Ch # 3.

Directors Page 27

INTRODUCTION & ELIGIBILITY

Director
Includes any person occupying the position of a director, by whatever name called

§ Only natural persons to be directors

§ Directors act collectively or by majority
§ Every director has got one vote in a directors meeting.
§ Director cannot be a variable representative
(cannot claim relief from responsibility as a director in any particular area of business)

Directors in fiduciary relationship

§ Directors are agents of the company

§ They are supposed to make decisions in best interest of company
§ They must be vigilant and should not be negligent in their duties

Minimum number of directors of a company

SMC è At least 1
Other private è At least 2
Public (unlisted) è At least 3
Public (listed) è At least 7

No person shall be a director (including alternate director) at same time in more than such
number of companies as may be specified
(this limit shall not include the directorships in a listed subsidiary)

Consent to act as director

§ No person shall be elected or appointed as a director or chief executive if he has not filed
his consent in writing
§ Company shall file such consent to registrar within 15 days of the date of appointment or
election of director or chief executive
Ch # 3. Directors Page 28

Ineligibility of certain persons to become director

§ Minor;
§ Unsound mind;
§ Has applied to be adjudicated as an insolvent and his application is pending;
§ Undischarged insolvent;
§ Has been convicted by a court of law for an offence involving moral turpitude (conduct that
is contrary to community standards of good morals, or justice, e.g. murder, kidnapping);
§ Has been debarred from holding such office under any provision of this Act;
§ Has betrayed lack of fiduciary behaviour at any time during preceding 5 years;
§ Does not hold NTN as per Income Tax Ordinance 2001 (SECP can give exemption in this)
§ Not a member except
- Person representing a member who is not a natural person
- Whole-time director who is an employee of the company;
- Chief Executive
- Person representing a creditor or other special interests through contractual
arrangement

Additional Ineligibilities only for Listed Co

§ Declared by Court of competent jurisdiction as defaulter in repayment of loan to a

financial institution
§ Engaged in business of brokerage, or is spouse of such person or is sponsor, director or
officer of a corporate brokerage house

If any person being an undischarged insolvent acts as chief executive or director of a company, he
shall be liable to imprisonment for a term not exceeding 2 years or to a fine, or to both.
Ch # 3. Directors Page 29

DIFFERENT TYPE OF DIRECTORS

First directors

§ Names & number of first directors shall be decided by subscribers

§ Their particulars shall be submitted along with the documents for incorporation.
§ Additional directors may also be appointed in general meeting
§ 1st directors shall retire at first AGM

Elected Director and the process of election

In first AGM, all first directors shall retire and election of directors shall be held. Afterwards
election shall be held after every 3 years.
(Company limited by guarantee may reduce the period through AOA)

Process of Election

§ Directors of Co shall, fix No of elected directors at least 35 days before general meeting at
which directors are to be elected
(Number shall not be changed except prior approval of members)
§ Notice of meeting shall expressly state-
- No of elected directors fixed; and
- Names of retiring directors.
§ A person who seeks to contest in election of director shall (whether he is a retiring director
or otherwise), file with company a notice of his intention at least 14 days before meeting
- Notice may be withdrawn at any time before election
- All such notices shall be transmitted to the members at least 7 days before meeting
- For listed: Notice also published in 1 Urdu & 1 English newspaper, in respective
language, having wide circulation
§ If number of persons offering themselves to be elected as director is not more than number
of directors fixed for election, the directors shall stand elected unopposed.

For companies not having share capital

Elected by members in general meeting in manner provided in AOA.

