KHALIL-UR-REHMAN KHAN, J.--1. The Joint Registrar of the Companies initiated these proceedings against Ch. Ali Muhammad, ex-Managing Director, Amjad Hussain Khokhar, ex-Managing Director, Muhammad Ashraf Pervez, Sh. Muhammad Saleem, Ch. Muhammad Saleem, ex-Directors of Taj Company and Riaz Ahmed of Riaz & Company, Chartered Accountants, the Auditor of Taj Company, under sections 412 and 413 and other provisions of the Companies Ordinance, 1984 (Ordinance XLVII of 1984) (hereinafter called the Ordinance) by serving statement of allegations on 11th May, 1991 on each of the aforenoted respondents during the pendency of the proceedings under section 290 of the Ordinance. As in these allegations, violations of various other sections of the Ordinance were asserted and orders to impose penalty under the relevant provisions of law were solicited, this Court pointed out that in the proceedings under section 290 of the Ordinance, only those allegations which fall within the purview. Of sections 410 to 415 can be examined and determined. This is so provided in section 294 of the Ordinance which reads as under:- "294. Application of certain sections to proceedings under this Part.- In relation to an application under section 290, sections 410 to 415 shall mutatis mutandis apply as they apply in respect of winding up."
It is, therefore, apparent that violations of other provisions of law and the liabilities incurred thereunder cannot be gone into in these proceedings. It was also made clear that the Joint Registrar is free to lodge independent proceedings before the competent forums for violations not falling within the purview of sections 410 to 415 of the Ordinance.
2. Each of the respondents submitted reply to the statement of allegations wherein they raised preliminary objections with regard to the maintainability and competence of the proceedings as well as with regard to legality and validity of the proceedings. Learned counsel after arguing at some length abandoned the objections to the present petition as well as objections with regard to the legality and validity of the proceedings. In fact, the learned counsel for the respondents did not press the objections taken in their replies. These preliminary objections were disposed of by this Court vide order dated 4th December, 1991 (pages 134 to 137 of the order sheets). As regards the scope of the proceedings, para. 9 of the order dated 4th December, 1991 reads as under:-- "I have made it clear more than once to the Directors and their learned counsel that this inquiry is being held to determine the liability of each Director under sections 412 and 413 of the Companies Ordinance. They are at liberty to call the requisite witnesses and record. This determination will entail their civil as well as: criminal liability in terms of the aforenoted provisions of the Companies Ordinance. This will be without prejudice to any liability, civil or criminal which may be imposed independent of these proceedings under the general, civil or criminal law."
At this stage, it is pertinent to note that in the main proceedings under section 290 of the Ordinance statements of Ch. Ali Muhammad, Amjad Hussain Khokhar, the former Managing Directors, Muhammdd Ashraf Pervez and Sh. Muhammad Saleem, Directors were recorded to know their version of the affairs of the Company.
3. With these general observations, I proceed to examine the material on record against each of the Managing Directors and the Directors for the purpose of determining their respective liabilities under sections 412 and 413 of the Ordinance. The case of Riaz Ahmed, Chartered Accountant will be dealt with separately.
CH. ALI MUHAMMAD:
4. Ch. Ali Muhammad became Director in the year 1983 and he was appointed as Managing Director/Chief Executive of the Company on 30th October, 1989. He continued to hold this office till the appointment of the Board of Administrators by this Court vide order dated 19th December, 1990.
The Joint Registrar filed statement of allegations dated 11th May, 1991 which was served on Ch. Ali Muhammad. The allegations contained therein read as under: - "(1) Ch. Ali Muhammad, being the Chief Executive/Director of Taj Company Limited, committed following defaults/irreguiarities and he misapplied money and property of the Company and has been guilty of misfeasance and breach of trust in relation to the company which resulted in irreparable loss to the company, its members, creditors and the public-at-large especially the persons who had deposited their savings with the company.
(2) He, as Chief Executive and Director of Taj Company Limited, has been accepting deposits from the pfiblic in violation of the objects of the Company provided in the Memo, of Association. As per Audited Accounts of the Company for the year ended 31st December, 1989, the total deposits received from the public werd to the tune of Rs. 40,94,04,826. Since the company has been carrying on business ultra vires of its objects, Ch. Ali Muhammad is, therefore, responsible for carrying on such business and is thus liable to a fine and also personally liable for the liabilities and obligations arising out of such business and transactions in terms of the provisions of section 496 of the Companies Ordinance, 1984. He is also liable for action under sections 412, 413, 414 and 415 of the Companies Ordinance, 1984, and as follows:--
(i) Amount due towards public deposits to the tune of Rs. 409 Million shown in the Audited Accounts for the year ending 31st December, 1989 is much less than the figure of Rs. 1,338 Million ascertained by M/s. S.M. Masood & Company, Chartered Accountants, Lahore and the actual deposits of Rs. 2,472,183,000 taken by him from public as follows:-
(a) Deposits at Lahore Rs.1,216,835,000
(b) Deposits at Karachi Rs.1,255,358,000 Total Rs. 2,472,193,000 Thus the figures shown in the said Accounts are false and incorrect and being Chief Executive and Director, Ch. Ali Muhammad is responsible, knowingly and wilfully, for the said false and incorrect statements and is, therefore, liable to the punishment prescribed under sections 492 and 230(7) of the Companies Ordinance, 1984.
(ii) He, being the Chief Executive and Director of the Company, has also been accepting deposits from the general public in violation of the provisions of section 88 read with Rules 2 and 3 of the Companies (Invitation and Acceptance of Deposits) Rules, 1987 as under the said rules, no (sic) accept deposits beyond the limit of 25% of the aggregate of the paid-up capital and free reserves.
The paid- up capital of the company being Rs. 77,44,350 only, it could not retain deposits beyond Rs. 19,36,088 whereas it continued to accept further deposits in; spite of repeated directions by the Registrar and Corporate Law Authority from time to time. He is, therefore, liable to the punishment prescribed under section 88(4) of the Companies Ordinance, 1984 and Rule 16 of the Companies (Invitation and Acceptance of Deposits) Rules, 1987.
(iii) Return: of deposits for the year ended 31st December, 1988 filed under Rule 15 of the Companies (Invitation and Acceptance of Deposits) Rules, 1987, is false and incorrect as confessed by Ch. Ali Muhammad, Chief Executive, in his statement before the Hon'ble Court. He is thus liable for punishment under section 492 of the Companies Ordinance, 1984. Besides, under Rule 15 of the Companies (Invitation and Acceptance of Deposits) Rules, 1987, a return of deposits for the year ended 31st December, 1989 wais to be filed with the Registrar on or before 31st March, 1990, but the said return was not filed in spite of repeated reminders by the Registrar. Thus he is liable to the penalty prescribed under Rule 16 of the Companies (Invitation and Acceptance of Deposits) Rules, 1987.
(iv) He is responsible for misappropriation of public deposits to the tune of Rs. 1,338 million and interest accrued thereon. He is, thus, liable for action under sections 412, 413, 414 and 415 of the Companies Ordinance, 1984.
(v) He created a Trust, namely, Taj Trust, in which funds were raised in an unlawful manner. The main source of the contribution to the Trust was deduction of Zakat from public borrowing. Instead of surrendering to the Central Zakat Fund, the Zakat amount was transferred to the said Trust. Thus .
The amount so transferred was misappropriated, misutilized in violation of the Zakat Ordinance.
As confessed by him in his statement before the Hon'ble Court, the Company never earned profit whereas the Annual Accounts always revealed fictitious profits, which were actually shown for maintaining goodwill of the company and trapping general public to make deposits with it. The profits of the company for the year ended 31st December, 1989 were also overstated by Rs.
20,000,000 by manipulating the closing stock of the company by the similar amount. The annual accounts were incorrect and prepared in contravention of the provisions of sections 230 and 233 of the Companies Ordinance, 1984. Hence, he being Chief Executive and Director of the company, was knowingly in default and is liable for action provided under sections 230(7), 492, 412 to 415 of the Companies Ordinance, 1984.
(4) Though the company was not earning profit, yet it continued to pay dividends to its shareholders every year in contravention of the provisions of section 249 of the Companies Ordinance, 1984. In fact, dividend was paid out of the capital instead of the profits. The company had thus to bear extra burden of payment of dividends which put the company into crisis.
Therefore, he, being the Chief Executive and Director of the company, is liable for punishment under section 492, 498 and 412 to 415 of the Companies Ordinance, 1984.
(5) The fixed assets of the company were revalued to show a rosy picture to depositors, members and creditors of the company in contravention of the provisions of section 235 of the Companies Ordinance, 1984. The depreciation was also not provided for in the Accounts on the assigned values of the assets as revalued and thus the profit was overstated. He is, therefore, liable for the action and punishment under sections 235(5), 412, 413, 414 and 415 of the Companies Ordinance, 1984.
(6) He is personally liable for the mismanagement and improper utilization/misappropriation of the deposits received from the general public. An amount of Rs. 1,77,71,415 was unnecessarily blocked in the purchase of a building which had been declared as National Monument. Thus he is liable for action under sections 412,413, 414 and 415 of the Companies Ordinance, 1984.
(7) There are clear indications of unlawful and shady deals as he unlawfully and irregularly utilized Company's Funds in the following associated companies in which he had an interest. He is liable for action under sections 196, 412, 413, 414 and 415 of the Companies Ordinance, 1984:--
(a) Bahawalpur Board Mills Limited.
(b) Taj Printing and Packaging Industries (Pvt.) Ltd.
(c) Taj Coating (Pvt.) Limited.
(8) Bahawalpur Board Mills Limited was purchased out of funds of the Taj Company Limited.
Instead of transferring the shares in the name of the company, he in the first instance, transferred those shares in his own name and in r the names of his friends and associates. Thus the company was financially overburdened by payment of double stamp duty on the acquisition and transfer of shades. Further, he being the Chief Executive of the company, invested approximately Rs. 144.3 million in Bahawalpur Board Mills Limited which are still unsecured and unrealised. Similarly an amount of Rs. 38.7 million was invested in associated company, namely Taj Printing and Packaging Industries (Private) Limited at Hub in violation of the provisions of section 208 of the Companies Ordinance, 1984. Thus he is liable for action under sections 208(5), 412,413,414 and 415 of the Companies Ordinance, 1984.
(9) He failed to complete and get the accounts audited of the subsidiaries of Taj Company Limited, namely, Bahawalpur Board Mills Limited and Taj Printing and Packaging Industries (Private) Limited in violation of the provisions of section 237(12) of the Companies Ordinance, 1984.
(10) Prize Bonds for Rs. 2,55,00,000 were purchased in 1983 which were misappropriated by a Director but he failed to take action in this respect in his capacity as Chief Executive of the company. He is liable for action under sections 412, 4I3, 414 and 415 of the Companies Ordinance, 1984.
(11) Taj Company Limited provided the Guarantees of more than Rs. 10 Crores to the Companies which were neither associated with nor subsidiaries of the company. Not only this but the company was even burdened with heavy contingent liabilities and it suffered losses and damages due to these Guarantees. Actually, the Directors of the company Had their own interests in the said companies. No approval of the Board of Directors was obtained as required under section 195 of the Ordinance and no action was taken by Ch. Ali Muhammad being the Chief Executive/Director of the Company.
(12) Under section 178 of the Companies Ordinance, 1984, the Directors of the Company should have been elected and Board constituted in the manner provided therein. In his capacity of the Chief Executive of the Company, he failed to hold the election of the Directors of the company.
Besides, appointment of Dr. Inamullah Khan, notified vide Form 29 dated 19th November, 1990 under signatures of Ch. Ali Muhammad was admittedly found false. Thus he is liable to the penalties provided under sections 186 and 492 of the Companies Ordinance, 1984.
(13) LJjider section 230 of the Companies Ordinance, 1984, every company is required to keep/maintain proper books of Accounts, but being the Chief Executive of the company he failed to do so and according to his own statement, all the previous Accounts were bogus. Moreover, books for the year 1990 had not been written. Whereas, he in connivance with the company Auditor, prepared and circulated the Audited Accounts which were bogus and incomplete. Thus he is liable for action under sections 230, 233, 412 to 415 of the Companies Ordinance, 1984.
(14) The Bahawalpur Board Mills Limited was given on lease to S.T. Trading Company, Lahore without the approval of the Board of Directors. The company suffered huge loss including return of investment made by the Taj Company Ltd. And payment of the fixed expenses to the tune of Rs.
15,00,000 per month. He is, therefore, liable for action under sections 196, 412, 414 and 415 of the Companies Ordinance, 1984.
(15) Taj Coating (Pvt.) Limited is an associated company of Taj Company Limited and the Board of Directors is the same as that of Taj Company Limited. Sh. Muhammad Saleem, one of the Directors, got a loan of Rs. 20,000,000 from the Bank of Oman Limited against the property of Taj Company Ltd. Further a charge of Rs. 17 million was also created in favour of the Bank of Oman Limited on the machinery of the Company without the approval of the Board of Directors. The company suffered a great loss and damage due to these acts and the loan was obtained in contravention of the provisions of sections 196 and 208 of the Companies Ordinance, 1984.
(16) Further capital of 14,139 shares of Rs. 10 each was issued in violation of section 86 of the Companies Ordinance, 1984 as the Circular required under section 86(3) of the Companies Ordinance, 1984 was neither issued to the shareholders nor filed.With the Registrar. Moreover, intimation thereof on the prescribed Form 3 made up to the date of allotment of shares was also not filed with the Registrar of Companies in terms of section 73 of the Companies Ordinance, 1984 for which he is liable to the penalties prescribed under sections 73(4) and 498 of the Companies Ordinance, 1984."
5. Ch. Ali Muhammad filed reply to the statement of allegation wherein preliminary objections were also taken. The same may not be noticed as these were not pressed as has been mentioned above. On merits the allegations were denied saying that he does not admit any omission, commission, negligence, malfeasance, misfeasance and breach of trust, etc. He further objected that as petitioner has failed to give any particulars of the allegations, the answering respondent is unable to explain his position. The denial made was, however, in general terms. It was also pleaded that the answering respondent who is educationally matriculate was led to be appointed as Chief Executive of the company in October, 1989 when the ship had already started sinking and the rats responsible for the downfall of the Company had already left; that the financial management of the company was conducted on the advice of the professional Auditors and the answering respondent had no mens rea to commit the alleged offences at the given time. As regards the affairs of Bahawalpur Board Mills, Taj Printing and Packaging Industries (Pvt.) Limited, furnishing of bank guarantees, the plea taken was that Amjad Hussain Khokhar and his son Rashid Hussain Khokhar and Muhammad Akram Rathore, Karachi Office Manager, were managing the affairs of these companies and they are solely responsible for it. It was asserted that he had always acted in good faith to the best of his ability to protect the interests of the company.
6. The Joint Registrar thereafter filed statement of allegations dated 22nd October, 1991 detailing the material information emerging from the record. These allegations were detailed under these heads viz. (i) allegations pertaining to misappropriation of funds etc.; (ii) -matters pertaining to recoveries of established liabilities; and (iii) defaults pertaining to the statutory requirements under the Ordinance. These statements of allegations are Exh. PW. 1/11, PW-1/11-A and PW-1/11-B and the same are being enclosed as appendices 1,2 and 3. A statement giving gist of allegations was also placed on record.
7. The petitioner in order to prove the allegations produced Ata Muhammad, P.W. 1, Irfan Rehman Malik, Chartered Accountant, S.M. Masood and Company, P.W. 2, Nazir Ahmed Shaheen, Deputy Registrar, P.W. 3, Abdul Rehman Qureshi, P.W. 4, Muhammad Akram Rathore, P.W.
5. The statement of Irfan Malik was recorded twice. The first statement pertains to the interim report prepared by S.M.
Masood and Company, Chartered Accountants and supplementary statement pertains to the final report.
No evidence was produced by Ch. Ali Muhammad respondent. His learned counsel Mr. M. Saleem Sahgal stated that though he had submitted a list of witnesses and documents, but he has instructions from his client not to produce any evidence and that he reserved the right to cross- examine the witnesses, if any, produced by any of the ex-Directors. It is to be noted that neither the reply to the detailed statement of allegations dated 22nd October, 1991 was filed nor Ch. Ali Muhammad entered the witness-box to explain his position.
8. At this stage, certain matters having bearing on the proceedings may be noted:-
(a) The possession of the Karachi office alongwith the record and press with its machinery was retrieved by this Court from the Workers' Union as also the possession of the Karachi Sale Depot;
(b) The record of the deposits received from the depositors was also incomplete and as such the total amount of the deposits received was not ascertainable. This Court invited claims from the depositors and claims so received were checked with the available record. The material pertaining to the deposits received and the refunds made was then accumulated and got computerised through the agency of M/s. S.M. Masood & Company, Chartered Accountants. The interim report submitted by S.M. Masood & Company, Chartered Accountants is on record as Exh. DD. The position of the deposits after inviting claims was reflected in report No. 71 (Exh. EE). The final report of S.M.
Masood & Company is Ex JJ. This report highlights financial position of the company from 1981-90.
(c) The balance-sheet and statement of account for the year ended 31st December, 1989, was superseded by the Auditors namely Riaz & Co. On the plea that the ledgers on the basis of which Audit report was prepared were different from those later produced in Court. The plea in fact was that the ledgers and account books of the Karachi Office for the years 1983 to 1989 are not the one shown to him and on the basis of which he had submitted his audit report. This assertion of the Auditor was controverted by Ch. Ali Muhammad. The other Directors have preferred to keep mum in this respect. They have also not entered witness-box to explain the maintaining and preparing of false and bogus accounts.
(d) Ch. Ali Muhammad in his statement recorded on 24th February, 1991 admitted that the company was incurring loss in its business every year since 1983-84 but the balance-sheets till date are showing as if profit was accruing to the company and that everyone was responsible for showing profit in Annual Reports and Balance-Sheets when actually losses were incurred.
