Chapter 01: Company: Introduction, Types and Registration

Question 1

What is Company Law:

Answer 1

Company law includes:
 repealed Companies Act 1913,
 repealed Companies Ordinance 1984 and 2016, and
 Companies Act 2017.

[Chapter 1: LO 1]

Question 2

List down the features of a Company:

Answer 2

1. A company is an Artificial legal person.
2. Separation of ownership from management.
3. A Company has Shares and Share Capital.
4. Limited Liability of Members/Shareholders.
5. Legal Obligations.
6. Liability to pay tax.
7. Perpetual Succession (or perpetual existence).

[Chapter 1: LO 1]

Question 3

What are the Consequences of Separate Legal Status:

Answer 3

1. A company can contract with its own name.
2. A company owns its assets, and is fully liable to pay its debts. [Debtors owe money to company, and not to its owners]
3. Members not liable for debts of company, except as stated in Memorandum.
4. Perpetual succession and Transfer of ownership.

[Chapter 1: LO 1]

Question 4

Usually, there is separation of Ownership from Management in a company. Who can become an owner but not manager in a company?

Answer 4

Owner can be a natural person (e.g. an individual), or an artificial person (e.g. a company may own shares in another company).
However, only a natural person can manage the business.

[Chapter 1: LO 1]

Question 5

List some characteristics of a Share:

Answer 5

1. Shares have some rights (e.g. right to receive dividend, right to attend general meeting, voting rights).
2. Shares are** transferable**. Shareholders can transfer some or all of their shares to another person.

[Chapter 1: LO 1]

Question 6

Define voting Rights:

Answer 6

“Voting Right” means right of a member to vote on a matter in general meeting, either present in person or through video-link or by proxy or by means of postal ballot.

[Chapter 1: LO 1]

Question 7

Briefly Explain the feature “Limited Liability of Members/Shareholders”.

Answer 7

Concept of limited liability applies to shareholders, and not to company. A company is fully liable for all debts. However, liability of members is:
* limited upto unpaid amount on face value of shares (in case of company Limited by Shares), or
* limited upto the amount each members guarantees to contribute at time of winding up of company (in case of company Limited by Guarantee).

Word “Limited” is added at the end of name of a company to warn creditors that liability of its members is limited.

[Chapter 1: LO 1]

Question 8

A company is governed by which Laws? List in order of Application.

Answer 8

A company is governed by following laws:
1. Companies Act, 2017. (This is the law relating to creation and operations of companies)
2. Memorandum of Association. (This is constitutional document which focus on external stakeholders).
3. Articles of Association (These are by-laws which focus on internal affairs of company)

[Chapter 1: LO 1]

Question 9

Define “Body Corporate or Corporation”.

Answer 9

Definition of Body Corporate is broader than Company.

Body corporate or corporation includes:
(a) A company incorporated in Pakistan, under Company Law.
(b) An company incorporated outside Pakistan.
(c) A body corporate declared as body corporate under relevant statute (e.g. State Bank of Pakistan).

However, following are NOT considered Body Corporate:
* a co-operative society registered under any law relating to co-operative societies, or
* any statutory body which Federal Government specifies by notification.

[Chapter 1: LO 2]

Question 10

Define Foreign Company.

Answer 10

Foreign company means a company incorporated outside Pakistan, which:
* conducts any **business activity **in Pakistan, or
* has a place of business or liaison office in Pakistan (whether itself or through agent, whether physically or electronically).

[Chapter 1: LO 2]

Question 11

List down different Types of Companies which can be formed under Companies Act 2017:

Answer 11

Types on the basis of Status:
1. Private Company (Single Member Company, and Other than SMC)
2. Public Company (Listed Company, and Unlisted Company)

Types on the basis of Liability:
3. Limited by Shares
4. Limited by Guarantee
5. Unlimited Company

Examples of Other companies:
6. Holding Company and Subsidiary Company
7. Association not for profit

[Chapter 1: LO 2]

Question 12

Define Private Company:

Answer 12

Private Company means a company which, by its articles:
1. Limits maximum number of its members to be 50 excluding employees (joint-holders are considered as 1 member).
2. Restricts right to transfer its shares, and
3. Prohibits invitation to general public to subscribe for shares (or debentures or other redeemable capital) of the company.

[Chapter 1: LO 2]

Question 13

Briefly explain concept of Single Member Company (SMC)

Answer 13

This is a company which is registered with only one member, who is also the director of the company.