For companies having share capital

(Where No of contestants are more than No of directors fixed)
§ Votes = No of voting shares or securities x No of directors (seats)
§ Member may give all votes to 1 candidate or may divide votes between the contestants
§ Candidate getting highest votes elected as director and then candidate getting next highest
votes shall be so declared and so on until total directors elected.
Ch # 3. Directors Page 30

Circumstances in which election may be declared invalid

Court may, declare election of all directors or any of them invalid if satisfied that there has
been material irregularity in procedures.
§ On application of members having at least 10% voting power
§ Within 30 days of the date of election
Any act of director, or of meeting of BOD attended by him, shall not be invalid only due to any
defect (subsequently discovered) in appointment

Duty of retired directors

The directors so continuing to perform their functions shall:

§ take immediate steps to hold the election of directors; and
§ in case of any impediment, report such circumstances to the registrar within 45 days
before the due date of the annual general meeting or extra-ordinary general meeting, as
the case may be, in which elections are to be held.
Such AGM or EGM shall not be delayed for more than 90 days from the due date of the meeting
or such extended time as may be allowed by the registrar, for reasons to be recorded, only in
case of exceptional circumstances beyond the control of the directors or in compliance of any
order of the court.
Direction by registrar
The registrar, may on expiry of period (for election), either:
(a) On its own motion; or
(b) On the representation of the members holding at least 10% of total voting powers in a
company having share capital; or
(c) On the representation of the members holding at least 10% of total members of the
company not having share capital of the company, directs the company to hold annual
general meeting or extra-ordinary general meeting for the election of directors on such
date and time as may be specified in the order.

Nominee directors

By Creditors
§ Creditors may also nominate directors on the board
(if they are empowered to do so by virtue of any agreement)
§ Such directors are in addition to minimum number of directors fixed by Act.
By Federal Govt., Provincial Govt. or Investor company
§ Federal government, provincial government and any investor company (holding shares in
other company) can nominate any person to represent them as director in that company
§ Such person shall be considered to be ‘elected director’ (deemed)
§ Shall be considered for calculation of minimum number
Ch # 3. Directors Page 31

Fresh election on request of substantial acquirer

§ If a person acquires requisite shareholding to get him elected as a director, he may require
the company to hold fresh election.
§ Number of directors fixed in last election shall not be decreased
§ Board shall as soon as practicable within 30 days, proceed to hold such fresh election.
§ Listed company shall follow such procedure as may be specified by SECP for such election

Casual Vacancy

§ If directors resign earlier from the office (before 3 years), casual vacancy shall be filled by
remaining directors.
§ In listed company it shall be filled at the earliest but not later than 90 days from the date of
vacancy.
§ For others no time limit specified in Act for filling of casual vacancy, nor it is mandatory
(unless number of directors falls below minimum)
§ Casual vacancy shall be appointed for remainder term

Independent Director

A director who is not connected or does not have any other relationship, whether pecuniary or
other, with company, associates, subsidiaries, holding or directors; and he can be reasonably
perceived as being able to exercise independent business judgment without being subservient
to any conflict of interest

No director shall be considered independent if one or more of following circumstances exist:

§ Has been employee of company, its subsidiaries or holding company within last 3 years;
§ Is or has been CE of subsidiaries, associated undertaking or holding company in last 3 years
§ Has, or has had within last 3 years, a material business relationship with company either
directly, or indirectly as a partner, major shareholder (10% voting power individually or in
concert with his family or as part of group) or director of a body having such relationship.
§ Has received remuneration in 3 years preceding his/her appointment as a director or
receives additional remuneration, excluding retirement benefits from company apart from
a director’s fee or has participated in stock option or a performance-related pay scheme;
§ Is a close relative of the company’s promoters, directors or major shareholders:
(close relative means spouse, lineal ascendants and descendants and the siblings)
§ Holds cross-directorships or has significant links with other directors through involvement
in other companies or bodies not being associations licenced u/s 42;
§ Has served on board for more than 3 consecutive terms from date of his first appointment,
and for more than 2 consecutive terms in case of a public sector company
(such person shall be deemed “independent director” after a lapse of one term)
§ Person nominated as a director or representing special interest
Ch # 3. Directors Page 32

For public sector companies, time period shall be taken as 2 years instead 3 years in first 3
conditions. An independent director in case of a public sector company shall not be in service of
Pakistan or any statutory body or any body or institution owned/controlled by Government.
Independent director of a listed company shall be elected in the same manner as other
directors are elected (u/s 159) and the statement of material facts annexed to the notice shall
indicate the justification for choosing the appointee for appointment as independent director.

