ABID HUSSAIN, DIRECTOR (ENFORCEMENT).---This order shall dispose of the proceedings initiated against (Colony) Thal Textile Mills Limited (hereinafter referred to a& the "Company") vide show cause notice dated June 29, 2007 tinder the provisions of section 249 read with section 498 ana section 476 of the Companies Ordinance, 1984 (hereinafter referred to as the "Ordinance").
2. 'The Company was established as a public limited company on October 3, 1958 and is currently listed on Lahore and Karachi Stock Exchanges. Its authorized and paid-up capital, as per annual audited accounts for the year ended June 30, 2006 (hereinafter referred to as the "annual accounts"), was Rs.90.00 million divided in to 9.00 million of dinary shares of 10.00 each and Rs.55.688 million divided into 5.569 million ordinary shares of Rs.10.00 each, respectively. The principal activity of the Company is manufacturing, processing and sale of yarn. The Company has 1,093 shareholders comprising individuals, financial institutions, joint stock companies etc., as per pattern of shareholding annexed to the annual accounts.
3. Brief facts leading to this case are that from the examination of the annual accounts of the Company, it was observed that the Board of Directors has paid an interim . Dividend at the rate of 3% amounting to Rs.595,089 which was declared in the first quarter ended on September 30, 2005.
It was further observed that the Company has incurred a net loss of Rs.9.676 million for the year ended on June 30, 2006 reflecting that the interim dividend of Rs.595,089, has actually been paid out of capital. It was further observed that the Company has a history of losses and its accumulated losses stood at Rs.90.91 1 million as at June 30, 2006.
4. The auditors of the Company Messrs Fazal Mahmood & Company, Chartered Accountants, in their report to the members have also qualified the above violation in the following terms:-- Quote "The Company paid interim dividend of Rs.595,089 which was declared in the first quarter ended September 30, 2005 out of the unaudited profits up to that quarter. However, the annual financial result of the Company show loss and ultimately the dividend is paid out of the loss which is not in compliance with the requirements of section 249 of the Ordinance."
5. Failure of the Company to comply with the mandatory provisions of the Ordinance necessitated action against the directors of the Company in terms of section 249 read with sections 498 and 476 of the Ordinance. Accordingly, a show cause notice dated June 29, 2007 under the provisions of section 249 read with sections 498 and 476 of the Ordinance ("the SCN") was served on the following Directors of the Company calling upon them to show cause in writing and to explain as to wny penalty may not be imposed under provisions of section 498 of the Ordinance for contravening the provisions of section 249 of the Ordinance:--
(i) Mr. Tanveer A. Shaikh, Chief Executive;
(ii) Mrs. Ayesha Tanveer, Chairperson;
(iii) Mr. Ahmed Shaikh, Director;
(iv) Sardar Muhammad Nawaz, Director;
(v) Mr. Muhammad Taimur Tanveer, Director;
(vi) Ms. Beenish Elahi, Director;
(vii) Mr. Abrar Hussain Naqvi, Director.
6. In response to the SCN, the Chief Executive, on behalf of all directors made following submissions vide his letter dated July 13, 2007:-
(a) the Company earned profit during the first quarter ending on September 30, 2005. The Directors of the Company announced an interim cash dividend @ 3% in board of directors meeting held on October 31, 2005 on the basis of profitability in the first quarter. It will not be out of place to mention here that the Company was also in profits for the half year ended December 31, 2005;
(b) furthermore, the Company was under immense pressure from Karachi Stock Exchange (KSE) regarding non-declaration of dividends. The Company received an SCN from KSE dated October 10, 2005 for non-declaration of dividends;
(c) the directors and sponsors of the Company did not have any interest in the amount of dividend as they have already forgone their right to receive dividend in the aforesaid Board meeting;
(d) Directors of the Company are well aware of the provisions of Section 249 of the Ordinance and have not violated the aforesaid provisions of the Ordinance which stipulates that no dividend shall be paid out of the profits of the Company;
(e) at the time of announcement of dividend by the Board of Directors on October 30, 2005, the overall-condition of the textile sector looked positive and the directors on the basis of profitability in the first quarter ended September 30, 2005 and show-cause notice by the KSE announced 3% cash dividend. The interim dividend was paid out of the profits of the Company in accordance with section 249 of the Ordinance;
(f) reference is made to the case-law, 1999 M LD 108 where petition of the Company was dismissed as regards to placement of the Company on defaulters counter by KSE.; and
(g) the Company has complied with the requirements of section 249 of the Ordinance and dividend was paid out of the first quarter profits of the Company therefore there was contravention and proceedings may be closed.
7. In order to provide an opportunity of personal hearing, the case was fixed for several times however the Company requested for adjournments. Finally the hearing was held on October 10, 2007 and Mr. M. Hayat Jasra, FCMA, appeared before me as the Counsel of the Directors and presented following arguments:-- Facts:
(a) the Company is facing hardships and directors are making their best efforts for the past many years to keep the Company operational;
(b) the Company was under the immense pressure from the KSE to declare dividend failing which it was threatened to place the Company on defaulter counter thus adding more difficulties the Company which might have ended up on winding up of the Company;
(c) the Company earned a profit after tax of Rs.5.094 million in the first quarter ended on September 30, 2005 and on the basis of profitability the Board of Directors in the best interest of the share-holders and the Company declared a dividend of 3% to save the Company;
(d) the good intentions of the Directors can be seen from the fact that a total dividend of Rs.1.67 million was declared however the directors in good faith and for benefit of the Company. Forgone their share of dividend and a dividend of Rs.595,089 was paid to the minority shareholders belonging to general public only. The directors have forgone their dividend entitlement which constitutes of 63% of the total declared dividend;
(e) the sponsors have financed the Company through unsecured interest free long term loan amounting to Rs.31.00 million despite the fact that there is hope of recovery in near future; Legal Position:
(f) the present provisions relating to declaration and payment of dividend given in the Ordinance relate to final dividend only and interim dividend is not covered under them except that the position regarding declaration of interim dividend is explained in the explanation of Section 251 of the Ordinance;
(g) the law empowers the directors under the provisions of section 196(2)(1) of the Ordinance to declare interim dividend;
(h) as the provisions of section 249 of the Ordinance do not restrict period of profitability for declaration of dividend therefore dividend can be announced based on the profitability of a certain period/quarter;
(i) the term profit is not explained in the Ordinance and if it is taken as the profit for the year than it would be very stringent vision;
(j) reference may be made to the provisions of section 205 of the Indian Act, 1956 containing the similar provisions relating to declaration of divided where in the commentary the term profit has been, defined as a "surplus earned by a company between two dates-. Thus the profit out of which dividend can be declared could be a profit for the quarter.
