REVISED EDITION 2019 CORPORATE ee / — B.Com, M.Com, MBA, LL.B Pes Fey KHALID MEHMOOD CHEEMA Hailey College of Commerce University of the Punjab, Lahore 41 NATURE OF COMPANY Historjcal Background z 7 he word company originated from the Latin word companio which means companion, The word company was first used in 4553 for a business association. The word corporation derived from the Latin word corpus which means body) In Europe, churches and local governments such as the City of London Corporation were incorporated. The world's oldest commercial corporation was Stora Kopparberg mining community in Sweden which obtained a charter from the king in 1347. Originally, companies were only established through a royal charter or an Act of the parliament. Examples of chartered companies are the British East India Company, Dutch East India Company and Bank of England established in 1600 1602 and 1694 respectively. The British parliament enacted the Joint Stock Companies Act, 1844 which allowed incorporation through a simple procedure. It introduced the concept of company as @ separate legal person. The first company law in India was the Joint Stock Companies Act, 1850, which described the procedure of registration of companies and transfer of shares without consent of other members. The Joint Stock Companies Act, 1857 introduced the concept of limited liability. The benefit of limited liability was granted to banking and insurance companies through the Joint Stock Companies Act, 1860. India enacted the Companies Act, 1866 which introduced memorandum of association, articles of association, company limited by guarantee, prohibition of alteration in the object clause of the memorandum and provisions for winding up. he Companies Act, 1882 repealed all previous laws in India. The Indian Companies Act, 1913 replaced the Companies Act, 1882 and introduced the concept of private company. Later, the Amendment Act of 1936 introduced provisions for managing agent, holding and subsidiary companies, and members’ voluntary winding up and creditors’ voluntary winding up.} ” " t independence in 1947, Pakistan adopted the Companies Act, 1913 along with its amendments. In 1981, an independent regulatory body named the Corporate Law Authority was formed to regulate the corporate sector. 5 _ The Companies Act, 1913 was repealed and the Co n 1984’ was enacted. In order to enforce this law, the Sec Commission of Pakistan (SECP) was established under: The SECP replaced the Corporate Law Authority. ¥ 1 ‘Scanned with CamScannerNature of Company 2 % ent. In 2017, the J functions on behalf of the Federal Governm Companies Ordinance, 1984 was replaced by the Companies Act, 2017.) Application of Law : " The Companies Act, 2017 applies to the whole of Pakistan. It is a Federal law. It has 515 sections and 8 schedules, The Act Pyoyides powers to the Provincial Government for es corporations confined to a single province, if the license is issue b y Provincial Government. If a Non-trading corporation extends its business activilies beyond the limits of the province, it shall be liable to a penalty of level 3 or may be wound up. : rh i ir The provisions of this Act shall apply in Sota of any provision contained in the memorandum, articles, agreement or resolution. All provisions which are against the Companies Act, 2017 shall be void. [Sec. 1,3,4] Meaning and Definition . A company means a voluntary association of Persons to run a business and share the profit with limited liability, common-seal and capital divisible into shares. Sec. 2(1)(17): “Company means a company formed and registered under this Act or the company law". Lord Haney: “A Company is an incorporated association which is an artificial person created by law, having a Separate entity with a perpetual Succession and a common seal”. Heelis: “A Joint stock company is an association of individuals for the Purpose of carrying on some trade, business or undertaking usually with limited but sometimes, with unlimited liability”. . Characteristics of Company The following are characteristics of a company: 1. Voluntary Association , A company is an incorporated voluntary association, A company is Created under the law. The registration of companies is Compulsory in Pakistan, The company is registered under the Companies Act, 2017. It comes into existence from the date mentioned in the certificate of incorporation, Without incorporation, the voluntary association has no legal existence. 2. Artificial Legal Person ial legal person with fights and liabilities. A erson separate from its members, It does not ‘on bul exists legally. It exists in the eye of law Ctors elected by the shareholders, The company company 's treated as a legal p exist physically like a living pers and acts through a board of dire: is also wound up under the law. Scanned wih CamScannerNature of Company 3 3, Members and Directors < A company having one member is called a single member company. A Private Compa: y must have at least two members. A public company must have at least three members A single member company shall have one director. A private company shall have at least two directors. A non-listed company shall have at least three directors. A listed company shall have at least seven directors. 