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Petitioner: Hashoo Holdings (Private) Limited VS Respondent: Securities and Exchange Commission JUDGMENT
Court Name: Sindh High Court Judge(s): Muhammad Junaid Ghaffar Title:Hashoo Holdings (Private) Limited vs Securities and Exchange Commission
JUDGMENT
Reported As: 2019 CLD 675 Result: Appeal dismissed Judgment JUDGMENT MUHAMMAD JUNAID GHAFF AR, J.---This is an Appeal under Section 34 of the Securities and Exchange Commission of Pakistan Act, 1997 ("SECP Act") against order dated 01.12.2014 passed by the Appellate Bench of Securities and Exchange Commission of Pakistan ("SECP ") whereby , the order dated 09.02.2010, passed by the Executive Director (SMD ) of SECP has been set aside with directions that the gain has to be transferred to the Issuer Company and not to SECP . 2. Precisely stated facts are that on 20.10.2004 a notice was issued by SECP , wherein, it was alleged that Appellant entered into sale and purch ase of various shares of Pakistan Services Limited ("PSL") in four transactions within a period of six months and allegedly made a gain of Rs. 135,019,644/-. It was further alleged that in terms of section 224 of the then Companies Ordinance, 1984 ("Ordinance 1984 ") the appellant was required to tender such gain, back to PSL and at the same time, was further required to send such intimation to the Registrar of SECP . The notice dated 20.10.2004 was responded on 08.11.2004, and thereafter , various correspondence took place and it is the case of the Appellant that the matter was settled and closed without any need of further hearing. It is further stated that on 14.07.2009, another Show Cause Notice was issued on identical terms which was again responded, whereafter , Order in Original dated 09.02.2 010 was passed, whereby; the Appellant was directed to tender Rs. 135,019,644/- to SECP on account of its failure to pay the said amount to PSL within six months of such alleged gains. The said order was challenged in Appeal and through impugned order; the Appellant has been directed to pay such gain/amount to PSL and not to SECP . 3. Learned Counsel for the Appellant has contended that Appellant is a beneficial shareholder in excess of 10% in PSL and purchased as well as sold various shares of PSL on 25.08.2003, 16.09.2003, 26.12.2003 and 19.01.2004.
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Per learned Counsel, first notice was issued in 2004 which was duly replied and several hearings and meetings were conducted till 2006, and no adverse order was passed giving an impression to the Appellant that the matter stands closed and settled. However , once again in 2009 a fresh Show Cause Notice with same allegations was issued, which in law could not have been done so, on the same set of allegations. Per learned Counsel, unreasonable delay on the part of SECP in issuing Show Cause Notice and passin g of the Order in Original is bad in law and it cannot be sustained. Accor ding' to him, the last date of transaction was 19.01.2004, whereas, the Show Cause Notice was issued on 14.07.2009, and according to him in view of the dicta laid down by the Hon'ble Supreme Court in the case reported as Chairman, Regional Transport Autho rity, Rawalpindi v. Pakistan Mutual Insurance Company Limited, Rawalpindi (PLD 1991 SC 14), the official act must be performed within a reasonable time, whereas, delay of more than five years in this case is not only unjustified; but so also unreasonable. He has further contended that the Order in Original itself states that matter was revived in 2009 after appointment of a new Executive Director; therefore, this conduct is unreasonable and amounts to arbitrary exercise of discretionary powers by the said Executive Director , whereas, a past and closed transaction has been simply revived on the whims and fancy of an officer. In support of this proposition he has relied upon Abid Hassan and others v. P.I.A. C. and others (2005 SCMR 25) and Mithu Bawa Padiyar v. Union of India and another (2003 (86) ECC 485). On merits of the case learned Counsel has relied upon Securities and Exchange Commission of Pakistan through Commissioner v. First Capital Securities Corporation Limited and another (PLD 2011 SC 778), Paras 14, 15 and 17 of the said judgment and has contended that the Appellant is only required to tender the gains to the Company in terms of section 224 ibid if the Appellant had done something which is unjust or inequitable or in violation of its duties and obligations to the company , whereas, the Respondent's case is not that any unjust or inequitable act was committed; rather in the impugned order of the Appellate Bench, it has been held that it is difficult to establish whether the transactions are bona fide or not, and therefore, the impugned order is liable to be set aside. Per learned Counsel, in the judgment of the Hon'ble Supreme Court it has been observed that the person making the transaction in question shall be entitled to retain the profits if he has acted in good faith, therefore, per