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Suit No. 428 of 1987, decided on 2nd July, 1987.

‑‑‑ Connotation of‑‑Fraud, a mixed question of law and fact‑‑Burden to prove fraud, held, would be on the party alleging same and could be established by clear and convincing evidence‑‑Fraud would involve in first instance, finding in regard to fact i.e. conduct on part of the party alleged to have committed fraud‑‑Legal question as to applicability of fraud to particular facts would arise thereafter‑‑Mere selling of shares at a price lower than market price on a previous day would not be sufficient to come to a finding even prima facie, that such sale was collusive or fraudulent.‑‑[Burden of proof].

Abdul Wahid v. Mst. Zamrut P L D 1967 S C 153 and Ahsan Ali and others v. District Judge and others PLD 1969 S C 167 rel.

‑‑‑S. 176‑‑Notice‑‑Pledgee's right to sell‑ ‑Requirements‑‑Pledgee, before exercising his right to sell goods pledged with him, is required to give a reasonable notice to pledgor of his intention to sell‑‑At time of actual sale, however, pledgee is not bound to serve another notice to pledgor.

Usman Malik v. The Bank of Bahawalpur Ltd. PLD 1959 (W.P.) Kar. 725 and Messrs Continental Syndicate of Trade v. Lloyds Bank Ltd. PLD 1966 (W.P.) Kar. 556 rel.

‑S‑‑. 62(5) [as added by Banking and Financial Services (Amendment of Laws) Ordinance (LVII of 1984) ]‑‑Sale of shares without permission of Authority‑‑Restriction‑‑Exemption of scheduled Banks and financial institutions from restrictions and prohibitions of subsection (1) of S.62‑‑Sale of such shares without permission of Authority therefore was not barred.

‑‑‑S. 62‑‑Phrase "Offer for sale to the public of ten per cent. of the shares of a Company held by a person"‑‑Connotation‑‑Such offer of sale to the public deemed to be a prospectus‑‑Sale of shares, held, would not mean an offer to the public as contemplated by S. 62(1) and not a prospectus as deemed in S. 62(2)‑‑Provisions of cl. (5) of S. 62, however, would cover case of person making sale of shares even if they exceeded ten per cent of the issued Capital of Company‑‑Penalty was provided in S. 66 for violation of provision of S. 62 of the Ordinance.

‑‑‑S. 31‑‑Contract between Bank and debtor and between Bank and purchasers of shares‑‑Scope‑‑Contract between Bank and borrower of loan would be that of creditor and debtor and between Bank and purchasers of shares was that of seller and purchasers‑‑Contract of both types were distinct and would require consideration in different context‑‑Fraud was alleged against debtors but no fraud could legitimately be alleged against purchasers of shares who were bona fide purchasers for value without notice of any defect as to title of plaintiff or impediment in selling said shares by the Bank Property having changed hands by delivery of share certificates from side of seller to purchasers, as a result whereof, transaction of sale and purchase, consideration having passed, would seem to be complete‑ Only a secretarial part remained to be done under the Companies Ordinance, 1984 for purpose of rights and liabilities of transferor and transferees, which had nothing to do with Sale of Goods Act, 1930, or the Transfer of Property Act, 1882.

‑‑‑O.XXXIX, Rr. 1 & 2 and S. 151‑‑Interim injunction for restraining defendants from selling, alienating, pledging, charging and hypothecating shares of company‑‑Equitability of grant of injunction‑ Where grant of interim injunction was meant to be a unilateral benefit to plaintiff and loss to purchasers amounting to millions of rupees, such injunction, held, would not be equitable‑‑Absence of balance of convenience and irreparable loss in favour of plaintiffs would also disentitle them for grant of injunction‑‑Application for grant of injunction was rejected in circumstances.

Khalid Anwer for Plaintiff.

Sajid Zahid for Defendant No. 1.

A.H. Mirza for Defendant No. 2.

Mansoor Ahmed Khan for Defendants Nos. 3 to 6.

Dates of hearing: 9th, 29th June, and 2nd July,1987.

