Comprehensive Study Guide: Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980

Preliminary Aspects and Scope of the Ordinance

• Official Title and Extension: The legislation is titled the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (Ordinance No. XXXI of 1980).

• Territorial Jurisidiction: The Ordinance extends to the whole of Pakistan.

• Date of Commencement: It came into force immediately upon its promulgation on $26^{th}\,June, 1980$.

• Legislative Intent: To provide for the registration of modaraba companies and the floatation, management, and regulation of modarabas, including ancillary matters.

• Overriding Nature of the Act: Section $42$ specifies that the provisions of this Ordinance shall have effect notwithstanding anything contained in the Companies Act, 1913 (VII of 1913) or any other law currently in force.

Key Definitions and Interpretations

• Commission: Refers to the Commission defined in the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997).

• Modaraba: A business model where one person participates with their money and another provides efforts, skills, or both. This definition explicitly includes Unit Trusts and Mutual Funds under any name.

• Modaraba Certificate: A certificate of a definite denomination issued to subscribers as an acknowledgment of the money they have subscribed to the modaraba.

• Modaraba Company: A company engaged in the business of floating and managing a modaraba.

• Modaraba Fund: The total fund raised through the floatation of a modaraba.

• Registrar: The officer appointed under Section $3$ for the purposes of this Ordinance.

• Rules: The rules established under this Ordinance; "prescribed" refers to being prescribed by these rules.

• Tribunal: The Tribunal constituted under Section $24$.

• Residual Definitions: Terms and expressions used but not explicitly defined in this Ordinance follow the meanings assigned to them in the Companies Act, 1913 (VII of 1913).

Appointment and Power of the Registrar

• Appointment: The Federal Government possesses the authority to appoint a person as the Registrar via notification in the official Gazette.

• Delegation of Powers (Section 39): The Registrar may, by notification in the official Gazette, delegate their powers and functions to any subordinate officer, subject to specified limitations or conditions.

• Enforcement Authority (Section 36): If a modaraba company defaults on compliance, the Registrar may apply to the Tribunal to compel the company and its directors to rectify the default within a specified period.

• Procedural Powers (Section 34): In proceedings under Section $32$, the Registrar has the powers of a civil court under the Code of Civil Procedure, 1908, including:

  • Enforcing the attendance of persons and examining them on oath.

  • Compelling the discovery and production of documents.

Registration and Eligibility of Modaraba Companies

• Mandatory Registration: Section $4$ prohibits any modaraba company from operating without registration with the Registrar.

• Eligibility Criteria (Section 5):

  • Legal Structure: Must be registered under the Companies Act, 1913, or be a body corporate owned/controlled by Federal or Provincial Governments.

  • Capital Requirement: Companies solely engaged in modaraba floatation must have a paid-up capital of no less than $2,500,000\,rupees$.

  • Integrity Requirement: No director, officer, or employee can have a conviction for fraud, breach of trust, or moral turpitude.

  • Solvency: No director or officer can be an adjudged insolvent or have suspended payments/compounded with creditors.

  • Promoter Standards: Promoters must be individuals of means and integrity with relevant knowledge, as appraised by the Registrar.

  • Diversified Companies: For companies engaged in other businesses alongside modaraba, capital requirements are as prescribed by rules.

• Registration Process (Section 6):

  • Application is made in a prescribed form with necessary documents.

  • The Registrar performs an enquiry and may grant registration if it is in the public interest.

  • Conditions may be imposed regarding investments, information/returns, business types, and restrictions on share transfers by controlling interests.

Types, Creation, and Authorization of Modarabas

• Categorization of Modarabas (Section 7):

  • Multipurpose Modaraba: A modaraba with more than one specific objective.

  • Specific Purpose Modaraba: A modaraba with a single specific objective.

  • Duration: Can be for a fixed or an indefinite period.

• Floatation Permission (Section 8):

  • Companies must apply to the Registrar with a Prospectus containing:

    • Name and type of modaraba.

    • Conditions, amounts, and division into fixed-value Modaraba Certificates.