learned Counsel, since there is no adverse finding on merits as to the good faith; hence, the Appellant is fully entitled to retain the gains made in the said transactions. According to him, it is not the case of SECP that the gains in question were made on the basis of any inside information; nor, there is a finding of guilt in relation thereto. He has further contended that case of SECP is premised on the assertion that the offence is of strict liability , whereas, the Hon'ble Supreme Court has interpreted the same otherwise. Learned Counsel has also relied upon the impugned order , wherein, it is observed that the transactions were done in the ordinary course of business; hence, in view of such findings the impugned order cannot be sustained. In these circumstances he has prayed that instant Appeal be allowed. 4. On the other hand, learned Counsel for SECP has contended that insofar as the law on the subject i.e. section 224 as well as the gains made by the Appellant are concerned, it is not under challenge, and it is only the retention of the gains by the Appellant, which is a matter of concern and is to be decided by this Court in this Appeal. He has at the very outset, admitted that insofar as the gains are concerned, they must not be retained by SECP , and should be paid to the Company i.e. PSL in this case. Learned Counsel has referred to section 224 of the Ordinance 1984 and has contended that whatever gains are made by any of the Directors or a beneficial owner of more than 10% of a listed company within a period of less than six months, such gain has to be tendered to the Company and the only exception is in the proviso to the said section, which states that subsection (1) shall not apply to a Security which has been acquired in good faith in satisfaction of a debt previously .contra cted. Per learned Counsel, the Appellant admittedly does not fall within the ambit of the proviso; nor has a case to this effect been pleaded, except that it was a bona fide transaction. According to him, the judgment of the Hon'ble Supreme Court in the case of SECP (supra) was only to the effect that whether the entitlement of SECP to retain gains to the exclusion of shareholder(s) or beneficial owner is justified or not, and the Hon'ble Supreme Court came to the conclusion that such gains cannot be retained by SECP . According to him, while doing so, the said provision has though been interpreted, but in no manner it entitles the Appellant to seek shelter under the observations in the said judgment and retain the gains, which otherwise are to be tendered to the public listed comp any/PSL, for the ultimate benefit
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of the general shareholders. Insofar as the Appellant's case on merits is concerned, learned Counsel has contended that the four transactions in question were not bona fide; nor do they fall 'within the exception so stated in the proviso to section 224 of the Ordinance, 1984. Per learned Counsel, the stance that the transaction was also entered into for repossessing of shareholding within the Group is also misconceived as every company is a separate legal entity , and there is no exception whatsoever to any such Inter Group transfers in law. According to him, the real gain was made when share s were bought and sold of within six months by the Appellant, who is a shareholder of more than 10% and had inside information. Learned Counsel has also referred to a judgment from the United States Court of Appeal in the case of Smolowe v. Delendo Corporation , (136 F.2d 231 (2d Cir. 1943 ), wherein, Section 16(b) of the Securities Exchange Act, 1934 has been dealt with, which according to the learned Counsel for SECP is, identical in terms to- Section 224 ibid, and has contended that the Court went to hold that, "A subjective standard of proof, requiring a showing of an actual unfair use of inside information, would render senseless the provisions of the legislation". Insofar as the delay in passing of the Order in Original is concerned, learned Counsel has contended that the matter was never settled or closed, whereas, the first notice was not a Show Cause Notice and it was only seeking information as to the transaction in question and thereafter , communication continued till 2006, after which the office of the Executive Director was vacant and finally in 2009 a. Show Cause Notice was issued and Order in Original was passed; therefore, per learned Counsel, no benefit can accrue to the Appellant for delay , if any, as there is no restriction or limitation in law for either issuing a Show Cause Notice or passing of an Order in Original. 5. I have heard both the learned Counsel and perused the record. The Appe llant admittedly is a beneficial shareholder of PSL (a Public Listed Company) in excess of 10%, and conducted transactions of purchase of PSL shares on 25.08.2003 and 16.09.2003, whereas, sold the shares of PSL on 26.12.2003 and 19.01.2004. According to SECP this was in violation of Section 224 of the Ordinance, 1984 which reads as under:- "224. T rading by directors, officers and principal shareholders.