2015 PLP 1978 (CLD)

SHAMS MEHMOOD MIRZA, J.

This is a petition filed under section 494 read with section 152 of the Companies Ordinance, 1984 (the Ordinance) challenging the issuance of 589,997 shares of respondent No.1 company to respondents Nos.2 and 3 with the prayer that the issue of the said shares along with returns filed by respondent No. 1 company be declared to be unlawful and illegal and register of members of respondent No. 1 company be rectified accordingly.

2. Briefly stated facts of the case are that the petitioners along with respondents Nos.2 and 3 are the shareholders of respondent No.1 company. Petitioner No.1 remained as chief executive of respondent No.1 company till the year 1998. Petitioner No.1 in the year 2003 proceeded abroad for his treatment and on his return came to know that respondents Nos.2 to 6 in connivance with each other and without any notice to the petitioners had issued 589,997 shares to respondents Nos.2 and 3 on 23-8-2004 and 8-12-2004. It is stated that these shares were issued without any consideration. The petitioners have also in the alternate stated that even if the shares in question were issued for consideration, the said issuance was in contravention of section 86 of the Ordinance as the petitioners were not served with any notice in terms of the said section.

3. Respondents have filed their written replies in which the stance of the petitioners has been controverted. It is stated that shares in question were issued to respondents Nos.2 and 3 for valid consideration, the amounts whereof are reflected in the audited accounts of respondent No.1 company. It is further stated that provisions of section 494 of the Ordinance do not apply to the facts of present case. It is also the case of the respondents that they had complied with the requirements contained in section 86 of the Ordinance.

4. I have heard the respective contentions of the learned counsel for the parties and perused the record with their help.

5. The main argument of the petitioners' counsel was that the issuance of 589,997 shares to respondents Nos. 2 and 3 was without consideration. Learned counsel pointed out to the reply filed by the respondents and stated that the respondents have merely relied on the audited account of respondent No.1 company to show receipt of consideration of shares. It was submitted that there was no independent evidence available on record in the shape of bank statements to demonstrate that respondents Nos.2 and 3 had paid any amount to respondent No.1 company as consideration for the shares in question. Notwithstanding the arguments by the learned counsel for the petitioners, the audited account of respondent No.1 company available on record for the years 2004 and 2005 duly reflect the amount of consideration of the shares in question (Rs.28,999,700.00 and Rs.30,000,000.00) under the heading "Share Capital Issued". Although the respondents have not appended any other document to demonstrate the payment of consideration for the shares, there is absolutely no reason to doubt the veracity of the audited accounts of respondent No.1 company which are prepared in terms of the provisions of the Ordinance. There must be overwhelming and compelling evidence to repel the contents of the audited accounts. The learned counsel for the petitioners has not come up with any good ground for this Court to disbelieve the statements made in the audited accounts of respondent No. 1 company and to go behind the said accounts requiring actual proof of payment of consideration.

6. It was next argued by the petitioners' counsel that in terms of section 494 of the Ordinance, this Court has ample powers to hold a full inquiry into the circumstances of the transaction. The learned counsel for the respondents, on the other hand, stated that section 494 of the Ordinance is not attracted to the facts of the case as the said section only pertains to cases where "inadequate consideration" has been paid for the issuance of shares. There is force in this submission as it is clear that section 494 of the Ordinance by its terms is not attracted to a case where the allegation is that no consideration at all has been paid in respect of the shares. As regards the holding of inquiry by the Court, it cannot be undertaken on mere oral assertions. There must be some valid proof before this Court regarding payment of inadequate consideration for the issuance of shares before inquiry can be ordered. The petitioners have failed to demonstrate to this Court through any credible evidence that inadequate consideration was paid.

7. Learned counsel for the petitioners also took the position that even if it is proved that respondents Nos.2 and 3 had in fact paid the amount for the shares in question, the said transaction was still in contravention of section 86 of Ordinance as no notice was served on the petitioners prior to the issuance of the shares. It was thus prayed that the register of member of respondent No. 1 company showing the induction of the new shares needs to be rectified. Section 86 of the Companies Ordinance, 1984 reads as under. "

