1986 PLP 2555 (MLD)

22. Some other similar case-law has also been quoted and it has been stated that the Corporate Law Authority did not apply its mind in examining the report of the Enquiry Officer and has acted blindly on the readymade advice contained in the Enquiry Report in which findings are based on irrelevant material and misreading of the law and is thus inoperative, null and void. It has been urged that the issue of a show-case notice based on the Enquiry Report was mala fide and against principles of Natural Justice.

23. This objection is also misconceived. The case-law quoted by the counsel of the company is about malice where action has been taken. No action has been taken by any authority so far and as such there is no question of any malice. This objection, therefore, also fails.

24. The next objection is that S.R.O. No.1024/ 181 was published in the official Gazette of Pakistan on September 21, 1981 by which the Federal Government delegated the powers and functions of the Federal Government under section 28 of the Ordinance other than those of under sections 26, 2.7, 28 and 33 to be exercised or performed by the Member, Corporate Law Authority (Corporate Law Wing). It has been stated that this notification had no retrospective effect and that if, at all any breach of the Second Schedule was committed for the accounting year ending on 30-9-1980 it was committed before the period " of this notification, hence the Member of the Corporate Law Authority is not competent to hear the case and it is only the Federal Government which is competent to hear the matter of the company.

25. This objection is without any basis. The Member, Corporate Law; Authority is fully competent to deal with the case of the company in respect of any year as section 21 of the Ordinance or the notification does not specify any estoppel for not making any enquiry in respect of any earlier year. The objection on this point, therefore, must also fail.

26. The next point raised is that the Corporate Law Authority has violated the principles of Natural Justice in pre-judging and pre determining the case of the company by indicating its intention of imposing 'the maximum penalty' on the company. It has been stated pre-judging closes the mind of a judicial Authority which is against the law.

27. This objection of the learned counsel is misconceived. The company has been served with a show-cause notice to state why maximum penalty for each contravention may not be imposed. The matter is to be decide after hearing the case and there is no question of pre-judging it. This objection also fails.

28. The next objection is that in the last paragraph of the notice issued by the Corporate Law Authority it is mentioned that the authority would impose penalty for 'Each Contravention' of the Ordinance and the Securities and Exchange Rules, 1971. It has been stated that the relevant portion of the provisions of the section 22 of the Ordinance reads as under: "The Central Government may, if it is satisfied after giving the person an opportunity of being heard that the refusal, failure or contravention was wilful, by order direct that such person shall pay to the Central Government by way of penalty such sum not exceeding thirty thousand rupees as may be specified in the order and, in the case of a continuing default, a further sum calculated at the rate of one thousand rupees for every day after the issue of such order during which the refusal, failure or contravention continues."

29. It has been pleaded that from the perusal of the provisions of section 22 of the Ordinance, it is clear that the words for 'Each Contravention' does not exist and it is trite law that in order to determine the intention of legislature it must be found in the words used in a statute. It has further been stated that the words of the section 22 of the Ordinance are clear plain, and unambiguous and no other meaning can be ascribed to it. It has been urged that the Corporate Law Authority has acted illegally by adding the words 'Each Contravention' in the provisions of the section 22 of the Ordinance without any lawful authority.

30. The arguments of the learned counsel have been considered. The law uses the word 'contravention' and not 'contraventions'. The use of a singular clearly shows that it refers to one contravention an as such a separate penalty can be levied for each contravention. If the plea of learned counsel was to be accepted a company making a hundred contraventions would be dealt with on the same footing as a company making only one contravention. This would be against all cannons of natural justice. The objection on this point also fails.

31. After disposing of the legal issues raised by the learned counsel the contraventions mentioned in the show-cause notice are taken up. The first contravention mentioned in the notice states that the company invested Rs.18,750,000 in its following two subsidiary companies: Name of Company Investment Percentage of capital held. (a)Consolidated Sugar Mills Limited. Rs.15,000,000 99% (b) Consolidated Spinning and Textile Mills. Limited Rs.3,750,001 95% Both the companies have been making losses since commencement of commercial production in 1977 and the accumulated losses as on 30-e-1980 were as under:- (a)Consolidated Sugar Mills Limited. Rs.82,783,249 (b) Consolidated Spinning and Textile Mills. Limited Rs.40,177,880 These investments were shown in the Annual Reports for 1978, 1979 and 1980 at cost without providing for the diminution in value of investment, although the losses shown by the subsidiaries were more than 6j times the value of investment. It was pointed- out that in accordance with the generally accepted accounting principles (as given under IAS-3), if the value of an investment is below the carrying amount for other than a temporary period, the investor's assets are overstated. unless there is appropriate recognition of the decline in value. Further that generally accepted auditing practice also require that provision be made if there is a material and permanent diminution in the value of an investment. As such no provision having been made, the Balance-sheets and profit and Loss Accounts of the company for the years 1978, 1979 and 1980 did not exhibit true and correct state of your company's affairs and the annual published accounts for the above-mentioned years were materially incorrect and this was a contravention of section 18 of the Ordinance.

