INAAM AMEEN MINHAS, J.- Through the instant writ petition, the petitioner company impugns: (i) the show cause notice dated 10.04.2017 under section 265 of the Companies Ordinance, 1984 issued by the respondent No. 2/Executive Director/ HoD (CSD) to require the petitioner company to show cause as to why an inspector may not be appointed to investigate the affairs of the company, (ii) the order dated 05.12.2017, whereby inspectors were appointed for carrying out investigation into the affairs of the petitioner company, and (iii) challenged the vires of the amendments brought in section 33(1) of the SECP Act.
2. The facts, in brief, leading to the filing of the instant writ petition are that respondents No.1 and 2 ("SECP") issued a Show Cause Notice, dated 10.04.2017("Impugned SCN"), under Section 265 of the Companies Ordinance, 1984 ("Ordinance, 1984") calling upon the Chief Executive Officer of the petitioner company to explain as to why an inspector may not be appointed to investigate the affairs of the petitioner company concerning certain irregularities and observations i.e. potential misappropriation involving an advance payment against purchase of land and serious governance issues (including failure to pay outstanding amount of 'provident fund' within prescribed time). Subsequently, the SECP issued an Inspection Order dated 05.12.2017 ("Impugned Order"), whereby inspectors were appointed for carrying out investigation into the affairs of the petitioner company in respect of the above said two allegations.
3. The learned counsel for the petitioner company contended that the powers to appoint the inspector has been given to SECP under Section 265 of the Ordinance, 1984; that in facts and circumstances of the case the referred provision was not applicable and has wrongly been invoked; that the Impugned SCN and Order were passed in violation of Section 263 of the Ordinance, 1984, as the underlying complaint was unsigned, anonymous and failed to meet the statutory criteria for initiating an investigation into the affairs of a company. The learned counsel further contended that the appointment of inspectors must be predicated upon clear, prima facie evidence of fraud or statutory non-compliance and not on mere suspicion or inconclusive observations, emphasizing that the issues forming the basis of the Impugned SCN and Order had already been settled in prior years and that the Impugned Order was passed without application of judicial mind, in contravention of established legal principles and procedural requirements, including undue delay in pronouncement of the order, thereby prejudicing the petitioner's rights and reputation. He also contended that no appeal is provided under the law against the Impugned Order passed under Section 265 of the Ordinance, 1984; that the petitioner company withdrew his prayer challenging the vires of the amendments brought in section 33(1) of the SECP Act. Lastly, he contended that the Impugned SCN and Order are illegal, discriminatory, without lawful jurisdiction, and in violation of the applicable law.
4. Conversely, the learned counsel for the SECP contended that the investigation against the petitioner company was lawfully ordered under Section 265 of the repealed Ordinance, 1984, and that Section 513 of the Companies Act, 2017, expressly validated all amendments made to the repealed ordinance, thereby preserving the legal effect of such actions; that the jurisdiction and scope of Section 265 are distinct from those of Section 263, as Section 265 empowers the SECP, independent of Section 263, to appoint inspectors to investigate a company's affairs, where circumstances suggest fraudulent conduct, oppression of members, or withholding of material information from members; that the petitioner company was afforded full opportunity of hearing, however, the petitioner company's responses were found unsatisfactory, consequently, the Impugned Order was issued under Section 265, appointing inspectors to investigate serious financial irregularities, without any finding of guilt or infringement of rights at this preliminary stage.
The learned counsel further contended that the issuance of the Impugned Order is a procedural step to ascertain facts and does not constitute a conviction or adverse determination against the petitioner company, and that all actions were taken in accordance with law and principles of natural justice, and that the petitioner company will be afforded due process and appellate remedies.
5. I have given anxious consideration to the arguments of the learned counsel for the parties and perused the record with their able assistance.
6. The petitioner's primary grievance pertains to two interrelated issuesthat were raised through the Impugned SCN dated 10.04.2017 i.e. potential misappropriation involving an advance payment against purchase of land and serious governance issues (including failure to pay outstanding amount of 'provident fund' within prescribed time). Accordingly, the SECP issued an Investigation Order i.e. the Impugned Order dated 05.12.2017 to investigate these points.
7. Upon perusal of the record, it is revealed that the petitioner company had already submitted in the earlier proceedings the entire evidence as required by SECP in the year 2012 when information regarding purchase of land and its subsequent cancellation was sought by the then Director (Enforcement) SECP from the petitioner company. In this regard all the documents i.e. sale agreement, details of land and payment transactions were provided to the SECP. The same was duly provided by the petitioner company vide letter dated 25.01.2012. However, the then Deputy Director of the SECP again sent a letter dated 20.08.2013 to the petitioner company seeking the same information regarding purchase of the land and payment of provident fund. The petitioner company vide letters dated 06.09.2013 and 14.09.2013 clarified its position but some additional information was sought by the SECP vide letter dated 23.09.2013, which was duly provided by the petitioner company vide its representative letter dated 30.09.2013. Thus, neither any penal action was taken nor any further proceedings were recommended against the petitioner company.
