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Petitioner: REGISTRAR OF COMPANIES VS Respondent: PAKISTAN INDUSTRIAL AND COMMERCIAL JUDGMENT
Court Name: Sindh High Court Judge(s): Zia Pervez Title:REGISTRAR OF COMPANIES vs PAKISTAN INDUSTRIAL AND COMMERCIAL
JUDGMENT
Reported As: 2005 CLD 463 Result: Order accordingly Judgment JUDGMENT ' This is a petition under section 290 read with sections 291 to 295 of the Companies Ordinance, 1984 filed by the Registrar of Companies, Securities and Exchange Commission of Pakistan, hereinafter referred to as the Commission' against Pakistan Industrial Commercial Leasing Limited, hereinafter referred to as the respondent-Company'. 2. The Registrar of Firms has moved the present petition in his capacity as an Officer of the Commission established under the Security and Exchange Commission of Pakistan Act, 1997. Respondent-Company is incorporated as a limited company and is subject to the Leasing Companies (Establishment and Regulation) Rules, 2001, hereinafter referred to as the said Rules'. The said rules provide for appointment of the Board of Directors after necessary prior approval of the Authorities under rule 7(2)(xii) and rule 7(1)(ix) of the said rules. Petitioner also claims violation of rule 19 of the said rules which provides for information to be furnished to the Registrar. Sections 230(7) and 492 of the Companies Ordinance, 1984 are also invoked leading the present petition whereby the petitioner seeks the orders of this Court under section 290 of the Companies Ordinance and has move the petition with the following prayers: "(i) Supercede the Board of Directors, including the Chief Executive, of the respondent and to vest all powers of the Board of Directors and Chief Executive of the respondent in a person appointed by this Hon'ble Court to be competent/qualified to handle the affairs of the respondent ("the Administrator"); (ii) Direct that all assets, documents, record:- and instruments of the respondent be given under the custody and control of the Administrator to ascertain the true position relating thereto and to
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ascertain the true ownership of the majority shares of the respondent; (iii) Pass such consequential orders as may from time to time be required in order to regulate the affairs of the respondent and to terminate/set aside any arid all arrangements/contracts which may have been prejudicial to the interest of the members and creditors of the respondent; and (iv) Grant any other, better or further relief which this Hon'ble Court may deem fit in the facts and circumstance of this case." 3. Counter-affidavit/reply to the main petition was filed on behalf of the respondent-Company on 6-9-2002. Affidavit-inrejoinder was filed by the petitioner in March, 2003. Respondents Nos.2 to 30 were initially impleaded and subsequently respondent No,31 was impleaded, subject to all just exceptions. 4. In September, 2000 the State Bank of Pakistan conducted investigations into the affairs of the Prudential Group of Companies, in which major shares were owned by Mr. Rashidullah Yacoob and his Group, it revealed gross irregularities and misappropriation of funds had occurred in the Prudential Group of Companies. Respondent-Company is also a member of the Prudential Group of Companies, therefore, the petitioner initiated a special audit of the respondent-Company for the year ended 30-6-2000 in accordance with rule 19 of the Leasing Companies (Establishment and Regulation) Rules, 2000. On the basis of the special audit report, the petitioner alleges that the affairs of the respondent-Company are being conducted in an unlawful and fraudulent manner. Some of the salient matters revealed in the report have been specified in paragraphs 8, 9 and 10 of the petition. Subsequently, the management of the respondent-Company was changed and new directors were inducted, however, the approval of the new directors has not been accorded by the petitioner. In this connection, three show-cause notices to the respondent-Company under various provisions of the Companies Ordinance, 1984, hereinafter referred to as 'the Ordinance'. As the respondent-Company failed to take corrective measures, the petitioner filed the present petition seeking the above quoted prayers. The grounds for filing the petition have been stated in paragraph 25 of the petition from 'A' to K. 5. Qazi Faez Isa, learned counsel for the petitioner, in support of the petition, advanced elaborate arguments to show that before invoking the jurisdiction of this Court under the provisions of section 290 of the Companies Ordinance, the respondent-Company was provided all the opportunities required under the provisions of the said rules. He elaborately explained the aforesaid dates when the notices were issued, extensions were sought and replies were considered to show that the petitioner has throughout acted diligently and without any delay in the matter. He explained that this exercise was necessary for compliance of the requisite provisions of the said rules before invoking the jurisdiction of this Court. 