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Petitioner: Messrs KINGSWAY CAPITAL LLP and anothers VS Respondent: MURREE BREWERY CO. LTD. JUDGMENT
Court Name: Lahore High Court Judge(s): Shahid Karim Title:Messrs KINGSWAY CAPITAL LLP and anothers vs MURREE BREWERY CO. LTD.
JUDGMENT
Reported As: 2017 CLD 587 Result: Petition allowed Judgment JUDGMENT ' SHAHID KARIM, J.---This is a petition under section 160A read with section 290 of the Companies Ordinance, 1984 ("the Ordinance, 1984"). The petition has the following prayer: "i. To Declare the EOGM held on 29.09.2016 as unlawful, illegal and invalid and Direct the Company and its Directors to hold a fresh General Meeting, allowing the Petitioners to participate in it as well; ii. Declare that the Notice of the EOGM dated 20.08.2016, was invalid and in violation of section 160(1)(b) of the Companies Ordinance, 1984. iii. To restrain the Respondents from giving effect to any decision taken or resolution purportedly passed at the said EOGM; iv. To restrain the Respondents from announcing book closure for bonus shares from 21-Oct-2016 to 28-Oct-2016; v. To restrain the Respondent No,1 from increasing the authorized share capital and from issuing the proposed 1,500% rights issue; vi. To restrain Respondents from interfering, in any way, with the Petitioners' right to attend and vote in the fresh Extra Ordinary General Meeting, vii. Further or alternatively; such other orders are mode, as may be just." ' Facts: 2. The facts in this petition lend themselves fortunately to some simplification and the parties are not at variance on most of them. The petitioners seek a declaration that an Extraordinary General Meeting ("EOGM") of the respondent No,1, Murree Brewery Company Limited ("Murree Brewery") held
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on 29.9.2016 was invalid and incompetently held. Primarily, it is alleged that the petitioners' duly authorized representative was not permitted to participate in the EOGM as a result of which the respondents Nos.2 to 8 were able to procure the passage of resolutions enhancing Murree Brewery's authorized capital to the detriment of the petitioners. The enhancement of the authorized capital was a sine qua non for the issuance of bonus shares and the facts relating thereto shall be unfolded in the proceeding paragraphs. It is stated in the petition that the respondent No,2 who controls Murree Brewery is intending to issue 1500% additional shares in the Company which will have the unsavory effect of imposing 'an additional tax burden of approximately Rs,1.3 Billion on the shareholders. It is the apprehension of the petitioners that the entire act of the issuance of 1500% additional shares is a contraption on the part of the respondent No,2 who is well aware that many of the shareholders will not be willing to pay the 5% tax on bonus shares and as a result their shares will be sold in the market. These will then be plucked (at a throw away price) by the respondent No,2. The entire premise of this petition is that in order to issue bonus shares, the Company's shareholders were firstly to pass a special resolution. An EOGM held on 29.9.2016 was convened specifically for the purpose and since the petitioners have more than 25% shares, the respondent No,2 prevented the petitioners' representative from attending the meeting in order to pre-empt a vote against the passing of the resolution. 3. The petitioner No,1 is regulated by the Financial Conduct Authority (FCA) in the U.K and it manages the petitioner No,2 which is a fund incorporated under the laws of Luxembourg. Kingsway Capital is one of the largest investors globally. The petition states the goal of the fund to be to identify securities which offer long term capital appreciation and dividends creating long term value for all shareholders of the portfolio companies. The Fund holds 27.06% stake in the Company as represented by its holding of 6,237,651 ordinary shares of the Company, currently valuing at over $75 million. The petitioners take strong exception to the acts of the management of the Company represented by the respondents Nos.2 to 9, which according to the petitioners, is not in the best interest of the shareholders who may have better alternate venues to invest this money. It will cause the Company's shares to fall which will, in turn, decrease the value of investment of the current shareholders. 