The Companies Act, 2017 Will Make Doing Business In Pakistan Easier (Part 1/3)

The Companies Act, 2017 Will Make Doing Business In Pakistan Easier (Part-1/3)

What Is a Company

A company, abbreviated co., is a legal entity made up of an association of people, be they natural, legal, or a mixture of both, for carrying on a commercial or industrial enterprise. Company members share a common purpose and unite in order to focus their various talents and organize their collectively available skills or resources to achieve specific, declared goals. Companies take various forms such as:

  • Voluntary associations which may include non-profit organization
  • A group of soldiers
  • Business entities with an aim of gaining a profit
  • Financial entities and banks

A company or association of persons can be created at law as legal person so that the company in itself can accept limited liability for civil responsibility and taxation incurred as members perform (or fail) to discharge their duty within the publicly declared “birth certificate” or published policy.

Because companies are legal persons, they also may associate and register themselves as companies – often known as a corporate group. When the company closes it may need a “death certificate” to avoid further legal obligations.

Company can be defined as an “artificial person”, invisible, intangible, created by or under law, with a discrete legal personality, perpetual succession, and a common seal. It is not affected by the death, insanity, or insolvency of an individual member.

A company is an artificial person created by law, which can sue and be sued, except that it cannot be jailed or hanged. Which is why, ever since the Dutch East India Co. issued stock for the first time in history, around 1602, the lawmakers continue to struggle to frame regulations robust and comprehensive enough to protect the interests of the minorities, and to restrain, as far as possible, companies from indulging in fraudulent practices and illegal acts. While the thrust of these regulations is focused towards holding those at the helm of affairs of the corporations responsible for the vagaries of the latter, indeed a logical approach in the given circumstances, opaqueness of the corporate veil has continued to frustrate the long arm of the law even in this apparently simple objective.

In hindsight, corporations, or companies as referred to in Pakistan, have been the backbone for capitalism, and arguably, have played the most significant role in improving the quality of life of humanity. On the other hand, the concept of limited liability does foster reckless financial decisions, since management stands to lose nothing on a personal level in the case of any adverse eventuality, hence the need for regulation. Additionally, as companies have continued to grow and the world became flat, pursuant to globalization coupled with the advances in information technology, the need for fairly regular review and modification of the underlying legislation regulating companies has become necessary and urgent.

The quest to achieve the Golden mean of corporate regulations has globally experienced many ups and downs in recent time, especially in the case of the banking sector where easing of regulations fostered a recession with Basel III again tightening the regulatory framework. In general, public outcry, pursuant to corporate scandals, is a catalyst for a harsher regulatory regime which appears to be the broader drift of the Act.

There are 559 companies listed on the Pakistan Stock Exchange, which it can be said require proactive monitoring, in light of public interest, minority holdings and other factors such as environment and social welfare. Albeit, even in these cases a balanced approach is warranted, which ensures safeguarding of promoter’s interest side by side with the minority. However, more importantly, in case of Pakistan there is an urgent need to facilitate the migration of the informal business sector within the folds of the documented economy and corporate laws can play a significant role to meet this objective. There are in excess of 60,000 companies registered with the SECP and this is the segment which needs facilitation and encouragement to promote a corporate culture in the country. If the Act is perceived to be more authoritarian than necessary by the business community, it might impact other economic objectives of the government. Accordingly, it would be highly productive for SECP to in the short term continuingly engage the stakeholders during the transition.

The brief on the Act is an attempt to summarize the primary changes in corporate legislation, brought about by the Act, when compared with the Companies Ordinance 1984 as amended from time to time, with a view to facilitate an understanding of the new regulatory regime.

In summary the Act significantly enhance SECP authority in relation to: investigation and related matters; disqualification of directors; the power to call for information; mediation, compromises, arbitration, arrangement and reconstruction and in the case of general administrative functions. To quote a famous cliché, with great power comes great responsibility, SECP may consider devising rules and procedures for a fair and swift implementation of its newly acquired quasi judicial powers.

In the backdrop of a stricter regulatory environment, matters relating to audit and financial reporting have been significantly, if not fully, streamlined with the International Standards on Auditing and International Financial Reporting Standards (IFRS), respectively. Additional disclosure requirements in the Fourth and Fifth schedule go beyond the disclosure requirements of IFRS.

In a positive development, a lot of filing, registration and winding up requirements have been simplified with a proactive thrust towards automation, i.e. e- filing. Particularly life has been made simpler for single member companies and companies with small capital.

Promulgation of Companies Act 2017

The promulgation of the Companies Act, 2017 which was published in the official gazette on May 31, 2017, is aimed at ease of starting and doing business. It has simplified registration and post-incorporation compliance. The Act will ease doing business in the following manner:

  1. Single member and private limited companies are exempt from filing annual returns, audit of financial statements, and filing of director’s report. 
  2. Private companies having paid up capital of one million rupees or less are exempt from the requirement to prepare consolidated financial statements. 
  3. Single member companies are exempted from the requirements to appoint company secretary, hold general and board meetings, as well as election of director. 
  4. A simple one-page memorandum, having principal line of business and prohibtory clauses is introduced vide the First Schedule to the Act. 
  5. Alteration of memorandum and articles of association has been made easier. 
  6. Appointment of CEO is required to be notified at the time of incorporation along with directors and no additional requirement to notify it after incorporation. 
  7. Companies can serve documents/notices to the members, registrar and the Securities and Exchange Commission (SECP) through electronic means. 
  8. Enabling provisions are provided to empower the Commission to notify mandatory service of documents by the company to members electronically. 
  9. Members and directors can participate in the meetings with other members and directors through video links. 
  10. Voting can be done through electronic means.
  11. Passing of members’ resolution through circulation in case of unlisted companies is allowed.
  12. Companies shall be able to rectify overdue filings without any cumbersome process.
  13. Concept of inactive company is introduced to provide flexibility to owners to keep the company alive with no compliance requirements during the inactive period.
  14. Procedure for amalgamation and merger of companies is simplified by allowing the amalgamation of wholly owned subsidiaries in the holding company without formal approval. 
  15. SECP is empowered to enhance the limit of paid up capital beyond Rs.10 million for mandatory filing of audited financial statements by the private company.

