PROPOSED COMPANIES ACT

Mohammad Zulfikar Akhtar FCA, CFA, FCCA

WHAT WE SHALL DISCUSS..

Brief History of Company Law in Pakistan

Developments in other relevant jurisdictions

Objectives for the reform of Company Law

Key changes and comments.

Corporate matters

Preparation of financial statements

Audit and auditor related matters

Way forward

BRIEF HISTORY OF COMPANY LAW

IN PAKISTAN

BRIEF HISTORY OF COMPANY LAW IN PAKISTAN

The Companies Ordinance, 1984 based on the lines of then Legislation in

England
Prior to that Companies Act, 1913 was followed
In Indian subcontinent, the Companies Act, 1913 was the first comprehensive
enactment relating to companies
This was enacted following the English Companies (Consolidated) Act, 1908
and was almost the reproduction of the English Act

BRIEF HISTORY OF COMPANY LAW IN PAKISTAN

There were a number of efforts made since 1960s to come up with a new
company law
After about 20 years in late 1980 a draft was published for eliciting views
of the public
Finally the company law entitled Companies Ordinance, 1984 was issued
on October 8, 1984
Some major changes took place in 2002 through introduction of Companies
Amendment Act, 2002
A major amendment took place in December 2015 re treasury shares

BRIEF HISTORY OF COMPANY LAW IN PAKISTAN

Commission was formed in 2006 for revision no draft came up

By the present chairman of the Commission, an in-house committee was
formed

The first draft came up in end 2015

The second draft came up in April 2016

DEVELOPMENTS IN OTHER
JURISDICTIONS

DEVELOPMENTS IN OTHER JURISDICTIONS

United Kingdom
o
o

A review commission started working in 1998

ToRs required to consider modernising in order to provide a simple, efficient and cost
effective framework for businesses

New Companies Act was introduced in 2006

Hefty 1300 sections and 16 Schedules

Singapore updated its company law of 1967 and made amendments in

2014
Ireland completely revised its company law after 50 years in 2014
A number of other countries in the last decade made special commissions
and have amended their company laws
8

DEVELOPMENTS IN OTHER JURISDICTIONS - INDIA

Neighbouring India replaced its 1956 Companies Act recently in 2013.

Reduced number of sections (658 to 470) schedules (15 to 7)
Key new matters include:
o

Concepts of Small Company, One Person Company and Dormant Company

Limit of members in private companies increased from 50 to 200

Companies meeting certain threshold and listed companies to have one Woman
Director
Every company to have at least one resident director (who stayed in India for more
than 182 days in the last year)

Compulsory financial year for all companies (April 1 to March 31)

Companies cannot lend money to the Directors

Shares can not be issued at discount (other than sweat equity)

9

DEVELOPMENT IN OTHER JURISDICTIONS - INDIA

Key new matters include (Contd):

o

Mandatory rotation of auditor for listed companies (5 / 10 years)

Concept of Class Action Suits

Limits on remuneration of directors and key management personnel

Electronic balloting and postal ballots for all companies, not just listed

o
o

Amalgamation of holding companies and wholly owned subsidiaries without

regulatory involvement
Cross border mergers
Creation of National Company Law Tribunal and an Appellate Forum with final
appeal directly to the Supreme Court

Definition of Associated Company aligned with significant influence

Mandatory CSR for companies having prescribed net worth or revenue

10

OBJECTIVES FOR THE REFORM OF

COMPANY LAW

OBJECTIVES FOR THE REFORM OF COMPANY LAW

Facilitating corporatisation and promoting development of the corporate

sector by:
o

Allowing the use of technology and electronic means

Protecting interest of shareholders, creditors, other stakeholders and public

Inculcating principles of good governance

Safeguarding minority interests

Providing alternate mechanism for expeditious resolution of corporate disputes

Abolishing unnecessary requirements and softer regime for the companies not having
stake of general public

12

KEY CHANGES
CORPORATE MATTERS

KEY CHANGES INCORPORATION AND RELATED

One pager MoA

Only principal line of business to be mentioned

All lawful businesses allowed except the prohibited / restricted ones

Payment of subscription amount within 15 days from incorporation

Certification of receipt of money by the auditor

14

KEY CHANGES USE OF TECHNOLOGY

Service of documents / notices to the members, registrar and the

Commission through electronic means

Participation in the meetings by members and directors through video links

Voting through electronic means

Enabling provision empowering the Commission to notify mandatory on-line

filing. Concept of licensed e-intermediaries where companies do not have
requisite IT Infrastructure
Enabling provision empowering the Commission to notify mandatory service
of documents on the members electronically member requiring physical
document shall bear the cost

15

KEY CHANGES USE OF TECHNOLOGY (CONTD)

Mandatory conversion of shares of all existing companies into

dematerialised / book-entry form. Commission empowered to provide the
time period of upto 4 years.

