5. Company Law Administration Division

• 5.1 Overview
• 5.2 Improvements in Operational Efficiency
• 5.3 Introduction of New Schemes and Systems
• 5.4 Developmental Activities
• 5.5 Regulatory Actions
• 5.6 Monitoring and Enforcement
• 5.7 Approvals and Permissions

The Company Law Ad ministration Division (CLAD) is primarily responsible for administration of the Companies Ordinance, 1984 and the Companies (Appointment of Legal Advisors) Act, 1974. The CLAD grants licenses and accords approval to matters stipulated in the Companies Ordinance, 1984. It also supervises and coordinates the working of its regional offices, the CROs, which are located in Karachi, Sukkur, Multan, Faisalabad, Islamabad, Lahore, Peshawar and Quetta.

The CLAD is responsible for regulation and supervision of non-listed public and private companies that involves:

(i) ensuring compliance with statutory requirements;

(ii) developing regulatory mechanisms for effective enforcement, including the conduct of inspections and investigations;

(iii) implementation of Cost Audit Rules;

(iv) protecting rights of investors and creditors;

(v) encouraging best corporate practices; and (vi) speedy disposal of complaints from investors and the public.

During the year under review, the CLAD suggested several amendments in the Companies Ordinance, 1984 and the Companies (Appointment of Legal Advisors) Act, 1974. It was also involved in updating various rules and regulations, including the Companies (General Provisions and Forms) Rules, 1985, the Companies (Registration Offices) Regulations, 1986 and the Companies (Invitation and Acceptance of Deposits) Rules, 1987. Two important schemes, namely the Companies Regularization Scheme and the Companies Easy Exit Scheme were introduced by the CLAD during the year under review. These schemes were widely acclaimed by the business community and the general public.

Substantial progress was made during the year to ensure timely and prompt incorporation of companies, registration of mortgages and charges, and issuance of availability of name certificates to new companies. The CROs were automated to enable them to serve the corporate sector more efficiently and effectively. The general public was facilitated in its inspection of companies' records and was provided certified copies on demand expeditiously.

A number of additional features have been added on the Commission's website to provide better and easily accessible information to the general public.

A facility for "Name Search" is available on the website of the Commission. Through this facility, sponsors can easily confirm whether or not a particular name is available for incorporation of a company.

The forms prescribed under the Companies (General Provisions and Forms) Rules, 1985 have been placed on the Commission's website. These forms can be downloaded and used for the purpose of incorporation of a company as well as filing of various statutory returns. The fee structure for services, such as availability and approval of name, incorporation of a company, grant of license, alteration in the memorandum of association, registration, modification and satisfaction of charge and filing of statutory returns, is also available on the website.

A complete guide for promoters of companies has been made available on the website to give useful information about incorporation of local and foreign companies along with contact details of respective CROs.

It is mandatory for companies to file annual returns and other periodic documents with the registrar under the Companies Ordinance, 1984. Companies that fail to file these returns/ documents are liable to penal action. The extent of non-compliance

with the statutory requirements was such that by December 2001, as many as 27,288 companies, out of a total of 43,317 companies, were in default with respect to filing of their statutory returns. The reluctance of companies to rectify their default was largely owing to fear of penalties and levy of additional fee.

In order to ensure compliance, encourage filing of overdue returns and create an environment of confidence and partnership with the business community, the CLAD introduced a scheme called the Companies Regularization Scheme during the year. An announcement was made in the local press on December 31, 2001 to explain the salient features of the scheme. The Companies Regularization Scheme was effective from January 1, 2002 to June 30, 2002 and was applicable to non-listed public and private companies. It provided an opportunity to defaulting companies to file overdue returns on payment of filing fee and one-time additional fee instead of three-times additional fee, otherwise required under the law. However, the companies were obliged to pay two-times additional fee during the last months of the scheme, i.e. May and June 2002. The companies regularizing their default were assured that no penalty would be imposed on them if the overdue documents were filed during the period of the scheme.

Under the Companies Regularization Scheme, 4,909 companies were regularized over a six-month period and an amount ofRs. 17.19 million was collected as filing/ additional filing fee. The outcome of the scheme, in terms of the number of companies regularized and aggregate fee collected by each CRO is presented in Table 23.