8. The second round of proceedings were reinitiated by SECP on the complaint of a shareholder after which the SECP issued the impugned SCN dated 10.04.2017 and the impugned inspection order. After a thorough perusal of the contents of the impugned SCN it transpired that the SECP issued the impugned inspection order on the basis of two issues that were raised through the impugned SCN i.e. potential misappropriation involving an advance payment against purchase of land and serious governance issues (including failure to pay outstanding amount of 'provident fund' within prescribed time). This reflects that the allegations against the petitioner company contains the same allegations which were earlier dealt by the SECP especially with regards to potential misappropriation of payment against land purchase, however, the SECP took action on the application of the shareholder.
9. The contents of the Impugned SCN reveal that the same was issued under Section 265 of the Ordinance, 1984. However, the underlying basis for the Impugned SCN was a complaint filed by a shareholder, which falls within the scope of Section 263 of the Ordinance, 1984, not Section 265. The statutory framework applicable for adjudicating this question is the Ordinance, 1984, particularly Sections 263 and 265, which are reproduced hereunder for ease:- "263. Investigation of affairs of company on application by members or report by registrar. - The Commission may appoint one or more competent persons as inspectors to investigate the affairs of any company and to report thereon in such manner as the Commission may direct,--
(a) in the case of a company having a share capital, on the application of members holding not less than one-tenth of the total voting powers therein
(b) in the case of a company not having a share capital, on the application of not less than one- tenth in number of the persons entered on the company's register of members;
(c) in the case of any company, on receipt of a report under sub-section (5) of section 231 or on a report by the registrar under sub-section (6) of section 261."
"265. Investigation of company's affairs in other cases.- Without prejudice to its power under section 263, 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 resolution in general meeting, or
(ii) the Court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Commission; 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 the opinion of the Commission 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 unauthorized 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 member 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 sound 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 to show cause against the action proposed to be taken."
10. A bare perusal of the above referred provisions reveals that although Sections 265 and 263 of the Ordinance, 1984 are closely tied in, the power flows out of entirely different circumstances for the SECP to start an investigation. Reduced to its core, under Section 265 the SECP can appoint one or more competent persons as inspectors to investigate the affairs of a company and report thereon as directed. This power is exercised in two principal scenarios: (a) mandatorily, where the company by resolution in a general meeting or the Court by order declares that an investigation is warranted; and (b) at the Commission's discretion, where circumstances suggest, inter alia, that the company's business is being or has been conducted with intent to defraud creditors, members or others for a fraudulent or unlawful purpose, in an oppressive manner or where there is evidence of fraud, misfeasance, breach of trust, unauthorized business, deprivation of reasonable return to members, inadequate disclosure of information, allotment of shares for inadequate consideration, unsound business practices, or financial instability endangering solvency. Whereas Section 263 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 231 or by the registrar under subsection (6) of Section 261. Thus, if at all the SECP sought to investigate into the affairs of a company on the basis of a shareholder's application, it must have initiated proceedings under Section 263.
11. From the facts and evidence on record, it is evident that the Impugned SCN was issued under Section 265 of the Ordinance, 1984 and a holistic reading of the Impugned SCN makes it abundantly clear that the proceedings were not initiated by the SECP on its own and under its suo motu powers conferred by Section 265 by forming an independent and bipartisan opinion. Instead, the entire process was initiated on a complaint from an individual claiming to be a shareholder of the petitioner company. Thus, the SECP's issuance of the Impugned SCN under Section 265 of the Ordinance, 1984, based on a shareholder complaint, is fundamentally flawed because it failed to meet the legally required threshold, specifically, the complaint must be filed by 10% of the total voting power of the shareholders. This statutory threshold is not a mere formality; it serves as a critical safeguard designed to prevent undue interference in a company's internal affairs by individual shareholders or regulators without sufficient backing. This provision ensures that only a significant portion of shareholders can initiate regulatory action, thereby maintaining corporate independence and stability.
12. It is essential to recognize that initiating a formal investigation into a company's internal affairs is a profound and far-reaching step. Such an action can have significant consequences, not only in terms of financial liabilities but also in terms of damaging the company's reputation and goodwill. Therefore, the law has deliberately placed strict limitations on the exercise of this power.
