1. This order is in Appeal No, 07 of 2016 filed under section 33 of the Securities and Exchange Commission of Pakistan Act, 1997 against the order (Impugned Order) dated 17/02/16 passed.By the Respondent.
2. The brief facts of the case are that the directors including the chief executive (Appellants) of Saleem Sugar Mills Limited (Company) submitted a revival plan in the honourable Lahore High Court (LHC) during the proceedings filed by the Commission under section 309 of the Companies Ordinance, 1984 (Ordinance) for winding up of the Company. The LHC on 08/08/12 directed that proposal for revival be presented before the Commission for evaluation about its genuineness. The management made a presentation before the Commission on the proposal for revival, through their authorized representatives MJ Panni and Associates. The highlights of submissions with regard to the revival plan were as under:
(a) Arranging an investment of Rs,250 million under a Joint Venture Agreement (JV Agreement) dated 22/11/11, with Q Group from UAE, that shall be utilized for: i) Balancing, modernization and replacement - BMR of Plant and Machinery and working capital requirement of the company from May to September 2012. ii) Repair and maintenance of the building, that will be conducted at the same time.
(b) Investment was subject to certain pre-requisites including, inter alia, holding of annual general meetings (AGMs), dismissal of winding up petition filed by the Commission, and consent from banks for providing credit facility up to Rs,200 million.
(c) As a top preference for phase-1 the plan included developing best quality/model sugar, cane and beet farms by providing imported seeds, guaranteed price, survey of land; applying for banking credit lines in 2012 for payments to the sugarcane growers; payment of Rs,75 million and Rs,25 million to growers in 2012 and 2013, out of a total of Rs,250 million to be injected by Q group.
(d) The company based its projections on the installed crushing capacity of 2,200 M. Tons for sugarcane crushing and 1470 M. Tons for beet crushing, during phase-1 from 2011-12 to 2014-15, that will be enhanced to 12,000 M. Tons in subsequent phases of the business plan.
3. Based on the revival plan/presentation, the Commission submitted its consent to the LHC for grant of relaxation in timeline up till 30/09/14, for revival of the Company, subject to certain guidelines and conditions including submission of quarterly review on revival plan. The LHC disposed of the winding up petition of the Commission vide order dated 23/04/13. Subsequently, iii terms of the Order of the Court, the Commission received a quarterly review report dated 13/08/13 from the Chairman/Directors of the Company on injection of funds and compliance and achievements against the projections. The review report revealed that:
(i) The Q Group terminated the JV Agreement due to failure on the part of company in meeting the agreed conditions, including the consent of the banks for credit facilities.
(ii) The directors could not succeed to borrow money or raise funds as per business plan.
(iii) Creditor issued notice for payment of Rs,874.536 million and intimated to takeover possession of the mills.
(iv) Major growers in the area demanded huge unsecured advances and guaranteed price of sugarcane against assurances for supplies.
(v) Sugarcane industry experts apprised the directors that existing plant and machinery should be considered as scrap. Most of the portions of the buildings are damaged and require new construction instead of repair as no repair and maintenance was carried out for last 20 years.
' The contents of the aforesaid review report reveal that the condition of the fixed assets of the Company, which is vital to ensure production capacity of the Company (including building, plant and machinery), had significantly deteriorated, in contradiction to the statements/assertions made out in the revival plan. Review of the projections, in the light of assertions stated in the revival plan and presentation to the Commission, revealed that the physical condition of the fixed assets, the condition imposed in the JV Agreement, and the financial position of the Company did not warrant such unrealistic and optimistic projections. It appeared that the revival plan was not prepared with due diligence and the information/assertions provided to the Commission by the Appellants was, prima facie, incorrect.
4. Show Cause Notice dated 23/01/14 (SCN) was issued to the Appellants for alleged misstatements in terms of section 492 of the Ordinance and they were called upon to show cause as to why fines may not be imposed on them for the aforesaid contraventions and why a direction to comply with the requirements of the Ordinance may not be given. Mr. Javed Panni (Authorised representative) submitted the response to the SCN vide letter dated 08/04/14 stating that on appointment of the Liquidator, the Board stood dissolved and all the powers of the directors, chief executive and other officers stood ceased under section 378 of the Ordinance. Further, the Deputy Registrar of Companies passed an order dated 10/03/14 under section 468 of the Ordinance by which the returns and documents filed by the Liquidator had not been accepted. The Liquidator had filed an appeal against the said Order before the Registrar of Companies under section 468(4) of the Ordinance. Hearing in the matter was fixed on 26/02/15, however, no one appeared on due date.