The overall picture of the financial affairs of Taj Company emerging from the record is as under:-
(i) Liability on account of public borrowings as per note 7.1 of the final report of M/s. S.M.
Masood & Company .Rs.2,550,120,840
(ii) Total liability other than share capital as per note 7.3 of final report:Rs.2,538,1 14,806
(iii) Total assets as per book value (the actual realizable value may be different) as per note 7.1 of the final report.Rs.476,402,419
(iv) Shortfall in meeting ascertained liabilities as per note 7.7 of the final report.Rs.2,061,712,387
(f) The position of bank loans taken by the Taj Company in its own name or in the name of subsidiary concerns is that a sum of Rs. 93,420,038 on account of principal and a sum of Rs.
52,001,253 as interest is statedly due and payable. The Board of Administrators under the direction of this Court approached the banks and the Banking Council for waiving the mark up and re- scheduling the payment of principal amount in view of the circumstances prevailing in the Taj Company. The Banking Council with the consent of these banks except for the Bank of Oman, Lahore has conveyed its decision dated 10th February, 1992 to waive the mark up provided the payment of principal is made by Taj Company in lump sum or through agreed schedule. The Bank of Oman is, however, claiming the principal amount alongwith mark up and proceedings in this respect are also pending before this Court as well as before' learned Special Judge Banking.
(g) In addition to these loans, the Management created liens on the properties of the Company by issuing guarantees to various banks in order to secure the loans obtained by different companies and persons for no obvious advantage to Taj Company. Amjad Hussain Khokhar, the Managing Director and the Directors failed to disclose the reasons for encumbering the properties of the Taj Company by furnishing these guarantees. The version of one of the Directors (Ashraf Pervez) was that the amount was invested in these companies for earning profit at the rate of 2% per mensem but no written agreement was produced by him.
9. Before dealing with each item of allegations pertaining to misappropriation etc. It will be appropriate to deal with certain legal pleas of Mr. Saleem Sahgal, learned counsel for Ch. Ali Muhammad. He argued that particulars of fraud and misappropriation etc. Have not been given and it has not been disclosed as to how much money, on which date, and in what manner was misappropriated and misapplied etc. And as such the proceedings under section 412 as well as under section 413 of the Ordinance merit to be dismissed. This plea was raised in the reply submitted to the statement of allegations dated 11th May, 1991. In order to meet this plea, the Joint Registrar of Companies, petitioner, filed second statement of allegations dated 20th October, 1991 (Appendix 1 and 2 and 3 to this judgment). These statements give details of the amounts misappropriated and misapplied etc. These allegations were never replied to through a reply or by making a statement by entering the witness-box. Elaborate evidence in the shape of interim report, final report of the Chartered Accountants and reports of the Board of Administrators alongwith statements of witnesses give ample details of the liabilities incurred as asserted in the statement of allegations. The next plea urged was that Ch. Ali Muhammad has been discriminated as all the persons who held the office of Directors since the time the Company started receiving deposits from the public, had not been impleaded and proceeded against. He added that even the legal heirs of deceased Directors could be proceeded against as these are proceedings of civil nature. It is correct that proceedings for examining the conduct of a Director and others as mentioned in section 412 has the trapping of civil proceedings, but firstly no discrimination can be claimed on the plea that some others who were party to the loot or misappropriation etc. Have not been proceeded against. Secondly, section 412(2) of the Ordinance provides for period of limitation for initiating these proceedings. Thirdly, proceedings are to be initiated against those delinquent Directors against whom sufficient material to substantiate the allegations is available. The plea that the proceedings once initiated can be continued even against heirs of the deceased Directors need not be examined as no such situation arose in these proceedings. Moreover, as a matter of law, all the Directors cannot be made responsible for acts and omissions of Director Incharge in the absence of proof that they knew all those acts and omissions and despite that they failed to take steps to mend the matters. (See Vijai Laxmi Sugar Mills Ltd. (In liquidation) Official Liquidator v.
Mathura Prasad and others (AIR 1963 AIL 55) (V 50 C 24). Again mere imprudence of Directors is of no significance and does not make a Director liable. (See Faure Electric Accumulator Company (1889) 40 Ch. D. 141). It was also held In re: City Equitable Fire Insurance Company Limited ((1925) 1 Ch. 407) that only such Directors who committed misfeasance are responsible. It is to be noted that the learned counsel neither gave the names of the Directors nor the facts which will make the case of any such Director similar to that of Ch. Ali Muhammad. The generalisation made as such is of no significance. The plea of discrimination in view of above is without merit and is therefore repelled.
10. Learned counsel next relied on Articles 36 and 9$ of the Limitation Act to contend that the proceedings initiated were barred by time. The Limitation Act does not apply. These proceedings were initiated under sections 412 and 413 of the Ordinance. Section 412 itself provides period of limitation while for the purposes of obtaining declaration as contemplated in section 413 of the Ordinance no period of limitation has been prescribed. Section 412(2) provides a period of five years for application under sub-section (1). This period commences from the date of winding up, or of the first appointment of the liquidator in the winding up, or of the misapplication, retainer, misfeasance or breach of trust, as the case may be, whichever is longer. The proceedings initiated in respect of the amount misapplied etc. For which any of these Directors have become liable or accountable or in respect of which misfeasance or breach of trust has been asserted were not shown to be barred by time. It may also be added that though the reports submitted by the Board of Administrators as well as by M/s. S.M. Masood & Company pertain to ten years period, but these reports indicate the position and affairs of the Company and its business. This was so done to show the amount of deposits received and refunds made in these 10 years. Such an examination of conduct of business and affairs of the Company was necessary to establish that the annual balance sheets and annual financial reports failed to depict the true picture of affairs of the Company to the knowledge of the Directors specially the Chief Executive.
For all these reasons, the plea that the proceedings are barred by time is without substance and is hereby repelled.
11. The last argument of the learned counsel was that the evidence produced on record was not sufficient to substantiate the allegations. The evidence available on record will be discussed and dealt with while dealing with each item of the allegations. This may, however, be noted that the evidence has remained uncontroverted.
12. The stage is now set for examining the specific liabilities of Ch. Ali Muhammad. The first item in the list of liabilities, Exh. PW-1/11 (Appendix I) reads as under:-
(1) Misappropriation of Public Deposits.
Estimated total liabilities of public deposits as per S.M. Masood & Co.
Chartered Accountants Report dated 14th September , 1991.Rs. 2,550,120,840 Public deposits as per financial statement for the Rs. 409,404,826 year ended 31st December , 1989 Misappropriation of public deposits .Rs. 2,140,716,014 "Ch. Ali Muhammad being the Chief Executive and Director of the company was responsible for misappropriation of the public deposits. The public deposits as calculated by M/s. S.M. Masood & Company, Chartered Accountant on the basis of depositors claim, General Ledger and subsidiary ledger have been calculated as Rs. 2550,120,840 whereas the financial statement for the year ended 31st December, 1989 shows such deposits as Rs. 409,404,826. So there is an indication that a huge volume of Rs. 2,140,716,014 was misappropriated. Such accounted for as per report of the concerned staff Ch. Ali Muhammad and his son, Mr. Inam-ul-Haq used to collect personally the public deposits at Lahore and Mr. Amjad Hussain Khokhar at Karachi. No other person was authorized to receive the public deposits. In view of the statements provided by the staff and confessed by Ch. Ali Muhammad before the Honourable High Court, he being the Ex-Chief Executive and Director of the company is personally liable for the public borrowings which he and his son received at Lahore and collectively for the whole deposits which were received by Taj Company Limited."
The principal amount, thus, payable to the depositors is to the tune of Rs. 2,550,120,840. The profit payable to the depositors at the rate of 18% per annum has not been paid, since 1990 and in some cases even a year earlier. On the question of receipt of deposits at Lahore office, Ch. Ali Muhammad in his statement dated 24th February, 1991 deposed as under:- "The cash from depositors was being received by me personally. The documents acknowledging receipt were prepared by the office but the same were signed by me. The daily receipts used to be deposited in the bank and if any amount remained available after the banking hours the same was taker, by me to my residence because twice the cash had been stolen from the office by breaking open the locks. This cash used to be deposited in the bank next morning or out of the said cash payments were to be made. It is correct that since my appointment as Chief Executive I received more than 50 Crores of rupees from the depositors and the same very amount was paid to various depositors. Inam-ul-Haq used to sign the receipts in my absence after receiving cash from depositors and others. In case both of us, neither I nor my son, were available the receipts used to be signed by Zafar Ullah Khan, Sale Depot Incharge.
In the same statement, at another place, he deposed that almost 35 Crores of rupees were distributed as profit to the depositors from the Lahore and Karachi offices. The matter that loss was being incurred and as against that profit was being paid was not formally brought in meetings of the Board of Directors. This was being done to protect goodwill of the company. We did not disclose to the depositors that the company was incurring loss and as such their deposits would not be safe. Even during the period that Sh. Inayat Ullah was in control of the affairs of the company the profit was being paid through recycling of the funds. Even at that time the company was incurring huge losses. As a Director or as Chief Executive had not considered recycling of funds prejudicial to the interests of the company, the shareholders and the depositors. The persons who are responsible for the present state of affairs and embezzlement and losses to the company are Sh.
Inayat Ullah, deceased, Mrs. Sh. Inayat Ullah, Amjad Hussain Khokhar, Abdul Saboor, Sh.
Muhammad Saleem, Ch. Ali Muhammad (myself), Muhammad Akram Rathore, Abdur Rashid Chaudhary and Ashraf Pervez. I cannot say as to the extent of liability incurred by any one of the aforesaid persons. The company had the services of a legal advisor at all times. I have been consulting the legal advisor of the company about misappropriation of the fundk of the company by the aforesaid persons as well as with regard to the affairs of the company. I did not consult the legal advisor in writing. It was all verbal discussion."
13. On taking over of the Company by Board of Administrators it came to light that the record pertaining to deposits is not complete, the entries of deposits in the ledgers exist but there was no corresponding record or complete list of depositors available either at Lahore or Karachi office.
These lists were completed after inviting claims and from the entries of the ledgers. The total liability of the company on account of deposits could be found out by completing the records in the aforesaid manner. The Directors were allowed opportunity to participate in the completion of the record and verification of the claims of the depositors but none chose to participate in the said assignment. It is an admitted fact that the annual public audited accounts did not reflect the true picture of the deposits as well as of the financial position of the company. The question is -whether this was done intentionally and whether Ch. Alt Muhammad and other Directors, if any, was knowingly party to preparation of the false financial statement and non-maintenance of complete accounts. In this connection it is also pertinent to note that Taj Company did not employ any qualified Accountant to maintain the account books. Ch. Ali Muhammad in his statement dated 24th February, 1991 deposed that "the list of depositors of Lahore Office till December, 1989 used to be maintained correctly and truly. The list of depositors thereafter in the year 1989 was disturbed by the auditors and as such the true list of the depositors of 1989 is not available. The list of depositors of Karachi office since long is not being maintained correctly. The record pertaining to depositors of Karachi office was to be prepared and maintained by Karachi office. I am not in the know of the accounts maintained by the Karachi office. I have not seen the accounts of the Karachi office. I am not aware of the total number of depositors of Taj Company and as such I am not in a position to give any estimate of the amounts deposited by these depositors. The full amount of depositors was never shown in the list. It is correct that as per list filed by the company under my signatures dated 6th April, 1989 the total number of depositors was 4,761 and the total amount of deposits was Rs. 41,08,32,826. It is correct that this figure tallies with the audited account of the company. In fact this is the doing of the auditors as the actual number of the depositors and the actual amount deposited is not ascertainable as record of Karachi office is not available.
As regards the Account Books of the company Ch. Ali Muhammad stated:- "The Account Books of the company used to be prepared and maintained by the employees of the company under the direction and guidance of Riaz & Company, Chartered Accountants, the auditors of the company. The record used to be so prepared of the amount received and profit delivered so as to be in accord with each other. The record, however, did not reflect the true picture of the amount received and the profit paid. These were combined record being manufactured on the guidance and under the instructions of Riaz & Company, Chartered Accountants. Ch. Rashid and Riaz Ahmad, Chartered Accountant, used to do the manipulation of the record in consultation with each other."
14. Ch. Riaz Ahmed of Riaz & Company, Chartered Accountants in his statement controverted the aforesaid version of Ch. Ali Muhammad saying that they were only Auditors of the Company. With regard to other aspects of the affairs of the Company, statement made by Ch. Ali Muhammad may be reproduced hereunder: - The Board of Directors formally resolved to transact the business of prize bonds. This resolution was passed towards the end of ly83 or in the first quarter of 1984. In the said resolution no decision was taken as to the person who would conduct the business of sale and purchase of prize bonds on behalf of Taj Company. Ajmad Hussain Khokhar used to tell the Board of Directors that Ashraf Pervez is conducting the business of prize bonds and that profit is accruing to Taj Company but these prize bonds were never given into the custody of the company nor any profit was ever recorded in the books of the company. In fact, I have been raising the objection that the prize bonds be produced and that the profit, if actually received, should be recorded in the books of the company. These objections were raised by me verbally in the meetings of the Board of Directors.
These objections were never recorded in the minutes of the meetings. Ashraf Pervez had been saying that he was maintaining accounts of the prize bonds and that profit was accruing to the company but despite demand to pay profit and to render accounts the same were never submitted to the company. I did not even once lodge written protest for non-recording of my verbal objections regarding the non-delivery of the prize bonds to the Taj Company and non- payment of the profits accruing in the minutes of the meeting of the Board of Directors. After taking over as Chief Executive, I did not write to Ashraf Pervez to hand over the prize bonds and also to pay the accrued profits. (Volunteered) On my instructions auditors of the Company wrote letter dated 13th May, 1989 to the former Managing Director saying that the prize bonds of the value of Rs.
2,55,00,000.00 have been fraudulently encashed by one of the Directors whose name is not hidden from any one both in and outside the company and that the total amount embezzled is Rs.
2,81,55,672.00. A copy of this letter was also forwarded to me. Likewise the auditors ride letters dated 23rd January, 1990 and 14th May, 1990 addressed to Amjad Hussain Khokhar and Ashraf Pervez, Directors, raised the issue of prize bonds of the value of Rs. 2,55,00,000.00 and asking them to have the prize bonds physically verified. Copies of these letters were also addressed to me. I produce copies of these letters. The same are placed on record as Exh. K. 1, Exh. K. 2 and Exh. K.
3. The letters Exhs. K. 1 and K. 2 were neither mentioned by me nor produced before the Inquiry Officer in the inquiry initiated by the Registrar of Companies. I produce the list Exhs. F/1 and F/2 which gives the numbers of the prize bonds. This list was provided by Ashraf Pervez to the Karachi Office. This list indicates the prize bonds purchased from 5th February, 1987 to 28th February, 1987. These are of the value of Rs. 2,55,00,000.00. No reply was received either from Amjad Hussain Khokhar, Managing Director or Ashraf Pervez, Director nor did they both surrender the prize bonds. 1 did not get a criminal case registered against Ashraf Pervez or Amjad Hussain Khokhar for non-production of the prize bonds. The Board never authorised either Ashraf Pervez Director or Amjad Hussain Khokhar, Managing Director to dispose of the prize bonds and to invest the amount realised in the purchase or sale of shares of the companies. I do not know for what reason the amount representing the prize bonds belonging to the Taj Company was omitted in the annual report and balance-sheet pertaining to the period ending on 31st December, 1986. The amount was invested in the prize bonds in 1983-84. Since 1983-84 till date neither the prize bonds were physically delivered to the company nor the profits accrued were deposited with the Taj Company nor any such amount was recorded in the accounts of the company. During all this period I was one of the Directors of the Company and during all this period I have neither lodged any protest in writing with the Board nor I initiated any action for securing the interest of the Taj Company even after my taking over the office of the Chief Executive of the Company."
15. In respect of the prize bonds and the furnishing of guarantees Ch. Alt Muhammad stated as under:-- "I did not make any effort to Find out as to whether the prize bonds enlisted in the list submitted (Exhs. F/l and F/2) to Court had drawn prize or not. In the meeting of the Board of Directors held on 9th July, 1990, the matter of recovery of prize bonds and guarantees given on the behest of Ashraf Pervez and Amjad Hussain Khokhar, Directors, was taken up at my initiative and the Board of Directors authorised me to take action against Amjad Hussain Khokhar and Ashraf' Pervez for recovery of prize bonds and for release of the guarantees. I, however, took no concrete action against them nor I initiate any legal proceedings against them because they had b( n making promises."
FURNISHING OF BANK GUARANTEES: "It is correct that guarantees were given by Taj Company to various Banks on behalf of the aforesaid five companies. These guarantees were given by the Karachi Office without any approval of the Board of Directors. I came to know of the furnishing of the Bank guarantees by the Taj Company after taking over the office of the Chief Executive of the Company. I did not directly require the aforesaid five companies to get the Bank guarantees furnished by Taj Company on their behalf released. These are bogus companies and as such I have been asking Amjad Hussain Khokhar to have the bank guarantees released as these companies are in reality of Ashraf Pervez.
These guarantees were furnished by Amjad Hussain Khokhar due to some arrangement between Amjad Hussain Khokhar and Ashraf Pervez. On account of these bank guarantees a sum of Rs.
30,00,000.00 of the Taj Company stands blocked with the Habib Bank. On receiving notice from the National Bank of Pakistan with reference to the furnishing of bank guarantees I, as the Chief Executive, gave reply to the bank saying that Amjad Hussain Khokhar had unauthorisedly given the bank guarantee if any and as such the Taj Company is not responsible for the said bank guarantee. The other banks whom the bank guarantees were furnished were not written any such letters by me. This information was given to the National Bank as a notice was received from them.
I did not demand the release of Rs. 30,00,000.00 from Habib Bank. I only used to ask Amjad Hussain Khokhar and Ashraf Pervez to get the bank guarantees released."
