Who can form a public company in Pakistan?

Any three or more persons associated for lawful purpose may, by subscribing their names to the Memorandum of Association and complying with the requirements of the Companies Act 2017 to form a public company. As per the Companies Act 2017  a “listed company” means a public company, body corporate or any other entity whose securities are listed on securities exchange and “public company” means a company which is not a private company.

Also as per the definitions “public sector company” means a company, whether public or private, which is directly or indirectly controlled, beneficially owned or not less than fifty-one percent of the voting securities or voting power of which are held by the Government or any agency of the Government or a statutory body, or in respect of which the Government or any agency of the Government or a statutory body, has otherwise power to elect, nominate or appoint majority of its directors and includes a public sector association not for profit, licenced under section 42: Provided that nomination of directors by the Commission on the board of the securities exchange or any other entity or operation of any other law shall not make it a public sector company.

As per Section 14 of the Companies Act 2017 states as follows. Mode of forming a company.— (1) Any- (a) three or more persons associated for any lawful purpose may, by subscribing their names to a memorandum of association and complying with the requirements of this Act in respect of registration, form a public company; or…..

Legal Note on Commencement of Business by a Public Company under the Companies Act 2017

Introduction:

The Companies Act 2017 lays down the framework for the commencement of business operations by public companies in Pakistan. Herein, we’ll delve into the provisions of Section 19 and Section 20 of the Act, which detail the prerequisites for starting business operations and the consequences of non-compliance, respectively.

Section 19: Commencement of business by a public company

• Prerequisites for Commencement: A public company cannot initiate its operations or leverage any borrowing powers unless it fulfils the following conditions:
  a. Minimum Subscription: Shares equivalent to the minimum subscription must be allotted, and the entire amount for these shares should have been received by the company in cash.
  b. Directors’ Share Payment: Every director must have fully paid the company for any shares they have taken or agreed to take.
  c. No Repayment Obligation: The company should not owe any money or be in a position where it might owe money to those who applied for publicly offered shares.
  d. Declaration: A verified declaration must be filed with the registrar by either the chief executive or one of the directors and the secretary. This declaration should confirm that the above conditions have been met.
  e. Statement in lieu of Prospectus: If the company hasn’t issued a prospectus inviting the public to subscribe to its shares, a statement as per the Second Schedule of the Act should be filed with the registrar.
  • Explanation: The term “minimum subscription” refers to the amount specified in the company’s memorandum or articles of association. If no amount is specified, it encompasses the entire share capital, excluding the portion issued or agreed to be issued as paid up other than in cash.
• Role of the Registrar: Once the registrar receives the duly verified declaration and is satisfied that all the Act’s requirements have been complied with, the registrar will register all relevant documents.
• Conclusive Evidence: The registration of these documents will serve as definitive proof that the company can commence its operations and exercise borrowing powers.
• Exemptions: This section doesn’t apply to companies converted from private to public and companies limited by guarantee without a share capital.

Section 20: Consequences of non-compliance of Section 19

• Penalty: If a company commences its operations or borrows in violation of Section 19, every responsible officer or individual can face a penalty up to level 2 on the standard scale.
• Provisional Contracts: Any contract made by the company before it’s legally entitled to start operations is provisional. Such contracts will only become binding on the company once it is authorised to commence business.

Legal Note on Conversion of Company Types and Related Provisions under the Companies Act 2017

Section 46: Conversion of public company into private company and vice-versa

• Conversion Process:
  • A public company may convert into a private company, provided it obtains prior approval from the Commission. This conversion necessitates:
    • Passing a special resolution.
    • Amending the memorandum and articles of association to align with private company provisions.
    • Complying with other specified requirements.
  • For listed companies aiming for conversion, the Commission must notify the securities exchange of the application and consider any representation by the securities exchange.
• Commission’s Role:
  • Upon receiving a conversion application, if the Commission is convinced of the company’s eligibility, it will grant approval in writing.
• Submission of Order:
  • A certified copy of the conversion order must be sent to the company and the registrar within seven days of issuance.
• Filing of Amended Documents:
  • The company must file the altered memorandum and articles of association with the registrar within fifteen days of the order’s date. Post-registration, these will be the guiding documents for the newly converted company.
• Change from Private to Public:
  • If a private company modifies its articles such that it no longer aligns with the criteria defining a private company (as per sub-section (1) of section 2), the company will:
    • Cease to be a private company from the alteration date.
    • File the altered memorandum and articles, along with the special resolution, with the registrar.
• Penalties for Non-compliance:
  • Any failure to adhere to the provisions results in penalties, with the company and every defaulting officer liable up to level 2 on the standard scale.

