Chapter 3: Directors

Question 1

What is the Eligibility Criteria of a Director?

Answer 1

A director must:
 be a natural person.
 be a member (with certain exceptions).
 meet additional criteria if specified by articles e.g. holding qualification shares, education and experience requirements in case of banking and insurance companies.

Chapter 3 LO 2

Question 2

A director must be a member. List the situations when a non-member can be appointed as a director.

Answer 2

In following cases, a non-member can be a director:
 a whole-time director who is an employee of the company (also called executive director).
 a chief executive
 a person representing a member who is government or a body corporate.
 a person representing a creditor or other special interests through contractual arrangements.

Chapter 3 LO 2

Question 3

Which persons are disqualified for appointment as a director of a company?

Answer 3

Act has specified that following persons cannot become directors of a company:
1. a person who is not a member (exceptions described above).
2. a body-corporate/Company.
3. a minor.
4. a person with unsound mind
5. a person who does not hold national tax number (Commission may grant exemption in this case).
6. a person who is undischarged insolvent or has applied to Court to be declared as insolvent and his application is pending.
7. a person who has been convicted by a Court for an offence involving immorality.
8. a person who lacks fiduciary behavior as declared by a Court during last 5 years.
9. a person who is disqualified from holding office under any provisions of the Act.

For listed companies, following persons are also disqualified:
1. a person who has been declared defaulter of a financial institution by a Court.
2. a person or his spouse is a broker or is an officer/director of a brokerage house.

Chapter 3 LO 2

Question 4

What are the minimum number of directors prescribed by Companies Act?

Answer 4

Single member company (SMC)  1
Private company (other than SMC)  2
Public company – unlisted  3
Public company –listed  7

Chapter 3 LO 3

Question 5

How first directors are appointed and what is their tenure?

Answer 5

 First directors shall be appointed by subscribers of memorandum, and they shall hold office till the election of directors in first AGM.
 Particulars of first directors shall be submitted alongwith documents for incorporation.
 Number of first directors may be increased by appointing additional directors in a general meeting.

Chapter 3 LO 3

Question 6

How second directors are appointed and what is their tenure?

Answer 6

Subsequent directors shall be elected by members at general meeting, and they shall hold office for three years, unless he earlier dies or is disqualified or resigns. (however, a company limited by guarantee not having share capital may reduce this period through its articles.)

Chapter 3 LO 3

Question 7

How casual vacancy of directors is filled?

Answer 7

Casual vacancy (e.g. death, disqualification, resignation) is filled by directors, and person appointed shall hold office for the remainder term of the director in whose place he is appointed.

Filling casual vacancy is required if:
 company is a listed company (to be filled within 90 days of occurrence), **or **
 remaining directors are less than minimum number required by law/articles.

Chapter 3 LO 3

Question 8

What is the Procedure for Election of Directors for a company having share capital:

Answer 8

1. Fixation of number of directors to be elected.
2. Send notice of meeting.
3. Filing of intention to become director.
4. List of candidates to be transmitted to members.
5. If number of candidates is equal or less than number fixed by directors  Unopposed Directors
6. If number of candidates exceed number fixed by directors  Election
   **

Chapter 3 LO 4

Question 9

How number of directors to be elected are fixed?

Answer 9

Existing Directors of the company shall fix the number of directors to be elected atleast 35 days before the general meeting.

*Once the number is fixed in the Board meeting, it shall not be changed except with the prior approval of the general meeting in which election is to be held.
*

Chapter 3 LO 4

Question 10

What additional information shall be included in the notice of general meeting, if directors’ election is to be held in general meeting?

Answer 10

Notice shall expressly state number of directors to be elected, and names of retiring directors.

Chapter 3 LO 4

Question 11

What should a member do if he intends to become director of a company?

Answer 11

A person (whether retiring director or otherwise) seeking to contest election shall file a notice of his intention in writing with company atleast 14 days before relevant general meeting. Such person may withdraw notice anytime before holding of election.

Chapter 3 LO 4

Question 12

What is company’s responsibility if it receives notices of intention to become director from members?

