Chapter 1 : Introduction to Company Law Company law in Pakistan has finally undergone the long awaited reform. A new law has now been promulgated, in the form of the Companies Act of 2017, after more than three decades of sporadic efforts. The new law brings about substantial, and hopefully beneficial, changes in the law. The basic structure of the law, however, remains the same. The trend in this law is to move as close as possible to the fundamental principles and standards that control this law all over the world. A synopsis of the changes made to the existing law will be discussed at the end of this chapler. Before we do that, a few words about the general meaning of a company and company law are in order so that the student beginning a study of this field knows what he requires for a deeper understanding of the subject. 11 Meaning of Company Law Company law, it is generally said, is a difficult subject. The difficulty is attributed to two main reasons.‘ The first reason is that there are certain prerequisites to the study of this law, but most students begin the study of company law without meeting all the basic requirements. These include a reasonable knowledge of contract law, an understanding of equity, transfer of property law and statutory interpretation.5 Some of these the student has not studied before he comes to face company law. In addition to this, it is said, that the student must possess a certain flexibility of mind that is needed to deal with the legal creation of corporate personality. In our view, it is this last requirement that is the most important. If the student is willing to grasp some of the intricacies of corporate personality, then the eres Dignam and John Lowry, Company Law, 7th ed. (Oxford: Oxford University Press, ve «5. Ibid. Scanned with CamScannerrest may be overcome. ‘Another reason that is often stated for the difficulty in the Subject not until the end of the course that the students are able to see how ie that ity parts.of company law fit together. The various pieces, of which the ji sag Ou, of company law is made up, do not fit together except towards the end Purr, therefore, not until the end of the course that the full picture of compra, ti, revealed, which is usually too late for a really good understanding of the fi law jg By way of illustration we may say that the core company law today, in te , almost all contained in the 1,300 sections and 16 schedules of the Companicc 2006, regulations made pursuant to that Act, and cases clarifying the application t the statutory rules and principles. And yet this does not cover matters of securig: regulation and insolvency. In Pakistan, the situation may not be as complex ai the UK, but it is somewhat complex. The intention in this book is to do our bese : Provide the whole picture from the start and to go on explaining it as we proces, with the various parts 5 . 1.1.1 Conceiving the Big Picture: The structure of this Book Company law lies at the core of the world’s capitalist system. The detailed rules of this law prescribe the framework within which the factors of production operate? Company law organises this framework by regulating two environments. The first of these is the company, which provides the organisational structure within which the production takes place. The second is the capital market through which the money is raised to finance the production process.® This capital market law is also called securities regulation or even the financial services law insofar as these apply io companies.’ In this capital market, investors supply the company with the capital itneeds. They do this by taking up securities that the company issues. These will usually be either share capital or debt securities, which give certain rights to their holders,gs we shall see within this book. The first Part of this book, "Nature and Foundations of Company Law,” begins with the meaning of company and company law. The new law has introduced certain new classifications of companies. This part first deals with various technical distinctions between different types of companies to see where they are placed in the general scheme of business organisation. As stated already, companies are treated by the law as having legal personality. This means that they are treated as being separate from the shareholders, implying that the company, and not the & Dignam and Lowry, Company Law, v 7. See, eg. John Lowry and Arad Reisberg, Pettet’s Company Law: Company Law & ~ Corporate Finance, 4th ed. (Essex: Pearson Education Limited, 2012), 3. 8, Ibid. 9. Susan McLaughlin, Unlocking Company Law, 2nd ed. (Oxford: Routledge, 2013), 4. "elmran A. Nyazee Advanced Legal Studies Institute Scanned with CamScannerNarort & FOUNDATIONS shareholders, is the owner of its property. ‘There is then the doctrine of limited lability that limits the losses of the aharehla , maintaining that the maximum amount that the shareholders stand to lose is the amount they have invested or agreed to invest. Thus, if the company becomes insolvent and goes into liquidation, the shareholders will not be required to make good the losses, beyond what they have lost in terms of their shares. It will not be wrong to say that the doctrine of limited lability has many effects but it has played a powerful role in enabling companies to raise large sums of capital from the public, as a result of which the companies have grown into huge organisations. There has been heated debate in the recent past about the extent to which this doctrine should be applied. The impact can be seen when a company causes collossal disa: sters leading to loss of life and property, not seen by the world in the past, yet the doctrine of limited liability protects the rich owners behind the company from liability. This first part then deals with the formation of the compi any and its registration, which are topics that are of substantial practical significance, The second Part of the book deals with “the constitution of the company.” The constitution of the company emerges from its basic documents; namely, the memorandum of association and articles of association. The new law has made a major change in the form of the memorandum. This may have some effect on the various doctrines that have dominated this topic and which elaborated how functions are divided between the shareholders and directors. The constitution of a company also permits shareholders to entrench rights. These rights can be altered by prescribed procedures so as to produce a system of checks and balances.” -The shareholders, by means of contractual arrangements called shareholder agreements, are able to entrench rights and make detailed provisions for an almost unlimited variety of contingencies.'