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We offer advice on the incorporation of all kinds of Companies; public, private, foreign etc. Advice is also provided on Non-Governmental Organization’s registration, Social Welfare Organizations and establishment of Trusts. As a part of our services, clients are assisted, guided and facilitated through the procedures adopted at Board of Investment for the foreign investor companies, branches and liaison offices of the foreign companies. Legal assistance is also provided to clients in relation to proceedings concerning bankruptcy, winding up or liquidation of companies.
The article below is intended to be a brief primer about the current laws on incorporation in Pakistan.
What law governs Corporations and Companies in Pakistan?
Law relating to corporations (or “companies” as they are called in Pakistan) is chiefly contained in Companies Ordinance, 1984 as amended.
General Supervision.
Duties of registration of companies and enforcing Ordinance are vested in Registrars, Additional Registrars, Joint Registrars, Deputy Registrars or Assistant Registrars of Joint Stock Companies who maintain offices in Karachi, Lahore, Peshawar, Quetta, Multan and Hyderabad. Securities and Exchange Commission (“SECP”) enjoys wide powers of investigation of affairs of companies. SECP may in pursuance of findings of such investigation either itself take action or apply to court of law for any number of specified sanctions against company, including dismissal of any officer of company or direction to directors to carry out requisite changes in management or accounting policies. In addition, courts have jurisdiction in certain matters relating to Ordinance.
Code of Corporate Governance has been issued by SECP for all listed and insurance companies to follow. Code encourages such companies to appoint independent nonexecutive directors, including chairman of company, and afford reasonable representation to minority interests. No person directly or indirectly engaged in business of stock brokerage or part of particular company’s external auditors may be appointed director of that company. Board of Directors of every listed company must prepare “Statement of Ethics and Business Practices”, adopt “Mission Statement” and overall corporate strategy and generally establish sound system of internal control. Code also contains detailed criteria for persons appointed as Chief Financial Officers. All listed companies would be obliged to appoint independent share registrar of company possessing such qualifications and performing such functions as may be specified by commission. All listed companies must also establish internal Audit Committees, comprised of at least three members, that shall consult with external auditors at least once a year. Companies shall also be required to change their external auditors after every five years. § 234A of Companies Ordinance 1984 has been inserted with objective to enable commission to order special audit of company and hence appoint auditor to carry out such audit by detailed scrutiny of affairs of company. Powers and duties of auditor to be appointed to undertake special audit are to be governed by § 255 of Companies Ordinance 1984. § 234A empowers commission to pass such interim orders and directions during course of special audit as it may deem appropriate and also issue such directions for immediate compliance to company and its management as may be deemed appropriate.
Formation.
Incorporated company, with or without limited liability, is formed in case of private company by one or more persons, in case of unlisted public company by three or more persons, and public listed company by ten members (as quorum for general meetings of public listed companies has been set at ten) subscribing their names to Memorandum of Association thereby agreeing to take at least one share each in company, and by otherwise complying with requirements of Ordinance as regards registration. Memorandum must state name of company with “Limited” as last word in its name in case of public limited company and parentheses and words “(Private) Limited” as last words in its name in case of private limited company; province in which registered office will be situated; objects of company; (in case of company limited by shares) that liability of members is limited; and amount of authorized share capital and its division into shares of fixed amount. Company may be limited by guarantee.
Name.
Name of company must not be identical to, or closely resemble, that of existing company or (without SECP’s consent) contain any words denoting patronage of or in connection with any past or present, Pakistani or foreign, Head of State or Government or any international organisation. Name which is inappropriate or deceptive or designed to exploit or offend religious susceptibilities is also prohibited. Ordinance lays down procedure whereby company can change its name.
Registration of Articles.
A company limited by shares (to which the succeeding paragraphs exclusively relate) may also register articles of association signed by subscribers to memorandum setting out the company regulations. A company may adopt the specimen articles contained in Table A in First Schedule to Ordinance, which will in any case be deemed to be regulations of company in so far as its registered articles do not exclude or modify them.
Stamp Duty and Registration Fees.
Memorandum and articles of a company (which must be printed) are required to be stamped in accordance with Stamp Act 1899 in federal capital Islamabad. No stamp duty is payable in this respect in other parts of country. Fee based on amount of the authorized capital is, however, payable to Registrar. There is no capital duty as such.
Certificate of Incorporation.
On registration of memorandum and articles together with certain prescribed returns. Registrar will issue certificate of incorporation, upon which subscribers (with such other persons as may become members of the company) become a body corporate with perpetual succession and common seal.
