1. This order is in Appeal No, 23 of 2014 filed under section 33 of the Securities and Exchange Commission of Pakistan Act, 1997 by above stated Appellants against the order dated 03/04/2014 (the "Impugned Order") passed by the Respondent.
1. The brief facts of the case are that IBL Modaraba Management (Pvt.) Limited is the management company of First IBL Modaraba (the "Modaraba Company") and during off-site examination of the quarterly accounts of the Modaraba for the quarter ending 31/03/13, it was observed that in violation of section 496 of Companies Ordinance 1984 (the "Ordinance") the Modaraba Company has issued following guarantees to its client without any enabling provision of the prospectus therefore conducted ultra vires business: Name of Client Date of Issue Amount of Guarantee (PKR)
Din Sons 06-Mar-2013 20,796,552 Din Sons 06-Mar-2013 27,161,100
3. Show Cause Notice dated 06/01/14 ("SCN") was issued to the Appellants under section 496 read with section 503 of the Ordinance. Pursuant to the SCN, the Appellants submitted written comments, however, stance of Appellants was found to be unsatisfactory, therefore, penalty of fine of Rs,25,000/- on each of the Appellants was imposed by the Respondent vide Impugned Order dated 03/04/2014.
4. The Appellants have preferred the instant appeal against the Impugned Order. The Appellants argued that:
(a) sub-clause 4-1 of clause 6.3 of Part IV of the Prospectus grants the Modaraba Company the scope of any business for every possible source of generating income at as high a rate as possible within the scope of the Modaraba laws and rules etc. Sub-clause 4-1 of clause 6.3 of Part IV of the Prospectus provides that, " First IBL Modaraba (formerly Sanaullah Modaraba) would be guided by the consideration of paying high return through cash dividend and/or Bonus certificates to the shareholders and alio marking periodical additions to its capital structure as an incentive to the investors. The Modaraba would therefore look into every possible source of generating its income at as high a rate as possible, without risking its funds ". Further.. Point 2 of Part II of Prudential Regulations for Modarabas ("PRM") refers to the proposal for funded/nonfunded facilities to be considered by Modarabas; and
(b) the Prospectus of the Modabara does not specifically prohibit the undertaking/issuance of facilities of guarantees and as per general principle of law when anything is not prohibited specifically, it shall deem to be allowed. Further, the Respondent has ignored the regular compliance history of annual and quarterly accounts with the Registrar under section 14(2) of Modaraba Companies and Modarabas (Flotation and Control) Ordinance, 1980 (the "Modaraba Ordinance") read with Rules 8, 9 and 10 of Modaraba Companies and Modaraba Rules 1981 (the "Modoraba Rules") and certificate of compliance issued by the auditor wherein auditor has rendered its opinion regarding compliance with the objects of company. The Respondent had not raised any objection regarding the subject guarantees while conducting the inspection for the years 2011 and 2012 by enquiry officers appointed under section 21 of the Modaraba Ordinance. The order, therefore, is not maintainable because it has been passed without considering the material and references provided by the Appellants.
5. The department's representatives argued that:
(a) sub-clause 4(i) of clause 6.3 of Part-IV of the Prospectus of the , Modaraba Company does not grant the Appellants the scope of any business for every possible source of generating income at as high rate as possible, within the scope of the Modaraba laws and rules. The business to be undertaken by a Modaraba requires a certification from the Religious Board in terms of section 10 of the Modaraba Ordinance. Further, issuing guarantees is a full-fledged business and has not been allowed by the Religious Board to any Modaraba. Point No,2 of Part-H of PRM is subject to enabling provisions in the prospectus and not applicable in the absence of relevant objects in the object clause of the prospectus; and
(b) the Appellants are misconceived that Prospectus of the Modaraba does not specifically prohibit the undertaking/issuance of facilities of guarantees. Condition No, 2 of the Authorisation Certificate dated 19/10/1989 issued by the Registrar Modaraba for the floatation of the Modaraba specifically states that " the modaraba shall not undertake any business other than those specified in the prospectus. " The scope of business activities to be undertaken is limited to the extent of Prospectus in case of Modaraba and any business undertaken beyond the scope of prospectus or memorandum is ultra vires and is punishable under section 496 read with section 503 of the Ordinance.
6. We have heard the arguments. Sections 496, 503(1) of the Ordinance and section 10 of the Modaraba Ordinance are reproduced for ease of reference: ' Section 496 of Companies Ordinance 1984- Penalty for carrying on ultra vires business .- If any business or part of business carried on or any transaction made, by a company is ultra vires of the company, every person who acted as a director or officer of the company and is responsible for carrying on such business shall be liable to a fine not exceeding (five hundred] thousand rupees and shall also be personally liable for the liabilities and obligations arising out of such business or transaction.
'Section 503 of Companies Ordinance 1984- Application of Ordinance to companies governed by special enactments. - (1) The provisions of this Ordinance shall apply-
(c) to modaraba companies and modarabas, except in so far as the said provisions are inconsistent with the provisions of the Modaraba Companies and Modarabo (Floatation and Control ) Ordinance, 1980 (XXXI of 1980);
10. Business of modaraba.- No modaraba shall be a business which is opposed to the injunctio is of Islam and the Registrar shall not permit the floatation of a modaraba unless the Religious Board has certified in writing that the modaraba is not a business opposed to the injunctions of Islam.
Emphasis Added
(a) section 10 of the Modaraba Ordinance provides that no Modaraba shall be a business against Islamic injunctions and the Religious Board has to certify in writing that the modaraba is not a business opposed to the injunction of 'Islam before the Registrar can permit the floatation of such modaraba. We do not agree with the Appellant's contention that sub-clause 4(1) of clause 6.3 of Part-IV of the Prospectus grants the Modaraba Company the scope of any business as for every business undertaken by a Modaraba, a certification from the Religious Board in terms of section 10 of the Modaraba Ordinance is required. Moreover, we concur with the Respondent that issuance of guarantees is also a business which has not been allowed by the Religious Board. We have reviewed the guarantees provided by the Appellants and they cannot be said to have complied with the terms of section 10 of the Modaraba Ordinance as no certification in writing was obtained from either the Religious Board or any Shariah Scholar prior to issuance of the said guarantees. The Appellants, therefore, have undertaken ultra vires business by allowing the above guarantees in violation of section 496 of the Ordinance; and
(b) the Appellants have argued that the Prospectus does not specifically allow the business of issuance of guarantees, however, the fact that it does not expressly forbid it, therefore, it is deemed to be allowed. The Respondent has argued that it is specifically provided in Condition No,2 of the Authorisation Certificate dated 19/10/1989 that "the modaraba shall not undertake any business other than those specified in the prospectus." As stated in paragraph 6(a) above, we agree with the Respondent that since the issuance of guarantees was not specifically allowed through the Prospectus, it cannot be deemed to have been allowed and express approval from the Registrar in terms of section 10 of the Modaraba Ordinance was required.
In view of the foregoing, we are of the view that penalty was rightly imposed on the Appellants and we see no reason to interfere with the Impugned Order. The Appeal is dismissed with no order as to costs.