!. Under the constitution, the power to manage the business of the company is vested in the board of directors. The powers of the company have been limited by the constitution, under-what is called the ultra vires doctrine. According to this doctrine, acts beyond those powers have been regarded as ineffective. This doctrine has now been curtailed by statute, but it remains to be seen how the powers of the directors to bind the company are to be limited. The related question of how a company enters into contractual relations with other legal persons is largely determined by the law of agency. This has been governed by the doctrine known as the “indoor management rule” and by the effect of limitations on the powers of directors and other agents contained in the constitution. In this part we will try to assess how these rules and doctrines may have been affected by changes in the new law, especially the memorandum. Part three is about “Corporate Governance.” Corporate governance has recently 10. Lowry and Reisberg, Pettet’s Company Law, 4. 11. Ibid. Advanced Legal Studies Institute imran A. Nyazee Scanned with CamScanner6 Company Law, s as an important aspect of company lay, ¢ stircied grenises] Satin The tira anuljses,the destin <2 Faia and to what extent corporate decisions must be taken, -tp[° oy, support extensive use of Jaw 10 improve corporate governance atternpy 4, Jegal content to corporate governance, The term corporate governance, jp, na denotes the system by which the company is controlled and governed, but ima yop large company it carries the additional connotation that the managers yj ne to be controlled, otherwise they will pursue their own interests, Consequeny it involves an analysis of the ways in which the law seeks to align the interes, of the managers with those of the shareholders.' The relationship betwew, the board of directors and the shareholders is governed by the provisions Fegulating th, calling of meetings and passing of resolutions that are supplemented by Provision, contained in the constitution of the company. As a primary alignment Mechanism, the law casts duties of care and skill on directors and fiduciary duties of Good faith. These duties are, in fact, owed to the company, rather than the shareholder, as individuals. Insufficiencies in corporate governance mechanisms have resulted in the appearance of codes of corporate governance, supplementing the legal requirements and relying on elements of self-regulation for compliance,’® The ney, law of 2017 provides for such codes. Litigation by shareholders is a last Fesort and historically the common law has discouraged it, in particular by developing doctrines that restrict the standing of shareholders to bring proceedings. In all this, the interests and remedies of minority shareholders are of great significance. We will examine most of these topics in this part. Following some authors, we have used the title of “Corporate Finance Law” for « 12. McLaughlin, Unlocking Company Law, 4. 13. Ibid.,3. “Corporate governance means different things to different people in different contexts. Whenever the term is used, the first question to ask is, in what sense is it being used by the writer? If this is not made clear, it is usually helpful to examine the context in which the term is being used. Subject to this caveat, two definitions of. ‘corporate governance are often referenced (as, for example, in the recent European Commission Green Paper, The EU Corporate Governance Framework (COM(2011) 164 final). The first is a definition laid down in 1992 in the Report of the Cadbury Committee, a Committee established by the Financial Reporting Council, the London Stock Exchange and the Accountancy Profession to consider the Financial Aspects of Corporate Governance. According to the Cadbury Committee (at para 2.5), ‘Corporate Governance is the system by which companies are directed and controlled’. The second definition is the one first provided by the Organisation of Economic Cooperation and Development (OECD) in 1999 and repeated in the preamble to its revised Principles of Corporate Governance in 2004 in which corporate governance 4s identified as one key element in improving economic efficiency and growth as well as enhancing investor confidence.” Ibid,, 5. 14. Lowry and Reisberg, Pettet’s Company Law, 5, 15, Ibid. Olmran A. Nyazee Advanced Legal Studies Institute : ONE Fecpoateg se — Scanned with CamScannerie Nature & Founvanions: Company Law # Part IV. This part is, therefore, concerned with basic doctrines of corporate finance and the techniques by which companies raise capital, The techniques include rules that apply to restrict the situations where capital raised can be returned to the shareholders. Techniques of corporate finance range from private Investments to venture capital schemes, and to an initlal public offering and flotation on the Stock Exchange.'* These and other techniques are made possible by the ability of the company to issue shares and to borrow in various ways, Once capital has been raised, the company comes under restrictions represented by the doctrine ‘of maintenance of capital, regulating how and when it can return capital to the shareholders and related matters. The acquisition by the company of its own shares is also covered in this part, “Securities Regulation” is covered in Part V of the book. Securities regulation is part of what is often called finance law. Finance law can be viewed as made up of three parts: banking law; the regulation of those who conduct investment business and the markets on which investments are traded; and, increasingly, the regulation of companies whose securities (shares and bonds) are offered to the public.!” Inclusion of this topic in a text on company law is probably a controversial matter. Securities regulation, or as it is sometimes called, “capital markets law,” is often thought to be a discrete field, separate and distinct from company law. Nevertheless, the new securities law of 2015 in the shape of the Securities Act, 2015 has included within it very important topics that we feel should be included in this book even if this is done very briefly. The final part is called “Winding up and Liquidation.” The new law, like the previous law, contains a large number of sections that deal with this topic.