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Official Citation: 2024 SHC 660
Court / Jurisdiction: Sindh High Court
Year of Decision: 2024
Decision Date: 2024-06-07
Parties: Searle Pakistan Ltd. & another vs The Competition Commission of Pakistan
Ruling Summary: This decision was rendered by the Sindh High Court on 2024-06-07, officially reported as 2024 SHC 660. In this matter between Searle Pakistan Ltd. & another and The Competition Commission of Pakistan, the court adjudicated key questions of statutory construction, procedural regularity, and legal precedent under Pakistani law.
Core Holding: The honorable bench evaluated governing statutory provisions and judicial authorities to establish the rights of the parties, delivering the binding reasoning set out below.
Case cited as 2024SHC660
Court Name: Sindh High Court Judge(s): Muhammad Shafi Siddiqui, Sana Akram Minhas Title: Searle Pakistan Ltd. & another vs The Competition Commission of Pakistan Case No.: Miscellaneous Appeal No. 7 of 2007 Date of Judgment:2024-06-07 Reported As: 2024 SHC 660, 2024 CLD 1314 Result: Appeal Dismissed
JUDGMENT
JUDGMENT Muhammad Shafi Siddiqui, J.- This appeal under section 20 of Monopolies & Restrictive Trade Practices (Control Et Prevention) Ordinance, 1970 (MRTPO) was filed, assailing an order of 13.09.2007. The operative part of the order, of which the appellants are primarily aggrieved of, is consisting of paragraphs 34 and 35 which set the tone of the conclusion reached, which will be in discussion later. Brief facts 2. The facts to understand the whole gamut of dispute, for the purposes of deciding this appeal, which we find necessary, are: 3. The appellants before us are the two entities; though independent corporate entities but beneficially interlinked by way of common directors/shareholders. (This being core bone of contention hence highlighted): (i) Searle Pakistan Limited (Searle), appellant No.1 and (ii) International Brands (Pvt.) Ltd. (IBL), appellant No.2. 4. Searle, being a public limited company, is listed on the Stock Exchange and a large number of members of the general public hold its shares. IBL on the other hand is a private limited company and along with its directors, their associates hold majority shares in Searle. Both the companies i.e. Searle and IBL have been alleged to be associated undertakings and involved in such business practices which is benefitting a set of selective directors/shareholders of one of them, depriving and/or to the prejudice of shareholders of the other's and hence show-cause notice dated 07.02.2007 was issued. The said show-cause was subject matter of the proceedings before the
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Monopoly Control Authority (Authority). The Authority passed the impugned order, referred above. Accusatorial stance of respondent, being regulator, is that IBL has used its control on Searle to take advantage for itself and its shareholders at the cost of Searle and its minority shareholders. 5. We have heard learned counsel appearing for the parties and perused material available on record. Relevant Law 6. The relevant provisions of MRTPO that would cover the controversy in hand are Sections 3, 4, 11 and 12 which, for the purpose of convenience are reproduced as under:- "3. Undue concentration of economic power, etc. prohibited.- There shall be no undue concentration of economic power, unreasonable monopoly power or unreasonable restrictive trade practices. 4. Circumstances constituting undue concentration of economic power. -Undue concentration of economic power shall be deemed to have been brought about, maintained or continued if,--- (a) there is established, run or continued an undertaking the total value of whose assets is not less than three hundred million rupees or such other amount as the Authority may by rule prescribe, and which is,--- (i) not owned by a public company, or (ii) is owned by a public company in which any individual holds or controls shares carrying not less than fifty per cent., or such other percentage as the Authority may by rule prescribe, of the voting power in the undertaking; (b) there are any dealings between associated undertakings which have or are likely to have the effect of unfairly benefiting the owners or shareholders of one such undertaking to the prejudice of the owners or shareholders of any other of its associated undertakings. .... 11. Proceedings in case of contravention of section 3.