Member of SMC shall nominate a person who shall be responsible for following in case of death of member:
 Manage the affairs of company as trustee, and
 Transfer the shares of deceased member to his legal heirs as per Islamic Inheritance Law (or in case of non-Muslim members, as per their respective law).

If shares are transferred to more than one legal heirs, such company shall cease to be an SMC and shall convert itself into a private company.

[Chapter 1: LO 2]

Question 14

Define a Public Company:

Answer 14

Public Company means a company which is NOT a private company. A public company has to add word “Limited” at the end of its name.

[Chapter 1: LO 2]

Question 15

Define and briefly explain the concept of “Company Limited by Shares”.

Answer 15

 This is a company in which liability of members is limited by the memorandum upto unpaid amount (if any) on face value of share they acquired.

For example:
 If shares are partly paid, members are liable to pay unpaid amount to company.
 If shares are fully paid, members are not liable to pay any amount to company.

 This company can raise additional capital by issuing new shares.

[Chapter 1: LO 2]

Question 16

Define and briefly explain the concept of “Company Limited by Guarantee”.

Answer 16

 This is a company in which liability of members is limited by the memorandum to such amount as members agree to contribute to the assets of company at time of winding up.
 If a person ceases to be a member, he is also liable to contribute within one year afterwards, for the debts contracted before he ceased to be a member.
 Such companies may have or may not have share capital. If such company has share capital, liability of its members shall also include the amount unpaid on shares.
 A company limited by guarantee has to include word “(Guarantee) Limited” in its name.
** Examples** include: Charities, Trade Associations, Sports Clubs.

[Chapter 1: LO 2]

Question 17

Briefly explain “Unlimited company”:

Answer 17

 Liability of members in such type of company is unlimited.
 Such companies are rare in practice, and are used by partnership-style business.

[Chapter 1: LO 2]

Question 18

Define Public Sector Company.

Answer 18

Public sector company means a company:
 Whose more than one-half voting securities are held by Govt. or any agency of Govt, or
 Govt or any of its agency has power to appoint majority of its directors.

It also includes a public sector association not for profit, licensed by Commission. However, nomination of directors by Commission on board of securities exchange or any other entity shall not make it a public sector company.

[Chapter 1: LO 2]

Question 19

Define Holding Company.

Answer 19

A company will be a holding company of other company if:
 it controls more than one-half voting securities of other company, either by itself or together with one or more of its subsidiary companies; or
 it controls composition of board of other company. Composition of board is controlled when a company can appoint or remove all or majority of directors of other company.

[Chapter 1: LO 2]

Question 20

Define Subsidiary Company.

Answer 20

A company will be a subsidiary company of other company if:
 Other company controls more than one-half of its voting securities, either by itself or together with one or more of its subsidiary companies; or
 Other company controls its composition of board. Composition of board is controlled when a company can appoint or remove all or majority of directors of other company.
However, holding companies shall not have layers of subsidiaries beyond numbers notified.

[Chapter 1: LO 2]

Question 21

What are minimum number of members required for different types of companies:

Answer 21

 1 for Single Member Company
 2 for Other Private Company
 3 for Unlisted Public Company
 7 for Listed Company

[Chapter 1: LO 2]

Question 22

What are implication if a company carries on a business with less than minimum number of members.

Answer 22

If a company carries on a business with less than minimum number for more than 180 days, every member who knows this fact, shall be **personally liable **for debts of the company contracted after 180 days.

Further, Court may also wind-up such company.

[Chapter 1: LO 2]

Question 23

Define Registrar:

Answer 23

“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”

[Chapter 1: LO 3]

Question 24

Which Powers and Duties are given by Companies Act to Registrar:

Answer 24

Registrar has various powers and duties under the Act e.g. to register companies, to receive documents from company, keeps record of mortgages of companies, to inspect books and seize books (if necessary to reach out certain facts).

[Chapter 1: LO 3]

Question 25

In how many offices SECP is organized.

Answer 25

• Head office of SECP is in Islamabad and
• It has 8 regional offices (called Company Registration Offices) i.e.
   1 in Islamabad,
   1 each in every provincial capital (total 4), and
   1 each in Multan, Faisalabad and Sukkur (total 3).

[Chapter 1: LO 3]

Question 26

Which Powers and Functions are given by Companies Act to Commission:

Answer 26

SECP has functions/powers to regulate affairs of all the companies (including Insurance, Banking and other companies). SECP has powers and functions under Companies Act as well as under SECP Act.