Maintenance of a databank of independent directors

§ An independent director to be appointed under any law, rules, regulations or code, shall be
selected from a data bank containing names, addresses and qualifications of persons who
are eligible and willing to act as independent directors
§ It shall be maintained by any institute, body or association, as notified by SECP, having
expertise in so; and post on their website for use by the company making appointment
(Exercising due diligence before selecting a person from data bank lie with company/Govt)
§ The manner and procedure of selection of independent directors on the databank who
fulfill the qualifications and other requirements shall be specified by the SECP.
[i.e. “Companies (Manner and Selection of Independent Directors) Regulations, 2018”]
Above Requirements may be relaxed by SECP on an application made by company supported
with the sufficient justification or the practical difficulty, as the case may be.

Companies (Manner and Selection of Independent Directors) Regulations, 2018

Eligibility criteria for person desirous of inclusion in databank of independent directors

§ A person who:
- Either holds at least a graduate degree from a university recognized and approved by
HEC or is a member of a professional body; and
- Has at least 5 years of relevant experience in one or more of the fields of finance, law,
management, sales, marketing, administration, research, corporate governance,
technical operations or other disciplines relevant to the company’s business; or
§ Has at least 15 years of relevant work experience in the above mentioned fields; and
§ Person is willing to act as an independent director
§ Can confirm that on appointment, would devote reasonable time to affairs of company in
order to enable him/her to discharge his/her stewardship responsibilities as given under
applicable law, corporate governance directives and if applicable, licensing requirements.

The expression, “professional body” means:

§ Established in Pakistan, governed under a special enactment of the Federal Government as a
self-regulatory organization managed by a representative National Council, and has a
prescribed minimum criterion of examination and entitlement of membership of such body; or
§ Established outside Pakistan and established under a special enactment in the country of its
origin and which is a member of the international body relevant for such field.
Ch # 3. Directors Page 33

Directors’ Training Program

Independent director, after being appointed/ elected on board, shall complete Director’s
Training Program or avail exemption from SECP as per requirements of Listed Companies
(Code of Corporate Governance) Regulations, 2017 within 12 months of appointment etc.

Maintenance of data bank by the Institute

§ Place the information on process of registration in databank, eligibility criteria, fees and
documents and other relevant details on its website
§ Ensure that information shall be in format easily accessible & downloadable by applicants.
§ May determine necessary measures, conditions and procedure for including and retaining
details of individuals in the databank.
§ May fix a fee, with approval of SECP, to be paid by individuals for their names in databank.

Every person whose name is included in databank shall be responsible for the accuracy, adequacy
and completeness of the information and particulars provided by him/her to the institute
Responsibility of company and disclaimer by the Institute

§ Company shall be responsible for exercising its own due diligence before selecting an
individual form the databank for appointment as independent director.
§ Company shall require such individual to submit an undertaking on a non-judicial stamp
paper that he/she meets the requirements of this regulation with supporting information.

The institute shall conspicuously display the following disclaimers on its website:

“It is responsibility of every person appointing independent director, to exercise due diligence in
terms of requirements of Act or applicable laws for purpose of selecting a person from data bank;
Inclusion in databank does not guarantee selection as an independent director; institute shall
neither guarantee nor make any representation regarding the accuracy and or reliability of the
information about any person whose name has been included in the databank; and
Institute shall not be responsible for any contravention of any law committed by any company or
its directors by the reason of the fact that person appointed by company as an independent
director was selected from the databank nor it will be a defence in any court of law.”
Ch # 3. Directors Page 34

REMOVAL OF DIRECTORS

Directors can be removed

§ By Members (through resolution)
§ By operation of Law (vacation of office)

Removal of directors by members

Members may remove directors through resolution in their meeting

However, the resolution shall not be considered as passed, if the number of votes casted
against resolution (i.e. in favor of director) is equal to or exceeds:

§ In case of Elected Directors:

Minimum No of votes casted at immediately preceding election of directors.

