The Counsel

Corporate Decisions

Shoaib vs. Project Director, National ICT Scholarship Program,
Ministry of Information Technology and another 2011 Corporate Law Decisions 23 (Division Bench – High Court of Balochistan)

Subject: Constitution

Key words: Independent directors of a Government owned / controlled companies; whether writ / review under Article 199 of the Constitution of Pakistan, 1973 (“Constitution”) lies against a Government owned company.

Abstract: The petitioner / student brought a writ against the Ministry of Information Technology (“Ministry”) and National ICT R&D Fund (“Company”) under Article 199 of the Constitution. The Company invited applications for scholarships under the Ministry’s scholarship program funded through the Company. The petitioner / applicant completed the prescribed registration form wherein he also stated his preference of universities. He was admitted in the respondent No.2 institution with the approval of the Company, however, subsequently the Company unilaterally transferred the petitioner to another institution. No prior intimation or hearing was afforded by the Company to the petitioner. The petitioner moved the Court and sought to suspend the decision of Company.

Judgment: The Company / respondent No.1 raised a preliminary objection regarding maintainability of the petition on the grounds that the Company / respondent No.1 was not amenable to writ jurisdiction of the High Courts as it was not a “person performing functions in connection with affairs of the Federation” as per Article 199 of the Constitution. The petitioner, however, contended that all the subscribers and employees of the Company are government employees, the funding for the Company had been directly provided by the government and that control of the Company vested at all times with the government. The Court observed that in order to determine this question, the Court has to ascertain whether (i) education is a function of the State, (ii) the control of the Company vests in a substantial manner in the hands of the government and (iii) the bulk of the funds of the Company are provided by the government. As regards the first issue, the Court relied on Articles 29 (Principles of Policy) and 37 (Promotion of Social Justice and Eradication of Social Evils) of the Constitution and held that education and state policy in respect of education were the primary functions of the State. As regards the second and third issues, the Court examined the memorandum of association of the Company and observed that all the subscribers to same were government officials, the power to appoint and remove directors / chairman belonged to the government, majority of the funds of the Company was invested by the government. Hence, the Company was a person performing functions in connection with the affairs of the Federation. The Court also relied on the decision of the Supreme Court in Maqsood Ahmed Toor v. Federation of Pakistan PLD 2000 SCMR 928, in which it was held that persons including a body corporate can be regarded as performing functions in connection with the affairs of the Federation if the functions entrusted to it are the functions of the State or where the control of an organization vested substantially in hands of the government. Accordingly, the Court allowed the Petition.

Justices: Qazi Faez Isa C.J. & Syeda Tahira Safdar J.

Advocates: H. Shakil Ahmed for the petitioner, Muezzin Qureshi for respondent No.1 and Qahir Shah for respondent No.2.

Cases relied upon: Maqsood Ahmed Toor v. Federation of Pakistan PLD 2000 SCMR 928

Mr. Raja Gupta, ICC Chairman in Foreword to the Incoterms 2010

Muhammad Masood Butt & 3 others vs. S.M Corporation (Pvt.) Ltd. & 6 others 2011 Corporate Law Decisions 496 (Division Bench – High Court of Sindh)

Subject:Constitution; company law.

Key words: Right of information under Article 19A of the Constitution of Pakistan, 1973 (“Constitution”); judicial review a company not owned by government.

Abstract: The case involved a constitution petition brought by the petitioners under Article 199(1)(c) of the Constitution. The petitioners were shareholders in the respondent No.1 company and owned 22% of the shares of that company and 33% shares in an associated company. The petitioners sought the Court to direct the respondent company to inter alia (i) declare and distribute the entire un-appropriated profit of Rs.1,900,000, (ii) produce authenticated accounts for the last ten years, and (iii) direct the company to allow the petitioners and their designated accountant to inspect its books of accounts. The question arose as to the maintainability of the petition in relation to the Court’s constitutional jurisdiction over a private limited company.

