2002 PLP 1150 (CLD)

This is an appeal against the order (impugned order) dated September 17, 2001 passed by the Executive Director, Specialized Companies Division (SC Division) of the Securities and Exchange Commission of Pakistan ("the Commission") under section 208 of the Companies Ordinance, 1984 ("the Ordinance"), whereby the Executive Director imposed a fine of Rs.500,000 on each of seven directors of rd/s. National Asset Leasing Corporation Ltd. (the "Company") for investment in associated undertakings in violation of provisions of section 208 (Ibid).

2. The appeal came up for hearing today wherein Mr. Athar Minallah, Advocate, appeared on behalf of the appellants. Ms. Irum Wahid Butt, Director (Leasing) appeared on behalf of respondent alongwith Ms. Farrah Qamar Faiz, Joint Director.

3. The brief facts of the case are that while examining the published accounts of the Company for the financial year ended on 30‑6‑2000, it was observed by the Commission that heavy investments have been made by the Company in its associated undertakings. Aggregately investments of Rs.125,129,183 were made up to 30‑6‑2000 which constituted around 168% of the paid‑up capital plus free reserves of the Company. Section 208 of the Ordinance imposes certain restrictions on investments in associated undertakings so that funds of a company are not transferred/siphoned out to another company against the interest of the transferring company. The relevant provisions specify that a company shall not make any investment in any of its associated undertaking except under the authority of a special resolution passed in a general meeting which shall indicate the nature, amount, terms of the investment. It further provides that the aggregate investment in associated company/ undertaking, not being a wholly owned subsidiary company, shall not exceed 30% of the paid‑up capital plus free reserves of the Investing company at any point of time except with the approval of the Federal Government.

4. Since the investments made by the Company appeared to be in violation of section 208, (ibid), the SC Division of the Commission issued a show‑cause notice to the directors of the Company ("appellant). In response to that notice, the said directors made written submissions and provided various explanations. A hearing was also held on June Ist, 2001. After having considered the explanations provided, Executive Director (SC) concluded that investment to the tune of Rs.62,128,755 was in total violation of section 208(1) ibid. These investments were made in associated undertaking namely, M/s. Industrial Capital Modaraba (Rs.5,742,575), National Industrial Management Limited (Rs.2,500,000) and‑Assets Investment Bank Limited (Rs.53,886 million i.e. Rs.9.949 million in shares, Rs.34.400 million in CODs and Rs.9.586 million in Deposit Account) and constituted 83.52% of the paid‑up capital plus free reserves of the Company. The Executive Director (SC) accordingly imposed a penalty of Rs.500,000 on each of the seven directors of the Company holding further that if the directors fail to protect the investment in Assets Investment Bank Limited, the directors, in addition to the penalty, be made liable to reimburse to the Company any consequential loss on this account as provided in subsection (5) of section 208 ibid.

5. Ms. Irum W. Butt, representing Executive Director (SC) defended the passing of the impugned order and further clarified that it is not merely a matter of violation of section 208 ibid but the management of the Company had placed their funds with an entity which was totally in a bad shape and at the instance of the State Bank of Pakistan, it is under liquidation.

6. The counsel for the appellant stated that M/s. Industrial Capital Modaraba and National Industrial Management Limited do not qualify to be associated undertakings of the Company. However, he could not substantiate this contention except referring to a legal opinion dated December 2, 1996 which is irrelevant in the case in hand. The published accounts of the Company also disclose these companies as its associated undertakings. While referring to the investment of Rs.53.886 million in Assets Investment Bank Limited, the counsel for the appellants pleaded that the investment did not constitute investment in terms of the explanation to section 208(1). He further contended that section 208 ibid is not applicable to a financial institution (as provided in section 208(6)(b) and claimed that the Company is a financial institution. He stated that even if default was made or law was violated, it was not done knowingly and wilfully and that the penalty can only be imposed under section 208 (ibid) if the default has been committed knowingly and wilfully. The counsel for the appellants also referred to a special resolution passed on 30‑12‑2000 in the Annual General Meeting of the Company, claiming that though, subsequently, the requirement of section 208(1) (ibid) was fulfilled.

7. Elaborating further, the counsel invited the attention of the Bench towards the explanation to section 208(1), reproduced hereinbelow:‑‑ "Explanation.‑‑‑The expression "investment" shall include loans advances, equity, by whatever name called, or any amount which is not in the nature of normal trade credit." The counsel pleaded that the above Explanation does not include the word "deposits" and the investment by the Company in Assets Investment Bank Limited was neither loan nor advance or equity but "deposit". hence does not fall within the purview of section 208 ibid. This, interpretation of the counsel cannot be accepted as the abovesaid explanation qualifies any amount which is not in the nature of "normal trade credit" to be considered as investment.

