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Petitioner: DEPILEX SMILEAGAIN FOUNDATION VS Respondent: SECURITY AND EXCHANGE COMMISSION OF PAKISTAN, ETC
Court Name: Lahore High Court Judge(s): Asim Hafeez Title:DEPILEX SMILEAGAIN FOUNDATION vs SECURITY AND EXCHANGE COMMISSION
OF PAKISTAN, ETC Case No.: Writ Petition No.2162 of 2019 Date of Judgment:2019-04-18 Reported As: 2019 CLD 861, 2020 PCTLR 109, 2019 LHC 1090 Result: petition dismissed Judgment ASIM HAFEEZ, J.:- The petitioner hereby impugns order dated 11.01.2019 of the respondent No.1, issued in exercise of powers under section 29, sections 30, 31, 31-A and section 32 of the Securities and Exchange Commission of Pakistan Act, 1997 ("Act of 1997"), whereby a team, comprising of officers of the Commission, was constituted to investigate qua the allegations in order under reference. Pursuant thereto, letter dated 12.01.2019 was issued to the petitioner company for the provisioning of record stated therein, which is also impugned herein. 2. Brief facts, necessary for the adjudication of the lis at hand, are that petitioner was incorporated on 10.01.2005 as a company limited by guarantee under section 42 of the erstwhile Companies Ordinance 1984 (Ordinance of 1984). It transpired that earlier proceedings were initiated under section 263 (c) of Ordinance of 1984, on complaints, which culminated into appointment of inspectors vide order dated 07.08.2009. The order was impugned before the Appellate Bench of the Commission, which appeal was dismissed on 24.12.2009. The Company filed appeal before Hon'ble Islamabad High Court, Islamabad under section 34 of the Act of 1997, which was allowed on 17.01.2017. 3. In December 2018, Mr. Manzar Latif - ex-promoter / subscriber / ex-director - filed another complaint with Human Rights Cell, Supreme Court of Pakistan, whereupon comments were solicited from the Commission. The Commission issued order dated 11.01.2019 to investigate into allegations, impugned alongwith letter dated 12.01.2019. Respondent No.1 submitted reply, placed documents on record and contested the petition. 4. Learned counsel for the petitioner contends that order to investigate, is per-se, an adverse action, which cannot be issued without affording an opportunity of hearing. It tantamount to violate the mandate of Article 10-A of the Constitution of Islamic Republic of Pakistan 1973. Contends, that petitioner was otherwise entitled to prior notice, before passing of order to investigate, in terms of sub sections (3) and (5) of section 22 of the Act of 1997. Adds, that if any action is warranted it can be initiated under sections 256 and / or 257 of Companies Act 2017 (Act of 2017)
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after affording an opportunity of hearing. Further contends, that in the wake of clause (a) of section 4 of Act of 2017, which gave overriding effect to the provisions of Act of 2017, no order can be passed by the Commission under section 29 of the Act of 1997. Adds that there was no justification, reasons and occasion to order investigation into affairs, when read in juxtaposition to the comments submitted by respondent No.1 with the Human Rights Cell, Supreme Court of Pakistan. Learned counsel alleged manifest bad faith on the part of the Commission. Added that order of investigation would have an adverse effect on the business and working of the Company and damage repute of its members. Lastly submits that appeal, in view of the facts and circumstances, is not an adequate remedy and if at all remedy of appeal is deemed effective and appropriate, instant petition may be converted into appeal as this court also exercises appellate jurisdiction. To support its contentions, learned counsel referred judgments, reported as "Messrs KALOODI INTERRNATIONAL (PVT.) LTD. and another v. FEDERATION OF PAKISTAN and others" (PLD 2001 Karachi 311), "SERVICE INDUSTRIES TEXTILES LIMITED, LAHORE v. SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN through Chairman, Blue Area, Islamabad and 4 others" (2000 MLD 1880), "Rohtas Industries Ltd. v. S. D. Agarwal and another, etc." (AIR 1969 SC 707, "(1) UNIVERSITY OF DACCA THROUGH ITS VICE-CHANCELLOR AND (2) THE REGISTRAR, UNIVERSITY OF DACCA v. ZAKIR AHMED" (PLD 1965 SC 90), "Mian MIRAJ DIN and others v. BROTHERS STEEL MILLS and others" (1996 CLC 516), "ABDUL MAJEED ZAFAR and others v. GOVERNOR OF THE PUNJAB through Chief Secretary and others" (2007 SCMR 330), "M.D. THE BANK OF PUNJAB and another v. Syed SHAHZAD HUSSAIN" (2006 SCMR 1023), "Messrs DEWAN SALMAN FIBER LTD. and others v. GOVERNMENT OF N.W.F.P., through Secretary, Revenue Department, Peshawar and others" (PLD 2004 SC 441), "Messrs PRIME CHEMICALS through Member of Association of Person v. GOVERNMENT OF PAKISTAN through Secretary Finance, Islamabad and 3 others" (2004 PTD 1388), "GHULAM SARWAR ZARDARI v PIYAR ALI alias PIYARO and another" (2010 SCMR 624), "THE MURREE BREWERY Co. Ltd. v. PAKISTAN THROUGH THE SECRETARY TO GOVERNMENT OF PAKISTAN, WORKS DIVISION AND 2 OTHERS" (PLD 1972 SC 279), and "MUHAMMAD ANIS and others v. ABDUL HASEEB and others" (PLD 1994 SC 539). Learned counsel has also relied on an un-reported judgment of this court in Writ Petition No.20088 of 2012. 