86. Further issue of capital.- (1) Where the directors decide to increase the capital of the company by the issue of further shares, such shares shall be offered to the members in proportion to the existing shares held by each member, irrespective of class, and such offer shall be made by notice specifying the number of shares to which the member is entitled, and limiting a time within which the offer, if not accepted, will be deemed to be declined: Provided that the Federal Government may, on an application made by any public company on the basis of a special resolution passed by it, allow such company to raise its further capital without issue of right shares: Provided further that a public company may reserve a certain percentage of further issue of its employees under "Employees Stock Option Scheme" to be approved by the Commission in accordance with the rules made under this Ordinance. (2) The offer of new shares shall be strictly in proportion to the number of existing shares held: Provided that fractional shares shall not be offered and all fractions less than a share shall be consolidated and disposed of by the company and the proceeds from such disposition shall be paid to such of the entitled shareholders as may have accepted such offer. (3) The offer of new shares shall be accompanied by a circular duly signed by the directors or an officer of the company authorized by them in this behalf in the form prescribed by the Commission containing material information about the affairs of the company, latest statement of the accounts and setting forth necessity for issue of further capital. (4) A copy of the circular referred to in subsection (3) duly signed by the directors or an officer authorized as aforesaid shall be filed with the registrar before the circular is sent to the shareholders. (5) The circular referred to in subsection (3) shall specify a date by which the offer, if not accepted, will be deemed to be declined. (6) Omitted by Finance Act, 1995. (7) If the whole or any part of the shares offered under subsection (1) is declined or is not subscribed, the directors may allot and issue such shares in such manner as they may deem fit." The examination of the above provision makes it abundantly clear that the directors of a company have to first offer the new issue of shares to the existing members in proportion to the shares held by them and that such offer shall be through a notice which should specify a time within which the offer has to be accepted failing which it shall be deemed to have been declined. Section 86(3) of the Ordinance further prescribes that the offer of new shares shall be accompanied by a circular duly signed by the directors in the form prescribed by Securities and Exchange Commission of Pakistan (SECP) containing material information about the affairs of the company, latest statement of the accounts and setting forth necessity for issue of further capital.

8. The learned counsel for the respondents stated that notice in terms of section 86 of the Ordinance was duly issued to the petitioners. It was further stated that the address of the petitioners in the Form filed with SECP was wrongly mentioned as 18-D, Model Town, Lahore instead of 18-D, Faisal Town, Lahore and that the said mistake was on account of the petitioners. In this regard, reply to paragraph 6 of the petition by SECP is quite revealing wherein it is stated that the residential address of the petitioners till 14-5-2003 was shown by respondent No. 1 company in Form 29 as 18-D, Faisal Town, Lahore. However, vide Form 29 dated 16-4-2004 the address of the petitioners was changed to 18-D, Model Town, Lahore. Suffice it to state that the issue of further shares took place on 23-8-2004 and 8-12-2004. It is thus clear that immediately prior to issuance of shares in question, respondent No. 1 company reported the wrong address of the petitioners to SECP through the returns filed by it.

9. The respondents have even otherwise utterly failed to demonstrate to this Court that any notice was served on the petitioners in terms of section 86 of the Ordinance prior to the issue of new shares. The respondents did not append with their reply the copy of such notice or proof of postal receipts in order to controvert the stance of the petitioners. The learned counsel for the respondents was time and again asked to show from the record the proof of dispatch of such a notice even on the wrong address of the petitioners but he could not point out to any document to this effect. It is thus clear that the respondents failed to comply with the mandatory provisions of section 86 of the Ordinance by not sending any notice to the petitioners regarding issue of new shares.

10. Faced with this situation, learned counsel for the respondent argued that this petition is hit by laches as the issuance of shares in question took place in the year 2004 whereas the petitioners have challenged the same through this petition in the year 2012. It was further stated that the petitioners had initiated proceedings against respondents in civil court in the year 2006 and despite having knowledge about the issuance of shares did not impugn the same. It is further stated that the petitioner also filed a complaint before the SECP under section 468 of Companies Ordinance, 1984 where the issue of further shares was also challenged.