6. On facts, the learned counsel for the petitioner, in addition to the irregularities pertaining to the prior approval of the Authority in connection with the appointment of Directors and Managing Director, further proceeded to refer to the violations of the Leasing Rules that surfaced after the Special Audit was conducted. A copy of the Special Audit Report was filed by the learned counsel for the petitioner in Court and also provided to the learned counsel for the respondents which supported the contention of the learned counsel in respect of various irregularities alleged in the petition in running the affairs of the respondent-Company. The learned counsel further submitted that the object of the provisions of the said rules, since repealed and now replaced by the Non- Banking Finance Companies (Establishment and Regulation) Rules, 2003, is to safeguard the interest of the shareholders and, at the same time, guard against money laundering and to check the induction of unscrupulous persons in the capital market and that was necessary in the present case as one of the alleged buyers of the shares from Rasheedullah Yacoob, Sabur Rehman, is an absconder from law and his properties are liable to confiscation as ordered by the Supreme Court of Pakistan in the case of Sabur Rehman and another v. Government of Sindh and others (PLD 1996
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SC 801). By purchase of the said shares, the said Sabur Rehman attempted to acquire the control of affairs of the respondent-Company. This is against the very object for which the rules are framed. 7. His next contention is that the company has been running into losses and under the present circumstances it is not in a position to raise its paid-up capital from the existing Rs.169 million, as revealed in the 14th and 15th Annual Reports, to the minimum requirement of paid-up capital of Rs.200 million prescribed for carrying on the business of leasing by a public limited company in pursuance to rule 5(2)(b)(ii) of the Non-Banking Finance Companies Rules, 2003. 8. The learned counsel submitted that this is the first case of its nature and therefore the petitioner has exercised restraint in not proceeding for the winding-up of the respondent-Company with the object to encourage growth of economic and financial activities and prayed only for appointment of a Manager/Administrator. 9. Mr. Arshad Tayebaly, learned counsel for the respondent-Company, opposes this petition. In addition to oral arguments he also filed a detailed synopsis of his arguments as discussed in detail hereafter. 10. 10. Mr. Yawar Faruqui, learned counsel for the respondent No,31, Kashifur Rehman, adopted the arguments advanced by Mr. Arshad Tayebaly. Additionally, he stated that respondent No,31 did not acquire any shares from Sabur Rehman and that the shares held by his client were purchased from open market and lodged with the Central Depository Company, that the irregularities committed by Rasheedullah Yacoob, the former Managing Director of the respondent-Company, may not be made a ground of action against the present management and that the provisions of section 265 of the Companies Ordinance in general and section 265(b)(2) of the Ordinance have not been complied with which would be a pre-requisite for an action as in the absence of an Inspection Report, carried out under said provisions, the present proceedings are an exercise in futility. 11. Mr. Nadeem Akhtar, learned counsel for respondents Nos.2 to 31, after referring to the pending litigation before this Court pointed out that the subsequently added respondents Nos. 2 to 31 were not party to the execution of the documents and were initially not impleaded in these proceedings. His contention is that there is no valid transfer of shares of the respondents represented by him in favour of Sabur Rehman. In fact the matter is being contested under separate proceedings in Suit No,1570 of 2001. Mr. Nadeem has supported this petition. He has also referred to certain irregularities in the removal of the Registrar of shares and appointment of another Registrar without proper resolution of the Board of Directors of the company and pointed out that the management of the affairs of the company in violation of the interest of the shareholders. 12. The Annual Balance-Sheets and other documents not brought on record by either of the parties, were placed on record under the direction of this Court and are examined herein. 13. Mr. Arshad Tayebaly, on being pointed out that the capital of the respondent-Company has been eroded and in fact the respondent-Company has incurred liabilities beyond its paid-up capital with the result that the break-up value of each fully paid-up share of Rs.10 is shown as Rs.8 per share. The learned counsel explained that due to earlier recessionary tendency the respondent-Company suffered losses but in spite of the negative equity the respondent-Company has not committed any default so far, that all the commitments are being honoured. He also referred to the repayment of debt of Rs. Four million by the respondent-Company. It was also pointed out that appointment and sudden changes at this vulnerable stage would give excuse to the various creditors of the respondent-Company to delay and avoid payments and back out of their commitments made by them and would push the company into liquidation. He also undertook that if the respondent-Company was afforded an opportunity, the present