[Chapter 1: LO 3]

Question 27

Define a Member.

Answer 27

Member includes:
1. Subscribers to the memorandum of association, who become members of the company on its registration.
2. A person who becomes shareholder of any class or kind of shares in the company, and whose name is entered in the register of members (for company having share capital).
3. A person who agrees to become a member of the company, and whose name is entered in the register of members (for company NOT having share capital).

[Chapter 1: LO 3]

Question 28

Define the term “Officer” under Companies Act.

Answer 28

It includes any Director, Chief Executive, Chief Financial Officer, Company Secretary, Share Registrar or other authorized officer of the company.

[Chapter 1: LO 3]

Question 29

Define Ordinary Resolution.

Answer 29

Ordinary resolution means a resolution which is passed by:
 simple majority of members who are entitled to vote and
 are present in person or by proxy, or through postal ballot (as provided in the articles or as may be specified).
 at a general meeting

[Chapter 1: LO 3]

Question 30

Define Special Resolution.

Answer 30

Special resolution means a resolution which is passed by:
 atleast **3/4th **majority of members who are entitled to vote and
 are present in person or by proxy, or through postal ballot,
 at general meeting (for which notice has been given atleast 21 days before meeting specifying proposed resolution)

Exception: A special resolution may be passed by giving notice for less than 21 days, if all the members entitled to attend and vote at any such meeting so agree.

[Chapter 1: LO 3]

Question 31

List the Conditions/Criteria for grant of license to a Company as “Associations Not for Profit”.

Answer 31

1. It is to be formed as a public limited company for useful social objects e.g. promoting science, arts, commerce, education, religion, sports, health, social welfare, charity or any other useful object.
2. It prohibits payment of dividend to its members.
3. It applies its profit and other income in promoting its objects.
4. Its objects and activities are not against the laws, and national interests of Pakistan.
5. Its** Memorandum and articles** shall be in accordance with specified form and approved by Commission.
   Commission may also impose additional conditions, and such conditions shall be inserted in memorandum and/or articles of company.

[Chapter 1: LO 4]

Question 32

What are Privileges and Obligation of an Associations Not For Profit.

Answer 32

On registration, such association shall enjoy all the privileges and obligations of a limited company. However, it does not have to add words “Limited” or “(Guarantee) Limited” in its name.

[Chapter 1: LO 4]

Question 33

List the circumstances under which license of an Association Not For Profit can be revoked.

Answer 33

1. If management has failed to comply with terms and conditions subject to which a license is granted, or
2. If affairs of the company are against public interest, or
3. If company has failed to file with Registrar its financial statements or annual return for 2 consecutive years, or
4. If company has acted against the laws, and national interests of Pakistan, or
5. Number of members is reduced below 3, or
6. If:
   a. company has conducted unlawful or fraudulent activities, or
   b. its management fails to maintain proper accounts, or commits fraud, or
   c. Its management is involved in terrorist financing or money laundering, or
   d. Management refuses to act according to requirements of Memorandum or Articles or Companies Act, or Directions of Registrar and Commission, or
   e. Company is not carrying on its business or is not in operation for one year, or
7. If it is just and equitable to revoke license.

However, before revocation, Commission shall:
1. give written notice to company of its intention to do so, and
2. provide an opportunity of being heard.

[Chapter 1: LO 4]

Question 34

What are requirements to be completed by company on revocation of its license as an Association Not For Profit:

Answer 34

If license of the association is revoked by Commission:
1. Company shall stop all of its operations except recovery of amounts receivable, if any.
2. Company shall not ask or receive donation from any source.
3. Within 90 days from revocation of license (or such extended period as may be allowed by the Commission), all the assets of the company shall be transferred to another company (after payment of liabilities) which is registered as associated not for profit, preferably with similar objects.
However, company can retain reasonable expenses for voluntary winding up of company or making application to Registrar for removing its name from his records.

[Chapter 1: LO 4]

Question 35

What further proceedings are required when an Association Not For Profit transfers its net assets on revocation of license.

Answer 35

Report to Registrar:
After compliance with the above requirements, company shall file a report to Registrar within 15 days which shall include specified information and documents.

Proceedings for Winding up:
Within 30 days of acceptance of the report by Registrar, board of directors shall start proceedings for voluntary winding up of company, or making application to Registrar for removing its name from his records.