® These sections contain complex procedures for the winding up of solvent and insolvent companies and eventual dissolution of the corporate entity. Nevertheless, we will discuss these provisions as briefly as possible so as to avoid lengthening this book. 1.1.2 Limiting the Scope of this Book Company law and scholarship on company law have grown manifold in recent years making it difficult to cover the whole of even essential company law. For example, the UK Act of 2006 contains 1300 sections, several schedules and a large number of associated regulations. Writers usually employ three filters commonly used to limit the volume of material covered in books. These filters are as follows: * The focus will be on companies formed to run businesses for profit, nat 16. Ibid, 17. McLaughlin, Unlocking Company Lavo, 4. 18. Companies Act, 2017, pt. X. 19. McLaughlin, Unlocking Company Law, 2. Advanced Legal Studies Institute as ©lmran A. Nyaza Scanned with CamScanner‘eis bia xt DORSET seen nt Oe SOON ee eee cdrom ares NATIONS companies formed for charitable or other non profit-making purposes, * Only registered limited ability companies with’a share capital rather than other type of registered companies such as unlimited companies orcompante, limited by guarantee are to be discussed. * The Securities Act, 2015 may be ignored as is done by some writers who do not bring in discussions of securities regulation, nevertheless we will discuss the important topics included in this Act, 1.2 The Meaning and Definition of Company The word “company” is derived from the Latin word “panis,” which means bread, The. word “companis” means to eat bread together. The word corporation is used to signify the same meaning, and we shall be using the words interchangeably, drawing a distinction between the two where needed. According to Blumberg, “Reflecting on this concept of the corporation as a legal creation, Coke described the corporation as ‘invisible, immortal, and rest[ing] only in intendment and consideration of the law,’ while Blackstone introduced another characterization that has echoed since. He called the corporation an ‘artificial person.’ Chief Justice Marshall borrowed both of these characterizations in his celebrated opinions on the status of American corporations under provisions of the Constitution.’2°. The company is the creation of the state and possesses legal personality that enables it through its agents and representatives to do many of the things that a natural person does. The company is an artificial person, and its whole character and life depend on the law that brings it into being. The essential idea ofa company is found in the classical definition given by Chief Justice John Marshall in 1819 in Dartmouth College v. Woodward, 4 Wheaton (USS.) 518 (1819): A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of the law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence. These are such as are supposed best calculated to effect the object for which it was created. Among the most important are immortality, and, if the expression may be allowed, individuality; properties, by which a perpetual succession of many persons are considered as the same, and may act as a single individual. They enable a corporation to manage its own affairs, and to hold property without the perplexing intricacies, the hazardous and endless necessity, of perpetual conveyances for the purpose of transmitting it from hand to hand. It is chiefly 20, Phillip I. Blumberg, The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality (Oxford: Oxford University Press, 1993), 3. ©lmran A. Nyazee Advanced Legal Studies Institute Scanned with CamScannerNatur & FOUNDATIONS Company Law 28. for the purpose of clothing bodies of men, in succession, with these qualities and capacities, that corporations were invented, and are in use, By these means, a perpetual succession of individuals are capable of acting for the promotion of the particular object, like one immortal being, This {s one way of looking at a company, according to one theory of the corporation. There are other theories of the corporation and we shall have occasion to briefly view these theories, Nevertheless, the lawyer still looks at the corporation through the eyes of John Marshall, Some smaller definitions are as follows: A company is an association of Acompany is an artifict: with a perpetual succe: All these definitions ind: : cate several distinctive features of companies and these are listed in the following section. Persons united for a common object. al person created by law, having a separate entity ssion and a common seal. 1.3 . Distinctive Features of Companies Instead of defining companies, according to some, it is better to identify their distinctive features. Companies formed under this law have the following main features: » 1. They are corperations, Corporations are artificial legal persons invested by the law with most of the responsibilities of natural persons. John Marshall (1755-1835), Chief Justice of the US Supreme Court said, “A corporation is an artificial being, invisible, intangible, and existing only in the contemplation of the law.” This means that companies may own property, enter into contracts, inflict or suffer wrongs, sue and be sued and do many other things that are done by human beings. (They cannot marry, vote, become members of parliament or even become lawyers). The following case is mentioned in Smith and Keenon’s Company Law: In DPP v Dziurzynski (2002) The Times, 8 July, a Prosecution was brought against D, an animal-rights protestor, for harassing a company (B & K Universal Grow ip Ltd) by filming its vehicles going in and out of its premises and makin; g abusive remarks. The company brought a prosecution through the Director of Public Prosecutions under the Protection from Harassment Act 1997. The Divisional Court of the Queen's Bench ruled that the Prosecution