- (1) Where any director , chief executive, managing agent, chief accountant, secretary or auditor of a listed company or any person who is directly or indirec tly the beneficial owner of more than ten per cent of its listed equity securities makes any gain by the purchase and sale, or the sale and purchase, of any such security within a period of less than six months, such director , chief executive, managing agent, chief accountant, secretary or auditor or person who is beneficial owner shall make a report and tender the amount of such gain to the company and simultaneously send an intimation to this ef fect to the registrar and the Commission: Provided that nothing in this subsection shall apply to a security acquired in good faith in satisfaction of debt previously contracted. (2) Where a director , chief executive, managing agent, chief accountant, secre tary, auditor or person who is beneficial owner as aforesaid fails or neglects to tender , or the company-fails to recover , any such gain as is mentioned in subsection (1)' within a period of six months after its accrual, or within sixty days of a demand therefore, whichever is later, such gain shall vest in the Commission and unless such gain is deposited in the prescribed account, the Commission may direct recovery of the same as an area of land revenue. (3) For the purposes of sections 220 to 224, the term "auditor of the company" shall, where such auditor is a firm, include all partners of such firm. Explanation ---(a) For the purposes of this section and section 222, beneficial ownership of securities of any person shall be deemed to include the securities beneficially owned, held or controlled by him or his spouse or by any of his dependent lineal ascendants or descendants not being himself or herself a person. who is required to furnish a return under section 222, and (i) in the case where such person is a partner in a firm, shall be deemed to includ e the securities beneficially held by such firm; and (ii) in the case where such person is a shareholder in a private company , shall be deemed to include the securities beneficially held by such company: Provided that for the purposes of subsection (1) the gain which is required to be tendered to the company by such person shall be an amount bearing to the total amount of the gain made, as the case may be, by the firm or private
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company the same proportion as his relative interest bears to the total interest in such firm or private company . (b) For the purposes of this Explanation, "control", in relation to securities, means the power to exercise a controlling influence over the voting power attached thereto. (4) Whoever knowingly and willfully contravenes or otherwise fails to comply with any provision of section 222, section 223 or section 224 shall be liable to a fine which may extend to thirty thousand rupees and in the case of a continuing contravention, non- compliance or default to a further fine which may extend to one thousand rupees for every day after the first during which such contravention, non-compliance or default continues." 6. The above Section provides that where any director , chief executive, managing agent, chief accountant, secretary or auditor of a listed company or any person who is directly or indirectly the beneficial owner of more than ten per cent of the listed company , make s any gain by the purchase and sale, or the sale and purchase, of any such security within a period of less than six months, such person shall make a report and tender the amount of such gain to the company and simultaneously , send an intimation to this effect to the Registrar and the authority , provided that this sub-section shall not apply to a security acquired in good faith in satisfaction of debt previously contracted . For the present purposes, it is only subsection (1) and the proviso thereof which is to be considered by the Court. In this matter through the Order in Original it was ordered that such amount of gain is to be deposited with SECP , whereas, the Appellate/impugned order has directed that such amount be paid to the listed Company , whereas, the case of the Appellant is that their case is covered by the proviso, and therefore, no amount of gain is to be paid to anyone except; but is to be retained by the Appellant itself. It is their further case that since there are no adverse findings in the Appellate Order; therefore, the transaction is otherwise bona fide. The Hon'ble Supreme Court in the case of SECP (supra) has been pleased to interpret the afores aid provision of law and it has been held that in case of any contravention of subsection (1) of section 224 ibid, the gains are only to be paid and tendered to the listed Company in question and not to SECP . To that extent the Order in Original was erroneous, and in fact this settled position of law was not even disputed on behalf of SECP in this case. Therefore, before this Court the issue is only to this extent that whether it could be retained by the Appellant or not. It may further be noted that in the impugned order , nor in the Order in Original, any fine, penalty or any other coercive action was initiated against the Appellant. 