By this application under Order XXXIX Rules 1 & 2 read with section 151, C.P.C. the plaintiff prays for an interim injunction to restrain the defendants from selling, transferring, alienating, pledging, charging and hypothecating the shares in question and defendant No. 2 in particular from effecting any change of whatsoever nature in relation to the said shares in its books and registers and from recognizing any claim or title of whatsoever nature for or in relation to the said shares except that of the plaintiff, and from paying dividends or issuing right shares to any one other than the plaintiff. On 31‑5‑1987 when this application was first placed before me, I ordered, "notice for 4‑6‑1987, meanwhile defendant No. 2 will not effect transfer of the shares." In response to notice defendants 1 to 3 put in their appearance through their counsel M/s. Sajid Zahid, A.H. Mirza and Mansoor Ahmed Khan. Counter‑affidavits and rejoinder were filed by the parties. In the meantime the plaintiff's counsel filed an application for joining some more persons in the ‑6‑1987 the application was allowed and the proposed parties suit On 8 were added as defendants No. 4, 5 and 6 who were shown as purchasers of the shares. Mr. Mansoor Ahmed Khan on the subsequent day filed power on their behalf.

2. I have heard the arguments of the learned counsel for the parties. Before adverting to their submissions it seems proper to give some facts of the case relevant for the purpose of deciding the above application. The plaintiff is a natural person who also happens to be a director of defendant No. 2 (hereinafter called as the 'company') and a member of the Stock Exchange, Karachi. The plaintiff, at his request, was granted in February, 1986 certain credit facilities in the sum of Rs.20 millions, bifurcating into 10 millions each, extended into two accounts maintained by the plaintiff with defendant No. 1 (hereinafter called as 'the bank') in the name of (1) Habib Ahmed and (2) Habib & Habib International. The said credit facilities were granted to the plaintiff under express terms and conditions in the bank's two letters both dated 18‑2‑1986. The plaintiff thereupon executed two agreements relating to pledge of securities (the shares in question), demand promissory note in the sum of Rs.12 millions, personal guarantees and agreements for financing on mark‑up basis all on the same date i.e. 18‑2‑1986. As would appear from the documents referred to above, the plaintiff was extended the said credit facilities initially for a period of three months i.e. until 20‑5‑1986 by which time the credit facilities had to be repaid subject to the bank's right to review the position at that time. The plaintiff by his letter dated 22‑2‑1986 expressly undertook to fully compensate the bank should the same suffer any loss due to adverse fluctuation in the market price of the shares and to fully honour any commitment made by the bank in this behalf. This undertaking/indemnity was given by the plaintiff when a request was made by him to the bank to accept the pledge of shares in equal proportions in two accounts. On 6‑3‑1986 the bank wrote a letter to the plainiff requiring him to place additional shares with a current market value of Rs.11,042,000 to cover the shortfall as the value of 2,98,600 shares of the company deposited by the plaintiff as security had come down in the market. The plaintiff, however, did not make‑up the deficiency. The bank appears to have written letters in August and October, 1986 asking for repayments of the amounts due to it and also making up the deficiency but the plaintiff again failed to make repayments or offer additional security. The bank ultimately wrote a letter to the plaintiff in January 1987 demanding repayment of all the outstandings in both the accounts. By the said letter the plaintiff was also put on notice that if the outstandings are not adjusted, the bank "will be constrained to start selling of the securities pledged by him with us to alienate the said outstandings". The said letter was personally acknowledged and accepted by the plaintiff on the very face of it, stating that "I accept the letter on condition if you allow me (Thirty days) 30 days from today." The plaintiff signed the writing and put 29‑1‑1987 under it.

