20000205

Ex-directors sold land to themselves, co lost Rs 27m

IKRAMUL HAQ

ISLAMABAD: Holding the ex-directors of Asim Textile Mills guilty of a "naked corporate crime", the Securities and Exchange Commission has asked them to deposit Rs 27.8 million which was the loss suffered by the company in a transaction of land with their associate company Aizad Beverage Industries (Pvt) Ltd.

The Commission found the deal to be fraudulent, as the sellers and the buyers of the land, were the same persons and the land was bought for Rs 67.8 million in 1993, and sold for Rs 40 million after several years.

The order of Commissioner, Enforcement of SECP, asks the ex-directors, (Ch Mohammed Nazir Ahmed, Shahid Nazir and Zahid Nazi) to deposit into the company's account the amount of Rs 27. 8 million (difference between the sale and purchase price of the land) loss suffered by the company in the transaction.

The Karachi Stock Exchange had informed the Commission that Asim Textiles Mills Ltd, a listed company, booked a loss of Rs 27.8 million during year ending June 1998 of disposal of land which carried a book value of Rs 67.8 million. The KSE also stated that the company did not obtain approval of shareholders as required by Section 196 (3) of the Companies Ordinance, 1984. When SECP raised the question of approval of shareholders, the company took the plea that the land did not form a sizable part of the company and that the land was sold to the creditor bank to settle its dues.

The SECP order says that on an enquiry from the Companies Registration Office, it was noted that the associated undertaking i.e. Aizad Beverage Industries Ltd was owned by the sponsor/directors of Asim Textile Mills Ltd i.e Ch Mohammed Nazir Ahmed, Shahid Nazir and Zahid Nazir.

The order says that in view of the common ownership, it was a fabricated story that there were some disputes in recovering the advance due to which land had to be purchased as the seller of the land were none else than the sponsor directors of Asim Textile Mills.

In other words, the order says, in this case the sellers and buyers of the land were the same party. In this manner, very daringly the directors of Asim Textile Mills Ltd which were also directors of the Aizad Beverage Industries (Pvt) transferred to the latter company the land held by the associated company at a lower price though price escalation of land during five years was well established. The present management reported that the land was unremunerative, lying idles and was of no use to the company.

The order states that the company which raised funds amounting to Rs 40 million from the public in 1991 for meeting the public working capital requirements and for completion of the project advance nearly the total capital so raised (Rs 80 million including sponsors contribution) to a privately held associated undertaking and then squared up the advance by purchasing the idle land five kilometers away from the mills premises at a price at which it could not be sold.

It observed "this is (a) naked corporate crime which needs to be dealt with by iron hands." The ex-directors have very bluntly siphoned out funds raised through share floatation in the year 1991. The directors did not even disclose their interest in the transaction in boards meeting as required by Section 216 of the Companies Ordinance which is evident from the minutes of the board meeting dated June 8, 1993. This attracts action under Section 217 of the companies ordinance which deals with the matters of directors lacking fiduciary behaviour. The annual accounts published by the company also did not disclose the transaction adequately.

While the proceedings may be started for violations of law, the circumstances justify that directions under Section 472 of the Companies Ordinance are given to the director s of the company on the one hand to recover from the ex-directors who arranged the fraudulent transaction, the amount of loss suffered ultimately by the company and on the other hand, directions under Section 472 read with Section 493 to the ex-directors to deposit the amount of Rs 27.8 million in the company's account. The amounts is the difference between the purchase price and the sale price.