failed because a company could not be regarded as a ‘person’ for these purposes. The Act envisaged harassment of a human being! This also means that the rights and liabilities of a cor mpany belong 21. Charles Wild and Stuart Weinstein, Smith and'Keenan’s Company Law, 15th ed. (Essex: Pearson Education Limited, 2011), 61. “Advanced Legal Studie$ Institute ©lmran A, Nyazee Scanned with CamScannerWig atal Moshe ses cies a an eames OUR E Din, 7 og to it, and to it alone, and cannot be enforced by or against its dir or members personally, The legal relationship between a conta? directors is that of principal and agent and not that of trustee and! be and 2. The liability of the members to contribute toward the payment of the eo net ny és usually limited. The members, in a majority of cases, are the oh ‘s i Their lability ts Limited to the value of the shares subscrite ellen Liability may also be limited by guarantee to the extent of the by Stated simply, this means that if the debts of the company, ata! but especially at the time of winding up, exceed its assets, the ary ting cannot be asked to satisfy these debts through their personal propentts is possible under the law to have a company with unlimited liability el such satisfaction will be required, or even to make the liability of on directors unlimited. POM Of the 3. Perpetual succession, A company has continuous existence and its li not affected by the death, lunacy, insolvency or death of its membor:*,* Justice Marshall has stated, the members may come and go, but the ci nos continues its operation as long as it fulfils the requirements of the int which it has been created. This coming and going of members, without 2 effect on the life of the company, is called perpetual succession, os 4. Common seal. A company being an artificial person cannot sign do The law has, therefore, provided for the use ofa common seal, wilh then ham of the company engraved on it, as a substitute for its signature. Any document bearing the common seal of the company and signed by at least two directors binds the company. 5. Transferability of shares. Members of a public limited company are free to transfer the shares held by them to any person. These shares are usually sold at the stock-exchange. In a private company, however, there is a restriction on such transfer and the shares cannot be traded on the stock exchange. 6. Separation of ownership and management. The number of members or shareholders in a company is usually very large and all of them cannot take part in the direct management of the company. Companies are managed by professionals and the shareholders leave these affairs to them. A characteristic of the company, therefore, is the separation between management and control. Such a separation is not found in a partnership. mn, The Anatomy of Corporate Law says: There are five of these characteristics, most of which will be easily recognizable to anyone familiar with business affairs. They are: legal personality, limited liability, transferable shares, delegated management under a board structure, and investor ownership. These characteristics respond—in ways we will explore—to the economic exigencies of the large modern business ‘Advanced Legal Studies Institute ©lmran A. Nyazee Scanned with CamScannerNaturs & Founpations Company Law 31 enterprise. Thus, corporate law everywhere must, of Necessity, provide for them. ‘To be sure, there are other forms of business enterprise that lack one or more of these characteristics.” But the remarkable fact—and the fact that we wish to stress—is that, in market economies, almost all large-scale business firms adopt a legal form that possesses all five of the basic characteristics of the business corporation. Indeed, most small jointly-owned firms adopt this corporate form as well, although sometimes with deviations from one or more of the five basic characteristics to fit thefr special needs.2? 1.4 Company Law, Corporate Law or Corporations Law? The terms company law, corporate law and corporations law are somtimes a matter of confusion for students. We give below an explanation provided by Lowry and Reisberg. The authors say that it has become quite common in England in recent years to see the American term “corporation” used instead of “company.” Some universities, they state, have chairs of “corporate” law. Courses on company law in American universities are usually called “Corporations Law” and their legislation, State “corporations” statutes, In our own universities we now have LLM programs on “Corporate Law.” Over the years the word “company” has been used in the UK instead of “corporation” Probably mainly for historical reasons. Pakistan also follows UK in this respect. The early joint stock companies used “company” rather than “corporation” and the word became part of the title of the statute which was the foundation of modern company law, the Joint Stock Companies Act 1844. Since 1862 the statutes have been, entitled “Companies Act” and their provisions invariably refer to “company” and\“companies.” Nearly alll the textbooks speak of reompany law” and university courses are usually similarly titled. However, the UK Companies Act, 2006 makes it clear that a company is a corporation, and, for example, s. 16 (2) of the Companies Act 2006 Provides that the effect of registration under the Act is that from the date o! “incorporation” the members of the company “shall be a body corporate.” Section 2(9) of the new Companies Act, 2017 states the following: “body corporate” or “corporation” includes— (a) accompany incorporated under this Act or company law; or (b) a company incorporated outside Pakistan, or () a statutory body declared as body corporate in the relevant statute, but does not include— 22. Reinier Kraakman et al,, The Anatomy of Corporate Lave: A Comparative and Functional Approach, 2nd ed. (Oxford: Oxford University Press, 2016), 14. Advanced Legal Studies Institute ; Olmran A. Nyazee Scanned with CamScannerots (i) a co-operative society registered under any law relating to ¢ ail societies; or F ve (i) any other entity, not being company as defined in this Act or an law for the time being which the concerned Minister-in-Charge of Federal Government may, by notification, specify in this behalf; ~ Thus, our law considers the term “corporation” to