7. The first question which has been raised by the Appellant is in respect of the delay; firstly in issuance of Show Cause Notice, and thereafter in passing of the Order in Original vis--vis. the last date of transaction. Learned Counsel has contended that the last transaction was entered into on 19.01.2004, whereas, the first notice which is termed as a Show Cause Notice by the Appellant was issued on 20.10.2004. However , when the said purported notice is examined, it appears that in fact this was not a Show Cause Notice stricto sensu, but only a letter seeking clarification and explanation from the Appellant in respect of the transaction(s) in question and the gains made thereon. Therefore, the objection as to issuance of Show Cause Notice and passing of the order after so much delay is not tenable. In fact no Show Cause Notice was issued until 2009, wherea s, as to the objection regarding issuance of Show Cause Notice in 2009 in respect of transactions entered into in 2004, learned Counsel for the Appellant was confronted as to whether any limitation has been prescribed in law for issuance of such impugned Show Cause Notice, and to this he frankly conceded that no such limitation has been provided. He, however , contended that notwithstanding the fact that in law there is no limitation; but it must be issued within a reasonable time. In support he relied upon the case from Indian jurisdiction reported as Mithu Bawa Padiyar (Supra ). Insofar as the objection regarding limitation is conc erned, admittedly , there is no prescribed limitation; hence, merely for delay as contended, the entire transaction ,cannot be termed to be invalid merely for this reason. Nonetheless, the transaction was entered into by the Appellant and was confronted immediately in 2004, through an explanation; therefore, the ground that in 2006 the matter stood settled has no basis. For the sake of argument if it is assumed that the first letter of explanation was a Show Cause Notice, as contended, even then, the order could have been passed subsequently , even belatedly , as again there is no limitation to this effect as well. Moreover , since there is neither any limitation nor a consequence, for not passing an order within any such time limit, the objection is otherwise also liable to be discarded. The Hon'ble Supreme Court in the case reported as Assistant Collector of Customs AFU, Airport, Lahore v. Messrs Tripple-M (Pvt.) Ltd. through Managing Director and 4 others (PLD 2006
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SC 209) had the occasion to deal with a more or less similar situation, wherein, a Show Cause Notice was issued on 10.07.1989 and thereafter , the matter was kept pending and no Order in Original was passed. Subsequently , the order was passed on 26.09.2009 and it was contended that the last notice of hearing was issued on 31.08.1992; which resultantly had the earlier Show Cause Notice vacated, and therefore, the Order in Original was time barred. However , the Hon'ble Supreme Court went on to held that the first notice was issued within time, whereas, even if the order was not passed thereafter , the same would not annul and set aside or scrap the Order in Original. The relevant finding of the Hon'ble Supreme Court is in the following terms:- "It is thus concluded that the above-said proceedings initiated against the respondent through the show-cause notice dated 10-71989, were well within time, were not hit by the period of limitatio n then prescribed under section 32(3) of the Act and were never dropped . As regards the observations of the learned Single Judge of the High Court that the order-in-original dated 26-94992 passed by the appellant was not within a reasonable time from the date of the issuance of notice dated 10-7-1989, the same are neither here nor there. No order can be scraped or annulled or set aside, only on the ground that the same has been passed with unreasonable delay . There is no such concept attached to the judicial and quasi-judicial proceedings, unless provided in the statute. The above-mentioned observations of the learned Single Judge have attained seriousness because of the contention of the learned Senior Advocate Supreme Court of the appellant that this issue may be involved in a large number of customs cases and the department would suffer because of the above- said observations made in the impugned judgment especially when the judgment has been approved for reporting. It is, therefore, held that the said observations have no value in the eye of law . No other point was urged before us." 8. Therefore, insofar as the first objection raised by the learned Counsel for the Appellant is concerned, I am of the view that no case is made out to this extent and the Order in Original cannot be set aside or annulled, merely on this ground that it was passed after a delay of six years from the date of first notice. 