Executive Summary

  • A number of new definitions added and some existing definitions are amended to bring clarity. Several of these terms are already in use in code of corporate governance and general business practices.
  • The definition of associated undertakings / companies amended to exclude associate relationship due to existence of independent directors as common directors between the two entities. This change is a step towards aligning definition of associated company with definition given in IAS 28 – Investments in Associates and Joint Ventures.
  • A special bench to be formed at each of High Courts to deal with Companies Act matters in a speedy manner. An office of Registrar of Company Bench to be created to administer the cases.
  • Various filings/ service by electronic modes allowed. These include service of summons by the Courts, service of documents on a company, service of documents on Commission or the registrar, service of notice on a member. After the notified date all information, notices and accounts or any other document to be provided by the company to its members, shall only be provided electronically on the email address provided by the members. The Commission has been empowered to require mandatory electronic filing of any document, return or application to be filed, lodged or submitted with the Commission or the registrar after the notified date.
  • A company may carry on or undertake any lawful business or activity except a business which is prohibited or restricted by any law, rules or regulations unless necessary license, registration, permission or approval has been obtained. Memorandum of association made simpler by requiring statement of principal line of business only. The name of the company should commensurate with the principal line of business.
  • Process for conversion of a company from public to private, private to single member, unlimited to limited, and a company limited by guarantee to a company limited by shares and vice-versa for each has been laid out.
  • A company having share capital, shall have shares in book-entry form only.
  • All companies having share capital can now issue fully paid shares of different kinds and classes as provided in memorandum and articles. Previously this was restricted to companies limited by shares.
  • First right of refusal made mandatory for sale of any shares held by members of a private company.
  • All listed companies to provide a video link to attend AGM from cities other than where the meeting is being held in case members holding more than ten percent are resident in that other city. On a poll, vote may be given through video link.
  • Members of a private company or a public unlisted company (having not more than fifty members), may pass a resolution (ordinary or special) by circulation signed by all members who are entitled of vote.
  • A resolution in writing signed by all the directors or the committee of directors entitled to receive notice of a meeting of the directors or committee of directors shall be as valid and effectual as if it had been passed at a meeting of the directors or the committee of directors duly convened and held.
  • A data bank of independent directors would be developed and all companies would be required to select independent directors from such data bank. The data bank will be maintained by such institutions as notified by the Commission.
  • Every public interest company to have female representation on their board as may be specified by the Commission.
  • An independent director; and a non-executive director; shall be held liable, only in respect of such acts of omission or commission by a listed company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.
  • Loans to directors or their relatives including issuance of a guarantee or provision of security in connection with the loans allowed with approval through a resolution of the members of the company. In case of a listed company approval of the Commission is also required. The above is not applicable to a company which in the ordinary course of its business provides loans or gives guarantees or securities.
  • The Board has been empowered to take decisions for takeover or acquisition of a controlling or substantial stake in another company.
  • A listed company shall not be entitled to sell or otherwise dispose of the undertaking, which results in or may lead to closure of business operation or winding up of the company, without there being a viable alternate business plan duly authenticated by the Board.
  • A new section on related party transactions has been inserted setting out mechanism for all related party transactions. The definition of related party has been extended to include a public company in which a director or manager is a director or holds along with his relatives, any shares of its paid up share capital. The definition of relatives has also been extended to include spouse, siblings and lineal ascendants and descendants. The definition of related parties is at variance with definition in IAS 24 – Related Party Disclosures which is more principle based.
  • Restriction imposed on company from selling or purchasing any asset from / to a director or a connected person for a consideration other than cash, without the approval of members.
  • The companies have been classified into three categories, public interest companies & large sized companies, Medium Size companies and small sized companies and accounting framework for each type laid down for each.
  • All companies allowed to prepare their financial statements in full compliance with International Financial Reporting Standards (IFRSs), if they so desire. However, regulated (e.g. banking companies, NBFIs, Insurance, etc.) and those entities whose accounts are affected by various circulars from SECP or SBP will not be able to prepare such financial statements.
  • The financial year of the holding company and subsidiaries should coincide unless there are good reasons against it. The companies have been provided liberty that either the holding company may change its financial year according to subsidiary company and vice versa.
  • In case of listed company, the financial statements should also be signed by Chief Financial Officer in addition to CEO and a director.
  • In case of a listed company, any dividend payable in cash shall only be paid through electronic mode directly into the bank account of shareholders.
  • Unclaimed shares, modaraba certificates and dividend should be transferred to federal government after a period of three years.
  • An Investor Education and Awareness Fund (“Fund”) to be managed and controlled by the Commission shall be formed. This would be funded by profits/ interest on companies unclaimed instruments/dividend, grants and donations by federal government and any other forfeitures. The Fund shall be utilized for the promotion of investor education and awareness, educational activities including seminars, training, research and publications and investor education and awareness activities.
  • The registrar, inspector or investigation officer has been empowered, with the prior permission of commission, to enter such place and cause a search to be made at any time and freeze, seize or take possession of and retain any document, object, article, material, thing, account books, movable or immovable property where he has reasons to believe that documents, book and paper or anything relating to any company or any chief executive or officer of such company or any associate of such person is useful or relevant to any proceedings or investigation under the Act or which may be destroyed, mutilated, altered, falsified or secreted. These powers have been widened and were previously available with the permission of Court.
