NEW TRADE ORGANIZATIONS ORDINANCE

Will it be able to remove real inconsistencies?

ABDUL REHMAN QURESHI
Former chairman and currently adviser to SECP
Mar 05 - 11, 2007

With a view to revamp and update the Trade Organization Law which has been operative since 1961, the Government of Pakistan constituted a committee under the chairmanship of Mr. Justice (Retd.) Saleem Akhtar. The members of the committee included Additional Secretary Commerce; President, Federation of Pakistan Chambers of Commerce & Industry; a representative of the Chairman SECP; Chairman Pakistan International Freight Forwarders; and the Country Director of Center for International Private Enterprises. The committee held numerous meetings and also visited different representative bodies of the trade and industry. Since many practical problems were being faced due to deficiencies in the regulatory law, there was a general demand for completely replacing the existing law.

Based on the recommendations of the committee, the trade law, namely the Trade Organizations Ordinance-2006 has since been promulgated. Main features of the new law include upgradation of the post of former regulator i.e. Director Trade Organizations (DTO) as a Director General (DG) who might be an officer of Grade 21. Now, the DG will be mainly responsible to regulate the affairs of the trade organizations in the country. The basic requirement under the repealed law as well as the new ordinance is that a trade organization intended to be formed is to be registered as a company limited by guarantee under the Companies Ordinance-1984 and apart from the DG, the Registrar of Companies and SECP are also its regulators.

Apart from certain drafting errors of material nature, the following specific comments are made which need to be addressed by the government:

*Sub-clause (ii) of clause (p) of section 2 of the ordinance defines the trade organization as an organization which is formed or intended to be formed with the object of promoting any trade, industry or service or any combination thereof. It is not understood as to how an 'Association' which is intended to be formed can be given the status of a trade organization. It is to be seen as to whether the organizations which are still ideas or proposals be given the rights and privileges of a trade organization.

*Section 14 of the ordinance contains powers and functions of the DG and it provides that all acts and proceedings of a registered trade organization shall be subject to the control of the Federal Government as well as the DG appointed by the government. The DG, for the purposes of this ordinance shall be enjoying powers of a civil court under the Code of Civil Procedures and shall also be authorized to conduct inquiries into the affairs of trade organizations. He may inspect their offices, attend meetings of general bodies and executive committees and may also supervise the elections of the executive committees. Besides, he may remove the elected members of the executive committee from their offices. Similarly, he is also empowered to remove names of any number of members from the membership register and may also reinstate them in the said register at his discretion. The DG on the one side appears to be involved deeply in all the internal matters but on the other side he has been declared the final forum of appeal. He is also empowered to annul the results of any election held by any trade organization. When the DG is empowered to participate in the meetings of general bodies and to supervise the proceedings pertaining to election of office bearers, how he has been declared as an appellate forum? Apart from this, it may be noted that trade organizations are in fact representative bodies of the entrepreneurs/corporates and these cannot be equated to the companies limited by shares or certain others limited by guarantee like the stock exchanges where huge financial stake of the investors and creditors is involved. In my view the grant of powers to the DG for inspection, inquiries and participation in the meetings of general bodies of the trade organizations is absolutely uncalled for as it will be considered an undue interference by the regulator into the affairs of representative bodies of the trade and industry.

*The powers granted to the DG under section 14 of the ordinance have not been considered sufficient as he has been further authorised to enter in and search the premises of a trade organization and also to impound and seal books of accounts and other record on computer hardware or software. I think while recommending such powers, the members of the committee have not been able to assess and determine the factual nature and role of such representative bodies which are formed to encourage, facilitate and suggest measures for the growth of trade and industry in the country. It appears from the contents of sections 14 and 15 of the ordinance that the government and the DG who are responsible to regulate their matters will be dealing with certain criminals. In my view there is absolutely no need and justification to have such stringent powers which are only needed in the cases of companies or organizations which raise money from the general public or which are responsible to deal with public funds.

