2006 PLP 1376 (CLD)

TARIQ BAKHTAWAR, DIRECTOR ENFORCEMENT.

The case before me pertains to the proceedings initiated against Messrs Mehran Sugar Limited ("Company") and its present directors under subsections (2) and (3) of section 227 read with sections 229 and 476 of the Companies Ordinance, 1984 (the "Ordinance").

2. The Company is a public company limited by shares, incorporated in Pakistan on December 22, 1965 under the Companies Act, 1913 (now Companies Ordinance, 1984). The shares of the Company are quoted on Karachi Stock Exchange. The registered office of the Company is situated at Adamjee House, 8th Floor, I.I. Chundrigar Road, Karachi. It has authorized and paid up share capital of Rs.500 million as per its audited accounts for the year ended September 30, 2005. The object for which the Company was established and its powers are contained in its Memorandum and Articles of Association. The Company is principally engaged in the manufacturing and sale of sugar. The manufacturing facility of the Company is located at Tando Adam Road, District Tando Allahyar Sindh, Pakistan. The Company has 1,258 shareholders comprising individuals, joint stock companies, public sector institutions, financial institutions etc. as per pattern of shareholding annexed to the Directors' Report on the accounts for the year September 30, 2005. Directors, CEO and their spouses and Minor Children hold around 75.25% of the paid up capital. This indicates that there is a substantial public interest in the shares of this Company.

3. The facts leading to this case, briefly stated, are that it has been noticed from the examination of annual accounts for the year ended September 30, 2005 that an amount of Rs.4.138 million is payable to Provident Fund by the Company. Note 22.2 of the financial statements of September 30, 2005 the Company stated that:-- "The Company was unable to pay the liability in time due to the cash flow problems and to keep the factory operational and to meet its obligations on time to the lenders, various government authorities and other creditors. The Company has requested the trustees of the fund to provide a facility of deferred payment in instalments, to which the trustees have agreed."

4. The Auditors have expressed following opinion on the irregularity: -- "Without qualifying our opinion we draw attention to note 22.2 to the financial statements, which states that the Company has not made payment to the trustees of the Employees provident fund within stipulated time. According to the requirement of section 227 of the Companies Ordinance, 1984. It is required to be paid to the trustees within fifteen."

5. The Director's reports do not address the aforementioned qualification of the Auditors in violation of section 236 of the Ordinance. The aforesaid notes and the Auditor's qualification categorically pointed out ' that the Company has not made payments to the Provident Fund Trust ("Fund") as required under the law. The Company has thus contravened the provisions of section 227 of the Ordinance. In view of the facts and circumstances narrated A before it was considered necessary to ascertain the extent of violations committed by the Company and loss sustained in consequence of violations of section 227 of the Ordinance.

6. Consequently, a show cause notice dated May 17, 2006 (the "SCN") was issued under subsections (2) and (3) of sections 227 and 229 read with section 476 of the Ordinance to the following persons, who prima facie had authorized and permitted the contravention of the provisions of section 227 of the Ordinance:--