Answer 12

All notices of intention received by company shall be transmitted to members atleast 07 days before general meeting in the same manner as of notice of AGM. In the case of a listed company such notices shall also be published in English and Urdu daily newspapers having wide circulation.

Chapter 3 LO 4

Question 13

How directors are elected in general meeting?

Answer 13

If number of candidates is equal or less than number fixed by directors:
All directors shall stand elected unopposed without Poll.

If number of candidates exceed number fixed by directors:
 Poll for election of directors shall be conducted.
 Every member shall have votes equal to:
“Number of his shares x Number of directors to be elected”
 A member can distribute his votes between different candidates in any way he thinks appropriate (even all votes can be given to one person).
 Candidate getting highest votes shall be declared elected as director, and then next candidate, and so on until number of directors fixed have been elected.

Retiring directors shall continue to perform their functions until their successors are elected.

Chapter 3 LO 4

Question 14

What should be done if there is irregularity in holding of election of directors?

Answer 14

Court may declare election of all directors or any one of them as invalid:
 if member holding 10% or more voting powers
 apply to Court within 30 days from the date of election, and
 it is proved that there has been material irregularity in the holding of the elections and related matters.

Chapter 3 LO 4

Question 15

What is the impact on a director if a defect is discovered in his appointment?

Answer 15

If a defect is discovered in the appointment of a director, such director shall not exercise any right as director from the date of discovery of defect (until defect is removed). However, his past acts as director will remain valid.

Chapter 3 LO 4

Question 16

Can a member require company to hold fresh election?

Answer 16

 If a person gets required shareholding to become a director, he may apply company to hold fresh election of directors.
 Within 30 days of request, company shall proceed to hold fresh election (by calling general meeting with agenda of holding election of directors).
 However, number of directors fixed in preceding election shall not be reduced.
 To hold fresh election, a listed company shall follow procedures specified by Commission.

Chapter 3 LO 4

Question 17

What are the circumstances when a director shall ipso-facto ceases to hold office?

Answer 17

A director shall ipso-facto cease to hold office if:
1. after appointment, he becomes subject to any of ineligibility criteria specified by Act.
2. he absents himself from three consecutive board meetings without seeking leave of absence.
3. He or any firm in which he is a partner or any private company in which he is a director:
a. obtains loan or guarantee from the company without fulfilling conditions of the Act.
b. accepts office of profit without approval of members. However, this restriction does not apply to office of chief executive or a legal or technical adviser.

Company may include additional grounds in its articles for vacation of office of director.

Chapter 3 LO 5

Question 18

How can a director be removed if he is elected by members?

Answer 18

An elected director will NOT be removed if number of votes against the resolution equals or exceeds least number of votes obtained by any elected director in the last election.

Number of votes shall be calculated in the same manner as at time of election i.e. total votes of a member are equal to:
**“Number of Shares held by Member x Number of directors appointed at AGM”
**

Chapter 3 LO 5

Question 19

How can a director be removed if he is first director, in casual vacancy or unopposed director:

Answer 19

An appointed director will NOT be removed if number of votes against the resolution equals or exceeds following number:
(Total Number of Ordinary Shares of Company x Number of directors appointed at AGM) ÷
Number of directors for the time being

Chapter 3 LO 5

Question 20

What are Powers of Directors which can be exercised by board without obtaining approval in general meeting.

Answer 20

Following powers can be exercised by directors, but only after passing a resolution in board meeting:
1. To issue shares, debentures, other redeemable capital, or to borrow money.
2. To make loans. (however, in banking companies acceptance of deposits or placement of funds is not considered loan).
3. To make investment.
4. To approve quarterly financial statements and annual financial statements.
5. To declare interim dividend.
6. To approve bonus for employees
7. To incur capital expenditure on any single item or dispose of a fixed asset exceeding such amount as may be notified.
8. To undertake obligations under leasing contracts exceeding such amount as may be notified
9. To authorize a director of the company (or partnership firm in which he is a partner, or a private company in which he is a director) for entering into transactions with the company.
10. To write-off material debtors, inventories, advances and other assets.
11. To settle material litigations.
12. To take over a company or acquiring controlling stake in another company.
13. To appoint and remove chief executive.
14. To fill casual vacancy of director.

