BUSINESS LAW

INTRODUCTION TO LEGAL SYSTEM IN PAKISTAN

Structure, Organization and Jurisdiction

The judicial structure of Pakistan, as it now stands, can conveniently be divided into three types
of institutions:

 superior judiciary

 subordinate judiciary

 administrative tribunals and special courts

1. Superior Judiciary

The term Superior Judiciary is commonly taken to mean judicial institutions created and
recognized by the Constitution of the Islamic Republic of Pakistan, 1973 (the “Constitution”).
The Superior Judiciary can further be subdivided into three categories:

 The Supreme Court of Pakistan

 The High Courts

 The Federal Shariat Court

(1) Supreme Court of Pakistan

The Supreme Court of Pakistan is created by virtue of Article 175 of the Constitution which
states that there “shall be a Supreme Court of Pakistan”.

The Supreme Court has three types of jurisdiction, namely original, advisory and appellate.
The original jurisdiction of the Supreme Court is provided for by Article 1`84 of the
Constitution. Article 184(1) provides that the Supreme Court shall have exclusive jurisdiction
between two governments (the term “government” referring” to either the Federal or any
provincial government) while Article 184(3) provides that the questions of public importance
relating to the enforcement of certain Fundamental Rights protected by the Constitution may be
agitated directly in the Supreme Court.
The advisory jurisdiction of the Supreme Court is provided for by Article 186 of the
Constitution. It provides that where the President considers it desirable to obtain the opinion of
the Supreme Court on any question of law which he considers of public importance, he may refer
that question to the Supreme Court for consideration.

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The appellate jurisdiction of the Supreme Court is provided for by Article 185 of the Constitution
which provides that the Supreme Court shall have jurisdiction to hear appeals against judgments,
decrees, orders, sentences etc. of a High Court.

More specifically, the appellate jurisdiction of the Supreme Court can be divided into two
categories: appeals as of right and appeals by leave of the court.

With respect to appeals as of right, Article 185(2) of the Constitution states as follows:

An appeal shall lie to the Supreme Court from any judgment, decree, final order or
sentence of a High Court:

(a) If the High Court has on appeal reversed an order of acquittal of an accused person
and sentenced him to death or to transportation for life or imprisonment for life; or
on revision, has enhanced a sentence to a sentence as aforesaid; or

(b) If the High Court has withdrawn for trial before itself any case from any Court
subordinate to it and has in such trial convicted the accused person and sentenced
him as aforesaid; or

(c) If the High Court has imposed any punishment on any person for contempt of the
High Court; or
(d) If the amount or value of the subject-matter of the dispute in the court of first
instance was, and also in dispute in appeal, is not less than fifty thousand rupees or
such other sum as may be specified in that behalf by Act of Parliament and the
judgment, decree or final order appealed from has varied or set aside the judgment,
decree or final order of the court immediately below;
(e) If the judgment, decree of final order involves directly or indirectly some claim or
question respecting property of the like amount or value and the judgment, decree or
final order appealed from has varied or set aside the judgment, decree or final order
of the court immediately below; or
(f) If the High Court certifies that the case involves a substantial question of law as to
the interpretation of the Constitution.

Apart from the provisions under Article 185(2) whereby an appeals is provided as or right, an
appeal to the Supreme Court is only available if the Supreme Court grants leave to appeal. In
theory, the Supreme Court grants leave to appeal only here it considers that the case raises
substantial questions of law of public importance. However, the issue of public importance is
understood in a broad sense and many cases which raise no legal issues whatsoever are also
heard by the Supreme Court.
Under Article 189 of the Constitution, the decision of the Supreme Court are declared to be
binding upon all courts in Pakistan. Furthermore, Article 190 of the Constitution provides that all

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executive and judicial authorities throughout Pakistan are required to act in aid of the Supreme
Court.

(2) The High Courts

Like the Supreme Court, the High Courts are also created by virtue of Article 175(1) of the
Constitution which provides that there shall be “a High Court for each Province”. Since Pakistan
has four provinces, there are four High Courts.

The jurisdiction of the High Courts can be divided into three categories, namely constitutional
jurisdiction, appellate jurisdiction and original jurisdiction.

