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Mercantile Law – Study Notes Chapter 1 The Legal System
CHAPTER ONE
THE LEGAL SYSTEM
ICAP'S STUDY TEXT
LO #* LEARNING OBJCTIVE
REFERENCE**
PART A – INTRODUCTION TO THE LEGAL SYSTEM
LO 1
✯✯
BRANCHES OF LAW 1.1.7
LO 2
SOURCES OF LAW 1.1.5
✯✯
PART B – MAKING OF LAW
LO 3
✯✯✯
THE PARLIAMENT / MAJLIS-E-SHOORA 1.2.5
LO 4
✯
DELEGATED LEGISLATION 1.2.6
LO 5
✯✯✯
BINDING PRECEDENT 1.1.6
PART C – IMPLEMENTATION/INTERPRETATION OF LAW
LO 6
JUDICIAL SYSTEM IN PAKSTAN
✯✯
1.3.1 – 1.3.5
LO 7
APPOINTMENT OF JUDGES
✯
LO 8
✯
ALTERNATIVE DISPUTE RESOLUTION 1.3.6
*Explanation of Symbol:
Symbol ✯ indicates importance of the concept from exam point of view.
 If a concept is tagged with three stars i.e. ✯✯✯, it is very very important concept.
 If a concept is tagged with two stars i.e. ✯✯, it is very important concept.
 If a concept is tagged with single star i.e. ✯, it is important concept.
(Note that none of the concept is unimportant, therefore none should be skipped)
** Explanation of Reference:
First digit in reference represents chapter number, second and third digits represents section and sub-section number of
ICAP’s Study Text (2016 edition).
1 By: M. Asif, ACA
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PART A – INTRODUCTION TO THE LEGAL SYSTEM
LO 1: BRANCHES OF LAW: ✯✯
There are two major branches of law i.e. Civil Law and Criminal Law.
Civil Law Criminal Law

Civil Law deals with disputes in respect of rights and Criminal law deals with crimes and the
Definition
obligations between individuals and organizations. legal punishment.
Case filed by Private party Government
A civil case is decided on the balance of probabilities. Evidence should be beyond all
Burden of proof
reasonable doubts.
Compensation (usually financial) for injuries or A guilty defendant is subject to
Type of punishment
damages, or an injunction. imprisonment or fines.
 Business laws dealing with commercial disputes  Theft
(e.g. company law, contract act).  Robbery
 Property disputes  Murder
 Family laws (e.g. divorce proceedings, child  Terrorism
custody proceedings).
Examples
 Copyrights disputes
 Employment laws (dealing with work related
issues).
 Law of Tort (e.g. claims of defamation of
character, claim for negligent behavior).
CONCEPT REVIEW QUESTION

Distinguish between civil law and criminal law giving two examples of each. (06 marks)
(CAF 03 Level – Autumn 2012)
LO 2: SOURCES OF LAW: ✯✯
Basis of Legal System of Pakistan:
The legal system of Pakistan is based on the Constitution of Pakistan 1973 as well as Islamic law
(Sharia).
Sources of Law in Pakistan:

Legislation:
It is the law created by:
 Act of the Parliament of a country, or
 Other bodies with delegated authority.
Precedent:
Precedent is a judgment or decision of a court of law cited as an authority in deciding identical
cases, and is binding on the subordinate courts.
Customs:
In Pakistan, customary law has been replaced by Shariat Law. Key sources of Shariat law are Quran,
Sunnah, and Ijtihad.
Agreement:
Agreement is a kind of special law (in addition to general law) which is applied to parties who have
agreed to stipulated terms for themselves.
2 By: M. Asif, ACA


Identify the basis of legal system and explain the main sources of law in Pakistan. (05 marks)
(CAF 03 Level – Spring 2016)
There are different sources of law. You are required to briefly describe the following sources of law:
(i) Legislation (02 marks)
(ii) Precedent (02 marks)
(ICMA Pakistan – Fall 2015)
PART B – MAKING OF LAW
LO 3: THE PARLIAMENT / MAJLIS-E-SHOORA: ✯✯✯

A Majlis-e-Shoora (Parliament) of Pakistan consists of:
 President, and
 Two Houses i.e. National Assembly and Senate.
President:
President is the head of the state, and is considered a symbol of unity. He approves the statute
passed by the National Assembly and Senate. President must be a Muslim.
National Assembly:
 Seats of National Assembly are determined on the basis of population of provinces. It is
composed of 342 seats in total consisting of:
o 272 General seats
o 60 women members (reserved)
o 10 minority members (reserved)
 Members are selected by registered voters for a period of 5 years.
 Among themselves, members select a Speaker, Deputy Speaker and Prime Minister.
 Most important function of National Assembly is law making and formulation of policies.
Senate:
 All provinces are represented in Senate equally. It is composed of 104 sets in total
consisting of:
o 14 general seats for each provincial assembly, 8 general seats for FATA and 2 for
Federal Capital.
o 4 women sets (reserved) for each provincial assembly, and 1 for Federal Capital.
o 4 technocrats (reserved) for each provincial assembly, and 1 for Federal Capital.
o 1 minority(reserved) for each provincial assembly.
o
 Members are elected (by members of respective provincial assembly and President) for a
period of 6 years. Senate is a permanent institution. Half of members retire after 3 years and
are replaced by equal number of newly elected senators.
 Among themselves, member select a Chairman and a Deputy Chairman.
 All statutes passed by National Assembly are also approved by Senate, with the exception of
money bills.
3 By: M. Asif, ACA

Process of Legislation:
Process of Legislation when National Assembly is in session:
All bills proposed by the government are formally approved by the cabinet before going forwarded
to national assembly.
A bill is passed by both houses i.e. The National Assembly and the Senate (except a money bill).
Thereafter, it is presented to the President of Pakistan for assent and becomes an Act of Parliament
upon receiving such assent.
If president does not want to assent a bill, he can send it back to the parliament for reconsideration.
If bill is passed again after reconsideration, President cannot refuse to assent the bill now.
Process of Legislation when National Assembly is NOT in session:

 When National assembly is not in session and President deems necessary to take immediate
action, he has the power to issue an Ordinance.
 Such Ordinance promulgated thus, shall have the same force and effect as an Act of the
parliament.
 However, the Ordinance shall stand repealed after 120 days if it is not presented or passed
by the National assembly.
Exam Tips
1. In case of a Money Bill, approval of Senate is not required. However, rest of the process is same.
2. Validity of an act of Parliament cannot be questioned.

Briefly describe the process of legislation in case of a money bill when:
(a) National assembly is in session
(b) National assembly is not in session (05 marks)
How is a law promulgated when national assembly is not in session? Is such law in any way different from an act of
parliament? What is its tenure? (05 marks)
Write down the process of passing ‘Money Bills’. (03 marks)

(ICMA Pakistan, Winter 2011)
With respect to enactment of any Act in Pakistan, what is the procedure to be followed by the National Assembly and the
President of Pakistan? (06 marks)
What are the powers available to the President of Pakistan under the constitution to promulgate a law? What is the legal
status of such law? (04 marks)
The power to make law, in any country, is derived from the Constitution of that country. In Pakistan, this power is
contained in the Constitution of the Islamic Republic of Pakistan, 1973. The parliament of Pakistan is called Majlis-e-
Shoora and consists of the President and two houses i.e. National Assembly and the Senate.
Required:
In the light of the above, briefly explain the composition of the two houses. (06 marks)
(ICMA Pakistan, Spring 2016)
(i) In our country the legislative bodies are President and two houses i.e., National Assembly and the Senate. Can any bill
be passed without involvement of both the houses? Develop your argument briefly in the light of legal system in Pakistan.
(02 marks)
(ii) If President returns a bill passed by both the houses for reconsideration, how such bill can become Act/Law? Discuss
briefly. (03 marks)
(ICMA Pakistan, Summer 2010)
4 By: M. Asif, ACA

LO 4: DELEGATED LEGISLATION: ✯
What is meant by Delegated Legislation:
In delegated legislation, power is given to a subordinate executive authority to make bye-laws for
specified purposes only.
Advantages of Delegated Legislation:

Time Saving:
Delegation of work of making detailed provision to appropriate minister or body saves time of
Parliament. Parliament concentrates on broad issues, rather than masses in detail.
Use of Expert Knowledge:

Parliament may not have persons with sufficient technical knowledge on the subject. It allows
technical matters to be determined by those competent to do so.
Flexibility:
It is simpler to amend delegated legislation than to amend act of Parliament.
Speed:
Process of Parliament takes lot of time. Delegated legislation allows rapid action to be taken in
times of emergency.
Disadvantages of Delegated Legislation:

Unconstitutional:
It takes away law-making power from democratically elected members. Power to make law is given
to unelected civil servants.
Loss of Accountability and Control:

Govt. ministers and their staff effectively become the source of law. It raises questions of
accountability and control over so much powers given to these individuals.
Bulk:
Delegated legislation may result in large number of law making, which makes it difficult to manage
and keep up-to-date.
Control over Delegated Legislation:

Following controls have been established to overcome the shortcomings of delegated legislation:
Parliamentary Control:
Parliament can control delegated legislation by restriction and defining the power to make rules.
Any new legislation created must be laid in front of Parliament for approval.
Judicial Control:
Delegated legislation can be challenged in Court if it is ultra-vires (i.e. beyond powers delegated to
them). Court may declare such legislation void if objection is valid.

What do you understand by delegated legislation? Give two advantages and disadvantages of such legislation. (05 marks)
5 By: M. Asif, ACA

LO 5: BINDING PRECEDENT: ✯✯✯

Doctrine of Binding Precedent:
Definition:
‘A judge, subject to the fulfillment of certain conditions, is bound to apply decisions from earlier
cases to the facts of the case before him’.
Requisites of a binding precedent:

For a precedent to be binding it must meet the following requirements:
(i) The ratio decidendi (reason for the judgment) is clearly identified;
(ii) The material facts of the case must be similar;
(iii) The status of the court which set the precedent must be such as to bind the present court.
Exceptions:
A judge is not bound to follow the precedent under the following Circumstances:
1. Ratio Decidendi is obscure:
Particularly, if different judges given many ratios.
2. Making a distinction between cases:
If the facts in current case are sufficiently different from a previous case, the judge in the
current case does not have to follow the precedent of the previous case.
3. Overruling a precedent:
A precedent established by a lower court can be overruled by a higher court.
Advantages and Disadvantages of Binding Precedent:

Advantages of Binding Precedent:
1. Saves time and expense:
Existence of a precedent means that the legal arguments do not have to be repeated in the
current case, because they are already established.
2. Consistency in judicial decisions:
Judicial decision are consistent in all cases of similar nature.
3. Flexibility:
Judges are able to interpret the existing law, by creating new precedents. This gives
flexibility to the legal system, as it may be modified when necessary without need for new
legislation by statute.
Disadvantages of Binding Precedent:

1. Large number of precedents:
There may be large number of reported cases (with different outcomes) that can be cited as
precedent in a current case. Therefore, there is uncertainty and lawyers argue which
precedent to apply in current case.
2. Unjust precedent:
In some cases, a precedent may be unfair or unjust, and it will continue to be binding unless
a higher court overrules it.
3. Judiciary makes the law:
Making a law is an act of Parliament. Judiciary should interpret and implement the law.
However, when judiciary makes new precedent, it is actually making the new law.

What are the requisites of a binding precedent? (04 marks)
6 By: M. Asif, ACA

The doctrine of binding precedent suggests that ‘a judge, subject to the fulfilment of certain conditions, is bound to apply
decisions from earlier cases to the facts of the case before him’.
Identify the situation(s) in which a judge is not bound to follow the precedent. (02 marks)
PART C – IMPLEMENTATION/INTERPRETATION OF LAW
LO 6: JUDICIAL SYSTEM IN PAKSTAN: ✯✯

Supreme Court of Pakistan:
Structure:
The Supreme Court is the highest body in judicial system of Pakistan. It consists of:
 a Chief Justice known as Chief Justice of Pakistan and
 such number of other judges as may be determined by the Act of Parliament.
Jurisdiction:
1. Original Jurisdiction:
The Supreme Court has exclusive jurisdiction over disputes between and among
Provincial/Federal governments. It may also exercise Suo-Moto power on human rights
matters.
2. Appellate Jurisdiction:
Supreme Court has jurisdiction to hear appeals from decisions by High Court and Federal
Shariat Court.
3. Advisory Jurisdiction:
If President considers it necessary to obtain opinion of Supreme Court on any question of
public importance, Supreme Court reports its opinion to the President.
High Courts:
There are five High Courts in Pakistan (one in each province and one in Islamabad). A High Court is
the principal court of its province.
Structure of High Court:

A High Court consists of a Chief Justice and other judges as may be determined law or President.
Jurisdiction of High Court:

Following are areas of jurisdiction of High Court:
1. Original Civil jurisdiction (including Company Court)
2. Appellate jurisdiction (civil and criminal)
3. Supervisory Jurisdiction
4. Constitutional jurisdiction
Supervisory role of High Court:

The High Court exercises its supervisory role in the following manner:
1. It may issue Habeas Corpus order.
Habeas Corpus Order is an order for the release of a person wrongfully detained by a court
subordinate to it.
2. It may issue Prerogative orders.
Prerogative Orders are orders issued by the High Court in exercising its supervisory jurisdiction
over inferior courts, tribunals, and public authorities. They include:
7 By: M. Asif, ACA

 Mandamus Order (requires the court or other body to carry out a public duty
 Prohibition Order (prevents a court or tribunal from exceeding its jurisdiction)
 Certiorari Order (an order by a higher court directing a lower court to send the record in a
given case for judicial review where inferior court has reached a decision contrary to the
principle of natural justice or has exceeded its jurisdiction).
Company Court and Company Bench:

Company court:
A company court is the High Court having jurisdiction over the area where the registered office of
the company is situated. Provided that the Federal Government may empower any civil Court to
exercise all or any of the jurisdiction by this Ordinance conferred upon the Court.
Company bench:
Company bench(s) is/are one or more benches constituted in each High Court by the chief justice of
the High Court to exercise the jurisdiction vested in the High Court.
Lower Courts:
Lower courts exist at district level. These include:
1. Session Courts (to hear criminal cases)
2. District Courts (to hear civil cases)
Structure of the lower courts include Session/District Judge, Additional Session/District Judge, and
Assistant Session/District Judge.
Federal Shariat Court:

Composition:
Federal Shariat Court consists of not more than 8 Muslims judges, including:
 A Chief Justice (to be appointed by President).
 Not more than 3 judges having aleast 15 years’ experience in Islamic law and research.
 Not more than 4 judges who are qualified to be a judge of High Court.
The judges hold office for a period of three years. However, the President may extend such period.
Jurisdiction:
Original Jurisdiction:
Federal Shariat Court examines and decides whether any law or any of its provision is repugnant to
Islamic values "as laid down in the Quran and the Sunnah". Consideration of such an issue may be
taken up by Shariat Court on its own, or may be referred by any citizen or Federal or Provincial
Government. If a law is found to be 'repugnant', the Court notifies the relevant government,
specifying the reasons for its decision.
Appellate Jurisdiction:
The Court also has jurisdiction to hear appeals from the decision of criminal courts under any law
relating to enforcement of Hudood Law
Appeal to Supreme Court:

An appeal against the decisions of Shariat Court can be filed in Supreme Court within 60 days of
such decision, and is reviewed by the Shariat Appellate Bench of the Supreme Court. An appeal on
behalf of government can be filed within six months of decision.
8 By: M. Asif, ACA


How does the High Court exercise its supervisory role over subordinate courts? Describe the three types of prerogative
orders that it may issue. (05 marks)
Briefly describe the terms ‘Company court’ and ‘Company bench’. (03 marks)
What is the composition and tenure of Federal Shariat Court? (03 marks)
Briefly describe the kind of cases handled by the Federal Shariat Court and the procedures followed in the discharge of
these cases. (07 marks)
LO 7: APPOINTMENT OF JUDGES: ✯
Criteria to be Judge of Supreme Court:
Following persons are eligible for appointment as Judge of the Supreme Court:
 A person with five years’ experience as a Judge of a High Court or
 Fifteen years standing as an advocate of a High Court
The Chief Justice of Pakistan is appointed by the President. Other Judges are also appointed by the
President after consultation with the Chief Justice.
Criteria to be Judge of High Court:

Following persons are eligible for appointment as Judge of the High Court:
 Ten years’ experience as an advocate of a High Court, or
 Ten years’ service as a civil servant including three years’ experience as a District Judge, or
 Ten years’ experience in a judicial office.

List the criteria which may be followed for determining the eligibility of a person(s) for appointment as a judge of the
High Court and Supreme Court. (05 marks)
(CAF 03 Level – 2014 Autumn)
LO 8: ALTERNATIVE DISPUTE RESOLUTION: ✯

Definition:
Alternative Dispute Resolution ("ADR") refers to any means of settling disputes outside of the
courtroom.
Types:
Alternative dispute resolution (ADR) is generally classified into at least four types:
• Negotiation:
Participation is voluntary and there is no third party who facilitates the resolution process
or imposes a resolution.
• Mediation:
There is a third party, a mediator, who facilitates the resolution process (and may even
suggest a resolution, typically known as a "mediator's proposal"), but does not impose a
resolution on the parties.
9 By: M. Asif, ACA

• Conciliation:
The parties to a dispute use a conciliator, who meets with the parties both separately and
together in an attempt to resolve their differences. Often the parties are in need of restoring
or repairing a relationship, either personal or business.
• Arbitration:
Arbitration is the settlement of a dispute by an independent person usually chosen by the
parties themselves. Independent person, as a private judge, imposes a resolution.
Advantages of ADR:
Saves Time:
A dispute often can be settled or decided much sooner with ADR; often in a matter of months, even
weeks, while bringing a lawsuit to trial can take a year or more.
Saves Money:
When cases are resolved earlier through ADR, the parties may save some of the money they would
have spent on attorney fees, court costs, experts' fees, and other litigation expenses.
Preserves Relationships:
ADR can be a less adversarial and hostile way to resolve a dispute.
Increases Satisfaction:
In a trial, there is typically a winner and a loser. ADR can help the parties find win-win solutions.
Privacy:
Public and press cannot attend ADR process.
Disadvantages of ADR:
 Not popular with lawyers because it is not in their financial interests.
 Disadvantages the less powerful side in a dispute,
 ADR is not suitable where there has been intentional wrongdoing, or involves public law, or
crime.
 ADR also cannot issue order of injunction where it is necessary. Usually, it only deals with
cases involving money.
 Increases cost and delay if unsuccessful.

Briefly describe the following legal term:
-Arbitration
LO 7: DIFFERENT LEGAL TERMS:

Act of Parliament: (also called Statute)
It is a law which is passed by Parliament (i.e. by both houses, and President).
Purposes of act of parliament may be to create new law, to amend existing law, to cancel existing
law and to clarify existing law.
Ordinance
 It is a law which is passed by President when National assembly is not in session and
President deems necessary to take immediate action.
10 By: M. Asif, ACA

 Such Ordinance promulgated thus, shall have the same force and effect as an Act of the
parliament.
 However, the Ordinance shall stand repealed after 120 days if it is not presented or passed
by the National assembly.
Court of first instance:

The court where the case is originally heard in full.
Ratio decidendi
Ratio decidendi is a Latin phrase meaning "the reason" or "the rationale for the decision". The ratio
decidendi is "the point in a case that determines the judgment" or "the principle that the case
establishes".
Injunction:
an order of the court directing a person not to carry out a certain act.
Decision reversed:
where the appellate court overturns the decision of lower court in an appeal.
Decision overruled:
where a higher court has decided that decision of a lower court (in an unrelated proceedings) is
wrong and gives an opposite decision on the same question of law.

Briefly differentiate between ‘Statute’ and an ‘Ordinance’. List down any four purposes of an ‘Act of Parliament’.
(06 marks)
What does court of first instance means?

Define the following terms used in court of law:

(i) Decision reversed (02 marks)
(ii) Decision overruled (02 marks)
(ICMA Pakistan, Fall 2013)
Explain the following legal terms:

a) Legislation (02 marks)
b) Statute Law (02 marks)
c) The Ordinance (02 marks)
(ICMA Pakistan, Summer 2008)
Briefly describe the following legal terms:

(a) Precedent
(b) Ratio Decidendi
11 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 10 Quasi Contracts
CHAPTER TEN
QUASI CONTRACTS
ICAP'S STUDY TEXT
REFERENCE**
LO 1 DEFINITION AND TYPES OF QUASI CONTRACT 10.1.1, 10.1.2
LO 2 QUANTUM MERUIT 10.1.3
1 By: M. Asif, ACA

LO 1: DEFINITION AND TYPES OF QUASI CONTRACT:

Meaning of Quasi/Constructive Contract:
A quasi contract is a relation between individuals having rights and liabilities (resembling to
contractual rights and liabilities but) created by law. It is an obligation based on principle of equity
and justice which means no person should get benefit at expense of another.
Types of Quasi Contracts:

Right to Recover the Price of Necessaries Supplied:
The person who has supplied the necessaries to a person who is incompetent to contract or anyone
who is dependent on such incompetent person, is entitled to claim their price from the property of
such incapable person.
Right to Recover Money Paid for Another Person by Interested Person:

A person who is interested in the payment of money for which another person is legally bound to
pay, and who therefore pays it, is entitled to recover the payment made from the person who was
legally bound to pay.
Right to Recover Price for Non-Gratuitous Act:

Such right to recover arises if the following three conditions are satisfied:
(i) The thing must have been done or delivered lawfully;
(ii) The person who has done or delivered the thing, must not have intended to do so
gratuitously; and
(iii) The person for whom the act is done/to whom thing is delivered must have enjoyed the
benefit of the act done/thing delivered.
Responsibility of Finder of Goods:

A person who finds goods belonging to another, and takes them into his custody, is subject to the
same responsibility as a bailee. He must take care of goods and should take reasonable steps to
trace its true owner.
Right to Recover Payment made by Mistake or Under Coercion:

A person to whom money has been paid, or anything delivered by mistake or under coercion, must
repay or return it.
2 By: M. Asif, ACA

LO 1: DEFINITION AND TYPES OF QUASI CONTRACT:

Meaning of Quasi/Constructive Contract:
A quasi contract is a relation between individuals having rights and liabilities (resembling to
contractual rights and liabilities but) created by law. It is an obligation based on principle of equity
and justice which means no person should get benefit at expense of another.
Types of Quasi Contracts:

Right to Recover the Price of Necessaries Supplied:
The person who has supplied the necessaries to a person who is incompetent to contract or anyone
who is dependent on such incompetent person, is entitled to claim their price from the property of
such incapable person.
Right to Recover Money Paid for Another Person by Interested Person:

A person who is interested in the payment of money for which another person is legally bound to
pay, and who therefore pays it, is entitled to recover the payment made from the person who was
legally bound to pay.
Right to Recover Price for Non-Gratuitous Act:

Such right to recover arises if the following three conditions are satisfied:
(i) The thing must have been done or delivered lawfully;
(ii) The person who has done or delivered the thing, must not have intended to do so
gratuitously; and
(iii) The person for whom the act is done/to whom thing is delivered must have enjoyed the
benefit of the act done/thing delivered.
Responsibility of Finder of Goods:

A person who finds goods belonging to another, and takes them into his custody, is subject to the
same responsibility as a bailee. He must take care of goods and should take reasonable steps to
trace its true owner.
Right to Recover Payment made by Mistake or Under Coercion:

A person to whom money has been paid, or anything delivered by mistake or under coercion, must
repay or return it.
2 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 11 Performance of a contract
CHAPTER ELEVEN
PERFORMANCE OF A CONTRACT
ICAP'S STUDY TEXT
LO # LEARNING OBJCTIVE REFERENCE*
PART A – PERFORMANCE OF A CONTRACT
LO 1 WHAT IS THE MEANING OF PERFORMANCE 11.1.1
WHAT ARE THE TYPES OF PERFORMANCE OF THE
LO 2 11.1.2, 11.1.3, 11.1.5
CONTRACT
LO 3 WHAT ARE THE ESSENTIALS OF A VALID TENDER 11.1.4
LO 4 WHO MAY DEMAND PERFORMANCE OF A CONTRACT 11.1.6
LO 5 WHO MAY PERFORM THE CONTRACT 11.1.6
LO 6 Rules Regarding the Performance of Joint Promise 11.1.7

DEVOLUTION OF JOINT LIABILITIES AND JOINT 11.1.7 (Devolution of joint
LO 7
RIGHTS rights)
LO 8 TIME AND PLACE OF PERFORMANCE 11.1.8
LO 9 IS TIME AN ESSENCE OF CONTRACT 11.1.9
PART B – RECIPROCAL PROMISES

LO 1 0 RECIPROCAL PROMISES 11.2.1
PART C – ASSIGNMENT OF CONTRACTS

LO 1 1 ASSIGNMENT OF CONTRACTS 11.4.1, 11.4.2
PART D – ASSIGNMENT OF CONTRACTS
LO 1 2 APPROPRIATION OF PAYMENT 11.3.1, 11.3.2
1 By: M. Asif, ACA

LO 1: WHAT IS THE MEANING OF PERFORMANCE:

1. Performance of the contract is one of the various modes of discharge of the contract.
2. A contract is said to have been performed when the parties to a contract either perform or offer
to perform their respective promises.
LO 2: WHAT ARE THE TYPES OF PERFORMANCE OF THE CONTRACT:

Types of Performance:
There may be two types of performance as follows:
Actual Performance:
Where a promisor has made an offer of performance to the promisee and the offer has been
accepted by the promisee, it is called an actual performance.
Attempted Performance (or Tender or Offer to Perform):

Where a promisor has made an offer of performance to the promisee, and the offer has not been
accepted by the promisee, it is called an attempted performance.
Types of Tender:
There can be two types of tender as follows:
Types of
Meaning Effects
tender
Where the promisor offers to (a) Goods or services need not be offered again.
Tender of
deliver the goods or services but (b) Promisor may sue the promisee for non-performance.
goods
the promisee refuses to accept the (c) Promisor is discharged from his liability.
or services
delivery.
Where the promisor offers to pay (a) Promisor is not discharged
Tender of the amount but the promisee from his liability to pay the amount.
money refuses to accept the same. (b) Promisor will not be liable for interest from the date of a valid
tender.
What is the effect of refusal of party to perform promise wholly:

When a party to a contract has refused to perform or disabled himself from performing his promise
in its entirety, the promisee:
 may put an end to the contract, or
 may signify, by words or conduct, his willingness in its continuance.
LO 3: WHAT ARE THE ESSENTIALS OF A VALID TENDER:

The essentials of a valid tender are discussed below:
1. Unconditional:
It must be unconditional. Tender is said to be unconditional when it is made in accordance
with the terms of the contract.
2. At Proper Time:
It must be at proper time, i.e. at the stipulated time (if there is an agreement as to time) or
during business hours (if there is no agreement as to time). Tender of goods or money
before the due date is also not a valid tender.
2 By: M. Asif, ACA

CHAPTER ELEVEN
PERFORMANCE OF A CONTRACT
ICAP'S STUDY TEXT
LO 1 WHAT IS THE MEANING OF PERFORMANCE 11.1.1
WHAT ARE THE TYPES OF PERFORMANCE OF THE
LO 2 11.1.2, 11.1.3, 11.1.5
CONTRACT
LO 3 WHAT ARE THE ESSENTIALS OF A VALID TENDER 11.1.4
LO 4 WHO MAY DEMAND PERFORMANCE OF A CONTRACT 11.1.6
LO 5 WHO MAY PERFORM THE CONTRACT 11.1.6
LO 6 Rules Regarding the Performance of Joint Promise 11.1.7

DEVOLUTION OF JOINT LIABILITIES AND JOINT 11.1.7 (Devolution of joint
LO 7
RIGHTS rights)
LO 8 TIME AND PLACE OF PERFORMANCE 11.1.8
LO 9 IS TIME AN ESSENCE OF CONTRACT 11.1.9

LO 1 0 RECIPROCAL PROMISES 11.2.1

LO 1 1 ASSIGNMENT OF CONTRACTS 11.4.1, 11.4.2
LO 1 2 APPROPRIATION OF PAYMENT 11.3.1, 11.3.2
1 By: M. Asif, ACA

Legal Representatives:
In case of death of promisor, his legal representative can perform the contract unless a contrary
intention appears or the contract is of personal nature.
Third Party:
A contract can be performed by a third party if the promisee accepts the arrangement. When a
promisee accepts performance of the promise from a third person, he cannot afterwards enforce it
against the promisor.
Joint Promisors:
In case of several promisors, unless a contrary intention appears, the following persons must
perform the promise:
Case Who must perform the promise
In case all the promisors are alive All the promisors jointly.
In case of death of any of joint promisors Representatives of the deceased promisor
jointly with the surviving promisor(s).
In case of death of all joint promisors Representatives of all of them jointly.
LO 6: RULES REGARDING THE PERFORMANCE OF JOINT PROMISE:

The rules regarding the performance of joint promises are as follows:
Joint and Several Liability of Joint Promisors:

In the absence of express agreement to the contrary, the promisee may compel anyone or more of
such joint promisors to perform the whole of the promise.
Joint Promisor's Right to Claim Contribution:

Each of the joint promisors may compel every other joint promisor to contribute equally with
himself to the performance of the promise, unless a contrary intention appears from the contract.
Joint Promisor's Duty to Share Loss from Default in Contribution:

If any of the joint promisors makes default in such contribution, the remaining joint promisor must
bear the loss arising from such default in equal shares.
Effect of Release of One Joint Promisor:

A release of one of such joint promisors by the promisee, does not discharge the other joint
promisors neither does it free the joint promisor so released from responsibility to the other joint
promisors.
LO 7: DEVOLUTION OF JOINT LIABILITIES AND JOINT RIGHTS:

Meaning of Devolution:
Devolution means passing over from one person to another.
Meaning of Devolution of Joint Liabilities and Rights:

The liabilities of joint promisors, and rights of joint promisees pass to their legal representatives
(in case of death).
4 By: M. Asif, ACA

LO 8: TIME AND PLACE OF PERFORMANCE:

The various rules regarding the time and place of performance are given below:
Where promisee prescribes the manner and/or time:

The promise must be performed in the manner and at the time prescribed by the promisee
Where promisor is to perform his promise without application by the promisee:

If no time for The contract must be performed within a reasonable time. The
performance is specified question 'What is reasonable time' is a question of fact in each
particular case.
If a certain day is The promisor may perform it at any time during the usual hours of
specified for business on such day and at the place at which the promise ought to be
performance performed.
If no place for The promisor must apply to the promisee to appoint a reasonable
performance is specified place for the performance and to perform the promise at such place.
Where promisor has not undertaken to perform his promise without application by the
promisee:
If a certain day is It is the duty of the promisee to apply for performance at a proper
specified for place and within the usual hours of business.
performance The question "what is a proper time and place" is a question of fact in
each particular case.
LO 9: IS TIME AN ESSENCE OF CONTRACT:

Meaning of Time as Essence of Contract:
Time is an essence of a contract means that it is essential for the parties to a contract to perform
their respective promises within the specified time.
Cases where Time is considered to be Essence of Contract:

(a) Where the parties have expressly agreed to treat the time as the essence of the contract.
(b) Where the nature and necessity of the contract requires the performance of the contract within
the specified time.
(c) Where the non-performance at the specified time operates as an injury to the party.
Exam Tip: Time fixed for the delivery of goods is considered to be the essence of a contract. However,
time fixed for the payment of the price is not considered to be the essence of a contract.
Consequences of Non-performance of Contract within Specified Time:

The consequences of non-performance of a contract within the specified time depends upon
whether the time is essence of the contract or not:
When time is essence of a contract:

(a) The contract becomes voidable at the option of the promisee.
(b) If performance beyond the specified time is accepted, the promisee cannot claim compensation
for any loss occasioned by the non-performance of the promise at the agreed time unless at the time
of such acceptance, he gives notice to the promisor of his intention to do so.
5 By: M. Asif, ACA

When time is not essence of a contract:

(a) The contract does not become voidable at the option of the promisee.
(b) The promisee is entitled to claim compensation for any loss occasioned to him by non-
performance of the promise at the agreed time.
LO 10: RECIPROCAL PROMISES:

Meaning of Reciprocal Promises:
Promises which form the consideration or part of the consideration for each other, are called
'reciprocal promises'.
Types of Reciprocal Promises:

Mutual and Independent:
When the promises are to be performed by each party independently, without waiting for the other
party to perform his promise.
Mutual and Dependent:

When the performance of one party depends on the prior performance of the other party.
Mutual and Concurrent:

When the promises are to be performed simultaneously.
What are Rules Regarding Performance of Reciprocal Promises ?

Regarding Simultaneous Performance:
When a contract consists of reciprocal promises to be simultaneously performed, the promisor
need not perform his promise unless the promisee is ready and willing to perform his reciprocal
promise.
Regarding Order of Performance:

Where the order in which reciprocal promises are to be performed is expressly fixed by the
contract, they must be performed in that order, and where the order is not expressly fixed by the
contract, they must be performed in the order which the nature of the transaction requires.
Effects of Preventing the Performance:

When a contract contains reciprocal promises, and one party to the contract prevents the other
from performing his promise, the contract becomes voidable at the option of the party so
prevented; and such party is entitled to compensation from the other party for any loss which he
may sustain in consequence of the non-performance of the contract.
Effects of non-performance in case of Mutual and Dependent Reciprocal Promises:

Where the performance of one party depends on the prior performance of the other party and the
party who is liable to perform first, fails to perform it, then such party cannot claim the
performance from the other party and must make compensation to the other party for any loss
which the other party may sustain by the non-performance of the contract.
6 By: M. Asif, ACA

Effect of Promise to do Legal and Illegal things:

Where persons reciprocally promise, firstly, to do certain things which are legal, and secondly,
under specified circumstances, to do certain other things which are illegal, the first set of promises
is a contract, but the second is a void agreement.
Effect of alternative Promise being Illegal:

In the case of an alternative promise, one branch of which is legal and the other illegal, the legal
branch alone can be enforced.
LO 11: ASSIGNMENT OF CONTRACTS:

Meaning of Assignment of Contracts:
Assignment of a contract means transfer of contractual rights and liabilities to a third party.
Modes of Assignment of Contracts:

Assignment of a contract may take place in the following ways:
1. Assignment by act of parties
2. Assignment by operation of law
Assignment by Act of Parties:

Assignment by act of parties takes place when the parties to a contract themselves make the
assignment. Such an assignment is subject to the following rules:
1. If it is a contractual obligation/right involving a personal skill or ability, then it cannot be
assigned.
2. If the contract expressly or impliedly provides that the contract shall be performed by the
promisor only, such obligation cannot be assigned.
3. If the contract does not expressly or impliedly provide that the contract shall be performed
by the promisor only, the promisor or his representative may employ a competent person
to perform such obligation, but promisor still remains liable to the promisee for proper
performance.
4. Actionable claims (i.e. claim to any debt or to any beneficial interest in movable property)
can always be assigned by instrument in writing.
Assignment by Operation of Law:

1. In case of death of any party:
The rights and obligations (other than those of personal nature) of the deceased party pass
on to his legal representatives.
2. In case of insolvency of any party:
The rights and obligations (other than those of personal nature) of the insolvent party pass
on to the Official Receiver or Assignee.
7 By: M. Asif, ACA

LO 12: APPROPRIATION OF PAYMENT:

Meaning of Appropriation of Payment:
Appropriation of payment means application of payment to a particular debt.
Rules Regarding Appropriation of Payments:

Where a debtor owes several distinct debts to a creditor and makes payment to a creditor, the
following various rules regarding appropriation of payments shall apply:
1. Where debt to be discharged is indicated:

The payment, if accepted must be applied accordingly.
2. Where debt to be discharged is not indicated
The creditor has option to apply the payment to any lawful debt due from the debtor even if
it is a time barred debt. But he cannot apply to a disputed debt.
3. Where neither party makes any appropriation:
The payment shall be applied in discharge of the debts in order of time whether or not they
are time barred. If principal and markup both are due, then markup is settled first and then
principal amount is settled.
8 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 12 Discharge of a Contract
CHAPTER TWELVE
DISCHARGE OF A CONTRACT
ICAP'S STUDY TEXT
WHAT IS THE MEANING OF DISCHARGE OF A

LO 1
CONTRACT
12.1.1
LO 2 DISCHARGE BY PERFORMANCE 12.2.1 – 12.2.2
LO 3 DISCHARGE BY MUTUAL AGREEMENT 12.3.1 – 12.3.6
LO 4 DISCHARGE BY OPERATION OF LAW 12.4.1 – 12.4.4
LO 5 DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE 12.5.1 – 12.5.4
LO 6 DISCHARGE BY LAPSE OF TIME 12.6.1
LO 7 DISCHARGE BY BREACH OF CONTRACT 12.7.1 – 12.7.2
1 By: M. Asif, ACA

LO 1: WHAT IS THE MEANING OF DISCHARGE OF A CONTRACT:

Discharge of a contract means termination of the contractual relations between the parties to a
contract i.e. when the rights and obligations of the parties under the contract come to an end.
LO 2: DISCHARGE BY PERFORMANCE:
A contract can be discharged by performance in any of the following ways:
By Actual Performance:
when the parties to the contract perform their promises in accordance with the terms of the
contract.
By Attempted Performance or Tender:

when the promisor has made an offer of performance (i.e. a Valid Tender) to the promisee but it has
not been accepted by the promisee.
LO 3: DISCHARGE BY MUTUAL AGREEMENT:

A contract can be discharged by mutual agreement in any of the following ways:
Novation:
Novation means the substitution of a new contract for the original contract. Such a new contract
may be either between the same parties or between different parties. The term of contracts may or
may not be changed. The consideration for the new contract is the discharge of the original
contract.
Rescission:
Rescission means cancellation of the contract by any party or all the parties to a contract.
Alteration:
Alteration means a change in the terms of a contract with mutual consent of the parties. Alteration
discharges the original contract and creates a new contract. However, parties to the new contract
must not change.
Remission:
Remission means acceptance by the promisee of a lesser fulfillment of the promise made. No
consideration is necessary for remission.
Waiver:
Waiver means intentional relinquishment of a right under the contract. Thus, it amounts to
releasing a person of certain legal obligation under a contract.
LO 4: DISCHARGE BY OPERATION OF LAW:

Contract may be discharged by operation of law in the following cases:
By Death of the Promisor:
A contract involving the personal skill or ability of the promisor is discharged automatically on the
death of the promisor.
2 By: M. Asif, ACA

By Insolvency:
When a person is declared insolvent, he is discharged from his liability up to the date of his
insolvency.
By Unauthorised Material Alteration:

If any party makes any material alteration in the terms of the contract without the approval of the
other party, the contract comes to an end.
By the Same Identity of Promisor and Promisee:

When the promisor becomes the promisee, the other parties are discharged.
LO 5: DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE:

Types and Effects of Impossibility:
There are two types of impossibility which may affect a contract i.e. Initial Impossibility, and
Supervening Impossibility.
Initial Impossibility:
Initial impossibility means the impossibility existing at the time of making the contract.
The effects of initial impossibility are as follows:

 Such agreement is void whether are not both parties know about the initial impossibility.
 If promisor alone knows about initial impossibility, such promisor must compensate
promisee for any loss which he sustains through the nonperformance of the promise.
Supervening Impossibility:
Supervening impossibility means impossibility which does not exist at the time of making the
contract but which arises subsequently after the formation of the contract and which makes the
performance of the contract impossible or illegal.
The effects of supervening impossibility are as under:

