Commercial Law

Spring 2022

Haroun Rahimi, Ph.D.

Introduction to the Class

What are we going to study in this class?

Introduction to commercial law

How commercial laws affect your life?

Introduction to commercial law
• What is commercial law?
• Who is a merchant?
Every individual who has attained the age of eighteen and there is no legal impediment to
his legal actions in terms of personality and kind of business may engage in commercial
activities. (Article 4 Commercial Code)
Any person, including individuals and corporations, who has legal commercial capacity
and engages, in his own name, in one or more commercial transactions and makes this
occupation as his usual profession shall be considered merchant. (Article 8)
• What are the sources of commercial law? (Article 2 of Commercial Code)
Commercial disputes shall be settled in accordance with legally binding agreements and, in
their absence, by reference to explicit or implicit meaning of commercial laws. If the
dispute may not be settled in the said way, commercial customs and practices shall apply.
Local and special customs and practices shall be preferred to general customs and
practices. In the absence of customs and practices, provisions of other laws to which
attribution is made shall apply. (Article 2 of Commercial Code)
Types of commercial transactions
• Ordinary commercial transactions
If a merchant or non-merchant purchases movable properties for sale or lease to
others and sell or rent those properties in their original or altered form, this sale or
rent shall be considered as a commercial transaction. (article 14 commercial code)
• Inherent commercial transactions
The following transactions shall be considered commercial notwithstanding the
intention of parties to the transaction: commission working, brokerage, transactions of
bills, drafts and cheques, money exchange transactions, transactions by private and public banks,
… transactions relating to mortgage …, establishing commercial companies and sale and
purchase of shares, concluding any kind of insurance contract... (article 19 commercial code)
• Any transaction of a merchant shall be considered as commercial unless
it is proved that it is ordinary. (article 20 commercial code)
Afghanistan Commercial Law Framework

• What does this statement mean?

“Afghanistan has a pluralistic legal system”

Formal
Sources of
Law in
Afghanistan
Afghanistan Commercial Law Framework

Formal Sources of Commercial Law

• 1957 Commercial Code
• 1965 Code of Commercial Procedure
• 2003 Law on Domestic and Foreign Private Investment in Afghanistan
• 2019 Law on Limited Liability Companies
• 2007 Law on Partnership Companies
• 2009 Negotiable Documents Law
• 2014 Law on Commercial Agreements and Sales of Goods
• 2018 Insolvency Law
Afghanistan Commercial Law Framework

Informal Commercial Practices in Afghanistan

• What are informal commercial practices in Afghanistan?
• What are informal commercial institutions in Afghanistan?
Afghanistan Commercial Law Framework

Discussion Questions
1. What are some differences between formal and informal
commercial law?
2. In your view, what might be some of the advantages and
disadvantages of formal commercial law?
3. Why do you think Afghanistan has worked to expand formal
commercial laws in Afghanistan?
4. What are some challenges that you might face as a lawyer working
within a system of legal pluralism?
THE DEVELOPMENT OF FORMAL
COMMERCIAL LAW IN AFGHANISTAN

1. Development of Formal Law

in Import and Customs Union

2. Development of Formal Law

in Afghan Banking and
Finance

3. Development of Formal Law

in Business and Beyond
THE DEVELOPMENT OF FORMAL
COMMERCIAL LAW IN AFGHANISTAN
FORMAL SOURCES OF COMMERCIAL
LAW
ü1957 Commercial Code
ü1977 Civil Code
ü1965 Code of Commercial Procedure
ü1990 Code of Civil Procedure
ü2005 Law on Private Investment
ü2007 Partnership Law
ü2007 Corporations and Limited Liability Companies Law
ü2015 Banking Laws
FORMAL SOURCES OF COMMERCIAL
LAW
ü2003 Law of Da Afghanistan Bank
ü2009 Law on Mortgage of Movable Property in Banking Transactions
ü2016 Customs Law
ü2009 Income Tax Law
ü2014 Law on Commercial Contracts and Sale of Goods
ü2016 Procurement Law
ü2007 Negotiable Instruments Law
FORMAL SOURCES OF COMMERCIAL
LAW
ü2007 Commercial Arbitration Law
ü2007 Mediation Law
ü2009 Trademark Registration Law
ü2008 Copyright Law
üPatent Law
INFORMAL COMMERCIAL PRACTICE
üHawala Market
üInformal Credit Market
üSar qufli
COMMERCIAL ENTITIES