§ First / Casual Directors:

Total votes available [i.e. No of directors for the term x No of shares] divided by the No of
directors for the time being.

Vacation of office by directors

§ He or any firm (of which he is a partner) or any private company (of which he is a director)
- Without sanction of general meeting accepts or holds any office of profit under
company other than chief executive or a legal or a technical adviser; or
- Accepts a loan or guarantee from Company in contravention of the Act
§ Absents himself (without leave of absence from the directors) for 3 consecutive meetings
of BOD
§ Becomes ineligible under Companies Act 2017
[Any additional grounds may be specified in AOA for this]
Ch # 3. Directors Page 35

POWER, DUTIES AND P ROCEEDINGS OF DIRECTORS

Powers of Directors

Directors may exercise all such powers as are not by Act/AOA/special resolution, required to
be exercised by members.

They shall exercise following powers by resolution in BOD meeting

§ Issue shares, debentures or other redeemable capital
§ Borrow moneys other than debentures or Invest company’s funds
§ Make loans (Resolution not required if it’s a banking company)
§ Incur capital expenditure on any single item or undertake leasing obligations exceeding Rs
1 Million
§ Sell or dispose of assets having book value exceeding Rs. 100,000
§ To takeover a company or acquire a controlling stake in another
§ Approve annual or periodical accounts
§ Approve bonus to employees
§ Declare interim dividend
§ Authorise a director or firm (of which he is a partner) or a private company (of which he is
a director) to transact with company
§ If amount is material as per accounting principles.
- to write off bad debts
- to write of inventories and other assets
- to determine and circumstances for compromise in a law suit or reduction/extinction of
claim in favor of company
§ Any other specified matter

Directors shall not except with consent of general meeting (either specifically or by way of
an authorization), do any of following things
§ Sell, lease or otherwise dispose of undertaking or any sizable part (i.e. 25% or more assets
in that class as per audited accounts of last financial year) unless it is company's business.
§ Sell or otherwise dispose of the subsidiary of company
§ Remit; give relief or extension of time for loans or advances provided under the provisions
of Act (loan to directors)

Note: A listed company is not entitled to sell or otherwise dispose of undertaking resulting in
closure of business operation or winding up, without there being a viable alternate business
plan approved by BOD

Authorization by the members for exercise of such powers may be either specific or general. Any
such resolution, if not implemented within 1 year from date of passing, shall stand lapsed.
Ch # 3. Directors Page 36

Duties of directors [Section 204]

§ Act in accordance with AOA.

§ Act in good faith in order to promote the objects for the benefit of members as a whole, and
in best interests of company, employees, shareholders, community and for protection of
environment
§ Discharge his duties with due and reasonable care, skill and diligence and shall exercise
independent judgment.
§ Shall not involve in a situation in which he may have a direct or indirect interest that
conflicts with the interest of company.
§ Shall not attempt to achieve any undue gain or advantage either to himself or to his
relatives, partners, or associates
(if so, he shall be liable to pay that gain to the company)
§ Shall not assign his office (such assignment shall be void).

SECP may provide for the extent of duties and the role of directors as may be specified. Any
breach of duty, default or negligence by a director in contravention of articles or any of its policy
or decision of board may be ratified by company through a special resolution and SECP may
impose any restriction as may be specified.

Compliance with the code of corporate governance

§ SECP may provide a framework for good corporate governance practices, compliance and
connected matters for companies or class of companies in a manner as may be specified.
§ It would be the duty of directors to act in line with good corporate governance practices

Liabilities of Directors

Any provision in AOA/Contract with Co shall be void that is exempting any Officer or auditor,
from, or indemnifying him against, any liability that would otherwise attach to him in respect
of any negligence, default, breach of duty or breach of trust of which he may be guilty in
relation to the company
Exemption:
Company may indemnify any such person against any liability incurred by him in defending
any proceedings (civil or criminal), in which judgment is given in his favor or he is not guilty.

