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Petitioner: Muhammad Yousuf Ahmed & others VS Respondent: Artistic Denim Mills Limited
Court Name: Sindh High Court Judge(s): Muhammad Junaid Ghaffar Title: Muhammad Yousuf Ahmed & others vs Artistic Denim Mills Limited Case No.: JCM No. 33 of 2019 Date of Judgment:2020-04-16 Reported As: 2021 CLD 134, 2020 SHC 298 Result: Petition dismissed
Judgment Muhammad Junaid Ghaffar , J. This is a Petition under Section 136 of the Companies Act, 2017 ("The Act" ) through which the Petitioners have sought the following relief(s):- (a) Set aside the proceedings of the impu gned AGM of Artistic Denim Mills Limited held on 19-10-2019 and declare the same to be illegal and invalid. (b) After annulment of the impugned AGM, direct holding a fresh AGM and appoint an independent person to preside over fresh AGM to ensure that proceedings are conducted in accordance with the law and submit a report in this regard directly to this Court. (c) After annulment of the impugned AGM, give strict directions to the management of the Respondent to comply with the provisions of section 134(3) of the Companies Act, 2017 read with regulation 5 of the Companies (Related Parties Transactions and Maintenance of Related Records) Regulations, 2018. (d) After annulment of the impugned AGM, give strict directions to the management and external auditors of Respondent, to provide all the information, explanations and analyses in detailed written form along with copies of evidences and records as have been requested through the aforesaid letter dated 18-10-2019 from aforesaid two minority shareholders. (e) Restrain the management of the Respondent from acting on any of the resolutions unlawfully passed in the impugned AGM held on 19-10-2019. (f) Restrain the management of the Respondent from conducting any business with DL 1961 Premium Denim Inc. and Premium Distributors, Dubai. (g) Any other and/or further relief. (h) Costs. 2. The precise facts, as stated, are that Petitioners hold 14.45% shares in respondent Company and are aggrieved by the notice as well as the proceedings of the impugned Meeting dated 19.10.2019 and the resolutions passed
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thereon. It is their case that they hold more than 10% of the shareholding and are, therefore, qualified to institute present proceedings, which according to them has seriously prejudiced their interests. 3. Learned Counsel for the Petitioners has contended that the impugned notice of the meeting dated 28.09.2019, for conducting the 27th Annual General Meeting to be held on 19.10.2019, was not a proper notice as contemplated under the relevant provisions of the Act; that the statement of material facts under Section 134(3) of the Act, annexed with the impugned notice, failed to include the minimum information required under Regulation-5 of the Company (Related Parties Transactions and Maintenance of Related Records) Regulations, 2018 ("2018 Regulations"); that the Related Party Transactions as disclosed in Note-39 of the Annual Report could only be approved through a Special Resolution in terms of section 208 of the Act, whereas, in the impugned meeting, the same were approved through Ordinary Resolution,; that without prejudice, even if the resolution in question is a Special Resolution, the same remains illegal for the reason that Agenda Item No.6 sought approval of the transactions with related parties retrospectively; that in terms of Section 208 (ibid), investments with associated undertakings cannot be validated/ratified through subsequent ratification; that compliance of Section 134(3) of the Act is mandatory; that under Regulation-5(2) of the 2018 Regulations, the minimum information has to be provided to the members in the statement of material facts, which in the instant matter is lacking; that the statement under Section 134(3) of the Act, annexed with the impugned Notice of the meeting failed to make compliance of Regulations-5 (1) (c), (d), (f), (g), (h) & (i) of the 2018 Regulations; that even otherwise, when the meeting was being conducted the Petitioners were denied proper participation; that the majority shareholding proceeded with the impugned meeting without following proper procedure and never gave an opportunity to the Petitioners to fully participate and seek proper information; that the approval of the business in the impugned meeting was without any proper debate, discussion and even failed to record the dissenting vote of the Petitioners; that the approval of the Related Party Transactions is benefiting the Chief Executive of the Company inasmuch his wife is the interested director in respect of transaction at Serial No.3 of the Agenda Item No.6 in the Company i.e. DL1961 Premium Denim Inc. ("DL 1961 "), whereby , the sales reimbursement and expenses have been approved to the extent of Rs.795,809,000/- and Rs.51,435,000/-, respectively; and based on these submission he has prayed to declare the proceedings of the impugned meeting as invalid and order for holding another meeting under Court supervisions, by relying upon cases reported as Pfizer Laboratories Ltd. and another (2003 CLD 1209 ), M. Shahid Saigol and 16 others v. M/s. Kohinoor Mills Ltd. and 7 others (PLD 1995 Lahore 264), Central Cotton Mills Limited and 2 others v. Naveed Textile Mills Limited and another (1996 MLD 1943 ) Naveed Textile Mills Ltd. Karachi and 3 others v. Central Cotton Mills Limited, S.I.T.E Kotri, District Dadu and 2 others (PLD 1997 Karachi 432) and Messrs Kingsway Capital LLP and another v. Murree Brewery Co. Ltd. and 10 others (2017 CLD 587 ). 