  • New section has been inserted empowering the Commission to initiate investigation proceedings where it thinks that any fraud or activity is undertaken by a company having serious implications.
  • Commission is empowered to maintain a Mediation and Conciliation Panel consisting of suitably qualified individuals for mediation between the parties for any proceeding under the Act before the Commission or the Appellate Bench.
  • A fresh concept of dispute resolution has been introduced and the company, its management or its members or creditors may directly refer relevant matters to any member of the mediation and conciliation panel maintained before taking recourse to formal dispute resolution.
  • The matters to approve compromise, arrangement, reconstruction and amalgamation are being given under the jurisdiction of the Commission previously under the jurisdiction of Court).
  • Amalgamation of wholly owned subsidiary into its holding company or wholly owned subsidiaries of the same holding company allowed without the approval of the Commission.
  • Commission to maintain a panel of provisional manager and official liquidators.
  • Foreign companies (which have a place of business or a liaison office in Pakistan, whether by itself or through an agent, physically or through electronic mode or conducts any business activity in Pakistan) to furnish information of shareholding including beneficial ownership or such other information or document, as may be required for the purposes of this Act or in connection with any inspection, inquiry or investigation and it shall be the duty of the company and its officers to furnish such information or document within specified time.
  • A company which ceases to operate and has no known assets and liabilities has been provided with easy exit option by applying to the registrar in a specified manner seeking to strike off its name from the register of companies on payment of prescribed fee.
  • Every substantial shareholder or officer of a company who is a citizen of Pakistan including holders of dual citizenship having shareholding in a foreign company or body corporate shall report to the company his shareholding or any other interest as may be notified by the Commission. The company’s investments in securities or other interest as may be notified in a foreign company or body corporate or any other interest shall also be reported. All the above information shall be reported to the registrar through a special return on a specified form within sixty days from commencement of this Act and thereafter annually along with annual return. The Commission shall keep record of the information in the Companies’ Global Register of Beneficial Ownership. The information shall be provided to the Federal Board of Revenue or to any other agency, authority and court.
  • Concept of Free Zone Company added for companies formed for the purpose of carrying on business in the export processing zone or other area notified as free zone.
  • For the purposes of filing under the Act, a person may avail services of “intermediary” as defined in the Electronic Transactions Ordinance, 2002.
  • New requirements have been included for real estate companies.
  • A concept of Agriculture Promotion Company introduced having its principle line of business related to produce for agriculture promotion or managing produce as collateral or engaged in any activity connected with or related to any Produce or other related activities. Such company shall primarily deal with the produce of its members.
  • Where valuation is required, in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets (herein referred to as the assets) or net worth of a company or its liabilities, it shall be valued by a person having such qualifications and experience and registered with the Commission.
  • A standard scale of penalty for offences set out.
  • An amendment has been made where under powers, in relation to enquiries and proceedings, conferred on the Federal Government are now vested with the Commission.
  • Section 235 of the repealed Companies Ordinance 1984 (‘repealed ordinance’) relating to treatment of surplus arising on revaluation of fixed assets has not been carried forward in The Companies Act, 2017. As the said section carried certain accounting treatment relating to revaluation of fixed assets, the affected companies would need to change their accounting policies and account for the change in accordance with IAS 8 – ‘Accounting Policies, Changes in Accounting Estimates and Errors’. The main effects would be disclosure of surplus under equity and not able to offset deficit on revaluation of an asset with surplus on another asset.
  • Federal government has been given the right to nominate Chief Executive of a company where majority of directors are nominated by the Federal Government. His term shall also be determined by the Federal government.
  • New provision has been added whereby a company, other than a listed company, which is formed for a future project or to hold an asset or intellectual property and has no significant accounting transaction, can obtain the status of “Inactive Company” by making an application to the Registrar in a prescribed manner.
  • No company shall be called a Shariah compliant company unless it is conducting its business according to the principles of Shariah and it has obtained a certificate of Shariah compliance from the Commission. No security shall be called a Shariah compliant security unless the proceeds from the security are utilized for Shariah permissible business and it has obtained a certificate of Shariah compliance from the Commission.
  • Mandatory requirement to have NTN for a director has been included. However, the Commission has been empowered to grant an exemption.
  • Every officer of a company shall endeavor to prevent the commission of any fraud, offences of money laundering including predicated offences as provided in the Anti-Money Laundering Act, 2010 (VII of 2010) with respect to affairs of the company and shall take adequate measures for the purpose.
  • A person may on acquiring interest in a company as member, represented by shares, at any time after acquisition of such interest deposit with the company a nomination conferring on a person the right to protect the interest of the legal heirs in the shares of the deceased in the event of his death, as a trustee and to facilitate the transfer of shares to the legal heirs of the deceased subject to succession to be determined under the Islamic law of inheritance and in case of a non-Muslim members, as per their respective personal law.
  • The board shall make out and attach to the financial statements such statement of compliance as may be specified.
  • The clause relating to indebtedness of the auditor has been expended to exclude indebtedness other than in the ordinary course of business of such entities. The new clause reads ‘a person who is indebted to the company other than in the ordinary course of business of such entities’. With the change now the auditors can have borrowings from clients who are in the business of lending money as long as those loans do not become overdue. Other conditions in the code of ethics such as materiality of borrowings would remain applicable.
  • Additional disclosures required in the financial statements. These includes:

a) Revaluation surplus on property, plant and equipment, long term deposits and prepayments, unpaid dividend              and unclaimed dividends to be disclosed as separate line item on statement of financial position.

b) In case or revaluation, forced sale value of property, plant and equipment or investment property to be                          disclosed.

c) Additional disclosure in respect of contingencies, e.g. name of the Court, the date instituted, principal parties               and factual basis of proceedings.

d) Names and relationship for royalty payments.

  • General information about the company to include, geographical location and address of all business units, particulars of immoveable assets including location and area of land, name of associated companies or related parties and the basis of relationship with them.
  • Mutual Funds, Pension Funds, Banks, Insurance, brokers, and investment banks are classified as unlisted Public Interest Company (PIC), in the third schedule (accounting framework : IFRS and fifth schedule).
  • Additional disclosures for foreign shareholders, Shariah compliant companies, related parties, associated companies, Joint ventures and subsidiaries are included in third and forth schedules.
  • Management assessment of sufficiency of tax provision made in the company’s financial statements shall be clearly stated along with comparisons of tax provision as per accounts viz a viz tax assessment for last three years in the financial statements.

Significant changes from Companies Ordinance 1984

PART I – PRELIMINARY

Definitions

ASSOCIATED COMPANIES AND ASSOCIATED UNDERTAKINGS 

Section 2 (4)

The definition of associated companies and associated undertakings has been amended to exclude companies interconnected by virtue of directorship of a person appointed as an independent director. This change is a step towards aligning definition of associated company with definition given in IAS 28 – Investments in Associates and Joint Ventures.

BENEFICIAL OWNERSHIP OF SHAREHOLDERS OR OFFICER OF A COMPANY

Section 2 (7)

“beneficial ownership of shareholders or officer of a company” means ownership of securities beneficially owned, held or controlled by any officer or substantial shareholder directly or indirectly, either by:

  •  him or her;
  • the wife or husband of an officer of a company, not being herself or himself an officer of the company;
  • the minor son or daughter of an officer where “son” includes step-son and “daughter” includes step-daughter; and “minor’ means a person under the age of eighteen years;
  • in case of a company, where such officer or substantial shareholder is a shareholder, but to the extent of his proportionate shareholding in the company.

Provided that “control” in relation to securities means the power to exercise a controlling influence over the voting power attached thereto.

Provided further that in case the substantial shareholder is a non-natural person, only those securities will be treate beneficially owned by it, which are held in its name.

Substantial shareholding has been defined as 10% or more of the shares or 10% or more of the voting rights.

Body corporate

Section 2 (9)

The definition has been further elaborated to include the following:

  • A company incorporated under this Act or company law;
  • A company incorporated outside Pakistan; and
  • Statutory body declared as body corporate in the relevant statute.

Books of account

Section 2 (11)

 The definition has been elaborated to include records maintained in respect of:

  • all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;
  • all sales and purchases of goods and services by the company;
  • all assets and liabilities of the company; and
  • items of cost in respect of production, processing, manufacturing or mining activities.

Employee Stock Option

Section 2 (29)

It means the option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the right to purchase or to subscribe for shares of the company at a price to be determined in the manner as may be specified.

Expert

Section 2 (30)

Expert includes; an engineer, a valuer, an actuary, a chartered accountant or a cost and management accountant and any other person who has the power or authority to issue a certificate in pursuance of any law for the time being in force or any other person notified as such by the Commission.

Financial institution

Section 2 (31)

This definition has been further elaborated to make it in in line with definition given in Financial Institutions (Recovery of Finance) Ordinance, 2001.

“financial institution” includes:

  • any company whether incorporated within or outside Pakistan which transacts the business of banking or any associated or ancillary business in Pakistan through its branches within or outside Pakistan and includes a government savings bank, but excludes the State Bank of Pakistan;
  • a modaraba or modaraba management company, leasing company, investment bank, venture capital company, financing company, asset management company and credit or investment institution, corporation or company; and
  • any company authorised by law to carry on any similar business, as the Federal Government may by notification in the official Gazette, specify.

Financial period

Section 2(32)

“financial period” in relation to a company or any other body corporate, means the period (other than financial year) in respect of which any financial statements thereof are required to be made pursuant to this Act.

Net worth

Section 2 (43)

“Net worth” means the amount by which total assets exceed total liabilities.

Postal ballot

Section 2 (47)

“Postal ballot” means voting by post or through any electronic mode.

Provided that voting through postal ballot shall be subject to the provision in the articles of association of a company, save as otherwise provided in this Act.

Prescribed

Section 2 (48)

“Prescribed” means prescribed by rules made by the Federal Government under this Act. This definition has been made broader. The definition in repealed Ordinance was: “Prescribed” means:

  • as respects the provisions of this Ordinance relating to the winding up of companies and other matters requiring to be determined or decided by the Court, prescribed by rules made by the Supreme Court in consultation with the High Courts or, where the Supreme Court advises the Federal Government to do so, by the Federal Government in consultation with the High Courts; and
  • as respects the other provisions of this Ordinance, prescribed by rules or regulations made by the Federal Government [or the Commission as the case may be] after previous publication in the official Gazette.

Promoter

Section 2 (50)

“promoter” means a person:

  • who is named as a subscriber to the memorandum of association of a company; or
  • who has been named as such in a prospectus; or
  • who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
  • in accordance with whose advice, directions or instructions the Board of the company is accustomed to act.

Provided that nothing in sub-clause (d) shall apply to a person who is acting merely in a professional capacity;

Provided further that nothing contained in sub-clause (d) shall apply to the Commission, registrar or any authorised officer by virtue of enforcement or regulation of the provisions of this Act or any rules, regulations, instructions, directions, orders thereof.

Public sector company

Section 2(54)

“Public sector company” means a company, whether public or private, which is directly or indirectly controlled, beneficially owned or not less than fifty- one percent of the voting securities or voting power of which are held by the Government or any agency of the Government or a statutory body, or in respect of which the Government or any agency of the Government or a statutory body, has otherwise power to elect, nominate or appoint majority of its directors and includes a public sector association not for profit, licensed under section 42.

Provided that nomination of directors by the Commission on the Board of the securities exchange or any other entity or operation of any other law shall not make it a public sector company.

Redeemable capital

Section 2 (55)

The definition amended to included Sukuks and other forms of finances.

Shariah compliant company

 Section 2(64)

“Shariah compliant company” means a company which is conducting its business according to the principles of Shariah.

Subsidiary company

Section 2 (68)

The definition of ‘Subsidiary” has been elaborated by specifying direct or indirect holding. Indirect holding has been specified to be with one or more of its subsidiary companies.

Previously subsidiary was defined where the holding company directly or indirectly controlled more than fifty percent of its voting securities or had power to elect and appoint more than fifty percent of its directors.

“subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company:

  • controls the composition of the Board; or
  • exercises or controls more than one-half of its voting securities either by itself or together with one or more of its subsidiary companies.

Provided that such class or classes of holding companies shall not have layers of subsidiaries beyond such numbers, as may be notified.

Explanation – For the purposes of this clause:

  • a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (a) or sub- clause (b) is of another subsidiary company of the holding company;
  • the composition of a company’s Board shall be deemed to be controlled by another company if that other company by exercise of power exercisable by it at its discretion can appoint or remove all or a majority of the directors;
  • the expression “company” includes anybody corporate; “layer” in relation to a holding company means its subsidiary or subsidiaries.

Turnover

Section 2(70)

“turnover” means the aggregate value of sale, supply or distribution of goods or on account of services rendered, or both, net of discounts. If any, held by the company during a financial year.

Voting right

Section 2 (73)

This is added to introduce the concept of e voting through video link.

“voting right” means the right of a member of a company to vote on any matter in a meeting of the company either present in person or through video link or by proxy or by means of postal ballot.

Provided that attending of meeting through video-link shall be subject to such facility arranged by the company and in the manner as may be specified, save as otherwise provided in this Act.

Non-trading companies with purely provincial objects

Section 3

The Act shall apply to non-trading companies with purely provincial objects that are confined to a single province. The powers conferred on the Minister Incharge of the Federal Government or Commission may be exercised by the Minister Incharge of the provincial government.

In the event if a non-trading company formed on above basis extends its activities beyond the territorial limits of the respective provinces then it will attract penal provision under the Act.

PART II – JURISDICTION OF COURT

Jurisdiction of the Court and creation of Benches

Section 5

The jurisdiction of the court has been simplified and reinforced. No Civil Court or any other Court shall have Jurisdiction to entertain any suit or proceeding in respect of any matter which the High Court is empowered to determine by or under this Act.

There shall be in each High Court, one or more benches, each to be known as Company Bench. Also a new provision has been added to provide the office of ‘Registrar of the Company Bench” in each of the High Courts.

The new provision relating to Registrar are reproduced below:

  • There shall be a Registrar to be known as “Registrar of the Company Bench” duly notified by the Chief Justice of the respective High Court who shall be assisted by such other officers as may be assigned by the Chief Justice of the respective High Court. 
  • The Registrar of Company Bench shall perform all the functions assigned to it under this Act including all ministerial and administrative business of the Company Bench such as receipt of petitions, applications, written replies, issuance of notices, service of summons and such other functions or duties as may be prescribed under section 423. 
  • The Chief Justice of respective High Courts, if deemed appropriate, may also establish a Secretariat in each Company

Bench of the respective High Court in such form and manner to provide secretarial support and to perform such functions as may be prescribed under section 423.

Procedure of the Court and appeal

Section 6

Detailed procedure of filing of written submissions to the Court under this Act has been laid down. Such written submission shall be filed with the Registrar of Company Bench.

No adjournment shall be granted once the Court has fixed a date of hearing except in exceptional circumstance beyond the control of the party.

The petition proceeded before the court shall be decided within a period of 120 days (extended from 90 days in the repealed Ordinance).

The provisions of the Qanun-e-Shahdat Order 1984 and the Code of Civil Procedure, 1908 shall not apply to the proceedings, except to such extent as the Court may determine in its discretion.

Any person aggrieved by any judgment or final order of the Court may, file a petition for leave of appeal in the Supreme Court within 60 days.

Prohibition of certain names and mentioning of old name

Section 10

Enabling provision has been added empowering the Commission to to notfy such word or expression in the name of a company which cannot be used.

Registrar can also reject or change any name if it is identical with or resembles or similar to the name of a company; inappropriate; undesirable; deceptive; or designed to exploit or offend the religious susceptibilities of the people.

No Company shall be registered by a name which contains any words which suggest the establishment of a modaraba management company or to float a modaraba or any other business requiring license from the commission without such license.

An enabling provision is also introduced for the reservation of a name for a period of 60 days.

Change of Name

Section 13

The time frame for mentioning the old name with the new name has been reduced from 1 year to 90 days.

Mode of forming a company

Section 14

  • Three or more persons may form a public company
  • Two or more persons may form a private company
  • One person may form a single member company

A company formed may be a company with or without limited liability, that is:

  • a company limited by shares;
  • company limited by guarantee; or
  • an unlimited company.

Registration of memorandum and Articles

Section 16

The section has been redrafted to include and combine all matters relating to filing and registration of memorandum & articles, certificate of incorporation and its effects etc.

A new subsection introduced to allow a period of 30 days to appeal against a refusal order for registration of the memorandum.

Effects of memorandum

Section 17

All money payable by a subscriber in pursuance of his undertaking in the memorandum of association against the shares subscribed shall be payable in cash within 30 days from the date of incorporation of the company. The same shall be reported to the registrar within 45 days from the date of incorporation accompanied by a certificate by a practicing chartered accountant or a cost and management accountant verifying the receipt of money so subscribed.

Provided that in case the share money is not deposited within the prescribed time, the shares shall be deemed to be cancelled and the name of that subscriber shall be removed from the register and the registrar shall give such direction to the company in each case as deemed appropriate for compliance with the provisions of the company law.

Commencement of business by a public company

Section 19

 In this section following changes are incorporated:

  • The word “debenture” is deleted since the company cannot exercise borrowing powers unless the requirement for the commencement of business are complied.
  • The requirement of minimum subscription has been explained as follows:

“Minimum subscription”, means the amount, if any, fixed by the memorandum or articles of association as minimum subscription upon which the directors may proceed to allotment or if no amount is so fixed and specified, the whole amount of the share capital other than that issued or agreed to be issued as paid up otherwise than in cash.”

Registered office

Section 21

Time frame for reporting the change in registered office has been reduced to 15 days from 28 days.