5. Learned counsel appearing for respondents No.1 to 5 controverted the submis sions. The case set out is that petitioner is a section 42 company , which has received financial assistance / donations in millions, both from local and foreign sources, but no details were provided, which deliberate non-disclosure s led the Commission to invoke section 29 of the Act of 1997. Adds, that order to investigate is in the nature of an administrative order , a fact- finding inquiry , to find out the facts qua the allegations. Order to investigate does not carry any stigma nor per se incriminating, as no inspectors are being appointed yet. And once incriminating evidence / information / material is discovered, as a consequence of this fact-finding endeavor , the petitioner would be confronted with said information. To rebut arguments regarding overriding effect of clause(a) of section 4 of the Act of 2017, reference is made to section 45 of Act of 1997, non-obstante clause giving preference to Act of 1997 in case of any inconsistency. Further contends that sub-sections (3) and (5) of section 22 of Act of 1997 are not applicable, which envisaged a different situation and has no application with respect to the order to investigate. Per learned counsel, this petition is not maintainable in view of the remedies available under Act of 1997. Added, that this petition cannot be converted unless remedy under section 33 of the Act of 1997 availed. In support of its contentions, reference is made to the judgments reported as "ATTOCK REFINERY LTD. v. EXECUTIVE DIRECTOR ENFORCEMENT AND MONITORING DIVISION, S.E.C.P. and another" (PLD 2010 SC 946), "Raja Narayanlal Bansila v. Maneek Phiroz Mistry And Another" (1961 AIR 29, 1961 SCR (1) 417), "Barium Chemicals Ltd. and another v. Company Law Board and others" (AIR 1967 SC 295 (V 54 C 59), "DIAMOND INDUSTRIES LIMITED v. APPELLATE BENCH OF THE SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN and others" (2002 CLD 1714) and "Mian MIRAJ DIN and others v. BROTHERS STEEL MILLS and others" (1996 CLC 516). 6. While rebutting the submissions, emphasizes was laid on the ratio settled in Rohtas Industries Limited' s case, supra, to highlight adverse ef fects of order of investigation. 7. Arguments heard. Available record perused. 8. The controversy, raised, hinges on the scope, extent and nature of the powers of the Commission in terms of section 29 of Act of 1997, particularly when read in juxtaposition with the powers under sections 256 or 257 of Act of 2017, and
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existence of conditions / factors, which necessitates order for investigation qua the affairs of the company . It is expedient to reproduce relevant sections, before proceeding to determine and decide the controversy . Relevant sections read as; Sub-section (1) of Section 29 of Act of 1997 Investigation and proceedings by the Commission. (1) Where the Commission, either on its own motion or on the basis of any information received, authorize one or more of its employees or one or more other persons to investigate, whether-- (a) an offence or a contravention has been committed by any person under this Act or any administered legislation or a subordinate legislation; (b) a regulated person has been engaged in committing fraud, misfeasance or other misconduct in carrying on a regulated activity; or (c) the manner in which a regulated person has engaged or is engaging in his regulated activity is not in the interest of the financial services market or investors, And submit an investigation report thereof to the Commission, the Commission shall proceed in the matter in accordance with the provisions of the Act and the administered legislation: Provided that where any special proced ure regarding investigation or inquiry is provided in the administered legislation the Commission may adopt such special procedure in addition to the procedure provided in this Act." Sub-section (3) and (5) of Section 22 of Act of 1997 Section 22: Supplementary Provisions (1)... (2)... (3) The Commission shall, in adjudicatin g upon the rights of any person whose application on any matter it is required to consider in the exercise of any power or function under this Act, give the reasons for its decision after giving the person concerned a personal hearing, in addition to any written applications or submission which may be required to be made. (4)... (5) Subject to the compliance of the provisions of sub-section (3), section 24 A of the General Clauses Act, 1897 (X of 1897), shall apply to any order made or direction given under this Act. Section 45 of Act of 1997 "Act to override other laws.