of the order
 If such alteration is not made within ninety days, the alteration shall not be
effective however Commission may extend this time period for another
ninety days.
Commission’s approval for alteration [Sections 22 and 23]

For approval of Commission in both of the above cases the company shall file an
application to the Commission on the basis of special resolution as discussed
above. The Commission must be satisfied that
 the circumstances, as discussed above for the alteration of object and
registered office clauses of the memorandum, exist and
 Sufficient disclosure regarding alteration of memorandum has been given
by the company to every person who is a holder of debentures of company
or any other person whose interest might be affected by the alteration.
 Consent of the creditors has been obtained or their debts have been
discharged. If the consent has not been so obtained nor the debt has been
discharged, the Commission may require the company to secure or
determine the payment of amount due to those creditors.
The Commission may make an order confirming the alteration either wholly or in
part, and on such terms and conditions as it thinks fit.
The Commission may also order the purchase the shares from dissenting
shareholders by some controlling shareholders.
Illustration: Creditors and alteration

Suppose ABC limited wants to shift its registered office from Lahore to Karachi
and all but three creditors are consented, also few shareholders also disagree to
the shifting of registered office. The directors have been asked by the
Commission to first reach a settlement with all these persons then the
Commission will proceed. Company could not obtain the consent of all the
creditors but has paid for their debt; the objection of Commission for the sake of
creditors shall be removed. Commission may require the directors or sponsors to

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purchase shares from these dissenting shareholders however it may allow the
company to proceed without doing anything for these dissenting shareholders
because of the fact that company has passed a special resolution for this shifting.
Effect of alteration [Section 34]

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 to the alteration otherwise this shall not be applicable to the company.
3.4 Registration of memorandum of association [Section 30]
Registration
For registration of a memorandum of association, it shall be filed with the registrar
of companies. A declaration of compliance (on Form 1) with requirements of the
Ordinance in getting the company registered shall be provided to the registrar
along with the memorandum,
Registrar shall register the memorandum of association only if it satisfied that
 the company is being formed for lawful purposes,
 none of its objects stated in the memorandum is inappropriate or deceptive
or insufficiently expressive and
 All the requirements of this Ordinance and the rules made thereunder have
been complied with in respect of registration.
If the registrar of companies for any reason refuses the registration of the
memorandum, the company may file an appeal before a registrar higher in rank
or ultimately to commission if no relief is received against such a refusal. Order of
Commission on such appeal shall be final.
Effect of registration [Sections 32 and 33]

Registration of memorandum and articles means the registration of the company.
The registrar if satisfied regarding the above mentioned, shall register the
company and shall issue a certificate of registration signed by him under his
hand.
A certificate of incorporation given by the registrar in respect of any association
shall be conclusive evidence that all the requirements of this Ordinance in
respect of registration and of matters precedent and incidental thereto have been
complied with, and that the association is a company authorised to be registered
and duly registered under this Ordinance.
From the date of incorporation mentioned in the certificate of incorporation, the
subscribers of the memorandum, together with such other persons as may from
time to time become members of the company shall be a body corporate by the
name contained in the memorandum.
This company or body corporate shall be capable forth-with of exercising all the
functions of an incorporated company, and having perpetual succession and a
common seal, but with such liability on the part of the members to contribute to
the assets of the company in the event of its being wound up as is mentioned in
this Ordinance. (We have discussed these details in chapter 1 of the study text)

4 ARTICLES OF ASSOCIATION
Section overview
 Introduction to articles of association

 Alteration of articles of association
4.1 Introduction to articles of association
Articles of association [Section 26]

The byelaws of the company, subordinate to the constitution of the company and
further subordinate to the Ordinance. They contain the guidelines on day to day
issues faced by a company. They provide an insight on all the matters that
require an exercise of judgment by individuals.
Example: Articles of association

For example, the Ordinance 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 the each class of shareholders shall be stated in the articles of association.
It is the option for the company limited by shares to get the articles registered or
adopt Table A of the first schedule to the Companies Ordinance 1984 as its
articles.
However the registration of the articles of association is compulsory requirements
for a company limited by guarantee and an unlimited company.
The articles of an unlimited company or a company limited by guarantee (if both
have a share capital) shall state the amount of share capital with which the
company proposes to be registered.
The articles of an unlimited company or a company limited by guarantee (if both
have no share capital) shall state the number of members with which the
company proposes to be registered.
Printing and signature of memorandum of association and articles of association

[Sections 19 and 27]
The articles shall be printed, divided into paragraphs numbered consecutively,
signed by every subscriber to the memorandum and dated.
The subscribers 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 prescribed, in the presence of a witness who shall
attest the signature and shall likewise add his particulars; and they shall be dated
as well.

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Copies of memorandum and articles [Sections 35 and 36]

Every company, upon the request and payment of a prescribed amount by its
member, shall supply within a period of fourteen days a copy of the
memorandum and articles of the company.
Every copy issued after the date of the alteration in the memorandum or articles
of a company shall contain such alteration and the officers of the company liable
to contravention shall be liable to a fine.
4.2 Alteration of articles of association [Section 28]
As the articles are subordinate to the memorandum of association and the

Companies Ordinance, 1984 thus any alteration in any clause of the articles can
be made only if the same is permitted by the memorandum and the Ordinance.
The company may alter its articles by passing a special resolution.
If the alteration affects the substantive rights, privileges or liabilities of members
or a class of members, it can be carried out only if at least three-fourth of the
affected members or class of members vote in favour of such alteration. For this
purpose firstly a full company meeting shall be called and then a separate class
meeting of the affected class shall be conducted.
The details regarding variation in shareholders’ rights have been discussed in
next chapter.

5 COMMENCEMENT OF BUSINESS AND REGISTERED OFFICE
Section overview
 Commencement of business
 Registered office
5.1 Commencement of business [Section 146]
Requirements for commencement of business

Private company and a guarantee limited company not having share capital can
commence their business and exercise all of the powers regarding borrowings
after the incorporation of the company without needing to do anything further.
However other companies are required to commence the business only after they
obtain certificate of commencement of business from the registrar.
For obtaining the certificate of commencement of business company has to meet
certain requirements which are as follows.
In order to get a certificate of commencement of business the company should
have allotted shares against cash for an amount which is at least equal to the
amount of minimum subscription.
Illustration: Minimum subscription

That minimum amount of money which is required to commence the business,
for example company would need a building, machinery, equipment and working
capital budget for starting the business, if company has not got sufficient funds
for all this company would not be able to commence its business hence this
amount must be available in order to obtain a certificate of commencement of
business.
Further the directors of the company should have 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;
If the company had issued a prospectus and could not get its shares listed on the
exchange, the company shall not be given a certificate of commencement of
business until the date all money repayable on such a prospectus is not paid by
the company and statement in lieu of prospectus is not filed by the company
Illustration: Repayment against a 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

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If listing is refused or the company does not apply for listing, the money
from applicants must be repaid forthwith.
Until such money is repaid, company shall not be allowed to commence
business.
For obtaining certificate of commencement of business there should be been filed

with the registrar a duly verified declaration by the chief executive or one of the
directors and the secretary the aforesaid conditions have been complied
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
On the basis of these documents, the company shall be provided with a
certificate to commence the business by the registrar.
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 However
company may be allowed to make simultaneous offer for subscription or
allotment of any shares and debentures or the receipt of any money payable on
application for debentures.
5.2 Registered office [Section 142]
Registered office is a place which is the address of the company for receiving all
of its communications. It does not necessarily require being the head office of the
company. There may be more than one office for business of the company but
registered office shall be single.
A company shall as from the day on which it begins to carry on business, or as
from the twenty-eighth day after the date of its incorporation, whichever is the
earlier, have a registered office to which all communications and notices may be
addressed.
Notice of the situation of the registered office and of any change therein shall be
given within twenty-eight days after the date of the incorporation of the company
or of the change, as the case may be, to the registrar who shall record the same.
The inclusion in the annual return or any other document of a company of the
statement as to the address of its registered office shall not be enough
compliance and company shall have to files the change of the registered office
appropriately on prescribed form.

6 CHAPTER REVIEW
Chapter review
 How to register a company.
 The various clauses of memorandum and articles of association.
 Procedure for alteration in memorandum and articles of association.
 The requirements of Ordinance regarding names of companies
 The requirements of the Ordinance regarding commencement of business and
registered office of the company.

Business Law

CHAPTER
Business Law
21
Share Capital –
Types & Variations
Contents
1 Shares in companies
2 Variation in share capital
3 Chapter review

Business Law
INTRODUCTION
Learning outcomes
demonstrate familiarity with the provisions governing the issuance of
shares.
LO 4.2.1 Describe the nature of shares and share certificates.
LO 4.2.2 Describe the classes and kinds of shares.
LO 4.2.3 Describe with simple example the condition of fully paid shares.
LO 4.2.4 State with simple examples the kinds of alterations can be made to the share
capital.
LO 4.2.5 State the rules on prohibition of purchase of a company’s own or its holding
company’s shares.
LO 4.2.6 Understand the meaning of variation of shareholders’ right.
LO 4.2.7 Demonstrate familiarity with the procedure for cancellation of variation of
shareholders’ right.
Exam context
 Understand and explain the kinds of shares and various classes of the shares
 Understand and explain the variation in rights of the shareholders
 Understand and explain the provisions regarding non permission of buyback of shares
by the companies

Act Chapters

Section B: Company Law - Chapter 21: Share capital – types & variations
1 SHARES IN COMPANIES
Section overview
 Division of share capital into shares of fixed amounts

 The nature of shares and share certificates
 Authorised share capital
 Issued and paid up share capital
 Kinds & classes of shares
1.1 Division of share capital into shares of fixed amounts
Share capital
In a company limited by shares, the share capital represents capital introduced
into the company by the company’s ‘shareholders’, the members.
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 amount. This is the nominal value of the shares.
Example: Division into fixed amounts

The ordinary shares in a company may be divided into 500,000 shares, all of PKR
10 each. Within the same class, there cannot be shares for differing nominal
amounts and all the shares carry equal rights and privileges.
When new shares are created, they are issued to persons who become
shareholders (or who are already shareholders and are acquiring additional
shares).
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 paying up
of the capital.
1.2 The nature of shares and share certificate
Shares [Section 89]

Shares in companies have several characteristics.
 A share is a form of property, carrying rights and obligations, and is
transferable from one person to another. In other words, ownership of
shares can be transferred as per the terms of articles of association.
 A share can be described as a form of bargain between the shareholders,
who must all comply with the company’s memorandum of association and
articles of association.
 A share must be paid for. It must be paid for in full when it is allotted to the
shareholder.

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Share certificates [Section 74]
The share certificate is evidence of ownership of shares in the name of the

member. The company is required to issue share certificates to every
shareholder within ninety days of allotment of shares in the name of the
applicant.
Such person is termed as original allottee of the shares. The share certificate
denotes the number of shares owned by the shareholder, carries the signature of
directors or chief executive of the company, bears its own certificate number and
denotes the distinctive numbers of shares contained in the share certificate.
Whenever the shareholder wants to transfer shares to someone, he has to
surrender this share certificate to the company so that company can add the
particulars of the transferee on the share certificate.
Instead of share certificates, the holders of shares in listed companies are
allowed to keep their shares in central depository company (CDC) instead of
share certificate, thus avoiding the need to safe keep the share certificate. CDC
is just like a bank of securities where the shareholders can open accounts and
deposit the securities electronically in their system. This concept shall be
discussed in detail in further studies.
1.3 Authorized share capital
The Ordinance requires companies to have an authorised amount of share

capital. Authorised share capital is the maximum amount of shares (in each
class) that the company may issue. It is expressed in terms of the nominal value
of the shares.
In the Pakistan all companies limited by shares are required by the Companies
Ordinance, 1984 to have an authorised share capital, and the amount of the
authorized share capital has to be specified in the company’s memorandum of
association.
The authorised share capital can be increased, but only with the formal approval
of the shareholders.
1.4 Issued and paid up share capital
The issued share capital, also called allotted share capital, is the nominal value
of the shares (in each class) that have been issued to shareholders. The issued
share capital may be less than the authorised share capital, but cannot exceed it.
When shares are issued, they must be paid for, the shareholders must pay for
the shares in full when the shares are issued.
Only fully paid shares to be issued [Section 91]

The Companies Ordinance 1984 allows the issuance of fully paid shares only
and no part paid shares are allowed for issuance under the Ordinance, however
a company may have in issue partly paid shares before the promulgation of this
Ordinance then such company may hold the partly paid shares with it for so long
period as it may deem fit. In case such company wants to issue any further

shares, such issue shall be fully paid and shall be possible only when all the
previous issues of shares are fully paid.
Issued share capital and the liability of shareholders

A share represents the maximum liability of a shareholder in a limited liability in
the event that the company is wound up with unpaid debts. The actual liability of
the shareholders is limited to any unpaid capital on their shares (which shall be
zero in most cases as partly paid shares are not allowed to be issued in
Pakistan).
When issued shares are fully paid, the shareholders have no further liability for
the unpaid debts (liabilities) of the company. If the company goes into liquidation
with unpaid debts, the shareholders will not be required to contribute anything to
the payment of the company’s debts. The maximum amount they will lose is the
amount already contributed as share capital.
When shares are partly-paid, the maximum liability of the shareholders is the
unpaid portion of the share capital. If the company goes into liquidation with
unpaid debts, the shareholders will be required to contribute extra capital up to
the amount unpaid on the shares.
Example: Liability of shareholders

ABC Limited, a public company has authorised share capital of 800,000 ordinary
shares of Rs10 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.
In this example:
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.
Adverts and notices [Section 145]

Whenever a company mentions its authorized capital in any advertisement or
notice or in any statement, it shall mention the amount of its paid up capital as
well in equally conspicuous letters and in equally prominent position.
1.5 Kinds and classes of shares [Section 90]
Various kinds and classes
A company limited by shares may have different kinds of share capital and
various classes under each kind. Different kinds of shares are
 Ordinary shares
 Preference shares
Company can have more than one kind of share capital only if it has got
authorized capital for all those kinds and under both the kinds of share capital,
company may have different classes of shares.

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Ordinary shares
The ordinary shareholders are the owners of their company. Ordinary shares are
often called ‘equity’ shares.
The ordinary shareholders ‘own’ the distributable profits of their company, after
preference dividends have been paid, but are only entitled to a dividend:
 if the directors propose a dividend and
 (in the case of a final dividend) the shareholders vote for the payment of a
dividend.
There is no limit to the amount of dividends that a company can pay to its
ordinary shareholders out of its distributable profits.
Ordinary dividends cannot be paid until all unpaid cumulative preference
dividends payable have been paid to the preference shareholders, and until all
preference dividends for the current year have been paid to all classes of
preference shareholders.
In a winding up of the company, the ordinary shareholders 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.
The ordinary shareholders are entitled to vote at general meetings of the
company. Normally, all ordinary shareholders have one vote per share.
(However, this general rule does not apply all the time in the rare cases where a
company has more than one class of ordinary shares – ‘class A’ and ‘class B’
ordinary shares will usually have different voting rights.
Company may make various classes of shares by writing in the articles of
association. Different classes may enjoy different voting rights, voting rights
disproportionate to the paid up value of the shares of the company or no voting
rights at all, or otherwise different classes may be made on the basis of different
entitlements to dividends or right or bonus shares etc.
Preference shares
A preference share normally carries a prior right (ahead of ordinary shares) to:
 receive a dividend: the dividend payable on preference shares is normally a
fixed amount each year
 receive a repayment of capital in the event that the company is wound up.
Holders of preference shares therefore receive preferential treatment, ahead of
the ordinary shareholders.
Preference shares may be of various different classes on the basis of

accumulation or otherwise of the dividend on preference shares, on the basis of
redemption or conversion of preference shares into ordinary shares etc.

2 VARIATION IN SHARE CAPITAL
Section overview
 Alteration in capital
 Restriction on purchase of own shares by a company
 Variation in rights of shareholders
2.1 Alteration in capital [Sections 92-94]
Capital clause of memorandum of association

The company can alter the capital clause of its memorandum of association so
as to increase the authorized capital whenever it requires. Further the company
may choose to consolidate the share capital into shares of a larger amount or it
may decide to divide and subdivide the share capital into shares of an amount
smaller than the one fixed by the memorandum of association initially. Further
company may choose to 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.
Example: Variation in 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 by
passing a resolution in its general meeting alter this capital 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.
Now suppose 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.
For exercising the above mentioned powers, company is required to convene a

general meeting and obtain approval of members through a resolution. Also 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.
In case of companies not having share capital, they may increase the authorized
number of members for such company by passing a resolution in the same way
as a company limited by shares does for increasing its share capital.

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Special provisions for banks and financial institutions [Section 92(3A)]

A company, if it is required to issue shares to a scheduled bank or financial
institution against any of its obligations so to do, may issue and allot shares to a
scheduled bank or financial institution even if the company has no sufficient
authorised capital to issue new shares. The authorised capital of the company
shall be deemed to have been increased to the extent of the requirement of
issuance of shares to a scheduled bank or a financial institution..
2.2 Restriction on purchase of own shares by company [Section 95]
Irredeemable share capital

The ordinary share capital of the company is irredeemable and no member has
got the right to get his money back from the company by surrendering his shares.
The preference shares however can be issued as redeemable on such terms and
conditions as may be agreed by the company and holders of shares.
As the members do not have any right to demand his money back from the
company similarly company is also not entitled to buy its shares from the
members further company is also forbidden to buy the shares of its holding
company. However as an exception, If subsidiary carries on a bonafide business
of brokerage, then company can deal in the shares of its holding company but in
this case as well, the company shall not exercise voting rights on the shares of
the holding company held by it
As a further exception, if a subsidiary company provides service of a trustee for
shares and people buy the shares and place in the subsidiary company as
trustee then such subsidiary, while acting as a subsidiary can hold the shares of
the holding company in trust as well but beneficial ownership of those shares
should not be in the name of the subsidiary company itself or the holding
company.
Prohibition of financial assistance

Except a private company, a company is not allowed to grant financial assistance
of any sort, i.e. loan advance or credit etc., to any person for buying its shares or
the shares of its holding company. This condition shall be applicable to the
private company as well if such private company is a subsidiary of any public
company.
However every company can provide such benefit to any of its salaried
employees if payment of such financial assistance is part of contract of service.
For the purpose of this provision the term employee includes a chief executive of
the company who was not a director of the company prior to his appointment as a
chief executive of the company but the term employee does not cover any other
director of the company.
Permission of buyback of shares

As an exception however a listed company may, if it complies with the rules
made by Commission in this regard, buy back its shares from its shareholder.

2.3 Variation in rights of the shareholders [Section 108]
Procedure for variation in rights

Variation in rights of the shareholders can be made only by an alteration of the
articles of association by passing a special resolution of the members of the
company. By a special resolution, the company shall alter the conditions as to
various classes of shareholders. If however, the variation affects the substantive
rights of any particular class of shareholders, it shall not be deemed to have been
carried out unless three fourth majority of that particular class of the members
does not agree to the alteration.
Right to challenge the variation in rights

Although the resolution to vary the rights of the members needs approval by
three fourth majorities of the members of the particular class affected by the
variation however any member or members of the affected class representing at
least ten percent shareholding of that class may apply to the court for an order
against the resolution varying their rights. 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 change is otherwise prejudicial to the interest of members,
Such application for getting an order against the resolution should be filed by the
persons aggrieved by the change within 30 days of the date of resolution. The
decision of the court on such matter shall be final and appeal cannot be filed
against such decision and the company is required to file a copy of the order of
the court to the registrar within fourteen days of receipt of the order.