11. Vide order dated 2-10-2014 passed by this Court, the learned counsel for the parties were asked to look at the applicability of the provisions of the Limitation Act, 1908 (the Limitation Act) on a petition filed under section 152 of the Ordinance in view of the dictum laid down in "Mrs. Saeeda Mahmood and another v. Anas Munir (Pvt.) Limited and 6 others" 2007 CLD 637, the relevant portion whereof is reproduced hereunder. "An overview of the judgment cited at the bar referred to above reveals time available for filing a petition under section 152 of the Companies Ordinance, 1984 is not open ended where a suit based on the same cause of action seeking substantially the same relief as prayed for under section 152 of the Companies Ordinance, 1984 has become barred by limitation, the application of section 152 of the Ordinance would ordinarily be liable to be dismissed. Time of the knowledge of the facts and circumstances giving rise to the cause of action would be relevant. In our jurisdiction there appears to be no definitive precedent to the effect that the provision of Limitation Act applied to a petition under section 152 of the Companies Ordinance, 1984 or whether the same is covered under Article 120 or Article 181 thereof however in the Indian jurisdiction such an application is treated to be covered by the residual Article pertaining to filing of application." During the course of arguments, the judgment referred as "Syed Akbar Ali v. Mamun Ali Bumasuk (Pvt.) Limited and others" 2006 CLD 960 was also brought to the attention of this Court in which it was held as follows: "A party, who called in question title of the shares and of omitting his name fraudulently from the register of Company, has two remedies i.e. by filing a suit for declaration before the civil Court and/or by filing an application under section 152 of the Companies Ordinance, 1984 but such remedies ought to have been invoked within the period of limitation provided and if no period is specifically provided then within reasonable period of time. Without going into the question whether Article 120 of the Limitation Act and/or Article 181 of the Limitation Act is applicable to the petition under section 152 of the Companies Ordinance, 1984 or not as such petition is neither a suit nor an application under section 3 of the Limitation Act, the petitioner cannot be allowed to call in question transfer of shares at his own sweet-will. Once a remedy of Civil Suit has become time barred by time then only in exceptional circumstances a party can be allowed to avail other remedy if available in law."

12. It appears from the above judgments that the learned Courts passing them did not make any conclusive determination regarding the applicability of the provisions of Limitation Act to a petition under section 152 of the Ordinance. However, for the purposes of determining the delay in filing the said petition, the period fixed by the Limitation Act within which a suit for similar relief in a civil court must be filed was taken to be a reasonable criterion.

13. After carefully considering the issue, this Court has come to the conclusion that the provisions of Limitation Act apply to a petition filed under section 152 of the Ordinance. In "Syed Akbar Ali v. Mamun Ali Bumasuk (Pvt.) Limited and others" 2006 CLD 960, with reference to Articles 120 and 181 of the Limitation Act, it was stated that the petition under section 152 of the Ordinance was neither a suit nor an application. This description of a petition under section 152 of the Ordinance, with due respect, may not be apt as such a petition is akin to a plaint for the reasons stated below.

14. The expressions "suits", "applications" and "petitions" are not defined in the Civil Procedure Code, 1908. By virtue of section 2(1) of the Limitation Act, 1908, "applicant" includes any person from or through whom the applicant derives his right to apply and "suit" in terms of section 2(10) thereof does not include an appeal or an application. Section 3 of the Limitation Act provides that subject to the provisions contained in sections 4 to 24, every suit instituted, appeal preferred and application made after the prescribed period shall be dismissed. By virtue of section 5 of the Limitation Act, any appeal or any application as specified therein but not a suit may be admitted after the prescribed period provided the appellant or the applicant satisfies the Court that he had sufficient cause for not preferring the appeal or making application within such period. Section 29 provides that where any special or local law prescribes for any suit, appeal or application a period of limitation different from the period prescribed by the Schedule forming part of the Limitation Act, the period prescribed by such special or local law will be applied for determining any period of limitation for any suit or appeal or application as the case may be. The Schedule forming part of the Limitation Act consists of three divisions prescribing the period of limitation. The first division covering Articles 1 to 155 deals with the limitation for a suit. The second division comprising Articles 156 to 164 pertains to the limitation for filing an appeal, while Articles 166 to 183 deals with the limitation for filing an application. Article 181 is a residuary Article which applies to all applications for which no period of limitation is provided and the period starts running from the date on which the right to apply accrues and is enforceable within three years thereof. A reading of these Articles would show that the limitation period is fixed only in connection with the filing of either a suit or application before a civil court or an appeal.

15. By virtue of the explanation to section 3 of the Limitation Act, a suit is instituted in ordinary cases, when the plaint is presented to the proper officer. Similarly, Order IV, C.P.C. deals with institution of suits. Rule 1 thereof is as follows:

1. Suit to be commenced by plaint.

(1) Every suit shall be instituted by presenting a plaint to the Court or such officer as it appoints in this behalf. (2) Every plaint shall comply with the rules contained in Orders VI and VII, so far as they are applicable.