    • Business scheme, prospects, and profit distribution modes.

    • Evidence of the company's ability to subscribe its own required portion.

    • The form of the Modaraba Certificate.

• Authorization (Section 11): Following Religious Board certification and satisfaction of public interest, the Registrar issues an authorization certificate. The Registrar can mandate modifications to the prospectus regarding business undertaking, management of funds, and profit distribution.

The Religious Board and Islamic Compliance

• Constitution (Section 9): The Federal Government constitutes a Religious Board with members and functions prescribed by rules.

• Permissible Business (Section 10): No business opposed to the Injunctions of Islam is allowed.

• Mandatory Certification: The Registrar cannot permit floatation until the Religious Board verifies in writing that the proposed business is not contrary to Islamic Injunctions.

Modaraba as a Legal Person and Asset Management

• Legal Status (Section 12): A modaraba is a legal person and shall sue and be sued in its own name through the modaraba company.

• Separation of Assets: The assets and liabilities of each individual modaraba must be kept separate and distinct from both other modarabas and from the modaraba company itself (Sections $12$ and $13(6)$).

• Limited Liability/Benefit: A modaraba is not liable for the debts of another modaraba nor can it benefit from the assets of another modaraba or the managing company.

Modaraba Certificates: Subscriptions and Allotment

• Allotment Restrictions (Section 13): No certificates can be allotted without an approved prospectus and the receipt of the "minimum amount" required for operation.

• Escrow Accounts: All subscription money must be kept in a separate account with a scheduled bank defined by the State Bank of Pakistan Act, 1956.

• Refund Protocols: If the minimum subscription is not met by the date in the prospectus, money must be refunded within $15\,days$. Failure makes directors jointly and severally liable for repayment.

• Certificate Issuance: Certificates must be issued within $30\,days$ of allotment.

• Transferability: Certificates are transferable as per the manner provided in the prospectus.

Reporting, Annual Accounts, and Auditing Requirements

• Annual Reporting (Section 14):

  • Must be prepared and circulated within $6\,months$ of the close of the accounting year.

  • Documentation includes a balance sheet, profit and loss account, auditor's report, and a report on the state of affairs/profit distribution.

  • Five copies must be submitted to the Registrar.

• Audit Protocols (Section 15):

  • Accounts must be audited by a Chartered Accountant (as per the Chartered Accountants Ordinance, 1961) approved by the Registrar.

  • The auditor must certify whether the business, investments, and expenditures align with the objects and terms of the modaraba.

Prohibitions, Operational Restrictions, and Remuneration

• Non-Competition (Section 17): A modaraba company is barred from engaging in any business that competes with the modaraba it manages.

• Conflict of Interest: Modaraba companies, directors, officers, or their relatives (spouses, siblings, lineal ascendants/descendants) are prohibited from obtaining loans or credit from modaraba funds.

• Compulsory Subscription: The modaraba company must subscribe to no less than $10\,\%$ of the total amount of Modaraba Certificates offered for subscription.

• Remuneration Cap (Section 18): The managing company’s remuneration is a fixed percentage of net annual profits, not exceeding $10\,\%$.

• False Statements (Section 16): All parties are prohibited from making false/incorrect statements or omitting material facts in any document, report, or prospectus.

Regulatory Oversight: Directions, Cancellation, and Administration

• Power to Issue Directions (Section 18A): The Registrar can issue directions to companies in the public interest or to protect certificate holders' interests. Compliance is mandatory.

• Cancellation of Registration (Section 19): The Registrar may cancel a company's registration or remove it from management for contravening the Ordinance, provided the company receives an opportunity to be heard.

• Appointment of Administrator (Section 20): If a company mishandles affairs fraudulently, unlawfully, or after registration cancellation, the Registrar (with Commission approval) may:

  • Appoint an administrator for a specified period.

  • Mandate management changes.

  • Replace the modaraba company with another company.

Enquiries and Investigative Powers

• Initiating Enquiries (Section 21): The Registrar may launch an enquiry on their own motion or upon application by certificate holders representing at least $10\,\%$ of the subscribed amount.

