Dispute Resolution under the Companies Act, 2017

By Asad Ladha | Partner, Islamabad

The Companies Act, 2017 (“the 2017 Act”), which came into force on 30 May 2017, has introduced a plethora of amendments to the now repealed Companies Ordinance, 1984 (“the 1984 Ordinance”). This briefing focuses on the amendments relating to dispute resolution and discusses the impact on potential litigants under the new regime.

Jurisdictional Amendments

Section 5 of the 2017 Act has clarified that jurisdiction in matters under the 2017 Act rests with the High Court having jurisdiction in the place where the registered office of the company is situated. In particular, Section 5(2) of the 2017 Act expressly excludes the jurisdiction of civil courts and all other courts to entertain any suits or proceedings in respect of any matter that the High Court is empowered to determine by or under the 2017 Act.

Previously, under the 1984 Ordinance, the Federal Government was authorised to empower any civil court to exercise all or any jurisdiction that was conferred upon the High Court. The 1984 Ordinance also provided that proceedings would not be invalidated if they were taken in a court other than the High Court or any other court so empowered by the Federal Government. Conflicting superior court judgments in relation to the matters that fell under the jurisdictions of the civil court and the High Court fuelled the confusion as to the applicability of the law.

Section 5 of the 2017 Act, by excluding the jurisdiction of all other courts, removes the confusion about choice of forum, provides certainty for litigants, and prevents scattered litigation.

Stipulated Time Limits

Section 6 of the 2017 Act stipulates strict time limits for the filing of pleadings. For example, a respondent is required to file a written reply and particulars of set-off (if any) within 30 days of first being served with a petition or application. However, it may be noted that such timelines are also stated in other statutes but are seldom enforced.

Case Management

Section 6 of the 2017 Act further demonstrates an intention on the part of the legislature to encourage and ensure the timely hearing and conclusion of cases and penalise delays. Further, the High Court is required to decide matters in a summary manner and pass final orders on the basis of the documents and affidavits placed before the court by the parties. Section 6(11) of the 2017 Act requires that a petition presented before the court shall be decided within a period of 120 days from the presentation of the case.

Section 6(2) of the 2017 Act empowers the court to take notice of, and take serious action against, any misstatement and/or material non-disclosure of facts by any party to the proceedings, which includes dismissing the petition/application, closing the right of defence of the respondent and imposing costs and/or a fine. The court may also proceed to pass a final order.

Appeals from the High Court’s Orders and Judgements

Section 6(14) of the 2017 Act states that any challenge to a judgment or final order of the Court is to be by way of a petition for leave to appeal to the Supreme Court of Pakistan within 60 days of the passing of the judgment or order under challenge. Previously, under Section 10 of the 1984 Ordinance, whether an appeal or a petition for leave to appeal against an Order of the High Court lay before the Supreme Court was a question to be determined by the paid-up capital of the company in question.

Whereas under the 1984 Ordinance, orders of the Court (other than final orders) were appealable to the Supreme Court, under Section 6(14) of the 2017 Act, no appeal or petition now lies against any interlocutory order of the High Court.

Appeals from fora other than the High Court

The 2017 Act has simplified the process for appeals against the orders of the officers of the SECP and registrars.

Pursuant to Section 480(a), all orders passed under the 2017 Act by an additional registrar, a joint registrar, an additional joint registrar, a deputy registrar or an assistant registrar or such other officer as may be designated by the SECP are appealable to the registrar within 30 days of any such order. Pursuant to Section 480(b) of the 2017 Act, a further appeal against the decision of the Registrar then lies to an officer authorised by the SECP.

Section 481 of the 2017 Act provides for an alternative second and further third appeal. Instead of approaching the SECP under Section 480(b) of the 2017 Act, a person aggrieved by an order passed by the Registrar may prefer an appeal to the Appellate Bench of the SECP under Section 33 of the SECP Act, 1997. Further, a person aggrieved of the order of an officer authorised by the SECP against the order of the Registrar may prefer a third appeal to the Appellate Bench of the SECP under Section 33 of the SECP Act, 1997.

Lastly, the right to directly appeal original orders, directives or judgments of the Commission before the High Court, which was available under Section 485 of the 1984 Ordinance, has been extinguished by the 2017 Act.

Mediation and Conciliation Panel

Through Sections 276 and 277, the 2017 Act has introduced the concepts of mediation and conciliation for company law disputes. In any proceedings before the SECP or the Appellate Bench, the parties by mutual consent are now able to apply for the matter to be referred to the Mediation and Conciliation Panel (“the Panel”). The Panel will consist of individuals with relevant qualifications relating to mediation. The fees and other terms and conditions of the individuals on the panel are to be specified separately. The Panel is required to dispose of the matter referred to it within a period of 90 days from the date of such reference and forward its recommendations to the SECP or the Appellate Bench, as the case may be.