 The contract to do such an act becomes void when the act becomes impossible.
 When contract becomes void, any person who has received any benefit under such
agreement or contract is bound to restore it or to make compensation for it, to the person
from whom he received it.
 If promisor alone knows about supervening impossibility, such promisor must compensate
promisee for any loss which he sustains through the nonperformance of the promise.
Cases when a contract is discharged on the ground of supervening impossibility:

A contract is discharged by supervening impossibility in the following cases:
Destruction of Subject Matter

The contract is discharged if the subject matter of the contract is destroyed after the formation of
the contract without any fault of either party.
Death or Personal Incapacity:

The contract is discharged on the death or incapacity or illness of a person if the performance of a
contract depends on his personal skill or ability.
3 By: M. Asif, ACA

Effect of Promise to do Legal and Illegal things:

Where persons reciprocally promise, firstly, to do certain things which are legal, and secondly,
under specified circumstances, to do certain other things which are illegal, the first set of promises
is a contract, but the second is a void agreement.
Effect of alternative Promise being Illegal:

In the case of an alternative promise, one branch of which is legal and the other illegal, the legal
branch alone can be enforced.
LO 11: ASSIGNMENT OF CONTRACTS:

Meaning of Assignment of Contracts:
Assignment of a contract means transfer of contractual rights and liabilities to a third party.
Modes of Assignment of Contracts:

Assignment of a contract may take place in the following ways:
1. Assignment by act of parties
2. Assignment by operation of law
Assignment by Act of Parties:

Assignment by act of parties takes place when the parties to a contract themselves make the
assignment. Such an assignment is subject to the following rules:
1. If it is a contractual obligation/right involving a personal skill or ability, then it cannot be
assigned.
2. If the contract expressly or impliedly provides that the contract shall be performed by the
promisor only, such obligation cannot be assigned.
3. If the contract does not expressly or impliedly provide that the contract shall be performed
by the promisor only, the promisor or his representative may employ a competent person
to perform such obligation, but promisor still remains liable to the promisee for proper
performance.
4. Actionable claims (i.e. claim to any debt or to any beneficial interest in movable property)
can always be assigned by instrument in writing.
Assignment by Operation of Law:

1. In case of death of any party:
The rights and obligations (other than those of personal nature) of the deceased party pass
on to his legal representatives.
2. In case of insolvency of any party:
The rights and obligations (other than those of personal nature) of the insolvent party pass
on to the Official Receiver or Assignee.
7 By: M. Asif, ACA

LO 12: APPROPRIATION OF PAYMENT:

Meaning of Appropriation of Payment:
Appropriation of payment means application of payment to a particular debt.
Rules Regarding Appropriation of Payments:

Where a debtor owes several distinct debts to a creditor and makes payment to a creditor, the
following various rules regarding appropriation of payments shall apply:
1. Where debt to be discharged is indicated:

The payment, if accepted must be applied accordingly.
2. Where debt to be discharged is not indicated
The creditor has option to apply the payment to any lawful debt due from the debtor even if
it is a time barred debt. But he cannot apply to a disputed debt.
3. Where neither party makes any appropriation:
The payment shall be applied in discharge of the debts in order of time whether or not they
are time barred. If principal and markup both are due, then markup is settled first and then
principal amount is settled.
8 By: M. Asif, ACA

3. if performance beyond stipulated time is accepted, promisee is entitled to claim the

compensation for any loss but only if promisee gives notice to the promisor of his intention
to do so.
Where time is not essence of a contract:

1. contract does not become voidable at the option of the promisee.
2. promisee is entitled to claim the compensation for any loss but only if promisee gives notice
to the promisor of his intention to do so.
6 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 13 Remedies for breach of contract
CHAPTER THIRTEEN
REMEDIES FOR BREACH OF CONTRACT
ICAP'S STUDY TEXT
LO 1 REMEDIES FOR BREACH OF CONTRACT 13.1.2
LO 2 DIFFERENT KINDS OF DAMAGES 13.1.3
1 By: M. Asif, ACA

LO 1: REMEDIES FOR BREACH OF CONTRACT:

Meaning of Remedy:
A remedy is the course of action available to an aggrieved party (i.e. the party not at default) for the
enforcement of a right under a contract.
Remedies for Breach of Contract:

Rescission of Contract:
Rescission means a right not to perform obligation. In case of breach of a contract, the promisee
may put an end to the contract. In such a case, the aggrieved party is discharged from all the
obligations under the contract and is entitled to claim compensation for the damage which he has
sustained because of the non-performance of the contract.
Suit for Damages:

Damages are monetary compensation allowed for loss suffered by the aggrieved party due to
breach of a contract.
Suit for Specific Performance:

Suit for specific performance means demanding the court's direction to the defaulting party to carry
out the promise according to the terms of the contract.
Cases where suit for specific performance is maintainable

(i) Where Actual damages arising from breach are not measurable
(ii) Where Monetary compensation is not an adequate remedy.
(iii) There is a contract for the sale of rare commodities
(iv) There is a contract for the sale of land, building, houses.
Cases where suit for specific performance is not maintainable:

(i) Where the damages are considered as an adequate remedy.
(ii) Where the contract is of personal nature, e.g. contract to marry.
(iii) Where the court cannot supervise the performance of the contract.
(iv) Where one of the parties is a minor.
(v) Where the contract is inequitable to either party.
Suit for Injunction:

Suit for injunction means demanding court's stay order. Injunction means an order of the court
which prohibits a person to do a particular act. Where a party to a contract does something which
he promised not to do, the court may issue an order prohibiting him from doing so.
Suit for Quantum Meruit:

Quantum Meruit means as much as is earned. Right to Quantum Meruit means a right to claim the
compensation for the work already done.
LO 2: DIFFERENT KINDS OF DAMAGES:

Nominal Damages:
These are very small damages e.g. ten rupees.
Nominal damages are awarded where there is only a technical violation of a legal right but the
aggrieved party has not in fact suffered any loss because of breach of contract.
2 By: M. Asif, ACA

Ordinary Damages:
Ordinary damages are those which naturally arise in the usual course of things from such breach.
These damages can be recovered if:

(i) The aggrieved party has suffered by breach of contract, and
(ii) The damages must be a direct consequence of the breach of contract.
In a contract for the sale of goods, the measure of ordinary damages is the difference between the
contract price and the market price of such goods on the date of breach.
Special Damages:
Special damages are those which may reasonably be supposed to have been in the contemplation of
both parties as the probable result of the breach of a contract.
These damages can be recovered if the special circumstances which would result in a special loss in
case of breach of a contract are communicated to the promisor, e.g. loss of profits on account of
default by the other party to the contract can be claimed only when an advance notice of such
damages has been given before
Exemplary or Punitive or Vindictive Damages:

Exemplary damages are those which are in the nature of punishment.
The court may award these damages in case of

1. a breach of promise to marry, where damages shall be calculated on the basis of mental
injury sustained by the aggrieved party,
2. Wrongful dishonour of a cheque by a banker.A trader may recover such damages as
wrongful dishonour of cheque shall adversely affect his goodwill but a non-trader whose
cheque is wrongfully dishonoured will have to prove the loss of goodwill before claiming
such damages.
Damages for Inconvenience and Discomfort:

If a party has suffered physical inconvenience and discomfort due to breach of contract, that party
can recover the damages for such inconvenience and discomfort.
Liquidated Damages and Penalty:

When the parties to a contract at the time of formation of contract, specify a sum which will become
payable by the party responsible for breach, such specified sum is called:
(i) Liquidated Damages if the specified sum represents a fair and genuine pre-estimate of the
damages likely to result due to breach;
(ii) Penalty if the specified sum is disproportionate to the damages likely to result due to
breach.
Stipulation for Interest:

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

A clause in a contract which provides for forfeiture of security deposit in the event of failure to
perform is in the nature of a penalty. In such cases, the court may award reasonable compensation
only.
3 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 14 Indemnity and Guarantee
CHAPTER FOURTEEN
INDEMNITY AND GUARANTEE
ICAP'S STUDY TEXT
LO 1 BASICS OF CONTRACT OF INDEMNITY 14.1.1 – 14.1.4

14.2.1 – 14.2.4, 14.2.6,
LO 2 BASICS OF CONTRACT OF GUARANTEE
14.2.7
LO 3 DISCHARGE OF SURETY 14.2.5, 14.2.8 – 14.2.9
DIFFERENCE BETWEEN CONTRACT OF INDEMNITY
LO 4 14.2.10
AND CONTRACT OF GUARANTEE
1 By: M. Asif, ACA

LO 1: BASICS OF CONTRACT OF INDEMNITY:

Definition of “Contract of Indemnity”:
A contract of indemnity is a contract whereby one party promises to save the other party from the
loss caused to him by the conduct of the promisor himself, or by the conduct of any other person.
Parties to a Contract of Indemnity:

There are two parties in a contract of indemnity i.e.
1. Indemnifier: (also called Promisor)
Indemnifier is the person who promises to compensate the loss.
2. Indemnity holder: (also called Indemnified and Promisee)
Indemnity holder is the person whose loss is to be compensated.
Rights and Liabilities of Parties:

Rights of Indemnity Holder when sued:
Indemnity holder is entitled to recover following (provided he acts within the scope of
indemnifier’s authority):
1. All damages which he may be compelled to pay in respect of any suit relating to matters
covered by contract of indemnity.
2. All costs which he may be compelled to pay in brining or defending such suits provided he
did not act against orders of indemnifier and he acted prudently in the absence of contract
of indemnity.
3. All sums which he may have paid under the terms of any compromise of any such suit,
provided compromise is not against the order of indemnifier and he acted prudently in the
absence of contract of indemnity.
Commencement of Liability of Indemnifier:

Contract of indemnity is silent about time of commencement of liability of indemnifier. On the basis
of judicial decisions, liability of an indemnifier commences as soon as the liability of the indemnity
holder becomes absolute and certain, even though indemnity holder has not paid it yet.
LO 2: BASICS OF CONTRACT OF GUARANTEE:

Definition and Essentials of “Contract of Guarantee”:
Definition:
A "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a third
person in case of his default.
Essentials of Contract of Guarantee:

1. A contract of guarantee is a tripartite agreement i.e. there are three contracts between
parties
a. Contract between creditor and principal debtor.
b. Contract between creditor and surety
c. Contract between surety and principal debtor.
2. There must be existence of a liability whose performance is guaranteed.
3. All the essentials of a contract must exist.
4. There must be consent of all three parties.
5. A guarantee must not be obtained by Misrepresentation.
6. A guarantee must not be obtained by Fraud.
2 By: M. Asif, ACA

Parties to a Contract of Guarantee:

There are three parties in a contract of guarantee i.e.
1. Surety
The Person who gives the guarantee
2. Principal debtor
The person in respect of whose default the guarantee is given.
3. Creditor
The person to whom the guarantee is given
Kinds of Guarantee:
There are two types of guarantee:
1. Specific Guarantee
A guarantee which is limited to a single transaction is called a "specific guarantee”.
2. Continuing guarantee
A guarantee which extends to a series of transactions is called a "continuing guarantee”.
Liability of Surety:
1. The liability of the surety is co-extensive (i.e. equal) with that of the principal debtor, unless
it is otherwise provided by the contract.
2. Liability of surety can be made less than that of principal debtor by express contract.
3. Liability of surety arises immediately on the default of principal debtor. Creditor can sue
surety without suing the principal debtor.
4. If a condition is precedent to surety’s guarantee, the guarantee is not valid if the condition is
not fulfilled (e.g. condition of joining another person as co-surety).
Rights of Surety:
Rights against Principal Debtor:
1. Right of Subrogation:
When surety has paid the guaranteed debt on default of principal debtor, he is entitled to all
the rights which creditor had against the principal debtor.
2. Right to be indemnified:
In every contract of guarantee there is an implied promise by the principal debtor to
indemnify the surety; and the surety is entitled to recover from the principal debtor
whatever sum he has rightfully paid under the guarantee.
Rights against Creditor:

1. Right to Claim Securities
At the time of payment, surety can demand the securities which creditor has received from
principal debtor at time of creation of contract, whether surety is aware of such securities
or not. If creditor loses any such security by his negligence, surety is discharged from
liability upto that extent.
2. Right to claim Set-off
If creditor sues surety for repayment, the surety can claim set-off if principal debtor is
entitled to claim any deduction from creditor.
3 By: M. Asif, ACA

Rights against Co-securities to claim contribution:

1. Co-sureties liable to contribute equally
In the absence of any contract to the contrary, where two or more persons are co-sureties
for the same debt, the co-sureties are liable to contribute equally if default is made by
principal debtor.
2. Liability of co-sureties agreed in different sums
If co-sureties have agreed to guarantee different sums, they are liable to pay equally subject
to the maximum amount guaranteed by each one.
3. Release of one co-surety does not discharge others
Where there are co-sureties, a release by the creditor of one of them does not discharge the
others; neither does it free the surety so released from his responsibility to the other
sureties.
LO 3: DISCHARGE OF SURETY:
Discharge by Revocation:
By Notice of Revocation:
A specific guarantee can be revoked by notice if the liability has not arisen. A continuing guarantee
may be revoked anytime by giving a notice to creditor, however surety remains liable for
transactions prior to notice.
By Surety's death:
In specific guarantee, surety is discharged from liability on his death if liability has not already
occurred. In continuing guarantee, surety is discharged from transactions after his death. However
surety remains liable for transactions prior to death.
By Novation:
If the parties to a contract agree to substitute a new contract for it, the original contract need not be
performed.
Discharge by Conduct of the Creditor:

By Alteration in terms of contract:
Any variance in the terms of the contract, made without the surety's consents, discharges the surety
as to transactions subsequent to the variance.
By release or discharge of principal debtor:

Surety is discharged from liability if:
 principal debtor is released by creditor, or
 principal debtor is discharged by any act or omission of the creditor.
By Arrangement:
Surety is discharged from liability if creditor makes a composition with the principal debtor, or
creditor promises to give time or not to sue the principal debtor, unless surety gives his consent.
Discharge by Invalidation of Contract:

By Misrepresentation/Fraud:
A guarantee is invalid if creditor has been obtained it:
 by misrepresentation or fraud concerning a material part of the transaction
 by keeping silence as to material circumstance.
4 By: M. Asif, ACA

By creditor's act or omission impairing surety's eventual remedy:

If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act
which his duty to the surety requires him to do, and the eventual remedy of the surety himself
against the principal debtor is thereby impaired, the surety is discharged.
Failure of co-surety to join surety:

Where a person gives a guarantee upon a contract that the creditor shall not act upon it until
another person has joined in it as co-surety, the guarantee is not valid if that other person does not
join.
LO 4: DIFFERENCE BETWEEN CONTRACT OF INDEMNITY AND CONTRACT OF GUARANTEE:
Basis of Distinction Contract of Indemnity Contract of Guarantee

There are two parties i.e. indemnifier and There are three parties i.e. surety, principal debtor,
Number of Parties
indemnity-holder. and creditor.
Number of Contracts There is only one contract. There are three contracts.
Indemnifier undertakes to save the The surety undertakes for the payment of debts of
Object
indemnity holder from any loss. principal debtor in case of his default.
The liability of indemnifier is primary and The liability of surety is secondary and conditional
Nature of liability
unconditional. and co-extensive.
Commencement of The liability arises only on the happening The liability arises only on non-payment of a debt or
liability of a contingency. the non-performance of a promise.
Indemnifier cannot sue a third party in A surety can sue the principal debtor in his own
Right to sue
his own name. name, after discharge of his liability.
5 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 15 Bailment and Pledge
CHAPTER FIFTEEN
BAILMENT AND PLEDGE
ICAP'S STUDY TEXT
PART A – BAILMENT
LO 1 BASICS OF BAILMENT 15.1.1 – 15.1.3
LO 2 RIGHTS AND DUTIES OF PARTIES 15.2.1 – 15.2.4
LO 3 TERMINATION OF BAILMENT 15.3.1, 15.3.2
LO 4 FINDER OF GOODS 15.4.1, 15.4.2
PART B – PLEDGE
LO 5 BASICS OF PLEDGE 15.5.1
LO 6 RIGHTS AND DUTIES OF PARTIES 15.5.2 – 15.5.3
LO 7 PLEDGE BY NON-OWNERS 15.5.4
LO 8 DIFFERENCE BETWEEN BAILMENT AND PLEDGE 15.5.5
1 By: M. Asif, ACA

PART A – BAILMENT
LO 1: BASICS OF BAILMENT:
Definition and Essentials of “Bailment”:
Definition:
A "bailment" is the delivery of goods by one person to another for some purpose, upon a condition
that they shall be returned or otherwise disposed of according to the directions of the person
delivering them, when the purpose is accomplished.
Essential Features of Bailment:

1. Delivery of Goods:
Bailment involves voluntary delivery of movable goods from one person to another. There
are two types of delivery i.e.
 Actual delivery:
When bailor hands-over the goods physically to bailee.
 Constructive delivery:
It does not involves handing-over goods physically, but something is done which has the
effect of putting goods in possession of bailee e.g. giving bill of landing when goods are
at sea on a ship.
2. Purpose:
Goods are given for some purpose e.g. for safe custody, for personal use, for transportation,
for repair.
3. Return of Goods:
When the purpose is accomplished, goods are to be returned or otherwise to be disposed of
according to the direction of bailor.
Parties to a Contract of Bailment:

There are two parties in a contract of bailment i.e.
1. Bailor:
The person delivering the goods is called the "bailor".
2. Bailee:
The person to whom they are delivered is called the "bailee".
Kinds of Bailment:
Kinds from “reward” point of view:
1. Gratuitous bailment:
It is one in which neither the bailor nor the bailee is entitled to any remuneration e.g.
handing over a calculator to a friend for personal use.
2. Non-gratuitous bailment:
It is one in which either the bailor or the bailee is entitled to a remuneration e.g. handing
over goods for hire, or for repair.
Kinds from “benefit” point of view:

1. Bailment for exclusive benefit of bailor e.g. handing over goods for safe custody.
2. Bailment for exclusive benefit of bailee e.g. handing over a calculator to a friend for personal
use.
3. Bailment for mutual benefit of bailor and bailee e.g. handing over goods for hire, or for
repair.
2 By: M. Asif, ACA

LO 2: RIGHTS AND DUTIES OF PARTIES:

Duties of Bailor:
Duty to disclose faults in goods bailed:
In case of non-gratuitous bailment, if bailor does not disclose the defect in goods to bailee, bailor is
responsible for all damages whether he was aware of the defect or not.
In case of gratuitous bailment, if bailor does not disclose the defect in goods to bailee, bailor is
responsible for all damages only if he was aware of the defect.
Duty to repay expenses:

If goods are to be kept or some work is to be done on them, it is bailor’s duty to repay to the bailee:
 All necessary expenses incurred by bailee for the purpose of the bailment, if bailee is to
receive no remuneration.
 Only extraordinary expenses incurred by bailee for the purpose of the bailment, if bailee is
to receive remuneration.
Duty to indemnify in case of early termination of gratuitous bailment:

In a gratuitous bailment, if bailor takes delivery back before expiry of its term and bailee suffers
loss then bailor is liable to pay compensation for the loss which exceeds benefits derived.
Duty to receive back the goods:

It is the duty of bailor to receive goods back.
Duty to indemnify bailee:

Bailor is liable to indemnify bailee for any loss arising due to defective title of bailor.
Rights of Bailor:
Right for enforcement of bailor’s duties:
 Right to claim damages for loss caused to the goods if bailee does not take reasonable care.
 Right to claim compensation for any damage from unauthorized use of goods bailed.
 Right to claim compensation for any expenses or loss caused by the unauthorized mixing of
goods bailed with his own goods.
 Right to claim increase or profit from goods bailed
 Right to demand return of goods as soon as the time of bailment expires or purpose is
accomplished. In case of gratuitous bailment, bailor can claim return of goods even before
expiry of its term.
Right to terminate bailment if bailee acts inconsistent with conditions

A contract of bailment is voidable at the option of the bailor, if the bailee does any act inconsistent
with the conditions of the bailment.
Right to claim compensation if goods are not returned at proper time:

If, by the default of the bailee, the goods are not returned at the proper time, bailor has right to
claim compensation for any damage to goods.
3 By: M. Asif, ACA

Duties of Bailee:
Duty to take reasonable care of goods delivered to him:
Bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence
would, under similar circumstances, take of his own goods. However, bailee is not liable if goods are
lost or destroyed despite reasonable care.
Duty not to make unauthorized use of goods delivered to him:

If the bailee uses goods in a manner which is not in accordance with terms of the contract, he is
liable to make compensation to the bailor for any damage arising to the goods from or during such
use even if he is not guilty of negligence.
Duty not to mix goods bailed with his own goods:

If the bailee, with the consent of the bailor, mixes the goods of the bailor with his own goods, there
is no breach of contract. The bailor and the bailee shall have an interest, in proportion to their
respective shares, in the mixture thus produced.
If the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods,
there is a breach of contract with following effects:
1. If goods can be separated or divided, property in the goods remains in the parties
respectively; but the bailee is bound to bear the expense of separation or division, and any
damage arising from the mixture.
2. If goods cannot be separated or divided, the bailor is entitled to be compensated by the
bailee for the loss of the goods.
Duty to return the goods:

It is the duty of the bailee to return goods without demand, as soon as the time of bailment expires
or purpose is accomplished.
If bailee fails to return the goods at proper time, he is liable for any loss, or destruction of goods
even if he is not guilty of negligence.
Duty to return increase or profit from goods bailed:

In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor any
increase or profit which have accrued from the goods bailed.
Rights of Bailee:
Right for Enforcement of Bailor’s duties:
 Bailee has a right to claim damages for loss arising from the undisclosed faults in the goods
bailed.
 Right to claim reimbursement for extraordinary expenses incurred in relation to goods
bailed.
 Right to indemnity for any loss which the bailee may sustain by reason that the bailor was
not entitled to make the bailment.
 right to claim compensation for the safe custardy of the goods if the bailer has wrongfully
refused to take delivery of goods after the term of bailment.
Right to deliver goods in case of several joint owner:

Where there are several joint bailors, bailee may return the goods to any one of joint-owners (in the
absence of any agreement to the contrary).
4 By: M. Asif, ACA

LO 1: BASICS OF CONTRACT OF INDEMNITY:

Definition of “Contract of Indemnity”:
A contract of indemnity is a contract whereby one party promises to save the other party from the
loss caused to him by the conduct of the promisor himself, or by the conduct of any other person.
Parties to a Contract of Indemnity:

There are two parties in a contract of indemnity i.e.
1. Indemnifier: (also called Promisor)
Indemnifier is the person who promises to compensate the loss.
2. Indemnity holder: (also called Indemnified and Promisee)
Indemnity holder is the person whose loss is to be compensated.
Rights and Liabilities of Parties:

Rights of Indemnity Holder when sued:
Indemnity holder is entitled to recover following (provided he acts within the scope of
indemnifier’s authority):
1. All damages which he may be compelled to pay in respect of any suit relating to matters
covered by contract of indemnity.
2. All costs which he may be compelled to pay in brining or defending such suits provided he
did not act against orders of indemnifier and he acted prudently in the absence of contract
of indemnity.
3. All sums which he may have paid under the terms of any compromise of any such suit,
provided compromise is not against the order of indemnifier and he acted prudently in the
absence of contract of indemnity.
Commencement of Liability of Indemnifier:

Contract of indemnity is silent about time of commencement of liability of indemnifier. On the basis
of judicial decisions, liability of an indemnifier commences as soon as the liability of the indemnity
holder becomes absolute and certain, even though indemnity holder has not paid it yet.
LO 2: BASICS OF CONTRACT OF GUARANTEE:

Definition and Essentials of “Contract of Guarantee”:
Definition:
A "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a third
person in case of his default.
Essentials of Contract of Guarantee:

1. A contract of guarantee is a tripartite agreement i.e. there are three contracts between
parties
a. Contract between creditor and principal debtor.
b. Contract between creditor and surety
c. Contract between surety and principal debtor.
2. There must be existence of a liability whose performance is guaranteed.
3. All the essentials of a contract must exist.
4. There must be consent of all three parties.
5. A guarantee must not be obtained by Misrepresentation.
6. A guarantee must not be obtained by Fraud.
2 By: M. Asif, ACA

Right of lien:
Finder has a right to retain the goods against the true owner until he receives reasonable
compensation for trouble and expenses incurred by him to find the true owner and for safe custody
of goods. But he cannot file suit to recover expenses because these expenses were voluntarily
without any contract.
Right to sue for reward:

Finder has a right to retain goods and can also file a suite for recovery of reward which was offered
by true owner and was communicated to finder before finding goods.
Right of Sale:
If the true owner cannot be found with reasonable efforts, or true owner refuses to pay the lawful
charges of the finder, finder may sell the goods in following cases:
1. When things may perish or may lose substantial value, or
2. When lawful charges of finder on goods amounts two-third of value of goods.
PART B – PLEDGE
LO 5: BASICS OF PLEDGE:
Definition of “Pledge” or “Pawn”:
The bailment of goods as security for payment of a debt or performance of a promise is called
"pledge".
Parties to a Contract of Pledge:

There are two parties in a contract of pledge i.e.
1. Pawnor or Pledgor:
The person delivering the goods is called the "pawnor".
2. Pawnee or Pledgee:
The person to whom they are delivered is called the "pawnee".
LO 6: RIGHTS AND DUTIES OF PARTIES:

Rights of Pawnee:
Right of Lien (i.e. right to retain goods):
The pawnee has right to retain the goods pledged until his dues are paid including amount of debt,
interest of debt and all necessary expenses incurred by him in respect of preservation of goods.
Right of retainer for subsequent advances:

If pawnee lends further money to same debtor after the date of pledge without any further security,
it shall be presumed (unless agreed otherwise) that the right of pawnee over pledged goods
extends even to subsequent advances.
Pawnee's right as to extraordinary expenses incurred

The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the
preservation of the goods pledged.
6 By: M. Asif, ACA

Rights where pawnor makes default:

Where a pawnor makes default in the payment of the debt or performance of promise, pawnee has
right:
1. To file a suit against the pawnor for the recovery the amount due to him, and may retain
goods pledged as a collateral security, or
2. To sell things pledged, after giving to the pawnor a reasonable notice of his intention to sell.
Rights of Pawnor:
Right to get back goods:
Pawnor is entitled to get back goods pledged on the performance of promise or repayment of loan,
interest and necessary expenses.
Right to redeem debt:

A pawnor who defaults in the payment of debt, still has right to redeem the debt before the actual
sale of goods pledged. However, he should also pay additional expenses incurred because of his
default.
Right to see:
Pawnor has a right to see that the pawnee preserves the goods pledged and properly maintains
them.
Study Tip: Duties of Pawnor and Pawnee are same as duties of Bailor and Bailee.
LO 7: PLEDGE BY NON-OWNERS:
General rule is that only an owner can create valid pledge. However, in following cases, a non-
owner can also create a valid pledge.
Mercantile Agent:
A mercantile agent, who is in possession of the goods or the documents of title to goods (e.g. bill of
lading, railway receipts), can make a pledge with the consent of owner.
Such a pledge will be valid even if the agent has no actual authority provided:
 Pawnee acts in good faith and
 Pawnee is not aware that agent has no authority to pledge.
Person in possession under voidable contract:

If a person has obtained possession of goods under a voidable contract, he can make a valid pledge
provided:
 Contract has not been rescinded at time of pledge, and
 Pledgee has acted in good faith.
Seller in possession of goods after sale:

Where a seller is in possession of goods even after sale and pledges them to a person who acts in
good faith, it will be a valid pledge.
Buyer in possession of goods before sale:

Where a buyer (or a person who agrees to buy) is in possession of goods before sale, and pledges
them to a person who acts in good faith, it will be a valid pledge.
7 By: M. Asif, ACA

Pledge by co-owner in possession:

Where there are several joint owners of goods and one of the co-owners is in possession of goods,
such co-owner can make valid pledge.
LO 8: DIFFERENCE BETWEEN BAILMENT AND PLEDGE:
Basis of
Pledge Bailment
Distinction
Name of Parties Pawnor (pledgor) and Pawnee (pledge) Bailor and Bailee
Pledge is the bailment of goods for specific purpose of Bailment is for any purpose other than as
Purpose
providing security to a debt or performance of a promise. security e.g. it may be repair, safe custody.
Bailee has no right of sale. Bailee can either
Right of Sale Pledgee has a right of sale on default after giving notice.
retain the goods or file the suit.
Bailee can use goods if terms of contract
Right of using Pledgee has no right of using the goods.
provide so.
8 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 16 Agency
CHAPTER SIXTEEN
AGENCY
ICAP'S STUDY TEXT
LO 1 DEFINITION AND TYPES OF AGENT 16.1.1 – 16.1.4
LO 2 CREATION OF AGENCY 16.1.5
LO 3 AUTHORITY OF AN AGENT 16.1.6
LO 4 RIGHTS AND DUTIES OF THE AGENT AND PRINCIPAL 16.2.1 – 16.2.4
LO 5 IRREVOCABLE AGENCY 16.3.1 – 16.3.3
LO 6 TERMINATION OF AGENCY 16.4.1 – 16.4.2
LO 7 UNDISCLOSED AGENCY 16.5.1 – 16.5.4

PERSONAL LIABILITY OF AN AGENT TO THIRD
LO 8 16.6.1
PARTY
1 By: M. Asif, ACA

LO 1: DEFINITION AND TYPES OF AGENT:

Definitions:
Agent:
An "agent" is a person employed to do any act for another or to represent another in dealings with
third persons.
Principal:
The person for whom such act is done, or who is so represented, is called the "principal".
Types of Agent:
Commercial agent or mercantile agent:
An agent who regularly buys or sells goods on behalf of a principal.
Broker :
A broker is an intermediary who arranges trades or transactions on behalf of clients (principals).
An example is a stock broker.
Auctioneer:
An auctioneer is an agent who is authorised to sell property of a principal at auction.
Del-credere agent:
A del credere agent is one who in consideration of an extra commission, guarantees his principal
that the persons with whom he enters into contract on behalf of the principal shall perform their
obligation.
Other Types:
 Company directors and managers
 Partners in a business partnership
LO 2: CREATION OF AGENCY:
An agency may be created in any of following ways:
Agency by express agreement:

Normally agency is created by an express agreement, specifying the scope of authority of agent.
This agreement may be in writing or in spoken words. However, in certain cases (e.g. to execute a
deed for sale or purchase of land) the agent must be appointed by executing a formal ‘power of
attorney’ on a stamped paper.
Agency by Ratification:
Ratification means the subsequent adoption and acceptance of an act originally done without
authority.
Where acts are done by one person on behalf of another, but without his knowledge or authority, he
may elect to ratify or to disown such acts. If he ratify them, the same effects will follow as if they
had been performed by his authority.
2 By: M. Asif, ACA

Requisites of valid ratification:

1. Act to be ratified should be done on behalf of person who wants to ratify it.
2. Principal must in existence at time when original contract was made and at time when it is
ratified.
3. Principal must be competent to contract at time when original contract was made and at
time when it is ratified.
4. Only lawful acts can be ratified.
5. Whole transaction must be ratified. There cannot be ratification of partial transaction.
6. Principal must have full knowledge of material facts.
7. Ratification must be made within a reasonable time.
8. Ratification must not injure a third person.
Agency by Estoppel:
When an agent has, without authority, done acts or incurred obligations to third persons on behalf
of his principal, the principal is bound by such acts or obligations if he has by his words or conduct
induced such third persons to believe that such acts and obligations were within the scope of the
agent's authority.
Agency by Necessity:
Agency by necessity occurs in circumstances where there is no agreement between the parties, but
an emergency requires that one party (the agent) has to take action to protect the interests of the
other party (the principal).
Following conditions must apply for agency by necessity:

1. There must be real emergency.
2. It must be impossible for the person acting as agent to contact the owner of the property to
obtain instructions.
3. The person acting as agent by necessity must act in the best interest of the principal.
Agency by operation of law:

In following situations, agency by operation of law may arise in following situations:
 In case of a company, directors are agents of a company.
 In case of partnership, partners are agents of the firm.
LO 3: AUTHORITY OF AN AGENT:
Types of agent’s authority:
Authority of an agent is of following types:
Actual/Real Authority:
Actual or real authority means authority which is given by principal expressly or impliedly.
 Authority of an agent is express when it is given by words written or spoken.
 Authority of an agent is implied when it is inferred from the circumstances.
Ostensible or Apparent Authority:

Apparent authority means an authority which the third parties dealing with the agent can presume
to be with the agent. An agent can bind principal to third parties by acts does within his apparent
authority (even though the act is in excess of his actual authority).
3 By: M. Asif, ACA

Authority in emergency:
An agent has authority, in an emergency, to do all such acts for the purpose of protecting his
principal from loss as would be done by a person of ordinary prudence, in his own case.
Delegation of agent’s authority:

Circumstances when a sub-agent can be appointed:
The general rule is that an agent is not entitled to delegate his authority to another person without
the consent of his principal.
However, followings are exceptions to this general rule where an agent can appoint a sub-agent:
1. If principal has expressly or impliedly permitted delegation of such power.
2. If by ordinary custom of trade, a sub-agent may be employed.
3. If nature of agency makes it necessary to appoint a sub-agent.
4. If acts to be done are purely immaterial.
5. If unforeseen emergencies arise rendering appointment of sub-agent necessary.
If a sub-agent is appointed in any of the above circumstances, he is called “properly appointed sub-
agent”.
Consequences if sub-agent is properly appointed:

1. Principal is liable to third parties for the acts of the sub-agent.
2. Agent is responsible to the principal for the acts of sub-agent. Principal cannot sue the sub-
agent.
3. Sub-agent is responsible for his acts to the agent, and not to the principal (except in case of
fraud or willful wrong act).
Consequences if sub-agent is improperly appointed:

1. Principal is not liable to third parties for the acts of the sub-agent.
2. Agent is responsible to the principal as well as third parties for the acts of sub-agent.
3. Sub-agent is responsible for his acts to the agent, and not to the principal.
Difference between sub-agent and co-agent:
Basis of
Co-agent/Substituted agent Sub-agent
Distinction
Co-agent is appointed alonwith agent on authority A sub-agent is employed by the original
Definition
from principal to act for principal. agent to act under his control.
Control Co-agent works under the control of principal. Sub-agent works under the control of agent.
Agent is not responsible to the principal for the acts of Agent is responsible to the principal for the
Responsibility
the substituted agent. acts of the sub-agent.
There is no contract between sub-agent and
Contract There is a contract between co-agent and principal.
principal.
If authority of agent is revoked, co-agent is not If authority of agent is revoked, sub-agent is
Termination
affected. automatically terminated.
Remuneration Remuneration of co-agent is paid by principal. Remuneration of sub-agent is paid by agent.
4 By: M. Asif, ACA

LO 4: RIGHTS AND DUTIES OF THE AGENT AND PRINCIPAL:

Duties of Agent:
Duty to follow principal’s directions or customs:
Agent must act within the scope of authority according to directions of the principal. If agent acts
otherwise:
 if any loss is sustained, he has to make the loss good.
 if any profit is accrued, he must account for it.
Duty to carry out the work with reasonable skill and diligence:
An agent must conduct business with reasonable skill and diligence. If any loss occurs as direct
consequence of his negligence, he must compensate it.
Duty to render accounts:

It is the duty of agent to keep proper accounts of his principal’s money or property and render them
on demand.
Duty to communicate:
If any difficulty or emergency arises, it is duty of agent to use all reasonable steps to communicate
to principal to obtain instructions.
Duty not to deal in his own accounts:

An agent must not deal on his own account in the business of agency, without obtaining the consent
of his principal.
Duty to pay sums received for principal

Agent is bound to pay to his principal all sums received on his account, after deducing amounts due
to him.
Duty not to delegate authority:

An agent must not further delegate his authority to another person, except when allowed.
Duty in case of principal’s death or insanity:

When an agency is terminated by death or insanity of principal, agent is abound to take necessary
stops for protection and preservation of interests in his hands.
Rights of Agent:
Right to receive remuneration:
Agent is entitled to receive his agreed remuneration, or a reasonable remuneration if nothing is
agreed; unless he agrees to act gratuitously.
Rights of retainer:
An agent has right to retain, out of sums received on account of principal, all moneys due to himself
in respect of his remuneration, advances made or expenses incurred in conducting business of
agency.
Right of lien:
Subject to contract to the contrary, an agent has right to retain goods of the principal until the
amount due to him for commission, disbursement and services has been paid.
5 By: M. Asif, ACA

Right to be indemnified against consequences of lawful acts:

An agent has right to be indemnified against the consequence of all lawful acts done by him in
exercise of his authority.
Right to be indemnified against consequences of acts done in good faith:

An agent has right to be indemnified against the consequence of all acts done in good faith by him in
exercise of his authority.
Right to compensation:
Agent has a right to be compensated for inuries sustained by him due to principal’s neglect or lack
of skill.
Right of stoppage of goods in transit:

An agent has right to stop the goods in transit to the principal (just like an unpaid seller) if:
 he has bought goods either with his own money or by incurring a personal liability for the
price, and
 the principal has become insolvent.
Duties of Principal:
Principal has following duties (already explained as rights of agent)
1. Duty to indemnify agent for lawful acts
2. Duty to indemnify agent for acts done in good faith
3. Duty to compensate for his neglect or lack of skill.
4. Duty to pay
Rights of Principal:
Right to revoke:
Principal can revoke the authority given to his agent except in case of irrevocable agency or where
authority has been exercised.
Right in case of departure from directions:

If agent acts otherwise than the instructions of the principal, then principal:
 Must be compensated by the agent for any loss.
 Is entitled to profit (if any) that occurred from the transaction.
Right in case of misconduct:

Principal is entitled to compensation for any loss which is the direct consequences of agent’s
neglect, misconduct or lack of skill.
Right to accounts:
It is the right of principal to obtain proper accounts from agent on demand.
Right to repudiate transaction:

If an agent deals with his own account in the business of agency without consent of principal,
principal can repudiate the transaction.
Right to claim benefit:

If agent secured secret profit during the course of agency without consent of principal, then
principal is entitled to claim all the benefits from the transaction.
6 By: M. Asif, ACA

LO 5: IRREVOCABLE AGENCY:
When the authority given to an agent cannot be revoked, it is said to be an irrevocable agency. An
agency becomes irrevocable in following cases:
Where agency is coupled with interest:

When agent has himself an interest in the subject-matter of agency, the agency is said to be coupled
with interest. Such an agency is created with the object of protecting or securing any interest of the
agent. Such agency cannot be revoked in the absence of express provision in the contract.
Where revocation would cause the agent personal loss:

Where agent has contracted a personal liability, the agency cannot be revoked by principal
unilaterally.
Where the authority has been partly exercised by the agent:

If the authority has been partly exercised, it cannot be revoked regarding such acts and obligations
which arise from acts already done.
LO 6: TERMINATION OF AGENCY:
An agency may be terminated in following ways:
By act of Parties:
By Mutual Agreement:
An agency can be terminated at any time by mutual agreement between principal and agent.
Revocation by the principal:

An agency may be terminated by (express or implied) revocation of authority given by principal to
his agent at any time before the authority has been exercised unless the agency is irrevocable.
However, principal is required to give reasonable notice to agent, otherwise principal will be liable
for damages resulting to agent. Further, if agency is created for a specific period of time and is
revoked by principal before that time without sufficient cause, principal shall compensate to agent.
Renunciation by the agent:

An agency may be terminated by (express or implied) renunciation by agent. However, agent is
required to give reasonable notice to principal, otherwise agent will be liable for damages resulting
to principal. Further, if agency is created for a specific period of time and is revoked by principal
before that time without sufficient cause, principal shall compensate to agent.
By Operation of Law:
Completion of the business of agency:
An agency automatically comes to an end when the business of agency is completed.
Expiry of time:
If the agent is appointed for a fixed term, agency automatically comes to an end when the time
period expires even if business is not yet completed.
7 By: M. Asif, ACA

Death of principal or agent:

An agency is terminated on the death of principal or agent. However, if principal dies, agent must
take all reasonable steps for the protection of interest of principal in his hands.
Insanity of principal or agent:

An agency is terminated on if principal or agent becomes person of unsound mind. However, if
principal becomes person of unsound mind, agent must take all reasonable steps for the protection
of interest of principal in his hands.
Insolvency of principal:
An agency is terminated if principal becomes insolvent.
Destruction of the subject matter:

An agency is terminated if subject matter is destroyed.
Dissolution of a company:
If principal or agent is a company, agency is terminated if company is dissolved.
Principal and agent become alien-enemy:

If principal and agent are citizens of different countries and a war breaks-out between two
countries, agency is terminated.
LO 7: UNDISCLOSED AGENCY:
Undisclosed agency means an agency in which agent has concealed not only the name of principal
but also the fact that there is a principal.
Following are position of different parties in an undisclosed agency:
Position of Agent:
 Agent is personally liable to third parties.
 Agent may sue and may be sued by third parties.
Position of Principal:
 Principal may intervene and sue the third party for non-performance of the contract.
 If principal discloses himself before the contract is completed, the third party may refuse to
fulfill the contract, if it can show that if he had known about principal at time of contract, it
would not have entered into contract.
Position of Third Party:

 If third party knows about existence of the principal before obtaining judgment against the
agent, it may sue either the principal or agent or both.
8 By: M. Asif, ACA

LO 8: PERSONAL LIABILITY OF AN AGENT TO THIRD PARTY:

It is a general rule that an agent is not liable if he acts on behalf of principal. However, in following
circumstances, agent is personally liable:
1. If an agent contracts for the sale or purchase of goods for a merchant residing abroad.
2. If agent refuses to disclose the identity of unnamed principal.
3. If agent acts for a principal who, though disclosed, cannot be sued e.g. ambassadors.
4. If agent exceeds his actual and apparent authority, he is personally liable for the excess part
(if separable) or entire transaction (if not separable).
5. If agent expressly agrees in the contract to be personally liable.
6. If agent appoints a sub-agent improperly, he is personally liable to third parties for acts of
sub-agent.
7. If contract with third party relates to a subject matter in which agent has a special interest,
agent is personally liable to the extent of his interest.
8. If there is a trade usage or custom of a market to that effect e.g. stock brokerage business
9. If an agent is employed to do a criminal act.
9 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 17 Partnership Act
CHAPTER SEVENTEEN
PARTNERSHIP ACT
ICAP'S STUDY TEXT
REFERENCE**
PART A – BASIC CONCEPTS OF PARTNERSHIP
LO 1
DEFINITION AND ESSENTIALS OF PARTNERSHIP 17.1.1, 17.1.2, 17.1.3
✯✯
LO 2 COMPARISON OF PARTNERSHIP WITH OTHER
17.1.6, 17.1.7
✯ BUSINESS ACTIVITIES
LO 3
TYPES OF PARTNERSHIP 17.1.4
✯
LO 4
TYPES OF PARTNERS 17.1.5
✯
LO 5
PROPERTY OF THE PARTNERSHIP 17.2.5
✯✯
PART B – APPLICATION OF PARTNERSHIP TO THIRD PARTIES
LO 6
PRINCIPLE OF ESTOPPEL OR HOLDING OUT 17.3.4
✯✯
LO 7
TRANSFEREE OF A PARTNER’S INTEREST 17.3.5
✯✯
LO 8
MINOR IN A PARTNERSHIP 17.3.6
✯✯
PART C – RIGHTS, DUTIES AND LIABILITIES OF PARTNERS
LO 9
AUTHORITY OF A PARTNER 17.3.1, 17.3.2
✯✯
LO 1 0
✯✯✯
MUTUAL RIGHTS AND DUTIES OF PARTNERS 17.2.1 – 17.2.4
LO 1 1
LIABILITY OF PARTNERS TO THIRD PARTIES 17.3.3
✯✯✯
LO 12 RIGHTS OF PARTNERS ON RECONSTITUTION OF
17.2.3
✯✯ FIRM
1 By: M. Asif, ACA

PART A – BASIC CONCEPTS OF PARTNERSHIP
LO 1: DEFINITION AND ESSENTIALS OF PARTNERSHIP: ✯✯

Definitions:
“Partnership" is the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all.
Persons who have entered into partnership with one another are called individually "partners" and
collectively "a firm" and the name under which their business is carried on is called "firm name".
An "act of a firm" means any act or omission by all the partners or by any partner or agent of the
firm which gives rise to a right enforceable by or against the firm.
"Third party" means any person who is not a partner in the firm.
Essentials of a Partnership:
There must be a contract:
Partnership is a result of contract. It does not arise from status or inheritance. It may be oral or in
writing. Further, it may be expressed or implied. A written agreement is called “Partnership Deed”.
Elements of Partnership Deed

1. Name of Firm and its partners along with their addresses.
2. Amount of capital to be contributed by each partner.
3. Duration of partnership (if any).
4. Profit and Losses sharing ratio among partners.
5. Interest, Salary or Commission payable to partners (if any).
6. Rights and Duties of Partners.
There must be association of two or more persons:

To form a partnership, there must be atleast two persons who are competent to enter into contract.
Maximum number of partners in banking business can be 10, and in other business 20 (however, a
partnership of professional persons can exceed 20).
Parties must agree to carry on business:

If there is no business, there will be no partnership. Therefore, in following cases, there is no
partnership because there is no business:
1. if purpose is to carry on some charitable work.
2. if persons agree to share rent income of a property.
There must be sharing of profits among parties:

Sharing of profit is necessary but sharing of losses is not necessary. However, if a partner does not
share losses, his personal liability will still be unlimited for the debts of the company.
2 By: M. Asif, ACA

Sharing of profits is a strong test of partnership, but not conclusive evidence. Following are
situations in which the parties are sharing profit but they are not partners i.e. the receipt of such
share of payment:
1. by a lender of money to persons engaged or about to engage in any business.
2. by a servant or agent as remuneration.
3. by the widow or child of a deceased partner as annuity.
4. by a previous owner or part owner of the business, as consideration for the sale of the
goodwill or share.
5. a minor who is admitted to the benefits of an existing partnership.
6. a transferee of a partners’ interest.
There must be mutual agency among partners

A partnership is a mutual agency i.e. every partner is both an agent and principal for other partners.
In the ordinary course of business, he can bind other partners by his acts and other partners can
bind him. Every partner has implied authority to act for all and can make contracts with third
parties in the ordinary course of business. However, other partners can make a partner liable if he
exceeds his authority.
Exam Tips – Test of Partnership

1. All above essentials must exist simultaneously. If any of these is not present, it will not be a partnership.
2. Partners may agree that:
a) a person can become partner without capital or without sharing losses.
b) a partner can receive salary, commission or interest on capital.
c) a partner will not participate in management of business.

How will you determine if a group of persons has constituted a ‘partnership’? (04 marks)
(CA Inter – Spring 2003)
Sharing net profits usually creates a very strong inference that the parties have formed a partnership. But in certain
situations, the fact that the profits are shared or the parties have agreed to share the profits will not by itself create a
presumption that a partnership was intended. List such situations as given in the Partnership Act, 1932. (05 marks)
(CA Inter – Autumn 2014)
LO 2: COMPARISON OF PARTNERSHIP WITH OTHER BUSINESS ACTIVITIES: ✯

Difference between Partnership and Joint Stock Company:
Partnership Joint Stock Company

Formation It is created by an agreement alone. It is created by law.
Registration Registration is optional. Registration is compulsory.
It is a separate entity or an artificial
Legal entity It is not a separate legal entity.
person distinct from it members.
Nature of Partners have joint and several liability i.e. It has limited liability i.e. liability is
liability unlimited liability. restricted to the amount of capital
A joint stock company continues to exist
Perpetual A firm is dissolved on the death or insolvency of a
irrespective of death or insolvency of its
succession partner. It has no perpetual succession.
members or directors.
A partner is an agent of the firm for the purpose of Directors are agent of the company.
Agency
business of the firm. Shareholders are not agents.
Transfer of A partner cannot transfer his interest without There is no such restriction for transfer
interest getting consent from other partners. of shares.
3 By: M. Asif, ACA

Minimum one person can carry single

Minimum two competent to contract persons are
Number of member company and no limit on
required and a maximum of 20 persons can carry
persons shareholders for a public company.
partnership other than banking business.
All shareholders cannot take part in the
Management All partners can take part in the management.
management.
Difference between Partnership and Co-ownership:
Partnership Co-ownership
Co-ownership is not necessarily a result
Formation It is created by an agreement alone.
of an agreement.
In partnership carry on business in an
Co-ownership does not necessarily
Business essential. If there will be end of business it will
involve the carrying on of a business.
ultimately result in end of partnership firm.
Minimum two competent to contract persons No limit on maximum number of co-
Number of
are required and a maximum of 20 persons can owners.
persons
carry partnership other than banking business.
Sharing of Sharing of profit is one of the essential
It does not involve sharing of profit.
profit elements.
A partner is an agent of the firm for the
Agency Co-owners are not agents to one another.
purpose of business of the firm.
Co-owner can transfer his interest
Transfer of A partner cannot transfer his interest without
without getting consent from other co-
interest getting consent from other partners.
owner(s).
LO 3: TYPES OF PARTNERSHIP: ✯
There are two types of partnerships i.e. Particular Partnership, and Partnership at Will.
Particular Partnership:
Where a partnership is created for any particular adventures or undertakings, or for a specific time
period. Such partnership is dissolved on completion of venture or on expiry of the period.
Partnership at will:
Where contract between partners contains no provision for duration of their partnership or for
termination of their partnership. Such partnership is dissolved when any of partners give a notice
in writing to firm that he intends to dissolve the firm.

In view of the Partnership Act, 1932, briefly explain the meaning of ‘Partnership at Will’ and ‘Particular Partnership’.
(02 marks)
LO 4: TYPES OF PARTNERS: ✯
Actual or Ostensible Partner:
This is a partner who is actively engaged in the conduct of the business, and is known to third
parties as a partner. Public notice is required if they retire from firm.
4 By: M. Asif, ACA

Sleeping or dormant partner:

This is a partner who is NOT actively engaged in the conduct of the business, and is NOT known to
third parties as a partner. A sleeping partner is not required to give a public notice if he retires from
firm.
Silent Partner:
This is a partner who, by agreement, has no voice in the management of the partnership.
Partners in Profit only:

This is a partner who, by agreement, is entitled to share profits but does NOT share losses.
However, his liability towards third parties is still unlimited.
Nominal Partner:
This is a partner who is NOT actively engaged in the conduct of the business. It does not contribute
any capital but lends his name to firm. However, his liability towards third parties is still unlimited.
Sub-Partner:
If a partner agrees to share his share of profits with an outsider, such an outsider is called a sub-
partner. A sub-partner has no direct relation with partnership and has no right or liability for
partnership.
Partners by estoppels or by holding out:

(explained below).
LO 5: PROPERTY OF THE PARTNERSHIP: ✯✯

Subject to contract between the partners, the property of the firm includes:
1. All property originally brought into the common stock of the firm;
2. All rights or interest in the property originally so brought;
3. All property acquired, by purchase or otherwise, by the firm or for the firm and all rights
and interest in any property so acquired;
4. Goodwill of the business of the firm;
Any property purchased with partnership money with or without other partners consent will be
deemed to be partnership property, unless any contrary intention appears.

Maqbool, Rufi and Sham are the partners in Zeeshan Builders (ZB), a firm engaged in the business of constructing
industrial and residential projects in Balochistan. Rufi intends to acquire a plot of land for the firm with his own money.
However, he is not certain whether the plot would be considered as partnership property.
Under the provisions of the Partnership Act, 1932 advise Rufi as what is considered to be included in the partnership
property and how it is to be applied. (04 marks)
5 By: M. Asif, ACA

PART B – APPLICATION OF PARTNERSHIP TO THIRD PARTIES
LO 6: PRINCIPLE OF ESTOPPEL OR HOLDING OUT: ✯✯

If a person represents himself (or permits himself to be represented) a partner in a firm, he is liable
as a partner in that firm to anyone who gave credit to the firm on the faith of such representation. It
is not necessary that the person represented to be a partner knows that representation has reached
the person giving credit.
Examples/Application of the principle:

1. If an active partner retires but does not give public notice of his retirement, and continuing
partners still use his name as a partner, retiring partner will be liable to third parties.
2. If a minor, who is admitted to the benefits of partnership, attains age of majority but does
not give public notice, he will be liable to third parties as partner.
Exceptions:
1. Where a partner in a firm is adjudicated an insolvent he ceases to be a partner. An insolvent
is not liable for any act of the firm and the firm is not liable for any act of the insolvent, done
after the date of insolvency.
2. If a person dies, the estate of a deceased partner is not liable for any act of the firm done
after his death.

Explain the doctrine of ‘holding out’ as given in the Partnership Act 1932. What is the status of a person who so holds out?
(06 marks)
With reference to Partnership Act, 1932 discuss the consequences of not giving a public notice in the following cases:
• When a minor partner attains the age of majority.
• When a partner retires from the firm.
Patel, Bari and Sultan were partners in a firm of interior design. On 1 February 2014 Patel was adjudicated an insolvent
by the Court. Under the provisions of Partnership Act, 1932 briefly describe whether or not Patel may be treated as a
partner in the firm after adjudication. Also state the effects of such adjudication on Patel. (05 marks)
LO 7: TRANSFEREE OF A PARTNER’S INTEREST: ✯✯

A partner assign or transfer his interest in profits and property of firm by sale, mortgage or charge
either fully or partially.
Rights of Transferee:
1. To receive the share of profits of the transferring partner
2. If firm is dissolved, transferee is entitled:
(a) to receive the share of the assets of the firm to which the transferring partner is
entitled, and,
(b) for the purpose of ascertaining that share, to an account as from the date of the
dissolution.
6 By: M. Asif, ACA

Restrictions on Transferee:
1. He does not have status of a partner.
2. He cannot interfere in the conduct of the business.
3. He cannot require accounts.
4. He cannot inspect the books of the firm.
5. He cannot challenge the account of profits agreed by the partners.

Sameer, Fauzia and Sualat are partners in a firm. Fauzia transferred her interest in the firm absolutely to her son Adil. In
the light of the provisions of Partnership Act, 1932 would Adil be considered a new partner in the firm? Also describe the
rights and restrictions on Adil in view of such transfer. (06 marks)
LO 8: MINOR IN A PARTNERSHIP: ✯✯
Minor is not capable of entering into a contract, therefore he cannot become a partner. However, he
can be admitted to benefits of an existing partnership, with the consent of all the partners.
Legal Status of a minor admitted to a partnership:

Rights of minor admitted to partnership:
1. to such share of the profits and property and of the firm as may be agreed upon.
2. have access to inspect and copy any of the accounts of the firm.
Liabilities of minor admitted to partnership:

1. minor's share is liable for the acts of the firm, but the minor is not personally liable for
any such act.
Disabilities of minor admitted to partnership:

1. he does not have status of a partner.
2. He cannot sue the partners for an account or payment of his share of the property or
profits of the firm except after disconnecting his relation with the firm.
Legal Status of a minor on attaining age of majority:

Within six months of attaining majority (or becoming aware that he was admitted to the benefits of
partnership whichever is later), such person shall give notice that:
1. he has elected to become a partner in the firm, or
2. he has elected not to become a partner in the firm.
He has status of a minor upto the date of notice (unless he acts as a partner). If he fails to give such
notice, he shall become a partner in the firm, on the expiry of the said six months.
Rights and Liabilities if he has elected to become a partner in the firm:

1. his share in the property and profits of the firm shall be the share to which he was
entitled as a minor.
2. he also becomes personally liable to third parties for all acts of the firm done since he was
admitted to the benefits of partnership.
Rights and Liabilities if he has elected NOT to become a partner in the firm:
1. his share shall not be liable for any acts of the firm done after the date of the notice.
2. he shall be entitled to his share of profits and property and he can sue the partners for it.
7 By: M. Asif, ACA


Rustum, Mahmood and Wali are partners in a firm. Wali wants to admit his sixteen year old son Raghib as a new partner.
Under the provisions of the Partnership Act, 1932 can Raghib be admitted to the partnership business? State the rights,
liabilities and limitations of Raghib, if he is admitted to the partnership business. (05 marks)
PART C – RIGHTS, DUTIES AND LIABILITIES OF PARTNERS
LO 9: AUTHORITY OF A PARTNER: ✯✯
Implied Authority:
What is Implied Authority:
The authority of a partner to bind the firm with his acts is referred to as the implied authority of a
partner.
Conditions to be met to bind a firm by act of a partner:

Act of a partner shall bind the firm only if following conditions are met:
1. The act should be for the kind of business carried on by the firm;
2. The act should be done in the usual way of such business;
3. The act must be done in the name of the firm or in any other manner expressing or implying
an intention to bind the firm.
Examples of powers covered by Implied Authority:

 buying and selling goods in which firm deals  contracting debts
 receiving from and paying to persons dealing with firm  pledging movable property of firm
 employing servants  drawing cheques etc.
Examples of powers NOT covered by Implied Authority:

1. Submit a dispute relating to the business of the firm to arbitration.
2. Open a banking account on behalf of the firm in his own name,
3. Compromise or relinquish any claim or portion of a claim by the firm,
4. Withdraw a suit or proceeding filed on behalf of the firm,
5. Admit any liability in a suit or proceeding against the firm,
6. Acquire immovable property on behalf of the firm,
7. Transfer immovable property belonging to the firm, or
8. Enter into partnership on behalf of the firm.
Extension or restriction of partners’ implied authority:

Partners may extend or restrict implied authority through partnership agreement.
 If a partner acts on authority which was restricted by contract between partners, firm will
be liable if third party did not know about restriction.
 If a partner acts on authority exceeding implied authority, firm will be liable only if third
party proves that he had knowledge of extended authority.
Partner's authority in an emergency:

In case of emergency, a partner has authority to do all such acts to protect the firm from loss as
would be done by a person of ordinary prudence acting under similar circumstances, and such
acts bind the firm.

What is implied authority of a partner? What conditions should be met for the act of a partner to become binding on the
firm? (04 marks)
8 By: M. Asif, ACA

The authority of a partner to bind the firm is called “Implied Authority.” List the acts which cannot be exercised by a
partner as his implied authority. (04 marks)
LO 10: MUTUAL RIGHTS AND DUTIES OF PARTNERS: ✯✯✯

Rights of Partners:
Subject to contract between partners, following are rights of a partner:
1. Right to take part in the conduct of the business:

Every partner has a right to take part in the conduct of the business.
2. Right to be consulted:
Every partner has a right to be consulted before any matter is decided. Any difference is decided by
majority of partners. However, no change may be made in the nature of the business or constitution
of partnership without the consent of all the partners.
3. Right of access to books:

Every partner has a right to have access, to inspect and copy any of the books of the firm
4. Right to share profits:

The partners are entitled to share equally in the profits earned, irrespective of capital contribution
or business expertise.
5. Right to interest on advances:

If a partner making, for the purposes of the business, any payment or advance beyond the amount
of capital, he is entitled to interest thereon @ 6% p.m.
6. Right to be indemnified:
Every partner has a right to be indemnified by firm for payments made and liabilities incurred by
him:
1. in the ordinary and proper conduct of the business, and
2. in doing such act, in an emergency, for the purpose of protecting the firm from loss, as
would be done by a person of ordinary prudence, in his own case, under similar
circumstances.
Qualified duties of Partners:

Qualified duties are those which depend on contract between partners. However, partnership act
will apply if these are not agreed in contract.
1. Duty to attend diligently his duties:

Every partner has duty to attend diligently to his duties in the conduct of the business.
2. Duty to work without remuneration:

A partner should not take any remuneration for taking part in conduct of the business.
9 By: M. Asif, ACA

3. Duty to contribute to the losses:

Partners must contribute equally to the losses, irrespective of the amount of capital contribution by
each partner.
4. Duty to indemnify for willful neglect:

Every partner must indemnify firm for any loss caused to firm by his willful neglect.
5. Duty to use firm’s property exclusively for the firm:

No partner should use firm’s property for personal benefit.
6. Duty to account for personal profits derived:

If a partner makes profit for himself from the use of partnership property or business connection of
the firm or firm name, he is bound to account for and pay to the firm all profits made by him in such
business.
7. Duty not to engage in prohibited and competing business:

Following are restrictions on trade by a partner:
1. Partnership Agreement may provide that a partner shall not carry on any business other
than that of the firm while he is a partner.
2. A partner cannot carry on any business which is of the same nature and is competing with
the firm.
If he does so, he is bound to account for and pay to the firm all profits made by him in such business.
Absolute duties of Partners:

These duties are imposed by law and cannot be varied by agreement between partners. These
duties apply to all partnerships.
1. Duty to carry on business to the greatest common advantage:

Every partner shall use his knowledge and skill for the benefits of firm, and should not work for his
personal gains.
2. Duty to be just and faithful:

Every partner shall be just and faithful to other partners.
3. Duty to render true accounts:

Every partner shall render true and proper accounts to other partners.
4. Duty to provide full information:

Every partner shall render full information of all things affecting the firm to any partner or his legal
representative.
5. Duty to indemnify for loss caused by fraud:

Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the
business of the firm.
6. Duty to be liable jointly and severally:

Every partner shall be liable, jointly with all the other partners and also severally, for all acts of the
firm done while he is a partner.
10 By: M. Asif, ACA

7. Duty not to assign his interest:

No partner can assign or transfer his partnership interest to any other person to make him a
partner in the business without consent of all other partners.

What are the rights of a partner as regards the conduct of business? (06 marks)
“An agreement in restraint of trade is void”. State the exceptions to this rule as given in the Partnership Act, 1932.
Rafiq, Bari and Furqan have decided to establish a partnership business for trading in medical equipments. In the absence
of any express contract, advise them of their mutual rights and liabilities under the provisions of the Partnership Act,
1932. (09 marks)
Under the provisions of the Partnership Act, 1932 list the general duties of partners which cannot be modified by an
agreement amongst them. (03 marks)
LO 11: LIABILITY OF PARTNERS TO THIRD PARTIES: ✯✯✯

Liability of a partner for acts of the firm:
Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm
done while he is a partner. Further, liability of all partners is unlimited. However, a partner paying
more than his share of liability may claim reimbursement from others according to the terms of
partnership agreement.
Liability of the firm for wrongful acts of a partner:

Where by the wrongful act or omission of a partner (acting in the ordinary course of the business
of the firm), a loss or injury is caused to any third party or any penalty is incurred, the firm is liable
to the same extent as the partner.
If a partner commits fraud, firm is liable to third party. However, as between partners, the full loss is
borne by partner committing fraud and not by others.
Liability of firm for misapplication of money or property by partners:

The firm is liable to make good the loss if
1. A partner receives money or property from a third party and misapplies it, or
2. A firm receives money or property from a third party, and the money or property is
misapplied by any of the partners while it is in the custody of the firm.

Describe the liabilities of:
(i) a partner for the acts of the firm.
(ii) the firm for wrongful acts of a partner.
(iii) the firm for misapplication of money or property by a partner. (08 marks)
11 By: M. Asif, ACA

LO 12: RIGHTS OF PARTNERS ON RECONSTITUTION OF FIRM: ✯✯

Right of outgoing partner:
If a partner ceases to be partner and surviving partners continue business without settlement of
accounts of outgoing partner, outgoing partner or his legal representative is entitled at his option to
receive:
1. interest @ 6% on the amount of his share in the property of firm, or
2. share of profit, proportionate to his share in the property of firm.
Rights of partners after reconstitution of a firm:

If a change occurs in the constitutions of a firm, the mutual rights and duties of the partners in the
reconstituted firm remain the same as they were immediately before the change.

Obaid, Raheel and Pervez were partners in a firm. On September 1, 2009 Pervez retired from the partnership. The
remaining partners continued the business, with the property of the firm, without final settlement of accounts as between
them and Pervez.
In the light of the Partnership Act, 1932, describe the rights of Pervez, in the above circumstances. (04 marks)
12 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 18 Negotiable Instruments Act
CHAPTER EIGHTEEN
NEGOTIABLE INSTRUMENTS ACT
ICAP'S STUDY TEXT
REFERENCE**
PART A – GENERAL PROVISIONS RELATING TO NEGOTIABLE INSTRUMENTS
LO 1
NEGOTIABLE INSTRUMENTS AND THEIR CHARACTERISTICS 18.1.1, 18.1.2
✯
LO 2
PARTIES TO NEGOTIABLE INSTRUMENTS 18.2.2, 18.3.2, 18.4.2
✯
LO 3
CLASSIFICATION OF NEGOTIABLE INSTRUMENTS 18.1.4
✯
LO 4 “HOLDER”, “HOLDER IN DUE COURSE” AND “PAYMENT IN 18.1.3 (Holder, Holder
✯✯ DUE COURSE” in due course)
LO 5 18.1.4 (Inchoate
INCHOATE INSTRUMENT
✯ Instrument)
LO 6
MATERIAL ALTERATION AND ITS CONSEQUENCES 18.1.8
✯✯
LO 7
NEGOTIATION AND ENDORSEMENT 18.1.6, 18.1.7
✯✯✯
LO 8
DISCHARGE OF NEGOTIABLE INSTRUMENT AND PARTIES 18.5.1 – 18.5.2
✯✯✯
LO 9 18.1.5, 18.1.4
MISCELLANEOUS CONCEPTS (Ambiguous Instrument,
✯ Maturity)
PART B – SPECIFIC PROVISIONS RELATING TO NEGOTIABLE INSTRUMENTS
LO 1 0
PROMISSORY NOTE & ITS ESSENTIAL ELEMENTS 18.2.1, 18.2.3, 18.2.4
✯✯
LO 1 1
BILL OF EXCHANGE & ITS ESSENTIAL ELEMENTS 18.3.1, 18.3.3
✯✯
LO 1 2
CHEQUE AND ITS ESSENTIAL ELEMENTS 18.4.1, 18.4.3, 18.4.4
✯
LO 1 3
CROSSING OF CHEQUE 18.4.5 – 18.4.9
✯✯✯
LO 1 4
REASONS FOR DISHONOUR OF A CHEQUE 18.4.10, 18.4.11
✯✯
1 By: M. Asif, ACA

PART A – GENERAL PROVISIONS RELATING TO NEGOTIABLE

INSTRUMENTS
LO 1: NEGOTIABLE INSTRUMENTS AND THEIR CHARACTERISTICS: ✯

Negotiable Instruments:
A negotiable instrument is a written document by which a right is crated in favor of some person
and which is transferable from one person to another in return for consideration. Negotiable
Instrument means a promissory note, bill of exchange or cheque payable either to bearer or to
order.
Characteristics of negotiable instruments:

1. Freely transferable:
A negotiable instrument is easily transferable from one person to another by:
a. mere delivery (if payable to bearer) or
b. endorsement and delivery (if payable to order)
2. Title of holder free from all defects:

A person taking a negotiable instrument bona-fide and for value (known as a holder in due course)
gets the instrument free from all defects in the title of the transferor.
3. Transferee can sue for recovery in its own name:

A holder in due course can sue upon a negotiable instrument in his own name for the recovery of
amount. Further, he need not give notice of transfer to party liable to pay the instrument.
Presumptions:
Unless the contrary is proved, the following presumptions shall be assumed in respect of all
negotiable instruments:
1. As to Consideration:
All negotiable instruments are presumed to have been made, drawn, accepted, endorsed,
transferred for consideration.
2. As to Date:
Every negotiable instrument bearing a date is presumed to have been drawn on such date.
3. As to Acceptance:
Every bill of exchange is presumed to be accepted within reasonable time and before its
maturity.
4. As to Time of Transfer:
Every transfer of a negotiable instrument is presumed to have been made before its maturity.
5. As to Order of endorsement:
Endorsements appearing on a negotiable instrument are presumed to have been made in the
order in which they appear thereon.
2 By: M. Asif, ACA

6. As to Stamp:
It is assumed that a lost negotiable instrument was duly stamped.
7. As to Holder:
Every holder of a negotiable instrument is presumed to be a holder in due course.

State the presumptions that are applicable to all negotiable instruments unless the contrary is proved. (07 marks)
LO 2: PARTIES TO NEGOTIABLE INSTRUMENTS: ✯
Parties to a Promissory Note Parties to a Bill of Exchange Parties to a Cheque

1. Maker 1. Drawer 1. Drawer
2. Payee 2. Drawee & Acceptor 2. Drawee
3. Payee 3. Payee
4. Drawee in case of Need
5. Acceptor for Honour
Other Parties if bill is negotiated: Holder, Endorser, Endorsee
Maker:
The person who makes a promissory note is called “Maker”.
Payee:
The person named in the instrument, to whom or to whose order the money is to be paid is called
payee.
Drawer:
The maker of a bill of exchange or cheque is called “Drawer”.
Drawee:
The person on whom bill of exchange or cheque is drawn and who is directed to pay, is called
“Drawee”. In case of a cheque, Drawee is always a bank.
Drawee in case of need:

In bill of exchange, when name of a person is given in addition to the drawee to be resorted to in
case of need (e.g. when bill is not accepted or paid by drawee), such a person is called “Drawee in
case of need”.
Acceptor:
A bill of exchange must be presented to the drawee for acceptance first, and then presented for
payment on due date. Drawee becomes acceptor when he accepts the bill i.e.
 he signs his assent on the bill and
 delivers it or give notice of signing to holder or some person on his behalf.
Study Tips
1) A cheque does not require acceptance.
2) A bill which is unaccepted or unpaid, should be handed to Notary Public for noting and protesting
which bill be legal proof that drawee refused to accept or pay. Further, holder of dishonoured
instrument must give notice of dishonor to all parties whom holder seeks to make liable.
3 By: M. Asif, ACA

Acceptor for honour Payment for honour

If a bill of exchange is dishonoured because of non-acceptance by If a bill of exchange is dishonoured because of non-
drawee, and any other person accepts the bill for the honor of the payment by drawee, and any other person pays the bill for
drawer or particular endorser, he is called “acceptor for honour”. the honor of any party liable to pay, it is called “payment
for honour”.
Conditions for a valid acceptance for honour: Conditions for a valid payment for honour:
1. The bill must have been dishonoured for non-acceptance. 1. The bill must have been dishonoured for non-payment.
2. The bill must have been noted or protested for non- 2. The bill must have been noted or protested for non-
acceptance. payment.
3. It must be written on the bill that it is acceptance for the 3. Payment must be made for the honour of any party
honour of party who is already liable on the bill (otherwise it liable to pay the bill (otherwise it is deemed to be paid
is deemed to be accepted for honour of drawer). for honour of drawer).
4. Acceptance for honour must be made with the consent of the 4. The person paying (or his agent) must previously
holder. declare before the Notary Public the party for whose
5. It must be signed by the acceptor for honour who must not be honour he pays.
already a party liable on the bill. 5. Such declaration must have been recorded by Notary
Public.
Liabilities of Acceptor for Honour: Rights of Payer for Honour:
An acceptor for honour binds himself to pay the amount of the He is entitled to all the rights of a holder at time of
bill if the drawee does not pay. payment. He may recover following from party in whose
However, he is liable to pay only if following conditions are honour he paid:
fulfilled:  all sums paid, and
1. Once more, the bill should be presented to drawee for  interest thereon, and
payment at maturity.  all expenses properly incurred in making such
2. If the drawee still refuses to pay, the bill should be noted or payment.
protested for payment.
3. Bill should be presented or forwarded to the acceptor for
honour very next day after day of maturity (and not later).
Rights of Acceptor for Honour:
After payment of the bill, acceptor for honour can sue the party
for whose honour the bill is accepted and all the prior parties.

Write down short notes on any THREE of the following:
(a) Acceptance for Honour (05 marks)
(b) Special Crossing (05 marks)
(c) Drawee in case of Need (05 marks)
(d) Parties to a Cheque (05 marks)
(ICMA Pakistan – Summer 2003)
LO 3: CLASSIFICATION OF NEGOTIABLE INSTRUMENTS: ✯

Bearer Instrument and Order Instrument:
Bearer Instrument/Payable to bearer:
A negotiable instrument is payable to bearer if it is payable to any person who bears it. It is
expressed to be so payable, or last endorsement on it is blank e.g. “Pay bearer”, or “Pay A or bearer”.
A bearer instrument can be negotiated by its delivery.
Order Instrument/Payable to Order:

A negotiable instrument is payable to order which is expressed to be payable to a particular person
or to his order e.g. “Pay A” or “Pay A or order”. However, it should not contain words prohibiting
transfer e.g. “Pay to A only”.
An order instrument can be negotiated by an endorsement on it and its delivery.
4 By: M. Asif, ACA

Time Instrument, and Demand Instrument:

Time Instrument:
An instrument payable after a fixed time or on a specified date is called Time Instrument. It may
also be payable after happening of a certain event e.g. death of a person.
Demand Instrument:
A negotiable instrument is payable on demand where:
 It is expressed to be payable on demand, or payable at sight or payable on presentment, or
 No time for payment is expressed on it, or
 It is accepted or endorsed after it is overdue, as regards person accepting or endorsing it.
Exam Tip
A cheque is always a Demand Instrument.
Inland instrument and Foreign Instrument:

Inland instrument is a negotiable instrument which is:
1. Made in Pakistan or Drawn in Pakistan, and
2. Payable in Pakistan or drawn on a person resident in Pakistan.
An instrument which is not an inland instrument, is deemed to be a foreign instrument.
LO 4: “HOLDER”, “HOLDER IN DUE COURSE” AND “PAYMENT IN DUE COURSE”: ✯✯

Holder:
Holder of a negotiable instrument means a person who has possession of the instrument, and who
is entitled to receive the amount. If a negotiable instrument is lost or destroyed, its holder is the
person who is so entitled at time of such loss or destruction.
In a bearer instrument, holder is the one who is the bearer. In an order instrument, holder is the
one who is either payee or endorsee.
Holder in due course:

A holder in due course if a person who fulfills following conditions:
1. He became possessor (in case of bearer instrument), or payee/endorsee (in case of order
instrument) for lawful and adequate consideration.
2. He became the holder of the instrument before its maturity.
3. He because the holder in good faith i.e. there were no reasons to believe that any defect
existed in the title of transferor.
4. Negotiable instrument must be complete and regular i.e. it must be properly stamped, and
should not have material alteration.
Payment in due course:

Payment in due course means payment to discharge liability of a negotiable instrument, which
fulfills following conditions:
1. Payment is made in accordance with apparent tenure of the instrument. It must be made at
or after maturity. A payment before maturity does not discharge a negotiable instrument
and is not a payment in due course.
2. Payment must be made in good faith and without negligence.
5 By: M. Asif, ACA

Minimum one person can carry single

Minimum two competent to contract persons are
Number of member company and no limit on
required and a maximum of 20 persons can carry
persons shareholders for a public company.
partnership other than banking business.
All shareholders cannot take part in the
Management All partners can take part in the management.
management.
Difference between Partnership and Co-ownership:
Partnership Co-ownership
Co-ownership is not necessarily a result
Formation It is created by an agreement alone.
of an agreement.
In partnership carry on business in an
Co-ownership does not necessarily
Business essential. If there will be end of business it will
involve the carrying on of a business.
ultimately result in end of partnership firm.
Minimum two competent to contract persons No limit on maximum number of co-
Number of
are required and a maximum of 20 persons can owners.
persons
carry partnership other than banking business.
Sharing of Sharing of profit is one of the essential
It does not involve sharing of profit.
profit elements.
A partner is an agent of the firm for the
Agency Co-owners are not agents to one another.
purpose of business of the firm.
Co-owner can transfer his interest
Transfer of A partner cannot transfer his interest without
without getting consent from other co-
interest getting consent from other partners.
owner(s).
LO 3: TYPES OF PARTNERSHIP: ✯
There are two types of partnerships i.e. Particular Partnership, and Partnership at Will.
Particular Partnership:
Where a partnership is created for any particular adventures or undertakings, or for a specific time
period. Such partnership is dissolved on completion of venture or on expiry of the period.
Partnership at will:
Where contract between partners contains no provision for duration of their partnership or for
termination of their partnership. Such partnership is dissolved when any of partners give a notice
in writing to firm that he intends to dissolve the firm.

In view of the Partnership Act, 1932, briefly explain the meaning of ‘Partnership at Will’ and ‘Particular Partnership’.
(02 marks)
LO 4: TYPES OF PARTNERS: ✯
Actual or Ostensible Partner:
This is a partner who is actively engaged in the conduct of the business, and is known to third
parties as a partner. Public notice is required if they retire from firm.
4 By: M. Asif, ACA

5. Alteration made to carry out the common intention of the original parties.
6. Alteration made with the consent of the parties liable on the instrument.
7. Alteration made for the purpose of correcting a mistake or a clerical error.
8. Conversion of bearer cheque into an order cheque.

Under the provisions of the Negotiable Instruments Act, 1881 describe the following:
(i) Acceptor for honour (ii) Material alteration (05 marks)
Any material alteration to a negotiable instrument renders the instrument void. What are the exceptions to this rule?
(07 marks)
What is the general effect of a material alteration? (03 marks)
LO 7: NEGOTIATION AND ENDORSEMENT: ✯✯✯

Negotiation:
A negotiable instrument is negotiated when it is transferred to any person to make that person the
holder of instrument.
Methods of Negotiation:
There are two methods of Negotiation i.e. negotiation by delivery and negotiation by endorsement.
Negotiation by mere delivery Negotiation by endorsement and delivery

1. An instrument payable to bearer is negotiated by the 1. An instrument payable to order is negotiated by the
holder by delivery thereof. holder by endorsement and delivery thereof.
2. It does not require signature of the transferor. 2. It requires signature of the transferor.
3. Transferor of a bearer instrument is not liable on its 3. Transferor of an order instrument is liable on its
dishonor because he has not signed and has not added dishonor because he has signed it.
his credit to the instrument. 4. Delivery must be voluntary.
4. Delivery must be voluntary.
Endorsement:
Endorsement means when the maker or holder of a negotiable instrument signs it on the back or
face of it or on an annexed slip of paper, otherwise than as a maker, for the purpose of negotiation.
Or he so signs for the same purpose a stamped paper intended to be completed as a negotiable
instrument.
Essentials of a valid endorsement:

1. It must be on Instrument itself. If no space is left on instrument, it must be on a separate slip
of paper attached to the instrument called “Allonge”.
2. It must be signed by endorser for the purpose of negotiation. Signature of endorser without
any additional words is sufficient.
3. No particular form of words is necessary for an endorsement.
4. It must be completed by the delivery of the instrument.
5. Negotiation by endorsement must be for the entire instrument. Endorsement for part of the
amount, or to two or more endorsees, is invalid.
7 By: M. Asif, ACA

Types of Endorsements:
There are two types of Endorsements i.e. Blank Endorsement, and Full Endorsement.
Blank or General Endorsement:

If endorser signs his name only on instrument and does not specify the name of endorsee, it is
called blank endorsement.
1. Effect of a blank endorsement is that it becomes payable to bearer, although it was
originally payable to order.
2. An instrument endorsed in blank endorsement can be further negotiated by delivery.
3. Holder of blank instrument can also convert it into Full endorsement without signing his
own name by writing the name of endorsee above endorser’s signature.
Full or Special Endorsement:

If endorser signs his name and adds direction to pay the amount to a certain person or his order,
It is called Full Endorsement e.g. “Pay to A or Order”, or “Pay to A”.
Liability of Endorser:
In the absence of a contract to contrary, if a bill is dishonoured, every endorser is liable to
compensate holder or subsequent endorser for any loss or damage caused to him by such
dishonour.

