Formation of company-ll Company:

Company Promotes
Meaning: promoter a person who conceives the idea of starting a fresh Promoter
business plans the necessary preliminary work incident of to the company in short
promoter is a person who volunters to bring a company into existence Thus to
designate a person as promoter the only requirement is that he should take all the
necc8sary steps for the formation of a company. gain a promoter may be an
individual a partnership firm an association or a limited company.
That may be a number of promoters for a company e.g:
!a" Persons who give instructions for the preparation of memorandum and articles
of association
!b" Persons who obtains the directors
!c" Persons who prepare prospectus
!d" Persons who negotiate underwriting contracts and contracts for purchase of
property# procure capital.
Functions of promoters:
$. %onceive idea of forming a company and to explore its possibilities.
&. 'et together a number of persons who may sign the memorandum of
association and act as its first directors.
(. )ettle the name of the company the amount and form of its capital and
to arrange for underwriting.
*. )ettle banks# auditors# brokers and legal advisers.
+. ,ave the memorandum and articles of association and prospectus
drafted.
Legal status: promoter occupies an important position as he is involved in forming
and bringing the company into existence. ,e has wide powers and liabilities. Thus a
promoter has a legal relationship with the proposed company. ,e stands in a fiduciary
relationship towards the company the promotes. The position of a promoter is clearly
reflected in the following case:
Promoter Agent or Trustee:
promoter is neither an agent nor the trustee of again# he is not a trustee because.
There is no trust in existence although a promoter is not an agent or trustee of the
company before its formation registration and issuance of certificate of incorporation
yet his responsibilities are those of an agent and trustee.
Duties and obligations of promoters
promoter standing in fiduciary relationship towards the company which he
is bringing into existence he becomes bound to perform all the duties and obligations
imposed on him by such relationship. )o his duties and obligates and.
$. Promoter must not make directly or indirectly any secret
profit at the expense of the company.
&. Promote must disclose full material facts relating to the
formation of the company.
(. Promoter must disclose full facts about his own
property which he intends to sell to the company as follows:
Duties
-ot to make secret profit disclose material facts fact about sale own property unfair
use of position must act honestly
Liabilities of promoters
.iability to disclose
.iability for secret profits
%o/promoters
Remuneration of promoters
promoter has no right to demand from the company after its incorporation
any remuneration for his services rendered in connection with the formation of such
company.
The usual ways of remuneration of promoters are
$. grant of some shares of the company.
&. grant payment of commission on shares sold by the
company
(. 'iven option to buy shares at part when marker price is
higher
*. Payment of commission on property purchased through
him.
Memorandum of Association-l
Law as to memorandum
!at is Memorandum
The memorandum of association is the charter of incorporation of company and is so
to say a statutory decd of partnership. 0t contains the fundamental conditions upon
which alone the company is granted incorporation. 0t lays doesn1t the powers and
ob2ects of the company and the scope of operations beyond which its actions cannot
go The company is bound to act according to the ob2ects and powers taken in the
memorandum all actions of the company beyond such provisions are ultra virus
memorandum regulated the company1s external affairs i.e. the relationship of the
company with outside world. 0t informs all persons what the company is formed to do
and what capital it has to play with.
Purpose of memorandum
The main purpose of the memorandum is to enable shareholders creditors and all
those persons who deal with the company to know what are its powers and what is the
range of its actions. shareholder obtains a knowledge of the purposes for which his
investment would be utili3ed the risk involved. ll other persons dealing with the
company come to know whether their dealings are in relation to the matters within the
ob2ects of the company contents or %lauses of memorandum/section %ompany limited
by shares:
!$" -ame of the company
!&" Place of its registered office
!(" 4b2ects of the company
!*" .iability of members is limited
!+" uthori3e capital and division into shares
!5" ssociation clause and subscription )ection $5
$68* company limited by guarantee:
7hen having share capital:
!a" -ame of the company
!b" Place of registered office
!c" 4b2ects of establishing company
!d" .iability of the members
!e" mount of capital and the number of shares
!f" ssociation and subscription clause.
7hen -o share %apital:
8nlimited company:
!a" -ame of the company
!b" Place of registered office
!c" 4b2ects of the company
!d" ssociation and subscription clause.
9equirements of memorandum
Must be printed.