Business Law
3 CHAPTER REVIEW
Chapter review
 About shares and share certificates
 About kinds and classes of shares
 About authorised and paid up capital
 About the variation of authorised capital
 About the variation in rights of the shareholders.

CHAPTER
Business Law
22
Share Capital-Prospectus
Contents
1 Introduction to prospectus
2 Experts in context of prospectus
3 Chapter review

Business Law
INTRODUCTION
Learning outcomes
shares.
LO 4.1.1 Define a prospectus and explains its purpose
LO 4.1.2 Understand the requirements relating to a prospectus as laid down in Section
52, 53 (1), (5) and (8)
LO 4.1.3 Describe the matters that are to be specified in a prospectus as required
under clause 1 to 7 and 17, 18 19, 24, 26 and 27 of Section 1 of Part I of
Second Schedule
LO 4.1.4 Describe the reports that are to be included in a prospectus as required under
Section 2 of Part I of Second Schedule
LO 4.1.5 Understand the provisions regarding statement and consent of expert
Exam context
 Understand and explain the concept, need and contents of a prospectus
 Understand and explain the reports to be set out in a prospectus
 Understand and explain the concept of experts in context of a prospectus

Act Chapters

Section B: Company Law - Chapter 22: Share Capital-Prospectus
1 INTRODUCTION TO PROSPECTUS
Section overview
Basics
Contents of prospectus
Timing of prospectus
Necessity of prospectus
Availability of prospectus
Registration of the prospectus
1.1 Basics
Definition: Prospectus [Section 2(29)]

"Prospectus" means any document described or issued as prospectus, and includes
any notice, circular, advertisement, or other communication, inviting offers from
the public for the subscription or purchase of any shares in, or debentures of, a
body corporate, or inviting deposits from the public, other than deposits invited by a
banking company or a financial institution approved by the Federal Government,
whether described as prospectus or otherwise.
As per the definition it can be construed that the prospectus
Is a document issued for general public,
It invites offers for sales of company’s shares or debentures or invites
deposits from general public, and
Companies are not entitled to invite deposits from general public in the like
manner as the banks or financial institutions do
Definition: Financial Institution [Section 2(15A)]

The term financial institution” includes:–
(a) a company or an institution whether established under any special law (like
banking Companies Ordinance 1962) and operating within or outside Pakistan
which transacts the business of banking or any associated or ancillary business
through its branches;
(b) a modaraba, leasing company, investment bank, venture capital company,
financing company, housing finance company, a non-banking finance company;
and
(c) such other institution or company authorized by law to undertake any similar
business, as the Federal Government may, by notification in the official Gazette,
specify for the purpose
Financial institution as stated in definition above are freely allowed at to call for
deposits from the public but the companies other than the financial institutions do
not enjoy such powers and they are required to issue a prospectus for such
purposes and that too after obtaining approvals and meeting rather strict
requirements, reason being that companies are not that strictly regulated as do
the financial institution are so the regulatory bodies prefer not to allow the calling
of deposits to the companies on easy terms.

Business Law
We have already discussed the details of shares in previous chapter and can
now understand what the issuance of shares means; however we need to define
the debentures over here.
Definition: Debenture [Section 2(12)]

“Debenture" includes debenture stock, bonds, term finance certificate, and any
other securities, other than a share, of a company, whether constituting a charge
of the assets of the company or not;
The prime words we come across regarding debentures are ‘any other security,
other than share of the company’ so if the company wants to raise finance on
the basis of issuing securities, anything it issues shall be termed as debenture if it
is not a share of the company.
Debentures sometimes constitute charge in the assets of the company; we shall
study in detail about this in chapter 5, Mortgages & Charges’
Purpose of prospectus
The purpose of prospectus as indicated above is to invite offers from general
public for the shares or debentures of the company or calling of the deposits from
the public.
The term “public or general public’ is specific for prospectus because shares or
debentures can be issued by the company by private arrangement with some
friends or relatives of the promoters or directors etc. but if the company wants to
issue shares to large number of persons it has to offer this to the general public
and the requirement of the law is to issue a prospectus along with such offer of
shares or debentures.
The friends or relatives of the promoters and directors can get every information
about the objects, prospects and operations of the company however if the
general public wants to purchase shares in the company, it shall have no avenue
available regarding the company to make investment or otherwise decision about
the company.
Prospectus comes to play in these situations and provides the readers with all
the information required by them before making any financial decision regarding
investment or otherwise in the company.
Statement in Lieu of prospectus

Alternatively if a company does not want to call subscriptions from general public
and wants to carry on business as a public unlisted company, it shall be required
to file a statement in lieu of prospectus with the registrar at least three days
before first allotment of any shares or debentures. It may however be noted that
the private company is not required to file the statement in lieu of prospectus.
1.2 Contents of prospectus [Section 53 and 2nd Schedule]
Primarily, the prospectus must contain sufficient material to enable any person to
reach a decision on the investment in the shares or debentures of the company
or to make a deposit with the company.
The prospectus is a very formal document and needs approvals from the
Commission and clearance from the stock exchange as well because any
security which is offered to the general public should be listed on stock exchange

otherwise company is not allowed to allot that security to the applicants. Hence
the stock exchange in addition to the Commission is also a regulator, who
regulates the issuance of prospectus.
Detailed contents of the prospectus have been stated in the second schedule to
the Companies Ordinance 1984, prime of them are as follows
 Prospectus shall contain the full memorandum of association of the
company with complete particulars of signatories to the memorandum
however if the prospectus is issued after two years of the date of
commencement of business such particulars shall not be required.
 Number and value of shares with existing members and nature of extent of
interest of such shareholders in the company.
 Description of business to be undertaken along with reasonable future
prospects of the business.
 Any provisions in articles of association regarding authority of determination
of remuneration of directors.
 Particulars of directors, proposed directors, secretary and chief executive of
the company and their directorships of above persons in any other
company and any contract regarding appointment of the above persons or
remuneration etc.
 The amount of minimum Subscription, it includes
 Purchase price of property to be purchased
 Preliminary expenses including underwriting commissions etc.
 Repayment of any money borrowed for above matters
 Working capital
 Any other expenditure
 If the company intends to meet the all or any of the above needs from
any source other than the issue of shares, such source shall be
disclosed.
 Date and time of opening and closing of subscription lists. It states the time
and day when applicants can deposit money in bank account of company.
 Amount payable on each share and on each application.
 Full particulars of auditors and legal advisors of the company appointed
under the Ordinance.
 Any personal interest of any director or promoter in the promotion of the
company.
 Voting rights on the shares of the company and any restrictions on it as per
articles of association of the company.
 If the company had already commenced business then length of time from
the date of commencement of business shall also be mentioned in the
prospectus.
 Purpose or the activity for which the proceeds of the issue of shares shall
be used.
 Details if the shares are to be issued for a consideration otherwise than in
cash.

Business Law
 Summery in columnar form of the earnings of the company for each of the
last three financial years.
 Pending litigations of the company or its subsidiaries other than the routine
litigations.
As we can now see that all the contents of the prospectus lead to one conclusion,
whether the person reading the prospectus should decide to buy the shares or
debentures of the company or he should decide otherwise. The company would
surely want that all the good aspects are shown and people are allured to invest
in the company but this is the time when regulators like, Commission, Stock
exchange and Registrar come to the rescue and ask the company about every
fact written in or omitted from the prospectus, before approving the prospectus
for issue to the general public.
It is customary for the authorities to require the company to arrange and write the
risk factors separately. All the factors that could be risky for investment in the
company are written in a single paragraph and readers of the prospectus are
specifically advised to read at least that paragraph before making any investment
decision.
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 the provision of
accurate information to the prospective shareholders or members.
Reports to be set out in the prospectus
In addition to the above contents, following reports, by the auditors of the
company shall also be set out in the prospectus; namely
 A report on assets and liabilities at the last date when accounts were
prepared and Profit and loss account of the company along with any
unusual or extraordinary or non-recurring item
 Dividends paid by the company during last five financial years for all
classes of shares including when dividend was not paid and also on the
matter when accounts of the company were not prepared for any year
during last five years.
 If the company has got subsidiaries the auditor’s report shall deal with the
profit and loss accounts and statements of assets and liabilities of the
subsidiaries as well along with the same financial statements of the
company itself.
If the proceeds of the issue shall be used for the acquisition of any business or
any interest therein then the auditors (of that company whose shares or interest
is proposed to be purchased) shall report separately on last five year’s profits and
losses of that business or company and assets and liabilities of that business or
company at a date not earlier than 120 days of the prospectus
Further If the proceeds of the issue shall be used for the acquisition of any
business or any interest therein, which shall make the other company as
subsidiary of the company, then the auditors (of that company whose shares or
interest is proposed to be purchased) shall report separately on last five year’s
profits and losses of that business or company and assets and liabilities of that
business.
The report shall also explain that what difference would it have been on the profit
and loss of the company (issuing a prospectus) had the company always held
those shares in that company which are proposed to be purchased now.

Further if that other business or company has subsidiaries, the report shall
include the performance and assets liabilities of that business as well.
1.3 Timing of prospectus

The company may issue a prospectus at any point in time of its life. If the
company wants to issue shares to the public before commencement of business
it may opt to issue a prospectus at the very moment. Or otherwise the company
may opt to not to issue shares to the general public initially and start the business
without involving the general public in the company, in such a case however
company would be required to file a statement in lieu of the prospectus with the
registrar before obtaining a certificate to commence the business.
In future whenever the company decides to issue shares or debentures to the
general public, it shall be required to issue a prospectus and get the shares or
debenture, as the case may be, listed on stock exchange.
Once issued and securities allotted under a prospectus, its existence ends and it
is not like something the memorandum or articles of association. It is intact for a
certain period of time for which company is in a process to issue shares or
debentures etc.
Prospectus must be dated and that date shall be considered as the date of
publication of the prospectus unless contrary is specifically proven. [Section 52].
1.4 Necessity of prospectus

Company shall issue form of application for shares in or debentures of a
company only if the form is accompanied by a prospectus however if the form of
application is issued either in connection with a bona fide invitation to a person to
enter into an underwriting agreement with respect to the shares or debentures; or
in relation to shares or debentures which were not offered to the public.
Definition: Underwriter
Usually the banks or financial institutions who, against a fee or commission,
undertakes to purchase those shares or debentures of the company which are not
subscribed by public in a public issue of shares or debentures.
They may charge two types of fee, one for undertaking to buy the shares if
required, named as ‘underwriting commission’ and secondly if they actually
purchase the shares or debentures, they may charge additional fee termed as ‘take
up commission’.
Illustration: Form of application for shares or debentures

ABC Limited has recently started its business after obtaining certificate of
commencement of business from the registrar. The company wants to issue
debentures for obtaining loans however the company does not want to approach
general public for this purpose, the directors of the company rather provide their
friends with choice to apply any number of debentures in the company and issue
them form of debentures for this purpose. Such issue of application form without
issuing a prospectus is allowed as it is not issued to general public rather it has
been issued as a domestic concern of the persons issuing forms.

Business Law
Suppose ABC Limited wants to issue debentures to the public and for this purpose
it is required to arrange for underwriters.
Further the issuance of a prospectus shall not be required to be issued if
the offer of shares or debentures is made to existing shareholders or
debenture holders or
The offer is being made for such shares or debentures which are already in
issue and listed on an exchange.
1.5 Availability of prospectus [Section 53]
A sufficient number of copies of the prospectus shall be made available at the

registered office of the company, with the stock exchange at which the company
is listed or proposes to be listed and with the bankers to the issue, and the
prospectus in its full text or in such abridged form, shall be published at least in
one Urdu and one English daily newspaper.
1.6 Registration of prospectus [Section 57]
Copy of the prospectus shall be filed with the registrar for registration of the same
before its issuance for the general public. The copy so delivered shall be signed
by all the directors of the company or their agents authorised in writing in this
behalf. The copy so delivered shall be accompanied by the consents of experts,
the copies of material contracts referred to in the prospectus and the reports as
required by the second schedule. The registrar shall register the prospectus only
if it complies with all the requirements of law as to its contents, filing and
registration etc.
Face of prospectus
The following matters shall be stated on the face of the prospectus:
That a copy of this prospectus has been filed with the registrar for
registration purpose
A list of documents or a reference to any note in the prospectus containing
the list of documents that were files with the registrar along with the copy of
the prospectus when it was filed for registration
That an application for listing of the shares or debentures offered under the
prospectus has been filed or shall be filed with the stock exchange.

2 EXPERTS IN CONTEXT OF PROSPECTUS
Section overview
Experts
Consent of experts
2.1 Experts [Section 54 and 55]
Definition:
"Expert" includes an engineer, a valuer, an accountant and every other person
whose profession gives authority to a statement made by him.
Why would company need statements from experts in its prospectus? Because
the statement of the experts increase the credibility of the information provided in
the prospectus, it is very simple, we see in TV advertisements that they show a
dentist recommending a toothpaste or a tooth brush, this is because we take his
or her advice rather more seriously regarding the choice of the toothpaste,
Company’s management may claim in the prospectus that their machinery is very
modern and has a production capacity of x number of units which will boost the
sales by y number of times but people would tend to doubt about this but when
an expert , say, a mechanical engineer would confirm this thing, doubts will fade.
This is why sometimes companies opt to include statements from experts in their
prospectus.
Independence of expert
The above discussion highlights the fact the expert must be independent of the
company to make an independent statement about any aspect of the company
so that his statement is relied upon.
So the Ordinance requires that the expert must have no connection with the
formation or management of the company if he has to make any statement in the
prospectus of the company
2.2 Consent of expert
Experts consent should be obtained

Experts’ statement in the prospectus should only be included only if the expert
has given his written consent to the issue of prospectus containing his statement
and has not withdrawn the consent till the time a copy if filed for registration of
the prospectus.
If the expert has withdrawn his consent to the issue of the prospectus containing
his statement and the directors did not exclude his statement, such directors in
default shall be liable for loss whatsoever occurred to the expert due to this wilful
act of omission.

Business Law
Statement regarding experts’ consent

Although the experts consent to the issue of the prospectus must be obtained in
writing besides it should be specifically mentioned in the prospectus that
 The expert had given his consent to the issue of the prospectus containing
his statement and
 That he had not withdrawn his consent to the issue of prospectus
containing his statement till the time a copy of prospectus was filed with the
registrar for registration

3 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know about:
 the concept, need and contents of a prospectus
 the reports to be set out in a prospectus
 the concept of experts in context of a prospectus and provisions regarding their
statements

Business Law

CHAPTER
Business Law
23
Mortgages & Charges
Contents
1 Borrowing powers of a company
2 Registration of mortgages & charges
3 Chapter review

Business Law
INTRODUCTION
Learning outcomes
shares.
LO 4.3.1 Discuss the meaning of mortgage/charge with simple examples, and the duty
of company and the procedure for registration of charges.
LO 4.3.2 State the right of an interested party in respect of a registration of
mortgage/charge.
LO 4.3.3 State the duty and procedure of payment or satisfaction of mortgage/charge.
LO 4.3.4 Demonstrate familiarity with the right to inspect the instrument creating a
mortgage/charge.
LO 4.3.5 Discuss the consequences of registered and unregistered mortgages/charges.
Exam context
By the end of this chapter students will be able to understand:
 The borrowing powers of a company
 Different forms of borrowings by companies
 Types of mortgages and charges and provisions regarding their registration and
satisfaction etc.

Act Chapters

Section B: Company Law - Chapter 23: Mortgages & Charges
1 BORROWING POWERS OF A COMPANY
Section overview
 Inherent borrowing powers of a company

 Forms of borrowings
 Types of security
1.1 Inherent borrowing powers of a company
General permission to borrow

The company may add in its object clause of memorandum to borrow money as
and when required by it however even if it is not included as such the
memorandum of association of the company is deemed to contain the powers to
borrow money as loans, advances or credit from the scheduled banks or financial
institutions. It also includes the powers to issue securities not based on interest
for raising resources.
The powers as mentioned above shall not be faded by operation of any other law
enforced in Pakistan.
Restriction on borrowing
As studied in earlier chapters, few companies are required to obtain a certificate
of commencement of business before commencing their business, such
companies cannot exercise any borrowing powers until the date they obtain a
certificate of commencement of business.
Ultra-Vires borrowings
The power to borrow money rests with the directors of the company and they are
allowed to borrow money once they have passed a resolution in their meeting in
this behalf. Company may restrict their powers to borrow by its articles of
association, by mentioning, as such, that the borrowings exceeding a certain
amount may be made only with the prior approval of members in a general
meeting. Hence if the directors exceed their authority in such a case and borrow
in excess of the limit, the borrowing so made shall be considered as ultra-vires
borrowings.
1.2 Forms of borrowings
Debentures
The securities issued to borrow money are named as debentures.
Definition: Debenture [Section 2(12)]

Debenture includes debenture stock, bonds, term finance certificate and any other
securities, other than a share, of a company, whether constituting a charge of the
assets of the company or not;
It means that the company may name its securities anything they shall effectively
be a debenture if they are not the share of the company.

Business Law
A public company may issuedebentures to public or otherwise issue debentures

to any persons privately. The debentures often carry certain fixed interest
however the companies are also allowed to issue debentures which do not carry
interest rather such debentures are allowed to participate in the profits of the
company. Holders of debentures are not allowed to cast votes in the meetings of
the company (members) however they are allowed to vote in their own or
creditor’s respective meetings, if called for any purpose. At times, however, the
holder of debentures convertible to ordinary shares may also be allowed to cast
votes in the general meetings of the company.
Debentures may be secures or unsecured. The secured debentures are the ones
against which company has provided any collateral as a security. It may be any
property of the company or any other asset of the company having value
equivalent or in excess of the amount borrowed against debentures. Normally
such agreements do not require the physical transfer of the asset at the time of
making a borrowing agreement however this takes place at some future date if
the company does not honour its obligations to pay interest or principal at
relevant time.
Borrowings from credit institutions

Credit institutions include the commercial banks, investment banks, non-banking
finance companies, modarbas and all other business organisations providing
facilities for loan against the interest or sometimes against participation in profits
of the company as per agreed terms.
These loans too, usually are secured against the assets of the company.
Borrowing from other sources

Other resources for obtaining loans may include the sponsors or controlling
shareholders of the company who at times facilitate the company with financial
help whenever it is required. With this option available company at times can
benefit the business situations in a better way. This type of financing is usually
unsecured however it may be secured against the assets of the company.
1.3 Types of security
Pledge
Definition:
Contract Act defines pledge as a ‘bailment’ of goods as security for the repayment
of a debt or performance of a promise.
As the definition implies, the goods or valuables of the company are physically
given in possession of the lender till the debt or obligation is satisfied by the
company. Although the contracts for pledge are in writing and signed by both the
parties but this contract is not required to be registered with registrar of
companies as both lender and borrower are secured by the valuables of each
other, the lender holds the right to the goods and the borrower uses the money
instead.

