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CSS Past Paper 2017 Mercantile Law Descriptive (Part 2)

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CSS Past Paper 2017 Mercantile Law Descriptive (Part 2)
CSS | Past Paper | Group 6 | 2017 | Part 2 | Descriptive

Below is the solution to PART-II (COMPULSORY) of the CSS Past Paper 2017 Mercantile Law Descriptive (Part 2).

Question 2

Discuss the circumstances in which the veil of incorporation may be pierced in Pakistan referring to the relevant case law and statutory provisions?

Introduction

The veil of incorporation means a company is treated as a separate legal person from its shareholders or directors. This concept comes from the famous English case Salomon v. Salomon & Co. Ltd. (1897), where the court held that once a company is incorporated, it becomes a separate legal entity.

But in some situations, courts ignore this separation and “pierce” or “lift” the corporate veil to look at the real people behind the company. This is usually done when the company is used for fraud, illegal activities, or to avoid legal duties.

Circumstances When Veil May Be Pierced in Pakistan
  1. Fraud or Improper Conduct:
    If a company is formed or used to commit fraud or wrongful acts, the court can pierce the veil. This is to stop people from hiding behind the company to escape responsibility.
    • Case: Muhammad Shafi v. Malik Muhammad Arshad (PLD 2003 SC 387) – the court lifted the veil where the company was just a cover for personal dealings.
  2. Evasion of Legal Obligations:
    When a company is used to avoid existing legal duty or contract, the court may disregard the company’s separate identity.
    • Example: If a person transfers business to a company to avoid paying tax or to escape a contract, veil may be lifted.
  3. Protection of Public Interest or National Security:
    In matters involving public interest, national economy, or security, the state or courts may lift the veil to identify true owners or controllers.
    • Example: Security laws and SECP regulations may demand full disclosure.
  4. Agency or Sham Companies:
    If a company is just acting as an agent or is not a real independent business, the veil can be lifted.
    • Example: Dummy companies created just to hide money or assets.
  5. Group Enterprises or Holding Companies:
    In group companies where one company controls the other, courts may treat the group as one entity.
    • Case: Kohinoor Textile Mills v. BCCI (PLD 2004 Lah. 597) – veil was lifted to hold parent company responsible.
  6. Tax Avoidance:
    Where company is made only to escape tax, courts and tax authorities may ignore separate entity status.
Statutory Provisions in Pakistan
  • Companies Act, 2017 (previously Companies Ordinance, 1984):
    While it does not directly talk about veil lifting, courts interpret different sections to reach justice.
    For example:
    • Section 279: talks about personal liability of officers for fraudulent conduct.
    • Section 301: deals with investigation of ownership of company.
  • Income Tax Ordinance, 2001:
    Allows authorities to look behind the company structure to find real income earners.
  • SECP Regulations:
    The Securities and Exchange Commission of Pakistan can investigate companies under relevant rules and uncover true controllers.
Conclusion

While the basic principle in company law is that a company is a separate legal person, Pakistani courts do lift the veil of incorporation in special cases. This helps in stopping fraud, protecting public interest, and ensuring justice. The courts carefully analyze each case and apply veil piercing only when really needed. It’s not done lightly because corporate personality is important for business trust and law.

Question 3

Describe the legal rules and limitations for altering the memorandum and articles of association of a company?

Introduction

The Memorandum of Association (MOA) and Articles of Association (AOA) are two very important documents of a company. The MOA defines the basic structure and purpose of the company, while the AOA contains rules for internal management.

After registration, these documents can be changed but only under specific legal rules and limits. Pakistani law, especially under the Companies Act, 2017, tells us how this process works and what things companies can or cannot do while altering them.

I. Alteration of Memorandum of Association (MOA)

The MOA has different clauses like Name Clause, Object Clause, Registered Office Clause, Liability Clause, etc. Here are the rules for changing each:

1. Name Clause
  • A company can change its name by passing a special resolution and with approval of SECP.
  • If it’s a public listed company, name must also be approved by the Registrar.
  • New name must not be misleading or similar to existing companies.
2. Registered Office Clause
  • To shift office from one city to another within the same province, special resolution is required.
  • But if the shift is to another province, then permission of Company Law Board or Court may also be needed.
3. Object Clause
  • This is the most important part. Changing objects needs a special resolution and approval from SECP.
  • The reason must be genuine like expanding business, merging, etc.
  • Company must notify members and creditors, and no alteration should harm their interests.
4. Liability Clause
  • Generally cannot be changed to increase members’ liability without their consent.
  • Members must give written agreement if liability is being increased.
5. Capital Clause
  • Company can increase or reduce share capital through special resolution and with SECP approval.
  • Reduction also requires court permission in some cases.
II. Alteration of Articles of Association (AOA)

Articles can be altered more freely than MOA, but still there are limits.

