SUPPLIER DEVELOPMENT PROGRAMME

KP ECONOMIC DEVELOPMENT PROJECT

UNDP - PAKISTAN

COMPANY LAWS & FORMATION

ASIF JAH
BUILDING COMPREHENSIVE MARKETS & GENERATING EQUITABLE GROWTH
CONTENTS

What is Company?
Company Law
Distinctive Feature of Companies
Illegal Associations and Obligatory Registration
Companies and other Forms of Business Organizations
Type of Companies
Conversion of partnership into Companies
Private Companies and their privileges
Formation of Company
Memorandum, article & prospectus
Securities Regulations
The Securities Exchanges Commission of Pakistan, SECP

Supplier Development Building Comprehensive Markets & Generating

WHAT IS COMPANY?

The English word Company has its origins originally from the Late Latin word companion
companion, one who eats bread with you

A Company is:
An association of persons united for a common object
An artificial person created by law
Definition
A company can be defined as an "artificial person", invisible, intangible, created by or
under law, with a discrete legal entity, perpetual succession and a common seal. It is not
affected by the death, insanity or insolvency of an individual member.

Supplier Development Building Comprehensive Markets & Generating

COMPANY LAW
Objects of Company Law:
Company Law is branch of Law that govern Companies
Function of Company Law
To Provide an enabling environment for Companies & Corporations so that the economic growth and
social policies of the nations are strengthened.
To Provide minimum standards of business integrity and conduct on the part of businessmen and to
ensure effective participation and control by share holders is maintained
To Provide a regulatory system that attempts to minimize risks for businessmen
To Provide for adequate disclosure of information and proper auditing of the corporation (Public
Companies)
To Ensure Appropriate appointment of managers and they do not work against the interests of the
company
To Ensure that the interests of all players are protected while winding up a Company

Supplier Development Building Comprehensive Markets & Generating

COMPANY LAW - CONTINUED

DIVISIONS OF COMPANY LAW

1. Objects, Functions and Sources of Company Law
2. Meaning of Company and its Types
3. Choosing the Business Form
4. The Corporate Form (Pre-Incorporation, Incorporation & Commencement)
5. The Governing Documents of a Company (Memorandum & Article)
6. Financing: Share Capital & Loans
Divisions 7. Transaction in Shares, Profits and Dividends
8. The Corporate Structure (Members, Directors, and Officers)
9. Corporate Books & Records
10. Compromises, Arrangements and Reconstruction
11. Winding Up
12. The Regulating Body & its Procedures (SECP)

Supplier Development Building Comprehensive Markets & Generating

DISTINCTIVE FEATURE OF COMPANIES

Instead of defining companies, it is better to identify their features. Companies formed

under law have the following features:
They are Corporations
A corporation is an artificial being, invisible, intangible, and existing only in the contemplation of
the law. - John Marshall (1755-1835)
It can own property, enter into contract, inflict or suffer wrongs, sue and be sued
The Liability of the members to contribute towards the payment of the
companys debts is usually limited
The members, in majority of cases, are share holders
Perpetual succession
A company has continuous existence and its life has not effected by the death, lunacy, insolvency or
death of its members

Supplier Development Building Comprehensive Markets & Generating

DISTINCTIVE FEATURE OF COMPANIES CONTINUED

Common Seal
A Company being artificial person cannot sign documents. The law has, therefore provided for he
use of common seal, with the name of the company on it, as a substitute for its signatures
Transferability of the shares
Members of Public Limited Company are free to transfer the shares held by them to any person
These share are usually sold at stock exchange
In Private Company, there is restriction on such transfer and the shares cannot be traded on
stock exchange
Separation of Ownership & Management
Companies are managed by professional and the shareholders leave these affairs to them
because the number of members or shareholders in a company is usually very large and all of
them cannot take part in direct management of the company.