Example: Pledge
Company ABC textiles Limited needs funds for procurement of raw material which
shall be used by the company over next six months. The company is not financially
capable of purchasing the inventory for next six months but they cannot delay the
procurement because the raw material shall not be available in next few months.
The company may make an arrangement with a financial institution to borrow
money for the procurement of inventory and against such borrowing provide the
same inventory as a security and ask the financial institution to take the
possession of the inventory. The company shall get the inventory for usage as and
when required when it pays the liability of the financial institution. The only thing
company has to worry about is the repayment and servicing cost (mark-
up/Interest) of the financial institution. The company doesn’t need the inventory
currently so they can pile up the money to free their inventory as and when
required by them.
The above arrangement is an example of pledge contract in which physical
possession of the asset was handed to the lender and released once his
outstanding balance was cleared.
Mortgage
Definition:
A mortgage is the transfer of an interest in specific immovable property for the
purpose of securing the payment of money advanced or to be advanced by way of
loan, an existing or future debt or the performance of an engagement which may
give rise to a financial liability.
The definition clearly implies that the term ‘mortgage’ shall be used when the
company agrees to transfer the title of any ‘immoveable property’ to any person
against his loan or any other debt..
however the company does not transfer the physical possessionof the asset to
the lender in the case of a mortgage and continue enjoying benefits of the asset
unless and until it fails in complying with the terms of the loan contract giving rise
to physical transfer of the property to the lender.
Example: Mortgage
If the company ABC Textiles Limited as in previous example required the loan for
construction of a new factory, it would rather have an option to get the long term
loan on the basis of the mortgage of the same property on which they shall
construct the factory. As ABC limited wants funds as well as it needs possession of
the asset, mortgage would be a better option rather than pledge in which company
has to deliver the physical asset to the lender.
Title of the property and factory will remain in the name of the financial institution
however the company will continue to use its asset and pay the amount of the
financial institution as agreed between them.
This set up is a mortgage contract.

Business Law
Charge
Definition:
A charge is security for the payment of a debt or other obligation that does not pass
‘title of the property’ or any right to its possession to the person to whom the
charge is given.
Evident from its definition the term charge shall be used when there is a mere
contract of transferring the title and physical possession of the asset in the event
of company’s failure to abide by the terms of the loan contract.
Example:Charge
Suppose the company ABC textiles Limited requires funds off and on because
sometimes their receivables take longer than usual time to pay. The management
of the company feels that they can manage their short term needs of funds if they
get a facility of overdrawing from their bank as and when required up to an amount
of Rupees 500 Million. Now it is not the case that they will be using entire amount
of Rupees 500 million all the times however they will use any funds they need to
the tune of this amount.
Bank shall surely ask for some security against such loan. Company can make an
arrangement of creating a charge on the current assets of the company, say on
receivables. The broader terms of the contract shall state that company shall
continue its business in its ordinary course and overdraw from bank as and when
they require however they will repay the principal and mark-up and if the company
fails to do so, bank shall be entitled to receive the money from receivables rather
than the company.
Charge can be of two different types

Fixed charge
created on a specific asset for a defined amount,
the asset under fixed charge cannot be replaced or sold without prior
approval of beneficiary of charge,
In the event of winding up of the company, holder or beneficiary of the
fixed charge possess right of priority in respect of asset secured
under the fixed charge.
Floating charge
may be created on any class of assets meaning thereby that the
asset is not fixed under the floating charge,
may be created on the entire undertaking of the company,
the assets under floating charge may be replaced by the company
however overall value of class of assets charges should not reduce
below an agreed amount

2 REGISTRATION OF MORTGAGES & CHARGES
Section overview
 Registration of mortgage or charge

 Procedure for registration of mortgage or charge
 Payment or satisfaction of mortgage or charge
2.1 Registration of mortgage or charge
Types of mortgage & charge liable for registration [Section 121]

Whenever the company enters into any contract for mortgage or charge whether
for securing the debentures or otherwise, it shall need guidance regarding
whether or not to register that mortgage & charge with Registrar. The Companies
Ordinance 1984 requires that the following mortgages and charges, whenever
entered by a company, must be registered with the registrar i-e a mortgage or
charge.
 for the purpose of securing any issue of debentures including redeemable
capital or musharika agreements;
 on uncalled share capital of the company (in case company has issued
partly paid shares);
 on any immovable property wherever situate, or any interest therein;
 on any receivables of the company however the routine invoice discounting
etc as a financing arrangement is not considered as a charge;
 on any movable property of the company including a ship or any share in a
ship; or
 on goodwill, on a patent or licence under patent, on a trade mark, or on a
copyright or a licence under a copyright;
 or other interest based on hire-purchase or leasing agreement for
acquisition of fixed assets;
 including a floating charge on the undertaking or property of the company,
including stock-in-trade;
Where
 Redeemable capital means:
Definition: Redeemable Capital [Section 2(30A)]

The term redeemable capital includes finance obtained on the basis of:
 participation terms certificate (a name for participatory redeemable capital-
explained below).
 musharika certificate, terms finance certificate (TFC).
 or any other security or obligation not based on interest.
Definition: Participatory Redeemable Capital [Section 2(25)]

means such redeemable capital as is entitled to participate in the profit and loss of
a company.

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 Musharika Agreement is a term used as equivalent of partnership/

participatory redeemable capital in Islamic banking.
2.2 Procedure for registration of mortgage or charge [Section 129]
Duty of registration
Whenever the company enters into any of the above mentioned mortgages &
charges, it is the duty of the company to get the particulars of charge registered
with the registrar within twenty one days of the creation of the same. The
particulars required to be produced to the registrar includes the agreements for
loan or debt and other information prescribed.
Briefly the following documents are required to be filed for registration of a
mortgage or charge:
 Form 10 containing particulars of mortgage/charges etc.
 Copy of instruments (contract documents) creating the mortgage or charge.
 An Affidavit to the effect that the copies of the instruments are the true
copies.
 Bank challan evidencing the payment of fee for registration.
Duty and right of registration [Section 129]

It is duty of the company however right of the interested person (usually lender)to
get the mortgage or charge registered with the registrar within twenty one days of
the creation of the same. It is usually pre-decided among the parties as to who
shall get the mortgage or charge registered with the registrar.
Whether the charge is registered by company or the interested person, the cost
of registration shall be borne by the company and the interested person
registering the charge shall be entitled for reimbursement of the costs properly
incurred in getting the mortgage or charge registered.
Consequences of non-registration [Section 121]

If the company or interested persons fails or neglects to register the mortgage or
charge within the given time of twenty one days after creation of the same, the
mortgage or charge would become void and shall not be accepted as such by the
liquidator or any creditor.
Further the debt in respect of which the mortgage or charge was created remains
unsecured and money to which was to be secured by the charge becomes
payable immediately.
Law has provided both the parties an opportunity to get the mortgage or charge
registered as the non-registration of the same is harmful for both parties of the
contract. For company, the amount becomes immediately repayable and for the
lender, security no more remains available.
Registration of mortgage or charge created outside Pakistan on a property situated

outside Pakistan [Section 121]
In such a case where the mortgage or charge has been created outside Pakistan
on any property of the company which is situated outside Pakistan, the rest of the
procedure for registration of the charge is same with the exception that the period
of twenty one days shall start from the day when the documents should reach
Pakistan if sent with due care from that other country.

Registration of mortgage or charge created in Pakistan on a property situated

outside Pakistan [Section 121]
In such a case where the mortgage or charge has been created in Pakistan on
any property of the company which is situated outside Pakistan, the rest of the
procedure for registration of the charge is same with the exception that the
registration of charge with the authorities of that other country shall also be
required for completion of registration of mortgage or charge.
Constructive notice regarding existence of mortgage or charge
Every person buying any property of the company shall be deemed to have a
constructive notice of the fact that the asset is subject to mortgage or charge.
This is the reason any person buying any asset from the company needs its
checking with the registrar to confirm whether or not the asset is free from any
mortgage or charge.
2.3 Payment or satisfaction of mortgage or charge [Section 132]
Satisfaction of mortgage or charge

Satisfaction mortgage or charge means that the company has paid for theamount
of debt or loan against which the property of the company was secured. The
company may partially pay the amount of loan or debt and if the relevant loan
contract allows, get the charge satisfied
It is in the company’s own interest to inform the registrar that the charge has
been fully or partially satisfied so that the stake holders i.e. investors and lenders
should know that all of the debt has been paid off.
The particulars of satisfaction of mortgage/charge shall be submitted to the
registrar concerned on prescribed form 17 within twenty one days from the date
of satisfaction/repayment.
Duty of company and right of registrar [Section 132]

It is the duty of the company to inform the registrar regarding satisfaction of
mortgage or charge as discussed above.
The registrar shall register the satisfaction of mortgage or charge only after
verifying from the interested person (the lender) regarding the repayment of the
loan and shall grant him a time of fourteen days to file any objection to the
satisfaction of mortgage or charge.
If no objection is filed by the lender, the registrar shall register the satisfaction of
the mortgage or charge as requested by company, otherwise he shall
communicate the company regarding objection raised by the lender
The registrar is entitled, even if no information is received from company, to enter
the satisfaction of mortgage or charge if he is aware that a particular mortgage r
charge has been repaid or the property subject to the charge no longer remains
the part of the undertaking of the company.
Right to inspect the copies of instruments creating charges [Section 136]

Company is required to keep the copies of the instruments creating charges or
relating to the registration of charges or any rectifications therein at its registered
office.
Further the company is required to keep at its registered office a register
regarding the mortgages or charges created by it. This register contains fullest

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information as to identify the property mortgaged or charged as well as the terms

and conditions and the beneficiary of the charge.
Any creditor or member of the company can inspect the copies of the instruments
so placed and the register of mortgages or charges of the company free of cost
at all reasonable times. The register of the mortgages or charges as above is
also open to inspection of any person other than members or creditors against
payment of fee.

3 CHAPTER REVIEW
Chapter review
 What are the inherent borrowing powers of a company,
 What are different modes of borrowings by the companies
 What are different types of mortgages & charges and what is the procedure of
their registration and satisfaction.

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CHAPTER
Business Law
24
Meetings
Contents
1 Company Meetings
2 General provisions as to company meetings
3 Chapter review

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INTRODUCTION
Learning outcomes
demonstrate knowledge of the management of companies.
LO 5.3.1 State the timing, matters and reports relating to statutory meetings.
LO 5.3.2 State the timing, matters and reports relating to an annual general meeting
using simple examples.
LO 5.3.3 State who can call an annual general meeting.
LO 5.3.4 State the timing, matters and reports relating to an extraordinary general
meeting.
LO 5.3.5 State who can call an extraordinary general meeting.
LO 5.3.6 State the quorum for a general meeting
LO 5.3.7 State the entitlement of a member in respect of appointment of proxy and
conditions applicable thereon.
LO 5.3.8 Describe the provisions relating to minutes of meetings
Exam context
 Understand the requirements for meetings
 Understand and explain powers of various persons to call meetings
 Understand the minutes of meetings

Act Chapters

Section B: Company Law - Chapter 24: Meetings
1 COMPANY MEETINGS
Section overview
Types of company meetings

General meetings
Statutory meeting
Annual General Meeting (AGM)
Extraordinary General Meeting (EGM)
Calling of meetings by the Commission
Filing of resolutions
1.1 Types of company meetings

The companies have to hold and conduct a variety of meetings during their life
and even during winding up as well. Some of them are mandatory as per the
Ordinance and the others are conducted on ‘as and when required’ basis. The
broader categories of the meetings are as follows:
Board of directors meetings
General meetings
For the directors there may be certain committees in place so the meetings of
those committees may also be held, termed as ‘Committee Meetings’. In certain
cases companies have more than one class of members, so there may be
meetings of various classes of members, termed as “class meetings”.
1.2 General meetings
Definition:
A general meeting is a meeting of the shareholders (members) of the company
who are entitled by the company’s articles to attend and vote at such meetings.
Usually, the ordinary shareholders of a company have the right to attend and
vote at general meetings, but preference shareholders do not..
In theory, general meetings allow the members to make decisions on matters of
importance, and at times, restrict the powers of the directors. For example, the
members in general meeting may:
remove directors from office
restrict the powers of the directors by altering articles of association of the
company
approve or disapprove dividends
resolve any differences between the shareholders themselves.
In practice, however, the power of the shareholders in general meeting is often
fairly limited. Resolutions at general meetings are usually proposed by the
directors. Individual shareholders or a number of shareholders acting together
possessing a described voting powers may have the right to propose resolutions

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that all the members will vote on, but it is unusual for shareholders to exercise
this right.
Many of the resolutions voted on by the members, particularly at annual general
meetings, are routine. The approval of resolutions is therefore often a formality,
where the company is simply complying with procedures required by law.
General meetings are usually 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.
A general meeting may be:
 a statutory meeting,
 an annual general meeting, or
 an extraordinary general meeting.
1.3 Statutory meeting [Section 157]

Introduction
In case of a public company, the law requires it to hold a general meeting known
as statutory meeting and deliver a report in such meeting called as a statutory
report. This is actually the beginning phase of the company and the members
usually do not know all other members nor all of them are familiar with
management (directors and chief executive) of the company, so this meeting
provides an opportunity to get to know each other and also the statutory report is
an indicative of financial startup of the company that can be helpful for
understanding of the members of the company.
Requirement to hold statutory meeting
Following companies are required to hold statutory meeting

 Every company limited by shares
 Every company limited by guarantee and having share capital
However a private company is not required to hold a statutory meeting but if such
private company converts itself into a public company within one year of its
incorporation, it shall also be required to hold a statutory meeting.
Timing of statutory meeting

Companies as above are required to hold the statutory meeting after three
months and before six months from the date of entitlement to commence the
business. In case of conversion from a private company to a public company
within one year of its incorporation, the date of commencement of business shall
be replaced by the date of date of its conversion for timeline of holding the
statutory meeting.
The meeting shall consider and approve report called “Statutory Report which is
sent to each member at least twenty one days before the date of statutory
meeting (along with notice of the statutory meeting).

Matters to be stated in statutory report

The statutory report shall include:
total number of shares allotted by the company. The company shall
distinguish between shares allotted for cash and otherwise than in cash. In
case of shares allotted for a consideration otherwise than in cash, the
consideration shall also be discussed in detail in the statutory report.
total cash received against shares allotted;
summary of receipts and payments prepared to a date not earlier by 7 days
of the date of report;
particulars of directors chief executive, secretary, auditor and legal adviser;
particulars of any commission paid on issue of shares particularly against
the shares issued to directors, chief executive and to the companies in
which such persons are directors;
particulars of any contract to be modified of which approval is required in
the meeting; and
extent of carrying out or not carrying out any underwriting contract along
with reasons for not carrying out.
Statutory Report should also contain a brief review of the state of affairs of
the company since its incorporation and the business plan.
Auditors’ certificates on statutory report

The statutory report should be accompanied by an auditor’s certificate in respect
of correctness or otherwise of
Allotment of shares
Cash received against share allotted and
Receipts and Payments account of the company.
Certification & Filing of Report

Report shall be certified by the chief executive of the company and at least
two directors.
Five copies of the report are filed with the registrar forthwith after sending
report to the members.
The company may be wound up on the petition files by any person on grounds
that the company has not convened the statutory meeting however the court
may, instead of passing an order of winding up, advise the company to convene
the statutory meeting or deliver the statutory report.
The members may discuss any matter pertaining to the company in statutory
meeting however resolution shall be passed only for those matters of which prior
notice as per articles of the company has been duly given.
Note: In case where a private company converts itself into a public company, the
three to six months period for holding of statutory meeting shall be determined
from the date of confirmation of conversion by the registrar of companies

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1.4 Annual General Meeting (AGM) [Section 158]
Requirement & purpose

A company is normally required by law to hold an annual general meeting (AGM),
at which the members should be entitled to vote on certain resolutions. In normal
circumstances, the meeting is called by the board of directors.
An AGM gives the members an opportunity to assess and discuss the company’s
performance and situation because one of the main agenda items of such a
meeting is consideration and discussion of audited annual financial statements.
Without a meeting of this kind, the members of a large company who are remote
from the directors would be deprived of the opportunity to hear the directors give
an account of themselves and the company’s achievements.
Besides consideration and adoption of audited financial statements, auditors’ and
directors’ report, an AGM is also used to obtain shareholder approval for certain
matters such as:
 the election or re-election of directors, if due on the date of AGM
 the approval of a final dividend, if declared by the directors
 the appointment or re-appointment of the auditors.
The AGM is therefore normally used to consider routine business. Most of the
resolutions at an AGM are (ordinary) resolutions, but there may also be some
special resolutions (defined in earlier chapters).
Timing, place and notice period
 The first annual general meeting of a company shall be held within 18
months from the date of its incorporation and thereafter at least once in a
calendar year.
 Subsequent annual general meeting shall be held within four months from
closure of its financial year and 15 months from the last meeting, whichever
is earlier.
 The SECP, in the case of a listed company and the Registrar, in the cases
of other companies may extend the time for holding of such meetings.
 No extension of time can be granted to any company for the first annual
general meeting after incorporation. For subsequent AGM; the period of
extension cannot exceed 30 days.
 At least 21 days’ notice shall be given to members for holding of a meeting,
further In case of listed companies such notice shall also be published in
an Urdu and an English daily newspapers having circulation in the province
in which the stock exchange, on which the company is listed, is situated.
 AGM of a listed company is held in the town in which the registered office is
situated, however SECP may allow to hold any particular AGM elsewhere
than the town of registered office.
 AGM is called on the order of directors and not of the members
Annual General Meeting-Scenarios:

Suppose ABC limited is incorporated on 1st April 2010 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 eighteen month time period. So it can opt to hold the first
annual general meeting till 31st December 2011.

We assume that the company opted to hold the annual general meeting on 1st July
2011. From this date onward company will be required to hold the annual general
meeting within four months of the close of financial year at least once in a
calendar year and not later than 15 months from previous AGM. Keeping all the
above in view, what shall be the latest time on which company can hold its AGM?
Financial year will close on 30th June 2012, so the company would be required to
hold its AGM within four months of close of financial year and within 15 months of
previous AGM, i-e 3oth October? No it should be 30th September because 15
months from previous AGM end at 30th September hence company cannot wait for
four months from close of financial year for holding of AGM.
XYZ limited, another company registered on 1st September 2010, Its financial year
closes in 30th September each year. It held its first annual general meeting on 1st
November 2011 which was well within 18 months from the date of its
incorporation.
What is the latest date by which company can hold its second AGM? Come on, it’s
within 4 months of close of financial year and within 15 months of the previous
meeting whichever is earlier. I am sure you are not missing the point of holding at
least one AGM a year, so latest date should be 31st December 2012.
1.5 Extraordinary General Meeting (EGM) [Section 159]
Purpose
As seen in last chapters, Ordinance requires various matters of the company to
be approved by its members by a resolution, for example alteration in articles or
memorandum of association of the company. For this purpose it is not always
possible to defer the approval of such matters till annual general meeting hence
the directors need to call a general meeting for obtaining approvals of members,
such meeting is known as extraordinary general meeting (EGM).
Definition: Extraordinary General Meeting (EGM)

Every general meeting of a company other than annual general meeting and the
statutory meeting is called extra-ordinary general meeting.
Calling of EGM
Directors of the company are entitled to call and hold an EGM on their own
motion whenever they feel the need for it to get some approvals from
shareholders. Members holding more than ten per cent of total voting power in
the company may also require the holding of such a meeting if they want to meet
other members of the company. They shall file a proper written requisition for this
purpose which shall include the objects of the meeting and shall be signed by the
rquisitionist in this behalf.
Directors should call the meeting on such valid requisition as discussed above
however if they do not proceed to call a meeting within twenty one days of filing
of the requisition, the rquisitionist themselves should call a meeting. The meeting
so called by the rquisitionist should be called as nearly possible in such a way as
the meetings called by the directors are held., After filing a requisition for the
holding of an EGM, the meeting should be held and conducted within three
months of filing of the same either by the directors or by the requisiteness
otherwise the requisition shall be expired.

