Companies Ordinance, 2016 – The progression of the companies law from 1984 to 2016

The Government has, in November 2016, promulgated the Companies Ordinance, 2016 replacing the Companies Ordinance, 1984. After various seminars, conferences, expert groups, discussions and debates, the Companies Ordinance, 2016 (the “2016 Ordinance”) was drafted, debated and promulgated. The new law encourages a movement towards simplifying certain procedures, enabling greater use of technology, and encouraging a paperless record keeping environment.

The constitution for companies and the backbone legislation for the economy has experienced a cardinal shift. The salient changes to the legislation are provided below and will be revised accordingly; the history of the law and the analysis and discussion on the projected effect will follow in a subsequent post.

  1. Classification of Companies as provided by Section 224 and the Third Schedule of the 2016 Ordinance.

The Third Schedule provides for Public Interest Companies and Large Sized Companies (“PILSCs”), Medium Sized Companies (“MSCs”); and Small Sized Companies (“SSCs”). Small Sized Companies, for example, shall include private companies having (1) paid up capital up to Rs. 10 million; (2) turnover not exceeding Rs. 100 million; or (3) employees not more than 250.

The classification of a company shall be based on the previous year’s audited financial statements and can be changed if it does not fall under the previous criteria for two consecutive years.

Special provisions are provided to facilitate small and medium companies.

The 2016 Ordinance also provides for relaxations for Free-Zone Companies (Section 454) and the establishment of an Investor Education and Awareness Fund (Section 245). The 2016 Ordinance further provides for companies that are “Inactive Companies” to seek such status from the registrar to avail limited procedural and accounting requirements (Section 424).

Moreover, the 2016 Ordinance provides for streamlining lengthy processes by introducing an efficient dispute resolution mechanism through the Mediation and Conciliation Panel (Section 276), passing of members’ resolution by circulation and simplified provisions for Mergers and Acquisitions.

  1. Memorandum of Association

The 2016 Ordinance requires that companies engage in such business that is the “principal line of business” (Section 26) to reduce the issues related to the doctrine of ultra vires whereby the company undertakes acts that are beyond its scope of work or powers. The principal line of business shall be mentioned in the memorandum of association or notified to the registrar.

  1. Conversion of Shares into Electronic Format.

Electronic or “demat” form is the concept of dematerialization in finance and financial law and refers to the substitution of paper-form securities by book-entry securities. This is a form of an indirect holding system which is used as an intermediary, such as a broker or a central securities depository and holds the records of the ownership of the shares in an electronic format. The Central Depository System in Pakistan, established under the Central Depositories Act, 1997 has a similar system of electronic filing, record and transfer for and of securities.

  1. Special provisions for Independent and Non-Executive Directors (Section 166).

The 2016 Ordinance provides for the inclusion of independent directors and non-executive directors on the Board including provisions for the manner of selection and maintenance of the data bank of such directors.

  1. Increased provisions for Disclosure of Directors, and Beneficial Owners and Increased Transparency by local and foreign companies.

The 2016 Ordinance provides for increased disclosure by companies to the regulatory. It further provides for the companies to maintain a Companies’ Global Register of Beneficial Ownership (Section 452) for every substantial shareholder or officer of a company incorporated under the 2016 Ordinance, having ten percent (10%) or more shares in a foreign company or body corporate.

There is increased regulatory control vis-à-vis fraud, terrorist or corrupt financing, and money laundering.

  1. Certificate of Shariah Compliance.

Section 451 enables companies to seek for a Shariah compliance certificate from the Securities and Exchange Commission of Pakistan. No company shall be permitted to be called “Shariah compliant” unless it is conducting business according to the principles of Shariah and has been so certified by the Commission.

  1. Agriculture Promotion Companies (Section 457).

The 2016 Ordinance enables the registration of agriculture promotion companies for the development and enabling of the agriculture sector.

  1. Table of Fees, amended, to be Paid to the Registrar.

The Seventh Schedule updates the Table of Fees to be paid to the Registrar (Section 462 and 469).

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Can a foreign company sue in Pakistan?

4 August 2014

Under Section 456 of the Companies Ordinance, 1984 (the “Ordinance”), a foreign company may contract, deal or transact (with other companies) in Pakistan but unless the foreign company meets the requirements laid out under the laws of Pakistan, in the event of any conflict, dispute, or issue, the foreign company is not entitled to bring any suit, claim any set-off, make any counter-claim or institute any legal proceedings. Section 456 is as follows:

456. Company’s failure to comply with this part not to affect its liability under contracts, etc.-Any failure by a foreign company to comply with any of the requirements of section 451 or section 452 shall not affect the validity of any contract, dealing or transaction entered into by the company or its liability to be sued in respect thereof; but the company shall not be entitled to bring any suit, claim any set-off, make any counter-claim or institute any legal proceeding in respect of any such contract, dealing or transaction, until it has complied with the provisions of section 451 and section 452. (emphasis added)

Sections 450 to 460 of the Ordinance, inter alia, deal with the requirements that foreign companies must meet in order to effectively defend themselves or initiate proceedings in Pakistan.

