This is a petition under section 305 read with section 152 of the Companies Ordinance, 1984 asking for winding up of the Company as well as for rectification of the register of share-holders. It was said that the Company was formed on the basis of the close relationship and longstanding friendship between petitioner No.1 and respondent No.2 and this was in fact a business which flowed out of the cordial personal bond between these two major actors based on mutual faith and goodwill. But this confidence is being no longer reposed by either side for the reasons which have been given in the petition itself.
2. As to why the dispute has actually emerged, is selected in the petition itself and the relevant excerpts are re-produced below in extenso:-- "26. That as detailed above, till 1999 respondent No.2 was only a share-holder in the Company and was not a Director therein. As such, he had no authority to act for the Company. However, respondent No.2 incorrectly and unlawfully manoeuvred to file a backdate Form A dated 31-12-1997 in the office of respondent No.9, which purports to show that on 10-10-1997 petitioner No. I transferred No.10. Thus the said Form A purports to show that petitioner No.1 holds 2,45,000 shares instead of 4,70,000. The same (incorrect) information is given in the Forms "A" for subsequent year.
Respondent No.2 had thereby (unlawfully) attempted to show that the shareholding of the MJA Group had been reduced from 38% to 23%.
Copies of Form-A dated 31-12-1997 and 31-12-2000 are attached herewith as Annexure J/ 1-J/2.
Reference may also be made to the more recent Forms A, details of which are given below.
27. That petitioner No.1 has never transferred his shares to respondent No.2 or respondent No.10 nor has he executed any documents showing or effecting such a transfer. As such, the purported transfer is illegal, void ab initio, and totally ineffective against petitioner No. 1. To the extent that respondents Nos.2 and 10 assert that there was such a transfer, they are put to strict proof thereof.
It is pertinent that the said Form "A" does not even purport to show that respondent No.2 was a Director in the Company.
28. That the alleged transfer of shares dated 10-10-1997 reflected in the said Form-A is bogus, spurious and unlawful to the knowledge of respondent No.2 and the KRS Group. This is reflected in some of the correspondence by respondent No.2. For instance, in his letter dated 21-1-1999 (attached as Annexure E/1) he admits that the MJA Group owns 38% shares. Similarly, in his letter dated 1-2-2000, which purports to contain minutes of a Board meeting dated 31-1-2000, respondent No.2 again states that petitioner No.1 represents 38% shareholding. This is without prejudice to the petitioner's contention that no such Board meeting took place on the said date, and that this letter is one of many wherein respondent No.2 has unilaterally tried to fabricate minutes of fictitious meetings. That is why the said letter was never signed by petitioner No.1"
"30. That respondent No.2 filed two Forms-A dated 31-12-2001 and 31-12-2002 with the office of the respondent No.9 recording that the authorized share capital of the Company is Rs.40,000,000 divided into 4,000,900 shares of Rs.10 each. The alleged increase in the share capital is illegal, fictitious and unauthorized as the Company has not filed any Form III nor has it followed the other requirements laid down in the Ordinance, as for instance in section 92 of the Ordinance.
Furthermore, it is clear that in violation of section 86 of the Ordinance, the (so-called) further shares were neither offered nor issued to all the existing share-holders in proportion to their existing shareholding. The KRS Group is put to strict proof that any such increase in the share capital of the Company was lawfully effected."
"31. That the foregoing is significant as the petitioner's entitlement to the increased share capital has been worked out on the basis of 23% shareholding rather than 38%. This illegality has been committed to assume total control over the affairs of the Company. to give some credibility to other forged documents which have been illegally filed by respondent No.2 and to compound the effect of the unlawful (purported) reduction in the shareholding of petitioner No.1."
"34. That resultantly, one of the fundamental motives for establishing the Company was in danger of being frustrated. Petitioner No.1 had devoted a lifetime to the Company exclusively in the hope that his future generations will reap the reward of his labours. He had no other business nor any other source of livelihood. However, it was obvious that he and his children had no future in the Company. Coming at the heels of the purported reduction in the shareholding of petitioner No.1, the attempt by respondent No.2 to exclude petitioner No.3 from active management and his steadfast refusal to allow any other member of the MJA Group onto the Board made it clear that the KRS Group was going all out to oust petitioner No.1 and his family from the management and membership of Company."
"39. That things were quiet for a couple of months after the petitioners left the management of the Company. However, the petitioners were shocked to learn that respondent No. 2, along with the Company. had filed a civil suit against them and Joy Foam, alleging (totally incorrectly) that Joy Foam was a subsidiary of the Company, having been set up with the latter's funds. Having orchestrated the ouster of the MJA Group from the management of the Company, the KRS Group was now funning for their investment in Joy Foam also."
