Shahid Karim, J. The petitioner Daewoo Pakistan Express Bus Service Limited ("Daewoo" ) is a public limited unlisted company incorporated under the laws of Pakistan. Its principal activity is the provision of inter and intra city passenger transportation. The facts are not contentious and may be briefly stated. The cause of action for the instant petition stems out of an order issued by the respondent No.2, Director Corporatization and Compliance Department, Company Law Division SECP dated February 22, 2018.
The order (hereinafter the Inspection Order) was passed under Section 221 of the Companies Act, 2017 (The Act).
This was followed by a letter dated February 26, 2018 by which Daewoo was informed of the passing the Inspection Order and was required to ensure the availability of books of account, record papers and other documents for inspection mentioned in the letter . This was addressed to Daewoo by a Joint Registrar of SECP . The Inspection Order in its first three paragraphs gives an inkling into the causes which triggered the issuance of the Order . It was said in the order that: "Mr. Saad S. Faruqui (the Complainant), shareholder of M/s. Daewoo Pakistan Express Bus Service Limited (the "Company") has filed a complaint dated 11 December 2017 alleging that the management of the Company is engaged in various illegal and fraudulent activities and resources of the Company are being used for personal benefits. It has been alleged that the Chief Executive Officer (CEO) has unauthorizedly issued new shares to third parties and transferred shares to persons/entities without following the process of law, thereby causing loss to the shareholders and depriving the existing shareholders of their lawful right.
2. The Complainant has further contend ed that the CEO of the Company has siphoned off huge money of the company and borrowed massively from various financial institutions and created circumstances for the premature departure of financial institutions. It has further been alleged that there have been multiple changes made to the board of directors without fulfilling the necessary requirements of law and ensuring good corporate governance, as well as the creation of multiple subsidiaries without seeking necessary approvals from the board of directors and members of the Company .
3. To probe the matter further and in order to ensure the veracity of these allegations, it is considered essential to inspect the books of accounts and books and papers of the Company . I, there fore, in exercise of the powers conferred under Section 221 of the Companies Act, 2017 and in pursuance of S.R.O No.1136(I)/2017 dated October 30, 2017 hereby appoint Mr. Asif Muzaffar Sheikh, Join Registrar and Mr. Irfan Afzal, Joint Registrar (the Institution T eam) to conduct an inspection of M/s. Daewoo Pakistan Express Buss Service Limited."
2. Thus, doubtless, the Inspection Order was issued on a complaint filed by one Saad S. Faruqui (who has appeared through his counsel today) who claims to be a shareholder of Daewoo and which contains allegations of mismanagement of the company and refers to the various illegal and fraudulent activities purportedly carried out by the management of the company . Further allegations were made against the Chief Executive Officer who is alleged to have issued new shares to third parties and transferred shares to persons/ entities without following the process given in the Act, 2017. This complaint prompted the Commission for an order to be made under Section 221 of the Act, 2017 which provides as under:
221. Inspection of books of account by the Commission.-- (1) The books of account and books and papers of every company shall be open to inspection by any officer authorised by the Commission in this behalf if, for reasons to be recorded in writing, the Commission considers it necessary so to do.
(2) It shall be the duty of every director , officer or other employee of the company to produce to the person making inspection under sub-section (1) all such books of account and books and papers of the company in his custody or under his control, and to furnish him with any such statement, information or explanation relating to the affairs of the company , as the said person may require of him within such time and at such place as he may specify .
(3) It shall also be the duty of every direct or, officer or other employee of the company to give to the person making inspection under this section all assistan ce and facilitation in connection with the inspection which the company may be reasonably expected to give.
(4) The officer making the inspection under this section may, during the course of inspection-- (a) make or cause to be made copies of books of account and other books and papers; or
(b) place or cause to be placed by marks of identification thereon in token of the inspection having been made;
(c) take possession of such documents and retain them for thirty days if there are reasonable grounds for believing that they are evidence of the commission of an offence.
(S) Where an inspection of the books of account and books and papers of the company has been conducted under this section, by an officer authorised by the Commission, such officer shall make a report to the Commission.
(6) Any officer authorised to make an inspection under this section shall have all the powers that the Commission has under this Act in relation to the making of inquiries."