Section 450 provides as follows:

450. Application of this Part to foreign companies.- This Part shall apply to all foreign companies, that is to say, companies incorporated or formed outside Pakistan which, after the commencement of this Ordinance, establish a place of business within Pakistan or which have, before the commencement of this Ordinance, established a place of business in Pakistan and continue to have an established place of business within Pakistan at the commencement of this Ordinance.

A “place of business” includes a branch, management, share transfer or registration office, factory, mine or fixed place of business but does not include an agency unless the agent exercises a general authority to negotiate and conclude contract or maintains stock of merchandise on behalf of the company.

Section 451 provides for the documents to be delivered to the registrar by foreign companies. These documents include:

(a) a certified copy of the memorandum and articles of the company (Form 38);

(b) full address of the registered or principal office of the company (Form 39);

(c) a list of the directors, chief executive and secretaries (if any) (Form 40);

(d) a return showing the full name and surname, father’s name, nationality, designation and full address in Pakistan of the principal officer of the company in Pakistan by whatever name called;

(e) the full name and surname, father’s name, nationality, designation and full address of some one (1) or more persons resident in Pakistan authorised to accept on behalf of the company service of process and any notice or other document required to be served on the company together with his consent to do so (Form 42);

(f) the full address of that office of the company in Pakistan which is deemed to be the principal place of business in Pakistan (Form 43); and

(g) particulars of principal officer of the company in Pakistan (Form 41).

Section 451 is read in line with with Rule 22 of the Companies (General Provisions and Forms) Rules, 1985.

Moreover, a foreign company is required to obtain a permission letter from the Board of Investment with a specific validity period for opening and maintaining of its branch/liaison office in Pakistan. Copy of such permission letter is required to be furnished with the documents meant for registration.

Section 454 of the Ordinance provides the statutory obligations that the foreign company is required to comply with. These include, among others, maintaining registers of Pakistani members, directors and officers at its principal place of business and keeping it open to inspection, stating the country of origin in every prospectus, exhibition of the name of the company.

Disclaimer: This post is intended as an introduction and for information only and should be read with the relevant legislation. This post does not provide or intend to provide an alternate to legal advice by a competent counsel. For any further queries or assistance, please contact Myra Khan at lawyereadia@gmail.com.

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Myra Khan is a Barrister-at-Law from the Honourable Society of Lincoln’s Inn and Vice Chairperson Women Rights Committee of the Lahore High Court Bar Association. She is currently practicing law in Lahore, Pakistan.

Any queries may be directed to lawyereadia@gmail.com

Directors of a Company in Pakistan

14 February 2014

1. What do the Board of Directors do?

(1) Under the law, the Board of Directors is the repository of all corporate powers, except those powers which, by law, are to be undertaken by the shareholders or such powers which have been given to the shareholders under the Articles of Association of a company.

Section 196 of the Companies Ordinance, 1984 outlines the powers of the Directors.

(2) Directors have almost all the powers over the operation and management of the Company until they are removed. It has been held that the shareholders cannot undertake functions allowed to the Board under law (Abdul Malik vs. Janana De Malucho Textile Mills Limited, PLD 1973 Note 116 (Lahore)).

2. Can Directors hold Board Meetings through telephone/video conferencing?

Circular Number 20/2005 dated 10 November 2005 issued by the Securities and Exchange Commission of Pakistan allows the Board to conduct board meetings through telephone/video conferencing.

3. What if the matter is urgent and the Directors have no time to hold a regular meeting?

If the matter is urgent then the Directors may exercise certain powers on behalf of the Company without their formal meeting through a circular resolution or a resolution in writing, provided that this permission has been granted in the Articles of Association of the Company.

4. What are the fiduciary (ethical/legal) duties of Directors?

(1) In the Companies Ordinance, 1984, there are strict provisions for disclosure of interest/ conflict of interest of Directors (Sections 215 and 216)

(2) Directors must exercise their powers for (only) the purposes for which they were conferred and if they are for the benefit of the Company as a whole.

(3) Directors should ensure that they do not put themselves in a position in which their duties to the Company and their personal interests may conflict (Section 214).

(4) The Directors have a duty to take care of the Company.

5. What is the benchmark expected of a Director?

In discharging his duties, Directors must act honestly and must exercise such care as might be expected from an ordinary man (see, generally, Govind Narayan Kakade vs. Rangnath Gopal Rajopadhye, 1930 AIR Bombay 572). If a Director so acted, and the decision led to irregularities or losses, he would not be liable in negligence for breach of his duty of care (see, generally, Dovey vs. Cory, (1901) AC 477: (1895-9) All ER Rep 724 (HL)).

