LECTURE NOTES

COMPANY LAW

By

M. Danyal Khan

LLM CORPORATE LAWFACULTY OF SHARI’AH & LAW

INTERNATIONAL ISLAMIC UNIVERSITY

CONTENTS

Page No.

Course Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --

Existing Regulatory & Adjucatory System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --

Formation and Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Effect of Incorporation and Concept of Separate Legal Entity . . . . . . . . . . . . . . . . . .--

Kinds of Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Conversion of Private Company to Public Company . . . . . . . . . . . . . . . . . . . . . . . . . 20

Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Capital, Classes of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Legal Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Borrowing and Registration of Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Directors and Chief Executive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Meetings and Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Lifting the Veil of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Remedies of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Winding up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79

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EXISTING REGULATORY AND ADJUCATORY SYSTEMSUNDER THE COMPANIES ORDINANCE, 1984

- - - -

Before discussing the regulatory system under the Companies Ordinance,

1984, it would be appropriate, if some background information about such system

under the previous Company Law i.e. Companies Act, 1913 is outlined.

The Companies Act, 1913 which remained the Company Law in Pakistan upto

8th October, 1984, was repealed and replaced by the existing law i.e. Companies

Ordinance, 1984. Under the said previous repealed Act, 1913, the jurisdiction in

companies matters was with the respective High Courts. The penalties under the

Company Law were in the form of fine and also in the nature of imprisonment.

Irrespective of the nature of penalties, the cognizance of all offences were within the

jurisdiction of a Court not inferior to that of a Magistrate First Class. There were no

such powers with the government functionaries. A provision, however, existed under

the repealed Companies Act, 1913 to the effect that the directors and managers of a

company apprehending any claim against them for negligence or default may

approach the High Court for seeking relief. The defaulter directors used to avail this

remedy in order to avoid any legal proceedings against them in the Court of

Magistrate First Class and such applications coming before the High Courts were

disposed of after a notice to the Registrar and by awarding reasonable cost keeping in

view the nature and period of defaults. This remained a normal practice for years.

The system, besides being out-dated, failed to serve the purpose and

resultantly there were no cognizance of offences. The reasons included; (i) there were

extraordinary delay of cases in the High Courts; (ii) The First Class Magistrates

being not conversant with the spirit of the Company Law did not take appropriate

action either deliberately or due to rush of work. Registrar being the prosecutor was

facing a lot of inconvenience by appearing before the, Courts in every case, spending

a lot of time and all without positive results.

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EXISTING ADJUDICATORY SYSTEM

Under the Companies Ordinance, 1984, the word “Court” has been defined under

clause 11 of sub-section (1) of section 2 as under:

11 “the Court” means the court having jurisdiction under this Ordinance.

Section 7 of the said Ordinance pertains to justification of the courts

and it states –

The Court having jurisdiction under this Ordinance shall be the High

Court having jurisdiction in the place at which the registered office of

the company is situate.

However, the Federal Government is empowered to notify in the Official Gazette, a

civil court to exercise powers of the High Court under the Companies Ordinance. As

regards jurisdiction of the courts, the companies having their registered office within

the territorial jurisdiction of that courts will fall within such jurisdiction. The appeal

against the orders of the High Court is, as usual, with the Supreme Court. In the case

where imprisonment in addition to fine is provided for any contravention of law, it is

to be adjudicated by a Court not inferior to that of Court of Session. The provisions

regarding powers of the Court of Session to adjudicate such offences do not bar the

High Court from exercising its powers to adjudicate offences. The appeal against the

orders of Court of Session is with the High Court. Any offence where the penalties

are in the form of fine only, the powers has been assigned to the regulatory authority

under Section 476 of the Ordinance. Such authorities are (i) Officers who are

incharge of the Company Registration Offices in which the company is registered.

(ii) Registrar of Companies who is head of the Organization for registration of

companies and (iii) the Securities and Exchange Commission of Pakistan (the

Commission) or an officer to whom the Commission has delegated its powers and

functions in this behalf. The distribution of adjudicatory powers is according to the

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size of prescribed fines as provided in the relevant sections read with Section

476.The fine as aforesaid can only be imposed after giving the person concerned an

opportunity to showcase and if he requests, after providing him an opportunity of

personal hearing The appeal and revision against the orders passed under Section

476 are made under Section 477 according to which appeals against the orders of the

officer incharge of CROs are with the Registrar of Companies and against the orders

of the Registrar with the Commission and against the orders of the Commission with

the High Court. In matters where prosecution is to be initiated in the Courts, the

complaints are to be filed through the Commission or the Registrar of Companies or

members and creditors of the companies having interest not less than 5% of the

issued share capital, under Section 474. In the case of an order passed by the

Registrar or an officer subordinate to the Commission other than an order under

Section 476, the aggrieved person can either go for revision or review with the

Commission or alternatively can go for an appeal before the High Court against the

original orders of any authority under Section 485 of the Ordinance.

According to scheme of Companies Ordinance, 1984, various penalties are

prescribed for the defaults under different sections and where no penalty is provided

in any relevant section, the fine has been prescribed under Section 498.

As indicated above, the adjudicating powers have been vested in the

functionaries, if penalty is in the form of fine only. But if there is imprisonment, the

power is with the Court of Session and the concerned Registrar becomes the

prosecutor and the case is prepared/filed after giving a show cause notice to the

accused.

The existing adjudicatory system is not free from defects and unfortunately it

has failed to achieve its objectives. For example;

(i) Sections 8 and 9 provide that there shall be Company Benches in each

High Court and Court will dispose of the matters coming before it

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under the Companies Ordinance, as expeditiously as possible but not

later than 90 days but unfortunately the statutory provisions are not

being observed. Sindh High Court in a judgment has declared these

provisions as directory and not mandatory.

(ii) The amounts of fines are not fixed and the adjudicatory authority may

impose a fine upto a maximum limit prescribed. Besides, in most of the

defaults, the fine is on daily basis. This gives discretionary powers to

the functionaries.

(iii) The officers of the Commission are not qualified and experienced

enough in taking cognizance of the offences and it has been found that

the orders made by them are deficient.

(iv) The proceedings initiated by the Commission are some time frustrated

as parties succeed in getting the stay orders by going to the Court in the

form of writ petitions.

SOME SUGGESTIONS

(1) Provisions about constitution of Company Benches and disposal of cases

within the prescribed period should be made mandatory.

(2) Powers assigned to the Session Courts to adjudicate the criminal offences,

should be with the High Courts as the Courts of session are not conversant

with the provisions of Company Law and they delay the cases.

(3) Rates of fines should be at flat rates so that the officers taking cognizance may

not exercise discretionary powers.

(4) The amounts of fine should be fixed at higher rates keeping in view rate of

inflation and ensuring effect of the penalties.

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SECURITIES AND EXCHANGE ORDINANCE, 1969

The penalties provided under the Securities and Exchange Ordinance are also in

form of line and imprisonment. As regards cognizance of the offences, Federal

Government is empowered to impose penalty maximum upto thirty thousand rupees for

each default and in the case of continuing default, fine is at the rate of one thousand

rupees for every day after the issue of such order. For contravening the provisions of

section 15A (Insider Trading) and section 17 (Prohibition of fraudulent acts),

imprisonment for a term of three years in addition to fine has been provided and such

offences are to be tried in the Court of Session on a report in writing by the Federal

Government.

Any order passed by an officer or authority subordinate to the Federal

Government exercising its powers is subject to revision or review by the Federal

Government. All powers and functions of the Federal Government except hose relevant

to appeals/revision and framing of rules, etc. stand delegated to the Commissioner and

Chairman, Securities and Exchange Commission of Pakistan. Unfortunately no

prosecution proceedings have ever been initiated in the Court of Session and only few

cases of fine can be quoted. As stated above, any order passed by an officer subordinate

to the Federal Government is subject to a revision by the Federal Government but in

such cases revision petitions are not disposed of in time by the Finance Secretary due to

pre-occupation in matters of national importance and other limiting factors.

The system is not working properly and needs improvement in uniformity with

that which may be recommended in the case of Companies Ordinance.

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FORMATION AND INCORPOORATION

Incorporation of a Private Company Limited by Share Capital

WHO CAN FORM

Section 15 provides that any one or more persons, associated for any lawful purpose, may

form a private company by subscribing their names to the Memorandum of Association and

by complying with the requirements of the Ordinance.

TYPE OF COMPANY

A company incorporated may be either:

(i) a company having share capital with the liability of its members limited by

the memorandum to the extent of amount remaining unpaid on the shares

held by them; or

(ii) a company limited by guarantee having the liability of its members limited by

the Memorandum to such amount as the members may undertake.

INCORPORATION

Section 32 provides that on registration of the Memorandum of a company, the Registrar

shall certify under his hand that the company incorporated and, in the case of a limited

company, that the company is limited by shares or guarantee, as the case may be.

For registration of a company, documents referred to in section 30 of the Companies

Ordinance, 1984 are required to be presented before the Registrar of Companies having

jurisdiction for the purpose.

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NAME

The promoters are required to make an application to the Registrar for confirming

availability of name. The name shall not be undesirable as per the guidelines issued by the

Commission in this regard.

INSTANCES OF NAME BEING UNDESIRABLE

1. The proposed name too closely resembles the name of any existing company.

2. The proposed name too closely resembles the name of a company under winding

up or which has recently gone into liquidation.

3. The proposed name includes name of any well established organization not

connected with the company.

4. The company includes the name of any well established group of companies

without their consent.

5. The proposed name differs from the existing registered company only by

addition or omission of the words like ‘New’ or ‘Pak’ or ‘Modern’ etc.

6. The proposed name closely resembles established brand name of product of any

company or closely resembles or identical to the nick name of the company by which

it is well known in the market.

7. The proposed name contains name or surname of any person unconnected with

the formation of the company without his consent.

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8. The proposed name contains words registered as trade mark without approval of

the trade-mark owner.

9. The proposed name indicates patronage or association with any national hero

without any reasonable connection.

10. The proposed name does not indicate proposed activities of the company.

11. The name of the company is misleading as to its activities.

12. The proposed name falsely indicates association of government.

13. The proposed name contains the word ‘co-operative’ in English or similar word

in any other language.

14. The proposed name contains name of any foreign country or foreign company

without any collaboration.

The application is required to be submitted in Form No.1 of the Companies General

(Provisions & Forms) Rules, 1986 along with the challan evidencing deposit of fee for

registration calculated in light of the rates prescribed in Schedule Sixth to the Companies

Ordinance, 1984.

The application shall contain names of all the promoters and the same persons shall be the

signatories to the Memorandum of Association submitted at the time of registration.

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BUSINESS

The company may be registered for any lawful purpose only and if a company is registered

with unlawful purpose it shall not be construed as legalization of unlawful objectives by the

Registrar. The certificate of incorporation issued by the Registrar after registration of the

company is not a proof of the fact that the object of the company is legal but it is a

conclusive evidence of the fact that all the statutory requirements precedent or incidental to

the registration of the company have been duly complied with.

MEMORANDUM OF ASSOCIATION

Section 16 provides that the Memorandum of the company shall contain following clauses-

(a) Name clause.- Name of the company, as approved by the Registrar, ending with the

word “(Private) Limited” or “Limited” only, unless a license has been obtained under

section 42 of the Ordinance,

(b) Registered Office Clause.- The Province ar the part of Pakistan not forming part of a

province as the case may be, in which registered office of the company is proposed

to be situated,

(c) Objects Clause.- Object clause divided into following sub-clauses-

(i) Main Objects.- The main objects means the purpose for which the

company is formed or the business of the company which it proposes to carry

on immediately on incorporation.

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(ii) Incidental Objects.- This clause is an enabling clause which equips

the company with powers to do certain things which are helpful and/or

necessary in attaining the main objects of the company.

(iii) Other Objects.- There is no major difference between the main

objects and other objects except the fact that the company proposes to be

engaged in the activities contained in the main objects clause immediately on

incorporation while it may take up any of the activity) contained in the other

objects clauses at any time in future.

ARTICLES OF ASSOCIATION

Section 26 provides that a company shall be registered with its own articles.

Sub section (2) of section 26 provides that if articles of a company do not cover all the

matters covered in Table A, contents of Table A would be operative to the extent they have

not been excluded or modified.

The articles shall also be printed, divided into paragraphs numbered consecutively and

signed by each subscriber to the memorandum in the same manner as in the case of

memorandum.

The memorandum and articles of a company limited by guarantee and not having share

capital shall be in the form contained in Table C of Schedule 1 to the Ordinance or in any

other form near thereto while the memorandum and articles of a company limited by

guarantee and having share capital shall be in the form of Table D of Schedule 1 to the

Ordinance.

