Ch3 Directors - Sheet1

Question 1

Definition: Director [Section 2(25)]

Answer 1

“Director” includes any person occupying the position of a director, by whatever name called.
* The definition above focuses on function and position and not on specific designation
* The word ‘director’ in a job title does not necessarily mean that a person is legally a director.
* Appointed by members to manage affairs of the company

Question 2

Director to be Natural person [Section 154]

Answer 2

• Only natural persons shall be directors of a company.
• A company or body corporate (even if it is subscriber to the memorandum) shall not be a director of another company.

Question 3

Director not to be variable representative

Answer 3

• A director cannot claim to be variable representative of the company.
• It means that a director cannot claim relief from his responsibility as a director on the basis that he is not concerned with any particular area of the company’s business.
• When he is a director, he is a director in entirety.

Question 4

Director to be member

Answer 4

• Directors must be member of the company except where law specifically allows the non-members as directors.
• In the board of directors meeting, every director shall have one vote but the same persons while sitting in a general meeting as members may have different voting rights based on the number of shares they hold.

Question 5

Authority of Director

Answer 5

• Directors act collectively or by majority, every decision by the directors is made in a board meeting of the directors or by passing a resolution by circulation and every director has got one vote in decision making.
• It means when appointed as a director, every director is an equal director and there is no difference in their authority.

Question 6

Role of Directors:
* As Agent
* As Fiduciary

Answer 6

• Directors of the company are agents of the company and they act in accordance with articles of the company on behalf of the members.
• They must be vigilant and not be negligent in performance of their duties.

In other words directors have fiduciary relationship with the company.
* They are supposed to make decisions/act in the best interest of the company and its stakeholders.
* A fiduciary relationship is generally established only when the confidence given by one person is accepted by the other person.
* No director can hold office of a director if he is declared as lacking fiduciary behaviour by the court.

Question 7

Consent to act as director [ Section 167]

Answer 7

No person shall be appointed or nominated as a director or chief executive unless such person has given his consent in writing to the company for such appointment or nomination.

The company shall file such consent with the registrar within 15 days of appointment or nomination.

Question 8

Number of directorships [Section 155]

Answer 8

No person shall hold office as a director, including as an alternate director at the same time in more than such number of companies as may be specified

_Exception:_ However, this limit shall not include the directorships in a listed subsidiary.

Question 9

Minimum number of directors [Section 154]
(similar to minimum number of members)

Answer 9

A company may require a larger number of directors by its articles.

Single member company One
Other private company Two
Public unlisted company Three
Public listed company Seven

Note: Companies Act 2017 does not specify maximum number of directors. Articles or directors may decide any number of directors

Question 10

Eligibility / ineligibility of certain persons to become director

Answer 10

1. Only a natural person shall be a director
2. Must be a member of the company. However this shall not apply in the case of:
   • a whole-time director who is an employee of the company;(ED)
   • a chief executive (deemed director by law if not already a director being member).(ED)
   • a person representing a member who is not a natural person (Govt / Body Corporate); (NED)
   • a person representing a creditor or other special interests through contractual arrangements; (NED)
3. The company may by its articles fix any conditions to become the director of the company including
   • holding a specific number of shares as a minimum (qualification shares) or
   • specific educational requirements.

Criteria to be met at the time of appointment and as well as during tenure of directorship

Question 11

Ineligibility [Section 153]

Answer 11

Note: (following can be share holder but not director)

No person shall be appointed as a director of a company if he:

• is a not a natural person (body corporate / company)
• does not meet criteria specified by articles
  a) is a minor;
  b) is of unsound mind;
  c) has applied to be adjudicated as an insolvent and his application is pending;
  d) is an undischarged (unsettled) insolvent (imprisonment 2 years or fine or both);
  e) has been convicted by a court of law for an offense involving moral turpitude (conduct that is believed to be contrary to community standards of honesty, good morals, or justice, e.g. murder, kidnapping, etc.);
  f) has been debarred (disqualified) from holding such office under Companies Act (non-payment of declared dividend within 10 days);
  g) is lacking fiduciary behaviour and a declaration to this effect has been made by the Court at any time during the preceding 5 years;
  h) does not hold National Tax Number. The Commission may grant exemption from this requirement;
  i) is not a member. However, this shall not apply in the case of:
  • a whole-time director who is an employee of the company;
  • a chief executive; or
  • a person representing a member who is not a natural person;
  • a person representing a creditor or other special interests through contractual arrangements.

Further for listed companies only, a person shall not be appointed as a director if he:
a) has been declared by a court as defaulter in repayment of loan to a financial institution (even if defaulted, not bankrupt);
b) is engaged in the business of brokerage or is a spouse of such person or is a sponsor, director or officer of a corporate brokerage house.