Section 86: Prohibition of purchase by company or giving of loans by it for purchase of its shares

• Restrictions:
  • Companies with share capital, excluding listed companies, cannot purchase their own shares.
  • Neither public companies nor private subsidiaries of public companies can provide financial assistance, directly or indirectly, for purchasing any shares in the company or its holding company.
• Exceptions:
  • The prohibition doesn’t apply to:
    • Banking companies lending money as a regular business activity.
    • Companies providing funds for share purchase or subscription if held by a trust for employees’ benefit.
    • Advances given to certain employees for purchasing the company’s shares.
• Penalties for Violations:
  • Breaching this section incurs a penalty of level 1 on the standard scale.

Section 131: Statutory meeting of company

• Mandatory Meeting:
  • Every public company with share capital must hold a “statutory meeting” within 180 days from when it can commence business or within nine months of its incorporation, whichever is earlier. However, if the first annual general meeting is decided to be held earlier, the statutory meeting isn’t required.
• Statutory Report Requirements:
  • The notice of the statutory meeting should be sent 21 days prior along with a statutory report. This report includes details like shares allotted, cash received, a brief account of the company’s affairs since its inception, business plans, any changes affecting shareholders’ interests, and more.
• Auditors’ Role:
  • The statutory report must be verified by the company’s auditors for the correct allotment of shares, cash receipts, and company payments.
• Filing Requirements:
  • The company needs to file the statutory report and auditors’ report with the registrar. Additionally, during the meeting, a list showing member details and shares held must be accessible.
• Discussion and Adjournment:
  • Members can discuss any matter related to the company’s formation or the statutory report. The meeting can be adjourned, and resolutions can be passed during adjourned meetings.
• Exemptions:
  • This section doesn’t apply to public companies converted from private companies after one year of incorporation.
• Penalties for Non-compliance:
  • Listed companies violating this section are liable to a penalty of level 2 on the standard scale, while other companies face a penalty of level 1 on the standard scale.

In summation, the Companies Act 2017 has set clear guidelines for the conversion of companies, their ability to purchase their shares, and the conduct of statutory meetings. Companies must ensure strict compliance to avoid penalties.

Legal Note on Selected Provisions of the Companies Act 2017 on Public companies 

Section 191: Prohibition on Chief Executive’s Competing Business

• Restriction:
  • A chief executive of a public company is prohibited from engaging, either directly or indirectly, in any business that competes with the company’s business or its subsidiary’s business.
• Explanation:
  • The business is deemed to be indirectly carried out by the chief executive if it’s run by his spouse or any of his minor children.
• Disclosure Requirement:
  • Upon appointment, a chief executive must immediately disclose in writing to the company the nature of any competing business and his involvement therein.

Section 192: Role of Chairman in a Listed Company

• Appointment:
  • The board of a listed company must appoint a non-executive director as chairman within 14 days after the directors’ election. The chairman’s term lasts three years unless he resigns, becomes ineligible, is disqualified, or is removed by the directors.
• Roles and Responsibilities:
  • The board must clearly differentiate the roles and responsibilities of the chairman and the chief executive. The Commission may specify which companies cannot have the same individual as chairman and chief executive.
• Chairman’s Role:
  • The chairman leads the board and ensures it fulfils its responsibilities effectively.Review Report:
  • Financial statements shared under section 223 must include a review by the chairman on the board’s performance and its role in achieving company objectives.

Section 193: Penalty

• Contravention:
  • Non-compliance with sections 186 to 192 results in a penalty of level 2 on the standard scale. The authority imposing the penalty may also bar the individual from becoming a director or chief executive for up to five years.

Section 194: Requirement for a Secretary in a Public Company

• Mandatory Role:
  • Public companies must appoint a company secretary who possesses the necessary qualifications.

