Law Reforms Regarding Small Private Companies in Pakistan

LAW REFORMS REGARDING SMALL PRIVATE LAW REFORMS REGARDING SMALL PRIVATE COMPANIES IN PAKISTAN By Muhammad Shahid Gull Advocate High Court, Islamabad Pakistan is an economy comprising mainly of SMEs1. They have been playing an effective role with different perspectives such as creating jobs, strengthening the entrepreneurial culture and giving boost to the national economy and many more. In order to fortify and promote sivlEs2, it is high time to take a step to encourage them while making the UK legislation as role model in order that they could work at fast pace and could be able to equate with other nations' SMEs. Therefore, we would have to overhaul the legal framework of private companies under the CO, 1984 and would need to appreciate the efforts made in previous years in this regard to modernize and simplify the company legislation. Here, it is partner to applaud and commend the efforts of Corporate Laws Review Commission (CLRC) made in the year of 2006 as to bringing radical changes. However, this work unfortunately could not be carried on incessantly. It is desirable to highlight the objective of the CLRC, which evinces the vision of the Concept Paper for the development and regulation of the Corporate Sector published by SECP which reads as follows:-- "It is necessary to carry out a holistic examination of the Ordinance in order to assess: (a) the relevance of its objectives in the current economic environment; (b) the adequacy of its provisions, not only for the achievement of 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 SMEs; and (d) the extent of its harmonization with international best practices"3 A. Brief Historical Background of the Companies Ordinance, 1984 In Pakistan, the CA, 1913 was adopted after independence. Later on, the CA, 1958, the Securities and Exchange Ordinance, 1969, the Companies (Managing Agency and Election of Directors) Order, 1972 and the Companies (Shifting of Registered Office) Ordinance, 1972 were passed. The CO, 19846 repealed all these laws, except the Securities and Exchange Ordinance, 1969 of which only sections 11-156 were repealed. The law on insider trading' has been introduced recently as have the rules of mergers and acquisitions. In 2002, the SMC was introduced.8 The corporate sector in Pakistan is regulated primarily by the CO, 1984. The Ordinance was promulgated to "consolidate and amend the law relating to companies and certain other associations for the purpose of healthy growth of the corporate enterprises, protection of investors and creditors, promotion of investment and development of economy and matters arising out of or connected therewith.9" Since the CO, 1984, the period of twenty-five years is the period of growth of the Pakistani economy including the Corporate Sector. In order to address the needs of changing environment of corporate sector, the CO, 1984 has been amended in 1991, 1999 and 2002. SECP1 established several Corporate Law Reform Committees to review and assess the company law regime in Pakistan. In April 1991, a review committee was formed which 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 published its report. Some of its most important recommendations were incorporated in the Companies (Amendment) Act, 1999. In January 2001, SECP established a committee to review the CO, 1984. The Companies (Amendment) Ordinance, 2002 was promulgated on the basis of this committee's recommendations. Two significant developments came into being in the wake of such amendments". However, those amendments were not exhaustive within them. In 2006, a 'Concept Paper' has been issued by the SECP and a CLRC has been formed to undertake a comprehensive review of the Company Law12. B. Existing Situation of Private Companies under the Companies Ordinance, 1984 In order to carry on a business of family and small scale, a private company which either be limited by shares or limited by guarantee and having a share capital, may be formed with the minimum one person called as SMC13 (also called as OPC14 in India) and with two persons called as private company16. The genesis of private companies was said to have been embodied in the CA, 1907/1908 of the UK18. The SMC was introduced in the UK in 1980 giving exemption from filing a balance sheet thereto. Its purpose was to protect the small investors in contrast to large investors who were financially stronger than the former. The CO, 1984 defines a private company as a company that by its articles:-- (i) restricts the rights to transfer its shares, if any; (ii) limits the number of its members to fifty not including persons who are in the employment of the company; and (iii) prohibits any invitation to the public to subscribe for the shares, if any, or debentures of the company: Provided that, where two or more persons hold one or more shares in a company jointly, they shall for the purposes of this definition, be treated as a single member17. All these three conditions mentioned above in the definition should be included in the articles of a company otherwise such company would not be treated as a private company nor would it be provided with the exemptions as are available to private companies under the CO, 198418. Albeit the private companies are constrained from transferring their shares, with the restriction of members not more than fifty and with the prohibition not to invite the public to subscribe for their shares, yet they have been given certain exemptions which are as follows:-- Only two members are required for registering a private company19 and it is not required to have more than two directors20. In case of SMC, only one member is required and such company may have just one director21. A private company is not required to hold a statutory meeting or prepare and file a statutory report22. There is no restriction on the appointment and advertisement of the first directors of a private company23. A private company is not required to file with the registrar a statement in lieu of prospectus24. A private company can