concept paper for development of corporate sector

7/30/2019 Concept Paper for Development of Corporate Sector

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a

ConceptPaper

for the development

and regulation of the corporate sector

CORPORATE LAWS REVIEW COMMISSION

Established by theSecurities and Exchange Commission of Pakistan


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TABLE OF CONTENTS

1. Introduction 3

2. The Conceptual Approach 5

3. Proposed contents of a Core Company Law 7

4. A seriatim analysis of the Core Areas 8

A. Objectives of the law 8

B. Classification of Companies 9

C. Relationship between Companies 10

D. Formation and Conversion of Companies 11

E. Raising and Maintenance of Capital 12

F. Management and Governance 13

G. Audit, Accounts and Corporate Disclosures 15

H. Prevention of Oppression & Mismanagement 16

I. Mergers and Acquisitions 18

J. Restructuring and Liquidation 19

K. Regulation and Supervision 20

5. Conclusions and Recommendations 23

6. Bibliography 27


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1. Introduction

1.1 The corporate sector in Pakistan is regulated primarily by The CompaniesOrdinance, 1984 (Ordinance No. XLVII of 1984) (the Ordinance)

1. The

Ordinance was promulgated to consolidate and amend the law relating to

companies and certain other associations for the purpose of healthy growth of thecorporate enterprises, protection of investors and creditors, promotion ofinvestment and development of economy and matters arising out of or connected

therewith2.

1.2 In the twenty one years since the Ordinance was promulgated, the Pakistanieconomy, particularly the corporate sector, has considerably evolved and

expanded. Two significant developments in this regard are (a) the growth of non-

banking finance companies and (b) the introduction of single member companies.The Ordinance has been amended (inter alia in 1991, 1999 and 2002)3 to cater to

these and other developments. However, these amendments have been piecemeal

and narrowly focused, often resulting in a disconnect or overlap in the provisionsof the Ordinance.

1.3 It is, therefore, necessary to carry out a holistic examination of the Ordinance inorder to assess: (a) the relevance of its objectives in the current economicenvironment; (b) the adequacy of its provisions, not only for the achievement of

1 Prior to independence, companies were regulated by The Indian Companies Act, 1913 which was

a replica of the English Companies (Consolidation) Act, 1908 save certain minor variations. Post

independence, Pakistan adopted The Companies Act, 1913 after making certain necessary

amendments thereto. In 1959, a Company Law Commission was formed to review The

Companies Act, 1913. The Company Law Commission published its report in 1962 and the

recommendations made therein culminated in the promulgation of the Companies Ordinance,1984.

2 The first recital of the Preamble to the Ordinance.

3 Since the promulgation of the Ordinance, first the Corporate Law Authority and then the SECP

established several Corporate Law Reform Committees to review and assess the company law

regime in Pakistan:

In April 1991, a Committee was formed under the Chairmanship of Mian Mumtaz Abdullah,Chairman of the erstwhile Corporate Law Authority (the Review Committee). The Review

Committee submitted its report to the Federal Government in 1993. Some of its

recommendations were incorporated in the law through an ordinance promulgated by a

caretaker government, however, the ordinance lapsed and the recommendations made therein

were not placed before the Parliament.

In February 1997, a Commission on Corporate Laws was constituted under the Chairmanshipof Mr. Justice (Retd.) Shafi ur Rehman. It published its report in the same year. Some of its

most important recommendations were incorporated in the Companies (Amendment) Act,

1999.

In January 2001, the SECP established a committee to review the Ordinance. The Companies(Amendment) Ordinance, 2002 was promulgated on the basis of this committees

recommendations.


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its avowed objectives, but for the creation and maintenance of a liberal,deregulated and efficient corporate sector; (c) its capacity to allow for the

balanced growth of corporate enterprises, particularly small and medium

enterprises; and (d) the extent of its harmonization with international bestpractices.

1.4 To undertake this essential exercise, the Securities and Exchange Commission ofPakistan (the SECP) established the Corporate Laws Review Commission (the

CLRC) in November 2005 under the able leadership and guidance of Chief

Justice of Pakistan (Retd.) Ajmal Mian and comprising, inter alia, eminent

members of the legal, business and accountancy community4, to examine, assess

and ultimately amend the Ordinance or to draft a new law for the regulation of the

corporate sector, as may be necessary.

1.5 The exercise is timely and topical: company law is in varying stages of reform inthe United Kingdom, Canada, Australia, New Zealand, Malaysia, Hong Kong,

Singapore, India and South Africa

5

. The driving forces behind company lawreform, throughout these countries, are much the same: each jurisdiction

recognizes the need for stronger corporate governance and seeks to address the

implications of globalization and international competition, the rapid growth in

the number of shareholders of companies as well as their increased sophistication,the emergence of new industries and the developments in the financial markets

and in modern technology.

1.6 Against this backdrop, the Concept Paper aims to formulate a conceptualframework for the development and regulation of the corporate sector in Pakistanin order to provide direction for the review of the Ordinance and to determine the

question of whether the Ordinance needs to be amended or whether a new law

needs to be drafted in its stead, in order to best address the views expressed in theConcept Paper. 6

4 The CLRC presently comprises Chief Justice of Pakistan (Retd.) Mr. Ajmal Mian, Mr. Hameed

Chaudhri, Mr. Razzak Dawood, Ms. Musharaf Hai, Mr. Sohail Hasan, Dr. Tariq Hassan, Mr.

Tahsin Khan Iqbal, Mr. Qazi Jamil, Mr. Razi-ur-Rahman Khan, Mr. Rashid I. Malik, Dr. Khalid

Ranjha and. Mr. S. Salim Raza. Barrister Amber Darr, Executive Director (Law) at the SECP is

the Secretary to the CLRC. The names of Mr. Razi-ur-Rahman Khan and Mr. Rashid I. Malik

were added to the CLRC membership by a decision of the SECP dated 30.01.2006. By a further

decision of the SECP dated 19.04.2006, the names of Mr. Hafeez Pirzada and Mr. Sikander

Jamali, originally in the list of CLRC members, were excluded from the CLRC and Mr. S. Salim

Razas name was added thereto.

5In the post colonial era, the commonwealth countries have not always opted to follow the U.K.

company legislation. A case in point is the New Zealand Companies Act 1993 (the NZCA 1993)

which largely draws upon North American models. The Concept Paper draws upon the reform

measures proposed or undertaken in these countries, wherever relevant.

6 The views expressed and recommendations made in this Concept Paper are those of the members

of the CLRC. Although the CLRC Secretariat has taken care to accurately record the views of the

members, it accepts full responsibility for any errors and omissions in respect of the same.


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2. The Conceptual Approach

The [Canada Business Corporations Act] had all of the virtues its

predecessors lacked. The drafters had a clear conception of what they

wanted the new Act to look like and they pursued a series of well-

defined and clearly articulated goals. They endorsed a strong dose of

enablingism with respect to incorporation procedures and dispensed

with formalism where it served no useful purpose. They embraced a

principal scheme of corporate governance and combined it with a strong

affirmation of non-excludable obligations to which officers and directors

were subject. They were conscious of the vulnerability of minority

shareholders and sprinkled the Act liberally with substantive and

remedial safeguards for their protection. No less important, the Act was

drafted in commendably clear language and crisp sentences. The

exposure draft was accompanied by a commentary volume clearly

explaining the drafters goals and what the various provisions were

designed to accomplish.