- (1) Where the Authority is satisfied that there has been or is likely to be a contravention of the provisions of section 3 and that action is necessary in the public interest, it may make one or more of such orders specified in section 12 as it may deem appropriate. (2) Before making an order under subsection (1), the Authority shall,--- (a) give notice of its intention to make such order stating the reasons therefor to such persons or undertakings as may appear to it to be concerned in the contravention to show cause on or before a date specified therein as to why such order shall not he made; and (b) give the persons or undertakings an opportunity of being heard and of placing before it facts and material in support of their contention. (3) An order made under subsection (1) shall have effect notwithstanding anything contained in any other law for the time being in force or in any contract or memorandum or articles of association. 12. Order of the authority.- (1) An order of the Authority under section 11 may,--- (a) in the case of undue concentration of economic power- (i) require the firms or companies concerned, not being public limited companies, to the converted, within such time and in such manner as may he specified in the order, into public limited companies; (ii) require the controlling shareholders of the public limited companies concerned to offer such part of the stocks and shares held by them within such time and in such manner as may be specified in the order to the general public, including the National Investment Trust and an investment institution established or controlled by Government; (iii) prescribe the circumstances in which and the conditions on which the associated undertakings concerned may deal with each other,
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(b)....... 7. The cause triggered at the relevant time when MRTPO was effective with its full force however its successor organization being Competition Commission of Pakistan, has also initially provided such frame to regulate under Section 59 of the Competition Ordinance 2007 (LII of 2007). The Ordinance was succeeded by the Competition Act, 2010 and Section 61 of the Competition Act stands pari materia with Section 59 of the said Ordinance. Again for the convenience to understand the controversy section 61 of the Act is reproduced as under:- "61. Repeals and savings.- (1) On the commencement of this Act,--- (a) the Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance, 1970 (V of 1970), hereinafter referred to as the repealed Act, shall stand repealed; (b) the Monopoly Control Authority established under the repealed Act shall stand dissolved; (c) all assets, rights, powers, authorities and privileges and property, movable and immovable, cash and bank balances, reserve funds, investments and all other interests and rights in, or arising out of such property and all debts, liabilities and obligations of whatever kind of the Monopoly Control Authority subsisting immediately before its dissolution shall stand transferred to and vest in the Competition Commission of Pakistan established under this Act; (d)..... (e)..... (f).... and (g) all suits and other legal proceedings instituted by or against the Monopoly Control Authority before the commencement of this Ordinance shall be deemed to be suits and proceedings by or against the Competition Commission of Pakistan as the case may be and may proceed and be dealt with accordingly." 8. The gist of the conclusion as drawn by the Authority is summarized in paragraph 34 and 35 of the impugned order which for the purpose of understanding the controversy are reproduced as under:- "34. We have very carefully considered this case in the light of the various submissions made by both parties, the extensive deliberations at the hearings, and our own market inquiries. The business relationship between SEARLE & IBL is not the outcome of rational interaction between two economic agents on a level playing field. The content of both distribution agreements and, even more so, the actual dealings of the parties with each other reflect the marked tilt in favour of IBL as compared with most distribution arrangements put in place by major pharmaceutical undertakings in Pakistan. It is self-evident that IBL has been able to use its majority equity interest and control over SEARLE to extract a most favourable arrangement for itself which is way out of line from market practice, and which has greatly disadvantaged the other shareholders of SEARLE. It is difficult to imagine a more glaring manifestation of undue concentration of economic power at play and a more obvious situation to which Section 4(b) of the Ordinance applies.... First Consistent with normal market practice, the consignment basis will have to be deemed retrospectively as inoperative with the necessary consequences that follow from this instead of placement with IBL on consignment, each delivery of the products to IBL will be deemed sold to IBL with a 40 day credit period. In this connection, we are of the view, considering the circumstances, that mark-up calculations may be made at the rates stipulated by the parties from time to time since the effect of any reasonable revision of these rates is likely to be marginal: Second, all amounts charged to SEARLE on account of warehousing stock being not in accord with market practice will need to be reversed; Third, instead of bearing the cost of transportation up to the ultimate customer which was the case until July 01, 2005 in terms of the Distribution Agreement of July 01, 2000, adjustments will