For all new companies to be incorporated, the shares shall be in the

dematerialised / book-entry form from incorporation.

16

KEY CHANGES TRANSFER / TRANSMISSION OF SHARES

In case of Private Company, mandatory requirement on the seller of shares

to first offer these to the existing members in proportion of their
shareholding
Proposed: The mechanism be applicable only where specific provisions are
not in the AoA of the company. A layer of shareholders agreement will
invariably strengthen!
Nominee (at death of a member) to hold shares under trust for the legal
heirs under the relevant inheritance laws
Proposed: This is repugnant with the company not registering a trust. This be
left to the applicability of relevant laws and not involve the company. The
domain of Corporate Law should remain the creation, running and winding
up of the artificial person
17

KEY CHANGES GENERAL MEETINGS

Unlisted companies with upto 50 members can pass members resolution by

circulation
Notice period for general meetings reduced from 21 days to 14 days
Softer regime for SMC no requirement of holding AGM, EoGM and
election of directors
Facility for attending the meetings through video link allowed
For listed companies, arranging Video-link facility mandatory in cities
where 10% or more than prescribed shareholders reside
Proposed: This be left onto the companies to manage depending on their
situation
18

KEY CHANGES FURTHER ISSUE OF CAPITAL

Minimum and maximum time frame of 15 to 30 days for the acceptance of

rights offer prescribed
Company to ensure the service of letter of rights offer on the shareholder
before the commencement of period of offer

Right of renunciation in case of listed company provided

Requirement of special resolution for allotment other than cash prescribed

Conversion of loans and redeemable securities into shares allowed when

such option is part of the contract
Proposed: Private companies be allowed to put in their AoA mechanism for
offering further shares otherwise than through rights
19

KEY CHANGES FURTHER ISSUE OF CAPITAL

Where a public interest company obtains a loan from a Government

(defined to include Federal Government, Provincial Government, body
corporate owned or controlled by Federal and Provincial Government), if
that Government considers it necessary in the public interest so to do, it
may, by order, direct that such loan or any part thereof shall be converted
into shares in that company or body corporate, on such terms and conditions
as appear to the Government to be reasonable in the circumstances of the
case even if terms of such loan does not include a term for providing for an
option for such conversion
Proposed: Consider redrafting to be applicable only in cases where
Government is the only shareholder

20

KEY CHANGES ISSUE OF SHARES AT DISCOUNT

Approval of Commission not required if discount is upto 10% of face value

and 90 days closing volume weighted price remained below the proposed
issue price.
Proposed: First draft had restriction on maximum discount to be upto 50%
of par value. This was proposed to be abolished which has been agreed in
the second draft.

Conditions prescribed for the discount rate in relation to market price of

shares where Commission can grant approval.

21

KEY CHANGES LOAN TO DIRECTORS AND CEO

Commissions approval for grant of loan to directors no more required

Resolution of general meeting required to give loan to the directors or CEO

In case of the loan to CEO, general meeting approval is also not required if
loan is:
o

Part of service contract

Pursuant to any scheme approved by the members by a special resolution

By a company whose ordinary course of business is to provide loans

22

KEY CHANGES PROTECTION OF INDEPENDENT AND NONEXECUTIVE DIRECTORS

Independent and non-executive directors (as defined) to be held liable,

only in respect of such acts of omission or commission by a listed company
which had occurred:
o

with his knowledge

attributable through board processes with his consent or connivance, or

where he had not acted diligently

23

KEY CHANGES DISQUALIFICATION TO BE A DIRECTOR

Commission empowered (in presently provided situations in place of the

Court, and new situations added) to disqualify a person, suo-moto or on
application, from being a director in case of public interest companies for a
period of five years.
o
o

conviction of an offence in connection with management of a company

persistent default in relation to provisions of this Act requiring any return, account or
other document to be filed
a person has been a director of a company which became insolvent during his tenure
or within two years afterwards
the affairs of the company of which he is a director have been conducted in a
manner which has deprived the shareholders thereof of a reasonable return

24

KEY CHANGES DISQUALIFICATION TO BE A DIRECTOR

Contd
o

the person has been involved in convicted of allotment of shares of a company for
inadequate consideration
the company of which he is a director has acted against the interests of the
sovereignty and integrity of Pakistan, the security of the State, friendly relations with
foreign States
the person has entered into a plea bargain arrangement with the National
Accountability Bureau or any other regulatory body
it is expedient in the public interest so to do

Proposal: This to be rationalised

25

KEY CHANGES ADDITIONS TO DUTIES OF DIRECTORS

A duty of director has been added clarified that requires him to:
act in good faith in order to promote the objects of the company for the
benefit of its members as a whole, and in the best interests of the company,
its employees, the shareholders, the community and for the protection of
environment

What about the established theory of conflicting interest of stakeholders?