J. Ziegel, The CBCA Twenty Years Later: WhereDo We Go From Here?7

2.1 In recognition of the fact that the primary purpose of any law is to facilitate thepublic and bearing in mind the current international style of legal drafting, anideal law for the Pakistani corporate sector may be clear, concise and

comprehensible.

2.2 It is desirable that the law may be a core company law 8 i.e. regulating theentity (irrespective of its corporate structure and size) rather than its activity9

and providing the basic principles governing all aspects of the operation of

corporate entities within a single, comprehensive framework.

7 Corporations at the Crossroads (Paper presented at the Meredith Lectures, McGill University,

Montreal, Canada, 1995) [unpublished], Page 1, quoted in UK DTI Paper: Modern Company

Law for a Competitive Economy (August 1998), Page 34.

8The concept of core company law is borrowed from the New Zealand company law regime. In

New Zealand, the first major break with U.K. legislative tradition came in 1978 with the

separation of securities law from company law. The Securities Act, 1978 became operational in

1983 and its essential feature was the creation of a distinction between entity-based company law

and activity-based securities regulation, a distinction which was very much North American in

nature. Such a distinction has most recently been endorsed in India by the Report of the Expert

Committee set up to review the Indian company law regime (the Irani Report, May 2005).

9 For example, the incorporation and registration etc. of banking and insurance companies is even

presently regulated by the Ordinance, whereas their business is regulated by the Banking

Companies Ordinance, 1962 and the Insurance Ordinance, 2000 respectively. An anomaly was

created in the Companies Ordinance, 1984 by the insertion of Part VIIIA for the regulation of non

banking finance companies and section 42, for the regulation of not for profit companies.


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2.3 In keeping with this thinking, only substantive matters setting out defining orenabling provisions may be included in the law. All procedural and quantitative

matters may be identified for inclusion in secondary legislation i.e. rules or

regulations made in pursuance of powers provided in the law.

2.4

The law may classify and provide for the regulation of companies in accordancewith the following criteria: on the basis of size (i.e. as small companies, mediumsized companies and large companies); on the basis of number of members (i.e. as

single member companies, private companies and public companies); on the basis

of control (i.e. as holding companies, subsidiary companies and associated

companies); on the basis of liability (i.e. as companies limited by shares or byguarantee (with or without share capital) and unlimited liability companies) and

on the basis of manner of access to capital (i.e. listed and unlisted companies). 10

2.5 The law may facilitate the formation of a company and allow for its growth anddevelopment and particularly for its smooth and easy conversion from one form to

another.

2.6 The law may address the issue of liquidation of companies, either dealing with itextensively within its own framework or identifying it as a subject matter fit for

an independent legislation.

2.7 The law may promote and endorse a strong framework of corporate governance toeffectively balance the interests of the different stakeholders in a company.

2.8 The law may be made flexible to address new issues and provide forcorresponding legal requirements dictated by changes in the economic and

corporate environment11.

2.9 The law may allow companies to move towards a self-regulatory regime in thefuture. Correspondingly, the law may provide safeguards for members by

imposing on the company the requirement to make appropriate corporatedisclosures and by prescribing procedures for speedy administration of reasonable

and effective sanctions in case of breach of these requirements by the company.

10Such a classification was recommended in the Irani Report [Chapter III: Classification and

Registration of Companies, paragraphs 2 and 3].

11This echoes the concept of the UK Company Law Reform Bill 2005, the key objective of which

was to provide a flexible legal framework to cater for future developments.


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3. Proposed contents of a Core Company Law

3.1 A comparative examination of the Indian Company Law Reform Bill, 2004 (the

Indian Reform Bill), the New Zealand Companies Act, 1993 (the NZCA 1993)and the UK Company Law Reform Bill, 2005 (the UK Reform Bill)12 suggests

that the following aspects of the life cycle of a company may be subject matter fitfor inclusion in a core company law:

A. The Objectives of the LawB. Classification of companiesC. The relationship between holding and subsidiary and associated

companies

D. The formation and conversion of companiesE. The raising and maintenance of Capital (including the nature and

classification of securities; the issuance, conversion, redemption and

transfer of securities; rules for authorized and minimum capital; and

capital maintenance).F. Management and governance of a company (including powers,responsibilities, meetings and procedures of Board of Directors; rights of

shareholders, their meetings and procedures etc.; and rules for Corporate

Governance i.e. internal and external checks and balances).G. Audit, accounts and corporate disclosures requirements and proceduresH. Prevention of Oppression and mismanagementI. Mergers and acquisitionsJ. Restructuring and liquidationK. Regulation and supervision (including inspection and investigation,

offences and penalties, disputes and adjudication).

3.2 The remainder of the Concept Paper examines each of the proposed core areas ofcompany law, evaluating the provisions of the Ordinance in light of feedback

received from the stakeholders and the general public and international best

practices and in accordance with the conceptual approach outlined in thepreceding section.

12By way of assistance to the CLRC, the CLRC Secretariat prepared and presented to the members

of the CLRC a comparative table of the Indian Company Law Reform Bill, 2004, The NZCA

1993 and the UK Company Law Reform Bill, 2005.The aspects of a company common to all

three have been identified as subject matter fit to be included in a core company law.


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4. A seriatim analysis of the core areas

A. Objectives of the law

4.1 The objectives of the Ordinance are: (i) the healthy growth of the corporateenterprises (ii) the protection of investors and creditors (iii) the promotion ofinvestment and (iv) the development of the economy.

4.2 The objectives of company legislation vary across jurisdictions ranging from theAustralian Corporations Act, 2001 which does not specify objectives, to the

NZCA 1993 which specifies its objectives in minute detail.13

4.3 It is desirable that the Pakistani company law specifies its objectives and that theobjectives be not as wide (and therefore, of necessity, vague) as the objectives ofthe Ordinance, nor be as narrow (and therefore too focused) as the NZCA 1993. A

balance may be struck in the following formulation: 14

Whereas it is expedient to reform the law relating to companies [and certain

other associations]15 for the purposes of:

facilitating the growth of companies [and certain other associations],

including small and medium enterprises, and progressive development of

companies for achieving social and economic benefits;

promoting and enhancing corporate governance for the development of

good management and financial practices with a view to protecting

investors, especially small investors and minority shareholders, and

creditors;

13 The objectives of the NZCA 1993 are to:a) reaffirm the value of the company as a means of achieving economic and social benefits;b) provide basic and adaptable requirements for the incorporation, organization and operation of

companies;

c) define the relationships between companies and their directors, shareholders and creditors;d) encourage the efficient and responsible management of companies; ande) provide straightforward and fair procedures for realising and distributing the assets of

insolvent companies.

14

This formulation is based on the formulation proposed by Dr. Tariq Hassan in his letter to theCLRC members dated 24

thFebruary 2006, as amended by the members of the CLRC in a full

body meeting held in Karachi on 6th May 2006.

15 In terms of section 14 and 42 of the Ordinance, the Ordinance is also applicable to certain

associations. The reference to associations has been retained in square brackets as a reminder that

the fate of associations must be decided at the drafting stage. If at that stage it is decided that the

new law would not be applicable to associations, this reference may be deleted from the objectives

clause.