- The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force." COMP ANIES ACT 2017 Section 4 Act to override; - Save as otherwise expressly provided herein -- a) the provisions of this Act shall have effect notwithstanding anything contained in any other law or the memorandum or articles of a company or in any contract or agreement executed by it or in any resolution passed by the company in general meeting or by its directors, whether the same be registered, executed or passed, as the case may be, before or after the coming into force of the said provisions; and Section 256. Investigation into affairs of company; (1) Where the Commission is of the opinion, that it is necessary to investigate into the af fairs of a company-- (a) on the application of the members holding not less than one tenth of the total voting power in a company having share capital; (b) on the application of not less than one tenth of the total members of a company not having share capital; (c) on the receipt of a report under sub section (5) of section 221 or on the report by the registrar under sub-section (6) of section 254; It may order an investigation into the affairs of the company and appoint one or more person s as inspectors to investigate into the af fairs of the company and to report thereon in such manner as the Commission may direct; Provided that before making an order of investigation, the Commission shall give the company an opportunity of being heard.
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Section 257. Investigation of company' s affairs in other cases; (1) Without prejudice to its power under section 256, the Commission-- (a) shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Commission may direct, if--- (i) the company, by a special resolution, or (ii) the Court, by order , declare that the af fairs of the company ought to be investigated; and (b) may appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Commission may direct if in its opinion there are circumstances suggesting-- (i) that the business of the company is being or has been conducted with intent to defraud its creditors, members or any other person or for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members or that the company was formed for any fraudulent or unlawful purposes; or (ii) that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance, breach of trust or other misconduct towards the company or towards any of its members or have been carrying on unauthorized business; or (iii)... (iv)... (v)... (vi) that the affairs or the company are not being managed in accordance with soun d business principles or prudent commercial practices; or (vii)... Provided that, before making an order under clause (b), the Commission shall give the company an opportunity of being heard. [Emphasis supplied] 9. Learned counsel for the petitioner has objected to the exercise of authority / powers by the Commission under section 29 of Act of 1997, which objections attack very act of assumption of jurisdiction. The objections are broadly summarized for convenience; i) Whether Commission can exercise authority under section 29 of Act of 1997 in view of clause (a) of section 4 of the Act of 2017, which gives overriding effect to the provisions of Act of 2017, notwithstanding anything contained in any other law; ii) what are those conditions / factors that led the Commission to invoke section 29 of Act of 1997 without resorting to appointment of inspectors under sections 256 and / or 257 of the Act of 2017, in terms whereof the company and its members are entitled to an opportunity of hearing. 10. The submissions regarding preference / exclusivity extended to the provisions of Act of 2017, in view of clause (a) of section 4 of Act of 2017, is the heart of the controversy. A plain reading would establish that preferential status has been extended to the provisions of Act of 2017 but it was qualified. The expression, save as otherwise expressly provided herein is crucial and controls the extent of the preference extended. Is there anything expressly provided in the Act of 2017? It appears that sub-section (2) of section 7 of Act of 2017 prescribes said qualification, when read in conjunction with clause (a) of section 4, ibid. It is expedient to reproduce section 7 of Act of 2017, which reads as; Section 7; Powers and Functions of the Commission; (1) The Commission shall exercise such powers and perform such functions as are conferred on it by or under this Act. (2) The powers and functions of the Commission under this Act shall be in addition and not in derogation to the powers and functions of the Commission under the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997) [Emphasis supplied] 11. The legislative intent is clear and obvious. The powers and functions of the Commission under Act of 2017 are in addition to and not in derogation of the powers and functions under Act of 1997. Notwithstanding clause (a) of section 4 of the Act of 2017, the Commission is empowered to invoke section 29 of Act of 1997 to order for investigation,