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Any reasonable expenses incurred by the rquisitionist due to failure of the

directors to convene a meeting shall be repaid by the company to the rquisitionist
and company shall deduct this money from the remuneration payable to the
directors in default.
The notice of the meeting is required to be sent to the member’s at least twenty
one days before the date of the meeting similarly as of the notice of AGM.
However, the registrar may authorise holding of a meeting at a shorter notice (for
less than twenty one days’ notice.) The registrar shall so authorize in emergency
situations only on application by directors.
1.6 Calling of meetings by the Commission
Commission’s power to call meetings [Section 170]

Commission has been given powers to call general meeting of the company If the
company makes a default in calling and Annual general meeting or a Statutory
meeting or the directors do not proceed to call an extraordinary general meeting
on the requisition the member.
While calling such meetings, the commission may give such incidental directions
as it deems fit. Such directions may include a direction that even one member
present in the meeting shall be treated as a quorum of the meeting for the
purpose of that meeting. The commission may also advise the cost and
expenses of such meeting to be borne by any officers of the company including
directors of the company.
Penalty for non-compliance [Section 171]
In case of non-compliance such officers may be subjected to a fine of Rupees
ten thousands and for a continuing default a fine of Rupees two hundred per day
shall also be charged.
1.7 Filing of resolutions [Section 172]
Company is required to file all special resolutions passed by it with the registrar.
The company shall file all the special resolutions passed by it within fifteen days
of passing the same with the registrar. Such copy to be filed shall be
authenticated by the chief executive or secretary of the company.
Company shall keep all the special resolutions currently intact with its articles of
association and whenever any person asks for a copy of the articles of
association he shall also be provided with a copy of such special resolutions as
well.
Normally the resolutions require certain additional documents to be filed with the
registrar as well. For example if the company passes a special resolution to alter
the articles of association, it shall file the altered copy of articles of association as
well to the registrar along with the special resolution. However sometimes the
special resolutions may be filed alone for example if the company has passed a
special resolution for investment in associated company, it shall only file the copy
of resolution.

2 GENERAL PROVISIONS AS TO COMPANY MEETINGS
Section overview
Notice of meeting
Quorum of meeting
Voting in meetings
Proxies
Minutes
Representation at meeting
2.1 Notice of meeting [Section 160]
General provisions
Notice of meeting 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.
Further the notice of a general meeting shall also be sent to the auditors of the
company.
This notice shall state place, day and time of the meeting and in case any
resolution is to be passed in the meeting which is other than the routine or
procedural resolution, the draft of that resolution shall also be contained in the
notice. The notice may be served to members by hand or by post and its service
is deemed to be complete if the company properly prepays and address the
envelope containing the notice and send it to the member.
If the meeting is required to discuss and transact any special business, there
shall be annexed to the notice of the meeting all material facts concerning such
business. This statement is commonly known as statement of material facts.
Theoretically this statement must be such comprehensive and self-explanatory
that every member of the company can reach a decision on the proposed
resolutions after studying this statement.
Definition: Business in context of meeting
Any activity or agenda item to be discussed in a meeting is known as a business.

The business in general meetings of the company are of two types
Ordinary business
Special business
Following are four types of ordinary business and apart from this rest of all
are special businesses to be undertaken in a general meeting.
Consideration of accounts, balance sheets and the reports of the directors
and auditors;
The declaration(approval) of a dividend
The appointment and fixation of remuneration of auditors; and
The election or appointment of directors.

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Point to be notes here is that ordinary business in conducted by way of an

ordinary resolution except the election of directors which has its own
procedure discussed later in the chapter, but not all special businesses are
conducted by means of a special resolution. We may say it otherwise that a
special resolution is always passed for a special business but a special
business does not always require a special resolution. For example the
alteration of authorized capital clause of the memorandum of association is
a special business but it does not require a special resolution.
2.2 Quorum of meeting [Section 160]
Definition: Quorum
Quorum means a 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.
Quorum of meeting
The minimum quorum of the meeting has been fixed by the Ordinance however
the company may fix a larger number of members as quorum of the meeting by
its articles of association.
Hence the Ordinance provides that unless a larger number is fixed by the
articles, the minimum quorum shall be:
in case of a public listed company - Ten members, present personally in
the meeting, representing 25% voting powers, either on their own account
or as proxies, in the meeting
in case of any other ccompany - two members, present personally in the
meeting, representing 25 % of total voting powers, either on their own
account or as proxies,
in case of single member ccompany - The single member present in
person or proxy
Presence/Absence of quorum
If the fixed quorum is not present at the meeting within half an hour from the time
appointed for the meeting, it 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.
If a quorum is not present at an adjourned meeting, as above, within half an hour
from the time appointed for the adjourned meeting, the members present in the
meetings, not being less than two, shall be a quorum, however the articles of
association may provide otherwise.
2.3 Voting in meetings [Sections 160, 165 and 166]

In a company having share capital a member shall have votes proportionate to
the paid up value of the shares held by him and in a company not having share
capital, each member shall have one vote.

In any company voting is done by show of hands unless a poll is ordered by

chairman of the meeting or the demand for poll is raised by any person
competent to demand the poll. On show of hands every member shall exercise
one vote however on a poll votes may be casted personally or through proxy.
The chairman of the meeting shall declare the results of the show of hands i.e.
whether a resolution has been carried or not, unanimously or by a particular
majority. An entry in the minute books of the company shall be the evidence of
such result unless contrary is proved.
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.
Provisions relating to poll [Section 167]

Demand for poll
Chairman of the meeting may order a poll to be taken instead of voting by show
of hands or after seeing the result of voting by show of hands; however certain
persons are entitled to demand a poll from chairman before or on the
announcement of result of polling by show of hands by the chairman of the
meeting
Following persons can demand poll in a general meeting
 In case of a public company whether listed or unlisted, any 5 members
present in person or through proxy and having the right to vote on the
resolution may demand a poll to be taken
Explanation Mr A is a member of ABC Limited, a public listed company and he is

present in its general meeting. He is unhappy on the decision of meeting on a
particular resolution allowing the directors to make an investment in an associated
company. On announcement of the resolution being carried out he stands and asks
the chairman for poll as he believes that he can reverse the situation if a poll is
taken. Mr A shall require the company of another four members to ask for a poll or
else he could ask a poll singly if he was appointed as a proxy by four other
members. In this case he would be representing five out of which one (himself) is
present personally and rest of them are present through proxy.
 In case of a private company:

 Any one member present in person or by proxy can demand for a poll
if not more than seven members having the right to vote on the
resolution are present.
 Any two members present in person or by proxy, where more than
seven members having the right to vote on the resolution are present.
 In case of any company, member or members present in person or by
proxy, having one tenth of the total voting power in respect of the
resolution,
 In case of any company, member or members present in person or by
proxy and holding shares with right to vote, being shares on which an

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aggregate sum has been paid up which is at least one tenth of the total
sum paid up on all such shares.
Explanation From above it is evident that the right to demand for a poll is either on
the basis of votes of members or on the basis of number of members. Suppose Mr
A has got 12% shares out of total voting power of the company and on the basis of
these shares he has got same percentage of voting power, he is allowed to
demand for a poll, Now although if he had not got 12% voting because of any class
difference of shares, but his paid up shares are more than 10% of the total paid up
capital of the company hence he can still demand for a poll.
The demand for poll may be withdrawn at any time by the person or persons who
made the demand.
Time of taking poll [Section 168]

A poll demanded on the election of a chairman or adjournment of a meeting shall
be taken forthwith. In all other cases, poll shall be taken at such time as the
chairman of the meeting may decide; however, such time shall not be more than
fourteen days from the day on which it is demanded.
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.
Although it is significant to note that the resolution passed at an adjourned
meeting is considered to have been passed on the day on which it is actually
passed and not on any earlier date [Section 169].
However this shall not be the case with the date of poll being other than the date
of meeting itself because the result of the poll, whenever it is taken, shall be
considered as the decision of the meeting in which poll is demanded.
2.4 Proxies [Section 161]
Requirements for a proxy

Proxy is a person appointed to vote and speak on behalf of a member in a
general meeting of the company. Proxy is entitled to on behalf of the original
shareholder all the acts which the original shareholder is entitled to do himself in
the meeting. Broadly proxy has got following rights
 to speak and vote at the meeting;
 to demand a poll;
 to abstain from voting, on a question on which poll is demanded.
Notice of meeting must specifically mention the right of the shareholder to
appoint proxy on his behalf and attached to the notice should be a blank proxy
form for facilitation of the shareholder. The document to appoint proxy shall be in
writing and signed by the appointer or his authorized agent
A member cannot appoint more than one proxy to attend any one meeting. If
more than one proxies are appointed for any one meeting, all appointments of

proxy shall be invalid. Further a proxy must be a member unless articles permit to
appoint a non-member as proxy.
The instrument for appointment of proxy has been provided in table A of the first
schedule to the companies Ordinance 1984. If the instrument is valid as per that
table A, company shall not reject or question its validity for non-compliance of
any additional terms or conditions attached to such instruments by the company
itself and shall accept the instrument as proper.
In order to be effective, proxies shall be lodged with the company at least 48
hours before the meeting.
Note: In case of companies not having share capital members are not entitled to
appoint another person as his proxy.
2.5 Minutes [Section 173]
Minutes of proceedings of general meetings and meeting of directors

Every company is required to maintain a fair and accurate summary of all
proceedings of meetings of directors, member or committees of directors along
with names of participants in properly maintained books at it registered office. A
copy of the minutes of meetings of the board of directors shall be furnished to
every director within fourteen days of the date of meeting
Signatures of the chairman of meeting or of the chairman of next succeeding
meeting shall be sufficient evidence of the proceedings unless contrary is proved.
The books containing the minutes of proceedings of the general meetings shall
be open to inspection by members for at least two hours on each day without
charge during the business hours.
Members of the company can demand a certified copy of the minutes of general
meeting which the company shall provide to him within seven working days of
receipt of his request.
2.6 Representation at meetings

Representation of certain corporations at meetings of companies and of creditors
[Section 162]
If a company is the member of another company, it may authorise any of its
officials or any other person to act as its representative at any meeting of that
other company and such representative shall be entitled to exercise, on behalf of
the company, the same powers, which an individual shareholder of that other
company possess at the meeting.
Similarly if a company is the creditor of another company, it may authorize any of
its officials or any other person to act as its representative at any meeting of
creditors of that other company held in pursuance of the Companies Ordinance,
1984 and such representative shall be entitled to exercise all such powers as the
company has as a creditor of that other company.

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Representation of federal government and provincial government at meetings of

companies: [Section 163]
Being a member of the company the Federal Government or Provincial
Government may appoint any person to act as its representative at:
 any meeting of the company; or
 any meeting of any class of members of the company.
Such person shall be deemed to be a member of such company and he shall be
entitled to exercise the same rights and powers, including the right to appoint
proxy, which the Federal Government or the Provincial Government has as a
member of the company.

3 CHAPTER REVIEW
Chapter review
 Different types of meetings of the company
 Rights and duties regarding calling and holding of meetings
 Various provisions regarding notices, quorum and minutes of the meetings.

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CHAPTER
Business Law
25
Management
Contents
1 Appointment and election of Directors
2 Powers duties and liabilities of directors
3 Chief executive and company secretary
4 Chapter review

Business Law
INTRODUCTION
Learning outcomes
demonstrate knowledge of the management of companies.
LO 5.4.1 Explain and apply in given scenarios, the legal provision with respect to
directors’:
 Eligibility
 Number
 Election
 Vacation of office
 Powers, duties and liabilities
LO 5.4.2 State the legal restrictions on a company with reference to loans to directors
LO 5.5.1 Explain the appointment of first chief executive and subsequent chief
executives using simple examples.
LO 5.5.2 State the conditions applicable on appointment, removal, engagement in any
business
LO 5.5.3 State the provisions relating to appointment of a secretary
LO 6.3.1 Explain the requirements of disclosure of interest by director in contract /
arrangement entered into by or on behalf of the company.
LO 6.4.1 Explain the requirements of disclosure of interest by officers in contract /
arrangement entered into by or on behalf of the company.
LO 6.5.1 Describe the participation of interested director in the proceedings of directors
in contract / arrangement entered into by or on behalf of the company
Exam context
 Understand the role, powers and responsibilities of directors
 Understand the procedure for appointment, election of various directors, their term of
office and their casual vacancies
 Understand the requirements of disclosure from directors regarding their personal
interest in the contracts or transactions of the company.
 Understand the role, appointment and other provisions regarding chief executive of the
company.
Act Chapters

Section B: Company Law - Chapter 25: Management
1 APPOINTMENT AND ELECTION OF DIRECTORS
Section overview
 Directors
 Number and appointment of directors
 Election of directors
 Eligibility to act as director
 Vacation of office by directors
1.1 Directors
Introduction
A company is an artificial person, and cannot manage itself. Companies therefore
have individuals to give it leadership and direction. This is provided by the board
of directors. Most of the powers of a company are given to its directors by the
Ordinance and company’s articles of association. Directors are collectively
named as ‘board’ or ‘board of directors’ (we may use abbreviations as ‘BOD’ for
board of directors)
For the purpose of ordinance, a person is a director if he or she occupies the
position of a director by whatever name, which indirectly means that the person
carries out functions that can only be done by a director, or attends board
meetings of the company’s directors.
The word ‘director’ in a job title does not mean that a person is legally a director:
for example, a ‘human resources director’ or an ‘IT director’ is not a director for
the purpose of the ordinance unless, for example, he or she attends meetings of
the board of directors and joins in the decision-making processes of the board.
Directors must be member of the company except for certain matters where law
specifically allows the non-members as directors. Sometimes in small companies
the directors are the only members of the company or in other words all the
members of the company are directors as well but in such cases as well the
directors have a dual role, as a member as well as a director. Being director, in
the board of directors meeting every director shall have one vote but the same
persons while sitting in a general meeting as a member may have different voting
rights based on the number of shares they hold.
Directors act collectively or by majority, every decision to be taken by the
directors is taken in a board meeting of the directors in which every director has
got one vote.
Directors in fiduciary relationship

Directors of the company may well be said as agents of the company whom
members have given the right to make financial decisions on their behalf. They
are supposed to make decisions in the best interest of the company and its
members; they must be vigilant and should not be negligent in performance of
their duties.
The director is said to be lacking a fiduciary behaviour if he deliberately keeps the
company and members at a disadvantage. No director can hold office of a
director if he is declared as lacking fiduciary behaviour by the court.

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Natural persons only to be directors [Section 175]

Under the provisions of the ordinance only natural persons can be directors of
the company. No company can be a director of any other company. Further when
appointed as a director, every director is an equal director and there are no
differences between their authorities, rights and liabilities, so no director can
claim to be a variable representative of the company meaning thereby that no
director can claim relief from his responsibility as a director claiming that he is not
concerned with that part of the company’s business. When he is a director, he is
a director in entirety.
Nominee directors [Sections 182 and 183]

In additions to the directors elected and appointed in the general meeting, the
creditors 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. Remember that
the directors nominated by the creditors are in addition to the minimum number of
directors fixed by the ordinance.
The federal government, provincial government and any company, if hold shares
in any other company, can nominate any person to represent them as a director
on the board of directors of 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.
Consent to act as director [Section 184]

In case of a public company, no person shall be elected or appointed as a
director or a chief executive if such person has not filed his consent in writing for
becoming the director or chief executive as such. The company shall file such
consent to the registrar within fourteen days of the date of appointment or
election of the director or chief executive as the case may be.
1.2 Number and appointment of directors
Minimum number of directors [Section 174]

Ordinance has provided for the minimum number of directors of each company, it
is equal to the required minimum number of members for that company.
Company may by its articles of association provide for larger number of directors
if it feels appropriate. Hence every single member company shall have at least
one; other private company shall have at least two and every public company
other than a listed company shall have at least three directors appointed and
elected in the manner provided in this Ordinance.
Further every listed company shall have not less than seven elected directors
First directors [Section 176]

Company may appoint first directors through its articles of association; the
persons whose names are so entered in the articles of association shall be
directors of the company.
If not so written in the articles of association, the names and number of first
directors shall be decided by the subscribers of memorandum who shall decide
this matter with their majority.

Until the names and number of directors is so determined, all the subscribers of
memorandum who are natural persons shall be considered as directors of the
company.
Illustration: directors
The company can be a subscriber of memorandum to any other company however
any company cannot be a director of any other company.
The first directors shall retire at the date of first annual general meeting and in
such a meeting an election of directors shall be conducted to elect and appoint
subsequent directors. [Section 177]
1.3 Election of directors [Section 178]

Elections procedure
In the first annual general meeting, all the first directors shall retire and election of
directors shall be held to appoint new directors. The directors so appointed shall
hold office of the directors for next three year after which they retire and elections
are held afresh.
Whenever an election of directors is required the following procedure for is as
followed
 Existing directors decide the number of directors for the next term at least
thirty five days before the date of meeting. Such number once fixed cannot
be changed by the directors themselves without the approval of members
in a general meeting.
 A general meeting of the members of the company is called for the
elections and the notice of general meeting, in addition to its routine
contents, includes the number of directors to be elected and the names of
the retiring directors as its extra contents.
 Every members interested in contesting the election of directors sends the
notice of his interest to the company at least fourteen (14) days before the
date of meeting. However any such member may withdraw such notice at
any time before the election, if he so desires. Company sends such notices
(of interest to contest the election of directors) to all the members in the
same manner as a notice of general meeting is given to the shareholders
and in case of a listed company it is published in one issue of a daily
newspaper in English Language and a daily newspaper in Urdu language
having circulation in the province where the stock exchange is situated on
which the securities of the company are listed
 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.
Illustration: Unopposed directors

For example directors had planned for eight directors in 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.
During a poll for election of directors every member is entitled to cast the number
of votes equal to the product of number of shares held and the number of

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directors to be elected, a member can give all his votes to any one applicants or
he may distribute it to more than one applicant as he deems appropriate.
Illustration: Number of votes

If Mr A has got 10,000 shares of Rs. 10 each and he is entitled to caste vote for
the purpose of election of directors. Company has to elect 8 directors for the
term. Mr A 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 better like.
The person getting the highest number of votes shall be considered as a director
then the second and then third until the number of directors fixed for election is
reached.
In case of a company not having share capital, the procedure for election of
directors shall be mentioned in its articles of association
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.
Fresh election of directors on request of substantial acquirer [Section 178A]

As discussed earlier, the directors elected in a general meeting are entitled to
hold the office of the directors for three years however; in listed companies, there
may be a case when the elections of directors are held on such time before the
expiry of the three years period on orders of Commission.
Where a person acquires 12.5% or more voting shares in a listed company in his
own name, he may apply to the Commission for ordering the company to hold
fresh election of directors in the forthcoming annual general meeting of the
company. The Commission may, if it deems appropriate in the interest of the
company, its minority shareholders or the capital markets generally, direct the
company to hold the election of directors in the manner provided as above and
the company shall comply with such directions of Commission.
The person on whose request fresh elections of directors is held shall not sell or
otherwise dispose of the shares acquired by him for at least one year from the
date of election of directors.
Illustration: 12.5% voting power and directors’ election

Can a person become a director of a listed company if the holds only 12.5% voting
shares of that company and no other member of the company cast votes in his
favour?
The answer is yes, how? Give it a try, it is simple mathematics; you only need to
remember that a listed company should always have at least 7 directors to be
elected in a general meeting.
Declaring election of directors invalid [Section 179 and 185]

The court has got the authority to declare the directors’ election invalid on certain
grounds. Members holding at least twenty percent of the voting power in the
company may make an appeal in the court to declare the election of all directors
or any one or more of them invalid
Such appeal may be made within thirty days of the date of election and 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.