Criteria to be met at the time of appointment and as well as during tenure of directorship

Question 12

Ineligibility of bankrupt [Section 177] & Penalty

Answer 12

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 two years or to a fine, or to both.

Question 13

Term of directors [Section 157, 158 & 161]

Answer 13

(First Director) At incorporation: The names and number of first directors shall be decided by the subscribers of memorandum (not members), and their specified particulars shall be submitted along with the documents for incorporation.

Additional directors: Number of first directors may be increased (by members) by appointing additional directors in general meeting.

Retirement of first directors: The first directors shall hold office until the election of directors in the first annual general meeting of the company.

Term of office of subsequent directors: An elected director shall hold office for a period of three years unless he earlier resigns or otherwise ceases to hold office.
However, the term of office of directors of a company limited by guarantee and not having share capital may be a period of less than three years as provided in the articles.
The retiring directors shall continue to perform their functions until their successors are elected.

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.

Question 14

Procedure for election of subsequent directors

[Section 159]

Answer 14

(For Subsequent Directors Only: Not Nominee, First or Casual Vacancy)
(For Companies having Share Capital Only: In case of a company limited by guarantee and not having share capital, the procedure for election of directors shall be mentioned in its articles.)

Fixing the number of directors: The existing directors of a company shall fix the number of directors to be elected in the general meeting, not later than 35 days before convening of such meeting. Such number once fixed (in board meeting) shall not be changed except with the prior approval of the general meeting in which election is to be held.

Notice of Meeting: The notice of the meeting shall expressly state, among other matters, the number of directors to be elected (fixed as above) and the names of retiring directors. (not later than 21 days before the meeting)

Notice of contesting the election: Any member (including retiring director) who seeks to contest the election of directors shall file the notice of his intention to the company, at least 14 days before the date of meeting at which election is to be held. However, any such person may withdraw such notice at any time before the election.

List of Candidates to be transmitted to members: The company shall transmit such notices (of intention to contest the election of directors) to the members not later than 7 days before the date of the meeting, in the same manner as a notice of general meeting is given to the shareholders.
In case of a listed company, it shall also be published in at least one issue of a daily newspaper in English and Urdu language having wide circulation.

Elected unopposed (Contesters<= Number) : If the number of persons offering themselves to be elected as director is not more than the number of directors fixed for election by the directors, the directors shall stand elected unopposed.

(Voting by Poll: In case of Directors not by Show of Hand)
(if Contesters>Number)
Number of votes
During a poll for election of directors every member is entitled to cast the number of votes equal to the product of number of voting shares or securities held and the number of directors to be elected.
A member can give all his votes to any one candidate or he may divide them between more than one candidate as he deems appropriate.

Result of polling
The candidate getting the highest number of votes shall be declared elected as a director then the candidate who gets the next highest number of votes shall be so declared and so on until the total number of directors to be elected has been so elected.

All directors are equal
After election as a director, every director shall have equal authority and they shall not be superior or inferior on the basis of number of votes they got in election or on any other grounds.

Question 15

Nominee directors [Section 164 & 165]

Answer 15

Nominated by creditors
In addition to directors elected, a company may have directors nominated by the company’s creditors or other special interests by virtue of contractual arrangements.

Nominated by Government or body corporate
The directors may be nominated by a body corporate or a company or Federal Government or Provincial Government if they have made investment in the company.
Such person shall be considered to be an elected director termed as ‘deemed to have been elected director’ and shall be considered for the calculation of minimum number of directors required for any company.
Such nominated director shall hold office during the pleasure of the nominating body.
The number of votes as are proportionate to the number of votes required to elect the director if they had offered themselves for election, shall stand excluded from the total number of votes available to the nominating body at an election of director.

Question 16

Fresh election of directors: Criteria, Time Limit & Procedure
[Section 162]

Answer 16

Criteria
Where a person acquires the requisite shareholding to get him elected as a director on the board of a company, he may require the company to hold fresh election.
However, the number of directors fixed in the preceding election shall not be decreased.

Time limit and procedure
The board shall, upon receipt of such requisition, as soon as practicable but not later than 30 days, proceed to hold fresh election of directors of the company.
A listed company for the purpose of fresh election of directors shall follow such procedure as may be specified by the Commission.

Question 17

Powers of the court to declare election invalid [Section 160]

Answer 17

Appeal criteria
Members holding at least 10% of the voting power in the company may apply to the court to declare the election of all directors or any one or more of them invalid.
Time limit
Such appeal may be made within 30 days of the date of election.
Decision of court
The court shall declare the elections invalid if it is satisfied that there has been material irregularity in the holding of the elections and incidental or relating matters.