Judgment: The petitioner contended that the recently inserted Article 19-A of the Constitution gave every citizen the right to information and this right included a right of shareholders to inspect the books of accounts of companies. In this regard, the petitioner contended that Section 230 of the Companies Ordinance. 1984 (“Companies Ordinance”) was insufficient as it only gave directors the said right of inspection and further that jurisdiction of the Courts under Sections 290, 305 etc. of the Companies Ordinance entailed procedures that were too cumbersome and inefficacious as remedies and that the newly inserted Article 19A of the Constitution provided an alternate ground for the Court’s interference with the companies on touchstone of fundamental rights as guaranteed by the Constitution.

The Court rejected this line of reasoning. It held that Article 19-A has no application to the instant case as a bare perusal of the said provision would make it clear that such right of information pertains to matters of “public importance”. Further, the respondent company was not a government owned company and as such Article 199 of the Constitution also had no application in the circumstances of the case. Accordingly, the petition was dismissed as being not maintainable.

Justices: Shahid Anwar Bajwa and Tufail H. Ibrahim JJ.

Advocates: Rasheed Akhund for petitioners, Kashif Paracha and Zubair Hashmi for respondents.

Cases relied upon: Muhammad Mohsin Butt and others vs. Muhammad Inayat Butt 2005 CLD 1047; Salahuddin vs. Frontier Sugar Mills and Distillery Ltd. PLD 1975 SC 244; Gujrat Punjab Bus Ltd. vs. Mian Muhammad Ashraf Pagganwala PLD 1960 (W.P.) Lahore 609.

Cases referred to: Human Rights Commission of Pakistan v. Gov’t of Pakistan PLD 2009 SC 507.

Crescent Star Insurance Company Limited
Securities and Exchange Commission of Pakistan 2011 Corporate Law Decisions (Single Bench – High Court of Sindh)

Subject: Insurance; administration of justice; interpretation of statutes.

Key words: Mandatory requirements of statute to be complied with strictly; Section 63 of the Insurance Ordinance, 2000 (“Insurance Ordinance”).

Abstract: The SECP increased the paid up capital requirement for insurance companies to Rs.160 million vide Notification of the Ministry of Commerce. The plaintiff / insurer sought further time from SECP on grounds of poor market / investment conditions prevailing in the country. Thereafter, SECP issued a Directive under Section 63 of the Insurance Ordinance to the plaintiff directing it to cease business operations and restricting it to enter into further contracts unless the requirements of the said Directive are complied with. The petitioner brought an action seeking suspension of the Directive.

Judgment: The Court framed a single issue: whether the defendant was required to give the plaintiff an opportunity to be heard before issuing Directives under Section 63(1) of the Insurance Ordinance. Section 63(1) of the Insurance Ordinance gives the SECP the power to issue a direction to an insurer restraining it from entering into new contracts of insurance if it believes on reasonable grounds that an insurer has failed or is about to fail to comply with the conditions of registration set out in Section 11 of the Insurance Ordinance. Sub-section (2) of the Section 63 sets out the conditions for exercise of this power and one of these conditions presupposes a right of fair hearing to an insurer to whom a directive is issued. The Court relied on certain judgments of the Supreme Court which hold that no order affecting rights of persons can be passed by an authority without giving an opportunity of hearing and held this to be one of the cardinal principles of natural justice (1971 SCMR 681 and PLD 1999 SC 1126). Further, the Court relied upon a Division Bench judgment of the High Court of Sindh (2000 MLD 145), wherein the Court held that there was a clear distinction between two situations, one where the right of hearing is statutory and the other where such right is claimed on the basis of natural justice. In the former case, the right is absolute while in the latter case this right may be excluded by express words or implication. In the instant case, the Court held the power under Section 63(1) of the Insurance Ordinance should have been exercised in conjunction with the right of hearing prescribed under Section 63(2). However, whilst the Court decreed the suit in favour of the plaintiff, it did so without prejudice to the rights of SECP to initiate further actions accordingly to law after providing an opportunity of hearing to the plaintiff as envisaged under Section 63(1) and (2) of the Insurance Ordinance.

Justice: Muhammad Ali Mazhar J.

Advocates: Amel Kansi for plaintiff and Ijaz Ahmed for defendant.

Cases relied upon: 1971 SCMR 681; PLD 1999 SC 1126 and 2000 MLD 145.