There is also penalty for the breach of a duty by the director

Proposed: The matter be addressed by separate guidelines or code instead

of a statutorily imposed duty

26

KEY CHANGES POWER TO RECTIFY REGISTER OF MEMBERS

Power of court to rectify register of members has been given to the

Commission
Proposed: This be left with the Court:
o

o
o

Determination as to whether a legal transfer of a share in a company (i.e. an asset)

has taken place or not, and its resulting affects onto the register of members, require
jurisdiction over laws relating to sale, transfer of property, contracts etc. including
jurisdiction over law of evidence, notaries, etc.
The Commission is only a corporate regulator
Although the intention maybe good, the practicality may even further complicate the
matters resulting in more delays and stays

27

KEY CHANGES RELATED PARTY TRANSACTIONS

All companies required to make following related party transactions at

arms length with approval of the board, or general meeting if majority of
board members are interested:
o

sale, purchase or supply of any goods or materials

selling or otherwise disposing of, or buying, property of any kind

leasing of property of any kind

availing or rendering of any services

appointment of any agent for purchase or sale of goods, materials, services or

property
such related party's appointment to any office or place of profit in the company, its
subsidiary company or associate company

28

KEY CHANGES RELATED PARTY TRANSACTIONS

Proposed: First draft had the Indian provisions copied which:

o
o

required the approval of the special resolution for such related party transactions
the special resolution threshold was proposed to be 3/4th of the total shares and not
those present in the meeting
the shareholders because of whom the transacting parties were becoming related
parties could not vote in such a meeting
threshold for a special resolution in the Indian law is votes in favour of the resolution
being at least 3 times of the votes against the resolution

29

KEY CHANGES SUBSIDIARIES HOLDING SHARES OF PARENT

Subsidiaries have been restricted to buy shares of the holding company.

This is to change to the restriction on holding shares of the holding
company.
What happens if the shares of a holding company come to a subsidiary say
through amalgamation, security call etc.

Proposed: Do not change the position in this respect.

30

KEY CHANGES DIVIDEND

Dividend in kind to be paid only in the form of shares of listed companies

Proposal: This restriction be removed, at least for un-listed companies.

Enabling provision to withhold the dividend in case of incomplete

documentation as prescribed by the Commission

31

KEY CHANGES JURISDICTION OVER SCHEMES OF

ARRANGEMENTS

Jurisdiction for Compromises, Arrangements and Reconstruction to be shifted

to the Commission from the Court
Proposed: Do not change this jurisdiction or define criteria for approval
o

o
o

This jurisdiction is exercised by the Courts as it is a separate jurisdiction where other

matters of Corporate Law do not apply
Jurisdiction of Court in this respect also interacts with its jurisdictions under other laws
In comparative legal framework, this jurisdiction is exercised by judicial courts /
tribunals

Related reduction of capital jurisdiction still left to court

No specific appellate forum

32

KEY CHANGES JURISDICTION OVER SCHEMES OF

ARRANGEMENTS

Board of directors given jurisdiction for amalgamation of following without

any regulatory / court approval:
o

Wholly owned subsidiaries of a holding company

wholly owned subsidiarie(s) into its holding company

Proposed: Add this jurisdiction to:

o

Hive down i.e. creation of a subsidiary by a company and transfer of part or whole
of the undertaking to that company
De-merger with proportionate shareholding of the new company being the same as
that of the old company

33

KEY CHANGES REGIME OF REGISTERED VALUERS

Valuation of any kind required under the Act to be done only by the
valuers registered with the Commission
o

Regulations in respect of registration and valuation methodologies to be prescribed

by the Commission
Draft of regulations recently published by the Commission - only allow incorporated
companies to be registered with separate QAB and rating regime
This has inherent conflict where law allows chartered accountants to perform a
valuation and where CA firms cant be incorporated
Statutory penalties to valuer in the form of damages to the company or to any other
person

Proposal: Consultation with ICAP be made before any matter is taken up

for incorporation in the Act
34

KEY CHANGES PROHIBITION ON ACCEPTING DEPOSITS FROM

PUBLIC

No company other than a banking company or class of specified

companies, to invite, accept or renew deposits from public.

