The last Pakistan Democratic Movement (PDM) government illegally replaced five independent directors of Sui Northern Gas Pipelines Limited (SNGPL) towards its fag end without holding their elections, creating a legal challenge for the firm.

The matter suddenly got attention this week after the Lahore High Court (LHC) granted an interim injunction a day earlier and the Securities and Exchange Commission of Pakistan (SECP) on Tuesday sought an explanation from the company.

The decision to allow nominee directors of SNGPL to take over its board without following due process was not only in violation of the Companies Act 2017 but also against the spirit of the federal cabinet’s decision, showed documents.

The LHC on Monday instructed that “subject to notice and till the next date of hearing, the election process for the board of directors of SNGPL will continue, however, the same shall remain subject to final outcome of this petition”.

The company has fixed September 11 for the election of independent directors but in violation of the law, the nominee directors have already assumed their responsibilities, showed the company’s website and official documents.

The court instructed to fix the case for hearing in October 2023, a date that may cause further uncertainty as elections would be held on September 11 but the decision would be subject to the court’s nod.

In July, the federal cabinet approved the nomination of six directors against five seats, including Ismail Qureshi as the new chairman. It nominated Arif Saeed, Faraia Rehman Salahuddin, Sardar Saadat Ali Khan, Ahmad Atteeq Anwar and Osman Saifallah Khan.

The Companies Act 2017 has determined the process for removal of existing directors and appointment of new directors under Sections 159 and 163. However, official documents and court filing showed that SNGPL did not adopt the legal path.

“A company may by resolution in general meeting remove a director appointed under Sections 157, 161 or Section 162 or elected in the manner provided for in Section 159,” states Section 163. Company Secretary Imtiaz Mehmood did not respond to questions about the legal process adopted to replace the existing directors and the impact of LHC judgement on next month’s elections.

It is not the only case where the PDM government breached the law or rules. It also appointed Pakistan’s deputy permanent delegate to Unesco in violation of merit. The concerned joint secretary of the Petroleum Division did not respond to the questions sent by The Express Tribune.

Sources said that the SECP – the equity market and companies’ regulator – has also sought an explanation from the company.

“SNGPL at PSX announced changes in its board of directors on August 8, 2023. The matter is under consideration of the commission with regards to compliance by the company with the regulatory framework and the matter will be dealt with in accordance with the law,” said an SECP spokesperson.

Sources said that since the SECP had taken cognisance of the matter, the newly appointed directors could no longer perform their functions.

Section 168 of the Companies Act states “the acts of a person acting as a director are valid notwithstanding that it is afterwards discovered that there was a defect in his appointment; or he was disqualified from holding office; or he had ceased to hold such office: Provided that, as soon as any such defect has come to notice, the director shall not exercise the right of his office till the defect has been removed.”

The federal government has total 58% shareholding in the firm, including the indirectly held 26%.

SNGPL’s profit went down by 5.7% to Rs10.4 billion in 2022 and the company was also facing challenges of increasing receivables and a high ratio of unaccounted for gas. Its unaccounted-for-gas ratio was 8.1% in 2022.

Sources said that the federal government pushed through the process and sent a senior official of the Petroleum Division on holiday to ensure that new members smoothly take over.

They said that an embarrassing situation was created when all the six nominated directors reached Lahore but one of them was asked to leave since there were only five places on the board.

The court filing showed that instead of nominating the said persons for election, five independent directors of the board were replaced on the directive of the former prime minister and the Ministry of Energy.

The petitioner submitted before the court that the federal government could only nominate persons for fresh election but could not replace them and secondly the federal government could only act through the cabinet.

The court filing highlighted another violation. It stated that the independent directors nominated on behalf of legal entities could not be replaced by the federal government without approval of the board of the respective legal entities.

A July 31 correspondence between the Petroleum Division and SNGPL revealed that the federal government had only nominated the directors, as it did not use the word “appointment” in the letter.

“The federal government has approved nominations of directors for the fresh board of directors of SNGPL. SNGPL may ensure further necessary action at their end in order to comply with Section 159 of the Companies Act 2017, and legal provisions of other applicable laws/rules, if any,” read the letter.

However, subsequently, there was a change of heart and on August 5, the Petroleum Division issued fresh instructions to SNGPL that lacked approval of the cabinet and were conveyed on behalf of the prime minister.

The board’s original term had expired on July 5 but the government sought a three-month extension from the SECP. It subsequently decided to install new directors in violation of the Companies Act.

The Petroleum Division conveyed to SNGPL that Shehbaz Sharif as energy minister instructed that “the government nominated independent directors of SNGPL to replace existing directors for the remaining period and the government nominated Chairman Muhammad Ismail Qureshi to replace the existing chairperson.” It was further instructed that fresh elections shall be held on expiry of the tenure of current board and the (new) independent directors shall be eligible for elections to the new board.

Through these instructions, the Petroleum Division said that a meeting of the board of directors of SNGPL shall be convened no later than Monday, August 7, 2023 to give effect to the above-captioned directions.

However, the ousted chairperson conveyed her concerns to the company secretary, according to an electronic correspondence between the two.

She stated that her concern stemmed from the fact that an agenda in the forthcoming board of directors meeting convened on August 10 has already been circulated specifying the process of elections of recently nominated government directors through AGM as per companies’ law, SECP regulations and SOE Act.

She further wrote that the sitting board (now five members removed) had been formed through a proper process of elections, as per all applicable laws, after being nominated by the government.

Bypassing the election process will be an illegal act to which neither MOP nor SNGPL, nor the nominated and yet to be elected directors should become a party, she added.

Published in The Express Tribune, August 23rd, 2023.

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