Judicial Attitudes to Corporate Governance in Pakistan: A Review of Recent Cases

Judicial Attitudes to Corporate Governance in Pakistan: A Case Law Perspective

Corporate governance in Pakistan has undergone significant evolution, driven by regulatory reforms and judicial interpretations aimed at enhancing transparency, accountability, and integrity within corporate entities. Judicial attitudes, as reflected in various landmark cases, have played a pivotal role in shaping the corporate governance landscape, ensuring adherence to statutory requirements and reinforcing principles of good governance. This blog explores the judicial stance on corporate governance in Pakistan through the lens of several key cases.

Enforcing Mandatory Governance Provisions

In the case of Tandlianwala Sugar Mills Limited v. Securities and Exchange Commission of Pakistan (2024 CLD 740), the Securities and Exchange Commission of Pakistan (SECP) penalized the appellant for failing to appoint independent directors, as mandated by Regulation 6 of the Listed Companies (Code of Corporate Governance) Regulations, 2019, and Section 166 of the Companies Act, 2017. The appellant’s argument for relaxation was dismissed due to the late filing of their application. The court upheld SECP’s decision, emphasizing the mandatory nature of appointing independent directors to enhance corporate governance practices. This case underscores the judiciary’s commitment to enforcing regulatory provisions, ensuring that listed companies adhere to the governance framework established by law.

Distinction Between Elected and Nominated Directors

The case of Nadeem Mumtaz Qureshi v. Pakistan Petroleum Limited (2019 CLD 1374) provides a nuanced view of the removal process for directors. The petitioner, an elected director proposed by the Federal Government, was removed by an Annual General Meeting. The court recognized the petitioner’s status as an elected director and emphasized the necessity of following the procedure outlined in Section 163 of the Companies Act, 2017, for his removal. The judiciary’s decision to uphold the AGM’s resolution, without interfering in corporate decisions made in compliance with statutory requirements, reflects a balanced approach that respects the governance mechanisms of corporate entities while ensuring adherence to legal norms.

Addressing Non-Statutory Service Rules and Constitutional Jurisdiction

In National Engineering Services Pakistan (NESPAK) v. Muhammad Nawaz Cheema (2023 PLC(CS) 785), the Lahore High Court delineated the boundaries of constitutional petitions concerning corporate governance. The court ruled that non-statutory service rules did not warrant constitutional intervention, even when public sector corporate governance rules were allegedly violated. This decision highlights the judiciary’s stance that statutory intervention is essential for maintaining constitutional petitions, thereby reinforcing the importance of statutory compliance in corporate governance matters.

Emphasizing Legislative Intent and Statutory Compliance

The case of Tariq Iqbal Malik v. Multiplierz Group Pvt. Ltd. (2022 CLD 468) delves into the legislative intent behind the Companies Act, 2017. The Lahore High Court underscored the Act’s objective to reform company law, facilitate corporatization, and promote good governance. The court’s interpretation emphasized the Act’s role in protecting stakeholders’ interests and fostering corporate sector development, reflecting a judicial endorsement of comprehensive corporate governance reforms aimed at enhancing transparency and accountability.

Ensuring Transparent and Merit-Based Appointments

In Parvaiz Akhter Bhatti v. Federation of Pakistan (2022 CLD 731), the Islamabad High Court scrutinized the appointment processes within public sector companies, particularly Pakistan Television Corporation (PTVC). The court invalidated appointments that did not adhere to the fit and proper criteria, emphasizing the necessity for transparent and merit-based selection processes. The judgment mandated adherence to the Companies Act, 2017, and Public Sector Companies (Corporate Governance) Rules, 2013, for future appointments. This case highlights the judiciary’s proactive role in ensuring that public sector companies operate independently and transparently, free from undue governmental influence.

Addressing Fiduciary Breaches and Illegal Appointments

The Supreme Court’s decision in 2019 SCMR 1 addressed fiduciary breaches and illegal appointments within PTVC. The court found the appointment of the Chairman and Director unlawful due to non-compliance with the Public Sector Companies (Corporate Governance) Rules, 2013, and the Companies Act, 2017. The judgment emphasized the importance of skill, experience, and adherence to legal criteria in appointments to prevent financial mismanagement and promote effective corporate governance. The court’s decision to hold individuals accountable for fiduciary breaches reinforces the judiciary’s role in upholding the principles of good governance and protecting public interests.