:ivided into paragraphs.
Paragraphs numbers.
)ignaturfe attested.
dd addresses etc.
7itnessed.
)tamped.
)igning and attestation of memorandum.
signature:the memorandun has to be signed by cach of the subscribers who must add
to his signatures:
!a" ,is name and surname in full any former name or surname in full.
!b" ,is occupation.
!c" ;ather name
!d" 0n the case of a married woman or widow her husband1s name in full
!e" ,is nationality of origin
!f" ,is usual residential address in full
8nder the law any person can sign the memorandum it has been held that the
following can sign memorandum:
!a" married woman a bankrupt a foreigner residing abroad.
!b" limited company.
!c" nominee of a person.
!d" n agent appointed by the subscriber.
!e" 9egistration of memorandum/section
9egistration: the memorandum of association is filed with the registrar in the
province or deceptive or part of Pakistan not forming part of province as the case
may be in which the registered office of the company is stated bt the
memorandum to be situate.section
0f the registrar is satisficd that is satisfied that none of the ob2ects stated in the
memorandum is inappropriate or deccptive or insufficiently expressive he shall
retain and register the memorandum.
"ffect of registration of memorandum
!a" The registrant certifies that the company is incorporated and that the company
is limited by share or by guarantee as the case may be.
!b" ;rom the date of incorporation the subscribers become members of the
company.
!c" The company becomes a body corporate by the name contained in the
memorandum.
!d" ll functions of an incorporated company can be exercised.
!e" The company en2oys perpetual succession and has a common seaf.
!f" The members have liability to contribute to the assets of the company in the
event of the being wound up.
Alteration of memorandum
The memorandum of association is the fundamental and most important document
of the company of the company under the law its alteration is not dependent on
the pleasure and sweet will of the members of the company. 0t can be altered only
by adopting the alteration procedure laid down $ in the company1s ordinance
preliminary discussion:
& )tock exchange requirements:
( consultations with vested interest:
* settlements with registrar:
+ notice or circular:
5 routine or meeting:
< share certificates:
8 resolutions:
#election of name
The general rule is that a company mayk select any name keeping in view the
restrictions imposed by section (< on the selection of company1s name.
$ name should not be undesirable.
& -ame should not be identical to another company1s name.
( -ame should not be prohibited by law.
* -ame should and both .imited.!private".imited.!'uarantee".imited.
+ the sound as well as spelling of the name must be considered.
5 The name should not lead to an assumption that the new company has absorbed an
existing company.
< The question in each case is one of facts le whether a confusion has arisen or will
arise.
$= new company can use a descriptive word even when the word is a word whose
use first adopted by the complaining company.
C!ange of name-section$
company# t any time during the course of its existence. May alter !ie change" its
registered name. The only requirement is that the change must be made in accordance
with the procedure prescribed by law.
)ummary of procedure is as follows:
!a" )pecial resolution is to be passed# sectiom(6.
!b" pproval of registrar is obtained in writing. )ection (6.
!c" pproval of registrar is not required when change involves addition or
deletion of word private on conversion of public into private or vice versa
section (6 provisos.
!d" -ew name is registered section *=!$"
!e" 9egistrar enters the new name in this records and issues a fresh certificate of
incorporation section *= !$"
!f" 7here a company has been registered with a name which is identical with the
name of an existing procedure:
$ by passing an ordinary resolution.
& by obtaining the approval of registrar.
Rectification of name-section
company which through inadvertence or otherwise is registered by a name in
contravention of section (<.
May with the approval of the registrar change its name and shall if the registrar so
direct within (= days of the receipt of such direction# change its name with thee
approval of the registrar.
Purpose of Registered office
The registered office of a company must be in existence as from the easy it begins to
carry on the business. 4r as from the twenty eight day after the date of its
incorporation# whichever is earlier. Thus a company must decide the province before
incorporation which is to be mentioned in the memorandum and the exact situation
immediately on the commencement of business or maximum within (= days of
incorporation.
%ecessity of registered office
The place of the situation of the registered office of a company mentioned in the
memorandum determines the company1s nationality and domicile. The domicile is
important as it fixes the in restriction of the courts in the legal actions are to be
brought by the company or against the company.
