' SHAMS MEHMOOD MIRZA, J.---This is a petition under section 152 of the Companies Ordinance, 1984 (the Companies Ordinance) seeking rectification of the register of members of Alka Power (Pvt.) Limited, respondent No,4 (the Company) on the ground that the petitioner was not served with a notice under section 86 of the Companies Ordinance prior to issuance of 250,000 shares by the Company. The primary issue that requires resolution by this Court is whether the petitioner was prohibited by Prudential Regulations for Modarbas (2004) for further investing in the shares of the Company.
2. Brief facts of the case are that the petitioner, which is a Modaraba, made an investment of Rs,6,40.0,000 in the Company by acquiring 80% of its shareholding. At the relevant time, the total paid up capital of the Company was Rs,10,000,000 divided into 100,000 shares of the nominal value of Rs,100 per share. The said shares were acquired by the petitioner from the then shareholders of the Company against the value of Rs,6,400,000. Out of the amount paid, a sum of Rs,0.4 Million was to be reverted as the investment made by the petitioner in the shares of the Company exceeded the permitted limit granted to the petitioner by the Registrar (Modaraba), Securities and Exchange Commission of Pakistan vide authorization letter dated April 16, 2009 for investing in the Company.
The petitioner also got appointed Arslan Khakwani and Dr. Sohaib Murad as directors on the Board of Directors of the Company. The petitioner further injected a sum of Rs,57,305,581 in the Company as advance against issuance of shares of the Company. In August 2010, the Board of Directors of the Company was changed and it also increased its authorized capital as well as paid up capital and, according to the contents of the Petition, subsequently issued 250,000 shares without any notice to the petitioner.
3. Pursuant to notices issued by this Court, the respondents entered appearance and filed their reply to the petition wherein the stance of the petitioner was controverted. It may be stated that initially, the Company was not made a party in the petition filed by the petitioner. A preliminary objection in this regard was taken by respondents Nos.1 and 2 in their reply whereafter permission was sought from the Court for filing of an amended memo of parties, which permission was granted on 3-4-2014. Consequently, an amended memo of parties was filed in the Court reflecting the Company as respondent No,4. Pursuant to the filing of the amended memo of parties, this Court issued notices to the Company on 8-5-2014. The petitioner also filed C.M. No,585 of 2014 for filing of an amended petition, which permission was granted on 20-10-2014. After the filing of the amended petition by the petitioner, reply thereto was jointly filed by respondents Nos.1, 2 and 4; who shall hereinafter be referred to as the "respondents".
4. It was stated by the petitioner's counsel that in the Annual General Meeting of the Company held on 30-10-2010, the paid up capital of the Company was enhanced by Rs,25,000,000 by issuing Rs,2,500,000 shares in sheer violation of law and the afore-mentioned nominee directors of the petitioner were also shown to have resigned. It was also stated that the allotment of the new shares of the. Company to respondents Nos.2 and 3 was illegal as the petitioner had the right of first refusal which it was not allowed to exercise more so when the petitioner had made an equity investment in the Company amounting to Rs,57,305,581 against the further issue of shares; that no notice/circular as mandated by section 86 of the Companies Ordinance was served on the petitioner prior to the issuance of shares and that the nominee directors of the petitioner were removed from the Board illegally and that respondents Nos. 1 and 2 were not even shareholders when they were appointed as directors.
5. Before proceeding further in the matter, it would be useful to lay down the necessary provisions of law that would have bearing on the decision of this case. The most important provision is section 503 of the Companies Ordinance, which insofar as it is relevant reads as under:--
503. Application of Ordinance to companies governed by special enactments.--
(1) The provisions of this Ordinance shall apply- (a).......
(b)......
(c) to modarba companies and modarbas, except in so far as the said provisions are inconsistent with the provisions of the Modarba Companies and Modarba (Floatation and Control) Ordinance, 1980 (XXXI of 1580); (d)..
' The Federal Government under section 41 the Modarba Companies and Modarba (Floatation and Control) Ordinance, 1980 (the Modarba Ordinance, 1980) is empowered to frame Rules for carrying out the purposes of the said Ordinance. In pursuance of the section 41, the Modarba Companies and Modarba Rules, 1981 (the Modarba Rules, 1981) were framed. Rule 3 of the Modarba Rules, 1981 states that there shall be a Registrar who in terms of sub-rule (15) thereof shall have the power to institute such inquiries or proceedings in respect of any matter as may be necessary to obtain information or evidence respecting defaults or any lapse, irregularity or infraction of the law by any modarba company or in relation to a modarba or any promoter, officer, employee, liquidator or receiver. The Registrar in terms of section 11 of the Modarba Ordinance, 1980 read with rule 3(2)(e) of the Modarba Rules, 1981 has framed Prudential Regulations for Modarbas (2004) (the Prudential Regulations).
