1. ' SAJJAD ALI SHAH, J.---4, 5 and 6.Through application listed at serial No,4, plaintiffs seek an order restraining the defendants from incurring any further amount by way of capital expenditure on the ground that huge sums of money belonging to the shareholders are being fraudulently siphoned off by the defendants in the garb of capital expenditure, whereas through listed application at serial No,5, the defendants seek discharge of ex parte interim order dated 27-3-2009 passed on the application listed at serial No,4, whereby the defendants were restrained from incurring further amount towards capital expenditure. Likewise through application listed at serial No,6, plaintiffs seek appointment of an independent Chartered Accountant to carry out forensic/investigative audit to find out siphoning off of the Company's money in the garb of capital expenditure. Since all applications are interlinked therefore, are taken up together.
2. ' Mr. Khalid Jawed Khan, learned counsel for the plaintiff has contended that the plaintiffs collectively represent about 38% shareholding of the defendant No,1 Company and have four Directors on the board, whereas defendant No,2 'represents 40% of the shareholding supported by additional 12% manages and controls the Company by having six Directors on the board. Per learned counsel though the shareholding represented by the plaintiff, was acquired in the year, 2004 and such shareholding was being represented on the board but in July, 2008, plaintiffs were elected as Directors, beside the plaintiff No,1 was elected as Chairman of audit committee of the Company. The plaintiffs after such appointment in order to maintain good relationship with the management headed by defendant No,2 and assuming that all acts were being done in accordance with law and in the best interest of the shareholder participated in various meetings and approved various agenda items as well as accounts. The dispute started when the plaintiff No,1 who by profession is Chartered Accountant and Heads the audit committee sought some information and came to know that despite lapse of half of the financial year the Company had no approved budget and the information sought though in view of SAP system installed were readily available but were not provided to the plaintiffs. Per learned counsel it was being done with a view to keep the plaintiffs away from the management as without such information the plaintiffs could hardly participate in the decisions of the board and were to rectify everything done by the management without asking any question. However, since the requests and objections raised by the plaintiffs prevented the defendants to run a public limited Company like a proprietary concern they inter alia started distorting and manipulating minutes, giving rise to filing of the instant suit and this Court directed the recording of minutes on a recorder. Per Mr. Khalid Jawed Khan, during this period it further transpired upon examining the audited accounts that the defendants since 2002-2003 till December 31, 2008 have purportedly spent a sum of Rs,687 millions by way of capital expenditure but such expenses did not yield corresponding profit. It was pointed out that the profit before tax in the year, 2002-2003 was Rs,54,016,000 and after spending such a huge amount on capital expenditure the earning for the year, 20072008 was only Rs,54,790,000 which reflects that after spending Rs,687 millions by way of capital expenditure the profit could not be increased even by one Million. Mr. Khan referred to a statement extracted from the Company's annual report which reflects the amount spent by way of capital expenditure and the Profit earned.
3. Year Capital Expenditure incurredProfit 2002-2003Rs.83,151,000 Rs.54,016,000 2003-2004 Rs.113,421,000 Rs.63,126,000 2004-2005 Rs.109,028,000 Rs.78,001,000 2005-2006 Rs.74,946,000 Rs. 12,556,000 2006-2007 Rs. 30, 273, 000 Rs. 38, 463,000 2007-2008 Rs.261,861,000 Rs.54,790,000 July to December 2008 Rs.15,063,000 Rs.6,942,000 ' Per learned counsel the financial position of the company for the last six years would reflect that the investment in the capital expenditure have not yielded corresponding profit and since the plaintiffs have not been provided necessary information to determine the cause for such anomaly, therefore, it could either be siphoning off the Company funds or mismanagement, which could only be ascertained upon appointment of an independent Chartered Accountant to carry out forensic/investigative audit as the internal and external audit of the Company carried out by the Chartered Accountant does not serve the purpose as they are based on the data and information exclusively supplied by the management and till then the defendant No,1 be' restrained from spending any further amount on account of capital expenditure.