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management would make the requirements of raising the paid-up capital of the company to the minimum requirement of Rs.200 million which under the present circumstances is not possible for the Manager proposed to be appointed. 14. During the course of his detailed oral arguments in Court as well as in the written arguments he raised many objections to the grant of this petition. 15. At the very outset, Mr. Tayebaly contended that in view of the consent order passed in Suit No,1214 of 2001 (Moin Asif Khawaja v. Securities Exchange Commission of Pakistan and another), whereby the petitioner undertook not to create any hindrance for removal of the Chief Executive Officer of the respondent-Company until the disposal of a petition filed in Lahore High Court being C.O. No,34 of 2001, the petitioner after giving its own consent, cannot take any action for removal of the Chief Executive Officer of the respondent-Company. As such, the petitioner has not come to this Hon`ble Court with clean hands. It was further submitted that the subsequent change in the Chief Executive Officer is irrelevant as the petition has to be decided on the basis of the grounds stated in the petition and the main objection of the petitioner was on the appointment of the Chief Executive Officer but after giving its consent, the petition is liable to be dismissed on this ground alone. 16. The learned counsel, with regard to provisions of section 290 of the Ordinance submitted that the petitioner has sought relief under the specific provision of section 295 of the Ordinance but such provision is only available for creditors having interest equivalent in amount to not less than twenty per cent. Of the paid-up capital of a company and only when such creditors represent to the petitioner that the affairs or business of the company are being conducted or managed with intention to defraud its members of creditors or any other person or for a fraudulent or unlawful purpose, or in a manner oppressive of any such person only then the petitioner may take any action for appointment of an Administrator. He submitted that not a single creditor has represented to the petitioner with any such complaint against the respondent-Company. 17. Mr. Tayebaly further submitted that only 4% of the shareholders (respondents Nos.2 to 30) are supporting this petition and, therefore, this Court may not take cognizance on the complaint of these shareholders as they are less than the statutory requirement of 20% for moving an application under section 290 of the Ordinance. 18. The learned counsel for respondent-Company submitted that although it may be necessary to interfere with the conduct which lacks in probity, however, it is equally important not to, interfere where there is no proof of such lack of probity and the complaint is based on mere resentment or lack of confidence. A failure to maintain this distinction will create more problems than it cures. The learned counsel relied on (i) Robin Hollington, Minority shareholders' Rights, Second Edition, Sweet and Maxwell, London, 1994 page 46 (ii) PLD 1988 Lahore 1 at page 30, para.29 (Shahbazuddin Chaudhry v. Service Industries Textile Limited), (iii) [1996] 1 All. ER 242 at page 246-248 (Re Five Minute Car Wash Service, Ltd.], which I propose to examine as follows. 19. Mr. Arshad Tayebaly contended that it must be shown that the Board of Directors has exercised its powers in running the business of the company, or made a corporate decision, in an unlawful manner. He submitted that the petitioner's complaint is, that the Board of Directors have not been approved by the petitioner and as such an Administrator should be appointed to run the affairs of respondent-Company. He submitted that the respondent-Company's position is that it is being managed by a Board of Directors and the names of these Directors were sent for approval of the petitioner, however it is the petitioner who has neither rejected nor approved such names of Directors. 20. He submits that the Registrar of the Companies cannot speak for the 4% shareholders and even otherwise to pass an order under section 290, the Hon'ble Court has to form an opinion that:
