An appellate bench of the Securities and Exchange Commission of Pakistan (SECP) has observed that the role of a non-executive director of a company is akin to a whistle-blower and company's management is accountable before the shareholders during the annual general meeting (AGM). A two-member order of the SECP appellant bench has issued an order against a leasing company.
The bench believes that the role of a non-executive director is akin to a whistle-blower and the appellant (leasing company) has attempted to demonstrate the required conduct. On the other hand, preparation of accounts is the responsibility of the management and ultimately the management is accountable before the shareholders during the AGM, therefore, the AGM should not be delayed in any case. If the accounts are qualified and the non-executive directors have rendered their dissenting note, the shareholders could be the best judge to fix the persons responsible for such qualifications.
The default under section 158 of the Ordinance has been established; however, by considering the facts of the case and subsequent compliance, the bench is inclined to take a lenient view in the case. Therefore, the bench hereby converts the penalty of fine imposed on the appellant into warning and direct the appellant to ensure strict compliance with the relevant provisions of law in future, the bench added.
The order shall dispose of appeal No 43 of 2016 filed under section 33 of the Securities and Exchange Commission of Pakistan Act, 1997 (the Act) against the order dated 14/06/16 (the impugned order) passed by the respondent under section 158 read with section 476 of Companies Ordinance 1984 (the Ordinance). Brief facts of the case are that leasing company failed to convene its annual general meeting (AGM) for the year ended 30/06/15 on or before 31/10/15 as required under subsection (1) of section 158 of the Ordinance. The company was initially granted one month extension to conduct the AGM by 30/11/15; however, the company failed to conduct the AGM within this period and requested for another extension which was granted with direction under section 170 of the Ordinance to convene the delayed AGM latest by 31/12/15. However, the company failed to hold the AGM even by this extended timeline. Therefore, a show cause notice (SCN) dated 16/03/16 was issued to (the appellant) and other directors.
The bench has heard the parties (appellant and respondent) and perused the record of the appeal. The argument of the appellant's counsel (the counsel) that the appellant being a non-executive director is not responsible for the delayed AGM, cannot be acceded to because law does not distinguish the responsibilities of directors whether they are executive or non-executive. Furthermore, it is mandatory for the directors of a listed company to have knowledge of applicable laws because every director of a listed company while filing the consent to act as a director, inter alia, gives an undertaking that he/she is aware of the duties required under the Ordinance.
As per bench viewpoint the role of a non-executive director is more critical than an executive director because he/she sits on the board of directors (BOD) to ensure compliance, good governance and transparency of the affairs of the company, for the protection of the shareholders/members. Although a non-executive director has no active role in day-to-day affairs of the company, he/she can object or resist to any non-compliance by the management during the BoD meetings, through dissenting notes or in accordance with clause eight of the Code of Corporate Governance, 2012. Therefore, the appellant bench may say that the leasing company, in the capacity of a non-executive director, was required to be more vigilant and conscious about his/her responsibilities.
The counsel's argument that the respondent (commissioner SECP) has failed to establish willful default of the appellant also cannot be accepted because two extensions were granted to the company, however, it failed to convene the AGM by 31/12/15. The AGM of the company was held on 22/03/16, after lapse of the extended time. This fact is enough to indicate that the company/BOD were aware of the mandatory requirement of Section 158, and to avoid non-compliance, had sought and availed two extensions.
The next plank of the arguments advanced by the counsel was that the management of the company failed to prepare true accounts, therefore, all non-executive directors refused to approve the same, until removal of the qualifications/observations of the auditor with respect to the company accounts. The appellant stated that being a non-executive director of the company, he has performed his duties in the required manner and did not approve the untrue accounts, which could have been detrimental to the interest of the company and shareholders. Adverting to the question of delay in holding of the AGM, the counsel argued that the circumstances were beyond his control and the management had failed to prepare accurate accounts within the stipulated time, the SECP added.