Sindh Bank Limited Vs Ms Oriental Fruits Pvt. Limited etc

Stereo. H C J D A 38

JUDGMENT SHEET

LAHORE HIGH COURT, LAHORE

JUDICIAL DEPARTMENT

C. O. S. No. 80399 / 2017

Sindh Bank Limited

Versus

M/s Oriental Fruits (Pvt) Limited and 05 others

JUDGMENT

Date of Hearing: 30.03.2026 Plaintiff By: Mr. Majid Ali Wajid, Advocate Defendant No. 5 By: Mirza Nasar Ahmad, Advocate

ABID HUSSAIN CHATTHA, J: The titled suit for recovery was instituted by the Plaintiff Bank against contesting Defendants No. 1 to 5 and Proforma Defendant No. 6 under Section 9 of the Financial Institutions (Recovery of Finances) Ordinance, 2001 (the “FIO”). PLA No. 108062-B of 2017 was decided on 17.10.2019, whereby, leave to defend of Defendants No. 1 to 4 was rejected and in consequence thereof, the suit of the Plaintiff Bank was decreed against them jointly and severally for a sum of Rs. 105,797,943/- with cost of funds in terms of Section 3 of the FIO and costs of the suit. However, contesting Defendant No. 5 company was granted leave to defend to examine the question if its Memorandum of Association permitted issuance of corporate guarantee to secure the Plaintiff Bank against the liability of Defendant No. 1 company.

2.With the consent of the parties, following issues were framed vide Order dated 10.02.2020 read with order dated 28.09.2020 passed in C.M. No. 1 / 2020 regarding recasting of onus of proof:-

(1)Whether the suit is maintainable against the present Defendant No. 5? OPP/OPD

(2)Whether corporate guarantee executed for benefit of Defendant No. 1 by Defendant No. 5 is ultra vires to the Memorandum of

Association of Defendant No. 5 and thus void and unenforceable? OPD

(3)Relief.

3.The Local Commission was appointed who recorded respective evidence of the parties and submitted the report, accordingly. The Plaintiff Bank produced two witnesses and documentary evidence as Exhibits P-1 to P-

11.Defendant No. 5 produced a single witness with documentary evidence as Exhibits D-1 to D-3. Learned Counsels addressed their respective arguments on the basis of recorded evidence.

4.Learned counsel for the Plaintiff Bank submitted that suit of the Plaintiff Bank is maintainable against Defendant No. 5 as DW-1 candidly admitted the due issuance and execution of the corporate guarantees in order to secure the Finances availed by Defendant No. 1. Clause III(2)(r) of the Memorandum of Association clearly empowers Defendant No. 5 to guarantee the performance of contracts and obligations in relation to the payment of any loan, debentures, stock, bonds and obligations or security issued by or in favour of the company and to guarantee the payment or return on such investment. As such, the issuance of corporate guarantees by Defendant No. 5 are not ultra vires to its Memorandum of Association. Reliance was placed on case titled, “Silk Bank Limited through Constituted Attorney v. Messrs Haseeb Waqas Sugar Mills Limited through Chief Executive and 14 others” (2024 CLD 278) to stress that object clauses of Memorandum of Association are liable to wide and broad construction vis-à-vis the rights and interests of third parties. This is particularly so, when Defendant No. 5 is not a public listed company but merely a public company and as per its Form-A (Annual Return) dated 31.10.2012, Defendant No. 5 company held 4,000,000/- shares out of the total paid-up 4,001,000/- shares of Defendant No. 1 equivalent to 99.975% shareholding and thus, had full control of Defendant No. 1 company. As such, Defendant No. 5 lawfully extended corporate guarantees in order to secure the Finances of Defendant No. 1. The argument of learned counsel for Defendant No. 5 that corporate guarantees issued by Defendant No. 5 are void having been issued in violation of Section 208 of the Companies Ordinance, 1984 (the “Companies Ordinance”) as applicable at the time of issuance of corporate guarantees is not tenable for the reason that it relates to direct

investments in associated companies and is not applicable to corporate guarantees. Even otherwise, any violation thereof provides for penal consequences for the directors of that company and does not treat any transaction undertaken by that company as void with respect to rights and interests of a third party. Moreover, the plea is an afterthought and beyond pleadings on which no evidence has been led. The issuance and due execution of corporate guarantees by Defendant No. 5 are proved through oral and documentary evidence on record. Hence, the suit is liable to be decreed in favour of the Plaintiff Bank and against Defendant No. 5.

