P L D 1995 Supreme Court 320 (PLP)

By this order, we propose to dispose of all the above petitions, which have arisen out of a consolidated judgment dated 16-1-1995 passed by a learned Single Judge of the Lahore High Court in the exercise of company jurisdiction.

2. The facts in brief are that the respondents herein moved separate application under section 265 (a) of the Companies Ordinance, 1984 (hereinafter referred to as the Ordinance), for appointment of Inspectors to investigate the affairs of the petitioners/companies. The allegations made by the respondents in their applications were that throughout the existence of the petitioners companies, their affairs have been conducted entirely in the sole discretion and under the direction of Mian Muhammad Sharif petitioner No-2 herein, who was the head of the family. With the passage of time; the manner of running the companies has become oppressive to their other members and in particular to the respondents herein. It was further alleged that Mian Muhammad Sharif had been guilty of breach of trust on various accounts and that the company funds had been withdrawn and used for creating independent assets. Furthermore, companies assets had been charged to generate funds, which were misappropriated. It was also alleged that the distribution of dividends and other financial benefits associated with the operation of the petitioners companies had been withheld without any justification; that the annual general meetings of the companies had not been held at all or not in the manner prescribed by law and that most of the record to that effect had been fabricated. Yet another allegation made was that the respondents were not given the information with respect to the affairs of the petitioners companies and, therefore, the respondents had suspected that the fraudulent transfer deeds were prepared to remove them from selected companies. It was also alleged that financial position of the petitioners companies was such as would endanger their solvency. In view of the aforementioned allegations, it was stated that investigations were necessary to be held in all the aspects of the operation of the petitioner companies particularly, (i) use of funds; (ii) charge over the assets; (iii) diversion of funds to unauthorised objects; (iv) legitimacy of the regimes; (v) genuineness of the record; (vi) compliance with statutory requirements in the operations of the respondent company, and (vii) preparation and use of forged transfer deeds in selected companies.

3. In support of the aforenoted allegations, respondents annexed with their applications a memorandum of available documentary evidence, containing various documents, details whereof, as given by them, are as follows:-- (1)??? Draft memorandum of Understanding dated 1-9-1991 with a covering letter dated 2-9-1991 which vvas duly presented to Mian Idrees Bashir on behalf of Family No.7 but who declined to execute the same after making detailed endorsement thereon giving grounds for his refusal. (2)??? Special Resolutions dated 26-5-1994 whereby the Extraordinary General Meeting of the two Companies is stated to have been held by virtue of which Ittefaq Foundries (Pvt.) Limited have acquired/purchased all the assets of IIyas Enterprises (Pvt.) Limited. (3)??????????? Letter dated 19th October, 1992 to the effect that despite decision that the steel unit has been placed in the pool, the petitioners have taken possession thereof and have taken away material and machinery from the premises. (4)????????????????? Schedule of change of Directorship in various companies belonging to ?????????????????????????????????????????????????????????????????????????????????????????????????? Ittefaq Group. (5) Schedule of Changes in the shareholding of Ittefaq Sugar Mills Ltd. and other irregularities as per official record. (6)???????????? Minutes of Decisions purportedly taken at the Meeting held in Lahore on 1-9-1992 attached Annexure with the reply submitted on behalf of Respondent Company. (7)?????????????????? Undated certificate issued on the. Letter-pad of Brother Sugar Mill Limited by Mian Muhammad Sharif, Head of Family No.1 whereby '????????????????????????? allocation of two companies i.e. Brother Sugar Mills and Brother Textile Mills has been made unilaterally in favour of Family No.l. (8)?????????????????? Comparative table of amounts due by various Companies of Ittefaq ??????? Group to various Banks. (9)??? A note addressed by site Incharge, Ramazan Sugar Mills wherein removal of machinery worth more than two crores of rupees is admitted. (10) Balance sheets for the year 1991-1992 and 1992-1993 for Ramzan Sugar Mills. (11) Affidavit regarding movement of stocks from the Godowns of Brother Sugar Mills for the period 20-7-1994 to 13-8-1994.