The constitutional jurisdiction of the High Courts is provided for by article 199 of the
Constitution, which importantly provides:

Subject to the Constitution, a High Court may, if it is satisfied that no other remedy is
provided by law—

(a) On the application of any aggrieved party, make an order—

(i) directing a person performing, within the territorial jurisdiction of the Court,
functions in connection with the affairs of the Federation, a Province or a
local authority, to refrain from doing anything he is not permitted by law
to, or to do anything he is required by law to do; or

(ii) declaring that any act done or proceeding taken within the territorial
jurisdiction of the Court by a person performing functions in connection
with the affairs of the Federation, a Province or a local authority has been
done or taken without lawful authority and is of no legal effect; or

(b) on the application of any person, make an order—

(i) directing that a person in custody within the territorial jurisdiction of the
Court be brought before it so that the Court may satisfy itself that he is not
being held in custody without lawful authority or in an unlawful manner;
or

(ii) requiring a person within the territorial jurisdiction of the Court holding or
purporting to hold a public office to show under what authority of law he
claims to hold that office;

(c) on the application of any aggrieved person, make an order giving such directions to
any person or authority, including any Government exercising any power or
performing any function in, or in relation to, any territory within the jurisdiction of
that Court as may be appropriate for the enforcement of any of the Fundamental
Rights conferred by Chapter 1 of Part II.

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This provision, generally known as the writ jurisdiction of the High Courts.

In addition to the constitutional jurisdiction of the High Courts, the High Courts also exercise
statutory jurisdiction, both appellate and original. Thus, with respect to appellate jurisdiction, the
Civil Procedure Code, 1908 (“CPC”) provides for two sorts of secondary recourse to the High
Court, i.e. appeals and revisions (In an appeal under Section 96 of CPC, technically the whole
case is reheard and the decision under appeal may be reversed both for errors of law and fact. A
revision under Section 115 of CPC, however, lies only where an appeal is not competent and in
theory, may only be used to correct errors of law). Similarly, the Criminal Procedure Code of
1898 (“CrPC”) provides that every sentence of death must be confirmed by the High Court
(Section 374) and also generally provides for appeals to the High Court against all sentences
passed by Sessions Judge or an Additional Sessions Judge (Section 410).

In addition to appellate jurisdiction, the High Courts also exercise original jurisdiction under
certain statutes. For example, under the Financial Institutions (Recovery of Finances) Ordinance,
2001 all suits by financial institutions for the recovery of debts having a value exceeding
Rs. 50,000,000 are brought directly in the appropriate High Court. Similarly, the Companies
Ordinance, 1984 provides that certain corporate disputes may be instituted directly in the High
Courts.

On the criminal side, the CrPC provides that certain types of actions may be filed directly in the
High Court. For example, habeas corpus petitions under section 491 of CrPC are filed directly.
With respect to other types of actions, for example bail and quashment applications, an
application may be made directly to the High Court but in the absence of compelling
circumstances, the High Court will simply direct the applicant to first exhaust his remedies in
front of the lower courts before approaching the High Court.

(3) The Federal Shariat Court

The Shariat Court was created in 1984 by the then President of Pakistan, General Muhammad
Zia ul Haq through the introduction of Articles 203-A to 203 J of the Constitution.

The jurisdiction of the Shariat Court can also be divided into original and appellate jurisdiction.
The original jurisdiction of the Shariat Court is contained in Article 203D which provides that
the Court may, either on its own motion or on the petition of a citizen, examine any law or
provision of law to see if it is repugnant to the injunctions if Islam.

The Shariat Court cannot examine the legality of any law without first giving notice to the
government which has promulgated the law.

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Under Article 203F, an appeal from Shariat Court decisions lies to the Supreme Court, where
such appeal is to be heard by a special Shariat Appellate Bench consisting of three Muslim
judges of the Supreme Court and not more than two scholars of Islamic law.

2. Subordinate Judiciary

The term “subordinate judiciary” is being used here to refer to civil and criminal courts of
general subject matter jurisdiction.

Each province in Pakistan is divided into a number of units, generally known as district. These
districts are also the basic geographical unit of the subordinate judiciary. Thus, each district is
headed by a single judge who is the head of both the civil and criminal subordinate judiciary for
that particular district, and is known as the District and Sessions Judge. More specifically, he is
known as the District Judge with respect to civil matters and as the Sessions Judge with respect
to the criminal matters.

