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Petitioner: (1) State Bank of Pakistan through Chief Manager, Peshawar (2) M/s Securities & Exchange Commission of Pakistan, Islamabad. VS Respondent: (1) Securities and Exchange Commission of Pakistan and others (2) Official Liquidator, Islamic Investment Bank Limited and others
Court Name: Supreme Court of Pakistan Judge(s): Ijaz-ul-Ahsan, Qazi Faez Isa, Ejaz Afzal Khan Title:(1) State Bank of Pakistan through Chief Manager, Peshawar (2) M/s
Securities & Exchange Commission of Pakistan, Islamabad. vs (1) Securities and Exchange Commission of Pakistan and others (2) Official Liquidator, Islamic Investment Bank Limited and others Case No.: CIVIL APPEALS NO. 1406 AND 1407 OF 2016 Date of Judgment:2017-10-27 Reported As: K.L.R. 2017 S.C. 627, 2017 SCP 975 Result: Appeals allowed Judgment Qazi Faez Isa, J. Leave to appeal was granted (in Civil Petitions for Leave to Appeal Nos. 1163 and 1344 of 2016) on May 5, 2016, which order is reproduced hereunder: "It is inter alia contended that in winding up proceedings pending against Islamic Investment Bank Limited, learned Bench of the Peshawar High Court, Peshawar held the petitioner State Bank of Pakistan (in Civil Petition No. 1163/2016) and so also the petitioner Securities and Exchange Commission of Pakistan (in Civil Petition No. 1344/2016) liable for the conduct of the delinquent directors who forced the Islamic Investment Bank to go into liquidation. According to learned counsel for the petitioners, the State Bank of Pakistan and so also Securities and Exchange Commission were made liable to make good the loss on misreading and mis-interpretation of Sections 412 & 413 of the Companies Ordinance, 1984, which are clearly aimed at delinquent sponsor and or directors involved in promotion and formation of a company. It is alleged that State Bank only regulates the financial and or other matter within the contemplation of State Bank of Pakistan Act, 1956 and has no other role except regulating the financial and banking business. 2. Likewise, it is urged by the learned counsel Mr. Anwar Mansoor Khan that SECP is only a regulatory body , which regulates the functioning and operation of a company covered under Companies Ordinance, 1984. It is urged that such provisions of Section 412 & 413 of the Companies Ordinance only apply to the delinquent director and not regulators as such. 3. Syed Ali Zafar, learned ASC for State Bank further contended that if at all the liability is stretched, it could be a tortuous liability which does not come within the purview of Sections 412 & 413 of the Companies Ordinance,
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which has been invoked by the Company Judge to held them liable and such liability if at all is denied it can be resulted in civil proceedings and not in liquidation proceedings under the Companies Ordinance. 4. Points noted above do call for examination. We, therefore, grant leave in both these petitions. Since it is a case of first impression, we would direct the of fice to fix the main appeals immediately after summer vacations. CMA No. 2680/2016 5. Notice. In the meantime, the operation of the impugned judgment to the extent of both the petitioners is suspended. " 2. To appreciate the controversy it would be appropriate to recount certain admitted facts. The Islamic Investment Bank Limited ("IIBL") was incorporated as an investment finance company on June 14, 1990 in the province of Khyber Pakhtunkhwa. The Security and Exchange Commission of Pakistan ("SECP ") submitted an application on May 11, 2005 to the High Court under sections 305 and 309 of the Companies Ordinance, 1984 ("the Ordinance ") for winding up IIBL (Company Case No. 5/2005). IIBL was ordered to be wound up vide order dated May 18, 2009 and Syed Mudassar Ameer , Barrister-at-Law , was appointed as the official liquidator under section 321 of the Ordinance. The High Court also directed the official liquidator to "ensure that each and every penny outstanding against any person, authority , organization, Company or institution whatsoever it may be is promptly recovered, secured and deposited ". The following further observations were made (in paragraph 15 of the judgment): "15. Before concluding this judgment, it is held that not only the Chief Executive and Directors of the Board are liable to pay back the money they have looted from the Company , invested by the depositors but are also liable to criminal prosecution under the special law. Similarly the high ranking officers of the State Bank (Regulation and Supervision) are equally liable to share the burden of liability because of their criminal negligence knowing well that the respondent Company was going to sink but they muffled certain facts and did not take timely action for its rehabilitation or liquidation. The SECP (petitioner herein) is also no exception because during the deep crisis period the Company was going through, it played a similar negative rule, therefore, those