Chapter #01 INTRODUCTION TO COMPANY & INCORPORATION

Question 1

What is Sole Trader?

Answer 1

1. An individual who owns and runs his or her own business.
2. The law does not recognize the business as a separate person.
3. The person is personally liable for debts of the business.

Question 2

What is Partnership?

Answer 2

1. Group of individuals who own and run thier own business.
2. The law does not recognize the partnership business as a separate person.
3. Partners are personally liable jointly with other partners for debts.

Question 3

What is Companies?

Answer 3

1.Capital of a company is represented by shares.
2.Ordinary shareholders are its owners.
3.Created by a process established by Companies Act 2017
4.Company is a legal person, separate from its owners.
(doctrine of corporate personality)
5.Companies are managed by their directors

Question 4

Distinguishing Feature of Company

Answer 4

1. Separate legal personality
   ▪ Company can enter into contracts with other persons
   ▪ A company owns its own assets
   ▪ A company is personally liable to pay tax on its income (profits).
2. Limited liability
   ▪ The liability of the owners of a company for the debts of the company is limited to the
   amount of their investment in the company.
3. Transfer of ownership and perpetual succession
   ▪ Any legal person can own shares in a company (even another company can own shares)
   ▪ Shareholders can transfer their share in the ownership of the company to someone else,
   ▪ It does not affect the legal status or legal existence of company.
   ▪ Company continues to exist (unaffected by change in ownership)

Question 5

Define Company.

Answer 5

A Company formed and registered under this Act or the company law.

Question 6

Company law

Answer 6

The repealed Companies Act(1935), Companies Ordinance, 1984, Companies Ordinance, 2016 and
also includes this Act unless the context provides otherwise

Question 7

Body corporate or Corporation

Answer 7

Body corporate or corporation includes
- a company incorporated under this Act or company law;
- a company incorporated outside Pakistan, or
- a body corporate declared as body corporate in the relevant statute
but does not include
- A co-operative society registered under any law relating to the registration of co-
operative societies; or
- Any other entity, not being a company as defined in this Act or any other law for the time
being which the concerned Minister of the Federal Government may, by notification,
specify in this behalf.

Question 8

Foreign company

Answer 8

Means any company or body corporate incorporated outside Pakistan, which:
- has a place of business or liaison office in Pakistan whether by itself or through an agent,
physically or through electronic mode; or
- conducts any business activity in Pakistan in any other manner as may be specified

Question 9

Companies limited by shares

Answer 9

Liability of its members is limited by the memorandum to the extent of amount, if any,
remaining unpaid on the shares respectively held by them.

Question 10

Companies limited by guarantee

Answer 10

Liability of owners is limited to the amount member guarantees to contribute in the event that
the company goes into liquidation
▪ The company may or may not have share capital
▪ If Company has share capital; Liability shall also include amount unpaid on shares (if any)

Question 11

Unlimited Companies

Answer 11

A company not having any limit on the liability of its members
(This has all advantages of a normal company except limited liability)

Question 12

Public Company
Also listed company & unlisted company

Answer 12

A company which is not a private company

1. Listed Company:

Whose securities are listed on stock exchange and are traded on it

2. Unlisted Company:

Whose securities are not listed on stock exchange

Question 13

Private Company other than single Member Company?

Answer 13

Company can be registered by at least two members and it restricts
▪ Maximum number of members to 50
(members jointly holding shares shall be counted as 1 member)
▪ Right to transfer the shares by its members (save as otherwise provided in act),
▪ Invitation of subscriptions from general public for its shares debentures or
Redeemable capital.

Question 14

Single Member Company?

Answer 14

Which consists of a single member who is director of the company.
[In these companies (SMC-PVT) Limited is added to the name]

Question 15

Holding Company?

Answer 15

Means a company which is another company‘s holding company if, but only if, that other
company is its subsidiary.

Question 16

Wholly owned subsidiary?

Answer 16

A company shall be deemed to be a wholly owned subsidiary of another company or the
statutory body if all its shares are owned by that other company or the statutory body.

Question 17

Subsidiary Company

Answer 17

The company in which the holding company:
▪ Exercise or controls more than one-half of its voting securities either by itself or together
with one or more of its subsidiary companies; or
▪ Holds the Composition of the Board;
(can appoint or remove all or a majority of directors by exercise of power available to it)

Notes:

• Subsidiary of a subsidiary company would also be considered subsidiary company of
  the main holding company
• The expression “company” includes any body corporate and “layer” in relation to a
  holding company means its subsidiary or subsidiaries.
• Such class or classes of holding companies shall not have layers of subsidiaries beyond
  such numbers, as may be notified.

Question 18

Public Sector Company?