(1) Subordinate civil judiciary

The subordinate judicial hierarchy with respect to civil courts is provided by the Civil Courts
Ordinance of 1962. This Ordinance provides that each district shall be headed by a District
Judge, who in turn shall be assisted by a number of other judges to be known as Additional
District Judges.

With certain exceptions, though, District Courts do not function as trial courts. Instead, the courts
of first instance in civil matters are referred to as civil courts, which in turn are divided into three
categories based upon pecuniary jurisdiction. Thus a civil judge, third class may hear cases up to
a value of Rs. 20,000 while a civil judge, second class may hear cases up to a value of Rs.
50,000. A civil judge, first class has unlimited pecuniary jurisdiction. In addition to the hierarchy
of civil courts, there are also small claims courts which may hear cases having a value of up to
Rs. 25,000.

With respect to appeals against judgments of a civil court, CPC provides that any judgment in a
suit valued at less than Rs. 250,000 may be appealed to the District Court, while cases valued at
more than Rs. 250,000 may be appealed directly to the High Court.

It may be noted that one consequence of the multiple avenues for appeal provided in the CPC
(and as discussed below, also in the CrPC) is that there is very little finality attached to decisions.
The lack of finality if further exacerbated by the fact that in both criminal and civil cases, a first
appeal is understood to be a complete and total rehearing of the case, not simply a limited
hearing on specific points.

(2) Subordinate Criminal Judiciary

The subordinate criminal judiciary presents essentially a mirror image to the subordinate civil
judiciary. Thus, the bottom rung of the ladder is occupied by magistrates, who like civil judges,
are further divided into three classes. A third class magistrate can pass a sentence for

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imprisonment up to one month (or a fine not exceeding one thousand rupees). A second class
magistrate can pass a sentence for imprisonment up to one year (or a fine not exceeding five
thousand rupees). A first class magistrate can pass a sentence not exceeding three years (or a fine
not exceeding Rs. 15,000). Thus, any case involving a potential sentence of more than three
years must be heard by the Sessions Court acting as the trial court. Additional Sessions Judges,
however can only act as trial courts with respect to crimes involving sentences of up to seven
years: any crime involving a sentence of more than seven years, or a sentence of death, must be
tried by the Sessions Judge himself.

The appellate process with regard to criminal case is also similar to that with respect to civil
cases. Thus, convictions before a magistrate may be appealed to the Sessions Court and
convictions before a Sessions Judge may be further appealed by the High Court and then to the
Supreme Court.

3. Special courts and Quasi-Judicial Tribunals

While special courts and quasi-judicial tribunals have been lumped together in one category,
there is actually an extremely significant difference between them.

Special courts are still “courts”, in that they operate on the basis of the civil and criminal
procedure codes and the principles of the law of evidence and in that they are subject to the
direct supervision and control (in terms of appointments and transfers) of the High Court. The
only difference between special courts and other courts is that special courts are courts of limited
subject matter jurisdiction. Banking Courts, for example, deal only with debts or loans owed to
or by financial institutions and disputes relating to such loans. Similarly, Accountability Courts
deal only with offences under the National Accountability Bureau Ordinance, 1999. In both
instances, the special courts are performing as the equivalent of civil and criminal courts and in
both instances, the judges are appointed in consultation with the chief justice of the relevant
province.

Administrative tribunals, on the other hand, are quasi-judicial bodies which are not required to
offer all the procedural protections mandated in the civil and criminal procedure codes. Such
tribunals are normally the creation of a statute which also sets up a particular regime for the
tribunal to administer. Thus, the Sales Tax Act of 1990 not only charges and levies sales tax on
all taxable supplies in Pakistan but also creates a hierarchy of officials to adjudicate one’s
liabilities under the said act. More importantly, administrative tribunals do not fall within the
administrative purview of the High Courts but are instead under the direct control of the
executive branch authorities.