Sophistication of business organization

Limited
Liability
Partnerships Company
Sole
Proprietorship

Separation of Ownership from Management

SOLE PROPRIETORSHIP
üA single person owns the business.
üThe owner is entitled to all of the business profits and is also liable
for all of the debts.
üNo need to consult with anyone else to make business decisions.
üMust only obtain a tax identification number.
üMust register with their district and municipal authorities.
FAMILY BUSINESSES

What are family businesses?

Do you think family businesses are sole proprietorship?

PROS & CONS OF SOLE PROPRIETORSHIP

PROS CONS
Ease of decision-making Limited talent, expertise, and potential
for customer relationships
Lower taxes* Limited equity financing
Limited durability
INCOME TAX RATES FOR SOLE
PROPRIETORSHIPS
PARTNERSHIPs

A partnership is a business form in which two or more people “carry on

business for profit as co-owners.”
Article 2 of Partnership Law of Afghanistan (2007)

Why would someone decide to form a partnership?

PARTNERSHIPs
1. General Partnership (article 21)
Established for the purpose of carrying out … business transactions between
two or among more persons with collective responsibility. If the capital of the
General Partnership is not sufficient … each of the Partners is responsible to pay
all the debts of the General Partnership.

2. Special Partnership (article 22)

Established for the purpose of carrying out … business transactions, in which
one or more Partners have unlimited liability (General Partners) and the rest of
the Partners have limited liability with a definite capital (Special Partners). The
capital of the Partners with limited liability can be divided into shares.
PARTNERSHIPs
3. Work Partnerships (article 23)
is an association of two or more persons who perform work or fulfill an
obligation for another person. The profits of the work of the partnership shall
be distributed between them as agreed by the partners.

4. Credit Partnerships
is a company in which two or more persons agree to buy goods on credit to sell
them and to share the profits and losses of the credit partnership. Each of the
partners shall be responsible for his specific part.
PARTNERSHIP AGREEMENT
• All forms of partnerships are governed by a partnership agreement.
• A partnership agreement is the agreement between business owners
outlining the rights and obligations of each owner.
• A partnership agreement can be oral if it is a work or credit
partnership (see Article 4) but it must otherwise be written for a
general or specific partnership (see Article 61).
PARTNERSHIP
AGREEMENT
PARTNERSHIP
• A partnership’s legal existence begins when it is recorded in the
Central Business Registry at the Ministry of Commerce and Industry.
(article 20 Partnership Law 2007)
• If a partnership enters a transaction before registration is complete, it
will still be held liable for any obligations that result. (id.)
• A partnership that is not registered yet will not be able to enforce any
rights against third parties. (id.)
• Partnerships may exist for a definite term or an indefinite period. If
duration is not specified in the partnership agreement, the
partnership is considered to have an indefinite duration (Article 26).
PARTNERS RIGHTS AND OBLIGATIONS
• Profits and Losses
How should profits and losses get divided among partners?
• Liability for Partnership Debts
What happens when an individual partner has a personal debt that she is
unable to satisfy with her personal assets?
What happens when the partnership has insufficient assets to pay its debts?
What happens if a partnership suffers loss as a result of negligent of a partner?
• Decision-Making and Control
Partners must designate at least one partner or other individual to “administer
the affairs of the Partnership.” (article 40)
Dissolving or
Liquidating a
Partnership
PROS & CONS OF PARTNERSHIP
PROS
Easier to establish
Bringing in more skills and assets
tax rates*
Ability to bring in equity financing
CONS
unstable over the longer term because a
partner’s death or departure can disrupt operations
and even force dissolution
individuals who contribute capital are personally
liable for the firm’s debts
Investments cannot be easily withdrawn so it can
be difficult for investors to cash out their interests
in the partnership without dissolution.
direct involvement by the partners in the
management of the firm can be complex and
inefficient.
LLCs
• LLC is probably the most common business form in the world.
• Afghanistan has a new law that governs LLC.
• LLC cannot offer share to the public.
• LLCs do not have publicly traded shares.
• LLCs are established by agreement of shareholders, not founders.
ELEMENTS of CORPORATE FORM
Elements Advantage

