Legal Advice on ‘Easy Exit’ for Companies in Pakistan? A solution for defunct companies

The Easy Exit Regulations stipulate that all private and public unlisted companies, including associations not for profit licensed under section 42 of the Companies Ordinance, 1984/Companies Act 2017, can file applications for striking their name off the register of companies under Companies (Easy Exit Regulations), 2014, with certain exceptions​. 

Navigating the Easy Exit Regulations: A Guide to Eligibility Filtering for Pakistani Companies

In an endeavour to simplify the process of closing down companies that are no longer operational or required, Pakistan’s Securities and Exchange Commission (SECP) introduced the Companies (Easy Exit Regulations), 2014. This regulatory framework facilitates the striking off of a company’s name from the register of companies, providing a hassle-free exit pathway. However, not all entities are eligible to utilise this exit scheme. The first step towards availing of this opportunity is understanding the eligibility criteria.

The eligibility for the Easy Exit scheme encompasses all private and public unlisted companies, along with associations not for profit licensed under section 42 of the Companies Ordinance, 1984 and Companies act 2017. These entities can file an application to have their name removed from the register of companies, essentially marking the cessation of their legal existence under the designated regulations.

However, there are certain types of companies and entities that are exempt from availing the Easy Exit scheme. These include:

• Subsidiaries of listed companies: These are entities where the controlling stake is held by a company listed on a stock exchange, thereby falling outside the purview of the Easy Exit Regulations.
• Foreign companies: Companies incorporated outside Pakistan but operating within the country are not eligible for this exit scheme.
• Trade organizations licensed under the Trade Organization Act, 2013, (II of 2013): Trade bodies regulated under this specific act are excluded from the Easy Exit framework.
• Companies with outstanding liabilities: If a company has outstanding liabilities concerning loans from banks or financial institutions, taxes, utility charges, or any other obligations towards government departments or private parties, it is not eligible for an easy exit.
• Companies under investigation or legal scrutiny: Companies that are currently under investigation, enquiry, inspection, or have matters pending before the court or any other competent authority cannot avail of this scheme.
• Companies with management or shareholding disputes: Entities facing internal discord or disputes concerning management or shareholding are exempt from the Easy Exit Regulations.
• Companies involved in illegal or fraudulent activities: Companies found to be engaging in unlawful or fraudulent activities are not permitted to exit easily.
• Housing and real estate development or real estate marketing companies: Given the nature of their business, these companies are excluded from the scheme.
• Companies soliciting public deposits: If a company is involved in the collection of public deposits and the repayment thereof or delivery of promised goods or services against these deposits is yet to be completed, such companies are barred from the Easy Exit Regulations.

In conclusion, the Companies (Easy Exit Regulations), 2014, manifest SECP’s initiative towards easing the business closure process, promoting a culture of compliance and responsibility. It is pivotal for companies and associations to meticulously assess their eligibility against the stipulated criteria before proceeding with an application for an easy exit. Understanding these exceptions is crucial for a smooth transition and ensuring adherence to the legal and regulatory framework governing corporate entities in Pakistan.

Real Estate Companies are excluded from Easy Exit Regulations 

The exclusion of real estate development and marketing companies from the Easy Exit Scheme as stipulated by the Securities and Exchange Commission of Pakistan (SECP) showcases a layered regulatory approach. Companies wishing to avail themselves of the Easy Exit Scheme are required to declare non-involvement in real estate activities​1​. This regulation is part of a broader regulatory framework that seeks to ensure transparency and compliance within the real estate sector, a critical segment of the economy. This restriction is important for many reasons.

• Ensuring Transparency: Regulations ensure that companies operate within a framework of transparency, thus building trust with investors and other stakeholders. This is particularly crucial for real estate companies given the substantial financial commitments involved.
• Consumer Protection: By requiring real estate companies to adhere to certain standards and regulations, the interests of consumers are safeguarded. This is essential in preventing fraud and ensuring that individuals’ investments are protected.
• Maintaining Market Stability: The real estate sector is a significant contributor to the economy. Regulations help in maintaining market stability by preventing abrupt exits that could disrupt the market and potentially lead to a loss of jobs and economic downturn.
• Preventing Financial Mismanagement: The exclusion of real estate development and marketing companies from the Easy Exit Scheme helps in ensuring that these entities fulfil their financial obligations before ceasing operations, which is crucial for preventing financial mismanagement and ensuring economic stability.