Any provision repugnant to the provisions of the Ordinance contained in the memorandum

and articles of association shall be void. (Section 6)

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KINDS OF COMPANIES

1. COMPANIES LIMITED BY SHARES AND BY GUARANTEE

Registered companies may be divided into two categories, those limited by shares and those

limited by guarantee. A company limited by shares has the liability of its members limited

by the company’s memorandum (the main document in its constitution) to the amount, if

any, unpaid on the shares held by those members. Thus where a member holds shares which

he has completely paid for, he has no fear that upon a liquidation he would be held

personally liable for the debts of the company. A company limited by guarantee has the

liability of its members limited by its memorandum to such amount as the members may

have agreed to contribute to the assets of the company in the events of its being wound up.

The sort of company which is usually limited by guarantee is one where capital is provided

by fees paid in advance such as school run by charitable Foundations and where because

funds are provided in advance there is no need for members to provide the working capital.

2. LIMITED AND UNLIMITED COMPANIES

Another division of companies is into limited and unlimited companies. As has just been

seen, limited companies are companies whose members’ liability is limited either by shares

or by guarantee. In other words, the members of such companies know from the outset of

their association with the company what the top line of their liability is. Unlimited

companies, as the name implies, are companies where there is no limit on the liability of

their members. In the even of an unlimited company being wound up in circumstances

where its liability exceed its assets, in other words where it is insolvent, the liquidator will

go to the members asking for a contribution pro rata to make good the deficit. This liability

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only arises when the company is wound up, and the creditors of the company have no right

to sue the members direct. The reason why businessmen choose to have unlimited

companies is usually because such companies enjoy the privilege of not having to deliver

annual accounts to the Registrar of Companies or for certain tax benefits. This allows them

to maintain a level of secrecy which is not available to public limited companies which are

under an obligation to file annual accounts.

3. GROUPS OF COMPANIES: HOLDING AND SUBSIDIARY

COMPANIES

Sometimes companies operate in groups, with one company, known as the holding

company, holding shares in other companies, known as subsidiary companies. Sometimes

students find this difficult to understand; the key is to appreciate that membership of a

company is not limited to human beings; companies can also be members of companies.

There are a variety of reasons for this, the main one being that where a business enterprise

wants to carry on a variety of diverse activities it is sometimes administratively convenient

to do so through separate subsidiary companies each of which substantially manages its own

affairs.

A company is said basically to be a subsidiary of another company if:

1. that other company either;

(a) is a member of it and controls the composition of its board of directors, or

(b) holds or controls more than half of the voting capital of that company.

4. HOLDING COMPANY

A company or body corporate is said to be the holding company of another company if it

directly or indirectly controls, beneficially owns or holds more than fifty per cent of voting

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securities or otherwise has power to elect and appoint more than fifty per cent of directors of

some other company.

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5. PRIVATE COMPANY

The articles of association of a private company must contain provisions in respect of the

following restriction, limitation and prohibition:

(a) Restriction on members’ right of free transferability of shares;

(b) Limitation on number of members up to fifty excluding those who hold

shares of the company since they were in the employment of the company

and continue to hold the shares;

(c) Prohibition of invitation to public for inviting subscription of shares in or

debentures of the company.

6. PUBLIC COMPANY

A company the articles of which do not contain any of the restriction, limitation and

prohibition as applicable in the case of a private company is a public company.

Section 2(1)(30) defines the public company as under:-

‘public company’ means a company which is not a private company.

(i) It cannot commence business without obtaining certificate for

commencement of business from the Registrar of Companies.

(ii) It cannot exercise borrowing powers with the certificate for

commencement of business.

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7. DOMESTIC OCMPANY

A company incorporated in Pakistan is domestic company.

8. FOREIGN COMPANY

A company which has been incorporated as per law of any country other than Pakistan and

having a place of business in Pakistan is known as a foreign company.

9. SUBSIDIARY COMPANY

A company is said to be subsidiary of another company if another company or body

corporate directly or indirectly controls, beneficially owns or holds more than fifty per cent

of its voting securities or otherwise has power to elect and appoint more than fifty per cent

of its directors.

ADVANTAGES OF A COMPANY OVER A FIRM

The principal points of distinction between a company and a firm or partnership are as

follows:

1. A company is incorporated under the Companies Ordinance, 1984. It

comes into existence by operation of law while the partnership is the result of mutual

agreement between the partners and it is governed by the provisions of Partnership

Act 1932.

2. A company is incorporated by registration with the Registrar of

Companies while a firm may be registered with the Registrar of Firms but it is not

compulsory. A firm can come into existence without formal registration.

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3. A company is a distinct person from its members while a partnership firm

is not distinct from the several persons who compose it.

4. In partnership the property of the firm is the property of the individuals

comprising it while in company it belongs to the company and to the company’s

members.

5. Creditors of the firm are the creditors of the individual partners and a

decree against the firm can be executed against the partners jointly and severally

while the creditors of the company can proceed against the company only and not

against its members.

6. Partners of the firm are its agents while the members of the company are

not its agents.

7. A partner cannot contract with the firm while a member can contract with

the company.

8. Partner’s share in the firm is not transferable while the share in the

company is a transferable asset.

9. Liability of a shareholder is limited to the nominal value of the shares

held. Whereas in a firm every partner is jointly and severally liable for all debts

incurred by the firm.

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10. A shareholder has no power to bind the company or to bind the other

shareholders. A partner can bind the firm and his co-partners so long as he acts

within the ordinary scope of business.

11. A shareholder has no right to take part in the management of a company.

All partners can take part in the management of the business.

12. A shareholder has no right to inspect the books except to the extent

allowed by the articles, or under the Companies Ordinance, 1984. All partners have

access to its books.

13. A company must keep proper books of accounts under the Companies

Ordinance, 1984. There is no statutory provision requiring a partnership firm to do

so.

14. A company must get its accounts audited. There is no statutory provision

in the Partnership Act, 1932.

15. A company’s existence can be brought to an end only by being:

i) Dissolved by order of the Court

ii) winding up in a legal manner

iii) its name being struck off by the Registrar

16. A company being legal existence goes on irrespective of the death or

retirement/ cessation of a member. Death or retirement of a partner dissolves the

firm in the absence of a contract to the company.

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17. The life span of the company does not depend on life span of its members

while the constitution of the firm changes with the change in partners for any reason.

18. The number of partners in a firm cannot exceed beyond 20 in any

business while there is no restriction on the number of members in the public

company. The number of members in a private company (excluding past and present

employee members) shall not exceed 50.

19. A company has its common seal while the firm does not have any such

seal.

20. A company can sue and be sued by others while a firm can act through its

partners.

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CONVERSION OF PRIVATE COMPANY TO PUBLIC COMPANY

If a company, being a private company, alters its articles in such a manner

that they no longer include the provisions which, under clause (28) of sub-

section (1) of section 2, are required to be included in the articles of a

company in order to constitute it a private company.

Take a decision in the meeting of the Board of Directors of the company for

conversion of the private company into public company

The number of members and directors have to be increased to minimum 3

The Board shall take a decision about:

Conversion of company into public company

Alteration of articles of association of the company to

make them suitable for a public company

Convening of general meeting

Convene the general meeting and to get the following matters approved by

way of “Special Resolution”. Special resolution has been defined under

section 2(1)(36) of the Companies Ordinance, 1984:

“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

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as a special resolution at a meeting of which less than twenty-one

days notice has been given.

Conversion of the company into public company

Alterations of articles of association

Change of name consequent to the deletion of the word

“Private”

After the general meeting file the following resolution with the Registrar

Special resolution on the prescribed Form 26 under section 172 of the

Companies Ordinance, 1984.

Change of name consequent to the deletion of word

“Private”

Alongwith the above resolution also arrange for filing

a statement of lieu of prospectus in pursuance of

section 45 of the Companies Ordinance, 1984.

PUBLIC COMPANY TO PRIVATE COMPANY

A public company cannot be converted into private company without obtaining

consent of the Registrar in this regard.

Circumstances in which a public company is normally converted into a private

company:

Reduction of number of members below three

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The company’s business is not expected to cross Rs.10.00

crores turnover.

PROSPECTUS

If a company seeks to raise capital by a direct offer of securities to the public, the

document or advertisement which sets out the offer and makes the invitation to

subscribe is called a prospectus. (See the definition in Section 2(1)(29).

A prospectus must be registered with the Registrar of Companies before it is issued

to the public.

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PROSPECTUS

If a company seeks to raise capital by a direct offer of securities to the public, the

document or advertisement which sets out the offer and makes the invitation to

subscribe is called a prospectus.

Every prospectus issued:

a) by or on behalf of a company; or

b) by or on behalf of any person who has been engaged or interested in the

formation of a company shall state the matters specified in sections 1, 2 & 3

of Part I of the Second Schedule to the Companies Ordinance, 1984

The word Prospectus has been defined under clause (29) of sub-section (1) of section

2 of the Companies Ordinance as under:-

(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;

A sufficient number of copies of the prospectus issued under sub-rule (1) of section

53 of the Ordinance must be made available at the registered office of the company,

with the Stock Exchange at which company is listed and with the bankers to issue.

The prospectus is also required to be published atleast in one urdu and one English

daily newspaper

A prospectus must comply with the requirements of sections 52 – 57 of the

Companies Ordinance, 1984.

A prospectus must be registered with the Registrar of Companies under sub-section

(3) of section 57 of the Companies Ordinance, 1984

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A prospectus complying with the requirements of sections 52 – 57 of the Companies

Ordinance must accompany a form of application duly specified by the Commission

for subscription to shares or debentures of a company.

The division of companies onto public and private envisages that the former are

likely to try to raise capital from the public. Generally this takes the form of an issue

of shares or debentures to the public. No private company may issue or cause to be

issued any advertisement offering securities to the public. A private company may

not apply for listing of its securities on the Stock Exchange.

TYPE OF FLOATATION

Shares or debentures may be offered to the public in three ways –

1. by a direct invitation2. by an offer for sale, or3. by a private placement

Direct invitation

This occurs where the company itself advertises its shares for subscription and members of

the general public who wish to acquire them apply direct to the company.

Offer for sale

This is where the company initially issues shares to the existing shareholders or to certain

institutions and then offload such shares directly to the public. Section 62 of the Companies

Ordinance provides that –

No person who holds more than ten percent of the shares or debentures of a company shall offer for sale to the public any share or debenture held by him except with the approval of the Commission; and

Any document by which an offer for sale to the public is made by any such person shall, for all purposes, be deemed to be prospectus issued by the company, and all rules of law as to the contents, filing and registration of a prospectus shall apply.

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Private placement

This usually occurs when a company decides to issue a small part of its capital to certain

specific company or institutions or some foreign investor.

In developed countries such shares are allotted to an issuing house and then it invites its

clients to purchase shares from it at a higher price. In other words, they place shares rather

than inviting applications from the general public. This procedure tends to be used for small

floatation. It is obviously much quicker and cheaper than an offer for sale.

Primary Offer

A primary offer is an advertisement issued inviting persons to subscribe for shares or any other security issued by a company.

Secondary Offer

Secondary offer is an advertisement directly or indirectly inviting the acquisition of

securities involved, though not directly from the issuer.

Approval, issue and registration of Prospectus (S. 57)

No listed company, and no company which proposes to make an application to stock

exchange of listing of its securities and no other person shall issue, circulate or publish any

prospectus or other document offering for subscription, unless approval of the Commission

has been obtained within a period sixty days preceding the date of its issue.

The Commission may, while according approval, impose such conditions as it may deem necessary.

No prospectus shall be issued by or on behalf of a company unless, on or before the date of

its publication, there has been delivered to the registrar a copy thereof signed by all the

directors.

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Civil liability for mis-statement in prospectus (S.59)

There are statutory remedies available in respect of misrepresentation or any omission in

where a prospectus invites persons to subscribe for shares or debentures of a company, the

following persons shall be liable to pay compensation to every person who subscribes for

any shares on the faith of the prospectus for any loss or damages he may have sustained by

reasons of any untrue statement.

(a) the issuer of the securities(b) every person who is a director of the company(c) every person who is a promoter of the company(d) every person who has given consent to the issue of the prospectus. Such

persons include auditor, legal adviser, attorney, solicitor, banker or broker, being a member of a stock exchange.

Criminal liability for mis-statement in prospectus (S. 60)

Where a prospectus includes any untrue statement, every person who signed or authorized

the issue of prospectus shall be punishable with imprisonment for a term of two years or

with a fine which may extend to ten thousand rupees or with both.

It is a criminal offence to make statement, promise or forecast which is known to be

misleading, false or deceptive or which dishonesty conceals a material fact. It is also an

offence to make such statement recklessly.

Allotment

Directors of a company are empowered to issue shares and to make allotment of categories

of shares. The authority must be exercised by means of a resolution passed at their meeting.

“The allotment of shares to an application is an acceptance by the company of its

offer to take shares; it completes a binding and enforceable contract between them,

but an applicant does not become member of a company until his name is entered on

the share register.”

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Pre-emption rights

A pre-emption right is a right given to the shareholders of a company to subscribe for any

new shares that the company issues in proportion to their existing shareholdings. It is most

often found in relation to equity shares and normally applies only to new issues of shares of

the same class. In this way, the balance of control between the respective shareholders can

be kept constant. A pre-emption right may also prevent the ‘watering’ or dilution in value of

existing shares if the new shares are issued at a price which is below their true value.

