Shekha & Mufti Chartered Accountants

The Act now considers nominee of a deceased member as a trustee only who shall be responsible to facilitate the transfer of shares to the legal heirs, in accordance with the Islamic law of inheritance and in case of non-Muslim members, as per the respective law.

6. BOARD OF DIRECTORS

A. Eligibility & Composition of Board

i) Director shall hold National Tax Number

The Act requires a director to hold a National Tax Number (NTN). Simultaneously, it has also empowered the Commission to notify exemptions from this requirement. Keeping in view the difficulties of promoters, a notification has already been issued by the Commission, vide Circular 15 of 2017 whereby a general exemption has been granted for a period of 2 years to directors of Small Sized and Agriculture Promotion Companies.

ii) Nominee Directors

In the repealed Ordinance, directors were required to be members of the Company, i.e. hold at least one share in the Company. There were exemptions to government, institution and authority but not to corporate nominees. The section has now been re-phrased and resultantly nominated directors of effectively all legal persons, including corporate members, will no longer be required to hold any shares in the company.

iii) Cap on Directorship

The Act intends to fix an upper limit on the number of directorships an individual can hold, including that of an alternate director; excluding directorship in a listed subsidiary. The limit is yet to be specified by the Commission but contrarily the sub-section to this provision states that a person holding directorship in 7 companies shall ensure compliance with this section within one year. Thus clarity on the maximum number remains pending. For listed companies similar restriction is already in place through Code of Corporate Governance.

iv) Female Director in Public Interest Companies

Public interest companies are required to have a female member on their board.

v) Independent Directors Database

A database of independent directors shall serve as means for selection by companies, required to appoint independent directors. The responsibility to exercise due diligence before making such selection will rest with the company making such appointment and will be disclosed with justification in the notice of general meeting. The requirement has been relaxed till a notification is issued by the Commission

vi) Consent to act as Director mandatory in all Companies

Public companies were required to obtain written consents from intending directors/CEO, prior to their election/appointment. Now all companies are required to do so.

vii) Chairman in Listed Companies

A provision, similar to the requirement of CCG, has been inserted in the Act requiring appointment of a chairman by listed companies from amongst the non-executive directors.

B. Appointment and Election of Directors

i) First Directors

The first directors of a company are appointed at the time of incorporation. Their number can be increased before the first AGM by appointing additional directors in a general meeting. No such provision was available to newly incorporated companies in the repealed Ordinance.

ii) Reporting of Delay in Holding Elections

A delay foreseen in the holding of election of directors is to be reported to the Registrar at least 45 days before the due date. The Registrar can extend time for 90 days and thereafter give further time through directions to hold the election.

iii) Declaring Elections invalid by the Court

Members holding 10% of voting power in the company may apply to the Court for declaring election of directors invalid. Previously the minimum percentage required was 20%.

iv) Fresh Elections can now be demanded in all Companies

The option of demanding fresh election was available to an acquirer of a minimum of 12.5% shares in a listed company. Now fresh elections can be asked for, in all type of companies, with no specific threshold of acquisition given any more. A member may require the company to hold fresh election of directors if he has acquired shares, sufficient enough to get him elected as a director on the board.

C. Proceedings of Directors

i) Remote Participation in Board Meeting

The directors of public companies in the past have been allowed participation in a board meeting through video conferencing or audio visual. With the Act it seems the option will now be available to listed companies only.

ii) Lack of Quorum due to Casual Vacancy

Addressing a practical issue, the Act tackles circumstances where there are not enough directors to fill in a casual vacancy on the board. It clarifies that presence of all remaining directors will be deemed to fulfill quorum requirements.

iii) Circular Resolution

The notion of ‘Circular Resolution’ was previously covered in Table A, and adopted through the Articles of Association whereby matters, not reserved for meetings, could be approved by the board through circular resolution. This notion has now been formally adopted by the Act.It requires such a resolution to be noted at the subsequent board meeting and be made part of the minutes.

iv) Retention of record of Board Meetings

Records of all circular resolutions and minutes of board meetings must be maintained in physical form for at least 10 years and for good in electronic form.

D. Powers and Duties of Directors

i) Investment & Divestment

The Act, in addition to powers retained from repealed Ordinance, requires the board to approve acquisition of a controlling or substantial stake in a company. As regards divestment, the board of private companies were empowered to sell, lease or dispose of undertaking or a sizeable part thereof. Now private companies are also required to take approval of the shareholders for such transactions. The Act has also removed the related ambiguity by defining what constitutes an ‘undertaking’ and ‘sizeable part’.

The board of directors of a listed company should have a viable alternate business plan where it intends to sell or dispose of an undertaking, which may lead to a closure of business or winding up of the company.

ii) Fiduciary Responsibilities emphasized upon

A new provision has been inserted in the Act which explicitly binds directors to act in accordance with the provisions of the Act and Company’s Articles of Association and to fulfill their fiduciary responsibilities.