In conclusion, the regulatory restrictions on real estate development and marketing companies in the context of the Easy Exit Scheme reflect a broader regulatory ethos aimed at ensuring transparency, consumer protection, and market stability. The meticulous regulatory approach towards this sector underscores the significance of real estate in Pakistan’s economic landscape and the imperative for stringent oversight to foster a conducive environment for sustainable development.

 The Path to a Hassle-Free Exit: Understanding the Declaration/Indemnity Process for Companies in Pakistan

In the corporate world, the cessation of a company’s operations is a nuanced process, governed by meticulous regulatory frameworks. In Pakistan, the Easy Exit scheme introduced by the Securities and Exchange Commission of Pakistan (SECP) has streamlined this process, ensuring a smooth transition for companies wishing to close down. Central to this scheme is the Declaration/Indemnity process, a crucial step ensuring compliance and accountability as companies bid adieu to the business landscape. This article delves into the Declaration/Indemnity to be made by a company applying for Easy Exit, shedding light on its significance and the legal backdrop underpinning it.

The Declaration/Indemnity is a formal document, solemnly affirmed by the directors or chief executive of the company intending to exit. This document underscores the company’s adherence to the stipulated regulations, ensuring a transparent and accountable exit process. Let’s delve into the key elements of this declaration:

• Board of Directors Affirmation:
• The affirmation by a majority of the board of directors, including the chief executive, sets the stage for the application for striking off the company’s name from the register of companies.
• Members’ Resolution:
• A resolution passed by the members in a general meeting accentuates the collective intent to seek the cessation of the company under section 439 of the Companies Act, 2017.
• Voting Dynamics:
• The document elucidates whether the resolution was passed unanimously or by a simple majority, ensuring clarity on the members’ stance.
• Operational Status and Assets:
• A declaration regarding the company’s operational status and assets provides a snapshot of its financial standing at the time of exit.
• Liabilities Clearance:
• The document asserts that the company has cleared all outstanding liabilities, a crucial step towards a seamless exit.

5A. Real Estate Business Disclosure:

Given the nuanced regulatory landscape governing real estate businesses, this section ensures that the company has not engaged in real estate development or marketing activities.

• Legal Compliance:
• An affirmation regarding the absence of any pending legal or investigative proceedings against the company reflects its compliance with legal and regulatory frameworks.
• Indemnification Undertaking:
• A comprehensive undertaking to settle any lawful claims or losses arising post the striking off, underscores the directors’ commitment to uphold legal and financial obligations.
• Awareness of Consequences:
• This section reinforces the directors’ awareness of the civil and criminal consequences tied to any false declarations.
• Truthfulness Affirmation:
• The final affirmation of truthfulness underscores the authenticity of the information provided in the application.

In conclusion, the Declaration/Indemnity is a testament to a company’s adherence to the legal and regulatory frameworks governing corporate exits in Pakistan. It reflects a balance between facilitating a hassle-free exit and ensuring accountability and transparency, thus contributing to a robust and compliant business ecosystem. Understanding the intricacies of this declaration is pivotal for companies on the cusp of bidding farewell to the business arena, ensuring a departure that is in harmony with the legal landscape.

Section 426 of the Companies Act, 2017, and the Companies (Easy Exit) Regulations, 2014, provide a convenient solution for private or public unlisted companies that have ceased operations and have no significant assets or liabilities. These provisions allow such companies to streamline the process of removing their names from the Register of Companies, eliminating the need for a voluntary winding up process.The option of Easy Exit is not available to Foreign Companies as per the Companies (Easy Exit) Regulations, 2014. A foreign company will need to go through the winding up process in the Companies Act 2017 if it intends to wrap up its Operations in Pakistan.

By availing themselves of this option, companies can save time, effort, and resources that would otherwise be required for a formal winding up procedure. This provision offers a simplified and efficient approach for companies that have reached the end of their business journey and wish to dissolve their legal entity.