Another hearing was fixed on 10/09/15 in response to which Mr. Panni submitted another reply stating that the Registrar of Companies through order dated 19/06/14 remanded the case of Creditors Voluntary Winding up to the concerned registrar at the CRO with further direction to call comments from the Liquidator in respect of the observations. The Liquidator preferred an appeal in the Appellate Bench of the Commission, however, the appeal was dismissed through the Appellate Bench's order dated 29/06/15 and the Registrar's order was upheld. Mr. Panni further stated that the Liquidator filed an appeal , in the LHC against Appellate Bench's order and the matter was sub judice, therefore, hearing could not be held. He also said that he was no more a representative of the Appellants. The Respondent fixed further hearings on 09/10/15, 21/10/15 but no one appeared on behalf of the Appellants. A final hearing opportunity was given on 04/11/15. The Liquidator through his letter dated 20/10/15 again reiterated that he had filed an appeal in LHC against order of the Appellate Bench and the matter be kept pending till the decision of the honourable High Court. The same was reiterated by all the seven Appellants through their separate letters all dated 28/10/15.
The Respondent in response to the letters through letter dated 02/11/15 once again communicated that the subject proceedings were initiated under section 492 of the Ordinance and relate to alleged misstatements by the Appellants who were directors of the Company at the relevant time.
Therefore, filing of appeal/petition in the court in respect of Creditors' Voluntary Winding up did not affec t the subject proceedings. The Appellants were again advised to appear for hearing in person or through authorized representative on the appointed date and time and a hearing was fixed on 19/11/15. The Appellants through letter dated 18/11/15 again requested for adjournment. Finally, a hearing was held on 07/12/15 art five of the directors (Appellants) were represented by Mr. Raza Imtiaz and Mr. Sabeel Mann. The remaining two directors namely Mr. Ghulam Shah and Mr. Mehmood Shah remained unrepresented. The representatives of the Appellants submitted written reply during the hearing and also made verbal submissions reiterating the written reply.
5. The Respondent dissatisfied with the response of the Appellants held that the Appellants presented a revival plan that was based on unrealistic assumptions devoid of reasonable prudence and diligence and, hence, misstated regarding viability of revival of the Company.
Therefore, in exercise of the powers conferred by section 492 of the Ordinance, an aggregate penalty of Rs,3,500,000 was imposed on the Appellants. The Appellants were directed, to deposit the fines in the following manner: Name of Appellants Amount in Rupees
1. Mr. Mujeeb-ur-Rehman, Chairman500,000
2. Mr. Faisal Saleem. Director and CEO500,000
3. Mr. Masood ur Rehman, Director500,000
4. Mr. Pazeer Ahmad, Director 500,000
5. Mr. Muhammad Azeem, Director500,000
6. Mr. Ghulam Shah, Director 500,000
7. Mr. Mehmood Shah, Director 500,000 Total 3,500,000 Further, the concerned Registrar was directed to refer the matter to the relevant court as the Appellants also made misstatement before the Honourable Court and avoided winding up in a transparent manner.
6. The Appellants have preferred the instant appeal against the Impugned Order on the following grounds:
(i) As per section 5 of the SECP Act, the Commission is to consist of such number of Commissioners, being not less than five and more than seven, as may be notified by the Federal Government.