commence its business and exercise any borrowing powers without any restrictions25. A private company having paid up capital of less than 7.5 million rupees26 is neither required to send its annual accounts to SECP, nor stock exchange nor registrar27. There is no restriction on the allotment of shares of a private company28. In addition to the above, the following further legal exemptions are provided for those private companies which are not the subsidiary companies of any public company. The legal restrictions imposed on a public company in regard to financial assistance to be given for the purchase of its shares do not apply to a private company29. Restrictions imposed upon the powers of management of the directors of a public company do not apply to the directors of a private company30. The prohibition on public companies with regard to the granting of loans or the guaranteeing of loans granted to directors does not apply to a private company31. The prohibition on voting by interested directors is not I applicable to a private company32. Provisions requiring an agent of a public company, who makes a contract in his own name but on account of the company as undisclosed principal to make a memorandum of the contract and file it in the company's office do not apply to a private company33. A private company may employ an unqualified auditor as also any person in the employment of its directors or officer, as an auditor34. However, a private company is to employ an auditor who is a chartered accountant only if its paid up capital is rupees 3 million or more.35 This means that a private company whose paid up capital is less than 3 million may not employ a chartered accountant for audit. C. Problems of small and Medium-sized Enterprises and their Proposed Solutions Where the SMEs are the contributors in the economy of the country, their problems must be addressed seriously in order to make them efficient and effective promoting the entrepreneurial culture while having all the privileges of company. In developing countries, their numbers are increasing but with the low pace the reason of which may be the ignorance of the investors as to privileges and benefits which are available after the formation of a company. The share of SPCs in the economy of Organization for Economic and Cooperation Development (OECD) countries is around 96% to 99%. In the United Kingdom (UK), 90% of the companies are SPCs. SMEs account for between 55 per cent and 80 per cent of total employment in Western Europe, Japan and USA. Their contribution in output in Japan is 65 per cent, in Germany 48 per cent and in USA 45 per cent. SMEs have played a very important role in the economic development of China. Presently, there are more than 10 million of SMEs comprising 99 per cent of the total number of enterprises in China. They are the major players in creating jobs in such country.36 SMEs are capable of creating almost one billion new jobs that the world will need in the times to come.37. In developed countries, SMEs have constituted a significant portion of Gross National Product (GNP) and total employment. The successful experience of SMEs in Bangladesh demonstrates their significance. Difference financial assistance programs have been carried out by the Bangladesh Government with a view to extending finance to small businesses at comparatively favourable conditions. SMEs form backbone of the Indian manufacturing sector and have become engine of economic growth in India. It is estimated that SMEs account for almost 90% of industrial units in India and 40% of value addition in the manufacturing sector.39 Approximately, SMEs constitute nearly 90% of all the enterprises in Pakistan; employ 80% of the non-agricultural labour force; and their share in the annual Gross Domestic Product (GDP) is 40%.39 According to Dr. Tariq Hassan,4 "The benefits of corporatization to economy primarily result from improved transparency and accountability. The corporate entities are required under the law to maintain proper records of operations and business affairs. Disclosure requirements are generally set out in the law along with the responsibilities for preparation and circulation of specified statements. The comprehensive legal and organizational framework within which corporate entities operate gives rise to a well-regulated and well-documented economic sector. In consideration of the multiple benefits arising from corporatization, the Government has encouraged a policy of corporatization and privatization of public sector entities, which is expected to have a profound impact on accountability in the public administration."41 In order to promote and encourage the corporatization of SMEs, SECP has reduced the fees for incorporating the company 42 and corporate tax rate from 50% to 20% for SMEs registered under the CO, 1984.43 On the contrary, the company is not entitled to run its business unless it takes the certificate of incorporation. When it wants to run, it undergoes the lengthy procedure. It incurs high tax rates and filing requirements keep increasing. It has to automatically become the part of Federal Board of Revenue (FBR) as withholding agent not by choice rather by law. It is overburdened with the mandatory filing of returns and statements electronically (e-Filing). It is required to maintain the external audit as well as secretarial records, Filing of Audited Statements of Accounts with SECP is mandatory for it. The company is under obligation to appoint Legal Advisor (LA) and CS. As long as it keeps doing business, its costs keep increasing too.44 It is worthwhile to address the problems of SMEs and to seek their proposed solutions so that they can be encouraged and promoted for speedily growth of the economy. The following are the problems of SMEs being faced by them:-- The labour laws are not without shortcomings, for instance, there is no protection of labour force in spite of the presence of their class in labour laws. Labour laws dealing with employers and employees such as the rights of formation of collective bargaining