32. In the reply to the notice it was stated that the investments in subsidiaries, despite the fact that the subsidiares suffered losses, cannot be construed as a permanent diminution in the value of investments. It was further stated that the subsidiaries are running concerns and fully operational, their performance is improving by every passing year and the management is sure that in course of time subsidiaries especially Consolidated Sugar Mills Limited would make tangible contribution towards the profitability of the holding company by making good profits. It was also stated that the losses suffered by the subsidiaries were due to the intervention of extraneous factors over which the management had no control. It was further stated that the subsidiaries are industrial companies and the value of investment in them is determined at the replacement value of the units and that the present net replacement value of, the assets of the subsidiaries exceeds several times their original cost:

33. At the time of hearing it has been stated that the International Accounting Standards have not been adopted by the Rules or Schedule applicable at the relevant time. This being so this point is dropped.

34. The next point mentioned in the show-cause notice was that the accounts of the company 'for the year ending 30-9-1980 showed the following amounts as due from subsidiaries: (a)Consolidated Sugar Mills Limited. Rs.8,046,330 (b) Consolidated Spinning and Textile Mills. Limited Rs.24,828,553 The enquiry had revealed that, in the Annual Report for 1980, these were classified as 'current assets' though they were of long term nature. Thus, correct disclosure was not made, contrary to the requirement of part.I of the Second Schedule than in force.

35. In reply to the show-cause notice it was stated that due to factors beyond the control of the management, the subsidiaries were running in losses and the holding company had to help these out in meeting their working capital requirements and advances of temporary nature were given. It was also stated that the advances were not of permanent nature but fluctuated from year to year.

36. At the time of hearing the position stated in reply to snow-cause notice was reiterated. The company was asked to supply a statement showing monthly balances of the two subsidiary companies for the period under consideration. This statement has since been received. Its perusal shows that there were very considerable variations from month to month and as such they were correctly shown as 'current assets'. This objection is, therefore, dropped.

37. The next point raised in the show-cause notice was that the loans and advances to subsidiaries referred to above were identified as doubtful in the Annual Accounts of 1980 but no provision was made for doubtful debts in the accounts. Hence the accounts did not exhibit a true and correct view of the state of the company's affairs.

38. In reply to show-cause notice it was stated that the auditors had treated the advances to subsidiary companies as doubtful which was contrary to the realities and the judgment of the management of the company who had never regarded the advances as doubtful. It was further stated that the management was sure that, in course of time, the subsidiaries would become viable and profitable and generate sufficient cash to repay the amount and as such no provision for doubtful debts was made.

39. At the time of hearing it has been stated that it is for company to decide whether a debt was doubtful or not and no provision of the Ordinance or Rules lays down any yardstick for treating a particular debt as doubtful. This point has been considered. As no infringement of Ordinance or Rules has been made the point is dropped.

40. The next point raised in - the show-cause notice was that on loans and advances to. associated companies, which were doubtful of recovery, interest was charged during the years 1978-79 and 1979-80 and these interest amounts were disclosed as income during the said years. As a result of company's policy of adding interest on doubtful loans and advances, the profits for the years were overstated to that extent. Hence the Balance-Sheet and profit and Loss Accounts for the years 1975-76 to 1979-80 did not exhibit a true and correct view of the state of the company's affairs.

41. In reply to show-cause notice it was stated that the advances to subsidiaries were, never at any stage, considered by the management as doubtful and the interest on these amounts was, therefore, treated as income to disclose the correct operating results for the year. It was further stated that as the management regards their investments a sound and recoverable, neither the advances nor the interest receivable could be classified as doubtful.

42. The same view, has been reiterated at the time of hearing it has also been pleaded that there was no contravention of the Ordinance or Rules. This being so this point is dropped.