Certificates:

A share certificate is prima facie evidence of the membership of the shares by the person

named therein as a shareholder.

Every company shall, within 90 days after the allotment of any of its shares, and within 45

days after the application for the registration of the transfer of any such shares, complete and

have ready for delivery the certificates of all shares allotted or transferred, and unless sent

by post or delivered to the person entitled thereto, within that period, shall give notice of this

fact to the shareholders.

Provided that, the company shall, within 5 days after an application is made for the

registration of the transfer of any shares, to a central depository, register such transfer in the

name of the central depository. (Section 74)

Issue of Duplicate Certificates

A duplicate of certificate of shares issued under section 74 shall be issued by the company

within 45 days from the date of application by a shareholder. (Section 75)

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Transfer of shares and debenture

An application for registration of the transfer of shares and debentures in a company may be

made either by the transferrer or the transferee, and subject to the provisions of section 76,

the company shall enter in its register of members, the name of transferee in the same

manner and subject to the same conditions as if the application was made by the transferee.

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CAPITAL, CLASSES OF SHARES

Gentlemen today we shall be looking at the meaning of capital. Put at its simplest, this is the

money with which the company operates. It can take two forms, share capital and loan

capital. Share capital is the money provided by the members for the operation of the

company. Loan capital is money borrowed for the purpose of operating the business,

whether it be borrowed from a bank or other lending institutions or from individual

certificate holders.

The meaning of capital:

The difficulty arises when we look at the company’s balance sheet and find that capital is

shown as a liability. This highlights the essential difference between the thinking of the

lawyer and the thinking of the accountant. The lawyer looks upon capital as an asset in the

sense that it is something which the company uses to make further money. The accountant

looks upon it as the liability in the sense that it is some using which, in the event of the

liquidation, the liquidator must repay to the shareholders.

Nominal or authorized capital:

This is the amount of share capital which the company is authorized to issue. It is set out in

the memorandum of association. The amount of the company’s nominal capital depends

upon the business requirements of the company.

The issue or allotted capital:

This is that part of the company’s nominal capital which has actually been issued to the

members. A company is under no obligation to issue all of its nominal capital and frequently

there is a difference between the level of nominal capital and the level of issued capital.

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1. Paid-up capital:

As the expression implies, this is that part of the issued capital of a company which has

been paid-up by the members. For example, a company may issue 1,000 shares of

Rs.10/- each. The nominal value of which has been paid. Thus paid-up capital of the

company will be Rs.10,000/-.

2. Procedure on the issue of shares by a company:

When issuing shares, the directors must ensure, not only that the company has

sufficient unissued shares authorized by the capital clause of the memorandum, but

also that the directors are authorized to issues shares. The shares may not be issued

unless the directors are authorized to do so. Thus the directors must first check the

memorandum to ensure that there are shares which they can issue. If there are not,

they must have the members pass an ordinary resolution under the Companies

Ordinance, 1984 to increase the share capital. The authority referred to may be

contained in the company’s articles.

Section 74 limitation of time for issue of certificates

Section 77 Directors not to refuse transfer of shares

Section 78 Notice of refusal to transfer shares

Section 78-A Right of appeal against refusal for registration of shares

3. Issue of shares at a premium (Section 83):

Sometimes a company will issue shares for a sum greater than their nominal value.

This is known as issuing shares at a premium.

Section 84 Power to issue shares at a discount.

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LEGAL MORTGAGE

An instrument which purport or operate to create, declare, assign, limit or extinguish,

whether in present or in future, any right, title or interest, whether vested or contingent, of

the value of one hundred rupees and upwards, to or in immovable property is registrable

under clause (b) of section 17 of the Registration Act, 1908. If it is of the value of Rs.100 or

upwards.

A mortgage document for less than Rs.100 is compulsory registrable under the Registration

Act.

Equitable Mortgage by Deposit of Title Deeds

A mortgage may be made by mere deposit of title deeds without any document. A

memorandum usually accompanies the deposit of title deeds by way of securities and the

mortgagee will ordinarily be entitled to claim to have such a memorandum executed.

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BORROWING AND REGISTRATION OF CHARGES

Borrowing:

Like any other legal person, a company may borrow money, subject to any restrictions in its

memorandum and articles of association. There are, however, some special features of

corporate borrowing:

Where a company charges property to secure a borrowing obligation, the Companies

Ordinance, 1984 requires that particulars of the charge be registered under the

provisions of Section 121 of the Companies Ordinance, 1984, failing which the

security will be for most purposes void.

A company has the ability, not enjoyed by an individual, to create a ‘floating charge’

over assets such as stock-in-trade and book debts, which may fluctuate from time to

time, on terms that the company remains free to deal with them in the ordinary

course of business.

When a company makes default in any of its obligations under the document creating

a charge, or when the security it has created is in jeopardy, the obligation is normally

enforced by appointment of a receiver to look after the creditor’s interests.

Exercise of borrowing powers by a company:

A private company can commence its business and exercise its borrowing powers

immediately after incorporation. Whereas a public company neither can commence its

business nor can exercise its borrowing powers without obtaining a certificate for

commencement of business from the Registrar of Companies. There is a restriction under

section 146 of the Companies Ordinance, 1984. Since the Companies Ordinance does not

give specific power to any company to borrow it becomes necessary that it is authorized by

its memorandum and articles of association in this regard.

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Types of borrowing:

The monies borrowed by the company may or may not be secured. The monies borrowed by

the company may be secured by creating charge on the assets. Thus, on the basis of security,

borrowing may be divided into secured and unsecured borrowing.

Borrowings can also be divided into long term and short term on the basis of repayment

duration of the loans. Further, the borrowings may also be with option of conversion into

equity.

Ultra vires borrowing:

Exercise of borrowing powers by a company without there being proper authorization in the

memorandum and articles of association for the purpose of borrowing beyond the limits

fixed by shareholders in the general meeting is referred as ultra vires borrowing. This can be

further divided into two categories-

(a) Ultra vires the company: Borrowings without the necessary power or in excess of authorization

(b) Ultra vires the directors: Borrowing by directors on behalf of the company without their being properly authorized. Borrowings which are ultra vires the directors but are intra vires the company may be ratified by the company subsequently.

What is charge:

When any money borrowed by the company is proposed to be secured by providing

guarantee of assets of the company, the company is said to be having a charge on its assets.

Charge means transfer of interest in the assets of company in favour of financial

institution/lender to secure repayment of the financial assistance extended by it.

Types of charge:

Depending on the terms and conditions of creation of charge and on the assets offered as

security there are two kinds of charge-

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1. Floating charge: Floating charge is a charge on current and movable assets of the

company for which company is free to deal in the ordinary course of business. The

assets on which charge is created is not specific.

English Definition: The floating charge allows a company to give

security over its fluctuating assets, including property acquired after

the creation of the charge, and to do so on terms that the assets may

be dealt with by the company in the ordinary course of its business,

free from the claims of the charge-holder.

2. Fixed charge: Fixed charge is a charge on specific identifiable fixed asset of the

company and the company is not free to deal with those assets in its ordinary course

of business. The fixed assets subject to charge cannot be disposed of by the company

without approval of charge holders.

How and when charge can be created:

Charge is much wide in coverage than mortgage and includes mortgage also but, still, some

of the differences between the two are given here.

The charge can be created on fixed as well as all moving assets while mortgage can be

created only on fixed assets. Charge can be floating or fixed but mortgage is always fixed. In

mortgage possession of the assets may or may not be handed over to mortgage holder but in

charge the possession of assets is never handed over to the charge holder.

Registration of mortgages and charges:

In accordance with the provisions of Section 121 of the Companies Ordinance, 1984,

particulars of charge created by a company are required to be filed with the Registrar of

Companies within twenty-one days after the date of its creation. However, on an application

made by the company, the Commission may extend the time. The said section 121 of the

Companies Ordinance, 1984 provides that charge created on any of the following assets are

required to be registered:

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(a) a mortgage or charge for the purpose of securing any issue of debentures; or

(A debenture is an instrument issued by a company as evidence of a debt or other obligation. It includes debenture stock, bonds and any other security of a company, whether or not it forms a charge on the assets of the company.)

(b) a mortgage or charge on uncalled share capital of the company; or

(Uncalled share capital is the balance owing for shares that are issued partly paid. Presently Companies Ordinance does not envisage such issuance of partly paid shares but certain companies may have such shares before its promulgation.)

(c) a mortgage or charge on any immovable property wherever situate, or any interest therein; or

(d) a mortgage or charge on any book debts of the company; or

(Book debts are debts that in the ordinary course of a company's business are commonly entered in its books.)

(e) a mortgage or charge, not being a pledge, on any movable property of the company; or

(f) a floating charge on the undertaking or property of the company, including stock-in-trade; or

(A floating charge is a charge that does not affect the assets charged until some event crystallises the charge, fixing it to a certain point in time.)

(g) a mortgage or charge on a ship or any share in a ship; or

(h) a mortgage or charge on goodwill, on a patent or licence under patent on, a trade mark, or on a copyright or a licence under a copyright; or

(i) a mortgage or charge or other interest based on agreement for the issue of any instrument in the nature of redeemable capital; or

(j) a mortgage or charge or other interest based on a mushrika agreement; or

(k) a mortgage or charge or other interest based on hire-purchase or leasing agreement for acquisition of fixed assets.

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Documents required to be filed for registration of mortgage or charge?

a. Form 10 containing particulars of mortgages, charges etc.

b. Certified copies of instruments creating the mortgage charge.

c. Affidavit that copies of the instruments are true copies.

d. Bank challan of Rs.5,000/- being filing fee.

Filing fee:

There is a fee of Rs.5,000 for registering each Form 10, 11, 13 and 14 filed with the registrar

concerned. Same fee is applicable on filing of modification of particulars of mortgage or

charge on Form 16 or memorandum of satisfaction of a mortgage or charge on Form 17.

These forms are available on SEC’s web site: www.secp.gov.pk.

Relevant forms:

The form numbers in this table correspond to the relevant sections of the Companies

Ordinance, 1984 and rules contained in the Companies (General Provisions and Forms)

Rules, 1985:-

Form No.

Description Section

10 Particulars of mortgages, charges, etc. 121, 129 and 463

11 Particulars of mortgage or charge subject to which property has been acquired.

122 and 463

13 Registration of entire series of debentures / redeemable capital

123, 124 and 463

14 Particulars of an issue of redeemable capital / debentures in a series when more than one issue in the series is made

Proviso to section 123 and section 463

16 Particulars of modification of mortgage, charge, etc. 129(3) and 463

17 Memorandum of complete satisfaction of mortgage, charge, etc.

132 and 463

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Correct documentation:

Select the correct form to send to the correct registration office, and follow any notes

on the form itself. Act as quickly as possible: you have only 21 days from the date of

creation of the charge to register the correct details.

Send the instrument creating or evidencing the charge with the form, if there is an

instrument, as there usually will be. Copy of the instrument must be attested by a

notary public.

Make sure the details on the form are correct and match the instrument. If registrar

finds errors, the presenter must authorise their correction and, if necessary, deliver

new forms within the 21-day time limit. If necessary, registrar will return

instruments and documents to the presenter named on the charge form itself.

Please ensure this information is complete and accurate.

Make sure the company name and number are correct.

Make sure the creation date and description of the charge agree with the instrument.

Make sure the amount secured accurately reflects what is stated in the instrument.

Make sure the name of the chargee matches the instrument. ('Chargee' means the

person to whom property is charged.)

Make sure the short details of the property charged accurately reflect what is stated

in the instrument.

For mortgaged land it is desirable that you give the title number of the property.

Ensure that charging clauses are always inserted, including reference to fixed and

floating charges.

Sign and date the form.

Complete the forms legibly using black ink or, preferably, type the form.

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Forms are scanned and reproduced electronically so that the public can inspect them.

The Registrar may refuse documents that are not suitable for scanning and

reproduction.

Delay in filing of documents:

If a registerable charge is not registered in time, then the security is void against the

liquidator and any creditor of the company. This means that the debt for which the charge

was given will remain payable, but it will be unsecured.

If a company fails to deliver a registrable charge, and no interested party has registered it,

then the company and every officer of the company who is in default are liable to a fine upto

Rs.5,000/-. If the default continues, they are liable to a daily fine of Rs.100/-.

Extension:

Only the Commission can grant an extension of time for registration of a charge that was not

received in time and correct. The normal time limit is 21 days from the date of creation of

the charge.

Registration of charge on acquired property subject to charge:

If the charge is of a type which the company would have had to register if it had created the

charge itself, then it must notify the fact that it has acquired this property. To do this the

company must complete and send Form 11 with the registrar concerned, with a certified

copy of any instrument that created or evidenced the charge.

This must be done within 21 days after the company completed the acquisition of the

property. If the charged property is outside Pakistan and the charge was created outside

Pakistan, the 21 days runs from the date when the copy instrument could have been received

in Pakistan in the normal course of post, assuming that it had been dispatched with due

diligence.