Actions of directors taken within their scope of being a director are considered as
valid whatever invalidity may be subsequently discovered in their election or
appointment.
1.4 Eligibility to act as director [Sections 187 and 190]
The ordinance has not specifically provided for any eligibility of any person to act
as a director of the company however the company may by its articles fix any
conditions to become the director of the company. These may include a specific
number of shares as a minimum to become a director or may be of specific
educational requirements. The banking companies and insurance companies as
well as non-banking finance companies can appoint any person director only if he
has got certain qualifications and experience but the ordinance only describes
certain in-eligibilities, i-e the persons who cannot become directors of the
company are as follows.
No person shall be appointed as a director of a company if he
is a minor;
is of unsound mind;
has applied to be adjudicated as an insolvent and his application is
pending;
is an un-discharged insolvent;
has been convicted by a court of law for an offense involving immorality
has been debarred from holding such office under any provision of this
Ordinance;
has betrayed lack of fiduciary behaviour and a declaration to this effect has
been made by the Court at any time during the preceding five years;
Illustration: Lacking fiduciary behaviour

Court can declare a person lacking fiduciary behaviour if he fails to comply with
certain provisions relating to the disclosure of his personal interest in company’s
transactions or contracts. We will discuss it later in this chapter.
is not a member however this ineligibility shall not apply in the case of
a person representing the Government or an institution or authority
which is a member;
a whole-time director who is an employee of the company;
Illustration: Whole time director
This is commonly termed as an executive director; they are senior employees of

the company who are authorised to act as directors and involve in the board of
directors decision making. These directors are however not included in the
calculation for minimum number of directors for any company.
a chief executive; or
a person representing a creditor

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Further for listed companies only a person shall not be appointed as a director if
he
 has been declared by a Court as defaulter in repayment of loan to a
financial institution,
 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
The prohibition contained above shall not apply where the company is a stock
exchange.
As above, a person who is a bankrupt shall not act as a director of the company
and if such person acts as such he shall be liable to imprisonment for a term
which may extend to two years or with a fine which may extend to ten thousand
rupees or with both.
Illustration: Broker and corporate brokerage house

Members of stock exchange are named as brokers, no person can purchase or sale
shares in the stock exchange without the involvement of a broker. A broker may be
an individual or it may be a company, if the broker works as a company he is called
as corporate brokerage house. Brokers are regulated through Securities &
Exchange Ordinance 1969 and regulations of respective stock exchanges. The
brokers however can become the directors of stock exchange, which itself is a
public company.
1.5 Vacation of office by directors
Casual vacancy [Section 180]

Directors are appointed for a term of three years, however they may earlier resign
from the office and casual vacancy shall be filled by the remaining directors.
There is no time limit specified in the ordinance for the filling of casual vacancy
however the company should not work with less than required minimum number
of directors at any time, however if the number of members of the company is
equal or above the minimum number of members required for that company,
such directors may not fill in the casual vacancy and complete the term without
filling such vacancy.
The director appointed under a casual vacancy shall be appointed for the
remainder of the term of the directors and shall vacate the office when the term of
routine directors end.
Removal from office [Section 181]

Director may be removed from the office by the members of the company by
passing a resolution in their meeting. No director has power to remove any other
director from office.
For removal of an elected director, a resolution shall be passed in the general
meeting and number of votes shall be calculated in the same manner as are
calculated at the time of election of directors, implying thereby that every member
has such number of votes which are equal to the product of his number of shares
and number of directors for the term. The director shall not be considered to have
been removed if the number of votes casted against the resolution equals or
exceeds the least number of votes which were enough to qualify a person as a
director in the last election of directors

Similarly removal of a director appointed as first director and under the casual
vacancy shall not be removed from the office if number of votes cast against the
resolution equals or exceeds the number of votes calculated as per following
formula
Number of director for the term multiplied by the number of shares divided by
number of directors for the time being
Example: Removal of director

Mr Aslam was elected as a director in ABC Limited one year ago; company has
two million shares and seven directors. He was the last one to become a director
by securing 1.5 million votes. A resolution has been moved in the general meeting
to remove Mr Aslam from his position.
He can be removed from the office by passing a resolution, in order that he is not
removed from his office, he will have to secure at least 1.5 million shares against
the resolution which is the least number of shares which were sufficient to make a
person director in the last election of directors.
Other things remaining the same now suppose that Mr Aslam is a director
appointed in casual vacancy, how much votes would he require against the
resolution to save his seat?
Answer: Number of director for the term multiplied by the number of shares
divided by number of directors for the time being
Which comes as follows 7*2,000,000/7=2,000,000 votes.
Vacation by contravention of provisions of the ordinance [Section 188]

A director shall be treated to have vacated the office of director if he becomes
subject to any of the ineligibilities as discussed above or he absents himself from
three consecutive meetings of the board or from all meeting held in a consecutive
period of three months, whichever is longer.
Example: vacation of office due to non-attendance

ABC Limited conducted three board meetings in January 2013. Mr Aslam, a
director of the company didn’t attend all of three meeting without leave of
absence. Does he vacate his office due to this non-attendance? No, we have to wait
for February and March to see that. If the company conducts a meeting In March
2013 and Mr Aslam attends the meeting, he will not vacate the office, however if
he doesn’t attend that meeting as well he will vacate the office because he has not
attended three meetings and has not attended all the meetings held in three
months period without leave of absence.
Further a director shall be treated to have vacated the office of director if 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 in contravention of the provisions of this
Ordinance or
accepts any office of profit without sanction of company in a general
meeting however office of chief executive, legal or technical advisor and
banker are not covered by the above prohibition.
In addition to the above, the company may add in its articles any other clauses as
well to get the office of director vacated.

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2 POWERS, DUTIES AND LIABILITIES OF DIRECTORS
Section overview
Powers of directors
Loans to directors
Disclosure of interest by directors
2.1 Powers of directors [Section 196]
Directors are overall managers of the company's business they are empowered
to take a lot of decisions in the interest of the company. They are empowered to
pay all the costs incurred in promotion and registration of the company and can
exercise all the powers regarding company which have not been vested with the
members.
Certain powers have been vested in members by the Ordinance like approval of
issuance of shares at a discount or alteration in the articles of association.
Company can vest certain other powers in members through articles or special
resolution.
Directors shall exercise the following powers by ‘passing a resolution’ in board
meeting:
To call the uncalled an unpaid share capital of the company
To issue shares, debentures or other redeemable capital or to otherwise
borrow money or invest the funds of the company
To make loans, provided in case of banking companies, the acceptance
of deposits and other amounts from account holders and placements of
own funds in other banking companies shall not be considered as incurring
or making of a loan.
To approve annual and periodical accounts and to approve bonus for
employees
To incur capital expenditure exceeding or undertake leasing obligations
exceeding Rupees one million or to sell/dispose of assets having book
value exceeding Rupees one hundred thousand.
To undertake leasing obligation exceeding one million rupees.
To declare interim dividend
To authorize any of the following for entering into transactions with the
company
Director of the company
Partnership firm in which director of the company is a partner.
Private Company in which director of the company is a director.
If the amount is material as per generally accepted accounting principles.
to write off bad debts
to write of inventories and other assets

to determine the terms and circumstances on which a law suit may

be compromised or a claim in favor of company be vanished or
reduced.
Directors can exercise the following powers by resolution in their meeting only if
they are authorized in this regard by the company in a general meeting.
Sell, lease or otherwise dispose of the undertaking or any sizable
part unless it is the company's business.
Remit; give relief or extension of time for loans or advances provided under
the provisions of the ordinance.
The authorization for exercise of such powers may be either specific for
transaction to transaction basis or it may take form a general authorization by the
members of the company.
2.2 Loans to directors [Section 195]
Prohibition of granting loans, providing guarantees or securities etc.

Directors of the company being in the management capacity of the company may
at times wish to use some of the company’s funds or the other facilities that they
can otherwise obtain by virtue of the office of directorship. They may expect
loans from the company or may otherwise require some guarantee or security for
the amounts borrowed by them for personal purpose or lent for the similar
purpose. However the company is not allowed to provide any of these financial
facilities to
a director of the company, a director of the holding company or their
relatives or their partner
a partnership firm in which the director or relative is a partner
a private company in which such director is a director or a member
a body corporate whose twenty five per cent or more voting power is held
by the director, or more of them or directors and their relatives combined,
a body corporate whose management is accustomed of taking advice from
the chief executive or any one or more directors of the company
Exceptions
The restrictions to not to grant loan or extend any other financial facilities as
above shall not apply to
a private company which is not a subsidiary of a public company
a banking company
any loan, guarantee or security provided by the holding company for/to its
subsidiary company.
Permission of granting loans, providing guarantees or securities etc.

All of the above loans and facilities for loans are prohibited however loan or
guarantee or security for a loan may be given by the company to a whole time
working director if it is approved by Commission and the purpose of financial
facility take any of the following forms.
Purchase or construction of a dwelling house

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 Purchase of a conveyance for personal use

 Purchase of household effects
 Payment of medical cost incurred by the director for himself or for any
relative.
Any relaxation in the terms of such loan may only be granted if the same is
approved by the company in the general meeting.
2.3 Disclosure of directors’ interest [Section 214]
Why to disclose interest or concern

As discussed earlier, 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 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, so that they are not charged with the allegations of
secretly misusing or getting undue advantage from the company.
For example 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 because in position of a director of the company he
shall be working for shareholders and should try to bargain at lowest possible
price but on the other hand his spouse is owner of the property he may want his
spouse to get best price for that property, you see 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 should not be part of the
directors meetings in which such contract or transaction is to be discussed.
Further if directors are forbidden to make transactions with the company by
provisions of any other law, those provisions shall prevail.
Timing of disclosure
The director should give the notice of his interest in any transaction or
arrangement of the company in which he is directly or indirectly interested and
such notice shall be given
 if the transaction or arrangement requires the directors' approval before
start-up of the contract or transaction as the case may be then in the first
meeting of directors in which discussion is started regarding the transaction
or arrangement and in case the directors was not interested at the time of
first discussion regarding the matter, such disclosure shall be given at the
first meeting after he becomes so interested.
 in a case where the transaction or arrangement does not require directors'
approval before its start up or commencement then the director concerned
shall give the notice of his interest in first meeting held after the transaction
or arrangement is entered into.
General notice of ownerships and directorships

Instead 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.
Interested director not to vote [Section 216]

Interested director shall not participate in the discussion for the matter in which
he is interested, he shall not be counted for the purpose of quorum for that part of
the meeting of the board and further he shall not be allowed to vote on such
matter. If the director votes for such transaction or arrangement in which he is
interested, his vote shall be void.
However in following circumstances the provisions of this section shall not apply
 when the company is a private company and it is neither a subsidiary nor a
holding company of any public company
 when the director has acted as surety of the company and the resolution
under consideration relates to the indemnification of the surety director
against any loss incurred by the director for becoming surety of the
company
 when the director is a director on the board of any public company on an
appointment made by his present company and he has got only that
number of shares which are qualification shares. He shall not be
considered as interested director on the board of his original company for
any transaction to be entered into with that other public company.
Example: Interested director not to vote-exception

Mr Aslam is an elected director of ABC limited for last two years. ABC limited has
significant shareholding in XYZ limited and on the basis of such shareholding ABC
limited is allowed to appoint any person as director on the board of XYZ limited,
but the director so appointed must possess at least five thousand qualification
shares in his name. ABC limited transferred five thousand shares to Mr Aslam
from its investment in XYZ limited and appointed him as a director in XYZ limited
on its own behalf.
Now Mr Aslam is a director of ABC limited as well as XYZ limited but at the
meeting of ABC limited whenever a transaction or contract with XYZ limited is
discussed, he shall not be considered as interested director on the ground oh his
directorship in XYZ limited because his directorship In XYZ limited is merely due
to the ABC Limited’s appointment and transfer of qualification shares to him.

Business Law
3 CHIEF EXECUTIVE AND COMPANY SECRETARY
Section overview
Appointment, removal and other provisions relating to chief executive

Appointment of company secretary and share registrar
3.1 Appointment, removal and other provisions relating to chief executive
Definition: Chief Executive [Section 2(6)]

"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;
He is subject to control and directions of the directors, means that he is an agent
of the directors and is vested with the powers granted by the directors.
Role and responsibility

The ordinance has not fixed any specific role and responsibility of a chief
executive, It simply states that a chief executive shall be a person who is vested
with whole or substantially the whole powers of the management of the affairs of
the company. He is often empowered by directors to do various acts on behalf of
the company, he enjoys implied powers as a business manager of any company
however he cannot exceed his authority which has been granted by board of
directors.
Although being part of the board of directors, He is reportable to the board. Any
person can be appointed as a chief executive however if the company wants to
fix some qualifications for appointment of a chief executive, it may do so by
means of an alteration in the articles of association.
Usually companies appoint one of the elected directors as chief executive of the
company however any person other than such director may also be appointed as
a chief executive and in such a case the person so appointed, if not already a
directors, shall be deemed to be a director in addition to his being a chief
executive of the company.
First chief executive [Section 198]

Directors shall appoint chief executive within fifteen days of the date of
incorporation or right on the day of commencement of the business whichever is
earlier.
First chief executive can be appointed for a period of maximum up to the first
AGM. He may earlier resign or be removed from his office. We shall discuss the
procedure for removal in forthcoming paragraphs.

Subsequent chief executive [Section 199]

First chief executive shall retire on the date of first AGM, subsequent chief
executive shall be appointed within 14 days of the election of the directors
themselves or office of the chief executive falling vacant as the case may be
Subsequent chief executive shall be appointed for a maximum period of three
years. However he may be earlier removed from office or he may otherwise
cease to hold office. Retiring chief executive can be re-appointed
Retiring chief executive shall continue to perform his services until his successor
is appointed but in following circumstances he shall not so hold the office
 His office was expressly terminated
 He is the cause of non-appointment of new chief executive.
Company's articles of association state the authority for determination of terms
and conditions of chief executive.
As discussed above, by virtue of his being chief executive, he shall be
considered as a director of the company and shall enjoy and be liable to all the
rights and liabilities attached to the office of the director hence If a person is in-
illegible to become a director of a company, he shall also be ineligible to become
a chief executive of the company as well
Removal of chief executive [Section 202]

Chief executive can be removed through any of the following modes at any point
in time regardless of any provisions in the articles of association or in his
appointment to the contrary
 by passing a special resolution in general meeting of the company or
 by passing a resolution of board of directors with their at least fourth
majority of the directors.
Illustration: Removal of chief executive

Board of directors of ABC limited appointed its chief executive for a term of three
years and it was specifically mentioned in his contract that he shall not be
terminated before the expiry of term of his office. But 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? The answer is yes, directors may pass a
resolution by their three fourth majority and remove the chief executive,
otherwise they may decide to pass a special resolution by calling an extraordinary
general meeting of the members of the company
Chief executive and competing business [Section 203]

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.
Illustration: Competing business

Business is considered to be a competing business if it is of same nature and is in
the same markets, this has nothing to do with the volume of the business. The
test is basically of the fairness of the person with the objects of the company.

Business Law
Chief executive is required to furnish to the company the detail of every such
business carried on by him forthwith at the time of his appointment.
3.2 Appointment of company secretary and share registrar [Section 204]
Company Secretary
The Ordinance requires the appointment of a whole time qualified company
secretary for listed companies. He shall be an employee of the company and his
responsibilities include making sure that company complies with all relevant
corporate requirements. Any of the following can be appointed as a company
secretary of a listed company.
 A member of a recognized body of professional accountants like chartered
accountants members of ICAP ; or
 A member of a recognized body of corporate/chartered secretaries; or
 A person holding a master’s degree in Business Administration or
Commerce or being a Law Graduate from a university recognized by
Higher Education Commission and having at least two years relevant
experience:
Further the appointment of a company secretary is also compulsory for single
member companies, such person should be at least a graduate from a university
recognized by Higher Education Commission.
Share registrar
Listed companies are further required to appoint independent share registrars 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.
Commission provides licenses to persons for working as share registrar and the
pre-requisites have been established by the Commission to grant a license for
providing share registrar services.

4 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now:

 Understand the role, powers and responsibilities of directors
 Understand the procedure for appointment, election of various directors, their
term of office and their casual vacancies
 Understand the requirements of disclosure from directors regarding their
personal interest in the contracts or transactions of the company.
 Understand the role, appointment and other provisions regarding chief
executive of the company.