Answer 18

A company, whether public or private, which is directly or indirectly controlled, beneficially
owned or not less than 51% of the voting securities or voting power of which are held by the
Government or any agency of the Government or a statutory body, or in respect of which the
Government or any agency of the Government or a statutory body, has otherwise power to
elect, nominate or appoint majority of its directors and includes a public sector association not
for profit, licenced by the SECP:
Provided that nomination of directors by the Commission on the board of the securities exchange
or any other entity or operation of any other law shall not make it a public sector company.

Question 19

SECP (Securities & Exchange Commission of Pakistan)

Answer 19

SECP (Securities & Exchange Commission of Pakistan)

▪ SECP was operationalized on 1st January 1999.
▪ SECP replaced Corporate Law Authority
▪ SECP’s head office is at Federal Capital, Islamabad
▪ SECP has 8 regional offices
- 1 at Federal Capital
- 4at provincial capitals
- 3 in other major cities i.e. Multan, Faisalabad and Sukkur.
(Tutor Note: For ease of memorizing you can say PSL cities + Faisalabad & Sukkhar)
▪ SECP regulate the affairs of Companies, Insurance Companies, Banking Companies,
Modarbas & Non-Banking Finance Companies
▪ Law has vested various powers to SECP
- SECP has been given lot of powers under Companies Act
- SECP is also empowered by SECP Act, 1997 to exercise many powers and functions.

Question 20

Define Registrar?
Also power and duties of Registrar.

Answer 20

Means a registrar, an additional registrar, an additional joint registrar, a joint registrar, a
deputy registrar, an assistant registrar or such other officer as may be designated by SECP,
performing duties and functions under this Act.

Power and Duties

▪ Registration of companies
▪ Receiving various documents under the Act.
▪ Keeps track of company routine documents
▪ He keeps the record of mortgages and charges (explained in a further chapter)
▪ Can call the officers of company for information and explanations
▪ Empowered to inspect the books and records of the company.
▪ May seize the books and records, if think necessary

Question 21

Obligation to register certain associations, partnerships as companies (Sec 9) and it’s exceptions

Answer 21

No association, partnership or entity of more than 20 persons shall be formed for carrying on
any business (for gain) without registration as company under the Companies Act 2017.
▪ Penalty = Level 1 + personally liable for all liabilities incurred.

Exceptions

▪ Any society, body or association, other than a partnership, formed or incorporated under
any other Pakistan law; or
▪ A joint family carrying on joint family business; or
▪ A partnership of two or more joint families where the total number of members of such
families, excluding the minor members, does not exceed twenty; or
▪ A partnership formed to carry on practice as lawyers, accountants or any other profession
where practice as limited liability Co not permitted under relevant laws / regulations

Question 22

Mode of forming a company.
Also discuss special requirements of SMC (PVT) Ltd.
Also discuss if legal hires more than one what procedure will follow.

Answer 22

Following number of persons associated for lawful purpose may, by subscribing their names
to MOA and complying requirements of this Act in respect of registration, form a company:
▪ For Public Companies: 3 or more
▪ For Private companies: 2 or more
▪ For Single Member Company: 1 Person

For SMC, subscriber to MOA shall nominate a person who in the event of death of the sole
member shall be responsible to:
▪ Transfer the shares to legal heirs subject to succession under Islamic law of inheritance
(in case of a non-Muslim members, as per their respective law); and
▪ Manage the affairs of company as a trustee, till such time the title of shares are transferred.

If transfer is made to more than 1 legal heir, company shall cease to be a SMC and shall follow
the process of conversion to a private company.

Question 23

Step of incorporation of Company.

Answer 23

▪ Getting availability of suitable name from registrar
▪ Preparing MOA and AOA with supporting documents
▪ Filing documents (along with application for registration) with registrar
▪ Obtaining the “certificate of incorporation” of company

Question 24

Registration of MOA and AOA

Answer 24

▪ A declaration of compliance shall also be filed with MOA & AOA
(Compliance with requirements regarding incorporation of Co)
▪ Registrar shall register MOA & AOA only if it satisfied that
- Company is being formed for lawful purposes,
- All requirements of this Act and associated rules have been complied with
▪ If registrar think that any document or information contains any matter contrary to law or
is not complete
- He may require revised document or to remove deficiencies within specified period.
- If applicant fails to remove deficiencies, registrar may refuse registration of company
- Co may file an appeal before SECP within 30 days of refusal.
- Order of SECP, on such appeal, shall be final.

