SHAHID KARIM, J.---This constitutional petition challenged the show cause notice under section 257 of the Company Act, 2017 issued by the Executive Director/Authorized Officer to require the petitioner-company ("Hira Textile ") to show cause as to why Inspectors may not be appointed to investigate the af fairs of the company .
2. The show cause notice firstly refers to the audit report made by the statutory auditor of the petitioner-company for the year ended June 30, 2020 and alludes to some purported adverse opinion which has been reproduced in the initial part of the show cause notice. All of these observations in the audit report refer to some outstanding principal amount as well as an amount by way of markup relating to various short term borrowings reported in the financial statements. The report further makes a reference to the failure on the part of the company to make timely payments of those financial obligations. Thus, the portion of the audit report which has been set out in the first part of the show cause notice merely refers to contractual obligations between a financial institution and the petitioner- company . This is further substantiated by the next two paragraphs of the show cause notice which provide that: "2. AND WHEREAS, the complaint/application received by the Commission from MCB Bank Limited and Bank Alfalah Limited (collectively referred as "Banks") reveals that the Company in pursuance of financing facilities availed from the Banks executed facility agreements and security documents in favor of the Banks. These security documents granted charge over specific assets belonging to the Company . Subsequently , HTML in violation of the agreements, without permission of the Banks, entered into two lease agreements in favour of its associated company Hira T erry Mills Limited.
3. AND WHEREAS, the Lahore High Court appointed local Commission whose report prepared on verification and existence of inventory hypothecated in favour of the Bank revealed that meager stocks are available at the factory of the Company , it appears that Company has illegally , fraudulently and without knowledge of the Banks lifted misappropriated the goods."
3. From a read of the above paragraphs it is apparent at once that the show cause notice has been triggered on a complaint received by the Commission from MCB Bank Limited and Bank Alfalah Limited (the Banks ) and clearly adverts to the finance facilities being availed by the company from these banks and alleges violation of the finance agreement executed between the parties. This begs the question whether the complaints made by the Banks constituted jurisdictional facts to authorize the Commission to issue a show cause notice under section 257 of the Act, 2017 under the circumstances. Section 257 of the Act, 2017 provides that: "257. Investigation of company's affairs in other cases.--
(1) W ithout prejudice to its power under section 256, the Commission--
(a) shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Commission may direct, if-
(i) the company , by a special resolution, or
(ii) the Court, by order , declares that the affairs of the company ought to be investigated; and
(b) may appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Commission may direct if in its opinion there are circumstances suggesting-
(i) that the business of the company is being or has been conducted with intent to defraud its creditors, members or any other person or for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members or that the company was formed for any fraudulent or unlawful purpose; or
(ii) that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance, breach of trust or other misconduct towards the company or towards any of its members or have been carrying on unauthorised business; or
(iii) that the affairs of the company have been so conducted or managed as to deprive the members thereof of a reasonable return; or
(iv) that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect; or
(v) that any shares of the company have been allotted for inadequate consideration; or
(vi) that the affairs or the company are not being managed in accordance with soun d business principles or prudent commercial practices; or
(vii) that the financial position of the company is such as to endanger its solvency: Provided that, before making an order under clause (b),- the Commission shall give the company an opportunity of being heard.
(2) While appointing an inspector under subsection (1), the Commission may define the scope of the investigation, whether as respects the matters or the period to which it is to extend or otherwise.
4. There are two ways by which the powers conferred upon the Commission may be engaged in different circumstances set out in clauses 'a' and 'b' respectively of section 257. Clause 'a' of section 257 delineates that the Commission is obligated to appoint a competent person as inspector to investigate the affairs of a company if the company resolves by special resolution or the Court under the Act, 2017 declares that- the affairs of a company ought to be investigated. Clause 'b' of subsection (1) of section 257 gives power to the Commission to investigate the affairs of a company on its own but prior to that it has to form its opinion that there are circumstances suggesting one of the grounds to exist which have in fact been spelt out by the legislature in clause 'b' of subsection (1) of section 257. All of these factors relate to the corporate affairs of a company and has a direct nexus to the regulatory authority of the Commission. Thus the powers of the Commission under this provision are circumscribed and the Commission does not have a carte blanche in such matters. This aspect will be adverted to in the proceeding paragraphs.