4, Separate Legal Entity A company has a legal entity separate from its members. It has its own name and seal. Its assets and liabilities are separate from those of its members. The creditors can recover their debts only from the assets of the company. Similarly, the company is not liable for the debts of its members. A company can sue and be sued. It can own property, borrow debts, open a bank account, employ people and enter into contracts Salomon vs. Salomon & Go. Ltd. Mr. Salomon owned a leather business in England. He formed a company called Salomon and Co. Ltd and sold his business to the company for £39,000. Salomon, his wife and five children became members of the company. Salomon became the managing director and his two sons became the directors. The purchase consideration was paid by the company by allotment of 20,000 shares of £1 each, £10,000 secured debentures and £9,000 in cash to Mr. Salomon. One share of £1 each was allotted to six members of his family, After some time, the company went into liquidation. On liquidation, company had assets worth £6,000. The liabilities included £10,000 secured debentures held by Salomon and £7,000 to unsecured creditors. Thus, assets were less than the liabilities. The unsecured creditors claimed priority over debenture holder on the ground that the company and Salomon were the same person. The Court held that the company is separate from its members and secured debenture holder will be paid first. Arshad Saleem vs. Civil Aviation Authority : Arshad Saleem, a director of TD! International Holding (Pvt.) Ltd. made an agreement with CAA for installation ‘of advertisement and hoardings. CAA sued the director for payment of dues. The Court held that director who signed the contract on behalf of the company cannot be held personally liable for acts of the company because company is a Separate legal entity. 5. Limited Liability ‘A company may be limited by shares or limited by guarantee. In company limited by shares, the liability of the members is limited up to the face value of shares held by them. If a member has already paid the full amount on his shares, he is not further liable for the debts of the company. In a company limited by guarantee, the liability of member is limited up to the amount for which ‘Scanned with CamScanner4 Nature of Company guaranteed to contribute to the assets of the company ‘on its winding up. 6. Perpetual Succession A company has a2 perpetual succession which means continuous existence. Its life does not end with the death, insolvency or retirement of shareholders. A company is created under law and can be dissolved only according to the law. The members may leave the company by selling their shares but the company continues to, exist. Noel Tedman Holdings Pty Ltd. A husband and wife were only shareholders of a company. They were also the company’s directors. Both died in an accident, leaving behind an infant child. The Court allowed the representatives of the deceased to appoint directors of the company to allow transfer of shares to the child. 7. Common Seal Every company has a common seal..A company is an artificial person so it cannot put signatures on its documents. The common seal affixed on any document is regarded as the signature of the company. The signature of director of company secretary is not valid without the common seal. The name of the company must be engraved on the common seal. Any document bearing the common seal is binding on the company. 8. Transfer of Shares The shares of a public company are freely transferable. However, in a private company, the law describes the manner in which transfer of shares shall be made. The articles may contain reasonable restrictions on the right of members to transfer the shares. When a member transfers his shares, the transferee gets all the rights of transferor in respect of those shares. Aziz bin Atan vs. Ladang R.M. Estate Sdn Bhd All shareholders of the company sold their shares to a certain buyer. The Court had to determine whether a change of employer took place. It was held that the company did not change its identity. 9. Separate Property z The company is a legal person separate from its members, so the company’s property is its own. It can buy and sell property in its own name. The property of the company cannot be used for personal benefit of the shareholders. ‘The members cannot claim any ownership rights in assets of the company during the existence of the company. Macaura vs. Northern Assurance Co Ltd. Macaura bought insurance policy for his timber business. Later, he converted his business into a company but did not transfer the insurance policy to the company. A fire broke out and destroyed all the timber. The insurance company refused Macaura’s claim for compensation. It was held that insurance Scanned wih CamSeannerNature of Company company is not liable as Macaura’s property is separate from the company, 10. Separate Management The ownership and Management of a company are separate. It has @ large number of members, so all members cannot take part in the management of the company. The management is run by the representatives of members known as directors. The members elect directors from the members to run the affairs of the company, The directors are collectively known as board of directors. Foss vs. Harbottle Foss and Turton were two minority shareholders in Victoria Park Co. They sued the directors for improper use of company’s property. It was held that only company has the right to sue. Moreover, if the majority shareholders have approved an act, the minority shareholders cannot sue. Lifting the Corporate Veil A company is a legal person which is separate from its members. There is a veil between the company and its members. When a company is involved in fraud or its policies are against the public interest, the members and management may be held personally liable by the Court. The Court can ignore the limited liability of members and separate legal entity of the company in order to punish the culprits. This act of the Court is called lifting the corporate veil. The corporate veil may be lifted for the following reasons: 4. Statutory Provisions The corporate veil can be lifted under the following statutory provisions: a, Minimum Members The corporate veil can be lifted if a company carries on business for more than 180 day after the number of members reduces below 3 in case of a public company or below 2 in case of a private company. Every person who is a member during the time the company continues its business after 180 days and is aware of this fact, shall be liable for the debts of company incurred during that time. [Sec. 15] . Application