Publication of name by a company

Section 22

The requirement of mentioning telephone number, fax number, email and website address on letterhead and, all its documents, notices and other official publications have been added along with the display of certified copy of certificate of incorporation at every place of business.

Principal line of business

Sections 26 and 29

Companies are allowed to undertake all lawful business or activity which is necessary in attaining its business activities. A company shall not engage in any business which is prohibited or restricted by any law unless necessary license, registration, permission or approval has been obtained. A concept of principal line of business is also introduced in section 26 and that it should always commensurate with the name of the company. The existing companies shall continue with their existing memorandum of association and the object stated at serial number 1 of the object clause shall be treated as the principal line of business.

If the object stated at serial number 1 of the object clause is not the principal line of business of the company, all such companies shall be required to intimate to the registrar their principal line of business within such time from the commencement of this Act and on the form as may be specified. A copy of the revised memorandum of association mentioning the principal business at serial number 1 of the object clause shall also be furnished to the Registrar.

The existing companies or the companies to be formed to carry on or engage in any business which is subject to a licence or registration, permission or approval shall mention the businesses as required under the respective law and the rules and regulations made thereunder.

Associations not for profit

Sections 42 to 44

New requirements are as follows:

  • that the company’s objects and activities shall not be against the laws, public order, security, sovereignty and national interests of Pakistan;
  • a separate format for the association to be licensed under this section has been prescribed;
  • Grounds for revocation of license added.

New sections have been included which describe the effects of revocation of license and penal provisions.

Conversion of Companies

Sections 46 to 50

The process for conversion from public to private, private to single member company, unlimited to limited liability, limited by guarantee to limited by shares and vice versa, for each of the categories has been set out in detail in these sections. Such conversion require the Company to pass a special resolution and seek prior approval of the Commission.

Service of documents on Commission, Registrar, Company and Member

Sections 53 to 55

Courier service and electronic means have been added as the mode of service, as well as the enabling provision empowering the Commission to prescribe any other manner is also included.

The provision relating to service of notice through advertisement in newspaper has been abolished to facilitate corporate sector.

Classes and kinds of share capital

Section 58

A company having share capital shall issue only fully paid shares which may be of different kinds and classes as provided by its memorandum and articles.

Previously, issue of different kinds and classes of shares was restricted to companies limited by shares.

Repayment of money received for shares not allotted

Section 68

The provision has been simplified and the time frame for the refund of money will be specified through regulations.

Previously, the company was required to take a decision within ten days of the closure of the subscription lists as to what applications have been accepted and refund the money within ten days of the date of such decision.

The rate of surcharge has been enhanced from 1.5 to 2 % per month, in case the refund is not made within the stipulated time.

Return as to allotments

Section 70

The time period for filing of return of allotment to the Registrar has been increased from 30 days to 45 days.

New requirement of filing a report from the auditors (or a practicing chartered accountant or a cost and management accountant in case where appointment of auditor is not mandatory) to the effect that the consideration has been received and share certificate issued has been added.

The procedure of filing the return of allotment for issues of shares for consideration other than cash has been simplified.

Time for issue of certificates

Section 71

Every company shall issue shares within thirty days after the allotment of any of its shares, or other securities and ensure delivery of the certificates to the person entitled thereto at his registered address.

In previous Ordinance, the time period for issue of certificates was 90 days.

Shares in book-entry form only

Section 72

A company having share capital, shall have shares in book entry form only. Existing company shall replace its physical shares with book entry form within 4 years from the commencement of this Act. The Commission may, extend the period for another 2 years.

Duplicate certificates

Section 73

The time for issuance of a duplicate certificate has been reduced from 45 to 30 days and for conveying the reasons of not issuing the duplicate certificate reduced to 20 days. The Company has the liberty to charge fee and actual expenses incurred on such enquiry.

Transfer

Section 74, 75 and 77

The time period for transfer of shares is reduced from 45 to 15 days. In case of conversion into book-entry form, the company shall, register such transfer in the name of the central depository, within ten days of application.

Time frame for notifying the defect in the transfer application / transfer deed has been reduced from 30 to 15 days.

Time frame for notifying the refusal to transfer application / transfer deed has been reduced from 30 to 15 days.

Transfer of shares by the members of a private company

Section 76

  • A member of a private company desirous to sell any shares held by him shall intimate to the Board his intention through a notice.
  • On receipt of such notice, the Board, within a period of ten days, shall offer those shares for sale to the members in proportion to their existing shareholding. Provided that a private company may transfer or sell its shares in accordance with its articles of association and agreement among the shareholders, if any, entered into prior to the commencement of this Act:. Provided further that any such agreement will be valid only if it is filed with the registrar within ninety days of the commencement of this Act.(3) The letter of offer for sale specifying the number of shares to which the member is entitled, price per share and limiting a time, within which the offer, if not accepted, be deemed as declined, shall be dispatched to the members through registered post or courier or through electronic mode.
  • If the whole or any part of the shares offered is declined or is not taken, the Board may offer such shares to the other members in proportion to their shareholding.
  • If all the members refuse to accept the offer or if any shares are left over, the shares may be sold to any other person as determined by the member, who initiated the offer.
  • For the purpose of this section, the mechanism/to determine the price of shares shall be such, as may be specified.

Transfer to nominee of a deceased member

Section 79

The provision has been amended according to Islamic law.

A person may on acquiring interest in a company as member, represented by shares, at any time after acquisition of such interest deposit with the company a nomination conferring on a person the right to protect the interest of the legal heirs in the shares of the deceased in the event of his death, as a trustee and to facilitate the transfer of shares to the legal heirs of the deceased subject to succession to be determined under the Islamic law of inheritance and in case of a non-Muslim members, as per their respective law. The person nominated under this section shall, after the death of the member, be deemed as a member of company till the shares are transferred to the legal heirs and if the deceased was a director of the company, not being a listed company, the nominee shall also act as director of the company to protect the interest of the legal heirs. The person to be nominated shall not be a person other than the relatives of the member, namely, a spouse, father, mother, brother, sister and son or daughter. The nomination in no way prejudice the right of the member making the nomination to transfer, dispose of or otherwise deal in the shares owned by him during his lifetime and shall have effect in respect of the shares owned by the said member on the day of his death.

