Company Law Notes PDF

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COMPANY LAW Advocate has same meaning as assigned to it in section 2 of the Legal Practitioners and Bar Councils Act, 1973, “advocate means an advocate entered in any roll under the provisions of this act” 1. DEFINITION OF COMPANY: A company is an artificial person, incorporated association created by law, having a separate entity with a perpetual succession and a common seal, which is not a firm. OR Company means a company formed and registered under companies Act 2017 or the company law; 2. CHARACTERISTICS OF COMPANY: ❖ Separate Legal Personality: A company has separate legal personality of its own because law has granted the company a separate legal personality. Principle of separate legal personality established in 18th Century and this principle established in case “Salomon V/s Salomon and Company Limited”. ❖ Liability: The liability of the members to contribute towards the payment of the company’s debts is usually limited. The members in majority of the cases are the shareholders and their liability is limited to the value of the shares subscribed by them. ❖ Perpetual Succession: A company has continuous existence and its life is not affected by the lunacy, insolvency or death of its members. The members may come and go, but the company continuous its operation. This coming and going of members without any affect on the life of the company, is called perpetual succession. ❖ Transferability of Shares: Members of public limited company are free to transfer the shares to any person which are held by them. These shares are usually sold at the stock-exchange. In a private company, however, there is a restriction on such transfer of shares and cannot be traded on stock-exchange. ❖ Separation Of Ownership And Management:A number of members or shareholders in a company are usually very large and all of them cannot take part in the direct management of the company. Companies are managed by the professionals.

3. KINDS OF COMPANIES: -

4. KINDS OF COMPANIES IN DETAIL:There are two kinds of companies, which are as under:i. Companies by Special Public Act (Statutory Compaines):These are the companies which are established by the special act of the parliament like Pakistan Railways, PIA etc. ii. Companies by General Public Act (Registered Companies):These are the companies which are established by the general act of the parliament like companies established under Companies Act, 2017. ❖ Companies by General Public Act is divided into two kinds which are as under:I.Unlimited Company II.Limited Company Detail of these two kinds, is as under:I.Unlimited Company:Unlimited limited is that in which the liability of shareholders /members is unlimited. II.Limited Company:Limited Company is that in the liability of the Shareholders is limited. ❖ Limited Companies is further divided into two kinds which are as under:i.Companies Limited by Shares ii.Companies Limited by Guarantee Detail of these two kinds, is as under:I.Companies Limited by Shares:A company limited by shares means “a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively hold by them”. ❖ Companies Limited by Shares is further divided into two kinds, which are as under:i. Public Limited Company:-

A company whose shares offered to the Public for sale is called Public Limited Company. A Public Company can be registered with three persons subscribing to the memorandum and articles of association. ii. Private Limited Company:A company whose shares may not be offered to the public for sale. A private company can be registered with one person subscribing to the memorandum and articles of association. iii. Single Member Company:A single member company can be defined as a company with only one member or a company which can be establish by a single member is called single member company II.Companies Limited by Guarantee:A company limited by guarantee means “a company having the liability of its members limited by the memorandum to such amount as the members may respectively thereby undertake to contribute to the assets of the company in the event of winding up”. ❖ Companies Limited by Guarantee is further divided into two kinds, which are as under: i. Companies Limited by Guarantee for Profit:Companies for profit issue stock to their shareholders, who invest in companies with expectation that they will earn a profit on their investment and that profit may take the form of dividends paid by the company. ii. Companies Not for Profit:These companies usually do not issue stock. These are usually companies limited by guarantee. 5. DIFFERENCE BETWEEN PUBLIC AND PRIVATE COMPANY:S.No Private Company 1. Private Company must have at least one member for subscribing to the memorandum and articles. In Private Company the maximum 2. number of its members is 50 excluding the employees. 3. A Private Company is not required to have more than two directors.

