Companies Ordinance, 2016Executive 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.

— A special bench to be formed at each of High Courts to deal with Companies Ordinance 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 licence, 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.

— 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.

— 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 take-over 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.

— 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 type.

— All companies allowed to prepare their financial statements in full compliance with International Financial Reporting Standards (IFRSs), if they so desire. However, regulated (eg 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 utilised 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 Ordinance 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 Ordinance 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.

— The Commission has been empowered to seek information from foreign companies (which has 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) and any of its present or past directors, officers or auditors or indirectly the beneficial owners of its equity securities about the shareholding in the Company. The said person who ceased to hold office more than five years before the notice shall however not be compelled to furnish information.

— 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.

— The companies would be required to maintain global register of beneficial ownership by substantial shareholder or officer of a company having ten percent or more shares in a foreign company or body corporate.

The substantial shareholders or officers holding such interest are required to report to the company on a specified form within 30 days of holding of such interest. The company is currently required to submit required information on a specified form to the Registrar within 60 days from the date of promulgation of the Ordinance. The above noted details are required to be submitted to Registrar along with the Annual Return. The Commission shall keep record of the information of the companies in a global register for Beneficial Ownership.

— 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 Ordinance, a person may avail services of “intermediary” as defined in the Electronic Transactions Ordinance, 2002.

— A company cannot engage in the business of real estate unless its principal line of business is development of real estate projects.

— 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 whereunder 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 Ordinance, 2016. 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 in one category of assets with surplus on another category of assets.

— Federal government has been given the right to nominate Chief Executive of a company where majority of directors is nominated by the Federal Government. His term shall also be determined by the Federal government.

— The definition of financial institution has been expanded to include a modaraba or modaraba management company, leasing company, investment bank, venture capital company, financing company, unit trust or mutual fund of any kind and credit or investment institution, corporation or company.

— 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 utilised 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.

— Every officer of a company shall endeavour 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.

— Additional disclosures required in the financial statements. These includes:

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

— In case or revaluation, forced sale value of property, plant and equipments or investment property to be disclosed.

— Additional disclosure in respect of contingencies, eg, name of the Court, the date instituted, principal parties and factual basis of proceedings.

— Names and relationship for royalty payments.

— General information about the company to include, geographical location and address of all business units, particulars of immovable assets including location and area of land, name of associated companies or related parties and the basis of relationship with them. (To read the full text of the matter please turn to link http://www.brecorder.com/pdf/a-brief-on-the-companies-ordinance-2016.pdf)