SHAHID KARIM, J.---This is a petition under section 265 of the Companies Ordinance, 1984 ("the Ordinance") seeking a declaration to the effect that the affairs of the company ought to be investigated and seeks appropriate directions to the Securities and Exchange Commission of Pakistan (SECP) for appointment of inspectors to carry out investigation into the affairs of the company.
2. The factual background has been narrated in the contents of the petition. The investigation sought to be set in motion is with regard to the respondent No, 1 viz. Crescent Industrial Chemical Limited ("Crescent"). A substantial portion of the facts are not in dispute between the parties.
Crescent was incorporated as a public limited company on 19.04.1995. The respondents Nos, 3 to 6 are directors of Crescent and have been its directors since the time of its incorporation. The petitioner holds 3 Million shares in Crescent and in terms of percentage the petitioner holds 2.31 percent shares. The primary objective of Crescent was to manufacture and sell acrylic fibre and the company started out with an authorized capital of PKR 10 million. It has been averred that Crescent initially issued 1 million shares and as of today it has issued more than 129 million shares out of a total of 250 million shares yet despite the induction of billion of rupees into the company, Crescent has not commenced business and this constitutes the main plank of the petitioner's challenge.
3. The reply was filed on behalf of the respondents as also SECP. The respondents deny the allegations made in the instant petition and have urged that it be dismissed on the threshold.
4. Having heard the learned counsel for the parties as also the representative of SECP, I do not find any reasonable basis for withholding the relief claimed in this petition, for the facts and circumstances of the case which have been brought forth do not countenance the running of the affairs of the company without a proper investigation to be made by the Commission by appointment of inspectors.
5. The learned counsel for the petitioner referred to the audited accounts of the year 2000. In particular the following observations in the Auditors' report may be referred:- "2. Further and as stated in note 1.2 to the accompanying financial statements, the company has not commenced its commercial operations since its incorporation due to continuous operational and financial complications. In this respect we have noted the following conditions:
(a) As at June 30, 2000 the current liabilities of the company exceed its current asset by Rs,849.711 million whereas the fixed assets (including capital work-in-progress) and unallocated expenditure amount to Rs,2,028.686 million and Rs,189.583 million respectively.
(e) The company has" not held its annual general meeting since December 28, 1999 and has not commenced its business within a year from its incorporation. Due to such a situation the company may be wound up by the Court in accordance with the provisions of section 305 of the Companies Ordinance, 1984.
The company has reduced the amount of its issued share capital by Rs,265 million in the financial statements for the year ended June 30, 2001 without obtaining prior approval of the Court.
According to the requirements of section 96 of the Companies Ordinance, 1984 the aforementioned transaction being reduction in share capital cannot be effected without confirmation of the Court. A petition filed for seeking approval of the Court in respect of cancellation of the aforementioned shares is pending."
6. It can be seen that the observations of the Auditors are averse to the established corporate standards which were required to be followed by Crescent. It was noted that the company had not commenced its commercial operation and that the current liabilities of the company exceeded its current assets. Also that the company had not held its annual general meeting since 1999 and that it had reduced its share capital without recourse to the provisions of section 96 of the Ordinance.
7. In the year 2005, the company approached SECP for condonation of the lapses that had occurred in the obligations imposed by law. It was under these circumstances that SECP was constrained to issue a letter dated 19.12.2005 by which the company was required to convene within sixty days its overdue annual general meeting for the years ended 30.06.2000 to 30.06.2005 so as to lay the accounts for the said years and to transact any other business as required by law and a compliance report was required to be submitted to SECP. The learned counsel made further reference to the audited accounts and in particular the facts mentioned under the heading "Unallocated expenditure" where advances to the tune of Rs,31,121,580/- have been shown to be written-off. The precise submission of the learned counsel is that no details have been given of the advances which were written off or which were incurred by Crescent and the precise time at which these were incurred. Also the details as regards the persons to whom the advances were written off is also conspicuously absent. The contention raised by the learned counsel has substantial force and indeed the sub-heading "Advances written off" is without any insight into the precise nature of the advances and the persons in favour of whom they were written off. He made a further reference to clause 5.2 in the same report which reads as under:- "5.2 Included in the above expenses are Rs,17,567,169 (1999: Rs, 17,567,169) which were incurred by associated undertakings on behalf of the company during the project conception and development stages, and after the company was set up. These expenses were later charged to the company by ways of debit notes from the relevant associated undertakings."