5.Conversely, learned counsel for Defendant No. 5 submitted that Defendant No. 5 as a public limited company was barred to issue corporate guarantees under Section 208 of the Companies Ordinance read with Companies (Investment in Associated Companies or Associated Undertakings) Regulations, 2012 (the “Regulations”) without approval of special resolution as defined under Section 2(36) of the Companies Ordinance. Since corporate guarantees were issued without passing of special resolution, therefore, the same are void and cannot be enforced against Defendant No. 5 who expressly raised this issue in Para No. 10 (on merits) of the application for leave to defend and produced evidence in this behalf. Hence, evidence led in this respect is not beyond pleadings. He emphasized that DW-1 categorically deposed that corporate guarantees are void and not enforceable being in violation of Section 208 of the Companies Ordinance who was not cross-examined on this issue. Hence, failure on the part of the Plaintiff Bank to undertake due diligence before accepting the corporate guarantees cannot be attributed to Defendant No. 5. It was further submitted that clause III(2)(r) of the Memorandum of Association only empowers Defendant No. 5 to guarantee repayment of loans and obligations of the company issued or undertaken by itself and not that of another company or person. Haseeb Waqas Sugar Mills Limited, case (supra) relied upon by learned counsel for the Plaintiff Bank is not applicable since the said Judgment was rendered in the context of Companies Act, 2017 (the “Companies Act”) and not with reference to the Companies Ordinance which was in vogue at the relevant time. This is especially so when in recent case titled, “Pakistan Stock Exchange Limited v. Commissioner Inland Revenue Zone-VI, Karachi” (2025 SCP 397), the doctrine of invalidity of an act ultra

vires to the Memorandum of Association of a company has been reinforced. Hence, the corporate guarantees issued by Defendant No. 5 in favor of the Plaintiff Bank to secure the Finances of Defendant No. 1 are void and thus, cannot be enforced.

6.The Plaintiff Bank produced two witnesses along with documentary evidence. PWs in their affidavits (Ex.P-1 & Ex.P-5) categorically and candidly deposed that Defendant No. 1 availed various Finance Facilities from the Plaintiff Bank. Defendant No. 5 furnished cross- corporate guarantee dated 26.06.2012 (Ex.P-7) as security in relation to the Syndicate Term Finance Facility extended by the Plaintiff Bank and Bank of Punjab which was fully utilized by Defendant No. 1 who failed to discharge its liability. As such, Defendant No. 5 unequivocally guaranteed the due payment of the Facility alongwith markup, costs and charges, etc. agreed as per terms and conditions of the Syndicate Term Finance Agreement executed between the Plaintiff Bank and Defendant No. 1 from time to time and performance of all the obligations thereunder including the obligation to make immediate and unconditional payment to Bank of Punjab (Defendant No. 6) without demur of any sum demanded by Bank of Punjab from the guarantor. Further, Defendant No. 5 also furnished a cross-corporate guarantee dated 22.06.2015 (Ex.P-4) in relation to the Facility of ERF-Part 1 (SBP/Own Sources). Defendant No. 5 guaranteed as principal debtor empowering the Plaintiff Bank at its option to hold it primarily liable for the liability of Defendant No. 1. The guarantees are continuing guarantees which extend to all future sums of money at any time due from Defendant No. 1. Hence, Defendant No. 5 has furnished the corporate guarantees as security in favour of the Plaintiff Bank within the ambit and scope of the FIO and the suit against Defendant No. 5 is fully maintainable. The execution of corporate guarantees was lawfully authorized by the board of directors of Defendants No. 1 & 5 as depicted from Ex.P-8 & Ex.P-9. Form-A (Ex.P-10) up to 31.10.2012 clearly mentions that there are only three shareholders of Defendant No. 1 with two natural persons holding 500 shares each and the remaining 4,000,000/- shares are held by Defendant No. 5 making the latter as a holding company of Defendant No. 1 and beneficiary of Finances availed by Defendant No. 1. Nothing favorable could be extracted from their cross- examination.

7.DW-1 in his affidavit (Ex.D-1) did not deny the issuance of corporate guarantees but maintained that the same are not enforceable as Defendant No. 5 did not have the power to execute corporate guarantees or act as surety in relation to any loans or advances to another person. As such, the corporate guarantees are ultra vires to the Memorandum of Association of Defendant No. 5. Further, Defendant No. 5 as a public limited company could not have issued the same in favour of an associated company without passing of special resolution in terms of the procedure prescribed under Section 208 of the Companies Ordinance. Therefore, corporate guarantees issued in violation of such procedure are void and not enforceable. Nevertheless, the witness admitted in his cross-examination that as per covenants of the corporate guarantees, Defendant No. 5 has represented that it is empowered to give guarantees under its constituent documents and has obtained all consents, authorizations and resolutions for this purpose. He also admitted that corporate guarantees have been signed by him and authorized by valid resolutions of the board of directors which were under his signatures as a company secretary. He also conceded that the Finance Facilities could not have been disbursed or availed without furnishing of cross-corporate guarantees by Defendant No. 5.