Question 25

Certificate of Incorporation

Answer 25

▪ Registrar shall issue certificate of registration signed by him. ▪ The certificate of incorporation shall state - Name and registration number of company; - Date of its incorporation; - Whether it is a private or a public company; - Whether it is a limited (shares or guarantee) or unlimited;

Question 26

Effect of registration of Company

Answer 26

▪ Subscribers to MOA and subsequent members are now a company by the name stated in the certificate of incorporation; ▪ It is capable of exercising all the functions of an incorporated company, having perpetual succession ▪ Status and registered office are as stated in application ▪ Subscribers become holders of initial shares (if applicable) ▪ Persons named in AOA as proposed directors are appointed.

Question 27

Liability for carrying on business with less minimum members (sec 15)

Answer 27

If number of members of a company is reduced below minimum number of members: - Private company other than a single member company 2 members - Any other company 3 members and the company carries on business for more than 180 days while, every person who is a member during the time that it so carries on business after those 180 days shall be severally liable for payment of whole debts of company contracted during that time and may be sued therefore without joinder in the suit of any other member (provided that member(s) is in knowledge of the fact)

Question 28

LAW AND GOVERNANCE OF A COMPANY

Answer 28

Relevant Law: Companies are created by a process established by Companies Act, 2017 Memorandum of association (MOA): Constitutional document that focuses on external stakeholders is called memorandum of association Articles of association (AOA): Bye-laws which focuses on internal procedures of company

Question 29

Define Members.

Answer 29

Subscribers to memorandum of association are deemed to have agreed to become members of the company and become members on its registration and every other person- - to whom is allotted, or who becomes the holder of any class or kind of shares; or - in relation to a company not having a share capital, any person who has agreed to become a member of the company; and whose names are entered; in the register of members, are members of the company.

Question 30

Under which conditions SECP shall grant license to Not for profit association registered as company having not include ending words limited?

Answer 30

SECP shall grant license if following conditions are fulfilled: ▪ Shall choose any of the following purposes (mnemonic for cramming: “CSS RESEARCH”) - Commerce - Science - Social Welfare - Research - Education - Sports - Environment Protection - Arts - Religion - Charity - Health - Any other useful object ▪ It shall apply its profits (if any) in promoting its objects ▪ It shall prohibit the payment of any dividend to its members and ▪ Its objects and activities are not and shall not, at any time, be against the laws, public order, security, sovereignty and national interests of Pakistan SECP shall grant license on such conditions and subject to such regulations as it thinks fit. Association shall enjoy all privileges of a limited company and be subject to all its obligations, except using the ending word(s) "Limited" or "(Guarantee) Limited" License may be revoked at any time by SCEP ▪ SECP shall give a notice in writing to Co, of its intention to do so ▪ SECP shall provide an opportunity to be heard to the association. On revocation, registrar shall again add the ending words and it shall cease to enjoy exemptions and privileges granted by license.

Question 31

Conditions for Revocation of the Licence of not for profit association

Answer 31

▪ Company/management has failed to comply with any terms or conditions of licence; ▪ Any of the requirements of this section or any connected regulations are not met; ▪ Affairs of company are conducted in a manner prejudicial to public interest; or ▪ Company has made a default in filing with registrar its financial statements or annual returns for immediately preceding 2 consecutive financial years; ▪ Company has acted against the interest, sovereignty and integrity of Pakistan, the security of the State and friendly relations with foreign States; ▪ Number of members is reduced, below 3; ▪ The company is - Conceived or brought forth for unlawful or fraudulent activities; - Run and managed by persons who fail to maintain proper and true accounts or they commit fraud, misfeasance or malfeasance in relation to the company; - Run and managed by persons involved in terrorist financing or money laundering; - Managed by persons who refuse to act according to MOA or AOA or provisions of this Act or failed to carry out directions or decisions of SECP or the registrar; or - Not carrying on its business or is not in operation for 1 year; or ▪ It is just and equitable that the licence should be revoked:

Question 32

Effect of revocation of Licence of not for profit association

Answer 32

▪ Company shall stop all its activities except the recovery of money owed to it, if any; ▪ Company shall not solicit or receive donations from any source; and ▪ All the net assets of the company shall, in a specified manner, be transferred to another company licensed u/s 42, preferably having similar or identical objects, within 90 days of revocation or any extended period (if allowed by the SECP) ▪ A reasonable amount to meet expenses of voluntary winding up or making an application to the registrar for striking off the name may be retained by the company. ▪ After such transfer, the members and officers of the first company or any of their family members shall not be eligible to hold any office in later company for next 5 years. ▪ After compliance of above requirements, BOD shall file within 15 days, a report to registrar containing such information and documents as may be specified. ▪ Within 30 days of acceptance of the report by registrar BOD shall - Initiate necessary proceedings for voluntary winding up; or - Make an application to registrar for striking the name of company off the register (if it has no assets and liabilities) ▪ If requirements not complied with on a timely basis; SECP may appoint an administrator to manage affairs of company and initiate proceedings for winding up.