4. The petitioners resisted the applications by filing replies thereto: Ch. Muhammad Farooq, Advocate appearing for them has pointed out that the sum and substance of the case of the petitioners is incorporated in para. 5 of the reply which is reproduced hereunder:-- "In reply to para. No.5, it is submitted that initially business was commenced by 7 brothers namely, (i) Mian Muhammad Sharif, #'fr~ (Family No.l), (ii) Mian Muhammad Shafi - deceased (Family No.2) Mian Mirajuddin, (Family No3), (iv) Mian Sirajuddin ? deceased (Family No.4), (v) Mian Barkat Ali - deceased (Family No.5), (vi) Mian Abdul Aziz - deceased (Family No.6), (vii) Mian Muhammad Bashir - deceased (Family No.7). The ventures, originally started by the family, were later on got registered as Limited Companies by the name of Ittefaq Foundries (Pvt.) Ltd. etc. Some more companies were floated/incorporated in due Course of time. Each Company is a separate legal entity laving its Board of Directors which manages its. affairs. In 1990, negotiations started amongst the seven families for the division/distribution of flit industrial concerns/assets. As a result thereof, memorandum of Understanding dated 25-9-1991 materialised which was signed five families excluding families of Mian Barkat Ali (Family No.5) and family of Mian Muhammad Bashir (Family No.7). The family/families of the contesting-respondents (Families Nos.3 and 4) were signatories to the aforementioned Memorandum signed/executed on 25-9-1991. So far as the contesting-respondents are concerned, the terms of the Memorandum of Understanding were acted upon. This document of Family Understanding dated 25-9-1991 has been intentionally/mala fidely kept away from the record of the High Court and is not appended with the main petition. Pursuant to the abovementioned Memorandum of Understanding dated 25-9-1991, the amount of Rs.85.1 million was paid to Khalid Siraj etc. (Family No.4), the receipt of which is Annexure R/II. Additionally, possession exclusive/sole management rights of Ittefaq .Textile Mills Ltd. (Unit No.l) was handed over to Khalid Siraj etc. (Family No.4), the net worth whereof was determined and agreed to be Rs.154.123 Million. Ittefaq Textile Mills Ltd was fully operating when it was handed over to Khalid Siraj etc. (Family No.4), but, after some time, despite the fact that ample stock of raw cotton, sufficient for its smooth operation, was lying therein to last till the next cotton season. Instead of using the cotton-stock for running the Mill, it was sold away by Khalid Siraj etc. (Family No.4) in the open market, and, the sale-proceeds thereof were pocketed by them. Khalid Siraj etc. also advertised through All Pakistan Textile Mills Association (APTMA) for the .sale of the machinery of the Mill. The said advertisement is Annexure R/III. As regards the family of Mian Mirajuddin (Family No3), who are also petitioners before the High Court, in addition to Khalid Siraj etc. (Family No.4), according to the arrangement as per Memorandum o1 Understanding, dated 25-9-1991, they were allocated 50% shares. in (i) Ittefaq Foundries (Pvt.) Ltd., (ii) Brothers Steel Ltd., (iii) Ittefaq Textile Mills Ltd. (Unit No.2), and (iv) Brothers Textile Mills Ltd. The balance 50% shareholding in each of the aforementioned companies, as per the Memorandum of Understanding 25-9-1991, was allocated to the family of Mian Muhammad Sharif (Family No.l). In order to streamline the management and operations of the companies units, which were agreed to be shared to the extent of 50% by the families of Mian Mirajuddin and Mian Muhammad Sharif, it was considered necessary by both of these families that Ittefaq Foundries (Pvt.) Ltd., and Brothers Steel Ltd., would be managed jointly by the two families. In this regard, draft-agreements were prepared, while Main Ilyas Miraj subsequently refused to execute. It was also agreed between Main Shahbaz Sharif, on behalf of Family No.1 and Mian Ilyas Miraj on behalf of Family No.3, that instead of the two families holding 50% shareholding in two Textile Companies, namely (i) Unit No.2 of Ittefaq Textile Mills Ltd., and (ii) Brothers Textile Mills Ltd., Unit No.2 of Ittefaq Textile Mills (Pot.) Ltd. would be owned solely by the family of Mian Mirajuddin (Family No. 3) and the sponsors shareholding in Brothers Textile Mills Ltd., would be owned solely by the