Legal Procedure
  • Must pass a special resolution (3/4 majority).
  • The change must be registered with the Registrar of Companies within 15 days.
  • New articles must not violate the MOA or the law.
III. Limitations on Alteration (MOA & AOA)

The law puts some checks to avoid misuse of powers.

  1. Must Not Be Illegal:
    No change should go against any provision of the Companies Act, 2017, SECP rules, or any other law.
  2. Should Not Be Fraudulent or Oppressive:
    Alteration should not hurt minority shareholders or be done just to benefit a few.
  3. Court Can Intervene:
    If alteration is unfair or causes loss to creditors/shareholders, the court can cancel or block it.
  4. Public Interest:
    SECP and government can stop changes that are against the public good or national interest.
  5. Must Be Done in Good Faith:
    Company must have genuine reason to change its structure or objects.
Important Case Laws
  • Ashbury Railway Carriage v. Riche (1875):
    Shows that a company cannot go beyond its object clause. If it wants to, it must change the MOA properly.
  • Sidebottom v. Kershaw Leese (1920):
    Company can change AOA even to force out a shareholder if it’s done fairly and in interest of company.
Conclusion

Changing the MOA or AOA is possible but not easy. The law gives this power to companies but with strict rules and limits. The company must act honestly, follow proper legal procedure, and always keep the interest of shareholders, creditors, and public in mind.

Question 4

Describe the features of partnership and the legal status of a minor partner in a partnership?

Introduction

A partnership is a business form where two or more people agree to share the profits and losses of a business. In Pakistan, it is governed by the Partnership Act, 1932.

This form of business is common because it’s easy to form and flexible to manage. But it also has some risks because partners are usually personally liable.

Features of Partnership
  1. Agreement Between Partners:
    Partnership is based on an agreement (oral or written) between two or more persons. This is called a Partnership Deed.
  2. Number of Partners:
    Minimum is 2, and maximum is 20 (except in banking where it’s 10). If more than 20, it must register as a company.
  3. Sharing of Profit:
    The main purpose is to earn and share profits. Losses are also shared as per agreement.
  4. Mutual Agency:
    Every partner is both an agent and principal. One partner can bind others by his actions in the business.
  5. Lawful Business:
    The partnership must be for a legal business. Any illegal work is not considered a valid partnership.
  6. Unlimited Liability:
    Partners are personally and jointly liable for debts. Creditors can sue one or all partners.
  7. No Separate Legal Entity:
    Unlike companies, a partnership is not a separate legal person. It doesn’t have its own identity in law.
  8. Voluntary Registration:
    In Pakistan, registration is not compulsory, but registered firms have more legal advantages, like right to sue.
  9. Dissolution:
    Partnership can be dissolved on mutual consent, death, insolvency of a partner, or court order.
Legal Status of Minor Partner

As per Section 30 of the Partnership Act, 1932, a minor (under 18 years) cannot become a full partner because he is not capable of making contracts under Contract Act, 1872. But he can be admitted to the benefits of an existing partnership with the consent of all partners.

Rights of a Minor Partner
  1. Right to Profit:
    Minor gets his agreed share in profits of the firm.
  2. Right to Inspect Accounts:
    He can inspect account books of the firm.
  3. No Personal Liability:
    He is not personally liable for debts of the firm. His liability is limited to his share inthe firm.
  4. Right to Sue:
    If not given his share, minor can sue the partners for his rights.
Duties or Limitations
  1. Cannot Take Active Part:
    Minor cannot take active role in running the business.
  2. Cannot Bind the Firm:
    He has no power to bind other partners by his acts.
  3. Option on Becoming Major:
    When minor turns 18, he has 6 months to decide if he wants to become full partner. He must give a public notice.
    • If he becomes full partner → He becomes personally liable even for earlier acts.
    • If he doesn’t → He is treated as if he was never a partner.
Important Case Law
  • Cox v. Hickman (1860): Explained the idea of mutual agency in partnership.
  • Duli Chand v. CIT (1956): Supreme Court of India said minor can’t be a full partner, but only share benefits.
Conclusion

