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Petitioner: ASSOCIATED BISCUITS INTERNATIONAL LIMITED VS Respondent: ENGLISH BISCUITS JUDGMENT
Court Name: Sindh High Court Judge(s): Shabbir Ahmed Title:ASSOCIATED BISCUITS INTERNATIONAL LIMITED vs ENGLISH BISCUITS
JUDGMENT
Reported As: 2003 CLD 815 Result: Order accordingly Judgment JUDGMENT The petitioner through the present petition under section 290 of the Companies Ordinance, 1984 (the Ordinance in short) seeks following order complaining oppressiveness on the part of the majority shareholders (1) Declaration that the decision of the Board of Directors at their meeting held on 22-1-1999 pertaining to further issue of shares to finance the acquisition of CFL shares and all actions in pursuance thereof are unlawful, fraudulent and of no legal effect. (2) Suspension of the decision dated 22-12-1999 of the Board of Directors of the respondent No,1 (i,e, respondents 2--7) to further issue shares to finance the acquisition of CLF shares owned by the respondents Nos,2, 3, 5, 6 and 7. (3) Injunction restraining the respondents from acting upon the decision of the Board dated 22-12-1999. (4) Direction to the respondent Nos,2--7 to cease and desist their direct and indirect efforts to browbeat and oppress the petitioner into reducing their shareholding by resorting to mala fide acts of oppression. 2. It is necessary to refer briefly to, the relevant part of the proceedings and the history of formation and composition of respondent English Biscuits Manufacturing (Pvt.) Ltd. (EBM in short), before examining the allegations of oppression made by the petitioner against the majority. As a result of agreement between Peek Freans & Co. Ltd. And the House of Manji (Investment) Limited and M. Manji, a joint venture company was incorporated in 1,965, in the name and style of PEEK FREAN (PAKISTAN) LIMITED. The sponsor Peek Frean & Company-UK. (PF) had an equity of 25.25% and local sponsors 74.75% in the Company. A year later i,e, 1966, the name of the company was changed from PEEK FREAN (PAKISTAN) LIMITED to its present name i,e, ENGLISH BISCUIT MANUFACTURERS (PRIVATE) (EBM).
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Similarly, the name of' Peek Frean & Company-UK was changed to Associated Biscuits International Limited-UK i,e, the petitioner (ABIL in short). The EBM is primarily engaged in manufacture of biscuits and other confectionery products in Pakistan. The respondent No,2 is its Managing Director, whereas, the respondents 3 to 7 are the Directors, The entire board of EBM with the exception of respondent 7 are family members of the respondents 2 and 3. Since 1993, ABL has neither representation on the Board of Directors of EBM, nor any other managerial or executive influence pertaining to its affaiRs, EBM, presently, holds fifty- one per cent. Shareholding in Coronet Foods (Pvt.) Limited (CFL in short), a private limited company, subsidiary of EBM, whereas, respondents 2, 3, 5, 6 and 7 collectively hold 1,135,000 shares representing 49% shareholding of CFL and the respondents 2 and 3 are the Managing Director and Director of CFL respectively. It is the case of the ABL that on 30-8-1999, notice for 34th Annual General Meeting of EBM was issued with Director's report ending 30-6-1999, inter alia, Agenda No,3 was in respect of the acquisition of 49% equity stake in CFL by EBM to make it wholly owned subsidiary and to avoid conflict of interest. The item of agenda No,3 reads as follows:-- 3. ACQUISITION OF 49.0% EQUITY STAKE IN CFL(EBMUS SUBSIDIARY). ' The Board of Directors in its meeting held on 30th August, 1999, has in principle, considered to acquire 49.0% shares from individual shareholders of CFL at a fair value to be determined/settled with the present shareholders based on valuation of CFL's shares being carried out by the Auditors of CFL M/s. A.F. Ferguson & Co., Chartered Accountants (Price Water House Coopers) and M/s. Sidat Hyder Marshed Associates (Pvt.) Ltd. (Arthur Andersen) on behalf of the proposed buyer (EBML). The move to make CFL a wholly owned subsidiary of EBML is to achieve the objectives of creating, manufacturing and marketing synergies through horizontal integration of the two companies. The proposed acquisition of 49.0% shares in CFL is intended to be funded through a raise in paid-up capital of EBML. The final decision in this regard will be made in due course. The above item/agenda was placed in Annual General Meeting held on 8-10-1999. Mr. Zahid F. Ibrahim, representing th ABL on proxy, conveyed ABL point of view on acquisition of the additional 49% shares in CFL by EBM in following terms:- 'We agree in principle with this plan insofar as it would put to an end the 'Conflict of Interest' situation. It is imperative that the valuation be made on a transparent basis taking into account recurring profit and relationship between EBM and CFL. Therefore, we request for the details of term of reference given to A.F. Ferguson & Co. And Seedat Hyder Murshed Associates (Pvt.) Ltd. We would also request for the clarification as to final valuation based on two valuation of different AuditoRs,' On 2-11-1999, ABM addressed letter to the respondents, on receipt of the certified copy of minutes of the 34th Annual General Meeting held on 18-10-1999, maintaining that there has been no response to their request for (i) copy of detailed terms of reference provided to M/s. A.F. Ferguson & Co. And M/s. Sidate Hyder Morshed Associates, the nominated auditors and also (ii) the clarification as to final valuation based on the reports of two different auditors pertaining to the valuation of CFL shares. EBM through its letter dated 11-11-1999, in acknowledgement of the ABM letter forwarded the terms of reference provided to the Auditors/Valuators, regarding clarification on final value of CFL shares, it was stated that both of them have so far not submitted their reports. As and when their reports are submitted, the final value shall be determined after due consideration and approval of the Board. It is the case of the ABM that the respondents 2 to 7 in complete disregard of their obligations under the law and without any intimation to them who are majority shareholders of EBL proceeded to arbitrarily decide the matter of valuation of the shares in the meeting of the Board of Directors held on 22-12-1999. It is the case of the ABM that on 16-1- 2000, they received notice dated 14-1-2000 pursuant to the Article 7 of the Company in respect of further issue of 2,020,000 shares of Rs,10 each and ABL was offered 808,000 shares from the aforesaid Right Issue, according to their entitlement, and they were required to signify their acceptance of the offer or part thereof with payment by 26-1-2000 in the account of EBM with the designated bank failing which the offer
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or the balance thereof shall be deemed to have been declined and the Board shall be entitled to dispose of the same in such manner as it thinks most beneficial to the company. The purpose/object for further issue of right share was disclosed in Part II of Statement under section 86(3) of the Ordinance:-- (17) Proportion of new issue to existing shares with any condition applicable thereto.Two ordinary shares of Rs,10 each for each issued/paid-up share at a premium of Rs,10 per share. The offer shall be deemed to be declined if not subscribed by 26-1- 2000. (18)Pursuant of the present issue To acquire 2,450,000 ordinary specifying the main projects/ shares of Rs,10 each (49.0%) at a objects for which additional funds fair value/price of Rs,20 per share required.To acquire 2,450,000 ordinary shares of Rs. 10 each Rs, (49.0%) at a fair value/price of Rs. 20 per share from individual shareholders of M/s. Coronet Foods (private) Limited which is presently owned by EBML to the extent of 51%. The acquisition shall cost around 49.0 m which shall be financed to the extent of Rs,40.40m through issue of capital and the balance shall be financed through encashment of short term investment. ABM became aware of the purported 22-12-1999 decision of the Board when, they received letter dated 14- 1-2000 on 16-1-2000. Significantly the valuation report of the auditors were not provided to the ABL until 18- 1-2000. The decision of the Board of Directors of EBM to purchase CFL shares at 100% premium by issuing further shares smacks of undue personal enrichment and oppression of minority shareholders, The valuation of CFL shares have been manoeuvred to the undue personal advantage of the respondents 2 to 7 which have been artificially inflated to a ridiculous 100% premium value through a non-transparent process where the sellers have manoeuvred the price at which EBM (of which the ABM holds 40% share) is being compelled to purchase CFL shares which has, been done for no reason other than to personally benefit the respondents 2 to 7. It was also their case that valuation, report of auditor M/s. Ferguson dated 6-12-1999 clearly specifies that the valuation report is based on the forecast and actual result could differ from the forecast since anticipated events frequently do not occur as expected and variations may be material. It was also pleaded that forecast has been prepared by respondents 2 and 3. Thus the valuation reports have no credible value is based on information manoeuvred by respondents 2 to 7, who are directly interested in the purchase of CFL shares by compelling the purchase CFL shares at an inflated value of Rs,20, the respondents 2 to 7 are determined to cause loss to the respondent. 1 and to cause personal benefit to the respondents 2 to 7 and grave prejudice to the interests of the ABL. Therefore, the efforts of the respondents 2 to 7 to improperly acquire the shares of CFL at ridiculously inflated value are mala fide, oppressive and fraudulent. 3. Alongwith petition, C.M.A. No,126 of 2000 under section 292 of the Companies Ordinance read with Order 39, rules 1 and 2, C.P.C. Was also filed for suspension of the decision of the Board of Directors dated 22-12- 1999 to issue shares to finance the acquisition of CFL shares owned by the respondents 2, 3, 5, 6 and 7 and to restrain the respondents from acting thereupon in any manner whatsoever. 4. On 26-1-2000, the parties were directed to maintain the status quo. After hearing the parties' counsel, perusal of the petition, counter-affidavit, affidavit-in-rejoinder, the application referred to above was disposed of with the following directions:-- (a) That the respondents are to supply to the petitioner the entire material/record including the copies of reports of Iqbal Nanji & Company to the petitioner within a period of 7 days;
