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Petitioner: Dr. ZAFAR ULLAH and 5 others VS Respondent: SPECIALISTS CARE HOSPITALthrough Chief JUDGMENT
Court Name: Lahore High Court Judge(s): Shahid Karim Title:Dr. ZAFAR ULLAH and 5 others vs SPECIALISTS CARE HOSPITALthrough Chief
JUDGMENT
Reported As: 2016 CLD 1283 Result: N/A Judgment JUDGMENT SHAHID KARIM, J.---This single judgment shall decide the instant petition C.O. No,61/04 (first petition) as well as connected petitions C.O. No,22/06 and C.O. No,23/06 (second petitions) . The First Petition ' The first petition is a petition under section 152 of the Companies Ordinance, 1984 (Ordinance) for the rectification of Registers of Members of Specialists Care Hospital (Pvt.) Ltd. Company was incorporated on 04.06.1986 as a private limited company. The authorized capital of the Company at the time of its incorporation was Rs,40,00,000/- divided into 4,000 ordinary shares of Rs,1000/- each. In January 1994, the authorized capital was enhanced to Rs,10 million. The paid up capital was increased accordingly and in terms of the Form "A" filed for the year ending on 31.12.2001 the enhancement was made to Rs,11,900,000/- divided into 11900 shares of Rs,1000/- each. As per the Form 3 filed on 3.3.2004, the authorized capital of the Company is Rs,20 million and the paid up capital was Rs,14,775,000/- divided into 14775 shares of Rs,1000/- each. 2. The shareholding of the petitioners (at the time of the filing of the petition) has been given in paragraph 5 and is not disputed between the parties. It has been mentioned in the petition that the main object of the Company was to establish, manage and run a hospital known as 'The Specialists Care Hospital (Pvt.) Ltd." and other allied purposes in accordance with the objectives as set forth in the Memorandum of Association. The Relevant Facts: 3. There are historical facts since the incorporation of the Company which are not relevant for our purposes. During the pendency of these proceedings, the petitioners Nos.3 to 6 have withdrawn
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from the prosecution of the instant petition and this fact has been recorded in the order of this Court dated 02.09.2012. At present, petitioners Nos.1 and 2 are the petitioners pursuing the present petition. 5. On 02.05.1996 a Memorandum of Understanding (MOU) was entered into between four persons who are the shareholders of the Company and this MOU formalises the various agreements reached by the four persons who are parties to this MOU. This has merely been mentioned as one of the facts by the learned counsel for the respondents in order to substantiate his arguments that the shareholders of the Company have on various occasions in the past too entered into such MOUs for the running of the affairs of the Company. The significance of this MOU will be adverted to at a later stage. 6. The provenance of the cause of action for the present petition can be traced to an MOU made at Lahore on 02.04.1999 between the Company and one Mehmood Bhatti. This MOU in its recitals mentions that the sponsors of the Company have raised construction of National Hospital and Medical Centre in L-Block, DHA, Lahore. It further states that the sponsors of the Company had negotiated the sale and transfer of 20% shareholding with all rights and interests to the second party (Mehmood Bhatti) who had agreed to purchase those shares for a certain consideration mentioned in the MOU. By the term of the said MOU, the sponsors of the Company were obligated to transfer the plot No,132/3-L, L-Block, LCCHS, Lahore (now DHA) measuring 15000 Sq. Ft. To the Company with all proprietary rights of the Company. Significantly, this MOU has been signed by the petitioner No, 1 . This fact is not denied by the learned counsel for the petitioners and he admits that the signatures on the sidelines of this MOU were affixed by the petitioner No,1 and thus he was an executant thereof. 7. In fulfillment of the MOU, the shares to the extent of 20% of the shareholding were transferred in the name of the persons who have been arrayed as respondents Nos.2 to 15 in proportion which is mentioned in paragraph 5 of the petition. This too has not been denied by either side and is a common ground between them. The entire challenge in this petition is to the transfer of these shares in the names of the respondents Nos.2 to 15 and thus, the rectification of the Register of Members of the Company has been sought. The learned counsel for the petitioners does not deny the documents which have been brought forth on record and on which both the parties rely in support of their respective cases. In a nub, the learned counsel for the petitioners submits that there is no denial that the petitioner No,1 executed the MOU by which the sale of shares to the respondents Nos.2 to 15 took place. ' According to him, this should not be an impediment to the challenge made in these proceedings to the failure on the part of the Company and its sponsors to follow the procedural formalities enacted