4. The Board of Directors of Murree Brewery at its meeting on August 20, 2016, proposed increasing the authorized share capital from Rs,300 millions to 4 Billion by issuing bonus shares of 1500%. According to the petitioners, this makes no economic sense as income tax equal to 5% of the value of bonus shares will be levied on the shareholders. The issuance of the bonus shares means. That the Company's free cash reserves will be converted into capital with no benefit for the Company. In a nub, the petitioners allege a conspiracy to have been hatched by the respondent No,2, who has publicly declared that he intends to acquire additional shares in order to control 5% shares in the Company. The entire scheme which is apprehended by the petitioners to have been hatched by the respondent No,2, has been brought forth in the contents of the petition. However, it is not necessary to allude to the contents relating to the apprehensions as expressed. The petition lays a challenge to the EOGM and the illegality which has crept in the entire process preceding the EOGM. ' Issues: 5. The learned counsel for the petitioners has raised the following issues of law which impact the outcome of this petition and render the EOGM as a nullity: I. In terms of section 160(1)(b) of the Ordinance, where any special business is to be transacted at general meeting, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning such business. The notice of the EOGM which was sent is not accompanied by- a statement as envisaged by section 160(1) (b) and, therefore, renders the said notice a nullity. II. By relying upon section 28 of the Ordinance, it is contended that a company may by special resolution alter or add to its articles provided that where such alteration affects
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the substantive rights or liabilities of members or of a class of members, it shall be carried out only if a majority of at least three-fourths of the members or of the class of members affected by such alteration, as the case may be, personally or through proxy vote for such alteration. III. The meeting was incompetent, in that, the representative of the petitioners was prevented from attending the EOGM on the pretext that the proxy in favour of the representative was improper and in contravention of the specifications provided in law for a proxy to be valid. 6. Reply has been filed on behalf of the respondents Nos.1, 2, 3 and 9. The parties agree that the petition can be dealt with and decided on the basis of the replies filed by these respondents which are the proper and necessary parties in the matter. 7. The respondents in their replies have controverted the contents of the petition and the, averments and allegations contained therein. It is not necessary to refer in greater details to the contents of the replies at this juncture. They shall be dealt with in the course of the judgment that I propose to render and with regard to each issue of law which arises in this petition. ' Statement under section 160(1)(b): 8. As adumbrated, the learned counsel for the petitioners invites this Court to hold that the. EOGM is incompetently held on the ground that the notice sent to the petitioners (as also to the other shareholders) offended the provisions encapsulated in section 160 of the Ordinance, 1984. Section 160 reads as under: 160. Provisions as to meetings and votes.---(1) The following provisions shall apply to the general meetings of a company or meetings of a class of members of the company, namely:- (a) notice of the meeting specifying the place and the day and hour of the meeting along with a statement of the business to be transacted at the meeting shall be given- (i) to every member of the company; (ii) to any person entitled to a share in consequence of death of a member if the interest of such person is known to the company; and (iii) to the auditor or auditors of the company; in the manner in which notices are required to be served by section 50, but the accidental omission to give notice to, or the non-receipt of notice by, any member shall not invalidate the proceedings at any meeting; (b) where any special business, that is to say business other than consideration of the accounts, balance-sheets and the reports of the directors and auditors, the declaration of a dividend, the appointment and fixation of remuneration of auditors, and the election or appointment of directors, is to be transacted at a general meeting, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning such business, including, in particular, the nature and extent of the interest, if any, therein of every director, whether directly or indirectly, and, where any item of business consists of the according of an approval to any document by the meeting, the time when and the place where the document may be inspected shall be specified in the statement; (c) (d).... 9. From a reading of section 160 above, it is clear that the provision applies to general meetings of a company and it is not in dispute that EOGM was such a meeting By clause (b) of subsection (1), it has been specified that where any special business is to be transacted at a general meeting, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning such business, including, in particular, the nature and extent of the interest, if any, therein of every director, whether directly or indirectly, and, where any item of business consists of the according of an approval to any document by the meeting, the time and the place where the document may be inspected shall also be specified in the statement. The same clause (b) gives an inkling of what special, business means. Special business, according to this clause, is business other than consideration of accounts, balance-sheets and the reports of the directors and auditors, the