Late delivery of the particulars of mortgage or charge is an offence. The company and every

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officer of it who is in default are liable to a fine. If the default continues, they are liable to a

daily default fine.

Rights of mortgages:

If the company does not send us a charge for registration, then the chargee (the person to

whom property is charged) - or some other interested person - can register the required

documents. In certain circumstances a chargee can appoint a receiver or manager, or ask the

court to appoint a receiver or manager, over the property charged - for example, if the

company defaults in payment of the debt secured by the charge. The chargee must notify the

appointment with the registrar concerned within 15 days using form 18. Registrar will then

enter this in the register of charges.

On ceasing to act, a receiver or manager must notify the registrar concerned within 30 days

using Form 19. Registrar will then enter the fact in the register of charges.

Modification of mortgages or charges.

Modification is change in mortgage or charges that is change in:-

a. Amount of mortgage / charge (enhancement or reduction in amount).

b. Change in particulars of property (excluding or including certain property or

asset).

c. Variation in the rate of markup or interest.

d. Extension of time for repayment on period of maturity (rescheduling).

e. Change in other terms and conditions.

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Documents required to be filed for modification in a mortgage or charge?

a. Form 16 containing modification in mortgages, charges etc.

b. Certified copies of instruments creating the mortgage charge.

c. Affidavit that copies of the instruments are true copies.

d. Bank challan of Rs.5,000/- being filing fee.

Partial satisfaction:

Partial payment is modification of a mortgage or charge and cannot be treated as

satisfaction. The particulars of the modification are filed on Form 16.

Rectification of mortgage or charge.

The following are grounds of rectification of register of mortgages or charges:-

a. Omission to file charge within the prescribed period.

b. Failure to tile modification of charge.

c. Omission to intimate payment or satisfaction.

d. Omission or mis-statement of particulars.

The Commission is empowered to order for rectification of register of mortgages or charges.

Documents to be enclosed with the petition for rectification:-

a. Copy of Form 10, 11, 13, 16 or 17, as the case may be.

b. Copies of instruments relating to creation, modification, satisfaction etc.

c. Copy of the resolution, if any.

d. Observation memorandum, if issued, of the registrar concerned.

e. Affidavit verifying the contents of petition to be true.

f. Bank challan on account of application fee of Rs.500.

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Documents to be filed with the registrar concerned after making of order by the Commission:

a. Copy of Form 10, 11, 13, 16 or 17, as the case may be.

b. Copies of instruments relating to creation, modification, satisfaction etc.

c. Copy of order of the Commission.

d. Affidavit that copies of the instruments are true copies.

e. Bank challan of Rs.5,000/- being filing fee.

Satisfaction of mortgages and charges

The company needs to inform registrar concerned that a charge has been fully satisfied.

However, it is obviously in the company's own interests that investors and lenders know that

all of the debt has been paid off. Therefore, it would be in the interest of the company if an

NOC is obtained for mortgagee regarding payment off (or satisfaction of) the mortgage or

charge.

As with fully paid-off charges, the company needs to inform registrar concerned that its

property has been released from a charge or that the property no longer belongs to the

company. It is obviously in the company's interests that potential investors and lenders

should know. The company shall file a memorandum of satisfaction of mortgage or charge

on Form 17 with or without NOC obtained from the mortgagee.

Register of mortgages/charges:

Every company is required to maintain a register of mortgages and charges which is

prescribed as Form 12. This register is kept open for inspection by the members of the

company and even they have the right to obtain copy or abstract of the register. Instruments,

in original or certified copies thereof, relating to mortgages or charges are also kept at the

registered office of the company and remain open for inspection by the members of the

company subject to payment of fee, prescribed by the company. It must be noted that

company cannot prescribe fees (copying or inspection fees) exceeding those prescribed for

the purpose under the Companies Ordinance, 1984.

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DIRECTORS AND CHIEF EXECUTIVE

DIRCTORSDefinition:

The Directors of a company are the persons in-charge of managing the affairs of the

company. They are the agents of the company and are collectively referred as Board.

Section 2(1)(13) of the Companies Ordinance, 1984 contains an inclusive definition of the

term Director as “includes any person occupying the position of Director, by whatever name

called.”

Only natural persons to be directors: (S.175)

In accordance with the provisions of Section 175 of the Companies Ordinance, 1984 only a

natural person shall be a director and no director shall be the variable representative of a

body corporate.

First directors and their term: (S.176)

The number of directors and the names of the first directors shall be determined in

writing by a majority of the subscribers of the memorandum, and until so

determined, all the subscribers of the memorandum who are natural persons shall be

deemed to be the directors of the company.

The first directors shall hold office until the election of directors in the first annual

general meeting.

According to Section 174(1) of the Companies Ordinance, 1984:

(a) every single member company shall have at least one director;

(b) every other private company shall have not less than two directors; and

(c) every public company other than a listed company shall have not less than

three directors.

(d) every listed company shall have not less than seven directors

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Retirement of directors: (S.177)

On the date of the first annual general meeting of a company all directors of the company for

the time being who are subject to election shall stand retired from office and thereafter all

such directors shall retire on the expiry of the term laid down in Section 180:

Provided that the directors so retiring shall continue to perform their functions until

their successors are elected:

Provided further that the directors so continuing to perform their functions shall take

immediate steps to hold the election of directors and in case of any impediment report the

circumstances of the case to the registrar within fifteen days of the expiry of the term laid

down in section 180.

Procedure for election of directors: (S.178)

The directors of a company shall, subject to section 174 fix the number of elected

directors of the company not later than thirty five days before the convening of the

general meeting at which directors are to be elected, and the number so fixed shall

not be changed except with the prior approval of a general meeting of the company.

The notice of the meeting at which directors are proposed to be elected shall among

other matters, expressly state-

(a) the number of elected directors fixed under sub-section (1); and

(b) the names of the retiring directors.

Any person who seeks to contest an election to the office of director shall, whether

he is a retiring director or otherwise, file with the company, not later than fourteen

days before the date of the meeting at which elections are to be held, a notice of his

intention to offer himself for election as a director:

Provided that any such person may, at any time before the holding of

election, withdraw such notice.

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All notices received by the company in pursuance of sub-section (3) shall be

transmitted to the members not later than seven days before the date of the meeting,

in the manner provided for sending of a notice of general meeting in the normal

manner or in the case of a listed company by publication at least in one issue each of

a daily newspaper in English language and a daily newspaper in Urdu language

having circulation in the Province in which the stock exchange on which its

securities are listed is situate.

The directors of a company having a share capital shall, unless the number of

persons who offer themselves to be elected is not more than the number of directors

fixed under sub-section (1), be elected by the members of the company in general

meeting in the following manner, namely:-

(a) a member shall have such number of votes as is equal to the product of the

number of voting shares or securities held by him and the number of directors to

be elected;

(b) a member may give all his votes to s single candidate or divide them between

more than one of the candidates in such manner as he may choose; and

(c) the candidate who gets the highest number of votes shall be declared elected as

director and then the candidate who gets the next highest number of votes shall

be so declared and so on until the total number of directors to be elected has been

so elected.

The directors of a company not having share capital shall be elected by members of

the company in general meeting in the manner as provided in articles of association

of the company.

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Circumstances in which election of directors may be declared invalid: (S.179)

The Court may, on the application of members holding not less than twenty per cent of the

voting power in the company, made within thirty days of the date of election, declare

election of all directors or any one or more of them invalid if it is satisfied that there has

been material irregularity in the holding of the elections and matters incidental or relating

thereto.

Term of office of director: (S.180)

A director elected under section 178 shall hold office for a period of three years

unless he earlier resigns, becomes disqualified from being a director or otherwise

ceases to hold office.

Any casual vacancy occurring among the directors may be filled up by the directors

and the person so appointed shall hold office for the remainder of the term of the

director in whose place he is appointed.

Removal of director: (S.181)

A company may by resolution in general meeting remove a director appointed under section

176 or section 180 or elected in the manner provided for in section 178:

Provided that a resolution for removing a director shall not be deemed to have been

passed if the number of votes cast (against it is equal to, or exceeds)-

(i) the minimum number of votes that were cast for the election of director at the

immediately preceding election of directors, if the resolution relates to

removal of a director elected in the manner provided in sub-section (5) of

section 178; or

(ii) the total number of votes for the time being computed in the manner laid

down in sub-section (5) of section 178 divided by the number of directors for

the time being, if the resolution relates to removal of a director appointed

under section 176 or section 180.

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Validity of acts of directors: (S.185)

No act of a director, or of a meeting of directors attended by him, shall be invalid merely on

the ground of any defect subsequently discovered in his appointment to such office.

Provided that, as soon as any such defect has come to notice, the director shall not

exercise the right of his office till the defect has been rectified.

Ineligibility of certain persons to become director: (S.187)

No person shall be appointed as a director of a company if he:

(a) is a minor;

(b) is of unsound mind;

(c) has applied to be adjudicated as an insolvent and his application is pending;

(d) is an undischarge insolvent;

(e) has been convicted by a court of law for an offence involving moral

turpitude;

(f) has been debarred from holding such office under any provision of this

Ordinance;

(g) has betrayed lack of fiduciary behavior and a declaration to this effect has

been made by the Court under section 217 at any time during the preceding

five years;

(h) is not a member;

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Provided that clause (h) shall not apply in the case of:

1) a person representing the Government or an institution or authority

which is a member;

2) a whole-time director who is an employee of the company;

3) a chief executive; or

4) a person representing a creditor

(i) has been declared by a Court of competent jurisdiction as defaulter in

repayment of loan to a financial institution, exceeding such amount as may be

notified by the Commission from time to time;

(j) is member of a Stock Exchange engaged in the business of brokerage, or is a

spouse of such member:

Provided that clause (i) and (j) shall be applicable only in case of a

listed company.

Vacation of office by the directors: (S.188)

(1) A director shall ipso facto cease to hold office if:

(a) he becomes ineligible to be appointed a director on any one or more of the

grounds enumerated in clauses (a) to (h) of section 187;

(b) he absents himself from three consecutive meetings of the directors or from

all the meetings of the directors for a continuous period of three months,

whichever is the longer, without leave of absence from the directors;

(c) he or any firm of which he is a partner or any private company of which he is

a director:

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(i) without the sanction of the company in general meeting accepts or

holds any office of profit under the company other than that of chief

executive or a legal or technical adviser or a banker; or

(ii) accepts a loan or guarantee from the company in contravention of

section 195.

(2) Nothing contained in sub-section (1) shall be deemed to preclude a company from

providing by its articles that the office of director shall be vacated on any grounds

additional to those specified in that sub-section.

Powers of directors: (S.196)

(1) The business of a company shall be managed by the directors, who may pay all

expenses incurred in promoting and registering the company, and may exercise all

such powers of the company as are not by this Ordinance, or by the articles, or by a

special resolution, required to be exercised by the company in general meeting.

(2) The directors of a company shall exercise the following powers on behalf of the

company, and shall do so by means of a resolution passed at their meeting, namely:-

(a) to make calls on shareholders in respect of moneys unpaid on their

shares;

(b) to issue shares;

(c) to issue debentures or (any instrument in the nature of redeemable

capital);

(d) to borrow moneys otherwise than on debentures;

(e) to invest the funds of the company;

(f) to make loans;

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(g) to authorize a director or the firm of which he is a partner or any partner

of such firm or a private company of which he is a member or director to

enter into any contract, with the company for making sale, purchase or

supply of goods or rendering services with the company;

(h) to approve annual or half yearly or other periodical accounts as are

required to be circulated to the members;

(i) to approve bonus to employees;

(j) to incur capital expenditure on any single item or dispose of a fixed asset

in accordance with the limits as prescribed by the Commission from time

to time.

Provided that the acceptance by a banking company in the ordinary

course of its business of deposits of money from the public repayable on

demand or otherwise and withdrawable by cheque, draft, order or otherwise,

or the placing of moneys on deposit by a banking company with another

banking company on such conditions as the directors may prescribe, shall not

be deemed to be a borrowing of money or, as the case may be, a making of

loans by a banking company within the meaning of this section.

(k) to undertake obligations under leasing contracts exceeding one million

rupees;

(l) to declare interim dividend; and

(m) having regard to such amount as may be determined to be material (as

construed in the Generally Accepted Accounting Principles) by the

Board,-

(i) to write off bad debts, advances and receivables;

(ii) to write off inventories and other assets of the company;

and

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(iii) to determine the terms of and the circumstances in which a

law suit may be compromised and a claim or right in favour of a

company may be released, extinguished or relinquished.

(3) The directors of a public company or of a subsidiary of a public company shall not

except with the consent of the general meeting either specifically or by way of an

authorization, do any of the following things, namely:-

(a) sell, lease or otherwise dispose of the undertakings or a sizeable part

thereof, unless the main business of the company comprises of such

selling or leasing; and

(b) remit, give any relief or give extension of time for the repayment of any

debt outstanding against any person specified in sub-section (1) of section

195.