Money Where a company issues any invitation to the public to subscribe its shares or other securities, the company shall refund the money in case of unaccepted or unsuccessful applications within the specified time If refund is not thi ified time, the directors shall be liable to repay the money made within the specified time, of with surcharge at the rate of 2% for every month or part thereof from the expiry 18th day and shall be liable to a penalty of level 3. (Sec. 68] ‘Scanned with CamScanner6 ee Nature of Company jiable to pay compensation to any person who acquires securities and suffers loss due to such prospectus. [Sec. 92,93 Securities Act, 2015] 4. Investigation of Company The members, through a resolution or Court order, may ask the Commission to appoint investigators to look into the affairs of the company. The investigator can lift the corporate veil under the following circumstances: [Sec. 256,257] ‘Fraudulent intention against members, creditors or other persons; oppression against members; or fraudulent and unlawful business activities ii, Fraud, misconduct or unlawful business by promoters and management ili, Denial of reasonable profits to members iv. Denial of information to members regarding the company affairs v. Allotment of shares for inadequate consideration vi. Management contradicting sound business principles vii. Danger of insolvency of company €. Investigation of Associated Company If an inspector is appointed to investigate the affairs of a company, he may investigate the affairs of any other associated company or associated undertaking and also from the chief executive of such company. [Sec. 260) f. Non-publication of Name If an officer of a limited company issues or authorizes the issue of a document including bills of exchange, cheque or promissory note and does not mention the name of the company, he shall be liable to a penalty of level 1 and shall be personally liable to the holder of the document. [Sec. 24(2)] 2. Judicial Decisions The corporate veil can be lifted under the following judicial decisions: a. Tax Evasion When a company is formed for the purpose of tax evasion, the Court may disregard the corporate entity. Sir Dinshaw Maneckjee Petit Dinshaw created 4 private companies for the purpose of tax evasion. He transferred his income to the 4 companies. He got loans from the 4 companies and never repaid. The Court lifted the corporate veil of all 4 companies and held that they were created to conceal Dinshaw's income. b. Company as Agent When a company acts as an agent or trustee of the shareholders, it loses its corporate entity. In such circumstances, the Court may lift the corporate veil. ‘Scanned with CamScannerNature of Company Merchandise Transport Ltd. vs. British Transport Commission A transport company wanted to obtain licenses for its vehicles but was not allowed to apply in its own name. It formed a subsidiary company and applied for licenses in the name of subsidiary. Held, the holding and subsidiary Company were one unit and the application was rejected. ¢. Contractual Obligation When company is incorporated to avoid legal obligations, the Court may lift the corporate veil. 7 Gilford Motor Co. vs. Horne Horne, a former employee, had an agreement with GM Co. not to persuade its customers. Hoine formed a Private company and started competing against GM Co. GM Co. filed a suit against Home and his private company. The Court restrained Horne and his private company from competing against GM Co. d. Fraudulent Purpose The corporate veil may be lifted by the Court where a company is formed for fraudulent purpose. Gencor ACP Ltd. vs. Dalby - Dalby was a director of Gencor ACP Ltd. He fraudulently shifted assets to another company owned by him, Dalby and his company were ordered to return the money as he did this act without the consent of shareholders of Gencor ACP Lid The Court lifted the corporate veil between Dalby and his company. e, Character of Company A company may be considered an enemy if the persons controlling its affairs are citizens of an enemy country. The Court may lift the corporate veil to examine the character of the persons controlling the company. Daimler Co. Ltd. vs. Continental Tire and Rubber Co. CTR Co. was marketing German-built tires in England. The majority of CTR Co. shares were held by German nationals. During World War 1, CTR Co. filed a suit against an English company Daimler Co. for recovery of debts. Daimler Co. refused as CTR Co. was owned by German nationals and Germany was at war with England. The Court lifted the corporate veil and found that CTR Co. was in fact owned by German nationals. DIFFERENCE BETWEEN COMPANY AND PARTNERSHIP. COMPANY I PARTNERSHIP: 1. Formation . . It is formed by following a procedure | It is formed by an agreement between under the law the persons. 2. Legal Person , It has a legal existence separate from | It has no legal ‘existence separate its shareholders from its partners. Scanned wih CamScanner8 = 3. Liability of Members The liability of members is limited. 4. Mutual Relationship The members of company are not its agents. 5. Management Al members cannot manage the affairs of a company. It is managed by board of directors. 6, Regulation It is regulated by the Companies Act, 2017. 7. Registration The registration is a compulsory for the formation of a company. 8. Minimum Members A single member company has 1 member. A private company has at least 2 members. A public company has at least 3 members. 9, Maximum Members The maximum number of members is 50 in a private company and unlimited in public company. 10. Dissolution It can be dissolved under the law only. 44. Transfer of ownership A shareholder can transfer his shares to any person without consent of shareholders. 