Name of client Airblue Limited

Engagement Audit for the year ended 31 December 2020

Matters pending with the Securities and Exchange Commission of Pakistan

Background

Airblue Limited (“the Company”) is an unlisted public limited company and was incorporated on 20 May 2003. The principal activity of the Company is to
provide air transport and cargo services inside and outside Pakistan. The Company commenced its commercial operations in June 2004. The Company
obtained license from the Pakistan Civil Aviation Authority to operate as regular public transport on 10 June 2004.
The Company is owned by individual shareholders with 65% shares held by Chaudhary Tariq Mehmood and his close family members. 24.6% of the shares
are held by SPM (Private) Limited.

On 22 October 2018, SPM (Private) Limited (SPM) filed an application to the Securities and Exchange Commission of Pakistan (SECP) for investigation
into the affairs of the Company under section 256 of the Companies Act, 2017 on the basis of allegations relating to certain payments and transactions with
the Company’s related parties/key management personnel.

A show-cause notice was issued by the SECP to the Company and the Company, through its attorney, submitted a para-wise comments on the allegations by
SPM on 21 January 2019. On 03 April 2019, SPM submitted its comments rebutting the contentions of the Company and various hearings were held at the
SECP on the matter.

The SECP passed investigation order on 02 July 2019 and appointed Mr. Ijaz Akbar, FCA of M/s HLB Ijaz Tabussum & Co., Chartered Accountants as
inspector to investigate the matter under section 256 of the Companies Act, 2017. The SECP set out the terms of reference for the investigation.

The inspector conducted the investigation and submitted its report to the SECP on 18 February 2020. The investigation report was forwarded by the SECP to
the Company on 21 February 2020 for point-wise comments. SECP issued show cause notices to the Company based on findings in the investigation report.
Inspector’s Report Findings

S. Scope of Inspection/TORs Findings Current Status

No.
1 With respect to the amount of Rs. 2,097
million paid/payable in the year 2017 to the
chief executive and chief operating officer of
the Company, the following is to be
ascertained:
(a) Whether proper contracts were executed Contract with CEO Pending.
between the Company and the CEO/COO The Company has violated section 198(2) and
at the time of initial appointment and what 200(1) of the repealed Companies Ordinance, The Company has submitted its response to
were the terms and condition; 1984 relating to appointment and terms of the show cause issued by SECP.
appointment to be approved by the Board and
by the Company in general meeting.

Contract with COO (Payment of Rs. 800

million) Closed
The Company has not violated any provision of
the repealed Companies Ordinance,
1984/Companies Act, 2017.
(b) Whether the contracts were renewed after CEO Pending.
the expiry if the contract and the details of The Company violated sections 198(2), 199(1)
the said renewals; and 200(1) of the repealed Companies The Company has submitted its response to
Ordinance, 1984 requiring the appointment of the show cause issued by SECP.
first chief executive, appointment of subsequent
chief executive and terms of appointment of
chief executive respectively to be approved by
directors, or in case of terms of appointment, by
the Company in general meeting.

COO
In the ‘Offer of Employment’ dated 23 June
2003 signed with COO, there is no clause to Closed
renew terms and conditions every year.
(c) Whether the contracts provided for a CEO Pending.
 condition that in case the CEO/COO were There exists no contract between the Company
under compensated in earlier years, they and CEO. The Company has submitted its response to
would be compensated later and the details the show cause issued by SECP.
of the same;
COO
The ‘Offer of Employment’ dated 23 June 2003 Closed.
appointing COO does not have any such clause.

If the Company is treating this payment as a

payment for past services, a provision for
contingent liability was required to be created. If
so, the Company as violated the requirements of
IAS 37.
(d) Whether the Board of Directors deliberated Both appointments have not been discussed, Pending.
and approved the initial as well as deliberated or approved in any Board meeting.
subsequent terms and conditions (including The Company has submitted its response to
payment) of the CEO/COO; There is no appointment letter confirming the the show cause issued by SECP.
appointment of CEO. However, subsequently,
the matter of CEO re-appointment is discussed
in the Board meeting held on 07 May 2017.
Even this re-appointment by the Board does not
discuss any emoluments to be paid to him for
his services.

COO has been appointed by the CEO. However,

the Board has approved vide resolution dated 23
March 2018 and 26 December 2017 to pay Closed
compensation to CEO and CEO respectively.