"40. That while the concerned petitioners are preparing to defend the said civil suit, and will file a written statement in due course, they are, for the purposes of the present proceedings particularly aggrieved of the manner in which the record of the Company has been manipulated and fabricated in an attempt to provide succour to the said suit. The KRS Group has prepared bogus records of share-holders and directors' meetings and resolutions in order to further their plans. In particular, the petitioner refer to the alleged resolution dated 27-1-2001 whereby (allegedly) the Company resolved to set up a subsidiary company, and the alleged resolution dated 26-12-2003 (mentioned in the letter dated 27-12-2003 attached herewith as Annexure P/1) passed at an extraordinary share-holders' meeting, The petitioners categorically state that no meetings as alleged were held on the said dates, nor were these resolutions ever passed. The KRS Group is put to strict proof of these facts."
"46 That the petitioners received notices dated 9-10-2004 informing them that an AGM of the Company will be held on 30-10-2004. Along with the notices, the petitioners received, accounts of the Company for the financial year 2004, which were to be put up for approval at the said AGM."
"47 That much to the petitioners surprise, the said accounts revealed that during their preparation, accounts for the financial year 2002-2003 had been revised. This was totally inexplicable as the accounts for the financial year 2002-2003, prepared by respondent No.7, had been signed and submitted by respondents Nos.4 and 5, and no basis or justification for the said revision had ever been put forward. Significantly, the accounts for the financial year 2003-2004 showed that the Company had run up losses of. Rs. 101,325,867 even though the accounts for the financial year 2002-2003, signed and submitted by the KRS Group themselves, showed that the Company had earned a profit of Rs.2,823,964. Indeed, the Company had declared profits for the years preceding 2003."
"48 That it hardly needs to be emphasized that the said accounts for the financial year 2003-2004 were bogus, fictitious and had been fabricated simply in order to avoid payment of any dividends to the petitioners and to caste a negative light on the time the MJA Group was involved in the management of the Company."
Therefore, the following prayer was made:-- "In the light of the foregoing, it is most respectfully submitted that this Honourable Court may be pleased to:--
(i) declare that the attempted reduction in the shareholding of petitioner No.1 by means of the purported transfer of his shares to other respondents is illegal and oflegal effect;
(ii) declare the attempted increase in the share capital of the Company from Rs.15,000,000 to Rs.40,000,000 to be illegal and of no legal effect;
(iii) declare the allotment and issuance of shares bas :1 on the attempted increase in share capital to be illeg and of no legal effect;
(iv) declare that prior to the attempted reduction in his shareholding and the attempted increase in the share capital of the Company, petitioner No.1 held 4,70,000 instead of 2,45,000 shares and that the petitioners collectively held 38% of the shares in the Company, instead of 23% and continue to do so;
(v) direct the Company and the KRS Group to rectify the register of share-holders of the Company to reflect that prior to the attempted reduction in his shareholding and the attempted increase in the share capital of the Company petitioner No.1 held 4,70,000 instead of 2,45,000 shares and that the petitioners collectively held 38% of the shares in the Company instead of 23%, and continue to do so, and direct respondent No.9 to rectify its records accordingly;
(vi) order that the Company be wound up;
(vii) order that upon liquidation, and after paying the creditors, the assets of the Company be distri I uted amongst the share-holders on the basis tha i the petitioners hold 38% of the shares in the Company;
(viii) Order the KRS Group to pay costs of the case to the netitioners;
(ix) Grant such other relief as may be deemed just and proper on the facts of the case."
3. The respondent's side in its written statement has taken a number of objections. It was said that the petition was not maintainable because a necessary party, to whom the petitioner had transferred his shares i.e. Messrs Sheikh Combined Industries Pvt. Ltd., has not been made a party.
But subsequently the said Company was represented by Mian Nisar Ahmad, Senior Advocate on their behalf. It was also the case of the respondents that the Company was making profit and no good grounds were made for its winding up even if the petitioner had to make the allegation against oppressive management.
4. Counter-allegations were hurled against the petitioner in paragraphs 6, 8, 13, 19, 20 of the written statement. It was said:-- "(6) That the petitioners by abusing the process of this Honourable Court want to take benefit of their some of the following misdeeds:--
(i) making up money of over Rs.1,000 millions by indulging in fraud, forgery and embezzlement through:--
(a) cloth purchase and short supplies,
(b) payment to fictitious names without support of purchase.
(c) sale of drums,
(d) kick-backs,
(e) payment to Messrs Joy Foam Industries (Pvt.) Ltd., against their capital.
(f) embezzlement in creating and declaring bad debts and writing them off without resolution and authority of Board of Directors.
(ii) damages of over 2,000 millions which the petitioners caused to the Company by their wilful default and various wrong decisions.
(iii) illegal Commissions."
"(8) That it is an established principle of law that Companies, as far as possible, should be left to self-government and self-determination through the wishes of majority of share-holders. It would not be equity, if the petition is allowed contrary to the wishes of majority, as in such situation the petitioners would get following illegal benefits:--
(a) That cases of fraud and forgery and embezzlement over rupees one hundred crores would be sabotaged.
