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MERCANTILE LAW ( companies act 2017)

LEGAL MODES OF CONDUCTING BUSINESS:
There are three legal modes of conducting business;
1. Sole Tradership or Proprietorship
2. Partnership and
3. Company.
(1)SOLE PROPRIETORSHIP:
A sole proprietorship is a business that is owned and operated by a single
individual. OR
A business owned by one person who has complete responsibility for its
operation, and exclusive rights to its proceeds.
Example: Single person art studio, a local grocery or an IT consultation service.
(2)PARTNERSHIP:
Partnership is a relationship between parties who have agreed to share the
profit of a business carried on by all or any one of them acting for all.
(3)COMPANY:
A company can be defined as an “Artificial person”, invisible, intangible,
created by or under law, with a discrete legal PERSONALITY, PERPETUAL
SUCCESSION and a COMMON SEAL.
It is not effected by the death, insanity, or insolvency of an individual member.
Companies are very significant legal mode in modern area.
DIFFERENCE BETWEEN COMPANY AND OTHER LEGAL MODES:
Following are the differences between company, partnership and sole
proprietorship;

(1)FORMATION:
(i)Sole proprietorship:
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 A sole proprietor generally does not need to do anything to form a sole

proprietorship. It is very easy to form a sale proprietorship.
 No need of registration.
 There is no legal complication.
(ii)Partnership:
 A partnership is based automatically formed when at least two people decide
to work together on some activity for profit.
 But there is a bit technical to form a company.
(iii)Company:
 There is a more technical to form company. There is more legal requirement
for company.
 Thus you need to submit the requisite documentation to form a company.
(2)COSTS:
(i)Sole proprietorship:
 There is no serious costs are involving to conduct business.
(ii)Partnership:
 More costs are required to form partnership but less than company.
(iii)Company:
 There are more costs like registration and other legal costs are involving to
form companies.
(3)LIABILITY:
Here liability means financial liability, means how much a partner is liable for
finance.

(i)Sole proprietorship:
 Sole proprietor will make good the loss if any loss occurred.
 In sole proprietorship the sole proprietor will be personally liable.
(ii)Partnership:
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 In partnership every partner is considered an agent of every other partner.

This means that you can liable when your partner screw up.
 Simply the liability of a partner is un-limited.
(iii)Company:
 The share holder will not personally liable.
 They will be liable to the amount extend or to the extent of their investment.
 This type of liability is known as limited liability.
(4)FLEXIBILITY:
(i)Sole proprietorship:
 There is more flexibility in sole tradership.
 A sole proprietor can do anything whatever he wants.
(ii)Partnership:
 A partner can make decisions with the consent of all the partners. Therefore
there is not such flexibility as in sole proprietorship.
(iii)Company:
 There is majority rule in company. Decision will make with the consent of
majority share-holder.
 Therefore there is such good flexibility are available in company.
(5)PROTECTION:
(i)Sole proprietorship:
 There is more protection in sole proprietorship.

(ii)partnership:
 There is also more protection in partnership.
 Partner having written agreement feel protection.
(iii)Company:
 Due to majority rule in company, members are less protected.
(6)DISSOLUTION:
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(I)Sole proprietorship:
 It is very easy to dissolve sole proprietorship.
(ii)Partnership:
 There are some legal formalities are required to dissolve partnership.
(iii)Company:
 There are more legal requirements for dissolution of company.