Under the provisions of the Negotiable Instruments Act, 1881 briefly describe the terms ‘Negotiation’ and ‘Indorsement’.
(04 marks)
What are the different types of endorsement? (06 marks)
Differentiate between the negotiation by delivery and negotiation by endorsement. (05 marks)
Define “endorsement”. Discuss any five essentials of valid endorsement. (07 marks)
(ICMA Pakistan – Spring 2013)
LO 8: DISCHARGE OF NEGOTIABLE INSTRUMENT AND PARTIES: ✯✯✯

Discharge of the instrument:
Meaning:
An instrument is said to be discharged when all rights of action under it are completely
extinguished and when it ceases to be negotiable. After a negotiable instrument is discharged,
rights of all parties come to an end. Even a holder in due course cannot claim amount from any
party.
Modes of discharge of instrument:

1. By payment in due course.
A negotiable instrument is discharged when the party primarily liable on the instrument (i.e.
maker of the note, or acceptor of the bill, or drawee bank of cheque) makes the payment in due
course to holder at or after maturity. Payment by a party secondary liable does not discharge
instrument.
2. By party primarily liable becoming holder.

A negotiable instrument is discharged when a bill of exchange is held by acceptor, at or after
maturity, in his own right.
8 By: M. Asif, ACA

3. By express waiver
A negotiable instrument is discharged when the holder of an instrument absolutely and
unconditionally renounces it in writing, at or after maturity.
4. By cancellation
A negotiable instrument is discharged when instrument is intentionally cancelled by holder or
his agent, and cancellation is apparent thereon. Cancellation may take place either by crossing
out signatures on the instrument, or by physical destruction of the instrument with intention of
putting it to end.
Discharge of one or more parties from liability:

Meaning:
Discharge of parties means only some of the parties to the negotiable instrument are discharged
from liability. Undischarged parties remain liable, and instrument continues to be negotiable.
Modes of discharge of parties from liability:

1. By payment in due course.
A party who is secondary liable is discharged when it makes payment in due course.
2. By cancellation
When holder of a negotiable instrument or his agent cancels the name of a party on the
instrument to discharge him, such party and all subsequent parties having right of action against
such party are discharged from liability.
3. By release of some party

When holder of a negotiable instrument releases a party to the instrument by any method other
than cancellation (e.g. by separate agreement), the party so released is discharged from the
liability.
4. By allowing drawee more than 48 hours:

If the holder of a bill of exchange allows the drawee more than 48 hours (exclusive of public
holidays) to consider whether he will accept the same, all previous parties not consenting to
such allowance are discharged from their liability.
5. By non-presentment of cheque:
If a cheque is not presented by the holder for payment within a reasonable time of its issue and
drawer suffers damage through the delay (e.g. because of insolvency of bank), drawer is
discharged from the liability to the extent of such damage.
6. By non-presentment for acceptance of a bill:

When a bill of exchange is payable certain period after sight, its holder must present it for
acceptance to the drawee within a reasonable time. If default is making in such presentment, the
drawer and all indorsers who were liable are discharged from their liability.
7. By Qualified Acceptance:
If holder of a bill of exchange agrees to a qualified acceptance (e.g. with respect to time of
payment, place of payment or partial payment), all prior parties whose consent is not obtained
to such an acceptance are discharged from liability.
9 By: M. Asif, ACA

8. By operation of law:
This includes:
 By an order of insolvency court, discharging the insolvent.
 By merger.
 By lapse of time i.e. when remedy becomes time-barred.
9. By material alteration:
A material alteration of a negotiable instrument renders it void and discharges liability of anyone
who is a party at time of alteration and does not consent to it. However, persons who become
parties to the instrument after the alteration are liable under the instrument as altered.
10. By payment of altered instrument:

If a negotiable instrument which has been materially altered but does not appear to be altered, is
paid by liable party, such liable party is discharged from liability if he proves that he made the
payment in due course.

Under the Negotiable Instruments Act, 1881 briefly describe any five modes by which a party or parties to a negotiable
instrument is/are discharged from liability. (05 marks)
What is discharge of an instrument and how an instrument may be discharged? (03 marks)
LO 9: MISCELLANEOUS CONCEPTS: ✯
Amount on negotiable instruments stated differently in figures and words:
If the amount to be paid is stated differently in figures and in words on a negotiable instrument, the
amount stated in words shall be the amount to be paid. Provided that if the words, are ambiguous
or uncertain, the amount may be ascertained by reference to the figures.
Ambiguous Instrument:
An instrument which may be interpreted as either promissory note or bill of exchange is called an
ambiguous instrument. Its holder must elect once for all whether he wants to treat it as a
promissory note or bill of exchange
Examples:
1. A bill of exchange where the drawer and drawee are the same person.
2. Where the drawee is a fictitious person
3. Bills drawn by an agent on his principal
Maturity:
“Maturity means the date on which the payment of an instrument falls due.”
Maturity of Demand Instrument:

An instrument payable on demand (e.g. cheque) is payable immediately on the date of issue.
Maturity of Time Instrument:

Every promissory note or bill of exchange payable on a specified date (or at a certain period after
sight or at a certain period after happening of an event) is at maturity on the third day after the day
on which it is expressed to be payable.
10 By: M. Asif, ACA

Following are rules of calculating maturity of a time instrument:

1. If it is payable after stated number of months from the date or sight or from happening of a
certain event, it matures (or becomes payable) after three days of the corresponding date
after stated months.
2. If the month in which period terminates has no corresponding date, it is payable on the last
day of such month.
3. If day of maturity is a public holiday, the instrument shall be deemed to be due on the
preceding business day.
4. If instrument is payable on installments, three days of grace are to be allowed on each
installment.

Explain the term “ambiguous instruments” giving at least two examples. Can such instruments be negotiated? (04 marks)
PART B – SPECIFIC PROVISIONS RELATING TO NEGOTIABLE

INSTRUMENTS
LO 10: PROMISSORY NOTE & ITS ESSENTIAL ELEMENTS: ✯✯

Definition of Promissory Note:
A "promissory note" is in an instrument in writing (not being a bank-note or a currency note)
containing an unconditional undertaking signed by the maker, to pay on demand or at a fixed or
determinable future time, a certain sum of money only to or to the order of a certain person, or to
the bearer of the instrument.
Specimen of Promissory Note:

15th January 2017
On demand, I promise to pay Pakistan Bank Limited a sum of Rs.
500,000/- (Five Lac rupees only).
Revenue Stamp
Signed:
Abdullah s/o Usman
A 19, Garden Town, Lahore
Essential Elements of a Promissory Note:

It must be in Writing:
It must be in writing. Writing includes manual writing, typewriting and printing. A verbal promise
to pay is not enough.
Unconditional Promise to Pay:

It must contain an express promise to pay. A mere acknowledgement of debt does not constitute
promissory note.
Further, it must be unconditional. However, a promise to pay is not conditional if:

 Promise is to pay at a particular place or after a specified time.
 It depends on an event which is certain to happen, although time of happening may be
uncertain.
11 By: M. Asif, ACA

Signed by the maker:

Promissory note must be authenticated by the signature of the maker. If maker is illiterate, he may
place his thumb impression.
Certain Parties:
Promissory Note must clearly mention as to who is the maker and who is the payee. If maker or
payee cannot be identified with certainty, instrument is not a promissory note.
Certain Sum of Money:

Sum payable must be certain and definite. Amount payable must not include contingent addition or
contingent subtraction.
Promise to pay money only:

Payment to be made must be in legal tender money of Pakistan. If instrument contains a promise to
pay something other than money, it is not a valid promissory note.
Liabilities of the maker of promissory note:

In the absence of a contract to the contrary, the maker of a promissory note, by making it, promises
that:
i. He will pay it according to the tenor of the note and
ii. In default of such payment, he will compensate any party to the note for any loss or damage
sustained by that party and caused by such default.

Explain the term “promissory note” in accordance with Negotiable Instruments Act, 1881. Also state the liabilities of its
maker. (06 marks)
What are the essentials of a promissory note? (03 marks)
LO 11: BILL OF EXCHANGE & ITS ESSENTIAL ELEMENTS: ✯✯

Definition of Bill of Exchange:
A "bill of exchange" is an instrument in writing containing an unconditional order, signed by the
maker, directing a certain person to pay on demand or at a fixed or determinable future time, a
certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.
Specimen of Bill of Exchange:

15th January 2017
Three months after sight, Pay to Mm/s Excellent Traders or Order a sum
of Rs. 500,000/- (Five Lac rupees only), for the value received.
Revenue Stamp
To: Signed:
ABC Traders Abdullah s/o Usman
110 – Jail Road, Lahore A 19, Garden Town, Lahore
Essential Elements of a Bill of Exchange:

It must be in Writing:
It must be in writing. Writing includes manual writing, typewriting and printing. A verbal order to
pay is not enough.
12 By: M. Asif, ACA

Unconditional Order:
A bill of exchange is an order to pay (not a promise). Words “Pay” or “Please pay” are sufficient to
constitute an order.
Further, it must be unconditional.
Certain Sum of Money:

Sum payable must be certain and definite. Amount payable must not include contingent addition or
contingent subtraction. A bill including payment of interest with principal is certain if rate of
interest is specified.
Signed by drawer and drawee:

Bill of exchange is required to be signed by both, the drawer and drawee.
Certain Parties:
Bill of Exchange must clearly include name of all parties so that drawer, drawee and payee can be
identified with certainty. A party may be natural person (e.g. individuals) or legal person (e.g.
company).
Order to pay money only:

Payment to be made must be in legal tender money of Pakistan. If instrument contains an order to
pay something other than money, it is not a valid bill of exchange.
Difference between a Promissory Note and a Bill of Exchange

1. A promissory note has two parties, a bill of exchange has three parties.
2. A promissory note is a promise to pay, a bill of exchange is an order to pay.
3. A promissory note is written by the borrower, a bill of exchange is prepared and
issued by lender.
Liabilities of drawer of a bill of exchange:

The liabilities incurred by the drawer of a bill are as follows:
1. until acceptance, the drawer is liable thereon as principal debtor, and
2. on due presentment, the bill shall be accepted, and paid according to its tenor, and
3. if the bill is dishonoured, the drawer shall compensate the holder or any indorser who is
compelled to pay it, provided that due notice of dishonour of the bill is given to or received
by the drawer.
Liabilities of drawee of a bill of exchange:

The drawee of a bill of exchange is not liable thereon until acceptance in the prescribed manner. On
acceptance, acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to
the holder on demand.

What liabilities does the drawer of a bill of exchange incur under the Negotiable Instruments Act, 1881? (03 marks)
Distinguish between a promissory note and a bill of exchange. (06 marks)
13 By: M. Asif, ACA

LO 12: CHEQUE AND ITS ESSENTIAL ELEMENTS: ✯

Definition of Cheque:
A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand.
A cheque is always drawn on a bank; and it is always payable on demand.
Essential characteristics of a cheque:

1. It must be in writing.
2. It is an order to pay (not a request).
3. It must be definite and unconditional.
4. It must be signed by drawer.
5. Parties (drawer, drawee and payee) must be certain.
6. Amount should be certain.
7. Order must be to pay money only.
8. It is always drawn on a specified banker.
9. It is always payable on demand.
Note: explanation of most of the characteristics is already explained in earlier sections.
Liabilities of drawer of a cheque:

If the cheque is dishonoured, the drawer shall compensate the holder, provided that due notice of
dishonour of the bill is given to or received by the drawer.
Liability of drawee of cheque.

The drawer of a cheque having sufficient funds of the drawer in his hands properly applicable to the
payment of such cheque must pay the cheque when duly required so to do, and, in default of such
payment, must compensate the drawer for any loss or damage caused by such default.

Explain the term “Cheque” as defined in the Negotiable Instruments Act, 1881 and list down the essential elements of a
valid cheque. (07 marks)
What are the liabilities of the banker towards the ‘drawer’ and the ‘holder’ if the bank wrongly refuses to honour the
payment of a cheque? (04 marks)
What are the liabilities of the drawer and drawee of a negotiable instrument? (05 marks)
LO 13: CROSSING OF CHEQUE: ✯✯✯

A cheque can be either Open Cheque (which is payable in cash at counter of a bank), or Crossed
Cheque. Open cheque is payable to bearer or order.
Crossed Cheque:
Definition:
A crossed cheque is one which two parallel lines are drawn (with or without words “& Co”).
Effects (or Purpose or benefits) of crossing a cheque:

 A crossed cheque can be deposited in an account only (not to be paid in cash over counter).
Crossing is a direction to the paying banker to pay the proceeds to a banker only.
14 By: M. Asif, ACA

 Crossing gives security and protection to the owner of the cheque and minimized risk of fraud
by easily tracing receiving party.
Types of Crossing:
There are three types of crossings i.e. General Crossing, Special Crossing, and Restrictive Crossing.
General Crossing Special Crossing Restrictive Crossing
When two parallel lines are drawn When name of a banker is added on When in general crossing,
on the face of a cheque (with or the face of a cheque (with or without words “A/C Payee” are
Definition
without words “& Co”), it is called parallel lines), it is called special added, it is called Restrictive
general crossing. crossing. crossing.
A generally crossed cheque can be A specially crossed cheque can be A restrictively crossed
collected by any bank (not to be collected only by that bank whose cheque must be credited only
Effect
paid in cash over counter). name appears on face of cheque (or by to the account of payee.
his agent for collection).
Crossing a cheque after issue:

Who can cross a cheque after issue:
Following persons can cross the cheque:
1. Holder
2. Banker
Manner in which cheque can be crossed:

A cheque can be crossed after its issue in following manner:
1. If a cheque is uncrossed, holder may cross it generally or specially.
2. If a cheque is generally crossed, holder may cross it specially.
3. If a cheque is specially crossed, the banker (to whom it is crossed) may again cross it
specially to another bankers (his agent) for collection.
Further:
4. If a cheque is uncrossed or generally crossed, a banker may cross it specially to himself.
5. The holder may add the words “not negotiable” on a cheque crossed generally or specially.
Effect of adding words “Not Negotiable” on a Cheque:

If words "not negotiable” are mentioned on a crossed cheque, a person taking the cheque shall not
have a better title to the cheque than that which the person from whom he took it had. Therefore, a
holder with a defective title cannot give a good title to a subsequent holder
However, it does not restrict future transferability of cheque.
Protection to a banker, and Rights of Holder against Banker:

Payment of crossed cheque in due course:
Payment of a crossed cheque would be deemed to be paid to true owner and a collecting/paying
bank would not be liable to true owner if:
 The banker acted in good faith and without negligence.
 Cheque was already crossed before coming into his hands.
 He received the payment on behalf of a customer and not on his own account.
Payment of crossed cheque out of due course:

A banker shall be liable to true owner for any loss if:
 Banker pays a generally crossed cheque otherwise than to a banker.
 Banker pays a specially crossed cheque otherwise than to specified banker or his agent for
collection.
15 By: M. Asif, ACA


Under the provisions of the Negotiable Instruments Act, 1881 describe the purpose of crossing a cheque. Also state
whether a cheque can be crossed specially more than once. (02 marks)
Under the provisions of the Negotiable Instruments Act, 1881 identify the person(s) who may cross the cheque after its
issue and the manner in which it may be crossed. (05 marks)
(a) What do you understand by the term “Cheque” as specified in the Negotiable
Instruments Act, 1881? When is a cheque deemed to be crossed generally? (06 marks)
(b) State the conditions when a cheque crossed generally is considered to be paid by a banker in due course or out of due
course. Describe the rights of the banker when payment of a cheque crossed generally is made in due course and the
consequences of payment out of due course under the Negotiable Instruments Act, 1881. (04 marks)
What is the general crossing of cheque and what is its effect? (03 marks)
In what ways can cheques be crossed by businessmen? Comment on the effect of “Not negotiable crossing”. (09 marks)
(ICMA Pakistan – Winter 2009)
As per the Negotiable Instruments Act 1881, define bearer and post-dated cheque. (04 marks)
(ICMA Pakistan – Fall 2011)
LO 14: REASONS FOR DISHONOUR OF A CHEQUE: ✯✯

A bank refuses to pay the cheque in following cases:
1. If customer has stopped the payment of cheque.
2. When a court order prohibits the payment of cheque (e.g. garnishee order is issued in favor
of a creditor).
3. When bank receives notice of customer’s death (irrespective of date of cheque or date of
death).
4. When bank receives notice of customer’s insanity.
5. When the customer has been declared insolvent by insolvency court. In such case property
of the account holder vests is Official Assignee/Receiver.
6. When banker believes that the title of holder is defective.
7. When there has been material alteration in the cheque and such alteration has not been
authenticated by his customer by putting his signature.
8. When the signature of the drawer does not tally with the specimen signature kept by the
bank
9. When the balance in customers account is insufficient to meet the cheque
10. When the cheque is presented after banking hours.
11. When the cheque has been stale (i.e. presented after six months of mentioned date of
payment).
12. When the cheque is post-dated (i.e. presented before mentioned date of payment).

When must a bank refuse payment against a cheque? (07 marks)
16 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 2 Introduction to the law of contract
CHAPTER TWO
INTRODUCTION TO THE LAW OF
CONTRACT
ICAP'S STUDY TEXT
REFERENCE**
LO 1 DEFINITIONS OF CONTRACT, AGREEMENT AND

✯ PROMISE
2.1.1
LO 2
✯✯✯
ESSENTIAL ELEMENTS OF A VALID CONTRACT 2.1.2
LO 3 DIFFERENT TYPES/CLASSIFICATION OF
✯✯ CONTRACTS
2.1.3
1 By: M. Asif, ACA

LO 1: DEFINITIONS OF CONTRACT, AGREEMENT AND PROMISE: ✯

Contract:
Contract is an agreement enforceable by law.
Agreement:
Agreement is every promise and every set of promises, forming consideration for each other.
Symbolically,
Agreement = Offer (also called Proposal) + Acceptance
Promise:
When the person to whom proposal is made signifies his assent, the proposal is said to be accepted.
A proposal when accepted becomes a promise.

What is the difference between an agreement and a contract? (03 marks)
LO 2: ESSENTIAL ELEMENTS OF A VALID CONTRACT: ✯✯✯

Offer and Acceptance:
There must be two parties to an agreement, one making offer and other making acceptance. Offer
and acceptance both must be valid.
Intention to create legal relationship:

Parties should have intention to create legal relationship between them which may result in legal
consequences.
There is a usual presumption that:
 Social or domestic agreements do not intend to create legal relationship (unless otherwise
agreed), and
 Commercial or business agreements intend to create legal relationship (unless otherwise
agreed).
Capacity/Competence of parties:
Parties to the contract must be competent to contract. A person is competent to contract if he is:
 Of age of majority.
 Person of sound mind.
 Not disqualified from contracting by any law.
Free Consent:
There must be free consent of parties on terms of agreement.
Consent means parties must agree upon the same thing in the same sense.
Free means consent should not be obtained by:
 Coercion
 Undue influence
 Fraud
 Misrepresentation
 Mistake
2 By: M. Asif, ACA

Consideration:
An agreement without consideration is void (with a few exceptions). Consideration means benefits
moving from one party to another, or simply “something in return”.
 Consideration may be in cash, or in kind, or a promise to do or not to do anything.
 Consideration may be past, present or future.
Consideration and object must be lawful:

An agreement is void if its consideration or object is unlawful, wholly or partially.
Consideration or object is unlawful if:
 it is forbidden by law, or
 it would defeat provision of any law, or
 it is fraudulent
 it involves injury to the person or property of another, or
 if court regards it immoral or opposed to public policy.
Possibility of performance:
Agreement to do an impossible act is void whether the impossibility of the event is known or not to
the parties to the agreement at the time when it is made.
Not expressly declared as void:

Following agreements have been expressly declared as void by Contract Act:
 Agreement in restraint of marriage.
 Agreement in restraint of trade.
 Agreement in restraint of legal proceedings.
 Agreements, meanings of which are uncertain.
 Agreements by way of wager.
Legal formalities regarding writing and registration:

Although a contract may be in writing as well as oral. But in certain cases, agreements are required
to be in writing and registered.

What are the essentials of a valid contract?
LO 3: DIFFERENT TYPES/CLASSIFICATION OF CONTRACTS: ✯✯

Classification on the basis of Enforceability/Validity of Contracts:
Valid Contract:
It means an agreement enforceable by law.
Void Contract:
It means an agreement not enforceable by law.
Exam Tip – Difference between Void Agreement and Void Contract

A void agreement is void ab-initio e.g. agreement with illegal object. A void contract is valid at start but
subsequently something happened which made it unenforceable by law.
3 By: M. Asif, ACA

Acceptor for honour Payment for honour

If a bill of exchange is dishonoured because of non-acceptance by If a bill of exchange is dishonoured because of non-
drawee, and any other person accepts the bill for the honor of the payment by drawee, and any other person pays the bill for
drawer or particular endorser, he is called “acceptor for honour”. the honor of any party liable to pay, it is called “payment
for honour”.
Conditions for a valid acceptance for honour: Conditions for a valid payment for honour:
1. The bill must have been dishonoured for non-acceptance. 1. The bill must have been dishonoured for non-payment.
2. The bill must have been noted or protested for non- 2. The bill must have been noted or protested for non-
acceptance. payment.
3. It must be written on the bill that it is acceptance for the 3. Payment must be made for the honour of any party
honour of party who is already liable on the bill (otherwise it liable to pay the bill (otherwise it is deemed to be paid
is deemed to be accepted for honour of drawer). for honour of drawer).
4. Acceptance for honour must be made with the consent of the 4. The person paying (or his agent) must previously
holder. declare before the Notary Public the party for whose
5. It must be signed by the acceptor for honour who must not be honour he pays.
already a party liable on the bill. 5. Such declaration must have been recorded by Notary
Public.
Liabilities of Acceptor for Honour: Rights of Payer for Honour:
An acceptor for honour binds himself to pay the amount of the He is entitled to all the rights of a holder at time of
bill if the drawee does not pay. payment. He may recover following from party in whose
However, he is liable to pay only if following conditions are honour he paid:
fulfilled:  all sums paid, and
1. Once more, the bill should be presented to drawee for  interest thereon, and
payment at maturity.  all expenses properly incurred in making such
2. If the drawee still refuses to pay, the bill should be noted or payment.
protested for payment.
3. Bill should be presented or forwarded to the acceptor for
honour very next day after day of maturity (and not later).
Rights of Acceptor for Honour:
After payment of the bill, acceptor for honour can sue the party
for whose honour the bill is accepted and all the prior parties.

Write down short notes on any THREE of the following:
(a) Acceptance for Honour (05 marks)
(b) Special Crossing (05 marks)
(c) Drawee in case of Need (05 marks)
(d) Parties to a Cheque (05 marks)
LO 3: CLASSIFICATION OF NEGOTIABLE INSTRUMENTS: ✯

Bearer Instrument and Order Instrument:
Bearer Instrument/Payable to bearer:
A negotiable instrument is payable to bearer if it is payable to any person who bears it. It is
expressed to be so payable, or last endorsement on it is blank e.g. “Pay bearer”, or “Pay A or bearer”.
A bearer instrument can be negotiated by its delivery.
Order Instrument/Payable to Order:

A negotiable instrument is payable to order which is expressed to be payable to a particular person
or to his order e.g. “Pay A” or “Pay A or order”. However, it should not contain words prohibiting
transfer e.g. “Pay to A only”.
An order instrument can be negotiated by an endorsement on it and its delivery.
4 By: M. Asif, ACA

Time Instrument, and Demand Instrument:

Time Instrument:
An instrument payable after a fixed time or on a specified date is called Time Instrument. It may
also be payable after happening of a certain event e.g. death of a person.
Demand Instrument:
A negotiable instrument is payable on demand where:
 It is expressed to be payable on demand, or payable at sight or payable on presentment, or
 No time for payment is expressed on it, or
 It is accepted or endorsed after it is overdue, as regards person accepting or endorsing it.
Exam Tip
A cheque is always a Demand Instrument.
Inland instrument and Foreign Instrument:

Inland instrument is a negotiable instrument which is:
1. Made in Pakistan or Drawn in Pakistan, and
2. Payable in Pakistan or drawn on a person resident in Pakistan.
An instrument which is not an inland instrument, is deemed to be a foreign instrument.
LO 4: “HOLDER”, “HOLDER IN DUE COURSE” AND “PAYMENT IN DUE COURSE”: ✯✯

Holder:
Holder of a negotiable instrument means a person who has possession of the instrument, and who
is entitled to receive the amount. If a negotiable instrument is lost or destroyed, its holder is the
person who is so entitled at time of such loss or destruction.
In a bearer instrument, holder is the one who is the bearer. In an order instrument, holder is the
one who is either payee or endorsee.
Holder in due course:

A holder in due course if a person who fulfills following conditions:
1. He became possessor (in case of bearer instrument), or payee/endorsee (in case of order
instrument) for lawful and adequate consideration.
2. He became the holder of the instrument before its maturity.
3. He because the holder in good faith i.e. there were no reasons to believe that any defect
existed in the title of transferor.
4. Negotiable instrument must be complete and regular i.e. it must be properly stamped, and
should not have material alteration.
Payment in due course:

Payment in due course means payment to discharge liability of a negotiable instrument, which
fulfills following conditions:
1. Payment is made in accordance with apparent tenure of the instrument. It must be made at
or after maturity. A payment before maturity does not discharge a negotiable instrument
and is not a payment in due course.
2. Payment must be made in good faith and without negligence.
5 By: M. Asif, ACA

3. Payment must be made to a person who is in possession of the negotiable instrument, and
there are no circumstances to believe that he is not entitled to receive payment of the
amount.

What do you understand by the terms ‘Holder’, ‘Holder in due course’ and ‘Payment in due course’ under the Negotiable
Instruments Act, 1881? (08 marks)
LO 5: INCHOATE INSTRUMENT: ✯
Inchoate Instrument:
An incomplete or blank negotiable instrument properly stamped and signed, is termed as inchoate
instrument.
Enforceability of Inchoate stamped instruments:

Where a person signs and delivers a wholly blank or incomplete instrument, which is appropriately
stamped, he thereby gives prima facie authority to the person who receives that paper to make or
complete it into a negotiable instrument for the amount specified therein (if any) or for any amount
covered by the stamp (if no amount is specified).
Extent of liability:
The person so signing shall be liable to any holder in due course for the amount specified in the
instrument or filled upon therein.

In the light of Negotiable Instruments Act, 1881 explain the provisions relating to the enforceability of inchoate stamped
instruments. Also discuss the extent to which the person signing the instrument is liable upon such instrument.
(06 marks)
LO 6: MATERIAL ALTERATION AND ITS CONSEQUENCES: ✯✯

Definition:
"Material alteration" in relation to a negotiable instrument includes an alteration of the date, the
sum payable, the time of payment, the of payment, and, where any such instrument has been
accepted generally, the addition of a place of payment without the acceptor's assent.
Effect of material alteration:

1. Any material alteration of a negotiable instrument renders the same void as against any one
who is a party thereto at the time of making such alteration and does not consent thereto,
unless it was made in order to carry out the common intention of the original parties.
2. Alteration by endorsee and any such alteration, if made by an endorsee, discharges its
endorser from all liability to him in respect of the consideration thereof.
Exceptions where material alteration does not make instrument void:

1. Crossing of an uncrossed cheque.
2. Conversion of blank endorsement into an endorsement in full.
3. Filling blanks in the case of inchoate or incomplete instruments.
4. Making qualified acceptance.
6 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 3 Offer and Acceptance
Conditional:
An offer may be subject to some conditions. Offeree will have to accept all the terms of the offer. If a
condition is not accepted, such conditional offer lapses.

An offer must have certain essentials in order to constitute a valid offer. Describe any six essentials of a valid offer.
(06 marks)
What is an invitation to an offer? Give any three (03) suitable examples of the same. (04 marks)
LO 2: TYPES OF OFFER: ✯
Specific Offer:
An offer is specific when it is made to a definite person or persons. Such an offer can be accepted
only the person or persons to whom it is made.
General Offer:
An offer is general when it is made to the world at large or public in general. Such an offer can be
accepted by any person who fulfils the requisite conditions.
Cross offers:
If two parties make identical offers to each other, in ignorance of each other’s offer, the offers are
called “cross offers”. Cross offers are not acceptance, and do not make a contract.
Standing/Open/Continuing offer:
If an offer is of on-going nature, it is said to be a standing offer. A contract is entered every time
when a person signifies his acceptance.

With reference to the Contract Act 1872, discuss the following:
(a)Types of offer (05 marks)
(b)Communication of offer (05 marks)
LO 3: LAPSE/REVOCATION OF AN OFFER/PROPOSAL: ✯✯✯

By Revocation:
An offer is revoked when it is withdrawn by offeror. Offer can be revoked any time before
acceptance through communication of notice of revocation to offeree.
After stipulated or reasonable time:

An offer lapses if its acceptance is not communicated to offeror with the time prescribed in the
offer, or within a reasonable time (if no time is prescribed).
Acceptance not in accordance with requirements:

If an offer is not accepted in the prescribed manner, or in usual and reasonable manner (if no
manner is prescribed), it lapses.
3 By: M. Asif, ACA

Rejection by offeree:
An offer lapses if offeree expressly rejects the offer. Rejection becomes effective when it comes to
the knowledge of the offeror.
Death or Insanity:
An offer lapses by the death or insanity of the offeror or the offeree before acceptance. Legal heirs
of offeree cannot accept the offer.
However, acceptance after death or insanity of offerror will be effective if offeree does not have
knowledge of death or insanity.
Counter-offer:
An offer comes to an end if counter offer is made.
Non-fulfilment of condition:
An offer stands revoked if the offeree fails to fulfil a condition precedent to acceptance.
Subsequent illegality or destruction of subject matter:

An offer lapses if after it is made and before it is accepted:
1. it becomes illegal
2. subject matter is destroyed.

Identify the circumstances under which a proposal may be revoked under the Contract Act, 1872. (07 marks)
(Spring 2009)
LO 4: ACCEPTANCE AND ITS ESSENTIALS: ✯✯

Definition of Acceptance:
When the person to whom the proposal is made signifies his assent thereto, the proposal is said to
be accepted. A proposal, when accepted, becomes a promise.
Essentials of an Acceptance:
Acceptance must be absolute and unqualified:
An acceptance must be absolute and unconditional in respect of all terms of the offer whether
major or minor. If parties are not ad-idem on all terms, there will be no contract.
Acceptance must be communicated to offeror:

Acceptance must be communicated to offeror. It may be accepted by words (written or spoken) or
by conduct of persons.
Communication of Acceptance is complete:
 against the proposer, when it is put in a course of transmission to him, so as to be out of
power of the acceptor.
 against the acceptor, when it comes to the knowledge of the proposer.
Acceptance must be given by parties to whom it is made:

Acceptance must be communicated only by offeree or his authorized representative (and not by
anyone else).
4 By: M. Asif, ACA

Reasonable Time:
Acceptance must be given within the time specified, or within reasonable time (if no time is
specified). Further, acceptance must be given before offer is revoked or lapses.
Reasonable Mode:
Acceptance should be made in the manner specified, or in a usual manner (if no manner is
specified).
Acceptance cannot precede an offer:

Acceptance must be given after receiving offer. It cannot be given before the offer.
Acceptance cannot be implied from silence:

If no reply is received from offeree, it cannot be assumed as acceptance. Similarly, just mental
acceptance by offeree is not a valid acceptance.
Rejected offer cannot be accepted unless renewed:

If an offer is rejected, it cannot be accepted again unless a fresh offer is made.

Define acceptance. When is an acceptance considered valid, under the Contract Act, 1872? (07 marks)
(Autumn 2011)
LO 5: TIMING AND COMMUNICATION OF REVOCATION: ✯

Revocation of Offer/Proposal:
A proposal may be revoked at any time before the communication of acceptance is complete as
against the proposer, but not afterwards.
Revocation of Acceptance:
An acceptance may be revoked at any time before communication of acceptance is complete as
against the acceptor, but not afterwards.
Communication of Revocation:
Communication of Revocation is complete:
 As against the person who makes it, when it is put in a course of transmission to revokee, so
as to be out of power of revoker.
 As against the person to whom it is made, when it comes to his knowledge.

What is the time limit after which a proposal cannot be revoked? (03 marks)
(2012 Spring)
5 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 4 Capacity of Parties
CHAPTER FOUR
CAPACITY OF PARTIES
ICAP'S STUDY TEXT
REFERENCE**
LO 1
AGREEMENT WITH MINOR 4.1.2
✯✯
LO 2
AGREEMENT WITH PERSON OF UNSOUND MIND 4.1.3
✯
LO 3 AGREEMENT WITH PERSONS DISQUALIFIED BY
4.1.4
✯ LAW
1 By: M. Asif, ACA

 Not disqualified from contracting by any law. (4.1.1)
LO 1: AGREEMENT WITH MINOR: ✯✯

Who is a minor:
A minor is a person who has not attained age of majority which is 18 years of age. However, if a
guardian is appointed by court for a minor, then age of majority will be 21 years.
Position of Agreement with Minor:

Agreement by a minor is void against him:
An agreement by a minor is void and inoperative as against him, but he can derive benefits under it.
Position of minor’s parents:

The parents of a minor are not liable for agreements made by a minor even if agreement is for
purchase of necessaries of life. However, parents are liable when minor is contracting as an agent
for the parents.
Contracts by minor and adult jointly:

If a minor and an adult jointly enters into a contract with another person, minor has no liability
under the contract and contract can be enforced only against adult.
Minor in a partnership:
A minor cannot be a partner in a partnership firm. However, he can be admitted to the benefits of
partnership with the consent of all the partners.
Minor as agent:
A minor can be an agent but cannot be a principal. As an agent, he can bind his principal by his acts
but minor cannot be personally liable for negligence or breach of duty.
Minor and insolvency:

A minor cannot be declared as insolvent because he is incapable of contracting debts.
No ratification of agreement by minor:

An agreement with a minor cannot be ratified subsequently after he attains majority.
Rule of estoppels does not apply to a minor:

If a minor falsely represents himself to be a major and enters a contract, he can avoid contract by
pleading himself as a minor. However, such minor shall restore property obtained by him if
traceable in his hands.
Minor’s liabilities for necessities of life:

If a person is incapable of entering into contract (e.g. minor or person of unsound mind) and he or
his legally dependent persons are supplied necessities of life by other person, such other person
can be reimbursed from property of such incapable person. However:
 A minor is not personally liable, it is his property only which is liable.
 Suppliers will get a reasonable price only and not the price agreed by minor.
2 By: M. Asif, ACA

LO 2: AGREEMENT WITH PERSON OF UNSOUND MIND: ✯

Who is a person of sound mind:
A person is of sound mind for making a contract if, at time of making it:
 he is capable of understanding it, and
 he is capable of forming a rational judgment as to its effects on his interests.
Position of Agreements with a person of unsound mind:

1. A person who is usually of unsound mind, but occasionally of sound mind, may make a
contract when he is of sound mind (e.g. a lunatic)
2. A person who is usually of sound mind, but occasionally of unsound mind cannot make a
contract when he is of unsound mind (e.g. a sane man delirious from fever, or drunken so
much that he cannot understand terms of a contract)
3. An agreement made by a person of unsound mind on same footing as that of minor’s
contract i.e.
a. An agreement by a person of unsound mind is void and inoperative as against him,
but he can derive benefits under it.
b. If he or his legally dependent persons are supplied necessities of life by other
person, such other person can be reimbursed from property of such person of
unsound mind.
LO 3: AGREEMENT WITH PERSONS DISQUALIFIED BY LAW: ✯

Which persons are disqualified by law:
1. Alien enemy (i.e. citizen of a foreign country which is at war with Pakistan)
2. Foreign Sovereigns and Ambassadors
3. Convicts (i.e. a person who is found guilty and is imprisoned)
4. Insolvent
Position of Agreement with disqualified persons:

Agreement with Alien Enemies:
An alien can enter into contracts with citizens of Pakistan during time of peace only. On declaration
of war, he becomes alien enemy and cannot enter into contracts. Contracts entered before
declaration of war stand suspended and cannot be performed during course of war. However, they
can be revived after war is over.
Agreement with Foreign Sovereigns and Ambassadors:
Such persons can enter into contracts and can sue others to enforce contracts. However, they are in
a privileged position and cannot be sued without sanction of government.
Agreement with Convicts:

During the period of imprisonment, a convict is incompetent:
 To enter into contracts, and
 To sue on contracts made before conviction.
Agreement with Insolvent:
A person who is declared undischarged insolvent cannot make agreements to dispose his properly
as his property rests with official assignee/receiver.
Agreement with Companies:
An agreement by a company is valid only if it is within powers granted by its Memorandum of
Association.
3 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 5 Consideration
CHAPTER FIVE
CONSIDERATION
ICAP'S STUDY TEXT
REFERENCE**
LO 1 CONSIDERATION AND ITS ESSENTIALS 5.1.1, 5.1.2, 5.1.3

EXCEPTIONS TO THE RULE “NO CONSIDERATION,
LO 2 5.1.5
NO CONTRACT”
“DOCTRINE OF PRIVITY OF CONTRACT” AND ITS
LO 3 5.1.4
EXCEPTIONS
1 By: M. Asif, ACA

LO 1: CONSIDERATION AND ITS ESSENTIALS:

Consideration:
When, at the desire of the promisor, the promisee or any other person has done or abstained from
doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such
act or abstinence or promise is called a consideration for the promise.
Essential Elements of Consideration:

Consideration must move at the desire of promisor:
Act or abstinence must be done at the desire or request of promisor. Acts done or services rendered
voluntarily or at the desire of third party will not be valid consideration.
Consideration may move from promisee or any other person:

As long as there is a consideration for the promise, it is immaterial who has furnished it.
Consideration may be past, present or future act or abstinence:

Consideration may consist of either a positive act (i.e. to do) or abstinence (i.e. not to do). It may be:
 Past consideration (i.e. something is done before date of agreement at the desire of
promisor).
 Present consideration (i.e. consideration moves simultaneously with the promise).
 Future consideration (i.e. when consideration from both sides is to move at a future date).
Consideration must be something in value:

Consideration must be something to which the law attaches a value. Law insists on presence of
consideration and not on adequacy of it. Inadequacy of consideration is no bar to a valid contract,
unless it is due to unfree consent.
Consideration must be real, and not illusory:

There is no real consideration in following cases:
 Physical impossibility.
 Legal impossibility.
 Uncertain consideration.
 Illusory consideration.
Consideration must be something which promisor is not already bound to do:

A promise to do what one is already bound to do, either by general law or under existing contract, is
not a good consideration for a new promise. Similarly, a promise to perform a public duty by a
public servant is not a consideration.
Consideration must be lawful:

Consideration must not be illegal, immoral or opposed to public policy.
LO 2: EXCEPTIONS TO THE RULE “NO CONSIDERATION, NO CONTRACT”:

Consideration is an essential element of contract. General rule is that an agreement made without
consideration is void. However, in following situations, contracts without consideration are valid.
Agreement made on account of natural love and affection:

An agreement made without consideration is enforceable if it is:
 Expressed in writing, and
2 By: M. Asif, ACA

 Registered under the law for registration of documents, and

 Between parties standing in a near relation to each other, and
 Made on account of natural love and affection.
Agreement to compensate for past voluntary service:

A promise made without consideration is also valid if it is a promise to compensate (wholly or in
part) a person who has already done voluntarily something for the promisor.
Agreement to pay a time-barred debt:

A promise by a debtor to pay a time-barred debt is enforceable provided:
 It is made in writing, and
 Signed by debtor or his authorized agent, and
 It related to a debt which could not be enforced by a creditor because of law of limitation.
Completed Gift:
If any gift is actually made between donor and donee, it shall be valid even without consideration.
Contribution to charity:
A promise to contribute to charity would be enforceable if, on the faith of the promised
subscription, promisee takes step and undertakes a liability.
Contract of agency:
No consideration is necessary to create an agency.
Contract of bailment:
No consideration is necessary for a contract of bailment.
LO 3: “DOCTRINE OF PRIVITY OF CONTRACT” AND ITS EXCEPTIONS:

Doctrine of Privity of Contract:
“Only a person who is a party to a contract can sue on it. A stranger to a contract cannot sue even if
contract is for his benefit”.
Exceptions to the “Doctrine of Privity of Contract”:

Contract entered through an agent:
Principal can enforce the contracts entered into by his agent provided agent acts within the scope of
his authority.
Assignment of a contract:
The assignee of rights and benefits under a contract can enforce the benefits of a contract e.g.
assignee of insurance policy or official assignee of insolvent person.
Family settlements:
When an arrangement is made in connection with marriage, partition, or other family
arrangements and a provision is made for the benefit of a person, he may sue although he is not a
party to the agreement.
A Trust or Charge:
A person (called beneficiary) in whose favor a trust or other interest in some specific immovable
property has been created, can enforce it even though he is not a party to the contract.
3 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 6 Free Consent
CHAPTER SIX
FREE CONSENT
ICAP'S STUDY TEXT
REFERENCE**
LO 1 DEFINITION OF CONSENT AND FREE CONSENT 6.1.1 – 6.1.4
LO 2 COERCION 6.2.1 – 6.2.2
LO 3 UNDUE INFLUENCE 6.3.1 – 6.3.4
LO 4 MISREPRESENTATION 6.5.1 – 6.5.3
LO 5 FRAUD 6.4.1 – 6.4.4
LO 6 MISTAKE 6.6.1 – 6.6.2
1 By: M. Asif, ACA

LO 1: DEFINITION OF CONSENT AND FREE CONSENT:

Consent:
Definition:
"Two or more persons are said to consent when they agree upon the same thing in the same sense."
In English Law, this is called 'consensus-ad-idem'.
Effect of absence of Consent:

When there is no consent at all, the agreement is void ab-initio, i.e. it is not enforceable at the option
of either party.
Free Consent:
Definition:
Consent is said to be free when it is not caused by (a) coercion, or (b) undue influence, or (c) fraud,
or (d) misrepresentation, or (e) mistake".
Effect of absence of Free Consent:

1. If contract is caused by coercion, undue influence, misrepresentation or fraud, contract is
voidable at the option of the party whose consent was so obtained.
2. If contract is caused by ‘bilateral mistake’ about a matter of fact, agreement is void.
LO 2: COERCION:
Definition:
"Coercion" is the committing, or threatening to commit, any act forbidden by the Penal Code or the
unlawful detaining or threatening to detain any property to the prejudice of any person whatever,
with the intention of causing any person to enter into an agreement.
Coercion may be exercised by any person (even stranger of the contract), and may be directed at
any person (even stranger of the contract).
Effect of Coercion:
1. The contract is voidable at the option of the party whose consent was obtained by coercion.
2. The party rescinding a voidable contract shall restore the benefit received by him under the
contract.
3. A person to whom money has been paid or anything delivered under coercion, must repay
or return it.
LO 3: UNDUE INFLUENCE:
Definition of undue influence:
A contract is said to be induced by "undue influence" where:
 the relations subsisting between the parties are such that one of the parties is in a position
to dominate the will of the other and
 dominant party uses that position to obtain an unfair advantage over the other.
2 By: M. Asif, ACA

A person is deemed to be in a position to dominate the will of another if:

1. he holds a real or apparent authority over the other or
2. he stands in a fiduciary relation to the other, or
3. he makes a contract with a person whose mental capacity is temporarily or permanently
affected by reason of age, illness, or mental or bodily distress.
Presumptions of Undue Influence:

Undue influence is presumed to exist in following relationships:
 Parents and Child.
 Guardian and Ward
 Trustee and Beneficiary
 Guru (spiritual adviser) and Disciple
 Solicitor and Client
 Doctor and Patient
 Contracts with Pardanasheen Lady, or other completely ignorant and illiterate persons.
Study Tip
Undue influence is NOT presumed to exist in following relationships:
 Husband and Wife (not being a Pardanasheen Lady)
 Creditor and Debtor
 Landlord and Tenant
 Master and Servant
Rebutting the presumption:

However, presumption of undue influence can be rebutted by showing that:
1. Dominant party has made full disclosure of all facts to the weaker party before making the
contract.
2. Price was adequate.
3. Weaker party was in receipt of independent advice, before making the contract.
Effect of Undue Influence:

The contract is voidable at the option of the party whose consent was so caused. However, Court
has discretion to set aside such contract either absolutely or, if the weaker party has received any
benefit thereunder, upon such terms and conditions as the court may seem just.
Difference between Coercion and Undue Influence:
Coercion Undue Influence

Parties to a contract may or may not be related Parties to a contract are related to each
Relationship
to each other. other under some sort of relationship.
Consent is obtained by giving a threat of an
Consent Consent is obtained by dominating the will.
offence or committing an offence
Nature of Pressure It involves physical pressure. It involves mental pressure.
It can be exercised even by a stranger to the It can be exercised only by a party to a
Who can exercise
contract. contract and not by a stranger.
Coercion has to be proved by the aggrieved It may be presumed by the law under
Presumption
party alleging it. It is not presumed by the law. certain circumstances.
The party committing the crime may be
Nature of liability It doesn't involve any criminal liability
punishable under Penal Code.
Burden of Proof On aggrieved party (plaintiff) On dominant party (defendant)
3 By: M. Asif, ACA

LO 1: DEFINITIONS OF CONTRACT, AGREEMENT AND PROMISE: ✯

Contract:
Contract is an agreement enforceable by law.
Agreement:
Agreement is every promise and every set of promises, forming consideration for each other.
Symbolically,
Agreement = Offer (also called Proposal) + Acceptance
Promise:
When the person to whom proposal is made signifies his assent, the proposal is said to be accepted.
A proposal when accepted becomes a promise.

What is the difference between an agreement and a contract? (03 marks)
LO 2: ESSENTIAL ELEMENTS OF A VALID CONTRACT: ✯✯✯

Offer and Acceptance:
There must be two parties to an agreement, one making offer and other making acceptance. Offer
and acceptance both must be valid.
Intention to create legal relationship:

Parties should have intention to create legal relationship between them which may result in legal
consequences.
There is a usual presumption that:
 Social or domestic agreements do not intend to create legal relationship (unless otherwise
agreed), and
 Commercial or business agreements intend to create legal relationship (unless otherwise
agreed).
Capacity/Competence of parties:
 Not disqualified from contracting by any law.
Free Consent:
There must be free consent of parties on terms of agreement.
Consent means parties must agree upon the same thing in the same sense.
Free means consent should not be obtained by:
 Coercion
 Undue influence
 Fraud
 Misrepresentation
 Mistake
2 By: M. Asif, ACA

LO 5: FRAUD:
Definition of Fraud:
"Fraud" means and includes any of the following acts committed by a party to a contract, or with his
connivance, or by his agent with intent to deceive another party, or his agent or to induce him to
enter into the contract:-
(1) the suggestion that a fact is true when it is not true and the person making the suggestion
does not believe it to be true.
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.
Essentials of Fraud:
By a party to a contract or his agent:
Fraudulent representation must be made by a party to the contract or by his connivance or by his
agent. Fraudulent representation by strangers does not affect validity of contract.
False representation:
There must be a false representation and it must be made with the knowledge of its falsehood.
Representation as to fact:
The representation must relate to a fact. In other words, a mere opinion, a statement of expression
or intention does not amount to fraud.
Actually Acted:
Other party must have acted on the faith of the fraudulent representation, and must have been
actually deceived. A mere attempt for deceit is not a fraud.
Suffered loss:
Other party must have suffered loss. There is a common rule of law that “there is no fraud without
damage”.
Effect of Fraud:
Right to Rescind the Contract:
The party whose consent was caused by fraud can rescind (cancel) the contract but he cannot do so
in the following cases:
(i) where silence amounts to fraud, the aggrieved party cannot rescind the contract if he had
the means of discovering the truth with ordinary diligence;
(ii) where the party gave the consent in ignorance of fraud;
(iii) where the party after becoming aware of the fraud takes a benefit under the contract;
(iv) where an innocent third party before the contract is rescinded acquires for consideration
some interest in the property passing under the contract,
(v) where the parties cannot be restored to their original position.
Right to Insist Upon Performance:

The party whose consent was caused by fraud may, if he thinks fit, insist that the contract shall be
performed
5 By: M. Asif, ACA

Right to Claim Damages:

The party whose consent was caused by fraud, can claim damages if he suffers some loss.
Does silence amount to Fraud?:

General Rule:
Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not
fraud.
Exceptions:
1. Where parties stand in fiduciary relationship like parent-child, trustee-beneficiary.
2. Where the silence itself is equivalent to speech.
LO 6: MISTAKE:
Type of Mistake Effect of Mistake

Mistake of A contract is not voidable because it was caused by a mistake as to any law in force in
Mistake of Pakistani Law Pakistan.
Law Mistake of Such a mistake is treated as mistake of fact, and the agreement in such case is void (if
Foreign Law bilateral mistake).
If both parties are under a mistake regarding a matter of fact which is essential for
agreement, agreement is void.
Following are examples of bilateral mistakes which make agreement void:
1. Bilateral Mistake as to subject-matter:
 Mistake as to existence of subject-matter.
 Mistake as to identity of subject-matter.
Bilateral
 Mistake as to quality of subject-matter.
Mistake
 Mistake as to quantity of subject-matter.
Mistake of  Mistake as to title of subject-matter.
Fact  Mistake as to price of subject-matter.
2. Bilateral Mistake as to possibility of performance:
 Physical impossibility
 Legal impossibility
If one of the parties is under a mistake regarding a matter of fact, contract is valid and
cannot be avoided.
Unilateral
Following are the exceptions where agreement is void on the basis of unilateral mistakes:
Mistake
1. Mistake as to the identity of the person contracted with.
2. Mistake as to the nature of contract.
6 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 7 Legality of Object and Consideration
CHAPTER SEVEN
LEGALITY OF OBJECT AND
CONSIDERATION
ICAP'S STUDY TEXT
REFERENCE**
CIRCUMSTANCES UNDER WHICH THE OBJECT OR

LO 1 7.1.1, 7.1.3
CONSIDERATION IS UNLAWFUL
OBJECT OR CONSIDERATION PARTIALLY
LO 2 7.1.2
UNLAWFUL
LO 3 ILLEGAL AGREEMENTS 7.1.1
1 By: M. Asif, ACA

LO 1: CIRCUMSTANCES UNDER WHICH THE OBJECT OR CONSIDERATION IS UNLAWFUL:

Every agreement of which the object or consideration is unlawful is void. According to Contract
Act, the consideration or the object of an agreement is unlawful in the following cases:
If it is forbidden by law:
Ac ant is forbidden by law if it is punishable by the criminal law of Pakistan or when it is prohibited
by special legislation or regulation make by competent authority.
If it is of such a nature that, if permitted, it would defeat the provisions of any law:
This clause refers to the cases where object or consideration of an agreement is not directly
forbidden by law, however it would indirectly violate a provision of law.
If it is fraudulent:
If object of the agreement is to defraud others, it is unlawful.
If it involves or implies injury to the person or property of another:

If object or consideration of an agreement is injury to the person or property (whether movable or
immovable) of another, it is unlawful.
If The Court regards it as immoral:

An object or consideration will be unlawful if court considers it as immoral e.g. sexual immorality,
interference with marital relations, or acts against good public morals.
If The Court regards it as opposed to public policy:

Following agreements are opposed to public policy:
Trading with an alien enemy:

An agreement with an alien enemy in time of war is illegal. Contracts before war are either
suspended or terminated according to intention of parties.
Stifling prosecution:
If a person has committed a crime, he must be punished. Hence, any agreement which seeks to
prevent the prosecution of guilty party is void.
Maintenance and Champerty:

"Maintenance" is the interference of a disinterested party to encourage a lawsuit.
“Champerty” is an agreement in which a person with no previous interest in a lawsuit finances it
with a view to sharing the disputed property if the suit succeeds.
Following is the effect of maintenance and champerty:

1. An agreement for supplying funds by way of ‘maintenance for ‘Champerty’ is valid if is not
unreasonable, and is not for malicious motive like oppressing others.
2. Agreement to provide professional services is valid if it is made by way of maintenance. But
it is void if made by way of ‘Champerty’, i.e., making the remuneration dependent upon the
result of the suit.
2 By: M. Asif, ACA

Agreement for Sale or transfer of public office:

Agreements for sale or transfer of public officers for appointments to public offices in consideration
of money are illegal, as these will lead to corruption. Similarly agreements to pay money t a public
servant to act corruptly or to perform his duty, or to retire to make way for appointment of
promisor are also illegal.
Agreement to restraint of parental rights:

The right of guardianship cannot be bartered away by any agreement.
Agreement to restraint of personal liberty:

Agreement which unduly restricts the personal freedom of the parties to it, is against public policy.
Agreement to create Monopoly:

An agreement to create monopoly is against public policy.
Marriage brokerage agreement:

An agreement by which a person promises, for monetary consideration, to procure the marriage of
another, is against public policy.
Agreement in restraint of trade:

Agreement which unduly restricts the right of persons to trade is void (subject to exceptions e.g.
Sale of Goodwill, Partners’ agreements).
LO 2: OBJECT OR CONSIDERATION PARTIALLY UNLAWFUL:

If some part of an agreement is legal and other part illegal, the legal position is as under:
1. If any part of single consideration or any one of several considerations is unlawful, the
agreement is void (i.e. where legal part cannot be separated from illegal part).
2. If parties reciprocally agree first to do certain legal things and secondly (under specified
circumstances) to do certain illegal things, first set of promises is a valid contract but
second is a void agreement.
3. If there are alternate promises and one of them is illegal, the legal branch can be enforced.
LO 3: ILLEGAL AGREEMENTS:
Meaning of Illegal Agreements:
Illegal agreements are those agreements which are—
(a) void ab-initio, i.e. void from the very beginning, and
(b) punishable by the criminal law of the country or by any special legislation/regulation.
Effects of Illegal Agreements:

The effects of illegal agreements are as under:
1. Illegal agreements are void.
2. The collateral transactions to an illegal agreement also become illegal and hence cannot be
enforced.
3. No action can be taken for the recovery of money paid or property transferred under an
illegal agreement and for the breach of an illegal agreement.
3 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 8 Void Agreements
CHAPTER EIGHT
VOID AGREEMENTS
ICAP'S STUDY TEXT
REFERENCE**
LO 1 MEANING OF VOID AGREEMENTS 8.1.1 – 8.1.2
LO 2 AGREEMENTS IN RESTRAINT OF TRADE 8.2.1 – 8.2.2
LO 3 WAGERING AGREEMENTS 8.3.1 – 8.3.2
LO 4 OTHER VOID AGREEMENTS 8.4.1 – 8.4.6
1 By: M. Asif, ACA

LO 1: MEANING OF VOID AGREEMENTS:

Definition of void agreement:
A void agreement is an agreement which is not enforceable by law. The agreements which are not
enforceable by law right from the time when they are made, are void-ab-initio.
Examples of void agreement:

The following types of agreements have expressly been declared void under various sections of the
Contract Act.
1. Agreements by or with persons incompetent to contract.
2. Agreements entered into through a mutual mistake of fact between the parties.
3. Agreement, the object or consideration of which is unlawful.
4. Agreement, the consideration or object of which is partly unlawful.
5. Agreement made without consideration.
6. Agreements in restraint of marriage.
7. Agreements in restraint of trade.
8. Agreements in restraint of legal proceedings.
9. Wagering agreement.
10. Impossible agreement.
11. An agreement to enter into an agreement in the future.
LO 2: AGREEMENTS IN RESTRAINT OF TRADE:

Every agreement by which anyone is restricted from exercising a lawful profession, trade or
business of any kind, is to that extent void.
Exceptions of agreements in restraint of trade:
Sale of Goodwill:
An agreement which restrains the seller of a goodwill from carrying on a business is valid if all the
following conditions are fulfilled:
1. Such restriction must relate to a similar business.
2. Such restriction must be within specified local limits.
3. Such restriction must be for the time so long as the buyer or any person deriving title to the
goodwill from him, carries on a like business in the specified local limits.
4. Such specified local limits must be reasonable having regard to the nature of the business.
Partners' Agreements:
The Partnership Act, 1932, recognises the following agreements in restraint of trade as valid:
1. A partner shall not carry on any business other than that of the firm while he is a partner.
2. An outgoing partner may agree with his partners that he will not carry on any business
similar to that of the firm within a specified period or within specified local limits.
3. Partners may make an agreement that, at time of dissolution, some or all of them will not
carry on a business similar to that of the firm within a specified period or within specified
local limits.
4. A partner may upon the sale of the goodwill of a firm, make an agreement that such partner
will not carry on any business similar to that of the firm within a specified period or within
specified local limits.
Trade Combinations:
Trade combinations which have been formed to regulate the business or to fix prices are valid.
However, trade combinations to create monopoly and which are against public interest are void.
2 By: M. Asif, ACA

Service Agreements:
Following agreements are enforceable:
1. A clause to serve the employer for a stipulated period.
2. A clause to prevent the employee from accepting any other engagement during his
employment.
3. A clause to prevent the employee from accepting a similar engagement after the
termination of his services if restraint is intended only to protect an employer (However, if
a restraint is intended to serve any other purpose, it will not be enforceable).
LO 3: WAGERING AGREEMENTS:
Meaning of wagering agreement
An agreement between two persons under which money or money's worth is payable, by one
person to another on the happening or non-happening of a future uncertain event is called a
wagering event.
Effects of Wagering Agreement

1. Agreements by way of wager are void.
2. No suit can be filed to recover the amount won on any wager.
3. Transactions which are collateral to wagering agreements may also be void.
LO 4: OTHER VOID AGREEMENTS:

Agreements in restraint of legal proceedings:
Every agreement by which any party is restricted from enforcing his right under a contract by the
usual legal proceedings or which limits the time within which he may enforce his right is void.
Exceptions
1. An agreement between two or more persons who agree that any dispute which may arise
between them shall be referred to arbitration, is valid.
2. An agreement whereby parties agree not to file an appeal in upper court of law, is valid.
3. Parties making extract to select one court of law between two courts equally competent, is
valid.
Agreements in restraint of marriage:

Every agreement in restraint of the marriage of any person other than a minor is void.
Uncertain agreements:
An agreement the meaning of which is not certain or capable of being made certain are void.
Agreements contingent on impossible events:

Contingent agreements to do or not to do anything, if an impossible event happens are void
whether the impossibility of the event is known or not to the parties to the agreement at the time
when it is made.
Agreements to do impossible acts:

An agreement to do an impossible act is void.
Agreements to enter into an agreement in the future:

An agreement to enter into an agreement in the future is void.
3 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 9 Contingent Contracts
CHAPTER NINE
CONTINGENT CONTRACTS
ICAP'S STUDY TEXT
REFERENCE**
DEFINITION AND ESSENTIALS OF CONTINGENT

LO 1 9.1.1, 9.1.2
CONTRACT
LO 2 RULES REGARDING CONTINGENT CONTRACTS 9.1.3
DIFFERENCE BETWEEN CONTINGENT CONTRACT
LO 3 9.1.4
AND WAGERING AGREEMENT
1 By: M. Asif, ACA

Mercantile Law – Study Notes Chapter 9 Contingent Contracts
LO 1: DEFINITION AND ESSENTIALS OF CONTINGENT CONTRACT:

Meaning of a Contingent Contract:
A 'contingent contract' is a contract to do or not to do something if some event, collateral to such
contract, does or does not happen. Examples include Insurance Contracts and Indemnity and
Guarantee Contracts.
Essential Features/Characteristics of a Contingent Contract:

The essential features of a Contingent Contract are discussed below.
1. Dependence on a Future Event: The performance of a contingent contract depends upon
the happening or non-happening of some future event.
2. Collateral Event: The event must be collateral to the contract.
3. Uncertain Event: The event must be uncertain.
LO 2: RULES REGARDING CONTINGENT CONTRACTS:
Kind of Contingent Contract Rule Regarding Contingent Contract

Contracts contingent upon the happening Such contracts can be enforced by law only when that event has happened.
of an uncertain event If the event becomes impossible, such contracts become void.
Such contracts can be enforced by law only when the event happens within
Contracts contingent upon the happening specified time.
of an uncertain event within a fixed time. If the event becomes impossible or does not happen within specified time,
such contracts become void.
Contracts contingent upon the non Such contracts can be enforced by law only when the happening of that event
happening of an uncertain event becomes impossible.
Contracts contingent upon the non-
Such contracts can be enforced by law only when the event becomes
happening of an uncertain event within a
impossible or does not happen within specified time.
fixed time.
Agreements contingent upon impossible Such agreements are void whether the impossibility of the event is known or
events. not to the parties to the agreement at the time when it is made.
If the uncertain event is the future conduct of a living person, such event
Contracts contingent upon the future
shall be considered impossible if that such person does anything by which it
conduct of a living person.
becomes impossible to perform the contract within any definite time.
LO 3: DIFFERENCE BETWEEN CONTINGENT CONTRACT AND WAGERING AGREEMENT:
Basis of Difference Wagering Agreement Contingent Contract

Validity It is void. It is valid.
It may or may not consist of reciprocal
Reciprocal promises It consists of reciprocal promises.
promises.
Future event is the sole determining factor of
Future Event Future event is only collateral.
the agreement.
Its parties have no other interest in the subject
Interest of parties matter of the agreement except winning or Its parties have real interest in the contract.
losing of wagering amount.
2 By: M. Asif, ACA

Company Law – Study Notes Chapter 19: Introduction to Companies
CHAPTER NINTEEN
INTRODUCTION TO COMPANIES
ICAP'S STUDY TEXT

19.1.1 – 19.1.4
LO 1 FEATURES OF A COMPANY
19.2.1
LO 2 TYPES OF COMPANIES 19.2.2 – 19.2.5
LO 3 ASSOCIATION NOT FOR PROFIT 19.3.1
LO 4 REGULATORS OF COMPANIES IN PAKISTAN 19.4.1 – 19.4.2
*Explanation of Reference:
First digit in Study Text’s Reference represents chapter number, second and third digits represents
section and sub-section number. Contents in brackets (if any) represent part of the sub-section
which is covered by the learning objective.
1|Page

LO 1: DEFINITION AND DISTINGUISIHING FEATURES OF A COMPANY:

Comparison of Companies with other forms of business:
Company Sole-proprietor/Partnership
Separate Legal A company has a separate legal status. A Sole-proprietorship/Partnership does not have
Status a separate legal status.
Liability Members of a company have limited liability. Sole-proprietor/Partners have unlimited liability.
Constitutional Memorandum of Association & Articles of Partnership Deed (for partnership)
Documents Association
Shareholders of a company can be natural as Sole-proprietor/Partners are natural persons
Owners
well as legal. only.
Distinguishing Features of a Company: (as compared to Sole-proprietorship and Partnership)

Separate Legal Status:
A company is recognized by law as a legal (or artificial) person separate from its owners, which also
has legal rights and obligations. This concept is called “Doctrine of Corporate Personality”.
Effects of Separate Legal Status:

1. A company owns its assets; although the members (ordinary shareholders) own the
company, they do not own the assets of the company. For example, the debtor of the
company owes the money to the company, and not to its owners.
2. If a company incurs a debt, the company itself is liable. Liability of owners is limited only.
3. A company can enter into contractual agreements with other persons (individuals or
companies) in its own name.
4. Company has characteristics of perpetual succession, transferability of ownership, and
separation of ownership from management.
Limited Liability of Members:

This concept states that 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. However, if company is being liquidated
and is unable to pay its debts, members may be required to contribute but only upto the amount as
stated in Memorandum of Association (e.g. when shares are partly paid). This is called Limited
Liability concept. The word ‘limited’ in the name of the company shows that liability of its members
is limited.
Study Tip – Liability of Company itself, and Liability of Directors

A company is fully liable for all its debts and other liabilities. The directors and other officers
of a company are not personally liable for debts of the company, provided that they act within
their powers and in accordance with law.
Transferability of ownership:
Shareholders can transfer (through sale, gift and inheritance) their shares to other persons (natural
or artificial). However, transfer of shares does not affect legal status or legal existence of company.
Perpetual Succession (or perpetual existence):

Perpetual succession means a company, being a legal person, does not die. It continues even if its
owners change or die. A company is created by a process of law and is wound-up by a process of
law. This is called “perpetual succession”.
2|Page


Under the provisions of the Companies Ordinance, 1984 briefly describe the term ‘Body corporate’. (02 marks)
(ICAP, CAF 03 Level – Autumn 2016)
A company duly registered under the Companies Ordinance, 1984 is a separate legal entity and a distinct person from the
shareholders. Do you agree? Elaborate. (04 marks)
(ICAP, CAF 03 Level – Spring 2005)
LO 2: TYPES OF COMPANIES:
Definition of a Company:
Companies Act 2017 defines a company as a company formed and registered under this Act or
under company law.
Study Tip – Company Law

Company law means the repealed Companies Act, 1913, Companies Ordinance, 1984,
Companies Ordinance, 2016 and also includes Companies Act 2017 unless the context
provides otherwise.
Definition of a Body Corporate:

"Body corporate" or "Corporation" includes:
1. a company incorporated under this Act or company law; or
2. a company incorporated outside Pakistan, or
3. a statutory body declared as body corporate in the relevant statute, but does not include:
a. a co-operative society registered under any law relating to cooperative societies; or
b. any other entity which the concerned Minister-in-Charge of the Federal Government
may specify in this behalf, by notification.
Types of Companies:
Following are different types of companies discussed in Companies Act 2017:
Types on the basis of Status Types on the basis of Liability Other Types of Companies
1. Private Company (SMC or other) 1. Company Limited by Share 1. Holding Company and Subsidiary
2. Public Company (Listed or 2. Company Limited by Guarantee Company
Unlisted) 3. Unlimited Company 2. Associations not for profit
Private Company:
Private Company means a company which, by its articles,:
(i) limits the number of its members to 50 (members jointly holding shares shall be counted as
one member),
(ii) restricts the right to transfer its shares, and
(iii) prohibits invitation to public to subscribe for shares or debentures or redeemable capital of
the company.
A private company has to add word "(Private) Limited" at the end of its name.
Study Tip – Single Member Company (SMC)

It is a company which consists of a single member who is also the director of the company. In
these companies “(SMC-PVT) Limited” is added to the name of the company.
These companies are governed by special rules implemented by SECP for such companies.
3|Page

CHAPTER FIVE
CONSIDERATION
ICAP'S STUDY TEXT
REFERENCE**
LO 1 CONSIDERATION AND ITS ESSENTIALS 5.1.1, 5.1.2, 5.1.3

EXCEPTIONS TO THE RULE “NO CONSIDERATION,
LO 2 5.1.5
NO CONTRACT”
“DOCTRINE OF PRIVITY OF CONTRACT” AND ITS
LO 3 5.1.4
EXCEPTIONS
1 By: M. Asif, ACA

What categories of companies can be formed under the Companies Ordinance? (02 marks)
State briefly the restrictive conditions under which a private company is incorporated.
Can a shareholder of a company limited by shares be held responsible to pay off the debt of the company and if so, to what
extent? (04 marks)
Write short note on Unlimited Company. (02 marks)

What is a Single Member Company?
LO 3: ASSOCIATION NOT FOR PROFIT:

Conditions for grant of license as “Associations Not for Profit”:
If SECP is satisfied that an association is to be formed as a limited company:
a) for promoting commerce, art, science, religion, health, education, research, sports,
protection of environment, social welfare, charity or any other useful object,
b) such company
 prohibits the payment of dividends to the company‘s members; and
 intends to apply the company‘s profits and other income in promoting its objects; and
c) such company‘s objects and activities are not and shall not, at any time, be against the laws,
public order, security, sovereignty and national interests of Pakistan
the Commission may, by licence for a period to be specified, permit the association to be registered
as a public limited company, without addition of the words “Limited” or “(Guarantee) Limited” to its
name.
Commission may grant license on such further conditions or regulations as it thinks fit, and those
conditions shall be inserted in and shall be deemed part of memorandum and articles (or in one of
these documents).
Privileges to an associations not for profit:

On registration as association not for profit, the association shall:
̶ be registered as a company with limited liability.
̶ not add words “"Limited" or "(Guarantee) Limited" with its name.
Revocation of license:
1. Such a license may be revoked anytime by Commission. However, Commission:
a. shall give to the company, a notice in writing of its intention to do so, and
b. shall provide an opportunity to be heard to the association before such revocation.
2. On revocation,
a. Registrar shall add words “"Limited", or "(Guarantee) Limited" at the end of the
name of company, and
b. the association shall cease to enjoy the exemptions and privileges granted by that
license
5|Page


Alfalah Associates is an association of persons. It wants to register itself as a limited company but does not wish to include
the word “Limited” in its name.
In view of the provisions of the Companies Ordinance, 1984 you are required to explain the conditions:
(a) that need to be satisfied before the Commission may issue it a licence and allow it to dispense with the word “Limited”
from its name. (07marks)
(b) under which the licence may be revoked and its consequences. (04 marks)
LO 4: REGULATORS OF COMPANIES IN PAKISTAN:

The Commission:
Definition:
The Commission means the Securities and Exchange Commission of Pakistan constituted under
section 3 of Securities and Exchange Commission of Pakistan Act 1997.
Organization:
Head office of SECP is in Islamabad and it has 8 regional offices (called Company Registration
Offices) i.e. 1 in Islamabad, 4 in each provincial capitals, and 1 each in Multan, Faisalabad and
Sukkur.
Functions:
Functions of Commission is to regulate Companies including Insurance Companies, Banking
Companies, Non-Banking Financial Companies, Modaraba and other companies.
Various powers have been given to Commission under SECP Act 1997, Companies Act 2017 and
other laws.
Registrar:
Definition:
“Registrar 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”
Powers and Duties:

Registrar has various powers and duties e.g. relating to
1. registration of companies.
2. receiving various documents which the companies are required to submit to the authorities
under Companies Act 2017.
3. keeping record of mortgages and charges.
4. calling information and explanation from directors or officers of companies.
5. inspection of books and records of company.
6. seize the books and records if he believes that seizure is necessary to reach out certain facts
by Commission.

State the powers of the registrar with respect to seizure of books and documents of a company as specified under the
Companies Ordinance, 1984.
6|Page

Company Law – Study Notes Chapter 20: Incorporation of Company
CHAPTER TWENTY
INCORPORATION OF COMPANY
ICAP'S STUDY TEXT
PART 1 – REGISTRATION OF A COMPANY
LO 1 PROCESS OF REGISTRATION/INCORPORATION 20.1.1, 20.3.4
PART 2 – MEMORANDUM OF ASSOCIATION
LO 2 MEMORANDUM OF ASSOCIATION AND ITS CLAUSES 20.3.1, 20.3.2
LO 3 NAME CLAUSE – EXPLANATION 20.2.1, 20.2.2

PLACE AND PRINCIPAL LINE OF BUISNESS
LO 4 20.3.3
CLAUSES – EXPLANATION
PART 3 – ARTICLES OF ASSOCIATION
LO 5 ARTICLES OF ASSOCIATION 20.4.1, 20.4.2
PART 4 – COMMENCEMENT OF BUSINESS AND REGISTERED OFFICE
LO 6 COMMENCEMENT OF BUSINESS 20.5.1
LO 7 REGISTERED OFFICE 20.5.2

LO 1: DEFINITION OF CONSENT AND FREE CONSENT:

Consent:
Definition:
"Two or more persons are said to consent when they agree upon the same thing in the same sense."
In English Law, this is called 'consensus-ad-idem'.
Effect of absence of Consent:

When there is no consent at all, the agreement is void ab-initio, i.e. it is not enforceable at the option
of either party.
Free Consent:
Definition:
Consent is said to be free when it is not caused by (a) coercion, or (b) undue influence, or (c) fraud,
or (d) misrepresentation, or (e) mistake".
Effect of absence of Free Consent:

1. If contract is caused by coercion, undue influence, misrepresentation or fraud, contract is
voidable at the option of the party whose consent was so obtained.
2. If contract is caused by ‘bilateral mistake’ about a matter of fact, agreement is void.
LO 2: COERCION:
Definition:
"Coercion" is the committing, or threatening to commit, any act forbidden by the Penal Code or the
unlawful detaining or threatening to detain any property to the prejudice of any person whatever,
with the intention of causing any person to enter into an agreement.
Coercion may be exercised by any person (even stranger of the contract), and may be directed at
any person (even stranger of the contract).
Effect of Coercion:
1. The contract is voidable at the option of the party whose consent was obtained by coercion.
2. The party rescinding a voidable contract shall restore the benefit received by him under the
contract.
3. A person to whom money has been paid or anything delivered under coercion, must repay
or return it.
LO 3: UNDUE INFLUENCE:
Definition of undue influence:
A contract is said to be induced by "undue influence" where:
 the relations subsisting between the parties are such that one of the parties is in a position
to dominate the will of the other and
 dominant party uses that position to obtain an unfair advantage over the other.
2 By: M. Asif, ACA


What is the procedure for forming a Company? (06 marks)
Paband Limited is in the process of incorporation and has filed an application with the registrar’s office for registration of
its memorandum of association. However, the registrar has refused to register the memorandum.
Under the provisions of the Companies Ordinance, 1984 state the possible reasons for such refusal. Also advise the
options available to Paband Limited in the above circumstances. (06 marks)
What is the effect of registration of memorandum and articles of a company? (03 marks)
PART 2 – MEMORANDUM OF ASSOCIATION
LO 2: MEMORANDUM OF ASSOCIATION AND ITS CLAUSES:

Memorandum is the constitution of the company. It defines the scope of the company and describes
briefly what the company is, what it is for, where it will be and what shall be the liability of its
members. It binds all the members of the company irrespective of whether any member has
subscribed it or not.
Clauses of Memorandum of Association:

Following clauses are required to be included in the memorandum of every company:
Clause Explanation
This clause contains the name of the company. In following cases, additional
words are also added at the end of name:
 In case of Public company, word “Limited”.
Name Clause  In case of Private company, word “(Private) Limited”.
 In case of Guarantee Limited Company, word “(Guarantee) Limited”.
 In case of Unlimited company, word “Unlimited”.
 In case of Single Member Company, “(SMC-Private) Limited”.
This clause shall state Province or part of Pakistan not forming part of a
Registered Office Clause
province in which registered office of the company is to be situated.
Every company shall mention principal line of business of company in its
memorandum, which shall always commensurate with name of the company.
 In case of existing companies, the object stated at serial # 1 of their
Principal Line of Business
objective clause shall be treated as principal line of business.
Clause
 If principal line of business is changed, it shall be reported to the
registrar within thirty days, and registrar may give direction of
change of name if it is in violation of this section.
This clause shall state liabilities of members.
 In case of company limited by shares, it shall state that liability of the
members is limited.
 In case of a company limited by guarantee, it shall state that liability
Liability Clause
of the members is limited and shall also state such amount as each
member undertakes to contribute to the assets of the company in the
event of its being wound up while he is a member or within one year
afterwards for payment of the debts and liabilities of the company

contracted before he ceases to be a member and for adjustment of

rights of the contributories among themselves.
 In case of an unlimited company, the liability clause shall state that
“the liability of the members is unlimited”.
1. This clause shall state Authorized/Registered Share capital and division
of share capital into shares of fixed amount. This is the maximum amount
of shares which can be issued.
Authorized Capital Clause 2. Each subscriber of memorandum is required to take atleast one share and
shall state in this clause, opposite to his name, shares taken by him.
This clause shall not be included in case of a company limited by guarantee
not having share capital.
This includes undertaking by subscribers to form a company, to comply its
Association or memorandum and to take shares in the company.
Subscription Clause This also includes names, addresses, other required particulars and
signatures of subscribers.
The company shall add an undertaking in the memorandum, as may be
Undertaking Clause
specified by the Commission.
Notes:
1. Memorandum and articles of a company shall be deemed to include the power of company to
enter into any arrangement for obtaining advances, credit and loans from financial institutions.
2. In the case of a company limited by guarantee and not having a share capital, every provision in
the memorandum or articles or in any resolution of the company to give right to any person
other than members to participate in the divisible profits of the company shall be void.
3. In case of a company limited by guarantee, every provision in memorandum, articles or
resolution of company to divided the undertaking of the company into shares or interest shall be
treated as a provision of share capital (even if number or amount of shares is not mentioned at
all).
Printing and signature of memorandum of association:

The memorandum shall be
 printed in the manner generally acceptable;
 divided into paragraphs numbered consecutively;
 signed by each subscriber. Each subscriber shall write his name, father’s name, occupation,
nationality and address. A witness shall attest the signature and shall likewise add his
particulars
 dated.

List down the contents of the memorandum of a listed company. (05 marks)
A company wishes to borrow a loan for the purposes of its business. Can it do so even if no express provision is contained
in its Memorandum of Association? (04 marks)
State whether the following statement is true or false.
“Every limited company has to write (Private) with its name.”

LO 3: NAME CLAUSE – EXPLANATION:

Reservation of Name:
A person may make an application to Registrar to reserve the name for a company (on a specified
form, in specified manner and with specified fee) for a period upto 60 days.
If registrar refuses to reserve the name, an appeal can be filed to Commission within 30 days of the
refusal.
Decision of the Commission shall be final in this regard and shall not be called in question before any
court or authority.
Prohibition of Certain Names:

Companies are prohibited to be registered with a name which:
1. is inappropriate, undesirable or deceptive
2. is selected to exploit or offend religious feelings of people.
3. is identical or closely resembles with an existing company (except when existing company is
under winding up and gives its consent in writing in such manner as Registrar requires).
4. contains words or expressions notified by the Commission, and require prior approval of
Commission.
Decision of the Commission shall be final in this regard and shall not be called in question before any
court or authority.
Names which require prior approval of Commission:

Prior approval of commission is required if proposed name of the company contains words
suggesting:
 Patronage of any Head of State whether Past or Present, Pakistani or Foreign.
 Connection with Federal or Provincial Govt. or any of their department or authority.
 Connection with any corporation set up by or under any Federal or Provincial law.
 Patronage or connection with any Foreign Govt. or any international organization.
 Any other business requiring license from the government.
 Establishing a moraraba management company or to float a modaraba.
Rectification of name of Company:

If a company has been registered with an inappropriate name, its name can be rectified
subsequently:
1. By Registrar:
Company will have to change its name within 30 days of the order of Registrar. Registrar
shall give company opportunity of being heard before issuing such order. If company fails to
rectify its name, registrar may register the company with a new name selected by him and
shall issue a new certificate of incorporation of change of name.
2. By Company:
Company can change its name anytime after registration, with approval of registrar.
Change in name of a Company:

To change name of a company:
1. Company can change its name by passing a Special Resolution and by obtaining written
permission of the registrar for new name.
2. Application shall be filed to Registrar to register the change (application shall accompany
altered memorandum and copy of special resolution).
3. Registrar shall approve/register the change and shall issue altered certificate of
incorporation on change of name.