Under Section 263, investigations based on shareholder complaints must follow a defined legal route, including specific thresholds and procedural safeguards. It goes without saying that an investigation into the affairs of a company is a serious matter and entails consequences both financial and ones relating to goodwill of a corporate entity and these powers cannot be lightly used by the SECP. In this case, the SECP appears to have acted on a private complaint without meeting the procedural or substantive conditions required by either Section 263 or Section 265, raising serious questions about the legality and fairness of the proceedings.
13. It is a settled principle that due process constitutes a fundamental Constitutional right and no proceedings may be lawfully initiated except in strict adherence to due process and the prescribed procedural formalities. In the present case, the proceedings commenced by the SECP under Section 265, an inapplicable provision, on the basis of a complaint by a shareholder of the petitioner company are in clear contravention of statutory requirements and thus vitiate the legality of the proceedings. The regulatory functionaries, if allowed to assign themselves with a jurisdiction not vested in them in the sacred statute book and their desire to cross the same would amount to a flagrant violation of their legal jurisdiction and would result in abuse of their powers. It is a well-settled principle of law that any exercise conducted without due process of law is unconstitutional, illegal and void. It is also a well-settled and established principle of law that when the legislature requires the doing of a thing in a particular manner then it is to be done in that manner and all other manners or modes of doing or performing that thing are barred as held in Federation of Pakistan through Secretary, Finance, Islamabad and another vs. E-Movers (Pvt.)
Ltd. and another, (2022 SCMR 1021) and Chairman, NAB vs. Nasar Ullah, (PLD 2022 SC 497). In light of this settled legal position, it is clear that the SECP had no authority to issue a Show Cause Notice under Section 265 based solely on a shareholder complaint that did not meet the statutory threshold. Therefore, the issuance of the Impugned SCN was not only procedurally flawed but also legally void.
14. It is essential to highlight that during the course of the proceedings the petitioner company stated that the SECP has withdrawn the Impugned SCN vide order dated 07.12.2021 which was denied by the SECP. Observing this procedural impropriety this Court directed the SECP to file a detailed report regarding the current status of the proceedings in light of the Impugned SCN and Impugned order concerning the provident fund and land purchase funds. It transpired from the report that the SECP had initiated parallel proceedings against the petitioner company through another show cause notice dated 05.05.2020 under Sections 218, 219, and 479 of the Companies Act, 2017, which dealt exclusively with non-compliance in relation to provident fund contributions and the same was already settled by allowing a payment plan and consequently disposed of vide adjudication order dated 07.12.2021, whereas no monetary penalty or any recommendation for initiation of other proceedings was imposed. Therefore, the issue of provident fund stands settled and there exists no reason qua the same for the appointment of inspectors.
15. This Court shall now proceed to consider the remaining issue i.e. the potential misappropriation of payment against purchase of land. The investigation regarding potential misappropriation involving an advance payment against land purchase initiated under the Impugned SCN remains pending. The learned counsel for the SECP contended that the transaction lacks adequate supporting documentation and has raised substantial doubts about its legality. Upon perusal of the record, it is revealed that the petitioner company had already submitted in the earlier proceedings the entire evidence as required by SECP in the year 2013 when information regarding purchase of land and its subsequent cancellation was sought by the then Director (Enforcement) of the SECP from the petitioner company. It is imperative to underscore that, although the SECP is endowed with extensive investigative and regulatory powers, such authority is not unbridled and must be exercised strictly within the confined limits of law, subject to the principles of procedural fairness, propriety, and statutory limitations. The exercise of such powers must be guided by due process and cannot be arbitrary or capricious. In this context, the issuance of the Impugned SCN on a matter that has already been addressed in a previous round of proceedings without giving reasons for reopening the same reflects the non-application of statutory obligation, in contravention of established legal principles and procedural requirements, without prejudicing the petitioner's rights including undue delay in pronouncement of the order. Therefore, the Impugned SCN issued on the basis of misappropriation of payment against purchase of the land is not in essence of the third round of proceedings since it is regarding the same issue, transactions and allegations. Moreover, the same was issued without mentioning the earlier proceedings i.e. the ones initiated in 2012 and 2013, and without mentioning the delay/reason in non-pronouncement of any order. Since the earlier round of proceedings did not culminate into any order, it means that the SECP was satisfied by the petitioner company's response. Accordingly, the SECP being the regulator must have acted fairly and have dealt with this matter within the bounds of its jurisdiction, reasonable time and in accordance with the law, ensuring that its actions do not infringe upon the rights of the parties.
16. Since it is an admitted fact that the documents submitted by the petitioner company in respect of the land are already available with the SECP, who have not yet given any findings in respect of the same due to pendency of these proceedings, the department retains the liberty to initiate separate and independent proceedings, if required according to the law.
17. In view of the above discussion, the instant writ petition is allowed. The Impugned SCN and the Impugned Order appointing the investigators are set aside.