KARACHI OFFICE AND THE PRESS: The Karachi Office and the Press of the company was under the control of the Workers' Union Karachi during the period when Amjad Hussain Khokhar was the Managing Director/Chief Executive. The Workers' Union had taken over the control of Karachi Office and Press in the early 1988. The Board did not take any legal action or step to regain control of the Karachi Office and the Press. Even after assuming the office of Chief Executive I did not take any step to regain the possession and control of Karachi Office. Press and its assets.
BAHAWALPUR BOARD MILLS LIMITED: "Sh. Muhammad Saleem younger brother of Sh. Inayat Ullah was the Chairman of Board of Directors till December, 1989. He took over as Chairman on the death of Jan Muhammad, the then Chairman.' Sh. Muhammad Saleem ceased to be a Director also since December, 1989. He is, however, still the shareholder of the Taj Company Limited. Sh. Muhammad Saleem aforesaid was also the Chief Executive of Bahawalpur Board Mills Limited. I took over as Chief Executive of Bahawalpur Board Mills in February, 1990. All the Directors of the Taj Company Limited are also the Directors and shareholders of Bahawalpur Board Mills Ltd. All the amounts paid for purchase of Bahawalpur Board Mills belonged to Taj Company Limited."
After my taking over as Chief Executive he delivered the shares of the value of approximately Rs.
51,00,000.00 only to me. I have been demanding in writing from Sh. Muhammad Saleem to deliver the remaining share scripts. Sh. Muhammad Saleem was paid over 16,00,00,000.00 for purchase and operation of Bahawalpur Board Mills Limited. Sh. Muhammad Saleem has not rendered accounts of these Rs. 16,00,00,000.00. 1 did not, as Chief Executive, initiate any legal step to secure the investment made by Taj Company Limited in Bahawalpur Board Mills or against Sh.
Muhammad Saleem. The Bahawalpur Board Mills was on lease with S.T. Trading Co. This lease was granted by Sh. Muhammad Saleem without the permission of the Board of Directors of the Bahawalpur Board Mills or Board of Directors of Taj Company Limited and Industrial Development Bank of Pakistan. I know that this lease was terminated. On termination of the lease aforesaid lessee filed a suit in the Civil Court, Sheikhupura, citing Bahawalpur Board Mills Limited and myself personally as defendants. I had been defending the suit till 19th December, 1990. I stopped pursuing the suit as Board of Administrators was appointed in my place vide order dated 19th December, 1990. 1 am not pursuing the said suit although I am the Chief Executive of Bahawalpur Board Mills Limited and continue to hold the said office till date.
Taj Coating Private Limited was floated after discussion in the Board of Directors meeting of the Taj Company. Taj Coating Co., however, did not come into existence. Seventeen million rupees were obtained from the Bank by Sh. Muhammad Saleem, the then Chairman of Taj Company after mortgaging Gulberg Office of the Taj Company. This was done with the approval of the Board of Directors of the company. The discussion which was held in the Board meeting was respecting floating of .The company and for procuring loan for the coating plant. I think that in some Board meeting this matter was duly recorded. The Board of Directors of Taj Company, however, never approved the mortgaging of the Gulberg Office with the bank for facility to be obtained by Taj Coating Company. On coming to know that Sh. Saleem has mortgaged the Gulberg Office I did raise objection in writing. I produce copies of letters dated 6th December, 1987, 4th January, 1988, 7th March, 1988 and 21st April, 1988 (placed on record as Exhs. Ml, M2, M3 and M4 respectively)." Ch. Ali Muhammad stated that it is correct that in these letters objection to the pledging of building with the Bank of Oman was not raised."
TAJ TRUST AND DEDUCTION OF ZAKAT: 'Taj Trust was established probably in 1985. Sh. Muhammad Saleem, M.E. Naeem Lakhesar and myself were the Trustees. M.E. Naeem Lakhesar died in the year 1989. No one was appointed as Trustee in his place. Taj Trust was allotted shares of the Taj Company of the value of Rs. 16 lacs. The trust had paid the money towards shares. We used to deduct 2/1-2 per cent, towards Zakat on the refund of the principal amount deposited. The Zakat so deducted from time to time was entrusted to Taj Trust because the Government had refused to receive the amount of Zakat so deducted on the plea that on loans Zakat cannot be deducted. This amount so deducted by way of Zakat had accumulated to about 50 to 60 lacs of rupees. The Government had advised Taj Company to refund the amount so deducted as Zakat to the parties concerned....... The amount deducted as Zakat was under the instructions of the State Bank, refunded to the depositors. Some depositors are being refunded this amount even now. On receipt of money from depositors 1% thereof as commission was used to be credited in the account of Taj Trust. The amount was not actually used to be deposited in the bank account of the Taj Trust as all the amounts were used to be kept and deposited in the account of Taj Company itself. The amount which has been shown in the account of Taj Trust has been raised in the aforesaid manner. The amount of profit earned on account of short-term deposit used also to be credited in the acount books of the Taj Trust. The amounts representing the short-term deposits were used to be deposited again in the name of Taj Company. All the amounts which have been shown in the account of Taj Trust belong to Taj Company. The account of Taj Trust was never got audited."
TAJ TRUST BOOK FOUNDATION: The Taj Trust Book Foundation was got registered but it never started functioning. It was allotted over one lac shares of Taj Company. The sellers of Shah Din Building had provided three lacs of rupees out of which shares of one lac of Taj Company were allotted in favour of Taj Trust Book Foundation. Another sum of one lac rupees was invested in Naeem Book Foundation and the manner of utilization of the remaining one lac rupees is not remembered by me now."
16. All these admissions, the features emerging from the record and the factors noted above fully establish that Ch. Ali Muhammad was knowingly a party to preparation of the false accounts and also of not maintaining and preparing the full and complete accounts. In these circumstances, it was necessary for the Managing Director who was receiving the amounts personally as well as under his personal supervision and under the arrangements made by him to account for the amount of deposits received. Ch. Ali Muhammad who was Director of the Company since 1983 and Managing Director since 30th October, 1989 was, thus, accountable for the sums received in view of his own admission and the other evidence on record. He admitted that they did not disclose to the depositors that the Company was incurring loss and as such their deposits would not be safe. This is, not mere imprudence or negligence, in managing the affairs of the Company, there was deliberate attempt to prepare false accounts and present false and incorrect Annual Financial Statements which did not reflect the true picture of the financial affairs of the Company to the knowledge of the Managing Director. In re: City Equitable Fire Insurance Company (1925) 1 Ch. 407 the duties of Directors were commented upon as under:-- "Before presenting their Annual Report and balance-sheet to their shareholders and before recommending a dividend, directors should have complete and detailed list of the company's assets and investment prepared for their own use and informations and ought not be satisfied as to the value of their company's assets merely by the assurance of the Chairman, however, apparently distinguished and honourable, nor with the expression of the belief of their auditors, however, competent and trustworthy."
17. To the question of what is the particular degree of skill and diligence required of the Directors, the authorities do not give a very clear picture. These are general propositions that seem to be warranted by the reported cases viz a Director need not exhibit in performance of his duties a greater degree of skill than may reasonably be expected from a person of acknowledge and experience. In the case of Overend V. Gunnery Co. v. Gibb (House of Lords case) LR~5 H/L. 480, 486) it was observed that proper test to apply is whether or not the Director exceeded the powers entrusted to them or whether if they did not so exceed their power they were cognizant of circumstances of such character, so plain, so manifest and so simple of appreciation that no man with an ordinary degree of prudence acting on their own behalf would have entered into such transaction as they entered into. The present is case of wilful preparation of false accounts so as to save the so-called 'goodwill' of the Company, in other words there was deliberate act of defrauding the creditors for continuously receiving deposits from the public. The showing of profits when admittedly company was running in losses was another deceitful act in the series. Similarly, paying of dividend to the shareholders out of the capital and the money of the depositors was not only an ultra vires act but also dishonest and deceitful act of the Directors who were doing so with the said knowledge and with a view to continue receiving deposits from the public. Such a knowledge and intent stands established on record as against Ch. Ali Muhammad, Amjad Hussain Khokhar and Sh.
Muhammad Saleem. The material on record as against Amjad Hussain Khokhar and Sh.
Muhammad Saleem will be noted and discussed while dealing with their respective cases hereunder.
18. Viewed in the above perspective, it.Is apparent that Ch. Ali Muhammad did render himself accountable to the shortfall in the assets suffered by the company. The shortfall represents the amount misappropriated.
19. I now proceed to examine the alleged liabilities incurred by Ch. Ali Muhammad.
(1) The shortfall in meeting ascertained liabilities as per note 7.7 of Final Report Ext. JJ (page 37) has been worked out as Rs. 2,061,712,387.00 (See also clause (e) of para. 8 of the judgment). The shortfall stands substantiated by the evidence of Irfan Rehman Malik PW3, interim report Exh. DD and final report Exh. JJ. In the interim report under the heading "Deposit Schemes" the facts noted were as under:- "6.3.1. Records maintained at Lahore: The ledgers indicating the balances of depositors have been maintained up to 31st December, 1988, with separate control accounts for public loan liabilities and profits paid on public loans under the deposit scheme. However, complete lists of depositors were not made available for those periods. For the year ending 31st December, 1989, a complete list of depositors is also not available. It is also difficult to ascertain the total liability under the deposit scheme and the profits paid thereon, as a combine control account had been maintained. This combine control account titled "Public Loans and Profit on Public Loans" does not contain complete description of transactions and only refers to subsidiary books. However, at the year end Rs. 36,300,135 was transferred as profit on public loan the validity of which also remains unsubstantiated due to non- availability of corroborative details, and other deficiencies observed and reported hereafter.
6.3.2. Records maintained at Karachi: The same deficiencies have been observed in respect of the records maintained for the Karachi Branch for the year ending 31st December, 1989, whereby a combined control account was maintained. The amount transferred as profit on deposit was; Rs. 25,440,683.
It has been further noted that up to 31st December, 1988, the Deposit Account only reflects the transactions for the period without any references to the opening liabilities for tflie deposit scheme.
However, for the Deposit Account for the year ending 31st December, 1989, the opening liabilities reported as at 1st January, 1989, were Rs. 305,210,629, which is also unsubstantiated and it appears to be a balancing figure inserted to arrive at predetermined results...."
The fact that the published accounts did not depict the actual position of the profits paid was reflected in para. 6.3.4 of the interim report which reads as under: "6.3.4. COMPARISON OF PROFITS PAID ON DEPOSITS AS PER ACCOUNTING RECORDS AND THC^E REPORTED IN PUBLISHED ACCOUNTS: Further differences observed by us are depicted below:-- YEAR ENDINGACCOUNTING RECORD PUBLISHED ACCOUNTS LAHORE KARACHI TOTAL 1984 22,508,1 10 109,533,890 132,042,000 35,882,91 1 1985 33,272,100 120,41 1,696 153,683,796 43,448,083 1986 43,064,992 140,969,214 184,034,206 50,859,958 1987 56,261,334 173,709,707 229,971,041 65,400,132 1988 53,497,305 203,576,878 257,024,183 61,740,818 The above comparison further suggests manipulation of accounting records and financial statements to obtain predetermined results."
As for the year ended 31st December, 1989, complete list of depositors was not available, the total liability under the deposit scheme and the profit paid thereon was not ascertainable. This Court, therefore, invited claims from the depositors, the claims were got computerised and these were checked with the available record. This Court directed that Directors can associate in the examination and verification of the claims but none of the Directors actually participated in the exercise which the auditors, however, completed on the basis of the claims received and the available record. The position which emerges is that the public borrowing as on 31st December, 1990, as per auditors' report stood at Rs. 2,550,120,840 (see para. 7.1 of final report Exh. JJ). The final report in para. 6 details the position of the public borrowing as estimated and the public borrowing as was shown in the financial statements.
Para. 6.6 read with Table 1 gives the comparison of public borrowing and profit paid thereon. It is apparent that in each year the published audited accounts did not reflect the true picture. The question is whether this was so done intentionally and if so whether Ch. Ali Muhammad was knowing party to preparation of the false accounts and that these false accounts were being prepared and publicised with an intention to lure the creditors for more deposits. Obviously had the true state of affairs of the company been depicted in the published accounts the depositors over these years would not have deposited their life savings with the company. This false preparation of the accounts is also to be viewed in the light of the conduct of paying profit to the depositors in all these years through recycling of the deposits. It is admitted by Ch. Ali Muhammad in his statement that "the company is incurring loss in its business every year since 1983-84 but the Balance-Sheets till date are showing as if profit was accruing to the company. Everyone is responsible for showing profits in Annual Reports and Balance-Sheets when actually losses were incurred, I mean every Director as well as Auditors. In spite of this every shareholder was being paid dividend and every depositor was being paid profit. Almost 35 Crores of rupees were distributed as profit to the depositors from the Lahore and Karachi offices. The matter that loss was being incurred and as against that profit was being paid was not formally brought in meetings of the Board of Directors.
This was being done to protect the goodwill of the company. We did not disclose to the depositors that the company was incurring loss and as such their deposits would not be safe. Even during the period that Sh. Inayat Ullah was in control of the affairs of the company the profit was being paid through recycling of the funds."
In the final report Exh. JJ para. 6.8 reads as under:- "We observed that the company has been inviting and accepting deposits from the general public, which appears prima facie to be in Contravention of the Memorandum of Association of the Company. The deposit scheme was being operated and was surviving on the recycling of the funds raised by the company. Even the profits were paid from the recycled amount. The recent demand for repayments from the depositors, and the company's liability to meet these demands has exposed vulnerability of the deposit scheme amongst other deficiencies of the company's operations."
Payment of profit through recycling of funds was another deceitful device to ensure continuity of public borrowing. It will be noted that as per para. 6.9 of the report out of the deposits amounting to Rs. 3,826,326 millions refunds made were to the tune of 1,660,298 millions. The company's primary business, that is, printing and sale of Holy Qur'an and religious books was at the minimal and over the years this business was on decline and the loss being incurred was mounting but the manipulated accounts showed profits. These facts were admittedly in the knowledge of Ch. Ali Muhammad, the then Managing Director. On the basis of the record I am satisfied that the business of the company was being carried on with intention to defraud the creditors and Ch. Ali Muhammad was knowing party to such fraudulent carrying on business and is thus liable for the shortfall in the assets of the Company.
Thus the overall liability is to the tune of Rs. 2,061,712,387.00. This is the overall liability of which Ch. Ali Muhammad, ex- Managing Director is held jointly liable and is thus hereby held responsible to contribute to the assets of the Taj Company under section 412 (1) of the Ordinance. This joint liability will stand reduced to the extent that Ch. Ali Muhammad himself, Amjad Hussain Khokhar, the other Managing Director or others Directors are held liable individually and specifically, and they actually contribute to the assets of the company, the sum so specifically adjudged against them. This disposes of the liabilities detailed in item No. 1 of Exh. PW. 1/11.
20. Items Nos. 2 and. 3 of Exh. PW. 1/11.
A sum of Rs. 2,06,71,979.00 (the amount of deducted Zakat) and Rs. 3,71,156 profit accruing thereon has been claimed under these items.
These amounts were claimed with the assertion that at the time of refund of public deposits Ch. Ali Muhammad personally used to deduct 2-1/2. As Zakat. The amount so deducted was then transferred to Taj Trust which existed only in papers. Ch. Ali Muhammad and two others were trustees oi the said Trust and in fact whole amount deducted as Zakat or public deposits was misappropriated. It was further assertec that Zakat so deducted used to be re-invested in Taj Company deposit scheme and the profit accrued on deposits was not ai all credited to Taj Trust and as such Ch. Ali Muhammad is personally responsible as he may have taken the profit himself.
The amount of profit at the rate of 18% amounting to Rs. 3,71,156 was thus claimed.
Ch. Ali Muhammad during the examination of Muhammad Akram Rathore, handed over a rough statement of accounts showing disbursement of various amounts. A perusal of this statement shows that these amounts were transferred in seven different accounts maintained with banks.
Some TDRs were also got issued, encahsed or transferred. In the examination of Mr. Akram Rathore, C.W. It was suggested that the amount so deducted was refunded to the depositors and that no amount was misappropriated. Though neither specific explanation was offered nor Ch. Ali Muhammad entered the witness-box to explain his position and the accounts have also not been properly rendered, yet it will be appropriate to keep open this matter as further probe is being made by the Board of Administrators. The Report No. 185 pertains to this specific liability. Necessary information from the banks concerned has been ordered to be provided. The liability under these two items will be determined under the said Report (185).
21. Item No. 4 (Exh. PW. 1/11)
A sum of Rs. 2,00,00,000 was claimed to have been misappropriated by overstating the closed stock of raw material consumed. The audited accounts for the year ending 31st December, 1989 show raw material consumed of value of Rs. 62,196,112. The actual figure as per the ledgers is Rs.
42,196,112. Thus the profit understated was to the extent of Rs. 2,00,00,000. Reliance was also placed on note 16.2 of the audited accounts for the year ending 31st December, 1989. Thus the stock of value of Rs. 2,00,00,000 was in fact, not consumed. No explanation whatsoever was offered .To this amount. This amount as such has to be taken to have been misappropriated by Ch. Ali Muhammad, Chief Executive and therefore he is held responsible for the said defalcation, and is responsible to compensate the Company of the said amount.
22. Item No. 5.
A sum of Rs. 50,597,767.00 is liability for misappropriation of amount due to inter-company transaction between Taj Company Limited and Bahawalpur Board Mills Limited. The balance due to Taj Company as per its books for the year ended 31st December, 1989 was Rs. 1,63,468,138 while the balance as shown in the books of Bahawalpur Board Mills as per trial balance is Rs. 112,872,371.00.