4. On the other hand, learned Counsel for the Respondent Company has contended that the petition is misconceived, whereas, the Petitioners have come before the Court with unclean hands as they have failed to properly disclose the earlier proceedings initiated by them in respect of the same transactions already approved for the earlier years; that Related Party Transactions in dispute were not even required to be approved by the shareholders; but only by the Board of Directors; however , as a gesture and for the sake of transparency and compliance, it was placed before the shareholders; that under Section 208 of the Act the requirement is, that if majority of the directors are interested in such transactions, only then it has to be placed before the general meeting for approval as a Special Resolution, whereas, it does not apply to transactions entered into by the Company in its ordinary course of business on an arm's length basis; that insofar as the Petitioners are concerned, they have only impugned the transaction between respondent and DL1961; hence the interested director is only one i.e. Mrs. Maliha Faisal, and therefore, it is clearly reflected that out of seven directors only one director is the interested director in the transaction and the majority is not; therefore, it was not required to be placed in the Annual General Meeting; that notwithstanding this, the transactions are otherwise proper in the ordinary course of business and on an arm's length basis; that without prejudice these transactions were placed before the Audit Committee, which in its meeting held on 19.10.2019 approved the said transactions, and thereafter by the Board of Directors, whereas, Petitioner No.1 is a member of the Board; but has never raised any such objections; that the
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Petitioners have come before the Court with unclean hands and have not properly disclosed the pending proceedings initiated by them inasmuch as the respondent has already filed Suit No.620/2017, wherein, the Petitioners filed an application seeking orders against the respondent in respect of DL1961, including appointment of an Auditor for audit of transactions with DL1961, including alleged transfer pricing; JCM No. 32/2017 filed by the present petitioners under Section 136 of the Act seeking identical prayer against the respondent in respect of the transaction with DL1961 for the year 2017, whereas, the said petition is still pending and the Petitioners have failed to proceed with the same and to obtain any restraining orders; JCM No. 29/2017 once again filed by the Petitioners under Section 286 of the Act, wherein, one of the prayers seeks a restraining order against the present respondents from carrying on any business with DL1961; that all along the Petitioners have targeted the transaction of respondent with DL1961 and their grievance is entirely of a personal nature inasmuch as in the same impugned meeting, other Related Party Transactions were also approved including transaction with Artistic Apparels (Pvt) Ltd. in which interested director is Petitioner No.1; that the conduct of the Petitioners amounts to pick and choose, as in the year 2017 identical transaction was impugned through JCM No. 32/2017, whereas, in the year 2018, they never challenged any proceedings relating to this very transaction and now once again for the year 2019 they have filed this petition; that the petition is also misconceived on the ground that all along the Petitioners had knowledge about this impugned Related Party Transaction inasmuch as Petitioner No.1 is director of respondent and has attended the meetings of the Board of Directors, wherein, these transactions were discussed and approved including that of the Audit Committee; that it is the malafide agenda of the Petitioners, whereby, they are constantly approaching the majority shareholders of the respondent Company to buy their shares at an exorbitant price and once such offer was refused, they have taken recourse to these proceedings; that Respondent Company has obtained consent and no objection from Securities and Exchange Commission of Pakistan ("SECP"), Auditors of the Company, the Audit Committee as well as the Board of Directors in respect of impugned Related Party Transactions; that the Petitioners have failed to make out any