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simplifying and strengthening legal, regulatory and auditing requirements

and procedures with a view to ensuring enhanced compliance by

companies and effective enforcement by the regulator; and

fostering healthy competition among companies and their productive

participation in the socio-economic development of the country.

B. Classification of Companies164.4 The Ordinance does not differentiate amongst companies on the basis of their

size.17

It distinguishes between single member companies18

, private and publiccompanies [Sections 2(28) and 2(30) respectively]. The Ordinance also regulates

companies whose liability is limited either by shares or by guarantee as well as

companies with unlimited liability. The provisions of the Ordinance are alsoapplicable to certain associations [Sections 14 and 42] and in some cases to

unregistered companies [Sections 443-449].

4.5 India has recommended that the company law may provide for a less onerous

regime for smaller companies19 whereas the UK Reform Bill has distinguished

amongst small companies, medium sized companies and other companies in

respect of accounting disclosures and filing requirements. The laws examinedgenerally provide for public and private companies20. However, while the Indian

law limits the number of members of private companies to 50 (as in the

Ordinance) there appears to be no restriction on the number of members in theNZCA 1993 or the UK Reform Bill. All jurisdictions provide for limited and

unlimited liability and all (save New Zealand) allow members to limit theirliability by share or by guarantee.

4.6 Given the similarities across jurisdictions in this regard, the company law inPakistan may continue to cater to limited and unlimited companies (liability may

be limited by shares or by guarantee or both) and private and public companies

(which may be limited by shares or by guarantee or both). It is however,recommended that the cap of 50 members in respect of private companies in

Pakistan may be removed and the category of public unlisted companies may be

abolished. Further, the concept of single member companies may be clarified

16 The CLRC Secretariat prepared and presented to the CLRC members a comparative table of

classification of companies as provided in the Indian Companies Act, 1956, the NZCA 1993 and

the UK Company Law Reform Bill, 2005.

17Provisions specific to the regulation of small and medium enterprises are provided in the Small

and Medium Enterprises Development Authority Ordinance, 2002 (SMEDA 2002).

18 Not specifically defined in the Ordinance.

19 The Irani Report, paragraphs 4.1 and 4.5.

20 The NZCA 1993 does not differentiate between public and private companies.


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within the law. The factors distinguishing between small, medium and largecompanies (alongwith the benefits and liabilities pertinent to each category) may

be elaborated, and the test for determining the category within which the company

falls may be prescribed, based on capital turnover, the number of members or thenumber of employees, as may be relevant.

C. Relationship between companies214.7 The Ordinance envisages the following relationships between companies:

companies may either be holding or subsidiary companies or associated

companies. A company may be deemed to be a holding company of another in theevent that it owns or controls more than 50% of its voting shares or has power to

appoint more than 50% of its directors [Section 3(1)]. Companies may be deemed

to be associated with each other if they are holding and subsidiary companies or ifa director of one company is either a director of the other company or holds or

controls 20% or more of the shares of the other company [Section 2(2)].

4.8 The definitions of holding and subsidiary companies are largely similar across

India, New Zealand and the UK. However companies do not become associated

or related merely by the presence of one common director on their Boards. The

requirements of the Ordinance in this regard may be relaxed and it isrecommended that the present law be amended to prevent companies from

becoming associated simply on the basis of common directorship. It was further

recommended that the UK concept of association by dominant influence may beconsidered for inclusion in the law.

4.9 Areas of regulation from the point of view of holding and subsidiary and other

associated companies that may be examined are: financial assistance that may be

provided by one to the other, the extent of shareholding that one can have in theother, the procedure and requirements for election of directors and investment by

one in another. The aim of any such analysis may be to facilitate the formation of

groups (another term which although used in the Ordinance has not beendefined) in achieving economies of scale.

4.10 In this regard it is recommended that the practice of filing consolidated accounts

may be made optional and companies may file such accounts only if they qualifyfor exemption or concession under the tax laws. It is further recommended that

the formation of groups may be promoted and strengthened: initially public listed

and large private companies may be allowed to form groups provided that theyare able to turn around the companies they acquire or become associated with,

within three years by the introduction of new business or otherwise.

Corresponding amendments may be made in the Tax laws to promote the

21 The CLRC Secretariat had prepared a comparative table of the provisions pertaining to holding

and subsidiary companies as provided in the Indian Companies Act, 1956, the NZCA 1993 and the

UK Company Law Reform Bill, 2005 for the consideration of the members.


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formation of groups and the law against monopolies may be abolished andcompetition between companies may be encouraged.

D. Formation and Conversion of Companies

4.11 A company, irrespective of its form, may be incorporated under the Ordinance bythe minimum required number of members subscribing their names to amemorandum of association and complying with the registration requirements

stipulated in the Ordinance [Section 15]. Companies are traditionally registered

with articles of association which set out the regulations for the company,

however, this exercise is not mandatory for a company limited by shares [Section26]. A company that seeks to alter its memorandum of association may do so only

(in addition to completing all the internal procedures specified in the Ordinance)

after obtaining confirmation of the change from the SECP [Section 21] whereasthe articles may be amended by a special resolution of the company [Section 28].

4.12 In order to facilitate the public, the reports and white papers published in India,New Zealand and the UK22 have recommended inter alia, the simplification and

automation of the procedure of name allotment, particularly that the restrictions

on use of particular names may be specified within the law. The requirement for a

company to have a constitution has been simplified in New Zealand to state theprincipal business, whereas in the UK a separate constitution is proposed for

public and private companies23. The majority of jurisdictions permit the adoption,

alteration and revocation of constitutive documents by the passing of a specialresolution, notice of which may be delivered to the Registrar. These policies may

be adopted in Pakistan with the caveat that an aggrieved party may file objectionsbefore a specified forum, the SECP, within a prescribed time.

4.13 The Irani Report also recommends a system of e-filing of documents for speedilyprocessing requests for registration and incorporation, minimizing physical

interface and potential abuse of discretionary powers by the registering

authorities.24

Both New Zealand and India propose an easy exit mechanism fordefunct companies. Given the extent of computerisation in Pakistan, a system of

e-filing is desirable, however it may be introduced in addition to rather than in

lieu of traditional filing. The CLRC is further of the view that an easy exit

mechanism, which had been provided to companies in Pakistan, may be enshrinedin the law.

22 The Irani Report, the New Zealand Law Commission Report and the UK White Paper

respectively.

23The Ordinance contains model regulations for each type of company, however the company may

adopt these regulations to the extent it deems desirable.

24 A system of e-filing is already in place in the UK and most likely in New Zealand.


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4.14 The Ordinance allows for the conversion of public companies into privatecompanies and vice versa [Sections 44-46] and re-registration of unlimited

companies as limited companies [Sections 109-110]. The procedure outlined in

these sections is narrow in its scope, sketchy and heavily SECP dependent. This isin stark contrast with the very clear guidelines for conversion of companies in the

UK Reform Bill which provides for private companies becoming public, publiccompanies becoming private, private limited companies becoming unlimited,unlimited private companies becoming limited and public companies becoming

private and unlimited, by a simple process of re-registration, which may be

allowed after fulfillment of specified requirements [Sections 90-110 of the UK

Reform Bill]. It is recommended that measures comparable to those prescribed inthe UK Reform Bill may be adopted.