8. Till 2015, according to the learned counsel, the Annual General Meetings were not held by the company and this fact has not been denied by the learned counsel for Crescent. This factually means that from the years 2005 to 2015 the Annual General Meetings were not held by the company and for ten years the business which was to be transacted in the Annual General Meetings was left unattended by the shareholders and were belatedly approved in the year 2015.
The fact that the company held its first Annual General Meeting in the year 2005 and that too on the prompting of SECP and that the second Annual General Meeting was held in the year 2015 would show that the company pays scant regard to its legal duties under the provisions of the Ordinance, 1984 which obliges it to carry out certain essential functions of cooperate governance and which have gone a begging in the instant case.
9. During the' course of these proceedings an application C.M. No,1056 of 2015 was filed by which permission was sought to place on record additional documents on behalf of Crescent. One of the documents which is of significance and placed on record by Crescent itself is the Directors' report for 2014-15 and the annual audited accounts of the company for the year ended June 30, 2014 and June 30, 2015 along with Auditor's report. We need not go through the entire set of documents which are annexed with this application and which were placed on record by Crescent itself. It will suffice to refer to Directors' report for the year ended June 30, 2014' and the following observations : - "After the cessation of the efforts to raise further capital to restart the project, Faysal Bank filed Suit No, 8-56 of 2011 in the High Court of Sindh (Recovery Suit) against CICL, for the recovery of Rs,1,234,057,463 (Rupees One billion two hundred thirty four million, fifty seven thousand four hundred and sixty three only), along with the costs of funds from the date of institution of the Recovery Suit till full and final realization of sued amount.
Since all the assets of CICL were under the charge of Faysal Bank and there being left no way to restart the project CICL had to enter into compromise decree in the above mentioned suit.
Resultantly FBL and CICL filed a compromise application under Order XXIII, Rule 3, C.P.C. whereby the Plant and Machinery of the company was sold at a value of Rs, 300 million, with the consent of the bank, and the proceeds of the sale were applied towards the settlement of the liabilitie-s of Faysal Bank.
A settlement agreement was entered between CICL and FBL whereby in consideration of the proceeds of Rs, 300 million against the sale of Plant and Machinery of CICL, Faysal Bank agreed that it would have no claim against CICL in respect of the liabilities mentioned in the Recovery Suit.
Future Outlook: In light of the above developments the accounts have been prepared on realizable value basis as the company is not likely to continue as a going concern in the near future."
10.Therefore, Crescent admits that the assets of the company were under the lien of Faysal Bank and under a compromise with Faysal Bank the Plant and Machinery of the company has been sold at a value of Rs,300 million and the proceeds of the value has been applied towards the settlement of liabilities of Faysal Bank. In the column "Future Outlook" it has been mentioned that the company is not likely to continue as a going concern in the near future. These two observations made in the Directors' report itself are sufficient to arrive at a conclusion that not only the affairs of the company are being conducted and managed as to deprive the members of a reasonable return but that members of the company have not' been given all the information with respect to its affairs which they might reasonably expect. Also that the affairs of the company are not being managed in accordance with the sound business principles tor 'known commercial practices and the persons concerned in the formation of the company or the management of its affairs have been guilty of breach of trust and misfeasance. Finally, the substratum of the company seems to have been lost and the financial position of the company is such as to endanger its solvency. An order of this Court for the investigation of the affairs of the company is, under the circumstances, apt and proper.
11.In view of the above, this petition is allowed. The SECP is directed to appoint one or more competent persons as inspectors to investigate the affairs of Crescent and to report thereon. The SECP shall fix a timeline within which the report shall be submitted with regard to the affairs of Crescent by the inspectors.