(4) Whosoever contravenes any provision of this section shall be punishable with a fine

which may extend to (one hundred thousand rupees and shall be individually and

severally liable for losses or damages arising out of such action.

51

CHIEF EXECUTIVE

Appointment of first chief executive: (S.198)

(1) Every company shall have a chief executive appointed in the manner provided in

this section and section 199.

(2) The directors of every company shall as from the date from which it commences

business or as from a date not later than the fifteenth day after the date of its

incorporation, whichever is earlier, appoint any individual to be the chief

executive of the company.

(3) The chief executive appointed as aforesaid shall, unless he earlier resigns or

otherwise ceases to hold office, hold office up to the first annual general meeting

of the company or, if a shorter period is fixed by the directors at the time of his

appointment, of such period.

Appointment of subsequent chief executive: (S.199)

(1) Within fourteen days from the date of election of directors under section 178 or

the office of the chief executive falling vacant, as the case may be, the directors

of a company shall appoint any person, including an elected director, to be the

chief executive, but such appointment shall not be for a period exceeding three

years from the date of appointment.

(2) On the expiry of his term of office under section 198 or sub-section (1), a chief

executive shall be eligible for reappointment.

(3) The chief executive retiring under section 198 or this section shall continue to

perform his functions until his successor is appointed unless non-appointment of

his successor is due to any fault on his part or his office is expressly terminated.

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Terms of appointment of chief executive and filling up of casual vacancy: (S.200)

(1) The terms and conditions of appointment of a chief executive shall be determined

by the directors or the company in general meeting in accordance with the

provisions in the company’s articles.

(2) The chief executive shall, if he is not already a director of the company, be

deemed to be its director and be entitled to all the rights and privileges, and

subject to all the liabilities, of that office.

Restriction on appointment of chief executive: (S.201)

No person who is ineligible to become a director of a company under section 187 shall be

appointed or continue as the chief executive of any company.

Removal of chief executive: (S.202)

The directors of a company by resolution passed by not less than three-fourths of the total

number of directors for the time being, or the company by a special resolution, may remove

a chief executive before the expiration of his term of office notwithstanding anything

contained in the articles or in any agreement between the company and such chief executive.

Chief executive not to engage in business competing with company’s business: (S.203)

(1) A chief Executive of a public company shall not directly or indirectly engage in

any business which is of the same nature as and directly competes with the

business carried on by the company of which he is the chief executive or by

subsidiary of such company.

Explanation.- A business shall be deemed to be carried on indirectly by the chief

executive if the same is carried on by his spouse or any of his minor children.

(2) Every person who is appointed as chief executive of a public company shall

forthwith on such appointment disclose to the company in writing the nature of such

business and his interest therein.

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MEETINGS AND PROCEEDINGS

Within a company there are two mains centers of power, the board of directors and

the members in general meeting. The decisions of both these organs are taken in

meetings and it is important to consider the significance of meetings in the life of a

company.

The directors are obviously in close contact with each other and so their meetings

require far less formality than those of the members.

Meetings Generally:

The directors of a company may regulate their proceedings as they think fit, and that

a director may, and the secretary on the requisition of a director must, at any time

summon a board meeting.

Obviously board meetings need to be called very speedily on many occasions and so

in Browne v La Trinidad (1887) five minutes’ notice was held to be reasonable in a

situation where a director was present at the proposed venue of the meeting and had

no other engagements in his diary.

The only other point which needs noting about directors’ meetings, at this stage, is

that each director has a vote and decisions at the meeting are decided by a majority

of votes cast.

In the case of an equality of votes, the chairman shall have a second or casting vote.

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Board of Directors meeting

SYNOPSIS

1. Board Meeting

2. Where and when

3. Notice

4. Quorum

5. Adjournment

6. Minutes

7. Matters to be approved only in Board meetings

8. Resolution by circulation

1. Board Meeting

Section 196 of the Companies Ordinance, 1984 (the Ordinance) provides that

the business of a company shall be managed by the directors, who may pay

all expenses incurred in promoting and registering the company, and may

exercise all such powers of the company as are not by the Companies

Ordinance, or by the articles, or by special resolution, required to be

exercised by the company in general meeting.

The Ordinance does not authorize any director in his individual capacity to

do anything what the Board is entitled to do. However, he is entitled to

exercise such powers and do such acts which are delegated to him by the

Board or by the company in the general meeting. The Board exercises its

functions by convening meetings.

2. Where and when

In accordance with the provisions of section 193 of the Ordinance, the

director of every public company must meet together for the despatch of

business, at least once in each quarter of a year.

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The Ordinance does not specify the place of holding meetings of the Board

and, therefore, can be held at any place. Similarly, the time of holding the

meeting is also not prescribed and, thus, the meetings can be held at any time

as per the convenience of all the members of the Board. Further, meetings

can be held on any day of the week.

3. Notice

Notice for meetings of the Board must be given in writing to every director at

his usual address. Under the Ordinance, no notice period has been prescribed.

However under the Code of Corporate Governance, written notice (including

agenda) of the meeting must be circulated not less than seven days before the

meeting, except in the case of emergency, where the notice period may be

reduced.

4. Quorum

Quorum is the minimum number of members who are authorized to act as

Board on behalf of the Company. Section 193 of the Ordinance provides that

the quorum for the meeting of the Board of Directors of a listed company

shall be one third (any fraction contained in that one-third being rounded off

as one) of their number or four, whichever is greater. The quorum of other

companies is always fixed in their articles of association.

5. Adjournment

Adjournment of the meeting means break off the meeting with the intention

of resuming later. A meeting of the Board can be adjourned as per the

provisions contained in the articles of association of a company.

If the quorum for the meeting is not present within the time stipulated in the

articles of the company, the meeting shall automatically stand adjourned till

the same day in the next week at same time and place. If the quorum is not

present at the adjourned meeting, fresh notice shall be issued for meeting.

6. Minutes

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Minutes of meetings of Board shall be maintained in accordance with the

provisions of section 173 of the ‘Ordinance’

7. Matters to be approved only in Board’s meetings

Certain matters which are of importance to the company shall always be

considered in the meetings of the Board and shall be accorded approval by

passing a resolution. These are listed below:-

(a) to make calls on shareholders in respect of moneys unpaid on their

shares;

(b) to issue shares;

(c) to issue debentures or (participation term certificate, any instrument in

the nature of redeemable capital);

(d) to borrow moneys otherwise than on debentures;

(e) to invest the funds of the company;

(f) to make loans;

(g) to authorize a director or the firm of which he is partner or any partner

of such firm or a private company of which he is a member or director

to enter into any contract with the company for making sale, purchase

or supply of goods or rendering services with the company;

(h) to approve annual or half-yearly or other periodical accounts as are

required to be circulated to the members;

(i) to approve bonus to employees;

(j) to incur capital expenditure on any single item or dispose of a fixed

asset in accordance with the limits as prescribed by the Commission

from time to time;

(k) to undertake obligations under leasing contracts exceeding one

million rupees; and

(l) to declare interim dividend.

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Rs.1 millionRs.1,00,000

8. Resolution by circulation

Instead of holding a meeting of the Board, the directors may adopt a

resolution by circulation. For passing a resolution by circulation, a draft of

the proposed resolution shall be circulated along with the necessary papers, to

all the directors. The resolution is considered to have been passed when

approved by all the directors. All resolution passed by circulation shall be

included in the minutes of next meeting of Board of directors for the purpose

of authenticity.

B. GENERAL MEETINGS

Meetings of the company are of two types, those which must be held and those

which may be held.

General meetings of the company are the meetings of the members of the company

and ordinary and special business are transacted therein. The following meetings are

held by a company.

1. Statutory Meeting

Every company which is incorporated as a public company is required to

hold a meeting of members of the company not less than three months and

not more than six months since the day it becomes entitled to commence

business, to be called as Statutory Meeting for discussing various matters

relating to formation of company or arising out of the statutory report.

2. Annual General Meetings:

(i) In accordance with Section 158 of the Ordinance every company must

hold a general meeting of its members which shall be called an

Annual General meeting in the notice calling it. Calling of annual

general meeting every year is mandatory. The companies are free to

convene any number of meetings of its members for any matter

during the year.

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(ii) All general meetings of members other than statutory meeting or

annual general meeting are called and known as extraordinary general

meetings.

(iii) In case of listed companies the Commission and in other, Registrar

may grant extension upto sixty days.

1. First Annual General Meeting

The first annual general meeting of the company must be held within a period

of eighteen months from the date of its incorporation. The accounts placed

before the first annual general meeting shall be for the period beginning from

the date of incorporation up to the last day of the financial year adopted by

the company. The accounts for the financial year must be laid before the first

annual general meeting within a period of three months from the end of first

financial year. Requirement of placing the accounts before the company in

the annual general meeting shall be strictly complied with since the Registrar

is not empowered to grant any extension of time for the same.

2. Second and subsequent general meetings

The second annual general meeting of the company shall be held in the next

year of the year in which the first annual general meeting was held in

accordance with the provisions of section 158 of the Ordinance. Section 158

provides that the time lag between the two annual general meetings shall not

exceed 15 months.

3. Financial year

Financial year has been defined under clause (16) of sub-section (1) of

section 2 of the Ordinance and it refers to the period for which accounts are

placed before the annual general meeting. It may be more or less than 12

months except where special permission has been granted by the registrar.

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4. Day, time and place of meeting

The annual general meeting of all the companies shall be held at the

registered office of the company or at any other place within the same town

or village in which the registered office of the company is situated.

Commission may, however, allow holding annual general meeting at some

other place.

5. Notice

For a meeting to be validly convened the appropriate length of notice must be

given. The length of notice for all the general meeting is twenty one days. A

meeting may be convened by giving a shorter notice also, provided all the

members entitled to attend and vote at a meeting consent to it. The persons

entitled to receive the notice are:

Members – whose name appears in the register of members of the company.

Statutory Auditors of the company

Directors get a right to receive the notice of general meeting of the company

only if they also happen to be members of the company.

6. Business

At annual general meeting two types of business are transacted:

(1) Ordinary business

For the purpose of annual general meeting, following matters are

considered as ordinary business

(i) Consideration and adoption of accounts, balance sheet and

the reports of the directors and auditors

(ii) Declaration of dividend

(iii) Appointment of auditors and fixation of their remuneration.

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(2) Special business

In the annual general meeting, every matter other than those

mentioned as ordinary business, is known as special business and

needs to be approved by the members as an ordinary or special

resolution as may be proposed by the notice. Irrespective of the type

of resolution proposed, every item of special business be

accompanied by an explanatory statement as per requirement of

Section 160(1)(b) of the ‘Ordinance’.

7. Quorum

The articles of a company may contain provisions regarding quorum of the

general meeting. In absence of any specific provision in the articles, Section

160 provides that:

(a) in the case of a public listed company, unless the

articles provide for a larger number, not less than ten members

present personally who represent not less than twenty five per cent of

the total voting power, either of their own account or as proxies.

(b) In the case of any other company, unless the articles

provide for a larger number, two members present personally who

represent not less than twenty-five per cent of the total voting power,

either of their own account or as proxies.

(c) In the case of a single member company, single

member present in person or by proxy.

8. Chairman

For proper conduct of meetings, the articles generally contain provisions

regarding appointment, rights and powers of Chairman of the general

meeting. In absence of any such provision, the Chairman of the Board shall

preside over all general meetings of the company and if he is not present

within 15 minutes for the appointed time, the Directors present shall elect on

of themselves to be the Chairman and if none of the directors are willing to

work as chairman, the members present shall elect one of themselves to be

the chairman of the meeting.

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9. Minutes

Minutes of general meetings of the company shall be maintained in

accordance with the provisions of Section 173 of the Ordinance. Every

company must keep minutes of all proceedings of general meetings. It must

also keep in a separate book minutes of meetings of its directors. Once a

minute has been signed either by the chairman of the meeting at which the

proceedings were held, or by the chairman of the next succeeding meeting, it

is prima facie evidence of the proceedings at the meeting. The minute books

must be kept at the registered office of the company, and the minute book of

the general meetings (though not of the directors) must be available for

inspection by any member during normal business hours without charge.

Also, any member is entitled to be provided with a copy of any such minutes

within seven days of his requesting them. For this service the company may

make a nominal charge.

10. Extraordinary General Meeting

All meetings of the company other than statutory meeting and annual general

meeting are called as Extraordinary general meetings (EGM). An EGM can

be convened any number of times as company feels necessary. Applicability

of provisions in respect of notice, resolution, chairman, resolutions, etc. are

same as applicable to annual general meeting.

11. Power of the Commission to call Meetings under Section 170

If for any reason it is impracticable to call a statutory meeting, annual general

meeting or any extraordinary general meeting of the company, the

Commission may, either of its own motion or on the application of any

director of the company or of any member who would be entitled to vote at

the meeting, order a meeting to be called, held and conducted in such a way

as the Commission may think fit.

