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Petitioner: JAHANGIR SIDDIQUI & CO LTD through Chief Executive Officer VS Respondent: HUM NETWORK LTD through Chief Executive and another
Court Name: Sindh High Court Judge(s): Munib Akhtar Title:JAHANGIR SIDDIQUI & CO LTD through Chief Executive Officer vs HUM
NETWORK LTD through Chief Executive and another Case No.: Suit No. 298 of 2014 Date of Judgment:2014-07-08 Reported As: 2015 CLD 323 Result: application dismissed Judgment ORDER ' MUNIB AKHTAR, J.---The plaintiff, a shareholder of the defendant No. 1 ("Company") seeks an order against certain alterations being made in the objects clause of its memorandum of association ("Memorandum"). To consider the proposed changes, an extra-ordinary general meeting of the shareholders was summoned for 25-1-2014 ("EOGM") by notice dated 4-1-2014 ("Notice"). The meeting was held and the Company's case is that the resolution was lawfully carried as a special resolution (by winch alone the objects clause can be altered). The plaintiff challenges the meeting and the resolution passed, both on procedural grounds as would bring the matter within the terms of section 160-A of the Companies Ordinance, 1984 ("1984 Ordinance"), as well as on substantive grounds as being in violation of section 21. The Company denies violation of any applicable provision and raises a preliminary objection as to the Court's jurisdiction. The foregoing, in a nutshell, is the dispute that falls for determination. 2. Learned counsel submitted that the plaintiff (itself a company) held 14% of the issued share capital of the Company. Referring to the objects clause of the Memorandum as presently constituted, learned counsel drew attention in particular to paragraphs 1, 5, 7, 23 and 39 to contend that the Company had been incorporated essentially to set up and operate television channels and to generally act as a media house. It was submitted that the Company's business had since inception focused on these activities (it was incorporated in 2004). The Company had successful operations in this regard, being the owner of the Hum TV and Masala TV channels, among others. Referring to the notice for the EOGM, learned counsel referred to the proposed alterations sought to be made in the objects clause. A large number of paragraphs were proposed to be added, around
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25 in all, relating to all manner of diverse and unrelated businesses. Only a few could conceivably, have any connection with the existing business or of the Company acting as a media house. In particular, learned counsel referred to the proposed paragraphs whereby the Company would be able to operate a sugar mill or a cement factory. Other proposed paragraphs would enable the Company to set up a textile business, enter the hotel industry, open a fashion house, carry on business consultancy, run spas and saloons, become a confectioner and manufacturer of biscuits and, cookies, and provide event management services. This enumeration, by no means exhaustive, reflects the diverse businesses that the Company could embark upon if the proposed alterations were allowed to go through, and learned counsel took serious exception to them. 3. As regards the procedural aspects of the objections to the EOGM, learned counsel referred to section 2(36) of the 1984 Ordinance, which gives the definition of "special resolution". It was submitted that the Notice did not state that the EOGM had been called to consider a special resolution. It was contended that the resolution was not passed properly as no voting as such took place. The representative of the plaintiff had attended the meeting and raised objections to the proposed resolution, but no heed was taken nor was he given an opportunity to properly air the same. Learned counsel submitted that subsequently, the objections were repeated in a letter dated 11-2-2014 written to the Company. On a query from the Court, learned counsel candidly stated that while the plaintiff had the requisite shareholding to demand a poll, no such demand was, as such, made. Learned counsel also referred to section 60(1)(b), which provides that a statement of material facts must accompany any notice of a meeting at which any special business is to be transacted. (Special business is any business other than that specifically stated in the aforementioned provision.) Although a statement did accompany the Notice, learned counsel submitted that it was materially defective and did not fulfill the statutory requirements. It was submitted that in relation to the proposed alterations, there should have been a proper justification of why so many and such diverse businesses were being added to the objects clause. In addition, the proposed resolution also intended to make certain other changes in the Memorandum, but the statement was silent as to these. It was submitted that the chief executive of the Company and a director were, respectively, a director in and chief executive of a cement company. This clearly created a conflict of interest since, as noted, one of the proposed businesses was to set up a cement plant. It was contended that there should have been proper disclosure in the statement but this was not done. Indeed, learned counsel submitted that the real purpose was only to enable the Company to engage upon the sugar and cement businesses; the other proposed additions were camouflage to hide the real intent. It was reiterated that there ought to have been proper disclosure, with supporting documents such as copies of any studies carried out, as to how or why such businesses could be carried on along with the existing business. 4. As regards the substantive grounds, learned counsel placed principal reliance on section 21(1) (d), which allows the objects clause to be altered to add businesses that can be "conveniently or advantageously be combined with the business of the company". It was submitted that none of the businesses proposed to be added met the requisite standard. No alterations could be allowed as would effectively destroy the existing business. Again, the focus of attention was the proposed addition of the sugar and cement businesses. Learned counsel ,also relied on subsections (2) and (3) of section 21 and referred to sections 22 and 23. It was submitted that the alterations to the objects clause could not travel beyond what was stated in and made permissible by section 21, and what was being attempted in the present case went well beyond that. The proposed additions were therefore clearly unlawful. Explaining the need to file the suit, learned counsel submitted that section 160-A allowed members holding the requisite threshold shareholding (10%) to file a petition challenging a general body meeting on grounds of material procedural irregularity etc. In the present case, the challenge was on both procedural and substantive grounds and therefore a suit