Question 18

Validity of acts of directors [Section 168]

Answer 18

Validity of acts already done
The acts of a person acting as a director are valid even if it is afterwards discovered that there was a defect in his appointment; or he was disqualified from holding office; or he had ceased to hold such office.
When defect is noticed
However, as soon as any such defect has come to notice, the director shall not exercise the right of his office till the defect has been removed.

Question 19

Casual vacancy [Section 161 & 155]

Answer 19

Term of office
Any casual vacancy occurring among the directors may be filled up by the directors and the person so appointed shall hold office for the remainder of the term of the director in whose place he is appointed.

Appointment not necessary
If the number of directors of the company is equal or above the minimum number of directors required for that company, even after the casual vacancy, such directors may not fill in the casual vacancy and complete the term without filling such vacancy.

Time limit (listed company)
Any casual vacancy on the board of a listed company shall be filled up by the directors at the earliest but not later than 90 days from the date of vacancy. There is no time limit specified in Companies Act for other companies.

Question 20

Vacation of office [Section 171]

Answer 20

A director shall be treated to have vacated the office of director if:
* he becomes ineligible to be appointed as director;
* he absents himself from three consecutive meetings of the board without seeking leave of absence;
* he, his partnership firm in which he is a partner or any private company in which he is a director, accepts
any loan or guarantee from the company in contravention of Companies Act; or
* accepts any office of profit (other than that of chief executive or a legal or technical adviser) without
sanction of the company in a general meeting.
A company may include additional grounds for vacation of office in its articles.

Question 21

Removal of directors [Section 163]

Answer 21

A director may be removed from the office by the members of the company by passing a resolution. The director
shall not be considered to have been removed if votes against removal equal or exceed as follows:

Elected director: Not removed if votes against removal equal to or exceed Minimum number of votes which were enough to qualify a person as a
director in the last election of directors.

Elected unopposed
First directors
Casual vacancy: Not removed if votes against removal equal to or exceed Average votes i.e.
= 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑡𝑒𝑟𝑚 × 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑣𝑜𝑡𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠 / 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑡𝑖𝑚𝑒 𝑏𝑒𝑖𝑛𝑔

Question 22

Powers of board [Section 183]

Answer 22

The business of a company shall be managed by the board, who may exercise all such powers of the company as
are not by Companies Act, or by the articles, or by a special resolution, required to be exercised by the company
in general meeting.

Question 23

Power to be exercised by passing a board resolution

Answer 23

The board shall exercise the following powers by ‘passing a resolution’ in board meetings:
* to issue shares, debentures or other redeemable capital or to otherwise borrow money or invest the
funds of the company;
* to make loans. This restriction of passing a board resolution does not apply to banking company
advancing loans in ordinary course of its business;
* to approve annual and periodical accounts and to approve bonus for employees;
* to incur capital expenditure on any single item or dispose of a fixed asset in accordance with the limit as
may be specified;
* to undertake obligations under leasing contracts exceeding such amount as may be notified;
* to declare interim dividend;
* to authorize the following to enter into any contract with the company for making sale, purchase or
supply of goods or rendering services with the company:
* a director;
* the firm of which a director is a partner or any partner of such firm; or
* a private company of which such director is a member or director;
* if the amount is material as per Generally Accepted Accounting Principles:
* to write off bad debts, advances and receivables;
* to write off inventories and other assets; and
* to determine the terms of and the circumstances in which a law suit may be compromised and a claim
or right in favour of a company may be released, extinguished or relinquished.
* to take over a company or acquiring a controlling or substantial stake in another company;
* any other specified matter.

Question 24

Authorisation of general meeting

Answer 24

The board of a company shall not except with the consent of the general meeting either specifically or by way of
an authorisation, do any of the following things, namely:
* sell, lease or otherwise dispose of the undertakings or a sizeable part thereof unless the main business
of the company comprises of such selling or leasing; and
* sell or otherwise dispose of the subsidiary of the company;
* remit, give any relief or give extension of time for the repayment of any debt outstanding against any
director of the company or of its holding company; or to any of this relatives.
A listed company is not entitled to sell or otherwise dispose of the undertaking, which results in or may lead to
closure of business operation or winding up of the company, without there being a viable alternate business plan
duly authenticated by the board.
Any resolution passed (authorisation of general meeting) if not implemented within one year from the date of
passing shall stand lapsed.