Under this framework, qualifying companies can apply to the registrar to have their names struck off the Register of Companies. This process eliminates the burden of a full-scale winding up, making it a more streamlined and cost-effective solution. It is particularly beneficial for companies with minimal or no outstanding obligations, allowing them to achieve closure in a straightforward manner.

By leveraging the provisions outlined in Section 426 and the Companies (Easy Exit) Regulations, eligible companies can seamlessly navigate the legal requirements for removal from the Register of Companies. This approach aligns with the modern business landscape, providing an efficient and practical avenue for companies to conclude their operations in a timely manner.

It is important to note that specific eligibility criteria and procedural requirements may apply, and it is advisable to consult with legal professionals well-versed in company law and regulations to ensure compliance and a smooth transition throughout the striking off process.

Section 426 of the Companies Act 2017

Easy exit of a defunct company.—

(1) A company which ceases to operate and has no known assets and liabilities, may apply to the registrar in the specified manner, seeking to strike its name off the register of companies on payment of such fee mentioned in the Seventh Schedule.

(2) After examination of the application, the registrar on being satisfied, may publish a notice in terms of sub-section (3) of section 425 of this Act, in the Official Gazette stating that at the expiration of ninety days from the date of that notice, unless cause is shown to the contrary, the name of the applicant company will be struck off the register of companies and the company will be dissolved. Such notice shall also be posted on the Commission’s website.

(3) At the expiration of the time mentioned in the notice, the registrar may, unless any objection to the contrary is received by him, strike its name off the register, and shall publish a notice thereof in the official Gazette, and, on the publication of such notice, the company shall stand dissolved:

Provided that the liability criminal, civil or otherwise (if any) of every director, officer and member of the company shall continue and may be enforced as if the company had not been dissolved.

Relevant parts of the  Companies Easy Exit Regulations 2014 are produced as below

Regulation 1 (3) These Regulations shall apply to private and public non-listed companies including associations not for profit licensed under section 42 of the Companies Ordinance 1984, (XLVII of 1984), which are not carrying on business and are not in operation and desirous to strike their names off the register of companies in terms of section 439 of the said Ordinance but shall not apply to the following companies,-

• • subsidiaries of listed companies;
  • public sector companies as defined in Public Sector Companies (Corporate Governance) Rules, 2013;
  • foreign companies;
  • trade organizations licensed under the Trade Organization Act, 2013, (II of2013);
  • companies which have liabilities outstanding in relation to any loanobtained from the banks or financial institutions, taxes, utility charges, or any obligations towards government departments or private parties;
  • companies against which investigations, enquiries or inspections are either pending or are in the process of initiation or any matter/prosecution is pending before the court or any other competent authority;
  • companies having dispute regarding management or shareholding;
  • companies found involved in illegalities or fraudulent activities;
  • housing and real estate development or real estate marketing companies; and
  • companies involved in soliciting public deposits and repayment thereof or delivery of promised goods or services there against is yet not completed.

2. – (1) In these Regulations, unless there is anything repugnant in the subject or context,-
   • “Commission” means the Secwities and Exchange Commission of Pakistan established under sechon 3 of Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997);
   • “defunct company” includes a company which,-
     • has no known assets and liabilities; and
     • is not carrying on any business and is not in operation

3. Application procedure for striking off.- (1) Where a defunct company desirous to strike its name off the register of companies, may file with the concerned registrar an application in Form EE-I along with the following documents
   • copy of members’ resolution as specified on Form EE-II;
   • copy of the minutes of the meeting specifically containing the viewpoint of the dissenting member, if any;
   • a declaration/indemnity on Form EE-III by at least three fourth majority of the directors including the chief executive of the company, duly verified by an affidavit administered before the Class I Magistrate or Oath Commissioner/Notary public; and
   • auditors’ certificate, from a person not disqualified to act as an auditor of the company under the Ordinance, on the format given in Form EE-IV:

Provided that the public company and its subsidiary, and private company having paid up capital of three million rupees or more shall furnish the certificate ñom a chartered accountant within the meaning of Chartered Accountants Ordinance, 1961(X of 1961).

(2) Where an application received under sub-regulation (1), is made by a company formed or operating under any licensing regime, or which has been granted approval, registration, or enrolment by any authority or entity, such application shall be accompanied by no objection certificate from that respective authority or entity.