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Public Company Public Company has at least three members subscribing to its memorandum and articles. In Public Company there is no maximum limit on the number of members. A Public Company must have at least three directors, but if it is listed on the stock exchange it must have seven directors. A Private Company may A Public cannot commence its business commence business and exercise unless it complies with the certain borrowing powers immediately requirements. after its incorporation.

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In Private Company, itis not legally required to hold the Statutory Meeting and file the Statutory Report. In Private Company, it is not required to file the Registrar copies of its annual balance sheet and profit and loss account. A Private Company cannot issue a prospectus and it is not required to file a statement in lieu of a prospectus. In Private Company the articles must impose a restriction on the transfer of shares. In Private Company interested directors can vote because prohibition on voting by interested directors is not applicable. A Private Company may employee an auditor who may not be a chartered accountant.

In Public Company, it is legally required to hold the Statutory Meeting and file the Statutory Report within the required time. In Public Company, it is legally required to file with the Registrar copies of its annual balance sheet and profit and loss account. If a Public Company does not issue a prospectus then it must file a statement with the Registrar in lieu of a prospectus. In Public Company articles does not impose a restriction on the transfer of shares. In Public Company, Interested directors cannot vote if they are directly or in directly interested in the contract or arrangement. A Public Company has to employee an auditor who must be a chartered accountant.

6. BIRTH / REGISTRATION OF COMPANY:A Company is formed when a number of legal formalities have been completed. Generally, there are three stages towards the creation of company or birth of company. 1. Promotion 2. Incorporation or Registration 3. Commencement of Business Detail is as under:1. PROMOTION:It is a kind of introduction, it is not a legal term but a business term. Promotion means a process by which a company is brought into existence as corporate body. Promotion has four major activities. i. Discovery of Business idea. ii. Detailed investigation of that idea. iii. Gathering together of men, material and resources. iv. Financing the business through debt etc.

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Anyone who is involved in the promotion of the company is called promoter. A promoter may be an individual, association, firm or may be another company. FUNCTIONS OF PROMOTER:1. Promoter originates scheme for the formation of a company. 2. To prepare, execute and register the memorandum and articles. 3. Collect all information of business and arrange the capital for business. 4. To arrange the people, directions for business, both from business and legal prospective. 5. Enter with certain contracts necessary for business and its registration. 6. To do certain proper work for registration. 7. Submit all documents to the registrar. LEGAL STATUS OF PROMOTERS:Promoters have a fiduciary relation with the company, that relation is trust. So the promoters will not do anything which is against to the interest of the company. Any contract made between the company and the promoters is voidable at the option of the company unless he has disclosed all the material facts. He will not make a secret profit while acting in that capacity and if he does make a secret profit the company can compel him to account for it. PRE-INCORPORATION CONTRACTS OR PERLIMINARY CONTRACTS:Preliminary or pre-incorporation contracts are contracts purported to be made on behalf of a company before its incorporation. Such contracts may relate to the property which the promoters wish to purchase for the company. The promoter will be liable before the registration of the company. But when the company become registered and re-enter into that contracts then the company would be liable for that contracts. REGISTRATION OF COMPANY:At the end of the promotion the promoters will submit the legal documents to the registrar whether the company is public or private. The registrar will issue a certificate of incorporation to be incorporated. The person who is going to register the company is supposed to deliver the documents to the registrar, these are the constitutional documents of the company, as mentioned below:i. MEMORANDUM OF ASSOCIATION (M.O.A):This document has to be filed whether the company is limited by shares, limited by guarantee or unlimited. In case of the public limited company it has to be signed by three or more persons. ii. ARTICLES OF ASSOCIATION (A.O.A):A company limited by shares may and a company limited by guarantee as well as an unlimited company shall file this document. Instead of providing its own articles, a company may adopt, in whole or in part, the articles provided in Table-A in the First Schedule.