LO 4: MISREPRESENTATION:
Definition:
There is a misrepresentation when:
1. A person makes a positive statement that a fact is true when his information does not
warrant it to be so, although he believes it to be true.
2. There is a breach of duty by a person which, without an intent to deceivewhich brings an
advantage to the person committing it by misleading another to his prejudice.
3. A party innocently causes other party to make a mistake as to the nature or quality of
subject of agreement.
Essentials of Misrepresentation:
By a party to a contract or his agent:
Representation must be made by a party to the contract or by his connivance or by his agent.
Misrepresentation by strangers does not affect validity of contract.
False representation without knowledge:

There must be a false representation but person making it must honestly believe it to be true.
Representation as to fact:
The representation must relate to a fact. In other words, a mere opinion, a statement of expression
or intention does not amount to misrepresentation.
Object:
Object of representation should be to induce the other party to enter into contract without
intention of deceiving the other party.
Actually Acted:
Other party must have acted on the faith of the representation.
Effect of Misrepresentation:
Right to Rescind the Contract
The party whose consent was caused by misrepresentation can rescind (cancel) the contract but he
cannot do so in the following cases:
(i) where the party whose consent was caused by misrepresentation had the means of
discovering the truth with ordinary diligence;
(ii) where the party gave the consent in ignorance of misrepresentation;
(iii) where the party after becoming aware of the misrepresentation, takes a benefit under the
contract;
(iv) where an innocent third party, before the contract is rescinded, acquires for consideration
some interest in the property passing under the contract;
(v) where the parties cannot be restored to their original position.
Right to Insist upon Performance The party whose consent was caused by misrepresentation
may if he thinks fit, insist that the contract shall be performed.
4 By: M. Asif, ACA

LO 4: PLACE AND PRINCIPAL LINE OF BUISNESS CLAUSES – EXPLANATION:

A company can alter any clause of its memorandum subsequent to its registration (subscription
clause cannot be altered). However, alteration of each clause shall be strictly in accordance with
provisions of Companies Act 2017.
Step-wise Procedures to change Place and Principal Line of Business:

1. Company shall pass Special Resolution to:
a. change the place of its registered office
b. change its principal line of business
c. change or adopt any business activity which is subject to licence, registration,
permission or approval under any law
2. Application shall be filed with Commission to obtain confirmation. However, confirmation
of Commission is not required in case of change its principal line of business.
3. In making an order, SECP shall have regard to rights and interests of the members of the
company (or any class of them) as well as rights and interests of the creditors of the
company, and may make such orders as it thinks fit for facilitating or carrying out such
arrangement.
4. Upon confirmation by Commission, a copy of the order shall be forwarded to Company and
Registrar within 07 days of the order.
5. Within 30 days of the order, Company shall file with Registrar a copy of altered
memorandum of association. If copy of memorandum is not filed within prescribed time,
alteration of memorandum shall become null and void. However, Commission my order (at
any time on an application by the company, on sufficient cause shown) to extend the time of
filing of memorandum for such period as it thinks proper.
6. Registrar shall register the same, and shall issue a certificate which shall be conclusive
evidence that all requirements of Act have been complied with.
Note – Shifting of Registered Office

If registered office is shifted within same province, it will not be alteration in memorandum. However, company will have
to send notice to Registrar within 15 days. If registered office is transferred from jurisdiction of one registrar to another
registrar, physical record of company shall also be transferred to other registrar.
Exam Tip – Exception

An alteration in memorandum or articles to require a member to take more shares than he already holds, or
to increases his liability to contribute to share capital or otherwise to pay money to company, shall not be
applicable on company, unless member agrees in writing either before or after the alteration is made.

Energy Petroleum Limited is presently involved in Oil Marketing Business. In order to expand the business, the directors
have decided to establish an oil refinery. Financing for this project has been arranged from two different financial
institutions.
Identify the changes that may be required in the memorandum of association of the company and the necessary steps to
incorporate these changes. (07 marks)
Yawar Limited (YL) is engaged in the business of manufacture and supply of watches in urban areas of Sindh. However,
due to rapidly changing consumer demand, YL has decided to diversify its business and start assembly of smart phones at
their factory in Karachi. In order to alter the object clause of its memorandum for the purpose, YL has passed a special
resolution and has applied to the Commission for approval.

Under the provisions of the Companies Ordinance, 1984 briefly describe:

(i) the circumstances in which YL may alter the object clause of its memorandum. (04 marks)
(ii) the conditions which must be satisfied before the Commission may issue an order confirming the alteration.
(04 marks)
Specify the competent authoritie(s) who shall be required to grant their approval in the following situation:
“Alteration of memorandum of association.” (01 mark)
For alteration in the memorandum regarding change of registered office confirmation from Securities and Exchange
Commission is required. Please explain exception to it. (04 marks)
PART 3 – ARTICLES OF ASSOCIATION
LO 5: ARTICLES OF ASSOCIATION:
What is Articles of Association:
Articles are bye-laws of the company. They contain rules and regulations on day to day issues and
internal affairs of the company e.g. regulations regarding minimum number of directors, or rights
and liabilities of various classes of shareholders
Articles are subordinate to Memorandum and Companies Act 2017.
Who is required to register it:

A company limited by guarantee and an unlimited company are required to register their Articles.
 If these companies have share capital, articles shall state amount of share capital which
company proposes to be registered.
 If these companies have no share capital, articles shall state number of members with which
company proposes to be registered.
A company limited by share:

 may register its articles, or
 may adopt Table A of the first schedule to the Companies Act 2017
Step-wise Procedures for Alteration in Articles:

1. Company shall pass Special Resolution to alter the articles:
2. Within 30 days of the resolution, Company shall file with Registrar a copy of altered articles
of association.
3. Registrar shall register the same.

An alteration in articles affecting substantive rights or liabilities of members or a class of members shall be
applicable on company only if atleast three-fourths of the affected members approve this by voting
personally or through proxy for such alteration.
Copies of Memorandum and Articles:

Every member of a company can request company, after payment of prescribed fee, to supply a
copy of memorandum or articles of company. Company shall supply it to members within 14 days.

Every copy issued after alteration in memorandum or articles shall include such alteration. In case
of violation, officers of company shall be liable to fine.

Distinguish between Articles of Association & Memorandum of Association. (03 marks)
Narrate the responsibilities of a company or of its directors in the following circumstances:

“An alteration in Articles of Association of the company is approved by passing a resolution in the annual general
meeting.” (03 marks)
A Malaysian company is interested in incorporating a limited liability company in Pakistan. Discuss provisions of the
Companies Ordinance, 1984, relating to the following:
(a) contents, printing and signature of the Articles of Association (05 marks)
(b) registration of the Articles of Association (02 marks)
(c) alteration of the Articles of Association after its registration (04 marks)
PART 4 – COMMENCEMENT OF BUSINESS AND REGISTERED OFFICE
LO 6: COMMENCEMENT OF BUSINESS:
Requirements for public company to commence business:
1. A public company cannot exercise any borrowing powers or commence any business unless
it has obtained “certificate of commencement of business” from Registrar.
2. Before obtaining certificate of commencement of business by a public company:
a. all agreements to exercise borrowing powers shall be void, and
b. all agreements to commence business (e.g. agreements of sale and purchase) shall
be provisional only (i.e. will become binding only if certificate is obtained).

Private Company, A company converted from private to public company, A company limited by guarantee not
having share capital are NOT required to obtain “certificate of commencement of business”.
Procedure to obtain “Certificate of Commencement of Business”:

Chief Executive or a Director and Secretary of a public company shall file with registrar a
declaration that following conditions have been complied:
1. Shares have been allotted upto the amount of minimum subscription.
2. Directors have paid full amount for shares taken by them in cash.
3. If company has offered shares for public subscription, no money is or may become liable to
be repaid to applicants.
4. If company has not issued a prospectus inviting the public to subscribe for its shares, a
statement in lieu of prospectus has been filed with the registrar.
Registrar shall issue certificate after receiving and verifying such declaration.


Explain the provisions specified in the Companies Ordinance, 1984 relating to requirements to be completed before the
commencement of business by a public company. (06 marks)
What is the status of contracts entered by the company before acquiring certificate of commencement of business?
(03 marks)
LO 10: REGISTERED OFFICE:

1. Every company shall notify Registrar the complete address of its registered office within 30
days of incorporation.
2. All communications and notices shall be addressed to Registered Office of company.
3. Any change in address of registered office shall be notified to Registrar within 15 days of
change.

What are the legal provisions regarding registered office of the company? (03 marks)
10

Company Law – Study Notes Chapter21: Share Capital – Types & Variations
CHAPTER TWENTY ONE

SHARE CAPITAL – TYPES & VARIATIONS
ICAP'S STUDY TEXT
PART 1 – SHARE CAPITAL OF A COMPANY
LO 1 SHARE CAPITAL 21.1.1, 21.1.3, 21.1.4
LO 2 SHARE AND ITS CHARACTERISTICS 21.1.2
LO 3 KINDS AND CLASSES OF SHARES 21.1.5

PART 2 – VARIATION IN SHARE CAPITAL
LO 4 ALTERATION IN AUTHORIZED SHARE CAPITAL 21.2.1
LO 5 VARIATION IN RIGHTS OF THE SHAREHOLDERS 21.2.3
LO 6 RESTRICTION ON PURCHASE OF OWN SHARES 21.2.2

PART 1 – SHARE CAPITAL OF A COMPANY
LO 1: SHARE CAPITAL:
What is Share Capital:
In a company limited by shares, share capital means capital introduced by owners of the company
(called shareholders or members).
Share capital is divided into shares of fixed amounts (called nominal value). When people pay for
the shares, this is called ‘subscription’ of shares. When company issues shares to people, this is
called “allotment/issuance” of shares.
There are different variants of share capital i.e. authorized share capital, issued share capital and
paid up share capital.
Authorized Share Capital:

This is the maximum amount of share capital which can be issued. If a company has share capital,
capital clause of memorandum states authorized share capital divided into fixed nominal value of
shares (e.g. authorized share capital of company is Rs. 10 million divided into 1 million shares of Rs.
10 each).
Issued/Allotted Share Capital:

Issued share capital is that part of authorized share capital which has been issued to shareholders.
Issued share capital can be less than authorized share capital, but cannot exceed it.
Only fully paid shares to be issued:

A company cannot issue partly paid shares. If a company has partly paid shares, it shall not issue
further shares unless such shares are fully paid.
Issued share capital and the liability of shareholders:

Liability of shareholder is limited up to the unpaid amount of shares held by him i.e.
1. If shares are fully paid, liability of shareholder will be zero. If company goes into liquidation
with unpaid debts, shareholders will not be required to contribute anything for payment of
debts of company.
2. If shares are partly paid, liability of shareholder will be upto unpaid amount. If company
goes into liquidation with unpaid debts, shareholders will be required to contribute extra
capital upto amount unpaid on shares.
Advertisements and Notices:

Whenever a company mentions its authorized share capital in a notice or in any
statement, it shall also mention its issued share capital at equally prominent position.
Exam Tip
Authorized share capital can be increased by altering memorandum with approval of shareholders.
However, approval of shareholders is not required to further issue share capital.

LO 1: MEANING OF VOID AGREEMENTS:

Definition of void agreement:
A void agreement is an agreement which is not enforceable by law. The agreements which are not
enforceable by law right from the time when they are made, are void-ab-initio.
Examples of void agreement:

The following types of agreements have expressly been declared void under various sections of the
Contract Act.
1. Agreements by or with persons incompetent to contract.
2. Agreements entered into through a mutual mistake of fact between the parties.
3. Agreement, the object or consideration of which is unlawful.
4. Agreement, the consideration or object of which is partly unlawful.
5. Agreement made without consideration.
6. Agreements in restraint of marriage.
7. Agreements in restraint of trade.
8. Agreements in restraint of legal proceedings.
9. Wagering agreement.
10. Impossible agreement.
11. An agreement to enter into an agreement in the future.
LO 2: AGREEMENTS IN RESTRAINT OF TRADE:

Every agreement by which anyone is restricted from exercising a lawful profession, trade or
business of any kind, is to that extent void.
Exceptions of agreements in restraint of trade:
Sale of Goodwill:
An agreement which restrains the seller of a goodwill from carrying on a business is valid if all the
following conditions are fulfilled:
1. Such restriction must relate to a similar business.
2. Such restriction must be within specified local limits.
3. Such restriction must be for the time so long as the buyer or any person deriving title to the
goodwill from him, carries on a like business in the specified local limits.
4. Such specified local limits must be reasonable having regard to the nature of the business.
Partners' Agreements:
The Partnership Act, 1932, recognises the following agreements in restraint of trade as valid:
1. A partner shall not carry on any business other than that of the firm while he is a partner.
2. An outgoing partner may agree with his partners that he will not carry on any business
similar to that of the firm within a specified period or within specified local limits.
3. Partners may make an agreement that, at time of dissolution, some or all of them will not
carry on a business similar to that of the firm within a specified period or within specified
local limits.
4. A partner may upon the sale of the goodwill of a firm, make an agreement that such partner
will not carry on any business similar to that of the firm within a specified period or within
specified local limits.
Trade Combinations:
Trade combinations which have been formed to regulate the business or to fix prices are valid.
However, trade combinations to create monopoly and which are against public interest are void.
2 By: M. Asif, ACA


What is meant by the term ‘Member’ as described under the provisions of the Companies Act, 2017? (04 marks)
List 2 ways how a person can become a member of a company. (02 Marks)
(ICAP, CFAP 02 Level – Summer 1998)
Distinguish between a ‘shareholder’ and a ‘member’. (04 marks)

LO 3: KINDS AND CLASSES OF SHARES:

Kinds of Shares:
A company can have different kinds of shares if it has registered authorized capital for each kind i.e.
1. Ordinary Shares, and
2. Preference Shares
Difference between Ordinary Shares and Preference Shares:

Ordinary Shares Preference Shares
Ordinary shares or (equity shares) are Preference shares are those shares which carry
shares held by the member/owners of the priority rights (ahead of ordinary shares) to:
Definition company. These carry rights of the  receive dividend
member/owner of the company and are  receive repayment of capital at time
NOT given any special rights. of winding up.
Ordinary shareholders have voting rights Usually, preference shares do not have voting
Voting Rights
at general meeting. rights at general meeting.
Redemption Ordinary shares are not redeemable. Usually, preference shares are redeemable.
Dividend to ordinary shares is not certain. Dividend to preference shares is usually fixed
Dividend Further, there is no limit to the amount of on annual basis and can also be cumulative.
dividend which can be paid.
Company may have different classes of Preference shares may also be of different
shares by writing in articles of association. classes on the basis of accumulation of
These classes may enjoy different voting dividend, on the basis of redemption of shares,
Classes of
rights (e.g. disproportionate to number of or on the basis of conversion into ordinary
Shares
shares, or no voting rights at all), or shares.
different entitlements to dividend or
right/bonus shares etc.
Note: Rights attached to each class of shares are mentioned in Articles of Association.

(a) Can a company have more than one class of share capital?, and (01 mark)
(b) What variations are possible with regards to the rights and privileges of different classes of share holders?
(03 marks)
Briefly describe the nature of:

(i) preference shares (03 marks)
(ii) ordinary shares (02 marks)
(iii) main elements and characteristics of shares (03 marks)
(Malaysian Institute of Accountants – September 2013)

PART 2 – VARIATION IN SHARE CAPITAL
LO 4: ALTERATION IN AUTHORIZED SHARE CAPITAL:

Alteration in Authorized Share Capital by a company having share capital:
Ways in which authorized share capital may be altered:
A company limited by share can alter its authorized share capital clause in following ways:
 increase the amount of share capital, or
 cancel the shares which have not been taken up till date of cancellation, and such
cancellation does not affect rights of paid up shares.
 sub-divide shares into amounts smaller than existing shares.
 consolidate and divide shares into amounts larger than existing shares.
Procedure/Conditions to alter the authorized share capital:

1. A company limited by shares can alter its share capital if authorized by its articles.
2. A resolution to alter authorized share capital is passed by company in general meeting.
3. Altered copy of memorandum and Copy of resolution shall be filed with Registrar within 15
days of resolution (otherwise, resolution shall be null and void).
4. In case of consolidation or sub-division of shares, rights attaching to shares shall not be
affected in any way and new shares shall rank equally with the existing shares of the
company.

Samjhota Limited (SL) has an authorised capital of Rs. 100,000,000 divided into 2,000,000 shares of Rs. 50 each. The
directors have decided to alter the conditions of the capital clause of SL’s memorandum of association. Advise the
directors about the provisions of the Companies Act, 2017 applicable to such alteration. (04 marks)
LO 5: VARIATION IN RIGHTS OF THE SHAREHOLDERS:

How to vary the rights of shareholders:
Rights of shareholders can be varied by alteration of articles of association by passing special
resolution. However, if such alteration affects the substantive rights or liabilities of a class of
members, it shall be carried out only if a majority of at least three-fourths of the class of members
affected by such alteration vote for such alteration.
Right of Appeal to challenge variation in rights:

Atleast 10% of the class of shareholders, who are aggrieved by the variation of their rights, may
apply to the Court for an order of cancellation of the resolution, within thirty days of the date of the
resolution.
Order of Court:
Court shall pass an order to cancel resolution only if it is proved to court that:
1. Some material facts were concealed by the company to get the resolution passed, or
2. having regard to all the circumstances of the case, variation will ‘unfairly prejudice’
shareholders of the class represented by the applicant.
Decision of court on this matter shall be final and an appeal cannot be filed against such decision.
Company shall file the copy of order to Registrar within 14 days of receipt of order.


RA Limited is a public limited company. It has two classes of shares namely ‘A’ and ‘B’. The directors of the company have
decided to restrict the voting rights of Class ‘A’ shareholders. In lieu thereof, they shall be allowed to get preference in
payment of dividend.
State the procedures through which the decision of directors can be put into effect. (03 marks)
Paradise Limited, upon passing a special resolution on August 20, 2010 made amendments in its Articles of Association
affecting substantial rights associated with class “B” shares of the company. Few aggrieved shareholders having objection
on the special resolution intend to file an application in the Court, for the cancellation of the above resolution.
Discuss the relevant provisions of the Companies Act, 2017 specifying the following:
(a) The conditions which the aggrieved shareholders will have to comply with, to be eligible for filing an application in the
court for the cancellation of the above resolution. (02 marks)
(b) The matters which the Court would consider while making a decision on the above application. (02 marks)
LO 6: RESTRICTION ON PURCHASE OF OWN SHARES:

As a general rule, shares of a company are irredeemable and a company cannot buy its own shares
or shares of its holding company. However, followings are exceptions in this regard:
Restriction Exceptions
Purchase of own shares A listed company may buy back its own shares.
A subsidiary company can purchase shares of its holding company,
provided:
a. Subsidiary is dealing in ordinary course of brokerage business,
and
b. Subsidiary does not exercise voting rights on shares held by it.
Purchase of shares of holding
company
Further, A subsidiary company can act as trustee of shares of holding
company if holding company is not beneficially interested in the trust.
Further, a subsidiary company can hold shares of holding company by

operation of law.
Following companies can provide financial assistance:
1. A private company (not being a subsidiary of a public company)
2. Lending of money by a banking company in the ordinary course of
its business.
Providing the financial assistance
3. Financial assistance is given to its salaried employee (including
(loan or advances etc) to anyone
chief executive who was not director before his appointment as
for purchase of its own shares or
chief executive) excluding directors
shares of its holding company
4. Financial assistance is given in accordance with scheme approved
through special resolution and in accordance with specified
requirements, if purchase of shares is held by employee of the
company or held by a trust for benefit of employee of the company.

Explain the exceptions to the following provision of the Companies Act, 2017:
“Companies are prohibited from purchasing their own shares or granting financial assistance for purchase of their shares
or shares of their holding company.” (08 marks)

Company Law – Study Notes Chapter 22: Share Capital – Prospectus
CHAPTER TWENTY TWO

SHARE CAPITAL – PROSPECTUS
ICAP'S STUDY
LO # LEARNING OBJCTIVE TEXT
REFERENCE*
LO 1 WHAT IS A “PROSPECTUS” AND WHEN IS IT ISSUED 22.1.1, 22.1.5
LO 2 APPROVAL OF PROSPECTUS 22.1.2
LO 3 PUBLICATION AND AVAILABLITY OF PROSPECTUS 22.1.3
LO 4 CONTENTS OF PROSPECTUS 22.1.4
LO 5 EXPERT’S STATEMENT TO BE INCLUDED IN PROSPECTUS 22.1.6, 22.1.7

CRIMINAL AND CIVIL LIABILITY FOR DEFECTIVE
LO 6 22.1.8, 22.1.9
PROSPECTUS
Q. # 107 & 108
LO 7 REGISTRATION OF PROSPECTUS
(ii) of Q. B. 2017

LO 1: WHAT IS A “PROSPECTUS” AND WHEN IS IT ISSUED:

Prospectus:
Prospectus:
 means any document described or issued as a prospectus, and
 includes any document inviting offers from the general public for subscription or purchase
of any securities of a company, other than deposits invited by a bank and certificate of
investments/deposit deposits issued by non-banking finance companies.
Purpose of Prospectus:
When a listed company wants to issue securities to general public, it issues Prospectus to invite
offers from general public for subscription or purchase of securities of company.
Prospectus provides general public with all information about company which is required before
making any decision of investment in the company.
Exam Tip
If a listed company issues securities through private arrangements (e.g. to friends or relatives of promoters or
directors), it does not issue Prospectus. It files “Statement in lieu of Prospectus” with Registrar in such case.
Shelf prospectus, and Supplement to Prospectus:

Shelf prospectus is a single document (or prospectus) offering securities to public, where
companies are allowed (within prescribed time and subject to prescribed conditions) to make
multiple offers to public without a separate prospectus for each offer.
Supplement to prospectus is issued to general public to invite offers from general public for
subscription or purchase of securities earlier offered thorough Shelf-prospectus. Supplement to
prospects provides disclosures which have been updated. It also provides such information as
prescribed by the Commission.
Timing of Prospectus:
Prospectus can be issued by company anytime after its incorporation (i.e. even before
commencement of business).

(a) Enumerate the differences between Prospectus and Statement in Lieu of Prospectus.
(b) What is the objective of issuing Prospectus?
(c) Can the promoters of a company issue Prospectus before registration of a company?
Can a private limited company issue prospectus? (03 marks)


LO 2: APPROVAL OF PROSPECTUS:
Requirement for Approval:
No company shall issue prospectus unless the Commission has approved prospectus (including a
shelf-prospectus or supplement to the prospectus). Approval may be subject to such conditions or
restrictions as the Commission considers necessary.
Time frame within which approval is to be obtained:

The company shall submit a copy of prospectus to the Commission for approval atleast 21 days
before the proposed date of publication of the prospectus.
Time frame for which Prospectus remains valid after approval:

A prospectus approved by the Commission shall be valid for a period of sixty days from the date of
such approval. However, time period of sixty days may be extended by the Commission for reasons
to be recorded in writing.
In case of shelf registration, approval of a period longer than 60 days may be given by Commission.

The Board of Directors of Tanveer Limited, a listed company, has decided to invite general public for the subscription of
its securities and therefore, intends to issue/publish a prospectus.
Under the provisions of the Securities Act, 2015 advise the directors about the time frame within which approval for the
issuance of prospectus may be obtained and the time for which the prospectus may remain valid after approval.
(02 marks)
LO 3: PUBLICATION AND AVAILABLITY OF PROSPECTUS:

Publication of Prospectus:
Prospectus shall be published (in full form or in abridged form) atleast in one Urdu and one English
daily newspaper. Prospectus is required to be published in a newspaper “not less than 7 and not
more than 30 days” before the subscription list is due to open.
However, the Commission may, for special reasons, allow the company to publish the prospectus
more than thirty days before the subscription list is due to open.
Exam Tip
Commencement of subscription is also called opening of subscription list.
Availability of Prospectus:
From date of publication in newspaper till date of closing of subscription, prospectus of a company
shall be made available (free of cost), at following places:
1. At registered office of company.
2. At all securities exchanges of the Pakistan.
3. With all bankers to the issue.
4. With concerned share registrar.
5. With concerned ballotter.
6. With concerned credit rating agency (if any).
7. On website of the issuer.


(a) Deo Limited (DL) has published a prospectus on March 1, 2009. The subscription list is due to open on April 5, 2009.
Explain whether the company is in compliance with the provisions of the Companies Act, 2017 regarding the publication
of its prospectus. What relaxation can DL avail, in this regard? (03)
(b) Identify the places where DL is required to make available the copies of its prospectus. (02)
LO 4: CONTENTS OF PROSPECTUS:
Prospectus must contain the information and reports as may be prescribed, to enable a person to
reach a decision about investment in company (e.g. particulars of directors, earning of previous
years).
Authorities also require companies to include risk factors in prospectus, and readers are
specifically advised to read them before making decision.
Prospectus requires:
 Approval from Commission (before its publication)
 Filing a copy with Registrar (on or before its publication)
 Clearance from Securities Exchange
LO 5: EXPERT’S STATEMENT TO BE INCLUDED IN PROSPECTUS:
Expert:
"Expert" includes banker, securities advisor, engineer, valuer, accountant, lawyer and any other
person whose profession gives him authority to a statement made by him (in prospectus).
Conditions to be satisfied to include Expert’s Statement in Prospectus:

Expert to be Independent:
An expert cannot make a statement to be included in prospectus unless expert is not and has not
been engaged or interested in formation, promotion or management of the company.
Expert’s Consent to the Issue of Prospectus:

A prospectus that contains a statement purporting to be made by an expert, shall not be issued
unless:
1. The Expert has given his written consent to issue of prospectus with his statement in the
form and context in which it is included in prospectus.
2. It is mentioned in prospectus that expert has given his consent and has not withdrawn it.

Quite often, a prospectus inviting persons to subscribe for shares in a company contains a statement from person(s) who
are experts in their respective fields.
(a) Describe the term “Expert” as explained in Companies Act, 2017 in the above context. (02 marks)
(b) Narrate the conditions that a company should comply with if its prospectus contains a statement by an expert.
(03 marks)

LO 1: DEFINITION AND DISTINGUISIHING FEATURES OF A COMPANY:

Comparison of Companies with other forms of business:
Company Sole-proprietor/Partnership
Separate Legal A company has a separate legal status. A Sole-proprietorship/Partnership does not have
Status a separate legal status.
Liability Members of a company have limited liability. Sole-proprietor/Partners have unlimited liability.
Constitutional Memorandum of Association & Articles of Partnership Deed (for partnership)
Documents Association
Shareholders of a company can be natural as Sole-proprietor/Partners are natural persons
Owners
well as legal. only.
Distinguishing Features of a Company: (as compared to Sole-proprietorship and Partnership)

Separate Legal Status:
A company is recognized by law as a legal (or artificial) person separate from its owners, which also
has legal rights and obligations. This concept is called “Doctrine of Corporate Personality”.
Effects of Separate Legal Status:

1. A company owns its assets; although the members (ordinary shareholders) own the
company, they do not own the assets of the company. For example, the debtor of the
company owes the money to the company, and not to its owners.
2. If a company incurs a debt, the company itself is liable. Liability of owners is limited only.
3. A company can enter into contractual agreements with other persons (individuals or
companies) in its own name.
4. Company has characteristics of perpetual succession, transferability of ownership, and
separation of ownership from management.
Limited Liability of Members:

This concept states that 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. However, if company is being liquidated
and is unable to pay its debts, members may be required to contribute but only upto the amount as
stated in Memorandum of Association (e.g. when shares are partly paid). This is called Limited
Liability concept. The word ‘limited’ in the name of the company shows that liability of its members
is limited.
Study Tip – Liability of Company itself, and Liability of Directors

A company is fully liable for all its debts and other liabilities. The directors and other officers
of a company are not personally liable for debts of the company, provided that they act within
their powers and in accordance with law.
Transferability of ownership:
Shareholders can transfer (through sale, gift and inheritance) their shares to other persons (natural
or artificial). However, transfer of shares does not affect legal status or legal existence of company.
Perpetual Succession (or perpetual existence):

Perpetual succession means a company, being a legal person, does not die. It continues even if its
owners change or die. A company is created by a process of law and is wound-up by a process of
law. This is called “perpetual succession”.
2|Page

Company Law – Study Notes Chapter 23: Mortgages & Charges
CHAPTER TWENTY THREE

MORTGAGES & CHARGES
ICAP'S STUDY TEXT
LO # LEARNING OBJCTIVE REFERENCE
PART 1 – BORROWING POWERS OF A COMPANY
LO 1 BORROWING POWERS OF A COMPANY 23.1.1
LO 2 FORMS OF BORROWINGS 23.1.2
LO 3 TYPES OF SECURITY 23.1.3

PART 2 – REGISTRATION OF MORTGAGES & CHARGES
MORTGAGE OR CHARGE REQUIRED TO BE
LO 4 23.2.1
REGISTERED
PROCEDURE FOR REGISTRATION OF MORTGAGE
LO 5 23.2.2
OR CHARGE
PROCEDURE FOR REGISTRATION OF PAYMENT
LO 6 OR SATISFACTION OF MORTGAGES AND 23.2.3
CHARGES
REGISTER OF MORTGAGES AND CHARGES AND
LO 7 23.2.4
ITS INSPECTION

PART 1 – BORROWING POWERS OF A COMPANY
LO 1: BORROWING POWERS OF A COMPANY:

Powers of a company to borrow money:
A company is deemed to have powers to borrow money, or to issue debentures (whether based on
interest, or not based on interest). It is not necessary to include specific provisions in Memorandum
to borrow money.
Restrictions on a company to borrow money:

A public company cannot borrow money until it obtains certificate of commencement of business.
Restrictions on directors to borrow money:

Directors of a company have power to borrow money after passing resolution in their meeting.
Company can restrict their power to borrow money by mentioning that borrowing exceeding a
certain amount can be made only with prior approval of members in general meeting.
If directors borrow in excess of prescribed limit without prior approval of members, borrowing
shall be considered ultra-vires.

Explain borrowing powers. What are the limitations and how it becomes ultra vires? (05 marks)
A company wishes to borrow a loan for the purposes of its business. Can it do so even if no express provision is contained
in its Memorandum of Association? (04 marks)
LO 2: FORMS OF BORROWINGS:
Forms of Borrowings:
A company can borrow money by:
1. Issuance of debentures.
2. Loan from financial institutions (banks and other non-banking financial institutions e.g.
modaraba, investment banks)
3. Borrowings from other sources (e.g. from controlling shareholders, directors, sponsors)
These borrowings may be secured or unsecured. Secured debts means debt against which company has
provided any asset as collateral.
Debentures:
Securities issued to borrow money are called debentures. Debenture includes:
 debenture stock, bonds, term finance certificate or any other instrument of a company
 evidencing a debt,
 whether constituting a mortage or charge on the assets of the company or not.
Characteristics of Debentures:
1. Debentures often carry fixed interest. However, a company can issue debentures not based
on interest which participate in the profits of company.
2. Debentures do not carry voting rights in general meeting.
3. Debentures may be redeemable or irredeemable.
4. Debentures may be secured or unsecured.


What are the characteristics of a debenture? (03 marks)
Differentiate between debentures and shares. (06 marks)

LO 3: TYPES OF SECURITY:
A company can offer following types of securities to secure its debts:
1. Pledge
2. Mortgage
3. Charges
Pledge:
“Pledge is a bailment of goods as security for the repayment of a debt.”
In Pledge, a loan contract in writing is signed by both parties and goods (e.g. inventory, jewellery)
are physically transferred to lender until debt is repaid.
Mortgage:
Mortgage means an interest or lien created on the property/assets of a company or any of its
undertaking or both as security.
In Mortgage, title of an immovable property is transferred to lender. Physical possession remains

with borrower until borrower fails to comply with terms of the loan contract.
Charge:
“A charge is security for the payment of a debt or other obligation that does not pass title of the
property or any right to its possession to the person to whom the charge is given.”
In Charge, there is only a loan contract to transfer the title and physical possession of the asset in
the event of company’s failure to comply with terms of the loan contract.
There are two types of Charge:

Fixed Charge Floating Charge
It is created on specific identifiable present assets. It may be created on entire undertaking or class of assets
(present or future).
Company cannot dispose/replace assets under Fixed Company can dispose assets under Floating Charge. New
Charge without prior approval of lender. assets acquired will automatically be subject to charge.
However, value of assets under charge should not reduce
below an agreed amount.
At time of default or winding up, holder of fixed charge At time of default or winding up, holder of floating charges
possesses right of priority in respect of asset secured has right subordinate to fixed charge.
under fixed charge.

Differentiate between fixed and floating charge. (06 marks)

PART 2 – REGISTRATION OF MORTGAGES & CHARGES
LO 4: MORTGAGE OR CHARGE REQUIRED TO BE REGISTERED:

A company is required to register the following types of Pledge, Mortgages or Charges with
Registrar:
1. On any movable property of the company;
2. On any immovable property wherever situate; or
3. On book debts of the company;
4. On the property or undertaking of the company, including stock-in-trade; or
5. On goodwill or on any intellectual property;
6. On a ship or aircraft, or any share in a ship or aircraft;
7. For issuance of debentures;
8. For issuance of any instrument in the nature of redeemable capital; or
9. Based on conditional sale agreement, namely, lease financing, hirepurchase, sale and lease
back for acquisition of machinery, equipment or other goods:

List the mortgages and charges which, if not registered by the company, shall be considered as void. (06 marks)
LO 5: PROCEDURE FOR REGISTRATION OF MORTGAGE OR CHARGE:

Duty of Registration:
It is duty of Company (but right of lender) to get the pledge, mortgage, or charge registered with
Registrar within 30 days of its creation. Whoever gets the charge registered, charges of registration
shall be borne by company and if lender pays the expenses he is entitled for reimbursement of cost.
Procedure for Registration of Mortgage or Charge:

1. Agreement for loan and other prescribed information shall be filed with registrar.
2. Upon registration, Registrar shall issue a certificate of registration under his signature and
authenticated by his official seal.
Property situated outside Pakistan

If a property is situated out of Pakistan and mortgage or charge is created in Pakistan, rest of the
procedure for registration shall be same except that registration of charge with authorities of
that other country shall also be required for completion of registration.
If a property is situated out of Pakistan and mortgage or charge is created out of Pakistan, rest of
the procedure for registration shall be same except that period of 30 days shall start from the
day when documents should reach Pakistan if sent with due care from that other country.
Constructive notice of registration:

If a person acquires a property on which mortgage or charges has been registered, such person
shall be deemed to have notice of the said mortgage or charge. Therefore, a person buying any
property from company must check with registrar to confirm whether or not the asset is from any
mortgage or charge.

Consequences of non-registration:
If a pledge/mortgage/charge is not registered with Registrar, it would become void and shall not be
accepted by liquidator or any creditor. However, this shall not affect any contract or obligation for
repayment of the money secured.

What is the time limit for registration of mortgage or charge and what are the effects of non-registration? (03 marks)
LO 6: PROCEDURE FOR REGISTRATION OF PAYMENT OR SATISFACTION OF

MORTGAGES AND CHARGES:
Satisfaction of mortgage or charge means that debt has been paid against which charge was created
on property of the company to secure debt.
Procedure for Registration of payment or satisfaction of charge by Company:

1. It is the duty of company to intimate registrar for the repayment or satisfaction of any
charge or mortgage registered, within 30 days from the date of the repayment or
satisfaction, alongwith particulars of repayment/satisfaction.
2. On receipt of intimation, registrar shall send notice to lender to verify the repayment of loan
and shall grant him 14 days to file any objection.
3. If no objection is filed, Registrar shall register the satisfaction of charge as requested by
company.
4. If objection is filed, Registrar shall communicate the company regarding objection raised by
lender.
Registration of payment or satisfaction of charge by Registrar:

The registrar is entitled, even if no information is received from company, to enter the satisfaction
of mortgage or charge if he is aware that:
 a particular mortgage or charge has been repaid or
 the property subject to the charge no is longer the property of the company.

In the context of mortgages and charges, what do you understand by “satisfaction of charge”. (02 marks)
A company has created a pari passu charge on August 27, 2007 over a series of debentures to the benefits of which the
debenture-holders are entitled. What action would the company need to take for the registration of the above charge?
(07 marks)
Explain the circumstances under which the registrar has the power to make entries of satisfaction and release of charge,
in the register of mortgages and charges, without intimation from the company. (04 marks)
Explain the procedure described by the Companies Ordinance, 1984 for registration of payment or satisfaction of
mortgage. (05 marks)

LO 7: REGISTER OF MORTGAGES AND CHARGES AND ITS INSPECTION:

Company's register of mortgages:
Every company shall keep at its registered office:
1. instruments creating charges or relating to registration of charges
2. a register of mortgages and charges showing property mortgaged/charged, terms and
conditions and beneficiary of mortgage/charge.
Right to inspect company's register of mortgages and instruments:

Register of mortgages and charges, and copies of instruments creating mortgage or charge shall be
open, at all reasonable times, for inspection:
 by any creditor or member of the company without fee, and
 by any other person on payment of such fee, as the company may fix.

Explain the provisions of the Companies Ordinance, 1984 relating to the following:
(a) Company’s register of mortgages. (04 marks)
(b) Right to inspect a company’s register of mortgages. (04 marks)

Company Law – Study Notes Chapter 24: Meetings
CHAPTER TWENTY FOUR

MEETINGS
ICAP'S STUDY TEXT
24.1.1, 24.1.2, 24.1.3,

LO 1 TYPES OF MEETINGS
24.1.5 (Purpose)
24.2.1 (business in context of
LO 2 BUSINESS TRANSACTED AT GENERAL MEETINGS meeting), 24.1.4 (Requirement
and purpose)
20.2.1 (Definition: Special
RESOLUTIONS PASSED AT GENERAL MEETINGS resolution), 24.1.8,
LO 3
AND THEIR FILING 24.2.5 (Passing of resolution by
circulation)
24.1.3 (Timing of statutory
LO 4 WHEN IS A GENERAL MEETING CONDUCTED
meeting), 24.1.4(first 3 bullets)
LO 5 PLACE OF GENERAL MEETING 24.1.4 (5th bullet)
LO 6 WHO CAN CALL A GENERAL MEETING 24.1.6, 24.1.5 (calling of EGM)
LO 7 NOTICE OF GENERAL MEETING 24.2.1, 24.1.4 (4th bullet)
LO 8 QUORUM OF GENERAL MEETING 24.2.2
LO 9 VOTING AT GENERAL MEETING 24.2.3, 24.2.5 (resolutions

passed at adjourned meeting)
LO 10 PROXY 24.2.4
LO 11 REPRESENTATION 24.2.6
LO 12 MINUTES OF GENERAL MEETINGS 24.2.5 (Minutes of proceedings)

CIRCUMSTANCES IN WHICH PROCEEDINGS OF A
LO 13 24.1.7
GENERAL MEETING MAY BE DECLARED INVALID

LO 1: TYPES OF MEETINGS:
Types of Meetings:
There are two types of meetings under Companies Act, 2017 i.e.
1. Board Meetings:
These are meetings of Directors of a company.
2. General Meetings
General meetings are meetings of shareholders/members of the company who are entitled
by articles of company to attend and vote at such meetings. Directors cannot vote at general
meeting unless they are also members.
Committee Meetings and Class Meetings:

Sometimes, directors may have certain committees. Meetings of such committee are called
“Committee Meetings”. Sometimes, members may have certain classes. Meetings of such classes of
members are called “Class Meetings”.
Chairman of General Meeting:

The chairman of BOD shall be chairman of every general meeting of the company.
In this chapter, we will discuss General Meetings in detail. There are three types of meetings of
members i.e.
1. Statutory Meeting
2. Annual General Meeting
3. Extraordinary General Meeting
Statutory Meeting:
This is the first general meeting of a company, in which members discuss matters in respect of
formation of company, and approve Statutory Report.
The notice of a statutory meeting shall be sent to the members at least 21 days before the date of
meeting alongwith a copy of statutory report.
Matters/Contents to be stated in Statutory Report

1. Total number of shares allotted (distinguish between shares allotted for cash and
otherwise than in cash). In case of allotment otherwise than in cash, consideration shall
also be discussed.
2. Total cash received against shares allotted;
3. Summary of the receipts and payments of the company (upto a date not earlier than 15
days from date of statutory report).
4. Particulars of directors, chief executive, secretary, auditors and legal advisers;
5. Particulars of contract which are to be modified with approval of members.
6. Extent of carrying out or not carrying out of underwriting contracts, alongwith reason of
not carrying out.
7. Particulars of commission paid against shares issued to directors, chief executive, or to
companies in which such persons are directors.
8. Company's affairs since its incorporation and the business plan.