officers connected with the affairs of the Company supervision must be taken to task. " 3. The aforesaid judgment was appealed in this Court (C. A.Nos. 135-P , 136-P , 154-P , 878 and 879 of 2009); the appeals were disposed of vide order dated September 28, 201 1, reproduced hereunder: "The learned counsel for the parties agree that as far as winding up of the Company is concerned, no one has objection and that the winding up proceedings shall continue before the Company Judge. As to the observations made, directions given by the learned Company Judge, regarding the State Bank of Pakistan, Securities & Exchange Commission of Pakistan, the Chief Executive and the Directors of the Islamic Investment Bank and the Federal Government, the same are expu nged as those were made without due notice to the said Institutions or individuals. However , it will be open to the Company Judge to proceed in the matter , as he deems fit, after due notice to those against whom an action is suggested or proposed to be taken. All these appeals are disposed of in the terms mentioned above. " 4. Thereafter, the official liquidator filed an application before the Company Judge of the High Court (C.M. No. 35 of 2011) under sections 412 and 413 of the Ordinance and in it also arrayed the Federal Government as respondent Nos. 1 and 2, SBP as respondent No. 3 and SECP as respondent No. 4. The depositors / account holders of IIBL filed an application (C. M. No. 7-P of 2012) under section 412 of the Ordinance and in it also arrayed SECP as respondent No. 1, the State Bank of Pakistan ("SBP") as respondent No. 2 and the Government of Pakistan as respondent No. 3. Both these applications ("the said applications") alleged that the Federal Government, SBP and SECP did not properly regulate the affairs of IIBL and / or did not take preventive measures which could have saved the deposits and investments provided to IIBL, therefore, they were liable to the extent that the properties, assets and monies of IIBL available with the official liquidator for distribution fell short. The appellants filed their objections to the maintainability of the said applications. However, vide a common order dated October 15, 2012 the learned Company Judge rejected the objections and held that the said applications were "maintainable against them". This order was assailed by filing intra court appeals (SECP filed ICA No. 6/2012 and by SBP filed ICA No. 7/2012), however, both the appeals were dismissed vide common judgment dated February 4, 2016. The order of the Company Judge dated October
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15, 2012 which was upheld in the Division Bench's judgment dated February 4, 2016 are challenged in these two appeals. 5. Syed Ali Zafar , the learned counsel representing SBP, and Mr. Anwar Mansoor Khan, the learned senior counsel representing SECP , state that under section 412 or section 413 of the Ordinance, action cannot be taken against the appellants nor are they liable thereunder . They state that subsection (1) of section 412 of the Ordinance stipulates that only those who had, "taken part in the promotion and formation of the company, or any past or present director, or officer of the company" can be proceeded against, provided they, "misapplied or retained or become liable or accountable for any money or property of the company" or are "guilty of any misfeasance or breach of trust in relation to the company" and as the appellants are not amongst such persons nor have committed any of the stipulated acts they are not liable. Similarly, they are also not liable under subsection (1) of section 413 of the Ordinance which provides that only those carrying on "any business of the company ... with intent to defraud creditors of the company or any other person, or for any fraudulent purpose" and provided such persons "were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible ". It is next contended that liability envisaged under sections 412 and 413 is personal and institutions like the SBP, which is a central bank established under the State Bank of Pakistan Act, 1956 or the SECP , which is the regulator of companies and markets and operates under the Securities and Exchange Commission of Pakistan Act, 1997, cannot be proceeded against. It was next contended that neither the SBP nor SECP were involved in the promotion or formation of IIBL, and that the words promotion or formation can not be extended to cover the appellants; Syed Ali Zafar referred to 'Company Law' by Robert Pennington to reiterate that neither SBP nor SECP are promoters of IIBL as the word is understood in company law. If, as per the learned counsel, the appellants had performed any act pursuant to their respective statutes in their ordinary course of business, this would not mean that they are promoters of IIBL in terms of section 412 or section 413 and liable thereunder . The Legislature, according to them, can not be presumed to have made a regulator and a central bank liable as it would result in their destruction because whenever any company is unable to pay its debts or its substratum disappears the appellants would be liable. The said applications, the learned counsel state, do not make any specific allegation against the appellants with regard to any matter as enunciated in section 412 or section 413 of the Ordinance, let alone there being any determination or finding with regard thereto. 