Previously, as per section 80 of the repealed Companies Ordinance, 1984, a member represented by shares, at any time after acquisition of such interest deposit with the company a nomination conferring on one or more persons the right to acquire the interest in the shares therein specified in the event of his death. Where a member nominates more than one person, he shall specify in the nomination the extent of right conferred upon each of the nominees, so however that the number of shares therein specified are possible of ascertainment in whole numbers.

Issue of shares at a discount

Section 82

The issue of shares at a discount must be authorised by special resolution passed in the general meeting of the company. The resolution must specify the number of shares to be issued, rate of discount, and price per share.

In case of listed companies discount shall only be allowed if the market price is lower than the par value of the shares for a continuous period of past ninety trading days immediately preceding the date of announcement by the Board; and the issue of shares at discount must be sanctioned by the Commission. No approval of Commission is required for a discount up to 10%.

Further issue of capital

Section 83

Minimum and maximum time frame for the acceptance of offer has been prescribed i.e. 15 and 30 days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined.

In case of listed company, the member not interested to subscribe, may exercise the right to renounce the shares offered to him in favour of any other person, before the date of expiry stated in the letter of offer.

If the shares offered are not subscribed, the directors may allot such shares in such manner as they may deem fit, within a period of thirty days from the close of the offer.

Allotment other than right shares for cash or consideration other than cash to be made on the basis of special resolution. Value of non-cash asset shall be determined by a valuer registered with the Commission.

Enabling provision has been inserted for conversion of loan of the Federal Government given to a public sector company into shares in that company.

Prohibition on acceptance of deposits from public

Section 84

Except for the Specialized Companies (banking company etc.) and such deposits as may be notified by the Commission, the invitation and acceptance of deposits shall be prohibited.

Explanation. —For the purposes of this section, “deposit” means any deposit of money with, and includes any amount borrowed by, a company, but shall not include a loan raised by issue of debentures or a loan obtained from a banking company or financial institution or an advance against sale of goods or provision of services in the ordinary course of business.

Where a company accepts or invites, or allows or causes any other person to accept or invite on its behalf, any deposit, the company shall be punishable-

  • where such contravention relates to the acceptance of any deposit, with penalty which shall not be less than the amount of the deposit so accepted; and
  • where such contravention relates to the invitation for any deposit, shall be liable to a penalty of level 3 on the standard scale.
  • In addition to the fine on the company under sub- section (2), every officer of the company which is in default shall be punishable with imprisonment for a term which may extend to two years and shall also be liable to fine which may extend to five million rupees.

Alteration of share capital

Section 85

Condition of a special resolution to increase / consolidate / divide share has been added.

Requirement to register a mortgage or charge

Section 100

A company that creates a charge must file the particulars together with a copy of instrument, with the registrar for registration within a period of 30 days after the date of its creation (previously it was 21 days).

Registration of appointment of receiver or manager

Section 113

  • Where in order to ensure enforcement of security of a company’s property, a person obtains an order for the appointment of a receiver or manager, or appoints such a receiver or manager under any powers contained in any instrument, he shall within seven days of the order or of the appointment under the powers contained in the instrument, file a notice of the fact with the registrar. (Previously, the time period was within 15 days).
  • Where a person appointed as a receiver or manager under this section ceases to act as such, the person who had obtained the order or appointed such a receiver or manager pursuant to the powers contained in any instrument shall on ceasing of the receiver or manager, give the registrar a notice to that effect within seven days. (Previously, the time period was within 15 days)

PART VII – MANAGEMENT AND ADMINISTRATION

Section 118

A complete and comprehensive definition of “member” has been added in the main statute, with clarity that on the registration of a company, the subscribers of the memorandum shall become its members.

Index of Members and debenture- holders

Section 122 and 123

Separate sections have been added to maintain the index of members and debenture-holders.

Power to close register

Section 125

No substantial amendment has been made in the section from old section 151. However, requirement for advertisement for publication of notice for closure of register of members for companies other than listed companies have been removed while retaining a requirement for service of notice to that effect.

Moreover, the period of closure of register has been stated not exceeding whole thirty days in each year with further period of fifteen days to be allowed by the Commission on application of the Company.

Punishment for fraudulent entries in and omission from register

Section 127

No substantial changes made except for extension in term of imprisonment from one year to three years and fine amount extended from ten thousand rupees to one million rupees.

Annual return

Section 130

Previously listed companies were required to submit annual return containing specified particulars within forty five days from the date of annual general meeting with further extension of fifteen days on application made by company to registrar. However, in the Act, a time period for filing of return is reduced to thirty days from the date of annual general meeting. For listed companies, the period may be extended by fifteen days for special reasons. Further private companies having paid up capital not more than three million rupees and single member company are not required to file the return in case there is no change of particulars in the last annual return filed with the registrar. Such Companies shall inform the registrar that there is no change of particulars in the last annual return filed.

MEETINGS AND PROCEEDINGS

Statutory meeting

Section 131

Amendment has been made with respect to calling of statutory meeting of a public company having share capital. Now such meeting be conveyed within a period of one hundred and eighty days from the date at which company is entitled to commence business or within nine months from the date of its incorporation whichever is earlier. Where annual general meeting of a company is decided to be held earlier no statutory meeting shall be required.

Further statutory report to require to be certified by the Chief Executive Officer, at least one Director and in case of listed company also by the Chief Financial Officer.