they are considered “commercial legal persons” and Ownership shares can be transferred without
have an indefinite life disrupting the business, making the business more
stable over a long-term period;
investors enjoy limited liability; Encourages risk-taking and diversification of risk

shares or stock in the company are freely It is easier for individual investors to cash out their
transferable between parties in most circumstances investment
the company is centrally managed by a board of Management can be centralized, specialized, and
directors elected by the shareholders. more efficient.
SEPARATE LEGAL ENTITY
• A corporation’s legal existence begins when its Articles of
Incorporation are signed by the shareholders of the company (the
incorporators) and registered with the Central Business Registry.
CENTRALIZED CORPORATE
GOVERNANCE
• the Articles of Incorporation establish how the company will govern
its affairs.
• The incorporators or the board of directors may also enact bylaws,
which are additional rules for governing the company.
• The rights and responsibilities of the company’s various participants—
including its boards, managers, shareholders, and other stakeholders—
and the procedures for making company decisions are referred to as
corporate governance.
CORPORATE
GOVERNANCE
*CHIEF
FINANCIAL
BOARD OF CHIEF EXECUTIVE OFFICER (CFO)
DIRECTORS OFFICER (CEO)
*GENERAL
SHAREHOLDERS
CONSULE
BOARD OF
SUPERVISORS
ADVANTAGES OF THE CORPORATE
FORM
• Limited Liability
• Moral Hazard
• Free Transferability of Ownership
• free transfer of ownership interests without disrupting the company’s
operation
Solving the Principle-Agent Problem: Shareholder
voting
• Issues that require shareholder voting
• election of directors and supervisors and their removal.
• amendments to the Articles of Incorporation (unless the amendment concerns
administrative details only);
• increase in the number of authorized shares of the company; and
• on the dissolution of the company.
• The issues about voting
• Method of voting
• Annual & Extraordinary Meetings
• Notification
• Mode of participation
• Number of votes
• Quorum
• Victory rule
• Written action
Collective Action Problem & Shareholder
Voting
• What is a collective action problem?
• The ways to get around collective action problem?
• allow shareholders to inspect the company’s records
• Allow shareholders to review the list of shareholders prior to a shareholder
meeting
Solving the Principal-Agent Problem
• Fiduciary duties and shareholder lawsuits
• The market for corporate control*
LLC Law 2018: Chapter 4
• Article 16: Incorporation
• Purpose: Commercial transaction and
commercial advertisements
• Equity is divided into shares and the
liability of shareholders is limited to their
shares
• Article 17: term of the company
• Article 18: Founders
• Founder(s) sign the articles of
incorporation
• Founder(s) can take decisions without
convening a meeting provided that all
founders sign the written decision
• Article 19: Articles of Incorporation
• Required: title, address, shares, numbers
of issued shares, the face value of shares,
and the class of shares
• Optional: purpose, priority right over
unissued shares or transfer of shares,
rules of liability of directors, other rules
that are not against the provisions of law
• Article 20: the inception of the
company
• Article 21: transactions before
inception of the company
• Article 22: the start date for board of
directors
LLC Law 2018: Chapter 6
• Article 25: issuance of shares
• New shares can be issued with the
consent of existing shareholders
provided that the priority rights are
respected
• Value exchanged for shares
• Article 26: the value exchanged of
shares
• BoD determines the value exchanged for
shares
• Shares are considered final and approved