Partnership is based on trust and mutual understanding between partners. It has flexibility but also risks due to unlimited liability. Minor partners are allowed only limited rights under law, and they get full rights only if they choose to become partner after becoming adult. The law protects the minor from personal risk, which is fair because they are not fully responsible yet.

Question 5

Discuss the creation and legal effects of agency relationship in law?

Introduction

An agency is a legal relationship where one person (called the agent) is authorized to act on behalf of another person (called the principal) to make contracts or decisions in business. This relationship is important in business because principals cannot do everything by themselves, so they appoint agents.

In Pakistan, agency law is covered under Contract Act, 1872, specifically from Section 182 to 238.

I. Creation of Agency

There are different ways in which agency can be created under law:

1. By Express Agreement (Section 186)
  • The most common method. The principal appoints someone clearly to be his agent, either in writing or verbally.
  • Example: A company hires a sales agent to sell its products.
2. By Implied Agreement (Section 187)
  • Agency can be created from conduct, situation, or relationship between the parties.
  • Example: A servant regularly buys items for employer — it becomes implied agency.
3. By Ratification (Section 196)
  • If a person acts without authority and later the principal approves his act, then agency is created by ratification.
  • Example: A person buys goods for another without asking, and later that person accepts it.
4. By Necessity (Section 189)
  • In urgent situations, agency can arise even without consent, like to protect property or goods.
  • Example: A driver of a truck sells perishable goods to avoid loss after accident.

5. By Estoppel (Section 237)

  • If the principal behaves in a way that makes others believe a person is his agent, then the law may stop him from denying that agency.
II. Legal Effects of Agency Relationship

Once agency is created, it brings many legal consequences:

1. Principal is Bound by Agent’s Acts
  • If agent acts within his authority, all contracts made by him bind the principal as if principal made them himself (Section 226).
2. Agent Cannot Sue or Be Sued Personally (Section 230)
  • Usually, contracts are between principal and third party, so agent is not personally responsible, unless he hides principal’s name or acts for a foreign principal.
3. Duties of Agent
  • Agent must act honestly, follow instructions, and protect principal’s interest (Section 211–215).
4. Duties of Principal
  • Principal must pay commission, support agent for lawful acts, and indemnify him for losses (Section 222–225).
5. Termination of Agency (Section 201–210)
  • Agency ends by:
    • Completion of purpose.
    • Expiry of time.
    • Death or insanity of principal or agent.
    • Mutual agreement.
    • Revocation by principal or renunciation by agent.
6. Liability for Misrepresentation
  • If agent commits fraud or misrepresentation, principal is also responsible if it was within agent’s authority (Section 238).
Important Case Laws
  • Pannalal Jankidas v. Mohanlal (AIR 1951): Held that principal must compensate agent for lawful losses.
  • State of Rajasthan v. Basant Nahata (2005): Explained that power of attorney holder acts as agent of the principal.
Examples in Real Life
  • Insurance agents selling policies.
  • Property dealers working for landlords.
  • Bankers acting as agents for money transfers.
Conclusion

Agency is a very useful and necessary relationship in today’s business world. It helps in handling multiple tasks through trusted people. The law gives rights and duties to both principal and agent to protect their interests. But agency should always be created carefully because the principal becomes legally bound by the acts of the agent.

Question 6

Distinguish negotiable instruments by statute and explain the liability of parties to these instruments?

Introduction

A negotiable instrument is a written document which promises to pay a certain amount of money either on demand or at a set time. These instruments are important in business because they are used as a substitute for cash.

In Pakistan, negotiable instruments are governed by the Negotiable Instruments Act, 1881.