8. I feel it appropriate to quote here the relevant provisions of the Ordinance. Section 249 of the Ordinance provides that:-- "No dividend shall be paid by a company otherwise than out of profits of the Company."
Section 498 of the Ordinance provides that:-- "If a company or any other person contravenes or fails to comply with any provision of this Ordinance or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, for which no punishment is provided elsewhere in this Ordinance, the Company and every officer of the Company who is in default or such other person shall be punishable with a fine which may extend to fifty thousand rupees, and, where the contravention is a continuing one, with a further fine which may extend to five hundred rupees for every day after the first during with the contravention continues."
9. I have analyzed the written submissions of the Directors, arguments put forth by the Counsel and the record of the ' Company available with the Commission and my observations on the issue are as follows:--
(a) although, the Company has earned profit after tax of Rs.5.094 million in the first quarter ended on September 30, 2005 but at the end of the financial year i.e. June 30, 2006 the Company had a loss after tax of Rs.9.676 million;
(b) the said quarter was not subject to limited review by the auditor, therefore, figure of profit i.e. Rs.5.094 million derived by the Company while preparing the said quarterly accounts is unaudited;
(c) the Directors can declare interim dividend on the basis of profitability of a quarter only when they have reasonable assurance that the Company will remain in profits by the year end;
(d) in this case, there was no reasonable assurance that the Company would remain in profits by year end as the pattern of its previous few years financial statements reflects that the Company earns profits in first two quarters and then suffers losses in the third and fourth quarter and ends up with net losses;
(e) the Company had a history of losses and its accumulated losses stood at Rs.90.911- million as at June 30, 2006;
(f) it is pertinent to mention here that the show cause notice issued by KSE was not merely for non- declaration of dividend but in fact the SCN was issued for following three defaults:--
(i) failure to declare dividend and/or bonus shares for five years and accordingly the company is liable for action under Regulation No.32 (1) (b);
(ii) failure to pay the requisite annual listing fees as required under Listing Regulation No.34 (3), amounting to Rs.260,000 for the period from 1-7-2000 to 30-6-2006 and accordingly the company is liable for action under Regulation No.32 (1) (e);
(iii) failure to join CDC of Pakistan and accordingly the company is liable for action Regulation No.32 (1) (ff);
(g) the judgment referred by the Company titled Data Textiles Limited v. Karachi Stock Exchange: 1999 M LD 108(a), has been read and it has been observed that the provisions of section 249 of the Ordinance would prevail over the listing regulations and Ordinance XVII of 1969 or the Regulation framed thereunder, do not compel a company to pay dividend if it is not making profits;
(h) Provision of subsection (4) of section 196 of the Ordinance while defining the penalty for contravention of any provision of this Ordinance clearly provides that the directors shall be individually and severally liable for losses or damages arising out of their action. This gives a clear indication that the law requires the directors to be extra conscious and calculative while exercising any of the powers given to them under the said provisions of the Ordinance;
(i) Regulation 64 of the First Schedule to the Ordinance clearly provides that the directors may from time to time pay to the members such interim dividends as appear to the directors to be justified by the profits of the company. Whereas, Regulation 65 states that no dividend shall be paid otherwise than out of profits of the year or any other undistributed profits. Regulation 66 clearly provides that the Directors may, before recommending any dividend, set aside out of the profits of the company such sums as they think proper as a reserve or reserves which shall, at the discretion of the directors, be applicable for meeting contingencies, or for equalizing dividends, or for any other purpose to which the profits of the company may be properly applied, and pending such application may, at the like discretion either be employed in the business of company or be invested in such investments (other than shares of the company) as the directors may, subject to the provisions of the Ordinance, from time to time think fit.
10. I have given due consideration to the relevant provisions of the law and after taking care of all the facts, I am of the considered opinion that the Company has violated the mandatory provisions of law. The decision of Board of Directors to declare interim dividend was not prudent. It is the fundamental responsibility of board of directors to comply with the statutory requirements of law while managing the affairs of the Company. The auditor has also expressed qualified opinion in the audit report dated October 10, 2006 and has drawn attention toward the contravention of the provisions of section 249 of the Ordinance. However, the decision of the Company was in favour of minority shareholders of the Company who have stuck their money in the Company for so many years without any return and ultimately they have been paid some return on their investments.
11. From the above discussion, submissions of the Company and submissions of the legal counsel, I am of the considered view that the provisions of. Section 249 of the Ordinance have been violated.
However, keeping in view the circumstances of the case and the fact that the dividend has been paid to minority share-holders only and the Directors had forgone their share of dividend, I am taking a lenient view and instead of imposing any penalty on the directors hereby warn all the directors including Chief Executive of the Company and advise them to be very careful in future while complying with the mandatory provisions of law.