4. ' On the other hand, Mr. Sajid Zahid, learned counsel for the defendants, has vehemently denied all the assertions and allegations and contended that the plaintiffs are being represented on the board of directors since April, 2004 and the plaintiff No,2 i,e, Mr. Jahangir Siddiqui after failure of his scheme to surreptitiously take over defendant No,1 got himself elected as a director in the year, 2008, however throughout he was involved in the management of the Company and was invited in various meetings even before becoming a director. Mr. Sajid referred to various documents to show that the plaintiff No,2 in the year, 2006 visited many places representing defendant No,1 as advisor. It was further contended that the plaintiff being a blue-chip Company has been earning profit and announcing dividends for the last over 40 years and even the American Petroleum Institute in recognition of defendant's excellence permitted the use of its monogram. The plaintiffs themselves in their annual publication acknowledged the implementation of SAP, a state of the art enterprise resource planning system by the defendant No,1 into its business process structure.
5. Learned counsel by further referring to Director's report argued that the key decisions including approval of accounts with capital expenditure were unanimously approved by the Board including the plaintiffs and such approval was on the recommendation of audit committee headed by one of the plaintiffs. The annual report of the Company for the year, 2008 was further referred to show that the profit for that year was 7.1% higher than the previous year with a dividend of Rs,4 per share and that the Code of Corporate Governance was duly observed. Mr. Sajid further referred to minute of meetings of Board of Directors right from the years, 2002-2003 to 2007-2008 to demonstrate that the investment budget was duly approved by the Board unanimously. He further pointed out that in the year, 2004 the Chief Executive Officer proposed the reduction of capital expenditure but the Board of Directors in view of the vast opportunities available advised him not to curtail capital expenditure. Learned counsel further referred to the minutes of the meetings of Board of Directors held on 27-10-2008 to show that the capital expenditures for the quarter, July to September, 2008, were 1 retrospectively approved by the Board on 27-10-2008. In order to justify spending of such huge amounts on capital expenditures it was submitted that a new factory at Sunder Industrial Estate near Lahore was being set up by the defendant No,1, which has commenced operation since November, 2007. He further referred to resolution for approval of revised budget for the year, 2008- 2009 passed by majority though dissented by ,the plaintiffs. The summary of properties owned by the defendant No,1 was further referred to show that the book value of the fixed assets has been increased by 1624 per cent i,e, from Rs,88,309,000 to Rs,1,433,935,260.
6. ' It was further contended that neither internal not external auditors have raised any objection of like nature though auditors under section 255(4) of the Companies Ordinance, 1984 have powers to conduct forensic audit if and when found necessary and any officer of the Company, who refuses to provide any information asked for by the auditor, under section 255(7) is liable to be penalized. As to providing of information to the plaintiffs it was contended that the plaintiffs under section 230(4) have a statutory right to examine the books of accounts during business hours as reiterated in the case of Mst. Khurshid Ismail v. Unichem Corp. (Pvt.) Limited, 1996 CLC 1863 and it is not the case of the plaintiffs that the books of accounts etc. Are not available. It was further contended that there is no statutory obligation for conducting forensic audit and such audit can only be directed once the fraud is disclosed or some cogent basis for its being suspected, as the Courts ordinarily do not interfere in the internal management of the Company. Mr. Sajid Zahid by placing reliance on the case of Mahendra Singh Mewar v. Lake Palace Hotels and Motels (Ltd.) 1999 Company Cases (Volume 96), Page 1999, has contended that in similar circumstances where the allegations of low profitability and inflated expenses were levelled special audit was declined on the ground that all information's were available to the petitioner as a member of the Company and the petitioner had full liberty to discuss the same in the internal forum. Mr. Sajid by further placing reliance on the case of Messrs Dadabhoy Cement Industries Ltd. v. NDFC PLD 2002 SC 500 and Ghulam Ghous v. Muhammad Yasin 2009 SCM R 70 contended that mere allegations of fraud not supported by any material would not warrant inquiry or investigation, and prayed for dismissal of both the applications.