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12. Convening of general meeting on members’ requisition

Section 159 provides that the Board of directors shall proceed to convene a

meeting of the members of the company within 21 days from receipt of a

requisition from members holding not less than one-tenth of the paid up

capital carrying voting rights.

The requirements as to the members making requisition for holding the

meeting has to be complied with separately in respect of every matters

proposed to be taken up in the general meeting.

The Board shall hold the meeting within 21 days from the date of receipt of

valid requisition failing which the members making requisition may

themselves proceed to convene the meeting in the same manner, as nearly as

possible, as that in which meetings are called by the Board and it shall be

held at a date not later than three months from the date of deposit of

requisition with the company. All reasonable expenses incurred by the

requisitionists shall be repaid to them by the company and in turn the

company may claim such sum as paid to the requisitionists from the directors

who were in default.

13. Proxies:

Confusion often arises in respect of this topic because the word proxy has

two meanings which, though closely related, are different. Firstly, it can

mean a person who attends a meeting in place of and as the representative of

another person entitled to attend a meeting. Secondly, it can mean a written

instrument indicating how a person wishes his vote to be used at a meeting.

Any member of a company entitled to attend and vote at a meeting is entitled

to appoint another person, as his proxy to attend and vote for him.

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14. Voting:

Initially, voting is by way of show of hands. On such a vote each member has

one vote. Obviously in the event of a unanimous vote there is no need for any

other method of voting to be considered. However, equally obviously, this

method of voting is unfair to a person having a significant shareholding in the

company. Accordingly, there are rules which permit voting to be done on a

poll, in this regard, that on such a vote every member shall have one vote for

every share of which he is the holder.

15. Adjournment:

A company’s articles usually make some provision for adjournment in certain

circumstances. For example, if a quorum is not present within half an hour

from the time appointed for the start of a meeting, or if during a meeting a

quorum ceases to be present, then the meeting will stand adjourned to the

same day in the next week at the same time or place or at such other time or

place as the directors may determine. Chairman may, with the consent of a

meeting at which a quorum is present, adjourn the meeting from time to time

and from place to place, but that no business shall be transacted at an

adjourned meeting other than business which might properly have been

transacted at the meeting had the adjournment not taken place.

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LIFTING THE VEIL OF INCORPORATION

The principle established in Salomon v A Salomon & Co. Limited that a company upon

incorporation becomes a separate legal person, completely distinct from its members, is

fundamental to company law. Nevertheless it is not so sacrosanct that it is not subject to

some exceptions. There is no coherent pattern created by those instances where the court has

been prepared to go behind the corporate veil. While all instances can be described as being

founded upon policy considerations, it is probably best to consider them under a series of

headings:

1) Fraud

2) Agency

3) Group of Companies

4) Enemy-ownership or unlawful purpose

5) Trust cases

6) Taxation

7) Company Legislation Generally

These will now be considered in some detail.

1) Fraud

The court will lift the veil of incorporation where the company is a sham formed for

some fraudulent purpose or so that the proprietors of the company can exploit rules

of law in an improper manner. A good example occurred in Re Bugle Press Limited.

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Re Bugle Press Limited (1961)

Under what is now Companies Act, 1985, Section 428 where in a takeover, the

bidder acquires 90% of the shares in the company being taken over, he can insist

that the minority shareholder with 10% or less than 10% of the company’s share

capital must sell those shares to him at the contract rate. In this case, Jackson, Shaw

and Treby were shareholders in Bugle Press Limited. Jackson and Shaw each held

4,500 & 1 shares and Treby held 1,000 shares, thus making a total share capital of

£10,000. Jackson and Shaw wanted to buy Treby out, but he was unwilling to sell.

Accordingly Jackson and Shaw formed a company having a share capital of £100,

Jackson and Shaw (Holdings) Limited, in which they each held half the shares. They

then caused Jackson and Shaw (Holdings) Limited to make an offer to purchase all

the shares in Bugle Press Limited at £10 per share. Jackson and Shaw accepted the

offer (which was hardly surprising) but Treby rejected it on the ground that the price

was too low. Thereupon Jackson and Shaw (Holdings) Limited sought to invoke

what is now Companies Act,1985, Section 428 to force Treby to sell out at £10 per

share.

It was held by the Court of Appeal that Treby would not be forced to sell. The new

company was clearly a sham formed to get Treby out of the business. In the words

of Harman J. Treby, the minority shareholder, had only to shout and the walls of

Jericho fell flat.

A similar decision was reached in Jones V Lipman below.

Jones V Lipman (1962)

Lipman entered into a contract to sell land to Jones. He then changed his mind and

formed a company to which he subsequently conveyed the land. The strategy behind

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this was to prevent Jones from obtaining an order for specific performance forcing

Lipman to convey the land to him. In the circumstances, had the company have been

bona fide and owned by third parties such a conveyance could not have been set

aside. However Russell J held that the company was a sham formed for the sole

purpose of defeating Jones’s claim to the land and, as such, the veil of incorporation

should be lifted. Specific performance was accordingly ordered against Lipman and

his company. The contract with Jones had to be honoured.

Gilford Motor Co. V Horne (1933)

E B Horne had been employed by Gilford Motor Co. as its managing director. By

his contract to service he had covenanted not to solicit customers of the company

after leaving its employment. When this employment came to an end, he started

business on his own account. So as to get around the restrictive covenant he traded

through a company J M Horne & Co. Limited in which his wife and an employee

were the directors and shareholders. Horne himself had no tangible interest in the

company.

The Court of appeal held that the veil of incorporation should be lifted to disclose

that the company was a mere sham. Accordingly an injunction should be granted

against both Horne and his company to prevent their breaching the restrictive

covenant with Horne’s former employer.

2) Agency

Although a company is a separate legal entity, in appropriate circumstances the law

will treat the company as an agent of its shareholders or controllers.

Smith, Stone and Knight Limited V Birmingham Corporation (1939)

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A company took over a business and subsequently operated it through a subsidiary

company which it treated as though it were a department rather than as a self-

contained corporate entity. Birmingham Corporation compulsory acquired land

belonging to the subsidiary company. The law as it stood was such that the

Corporation would only have to pay compensation for acquiring the land if the

holding company rather than the subsidiary could be shown to be the occupier of the

land. The reason for this was that under the Land Clauses Consolidation Act, 1845

(under which the compulsory acquisition was effected) purchasers could evict

occupiers with short tenancies merely by giving them notice. Thus the question of

whether compensation was payable turned upon whether the subsidiary company

was carrying on its own business or its parent company’s business.

Atkinson J. In a judgement in which he reviewed the authorities on this point,

concluded that, in the circumstances of this present case, the subsidiary company

was simply the agent of the holding company and thus compensation was payable in

deciding whether the subsidiary was carrying out the parent company’s business, six

factors were to be considered.

1. Were the profits made by the subsidiary company in fact profits of the parent company?

2. Were the persons conducting the business of the subsidiary appointed by the parent company?

3. Was the parent company the ‘head and brains’ of the trading venture?

4. Did the parent company govern the business?

5. Were the profits of the subsidiary company made as a result of the skill and direction of the parent company?

6. Was the subsidiary company under the effective and constant control of the parent company?

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(It is difficult if not impossible, to reconcile the agency principle laid down here with

the rigidity of Salomon’s case. Is it cynical to say here that the court was merely

trying to ensure that the Corporation paid compensation for the land it acquired?)

3) Groups of companies

Increasingly the courts have looked at a group of companies as single economic unit.

In a sense this is inevitable having regard to the way in which legislation regarding

the company accounts has moved towards accounting for groups as a single entity. In

many ways this is very similar to the agency exception discussed above, and some

writers treat them as identical. An example of lifting the veil of incorporation in the

case of groups of companies is to be found in the following case.

DHN Food Distributors Limited V London Borough of Tower Hamlets (1976)

DHN ran a wholesale grocery business from premises which were owned by a

wholly-owned subsidiary company, Bronze. Bronze and DHN had exactly the same

directors. Bronze was not a trading company and its only asset were the premises

from which DHN traded. DHN had to cease trading. DHN occupied the premises as

a licensee. The local authority, Tower Hamlets, compulsorily acquired the premises.

Because of this, DHN had to cease trading. If DHN were a mere licensee, the local

authority would be obliged only to pay compensation based upon the site value. On

the other hand, if DHN could be shown to have an interest in the land over and

above that of a mere licensee, substantial compensation for disturbance would be

payable.

It was held by the Court of Appeal that the group of companies should in the

circumstances of this case be treated as a single trading unit. Accordingly substantial

compensation should be paid. Shaw L J said that too legalistic a view should not be

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adopted. The exact facts of the case should be considered. ‘The respective roles

which the companies filled’ had to be borne in mind. ‘No abuse is precluded by

disregarding the bonds which bundled DHN and Bronze together in a close and, as

far as Bronze was concerned, indissoluble relationship.’

(Again, this decision is hard to reconcile with that in Salomon’s case).

4) Enemy-ownership or unlawful purpose

The courts are prepared to lift the veil of incorporation so as to reveal that the

company is enemy-owned in wartime as illustrated below.

Daimler Co. Limited V Continental Tyre and Rubber Co. (Great Britain) Ltd (1916)

All but one of the shares in the Continental Tyre Co. were owned by persons

resident in Germany. All its directors were resident in Germany. The question arose

whether such a company had sufficient standing, at a time when England and

Germany were at war, to bring proceedings in the English courts for recovery of a

debt.

It was held by the House of Lords that the veil of incorporation should be lifted to

reveal the true nature of the company and expose the fact that it was German owned

and controlled notwithstanding that it was incorporated in England. Accordingly the

company could not bring proceedings in the English courts. Lord Parker of

Waddington thought that an English company could in the circumstances of this

case assume an enemy character. ‘This will be the case if its agents or the persons in

de facto control of its affairs, whether authorized or not, are resident in an enemy

country, or, wherever resident, are adhering to the enemy or taking instructions from

or acting under the control of enemies.’ He went on to say that ‘a company

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registered in the United Kingdom, but carrying on business in a neutral country

through agents properly authorized and resident here or in the neutral country, is

prima facie to be regarded as a friend, but may, through its agents or persons in de

facto control of its affairs acquire an enemy character.’

The courts will likewise lift the veil of incorporation to reveal an unlawful purpose.

Recently, in an unreported case, the court lifted the veil to show that a company had

been formed for the purpose of prostitution. In proceedings brought by the Attorney-

General, the court ordered that the company be struck off the register.

5) Trust cases

On occasions the courts will lift the veil of incorporation so as to reveal the

characteristics of a company’s shareholders.

Trebanog Working Men’s Club V MacDonald (1940)

The Trebanog Working Men’s Club was incorporated under the Industrial and

Provident Societies Act 1893-1913. It would buy alcoholic drink in its own name,

pay for it by cheques drawn on a bank account which it maintained in its own name,

and then sell it to its members. It was charged in the criminal courts with selling

alcoholic liquor without a licence. Having been convicted before magistrates, it then

appealed to the Divisional Court.

The appeal was successful. The club was acquitted. The members of the club were

really the owners of the drink. Although the legal ownership of the drink was vested

in the club since the drink had been bought in the club’s name, the club was

nevertheless seen by the court as holding the drink as trustee for its members.

Accordingly, beneficial ownership of the drink was vested in the members, and so

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when the members bought drinks at the club there was no sale since they already

owned the drink.

Abbey, Malvern Wells Ltd v Ministry of Local Government and Planning (1951)

A school was carried on through the medium of a company in which the shares were

held by trustees on educational charitable trusts.

It was held by Dankwerts J that the veil of incorporation should be lifted so as to

impress upon the company’s assets the terms of the trusts.

6) Taxation

In many instances tax legislation will go behind the separate corporate personality of

the company e.g. in the case of close companies and groups of companies.

7) Company Legislation Generally

There are a number of instances where the Companies Acts lift the veil of

incorporation. Some of the more important of these are mentioned below:

a) Companies Act 1985, Section 24 – membership below two

If a company carries on business without having at least two members and

does so for more than six months, a person who, for the whole part or any

part of the period that it so carries on business after those six months, is a

member of the company and knows that it is carrying on business with only

one member, becomes liable (jointly and severally with the company) for the

payment of the debts of the company contracted during the period or, as the

case may be, that part of it).

b) Companies Act 1985, Section 229 – group accounts

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If at the end of its financial year a company has subsidiaries, the directors

must, as well as preparing individual accounts for that year, also prepare

group accounts, being accounts or statements which deal with the state of

affairs and profit or loss of the company and the subsidiaries.

c) Companies Act 1985, Section 349 – personal liability where company name not used

If an officer of a company or a person on its behalf signs or authorizes to be

signed on behalf of the company any bill of exchange, promissory note,

endorsement, cheque or order for money or goods in which the company’s

name is not mentioned in full he commits a criminal offence and also he

becomes personally liable to the holder of the bill etc. for the amount of it,

unless it is fully paid by the company. As for example, in:

Hendon V Adelman (1973)

The directors of L & R Agencies Limited signed a chque on behalf of the

company ‘L R Agencies Limited’. The ampersand was missing from the

company’s name. The company’s bank failed to honour the cheque.