Address of registered office-section
The address of the registered office i.e. the name of the premises the name of street#
and the name of the city need not be set out in the memorandum but notice of the
address must be stated in another documents named notice of situation of registered
office.
C!ange of registered office-section
9egistered office of a company# according to section &$ may be altered changed in
any of the following situations:
!a" ;rom one place to another within the same city.
!b" ;rom one city to another within the same province.
!c" ;rom one province to another province.
!d" ;rom a part of Pakistan !not forming part of a province" to a province.
!e" ;rom a province to a part of Pakistan !not forming part of a province.
&b'ects of Company
(inds of ob'ects
The ob2ects of a company can be classified into !a" main ob2ects and !b" other
subsidiary ob2ects or powers as they may be termed.
Main ob'ects
The memorandum of association expresses the ob2ects of the company in a series of
paragraph and the first paragraph or the first two or three paragraphs usually embody
the main ob2ects of the company# all other paragraphs are treated as merely ancillary
to the main ob2ect and are limited to or controlled thereby.
)a* &b'ects s!ould be lawful$
4b2ects should not be against the provisions of companies ordinance
4b2ects should not be against general law of the land
4b2ects should not be against any other Pakistani law.
#ubsidiary ob'ects or powers:
part from the ob2ects strictly so called# the memorandum invariably sets ort a
number of powers which are reasonably conducive to the fulfillment of the ob2ects of
the company and many of them would probably be implied.
Prospectus of company
Definition of prospectus-section + )+,*:
ny document described for 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 whether described as prospectus or otherwise.
Features of prospectus:
;ollowing are the important features of prospectus
$. There must be an invitation to public.
&. 0nvitation must be to subscribe shares or debentures.
(. 0nvitation must be made by or on behalf of a company.
Legal rules re issue of prospectus:
Time of issue of prospectus
:ate of prospectus
%onsent of expert
9egistration of prospectus
Terms of %ontract not to be varid
0ssue of appliction form
%lasses of prospectus section +(:
Prospectus issued generally
Prospectus issued generally bur exempt from certain requirements.
Prospectus not issued generally.
)ignificance and importance of prospectus.
%ontents of prospectus
7ho are the directors and what benefit they get as such
Profit made by the promoters.
%apital required by the company in cash.
Past financial record of the company.
Preliminary contracts # commission and preliminary expenses.
>oting and dividend rights of each class of shares.
Matters and reports for prospectus:
Matter contained in part - of sc!edule --$
.eneral information
Memorandum of association
:erectors# chief executive secretary
Particulars of issue to public
Meetings and voting.
;inancial matters.
9equirements of prospectus section +(:
Matters and reports in prospectus section +(:
?very prospectus issued by or on behalf of a company or in relation to an intended
company must:
)tate the specified matters
)et out specified reports
The date of publication of the prospectus section +&.
4n the face of the prospectus:
)tate that a copy has been delivered to the registrar.
)pecify any document required to be endorsed on or to attached to such copy and.
)tate that an application to a stock exchange for listing of security has been made
section +< !*".
-o prospectus shall be issued by a listed company or would be listed company unless
the approval of the commission has been obtained with in 5= days preceding the date
of its issue section +<!$".
-o prospectus shall be issued unless a copy thereof has been delivered to the registrar
section +<!(".
Registration of prospectus section /0)/*:
copy of every prospectus before the date of publication must be delivered to the
registrar section +<!(". The prospectus must be accompanied by the consent in writing
of the person if any named therein as the auditor legal adviser attorney solicitor
banker or broker being a member of a stock exchange of the company to act in that
company +<!+". The registrar shall not register a prospectus unless the requirements
for section +&# +(# +*# ++# and +< have been complied with +< !+".
:ocuments endorsed or attached to prospectus section +< !(":
%onsent of an expert tot the issue of the prospectus section ++.
0n the case of a prospectus issued generally also.
copy of every contract# if reduced into writing.
0f such contract has not been reduced into writing a memorandum giving full
particulars thereof and.
7here the person making a report have made any ad2ustment a written statement
signed by that person setting out the ad2ustments and giving the resons therefore
section +<!(".
Liability of director regarding prospectus:
s regards any matter not disclosed# he proves that he had no knowledge therefore or
,e proves that the non/ compliance or contravention arose from an honest mistake of
fact on his part or
That non/ compliance or contravention was in respect of matters which in the opinion
of the registrar or officer dealing with the case# were immaterial and reasonably be
excused +<!(".