Supplier Development Building Comprehensive Markets & Generating

ILLEGAL ASSOCIATION AND OBLIGATORY REGISTRATION

Ordinance prohibits the formation of a partnership, an association, or a company of more than 20

persons without obtaining registration under the Ordinance
The condition is that such partnership can only be formed for Business Purpose or for the acquisition of gain
Associations that are not illegal The meaning of Illegal association does not include the
following
A society, body or association
That has obtained registration under some other laws, for example the Cooperative Societies Act.
For acquisition of gain that has not obtained registration - members does not exceeds 20 persons
Having more than 20 members not obtained registration - when acquisition of gain is not its purpose
A joint Family carrying joint family business. The term joint family is not defined in the ordinance.
A partnership of two or more joint families total number of members of such families not exceeding 20
A partnership formed to carry on practice as lawyers, accountants or any other professional - when such
practice are not permitted under law

Supplier Development Building Comprehensive Markets & Generating

ILLEGAL ASSOCIATION AND OBLIGATORY REGISTRATION CONTINUED

Consequences for the Illegal Association

Every Member should be fined i.e. Rs. 5000 Only
Every Member shall be personally liable for the debts incurred by the illegal association. In short
each member shall be sued separately for the entire liability
The price of any good sold by the association cannot be recovered
Cannot seek dissolution or winding up under the ordinance in accordance with the provision for
unregistered companies
Unregistered Companies
The term un-registered Company is not defined clearly in Ordinance
An Association, partnership or company that is not registered under the Ordinance or a previous
law, is to be treated as a legal un-registered company for purposes of winding up
proceedings.

Supplier Development Building Comprehensive Markets & Generating

COMPANIES AND OTHER FORMS OF BUSINESS
ORGANIZATIONS

Classification of Business Forms with Reference to Companies

Single Trader

Public
Partnership
Company
Limited Private
Limited by
Limited
Business

Liability Share
Forms

Partnership Single
Unincorporate Member
d Association Company
By General
Public Act For Profit
Corporation Company
By Special Limited by
Public Act Guarantee Not for Profit
Trust Unlimited
Company
Specialized
Type

Supplier Development Building Comprehensive Markets & Generating

COMPANIES AND OTHER FORMS OF BUSINESS ORGANIZATIONS CONTINUED

Classification of Specialized Types

Specialized Types

Special Kinds of Companies Forms of Business

Insuran Investment Modarab Unit Saving Cooperativ Building

Banks s s
Leasing
Trusts Banks es Societies
ce

Supplier Development Building Comprehensive Markets & Generating

TYPE OF COMPANIES IN GENERAL

Chartered Companies
This type of Company does not exist in Pakistan
Chartered Companies were established by the crown in England by grant of charter to persons
assenting to be incorporated.
For Example: Bank of England (1694), East India Company (1600)
Statutory Companies
Establish by Special Act (As described in the preceding figure)
Such Companies are usually formed to carry out some special undertaking
For Example: Railways, Water, power etc. Instances of such companies are State Bank of Pakistan,
State Life and PIA

Supplier Development Building Comprehensive Markets & Generating

TYPE OF COMPANIES IN GENERAL CONTINUED

Registered Companies
Companies registered under the Companies Ordinance, 1984 are called Registered Companies
Such Companies are registered under General Law (Companies Ordinance, 1984 )
Further divided into three classes

Companies for Profit Companies not for Profit Government Owned

Companies
Issue Stock to Share Registered under Registered under
holders Ordinance Ordinance
Three Classes Usually do not issue Government Hold
1. Public Company (May or Stock Majority Shares
may not listed on Stock Limited by Guarantee Different from statutory
exchange) companies
2. Private Company (With two
or more members
3. Single Member Company
(A Private Company with one
member) Development
Supplier Building Comprehensive Markets & Generating
CONVERSION OF PARTNERSHIP INTO COMPANIES

Sole proprietorship
An unincorporated business with one owner who pays personal income tax on profits from the business. With little
government regulation, they are the simplest business to set up or take apart.
From Sole proprietorship to Partnership
The most popular option for entrepreneurs is a Sole Proprietorship. However, a Sole Proprietorship works best when
the business has one owner; sometimes it is necessary or desirable to include another person. In this case, a
Partnership structure may be right for your business.
From Partnership into Limited Company
Partners and sole proprietors of business often turn their business into limited companies
Reason: They are grown to such sizes that is no longer safe to bear personal liability for debts
incurred
Procedure
Partners and Proprietors sell their business to the company they form
Take as the purchase price fully paid shares or debentures in the company
May also appoint themselves as a director

Supplier Development Building Comprehensive Markets & Generating

PRIVATE COMPANIES AND THEIR PRIVILEGES

A company having a share capital may be formed as a private or a public company

Private Companies Act
Introduced for the first time in Companies Act 1907/1908
1980 Act in Britain permitted one person to form such a company and also exempted from filing a
balance sheet - this is to protect the small investor from financially stronger rivals
Note: This protection is not available to small investors in Pakistan