Public and Private Companies.
Private company is company which by its articles restricts right to transfer its shares, limits number of its members to 50 and prohibits any invitation to the public to subscribe for shares. Law also allows single member private companies which are treated differently than ordinary private companies. All other companies are public companies. Many provisions of Ordinance do not apply to private companies, and certain provisions do not apply to private companies unless they are subsidiaries of public companies.
Commencement of Business.
Except in case of private company, a company cannot commence any business or exercise any borrowing powers unless shares have been allotted to an amount not less than the minimum subscription; every director has paid full amount on shares taken or contracted to be taken by him; no money is or may become liable to be paid to applicants for shares owing to failure to obtain permission for shares to be dealt in on stock exchange; declaration that above conditions have been complied with has been filed with Registrar and Registrar has issued certificate to commence business; and either prospectus inviting public to subscribe for shares has been filed with Registrar or, if no prospectus is issued, statement in lieu of prospectus.
Alteration of Memorandum and Articles.
A company may alter its memorandum to change its name or place of its registered office to another province or to alter or restructure its share capital, or (to limited extent) with respect to its objects, and may alter or add to its articles, by special resolution, but any such alteration of memorandum must be confirmed by Registrar of Companies in each province.
Share Capital.
Shares of no par value are not permitted. All shares issued by company must be fully paid up. Companies are now allowed to have any type of share capital. Shares in company are moveable property transferable as provided in company’s articles. Certificate under common seal of company is prima facie evidence of title of member to shares specified therein. Company is required to keep register of members and, if it has more than 50 members, index of members. No notice of any trust can be entered on register of members. Application for registration of transfer of shares can be made by transferor or transferee by delivering to company stamped and executed instrument of transfer along with scrip. Transfer of share of deceased member can be made by his legal representative. Member may confer on his spouse, parents, siblings or children right to acquire his shares in event of his death and such person(s) shall be entitled to such shares to exclusion of all others. Listed companies are allowed to repurchase their own shares subject to certain requirements. No company (except private company not subsidiary of public company) can give any financial assistance in connection with purchase of any of its shares. However, Finance Act 1999 has now allowed companies to have Employees Stock Option Schemes. Where share capital of company is divided into several classes of shares, and rights attached to any class of shares are varied, holders of not less than 10% of shares of that class may apply to court to have variation cancelled. Company, if so authorized by its articles, may alter conditions of its memorandum so as to increase its share capital by issue of new shares; consolidate and divide its share capital into shares of larger amount; convert its shares into stock and vice versa; subdivide its shares into shares of smaller amount than fixed in memorandum; or cancel shares not taken or agreed to be taken by any person. Company may not, however, reduce its share capital unless approved by court. And management in company cannot disinvest its shares unless minority shareholders are offered same price and prior approval of SEC is obtained.
Finance Bill 2007 seeks to relax existing provisions, where company was prohibited from purchasing its own shares and shares of its holding company. Amendment enables subsidiary to act as trustee of holding company provided holding company is not beneficially interested in trust.
Subsidiary may also deal in shares of holding company listed at stock exchange in ordinary course of bona fide business of brokerage of shares. However, such subsidiary shall not be entitled to exercise voting rights to such shares.
Central Depositories Act, 1997.
Act brings capital market in Pakistan at par with its counterparts in advanced countries in terms of credibility and transparency. Central Depository Company acts as custodian of shares in same sense as bank is custodian of money. Its most significant function is to facilitate prompt transfer of shares to buyers.
General Meetings.
A public company must hold statutory meeting of its members, called “the statutory meeting” not less than three months nor more than six months from date on which it became entitled to commence business, at which members may discuss formation of company and statutory report. This report, certified by directors and auditors of company, must be circulated to members and filed with Registrar prior to meeting. Company must hold annual general meeting within 18 months from date of its incorporation and thereafter at least once calendar year, within three months from close of financial year, not more than 15 months intervening between meetings. All other general meetings are extraordinary general meetings, but directors shall be bound to convene such meeting on meeting of requisition of holders of not less than 1/10th of issued share capital upon which all calls and other sums then due have been paid.
Both public listed and unlisted companies have to file their financial statements with registrar of companies within 30 days from date of Annual General Meeting. Private limited companies were exempted from this requirement. By virtue of proposed amendment in Finance Bill 2007, this exemption available to private limited companies is restricted only to such private limited companies which have paid-up capital of less than 7.5 million rupees.
Quorum, Voting and Proxies.