This sum it was contended, was thus misappropriated in connivance with Sh. Muhammad Saleem, Chief Executive of BBM. This liability has not been established as firstly the accounts of BBM were not produced. Secondly no substantial evidence or material was placed on record. This sum as such cannot be awarded as against Ch. Ali Muhammad for want of evidence.
23. Item No. 6: Liability for Commission on public losses.
A sum of Rs. 3,76,87,300 has been claimed under this item on account of deduction of 1% commission on total public deposits from 1981 to 1990. The record shows payment of only Rs.
37,68,730.00 in the year 1990 as commission paid on the deposits. This is assumed that the same amount of commission was received in the last 10 years till 1990. No basis exists on record for drawing the said inference. The amount thus established is the payment received in the year 1990 of Rs. 37,68,730.00. The same is, therefore, allowed as no justification was made out for receiving the said amount of commission.
24. Item No. 7 & 8.
A sum of Rs. 10,765 was asserted to have been misappropriated on account of dividend paid to Taj Book Foundation on 19th August, 1989 as Taj Book Foundation does not exist at all. Ch. Ali Muhammad was not the Managing Director at that time and it was not shown that the said amount was so paid to Taj Book Foundation at his instance. Amjad Hussain Khokhar was the Managing Director at that time. Ch. Ali Muhammad, therefore, cannot be personally held responsible for the said defalcation.
The same applies to sum of Rs. 12,000 shown to have been deducted against Taj Holding Limited under item No. 8.
25. Now the alleged liability as detailed in PW. 1/11-A may be taken up.
Item No. 1 pertaining to commission on public loans has already been dealt with above under item No. 6.
Item No. 2: A sum of Rs. 7,83,740 has been claimed as liability for commission on sale paid to Inam-ul-Haq son of Ch. Ali Muhammad. This amount is claimed as on the record a sum of Rs. 1,95,935 was recorded to have been paid as commission on sales in the year 1990. The payment of commission at the said rate was calculated for four years and claimed. As on record the payment made in the year 1990 of Rs. 1,95,935 has been shown only, the rest of the amount is disallowed. Inam-ul-Haq, according to admission of Ch. Ali Muhammad was assisting him in receipt of public deposits. He never worked in any sale depot and as such was not entitled to receive commission on sales. Even his dealing with the public deposits was unauthorised as he was neither regular employee nor was so authorised by the Board of Directors. The sum of Rs. 1,95,935 so paid by Ch. Ali Muhammad as commission on sales is an act of misapplication of the funds of the Company and the loss so caused to the Company is held to be recoverable from Ch. Ali Muhammad.
Item No. 3.
26. A sum of Rs. 18,000 was paid to Inam-ul-Haq vide voucher No. 1466 dated 7th October, 1990 but no supporting document/authority is available on record. No explanation whatsoever was offered by Ch. Ali Muhammad for making this payment, as such it was an act of misapplication of the funds of the company and the loss so caused to the company is held to be recoverable from Ch. Ali Muhammad.
Item No. 4.
27. Inam-ul-Haq was paid Rs. 5,000 vide Voucher No. 359 dated 7th March, 1990. In support, it is stated that receipt of the amount is not clear as the supporting documents are missing. As the receipts of the amount is admittedly not clear, the said amount cannot be claimed and the liability does not stand established. The claim under this item is thus rejected.
Item No. 5.
28. This item pertains to a credit entry appearing in the record which is asserted to be a bogus entry. No claim has been made by Ch. Ali Muhammad. This assertion, therefore, need not be gone into.
Item No. 6.
29. A sum of Rs. 7,50,000 paid vide Voucher No. 1503 dated 26th December, 1988 has been claimed as no supporting document except for a chit is available on record. There is no substantive evidence to substantiate non-payment of the said amount reflected in the chit. This claim for want of evidence is rejected.
Item No. 7.
30. A sum of Rs. 18,000 was paid vide Voucher No. 389 dated 15th March, 1990 to Inam-ul-Haq.
Neither any supporting document nor any explanation during the proceedings was furnished. The said amount is, therefore, held to be amount misapplied and thus recoverable.
Item Nos. 8 and 9.
31. Ch. Ali Muhammad was paid Rs. 10,00,000 vide Voucher No. 1785 dated 16th December, 1990.
Likewise Ch. Ali Muhammad withdraw a sum of Rs. 1,37,454 from his personal account vide Voucher No. 1791. For both these items there is neither any account nor any supporting document for receiving the said amounts. Even during the proceedings, no explanation was offered. Rs. 11,37,454 is, therefore, held to have been drawn without any justification and is held to be recoverable from Ch. Ali Muhammad to compensate the loss so caused.
Item No. 10.
32. Rashid Hussain Khokhar was paid Rs. 26,000 on 3rd December, 1985 but no Voucher or supporting document exists on record. The amount was so paid when Ch. Ali Muhammad was not the Managing Director of the Company, as such, he cannot be held responsible for the same.
Item No. 11.
33. Need not be commented upon as no such claim has been made by Ch. Ali Muhammad.
Item No. 12.
34. This question will be dealt with when the case of Riaz & Company will be dealt with.
Liabilities of Ch. Ali Muhammad under PW. 1/11-B.
35. These allegations point out the defaults pertaining to statutory requirements of Companies Ordinance, 1984. These defaults allegedly committed attracting provisions of Ordinance other than sections 412 and 413 cannot be gone into in the present proceedings. The Registrar of Joint Stock Companies, if he chooses, will have to initiate appropriate proceedings before the appropriate forums in respect thereof.
The net result of above discussion is that Ch. Ali Muhammad is held guilty of misfeasance and breach of trust in relation to the Company. He has misappropriated and misapplied various amounts mentioned above and as such is liable to pay Rs. 2,51,38,119 to the company by way of compensation individually. The overall joint liability representing the shortfall in the assets of the Company is determined and held at Rs. 2,061,712,387. Ch. Ali Muhammad and other Directors to be specified and named in later part of the judgment are held liable to contribute the aforesaid sums to the assets of the company.
MR. AMJAD HUSSAIN KHOKHAR.
36. Mr. Amjad Hussain Khokhar joined the Taj Company as Director in the year 1983. He was appointed as Managing Director/Chief Executive on 1st May, 1983 and continued to manage the affairs of the company till his resignation dated 30th October, 1989. He is son-in-law of Sh. Inayat Ullah, founder member of the company. He, thereafter continued to be a Director of the company.
He resigned from the Directorship of Taj Company on 22nd March, 1990. The statement of allegations dated 11th May, 1991, served on him is the same as served on Ch. Ali Muhammad and as such need not be reproduced here. Before noting the contents of the reply to the statement of the allegations filed, it may pertinently be mentioned that the petitioner also filed statement of allegations Exh. PW. 1/11-A and Exh. PW. 1/11- B in order to give further details and facts in respect of the allegations contained in statement of allegations dated 11th May, 1991. Another statement of allegations under the head 'gist of allegations' was also filed. Member, Board of Administrators also filed Report No. 102 giving gist of allegations and the gist of the reply of Mr. Amjad Hussain Khokhar.
The explanation offered by Amjad Hussain in the reply is that when he took as Chief Executive on 1st May, 1983, he found that he had succeeded to a system which was in vogue since the very incorporation of the company in the year 1929. This pattern of the business had developed during long time as is acknowledged' in the report of S.M. Masood & Company, Chartered Accountants, as well as in the initial report of Administrators dated 22nd January, 1991. It is to be noted that pattern of business implies the system of recycling of the funds received under public deposits. The assertions made are that the deposits received up to 1st May, 1983 had already reached a point where it was not possible for any person to immediately change or to completely divest from the legacies of the past, sc after thorough inspection, a policy to discourage the investor was laid down. There was previously no proper accounts system as the Managing Director used to pay the profits and even the rates of the profit were not uniform, that he and other members of the Board restricted the deposits and also curtailed the rate .Of profit and so the Board of Directors came to a definite conclusion that since the investments have reached such a figure that neither the profits or for that matter the investments could be returned by the company, the only course possible was to channelise the working of the company in such a way that there may accrue real profit out of which the investors could be paid, and that with this object in view the following steps were taken:
(1) Purchase of Bahawalpur Board Mills Limited Sheikhupura, (2) setting up of a press at Baluchistan under the name and style of Taj Printing and Packaging Industries (Pvt.) Limited, setting up of Taj Company (Pvt.) Limited, the press at Lahore was upgraded by installing new imported machinery.
The Board of Directors decided to divert the funds available with the company in the business of Prize Bonds. One of the Directors of the Company who had been dealing in the said business assured that this business had the effect of giving handsome returns on the money invested therein. Ashraf Pervaiz gave satisfactory results in the initial business of three months and, therefore, the Board decided to continue this business vide resolution dated 23rd March, 1984. The said Ashraf Pervaiz retained the value of the prize bonds and promised to repay the same in view of the objections of the Auditors. The amount of Prize Bonds was Rs. 2,55,00,000. This fact stands admitted by Sh. Muhammad Saleem in his statement recorded by the Court, and Ch. Ali Muhammad also in his statement before the Court stated that the said amount be recovered from Ashraf Pervaiz. The Board of Directors also decided that in order to cope with the situation investments may also be made in real estates and for this purpose, the investment was made by purchasing the following:--
(1) Shah Din Building.
(2) Two acres plot at Karachi.
(3) Plot at Hub (Baluchistan)
(4) Plot belonging to Kawasaki Factory at Sheikhupura, and
(5) Purchase of premises in Gulberg, Lahore.
In addition to the above, pleas taken are that the management launched export of the text books of Holy Qur'an to Saudi Arabia. The printing work was re-organized which resulted in saving of lot of money. After making these assertions, the specific allegations were replied to itemwise in general and vague terms and with reference to the aforesaid submissions.
37. It has already been noted above that the second statement of allegations and gist of allegations ;were not attended to by Amjad Hussain Khokhar by filing any reply. At this stage reference may also be made to the statement of Amjad Hussain Khokhar recorded by this Court on 18th September, 1991. Before this, statement of Ch. Ali Muhammad, Managing Director and Ashraf Pervaiz had also been recorded. Amjad Hussain in his statement deposed that he had never instructed Ashraf Pervaiz to invest any amount of Taj Company in Expo International Limited, Expotex Limited, M/s. Antasia Limited, M/s. Steel Craft (Pvt.) Limited and that neither he nor his wife nor sons had ever held any interest in any of the above-named companies. He added that if his wife has been shown as a Director or shareholder of Messrs Crest International (Pvt.) Limited, then her signatures must have been obtained through fraud or through false representation.
According to him he did not make any investment in these companies. He controverted the assertions of Ashraf Pervaiz that a sum of Rs. 37.50 lacs was invested by him in these companies.
He, however, admitted that he had executed guarantees in the capacity of Managing Director of Taj Company in favour of Banks in order to secure the loans etc. Obtained by aforenoted companies. He explained that he was introduced to the Directors of these companies by Ashraf Pervaiz, and they represented that they have obtained firm export orders for supply of textiles to foreign companies and as such in this venture Taj Company should be associated for sharing the profit. He added that though no arrangement could be finalised still he issued these guarantees on the understanding that they will have mortgaged their properties with the bank. He claimed that after three months of the execution of these guarantees, he made demand in writing to these Companies to have the guarantees of Taj Company released from the Banks. He admitted that he did not write to the bank to release the bank guarantees and that till October, 1989 that he was the Managing Director the bank guarantees, were not got released and that no further steps were taken by him to have these guarantees released or to otherwise secure the interest of Taj Company. In cross-examination he deposed that Ashraf Pervaiz was dealing with prize bonds business of Taj Company as Director and that he was entrusted with the prize bonds business in the year 1983-84. He added that Ashraf Pervaiz had himself submitted the accounts of the prize bonds to the Taj Company who was also maintaining the account which included the sum invested in the prize bonds; that in late 1984 or in 1985, the business of prize bonds was brought to an end by Ashraf Pervaiz. The reason given by Ashraf Pervaiz was that some restrictions as to the period were imposed by the State Bank of Pakistan. He admitted that he did not demand the amount representing the prize bonds as well as the loss accrued; that demand in writing was not made as he,was the Director. He added that Ashraf Pervaiz accepted liability on account of business of prize bonds and promised to pay the amount back through instalments. One of the questions put by the learned counsel for Ashraf Pervaiz may be reproduced: Q. I put to you that after closure of prize bonds business, the amounts that you are referring to were received by Ashraf Pervaiz under your personal instructions for investment in the shares of different companies listed on the Stock Exchange?
A. It is absolutely incorrect and false.
Learned counsel for Ashraf Pervaiz cross-examined Amjad Hussain at length. All this cross- examination confirmed that Ashraf Pervaiz was assigned the business of prize bonds and the writing to Ashraf Pervaiz acknowledging the liability is Exh. 'A'. The suggestion that Ashraf Pervaiz signed this document under some misrepresentation was controverted. He added that it is correct that some amount was paid by him by issuing cheques/pay orders to M/s. Expo International Ltd.
M/s. Steel Craft (Pvt.) Ltd. And M/s. Crest International (Pvt.) Ltd., with the further explanation that these companies were owned by Ashraf Pervaiz as he was Chief Executive and Director of these companies. He added that he is not in a position to tell the figure of the amount which was given to these companies, but added that whenever any amount was given to Ashraf Pervaiz a cheque for corresponding amount was used to be given either in the name of the bank or in the name of some company. These cheques were so being issued as the prize bonds were then being issued by the State Bank in the names of the Banks or the companies. The suggestion put by learned counsel fbr Ashraf Pervaiz to the effect that the pay orders were issued in the names of the companies was, however denied as incorrect. Amjad Hussain denied his signatures on letters which were placed on record as Mark 4 and 5. On the question of issuance of guarantees, he deposed that he had issued these guarantees on the recommendation of Ashraf Pervaiz. He also denied the suggestion that on his suggestion amount was invested in these companies by Ashraf Pervaiz or that the loss was incurred on account of such investment, or that he had authorised Ashraf Pervaiz to conduct import and export,business for the recovery of said loss. According to him he has been personally demanding the amount belonging to Taj Company from these companies directly. Amjad Hussain added that whenever Ashraf Pervaiz used to withdraw amount in the name of business of prize bonds, it was used to be invested by him in these companies on his behalf. He also denied that he had obtained signatures on blank papers of Ashraf Pervaiz as he used to sign such papers treating him as father. He volunteered that on the contrary it was he who had implicit faith in Ashraf Pervaiz.
Reference may also be made to statement of Muhammad Ali Hussain, Chief Manager, Main Branch, National Bank of Pakistan, Karachi, recorded on 16th October, 1991 on the question of guarantees executed by Amjad Hussain as Managing Director of Taj Company, in favopr of National Bank of Pakistan so as to secure loans obtained by Steel Craft (Pvt.) Limited, Expo., International (Pvt.) Limited, Antasia (Private) Limited, Expotex (Private) Limited, and Cougar Rins (Pvt.) Limited, copies of which are Exhs. Z, Z-l, Z/2, Z/3 and Z/4. Letters dated 2nd April, 1986 and 25th.
May, 1986, signed by Amjad Hussain Khokhar were placed on record as Exhs. Z/5, Z/6. The total amount outstanding against aforesaid companies till that date was Rs. 79,498 million rupees, which amount was secured by mortgaging immovable property of the Taj Company in addition to goods of the value of 19.80 million rupees since 1988. All these guarantees except for the one guarantee of Steel Craft (Pvt.) Ltd. Have been got released by this Court. Steps are being taken for getting this guarantee also released from the National Bank of Pakistan.
38. The Registrar in order to prove the allegations produced Ata Muhammad P.W. 1 who produced on record the statement of allegations PW.1/11, P.W. 1/11-A and 1/11-B, Irfan Rehman Malik, Chartered Accountant of M/s. S.M. Masood & Company who prepared interim report Exh. DD and later on final report Exh. JJ. And Nazir Ahmed Shaheen P.W. 3 who deposed about the inspection conducted by him of the company, Abdul Rehman Qureshi P.W. 4, Muhammad Akram Rathore P.W.
5. Statement of Irfan Malik was recorded twice. The first statement pertains to the interim report of M/s. S.M.
Masood, Chartered Accountants and supplementary statement pertains to the final report Exh. JJ.
No evidence was produced by Amjad Hussain Khokhar. He did not himself enter in the witness-box.
He also did not make himself available for recording his statement after conclusion of the evidence of the Registrar.
39. The specific pleas taken in the reply may first be examined. Amjad Hussain has admitted that the recycling of funds was inherited by him and he continued with the same as the same could not have been stopped but a policy to discourage the investors was adopted. This fact of discouraging the investors stands controverted from the record. Reply to report No. 138 Exh. BB would show that from the year 1983 till 1988 the amount of deposits being received each year was increasing successively. The position of deposits yearwise for 1983 to 1988 was as under:- Year Karachi Lahore Total 1983 141,506,887 40,759,861 182,266,748 1984 195,129,188 79,986,671 275,1 15,859 1985 229,620,372 108,424,976 338,045,348 1986 282,502,936 189,673,467 189,673,467 1987 237,857,013 261,440,226 499,297,239 1988 305,735,037 265,147,448 570,882,485 The receipt of deposits declined only in the year 1989 as against a sum of Rs. 570,882,485 the deposits received in the year 1989 were Rs. 548,192,196. Thus there was only negligible decrease. No credit can be claimed by Amjad Hussain Khokhar or other Directors of this decrease. It will, therefore, be seen that plea that under the decision of the Board of Directors the policy of discouraging the invejtors was adopted and practised is incorrect. The next plea of Amjad Hussain Khokhar was that he conducted a thorough inspection of offices at Lahore and Karachi and he alongwith the Board of Directors had come to the definite conclusion that since the investments had reached such a figure that neither the profit nor the investment could be returned by the Company so according to him the only course possible was to channelise the working of the company in such way that earning may accrue out of which the investments could be paid. As against the above claim, what emerges from the record is that the refund of principal amount of deposits as well as profit was continued in all these years from the deposits received, thus the recycling of the funds was continued and published annual statements of accounts and Audit Reports did not reflect the true picture. The amount of the public deposits received was understated. The company was shown to be earning profit though it was running under huge losses. All the reasons given and the facts noted in the earlier part of the judgment while dealing with the case of Ch. Ali Muhammad ex-Managing Director, who succeeded Amjad Hussain Khokhar, sufficiently show that any person of ordinary intelligence would have come to the conclusion that further receipt of deposits from the public would amount to conniving at the fraud which was continuously being practised with the depositors. The actual business which was being conducted by the Company was not yielding that much income which could enable the company to keep its promise to return their actual amount of deposit, what to say of paying profit at the promised high rate. Amjad Hussain Khokhar despite such a knowledge not only continued carrying on the business but also through misapplication, mismanagement and embezzlement squandered away the public money. The ventures undertaken by him on no reasonable hypothesis could be called even business ventures undertaking by any prudent businessman. The squandering away and loot of the public deposits which came to be entrusted to him and in respect of which the fiduciary relationship existed continued unabated during the period that Amjad Hussain Khokhar was the Managing Director. It is pertinent to note here that the Directors are trustees of the moneys, funds and assets of the Company. The claim that the only course possible was to channelise the working of the Company in such a way that there may accrue real profit in order to pay to the investors is also false as the investments made were not only reckless but also most of them were ultra vires of the company as well as the Managing Director. Now the so-called measures taken to increase the income of the Company may be noticed.
