1. ' In this suit for, declaration and mandatory injunction, plaintiff A.F. , Ferguson & Co. Chartered Accountants, (a registered partnership firm) through its partners has challenged the vires of items xli of the Code of Corporate Governance and Clause (vii) of the directives issued by the defendant No,1 to defendant No,2 to insert the same in its listing regulations immediately, being in violation of subsection (4) of section 34 of the Securities and Exchange Ordinance (XVII of 1969), and sections 252 to 254 of the Companies Ordinance 1984. The plaintiff has also prayed for suspension of the operation of the said provisions of law and further prayed for permanent injunction restraining the defendant No,1 from directly or indirectly restraining any client of the plaintiff from exercising its rights guaranteed under sections 252 to 254 of the Companies Ordinance. It has been further prayed that defendant No,1 be restrained through a permanent injunction from violating fundamental rights of the plaintiff under Article 18 of the Constitution of Islamic Republic of Pakistan and to maintain status quo apart from any other and better relief as deemed just and fair by this Court under the circumstances of the case. Prayer for grant of costs has also been made.
2. ' Suit was filed on 25-2-2004, and an application under Order XXXIX, rules 1 and 2 read with section 151, C.P.C. Accompanied the plaint seeking interim order till the disposal of the suit in respect of the prayers made in paragraphs 3 and 4 of the prayer clause of the plaint.
3. ' By an order dated 25-2-2004, after hearing the learned counsel for the plaintiff, the operation of the impugned directive dated 28-3-2002 was suspended till the next date with notice to the other side for 5-3-2004. On 16-3-2004 learned counsel for the parties made a statement before this Court that whole suit can be disposed of on the basis of available record and without recording of evidence, hence they prayed that hearing of C.M.A. No,974 of 2004 as well as main suit be fixed together. With their consent matter was adjourned to 31-3-2004 for the said purpose and till then ad interim order passed earlier was allowed to remain in force. However, in view of the request made by Mr. Anwer Mansoor Khan learned counsel for the defendants, it was made clear that the suit pertains to the personal grievance of the plaintiff in which interim order was passed and such order is only for the benefit of the plaintiff.
4. ' The facts of the case as can be gathered from the plaint appear to be that the plaintiff is a registered partnership firm of auditors and a member firm of Price Waterhouse Coopers. The plaintiff claims to be a firm of high reputation of integrity and professional excellence throughout the country and its chartered accountants are governed by the Chartered Accountants.
5. Ordinance, 1961. It is stated that on 28-3-2002, the defendant No,1 Security Exchange Commission of Pakistan (hereinafter referred as SEC) in purported exercise of powers conferred under subsection
(4) of section 34 of the Securities and Exchange Ordinance (XVII of 1969) issued a Code of Corporate Governance vide Notification No,2(10)SE/SMD/2002, and directed the defendant No,2 to insert the regulations provided by the said Code of Corporate Governance (hereinafter referred to as the 'Code') in its Listing Regulations immediately. As per Item No,xli of the Code "All listed companies are required to change their external auditors every five years. If for any reason this is impractical, a listed company may at a minimum, rotate the partner incharge of its audit engagement after obtaining the consent of the Securities and Exchange Commission of Pakistan."
6. As notified, it had to take effect when the next appointment of auditors was due.
7. ' However, in view of an initial representation made to the . Defendant No,1, the requirement of change of their external auditors every five years was made effective from 31-12-2003. It is alleged that during the year 2003, the defendant No,1 was itself undergoing various changes at its most senior level and question of implementation and enforcement of item xli of the Code and Clause vii of the directive continued to be under discussion with various stake holders. The said action of defendant No,1 was being questioned by the plaintiff and other professional bodies of the chartered accountants but without any result. The plaintiffs have based their case amongst others mainly on the ground that Financial Services Authority in the U.K. Or any other regulatory authority in the world never favoured nor implemented the mandatory rotation of firms as now directed by defendant No,
1. The plaintiff stated to have been given assurances that defendant No,1 was favourably reconsidering the earlier directive and actually a meeting was also held within Chairman of the defendant No,1 and its senior members of the chartered accountant profession on 23-12-2003. True copy of the report of the Task Force on Rebuilding Public Confidence to Financial Reporting, formed by the International Federation of Accountants has been filed and marked as Annexure 'C' to the plaint. According to the plaintiffs all sincere efforts to resolve the matter amicably failed and the defendant No,1 started compelling the plaintiff and its auditors to enforce mandatory changes though it amounted to circumvent the unequivocal legal right of the share- holders under section 252 to section 254 of the Companies Ordinance, 1984 to appoint auditors of their choice. The plaintiff further disclosed that a significant number of the clients of plaintiff had scheduled to hold a meeting of their respective share holders in relation to the appointment of auditors and the same would be irreparably affected if the alleged illegal bar placed by the defendant No,1 was not removed. It is further stated that in this respect the most imminent meeting of their valued client Messrs, Packages Limited was scheduled at Karachi on 26-2-2004. Such letters have been annexed with the plaint and marked as Annexures 'D' to 'I' and the letters from plaintiffs as Annexures 'X and 'K'. The plaintiff has further stated that in addition to the grounds taken above, item xli of the Code and Clause vii of the Directives are also in violation of the plaintiff's fundamental right of freedom of profession under Article 18 of the Constitution of the Islamic Republic of Pakistan.
