Coming Companies Act 2017 — commendable legislative achievement

The current 33 years old, outmoded, Companies Ordinance 1984, is perhaps the worst piece of legislation on our statute book today and thankfully, amid all the politics going on, the Parliament is about to, perhaps unanimously, repeal and replace it with Companies Act 2017, a statute that is far better, simpler, and modern.

The new statute demonstrates what our government, regulators like SECP, and the Parliament can achieve if they sincerely make an effort to improve a particular sector of our society and business.    

At the final stage of approval, the Senate Standing Committee on Finance, chaired by Mr. Saleem Mandviwalla, rightly sought to spend time to understand the rationale for each change and to make its own most valuable changes to the bill. 

Before analysing the important changes that the new Act is bringing, it would not be fair not to acknowledge the efforts of the SECP in putting together and having this new Act approved. Often perceived for not listening to the concerns and suggestions of its regulatees, the SECP, for a long period of time, held a series of conferences, seminars, open debates, seeking inputs and advice, even by emails as well, from practically all the stakeholders in the country, including chartered accountants, lawyers and business leaders, with the sole and sincere object of listening and ensuring that the new statute addresses as many genuine issues being faced by corporate managers as possible. 

It is thus that going through the coming Companies Act 2017, one can see a consistent effort to facilitate the corporate sector and once adopted, it may perhaps be the best and most progressive piece of legislation that will have been adopted by our Parliament in the last decade. Of course, the caveat is the timely issuance of comprehensive set of rules. 

The three broad changes in the coming Companies Act can be summedup as follows:

A.  By replacing vagueness with clarity, even specifying three slabs of penalties for each day’s default, the SECP’s discretionary power will stand reduced, not increased.

B. Every effort has been made to make it easier for corporate managers to conduct their matters such as holding board and general meetings in the easiest and fastest way possible, making merger and deregistration of defunct companies most easy and so on. 

C. On the other hand, the new Act will give entirely new sets of responsibilities and powers to SECP such as certifying the whole sharia sector, the real estate sector, approving mergers, offering mediation and conciliation services for disputes between shareholders and companies, collecting and maintaining a record of ‘global interest’ of Pakistani directors and significant shareholders of Pakisani companies, and compelling large companies to fulfill their social responsibility such as inducting female directors and employing disabled persons. 

Obviously, nothing is ideal, and new problems and unforeseen issues will obviously arise from the new statute as well, but broadly, the coming statute will make it far easier for companies all over Pakistan to understand and conduct their affairs in accordance with the law. 

With Shanghai Stock Exchange, Shenzhen Stock Exchange, China Futures Exchange, Pak China Investment representatives now being on the management of PSX, with PSX launching its own IPO, and with stock market at its highest level in history, the timing of Companies Act 2017 could not have been more timely. 

The 25 major changes that have been highlighted here are not some theoretical changes that may require just a passive understanding of a conceptual change.Each of the changes highlighted below are operational, objective and important. 

1. Panama Change – Requirement to Disclose of Global Ownership

In April 2016, the leak of 11.5 million documents from the record of Mossack Fonseca, a Panamanian law firm, embarrassed national corporate regulators all over the world and in the mounting outrage, the British Economist called for regulatory approaches to focus on the disclosure of the ‘ultimate beneficial ownership’ as a prerequisite in preventing tax evasion, tax avoidance, money laundering and corruption. 

The leak thus brought together international regulators, including the regulators of tax havens, to work together to develop a coordinated global solution that ensures greater transparency in the ownership of assets. 

To this end, corporate regulators all over the world are considering how to collectively require disclosure of global interests, and, according to SECP, while UK, Malaysia and Hong Kong are about to bring legislative changes on these lines, through the coming Companies Act 2017, after the tiny island of Jersey, Pakistan will become the first country in the world to require its citizens to make disclosure of all their global interests to the Pakistani corporate regulator SECP. 

Change

Under the Proposed Act, ‘every substantial shareholder’ or ‘officer’ of a Pakistani company, who is a citizen or a dual citizen of Pakistan, whether residing in Pakistan or not, shall have to report to his company any of his ‘shareholding in a foreign company or body corporate’ or ‘any other interest’ as may be notified by the Commission.

Upon adoption of the Proposed Act, such information shall have to be reported to the company and the company shall have to report it to the registrar through a special return, all within 60 days. 

Any subsequent information can be filed by companies with registrars with their annual returns. 