It was held that the directors were personally liable.

d) Insolvency Act 1986, Section 213 – fraudulent trading

If in the course of the winding-up of a company it appears that any business

of the company has been carried on with intent to defraud creditors of the

company or creditors of any other person, or for any other fraudulent

purpose, the liquidator may apply to the court for a declaration that any

persons who were knowingly parties to the carrying on of the business in

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such manner should be liable to contribute as the court thinks proper to the

assets of the company.

e) Insolvency Act 1986, Section 214 – wrongful trading

If in the course of a winding-up of a company it appears that the company has

gone into insolvent liquidation and at some time before the commencement

of the winding-up a director knew or ought to have concluded that there was

no reasonable prospect that the company would avoid going into insolvent

liquidation, the liquidator may apply to the court for a declaration that such

director should be liable to contribute as the court thinks proper to the assets

of the company. The director has a defence in such proceedings if he can

show that he took every step with a view to minimizing the potential loss to

the company’s creditors as he ought to have taken assuming him to have

known that there was no reasonable prospect that the company would avoid

going into insolvent liquidation.

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SUMMARY

In this chapter, we have seen that companies may be categorized as unlimited or limited by

shares or by guarantee; as public or private; or as members of a group. The definitive

category is that of public companies.

Once a company has come into existence it acquires a personality separate from that of its

members. At that stage, it can do most things that a human can do. Furthermore, its

members, being separate from the company, may have the advantage of limited liability.

That is, their liability for the company’s debts is limited to the amount, if any, unpaid on

their shares.

The veil of incorporation between a company and its members, however, may cause

difficulties or may be sued as a vehicle for fraud. The courts, therefore, are prepared to go

behind the veil in certain circumstances and to look at the reality of the company’s

ownership. This is known as ‘lifting the veil’. As we have seen, there is no general principle

which can be applied to cases where the courts are prepared to do this. They are policy

decisions, although many of them are based on the court’s reluctance to allow the veil of

incorporation to be used to cause harm to people outside the company or to company

members or even to the company itself.

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REMEDIES OF SHAREHOLDERS

Today we are going to examine the ways in which shareholders who are dissastisfied with the

way in which their company is being run can obtain a remedy. The redress of shareholder’s

grievances can be achieved in two principal ways, either by way of an action permitted by the

courts or by proceedings taken under the Companies Ordinance, 1984. First, however, it is

necessary to look at the instances where an individual shareholder can obtain remedy in context.

The Rule in Foss V Harbottle (1943)

It will be recalled that under the doctrine of incorporation once a company has been formed it is

a separate legal person in its own right. This was the reasoning behind the judgment in Salomon

v Salomon & Co. Ltd. As a separate legal entity in its own right, a company can make contracts,

own property and participate in legal proceedings. Within companies there is a general principle

of majority rule. In other words if the majority shareholders decide to follow a particular course

of action there is nothing that minority shareholders can do to challenge this. This is particularly

important where there is a company in which the directors own the majority of the shares but

where there are minority shareholders.

The facts of Foss v Harbottle

Two minority shareholders in a company brought an action against the company’s directors

alleging that certain assets of the company had been misapplied by the directors and that the

directors had improperly created mortgages over some of the company’s property. It was held

that the shareholders were not competent to act as plaintiffs in these proceedings. When a wrong

is done to a company, the proper plaintiffs in any action to remedy that wrong is the company

itself.

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Reasons for the rule

The following reasons are usually given for the rule in Foss v Harbottle:

1. It asserts the separate legal personality of the company. When a wrong is done to the

company, the proper person to sue to remedy the situation is the company itself. For

example, since directors’ duties are owed to the company, the proper plaintiff in any

action to enforce those duties is the company itself.

2. It prevents futile litigation.

Exceptions to the rule in Foss v Harbottle

The rule which provides that the company is the proper complainants in any action concerning a

wrong done to itself is essentially a procedural rule. As such it will not be allowed to result in

injustice and so there are a number of exceptions to it. These exceptions are as follows:

(1) Where the act complained of is illegal or ultra vires. An example of this arose in the

case of Parke v Daily News where, it will be recalled, a shareholder obtained a

declaration from the court that ex gratia redundancy payments being made by the

company were ultra vires and so the directors should be restrained from paying

them.

(2) Where the act complained of constitutes a fraud by the majority of the members on

minority shareholders. An example of fraud is where directors of a company divert

profitable contracts from the company and take the benefit of them themselves. For

example, in Cook v Deeks Directors who were controlling shareholders of the

company negotiated a contract in the name of the company. They then took the

contract in their own names. A minority shareholder was permitted to sue the

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directors on behalf of the company to compel them to account to the company for

their profits.

It is important to distinguish between the situation where the directors are fraudulent from

that where they are merely negligent. As a general rule a minority shareholders’ action

cannot be brought if the directors are simply negligent.

However, this is not so where the negligence of the directors results in a benefit to the

directors. Where negligence results in a benefit to the directors then such conduct may

amount to a fraud on the minority.

The nature of an action brought by a shareholder

An action brought by a a shareholder may take one of two forms. It may be a derivative

action or it may be a representative action. The former is a procedural device allowing the

aggrieved shareholder to sue in the name of the company. In other words, his right to sue

derives from the company. Before the court will allow such an action to be brought, it must

be satisfied that the plaintiff is a proper person to bring the action. If, for example, a

shareholder’s conduct is in some way tainted, then he may not bring an action.

The alternative remedy

Initially the principal remedy available to a shareholder who was dissatisfied with the way in

which the company was being run was either to sell his shares (if there was an available

market) or to petition for the company to be wound up. It was thought that there should be

some other remedy available which would have the effect of allowing the court to make

whatever order it thought fit in order to grant relief in respect of the matters complained of.

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This remedy is now to be found in section 290 of the Companies Ordinance, 1984. It is

frequently referred to as ‘the alternative remedy’, and in this context the word ‘alternative’

means that the remedy in section 290 is an alternative to a formal winding up of the

company.

Ground for the action under section 290

Any member or members holding not less than 20% of issued share capital or the Registrar

is of the opinion that the affairs of the company are being conducted in an unlawful or

fraudulent manner or in a manner oppressive to the members or are being conducted in a

manner prejudicial to the public interest may apply to the High Court under section 290 of

the Companies Ordinance, 1984.

The Principle of Majority Rule

The time-honoured and democratic principle of majority rule, backed by these other factors,

necessarily means that quite substantial power is placed in the hands of those who control

more than half of the votes on the board or at a shareholders’ meeting – and, indeed, where

shares are widely dispersed among a large number of members, comparable power can be

wielded with command of a good deal less than 51% of the votes. Minority members must,

in principle, accept the decisions of the majority and must also acknowledge that the power

lawfully enjoyed by their more numerous brethren is a fact of business life. In theory it is, of

course, open to them to seek to bring about change by the normal democratic processes of

persuasion, lobbying, publicity and so on; and it may sometimes be appropriate to argue that

a shareholder who does not agree with the policy of those in control, should sell his shares

and invest his money elsewhere.

Section 410 – 415

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WINDING UP OF COMPANIES AND PRESENT PROCEDURE

In the winding up (or liquidation – the terms are synonymous) of a company it gives

up its business, sells off its assets, pays its debts (or, if it is insolvent, does so to the

extent that its funds allow) and distributes whatever surplus remains amongst its

shareholders or otherwise as its memorandum and articles of association may

provide.

The conduct of the winding up is placed by law in the hands of a liquidator; and on

his appointment the directors’ power to manage the business of the company lapses.

The company continues in being throughout the process of winding up: there is still a

corporate personality; and all corporate acts in the course of the liquidation, such as

the transfer of property and the institution of legal proceedings, are done in its name

rather than by the liquidator in his own name. The company ceases to exist only by

the formal act of dissolution after the whole of the winding up procedure has been

completed.

A company may be wound up compulsorily, i.e. by court order, or voluntarily, as a

consequence of a special resolution passed by the shareholders. In a compulsory

winding up, the liquidator is appointed by the court and is in law regarded as an

officer of the court acting under its direction and control. In a voluntary winding up,

the liquidator is appointed by the shareholders if the directors are able to declare that

the company is solvent; if not, the company’s creditors have the power of

appointment and exercise general control over the conduct of the liquidation.

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Introduction

We have now come to examine the winding up of a company. Sometimes this is referred to

as liquidation and the two words are interchangeable. A winding up goes through three

distinct stages

(a) the commencement and appointment of the liquidator,

(b) the calling in of the assets; and

(c) the distribution of the assets.

The winding up of a company has to be distinguished from the dissolution of a company.

Dissolution is the actual striking off of the company from the records of the Registrar of

Companies. Winding up is the process which precedes this. The corporate status of the

company continues throughout the process of winding up. So in a sense we are looking at a

situation which is analogous to a human being being told that he is terminally ill. The

diagnosis of the illness, like the commencement of the winding up is not the end of life. This

continues until the moment of death.

Types of winding up:

There are various types of winding up. They are illustrated as under:

members’

Voluntary

creditors’Winding-up

Compulsory

The broad division is between compulsory and voluntary. The compulsory winding up

commences by way of a court order following a petition for such an order being presented

by someone, usually a creditor or a member of the company. A voluntary winding up is

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commenced by a resolution of the members. The court has no involvement in the

commencement of such a winding up. The division of voluntary winding up into members’

voluntary and creditors’ voluntary reflects the control of the winding up. In a members’

voluntary winding up, the liquidator is appointed by the members. In a creditors’ voluntary

winding up, he is usually appointed by the creditors. Obviously, whoever makes the

appointment has some degree of control over the liquidator.

VOLUNTARY WINDING UP:

There are two circumstances in which a company may be wound up voluntarily:

(1) When the company has been formed for a fixed time or for a specific purpose, it

may be wound up following an ordinary resolution passed by the members in

general meeting when that time has expired or the purpose has been achieved.

(2) When the company resolves by special resolution that it should be wound up

voluntarily.

Ground (1) is very seldom encountered in practice. Companies are very seldom

formed for a set period of time or for a single purpose. Because of the initial cost of setting

up a company, they are almost always looked upon as continuing entities.

Consequences of a winding up resolution:

The passing of a resolution to wind up the company has the following effects:

(1) The company must cease to carry on its business except insofar as may be required

for its beneficial winding up.

(2) However, the corporate state and corporate powers of the company continue until the

company is dissolved.

(3) Any transfer of shares made other than with the sanction of the liquidator is void.

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S- 358

S- 360

(4) Upon the appointment of a liquidator, all the powers of the directors cease.

(5) Within ten days of the passing of the resolution, the company must give notice of it

in the Official Gazette.

Declaration of solvency:

The significant difference between a members’ and a creditors’ voluntary winding up is that

in a members’ voluntary winding up the company is solvent and in a creditors’ voluntary

winding up it is insolvent. In a members’ voluntary winding up, the liquidator is appointed

by the members. Thus, this mode of winding up is favoured by the directors since their

conduct is likely to be less vigorously investigated by the liquidator than if he were the

creditors’ nominee.

The declaration must state that the directors have made a full enquiry into the company’s

affairs and that, having done so, they have formed the opinion that the company has no debts

or it will be able to pay all its debts in full within a period not exceeding 12 months from the

passing of the resolution. The resolution must be made within the five weeks immediately

prior to the passing of the resolution and must contain a statement of the company’s assets

and liabilities as at the latest practicable date prior to the making of the declaration. A

director making such a declaration without having reasonable grounds for the opinion that

the company will be able to pay its debts in full as stated commits a criminal offence as he

shall be punishable with imprisonment for a term of six months.

A winding up following the making of a director’s declaration of solvency is known as a

members’ voluntary winding up and a winding up where no such declaration has been made

is known as a creditors’ voluntary winding up.

Appointment of the liquidator in a members’ voluntary winding up:

In a members’ voluntary winding up the liquidator is appointed by the members in general

meeting. Thus, the procedure for a members’ voluntary winding up is as follows:

(1) directors enquire into the affairs of the company,

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(2) directors make a declaration of solvency,

(3) a general meeting of the company is convened for passing a special resolution

putting the company into liquidation and appointing a liquidator,

(4) The powers of the directors cease and the liquidator proceeds with the winding

up of the company.

In the event of a vacancy occurring in the office of liquidator, whether by death, resignation

or otherwise, the company in general meeting may appoint a person who has given his

written consent to act as liquidator.

Appointment of a liquidator in a creditors’ voluntary winding up:

The procedure where there is no declaration of solvency. The company shall call a meeting

of its creditors for the day, or the day next following day on which the resolution for a

voluntary winding up is to be passed. The company shall cause notice of the meeting of

creditors to be advertised in the manner specified in Section 361.

The directors and chief executive must draw up a statement of the affairs of the company

which they must lay before the creditors’ meeting.

