KARACHI: Advances by firms without markup illegal: SHC
By Our Staff Reporter
KARACHI, April 27: A limited company that makes advances to its associated undertakings without mark-up or claiming return on them renders itself liable to punishment under the Companies Ordinance-1984, the Sindh High Court declared on Thursday.
The observation came on a suit instituted by directors of M/s Fateh Sportswear Limited in their individual capacities through one of them without duly authorizing him in this behalf.
It challenged the validity of show cause notices issued to the company’s directors by the Securities and Exchange Commission of Pakistan (SECP) and the subsequent notices to appear before the commission to explain their ‘unsatisfactory’ replies.
The show cause notices were issued by the SECP on Nov 27, 2001 under Section 208 (5) read with Section 476 of the Companies Ordinance. They alleged that the examination of audited accounts of M/s Fateh Sportswear Limited for the fiscal year ending on June 30, 2001 indicated that the company had advanced Rs39.246 million to its associated undertakings during the said period and that no mark-up had been charged on the amount.
The advances accounted for 64 per cent of the company’s capital and were not sanctioned by a special resolution as required by the law. No return, moreover, was claimed on the ‘investment’. The SECP sought the directors’ replies within seven days.
Five of the seven directors submitted a joint reply on January 2, 2002, stating that the impugned advances were made in the year 1992 after approval by the board of directors at a meeting held in June 1992. The punitive provision (Section 208-5) was incorporated in the Companies Ordinance by the Finance Act of 1995 and it could not be given retrospective effect. The notices infringed their constitutionally guaranteed fundamental right against retrospective punishment. No response was received from the remaining two directors.
The SECP found the reply unsatisfactory and asked all the directors to appear before it personally or through their authorized representatives. The directors, instead, filed a plaint in the Sindh High Court seeking a declaration that the show cause notices be declared null and void.
Justice Muhammad Moosa K. Laghari, who heard the case, held that the SECP was empowered to issue notices under Section 208 (5) of the Companies Ordinance and was, in fact, obliged to give the directors a personal hearing before imposing fines under Section 476 (3) of the ordinance. The plaintiffs have failed to discharge their burden to prove that the impugned advances were made in 1992. He agreed that the provision could not operate retrospectively.
The judge held that the plaintiffs had no legal character as envisaged by Section 42 of the Specific Relief Act to maintain a suit for declaration. The Companies Ordinance provides remedies against any order passed under its punitive Section 476. The suit has been incompetently instituted without powers of attorney and by the directors in their individual capacities and not as a body corporate. “Yet the plaintiffs succeeded in getting the suit admitted and, astonishingly enough, on the same day, in dubious circumstances by exploiting the lust and appetite for money demonstrated by the office,” the judge observed. He also censured the plaintiffs’ counsel for ‘allowing to be tempted by financial gains and knowingly rendering illegal advice and seemingly luring them into frivolous litigation’.
Awarding compensatory costs, he asked the lawyer, S. A. A. Hasni, and the plaintiffs to pay Rs12,500 each and deposit Rs25,000 with the nazir of the court within 30 days.
Finally, the judge directed the SECP to dispose of the matter within 60 days if it is still pending after providing the plaintiffs a fair opportunity of hearing.
