ORDER This order shall dispose of the 1.3rooecd Iry initiated against the Company and the directors of the Haseeb INaclas Sugar Milk Limited (hereinafter referred to as the "Company") for default-, made in complying with provisions of Section 249 of the. Companies Ordinance, 1984 (the "Ordinance"). .The Company was incorporated as a public company limited by shares in the VertiT 1.992 The shares of the Company are listed on the Karachi and Lahore Stock Exchanges. The paid up share capital of the Company is. Rs.324 million divided into 32.4 million ordinary shares of Rs.10 each. The Company is principally engaged in the production and sale of refined sugar and its .By-products, lts mills are located in Sheik.Hupura. The Company has 1,457 shareholders comprising individuals, joint stock companies, insurance corporations, Financial institutions etc and as per pattern of shareholding annexed to the Directors' Report hi the Accounts for the year September 30, 2004, directors, their spouses and minor children hold 273.3% of the total shareholding which indicates that there is considerable public interest in the shares of the Company, The Board of Directors of the Company as per its annual report for the year ended September 30, 2004 comprises of the following persons: 1.
Mian Muhammad lly Mehraj, Chairman Mian Vilacia5Riaz, Chief Executive Mrs . Shahzaiii Ihra$, Director Mrs. Rano Metrirrii, Director Mrs. Zainab WaLias, Director Nisi. I'vfaiza Ria4 Director 7, liafiz.
Muhammad Irian Hussain Butt, Director 3. The fact leading to this case, briefly stated, are that from the examination cif annual account; of the Company for the rear ended September 30, 2003, it has 1L-en observed that the board of directors Has declared an interim dividend at the rate of 10% amounting to I. 32.4 million on the basis of interim results for the period From October 1, 2002 to December 31, 2002. It has further been observed that total profits earned by the Company for the year amounts Lo Rs.
27.116 million only and the interim dividend paid by the Company during its first .Quarter exceeded the total amount available at the year end by Rs. 5.284 million. It has been further observed that at the time the company had a history of Losses and accumulated losses of the Company stood at Rs, 71 million; 4_ The auditors of the Company Messrs Yousaf Sakem & Co, Chartered Acc:ottntartks in their report to the Members also qualified the above violation in the following terms:.
Quote Du ring the yvar the board of r rwe toys haw devlandi 21,1forinr dividend no, January 29, .2003 at i}1- 10% Jo) wren I 4' frg Rs 3 2r400,000 err the basis of tro te.Riat ivs ft its for the p4..Rioil Decemirer 31, 2002. Thi's Subsequerray lo 5hare1rolifer.4. Rrib' C.Rmothray arts ac'e' r rihiled 1469 alum' tfr R.c. 7/.002,126. This dr nif has invOi paid in con irareNtinn fDr S'ection 249 of the Companies On-km-Ince, 1984'.
5. Failure of the Company to comply with mandatory requirement necessitutthi action against the Genii party and the directors in terms of Section 249 read with Section 498 of the Ordinance. Accordingly, a show cause notice dated August 3, 2004 under the !Provisions of Sections 249 read with Section 498 of the Ordinance was. Served on the Company and its directors calling upon them to show cause and to explain as to why penalty may not be imposed for the contravention of the Section 249 of the Ordinance.
The Company responded to the aforesaid notice through their letter dated August 20, 2004 and informed that proceedings under Section 265 of the Ordinance were earlier initiated by the Commission on the grounds that performance of the Company was not satisfactory and it was not paying any dividend to its shareholderS. It was explained by the Company in respOnse to the aforesaid proceedings that its profitability would be improved as business conditions remained better as compared to previous years and on the basis of financial results the management would be able to announce the dividend. Consequently, considering the good results of the first quarter ended on December 31, 2002 and expecting the same leyeE of results in the remaining quarters, board Of directors declared the interim dividend on January 29, 2003. Unfortunately, the on going momentum could not he 5u.5tairted due to the decrease ire 'selling price which was out of control of the management and ultimately the 'rear was dosed belovy' the expvcted R!.5.1.1 e The ;itibrnissions of the Company were not found cogent and in order to provide an opportunity of personal hearing, the case was fixed for March 07, 2005 on which date Mr- Munawat Ali, General Manager Finance of the Company. Appeared on behalf of directors and the Compaity to plead the case.
In the written submissions as ,.)s during 1-Nearing of this case. It was contended that i. Dividend was announced to abate the pressure of Sec`uritic.S and Exchange Commission of Pakistan, which had issued a Show Cause Notice. Under Section 265 of the Ordinance to investigate the affairs of the Company. A nujur ground. On which the said show cause notice was issued, happened to he non-paynient of dividend to theshareholders and due to this stress, Companv declared dividend.
In Company's letter dated August 13, 2003, it was stated that the decision for payment of dividend was not prudent but implied only to satisfy the shareholders and 1Vglitai9rY authorities- iiL Company earned good profits during the first quarter. And foreseeing the same results in future announced interim dividends. However same level of profit could not be sustained in the subsequent quarters due to decision of Government to permit import of raw sugar during February/ March 2003- This decision efferted the production and also reduced the price of sugar and profits of the Company.