9. Insofar as the second point regarding interpretation of the provisions of section 224 ibid by the Hon'ble Supreme Court in the case of SECP (supra) is concerned, it would be advantageous to refer to the relevant findings of the Hon'ble Supreme Court at Paras 14, 15 and 17 which reads as under:- "14. Apart from the above error, there is a more substantial question which arises in relation to the interpretation of section 224. What was the objective underlying this section? No direct answer to this is provided by the language used in it. It merely states that in the event of a person falling within any of the categories mentioned therein making a profit in relation to a sale and purchase within a period of less than 6 months failing to tender the said profit within the prescribed time limit to the said company , or the company failing to recover it from the said person, the quantum of the gain is to vest in the SECP . But why? What is the justification for such a provision? What objective, rooted or based in public policy , is sought to be achieved thereby? 15. Although no direct answer is contained in this section, an answer can reasonably be inferred. It is clear that this section proceeds on the tacit assumption that the person in question was privy to inside information and, taking advantage of the same, obtained a gain to which accordingly he was morally not entitled and this was required it to surrender it to the company . In other word s, there is a presumption, which is tacit, to the effect that the person has done something which is unjust or inequitable, or in violation of his duties and obligations to the company as a person falling within any one of the prohibited categories, and thus should be compelled to surrender his gains to the company . Obviously , it would have been better if this presumption had been made explicit and not tacit but, accepting that the presumed legislative intent was the above, we can proceed further with our analysis. 17. We can now examine the comparative rights and liabilities of all three parties to the dispute. They are respectively (i) the person who has carried out the transaction, (ii) the company whose shares have been bought or sold, and, finally , (iii) the SECP .
(i) As has been pointed out in the above the section has been made on the tacit assumption that the person who has carried out the trans action has acted in an inequitable or illegal manner by relying on inside information. His position, therefore, legally speaking is the weakest.
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(ii) and (iii) We now turn to the company and SECP . The most important point to note here is that the section is confined to listed companies. These are, of course, those companies whose shares are quoted on the Stock Exchange and who have numerous shareholders, perhaps running into hundreds or even thousands, who are, on any conceivable version of the matter completely innocent. The SECP exists not in order to deprive them of their rights but to protect them. If the SECP fails to do so there is very little justification for the existence of its regulatory powers. The question, therefore, arises as to what justification there is, if a person with inside information has carried out a transaction on the basis of inside information, to deprive the innocent shareholders of their equitable entitlement by penalizing the company as a whole. On any conceivable view of the matter the only two persons or entities entitled to retain the profits are either the person in question, assuming he has acted in good faith, or the company whose shares he has bought or sold within 6 months. Clearly neither the State of Pakistan nor any of its statutory instrumentalities is entitled to share in the profits. The argument on behalf of SECP , in essence, is that the company ought to have recovered the amount of the gains from the said person within the time limits specified in the section, which are either six months from the date of accrual of the gain, or sixty days from the date of demand by SECP . Two questions are immediately raised by this proposition: (a) What is the modality provided in terms of which recovery can be made by the company from the said person within the drastically short time limits prescribed? The answer is none of course. All that the company can do is to file a suit for-recovery of the amount in question. If there is a legal system in force in terms of which suits for recovery can be routinely decided within these time limits it is not within our knowledge. Suits for recovery of money normally run into five or ten years or even more and the execution proce edings would further add to the delay , to say nothing about the time taken in appeals. It should be borne in mind that it is the responsibility of the State to ensure speedy and expeditious justice to its citizens. The…
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