Certification and Filing of Statutory Report:

1. This statutory report shall be certified by Chief Executive of the company and atleast one
director. In case of listed company, Chief Financial Officer shall also certify the report.
2. Directors shall also send once copy of Statutory Report, alongwith auditor’s report, to
registrar for registration forthwith after sending the report to members.
Auditors’ report on statutory report:

The statutory report should be accompanied by an auditor’s report on correctness of:
 allotment of shares,
 cash received against shares allotted, and
 receipts and payment account of company.
Resolutions in statutory meeting:

The members may discuss any matter pertaining to the company in statutory meeting, however,
resolution shall be passed only for those matters of which prior notice as per articles of the
company has been duly given.
Annual General Meeting:

Every Company (except a single member company) is required to hold AGM each calendar year, in
which members usually discuss Ordinary Business.
Extraordinary General Meeting:

Any general meeting, other than statutory meeting and annual general meeting is called
extraordinary general meeting. It is conducted when approval of members is required on Special
Business e.g. alteration of articles and memorandum.

Which meetings are called EOGM?
Define statutory meeting. How it is convened and what are the objective of this meeting. (04 marks)
How would you differentiate between a general meeting and an extra ordinary general meeting? (04 marks)
Who is required to authenticate the statutory report on behalf of the company?

What information is required to be stated in the Statutory Report of the company? (08 marks)
LO 2: BUSINESS TRANSACTED AT GENERAL MEETINGS:

There are two types of business (i.e. matters) which are transacted (i.e. discussed) at a general
meeting i.e. Ordinary Business, and Special Business.
Ordinary Business:
The following businesses transacted at a general meeting are considered as ordinary businesses:
1. Consideration and adoption of audited financial statements.
2. Consideration of Directors’ Report
3. Consideration of Auditor’s Report

PART 1 – REGISTRATION OF A COMPANY
LO 1: PROCESS OF REGISTRATION/INCORPORATION:
Process of Registration:
Registration of a company is actually the registration of its Memorandum (a constitutive document
of company). Promoters perform following procedures to incorporate a company:
1. Application is filed with registrar alongwith following documents:
 Memorandum of Association (and Articles of Association) duly singed by subscribers.
 Declaration of compliance with requirements of Companies Act 2017 regarding
incorporation.
2. Registrar shall register the memorandum of association if he is satisfied that:
 the company is being formed for lawful purposes,
 all the requirements of Companies Act 2017 regarding incorporation, have been complied
with.
If registration of Memorandum is refused:

If registrar things that any document or information filed with him contains matter contrary to law or does
not comply with the requirements of law or is not complete (owing to any defect, error or omission) or is
not properly authenticated, the registrar may either require the company to file a revised document or
remove deficiencies within the specified period. Registrar may refuse to register the Memorandum if
applicant fails to remove deficiency.
If Registrar refuses registration of Memorandum, the subscribers of the memorandum may file an
appeal to Commission with 30 days of refusal. Order of Commission shall be final on such appeal.
Effect of Registration of Memorandum:

On registration of Memorandum, Registrar shall issue a “Certificate of Incorporation” stating name
of company, registration #, date of incorporation, whether it is a private of public company, and
whether it limited by shares, limited by guarantee or unlimited company.
Registration of Memorandum has following effects from date of incorporation:

1. Subscriber to the memorandum and subsequent members of the company are body
corporate by the name stated in Certificate of Incorporation.
2. Body Corporate is capable of exercising all the functions of an incorporated company,
having perpetual secession and a common seal.
3. The status and the registered office of the company are as stated in the application for
registration.
4. In case of a company having share capital, the subscribers to the Memorandum become
holders of initial shares.
5. The persons named in the Articles of Association as proposed directors are appointed to
that office.
Study Tips
1. Promoters are the persons who take necessary steps to register a company.
2. A company cannot be held liable for pre-incorporation contracts, because company did not have legal
existence at time of contract. However, it may pay pre-incorporation expenses if articles permit.

A copy of every Special Resolution shall be filed with Registrar within 15 days of passing the same
(authenticated by a director or secretary of the company). If special resolution alters Articles, then
a copy of altered Articles should also be filed alongwith special resolution.
Company shall keep all special resolutions intact with its articles and whenever a copy of articles is
requested by a person, copy of such special resolution shall also be provided.
Ordinary resolutions are not required to be filed with Registrar.
Passing of resolution by the members through circulation:

Except for ordinary business to be conducted in the annual general meeting, the members of a
private company or a public unlisted company (having fifty or less members), may pass a resolution
(ordinary or special) by signing circulation sent to all the members for the time being entitled to
receive notice of a meeting.
Rules:
1. Resolution shall be circulated to all members alongwith necessary papers.
2. A members‘ agreement to a written resolution, passed by circulation, once signified, can not
be revoked.
3. Such resolution shall be noted at subsequent meeting of the members and made part of the
minutes of such meeting.

Write short notes on “Circulation of members’ resolution”. (03 marks)
LO 4: WHEN IS A GENERAL MEETING CONDUCTED:

Statutory Meeting:
Statutory meeting is required to be conducted within 09 months from date of incorporation or
within 180 days from date of commencement of business, whichever is earlier.
Statutory meeting is not required if first AGM is held before the due date of statutory meeting.
Exam Tip
Statutory meeting is required to be conducted only by following companies:
1. Every public company having share capital, and
2. A private company which converts into public company within one year of incorporation.

1. First AGM is conducted within 16 months from the date of incorporation.
2. Subsequently, AGM is conducted at least once in each calendar year, within 120 days after
close of its financial year.

Extension upto 30 days may be granted for holding of AGM by Commission (for listed company) or
Registrar (for other companies).

EOGM is conducted whenever “directors” or “members” want to discuss and approve any special
business.

Explain the exceptions to the following provisions as specified under the Companies Act, 2017:
“Every company shall hold its annual general meeting within a period of four months following the close of its financial
year and not more than fifteen months after the holding of its last preceding annual general meeting.” (03 marks)
Explain whether or not the following statements are in accordance with the provisions of the Companies Act, 2017 and
support your answer with reasons:
“All limited companies are required to hold statutory meeting within 6 months of incorporation. (03 marks)
Alpha Technologies Limited (ATL) is in the process of being incorporated as a public limited company.
Required:
Advising promoters about the period within which ATL is required to hold:
(i) Statutory Meeting.
(ii) First Annual General Meeting. (04 marks)
List down the type of companies who are not required to hold the statutory meeting. (02 marks)
LO 5: PLACE OF GENERAL MEETING:

Listed companies shall hold AGM in the town in which registered office of the company is situated,
or in nearest city.
Members of a listed company, not residing in city where AGM is taking place, may require company
to provide the facility of video-link, provided:
 Members hold atleast 10% of share capital,
 Written request is submitted to company atleaast 07 days before meeting.

Briefly explain the exceptions to the following provisions as specified under the Companies Act, 2017.
“An annual general meeting shall, in the case of a listed company, be held in the town in which the registered office of the
company is situated.” (02 marks)
LO 6: WHO CAN CALL A GENERAL MEETING:

Statutory Meeting:
Statutory Meeting is called by directors of the company.

Annual General Meeting is called by directors of the company (members cannot call such meetings).

Extraordinary General Meeting may be:
 called by directors when they require approval of members for a special business.
 requisitioned by members holding alteast 10% voting power (in case of company having
share capital), or 10% of all members (in case of companies not having share capital).

If EOGM is requisitioned by members:

1. Requisition shall state objects of meeting, shall be signed by requisitionist(s) and shall be
filed at registered office of the company.
2. If directors don’t proceed to call the meeting within 21 days, members may call meeting on
their own. Any reasonable expenses incurred by the rquisitionist due to failure of the
directors to convene a meeting shall be repaid by the company to the rquisitionist and
company shall deduct this money from the remuneration payable to the directors in default.
3. EOGM will be conducted by directors or by members within 90 days of requisition,
otherwise requisition shall be expired.
Exam Tip – Calling of General Meeting by Commission

If default is made by directors in holding the Statutory meeting, AGM or EOGM on the requisition of
members, Commission may call the said meeting of the company.
Commission may also give related directions e.g.:
 Even one member present in the meeting shall be treated as quorum of that meeting.
 Cost of meeting shall be paid by an officer (including directors) of the company.

Under the provisions of the Companies Act, 2017 state who may call an annual general meeting of the company.
(02 marks)
Can the Securities and Exchange Commission call the meeting of a company where default is made in holding the
meeting? (03 marks)
If directors of a company have refused to proceed for calling extra-ordinary general meeting within twenty one days of
receipt of requisition, what course of action is available to the members? (05 marks)
In what ways an extraordinary meeting may be called? (03 marks)

LO 7: NOTICE OF GENERAL MEETING:

Notice of meetings:
Notice of general meeting shall be sent to the members and every person who is entitled to receive
notice of general meetings atleast 21 days before the date of general meeting.
In case of listed company, notice shall also be published in one Urdu and one English newspaper
having nationwide circulation, and also the notice shall be sent to Commission.

In case of unlisted companies, if all the members entitled to attend and vote at EGM so agree, a meeting may be
held at a shorter notice.
Whom to send notice of a general meeting:

Notice of a general meeting shall be sent to:
1. Every member of the company (at his registered address or communicated address).
2. Every director of the company

3. Auditor of the company

4. Legal representative of a deceased member (if company has been notified)
5. Official receiver of an insolvent member (if company has been notified)
Study Tip
Accidental omission to give notice to a member, or the non-receipt of notice by a member shall not
invalidate the proceedings at any meeting.
What should notice of a general meeting should contain:

Notice of general meeting shall contain following:
1. Date, Time and Place of meeting
2. Business to be transacted (both ordinary and special)
3. If a special business is to be transacted at a general meeting, notice of general meeting
shall also include:
 A statement setting out all material facts concerning such business.
 Draft of resolution.
How to serve notice of a general meeting to members:

A notice may be given by a company to any member:
 personally (against acknowledgment of receipt) or
 by sending it by post or courier service, or
 through electronic means, or
 any other specified manner.

Few shareholders of Nadeem Industries Limited (NIL) have lodged a complaint that they have not received notice of the
last annual general meeting.
To satisfy the above shareholders, you are required to describe the circumstances in which the notices sent to the
members would be deemed to be duly served, in accordance with the provisions of the Companies Act, 2017.
(07 marks)
Briefly explain the exceptions to the following provisions as specified under the Companies Act, 2017.
“Notice of an extraordinary general meeting shall be sent to the members at least twenty-one days before the date of the
meeting, and in the case of a listed company shall also be published in the prescribed manner.” (02 marks)
State the requirements that a company needs to satisfy, as regards notice of the meeting, in case a special business is to be
transacted at a general meeting of the company. (03 marks)
Who is entitled to receive the notice of the meetings of a company? Does the non- receipt of notice by any member
invalidates the proceedings of any meeting? (05 marks)
LO 8: QUORUM OF GENERAL MEETING:
Study Tip
Quorum means a certain minimum number of members of a company as is fixed to transact business in a
general meeting in the absence of the other members. A meeting without quorum shall be void.

Quorum of a Company:
Quorum for Listed Company:
10 present members who represent 25% of total voting power present personally or through
video-link (either of their own account or as proxies).
Quorum for Unlisted Company having share capital:

02 present members who represent 25% of total voting power present personally or through
video-link (either of their own account or as proxies).
Quorum for Unlisted Company not having share capital:

As provided in articles.
Exam Tip
Articles may require a larger number to be quorum.
If quorum is not present at a meeting within half an hour:

If meeting was called by members, it shall be dissolved.
If meeting was called by directors, it shall be adjourned to the same day in the next week at the
same time and place. If at adjourned meeting, quorum again is not present, 2 present members
(either personally or through video-link) shall be Quorum unless articles provide otherwise.

Narrate the provisions of the Companies Act, 2017 related to the Quorum requirements of a general meeting.
(06 marks)
Who can be the chairman of meetings? (03 marks)

What are provisions provided in the Companies Act, 2017 if the quorum is not present within stipulated period of time?
(05 marks)
LO 9: VOTING AT GENERAL MEETING:

Every member has a statutory right to cast vote at general meeting. There are two methods of
casting vote i.e. Show of Hands, and Poll.
Process of Voting by “Show of Hands”:

1. This method will be used at first instance.
2. Chairman will ask members to raise their right hand if in favor of resolution and shall count
votes (each member will have one vote; Proxy cannot vote).
3. Chairman will ask members to raise their right hand if in against the resolution and shall count
votes.
4. Chairman will declare the results of voting indicating whether resolution is passed or not.
5. Declaration of result by chairman and an entry in the minute-book shall be evidence of
resolution, unless contrary is proved. Proof of number of votes (in favor or against) is not
required.

Process of Voting by “Poll”:

1. This method will be used, on or before declaration of result by show of hands, if:
 Opted by chairman, or
 Demanded by members having atleast 10% of voting power. The demand for a poll may be
withdrawn at any time by the person or persons who made the demand.
2. Chairman will regulate the manner in which poll will be taken (each member will have votes
proportionate to value of shares held by member; proxy can also vote).
3. Chairman (or his nominee) and a representative of members demanding poll, will scrutinize the
votes given on Poll.
4. Chairman will declare the results of voting indicating whether resolution is passed or not.
5. Result of the Poll shall be decision of members on resolution.
Exam Tip
In a company not having share capital, every member shall have one vote.
Time of Taking Poll:

Poll shall be taken forthwith if it relates to election of a chairman or adjournment of meeting. In all
other cases, Poll shall be taken at such time as Chairman of meeting may decide; however, such time
shall not exceed 14 days from the day it is demanded.
Resolutions Passed at Adjourned Meeting:

Resolution passed at an adjourned meeting is considered to have been passed on the day on which
it is actually passed, and not on any earlier date.

Results of Poll, even if conducted other than the date of meeting, shall be considered the decision of the
meeting in which Poll is demanded.

Mr. Shakeel has significant shareholdings in various public and private companies. He is not satisfied with some of the
resolutions passed by such companies by show of hands. You are required to advise him as regards the following:
(a) What conditions would he need to satisfy if Mr. Shakeel wishes to request for a poll? (05 marks)
(b) Explain whether a company is required to oblige him if he wishes to satisfy himself about the validity of the results of
voting by poll. (02 marks)
What is the legal status of a resolution passed at any adjourned meeting of the creditors of a company? (02 marks)
Explain the methods of voting in General Meetings. (06 marks)

LO 10: PROXY:
Proxy:
Proxy is a person appointed by a member to attend, speak and vote in a general meeting on his
behalf. It is statutory right of each member to appoint Proxy.
Study Tip
If member is a natural person, he can appoint another person as his Proxy. If member is an artificial person
(e.g. company or government), it can appoint a natural person as its Representative.
10

Who can appoint a Proxy:

Every member of a company having share capital can appoint a Proxy at any general meeting.
Notice of general meeting shall state member’s right to appoint Proxy; and shall also accompany a
Proxy Form.
Requirements relating to Proxy:

1. Proxy must be a member unless Articles permit appointment of a non-member as proxy.
2. A member can appoint only one Proxy for a meeting. If more than one proxies are
appointed, all appointments shall be invalid.
3. Proxy Form shall be:
a. in written and signed by member or his authorized agent.
b. lodged with company atleast 48 hours before the time of meeting. Any provision to
the contrary in the company's articles shall be void.
4. Every member can inspect Proxy Forms lodged with company.
5. An instrument appointing a proxy, in the form provided in regulations of Companies Act
2017, shall not be rejected if it fails to comply with any additional requirements specified by
company.
Rights of Proxy:
Proxy has following rights:
1. Right to attend a meeting.
2. Right to speak at meeting.
3. Right to vote at meeting (in certain cases).
4. Right to be counted for quorum of meeting.
5. Right to demand a Poll.
6. Right to abstain from voting, on a question on which poll is demanded.
Any provision to the contrary in the company's articles shall be void.

Zafar wants to appoint Zameer as his proxy for attending the annual general meeting of a listed company.
In view of the provisions of the Companies Act, 2017 you are required to describe:
(a) The conditions, relating to the form and submission of the proxy, which Zafar would have to comply with in order to
issue a valid proxy. (04 marks)
(b) The rights of Zameer on being appointed as a proxy. (04 marks)
Green Leaf Limited, a listed company, has sent a notice of the forth coming Annual General Meeting, to the Company
Secretary of Red Rose Limited which is also a listed company. Red Rose Limited has recently acquired 100,000 shares in
Green Leaf Limited and you are required to advise its directors about the following, in the light of Companies Act, 2017:
(a) Who can represent Red Rose Limited in the annual general meeting of Green Leaf Limited? (03 marks)
(b) What are the essential characteristics of an instrument of proxy to be submitted to Green Leaf Limited and what is the
deadline for its submission? (04 marks)
LO 11: REPRESENTATION:
Representation of certain corporations at meetings of companies:
If a company is a member (or creditor) of another company, it may authorize any of its official or
any other person (through Board Resolution) to act as his representative at a general meeting (or
creditors’ meeting).
11

The person so authorised shall be entitled to exercise the same powers as are available to the
company to which he represents.
Representation of federal government and provincial government at meetings of companies:

Federal Govt. or a Provincial Govt. (which is a member of another company) may authorize any
person to act as his representative at a general meeting.
The person so authorised shall be entitled to exercise the same powers, including the right to
appoint Proxy, as are available to the Federal/Provincial Govt. which he represents.

How a company or government is represented at a company meeting? (05 marks)
LO 12: MINUTES OF GENERAL MEETINGS:

1. Every company shall maintain records of—
 minutes of all proceedings of general meetings, and
 copies of all resolutions of members passed otherwise than at general meetings;
 minutes of all proceedings of directors’ meetings
2. Minutes authenticated by the chairman of the meeting or by the chairman of the next meeting,
shall be the evidence of the proceedings at the meeting, unless contrary is proved.
3. The records must be kept at the registered office of the company in physical and electronic
form and it shall be preserved for at least twenty years in physical form and permanently in
electronic form.
4. The book containing minutes of general meeting shall be open for inspection by members
without charge for atleast two business hours in each day.
5. After seven days from meeting, a member can request company to furnish a certified copy of
minutes of a general meeting at a fee prescribed by company. Company shall provide a
certified copy of minutes of general meeting within 7 days of the request.

Discuss the provisions contained in the Companies Act, 2017 relating to maintenance of minutes of the general meetings
of the company. (08 marks)
LO 13: CIRCUMSTANCES IN WHICH PROCEEDINGS OF A GENERAL MEETING MAY BE

DECLARED INVALID:
Court may declare proceedings (or part) of a general meeting invalid, and may direct holding of a
fresh general meeting if:
 Members having 10% or more voting power file petition with Court within thirty days of
the disputed meeting, and
 A material defect or omission is proved in notice or irregularity in the proceedings of
meeting which prevented members from using their rights effectively.

State the circumstances in which the proceedings of a general meeting may be declared invalid. (04 marks)
12

Company Law – Study Notes Chapter 25: Management
CHAPTER TWENTY FIVE

MANAGEMENT
ICAP'S STUDY TEXT
PART A – DIRECTORS
DEFINITION, POWERS AND DUTIES OF
LO 1 25.1.1*, 25.2.1, 25.2.2
DIRECTORS
LO 2 ELIGIBILITY AND INELIGIBILITY OF DIRECTORS 25.1.5
LO 3 APPOINTMENT OF DIRECTORS 25.1.2*, 25.1.3*, 25.1.6*
LO 4 ELECTION OF DIRECTORS 25.1.3
LO 5 VACATION AND REMOVAL OF DIRECTORS 25.1.3*, 25.1.6*

NOMINEE DIRECTORS AND INDEPENDENT
LO 6 25.1.1*, 25.1.4
DIRECTORS
LO 7 LIMITATIONS OF DIRECTORS 25.2.3, 25.2.5
LO 8 MEETING OF DIRECTORS 25.2.4
LO 9 INTEREST OF DIRECTORS 25.2.6

PART B – CHIEF EXECUTIVE AND OTHER OFFICERS
LO 10 CHIEF EXECUTIVE 25.3.1
CHAIRMAN, SOLE AGENT, COMPANY
LO 11 25.3.2 – 25.3.4
SECRETARY, SHARE REGISTRAR
50

PART A –DIRECTORS
LO 1: DEFINITION, POWERS AND DUTIES OF DIRECTORS:

Definition of Directors:
Director includes any person occupying the position of a director, by whatever name called.
Directors are collectively called “Board” or “Board of Directors (BOD)”.
Word “director” in job title does not mean that a person is legally a director e.g. a “finance director”,
“human resource director”, or “IT director” is not a director under the law.
Relationship of directors with Company:

Role as Fiduciary:
Fiduciary means “a relationship of trust between two or more parties”. Directors have a fiduciary
relationship with company as they prudently take care of money of company.
A director lacks fiduciary behavior if he intentionally keeps the company and members at
disadvantage.
Role as Agent:
An agent is an individual employed by principal to provide a particular service. Directors (agents)
are appointed by members (principal) to act in best interest of members in accordance with
instructions of members.
Powers of Directors:
Directors can exercise following powers by passing a resolution by majority in board meeting.
1. To issue shares,
2. To issue debentures or other redeemable capital
3. To borrow money.
4. To make loans
5. To approve annual and periodical accounts and
6. To approve bonus for employees
7. To incur capital expenditure (or undertake lease obligations) exceeding rupees “Ten Lac”.
8. To sell/dispose assets having book value exceeding rupees “One Lac”.
9. To declare interim dividend and propose final dividend.
10. To take over a company or acquire a controlling interest in another
11. To authorize any of the following for entering into transactions with the company
 Director of the company
 Partnership firm in which director of the company is a partner.
 Private Company in which director of the company is a member or director.
12. To write-off material debtors, inventories, advances and other assets.
13. To settle material litigations
Directors shall not do any of following acts without consent of general meeting (either for specific
transaction or by way of a general authorization):
1. sell or otherwise dispose of the subsidiary of the company
2. sell, lease or otherwise dispose of the undertakings or a sizeable part (i.e. 25% or more of
value of assets in that class), unless it is company’s business
3. Remit, give relief or extension of time for loans or advances provided under the provisions
of the Act

Exam Tip
A listed company cannot sell/dispose of undertaking which results in closure of business unless there is a
viable alternate business plan duly authenticated by the board.
Duties of Directors:
A director of a company shall:
1. act in accordance with the articles of the company.
2. discharge his duties with reasonable care, skill and diligence.
3. act in the best interests of the company, its employees, the shareholders the community and
for the protection of environment.
A director of a company shall NOT:

1. achieve any undue gain or advantage either to himself or to his relatives; and if undue gain
is made, he shall be liable to pay an amount equal to that gain to the company.
2. involve in a situation which creates conflict of interest of director with interest of company.
3. assign his office and any assignment so made shall be void.
Commission may further specify extent of duties and the role of directors.
Any negligence, default or breach of duty by a director may be ratified by company through special resolution.
Exam Tip – All Directors are Equal

Every director is equal and has one vote in board meetings. There is no difference between rights and duties of
directors. Legally, a director is responsible entirely for all areas of business, whether practically he is concerned with
an area or not.
Exam Tip – Appointment of Alternate/Substitute Director
Appointment of an alternate or substitute director by a director shall not be considered assignment of office provided:
 Alternate director is appointed to act for director during his absence from Pakistan of not less than 90 days, and
 approval of directors is obtained.
Such alternate director shall ipso facto vacate office when the director appointing him returns to Pakistan.

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 Ordinance, or by the articles, or
by a special resolution, required to be exercised by the company in general meeting.
In the context of the above provision of the Companies Act, 2017, list any twelve powers which can be exercised by the
directors of a company. (09 marks)
What are the powers which directors may exercise on behalf of the company without the consent of general meeting?
(09 marks)
Discuss the following, in the light of provisions of the Companies Act, 2017:
“Haris is director of ABC Limited. He intends to assign his office to his friend, Gibran, to act for him during his absence
from Pakistan.” (03 marks)
Director and Alternate Director are one and the same. Comment. (04 marks)

LO 2: ELIGIBILITY AND INELIGIBILITY OF DIRECTORS:

Eligibility Criteria:
Act has not specified any eligibility criteria. Any natural person, who is a member, can become
director of the company. However, articles may specify criteria e.g.
 minimum number of shares to become a director (called ‘qualification shares’), or
 specific educational qualification or experience requirements.
Ineligibility Criteria:
Act has specified that following persons cannot become directors of a company:
1. a person who is not a member (in some exceptional cases, a non-member can be appointed as director)
2. a body-corporate (a company can be a subscriber/member but cannot be a director of another company)
3. a minor.
4. a person with unsound mind
5. a person who does not hold national tax number
6. a person who is undischarged insolvent or has applied to Court to be declared as insolvent
and his application is pending.
7. a person who has been convicted by a Court for an offence involving immorality.
8. a person who lacks fiduciary behavior as declared by a Court during last 5 years.
9. a person who is debarred from holding office under any provisions of the Act.
For listed companies, following persons are also disqualified:

1. a person who has been declared by a Court as a defaulter in repayment of a loan to financial
institution.
2. a person who is a broker or spouse of a broker or an officer/director of a brokerage house.
Exam Tip
Following persons can be appointed as director of a company even if they are not members:
 a person representing a member who is not a natural person.
 a whole-time director (also called executive director) who is an employee of the company.
 a chief executive
 a person representing a creditor or other special interests through contractual arrangements.
Number of directorship:
No person shall hold office as a director (including as an alternate director) at the same time in
more than such number of companies as may be specified.
However, this limit shall not include the directorships in a listed subsidiary.

Mention two types of persons who cannot become a director of a company. (02 marks)
Explain the exceptions to the following provisions of the Companies Act, 2017:
“No person shall be appointed as a director of a company if he is not a member of that company.” (03 marks)
Can a company act as a director of another company? Give reasons for your answer. (03 marks)

LO 3: APPOINTMENT OF DIRECTORS:
Number of Directors:
Minimum number of directors under the Act:
 Every single member company shall have at least one director.
 Every other private company shall have at least two directors.
 Every unlisted public company shall have at least three directors.
 Every listed company shall have at least seven directors.
However, Articles may specify larger number.
Maximum number of directors under the Act:

Companies Act 2017 does not specify maximum number of directors. Articles or Directors may
decide to appoint any number of directors.
Appointment and Tenure of First Directors:

Appointment of First Directors:
Number and names of first directors shall be decided by subscribers of memorandum and their
particulars shall be submitted alongwith documents for incorporation. The number of first
directors may be increased by appointing additional directors by the members in a general
meeting.
Tenure of First Directors:

The first directors shall hold office until the election of directors in the first annual general meeting
of the company.
Appointment and Tenure of Subsequent Directors:

Appointment of Subsequent Directors:
Subsequent directors shall be elected by members at Annual General meeting.
Tenure of Subsequent Directors:

A director elected at AGM shall hold office for a period of three years unless he resigns earlier, or
ipso-facto ceases to hold office. However, a company limited by guarantee not having share
capital may reduce this period through its articles.
Appointment and Tenure of Casual Vacancy of Directors:

Appointment under Casual Vacancy:
A casual vacancy is filled by directors. In case of listed company, casual vacancy is required to
be filled within 90 days from the date of occurrence of casual vacancy.
Tenure under Casual Vacancy:

Person so appointed shall hold office for the remainder of the term of the director in whose place he is
appointed.
Exam Tip
Directors may not fill casual vacancy if remaining directors are equal or more than minimum number of
directors required by Act.


Can a company issue partly paid shares? If so describe the relevant provisions. (02 marks)
(ICAP, CFAP 02 Level – Winter 1995)
In relation to company law:

(a) explain the concept of a share; and (04 marks)
(b) explain and distinguish between authorised and issued share capital of a company. (06 marks)
(ACCA, Fundamentals Level F4 – June 2013)
LO 2: SHARE AND ITS CHARACTERISTICS:

Share:
Share capital means the capital introduced by members of the company. Total share capital is
divided into different smaller parts, which are called Shares.
Characteristics of Share (and Certificate):

An ordinary share in a company has following characteristics:
1. A share is a form of property i.e. it has rights and obligations.
2. Every share shall be distinguished by its distinctive number.
3. A share can be transferred from one person to another (as per articles of company).
4. Shareholders has rights to attend general meetings, and exercise voting rights in making
decisions.
5. Shareholders get dividend from profits of the company which can vary from time to time.
6. Shares are usually irredeemable.
7. At time of winding up, right of shareholders to receive money is subordinate to all of other
creditors.
Share Certificate:
1. Main evidence of the title of a share shall be the certificate issued to shareholder in physical
form under common seal of the company, or issued in electronic (book-entry form).
2. The manner of issue of a certificate of shares, form of such certificate and other matters may
be specified.
Study Tip
There is a difference between “Member”, and “Shareholder”.
Member:
1. The subscribers to the memorandum of association are deemed to have agreed to become
members of the company and become members on its registration, and
2. every other person-
a. to whom is allotted, or who becomes the holder of any class or kind of shares; or
b. 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.
Shareholder:
Shareholder means a person who is the holder of shares (ordinary or preference) in the company.


What is meant by the term ‘Member’ as described under the provisions of the Companies Act, 2017? (04 marks)
List 2 ways how a person can become a member of a company. (02 Marks)
Distinguish between a ‘shareholder’ and a ‘member’. (04 marks)

LO 3: KINDS AND CLASSES OF SHARES:

Kinds of Shares:
A company can have different kinds of shares if it has registered authorized capital for each kind i.e.
1. Ordinary Shares, and
2. Preference Shares
Difference between Ordinary Shares and Preference Shares:

Ordinary Shares Preference Shares
Ordinary shares or (equity shares) are Preference shares are those shares which carry
shares held by the member/owners of the priority rights (ahead of ordinary shares) to:
Definition company. These carry rights of the  receive dividend
member/owner of the company and are  receive repayment of capital at time
NOT given any special rights. of winding up.
Ordinary shareholders have voting rights Usually, preference shares do not have voting
Voting Rights
at general meeting. rights at general meeting.
Redemption Ordinary shares are not redeemable. Usually, preference shares are redeemable.
Dividend to ordinary shares is not certain. Dividend to preference shares is usually fixed
Dividend Further, there is no limit to the amount of on annual basis and can also be cumulative.
dividend which can be paid.
Company may have different classes of Preference shares may also be of different
shares by writing in articles of association. classes on the basis of accumulation of
These classes may enjoy different voting dividend, on the basis of redemption of shares,
Classes of
rights (e.g. disproportionate to number of or on the basis of conversion into ordinary
Shares
shares, or no voting rights at all), or shares.
different entitlements to dividend or
right/bonus shares etc.
Note: Rights attached to each class of shares are mentioned in Articles of Association.

(a) Can a company have more than one class of share capital?, and (01 mark)
(b) What variations are possible with regards to the rights and privileges of different classes of share holders?
(03 marks)
Briefly describe the nature of:

(i) preference shares (03 marks)
(ii) ordinary shares (02 marks)
(iii) main elements and characteristics of shares (03 marks)
(Malaysian Institute of Accountants – September 2013)

Removal of Directors:
Who has authority to remove directors:
A company may remove directors by passing resolution in general meeting. No director has power
to remove other directors.
Removal of elected director:

The director shall not be removed if the number of votes casted against the resolution to remove
director equals or exceeds the least number of votes which were enough to qualify a person as a
director in the last election of directors.
Removal of “first director’ or “director under casual vacancy” or “unopposed director”:

The director shall not be removed if the number of votes casted against the resolution to remove
director equals or exceeds following number of votes:
= Total number of shares multiplied number of directors appointed divided number of
directors for the time being

One of the directors while retaining his directorship in TPL is contemplating to start his own business which is likely to
take most of his time for the next few years.
Under the provisions of the Companies Act, 2017 the director is seeking your advice on the matters due to which he may
ipso facto cease to hold office of the director of TPL. (06 marks)
State whether the following statements are true or false.

“A director ceases to hold office if he is absent from three consecutive meetings without leave of absence from the
director.” (1 mark)
State in the light of provisions of the Companies Act, 2017:

“Whether any defect in the appointment of the director invalidate the acts done by him.” (03 marks)
How a director may be removed before the expiry of his term of office? (04 marks)
LO 6: NOMINEE DIRECTORS AND INDEPENDENT DIRECTORS:

Nominee Directors:
A company may have directors nominated by the company‘s creditors if they are empowered to do
so by an agreement in this regard. Directors nominated by creditors are not considered to calculate
minimum number of directors.
Similarly, the Federal Government or Provincial Government and any company can also nominate
any person as director in the company in which investment has been made.
Independent Directors:
Who is an Independent Director:
A director:
 who has no relationship with the company, its associated companies (including
subsidiaries, holding company) or directors; and

 he is able to exercise independent business judgment without any conflict of interest:
Under any of following circumstances a person is NOT considered as Independent Director:

1. he has been an employee of the company (its subsidiary or holding) in last three years
2. he has been chief executive officer of the associated company, subsidiary or holding in last
three years
3. he (or the partnership in which he was a partner or the company in which he was a director
or 10% shareholder) had material business relationship with company in last three years
4. he is a close relative (spouse(s), lineal ascendants and descendants and siblings) of
company‘s promoters, directors or major shareholders.
5. A nominee director.
6. he holds cross-directorships or has significant links with other directors through
involvement in other companies
For public sector companies, time period for first three cases will be 2 years, instead of 3 years.
Maintenance of a databank of independent directors:

A independent director shall be selected from a databank of persons who are eligible and willing to
act as independent directors. It shall be maintained by an institute, body or association, as notified
by SECP, and shall be posted on their website for use by company making appointment.
LO 7: LIMITATIONS OF DIRECTORS:
Loan to directors:
A company shall not give loan, and shall not provide security or guarantee in connection with a loan
to its director (or his spouse or minor child), unless:
 the transaction has been approved by a resolution of the members of the company, and
 approval of the Commission shall also be required before sanctioning of any such loan (in
case of listed company)
However, this restriction shall not apply to a company which in the ordinary course of its business
provides loans or gives guarantees or securities.
Political contribution and distribution of gifts:

A company shall NOT:
 contribute any amount to any political party or to any individual or body for political
purpose.
 distribute gifts in any form to its members in its meeting.
Restriction on directors’ remuneration:

Remuneration of directors for attending board meeting shall not exceed scale approved by
company or directors (in accordance with articles).
Remuneration of directors for performing extra services (including holding office of chairman) shall
be determined by company in general meeting or directors (in accordance with articles).
Restriction on cash transactions involving directors:

Company shall ensure that all cash transactions with directors are conducted only through banking
channel.

Restriction on non-cash transactions involving directors:

A company shall not enter into an arrangement by which:
 a director of company (or director of its associated companies or a person connected with
him) acquires assets from company for consideration other than cash, or
 company acquires assets from such director or person for consideration other than cash
unless, prior approval of general meeting of the company (and its holding company, if applicable) is
obtained through resolution. Notice of approval of resolution shall include particulars of
arrangement, alongiwth value of the asset to be acquired duly calculated by a registered valuer.

Briefly describe the provisions relating to the restrictions imposed on directors’ remuneration with regard to performing
extra services, attendance of meeting, etc. as provided in the Companies Act, 2017. (03 marks)
Azad Limited (AL) is a listed company engaged in the business of manufacturing and supply of electrical appliances. Mr.
Majnou, a director of AL, has applied for an interest free loan from the company to be repayable in five years.
In view of the provisions of the Companies Act, 2017 describe the circumstances under which AL may grant loan to Mr.
Majnou. (04 marks)
For what purpose a company can given loan to whole time director? (04 marks)
Whether a company can contribute any amount for political purposes? (02 marks)
LO 8: MEETING OF DIRECTORS:
Quorum of Board Meeting:
Quorum of Board meeting for listed company:
1/3rd of total number or four whichever is greater.
Quorum of Board meeting for unlisted company:

As provided in the Articles.
Quorum of Board meeting to fill casual vacancy:

If there not enough directors to form a quorum to fill casual vacancy, all the remaining directors
shall be deemed to constitute a quorum for this limited purpose.
Frequency of Board Meeting:

Directors of a public company are required to meet at least once in each quarter of a year.
Passing of resolution by directors through circulation:

Directors can pass a resolution through circulation, and it will be as valid and effectual as if it had
been passed at a meeting of the directors provided:
 resolution has been circulated (together with the necessary papers, if any) to all the
directors, and
 resolution has been signed in writing by all the directors for the time being entitled to
receive notice of a meeting of the directors
A directors‘ agreement to a written resolution, passed by circulation, once signified, may not be
revoked.
Such a resolution shall be noted in the minutes of subsequent board of
10


A newly established listed company ‘Snooker Limited’ has approached you for advice. Being their legal advisor, you are
required to inform them about Quorum requirements in respect of meeting of the board of directors. (02 marks)
LO 9: INTEREST OF DIRECTORS:
Disclosure of interest by director:
If a director (or his spouse, children or parents) has an interest in a proposed contract or
arrangement with the company, he shall disclose this interest in directors’ meeting.
Timing of disclosure:
Interested director shall disclose his interest at very next board meeting after he became interested
i.e.
1. If director became interested before first time consideration of contract or arrangements, at
meeting in which contract or arrangement is first time considered.
2. If director became interested after first time consideration of contract or arrangements, at
very next meeting after he became interested.
General Notice of Directorship or Partnership:

1. A director may give a general notice that “he is a director/partner in another business and he
should be treated as interested in every contract/arrangement made with that business”.
2. Such notice shall be considered sufficient as disclosure of director’s interest.
3. Such notice shall be effective from date of notice till the end of financial year in which it is
given.
4. Interest director shall given such notice himself in directors’ meeting or shall take reasonable
steps to ensure that such notice is brought up and read at directors’ meeting.
Interested director not to participate or vote in proceedings of directors’ meeting:

A director interested in a contract or arrangement shall not perform following activities concerning
contract or arrangement:
 Shall not take part in discussion.
 Shall not vote (if he votes, his vote will be void).
 Shall not be counted for quorum purposes.
In case of listed company, interested director shall not be present at the board meeting in which the
relevant contract or arrangement is being considered.
This rule shall not apply:

1. On Private companies (which are neither parent nor subsidiary of a public company).
2. On Contract of indemnity of director (against loss suffered by director as surety of
company). However, company shall insure the liability only if such liability arises out of
transaction validly approved by board or members of the company.
Exam Tip – Interest of other officers

If another officer of a company is interested in a proposed contract or arrangement with the company, he
is required to:
 disclose the nature and extent of his interest in the transaction, and
 obtain the prior approval of the directors.
11

LO 2: APPROVAL OF PROSPECTUS:
Requirement for Approval:
No company shall issue prospectus unless the Commission has approved prospectus (including a
shelf-prospectus or supplement to the prospectus). Approval may be subject to such conditions or
restrictions as the Commission considers necessary.
Time frame within which approval is to be obtained:

The company shall submit a copy of prospectus to the Commission for approval atleast 21 days
before the proposed date of publication of the prospectus.
Time frame for which Prospectus remains valid after approval:

A prospectus approved by the Commission shall be valid for a period of sixty days from the date of
such approval. However, time period of sixty days may be extended by the Commission for reasons
to be recorded in writing.
In case of shelf registration, approval of a period longer than 60 days may be given by Commission.

