Islamic Investment Bank Limited petitioner No. 1 a public listed company with limited liability incorporated under the Companies Ordinance, 1984 (hereinafter referred to as Ordinance of 1980) and First Islamic Modaraba, Modaraba Floated petitioner No.2 under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (hereinafter referred to as Ordinance, 1980) have moved the instant application under sections 284(1), 285 to 288 and 503(i)(c) of the Ordinance. 1984 with a prayer to sanction and approve the scheme of arrangement for amalgamation and also to pass necessary orders to give effect to the scheme and to pass orders for the dissolution, without winding-up, of petitioner No.2.
2. According to the petition; petitioner No.2 is managed by petitioner No. 1 and which was registered as a Modaraba Company with the Registrar Modaraba Companies and Modaraba on 18-8-1991.
Petitioner No.1 was granted permission to float Modaraba by Registrar Modaraba Companies and `Modaraba under the name, First Islamic Modaraba; petitioner No.2 commenced and has been carrying business as empowered in the prospectus. The Board of Directors of petitioner No. 1 considered the performance and future prospects of the business of petitioner No.2 and it was noticed that the Certificate holders of the Modarabas were not getting appropriate profit on their investment inasmuch as all the Modarabas, in general, were facing crisis and with no prospects of any improvement in the near future and the board of petitioner No. 1 resultantly, came to the conclusion that it was advantageous that the business of petitioner No.2 be transferred to and amalgamated with petitioner No. 1. At the time of floatation of petitioner No.2 nearly 70% un- described capital of petitioner No.2 was subscribed by petitioner No. 1. The proposal re- organisation/merger was stated to be beneficial to the share-holders of petitioner No. 1 and also the Certificate holders of petitioner No.2 on the ground:--
(i) That the consolidated group position would result in financial strength.
(ii) There will be reduction in administration and running cost.
(iii) Single dealing with the corporate regulators i.e. The Security and Exchange Commission of Pakistan, Registrar of Companies, State Bank of Pakistan, Stock Exchanges and others, would result in work efficiency.
(iv) Single dealing with the authorities would result overall better performance of petitioner No. 1 and consequently beneficial -to the share-holders of petitioner No. 1 and also the certificate holders of petitioner No.2.
(v) Bank has bright future prospects whereas Modaraba does not.
3. Notices of the petition were published in the dailies and also in the official gazette and was also given to the- Deputy Registrar of Companies. Subsequently notices were also issued to the Registrar of Modaraba Islamabad who filed his representation and then comments to which replies and rejoinder were also filed on behalf of the petitioner.
4. According to the representation, the Registrar of Modaraba will have to regulate the affairs of Modaraba and to watch the interests of the certificate holders (Investor) who have no say in the affairs of, the Modaraba as is the case with limited companies; that according to the Ordinance, 1980 no Modaraba can conduct any business which is against the Injunctions of Islam; that the business of the Modaraba is carried on according to the object clauses of its prospectus which (prospectus) is cleared by the Religious Board constituted under section 9 of the Modaraba Ordinance; that the merger of First Islamic Modaraba with and into an Investment Bank (whose business prima facie is interest based) would be in-appropriate. It would be a complete deviation from the concept of the Modaraba and in violation of object clause of the prospectus of First Islamic Modaraba; that the certificate holders of First Islamic Modaraba subscribed in the fund of the Modaraba considering it as Riba-free business; the proposed merger would change the status of their investment altogether; that neither the Memorandum of Association of Islamic Investment Bank Limited nor the prospectus of First Islamic Modaraba contain a clause enabling both entities to merge with each other, that. According to section 12(2) of the Ordinance, 1980 the assets and liabilities of each Modaraba shall be separate and distinct from those of another Modaraba and also from those of the Modaraba Company; that under section 13(7) no Modaraba shall be liable for the liabilities or be entitled to benefit from the assets of any other Modaraba or of the Modaraba Company; that no Modaraba Company shall engage in any business i.e. Of the same nature and competes with the business carried on by a Modaraba floated or controlled by it; that no Modaraba Company or any of its Director or Officer or their relatives shall obtain loan, advance or credit from the funds of the Modaraba or on the security of the assets of the Modaraba; that Modaraba is governed according to the object clauses of the prospectus and Management Company is functioning according to the object clauses of the Memorandum of Association.
Neither the object clause of the prospectus of the Modaraba nor any object clause of the Memorandum of Association of the Management Company provide merger; that as per financial result of the Modarabas for the year ending 30-6-1999 out of 47 Modarabas, 35 Modarabas are in profit and 26 Modarabas have paid good dividends and as such it cannot be stated that the whole sector is in crisis rather the petitioner company failed to run its own Modaraba in profitable manner; that business of Modaraba as approved by Religious Board (Constituted under section 9) is based on non---interest and according to injunctions of Islam, where bank business is on interest based economy.