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 Supreme Court of Pakistan
Shariat Appellate Bench of
the Supreme Court
5(3 MSC + 2 Ulema) CJ+16

Federal Shariat Court

CJ + 7 (3 to be Ulema)

Forums entertaining
Criminal Cases under the
Hudood Laws

Lahore High High Court of High Court of Peshawar High

Court Sindh Balochistan Court
CJ + 49 CJ + 27 CJ + 5 CJ + 14

Distt. & Sessions Distt. & Sessions Distt. & Sessions Distt. & Sessions
Judge Judge Judge Judge
Addl. Distt. & Addl. Distt. & Addl. Distt. & Addl. Distt. &
Sessions Judge Sessions Judge Sessions Judge Sessions Judge
159 39 44

Senior Civil Judge Judicial Magistrate Senior Civil Judge Judicial Magistrate
Civil Judge 1st Class 1st Class Civil Judge 1st Class 1st Class
Civil Judge 2nd Class Judicial Magistrate Civil Judge 2nd Class Judicial Magistrate
Civil Judge 3rd Class 2nd Class Civil Judge 3rd Class 2nd Class
Judicial Magistrate Judicial Magistrate
3rd Class 3rd Class
368 52 21 85

Senior Civil Judge Judicial Magistrate Senior Civil Judge Judicial Magistrate
Civil Judge 1st Class 1st Class Civil Judge 1st Class 1st Class
Civil Judge 2nd Class Judicial Magistrate Civil Judge 2nd Class Judicial Magistrate
Civil Judge 3rd Class 2nd Class Civil Judge 3rd Class 2nd Class
Judicial Magistrate Judicial Magistrate
3rd Class 3rd Class
143 113 32 24

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 INTRODUCTION TO COMPANY LAW

The effects of incorporation

Separate personality is where the company exists as a legal person in its own right, completely
distinct from the members who own shares in it.

Limited liability refers to the fact that the potential liability of shareholders is fixed at a
maximum level equal to the nominal value of the shares held.

Perpetual succession refers to the fact that the company continues to exist irrespective of any
change in its membership. The company only ceases to exist when it is formally wound up.

The company owns the business property in its own right – shareholders own shares; they do not
own the assets of the business they have invested in.

The company has contractual capacity in its own right and can sue and be sued in its own name –
members, as such, are not able to bind the company.

Lifting the veil of incorporation

The courts will, on occasion, ignore separate personality. Examples can be given in relation to
statutory provision, and the use of the company form as a mechanism for perpetrating fraud. It is
difficult, however, to provide a general rule to predict when the courts will take this approach,
other than to see it as depending on judicial views as to public policy.

Public and private companies

This is an essential distinction which causes/explains the need for different legal provisions to be
applied to the two forms. The essential difference is to be found in the fact that the private
company is really an economic partnership seeking the protection of limited liability.

The company’s documents

The memorandum of association governs the company’s external affairs. It represents the
company to the outside world, stating its capital structure, its powers and its objects.

The articles of association regulate the internal working of the company.

Share capital

A share has been defined as ‘the interest of the shareholder in the company measured by a sum of
money, for the purposes of liability in the first place and of interest in the second, but also
consisting of a series of mutual covenants entered into by all the shareholders’.

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Types of shares

Shares can be divided into: ordinary, preference, deferred and redeemable shares, each of which
carries particular and distinct rights.

Loan capital

The term debentures refers to the document which acknowledges the fact that a company has
borrowed money and also refers to the actual debt.
In the case of a fixed charge a specific asset of the company is made subject to a charge in order
to secure a debt.
A floating charge does not attach to any specific property of the company until it crystallizes
through the company committing some act or default.
All charges, both fixed and floating, have to be registered with the Companies Registry within 21
days of their creation.
In relation to properly registered charges of the same type, they take priority according to their
date of creation. As regards charges of different types, a fixed charge takes priority over a
floating charge even though it was created after it.

Directors

The board of directors is the agent of the company and may exercise all the powers of the
company. Individual directors may be described as being in a fiduciary relationship with their
companies.

A director can be removed at any time by the passing of a resolution of the company.

As fiduciaries directors owe the following duties to their company: to act bona fide in the interest
of the company; not to act for a collateral purpose; or to permit a conflict of interest to arise.
They also owe the company a duty of care and skill.

Meetings

In theory, the ultimate control over a company’s business lies with the members in general
meeting. In practice, however, the residual powers of the membership are extremely limited.
There are three types of meeting: the Annual General Meeting; the extraordinary general
meeting; and the class meeting.
Proper and adequate notice must be sent to all those who are entitled to attend any meeting,
although the precise nature of the notice is governed by the Articles of Association.
There are three types of resolution: the ordinary resolution; the extraordinary resolution; and the
special resolution.

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Voting is by a show of hands or according to the shareholding on a poll. Proxies may exercise
voting rights if properly appointed.

