This is a case of violation of the provisions of Clause (b) of Sub-section (1) of Section 160 of the Companies Ordinance, 1984 (the "Ordinance"), which requires that a statement of material facts shall be annexed to the notice of the meeting where a special business is to be transacted.
2. In order to decide this matter, a brief narration of the background facts leading to the issue of show cause notice is necessary. The Enforcement and Monitoring Division of the Securities and Exchange Commission of Pakistan (the "Commission") has conducted an examination of the annual accounts of M/S Pakistan PVC Limited (the "Company) for the year ended June 30, 2001 received at the Commission under Sub-section (5) of Section 233 of the Ordinance and it was observed from the notice of 38th annual general meeting (AGM) to be held on December 31, 2001 that the Company has proposed to its shareholders for their consideration and approval, the disposal of of scrap of dismantled caustic soda plant. The agenda item in this regard contained in the aforesaid notice of meeting is reproduced hereunder for ease of reference: Quote "To consider the recommendation of the Board with regard for the disposal of Scrap of dismantled caustic soda plant at Gharo".
Unquote The above agenda item was included as "Ordinary Business" to be conducted in the annual general meeting and no statement as required under Sub-section (b) of Section 160 of the Ordinance was appended to the AGM notice. Considering the sale of the scrap of dismantled caustic soda plant as a "Special Business" and not ordinary one it was apprehended that the notice of the AGM, prima facie, was defective to the extent of aforesaid agenda item. It was, therefore, decided to take up this matter with the Company and its directors.
3. Consequently, a notice dated December 11, 2002 was issued to the directors and Chief Executive of the Company to show cause as to why action under Sub-section (8) of Section 160 of the Ordinance may not be taken for the violation of the mandatory requirements of the Ordinance.
4. The reply to the show cause notice was received from Mr. M. Naseem Malik, Nominee Director IDBP on December 26, 2002. No response was received from other directors within due time for which a reminder was issued to them on December 26, 2002. Mr. Reyaz Shaffi, the Chief Executive of the Company responded to the show cause notice vide his letter dated December 23, 2002. In order to provide an opportunity of personal hearing the case was fixed on February 03, 2003, which was adjourned at the request of Chief Executive Mr. Reyaz Shaffi and re-fixed on February 24, 2003 on the condition that in case of non-appearance the matter would be decided on its merit. No one appeared on the date of hearing instead the Chief Executive made another request of adjournment and fixation of the hearing at Karachi. This was refused as the directors were already given adequate opportunity to defend this case. In the circumstances, I proceed to decide this case on the basis of the submissions contained in reply to the show cause notices and the material available on record.
5. The contentions of Mr. Reyaz Shaffi, the Chief Executive of the Company can be summarized as follows: a) The Company had already informed its shareholders in 37th Annual General Meeting through Director's Report that due to earthquake the building of caustic soda plant was damaged and Company decided to dismantle the caustic soda plant to enable the management to remove the damaged building. In Director's Report for 38th Annual General Meeting it was stated that shareholders' approval was required for sale of the scrap of the plant after the plant was dismantled completely. b) As disclosed in the accounts for the year ended June 30, 2002, the assets sold are only 0.5% of the total assets of the Company and are not a sizeable part of the undertaking, therefore, the general body approval was not required. Moreover, the assets were sold after negotiations and all the transactions are verifiable. c) The Company has provided sufficient disclosures to shareholders in the Directors' Reports for year 2000 and 2001 for this matter where general body approval was not required.
6. On the basis of the aforesaid arguments, it was the contention of the Chief Executive that no approval was required from the general body for the sale and it was only sought as a precautionary measure. However, he agreed that the Statement under Clause (b) of Sub- Section
(1) of Section 160 was not attached with the notice due to omission and requested to condone the default, as it was not intentional.
7. Mr. Naseem Malik, Nominee director of IDBP in response to the show cause notice submitted that he was not the director at the time of 38th Annual General in which the above-mentioned resolution was proposed and passed. The matter was, therefore, taken up with the IDBP, which confirmed that Mr. Naseem Malik retired from the service on October 24, 2001 and ceased to be the nominee director of the Company from the said date.