.rounds for defence against liability:
@efore the issue of prospectus he with drew his consent to act as director.
,e believed and had reasonable ground to believe upto the time of allotment that the
statement was true# or
)tatement was a correct and fair representation of an official statement or copy of or
extract from an official document section +6.
"1pert2s liability for M-# statement:
That he withdrew his consent in writing before delivery of the prospectus for
registration# or
That after delivery of a copy of the prospectus for registration and before allotment he
on becoming aware of the untrue statement withdrew his consent in writing and gave
reasonable public notice of the withdrawal and of the reason therefore# or
That he was competent to make the statement and had reasonable ground to believe
and did up to allotment believe that the statement was true section +6!(".
#TAT"M"%T &F L-"3 &F PR&#P"CT3#
Definition:
public document prepared in the form prescribed in the second schedule to
the companies ordinance by every such public company which does not issue a
prospectus on its formation for filing with the registrar before allotment of shares or
debentures and signed by every person who is named therein as a director or by his
agent duly authori3ed in writing.
;eatures of statement in lieu of prospectus has the following features:
9eturn of allotment of minimum subscription is to be filed within (= days of
allotment ! in form 000".
9eturn of allotment is followed by declaration. ! 0n form &(".
%ertificate from schedule bank showing deposit of minimum subscription is to be
proved.
;orm of statement in lieu is contained in second scheduler.
)tatement is to be accompanied by articles and other specified documents.
Conse4uence of Misstatement:
The companies ordinance is silent as to the effect of misstatement in a
statement in lieu of prospectus but it would appear that if a person applying for shares
inspects the statement in lieu of prospectus# the statement becomes the basis of the
contract and if it contains a false statement he may have right to rescind. person
who subscribes for shares on the faith of any statement contained in the statement in
lieu of prospectus cannot however claim compensation from the company directors
and promoters.
Consents of statement in lieu of prospectus:
-ame of the company
)tatement of capital
:escription of business.
-ames# addresses# and occupations of the directors# chief executive managing agents
and secretary.
9ights of voting conferred on several classes of shares
)hares and debentures to be issued for consideration other than cash.
-ames of vendors and details of property to be acquired for cash or shares or
debentures specifying the goodwill to be paid for.
?stimated preliminary expenses.
Material contracts
:irectors interest
Minimum subscription.
#5AR"# -% C&MPA%6
Meaning of s!are:
share in a company is one of the units into which the total capital of the
company is divide. Thus share means a share in the captial of a company a share is a
proportion of capital which each shareholder is entitled to. share is not a sum of
money. @ut an interest measured by a sum of money and made up of various rights
and liabilities of the shareholder. share involve rights and liabilities . a share may
be defined as an existing bundle of rights and liabilities.
0n pakistan shares are regarded as goods. share is an abstract right to
participate in a profits and in the capital and assets of a company. share may be
issued for cash# or against transfer of property# or to work done.
)hare movable property:
share is undoubtedly is a movable property but is not movable property in
the same way in which a bale of cloth or bag of wheat is movabel property. )uch
commodities are not brought into existence by legislation. ?very one of these rights
and obligaitons is created by a statute or under statutory instruments of powers which
also define their extent# scope# boundaries and incident.
-ature of share section 86:
The share of a company is measured by a sum of money i.e. the nominal value
of share and !b" by the rights and obligations belonging to it under the articles of the
company.
Ainds of shares:
4rdinary of equity share
Preference share
:eferred share
&rdinary of e4uity s!are:
The equity shares are those which are not preference shares. i.e. these shares
do no en2oy and preferentioal rights. Thus # for the purpose of dividend and repayment
of capital# the equity shares rank after the preference shares. 'enerally# their rate of
dividend is not fixed. 0t may vary from year to year depending upon the profits of the
company. They may get higher dividend if the profits are huge# and may get nothing
if there are no profits. The rate of dividend is determined by the directors of the
company the sum of the total of equity shares is the equity share capital.