Majority rule and minority protection

The majority usually dictate the action of a company and the minority is usually bound by the
decisions of the majority. Problems may arise where those in effective control of a company use
their power in such a way as to benefit themselves or to cause a detriment to the minority
shareholders.

Three remedies are available to minority shareholders:

 The minority may seek court action to prevent the majority from committing a fraud on
the minority;

 An order to have the company wound up on just and equitable grounds may be applied
for where there is evidence of a lack of probity on the part of some of the members. It
may also be used in small private companies to provide a remedy where there is either
deadlock on the board, or a member is removed from the board, altogether or refused a
part in the management of the business;

 A certain number of members may petition the court for an order on the grounds that the
affairs of the company are being conducted in a way that is unfairly prejudicial to the
interests of some of the members.

Winding up

Liquidation, is the process whereby the life of the company is brought to an end.

There are three possible procedures: compulsory winding up; a members’ voluntary winding up;
and a creditors’ voluntary winding up.

Administration

This is a procedure (not in practice) aimed at saving the business as a going concern by taking
control of the company out of the hands of its directors and placing it in the hands of an
administrator.

Once an administration order has been issued it is no longer possible to commence winding up
proceedings against the company.

Insider dealing

It is a criminal offence for an individual who has information as an insider to deal in price-
affected securities in relation to the information. It is also an offence if they encourage others to
deal in securities that are linked with the information.

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Corporate Personality

 The Company is in law a different person altogether from the members.

e.g. Sahib Jee & Co. (Pvt.) Ltd., is an entirely different person from Sahib Jee, even
though he started the company and manages it and owns practically all the shares. Its
premises are the property of Sahib Jee & Co. (Pvt.) Ltd., and not of Sahib Jee. He can
make contracts with the company and his goods cannot be seized for the debts of the
company. He may lend money to the company on the security of its assets.

Thus, in Salomon vs. Salomon & Co. Ltd.

Salomon had a boot business. He sold the business to a company named Salomon & Co.
Ltd. which he formed. There were seven members: his wife, daughter and four sons, who
took one £1 share each, and Salomon himself, who took 20,000 shares.

The price paid by the company to Salomon was £ 30,000; but instead of paying him cash,
the company gave him 20,000 fully-paid £1 shares and £10,000 in secured debentures.

Owing to strikes in the boot trade the company was wound up. The assets of the company
amounted to only £6,000, out of which to pay the £10,000 due to Salomon and secured
by the debentures, and a further £7,000 due to unsecured creditors.

The unsecured creditors claimed that as Salomon & Co. Ltd. was really the same person
as Salomon he could not owe money to himself, and that they should be paid their £7,000
first.

Held by the House of Lords, that Salomon was entitled to the £6,000, and the unsecured
creditors got nothing. The company was an entirely separate person from Salomon.

The principle of corporate personality has many important practical results. For instance, with
reference to the example of Sahib Jee & Co. (Pvt.) Ltd., given above:

1. Sahib Jee has no insurable interest in the property of Sahib Jee & Co. (Pvt.) Ltd.

2. When Sahib Jee dies, the company continues in existence. His shares, and not the assets
of the business, vest in his personal representatives. The shares are personal property
even if the company owns land.

3. The nationality of the company does not depend on the nationality of Sahib Jee.

The effects of incorporation

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A number of consequences flow from the fact that companies are treated as having legal
personality in their own right.

 Limited liability

No one is responsible for anyone else’s debts unless they agree to accept such
responsibility. In the case of a company limited by shares the level of liability is the
amount which is paid on the nominal value of the shares held. In the case of a company
limited by guarantee it is the amount that shareholders have agreed to pay on the event of
the company being wound up.

 Perpetual succession

As the company exists in its own right changes in its membership have no effect on its
status or existence. Members may die, be declared bankrupt or insane, or transfer their
shares without any effect on the company. As an abstract legal person the company
cannot die, although its existence can be brought to an end through the winding-up
procedure.

 Business property is owned by the company

Any business assets are owned by the company itself and not the shareholders. This is
normally a major advantage in that the company’s assets are not subject to claims based
on the ownership rights of its member.

 The company has contractual capacity in its own right and can sue and be sued in its own
name

The contracts are entered into in the company’s name and it is liable on any such
contracts. The extent of the company’s liability, as opposed to the member’s liability, is
unlimited and all its assets may be used to pay off debts.