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have to be made to ensure that SEARLE does not, in any instance, bear the cost of transportation beyond IBL's location of sale ie, the point from which the products are dispatched to the customer, Fourth, payment of mark-up to IBL on account of credit availed by institutional sub-distributors (mainly Government institutions) beyond the credit period allowed to IBL is possible only if incontrovertible evidence exists on record to show that the transaction occurred "on the discretion and approval of SEARLE" as has been specified in both the distribution agreements. Also, the rate of mark-up allowed to IBL must not exceed the rate of mark up payable by IBL to SEARLE on account of payments received after the credit period allowed to IBL; and Fifth, being not in keeping with market practice, it is not possible to allow reimbursement of miscellaneous expenses (such as telephone/fax charges, vehicle hiring charges etc allegedly incurred by SEARLE field staff) unless (i) incontrovertible evidence is on record to unquestionably demonstrate pre- authorization by SEARLE in each case; and (ii) it can be irrefutably shown that the expense in question was not incurred to assist or facilitate IBL in fulfilling its contractual obligations to SEARLE, whether directly or indirectly. We are, however, prepared to allow payment of charges on account of group corporate services to the extent of approximately Rs.300,000 out of Rs. 1,600,000 for the entire group (ie. about 18.75%) specified in the submissions of both SEARLE and IBL dated May 04, 2007, as this appears reasonable. "35. In the light of the foregoing, we direct and order as follows: (i) the principles and specifications enshrined in para 34 will apply henceforth to all dealings between SEARLE and IBL and will supersede as well as take precedent over any distribution agreement or other understanding between these parties, whether written or verbal. (ii) SEARLE and IBL will procure that the statutory auditors of SEARLE (or alternatively, a firm of Chartered Accountants approved by the Authority) examine all transactions between these undertakings since July 01. 2000 to date in the light of our observations in para 34 above and determine the net amount due from IBL to SEARLE after adjusting for payments already made. Any clarification needed in this respect will be provided by the Chief (Investigation) of the Authority or such other person as may be designated by the Authority for this purpose. This task must be completed within 90 days of the date of this Order and settlement for the net amount determined as due and payable must be effected to the satisfaction of the Authority within 120 days of the date of this Order; (iii)...." 9. Essentially the authority was of the view that the distribution agreement between Searle and IBL has the effect of unfairly benefiting shareholders of IBL to the prejudice of shareholders of Searle (minority shareholders) and, therefore, needs to be grind away, in terms of paragraph 34, as reproduced above whereas the directions of the authority to settle the monopolistic approach, being unfair with a set of shareholders, to be resolved are stipulated in the subsequent paragraph i.e. paragraph No.35, as reproduced above. (The rights of minority shareholders under Companies Ordinance, 1984 or Companies Act, 2017 are not under consideration here.) 10. Based on the questions as raised in the show-cause notice and devised by the Authority under the law, the appellants raised few questions to throw a challenge over the Authority's predatorial approach, as attempted by Mr. Jawad Qureshi in his arguments; which are summarized as under:- that the issue of extended credit period was not confronted in the show-cause notice, while the impugned order has reduced the credit period; the agreement relied upon by the authority to determine the market price were not confronted to the appellants and such agreements are not representative of market price; that the impugned order could have only implemented the measures provided in the impugned order prospectively and could not have applied to the benefits already accrued to be reversed as this gives the order retrospective effect.