TABLE ?o Outcome of Companies Regularization Scheme

After introduction of the Companies Regularization Scheme, it was observed that there were a large number of companies that were not in operation. Representations made by professional bodies and individuals also revealed that a large number of registered companies had, due to various reasons, failed to commence or continue business. In order to facilitate promoters of such companies get the names of the companies struck off without undergoing a cumbersome process, the Commission launched the Companies Easy Exist Scheme. The business community all over the country welcomed the scheme and appreciated the efforts of the Commission in this regard.

The Companies Easy Exist Scheme remained operative from April 1, 2002 to May 31, 2002. An announcement to this effect was made on March 31, 2002 in the local press to explain the salient features and procedural details of the scheme, which included:

(i) payment of fee of Rs. 3,500 in case of a private company and a fee of Rs. 7,500 in case of a public company;

(ii) resolution of the Board of Directors that approved submission of application for striking off the name of the company from the register of companies;

(iii) a duly verified affidavit from the directors or the CEO stating that the company has no assets and liabilities and is not in operation or doing any business; and

(iv) a certificate from the auditors of the company, and if the auditor was not a chartered accountant or a cost and management accountant then a certificate from a practicing chartered accountant or a cost and management accountant, that the company is not doing any business, has no assets and liabilities and does not owe any amount to any authority.

After proper scrutiny by the concerned registrars, notices were published in the official Gazette to invite objections against striking off the names of specified companies from the register of companies after a period of three months.

The number of companies, which responded to the scheme and the collections made by each CRO up to June 30, 2002 is given in Table 24.

TABLE Companies Easy Exit Scheme

The Corporate Registration System (CRS) has been launched to computerize the data of 43,788 incorporated companies. The system is accessible to all the CROs for incorporation of companies and for updating the existing companies' database in the central server. The CRS also provides information on name reservation, pre-incorporation activities, cessation of companies, change of a company's name as well as merger of companies. The system can generate user-defined reports, covering various fields in the database.

The CRS will, in particular, facilitate automation of information flow at the CROs. This will not only lead to time saving in compilation of records but will also expedite follow-up by the Commission, in case of any default by a company.

5.4 Developmental Activities

It was noted that the exorbitant and substantially different rates of stamp duty prevailing in certain provinces hindered incorporation of companies. In some provinces, the rates of stamp duty had increased manifold a few years back, which had caused reluctance among promoters to get their entities registered under the Companies Ordinance, 1984. As a result, the matter was taken upwith the Provincial Governments of Punjab, Sindh and Balochistan and, consequently the rate of stamp duty was considerably decreased during financial year 2002. A comparison of existing and previous rates is given in Table 25.

TABLE 25 Comparison of Rates of Stamp Duty

After the successful experience at the Information Technology Commerce Network (ITCN) Conference in Karachi in March 2001 when 15 companies were incorporated on-the-spot, the idea of mobile teams to provide on-the-spot registration services was conceived. During the year, mobile teams of officers were constituted to meet several professional and trade bodies, such as Hyderabad Chamber of Commerce and Industry, Lahore Chamber of Commerce and Industry, Export Promotion Bureau, Lahore Tax Bar Association, Institute of Cost and Management Accountants of Pakistan (ICMAP), various firms of chartered accountants, Sialkot Chamber of Commerce and Industry, Sialkot District Bar Association and Jhang Chamber of Commerce and Industry. The mobile teams had useful interaction with members of these professional and trade bodies, which gave considerable impetus to corporate registration.

To streamline the working ofCROs, their territorial jurisdiction was redefined in certain cases. As a result, the district of Bhakkar was excluded from the jurisdiction of CRO Faisalabad and included in that of CRO Multan while tehsil Chechawatni of district Pakpattan was excluded from the jurisdiction of CRO Lahore and included in the jurisdiction of CRO Multan.

The Commission had received representations from professional and trade bodies for establishment of a separate CRO for civil divisions of Larkana and Sukkur. In response to these representations and to address the difficulties of business community,

a CRO was set up in Sukkur in October2001. It is expected that establishment of this CRO will promote incorporation of companies in interior Sindh.

