The case before me pertains to the proceedings initiated against M/S Frontier Sugar Mills and Distillery Limited ("Company") and its present directors under Sub-section (2) and (3) of Section 227 read with Section 229 and 476 of the Companies Ordinance, 1984 (the "Ordinance").
2. The facts leading to this case, briefly stated, are that it has been noticed from the examination of annual accounts of M/s Frontier Sugar Mills & Distillery Limited ("Company") for the year ended June 30, 2004 that an amount of Rs.183,784 is payable to Provident Fund Trust by the Company. The aforesaid liability is in excess of the monthly provident fund contribution.
3. The aforesaid review categorically identifies that the Company has withheld the funds and has not made payments to the Provident Fund Trust ("Fund") as required under the law. The Company has thus contravened the provisions of Section 227 of the Ordinance. In view of the facts and circumstances narrated before, it was considered necessary to ascertain the extent of violations committed by the Company and loss sustained in consequence of violations of Section 227 of the Ordinance.
4. Consequently, a show cause notice dated November 21, 2005 (the "SCN") was issued under Sub- sections (2) and (3) of Section 227 and 229 read with Section 476 of the Ordinance to the following persons, who prima facie had authorized and permitted the contravention of the provisions of Section 227 of the Ordinance: {{TABLE}}
1. Begum Zari Sarfraz, Chairman / CEO
2. Mr. Khan Aziz Sarfraz Khan, Director
3. Begum Laila Sarfraz, Director
4. Mr. Abbas Sarfraz Khan, Director
5. Mr. Iskandar M. Khan, Director
6. Mr. Abdul Qadar Khattak, Director
7. Mr. Nadja Sarfraz, Director
8. M/s Frontier Sugar Mills and Distillery Limited {{TABLE}}
5. In response to the Show cause notice, the representative of the Company submitted that Provident Fund amounting to Rs. 183,784 is an accrued expense, the provision for which was established for the year ended on September 30, 2004 and subsequently paid in October 2004. The representative of the Company requested to withdraw the notice.
6. The reply of the Company was irrelevant and unsatisfactory. Accrued expense is an expense incurred during an accounting period but not yet paid for. As represented by the Company, yes it is a liability, however it is not paid in accordance with statute i.e. within fifteen days from the date of collection.
7. Hearing in the matter was fixed on December 21, 2005. Mr. Muhammad Haroon, Advocate, Mr. Zubair Ahmed, Sr. Manager Accounts and Mr. Mojahid Bashir, Commercial Manager represented the case on behalf of the Company and its directors. The learned counsel submitted that An amount of Rs.61,459 is outstanding for the month of August 2004, which was hold by the Company for finalization of the accounts for the Financial Year ended on September 30, 2004 to reduce the maximum error in the provisions of the Company. An amount of Rs.34,012 is contribution from the Company for the month of September 30, 2004 and same like that the same amount of Rs. 34,012 is the contribution from staff respectively An amount of Rs. 54,300 has been deducted from the salaries of the staff against advance which they have received from provident fund. When the Company completed all the working of the provident fund then they have deposited an amount of Rs. 250,000 in the bank account of the fund.
8. Before proceeding further, it is necessary to advert to the provision of law, which has been violated by the Company, and its directors. These provisions are contained in Section 227 of the Ordinance and are, to the extent relevant, reproduced as follows: "227. Employees' provident funds and securities:
(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."
9. The aforesaid provisions of the law are clear and unambiguous. The objective of these provisions is to secure the amounts collected from the employees of the company as contributions to a Provident Fund for the benefits of the employees of the Company. The law requires that all moneys contributed by the employees as well as the company's contributions, if any, including the profit thereon must be deposited within fifteen days of the contributions shall be invested in securities referred to in Clause (a) to (c) of Sub-section (2) of Section 227 of the Ordinance. 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. In the latter case, the trustees are responsible to invest the moneys of the Provident Fund in accordance with the provisions of Law. 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.
10. I have given due consideration to the submissions of the directors as well as the arguments advanced by the representatives of the Company and Directors but none of them justified the default. The Company was not allowed to withhold the contributions for the month of August 2004 and deduction from salaries against the advances taken from the provident fund. The argument that funds were held by the Company for finalization of the accounts for the financial year ended on September 30, 2004 to reduce the maximum error in the provisions of the Company is not tenable. It appears that payment towards the Fund is not prioritized by the Company and it does not take compliance of the law seriously.
11. For the forgoing, I am of the view that the Company and its directors have breached the mandatory requirements of Section 227 of the Ordinance. The outstanding liability disclosed in the financial statement at the end of the year make it clear that the mandatory provisions of the law were breached. Breach of mandatory provisions of the Ordinance meant to secure the funds of the employees cannot be allowed. An action, therefore, is necessary under Section 229 of the Ordinance. However, considering that the default is rectified, I hereby, instead of imposing fine on the Company, its Chief Executive and Directors, only impose fine of Rs. 5,000 on the Chief Executive of the Company and reprimand all the Directors of the Company to remain careful in future in compliance with the mandatory statutory provisions.
12. The Chief Executive of the Company is hereby directed to deposit within thirty days of the date of receipt of this Order the aforesaid fines totaling to Rs.5,000 (Rupees Five thousands Only) in the Commission's designated bank account with Habib Bank Limited or pay by a DD/Pay order issued in the name of Commission and send a copy of the receipted vouchers to the Commission for information and record, failing which proceedings under the Land Revenue Act, 1967 will be initiated which may result in the 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 the Directors in their personal capacity; therefore, they are required to pay the said amounts from their personal resources.