I. Types of Negotiable Instruments by Statute

According to Section 13 of the Act, there are three main types of negotiable instruments recognized by statute:

1. Promissory Note (Section 4)
  • A promissory note is a written promise by one person to pay another person a certain sum of money.
  • There are two parties: the maker and the payee.
  • Example: “I promise to pay Rs. 10,000 to Ali on demand. – Signed: Ahmed”
2. Bill of Exchange (Section 5)
  • It is a written order by one person to another to pay money to a third person.
  • Three parties involved:
    • Drawer (who makes the order)
    • Drawee (the person who pays)
    • Payee (the one who receives money)
  • Example: A orders B to pay Rs. 20,000 to C.
3. Cheque (Section 6)
  • A cheque is a special type of bill of exchange drawn on a bank and payable on demand.
  • It has only two parties: the drawer (account holder) and the drawee (bank).
II. Other Negotiable Instruments (By Usage)

Besides the above, some instruments are accepted as negotiable by custom or usage, like:

  • Bank Draft
  • Treasury Bill
  • Delivery Order
    (Note: These are not covered directly by the Act but still accepted in practice.)
III. Liability of Parties

Each party in a negotiable instrument has legal responsibility, depending on their role.

1. Drawer
  • The drawer creates the instrument.
  • He is liable if the instrument is dishonoured and not paid by the drawee.
2. Drawee
  • The drawee is the person who is ordered to pay.
  • In case of bills, once the drawee accepts, he becomes the acceptor and is primarily liable.
3. Acceptor
  • In a bill of exchange, once drawee signs his acceptance, he is bound to pay it on the due date.
  • He has the primary liability.
4. Maker
  • In a promissory note, the maker is the person who promises to pay.
  • He is also primarily liable.
5. Endorser
  • A person who signs the back of the instrument to transfer it to another.
  • He is secondarily liable, but only if the main party fails to pay and proper notice is given.
6. Holder in Due Course (Section 9)
  • A person who gets the instrument for value, in good faith and before maturity.
  • He has special protection and can recover money even if there were defects in earlier ownership.
Dishonour and Notice (Section 91–93)
  • If a negotiable instrument is not paid or accepted, it is called dishonoured.
  • Proper notice of dishonour must be given to all liable parties to hold them responsible.
Important Case Law
  • Kundan Lal Rallaram v. Custodian (1961): Explained that negotiable instruments must be clear, unconditional and in writing.
  • National Bank of Pakistan v. Zamir Industries (PLD 1995 SC): Liability of parties was discussed regarding dishonoured cheques.
Conclusion

Negotiable instruments are the backbone of business transactions. They allow money to be transferred easily and legally. Each party in the instrument has clear responsibilities. The law protects both the person who creates the instrument and the person who receives it, especially if it is transferred properly. Knowing these rules is important for anyone involved in commerce.

Question 7

Discuss the nature and scope of section 4 of the Competition Act 2010 regarding prohibited agreements?

Introduction

The Competition Act, 2010 was passed in Pakistan to make sure businesses compete fairly and to stop monopoly or cartel-like behavior. One of the most important parts of this law is Section 4, which deals with prohibited agreements. These are the types of agreements that hurt competition and are not allowed under the law.

This law is enforced by the Competition Commission of Pakistan (CCP).

Nature of Section 4

Section 4 bans all agreements that restrict competition. These can be between companies, associations, or any persons operating in the same market.

According to Section 4(1):

“No undertaking or association shall enter into any agreement which has the object or effect of preventing, restricting or reducing competition.”

This means the focus is not just on what the agreement says but also on what it causes in the market.

Scope of Prohibited Agreements (Section 4(2))

Section 4(2) gives examples of the types of agreements that are considered anti-competitive:

1. Price Fixing
  • Agreements where competitors fix purchase or selling prices.
  • Example: Cement companies agreeing to sell at the same price.
2. Output Restriction
  • Agreements to limit production or supply to create artificial shortage in market.
3. Market Division
  • Companies divide markets by area, customer type, or product to avoid competition.
4. Bid Rigging or Collusive Tendering
  • Companies agreeing on bids in public tenders to control who wins.

These are known as “hardcore” violations — they are strictly illegal, and CCP does not accept any excuses for these.