*What is needed for the effective regulation of such organizations, the clearly laid down rules of the game pertaining to membership of the Federation of Chamber of Commerce and Industry and its all other sub-ordinate representative bodies and the requirements of such matters including election of executive committees etc. should be incorporated in their charter which is the memorandum and articles of association. In case the government is desirous to control and regulate their activities, the powers to supersede the executive committee, office bearers and appointment of administrator should be retained with some independent, neutral and law knowing authority and it should be ensured that such powers are exercised purely on merit. The problems which warrant immediate actions should be resolved timely so as to save an organization before any big crisis and to protect the rights of its members who are the backbone of our trade and industry.

*Section 17 of the ordinance provides that an administrator appointed by the Federal Government shall act under the control of the DG who shall also be an officer appointed by the government whereas a person or trade organization aggrieved by any decision or order of the administrator may prefer an appeal before the DG. Such an arrangement is neither suitable nor transparent. Sub-section (2) of section 21 states that a person or trade organization aggrieved by any decision or order of the DG may prefer appeal to the Federal Government whose decision shall be final. Under sub-section (4) of section 14 of the ordinance, an order passed by the Federal Government which involves a question of law can only be challenged before the High Court.

*Clause (c) of sub-section (2) of section 3 of the ordinance provides for the separate women's Chamber of Commerce and Industry to represent women entrepreneurs engaged in trade, industry or services whereas the proviso to clause (d) states that a licence for registration as an All Pakistan Association shall not be granted to more than one trade organizations in the same sector. In case members of the women Chamber of Commerce are partners, shareholders or directors of various enterprises in different sectors, there will be a conflict of interest and it will negate the spirit of the proviso to clause (d) of the said section of the ordinance.

*Clause (a) of sub-section (1) of section 12 of the ordinance provides that a registered trade organization shall not rescind, amend or modify its memorandum & articles of association without prior approval of the Federal Government. In this connection, it is pointed out that all the trade organizations are registered by the Registrar of Companies under Section 42 of the Companies Ordinance-1984 and the said section also envisages a grant of licence by the Securities and Exchange Commission of Pakistan (SECP). The SECP, while granting registration, also imposes certain conditions to be complied with which include restriction on amendment in the memorandum & articles of association of such organizations without prior approval of the commission. In the past, there has been a total confusion as to which one is the competent authority and to whom the trade organizations should apply first - whether the DTO or the SECP. Extra-ordinary delay was noticed on the part of regulatory agencies and the affairs of the organizations have been without any proper regulation. Besides, the Federal Government is empowered to issue order to a trade organization for making amendments in its memorandum & articles of associations, rules, or bylaws and if a registered trade organization fails or neglects to comply with the directions of the Federal Government, the amendments, modifications so directed shall be deemed to have been duly made by the concerned trade organization. In my view the powers to issue directions on the subject must rest with the Federal Government but subsequent compliance should be ensured by the Registrar of Companies and the requisite formalities with regard to amendments in the memorandum & articles of associations and related rules must be fulfilled as in the absence of incomplete statutory record to be maintained by the Registrar, there always remains a total confusion in the minds of members of the respective trade organizations and it also leads to unending litigation.

*When a provision has been made to organize associations at a district level, then there is no justification to exclude the town association out of the purview of the district association as the towns are very much part of the districts.

*Sub-section (1) of Section 4 provides that the licence granted under Section 3 of the repealed ordinance to an existing trade organization shall stand revoked and trade organization shall be required to apply for grant of licence under the new law within 3 months of its commencement and such applications shall be decided within a further period of 3 months. As provided in sub-section (3), the existing trade organization shall continue to function without any valid licence during the said period and even till the holding of its first election, Section 4 of the ordinance is thus not properly worded as the existing trade organization should not be allowed to function without a valid licence. The revocation of existing licence should be linked with the grant of new licence under this ordinance.

*Sub-section (3) of Section 5 of the ordinance prohibits the use of words "Federation or Chamber" as a part of name by any trade organization unless it has applied for grant of a licence. But the proviso to the said sub-section excludes the companies and associations formed for the purposes of promoting art, science, religion, charity, sports or any other profession other than trade, commerce, industry and service. In this connection it may be noted that the words "Federation or Chamber" are not normally allowed by any jurisdiction throughout the world to the companies or associations formed for commercial or industrial purposes or for the promotion of art, science and religion, etc. Thus there appears to be no justification to allow the words "Federation or Chamber" for the companies which are not subject matter of this special law.