' At present, the strength of the Commission is complete but the Commission comprised of only two to three Commissioners particularly during 2014. It was decided by the august Supreme Court vide its judgment dated 27/04/01 passed in CPLAs Nos. 447 and 448 of 2001 wherein, the apex Court held that such an absence of the requisite strength of the Commissioners, renders the Commission as coram non judice. The Act also manifests that the statutory powers vested in the Commission under various provisions of the Act are in the nature of (a) administrative powers, (b) quasi-judicial powers and/or (c) legislative powers; the same are to be exercised collectively by the Commissioners. However, some of these may be delegated to any Commissioner and/or officer, thereof, by the Commission. SRO 1061(I)/2005 dated 18/10/2005 as amended by SRO 659(1)/2009 dated 14/07/2009, SRO 666(1)/2009 dated 16/07/2009, SRO 293(1)/2010 dated 03/05/10 and SRO 706(1)/2011 dated 13/07/11 are also without jurisdiction in as much as the same have been issued and enforced by the Commission and its functionaries and not the Federal Government. In the context of statutory orders/instruments issued by the Federal Government, in exercise of powers under any statute, the same per force are to be executed in the name of the executive authority of the state as constituted under Article 90 of the Constitution. The executing and issuing authority has to be one as laid down under the Rules of Business framed tinder Articles 90 and 99 of the Constitution. Therefore, the exercise of powers resulting in the framing and enforcement of the SRO is utterly without jurisdiction; the same is without lawful authority.
(ii) The directors of the Company were helpless for a number of reasons. The Commission's role was a substantive contributing factor vis-a-vis delaying the process of having the business plan/revival proposal, accepted. As a result of the same, implementation of the JVA was delayed and subsequently the agreement was cancelled by the foreign investor.
(iii) The secured creditors of the Company, issued notices for taking over possession of the Company's assets, being first charge holders, and consequently convened meetings of the creditors and shareholders for liquidation of the company, under the creditors' voluntary winding up of the Company; the Company stood wound up as a result thereof.
(iv) The business plan and the JVA clearly indicated the balancing, modernization and replacement of plant and machinery, the development of sugarcane and beet farms and a working capital for the Company and the assertions of the Respondent in its SCN are not substantiated and are merely assertions without any base or substance. The entire purpose of the investment of Rs,250 million, from the Q group, was to be inter alia for the balancing, modernization and replacement of the plant and machinery, repair and maintenance of the building etc.
(v) The revival plan submitted by the management of the Company, to the honourable LHC was presented to the Commission which on its own evaluated the same along with the business plan and with certain conditions accepted the revival plan. Thus at this stage, the Respondent cannot alone hold the ex-management responsible for any short comings in the revival plan and the projections thereof. Thus, the provisions of section 492 of the Ordinance are not attracted to the facts of the case as no misstatement/incorrect information was submitted to the Commission.
(vi) The political and economic conditions in the province of KPK changed substantially due to various factors beyond the control of the management. In addition thereto, the Province of KPK suffered heavily on account of floods as well as the influx of IDP's, therefore, any change in the economic scenario was beyond the contemplation of the management of the Company and the revival plan/projections could not be achieved.
(vii) The allegations asserted in the SCN were addressed by way of relying upon clauses of the JVA, the business revival plan and other grounds, both factual and legal in nature. However, the Respondent, without addressing the submissions of the Appellants stated that the JVA and the business revival plan were irrelevant. The basis of the Respondent's determination vis-a-vis the issues at hand and the subsequent Impugned Order pertained to the secured creditors winding up petition filed under section 358 of the Ordinance before the honourable LHC.
(viii) Q Group terminated the JVA, unilaterally, and communicated the termination vide letter dated 31/07/13 to the Company. In furtherance thereto, as per the Quarterly Review Report submitted by the Company, in compliance of the Commission's guidelines stated above, the management of the Company had tried their utmost to seek financing either in the form of credit facilities from various banks and/or from additional sources, however, the management was not successful in achieving the credit facilities. Therefore, by way of exhausting every other route that was available to them and due to the pressurization of the secured creditors, the management of the Company was left with no option but to initiate voluntary winding up proceedings in terms of section 358 of the Ordinance.
(ix) It is pertinent to state that the winding up proceedings, in terms of section 358 of the Ordinance, were initiated during the month of August 2013; after termination of the JVA by the Q Group. In furtherance thereto, a voluntary winding up, under section 358 of the Ordinance, is a right provided for, to the secured creditors under law. It is trite law that all statutes are to be applied fairly and justly. The Respondent has travelled beyond the ambit of the SCN and has erred in law while determining the issues in dispute by consequently furnishing an order that addresses issues not alleged, asserted or framed in the SCN.