case and their grievance does not fulfil the requirements of Section 136 of the Act; that the meeting was conducted in a transparent manner and Petitioners were never prevented from using their rights effectively; that the majority shareholders i.e. 68,242,416 voted in favour of the resolution and 10,212,900 voted against the same; hence the meeting was conducted in a transparent manner, wherein, majority and minority has duly exercised their right for and against the resolution; that the Regulations of 2018 reflect that the information is to be provided to the directors for its approval by the Board in their meeting, and therefore, the above Regulations are not applicable in respect of the present impugned meeting; that notwithstanding this inapplicability; however, compliance was made by the Respondent Company by placing the matter in its Annual General Meeting for approval; that even otherwise Note-39 of the Annual Report also provides complete details of the transactions including sales and imbursement, whereas, the Company is making profits and is disbursing dividends, which the Petitioners are also enjoying; hence, no case is made out; that the Petitioners do not have a prima-facie case nor balance of convenience lies in their favour and no irreparable loss would be cased to them, if the Petition is dismissed. In support he has relied upon the cases reported as Parshuram Dattaram Shamdasani & others v. Tata Industrial Bank, Ltd., & others (1925 Bombay 49), National Investment Trust Ltd. and another v. Crescent Textile Mills Ltd. (2010 CLD 1675 ), Parshuram Detaram Shamdasani & another v. Tata Industrial Bank, Ltd., & others (A.I.R 1928 Privy Council 180) and Dewan Salman Fibre Limited v. Dewan Petroleum (Pvt.) Limited ( 2016 CLD 1049 ). 5. I have heard both the learned Counsel and perused the record. This petition has been filed under Section 136 of the Act challenging the proceedings of the 27 Annual General Meeting held on 19.10.2019 and in essence, as per prayer clause, the Petitioners are aggriev ed with the approval of the Related Party Transactions for the year ended on 30.6.2019, entered into by the Respondent with DL 1961 and Premium Distributors; however , at the time of arguing this Petition it is only the transaction with DL 1961 which has been pressed upon. The Petitioners own approximately 14.5% shareholding in the Respondent Company , and are thus entitled to file instant Petition under Section 136 of the Act. It would be advantageous to refer to the provisions of Section 136 which reads as under: - "136. Power of the Court to declare the proceedings of a general meeting invalid.- The Court may, on a petition, by members having not less than ten percent of the voting power in the Company , that the proceedings ofth
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a general meeting be declared invalid by reason of a material defect or omission in the notice or irregularity in the proceedings of the meeting, which preven ted members from using effectively their rights , declare such proceedings or part thereof invalid and direct holding of a fresh general meeting: Provided that the petition shall be made within thirty days of the impugned meeting." 6. Perusal of the aforesaid provision reflects that the Court may on a Petition by members having not less than ten percent or more of the voting power in the Company, declare proceedings of a general meeting to be invalid by reason of a material defect or omission in the notice or irregularity in the proceedings of the meeting, which prevented members from using their rights effectively can declare such proceedings or part thereof invalid and direct holding of a fresh general meeting provided that such a Petition must be filed within 30 days of the impugned meeting. The above provision has two parts or remedies available to the set of shareholders as above. The first relates to a material defect or omission in the notice of the said meeting. Now in this case, it cannot be the case of the Petitioners that the notice of the meeting in question had any material defect or omission as for that the Petitioners ought to have approached the Court as soon as the notice of the meeting was issued. Though there is no bar as to impugning the notice itself subsequently , but I am of the view that if there had been any material defect or omission in the notice, then apparently , it was incumbent upon such members not to wait and let the meeting being carried on; but must challenge the said notice immediately and before the meeting is held. In the instant case they had enough time to do so. Notwiths tanding this observation and even otherwise, while confronted, learned Counsel for the petitioners could not put forth any convincing argument so as to justify this conduct of the Petitioners. In fact, his focus was more on the manner in which the meeting was proceeded and allegedly denied Petitioners their right(s) permitted by the Act. The Petitioners grievance is that the proceedings of the meeting were conducted in a manner which has affected their rights as members / shareholders of the Company in question and therefore, the proceedings of the impugned meeting must be declared invalid and a fresh meeting be convened. For that learned Counsel for the Petitioners has relied upon the letters addressed by the Petitioners and the supporting affidavit of one of the Petitioners and has argued that no proper opportunity was accorded to the Petitioners, whereas, the disclosure regarding related party transactions was not in accordance with the Act or the 2018 Regulations. 