4.15 There is a strong case for the requirements of incorporation and registration to bestreamlined, made more cost effective and less cumbersome. It is also desirable

that companies may be allowed to convert themselves into other forms of

companies with ease and facility and upon meeting clearly defined requirements.Certainty and transparency in the procedures and requirements for conversion of

companies will contribute to greater economic certainty and facilitate companies

in adjusting their form to their business.

E. Raising and maintenance of capital

4.16 The Ordinance allows a company to raise capital, within the limit of its authorizedcapital as specified in its memorandum of association, by the issuance of different

kinds and classes of shares and instruments of redeemable capital25. A companymay only issue fully paid shares [Section 90] and it may alter its share capital

provided that new shares rank pari passu with existing shares of the same class.

The Ordinance prescribes specific and lengthy procedures for an increase orreduction in share capital, as well as for the transfer of shares.

4.17 The UK Reform Bill recommended the abolition of the requirement for acompany to have an authorised capital for the reason that it merely adds a layer of

regulatory complexity to the company and is not a true indicator of the companys

legal capital (which is depicted by the paid up capital). It is recommended that the

requirement of authorised capital may be abolished for companies incorporated inPakistan.

4.18 A number of jurisdictions prescribe minimum capital requirements for companies(where the minimum capital may be linked to the risk factor in the business that

the company is engaged in). Prescribing such requirements is likely to serve as a

useful guide to companies and reduce arbitrary and ad hoc decisions. It isobserved however that prescribing a minimum capital requirement is an

25 Reference may be made to the Companies (Issue of Capital) Rules, 1996 and the Companies

Share Capital (Variation in Rights and Privileges) Rules, 2000.


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administrative matter and may not be stipulated in the law but rather determinedby the SECP.

4.19 The concept of par value of shares, although found in most jurisdictions, is ofdoubtful utility: the par value does not, in any way, indicate the price at which the

share is likely to be issued to investors. The concept of par value also raisesconcerns about issuance of shares at a premium and the application of moneysreceived thereby and the issuance of shares at a discount and the perceived losses

by the company as a consequence. The concept of par value also adds an artificial

complexity to the financial statements of a company. South Africa, New Zealand,

Australia and Malaysia have moved away from this concept. Despite arguments tothe contrary, the concept of par value may be retained in Pakistan given that the

market is accustomed to it. It is recommended however that the procedures for

issuance of shares at a premium or at a discount may be simplified to facilitate thecorporate sector.26

4.20 Nearly all jurisdictions are in agreement on the issuance of shares of differentclasses and kinds as well as the issuance of instruments such as debentures. It is

desirable that companies may be allowed a reasonable extent of autonomy in

determining the rights attached to its equity and other instruments and the types of

internal and external checks and balances that are desirable to protect the interestsof investors and mediate their relationship with management.

4.21 The related rule of capital maintenance is designed for the protection of creditorsand justifies prohibitions on share buy-backs, distributions to shareholders out of

capital and on financial assistance for share-buy-backs. This is, however, a matterof contract between the creditors and the company and does not raise any issues

for consideration in a review of the company law.

F. Management and Governance

4.22 The Ordinance contains detailed provisions on the management andadministration of a company [Part VIII]. The principal issue in this area is the

appropriate balance of power between the stakeholders of a company (i.e.

shareholders and creditors) on the one hand and its management (i.e. directors) on

the other. Directors though fully accountable to the company and therefore to theshareholders, need sufficient flexibility to efficiently and smoothly run the affairs

of the company.

4.23 The provisions pertaining to management may be drafted to streamline the

procedures for the election and removal of directors. The powers and duties of the

26International research on this area suggests that although there is no overwhelming logical reason

to retain the concept of par value in the company law, the system has not been abolished due to its

common acceptance throughout the world. In the UK however recommendations have been made

time and again that the concept of par value be restricted to ordinary share capital only [The

Gedge Committee Report (1954), which formed a part of the Jenkins Committee Report (1962)].


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Board of Directors (the Board) may also be clarified. The regime for election ofdirectors provided in the Ordinance prescribes a proportional representation

system and cumulative voting process. In the UK and India, the manner in which

directors may be elected is left to be determined by the company in its Articles. Inthe Pakistani context however, it is recommended that the proportional

representation system be retained.

4.24 The most important aspects to be considered in respect of the Board, are (a) the

extent of fiduciary duty of the directors and (b) their individual liability for the

decisions of the Board. The present provisions in the Ordinance are inadequate in

this regard. The UK law provides a two fold test to assess the extent of adirectors duty towards the company: the two fold test operates by stipulating an

objective standard as a minimum standard of care required of a director (i.e. of a

reasonable person in the position of a director), as well as a higher subjectivestandard which is applied where the director has a particular skill or expertise.27

4.25 Additionally, the recommendations

28

contained in the Code of CorporateGovernance may be considered for inclusion within the law itself. Particularly the

law may provide for independent and non-executive directors to be included in

the Board to perform its oversight role impartially and objectively29.

4.26 The UK Law stipulates that directors must act bona fide in what they consider is

in the interest of the company.30 This is known as the business judgment rule

and is a case law based concept whereby a court will refuse to review the actionsof the Board in managing the company unless there is some allegation of conduct

that (1) violates (a) the directors duty of care (b) duty of loyalty, or (c) duty ofgood faith; or (2) that the decisions of the directors lack a rational basis. In effect,

the business judgment rule creates a strong presumption in favour of the Board of

a company freeing its members from possible liability for decisions that result inharm to the company.31

4.27 The Australian reform programme has also recommended that a statutory businessjudgment rule may be introduced, in terms of which an officer of a company will

27 DJan of London [1994] 1 B.C.L.C 162 CA

28The Code of Corporate Governance is applicable only to listed companies and that too by way of

inclusion in the Listing Regulations made by the Stock Exchanges. The World Bank has, in an

independent study recommended the strengthening of the rules of corporate governance in

Pakistan.

29 For the difference between independent and non-executive directors please see page 2 of theIndependent Director: Perceptions, Roles and Responsibilities, published by the Malaysian

Institute of Corporate Governance and the Malaysian Securities Commission.30

Re Smith & Fawcett Ltd. [1942] Ch. 304. 306.

31 This approach has is proposed to be codified in terms of section 158 of the UK Company Law

Reform Bill.


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be deemed to have met the general law duty of care and diligence in respect of abusiness judgment made by him if he has exercised his judgment in good faith

and for proper purpose, if he does not have a material personal interest in the

subject matter of the business judgment, if he informs himself about the subjectmatter of the business judgment to the extent the officer reasonably believes to be

appropriate and rationally believes that the business judgment is in the bestinterests of the corporation.

4.28 The Canadian and American courts follow similar principles and it is

recommended that such an approach may also be adopted in the Pakistani law, not

merely for directors but for all officers of the company.

4.29 In order to introduce greater flexibility in the exercise of directors powers, it is

recommended that the exercise of such powers may not be restricted to meetings.The English law does not contain any strictures in this regard, whereas the Indian

law32 is far more flexible and allows for the delegation of powers by the Board to

individual directors or to directors committees. It is recommended that similarprovisions may be included in the Pakistani law.

4.30 The relaxation of rules for holding meetings may be considered for private

companies. The UK Companies Act, 198533

, allows for elective resolutionswhich means that the members of a private company may unanimously elect, by

resolution in a general meeting, to dispense with certain requirements of company

law (e.g. the holding of Annual General Meetings, the laying of accounts andreports before general meetings and the requirement as to majorities in order to

authorize meetings at a short notice)34. This approach is considered desirable inprinciple, however only small companies (so designated in accordance with

prescribed criteria) may be allowed to exercise this option. For all companies the

option of passing a resolution by circulation may be prescribed in the Ordinance.

