1. MALIK ASRAR AHMAD KHAN, MEMBER, C.L.A.,-1. Pursuant to the order issued by the Federal Government on 12th January, 1982, an enquiry was conducted into the affairs of M/s. Janana De Malicho Textile Mills Limited under section 21 of the Securities and Exchange Ordinance; 1969 (hereinafter referred to as the Ordinance).
2. On receipts of the enquiry report, a show cause notice under section 22 of the Ordinance, dated 8th January, 1986 was issued to the company which was replied by the company vide their letter dated 24th March, 1986. The case was heard on 17th January, 1990 and 24th February, 1990 when Dr. Pervez Hassan, Advocate and Mr. Amin-ur-Rashid, Manager Finance and Accounts were present on behalf of the company. During the hearing the learned counsel for the company took certain legal objections which were not, initially, a part of the reply (dated 24th March, 1986) to show cause notice. Written arguments were also filed. These objections were entertained because there is' no estoppel against law. These were also discussed in detail, particularly, at the time of hearing on 24th February, 1990. These objections are dealt with as under:-
(i) The first objection taken by the company was that the Corporate Law Authority did not supply complete documents and terms of reference of the Enquiry Officer to the company.
2. To examine this objection the record was perused. The record shows that copy of the order dated 12th January, 1982, was sent to the Managing Director/Chief Executive, M/s. Janana De Malicho Textile Mills Limited, 'Universal Insurance Building, (3rd Floor), Saddar Road, Peshawar. The bona fides of the record maintained in the public office during the normal course cannot, therefore, be challenged. The objection fails and accordingly ruled out.
(ii) The second objection of the company was that the terms of reference for the enquiry supplied to the company during the course of hearing, were vague and ambiguous.
3. During the course of hearing when a reference was made to "terms of reference" assigned to the Enquiry Officer, it was noticed that all the issues had been sufficiently set out therein. It was also not necessary to specify the allegations in an order for enquiry because the basis for the present proceedings was the show cause notice dated 8th January, 1986 which specified all the necessary details and not the terms of reference. I, therefore, see no substance in the argument of the learned counsel which is accordingly, rejected.
(iii) The next objection taken by the counsel was that the terms of reference or the enquiry could not include alleged violation of laws other than the Securities and Exchange Ordinance, 1969 and the Securities and Exchange Rules. It was further submitted that it was a fundamental proposition of law that an enquiry under specific legislation could only concern itself with the subject matter of that specific legislation while in fact the report of Enquiry Officer illegally covered all conceivable offences under legislations other than the Ordinance. It was further argued that because of this illegal reach of the enquiry the whole enquiry had vitiated. The Companies Act, 1913, the Companies Ordinance, 1984 allow enquiries into the affairs of the companies. The Enquiry Officer, therefore, could not investigate under the Companies Act or Ordinance, as has been held by the Supreme Court in Syed Raunaq Ali Vs Chief Settlement Commissioner reported as PLD 1973 SC 257). To support his contention the learned counsel referred to the case of Hyesons Sugar Mills PTCL 1986 CL-4.
4. There is no indication on record that this objection was ' raised earlier by the company either before the Enquiry Officer or in reply to the show cause notice. It is not necessary to examine here in detail the cases referred by the learned counsel, as I can do no better than to reproduce with advantage the following observations in the-above case which appear at Page-11 of the report: "The next objection is, that in Para-III of the 'Terms of Reference' the Enquiry Officer was asked to investigate breach of the provisions of sections 91A and 91B of the Companies Act, 1913 while the company law is a self contained and exhaustive enough to punish any company who contravenes the provisions of the company law. It has been stated that in section 138 of the Companies Act, 1913, there is a specific provision for the appointment of an Inspector to investigate the affairs of any company. Further that under section 21 of the Securities and Exchange Ordinance, 1969, the Federal or Central Government is not competent to appoint an Enquiry Officer to investigate alleged irregularities committed by a company under the Companies Act, 1913. It has been urged that the Federal Government has acted illegally and without any authority or jurisdiction by including this item in the 'Terms of Reference'."
5. It has been stated that in Syed Raunaq Ali Vs. Chief Settlement Commissioner reported as PLD 1973 S.C. 257 Mr. Hamoodur Rehman C.J. Observed: This is no doubt correct, but it is also now well established that where an inferior Tribunal or Court has acted wholly without jurisdiction or as Rubinstein puts it in his book on 'Jurisdiction and Illegality' taken any action "beyond the sphere allotted to the tribunal by law, and, therefore, outside the area within which the law recognises a privilege to err", then such action amounts to a 'usurpation of power unwarranted by law1 and such an act is a nullity; that to say, 'the result of a purported exercise of authority which has no legal effect whatsoever. In such a case, it is well established that a Superior Court is not bound to give effect to it particularly where the appeal is to the latter's, discretionary jurisdiction. The Courts would refuse to perpetuate, in such circumstances, something which would be patently unjust or unlawful".