8. ' The cause of action is shown to have accrued to the plaintiff to file this suit on 31-12-2003 when item No,xli of the Code of Corporate Governance and Clause vii of the said directive were made effective. Is further shown to be accruing each day. The plaintiff has, therefore, prayed for the reliefs as mentioned above.
9. ' The prayers made in suit and the injunction application have been resisted on behalf of the defendants.
10. ' Counter-affidavit to application under Order XXXIX, rules 1 and 2, C.P.C. Has been filed on behalf of defendant No,2 which covers the defence pleas. It has been stated that defendant No,4 has been incorporated as a Company Limited by guarantee under the Companies Ordinance, 1984, and registered with Securities and Exchange Commission of Pakistan as a Stock Exchange. It provides a market place for the purchase and sale of securities of companies listed on the Exchange and performs its duties under the law to carry out the directions issued from time to' time by the Commission/SEC. It has further been stated that its operations are governed by its Memorandum of Articles of Association as well as regulations made under the Securities and Exchange Ordinance, 1969. In compliance of the directions dated March 28, 2002 and May 10, 2002 issued by the defendant No,1/ SEC, provisions of Code of Corporate Governance and the clauses for Quality of Audit have been added in its Listing Regulations by defendant No,2. It has been clarified that Clause (vii) of Commission's direction dated May 10, 2002 was withdrawn by the Commission/SEC vide their letter dated June 13, 2002 and as such it has not been made apart of the Listed Regulations of the Exchange. Learned counsel for the defendants has adopted the same legal position on behalf of the defendant No,1, as stated in this counter-affidavit filed on behalf of the defendant No,2.
11. In view of the respective contentions of the parties, following issues/points for determination need to be framed and replied:-- "(1) Whether item No,xli of the Code of Corporate Governance is ultra vires the subsection (4) of section 34 of the SEC Act, 1969 and sections 252 to 254 of the Companies Ordinance, 1984? If so, its effect?
(2) Whether the fundamental rights of the plaintiff as guaranteed under Article 18 of the Constitution of Pakistan shall be violated if the defendant No,1 is not restrained from enforcing the said item No,xli of the Code of Corporate governance?
(3) What should the decree be?
12. ' Since the parties have not led any evidence, hence I have heard Mr. Zahid F. Ebrahim learned counsel for the plaintiffs and Mr. Ahwer Mansoor Khan learned counsel for the defendants at length who have meticulously argued on behalf of their clients and want decision on the above referred legal issues.
13. ' In support of this case Mr. Zahid F. Ebrahim learned counsel for the plaintiffs has argued that item xli of the Code of Clause vii of the Directive are clearly ultra vires the subsection (4) of section 34 of Securities and Exchange Commission Act, 1969 under which they are purported to have been issued. He has further argued that the same are also in direct violation of sections 252 to 254 of the Companies Ordinance, 1984 which have given unfettered powers to the companies to appoint the auditors of their choice through a procedure laid down therein, and as such the regulatory body like the defendant No,1 cannot exceed its jurisdiction to circumvent the will of the legislature through an arbitrary exercise as done by the defendant No,1 in this case. It has been further argued that item (xli) of the Code and Clause (vii) of the said Directives are also in violation of plaintiff's fundamental right of freedom of profession guaranteed under Article 18 of the Constitution of Islamic Republic of Pakistan. He has further urged that if item (xli) of the Code and Clause (vii) of the Directive are permitted to be enforced, the entire business of the plaintiffs will come to a grinding halt and the institution carefully nurtured and established over 102 years will stand destroyed due to such illegal action of defendant No,l.
14. ' In support of his contention that rules made under delegated powers, cannot go beyond the mandate conferred by the parent Act or that rules cannot be made to override the parent Statutes, Mr. Zahid F. Ebrahim learned counsel for the plaintiffs has placed reliance on the cases reported as Hashwani Sales and Services Limited v. Karachi Building Control Authority and 15 others PLD 1986 Karachi 393; (2) The Chairman, Railway Board, Lahore and others v. Messrs M. Wahabuddin & Sons PLD 1990 SC 1034; (3) Messrs United Bank Ltd. Karachi v. Messrs Mohibali Tannery Ltd., Karachi and 8 others PLD 1994 Karachi 275; (4) Mst. Fatima Bai Suleman and 5 others v. Pakistan State Oil Company Limited and 2 others 1997 MLD 2155; (5) Mirza Muhammad Iqbal and others v.