5. Be that as it may, it is apparent from the contents of the show cause notice that the proceedings were set in motion on a complaint received by the Commission from the Banks. It will now be necessary to collate section 257 with section 256 as the powers in these provisions are seemingly overlapping. The power conferred on the Commission to investigate a company's affairs under section 257 is without prejudice to its powers under section
256. There is, however , a subtle distinction which will be brought to fore in the following discussion. Section 256 reads as under: "256. Investigation into affairs of comp any.--(1) Where the Commission is of the opinion, 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 subsection (5) of section 221 or on the report by the registrar under subsection
(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 subsection (I), 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 comp any under clause (a) or (b) of subsection (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 .
6. Although sections 256 and 257 are closely tied in, the power flows out of entirely different circumstances for the Commission to start an investigation. Reduced to its core, section 256 is engaged on the happening of an event; either on an application by members (holding certain threshold voting power) or on a report compiled under sub- section (5) of section 221 or by the registrar under subsection (6) of section 254. Thus, if at all the Commission seeks to investigate into the affairs of a company on an application, it must be an application made by one of the persons or entities mentioned in section 256 and none else. Neither MCB Bank nor Bank Alfalah (as the creditors of the petitioner-company) were entitled to make an application under section 256. The cognizance of a matter relating to investigation cannot be taken by a circuitous route, that is, by firstly receiving a complaint and thereafter (upon finding it to be outside the ambit of section 256) invoking its powers under Section 257, whimsically and unreasonably , to serve a notice on Hira Textile. This is misdirection of law and which then led through the rest of the decision-making powers. The sweep of the powers under section 257 is distinct and separate from section 256 and one cannot be confused with the other. Section 257 envisages formations of opinion by the Commission as a pre-condition and that opinion must be based on the Commissions' own inquiry and by application of independent mind. Clause (b) of subsection (1) of section 257 discountenances a fishing enquiry but the discretion exercised by the Commission must have source in material which, prima facie, establishes malfeasance in any of the forms mentioned in that provision. A fact specific balancing exercise is to be conducted by the Commission uninfluenced by an external source. This is the cardinal feature of any exercise of power under section 257. The scope of the two provisions viz. sections 256 and 257 cannot be muddled by the Commission to the detriment of the corporate entities. That is why it is a better option for the Commission to proceed under Section 256(1)(c) on receipt of a report, to rule out infecting its discretion with bias and arbitrariness.
7. It does not matter whether the show cause notice has been mentioned as having been issued under section 257 of the Act, 2017 whereas a holistic reading of the show cause notice makes it abundantly clear that the proceedings were not initiated by the Commission on its own and under its suo motu powers conferred by section 257 by forming an independent and bipartisan opinion yet it was started on the complaint of certain financial institutions claiming to be the creditors of the petitioner company and simultaneously alleging default in the contractual obligations by that company . It goes without saying that an investigation into the affairs of a company is a serious matter and entails consequenc es both financial and ones relating to goodwill of a corporate entity and these powers cannot be lightly used by the Commission. That is why the power to investigate into the affairs of a company have been circumscribed by the provisions of section 256 and in case the Commission seeks to do so on its own, once again the power has to be confined to the grounds mentioned in clause '13' of subsection (1) of section 257. To reiterate, any power to be exercised by the Commission under section 257 has to be preceded by formation of an opinion and thereafter a show cause notice giving the company an opportunity of hearing can be issued. In this case, there is no formation of opinion by the Commission which is conspicuous by its absence. Once again, this shows clearly that the Commission acted mechanically on a compla int filed by the creditors of the company which was reflexively treated and did not apply its mind while forming an opinion.
8. In view of the above, this petition is allowed. The show cause notice impugned herein is set aside. However , it is made clear that the Commission may proceed to investigate into affairs of the petitioner-company by following the mandate of law , as adumbrated.