5. In the comments filed by the Registrar, it is also stated that there is no proof to the effect that all the Certificate holders of .The Modaraba want the amalgamation but it is petitioner No. I's desire which reflects in Note 14.2 to its account for the period ended June 30, 1999 which states that "the Management intends to merge the modaraba with the bank for which the consultants/lawyer has been engaged"; that the business of the petitioner No. 1 is interest based which is against the Injunction of Islam, as evident from Note 8.2 of annual accounts for the year ended 30-6-1999 of petitioner No.1 and Note 18 of Switch Securities (Pvt.) Ltd. a subsidiary company of petitioner No. 1.
The claim of the petitioner that the certificate holder of the Modaraba would be benefited from the proposed merger has not been substantiated; that the financial position of petitioner No.1 is deteriorating day by day as reflected in the latest audited account, not loss for the year ended 30- 6-1999 Rs.81.544 million and against paid-up capital of Rs.198 million, accumulated losses are Rs.163 million, which has eroded about 82% of the capital of petitioner No.1; that the State Bank of Pakistan has also reported to the Security and Exchange Commission of Pakistan in August, 2000 that 'The Bank has a high level of non-performing portfolio, negative not interest margin (NIM), high non-interest expenses, negative capital base, and its balance-sheet is gradually shrinking. The Management has been advised to adequately re-capitalise the bank and reduce stuck-up portfolio. The Ministry of Finance was also advised to either suspend the license of the investment bank or direct its management to inject fresh capital. No progress has so far been made by the bank to comply with the SBP directives"; that the petitioner No.1 has never distributed any dividend amongst its share-holder since the date of commencement of the business. On the other hand, petitioner No.2 has been paying dividend to its Certificate holders, this fact shows that the Certificate holder would not be benefited from this merger.
6. After filing of the representation, comments and rejoinder by the parties, learned counsel for the petitioner as well as Registrar of Modaraba were heard.
7. Learned counsel for the petitioner in support of the petition has contended that according to section 503(i)(c) of the Ordinance, 1984 its provision have been made applicable to the Ordinance, 1980 except in so far as the said provision are inconsistent with that of Ordinance, 1960 or the rules framed thereunder. Since the Ordinance, 1980 has rot provided for amalgamation, the provisions contained under sections 284 to 288 of the Ordinance, 1984 relating to amalgamation are applicable to the Modaraba as well.
8. He has also relied upon (i) an unreported judgment dated 20-10-1999 of the Sindh High Court, Karachi I.e. Siddique Sons Denim Mills Limited and others and (ii) PLD 2001 Karachi 5. Learned counsel representing the petitioner before announcement of the order on 21-5-2001 produced the judgment of the Sindh High Court, Karachi in case of Ibrahim Leasing Limited in support of the petition.
9. The position which emerges from the above is that petitioner No. 1 and petitioner No.2 are quite distinct entities and have been established under different provision of law. The former has been incorporated under the Ordinance, 1984 and the later under the Ordinance, 1980. Both having different procedure for their operation, petitioner No. 1 is having its share holders, memorandum and article of association while the latter is having certificate holder and also having its own prospectus. In the absence of any provision in the memorandum and article of association of petitioner No. 1 providing for any exigency, the same can be resolved through a resolution of the Board of Director while the petitioner No.2 is having no such provision in the prospectus i.e. For holding or passing or a resolution. Petitioner No. 1 is running under the interest based finance while petitioner No.2 is doing its business purely on Islamic mode of finance free from Riba.
10. According to section 10 of the Ordinance, 1980 the Registrar shall not permit the floatation of Modaraba unless the Board has certified in writing that the Modaraba is not a business opposed to the Injunction of Islam thus the two petitioners are having distinct system of their business opposed to each other and it will be in complete deviation from the concept of Modaraba and in violation of object clause of the prospectus of petitioner No.2. The certificate holders of petitioner No.2 subscribed in the fund of the Modaraba considering it is a Riba free business the proposed merger would change the status of their investment altogether and it would be at their (other certificate holder's) cost whose subscription in the term of share/amount may be less i.e. 30% but their number may be a large one. There is no clause in the prospectus of petitioner No.2 for amalgamation with/merger to management company. In view of the report of the State Bank of Pakistan, referred to above, petitioner No.1 is financially unstable while according to Registrar Modaraba Companies petitioner No.2 has paid dividend to its certificate holders and who may suffer due to amalgamation of the two companies. The attempt of petitioner No.1 for amalgam9tion with petitioner No.2 also speak of mala fide on the report of petitioner No. 1 in view of the report of the State Bank of Pakistan with regard to its poor performance and the advice given to it for re-capitalising the bank and in order to meet such requirement the instant petition has been filed at the cost of the certificate holders.
11. The judgment referred to above of the Sindh High Court, Karachi i.e. Siddique Sons Denim Mills Limited and others and PLD 2001 Karachi 5, and on which reliance has been placed by the learned counsel for the petitioner, pertain to the amalgamation of the Companies in which both are the Companies were incorporated under the Ordinance while in the instant case petitioner No. 1 is incorporated under the Ordinance, 1984 and the petitioner No.2 incorporated under the Ordinance, 1980 and in case of Ibrahim Leasing Limited and another, the issues agitated on behalf of the respondent are quite different from the present one with different circumstances.