Chapter 3: Directors

Question 1

Director definition

Answer 1

Any person occupying position of director by whatever name called

Question 2

General characteristics of a director [4]

Answer 2

1. Natural persons only
2. Directors act collectively or by majority
3. 1 Director = 1 vote
4. Director cannot be a variable representative. (no relief from specific areas of business)

Question 3

Directors in fiduciary relationship [3]

Answer 3

1. Directors are agents of the company
2. They are supposed to make decisions in best interest of company
3. They must be vigilant and should not be negligent in their duties

Question 4

Minimum number of directors of a company:
* SMC
* Other private
* Public (unlisted)
* Public (listed)

Answer 4

• SMC = 1
• Other pvt = 2
• Public (unlisted) = 3
• Public (listed) = 7

Question 5

Consent to act as director [2]

Answer 5

1. No person shall be elected or appointed as a director or chief executive if he has not filed his consent in writing
2. Company shall file such consent to registrar within 15 days of the date of appointment or election of director or chief executive

Question 6

Nominee director by creditors [2]

Answer 6

1. Creditors may also nominate directors on the board (if they are empowered to do so by virtue of any agreement)
2. Such directors are in addition to minimum number of directors fixed by Act.

Question 7

Nominee director by Federal Govt., Provincial Govt. or Investor company [3]

Answer 7

1. Fed/Prov/Investor co. can nominate any person to represent them as director in that company.
2. Such person shall be considered to be ‘elected director’ (deemed)
3. Shall be considered for calculation of minimum number

Question 8

First directors [3]

Answer 8

1. Names & number of first directors shall be decided by subscribers
2. Their particulars shall be submitted along with the documents for incorporation.
3. Additional directors may also be appointed in general meeting
4. 1st directors shall retire at first AGM

Question 9

Casual Vacancy of directors [4]

Answer 9

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

Question 10

Assignment of office and alternate directors [3+3]

Answer 10

1. Any director shall** not assign** his office to any other person
2. Such appointment shall be void ab-initio.

Alternate director may be appointed under following situation
i) With the approval of board
ii) During his absence from Pakistan of not less than 90 days
iii) He shall vacate office when appointing director returns Pak.

Question 11

Period of reirement of directors for Co. limited by guarantee [1]

Answer 11

(Company limited by guarantee may reduce the period through AOA)

Normally: 1st (till agm) others (for 3ys)

Question 12

Process of Election of Directors [5]

35, 21,14,7

Answer 12

1. Directors shall, fix No of elected directors(seats) at least 35D before election GM
   [this no. can only be changed after prior approval of members]
2. Notice of meeting at least 21 days before election GM stating: no. of seats, names of retiring directors
3. Person wanting to contest in election should file a notice of his intention at least 14 days before election
4. Notice by contestee:
   - could be withdrawn at any time before election.
   - transmitted to members 7D before meeting
   - for listed: eng+urdu newspaper
5. If no. of person contesting is less than seats fixed, directors shall stand elected unopposed.

Question 13

Circumstances in which election may be declared invalid [3]

Answer 13

Court may, declare election of all directors or any of them invalid if satisfied that there has been material irregularity in procedures:
1. On application of members having at least 10% voting power
2. Within 30 days of the date of election
3. Any act of director/meeting of BOD attended by him wont be invalid

Question 14

Fresh election on request of substantial acquirer [4]

Answer 14

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

Question 15

Independent Director definition [3+6]

Answer 15

i) A director who is not connected or does not have any other relationship (pecuniary or other)
1. with company
2. associates
3. subsidiaries
4. holding
5. directors

ii) he can be reasonably perceived as being able to exercise independent business judgment

iii) without being subservient to any conflict of interest

Question 16

Exceptions of independent director

Answer 16

i) in last 3 years [2 for public sector]
1. employee of company, subsidiary, holding
2. is or has been CEO of subsidiary, associate, holding
3. has or had a material business relationship with company (directly or indirectly)
4. received remuneration as a director (other than retirement benefits)

ii) receives performance related pay, participated in stock options

iii) Holds cross directorships with other directors in other companies (not NFPO u/s42)

iv) has served on board for more than 3 consecutive terms from first appointment [>2 terms for public sector co.]