iii. STATUTORY DECLARATION:It is like a statement which is made under oath. It is commonly use to allow a person to declare something to be true for the purpose of satisfying some legal requirements, when there is no other evidence is available similar to an affidavit. iv. RECEIPTS (CHALLANS):It shows the duty on share capital and filling fee or registration fee have been deposited. ➢ The above 04 documents is to be submitted both by public and private companies. ➢ The following 02 documents are to be submitted only by public companies. v. CONSENT TO ACT AS A DIRECTOR:The consent of the directors has to be filed with the registrar within 07 days of the issuance of the certificate of incorporation. vi. PROPECTUS:It mentioned the financial position and future position of the company, to obtain capital from the general public. A company has to be filed the prospectus with the Registrar for prior approval before it can be issued. After submitting these documents by the promoters, registrar will check these documents thoroughly, when he will be satisfied, then he will issue a certificate for incorporation. This certificate will birth certificate of the company and is conclusive evidence for the incorporation of company, after the issuance of this certificate no one can challenge the existence of the company. It bears the date of issue, name of the company, whether limited or not, name of province in which the company is located and having the seal of registrar of company. 3. COMMENCEMENT OF THE BUSINESS:A private company may start business any time after the registration. A Private company can issue shares and enter into binding contracts. But a public cannot do so unless it has obtained another certificate from the registrar i.e. Certificate of Commencement. However, a contract made by a public company after the Certificate of Incorporation but before the Certificate of Commencement of Business, is provisional contract and will be binding upon the company after the Certificate of Commencement of Business. ➢ EFFECT OF SEPARATE LEGAL PERSONALITY OF COMPANY:A Company is a legal person, a corporation. In law, company is regarded as a separate person, separate& distinct from its members, this principle is clearly established in case “Saloman Vs Saloman & Company Limited”. So the company is liable for all its contracts done with the company name. Company may also make a contract with one of its members, who can be shareholder, sole director or any servant employed by company. Due to the principle of separate legal personality the property of company belongs to it, not to the member of the company.

➢ PIERCING THE CORPORATE VEIL OR DISREGARDING THE CORPORATE FORM:The principle of separate legal personality as established in Saloman’s case and this principle is regarded as a curtain, veil, or shield between the company and its members. But in some in which the court may discard the separate legal personality of company and this disregarding is called piercing the corporate veil. In exception to the above principle in some instances the law disregards or looksbehind into the reality of situation. It is maintained that if the theory is pushed into the extreme limits the result may be injustice. Thus, when the motive of any legal entity is to defeat public interest, justify wrong, defend crime and protect fraud then law disregard the entity i.e. lifting the corporate veil. There are certain cases in which law may disregard the separate legal personality of a company i.e. lifting the corporate veil. 1. When the company become an enemy company. 2. When the company is acting as an agency of some one. 3. When the company is made to deceive someone for fraud. 4. When the company is used to evade contractual obligations. 5. When the statutory law requires that the veil may be lifted. 7. CONSTITUTIONAL DOCUMENTS:There are certain documents which are to be submitted before the registrar, these documents are called constitutional documents. These are two, which are as under:1. Memorandum of Association. 2. Articles of Association. Detail of these 02 constitutional documents is as under:1. MEMORANDUM OF ASSOCIATION:Memorandum of Association is the most important document of a company. It states the objects for which the company is formed. It contains the rights, privileges and powers of the company. Hence it is called a charter of the company. It is treated as the constitution of the company. It determines the relationship between the company and the outsiders. The whole business of the company is built up according to Memorandum of Association. A company cannot undertake any business or activity not stated in the Memorandum. It can exercise only those powers which are clearly stated in the Memorandum. ➢ Contents of Memorandum of Association:According to the Companies Act, the Memorandum of Association of a company must contain the following clauses: i. Name Clause of Memorandum of Association:The name of the company should be stated in this clause. A company is free to select any name it likes. But the name should not be identical or similar to that of a company already registered. It should not also use words like King, Queen, Emperor, Government Bodies and names of