family of Mian Muhammad Sharif (Family No.1). When Mian Ilyas Miraj was Managing Ittefaq Foundries (Pot.) Ltd. and Brother Steel Ltd., in 1991 and 1992 pursuant to the Memorandum of Understanding dated 25-9-1991, he signed several documents in that capacity, some of which are annexed as Annexure R/IV. In this period, he started to set up his own Sugar Mills by the name of Haseeb Waqas, situated-at Nankana, and side by side set up many other companies too with the names of Haseeb Waqas Engineering Ltd., Haseeb Waqas Farms Ltd., Haseeb Waqas High Tech. Ltd., and many other companies and ventures. For this purpose, he ordered manufacture of sugar mill machinery and rolled material by Ittefaq Foundries (Pvt) Ltd., and Brothers Steel Limited, Ittefaq Foundries (Pvt.) Ltd., and Brother Steel Limited, Ittefaq brother (Pvt.) Ltd. and Ilyas Enterprises (Pvt.) Ltd., worth over Rs.40 crores which was duly delivered. Mian Ilyas Miraj also extensively used the resources available at Ittefaq Brothers, brother Steel and Ilyas Enterprises for his personal benefit.and advantage during the aforesaid time. In late 1993, when the said Haseeb-Waqas Sugar Mill was about to come into production, the family of Mian Mirajuddin (Family No.3) resigned from the Board of Directors of Ittefaq Foundries (PvL) Ltd. and Brothers Steel Ltd. left the premises of these two companies of their own sweet-will and accord and moved to Nankana to manage Haseeb Waqas Sugar Mills. The said resignations are Annexure R/V. Simultaneously, they, in an attempt to wriggle out of their commitments under the Memorandum of Understanding, dated 25-9-1991, also communicated that they had no desire or interest in any of the Textile Mills, namely, Ittefaq Textile Mills (Unit No.2) and Brothers Textile Mills Ltd. The said communication is Annexure R/VI. This was so because the textile industry in the country was then going through a deep crisis. For the purpose of effective management, the management only of said Unit No.2 of Ittefaq Textile Mills Ltd. was, as an interim arrangement handed over to the family of Mian Abdul Aziz (Family No.6) on an undertaking given by the family that it would pay Rs.20 crores on demand by the other six families. Simultaneously, promissory notes were executed amounting in aggregate to Rs.20 crores on demand by the family of Mian Abdul Aziz. For the same purpose i.e. practical and effective management, the family of Mian Muhammad Bashir expressed their desire to also acquire Brothers Textile Mills Ltd. with a net worth of Rs.224 Million. The status of Family No.l in terms of the settlement thus reached almost identical to that of Family No.3. At the time of exchange of shareholding, these two families would now be entitled to receive cash in lieu of disinvestment of their shares in Unit No.2 of Ittefaq Textile Mills Ltd., and Brothers Textile Mills Ltd. In so far as the allocation to Family No.5 i.e. Mian Barkat Ali's Family is concerned, who were not a Party to the Memorandum of Understanding dated 25-9-1991, they have been allocated Khalid Siraj Textile Mills Ltd. at a net worth of Rs.205.058 Million, Ramzan Textile Mills at a net worth of Rs.1.938 Million and Barkat Textile Mills at a worth of Rs.0.382 Million. These three units in aggregate in terms of net worth amount to Rs.207.378 Million, which falls within each Family's determined/agreed and final net worth share of Rs.250.460 Million. No allocations in respect of Ittefaq Foundry (Pvt.) Ltd. shares or Brothers Steel Ltd. shares have been made to these families. From the above narration of facts, it is manifest that the terms of the Family Settlement, dated 25-9-1991 stood implemented amongst these seven families; however, as the shares mostly were pledged with the Financial Institutions, their formal exchange transfer could not take effect due to the pending liabilities. The family structure reflected by Annexure IV is misleading inasmuch as respondent No.2, whose name is shown at the top, therein, is neither the eldest of the seven brothers nor is he the head of the family. The petitioners assertion that the negotiations to divide the joint corporate assets failed is not correct. These negotiations, as evidenced by the memorandum of Understanding dated 25-9-1991, materialized, which has been acted upon. This document has been mala fides suppressed by the petitioners."

