LEGAL & REGULATORY ENVIRONMENT IN BUSINESS (EMBA_LAW526), IBHM-DUHS, FALL -2024

DOCTRINES OF COMPANY LAW

1. VEIL LIFTING
Lifting the veil of incorporation refers to situations in which the law and judiciary would not regard the
corporate personality as separate from its shareholders, such that the shareholders’ personal assets may
be utilized to pay off debts. This principle defies the Salomon principle such that it may not be abused at
the expense of the creditors.

There are two types of veil lifting:

(i) Statutory veil lifting

There may be instances where a parent company owns several subsidiary companies in which it is the
sole shareholder. Therefore, certain provisions were made in the Companies Act, 2017 where parent
company was made bound to produce group accounts and the details of shares it holds in the
subsidiary companies, their names and country of origin. This has been done to curb the possibility of
a company committing fraud and avoiding liability. Fraudulent trading is a criminal offence, whereas
liability for debt in case of insolvency shall has been covered under the law. In case fraudulent trading
is proved as the objective behind organizing a company, then its shareholders, directors and
sometimes employees may be called upon to pay off or contribute in the payment of debts in the name
of the company.

Point of no return is said to be the point where the financial performance of a company is beyond the
bar such that a reasonable director would stop trading and liquidate the assets to pay off debts. This
may come before seven years. If a director continues to trade beyond this point, then he is liable for
contributing to the company’s debts. The Companies Act 2017 ensures that the directors of a company
made informed decisions while carrying on with the business despite the losses incurred, applies the
test of reasonability for acting in such accord, and whether they took reasonable steps to prevent loss
or not.

(ii) Judicial veil lifting

Veil lifting may be challenging in cases where fraud on behalf of the owner/ director or company is
difficult to prove. Judiciary has been less eager to lift the corporate veil applying stricter interpretation
of Salomon principle. The court held that when a company is created for the sole purpose of tax evasion,
then the corporate veil shall be lifted to hold the person behind it accountable. The court would look
at the true nature of the transactions.

Foss v Harbottle case laid down the rule that if any loss is suffered by the company due to negligent
or fraudulent actions of its members or directors, then the action can be brought in respect of such
losses, by the company against such members or directors.

Adam v Cape, is another landmark case that has narrowed the application of veil lifting:

• In case of parent company being the principal financer of the subsidiary or have same economic
interests as the subsidiary
• When a company is a mere façade or sham
• Where subsidiary is an agent of the company, with day-to-day control over the subsidiary, through
an agency agreement. Relationship of an agency may be proven either through an express
agreement or implied by the conduct of the subsidiary

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Author: Adv. Asma Amjad (Pharm. D, LLB Hons.), LAW526/AA-01
 LEGAL & REGULATORY ENVIRONMENT IN BUSINESS (EMBA_LAW526), IBHM-DUHS, FALL -2024

2. ULTRA VIRES DOCTRINE

Registered companies are required to submit an object in their memorandum of association, to avoid
exploitation of corporate status and limiting companies’ operations in public interest. Companies cannot
operate outside their powers i.e. ultra vires act. If they acted ultra vires, the act would be considered as
void. This was important for public bodies to protect democratic rights and legitimacy. In case of a
registered company, the ultra vires doctrine ensured protection of the rights of shareholders and creditors,
as through restricted power, the directors were under obligation to use the funds for a particular authorized
transaction.

3. DOCTRINE OF PUBLIC NOTICE

The article of association and memorandum declaring the object clause of the company are public
documents, therefore, it is expected that the outsiders dealing with the company would have knowledge
about its objects, and in case of an ultra vires transaction, they are assumed to have knowingly entered in
to such a contract. The doctrine of public notice combined with ultra vires doctrine would have the
injurious impact of leaving a third party with a void and unenforceable contract with the company.
However, a company may participate in transactions that are incidental and consequential to their objects
which allows them freedom to operate to some extent.

4. CORPORATE OPPORTUNITY DOCTRINE

Corporate opportunity is viewed as company asset and by misusing it in one’s own interest, it may amount
to misappropriation. A director may be held as accountable to the company for the profits he made while
entering into a personal contract with the client that was to be secured for the company. It was irrelevant
that he was approached by the client personally and they were not to enter into a contract with the
company in the first place. The director got the opportunity while working as the director in the company
and it was his duty to disclose the personal opportunity and interest to the company. Even if the
opportunity or benefit acquired is out of the scope of company’s object or business, if the benefit is availed
while working in the capacity of director in the company, breach would be found. In case a business
opportunity is turned down by a director in good faith as the transaction would not be commercially viable
for the company, then he may not be held liable.