v) close relative of the company’s promoters, directors or major shareholders

vi) Person nominated as a director or representing special interest

Question 17

Restriction on independent director of a public sector company

Answer 17

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

Question 18

Databank of independent directors [5]

above is relaxed by SECP on application of company with sufficient justification

Answer 18

1. independent director to be appointed shall be selected from a data bank
2. having names, addresses, qualifications of persons willing and eligible
3. it shall be maintained by any institute, body, association, as notified by SECP, having expertise
4. and post on their website
5. manner and procedure of selection of independent directors on databank shall be specified by SECP

it is the company’s responsibility to exercise due dligence before selection

Question 19

Eligibility critera to become part of data bank of the independent directors [4+2]

Answer 19

i) person who:
1. has a graduate degree from HEC recognized uni or is a professional body member; AND
2. at least 5Y relevant experience in finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or others

ii) At least 15Y relevant experience in the above

iii) willing to act as an independent director

iv) can confirm on appointment: would devote reasonable time to affairs of company in order to enable him to discharge his stewardship responsibilities as under law

Question 20

Professional body definition [4+3]

not that important just read it a few times

Answer 20

i) Paki
1. Established in Pakistan
2. governed under a special enactment of the Federal Government as a self-regulatory organization
3. manged by a representative National Council
4. has a prescribed minimum criterion of examination and entitlement of membership of such body

ii) Foreign
1. Established outside Pakistan
2. established under a special enactment in the country of its origin
3. which is a member of the international body relevant for such field

Question 21

After appointment of independent director [5]

Directors’ Training Program

Answer 21

1. after being appointed/ elected on board
2. he shall complete Director’s Training Program
3. or avail exemption from SECP
4. as per requirements of Listed Companies (Code of Corporate Governance) Regulations, 2017
5. within 12M of appointment

Question 22

Duties of the institute that maintains the data bank [4]

Answer 22

1. Place the information regarding the process of registration in data bank, eligibility criteria, fees, and documents and other relevant details on its website
2. Ensure info is in the format i.e easily accessible and downloadable
3. Determine necessary measures, conditions, procedures for including and retaining details of individuals in the data bank
4. fix a fee, with approval of SECP, to be paid by individuals for their names in the data bank

individuals are responsible for accuracy, completeness and adequacy of their own info/particulars

Question 23

Responsibility of company when using data bank [2]

Answer 23

1. Co. shall be responsible for exercising own due diligence before selecting an individual from the data bank
2. Co. shall require such individual to submit an understaking on a non-judicial stamp paper that he meets the requirements of this regulation (with supporting info)

Question 24

Disclaimer by institute regarding the data bank [3]

Answer 24

1. Institute does not guarantee a selection to individuals
2. Institute is not responsible for reliability/accuracy of individuals’ particulars
3. Institute will not be responsible for any contravention of law by the company or the directors

Question 25

Removal of directors by members [2+2]

Answer 25

i) through resolution in their meeting

ii) resolution shall not be passed if, no. of votes against resolution is >= :
1. Elected: minimum no. of votes in last elections
2. First/Casual: Total votes available/no. of directors for the time being

Question 26

Vacation of office by directors [4+2]

Answer 26

1. Becomes ineligible under Companies Act 2017
2. Any additional grounds may be specified in AOA
3. Absents himself (without leave of absence) for 3 consecutive meetings of BOD
4. He/his firm/his pvt co.:
   - accepts loan from co. in contravention of the act
   - without sanction of gm, accepts/holds any office of profit other than CEO, technical adviser

Question 27

General ineligibility of certain persons to become director [9+4]

Answer 27

1. Minor
2. Unsound
3. applied insolvency/pending insolvency
4. undischarged insolvent
5. convicted by court of law involving moral turpitude
6. debarred under any provision of this act
7. in preceding 5Y, betrayed lack of fiduciary behaviour
8. does not hold an NTN
9. Not a member except one:
   - nominee
   - ceo (deemed director)
   - employee
   - representing non-natural person