3. The plaintiff, however, wrote a letter dated 10‑3‑1986 requesting defendant No. 2 company to pay the dividend warrants for the credit of plaintiff's accounts with the bank. Except the said dividend which was to accrue to the plaintiff at a future point of time the plaintiff did not pay any amount to the bank, ultimately the bank instructed its stock broker to commence selling the shares pledged with the bank through Karachi Stock Exchange. As a result thereof 37300 shares as alleged by the defendants were sold in different lots during the period 10‑5‑1987 and 17‑5‑1987. The bank, however, on 18‑5‑1987 put the balance of shares to sale. This perturbed the plaintiff who, then, served a legal notice dated 20‑5‑1987 on the bank. A notice was also served on the company requesting that no transfer of shares be effected in the company's books. Having received no reply the plaintiff filed the suit praying for the following reliefs:‑‑

(a) Declare that the plaintiff is the owner of 298600 shares in the Boots Company (Pakistan) Limited appearing against this name in Folio No. 218 in the register maintained by the said Company.

(b) Grant an injunction restraining the Defendant No. 2 from effecting any transfers whatsoever of the said shares and/or making payments of dividends to any one other than the plaintiff and/or from issuing right shares to any one other than the Plaintiff to exercise any right, tittle or interest of any sort including the exercise voting rights for or in relation to the said shares or any of them.

(c) Direct the Defendant No. 2 to permit the plaintiff to exercise all and whatsoever rights are attached to and in relation to the said shares and to treat the Plaintiff as the owner thereof.

(d) Restrain the Defendant No. 3, from acting directly or indirectly, or through any agent or associate or nominee, or through or in relation to any transferees or purported transferees not to claim or exercise any right or purported right for or in relation to the said shares and prohibit the sale/transfer/alienation pledge/hypothecation/charging of the said shares.

(e) Grant of decree in the sum of Rs.5 crores against the defendants jointly and/or severally.

(f) Such other relief as may be deemed appropriate by this Honourable Court.

(g) Costs of the Suit.

4. Mr. Khalid Anwar, learned counsel for the plaintiff in support of the above application for injunction raised the following pleas:‑‑

(i) That the bank and defendant No. 3 in collusion with each other played a fraud and managed to sell the shares at a price of Rs.55 per share which has never been the price during the last year. The sale is fraudulent and is liable to be declared as void and of no effect.

(ii) The bank failed to give notice of sale of the plaintiff's shares as required under section 176 of the Contract Act.

(iii) There is a bar to sell the aforesaid shares without the permission of the Authority as provided in section 62 of the Companies Ordinance, 1984.

On the other hand, Mr. Sajid Zahid, learned counsel for the bank denied the existence of any fraud and submitted that letter dated 28‑1‑1987 was a notice as required under section 176 of the Contract Act and that subsection (5) of section 62 of the Companies Ordinance exempts the bank from seeking prior approval of the Authority.

5. Mr. Mansoor Ahmed Khan, learned counsel for the defendants Nos. 3 to 6 submitted that the said defendants are bona fide purchasers and their rights as purchasers are protected under section 31 of the Securities and Exchange Ordinance, 1969. It was further submitted by him that no fraud can legitimately be alleged against the said purchasers to whom the property stands transferred as a result of the said transaction of sale and purchase which is complete. The only thing which remains is the registration of the names of these purchasers with the company for the purpose of rights and liabilities under the Companies Ordinance, 1984. He further submitted that a sum of Rs.5 crore are claimed by the plaintiff as damages in the suit, hence no injunction under sections 21 and 56 of the Specific Relief Act can be granted. With regard to section 62 of the Companies

Ordinance, 1984 it was submitted that the same was not attracted to the facts of the case.

6. As regards the allegation of fraud, the learned counsel for the plaintiff submitted that the ruling price in the stock exchange on 17‑5‑1987 was Rs.65 per share whereas the plaintiff's shares were sold at the rate of Rs.55 per share only. In fact on the next opening day namely 20th May, 1987 the share price had arisen to Rs.67 and thereafter within a few days it rose to Rs.77 per share. With regard to the bank's conduct in the matter, he submitted that as per letter dated 28‑1‑1987 the bank had proposed to "start selling the securities", thereby clearly indicating that the sales would be made over a period of time. The bank's hurried and sudden steps to dispose of all the shares at one time for the identical price, Rs.55, was a mala fide manoeuvre on its part to make wrongful gain to the bank officials and cause wrongful loss to the plaintiff. This was managed through its broker, defendant No. 3. It was further submitted by him that the company had recently received permission from the Government of Pakistan to acquire the infant and health food manufacturing facilities of Glaxo Laboratories Limited. The company was, therefore, in the process of issuing right shares for obtaining more capital for the said purpose. The plaintiff not only suffered a direct loss in getting low price but was also deprived of the future prospect of getting the right shares.

