TAHIR MAHMOOD, EXECUTIVE DIRECTOR (CL).---This order shall tlispose of the show cause proceedings initiated against Polyron Limited (Company), its Chief Executive and Directors under the provisions of section 249. Read with section 498 of the Companies Ordinance, 1984 (Ordinance).
2. Brief facts of the case are that the examination of annual audited accounts of the Company for the year ended June 30, 2006 revealed that despite the fact that the Company has suffered loss of Rs.28.530 million and accumulated losses amount to Rs.433.684 million for the said year. The Company has appropriated interim dividend @ 2.5% from the loss of Rs.28.530 million for the year ended June 30, 2006. It was also observed that the auditors of the Company namely Hafizullah & Co., Chartered Accountants have raised the following qualification in the aforesaid accounts in the following manner:- "The Company has been incurring continuous loss since last few years and has accumulated losses 'of Rs.433.684 million including loss after taxation of Rs.28.530 million incurred during the current year. The negative equity of the Company on the balance-sheet date stands at Rs.114.184 million. The current liabilities exceed the current assets by Rs.41.381 million and has current ratio of
0. 75:1. These financial statements have been prepared on historical :cost basis as disclosed in Note 2 although these factors indicate the existence of confirmed material uncertainty and there exists significant doubt about the company's ability to continue as going concern and therefore it may be unable to realize its recorded assets and discharge its liabilities in the normal course of business. In spite of these existing and potential future factors the company paid an interim dividend of Rs.0.25 per share during the year under review, which was on the basis of half yearly accounts, indicating profit."
Further probe in the matter revealed that the Company, in the 2nd quarterly accounts for the period ended December 31,. 2005 earned after tax profit of Rs.2.034 million and the Directors of the Company declared interim cash dividend of 2.5% per share i.e. Rs.0.25 per share despite huge accumulated losses and tight liquidity position of the Company. The Company, however, in the subsequent months was unable to sustain its position and the profit was transformed into loss of Rs.28.530 million at the year end from which the Company paid dividend of Rs.1.970 million.
3. In view of the foregoing, it was apprehended that the Directors had acted in contravention to the provisions of section 249 of the Ordinance and therefore, a show-cause A notice was issued to the Company and its Directors on June 25, 2007 asking them to explain why penalty as provided under section 249 of the Ordinance may not be imposed on them.
4. The Company responded to the aforesaid show-cause Notice on June 28, 2007 and made the following submissions:-- During the first half of the year 2005 the prices of raw material retarded nearest to its base prices and at that time it seemed that the international Oil crises was over. The circumstances improved and in the first half year the company made a modest profit. Anticipating that the prices of polyester chips would remain more or less the same, the company expected the trend to continue for the remaining part of the year and declared an interim dividend out of the profits revealed in the accounts of the first half year. The Consumer seeing the fall in the prices of raw material refrained from buying heavily hence the Company was unable to attain the turnover volume as of the first half year. Further, the selling prices .Of yarn also declined subsequently. In view of the above, the Company requested to condone the default.
5. The submissions of the Company were not found cogent and in order to provide the opportunity of personal hearing, the case was fixed for July 16, 2007 which was adjourned on the request of the Company and finally fixed for August 7, 2007 on CLL. which Mr. Hashim All Muhammad, Chief Accountant appeared on behalf of the Company and its Directors. At the time of hearing, Mr. Hashim Ali accepted the offence, however requested to condone the default.
6. Before deciding this case, I would like to make an observation. The directors of a company are appointed by the shareholders to manage and run their Company in their best interest. The directors should, therefore, exercise due care in the performance of their duties. It is, therefore, imperative that the directors should regularly oversee the affairs of the Company before making a prudent decision. .
7. Having considered the submissions, as dilated in the preceding paragraphs, I am of the view that the directors have acted against the following provisions of the Ordinance and have made themselves liable to penal action as warranted under the law: Section 249 of the Ordinance provides that:-- "No dividend- shall be paid by the Company otherwise than out of profits of the profits of the Company"
Regulation 65 of Table A of First Schedule to the Ordinance also states that:-- "No dividend shall be paid otherwise than out of profits of the year or any other undistributed profits."
The directors have violated the provisions of law and acted against the interest of the shareholders by paying dividend out of the capital of the Company. The decision of the directors to declare interim dividend caused loss of capital to the Company.
8. In view of the foregoing as the default is established and admitted by the Company with assurance of the compliance of law in future, I am inclined to take a lenient view and instead of imposing maximum penalty of Rs.50,000 as prescribed in section 498 of the Ordinance, I impose a fine of Rs.35,000 on the Company and each of its Directors as given below:-- Sr.No. Name Penalty (Rupees) i. Mr Bashir Ismail 35,000 ii. Mr. Bashir Abdulla 35,000 iii. Mr. Munir Ismail 35,000 iv. Mr. Abdul Sattar 35,000 v. Mr. Abdul Habib Aybani 35,000 vi. Mr. Muhammad Suleman 35,000 vii. Mr. Ghulam Hussain 35,000 viii Polyron Limited 35,000 Total 280,000
9. The Company and its Directors are hereby directed to deposit the aforesaid fine totaling to Rs.280,000 (Rupees Two Eighty Thousand Only) in the designated bank account maintained in the name of Securities and Exchange Commission of Pakistan with Habib Bank-Limited within thirty days from the receipt of this Order and furnish receipted vouchers or pay by a DD/pay order issued in the name of Commission for information and record, failing which proceedings under the Land Revenue Act, 1967 will be initiated which may result in the attachment and sale of movable and immovable property. It may also be noted that the said penalties are imposed on the Chief Executive and other Directors in their personal capacity, who are required to pay the said amount from their personal resources.