Jubilee Spinnings Weaving Mills Ltd v. Jubilee Energy Ltd.
2011 Corporate Law 10 (Single Bench –Lahore High Court)

Subject: Company law merger of companies

Keywords: Application under Sections 284 and 287 of the Companies Ordinance, 1984 for merger of companies; scope of right of creditors to object to the proposed Scheme of Arrangement.

Abstract: The petitioners sought to merge the companies pursuant the Sections 284 to 288 of the Companies Ordinance. The Scheme of Amalgamation (“Scheme”) was universally approved by all the shareholders. However, the SECP filed its objections to the Scheme on the following grounds: (i) the swap ratio should be on the basis of revaluation of assets for arriving at a par value rather than on the basis of breakup value of shares, (ii) although paid-up capital of the two merging entities was being added as a consequence of the amalgamation, the same treatment could not be extended to their authorized capital and (iii) since one of the merging companies was a loss making entity, the shareholders of the other company were at a disadvantage on account of the merger with a loss making company. In addition, a creditor of the petitioner No. 1 objected to the Scheme on the grounds that the petitioner No. 1 was admittedly in default and the Scheme was contrary to the interests of the creditor.

Judgment: After taking the observation of SECP in account, the Court allowed the Application and approved the Scheme. The Court’s reasoning was as follows:

1. As regards the first objection of SECP viz. the swap ratio, the Court observed that due to the statutory prohibition on utilization of the account for calculating shareholders’ equities (being the principle ingredient for determining breakup value of a share and consequently the swap ratio) recourse to revaluation of assets of the merging entities was not necessary in the circumstances of the case.

2. As for the second objection of SECP, the Court held that since the paid-up capital of the two merging companies was being aggregated pursuant to an amalgamation, likewise, the corresponding authorized capital of both companies should also be aggregated. As a result, the authorized capital of the surviving companies would be sufficient to cover the combined paid-up of the two merging companies. In this context, the Court relied on Mahmood Power Generation Limited and Mahmood Textile Mills Limited v. Joint Registrar of Companies and others 2006 CLC 1364.

3. The third observation of SECP relating to one of the petitioners being a loss making company was also disregarded by the Court. The Court relied on the report of the Chairman of the petitioner companies, which showed that no objection was raised by any member of either company against the proposed merger. Hence, the Court held that since the shareholders who were the ultimate beneficiaries of the Scheme have no objection to it and were satisfied with the swap ratio etc., the Court would not the substitute their commercial wisdom with its own.

With respect to the objections of the secured creditor of the petitioner No. 1 on the basis of default and likewise cash flow problems, the Court rejected these concerns and held that a creditor’s objections must have a wider calls for concerns as, for instance, if a scheme of amalgamation is shown to be mala fide or fraudulent or against public interest or unjust to the interest of a creditor. The Court extrapolated these principles from and referred to the following decisions: 2004 CLD 1 and an Indian decision in the case of Re: Zee Interactive Multimedia Ltd (2002) 111 Comp. Cases 733. In the instant case, the Court was of the view the creditor was applying pressure tactics on the petitioners as no substantive plea was raised other than change of business of the petitioner No.1. In this regard, the Court held that business viabilities and opportunities in the market place should be left in the domain of the shareholders and their elected management and the Court should not sit in judgment over the commercial wisdom of the shareholders and the management to pursue legitimate business interests as contemplated in a company’s objects clause in the memorandum of association. Accordingly, the Court sanctioned the Scheme with effect from the date it was unanimously approved by the shareholders.

Justice: Umar Ata Bandial, J

Advocates: Imran Anum Alvi with Asif-ur-Rehman for the Petitioners; Tariq Kamal Qazi for the Objectors / Creditor and Muhammad Saqlain Arshad, Assistant Director Legal, SECP.

Cases relied upon: International Multi Leasing Company v Capital Assets Leasing Corporation Ltd 2004 CLD 1; Mayfair Ltd.’s Case (2003) 46 SCL 672; Zee Interactive Multimedia Ltd. (2002) 111 Comp. Cases 733.

Imran Ali Soomro vs. Suadi Pak Leasing Company Limited
2011 Corporate Law Decision 269 (Division Bench-High Court of Sindh)

Subject: Banking recovery laws; contract of indemnity.