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(b) thereafter the respondent No,1 to approach the two auditors namely M/s. A.F. Ferguson & Co., Chartered Accountant and Sidat Hyder Murshed Associates (Pvt.) Ltd. For once again carry out the exercise to determine the value of shares of CFL by associating all parties including the petitioner after due notice and submit repot to the company within a reasonable time; the auditors will be at liberty to call for any other material or document/report/ evidence for reaching the right conclusion. The petitioners to bear the cost of the auditors for the exercise to be carried out by them hereinabove, (c) the respondent-company if wishes to increase share capital is directed to call the general body meeting of their shareholders as provided under section 92(3) of Companies Ordinance, 1984; (d) order dated 26-1-2000 will remain in force till compliance of the above directions. 5. The respondents impugned the order in High Court Appeal No,163 of 2000 which was disposed of by consent by order dated 5-10-2001, whereby following part of para.9 of the impugned order was deleted:- 'but they have to invoke the provisions of section 92(3) ibid for its final approval.' The deletion of the above phrase, from the order, necessitated as the dispute apparently pertains to the increase in the paid-up capital covered under section 86 of the Ordinance. 6. On 4-12-2001, C.M.A. No,3518 of 2001 was filed by ABL against the respondents 2 to 7 complaining disobedience and breach of order dated 15-3-2000 with further request for suspension of all the actions illegally taken by the respondents as stated in their letter dated 22-10-2001, with direction to the parties to maintain status quo, supported by affidavit of Farrukh M. Junaidy, attorney of ABL. Number of documents covering the correspondence exchanged between the ABL, their counsel, auditors, EBM and their counsel were also placed on record. The application referred to above has been resisted/opposed by filing counter-affidavit, with denial of the allegation of disobedience/breach, with the plea that after compliance of clauses (A) and (B) there was No, prohibitory order in the field as the order dated 26-1-2000 was to remain in force till compliance of the directions which were made by the respondents on 20-9-2001, thereafter, the position of order dated 26-1- 2000 with. Substituted dated 5-10-2001 (disposal of the HCA), the petitioner failed to signify their acceptance to purchase the right shares, on their failure, their shares were issued to other shareholders in accordance with section 86(7) of the Ordinance. Numerous documents were also placed alongwith the counter-affidavit, rejoinder was also filed. It is also to be noted that though the respondents have contested the interlocutory applications but have not filed any counter-affidavit in opposition of the main petition. 7. In intent to dispose of main petition and the C.M.A. No,3518 of 2001 by common order as the petition and application have been argued by counsel of both parties together. 8. Before I deal with the respective contentions raised, it will be necessary to keep in view the scope of the jurisdiction of the Company Judge, under the provisions of section 290 and section 291 of the Ordinance. The relevant provisions of the Companies Ordinance, 1984 are found in Part X dealing with Prevention of Oppression and Mismanagement. In the instant proceeding, I will be concerned with the sections 290 and 291 of the Ordinance, which read as follows:-- "290. Application to Court.---(1) If any member or members holding not less than twenty per cent. Of the issued share capital of a company, or a creditor or creditors having interest equivalent in amount to not less than twenty per cent. Of the paid-up capital of the company, complains or complain, or the Registrar is of the opinion, that the affairs of the company are being conducted, or are likely to be conducted, in an unlawful or fraudulent manner, or in a manner not provided for in its memorandum, or in a manner oppressive to the member or any of the members or the creditors or any of the creditors or are being conducted in a manner prejudicial to the public interest, such member or members or, the creditor or creditors, as the case may be, the Registrar may make an application to the Court by petition for an order under this section. (2) If, on any such petition, the Court is of opinion-- (a) that the company's affairs are being conducted, or are likely to be conducted, as aforesaid; and