6. The official liquidator and the learned Mr. Qazi Ehsanullah who represents the account holders/depositors of IIBL state, that the appellants failed to properly supervise and regulate IIBL which enabled the pilferage of deposits/investments of IIBL and accumulation of vast losses by it, and this could have been avoided if the appellants had been vigilant. They next urge that IIBL was incorporated by, or with the help, of SBP and SECP therefore they were its promoters and/or to have taken part in the promotion and formation of IIBL. Meeting the contention, that no specific allegation was made against the appellants in the said applications for being responsible for causing loss/damage, the learned counsel state that the liquidator has as yet not completed the liquidation of IIBL therefore the matter of loss/damage is premature and may be determined subsequently . They also rely on the impugned order of the learned Company Judge and the judgment of the learned Division Bench of the High Court, which they point out are concurrent and there is no reason to interfere therewith, particularly as sections 412 and 413 of the Ordinance had been correctly interpreted and the appellants are liable for the loss/damage suf fered by IIBL and its depositors/investors/ account holders. 7. The first question which requires determination is whether the SBP or SECP can be proceeded against under either section 412 or section 413 of the Ordinance. The Ordinance has been replac ed by the Companies Act, 2017 ("the Act") however as the said applications, objections thereto and the decision thereon pre dates the promulgation of the Act we shall be considering sections 412 and 413 of the Ordinance. The matters stipulated in section 412 of the Ordinance are now contained in section 395 of the Act and those in section 413 of the Ordinance are now found in section 398 of the Act; the sections in the said two statutes are identical. Sections 412 and 413 of the Ordinance are reproduced hereunder: "412. Power of Court to assess damages against delinquent directors, etc. (1) If in the course of winding up a company it appears that any person who has taken part in the promotion or formation of the company or any
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past or present director, liquidator or officer of the company- (a) has misapplied or retained or become liable or accountable for any money or property of the company; or (b) has been guilty of any misfeasance or breach of trust in relation to the company; the Court may, on the application of the official liquidator or the liquidator or of any creditor or contributory, made within the time specified in that behalf in sub-section (2), examine into the conduct of the person, director, liquidator or officer aforesaid, and compel him to repay or restore the money or property or any part thereof respectively, with surcharge at such rate as the Court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust as the Court thinks just. (2) An application under sub-section (1) shall be made within five years from the date of the order for winding up, or of the first appointment of the liquidator in the winding up, or of the misapplication, retainer , misfeasance or breach of trust, as the case may be, whichever is longer . (3) This section shall apply notwithstanding that the matter is one for which the person concerned may be criminally liable." "413. Liability for fraudulent conduct of business. (1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other person, or for any fraudulent purpose, the Court, on the application of the official liquidator or the liquidator or any creditor or contributory of the company , may, if it thinks fit, declare that any person s who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability , for all or any of the debts or other liabilities of the company as the Court may direct. (2) On the hearing of an application under sub section (1), the official liquidator or the liquidator, as the case may be, may himself give evidence or call witnesses. (3) Where the Court makes any such declaration, it may give such further directions as it thinks proper for the purpose of giving effect to that declaration; and, in particular, may make provision for making that liability of any such person under the declaration a charge on any debt or obligation due from the company to him, or on any mortgage or charge or any interest in any mortgage or charge on any assets of the company held by or vested in him, or any company or person on his behalf, or any person claiming as assignee from or through