G. Audits, Accounts and Corporate Disclosures

4.31 The provisions of the Ordinance pertaining to audit [Sections 252-260] and

accounts [Sections 230-247] are rudimentary yet cumbersome. This area of

company law may be examined with a view to ensuring maximum disclosure of

information and therefore transparency. Such disclosures are critical forfacilitating a proper assessment of the financial position of companies and their

policies and performance, not only by the shareholders but also other

stakeholders.

32Section 292 of the Indian Companies Act, 1956.

33 Section 379-A of the UK Companies Act.

34 The UK Company Law Reform Bill 2005 seeks to do away with the requirement of unanimity for

passing a written resolution (Norton Rose Briefing on the Company Law Reform Bill, December

2005, Page 10).


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4.32 The power of the SECP to penalize companies for offences in relation to books ofaccounts required to be maintained by companies may be reassessed. The extent

of disclosures required to be made by companies may be also be examined: while

it may be desirable to increase disclosures to include matters such as a list ofpolicies and manuals, the staff turnover ratio and average increments in salary, it

may also be appropriate to relax the requirements for private companies and smalland medium enterprises. It is further recommended that all accounts of publiccompanies may be prepared in accordance with International Accounting

Standards, in addition to what the SECP may require from these companies.

4.33 The opinion expressed in a 1997 Consultancy Report on the Review of the HongKong Companies Ordinance: The indiscriminate imposition of audited accounts

on all companies is unjustified and burdensome may be considered in the

Pakistani context for small and medium sized companies35

.

4.34 Strengthening of the internal audit function of companies and empowering the

SECP to conduct special audits (in circumstances to be specified in the law) mayalso be allowed.

4.35 The UK Reform Bill allows auditors to contractually limit their liability in respect

of any negligence, breach of duty or breach of trust occurring in the course of theaudit to such amount as is fair and reasonable in all the circumstances of the

case having regard to their responsibilities and obligations to the company and

the professional standards expected of them36

. Shareholders must approve theliability limitation agreement by an ordinary resolution37 which may be effective

for only one financial year. This proposal is not considered desirable in thePakistani context.

H. Prevention of Mismanagement and Oppression

4.36 Section 290 of the Ordinance, purports to address the concerns of members who

fear mismanagement of the company or consider themselves to be the oppressedminority. In terms of this section, minority shareholders, i.e. having not less than

20% of the paid up capital of the company, who fear that the affairs of the

company are being conducted in: (a) an unlawful or fraudulent manner; (b) a

35 The majority of countries have simplified the procedures for making corporate disclosures: in

Australia, companies no longer lodge an annual return but instead follow the annual company

review procedure. The Australian Securities & Investments Commission sends each company anextract of particulars and an invoice within 14 days of the anniversary its registration. Companies

verify the information contained in the particulars and return it to the Australian Securities &

Investments Commission. If the information is incorrect, a company must notify the changes

required to be made, within 28 days of the date of issue of the particulars.

36Norton Rose Briefing on the Company Law Reform Bill, December 2005, Pages 6 and 7.

37Moreover, private companies may resolve to waive the need for approving a liability limitation

agreement.


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manner not provided for in its memorandum; or (c) a manner oppressive tomembers, may make an application in court seeking redress for their grievances.

4.37 The Indian Companies Act, 195638

provides for an application by minorityshareholders to the Board of Company Law Administration, as opposed to the

Court

39

. Further, the following recommendations to protect the interests ofminority shareholders have been made in the Irani Report: (a) section 265 of theIndian Companies Act, 1956, whereby a company has an option to adopt

proportional representation for the appointment of directors, may be made

mandatory to ensure the representation of minority shareholders on the Board of

Directors; and (b) derivative actions may be recognized in the company law.

4.38 Other jurisdictions have included similar statutory safeguards for the protection of

the minority shareholder. In Australia and New Zealand for example, statutoryderivative action40 may be brought by a shareholder in the name of and on behalf

of the company, in the event that there is wrongdoing at the Board level resulting

in decisions which are not in the best interests of the company.

4.39 The NZCA 1993 further allows minority buy out rights [Section 110]41, personal

action by any shareholder against a director or the company [Sections 169 and

171 respectively]42

; action by a shareholder requiring a director to act [Section170]43 and representative action [Section 173]44. The law also retains the

38 Sections 397 and 398: In terms of Section 399 of the Indian Companies Act, 1956, the following

members are entitled to make an application under Sections 397 and 398:

in the case of a company having a share capital: not less than 100 members of the company or not less than one-tenth of the total

number of its members, whichever is less; or

any member(s) holding not less than one-tenth of the paid-up capital of thecompany; and in the case of a company not having a share capital, not less than one-fifth of the total

number of its members.

39 However, the Indian Reform Bill has suggested an amendment whereby this petition may instead

be presented before the National Company Tribunal.

40 Policy Paper No. 3 on Directors Duties and Corporate Governance issued by the Corporate Law

Economic Reform Programme (CLERP) instituted by the Australian Government; Section 165 of

the NZCA 1993

41 In terms of this section minority shareholders may be bought out where they dissent to: (i) the

alteration of the companys constitution where it imposes or removes a restriction on the activities

of a company; (ii) the approval of a major transaction; and (iii) the approval of an amalgamationof the company under Section 221 of the NZCA 1993.

42 A shareholder or former shareholder may bring an action against a director or the company for

breach of a duty owed to him or her as a shareholder.

43 The Court may, on the application of a shareholder of a company, if it is satisfied it is just and

equitable to do so, make an order requiring a director of the company to take any action that is

required to be taken by the directors under the constitution of the company or this Act or the

Financial Reporting Act 1993.


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traditional rights of minorities whereby a shareholder or former shareholder of acompany, or any other entitled person, who considers that the affairs of a

company have been, or are being, or are likely to be, conducted in a manner that

is, or any act or acts of the company have been, or are, or are likely to be,oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that

capacity or in any other capacity, may apply to the Court for an order [Section174].

4.40 Malaysia recommends the establishing of Minority Shareholder Watchdog

Groups to monitor and combat abuses against the minority shareholder45. The

first of such watchdog groups was formed in 2000. The Companies Commissionof Malaysia has also supported initiatives such as the introduction of a broad

injunctive power and a statutory derivative action46.

4.41 In order to minimize oppression of the minority shareholders, the members agreed

that the jurisdiction to hear complaints filed by members of Company against

oppression and mismanagement should be with the SECP rather than the HighCourt. The members further agreed that requirement of minimum share capital

holding for making a complaint should be reduced from 20% to 10%. The

members also discussed the concept of derivative action by a shareholder.

However the members decided that this issue needs to be considered furtherbefore any decision may be made in this regard.

I. Mergers and Acquisitions

4.42 The process of mergers and acquisitions [Sections 284-289: Compromises,Arrangements and Reconstruction] prescribed in the Ordinance, is entirely court

driven and even otherwise complicated. Although stakeholders in an agreement

(creditors, shareholders) may initiate a compromise amongst themselves, it is notgiven legal cover and sanction until such time as it is approved by the Court. The

complicated and long drawn out process acts as a deterrent for companies for

seeking to merge with or acquire the other, which in turn is antithetical to thedemands of a growing economy.