The powers of the registrar, under the Companies Ordinance, 1984, were delegated during the course of the year to Additional Registrars in Karachi and Lahore in respect of companies registered with these CROs to allow for expeditious disposal of cases. These powers are in relation to change of name of a company, extension in period of holding of AGM by a non-listed company, authorization for convening an extraordinary general meeting with a shorter notice, power to call or direct the convening of an overdue general meeting and permission for preparation of accounts for a period of more than 12 months. The decentralization of powers has considerably enhanced the efficiency and responsiveness of the CROs at Karachi and Lahore.

The Commission has recommended a number of amendments in the Companies Ordinance, 1984 to remove certain practical difficulties experienced by companies in complying with its provisions. These amendments have been proposed in consultation with professional and trade bodies, chambers of commerce, stock exchanges, associations of investors and individual experts and after taking into account the recommendations ofthe Justice Shafi-ur-Rehman Commission, constituted in 1997 to review all corporate laws. The salient aspects of the draft amendments are as follows.

At present, at least two members are required for the formation of a private company. A new concept of a single member company (SMC) has been proposed in Pakistan, whereby one member alone can form a company under the Companies Ordinance. The main rationale behind the establishment of SMC is to encourage the use of corporate structure by small businesses and sole proprietors.

The minimum number of seven persons to form a public company is proposed to be reduced to three, in view of practical difficulties being faced by promoters to induct a large number of persons at the stage of formation of a company However, listed companies will continue to have at least seven directors.

The existing provisions of the Companies Ordinance do not provide any relief to shareholders if directors refuse transfer of shares without valid grounds. Therefore, right of appeal to the Commission against such refusal is proposed to be included in the Companies Ordinance.

Under the existing provisions of law, the High Court has the power to grant extension in the time period for submitting of documents relating to registration of mortgages and charges. It has been proposed that these powers be entrusted to the Commission in consideration of practical difficulties in getting extension from the High Court.

In order to provide relevant and timely information to shareholders about the affairs of companies, amendments have been proposed to hold AGMs for consideration and approval of audited accounts within a period of four months instead of six months from the close of accounting period. Moreover, extension period is proposed to be curtailed from three to two months.

To provide for larger representation, the quorum of a general meeting of a public listed company is being increased from three members to 10 members present in person, representing not less than 25 percent of total voting power either on their own account or as proxies.

Amendment has been proposed to lay down the procedure for election of directors of companies, which are limited by guarantee, in the manner provided in the articles of association of such companies.

To formalize secretarial responsibilities with in listed companies, appointment of qualified company secretaries is proposed. SMCs will also be required to have company secretaries.

It is proposed that the existing provisions restricting investment in associated companies be liberalized and the statutory requirements simplified.

An amendment has been suggested to remove the inconsistency between IAS 27 "Consolidated financial statements and accounting for investments in subsidiaries" and Section 237 of the Companies Ordinance, 1984.

Since the law does not provide for removal of an auditor of a company, a suitable amendment has been proposed to remove this ambiguity.

The proposed amendments aim to remove certain causes of delay in winding up of companies by official liquidators.

These amendments will go a long way in ensuring healthy growth of the corporate sector, protection of investors and creditors and promotion of investment. The draft amendments have recently been approved by the Cabinet and are expected to be promulgated shortly.

The Companies (Appointment of Legal Advisors) Act was promulgated in 1974to require companies, having paid-up capital of Rs. 500,000 and above, to appoint at least one legal advisor to counsel such companies in the performance of their functions and duties. Under present circumstances, the limit of minimum capital is clearly too low. The Commission, has, therefore, proposed that this limit be raised to Rs. 2.5 million. Further, cognizance of default by a Court not inferior to that of a magistrate of First Class has proven to be cumbersome and expensive. For proper enforcement of the Companies (Appointment of Legal Advisors) Act, the default is proposed to be made cognizable by the registrar of companies with a right of appeal to the Commission. The draft amendments, duly vetted by the Ministry of Law, Justice and Human Rights, have been sent to the Ministry of Finance for promulgation.

The rules and forms, which were introduced in 1985, have been revised and reformatted in view of automation of corporate database so that both data entry and retrieval can be made quickly and easily. The new forms have also been simplified so that returns may be filled in easily by companies and promptly filed with the registrar. The proposed changes in rules and forms have been notified in the official Gazette for eliciting public opinion.

