CSS Past Paper 2024 Mercantile Law Descriptive (Part 2)
CSS | Past Paper | Group 6 | 2024 | Part 2 | Descriptive
Below is the solution to PART-II (COMPULSORY) of the CSS Past Paper 2024 Mercantile Law Descriptive (Part 2).
Question 2
Describe the relationship, if any, between Separate Legal Personality and Limited Liability of corporate form of business.
Introduction
In company law, two very important concepts are Separate Legal Personality and Limited Liability. These are the basic features that make a corporate form of business different from other business types like sole proprietorship or partnership.
These two ideas are strongly connected, and together, they provide legal protection and freedom for shareholders.
What is Separate Legal Personality?
When a company is registered, it becomes a separate person in the eyes of law, different from its owners. This means:
- The company can own property.
- It can enter into contracts.
- It can sue or be sued in its own name.
Famous Case: Salomon v. Salomon & Co. Ltd (1897)
This case confirmed that once a company is incorporated, it becomes a separate legal entity, even if one person owns most of it.
What is Limited Liability?
Limited Liability means that owners (shareholders) are only responsible up to the amount they invested. Their personal property is protected.
Example
If a company takes a loan and fails to pay, the personal house or car of the shareholder cannot be taken by creditors.
Relationship Between Separate Legal Personality and Limited Liability
These two concepts are deeply connected. Here’s how:
a) Limited Liability is Possible Because of Separate Legal Personality
Because the company is treated as its own “person”, it is responsible for its own debts. That’s why shareholders are not personally liable.
Without separate legal personality, the owners and business would be the same — and then, owners could be held fully responsible (like in sole proprietorship).
b) Legal Protection for Shareholders
Separate Legal Personality creates a wall between the company and its members. That wall allows Limited Liability. So if the company fails, shareholders only lose their investment — not their house, savings, etc.
c) Attracts Investment
This relationship builds trust. People are more willing to invest in companies because they know their personal assets are safe.
Exceptions (Lifting the Corporate Veil)
Sometimes, courts ignore Separate Legal Personality and hold the owners responsible — this is called lifting the corporate veil. It happens in cases of:
- Fraud,
- Illegal acts,
- Sham companies.
In such cases, Limited Liability protection is also removed.
Conclusion
Separate Legal Personality and Limited Liability are linked like cause and effect. Because a company is a separate person, the liability of its owners becomes limited. This relationship is the foundation of the corporate world, helping businesses grow without putting personal wealth at risk.
Question 3
What is meant by charge? Explain the legal nature and significance of floating charge in company law.
Introduction
In company law, when a company takes a loan, it often gives something as security to the lender. This security is known as a charge. It helps protect the lender in case the company fails to pay back. There are two main types of charges — fixed charge and floating charge. This answer focuses on the meaning of charge and explains the nature of floating charge, which is commonly used in business.
What is a Charge?
A charge is a legal right given by a company to a creditor (lender) over the company’s assets, to secure a debt or loan.
Definition
A charge is a form of security interest usually taken by a creditor over the property of the company, either fixed or floating.
Example
If a company borrows money from a bank, it may create a charge over its assets like machines, stock, or vehicles.
Types of Charges
- Fixed Charge: Attached to specific assets like land, building, or machinery. Company can’t sell those assets without lender’s permission.
- Floating Charge: This is more flexible. It hovers over general assets like stock, raw materials, or receivables. Company can use or sell these assets in normal business until the charge “crystallizes”.
Legal Nature of Floating Charge
- It is not fixed on any one asset.
- It covers all changing assets of a company, like inventory or cash.
- The company can freely deal with the assets in the ordinary course of business.
A floating charge becomes fixed (called crystallization) when:
- The company goes bankrupt or into liquidation.
- The company stops business.
- The lender takes legal action due to default.
Significance of Floating Charge
1. Flexibility for Companies
Companies can continue to trade, sell goods, and manage stock without lender’s approval.
2. Protection for Creditors
It gives lenders a claim over the company’s assets if the company fails to pay.