12.Life Its life is not affected by death, insanity, SS ET RAPS OEE acanen A company is required to follow many legal formalities. Nature of Company The liability of partners is unlimited The partners of a partnership are its agents. All partners can take part in the | management of business. it is reguiated by the Partnership Act, 1932. The registration is not compulsory for the formation of a partnership. A partnership must have at least 2 members. The maximum number of partners is 20 in a partnership. in some cases, it may be more than 20. It can be dissolved any time with the consent of partners. A partner cannot transfer his share to any other person without the consent all partners. — Nice ea The death, insanity, insolvency or ee of any partner terminates he partnership. A partnership is nee ocho ee, to follow many legal formalities, ‘Scanned with CamScannerNature of Company 9 44, Audit A public company is required to get its | A partnership is not required to get its accounts audited by a certified | accounts audited by a ceftified chartered accountant chartered accountant. ' 45, Suitability It is sound organization and suitable | It is a weak organization and not for large scale business. suitable for large-scale business. 46. Distribution of Profits The distribution of profit is not|The profit is distributed among compulsory. Members get a share in | partners as per the partnership deed. profit when dividend is declared. | 417.Number of Directors A single member company has 1 | A partnership has no director. director. A private company must have at least 2 directors. A non-listed company must have at least 3 directors. A listed company must have at least 7 directors. 18. Taxation The income of company and its} The income of partnership and shareholders is taxed separately’ It | partners is not taxed separately. results in double taxation. 19. Remedy for Creditors The creditors of the company can sue | The creditors of the firm can sue the the company but not its members. partners jointly or separately. 20. Financial Statements The financial statements are required | The financial statements are not to be published for general public. required to be published for general public. Jurisdiction of Court ’ The following are rules to deal with company cases: [Sec. 5,6) 1. High Court cots ' re The High Court having jurisdiction in the place at which the registered office of the company is situated shall be the Court for that company. ‘ 2. Winding up Cases : [ For winding up of companies, the registered office means the place which has longest been the registered office of the company during 180 days immediately before the presentation of the petition for winding up. ‘Scanned with CamScanner_Nature of Company 10 pied ee ae 3. Company Benches rt shall constitute one OF more The Chief Justice of each High Cou benches known as the Company Bench to deal with ¢ 4, Registrar I with The Chief Justice of High Court shall appoint a OO affairs of the company bench such as receipt of petnions Sen 5 ution aa replies, issuance of notices, service of summons and other ful may be prescribed. 5. Secretariat The Chief Justice of each High Court may establish 4 eee each company bench to provide secretarial support and perform other ful 6. Procedure of Court The procedure is as follows: a. All written submissions to the Court shall be filed with the registrar of the company bench. The written submission shail include the following: i. A petition explaining brief statement of facts, grounds and the relief claimed. ii, Awritten reply with particulars of set off, if any An affidavit of facts by the petitioner or respondent or other persons, duly attested by the oath commissioner. company cases: iti, iv. Any other relevant documents in possession of the petitioner or respondent v. Any application for discovery of documents or interim injunction, if required. x vi. A list of case law along with a summary by petitioner in support of his iaim. vii. Address, mobile number, email and-fax or any other mode notified by the Court for serving notices. viii. Any other document required by the registrar. b. Where any petition is filed, the registrar shall issu respondents according to law. oo c¢, The-respondent shall file a written reply to registrar within 30 days. If the respondent fails to file the written reply within the time prescribed, the Court may proceed ex parte and announce the final order, ~ , d. The registrar shall present the case file to the Court within 45 first service of notice or such extended time as may be granted by the Cour e, The Court shall fix a date and time for hearing of the case. No adjournment 4 shall be granted except in exceptional circumstances. Scanned with CamSeannerNature of Company 4 f. The Court shall treat affidavits, counter affidavits and other documents filed by the parties to the proceedings as’evidence g. The Court may order attendance of the relevant deponent for the purpose of cross examination. The Court may refer the matter to the registrar of any other person for recording of cross examination. . h. The Court shall decide the case within a period of 120 days from the date presentation of the case. + i, The Court may dismiss the petition and impose a fine for misstatements and material non-disclosure of facts. j. Any person aggrieved by any judgment of the High Court may, within 60 days, file an appeal in the Supreme Court of Pakistan. Standard Scale of Penalty There shall be a standard scale of penalty for offences under the - Companies Act, 2017. The standard scale consists of: (Sec. 479] Limit of Penalty Per day penalty during which the default continues Upto Rs.500 Upto Rs.25,000 Upio Rs.500,000 Upto Rs.100 million | Upto Rs.500,000 QUESTIONS 4. Explain the historical background of Company Law. Discuss the separate legal entity with the help of Salomon vs. Salomon & Co. Ltd. case. Define a company and discuss its characteristics. Differentiate between company and partnership. What is 2 corporate veil? Under what circumstances it is lifted? . What is the jurisdiction of Court? 4 Write a note on standard scale of penalty under Companies Act. n N@aSRO allem ‘Scanned with CamScanner