(e) Whether the Board before approving the After reviewing the minutes of meeting dated 26 Closed
underpaid compensation of prior years, has December 2017 and 23 March 2018, nothing
duly ensured that the same is indicated that would cause us to believe that the
commensurable with the industry in which Board of Directors while approving the
the Company is operating; underpaid compensation of prior years, to COO
and CEO has duly ensured that same is
commensurable with the industry in which the
 Company is operating.
(f) That the compensation paid/payable were The Company has violated clause 65 of its Closed
in accordance with the terms of the Articles of Association ‘Remuneration for extra
employment as well as the Articles of services’.
Association of the Company; and
(g) That the provisions of the Company Law The Company has violated section 200(1) of the Pending.
and /or Articles of Association of the repealed Companies Ordinance, 1984 requiring
Company were observed with respect to: the terms of appointment of chief executive to The Company has submitted its response to
i. Approval of the terms and conditions of be approved by directors, or by the company in the show cause issued by SECP.
employment of CEO/COO in Board general meeting.
meeting;
ii. Quorum of the Board meetings;
iii. Disclosure/participation if interested
directors.
2 With respect to the related party transactions
(RPTs) except those noted under TOR # 1
carried out during the years 2016 and 2017;
(i) Ascertain whether the price charged The Company has violated section 196(2)(g) of Closed
(including the amount deposited with related the repealed Companies Ordinance, 1984 while
parties) for each RPTs were in accordance with conducting transactions with related parties. The
the terms of the underlying agreements entered Company has also violated section 196(2)(k) of
into with related parties? Detail of the same the repealed Companies Ordinance, 1984 while
may also be provided. taking Aircrafts on lease.
(ii) Confirm that the provisions of the Since matter was not discussed in any Board Closed
Company Law and/or Articles of Association meeting, therefore no comments offered.
of the Company regarding quorum of Board
meetings, as well as disclosure/participation of Related party transactions were subsequently
interested directors were observed while approved and disclosures of interested directors
approving RPTs. were made in meeting held on 29 June 2018 for
the year ended 31 December 2016 and 31
December 2017. Quorum for the meeting held
on 29 June 2018 was complete.

(iii) Ascertain whether the receivable of Rs. 49 The Company has violated section 196(2)(m)(i) Closed
million from Zapway Inc., which was written of the repealed Companies Ordinance, 1984 as
off in the year 2016, was duly approved by the the write off was not approved by the Board in
 Board in accordance with section 196 of the accordance with section 196.
repealed Ordinance.
3 Whether the concerns raised by the nominee On review of minutes of meeting held on 14 Closed
director of the Applicant in the Board meeting July 2017, it was observed that concerns raised
held on 14.7.2017 were appropriately by the nominee director of the applicant were Penalty of Rs. 15,000 and order to ratify
addressed or recorded in the minutes book? not recorded in the minutes book. If the minutes of the meeting.
applicant is able to prove contrary, then the
Company has violated the requirements of the
section 178 of the Companies Act, 2017.

4 In view of the provision of section 227 of the Director’ report for the year 2016 was not Pending
Act (corresponding section 236 of the repealed issued, therefore we do not offer any comments.
Ordinance), please confirm that the director’s
report for the year 2016 & 2017 contained all The Company has violated section 236(1) of the
the information required to be provided in repealed Companies Ordinance, 1984.
terms of the aforesaid section and did not skip
out any details, particularly with respect of After review of directors’ report for the year
RPTs which may have significant bearing on 2017, we have observed the following:
the economic decisions of the users?
 Name of all directors were not
mentioned
 Pattern of shareholding is not disclosed
 Reason for lower profitability was
attributed to fuel prices and
devaluation, however, compensation to
CEO/COO was also major cause which
was not mentioned.

The Company has violated section 227(1) of the

Companies Act, 2017.

5 Whether the contention of the Company The Company has not violated the requirements Closed
regarding not appointing or otherwise the of the Companies Act, 2017
nominee director of the Applicant, was in
accordance with the provisions of the
Company Law, particularly provisions of
 section 164 of the Act (corresponding section
182 of the repealed Companies Ordinance,
1984)?
6 Any other matter(s) incidental or ancillary to There were no Standard Operating Procedures Closed
the above ToRs, which may warrant attention approved by the Board.
of this Commission. Please provide details of
the same, if any. Agreements with Zapways Inc. and Airblue
Flight Catering were not on stamp papers.

As such no violation of Company Law is

identified.
Show cause notices issued by SECP based on findings of Investigation Report
1) Show cause # 52356

SECP issued show cause notice to the Company under section Notice under Section 479 (Adjudication of offences) of the Companies Act, 2017 for
violation of section 17 (Effect of memorandum and articles.—) of the Act.
The provisions of sub section (1) of section 17 of the Companies Act, 2017 (the "Act") provides that the memorandum and articles shall, when
registered, bind the company and the members to observe and be bound by all provisions of the memorandum and of the articles subject to provisions
of the Act.
And whereas, clause 65 of the articles of association of M/s. Airblue Limited (the "Company") titled, "REMUNERATION FOR EXTRA SERVICES"
provides that if a Director or Directors shall be called upon to perform extra services or to make any special extortion for the purpose of the Company
or business thereof or give special attention to the business of the Company, such a Director or Directors shall be entitled to a special remuneration
which shall be determined by the Board of Directors or the shareholders in the general meeting and may be paid in the form of fixed monthly
allowances or a commission on the net annual profits of the Company or partly in one way and partly in another or in any other way as the Directors
may from time to time determine.

