This writer has penned another article on the incorrect legislation with respect to incorporation of Section 452 (Companies' Global Register of Beneficial Ownership) of the Act, which, is not a corporate law subject. This provision is incorrectly placed under the ambit of corporate law. It is an infringement of right conferred to a citizen of Pakistan under the Constitution of Pakistan. As a result of right to file a writ petition under Article 199 of the Constitution of Pakistan, this illogical provision is expected to be tested in courts of law.
Taking into consideration the history of this legislation with inherent rights of members/creditors; then there is a case of violation of 'jurisdictional imbalance' between SECP and the judiciary and juridical institutions of Pakistan.
Notwithstanding the above, following discussions is restricted to the matter of 'approval' of scheme of arrangement as laid down under Section 279 to 285 of the Companies Act, 2017. Previously such provisions were contained in Section 284 to 289 of the Repealed Companies Ordinance, 1984.
After reviewing these two provisions, greater emphasis is required on the need to strengthen the institutions. However, the question is; if the same could be done by providing additional constitutional powers to the regulator. This writer's view on the aforementioned question would be in negative, as absolute powers spoil the quality of the institution in all cases.
This article focuses on the role of jurisdiction and perceived conflict of interest that has emerged from revision in the provisions relating to 'approval' of scheme of arrangement under Section 279 of the Act. Section 279(3) of the Act states that this 'order' shall be passed by an authorized officer of SECP. Section 279 of the Act is reproduced as under:
"279.Compromise with creditors and members.- (1) Where a compromise or arrangement is proposed between a company and its creditors or any class of them, or between the company and its members or any class of them, the Commission may, on the application of the company or of any creditor or member of the company or, in the case of a company being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class of members, as the case may be, to be called, held and conducted in such manner as the Commission directs.
(2) If a majority in number representing three-fourths in value of the creditors or class of creditors, or members, as the case may be, present and voting either in person or, where proxies are allowed, by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Commission be binding on the company, all its creditors, all the members, the liquidators and the contributories of the company, as the case may be:
Provided that no order sanctioning any compromise or arrangement shall be made by the Commission unless the Commission is satisfied that the company or any other person by whom an application has been made under sub-section (1) has disclosed to the Commission, by affidavit or otherwise, all material facts relating to the company, such as the financial position of the company, the auditor's report on the latest accounts of the company, the pendency of any investigation proceedings in relation to the company and the like.
(3) A copy of the order under sub-section (2) sanctioning the compromise or arrangement duly certified by an authorised officer of the Commission shall be forwarded to the registrar within seven days from the date of the order." (emphasis is ours)
In comparison to Section 284 of the Companies Ordinance, 1984 which states:
"284. Power to compromise with creditors and members. - (1) Where a compromise or arrangement is proposed between a company and its creditors or any class of them, or between the company and its members or any class of them, the Court may, on the application in a summary way of the company or of any creditor or member of the company or, in the case of a company being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the member of the company or class of members, as the case may be, to be called, held and conducted in such manner as the Court directs.
(2) If a majority in number representing three-fourths in value of the creditors or class of creditors, or members, as the case may be, present and voting either in person or, where proxies are allowed, by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Court be binding on all the creditors or the class of creditors or on all the members or class of members, as the case may be, and also on the company, or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company:
may have filed suits or obtained decrees shall be deemed to be of the same class as other unsecured creditors." (emphasis is our)
The UK, being the mother legislator on this subject, even after taking into account the European Union (EU) directives on the aforementioned subject, emphatically reiterates the role of the High Court in the matter of scheme of arrangement. Under the English law, such actions are undertaken by way of operation of Chapter 27 of the Companies Act 2006. Later in this article, you will find references of the English court rulings about the importance, relevance and the role of the court in approving a scheme of arrangement. The answers would be different if the legislators are changed; it is recommended that till amended law comes into force, the present law shall be kept in abeyance. This writer fails to decipher the rationale behind this unique provision in law, and the reason for deviating from the international laws in practice. Such provisions would damage the confidence required for the development of corporate sector in Pakistan. Rumors are that SECP understands the need to rectify this provision and steps are being taken in the right direction to make the necessary amendments. The following paragraphs further shed light on the need to accelerate the process of abeyance and ultimately amending the law.
India has revised its corporate law in 2013, wherein the provisions relating to scheme of arrangement are referred to in Section 230 of the Companies Act, 2013. Section 230 is reproduced as under:
"230. (1) Where a compromise or arrangement is proposed-
(a) between a company and its creditors or any class of them; or
(b) between a company and its members or any class of them,
the Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs." (emphasis is ours)
The tribunal referred to in the Indian Act is provided in Section 408 of the Companies Act, 2013, which is reproduced below:
"408. The Central Government shall, by notification, constitute, with effect from such date as may be specified therein, a Tribunal to be known as the National Company Law Tribunal consisting of a President and such number of Judicial and Technical members, as the Central Government may deem necessary, to be appointed by it by notification, to exercise and discharge such powers and functions as are, or may be, conferred on it by or under this Act or any other law for the time being in force."(emphasis is ours)
The question here is whether 'National Company Law Tribunal' is the regulator or the judicial body. It is a different concept introduced vide Companies Act, 2013which recommends constitution of special corporate benches in the High Court. The desire for absolute power in the hands of regulator has totally overlooked the view that there is a concept of judicial tribunal in every decent legislature under the corporate law.