Business Law

CHAPTER
Business Law
26
Investments & dividends
Contents
1 Investments of company
2 Dividends
3 Payment of dividends
4 Chapter review

Business Law
INTRODUCTION
Learning outcomes
demonstrate familiarity with investment by companies, financial
accounts and distribution of profit.
LO 6.1.1 Describe the conditions applicable to a company for making investment in
associated companies and undertakings.
LO 6.2.1 Discuss with simple examples as to how a company can hold its investment in
names other than its own name.
LO 6.7.1 Explain the requirement relating to declaration of dividend and identify certain
restrictions on declaration of dividend.
LO 6.7.2 Describe the provisions applicable to payment of dividend.
Exam context
 Understand the procedure for investment in associated companies
 Understand and explain the concept of keeping the investments of company in the
name of the company
 Understand and explain the terms dividend, Interim dividend and final dividend
 Understand and explain restrictions on declaration of dividend
 Understand and explain time period and duty of the company to pay the dividend
 Understand and explain circumstances in which non-payment of dividend is not a
default on company’s part

Act Chapters

Section B: Company Law - Chapter 26: Investments & dividends
1 INVESTMENTS OF COMPANY
Section overview
Investment in associated company

Investments of company to be held in its own name
Clarification regarding holding investments in name of company
1.1 Investment in associated company [Section 208]
Associated company/undertaking
Definition: Associated company/Associated undertaking [Section 2(2)]

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 orcontrols shares carrying not less than twenty per cent of thevoting
power in such company or undertaking, is also the owneror partner or director
of another company or undertaking, ordirectly or indirectly, holds or controls
shares carrying not lessthan twenty per cent of the voting power in that
company orundertaking; or
if the companies or undertakings are under commonmanagement or control or
one is the subsidiary of another; or
if the undertaking is a modaraba managed by the company; (Modarba is an
Islamic financing activity, a set up created in order to ensure interest free
financing. Modarba Management Company is established as a public company
which is licensed to float Modarbas 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 bythe Federal Government or
a Provincial Government or afinancial institution directly or indirectly owned or
controlledby such Government; or
shares owned by the National Investment Trust or theInvestment Corporation of
Pakistan or a financial institutiondirectly or indirectly owned or controlled by the
FederalGovernment or a Provincial Government; or
shares registered in the name of a central depository, where such shares are
beneficially owned by the central depositor shall not be taken into account for
determining the status of a company as associated company,
Illustration: Associated companies and associated undertakings

Suppose Mr A 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 (Mr A) among both the companies.
Further suppose that the same Mr A 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

Business Law
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 Ordinance 1984.
Further suppose Mr A is also owner of more than 20% shares of JKL (Private)
Limited. Common presence of Mr A in all the businesses shall make the
undertakings as associated undertakings
Power to make investments

Under the provisions of the Companies Ordinance 1984, the power to make
investments in a company rests with directors of the company who can make an
investment or disinvestment decision, usually in a meeting through a resolution.
This investment may be made in securities (shares or debentures) of other
companies or otherwise may be a joint venture with some other persons;
however investment in associated company cannot be made by the directors
themselves by passing a resolution of the board. They will have to get its
approval from members in a general meeting through a special resolution.
Condition for investment

As discussed above company can make investment in any of its associated
companies or associated undertakings only under the authority of a special
resolution. The special resolution shall indicate the nature period and amount of
investment and terms and conditions attached to the investment.
The company shall not make any variation in the nature and terms & conditions
of investment without passing a special resolution.
Definition: Investment
For the purpose of this section, The expression ‘investment’ shall include loans,
advances, equity, by whatever name called, or any amount, which is not in the
nature of normal trade credit.
If the investment has been made in the form of a loan, the return on investment in
the form of loan shall not be less than the borrowing cost of investing company. If
the investing company itself can borrow at an interest rate of 10% per annum, it
shall not grant loan at lower than this rate to any of its associated companies.
The Commission has specified certain classes of companies including private
companies on which requirements of passing a special resolution etc. are not
applicable. It further has made regulations for imposing conditions on making of
investments by companies in associated companies.
Consequences of contravention of above conditions

If default is made in complying with the requirements of the Ordinance or
regulations every director of a company who is knowingly and wilfully in default,
shall be liable to fine which may extend to ten million rupees and in addition, the
directors shall jointly and severally reimburse to the company any loss sustained
by the company in consequence of an investment which was made without
complying with the above requirements.

1.2 Investments of ccompany to be held in its own name [Section 209]
Investments always to be kept in the name of the company

Being a separate legal person, a company can make investments in any other
company or security in its own name whenever it makes any investments
whatsoever. Companies Ordinance 1984 requires that all the investments of the
company must be made and held in the name of the company itself and not in
someone else’s name. However there are a few exceptions to this rule.
Exceptions
Following are exception to this general rule of keeping the investments of
company in its own name.
 If a company has made equity investments in any other company and due
to this investment it enjoys the right to appoint any person as director of the
investee company then the investor company is allowed to hold such
number of shares in the name of that nominee of the investor company who
shall be appointed as a directors of investee company and would require
certain qualification shares of investee company.
 A holding company may hold any shares in its subsidiary company in the
name of its nominees if the number of members of the subsidiary company
has reduced below required minimum number of members for that
company.
 An investment company having its principal business as making
investments can make and keep its investments in some one else’s name.
1.3 Clarification regarding holding investments in name of company
Permissions in specific circumstances

Company is allowed to deposit its investments in form of shares or debentures in
the name of bank or financial institution if it is a condition for receiving the
dividend or interest etc. payable on those securities.
Illustration: deposit of securities for collection of interest

This sometimes is the case with bearer debenture which are issued by a company
but not registered in name of any person and every holder of those debentures is
entitled to repayment as well as interest on those debentures. The holders of such
securities are usually required to deposit them into bank or financial institutions for
obtaining their due interest etc. So if company also owns any of such debentures
from some other company it may deposit them in financial institution in order to
receive its interests etc.
Company may deposit or transfer in the name of a financial institution its shares
or debentures if it is condition for the company to register the transfer of shares
or debentures.
Illustration: deposit/transfer of securities for collection of interest

Public companies are allowed to appoint any financial institution as their transfer
agent. In such a case all the applications for transfer of shares of company shall be
sent to such financial institution instead of the company. So if A limited has
appointed any financial institution as their transfer agent and B limited is the
shareholder of A limited then B limited will always apply to that financial institution

Business Law
for transfer of shares of A Limited wherever required. So although B limited should

always keep its investment in A Limited in its own name but if it wants to transfer
these shares then it will be required to deposit/transfer them to the financial
institution.
However if the transfer does not take place within six months of the date of
deposit of securities in the name of financial institution then company must get
the securities back in its own name.
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.
Illustration: deposit/transfer of securities into Central Depository

As discussed in previous chapters, 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 the 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 a state of non-
compliance of this section.
Although the companies are required to keep the investments in their own
custody and in their own name however the investments being the assets of the
company can be pledged with any financial institution for obtaining loans and this
transaction will not make the company non-compliant of the provisions of this
section.
Register for investments of company not held in its own name

Company is required to hold a register for all of its investments not held in its own
name. The register so required shall contain the following particulars
 the nature, value and such other particulars as may be necessary fully
toidentify such shares or securities; and
 the bank or person in whose name or custody such shares or securities are
held
Inspection of register
This register is open to inspection of the members and creditors of the company
including holder of debenture of the company free of cost for at least two hours
daily. The company may impose certain restrictions on the inspection by its
articles or by resolution of a general meeting.

2 DIVIDENDS
Section overview
 Dividend meaning
 Final & interim dividend & time restriction for its payment
 Restriction on declaration of dividend
2.1 Dividend meaning
Concept
Dividends are payments made to shareholders by a company, out of its
distributable profits. Unless there are specific restrictions in the company’s
memorandum and articles, every company has an implied power to use its profits
to pay dividends to its shareholders. [Section 249]
The power to declare a dividend should be specified in the company’s articles of
association. The articles should provide for the company to declare a dividend in
a general meeting, by means of an ordinary resolution of the shareholders
(requiring a majority vote), and should specify the procedures for agreeing to a
dividend payment.
In practice, companies might make one dividend payments each year, or possibly
more. For example, a listed company might pay an interim dividend in the middle
of its financial year, and then a final dividend after the end of the financial year.
The articles should give the directors the power to pay interim dividends.
2.2 Final & Interim Dividend & time restriction for its payment
Final dividend
The amount of final dividend is proposed by directors and approved by members
in annual general meeting of the company. The directors propose this amount
along with the approval of annual financial statements. The members may
reduce, accept or reject the dividend as proposed by the director however they
cannot resolve to increase the amount as proposed by directors
Final dividend is paid within thirty days of the date of annual general meeting for
all companies
Interim dividend
The directors of the company may propose and pay interim dividend before end
of the year. This dividend is usually announced with interim results (quarterly or
half yearly accounts) of the company in lieu of or in addition to the final dividend
The interim dividend must be paid within 30 days of commencement of book
closure for this purpose or if share transfer books were not closed for this
purpose such dividend shall be paid within 30 days of date of directors meeting.

Business Law
Illustration: 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 owned 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.
2.3 Restriction on declaration of dividend [Section 248]
Dividend from gain arising out of sale of immoveable properties

Dividend is not declared out of the profits from sale of immovable property or item
of capital nature except
after such profits are adjusted against losses on sale of immovable
properties or assets of capital nature sold by the company. Or
the business of the company consists of buying and selling items of capital
nature.
Illustration: Sale of immovable properties

ABC limited, incurred losses for the year from its operations; however it sold an
immoveable property at a gain. This gain is not sufficient to offset the losses
incurred by the company and company does not possess any accumulated profits
from past as well. The directors insist that the gain on sale of asset may be paid as
a dividend, but this stance is not supported by the Companies Ordinance 1984
which required that the gains on sale of assets must be offset against losses
before declaring any dividends.
Dividend from gain arising out of investment properties

Investment property can be recognised and carried in books of accounts on fair
value basis as per relevant International Financial Reporting Standard. Any gain
arising out of re-measurement of investment property directly credited to Income
statement shall also be excluded for the purpose of declaration of dividends.
Illustration: Investment property

Investment properties are the immovable properties of the company kept for gain
in market value of such property or for the purpose of rental to others. These are
allowed to be recognised and carried on fair value model by the international
accountings standard. Every time when the company prepares a balance sheet, it
re-measures these assets and resultant gain or loss is settled through income
statement (profit and loss account). The gain arising out of this re-measurement is
not allowed to be distributed as a dividend apparently because of the fact that it
has not been realised yet.

3 PAYMENT OF DIVIDENDS
Section overview
Dividend Warrants
Consequences of delay in payment
Withholding of Dividends
3.1 Dividend Warrants
Dividend is paid in form of dividend warrants which are a type of a crossed

cheque and can be credited into the bank account of member of the company.
Dividend warrants are sent to the shareholders at their registered addresses
through registered post unless the recipient of dividend desires otherwise in
writing. It may be credited/paid to bank, financial institution or to some other order
of the shareholder.
3.2 Consequences of delay in payment [Section 251]
Penalty for default

In case of default regarding period of payment, Chief executive of the company
may be fined for an amount up to Rs. one Million along with imprisonment for a
term which may extend to two years. He shall further be ineligible to become a
director or Chief Executive of any company for next five years.
3.3 Withholding of dividend s [Section 250]
Circumstances in which delay in payment of dividend shall not be an offense

In following cases, the company may withhold dividend after obtaining prior
approval of Commission within 45 days of declaration of dividend
If dividend cannot be paid due to operation of any law,
If the shareholder has given instructions regarding payment of dividend and
such instructions cannot be followed,
If company has withheld the payment of dividend against any sum
recoverable from shareholder,
If the non- payment of dividend or non -posting of the warrant was not due
to any default on part of the company.

Business Law
4 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know about:
 Associated companies and undertakings,
 Procedure for and restrictions on investment in Associated companies and
undertakings,
 Provisions about investment of companies to be held in its own name and
exceptions thereof,
 Types of dividends and restrictions on declaration of dividends,
 Time limitation for payment of dividends and consequences in case of default.

CHAPTER
Business Law
27
Accounts and Audit
Contents
1 Books of accounts
2 Directors’ report
3 Audit
4 Chapter review

Business Law
INTRODUCTION
Learning outcomes
demonstrate knowledge of the appointment of auditors and their
responsibilities and duties.
LO 6.6.1 List the books of accounts to be kept by company
LO 6.6.2 Explain the major requirements with respect to the annual accounts and the
balance sheet.
LO 6.6.3 Describe the contents of a directors’ report
LO 6.6.4 Describe the authentication of balance sheet and profit and loss account
LO 6.6.5 Discuss requirements of filing of balance sheets and profit and loss accounts
with the registrar.
LO 7.1.1 Explain the provisions applicable to
 Appointment and remuneration of auditors
 Qualification and disqualification of auditors
 An auditor’s right to access the record and information
 An auditor’s duty to report and contents thereof
 Signature of an audit report
Exam context
 Understand the books of accounts required to be maintained by the company
 Understand the financial statements to be placed before the members in a meeting
 Comprehend the directors report of any company
 Understand the role of auditors their rights, powers, liabilities and their report

Act Chapters

Section B: Company Law - Chapter 27: Accounts and Audit
1 BOOKS OF ACCOUNTS
Section overview
Books of accounts to be kept by a company

Annual accounts
Authentication of accounts
Filing of accounts
1.1 Books of accounts to be kept by a company [Section 230]
Books of accounts
The company being a business concern should always keep a full record of its
financial and operational activities so that all the stakeholders of the company are
provided with appropriate and adequate information as and when required by
them. Every stakeholder needs to rely on the records of the company, the
government for revenue collection, the members for ascertaining profit & loss and
all other stakeholders for their own justified reasons.
The Ordinance requires that a company must maintain proper books of accounts
and by elaborating the term ‘proper’ it means such set of books of accounts
which fairly present the state of the affairs of the company and a fair record of all
its transactions.
In order to achieve the above stated objective the books and records that are
required to be kept by the company may take the form of hardcopy books or any
other accounting system which is capable of achieving the above referred
objective.
On the basis of these books of accounts, the company draws its financial
statements which indicate its profits or losses, its liabilities and ownerships etc.,
so these books must provide for all this information fairly and correctly. Whether it
is a computerized or manual system of bookkeeping, we shall use the words
books of accounts in rest of the chapter.
Broadly following books of accounts should be kept by a company namely books
with respect to
all sums of money received and expended by the company and the matters
in respect of which the receipt and expenditure takes place;
all sales and purchases of goods by the company;
all assets of the company;
all liabilities of the company; and
such special books and records as required by Commission from certain
types of companies in manufacturing or mining activities etc.
Books of accounts for a period of at least ten years must be preserved in good
order under the requirements of the Ordinance. 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.

Business Law
Keeping the books

Such books must be kept at the registered office of the company however the
directors of the company may opt to keep these books at some other place. For
this purpose, the directors shall be required to pass a resolution in their meeting
and the intimation of such resolution shall be given to registrar within seven days
of passing the same.
In case the company has a branch office, proper books of that branch may be
maintained at the branch office itself however, proper summarized returns should
reach the registered office of the company or other place where books of
accounts for the company are kept, with maximum intervals of three months. If
the returns as such are reaching the registered office properly, this shall be
considered as a sufficient compliance for the branch office regarding the
maintenance of books of accounts.
Inspection of books of accounts

Members of the company are not fully entitled to inspect the books of accounts
maintained by the company however the directors are entitled to inspect the
books of accounts during business hours.
Further the directors are also empowered to decide when and in what
circumstances the members of the company (other than directors) can inspect
the books of accounts. The directors shall decide such powers in the board
meeting. Further the members may pass a resolution in this regard to inspect the
books of accounts without any resolution from the directors of the company.
1.2 Annual accounts [Section 233]
Presentation of annual accounts

Once in every calendar year, the directors of the company are required to
present the balance sheet and a profit & loss account (collectively called
‘accounts’ in this chapter), in a general meeting of the company, within four
months of the close of the financial year of the company; however In case of first
accounts of the company, it shall be presented before the meeting within
eighteen months of date of incorporation of the company.
In case of a not for profit company, the profit & loss account shall be replaced by
income & expenditure account.
Such accounts shall be audited by the auditor of the company and the auditor’s
report shall accompany the accounts.
The copy of these accounts along with auditor’s and directors’ report shall be
sent to every member of the company at least twenty one days before the date of
the meeting (Usually sent with the notice of the meeting).
Company shall also retain a copy at its registered office and every member of the
company shall be allowed to inspect such copy retained at the registered office of
the company.
Further a listed company is required to dispatch at least five copies of these
accounts along with directors’ and auditor’s report thereon to the Commission
and Stock exchange simultaneously with the dispatch of the same to the
members.
Upon an application of the company in this behalf, an extension of one month
may be granted to a company for presentation of the accounts as aforesaid.

Such extension in case of the listed company shall be granted by the

Commission and in case of any other company, shall be granted by registrar;
however the company cannot be granted an extension for presentation of first
accounts.
Company should not prepare the above accounts for a period more than twelve
months however on application of the company the registrar may extend this
period on specific request of the company.
1.3 Authentication of accounts [Section 241]
Power to approve
Authentication means the process of approval of accounts for the purpose of
issuance of the same to the members of the company or elsewhere as required.
As from the above it is evident that the members are only asked to review the
accounts and ask any question if they so require, it is actually the directors of the
company who are empowered as well as responsible for approval and issue of
accounts of the company.
Directors authenticate the accounts of the company in their meeting by passing a
resolution. The members only receive the accounts and can ask any questions
arising out of these accounts in annual general meeting.
As a token of approval of accounts, the chief executive and at least one director
of the company put their signatures on the accounts. If the chief executive is out
of Pakistan at the time of signing the accounts then at least two directors shall
sign the accounts and add a statement to the accounts that the requirements of
the authentication could not be specifically complied with because of the absence
of chief executive from Pakistan.
1.4 Filing of accounts [Section 242]
As discussed earlier, a listed company is required to send five copies of its

accounts along with directors and auditors report thereon to Commission and
stock exchange, in addition to that all the companies are required by law to send
copies of its accounts as well as auditors and directors report to the registrar
within 30 days of the date of annual general meeting in which these accounts
were approved.
The listed company shall send three copies of the above said accounts and
reports and other companies are required to send two copies to the registrar.
These copies must be signed as required by their individual provisions such that
the accounts to be filed shall be authenticated by the director and a chief
executive.
If the general meeting to which such accounts and reports are presented does
not adopt these accounts and reports, the fact shall be mentioned to the registrar
along with the copies of documents to be filed as above.
Further the auditor’s report shall be signed by the auditors of the company and
the directors’ report shall be signed by the chairman of the board or the chief
executive or at least on director and a chief executive as the case may be.

Business Law
A private company shall file the accounts and auditors or directors report with
registrar only if it has a paid up capital of seven and a half million Rupees or
more, all the other private companies need not filing their accounts or reports.

2 DIRECTORS’ REPORT
Section overview
 Directors report
2.1 Directors Report [Section 236]
Why should directors report?

By now we know that the directors are the persons who are elected and
appointed by the members of the company to run and manage the company on
their behalf and with a few exceptions all the directors must be members of the
company.
It is the shareholders’ or members’ money with which they run the business. The
decisions of the directors regarding company directly affect the company and its
members; it’s their money which is directly affected by the decisions of the
directors. We can broadly say that the directors are agents of the shareholder so
they should report the matter pertaining to the company to its members.
The accounts of the company are also a report from the directors to its members
but it is expected out of directors that they should add wording to those accounts
as well, that wording, we can say, is their report, which they approve in their
meeting for sending to its members.
Contents for every directors report

Director of every company shall make out and attach to the accounts, a report
containing following particulars namely
 Statements regarding the state of the affairs of the company
 Particulars of any amount recommended as dividend
 Particulars of any amount transferred or proposed to be transferred to any
reserve account.
Illustration: 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 members of the company.
Illustration: Transfer to reserve

Distributable profits are the ones which can be utilised for payment of dividend by
the company so if the directors wish to transfer certain portion of those
distributable profits to some reserve funds, they must discuss the idea with the
members, even though it is directors decision to utilise the surpluses as and when
they fell appropriate for the benefit of the company
Additional contents for directors report of public company

In case of a public company, there shall be additional matters to discuss in the
directors’ report, following are detailed
The directors’ report of a public company shall address any specific changes and
commitments affecting the financial position of the company, occurring between
the financial year end date and the date of the report.