PURCHASE OF BAHAWALPUR BOARD MILLS LIMITED.
40. The Taj Company invested in this Mills a sum of Rs. 13,63,63,365. The loans of the different banks and mark-up charged on this loan was of Rs. 5,11,51,000 thus the total investment was of Rs.
18,75,14,365. This figure includes the cost of machinery lying in public bonded warehouse on account of non-payment of customs duties. It will be noted that for A these years the machinery was not got released and is lying m the warehouse. This machinery comprises of Multipurpose Coating machinery, Washing and Bleaching machinery of the value of Rs. 3,72,00,607. The customs duty payable on these two machines is Rs. 1,13,02,481. The accrued bank interest/mark-up is Rs.
3,00,32,253. The interest charged by Taj Company entered in its books on investment in this Mill is to the tune of Rs. 3,66,97,300. Thus the total investment in this manner comes to Rs. 26,55,46,399.
Reference may be made to report No. 164 of the Member, Board of Administrators. As against the aforesaid huge investment, the Mill was leased out to Messrs S.T. Trading Company at the monthly lease money of five lac rupees only. Even this five lac rupees was not to be received by the lessor from the lessee as under the terms of the lease deed only rupees one lac per mensem was to be paid and the remaining was to be adjusted against advance statedly given to the Bahawalpur Board Mills, payment of outstanding bills pertaining to electricity, gas, telephone, staff salaries, insurance, waste paper, Government dues as well as against the value of any addition, improvement made to the fixed assets of the factory. Neither the advance statedly given was spelt out ever nor any statement of account of outstanding bills was rendered. It was also provided that after adjustment of the amounts referred to above, the balance remaining, if any, out of the agreed to sum of rupees one lac will be paid. No amount in actual fact was at all payable under the lease agreement. It is also in evidence of Sh. Muhammad Saleem, Managing Director/Chief Executive of Bahawalpur Board Mills as well as the statement of Ch. Ali Muhammad, ex-Managing Director that the account of the sum invested i.e. 13 crore rupees transferred to the account of Bahawalpur Board Mills was never rendered. It is also pertinent to note that the lease was granted without approval of the Board of Directors. No steps were taken by the Directors to secure the interest of the Company. The assessm ent of the Board of Administrators is that now the Mill will not fetch more than six Crores of mpees. It may be noted that during the proceedings, one party submitted an offer of mpees four Crores for purchasing this Mill on the condition that the amount will be payable in instalments. This ludicrously low offer was not pursued by the said party. Thus as against the investment of over thirteen Crores and bank loans of over five Crores, the Mill was to receive rupees five lacs per mensem Le. Sixty lacs per annum on paper but in actuality nothing. This was not a sound business venture by any standard. Had this amount been deposited in a bank, more money could be received in the shape of mark-up and the amount invested would have also remained secure and intact. Moreover, the Bahawalpur Board Mills was purchased on 16th November, 1985 but the shares were not got transferred in favour of Taj Company and the huge investment was thus left unsecured. These shares which were lying pledged with I.C.P. Consortium were retrieved by this Court after holding necessary proceedings but the Managing Director or Directors took no interest in the matter.
41. The next investment was claimed in the shape of setting up of Taj Printing and Packaging Industries (Pvt.) Ltd. At Hub. A sum of Rs. 3,87,69,154 was entered in the ledgers as having been invested in this project. This amount excludes a loan of Rs. 3,50,00,000 obtained from banks and financial institutions. This project was not even commissioned. The efforts made to sell this project or even to lease it out by the Board of Administrators, it was stated by Mr. Muhammad Naazar Khan, Advocate, have not succeeded as none came forward to purchase it or to obtain its lease.
The accounts of these two associated companies admittedly were never got audited since inception.
TAJ COMPANY (PVT.) LIMITED.
42. It was stated that this project could not be completed on account of non-availability of funds.
The actual position on the other hand, as admitted by Ch. Ali Muhammad, ex-Managing Director, was that this project was a paper project. In fact its name was used for siphoning funds. A loan of one crore seventy lac rupees was obtained for this paper company but the same was then shown to have been utilized for the purpose of Bahawalpur Board Mills. The Bank of Oman, from whom the loan was obtaihed, transferred various sums on various dates in the account of Bahawalpur Board Mills and from the said account these amounts were withdrawn by Sh. Muhammad Saleem. No supporting documents are available on record to justify these disbursements.
43. Next comes the claim that new machinery was installed at Lahore. Assuming that new machinery was installed, what was the result achieved? Admittedly the company continued incurring heavy losses in its business of publication and sale of Holy Qur'an and religious books.
This loss was, however, not reflected in the balance-sheets or in the audited annual reports; rather all these years that Amjad Hussain Khokhar was acting as Managing Director and even after him when Ch. Ali Muhammad was the Managing Director, false accounts were prepared. Thus the claim that investments were channelised in such a way that real profit may accrue so that investors could be paid, stands falsified by the very fact that reckless business adventures were resorted to.
Section 412 of the Ordinance is premised on the basis that the management, meaning the Directors, Officers and those who are controlling the shareholders owe various duties to their corporation and to the community of corporate interest, the shareholders and also to the creditors when the company is representing itself to be a solvent company to act intra vires and within their respective authority and also to exercise due care and to observe applicable fiduciary duties.
Broadly speaking the duties of management are three fold in nature, (a) obedience, (b) diligence and (c) loyalty. When management fulfils such duties by,acting intra vires and within their respective authority by exercising due care and by observing applicable fiduciary duties the transaction is usually immune from attack and management is usually immune from liability under the rule known as best management rule but the Directors in case of loss to the corporation resulting from their engaging the corporation in ultra vires activities are liable and as such become liable to account for the loss so occasioned. The Directors and officers are liable also for acts of mismanagement in addition to the acts of misappropriation and are liable to make compensation for the loss occasioned through their acts of negligence or in failing to act. It is true that they are not liable for errors of judgment or mistakes while acting with reasonable skill and prudence. The standard of care has been variously described as that of a reasonable prudent man or of an ordinary prudent Director in similar business or the same degree of fidelity and care as an ordinary prudent man could exercise in the management of -his own affairs of like magnitude and importance. It is, therefore, necessary that the Director should attend meetings of the Board of Directors have his views entered in the minutes of the meetings, keep himself well informed on corporate matters, familiarise himself with the financial statements prepared by the corporation accountants and the legal advice rendered by the corporate counsel and resign when he is unable to carry out his responsibility not in silence but by making public the cause of his resignation and dissent so that those who are dealing with the corporation or have granted credit to the corporation or the company get timely notice to watch and secure their interest. See Briggs v.
Spaulding (141 US 132, 35 L ED. 662). It may be pointed out that the persons who accept Directorship as 'accommodation' or 'dummy Director' or as 'sine ernes' for lending their prestige to Board of Directors have been held liable for any corporate loss resulting from passive as well as active negligence under the American Corporate Law. Same is the position of law in Pakistan in view of the provision contained in section 412 of the Ordinance which provision has been reinforced and supplemented by introduction of the provision contained in section 413 of the Ordinance. Such a provision was not contained earlier in the Companies Act, 1913. Moreover, the Directors and Officers are duty bound to act carefully, in the light of their actual knowledge and such knowledge as they should have gained by reasonable care and skill. Reasonable reliance on others is consistent with such requirement. I may here refer to an American case titled Francis v. United Jessey Bank [(87NJ)
15; 432 A 2d 814 (198l)] where the proposition canvassed was that the Directors are liable as a matter of law by reason of their failure to take action designed to learn of and bring to notice activities on the part of employees of the Company. This was a case of nonfeasance and the question was whether the mother, the third partner, failed in her duties of reasonable care to stop her two sons, the other partners, from continued conversion of funds. It was observed "in this case the scope of Mrs. Pritchard's duty was determined by the precarious financial condition of Pritchard and Baird, its fiduciary relationship to its client and the implied trust in which it held their funds.
Thus viewed the scope of her duties encompassed all reasonable care to stop continued conversion. Her duties extended beyond mere resignation to reasonable attempts to prevent the misappropriation of trust funds". It was held that by virtue of her office, Mrs. Pritchard had the power to prevent the losses sustained by the clients of Pritchard and Barid with power- cum- responsibility. She had a duty to deter the depredation of the other insiders, her sons; she breached that duty and caused plaintiff to sustain damages. In the case of Amjad Hussain Khokhar also the claimed resignation which even otherwise is not reflected by the record is of no avail. The reckless conduct of Amjad Hussain Khokhar does not end here as instead of bringing down the company's deposits within 25% of its paid- up capital and free reserve contemplated by rules 2 and 3 of the Companies (Invitation and Acceptance of Deposits) Rules, 1987, the amount of deposits went on increasing every year and he persisted in his conduct of accepting deposits in order to defraud the depositors. This fraudulent conduct was concealed by preparing manipulated accounts as these failed to reflect the actual financial position of the company and even the amount of deposits received. The knowledge of these false accounts cannot be denied as the annual account were being singed by him as well as other Directors. Even the returns of deposits were not being filed with the Registrar under rule 15 of the Rules. Again the fixed assets of the company were revalued.
Due to mismanagement and reckless utilization of deposits an amount of Rs. 1,77,71,415 was unnecessarily blocked in the purchase of Shah Din Building, Lahore, which had been declared as a national monument carrying restriction on reconstruction. The possession of the building was with tenants who are at best liable to pay rental of Rs. 40,000 per mensem. Such a return over the huge investment was no return. It is pertinent to point out that despite removal of certain objections which this building carries as a national monument even a single purchaser did not come forth to purchase the property though extensive publicity costing Rs. 40,000 was made. This is the position of this investment made of almost two Crores of rupees.
44. The prize bonds affair and other shady deals noted in the case of Ch. Ali Muhammad and the observations made and conclusions recorded in respect thereof fully apply to Amjad Hussain Khokhar as well. These may be read as a part of the judgment.
45. Amjad Hussain Khokhar advanced various amounts to various parties, without securing the said amounts in any manner. During the period that he held the office of Managing Director a. Sum of Rs. 1,77,00,000 approximately was recoverable from Mir Ghulam Hussain and the Sale Depot. He did not make any effort to recover this amount with the result that on the submission of a report by the Board of Administrators necessary proceedings were held wherein Mir Ghulam Hussain and his son Sarfraz Mir accepted their liability to the tune of Rs. 1,08,57,980.00 and a decree was accordingly passed. An unsecured loan of Rs. 20,00,000 to Noor Zaman of Purbani Traders was being shown for the last many years. Necessary proceedings were initiated by the Board of Administrators to recover the said loan also which are in progress. Likewise another sum of Rs.
5,00,000 was advanced to Welcome Oils. This sum was however, recovered by this Court through coercive process. All these loans were made recklessly and without any benefit to the Company.
This was thus a dead loan to the Company and had proceedings not been initiated by the Board of Administrators the same would not have ever been recovered. These are the instances of the reckless manner in which the money of the company was squandered away.
46. Coming to the defaults asserted in Exh. PW1/11-A it is to be noted that these allegations point out the defaults pertaining to statutory requirements of Companies Ordinance, 1984. These defaults allegedly committed attract provisions of the Ordinance other than sections 412 and 413 and cannot be gone into in the present proceedings. Registrar of Joint Stock Companies, if he so chooses, will have to initiate appropriate proceedings in this behalf before appropriate forums. Out of these defaults, however, the dividend paid out of the capital in violation of section 249 of the Ordinance is recoverable from Amjad Hussain Khokhar. According to the ledgers the sums paid as dividend from 1983 to 1988 are as under:-- 1983 3,05,968 1984 5,14,355 1985 6,90,934 1986 8,51,030 1987 11,07,667 1988 13,16,430 Total: 49,09,855 The sum of Rs. 49,09,855 so paid as dividend out of the capital, as admittedly the company was incurring loss every year, is not only an ultra vires act but also amounts to gross mismanagement.
Amjad Hussain Khokhar being the Chief Executive and the sums having been so paid within his knowledge and under his directions, he is accountable for the sam. The company was put to loss to the extent of Rs. 49,09,855 and he is, therefore, held liable under section 412 of the Ordinance, to contribute the said sum to the assets of the company.
The net result of the above discussion is that Amjad Hussain Khokhar is held guilty of misfeasance and breach of trust in relation to the company. He is liable to pay Rs. 49,09,855 to the company by way of compensation individually. The overall joint liability representing the shortfall in the assets of the company is determined and held at Rs. 2,061,712,387. The overall liability will get, reduced in case the amounts which Ch. Ali Muhammad, Ashraf Parvaiz, Sh. Muhammad Saleem are held to be specifically and individually liable to contribute and the said sums are actually contributed.
MUHAMMAD ASHRAF PARVEZ.
47. Muhammad Ashraf Parvez joined as a Director of the Taj Company on 25th August, 1984. He admittedly was assigned the job of sale and purchase of prize bonds. This business he conducted exclusively under the direct instructions of Amjad Hussain Khokhar. He was served with the statement of allegations dated 11th May, 1991 but the same need not be reproduced in detail as the statement of allegations later served on him dated 22nd October, 1991 giving further details was restricted to two matters only. A gist of allegations was also filed again containing eight allegations (Ex. PW1/11, PW1/11-A and PW1/11-B). The liabilities as alleged in Exh. PW1/11 read as under: --
1. Liability for Prize Bonds.
(1) Mr. Ashraf Parvez, Director, of Taj Company Limited obtained Rs. 2,47,50,000 for the business of Prize Bonds which he has been doing since 1982 in his personal name. As per agreement with the management he was bound to pay to the company interest on the said amount @ 24% P.A. As per his own statement dated 23rd June, 1987, a total amount of Rs. 3,82,94,953 is still outstanding against him from 1st April, 1987 to 30th June, 1987.
Principal 2,47,50,000 Profit 1,35,44,953 Total: 3,82,94,953
(2) Liability for investment of Taj Company Limited Funds in otlier companies in which he had his own interest.
Mr. Ashraf Pervez invested the funds of Rs. 2,55,00,000 in the following companies in an unauthorised manner. Therefore, the whole amount alongwith profit is recoverable from him:- Profit due on Principal amount for the period from 1st January, 1989 to 31st December, 1990 (two years) @ 24% per year i.e. Rs. 30,60,000 per year
(i) M/s. Intasia Enterprises (Private) Limited.
(ii) M/s. The Expo International (Private) Limited.
(iii) M/s. Expotex Rs.2,55,00,000. (Pvt.) Limited.