6. It has further been stated that in view of the law laid down by the Supreme Court of Pakistan the 'Terms of Reference' assigned by -the Central or Federal Government to the Enquiry Officer are ultra vires of the Companies Act, 1913 and are without jurisdiction. This illegal act of the Central Or Federal Government has made the whole 'Terms of Reference' illegal, inoperative and ultra vires.
7. This plea has been considered. A perusal of the 'Terms of Reference' shows that Para III 1 did ask the Enquiry Officer to investigate any breach of provisions of sections 91A and 9 IB of the Companies Act, 1913 but the present notice to the company does not require it to give any explanation about any default under the Companies Act. The notice under consideration relates to contravention of provisions of Securities and Exchange Ordinance, 1969. As no action under Companies Act is contemplated nor is proposed to be taken this objection also fails.
(iv) The next objection was that the company was not given an opportunity to show cause before the Enquiry Officer was appointed. The learned counsel contended that the principle of natural justice and "audi-alteram partem" was violated. In Commissioner of Income Tax vs Mr. Fazlur Rehman PLD 1964 S.C. 410, by the full bench of the Supreme Court of Pakistan, that "an order effecting the right of a party cannot be passed without an opportunity of hearing to that party" and that the maxim no man shall be condemned unheard" is not confined to Courts, but extends to all proceedings by whomsoever held which may affect the person or property or other rights of the parties concerned. It was further contended that this principle had been recognised in other decisions of our superior Courts.
8. After reading the above quoted observation, I am of the humble opinion that the above observations of the Supreme Court of Pakistan lay down that a hearing be given where the person, property and other rights of a party are effected. An enquiry is for fact finding and does not effect the rights of anyone. As such a notice for hearing before appointing an Enquiry Officer was not necessary and in fact before arriving at any decision in the matter, a show cause notice 8th January, 1986 had already been issued. Therefore, the argument that no opportunity was granted, does not hold good at all. The objection accordingly fails.
(v) The next objection was about the report which was stated to be based on (a) misconception of law, (b) personal opinion of legal issue and (c) reliance on irrelevant material. The learned counsel contended that the power under Ordinance was merely investigatory and not judicial. The mandate of the Enquiry Officer was only of a fact finding nature. Instead he proceeded to interpret and express opinions on issue of law. This vitiated the entire enquiry. In support of his contention the learned counsel referred to the case of Hyesons Sugar Mills, reported PTCL 1986 Cl. 4.
9. Regarding this objection I may also refer the case referred by the learned counsel, wherein an objection of somewhat similar in nature was raised by the company and was rejected. I may reproduce the relevant observations which read as follows: "This objection has been considered. The enquiry conducted by the Enquiry Officer was for fact finding and this has been done by him. The Enquiry Officer has also given his comments on each 'Terms of Reference'. He has also made some suggestions for amendment to the law, but this does not in any way effect the facts stated about the company under consideration. This objection is misconceived and also fails."
(vi) The next objection is that the enquiry can only be in respect of Securities and Exchange Ordinance, 1969, and the Rules framed thereunder applicable at the time of offence and not retrospective: In support of his contention the learned counsel relied on the observations made by this Authority in Hyesons Sugar Mills PTCL 1986 C.l. 4.
10. In order to appreciate the contention, it may be convenient if I quote here the relevant para from the above case.
11. This point has been considered. There cannot any two opinions that the law and rules applicable at the point of time when a default was committed have to be applied. The point is conceded."
(vii) The next objection was that the CLA had not applied its mind in examining the enquiry report.
12. The learned counsel contended that the show cause notice was issued mechanically. The voluminous report of the Enquiry Officer concerned with substantially irrelevant and extraneous matters and only a small portion of his findings concerned the show cause notice and all the other findings were extraneous to the enquiry. The enquiry report abundantly highlighted the bias of 'the Enquiry Officer against the company. The CLA on proceeding mechanically on the basis of the enquiry report had shown legal malice. In support of his contention the learned counsel referred to Hyesons Sugar Mills case PTCL1986 C.L. 4.