agents, rights of safety and levies, rights to obtain fixed wages arid benefits of provident funds and the payment of wages to the employees, etc. need effective implernentation.45 The credit by the banks and other financial institutions (Formal Financing) for maintaining the business is not provided to the SMEs as compared to large companies, which impedes their growth. The reasons for lack of access to credit facilities are, to wit, the requirements of banks and other financial institutions for giving loans, high costs and interest rates which are increased in each financial year, delay in loan financing process, sometimes the lack of access to banks, hurdles in obtaining loans, extension of non-performing loans and charging of advance taxes.46 At times, banks are reluctant to extend credit because of not maintaining proper accounts and due to their size. 47 One of the reasons is that SMEs do not disclose the exact picture of their accounts. 48 The lack of State institutional resources has undermined the performance of SMEs.49 Moreover, the government's lack of interest worsens the performance of such companies.5 It is a dilemma that shortage of power supply has affected each and every sector including the SMEs. The reasons such as high tariff rates, unreliable power supply, continuous load shedding and poor line connections and delivery are the impediments for the SMEs.51 Finance is the one of the main problems being faced by such enterprises and they have to take credit due to shortage of money with heavily interest-based. These have to rely on the limited personal and in-house resources (Informal Financing) as enterprises need huge capital for operational affairs and regulatory requirements. 52 The problem of high costs of leasing and the regulations of the State Bank of Pakistan (SBP) relating thereto affect the performance of the SMEs. They are unable to purchase machinery and other equipments and unaware of the techniques of asset-based lease financing.53 As regards the taxation, heavy taxes are imposed on the SMEs. The reasons such as complex taxation administrative setup, no incentives in existed tax laws for them, inability to afford proper documentation in terms of proper audited statements and other professional requirements, discretionary powers of tax authorities granted by taxation laws and inconsistency in tax laws are the obstacles for the SMEs. The UK has given financial relaxations and exemptions with regard to taxation requirements in terms of simplifying the regulatory requirements and granting concessions.54 In Pakistan, it has become the habit of people to avoiding tax, the reason whereof is presented tax is injustice with the people imposed by the Government, for people are not provided with facilities against the payment of taxes. Nevertheless, they use resources and different tricks for the sake of avoiding tax.55 There is a need to pay heed to this field and relaxations and exemptions should be provided to small businesses. Tax exemptions and simplified tax compliance requirements 1:%y means of filing of simple tax returns and accounts should be provided to SMEs. Terms and conditions for the payment of tax should be made easier, clearer and simplified. Small investors of SMEs should be given exemptions with regard to payment of taxes. The policies as to tariff rates need to be reviewed, for they are also one of the impediments for SMEs. High tariff rates are imposed on raw material and the low tariff rates on imported furnished products which cause the serious effects on SMEs.56 Want of technology impinge the competitiveness and innovation of SMEs. Illiteracy among the employees, outmoded machinery and equipment, lack of zeal for innovation and new technology and lack of skills and expertise are the causes which deteriorate the performance of these enterprises.57 Smuggling is also a problem which weakens the market competition and since the majority is of sole proprietorships and partnerships, the unregistered companies give bad impact affecting SMEs.58 The SMEs have to bear the heavy expenses while facing enforcement mechanism by virtue of costs and expenses. There is no any proper ADR mechanism for them.59 There is a need to review the laws regarding Foreign Direct Investment (FDI) so as to make the domestic investors confident as compared to foreign investors to whom so many facilities have been provided which cause the discouragement of local investors. The Foreign Private Investment (Promotion and Protection) Act, 1976 sets out that foreign investment will not be subject to higher income tax levels than those assessed on similar investments made by Pakistani Citizens. The Act and Protection of Economic Reforms Act, 1992 are the primary statutory safeguards for the rights of foreign direct investors. 6 Since its inception, Small and Medium Enterprises Development Authority (SMEDA)61 has played an effective role in promoting and encouraging the SMEs and enlightened this sector through workshops and training programs so that this sector could be able to compete with the world market.62 SMEDA has given the SME Policy, 2007 63 which is considered the best policy so far but its drawback is that SMEDA has not obliged the small investors to follow it compulsorily. In order to cope with the practical problems of SMEs being faced by them, the SECP and SMEDA have to play an effective role in promoting them, encouraging small investors, flourishing the business environment and enhancing their growth and competitiveness. The SMEs in Pakistan being in the nascent stage of incorporation process need to be promoted and encouraged and as such the investors thereof need to be educated for the benefits of the corporatization64 through proper education and awareness in terms of clear and plain language, legible and intelligible presented by means of guidelines and policies. There is a need to promote awareness through the media in order to keep the concerned people abreast of financial matters. The Government of Pakistan needs to take keen interest to flourish SMEs sector while providing