The Board of Directors of Tanveer Limited, a listed company, has decided to invite general public for the subscription of
its securities and therefore, intends to issue/publish a prospectus.
Under the provisions of the Securities Act, 2015 advise the directors about the time frame within which approval for the
issuance of prospectus may be obtained and the time for which the prospectus may remain valid after approval.
(02 marks)
LO 3: PUBLICATION AND AVAILABLITY OF PROSPECTUS:

Publication of Prospectus:
Prospectus shall be published (in full form or in abridged form) atleast in one Urdu and one English
daily newspaper. Prospectus is required to be published in a newspaper “not less than 7 and not
more than 30 days” before the subscription list is due to open.
However, the Commission may, for special reasons, allow the company to publish the prospectus
more than thirty days before the subscription list is due to open.
Exam Tip
Commencement of subscription is also called opening of subscription list.
Availability of Prospectus:
From date of publication in newspaper till date of closing of subscription, prospectus of a company
shall be made available (free of cost), at following places:
1. At registered office of company.
2. At all securities exchanges of the Pakistan.
3. With all bankers to the issue.
4. With concerned share registrar.
5. With concerned ballotter.
6. With concerned credit rating agency (if any).
7. On website of the issuer.

Terms of Appointment of Chief Executive:

Terms and Conditions of appointment of chief executive are determined by the directors or the
company in general meeting in accordance with the provisions of Articles.
Removal of Chief Executive:

Irrespective of anything contained in Articles or agreement between company and chief executive, a
chief executive can be removed before expiry of his term either:
 By directors by passing a resolution with atleast three-fourths of the total number of
directors for the time being, or
 By company by passing special resolution.
Rights of Retiring Chief Executive:

 Retiring chief executive is eligible for reappointment.
 Retiring chief executive shall continue to perform his functions till his successor is appointed.
unless his office was expressly terminated, or he is the cause of non-appointment of new chief
executive.
Powers of Federal Government to appoint, remove and determine terms and conditions of
Chief Executive:
Federal Government has power to:
 nominate and appoint chief executive of a company if majority of directors are nominated
by Federal Government.
 determine terms and conditions of chief executive nominated and appointed by it.
 remove chief executive if more than 75% of the voting rights are held by it.
Chief Executive and Competing Business:

In case of a public company, a chief executive (or his spouse or minor children) shall not engage in
any business which competes (i.e. of same nature and in same market) with the business carried on
by the company or by a subsidiary of such company.
At time of appointment, Chief executive is required to immediately disclose to company details of

such businesses carried on by him.

Alpha Technologies Limited (ATL) is in the process of being incorporated as a public limited company.
Required:
Write a letter to the promoters of ATL, on behalf of Best Financial Services who are their consultants, advising them about
appointment authority and the terms of holding of office of the following:
(i) the first and subsequent directors.
(ii) the first and subsequent chief executive. (08 marks)
Mr. Zameer is the first chief executive of Ryan Industries Limited, a public company. The directors of the company are not
satisfied with his performance. In view of the provisions of the Companies Act, 2017 specify the term of office of Mr.
Zameer and explain how he can be removed before expiry of the above term. (05 marks)
Write short notes on the following:

“A Chief Executive can be removed by simple majority of share holders.” (02 marks)
Can a Chief Executive of a company engage himself in a business competing with the company’s business? (03 marks)
13

LO 11: CHAIRMAN, SOLE AGENT, COMPANY SECRETARY, SHARE REGISTRAR:

Chairman:
 Board of a listed companies shall appoint a Chairman among non-executive directors within
14 days of election of directors.
 Annual financial statements shall contain a review report by the Chairman on overall
performance of the board.
 Chairman shall hold office for 3 years. However, he may earlier resign, may be removed or
may otherwise cease to hold office.
 Board shall define the respective roles and responsibilities of Chairman.
 Commission may specify class of companies for which the Chairman and Chief Executive
shall not the same individual.
Sole purchase, sale or distribution agent:

A company carrying on a business in Pakistan (whether incorporated in or outside Pakistan) shall
not appoint any sole purchase, sale or distribution agent without approval of Commission.
Exception: Companies incorporated outside Pakistan are not required to obtain approval of
Commission for such appointment, unless the major portion of the business of such company is
conducted in Pakistan.
Company Secretary:
Public companies shall have a qualified company secretary. He shall be an employee of the company
and he shall ensure that company complies with all relevant corporate requirements.
Share Registrar:
Listed companies shall appoint independent share-registrar to handle the transfer of shares and all
other obligations of the company as an issuer towards shareholders. Applications of transfer of
shares are sent to share registrar, instead of company. Name of share registrar is also mentioned in
notice of general meeting.
14


(a) Deo Limited (DL) has published a prospectus on March 1, 2009. The subscription list is due to open on April 5, 2009.
Explain whether the company is in compliance with the provisions of the Companies Act, 2017 regarding the publication
of its prospectus. What relaxation can DL avail, in this regard? (03)
(b) Identify the places where DL is required to make available the copies of its prospectus. (02)
LO 4: CONTENTS OF PROSPECTUS:
Prospectus must contain the information and reports as may be prescribed, to enable a person to
reach a decision about investment in company (e.g. particulars of directors, earning of previous
years).
Authorities also require companies to include risk factors in prospectus, and readers are
specifically advised to read them before making decision.
Prospectus requires:
 Approval from Commission (before its publication)
 Filing a copy with Registrar (on or before its publication)
 Clearance from Securities Exchange
LO 5: EXPERT’S STATEMENT TO BE INCLUDED IN PROSPECTUS:
Expert:
"Expert" includes banker, securities advisor, engineer, valuer, accountant, lawyer and any other
person whose profession gives him authority to a statement made by him (in prospectus).
Conditions to be satisfied to include Expert’s Statement in Prospectus:

Expert to be Independent:
An expert cannot make a statement to be included in prospectus unless expert is not and has not
been engaged or interested in formation, promotion or management of the company.
Expert’s Consent to the Issue of Prospectus:

A prospectus that contains a statement purporting to be made by an expert, shall not be issued
unless:
1. The Expert has given his written consent to issue of prospectus with his statement in the
form and context in which it is included in prospectus.
2. It is mentioned in prospectus that expert has given his consent and has not withdrawn it.

Quite often, a prospectus inviting persons to subscribe for shares in a company contains a statement from person(s) who
are experts in their respective fields.
(a) Describe the term “Expert” as explained in Companies Act, 2017 in the above context. (02 marks)
(b) Narrate the conditions that a company should comply with if its prospectus contains a statement by an expert.
(03 marks)

Company Law – Study Notes Chapter 26: Investments and Dividends
PART A –INVESTMENTS
LO 1: DEFINITIONS OF “INVESTMENT” AND “ASSOCIATED COMPANY”:

Investment:
‘Investment’ includes equity, loans, advances, guarantees by whatever name called, or any amount
which is not in the nature of normal trade credit.
Associated Company/Undertaking:
Any two or more companies or undertakings are associated if they are interconnected with each
other in following manner:
1) If a person who is the owner, partner, director or holder of 20% or more voting-power in a
company/undertaking is also the owner, partner, director or holder of 20% or more
voting- power in another company/undertaking.
2) If companies or undertakings are under common management or control, or one is the
subsidiary of another.
3) If the undertaking is a modaraba managed by the company
Provided that shares shall be deemed to be owned, held or controlled by a person if they are owned,
held or controlled by that person or by the spouse or minor children of the person.
Exceptions:
Following shall not be considered to determine status of Associate:
 a director nominated by federal or provincial government or by financial institution owned
or controlled by such governments.
 a director appointed as “Independent Director”
 shares owned by National Investment Trust.
 shares registered in the name of a central depository.
Exam Tip
If you are asked in exam to define “associated company/undertaking”, also include exceptions in definition.

Describe the term “associated company” in accordance with the Companies Act, 2017. (05 marks)
LO 2: INVESTMENT IN ASSOCIATED COMPANY/UNDERTAKING:

Conditions for investment in associated company/undertaking:
A company shall not invest in any of its associated company/undertaking, unless
1. a special resolution is passed which shall indicate nature, period and amount of
investment, and other terms and conditions, and
2. investment by way of loan and advances shall be made through a written agreement and
such agreement shall include terms and conditions.

3. return on investment in the form of loan shall not be less than the borrowing cost of
investing company or the rate as may be specified by the Commission whichever is higher, and
shall be recovered on regular basis in accordance with the terms of the agreement.
Further:
4. A change in the terms and conditions of investment shall be made only by a special
resolution.
5. SECP has powers:
a. To specify companies on which above requirements shall not apply (e.g. private
companies).
b. To make further regulations on making investments in associated companies.
Exam Tip
If you are asked in exam to describe “conditions for investment in associated company/undertaking”, also
include further conditions (4) and (5) above.

XYZ Limited is a listed company and is planning to invest Rs. 500 million in one of its associated undertaking. The
Company has asked you to provide them a report explaining the:
(-) requirements of the Companies Act, 2017 with regard to the investment in an associated undertakings.
How the terms and conditions of an existing advance to an associated undertaking can be changed.
LO 3: INVESTMENTS OF A COMPANY TO BE HELD IN ITS OWN NAME:

Investments of a Company to be Held in its own Name:
All investments of a company shall be owned and held by a company in its own name.
Exceptions:
1. A company may hold its shares in a subsidiary company in the name of a nominee person to
ensure that number of members of subsidiary company is not reduced below minimum
number.
2. If a company gets right to appoint any person as a director, company may register its share
in such other company in the name of a nominee director, upto the nominal value of
qualification shares.
3. A company may hold or register shares or securities in the name of central depository.
Register for “investments not held by company in its own name”:

If any investment made by company is not held in its own name, company shall maintain a “register
for investments not held by company in its own name” which shall contain nature, value and other
particulars to identify such shares or securities.
Inspection of Register:
This register shall be open for inspection by any member of company free of cost for atleast two
business hours in a day. Other persons may inspect the register on payment of fee prescribed by
company. The company may impose certain restrictions on the inspection.

Any member can request copy of register which shall be issued to him within 7 days, on paying fee
fixed by company.
If any inspection is refused, Registrar may, on an application, direct immediate inspection.

‘Companies Act, 2017 requires that all the investments of the company must be made and held in the name of the
company itself and not in someone else’s name.’
State the exception(s) to this general rule. (04 marks)
PART B– DIVIDENDS
LO 4: TYPES OF DIVIDEND AND RESTRICTION ON DIVIDEND:

Dividend:
“Dividend is any payment by a company to its shareholders out of distributable profits”
Types of Dividend:
There are two types of dividend:
1. Interim Dividend:
2. Final Dividend
Approval and Declaration of Interim Dividend:

1. Interim dividend is approved by Board of Directors.
2. Interim dividend is deemed to have been declared on the date of:
a. commencement of book closure to determine entitlement of dividend or
b. board meeting (if books were not closed for such purpose)
3. Interim dividend is paid within 30 days of its declaration.
Approval and Declaration of Final Dividend:

1. Final Dividend is recommended by Directors but approved/declared by Members in general
meeting. However, members cannot approve dividend in excess of amount recommended
by Directors.
2. Final dividend is deemed to have been declared on the date of the general meeting in which
it is approved.
3. Final dividend is paid within 30 days of its declaration.
Restriction on Declaration of Dividend

No dividend shall be declared or paid by a company:
1. out of the profits from the sale or disposal of any immovable property or assets of a capital
nature unless:
(i) it is ordinary business of company to purchase and sell such property or assets, and
(ii) company has set-off such profits against losses arising from sale of such property or
assets.
2. out of unrealized gain on investment property credited to profit and loss account.


The Directors of Sigma Limited wish to recommend a final dividend. Under the provisions of the Companies Act, 2017
advise the directors about the restrictions, if any, with regard to the declaration of dividend.
A company has earned huge profits from sale of fixed assets. Whether company can declare dividend out of above profits?
(03 marks)
LO 5: PAYMENT OF DIVIDEND:
Manner of Payment:
Any dividend may be paid by a company either in cash or in kind.
 in cash
Dividend payable in cash may be paid by cheque or warrant or in any electronic mode.
However, in case of a listed company, dividend payable in cash shall be paid through
electronic mode into the bank account specified by shareholder.
 in kind
The payment of dividend in kind shall only be in the form of shares of listed company held
by the distributing company.
Exam Tip – Dividend Warrant

Dividend Warrant is a type of crossed cheque which can be credited into bank account of member.
To Whom to Pay:
Any dividend declared by a company must be paid to its registered shareholders or to their order.
Consequences of Delay in Payment:

If dividend is not paid within 30 days of its declaration, chief executive of company shall be:
1. fined for an amount upto five million rupees, and
2. imprisonment for a term upto two years, and
3. ineligible to become a director or chief executive of any company of next five years.
Withholding of Dividends:
In following cases, the company may withhold dividend after obtaining prior approval of
Commission within 45 days of its declaration:
1. When there is a dispute regarding right to receive dividend.
2. When the dividend is lawfully set-off by the company against sum recoevable from
shareholders.
3. When a shareholder has given instructions to company regarding payment of dividend and
those instructions cannot be complied with.
4. When dividend cannot be paid because of operation of law.
5. If non-payment of dividend or non-posting of warrant was not due to any default on part of
the company.
A company may also withhold the payment of dividend of a member if member has not provided
the complete information or documents as specified by the Commission.


Explain whether or not the following statements are in accordance with the provisions of the Companies Act, 2017.
Support your answer with reasons.
“There is no restriction on the declaration of dividend and the chief executive may declare dividend in the general
meeting of the company out of any kind of profit.” (04 marks)
Can dividend be paid to any one else except the registered share holders?
Who is authorized to declare an interim dividend? (2 marks)

When dividend is deemed to have been declared? (02 marks)

(ICAP, CFAP 02 Level – Winter 2003)
Briefly explain the legal provisions as per the Companies Act, 2017 specifying period for payment of dividend and the
consequences for noncompliance in this regard. (04 marks)
(ICMA Pakistan, F5 & G4 Level – August 2013)
On 20 February 2013, the directors of FDA Limited, a listed company, had declared an interim dividend for the year ended
30 June 2013. Subsequently, the company has been awarded a major business contract for which the company needs
funds immediately. Consequently, the management wishes to defer payment of the interim dividend.
In view of the provisions of the Companies Act, 2017 you are required to explain:
(a) Whether FDA can defer the payment of interim dividend. (02 marks)
(b) The consequences of failure to pay the dividend on time. (05 marks)
(c) The situations under which delay in payment of dividend shall not be considered as unlawful. (05 marks)
LO 6: UNCLAIMED DIVIDEND (& UNCLAIMED SHARES/MODARABA CERTIFICATES):

Notice to Shareholders/Certificate Holders:
 If dividend has been declared OR Shares/Modaraba Certificates (including Bonus shares)
have been issued and remained unpaid/unclaimed for 3 years, company shall give a 90
days’ notice by registered post to shareholders/certificate holders at his last known address
to file a claim.
 After expiry of 90 days, company shall give another 90 days’ notice by publishing in one
Urdu and one English newspaper having nationwide circulation.
Transferring to Federal Government:

 If no claim is filed after 90 days of publication of second notice, company shall:
o Deposit unclaimed divided to the credit of Federal Government.
o In case of Shares/Modaraba Certificates, report and deliver them to SECP which
shall sell them and shall deposit proceeds to the credit of Federal Government.
 Such deposits shall be maintained in a profit being account with SBP/NBP, in account titled
“Companies’ unclaimed divided and Instruments and Investors Education Account”. Any
interest on it shall be credited on quarterly basis to “Investors’ Education Account”.
 Company shall continue to preserve records relating to these deposits to Federal
Government and shall provide copies to SECP until it is informed by the Commission in
writing that they need not to be preserved any longer.

Procedure to claim after the transfer:

 Application of claim shall be filed to SECP.
 After necessary verification from company concerned, SECP shall forward claim to
SBP/NBP for making payment.
 Payment shall be made within 30 days of verification, after deducting necessary expenses.
 If shares/certificates have not been sold, applicant is entitled to receive them.
 Where any dispute is arises regarding these dividends/shares/certificates and is pending in
before the relevant authority or court, Commission shall process claim in accordance with
final decision.
 No claim shall be entertained after 10 years from the date of transfer to credit of Federal
Govt.
 Every company shall submit to SECP a return of all unclaimed dividend/instruments within
30 days of close of financial year.

Company Law – Study Notes Chapter 27: Accounts and Audit
CHAPTER TWENTY SEVEN

ACCOUNTS AND AUDIT
ICAP'S STUDY TEXT
LO # LEARNING OBJECTIVE REFERENCE
PART A – BOOKS OF ACCOUNTS
LO 1 BOOKS OF ACCOUNTS 27.1.1
PART B –FINANCIAL STATEMENTS
LO 2 FINANCIAL STATEMENTS 27.1.2
APPROVAL AND AUTHENTICATION OF FINANCIAL
LO 3 27.1.3
STATEMENTS
LO 4 FILING OF FINANCIAL STATEMENTS 27.1.2, 27.1.4
PART C – DIRECTORS’ REPORT
LO 5 DIRECTORS’ REPORT 27.2.1
PART D – AUDIT & AUDITOR’S REPORT
LO 6 APPOINTMENT AND REMOVAL OF STATUTORY AUDITOR 27.3.1
PROCEDURE FOR REMOVAL/APPOINTMENT OF

LO 7 27.3.1
STATUTORY AUDITOR AT AGM
QUALIFICATION AND DISQUALIFICATION OF
LO 8 27.3.2
STATUTORY AUDITOR
LO 9 RIGHTS AND DUTIES OF STATUTORY AUDITOR 27.3.3, 27.3.4
68

PART A – BOOKS OF ACCOUNTS
LO 1: BOOKS OF ACCOUNTS:
Books of Accounts:
Every company shall prepare (in hard or electronic form) proper books of account i.e. such set of
books of accounts which fairly present the state of the affairs of the company and a fair record of all
its transactions. Liquidator of company is also required to maintain books of accounts during
winding up of company.
Books of account include records maintained in respect of:

(a) all sums of money received and expended by a company and matters in relation to which
the receipts and expenditure took place,
(b) all sales and purchases of goods and services by the company,
(c) all assets and liabilities of the company, and
(d) items of cost in respect of production, processing, manufacturing or mining activities.
Period of Retention:
Books of accounts must be preserved in good order for a period of at least ten years.
Place of keeping the books of accounts:

Books of accounts are kept at Registered office of the company. However, these may be kept
at any other place in Pakistan as the board may decide and, within 7 days of the decision, company
shall notify Registrar in writing giving the full address of that other place,
If a company has branch offices (whether in or outside Pakistan), books of accounts with respect to
branch may be maintained at branch provided summarized returns are periodically sent by branch
office to company at registered office (or any other place for this purpose).
Inspection of books of accounts:

Directors can inspect books of accounts during business hours. If any financial information is
maintained outside the country, copies of such financial information shall be maintained and
produced for inspection by any director.

SQL Plastics Limited is a wholly owned subsidiary of a foreign company and has its registered office in Karachi.
(a) List the books of account the company is required to maintain. (04 marks)
(b) State the conditions which the directors shall be required to comply with if they want to keep the books of account at
SQL’s factory located in Peshawar. (02 marks)
‘Every company is required to keep, at its registered office, proper books of account.’ Under the provisions of the
Companies Act, 2017 briefly explain the following:
(i) When such books are NOT deemed to be proper. (02 marks)
(ii) When a company is deemed to have kept proper books of account in case of a branch office. (03 marks)
The management of Umer Limited, a newly incorporated company having two branches outside Pakistan, has requested
you to advise on the following matters:
(i) Where are the company’s books of account required to be kept, especially in view of the fact that the company has two
overseas branches?
(ii) The minimum period for which the books of account are required to be retained. (03 marks)

Explain in detail the law relating to inspection of books of accounts. (06 marks)
PART B –FINANCIAL STATEMENTS
LO 2: FINANCIAL STATEMENTS:
Financial Statements:
Financial statements of a company includes:
(a) a statement of financial position as at the end of the period;
(b) a statement of profit or loss and other comprehensive income or in the case of a company
carrying on any activity not for profit, an income and expenditure statement for the period;
(c) a statement of changes in equity for the period;
(d) a statement of cash flows for the period;
(e) notes, comprising a summary of significant accounting policies and other explanatory
information;
When to prepare Financial Statements:

The board of every company must lay before the company in annual general meeting its financial
statements. These financial statements are to be prepared:
 In case of first financial statements, within 16 months from the date of incorporation.
 In case of subsequent financial statements, within 120 days from the close of financial year.
Exception: For any special reasons, Commission (for listed company) or Registrar (for other
companies) may extend time for preparation of accounts upto 30 days.
Audit of Financial Statements:

The financial statement shall be audited by the auditor of the company, and the auditor‘s report
shall be attached with financial statements.
Exception: However, this requirement shall not apply to a private company having the paid up capital
not exceeding one million rupees or such higher amount of paid up capital as may be notified by the
Commission.
Period covered by Accounts:

Period covered by subsequent financial statements shall not exceed one year months unless special
permission from Registrar is obtained.

Can the accounts of a company exceed twelve months period? Explain with legal stipulation. (02 marks)

LO 3: APPROVAL AND AUTHENTICATION OF FINANCIAL STATEMENTS:

Approval and Signing of Financial Statements:
Financial Statements shall be approved by Board of Directors in their meeting, and shall be signed
on behalf of board by:
 the Chief Executive and at least one Director of the company, and
 Chief Financial Officer (in case of listed company).
Financial statements of a single member company shall be signed by one director.
Notes:
 If chief executive is for the time being not available in Pakistan, then the financial
statements shall be signed by at least two directors.
 In case of private company having paid-up capital not exceeding one million rupees, the
financial statements shall also be accompanied by an affidavit that the financial statements
have been approved by the board. This affidavit shall be executed by Chief Executive (if he
signed the accounts) or any of directors (if two directors signed accounts).

The company’s annual financial statements are in the process of finalisation for presentation at company’s AGM.
Being company secretary, you are required to advise the company regarding approval and signing of financial statements
under the provisions of the Companies Act, 2017. (05 marks)
The chief executive of Raza Enterprises Limited (REL), a listed company, is out of the country at the time of finalization of
annual accounts. Explain the provisions related to signing and authentication of the annual accounts as contained in the
Companies Act, 2017 which REL would have to comply with, in the above situation. (03 marks)
LO 4: FILING OF FINANCIAL STATEMENTS:

To Members:
Every company shall send copy of its financial statements along with auditor’s report, directors’
report, chairman’s review report (in case of listed company) to every member 21 days before
general meeting (usually with notice of general meeting).
A copy shall also be kept at registered office of company for inspection by members.
To SECP and Stock Exchange: (for listed companies only)

A listed company shall also send by post three copies and electronically a copy of such financial
statements (alongwith auditor’s report and directors’ report) to SECP, Registrar and Securities
Exchange, simultaneously with despatch to members. Same shall also be uploaded on company’s
website.
To Registrar:
A copy of audited and adopted financial statements shall be filed (alongwith reports) to Registrar:
 within 30 days from the date of AGM, in case of listed company.
 within 15 days from the date of AGM, in case of any other company.
However, this filing requirement shall not apply to a private company having the paid up capital not
exceeding ten million rupees or such higher amount of paid up capital as may be notified by the
Commission.

If general meeting does not consider accounts, or does not adopt accounts or is adjourned, this fact
shall be annexed to accounts giving reasons thereof.

When and to whom a listed company is required to send the copies of the audited accounts? (04 marks)
State the provisions of law regarding filing of accounts with the Registrar as to:
(a) How many copies are to be filed? (02 marks)
(b) What types of companies should file? (02 marks)
PART C – DIRECTORS’ REPORT
LO 5: DIRECTORS’ REPORT:
Which companies are required to prepare Directors’ Report:
The board shall prepare a directors‘ report (and a statement of compliance, if applicable) for each
financial year of the company.
Exception: However, this requirement shall not apply to a private company (which is not subsidiary of
a public company) having the paid up capital not exceeding three million rupees.
Contents of Directors’ Report:

Directors shall attach with financial statements, a directors’ report containing following particulars:
Contents for every directors’ report:

 Statements regarding the state of the affairs of the company, and a fair review of its
business.
 Particulars of amount recommended as dividend (if any)
 Particulars of amount transferred or proposed to be transferred to any reserve account. (if
any)
In case of listed company, business review must cover:

(a) the main trends and factors likely to affect the future performance and position of company;
(b) the impact of the company‘s business on the environment;
(c) the activities undertaken by the company with regard to corporate social responsibility during the year; and
(d) directors‘ responsibility in respect of adequacy of internal financial controls as may be specified.
Additional contents for in case of public company or private company which is subsidiary of
public company:
 Names of the persons who were directors of the company at any time during the financial
year.
 Material changes in nature of business of company or its subsidiaries or companies in
which company has made investment.
 Material changes and commitments affecting financial position, occurring between year-end
and date of report (e.g. entering into a joint venture with foreign company, or imposition of
certain additional tax by government).
 Explanation regarding any reservations, observations qualification etc. or any adverse
remarks pointed out by the auditors.

 pattern of shareholding
 Name and country of incorporation of holding company (if holding company is
incorporated outside Pakistan)
 Earnings per share, Reasons for incurring loss and a reasonable indication of future
prospects of profit.
 Information about defaults in payment of debts, if any
 A description of the principal risks and uncertainties facing the company
 Comments in respect of adequacy internal financial controls
Authentication of Directors’ Report:

The directors‘ report (and statement of compliance, if applicable) must be approved by the board
and signed by the chief executive and a director of the company.

Aabshar Limited, a listed company, was incorporated on 1 April 2015. The directors are in the process of finalizing the
annual accounts of the company and have sought your advice with regard to the directors’ report to be sent to the
members along with the annual accounts.
Under the provisions of the Companies Act, 2017 advise the directors about the particulars to be set out in their report for
submission to the members of the company. (07 marks)
State the provisions of the Companies Act, 2017 relating to authentication of Directors’ Report.
PART D – AUDIT & AUDITOR’S REPORT
LO 6: APPOINTMENT AND REMOVAL OF STATUTORY AUDITOR:

In Pakistan, audit of annual financial statements is required for all types of companies, except a
private company having paid up capital not exceeding Rs. one million or such higher amount as may
be notified by the Commission. Large companies may appoint two or more joint auditors.
Appointing Authority for Auditor:

Appointment of first auditor:
First auditor is appointed by Board of Directors within 90 days of incorporation.
Appointment of subsequent auditor:

Subsequent auditor is appointed by company at each AGM (on recommendation of the board).
Appointment in case of casual vacancy:

Casual vacancy (i.e. death or disqualification or resignation of auditor during audit) is filled by
directors within 30 days of its occurrence. Until such vacancy is so filled, surviving auditor (if any)
may continue to act as auditor.
Appointment in case of mid-term removal of auditor:

If auditor is removed before expiry of his term, board of directors shall appoint the auditors with
prior approval of the Commission.

If a disqualified person is appointed by company:

If a disqualified person is appointed as auditor, this appointment shall be void, and SECP will
appoint qualified auditor in his place.
Appointment by SECP/Commission:
Commission may appoint auditors if:
1. the company fails to appoint the first auditors within ninety days of incorporation, or
2. the company fails to appoint subsequent auditors at an annual general meeting; or
3. the company fails to fill casual vacancy within thirty days of occurrence of the vacancy; or
4. the appointed auditors are unwilling to act as auditors of the company;
Company is required to give a notice to Commission regarding its powers becoming exercisable.
Tenure/Term of Auditor:
Tenure of auditor appointed in each case is from date of appointment till the conclusion of next
AGM.
Mid-Term Removal of Auditor: (i.e. removal before expiry of tenure)

An auditor, whether appointed by Directors or appointed by Members, can be removed before
expiry of his term by members through Special Resolution.
Remuneration of Auditor:
The remuneration of the auditor shall be fixed:
(a) by the company in the general meeting; or
(b) by the board or by the Commission, if the auditors are appointed by the board or the
Commission, as the case may be.

State the provisions of Companies Act, 2017 for appointment of auditors in the following cases:
(i) First auditors (02 marks)
(ii) Subsequent auditors (03 marks)
(iii) Casual vacancy (03 marks)
(iv) No appointment (02 marks)
The Directors of Sunshine Limited, a listed company, intend to appoint the first auditors of the company. In view of the
provisions of the Companies Ordinance 1984, advise the directors in respect of the following:
(i) The time frame within which the first auditors should be appointed.
(ii) The person(s) who may or may not be eligible for appointment as auditor(s). (10 marks)
Write short note on appointment of first auditors. (03 marks)

Narrate the circumstances in which SECP becomes empowered to appoint auditors under the Companies Act, 2017.
(06 marks)
What are the provisions of the Companies Act, 2017, regarding remuneration of auditors of a company. (03 marks)

LO 7: PROCEDURE FOR REMOVAL/APPOINTMENT OF STATUTORY AUDITOR AT AGM:

New auditor is appointed by members by passing resolution in annual general meeting.
1. Board of Directors shall recommend auditors, after obtaining consent of proposed auditors.
A notice of recommendation shall be sent to members with the notice of AGM.
2. A member or members (having 10% or more shareholding in company) can also propose an
auditor, provided:
a. consent of proposed auditors has been obtained by member, and
b. member has sent a notice in this regard to company atleast 7 days before AGM.
Company shall send copy of this notice to retiring auditor and shall also post on its website.
3. Retiring auditor has a right to make a representation in writing to company atleast two days
before the date of general meeting.
If such a representation in writing is made by retiring auditor:
a. It shall be read out at AGM before taking up the agenda for appointment of the
auditor.
b. it shall be mandatory for the auditor or a person authorized by him in writing to
attend the general meeting.
4. At AGM, members will pass a resolution to appoint auditor from proposed auditors.
5. Within 14 days of appointment (or removal) of auditor, company shall send Registrar
intimation of appointment (or removal) of auditor alongwith written consent of appointed
auditor.

Mr. Khushkismat holds 10% shareholding in Basant Limited (BL), a company listed on Karachi Stock Exchange. He wants
to propose Mustaid and Company, Chartered Accountants to be the new auditors of BL in place of the retiring auditors.
Under the provisions of the Companies Act, 2017 explain the duty of Mr. Khushkismat and the company in respect of the
proposed appointment. Also explain the rights of the retiring auditor under the above circumstances. (10 marks)
Explain the formalities to be completed by a company with the registrar of companies for the appointment, retirement,
removal and otherwise ceasing to hold office as an auditor. (04 marks)
LO 8: QUALIFICATION AND DISQUALIFICATION OF STATUTORY AUDITOR:

Qualification Criteria:
Audit of a Public Company, or a Private company which is subsidiary of a public company, or a
private company with paid up capital of Rs. 3 million or more, shall be conducted by a chartered
Accountant or a firm of chartered accountants (having valid certificate of practice from ICAP).
Audit of other companies shall be conducted by:

 a chartered Accountant or a firm of chartered accountants (having valid certificate of
practice from ICAP), or
 a cost and management accountant or firm of cost and management accountants (having
valid certificate of practice from ICMAP)
Exam Tips
A firm can be appointed as auditor if majority of its partners are qualified for appointment. However, only a
qualified person can act as auditor or can sign on behalf of firm.

LO 1: TYPES OF MEETINGS:
Types of Meetings:
There are two types of meetings under Companies Act, 2017 i.e.
1. Board Meetings:
These are meetings of Directors of a company.
2. General Meetings
General meetings are meetings of shareholders/members of the company who are entitled
by articles of company to attend and vote at such meetings. Directors cannot vote at general
meeting unless they are also members.
Committee Meetings and Class Meetings:

Sometimes, directors may have certain committees. Meetings of such committee are called
“Committee Meetings”. Sometimes, members may have certain classes. Meetings of such classes of
members are called “Class Meetings”.
Chairman of General Meeting:

The chairman of BOD shall be chairman of every general meeting of the company.
In this chapter, we will discuss General Meetings in detail. There are three types of meetings of
members i.e.
1. Statutory Meeting
2. Annual General Meeting
3. Extraordinary General Meeting
Statutory Meeting:
This is the first general meeting of a company, in which members discuss matters in respect of
formation of company, and approve Statutory Report.
The notice of a statutory meeting shall be sent to the members at least 21 days before the date of
meeting alongwith a copy of statutory report.
Matters/Contents to be stated in Statutory Report

1. Total number of shares allotted (distinguish between shares allotted for cash and
otherwise than in cash). In case of allotment otherwise than in cash, consideration shall
also be discussed.
2. Total cash received against shares allotted;
3. Summary of the receipts and payments of the company (upto a date not earlier than 15
days from date of statutory report).
4. Particulars of directors, chief executive, secretary, auditors and legal advisers;
5. Particulars of contract which are to be modified with approval of members.
6. Extent of carrying out or not carrying out of underwriting contracts, alongwith reason of
not carrying out.
7. Particulars of commission paid against shares issued to directors, chief executive, or to
companies in which such persons are directors.
8. Company's affairs since its incorporation and the business plan.

LO 9: RIGHTS AND DUTIES OF STATUTORY AUDITOR:

Statutory Rights of Auditor:
Auditors’ right to information
An auditor of a company has a right:
 of access at all times to the company‘s books, accounts and vouchers (in whatever form they
are held).
 of access to such copies of books and accounts of the branch as have been transmitted to
principal office of the company.
 to require such information and explanation as he thinks necessary for the purpose of audit:
o from any director, officer or employee of the company, or
o from any person holding or accountable for any of company’s books, accounts or
vouchers.
o from any subsidiary of company(or its employees).
Rights with regard to the general meeting:

1. Right to receive all notices of any general meetings which members of company are entitled
to receive.
2. Right to attend general meetings. However, in case of listed company, it is duty of auditor or
a person authorized by him in writing to attend general meeting in which financial
statements and auditor’s report are considered.
3. Right to speak at general meetings on audit related matters.
4. Right to make representation in writing if change of auditor is proposed.
Statutory Duties of Auditor:

1. A company‘s auditor shall conduct the audit and prepare his report in accordance with the
requirements of ISAs as adopted by ICAP.
2. A company‘s auditor shall examine whether:
a. adequate records have been kept and returns have been received by company from
branches not visited by him.
b. accounting records and returns are in agreement with financial statements.
3. The auditor shall make a report to the members of the company which shall state:
1. whether or not they have obtained all the information and explanations which to the
best of their knowledge and belief were necessary for the purposes of the audit; and
if not, the details and effect of such information on financial statements.
2. whether or not in their opinion, proper books of accounts have been kept by the
company as required by the Companies Act, 2017.
3. whether or not in their opinion, the ‘statement of financial position’ and ‘profit and
loss account and other comprehensive income’ (or income and expenditure
account) and cash flows have been drawn up in conformity with the requirements
of accounting and reporting standards as notified under the Companies Act , 2017,
and are in agreement with the books of accounts and are further in accordance
with accounting policies consistently applied;
4. whether or not in their opinion and to the best of their information and according to
the explanations given to them,:
a. Statement of financial position give a true and fair view of state of affairs of
company at end of financial year.
b. Profit and loss account and other comprehensive income give a true and fair
view of profit or loss (or surplus or deficit) for its financial year.
10

4. Approval and declaration of final dividend, if declared by directors.

5. Appointment or re-appointment of auditors, and fixation of auditor’s remuneration
6. Election or re-election of directors
Ordinary business is conducted by Ordinary resolution, except the election of directors.
Special Business:
Any business other than those specified above is termed as special business e.g.
1. Alteration of memorandum of association.
2. Alteration of articles of association.
3. Investment in associated company
Special business is conducted by Special resolution, except alteration in authorized share capital
clause of memorandum.

In a general meeting, ordinary as well as special businesses are put up for consideration of members. Distinguish between
ordinary business as opposed to special business. (03 marks)
LO 3: RESOLUTIONS PASSED AT GENERAL MEETINGS AND THEIR FILING:

Resolution:
Resolution is a decision reached by majority of the members. Resolutions at general meeting are
usually proposed by directors. However, members having 10% or more voting powers may also
give notice of resolution.
There are two types of resolutions i.e. Ordinary Resolution and Special Resolution.
Ordinary Resolution:
Ordinary resolution means a resolution which has been passed by a simple majority of such
members which are entitled to vote, and are present in person or by proxy or vote through postal
ballot at a general meeting.
Special Resolution
Special resolution means a resolution:
1. which has been passed by atleast three-fourth majority of such members which are
entitled to vote, and are present in person or by proxy or vote through postal ballot at a
general meeting, and
2. notice of general meeting has been duly given atleast 21 days before meeting specifying
the intention to propose the resolution as a special resolution

If all the members entitled to attend and vote at any such meeting so agree, a resolution may be proposed and
passed as a special resolution at a meeting of which less then twenty-one days notice has been given.
Filing requirements:

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1 By: M. Asif, ACA

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PART A – INTRODUCTION TO THE LEGAL SYSTEM

Civil Law Criminal Law

CONCEPT REVIEW QUESTION

Sources of Law in Pakistan:

2 By: M. Asif, ACA

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CONCEPT REVIEW QUESTION

PART B – MAKING OF LAW

LO 3: THE PARLIAMENT / MAJLIS-E-SHOORA: ✯✯✯

3 By: M. Asif, ACA

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Process of Legislation when National Assembly is NOT in session:

CONCEPT REVIEW QUESTION

Write down the process of passing ‘Money Bills’. (03 marks)

4 By: M. Asif, ACA

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Advantages of Delegated Legislation:

Use of Expert Knowledge:

Disadvantages of Delegated Legislation:

Loss of Accountability and Control:

Control over Delegated Legislation:

CONCEPT REVIEW QUESTION

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LO 5: BINDING PRECEDENT: ✯✯✯

Requisites of a binding precedent:

Advantages and Disadvantages of Binding Precedent:

Disadvantages of Binding Precedent:

CONCEPT REVIEW QUESTION

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PART C – IMPLEMENTATION/INTERPRETATION OF LAW

LO 6: JUDICIAL SYSTEM IN PAKSTAN: ✯✯

Structure of High Court:

Jurisdiction of High Court:

Supervisory role of High Court:

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Company Court and Company Bench:

Federal Shariat Court:

Appeal to Supreme Court:

8 By: M. Asif, ACA

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CONCEPT REVIEW QUESTION

Criteria to be Judge of High Court:

CONCEPT REVIEW QUESTION

LO 8: ALTERNATIVE DISPUTE RESOLUTION: ✯

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CONCEPT REVIEW QUESTION

LO 7: DIFFERENT LEGAL TERMS:

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Court of first instance:

CONCEPT REVIEW QUESTION

What does court of first instance means?

Define the following terms used in court of law:

Explain the following legal terms:

Briefly describe the following legal terms:

11 By: M. Asif, ACA