once the exchange value is fully received
• Article 26: shares offering
• No public offering
• Public LLCs will be subject to future
regulation
• Article 27: ban on subsidiary
shareholders
• One LLC can hold shares of another
LLC
• The direct and indirect subsidiary of one
LLC cannot hold shares in the parent
LLC
• Shares of the parent LLC cannot be
transferred to its direct or indirect
subsidiary
LLC Law 2018: Chapter 7: BoD
• Article 29: BoD manages, directs, • Article 37: BoD can fill its own
and represent LLCs. vacancy
• Article 30: qualification and • Articles 39 – 41: meetings of BoD
number of directors • Article 42: quorum and majority
• Article 31: General Assembly • Article 43: committees
appoints/removes directors
• Article 44: financial audit
• Article 32: tenure of directors (max committee in large LLC
3 years)
• Article 45: duties of directors
• Article 35: non-executive directors (stakeholder approach)
• Article 36: General Assembly or • Article 46: derivative lawsuit
founders select chair of the BoD
LLC Law 2018: Chapter 7: BoD
• Article 47: illegal distribution of fees of directors
LLC’s assets
• Article 48 - 50: conflict of interest
• Article 51: financial balance sheet
• Article 52: compensation of
directors
• Article 53: bookkeeping obligations
• Article 54: hiring officers and
employees
• Article 55: LLC pays for the legal
LLC Law 2018: Chapter 8: General Assembly
• Article 56: annual and extraordinary
general meetings of shareholders
• Article 57: virtual attendance
• Article 58: extraordinary general
meeting
• Article 59: court-ordered general
meeting
• Article 60: written decisions
• Article 61-65: notice of the meetings
• Article 66: chair of board chairs the
general assembly
• Article 67: list of shareholders
• Article 68-69: shareholders’ voting
rights
• Article 71: quorum and majority
• Article 72: auditors
• Article 73: the right to inspect LLC
document
• Article 74 - 75: voting rights
agreement
LLC Law 2018: Chapter 9: Dividends
• Art 76: BoD decides to distribute dividends to shareholders
• Art 77: dividends cannot be distributed if LLC cannot pay its payable
debts, or its assets would be less than liability, or the capital reserve dips
below 5% of total values of LLC shares
• Art 78: capital reserve (5%-25%)
• Art 79: dividends can be paid in the form of cash, property, or shares
within 60 days from the BoD written decision.
LLC Law 2018: Chapter 12: Share Certificate
• Art 88: Share Certificate
• Art 89: Transfer of Shares
• Art 90: negotiability, ACBR, and LLC Share Book
• Art 91: unpaid shares
• Art 92: destroyed, lost and stolen shares
LLC Law 2018: Chapter 13: Dissolution of
LLC
• Art 93: BoD can approve a based on MoIC or shareholder
dissolution plan and submit to petition
GMS • Art 98: appointment of a receiver
• Art 94: following BoD and GMS • Art 99: dissolution order registered
approval, the dissolution resolution with ACBR
must be registered with ACBR
• Art 95: dissolution of LLC by
founders before issuance of shares
• Art 96: reversal of dissolution
within 5 days by shareholders
• Art 97: court may order dissolution
Bankruptcy
• Commencement and Opening of Case
A) Requirements for Commencing Case. An insolvency case shall be
commenced upon the occurrence of:
i. the filing of a petition by a Trader who is eligible to be a Debtor in
accordance with Article 4(a) (Eligibility to be a Debtor); or
ii. the filing of a petition by one or more Creditors of a Trader with an
aggregate value of Claims not less than AFN 700,000, which Claims are due
and unpaid for more than thirty (30) days; and
iii. in each case, the opening of the case by the Commercial Court in
accordance with the provisions of this Article.
Bankruptcy
Commercial
Court
• Duties of the Debtor
• Appointment of the Receiver
Third
Receiver
Parties