CHARACTERISTICS OF COMPANY:
Following are essential elements or characteristics of company;
(1)SEPARATE LEGAL ENTITY OR PERSONALITY:
Under corporation law, company has separate legal personality from its
members. Law grants a status of legal person, known as company.
The company is distinct and different from its members in law. It has its own
seal and its own name, its assets and liability are separate and distinct from those
of its members. Therefore, company have rights and liability.
(2)LIMITED LIABILITY:
The liability of the company is limited to contribution to the assets of the
company up to the face value of shares held by him.
It means that the liability of members are not personal. It means that the
members is liable to the extent of their investment.
NOTE: according to the company act 2017, there must be a word LTD (limited)
with the company name.
(3)PERPETUAL SUCCESION:
Perpetual succession means that the share holders (members) may come in
live. It is the another essential element of company. Companies are the creation of
law and also can die by law.
Members of company may keep on changing from time to time but that does
not effect life of the company.
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Insolvency or death of members does not effect the existence of the company.
(4)COMMAN SEAL:
Common seal means stamp of the company. Every company has a common
seal it means signature of the companies.
(5)TRANSFERABILITY OF SHARES:
In public company share holders (members) has right to transfer his share to
someone else without getting permission of other members of company.
There is no such concept of transferability of shares in private companies.
(6)SEPARATION OF OWNERSHIP AND CONTROL(management):
A company is administered and managed by its managerial personal i,e the
board of directors the share holders are simple the holders of the shares and do not
manage the company.
(7)ONE SHARE ON VOTE:
The principle of voting in a company is one share-one vote I,e if a person has
10 shares, he has 10 votes in the company.

Kinds of company:
There are different kinds of companies, but two major kinds are as following;
 Companies by special act and
 Companies by general act.
(1)COMPANIES BY SPECIAL ACT:
These are the companies which are established under the special act of the
parliament. These companies are managing by the provision of special act. For
example PIA.
(2)COMPANIES BY GENERAL ACT:
These are the companies which are established by the specific act of the
parliament companies act 2017 are the general act.
NOTE: We discuss companies act 2017 in this course mercantile law.
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Types of companies on the basis of liability:

The registered companies can be classified into the following categories based
on the liability of the members.
1. Companies limited by shares,
2. Companies limited by guarantee and
3. Unlimited company.

(1)COMPANY LIMITED BY SHARES:

These companies have a defined shares capital and liability of each member is
limited by the memorandum to the extent of the face value of shares subscribed by
him.
In such type of companies members are not personally liable. Such kind of
liability is known as limited liability, and companies are known as “Companies
limited by shares”.
TYPES:
Companies limited by shares are further divided into three kinds;
(i)PRIVATE COPMANY:
 In private company the maximum number of members is 50.
 In this type of company there is a restriction on transfer of shares.
 In this type of company you can’t invite the general public to buy share.
(ii)PUBLIC COMPANY:
 In public company there is no restriction on maximum number of members.
 In this type of company you can transfer the shares, there is no restriction on
transferability of shares.
 Only public listed (registered on the stock exchange) can invite general
public to buy shares.
(iii)SINGLE MEMBER COMPANY:
 As clear from its name only one member can registered the company.
 Sometimes these are considered the kind of private company.
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 These companies are very popular, and it’s introduced in Pakistan in 2002.
(2)COMPANIES LIMITED BY GAURANTED:
It means liability is limited by guarantee.
These companies may or may not have a share capital and the liability of each
member is limited by the memorandum to the extent of the sum of money, that he
had promised to pay in the event of liquidation of the company for payments of
debts and liabilities of the company. OR
Simply where the liability is limited to the amount that you have guarantee.
For example: NGO’s.

(3)UNLIMITED COPMANY:
These are those companies in which the liability of the members are unlimited.
The members are personally liable.
Generally people do not preferred such types of companies, that’s why such
companies are not common at all.
CREATION OF COMPANY:
The process of formation of company can be divided into three stages;
(1) Promotion,
(2) Registration or Incorporation and
(3) Commencement of business.
NOTE:
A private company can start business as soon as it obtains the certificate if
incorporation. It needs to go through first two stages only. The reason is that a
private company cannot invite the subscribe to its share capital.
But a public company has to pass through all the three stages mentioned above
before it can commence business. These stages are discussed below;
(1)PROMOTION:
The term “PROMOTION” is a term of business and not a law. It is frequently
use in business.
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First of all the idea of carrying on a business is conceived by PROMOTORS.

PROMOTORS are persons engaged in, one or the other way in the formation of a
company. Next the promotors make detailed study to assess the feasibility of the
business idea and the amount of financial and other resources required. This stage
is called promotion. And when the business organize and start the stage of
promotion comes to end.

