An Appellate Bench of the Securities and Exchange Commission of Pakistan (SECP) has legally clarified the associated relation of two companies under the Companies Ordinance 1984, saying that the presence of a person in two companies or undertakings, either as owner or partner or director, makes both companies or undertakings associated with each other.
Through the order of the SECP Appellate Bench, the bench has explained the associated relation between the two companies. The two-member SECP's Appellate Bench Monday dismissed an appeal filed by directors of a company (the appellants) against the order passed by the executive director (Corporate Supervision Department) SECP (respondent).
The SECP Appellate Bench stated, "We have heard the arguments and perused the relevant record with the able assistance of the parties." The Appellants (directors of the company) have misconstrued the requirements contained in the Section 2(2)(i) of the Companies Ordinance. As per the section 2(2)(i) of the Ordinance, presence of a person in two companies or undertakings, either as owner or partner or director, makes both the companies or undertakings, associated with each other; therefore, the two involved companies are associated companies. The Section 2(2)(i) of the Ordinance presents two instances whereby, associated relation of two companies or undertakings may be established; firstly, if a person is either owner or partner or director in two companies or undertakings, and secondly, if a person, directly or indirectly, holds or controls shares carrying not less than 20% percent of the voting power in two companies or undertakings.
In the present case, two persons were directors in a private limited company and; therefore, common directorship is sufficient to prove the associated relation between the two companies, the SECP Appellate Bench added.
This order shall dispose of Appeal No. 34 of 2018 filed under section 33 of the Securities and Exchange Commission of Pakistan Act, 1997 against the Order dated 11/6/18 (the Impugned Order) passed by the Executive Director, CLD-CSD (the Respondent) under Section 208 read with Section 476 of the Companies Ordinance, 1984 (the Ordinance).
Brief facts of the case are that (the Company) half-yearly accounts for the period ending December 31, 2015 (the Accounts) had an entry, titled as "loan to associated Undertaking." The amount of loan was Rs 29.193 million. The terms and conditions of loan were described under Note 7 to the Accounts. Chartered Accountants of the Company (the Auditor) had mentioned in their report on the accounts that loan was given to the associated undertaking without complying with the requirements of Section 208 (special resolution) of the Ordinance. The Company Limited was identified as an associated undertaking which was established on the basis of common directorship. Therefore, the Respondent issued a show cause notice (the SCN) to directors of the Company. It was asserted by the Appellants (directors of the company) that no director is holding twenty percent shares or voting power in both entities therefore, the Company and the second Limited Company, cannot be treated as associated companies or undertakings in terms of Section 2(2)(i) of the Ordinance. The Executive Director (Corporate Supervision Department) SECP, being dissatisfied with the response of the appellants and other directors, imposed an aggregate fine of Rs 30,000,000 on twelve directors of the company.
The appellant directors of a company have filed this appeal before the Appellate Bench (the Bench) inter alia on the ground that the Company and Private Limited Company are not associated companies or associated undertakings.
The appellants are of the view that, as per Section 2(2)(i) of the Ordinance it is mandatory for a common director to have, directly or indirectly, hold or control of at least 20 per cent of the voting power shares in two companies or undertakings, to declare them associated with each other. The appellants stated that considering (Pvt) Limited Company and the Company as associated companies, on the basis of presence of a common director (without holding or control of twenty per cent of the voting power) would render Section 2(2)(ii) redundant, which provides "common management" in two associated companies.
The SECP Appellate Bench observed that directors of the company relied upon a case law, which is about the general rule that all the relevant provisions in a Statute are to be considered in their totality. The Bench is of the view, that the respondent had considered the relevant provision of the Ordinance i.e. Section 2(2)(i) of the Ordinance. It is important to understand that Section 2(2) of the Ordinance contains different instances whereby two companies or undertakings may be treated as associated. Furthermore, this provision also excludes certain entities from the application of this Section. The provisions contained in Section 2(2) of the Ordinance have no overriding effect on each other. Therefore, the cited case law does not support the assertions of the appellants. In view of the above circumstances, there is no reason to interfere with the merits of the impugned order therefore, hereby this appeal is dismissed, the SECP bench added.