Fine on contravention as to accepting deposit at least equal to the deposits.

Penalty on contravention as to soliciting deposits.

Imprisonment for personnel involved.

35

KEY CHANGES SERIOUS FRAUD INVESTIGATIONS

The Commission given powers to appoint professionals to conduct serious

fraud investigations

No clarity as to when and how such investigations be initiated

Proposed: Mechanism in this respect be made

36

KEY CHANGES NEW GROUNDS ADDED FOR WINDING UP BY

COURT

Default by a company in filing its financial statements or annual returns for

two financial years

Company acting against the interests of Pakistan

Conduct of business by a company in a manner oppressive to the minority

Revocation of a license

Commission empowered to add any other grounds

37

KEY CHANGES DISPOSAL OF UNDERTAKING OR SIZEABLE PART

General meeting approval is required for such disposal

Previously no definition was available

Following now explained (based on previous years audited financial

statements):
o

Undertaking investment exceeds 20% of companys net worth or revenue exceeds

20% of companys revenue
Sizeable part 25% or more of the value of asset in that class

38

KEY CHANGES SHARIAH COMPLIANT COMPANIES / SECURITIES

Shariah Compliant Company defined as a company which is conducting its

business according to the principles of Shariah.
Shariah Compliant Security means a security structured on the principles of
Shariah.
No company or security to be called Shariah Compliant unless a certificate
of shariah compliance is obtained from the Commission.

39

KEY CHANGES DORMANT COMPANY

Concept of Dormant Company introduced.

A company formed for a future project, or to hold an asset or intellectual
property and has no significant accounting transaction, or

an inactive company

Minimum compliance requirements for the dormant companies

Also, easy exit schemes have been made part of the law

40

KEY CHANGES DEFINITION OF CHARTERED ACCOUNTANT

Chartered Accountant for the company law defined as a chartered

accountant within the meaning of Chartered Accountants Ordinance, 1961
(X of 1961); and who holds a Certificate of Practice under that Ordinance
The second draft now has taken out the words and who holds a Certificate
of Practice under that Ordinance
Proposal: Consultation with ICAP be made before any change in this
respect

41

KEY CHANGES MIGRATION OF COMPANIES /

AMALGAMATION WITH FOREIGN ENTITIES
o

Proposed:
In most of the advanced jurisdictions, there is a concept of migration of
companies from one jurisdiction to another
in India, this migration is effectively available through amalgamation of an
Indian company into a foreign company or vice versa with foreign
companies in notified jurisdictions, subject, of course, to the approval of
relevant central bank
Enabling provisions in this respect to be introduced

42

KEY CHANGES ELECTION OF DIRECTORS

Proposed:
Present law is specific in terms of the way the directors shall be appointed,
including how the votes would be calculated and how the winners would be
declared
When a company has more than one classes of shares with varying voting
rights, the matter of calculating votes be aligned with the voting power
attached to the class
Companies should be allowed to have alternate mechanisms for election of
directors through their Articles

43

KEY CHANGES CORPORATE DIRECTORS

Proposed:
Like in advanced jurisdictions, enabling provisions for appointment of
corporate directors be made
The licensing regime maybe introduced over a period of time to align the
laws with modernised legal jurisdictions

44

KEY CHANGES SEGMENTED COMPANIES

Proposed:
Like in advanced jurisdictions, enabling provisions be made for segmented
companies
This shall allow multiple business to be made in the same corporate shell
saving costs and easing doing businesses
The regulations maybe made in this respect

45

KEY CHANGES PREPARATION

OF FINANCIAL
STATEMENTS

KEY CHANGES CLASSIFICATION OF COMPANIES

Companies have been classified into various classes for the requirements of
preparation of financial statements as follows:
o

Micro Company (MC)

Small Sized Company (SSC)

Medium Sized Company (MSC)

Public Interest & Large Sized Company (PILSC)

Proposed: Classification in the Act shall make changes in future, specifically

changing the thresholds, very difficult, and hence should be in power of the
Commission
Financial statements of Micro Company to be signed by all the directors
47

KEY CHANGES QUALIFICATION IN AUDIT REPORT ON

SUBSIDIARYS FINANCIAL STATEMENTS
o

Consolidated financial statements are required to disclose any qualification

in the audit report on the financial statements of a subsidiary.
Proposed: The financial statements should be prepared in accordance with
the IFRS and it is preferable not to include additional requirements