6. The learned counsel for the respondents has placed on record the audited accounts of the petitioner for the years 2013 and 2014 which show that after the filing of the petition, the petitioner had transferred its interest in the Company (the equity investment of Rs,57,305,581) to one of its associated undertakings, Messrs Institute of Leadership and Management (ILM) vide Agreement to Sell dated December 29, 2012 against the consideration of ownership rights in the fifth floor of a library building of ILM situated at C-II, Johar Town, Lahore. This fact is further reinforced from the audited accounts for the year 2013 wherein investment of the petitioner in the Company is shown as nil. Note 10.1 in the audited accounts for the year 2013 reads as under:- "Additions during the year represents fifth floor of Library Building acquired in settlement of balance receivable from Dosslani Securities (Pvt.) Limited and investment in subsidiary (Alka Power (Pvt.)
Limited).
' Modarba entered into agreements with ILM (an associate undertaking) and Dosslani Securities (Pvt.) Limited dated December 29, 2012 after approval of the Board of Directors of the Management Company in their meeting held on December 7, 2012. Under the terms of these agreements the balance receivable of Rs,39,782,384 from Dosslani Securities (Pvt.) Limited ("musharaka receivables") of Rs,37,664,589 (note 5) and "accrued profit on musharaka finance" of Rs,2,117,795 (note 6) has been taken up by ILM and investment in subsidiary (Alka Power (Pvt.) Limited) of Rs,53,305,581 (note 12) has been transferred to ILM against consideration of ownership rights of fifth floor measuring 13,730 square feet of "Building" situated at C-II, Johar Town, Lahore at an aggregate price of Rs,97,087,965 as per agreement to sell. Transfer of title in favour of Modarba has been through sale deed dated June 17, 2013 executed at DCR value. Other costs incurred for the acquisition of the said property amounted to Rs,2,912,500."
' Notwithstanding the statement is the audited accounts of the petitioner, the respondents deny the exact figure and state that the petitioner did not advance any money against shares but made a loan to the Company for which accounts are required to be settled between the parties.
7. The respondents' counsel also drew the attention of this Court towards the Prudential Regulations to argue that the petitioner was not entitled to be allotted any more shares in the Company beyond the investment already made by it by acquiring 80000 shares. In this regard, Regulation 7(7) of the Prudential Regulations was cited which is reproduced hereunder:-
(7) Restrictions on certain types of transactions.--
(7) Modaraba may make investment in shares of un-listed companies subject to fulfillment of the following conditions:--
(i) total exposure in such companies does not exceed 5% of the modaraba's equity;
(ii) the directors of the modaraba company have no direct or indirect interest in the investee company; and
(iii) the investee company must have operational track record of three profitable consecutive years preceding the decision: ' Provided that where a modaraba is engaged in Venture Capital Financing as set out in its prospectus, this regulation may be waived on an application made to the Registrar,"
' It is apparent that any investment by a modaraba in an unlisted company cannot exceed 5% of the modaraba's equity. It is a common ground between the parties that any further issue of shares of the Company in favour of the petitioner would have certainly breached Regulation 7(7) of the Prudential Regulations. Similarly, as per the contention respondents' counsel, by virtue of Regulation 7(7)(ii), directors of the petitioner could not have any direct or indirect interest in the Company but the petitioner had inducted Arslan Khakwani and Dr. Hassan Sohaib Murad as directors on the Board of the Directors of the Company. Furthermore, according to the counsel for the respondents, the Company must have an operational track record of three profitable consecutive years, preceding the decision, which the Company did not have and still does not have.
8. Learned counsel for the petitioner in rebuttal submitted that the proviso to Regulation 7(7) show that the restrictions placed on the petitioner was not absolute and could be waived as it was engaged in the business of venture capital financing. It was argued that the expression "waiver" presupposes that in case a modarba exceeds the prescribed limit contained in Regulation 7(7), the Registrar may waive the rigors of Regulation 7(7) and that the discretion rests with the Registrar.
The argument is misplaced as the petitioner by virtue of the clear language of Regulation 7(7) had to first move an application before the Registrar seeking waiver of the restriction placed on it and only when the permission was granted could the petitioner have become entitled to the issuance of further shares in the Company.