15. Government of Punjab PLD 1999 Lahore 109; (6) Kohinoor Textile v. The Federation of Pakistan 2002 PTD 121 and (7) Muhammad Kaleem Rathore v. Institution of Chartered Accountants 2003 CLD 1734.
16. ' Mr. Anwer Mansoor Khan learned counsel for the defendants has argued that the plaintiff is a public limited company listed on Stock Exchange and the suit has been filed to achieve something what its clients could not do. The law governing the subject-matter of the dispute is Securities and Exchange Ordinance, 1969 and Securities and Exchange Commission of Pakistan Act, 1997. Learned counsel has laid much stress on the point that the two provisions of law called in question in this suit have been made with bona fide intention to give protection to the stake-holders who are the innocent persons and unaware of the happenings 'inside the company except to have a look at the balance sheet. Referring to a large number of cases of such fraud committed by the companies with their share-holders/stake-holders, learned counsel has referred particularly to the scandals of Mehran Bank and Prudential Commercial Bank and some other financial scandals in other countries of the world. Learned counsel further argued that the auditors in such cases never reported the correct and true financial position of the institution with the result that a large number of innocent stake-holders had to suffer and it was under this spirit and background that it was being considered necessary not only in Pakistan but throughout the world to make suitable legislation and to amend the rules, bye-laws and regulations in order to protect the investors, as it is one of the duties of the defendants. Had there been such law in field, perhaps the people at large would have not suffered at the hands of two banks and many other listed companies within or outside yakistan. Referring to sections 4 and 9 of the Security and Exchange Ordinance of 1969, which deal with eligibility for registration of Stock Exchanges and listing of securities, learned counsel has argued that it was under this requirement of law that in exercise of powers under section 34(1) which deals with powers of Stock Exchange to make regulations with the previous approval of the Commission and 34(4), which deals with the powers of the Commission to make, amend and rescind any regulation if was felt expedient, and the defendants have collie forward to perform their statutory duty. With reference to powers of the Commission, learned counsel has referred to section 20 of the Security and Exchange Act of 1997 as a whole, particularly to Clause (o) of the said section. In support of his contention with reference to import, object and scope of the Companies Ordinance, 1984 and Security and Exchange Ordinance, 1969, learned counsel has referred to the cases of Muhammad Kaleem v. Institute of Chartered Accountants of Pakistan and others 2003 CLD 1734; (2) Chaudhri Nazir Ahmed Asad v. Institute of Chartered Accountants of Pakistan and 2 others 2002 CLD 1835. Learned counsel has also referred to Member's Hand Book Vol-I issued by Institute of Chartered Accountants of Pakistan (Chapter V-A) and Clauses v and vi of the Schedule-I) defining the "Misconduct" and "Professional Misconduct" in relation to chartered accountants in practice, and the members of the Institute.
17. ' Learned counsel has further placed reliance on the rule laid down in the case of Messrs East and West Steamship Company v. Government of Pakistan PLD 1958 SC 41 to show that reasonable restrictions on a trade can be imposed in public interest under the -law and it cannot be deemed to be illegal. Reliance has also been placed on Malik Asghar and 3 others v. Government of Punjab PLD 2003 Lahore 73, wherein it has been held that Government is fully competent to regulate the business of transport. Interest of the public at large being supreme and is to be kept in view while examining any such restriction on a particular trade, was examined by the Supreme Court of India with reference to Article 19(6) of the Indian Constitution, in the cases reported as Glass Chatons Importers and Users Association and others v. Union of India and others AIR 1961 SC 1514 and Akadasi Padhan v: State of Orissa and others AIR 1963 SC 1047. Reliance has also been placed on the case of Lahore Improvement Trust, Lahore v. The Custodian Evacuee Property, West Pakistan, Lahore PLD 1971 SC 811; Messrs Shahmurd Sugar Mills Ltd. v. Government of Sindh and others 2003 CLC 1078 and Rana Muhammad Arshad v. Additional Commissioner (Revenue), Multan Division and others 1998 SCMR 1462 in this context.
18. ' Learned counsel has further argued that the plaintiff has no cause of action and the relief claimed does not fall within the ambit of sections 42 and 56 of the Specific Relief Act as plaintiff has no right or legal character to place the case of others to attract the ingredients of section 42 of the Specific Relief Act and no injunction can be granted in view of bar contained in section 56 of the said Act.
19. Lastly, Mr. Anwer Mansoor Khan has urged that the two orders showing the refusal of the defendant No,1 to allow some of the listed companies to change the partner incharge of the audit firm is neither an illegal nor arbitrary order but the same is within the four corners of law and is an appealable order against which the said companies could have filed an appeal, but did not prefer to do so or come forward themselves, hence the plaintiff cannot plead their cause in this suit. He has further urged that out of 230 listed Companies, 175 Companies have started following the said regulations and the others are also following their colleagues.