7. It was submitted by the learned counsel for the bank that the plaintiff throughout neglected to fulfil his commitment to the bank. The bank, therefore, had no option but to instruct its stock broker (defendant No. 3) to commence selling the concerned shares through the Stock Exchange. Accordingly during a period from 10‑5‑1987 to 17‑5‑1987 the bank in all sold 37300 shares in different lots which included 11800 shares of the plaintiff on the rates shown below:‑‑

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑ ‑‑‑‑‑‑‑‑‑‑‑‑

Date Number of Shares Rate

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

10‑5‑1987 5,800 ... 77

11‑5‑1987 4,700 ... 73

12‑5‑1987 10,900 ... 75

13‑5‑1987 15,000 ... 76

14‑5‑1987 700 ... 70

17‑5‑1987 1,700 ... 64

8. The bank, while noticing the fall of price in a matter of eight days from Rs.76 to Rs.65 i.e. by a sum of Rs.11, apprehended that any further efforts to sell the shares in different lots would result in further loss in price. The bank, therefore, instructed that the Stock Broker should accept the offer for the balance of shares at Rs.55 per share. The selling price at Rs.55 was no doubt loss by Rs.9 as compared to the sale on 17‑5‑1987 but it was unavoidable because of the shares being put to sale in bulk, would inevitably result in a slump in the share market. Learned counsel pleaded that the bank exercised due diligence to sell the shares in question at the best possible price. Learned counsel for defendants 3 to 6 denied the allegation of fraud and submitted that the shares were purchased by the said defendants in the stock exchange trading in normal course and channel of stock exchange brokers in open market without any reservation and without any notice of plaintiff's alleged title or deficiency of entitlement of the bank to sell them. It was further submitted by him that the purchase was made in good faith for lawful consideration and without any fraud.

9. Fraud has never been considered to be a pure question of law. It is a mixed question of fact and law. It involves, in the first instance, a finding in regard to facts that is to say, ‑conduct on the part of the party alleged to have committed fraud. Thereafter, the legal question as to applicability of fraud to the particular facts would arise. It is a settled law that the burden of proof of fraud is on the party alleging it and that must be established by clear and convincing evidence. I am, therefore, clear in my mind that it is not: the stage where the finding of the existence or non‑existence of fraud, as alleged, is possible or advisable. It is to be dealt with at a proper stage after evidence is led by the parties. Reliance is placed on the cases reported as (1) Abdul Wahid v. Mst. Zamrut PLD 1967 S.C. 153 and (2) Ahsan Ali and others v. District Judge and others PLD 1969 S.C. 167. Mere selling the shares at a price lower than the market price on the previous day will not perhaps be sufficient to come to a finding, even prima facie, that the sale was collusive or fraudulent. There may be a number of other factors which can be thrashed out only at the time of the evidence.

10. The other contention of the learned counsel for the plaintiff that the bank failed to give notice of sale of the plaintiff's shares as required under section 176 of the Contract Act appears to be devoid of force. Section 176 of the Contract Act reads as under:‑‑

"176. If the pawnor makes default in payment of the debt, or performance, at the stipulated time of the promise in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged on giving the pawnor reasonable notice of the sale.

If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor."