1. Mr. Muhammad Kasiuu Hasham Chairman/Director

2. Mr. Muhammad Ebrahim Hasham Chief Executive Officer/Director

3. Mr. Muhammad Hussain Hasham Director

4. Mr. Khurram Kassim Director

5. Mr. Ahmed Ebrahim Hasham Director

6. Mr. Muhammad Igbal Director

7. Mr. Jamal Ahmed Director,

8. Messrs Mehran Sugar Mills Limited Company

7. In response to the show-cause notice, the Company submitted that:-- The Sugar industry has passed through a difficult period in 2003-2004 and 2004-2005. The financial position of the Company deteriorated and key financial indicators fell short of minimum benchmark prescribed by the State Bank under Prudential Regulations for obtaining financial facilities from bank. The Trustees of Provident Funds were requested to give a helping hand to the Company and defer the receivable contribution till the financial situation improved. Nevertheless cheques were delivered to the trustees but were not presented to the bank. However, as soon as the position improved trustees were asked to present the cheques. The cheques were cleared as per following detail: Contribution for Month Amount (Rs.) Debt of Credit in Bank Decernber, 2004 388,235 December 13, 2005 January, 2005 389,029 December 20, 2005 February, 2005 390,358 December 22, 2005 March, 2005 408,485 January 17, 2006 April, 2005 421,305 January 17, 2006 May, 2005 426,758 January 20, 2006 June, 2005 ,429,043 January 25, 2006 July, 2005 421,318 January 30, 2006 August, 2005 418,491 February 10, 2006 September, 2005 445,696 February 17, 2006 The Company regretted the above development and requested to condone the default.

8. Hearing in the matter was fixed on June 2, 2006. Mr. M. Hanif, General Manager Finance represented the case on behalf of the Company and its directors. The learned counsel admitted the default on part of the Company and reiterated the facts mentioned in their reply. He was asked to produce undertaking by the directors for fulfilling the loss incurred by the provident fund trust due to non-payment of the amount. The Company with regard to assessment of loss suffered by the provident fund trust deliberated during the hearing sent following working based on the interest rates offered by PICIC Commercial Bank on six months deposit. Month Contribu Payment Out- Minus Amount 8% -tion due date date stand -ing Days allowed period (15 days) Dec-04 Jan-05 Dec 13, 2005 346 331 388,235 28,165 Jan-05 Feb-05 Dec 20, 2005 322 307 389,029 26,176 Feb-05 Mar-05 Dec 22, 2005 289 274 390,358 23,442 Mar-05 Apr-05 Jan 17, 2006 291 276 408,485 24,710 Apr-05 May-05 Jan 17, 2006 261 246 421,305 22,715 May-05 Jun-05 Jan 20. 2006 233 218 426,758 20,390 Jun-05 Jul-05 Jan 25, 2006 208 193 429,043 18,149 Jul-05 Aug-05 Jan 30, 2006 182 167 421,318 15,421 Aug-05 Sep-05 Feb 10, 2006 162 147 418,491 13,483 Sep-05 Oct-05 Feb 17, 2006 132 117 445,696 11,429 Total 4,138,718 204,093 Month Contribu Payment date Out- Minus Amount 8% -tion clue date stand -irrg Days allowed period (15 days) Oct-05 Nov-05 Feb 21, 2006 112 97 438,648 9,325 Nov-05 Dec-05 Feb 25, 2006 86 71 432,645 6,732 Dec-05 Jan-06 Mar 30, 2006 88 73 432,068 6,913 Jan-06 Feb-06 Apr 1, 2006 60 45 443,679 4,376 Feb-06 Mar-06 Apr 3, 2006 33 18 459,430 1,812 Mar-06 Apr-06 Apr 22, 2006 21 6 470,76 619 Apr-06 May-06 May 31, 2006 30 15 489,246 1,608 May-06 Jun-06 Jun 7, 2006 6 0 496,515 0 Total 3,662,993 31,395 Grand Total 7,801,711 235,489

9. Before proceeding further, it is necessary to advert to the provision of law, which has been violated by the Company, and its directors. These provisions are contained in section 227 of the Ordinance and are, to the extent relevant, reproduced as follows: "

227. Employees' provident funds and securities:-- (2) Where a provident fiend has been constituted by a company for its employees or any class of its employees, all moneys contributed to such funds, whether by the company or by the employees, or received or accruing by way of interest profit or otherwise from the date of contribution, receipt or accrual, as the case may be, shall either:-- (a) be deposited:- (i) in National Savings Scheme ; (ii) in a special account to be opened by the company for the purpose in a scheduled bank; or (iii) where the company itself is a scheduled bank, in a special account to be opened by the company for the purpose either in itself or in any other scheduled bank; or (b) be invested in Government securities. (c) in bonds, redeemable capital, debt securities or instruments issued by the Pakistan Water and Power Development Authority and in listed securities subject to the conditions as may be prescribed by the Commission. (3) Where a trust has been created by a company with respect to any provident fund referred to in subsection (2), the company shall be bound to collect the contribution of the employees concerned and pay such contributions as well as its own contributions, if any, to the trustees within fifteen days from the date of collection, and thereupon, the obligations laid on the company by that subsection shall devolve on the trustees and shall be discharged by them instead of the company."