PROMOTERS:
Promoters are not defined in the companies act. People those are involve in
promotions called PROMOTERS. Promoter can be a individual or firm.
FUNCTUONS OF PROMOTERS:
(i)To arrange require number of persons.
(ii)To arrange required number of capitals.
(iii)Prepare the constitutional documents of a company.
(iv)To submit the documents to fulfill legal formalities for registration.
(v)To concede an idea that the business can be established and then explore
the possibility.
NOTE: When the company is registered the functions of promoters comes end.
LEGAL STATUS OF PROMOTERS:
PROMOTERS are not the agent or shareholders of the company because at the
stage of promotion company is not registered.
Promotors have fiduciary relationship with company. Fiduciary relationship
means, “Relationship of trust”.
PRE-INCORPORATION CONTRACT:
Some time PROMOTERS need to enter into a contract with future company
on behalf of the future interest, such contract called PRE-INCORPORATION
CONTRACT.
(2)REGISTRATIION OR INCORPORATION:
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This is the second stage of the company formation it is the registration that
brings a company into existence.

DOCUMENTS REQUIRED FOR REGISTRATION:

Following are documents are required for registration;
(1) Memorandum of Association (MOA),
(2) Article of association (AOA) and
(3) Statutory declaration.
You need to submit above documents along with registration fees.
CERTIFICATE OF INCORPORATUION:
If registrar is satisfied that requirements of the act have been met, he register
the documents and issue a certificate of INCORPORATION. This is the company
“birth certificate”. It is a conclusive evidence as the company is registered.
TRADING CERTIFICATE:
Private company can begin to trade as soon as the certificate of incorporation
has been issue.
The public company require a farther certificate called trading certificate.
Registrar will only issue Trading certificate if he satisfied that minimum capital
requirements for a public company have been met.
CONSTITUTIONAL DOCUMENTS:
(1)MEMORRANDUM OF ASSOCIATION:
The formation of company involves preparation and filing of several essential
documents. Two basic documents are;
(i)Memorandum of Association (MOA) and
(ii)Article of Association (AOA).
The preparation of Memorandum of Association is the first step in the
formation of company. It is main document of the company which define its
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object. It govern the relationship of company with the outside world and defines
the scope of its activity.

FORM OF MEMORANDUM:
Companies act has given four forms of Memorandum of Association in
schedule 1. These are follows:
(i)TABLE-B: Memorandum of company limited by share.
(ii)TABLE-C: Memorandum of company limited by guarantee and not having a
share capital.
(iii)TABLE-D: Memorandum of company limited by guarantee and having share
capital.
(iv)TABLE-E: Memorandum of unlimited company.
 Every company is required to adopt one of these forms.
CLAUSES OF MEMORANDUM OF ASSOCIATION:
Memorandum of association of company contain six clauses;
(1)NAME CLAUSE:
In this clause the name of the company is mentioned.
(2)REGISTERED OFFICE CLAUSE:
Memorandum of Association must state the of the state or city in which the
registered office of the company is situated.
(3)OBJECT CLAUSE:
This is very important clause of Memorandum of Association. In this clause
the object of the company provides. It also determined the extent of the powers
which the company is exercise in order to achieve the object.
(4)CAPITAL CLAUSE:
Capital clause provides what would be the capital of the company.
(5)LIABILITY CLAUSE:
This clause provides the liability of the share-holders.
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(6)ASSOCIATION OR SUBSCRIPTION CLAUSE:

This clause provides names and numbers of share-holders with their capital.
NOTE: The Memorandum of Association of a company shall be;
a) Printed,
b) Divided into paragraph and
c) Signed by prescribed number of subscribers.

ARTICLE OF ASSOCIATION (AOA):

Every company is required to file Article of Association along with the
Memorandum of Association.
Article of Association are the rules, regulations and bye-laws for governing the
internal affairs of the company.
CONTENTS OF ARTICLE OF ASSOCIATION:
Article of Association contains;
(i)The exclusion whole or in part of TABLE-A.
(ii)Definition of important terms and Phrases.
(iii)Adoption or execution of pre-incorporation contract.
(iv)Share capital and the rights of share-holders.
(v)Allotment of share.
(vi)Transfer of share.
(vii)Lien on share.
(viii)Alteration of share capital.
(ix)Meeting.
(x)Borrowing power.
According to section 2(28) a private company must in addition:
(i)Restrict the right to transfer its share, if any.
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(ii)Limit the number of its member to fifty.