Creditors Debtor
Effect of Opening
• Suspension of Legal Action
• Continuation or Termination of Commercial Activities
• Meeting of Creditors
• Liquidation Plan
• Estate Property
• Turnover
• Transactions Subject to Recession
• Abandonment of Assets
• Treatment of Contracts
Sale of Assets and Distribution of Money
• The Creditors’ Approval
• Estate Bank Account
• The rights of secured creditor
• Administrative claims
• Priority of claims
1. Secured claims
2. Claims related to the funding acquired after the Commencement
3. Administrative claims
4. Unpaid employees’ wages up to three months
5. Taxes
6. Unsecured claims
7. Debtor
• Filing and Verification of Claims
• Distribution of Money from Collection and Disposition of Estate Property
Agreement for Settlement
• Treatment for secured creditors
Conclusion of Case and Appeals
• Upon conclusion of the administration of the insolvency case which includes
resolution of all disputes regarding Claims and Estate Property, turnover of property,
collection of transactions subject to rescission, and sale or abandonment of all Estate
Property, the Receiver shall submit to the Commercial Court a report of final
accounting for filing in the Official Insolvency Register.
• Upon approval of the final accounting by Creditors, the case will be considered
concluded and the Receiver shall have no further responsibility in connection
with the case.
• After approval of final accounting report, the Receiver shall submit to the
Commercial Court minutes of the final meeting of Creditors & where the
Debtor is not a natural person, an application for dissolution of the Debtor will
be filed.
• Following the expiration of the appeals period, the Commercial Court shall
where the Debtor is a natural person, certify that the Debtor is discharged of all
debts and provide notice to the Debtor.
Commercial Contracts
• What is a contract?

• What is utility of a contract?

• What law governs commercial contracts in Afghanistan?

• What is the principle of freedom of contract (parties’ autonomy)?

Contracts in Shar’iah: restrictions on
freedom of contract under Islamic law
• Riba

• Gharar

• Maysar
What is a contract?
A contract is “an agreement made for the purpose of creation, amendment, transfer or
elimination of rights within the limits of this Law that shall be formed between natural or
legal persons.” Article 3 LCCSG

Article 8 LSCCSG
1. Contracting persons are bound to perform contractual obligations
2. Contracting parties shall not amend, terminate, or cease enforcement of a contract
unilaterally, unless prescribed in the contract or another Law differently.
3. Contracts that are formed in accordance with Law shall be deemed valid by courts and
government administrations.
Elements of a Contract
Offer and
Acceptance
Offer and Acceptance
Subject and Cause
contracts must have a subject that is “possible, definite or determinable
and legitimate.” art 13 LCCSG

Cause specifies that there must be principal objective of the contract,

which is legitimate and not contrary to public order. art. 14 LCCSG
Contractual Conditions
Validity of Contract
• Valid contract: satisfy the specific and general legal conditions, formed by
authorized persons, free of invalidating conditions.
• Void contracts: unlawful and lack essential elements of a contract.
• Capacity

• Revocable contract: lack of consent of authorized person at the time of

formation
• Duress
• Fraudulent inducement
• Contracts executed by an unauthorized agent
Void Contracts
Exercise
Contractual Interpretation
• Clear Language

• Vague Language

• Missing Conditions
Textual
Interpretation
Vague Language
• Where language is vague, the intention of the contracting parties is more
important than the literal meaning of the worlds.

• To determine the intention of the parties, the court should consider:

• the nature of the transaction;
• the principle of consent; and
• the trust of the parties that would exist from customary practice in such transactions.

• Ambiguity in the contract should be interpreted in favor of non-drafting party

• Vagueness should be interpreted in favor of the person who owes the money—
the debtor.
Missing Conditions
• Where a provision seems to be missing, court will:
• If the parties have had previous dealings, conditions about quality, price, fees,
or location for performance will be determined based on those previous
dealings, unless some contrary intention is specified.