&rdinary s!ares:
Provided that a company limited by shares can issue ordinary shares of
different classes. 4rdinary shares are those which have no special rights as to
dividend or capital allocated to thedm. 0n face## the holders of the ordinary shares
shall now hold the entire capital of the company even in the case of existing company
having preference shares# the bulk of the company1s capital to held by ordinary
shareholders. The holders of the ordinary shares are virtually the owners of the
company.
Preference s!are:
The preference shares are those which have some preferential rights over the
other types of shares i.e. which en2oy some priority over the equity shares. share to
be preference share must have both the following preferential rights.
A preferential rig!t as to t!e payments of di7idend:
:uring the continuance of the company the preference shareholders must get
some dividend. The preference dividend may consists of fixed amount to be
distributed among the preference shareholder# or it may be paid at a fixed rate e.g. +B
of nominal value of shares.
A preferential rig!t as to t!e repayment of capital:
0n the event of winding up of the company# the amount paid on preference
shares must be paid back before anything is paid to the equity shareholders.
(inds of preference s!ares:
The preference share may be of the following classes:
%omulative and non/comulative preference shares.
Participating and non/ participating preference shares.
%onvertible and non/convertible preference shares.
9edeemable preference shares.
Public issue of s!ares:
The exact procedure to be followed by a company making a public floatation
of shares will depend on the precise terms of the issue. ,owever the following is a
summary of the principal steps that are to be borne in mind.
0ssue of prospectus
9eceipt of applictions
%losing of subscription lists
llotment of shares
.etters of allotment
9eturn of allotment
#5AR" CAP-TAL &F C&MPA%6
-ntroduction:
The share capital of the company may be of the following
?quity capital !or ordinary share capital"
Preference share capital
Types or categories of s!are capital:
The term share capital used in connection with the capital of a limited
company is used in several sense. )o the capital of a company may be categori3ed as
follows :
uthori3ed capital
0ssued captial
8nissued capital
)ubscribed capital
Paid/ up capital
Aut!ori8ed capital:
0t is also called !a" nominal capital or !b" registered capital
uthori3ed capital is the maximum amount of share capital which a company
sets out in the memorandum of association and which it has power to issue. 0t is the
amount of capital with which company proposes to be registerd. The authori3ed
capital is divided into shares of fixed amount.
-ssued capital:
0ssued capital is that part of the authori3ed capital which is actually offered
! issued" to prospective shareholders for subscription. 0t represents the amount which
is available for subscroption.
3n issued capital:
The part of the authori3ed capital which is not issued at any given time is
called un issued capital.
#ubscribed capital:
The whole of the issued capital may not be taken up by the prospective
shareholders. )ubscrobed capital is that part of the issued capital which is actually
subscribed ! taken up" by the public.
Paid 9 up capital:
Paid up capital is that part of the issued capital which has been paid/up by the
shareholders. Paid/up capital is always equal to subscribe capital. )ection 58!*"
provides that the amount payable on the appliction on each share shall be the nominal
amount of the share. gain regulation ( of table lays down that shares shall be
offered to the public for subscription upon the terms that the amount payable on
appliction shall be the full amount of the nominal amount of the share.
-ncrease of capital:
0f the articles do not give authority to increase capital the articles must be
altered by special resolution so that they do give authority.
The company shall file with the registrar notice of the exercise of power to increase
the share capital within $+ days from the exercise thereof# if a company makes default
in filing this notice# it shall be liable to fine extending to 9s. $== for every day during
which the default continues# and every office of the company who knowingly and
willfully authori3es the default shall be liable to the like penalty section 6(!&".
Rig!ts and status:
4ffer to existing shareholders:
-otice of increase:

M"M:"R#5-P -% C&MPA%6
Members!ip:
company inspite of being an artificial legal person is composed of certain
persons who constitute it as a corporate body. The persons composing the company
are the members or shareholders of the company. The general rule of alw is that a
person who is the holder of shares in a company can be regarded as a member only
when his name is entered on the company1s register of members.
Competency to become member:
Minor
%ompany
Partnership firm
0nsolvent
;oreigner
Minimum and maximum numbers of members:
#ingle member company:
The minimum number of members required to form a )M% in one member.
This will fell in the category of private company.
Pri7ate company:
The minimum number of members required to form a private company is one
member. 0n other words# there can be only one member in a private company the
maximum number of members must not exceed +=. )o the number of members is
between from $ to +=. @ut the present and past employees who continue to be its
members are not to be counted for the purpose of determining maximum number of
members.