13. This objection was also misconceived. The case law quoted by the counsel of the company was about malice where action had been taken. No action had been taken by any authority so far and in fact the objection of 'proceeding mechanically' on the enquiry report was not valid when seen in the perspective of the fact that the entire enquiry report did not form the basis of the show cause notice and after due consideration some parts cif it were omitted from the show cause notice. As such there was no question of any malice. This objection, therefore, also fails.
(viii) The next objection was that the Enquiry Officer appointed pursuant to the SRO 1024(1)/81, could only investigate offences after such delegation. In the present case the Enquiry Officer had not respected this bar.
14. In view of the following principle laid down in Hyesons Sugar Mills PTCL 1986 CL. 4, I find no substance in the objection: "This objection is without any basis. The Member, Corporate Law Authority is fully competent to deal with the case of the company in respect of any year as section 21 of the Ordinance, or the Notification does not specify any estoppel for not making any enquiry in respect of any earlier year."
15. The objection in this behalf, therefore, fails.
(ix) The next objection was that the Enquiry Officer became functus officio after he submitted his enquiry report on 27th February, 1985. He could not be called upon to give his comments to the company reply as he did on 4th July, 1987. He was illegally allowed to carry his bias into the present proceedings before the Corporate Law Authority.
16. This objection has been considered in the light of the following observations made in the case of Hyesons Sugar Mills PTCL 1986 CL. 4: The enquiry conducted by the Enquiry Officer was for fact finding an4 this has been done by him.
17. The Enquiry Officer has also given his comments on each Term of Reference. He has also made some suggestions for amendment to the law, but has does not in any way effect the facts stated about the company under consideration."
18. I find no force in the objection which accordingly fails.
(x) The next objection taken by the company was that the enquiry report as well as the comments of the Enquiry Officer were based on surmises and hearsay evidence. There was no record of meetings, no joint signatures to any document. Inspite of all this the Enquiry Officer kept on relying on his personal opinion and alleged verbal statement made to him during the enquiry. Inasmuch as there was no record of the meetings, their timing and the participants who attended such meetings, the entire enquiry report was of no legal value and could not be basis of further proceedings against the company.. Farther, for all its illegality, bias and usurpation of power shown above, the Enquiry Report was a nullity in the eyes of law. It is a poisonous tree, the fruit of which was forbidden.
19. It is not necessary to discuss this objection at any great length. The enquiry conducted by the Enquiry Officer was for fact finding and this had been done by him. I may refer here the case of Hyesons Sugar Mills PTCL 1986 CL. 4., where objections somewhat similar nature were raised and were rejected. Relying on the same, the arguments are rejected here also.
3. Having dealt with the preliminary objections, I now proceed to take up the contentions of the company about the contraventions mentioned in the show cause notice:
(i) The first contravention pointed out in the show cause notice is that the company purchased Towel Cloth worth Rs. 301,500 in 1976 from an associated company, M/s Javed and Co. (Textile)
20. Limited and sold it in the same year. But the stock was not taken in the books and the sale was not booked at the time of disposal. It had been booked in the company's books in 1980. Non-disclosure of the purchase and sale of towel cloth in the annual accounts for the year 1975-76 involved contravention of para 1 and l(B)(ii) of Part-II of the Second Schedule (applicable at the relevant time) of the Securities and Exchange Rules, 1971. In reply to this the company submitted that the objection was not correct. It was stated that stocks of towels belonging to Javed & Co., (Textile)
21. Limited were lying duly processed in the godowns of the Janana alongwith the stock of the company. However, at the time of booking only the sales of towels belonging to Janana were booked in the accounts and no entry in 1976 was passed in the books of Janana for towel valuing 301,500 as these did not belong to them. Further, the company purchased 54,618-1/2 yards of towel from Javed & Co. (Textile) Limited in 1980 out of which the company exported towel of 48,348 yards in the same year to M/s Imtex Agencies AB Sweden which was evident from the record of the company. During the hearing the learned counsel stated that if they had allowed Javed & Co.
22. (Textile) Limited, to sell these towels directly to any other party, then the recovery of Rs. 338,244.47 from that company would have been jeopardised. It was argued that the Enquiry Officer had not been able to produce any documentary evidence in support of his contention that the company had sold the consignment in 1976. On the other hand, photocopies of bill of lading, invoice, form AE- 2, gate- passes and L/c were produced by the company to show that the transaction took place in 1980 for 48,348 yards (and not in 1976 for towel cloth worth Rs. 301,500). Since the Enquiry Officer did not support his allegation of non-disclosure with any documentary evidence, the proceedings on this count are dropped. The allegation of contravention against the company is not proved and accordingly dropped.