(b) The damages due to wilful defaults and wilful vrong decisions during his tenure as Chief Executive " over rupees two hundred crores would end up.
(c) Case of United Foam filed against Joy Foam wouId be automatically finished.
(d) Above all simultaneously shares have been sold save themselves from balance-sheet of 30- 6-2004, ,vhich confirms their share-holding negative by rupees two crore forty lacs only. Copy Annexure R/8.
(e) Petitioners' new company Messrs Joy Foam Industries (Pvt.) Ltd., would flourish at the cost of Unite Foam Industries (Pvt.) Ltd."
"13. The petitioners also have no locus standi to tile the instant petition either under section 152 or under section 305 of the Companies Ordinance, as before the filing of the petition they on 24-12- 2004 have sold all their shares in United Foam Industries (Pvt.) Ltd. It is pertinent to mention here that the petitioners firstly offered to sell their equity in United Foam (Pvt.) Ltd. to respondents Nos.2 to 6 and upon the refusal of the said respondent's to purchase the shares of the petitioners, they entered into an agreement with Messrs Sheikh Combined Industries (Pvt.) Ltd. for the sale of their entire holding to the latter. Copies of the letters exchanged between the petitioners and respondents Nos.2 to 6 containing the offer of the petitioners for sale of shares and refusal of the respondents. Copy of Agreement dated 24-12-2004, between the petitioners and Messrs Sheikh Combined Industries (Pvt.) Ltd. for the sale of shares of the petitioners are annexed as Annexure R/9. It is worth-mentioning here that the Board of Directors of respondent No.1 has also approved this transaction of transfer of shares and the name of Messrs Sheikh Combined Industries (Pvt.).
Ltd. has already been entered in the register of members."
"19 that the jurisdiction of this Honourable Court under section 152 of the Companies Ordinance, 1984 is also not available to the petitioners as the instant controversy requires settlement through evidence. The summary procedure provided under section 152 of the Companies Ordinance, 1984 cannot be invoked by the petitioners for the settlement of such complicated questions of fact without a regular trial."
"20 That it has been clearly laid down in a long line of rulings of the Superior Courts that although powers of the High Court , to rectify Register of Members is very wide, yet the jurisdiction of High Court being summary. is not to be invoked for the resolution of disputes of complicated nature necessitating regular trial-parties in such situations would be required to have the controversy resolved through a regular suit under the C.P.C. It is obvious from the contents of the titled petition itself that the questions of fact involved therein cannot be answered within the confines of the summary procedure provided in section 152 of the Companies Ordinance, 1984. The petitioners have deliberately avoided taking their dispute, if any, to the Civil Courts for regular trial, with the sole object of coercing the respondents and of preventing them from pressing the corporate rights of respondent No.1-Company in the equity of Messrs Joy Foam (Pvt.) Ltd. The petitioners are thus trying to abuse the process of law to the detriment of the respondents. They have not come to the Court with clean hands and are not entitled to any relief."
3. On the other side, it was said that there has not been any sale of safes and if at all there was any sale, it was based on the fraudulent act of the respondent's side. The learned counsel for the petitioner went on to say that as he is in possession of the scripts of the shares, those provide enough evidentiary proof for the Company to rectify the register of the share-holders or to refrain from omitting the name of the petitioner from the register of the share-holders.
6. The parties have placed material on record in support of their accusations. The consensus is that these accusations call for a detailed inquiry which may also require production of evidence and which is not possible under the summary procedure of this Court.
7. Since serious accusations have been made against each other by the parties and there are questions involved inter alia to the effect whether the petitioner did sell their shares or was withholding the same cleverly and whether the rectification of the register of share-holders had been effected bonafidely or malafidely and whether the affairs of the Company can be conducted in the future smoothly. These do call for investigation as envisaged under section 265 of the Companies Ordinance, 1984.
8. public limited companies are required to work within a corporate morality and when such-like accusations are made by the members of the Company itself, it damages the image of the Company and its actors and accusations are required to be enquired into and action taken in accordance with the spirit of the Company Law.
9. This Court, therefore, would ask the SECP to act under the provisions of section 265 by appointing a reputable Inspector to investigate into the grievances raised by both sides and to return its report to this Court thereafter while also suggesting whether a case under section 305 was, under the circumstances, made out or whether this was merely a case covered under section 76 of the Companies Ordinance. The Inspector will also point out the areas where correction in the working of the Company was required and also pc). nt out whether that was possible.
10. As the matter has been referred under section 265 of the Companies Ordinance, 1984 to the SECP, this C.O. as far as this Court is concerned, is being disposed of. The matter shall be re- agitated by the parties after the report of the SECP was available and favourable to the petitioner and not otherwise. Because, otherwise, it will be presumed that no case has been made out for rectification or for winding up and the matter will end there while only requiring the placement of the report of the Inspector on the file. The SECP will appoint a reputable Inspector within 14 days from today and the Inspector will be giving his report within the next 2 months without fail.