3. Covers a Wide Range of Assets
It is useful for lending against assets that change daily, like stock or cash.
4. Important in Corporate Lending
Banks and financial institutions often prefer floating charges for working capital loans.
5. Rank of Priority
Floating charge holders are paid after fixed charge holders and preferential creditors, but before unsecured creditors.
Conclusion
A floating charge is a smart way for businesses to secure loans without locking up their assets. It provides a balance between the needs of the company and the rights of the lender. In modern corporate finance, the floating charge plays a key role in helping companies grow while also ensuring creditor safety.
Question 4
In the presence of majority rule, how well the minority shareholders are protected in the Companies Act 2017?
Introduction
In company matters, decisions are usually made by majority shareholders through voting. This is called the majority rule, a basic principle in corporate law. But this rule can sometimes be unfair to minority shareholders, who hold fewer shares and have less power. To fix this imbalance, the Companies Act 2017 of Pakistan has given several protections to minority shareholders.
Who Are Minority Shareholders?
Minority shareholders are those who own less than 50% of the shares and usually have limited power in decision-making. They can be easily overruled by the majority in general meetings.
Why Minority Protection is Needed?
- To prevent misuse of power by majority.
- To stop oppression and mismanagement.
- To ensure fair return on investment.
- To keep investor confidence in the corporate system.
Minority Shareholder Protections in Companies Act 2017
1. Right to File Derivative Action (Section 286)
Minority shareholders can file a case on behalf of the company if the directors or majority shareholders commit fraud, negligence, or breach of duty.
2. Protection Against Oppression and Mismanagement (Section 287)
If the company’s affairs are being run in a way that harms minority shareholders, they can approach the court (SECP or Tribunal) for relief.
3. Right to Information (Section 223–225)
All shareholders, including minority, have the right to receive:
- Financial statements,
- Auditor’s reports,
- Meeting notices.
This ensures transparency.
4. Right to Call Extraordinary General Meeting (EGM) (Section 132)
Shareholders holding at least 10% of shares can demand the company to call an EGM to discuss important matters.
5. Class Action Suits (Section 286)
A group of minority shareholders can file a class action against:
- Wrong acts of the company,
- Misleading statements,
- Violation of the Articles or Memorandum.
This gives collective strength to minority voices.
6. Restriction on Related Party Transactions (Section 208)
Majority shareholders can’t misuse their power to approve unfair deals with related parties. SECP keeps a check on such transactions to protect minority interests.
7. Exit Option in Case of Major Changes (Section 108)
If the company goes for merger or major restructuring, minority shareholders are given an exit option with fair compensation.
Conclusion
The Companies Act 2017 balances the power of majority rule with strong legal protections for minority shareholders. These protections give them a voice, legal remedies, and transparency, ensuring that they are not ignored or oppressed. It builds investor trust and promotes fairness in corporate governance.
Question 5
In the light of Competition Act 2010, discuss six most common practices in Pakistani markets that prevent, restrict, reduce, and distort competition through abuse of dominant position.
Introduction
The Competition Act, 2010 was introduced to stop businesses in Pakistan from abusing their power and hurting fair market competition. When a company has a dominant position, it controls the market in such a way that other businesses cannot compete fairly. The Act makes such behavior illegal to protect small businesses, consumers, and the economy.
What is Abuse of Dominant Position?
According to Section 3 of the Competition Act, 2010, abuse happens when a business with market dominance uses unfair practices to:
- Limit competition,
- Harm consumers,
- Stop new companies from entering the market.
Six Common Anti-Competitive Practices in Pakistani Markets
1. Predatory Pricing
A dominant firm sells goods below cost just to drive competitors out of the market.
Example: A big telecom company lowers call rates to unsustainable levels, small operators cannot compete, and quit the market.
2. Refusal to Deal
A dominant company refuses to supply products or services to certain businesses without any valid reason.
Example: A cement company refusing to sell cement to specific dealers who also deal with competitors.
3. Tying and Bundling
Forcing customers to buy one product only if they agree to buy another product as well.
Example: A software company forcing customers to buy its antivirus only with its operating system.