11. The bank's letter dated 28‑1‑1987, in my view, w. q notice as contemplated by section 176 of the Contract Act. Section 176 of the Contract Act requires that the pledgee before exercising his right to sell the goods pledged with him must give a reasonable notice to the pledgor of his intention to sell. Such notice was in fact given by the bank as stated above. It is not necessary that at the time of actual sale the pledgee should also serve with a notice on the pledgor. For this view reliance is placed on the cases reported as (1) Usman Malik v. The Bank of Bahawalpur Ltd. PLD 1959 (W.P.) Kar. 725 and (2) Messrs Continental Syndicate of Trade v. Lloyds Bank Ltd. PLD 1966 (W.P.) Kar. 556.

12. The last submission of the learned counsel for the plaintiff that there was a bar to sell the aforesaid shares without the permission of the Authority as provided in section 62 of the Companies Ordinance, 1984, for purpose of deciding the above application, has also no force. Section 62 of the Companies Ordinance, 1984 ('the Ordinance'), as in the Ordinance originally enacted contained 4 subsections reading as under:‑‑

'62. Offer of shares or debentures for sale b certain persons:

(1) No person who holds more than ten per cent o the shares or debentures of a company shall offer for sale to the public any shares or debenture of the company held by him except with the approval of the Authority.

(2) Any document by which an offer for sale to the public is made by any such person as is referred to in subsection (1) shall, for all purposes, be deemed to be a prospectus issued by a company, and all enactments and rules of law as to the contents, filing and registration of a prospectus and as to the liability in respect of statements in and omissions from a prospectus, or otherwise relating to a prospectus, shall apply with the modifications specified in subsections (3) and (4), and have effect accordingly, but without prejudice to the liability, if any, of the persons by whom the offer is made in respect of mis‑statements contained in the document or otherwise in respect thereof.

(3) For the purposes of this section, section 57 shall have effect as if the person making the offer were a person named in a prospectus as director of a company.

(4) Where a person making an offer to which this section relates is a company or a firm, it shall be sufficient if the document referred to in subsection (2) is signed on behalf of the company or firm by two directors of the company or not less than one‑half of the partners in the firm, as the case may be; and any such director or partner may sign by his agent authorised in writing.

By subsection (5) of the Banking & Financial Services (Amendment of Laws) Ordinance, 1984 (LVII of 1984) the following subsection was subsequently added with a view to except the scheduled banks and financial institutions from the restriction and prohibition of subsection (1) above:

(5) A notice, circular, advertisement or other document soliciting bids, offers, proposals or tenders for sale of shares or other securities acquired in the course of normal business or for negotiating sale thereof or expressing on intention to disinvest such shares or other securities issued by a scheduled bank ' or a financial institution shall not be deemed to be a prospectus or an offer .for sale to the public for the purposes of sections 61 and 62.

13. The above amendment was brought about by insertion of an exception, such exception is to be noted for its need with force and emphasis and as an omission in the original contemplation. Subsection (5), therefore, is an important exception and must be read in that) context.

14. Section 62 refers to 'Offer for sale to the public' of ten per cent of the shares of a company held by a person. Such offer to the E public, by subsection (2) is deemed to be a 'prospectus'. Prospectus is defined in clause (29) of section 2 and is governed by the provisions in Part V, especially sections 52 to 66 of the Ordinance.

15.Learned counsel for plaintiff submittrd that, in any event, the purported sale is illegall and void by reason of non- compliance with the provisions of section 62 of the companies ordinance, 1984 which makes it mandatory to obtain the prior approval of the corporate law authority before selling more than 10% of the total shares of the company.

16. Learned counsel for the Bank and Defendants 3 to 6 in reply submitted that in view of subsection (5) added to section 62, Defendant No. 1 being a scheduled bank and having obtained the said shares in the normal course of their banking business were excepted from the purview of subsection (1) of section 62. It was further submitted that it was a case of realising the security by ordinary recourse to the sale of pledged shares after due notice to the plaintiff. In the aforesaid circumstances, to my mind the sale does not mean an offer to the public as contemplated by subsection (i) and further it is not a prospectus as deemed in subsection (2) and in any case the exception in subsection (5) appears to cover the case of the Defendant No. I. making sale of the shares even if they exceed 10% of the issue capital of the Company. In any case if there is violation of provision of section 62 of the Companies Ordinance, 1984, the penalty is provided in section 66.