The Commission shall keep record of all such information in its especially maintained record of Companies’ Global Register of Beneficial Ownership and shall provide a copy of it to FBR or to any other agency. 

The SECP is expected to notify the meaning of the word ‘interest’ to include immovable property etc.

Obviously, this is a most serious change, especially for entrepreneurs and business leaders who have business interests both within and outside Pakistan.  

2. Requirement to Prevent Money Laundering

The Proposed Act casts a duty on ‘every officer’ of a company to ‘endeavour to prevent’ the commission of offences of money-laundering as provided in the Anti-Money Laundering Act, 2010 ‘with respect to affairs of the company’. Adequate measures for this purpose will also be required to be put in place. 

3. Real Estate Sector

 In perhaps the boldest initiatives, the Parliament seems to have decided to get SECP to play a major role in this fast growing area to distinguish between genuine and dubious real estate projects. The move is admirable in protecting general public in view of thousands of housing projects being launched all over the country.  

 Change

The Proposed Act requires all the companies, that launch any estate projects and that invite advances from public for such projects, to obtain approvals and permissions from SECP at each of the following stages of development of their projects, such as: 

{C}(a)               {C}Before announcement of any real estate project

{C}(b)               {C}Before making any publication or advertisement of real estate projects

{C}(c)                {C}Before accepting any advances or deposits against any booking 

{C}(d)               {C}Before inviting persons to purchase any land, apartment or building

{C}(e)                {C}Before accepting a sum against purchase of the apartment, plot or building

4. Large Companies to Meet their Corporate Social Responsibility

This is another innovative initiative being introduced in the Proposed Act. 

For the sole purpose of getting large companies to meet their corporate social responsibility such as women employment etc. (something that many companies are already engaged in), the Proposed Act creates a new class of companies to be called ‘public interest companies’.

Following companies will be treated as being public interest companies:

{C}a)                  {C}All listed companies

{C}b)                  {C}All large non-listed companies having:

{C}(i)                 {C}A paid-up capital of PKR 200 m or more; or

{C}(ii)               {C}A turnover of PKR 1 billion or more; or

{C}(iii)             {C}Number of employees being more than 750; or

{C}(iv)             {C}Having such number of members holding ordinary shares as may be notified by the SECP; or

{C}(v)               {C}Having assets exceeding such value as may be notified by the SECP.

{C}c)                  {C}Foreign companies with a turnover of PKR 1 billion or more

Requirement to Have Women Directors

All the companies that fall into the above category of public interest companies shall be required to have female directors on their board, the number of which will be specified by the Commission.

Requirement to Employ Disabled Persons

In addition, all the companies falling into the above category and which are employing more than one hundred employees shall ensure a special quota of two percent or such higher percentage for employment of persons with disabilities as may be required under the applicable Federal and Provincial law.

5. Sharia Compliance

After adoption of the Proposed Act, no company shall be entitled to claim that it is Sharia compliant and no security, listed or not, can be said to be Sharia compliant, unless it has been declared in such form and manner as may be specified by the SECP.   

6. Sharia Advisors

The Proposed Act shall not allow any company to appoint or engage any person for ‘Sharia compliance’, ‘Sharia advisory’, or ‘Sharia audit’ unless that person meets the fit and proper criteria and fulfills such terms and conditions as will be specified by the SECP. 

All ‘Sharia Advisors’, Sharia compliance officers and Sharia Auditors’ who may already be working in these capacities for a company shall have 180 days to meet the fit and proper criteria and fulfill such terms and conditions to be specified by the SECP. 

7. Members May Attend General Meetings through Video-Link 

Under the current statute, companies still have to conduct their general meetings of shareholders requiring physical presence of their members or their proxies. Apart from other issues, this can be a serious problem for smaller companies especially when a major shareholder is not able to attend because he is in another city or abroad. 

Many companies have to fix their meetings after confirming the availability of their major shareholders. 

Change

The Proposed Act takes care of this dilemma by allowing any one or more members of a company to attend and participate in a general meeting through a video-link.

8. Smaller companies may get shareholders’ resolutions adopted without holding general meeting

Change

Here, the Proposed Act really makes life easier for the management of smaller companies, i.e. private companies and public unlisted companies with not more than 50 shareholders. 

Except for certain matters reserved for AGM, such companies, without having to hold any general meeting, ‘may pass a resolution (ordinary or special) by circulation signed by all the members.’ 

