New Companies Act, 2017 - EY

1 EY Ford Rhodes New Companies Act, 2017 in Pakistan Significant Legislative Changes & new concepts This Memorandum is correct to the best of our knowledge and belief. It is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. The Firm and Ernst & Young do not accept any responsibility for any loss arising from any action taken or not taken by anyone using this publication. This Memorandum may be accessed on our website Preface EY Ford Rhodes The repealed Companies Ordinance, 1984, which provided legal framework for the corporate sector in Pakistan, has been due for revision for numerous years, owing to the changes in the business environment and the impact of globalization and technology.

2 The Securities and Exchange Commission of Pakistan ( the Commission ), hence, lead the process for proposing changes in the company law in consultation with various stakeholders, resulting in the eventual promulgation of the Companies Act, 2017 ( the Act ) The major focus of the new company law is the facilitation to the corporate sector and other stakeholders, strengthening of the regulatory framework, maximum emphasis on the use of technology, abolishing unnecessary requirements, protection of the interest of shareholders and a softer regime for Companies without public stakes. The new law also facilitates regulation of public sector Companies and protection of interest of creditors.

3 Other features include the introduction of use of technological advancements by allowing communication between company and its members and the company and the registrar through electronic means, passing of resolution by members through circulation, minimum regulatory requirements for single member Companies , added responsibilities for the directors and auditors, additional safeguards for the creditors and investors and improved regime for winding up proceedings. One of the most significant changes, in line with the other jurisdictions, is that except for the prohibited and specialized businesses, Companies are allowed to engage in all the lawful businesses.

4 A simple one-page memorandum having principal line of business and prohibitory clauses has been introduced. Under the repealed Ordinance there was no provision to allow the appointment of additional director in mid-term to enlarge the Board, this lacuna has been removed in the new law. Keeping in view the importance of Islamic Finance, the concepts of "Shariah-compliant Company" and "Shariah-compliant security" have also been introduced. Further, in an increasingly global world, new concepts have been adopted such as specie dividend, mediation and reconciliation, complete regime for the valuation of assets, shifting of jurisdiction to approve the amalgamation of Companies , compromises and arrangements from Court to the Commission, no approval requirement for amalgamation of wholly owned subsidiaries, e-intermediaries for filing the returns of the Companies having no IT infrastructure, and removing redundant and unnecessary obligations contained in the repealed Companies Ordinance, 1984.

5 The new Companies Act, 2017 has been signed by the President of Pakistan on 30th May 2017 and it is effective from the said date, except Section 456 of the said Act, which will become applicable as per notification from the Federal Government. Highlights of the Act EY Ford Rhodes i Now, only the High Court will have jurisdiction to entertain claims and proceedings in relation to/under this Act. A Registrar of the company bench shall also be established to perform all the functions assigned under this Act. A simplified format for the Memorandum of Association has been introduced.

6 The new law has substantially reformed the legal provisions relating to NGOs. A new provision has been introduced whereby a company limited by guarantee can be converted into a company limited by shares. A member having acquired the requisite shareholding may require the company to hold fresh elections of directors of the unlisted company. A new provision has been introduced whereby Companies are obliged to file a return of allotment of shares, confirming receipt of subscription money, within the prescribed time. A listed company, for the purpose of fresh election of directors, shall follow such procedures as may be specified by the Commission.

7 Independent Directors shall be selected from a data bank. The data bank will be maintained by such institutions as notified by the Commission. The Commission has power to disqualify any Director to hold office in any public interest company. Directors attending board meeting through video conferencing or by other audio visual means shall also be counted for the purposes of quorum. An independent director and executive director shall both be held liable, only in respect of such acts of omission or Commission by a listed company or a public sector company which had occurred with their knowledge. The Commission may specify the classes of Companies for which the Chairman and the Chief Executive shall not be the same individual.

8 Every financial statement circulated to the members shall contain a review report by the Chairman on the overall performance of the Board. In a private limited company, the mechanism to determine the sale price of shares shall be such as may be notified by the Commission. Every public interest company is obliged to appoint a female to represent on their board as may be specified by the Commission. An independent Director of a listed company shall be elected in the same manner as other directors are elected in terms of Section 159. Unclaimed shares, modaraba certificates and dividend are to vest with the Federal Government.

9 Every company within thirty days of the closure of the financial year shall submit to the Commission a return of all unclaimed shares, modaraba certificates and dividend in the manner as may be specified by the Commission. A payment of dividend in kind shall only be in the form of shares of a listed company held by the distributing company. Now the Commission will facilitate the restructuring or amalgamation of Companies , instead of the High Court. The Commission may require foreign Companies to furnish information about the shareholding including beneficial ownership, etc. No person shall be appointed or engaged for Shariah compliance, Shariah advisory, or Shariah Audit, unless that person meets the fit and proper criteria specified by the Commission.

10 Every substantial shareholder or officer of a company incorporated in Pakistan, under local laws, and who is a Pakistani citizen, including dual nationals, residing in Pakistan or not, are required to provide information to the company of their shareholding details in a foreign company or body corporate, or any other interest as may be specified by the Commission. In this regard, the Commission will maintain Companies global register of beneficial ownership. Restrictions have been imposed on a company from selling or purchasing any asset from/to a director or a connected person for consideration other than cash, without prior approval of the members of the company in the general meeting.