*According to section 6 of the Ordinance, an application for renewal of licence is to be submitted after every three years. Its sub-section (3) further provides that annual accounts and performance of a trade organization shall be audited by a firm of chartered accountants and reports thereon shall be submitted to DG along with the renewal application. In my view the period of three years being too long, good corporate governance demands that the annual accounts and performance report should be submitted to the DG annually, simultaneously with the submission of these reports to the Registrar under the Companies Ordinance-1984.

*Clause (a) of sub-section (1) of section 7 of the ordinance provides that if a trade organization fails to apply for renewal of licence granted under section 3, within the prescribed or extended period, the Federal Government shall cancel the licence. Whereas under sub-section (7) of section 3 of the ordinance, the life of a licence granted to a trade organization is for a period of three years. It means that a licence once granted under section 3 of the ordinance shall lapse automatically and there will be no occasion for its cancellation by the Federal Government after the expiry of fixed period. Similarly, the grant of licence and registration of a trade organization is made at different stages. Thus licence granted to a trade organization may be cancelled when it fails to seek registration under the ordinance and not within one month of grant of licence. According to clause (e) of sub-section (1) of section 7, the elections of the executive bodies are subject matter of the memorandum of an organization whereas such matter are always provided under the articles of association of a company.

*Section 7 of the ordinance provides the grounds, on the basis of which, the licence granted to a trade organization shall be cancelled by the Federal Government. It further provides that where a licence is cancelled on any of the grounds stated thereunder, members of such trade organization found responsible by the Federal Government shall be debarred from sponsoring the proposal for grant of licence or becoming members of or holding any office of any trade organization for a period of three years. In this context, it may be noted that only the members of an executive committee or board of an organization are responsible to ensure proper compliance of the statutory provisions or other conditions whatsoever pertaining to the performance of a trade organization and not the ordinary members. Thus the punishment, if any, should be for the members of the executive committee or the Board of Directors. In fact directors of a company are the persons-in-charge of managing its affairs. They being agents of the company are collectively referred to as board or executive committee. In the case of trade organizations, normally the firms and companies are their members which are represented through their officers. Thus there appears no justification to debar or disqualify the firms and companies from becoming members of a trade organization on account of the default committed by the members of their executive committees/boards.

*Section 8 of the ordinance provides for cancellation of registration of a trade organization and it further states that such registration shall be deemed to have been cancelled with immediate effect if the licence granted to a trade organization has been cancelled by the Federal Government under section 7. Similarly, clause (b) of sub-section (1) of section 8 provides that registration of an existing trade organization shall stand cancelled after six months from the commencement of this ordinance unless it had been granted licence by the Federal Government. As a result, the Registrar of Companies is required to strike off the register, by publishing in the official gazette, the names of all such trade organizations whose registration has thus been cancelled.

*In this connection, I would like to point out that a company ceases to exist only by the formal process of dissolution and after the whole of the winding-up procedure has been completed. Whereas according to the arrangements provided under Section 8 of the ordinance, the trade organizations whose registration has been cancelled shall cease to exist and it will be up to the Federal Government to determine the mode and manner of liquidation of the affairs of such trade organizations. It is quite possible that certain trade organizations might be having huge assets and liabilities whereas the Registrar of Companies is only competent to struck off the names of those companies which have no significant assets or liabilities.

*Section 9 of the ordinance provides that where licence of a trade organization is cancelled under section 7, the Federal Government may grant de novo licence after a period of one year from the date of cancellation of the licence. Whereas clause (a) of sub-section (1) of section 8 says that the registration of a trade organization shall be deemed to have been cancelled with immediate effect if the licence granted to such trade organization has been cancelled by the Federal Government. It is difficult to understand as to how the Federal Government will be considering the grant of a de novo licence after a period of one year from the date of cancellation of licence when a trade organization shall cease to exist with immediate effect as a result of cancellation of a licence granted to it.

Since this ordinance has a limited life, I hope that the aforesaid observations will be taken into consideration in the public interest while giving the law a final shape.

- The views expressed by the writer are his personal and not on behalf of the SECP.