Business Law
Illustration: Changes and commitments
Say, the yearend date of company is 30th June 2012 and directors’ report is dated
for 01st 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 date of balance sheet and the
date of directors’ report, directors’ report would have addressed this matter as well.
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, or
its holding company or
any of its subsidiaries or
any other company where it has made investments.
However the company may apply to the registrar and get permission for non-
disclosure of such information if the disclosure of such information shall harm the
business interest of the company.
Also the directors’ report shall discuss the reservations, observations qualification
etc. or any adverse remarks pointed out by the auditors.
Illustration: 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
from the straight or unqualified 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.
Directors’ report shall state the earnings per shares and the reasons for incurring
loss and also contain the reasonable indication of future profit if any
Pattern of shareholding shall be circulated along with the directors’ report and the
report shall state the name and place of incorporation of its holding company if
such holding company is incorporated outside Pakistan.
Directors’ report shall contain the information regarding default in repayments of
loans or interests on loans, if any.
(Pattern of shareholding is contained in form 34 of the Companies (General
Provisions And Forms) Rules 1985 which is not covered in our syllabus)
Authentication of directors’ report

Directors Report shall be signed by the chairman of the board of directors
however it may be signed by the chief executive of the company if the chief
executive is authorised for such authentication by the directors, If the chief
executive is not so authorized, the report shall be signed by the chief executive
and such number of directors which are required to sign the financial statements.

3 AUDIT
Section overview
 Appointment and remuneration of auditors

 Qualification and disqualification of auditors
 Auditor’s right to access the records and information
 Auditors’ report
3.1 Appointment and remuneration of auditors [Section 252]
Introduction of auditor
As discussed above the annual financial statements of the company should be
audited by an auditor before they are sent to the members or filed to Commission
or registrar and also they shall be accompanied by the auditor’s report. Company
should always have an auditor appointed under the Companies Ordinance 1984.
Audit is not only a yearend task rather office of the auditor should not be vacant
and any vacancies should be filled in within given timeframes.
The auditors’ duty is to express an opinion on the truthfulness/fairness or
otherwise of the accounts.
Auditor may be appointed in his individual capacity or in the capacity of a firm,
however in Pakistan, auditors are not allowed to work in form of a limited liability
company. Auditors must be eligible to work as auditors under the relevant
provisions of the Companies Ordinance 1984 as well as the other applicable
laws.
Usually companies appoint only one auditor however for large companies two or
more joint auditors may be appointed but the expression used in the Ordinance is
a plural as the ‘auditors’ even for a single auditor.
Most of the companies are required to appoint the practicing chartered
accountants as their auditors and the exception is only for the private companies
with a paid up capital of less than Rupees three millions.
Appointment and removal first auditors and their remuneration [Section 253]
After the incorporation of the company, first auditors of the company shall be
appointed by the directors of the company within sixty days after the date of
incorporation of the company, the directors are also entitled to fix the
remuneration of the auditors so appointed by them.
If the first auditors are not appointed by the directors within the period of sixty
days from the date of incorporation, then the member should appoint first
auditors of the company within one hundred and twenty days of the date of
incorporation of the company. While appointing auditors as such the members
may fix their remuneration as well.
If the auditors are not appointed as such by the directors or the members,
Commission may appoint the auditors and fix their remuneration. The company
shall be required to give a notice to the auditors regarding its powers becoming
exercisable.
If the first auditors are appointed by the directors, they may be removed from
office by the members by passing a resolution in the general meeting of the

Business Law
company, however if the members want to remove from office the auditors
appointed by themselves, they shall have to pass a special resolution and shall
not be entitled to appoint any person as auditor in their place and in such a case
the auditor shall be appointed by Commission.
Appointment of subsequent auditor
First auditors shall retire on the date of first annual general meeting and in their
place the new auditors shall be appointed. New auditor shall be appointed by
members by passing a resolution in the general meeting.
Notice for appointment of the auditor shall be sent by any member of the
company at least fourteen days before the date of meeting and the company
shall circulate this notice to all the members at least seven days before the date
of annual general meeting.
If more than one persons are proposed as auditor of the company by its
members, then resolution of the members in the general meeting shall decide as
to who shall be appointed in the office of the auditor of the company.
The auditor so appointed shall hold the office of the auditor till conclusion of next
annual general meeting. However the members may remove him from office
before the expiration of the term of the office by passing a special resolution. As
discussed earlier, in such a situation the new auditor cannot be appointed by the
members and such appointment and fixation of remuneration of the auditors shall
be made by the Commission.
Whenever the powers of Commission become exercisable, the company shall
give it a notice within one week of the powers becoming so exercisable.
Right of retiring auditor to make representation

If a notice is received from any person appointing any person other than the
existing auditor, then such notice from the member shall be sent to the retiring
auditor forthwith. The retiring auditor has got right to make representation
regarding the matter to the members of the company. The representation shall be
sent to all the member of the company unless it is received too late by the
company for sending.
If the representation is not sent to every member as aforesaid, the retiring auditor
shall be allowed to read the representation in the annual general meeting.
However he may opt to ask the company to get it read at the meeting by
someone else.
The directors may make an application to the registrar claiming that the auditor
has misused the right to gain publicity etc. In such case the registrar shall allow
the company to not to forward the representation of the auditor and not to get it
read as well in the meeting. The registrar may also direct the auditor to pay the
cost etc. to the company for making of the application.
Casual vacancy
Casual vacancy in the office of the auditor arising due to the resignation or death
etc. of the auditor shall be filled by the directors however until such vacancy is so
filled, the surviving auditor if any may continue to act as auditor.
If auditors are not appointed in casual vacancy by the directors of the company
within thirty days of the occurrence of vacancy then Commission shall appoint
auditor to fill in the casual vacancy. Commission shall also be empowered to
appoint auditors and fix their remuneration when the auditors appointed by the
company are unwilling to act as auditors.

An auditor appointed to fill the casual vacancy shall hold the office of the auditor
till the conclusion of annual general meeting.
Notice to registrar
Company is required to inform the registrar within fourteen days of every
appointment, removal or retirement of the auditor.
3.2 Qualification and disqualification of auditors [Section 254]
Qualification of auditors
For a public company and its subsidiaries and a private company having paid up
capital of more than or equal to Rupees 3 million, the qualification of auditors is a
chartered accountant within the meanings of chartered accountants Ordinance
1961. Further a firm of which all the partners practicing in Pakistan are Chartered
Accountants may be appointed by its firm name as auditors of a company and
may act in its firm name.
As per relevant provisions of the Chartered Accountants Ordinance 1961, only
those persons can act as auditors who have obtained a valid certificate of
practice from the Institute of Chartered Accountants of Pakistan. Furthermore, a
body corporate cannot be appointed as auditor of any company – the auditor has
to be a natural person or the firm of natural persons who have obtained a valid
certificate of practice from the Institute of Chartered Accountants of Pakistan
Disqualification of auditors
The following named persons cannot act as auditors of the company.
 a person who is a director, other officer or employee of the company or
held such a position at any time during the preceding three years;
 a person who is a partner of a director, officer or employee of the company
or is in the employment of any of these persons;
 the spouse of a director of the company and a person who is indebted to
the company however a person is not considered as indebted if the
company is a utility provider and the auditor’s bills for up to three months
are pending or otherwise the company is a credit card issuer and the
auditor’s credit card bill for not more than Rupees five hundred thousand
are payable.
Illustration: Indebtedness of auditor

Q: Before the annual general meeting of ABC bank limited, a banking company
issuing credit cards as well, a notice has been received from a member of the
company for appointment of Mr Zaid ACA as auditor of the company. During the
meeting the company secretary of ABC Bank Limited has identified that Mr Zaid
is a credit card holder of the company and owes Rupees four hundred thousand
against the credit card utilisation. Will this impair Mr Zaid’s independence?
Answer: No, because it does not exceed Rs. five hundred thousands,
 a person or his spouse or minor children, or in case of a firm, all partners of

such firm who holds any shares of an audit client or any of its associated
companies: however as an exception if such a person holds shares prior to
his appointment as auditor, the fact shall be disclosed on his appointment

Business Law
as auditor and such person shall disinvest such shares within ninety days
of such appointment.
If at the time of appointment there was no defect or disqualification in the
appointment of the auditor and afterwards the defect or disqualification appears,
then the auditor shall vacate the office of the auditor immediately.
A person shall also not be qualified for appointment as auditor of a company if he
is, by virtue of above stated disqualifications, disqualified for appointment as
auditor of any other company which is that company’s subsidiary or holding
company or a subsidiary of that holding company
3.3 Auditor’s right to access the records and information [Section 255]
Auditor’s power to call information

Every auditor of a company has a right of access at all times to the books,
papers, accounts and vouchers of the company, whether kept at the registered
office of the company or elsewhere,
Auditor is also entitled to require from the company and the directors and other
officers of the company every information and explanation as he thinks
necessary for the performance of the duties of the auditors.
Documents of branch situated outside Pakistan.

In the case of a company having a branch office outside Pakistan, it shall be
sufficient if the auditor is allowed access to such copies of, and extracts from, the
books and papers of the branch as have been transmitted to the principal office
of the company in Pakistan.
Auditors’ right and duty to attend the general meetings

The auditor of a company shall be entitled to attend any general meeting of the
company, and the company is liable to send him a notice of all general meetings.
Auditor has a right to be heard at any general meeting which he attends on any
part of the business which concerns him as auditor:
Further in the case of a listed company, the auditor or a person authorized by him
in writing shall be present in the general meeting in which the balance-sheet and
profit and loss account and the auditor’s report are to be considered.
3.4 Auditors’ report [Section 255]
Duty of the auditor

The auditor’s duty is to express an opinion in form of a report to the members of
the company on the accounts and books of accounts of the company.
The auditor makes a report on balance sheet, profit and loss account or income
and expenditure account and every other statement which is to be presented to
the members of the company in annual general meeting including notes to the
accounts. The report of the auditor shall be discussed in lot more detail in your
future studies in paper of ‘Auditing’ however we briefly summarize as to what the
auditor is required to include in his report. Following are matters to be stated by
the auditor in his report.
 The auditors shall state in the auditors’ report that t they have obtained all
the information and explanations which in their knowledge and belief were

necessary for the purposes of the audit; however if any information or

explanation is not provided by the company or any of its officer, the auditors
shall report that they were not provided with all the required information and
explanations.
 The auditor shall further express and opinion about the books of accounts
as to the adequateness of them as per the requirements of the Companies
Ordinance 1984.Opinion shall also be expressed as to the conformity of the
accounts with the requirements of the Ordinance and with books of
accounts.
 Auditors shall also state that the whether or not in their opinion the said
accounts give the information required by this Ordinance in the manner
required by the Ordinance and give a true and fair view
 of the state of the company’s affairs as at the end of its financial year;
 of the profit or loss or surplus or deficit, as the case may be, for its
financial year; and
 of the changes in the financial position (statement of changes in
equity) or the sources and application of funds (statement of cash
flows) for its financial year;
 Opinion of the auditors shall also be required on expenditure of the
company and investments of the company during the year were for the
business of the company and were in line with the objects of the company.
 Auditor shall also report as to the responsibility of the company regarding
deduction and payment of Zakat under relevant law has been discharged.
The auditor shall state the reasons and factual position known to him if any of his
above stated opinions is negative or is qualified (positive opinion but with
exceptions)
Signature of an audit report [Section 257]

The person appointed as auditor shall sign the auditors’ report and all other
documents required to be signed or authenticated by the auditor of a company
and if a firm is appointed inn the firm name as auditors, any of the partners
practicing in Pakistan may sign the above said documents.
The report shall carry a date and shall indicate the place at which it is signed.
Illustration: Auditors report

Here is reproduction of From 35 A of the first schedule to the Companies
Ordinance 1984, it contains the format for a plain auditors’ report. Your
assignment is to review the auditors’ report in full and match it with the
requirements of law as stated above to ensure that all required opinions have been
made and all required disclosures give,
AUDITORS’ REPORT TO THE MEMBERS
We have audited the annexed balance sheet of ----------------------------------------------------- as
at -------------- and the related profit and loss account, cash flow statement and
statement of changes in equity together with the notes forming part thereof, for
the year then ended and we state that we have obtained all the information and
explanations which, to the best of our knowledge and belief, were necessary for the
purposes of our audit.

Business Law
It is the responsibility of the company’s management to establish and maintain a

system of internal control, and prepare and present the above said statements in
conformity with the approved accounting standards and the requirements of the
Companies Ordinance, 1984. Our responsibility is to express an opinion on these
statements based on our audit.
We conduct our audit in accordance with the auditing standards as applicable in
Pakistan. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the above said statements are free of any
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the above said statements. An audit
also includes assessing the accounting policies and significant estimates made by
management, as well as, evaluating the overall presentation of the above said
statements. We believe that our audit provides a reasonable basis for our opinion
and, after due verification, we report that—
(a) In our opinion, proper books of accounts have been kept by the company as
required by the Companies Ordinance, 1984;
(b) in our opinion—
the balance sheet and profit and loss account together with the notes thereon have
been drawn up in conformity with the Companies Ordinance, 1984, and are in
agreement with the books of accounts and are further in accordance with
accounting policies consistently applied except for the changes as stated in note(s)
with which we concur;
the expenditure incurred during the year was for the purpose of the company’s
business; and the business conducted, investments made and the expenditure
incurred during the year were in accordance with the objects of the company;
(c) in our opinion and to the best of our information and according to the
explanations given to us, the balance sheet, profits and loss account, cash flow
statement and statement of changes in equity together with the notes forming part
thereof conform with approved accounting standards as applicable in Pakistan,
and, gives the information required by the Companies Ordinance, 1984, in the
manner so required and respectively give a true and fair view of the state of the
company’s affairs as at -------------- and of the profit/loss, its cash flows and changes
in equity for the year then ended; and
(d) in our opinion Zakat deductible at source under the Zakat and Ushr Ordinance,
1980 (XVIII of 1980), was deducted by the company and deposited in the Central
Zakat Fund established under section 7 of that Ordinance.
Signature
[Name(s) of Auditors]
Date
Place

4 CHAPTER REVIEW
Chapter review
Before concluding your studies of this chapter check that you now know:
What books of account are required to be maintained by the company
What are the requirements for presentation of accounts by the company
What are the contents of a directors report
How auditors are appointed, what power and obligations do they have and
what do they report.

Business Law

Business Law
I
Index
Agreement to create monopoly 90

a Agreement, the consideration
or object of which is partly
unlawful 60, 87, 89
Acceptance 42 Agreements by persons of unsound
Acceptor for honour 260 mind 50
Act of firm 231 Agreements contingent on impossible
events 100
Act or omission 176
Agreements contingent upon
Active concealment 73
impossible events 107
Actual authority 245
Agreements in restraint of legal
Actual breach of contract 149 proceedings 99
Actual or ostensible partner 235 Agreements in restraint of marriage 99
Actual performance 119, 140 Agreements in restraint of trade 96
Additional District Judge 19 Agreements opposed to public policy 89
Additional Sessions Judges 18 Agreements to do impossible acts 100
Advantages and disadvantages of Agreements to enter into an
binding precedent 5 agreement in the future 100
Advantages of ADR 22 Agreements with a minor 49
Advantages of delegated legislation 13 Agreements with persons disqualified
Agency by estoppel 210 by law 52
Agency by express appointment 209 Allotted share capital 328
Agency by necessity 211 Alteration 142, 175
Agency by operation of law 211 Alterations permitted by the Act 268
Agency by ratification 209 Alternate Dispute Resolution 21
Agency coupled with interest 219 Alternative promise being illegal 89, 131
Agent - Definition 205 Ambiguous Instrument 265
Agent of the firm 245 Amount on negotiable instrument 266
Agent: authority 212 Annual accounts 406
Agent’s authority and the power to Annual General Meeting (AGM) 364
bind the principal 212 Anticipatory breach of contract 150
Agreement 4, 27, 232 Apparent authority 213

Business Law
Appeal 22 Business Law – Definition 274

Appeal to Supreme Court 21
Applicability of law 22
Appointment and remuneration of
auditors 411
c
Appropriation of payment 132, 133
Arbitration 22 Carrying on business 233
Arbitration in Islamic way 23 Cases where time is essence 127
Areas of jurisdiction of the High Court 17 Casual vacancy 412
Arrangement 176 Certiorari 17
Articles of association 319 Characteristics of contingent
Artificial person 294 contracts 105
Associated company/Associated Characteristics of Negotiable
Undertaking 395 Instrument 257
Association not for profit 300 Charge 352
Association of two or more persons 232 Charitable subscription 62
Association or subscription clause 315 Cheaper and Flexible 22
Attempted performance 119, 140 Cheque 278
Auctioneer 206 Chief executive 388
Audit 238, 293, 297, 300, 302, Circumstances in which a banker
337, 343, 349, 353, 411 may refuse to honour cheque 283, 284
Auditors’ report 414 Circumstances where agent is
Authentication of accounts 407 personally liable 225
Authentication of directors’ report 410 Circumstances where object or
consideration is unlawful 87
Authorised capital clause 315
Circumstances where surety is not
Authorised share capital 328
discharged 177
Authority of Partners 245
Civil court Appeals 19
Civil Courts 19
Civil law 7
b Civil law and criminal law 6
Classifications of contract 33
Coercion 68
Bailee not responsible on re-delivery
to bailor without title 193 Commencement of business 321
Bailment on the basis of benefit 186 Commercial agent 206
Bailment on the basis of reward 185 Commission’s approval 317
Bearer instrument 262 Common law remedies 155
Bilateral mistake 80 Communication of revocation 44
Bilateral mistake as to the possibility Companies 293
of performance 81 Company Courts 20
Bilateral mistake as to the subject Company directors 206
matter 81 Company limited by guarantee 297
Bill of Exchange 274 Company limited by shares 297
Blank or general endorsement 266 Company meetings 361
Body corporate 297 Company Secretary 390
Books of accounts 405 Competent to contract 49
Broker 206 Composition of Federal Shariat Court 21
Burden of proof 8, 51 Composition of National Assembly 11

Index
Conciliation 22 Criminal law or civil law? 7

Condition precedent to surety’s Criteria to be Judge of High Court 16
liability 171 Criteria to be Judge of Supreme
Conditions to be holder in due course 261 Court 16
Consent 67 Crossing of a cheque after issue 282
Consent of parties 168 Custom 225
Consequences of Actual Breach 149 Customs 4
Consequences of treating contract as
operative 151
Consequences where time is
essence 127
d
Consequences where time is not
essence 127 Damages 156
Consideration – Definition 57 Damages for inconvenience and
Consistency in judicial decisions 6 uneasiness 160
Contingent contract 105 Death 143
Contract - Definition 27 Death of surety 170, 175
Continuing guarantee 169 Debenture 338, 349
Contract of agency 62 Debt to be discharged is indicated 132
Contract of guarantee 62, 167 Debt to be discharged is not indicated 132
Contract of indemnity 165 Declared act 74
Contracts contingent upon the future Defeats the provisions of any law 88
conduct of a living person 106 Delay 23
Contracts contingent upon the Delegated Legislation 13
happening of an uncertain future
Demand for poll 369
event 105
Demand Instrument 262
Contracts contingent upon the
happening of an uncertain Devolution of joint rights 125
specified event within a fixed Difference between contingent
time 106 contract and wagering
Contracts contingent upon the non- agreement 107
happening of a certain future Difference between pledge and
event 106 bailment 199
Contracts contingent upon the non- Direct Representation 249
happening, of an uncertain Directors 377
specified event within a fixed Directors Report 409
time 106 Disabilities of Transferee 250
Contracts without consideration 61 Disabled to perform promise 150
Control over delegated legislation 13 Disadvantages 6
Counter offer 45 Disadvantages of ADR 22
Course of performance 149 Disadvantages of delegated
Court 303 legislation 14
Court regards it as immoral or Discharge by breach 149
opposed to public policy 88 Discharge by impossibility of
Creation of agency 209 performance 145
Creditor 167 Discharge by lapse of time 148
Criminal Act 226 Discharge by mutual agreement 141
Criminal court Appeals 18 Discharge by operation of law 143
Criminal Courts 17 Discharge by performance 140
Criminal law 6 Discharge of a contract 139

