Under the Companies Act, 2017 of Pakistan, a company can alter its memorandum. This process is governed by Section 32 of the Act, which outlines the specific steps and requirements for such alterations.
- Special Resolution: To alter the provisions of its memorandum, a company must pass a special resolution. This special resolution must be approved by at least three-fourths of the members present and voting at a general meeting .
- Types of Alterations: The alterations that can be made to the memorandum include:
- Changing the place of the registered office from one Province to another, or to the Islamabad Capital Territory, or vice versa.
- Changing the principal line of business.
- Adopting or changing any business activity that requires a licence, registration, permission, or approval under any law .
- Confirmation by the Commission: Except for changes in the principal line of business, any other alteration to the memorandum must be confirmed by the Securities and Exchange Commission of Pakistan (SECP) on petition. The SECP will review the alteration and may confirm it with or without modifications .
- Filing Requirements: Once the SECP confirms the alteration, a certified copy of the order must be forwarded to the company and the registrar within seven days. Additionally, a copy of the altered memorandum must be filed with the registrar within thirty days of the order. The registrar will then issue a certificate as conclusive evidence that all requirements have been met .
- Effectiveness of Alteration: The alteration does not take effect until it is confirmed by the SECP and the required documents are filed with the registrar. This ensures that the process is thoroughly regulated and transparent .
In summary, the alteration of a company’s memorandum in Pakistan requires a special resolution, confirmation by the SECP, and compliance with specific filing requirements, ensuring that such changes are conducted with due diligence and regulatory oversight.
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Alteration of Memorandum under the Companies Act 2017
The Companies Act 2017 brought about a sea change in the corporate world of Pakistan, particularly in terms of the alteration of a company’s memorandum. This provision is a key aspect of corporate governance, facilitating companies to adapt and thrive in an ever-evolving business landscape. Let’s delve into what this means for businesses and stakeholders.
Understanding the Alteration of Memorandum
Under Section 32 of the Companies Act 2017, a company may, by special resolution, alter its memorandum to change its registered office, principal line of business, or adopt a business activity that requires specific licenses or permissions under any law.
- Changing the Registered Office: A company can shift its registered office from one province to another or to/from Islamabad Capital Territory. This mobility is crucial for businesses seeking strategic advantages or operational efficiencies.
- Principal Line of Business: The ability to change the principal line of business offers companies the flexibility to pivot their business model in response to market dynamics or to explore new opportunities.
- Adopting New Business Activities: Diversifying or changing business activities, especially those requiring legal permissions, is now streamlined, allowing companies to remain compliant while innovating or expanding their offerings.
The Role of the Commission
The alteration does not take effect until confirmed by the Securities and Exchange Commission of Pakistan (SECP). The Commission’s role is pivotal in ensuring that these changes align with legal standards and protect the interests of shareholders and creditors.
- Confirmation by the Commission: Except for changing the principal line of business, all other alterations require SECP’s confirmation, adding a layer of oversight to ensure the alterations are justified and lawful.
- Filing Requirements: Post-confirmation, companies are required to file an amended memorandum with the registrar, making it the definitive charter of the company.
- Physical Record Transfer: In case of a change in registered office, physical records must be moved to the new jurisdiction’s registrar, ensuring continuity and transparency in corporate records.
Protecting Members and Creditors
Sections 33 and 34 empower the SECP to consider the rights and interests of members and creditors. This protection is crucial in maintaining a balance between corporate agility and stakeholder rights.
- Discretion of the Commission: The SECP exercises discretion in confirming alterations, taking into account the impact on members and creditors, and may impose conditions or directions as needed.
- Member Protection: Notably, no member is bound by an alteration requiring them to take more shares or increase their liability beyond their status at the time of the alteration, unless they agree in writing.
Implications for Corporate Governance
The provisions under the Companies Act 2017 for altering the memorandum are a testament to the evolving nature of corporate governance. They reflect a balancing act between enabling businesses to adapt and protecting stakeholder interests.
- Corporate Flexibility: Companies now have greater leeway to restructure, reposition, and respond to market conditions, fostering a dynamic business environment.
- Stakeholder Assurance: The requirement for SECP’s oversight and the protection accorded to members and creditors ensure that corporate changes are not just business-driven but also equitable.
- Legal Compliance: These provisions emphasize legal compliance and due process in corporate restructuring, reinforcing the integrity of the corporate sector.