However, the duty does not restrict a director form using his knowledge or skill acquired as a director to
make decisions, or take initiatives to set up a competing business but only to operate after his directorship
ceased. He may utilize confidential information or know how for this purpose but not the trade secrets.
Law recognizes that just a conflict being formed in a situation does not give rise to a breach, and in such a
situation how the director acts would decide if there is breach of duty or not.
5. COMPETITION POLICY

The Competition Commission of Pakistan (CCP) ensures free competition in all spheres of commercial and
economic activity, enhance economic efficiency, and to protect consumers from anticompetitive behavior,
by public or private undertakings, under the Competition Act 2010. The law prohibits situations that tend
to lessen, distort, or eliminate competition such as:

(i) Abuse of Dominant Position

The abuse of a dominant position through any practice that prevents, restricts, reduces, or distorts
competition in the relevant market, including but not limited to, reducing production or sales,
unreasonable price increases, predatory prices, charging different prices to different customers
without objective justifications, making conditional sale of goods or services on purchase of other

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Author: Adv. Asma Amjad (Pharm. D, LLB Hons.), LAW526/AA-01
LEGAL & REGULATORY ENVIRONMENT IN BUSINESS (EMBA_LAW526), IBHM-DUHS, FALL -2024

goods or services, boycotting or excluding any other undertaking from producing, distributing or
selling goods, or providing any service.

The Act defines that “dominant position” of one or several undertakings in a relevant market shall
be deemed to exist if they can behave to an appreciable extent independently of competitors,
customers, consumers, and suppliers, and if its share in the relevant market exceeds more than 40%.

(ii) Prohibited Agreements

Prohibiting undertakings or associations from entering into any agreement or making any decision
in respect of the production, supply, distribution, acquisition or control of goods or the provision of
services, which have the object or effect of preventing, restricting, reducing, or distorting
competition within the relevant market. Such agreements include, but are not limited to, market
sharing and price fixing of any sort, fixing quantities for production, distribution or sale; limiting
technical developments; as well as collusive tendering or bidding and the application of dissimilar
conditions.

(iii) Deceptive Marketing

The Act prohibits deceptive marketing practices, such as any advertising or promotional material
that misrepresents the nature, characteristics, qualities, or geographic origin of goods, services or
commercial activities. An Office of Fair Trade (OFT) has been created within CCP specifically to
oversee consumer protection issues under the Act.

(iv) Approval of Mergers

The law prohibits mergers that would substantially lessen competition by creating or strengthening
a dominant position in the relevant market. The Act requires prior notice of proposed mergers or
acquisitions that meet legal thresholds stipulated. If the Commission determines this to be the case,
it can prevent mergers or acquisitions, set conditions or require divestitures.

6. CORPORATE RESOLUTIONS

A corporate resolution is a written document created by the board of directors and shareholders of a
company detailing a binding corporate action, that:
• keeps the board accountable to various laws and regulations as well as ensure that the board is
upholding its fiduciary duty to the shareholders.
• provides a paper trail of the decisions made by the board and the executive management team.
• helps the corporation to remain independent from its owners by ensuring that the decisions made
by the board and the corporate executives do not create a conflict of interest with the owners

“Ordinary resolution” means a resolution passed by a simple majority (more than 50%) of such
members of the company entitled to vote as are present in person or by proxy or exercise the option to
vote through postal ballot, as provided in the articles or as may be specified, at a general meeting.

“Special resolution” means a resolution which has been passed by a majority of not less than three-
fourths (75%) of such members of the company entitled to vote as are present in person or by proxy or
vote through postal ballot at a general meeting of which not less than twenty-one days’ notice specifying
the intention to propose the resolution as a special resolution has been duly given. Provided that if all
the members entitled to attend and vote at any such meeting so agree, a resolution may be proposed and
passed as a special resolution at a meeting of which less than twenty-one days’ notice has been given;

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Author: Adv. Asma Amjad (Pharm. D, LLB Hons.), LAW526/AA-01