(ii) The next contravention mentioned in the show cause notice is that the damaged stock as on 30th September, 1980 was valued at rates applicable to finished goods. As a result of this incorrect valuation of damaged stock, the finished stocks were over valued to the extent of Rs. 3.48 lacs. Thus the finished stocks were not correctly disclosed. In reply the company submitted that the actually realised price of the stocks was higher than the valuation of the stocks, therefore, it was incorrect to suggest that the company had overstated its results due to wrong valuation of the stock. At the time of hearing the learned counsel for the company reiterated the contention that the realised Price (Rs. 351,418/-) of the damaged stocks was higher than the valuation made at Rs. 350,630/-.
23. The allegation, therefore, does not carry any weight. As the contention of the company is supported by actual facts, the objection is dropped.
(iii) The next contravention mentioned in the show cause notice was that at the time of physical verification of the cloth as on 6th April, 1982 by the Enquiry Officer it was found that the company pledged stocks of third parties with the National Bank of Pakistan. In the accounts for the year ended 30th September, 1982 it had been disclosed that these stocks were of the company for which, cash credit limit of Rs. 212 lacs was obtained from the bank. Thus correct disclosure was not made in the accounts for the year ended 30th September, 1982, and accordingly the company contravened the provisions of Part-1 of the Second Schedule applicable at the relevant time. In reply, the company submitted that on 6th April, 1982 they had pledged their. Own stocks with the National Bank of Pakistan, Kohat, against cash credit limit of Rs. 212 lacs, and they never pledged the stock mentioned in the show cause notice except the lot of mere seven bales viol 40 x 40 belonging to Babri Cotton Mills Limited which has been qualified by the Auditors in their notes to accounts of Babri Cotton Mills Limited. During the hearing, the learned counsel for the company admitted that there had been omission but pleaded that no intent of offence could be imputed if viewed in the totality of circumstances. It was claimed that the- stocks of in question were of the merely 6,546 meters and could hardly help substantially in getting a cash credit limit-of Rs. 212 lacs. It was a mistake of mixup that these stocks which belonged to Babri Cotton Mills Limited were inadvertently pledged with the National Bank of Pakistan, Kohat. But the pledge of this single lot was not advertent as very marginal and insignificant gain could be attributed this item. All other items mentioned in the show cause notice were denied and to substantiate. The arguments, bank- pledge Statements dated 5th April, 1982 were produced. It was pleaded that the omission may be condoned. The plea has been considered. Though, technically, the. Requirements of Part-1 have been contravened, but the fact remains that out of 59,954 meters of cloth mentioned in the show cause notice, the allegation is established as correct only in respect of 6,546 meters. This single instance can hardly form any basis for any penal action as the intent of offence cannot be established on the basis of a solitary transaction of a very small value. Accordingly, the objection is dropped.
(iv) The next contravention mentioned in the notice was that the following balances were due from . The associated undertakings. These amounts were of doubtful recovery: Balance due as Accounting loss on 30.9.1980. As per last accounts.
24. Bibojee Services Ltd.
25. (Accounting year 31.12.1980) 1,348,890 2,053,842 Javed and Co. (Textile) Limited (Accounting year 30.9.1980) 2,120,388 2,765,190 {{TABLE MISARRANGED}} No provision was made against these doubtful debts and the company treated them as 'good'. It was in contravention of Para 5(A) (iv) of Part-1 of the Second Schedule applicable at the relevant time. In .Their explanation, dated 6th February, 1990,. The company stated that the balance of Bibojee Services Limited were not doubtful at all as the same had been recovered in full besides recovery, of- interest from the said company. Regarding the outstanding balance of M/s Javed & Co. (Textile) Limited, it was stated that the balance was reduced to a sum of Rs. 1,922,658/- as on- 30th September, 1983 and was written off by charging it to the profit and loss account of the company in the year ended 30th September, 1983. The company further stated that pursuant to the specific advice of the CLA as mentioned in note 20 page 37 of the printed accounts of the company for the year ended 30th September, 1983, this write-off proposal was placed before the Share-holders of thew company for their approval, which was unanimously approved in the meeting held on 28th June, 1984. At the time of hearing the learned counsel argued that it was for the management of a company to judge whether a debt was doubtful or not and no provision of the Ordinance or Rules laid down any yardstick for treating a particular debt as doubtful. Explaining the argument further, it was pointed out that in the show cause notice objection was taken to the outstanding balance against two associated companies viz., Bibojee Services Limited and Javed & Co. (Textile) Ltd. However, the allegedly 'doubtful' debt against Bibojee Services Limited proved to be 'good' as judged by the management but unfortunately this judgment proved wrong in the other case. The learned counsel stated that it does not show any mala fides on the part of the company and the