9. Holding Board Meetings through Modern Modes of Communication

Again, under the current statute, companies often face a serious problem of ensuring attendance of all their directors in board meetings, at least to ensure quorum for passing of important resolutions. Apart from causing inconvenience and travelling hassle for their directors, this also means companies having to bear travel expenses etc. for their directors.  

 Change

 The Proposed Act takes care of this problem by allowing directors, wherever they may be, to participate in a board meeting of their company through a video conference or by other audio visual means, i.e. by phone.

10. Boards Can Adopt Resolution by Circulation

While many companies provided in their Articles that their board members could adopt resolutions through circulation, the current Companies Ordinance is silent on this practice. 

Change

The Proposed Act expressly allows companies to have their board resolutions adopted by their directors by circulation without each of them having to be physically present to cast their votes. 

11. Protection to independent and non-executive directors

The current statute does not offer any protection to independent non-executive directors. It does not even draw any distinction between the liability of an executive and a non-executive director.

This has often made it difficult for companies to bring on board independent professionals known for their integrity and competence. 

Change

The Proposed Act brings clarity on this point. 

First, it declares as ‘void’ any Article of a company that is aimed at exempting any director, or officer or auditor of any liability arising from any illegal act.

Then, it clearly defines both the expression ‘independent and non-executive directors’ and proceeds to expressly treat them differently from ordinary directors.

Under the Proposed Act, an independent and non-executive director shall be held liable only in respect of such acts of a listed company or a public sector company which had occurred ‘with his knowledge, attributable through board process’ (meaning his knowledge has to show from minutes of board meeting), ‘or with his consent or connivance or where he had not acted diligently.’  

12. Sizeable Part of Undertaking Explained

Under the current statute, no board of a public company may sell or dispose of the company’s undertakings or ‘a sizeable part’ of it without the approval of its shareholders. 

The problem is that the current statute does not state the exact meaning of the expression ‘sizeable part’ thus making it impossible for the board to decide in which case they are required to seek approval from the shareholders and when they are not required to do so. 

Change

The Proposed Act has addressed this problem by laying down clear objective yardsticks, using which the board of any company can itself decide what comprises company’s ‘undertaking’ and its sizeable part, allowing any company to sell or dispose of any of the company’s assets provided its value is not more than 25 per cent as per the audited financial statements of the preceding financial year. 

13. Inactive Companies

 The Proposed Act requires SECP to maintain a record of inactive companies. 

Any company that is already inactive or that is formed for a future project or to hold an asset or intellectual property and that has no significant accounting transaction, may apply to the registrar to obtain the formal status of an ‘inactive company’. 

Throughout the time period that a company has the status of an ‘inactive company,’ it shall be subject to a lower level of filing and regulation. 

14. Easy exit of a defunct company

There are tens of thousands of dormant or defunct companies all over the country, with owners not knowing of an easy way to dissolve them. As these companies have no assets or business, these companies are normally in violation of SECP filing requirements also. And owners often receive tax notices too from FBR. 

Change

The Proposed Act, under the very heading of ‘Easy Exit of Defunct Company’, provides a simple solution. All that a defunct company has to do is to apply, in prescribed form, to the Registrar requesting its dissolution. The Registrar will publish a notice in the official Gazette and 90 days later, he will dissolve that company by striking off its name from the register of companies.

15. Mediation and Conciliation

Under the Proposed Act, the SECP will set up a Mediation and Conciliation Panel and any company, its management or its members or creditors may by written consent, directly refer a dispute between them or between the members or directors inter-se, to the Panel for resolution.

16. New investor may demand immediate board elections 

Once the board of a company is elected for three years, new investors, even if they find the proposition commercially attractive, do not feel that keen to invest in that company when they realise that they would have to wait for three years to get on the board.

Change

The Proposed Act addresses this issue. 

In order to encourage activity and liquidity in the corporate sector, regardless of when the board was elected, any person interested in acquiring a stake in a company may do so in the comfort that immediately upon acquiring the shares, should his shareholding entitle him to one or more seats on the board, he can require the company to hold fresh election of directors. 

This will surely lead to more activity in the market and under-performing companies will more readily attract new investors looking for undervalued assets.  

MERGERS

Under the current statute, mergers between two or more companies, demergers and approval of scheme of arrangements are to be approved by the High Courts. With courts being so overworked, the schemes can take a long time to be approved. 