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had to be filed. It was submitted that a clear case for interim relief had been made out and all the ingredients were in favour of the plaintiff. It was prayed accordingly. 5. Learned counsel for the Company opposed the grant of any relief. A preliminary objection was taken to the jurisdiction of the Court. Learned counsel referred to section 21(2) as well as section 22, which provide that no alteration to the objects clause shall take place unless, and then only if and to the extent, decided by the Securities and Exchange Commission of Pakistan ("SECP"), the regulatory authority under the 1984 Ordinance. Reliance was also placed on section 24, which states that while considering the alterations, SECP shall have regard to the interests of the shareholders and creditors. Learned counsel submitted that under the previous dispensation, the Companies Act, 1913 ("1913 Act") the power of confirmation had been vested in the Court. It was contended that all the substantive objections taken by the plaintiff (which were otherwise denied as being devoid of merit) could be taken before the SECP when it took considered the alterations sought to be made. The law had been specifically changed and since jurisdiction had been vested in the statutory authority, it could only be exercised by the latter. The Court could not entertain the objections. As to the procedural objections, it was submitted that they could only be entertained as provided for under section 160-A. However, that provision (read with section 7) vested jurisdiction in the High Court as such whereas this Court, when entertaining suits on its original side, exercised the jurisdiction of the District Court. Therefore, objections under section 160-A (and again, the objections actually taken were denied as being devoid of merit) could only be taken by means of a petition (i.e. a JM) and not by way of a suit. On both grounds, the Court lacked jurisdiction in terms of the proceedings as filed.. 6. On the merits, learned counsel submitted that the objections ought to be dismissed. It was submitted that proper notice for the EOGM was issued and the plaintiff admittedly attended the meeting. All the requirements of the 1984 Ordinance were complied with and the resolution passed properly as a special resolution. The statement accompanying the Notice fulfilled the requirements of section 160(1)(b). It was submitted that the successful operation of the Company's business as presently constituted, i.e., the TV channels, had established a strong brand name and recognition for "Hum", "Masala" and "Style 360". The, brands could he beneficially used by the Company to diversify its operations in other areas of business. Thus, the proposed alterations to the Memorandum. Indeed, even the existing paragraphs of the objects clause allowed the Company to engage upon a diverse range of businesses quite different and distinct from running TV channels. It was contended that any of the businesses could be advantageously and conveniently combined with the existing business and hence the proposed alterations were well within the scope of section 21. Learned counsel submitted that none of the businesses would be destructive of or harm the existing business, which would continue to be run effectively and profitably. It was submitted that it was well settled that the various clauses of section 21(1) were to be construed and applied liberally and broadly. It was also well established that the sorts of businesses that could be combined and run together was a commercial or business decision, in which the Court rarely intervened. It was ultimately for the shareholders to decide the nature and direction of a company's activities and, subject to there being a sufficient majority to carry a special resolution, to make alterations in the objects clause for this purpose. The threshold for compliance with section 21 was set low and had been successfully crossed in the present case. Since the Company felt that it could now consider other possibilities, the objects clause was proposed to be altered so as to broaden the business horizon. In order to ensure maximum flexibility and to obviate the need to go back repeatedly to the shareholders, a large number of businesses were proposed to be added to the objects clause. It was emphasized that merely because the businesses were being so added did not mean that the Company would at once engage upon any of them. As to what happened at the EOGM, learned counsel submitted that the proposed resolution was carried on a show of hands and it was
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strongly denied that a poll was demanded by the plaintiff, whether as alleged or otherwise. Referring to the proceedings of the EOGM as brought on record by the Company, learned counsel submitted that it was only the plaintiff that objected to the proposed alterations. Eighty one percent of the members present voted in favour of the resolution, which was therefore successfully carried as a special resolution. While the result was obtained as stated, on a show of hands, learned counsel submitted that these shareholders also represented more than 75% of the voting power. Thus, on any conceivable view, the resolution was duly passed as required by law. It was submitted that no case for any interference by the Court or interim relief had been made out and the application merited dismissal. I allowed learned counsel to file written synopses, and learned counsel for the Company did so. Certain case-law was cited, both at the hearing and in the written synopsis; this will be considered as and to the extent necessary below. 