As an alternative to referring the matter to the Panel after the initiation of legal proceedings, a company, its management or its members or creditors may, by written consent, directly approach the Panel before taking the matter to formal dispute resolution, for the resolution of a dispute, claim or controversy arising between them or between the members or directors inter se.

The introduction of an alternative method of resolving disputes is in theory a welcome addition. It will allow parties to have recourse to a less formal and potentially less antagonistic forum in which to resolve their disputes. It will also allow parties the opportunity to try and amicably settle their differences in private so as to avoid unwanted attention from the media and preserve possibly long standing good will amongst management, members etc. The time frame set for the disposal of the matter within 90 days may also be attractive to parties seeking a timely resolution to their dispute.

However, the legal status and enforceability of the decisions of the Panel is not clearly stated. If referred to after proceedings have been initiated (under Section 276 of the 2017 Act), the Panel simply makes recommendations to the SECP or the Appellate Bench. Whereas the effect of an order or finding by the Panel pursuant to a reference under Section 277 has been left undefined. A number of questions arise in relation to the binding force and enforcement of orders passed under Section 277 of the 2017 Act. Answers to such questions are essential before litigants decide, and lawyers advise, as to whether to pursue mediation as an alternative to formal legal proceedings.

Despite the lack of clarity as stated above, the newly created Panel may suit many companies and individuals who wish to settle their differences in a timely manner without going down the dispute resolution route.

Oppression and/or mismanagement proceedings

The 2017 Act has reduced the threshold requirement for the shareholders and creditors of a company to initiate proceedings in relation to oppression and mismanagement.

Pursuant to Section 290 of the 1984 Ordinance, members holding not less than 20% of the issued share capital or creditors having an interest equivalent in amount to not less than 20% of the paid up capital of the company, could make an application to the Court for an Order under the said section in the event that they were of the view that the affairs of the company are being conducted, or are likely to be conducted, in an unlawful or fraudulent manner, or in a manner not provided for in its memorandum, or in a manner oppressive to any members or creditors or are being conducted in a manner that is unfairly prejudicial to the public interest.

Section 286 of the 2017 Act now permits members holding not less than 10% of the issued share capital and creditors having an interest equivalent in amount to not less than 10% of the paid-up capital of the company, to make an application to the Court.

The reduction in the threshold requirement empowers and strengthens the role of the minority shareholders and creditors to initiate proceedings in relation to mismanagement and oppression of the company.

Transfer of winding-up proceedings

In light of the grant of exclusive jurisdiction to the High Court pursuant to Section 5(2) of the 2017 Act (discussed above), Section 303 of the 2017 Act now only permits the High Court to transfer winding up proceedings to any other High Court. Previously, under Section 307 of the 1984 Ordinance, in addition to another High Court, proceedings could be transferred to a Civil Court empowered by the Federal Government.

Filing of Defective Documents

The 2017 Act has empowered the Registrar to allow rectification in the documents being filed with the Registrar or the cancellation of such documents. Previously, under the 1984 Ordinance, no express provision existed in relation to cases where the document being filed by a company is, subsequent to its acceptance, found to be defective, incorrect, false, or forged. Sections 464(5) and (6) of the 2017 Act provide that where the document filed with the Registrar is found to be defective, incorrect, false, or forged, the Registrar may for special reasons to be recorded in writing, after obtaining such evidence as he may deem appropriate, allow the rectification in such document or allow the filing of the revised document in lieu thereof. Further, in the event that the defect is not capable of rectification or is false or a forged document was accepted by mistake, the Registrar may for special reasons to be recorded in writing, after obtaining such evidence as he may deem appropriate, cancel the recording thereof.

Conclusion

Reform of company law in Pakistan has been a long time coming and the 2017 Act on the face of it has confronted the challenge head on. Whilst it may take some time for the corporate sector and other stakeholders to get to grips with the changes brought about by the new regime, they should be encouraged by what appears to be a more simplified and streamlined dispute resolution process with the availability of alternative methods of dispute resolution. With the 2017 Act in its infancy, it remains to be seen how the changes will materialise in practice and whether the objectives highlighted in the preamble will achieved.

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The information presented is not legal advice, is not to be acted on as such, may not be current, and is subject to change without notice. For further information, please contact Raja Mohammad Akram & Co.