43. The next point in the show-cause notice was that in note 25(ii) to the Annual accounts for the year ended 30-9-1980 it was stated that there was a dispute with Habib Bank Limited regarding the amount of interest accrued, but not received, on fixed deposit, and no provision was made against it. The amount involved is Rs.4,67,462 and was due since 1972. As a matter of accounting policy, a provision against it should have been made.

44. In reply to the show-cause notice it was stated that there was a firm commitment by the bank regarding the rate of interest to be allowed on fixed deposits and the company was expecting a sum of Rs.4,67,462 from the banks and hence in all fairness it had shown the amount as accrued amount. Further, that when its recovery was not in doubt, making a provision would have weakened the claim of the company.

45. At the time of hearing it has been pleaded that no contravention of Ordinance or Rules is involved and this being so the point is dropped.

46. The next point mentioned in the show-cause notice was that in the accounting year ended 30-9-1980, depreciation on plant and machinery of sugar unit was charged for only 164 days. Further that accounts gave no reason for charging depreciation on the basis of the number of actual working days. Moreover, this practice was contrary to paragraph 18 of International Accounting Standard-4, which requires charging of depreciation on the useful life of an asset. Further, that the method adopted by the company for charging depreciation reduced the charge to the profit and Loss account, thus over/understating profit/loss. Also that this practice was not in accordance with the generally prevalent practice in the sugar industry; nor it was in accordance with the policy followed within the company's own group. Hence the Profit and Loss Account for the year did not exhibit a true and correct view of the company's state of affairs.

47. In reply to show-cause notice it was stated that charging depreciation on the basis of actual working days, specially in seasonal industries, where the period of season may vary considerably from year to year, is a refined method of determining the quantum of depreciation charged for a year for computing cost of production. It was further, stated how can a practice which brings the quantum of depreciation in proportion to use of asset be contrary to paragraph 18 of JAS-4. Further that charging full year's depreciation in a variable seasonal industry would, understate profits and overstate loss. It was also stated that many sugar mills, to the best of knowledge, had adopted such practice. It was further stated that Consolidated Sugar Mills Limited is the only seasonal company in their group and it followed a policy of charging full depreciation and there were special circumstances for adopting this policy namely that the Federal Government's basis of fixing price of sugar for new units, at that time, was based on the total cost of manufacture which included a depreciation charge for full year.

48. At the time of hearing the same pleas were reiterated. A perusal of company's Annual Accounts shows that while stating the accounting policies it has been stated in note 1(b) that "depreciation is charge to income at normal tax rates". The depreciation charge is, however, contrary to this declared policy and has resulted in overstating/ understating income/loss. It also had the effect of giving a wrong impression to the shareholders, creditors etc. that depreciation was being charged in a particular manner while it was not so. This is case of misstatement which is prohibited under section 18 of the Ordinance. This default is, therefore, liable to penalty and a penalty of Rs. 5,000 (rupees five thousand) is imposed.

49. The next point mentioned in the show-cause notice is that the company incurred an expenditure of Rs.1,785,038 during the period 1973 to 1979 on revenue stamps, underwriting commission, commitment. charges etc., for securing debenture. loans. These expenses should have been, in accordance with standard accounting practice, written off immediately after they were incurred; or amortized over the term of the debentures. As a result of non-amortization of the expenditure, the Balance Sheet and Profit and Loss account of the company did not, over the years, exhibit a true and correct state of the company's affairs.

50. In reply to the show-cause notice it was stated-that the reason for not writing off or amortizing the sum was that the debentures were primarily raised to finance the setting up of the company's subsidiaries viz. C . S . M . and C . S . T . M . Further that the management was desirous of capitalising the amount when the subsidiaries went into production and the amount, therefore, was carried forward. Ultimately, bowing to expert advice, the company decided to write off the amount.

51. At the time of hearing it has pleaded that while it would have been appropriate to amortize the amount but by not doing so no provision of Ordinance and Rules had been contravened. This being so the point is dropped.

52. The next point raised in the show-cause notice was that the expenditure of Its.1,185,038 mentioned in the earlier sub-para. was shown as "Deferred Revenue Expenditure" in the Balance Sheets of 1973 to 1979, although as per requirement of paragraph 7 of part I of the Schedule, the same should have been disclosed distinctly and thus the provisions of the Schedule were contravened.

53. In reply to the show-cause notice it was stated that as the expenses represented expenses on issuing debentures, they should have been disclosed as such in compliance with paragraph 7 of Part I of the Schedule and the company was sorry for not having described them as such.