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which is an independent power and protected in terms of sub-section (2) of section 7 of Act of 2017. The legislature has reinforced legislative intent of section 45 of Act of 1997 as far as the powers and functions of the Commission are concerned. This addresses the objection regarding assumption of authority by the Commission. 12. The Commission is empowered to exercise discretion under section 256 of Act of 2017, which discretion is regulated and subjected to the conditions prescribed therein, existence of such conditions need not to be reiterated as the controversy does not relate to the appointment of inspectors under section 256, ibid. In terms of clause (a) of sub-section (1) of section 257 of Act of 2017, the Commission is obligated to appoint inspectors for conduct of investigation, if ordered by the Court of competent jurisdiction or upon passing of special resolution by the company . However , under clause (b) of sub-section (1) of section 257, ibid, the Commission may appoint inspectors to conduct investigation if in its opinion there are circumstances suggesting existence of the conditions prescribed, which circumstances are enumerated therein. One common feature of sections 256 & 257 of Act of 2017 is that before making an order of investigation, the Commission is required to give company an opportunity of being heard. No such concession / opportunity was provided under section 29 of Act of 1997. 13. Now the question is that whether such circumstances and factors exist, which warrant or necessitate action under section 29 of Act of 1997 by the Commission. The Commission, when deciding whether to order investigation into the affairs of the company under sections 256 and 257 of Act of 2017, may have to consider and weigh multiple factors, which inter alia includes the nature of the complaint and its source. If complaint is filed by the requisite number of the members, the Commission may resort to section 256 of Act of 2017, provided material is available to assist in formation of opinion. Likewise, under section 257 of Act of 2017, the Com mission without prejudice to its powers under section 256, may proceed accordingly , as the situation may warrant in view of the clause (a) and (b) of sub section (1) of section 257. The scope and extent of powers, circumstances and considerations for invoking section 29 of Act of 1997 are different. Perusal of the allegations would establish proximity with the action taken. It is expedient to reproduce the allegations - allegedly raised in the complaint and led to the order for investigation - as appearing in the order dated 1 1.01.2019, which read as; "ALLEGATIONS: (i) The Company is raising fund from foreign and local donors without maintaining proper record for utilization of such donations. (ii) SECP had initiated investigation on his complaint dated Jan 31, 2009, but the Company management got their accountant arrested on false charges of stealing of company' s entire accounts record though the accountants had resigned before lodging of FIR. The location where the alleged theft took place was never a registered office of the Company and the FIR was lodged by a company other than the Company . (iii) The Company has shown all the medical aid received from foreign donors as purchased in cash, which bring into doubt the demeanor of the Company . (iv) The Company announced construction of hospital for a sum of Rs.38 crores, however , till date, the site where the hospital was to be constructed consist of a dilapidated boundary wall. It can very well be gauged that the said hospital is a faade in order to extract donations from donors." 14. The exercise of discretion by the Commission would be guided / determined by the facts and circumstances of the case but has to be exercised in good faith, without any bias, prejudice or ulterior motives. The reasons / circumstances mentioned in the order dated 11.01.2019 are sufficient to initiate investigation. The petitioner company has nowhere denied factum of receipt of donations and not specifically rebutted the allegations, which it was supposed to do, particularly when allegations of bad faith are attributed to the Commission. The allegations of bad faith, in view of the facts and circumstances of the case, are unsubstantiated. The scope and implications of of order of appointing investigators for conducting investigations under the Companie s Act, has been discussed in a judgment, reported as Norwest Holst Ltd v. Secretary of State for Trade (1978) 3 All ER 280. The brief facts of said case are that Plaintif f was Public Limited Company . On 11 March 1977, the Secretary of State appointed two inspectors to investigate the affairs of the Company under section 165 of the Companies Act 1948. The Company sought information, made basis for taking such an action. The Secretary refused to give information. The Companyth