Cases Discussed :

(1) In 2024 CLD 740, the Securities and Exchange Commission of Pakistan (SECP) penalized Tandlianwala Sugar Mills Limited for failing to appoint independent directors as mandated by Regulation 6 of the Listed Companies (Code of Corporate Governance) Regulations, 2019, and Section 166 of the Companies Act, 2017. The appellant’s argument that their application for relaxation should have been accepted was dismissed, as the application was filed belatedly in response to a show-cause notice rather than proactively. The court upheld the SECP’s decision, reinforcing the mandatory nature of appointing independent directors to enhance corporate governance practices.

(2) In 2023 PLC(CS) 785, the Lahore High Court highlighted the importance of statutory rules of service in maintaining constitutional jurisdiction. The court set aside the impugned judgment, underscoring that non-statutory service rules did not warrant constitutional intervention, even when public sector corporate governance rules were allegedly violated. This decision delineates the boundaries of constitutional petitions concerning corporate governance in public sector companies, affirming that statutory intervention is essential for such petitions to be maintainable.

(3) The 2022 CLD 468 case delves into the legislative intent behind the Companies Act, 2017, underscoring its objective to reform company law, facilitate corporatization, and promote good governance. The Lahore High Court emphasized the Act’s role in protecting stakeholders’ interests and fostering corporate sector development, reflecting a judicial endorsement of comprehensive corporate governance reforms.

(4) In 2022 CLD 731, the Islamabad High Court scrutinized the appointment processes within public sector companies, particularly Pakistan Television Corporation (PTVC). The court invalidated appointments that did not adhere to the fit and proper criteria, emphasizing the necessity for transparent and merit-based selection processes. The judgment mandated adherence to the Companies Act, 2017, and Public Sector Companies (Corporate Governance) Rules, 2013, for future appointments, highlighting the judiciary’s role in enforcing corporate governance standards to prevent undue governmental influence and ensure managerial independence.

(5) In the 2019 SCMR 1 case from the Supreme Court addressed fiduciary breaches and illegal appointments within PTVC. The court found the appointment of the Chairman and Director unlawful due to non-compliance with the Public Sector Companies (Corporate Governance) Rules, 2013, and the Companies Act, 2017. The judgment emphasized the importance of skill, experience, and adherence to legal criteria in appointments to prevent financial mismanagement and promote effective corporate governance.

(6) The case of 2019 CLD 1374, involving Nadeem Mumtaz Qureshi and Pakistan Petroleum Limited, offers significant insights into corporate governance in Pakistan and judicial interpretations of it. This case centers on the removal of an elected director and the subsequent appointment of a new Managing Director/Chief Executive Officer.

Nadeem Mumtaz Qureshi, the petitioner, was an elected director of Pakistan Petroleum Limited, proposed by the Federal Government but elected through a general election where he secured a substantial number of votes. The case examines whether the petitioner’s removal by an Annual General Meeting (AGM) was valid and whether the High Court should intervene.

Key takeaways from the judicial attitude and interpretations in this case include:

1. Recognition of Elected Directors: The court acknowledged that even though Qureshi was proposed by the Federal Government, his position as a director was secured through an election, not merely a nomination. This distinction emphasizes the importance of the electoral process within corporate governance, distinguishing between appointed and elected directors.
2. Procedural Adherence for Removal: The court emphasized that the removal of an elected director must follow the procedure outlined in Section 163 of the Companies Act, 2017. This section allows for the removal of directors through a resolution in a general meeting, whether they were appointed under Sections 157, 161, or 162, or elected under Section 159. The court’s insistence on adhering to this procedure underscores the judiciary’s commitment to ensuring that corporate governance practices comply with statutory requirements.
3. Judicial Restraint in Corporate Matters: The High Court declined to interfere with the AGM’s decision to remove Qureshi as a director and found no need to intervene in the appointment of the new Managing Director/Chief Executive Officer, as the position was no longer contested. This restraint highlights the judiciary’s deference to corporate governance mechanisms and decisions made by a company’s shareholders and board, provided they comply with the law.
4. Regulatory Framework Enforcement: The case illustrates the judiciary’s role in enforcing the regulatory framework governing corporate entities. By upholding the procedural requirements for director removal, the court reinforces the principles of good governance and accountability.
5. Impact on Corporate Governance: The decision reinforces the idea that corporate governance in Pakistan is rooted in statutory compliance and procedural integrity. It demonstrates that the judiciary supports a governance model where the rights and responsibilities of directors, whether elected or appointed, are clearly defined and protected, ensuring that corporate decisions are made transparently and in accordance with legal standards.