44 Where a shareholder of a company brings proceedings against the company or a director, and

other shareholders have the same or substantially the same interest in relation to the subject-matterof the proceedings, the Court may appoint that shareholder to represent all or some of the

shareholders having the same or substantially the same interest, and may, for that purpose, make

such order as it thinks fit.

45The Malaysian Finance Committee Report on Corporate Governance, page 198

46 Key Developments in Corporate Law Reform in Malaysia, Janine Pascoe, Paper presented at the

Corporate Law Teachers Association Conference, 2005 at the Faculty of Law, University of

Sydney.


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4.43 In order to promote competitiveness in the economy and to ensure the survival ofthe fittest (irrespective of size), the possibility of giving legal sanction and

therefore effect to contractual mergers may be considered. The schemes of such

mergers may be made subject to subsequent approval of shareholders by a specialresolution, where an aggrieved party representing 10% or more of the

shareholding of the company, may file objections with the SECP. Such a proposalis likely to have a two fold benefit: it would eliminate the present obstructions inthe process of mergers while at the same time allowing for an opportunity of ex

post facto rectification and therefore protection.47

4.44 Areas of concern while examining the process of mergers, reconstructions andarrangements are: the valuation of shares48 (in this regard, it is recommended that

the SECP may be empowered to prescribe the approved methods of valuation; any

challenge to the valuation may also lie to the SECP); registration of schemes ofmerger49; the method and process of obtaining approval of the scheme by

shareholders; and protection of minority interests50. Consideration may be further

given to any special provisions which may be applicable to the merger of a listedcompany with an unlisted company and vice versa, the merger of a class of

companies and cross border mergers. The provisions of the Monopolies and

Restrictive Trade Practices (Control and Prevention) Ordinance, 1970 may be

examined to ensure their compatibility with these proposals.

J. Restructuring and Liquidation

4.45 Liquidation or winding up is no longer the only option available for insolvent

companies. There is a discernable international trend in various jurisdictionstowards corporate rescue mechanism as part and parcel of the corporate

insolvency regime.51

47 Proposed by the Irani Report, page 93 para 5

48 The Irani Report recommends that the valuation of shares of a company be made mandatory and

be carried out by independent registered valuers, rather than by court appointed valuers. The law

should lay out the exceptions, if any, to the mandatory valuation requirements. Valuation

standards may also be developed in line with International Valuation Standards issued by the

International Valuation Committee. The process and mechanism of valuation should be

transparent and an aggrieved party should have the opportunity to challenge the same in court.

49 It should be enough for a scheme of merger to be effective if a company files the scheme with the

Registrar of companies. (Irani Report page 95, para 13).

50While protection of minority interests should be recognized under law, only shareholders/creditors

having significant stake at a level prescribed under law should have the right to object to any

scheme of merger. This is desirable to limit a obstructionist attitude often displayed by the

minority. (Irani Report page 97, para 19).

51Reforming the Corporate Insolvency Regime, published by the Corporate Law Reform

Committee of the Companies Commission of Malaysia. http://www.ssm.com.my/clrc/clrc.html.


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4.46 The process of winding up or liquidation provided under the Ordinance iscumbersome, time consuming, duplicative and archaic. It may therefore be

reviewed for simplification and expeditious disposal of cases. Given the breadth

of this topic, it may also be examined as a subject matter fit for an independentlegislation52. The revival of so-called sick companies has been reviewed in the

context of the draft Corporate Rehabilitation Act, prepared by the State Bank ofPakistans Banking Law Review Commission, the provisions of which may bereviewed in this regard. It is recommended that both the revival of sick companies

and the liquidation of companies may be included in the company law.

4.47 Committees on company law reform established in India53

and Malaysia haveemphasized the importance of the area of winding up for detailed review. The

Companies Commission of Malaysia has identified the general objectives of any

good corporate insolvency law which may substantially adopted in the Pakistanicontext.54

K. Regulation and Supervision

4.48 Offences under the Ordinance are spread throughout the Ordinance and the

penalties prescribed for these offences are often not commensurate with the

enormity of the offence.

4.49 In the NZCA 1993, the offences and penalties are all consolidated in Part 21

(appropriately cross referred to the provisions of law that these pertain to). Thisarrangement helps in clarity and ease of reference. A similar approach may be

considered for the Pakistani law. Penalties may also be rationalised according tothe severity of the offence. The Irani Report also recommends a system of self

52 Both India and Hong Kong deal with corporate insolvency under an independent legislation.

53As provided in the Irani Report (May 2005).

54 These objectives are stated in the Paper by the Secretariat to the Malaysian Corporate Law Reform

Committee titled Reforming the Corporate Insolvency Regime:

(a) The facilitation of the rescue of companies which are in financial difficulties;

(b) The suspension of legal actions by individual creditors through the creation of a

moratorium;

(c) The removal of powers of management of the company by its directors, even if directors

retain their powers as directors;

(d) The avoidance of transfers and transactions which unfairly prejudice creditors;(e) Ensuring that there is an orderly distribution of the companys assets;

(f) The provision of a fair system for the ranking of claims against the company;

(g) Provisions for the investigation of the companys failures and the imposition of liability in

respect of those responsible for the failure;

(h) The protection of the public from directors who might engage in improper trading in the

future;

(i) Maintaining ethical standards and competence of insolvency practitioners; and

(j) The dissolution of the company at the end of the liquidation process.


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regulation for companies, with penalties to follow if the system fails to deliver.55

A similar approach is recommended for the Pakistani law.

4.50 Investigations may be carried out under the Ordinance primarily in pursuance ofsections 263 and 265. The provisions relating to investigation may be examined to

be more effective and less cumbersome. The offences in relation to whichinvestigations may be carried out may be specified.

4.51 Under the Ordinance [Section 7] the High Court of a province where the

registered office of a company is situated has jurisdiction in respect of matters

arising out of the Ordinance.56

Each High Court is to constitute one or morecompany benches to exercise its jurisdiction in respect of company matters

[Section 8] and to deliver its judgments as expeditiously as possible but not

later than 90 days from the date of presentation of the petition [Section 9].

4.52 Despite the aforesaid provisions of the Ordinance, company matters remain

pending in court long after the prescribed ninety (90) day period, due to the factthat the practise of forming company benches has not been uniformly and

consistently followed, there is a lack of technical expertise amongst the judges

and the overwhelming backlog of cases endemic in the system.

4.53 In India, The Companies (Second Amendment) Act 2002 tackles these issues by

instituting the National Company Law Tribunals and the National Company Law

Appellate Tribunal. The Tribunals consist of a President and a number of judicialand technical members, where the technical members may be persons of ability,

integrity and standing having special knowledge and relevant professionalexperience of not less than twenty years57.

4.54 The formation of Tribunals similar to the aforementioned Indian Tribunals is notdesirable in the Pakistani context as it is only likely to further devolve the

decision making in respect of company matters, which are often too complex even

for Judges of the High Court. In order to expedite the decision making process,High Courts may be urged to form company benches as prescribed, on the one

hand, and the powers of the SECP vis--vis the High Courts, as provided in the

Ordinance, be assessed on the other hand. It is recommended that a balance may

be struck in the powers of the SECP and the High Court in order to ensure thatonly more complex matters be referred to the High Court.