54. At the time of hearing it has been pleaded that it was a case of misclassification and as such it may be condoned.

55. The plea has been considered. It cannot be treated as a case of misclassification as the position was well-known to the company. For this default a penalty of Rs 10,000 (rupees ten thousand) is imposed.

56. The next point raised in the show-cause notice was that the company had pledged shares of various companies for securing loans from banks, but the following were not disclosed over the years: (a) Pledge of 160,000 shares (of Rs.10 each) of Consolidated Sugar Mills Limited. (b) Pledge of shares of other companies valuing Rs.3,360,000. (c) Creation of second charge on fixed assets. (d) Bank guarantee to secure a loan. This was contrary to the requirement of para.10(c) of Part I of the Schedule and the provisions of the Schedule were contravened.

57. In reply to the notice the company accepted that there had been omission in this respect, but this omission occurred because of lack of proper communication between the top management and the accounts department of the company.

58. At the time of hearing it has been pleaded that 'the omission may be condoned.

59. The plea has been considered. Inasmuch as the disclosure requirements have been contravened a penal Rs.10,000 (Rupees ten thousand) is imposed.

60. The next point is that the company took, during 1979-80, an unsecured loan of Rs.545,384 from the Allied Bank of Pakistan. The same was not shown separately, contrary to the requirement of para. 10(b) of Part I of the Schedule. It was wrongly disclosed as "secured" in note 5 to the annual accounts for the year 1979-80. Thus, the provisions of the Schedule were contravened.

61. In reply it was stated that a loan of Rs. 27, 00, 000 was obtained from Allied Bank of Pakistan against export of alcohol and -was secured on "stocks of alcohol held in Karachi" and later there was a short shipment, the stock having partly evaporated. Thus, after adjusting the export proceeds some amount remained in the loan account. It was stated that the loan was secured but the goods against which it was secured had exhausted and as such it could not be said with absolute certainty, whether, it was "secured" or "unsecured" at that date and the company treated it as "secured" as it was originally secured.

62. The same arguments have been reiterated at the time of hearing. Inasmuch as the loan was originally secured the point is dropped.

63. The next point in the show-cause notice was that in note 26(i) to the Annual Accounts for the year ending 30-9-1980 it was stated to the audited statements of account of Consolidated Sugar Mills Limited and Consolidated Spinning and .Textile Mills Limited for the years ended 30-9-1980, were annexed. The said 'accounts of the two subsidiary companies were, however, not annexed. Hence this statement was made, contravening section 18 of the Ordinance.

64. In reply the company had stated that they regret, due to oversight, the account of C.S.M. and C.S.T,M. were not annexed to the accounts of H.S.M. for the year 30th September, 1980, but on noticing the above omission the same has rectified. This plea has been reiterated at the time of hearing. It is however, a case of deliberate misstatement which is prohibited under section 18 of the Ordinance. As such the provisions of the Ordinance have been contravened and a penalty of Rs.10,000 (rupees ten thousand) is imposed.

65. The next point in the notice was that in note 20 to the annual accounts for the year ended 30-9-1980, the interest accrued was wrongly stated as "interest received". This contravened section 18 of the Ordinance. In reply it was stated that in the mercantile system of accounting followed by the company "interest accrued" is also "income receipt" and accordingly it was disclosed as "interest received" At the time of hearing the same argument has been reiterated. The default being minor is condoned.

66. The last point raised in the show-cause notice was that interest income shown as "interest received", referred to in the preceding sub-para, was wrongly adjusted towards "interest expenses and bank charges", in contravention of the requirement of para. I(A)(iii) of Part II of the Schedule which required separate disclosure of interest income on loans and advances and other interest.

67. In reply to show-cause notice it was stated that advances to subsidiaries were mainly made from funds the company borrowed 'from banks and it was imperative that the interest received on the funds be shown as deduction from the total interest paid on the borrowings, including borrowing for purpose of lending to subsidiary.

68. At the time of hearing it has been pleaded that while there may have been a technical default the overall results of the company were not affected.

69. The plea has been considered. The relevant para. of the Schedule requires that such income should be declared separately in the Profit and Loss Account. The requirements of the Schedule have, therefore, been contravened and a penalty of Rs.5,000 (rupees five thousand) is imposed.

70. The penalty levied should be paid by 30th November, 1985 and a compliance report should be sent to the Authority. A. A. Order accordingly.