5. The learned Company Judge after considering the evidence adduced by both the parties and hearing their learned counsel, declared vide the impugned judgment that the affairs of the companies ought to be investigated by the Inspector appointed by the Corporate Law Authority as envisaged by section 265(x) of the Ordinance.

6. We heard the learned counsel for both the sides at considerable length. Ch. Muhammad Farooq, appearing in support of these petitions, has argued that in terms of section 265(a) of the Ordinance, the respondents herein ought to have produced unimpeachable evidence in relation. to the matters referred to in sub-clauses (i) to (vii) of clause (b) of section 265 of the Ordinance for obtaining direction from the High Court for investigation into the affairs of the petitioners companies. The learned counsel contended that in the instant cases, there was no legal evidence whatsoever before the learned Company Judge showing the existence of relevant grounds justifying the impugned orders which are drastic in nature as they are bound to have an adverse effect on the functioning of the companies. He further submitted that the business of the companies was being carried on in accordance with the wishes of the majority of the shareholders. It was also argued that the respondents/applicants before the High Court were precluded by their own conduct from seeking relief under section 265(a) of the Ordinance, which is essentially discretionary in nature. In this behalf, it was pointed out that in pursuance of the settlement arrived at between the parties, the respondents had received their shares. The learned counsel next argued that there was no evidence on record supporting the respondents' allegations of mismanagement of the affairs of the companies and illegal diversion of their funds to other channels. In support of his contentions, the learned counsel placed reliance on Rohtas Industries Ltd. v. S.D. Agarwal and another (AIR 1969 SC 707), Patrakola Tea Co. Ltd. (AIR 1967 Calcutta 406), Saw Mills and Industries Ltd (AIR 1962 Kerala 148), Clive Mills Co. Ltd. (1964 Company Cases 731 (Calcutta), Suresh Kumar Sanghi v. Supreme Motors Ltd. and others (1983 Company Cases 235 (Delhi) and Rees and others v. Crane (1994 SCMR 1682),

7. None of these cases is of any help to the petitioners. In the first? mentioned case, the order appointing the Inspector was passed by the Central Government under section 237(b) of the Indian Companies Act, 1956, which corresponds to section 265 of the Ordinance. The order was challenged Through a writ petition fled in the High Court, which was dismissed holding that the opinion formed by the Central Government was not open to judicial review. On appeal, however, the Supreme Court took the view that the existence of circumstances justifying the appointment of Inspector was open tea examination by the Courts, and on merits, it was held that the impugned order eras ,rot justified by the material placed before the Central Government. In the second case, jurisdiction of the Court under section 237 (a)(ii) of the Indian Companies Act, 1956 was invoked, but the High Court declined to direct an inquiry into the affairs of the company opt the ground that' the newspaper report relied upon did not convey any definite or specific information. It was held that "it is based on certain unconfirmed news". The relief sought was 'declined with the observations, "the powers of the Court under this section should be exercised with caution and the Court ought to require fat more convincing proof of the allegations the petitioner has made". The third case has no relevance to the point at issue, in that, it was a case of winding up of the company, which allegedly had not been earning any profit for a long tune. In the fourth case, petition was filed in the High Court under sections 39'x, 398 and 18? of the Indian Companies Act, 1951 though, one of the prayers made therein, was for investigation into the affairs of the company. The relief was declined with the observation "these charges, barring one, do not justify a general order for investigation into the company's affairs". In the fifth case also, petition was filed in the High Court under sections 397, 398, 402 and 4133 of the Indian Companies Act, 1956, wherein legation of oppression ort the petitioner group was made. It was held that the legations made by the petitioner did not warrant any action under sections 397 and 398 of the Act. The last and the sixth case relied upon by the learned counsel for the petitioners, has also no relevance at all because the grievance made therein related to the breach of the principle of audi afteram partem, stating that the petitioner. therein was not given an opportunity to answer the charge of misconduct before making representation to the President that his removal be inquired into. Needless to observe that in the cases before us, the petitioners made no such grievance for the obvious reason that the learned Company Judge afforded them full opportunity to put across their version