Overall, this case reflects a judicial attitude that prioritizes statutory compliance, procedural integrity, and non-interference in corporate affairs unless there is a clear breach of legal requirements. It underscores the importance of the electoral process within corporate governance and the necessity for companies to adhere strictly to the provisions of the Companies Act, 2017, and related governance rules. The judiciary’s approach in this case promotes stability and trust in corporate governance practices in Pakistan.

Key Takeaways:

The key takeaways from the judicial attitudes towards corporate governance in Pakistan, as illustrated by the cited cases, are as follows:

1. Strict Enforcement of Regulatory Provisions:
   • The courts consistently enforce the mandatory nature of corporate governance regulations. For instance, in Tandlianwala Sugar Mills Limited v. SECP (2024 CLD 740), the SECP’s penalty for failing to appoint independent directors was upheld, underscoring the judiciary’s commitment to enforcing the Listed Companies (Code of Corporate Governance) Regulations, 2019, and the Companies Act, 2017.
2. Recognition of the Distinction Between Elected and Nominated Directors:
   • In Nadeem Mumtaz Qureshi v. Pakistan Petroleum Limited (2019 CLD 1374), the court recognized the distinction between elected and nominated directors and emphasized the importance of following the statutory procedure for the removal of elected directors, reflecting respect for the electoral process within corporate governance.
3. Judicial Restraint in Corporate Affairs:
   • The judiciary demonstrates restraint in interfering with corporate decisions made in compliance with legal requirements. This is evident in Nadeem Mumtaz Qureshi v. Pakistan Petroleum Limited, where the court declined to interfere in the AGM’s decision to remove a director and appoint a new Managing Director/CEO.
4. Statutory Compliance as a Basis for Constitutional Petitions:
   • The Lahore High Court, in NESPAK v. Muhammad Nawaz Cheema (2023 PLC(CS) 785), highlighted that constitutional petitions related to corporate governance are only maintainable when there is statutory intervention. This underscores the importance of statutory compliance for judicial review.
5. Emphasis on Legislative Intent and Comprehensive Reforms:
   • The case of Tariq Iqbal Malik v. Multiplierz Group Pvt. Ltd. (2022 CLD 468) illustrates the judiciary’s emphasis on the legislative intent behind the Companies Act, 2017, which aims to reform company law, facilitate corporatization, and promote good governance.
6. Transparent and Merit-Based Appointments:
   • In Parvaiz Akhter Bhatti v. Federation of Pakistan (2022 CLD 731), the court invalidated non-compliant appointments within public sector companies, emphasizing the necessity for transparent and merit-based selection processes. This highlights the judiciary’s role in ensuring that public sector companies adhere to the fit and proper criteria.
7. Accountability for Fiduciary Breaches:
   • The Supreme Court’s decision in 2019 SCMR 1 addressed fiduciary breaches and illegal appointments within PTVC, reinforcing the importance of skill, experience, and adherence to legal criteria in appointments. The judiciary’s willingness to hold individuals accountable for fiduciary breaches underscores its role in upholding good governance principles.
8. Reinforcement of Corporate Governance Framework:
   • Collectively, these cases illustrate the judiciary’s role in reinforcing the corporate governance framework established by the Companies Act, 2017, and related regulations. The judiciary’s interpretations and enforcement actions ensure that corporate entities operate transparently and accountably, safeguarding stakeholder interests.

These takeaways reflect a judicial attitude that prioritizes statutory compliance, transparency, and accountability within corporate governance in Pakistan, contributing to a robust and trustworthy corporate sector.

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