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August 29, 2004

Amendment of Companies Act

Professional partisanship not desirable

K. A. Muqtadir FCS

With an effort to inject further discipline and streamline accountability, the laws and regulations in the corporate sector are constantly undergoing various updates and upgradations. This is also intended to put those at par with other relevant statutes around this part of the world. In that exercise, the Bangladesh Companies Act is now at the reviewing table. A team by the name of 'Company Law Reforms Committee' has been assigned to work out the proposed amendments for upgradation and improvement of the Act.

It may be mentioned that the existing Companies Act 1994 was put in place replacing the age old statute the Companies Act 1913, which was long outdated and unfit in the present digital era. Long before our new enactment, both India and Pakistan have already got their relevant Companies Acts reframed back in 1956 and 1984 respectively. And that wasn't the end, they are reviewing their Acts almost every year and in 2003 both the Pakistani and Indian Acts have undergone massive revisions. However, though our new Act included so many novel and improved provisions over those of the Act of 1913, there were quite a few mismatches as well. The new Act also introduced some highly debatable provisions in areas like Board affairs, managing director's appointment, disclosure requirements, auditors' engagement and removal, preservation of documents etc., which came under instant criticism from concerned quarters. And then, there were contradictions and inconsistency in the Act between its sections and schedules. So, in view of its so many drawbacks, suggestions to review the Act and to amend the controversial provisions were pouring in immediately after its enactment. Finally, after a decade, the task of updating of the Companies Act is now on the government's action agenda.

Now, as stated earlier, the Company Law Reforms Committee (CLRC), which was entrusted to review and make recommendations for amendment/improvement of the Companies Act 1994, is reported to have finalised its proposal for the same. Interestingly, though the team was assigned to put forward amendments to the standing law (i.e. Companies Act-1994), it is learnt that the Committee has worked out to the length of drafting altogether a new act as a whole. This is good on the count that now readers would not require to go back and forth for cross-references to the original act. But the underlying worry is that the Committee is learnt to have craftily rewritten the law in a markedly biased form. Quite noticeably, five out of eight members of the CLRC are professional accountants. As a result, the draft is prepared reportedly with a view only to promote the profession of accountants. Positions in a company, which are essentially functional in nature, viz. finance officials or accountants are conspicuously finding place to play roles in the new act without relevance, whilst statutory position such as the company secretary is relegated to the back bench. Whereas, it is the company secretary who, as the corporate compliance officer, is primarily responsible for implementation of the provisions of statutes in any company. Even, the draft act has reportedly given noticeable focus to the Institute of Chartered Accountants of Bangladesh, as has been exposed latter in this article.

It warrants to be explained here that functional responsibilities are those, which arise apparently out of the customary functions of a company as it may call for, while statutory responsibilities are the ones that stem from the requirements of any law or statute. That is why the later is more of an obligation on the part of the company than the functional ones. A company, large or small, private or public, cannot just put aside its obligatory responsibilities towards the market, the regulators and the society at large. Whereas, it is optional for it to decide about the functional discharge. It may even combine several functions into one, depending on its standing. But a company just cannot shrug off its statutory liabilities from carrying out meticulously.

The subtle approach
It may be mentioned that the CLRC had invited suggestions from concerned quarters for inclusion in the proposed amendments. It is gathered that a few such suggestions were also submitted to them. However, it is reported that none of those were considered for inclusion. Whereas it has conspicuously strived to include the roles of the finance and accounts officials at various chores in the draft act, a venture nowhere available in the Pakistani or Indian Acts. To cite a few of the illustrative, but not exhaustive mark of partisan approach, we extract the following from the suggested draft :

(a) The term 'officer' has been defined to mean and include 'a director, chief financial officer, chief internal auditor, secretary, manager, or any other officer of a company' [sec.2(r)].

(b) About authentication of financial statements, the draft act provides - 'any financial statement shall be approved by the directors and shall be signed by two directors (including the Managing Director) and the Chief Financial Officer' [sec.205(1)].

(c) About auditors' remuneration it is stipulated in the draft that 'the remuneration of the auditors of a company shall not be lower than that fixed in the Schedule of fees determined by the Institute of Chartered Accountants of Bangladesh (ICAB)' [sec.227(10)(b)].

As it can be seen at the first two instances above that functional positions have got undue inclusion in the provisions, though the Board of Directors of a company have either very little or no inter-action with them. None of the Acts of 1913 or 1994 provided like that. If we look at the Pak and Indian acts as the sub-continental bench mark, we see no such mention of functional positions in the Companies Act there, and it is rightly so.

The most unscrupulous part about authentication of accounts at draft section 205(1) (mentioned at b above) is that this goes against all judgement and moral. Authentication of accounts should not be left for the same person who, according to section 206(2) of the same draft, is made 'primarily responsible' for preparation part of the accounts and who, as such, is manifestly interested. A person interested, when authenticates, it leave rooms for manipulation, much to the detriment of the Board. It should have been, ideally, the Company Secretary to authenticate (signature) the accounts, once those are approved by the Board. In fact, as of now, the Act of 1994 does provide so and there is no apparent need to bring in any amendment at that place. The Pakistan and Indian stipulations also match to the same. Actually, our culture is that we look upon Pakistan and India when it corresponds to our need, but immediately pull out when it doesn't. In Pakistan, Company Secretary is the Chief Compliance Officer (CCO), and in India, he is regarded as the Chief Governing Office or CGO, because of his central role-playing in corporate governance. The Bangladesh case should not lag behind in its insight appreciation.

At the third instance above, it is quite funny to see that ICAB is unduly given an upper hand over the act, in fixing the fee of a company's auditor. That kind of a stipulation is evidently partisan and profoundly demeans the act under review. It is also against all ethics and tantamount to imposing fine to the company concerned. Fees to be paid by one cannot be fixed by some other. Auditors' remuneration has always been a case-by-case issue and is supposed to be fixed mutually by the parties. It is not to be generalised. We should remember that there are both large and small entities existing and they should not be weighed evenly, not even on the count of their share capital. Such a stipulation is a manifest breach of, and infringement in, company's rights and deserves to be summarily withdrawn before putting ahead the draft act.

The Companies Act is a sectoral statute and is enacted by the government for general regulatory control of the corporate sector at large. It often comes under study by the foreign investors as well, before they decide anything in Bangladesh. Such a basic law cannot afford to be periled or prejudiced towards any particular profession, nor should it deviate from universal norms, practices and principles. Therefore, it would be advisable to thoroughly scrutinise the draft act by corporate experts. It should also include chartered secretaries in the process of its formulation, reforms or enhancement, so as to put in place the required check and balance.

The writer is a Fellow Chartered Secretary.