16. The Companies (Court) Rules, 1997 have been framed, inter alia, to regulate the conduct of the proceedings initiated under the Ordinance. In terms of Rule 5 thereof all applications under the Ordinance shall be made by petitions. Once a petition is entertained for regular hearing, the respondent(s) is/are required to file "written statement" in answer to the contents of the petition. In terms of Rule 7(1), the practice, procedure and provisions of the Code of Civil Procedure have been made applicable to all the proceedings under the Ordinance unless prescribed otherwise by the Ordinance and the Rules. It is thus clear that although the proceedings under section 152 of the Ordinance are initiated by a petition, the formalities and material particulars required to be mentioned in those petition are the same as in a plaint. Under the scheme of things, therefore, there is no sanctity attached to the use of the expressions "petition" or "plaint" for describing the nature of the lis. In the context of the proceedings under the Ordinance, the difference between the two expressions appears to be more of nomenclature than of substance. On the examination of the above provisions, this Court is satisfied that a petition filed under section 152 of the Ordinance is essentially in the nature of a plaint and the proceedings are akin to a suit.

17. There is yet another way of looking at the question of the applicability of the provisions of Limitation Act to a petition under section 152 of the Ordinance. For the resolution of this controversy, the right approach would be to look at the type of jurisdiction vested in this Court under the Ordinance. In "Brother Steel Mills Limited etc. v. Mian Ilyas Miraj etc." PLD 1996 SC 543, it was held that this Court under the Ordinance exercises civil original jurisdiction in contrast to the appellate jurisdiction as the proceedings before it are initiated as the Court of first instance. In "Lahore Race Club through Secretary and others v. Raja Khushbakht-ur-Rehman" PLD 2008 SC 707, it was held that a petition under section 152 of the Ordinance has to be filed in the first instance before this Court and only after appreciation of the contents of the petition, its reply and the documents appended by the parties if the Court reaches the conclusion that disputed questions of fact are involved can the petitioner be asked to approach the civil court. Insofar as the petition under section 152 of the Ordinance is concerned, this Court is the trial court subject to the condition that the issues raised in the petition are capable of being decided on the basis of affidavits. For the purposes of determining the applicability of the Limitation Act and ascertaining the period of limitation, it matters not whether the initiation of proceedings before this Court takes place in the shape of a suit or a petition as this Court is the Court of first instance and, therefore, the petition under section 152 of the Ordinance filed in such proceedings is analogous to a suit.

18. The next question for determination is the applicability of the periods mentioned in Article 120 or Article 181 of the Limitation Act to a petition filed under section 152 of the Ordinance. Article 120 and Article 181 of the Limitation Act are reproduced hereunder: 1 2 3

120. Suit for which no period of limitation is provided elsewhere in this schedule. Six years When the right to sue accrues.

181. Application for which no period of limitation is provided elsewhere in this schedule or by section 48 of the Code of Civil Procedure, 1908. Three years When the right to apply accrues. The examination of the above provisions leave no room for doubt that a civil suit for a relief under section 152 of the Ordinance would entail the limitation period prescribed in Article 120 of the Limitation Act. Therefore, Article 120 of the Limitation Act shall be applicable to a petition filed under section 152 of the Ordinance and period mentioned in the said Article should be taken as a reasonable standard by which delay in seeking remedy under section 152 of the Ordinance should be measured.

19. The learned counsel for the respondents also submitted that if Limitation Act is applicable, the petition filed by the petitioners is still time barred. It is, therefore, imperative to ascertain the date of knowledge of the petitioners regarding the issuance of shares in question by the respondents. The learned counsel for respondents vehemently argued that since the petitioners filed a civil suit on the same cause of action in the year 2004, this petition was hit by the principles of constructive res judicata and also by the provisions of Order II, Rule 2, C.P.C. and that the date of filing of the said suit should be taken as a reference point for determining the date of knowledge. The learned counsel for the petitioner rebutted the arguments by stating that the petitioner applied to the SECP for obtaining the certified copies of the returns filed by respondent No.1 company but the same were not provided.