the person liable or any company or person acting on his behalf, and may, from time to time, make such further order as may be necessary for the purpose of enforcing any charge imposed under this sub section. Explanation. For the purpose of this sub section, the expression "assignee" includes any person to whom or in whose favour, by the directions of the person liable, the debt, obligation, mortgage or charge was created, issued or transferred or the interest was created, but does not include an assignee for valuable consideration (not including consideration by way of marriage) given in good faith and without notice of any of the matters on the ground of which declaration is made. (4) Where any business of a company is carried on with such intent or for such purpose as is mentioned in sub- section (1), every person who was knowingly a party to the carrying on of the business in the manner aforesaid shall be punishable with imprisonment for a term which my extend to two years, or with fine which may extend to twenty thousand rupees, or with both. (5) This section shall apply , notwithstanding that the person concerned may be criminally liable in respect of the matters on the ground of which the declaration is to be made." 8. The Division Bench of the High Court dismissed the objections of the appellants to the maintainability of the said applications; the learned Judges provided their reasons for doing so in paragraphs 9 to 13 of the impugned judgment. They observed (in paragraph 9) that "the word 'promotion' used in section 412 is of significant nature", then observed that as the word 'promotion' is not a defined in the Ordinance, "therefore simple and ordinary meaning of the word 'promotion' shall be seen for ascertaining" it. The impugned judgment reproduces entries of the word "promotion" and of the word "promote" from "Webster dictionary", the entry for the word "promoter" from "Black' s Law dictionary , Sixth Edition" and the word "promoter" from "The Free dictionary by Farlex", and conclude thus:
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"11. From the above referred definitions of Promotion and Promoter it is manifest that any person who has taken part in influencing, persuading a person to invest or deposit his amount in a company or who advised plan for business venture or who take preliminary steps necessary for formation of the corporation, issue prospectus obtain stock subscription and secure charter would be promoter . It cannot be denied that the Security & Exchange Commission of Pakistan has a pivotal role in promotion of the companies, so much so, time to time, it arranges and provides information to promote investor education. Section 20 (4) (f) of the Security Exchange Commission Act enumerates that the commission shall be responsible for performance and function with regard to the promotion and regulating the organization including security indust ries and related organization such as stock exchange and association of mutual fund, leasing company and other (NBFIs) . Needless to mention that the company under liquidation is a Non-Banking Financial Institution, for regulation of which Security Commission is responsible. By inserting (20) (4) (f) in Security Exchange Act 1997 the legislature has expressly held responsible the Security Exchange Commission for promoting and regulating of Non-Banking Financial Institution. Here it would be not out of context to mention that the Security Exchange Commission Pakistan Act 1997 is latter in time, as Company Ordinance has been enforced in the year 1984. The promotion regulating of the NBFIs is the mission and vision of SECP as declared by the SECP Act, 1997. From the above, it can safely be concluded that while expressly assigning the function of promoting and regulating the NBFIs the legislature was fully aware of the intent to make section 412 of the Company Ordinance 1984 fully applicable to regulators including Security Exchange Commission of Pakistan. The Security Exchange Commission of Pakistan deals with all the companies registered under the Companies Ordinance except the Banking Companies. It is the mission of SECP to promote an efficient and transparent capital market, develop the corporate sector and protect the investor through responsive policy measure, effective regulation and enforcement of best governance practices. We are sure, rather clear in our mind that the appellant would not deny the facts that the Security & Exchange Commission Pakistan, being a regulator used to take action against companies for improving professional efficiency , sense of responsibility and healthy business environment." "13. Record divulge that decline status of the company came into notice of the regulating wing of State Bank of Pakistan and Security & Exchange Commission of Pakistan at the initial stage and they were in position to save the company from insolvency but they remain negligent from performing their statutory duty which resulted into fall of the company, followed by