20. ' In rebuttal, Mr. Zahid F. Ebrahim learned counsel for the plaintiffs has referred to Naresh Chandra Committee report on Corporate Audit and governance (down loaded from the web site of Finance Minister of India) where the said Committee did not recommend in favour of any statutory rotation of audit firms but in line with SOX Act found it in favour of compulsory rotation of audit partners.
21. ' Mr. Anwer Mansoor Khan has placed on record a copy of Companies (Amendment) Bill, 2003 introduced/to be introduced in the Indian Parliament to show that such amendment with regard to the appointment of auditors, rotations or restrictions on number of audits to be carried out and that an audit firm should not predominately depend on a company, is being sought, obviously in order to protect the interest of stake-holders. With reference to Naresh Chandra Committee's report and delay in promulgation of such regulation in India, learned counsel has referred to a resolution passed by ICAT (down loaded from www.Helplinelaw.Com/news/ 0703 / d business) which finds place in "India Business World - July, 2003 the month that was" ICAI has passed a resolution making rotation of auditors mandatory for listed companies and for those companies in which public is substantially interested. Attention of this Court has also been invited to the view expressed therein that the decision to rotate the auditors can be implemented even without an amendment in the Companies Act as ICAI can regulate its members through a code of conduct.
22. Learned counsel has, therefore, vehemently urged that members in Pakistan have been regulated through the code of conduct and there is no illegality in promulgating such regulation. With reference to delay in passing such resolution in India by ICAI, learned counsel has referred particularly to the last paragraph of the above-referred documents which reads as below:-- "The change in ICAI's stance is significant. The idea of rotation had come up several times in the Council over last 13 years but was invariably put off because many of the Council members were also partners in large audit firms and the rotation rule would have meant uncertainty in revenue flows from longstanding clients. The importance of the resolution can be considered from the fact that even President and Vice-President voted on the resolution though it is customary for them not to vote on resolution put before the Council." (underlining is by me)
23. ' I have given due consideration to the arguments advanced by the learned counsel for the parties and perused the material placed on record as well as the case-law cited at the bar.
24. ' The main thrust of the arguments of the learned counsel for the plaintiff is that the above referred directives are in flagrant violation of sections 252 to 254 of the Companies Ordinance, 1984, but it has been rightly pointed out by Mr. Anwer Mansoor Khan that the plaintiff cannot plead the cause of others viz. Companies who have neither filed this suit nor preferred any appeal against insertion of such regulation, though such remedy was available to them under the law and no such suit could be filed even by the said companies without exhausting the said remedy. It is well-settled position of law that reasonable restrictions on a trade or profession as rightly argued by Mr. Mansoor Ahmed Khan with the help of case-law cited from Apex Court of our country and the Indian Courts are not deemed to be violative of the fundamental rights. There also appears to he force in the contention of the learned counsel for the defendants that the plaintiff has pleaded the cause of others. No company has come forward to challenge the vires of the said provision of law but it is the plaintiff who appears to have been taken the burden upon its shoulders such as pro bono public, or as it is said in Urdu which is not permissible under the law. Larger public interest has always been Of prime consideration before the Courts while examining a particular piece of legislation at the touchstone of fundamental rights guaranteed under the Constitution. There are a large number of listed companies in the country where the interest of stake-holders is involved who cannot be left at the mercy of such companies and the auditors of their choice particularly having longstanding affiliations with the companies; I am fully conscious of the fact that all firms of Chartered Accountants cannot be deemed to be in collusion with their clients but in certain cases in Pakistan as well as in other countries it has not happened which has necessitated to promulgate such regulations in the interest of innocent stakeholders.
25. ' From the material placed on record, it appears that such type of legislation has been/is being introduced in many other countries particularly that of South Asia and South East Asia; Singapore and Mauritius have already introduced such system. In India a bill appears to have been moved or is being moved in the Parliament whereas in Pakistan this law has been enforced after adopting a proper procedure by the Competent Authority there appear to be no other purpose behind such amendments but to protect the interest of innocent share-holders and stake-holders who despite investing their hard earned savings have no access to the accounts of a listed company. I am of the considered view that the law enforced through such amendments being in public interest cannot be deemed to be ultra vires the Constitution of Pakistan or any of the provision of the Company Law. Clause (vii) of the directive has already been withdrawn by the authority as stated by Mr. Anwer Mansoor Khan at the very outset.
26. ' As a result of discussion made above, I have come to the conclusion that no case is made out for grant of declaration as sought or injunction as prayed in the suit. Issues Nos.1 and 2 are, therefore, replied in negative. Resultantly, the suit is dismissed with no orders as to costs alongwith listed application.