Section 40
Section 40 of the Companies Act 2017 lays down clear guidelines for companies regarding the issuance of their memorandum and articles after any alteration. It mandates that every copy of the memorandum or articles issued post-alteration must conform to the altered version. This provision is instrumental in ensuring that all stakeholders have access to the latest, legally compliant version of these fundamental documents.
- Alignment with Altered Documents: Post-alteration, every issued copy of the memorandum or articles must reflect the changes made. This ensures that any person reviewing these documents gets the most current and accurate information about the company’s structure, objectives, and governance policies.
- Penalties for Non-Compliance: The Act imposes penalties for issuing copies that do not conform to the altered versions. This serves as a deterrent against any negligence or oversight in disseminating outdated or incorrect corporate information.
Implications for Corporate Governance
- Enhanced Transparency: This provision reinforces the principle of transparency in corporate governance. By ensuring that all issued copies are up-to-date, stakeholders are kept informed about the company’s current governance structure and objectives.
- Legal Compliance: It emphasizes the importance of legal compliance in corporate affairs. Companies are encouraged to maintain meticulous records and disseminate information responsibly, reducing the risk of legal complications arising from outdated documents.
- Accountability of Officers: The liability extends not just to the company but also to its officers. This accountability ensures that those in charge of governance are vigilant in maintaining and distributing accurate corporate information.
Operational Implications for Companies
- Document Management: Companies must have robust systems for document management and control. This involves updating all copies of the memorandum and articles post-alteration and ensuring that only the latest versions are in circulation.
- Stakeholder Communication: Companies need to communicate effectively with stakeholders regarding any alterations. This may involve notifying shareholders, creditors, and other parties about significant changes to the memorandum or articles.
- Regular Audits and Compliance Checks: Regular internal audits and compliance checks become crucial to ensure that the company is not inadvertently distributing outdated copies, thus avoiding penalties.
Conclusion
Section 40 of the Companies Act 2017 plays a pivotal role in bolstering the principles of transparency, legal compliance, and accountability in Pakistan’s corporate sector. By mandating that all copies of the memorandum and articles issued reflect the latest alterations, the Act ensures that stakeholders have access to accurate and updated corporate information. This provision not only helps in building stakeholder trust but also fortifies the legal and ethical foundation of corporate governance in Pakistan.
Legal Analysis on Alteration of Company Memorandum and Articles From Precedent
The legal principles surrounding the alteration of a company’s memorandum and articles of association are intricate and pivot on specific statutory provisions, judicial interpretations, and the balancing of shareholder rights. The cases cited below offer a comprehensive insight into these principles, particularly in the context of Pakistani corporate law.
Issue of Rights Shares and Compliance with Articles of Association (2010 CLD 942, Karachi High Court):
This case discusses the issuance of rights shares in accordance with Section 86(1) of the Companies Ordinance, 1984. The court held that a company, if authorized by its Articles, may alter the conditions of its memorandum to increase its authorized capital by passing a resolution in the general meeting and obtaining approval from the Securities and Exchange Commission. In this case, the court found that the right shares were offered within the limit of authorized capital and not an alteration of the memorandum or authorized capital. Therefore, Sections 92 and 94 of the Companies Ordinance, 1984, were not applicable. The court dismissed the application for an interim injunction, indicating the necessity of balancing the interests of individual shareholders with the financial stability and objectives of the company.
Non-compliance with Provisions of Section 21 (2001 CLC 2019, Lahore High Court):
The court in this case emphasized the mandatory nature of Section 21 of the Companies Ordinance, 1984, which deals with the alteration of the memorandum of association. It was held that non-compliance with the provisions of Section 21 by a company cannot be justified on any grounds, including rules without legal sanction. This underscores the imperative to adhere to statutory requirements in corporate governance.
Limitations on Alteration of Memorandum (1969 PLD 71, Karachi High Court):
In this case, the court held that an alteration in the memorandum of association allowing a company to carry on additional and new business, not consistent with its former business, cannot be allowed. This decision highlights the principle that alterations in the memorandum must be within the scope of the company’s original business objectives, ensuring that the fundamental character of the company is preserved.