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' The company's affairs 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 shareholder. No person in this case has even complained of oppression or any conduct unfair to him and as such the harsh measure of appointment of Administrator cannot be justified. ' He placed reliance on the cases of: (i) Shahbazuddin Chaudhry v. Service Industries '11 xtile Limited (PLD 1988 Lahore 1) and (ii) Shanti Prasad Jain v. Kalinga Tubes Ltd. (1965) 35 Company Cases 351. 21. It may be mentioned that paragraphs 7 to 12 contain the allegations on the basis of which the petitioner alleges that the affairs of the company are being run in an unlawful and fraudulent manner and in a manner oppressive to the members and creditors and prejudicial to the public interest. The reply/counter-affidavit filed by the respondent-Company, in respect of allegations in the above paragraphs states as under: "5. With reference to paras.7, 8, 9, 10, 11 and 12 of the petition, it is submitted that all the allegations made therein pertain to the previous management of the respondent. It is admitted position that all allegations stated in paras.7, 8, 9, 10, 11 and 12 pertain to the period before 2-6-2001 and the present respondent has no concern whatsoever with any of the allegations raised in these paras." 22. This amounts to admission that the allegations contained in the above paras. Took place but since it was during the tenure of the previous management, therefore, the present management is not responsible for the same. However, the learned counsel has not been able to show that under the provisions of the Companies Ordinance, 1984, there is any distinction between the present or the previous management. But, interestingly, at the end of para.5, it is stated that "without prejudice. To the above, the respondent denies the several allegations specified in the said paragraphs and the petitioner is put to proof". The respondent, in the same breath, cannot blow hot and cold by saying that these allegations pertain to the period of the previous management and then denying the same.. 23. 23. As regards the petitioner being 'put to proof is concerned, in a petition usually no evidence is recorded if the documents on record through which each party endeavours to support its case. Now, in the presence of allegations as contained in paras.7 to 12 are concerned, the respondent- Company has attributed the same to the previous management. If the allegations were sought to be denied, it should have brought its version on record to show that the allegations are incorrect. However, there is nothing on record to show that t he findings in the report, which has provided the foundation for this petition, are incorrect. 24. The petitioner, in pursuance to rule 19 of the Leasing Companies (Establishment and Regulation) Rules, 2000, appointed M/s. Ibrahim Shaikh & Company, Chartered Accountants, to carry out a special audit. Section 19(2) of the said rules reads as under: "19. (1) ------------------ (not relevant) ------------------------- (2) The Commission shall monitor the general financial condition of a leasing company, and, at its discretion, may order special audit and appoint an auditor to carry out detailed scrutiny of the affairs of the company, or appoint both an auditor and an inspector, provided that the Commission may, during the pendency of the scrutiny, pass such interim orders and directions as may be deemed appropriate." 25. There is no cavil with the proposition advanced by the learned counsel for the respondent- Company that an order under section 290 of the Ordinance can only be made when the petition does not raise any disputed question of fact and highly complex matters and cases of a highly technical nature are not required to be determined and adjudicated under section 290. An order under section 290 must, therefore, only be made in the clearest of cases. This is not such a case. The allegations have all been rebutted. He relied on the following cases:
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(i) Muhammad Yousuf v. Taj Company 1994 CLC 403. (ii) Muhammad Anwar Manoo v. Muhammad Waqar Manoo 1987 CLC 1943. (iii) Shaheen Foundtion v. Capital F.M. (Pvt.) Ltd. 2002 CLD 188, and (iv) Muhammad Fikree v. Fikree Development Corporation Ltd. 1992 MLD 668. 26. As regards the requirement for passing an order under section 290 of the Ordinance, the learned counsel submitted that the power under section 290 is available only in those cases where it is shown that the grounds for winding-up under section 305 of the Companies Ordinance exist but that to windup the company would unfairly prejudice the shareholders. It was also contended that in order to make any order under section 290, the Court must form a view on both parts of subsection (2), that is, that it must be of the opinion that the company's affairs are being conducted or are likely to be conducted as stated in subsection (1) and that to wind-up the company would unfairly prejudice the members or creditors. It is only in such circumstances that an Administrator can be appointed under section 290 of the Ordinance. He submitted that in this particular case no case of winding-up is justified as respondent-Company is fulfilling its obligations, financial and otherwise, towards all creditors and other persons dealing with the company and as such, no justification has been made out to say that the conduct of the company's affairs is such as would otherwise merit its winding-up. He placed reliance on the following cases:-- (i) Shahbazuddin Chaudhry v. Service Industries Textile Limited PLD 1988 Lahore 1. (ii) Shanti Prasad Jain v. Kalinga Tubes Ltd. (1965) 35 Company Cases 351, (iii) V.M. Rao v. Rajeswa ri Ramakrishnan (1987) 61 Company Cases 20, (iv) Palghat Exports v. T.V. Chandran (1994) 79 Company Cases 213, and (v) Rajahmundry Electric Supply Corportion v. Nageshwara Rao AIR 1956 SC 213. 