in section 86 of the Ordinance, 1984 and thus notwithstanding the consent given by the petitioners, the transfer of shares and the incorporation of the names of the respondents Nos.2 to 15 in the Registers of Members of the Company is ultra vires and without lawful authority. He has made a frontal attack on the procedure adopted by the Company in transferring the shares to the respondents No,2 to 15 and contends that no amount of acquiescence' or consent by the petitioners would absolve the 'Company from following the procedure so prescribed and would render the acts done in contravention of that procedure to be an error of law which cannot be condoned. ' The learned counsel for the respondents have, on the other hand, primarily relied upon the principle of acquiescence and consent by the petitioners to contend that the petitioners cannot be heard to say that the procedural formalities were not complied with when the documents to which he was a party, have not been denied as having been executed by the petitioners. 9. A baseline objection was taken by the learned counsel for the respondents to the effect that at the time of the institution of the petition, the petition had been signed by the petitioner No,3 and it
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was his affidavit that was filed. After the withdrawal of the petitioners Nos.3 to 6, the petition was left without an affidavit and, therefore, in terms of rule 16 of the Company Code Rules, a petition without an affidavit is not a petition in the eye of law and ought to be rejected on the threshold. However, the learned counsel for the petitioner has controverted this objection by submitting that C.M. No,604 of 2015 was filed by the petitioners in which the affidavits of the petitioners have been sought to be brought on record in the changed circumstances of the case. Nothing, therefore, turns on this preliminary objection. The Issue: 10. As adumbrated, the instant petition begs the question whether notwithstanding the acquiescence of the petitioners the act of incorporation of the names of respondents Nos.2 to 15 as members is ultra wires the provisions of section 86 of the Ordinance, 1984 and, therefore, the Register of Members ought to be rectified as a consequence. Quite simply, and to put it another way, can the provisions of section 86 of the Ordinance,'1984 be waived by a shareholder so as to give a license to Company to circumvent its procedure. The submissions made by the learned counsel for the parties shall be dealt with during the course of the judgment and in the preceding paragraphs. The Law: 11. This case, involves the true construction of section 86 of the Ordinance, 1984. For facility, section 86 is reproduced as under: "86. Further issue of capital.---(1) Where the directors decide to increase the capital .Of the company by the issue of further shares, such shares shall be offered to the members in proportion to the existing shares held by each member, irrespective of class, and such offer shall be made by notice specifying the number of shares to which the member is entitled, and limiting a time within which the offer, if not accepted, will be deemed to be declined: Companies Ordinance, 1984. [Provided that the Federal Government may, on an application made by any public company on the basis of a special resolution passed by it, allow such company to raise its further capital without issue of right shares.] [Provided further that a public company may reserve a certain percentage of further issue for its employees under "Employees Stock Option Scheme" to be approved by the Commission in' accordance with the rules made under this Ordinance.] (2) The offer of new shares shall be strictly in proportion to the number of existing shares held: Provided that fractional shares shall not be offered and all fractions less than a share shall be consolidated and disposed of by the company and the proceeds from such disposition shall be paid to such of the entitled shareholders as may have accepted such offer. (3) The offer of new shares shall be accompanied by a circular duly signed by the directors or an officer of the company authorised by them in this behalf in the form prescribed by the Commission containing material information about the affairs, of the company, latest statement of the accounts and setting forth the necessity for issue of further capital. (4) A copy of the circular referred to in subsection (3) duly signed by the directors or an officer authorised as aforesaid shall be .Filed with the registrar before the circular is sent to the shareholders. (5) The circular referred to in subsection (3) shall specify a date by which the offer, if not accepted, will be deemed to be declined. (6) [Omitted] [(7) if the whole or any part of the shares offered under subsection (1) is declined or is not subscribed, the directors may allot and issue such shares in such manner as they may deem fit.] Determination:
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12. Section 86 of the Ordinance, 1984 is found in the chapter of further issue of capital and relates to the subject of issuance of capital. Where the directors decide to increase the capital of the company by the issuance of further shares, such shares have to be offered to the members in proportion to their existing shareholding irrespective of class. This offer has to be made by notice specifying the number of shares to which the member is entitled and a time limit has to be given within which the offer, if not accepted, will be deemed to be declined. By subsection (2), the offer of new shares shall be strictly in proportion to the number of existing share. Subsection (3) of this Section says that the offer of shares shall be accompanied by a circular duly signed by the directors or an officer of the company. Subsection (4) lays down that a copy of the circular referred to in subsection (3) shall be filed with the registrar before the circular is sent to the shareholders and by subsection (5), the circular shall specify a date by which the offer, if not accept, will be deemed to be declined. Subsection (7) lastly states that if the whole or any part of the shares offered under subsection (1) is declined or is not subscribed, the directors may allot and issue such shares in such manner as they may deem fit. 13. Much, emphasis was laid by the learned counsel for the petitioners on subsection (7) and the inference that was ought to be drawn from a reading of subsection (7), referred to above by the learned counsel for the petitioner, was that it is only when the offer made in terms of subsection (1) is declined that the directors may allot or issue such shares in such manner as they may deem fit. In a word, the learned counsel for the petitioners invites this Court to hold that since the offer in terms of subsection (1), was neither made nor declined, the allotment of shares by the Company by virtue of MOU, in the names of the respondents Nos.2 to 15 is erroneous and illegal. 14. Before embarking upon the true construction to be put in terms of section 86 of the Ordinance, 1984, a reference to a few facts, in the peculiar facts and circumstances of the case, would be in order. These facts are not disputed and go to the heart of the controversy. 15. A reference was made to the minutes of the joint meeting of the shareholders and Board of Directors of the Company held on 14.12.1998 (Annex K, p,58) (The Resolution). This was participated by all the shareholders including the petitioners (Attendance sheet at p.60). By the resolution of the general house, it was resolved as under by the majority: A.. The shares of the Specialists Care Hospital laying up, increase by 1000 shares thus minimized the total number of shares 20,000. B. An investor/investors be inducted irrespective of his profession. However a draw would be preferred. 16. According to the learned counsel for the respondents, this was the basic document which triggered the future course of events by which the respondents Nos.2 to 15 were inducted as members of the Company. It was thus that the resolution referred to above culminated in the execution of MOU dated 02.04.1998 between the Company and Mehmood Bhatti (Annex L, p.61, Annex 0, p.68, Annex P1-P4, p.70). These facts have been explicated in reply to grounds 'A and `B' by the respondents. The justification for the issuance of shares in favour of respondents Nos.2 to 15 has been based on the authorization issued by the shareholders in the meeting of the shareholders referred to above and held on 14.12.1998. According to the contents of the reply to grounds 'A and B' filed by the respondents, the agreements were necessitated for the issuance of shares for a consideration higher than the nominal value of the shares. Also that by agreeing to such course of action, the petitioners waived their right to receive the offer of new shares and thus the offer was considered to have been declined. It has further been brought forth and reiterated that the petitioners were present in the meeting of the directors and signed the minutes of the meeting for the issuance of shares to the respondents Nos.2 to 15. 17. The learned counsel for the respondents, however submits that notwithstanding the settled proposition that the provisions of section 86 of the Ordinance, 1984 are not mandatory and need
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not be complied with in letter and spirit in the case of shareholders waiving their rights, the Company did follow the procedure prescribed in section 86 of the Ordinance, 1984. He has drawn the attention of this Court to the documents filed with the reply by the respondents and which documents are in the nature of circulars as envisaged by subsection (3) of section 86. According to him, these circulars have been issued and filed by the Company with the Securities and Exchange Commission of Pakistan (SECP). 