Question 25

Duties of directors [Section 204]

Answer 25

The Companies Act mentions following duties of directors:
* a director of a company shall act in accordance with the articles of the company.
* a director of a company shall act in good faith in order to promote the objects of the company for the
benefit of its members as a whole, and in the best interests of the company, its employees, the
shareholders, the community and for the protection of environment.
* a director of a company shall discharge his duties with due and reasonable care, skill and diligence and
shall exercise independent judgment.
* a director of a company shall not involve in a situation in which he may have a direct or indirect interest
that conflicts, or possibly may conflict, with the interest of the company.
* a director of a company shall not achieve or attempt to achieve any undue gain or advantage either to
himself or to his relatives, partners, or associates and if such director is found guilty of making any undue
gain, he shall be liable to pay an amount equal to that gain to the company.
* a director of a company shall not assign his office and any assignment so made shall be void.
* In addition to above, the Commission may provide for the extent of duties and the role of directors as
may be specified.

Breach and ratification
Any breach of duty, default or negligence by a director in contravention of the articles of the company or any of
its policy or decision of the board may be ratified by the company through a special resolution and the
Commission may impose any restriction as may be specified.

Question 26

Compliance with the code of corporate governance [Section 156]

Answer 26

Power of Commission
The Commission may provide for framework to ensure good corporate governance practices, compliance and
matters incidental and auxiliary for companies or class of companies in a manner as may be specified.
Duty of directors
The above would require duty of directors to act in line with good corporate governance practices.

Question 27

Liabilities of directors and officers [Section 180]

Answer 27

Restriction on indemnification
Any provision, whether contained in the articles of a company or in any contract with a company or otherwise,
for exempting any officer or auditor of the company, from, or indemnifying him against, any liability which by
virtue of any law 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, shall be void except as specified below.

Exception
However, a company is not prohibited from indemnifying any of its director, chief executive or officer against
any liability incurred by any of them in defending any proceedings against him, in which judgement is given by
the court in his favour or in which any of them is acquitted; irrespective of the fact that whether the proceedings
against any of them were in respect of any civil or criminal nature.

Question 28

Non-executive director [Section 181]

Answer 28

A non-executive director 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 the company or any of its associated companies or undertakings;
* does not draw any remuneration from the company except the meeting fee.

Question 29

Independent director [Section 166]
Definition

Answer 29

An independent director means a director who is not connected or does not have any other relationship, whether
pecuniary or otherwise, with the company, its associated companies, subsidiaries, holding company or directors;
and he can be reasonably perceived as being able to exercise independent business judgment without being
subservient to any form of conflict of interest. In essence, an executive director can never be an independent
director.

Question 30

Independent director [Section 166]
Criteria

Answer 30

Without affecting the generality of the above definition, no director shall be considered independent if one or
more of the following circumstances exist:
a) he has been an employee of the company, any of its subsidiaries or holding company within the last 3
years (last 2 years in respect of public sector companies);
b) he is or has been the chief executive officer of subsidiaries, associated company, associated undertaking
or holding company in the last 3 years (last 2 years in respect of public sector companies);
c) he has, or has had within the last 3 years (last 2 years in respect of public sector companies), a material
business relationship with the company either directly, or indirectly as a partner, major shareholder or
director of a body that has such a relationship with the company. Explanation: The major shareholder
means a person who, individually or in concert with his family or as part of a group, holds 10% or more
shares having voting rights in the paid-up capital of the company;
d) he has received remuneration in the 3 years preceding his/her appointment as a director or receives
additional remuneration, excluding retirement benefits from the company apart from a director‘s fee or
has participated in the company‘s stock option or a performance-related pay scheme;
e) he is a close relative of the company‘s promoters, directors or major shareholders. Explanation: “close
relative” means spouse(s), lineal ascendants and descendants and siblings;
f) he holds cross-directorships or has significant links with other directors through involvement in other
companies or bodies not being the associations licenced as not for profit;
g) he has served on the board for more than 3 consecutive terms (2 consecutive terms in case of public
sector company) from the date of his first appointment. However, such person shall be deemed
“independent director” after a lapse of one term;
h) a person nominated as a director by creditors, Government or body corporate.
Further, an independent director in case of a public sector company shall not be in the service of Pakistan or of
any statutory body or any body or institution owned or controlled by the Government.

Question 31

Manner of selection of independent director and maintenance of data bank

Answer 31

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, maintained by any institute, body or association (the institute), as may be notified by the Commission, having expertise in creation and maintenance of such data bank and post on their website for the use by the company making the appointment of such directors.

However, responsibility of exercising due diligence before selecting a person from the data bank referred to above, as an independent director shall lie with the company or the Government, as the case may be, making such appointment.