them facilities in terms of introducing micro-economic schemes, making the existing laws simplified and implemented effectively, granting the relaxations and exemptions in terms of taxation and other regulatory requirements, providing loans and leasing on easy terms and conditions, furnishing advisory services, ensuring better infrastructure facilities, reducing tariff rates and transaction costs, liberalizing investment laws keeping in view the FDI and providing the world market access to such enterprises for promoting entrepreneurial culture. D. Problems of Small Private Companies under the Companies Ordinance, 1984 and Their Proposed Solutions When we talk about the relevant provisions of the private companies under the CO, 1984, we find them unjustifiable increasing regulatory and financial burdens upon the SPCs such as auditing procedures and filing of accounts and maintenance thereof. The primary purpose of any law is to facilitate the public and bearing in mind the current international style of legal drafting, an ideal law for the Pakistani Corporate Sector may be lucid, succinct and intelligible.65 - The law may be made flexible to address new issues and provide for corresponding legal requirements dictated by changes in the economic and corporate environment. 66 Company law should be compact and intelligible containing the essential principles in substantive law. Procedural and quantitative aspects should be addressed in the rules. The problems of SPCs under the CO, 1984 are identified as below: The first and foremost problem is that no separate legislation between public and private companies has ever been made so far through which private companies could be facilitated. 67 Private companies in the existing company law have been provided with certain exemptions and relaxations which should be carried on.68 Under section 252 (1) of the CO, 1984, every company is required to appoint an auditor. It is recommended that the requirement of auditor should be removed for SPCs unless they choose to do so. The draft of FRSSE of the UK should be introduced in Pakistan. With regard to accounting provisions for private companies, they should be separately set out under the CO, 1984. 69 The concept of SMC may be clarified within the law i.e. the CO, 1984. 70 The SMC is required to appoint a CS under the provisions of the CO, 1984.71 The requirement to appoint CS for the SMC should be abolished unless they opt to do so. The factors distinguishing between small, medium and large companies (along with 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 the number of employees, as may be relevant.72 India has recommended that the company law may provide for a less onerous regime for smaller companies 73 whereas the UK Company Law Reform Bill, 2005 has distinguished amongst small companies, medium-sized companies and other companies in respect of accounting disclosures and filing requirements. 74 In the UK, the CLRSG has considered for making a simpler form of report and accounts, to be prepared and filed by small companies, that is, those satisfying three of the following criteria: turnover of less than Pound 4.8 million; gross assets of less than Pound 2.4 million; fewer than 50 employees. In India, small company has been defined under the proposed Companies Bill, 2008, according to which, the paid-up share capital of a small company shall be up to five crore rupees and turnover shall be up to twenty crore. The CO, 1984 does not differentiate among companies on the basis of their Size. Therefore, the definitions of small and medium-sized companies are being proposed. The SME Policy, 2007 of Pakistan has given the definition of SMEs, according to which, a company may have a number of employees up to 250, its paid-up capital is up to Rs. 25 Million and its annual sale is up to Rs. 250 million. 75 In order to test for determining the category within which the company falls, the criteria as given through definition by the SME Policy may be introduced in the CO, 1984. The definition for the small companies having paid-up share capital up to Rs. 2-3 Million, turnover up to Rs. 10-15 Million and employees up to fifty may be introduced in the CO, 1984. 76 The UK has proposed separate constitutions for public and private companies within the company law. 77 It is suggested that such (separate) constitutions may be made in the CO, 1984 for public and private companies. The Irani Report also recommends a system of e-filing of documents for speedily processing requests for registration and incorporation, minimizing physical interface and potential abuse of discretionary powers by the registering authorities. 78 It is worth mentioning that SECP has introduced a system 79 of e-filing of documents in Pakistan that would facilitate the functions of online availability of name, el-incorporation of companies and e-filing of statutory returns. 80 It is recommended that all these procedures may be more simplified and easily intelligible for general public. The procedures for the conversion of public companies into private companies 81 as well as the re-registration of unlimited companies as limited companies 82 are narrow in its scope, sketchy and heavily SECP dependent. The UK Reform Bill, 2005 provides a simple process of re-registration, which may be allowed after fulfillment of specified requirements.83 It is recommended that the given procedure and a process of registration should be adopted in Pakistan while considering our own requirements. 84 There is a strong case for the requirements of incorporation and registration to be streamlined and 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. 