Powers of the liquidator in a voluntary winding up:

The liquidator in a voluntary winding can exercise the following powers without sanction

(either of the court or the creditors):

(1) Bring or defend any action or any other legal proceedings on behalf of the

company.

(2) Carry on the business of the company so far as is necessary for its beneficial

winding up.

(3) Sell any of the company’s property by public auction or private contract.

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(4) Carry out all acts and execute in the name and on behalf of the company all

deeds, receipts and other documents and to use, where necessary, the company’s

seal.

Compulsory liquidation after commencement of voluntary liquidation:

A voluntary liquidation does not prevent any creditor or contributory applying to have it

wound up by the court. Before the court will make an order in these circumstances it must

be satisfied that there are sound reasons as to why a voluntary winding up is inappropriate in

the circumstances. This might, for example, be the case where there is no liquidator acting

or he is found to have some personal interest in the company other than by reason simply of

his appointment. When a compulsory winding up follows a voluntary winding up, all

proceedings taken in the voluntary winding up are treated as having been validly taken

unless the court, on proof of fraud or mistake, directs otherwise.

COMPULSORY WINDING UP

Introduction:

In this method of winding up, a liquidator is appointed. This is, of course, a far more

expensive way of starting a winding up than the voluntary winding up. The respondent in

any case for a compulsory winding up order is always the company and, therefore, since the

company bears the costs there will be less money at the end of the day for creditors having a

claim against it.

In spite of this, a compulsory winding up enjoys advantages over a voluntary one in certain

circumstances. For example, a compulsory winding up is deemed to commence at the

presentation of the petition. On the other hand, a voluntary winding up is deemed to

commence, at the time of the passing of the resolution. It is sometimes preferable for the

winding up to be compulsory rather than voluntary because of the earlier commencement.

Another advantage of the compulsory winding up, in certain circumstances, is that there are

wider investigative powers available in the former which may be useful in the event of the

directors having acted wrongfully.

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Grounds for a compulsory winding up:

The grounds on which a petition may be presented are as follows:-

(1) if the company has, by special resolution, resolved that the company be wound

up by the Court;

(2) if default is made in delivering the statutory report to the registrar or in holding

the statutory meeting or any two consecutive annual general meetings;

(3) if the company does not commence its business within a year from its

incorporation, or suspends its business for a whole year;

(4) if the number of members is reduced, in the case of private company, below two

or, in the case of any other company below seven;

(5) if the company is unable to pay its debts;

(6) if the company is:-

(i) convinced or brought forth for, or is or has been carrying on, unlawful or

fraudulent activities;

(ii) carrying on business not authorized by the memorandum;

(iii) conducting its business in a manner oppressive to any of its members or

persons concerned with the formation or promotion of the company or the

minority shareholders;

(iv) run and managed by persons who fail to maintain proper and true

accounts, or commit fraud, misfeasance or malfeasance in relation to the

company; or

(v) managed by persons who refuse to act according to the requirements of

the memorandum or articles or the provisions of this Ordinance or fail to

carry out the directions or decisions of the Court or the registrar or the

Commission given in the exercise of powers under this Ordinance;

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(7) if, being a listed company, it ceases to be such company;

(8) if the Court is of opinion that it is just and equitable that the company should be

wound up; or

(9) if the company ceases to have a member.

Explanation: The promotion or the carrying on of any scheme or business, except the business carried on under the provisions of the Insurance Act, 1938, howsoever described, whereby, in return for a deposit or contribution, whether periodically or otherwise, of a sum of money in cash or by means of coupons, certificates tickets or other documents, right or benefit, directly or indirectly, and whether with or without any other right or benefit, determined by chance or lottery or any other like manner, is assured or promised shall be deemed to be an unlawful activity.

Inability to pay debts: [Section 306(1)]

(1) The most common ground for a compulsory winding up order in practice is that a

company cannot pay its debts. It occurs:

(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a

sum exceeding one per cent of its paid-up capital or fifty thousand rupees,

whichever is less, than due, has served on the company, by causing the same

to be delivered by registered post or otherwise, at its registered office, a

demand under his hand requiring the company to pay the sum so due and the

company has for thirty days thereafter neglected to pay the sum, or to secure

or compound for it to the reasonable satisfaction of the creditor; or

(b) if execution or other process issued on a decree or order of any court or any other

competent authority in favour of a creditor of the company is returned

unsatisfied in whole or in part; or

(c) if it is proved to the satisfaction of the court that the company is unable to pay its

debts, and, in determining whether a company is unable to pay its debts, the

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Court shall take into account the contingent and prospective liabilities of the

company.

(2) The demand referred to in clause (a) of sub-section (1) shall be deemed to

have been duly given under the hand of the creditor if it is signed by an agent or

legal adviser duly authorized on his behalf, or in the case of a firm if it is signed by

such agent or legal adviser or by any member of the firm on behalf of the firm.

Provisions as to applications for winding up: (Section 309)

An application to the Court for the winding up of a company shall be by petition presented,

subject to the provisions of this section, either by the company, or by any creditor or

creditors (including any contingent or prospective creditor or creditors), or by any

contributory or contributories, or by all or any of the aforesaid parties, together or

separately, or by the registrar, or by the Commission or by a person authorized by the

Commission in that behalf:

Provided that:-

(1) a contributory shall not be entitled to present a petition for winding up a

company unless:-

(i) either the number of members is reduced, in the case of a private

company, below two, or, in the case of any other company, below seven; or

(ii) the shares in respect of which he is a contributory or some of them either

were originally allotted to him or have been held by him, and registered in his

name, for at least six months during the eighteen months before the

commencement of the winding up, or have devolved on him through the

death of a former holder;

(2) the registrar shall not be entitled to present a petition for the winding up of a

company unless the previous sanction of the Commission has been obtained to the

presentation of the petition:

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Provided that no such sanction shall be given unless the company has

first been afforded an opportunity of making a representation and of being

heard;

(3) the Commission or a person authorized by the Commission in that behalf shall

not be entitled to present a petition for the winding up of a company unless an

investigation into the affairs of the company has revealed that it was formed for any

fraudulent or unlawful purpose or that it is carrying on a business no authorized by

its memorandum or that its business is being conducted in a manner oppressive to

any of its members or persons concerned in the formation of the company or that its

management has been guilty or fraud, misfeasance or other misconduct towards the

company or towards any of its members; and such petition shall not be presented or

authorized to be presented by the Commission unless the company has been afforded

an opportunity of making a representation and of being heard;

(4) the Court shall not give a hearing to a petition for winding up a company by a

contingent or prospective creditor until such reasonable and until a prima facie case

for winding up has been established to the satisfaction of the Court;

(5) the Court shall not give a hearing to a petition for winding up a company by the

company until the company has furnished with its petition, in the prescribed manner,

the particulars of its assets and liabilities and business operations and the suits or

proceedings pending against it.

Suits stayed on winding up order: (Section 316)

(1) When a winding up order has been made or provisional manager has been

appointed, no suit or other legal proceeding shall be proceeded with or commenced

against the company except by leave of the Court, and subject to such terms as the

Court may impose.

(2) The Court which is winding up the company shall, notwithstanding anything

contained in any other law for the time being in force, have jurisdiction to entertain,

or dispose of, any suit or proceeding by or against the company.

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(3) Any suit or proceeding by or against the company which is pending in any court

other than that in which the winding up of the company is proceeding may,

notwithstanding anything contained in any other law for the time being in force, be

transferred to and disposed of by the Court.

Remuneration of official liquidator: (Section 323)

(1) An official liquidator, not being a salaried officer of Government or of the Court,

shall be entitled to such remuneration by way of percentage of the amount realized

by him by disposal of assets or otherwise as may be fixed by the Court having regard

to the amount and nature of the work actually done and subject to such limits as may

be prescribed:

Provided that different percentage rates may be fixed for different types of

assets and items.

(2) In addition to the remuneration payable under sub-section (1), the Court may

permit payment of a monthly allowance to the official liquidator for meeting the

expenses of the winding up for a period not exceeding twelve months from the date

of the winding up order.

(3) The remuneration fixed as aforesaid shall not be enhanced subsequently but may

be reduced by the Court at any time.

(4) If the official liquidator resigns, is removed from office or otherwise ceases to

hold office before conclusion of the winding up proceedings, he shall not be entitled

to any remuneration and the remuneration already received by him, if any, shall be

refunded by him to the company.

(5) No remuneration shall be payable to an official liquidator who fails to complete

the winding up proceedings within the prescribed period.

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Statement of affairs to be made to official liquidator:

(1) Where the Court has made a winding up order or appointed an official liquidator

or provisional manager, there shall be made out and submitted to the official

liquidator or provisional manager a statement as to the affairs of the company in the

prescribed form, verified by an affidavit, and containing the following particulars,

namely:-

(i) the assets of the company, stating separately the cash balance in hand and

at the bank, if any, and the negotiable securities, if any, held by the

company;

(ii) the debts and liabilities of the company;

(iii) the names, residences and occupations of the creditors of the company,

stating separately the amount of secured debts and unsecured debts, and,

in the case of secured debts, particulars of the securities given, their value

and the dates when they were given;

(iv) the debts due to the company and the names, residences and occupations

of the persons from whom they are due and the amount likely to be

realized therefrom;

(v) where any property of the company is not in its custody or possession, the

place where and the person in whose custody or possession such property

is;

(vi) full address of the places where the business of the company was

conducted during the six months preceding the relevant date and the

names and particulars of the persons incharge of the same;

(vii) details of any pending suits or proceedings in which the company is a

party; and

(viii) such other particulars as may be prescribed or as the Court may order or

the official liquidator or provisional manager may require in writing,

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including any information relating to secret reserves and personal assets

of directors.

(2) The statement shall be submitted and verified by persons who are at the relevant

date the directors and by the persons who are at that date the chief executive and

secretary of the company, or by such of the persons hereafter in this sub-section

mentioned as the official liquidator or provisional manager, subject to the direction

of the Court, may require to submit and verify the statement, that is to say, persons:-

(i) who are or have been directors, chief executives or officers of the

company within one year from the relevant date;

(ii) who have taken part in the formation of the company at anytime within

one year before the relevant date;

(iii) who are in the employment of the company, or have been in the

employment of the company within the said year, and are in the opinion

of the official liquidator or provisional manager capable of giving the

information required;

(iv) who are or have been within the said year officers of, or in the

employment of, a company which is, or within the said year was, an

officer of the company to which the statement relates.

(3) The statement shall be submitted within twenty-one days from the relevant date,

or within such extended time not exceeding forty-five days from that date as the

official liquidator or provisional manager of the Court may, for special reasons,

appoint.

(4) Any person making, or concurring the making, the statement and affidavit

required by this section shall be allowed, and shall be paid by the official liquidator

or provisional manager, as the case may be, out of the assets of the company, such

costs and expenses incurred in and about the preparation and making of the statement

and affidavit as the official liquidator or provisional manager may consider

reasonable, subject to an appeal to the Court.

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(5) If any person, without reasonable excuse, makes default in complying with the

requirements of this section, he shall be liable to a fine not exceeding five hundred

rupees for every day during which the default continues.

(6) Without prejudice to the operation of any provisions imposing penalties in

respect of any such default as aforesaid, the Court which makes the winding up order

or appoints a provisional manager may take cognizance of an offence under sub-

section (5) and try the offence itself in accordance with the procedure laid down in

the Code of Criminal Procedure, 1898, for the trial of cases by Magistrates and

further direct the persons concerned to comply with the provisions of this section

within such time as may be specified by it.

(7) Any person stating himself in writing to be a creditor or contributory of the

company shall be entitled, by himself or by his agent, at all reasonable times, on

payment of the prescribed fee, to inspect the statement submitted in pursuance of this

section, and to a copy thereof or extract therefrom.

(8) Any person untruthfully so stating himself to be a creditor or contributory shall

by guilty of an offence under section 182 of the Pakistan Penal Code, 1860, and

shall, on the application of the official liquidator or provisional manager, be

punishable application of the official liquidator or provisional manager, be

punishable accordingly.

(9) In this section, the expression “the relevant date” means, in a case where a

provisional manager is appointed, the date of his appointment, and, in a case where

no such appointment is made, the date of the winding up order.

Dissolution of company: (Section 350)

(1) When the affairs of a company have been completely wound up, or when the

Court is of the opinion that the official liquidator cannot proceed with the winding up

of the company and reasonable in the circumstances of the case that an order of

dissolution of the company be made, the Court shall make an order that the company

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be dissolved from the date of the order, and the company shall be dissolved

accordingly:

Provided that such dissolution of the company shall not extinguish

any right of, or debt due to, the company against or from any person.

(2) A copy of the order shall, within fifteen days of the making thereof, be forwarded

by the official liquidator to the registrar, who shall make in his books, a minute of

the dissolution of the company.

(3) If the official liquidator makes default in comply with the requirements of this

section, he shall be liable to a fine not exceeding one hundred rupees for every day

during which he is in default.

Relevant Provisions:

Section 326Section 387

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