Further, a listed company cannot sell or dispose undertaking which results in closure of business operations or winding up of company, unless there is a viable alternate business plan duly authenticated by the board.

Chapter 3 LO 6

Question 21

What are Powers of Directors which can be exercised by board after obtaining approval in general meeting:

Answer 21

Directors of a public company can also exercise following powers, but only after obtaining consent of general meeting:
1. sell or dispose a subsidiary of the company.
2. sell, lease or otherwise dispose of the undertaking (venture) or a sizeable part of it (i.e. 25% or more value of assets in that class), unless it is the company’s business.
3. remit, or give extension of time for repayment of debt against specified persons.

Authorization for such powers may be specific to transactions, or may be general. Any such resolution/approval of general meeting shall lapse, if not implemented within 1 year.

Chapter 3 LO 6

Question 22

What is the Quorum of Board Meeting?

Answer 22

 Listed Company:
1/3rd of total number or 4 whichever is higher. [articles may fix higher numbers]
Participation by video-conferencing or by other audio-visual means shall also be counted.

 Other companies:
As per Articles.

 Quorum to fill casual vacancy, If there not enough directors to form a quorum:
All the remaining directors shall be quorum for this limited purpose.

Chapter 3 LO 7

Question 23

How frequently Board Meetings are required to be conducted.

Answer 23

Directors of a public company are required to meet at least once in each quarter of a year.

Chapter 3 LO 7

Question 24

How can a Board resolution be passed by directors through circulation.

Answer 24

Validity:
A resolution through circulation approved by majority of directors/committee of directors, shall be as valid and effectual as if passed at a board meeting duly held.

Rules:
Directors can pass a resolution through circulation, provided:
 Resolution shall be circulated to all directors alongwith necessary papers.
 Resolution shall be signed in writing by directors (or committee of directors).
 Once approved, a director cannot revoke his agreement to such resolution.
 Such a resolution shall be noted in the minutes of subsequent board meeting.

Chapter 3 LO 7

Question 25

In which manner records of resolution and meetings of Board of Directors are kept.

Answer 25

1. Every company shall maintain record of resolutions (passed at meeting or by circulation), and minutes of board meeting (or committee of directors), alongwith names of participants.
2. Chairman of the meeting or chairman of the next meeting shall sign and authenticate minutes.
3. A copy of minutes of board meeting shall be sent to every director within 14 days of meeting.
4. The minutes/records must be kept at the registered office of the company (from the date of the resolution) in physical and electronic form. It shall be preserved for at least ten years in physical form and permanently in electronic form.

Chapter 3 LO 7

Question 26

Can a company indemnify any of its director in case of negligence or non-compliance with law?

Answer 26

A company shall not indemnify a director or other officer in case of his negligence or non-compliance with law, and any such provision in articles or agreement shall be void.

However, a company can indemnify them for defending themselves in a legal proceeding (in relation to company whether civil or criminal), in which they are proven innocent.

Chapter 3 LO 7

Question 27

Who is a Non-Executive Director?

Answer 27

It means a director who:
 is not in executive management team.
 is not involved in managing the affairs of the company, and does not give his whole working time to company,
 does not draw any remuneration from the company except the meeting fee.
 is not a beneficial owner of the company or its associated companies;
 is expected to give an outside viewpoint in decision making by board;

A non-executive director may or may not be independent.

Chapter 3 LO 9

Question 28

Which Protection is available to non-executive director?

Answer 28

A non-executive director (and independent director) of a listed company or public sector company, shall not be liable for any act or omissions of company unless:
1. act or omission was done with his knowledge and consent, or
2. he did not act diligently.

Chapter 3 LO 9

Question 29

With respect to appointment of Independent Directors, what are the responsibilities of Institute/Body maintaining Data Bank?

Answer 29

 An Institute/Body authorized by SECP shall maintain on its website a databank containing Names, Address and Qualifications of persons who are willing and eligible to act as Independent Directors.
 Institute may determine necessary terms and conditions and procedures for inclusion of name of individuals in databank.
 Institute may also fix a fee to be paid by individual for inclusion of his name, and for companies to provide them access to databank.