18. To the limited question of whether a circular in terms of subsection (3) would suffice in compliance of the provisions of section 86, it will perhaps have to be read with earlier resolution of the shareholders dated 14.12.1998, referred to above. Although, no notice strictly in terms of subsection (1) of section 86 has been issued, the resolution of 14.12.1998 can be deemed to be a notice to the shareholders regarding the intent of the Company to issue further capital. By the same resolution, which was approved by the petitiorers, it was clearly resolved that further capital be arranged and for tile purpose investors be inducted irrespective of their profession. Prior io this, by the same resolution the share capital of the Company was enhanced to, 20,000 shares. A clear intent can be gleaned regarding the mindset of the shareholders attending the meeting. Was it then essential for the Company to issue a circular in terms of subsection (3) of Section 86 of the Ordinance, 1984. What is prescribed by subsection (3) is that the offer shall be accompanied by a circular duly signed by the directors. There is no cavil with the proposition and the fact has not been denied or controverted that a circular, in fact, was duly issued by the Company. In terms of subjections (4) and (5), the circular was filed with the registrar of the Companies and a date was also specified in this regard. That date was mentioned as 0'3.01.2003. Therefore, from a perusal of the documents holistically, it comes across as an undisputed fact that the petitioners were on board when a decision to increase the share capital of the Company was made as also to induct the new investors was taken. Also a circular was duly issued in terms of subsection (3) of section 86 to the Registrar of Companies and a date was also mentioned in it for the acceptance of the offer. Cumulative reading of the documents as also the provisions of section 86 would ineluctably follow that the terms of section 86 have been substantially complied with by the Company and what is missing is only a formal notice in terms of subsection (1) of section 86 of the Ordinance, 1984. The only question is whether that notice has to be a formal notice under the law or it can be a notice in any manner or form which substantially complies with the requirement of putting those members on notice as to rights issue. In my opinion, the notice need not be in a particular form as no such form has been specified by law. The notice could be by any means and method and what the Company has to demons:rate is the substantial compliance of the provisions of subsection ,1) of section 86 and not a total absence of it. 19. Section 86 of the Ordinance, 1984 encapsulates a private right in the context of a private limited company. A private company by its incorporation is a compact between its shareholders and allows more play to them in matters of management of the affairs of the company. With regard to a private company, no public element is involved and the shareholders may agree to adopt a method in following the procedure prescribed, unless the failure to follow that procedure is visited by a penalty. Therefore, a substantial compliance of section 86 will suffice. 20. Section 86 of the Ordinance, 1984 applies to a situation where the shareholders assert a right and allege the infringement of that right and the underlying safeguards contained therein. It would be an entirely different matter where the shareholders by agreement chose to proceed in a particular manner. In this regard, the purpose underlying the Section 86 has to be looked at. The purpose seems to be to put in place certain procedural formalities to thwart illegal and unauthorized issuance of share capital and to preserve the rights of the existing shareholders. So the purpose at the heart of section 86 is to protect the existing shareholders rights. If the shareholders acquiesce and agree to forgo that right, the procedural formalities will pale into
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insignificance; To what purpose is the formalities when the substantive right has been forgone. Surely, the procedure is meant to protect that right and no more. The case would take a different hue and colour if the petitioners had alleged a complete ouster in the matter of increase in the share capital. The question, therefore, is not whether the provisions of section 86 of the Ordinance, 1984 are mandatorily to be followed in all cases but that by not following the procedure in a given case, what prejudice is caused to the shareholders. 