4.55 The Ordinance pays merely lip service to alternative methods of disputeresolution (ADR). In the UK, referral to arbitration is still a voluntary exercise

55The Irani Report, Chapter XII, paragraph 2.

56 Reference may be made to s. 476(4) in terms of which a court not inferior to a sessions court has

jurisdiction to try criminal offences specified in the Ordinance.

57 Section 10FD (3) (f) of the Indian Companies Act 1956.


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however advisers are required to consider every case for its ADR suitability.Methods of alternative dispute resolution are well developed in countries such as

Singapore (which has made considerable progress in developing the use of these

methods to resolve disputes in various areas, from commercial to family law58

),Australia and South Africa.

4.56 The distinction between these countries and Pakistan lies in the well developedregime for regulating and offering alternative dispute resolution methods to the

public. In the Pakistani context, where the regulatory regime is inadequate and

centers of professional training have not yet been formed, compulsory reference

to ADR is not desirable. However, the option may be given to parties tocommercial disputes, whilst at the same time, attention may be paid to developing

the necessary ADR infrastructure.

58Australia has the Courts (Mediation and Arbitration) Act 1991 whereas in addition to the enabling

legislation (the International Arbitration Act), Singapore also has the Singapore International

Arbitration Centre which was established in 1991. In 1997, the Singapore Mediation Centre was

launched to offer parties involved in commercial disputes the alternative of using mediation to

reach an amicable and efficient settlement.


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5. Conclusions and Recommendations

5.1 The aim of the Concept Paper is to formulate a conceptual framework for the

development and regulation of the corporate sector in Pakistan in order to providedirection for the review of the Ordinance and to determine whether the Ordinance

needs to be amended or whether a new law needs to be drafted in its stead in orderto best address the views expressed in the Concept Paper.

5.2 The members agree that the following conceptual approach may be adopted in

reviewing the Ordinance:

(a) the law may be clear, concise and comprehensible;(b) the law may be certain yet flexible;

(c) the law may be a core company law, regulating all aspects of the entity

rather than the activity and only substantive matters may be included inthe law, whereas procedural matters may be identified for inclusion in

secondary legislation;

(d) the law may classify companies on the basis of size, number of members,control, nature of liability and the manner of access to capital;

(e) the law may facilitate the formation and conversion of companies;

(f) the law may promote a framework of strong corporate governance;

(g) the law may streamline the procedure for the liquidation of companies;and

(h) the law may allow for self regulation of companies in the future, while

providing adequate safeguards for the protection of shareholders and otherstakeholders.

5.3 A comparative examination of the India Reform Bill, the NZCA 1993 and the UK

Reform Bill, suggests that the following subjects may be included in a core

company law:(a) Objectives of the Law;

(b) Classification of Companies;

(c) The relationships amongst holding, subsidiary and associated companies;(d) The formation and conversion of companies;

(e) The raising and maintenance of capital by companies;

(f) Management and governance of a company;

(g) The requirement and procedure for the Audit of Accounts and CorporateDisclosures;

(h) Provisions for the prevention of oppression and mismanagement;

(i) Mergers and Acquisitions;(j) Restructuring and Liquidation; and

(k) Regulation and Supervision.

Each of the aforementioned areas has been examined in depth and the provisions

of the Ordinance have been evaluated in light of international standards and best

practices, comments received from the public in writing and through oralrepresentations, and in accordance with the conceptual approach referred to in 5.2


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above. The recommendations made in respect of each of these heads aresummarized below.

A. Objectives of the Law

5.4. It is recommended that the objectives of the law may be expressly and conciselystated in the law (for the proposed formulation, see 4.3 supra).

B. Classification of Companies

5.5 The Pakistan company law may continue to classify companies as public (whetherwith limited or unlimited liability) and private. However, the cap of 50 members

in respect of private companies may be removed and the category of public

unlisted companies may be abolished. The factors distinguishing small, medium

and large companies may be provided in the law and the test for determining thecategory within which a company falls (see 4.6 supra) may also be specified.

C. Relationship between Companies

5.6 This area has been given special consideration by the CLRC. It is stronglyrecommended that the formation of groups of companies may be encouraged and

corresponding changes be made in tax laws (by way of providing incentives) and

in the Monopolies and Restrictive Trade Practices (Control and Prevention)Ordinance, 1970 to facilitate such groups. It is further recommended that

companies may not be considered as associated with each other simply by virtue

of a single common director and instead the UK model of dominant influence beadopted (see 4.8 and 4.10 supra).

D. Formation and Conversion of Companies

5.7 It is recommended that the administrative procedures for the formation of a

company may be streamlined and simplified (see 4.12 supra) and e-filing beallowed in addition to traditional filing. Any party aggrieved in this regard, may

file objections with the SECP within a specified period. It is further recommended

that companies may be allowed to convert from one form to another withminimum procedural requirements and the method prescribed in the UK Reform

Bill may be adopted in this regard (see 4.14 supra).

E. Raising and Maintenance of Capital

5.8 In this regard it is recommended that the requirement of authorized capital may be

abolished (see 4.17 supra). However, the CLRC has refrained from prescribingminimum capital requirements for different sectors and left the matter to be

decided by the SECP. Although the CLRC recognizes the objections to the

concept of par value, raised particularly in the Jenkins Committee Report 1964, it


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recommends that the concept may be retained given its universal acceptance.However, the procedures for issuance of shares at a premium or at a discount may

be streamlined in order to facilitate the corporate sector (see 4.19 supra). The

CLRC further recommends that companies may be allowed reasonable autonomyin determining the rights attached to their equity and other instruments and putting

into place the necessary checks and balances (see 4.20 supra).

F. Management and Governance

5.9 The most significant recommendation in this area is the incorporation of the

concept of directors fiduciary duty as well as the business judgment rule, whichwould allow directors to enjoy immunity from court intervention in respect of

decisions which they have taken in the best interests of the company (see 4.23 to

4.27 supra). In order to introduce greater flexibility in the exercise of directorspowers, it is further recommended that the application of this rule may be

extended to the exercise of directors powers beyond their meetings (i.e. in

committees of directors, etc.) (see 4.29 supra). In addition, small companies(selected or identified according to a criteria prescribed in law) may be allowed to

determine matters through elective resolutions" (see 4.30 supra).

G. Audits, Accounts and Corporate Disclosures

5.10 In this regard the CLRC recommends that the power of the SECP to penalize

companies for offences in relation to books of accounts may be reassessed. Therequirements of disclosures may be amended to be made more meaningful for

public companies (see 4.32 supra), whereas they may be relaxed for private andsmall companies. It is further recommended that accounts of all listed and

unlisted companies may be prepared according to International Accounting

Standards, whereas the SECP may have the power to stipulate any additionalrequirements. The SECP may also be empowered to conduct a special audit of

companies in special specified circumstances (see 4.34 supra).

H. Prevention of Mismanagement and Oppression

5.11 In order to minimize oppression of the minority shareholders, the CLRC

recommends that the jurisdiction to hear complaints filed by members of aCompany against oppression and mismanagement should be with the SECP rather

than the High Court. The members further recommend that requirement of

minimum share capital holding for making a complaint should be reduced from20% to 10%. The members also discussed the concept of derivative action by a

shareholder. However the members decided that this issue needs to be considered

further before any decision may be made in this regard. (see 4.37 to 4.41 supra).