The amount claimed as per statement Exh. PW-I/II-A reads as under:- Principal amount as per statement dated 31st December , 1988Rs. 25,500,000 Profit due on Principal amount for the period from 1st January , 1989 to 31st December , 1990 (two years) @ 24% per year i.e. Rs. 30,60,000 per yearRs. 61,20,000 Previous balance of profit as per statement dated 31st December , 1988Rs. 234,79,953 Total profit payable up to 31st December , 1990Rs. 295,99,953 Principal amount: Rs. 255,00,000 Total amount payable up to 31st December , 1990.Rs. 550,99,953
48. Muhammad Ashraf Pervez filed reply to the first statement of allegations dated 11th May, 1991 wherein he besides replying the allegations, raised also preliminary objections and made preliminary submissions. He submitted that prior to becoming Director in the Company he was engaged in prize bonds business for Taj Company which was being done on the initiation and guidance of Amjad Hussain Khokhar (the Managing Director) since November/December, 1983 and that during the tenure of his office, Mr. Khokhar was practically sole incharge of the affairs of the Company. It is also stated therein that his involvement prior to becoming Director and for some time thereafter was only restricted to the prize bond business and to transactions mentioned hereinafter. This business on account of restrictive rules of the State Bank, became hardly profitable. So Mr. Khokhar instructed him to gradually close the same business. It is claimed that accordingly the prize bond business came to a close and as per instructions of Mr. Khokhar the moneys belonging to the Company were invested in share business in the Karachi Stock Exchange and that he acted honestly, faithfully and diligently in investing money of the Company for the benefit of the Company in the share business and in other business he engaged in on behalf of the company as advised and instructed by Mr. Khokhar. It was further claimed that investment in the share business ended up in loss amounting to rupees one crore. The details of loss in the share business were sought to be detailed by giving some figures in Annexure A to this reply. Ashraf Pervez in these preliminary submissions further submitted that the loss in the share business was within the knowledge of Mr. Khokhar as he had always posted Mr. Khokhar of true state of affairs and that in order to make up loss in the share business Mr. Khokhar advised him to go for business of export and trading. Consequently he made efforts by making investment in such business and that as instructed by Mr. Khokhar in order to achieve the above object he in collaboration with others formed the four companies, namely, (i) The Expo International (Pvt.) Limited, (ii) Expotax (Pvt.) Limited, (iii) Intasia Enterprises (Pvt.) Limited and (iv) Crest International (Pvt.) Limited. It was added that from time to time various amounts were invested by the Taj Company in these companies and in this manner a sum of Rs. 45,00,000 invested in these companies through him alongwith profit is due to Taj Company from these Companies. He added that Rs. 37,50,000 which was directly invested by the Taj Company in these Companies through Mr. Khokhar alongwith profit is also due to Taj Company. It was thus asserted that a sum of Rs. 82,50,000 as principal amount alongwith profit accrued thereon is due to Taj Company from these Companies. The case of Ashraf Parvez was that this amount has been illegally shown to be due from him in the prize bond account. It was also asserted that the aforesaid four Companies were functioning on the same premises and were practically being managed and controlled by one Umar Hayat and that in one of the Companies* i.e. Crest International, wife of Mr. Khokhar was also a Director. Ashraf Parvez further pleaded that he had resigned from the Directorship of these Companies since 1989 and has no concern with the affairs of the said Companies since then. He asserted that on his leaving the Companies Umar Hayat the Chief Executive had issued a cheque for Rs. 45 lacs exclusive of the profit in favour of Taj Company. A photo copy of the said cheque was placed on record. Ashraf Pervez also placed on record a promissory note statedly executed by Rashid Ahmad for a sum of Rs. 20,00,000. The undated cheque of Rs. 45,00,000 and promissory note dated 15th August, 1988 were, for the reasons known to Ashraf Parvez not delivered to the Company. Photo copies of these documents were placed on record for the first time when Ashraf Pervez filed the reply. It was claimed that a sum of Rs. 20,00,000 of the promissory note was invested with the consent of Mr. Khokhar in business with Rashid Ahmed. As regards the sum of Rs. 2,55,00,000 claimed as principal amount of the prize bonds, the explanation offered was that the statement of account was replete with unauthorised entries, for example, (i) the amount of Rs. 5,000,000 vide entry dated 27th November, 1983 has not been received by him, (ii) a sum of Rs. 30 lacs has been directly paid by Mr. Khokhar to Crest (Pvt.) Limited but this amount has been debited to the account CL. 73 of prize bond and shown due from him, (iii) a sum of Rs. 7,50,000 was paid by the Company to Mr. Sikandar Hayat, brother of Umar Hayat the Chief Executive of some of the aforesaid Companies directly vide entry dated 29th March, 1986, (iv) an amount of Rs. 1,010,000 was never received by him and the entry dated 20th June, 1984 regarding the above amount is incorrect and illegal, (v) an amount of Rs. 25,00,000 advanced as loan to Al-Mumtaz Departmental Stores has also been shown in the prize bond account, (vi) and amount of Rs. 7,50,000 vide last entry is again an unauthorised amount shown in the prize bond account. It was also asserted that the respondent had paid to the Company directly a sum of Rs. 98,00, 000.
Ashraf Pervez further pointed out that a sum of Rs. 70,380,000 has been calculated at the fixed rate of interest of 2% per mensem and from there it flows that according to the Taj Company he had received the said amount from the Company as a loan for further investment to be repaid alongwith fixed amount of interest and that he had already paid a substantial amount as profit to the Company. With these explanations and assertion, it was asserted that it cannot be alleged that he had misappropriated or embezzled or misapplied or retained any amount of the Taj Company.
49. Though in the gist of allegations, liabilities on eight counts were asserted but the emphasis of the Joint Registrar and the Board of Administrators was on two counts:--
(i) The amount due and recoverable on account of the amount of the prize bonds and liability for conducting the said business unauthorisedly and also conversion of the funds of prize-bonds to unauthorised channels through investment in other Companies.
(ii) Embezzlement of a sum of Rs. 2,55,00,000 and carrying on the ultra vires business by Ashraf Pervez the Director of the Company in a fraudulent manner.
These allegations were perused and sought to be established for the purpose of sections 412 and 413 of the Ordinance.
50. The case of the Registrar of the Companies was that the amount of the prize bonds alongwith its profit which comes to Rs. 6,04,64,953 be awarded to the Taj Company as recoverable from Ashraf Pervez under section 412 and a declaration as contemplated under section 413 be made as Ashraf Pervez was guilty of carrying on the business of prize bonds in a fraudulent manner knowingly to the great prejudice of the Company and as such he has rendered himself liable to be punished as provided by section 413 (4) of the Ordinance.
51. The learned Deputy Attorney-General appearing on behalf of the petitioner in order to substantiate the allegations, relied on the statement of Atta Muhammad, Joint Registrar P.W. 1, Irfan Rehman Malik, P.W. 2, Nazir Ahmed Shaheen, Deputy Registrar P.W. 3, Abdur Rehman Qureshi, Chief Legal Corporate Law Authority P.W. 4, and Muhammad Akram Rathore, Manager, Taj Company, P.W.
5. It may also be noted that on the request of learned counsel for Ashraf Parvez, Umar Hayat, Chief Executive and Director of the Companies floated by Ashraf Parvez, was allowed to be cross- examined by the counsel for Ashraf Parvez. His statement was recorded on 18th May, 1992 which is also on record. Likewise on the request of learned counsel'for Ashraf Parvez, statement of Muhammad Akram Rathore was recorded as C.W.
1. Riaz Ahmad, Chartered Accountant of Riaz & Company was also cross- examin'ed by Mian Saqib Nisar, Advocate. The other relevant material referred to by the learned counsel for the parties comprises of statements of Ashraf Parvez, Ch. Ali Muhammad, Amjad Hussain Khokhar, Sh. Muhammad Saleem and Muhammad Ali Hussain, Manager of Main Branch of National Bank of Pakistan for the purposes of knowing their respective versions regarding affairs of the Company. Ashraf Pervez however, did not enter the witness-box himself after close of the evidence by the petitioner. He did not even produce any evidence to substantiate his version though he had submitted list of witnesses and had also after obtaining order of the Court, got compared from the Expert the disputed signatures on certain documents.
Ashraf Pervez himself remained absent mostly from the proceedings on the plea of illness. He did not make himself available for recording his statement by the Court in respect of the allegations regarding which evidence had come on record against him.
52. The facts as alleged in the statement of allegations with regard to liability on account of prize bond business are not in dispute. The version of Ashraf Parvez given in the reply filed in these proceedings has been noted in the earlier part. His main plea was that the business of prize bonds was conducted by him as instructed by the then Chief Executive Amjad Hussain Khokhar and the said business was also taken note of by the Board of Directors in one of its meetings; that the prize bond business was closed and the moneys belonging to the Company were invested in share business in Karachi Stock Exchange and investment in the said share business ended up in loss amounting to more than one crore and the loss in the share business was in the knowledge of Mr. Khokhar and that in order to make up the loss so suffered Mr. Khokhar advised Ashraf Parvez to do the business of export and trading. Consequently he as instructed by Mr. Khokhar in collaboration with others formed the above four Companies. Thereafter, he relied on the cheque for an amount of Rs. 45,00,000 purportedly issued by Umar Hayat in favour of Taj Company out of a sum of Rs.
82,50,000 which was according to him due to the Taj Company on account of principal amount from the said Companies. The other entries disputed were of Rs. 5,000,000, 7,50,000, 1,010,000, 25,00,000 and Rs. 7,50,000 the total of which comes to Rs, 10,010,000. So much amount was thus disputed out of claimed liability of Rs. 2,55,00,000.
53. It may be noted at this stage that during the arguments Mian Saqib Nisar, learned counsel for Ashraf Parvez, admitted that no explanation has been offered by his client for the remaining principal amount and as such a sum of rupees one crore, seventy-five lacs approximately was due on account of principal from his client and that the said amount Ashraf Parvez is ready to refund or repay in instalments. He was asked to give schedule of payment of the admitted amount of liability but the same was not filed.
54. The first question is of determination of liability under section 412 of the Ordinance. Ashraf Parvez in his statement dated 21st February, 1991 deposed as under:- "I have seen the Prize Bonds Account Sheet Exh. A. This is in my hand and bears my signature.
According to this Account Sheet, I acknowledged having received Rs. 2,47,50,000 towards principal amount. I further acknowledge a sum of Rs. 1,35,44,953 which was due on account of profit.
Volunteered, many such acknowledgements were got executed from me. Some blank documents were also got signed from me.... A sum of Rs. 25,00,000 was obtained in the name of Al-Mumtaz Departmental Store.......... I had received some amount in the name of Liberty Shoes.... "
It is in his evidence that all the sums due were ultimately included in the prize bond account which as per statement Exh. A comes to Rs. 2,47,50,000. The original of document Exh. / was also produced as Exh. CW/4 by Mr. Muhammad Akrar Rathore, CW1. According to this document the amount owed to the Company was admitted as under:- Principal amount due and payable Rs. 2,47,50,000 Profit due Rs.1,35,44,953 Total sum due Rs. 3,82,94,953 Another sum of Rs. 2,14,20,000 is claimed as profit from 1st July, 1987 to 31st December, 1990. The total amount on this count claimed is Rs. 6,04,64,953. The version that one crore loss on account of share business was suffered has not been substantiated by producing any evidence by Ashraf Parvez. The assertion that a sum of Rs. 98,00,000 was paid cannot also be accepted for want of evidence. The version that certain entries were made incorrectly also remained unsubstantiated.
The same cannot be accepted in view of the clear admission made by signing the statement of account Exh. CW/4 on 23rd June, 1987. The aforesaid liability stands established from the evidence on record but in view of the clear admission contained in Exh. CW/4 the evidence need not be discussed. The plea feebly raised by the learned counsel for Ashraf Parvez was that the admission contained in the statement dated 21st February, 1991 be not relied upon as it was a mistaken admission. It has no merit. Moreover, Ashraf Parvez failed to enter the witness-box after conclusion of the evidence of the other side. The admission made in Exh. CW/4, a copy of which is Exh. A.
Available on record, is explicit. The addition made by saying that many such acknowledgements were got executed by him and some blank papers were also got signed from him, is inconsequential as such a statement does not have the effect of washing away the effect of clear admission made. Moreover, in the context of statement and in view of the position taken in the reply, liability on account of the money invested in the prize bonds business cannot be denied. It is, therefore, held that Ashraf Parvez is liable to contribute a sum of Rs. 3,82,94,953 to the assets of the Company by way of compensation. He had explicitly agreed to pay 24% per annum on the money retained but this being the excessive rate is not allowed. Surcharge at the rate of 6% per annum is awarded on the sum of Rs. 3,82,94,953 from 1st July, 1987 to 31st December, 1990. The amount payable thus comes to Rs. 80,41,940. Ashraf Parvez is held liable to contribute the sum of Rs.
4,63,36,893 to the assets of the Company under section 412 of the Ordinance.
55. Now I proceed to examine the liability of Ashraf Parvez under section 413 of the Ordinance. The question whether the business of the Company assigned to Ashraf Parvez, Director, was carried on with intent to defraud the Company or the shareholders and creditors requires to be examined now. The prize bond business, it was claimed, was closed under the instructions of Mr. Khokhar and the moneys belonging to the Company were invested in share business; that this business was authorized in Annual General Meeting of the Company dated 20th March, 1986. This share business ended up in loss amounting to more than one crore of rupees and loss in the share business was then directed to be made up by making investment in the business of export and trading for which purpose the four Companies were formed by Ashraf Parvez in collaboration with others and from time to time various amounts were invested by Taj Company in these Companies. According to Ashraf Parvez Rs. 82,50,000 was due on account of principal from these Companies excluding the profit. For conducting the business in the aforesaid manner and making investment as alleged, reliance was placed on the instructions issued by Amjad Hussain Khokhar, the then Managing Director. As regards the investment in the share business, reference was made to decision taken in the annual general meeting dated 20th March, 1986. A copy of the minute book is available on record as Report No. 115 filed in pursuance to the order dated 15th January, 1992. A perusal of the same would show that no annual general meeting was held on 20th March, 1986. The 56th annual general meeting was held on 28th June, 1986 and in the minutes of the said meeting, there is no such decision or authorization, as was alleged.
An extraordinary general meeting of the shareholders was, however, held on 20th March, 1986. A perusal of the minutes recorded on 20th March, 1986 would show that no such matter either came up for discussion nor any such authorization was made. Mr. Amjad Hussain Khokhar in his statement denied having authorised Ashraf Parvez to invest the amount of Taj Company in any company. He was cross-examined by the counsel for Ashraf Parvez but nothing could be called out in favour of the version of Ashraf Parvez. Mr. Khokhar further stated that assertion of Ashraf Parvez that Rs. 37,50,000 was invested in the Companies on his instructions, was false. He also denied having executed guarantees in favour of the Bank to secure loan obtained by these Companies which assertion was, however, not correct as the Bank Manager produced those guarantees which purportedly bear the signatures of Amjad Hussain Khokhar. In the later part of the statement he did admit that he had demanded in writing the release of these guarantees. He also denied the suggestion as incorrect that investment was made in the companies on the understanding of 2% profit. He denied that he or his wife was connected with these Companies or the money was invested in these Companies under his instructions. The statement of Ashraf Parvez recorded on 21st February, 1991 is very important. He deposed as under:- "I used to deal in sale and purchase of Prize Bonds on behalf of Taj Company Limited, under the instructions of Amjad Hussain Khokhar who was Chief Executive at the time when I joined as a Director....... 1 used to purchase Prize Bonds, at some time of the value of rupees one crore and at some time of the value of rupees three Crores..... I returned all the amount of these Prize Bonds to Amjad Hussain Khokhar. I did not obtain any receipt acknowledging return of the amount representing Prize Bonds. Again said that after sale of the Prize Bonds, the amount thereof used to be deposited in the Banks...... In the middle or at the end of 1985 under the instructions of Amjad Hussain Khokhar, the then Chief Executive, I invested various amounts on behalf of Taj Company on purchase and sale of shares of different Companies. I used to receive various amounts from the Company through Cheques or Bank Drafts. I have been maintaining account of the receipt of these amounts and the disposal thereof. I have bills issued by the Members of Karachi Stock Exchange showing the purchase and sale of these shares. I will produce these bills in Court (bills were not produced). These shares so purchased were later on sold.
Question.-I put it to you that according to Ch. Ali Muhammad ex- Managing Director of the company, you have failed to account for the principal sum of rupees two crore and fifty- five lacs on account of prize bonds and the profit amounting to approximately rupees three crore and fifty lacs till date despite demands made by the Company?
Ans--The Company did not make any demand to render accounts in respect of the above-stated principal amount or the profit. I had been working under the instructions of Amjad Hussain Khokhar and have rendered to him the accounts.
It is true that in the Company record, Prize Bonds of the value of rupees two crore and fifty lacs were used to be shown but the fact is that the Prize Bonds business was stopped with their disposal in 1984 and the amount received after disposal of the Prize Bonds was invested in the purchase of different Companies and in investments in the aforesaid four Companies. This position was in the knowledge of Ch. Ali Muhammad but the same was not reflected in record. The aforesaid four Companies were given various amounts on various dates through formal documentation on the understanding that the share in the profit will be given to Taj Company. Some agreements were got drafted in respect of the said agreement but they were not formally executed."
Ashraf Parvez in answers to the questions suggested by Mr. Muhammad Naazar Khan, Advocate, deposed:- "It is correct that Taj Company had furnished Bank Guarantees on behalf of M/s. Expo International, M/s. Exportex (Pvt.) Limited and M/s. Intasia (Pvt.) Ltd. To Habib Bank Limited and United Bank Limited. I remained Director and Chief Executive of, M/s. Intesia (Pvt.) Limited till early 1990 or late 1989. It is correct that fifth company with the name of M/s. Steel Craft (Pvt.) Limited was also established. I cannot say whether I was Director/shareholder of this Company.I also cannot say whether any amount was invested by Taj Company in the business of M/s. Steel Craft (Pvt.) Limited.
I do not remember whether any Guarantee was given by Taj Company on behalf of M/s. Steel Craft (Pvt.) Limited. I have seen the document dated 26th March, 1980, Exh. B. This bears ray signatures.
By this document I, as a Director of M/s. Expo International, undertook to get lien of rupees fifty lacs released by the end of July, 1988, failing which the equivalent amount was to be paid to Taj Company."
Again Ashraf Parvez in answers to the questions suggested by Mr. F.M. Saleem Sehgal, Advocate, deposed: - "I have seen the reply submitted by me in Court. This reply was signed by me.After reading it. (The reply is placed on record as Exh. D). It is correct that in preliminary objection No. 2 of the reply, it has been stated that I was elected as a director of the Company on 25th July, 1984..... This is however correct that some amount was obtained from Taj Company for Al-Mumtaz Departmental Store (of which he was the partner).... I did not ever submit report regarding the business of Prize Bonds to the Company. I used to give relevant information verbally to Amjad Hussain Khokhar. I did not inform the Board of Directors regarding these investments in the Prize Bonds and Investment in the sale and purchase of the Companies' shares as Amjad Hussain Khokhar had told me not to give this information to the Board. The investment in abovesaid 4/5 companies did come up for discussion in the Meeting of Board but I cannot say whether this investment in these Companies was formally recorded in the Minutes of the Meeting of Board or not."
In the balance-sheet of the year 1986 the amount of prize bonds was omitted but in the next year the amount representing the prize bonds was shown as due. Another allegation brought on record in cross-examination was to the effect that the Auditor had demanded a sum of rupees one lac as bribe for showing in the accounts the amount of prize bonds as investment of Taj Company in the aforenoted 4/5 companies floated by Ashraf Parvez. It was brought on record that conversation in this respect was recorded in a cassette which was produced and played in the meeting of the Board of Directors on 17th September, 1988. These minutes inter alia, read as undeit- "Ashraf Parvez was requested to apprise the Board about the progress of encashment of prize bonds and any amount received thereof. During the discussion Ashraf Parvez made serious allegations against the Auditors of the Company and produced a cassette containing the conversation between the Auditor and him in order to substantiate his allegation. He played the cassette before the Members of the Board to convince them about the allegations. He further requested the Board to make full-fledged investigation in the matter and report its finding and propose necessary action against the person concerned.