It has come to the knowledge of this office (SECP) that Board of the Company in meetings held on December 26, 2017 and March 23, 2018 approved
the payment of lump sum amounts of rupees 800 million and USO 11.734 million by the Company respectively to its former COO, Mr. Shahid
Khaqan Abbasi to recognize his exceptional contribution during his employment between January 01, 2004 and April 30, 2013, and to its CEO, Mr.
Tariq Mahmood Chaudhary to recognize his exceptional contribution during his employment between January 01, 2004 and April 30, 2017.
The Board has never approved any remuneration and has never assigned any extra services. The CEO remained working without any contract for
these years and implied to provide his services free of cost. On the other_ hand, the COO agreed to work on compensation of Rs. 200,000/- per month.
The appointments of CEO and COO were never discussed in advance by the Board.
The Company submitted its response vide letter dated December 15, 2020 through its legal counsel Tahir Razzaque and Company and contested on
the basis of admitted and undisputed factual matrix and applicable legal provisions.
• Companies Act, 2017 does not regulate issuance of appointment letter of CEO and its format;
• The remuneration of under-compensation for past services to COO and CEO was in compliance to section 183 (2) of the Companies Act, 2017;
• Companies Act, 2017 versus articles of association of Company the provision of statute shall prevail;
• Decision of High court in similar cases; and
• Ratification by Shareholders in Annual General Meeting by adoption of accounts.

The Company submitted additional facts through letter dated January 15 2021 including:
• Reference of case law related to ratifications;
• Evidence of appointment of CEO (investment agreement)
• Profitability analysis of Company 2004 - 2019
• Submission of form - 29 from time to time indicate the appointment of CEO.

SECP in its order dated 02 February 2021 dropped all the proceedings.
2) Show cause # 1203

SECP issued show cause notice to the Company under section 173(5) (Minutes of proceeding of general meetings and directors) and section 204
(Appointment of Chief Executive) of the repealed Companies Ordinance, 1984.
The Inspector submitted his final report to the Commission and observed that the Company prima facie violated sections 198(2), 199(1) and 200(1) of
the repealed Ordinance.
The Company submitted its response to the SECP vide Letter dated January 27, 2021 and the Company contested on following grounds:
— Appointment of inspector is illegal and void ab-initio (partner was appointed while the firm issued the report).
— The Company has substantially complied with the relevant requirements of Company Act, 2017 and further the Company can call general
meeting or Board of Directors meeting for further ratification.
The Company submitted its additional response to the SECP vide Letter dated Letter dated February 10, 2021 and provided the following explanation:
— The Company confirmed that they could not find minutes of meeting related to first appointment of Chief Executive however this can be
substantiated through relevant affidavits of that period and Form 29 submitted with SECP.
— The Company has ratified the recording of minutes by majority of shareholders, the Company has deemed to have complied section 173.

Response of SECP is awaited.

3) Show cause # 9171

SECP issued show cause notice to the Company under section 474 of the Companies Act, 2017 (Enforcing compliance with the provisions of Act) for
non-compliance with section 236(1), 227(1) and 227(2) (directors' report)
The Inspector submitted his final report to the Commission and observed that the Company prima facie violated sections 236(1), 227(1) and 227(2) of
the Companies Act 2017.
The Company is yet to submit its response.

4) Show cause # 45526

SECP issued show cause notice to the Company under section Notice under Section 479 (5) (Adjudication of offences) of the Companies Act, 2017
for violation of section 178 (Records of resolutions and meetings of board) of the Act.

The Company submitted its response to the SECP vide Letter dated November 11, 2020.

SECP issued order dated 10 December 2020 in respect of the above matter and imposed penalty of Rs. 15,000 to be paid within 30 days.
Further the Company has to exercise remedial measures to ratify the minutes of BOD meeting held on July 14, 2017 within the earliest
possible time.
Open / Undecided Matters:

Following matters are currently pending/under review by the Securities and Exchange Commission of Pakistan:

 Non-compliance with section 236(1), 227(1) and 227(2) of the Companies Act, 2017. (Related to directors' report)
The Company is yet to submit its response against the show cause notice in this regard.

 Non-compliance with sections 173 (1), 173 (4) (Minutes of proceeding of general meetings and directors), 198(2), 199(1) and 200(1)
(Appointment of Chief Executive) of the repealed Companies Ordinance, 1984.
The Company has submitted its response against the show cause notice in this regard and final order of SECP is pending.