Feasibility of Combining New Business with Existing One (1967 PLD 695, Karachi High Court):
This judgment allowed an alteration in the memorandum for a company engaged in cotton ginning and cotton seed oil expelling to combine with the new proposed business of producing vegetable ghee and manufacturing soap. The court’s decision was based on the finding that the new business could be “conveniently and advantageously” combined with the existing one, showcasing the flexible approach in interpreting the scope of permissible alterations in line with business practicalities.
Alteration Due to Change in Law (1966 PLD 204, Dhaka High Court):
Here, the court considered a scenario where a change in law necessitated a company to either dissolve or change its objects. The court held that the company was not barred under Section 10 from making the necessary alteration in the memorandum for this purpose. This case illustrates the adaptability of corporate entities to legal changes and the permissibility of altering corporate documents to comply with new legal requirements.
Special Resolution for Amendment in Memorandum and Articles (1964 PLD 666, Dhaka High Court):
This case involved amendments in the memorandum and articles of association via a special resolution. The court confirmed that such alterations were within the scope permitted under Section 12 of the Companies Act 1913 and did not affect the requirements of Section 7. The court’s role was to confirm the resolution effecting the alteration, not to consider the interests of persons or companies with a mere expectation of an interest dependent on uncertain events.
Fiduciary Doctrine and Safeguard Against Majority Oppression (2017 CLD 587, Lahore High Court):
This case emphasises the fiduciary duties of directors and the need to safeguard minority shareholders against majority oppression. It highlights the principles around the increase in share capital, issuance of bonus shares, and capitalization of reserves. The court underscores the importance of following due process in altering the Articles of Association and memorandum, ensuring that these changes do not unjustly favour the majority shareholders at the expense of the minority.
Mandatory Nature of Companies Ordinance Provisions (2017 CLD 587, Lahore High Court):
This judgment stresses the mandatory nature of provisions in the Companies Ordinance, 1984, particularly concerning the capitalization of reserves and alteration of Articles. It demonstrates the court’s stance on the importance of adhering to statutory requirements, such as Section 160(1)(b), which mandates specific disclosures in notices for general meetings. The case highlights the invalidity of decisions taken in non-compliance with these statutory requirements.
Power to Alter Share Capital and Articles (2017 CLD 587, Lahore High Court):
Section 92 of the Companies Ordinance, 1984, allows a company to increase its share capital, subject to the authorization in its Articles of Association. The alteration in the memorandum and the Articles naturally flows from the act of altering the share capital. This case clarifies that such alterations must comply with Section 28 of the Companies Ordinance, 1984, ensuring lawful and transparent corporate actions.
Constitutional Petitions and Principle of Laches (2017 CLD 1411, Islamabad; 2015 PLC(CS) 267, Supreme Court):
These cases involve constitutional petitions related to alteration of the memorandum and highlight the principle of laches. The principle of laches bars claims where there has been an inordinate delay in asserting a right or claim. The courts have demonstrated that they will dismiss petitions where there is a significant delay in bringing the claim, particularly when the delay prejudices the rights of the other party.
Alteration in Memorandum and Shareholder Rights (2015 CLD 323, Karachi High Court; 2014 CLD 961, Karachi High Court):
These judgments delve into the rights of shareholders concerning alterations in the memorandum. They stress that any alterations must be in the best interests of the company and its shareholders, and must comply with the relevant provisions of the Companies Ordinance. The courts also emphasize the role of the Securities and Exchange Commission of Pakistan (SECP) in overseeing such alterations to ensure compliance with the law.
Authorized Share Capital and Its Alteration (2013 CLD 1432, Securities and Exchange Commission of Pakistan):
This case clarifies the concept of authorized share capital and its alteration. It underscores the fact that the issued capital of a company can never exceed its authorized capital. The alteration of authorized capital requires a resolution in a general meeting, underlining the importance of shareholder involvement in major corporate decisions.
Conclusions
(1) These cases collectively highlight the legal principles and statutory compliance required in altering a company’s memorandum and articles of association. They underscore the importance of adhering to the Companies Ordinance’s provisions, the need for balancing shareholder interests, and the court’s role in ensuring that such alterations are within the legal and practical scope of the company’s operations.
(2)The cases also underscore the principles of compliance with statutory provisions, protection of minority shareholders, the importance of the fiduciary duty of directors, and the need for transparency and fairness in corporate governance. They highlight the necessity for companies to adhere strictly to the legal requirements when making significant changes to their corporate structure or capital, ensuring that such changes are in the best interest of the company and all its shareholders.