9. Learned counsel for the petitioner also submitted that the Prudential Regulations for Modarbas was in the nature of sub-delegated legislation which could not override the express provisions of section 86 of the Companies Ordinance. Section 86 of the Companies Ordinance reads as under.
"86. Further issue of capital.-
(1) Where the directors decide to increase the capital of the company by the issue of further shares, such shares shall be offered to the members in proportion to the existing shares held by each member, irrespective of class, and such offer shall be made by notice specifying the number of shares to which the member is entitled, and limiting a time within which the offer, if not accepted, will be deemed to be declined: ' Provided that the Federal Government may, on an application made by any public company on the basis of a special resolution passed by it, allow such company to raise its further capital without issue of right shares: ' Provided further that a public company may reserve a certain percentage of further issue of its employees under "Employees Stock Option Scheme" to be approved by the Commission in accordance with the rules made under this Ordinance.
(2) The offer of new shares shall be strictly in proportion to the number of existing shares held: ' Provided that fractional shares shall not be offered and all fractions less than a share shall be consolidated and disposed of by the company and the proceeds from such disposition shall be paid to such of the entitled shareholders as may have accepted such offer.
(3) The offer of new shares shall be accompanied by a circular duly signed by the directors or an officer of the company authorized by them in this behalf in the form prescribed by the Commission containing material information about the affairs of the company, latest statement of the accounts and setting forth necessity for issue of further capital.
(4) A copy of the circular referred to in subsection (3) duly signed by the directors or an officer authorized as aforesaid shall be filed with the registrar before the circular is sent to the shareholders.
(5) The circular referred to in subsection (3) shall specify a date by which the offer, if not accepted, will be deemed to be declined.
(6) Omitted by Finance Act, 1995.
(7) If the whole or any part of the shares offered under subsection (1) is declined or is not subscribed, the directors may allot and issue such shares in such manner as they may deem fit."
' From the examination of the documents available on record, it is evident that on February 16, 2009, the petitioner wrote to the Registrar (Modarba), SECP showing its intention to acquire 80% shareholding of the Company and sought approval for investment of an amount equivalent to USD 2.7 Million in the equity of the Company to implement the hydropower projects undertaken by it.
SECP through its letter No,SC/M/RW/IBL/2009-95 dated 11-3-2009 noted that the investment sought by the petitioner is not covered under Regulation 7(7) of the Prudential Regulations. The petitioner dispatched another letter on 16-3-2009 with the proposed plan for injection of equity. However, SECP vide its authorization letter No,SC/M/RW/IBL/2009-171 dated 16-4-2009 only allowed for the acquisition of 80% shareholding of the Company and asked the petitioner to keep it in line with the requirements of Regulation 7(7). However, notwithstanding the instructions contained in the afore- mentioned letter and the prohibition contained in Regulation 7(7), the petitioner allegedly made further investments in the Company. Upon noticing the increase in petitioner's investment in the Company, SECP served a show cause Notice No,SC/M/IHM/FIBL/2011/179 dated 20-5-2011 on the petitioner under Sections 19 and 20 of the Modaraba Ordinance, 1980 asking it to explain as to why it chose to increase its equity in the Company beyond the authorized limit of Rs,6 Million. The petitioner admitted in its audited accounts for the year 2013 that the amount of investment in the Company exceeded the approved amount. In this regard, Note 12.1 of the audited accounts for the year 2013 is reproduced hereunder: "Previous year's balance represented equity investment in the ordinary shares of Alka Power (Pvt.)
Limited and advance to Alka Power (Pvt.) Limited which was stated to be adjustable against further issue of shares of Rs,100 each at par. Modarba held 80% control over subsidiary through 80,000 shares of Rs,100 each, acquired at a cost of Rs,80 per share against the approval for investment of SECP for Rs,6.0 million. The amount of investment of previous year exceeded the approved amount by Rs,0.4 million. In the previous year the advance amount exceeded the exposure limit by Rs,4.710 million as required by Para 1 of Part II (A) of Prudential Regulations."