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brought an action claiming declaration that appointment of inspectors was ultra vires and of no legal effect and an injunction. The decision of the case is reproduced hereunder; Held: The decision of the Secretary of State to appoint inspectors under s 165 (b)(ii) was no more than an administrative decision the effect of which was to set in train an investigation at which those involved would have an opportunity of stating their case. There was therefore nothing in the rules of natural justice which required him to give the company an opportunity of stating its case before he made his decision to set up the investigation. The only requirement was that he should make his decision in good faith and there was no evidence to suggest that he had not done so. Relevant portions authored by Lord Denning are reproduced hereunder: "As the Secretary of State gave no information, the company started this action. They delivered a statement of claim, which they afterwards amended. The burden of the statement of claim is that the company know of no wrongdoing which has been done by them or any of their people; and therefore it was wrong that the Secretary of State should appoint inspectors without, as they say, any proper justification. They put it in these words in their final amended pleadings: .... it is implicit in the provisions of Section i65(b)(ii) of the said Act that the discretionary power to appoint Inspectors is to be exercised fairly and/or in accordance with the principles of natural justice.' They ask for a declaration that the appointment or purported appointment was ultra vires and invalid. It is important to know the background of the legislation. It sometimes happens that public companies are conducted in a way which is beyond the control of the ordinary j shareholders. The majority of the shares are in the hands of two or three individuals. These have control of the company's affairs. The other shareholders know' little and are told little. They receive the glossy annual reports. Most of them throw them into the wastepaper basket. There is an annual general" meeting but few' of the shareholders attend. The whole management and control is in the hands of the directors. They are a self-perpetuating oligarchy; and are virtually unaccountable. Seeing that the directors are the guardians of the company, the question is asked: quis custodiet ipsos custody? Who will guard the guards themselves?" "The only remaining point is that counsel for the company asked us to review the Secretary of state' s decision itself. He cited such cases as Padfield v Minister of Agricultural, Breen v. Amalgamated Engineering Union, Secretary of State for Employment v. Associated Society of Locomotive Engineers and Firemen (No.2), and Secretary of State for Education and Science v. Metropolitan Borough of Tameside. He said that the Secretary of State' s discretion in many cases is subject to review by the court. None of us would disagree with that proposition. Time and time again lately we have review ed the discretion of a Minister if it has not been properly exercised, or if it has been misused. But in this case there is no ground whatever for thinking that the Secretary of State' s discretion has been in any way improperly used. Counsel for the company put it this way. He said: "This is a completely innocent company , there is nothing whatever against it at all, and it follows there can have been no reasonable ground for the Secretary of State' s decision." "There may be nothing against the company itself, but can the company speak for all the persons concerned with the management of its affairs? Clearly not. Section 165(b)(ii) is not concerned only with the company itself. The company may be the innocent dupe of others. The section is concerned with the 'persons concerned with its formation or the management of its affairs'. They may have been guilty of misconduct such as to merit inquiry. We know that, when these inquiries are held, those persons who are the subject of them often complain about them. They say that the machinery operates unfairly against them. Such complaints are usually unfounded. They are made so as to delay the inquiry, or to lessen the effect of the report of the inspectors. But, whether well-founded or unfounded, it is no reason for abandoning this machinery. It is the only means given to / the public by which the conduct of companies can be investigated. Parliament has clearly enacted that there should be power, under the control of the Board of Trade, on behalf of the public at large, for an inquiry to be made into the conduct of the affairs of a company, if there are circumstances which appear to the Secretary of State to suggest 'fraud, misfeasance or other misconduct'. I do not think we should encourage or support any attempt to delay or hold up the inquiry. To my mind the action is without foundation. The judge was quite…
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