4. Examination of Application. – (1) The registrar shall, while examining the application received under regulation 3, ensure that all the requirements of the Regulations, in respect of applying, have been complied

• The registrar, while considering the application may require the applicant to furnish such further information or clarification as it may deem appropriate, and communicate the deficiency, if any, contained in the application, to the
• The applicant shall remove the deficiencies referred to in sub-regulation (2), within thirty days from ie date of communication of the same, or such an extended time as the registrar may allow:

Provided that if the applicant fails to remove the deficiencies within the specified time, the application shall be deemed to have been declined and the applicant may be  informed accordingly.

• After examination of the application, the registrar may publish a notice under subsection (3) of section 439 of the Ordinance, in the Official Gazette stating that at the expiration of three months from the date of that notice, unless cause is shown to the contrary, the name of the applicant company will be struck off the register of companies and the company will be dissolved, and such notice may also be placed on the website of the Commission for information of the general public.
• Where any objection or reservation is received, the registrar shall examine the same in detail to decide the application and inform the applicant,
• Where no objection or reservation is received, and the registrar is satisfied that the applicant company has no known assets and liabilities, and is not carrying on any business, on the expiration of three moms, the registrar shall strike off the name of the applicant company from the register and send notice for publication in the Official Gazette in terms of sub-section (5) of section 439 of the Ordinance, and on publication thereof, the applicant company shall be dissolved.

Analysis 

The Companies (Easy Exit) Regulations, 2014 introduced by the Securities and Exchange Commission of Pakistan (SECP) offer a streamlined and simplified process for companies in Pakistan that have ceased operations and wish to strike off their names from the Register of Companies. This regulatory framework provides an efficient avenue for companies to conclude their business journey and dissolve their legal entity without going through the traditional winding up process. In this article, we will explore the key features and benefits of the Companies (Easy Exit) Regulations, 2014.

Simplified Winding Up: Under the Companies (Easy Exit) Regulations, 2014, private or public unlisted companies that have ceased to operate and have no significant assets or liabilities can opt for an easier route to dissolution. Instead of undergoing a voluntary winding up process, these companies can apply to the registrar for striking off their names from the Register of Companies.

Eligibility Criteria: Foreign Companies within the meaning of the Companies Act 2017 are not eligible for the Easy Exit Regulations. Also, to be eligible for the easy exit process, companies must meet certain criteria, including:

1. Ceased Operations: The company must have discontinued its operations.
2. No Assets or Liabilities: The company should not have any known assets or liabilities.
3. Compliance: The company must be compliant with statutory requirements, such as filing annual returns and financial statements.

Advantages of Companies (Easy Exit) Regulations: The Companies (Easy Exit) Regulations, 2014 offer several advantages to companies seeking dissolution:

1. Simplified Procedure: The easy exit process streamlines the winding up procedure, reducing administrative burden, time, and costs associated with a traditional winding up process.
2. Cost-Effective Solution: By opting for the easy exit route, companies can save on legal and professional fees typically incurred in a voluntary winding up process.
3. Efficient Closure: The easy exit process allows companies to conclude their business operations swiftly, ensuring a smooth transition to dissolution.

Application Process: Companies interested in availing the benefits of the easy exit process must follow the prescribed application process, which typically includes the following steps:

1. Prepare Documentation: Gather and prepare the necessary documents, including a formal request for striking off, a statement of assets and liabilities, and a board resolution approving the dissolution.
2. Submit Application: Submit the application to the registrar along with the required supporting documents.
3. Registrar’s Review: The registrar will review the application and accompanying documents to verify compliance with the Companies (Easy Exit) Regulations, 2014.
4. Striking off: If the application is deemed valid, the registrar will proceed with striking off the company’s name from the Register of Companies.

Conclusion: The Companies (Easy Exit) Regulations, 2014 provide an efficient and cost-effective solution for companies in Pakistan to dissolve their legal entity. By taking advantage of this streamlined process, companies that have ceased operations and have no significant assets or liabilities can conclude their business journey smoothly. It is essential to consult with legal professionals familiar with the Companies (Easy Exit) Regulations 2014 to ensure compliance and a seamless dissolution process.