10. The aforesaid provisions of the law are clear and unambiguous. The objective of these provisions is to secure the amounts collected from the employees of the company as contributions to a Provident Fund for the benefits of the employees of the Company. The law requires that all moneys contributed by the employees as well as the company's contributions, if any, including the profit thereon must be deposited within fifteen days of the contributions and shall be invested in securities referred to in clauses (a) to (c) of subsection (2) of section 227 of the Ordinance. When a Trust has been created by a company with respect to any Provident Fund, the company has an obligation to pay the contributions including its own contributions to the trustee within fifteen days from the date of collection. In the latter case, the trustees are responsible to invest the moneys of the Provident Fund in accordance with the provisions of Law. The amounts collected from the employees as contributions to a Provident Fund are in the nature of trust moneys in the hand of the company and the same must be paid to the trustees within stipulated time. The Company on the pretext of higher returns cannot, therefore, withhold such moneys.

11. I have given due consideration to the submissions of the directors as well as the arguments advanced by the representatives of the Company and Directors at the time of hearing but none of them justified the default. The law does not permit any Company to utilize the funds of Provident Fund for its commercial purposes and the argument that the cheques have been delivered to the fund trustees is not in compliance with the law. It appears that the Trustee members are not acting in the best interest of the fund. The payment was not made by the Company within stipulated time. It appears that payment towards the Fund is not prioritized by the Company and it does not take compliance of the law seriously.

12. For the forgoing, I am of the view that the Company and its directors have breached the mandatory requirements of section 227 of the Ordinance. The outstanding contributions disclosed at the end of every year make it clear that the mandatory provisions of the law were breached since long. Breach of mandatory provisions of the Ordinance meant to secure the funds of the employees cannot be allowed. An action, therefore, is necessary under section 229 of the Ordinance. I therefore, proceed to impose a fine of Rs.5,000 (Five thousand only) on the Company and each of its Directors under section 229 of the Ordinance:

1. Mr. Muhammad Kasim Hasham Chairman/Director Rs.5,000

2. Mr. Muhammad Ebrahinr Hasharn C.E.O./Director Rs.5,000

3. Mr. Muhammad Hussain Hasham Director Rs.5,000

4. Mr. Khurram Kassim Director Rs.5,000

5. Mr. Ahmed Ebrahinr Hasham Director Rs.5,000

6. Mr. Muhammad Igbal Director Rs.5,000

7. Mr. Jamal Ahmed Director Rs.5,000

8. Messrs Mehran Sugar Mills Limited Company Rs.5,000

13. The Company, its Chief Executive and Directors are hereby directed to make good the loss suffered by the Provident Fund due to lack of payment. In this regard following actions are required from the Company within 30 days of this order: due Diligently assessing the lobs suffered by the provident fund, evidence of payment of the amount lost by the provident fund, the Auditor's certificate. in respect of compliance with above directions.

14. The Company, its Chief Executive and Directors are also directed to deposit the abovementioned penalty amounting to Rs.40,000 (Rupees Forty thousands Only) within 30 days in the Commission's designated bank account or pay by a DD/Pay order issued in the name of Commission and send a copy of the receipted vouchers to the Commission for information and record, failing which proceedings under the Land Revenue Act, 1967 will be initiated which may result in the attachment and sale of their movable and immovable property. It should also be noted that the said penalty is imposed on the Chief Executive and the Directors . in their personal capacity; therefore, they are required to pay the said amounts from their personal resources. H.B.T./84/SEC Order accordingly.