World Bodies like U.N.O., W.H.O., World Bank etc. If it is a Public Limited Company, the name of the company should end with the word ‘Limited’ and if it is a Private Limited Company, the name should end with the words ‘Private Limited’. ii. Situation Clause of Memorandum of Association:In this clause, the name of the State where the Company’s registered office is located should be mentioned. The company should intimate the location of registered office to the registrar within 30 days from the date of incorporation or commencement of business. The registered office of a company can be shifted from one place to another within the town with a simple intimation to the Registrar. But in some situation, the company may want to shift its registered office to another town within the state. Under such circumstance, a special resolution should be passed. Whereas, to shift the registered office to other state, Memorandum should be altered accordingly. iii. Objects Clause of Memorandum of Association:This clause specifies the objects for which the company is formed. It is difficult to alter the objects clause later on. Hence, it is necessary that the promoters should draft this clause carefully. This clause mentions all possible types of business in which a company may engage in future.The objects clause must contain the important objectives of the company and the other objectives not included above. iv. Liability Clause of Memorandum of Association:This clause states the liability of the members of the company. The liability may be limited by shares or by guarantee. This clause may be omitted in case of unlimited liability. v. Capital Clause of Memorandum of Association:This clause mentions the maximum amount of capital that can be raised by the company. The division of capital into shares is also mentioned in this clause. The company cannot secure more capital than mentioned in this clause. If some special rights and privileges are conferred on any type of shareholders mention may also be made in this clause. vi. Subscription Clause of Memorandum of Association:It contains the names and addresses of the first subscribers. The subscribers to the Memorandum must take at least one share. The minimum number of members is two in case of a private company and seven in case of a public company. ➢ Alteration of the Clauses of the Memorandum:No alteration can be made unless the procedure specified in the ordinance is followed, in order to protect the interest of members and creditors (Section 20 & 23). The alteration to the memorandum is provided in section 32 of the Company Act,2017. For alterations, two types of resolution can be passed by the company. i. Ordinary resolution: passed by the simple majority i.e. 51% of shares holding powers. ii. Special Resolution: passed by the special majority i.e. 75% of shares holding powers.

2. ARTICLES OF ASSOCIATION:Articles of Association is an important document of a Joint Stock Company. It contains the rules and regulations of the company. They are related to the internal working or management of the company. It deals with the rights of the members of the company between themselves. The contents of articles of association should not contradict with the Companies Act and the Memorandum of Association. If the document contains anything contrary to the Companies Act or the Memorandum of Association, it will be inoperative. The private concern that are limited by shares and those limited by guarantee and unlimited companies must have their articles of association. Public companies may not have their articles but may adopt Model articles given in Table-A of Schedule-I of Companies Act. If a public company has only some articles of its own, for the rest, articles of Table A will be applicable. ➢ Contents of Articles of Association:The contents of the Articles of Association can be understood by looking at the contents of Table-A in the First Schedule of Company Act. The following are usually the contents: 1) Definition of Important terms and phrases. 2) Adoption or execution of pre-incorporation contracts. 3) Share Capital and the rights of the shareholders. 4) Allotment of Shares. 5) Procedure as to making of calls on shares. 6) Procedure as to forfeiture of shares. 7) Transfer of shares. 8) Lien on Shares. 9) Share certificates and share warrants. 10) Alteration of share capital. 11) Conversion of shares into stock. 12) Dividend, reserve and capitalization of profits. 13) Directors, their appointment, powers, duties etc. 14) Meetings. 15) Borrowing powers. 16) Accounts and audit. 17) Common seal of company. 18) Voting rights and proxies. 19) Winding up of company. 20) Exclusion, total or partial, of Table-A of the First Schedule. According to section 2(28), a private company must in addition: 1) Restrict the right to transfer its shares, if any; 2) Limit the number of its members. 3) Prohibit any invitation to the public to subscribe for the sh...