48

KEY CHANGES CHOICE OF APPLYING FULL IFRS

Proposed:

Companies should be given a choice to adopt full IFRS

Certain added disclosures maybe required

This maybe a one-off choice for the companies

49

KEY CHANGES HARMONISING DEFINITIONS

Proposed:
Definitions of associate, subsidiary and holding company be harmonised
with IFRS
Otherwise, an overriding effect to IFRS definitions for financial statements
preparation be made
Definition of financial statements should also be harmonised with that of
IFRS

50

KEY CHANGES
AUDIT AND AUDITOR RELATED
MATTERS

KEY CHANGES ADDITIONAL MATTERS INCLUDED IN AUDIT

REPORT

Following additional matters have been included on which the auditor is to

report:
o

whether loans and advances made by the company on the basis of security have
been properly secured and whether the terms on which they have been made are on
arms length
Whether compliance of requirements of Act has been made by the Company while
acquiring or disposing of assets including investments, other than in the normal course
of business, entering into agreements and raising capital

Commission empowered to add further matters for all or specific class of

companies
Proposed: The report be kept in line with the ISAs

52

KEY CHANGES AUDIT FEE DETERMINED IN AGM

The audit fee to be fixed in the AGM

Presently the manner for determining the fee (e.g. to be agreed by the
board) can also be determined in the AGM
Proposed: Determination of the audit fee many a times depends on the
developments during the year. Present position be maintained.

53

KEY CHANGES SIGNING OF AUDITORS REPORT

Audit report to be signed by engagement partner in his own name for and
on behalf of the firm
Presently this is in the name of the firm
Proposed: The name of engagement partner is already identified. Present
position be maintained.

54

KEY CHANGES PRESENCE OF A PARTNER AT AGM

The first draft proposed that a partner of the audit firm must be present at
the AGM of listed auditee company
Present position is that by law, an authorised person can also be present,
although the code requires presence of engagement leader or another
authorised partner
Proposed: It is difficult for for sole proprietor firms and smaller firms. Hence
present position be maintained. This has been taken out in the second draft.

55

KEY CHANGES QUALIFICATION OF AUDITOR

For companies up to paid up capital of less than Rs 3 million, Chartered

Accountants and Cost and Management Accountants can be auditors
Right given to the Commission to prescribe others for also being eligible as
auditors of such companies

56

KEY CHANGES ADDITIONAL STATUTORY RIGHTS

Additional rights given to the auditor

Auditor can require information from the employees of the company

Access to the accounts of subsidiary companies and its employees

57

KEY CHANGES AUDIT NOT REQUIRED FOR MICRO COMPANIES

Financial statements of Micro Companies not required to be audited

Threshold for Micro Company is:

paid up capital upto Rs 1 million, and

turnover not exceeding Rs 25 million.

Proposed: Classification in the Act shall make changes in future, specifically

changing the thresholds, very difficult, and hence should be in power of the
Commission

58

KEY CHANGES FILING OF CONSENT WITH THE REGISTRAR

Auditor required to file consent given to the company for acting as auditor
with the Registrar within 14 days of appointment

59

KEY CHANGES FIRMS APPOINTMENT AS AUDITOR

Proposed:
Presently, only firms where all the partners are Chartered Accountants can
be appointed as auditors
It maybe changed to firms where majority of the partners are Chartered
Accountants
Relevant restriction on non Chartered Accountant partners to act as
engagement leader or signing the report maybe placed

60

KEY CHANGES PROVISIONS RELATING TO AUDIT OVERSIGHT

BOARD

Proposed:

These were introduced in the first draft

Further to discussions by the ICAP and Commissions task force, these have
been removed from the second draft

61

WAY FORWARD

WAY FORWARD

ICAP has remained key player in the Commissions consultation on the

proposed Act
o

Presentation to ICAP through VC (04-01-2016)

Peshawar ICAP CPD (08-02-2016)

Seminar Islamabad (26-03-2016) chaired by FM, representation of ICAP

Meeting with ICAP Team (13-04-2016)

Seminar by NRC (06-05-2016)

63

WAY FORWARD

Expected that comments on changes in the second draft and from this
session shall be formally sent
Expected that a third draft shall be exposed for comments
A recommendation for the Commission to constitute a committee once the
law is applicable that will examine on practical difficulties, defects,
drafting errors and lacunae
In India, in 2015, major changes have taken place in the 2013 Act after
such a review

64

THANK YOU