7. ' In response Mr. Khalid Jawed Khan has contended that since it is the statutory obligation of the defendants to manage the Company in accordance with law and in the best interest of the shareholders therefore, previous non-objection on the part of the plaintiff neither bar them from raising the objection as to fraudulent siphoning off the money in the garb of capital expenditures nor absolves the defendants from their statutory obligation of managing the Company in the best interest of the shareholders as there cannot be any waiver or estoppel against a statutory obligation. In support of his contention learned counsel has placed reliance on the judgment of the apex Court in the case of Islamic Republic of Pakistan v. Israr-ul-Haq PLD 1981 SC 531 and Jam Pari v. Muhammad Abdullah 1992 SCM R 786. Mr. Khan while placing reliance on the judgment of this Court in the case of Karachi Pipelines Limited v. Government of Sindh 1992 CLC 1668 contended that the question of lack of profitability and siphoning off are not examined by the internal Auditor or external auditors and can only be directed by the Court. In response to the allegation that the plaintiffs intend a hostile taking over of defendant No,1, it was contended that the plaintiffs never ever intended a hostile takeover nor ever attempted in such directions and the allegation has been levelled only to divert the attention of this Court from the core issue. As to increase in the fixed assets of the Company by 1624% it was submitted that such increase was because of general like in the value of real estate and nothing else.
8. ' I have heard the learned counsel for the respective parties and perused the record as well as the case-law cited at bar.
9. The question involved in the instant application appears to be two fold, firstly, as to whether in the circumstances non yielding of profits by the Company corresponding to the investment can be termed as siphoning off the Company funds by the directors in command justifying interference by the A Court in the internal affairs of the Company, and secondly, as to whether the plaintiffs after having approved the budget and annual accounts containing such capital expenditures have waived their right to object.
10. ' In support of first plea the plaintiffs who represent thirty eight per cent 38% of the shareholding of defendant company and have four directors on board have placed on record a comparative statement prepared from the figures picked up from the Company's annual report reflecting year- wise amounts ' spent by way of capital expenditure and the profit earned. The statement though not admitted by the defendant but has not been seriously disputed by placing on record a counter statement or by challenging the figures therein. A perusal of the statement so placed on record supports the plea to the extent that the capital expenditure incurred by the Company for the last six years are not reflecting corresponding increase in the profits, as in some years despite incurring huge capital expenditure the Company could not even achieve profit equal to the previous years.
11. In response the defendants have placed on record documentary evidence to show that all capital expenditures so incurred up to September, 2008 were unanimously approved by the Board of Directors including the plaintiffs and in order to justify the capital expenditure so incurred the defendants have asserted setting up of a new factory at Sunder Industrial Estate, Lahore, which, per defendants has commenced its operation since November, 2007 and such assertion has not been disputed by the plaintiffs. It is further important to note that the plaintiffs have not questioned the capital expenditure so incurred nor have imputed siphoning off the Company's fund under the garb of capital expenditure in the main suit, nor have produced documentary evidence of a solitary example to show that the expenditure so incurred do not reflect the actual purchase/expenses, though one of the plaintiffs is not only a Chartered Accountant by profession but also heads the audit committee. Even otherwise, the allegation of siphoning off the Company's fund amounts to imputing fraud upon the directors in command and would not warrant inquiry or investigation on bald allegations unless supported by documentary evidence or instances of fraud i,e, siphoning off the Company's funds under the garb of capital expenditures are detailed.
12. ' In the circumstances, I am of the view that directing forensic audit would not only amount to fishing inquiry but would be against the basic principle relating to the administration of the affairs of the Company that, the Court does not generally intervene at the instance of the shareholders in internal administration of the Company and would not interfere with the management of the Company by its directors so long they are acting within the powers conferred on them under the Articles of the Company. However, the principle is subject to an important exception i,e, the powers so vested in them must have been exercised honestly, in good faith and in the best interest of the shareholders.
13. The powers of the Directors as envisaged under section 196 'of the Companies Ordinance, 1984 (hereinafter referred to as "said Ordinance") subject to the restrictions as contained in the "said Ordinance", and in the Articles of Company are coextensive with those of the Company itself. Once elected and in control, the directors have almost all the powers over operation of the Company, until they are removed. However, such powers are subject to two limitations. Firstly, the Board is not competent to do what the "said Ordinance", Articles or special resolution, requires to be done by the shareholder in general meeting and, secondly, in the exercise of their powers the directors are subject to the provisions of the "said Ordinance". Articles and other regulations not inconsistent therewith made by the Company in general meeting. However, while, exercising such powers, every Director of the Company is expected to discharge the duties of his office honestly, in good faith and in the best interest of the Company and is bound to exercise that degree of case, diligence and skill which a reasonable prudent man would exercise in his own affairs in comparable circumstances.