Types of Agreements Covered
  • Horizontal Agreements:
    Between competitors on the same level — for example, two sugar companies.
  • Vertical Agreements:
    Between companies on different levels — like a manufacturer and a retailer.
    (Some vertical agreements may be allowed unless they harm competition badly.)
Legal Consequences (Section 4(3) & 4(4))
  • Any agreement falling under Section 4 is void.
  • The CCP has power to:
    • Investigate such agreements.
    • Impose heavy penalties (up to 10% of annual turnover or Rs. 75 million).
    • Order companies to stop the agreement.
Exemptions under Section 5

Sometimes, agreements may look anti-competitive but actually promote efficiency, research, or technology. These may be exempted by CCP, but companies must apply for it.

Important Case Example
  • CCP v. Pakistan Poultry Association (2010):
    CCP found that poultry producers were involved in price-fixing. The Commission imposed penalties and banned the practice.
  • CCP Inquiry Report on Sugar Mills (2020):
    CCP found evidence of collusion among sugar mills in pricing and production. Legal action was taken.
Purpose Behind Section 4

The goal is to:

  • Protect consumer rights.
  • Encourage fair market competition.
  • Prevent monopolies and cartels.
  • Ensure that businesses compete based on quality and price, not secret deals.
Conclusion

Section 4 of the Competition Act, 2010 is very important to keep the market fair in Pakistan. It makes sure that companies do not make secret agreements to cheat customers or block fair competition. The CCP plays a key role to catch and punish such activities. Businesses must follow this law or face serious consequences.

Question 8

In presence of an arbitration agreement discuss the legal aspects of the power of the judicial authority to stay legal proceedings under the Arbitration Act 1940?

Introduction

When two parties agree to settle their disputes through arbitration, it means they want to avoid going to court. They make an arbitration agreement, which says that any dispute will be solved by a neutral third person (called arbitrator). This is allowed under the Arbitration Act, 1940, which still applies in Pakistan.

Sometimes, even when an arbitration agreement exists, one party files a case in court. In such cases, the court has the power to “stay” (stop) the legal proceedings and refer the matter to arbitration.

I. What is an Arbitration Agreement?

According to Section 2(a) of the Arbitration Act, 1940:

An arbitration agreement is a written agreement between parties to refer disputes (that have already happened or may happen in future) to arbitration.

This means, both parties agree to avoid court and use arbitration to solve disputes.

II. Legal Power of Court to Stay Proceedings – Section 34

Section 34 of the Arbitration Act gives power to the court to stay a legal case, if:

  1. There is a valid arbitration agreement.
  2. One party files a suit in court against the terms of that agreement.
  3. The other party applies to the court for stay before giving any statement in the case.
  4. The court is satisfied that the arbitration agreement is still valid and covers the dispute.

If all these conditions are met, the court may refuse to proceed and tell the parties to go for arbitration instead.

III. Important Conditions for Stay
  1. Written Agreement:
    The arbitration agreement must be in writing and signed by both parties.
  2. Timely Objection:
    The party asking for stay must do so before filing any reply or written statement in the court.
  3. Dispute Must Be Covered:
    The matter in court must be the same dispute which is covered by the arbitration clause.
  4. Court’s Discretion:
    The court may or may not grant stay. It is not automatic. The court sees if it is just and fair to allow arbitration.
IV. Exceptions – When Court May Refuse Stay
  • If the arbitration agreement is invalid or vague.
  • If one party has already waived the right by participating in court proceedings.
  • If the court thinks that arbitration would be unfair or cause delay.
  • If the issue is criminal or involves public interest, which arbitration can’t handle.
Important Case Law
  • PLD 1964 SC 451 – Muhammad Ishaq v. The State:
    Court held that arbitration is a valid method to settle civil disputes, but judicial powers cannot be fully blocked.
  • 2004 SCMR 1225 – Pak Libya Holding Company Case:
    The Supreme Court said that courts must respect arbitration agreements if they are valid and parties agreed freely.
Benefits of Arbitration (Why Stay Is Allowed)
  • Saves time and cost.
  • Confidential process.
  • Less formal than courts.
  • Encourages settlement and avoids long litigation.
Conclusion

The Arbitration Act, 1940 gives strong support to arbitration as a way to settle disputes. If there is a valid arbitration agreement, the court usually stays the case and refers it to arbitration. But the court still has the final power to decide if stay should be granted, based on justice and fairness. Arbitration is useful, but it must be done properly and within the legal framework.

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