10. The submission made by the learned counsel for the petitioner regarding the Prudential Regulations being sub-delegated legislation has no substance. The petitioner being a modarba is regulated and bound by the provisions of Prudential Regulations and cannot take refuge behind section 86 of the Companies Ordinance. In the facts and circumstances of the case, the petitioner was under a legal disability by the Prudential Regulations from exercising its right of first refusal with respect to the further issuance of shares of the Company. The petitioner was not only not entitled to the shares of the Company at the time of their issuances in the year 2011 but that disentitlement would continue till such time it obtained necessary permission from the Registrar (Modarba) in the terms of the proviso to Regulation 7(7) of the Prudential Regulations. Were the petitioner to subscribe to the shares offered by the company, the same would have constituted violation of Regulation 7(7) of the Prudential Regulations. The entitlement of the petitioner to further shares in the Company was restricted by Regulation 7(7) and the said restriction could not be circumscribed by resorting to section 86 of the Ordinance, which provision to the extent of offering shares to the petitioner by virtue of section 503 of the Ordinance was even otherwise in. Conflict with Regulation 7(7) of the Prudential Regulations and thus rendered nugatory. The Company could not have overridden the prohibition contained in Regulation 7(7) by sending notice to the petitioner under section 86 of the Ordinance for issuance of further shares or in fact issuing it further shares.
Section 86 of the Companies Ordinance contemplates offering of shares to a member who is eligible in law to subscribe to the same, which the petitioner clearly was not in terms of Prudential Regulation No,7(7).
11. The Prudential Regulations have the force of law having been framed in pursuance of the Modarba Ordinance, 1980 and the Modarba Rules, 1981. In terms of section 503 of the Ordinance, the provisions of the Companies Ordinance have to yield to the provisions of the Modarba Ordinance to the extent of inconsistency. A fortiori, section 86 of the Ordinance shall be subject to the provisions of Modarba Rules and the Prudential Regulations framed thereunder. In case of conflict between the provisions of the Ordinance and the Prudential Regulations, the latter has to prevail by force of section 503 of the Companies Ordinance. The petitioner was thus prohibited by Regulation 7(7) from further investment in the shares of the Company. This Court cannot pass any order in favour of the petitioner which would result in violation of Regulation 7(7) of Prudential Regulations.
12. Notwithstanding the aforementioned position regarding prohibition placed on the petitioner from subscribing to further issue of shares, the learned counsel for the respondents stated that the due process was followed by the Company in issuance of further shares. In this regard, it was stated that the board of directors of the Company passed resolutions for the increase in share capital and notice dated 18-5-2011 was circulated in compliance with section 86 of the Companies Ordinance, which was duly served on the directors on the board. It is submitted that the meeting of the board was held on May 25, 2011 and the necessary board resolution was passed for the issuance of 150,000 shares of the Company. The board resolution of the Company has been appended with the reply which shows that the matter with regard to the issuance of shares to the petitioner was discussed as also the restriction placed on the petitioner by the Registrar/SECP. In the meantime, SECP intervened by issuing the show cause notice on 20-5-2011 to the petitioner. It is further stated that another notice dated 10-6-2011 was circulated by the then Company secretary on all the directors serving on the Board of the Company and that subsequently board resolution was passed on 17-6-2011 and the company secretary was authorized to complete the formalities for the issuance of another 100,000 shares. The board resolution for the said meeting is appended with the reply and shows that once again the matter with regard to the restrictions on the petitioner was discussed and it was decided that fresh issuance of shares cannot be offered to the petitioner. The reply filed by SECP shows that all the procedural formalities were complied with by the respondents in increasing the paid up capital of the Company and issuance of further shares.
13. It was further submitted that at the time of issuance of the shares in question, the registered and principal office of the Company and the principal place of business of the petitioner were both situated at Office No,14, First Floor, Park Lane Tower, 172 Tufail Road, Lahore Cant., Lahore. The learned counsel has drawn the attention of this Court towards the official letterhead of the petitioner on the correspondence available on the record to substantiate this point and to argue that the entire exercise of issuance of circulars under section 86(3) of the Companies Ordinance was in the knowledge of the management of the petitioner at all material times. It was also stated that being located in the same office, circulars dated May 25, 2011 and June 29, 2011 were served on and duly received by the petitioner on the dates of their respective issuance. The learned counsel for the petitioner controverted this factual position taken by the respondents. It is obvious that disputed questions of fact are involved in this case, which require recording of evidence, and cannot be decided in the summary proceedings before this Court under section 152 of the Companies Ordinance. In Khurshid Ahmad Khan and another v. Pak Cycle Manufacturing Company Limited, Shandara and others PLD 1987 Lahore 1, it was held that "The power vesting in Court under section 152, is to be exercised in cases where legal title in the applicant is clear, as in a complicated or doubtful case, summary jurisdiction ought not to be exercised."
' Similarly in Inayatullah Khan Niazi v. Additional Registrar of Companies and others 2007 CLD 334, the procedure before this Court was held not to be appropriate for resolving the disputed questions of fact.