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Again section 11 of MRTPO can only be given effect in the public interest, as pleaded. Performance increased via agreement. Scope of Appeal 11. Before responding to the questions raised by the appellants we may first understand the scope of appeal itself provided under MRTPO, as it then was applicable, in terms of Section 20. Section 20 provides that any person aggrieved by an order of the Authority under section 11 or Section 19 may within 60 days of the receipt of such order appeal against it to the High Court on the ground which are summarized therein: i) That the order is contrary to law or to some usage having the force of law; ii) That the order has failed to determine some material issue of law or usage having the force of law; iii) That there has been a substantial error or defect in following the procedure provided in the Ordinance which may possibly have produced error or defect in the order upon merits. 12. With these contours, available to the aggrieved person, learned counsel for respondent has resorted to Section 100 of Code of Civil Procedure, 1908 and submitted that Section 100 is pari materia to Section 20 of MRTPO which provides Second Appeal on the point of law only. The legislature while carving out the provision of appeal under MRTPO knew as to the nature of appeal being provided to the aggrieved person under MRTPO. The scope of the appeal is thus limited to the question of law as is available to the aggrieved person under section 100 CPC having identical frame; though this appeal (under MRTPO) is the first appeal which impugns the order of the Authority but the law has limited its scope to the extent of frame of Section 20 of MRTPO pari materia to Section 100 CPC. Thus, our findings would be keeping in mind the above frame of law. Maintainability of appeal on the count of "Aggrieved person" 13. It is claimed that IBL has its control on Searle to take advantage for itself and its shareholders at the cost of Searle and its minority shareholders. This constitutes undue concentration of economic power under section 4(b) of MRTPO and such undue concentration of economic power is prohibited under section 3 of MRTPO. Although we would independently deal with the undue concentration of economic power but for the purposes of maintainability of this appeal since it is attempted that Searle is not shown to be an aggrieved party, Mr. Ijaz Ahmed, learned counsel for the respondent in this regard, has initially raised objections as to its maintainability perhaps to the extent of appellant No.1. 14. A bare perusal of impugned order, particularly paragraph 34, would reveal that the arrangement between Searle and IBL was inclined in favour of IBL and therefore, IBL benefited from this arrangement at the cost of minority shareholders of Searle. The impugned order is an attempt to rectify and set the score at a balance and required IBL to remediate undue benefits that it has received from Searle. Hence, Searle would be an outright fiscal beneficiary. Question before us is, would that alone be a tool to adjudge a corporate entity or an individual having no grievance against impugned order? 15. Aggrieved person not necessarily be one facing financial losses; a person/entity feels and considers a process as an intervention to business decisions and actions are being an intervention to business decisions, it can qualify as basis of being an aggrieved person. To be an aggrieved, you do not have to show yourself in a frame of financial loss alone. An attempt to justify that intervention to the business understanding is unnecessary by regulator, notwithstanding financial gains, the intervention can be objected by objector as being aggrieved person. We now deal with the questions raised by appellant's counsel. Credit period v/s commission 16. Follow up of impugned order reveals that Securities Et Exchange Commission of Pakistan (SECP) had also initiated proceedings against the directors and chief executive of Searle for violation of
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Section 208 of Companies Ordinance, 1984. The SECP also concluded the transactions between Searle and IBL beyond the normal trade understanding and the normal trade credit, as seen in other identical situation, and such deviation of the normal trade credit would require approval of the shareholders of Searle which could have been the beneficiary of such amount, had it been passed on to Searle at the earliest. There is no such approval, as not demonstrated by the appellants, hence would spill over the requirement of Section 208 of Companies Ordinance, 1984 (as it then was). Having seen such effect, SECP imposed penalty on the directors and chief executive and directed recovery of outstanding balance from IBL with further directions to reduce credit period and commission to bring it in line with the market practice.17. Although Searle, being aggrieved of the findings of SECP filed a revision application (being a statutory remedy), but the same was later on withdrawn; this would demonstrate Searle having conceded to the facts, at least. The facts, as narrated by SECP, are identical and similar to the facts determined by the Authority under MRTPO as impugned in this appeal. 18. We would now see that veracity of the charges leveled. In order to understand the gravity of the violation, as highlighted by the Authority in the impugned order, we must understand the normal course of business being practiced by the principals and their distributors, which was taken into account by the Authority. The terms and conditions of this agreement, which was subjected to scrutiny in the impugned order, can be compared with the earlier distribution agreement with Muller Et Phipps which were Searle's previous distributor for nearly two decades; the only difference was that the two parties i.e. Muller Et Phipps vis--vis Searle were totally independent of each other and hence the Searle was conscious of their rights while entering into such agreement with an understanding i.e. Muller and Phipps would not get any undue advantage while the Searle fought for their rights against Muller Et Phipps; they seems to have surrendered all such rights when IBL became their distributor, the directors of which in fact owns majority shares of Searle. 