Section 195: Share Registrar for Listed Companies

• Mandatory Role:
  • All listed companies must have an independent share registrar with the requisite qualifications and performing specified functions.

Section 214: Contracts by Company Agents with Undisclosed Principals

• Contractual Requirements:
  • Any agent or officer of a company, apart from a private company that isn’t a public company’s subsidiary, entering a contract on the company’s behalf where the company is an undisclosed principal must make a written memorandum detailing the contract’s terms.
• Submission:
  • This memorandum must be promptly delivered to the company and its directors and presented at the next board meeting.
• Consequences of Non-compliance:
  • If the officer or agent fails to comply with this section:
    • The company can choose to void the contract.
    • The officer or agent may face a penalty of level 1 on the standard scale.

Section 234: Filing of Unaudited Financial Statements

• Submission Requirement:
  • A private company, not being a public company’s subsidiary, with a paid-up capital not exceeding one million rupees (or another amount set by the Commission) must file authenticated financial statements (audited or not) with the registrar within 30 days of the pertinent meeting.
• Penalty:
  • Non-compliance with this section results in a penalty of level 1 on the standard scale.

Legal Note on Section 247 of the Companies Act 2017: Qualification and Disqualification of Auditors (In a Public Company)

Section 247: Qualification and Disqualification of Auditors

• Provisions:
  • This section specifies the qualifications required for an individual or entity to be appointed as an auditor of certain types of companies.
• Criteria for Auditors:
  • For a public company, a private company that is a subsidiary of a public company, or a private company with a paid-up capital of three million rupees or more:
    • The auditor must be a chartered accountant with a valid certificate of practice from the Institute of Chartered Accountants of Pakistan.
    • Alternatively, a firm of chartered accountants can also be appointed as an auditor for such companies.
• Implication:
  • The provision ensures that only individuals or entities with the appropriate professional qualifications and credentials are appointed as auditors for significant companies. This aims to guarantee the integrity, accuracy, and reliability of the financial auditing process.

In conclusion, Section 247 outlines the necessary qualifications for auditors of public companies, private companies that are subsidiaries of public companies, and private companies with substantial paid-up capital. This provision reinforces the importance of having qualified professionals audit the financial statements of companies to maintain transparency, trust, and compliance with financial reporting standards. [end of response]

The following cases provide insights into various legal issues and principles concerning Public Limited Companies & Public Sector Companies 