20. Suffice it to state that the subject matter of the suit filed by the petitioners before the civil court, Gujranwala was different from that of the present petition. Similarly, when the petitioners approached SECP against the respondents by filing the complaint under section 468 of the Companies Ordinance, 1984, they were advised to approach this Court under section 152 of the Companies Ordinance, 1984 as has also been admitted by SECP in its reply to the petition. Having regard to the stance of the petitioners and SECP, it is clear that the petitioners, who were not in the management of respondent No. 1 company, were making efforts and approaching various fora for redressal of their grievances and only approached this Court after so advised by SECP. It is further clear that in the suit filed before the civil court as well as in the complaint before the SECP, the petitioners only made general allegations regarding the returns filed by respondent No.1 company and the enhancement of the share capital, which lends credence to their stance that they were not aware of the specific number of shares allotted by the respondents.

21. As the petition was silent about the date on which the petitioners gained knowledge about the allotment of shares, petitioner No.1 filed an affidavit in this regard on 6-11-2014 wherein it was, inter alia, stated that the petitioners gained knowledge about the allotment of shares on 17-10-2011 when they received Form A from the office of SECP. The respondents also filed their counter affidavit controverting the stance of the petitioner. SECP too filed a statement of facts in this regard in which it was stated that the petitioner applied to SECP for inspection of the record of respondent No.1 company on 7-5-2008. The learned counsel for the petitioners stated that the application for inspection of SECP record of respondent No. 1 company was made but the inspection was not carried out. When confronted with this, the learned legal adviser for SECP candidly accepted that it cannot be ascertained as to whether the petitioners carried out the inspection of the record of SECP. For the purpose of ascertaining the date of knowledge, the reply filed by SECP to paragraph 11 of the petitioner is relevant, which reads as under: "Furthermore, it is also not out of the context to mention here that the returns filed by the respondent Company, in respect of the period under question, have also not been accepted by the office of the Answering respondent due to being defective in nature." It is thus clear that, knowledge of the issuance of shares could not be imputed to the petitioners when SECP itself stated that returns filed by respondent No.1 company for the period in question were not being accepted by it and were being returned being defective in nature. The petitioners were thus unaware about the date of the issuance of the shares in question until respondents 1 to 3 disclosed it in the return filed by them with SECP. The returns of a company become public record once they are filed with SECP and accordingly knowledge could be imputed to the petitioners. In this view of the matter, it can safely be assumed that the petitioners remained unaware of the fact about the actual allotment of shares in question until the respondent No.1 filed the requisite return with SECP and the petitioners thereafter obtained a certified copy thereof. Reckoned from that date, the present petition is within time. Even if the date for application for inspection of record of SECP is taken into consideration and it is accepted that inspection was indeed carried out, the present petition is still within the time prescribed by Article 120 of the Limitation Act. By virtue of section 17 of the Limitation Act, 1963, the period of limitation shall not begin to run until the petitioners discovered the fraudulent concealment by the respondents 1 and 2.

22. The learned counsel for the respondents strenuously argued that the procedure before this Court is summary in nature and where fraud is alleged it is better to direct the petitioner to approach the civil court. This submission is untenable and flies against the clear wording of section 152 of the Companies Ordinance, 1984, which itself provide that a fraudulent entry in the register of members of a company can be challenged by filing a petition before this Court. No doubt in a case where complicated questions of fact are involved, summary procedure should not to be invoked. However, whether a petition for rectification of register raises complicated and disputed questions of fact or not depends on the facts of each case. In the present case, the petitioners have clearly alleged that respondents Nos.1 to 6 did not send notice to the petitioners in violation of the provisions of section 86 of the Ordinance. Although respondents Nos. 1 to 6 alleged that proper notices were issued, they failed to append the notice or any other document evidencing the dispatch of the same with their reply. Respondents Nos. 1 to 6 were under a duty to have appended necessary documents in support of their allegation that proper notices were issued to rebut the allegation of the petitioners. In the absence of the necessary material showing dispatch of notices, it can safely be inferred that notices under section 86 of the Ordinance were not issued to the petitioners by respondents Nos. 1 to 6 and, therefore, the provisions of section 86 of the Ordinance were on purpose violated to dilute the shareholding of the petitioners.

23. The upshot of the above discussion is that the petitioners have been able to demonstrate that 589,997 shares of respondent No.1 company were fraudulently issued to respondents Nos.2 and 3 without complying with the mandatory requirements of section 86 of the Ordinance. This petition is, therefore, partially allowed to the extent of rectification of register of members of respondent No.1 company. Respondent No.1 company is accordingly directed to forthwith rectify its register of members by excluding from it 589,997 shares in the names of respondents Nos.2 and

3. Costs of the petition are also allowed. MH/W-2/L Order accordingly.