• Submission of Info: All officers/directors must furnish documents in their custody; the investigator can enter premises to seize books.

• Legal Standing: The investigator has the powers of a court under the Code of Civil Procedure, 1908:

  • (a) Enforcing attendance and examining on oath.

  • (b) Compelling discovery of documents.

  • (c) Issuing commissions for witness examination.

Winding Up Procedures

• Voluntary Winding Up (Section 22): For fixed-period or specific-purpose modarabas, the company winds it up upon expiry/completion if:

  • Directors file an affidavit stating all liabilities and certificate payments can be cleared within $12\,months$.

  • An auditor's report supports the declaration and is approved by the Registrar within $90\,days$ of expiry.

• Winding Up by Tribunal (Section 23):

  • Occurs if the voluntary declaration is not filed.

  • Occurs if the Registrar declares the modaraba unable to pay liabilities.

  • Occurs if accumulated losses exceed $50\,\%$ of the total subscribed amount.

  • Occurs if business was conducted for fraudulent purposes.

• Liquidator appointment: The Tribunal appoints a liquidator in consultation with the Registrar. Winding up must be finished within $1\,year$ unless extended for special reasons (Section $27$).

The Modaraba Tribunal: Constitution, Powers, and Procedure

• Constitution (Section 24): The Federal Government establishes one or more Tribunals. The member must be, have been, or be qualified to be a High Court Judge.

• Civil Jurisdiction: Power of a civil court under the Code of Civil Procedure, 1908.

• Criminal Jurisdiction: Power of a Sessions Judge under the Code of Criminal Procedure, 1898. Cognizance is only taken via written complaint by the Registrar.

• Procedure (Section 26): Follows the summary procedure under Order XXXVII of the First Schedule to the Code of Civil Procedure, 1908. Cases are heard day-to-day where possible.

• Execution (Section 28): Decrees follow judgments immediately. Money recovery is conducted as "arrears of land revenue."

Appeals and Finality of Orders

• Appeal Timeframe (Section 30): Aggrieved parties can appeal to the High Court within $30\,days$ of a judgment or decree.

• Bench Composition: Appeals must be heard by a Bench of two High Court Judges.

• Grounds for Appeal:

  • Decision is contrary to law or usage.

  • Failure to determine a material issue of law.

  • Substantial procedural error causing error in decision.

• Finality (Section 29): Orders cannot be questioned by other authorities except through the provided appeal process.

Punishments, Penalties, and Liability

• Criminal Punishment (Section 31): Contraventions of major sections ($4, 10, 13, 14, 16, 17$) carry imprisonment up to $3\,years$ and a fine up to $500,000\,rupees$. Further fine for losses caused.

• Financial Penalties (Section 32): For general refusal to furnish info or non-compliance:

  • Specified penalty up to $100,000\,rupees$.

  • Continuing default fine up to $1,000\,rupees$ per day.

• Corporate Liability (Section 33): Every director, manager, or officer is deemed guilty unless they prove the offence happened without their knowledge or that they exercised due diligence.

• Application of Fines (Section 35): Fines may be applied toward proceeding costs or compensation for aggrieved parties.

Tax Exemptions and Miscellaneous Provisions

• Tax Exemption (Section 37): Modaraba income is exempt from tax under the Income Tax Ordinance, 1979, provided at least $90\,\%$ of its annual profits are distributed to certificate holders.

• Indemnity (Section 40): Government officials and the Registrar are protected from legal proceedings for actions taken in good faith under this Ordinance.

• Rule-Making Power (Section 41): The Federal Government makes rules for duties, Religious Board composition, prospectus content, and winding up procedures.

• Regulation-Making Power (Section 41A): The Commission may make regulations after public consultation (minimum $14\,days$ for feedback). Contravention carries fine up to $100,000\,rupees$ and $1,000\,rupees$ daily for continuing defaults.

• Difficulty Removal (Section 43): The Federal Government may issue orders to remove difficulties in giving effect to the Ordinance.