Supplier Development Building Comprehensive Markets & Generating

PRIVATE COMPANIES AND THEIR PRIVILEGES - CONTINUED

Single Member Company

Single Member Company means a Private Company which has only one
member
Any Person may form a Single Member Company
All the requirements for Incorporation of a Private Limited Company
apply to Single Member Company
A Single Member Company can be converted into a Private Company on
increase in number of its members to more than one
A Private Company having two or more becomes a Single Member
Company by passing a special resolution for change in its status

Supplier Development Building Comprehensive Markets & Generating

FORMATION OF A COMPANY

Stages in Formation of a Company

A company comes into existence after a number of formalities, which are
generally grouped under four headings.

Supplier Development Building Comprehensive Markets & Generating

FORMATION OF A COMPANY - CONTINUED

Supplier Development Building Comprehensive Markets & Generating

MEMORANDUM, ARTICLE & PROSPECTUS

Memorandum of Association it is a memorandum stating that the subscriber :

a) Wish to form a company under Act, and
b) Agree to become member of the company and, in the case of company that is to have a
share capital, to take one share each
The Memorandum of Association must have the following six clauses:

Supplier Development Building Comprehensive Markets & Generating

MEMORANDUM, ARTICLE & PROSPECTUS CONTINUED

Article of Association The Article defines:

The duties, the rights, and the powers of governing body between themselves and the company at
large
The Mode and form in which the business of company is to be carried on
The Mode and form in which changes in the internal regulations of the company may, from time to
time; be made
The Following are usually contents of the Article of Association :
Definition of Important term & Allotment of Shares Exclusions
Phrases
Adoption of pre-incorporation Conversion of Shares into Meetings
contract Stock
Share Capital & rights of share Accounts & Audits Lien on Shares
holders
Share Certificates & share Common Seal of Company Transfer of
Supplier Development
warrants Building Comprehensive MarketsShares
& Generating
MEMORANDUM, ARTICLE & PROSPECTUS CONTINUED

Article of Association (Continued)

A Private Company must add:
1. Restrict the Rights to transfer its shares, if any
2. Limit the number of its members to fifty
3. Prohibit any invitation to the public to subscribe for the shares, if any, or debentures of the company
Prospectus
The advantage of Public Company is to raise money from Public by inviting deposits or by inviting
offers for the purchase of its shares or debentures.
The document used for such invitation is the Prospectus.

Supplier Development Building Comprehensive Markets & Generating

SECURITIES REGULATIONS
Origin of Security Laws
Modern securities Regulations arose in the aftermath of the great stock market crash of October
1929
US Congress studied the causes of this crash and came to the conclusion:
Investors lacked the necessary information to make intelligent decisions about buying, selling or holding
securities
Disrespectful sellers of the securities made outlandish claims about the performance of securities and sold
non-existent securities
Main Aim of Legislation
To require the disclosure of meaningful information about a security
Allow investor to make intelligent decisions regarding investment
To Impose Liability on those who make inadequate and erroneous disclosure of information
To regulate insiders, professional sellers of securities, securities exchanges, and other self
regulatory securities organizations
Main Task : To Impose a duty on all concerned to disclosure information even
when they were not asked by investors

Supplier Development Building Comprehensive Markets & Generating

THE SECURITIES EXCHANGES COMMISSION OF PAKISTAN,
SECP
SECP
The Securities Exchanges Commission of Pakistan, SECP has been established under
the SECP Act, 1997
Purpose
The establishment of SECP for the beneficial regulation of the capital markets, superintendence
and control of corporate entities and for matters connected therewith and incidental thereto
The Commission has an autonomous status and is a body of corporate
Main Functions
Regulations of securities market and related institutions like Central Depository Company, Credit
Rating Companies etc.
Administration of the Company Law
Regulation of Non-Banking Finance Companies like Leasing Companies, Investment Banks & Mutual
funds and Regulation of Insurance Business
Important Function : Incorporation/Registration of Companies. This task has been
entrusted to Registration Department, Company Law Division (Field Offices known as
Company Registration Offices, CROs)

Supplier Development Building Comprehensive Markets & Generating

 COMPANY LAWS & FORMATION

Supplier Development Building Comprehensive Markets & Generating