3. Section 221, reproduced above, simply empowers the Commission to require any company to open for inspection its books of account and books and papers to any officer authorized by the Commission. The only prerequisite is that reasons have to be recorded in writing in issuing an order unde r Section 221. At first blush, the provisions of section 221 require the Commission to make an informed decision on its own regarding inspection of books of account of any company in respect of which an order is required to be passed under Section 221. The provision further provides that it shall be the duty of every director and officer of the company to produce to the person making the inspection all such books of account and books and papers of the company in his custody or under his control and to furnish him with such statements, information or explanation relating to the affairs of the company as the person may require of him. By sub-section (5) of section 221, where an inspection of the books of account has been conducted by an officer authorized by the Commission, such officer shall make a report to the Commission. This necessarily brings into focus the provisions of section 256 which relates to investigation of the affairs of a company by the Commission and which, by its terms, provides that: "256. Investigation into affairs of comp any.--(1) Where the Commission is of the opinio n, that it is necessary to investigate into the affairs of a company--
(a) on the application of the members holding not less than one tenth of the total voting power in a company having share capital;
(b) on the application of not less than one tenth of the total members of a company not having share capital;
(c) on the receipt of a report under sub-section (5) of section 221 or on the report by the registrar under sub-section
(6) of section 254; it may order an investigation into the affairs of the company and appoint one or more persons as inspectors to investigate into the affairs of the company and to report thereon in such manner as the Commission may direct: Provided that before making an order of investigation, the Commission shall give the company an opportunity of being heard.
(2) While appointing an inspector under sub-section (1), the Commission may define the scope of the investigation, the period to which it is to extend or any other matter connected or incidental to the investigation.
(3) An application by members of a company under clause (a) or (b) of sub-section (1) shall be supported by such evidence as the Commission may requir e for the purpose of showing that the applicants have good reason for requiring the investigation.
(4) The Commission may, before appointing an inspector , require the applicants to give such security for payment of the costs of the investigation as the Commission may specify ."
4. One of the grounds for initiating an investigation into the affairs of a company is upon the receipt of a report under sub-section (5) of section 221. Thus, section 221 has a close connection with section 256 and any report compiled under this provision would logically form the basis of an investigation sought to be conducted by the Commission into the affairs of that company . Section 221 merely relates to the inspection of books of account by the Commission whereas section 256 clothes the Commission with the power to investigate into the affairs of a company . It follows indubitably that these provisions relate to prying into affairs of a company by the Commission and the legislature has therefore circumscribed the limits of the powers vested in the Commission to initiate such actions.
5. In particular , in respect of investigation into the affairs of a company under Section 256, there are only three instances under which the investigation can be ordered by the Commission. By clause (a) of sub-section (1), it can be done on the application of members holding not less than one tenth of the total voting power in a company having share capital and in terms of clause (b) of sub-section (1) on the application of not less than one tenth of the total members of a company not having share capital. The learned counsel for Saad S. Faruqui (the complainant) concedes that the complainant does not possess the qualifications mentioned in clauses (a) and (b) of sub-section
(1) of section 256. Therefore, the complainant could not have filed an application under Section 256 directly . He however chose an indirect modus operandi to trigger and put into motion the investigation into the affairs of Daewoo envisaged by section 256. For, inevitably , the proceedings under Section 221 lead to the investigative powers contemplated by section 256 and so is equally egregious and harmful for any company which would, at once, be at guard of its creeping danger . The complainant simply filed a complaint to the Commission which passed the Inspection Order and served it upon Daewoo. The entire basis of that order are the allegations made in the complaint on the part of the complainant. Thus, plainly and clearly , the Commission did not bring its own independent mind to bear on the entire aspect of the case and by acting mechanically passed the Inspection Order .
No reasoned and deliberative process preceded the making of the Inspection Order .
This is against the grain of the core principles underlying section 221. For Daewoo this has unpalatable consequences, in that, the inspection would likely lead to the compiling of a report in terms of sub-section (5) of section 221 and on which the Commission would proceed to appoint Inspectors by exercise of powers under Section 256 of the Act, 2017. Therefore, the two provisions, that is, Sections 221 and 256 are closely tied in with each other and have to be read together while determining the true import and construction of section 221. Surely , the legislature realized the need to fence the powers conferred on the Commission and this intention which permeates both section 221 and 256 cannot be circumvented by a contraption. Learned counsel for Daewoo relies upon an order passed by this Court in W.P No.20088 of 2012 which involved the question regarding appointment of inspectors under the erstwhile section 231 of the Companies Ordinance, 1984 which is in pari materia with section
221. This judgment was followed in W.P No.27555 of 2017 by relying upon the following excerpt of the earlier judgment passed by a learned Single Judge ( Shams Mehmood Mirza J. ): "...It is accepted position that report under Section 231 (5) can lead to investigation and appointment of inspectors under Section 263 but inspectors cannot be appointed simultaneously with the order of inspection of books of accounts and other books and papers as SECP proceeded to do through letter dated 01.08.2012. Be that as it may, in case inspectors are to be appointed then prior show cause notice has to be given. For all intents and purposes, through letter dated 01.08.2012, SECP exercised powers under Section 265 of the Ordinance as under Section 231 of the Ordinance, it had no power to appoint inspectors to carry out the investigation into the affairs of the petitioners.