8. It may also be observed, in fairness to the learned counsel for the petitioners that apart from the cases noted hereinabove, he also cited other cases, viz., Shand Prasad Jain v. mtinga 'tubes Ltd. (AIR 1965 $C 1535), Rajahmundry Electric Supply Corporation' Ltd. v. A. Nageshwara Rao and others (AIR 1956 SC 213), Muhammad Fikree and 3 others v. Fikree Deveiopment Corporation Ltd. and 8 others (1992 MLD 668), Shahbazud Din Chaudhry and 27 others v. M/s. Services Industries Textiles Ltd. and 4 others (PLD 1988 Lahore 1 j, Needle Industries (India) Ltd. and others v. Needle Industries Newey (India) Holdings Ltd. and others (AIR 1981 SC 1298) and Re: Fellador Silk Ltd. (1965) 1 AER 667). These cases need not be examined, in detail because they have no direct bearing on the controversy in hand. Suffice it to observe, however, that the first four cases related to oppression by majority on the minority shareholders and the last two cases enunciated the principle that one isolated act is not sufficient to warrant any action and that the conduct of the petitioner is to be seen before passing any order.

9. We find no substance in the contention raised on behalf of the petitioner that there was no legal evidence before the learned Company Judge justifying the impugned judgment. Objection of the- learned counsel precisely was that the documents produced before the High Court were not admissible. We are of the considered view that in proceedings under section 265 of the Ordinance, full-fledged inquiry in the form of a trial, is not required to be held nor any formal evidence is to be recorded. Needless to observe that before passing the order under section 265 of the Ordinance, the Court has to only satisfy itself prima facie, of course, on the basis of the material placed before it, that a case for investigation through an Inspector is called for and it is for the Inspector to ascertain and determine the truth or otherwise of the allegations during the investigation to be conducted by him whereafter, he will submit the report to the concerned authority. The matter in fact rests in the discretion of the Court, to be decided after following the summary procedure as laid down in section 9 of the Ordinance: On perusal of the impugned judgment and I various documents placed before us and relied upon by the learned Judge of the High Court, we are satisfied that the discretion was properly exercised. The learned Judge has discussed all the relevant documents in paragraphs 7 to 12 of the impugned judgment and has finally held in para. 22 that the documents produced before him provide 3 overwhelming prima facie evidence for obtaining the requisite declaration and that the petitioners. herein could not refer to any material to rebut the documents produced by the respondents it was noted by the learned Judge that the correctness of financial liabilities of j, the companies as given by the respondents/applicants before the High Court, in a chart, though disputed during arguments, but no counter-chart was produced with certificates from the banks showing that the said statement was nut correct. The learned counsel for the petitioners has not been able to point out any misreading car disregard of arty relevant material. In the circumstances, the exercise of discretion by the learned Company. Judge is not open to any 13 exception.

10. As -regards the contention of the learned counsel for the petitioners that the respondents having received valuable consideration and their share of the companies/units allocated to them in the Memorandum of Understanding dated 25-9-1991, were precluded from seeking order for appointment of Inspectors, the learned Judge has dealt with this aspect of the matter and has held that the various Memoranda of Understanding had not become effective and enforceable for the reason that they were not signed by all the families/members of the companies. It has been further held by the learned Judge that the registers of the companies with the Joint Registrar regarding the transfer. of shares by one family to the other, have not been rectified with the result that all the shareholders in the record still continue to be the shareholders. The learned counsel for the petitioners has not been able to show that the finding of the learned Judge was incorrect. In the circumstances, . the learned Judge has rightly held that the applicants before him had the locus standi to maintain the petitions.

11. We would also like to dispose of the plea of the. learned counsel for the petitioners that the impugned judgment is bad in law, in that, each application has not been dealt with separately although the applications pertained to. different companies, which were independent juristic/legal entities. The grievance made was that the matter was disposed of by the learned Judge in a rolled up manner. We are not impressed by the submission for the simple reason that no prejudice is shown to have been caused to the p petitioners by the disposal of all- the applications through a consolidated judgment. We would also . like to observe that the learned counsel for the petitioners himself has addressed arguments with reference to the documents available in one petition and did not make submissions in respect of each petition separately.

12. In view of the foregoing discussion, we are not inclined to grant leave to appeal in these petitions, which are hereby dismissed. M.BA./B-265/S ??????????????????????????????????????????????????????????????????????????????????? Petitions dismissed.