27. He contended that the remedy available to the petitioner, if it is assumed that the respondent- Company has committed any violation as alleged in the petition, is in the form of action under sections 270 to 276 of the Ordinance. 28. There is also no cavil with the proposition that an order under section 290 of the Ordinance cannot be passed unless the facts proved are such that they would also justify the passing of order for winding-up of the company. In this connection reference may be made to section 305 of the Ordinance which enumerates the grounds on which a company may be wound up. Relevant provisions of clause (f) of section 305 of the Ordinance are produced for convenience: "305. A company may be wound by the Court: (a) to (e) (not relevant) ------------------- (f) if the company is (i) conceived or brought forth for or is or has b en carrying on, unlawful or fraudulent activities; (ii) (not relevant) ------------------------- (iii) conducts its business in a manner oppressive to any of its members or persons concerned with the formation or promotion of the company or the minority shareholders; (iv) run and managed by persons who fail to maintain proper and true accounts, or commit fraud, misfeasance or malfeasance in relation to the company; or (v) managed by persons who refuse to act according to the requirements of the memorandum or articles or the provisions of this Ordinance or fail to carry out the directions or decisions of the Court or Registrar or the Authority given in the exercise of powers under this Ordinance." 29. A perusal of the above provisions sub-clauses (ii), (iv) and (v) of clause (f) of section 305 of the Ordinance reveals that a company may be wound up if the company is carrying on unlawful or fraudulent activities, conducting its business in a manner. 30. The Auditor, appointed pursuant to rule 19 of the rules, carried out scrutiny of the affairs of the respondent-Company and submitted its report to the petitioner on 30-6-2000. In the report,
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following specific findings were given by the Auditors: (1) That funds of the respondent-Company were misappropriated and misapplied by fictitious Musharakas to the Chairman and his family (Rs.37.092 million); income booked instead of being suspended (Rs.31.653 million); dubious leasing (Rs.69.16 million); submission of fake leases for reimbursement from Asian Development Bank (Rs.100 million); leasing facilities granted in violation of the rules (Rs.188.26 million); (2) That the affairs of the respondent-Company are being conducted in unlawful and fraudulent manner as the largest lease given in the name of M/ s., Alpine International (Pvt.) Limited and another lease in the name of M/ s. Mehran Animal and Poultry Feeds (Pvt.) seems to be fake lease as the assets in both cases do not exist, that the management has been found to have embezzled funds of a Musharika investment of Rs.37.092 million, the Prudential Commercial Bank Limited has denied, in writing, that they have issued any guarantee for US $ 2.750 million in order to obtain Asian Development Bank as such it appears to be a fictitious guarantee, submission of fake documents to Asian Development Bank, submission of leases which had already been reimbursed by ADB and Kreditanstault Fur Wiederaufbau (KFW) Loan, the investment made during the year could not be proved to be genuine and short term transaction exposing the company to unwarranted risk for obtaining more profit. (3) Fund based facilities were provided to the relatives of the Chairman in the case of Alpine International and Mehran Animal and Poultry Feed. In one case even the address of the company was that of Prudential House, the head office of the Prudential Group. (4) That the respondent-Company was managed contrary to applicable laws and especially in blatant contravention of the rules as paid-up capital of the respondent-Company as on 30-6- 2000 was Rs.149.238 million and Rs.242.830 million were required to be made in the accounts of the respondent-Company for bad/ doubtful debts whereas the respondent-Company made provision of only Rs.88.50 million, the entire capital of the respondent-Company has, as such, been totally eroded and there is a shortfall of Rs.5 million in the capital of the respondent-Company, contrary to rule 71(xi) of the rules, granted…
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