Keeping in view the comparative provisions in repealed Companies Ordinance, 1984 of Pakistan, and International laws, including the provisions in Indian and English law, wherein Commission was not empowered to play any role in initiating and approving the scheme of arrangement in any jurisdiction. There is a rationale and basis of this accepted and well-tested provision of law. Any deviation from the standardised process reflected by the re-assignment of this function to SECP is fundamentally a step in the wrong direction. It is understandable that there are serious capacity constraints with the regulator, and Pakistan remains far away from an ideal corporate regulator. This does not in any manner justify disturbing an established position. In the forthcoming paragraphs, the perceived reasons which may be placed for supporting the amended status in Section 279 of the Companies Act, 2017 have been identified.
What is a 'Scheme of Arrangement' - Is it an Operational or a Judicious Decision?
To understand the question of jurisdiction, it is important to understand the nature and effect of 'scheme of arrangement'. The question is, if it is an ordinary regulatory process or a subject of judicious application of discretionary power. In this regard, it may be noted that the UK is the pioneer in corporate legislation as it has introduced the concept of corporate structure and the related legislation has been developed through the English Law in their native language. Without fully appreciating the syntax and context of the words used and its objective, it would be held highly unprofessional to deviate from the English law. The following paragraphs further explain the same with reference to the Anglo-Saxon laws.
Scheme of arrangement is a 'compromise' or 'arrangement' between creditors or members and the company as the case may be. In that arrangement, members of one company may, inter alia, agree to combine their company with another or the members may decide to split the company into two companies. The first action is called 'a scheme for merger', whereas the latter is termed a 'demerger'. There can be a reconstruction with the consent of creditors without effecting the members' status. In case of a merger, there can be more than one company involved in the process. The first and foremost issue to be appreciated is that the 'scheme of arrangement' is a step away from the 'regular' functions contained in the company law for incorporation and operation of companies.
In the case of NFU Development Trust Limited [1972 1 WLR at 1555], the English court stated that 'the word 'compromise' implies some element of accommodation on each side. It is not apt to describe total surrender. A claimant who abandons his claim is not compromising it. Similarly, this writer thinks the word 'arrangement' in this section implies some element of give and take. 'Confiscation is not my idea of arrangement'. The underlying tone in this quotation forms an essential feature of this article.
These are the words of English language that have been developed in an English environment; therefore, they should be applied and interpreted in full context. All schemes are compromises or arrangements; not regulations. The court is the only independent, transparent and publicly open forum in a society, therefore, the power of approval was vested with it, however, while drafting the provisions of law on this subject, the legislators have attempted to pass on the power of court to the regulator. The requisite independence emerges from the manner of appointment and removal of judges. Both the terms as indicated and created by the English jurisprudence require 'judgement', not 'regulation'. A compromise and an arrangement require a judge to decide whether justice is being done to the relevant parties. That judgement is not based on technical knowledge of the same; instead it requires independence, transparency and discussion at public forum. The legislators in our country have overlooked the inherent limitations that the independent role of courts/tribunals cannot be passed on to the regulators. It may be noted that the drafters of the text of the Companies Act, 2017 have mixed up the role of judiciary and the regulator. Our society needs maturity on that count. It is unfortunate that on such an important matter we are moving backwards and Section 279 is the depiction of that tendency.
Reiterating the view that application and manner of application of Company law, would be defined by its 'drafters', not the users. Guidance should be sought from the ones who have originally framed /drafted these concepts, ie, the UK, as we are only the 'followers' of the law and its underlying concepts. For instance, the user of an iPhone would not have the capability to reconfigure the undesired features of iPhone, and would have no choice but to accept all the features of iPhone as designed by Apple. An option would be to act similar to the UAE, ie, in continuation of our example of iPhone, block an application eg. 'Whatsapp' from iPhone as imposed in the UAE, but it is not recommended as Pakistan, being a developing and civilized country, shall not spoil its reasonable laws for this reason. To sum up, an intelligent approach would be to refrain from deviating from the practices of the 'inventor' of the product; being the law relating to scheme of arrangement. The English law is absolutely clear on such matter. (Chapter 27 of Companies Act, 2006).
Famous writer on Company Law of UK Boyle & Birds on page 809 states as under:
"THE RIGHTS OF DISENTING SHARERHOLDERS AND CREDITORS The sanction of the court to the scheme is essential, and in determining whether such sanction should be given, the duties of the court are twofold: first, to see that the resolutions are passed by the statutory majority, and secondly, to see whether the proposal is such that an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve. But although shareholders acting honestly are usually much better judges of what is to their commercial advantage than the court can be, this proposition is of little value when it is proved that the majority of a class have voted or may have voted in the way they did because of their interests as shareholders of another class. While s 899 does not, in terms, limit the freedom of members of a particular class from voting as they wish, it has been held that an allegation that a voting shareholder has a collateral interest, if made out, could result in the court disenfranchising the relevant member."
The passage highlighted is an example to illustrate that duty of approval is a judicial function that can never be assigned to regulators. It is very unfortunate that in Pakistan, the distinction is being overridden to please the regulators, duly supported by professionals, including some accountants, who consider it easier to deal with regulators than courts. It's true that our courts may not be ideal, but still that does not mean that we look up to an SHO (Station House Officer), to decide whether a person should be hanged or not, on speedy justice grounds. Unfortunately, we fail to understand that, the right of shareholder should not be affected in order to avoid apprehensions of some 'professionals'. In fact, even the argument by any professional in this regard is in theory not in practice. Later in the article, this writer would quote his professional firm's experience on that ground and state that 'theory of ease' is not supported by realities and is a farce.
(To be continued)
Copyright Business Recorder, 2017