19. Comparative summary of key terms to make us understand the controversy is described as under:- Term MEtP Agreement 24.07-1975IBL Agreement 05-07-93IBL Agreement 01- 01- 2000IBL Agreement 01-07-2005 Commission/ marginClause 3 - 11%Clause 4 - 10%pharma and 15% non- pharmaClause 4 - 10% Pharma and 12% non-pharmaClause 4 - 10% pharma and 3 to 12% non-pharma Credit period Clause 7 - 40 daysClause 6 - weekly basis after actual Sale in the marketClause 6.1 and 6.2-75 days commencing from actual sale in the market. The period was increased to 120 days by Amendment No. 1 dated 01-07- 2003Clause 6.1 - 120 days commencing From actual sale in the market. Stock level Clause 5 - 6 weeksClause 2.2 - 4 weeksNo specific requirement provided in the agreementNo specific requirement provided in the Agreement
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Basis of sale Clause 7 - outright sale on dispatchNo outright sale provided in the agreementClause 2.2 - IBL to hold inventory on account of SearleNo specific requirement provided in the agreement Delivery by SearleClause 4 - Main Distribution Depot of MEWClause 5 - IBL branchesClause 5 - IBL branches/networkClause 5 - IBL branches/ network
20. Reading the above table carefully it may be noted that the rates of commission/margin are comparable, however, MEW has much shorter credit period of 40 days from date of dispatch as compared to IBL which has 120 days from the date of actual sale to its customers. 21. As to the credit period, Clause 7 of the MEW agreement provides that goods will be provided by Searle to MEW on the basis of an outright sale and credit period is 40 days from the date of dispatch of goods. MEW therefore has to make payment within 40 days whether or not it is able to sell the goods within the same period. On the other hand, IBL is only obliged to pay after the actual sale of the goods and the agreements dated 1.7.2000 and 1.7.2005 provide for 120 days credit period. This effectively, means that even when IBL has sold the goods and recovered the price from the customer, it can still hold Searle's fund for 120 days and benefit from the same as against shareholders of Searle to whom money belongs. This practice is also contrary to the market practice as shown by the agreements of the comparable and compatible distributors and suppliers as noted in paragraph 23 of the Impugned Order and as observed by SECP in its order. In fact, SECP has noted that the credit period has been extended upto 136 days in the year 2005-2006. 22. For the stock level, M&P agreement requires it to hold a stock equal to at least 6 weeks requirements. Since M&P's credit period starts from the date of dispatch, it has to maintain this stock at its own risk. IBL on the other hand, has been holding stock on behalf of Searle, which means that IBL does not bear any risk for holding such stock and in fact Searle even pays warehouse rent to IBL as admitted by the Appellants in paragraph 6(b) of their letter dated March 2, 2007 and paragraph (1) of their letter dated March 27, 2007, both letters available. This found contrary to normal and general practice prevailing. 23. On the term basis of sale, Clause 7 of M&P agreement provides that the goods are being provided on the basis of outright sale which transfers all risks to M&P. However, IBL agreements are either vague or provide that the goods will be held on account of Searle, which has also been the practice between the parties. If these risks are ensured, then M&P will bear the cost while in case of IBL since the goods belong to Searle, such cost will be borne by Searle. 24. Under the M&P agreement, Searle had an obligation to deliver at the main depot of M&P while in case of IBL, Searle has taken the responsibility to deliver to IBL's branches and network locations. 25. It may also be noted that Searle has been paying substantial amounts under the head of various expenses, which in accordance with industry practice, should be borne by the distributor. The IBL agreements have been purposely kept vague in this regard and so-called MOU dated 01- 07-1993 was signed separately to provide for this. Appellant surely has not demonstrated that such understanding has improved the sale of the product tremendously. 26. The first point in relation to credit period is also claimed to have not been demonstrated or identified in the show-cause notice. We have perused the show-cause notice. In our understanding a show-cause doesn't need to be an encyclopedia; it just has to show that the point is taken which
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could be lawfully stretched and hence required a response. A perusal of show cause notice would further reveal that the same point is clearly stated. IBL was being paid commission at a rate higher than the market rate; it doesn't have to be as demonstrative as the impugned order is. During the proceedings and based on the information provided by the Appellants as well as other information gathered by the Authority from the market, it appeared to authority that there was a reciprocal relationship between the rate of commission and the credit period i.e. where the rate of commission is higher, the credit period is shorter and vice versa. A table summarizing the terms of the agreements…
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