7. The Respondents have rebutted the arguments as follows: i) The Appellant's argument that the Commission was coram non judice and all its SROs and proceedings are, therefore, without jurisdiction is misconceived. The explicit provision of section 5(7) of the SECP Act, substituted by the Finance Act, 2013 that was passed by the parliament and received assent of the President on 22/03/13 state that no act, proceeding or decision of the Commission shall be invalid only by reason of the existence of a vacancy or defect in the constitution of the Commission. Thereafter, after substitution of the aforesaid specific provisions, the existence of a vacancy or defect in the constitution of the Commission does not affect the proceedings or acts of the Commission. The plea of the Appellants holds no ground and all the statutory notifications issued and powers exercised by the Commission are valid and with proper legal authority. Ii) As per own submissions of the Appellants, the failure of the revival plan has primarily resulted due to refusal of banks to extend financing to the Company and Appellant's failure to obtain bank financing resulted in termination of JV Agreement by the Q Group.
Furthermore, as stated in the review report the existing condition of the asset including plant and machinery and building was not mentioned in the revival plan submitted by the Company, hence, the revival plan was baseless and untrue. The Appellants are raising baseless allegations by citing delay caused by the Commission as a substantive reason for termination of agreement. The Commission being the apex regulator of the corporate sector did not have any interest whatsoever in the issue and had solely acted in the best interest of the shareholders of the Company in discharge of its regulatory responsibilities. Iii) The secured creditors referred to by the Appellants are the Saleem Group of Industries, an associated concern by virtue of common directors.
Commissioning a Creditors Voluntary Winding on behest of the Saleem Group of Industries which is none other than the directors themselves clearly demonstrates that the Appellants avoided a transparent winding up process through Court by presenting a fabricated revival plan to pass benefit to their associated concern in disguise of a loan which is unverified and unsubstantiated.
Moreover, the status of creditors; voluntary winding up is not clear. In respect of creditor voluntary winding up, the liquidator of the Company filed the statutory documents with Registrar of Companies, Lahore as required under section 382(4) of the Ordinance on 19/12/13. The Deputy Registrar of Companies, Lahore through order dated 10/03/14 under section 468 of the Ordinance refused to accept the returns and documents filed by the Liquidator. The Liquidator filed an appeal against the said Order before the Registrar of Companies under section 468(4) of the Ordinance.
The Registrar of Companies through order dated 19/01/14 remanded back the case of Creditors Voluntary Winding up to the concerned Registrar at the CRO with further direction to call comments from the Liquidator in respect of the observations. The Liquidator preferred an appeal in the Appellate Bench of the Commission, however, the appeal was dismissed through the Appellate Bench's order dated 29/06/15 and the Registrar's order was upheld. The representative of the Appellants further stated that the Liquidator filed an appeal in the Lahore High Court against Appellate Bench's order and the matter was sub judice. Therefore, in view of the above, it cannot be construed that the Company stands wound up. It is relevant to mention that the status of proceedings under section 492 of the Ordinance which led to the Impugned Order is not affected by the status of winding up of the Company. The Appellants made every effort and used delaying tactics to avoid and delay the subject proceedings that ultimately led to imposition of penalties and they only appeared through their representative once it was made clear to them by the Respondent through several correspondences that the instant proceedings were initiated for alleged misstatements in the revival plan and that the sub judice status of their appeals in any other proceedings would not affect the current proceedings. Saleem Group of Industries, the only secured creditors that initiated Creditors' Voluntary Winding up comprises of the entities run by the Appellants. Therefore, the conflict of interest of the Appellants is very apparent in the whole process and it cannot be overlooked. Iv) The revival plan submitted to the Commission had two basic premises i,e, it had been prepared after thorough due diligence and that the Company's underlying assets are in a condition to fully support and implement the business plan. The SCN alleged that the directors despite being aware of the physical condition of the fixed assets and the financial position of the Company misstated and presented unrealistic projections. v) The revival plan as a whole was false and deceptive given all the circumstances prevalent at the time which was in the knowledge/ of the Appellants. The Appellants were insiders with complete knowledge and were responsible