Protection to independent and non-executive directors

For listed company and public sector company, an independent director and a non-executive
director shall be held liable, only for such acts or omission which had occurred with his
knowledge, attributable through board processes, and with his consent or involvement or
where he had not acted diligently.
Ch # 3. Directors Page 37

Non-executive director
In context of this section, means a person on the board of the company who:
§ Is not from among the executive management team and may or may not be independent;
§ Is expected to lend an outside viewpoint to the board of a company;
§ Does not undertake to devote his whole working time to the company and is not involved
in managing the affairs of the company;
§ Is not a beneficial owner of company or any of its associated companies or undertakings;
§ Does not draw any remuneration from the company except the meeting fee.

Proceedings of the BOD

§ Quorum of Listed Co: Higher of 4 or 1/3rd.

Participation of directors by video conferencing or other audio visual means shall also be
counted for the purposes of quorum

§ Quorum for others shall be as provided in AOA.

If there are not enough directors to form a quorum to fill a casual vacancy, all remaining
directors shall be deemed to constitute a quorum

Directors of Public Co shall meet at least once in each quarter of year.

Passing of resolution by the directors through circulation

§ A resolution in writing approved by majority of directors/committee shall be as valid and

effectual as if it had been passed at a meeting of them duly convened and held.
§ Before passing, the resolution should be circulated with necessary papers to all directors.
§ Resolution shall be noted at subsequent meeting and made part of the minutes of meeting.
§ Directors’ agreement to such a resolution, once approved, may not be revoked

Records of resolutions and meetings of board

§ Every company shall keep records (in properly maintained books) comprising:
- All resolutions of the board passed by circulation; and
- Minutes of all proceedings of board meetings or committee meetings along with the
names of participants.
§ Minutes authenticated by chairman of the meeting or next meeting, shall be the evidence of
the proceedings at the meeting.
§ A copy of draft minutes shall be furnished to every director within 14 days of the meeting.
§ Minutes must be kept at registered office simultaneously in physical and electronic form
§ Shall be preserved for at least 10 years in physical form and permanently in electronic form
Ch # 3. Directors Page 38

RESTRICTIONS, PROHIBITIONS AND LIMITATIONS

Restriction on directors remuneration, etc.

For performing extra services (including holding office of chairman)

Determined by directors / General meeting in accordance with AOA

For attending meetings,

Shall not exceed scale approved by Directors/Company in general meeting accordance with
AOA

Assignment of office and alternate directors

§ Any director shall not assign his office to any other person
§ Such appointment shall be void ab-initio.
§ Alternate director may be appointed under following situation
- With the approval of board
- During his absence from Pakistan of not less than 90 days
- He shall vacate office when appointing director returns Pak.

Restriction on transactions involving directors

Non-cash transactions

Unless prior approval is accorded by a resolution of general meeting of company or its holding
company, no company shall enter into an arrangement by which
§ A director of company/holding/subsidiary/associated or a person connected with him
acquires or is to acquire assets for consideration other than cash, from the company; or
§ Company acquires or is to acquire assets for consideration other than cash, from such
director or person so connected;

Notice for resolution shall include particulars of arrangement along with value of assets
involved duly calculated by a registered valuer.

Cash transaction

The company shall ensure that all cash transactions with its directors are conducted only
through banking channels.
Ch # 3. Directors Page 39

Loans to directors, etc.

Company is not allowed, without approval of members through resolution to provide any of
these financial facilities to:
§ A director of the company or holding company or any of their relatives (spouse and minor
children);
§ Provide guarantee or security in connection with a loan made by any person to such a
director; or to any of his relatives;

For Listed companies, approval of SECP is also required

Exception
This restriction does not apply to a company which in ordinary course of its business provides
loans or gives such guarantees or securities

Other Prohibitions

Prohibition regarding political contributions

A company is not allowed to contribute any amount:

§ to any political party; or
§ for any political purpose to any individual or body.

Prohibition regarding distribution of gifts

A company is also not allowed to distribute gifts in any form to its members in its meeting.