liquidation. The objections have been raised by appellants merely for choking the controversy and to stifle it in infancy on a hyper technical ground, which infact, is a step to wriggle out the appellant from their statutory liabilities through a short cut. It is an endeavour to let free the delinquent who have committed misfeasance or malfeasance and played negative role in relation with the insolvency of company under liquidation. No body can controvert the fact that the company under liquidation is registered and licensed organization being regulated, supervised and controlled by the Government of Pakistan through the State Bank of Pakistan and Security Exchange Commission of Pakistan. It was taking deposit from the public at large on the strength of its being organized and regulated by the Government of Pakistan which assurance was best source of promotion for the company." Before considering the specious reasoning of the learned appellate court Judges it would also be appropriate to reproduce the reasoning employed by the learned Company Judge in discarding the objections of the appellants: "15. While interpreting the Act, the intention of the legislature is of supreme importance. The cardinal rule of the construction of Act of Parliament is that the word of the Act should not [sic] be construed according to the intention expressed in the Act themselves. In many cases, the Court will endeavour to ascertain the legislative purpose but, only as a step in the process of discovering the legislative intent. It is perhaps possible that the legislative intent and legislative purpose may coincide. Moreover, so far as legislation is concerned, the law maker may have several purposes in mind when they enact a given law. The fact, which can be taken into account in ascertaining the intention of the Legislature, is the history of the Act, the reason which led to the passing of the Act, the mischief which had to be cured, as well as the cure proposed and also other provisions of the Statute.
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16. The method of constructing Statute is not to take particular words and give them a preconceived meaning, which one may have to displace or modify . It is, to read the Statute as a whole and ask oneself the question, in this Statute, in this context, relating to the subject-matter , what is the true meaning of the word. A statute is not open to construct as a matter of course. It is open only where the language used in the Statute requires interpretation i.e. where the Statute is ambiguous or bears two or more constructions, or is of such doubtful obscure meaning that reasonable minds might be uncertain or disagree as to its meaning. 17. The word 'misfeasance' used in section-412 (b) will generally apply to a case where a lawful act is done in improper manner . Reference is made to the statement given in para-b of the preliminary objections when seen in reference to misfeasance then arraying the said respondents seems to be necessa ry and lawful and the same will be determined by the end of the day when C.Ms will be decided on merits but for the time being it appears that both the respondents are necessary and legal parties for the purpose of sections 412 and 413 of the Companies Ordinance, 1984. 18. No doubt, mere negligence or neglect or duty will not by itself create liability unless there was gross negligence amounting to misfeasance or breach of duty resulting in the loss to the public interest but all this will be seen while deciding the C.Ms. on merits. 19. While keeping in view what has been said hereinabove, it appears that 'any person who has taken part in the promotion or formation of the company' brings the said respondents within the purview of necessary party . In addition to the words used in sub-section-(b) of section-412 i.e. 'any misfeasance or breach of trust in relation to the company', thus, the objection of respondents No. 1 and 2 in C.M.No.7-P/2012 is overruled and it is held that application under sections 412 and 413 of the Companies Ordinance, 1984 is maintainable against them. " 9. The learned High Court Judges did not read sections 412 and 413 of the Ordinance in its entirety and read a particular word, "promotion", in isolation. The words appearing in a section are to be read in the context in which they are used. In the matter of the Rev. James Godfrey MacManaway (PLD 1950 PC 149) Lord Radcliffe rendering the opinion for the Privy Council succinctly set out how a Court should proceed - "The primary duty of a Court of law is to find the natural meaning of the words used in the context in which they occur, that context including any other phrases in the Act which may throw light upon the sense in which the Act used the words in dispute" (page 150-151A). The reference to dictionaries by the learned Judges, without first examining the statutory provision and its context, was inappropriate. Such an approach may result in incorporating…
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