be the same as “bog corporate,” and perhaps a slightly wider concept than company. The term “ay other entity” includes corporation sole, and probably should include a limited liability partnership permitted under a recent law although It 1s a Jegal person20 Nevertheless, section 2(d) of the Limited Liability Partnership Act, 2017 says the following: (a) "body corporate” includes, (i) limited liabilily partnership registered under this Act; (i) limited liabilily partnership registered or incorporated outside Pakistan; It is suggested that the SECP should reconcile the definitions in the two Acts. The problem with using the word “corporations” instead of companies in English law is that, even in the present day, “corporations” is a wider concept than “companies.” There are two main types of corporations—corporations “sole” and corporations “aggregate.” A corporation sole is basically an office or public appointment that is deemed to be independent of the human being who happens to fill the office from time to time. Originally most corporations sole were of an ecclesiastical nature so that archbishops, bishops, canons, vicars and so on were, and still are, corporations sole.* But there are also many lay corporations sole, such as the Sovereign, government ministers (for example the Secretary of State for Defence) and non-ministerial offices such as the Treasury Solicitor. A corporation sole will have the normal incidents of corporateness such as perpetual succession, 50 that when the individual occupying the office dies, the corporation sole, unchanged, is still there and can be filled by someone else, either immediately or at some later - point in time. Itis clear from all this that a company is not a corporation sole, hence, perhaps, the historical English law reluctance to use “corporation” as a synonym for “company,” for while all companies are corporations, not all corporations are ee 23. Companies Act, 2017, sec. 2(9). 24. Limited Liability Partnership Act, 2017, sec. 2(d). 25. Imran Ahsan Khan Nyazee, Jurisprudence, 3rd ed. (Islamabad: Federal Law House, 2015), ch. 18, 255 passim. ‘©lmran A. Nyazee Advanced Legal Studies Institute Scanned with CamScannerNature & Founpations A SENDATIONS Company Law companies. Thus a com, froma totality of individualeae * CO*POFAtlo The idea of the conve ‘Orporat earliest theories have booms OT '8 linke 33 N agstegate, a corporation made up 'd to several corporate theorles. The ston from the state); * Entity Theory (“a Dartmouth College), Sorporation is an artificial being”—Marshall, CJ in * Realist Theo: and oon Bae Soe mode by which natural individuals conduct business * Contract Theory (cont tract between state and corporation OR contract between state and corporatio; \ COrporatic id thircholderhtee tporation and shareholder, and shareholder and * Nexus of Contracts Theory, The last two meanings appear to converge and it Is th tarsal inten PPI ge is these meanings that we are sida jeanne batee Shareholders LY ranaoeners [> Workers The term “nexus of contracts”-can be traced back to Ronald Coase and his article written in 1937: The nature of the firm. In this article, he characterised the corporation as a set of transactions between those involved in the business, The basics of this theory were developed by scholars within the “law and economics” movement —— 26, Lowry and Reisberg, Pettet’s Company Law, 6. | Advanced Legal Studies Institute ©lmran A. Nyazee at Scanned with CamScannerx Law Nature & ay sor et | ie a ints being referred to as cont,, of the Chicago Seto rel OF Pn npraton by the contractatiang s"S te between individuals and its corresponding denial gy be summarised in the notion that the corporation ® ” This term was first conc eneen and Mecktin, ry of the firm: managerial behavior, agency cast se tnodel, individuals within ¢ busine! oi vate market contracts, bargains which are overseen and guided 5, mes Et the company is only a legal fletion, the manager fipes not act as an agent for the company but for the shareholder. The popularity of the “law ang economics” movement in America shifted the focus from the corporate form as . fictitious legal entity to a large body of contracts. Hidden within this network ct contracts is the idea of “corporate law,” which focuses on all these contracts, For the corporate lawyer, it is this body of contracts that constitute what we call corporate law. The contracts include those between the shareholder and the corporation, the management and the corporation, labour and the corporation, ang above all the creditors and the corporation, The last category of contracts is the most complex, because it may include contracts between the sellers and providers of services and the corporations (including involuntary creditors due to torts), but more specifically the contracts between the banks or financial institutions and the corporation. This last category in this case ranges from the simple promissory note to trust deeds for debetures and underwriting agreements for promoting shares, All these contracts then are the domain of the corporate lawyer. To these we may add new forms of contracts and legal devices (like poison pills) arising from hostile takeovers and mergers, This should explain what we mean by corporate law, Tt may be mentioned here that in practice it is still the entity theory that holds ground, The legal analysis of the various relationships created by the law and the remediés sought in disputes cannot ignore the entity theory altogether, Ideas about corporate governance beginning with the theories of Berle and Means have been taken over by the “law and economics” movement, with the major issue being whether the main goal is the maximization of profits or the promotion of the business. Corporate governance is seen as the “reduction of agency costs,” which are the structural risks associated with the honesty or dishonesty of managers, who may act in their own self-interest instead of maximizing profits. The application of a set of arrangement corporation as an entity may merely a “nexus of contracts. in their famous article of 1976: ownership structure. In their nexus 0! 