The fact that inspectors were appointed under Section 265 of the Ordinance is furthermore apparent from the task given to them in terms of clause 2 of letter dated 01.08.2012. The registrar or the inspecting official at the most can inspect the books of account and other documents/papers of similar nature in exercise of powers under Section 231 of the Ordinance. However , the wide nature of work the inspectors were required to perform under the impugned letter could not be undertake n in terms of section 231 of the Ordinance. The source of power for issuance of order/letter dated 01.08.2012 was located in section 265 of the Ordinance and, therefore, SECP had to issue the show cause notice to the company before taking the proposed action. Notwithstanding the vital question of issuance of show cause notice, it is also to be noted that the power for appointment of inspectors under Section 265(b) of the Ordinance to carry out the investigation in the affairs of the company is discretionary and is dependent upon the formation of an opinion ("in the opinion of the Commission") that such an investigation is necessary ..."
6. It was further held that: "...This Court is of the opinion that the scope of inspection of books of account and other books and papers under Section 231 of the Ordinance has its limits and has to be distinguished from the investigation of the company' s affairs under Section 263 and 265 of the Ordinance."
7. Thus, a distinction was drawn between the scope of inspection under Section 231 as distinguished from the investigation of the company' s affairs under the provisions of sections 263 and 265 of the Ordinance, 1984.
However , in the case of Atlas (referred to above) the controversy turned on the question whether the simultaneous appointment of inspectors was a valid exercise of powers by the Commissioner or not and whether it was a distinct power from the power vesting in Commission under Section 231. On this basis it was held that prior to the appointment of inspectors, an opportunity of hearing was a sine qua non and was a requirement of procedure which was given in the statute itself.
8. The question before this Court is slightly nuanced and reduced to its core, the central issue relates to the precise scope of section 221 in juxtaposition to section 256 which are to be read in conjunction with each other . However , as explicated, the proceedings under Section 221 inevitably lead to the proceedings for investigation of the affairs of the company under Section 256. Therefore, this begs the question whether the Commission can proceed to exercise its powers under Section 221 on a complaint filed by one of the shareholders of a company?
9. The answer to the above question lies in a holistic reading of the provisions of Section 256 relating to the investigation of the affairs of the company . A direct approach to investigate into the affairs of a company has been provided as a complete code in section 256. This can be done by the Commission upon formation of an opinion on the application of the members holding not less than one tenth of the total voting power in a company having share capital. Thus, the only manner in which members can approach for investigation into the affairs of a company is on the application of a certain number of members having the voting power prescribed in clause (a) of sub-section (1) of section 256 and in no other manner . In the present case, the complainant not having the requisite qualification merely filed a set of allegations to the Commission on which proceedings were started in exercise of powers conferred on the Commission under Section 221. Thus, what the complainant was trying to achieve was an investigation into the affairs of the company indirectly which he could not have achieved directly by applying under Section 256 to the Commission. This not only seriously prejudiced the rights of Daewoo to be dealt with in accordance with law but also offends the well-worn adage that what cannot be achieved directly cannot be permitted to be done indirectly . This is not to imply that the Commission does not have the authority to proceed in terms of section 221 against a company . However , that has to be done on its own motion and by forming of opinion on the basis of material before the Commission and not upon extraneous considerations. The Commission has to take special care in all applications/ complaints filed to it which may be prompted by vested interests of a particular shareholder or a set of shareholders who do not have the qualification prescribed in section 256. If the Commission were to proceed on every complaint filed to it by a shareholder against a company , it would seriously jeopardize the right of a company to carry on its business without fear of being hounded by inspectors appointed by the Commission on allegations made by shareholders which may not have any basis or support. Any effort to unravel the affairs of a company is a serious concern for that company and impedes the normal business activities of that company and should not be permitted to be done without defining the parameters of the powers of the Commission under the various provisions of the Act, 2017. The power of the Commission to proceed under Section 221 surely remains intact and may be exercised in an appropriate case. However , it must not be solely predicated on a complaint filed by a shareholder without any material evidence and in order to lead indirectly to the consequences spelt out in section 256 as it is likely to have potentially wide implications. As stated above, there is no other basis for the Inspection Order except the complainant's allegations. This is evident when the officer issuing the Inspection Order observed that the powers conferre d under Section 221 were being exercised in order "to probe the matter further and in order to ensure the veraci ty of these allegations". Quite clearly , the Inspection Order unleashed a roving inquiry into Daewoo's affairs and thus impinged upon its rights to be treated in accordance with law. It is not the Commission's case that, priorly , the Commission had reasons to believe, apart from the contents of the complaint, that there was something amiss regarding Daewoo's affairs and that the complaint was the last straw which compelled and constrained the Commission into issuing the Inspection Order . The words 'for reasons to be recorded in writing' necessarily connotes that those reasons have to have provenance in a substantive review of the documents filed by a company by the Commission itself, on a fair and open-minded decision-making process.