for due diligence and preparing the plan based on realistic assumption keeping in view the ground realities. Therefore, as the Appellants had made a false representation that they had exercised prudence and due diligence and prepared a revival plan that was viable to be implemented; they were penalized under section 492 of the Ordinance. Paragraph 10 of the Impugned Order clearly establishes the default. Vi) It may be noted that KPK was also badly affected by floods in September 2012, which happened around the same time, when the management was presenting the revival plan. Moreover, there was no major change in political and economic situation of the KPK which was already not ideal. Therefore, these pleas of the Appellants are not tenable and are mere attempts to avoid their responsibility. Vii) It was the sole responsibility of the Appellants to prepare and present the revival plan prudently and based on facts and prevalent situation. The Respondent does not share the responsibility in this regard, as it neither had the complete inside knowledge nor had it possession of the record, assets and premises of the Company. The Respondent only discharged its regulatory duties and relied upon the revival plan in good faith. The Appellants being directors of the Company had the responsibility to oversee the functioning of the Company, to keep it appropriately staffed and organized to ensure due compliance of law. The Appellants being custodians of the record and assets of the Company were fully aware of its circumstances and knowingly and willfully presented a false picture of the condition of the assets of the Company as being one which is able to support and implement the revival plan to get away from the winding up proceedings in the High Court. The condition of company's assets and its credit worthiness could not be a hidden fact from the directors. The Appellants falsely represented to the Respondent that they had done substantive due diligence while preparing the plan. It transpires that the Appellants have deliberately tried to misguide the Respondent and the Court regarding the condition and circumstances of the Company to avoid winding up of the Company by Court based on the petition that was filed by the Commission under sections 305 and 309 of the Ordinance. viii)The Appellants have stressed that the revival plan failed due to non-availability of financing from banks and investment from Q Group. Review of correspondence of the Company with various banks does not indicate any concerted and systematic efforts by the management to secure the financing. The Company made requests on its letterhead to banks communicating its interest to avail long term and short term credit facilities stating that it intended to start production in November/December 2013. The only other information provided with the request is audited financial statements and a very brief profile of the Company, and the fact that there was no charge or lien on Company's assets except for the charge of its sponsors namely Saleem Group of Industries. The banks in response communicated regarding rejection of the Company's request for credit facilities. The entire correspondence does not show any lucid base work, appropriate documentation and supporting evidence to substantiate seriousness of efforts on the part of the management of the Company in respect of availing credit lines from the banks. In fact, being knowledgeable of the Company's state of affairs and its credit worthiness which are essential prerequisite of access to bank financing, the Appellants' assumption that substantial bank financing to the tune of Rs,200 million will be available, was baseless. Therefore, the whole scheme of presenting the revival plan appears to be unrealistic after evaluation of the subsequent events.
Ix) The Appellants after obtaining relief from the High Court based on the revival plan started the Creditors' Voluntary Winding up of the Company within less than four months. The said secured creditors as disclosed in the audited accounts of the company are Saleem Group of Industries, an associated concern of the directors of the Company. The notes further disclose that Saleem Group of Industries consists of entities run by the existing directors of the Company. The aforementioned facts prove that the Appellants deliberately misguided the Commission and the High Court by presenting a revival plan which was not viable to avoid the winding up of the Company by the Court. Subsequently, the Appellants tried to wind -up the Company under Creditors' Voluntary Winding up avoiding any check and balance or supervision by independent person or authority in the process of disposal of assets and payments of the claims in a transparent and fair manner.
The allegations levelled in the SCN have been duly proved and order has been accordingly passed.
The laws have been applied fairly and justly and the Appellants were given ample opportunities to clarify their position with regard to the allegations levelled in the SCN. All their submissions have been duly considered and evaluated in the light of applicable laws. The Impugned Order, therefore, has been issued strictly in accordance with the law.