7. As to the grievance of the Petitioners, it would be advantageous to refer to the notice of the meeting and the Special Business Agenda Item as well as the provisions of Section 134(3) of the Act which require certain disclosures while issuing notice in respect of the Agenda Item in question: - "NOTICE OF ANNUAL GENERAL MEETING Notice is hereby given that the 27th Annual General Meeting of the Members of Artistic Denim Mills Limited (the Company) will be held on Saturday , October 19, 2019 at 4:00 p.m at the premis es of the Institute of Chartered Accountants of Pakistan (ICAP), Chartered Accountants Avenue, Clifton, Karachi to transact the following business. Special Business 6. To approve / ratify the transactions with Related Parties as disclosed in note No.39 to the Financial Statements for the year ended June 30, 2019 by passing with or without modifications(s), the following resolutions as an Ordinary Resolutions: "RESOL VED that the related parties' transaction with: (i) Casual Sportswear; (ii) Artistic Apparels (Private) Limited; (iii) Artistic Fabric & Garment Industries (Private) Limited; (iv) DL1961 Premium Denim Inc.; (v) Premium Distributors; Carried out in the normal course of business during the year ended June 30, 2019 be and are hereby ratified and approved." "FURTHER RESOLVED that the Board of Directors of the Company be and is hereby authorized to approve all transactions carried out and to be carried out in the normal course of business during the ensuing year ending June 30, 2020 including but not limited to the following related parties' i.e.:
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(i) Casual Sportswear; (ii) Artistic Apparels (Private) Limited; (iii) Artistic Fabric & Garment Industries (Private) Limited; (iv) DL1961 Premium Denim Inc.; (v) Premium Distributors; Carried out in the normal course of business during the year ended June 30, 2019 be and are hereby ratified and approved." STATEMENT UNDER SECTION 134(3) OF THE COMP ANIES ACT, 2017. This statement set out the material facts concerning the Special Business, given as agenda item no. 6 of the Notice to be transacted at the 27 th Annual General Meeting of the Company . ITEM NO. 6 OF THE AGENDA: Artistic Denim Mills Limited is engaged in manufacture and sale of rope dyed denim fabric, yarn and value added textile products. The Company in the normal course of business carries out transactions with its associated companies. Summary of transactions carried out during the year with the associated companies is as follow: S. No.Name of Associated CompanyConcerned / Interested DirectorNature of Transaction sRupees in "000" 1 Casual Sportswear Mr. Muhammad Ali Sales 84,731 Ahmed 2 Artistic Apparels (Pvt) Mr. Muhammad Others 116 Ltd. Yousuf Ahmed 3DL1961 Premium DenimMrs. Maliha Faisal Sales 795,809 Inc. Reimbursement of expenses 51,435 4Artistic Fabric & GarmentMr. Muhammad IqbalSales Purchases56,463 Industries (Pvt) Ltd. Ahmed Services 46,958 rendered 7,760 5 Premium Distributors Mr. Muhammad Ali Sales 64,625 Ahmed
Majority of Directors of the Company were interested in these transactions due to common directorship in the associated companies, the required quorum of directors seemingly could not be formed for approval of these transactions which have to be approved by the shareholders in the General Meeting. Therefore, the transactions carried out during the financial year ended June 30, 2019 are being placed before the shareholders for their consideration and approval / ratification. All related party transactions, during the year 2019, were reviewed and approved by the Audit Committee and the Board in their respective meetings. The transactions with related parties were carried out at arm's length prices determined in accordance with the comparable uncontrolled prices method. The concerned Directors abstained while the Board approved the above transactions in accordance with the requirements of relevant provision of the Companies Act, 2017 and Listed Companies (Code of Corporate Governance) Regulations, 2017. The above transaction with related parties are an ongoing process and will remain continued in future. None of the Directors other than the concerned Directors have any direct or indirect interest in the above mentioned associated companies and have no interest in the above business, other than shareholders of the Company ."