If a director commits a breach, default or is guilty of negligence from the requirements of Articles of Association and any decision of the board, his action may be ratified by the company through a special resolution.

iii) Good Governance

Code of Corporate Governance is enforced on listed companies via listing regulations and on public sector entities through Rules issued by the SECP. A voluntary framework of corporate governance for unlisted entities is also in place.

Now, specific powers have been given to SECPto introduce frameworksfor all or any type of companies so as to ensure good governance practices and compliance.

iv) Prohibition on Assignment of Office

Assignment of office by a director to any other person, previously allowed under the authority of special resolution, has now been prohibited and any such appointment shall be void ab-initio.

E. Interest of Directors

i) Loan to Directors

The Act has simplified the provisions relating to loans to directors but has made its application across all type of companies. A company can now make loan to any of its director or of its holding company or to his spouse or minor children or provide guarantees or security in connection with any loans made by any person to them, subject to the prior approval of members in general meeting. Listed companies, additionally, will require prior approval of the Commission.

ii) Contracts and Arrangements

The repealed law considered directors to be interested in an arrangement or contract if their spouse or minor children were interested. The Act has expanded to it and has replaced minors with children and has added a directors’ parents as well to the list.

In listed companies a director with material personal interest shall not remain present in the meeting while the related matter is being discussed. Contracts or arrangements wherein majority of directors are interested shall have to be approved by the members in a general meeting.

Companies are no more required to disclose terms of appointment of chief executive, whole-time director or company secretary in their directors’ report. Circulation of terms of CEO’s appointment is also no more required.

F. Liability of Directors

i) Indemnification of Directors

Directors and officers cannot be exempt or indemnified from a liability arising due to negligence, default, breach of duty or breach of trust in relation to the affairs of Company. The Act, however, has explicitly allowed the Company to procure insurance or third party indemnity for directors.

ii) Protection to Independent and Non-Executive Directors

The Act provides protection to independent and non-executive directors of listed and Public Sector Companies. They shall be liable only where there has been an act of omission and commission.

iii) Disqualification of Directors by Commission

The Commission has been entrusted with the powers to disqualify a person to hold office of a director for a period up to five years. The Act has listed down 15 counts, a person falling under any of them may face disqualification proceeding of Commission. A disqualified person will be personally liable for relevant debts of the company, if he acts in contravention of a disqualification order.

7. OFFICERS OF THE COMPANY

A. Chief Executive

i) First Chief Executive

The first chief executive officer will now be determined by the subscribers to the Memorandum of the Association i.e. at the time of incorporation, while nominating the first directors. The term expires on the date of first AGM, unless a shorter period is fixed.

ii) Term of Chief Executive

The tenure of subsequent Chief Executive remains at 3 years. However, in case of appointment under a casual vacancy it may end earlier, if the directors elected in the next election go for a fresh appointment.

iii) Government nominated CEO

The Government can nominate a CEO in companies where it also nominates the majority of directors while for removal it needs to have more than 75% of the voting power. In a Public Sector Entity it has an absolute authority to nominate the CEO.

B. Company Secretary

Henceforth, unlisted public companies will also be required to have a company secretary, meeting the prescribed qualification criteria.

8. AUDITORS

A. Appointment and Removal of Auditors

i) First Auditor

The time period for the appointment of first auditors has been extended from 60 days to 90 days of incorporation. The power, thereafter, solely vests with the Commission.

ii) Subsequent Auditor

The process of appointment of subsequent auditors in the AGM has now been made part of the Act. This includes recommendation of the board, consent of the proposed auditor and reference in the notice of AGM.

iii) Remuneration of Auditor

Henceforth the remuneration of auditor will be approved in the general meeting only.

iv) Appointment of another Auditor

The provision of the repealed Ordinance in respect of appointment of auditors, other than retiring auditors, has been revised. Member having a shareholding of not less than 10% and holding auditors consent may propose another auditor for appointment in the AGM.

v) Casual Vacancy

In case of mid-term removal of auditors, the board has been authorized to fill the vacancy with the prior approval of the Commission.

B. Qualification and Disqualification of Auditors

i) CMA can also Audit

Besides a Chartered Accountant, The auditor of a private company having paid up capital less than Rs. 3 million can be a Cost and Management Accountant as well. Subsidiaries of public companies, however, do not get this option.

ii) List of Disqualifications Enhanced

List of disqualifications has been amended to include a person:

* who is indebted to the company, has given a guarantee or provided any security in connection with the indebtedness of any third person to the company or directly or indirectly, has business relationship with the company other than in the ordinary course of business of such entities;

* who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction;

* who is not eligible to act as auditor under the code of ethics as adopted by the Institute of Chartered Accountants of Pakistan or the Institute of Cost and Management Accountants of Pakistan, as the case maybe.