8. Before proceeding further, it is necessary to look at the provisions of law, which deal with this issue. These are contained in Clause (b) of sub-section (1) of Section 160 of the Ordinance. These provisions, to the extent relevant, are reproduced hereunder: "Where any special business, that is to say business other than consideration of the accounts, balance sheets and the reports of the directors and auditors, the declaration of a dividend, the appointment and fixation of the remuneration of auditors, and the election or appointment of directors, is to be transacted at a general meeting, there shall be annexed to the notice of the meeting, a statement setting out all material facts concerning such business, including, in particular, the nature and the extend of the interest, if any therein of every director, whether directly or indirectly, and, where any item of business consists of the according of an approval to any document by the meeting, the time when and the place where the document may be inspected shall be specified in the statement."
9. The aforesaid provisions of law are quite clear and unambiguous and envisaged two kinds of business, which could be transacted at the general meetings that is to say, ordinary business and special business. Special business has been defined as business other than the following business:
(i) consideration of accounts, balance sheet and reports of directors and auditors;
(ii) the declaration of a dividend;
(iii) the appointment and fixation of remuneration of auditor;
(iv) the election or appointment of directors; The aforesaid business being of routine nature is, therefore, considered as ordinary business and all business other than the above four items is special business for which annexation of a statement of material facts is a statutory necessity. In view of the above discussion, the sale of scrap of dismantled caustic soda plant was a special business and the Company was required to follow the mandatory requirements in this regard. The argument of the Chief Executive that the approval of the general body was not required is not sustainable. If the notice of the meeting contains any special business, the mandatory requirements of Clause (b) of Sub-section (1) of section 160 of the Ordinance need to be strictly followed.
10. The objective of the annexation of statement of material facts is that all members of the Company must know as to what was the exact nature of the business to be transacted at the meeting so that they can make up their mind prior to attend the meeting considering the nature of the business from their point of view and to make a conscious decision by using their rights effectively. Material facts are those, which have a bearing on the business to be transacted and which could influence the decision of shareholders while voting on the proposed resolution. In the case in hand, there was a proposal for sale of scrap of dismantled caustic soda plant and its material facts such as reasons for disposal, the nature of assets, their book value, expected proceeds and their utilization, how and by whom the value of the property was assessed, the interest of directors in the disposal, how the disposal of property would be beneficial to the company and its shareholders etc., etc., were required to be intimated to the shareholders through a statement to be attached with the notice of the meeting. These facts would have enabled the shareholders to take a decision to attend the meeting and to vote upon this business. The notice of meeting, therefore, did not comply with the provisions of Section 160 as it failed to give the aforesaid information to the members.
11. In view of the above discussion and after considering all the facts and circumstances of this case, I have come to the conclusion that the contentions of the Company do not carry any merit.
The argument of Chief Executive that sufficient disclosure has been made in director's report for sale of assets does not relieve the Company from following the requirements of Clause (b) of Subsection (1) of Section 160 of the Ordinance. Further, the argument of the Chief executive that the value of the item sold was only 0.5% of the total value of the asset of the Company as per the accounts for the year ended June 30, 2002 and the approval of the shareholders was not required is also not tenable due to the fact that the auditors Mr. Zulfiqar Haider & Company, have given an adverse opinion in their report to the members in the said year for not maintaining a proper fixed asset register as required by the Ordinance and their inability to verify the value and existence of the tangible fixed asset. Based on the aforesaid and the inability of the company to provide proper justification regarding the value of the asset sold, the argument of the Chief Executive holds no merit and cannot be entertained. It is, therefore, concluded that the notice of the meeting was not issued as per requirements of aforesaid provision of the Ordinance and the resolution passed, therefore, was not in accordance with the requirements of law. An action against the directors of the Company, therefore, is necessary. As the directors have not responded the show cause notice and the Chief Executive has not been able to give any justifiable excuse for the same, therefore, I consider it a deliberate act on the part of directors of the Company who were under legal obligation to act in accordance with the provisions of the Ordinance.
12. For the forgoing, I impose a fine of Rs 10,000/- (Rupees ten thousand only) on each of the following directors of the Company who are hereby directed to deposit the fine in the bank account of the Commission within 30 days of the receipt of this Order and submit a copy of the receipted challan to the Commission: AMOUNT Rupees i. Mr. Reyaz Shaffi 10,000 ii. Mr. Mamood-ur-Rehman 10,000 iii. Mr. Arif Shaffi 10,000 iv. Mr. Asif Shaffi 10,000 v. Ms. Naila Shaffi 10,000 vi. Mr. Anwar Khan 10,000 The matter regarding sale of caustic soda plant by the directors of the Company shall immediately be taken up with the Company.
13. No penalty is imposed on Mr. Naseem Malik, Nominee director of IDBP who was not the director at the time of 38th Annual General in which the above-mentioned resolution was proposed and passed.