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"134. Provisions as to meetings and votes. -- (1) (2)...................... (3) Where any special business is to be transacted at a general meeting, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning such business, including, in particular, the nature and extent of the interest, if any, therein of every director, whether directly or indirectly, and, where any item of business consists of the according of an approval to any document by the meeting, the time when and the place where the document may be inspected, shall be specified in the statement." 8. Section 134(3) of the Act requires that where any special business is to be transacted at a general meeting, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning such business, including, in particular , the nature and extent of the interest, if any, therein of every director , whether directly or indirectly , and, where any item of business consists of according an approval to any document, the time and the place where the document may be inspected, shall be specified in the statement. The agenda item 6 in respect of the special business of the 27 Annual General Meeting was in respect of approval and ratification of the transactions with related parties as disclosed in note 39 to the financial statements for the year ended 30.06.2019 by passing with or without modifications, the resolutions as ordinary resolutions which in essence, sought approval of related party transactions with five different companies with a further resolution authorizing the Board of Directors of the Company to approve all transactions already carried out and to be carried out in the normal course of business during the ensuing year ending on 30.06.2020 in respect of these five companies. Along with this Agenda, statement under Section 134(3) of the Companies Act was also annexed and to that extent there is no dispute; however , it is the case of the Petitioners that this statement is not in compliance with Section 134 ibid read with the 2018 Regulations. On perusal of the statement under Section 134(3), it reflects that members are being informed that the Company is engaged in manufacture and sale of rope dyed denim fabric, yarn and value added textile products and in the normal course of business has carried out transactions with its associated companies and then summary of transactions carried out with these companies has been stated. Out of these five companies it is only Company at serial No.3 on which the entire crux of the Petitioners case rests. The Director in this Company is also a Director in the Respondent Company and is also the wife of the Chief Executive of the Respondent Company . It would not be out of place to mention that Company at serial No.2 also has Petitioner No.1 as its Director; however , the Petitioners Counsel while confronted as to the interest of Petitioner No.1 has not been able to satisfactorily respond as to why on the one hand the Petitioners have impugned a particular transaction with DL 1961, on the ground of improper or incomplete disclosure, and on the other , remaining transactions with same degree of disclosure (including that of Petitioner No.1' s interest) approved in the same meeting have not been disputed. The notice further states that the related party transactions during the year 2019 were reviewed and approved by the Audit Committee first; and thereafter , the Board of Directors in their receptive meeting. Petitioner No.1 is admittedly also a Director of the Respondent Company . Now the question arises that if the case of the Petitioners is that no proper disclosure as required in law was made by the Com pany in respect of related party transactions pertaining to DL 1961, then why the Petitioner No.1 was not aggrieved of such approval by the Board of Directors and as to why he chose not to challenge or impugn such approval by the Board of Directors in accordance with the Act. Nor the Court has been assisted as to any other action taken by Petitioner No.1, for having been aggrieved of the approval of the same by the Board of Directors. In fact, it could not have been done, as Petitioner No.1 is also one of the beneficiaries of such approval. Not only this, the Petitioners never came before the Court by impugning the notice of the meeting and the alleged non-disclosure or incomplete disclosure as the case may be, allegedly in violation of Section 134 ibid as contended. It further appears that the case of the Company is that all transactions with related parties were carried out at arm's length prices determined in accordance with comparable uncontroll ed price method, whereas, the auditors of the Company have also examined these transactions so disclosed in the financial statements for the year in question as mentioned against note 39 and have not raised any objecti on as alleged. So in all fairness, on a bare perusal of the notice of the meeting as well as the statement annexed thereto, there does not appear to be any defect or material irregularity or for that matter omission so as to declare the meeting as invalid on the ground of impugned…
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