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 This Memorandum may be accessed on our website Preface EY Ford Rhodes The repealed Companies Ordinance, 1984, which provided legal framework for the corporate sector in Pakistan, has been due for revision for numerous years, owing to the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. 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.

2 The new law also facilitates regulation of public sector Companies and protection of interest of creditors. 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. 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 Under the repealed Ordinance there was no provision to allow the appointment of additional director in mid-term to enlarge the Board, this lacuna has been removed in the new law.

3 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. 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.

4 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. 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. Independent Directors shall be selected from a data bank. The data bank will be maintained by such institutions as notified by the Commission.

5 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. 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.

6 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. 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.

7 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. Table of Contents EY Ford Rhodes 1 Section Page DEFINITIONS: 4 New Definitions: 1 Beneficial Ownership of Shareholders or Officer of a company 4 2 Chief Financial Officer 4 3 Financial Period 4 4 Financial Statements 4 5 Government 4 6 Public Sector Company 4 7 Shariah Compliant Company 5 8 Turnover 5 9 Public Interest Company 5 10 E- Service 5 11 Employees' Stock Option 5 12 Expert 5 13 Unlimited Company 5 Amended Definitions: 5 14 Body Corporate 5 15 Associated Companies and Associated Undertakings 5 16 Officer 5 17 Subsidiary Company or Subsidiary 6 KEY CHANGES AND NEW CONCEPTS.

8 7 1 Jurisdiction of Court Section 5 7 2 Procedure of the Court Section 6 7 3 Prohibition of certain names Section 10 7 4 Registration of Memorandum and Articles of Association Section 16 7 5 Business and Objects of a company Section 26 7 6 Simple Memorandum allowing all lawful businesses Section 27 8 7 Associations not-for-profit Section 42 8 8 Conversion of status of Companies section 47, 48 & 49 8 9 Service of documents Section 53 to 55 8 10 Return as to allotments Section 70 8 11 Restriction on transfer of shares by the members of a private company Section 76 8 Table of Contents EY Ford Rhodes 2 Section Page 12 Transfer to nominee of a deceased member Section 79 8 13 Power to issue shares at a discount Section 82 9 14 Further issue of capital Section 83 9 15 Unlimited Liability of Directors Section 98 9 16 Annual General Meeting (AGM) Section 132 9 17 Directors and the Board 9 18 Related Party Transaction Section 208 11 19 Restriction on non-cash transaction involving Directors Section 211 12 20 Financial Statements Section 223 12 21 Classification of Companies Section 224 12 22 Contents of Financial Statements Section 225 12 23 Duty to prepare directors' report and statement of compliance Section 226 12 24 Contents of directors' report and statement of compliance Section 227 13 25 Consolidated financial statements Section 228 13 26 Financial year of holding company and subsidiary Section 229 13 27 Approval and authentication of Financial Statements Section 232 13 28 Copy of Financial Statements to be forwarded to the registrar Section 233 13 29 Filing of unaudited financial statements Section 234 13 30 Rights of Member of a company to copies of the Financial Statements and the auditor's report Section 235 13 31 Dividends to be paid only out of profits Section 241 13 32 Unclaimed

9 Shares, modaraba certificates and dividend to vest with Federal Government Section 244 14 33 Establishment of Investor Education and Awareness Fund Section 245 14 34 Appointment, removal and fee of auditors Section 246 15 35 Qualification and disqualification of auditors Section 247 15 36 Auditors' right to information Section 248 15 37 Duties of Auditor Section 249 15 38 Audit of Cost Accounts Section 250 16 39 Signature of auditor's report Section 251 16 40 Seizure of documents by registrar, inspector or investigation officer Section 255 16 41 Serious Fraud Investigation Section 258 16 42 Compromise with creditors and members Section 279 16 43 Powers of Commission to enforce compromises and arrangements Section 280 16 44 Powers of Commission to facilitate reconstruction or amalgamation of Companies Section 282 17 Table of Contents EY Ford Rhodes 3 Section Page 45 Amalgamation of wholly owned subsidiaries in holding company Section 284 17 46 Application to Court Section 286 17 47 Management by Administrator Section 291 17 48 Inactive Companies Section 424 17 49 Easy exit of a defunct company Section 426 18 50 Power of the Commission to require information from foreign company Section 439 18 51 Certification of Shariah compliant Companies and Shariah compliant securities Section 451 18 52 Companies Global Register of Beneficial Ownership Section 452 18 53 Prevention of offences relating to fraud.

10 Money laundering and terrorist financing Section 453 19 54 Free Zone Company Section 454 19 55 Acceptance of advance by real estate Companies engaged in real estate projects Section 456 19 56 Agriculture Promotion Companies Section 457 19 57 Valuation by registered valuers Section 460 20 58 Security and Clearance of Shareholders and Directors Section 461 20 59 Approval of transfer of shares by the agents licenced by the Commission Section 467 20 60 Offences to be cognizable Section 476 20 61 Adjudication of offences and standard scale of penalty Section 479 21 62 Power to alter schedules Section 507 21 63 Repeal and savings Section 509 21 64 Validation of laws Section 514 21 65 Salient features of the THIRD SCHEDULE of the Companies Act, 2017 21 66 Key changes in the FOURTH SCHEDULE of the Companies Act, 2017 21 67 Key changes in the FIFTH SCHEDULE of the Companies Act, 2017 22 Briefing on New Companies Act 2017 EY Ford Rhodes 4 DEFINITIONS: New Definitions: 1.