14. Since, as discussed above, only those acts of the Directors are immune from the judicial scrutiny which are within the sphere of their powers and are performed honestly, in good faith and in the best interest of the Company, therefore, in case the plaintiffs place on record any material to prove contrary then despite the fact that they may have approved the budget or the annual account containing capital expenditure an investigation as sought can very well be directed for the simple reason that there cannot be a waiver of rights unless relinquished intentionally or estoppels against fraudulent acts or breach of statutory obligation.
15. As to the allegations of the plaintiffs directors regarding non supply of information/details of capital expenditures by the directors in command and incurring them without taking the plaintiffs directors into confidence. The defendants in response have denied the non-supply of any information or keeping the detail of capital expenditure to the exclusion of the plaintiffs but have pleaded that since the defendant No,1 being a Company with a turnover of Rupees two billions cannot practically halt every expenditure until a formal board meeting is convened and a resolution passed thereon, consequently, all capital expenditure are incurred by the management under the directions of Chief Executive Officer and subsequently approved by the board when the directors are scheduled to meet, at least once every quarter. Taking up the first part of the controversy, since the law does not draw any distinction between the powers of the directors, and it is only the rule of Majority which empowers one set of the directors to manage the affairs of the Company and renders the other powerless, therefore, the directors who are not in command under the law have all the rights to participate in the meetings of the company and to contribute in its wellbeing by giving their views/expert opinion and, as envisaged under subsection (4) of section 230 of "said Ordinance" are entitled to an access to the record of the Company exactly in the manner as the directors in command. The law, in order to secure such right as provided in subsection (7) of section 230 of "said Ordinance" directs imposition of penalty on every director, Chief Executive Officer and Chief Accountant who knowingly fails to maintain such books or papers or place them open for inspection by the Directors during business hours. Since there is nothing on record to show that the plaintiffs had ever invoked the provision of subsection (7) of section 230 of "said Ordinance" nor have placed before this Court any documentary evidence to demonstrate the agitation of such grievance, through any other mode, therefore, the demand of forensic audit despite demonstrating the enormous increase in capital expenditure without proportionate increase in profit appears to be premature.
16. So far as the second portion of controversy is concerned, clause (i) of subsection (2), of section 196 of "said Ordinance" requires a resolution of the Board of Directors for incurring capital expenditure, therefore, in my view getting ex-post facto sanction of the Board of Directors for the capital expenditure already incurred at the instance of the. Chief Executive Officer of the Company not only appears to be against the intent of law but also amounts to "One Man Rule" depriving the Company from the expertise of the Directors on Board. It is true that the Chief Executive Officer of a Company is always backed by the majority of the Directors and all of his actions are approved as and when placed before the Board. It is also true that even if the approval of Board is obtained in terms of section 196 of "said Ordinance", i,e, before incurring such expenses, the result may not be different as the best available advice of a Director(s) may be bulldozed by the "Rule of Majority" and there is nothing much which can be done about it. The practice of incurring capital expenditure as pleaded by the defendants also appears to be against the "Rule of Transparency" and deprives a Director from his statutory right to contribute by participating in a meaningful meeting resolving to undertake such expenditures. The capital expenditure admittedly are to be incurred on plant, machinery, equipment, free hold land, building, furniture and fixture, vehicles etc. And from their very nature, they do not appear to be of imminent peril requiring instinctive action incapable of deliberate and intelligent action.
17. ' In view of what has been discussed above, all the three applications are dismissed two being premature and the third one listed at serial No,5 being infructuous. The defendant No,1 would be at liberty to incur capital expenditures in terms of section 196 of the "said Ordinance" after obtaining approval from its board of directors in a meaningful meeting describing the purpose on which they are to be incurred with full justification and the benefits which are likely to be accrued therefrom.