This order shall decide six appeals filed by the Appellants No. 1 to 6 under Section 33 of the Securities & Exchange Commission of Pakistan, Act 1997 against the order dated September 02, 2002 (the "Impugned Order") passed by the Executive Director (SCD). Brief facts leading to the passing of this order are as follows:
1. Allied Management Services (Private) Limited (hereinafter referred to as the "Company") was responsible for managing First Allied Bank Modaraba (hereinafter referred to as the "Modaraba"). A special audit conducted on the directions of Registrar Modaraba by M/s. A.F. Ferguson & Co. revealed that business of the Modaraba was not being run in accordance with the mandatory provisions of law. The Registrar Modaraba after giving an opportunity of showing cause to the Appellants and receiving their response, imposed penalties upon all of them for violation of provisions of the Prudential Regulations for the Modarabas ("Regulations").
2. The Appellants filed an appeal against the above order before the Executive Director (SCD) who, after discussing the matter at length in her Impugned Order, set aside most of the penalties imposed upon the Appellants. The following of the penalties imposed by the Registrar Modaraba were however upheld by the Respondent. {{TABLE}} Name of the Violation of Section Appellant Amount of Penalty
1. Mr. M. Salim Sheikh Regulation 6 (4) & (2), Rule 8 (1) & 8 (4) Rs. 30,000/-
2. Mr. S. Jauhar Hussain Regulation 6 (4) & (2), Rule 8 (1) & 8 (4) Rs. 30,000/-
3. Mr. Zahoor A. Siddiqui Rule 8 (1) & 8 (4) Rs. 10,000/-
4. Mr. Irshad A. Usmani Regulation 6 (4) & (2), Rule 8 (1) & 8 (4) Rs. 30,000/-
5. Mr. Rashid M. Chaudhry Regulation 6 (4) & (2), Rule 8 (1) & 8 (4) Rs. 30,000/-
6. Mr. Tahir Saeed Effendi Regulation 6 (4) & (2), Rule 8 (1) & 8 (4) Rs. 30,000/- {{TABLE}}
3. The Appellants being aggrieved by the Impugned Order have preferred the instant appeals before this Appellate Bench.
4. Appellants No. 1 to 5 raised the contention at the outset that they were the employees of Allied Bank Limited ("ABL") and were nominated as directors by ABL on the board of the Company, which was managing the Modaraba. They contended that as nominee directors they were not involved in the management and day to day affairs of the Company which was delegated by the Board to the Chief Executive of the Company. With regard to the penalty imposed upon them for violation of regulation No. 6(4) and 8(2) of the Regulations in approving the facility to National Asset Leasing Corporation ("NALC"), they contended that the facility was approved by the Board of Directors subject to creation of charge on the assets of NALC in favour of the Modaraba and implementation of the decision in the manner prescribed by the Board however was the responsibility of the management and not that of the Board. They further contended that in any case the Commission had advised all the Modarabas in the country to bring their operations in conformity with the Regulations by June 30, 2000 but as no Board meeting was held after February 02, 2000 till August 2000, when the Appellants No. 1 to 5 ceased to hold their positions as directors, the Appellants No. 1 to 5, understandably, had no opportunity to take note of any of the violations alleged to have been committed by the Company. Regarding the penalties imposed for violation of regulation 9 of the Regulations pertaining to provisioning against non-performing assets, which also resulted in violation of Rule 8(1) & 8(4) of the Rules, Appellants No. 1 to 5 clarified that they were not on the Board of Directors of the Company at the time the said accounts were approved, that is, on December 12, 2000. According to them the accounts approved for the years previous to year 2000 were approved by the Board on the recommendations and verifications given by the Chief Executive and external auditors of the Company to the effect that all statutory requirements had been duly met by the Company.
5. Appellant No. 6, who was the Chief Executive of the Company for the relevant period, argued in his defense that the facility to NALC was sanctioned on the security of not just personal guarantees of two working directors as held in the Impugned Order, but also on the security of a floating charge. He further contended that he was on leave when the facility was finally sanctioned and approved. He also contended that, as he was not the chief executive at the time when the accounts for the year ended June 30, 2000 were prepared, he could not be held liable for not making provisioning in accordance with the Regulations. He further contended that there was no need for provisioning in the accounts, as the valuer had wrongly put the value of the assets of Sun Flo Citrus company at nil. He informed the Bench that the same assets have been sold by the Modaraba for a value of Rs. 17 million, which establishes the truth with respect to the value of the assets. He also contended that the auditors had wrongly considered the regulations applicable to NBFIs while conducting the audit, which were not applicable to Modaraba.