85 Under the sections of 158 and 159 of the CO, 1984, prior notification of 21 days is must for holding AGMs and EGM. In the UK, for all sorts of meetings, the notice period of 14 days has been fixed. It is desirable that the time period of notices for holding meetings should be reduced for SPCs in Pakistan. The relaxation of rules for holding meetings may be considered for private companies. The UK Company Law Reforms Bill, 2005 abolished the requirement of holding of annual general meetings by the private companies. The CA, 1985 86 allows for "elective resolutions" which 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 (for example, the holding of AGMs, the laying of accounts and reports before general meetings and the requirement as to majorities in order to authorize meetings at a short notice).87 This approach is considered desirable in principle, 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 CO, 1984.88 The powers and duties of the BODs may be clarified in the CO, 1984.89 The regime for election of Directors provided in the CO, 1984 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. In the Pakistani context, however, it is recommended that the proportional representation system should be retained.90 The provisions of the CO, 1984 pertaining to audit 91 and accounts 92 are elementary but are burdensome. Exemptions from certain disclosures may also be considered and relaxations, if any required, in respect of compliance with Accounting Standards may be provided for small companies while notifying the Accounting Standards. The power of SECP to penalize companies for offences in relation to books of accounts required to be maintained by companies may be reassessed. The extent of disclosures required to be made by companies may also be examined: while it may be desirable to increase disclosures to include matters such as a list of policies and manuals, the staff turnover ratio and average increments in salary, it may also be appropriate to relax the requirements for private companies and SPCs.93 Offences are spread throughout the CO, 1984 and the penalties prescribed for these offences are often not commensurate with the enormity of the offence. All the offences may be consolidated on one place. Penalties may also be rationalized in line with the severity of the offence. The Irani Report, 2005 also recommends a system of self-regulation for companies, with penalties to follow if the system fails to deliver.94 A similar approach is recommended for the Pakistani law.95 Investigations may be carried out under the CO, 1984 primarily in pursuance of sections 263 and 265 thereof. The provisions relating to investigation may be examined to be more effective and less cumbersome. The offences in relation to which investigations may be carried out may be specified. 96 The jurisdiction of the courts with regard to company matters has been set out in the CO, 1984.97 Despite the provisions of court's jurisdiction mentioned in the Co, 1984, company matters remain pending in courts long after the prescribed ninety (90) day period, due to the fact that the practice 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, In order to expedite the decision-making process, HCs may be urged to form company benches as prescribed, on the one hand, and the powers of the SECP vis-a-vis the HCs, as provided in the CO, 1984, be assessed on the other hand. 98 India has established the National Company Law Tribunal (NCLT) to deal with the company matters.99 It is recommended that the similar Tribunals may be established in Pakistan in order to ensure that only more complex matters may be referred to these Tribunals, with the provision that only questions of law arising out of decisions rendered by such Tribunals, if any, may be referred to HC. The CO, 1984 just mentions the methods of ADR but does not address them in proper manner.1 In the UK, referral to arbitration is still a voluntary exercise; however, advisers are required to consider every case for its ADR suitability. 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 to commercial disputes, whilst at the same time, attention may be paid to developing the necessary ADR infrastructure. 10' E. Conclusion The corporate sector plays a pivotal role in the economy of a country. In this era, the importance of this sector has increased and countries have paid serious attention to make their Company Law effective, updated and flexible to the changing environment. Broadly speaking, there are mainly two types of companies, that is, public and private companies. History of the company law demonstrates that the major company legislation has been drafted and enacted with a view to deal with the needs and requirements of the public companies. However, with the passage of time it was realised that SPCs have played the major part in increasing the economic growth vis- -vis the large companies. The concept of corporatization with the privilege of the limited liability gave a way to an enterprise to perform better than the earlier. Thus, the requirements and needs underwent the changing process with the changing conditions and so the company law. From 1998 to 2008, the UK government has toiled to make the company law viable, effective, flexible, up-to-date and acceptable while taking keen interest in its corporate sector. The UK Company Law has brought the tremendous legislation regarding SPCs while separating their legislation from the public companies through the 'Integrated approach'. This legislation has become a model for other countries, especially for those which are following the UK Company Legislation such as Pakistan and India. The private companies have been liberated through deregulation process and exemptions and relaxations in order to ease their burdens of stringent and inflexible legislation and sketchy and lengthy procedures that were unjustifiable for SPCs. Nevertheless, they were provided with simplified registration and incorporation process, easy communication through electronic media and guidelines, the facility for financial assistance and with exemptions from appointing CS and auditors, holding a meeting and filing statutory accounts and audit reports. Consequently, the legislation for the SPCs has been separated from the public companies. India has also brought reforms in its Company Law and the Companies Bill, 2008 has been presented in the Parliament. The Irani Report, 2005' acknowledges SPCs, being different from the public companies, should not suffer from