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declaration of a dividend, the appointment and fixation of remuneration of auditors, and the election or appointment of directors. Therefore, any business apart from those incorporated in the clause shall be a special business. It is common ground between the parties that the increase in the authorized capital of the Company is a special business within the meaning of clause (b) of section 160 and thus, under ordinary circumstances a statement ought to have been annexed to the notice of the meeting. The precedent M. Shahid Saigol and 16 others v. M/s. Kohinoor Mills Ltd and 7 others (PLD 1995 Lahore 264), according to the learned counsel for the petitioners, is an authority for the proposition that the provisions of section 160(1)(b) being mandatory, any notice as well as resolution passed in a general meeting, stood vitiated on account of its non-compliance. The relevant portions of M. Shahid Saigol and 16 others, are reproduced as under: "12. Adverting to the main question as to whether the notice dated 8-9-1994 for holding Extraordinary General Meeting of respondent No, 1-company to be held on 1-10-1994 and the resolution passed on 1-10-1994 in the meeting so held suffer from legal infirmities and the same stood vitiated. "Under section 160(1) (B) it has been made mandatory to annex to the notice of the meeting a statement setting out all material facts concerning the business ... Under section 161(8) the Court on a petition by members having not less than 10 % of the voting powers in the company declare the proceedings of a general meeting as invalid by reasons of a material defect or omission in the notice or irregularity in the proceedings of the meeting in case the same' had prevented members from using effectively their rights and can direct that a fresh general meeting be held." "...a statement regarding all material facts in relation thereto under section 160(1) (B) was also to be appended with the notice so that all the members of the company must come to know as to what was the exact scope and nature of the business to be discussed in the meeting so that they could make up their minds considering the importance of the matter from their point of view to attend the meeting and to use their rights effectively. "In my considered view the notice dated 8-9-1994 for Extraordinary General Meeting suffered from acute illegality for non-compliance of provisions' of section 160(1) (B) and the resolution itself passed on 1-10-1994 was also violative of section 208 as it failed to indicate the terms and conditions attached to the investment to be made in the Maple Leaf for which it was sought to be passed to confer authority thereunder to the Chief Executive to make such investment.' The said provisions of law being mandatory, therefore, the notice as well as the resolution dated 1-10-1994 stood vitiated for noncompliance thereof " "On the other hand the view taken, by me finds support from a number of judgments from foreign jurisdiction referred' to by learned counsel for the petitioners interpreting section 173 of the ' Indian Companies Act, 1956 which is similar to section 160(1)(B) of Companies Ordinance, 1984. These are:- (1) (1917) AC 607; (2) (1915) 1 Ch. D 503; (3) (1898)1 Ch. D. 358; (4) (1973) 43 Company Cases 17, and (5) (1899)1 Ch. 861 18. In Lalaji Bhi C. Capadia v. Lalaji Bhai Desai (1973) 43 Company Cases 17 it was held that section 173 of the Indian Companies Act, 1956 had been enacted in the interest of general body of shareholders that in the notice of a meeting statement containing all material facts concerning each special item of business should be given so that all the shareholders must be in a position to make up their mind in advance whether they would attend the meeting or leave it, to the good sense of the majority present in the meeting. It was held that non-compliance with this requirement will have the effect of nullifying the action taken in the meeting. It was also laid down
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as a rule that while considering the legal efficacy of any such notice a benevolent construction cannot be adopted so as to defeat the provisions of the statute. The argument here that all the members must be presumed to know about the affairs of the company its financial position as also the company in which investment was to be made. These assumptions on which the argument was raised is wholly untenable. Even if it be so assumed it cannot be argued that the members were not entitled to disclosure of all material facts . And the terms and conditions attached to the investment before taking a decision as regards the business in question. On top of this it has been laid down as principle of law in case reported as E.A. Evans v. Muhammad Ashraf PLD 1964 SC 536 that if doing of a