Chapter 3 LO 10

Question 30

With respect to appointment of Independent Directors, what are the responsibilities of Individuals?

Answer 30

 Every individual is responsible for accuracy/completeness of particulars provided by him to Institute (and for subsequent change therein).
 Individual shall meet qualification/disqualification criteria and other regulations for independent directors.

Chapter 3 LO 10

Question 31

With respect to appointment of Independent Directors, what are the responsibilities of Companies Appointing Independent Directors?

Answer 31

 Responsibility of performing due diligence before appointment lie with company/govt. appointing independent director.
 Company is responsible for due diligence of person.
 Company shall require person to submit an undertaking on a non-judicial stamp paper that he meets the requirements of regulations relating to independent director, alongwith relevant supporting information.

Chapter 3 LO 10

Question 32

Which persons are eligible/qualified to be appointed as Independent Director?

Answer 32

1. A person who is a graduate from HEC recognized university or a member of a professional body (national or international) with 5 years’ experience in disciplines relevant to company’s business (e.g. finance, law, marketing, research, management), OR
2. A person with 15 years’ experience in disciplines relevant to company’s business, and
3. Person confirms to devote reasonable time to affairs of company to perform his duties, and
4. After appointment, person shall complete Directors’ Training Program or shall avail exemption within 12 months of appointment.

Chapter 3 LO 10

Question 33

Which persons are ineligible/disqualified to be appointed as Independent Director?

Answer 33

Following persons are disqualified for appointment as independent directors:
1. Chief Executive of the company or its associated company (in last 3 years)
2. Employee of the company or its subsidiary (in last 3 years).
3. A person who (or his partnership firm or company in which he is 10% shareholder) had material business relationships with the company (in last 3 years)
4. Director nominated by Creditors, Govt, or Body Corporate.
5. A person who holds cross-directorship or has significant links with other directors.
6. A director who has served board for three consecutive terms (however, he can be appointed as independent director after lapse of one term).
7. A close relative of company‘s promoters, directors or major shareholders.

In case of a public sector company, independent director shall not be in service of Govt. of Pakistan or any body owned/controlled by Govt.

Chapter 3 LO 10

Question 34

Can a company give loan to its directors?

Answer 34

A company can give loan (or guarantee or security) to its director (or his spouse or minor child):
1. if loan has been approved by resolution of members, and
2. in case of listed company, approval of Commission is also required before sanctioning of loan.

This restriction also applies to director of its holding company. However, this restriction does not apply to financial institutions (in ordinary course of business).

Chapter 3 LO 11

Question 35

Can a director assign his office to another person?

Answer 35

A director cannot assign his office to any other person, and such assignments shall be void ab-initio.

However, he can appoint alternate/substitute director if:
 he will be absent from Pakistan for 90 days or more, and
 such appointment is approved by board of directors.
Alternate director shall cease to hold office as soon as director returns to Pakistan.

Chapter 3 LO 11

Question 36

Can a company give Political contribution or distribute Gifts to its members?

Answer 36

A company shall NOT:
 distribute any gifts to its members in its meeting.
 donate any amount (or allow utilization of its resources) to any political party or for any political purpose.

Chapter 3 LO 11

Question 37

Who determines remuneration of directors?

Answer 37

Remuneration for **attending board meetings **shall not exceed scale approved by the company or directors in accordance with provisions of the articles of company.

Remuneration for performing extra services, including the holding of office of chairman, shall be determined by board or company in general meeting, in accordance with provisions of articles of company.

Chapter 3 LO 11

Question 38

Can a director make a Non-Cash Transaction with its company or associated company?

Answer 38

**Director of company (or associated company):
**A company can buy or sell assets from its directors (or director of associated company) for consideration other than cash if:
1. prior approval of transaction has been obtained by a resolution in general meeting, and
2. notice of resolution includes particulars of arrangement alongwith valuation of asset involved in transaction by a registered valuer.

Director of Holding company:
If that person is also a director in holding company, approval of transaction by a resolution in general meeting of holding company is also required.

Chapter 3 LO 11