the requirements which are actually meant for public companies. Indian Company Law has mostly appreciated the recommendations of the UK's private company law reforms. Inasmuch as Pakistan is concerned, it is dilemma with our country that the futile attempts carrying no ultimate results are carried out. However, there is no doubt that the effort made by the CLRC in 2006 as to the development and regulation of the corporate sector is appreciable. In the 'Concept Paper' given by SECP, no work on the separate legislation for private companies within the company law has ever been done, which is actually the need of the hour. It is high time for Pakistan to progress on this particular matter so SPCs could run smoothly and efficiently. It is pertinent to state that the area of corporate governance in the sidelines of the main company law cannot be ignored. The problems of SPCs such as lack of coherence in labour laws, lack of credit facilities, want of institutional resources, shortage of power supply, high costs of leasing, heavy taxes and tariff rates, lack of technology and smuggling are the root causes in the growth and performance of SMEs. These problems need serious attention and it is recommended that these should be addressed through effective policies and legislation and the government should cater for such problems and take effective steps in making and implementing the best standards of corporate governance and regulations and provide facilities and maximum relaxations to SPCs while playing its responsible role. 1. See SME Policy Pakistan - Ensuring Conducive Business Environment: Concept Paper at http://www.smeda.org.pk/html. The significance of their role is clearly indicated by various statistics. According to more recent estimates there are approximately 3.2 million business enterprises in Pakistan. Enterprises employing up to 99 persons constitute over 95% of all private enterprises in the industrial sector and employ nearly 78% of the non-agriculture labour force. They contribute over 30% to the GDP, Rs.140 billion to exports, and account 25% of exports of manufactured goods besides sharing 35% in manufacturing value added. However, there has been concern that in Pakistan the SME sector has not been able to realize its full potential. The SMEs continue to suffer from a number of weaknesses, which hamper their ability to take full advantage of the opening of economy and the increasingly accessible world markets. The areas of constraints are normally identified as labour, taxation, trade capacity, finance and credit availability. (accessed December 12, 2009). 2. Promotion of Small and Medium Enterprises (SMEs) entails enhancement of the competitiveness of the economy and generation of additional employment. A thriving Small and Medium Enterprise (SME) sector has long been recognized as one of the key characteristics of any prosperous and growing economy. 3. See Securities and Exchange Commission of Pakistan, 'Concept Paper for the Development and Regulation of the Corporate Sector,' (2006), para 1.3. 4. Nazir Ahmed Shaheen, Practical Approach to the CO, 1984 (Rawalpindi: Fedei al Law House, 2008), 2. 5. The CO, 1984 was promulgated on the October 8, 1984 that repealed previous CA, 1913. Prior to independence, companies were regulated by the Indian CA, 1913 which was a replica of the English Companies (Consolidation) Act, 1908 save certain minor variations. Post independence, Pakistan adopted the CA, 1913 after making certain necessary amendments thereto. In 1959, a Company LC was formed to review the CA, 1913. The Company LC published its report in 1962 and the recommendations made therein culminated in the promulgation of the CO, 1984. 6. These sections were repealed by the CO, 1984 (XLVII of 1984) Notification No. F. 17(1)/84-Pub dt. 8-10-84. 7. See. Chapter III-A inserted by the Finance Act (I of 1995), S 7(5) dated. 2-7-1995. 8. This word was substituted by the Companies (Amendment) Ordinance, 2002, dated .26.10.2002. 9. See the Preamble of the CO, 1984. 10. The then Corporate Law Authority (CLA). 11. Two significant developments in this regard are (a) the growth of non‑ banking finance companies and (b) the introduction of single member companies. 12. See supra note 3. 13. See the ECs (SMPLLCs) Regulation, 1994 providing that a sole person whether natural or legal can form or become a SMLLC. The regulations further provide that, subject to certain modifications, all the provisions of the CAs which apply to private companies limited by shares or by guarantee will apply to small and medium companies. 14. See the proposed Indian Companies Bill, 2008. This Bill has proposed a new entity named One Person Company (OPC) that will be a private limited company as SMC. SMC and OPC are analogous to each other. 15. See the CO, 1984, S.15(1). 16. Imran Ahsan Khan Nyazee, Company Law (Rawalpindi: Federal Law House, 2008), 47. 17. See supra note 15, S.2 (28). 18. Ibid, S. 46. It elaborates, "If these provisions are not complied with "the company shall cease to be entitled to the privileges and exemptions conferred on private companies by or under this Ordinance and this Ordinance shall apply to the company as if it were not a private company." 19. Ibid, S.15 (1). 20. Ibid, S.174. 21. Ibid. 22. Ibid. S.157 (12). 23. Sec. Supra note 15, S.184(3). 24. Ibid, S.69(3). 25. Ibid., S.146(6). 26. ibid., S.242(3). 27. Ibid., S.233(5). 28. Ibid., S.68(9). 29. Ibid., S.95. 30. Ibid., S.196(3). 31. Ibid.. S.195(2) (a) (I). 32. Ibid., S.216(2) (a). 33. Ibid. S.225 (1). 34. Ibid., S.254(1)(b). 35. Ibid., S.254(1)(ii) 36. The role of Small and Medium Enterprises, Industry and Economy,' Pakistan's Business Magazine 23-29th October, 2000. 37. Ibid. 38. KD Raju, 'Small and Medium Enterprises (SMEs): Past, Present and Future in India, (n,l:n.p..n.d.) 39. See 'State of SMEs in Pakistan, ' at http:/www.smeda,org.pk/html. (accessed November 8, 2009) 40. The author, a former Chairman of the Securities and Exchange Commission of Pakistan, is a lawyer based in Islamabad. He has a master's and doctorate in law from Harvard Law School and is a member of the Board of Governors of LEAD Pakistan. 