(iii)They cannot invite general people to buy share.
ALTERATION OF ARTICLE OF ASSOCIATION:
If we change the AOA, there is a appropriate procedure. We need special
resolution (75% of the total members) to alter the AOA, with the following
restriction;
(i)The alteration must not be in contravention of the provision of the companies
ordinance.
(ii)The alteration must not be in contravention of the Memorandum of Association.
(iii)The alteration must not be attempt to legalise something that is illegal.
(iv)The alteration must not operate against the substantive right of minority share-
holders.
(v)The alteration must not amount to breach of a contract with out-side.
(vii)The alteration must be in good-faith.
(viii)The alteration must be approved by special resolution.
DIFFERENCE BETWEEN MOA & AOA:
MOA MOA

1. They are the regulation of external They are regulation for the internal
world. management.
2. It, being the charter of the They are the subordinate to the
company, is the supreme Memorandum of Association.
documents.
3. Every company must have its own A company limited by shares not have
Memorandum. article of its own, in such case,
TABLE-A applies.

BINDING NATURE OF CONSTITUTIONAL DOCUMENTS:

The constitutional documents (Memorandum of Association and Article of
Association are binding upon members and company as a contract.
(1)BINDING UPON MEMBERS IN RELATION TO THE COMPANY:
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The Memorandum and article binds the members with respect to their
provisions. The company can sue the members for enforcement of the provisions
of those documents.
(2)BINDING ON COMPANY IN RELATION TO THE MEMBERS:
The documents binds the company in relation to the members just like they
bind the members.
(3)BINDING ON MEMBERS IN THEIR RALATION TO ONE ANOTHER:
The members in their relations inter se are also bound by provision of the
documents.
(4)NOT BINDING ON THE COMPANY IN RELATION TO OUTSIDER:
The company and its members are not bound to outsider.
DOCTRINE OF CONSTRUCTIVE NOTICE:
The memorandum and article of association of a company are registered with
registrar. These are public documents and open to public inspection.
Every person who deals with the company, whether shareholder or an outsider
is presumed to have read the memorandum and article of association of the
company and is deemed to know the content of these documents.
It is presumed that persons dealing with the company have not only read
these document but they have also understood their proper meaning. The
knowledge of these document and their contents is known as “THE DOCTRINE
OF CONSTRUCTIVE NOTICE”.
FIANANCING THE COMPANY: SHARE CAPITAL AND LOAN
CAPITAL:
FINANCE:
Finance is management of capital or provide capital is money or asset
available for instrument.
CAPITAL:
The word capital is used in company law in various senses.
Strictly speaking, the word capital is used to denote the share capital of a
company. Capital is mainly of two kinds;
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(1) Share capital and

(2) Loan capital.
(1)SHARE CAPITAL:
Share capital is capital that company obtain by issuing shares. And investors
(General public) who invest and provide capital and shareholder. A company issue
them a piece of paper that is an evidence that his person have share in company.
In a result the person become shareholders. The piece of paper evidence of
share is called security.
 Capital of company divided in different units of equal value units also
called shares.
TYPES OF SHARE CAPITAL:
Share capital can be categorized as;
(1) Authorized share capital,
(2) Issued share capital,
(3) Paid up share capital and
(4) Called up share capital.
(1)AUTHORIZEDN SHARE CAPITAL:
Authorized share capital refers to the total capital that accompany is
authorized to accept from investors by issuing shares.
It represents the capital with which a company is registered, that is why it is
also known as registered capital.
(2)ISSUED SHARE CAPITAL:
It represents that part of total authorized share capital which has been issued
by company for subscription by investors. Usually capital do not issue all of their
shares for control purpose.
Thus the part which is issued is called share capital.
(3)CALLED UP SHARE CAPITAL:
That part of capital which has been asked for payment represents is called,
“Called Up Share Capital”.
(4)PAID UP SHARE CAPITAL:
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It represents that part of called up share capital which has been paid by
investors.
LOAN CAPITAL:
Company obtain loan from some on inform of security known as debenture.
Companies borrow in one or more of the following three methods;
(1)Debenture and Bond,
(2)Loan from banks and
(3)Acceptance of deposit.
(1)DEBENTURE:
Legally debenture is acknowledgment of debt. It means company obtain loan
mention on instrument debenture. It is known as loan capital or debt capital.
Debenture includes debenture stock, securities, bonds and other kind loan
instrument other than shares.