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I. Mergers and Acquisitions

5.12 The CLRC is of the considered view that the facilitation of mergers and

acquisitions is instrumental in enabling groups of companies to form and forbusiness to achieve economics of scale. The CLRC therefore recommends that

contractual mergers may be allowed subject to the subsequent approval ofshareholders (by special resolution) (see 4.43 supra). Any aggrieved party mayfile his or her objections before the SECP within a specified time. It is further

recommended that acceptable methods of valuation may be identified and

aggrieved parties may be given an opportunity to approach the SECP in this

regard as well. (see 4.34 supra).

J. Restructuring and Liquidation

5.13 The CLRC places equal emphasis on rehabilitation of companies as it does on

their speedy winding up and recommends that both subjects may be included in

the core company law. The CLRC further recommends that the procedures forwinding up may be streamlined, simplified and made more expeditious and may

be redrafted in accordance with the general objectives identified by the

Companies Commission of Malaysia (see 4.47 and footnote 54 supra)

K. Regulation and supervision

5.14 In respect of offences, the CLRC endorses the recommendation of the IraniReport whereby companies may adopt a system of self regulation with penalties

to follow if the system fails to deliver (see 4.49 supra). The CLRC furtherendorses the recommendation that offences in relation to which investigations

may be carried out may be specified in the law (see 4.50 supra). The CLRC does

not favour the formation of special tribunals to hear company matters. Rather, itrecommends that a balance may be struck between the powers of the SECP and

the High Court in order to ensure that only the more complex matters are referred

to the High Court (see 4.54 supra). The CLRC also recognizes and endorses theusefulness of ADR methods for dispute resolution (see 4.54 supra).

18th

May 2006Corporate Laws Review Commission

Islamabad


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BIBLIOGRAPHY

I. United Kingdom References

(a)

Company Law Reform Bill 2005;

(b) The Gedge Committee Report (1954);(c) The Jenkins Committee Report (1962);(d) DTI White Paper: Company Law Reform (March 2005);(e) DTI White Paper: Modern Company Law for a Competitive Economy

(August 1998);

(f)

Norton Rose:Briefing on the Company Law Reform Bill, 2005 (December2005);

(g) Simmons and Simmons Newsletter: Company Law Reform: LatestDevelopments (August 2005);

(h) Article from The Times:Red Tape Reform Could Lower Standards (18thMarch, 2005);

(i) Faegre & Benson: The Company Law Reform Bill (28th November, 2005);and

(j) Deloitte Response to Company Law Reform Bill (7th November, 2005).

II. Indian References

(a) Indian Companies Act 1956;(b) Expert Committee on Company Law: The Irani Report on Company Law

(May 2005);

(c)

Ministry of Company Affairs: Concept Paper on Company Law (4

th

August, 2004);

(d) Article from The Hindu:A Strong Conceptual Basis for Company LawReform (13th June, 2005); and

(e) Article from The Hindu Business Line:Is There Need For A NewCompany Law? (21st June, 2005).


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III. Australian References

(a) Australian Courts (Mediation and Arbitration) Act 1991;

(b) Discussion papers published by the Australian Governments Corporations

and Markets Advisory Committee:(i) Corporate Duties Below Board Level (May 2005);(ii) Personal Liability for Corporate Fault(May 2005); and(iii) Corporate Social Responsibility (November 2005);

(c) Materials pertaining to the Corporate Law Economic Reform Programmeinitiated in March 1997:

(i) Overview by The Honble Justice I.D.F. Callinan of the HighCourt of Australia (Speech on 26

thOctober 1998 at the

Corporations Law Update Conference);

(ii) Extracts on the Corporate Law Economic Reform Programme; and(iii)

Paper No 3:Directors Duties and Corporate Governance;

(d) Centre for Corporate Law and Securities Regulation, University of

Melbourne: A Better Framework Reforming Not-For-Profit Regulation

(2004) by Susan Woodward and Shelley Marshall.

IV. New Zealand References

(a) Companies Act, 1993;

(b) Financial Reporting Act, 1993; and

(c) Report No. 16 of the Law Commission: Company Law Reform: Transition

and Revision.

V. Malaysian References

(a) Corporate Law Reform Committee, Companies Commission of Malaysia:(i) An Insight into Corporate Law Reform in Malaysia;(ii) Reform Trends in Directors Duties;(iii) Reviewing the Traditional Concepts that Underlie the Workings of

Capital Raising; and

(iv) Reforming the Corporate Insolvency Regime;(b) The Malaysian Finance Committee Report on Corporate Governance

(March 1999);


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(c) Department of Business Law & Taxation, Monash University, Australia:Key Developments in Corporate Law Reform in Malaysia by Janine

Pascoe (prepared for the Corporate Law Teachers Association

Conference 2005: Regulating Conflicts of Interest in ContemporaryCorporate Law 6th- 8th February, 2005); and

(d) Article from Star Business: Complete Review of Companies Act(13thDecember, 2002).

VI. Hong Kong References

(a) Standing Committee on Company Law Reform, Companies Registry:Review of the Hong Kong Companies Ordinance (March 1997);

(b) Standing Committee on Company Law Reform: The Twenty First AnnualReport(2004/2005).

VII. South African References

Department of Trade & Industry: Paper on South African Company Law for the21stCentury: Guidelines for Corporate Law Reform, May 2004.

VIII. Ordinances, Acts, etc. of Pakistan

(a) Small and Medium Enterprises Development Authority Ordinance, 2002;and

(b) Draft Corporate Rehabilitation Act, 2005.IX. Reports of previous Company Law Review Commissions/Committees

established within Pakistan

(a) Working Paper of the 2001 Committee on Corporate Law Reform;

(b) Report of the Commission on Corporate Laws (established on February

1997) headed by Justice (Rtd.) Shafi-ur-Rehman;

(c) A Summary of the Recommendations of the Abdullah Committee

(established April 1991) submitted to the Finance Division on June 1993;and

(d) 1961 Report of the Company Law Commission of Pakistan.


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X. Discussion Papers and Research undertaken by the CLRC Secretariat

(a) A table comparing the provisions of the Companies Ordinance, 1984 withthe Indian Companies Act, 1956;

(b) A compilation of issues pertaining to the company law arising in legalopinions addressed within the Commission;

(c) A compilation of all comments received in the respect of the currentreview of the company law by the CLRC, from stakeholders and thegeneral public;

(d) A table comparing insolvency provisions of the draft CorporateRehabilitation Act and the Companies Ordinance, 1984;

(e)

Mapping of sections of the Companies Ordinance, 1984 as categorizedunder the Concept Paper;

(f) Research on Alternative Dispute Resolution in various jurisdictions;(g) Research on the capital structure in various jurisdictions;(h) Research on classification of companies in various jurisdictions;(i) Research on core company law components in various jurisdictions;(j) Research on directors duties in reference to the Canada Business Rule;(k) Research on the formation and conversion of companies in various

jurisdictions;

(l) Research on holding and subsidiary companies in various jurisdictions;(m) Research on the treatment of accounts for holding and subsidiary

companies in various jurisdictions;

(n) Research on the protection of, and benefits accorded to, minorityshareholders in various jurisdictions; and

(o) Research on par-value shares with reference to the U.K. JenkinsCommittee Report 1962.

concept paper for development of corporate sector

Documents