{{Under Sub-Section (5) of Section 235 read with Section 472 of the Companies Ordinance, 1984 and SRO 45/(I)/2003}} This Order shall dispose off the proceedings initiated against M/s. Frontier Ceramics Limited (hereinafter referred to as the "Company") and its Directors for default made in complying with the provisions of Section 235 of the Companies Ordinance, 1984 ("Ordinance").
2. The Company was incorporated as a public company limited by shares in the year 1982.
The shares of the Company are listed on Karachi and Lahore Stock Exchanges. The paid up capital of the Company is Rs. 77.412 million divided into 7.741 million ordinary shares of Rs. 10 each. The Company is principally engaged in the manufacture and sale of sanitary and related ceramics products. Its production facilities are located in Peshawar and it has 2,799 shareholders comprising of individuals, joint stock companies, private limited companies, insurance companies, financial institutions etc. There is considerable public interest in the Company. Board of Directors of the company as per its annual report for the year ended June 30, 2006 comprises of the following persons:
1. Mr. Hafiz Akhter Randawa, Chairman/ CEO
2. Mr. Javed Khalid, Director
3. Miss. Shazia Khalid, Director
4. Mr. Umar Khalid , Director
5. Mr. Zia Khalid, Director
6. Mr. Iftikhar Ahmed , Director
7. Mr. Noman Ghani, Director
3. The facts leading to this case, briefly stated, are that examination of the annual accounts of the Company for the year ended June 30, 2006 revealed that the depreciation charge amounting to Rs.10.437 million on revalued assets has not been taken to the Profit and Loss Account and has resulted in understatement of loss for the year by the above stated amount. Had this been charged, the loss for the year would have increased accordingly. Moreover, the company has failed to transfer an amount equal to incremental depreciation of Rs. 10.437 million for the year ended June 30, 2006 from "Surplus on Revaluation of Fixed Assets Account" to un-appropriated profit / accumulated loss through Statement of Changes in Equity to record realization of surplus to the extent of the incremental depreciation charge for the period.
4. Section 235 (4) of the Companies Ordinance, 1984 (the "Ordinance") laid down the following statutory requirements to be followed for the depreciation on the revalued assets: After revaluation as aforesaid, depreciation on the assets so revalued shall be provided with reference to the value assigned to such assets before revaluation and surplus on revaluation may be amortized according to life of the assets.
Moreover the Clause (1) of SRO 45/(I)/2003 (the "SRO") provides that: Depreciation on assets which are revalued shall be determined with reference to the value assigned to such assets on revaluation and depreciation charge for the period shall be taken to the Profit and Loss Account.
And Clause (2) of the said SRO also requires that: An amount equal to incremental depreciation for the period shall be transferred from "Surplus on Revaluation of Fixed Assets Account" to un-appropriated profit / accumulated loss through Statement of Changes in Equity to record realization of surplus to the extent of the incremental depreciation charge for the period.
5. The requirements of the above statutory provisions of law have not been complied by the Company and consequently a show cause notice u/s 235 read with Section 472 of the Ordinance and SRO SRO 45/(I)/2003 was issued on April 4,2007 to the Directors of the Company for not complying with mandatory requirement of the statute.
6. In response to the aforementioned show cause notice the Company admitted the default.
It was represented that the adverse situations and circumstances were faced by the new management while taking the control of the Company, which took the whole attention of the management and management could not give the enough attention to the various important issues. The Company requested that as this mistake was neither intentional nor was done in bad faith, the violation of the sub-section (5) of the section 235 the companies Ordinance, 1984 requiring for the penal charge should be disregarded. The management assured that the company would observe the required provisions of the laws in future and made following deliberations: Quote "a. Frontier Ceramics Limited was a closed and sick unit due to heavy losses and was under heavy debts of approximately 850 millions rupees of different financial institutions when new management took the control, till the time of control management is trying to resolve these long outstanding disputed bank liabilities through different forum and matter is currently pending before State Bank of Pakistan Committee for Revival of Sick Units (CRSIU) and Sindh High Court. On the other hand Pakistan Industrial Credit and Investment Corporation (PICIC) one of the of lending bank is continuously demanding over and above for their outstanding liabilities by virtue of a consent decree from Sindh High Court which they had acquired in the past from old management.