8. We have heard the parties i,e, Appellants and Respondents.
9. The Appellants have argued that the proceedings were non coram judice and all its SROs and proceedings are, therefore, without jurisdiction. We place our reliance on section 2 of the Securities and Exchange Commission of Pakistan (Amendment) Act, 2013 (SECP Amendment Act), wherein, section 5 of the SECP Act was amended and the following was substituted namely, "(5) No act, proceeding or decision of the Commission shall be invalid only by reason of the existence of a vacancy or defect in the constitution of the Commission". Further section 4 of the SECP Amendment Act provides that, "Anything done, actions taken, orders passed, instruments made, notifications issued, agreement made, proceedings initiated, processes Or communications issued, powers conferred, assumed or exercised by the Commission as defined in clause (g) of section 2 of the said Act or its employees as defined in clause (k) of section 2 thereof in terms of amendments made through this Act, on or after 19th December, 1997 and before the commencement of this Act, shall be deemed to, have been validly done, made, issued, taken, initiated, conferred, assumed and exercised and the provisions of this Act shall have and shall be deemed to have had effect accordingly." Any amendments made through the Finance Acts have now been regularized through .The SECP Amendment Act.
10. The Appellants have argued they made their best efforts to ensure the success of the revival plan and delay in the implementation of the revival plan led to the unilateral termination by the Q Group for which the Respondent was also responsible. Moreover, it was argued ' that the Respondent had also evaluated the revival plan; therefore, the sole responsibility of the revival plan cannot rest with the Appellants. We have reviewed the Appellants' correspondence with the banks namely MCB Bank Limited, Faysal Bank Limited and Allied Bank Limited. Based on the correspondence, we are of the view that the termination of the JV agreement on 31/07/13 was subsequent to the fact that the Appellants had approached the banks for request of credit facilities which was rejected by them. Therefore the Appellants' assertion that the Respondent was also part responsible for the delay in acceptance of the revival plan which led to the unilateral termination of the JV agreement does not have any merit. The Appellants failed to meet one of the key conditions of the JV i,e, securing credit facilities of Rs,200 million pursuant to Clause 1.1 of the JV agreement.
Failure to do so by the Appellants resulted in termination of the agreement. We are of the view that the Appellants have not demonstrated that they have made their best efforts to secure credit facilities as it appears the Appellants submitted their revival plan without conducting due diligence on whether or not it was possible to secure credit facilities of Rs,200 Million. We concur with the Respondent that it was not their responsibility to determine whether the Appellants would succeed in securing credit facilities from the bank. In fact it was the responsibility of the Appellants to ensure the key conditions of the JV agreement were complied with before putting forward the JV agreement to the Court and the Commission as part of the Company's revival plan. Furthermore, the Appellants' contention that the political and economic conditions in the province of KPK changed substantially which resulted in difficulties for the Appellants does not hold any merit. The Company was already in the process of winding up and the halt in the winding up proceedings was due to the revival business plan which was also not viable.
11. Section 492 of the Ordinance provides, "Whoever in any return, report, certificate, balance sheet, profit and loss account, income and expenditure account, prospectus, offer of shares, books of accounts, application, information or explanation required by or for the purposes of any of the provisions of this Ordinance or pursuant to an order or direction given under this Ordinance makes a statement which is false or incorrect in any material particular, or omits any material fact knowing it to be material, shall be punishable..." The above provision penalizes a person who has given false or incorrect information "knowing it to be material" which shows there has to be a deliberate or willful default. The word "willful default" has been defined in Oxford Dictionary of Law Fifth Edition as "The failure of the person to do what he should do, either intentionally or through recklessness." In the instant case, the Appellants did not exercise the due skill and care when submitting the revival plan. The Appellants would have known, given the circumstances of the Company that it may not be possible to obtain credit facilities of Rs,200 million which led to the termination of the JV agreement unilaterally by the Q group on 31/07/13. The Appellants should have apprised the Commission fully of the facts and circumstances of the Company. Therefore, the revival plan in our view was a misstatement which in turn put a halt to the winding up proceedings by the Court. Subsequently, Creditors' Voluntary winding up in terms of section 383 of the Ordinance was initiated by Saleem Group of Industries, an associated concern by virtue of common directors which depicts that Appellants have avoided a transparent winding up process by the Court by submitting the revival plan which was not viable.
12. In the instant case, the default of the Appellants in terms of section 492 of the Ordinance has been established and, therefore, we see no reason to interfere with the Impugned Order. The Impugned Order is upheld with no order as to costs.