7. I have heard learned counsel as above, examined th "160-A. Circumstances in which proceedings of a general meeting may be declared invalid.--- The Court may, on e record and considered the case-law. It will be convenient to begin by gathering the statutory provisions in one place. Section 160-A provides as follows:--a petition, by members having not less than ten per cent of the voting power in the company, that the proceedings of a general meeting be declared invalid by reason of a material defect or omission in the notice or irregularity in the proceedings of the meeting, which prevented members from using effectively their rights, declare such proceedings or part thereof invalid and direct holding of a fresh general meeting: ' Provided that the petition shall be made within thirty days of the impugned meeting." ' The provisions regarding alteration of the objects clause, as presently relevant, are as follows:-- "(20) Restriction on alteration of memorandum.---A company shall not alter the conditions contained in its memorandum except in the cases and in the mode and to the extent specified in this Ordinance. (21) Alteration of Memorandum.---(1) Subject to the provisions of this Ordinance, a company may, by special resolution alter the provisions of its memorandum ... With respect to the objects of the company, so far as may be required to enable it- ... (d) to carry on some business, not being a business specified in its memorandum, which may conveniently or advantageously be combined with the business of the company; ... (2) The alteration shall not take effect until and except in so far as it is confirmed by the Commission on petition: ... (22) Powers of Commission when conforming alteration.---The Commission may make an order. Confirming the alteration either wholly or in part, and on such terms and conditions as it thinks fit, and make such order as to costs as it thinks proper. (23.---Exercise of discretion by Commission The Commission shall in exercising its discretion under sections 21 and 22 have regard to the rights and interests of the members of the company or of any class of them, as well as to the right and interests of the creditors, and may, if it thinks fit, adjourn the proceedings in order that an arrangement may be made to the satisfaction of the Commission for the purchase of the interests of dissident members; and may give such directions and make such orders as it may think expedient for facilitating or carrying into effect any such arrangement: ... (24) Procedure on confirmation of the alteration.---(1) A certified copy of the ing the alteration, together with a printed copy of the memorandum as altered shall within ninety days from the date of the order, be filed by the company with the registrar, and he shall register the same, and shall certify the registration under his hand, and the certificate shall be conclusive evidence that all the requirements of this Ordinance with respect to the alteration and the confirmation thereof have
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been complied with, and thenceforth the memorandum so altered shall be the memorandum of the company. ... (25) Effect of failure to register within ninety days.---No such alteration shall have any operation until registration thereof has been duly effected in accordance with the provision of section 24 and if such registration is not effected within ninety days next after the date of the order of the Commission confirming the alteration, or within such further time, as may be allowed by the Commission, in accordance with the provisions of section 24, such alteration and order, if any, and all proceedings connected therewith shall, at the expiration of such period of ninety days or such further time, as the ease may be, become null and void:..." "Commission" of course means SECP. Reference must also be made to the equivalent provisions of the 1913 Act, which - were as follows:-- "(10) Restriction on alteration of memorandum.---A company shall not alter the conditions contained in its memorandum except in the cases and in the mode and to the extent for which express provision is made in this Act: ... (12) Alteration of Memorandum.---(1) Subject to the provisions of this Act, a company may, by special resolution alter the provisions of its memorandum ... With respect to the objects of the company, so far as may be required to enable it- ...May conveniently or advantageously be combined with the business of the company; ... (2) The alteration shall not take effect until and except in so far as it is confirmed by the Court on petition:... (13)Powers of Court when conforming alteration.---The Court may make an ing the alteration either wholly or in part, and on such terms and conditions as it thinks fit, and make such order as to costs as it thinks proper. (14)Exercise of discretion by Court.---The Court shall in exercising its discretion under sections 12 and 13 have regard to the rights and interests of the members of the company or of any class of them, as well as to the right and interests of the creditors, and may, if it thinks fit, adjourn the proceedings in order that an arrangement may be made to the satisfaction of the Court for the purchase of the interests of dissentient members, and may give such directions and make such orders as it may think expedient for facilitating or carrying into effect any such arrangement: ... (15)Procedure on confirmation of the alteration.---(1) A certified copy of the ing the alteration, together with a printed copy of the memorandum as altered shall within three months from the date of the order, be filed by the company with the registrar and he shall register the same, and shall certify the registration under his hand, and the certificate shall be conclusive evidence that all the requirements of this Act with respect to the alteration and the confirmation (hereof have been complied with, and thenceforth the memorandum so altered shall be the memorandum of the company.... (16)Effect of failure to register within three months.---No such alteration shall, have any operation until registration thereof has been duly effected in accordance with the provision of section 15, and if such registration is not effected within three months next after the date of the order of the Court confirming the alteration, or within such further time, as may be allowed by the Court in accordance with the provisions of section 15, such alteration and order, if any, and all proceedings connected therewith shall, at the expiration of such period of three months or such further time, as the case may be, become absolutely null and void.... " 8. I start with the preliminary objection regarding the jurisdiction of the Court to hear a challenge to a proposed alteration of the objects clause. As noted above, learned counsel for the Company has contended that such challenge can only be taken before the SECP: Learned counsel relied on Lahore Race Club and others v. Raja Khusbakht-ur-Rehman PLD 2008 SC 707. Since the 1913 Mt any "conditions" contained in the memorandum can only be altered in the manner and to the extent as