Again, to help corporate managers to achieve their objects efficiently and without any delay, the Proposed Act has made several major changes:

17. Mergers between holding company and its wholly owned subsidiary

No formal approval from the SECP will be required. Subject to certain conditions, the two companies’ merger can be effected on the basis of the approval of the board. 

18. Mergers between Companies Owned by the Same Person

No formal approval from the SECP will be required. Subject to certain conditions, the two companies’ merger can be effected on the basis of the approval of the board. 

19. Other Mergers

Under the Proposed Act, it is the SECP itself, not the court that will become the sanctioning authority for all mergers, demergers and schemes of arrangements. 

Note. I understand that while the SECP may want to keep the easier matters of sanctioning mergers etc. of smaller companies to itself, it would prefer to have High Courts to hear and approve mergers, demergers and creditors’ scheme of arrangements etc. for larger companies. 

20. Introducing standard, predictable slabs of penalties

Till now, no one knew how much would be the penalty for non-compliance or non-filing. It was also not known as to how much further penalty was going to be imposed for each day’s delay in rectifying default. 

Change

The Proposed Act brings certainty into this area by providing three simple slabs of penalties for each day of default: PKR 500, PKR 1,000 and PKR 500,000 with the aggregate penalty in each case of default stated to be a maximum of PKR 25,000, PKR 500,000 and PKR100,000,000.

The above may appear harsh, but at least it is better than not knowing anything about the consequences of default and how worse would be the consequences if default continues. The penalty slabs will make the situation of default and their consequence predictable, and will also make it easier for SECP officials to deal with default in a uniform, consistent and transparent manner. 

21. All companies to report more than 25% change in shareholding

Except for filing of annual returns that includes the current list of their shareholders, while major changes in shareholding in listed companies are closely monitored, any significant change in the shareholding in unlisted companies are not monitored or reported at all. 

Change

The Proposed Act will compel all companies, listed or not, to disclose major changes in their shareholdings. All the companies, large or small, public or private, will be bound to inform SECP about any change of more than twenty five percent in their shareholding.

With so many investments and joint ventures taking place all over the country at present, with many Chinese companies acquiring major stakes in local unlisted companies, this move will enable the SECP and thus the government abreast of what changes are taking place in the corporate sector.

22. Effect of Proposed Act on Existing Matters 

While the Proposed Act will obviously repeal and replace the current Companies Ordinance 1984, its effect will be prospective, not retrospective, i.e. in principle it will apply to the future, not the past. The Proposed Act will thus not revive anything that was not in force at the time at which the repeal’ takes place. 

The Proposed Act shall not affect any decision already taken and any right already acquired under the previous statute. Nor will it ‘affect any inspection, investigation or legal proceeding that is continued or enforced under the Ordinance.’

FOR BANKS AND FINANCIAL INSTITUTIONS

23. Borrowing powers to be part of memorandum

No company is authorised to do anything that is not expressly provided in the objects clause of its Memorandum of Association. 

Many a times, companies face the problem of not being entitled to borrow any money just because their objects clause did not contain any such borrowing power. From lending banks’ standpoint too, this may be a problem. 

Change

The Proposed Act completely addresses this problem for both the banks and all financial institutions by providing that notwithstanding anything contained in any law or in the memorandum and articles of any company, every company ‘shall be deemed to include and always to have included the power … for obtaining loans, advances, finances or credit, and to issue other securities for raising resources from a scheduled bank, a financial institution or general public.

24. Registration of Pledge with SECP

For some strange reason, the current statute does not require a pledge on a company’s movable property to be reported to SECP. 

This has lead to various misunderstandings and even disputes between banks in courts, with one bank claiming that the goods in question were under its charges before the other bank created pledge over them, while the other bank taking the opposite position, with there being no basis or record to confirm with certainty whether charge preceded pledge or vice versa.  

Change

The Proposed Act has introduced a most comprehensive section listing a whole range of charges to be created over a company’s assets that are required to be registered with the SECP. 

As pledge has been expressly included in the definition of the word ‘charge’, a pledge will also have to be registered just like any other charge. 

Besides floating charge, charge on goodwill and charge over intellectual property too has been expressly listed as the charges that must be registered. 

25.       NBFC – No Change

This is an area where the Proposed Act expressly makes absolutely no change at all.

All the provisions of the current statute, Companies Ordinance 1984,that deal with Non-banking Finance Companies, along with all the rules made there under, shall remain intact and enforceable as if no change has come about.