8. As regards the non‑applicability of section 208 ibid to a financial institution, the correct legal position is that only those financial institutions are exempt from the application of section 208 ibid which are approved by the Federal Government in terms of section 208(6)(b) (ibid). The term "financial institutions" has been defined in section 2(1)(15‑A) in the following words:‑‑‑ "2(l)(15‑A) 'financial institutions' means an institution not less than fifty per cent. of the share capital of which is held by the Federal Government or a Provincial Government, whether directly or through a company or corporation set up or controlled by such Government and includes such other institutions or companies as the Federal Government may, by notification in the Official Gazette, specify for the purpose." The Company i.e. National Asset Leasing Corporation Limited was never notified as a financial 'institution in the official Gazette, as such it does not qualify to be a financial institution for the purpose of exemption provided under section 208 (ibid).

9. Pleading that even if there was default, it was not wilful, the counsel for the appellants stated that his clients acted in accordance with general understanding about the provisions of section 208 i.e. that these are not applicable to financial institutions for which they also subsequently obtained legal opinion. Further that the certificate of deposits of Rs.20,000 million were accepted from Assets Investment Bank Limited under compulsion. In this regard he explained that an amount of Rs.20 million was collected by Assets Investment Bank Limited in an account with Muslim Commercial Bank and the amount so collected was adjusted by Muslim Commercial Bank against certain amounts receivable from Assets Investment Bank Limited. Due to forced adjustment by Muslim Commercial Bank, Assets Investment Bank Limited was not in position to pay to the company and certificates of deposits were accepted under compulsion. In the opinion of the Bench, the very fact that all the directors of the Company and Assets Investment Bank Limited were common and the Assets Investment Bank Limited allowed Muslim Commercial Bank for adjustment and the Company accepted CODs in lieu thereof instead of recovering the amount, negates this plea. Furthermore, even if this argument is accepted that CODs for Rs.20,000 million were accepted under compulsion, it makes no difference as investments in shares (Rs.9.949 million), in deposit account (Rs.9.586 million) and in CODs Rs.14.400 million (total Rs.33.886 million) in case of Assets Investment Bank Limited taken together with investment in Industrial Capital Modaraba and National Industrial Management Limited make Rs.42.128 million which constitute 57% of paid‑up capital and free reserves of the Company. In consideration of series of transactions between Assets Investment Bank Limited and the Company, the conduct of the management appears highly prejudicial to the interests of Company. The fate of investment in CODs prior to financial year 1998‑99 has been recorded in note 18.3 of the published accounts of the Company for the year 2000 in following manner: "Because of the adverse financial position of this associated investment bank, the recovery of the aforementioned deposits of Rs.43,986,680 are dependent on the improvement in the financial position of this bank mark‑up thereon for the year has been suspended and the mark‑up recognized last year has been reversed." Acceptance of further CODs instead of recovering the amount from Assets Investment Bank Limited in the circumstances when the realization of previous investment seemed unlikely and even income (mark‑up) thereon had been suspended, depicts imprudent and irrational behaviour of the management in carrying out the affairs of the Company. The said investee associated company i.e. Assets Investment Bank Limited has reportedly gone under liquidation by now. To determine whether directors violated provisions of section 208 knowingly and wilfully or not, it is pertinent to refer to the statement made by the Chief Executive of the Company before the Executive Director on June 1, 2001 that investments in Industrial Capital Modaraba and National Industrial Management Limited were made with the approval of erstwhile Corporate Law Authority (though no evidence to this effect was produced). This indicates that directors were always mindful of the provisions of section 208 (ibid). Furthermore, the legal opinion dated December 2, 1996 obtained by the management which factually pertains to other companies of the group also indicates that the management was reasonably conscious about provisions of section 208 ibid but preferred to rely upon a legal opinion instead of approaching Corporate Law Authority for clarification/ approval. In the circumstances, this plea cannot be accepted that the default was not made knowingly and wilfully.

10. As regards the passing of special resolution on 30‑12‑2000, it does not make any difference as approval of Corporate Law Authority for making investment in associated undertaking in excess of paid‑up capital and free reserves of the Company was anyway not obtained.

11. In the case in hand, it appears that management siphoned out company's funds mercilessly and the so- called investments in associated companies have really ruined this Company. Taking serious notice of this, the order of Executive Director dated September 17, 2001 whereby penalty of Rs.500,000 on each of the seven directors of the Company has been imposed is maintained. The directors may be further liable to reimburse to the Company the consequential losses suffered by the Company on account of these investments in associated companies.

12. The appeal is dismissed in the terms mentioned hereinabove. S.A.K./3/SEC Appeal dismissed.