particular thing is made lawful doing of something in conflict of that will be unlawful. It has also been laid down that where the statute provided as a mandatory requirement for issuance of a notice as prescribed under the law, implied notice or information received aliened would not be sufficient to absolve the person from its legal obligation from issuing express notice in writing. In view of the law declared by the Supreme Court there is no merits in the arguments of the learned counsel for the respondent." "20. For the foregoing reasons this petition is accepted. The notice dated 8-9-1994 for Extraordinary General Meeting and the resolution passed in pursuance thereof on 1-10-1994 in the Extraordinary General Meeting are hereby declared to be invalid. The respondent No,1-company may hold fresh Extraordinary General Meeting for the purpose after making compliance with the provisions of section 160(1)(B) and section 208 of the Companies Ordinance." 10. Mr. Ali Raza, Advocate, the learned counsel for respondents Nos.2 and 9 does not deny that the notice of EOGM did not have a statement annexed to it. The learned counsel also tried to distinguish the case of M. Shahid Saigol and 16 others on the ground that the case was an authority on its own facts and the Court in the said case was swayed by the peculiar facts and circumstances of that case which related to the notice being issued by one company for making investment in associated company by way of rights shares. It was in this context that the Court held the annexing of a statement to the notice as mandatory in order to lend transparency to the entire process. However, I am not convinced that the judgment is distinguishable and the ratio of that judgment does not apply to the facts and circumstances of the instant case. The holding in M. Shahid Saigol and 16 others revolves around the true construction of section 160(1)(b) of the Ordinance, 1984 and the effect of its noncompliance. Upon a consideration of the entire scheme of section 160 and the policy underlying that provision, the Court came to the conclusion that the provisions of section 160(1)(b) were to be mandatorily applied to all general meetings where special resolutions were passed. The learned counsel for the respondents Nos.2 and 9 retorts that there was no requirement for a statement to be annexed to the notice sent to the members as the business being transacted at the EOGM was to increase the authorized share capital of Murree Brewery which was the only business to be transacted and in the submission of learned counsel that business is not a special business for which a statement was required to be annexed with the notice. This submission of the learned counsel is inextricably linked to the submissions made in response to the other issues of law raised by the learned counsel for the petitioners and shall be dealt with during the course of the proceeding paragraphs. The learned counsel for the respondents Nos.2 and 9 submitted that if the contention that the increase in the authorized share capital was not a special business were to be accepted by this Court, the rigors of section 160(1)(b) will not apply. 11. A peripheral issue which will exercise a gravitational pull on the controversy in hand will have to be dilated upon at this juncture. The issuance of the bonus shares was resolved in the meeting of the Board of Directors dated 20.8.2016. The directors resolved as under: "A. To approve Bonus Issue to the Shareholders of the Company. The Board approved the issuance of Bonus Shares as an interim payout towards the Members of the Company and the
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following resolution was passed: "a sum of Rs,3,457,953,750 be capitalized out of the free reserves of the Company and applied toward the issue of 345,795,375 of Ordinary Shares as Bonus Shares in the ratio of fifteen (15) bonus shares for every One (01) Ordinary Share held by the shareholders, whose names appear on the Register of Members on 15th September, 2016. These shares shall rank pari passu in all respect with the existing shares except payment of interim dividend announced today. ' FURTHER RESOLVED that for the purpose of giving effect to this Resolution, the Company Secretary be and is hereby authorized and empowered, on behalf of the Company, to give effect to this resolution and to do or cause to be done all acts, deeds and things that may be necessary or required for the issue, allotment and distribution of bonus shares." 