Public company ) non Listed*:
The minimum number of members required to form a public company is three.
0n other words there must be at least three members in a public company. There is no
limit on the maximum number of members.
Termination of membership Csection <5 D <6:
9ights of members:
member of the company has the following rights#
,ave copies of memorandum and articles on request and on payment of prescribed
fees.
9eceive with in prescrived time certificate of shares held by them.
Transfer shares# sub2ect to any restriction imposed by the article.
9emove directors.
;ill any vacancy in the office of a liquidator appointed by them.
.iability of members:
%ompany with unlimited liablility#
%ompany with limited by guarantee#
%ompany limited by shares#
>oting rights of members
4rdinary shareholders:
person who holds the equity shares in a company has a right to vote on
every resolution placed before the meeting.
Preference s!are!olders:
person who holds preference shares in a company has no right to vote on
every resolution placed before the meeting. ,e has a right to vote only on such
resolution which directly affect his right as preference shareholder.
Register of members!ip:
-ame# address# and occupation of each member.
)hare held by each member distinguishing each share by its distinctive number and
the amount paid or considered as paid on each shares.
:ate at which each person was entered in the register as a member.
:ate at which any person ceased to be a member and the reason for ceasing to be a
member.
9ectification of register fo members section $+&.
nnal return by company having share capital section $+5!$".
nnual return by company not having shares capital section $+5!&".
:ate of annual return section $+5!(".
%ontrol by members over directors.
D-R"CT&R# &F C&MPA%6
!o is director:
company though a legal entity in the eyes of the law# is an artificial person.
0t being created by law lacks both body and ming. 0t cannot act in its own person. 0t
can do so only through some human agency. The persons# through whom a company
acts and does its business are termed as board of directors ! @4:". The institution of
the company is composed of two organs/ the general body of shareholders and the
board of directors.
"ligibility of directors!ip:
The following persons aer eligible for appointment as director of a company#
-atural person
Person represinting government or institute or authority
?mployee of the company ! as whole time director"
%hief executive
Person representing creditors
-n eligibility for directors!ip:
The following persons are not eligible for appointment as director of a company#
Minor
0ndividual having sound mind
pplicant for ad2udiction as insolvent
8ndischarged unsolvent
0ndividual convicted for an offence involving moral turpitude.
#ummary position:
-ature of company -o of directors

@
%
:
)ingle member company
Private company
8nlisted public company
.isted public company
4ne
Two
Three
)even
Directors can be only natural person:
4nly a natural person i.e. a human being ! either sex" can be appointed as
director of a company subscriber may be include a corporate body which cannot be
appointed as director.
Types of appointment of directors:
:irectors may be appointed by different interests:
@y election
-omination by creditors
-omination by federal or provincial government
-omination by foreign equity holders.
?lection by subscribers:
)ubscribers deemed directors:
Tenure of first @4: section
:irectors nominated by creditors section $8&:
:isclosure of interest:
Euorum:
Procedure for election of directors section $<8:
Minimum number of :&D meetings:
The directors of a public company are required to meet atleast once in every
quarter of a year.
The minimum members of meetings of a private company is not prescribed by law.
@ut they are required to meet at least once a year to approve the annual accounts and
reports and decide the agenda of 'M.
Proceedings of directors:
.iability of directors section $6*:
.oan to directors:
C&MPA%6 M""T-%.
Ad'ournment of meeting:
Conduct:
0f there is no such chairman# or if he is not presint within $+ minutes after the
time appointed for holding the meeting or is unwilling to act as chairman of the
meeting any one of the directors present may be chairman of the meeting.
0f none of the directors is present or unwilling to act as chair man the members
present shall choose one of their number to be the chairman of the meeting.
The chairman must be the member of the company.
Powers of t!e c!airman:
Thus the powers of the chairman may be summarised as :
:ecide all questions and points of order which may arise.
Maintain his ruling on points of order or procedure.
d2ourn the meeting when authorised to do so or when it is impossible to maintain
order.
4rder the removal of any disorderly persons.
'ive such rulings and directions as are necessary to ensure the effective handling of
business before the meeting.
Penalty section:
The member of the company not having a share capital cannot appoint a
proxy.