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(b) that to wind-up the company would unfairly prejudice the members or creditors; the Court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit, whether for regulating the conduct of the company's affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of purchase by the company, for, the reduction accordingly of the company's capital, or otherwise. (3) Where an order under this section makes any alteration in, or addition to, a company's memorandum or articles, then, notwithstanding anything in any other provision of this Ordinance, the company shall not have power without the leave of the Court to make any further alteration in or addition to the memorandum or articles inconsistent with the provisions of the order; and the alterations or additions made by the order shall be of the same effect as if duly made by resolution of the company and the provisions of this Ordinance shall apply to the memorandum or articles as so modified accordingly. (4) A copy of any order under this section altering or adding to, or giving leave to alter or add to, a company's memorandum or articles, shall within fourteen days after' the making thereof, be delivered by the company to the Registrar for registration; and if the company makes default in complying with this subsection, the company and every officer of the company who is knowingly and willfully in default shall be liable to fine which may extend to five thousand rupees and to a further fine not exceeding one hundred rupees for every day after the first during which the default continues. (5) The provisions of this section shall not prejudice the right of any person to any other remedy or action. 291. Powers of Court under section 290.---Without ' prejudice to the generality of the powers of the Court under section 290, an order under that section may provide for-- (a) the termination, setting aside or modification of any agreement, howsoever, arrived at between the company and any director, including the chief executive, managing agent or other officer, upon such terms and conditions as may, in the opinion of the Court, be just and equitable in all the circumstances; (b) setting aside of any transfer, delivery of goods, payment, execution or other transactions not relating to property made or done by or against the company within three months before the date of the application which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference; and (c) any other matter, including a change in management, for which in the opinion of the Court it is just and equitable that provision should be made. The perusal of the section 290 reproduced above shows that the power/jurisdiction of the Company Court can be invoked by-- (1) any member or members holding not less than twenty per cent. Of the issued share capital; or (2) a creditor or creditors having interest equivalent in amount to not less than twenty per cent. Of the paid-up capital; or (3) The Registrar when he is of the opinion, that the ground mentioned the section exists for seeking interference of the Court. The causes which are to form basis of a petition under section 290 are:-- (a) That the affairs of the company are or are likely to be conducted in an unlawful or fraudulent manner; (b) that the affairs of the company are being conducted in a manner not provided for in its memorandum: (c) that the affairs of the company are being conducted in a manner oppressive to the member or any of the members or the creditors or creditors; (d) that the affairs of the company are being conducted in a manner prejudicial to the public interest. It may also be noticed that in addition to general power of the Court under section 290, an order under that section may invoke for-- (a) the termination, setting aside or modification of any agreement, howsoever arrived at between the company and any director including the Chief Executive, Managing agent or other officer, upon such terms and conditions as may, in the opinion of the Court, be just and equitable in all the circumstances;