• 2023 SCMR 236 SUPREME-COURT & 2023 CLD 256 SUPREME-COURT:
  • These cases revolve around the Peshawar Electric Supply Company (PESCO), a government-owned public limited company. The primary issue was whether the officials of PESCO could be sued in their personal capacity. The court determined that the plaintiffs had chosen to sue the officials in their personal capacities, not representing PESCO. Thus, the officials were not required to produce a Board Resolution when defending themselves. The High Court’s judgment was set aside.
  • Citation: 2023 SCMR 236 SUPREME-COURT; 2023 CLD 256 SUPREME-COURT.
• 2022 PLC(CS) 56 LAHORE-HIGH-COURT-LAHORE:
  • This case concerns the regularization of daily wagers, specifically chowkidars, in a public limited company, the Pakistan Agricultural Storage and Services Corporation (PASSCO). The High Court determined that the petitioners, who were hired on a temporary basis, could not claim regularization of their services. Their services were bound by the terms and conditions of the recruitment order, which clarified that their jobs were temporary.
  • Citation: 2022 PLC(CS) 56 LAHORE-HIGH-COURT-LAHORE.
• 2020 CLD 134 PESHAWAR-HIGH-COURT & 2020 PLD 10 PESHAWAR-HIGH-COURT:
  • The primary issue in these cases was whether a Director of a public limited company could be considered a “holder of public office” for the jurisdictional purposes of the High Court. The court determined that directors of public limited companies, not having ties with the Federal, Provincial, or Local Governments, were not amenable to the Constitutional jurisdiction of the High Court.
  • Citation: 2020 CLD 134 PESHAWAR-HIGH-COURT; 2020 PLD 10 PESHAWAR-HIGH-COURT.
• 2020 CLD 389 ISLAMABAD:
  • This case concerned the concealment of information in the Annual Audited Financial Statement by the management of a public limited company. The High Court upheld the imposition of a penalty by the Securities and Exchange Commission of Pakistan (SECP) for not disclosing bankruptcy proceedings of its wholly-owned subsidiary abroad.
  • Citation: 2020 CLD 389 ISLAMABAD.
• 2019 SCMR 1 SUPREME-COURT:
  • This case examined the appointment of the Director and Chairman of the Pakistan Television Corporation (PTV), a public limited company. The Supreme Court held that given the Federal Government’s substantial control over PTV, its Director and Chairman could be examined under the court’s jurisdiction, particularly considering the seemingly arbitrary manner of the Chairman’s appointment.
  • Citation: 2019 SCMR 1 SUPREME-COURT.
• 2018 PTD 2154 PESHAWAR-HIGH-COURT:
  • The case revolved around the applicability of Section 12(9A) of the Income Tax Ordinance, 1979, to a public limited company. The High Court concluded that the section, which imposed a charge on the fictional income of a company, could not be given retrospective effect to an income year that ended earlier than the insertion of the section.
  • Citation: 2018 PTD 2154 PESHAWAR-HIGH-COURT.
• Unauthorized Deposits and Ponzy Schemes:
  • In the case of 2023 CLD 111, the company, B4USOFT (PRIVATE) LIMITED, was found to be raising unauthorized deposits from the public under the guise of a ponzy scheme. This was in violation of Sections 84 & 301(i)(g) of the Companies Act, 2017. The company was subsequently ordered to be wound up.
• Termination from Service & Constitutional Jurisdiction:
  • The case 2023 PLC(CS) 785 delves into the issue of the termination of employees and the constitutional jurisdiction of the High Court. The employees’ termination orders were assailed based on the violation of terms and conditions, but the court highlighted the necessity of statutory intervention to maintain a constitutional petition. The judgment was set aside, suggesting that only statutory rules could invoke constitutional jurisdiction.
• Merger & Pre-merger Clearance Requirement:
  • 2023 CLD 1111 deals with the merger of companies and the need for pre-merger clearance. The court determined that the merger in question fell within the exemptions and did not require pre-merger clearance.
• Exemption from Disclosures – Remuneration of Directors:
  • The 2023 CLD 530 citation discusses the exemption from disclosing the remuneration of the CEO/director. The court found that such exemption could not be granted in public interest, especially if the financial statement would become available for public inspection.
• Rectification of Register and Limitation:
  • In 2022 CLD 821, the issue revolves around the transfer of shares and the limitation period for rectification of the register. The application filed after a considerable delay was deemed time-barred.
• Purpose & Procedure of Companies Act:
  • Cases 2022 CLD 718 and 2022 CLD 468 highlight the legislative intent of the Companies Act, 2017. The Act aims to facilitate corporatization, protect stakeholders’ interests, ensure good governance, and provide a mechanism for the resolution of corporate disputes.
• Constitutional Jurisdiction & Public Sector Companies:
  • 2022 PLC(CS) 1433 establishes that Pakistan Television Corporation Limited (PTVC) qualifies as a “public sector company” and is a “person” within the meaning of the Constitution.
• Reduction in Share Capital:
  • In 2022 CLD 999, the petitioner company sought a reduction of paid-up capital. The court confirmed the resolution after ensuring the proposal was just, fair, and reasonable.
• Scheme of Arrangements:
  • The case 2022 CLD 630 pertains to a company’s scheme of arrangements to settle its liabilities. The court sanctioned the scheme after ensuring all statutory benchmarks were adhered to.

In summary, these cases highlight the complexities involved in the corporate sector, especially concerning the Companies Act, 2017. Issues range from unauthorized deposits, mergers, terminations, and exemptions to the very procedure and intent of the Act itself. The court’s decisions underscore the importance of adhering to statutory guidelines and ensuring the interests of shareholders, stakeholders, and the general public are safeguarded. It’s evident that the Companies Act, 2017 plays a pivotal role in shaping the corporate landscape of Pakistan, and the judiciary ensures its correct interpretation and application for the benefit of all parties involved.