It may, perhaps, be urged that it was the plaintiff himself who ought to have obtained the required permission, if ant, at the time of pledging the shares with the bank, coupled with authority to sell them , as per agreement of loan , and so he cannot be allowed to raise the said plea in his derence.

18. Learned counsel for defendants 3 to 6 submitted that defendants 3 to 6 are bona fide purchasers for full value paid by them to the bank without any notice of deficiency of entitlement or otherwise on the part of bank or the plaintiff. Reliance was placed on section 31(1) of the Securities & Exchange Ordinance, 1969. It reads as under:‑‑

"31. Securities acquired in good faith:‑‑

(1) A person who, without fraud and for a lawful consideration becomes the professor of a certificate of an equity, security, script, possessed debenture, debenture stock or bound, and who is without notice that the title of the person from whom he derived his own title was defective shall hold such certificate and all rights attached thereto free from any defect of title of prior parties and free from defences available to prior parties among themselves."

It is apparent that the contract between bank and the plaintiff is that of a creditor and debtor whereas the contract (or contracts)I between the bank and defendants 3 to 6 are that of seller and purchasers. These contracts are distinct and require consideration in different context. Fraud is alleged against defendant No. 1 and 3. No fraud has been or may, perhaps, legitimately be alleged against the purchasers. They seem to be bona fide purchasers for value, without notice of any defect as to the title of the plaintiff or impediment in selling the said shares by the bank. In fact the property had changed hands by delivery of share certificates from the side of the seller to purchaser defendants, as a result whereof a transaction of sale and purchase, consideration having been passed, seems to be complete. What remains to be done, it is only a secretarial part under the provisions of the Companies Ordinance for purpose of G rights and liabilities of the transferor and transferees under the Company Law, which has little to do with the provisions of Sale of Goods Act, 1930 or Transfer of Property Act, 1882. According to the company's affidavit the plaintiff's shares in the normal course of business were sold by the plaintiff alongwith duly verified Transfers Deeds and share certificates were received by the Company in favour of the transferees. According to the procedure followed by the company for registering share transfer, the company upon receipt of duly executed, verified, stamped transfer deeds alongwith accompanying share certificates, issued receipts to the transferees. After all necessary verification having been made and the instruments of transfer having been found to be in order, the receipts handed over to the defendant purchasers, incorporate the registered transfer numbers and the folio numbers which have been allocated to the transferees and the folio numbers forming part of the registration numbers. After the receipts have been issued, according to the submission of the learned counsel for the company, no further action is required from the transferor company or the transferee purchasers.

19. The submission of the learned counsel for defendant No. 1 and defendants 3 to 6 that if the price obtained by the bank was not proper or reasonable, the same can be a proper subject matter of damages and not an interim injunction to restrain the defendant company from affecting transfer of the shares in their books in favour of other defendants, the purchasers. Sections 21 and 56 of the Specific Relief Act were referred to. In the facts and circumstances of the case granting of interim injunction will not be equitable. The grant of interim injunction will mean a unilateral benefit to the plaintiff and loss to purchasers as their two crores of rupees will be blocked H which, to my mind, would be an injustice to them. The proper remedy will be damages. The balance of convenience is not in favour of the plaintiff and that no irreparable lose will be caused to him. Learned counsel urged that the plaintiff, being a Director of the company will have to lose his directorship if injunction to restrain registration of shares is not granted, which will amount to an irreparable loss to him. I do not agree with him. The shares of the company are listed with and quoted at the Stock Exchange. The qualification shares can easily be procured by the plaintiff from the open market, if he is so advised.

20. For the foregoing reasons, the application is dismissed. Ad interim order dated 31‑5‑1987 regarding transfer of the shares and order dated 9‑6‑1987 regarding payment of dividend stand vacated and withdrawn. Mr. A.H. Mirza stated that the same has not been paid by the company so far.

A.A. /A‑102/K Application dismissed.

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