41. See the speech of Dr. Tariq Hassan, 'Benefits of Corporatization' delivered at the Expert Advisory Cell dated. 20-11-2003 (accessed December 2, 2009) 42. See Securities and Exchange Commission of Pakistan, 'SECP facilitation', p 1, at http://www.secp.gov.pk/htrnl. (accused December 12, 2009) 43. The Task Force Report on Corporate Tax Policy (Islamabad: April 14, 2005), 19-20. 44. See the presentation of Muhammad Zeeshan Merchant, 'Corporatization: Pros and Cons!' Tax House, Karachi. (May 26, 2008) 45. Faisal Bari and others, "SME Development in Pakistan: Analyzing the Constraints to Growth," Pakistan Resident Mission Working Paper No.3 (Islamabad: Asian Development Bank, 2005), 37. 46. S. Akbar Zaidi, Issues in Pakistan's Economy (Karachi: Oxford University Press, 1999), 126-131. 47. Muhammad Saleem Bhutta, "Engineering Subcontracting and Enterprise Development in Pakistan," (Ph.D. Thesis, Bahuddin Zakaria University, 2000), 16- 17. 48. Arif Iqbal Rana and Usman Asad, (2007) 'SME Pulse Entrepreneur and Small and Medium enterprise Center,' A survey report on the health of SMEs in Pakistan 19, 35. 49. Shahab KhawaJa, "Unleashing the Potential of the SME Sector with a focus on Productivity Improvements," (n.l: n.p.,2006), 4-5. 50. See supra note 46, 133. 51. See supra note 45, 29-32. 52. See supra note 46, 131-33. 53. See supra note 45,28. 54. Sanjaya Lall, "Strengthening SMEs for International Competivences," for the Egyptian Centre for Economic Studies Workshop. (Cairo: March . 6-8,2000)7-8. 55. M. Levi and M. Suddle, "White-Collar Crime, Shamelessness, and Disintegration: The Control of Tax Evasion in Pakistan" Journal of Law and Society, Vol.16, November 4, 1989, p 498. 56. See supra note 45, 43. 57. Muhammad Shahid Chaudary, "Country Paper Pakistan on Strategic Partnership in Promoting Technology Incubation system for SMEs," (SMEDA, GoP: October 18, 2004), 5-6. 58. See supra note 45, 48. 59. Ibid., 47 60. Taimoor Ali Khan, "Legal Framework for Foreign Direct Investment in Pakistan in Perspective of the Emerging International Regime" (LLM Thesis, International Islamic University, 2007), 172. 61. The Small and Medium Enterprises Development Authority (SMEDA) was established in 1998 under the Ministry of Industries and Production in order to foster the development of SME in the economy and was expected to take a key role in this process. Its functions include, inter alia, the facilitation on policy making and the provision of overall planning, programming, research and evaluation of matters related to SME in Pakistan; monitoring and evaluation; encouraging and facilitating development of SME and to protect their interests. 62. See'Introduction' at http: // www.smeda.org/SMEDA/introdution1.html (accessed November 17, 2009) 63. See the SME Policy, 2007. 64. In the words of Dr. Tariq Hassan, Corporatization entails separation of management from the owners while transforming an entity into a body with limited liability having perpetual succession. Corporatization allows a number of significant benefits to the entity as well as to the economy as a whole. Primarily, it extends the rights, duties and privileges of a natural person to a legal entity. These rights include among others the right to borrow money and invest funds, own property, sue and be sued and enter into contracts. Corporatization also allows the owners to limit their liability up to the extent of their investment in share capital of the entity. This helps to protect owners' personal assets from being used for discharging the debts and liabilities of the business. In addition, transferability of ownership interests is possible. Therefore, the life of a corporate entity is not limited to the life of its owners; rather it has perpetual succession. The separation of ownership and management allows professionals to administer and manage the affairs of an entity. While discharging their duties, they are bound to act honestly and with skill, care and diligence. Presence of professional management promotes credibility and effectiveness in the operations of the entity. Being entitled to the above rights and privileges, a corporate entity is better placed to raise equity and debt funds. It has easy access to capital market for raising long-term funds. Moreover, financial institutions generally prefer to extend financial assistance to documented and organized form of incorporated , business that enjoys credibility. Corporatization, therefore, is the means by which companies seek to improve competitiveness --nd access to capital and borrowing in a local and global market. 65. See supra note 3, para 2.1. 66. Ibid, para 2.8. This reflects the concept of the UK Company Law Reform Bill, 2005, the key objective of which is to provide a flexible legal framework to cater for future developments. 67. Department of Trade and Industry, White Paper, Company Law Reform (March 2005) (Cmnd 6456). Recently, the UK has separated company legislation as to SPCs with the 'Integrated Approach' as well as 'Think Small First Approach' while providing them with relaxations and exemptions on the basis of their size. 68. See supra note 3, para 4.2. 69. Relaxations to small companies with regard to the format of accounts to be prescribed in the Act/Rules may also be considered. 70. Though there are the Companies (Single Member Private Limited Companies) Rules, 2003, however, the substantive law may be provided in the CO, 1984 and procedural law may be provided in the rules. 71. See supra note 15, S. 204-A; See also Rule 10 of the Companies (Single Member Private Limited Companies) Rules, 2003 72. See supra note 3, para 4.6. 73. Ibid., pai a 4.5. 74. See the Company Law Reform Bill [HL] Bill 190 2005-2006, Research Paper 06/30, 2 June 2006, Timothy Edmonds. 75. This definition was approved in the SME policy, 2007. 76. These definitions are just proposals. SECP may change them as it deems fit. 77. See the CO, 1984, which contains model regulations for each type of company, however, the company may adopt these regulations to the ; extent it deems desirable. 