4. Loyalty Rebates and Discounts
Giving special discounts only to those customers who buy exclusively from them. This blocks rivals from getting customers.
Example: A food supplier gives heavy discounts to restaurants only if they don’t buy from competitors.
5. Limiting Production or Technical Development
A company intentionally limits the supply of goods or delays improvement in products to control the market and keep prices high.
Example: A company produces fewer electricity units than it can, just to create artificial shortage and increase price.
6. Discriminatory Pricing or Conditions
Charging different prices or placing unfair conditions for different buyers without any real reason.
Example: Selling sugar to one buyer at Rs.100/kg and to another at Rs.80/kg without market justification.
Conclusion
The Competition Act 2010 protects the Pakistani market from unfair control by big players. These six practices are commonly used to harm competition, but the law gives the Competition Commission of Pakistan (CCP) power to investigate and penalize such actions. Strong enforcement of this law is important to protect consumers and promote healthy economic growth.
Question 6
Discuss the basic legal features of partnership agreement and rights of partner by estoppel in the light of Partnership Act.
Introduction
Partnership is a popular form of business where two or more people share profit, loss, and responsibility. The rules for partnerships in Pakistan are given under the Partnership Act, 1932. A written or verbal agreement is made among partners which sets the foundation of their relationship. Also, there’s a special type of partner known as partner by estoppel who can be held responsible under certain situations even if not officially a partner.
A. Legal Features of a Partnership Agreement
A partnership agreement is the base of any partnership. It can be written, oral, or implied. The Partnership Act allows partners to decide their own terms, as long as they are legal.
1. Number of Partners
- Minimum: 2 persons
- Maximum: 20 persons (10 for banking, 20 for other businesses)
2. Mutual Agency
Each partner can act as an agent of the firm and bind the firm legally by his actions.
3. Profit and Loss Sharing
The agreement mentions how profit and loss will be shared. If not written, profit is shared equally (Section 13(b)).
4. Voluntary Formation
The partnership must be made by agreement, not by status (Section 4).
5. Business Purpose
The purpose must be to carry on a legal business for profit.
6. Unlimited Liability
Partners are personally liable for the debts of the firm.
7. Registration is Not Mandatory
Registration is optional but gives legal benefits like right to sue.
B. Rights of Partner by Estoppel
Partner by estoppel is someone who is not a real partner but acts like a partner or allows others to treat him as a partner, so the law treats him as responsible.
Definition (Section 28, Partnership Act 1932)
“A person who by words or conduct represents himself, or knowingly allows himself to be represented as a partner, is liable as a partner to anyone who gives credit to the firm on that belief”.
Legal Conditions for Partner by Estoppel
- Representation – He must say or act like he is a partner.
- Reliance – Third party must believe he is a partner.
- Credit Given – The third party gave loan or did business with the firm based on that belief.
Example: Mr. Ali attends meetings and signs as a partner, though not officially part of the firm. If someone gives a loan based on this, Mr. Ali is responsible like a real partner.
Rights and Liabilities of Partner by Estoppel
- He has no internal rights like profit sharing.
- But he has external liability towards third parties.
- He can be sued for firm’s debts.
- No right to take part in management unless made actual partner.
Conclusion
The Partnership Act 1932 covers both formal and informal roles of partners. A partnership agreement creates legal structure, while partner by estoppel is a concept to protect outsiders who trust a person acting like a partner. Both these ideas ensure fairness and responsibility in partnership business.
Question 7
Explain the meaning and legal function of negotiable instruments in the light of Negotiable Instruments Act 1881.
Introduction
In business and banking, negotiable instruments play a very important role. They are used to make payments, transfer money, and provide credit. The Negotiable Instruments Act, 1881 is the main law in Pakistan that defines and governs these instruments. It gives them legal recognition and explains how they work in daily transactions.
Meaning of Negotiable Instruments
According to Section 13 of the Act, a negotiable instrument is:
“A promissory note, bill of exchange or cheque payable either to order or to bearer”.