Unless articles of company provide for larger number, one member in case of single member private company, two members in case of ordinary private company, ten members in case of listed company, and three members in case of unlisted public company, personally present at meeting, and representing not less than 25% of total voting power of company either of their own account or as proxies, constitute quorum; each member has, except in case of appointment of director, votes proportionate to paid up value of shares carrying voting rights held by him according to entitlement of class of such shares; on poll votes may be given personally or by proxy; proxy must be member of company unless articles of company provide otherwise. Minutes of all general meetings (and directors meetings) must be kept.
Finance Bill 2007 proposes to insert new section to entitle acquirer of 12.5% or more of voting shares in listed company in his name to have board of directors reconstituted.
Resolutions.
An ordinary resolution is passed by a simple majority. Special resolution is passed by three-quarter majority of such members entitled to vote as are present in person or by proxy at meeting for which 21 days notice must be given to members of intention to propose resolution as special resolution, provided that, if all members entitled to attend and vote so agree special resolution may be passed at shorter notice. Copy of every special resolution must be filed with Registrar and annexed to articles. Distinctions between special and extraordinary resolutions is removed.
Directors.
Single member private company must have at least one director, other private companies must have minimum of two directors, unlisted public company must have three directors and listed public company must have seven directors to be elected by members of company in general meeting on basis of cumulative voting system. Only natural persons may be directors. Company may also have nominated (contractual) directors with certain restrictions. Member may cast as many votes as is equal to product of shares held by him and number of directors to be elected and may cast all his votes in favour of any one or more candidates. Every director must hold at least one share in company, unless nominated as directors. In addition articles of company may provide for holding of qualification shares by director. Normally, SEC imposes such condition for permitting company to issue shares. All directors of company can hold office for maximum period of three years only unless nominated as directors. Director cannot assign his office unless such assignment approved by special resolution of company. Director with approval of board, may appoint alternate director to act for him during his absence for period of not less than three months from Pakistan. No company except private company may make, guarantee or provide any security in connection with loan to director or partner, spouse or minor child of director. Director cannot hold any office of profit under company without consent of company in general meeting and he cannot enter into contracts of sale or purchase with company without consent of board. Ordinance lays down certain grounds upon which office of director shall be vacated and company may at any time, by resolution in general meeting, remove any director provided that resolution shall not be deemed to have been passed if number of votes in favour of it is less than: (i) Minimum number of votes cast for election of director at immediately preceding election of directors, in case of removal of elected director, or (ii) total number of votes computed in manner in which votes are computed for election of directors divided by number of directors for time being, in case of removal of persons appointed as first directors of company or to fill casual vacancy on board. Director must disclose nature of any interest he may have in contracts entered into by him with company and cannot vote on any contract in which he is interested.
Managing Agents.
Appointment of managing agents prohibited except in certain limited cases. No Pakistani company, or company conducting major portion of business in Pakistan may appoint sole purchase, sale or distribution agent without approval of SEC. Penalty for contravention of these provisions is imprisonment of up to two years and/or fine of Rs. 100,000.
Mortgages and Charges.
Every mortgage or charge by company affecting its assets is void against any creditor of company unless registered in prescribed manner with Registrar.
Execution of Documents.
Instruments not executed by a company under its common seal may be executed under the hand of an attorney of the company duly authorized by writing under its common seal.
Books and Returns.
Ordinance contains detailed provisions as to maintenance by companies of books of accounts, registers and other documents, and as to filing returns with Registrar giving notice of changes in board, shift of registered office, allotment of shares etc.
Winding-up.
Company may be wound up by court if: (a) It resolves to do so by special resolution; (b) it fails to file the statutory report or hold statutory meeting or any two consecutive annual general meetings; (c) it fails to commence business within one year from date of its incorporation or suspends its business for one year; (d) number of its members is reduced below statutory minimum; (e) it is unable to pay its debts; (f) it is carrying on unlawful or fraudulent activities or business not authorised by its memorandum or which is oppressive to any of its members or is run by persons who fail to maintain proper accounts or commit fraud in relation to company or who refuse to act according to its constitution or Ordinance; (g) being listed with stock exchange, it ceases to be so listed; or, (h) in court’s opinion it is just and equitable that company should be wound up. Company may be wound up voluntarily: (a) When period (if any) fixed by articles for duration of company expires or event, if any, occurs on occurrence of which articles provide that it is to be dissolved and company in general meeting passes resolution to be wound up voluntarily; or (b) if it resolves to do so by special resolution. When company has resolved to wind-up voluntarily, court may order that winding-up will continue subject to court’s supervision.