Question 32

Independent Director: Election process and consent

Answer 32

The independent director of a listed company shall be elected in the same manner as other directors are elected
and the statement of material facts annexed to the notice of the general meeting called for the purpose shall
indicate the justification for choosing the appointee for appointment as independent director.
No individual shall be selected for the data bank of independent directors without his consent in writing.

Question 33

Independent Director: Relaxation in requirements

Answer 33

The above requirements may be relaxed by the Commission on an application made by the company supported
with the sufficient justification or the practical difficulty, as the case may be.

Question 34

Proceedings of the board [Section 176]

Answer 34

Quorum of listed company The quorum for a meeting of directors of a listed company shall not be less than one-third of their number or four, whichever is greater and the participation of the directors by video conferencing or by other audio-visual means shall also be counted for the purposes of quorum. Quorum for other than listed company shall be as provided in the articles.

Question 35

Passing of resolution through circulation [Section 179]

Answer 35

Validity
A resolution in writing approved by majority of the directors/committee of directors for the time being entitled
to receive notice of a meeting shall be as valid and effectual as if it had been passed at a meeting of
directors/committee of directors duly convened and held.
Manner of circulation
Before passing it, the resolution should be circulated with necessary papers to all directors. Such resolution shall
be noted at a subsequent meeting of board/committee of directors and made part of the minutes of such meeting.
Revocation not allowed
A directors’ agreement to a written resolution, passed by circulation, once approved, may not be revoked.

Question 36

Records of resolutions and meetings of board [Section 178]

Answer 36

Record to be kept
Every company shall keep records comprising:
* all resolutions of the board passed by circulation; and
* minutes of all proceedings of board meetings or committee of directors along with the names of
participants, to be entered in properly maintained books.
Authentication
Minutes recorded as above if purporting to be authenticated by the chairman of the meeting or by the chairman
of the next meeting, shall be the evidence of the proceedings at the meeting.
Copy to directors
A copy of the draft minutes of meeting of board shall be furnished to every director within 14 days of the date of
meeting.
Place for keeping record and time duration
The records must be kept at the registered office of the company from the date of the resolution, meeting or
decision simultaneously in physical and electronic form and it shall be preserved for at least ten years in physical
form and permanently in electronic form.

Question 37

Restrictions on director’s remuneration [Section 170]

Answer 37

Remuneration for attending meetings
The remuneration to be paid to any director for attending the meetings of the directors or a committee of
directors shall not exceed the scale approved by the company or the board of directors, as the case may be, in
accordance with the provisions of the articles.
Remuneration for extra services
The remuneration of a director for performing extra services, including the holding of the office of chairman, is
determined by the board of directors or the company in general meeting in accordance with the provisions in
the company’s articles.

Question 38

Prohibition on assignment of office by directors [Section 174]

Answer 38

Prohibition on assignment of office
A director of any company shall not assign his office to any other person and any such appointment shall be void
ab-initio.
Appointment of alternate director is allowed
The appointment by a director, of an alternate or substitute director to act for him during his absence from
Pakistan of not less than 90 days, will not be deemed to be an assignment of office. Such appointment must be
with approval of the board.
The alternate director so appointed vacates office when the director appointing him returns to Pakistan.

Question 39

Restriction on transactions involving directors [Section 211]

Answer 39

Cash transactions
The company shall ensure that all cash transactions with its directors are conducted only through banking
channels.
Non-cash transactions
Unless prior approval is accorded by a resolution of general meeting of company (and if the director or connected
person is a director of its holding company, approval is also required to be obtained by passing a resolution in
general meeting of the holding company) no company shall enter into an arrangement by which:
* A director of company or its holding/subsidiary/associated company 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 approval of resolution shall include the particulars of arrangement along with the value of the assets
involved in such arrangement duly calculated by a registered valuer.

Question 40

Loan to directors [Section 182]

Answer 40

Restriction
The company is not allowed, unless the transaction has been approved by members through resolution, to:
* make a loan to a director of the company or of its holding company or any of his relatives (spouse
and minor children); or
* give a guarantee or security in connection with a loan made by any person to such a director; or to
any of his relatives.
Additional requirement for listed company
Additionally, approval of the Commission is also required in case of a listed company, for such loans.
Exception
The above restrictions do not apply to a company which in the ordinary course of its business provides loans or
gives guarantees or securities for the due repayment of any loan.

Question 41

Prohibition regarding making of political contribution [Section 184]

Answer 41

A company shall not contribute any amount or allow utilisation of its assets: * to any political party; or * for any political purpose to any individual or body.

Question 42

Prohibition regarding distribution of gifts [Section 185]

Answer 42

A company is prohibited to distribute gifts in any form to its members in its meeting.