Business Law
Discharge of liability 285 Duty to indemnify for loss caused by

Discharge of party or parties 286 fraud 239
Discharge of surety 174 Duty to indemnify for wilful neglect 240
Discharge of surety by invalidation of Duty to provide full information 239
contract 176 Duty to receive back the goods 189
Discharge of surety by revocation 175 Duty to render true accounts 239
Discharge of surety by the conduct of Duty to return increase 191
the creditor 175 Duty to return the goods 191
Discharge of the negotiable Duty to use firm’s property
instrument 285 exclusively for the firm 241
Disclosure of directors’ interest 386
Disqualification of auditors 413
District Magistrate
Dividend warrants
18
401
e
Dividends 399
delay in payment 401 Effect of absence of consent 67
Doctrine of binding precedent 4 Effect of absence of free consent 67
Doctrine of corporate personality 293 Effect of admissions by a partner 249
Drawee in case of need 260 Effect of general crossing 281
Duties of Effect of material alteration 268
Agent 214 Effect of notice to an active partner 249
Bailee 189 Effect of ratification 210
Bailor 188 Effect of refusal to perform 122
finder of goods 195 Effect of restrictive crossing 282
Principal 216 Effect of special crossing 281
Duty in case of emergency 240 Effect of undue influence 71, 72
Duty not to assign his interest 241 Effect on agreement collateral to void
Duty not to compete with the agreement 95
business of the firm 241 Effects of coercion 68
Duty not to make any unauthorized Effects of fraud 75
use of goods 190 Effects of misrepresentation 79
Duty not to mix the goods bailed with Effects of supervening impossibility 145
his own goods 190
Effects of Wagering Agreement 98
Duty not to set up an adverse title 190
Election of directors 379
Duty to account for personal profits
Eligibility to act as director 381
derived 241
Empty promise 73
Duty to act within authority 240
Endorsement 266
Duty to attend diligently to his duties 240
Endorsement in full or special
Duty to be just and faithful 239
endorsement 266
Duty to be liable jointly and severally
Enforceability 28
– unlimited liability 239
Enforceability of void agreements 95
Duty to bear the risk of loss 189
Equitable remedies 155
Duty to carry on business to the
greatest common advantage 239 Essential elements of a cheque 280
Duty to contribute to the losses 240 Essential elements of a partnership 232
Duty to disclose faults 188, 192 Essential elements of a Promissory
Note 271
Duty to indemnify bailee for loss in
case of early termination of Essential elements of Bailment 184
gratuitous bailment 189

Index
Essential elements of Bill of Forfeiture of Security Deposit (or

exchange 276 Earnest Money) 160
Essentials of a contract 168 Fraud 73, 74, 169
Essentials of a contract of guarantee 168 Fraudulent 88
Essentials of a valid contract 29 Free consent – Definition 67
Essentials of a valid tender 121 Fresh election of directors 380
Essentials of acceptance 42 Future consideration 59
Essentials of an offer 39
Essentials of consideration 58
Essentials of misrepresentation
Essentials of valid endorsement
78
266
g
Estoppel 210
Examples of applications of holding General Crossing 281
out partner 250 General duties of partner 239
Exceptions of agreements in restraint General meetings 361
of trade 96 Gifts 62
Exceptions of holding out 250 Goods being inseparable 190
Exceptions to rescind the contract 75, 79 Grounds of supervening impossibility 145
Exemplary damages 159
Existence of a debt 168
Expensive
Expert
22
343
h
Express authority 212
Extraordinary General Meeting High Courts 16
(EGM) 365 Holder 261
Holder in Due Course 261
Holding Company 299
f Holding out
How can precedents be altered or
249
avoided? 5
Failure of co-surety to join surety 177
False assertion 73
Family Courts
Federal Shariat Court
20
20
i
Fiduciary relationship 377
Filing of accounts 407 Implied authority 212, 245
Final dividend 399 Inchoate instrument 265
Financial Institution 337 Indemnified / Indemnity holder
Finder of goods 195 (Promisee) 165
Firm and partners 231 Indemnifier (Promisor) 165
First chief executive 388 Indirect Representation 249
First directors 378 Industrial Tribunal 20
Fitted act 74 Initiation surety’s liability 171
Fixed charge 352 Injunction 157
Flexibility in the law 6 Inland Instrument 264
Floating charge 352 Insolvency 143
Forbidden by law 87 Inspection of books of accounts 406
Foreign Instrument 264 Interested director not to vote 387

Business Law
Interim dividend 399 Liability of a partner for acts of a firm 247

Introduction of contract act 27 Liability of the firm for wrongful acts
Introduction of legal system 3 of a partner 247
Investment 396 Liability to account for personal
Investment in associated company 395 profits 248
Investment properties 400 Liability to account for profit of
competing business 248
Investments of company 395
Liability to indemnify for wilful neglect 248
Investments of Company to be held
in its own name 397 Liability to share losses 248
Involves or implies injury 88 Limitation of surety’s liability 170
Irrevocable agency 219 Limitation period 148
Issued share capital 328, 329 Limited liability 294
Liquidated damages 160
Loans to directors 385
j Lunatic 51
Joint and several liability of joint

promisors 125
m
Judiciary makes the law 6
Jurisdiction of Supreme Court 15 Magistrates’ courts 18
Maintenance and champerty 90
Making a distinction between cases 5
k Mandamus
Marriage brokerage agreement
16
90
Material alteration 143, 268
Kind of Quasi Contracts 111, 113 Maturity of Negotiable instrument 263
Kinds of damages 158 Meaning of acceptance 42
Kinds of endorsements 266 Meaning of agreements in restraint of
Kinds of guarantee 169 trade 96
Knowledge of the third party 249 Meaning of appropriation of
payment 132, 133
Meaning of Bailment 183
l Meaning of Crossing
Meaning of discharge
281
139
Meaning of performance 119
Lapse of an offer 44 Meaning of Quasi contract 111
Large number of precedents 6 Meaning of reciprocal promises 129
Law – Definition 3 Meaning of remedy 155
Legality of object and consideration 87 Meaning of sound mind 50
Legality of object, consideration and Meaning of undisclosed agency 223
agreements opposed to public Meaning of void agreement 95
policy 87 Meaning of wagering agreement 98
Legislation 4 Mediation 22
Legislation 9 Memorandum of association 313
Liabilities of partner and firm 247 Mercantile agent 206
Liability clause 314 Minimum Subscription 339
Liability for misapplication by partners 248

Index
Minors admission to the benefits of Not an excuse of supervening

partnership 251 impossibility 146
Minutes 371 Not Negotiable Crossing 282
Misrepresentation 77, 169 Note 198
Misrepresentation / Fraud 176 Notice 170, 175
Mistake 80 Notice of meeting 367
Mistake of foreign law 80 Novation 141, 175
Mistake of Pakistan law 80
Mixture without Bailor’s consent 190
Modarba
Modes of discharge of a contract
395
139
o
Modes of negotiation 267
Money bills 12 Object clause 314
Mortgage 351 Obligations of parties to contracts 119
Must have relied on the existence of Offer 39
the agency relationship 211 On due date of performance 149
Mutual agency 234 Options to the aggrieved party 151
Mutual and concurrent 129 Order instrument 262
Mutual and dependent 129 Order of performance 130
Mutual and independent 129 Ordinary business 367
Mutual Rights and Liabilities 243 Ordinary Damages 158
Ordinary shares 330
Ostensible authority 213
n Other modes of revocation of
continuing guarantee 170
Other VOID agreements 99
Name clause 314 Overruling a precedent 5
Name of a company 310
National Assembly 10
Natural love and affection
Nature of bailment
61
183
p
Nature of partnership 231
Nature of relationship 70 Participatory Redeemable Capital 353
Nature of surety’s liability 170 Particular partnership 235
Nature of surety’s liability - it is co- Particular state of things ceases to
extensive 170 exist or occur 146
Negotiable Instrument – Definition 257 Parties in a contract of guarantee 167
Negotiation 22, 267 Parties in a contract of indemnity 165
Negotiation by endorsement and Parties to a Bill of Exchange 274
delivery 267 Parties to a Cheque 279
Negotiation by mere delivery 267 Parties to a Promissory Note 270
Neither party makes an appropriation 132 Parties to Negotiable Instruments 260
Nominal Damages 159 Partner by estoppel or holding out 236
Nominal partner 236 Partner in profits only 236
Nominal value of shares 327 Partnership 231, 293
Non-performance in case of mutual Partnership property 243
and dependent reciprocal Partnership-at-will 235
promises 130 Past consideration 59

Business Law
Payable to bearer 258 Preventing the performance 130

Payable to order 258 Prime Minister 9
Payment by interested person 111 Principal debtor 167
Payment by mistake or under Privacy 22
coercion 112 Private companies 298
Payment for Honour 261 Process 21
Payment in due course 268 Process of Legislation 11, 13
Penalty 160 Prohibited names 310
Performance of a contract 119 Prohibition 16
Perpetual existence 296 Prohibition of financial assistance 332
Person enjoying benefit of non- Promise 27
gratuitous act / goods 112, 114 Promise to compensate 61
Personal liability of an agent 225 Promise to do legal and
Persons who can demand illegal things 89, 131
performance 124 Promisee prescribes the manner or
Persons who can perform 123 time 126
Persons who can perform and Promisee’s refusal / neglects 142
demand performance 122 Promissory Note 270
Persuasive authority 4 Proposal 28
Place for performance is not specified 126 Proposal / offer – Definition 39
Place for performance is specified 126 Prospectus 337
Pledge 186, 196, 350 Protection to the Collecting Banker 283
Pledge by buyer in possession before Proxies 370
sale 199
Public company 298
Pledge by co-owner in possession 199
Purpose of Crossing 281
Pledge by mercantile agent 198
Pledge by person in possession
under voidable contract 198
Pledge by seller in possession after q
sale 198
Pledged by non-owners 198
Qualification of auditors 413
Position of a minor before attaining
majority 251 Qualification to be an arbitrator 23
Position of a minor on attaining Qualified duties of partner 240
majority 251 Quantum Meruit 111, 113, 158
Position of a person who is usually of Quantum meruit claim 155
sound mind but occasionally of Quasi contract 111
unsound mind 51 Quorum of meeting 368
Position of a person who is usually of
unsound mind but occasionally of
sound mind
Position of agreements by a minor
51
49 r
Position of agreements with a person
of unsound mind 51 Reasons of alteration in Object and
Powers of directors 384 registered office clause 316
Precedent 4 Reciprocal promises 129
Preference shares 330 Rectification of names 310
Present consideration 59 Redeemable Capital 353
President 9 Refusal to perform promise 150

Index
Registered office clause 314 Right to claim damages in case of

Registrar 302 negligence 191
Registration of a company 308 Right to claim set off 172
Registration of mortgage or charge 354 Right to deliver goods in case of
Release of one joint promisor 125 several joint owners 193
Release of principal debtor 175 Right to demand increase 192
Remedies for breach 155 Right to demand return of goods 192
Remedies for breach of contract 155 Right to have access to the books 242
Remission 142 Right to indemnity 171, 242
Remoteness of damages 161 Right to interest on advances 242
Removal of chief executive 389 Right to interest on capital 242
Reports to be set out in the Right to recover loss in case of
prospectus 340 bailor’s defective title 192
Representation at meetings 371 Right to recover loss in case of
bailor’s refusal to take the goods
Representation to others 211
back 192
Rescission 141
Right to retire 242
Rescission of Contract 156
Right to share the profits 242
Restitution 156
Right to subrogation 171
Restraint of parental rights 90
Right to take part in the conduct of
Restraint of personal liberty 90 the business 242
Restrictions by partnership deed 247 Rights after reconstitution of firm 243
Restrictions on the implied authority Rights against co-sureties 173
of a partner 246
Rights against creditor 172
Restrictive crossing 282
Rights against principal debtor 171
Revocation of a continuing guarantee 170
Rights and liabilities of acceptor for
Revocation of offer and acceptance 44 honour 260
Right and duties of the agent and Rights of agent 215
principal 214
Rights of bailor and bailee against
Right of acceptor for honour 260 wrong-doer 193
Right of bailee 192 Rights of Holder against Banker 283
Right of bailor 191 Rights of indemnity holder 165
Right of finder of goods 195 Rights of partner 242
Right of outgoing partner to share in Rights of Pawnee 196
the subsequent profits 243
Rights of Pawnor 198
Right of particular lien 193
Rights of Principal 217
Right of payer for honour 261
Rights of surety 171
Right to be consulted 242
Rights of Transferee 250
Right to be indemnified in case of
Rights of transferee of a partner’s
early termination of gratuitous
interest 250
bailment 192
Rights to securities 172
Right to claim compensation in case
of unauthorized mixture of goods 191 Role of an agent 205
Right to claim compensation in case Rules for calculating maturity 263
of unauthorized retention of Rules regarding amount of damages 160
goods 192 Rules regarding appropriation of
Right to claim compensation in case payment 132, 133
of unauthorized use 191 Rules regarding contingent contracts 105
Right to claim contribution 125, 173 Rules regarding performance of
reciprocal promises 129

Business Law
Rules regarding the performance of Steps of registration 308

joint promise 124 Stifling prosecution 89
Stipulation for Interest 160
Stranger to contract 60
s Structure of courts in Pakistan
Sub-Bailment
15
186
Subordinate Magistrate 18
Sale of public offices 90 Sub-partner 236
Same identity 144 Subscription lists 339
Satisfaction of mortgage or charge 355 Subsequent chief executive 389
Save time and expense 5 Subsidiary Company 299
Scenario 1: 11 Supervening illegality 147
Scenario 2: 11 Supervening Impossibility 145
Scenario 3: 11 Supply of necessaries 111
Scenario 4: 11 Supreme Court 15
Senate 9 Surety 167
Separate legal personality 294
Service of an expert 22
Session Judge
Share capital
18
327
t
Share certificates 328
Share registrar 390 Tender of goods or services 120
Shares in companies 327 Tender of money 120
Sharing of loss in contribution 125 Termination by act of parties 221
Sharing of profits 233 Termination by operation of law 222
Silence as to fraud 75 Termination of agency 221
Silent partner 236 Termination of all contract of bailment 194
Simultaneous performance 129 Termination of gratuitous bailment 194
Single Member Company 298 Test of partnership 234
Sleeping or dormant partner 235 Third party 231
Sole trader 293 Time and place of performance 126
Some terms to remember 20 Time as essence of contract 127
Sources of law in Pakistan 3 Time for performance is not specified 126
Special business 367 Time for performance is specified 126
Special Contract 226 Time Instrument 263
Special crossing 281 Time is essence 149
Special Damages 159 Time is not essence 150
Special resolution 311 Time of commencement of the
Specific guarantee 169 indemnifier’s liability 166
Specific Offer 41 Timing of revocation 44
Specific Performance 157 Trading with enemy 89
Specific persons 50 Tripartite agreement 168
Specimen of a Bill of Exchange 275 Types of agent 206
Specimen of a Cheque 279 Types of Bailment 185
Specimen of a Promissory Note 271 Types of crossing 281
Statutory meeting 362 Types of Instrument 262
Statutory report 363 Types of mistakes 80
Statutory restrictions 246 Types of offer 41

Index
Types of partners 235

Types of partnership
Types of performance
235
119
v
Types of precedent 5
Types of reciprocal promises 129 Vacation of office 382
Types of tender 120 Variation in rights 333
Variation in share capital 331
Void agreements 95
u Voting in meetings 368
Ultra-Vires Borrowings
Uncertain agreements
349
99
w
Underwriter 341
Undisclosed agency 223 Wagering agreement 98
Undue influence 70 Waiver 142
Unilateral mistake 82 Where such person elects not to
become a partner 252
Unjust precedents 6
Where such person elects to become
Unlimited company 298 a partner 252
Where to apply law in practical life 3
Who are competent to contract? 49
Why Chartered Accountants study
law 3
Withholding of dividends 401


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© Emile Woolf International, November 2013

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

© Emile Woolf International iii The Institute of Chartered Accountants of Pakistan

© Emile Woolf International iv The Institute of Chartered Accountants of Pakistan

CERTIFICATE IN ACCOUNTING AND FINANCE

The candidate will be able to demonstrate:

© Emile Woolf International v The Institute of C hartere d Accountants of Pakistan

A Introduction to the Legal System

© Emile Woolf International vi The Institute of Chartered Accountants of Pakistan

contracts, voidable contracts and

© Emile Woolf International vii The Institute of Chartered Accountants of Pakistan

E Companies Ordinance 1984

© Emile Woolf International viii The Institute of Chartered Accountants of Pakistan

8 Association not for proﬁt 1 LO 3.8.1: Comprehend the nature of

© Emile Woolf International ix The Institute of Chartered Accountants of Pakistan

3 Registration of mortgages, 1 LO 4.3.1: Discuss the meaning of

© Emile Woolf International x The Institute of Chartered Accountants of Pakistan

LO 5.3.7: State the entitlement of a

© Emile Woolf International xi The Institute of Chartered Accountants of Pakistan

4 Interest of other officers etc. 1 LO 6.4.1: Explain the requirements of

© Emile Woolf International xii The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

References to Legal Acts

© Emile Woolf International 2 The Institute of Chartered Accountants of Pakistan

1 INTRODUCTION TO LEGAL SYSTEM

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

© Emile Woolf International 3 The Institute of Chartered Accountants of Pakistan

1.6 Doctrine of binding precedent

© Emile Woolf International 4 The Institute of Chartered Accountants of Pakistan

 There are comprehensive law reports on decisions in earlier cases, and

How can precedents be altered or avoided?

Advantages and disadvantages of binding precedent

© Emile Woolf International 5 The Institute of Chartered Accountants of Pakistan

by the precedent. Consistency in judicial decisions is an important

1.7 Civil law and criminal law

© Emile Woolf International 6 The Institute of Chartered Accountants of Pakistan

Civil law may be established by statute or by case law (common law),

Example: Civil law

Criminal law or civil law?

Example: Criminal law and Civil law

© Emile Woolf International 7 The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 8 The Institute of Chartered Accountants of Pakistan

2.2 Prime Minister

 The Senate is a permanent legislative body with equal representation from

© Emile Woolf International 9 The Institute of Chartered Accountants of Pakistan

Fourteen shall be elected by members each Provincial Assembly

2.4 National Assembly

© Emile Woolf International 10 The Institute of C hartere d Accountants of Pakistan

Composition of National Assembly

2.5 Process of Legislation

© Emile Woolf International 11 The Institute of C hartere d Accountants of Pakistan

 In case a bill is pending in the National Assembly or passed by it, is

© Emile Woolf International 12 The Institute of Chartered Accountants of Pakistan

The chart below shows the process of legislation

When National When National Assembly is

National National Ordinance

Sent for reconsideration to

2.6 Delegated Legislation