I have taken into consideration the submissions, made in writing as well as those at the time.Of hearing of this case arid am of the view that the grounds taken by the Company are not convincing and do not support the contravention of law due to the following reasons: The law and regulation governing dividend, show that declaration of dividends by the Company, in excess of available profits, is a violation of law: Section 249 of the Ordinance provides that; No divident shall be paid by a company otherwise than out of profits of the company Regulation 65 of Table A of first Schedule to the Ordinance also states that!
Quolo "No dividend shall be mii(i i,ormvise awn tacit f profits of the year or any other priifik" Unquote The submission that dividend hay been declared due to pressure Di Commission does not appears justified as the Commission has never desired any company to violate the mandatory provisions of law and as per the provisions of aforesaid laws the payment of interim dividend taut of capital was illegal.
Ii. The submission of the Company that sales and production of the subsequent periods were affected due to Government's decision to alErm imi.-Fort of raw sugar, has not been found correct.
Company was required to submit proof of such a decision taken by the Government. The docuinents and newspaper cuttings provided by the Company did not reflect any such de.ciNion of 'Government which should have affected the earlier optimistic forecasts of Company in the first quarter of 2003. The Company should not have declared interim dividend unless it was certain of the future profitability, principal/1/ when there was no Flion; of profits and had accumulated losses_ M9reoYer, quarterly accounts alSo showed FluctuationS and results did not tnurit declaration of interim dividend.
10. I have given due consideration to the relevant provisions Of the law governing payment of dividend and after taken care of all the facts, 1 am of the opinion that the Company has violated the mandatory provisions of Eaw and has acted against the interest of shareholder5 by paying dividend out of the capital of the Company. The decision of the` directors to declare interim dividend .Vas not prudent, as also acknowledged y the Company and the act caused loss of the capital to the Company_ It was the fundamental responsibility of the Company and its directors to comply with the statutory requirements in managing the affairs of the Company.. The payment of dividend out of capital of the company is uilra virus and a breach of fiduciary duty on the part of directors. The auditor have also expressed qualified opinion in the audit report and drawn attention toward contravention of Section 249 of the Ordinance [here are well known cases where payments were made out of capital and directors were held liable. In the English case of Towers 7_.r. African TugCompany Lt9041 Ch 904, where an interim dividend was paid and the annua] balance sheet showed that the pav mein had been made out of (qFital, it was held, that the payment of the dividend being an art arltrn cores, the directors "'Ore liabtc to replace the amount. In another Fnglish case, National Funds MS(M.11102 Company 1t8781 Ch. 118, it was held that the directors in making payments to shareholders out of capital, had acted uttra znn$ and COrninit a breach of trust and were therefore jointly and severally liable. To make good the amount of all such payments, L therefore, in exercise of powers conferred on me underSe.Ction 241 read with Section 498 of the Ordinance, impose a fine of Rs. 25,00f1 on each director and the Company total amounting to Rs. 200,000 in the following manner, 5, No. Name Penalty (Rupees)
1. Mian Muhammad. Ilyas Mehra] 25,000 .. 2- Mian 'agas Mai, 25,000 3. Mrs . Shah.Zoidi IIv as 25,000 4, Mrs. Ballo Mehra[ 25,000
5. Mrs. Zain,II., Watps 25,000 fie MsI. Mai7.a Riaz. 25,003 7.. i. IA fiz Mutiarrm-od irfan 1 tussain Butt 25,000 .8 MiS liaseeb Warps Sugar Mills Ltd 25,1,100 . . 200,000 Tula].
12. The Chief Executive and the directors of the Company are hereby directed to deposit, within 30 days of the date of receipt of this order, the aforesaid fines amounting to Rs, 200,000 (Rupees two hundred thousand only) in the Commission's designated bank accounts maintained with Habib Bank ltd or pay by a demand draft pay order issued in the name of the Commission and send copy of the receipt to the Commission for information and reecird, failing which proceedings under the Land Revenue Act, 1967 will be initiated which may result in the attachment and sale of moveable and immoveable property.
The payment of dividend out of capital of the company is term vires and a breach of fiduciary duty on the part of directors and it is necessary for me to issue directions for making good the loss of capita] of Rs. 5.2P4 sufferer 4.-1 by the Company due to imprudent decision of the [ direct the Company, to recover within 30 days of the date of this Order, the capital loss of ks. 5.234 million from the directors. In this regard, the Company shall Submit auditor.;' certificate after the payment of 4010w-it by the directors.
In ca: .e or non-compliance Of the above directive, the .Company and the directors shall be liable to action under Section 495 of the Ordinance, whic:h provides that: Where any. Directive is given or order is issued t.Ty the Court, the officer, the Commission, the registrar or the Federal Government under any provision of this Ordinance, non-compliance thereof within the period specified in such direction or order shall render every officer of the company or other person responsible for non- corn plianca thereof punishable, in addition to anv other Liability, with fine not exceeding fifty thousand rupdes 'and, in the ease of a continuing non-compliance, to a further fine not exceeding two thousand rupees for every day after the first during which such non- compliance continues. If non-comp]iance or failure continues alter conviction under sub-':iection (1), the officer or other person whO is a party to such nun-compliance or failure shall be liable to punishment with imprisonment which may extend to six months and fine not exceeding two thousand rupees for every day after the first during which such non- compliance continues, and shall further cease to hold office in the company and be disqualified front holding any office in any company for a period of five ye.Ars-