FEATUIRES OF DEBENTURES:
(1)It is an acknowledgment of indebtedness of company to its holder for the
amount stated in the certificate.
(2)It is usually in the of certificate issued under the seal of the company. It
may sometimes be signed by the directors without seal of the company.
(3)It is usually provide for the payment of a specified principle sum at a
specified date.
(4)It provides the payment of interest until the principle amount is paid back.
(5)It is usually issued out of a series of debenture.
(6)It is usually secured by a charge, fixed or floating, on the specified assets of
the company.
KINDS OF DEBENTURE:
Following are the kinds of debentures;
(1)REGISTER DEBENTURE:
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It is that debenture, the detail of which mention with the company on the
register of debenture. Interest on debenture is payable to the registered holders
through interest warrants.
(2)BEARER DEBENTURE:
It is that debenture the detail of which is not with the company. These are
negotiable instrument transferable by mere delivery of the certificate to the
transferee.
(3)SECURED DEBANTURE:
These debenture are secured by a charge on the assets of the company. The
charge is either fixed or floating.

(4)SIMPLE OR UNSECURED DEBENTURE:

There is no security provide. They do not have any charge on assets of a
company.
(5)CONVERTIBLE DEBANTURE:
These debenture could be converted into shares.

KINDS OF SHARES:
(1)ORDINARY SHARE OR COMMON STOCK:
These shares is issued by company to shareholders. It is a voting shares that
represents ownership interest in company with lowest priorities with respect to
payment of dividends and distribution of assets upon winding upon.
(2)PREFERENCE SHARES:
Shares that have priority over ordinary shares as to payment of dividend and
distribution of assts on winding up.
(3)CONVERTIBLE PREFERNCE SHARES:
Preference share with an option to convert the share into a specified number
of ordinary shares either in the issuing company or in some other company.
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(4)COMMULATIVE PREFERENCE SHARES:

If the specified dividends are not paid in a given year they must be paid in a
subsequent year before an ordinary share or other dividends are paid.

DEFERENCE BETWEEN SHARE AND DEBANTURE:

(1)Shares are part of the equity capital of the company, while debentures are
part of loan.
(2)Fixed interest is paid on debentures prior to the payment of dividend to the
shareholders.
(3)Shares are member of company. Debentures are creditor of company.
(4)Debentures have a charge on the assets of the company, but shares have no
such charge.
(5)dividend would payable when profit announce, interest is payable in any
condition.
(6)Debentures can be secure or unsecure, and for charge there is no security.
(7)Shareholders has right to vote while debenture holder has no right to vote.

CHARGE:
A company can issue debenture either secured or unsecured by a charge on its
property. Such charge may be;
1) Fixed charge (or specific charge),
2) Floating charge
(1)FIXED CHARGE:
Fixed charge or specific charge is one which is created on some ascertained
and defined property of the company such as building or machinery.
(2)FLOATING CHARGE:
When a charge is created on property which is not fixed but changing or
unstable, is known as “Floating charge”.
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For example, where debenture is secured by creating a charge on stock-in-

trade, the charge will be valid as a floating charge.
 If loan not paid by company, these charge assets will be sold to paid loan.
 All charges are required to be registered with registrar of a company.
 Charge will be valid if
1. Company need to register them.
2. If it is created 12 months prior before winding up of company.
 If there are two charges created upon same property, fixed and floating.
Priority will be given to fix charges.
 If there is two fixed charges is created. Charge created earlier will be given
before.