The Companies (Invitation and Acceptance of Deposits) Rules, 1987 were prescribed under Section 88 of the Companies Ordinance, 1984 to regulate deposits collected by companies. It was observed that the rules, in their present shape, do not apply to security deposits, earnest money and advances, including advances against supply of goods or property. After careful consideration of complaints received in this regard, amendments have been proposed to bring the said activities within the ambit of the Companies (Invitation and Acceptance of Deposits) Rules.

The proposed amendments are aimed at protecting the public from fraudulent and unscrupulous elements and are, therefore, expected to safeguard their interests. A number of complaints have been received from aggrieved members of the public who have allegedly lost their money to companies that did not fulfill their commitments to provide developed plots, constructed houses, motor vehicles, etc., as advertised by them. In orderto make the amendments meaningful and effective, the Commission has sought public opinion on the draft amendments.

The Companies (Registration Offices) Regulations were notified in December 1986, which repealed the Companies (Registration Offices) Regulations, 1978. The existing Regulations were at variance with current advances in technology. Extensive amendments have been made for switching over from the present manual system for record maintenance to a computerized document management system. Salient features of amendments in these Regulations are as under:

(i) returns filed by companies under various provisions of law will be handled

in terms of the CRS;

(ii) returns have been specified in order to monitor the activities of CROs;

(iii) the annexure specified in the Regulations have been updated to meet the

requirements of automation;

(iv) a document management system has been included in the Regulations; and (v) certificates for conversion of status of companies have been provided in the

Regulations to fulfill the requirements of Sections 44 and 45 of the Companies

Ordinance, 1984 and address practical difficulties being faced.

The amended Regulations will come into force shortly and will improve the internal working of the CROs.

To streamline the working of CROs, several orders, circulars and press releases relating to administrative, legal and other matters were issued during the course of the year. A complete list is provided in Appendix D.

The enforcement and monitoring of the Cost Audit Rules, in relation to non-listed public and private companies in the vegetable ghee and cooking oil, cement and sugar sectors have been assigned to the CLAD. Companies within these sectors are required to maintain cost data in the manner prescribed underthe Orders notified in terms of Section 230(1) (e) of the Companies Ordinance, 1984. Of a total of 34 non-listed public and private companies to which the Cost Audit Rules applied, 17 companies were in compliance with its requirements, 10 companies were not in operation while another seven companies were found to be non-compliant during the year under review.

On the complaint of the Commission, the Court of Session sentenced the directors of Taj Company Limited (in liquidation) under Section 190 ofCr. PC and Sections 88 (4), 195 (5), 230 (7) (b), 234 (b), 236 (b), 237 (12) and 492 of the Companies Ordinance 1984. Considering that the sentences awarded to the directors were minimal compared to the gravity of the offence committed, the Commission filed an application in the Lahore High Court for enhancing the sentence of the convicted directors as well as sentencing of the acquitted directors.

In response to applications filed by shareholders and on the report of the concerned registrar, the Commission ordered investigations into the affairs of two companies. The affairs of these companies, namely, Daru-Tasnif (Private) Limited and Alliance Textile Mills Limited were not being managed in accordance with prudent commercial practices.

Relevant particulars of other investigation cases are as under:

of financial year 2002 for want of compliance with certain observations of the Commission.

During the year, 224 cases were adjudicated by CROs, registrar and the Executive Director, CLAD under Section 476 of the Companies Ordinance, 1984. Penalties amounting to Rs. 1.19 million were imposed on parties in default.

During the year under review, 118 cases of liquidation were disposed of. The breakup of these cases is as under:

During the year under review, oral and written representations were filed in the Court in 17 cases of mergers and amalgamations. Of these, 11 cases have been decided while six cases were pending as of June 30, 2002.

Section 439 of the Companies Ordinance, 1984 provides that where the registrar has reasonable grounds to believe that a company is not in operation, he may strike off the name of such company from the register of companies maintained by him. During the year, a large number of notices were issued to companies that were found non-operational. After completion of legal formalities, the concerned registrars struck off names of 51 companies from the register of companies.

The Companies Ordinance, 1984 provides for approval to be accorded by the Commission and the registrar in various matters. A large number of applications submitted by companies were processed and approved during the year under review as presented in Table 26.