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made permissible by the statute. "Conditions" are those matters which are required to be stated in the memorandum and obviously include the objects clause. (Interestingly. In the predecessor legislation, the Indian Companies Act, 1882, there was very limited scope for alteration of the memorandum, and the objects clause could not be altered at all: see section 12.) The reason for this control over any alterations is well known. Since the liability of the members is limited only to the extent of the amount, if any, unpaid on the par (or face) value of the shares, there was a need to protect those dealing with the company, especially its creditors. They had a right to know exactly what the company was about, and could do. This perceived need led also to the development of the judicially evolved rule of ultra vires; the company could not do anything beyond what was stated in the objects clause or was reasonably incidental thereto. Similar considerations applied also in relation to companies limited by guarantee. 9. When sections 21(2) to 25 of the 1984 Ordinance are compared with sections 12(2) to 16 of the 1913 Act, the close similarity between these provisions is obvious. As presently relevant the substantive difference is that in the earlier statute, the matter rested with the Court, whereas now the petition has to be presented before SECP. In my view, learned counsel for the Company is correct that this is a deliberate change in the law, which must be given due effect. The conclusion is reinforced when the (again near identical? Section 20 and section 10 respectively are also taken into consideration. In my view the preliminary objection must be sustained. Any challenge to proposed alterations to the objects clause on the ground that they are contrary to section 21(1) can only be by petition before SECP. Such a petition must be presented since otherwise the alterations will not have effect, and SECP is bound to have regard to the interests of all the members when considering whether and if so how and to what extent effect is to be given to the changes. Of course, there are statutory rights of appeal against SECP's decision, and possibly other remedies as well. The matter may therefore ultimately end up before the High Court. But, jurisdiction does not lie directly with the Court. The decision cited by the learned counsel for the Company does not, with respect, assist him. At issue was rectification of the members' register (under section 152) of the first appellant, it being a company limited by guarantee. The member seeking such rectification filed a civil suit yin the courts at Lahore, and a preliminary objection was taken that the suit was barred, as under section 152 the power lay with the Court. The company succeeded on this point in the civil courts but lost in the Lahore High Court. On further appeal to the Supreme Court, the decision of the High Court was set aside. Learned counsel relied in particular on paras 19 and 20 of the judgment (at pp. 715-16). While the Supreme Court observed (in para 19) that the 1984 Ordinance was a special law, which provided its own remedy for rectification of the members' register and that when the law required something to be done in a particular manner it had to be so done or not at all, it was also observed (in para 20) that if the Court felt that the actual dispute could not be resolved in summary procedure, then it could "refer/advise the party to approach the Civil Court for resolution of the disputed controversies". This last observation is of course a well settled proposition. Therefore, the jurisdiction of the Court in relation to a dispute under section 152 was not exclusive in the sense that in certain circumstances the matter can be decided by the civil courts. Were these observations to be applied here, it could mean, e.g., that if the Court decided that the issues raised a complicated question of law or involved a resolution of interpretation as regards section 21(1), then it could entertain the objections directly notwithstanding the vesting of jurisdiction in SECP. If anything therefore, the cited case, with respect, tends to go against the point sought to be made by learned counsel. However, as I have said, in my respectful view the decision does not apply to the issue at hand. Here, the law as it had stood for around 70 years prior to the promulgation of the 1984 Ordinance was changed only to the extent of the vesting of jurisdiction and was otherwise allowed to remain the same as before (subject to what is stated below). The
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intent of the law-maker is clear. It must be given due effect. Jurisdiction now lies with SECP. Any challenge to the proposed alterations must be so dealt with. 10. I turn to the other aspect of the preliminary objection, namely that the challenge on procedural grounds (as would lie under section 160-A) can only be by a petition filed before the Court and not by way of a suit in this Court on the original side. To a certain extent, this objection must be examined along with a point implicit in the conclusion arrived at in the last preceding paragraph. The point is this. The proposed alterations, which must be confirmed by SECP, must necessarily be brought about by a special resolution: section 21(1) so provides. What if the member(s) objecting before SECP challenge the resolution itself, contending that (for whatever reason) in law no special resolution has been…
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