Keywords: Mortgage by fraud and misrepresentation; surety’s rights and liabilities.

Abstract: The appellant/mortgagor contended that he was induced to create a mortgage on the basis of fraud and misrepresentation by the respondent/creditor. The Appellant further alleged that he was induced to create a mortgage by the respondent/creditor even after the respondent/creditor had sufficient security in respect of the principal amount borrowed.

Judgment: The Court rejected the proposition that the appellant was induced by the representation of the creditor. The Court observed that both the equitable mortgage as well as the registered mortgage unequivocally acknowledges that the mortgage had been created in consideration of the finances provided by the respondent/creditor and, as such, the Court held that the appellant cannot be allowed to plead any condition extraneous to the terms and conditions of the finance documents. As regards the duty of the appellant as a surety, the Court held that as a surety the appellant is liable to the extent of the surety given and that a surety’s liability is co-extensive with that of the principal borrower and hence on an equal footing. Accordingly, the creditor has the option to proceed against the securities and / or the charged properties as he considers fit.

Justices: Mushir Alam & Aqeel Ahmad Abbasi JJ

Advocates: Emad-ul- Hassan for the appellant and Mrs. Samia Faiz Durrani for the respondent.

Cases relied upon: Zakas (Pvt) Ltd vs. The Bank Alfalah Ltd 2004 CLD 1660; Union Bank of India vs. Manku Narayana AIR 1987 SC 1078; Haji Fazal Elahi & Sons vs. Bank of Punjab 2004 CLD 162; Marianne Khan vs. National Bank of Pakistan 2006 CLD 232.

Haji Muhammad Ayaz Khan vs. Malik Khan Ayaz Khan 2001 Corporate Law Decisions 727 (Single Bench, Peshawar High Court)

Subject: Civil Procedure Code (“CPC”); Negotiable Instruments Act, 1891.

Key Words: Enforcement of promissory note.

Abstract: The Plaintiff issued a promissory note to the Defendant with the terms and conditions contained in the said note (“Pro Note”). In addition to the Pro Note, the parties entered into an agreement, which recorded the same terms and conditions as the Pro Note. Further, the Pro Note was witnessed by two witnesses, which under law was not required. In the Appeal, the question arose whether the Pro Note should be vitiated on the above grounds (i) whether the execution of the subsequent agreement superseded the Pro Note and (ii) whether attestation by two witnesses was required.

Judgement: The Court dismissed the Appeal as having no merits. As regards the subsequent agreement mirroring the Pro Note, the Court held the same to be of no consequence or doubt, even though under law execution of a subsequent agreement was not required, given that a Pro Note was sufficient to create the liability vis-a-vis the Defendant. In this context, the Court relied upon a Division Bench case of the Lahore High Court (PLD 2007 Lahore 114). With respect to the objections of the Appellant with regard to witnesses, this was also overruled with the Court holding that although a promissory note was not required to be witnessed under the Stamp Act, where this has been done the so-called witnesses would be considered as mere indorsees and would not affect the legality of the instrument. The Appeal was consequently dismissed.

Justice: Ataullah Khan, J.

Advocate: Rustam Khan Kundi for the Appellant and Salimullah Khan Rana Zai and Anwarul Haq for the Respondents.

Cases relied upon: PLD 2007 Lahore. 114

Khadija Edible Oil Refinery (Pvt.) Ltd. vs. M.T. “Galaxy”
2011 Corporate Law Decisions 709 (Single Bench, High Court of Sindh)

Subject: Admiralty laws.

Key Words: Admiralty jurisdiction in an action in rem or personam; arrest of sister ship.

Abstract: The Plaintiff filed two Admiralty Suits against the vessels M.T. Galaxy and M.T. “Horizon” on the basis of a claim for short landing. In both the Suits, the Defendant vessels were alleged to be sister ships of the offending ships i.e. M.T. “Prosperity”. At first instance, the Plaintiff was able to obtain an ex-parte arrest order against the sister ships and the matter came before the Court for confirmation of the arrest orders.