12. It will be seen that by the resolution, referred to above, the Board approved the issue of bonus shares as an interim payout towards the members of the Company and it was resolved that a certain sum of money lying in the reserve be capitalized and applied towards the issuance of ordinary shares as bonus shares. The decision made by the Board of Directors is not directly under challenge in this petition. However, it may be necessary to allude to that aspect for a complete grasp of the controversy involved and perhaps to enable the resolution of that controversy. It may be reiterated that the learned counsel for the petitioners states that three items were to be transacted as a special business and to be resolved through special resolution in the EOGM. The first related to the increase in the authorized share capital, the second regarding the amendment in the Articles and the Memorandum of Association of the Company and the third matter concerned the capitalization of reserves in terms of clause 121 of the Articles of Association. These three decisions were necessarily to be dealt with and decided in a general meeting by a special resolution. Any deviation from it would impinge upon the vires and competence of the EQGM, which has been called in question. In a nub, the learned counsel for the petitioners said that it did not lay within the powers of the Board of Directors to issue bonus shares and was. a power within the ambit of the general meeting through a special resolution. The learned counsel for the respondents does not take cavil with the fact that the matter regarding the issuance of bonus shares was not brought before the shareholders in the EOGM under challenge: 13. One event which requires to be mentioned in the context of the controversy is a letter dated 9.9.2016 written by the Security and Exchange Commission of Pakistan (SECP) to the Board of Directors of Murree Brewery. The contents of the letter which are relevant for our purposes read as under: "4. It is evident from above announcements that MBCL has yet to obtain its shareholders' approval through special resolution to increase its authorized share capital and fulfill other ensuing . Requirements to allow issuance of 1,500% bonus shares. 5. In terms of PSX Regulations made under the Securities Act, 2015 (Act), share price of a listed company is adjusted in proportion to the announced bonus dividend to work out ex-bonus trading price. In case of MBCL, outcome of change in authorized capital would be known only after announced EOGM is held whereas in the meantime its shares would be traded on ex-bonus basis in terms of PSX regulations. Any trading by members of MBCL and general investing public on ex- bonus basis up till EOGM to be held on 29th September, 2016 would not be in interest of general public and capital markets. 6. Therefore, the Commission considering the protection of members of MBCL and general public interest, in terms of section 100 of the Act, hereby directs MBCL, through its board of directors, to immediately change its book closure date pertaining to issuance of 1,500% bonus shares to a date that is after the announced EOGM to be held on September 29, 2016. Resultantly, the book closure from September 16 to 29, 2016 of the MBCL shall be valid only to the extent of entitlement of 100%
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interim cash dividend and extra ordinary general meeting to be held on 29th September 2016 and not valid for any bonus announcement made whatsoever." 14. It is admitted on all hands that the EOGM was convened and held in pursuance of the letter issued by SECP and to comply with the directives contain therein. The learned counsel for the petitioners submits that this was merely a partial compliance of the requirement and, in fact, the decision regarding issuance of bonus shares still went abegging. That decision too ought to have been taken of the general meeting by a special resolution. The entire reliance of the learned counsel is on clause 121 of the Articles of Association, which for facility, is reproduced as under: "121. Subject to any necessary sanction or authority being obtained, the Company in General meeting may at any time and from time to time pass a resolution that any sum (a) for the time being standing to the credit of any reserve fund or reserve account of the Company, including premiums received on the issue of any shares or debentures of the Company, or (b) being undivided net profits of the Company, be capitalized, and that such sum be appropriated as capital to and amongst the ordinary shareholders in the proportions in which they would have been entitled thereto if the same had been distributed by way of dividend on the ordinary shares, and in such manner as the resolution may direct, and such resolution shall be effective; and the directors shall in accordance with such resolution apply such sum in paying up in full any unissued shares or debentures of the Company on behalf of the ordinary shareholders aforesaid and appropriate such shares or debentures and distribute the same credited as fully paid up to and amongst such shareholders in the proportion aforesaid in satisfaction of the shares and interest of such shareholder in the said capitalized sum or otherwise deal with such sum as directed by such resolution. Where any difficulty arises in respect of any such distribution, the Directors may subject to the provisions of section 86(2) of the Ordinance settle the same as they…
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