The board of directors are the agents of the company. Members as such are not agents of
the company; they have no right to be involved in the day-to-day operation of the
business and they cannot bind the company in any way.

 Where a company suffers an injury, it is for the company, acting through the majority of the
members, to take the appropriate remedial action. An individual cannot raise an action in
response to a wrong suffered by the company.

LIFTING THE VEIL

In general, the Courts consider themselves bound by the principle of Salomon v. Salomon & Co.,
Ltd., viz. that the company is a separate legal person distinct from its members. In this way there
is a “veil” between the company and its members, and the Courts do not “lift the veil” to look at
the economic reality. See Annexure A.

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In certain cases, however, the Court will lift the veil, e.g.-

1. where the number of members falls below the statutory minimum;

2. where an officer of the company signs a cheque, etc. on behalf of the company without
any mention of the company’s name on it;
3. where group accounts are necessary;
4. where there has been fraudulent trading;
5. where the Securities and Exchange Commission of Pakistan (“SECP”) makes an
investigation into the affairs of related companies;
6. where the company is a mere “sham” or “puppet”;
7. where the company is acting as the agent of the shareholders;
8. where it is believed that in time of war the company is controlled by enemy aliens;
9. where it is desired to establish for tax purposes in what country a company is resident;
10. in some cases where a subsidiary company is wholly owned by a holding company.

1. NUMBERS BELOW MINIMUM

If at any time the number of members of a company is reduced in the case of a private company
below two, or in the case of a public listed company below seven, and it carries on business for
more than six months while the number is so reduced, every person who is a member of the
company during the time that it so carries on business after those six months, and is cognizant of
the fact that it is carrying on business with fewer than two members, or seven members, as the
case may be, is severally liable for the payment of the whole of the debts of the company
contracted during that time.

2. COMPANY NOT MENTIONED ON CHEQUE

If an officer of a company or any person on its behalf signs or authorizes to be signed on behalf
of the company any promissory note, endorsement, cheque or order for money or goods wherein
the name of the company is not mentioned, he is personally liable to the holder of the cheque,
etc. unless the amount is duly paid by the company.

3. GROUP ACCOUNTS

Where at the end of its financial year a company has subsidiaries, group accounts must be laid
before the company in general meeting when the company’s own balance sheet and profit and
loss account are so laid.

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 4. FRAUDULENT TRADING

If in the course of the winding up of a company it appears that any business of the company has
been carried on with intent to defraud creditors, the Court may declare that any persons who
were knowingly parties to the carrying on of the business in this way are to be personally
responsible without any limitation of liability for all or any of the debts or other liabilities of the
company as the Court may direct.

5. INVESTIGATION INTO RELATED COMPANIES

If an inspector appointed by the SECP to investigate the affairs of a company thinks it necessary
for the purposes of his investigation to investigate also the affairs of its subsidiary or holding
company, he has power to do so.

6. WHERE COMPANY IS A “SHAM” OR “PUPPET”

The Court will lift the veil where the company is a “sham”, e.g. where a person had agreed to sell
land to a buyer, and then changed his mind, and sold it to a company (of which he and his
servant were the only members) in order to avoid being compelled to sell the property to the
buyer, the Court could look to the reality of the situation, and order that the company should
convey it to the buyer.

7. COMPANY ACTING AS AGENT FOR SHAREHOLDERS

Where the company is acting as an agent for its shareholders, they will be liable for its acts.
Whether it is acting as an agent is a matter of fact in each case.

8. ENEMY CHARACTER

In time of war the Court will lift the veil to see whether a company is controlled by enemy aliens.

9. RESIDENCE FOR TAX PURPOSES

Where it is desired to establish for tax purposes in what country a company is resident, the Court
will lift the veil and find out where its central management is, and that place determines its
residence.

10. WHOLLY OWNED SUBSIDIARY

Where a holding company owned all the shares in a subsidiary company and the directors of
each company were the same, the Court could lift the corporate veil and look at the realities of
the situation.

The differences between limited companies and partnerships can be conveniently set out as
follows:

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 Partnership Limited Company

(a) the “firm” is not a distinct “person”. It A company is a distinct “being”.

is made up of the several persons who
compose it, and the property of the firm
belongs to all the members in common.
Consequently partners cannot make
contracts with the firm, and judgment
creditors can seize the goods of any partner.