RIGHTS OF SHAREHOLDERS:
(1)In registered public company shareholders have right to transfer shares.
(2)Right to receive certificate of shares.
(3)Record of shareholders manage through book.
(4)Extra-ordinary-general meeting. Shareholders having 10% shares can call
extra-ordinary meeting. There are two kinds of meeting;
a) Statutory meeting (Just once at life time).
b) Annual general meeting.
(5)Right to participate in the appointment of the directors.
(6)Right to investigate affairs of company.
(7)Right to file petition.
(8)Right to share profit.
(9)Right to inspect book of account.
(10)Right to vote.
(11)Right to priority in future issue of capital.
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APPOINTMENT OF DIRECTORS:
QUALIFICATION OF DIRECTORS:
1. Must be a natural person,
2. Should not be minor, unsound mind, not be an undischarged insolvent,
3. Must file a declaration of consent.
4. Should not be debarred from holding such office under any provision of
companies act.
APPOINTMENT:
Shareholders appoint the directors of his choice, who support his interest.
The value which la providing for voting is called cumulative voting.

DUTIES OF DIRECTORS:
(1)DUTY OF GOOD FAITH:
The meaning is that the directors must work in the interest of the company and
the protection of the interest of those who have invested in the company. In
particular, the director must not indulge in the following;
(a)SELF DEALING TRANSACTION:
Self-dealing transaction is one which;
(i)A director and the company or an opposite sides of transaction.
(ii)The director has helped influence the Companies decision to enter the
transaction. And
(iii)The directors personal financial interest are at least potentially in conflict with
the financial interest of the company.
For example: A director induces a company to buy a building from him at an
inflated price.
(2)DUTY OF REASONABLE CARE:
A law imposes on director a duty of care with respect to the company’s
business the director must behave with that level of care which a reasonable person
in similar circumstances is use.
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WINDING UP:
Winding up and dissolution are different. Winding up (which is more
commonly called liquidation in Scotland) of a company is the process whereby its
life is ended and its property is administered for the benefit of its creditor and
member.
The main purpose of winding up is that when a company cannot carry on its
business, the surplus that is left is to be distributed among the claimants, that is,
members and creditors.
MODES OF WINDING UP:
According to article 297 companies act 2017, a company can be wound up in
three ways.
1. Winding up by court or compulsory winding up.
2. Voluntarily winding up.
3. Winding up under supervision of court.
(1)WINDING BY COURT:
A company may be wound up by an order of the court. This is called
compulsory winding up or winding up by court.
GROUNDS:
A petition for winding up may be presented to the court on any of the grounds
stated below;
(i)SPECIAL RESOLUTION PASSED BY COMPANY:
A company wound up by the court, if it has, by a special resolution, resolved
that it be wound up by the court.
(ii)DEFAULT IN HOLDING STATUTORY MEETING OR DELIEVRING
STATUTORY REPORT TO REGISTRAR:
If a company has made a default in delivering the statutory report to the
registrar or in holding the statutory meeting, a petition for winding up of the
company may be presented to the court.
(iii)FAILRE TO COMMENCE BUSINESS:
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Where a company does not commence business with in one year from its
incorporation, a winding up petition may presented to the court.
(iv)REDUCTION OF MEMBERS BELOW THE MINIMUM:
When a number of members is reduced below minimum, a petition for
winding of a company may be file.
(v)COMPANY INABILITY TO PAY DEBTS:
A winding petition may be presented to the court, if the company is unable to
its debts.
(vi)MAJORITY RUNING COMPANY AGAINST THE INTEREST OF THE
MINORITY:
A winding up petition may be filed , when majority running company against
the minority interest.
(2)VOLUNTARY WINDING UP:
Voluntary winding up are of two kinds:
i. Members voluntary winding up.
ii. Creditors voluntary winding up.

(i)MEMBERS VOLUNTARY WINDING UP:

Members voluntary winding up is winding up of a company where
“declaration of solvency” is made and delivered to registrar.

(ii)CREDITORS VOLUNTARYU WINDING UP:

Creditors voluntary winding up of a company will arise where the company
is unable to pay its debts in full.
(3)WINDING UP UNDER SUPERVISION OF COURT:
Voluntary winding up may be under the supervision of the court. At any
time after a company has passed resolution for voluntary winding up, the court
may make an order that voluntary winding up shall continue, but subject to such
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supervision of court. This is called winding up of a company under supervision of

court.