[Chapter 1: LO 4]

Question 36

What are Commission’s Powers if a company fails to meet requirements on revocation of license as Association Not For Profit.

Answer 36

If company fails to meet any of the above requirements within the specified or extended period (if allowed), Commission may:
 appoint an Administrator to manage affairs of the company, and
 initiate necessary proceedings for winding up of the company.

[Chapter 1: LO 4]

Question 37

Describe Restrictions on members and Officers of an Association Not For Profit on revocation of its license and transfer of its assets.

Answer 37

If, due to revocation of license, net assets of a company are transferred to another company, members and officers (or their family members) of the first company shall not hold any office in the later company for 5 years from the date of transfer of assets.

[Chapter 1: LO 4]

Question 38

Which associations are required to register themselves as a company.

Answer 38

Every partnership or association of person which consists of more than 20 persons and is formed for the purpose of gain, is required to be registered as a company.

Exceptions:
Obligation to register as a company does not apply on following:
1. A partnership of lawyers, accountants or other profession who are not allowed by law to practice as a limited liability company (e.g. CA Firms).
2. A society, body or association of persons incorporated under any law in Pakistan.
3. Joint family carrying on joint family business.
4. Partnership of two or more joint families where total number of members (excluding minors) do not exceed 20.

[Chapter 1: LO 5]

Question 39

How the name of a proposed Company can be reserved.

Answer 39

• Promoters make application (in specified form and manner with a specified fee) to Registrar to reserve a name for proposed company. Name is reserved for a period not exceeding 60 days.
• If registrar refuses to reserve the name, an appeal can be filed to Commission within 30 days of the refusal. Order of Commission shall be final.
• If name is reserved by furnishing incorrect information, such reservation will be cancelled and company will have to change its name if registered. Applicant will be liable to a penalty.

[Chapter 1: LO 5]

Question 40

What is the conclusive evidence of Registration of a Company.

Answer 40

If registrar is satisfied that all requirements of Companies Act 2017 have been met and documents are valid, he shall register the memorandum and other documents, and shall issue “Certificate of Incorporation”. This certificate shall be signed/authenticated by Registrar.
Certificate of incorporation is the conclusive evidence of incorporation of company

[Chapter 1: LO 5]

Question 40

Which documents are required to be filed with Registrar for incorporation of a Company.

Answer 40

An application (on specified form) is filed with Registrar alongwith following information/documents:
* Memorandum of Association signed by subscribers, duly witnessed and dated.
* Articles of Association signed by subscribers duly witnessed and dated (optional for company limited by shares)
* Declaration of compliance with requirements of Companies Act 2017 regarding incorporation.
* Address for correspondence is notified (till Registered Office is established).

[Chapter 1: LO 5]

Question 41

Which information is included in “Certificate of Incorporation”.

Answer 41

 name of company,
 registration number,
 date of incorporation,
 status (public or private) and
 liability of company (limited by share, limited by guarantee or unlimited).

[Chapter 1: LO 5]

Question 42

On what grounds, Registrar can refuse Registration of a company.

Answer 42

Registrar may refuse to register a company if:
* any document is defective (e.g. there is error, omission or not properly authenticated) or
* does not comply with requirements of law.

[Chapter 1: LO 5]

Question 43

What Options are available to Subscribers if Registrar refuses Registration of company.

Answer 43

1. Subscribers may remove deficiency in documents and may file revised documents within prescribed time, or
2. Subscribers may file an appeal to Commission in writing within 30 days of refusal by Registrar. Decision of Commission on this matter shall be final and an appeal cannot be filed against such decision.

[Chapter 1: LO 5]

Question 44

What are the Effects of “Registration” of Memorandum & Articles:

Answer 44

1. A body corporate has been formed with name stated in certificate of incorporation.
2. The body corporate can perform all functions of an incorporated company i.e. separate legal status, perpetual succession and having its own common seal.
3. Company shall have same Status and Registered office as mentioned in the application for registration.
4. **Subscribers become members **with limited liability, and also become liable to acquire initial shares (if company is limited by shares).
5. Persons named as proposed director in articles, are deemed to have been appointed as director.

[Chapter 1: LO 5]

Question 45

Who is liable for contracts made for company but before incorporation of a company.

Answer 45

A company cannot be held liable for pre-incorporation contracts, because company did not exist at time of contract. Promoters are personally liable for those contracts.

[Chapter 1: LO 5]