2007 C D 1722 [Securities and Exchange Commission of Pakistan] Before Tahir Mahmood, Executive Director (Enforcement)
In the matter of: SALEEM DENIM INDUSTRIES LIMITED Show-Cause Notice No.EMD/233/229/2002-333- 339/1, dated 5th July, 2007, decided on 13th September, 2007.
Companies Ordinance (XLVII of 1984)- ----Ss. 177, 186 & 476---Failure to hold election of Directors of the company---Imposition of penalty---Election of the Directors of the company was held for the period of three years and after expiry of said period, Directors of the company were required to take immediate steps to hold election of Directors; and in case of any impediment, report the circumstances to the Registrar within 15 days of the expiry of terms of three years, but that had not been done in the present case---Directors of the company in response to the show-cause notice, had stated that elections of the Directors could not be held because the Chief Executive of the company was out of the country for his medical treatment-- Default was established and admitted---Absence of Chief Executive from the country was not a cogent reason for non-holding of election of Directors or for failure to report impediment---Other than the Chief Executive, six Directors were present in the country and it was their statutory responsibility to ensure compliance with the mandatory provisions of the Companies Ordinance, 1984, within the time prescribed therein, but they failed to do so---Default, in circumstances could not be ignored---Considering the fact that Directors, in response to showcase notice, had held election, taking lenient view of the default, instead of imposing maximum penalty of Rs.10,000 on each Director and debarring them from continuing or becoming the Directors of the company for a period of three years, a token penalty of Rs.2,000 was imposed on each Director except the Chief Executive. [P.1724] A Shahid Saleem, Director.
ORDER TAHIR MAHMOOD, EXECUTIVE DIRECTOR (ENFORCEMENT).---This order shall dispose of the proceedings initiated against the Directors of Saleem Denim Industries Limited (Company) under .
Section 186 of The Companies Ordinance, 1984 (Ordinance) for non-holding of election of Directors of the Company as required under section 177 of the Ordinance.
2. Brief facts of the case are that the Commission while examining the record of the company observed that the last election of directors of the Company was held on May 30, 2004, to elect directors for a period of 3 years which expired on May 30; 2007. In terms of section 177 of the Ordinance the Directors of the Company, on expiry of their term, were required to take immediate steps to hold election of directors and in case of any impediment report the circumstances of the case to the Registrar within 15 days of the expiry of term of three years. However, the continuing directors, not only, failed to hold elections but also failed to report the impediment to the Registrar within the prescribed time. Consequently, a notice dated July 05, 2007 was served upon the Directors of the Company to show cause as to why penalty as provided under section 186 read with section 476 of the Ordinance, may not be imposed and as to why they may not be debarred from continuing or becoming the Director of the Company for a period not exceeding three years for the aforesaid contravention.
3. Our aforesaid show-cause notice was responded by Mr. Shahid Saleem, Director of the Company on behalf of all the Directors. Mr. Saleem in his written submissions as well as at the time of hearing held on August 29, 2007 offered following arguments:-- Election of directors could not be held in time nor was SECP informed of its postponement because the Chief Executive of the Company was out of country for his medical treatment. When the default came to their knowledge they took immediate action and held election in EOGM held on August 10, 2007.
In view of the peculiar circumstances of the Company the Commission should take a lenient view of the default.
4. I have taken into consideration the submissions made before me and have also perused the relevant legal provisions applicable in this case. The default is established and admitted. Absence of the Chief Executive from the country is not a cogent reason for non-holding of election of directors or for failure to report impediment. Other than the Chief Executive, six directors were present in the country and it was their statutory responsibility to ensure compliance with the mandatory provisions of the Ordinance within the time prescribed therein however they failed to do so. The default therefore may not be ignored.
5. However, considering the fact that the Directors in A response to our show-cause notice have now held elections in EOGM held on August 10, 2007, I am inclined to take a lenient view of the default and instead of imposing maximum penalty of Rs.10,000 on each director and debarring them from continuing or becoming the director of the Company for a period of 3 years, impose a token penalty of Rs.2,000 each on all the Directors (except Chief Executive Officer, Mr. Tahir Saleem Chaudhry) namely Mr. Shahid Saleem Chaudhry, Mrs. Sobia Saleem, Mr. Abdul Haq Chaudhry, Mr. Abdul Aziz Chaudhry, Mrs. Nosheen Shahid and Mr. Ghulam Farid. The directors of the Company are also advised to remain careful in future in ensuring compliance with the mandatory requirements of the statute.
6. The Directors of the Company are directed to deposit the aforesaid fines aggregating to Rs.12,000 (Rupees twelve thousand only) in the designated bank account maintained in the name of the Securities and Exchange Commission of Pakistan with Habib Bank Limited or pay through a demand draft in the name of the Securities and Exchange Commission of Pakistan within thirty days from the receipt of this order and furnish receipted bank voucher to the Commission, failing which proceedings for recovery of the fines as an arrear of land revenue will be initiated. It may also be noted that the said penalty is imposed on directors in their personal capacity; therefore, they are required to pay the said amount from their personal resources.