1.5 Sources of company law The Companies Act, 2017 deals mainly with the organisation of the company, its creation, constitution, relationship to members and creditors, its management and winding up, The position of the company in modern business, however, ‘®lmran A. Nyazee Advanced Legal Studies Institute Scanned with CamScanner‘ompany Law ig not determined by these factors alone, ‘The administration of the company is now. widely entrusted to professional managers. The requirement of public accountability is a prominent feature of the Act and makes It necessary to pay due attention to the generally recognised principles of accountancy, ‘The law relating, to company finance extends far beyond the provisions of the Act. Those desirous of providing the company with funds have to take into account the requirements of listing on the stock exchange, the provisions of the securities and exchange law, the rights of the public shareholder, prevention of fraud and other matters. Workers participation funds and pension schemes have their own laws, as do the requirements of organised labour. Last but not the least are the tax aspects ‘of the company and cannot be ignored. Most of these matters are governed by independent laws, and some of these have been listed below. Besides the Companies Act, 2017, then, there are a host of other laws that directly or indirectly affect companies. Given below are only a few of such Acts, Rules and Regulations. We have not made an effort to separate the laws governing companies directly from capital markets law or from the laws pertining to Non-Banking Finance Companies. * Companies Act, 2017 « Part VIIA consisting of sections 282A to 282N of the Companies Ordinance, 1984 along with all related or connected provisions of the repealed Ordinance shall be applicable mutatis mutandis to Non-banking Finance Companies in a manner as if the repealed Ordinance has not been repealed. Securities Act, 2015 Limited Liability Partnership Act, 2017 Securities and Exchange Commission of Pakistan Act, 1997, with up-to-date amendments Single Member Companies Rules, 2003 Public Sector Companies (Corporate Governance) Rules 2013 ‘There are many other related laws, including regulations, but we do not wish to clutter tip the space here by reproducing their titles. 1.6 Outline History of Company Law It is believed that the foundations of the idea of the corporation can be traced back to Roman law. Blumberg summarises the position as follows: Advanced Legal Studies Institute ©lmran A, Nyazee Scanned with CamScanneroe. Pea ean a Pees SX Fo, in OS Centuries before there were economic or business Activities con, in corporate form, English ecclesiastical and local Bovernmenins ed Mt achieved recognition as legal units under the name of Corpor, These English concepts of corporations rested on medieval nor, Roman law, Although scholars vigorously disagree over the extents OF Roman law accepted concepts of the corporate personality and 1h that liability, it is quite clear that modern corporation law has, direct} indirectly, Roman roots, This accounts for the fundamental sim?" between English and Continental corporation law.27 ity In the following paragraphs we have briefly described the developm English company law. eat oy 16,1 From the 11th to the 16th Century: Earlier Forms In this period merchants had associations called Merchant Guilds that ex, in England. These associations often obtained monopoly rights from the through charters, The members worked on their own, but observed the Tules |, down by the Guild, On occasions the members traded through joint accounts, 7 forms they used for this purpose were two: commenda and Societas. In the Islam World the sharkah and mudrebal were used, Its to be noted that the Commas Was the opposite of mudérabah insofar as the Mability of the worker was limited ih the latter, but it was unlimited in the commenda, In fact, the liability of the investor was limited in the case of commenda and he lost just his investment in case of total loss. In societas all the members Participated in the business. The S0cletas developed into the modern partnership, while the commenda became the limited Hability partnership about which we will have to say something later in this book, In the fourteenth century, the word “company” was first used by trading members to trade overseas with forelgn countries, . 1.6.2 From the 16th Century Until 1825: Royal Charters Assoctations known as companies appeared in England in the real sense during the 16th century when the Tudor monarchs granted charters of incorporation to many companies of merchant adventurers trading in different parts of the world, eo 27, Blumberg, The Search for a New Corporate Personality, 3, says that for a historical review of these developments, see Carr, “Early Forms of Corporations,” in Select Essays in Anglo-American Legal History, vol. 3, 161 (1909); C. Cooke, Corporation Trust and Company (1951); W. Holdsworth, History of English Law, vol. 3, 469-90 (5th ed, 1942), and vol. 8, 192-222; L. Gower, Principles of Modern Company Law 25-41 (4th ed. 1979), ©lmran A, Nyazee Advanced Legal Studies Institute Scanned with CamScannereAnONA Company Lamy During the 17th century companies started trading on behalf of merchants, each of whom contributed « part of the marchandine, ‘This form of cooperation was called “joint stock tracing.” ‘The capital contributed was not permanent, By the end of the 17th century these companion had developed permanent fixed capitals represented by shares which were freely tradeable, while the property of the company wan under the exclusive contro! of the board of governors. The method of Incorporation at this time was by royal charter and by Act of Parliament, 1.6.3 1720: Fear of Companies In 1720, Parltament came down with crushing severity against these companies when ft passed the Bubble Act, ‘The main reason for this was the South Sea Company. The South Sea Company assumed Britain's national debt and received in return a monopoly over British trade with the-South Sea Islands in South America, plus an annual interest payment, The shares of the company were driven up by speculation, fraud was exposed, and a collapse followed. The event came to be known as the South Sea Bubble, and It led to the Bubble Act of 1720, a law that curtailed the use of joint stock companies for over a hundred years. Because of the history of fraud and collapse, organisations resembling corporations were regarded with suspicion not only in England, but also in the United States. 