6. Ms. Farah Q. Faiz appearing on behalf of the Executive Director (SCD) contended that law does not make any distinction between the duties of a director and that of a nominee director. She submitted that the directors are required by law to show a reasonable degree of concern and inquire into the affairs of a company/modaraba to ascertain as to whether the business of the same is being conducted in accordance with the mandatory provisions of law. She further stated that the penalty for extending facility to NALC without obtaining sufficient security was upheld by Executive Director (SCD) because extension of a facility of Rs. 13 million without ensuring that the charge was registered in favour of the Modaraba indicates a serious degree of imprudence and negligence on the part of management of the Company. She argued that Rule 13 (2) of the Rules which was in force at the time the facility was extended to NALC, specifically prohibited a modaraba from extending unsecured facilities or facilities secured only by personal guarantees.
With regard to the issue of provisioning she stated that Rule 8 (1) requires every modaraba company to keep proper books of account for each modaraba while Rule 8 (4) of the Modaraba Rules requires a true and fair view of the state of affairs of the modaraba to be shown in the financial statements. In view of relaxation given by the State Bank and the Commission in the matter of Pakland/Saadi Group, the amount of Rs. 92.74 million was excluded from the balance of Rs. 194.07 million. However, the deficiency in provision against doubtful debts, even after the exclusion, comes to Rs. 101.33 million. This being a material misstatement, the financial statements of the Modaraba did not present a true and fair view of its affairs due to lack of provisioning. She argued that short provisioning had arisen over a period of time and Appellant No.6 was the CEO for most of that time and was a director at the time of approval of accounts for the year 2000.
Therefore, he cannot simply transfer his responsibility to Mr. Ashfaq Qureshi. Also, the preparation of balance sheet and P/L account of a modaraba is the responsibility of directors of the modaraba company in terms of Modaraba Rules. So it was their responsibility, being the directors, to ensure that accounts of the modaraba showed a true and fair view.
7. We have heard both the parties at length and considered their arguments. We agree with the contention of the representative of the Executive Director that law does not make any distinction between the duties of a director and that of a nominee director. 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 the management. It is the duty of the directors not to be mere passive spectators of what is going on but to see and make the necessary arrangements to ensure that the statutory requirements are fully met and the business of the company is conducted in accordance with law. In the present case however the Appellants 1 to 5 have contended that they were not actively involved in the day to day affairs of the Company and it was the Chief Executive (Appellant 6) who was primarily responsible for every day business of the Company. It appears from the memo of approval of facility extended to NALC that the Board of Directors had approved the facility subject to creation and registration of charge. The Appellant 6 being responsible for the day to day affairs of the Company and the Modaraba should have ensured that the charge on the assets was created and registered by NALC. Though the Appellant 6 was on leave at the time the facility was sanctioned, he was very much involved in the disbursement of the facility amount and the fact that the charge remained unregistered should have put him on guard. Appellant 6 however has failed to convince us with respect to the performance of his fiduciary duty towards the certificate holders of the Modaraba in a satisfactory manner. Being the chief executive, Appellant 6 should have ensured that the decisions taken by the Board of Directors were properly and fully implemented.
8. On the issue of short provisioning, we are of the view that the contention of the Appellants 1 to 5 that they were not involved in approving the accounts for the year ending June 30, 2000 and therefore cannot be held responsible for the short provisioning, seems to carry weight. It appears that accounts for the year ending June 30, 2000 (in which the provisions should have been made) were not approved by the Appellants 1 to 5, as they had ceased to be directors of the Company on account of their retirement. As Appellants 1 to 5 were not involved in the approval of the accounts for the years ended June 30, 2002, it is difficult to hold them liable for the short provisioning.
Appellant 6 however was on the Board of Directors of the Company at the time the aforementioned accounts were approved.
9. In light of the submissions of the parties, examination of records and the above findings, we hold as follows: i) All the penalties imposed on Appellants No. 1 to 5 in the Impugned Order are hereby set aside; ii) All the penalties imposed on Appellant No. 6, the chief executive of the Company are retained.
The present appeals are disposed off accordingly.