These are written documents that guarantee a specific amount of money to the person named on it or the person holding it.
Simple Definition: A negotiable instrument is a document that can be transferred from one person to another, and whoever holds it can get the money written on it.
Types of Negotiable Instruments
- Promissory Note (Section 4)
A written promise to pay a certain sum to a specific person. - Bill of Exchange (Section 5)
An order made by one person to another to pay money to a third person. - Cheque (Section 6)
A bill of exchange drawn on a banker and payable on demand.
Legal Functions of Negotiable Instruments
1. Easy Transfer of Money
They allow easy and safe transfer of money from one person to another, without carrying cash. The ownership is transferred by endorsement and delivery.
2. Evidence of Debt
They are written proof of debt or payment. If someone refuses to pay, the holder can use it in court.
3. Substitute of Money
Negotiable instruments work as a substitute for cash, especially in business transactions.
4. Encourages Credit System
With these instruments, buyers and sellers can deal on credit. For example, a bill of exchange allows payment at a future date.
5. Legal Protection to Holder in Due Course (Section 9)
If a person receives a negotiable instrument honestly and for value, he becomes a holder in due course, and gets strong legal rights, even if there were problems with the earlier transaction.
6. Promotes Business and Banking
Banks depend heavily on cheques. Businessmen use bills and notes to manage payments, credit, and trade finance.
Legal Features of Negotiable Instruments
- Must be in writing.
- Must contain unconditional promise or order to pay.
- Must be signed by the maker or drawer.
- Amount must be certain.
- Payment must be in money only.
- Must be payable either on demand or at a fixed time.
Conclusion
The Negotiable Instruments Act, 1881 made business and banking safer, faster, and more efficient. These instruments reduce the need for carrying cash and provide legal security to both sender and receiver. Their legal functions are key to the smooth running of modern commercial life.
Question 8
Write notes on any TWO of the following:
a. Cumulative voting
b. Legal status of promotors
c. Doctrine of indoor management
a. Cumulative Voting
Cumulative voting is a method used in company elections, especially when electing directors. It allows minority shareholders to have a fair chance to elect at least one director to represent their interests.
How It Works?
Each shareholder multiplies their number of shares by the number of directors to be elected. They can cast all those votes for one candidate or divide them among several candidates.
Example
If a shareholder has 100 shares and there are 5 directors to be elected, the shareholder gets 500 votes. He can use all 500 for one candidate.
Legal Basis
Under the Companies Act 2017, cumulative voting is compulsory for listed companies during the election of directors.
Benefits
- Gives voice to minority shareholders.
- Ensures representation of all groups.
- Makes the board more balanced.
b. Legal Status of Promotors
A promoter is a person who starts the process of forming a company. He takes all steps needed before registration, like preparing documents, finding directors, arranging capital, etc.
Legal Position
- A promoter is not an agent, because the company doesn’t exist yet.
- He is also not a trustee, but he has a fiduciary duty (duty of honesty and care) towards the company.
Duties of Promoter
- Must disclose any profit made during formation.
- Cannot secretly benefit from transactions with the company.
- Must act in good faith.
Liability
If the promoter hides facts, misleads investors, or makes secret profit, he can be sued by the company after incorporation.
Case Law
Gluckstein v. Barnes (1900) — Court held the promoter responsible for making secret profit.
c. Doctrine of Indoor Management
The Doctrine of Indoor Management protects outsiders dealing with a company. It says that outsiders can assume internal rules are followed, and they don’t need to check company’s internal processes.
Relevancy
This doctrine is an exception to the doctrine of constructive notice, which says outsiders must know the public documents of a company.
Example
If a company’s Articles require board approval for a contract, but the manager signs it without that approval, the outsider can still trust the contract, unless he knew something was wrong.
Limitations
This protection doesn’t apply if:
- The outsider knew of the irregularity.
- There was fraud involved.
- The act was beyond company’s powers.
Purpose
- Protects people who deal honestly with the company.
- Makes business transactions smoother and safer.
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👉 Also read CSS Past Paper 2024 Mercantile Law (Part-I MCQs)
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