2007 PLP 165 (CLD)

FAISAL ARAB, J.

1 &

2. The plaintiffs are shareholders of Adamjee Insurance Company Limited, which company is defendant No.6 in the present suit. The elections of directors of defendant No.6 were lastly held on 29-5-2004. In the said elections, nine directors including plaintiffs Nos.2 and 3 and defendants Nos.1 and 2 were elected. Prior to such elections, defendant No.6 was under the managerial control of members of the Adamjee family including defendants Nos.1 to 3 and others on the strength of majority shareholdings that they held in defendant No.6. By the year, 2002, the shareholding of the members of Adamjee family was reduced to only 18% on account of their gradual disinvestments that started in 1998. The shares were mainly purchased by the plaintiffs, who gained majority in the share capital of defendant No.6. It is the case of the plaintiffs that the defendants Nos.1 to 3 when faced with the situation of losing the managerial control over defendant No.6 to its new shareholders, made several attempts to delay the takeover by the new majority by filing suits and constitution petitions both in this Court and in the Lahore High Court. According to the plaintiffs, this was done with the specific intent to delay the elections of directors that were then due in 2002. However, the members of the Adamjee family could not prevent the new majority from exercising their right of vote as the much-delayed elections were finally held on 29-5-2004. In Suit No.594 of 2004 that was filed by defendant Nos.1 to 3 and others, they however succeeded in obtaining an order on 3-6-2004 from this Court for examination of the credentials of the elected directors by SECP under the provisions of section 12 of the Insurance Ordinance, 2000. The relevant portion of the order, dated 3-6-2004 is reproduced as follows: "Let the Board of Directors so elected on 29-5-2004 function and discharge its duties in the matters relating to day to day affairs of the company. In the meantime credentials of all the directors elected on 29-5-2004 be ascertained by SECP independently in accordance with the requirement of Ordinance, 2000 more particularly section 12 thereof together with code of good governance within two weeks. All parties including the plaintiff will be entitled to be heard by SECP. This arrangement shall continue till the next date of hearing. Till such time, the independent evaluation of directors elected by SECP to reach this Court." SECP however examined the credentials of only such directors who were new in the company and submitted their credentials vide its report, dated 8-7-2004. In the report all six directors who were new to the company were found fit to hold the office of directorship. SECP however, did not report on the credentials of such directors who were associated with the Adamjee family. After submission of the report, Suit No.594 of 2004 was withdrawn. The order of this Court, dated 3-6-2004 passed in Suit No.594 of 2004 was not fully complied with by SECP for the reason that credentials of all the directors elected on 29-5-2004 were not examined by SECP as SECP left out such directors who were elected on the strength of shareholding of Adamjee family. This prompted the plaintiffs to file the present suit seeking disqualification of defendants Nos. 1 and 2 on the ground that they are not fit and proper persons to act as directors within the meaning of section 12 of the Insurance Ordinance, 2000. The plaintiff also obtained orders of this Court whereby SECP was directed to examine the credentials of defendants Nos. 1 to 3 as well. On 23-12-2005 SECP submitted its report. In the Report defendants Nos. 1 and 2 were shown as directors of two companies which had defaulted in payments of bank loans and on account of such defaults, these companies were placed on CIB list of the State Bank of Pakistan. The question that needs to be examined is whether at this sage of the case, is there any lawful justification to restrain defendants Nos.1 and 2 from acting as directors of defendant No.6 on the basis of SECP's recommendations. Section 12 of the Insurance Ordinance, 2000 provides criteria for sound and prudent management and section 187 of the Companies Ordinance, 1984 provides basis for disqualifying a person from acting as director of a company. Section 12 of the Insurance Ordinance, 2000 reads as follows: (12) Criteria for sound and prudent management.

(1) For the purposes of this Ordinance, the following shall, without limitation, be recognized as criteria for sound and prudent management of an insurer or applicant for registration as a person authorized to carry on insurance business; (a) the business of the insurer or applicant is carried on with integrity, due -care and the professional skill appropriate to the nature and scale of its activities; (c) each director and officer or (in the case of applicant which is a body corporate incorporated outside Pakistan) the principal officer in Pakistan of the insurer or applicant is a fit and proper person to hold that position; (d) the insurer or applicant is directed and managed by a sufficient member of persons who are fit and proper persons to hold the positions which they hold; (e) the insurer or applicant maintains adequate accounting and other records of its business; and (f) the insurer or applicant maintains adequate systems of control of its business and records. SECP in its report has not found anything which suggests that defendants Nos.1 and 2 do not qualify the test of sound and prudent management as stated in section 12 of Insurance Ordinance, 2000. The integrity or professional skills of the defendants Nos.1 and 2 have not even been doubted. The only ground on which disqualification of defendants Nos. 1 and 2 is sought is that two other companies in which they hold the position of directorship have become bank defaulters. Section 187 of the Companies Ordinance, 1984 enumerate several grounds for disqualifying a person from holding the position of a director. Clause (i) of section 187, which could only be relevant in the case of defendants Nos. 1 and 2, reads as follows: (187) Ineligibility of certain persons to become director.-No person shall be appointed as a director of a company if he

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??????????? (i) has been declared by a Court of competent jurisdiction as defaulter in repayment of loan to a financial institution, exceeding such amount as may be notified by the Commission from time to time; and (j)

??????????? Nothing has been brought on record to establish that any Court of law has declared the defendants Nos. 1 and 2 as defaulter in repayment of loan to a financial institution in order to attract the provisions of section 187(i) of the Companies Ordinance, 1984. There is no denying the fact that good governance demands that the shareholders and the public at large are protected from persons acting as directors whose conduct is dishonest or who commit breach of standards of commercial morality or through their actions they demonstrate gross incompetence. Person possessed with such traits and deficiencies would certainly be a danger to the public and the shareholders if they were to be allowed to continue with the management of a company. Therefore, such factors obviously are to be considered while examining the credential of persons acting as directors. The main objective to disqualify a person from acting as a director of a company is to save the community from the consequences of his mismanagement or fraudulent acts or incompetence. The report of SECP however does not point any such deficiency in defendants Nos.1 and

2. Even otherwise, defendant No. 1 or 2 who though are directors in defendant No.6 but the majority on the board do not belong to the group of defendants Nos.1 and 2 and they cannot exercise any substantial or overwhelming role in the decision making process of defendant No.6 which control admittedly lies with the plaintiffs. Learned counsel for the plaintiffs cited the cases of Re Pamstock Ltd., Ch. D. Re (1994) 1 BCLC 716; Re Swift 736 Ltd., Ch. D. (1993) BCLC 1 and Secretary of State for Trade and Industry v. Gray and another, Ch. D. (1995) BCLC 276, in support of his case. However, in these foreign judgments which were decided under the English law disqualification was ordered after the Courts finally came to the conclusion that director's conduct fell short of the minimum standard which the Court requires to be observed, or a director committed breach of commercial morality or misuse of privilege. In the present case, at this stage there is no material to justify disqualifying defendant Nos.1 and 2 from acting as directors under section 12 of the Insurance Ordinance, 2000 or section 187(1) of the Companies Ordinance, 1984. C.M.A. No.2503 of 2005 is therefore dismissed. H.B.T./M-171/K????????????????????????????????????????????????????????????????????? Application dismissed.