The case before me pertains to the proceedings initiated against all the directors including the Chief Executive of Bawanyair Products Limited ("the Company") under provisions of Section 229 of the Companies Ordinance, 1984 (the "Ordinance") for violating the provisions of Section 227 of the Ordinance.
2. The facts leading to this case, briefly stated, are that examination of annual audited accounts (the "accounts") of the Company for the year ended June 30, 2006 revealed that an amount of Rs.1,885,430 (2005: Rs.382,125) is payable to Provident Fund Trust by the Company. It was further noted from note 25 to the accounts that an amount of Rs 137,523 (2005: Rs.11,226) was paid as interest to the provident fund trust for use of the aforesaid amount. In view of these facts, it was considered necessary to ascertain the extent of violation committed by the Company therefore, a show cause notice under the provisions of Section 227 read with Sections 229 and 476 of the Ordinance dated September 12, 2007 was issued to the following directors of the Company, who prima facie had authorized and permitted the contravention of the provisions of Section 227 of the Ordinance:
1. Mr. Hanif Y. Bawany, Managing Director /Chief Executive
2. Ms. Momiza Kapadia, Director
3. Mr. Vali Mohammad M. Yahya, Director
4. Mr. Danish Amin, Director
5. Mr. Wazir Ahmed Jogezai, Director
6. Mr. Zakaria A. Ghaffar, Director
7. Mr. Mohammad Ashraf, Director
3. Mr. Hanif Y. Bawany, Managing Director /Chief Executive of the Company responded the show cause notice vide letter dated September 18, 2007 on behalf of all the directors of the Company. It was submitted that the Company has always disbursed the amount to the provident fund trust within the stipulated timeframe of 15 days. That the Company is giving 12% p.a. interest on the outstanding balance whereas the provident fund trust is earning averaging 2% returns on its deposit in PLS account. It was further stated that the delay in payment of outstanding amount is due to the fact that Company is facing liquidity crunch as expansion project is in progress, which is to be commissioned in December 2007 and that the outstanding amount to the Provident Fund Trust along with interest will be disbursed by December 2007. At the end it was requested to condone the default.
4. In order to provide an opportunity of hearing the matter was finally fixed on November 6, 2007 in which Mr. Faisal Habib, Chief Financial Officer of the Company appeared as an authorized representative on behalf of all the directors. He reiterated the same arguments as were given in the written response besides admitting the default and requested for a lenient view. He also provided a certified copy of the extract of the meeting of the board of trustees of the provident fund in which it was resolved to invest the funds of the provident fund trust in the Company at mark up of 12% p.a.
5. Before proceeding further, it is necessary to advert to the provision of law, which has been violated by the directors of the Company. These provisions are contained in Section 227 of the Ordinance, which is reproduced as follows: "227. Employees' provident funds and securities:
(1) All moneys or securities deposited with a company by its employees in pursuance of their contracts of service with the company shall be kept or deposited by the company within fifteen days from the date of deposit in a special account to be opened by the company for the purpose in a scheduled bank or in the National Saving Schemes, and no portion thereof shall be utilized by the company except for the breach of the contract of service on the part of the employee as provided in the contract and after notice to the employee concerned.
(2) Where a provident fund has been constituted by a company for its employees or any class of its employees, all moneys contributed to such funds, whether by the company or by the employees, or received or accruing by way of interest profit or otherwise from the date of contribution, receipt or accrual, as the case may be, shall either
(a) be deposited
(i) in National Savings Scheme;
(ii) in a special account to be opened by the company for the purpose in a scheduled bank; or
(iii) where the company itself is a scheduled bank, in a special account to be opened by the company for the purpose either in itself or in any other scheduled bank; or
(b) be invested in Government securities.
(c) in bonds, redeemable capital, debt securities or instruments issued by the Pakistan Water and Power Development Authority and in listed securities subject to the conditions as may be prescribed by the Commission.
(3) Where a trust has been created by a company with respect to any provident fund referred to in sub-section (2), the company shall be bound to collect the contribution of the employees concerned and pay such contributions as well as its own contributions, if any, to the trustees within fifteen days from the date of collection, and thereupon, the obligations laid on the company by that sub-section shall devolve on the trustees and shall be discharged by them instead of the company."
6. The aforesaid provisions of the law are clear and unambiguous. The objective of these provisions is to keep the management away from utilizing any portion of the fund collected as contributions to a provident fund and to secure the amounts collected from the employees of the company for the benefits of the employees of the Company. The law requires that when a trust has been created by a company with respect to any provident fund, the company has an obligation to pay the contributions including its own contributions to the trustee within fifteen days from the date of collection. The amounts collected from the employees as contributions to a provident fund are in the nature of trust moneys in the hand of the company and the same must be paid to the trustees within stipulated time whereas the trustees are responsible to invest the moneys of the fund in accordance with the provisions of law. Therefore the arguments advanced by the directors that the moneys were not paid to the trust due to liquidity crunch is not tenable. The Company has also attempted to justify the above default by claiming that the interest paid to trust at the rate of 12% p.a. against the existing return of 2% earned by the provident fund trust. I believe that the spirit of law is to secure the hard earned money of the employees and securing of principle amount is more emphasized rather than attempting to earn a better return. It appears that payment towards the provident fund is not prioritized by the Company and instead was utilized as working capital in violation of the provisions of Section 227 of the Ordinance.
7. For the forgoing, I am of the view that the directors have failed to comply with the mandatory requirements of Section 227 of the Ordinance by not making timely payments to the provident fund trust. Breach of mandatory provisions of the Ordinance meant to earn better return for the funds of the employees cannot be encouraged. An action, therefore, is necessary under Section 229 of the Ordinance which provides that whosoever contravenes or authorizes or permits the contravention of any of the provisions of Section 227 shall be punished with a fine which may extend to five thousand rupees and shall also be liable to pay the loss suffered by the employees on account of such contravention. Considering that the default is admitted by the directors and has also assured that the balance amount shall be paid by December, 2007, I hereby, taking a lenient view of the default, instead of imposing a maximum fine on the Chief Executive and Directors of the Company impose a fine of Rs. 15,000/- (rupees fifteen thousand only), in aggregate, on all directors of the Company in the following manner: {{TABLE}} Amount of penalty in rupees Mr. Hanif Y. Bawany Chief Executive 3000 Ms. Momiza Kapadia Director 2000 Mr. Vali Mohammad M. Yahya Director 2000 Mr. Danish Amin Director 2000 Mr. Wazir Ahmed Jogezai Director 2000 Mr. Zakaria A. Ghaffar Director 2000 Mr. Mohammad Ashraf Director 2000 Total 15,000 {{TABLE}}
8. The Chief Executive and Directors of the Company are directed to deposit the aforesaid fine of Rs.15,000/- within thirty days of the receipt of this Order in the Commission's designated bank account with Habib Bank Limited and send a copy of the receipt vouchers to the Commission for information and record, failing which proceedings under the Land Revenue Act, 1967 will be initiated resulting attachment and sale of their movable and immovable property. It should also be noted that the said penalty is imposed on the Chief Executive and directors in their personal capacity therefore they are required to pay the same from their personal resources. I hereby also feel it necessary to issue a stern warning to the trustees to the provident fund to be careful in future and not to indulge in such transaction which is in violation of the law
9. Before parting with this Order, I in terms of the provisions of Section 473 of the Ordinance, direct the Chief Executive of the Company, to arrange for disbursement of the balance amount of the provident fund along with the interest due thereon by December 31, 2007 to the provident fund trust and submit a report to the Commission by January 15, 2008. A certificate from the statutory auditors may also be submitted in this regard.