• If the contract is the first transaction, or past transactions may not

have been standardized. The gaps will be filled based on art. 60
LCCSG
Missing
Conditions:
art. 60
LSCCG
Exercise
Resolution of Contract
• Performance: perform the obligations that they’ve agreed to with good faith and
whatever is necessary to fulfill legal requirements, customary norms, and the goals
of the contract.
• Right of retention
• Anticipatory breach (art. 45-47 LSCCG)

• Breach
• Non-performance
• Partial performance
• Untimely performance
• Excused performance
Remedies for Breach: Specific Performance
• Specific performance for non monetary obligations
• It cannot be required where performance of the obligation is lawfully and
practically impossible
• It cannot be mandated when the subject of obligation does not require
specific performance or the costs of specific performance are unfairly high.
Remedies for Breach: Damages
• When the contract provides for the method of calculation of damages: liquidated damages
clause
• Court may amend liquidated damages when it deems appropriate

• When the contract does not provide for a method of calculation of damages, the court,
in Afghanistan, attempts to compensate the party so as to put it in the position it would
have been in if the contract had been completed: expectation interest
• the profits that the non-breaching party would have received if the contract was not breached;

• lost profits directly related to the breach of contract;

• and other calculable harms caused by the breach of contract.

Remedies for Breach: Damages
Remedies for Breach: Damages
• If expectation damages cannot be calculated, a court may find that the
non-breaching party is instead entitled to damages based on reliance
interest.

• While expectation interest seek to put the non-breaching party in the

position they would have been in if the contract was fulfilled, reliance
interests put the non-breaching party in the position it was in before
there was a contract
Exercise
Contract Termination
• Full performance

• parties mutually agree to terminate the contract, or agree to not require performance for the
remaining part of the contract, or if the person who has both the rights and obligations under the
contract is a single individual (and thus there is no need to repay the obligation).

• When contract time lapses provided that it is not extended by parties.

• A contract may also explicitly have a condition that gives one or both of the parties the right to
terminate the contract. If so, the party can terminate it upon giving notice.

• Termination is DIFFERENT than nonperformance and breach.

• Breach may lead to termination, but it does not affect the right to remedy

• Breach does not mean automatic termination. Until any of the conditions under Article 70 are met, the
parties’ rights and obligations continue to exist.
Termination
Nominate Contracts: Warehouse Contract
• Warehouse Contracts
• The warehouseman agrees to store goods and care for goods for the leasee
in accordance with the terms of contract.
• Warehouse is liable for the product under his/her care from the time he
examines and accepts the good until the time he/she delivers the good to the
leasee or someone appointed by him/her.
Nominate Contracts: Sale Contract
• Free Carrier Agreements (FCA)

• Carriage and Insurance Paid To (CIP)

• Transfer of Goods
• Transfer of the title
• Transfer of the risk
• Implied warranties
• Explicit warranties
Nominate Contracts: Sales Contract
• Remedies for Breach of Sales Contract by Buyer
Nominate Contracts: Sales Contract
• Remedies for Breach of Sales Contract by Seller
Nominate Contracts

• Insurance contracts (2005 Insurance Law)

• Administrative Law (Procurement Law)

• The National Procurement Agency

• Administrative Review Committee
Negotiable Documents
• Negotiability
Bill of Exchange (Draft)
Checks
Promissory Note
STEPS BETWEEN CREATION AND
PAYMENT
• Transferring an
Instrument
STEPS BETWEEN CREATION AND
PAYMENT
• Presenting a
Bill of Exchange
for Acceptance
STEPS BETWEEN CREATION AND
PAYMENT
• Presenting a Negotiable Instrument for Payment
STEPS BETWEEN CREATION AND
PAYMENT
• Payment and Discharge from Liability
DISHONORMENT
DISHNONORMENT
• Preventing dishnorment
• Accepting and Paying for Honor
• Receiving Compensation for Dishonor