Judgment: It was the contention of the Plaintiff that both the Defendant Vessels belonged to and were beneficially owned by the Defendant No.4, who were part of the same group and were also owners of the offending vessel i.e. M.T. “Prosperity”. In rebuttal, the Defendants contended that the arrest orders were obtained by the Plaintiff on a misrepresentation of facts and produced in its Counter-Affidavit to the arrest application extracts from the Lloyd’s Registry, Singapore, bearing certificate of registration of the Defendant vessels to be in the name of two different companies which in turn owned 100% shares in respect of the sister vessels. In this context, the question before the Court was whether pursuant to Sections 3 and 4 of the Admiralty Jurisdiction of High Courts Ordinance, 1980 (“1980 Ordinance”), the Defendant vessels could be considered as a sisters ship of the offending Vessel.

The relevant provision of the 1980 Ordinance is Section 4(4), which enables the Plaintiff to invoke admiralty jurisdiction in respect of any claims mentioned in Clauses (e) to (h) and (i) to (q) of Section 3(2), being a claim comprising in connection with a ship where the person, who would be liable on the claim in an action in personam was, when the cause of action arose, the owner or charterer of or in possession or in control of the ship. In such a circumstance, an admiralty action in rem may be brought against the offending ship provided that at the time the action is brought, the said ship is beneficially owned as respects majority shares therein by the owner or any other ship which at the time when the action is brought is beneficially owned by the said owner, as aforesaid. In other words, in applying Section 4 of the 1980 Ordinance, the following has to be taken into consideration in light of the facts and circumstances of the case:

(a)That the claim falls in any of the clauses (e) to (h) and (j) to (q) of Section 3(2) and arises in connection with a ship;

(b)When the cause of action in personam has arisen;

(c)The person liable in personam at the time when such cause of action arose, was the owner or charterer or in possession or in control of the offending ship; and

(d)When the offending ship or any other ship (i.e. sister ship) is sought to be arrested at the time when the action is brought is beneficially owned as respects of majority shares by the person liable on the claim in an action in personam.

Having stated the above preconditions, the Court held on the facts that the alleged sister ships were not owned by the Defendant No.4 (i.e. the person, who would be liable on the claim in an action in personam, when the cause of action arose). On the contrary, the shares of the owners of the Defendant Vessels were held by separate legal entities, which were subsidiaries of the Defendant No.4. Further, the Court stated that in law, each company is a distinct legal entity and the fact of one company being a subsidiary of another would not render that company liable for the acts or omissions of the holding company. On this legal point, the Court relied on a decision of the Bombay High Court in the case M.V. Sea Success I vs. Liverpool and London Steamship Protection and Indemnity Association Ltd. AIR 2002 Bombay 151. The Court relied on the following passage in the above Judgment:

“…In maritime law, world wide ownership of a ship is denoted by the concept of the owner of the shares in a ship. The shares in the vessel in question were not alleged in the plaint to be owned by defendant. The ownership of the ship by defendant was alleged to be on the basis of the defendant wholly owning the subsidiary. Fundamentally, each company incorporated in law is a distinct legal entity and mere incorporation of 100% subsidiary company by its parent company cannot lead to the conclusion that the assets of the former belong to and are owned by the parent company. It is not that in all cases a subsidiary company must be treated as an asset of the holding company. If that be so, the subsidiary company shall have no independent identity and such subsidiary company will crack not only under the pressure of its own uncongenial shareholders, but also of the pressure of the shareholders and creditors of the holding company.”

Accordingly, the Applications were dismissed and the arrest orders recalled.

Justice: Muhammad Tasnim, J.

Advocates: M/s. Mazhar Imtiaz Lari and Ibaad Mazhar Lari for the Plaintiffs and Khalid A. Rahman for the Defendants No.1 to 5.

Cases relied upon: V.N.Lakhani and Co. vs. M.V.Lakatoi Express PLD 1994 SC 894; Maratos and Co vs. Rice Trader PLD 1989 Karachi 94; M.V. Sea Success I vs. Liverpool and London (supra); Global Tradeways Ltd. vs. Tsavliris Russ (World Salvage and Towage) Ltd. 2004 YLR 2581 / [1981] 1 All E.R. 1092.