"Therefore, I will refuse to entertain this petition under section 152 of the Companies Ordinance, 1984 till the time the aforesaid contentious issues between the parties stand resolved by a competent forum. It goes without saying that once these issues are settled by a competent forum the petitioner can always approach this Court for exercise of jurisdiction under section 152 of the Companies Ordinance, 1984. The proceedings intended by way of this application as said above, cannot culminate into a direction for rectification as prayed for without holding of a long drawn trial, which obviously is not possible in summary jurisdiction of this Court."
' Likewise, the Hon'ble Supreme Court in a judgment reported as Lahore Race Club through Secretary and others v. Raja Khushbakht-urRehman PLD 2008 SC 707 also weighed on this aspect of the matter and held that:-- "There can be no doubt that any question raised within the peripheral field of rectification, it is the High Court under section 152 alone which has the exclusive jurisdiction. However, the question raised does not rest here. In case any claim is based on some seriously disputed civil rights or title, denial of any transaction or any other basic facts which may be the foundation to claim a right to be a member and if the Court feels such claim does not constitute to be rectification but instead seeking adjudication of basic pillar some such facts falling outside the rectification, its discretion t9 send a party to seek his relief before Civil Court first for the adjudication of such facts, it cannot be taken away merely on account of that no such language is provided in the section. For instance, if under the garb of rectification one may lay claim of many such contentious issues for adjudication not falling under it, in other words, the Court under it has discretion to find whether the dispute raised are really for rectification or is of such a nature, unless decided first it would not come within the purview of rectification. A plain reading of the word "rectification" itself connotes some error, which has crept in requiring correction. Error would only mean everything as required under the law has been done yet by some mistake the name is either committed or wrongly recorded in register of the company."
' The jurisdiction vested in this Court under section 152 of the Companies Ordinance is liable to be exercised where legal title of the applicant is clear see Khurshid Ahmad Khan and another v. Pak Cycle Manufacturing Company Limited PLD 1987 Lahore 1. This is, however, not the case as is apparent from the facts noted above and the law on the subject.
14. It is obvious from the audited accounts of the petitioner that the investment of Rs,53,305,581 that the petitioner had in the Company was against the further issue of shares. The said investment was in conflict with Regulation 7(7) of the Prudential Regulations and perhaps for this reason was divested by the petitioner after the filing of the present petition. The main thrust of the argument by the petitioners' counsel was that the out of the fresh issue, shares corresponding to the amount of petitioner's entitlement ought to have been allocated to the petitioner when it had made investment in the Company for that very purpose. Once the investment made by the petitioner in the Company had been transferred in favour of a third party, there no longer remains any cause left with the petitioner to continue with the present proceedings.
15. As regards the resignations of the nominee directors of the petitioner on October 20, 2010, according to the learned counsel for the respondents, the same were made voluntarily at the insistence of the Registrar (Modaraba) pursuant to the hearing in the show cause proceedings on August 3, 2010. It was further stated, that the nominee directors could not remain on the Board of the Company in view of the prohibition contained in Regulation 7(7)(ii) of the Prudential Regulations. It was submitted that after the resignation of the nominee directors of the petitioner, respondents Nos. 1 and 2 replaced them as directors on the Board, and the same was duly communicated to the SECP through From 29 dated 28-7-2010 and 24-11-2010. The respondents have also appended the resignations of the nominee directors of the petitioner with their reply as annexures C/1 and C/2. It appears that the petitioner do not recognize the said resignations as valid. Be that as it may, the validity of the said resignations and the genuineness of the signatures of the nominee directors on their resignation letters is again an issue which cannot be inquired into by this Court in the summary procedure that it is bound to follow in terms of section 9 of the Companies Ordinance. It was also the case of the respondents that shares were validily and lawfully offered to respondents Nos.1 and 2 in accordance with section 187(h) and that the provisions of section 86(3) of the Companies Ordinance had been duly complied with while issuing the said shares. The original owner of 20,000 shares of the Company, namely General (R) Shujat Ali Bukharee, had sold his shares to the respondent No, 1 vide an Agreement to Sell dated 12-11-2010 and Transfer Deed dated November 12, 2010, which were annexed with the reply as annexures F/1 and F/2.
16. In view of the foregoing discussion, it is held that the petitioner was at the relevant time under a legal disability in terms of Prudential Regulation No,7(7) from subscribing to the further issue of shares of the Company and therefore the shares were rightly not offered to it. It is further held that section 86 of the Companies Ordinance by force of section 503 had to yield the restriction placed on the petitioner under Prudential Regulation No,7(7). The case raises disputed questions of fact, which cannot be resolved in the summary procedure to be followed by this Court. In the result, this petition fails and is accordingly dismissed with costs.