In this respect PICIC had tried to sell off the factory in the last year and still they have given an advertisement in the daily "Jang" for an open auction to be held on 28/04/2007. b. Factory labor is also giving us tough time and almost once in a month they are on the strike as their previous salaries, provident funds and other dues relating to the past were not paid by the previous management. c. Apart from the above there is long list of pending cases of Wapda, Sui Northern Gas, Sales Tax, Income Tax, Social Security and of Employees Old Age Benefit Funds who at different Forums/Courts are pressurizing us for the clearance of their outstanding. d. After the acquisition of the management we started the factory for 9 months and realized that due to the old technology of eighties per unit cost of finished product was approximately two and half time more. Since we have already invested more than 130 million in this sick unit so in order to recover our investment and provide living to the more than 300 employees we are going for a major BMR. We are importing Roller kiln and glazing lines from China after which this factory will lnshah Allah become a major contributor to the economy. e. The aforesaid facts are before you, which can be checked from any source under these circumstances management was dealing on one hand with banks, government authorities and other creditors while on the other we were trying vigorously to successfully run the operations of the factory. In these circumstances the management could not give due attention to the accounts and depreciation was charged as per provisions of International Accounting Standards 16 "Property Plant & Equipments" in the financial statements of the company and SRO 45(I)/2003 could not taken into consideration as this mistake was not intentional either to overstate or understate the profit and loss of the company as the company was already in the heavy losses."
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7. An opportunity of hearing was also provided to the Company, Mr. Naeemuddin, Company Secretary appeared on behalf of all the directors before the undersigned. He reiterated the facts already narrated in the response to the show cause and admitted the default committed by the Company. Moreover, he requested for a lenient view.
8. The arguments advanced by the representative of the Company have been analyzed, the plea of the Company that the management could not give due attention to the accounts and mistake was not intentional either to overstate or understate the profit and loss of the company as the company was already in the heavy losses is not a cogent reason. The financial statement for the year ended June 30, 2006 do not reflect true and fair view of the state of affairs of the Company and the loss reported by the Company is understated by an amount of Rs. 10.437 million.
9. The argument that the mistake was neither intentional nor done in bad faith is not based on the established principles of company law. The management of a company and all powers relating thereto are vested exclusively in the Board of Directors and the Board is therefore collectively responsible for that management unless the law expressly prescribes otherwise. This view is supported by decisions of the superior courts. In the case of Saraswati Printers Ltd. (1960) 30 Com Cases 523, it was held, "The directors of the company cannot be allowed to escape the performance of their duties under the Companies Act by the mere plea that they had no real control over the affairs of the company and therefore they did not willfully permit the default. It is their duty not to be mere passive spectators of what is going on but to see and make the necessary attempt that the statutory requirements are carried out, and where this has not been done, the courts can and would legitimately infer that the defaults though not expressly authorized were willfully permitted."
10. The aforesaid ruling is enough to reject the argument presented by the Company that default was not committed 'intentionally". Moreover, the plea of financial crises and staff problems is not a valid reason to justify the non compliance with the mandatory requirements of law. The Directors of the Company are required to comply with the requirements of law at all times during its existence.
The Directors, therefore, cannot evade the performance of their duties under the Companies Ordinance on a plea that their attentions were diverted towards other issues. The responsibility for presenting the true and fair financial statements rests with the directors of the Company.
11. On the basis of the above conclusion, I am of the view that the default under Section 235 of the Ordinance and SRO 45 (I)/ 2003 is willful and deliberate. However, since the management has assured the future compliance with the requirements of SRO 45 (I)/ 2003 and are in process of reviving a sick units, I, instead of imposing a maximum penalty of Rs.20,000 on each of the directors, impose a fine of Rs.10,000 on the Chief Executive of the company only, for the said default, as provided under Subsection (5) of Section 235 of the Ordinance. The other directors are reprimanded to be careful in future.
12. The Chief Executive and Directors are directed to follow the provisions of Section 235 of the Ordinance and SRO 45 (I) / 2003 in true letter and spirit. They are directed that financial statements of the Company for the year ended June 30, 2007 must incorporate the effect of changes of depreciation on revaluation of fixed assets retrospectively due to adoption of policy under Section 235 read with SRO 45 (I) / 2003.
13. The Chief Executive of the Company is hereby directed to deposit the aforesaid fine in the designated bank account maintained in the name of Securities and Exchange Commission of Pakistan with Habib Bank Limited or pay through a demand draft in the name of Securities and Exchange Commission of Pakistan within thirty days from the receipt of this or der and furnish receipted bank vouchers to the Commission, failing which proceedings for recovery of the fines as an arrears of land revenue will be initiated. It may also be noted that the said penalties are imposed on the Chief Executive in his personal capacity; therefore, he is required to pay the said amounts from his personal resources.