The cassette was handed over to Mr. Saleem, the Chairman of the Board of Directors. In this connection the Board observed that the tone and language used by him against the Auditor was rather uncalledj for."
Ashraf Parvez when asked to give the background of the contents of the minutes of the meeting and also to state as to why these views were expressed by him if the prize bonds had been sold away in 1983-84, the reply given by him was:- it is correct that I expressed the views recorded in the aforesaid para, but I cannot at this moment give the background of the incident. I cannot give any explanation as to why these views were expressed by me."
56. It is apparent that effort was made not to disclose the truth. In fact the same has been the conduct of all the Directors including the two Chief Executives. They all ganged up together not to let out the truth for their common benefit so that their acts of mismanagement, embezzlement, breach of trust do not see light of the day. However, the fact that the business was being conducted in violation of the provisions of Articles of Association and huge amount running into Crores of rupees had been converted into unauthorised channels fraudulently could not be successfully concealed. It is intriguing to note that in the balance sheet up to 31st December, 1990 and prior to that a sum of Rs. 2,55,00,000 was shown as the value of the prize bonds, held by the Company. None of the Directors including Ashraf Parvez objected to the existence of those entries pertaining to prize bonds. The fact which, however, stands admitted is that prize bonds had been disposed of somewhere in the year 1984 or 1985 and since then the said amount belonging to the Taj Company was being utilized fraudulently for the purposes other than that of the Taj Company.
The investment made in the purchase and sale of shares of listed companies and then in the business of the Companies floated by Ashraf Parvez was not only unauthorised but also for the personal gain of Ashraf Parvez, his relatives and friends who constituted those companies. The very conduct of business of the prize bonds in the manner admitted was with intent to defraud the Company, its shareholders and the creditors. The cover to the fraud being committed, was provided by continuously showing the said amount to have remained invested in the prize bonds business in the annual reports and statements of account. To give it authenticity even the Auditors put their seal without physically checking the prize bonds. The conduct of the Auditors, Riaz Ahmad of Riaz & Co. In this respect is not above board. Amjad Hussain Khokhar by denying his knowledge of the conversion of the funds of the Company into unauthorised and fraudulent channels, cannot absolve himself of the responsibility as no satisfactory explanation could be given for furnishing of bank guarantees to the tune of Rs. 8,64,26,000 and creation of lien on T.D. Rs. Of Taj Company valuing Rs. 30 lacs. He is knowingly party to the fraudulent conduct of business by Ashraf Parvez, otherwise he would not have issued guarantees so as to secure the loans obtained by these companies. No only that these guarantees were furnished and that the amount of prize bonds was due for years, no effort worth the name was made firstly.By Amjad Hussain Khokhar till he remained the Chief Executive and then by Ch. Ali Muhammad, to retrieve the amount embezzled and to obtain the release of the bank guarantees. The immovable property of the Company remained mortgaged and under lien and encumbranced for years together; a sum of thirty lacs of rupees deposited with the bank under T.D. Rs. Also remained blocked for years for illegal gain of Ashraf Parvez, his relatives and friends and to the loss of the shareholders and creditors of the Taj Company. All these facts constituting fraudulent conduct of business by Ashraf Parvez was in the knowledge of Ch. Ali Muhammad as well as Amjad Hussain Khokhar. They did nothing to retrieve the embezzled amount or to prevent continued depredation of the funds of the Company. All <j)f> For the reasons given above, and in view of the evidence on record it is hereby declared that Ashraf Parvez has been conducting the business of the Company with intent to defraud creditors of the Company and for fraudulent purposes. It is further held that Ashraf Parvez has been carrying on knowingly the business in the aforesaid manner, and he has rendered himself liable to be punished under section 413(4) of the Ordinance.
SH. MUHAMMAD SALEEM EX-DIRECTOR:
57. Sh. Muhammad Saleem prior to entering the Taj Company as Director in the year 1983 was Chief Accountant in National Bottlers Limited. He has also been Chief Accountant in the Associated Cement Company Ltd. He also held the office of Chairman of the Taj Company for some years and finally besides being Director of the Taj Company was Chief Executive of the Bahawalpur Paper and Board Mills Ltd., a subsidiary company of the Taj Company. The statement of allegations dated 11th May, 1991 served on him is the same as was served on Ch. Ali Muhammad, ex-Managing Director except that one allegation i.e. Allegation No. 17 was an additional allegation. Allegations 1 to 16 which have already been reproduced in the case of Ch. Ali Muhammad need not be reproduced.
Additional allegation No. 17 may, however, be reproduced:- "17. He is mostly responsible for misma nagement of the affairs of Bahawalpur Board Mills Limited and particularly of investment to the extent of Rs. 170 million made therein and also responsible for misappropriation of loans of Rs. 37 million obtained for Taj Coating (Pvt.) Limited. He is, therefore, liable for action as required under sections 412, 413,414 and 415 of the Companies Ordinance, 1984."
58. Sh. Muhammad Saleem submitted reply to the statement of allegations. In this reply he raised the preliminary objections wherein he explained that he was not functional and his status was only to attend the meetings of the Board formally, otherwise all the powers and control were with the Managing Director, Taj Company, Mr. Amjad Hussain Khokhar, up to 13th April, 1989, while Ch. Ali Muhammad took the charge of Managing Director after Amjad Hussain Khokhar left the office, and that he was appointed Chief Executive of the Bahawalpur Board Mills after the approval of its purchase by the Board of Directors and in the said capacity he was functioning and as Chairman and Director of Taj Company he could join and preside over the meetings but in the said capacity he was not assigned any functional assignment. On merits he denied the assertions contained in each of the 17 allegations in general terms and on the question of public borrowing his case was that the matter prevailed as inheritance and practice, and this situation was not controllable by him and other Directors so they let the said practice to hold the field. It. Was added that Ch. Ali Muhammad was taking all steps and measures in respect of the profits and dividends. The main object was to save the structure of the company by maintaining good will as in case of loss publicaly shown, it had to be in the shape of insolvency, and this factor never could be treated a favourable step for securing the capital of the depositors. He added that "although he was not knowing the actual situation of accounts and ledgers on the record but in a bona fide and honest way, he always had been keen to safeguard the assets of the company as well as the deposits of the public, otherwise no other personal motive was prevailing during all the transactions and dealing with the matters, produced off and on in the meetings of the Directors, by Ch. Ali Muhammad, being an exclusive controller of all the affairs of the company". He added that "the deposits had assumed a figure which was not commensurate with the actual business of the company. Immediately blockage of the investment would have practically brought the situation at the time which has now emerged. The Board of Directors, therefore, decided that the affairs of the company may be handled in a way that the depositors may be paid. The purchase of Shah Din Building was a step in pursuance of the said decision which was taken by the Board of Directors".
With regard to purchase of Bahawalpur Board Mills Limited and the allegations concerning its sale, the reply given in paras. 7 and 17 is pertinent. In these paras, the position taken was that not a single penny from the amount shown in para. 7 was misappropriated, taken for personal use and utilized for any project belonging to the person of the respondent. As regards the amounts mentioned in this para, the explanation offered was that Rs. 1,40,00,000 was paid to previous owner Sh. Irshad Ahmed, against the consideration of the Mills, while about two crore of rupees were paid to Industrial Development Bank of Pakistan (I.D.B.P.) and Investment Corporation of Pakistan (I.C.P.) against their overdue instalments and interest, directly from the Karachi Office of the company. It was further asserted that "Two units of Coating, Washing and Bleaching, oi the value of rupees four Crores are lying in the Ware-house of the Customs Department at Lahore for non-payment of customs duty, and in this way and manner the amount mentioned in para. 7 of the statement of allegation was properly and carefully invested under the direction of the Taj Company. Moreover one crore of rupees was spent on 'Bitter House' and the same is not in functioning condition simply due to the reason that the Washing and Bleaching Unit has not been got released so far due to non-payment of customs duty. Had it been obtained after making the payment of customs duty, the Mills could be more useful and function in a viable manner." The allegation contained in para. 17 was replied as under:- The contents of para. 17 are denied and not admitted to be correct. As already explained that the answering respondent has done in good faith, with due care and diligence, in the best interest of the industrial concern, established under the name and style of 'Bahawalpur Board Mills', and not a single step taken by the answering respondent is mixed with his personal interest,and any other motive except that the Mills should remain in running condition and alive and no further loss should be borne by the said unit, therefore, taking in view these aims and objects Bahawalpur Board Mills was leased out in the best interest in the complicated situation existing, including aggressive trade union activities, non- provision of funds and non-availability of viable units in the Mills, therefore, the acts of the answering respondent are in consonance with the Memorandum of Articles and not a single step of the answering respondent is against the interest of the Company as well as the Bahawalpur Paper and Board Mills, in the capacity of its Chief Executive. The answering respondent wanted to keep the Mill in running condition and alive in all the circumstances to avoid further loss to the Mills, in spite of the fact that non-cooperation to the respondent was given from the internal corners, due to personal reasons and ulterior motives.''
In this respect it may be noted that para. 14 of the reply also repeats the same averments respecting the granting of lease to S.T. Trading Company. In para. 15 Sh. Muhammad Saleem admitted having taken loan of Rs. 17 million for the purposes of Washing and Bleaching Unit.
According to him this was necessary for the proper functioning of the Mills as without the said Unit the Mills was not viable.
59. Sh. Muhammad Saleem was also served statement of allegations Exhs. PW1/11, PW1/11-A, and Exh. PW1/11-B. These contain the same allegations as have been referred to in the case of Ch. Ali Muhammad, ex-Managing Director and have been annexed with this judgment as appendices 1, 2 and 3. The only addition is of allegation No. 17 reproduced above. Gist of allegations was also served. These allegations giving detailed facts were, however, not replied to by filing a specific reply by Sh. Muhammad Saleem.
The petitioner, in order to prove the allegations produced Atta Muhammad P.W. 1, Irfan Rehman Malik, P.W. 2, Nazir Ahmed Shaheen, P.W. 3, Abdur Rehman Qureshi, Chief Legal Corporate Law Authority, P.W. 4, and Muhammad Akram Rathore P.W.
5. It is pertinent to note that learned counsel for Sh. Muhammad Saleem did not cross-examine Irfan Rehman Malik, P.W. 2, either when his first statement was recorded or when recording supplementary statement. Similarly, Nazir Ahmed Shaheen, P.W. 3, Abdur Rehman Qureshi, P.W. 4, were also not cross-examined. Atta Muhammad, P.W. 1, was, however, cross-examined and in cross-examination he stated that it is correct that no specific amount having been misappropriated by Sh. Muhammad Saleem exclusively has been mentioned in the statement of allegations/liability. It is overall liability being the Director of the Company. He also accepted the suggestion that the profits were being paid by recycling the amount of deposits received and not out of the business earning of the Company.
60. This Court recorded statement of Sh. Saleem on 20th March, 1991 and as the same did not conclude on the said date the remaining statement was recorded on 24th March, 1991. This statement was recorded for knowing the version of Sh. Saleem as ta the running of the business of Taj Company and its subsidiary company namely Bahawalpur Board Mill Limited (hereinafter called BBM). He deposed that he is shareholder of Taj Company since 1965-66 and became Director of the company in 1983 which office he held till 30th June, 1989. He added-that he became Chief Executive of BBM on 1st July, 1986. His tenure as Director came to an end on 13th January, 1990.
However, he continued to work and sit in the office of the BBM. He deposed that Mill was purchased through Amjad Hussain Khokhar on 1st September, 1985 for'an amount of Rs. 1.40 lacs which amount was paid directly through cheques. He admitted having granted lease of the Mill to the S.T.
Trading Company at the rental of Rs. 5,00,000.00 per mensem for three years and that the Board did not approve of the said lease. He also admitted that he consulted other members of the Board who were not in favour of granting of the said lease, but he gave this lease in the better interest of the company. He stated that the total investment of the Taj Company in BBM was twelve crore rupees approximately, and electricity charges, salaries of employees, transportation charges etc. Are Rs. 10 lacs and he granted lease on monthly rental of Rs. 5 lacs as that was the Only offer availablr though he could not refute the suggestion that it was very low offer considering the total investment of the Taj Company in the said Mill. He admitted that he did not invite quotations by publishing any notice in the market or in the newspapers. He volunteered that 3/4 parties had given their offers but the offer of the S.T. Trading Company was the highest, in the reply later filed, however, the plea taken was that he after calling tenders from this trade, leased out the BBM. In his statement Sh. Saleem further deposed that he did not submit these offers which he had statedly received to the Board of Directors for seeking their opinion or approval. He added that the BBM was a project of the Industrial Development Bank of Pakistan as financial assistance was provided by it.
The mill could not be rented out to any one without prior permission of the bank and that he did not obtain permission while granting the lease. He volunteered that though he had granted the lease and had put in S.T." Trading Company in possession but he gave notice of termination of the lease as other Directors were not in favour of granting the lease. He admitted that in a suit filed by S.T.
Trading Company, he was impleaded as party in the capacity of Chief Executive. He added that he must have received notice issued by the Civil Court, but he did not appoint any Advocate to defend the said suit. He added that he had neither informed the Court that he had ceased to be a Chief Executive or Director since 30th June, 1989 nor he informed the other Directors of the Bahawalpur Board Mills/Taj Company for taking appropriate measures to defend the said suit. On the question of prize bonds he deposed that Ashraf Pervaiz Director who had dealt with the purchase of prize bonds for the Taj Company had promised to pay in cash the amount representing the value of the prize bonds to the corripany in view of the objections of the Auditors. The amount of prize bonds according to him was Rs. 2.40 Crores but added that this amount has increased. He admitted that till he remained in Taj Company, this amount had not been paid. He added that he did not make any move as a Director for the purpose of recovering the said amount of the prize bonds from Arshaf Pervaiz. He volunteered that he was Chairman of the Taj Company from 1983-84 to June, 1989 but that was for the purpose of only presiding over the meetings. During cross- examination by Member, Board of Administrators he deposed that the Washing and Bleaching Unit mentioned in this letter is lying at the bonded warehouse situated at Bund Road, Lahore since 1987, as it was pledged with the Bank of Oman and same was not got released on account of non-availability of funds for all these.Years. He admitted that he did not even request the Bank to have it released though the demurrage and other Charges were being levied. He added that had this unit been installed the investment of rupees one crore already made at Mills premises would have yielded income. In order to know the genuineness, of the plea that had this unit been got released and installed, the investment of one crore already made would have yeilded income, Mr. Muhammad Naazar Khan, Member, Board of Administrators questioned Sh. Saleem and the reply given in this respect reads as under:-- The customs documents respecting this Unit may be with Zaman Corporation, the Clearing Agents of the Company. All necessary details were given in the Import Documents. The Coating Unit was selected in Germany on the advice of Technical Experts of the. Company. It is correct that no quotations were invited for the import of this machinery. I-cannot say that this Unit is incomplete. If there is anything lacking the same can be obtained through local arket and that may be the reason for non-purchasing the same alongwitfe this Unit from Germany. The machinery was purchased at the advice of Technical Experts. It is, therefore, incorrect to say that the machinery was not purchased from the genuine company."
On further questioning he deposed that he used to operate the accounts of Bahawalpur Board Mills exclusively. No Board meeting of BBM used to be held and as such no minutes of the Meeting of the Board of Directors was maintained. The affairs of BBM used to be considered and decided in the meeting of the Board of Directors of the Taj Company. On the question of obtaining of loans for BBM, he deposed that he obtained loan for BBM after giving collateral security owned by Taj Company, and that the Directors of Taj Company were agreeing to the obtaining of loans by me for BBM. In order to point out the reckless manner in which the affairs of BBM were being handled by Sh. Muhammad Saleem he was asked about the disposal of vehicles of the Company. In reply to questions asked, he replied that "two vehicles were delivered to Sabir Hussain to whom Rs. 20 lacs were due from BBM. The Mercedes Benz was purchased for Rs. 9,20,000 and Toyota Corolla for Rs.
1,60,000. Sabir Hussain was told that Mercedez Benz is of the value of Rs. 7 lacs and Toyota Corolla of the value of Rs. 1,60,000 and the same amount should be adjusted towards the amount due after sale of the vehicles." He, however, admitted that he did not take approval of the Board of Directors for handing over of these vehicles to Sabir Hussain. No such approval was ever obtained either in the BBM or in the Taj Company for the sale and purchase of vehicles. He also admitted having sold Pick.Up of BBM to Manzoor Hussain vide receipt, copy of which is Exh. X. This sale also was not got approved from the Board of Directors. The version of Sh. Saleem as to the contents of the cassette which was delivered to him in the BoafdTof Directors- meeting in this statement was that the cassette when played in the Board Meeting, the observation made by the Directors was -that this appears to be the voices of Bushra Ansari and Mooen Akhtar. He promised to deliver the cassette 1 to' Board of "''Administrators but this was not so delivered till date.