Question 28

Additional Ineligibilities only for Listed Co [2]

Answer 28

• defaulter in repayment of loan to fin. inst. declared by court
• engaged in business of brokerage (spouse of director/officer of such brokerage)

Question 29

Powers of Directors [11+3]

Answer 29

They shall exercise following powers by resolution in BOD meeting:
1. Issue shares, debentures or other redeemable capital
2. Borrow moneys other than debentures or Invest company’s funds
3. Make loans (Resolution not required if it’s a banking company)
4. capital expenditure > Rs.1million
5. Selling asset with nbv > Rs.100,000
6. takeover a company or acquire a controlling stake
7. Approve annual or periodical accounts
8. Approve bonus to employees
9. Declare interim dividend
10. Authorize a director or firm or pvt co. to transact with company
11. If material ammounts:
- write off bad debts
- write off inventories/others
- increase provision for litigation claims

Directors may exercise all such powers not to be exercised by members

Question 30

Directors shall not, except with consent of general meeting, do the following [3]

Answer 30

1. 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.
2. Sell or otherwise dispose of the subsidiary of company
3. Remit; give relief or extension of time for loans or advances provided under the provisions of Act (loan to directors)

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.

Question 31

Duties of directors [6]

Answer 31

1. act in accordance with AOA
2. act in good faith to promote the objects for benefits of members as a whole, and in best interests of company and its stakeholders
3. Discharge duties with reasonable and due care, skill and diligence and exercise independent judgement.
4. not be involved in a situation where he has a direct/indirect interest against interest of company (conflict)
5. not attempt to achieve any undue gain/advantage to himself or his relatives/partners/associates
6. Shall not assign his office

Question 32

Meeting proceedings of BOD [5]

quorum and other info

Answer 32

1. Listed = Higher of 4 or 1/3rd
2. Others = as provided in AOA
3. Video conferencing = counted for quorum
4. Public co. directors shall at least meet once every quarter
5. If not enough to form a quorum to fill casual vacancy, all remaining directors shall be deemed to constitute a quorum

Question 33

Liabilities of Directors [4]

Answer 33

1. Any provision in AOA or contract with the company shall be void
2. if it is exempting any officer or auditor from/indemnifying against
3. any liability that would attach him in respect of any negligence, default, breach of trust
4. of which he may be guilty

ex: may indemnify him in defending proceedings with judgement in favor

Question 34

Protection to independent and non-executive directors [4]

Answer 34

1. an independent director and a non-executive director shall be held liable
2. only for such acts/omissions occured with
3. his knowledge, consent, involvement
4. or where he had not acted diligently

Question 35

Non-executive director definition [5]

Answer 35

Person on the board of the company who:
1. not from executive management team and may or may not be independent
2. expected to lend outside viewpoint
3. does not devote his whole working time/not involved in managing affairs
4. not a beneficial owner of co/associates
5. no remuneration except management fee

Question 36

Loans to directors, etc. [3]

Answer 36

Company is not allowed, without approval of members through resolution to provide financial facilities to
1. Director of co/holding and his relatives (spouse/minor child)
2. guarantee/security in connection to loan
3. Listed=secp approval is also required

Ex: company’s ordinary course of business

Question 37

Prohibition regarding political contributions [2]

Answer 37

A company is not allowed to contribute any amount:
1. to any political party; or
1. for any political purpose to any individual or body

Question 38

Prohibition of gifts

Answer 38

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

Question 39

Non-cash transactions with directors [3]

Answer 39

Unless prior approval is accorded by a resolution of general meeting of company/holding, company cannot enter into an arrangement:
1. A director of company/hold/subs/associate or a person connected with him acquires or is to acquire assets for consideration other than cash, from the company
2. ** Company acquires** or is to acquire assets for consideration other than cash, from such director or person so connected;
3. Notice for resolution shall include particulars of arrangement along with value of assets involved duly calculated by a registered valuer.

Question 40

Cash transaction with directors

Answer 40

The company shall ensure that all cash transactions with its directors are conducted only through banking channels.