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Myra Khan Qureshi is a Barrister-at-Law from the Honourable Society of Lincoln’s Inn and Vice Chairperson Women Rights Committee of the Lahore High Court Bar Association. She is currently practicing law in Lahore, Pakistan.

Any queries may be directed to lawyereadia@gmail.com

Setting up a Company in Pakistan

9 January 2014

Private Limited Companies (“Companies”) in Pakistan are set up under the Companies Ordinance, 1984 (to download complete act: http://www.secp.gov.pk/corporatelaws/pdf/Comp_Ord1984.pdf) and are regulated by the Securities and Exchange Commission of Pakistan (the “SECP”) (www.secp.gov.pk).

The process to set up a Company in Pakistan is fairly straightforward. It is prudent, however, to consult a legal professional in this matter but the following information will provide basic guidelines in respect of setting up / incorporation/ registration:

1. Name of the Company.

(1) Choose a name for the Company.

(2) The SECP does not allow names that are inappropriate, deceptive or designed to exploit or offend the religious susceptibilities or identical nor similar to the name of an existing company.

(3) There are certain words that are prohibited from being part of the name of the Company (http://www.secp.gov.pk/ns/pdf/Prohibited_words.pdf).

(4) The validity and the availability of the proposed name of the Company can be checked on http://www.secp.gov.pk/ns/index.asp, the e-service provided by the SECP.

(5) The Company is required to obtain a name availability certificate from the SECP. The application fee for this is Rs. 200 (Rupees Two Hundred Only) for online applications and Rs. 500 (Rupees Five Hundred Only) for offline applications. SECP shall then issue a certificate re availability and validity of proposed name of the Company.

(The abovementioned amounts are as presently confirmed by SECP and are subject to change. The amounts must be re-confirmed at a date prior to the submission of the application fee.)

2. Share Capital of the Company

(1) Decide the authorized capital or share capital of the Company. The capital of the Company is the total investment made in the Company.

(2) Registration fee of the Company (to be given to the SECP) is based on the total share capital. The Fee Calculator provided by the SECP e-services (http://www.secp.gov.pk/ns/CalculatorCS.asp) is a helpful tool in this regard.

3. Incorporation Documents

(1) Copies of Computerized National Identity Cards (“CNICs”) of each subscriber (or “Shareholder”) of the Company.

(2) Four (4) printed copies of the Memorandum of Association and Articles of Association of the Company.

The Memorandum of Association (the “Memorandum”) is the document that provides that the details of the Company and the activities that it is authorized to undertake. It governs the relationship of the Company with the outside world. The Object Clause of the Memorandum (the operative clause in respect of what the Company is authorized to do) is usually drafted to include all those tasks and activities that the Company may wish to / foresee that it shall undertake and all other tasks ancillary thereof.   

The Articles of Association (the “Articles”) provides the details of the everyday running of the Company like election of directors, audit of accounts, annual general meetings, notices etc. It specifies the regulations for a company’s operations and lays out how tasks are to be accomplished within the organization.

The Memorandum and Articles are crucial, foundation documents of the Company and should be prepared / reviewed meticulously.

(3) Form I, the declaration of the applicant for incorporation.

(4) Form 21, the notice of the situation of the registered office of the Company.

(5) Form 29, the particulars of the directors, chief executive, company secretary etc.

(The abovementioned Forms are available for download at http://www.secp.gov.pk/forms.asp)

(6) The original paid challan evidencing the payment of fee in any of authorized branches of MCB Bank Limited.

(7)  The authorization of the Shareholders in favor of a person to correct the deficiencies, if any, pointed out by the Registrar in any documents submitted for incorporation/registration.

4. Submission to SECP

(1) The documents once submitted to SECP may take between seven (7) to fourteen (14) days for scrutiny and review.

(2) Any mistake/omission found shall be informed to the requisite person who shall be required to re-submit the documents after correcting /amending the mistake or providing the necessary information as intimated by the SECP.

(3) If the documents are in order the SECP shall issue an incorporation certificate reflecting the incorporation of the Company and the permission to commence business.

Disclaimer: The above information is not legal advice but basic guidelines to help in understanding the process of setting up a company in Pakistan. Nothing provided herein should be used as a substitute for advice of competent counsel.

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Myra Khan Qureshi is a Barrister-at-Law from the Honourable Society of Lincoln’s Inn and Vice Chairperson Women Rights Committee of the Lahore High Court Bar Association. She is currently practicing law in Lahore, Pakistan.

Any queries may be directed to lawyereadia@gmail.com