78. A system of e-filing is already in place in the UK. 79. The E-Services project is undertaken by SECP in collaboration with E-Government Directorate (EGD) within the overall framework of National IT Policy approved by the Federal Cabinet. The E-Services project is an electronic data gathering and retrieval system that would perform automated collection, acceptance and forwarding of submissions by companies who are required by law to file forms and documents with SECP. Its primary purpose is to increase the efficiency of the corporate sector to facilitate the investors, companies, and the economy by accelerating the receipt, acceptance and dissemination of time-sensitive corporate information filed with SECP. The main objective of introducing the E-Services project is to improve efficiency and effectiveness of the business processes of SECP due to speedy and transparent paperless environment and making it easier for the representatives of companies and the business community to interact with and obtain information from the SECP through electronic means. E-services will enable promoters to complete the registration process online, using the E-Services portal, without visiting the Company Registration Office (CRO), and making it possible for companies to file their statutory returns with the registrars online. It will be a web-based system accessible from anywhere in the world via login ID and a password. 80. See the Official News Letter (May, 2008). 81. See supra note 15, Ss. 44-46. 82. Ibid., Ss. 109-110 83. See the Company Law reform Bill ItiLl Bill 190 2005-2006, Research paper 6/30, 2 June, 2006, Timothy Edmonds. Ss.90-110. 84. See supra note 3, para 4.14. 85. See supra note 3, para 4.15. this para states further that it is also desirable that companies may be allowed to convert themselves into her forms of companies with ease and facility and upon meeting ..early 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. 86. See the CA 1985, S. 379-A. 87. See the Company Law Reform Bill 11-11,1 Bill 190 2005 -2006, Research paper 6/30, 2 June, 2006, Timonthy Edmonds. This Bill 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, p 10) 88. See supra note 3, para 4.30. 89. The powers and duties of the BODs are mixed with the general powers and duties of the directors in the CO, 1984. It is desirable that they may be separately set out in the CO, 1984. The most important aspects to be considered in respect of the BODs are (a) the extent of fiduciary duty of the Directors and (b) their individual liability for the decisions of the BODs. The UK law provides a twofold test to assess the extent of a Director's duty towards the company: the two fold test operates by stipulating an objective standard as a minimum standard of care required by a Director (as by a reasonable person in the position of a biicelor) as well as a higher subjective standard which is applied where the Director has a particular skill or expertise. The UK Law stipulates that Directors must act bona fide in what they consider is in the interest of the company, which is known as the "business judgment rules". This approach is a case-law based concept whereby a Court will refuse to review the actions of 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 of good faith; or (2) that the decisions of the Directors lack a rational basis. This rule results in harm to the company. The reason is that the business judgment rule creates a. strong presumption in favour of the Board of a company freeing its members from possible liability for decisions. However, this approach is proposed to be codified in terms of section 158 of the UK Company Law Reform Bill. 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 restriction in this regard, whereas the Indian law 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 similar provisions may be included in the Pakistan Law. 90. See supra note 3, para 4.23. 91. See supra note 15, Ss. 252-260 92. ibid., Ss 230-247 93. See supra note 3 para 4.32 94. See the Irani Report, 2005, Chapter XII, para 2. 95. See supra note 3, paras 4.48-49. 96. Ibid., para 4.50. 97. See supra note 15. Under section 7 of the CO, 1984, the High Court (HC) in whose jurisdiction the company has its registered office will have jurisdiction. This jurisdiction is "original civil jurisdiction," and this includes winding up proceedings. In fact, the HC has jurisdiction wherever the question of jurisdiction is not clearly settled. The Chief Justice (CJ) of the HC will constitute a Company Bench(es) under section 8 of the CO, 1984. The Bench so constituted will exercise jurisdiction conferred on the HC. Section 9 fixes the time for the expeditious disposal of cases and states this period should not extend beyond 90 days. Section 9 (3) provides that a summary procedure will be followed, but the procedure has to be fair. In this respect, the original civil jurisdiction is different from that conferred by section 15 of the Civil Procedure Code (CPC), 1908. The form of petitions and the detailed procedure are provided in the Companies (Courts) Rules, 1997. These rules include a number of forms that are to be used for various purposes. Section 10 of the CO, 1984 provides that an appeal from the decision of the court will lie to the Supreme Court (SC). The appeal lies before the SC "where company ordered to be wound up has paid-up share capital of not less than one million rupees; and where company ordered to be wound up has paid-up share capital of less than one million rupees...such appeal would lie only if SC had granted leave to appeal." 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 CO, 1984. 98. See supra note 3, paras 4.52 and 4.54. 99. See the proposed Indian Companies Bill, 2008. 100. See supra note 15, S. 283. Though this section deals with the arbitrating procedure for parties where they are at variance, however, it is pertinent to introduce arbitration procedure for the dispute between regulator (SECP) and company or parties. 101. See supra note 3, paras 4.55-56.