Sh. Muhammad Saleem did not pursue the aforenoted story as to the recorded conversation in the reply filed by him. Para. 10 of the reply reads as under:- "10. It is stated and submitted that the affairs of the prize bonds were dealt with by Mr. Ashraf Parvez, one of the. Directors of the Company who has admitted this liability. This fact has also been proved from the statements of Ch.Ali Muhammad as well as his own admissions before this Hon'ble Court. It may also he added in this context that the collusion of the Company's auditors M/s. Ria? and Company Chartered Accountants with Mr. All Muhammad to manipulate this item in Company's balance-sheet. For instance in the balance-sheet as at 31st December, 1985 the "Cash and Bank Balances" under current Assets shows a figure of Rs. 12.31,35,865 and the explanatory Note 15 thereto shows "Prize Bonds Rs. 2,40,00,000". This item does not appear in the Balance-Sheet of 1986 but in the Balance-Sheet of 1987 it again appeared and the explanatory Note at 15.5 may be referred. Besides, this, Mr. Ashraf Parvez for his own defence recorded his conversation with the auditor of this deal. He played this cassette in the next meeting and handed over to the respondent as the integrity of the auditor had been questionable. Mr.Ashraf Parvez have an undertaking to the Board of Directors that he would pay the amount as soon as his financial position improve.
61. It is, therefore,apparent that the previous statement made by the Sh. Saleem was incorrect. On the question of maintaining the accounts, the statement made by Sh. Muhammad Saleem is very important. In cross-examination by M. Saleem Sehgal, Advocate for Ch. Ali Muhammad, ex- Managing Director, he deposed "The, accounts of Lahore and Karachi offices were being consolidated at Lahore office under supervision of Ch. Ali Muhammad. I used to assist Ch. Ali Muhammad in preparation of the accounts as I am also an Accountant prior to the taking over the affairs of Bahawalpur Board Mills Limited. Since 1960 for four/five years, I had been maintaining the accounts of Taj Company but later on I used to deal/with the affairs of BBM. It is incorrect that I being an Accountant alongwith Riaz Ahmed of Riaz & Company,used to prepare false accounts showing incurring of profits of the company. I used to prepare the trial balance of the accounts pertaining to Karachi office. These accounts used to show incurring of profits though actually it was not so. I used to sign the balance-sheet in which profits having accrued were shown and dividend was declared. I used to sign the balance-sheet as a matter of courtesy. I was not aware of the fact that actually the company had not incurred profits and that profits were being shown falsely. In the meetings of the Board of Directors these accounts used to be put up.I never tried to find out whether these accounts so put up represented the actual state of affairs It is correct that in the Board meetings and especially in the Board meeting dated 23rd May, 1988 of the Taj Company, I was asked to submit uptodate accounts of Bhawalputr Board Mills Limited.I,in response, did submit consolidated as well as Audited Accounts of BBM." With regard to the accounts of BBM, he deposed as under:- "I have seen the letter dated,2nd February,1989 alongwith a copy of accounts for the year ended 30th June, 1988 of BBM addressed to Amjad Hussain Khokhar for his signatures. The letter is placed on record as Exh. V and copy of accounts as Exh. V/1. I have seen the consolidated accounts Exh. W.
This bears my signatures. I have used the words "for income-tax" in the letter Exh. V as these accounts were to be submitted to the Income Tax Department. The consolidated accounts Exh. W is for year ended 30th June, 1988 as is the case of Accounts Exh. V/l. I have seen consolidated accounts Exh. W and audited accounts Exh. V/l. It is correct that amount shown under the heading of current account in the aforesaid two accounts differ from each other. It is also correct that the amounts mentioned in the Item Sundry Creditors differ from the amounts mentioned under the same item in audited accounts Exh. V/l. The consolidated accounts Exh. W reflect the true position of the accounts. The audited accounts do not represent the actual accounts as these were the accounts prepared for income-tax purpose only. It is, however, incorrect to suggest that I used to maintain two sets of account books (Volunteered). The accounts for income-tax purposes were used to be prepared separately though there was no separate book. It is incorrect that a third set of accounts which represented the true state of affairs was used to be prepared by me for own purpose while consolidated accounts for the purpose of company and audited accounts for the purposes of income-tax were fictitious accounts.''
62. With a view to highlight the fact that the accounts were being manipulated and were not reflecting true picture of the finances, certain questions asked and answers given are being reproduced:- Q. Is it correct that you in the meeting of Board of Directors of Taj Company held on 27th July, 1988 represented , that the accounts of Bahawalpur Board Mills Limited for the period 1st September, 1985 to 30th June, 1988 are with the auditors for verification?
A. It is correct. These accounts were with the auditors for verification and checking purposes and not for auditing. It is correct that the accounts of such companies are to be prepared and audited each year.
Q. Why the accounts for each year were not got prepared, maintained, verified and audited from the auditors?
A. The first year of Bahawalpur Board Mills Ltd.
Commences from 1st September, 1985 and ends on 30th June, 1986. Every year accounts were being maintained, submitted to the Income Tax Department and the assessment has been made and finalized.
Q. If the accounts were being maintained and got audited every year why these were not being presented in the Board Meetings annually?
A. This was not being done as nobody was taking interest in such matters. However, the accounts of first year were got signed from. Ch. Ali Muhammad, Managing Director."
63. Sh. Muhammad Saleem on further questioning stated that. "It is correct that in the Board Meeting dated 11th May, 1987, it was resolved that the matter pertaining to Bahawalpur Board Mills Limited will be taken up separately and separate Minutes Book will be maintained. No such Minutes Book, however, was maintained of the meetings of Board of Directors of Bahawalpur Board Mills Limited."
64. In view of the above statement, the plea that Sh. Saleem was not functional and he used to attend the meetings of the Board formally and control of the company was in the hand of firstly Amjad Hussain Khokhar and then of Ch. Ali Muhammad, cannot be accepted. The version that he had no knowledge that the accounts prepared were not reflecting true picture cannot be also believed as he was himself preparing the accounts. In fact the position taken in para. 3 of the reply was that Ch. Ali Muhammad was taking all steps and measures in respect of the profits and dividends in that the main object was to save the structure of the company by maintaining goodwill as in case of loss publicly shown it had to be in the shape of insolvency, and this factor never could be treated a favourable step, for securing the capital of the depositors-. Again the manner in which Public deposit were received and handled and the liability arising therefrom almost stands admitted from the following plea taken in the reply:- The deposits had assumed a figure which; was not commensurate with the actual business of the company, Immediate, blockage of the investment would have practically brought the situation at the time h which has now emerged."
65. This position he was taking as prevailing when he took over as Director in 1983. He having "realised and known the fact that deposits being received were not commensurate with the actual business of the company, it was his duty to act there and then and to stop the public loot instead of becoming the party because at that stage he came to know and realize that neither the company nor its business was in a position to return, the principal amount of the deposits what to say of the profits.Had he acted in a bona fide and honest manner in 1983, the liability of the company would bave stood at Rs.18,22,66,748 as against present Iiability of Rs.2.55 billion.Reference is invited to report No.138 Exh. BB and the final report (para. 7.1) Exh. JJ. The liability of Sh. Saleem is co-extensive with the liability of Ch. Ali Muhammad and Amjad Hussain Khokhar, the two Managing Directors as he had been preparing the accounts of Taj Company and then had the knowledge of the affairs of the company.He as a Director failed to act reasonably and with due diligence to safeguard the interest of the shareholders as well as the depositors. Hefis also liable for mismanaging and misappropriating the assets Of the BBM. The reasoning given in the cases of Ch. Ali Muhammad and Amjad Hussain Khokhar, equally applies to him and same may be read herein.
He is therefore held liable jointly with Ch.Ali Muhammad and Amjad Hussain Khokhar for the sum of Rs.2,061,712,387.00 under section 412 of the Ordinance. As regards individual specific liability of Sh.
Muhammad Saleem,report NO.189 is under process and the said liability if any, will be determined separate. Registrar Shall be at liberty to lodge appropriate proceeding for liability incurred, if any, with regard to affairs of Bahawalpur Paper and Board Mills Limited in accordance with law.
CH. MUHAMMAD SALEEM:
66. The same statement of allegations dated 11th May, 1991 was served oh Ch. Muhammad Saleem being the Director of the Taj Company, other statements of allegations Exhs. PW1/11, PW.1/11-A and PW. 1/11-B were also served. A gist of allegations too was served on him.
67. Ch. Muhammad Saleem in his reply filed to the first statement of allegations took the position that his name was proposed as Director of Taj Company to fill in the casual vacancy on 27th June, 1990 but he as matter of fact never attained the status of a Director as he not only failed to buy the requisite qualifying shares of a Director but also tendered his resignation on 8th December, 1990.
He urged that proceedings lodged against him be dismissed as the same have been launched on erroneous assumption of law and fact. In the evidence produced by the petitioner the assertion that Ch. Muhammad Saleem did not attain the status of a Director has not been controverted. No evidence worth the name is available on record to post him with the necessary knowledge of doing any acts of omission and commission to bring his case within the purview of sections 412 and 413 of the Ordinance. The proceedings against him are, therefore, dismissed.
68. The question of liability for fraudulent conduct of business under section 413 of the Ordinance may be gone into. The relevant sub-sections of section 413 are being reproduced for ready reference:-- "413. Liability for fraudulent conduct of business.-(1) If in the course of winding up of a Company it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other person, or for any fraudulent purpose, the Court,*on the application of the official liquidator or the liquidator or any creditor or contributory of the company, may if it thinks fit, declare that any persons who were knowingly parties to the carrying on of the business in the manner aforesaid, shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court may direct.
(2) On the hearing of an application under sub-section (1), the official liquidator or the liquidator, as the case may be, may himself give evidence or call witnesses." The important ingredient of the default is that the business has been carried on "with intent to defraud creditors of the company or any other persons, or for any fraudulent purpose." This section is almost a reproduction of section 332 of the English Companies Act, 1948. In the case of Re: Patrick and Lyon Limited (1933) Ch. 786, 790) Maughan, J. Observed that "defraud" for the purposes of section 332 and "fraudulent purpose" is actual dishonesty involving, according to current notions of fair trading among commercial men real moral blame", in the case of R. W.C. Leitch Brees Limited (1932) 2 Ch. 71 learned Judge observed that "under this section 332, the Court has power in its declaration to state that a person shall be personally liable without any limitation of liability, in respect of a certain sum being part of the debts or other liabilities of the company."
69. The next question required to be determined is whether within the meaning of section 413 (1) of the Ordinance and construing the reference therein to fraud as construed above, the business of the company was carried on to defraud the creditors or any. ^person, the shareholders. The findings recorded, the facts noted and the material discussed in case of each of Managing Directors and the Directors, read as a whole furnish sufficient justification to hold that since the joining of each of them as Directors and Managing Directors business to the knowledge of each one of them was carried on dishonestly with intent to defraud the creditors as well as shareholders. Each one of them actively participated in maintenance of false and manipulated books of account, balance-sneers. The reasons given in case of each of these Directors may, therefore, be read as part of this finding and declaration. It is pertinent to note that on deposits profit at the rate of 18%, 20% and 22% per annum was being promised to be paid. It is admitted fact j that business, that is, publication and sale of Holy Qur'an and other religious books was not yielding profits, rather it was sustaining loss every year. The position of the investments made in other transactions and purchase of assets, buildings and the two mills- purchased and set up at Sheikhupura Road and at Hub has been scanned. These investments were also not yielding any income. These were reckless investments made unauthorisedly and no real effort or even though was given to either their economic viability or to manage them in a manner that income may accrue. The recycling of the amounts received as deposits since 1981 to 1990 has been detailed in Report No. 138 (Exh. BB).
70. Noting the position of the two years, that is, 1989 and 1990 from Exhs. BB it appears that as against total sales of Rs. 74,130,827 the company received deposits of Rs. 548,192,196 while the amount refunded was to the tune of Rs. 238,136,296. Likewise in 1990, the total sales were of Rs.
55,028,877 while the deposits received were of Rs. 511,592,944 and sum of Rs. 209,081,289 was the amount refunded to depositors. Thus, the amount of profit was being refunded each year out of the amount of the deposits received. The Directors in order to attract more and more deposits were promising to pay profit from 18% to 22%, that is, the rate which was not being offered by any Scheduled Bank, Investment Bank and the Financial Institutions. These Directors kept on deceiving the depositors by paying profits at the promised rates, out of the money entrusted to them in the name of Holy Qur'an believing that their money would be safe as the same was being collected and invested in the business of publication and sale of Holy Qur'an and religious books. The depositors were made to believe that they are participating in propagation <5f Islam as well as earning profit out of business approved by religion. These Directors, namely, Ch. Ali Muhammad, Amjad Hussain Khokhar and Sh. Muhammad Saleem admitted that resort to recycling of the funds, that is, payment of profit out of deposits was considered necessary for continued existence of the company. Thus the camouflaging was continued intentionally to the prejudice of the shareholders * and depositors of the Taj Company and the Directors continued the loot and squandering away of the funds of the Company.
71. For all these reasons, it is hereby declared that Ch. Ali Muhammad, Amjad Hussain Khokhar, the two Managing Directors from time to time and Directors since 1983 to 1989 and Sh. Muhammad Saleem, Director, formally Chairman of Taj Company/Chief Executive of BBM (a subsidiary company) are jointly liable for the shortfall amounting to Rs. 2,061,712,387 whereas Muhammad Ashraf Parvez is liable for Rs. 2,47,50,000 (the principal amount due in the account of prize bonds).
This declaration is made in terms of section 413
(1) of the Ordinance and is complimentary to the liabilities determined under section 412 of the Ordinance.
72. The question of inflicting punishment under section 413
(3) of the Ordinance may be now attended to. Section 413(4) reads as under:-- "413. (4). Where any business of a company is can d on I with such intent or such purpose as is mentioned ' subsection (l), every person who was knowingly a party to the carrying on the business in the manner aforesaid shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to twenty thousand rupees, or with both."
73. The finding has been recorded that Ch. Ali Muhammad, Amjad Hussain Khokhar, Sh. Muhammad Saleem and Muhammad Ashraf Parvez have been carrying on business of the company with intent to defraud the creditors and as a result of their fraudulent conduct of business, shareholders of Taj Company and its creditors have been caused loss to the extent of the sums adjudged against them jointly and severally. Ch. Ali Muhammad, Amjad Hussain khokhar, Ch. Muhammad Saleem and Muhammad Ashraf Parvez are hereby punished to undergo simple imprisonment for two years each and also to fine of Rs. 20,000 each and in default to further undergo four months' simple imprisonment. Detention warrants shall issue accordingly and Ch. Ali Muhammad, Amjad Hussain Khokhar, Sh. Muhammad Saleem and Muhammad Ashraf Parvez shall be detained in prison to suffer the sentences awarded to them in accordance with law.
74. As regards the awarding of punishment under section 413(4) of the Ordinance, it may be pointed out that this Court took cognizance of the matter of criminal liability of the Managing Directors and Directors of the Taj Company on the initiation of the proceedings under sections 412 and 413 of the Ordinance, which provisions are applicable and invocable by virtue of section 294 of the Ordinance. The order dated 4th December, 1991 explicitly stated that the determination will entail their civil as well as criminal liability. The cognizance so taken for the determination of criminal liability is in accord with the scheme of the Companies Ordinance, 1984. It will be seen that awarding of punishment provided by section 413(4) is a necessary consequence of the declaration made and the finding recorded under sub-section (1) of section 413. Such a finding can be returned either in the course of winding up of a company or in the course of proceedings under section 290 by virtue of section 294 of the Ordinance. These proceedings are to be initiated before the 'Court', i.e. The Court having jurisdiction under the Ordinance: S. 2(11); Section 7 inter alia provides that the Court having jurisdiction under this Ordinance shall be the High Court having jurisdiction in the place at which the registered office of the company is situate. For the proceedings under section 290 and sections 412 and 413 this Court is the Court having jurisdiction in the matter and cognizance taken by it even otherwise is in conformity with the provisions of section 476(4) of the Ordinance.
Sub-section (4) of section 476 reads:-- "(4) Where imprisonment or imprisonment in addition to fine is provided for any contravention of, or default in complying with, any provisions of this Ordinance, it shall be adjudged by a Court not inferior to that of a Court of Session." It is also to be noted that the question of awarding punishment for any contravention or default is to be adjudged by the Court concerned obviously in accordance with the procedure applicable to the Court. As for this Court is concerned, the Companies Ordinance, 1984 in section 9 provides the procedure as under:- "Section 9. Notwithstanding anything contained in any other law, all matters coming before the Court under this Ordinance shall be disposed of and the judgment pronounced, as expeditiously as possible but not later than ninety days from the date of presentation of the petition or application to the Court and, except in extraordinary circumstances and on grounds to be recorded, the Court shall hear the case from day-to-day.
Explanation.-In this sub-section, "judgment" means a final judgment recorded in writing.
(2) The hearing of the matters referred to in sub-section (1) '-shall not be adjourned except for sufficient cause to be - recorded, or for more than fourteen days at any one time or for more than thirty days in all.
(3) In the exercise of its jurisdiction as aforesaid, the Court shall, in all matters before it, follow the summary procedure."
75. This Court accordingly served the statements of allegations. These were three statements of allegations served on each of the respondent-directors, opportunity to reply was allowed, extensive evidence was produced by the Joint Registrar, witnesses produced were cross-examined in detail, opportunity to appear and make statement and produce evidence was granted but not availed of.
76. Before parting with the judgment I have noted with anguish the failure of the Government Agencies to check the fraud being perpetuated since last three decades at least. The concerned Authorities in the State Bank as well as Corporate Law Authority should have taken notice of the invitation to the public to make deposit at profit rate which no financial institution can possibly pay.
This aspect was sufficient to invite thorough checking and inspection of the affairs as well as the accounts of the Company. Even now the concerned agencies will be well advised to devise effective monitoring system of public companies dealing with deposits in one form or the other so that any depredation or squandering of the public money by the companies, its Directors or officers should be checked, prevented and stopped in time. Had the Authorities earlier instituted inspections into the affairs of the Taj Company, the Directors would not have been able to produce the complete record of the public deposits and the deplorable state of affairs of the Company and loot and plunder being indulged into by the Managing Directors and the Directors would have come to light. The delinquent Directors deserve to be proceeded against under penal law as well as under other provisions of the Ordinance for those defaults of which cognizance could not be taken under section 412 and 413 of the Ordinance.