incident could be attributed to an error of judgment. He further stated the entire amount of Rs. 2,109,291 represented 'interest' from 30th September, 1973 to 30th September, 1982 and there was no element of principal in it out of which Rs. 1,922,658 were written off (as Rs. 186,633 had been recovered from the company). It was further stated that the write off .Was also strictly in accordance with the advice of SEAP given to the company vide letter dated 23rd September, 1983' and was subject to the approval of Share-holders. The Share-holders meeting took place on 20th June, 1984 and it was. Unanimously approved to writ off 1,922,658. The company also gave written explanation to this effect. I have considered the explanation of the company and I am inclined to agree to the same. As regards Bibojee Services Limited the position is squarely simple. If the amount alongwith the interest had been fully recovered, no allegation of wrong categorisation of debt can hold good. In so far as the case of Javed & Co. (Textile) Limited is concerned, I find that failure to categorise the debt as doubtful and not making any provision for the same could at the best be termed as a bad management decision which was taken inadvertently and no intentions to the determinent' of shareholders, could be attributed. The fact that there was loss as per last accounts of the company was also of no major consequence when viewed in the perspective of Bibojee Services Limited where entire recovery was made inspite of a similar loss situation as per last account of that company. Thus, even at the risk of prepetition, I would term it a bona fide error of judgment and would draw no adverse inference against the company on this account.
(V) The next contravention pointed out in the notice was that the company was charging interest at the rate of 14% per- annum on outstanding balances from associated companies which were of doubtful of recovery, the company was showing this interest in their other income and hence inflating their income. The company had been thus making incorrect disclosure about its income in contravention of Para 1 (A) (iii) of Part-II of the Schedule applicable at the relevant time. In reply it was stated that the company was required to charge interest @ 2% above bank rate as per provision of section 1-2(7) of the Income Tax Ordinance. Had the company not charged this interest, it would have been subjected to the charge of income tax on the notional income which would not have been adjustable against the operational losses. It was, therefore, obligatory on the company to charge interest on amount recoverable from Javed & Co. (Textile) Limited under the provision of Income Tax Law. At the time of hearing the learned counsel submitted that the levy of interest was obligatory under the Income Tax Law, therefore, the company. Should not be penalised merely, for abiding by the law. This being so, the objection is dropped.
(vi) The last objection pointed out in the notice was that the company was purchasing, processing and selling yam/cloth on behalf of associated undertakings. In fact these entries had been made to siphon the profits of the. Company to its associated undertakings. This had been reflected in the books of accounts in the following manner:
(a) The yarn produced by the company was sold to Javed & Co. (Textile) Limited and Simco;
(b) Thereafter, it is shown that the said yarn had been woven by Javed & Co., Simco and Bibojee Services Limited had purchased their cloth and sent it back to the company for processing;.
(c) Thereafter, it was shown that the company had sold this cloth on behalf of Bibojee Services Limited.
26. Prima facie, the company, made incorrect disclosure in the accounts about its transactions with the associated undertakings in contravention of para 4(k) of Part-II of the Schedule applicable at the relevant time. In reply it was stated that the yarn had been sold to the associated companies (M/s Javed & Co., Simco and Bibojee) at prevailing market rates of the relevant period and proper invoices were' raised # for all such transactions. This yarn had never been purchased from these companies by the JDM. However, the associated companies sent their cloth for processing to the company for which processing charging amounting to Rs. 49,05,758 were realised from these companies. It was submitted that the recovery of processing charges, sale of yarn and purchase of cloth and other facts related to these transactions were duly booked and were fully supported/ authenticated by independent excise records lying intact with the company. At the time of hearing the learned counsel for the company reiterated that the allegation of siphoning of profits was not correct and not based on facts. I have considered the objection and the arguments of the learned counsel on that behalf. The Enquiry Officer has not supported his allegation of siphoning of profits by showing any disparity in the rates of processing charges levied on associated companies and others. The manner in which these transactions took place, does create some doubt about their genuineness and propriety but in the absence of any concrete and substantial fact, mere doubt would not be enough to establish that what was apparent, was not real and sufficient enough to lead to an adverse inference against the company. The benefit will have to be given to the company. Accordingly, the objection is dropped.
27. To conclude as the objections mentioned in the show cause notice, dated 8th January, 1986, are not established, the said notice is vacated and proceedings are dropped.