Annual general meeting (AGM)

Sections 132, 133 and 134

Every company, shall hold, an annual general meeting within sixteen months from the date of its incorporation and thereafter once in every calendar year within a period of one hundred and twenty days following the close of its financial year. For a listed company, the time may be extended by thirty days. Previously it was required to be held within a period of eighteen months from the date of its incorporation and within not more than fifteen months after the holding of its last preceding annual general meeting thereafter. Further single member company is exempted from requirements to hold annual general meeting.

Previously it was expressly stated that notice of an extraordinary general meeting be sent to the members at least twenty one days before the date of the meeting and in case of an emergency affecting the business of the company, the registrar on application of directors authorize such meeting be held at such shorter notice as specified. However, such requirement is no longer mentioned. Further for companies other than listed companies if all members entitled to attend and vote at any extraordinary general meeting so agree a meeting may be held at a shorter notice.

The AGM can now be held in the city nearest to the city in which the registered office is situated. In case of listed companies, if members holding ten percent of capital, are resident in any other city, the company shall provide the facility of video-link to such members for attending AGM. The request for the same shall be received 7 days before the date of the meeting. A notice issued for the AGM should specify the option of video-link to such members of ordinary general meeting so agree a meeting may be held at a shorter notice.

The AGM can now be held in the city nearest to the city in which the registered office is situated. In case of listed companies, if members holding ten percent of capital, are resident in any other city, the company shall provide the facility of video-link to such members for attending AGM. The request for the same shall be received 7 days before the date of the meeting. A notice issued for the AGM should specify the option of video-link to such members.

In case of a listed company, such notice shall be sent to the Commission, in addition to its being dispatched in the normal course to members and the notice shall also be published in English and Urdu languages at least in one issue each of a daily newspaper of respective language having nationwide circulation.

On a poll, votes may be given either personally or through video-link or by proxy or through postal ballot.

The person attending the meeting through video link is to be counted for the purpose of quorum.

Demand for poll

Sections 143 and 144

Before or on the declaration of the result of the voting on any resolution on a show of hands, a poll may be ordered by the chairman or on a demand by the members present in person or through video-link or by proxy, where allowed, and having not less than one-tenth of the total voting power. When a poll is demanded it may be ordered to be taken by the chairman of the meeting by secret ballot.

Resolution through circulation

Sections 149

By Members

Members of a private company or a public unlisted company (having not more than fifty members), may pass a resolution (ordinary or special) by circulation signed by all members for the time being entitled to received notice of a meeting.

Provided the resolution has been circulated, together with the necessary papers to all the members. A members’ agreement to a resolution may not be revoked.

Such resolution be passed for any business (ordinary or special) other than:

  • the consideration of financial statements and the reports of the Board and auditors;
  • the declaration of any dividend;
  • the election and appointment of directors in place of those retiring; and
  • the appointment of the auditors and fixation of their remuneration.

Sections 179

By Directors

A resolution in writing signed by all the directors or the committee of directors entitled to receive notice of a meeting of the directors or committee of directors shall be as valid and effectual as if it had been passed at a meeting of the directors or the committee of directors duly convened and held.

Records of resolutions and meetings

Section 151

A requirement is inserted to keep records of copies of all resolutions of members passed otherwise than at general meetings and minutes of all proceedings of general meetings along with the names of participants from the date of resolution, meeting or decisions simultaneously in physical as well as electronic form and preserved for at least twenty years in physical form and permanently in electronic form.

Ineligibility of certain persons to become director

Section 153

Mandatory requirement to have NTN for a director has been included. The Commission may grant exemption from the requirement as may be notified.

In addition, an individual engaged in the business of brokerage, or is a spouse of such person or is a sponsor, director or officer of a corporate brokerage house and a person declared by a court as defaulter in repayment of loan to a financial institution cannot be a director of a listed company.

Securities and Exchange Commission of Pakistan via Circular 35 / 2016 dated 18 November 2016 granted a general exemption to promoters who are desirous of forming Small Size Companies as defined under the Third Schedule to the Act and Agriculture Promotion Companies formed in term of Section 457 of the Act from the requirement of NTN for the period of two years.

Female representation on the Board

Section 154

Public interest companies shall be required to have female representation on their board as may be specified by the Commission.

Number of directorships

Section 155

A new section has been added which places restriction on holding number of directorships in not more than such number of companies as may be specified by the Commission. A person who is a director in more than seven companies shall ensure the compliance within one year of the commencement of this Act.

Casual vacancy of director in case of listed company should be filled within 90 days.

Compliance with the Code of Corporate Governance

Section 156

The Commission may provide for framework to ensure good corporate governance practices, compliance and matters incidental and auxiliary for companies or class of companies in a manner as may be specified.

Retirement of first and subsequent directors

Section 158

All directors of the company on the date of first annual general meeting; or in case of subsequent directors on expiry of term of office of directors shall stand retired from office and the directors so retiring shall continue to perform their functions until their successors are elected.

The directors shall take immediate steps to hold the election of directors and in case of any impediment report such circumstances to the registrar within forty-five days before the due date of the annual general meeting or extraordinary general meeting, as the case may be, in which elections are to be held: Provided that the holding of annual general meeting or extraordinary general meeting, as the case may be, shall not be delayed for more than ninety days from the due date of the meeting or such extended time as may be allowed by the registrar, for reasons to be recorded, only in case of exceptional circumstances beyond the control of the directors, or in compliance of any order of the court.

The registrar may on expiry of period either on its own motion; or on the representation of the members holding not less than one-tenth of the total voting powers in a company having share capital; or on the representation of the members holding not less than one-tenth of the total members of the company not having share capital of the company, direct the company to hold annual general meeting or extraordinary general meeting for the election of directors on such date and time as may be specified in the order.

 

The views expressed in this article are those of the author and do not necessarily represent the views of CourtingTheLaw.com or any other organization with which he might be associated.

Zafar Kalanauri

The writer is an Advocate of the Supreme Court of Pakistan, Accredited Mediator USA & CEDR UK, and Accredited Mediation Master Trainer CEDR & IFC.



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