10. The requirements of procedural fairness implicit in section 221, demand in the particular context, that the Commission should not be influenced by extraneous and irrelevant considerations to produce procedurally defective decisions. This aspect becomes starker and more pronounced in the context of delegation argument raised by Daewoo. The argument raised in this Court calls in question the act of the Commission to delegate its powers on its officers and which are quasi-judicial in nature. Reference was made to SRO 1136(I)/2017 dated 30.10.2017 by which various statutory powers of the Commission have been delegated to its officers. This includes the power under Section 221; which by the notification, now vests in the officer who has issued the Inspection Order . The consequence is that instead of an informal and collegiate decisio n-making by members of the Commission, acts under Section 221 are now being performed at the whims of individual officers. This, in turn, conjures up myriad of situations in which the power may be abused and hence a corresponding need for it to be fenced by strict rules. The notification too has been brought under challenge but for the present this question is left unattended since the issue can be resolved on other grounds. Daewoo, may raise this challenge in future if the occasion presents itself. However , for the present, suffice to say that bad faith and improper motives are more likely to influence acts under Section 221 by an individual of ficer rather than the Commission sitting as a whole.
11. The proximity between the investigation and the ensuring decision and the requirements of procedural fairness has been alluded to in De Smith' s Judicial Review (7th Ed.) p.499 in the following words: "The degree of proximity between the investigation in question and an act or decision directly adverse to the interests of the claimant may be important. Thus, a person conducting a preliminary investigation with a view to recommending or deciding whether a formal inquiry or hearing (which may lead to a binding and adverse decision) should take place is not normally under any obligation to comply with the rules of fairness. But such a person may be placed under such an obligation if the investigation is an integral and necessary part of a process which may terminate in action adverse to the interests of a person claiming to be heard before him."
12. Decisions based upon irrelevant considerations (or failure to take account of relevant considerations) are reviewable for illegality . The same treatise provides that: "If the exercise of a discretionary power has been influenced by considerations that cannot lawfully be taken into account, or by the disregard of relevant considerations required to be taken into account, a court will normally hold that the power has not been validly exercised". (p.305)
13. There is no doubt in my mind that the exercise of discretionary power by the officer issuing the Inspection Order was influenced by extraneous considerations which could not lawfully be taken into account. If the discretion is permitted to be exercised on this basis, then the decision-maker will be left adrift on a sea of factors without guidance. If wide unstructured discretion has to be rules out, reasons forming the basis of an Inspection Order must be based on a fair and open-minded assessment by the delegatee (of the Commission) of the material in his possession and not contained in a complaint or other correspondence. The words "for reasons to be recorded in writing" do not refer to a mere reproduction of the contents of a letter by a shareholder . This will not meet the criteria mentioned in section 221. If the officer acted on a complaint mechanically , then it will be deemed that there were no reasons to be recorded in writin g. Those reasons must necessarily have nexus with the formation of an opinion by him which compelled the issuance of a notice. The opinion cannot be formed on mere allegations of a shareholder , the veracity of which is still to be proved.
14. Daewoo harbours legitimate expectation regarding due process of law and a corresponding duty of care on the part of SECP . The relevant standard of care has been given in section 221 itself. Since the power has been delegated to an officer of SECP , there is no check on the power nor has objective criteria been laid down on the basis of which that officer may proceed on an information laid before him. This will, in turn, give rise to instances of invidious discrimination amongst different companies. There is no test which may be employed by the delegatee to distinguish between complaints or to choose one or the other . This will make the exercise of discretion purely whimsical and irrational. No material was placed on record to show if any report s have been compiled over the years by the Commission on the frequency of exercise of such powers. This is all the more necessary to enable the Commission to retain its overarching role and to review the delegation if found to have degenerated into abuse of power by the delegatee. Doubtless, these are enormous powers and must be subject to checks and balances.
Neither the Commission has laid down a framework within which proceedings may be set in motion on disclosure of voluntary information by a person, nor has it made it compulsory for such actions to be considered by the Commission periodically , in a meeting convened for the purpose. It is essential that there be control of the delegatee' s power by the Commission.
15. It is evident from what has been adumbrated above that the Commission (or its delegate in this case) did not have any material before it independent of the allegations made by the complainant for the valid exercise of powers under Section 221 of the Act, 2017.
16. In view of the above, this petition is allowed . The inspection order as well as the letter dated 26.02.2018 are hereby set aside.
This order shall be remitted to the Chairm an, SECP by the Office who shall conven e a meeting of the Commission, at the earliest, to review the cases in which powers under Section 221 of the Act have been exercised by the delegate. Also objective criteria shall be laid down by the Commission for the delegate to follow in all such matters.