21. Before we proceed further in dealing with the issue involved in this petition, it would be appropriate to have a glance at the laws in pari materia in the Indian as well as the English jurisdiction. Section 81 of the Indian Companies Act, 1956 (Act, 1956) deals with further issue of capital. That section is enacted to cover cases where the directors decide to increase the capital by issuing further shares within the authorized limit because it is within that limit that the directors can decide to issue further shares unless they are precluded from doing that by the Articles of Association of the company. It is settled by law that the directors are in a fiduciary position and must exercise their powers for the benefit of the company. It follows that if the rights issue is for the bona fide purposes of the company, no injunction or interference would be made against such issue merely on the ground that it may alter the balance of power. (Needle Industries) (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. (AIR 1981 SC 1298). Further, it has been held that where the company is in genuine need for more capital as decided by the directors and there is nothing to doubt the directors' bona fides or motive in a further issue of shares, the court cannot be called upon to strike down or stay the issue only because the issue incidentally benefits the directors also in their capacity as shareholders. (Milan Sen v. Guardian Plastics Ltd. (1998) 91 Corn. Cases 105). 22. An important factor which distinguishes the provision of section 81 of the Act, 1956 and section 86 of the Ordinance, 1984 is that section 81 of the Act, 1956, is not applicable to any private company including a private company which is a subsidiary of a public company. Any such company may offer its further issue of capital to any person or in any manner as it thinks best for its own interest. Further, a private company's articles may provide any preemptive rights. 23. As far as the English law is concerned, suffice to refer to the observations made in Gower and Davies', Principles of Modern Company Law by Paul L. Davies (Seventh Edition): "The statutory policy In contrast with the relative simplicity of Ss. 80 and 80A, the provisions relating to pre-emptive rights (now Ss. 89 to 96) are complLcated and confusing-and also controversial. However, the basic principle which they enshrine is simple enough. It is that a shareholder should be able to protect his proportion of the total equity by having the opportunity to subscribe for any new issue for cash of equity capital or securities having an equity element. In short, the Act requires companies, which wish to' raise new capital, in certain circumstances to do so by means of a "rights" issue to existing shareholders (or through an equivalent procedure in the case of a private company) rather than by a general offer of the shares." (pages 631) Sanctions Finally, a civil (but not a criminal) sanction is provided by S.92. When there has been a contravention of subs. (1) of 5.89 or of any of subs. (1) to (6) of S.90, the company and every officer of it who knowingly authorized or permitted the contravention are jointly and severally liable to compensate any person to whom an offer should have been made under the subsection or provision, for any loss, damage, costs or expenses. Where under section 95, the statutory provisions are validly modified by a company resolution this will equally apply to a contravention of the modified provisions since "Ss. 89 to 94 have effect accordingly . Section 92 does not invalidate an allotment of shares made in breach of the pre-emption provisions, no doubt in order to protect the legitimate interests of third parties. However, in Re Thundercrest Ltd the judge was prepared to rectify the register under S.359 as against the directors of a small company, with only
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three shareholders, where, the directors responsible for the breach of the pre-emption provisions had allotted the shares in dispute to themselves." 24. It is clear from a reading of the extract, reproduced above, that the concept of pre-emptive rights issue does exist in the English law, however, in certain circumstances that right can be modified or waived. For example, under section 91 of the Companies Act, 1989 (Act, 1989) , the need to offer pre-emptive right may be excluded by a person in the memorandum or articles of a private company either wholly or in relation to allotment of a particular description. Further, section 90 of the Act, 1989 provides for the penalty to be imposed if the contravention takes place and any officer of the company who knowingly authorized or permitted the contravention shall be liable to compensate any person to whom any offer should have been made for any loss, damage, costs or expenses. 25. The learned counsel for the petitioners has relied upon three judgments of the superior courts to bring home the proposition that a right conferred by a law cannot be waived and even if that right has been waived there is no estoppel to challenge the waiver of that right. In Naseer A. Sheikh and 4 others v. The Commissioner of Income Tax (Investigation): Lahore and others (PLD 1992 Supreme Court 276), the learned counsel for the petitioners has relied upon the following observations: "When the company decides to issue further share, it is imperative that newly issued shares, in the first instance, should be offered to the members whose names are borne on the register of the company in proportion to the existing shares held by them." 26. There is no cavil with the proposition iterated in the paragraph reproduced above. This is what…
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