2018 PLP 734 (CLD)

SHAHID KARIM, J.

This is an appeal under section 34 of the Securities and Exchange Commission of Pakistan Act, 1997 ("the Act, 1997") and is directed against the order dated 13.4.2011 passed by the Appellate Bench of the SECP.

2. It is not necessary to narrate the entire facts in detail. Suffice to say that the appellant who was the Chief Executive of Asian Stocks Funds Limited along with the company and its directors were issued a show cause notice dated 24.4.2006 calling upon the appellant to show cause as to why fine may not be imposed under Rule 63 of the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 for the alleged contravention of Rules 49(3) and 49(4) of the Rules, 2003. The Appellate Bench in the impugned order took a lenient view to the extent of the directors and burdened the appellant who was the Chief Executive Officer of the company with fine/penalty under Rule 63 of the Rules, 2003. The determination of the Appellate Bench is reproduced as follows:- "...We are conscious of the fact that the majority of the investments were made in 2004, however, no serious effort was made by the Appellants to rectify the position till December 2005 as the Accounts indicated the contraventions of Rules 49(3) and 49(4) of the Rules. The CEO of the ASFL was involved in day to day monitoring of ASFL and cannot be allowed to take the plea that he did not authorize the investments in first place. The CEO did not rectify the position and ASFL remained in contravention of Rules 49(3) and 49(4) of the Rules till 31-12-05. The Respondent, however, at the time of imposition of penalty did not take into account the role of the directors on the BoD vis-a-vis the CEO, who had the prime responsibility to comply with the requirements of the law. In view of the above, we are inclined to take a lenient view to the extent of directors, who are let off with warning and are directed to be vigilant while approving the accounts, whereas, the penalty imposed on CEO in the impugned order is upheld."

3. It can be seen from a reading of the portion of the impugned order passed by the Appellate Bench that the Appellate Bench fell into a fallacy in holding the appellant liable while absolving the rest of the directors of the company. This was not only unreasonable but was a contradiction in terms. Admittedly and the fact has also been mentioned in the order of the Appellate Bench that the majority of the investments were made in the year 2004 while the appellant was not as the CEO as yet. The appellant on the other hand was appointed as CEO in April, 2005 and resigned in March, 2006 while the show cause notice was issued on 24.4.2006. Therefore, clearly the appellant was not on the Board of Directors which authorized the investments to be made. The only allegation against the appellant that he did not make any serious efforts to rectify the position till December, 2005. This allegation is not sufficient to saddle the appellant with the penalty under Rule 63 of the Rules, 2003, which reads as under:- "Rule

63. If an investment company refuses to comply with or contravenes any provision of these rules or directions passed by the Commission thereunder, every director of the company who is knowingly and willfully a party to the default shall be liable to a fine not exceeding five hundred thousand rupees and to a further fine not exceeding one thousand rupees for every day after the first week/month/quarter of its year during which the default continues."

4. It is incredulous that the Appellate Bench let off the directors who actually made the decision and made the appellant a scapegoat while the appellant was not responsible for the actual decision making and it was a matter of factual inquiry as to whether the appellant took steps to reverse or rectify the situation. Moreover, the penalty can only be visited if there is a contravention of any provision of the rules and not if the contravention has already taken place and a person is not able to rectify the contravention. In other words, penalty can only be imposed for the actual contravention and not for lack of effort to correct or reverse the position. Therefore, the appellant may not have been imposed penalty under Rule 63 of the Rules, 2003.

5. In view of the above, this appeal is allowed and the impugned order passed by the Appellate Bench of the SECP as also the order dated 29.9.2006 are set aside. MH/A-10/L Appeal allowed.