1.6.4 Unincorporated Associations The Act was intended to prevent fraudulent and speculative schemes, like the South Sea Company, but it had the effect of suppressing innocent companies as well, This prohibited the use of corporations, unless the corporation was authorised to act as such by the Act of Parliament or Royal Charter, The Bubble Act, however, did not lead to the suppression of the “form” of the company. Unincorporated associations were formed which, in law, were large partnerships, but by ingenious devices were approximated to the form of compantéé having transferable shares. The constitution of these unincorporated associations was contained in their deed of settlement and much use was made of it in the formation of the trust. The deed of settlement was made between the various shareholders and a trustee with whom. the shareholders agreed to observe the provisions of the deed, The deed usually also made the shares transferable, The members of such companies had unlimited Mability, because in reality they were nothing more than large partnerships, .5_ The Formative Years—¥825 lo 1855: Repeal of the Bubble Act and Creation of Limited Liability ‘The history of modern company law begins in reality in the year 1825 when the Bubble Act was repealed, During the first two decades of the 19th century 1 Advanced Legal Studies Institute ©lmran A, Nyazee Scanned with CamScanner_ company bare __NST086 € Fong, ¢ wore brought in which the defendant so, ‘d of settlement of an unincorporated compet ts evealed the uncertainties 4," by and i 382 fF civil proceeding der the dee prea it ble Act. These proces selying on he The Bubble Act. The Act was, fharefors crepeated in 1825, repealing measure was purely negative and gave mai acetate "0 persons a wished to establish companies through a cheap an Ph of. - ethod, Ong other hand, in the courts it was established that upinco! Fo A companies Wee Jawful associations in common law, and their shares were freely transferable, Suc companies largely overcame the handicap of not being: inporporated. For limite liability, the companies were entering into contracts W ich provided that only , liable for the debts. The only problem was bet these devices were inadequate ang capital contributed would be able to sue in its own name. Nevertheless, a number o} escape liability un haphazard. 1.6.6 The Joint Stock Companies Act, 1844 In 1844, Parliament passed the Joint Stock Companies Act, which prohibited la and for the first time admitted the creation of joint stocy, unincorporated companies e ation, This Act withheld the admission of limited liability, by, companies by registr it was admitted by the Limited Liability Act of 1855, Another Act consolidated the provisions in 1856. In Pakistan (then India), the first Indian Companies Act was passed in 1850, In 1857 another act was passed and this extended the privilege of limited ability to joint stock companies, except banking and insurance companies. 1.6.7 Later Developments—1856 to 1910 The Companies Act 1862 was the first enactment to bear the short title “Companies Act.” This Act consolidated the earlier Acts. For the first time a model set of articles appeared as Table A of the First Schedule. In India this was given shape in the form of the Companies Act of 1860, This was recast in 1882, Further amending Acts were passed in 1891 and in 1895, In England, another consolidation Act was passed in 1908 and was followed by 18 amending statutes. The outstanding feature of this Act was the introduction of the private company. In India, this was passed in the shape of the Act of 1910, 1.6.8 . The Companies Act, 1913 Till the Companies Ordinance, 1984 ° Finally, in India, the Companies Act of 1913 was introduced. This was followed by The Companies (Foreign Interest) Act, 1918 and the Companies (Amendment) Act, 1930, In Pakistan, the Undesirable Companies Act, 1958, the Securities and Exchange Ordinance, 1969, the Companies (Managing Agency and Election Advanced Legal Studies Institute Imran A. Nyazee Scanned with CamScannerNature & Founpations Company Law 39 of Directors) Order, 1972 and the Companies (Shifting of Registered Office) Ordinance, 1972 were passed. A report mn Company Law Reform was published by the Commission established for that purpose in 1961 (based mostly on a similar Indian report). The Companies Ordinance, 1984 repealed all these laws, except the Securities and Exchange Ordinance, 1969 of which §§11-15 were repealed. The single member company (SMC) was permitted, The process of law reform was commenced with the publication of a concept paper. After a long drawn process, the Companies Act, 2017 has now been praca 7 . 1.7 The Companies Act, 2017: A Synopsis The new company law has finally been passed by the Parliament in the shape of the Companies Act, 2017. It is a comprehensive legislation with a preamble, 515 gections and eight schedules. Section 509 of the new law says: “The Companies Ordinance, 1984 (XLVI of 1984), hereinafter called as repealed Ordinance, shall stand repealed, except Part VIIA consisting of sections 282A to 282N, from the date of coming into force of this Act and the provisions of the said Part VIIA along with all related or connected provisions of the repealed Ordinance shall be applicabie mutatis mutandis to Non-banking Finance Companies in a manner as if the repealed Ordinance has not been repealed.”** The preamble of the new Act tries to capture the purpose of the new law in the following words: WHEREAS it is expedient to reform company law with the objective of facilitating corporatization and promoting development of corporate sector, encouraging use of technology and electronic means in conduct of business and regulation thereof, regulating corporate entities for protecting interests of shareholders, creditors, other stakeholders and general public, inculcating principles of good governance and safeguarding minority interests in corporate entities and providing an alternate mechanism for expeditious resolution of corporate disputes and matters arising out of or connected therewith; The statement of objects and reasons attached to the Bill said that amendments in the Companies Ordinance, 1984 were made piecemeal and were narrowly focused resulting in a disconnect and overlap in the reglulatory framework and that there was a dire need to review and revamp the thirty two year old legislation to provide a competitive legal framework for the corporate sector in Pakistan. The reform process was started a long time ago with the publication of a concept paper. see 28. The Companies Act, 2017 (ACT NO. XIX OF 2017), §509. 