9. ACCOUNTS AND MATTERS ALLIED

A. Classification of Companies

The latest criteria for classification of companies for the purposes of accounting framework and financial reporting was prescribed by SRO929(I)/2015. The Third Schedule to the Act now specifically caters to it. Fourth and Fifth Schedule to the Act have also been amended.

i) Types of Companies and Basis

The Companies are broadly classified in the following four types:

* Public Interest Companies

* Large Sized Companies

* Medium Sized Companies

* Small Sized Companies

A Public Interest Company includes within itself, a Public Sector Company as well. For the remaining three types the basis of categorization are:

* size of paid-up capital;

* amount of turnover; and

* number of employees

Included in large and medium sized companies are Not for Profit Companies and Foreign Companies, depending upon their relative size.

ii) Accounting Framework

- Public Interest, Listed and Large Sized Companies (unlisted) have to adopt International Financial Reporting Standards. Listed companies will adopt the Fourth Schedule while the others shall comply with the Fifth Schedule.

- A Medium Sized Company is required to comply with International Financial Reporting Standards for SMEs and the Fifth Schedule.

- For Small Sized Companies the Accounting and Financial Reporting Standards for SSEs, as issued by the Institute of Chartered Accountants of Pakistan, remain in force together with the Fifth Schedule.

- Along with the applicable frameworks from above, a Not for Profit Company will also apply the standards specifically relevant to them.

The Commission has the power to grant exemptions from the requirements of relevant schedules to a company or a class of company.

B. Inspection of Books of Accounts

i) By Directors

The provision enabling members to inspect books of accounts of the Company has been done away with. On the other hand inspection by directors has been facilitated by instructing officers and employees of the company to give all assistance during the course of inspection.

ii) By Commission

The Commission retains the power to inspect books of accounts for justified reasons. The Act has empowered the officer conducting inspection, to take possession of documents for 30 days, if they constitute evidence.

C. Financial Statements and Audit

i) Period for holding first AGM reduced

With the change in the maximum period of holding the first AGM, the first financial statements now also have to be laid not later than 16 months, from the date of incorporation.

ii) Exemption for private and single member companies

A private company with paid up capital upto Rs.1 million is not required to have its financial statements audited. Such company, if a parent, is also not required to prepare consolidated financial statements if the subsidiary’s paid up capital also does not exceed Rs.1 million.

Single member companies are excluded from the requirement of laying financial statements in AGM. Nonetheless, they remain subject to audit.

iii) Revaluation surplus

The provisions concerning surplus arising out of revaluation of fixed assets, as they were in the repealed Ordinance, have not been retained in the Act.

iv) Quarterly Financial Statements

Gist of certain circulars and notification issued under the repealed Ordinance has now been made part of the Act. Overall the requirements, procedures and timelines remain the same.

A company which seeks extension in holding its Annual General Meeting may also make an application to extend the period for filing its first quarter accounts.

D. Signing and Authentication

Private Companies with a paid up capital upto Rs.1 million will ensure that financial statements accompany an affidavit of CEO or directors confirming their approval by the board.

Code of Corporate Governance requires CFO of a listed company to sign the financial statements. This is now required by the Act as well.

E. Reports and Compliance Statements

i) Chairman’s Review Report

Listed companies have been directed to enclose a chairman’s report with audited financial statements. Such a report shall include Chairman’s review of the overall performance of the board.

ii) Directors Report

Contents and details to be included within the directors’ report have been revised for public companies and their private subsidiaries. In addition, the Act now prescribes the details which must be included in a business review by the board of a listed company.

A private company with a paid up capital not exceeding Rs.3 million is exempt from preparing the directors report, unless it is subsidiary of a public company.

iii) Statement of Compliance

Vide the listing regulations, companies are obligated to provide a Statement of Compliance, reviewed by the auditor. This requirement has been included in the Act and may be extended to other class of companies by a general or special order of the Commission.

F. Circulation of Accounts

The Act permits electronic circulation of audited financial statements and accompanying reports to its members. Obligates listed companies to place their accounts and reports on the website.

G. Filing with Registrar

- Listed Companies will continue to file their audited financial statements within 30 days of AGM. All other companies now have 15 days.

- A private company, not being subsidiary of a public company, with a paid up capital not exceeding Rs.1 million will file unaudited financial statement within 30 days of Annual General Meeting.

- A private company with a paid up capital of Rs 10 million or lower is exempt from the requirement of filing, this limit being Rs 7.5 million in the repealed Ordinance.

(To be continued tomorrow)