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(b) setting aside of any transfer, delivery of goods, payment, execution or other transaction not relating to property made or done by or against the company within three months before the date of application which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference; and (c) anv other matter including a change in the management for which in the opinion of the Court it is just and equitable that provision should be made. 8. The remedy provided by section 290 is of a preventive nature so as to bring to an end to oppression and mismanagement on the part of controlling shareholders and not to allow its continuance to the detriment of the aggrieved shareholders or the company. The remedy is not intended to enable the aggrieved shareholders to set at naught what has already been done by the controlling shareholders in the management of the company. The section does not confer any power on the Court to set aside or interfere with past or concluded transactions between a company and third parties which are no longer continuing wrongs. The provisions are essentially intended to control and prevent oppression of the rights of the minority shareholders and mismanagement by the majority, actually alternative to winding-up proceedings. In order to invoke the jurisdiction of the company Judge under section 290 it must be made out that the company's affairs are being conducted in a manner prejudicial to public interest or oppressive to any member or members of the company and the facts justify the making of a winding-up order, but at the same time, making such winding-up order would unfairly prejudice such member or members, The provisions are essentially intended against the tyranny of the majority against the minority shareholders, The power of the Court under these provisions cannot be read as subject to the provisions contained in other chapters which deal with normal corporate management of the company. An analysis of the sections contained in Chapter X of the Ordinance would also indicate that the powers of the Court under section 290 or 291 cannot be read as being subject to the other provisions contained in sections dealing with corporate management of the company in normal circumstances with exception to application of the provisions of the sections 410 to 417 of the Ordinance. The topic or subjects dealt by Chapter X are such that it becomes impossible to read any such restriction or limitation on the powers of the Court. Without prejudice to the generality of the powers conferred on the Court under section 290, section 291 proceeds to indicate what types of orders the Court could pass. Under clause (c) of the section 291, the Court's order may provide for any other matter for which, in the opinion of the Court, it is just and equitable that provision should be made. The only limitation can be impliedly read on The exercise of the power would be that nexus must exist between the order that may be passed thereunder and the object sought to be achieved by those sections and beyond this limitation, which arises by necessary implication, it is difficult to read any other restriction or limitation on the exercise of Court's power. Further section intended to avoid winding-up of the company, if possible, and keep it going while at the same time relieving the minority shareholders from the acts of oppression and mismanagement or preventing its affairs from being conducted in a manner prejudicial to public interest and, with such objective, the Court has power to interfere with the normal corporate management E of the company. 9. After dilating on the scope of sections 290 and 291 with reference to the pre-conditions for the exercise of jurisdiction and limitation on exercise of such jurisdiction, I now venture to address the contentions raised. 10. Mr. Zahid F. Ebrahim, learned counsel for the petitioner contention was that the respondents 2 to 7, controller of the affairs of the EBM, have taken a decision in board meeting dated 22-12-1999 to purchase CFL share at 100% premium by issuing further shares smacks of undue personal enrichment and oppression of minority shareholders, The valuation of CFL shares have been manoeuvred to the undue personal advantage of the respondents 2 to 7 which have been artificially inflated to a ridiculous 100% premium value through a non-transparent process where the sellers have manoeuvred the price at which EBM is being compelled to purchase CFL shares which has been done for no reason other than to personally benefit the respondents 2 to 7. He also pointed out that valuation repot of Messrs Ferguson
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dated 6-12-1999 clearly specifies that the valuation report is based on the forecast and actual result could differ from the forecast since anticipated events frequently do not occur as expected and variations may be material. Therefore, his contention was that such report have no credible value based on information manoeuvred by respondents 2 to 7, who are directly interested in the purchase of CFL shares by compelling the EBM to purchase CFL shares at an inflated value of Rs,20, thus loss to EBM and to cause personal benefit to the respondents 2. To 7 and prejudicial interest of the petitioners, His contention was that efforts of the respondents 2 to 7 to improperly acquire the shares of CFL at ridiculously inflated value are mala fide, oppressive. His further contention was that the respondents 2 to '7 have duel position, i,e, purchaser and seller and the petitioner is being made to pay for the benefit being made by the respondents 2 to 7 as the purchase is being financed by further issue of…
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