29. The Companies Act, 2017 (ACT NO. XIX OF 2017), preambl. Advanced Legal Studies Institute @lmran A. Nyazec Scanned with CamScannerCompany Law Natur & Pousany 40 book. In that book, we had 2007 edition of this We had recon, Ths was much before tage another reform and that a'concept paper (lig ina! hat the eubliahed several years ago and a commission was formed to Under, ) Ae epenenihe review of the law. This was followed by a lengthy period of Slleney, ac J bat the parr the SCE 4, 2006 was passed ini England, wriod, the Companies Act, sland, tty Fee Ee tomprehentive Compantes (Model Articles) Regulations 2007 443 a number of other regulations. Many new ideas had been introduced. The maj, focus, however, had been on small companies that had not been facilitated jn, the t as like director’s duties and derivative suits appeared to ha, Cekkaiir a ae ding to a BIS Consultation Reps from the US law on corporations. Acco published in August 2010, the key policy objectives of the UK Compantes Act 29, were: * to enhance stakeholder engagement and a longterm investment cultuy, (promoting wider participation, and ensuring decisions are based on , longterm view rather than immediate return); * to ensure better regulation and a “think small first” approach; * to make it easier to set up and run a company.° In India too, a concept paper was issued, and a comprehensive report called the JJ. Irani Report was published. After extensive consultation and deliberation, and borrowing much from the UK legialsation, the “Companies Act, 2013” was enacted as Act no. 18 of 2013, The purpose was the “easing [of] the process of doing business in the country and improving governance by making firms more accountable.” Pakistan has also passed a Limited Liability Partnership Act, 2017 (Act No XV OF 2017). . According to a presentation found on the SECP website, the new Act has borrowed much from the Indian legislation of the recent years. In particular, the Companies Act, 2013, the Company Secretaries ‘Act, 1980, The Securities and Enithange Board of India Act, 1992. It has also borrowed in a major way from the'Companies Act, 2006, the Insolvency Act, 1986, and the Company Directors Disqualification Act, 1986. The presentation also mentions the laws of other countries including those of Australia, New Zealand, Singapore, Malaysia and so on, The presentation provides a lengthy list of all the stakeholders with whom consultations were carried out about the proposed provisions and drafts of the new law, 30, www. bis. gov. uk/assets/biscore/businesslaw/doce/e/ 101362evaluationcompaniesact2006executiv. jummary. pdf. ‘@lmran A. Nyazee 3 Advanced Legal Studies Institute Scanned with CamScannerser \ caer: Nature & FOUNDATIONS Company Law _ fi o The broad aims of the new Act, sector and its stakeholders through a. as follows: besides the strengthening of the corporate vibrant regulatory framework, appear to be + To undertake a general reform of the law for companies and to adopt international best practices so that the law is brought in line with a harmonized law for companies all over the world. Corporate laws today cannot take a domestic approach. Global trade has created the multi-jurisdictional enterprise that requires harmonization “at the international level, + To bring corporate governance in line with international practices. + Providing a softer legal framework for companies having no stake of the general public in them. This means reducing the stringent requirements in the case of small private companies on the same lines that were adopted by the UK Companies Act, 2006 and the Indian Act of of 2013. * Protection of minority shareholders and the interest of creditors, with emphasis on rights of minority shareholders. + Encouraging and enabling maximum use of technology for all kinds of filings and reporting, and for introduction of a paperless environment in SECP. ‘These are the broad trends all over the world and have been followed in the making, of the new law. In addition to the above, we may mention a few specific measures here so that the reader may be on guard when he or she comes across the discussion of the topic within this book. We will mention only a few significant measures: * The UK legislation, followed by India, has dumped the objects clause of the memorandum of association. The new Act has followed suit and reduced the memorandum to a one-page document. This means all lawful businesses are allowed. The requirement now is to list the principal line of business and the name chosen should be commensurate with this line of business. This provision will affect the docrine of ultra vires as well as the doctrine of indoor management. It will also affect the powers of the board. * The law up until now was geared to focus on and serve the larger company. The UK and Indian laws have now emphasized that the starting point of company law reform should be small companies. This has affected a large number of provisions where things have been made easy for small companies. These will be taken up during the course of discussions in this book, Advanced Legal Studies Institute ‘©lmrain A. Nyazee Scanned with CamScanner2 ¢ This emphasis on smaller companies has led to new clase) “and many other provisions have been removed, a8 we shall see, < : Company Law _Naturr & Fu antes Compe Ding Ne ~t Fie companies: small companies, medium sized compaties and large rome F a\ There are others like real estate companies and agriculture con yi Pan ey ‘ requirements for filing many documents and, of keeping a company sec, "any ‘An enhanced use of technology is provided for to move towards a pa SECP and a corporate environment. This includes service of doe participation in meetings through electronic means, mandatory onling < and even payment of dividends. Those companies that do not have fini for availing these services will have the facility to use the SeVices S E-Intermediaries, which will be licensed bodies. Scanned with CamScanner