(b) A partner cannot transfer his share to a Shares are usually freely transferable in the
person so as to make him a partner without case of public companies, but not in private
the consent of the others. companies.

(c) Each partner is an agent of the firm to A shareholder is not an agent for the
make contracts. company.

(d) The partnership can do anything which A company’s powers are limited to those
the partners agree to do. allowed by the objects clause in the
Memorandum of Association.

(e) The liability of each partner for the The liability of the shareholders may be
debts of the firm is unlimited. limited either by shares or by guarantee.

(f) The amount of capital can be freely The capital is set out in the Memorandum,
altered from time to time by the partners. but can be increased or reduced in
accordance with the provisions of the
Companies Ordinance, 1984.

(g) The death or bankruptcy of a partner The death or bankruptcy of a member does
dissolves the partnership. not affect the life of the company.

Case Analysis:

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The President vs. Mr. Justice Shaukat Ali, PLD 1971 SC 585 (pages 616 and 617)

In a reference under Article 128(5) some of the charges against a Judge of the High Court were:
that prior to his elevation to the Bench he was a shareholder of two private limited Companies
and this he continued to be given after he had become a Judge; that during the tenure of his office
as a Judge he had business and financial dealings with the said companies and had incurred
financial and other obligations to the said company which were likely to embarrass him in the
performance of his duties; that he involved himself in the activities of industry and trade for the
pursuit of wealth. The gravamen of these charges was that the respondent involved himself in
activities of trade and business, in contravention of Article VI of the Code of Conduct framed for
Judges of the superior Courts. On behalf of the State it was urged that the so-called private
companies were in substance nothing more than private partnership firms confined to members
of the same family. In the circumstances it was urged that it was permissible to lift the veil of
incorporation and look behind it for ascertaining the true nature of the association of the
respondent with these concerns. As against this the counsel appearing on behalf of the
respondent contended that a Company has a separate legal entity apart from its shareholders
whether it is a private or public company. Merely because a person holds shares in a private
Company it cannot be said that he either participated in the management or become involved in
activities of trade and industry. The lifting of the veil of incorporation could not be done in
respect of questions relating to the property of the company, the capacity of acts done and the
rights acquired or liability assumed by its shareholders. It was urged that in absence of positive
evidence to show active participation in the management or control of the affairs of a limited
liability company, a corporator or shareholder does not become involved in trade or business and
far less can holding of shares in such companies be said to the hindrance in the proper discharge
of his function in another capacity such as that of a public servant or a Judicial Officer. Reliance
was placed on the decision in the case of Salomon v. Saloman 1897 AC 22.

Held: The trend of decisions since the enunciation of the law in Salomon’s case appears,
however, to show that in a number of important respects both the Courts and the Legislatures
have rent the veil which was recognized in the above-mentioned decision to be almost inviolable.
The growing tendency appears to be rather to look at the substance and not to allow the vision to
be clouded by the shadow of the corporate personality. Thus where the corporate personality is
being used merely as a cloak for fraud or improper conduct or where it can be established that
the corporate personality is merely acting as an agent or trustee for someone else, be he an
individual or another subsidiary company, or where it is necessary to determine the true character
of the corporate personality for other purpose, such as to determine its tax liability or its quasi-
criminal liability or as to whether the corporate body is an enemy concern or not, or a mere
trustee for certain purposes, the Courts have not hesitated to look behind the veil of
incorporation. There are also other circumstances in which the veil has been pierced and the
separate legal entity theory given the go-by. It appears that even where questions of public policy
are involved, the Courts have not hesitated to lift the veil of incorporation.

Whatever might be the position of third parties, vis-à-vis the company and the liabilities of its
shareholders, it does appear that there is no bar to the Courts lifting the veil of incorporation to
determine the true relationship of the shareholders with regard to their dealings with the

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company or to ascertain the true nature of the company itself in matters which are governed by
other statutes or where other considerations necessitate the taking of such a step. In the present
case too, the Council is not concerned with the liability of the respondent as a member of the
companies but is concerned, in terms of a Code of Conduct drawn up under the Constitution with
determining as a matter of public policy as to whether the association of a Judge of a Superior
Court with such concerns constitutes involvement in activities of trade, business or industry. For
this purpose the Council is entitled to go behind the shadow of incorporation in order to ascertain
as to what the real nature of the association of the respondent was with these concerns.

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