8.Clause III(2)(r) of the Memorandum of Association of Defendant No. 5 unequivocally empowers it to guarantee the performance of contracts and obligations of the company in relation to payment of any loans, debentures, bonds, obligations or securities issued by or in favour of the company and to guarantee the payment or return on such investments. In addition, the catch all provision contained in clause III(2)(n) allowed Defendant No. 5 company to do all such others things as may be deemed incidental or conducive for the objects of the company. Conspicuously, Defendant No. 5 owned more than 99% shares in Defendant No. 1 company and had its complete control, thus, was the beneficiary of the Finances extended to Defendant No. 1 by the Plaintiff Bank. Thus, issuance and execution of independent contract of guarantees by Defendant No. 5 with the Plaintiff Bank undertaking obligations in relation to payment of Facilities of Defendant No. 1 is not ultra vires to the Memorandum of Association of Defendant No. 5. The above clauses of the Memorandum of Association of Defendant No. 5 fully empowered it to issue and execute corporate

guarantees. The argument that it could not have issued it for an associated company is misconceived as there is no prohibition to this effect. Defendant No. 5 since the availing of the Facilities from the Plaintiff Bank by Defendant No. 1 till the date of institution of the suit did not raise any objection with respect to corporate guarantees extended by it for repayment of Facilities of Defendant No. 1. Dilating upon evolving jurisprudence with respect to doctrine of ultra vires to the Memorandum of Association of a company, this Court while examining an identical proposition in case of Haseeb Waqas Sugar Mills Limited case (supra) noted as follows:- “8.The Memorandum of Association of a company is the document which forms and constitutes the company. It defines its purposes and objectives for which it is incorporated and determines the ambit of relationship of a company with the outside world. The Articles of Association of a company deal with the internal management of the company and determine inter se relationship between the management and shareholders of the company listing rules as to how it is run, governed and owned. The jurisprudence regarding the scope of activities that a company can possibly undertake in terms of its Memorandum of Association has universally evolved over the years. Consequently, the traditional concept of an objective or activity undertaken by a company being ultra vires the scope of its Memorandum of Association has been immensely diluted. It is now well acknowledged that stipulations in the Memorandum of Association of a company are required to be liberally and broadly interpreted unless a particular act by the company is unlawful or is specifically prohibited. For reference, see case titled, “Pakistan Mobile Communication Ltd. and others v. Appellate Bench No. III, Securities and Exchange Commission of Pakistan and others” (2016 CLD 76). Increasingly, various jurisdictions in the world are moving to the concept that just like a natural person who may perform any lawful act, a company as a juristic person may also undertake any lawful act. As such, the concept of controlling the company in terms of its activities through its Memorandum of Association is fast eroding. Canada has abolished the doctrine by way of Section 15(1) of the Canada Business Corporations Act, 1985 which states that a corporation has the capacity and privileges of a natural person. New Zealand has also extended farewell to the requirements of Memorandum of Association and an object clause by the introduction of Section 16 of the Companies Act, 1993 which is reproduced below:- “(1) Subject to this Act, any other enactment, and the general law, a company has, both within and outside New Zealand,-

(a)full capacity to carry on or undertake any business or activity, do any act, or enter into any transaction; and (b) for the purposes of paragraph (a), full rights, powers, and privileges.

(2)The constitution of a company may contain a provision relating to the capacity, rights, powers, or privileges of the company only if the provision restricts the capacity of the company or those rights, powers, and privileges.”

9.In English law, having an object clause is not a mandatory requirement for a company. According to Section 31(1) of the Companies Act, 2006, unless a company’s Articles specifically restrict the objects of the company, its objects are unrestricted. The Sri Lanka Companies Act No. 7 of 2007 has also dispensed with, inter alia, the requirement of Memorandum of Association and object clause, thereby, granting the company the capacity to undertake any lawful business or activity or do any act or enter into any transaction and diversify away from its original business. Section 4 thereof, does away the requirement of a Memorandum and accordingly, the company needs only to submit Articles of Association at the time of incorporation and, thereby, dispenses with the ultra vires doctrine vis-à-vis the Memorandum of Association. However, although the law has removed the mandatory requirement of having an object clause, any company may specify its objects in its Articles if it wishes to do so.

10.In view of above, it is explicitly clear that most of the countries have partially or completely done away with the doctrine of ultra vires with respect to objects listed in the Memorandum of Association in order to simplify the incorporation process, reduce the costs of incorporation and remove commercial constrains on business activities to be undertaken by a company. The idea is to offer maximum flexibility in corporate transactions to a company which previously was restricted in terms of activities to be undertaken by a company. According protection to third parties regarding their transactions with a company is also at the heart of the evolving jurisprudence. Therefore, after partial or complete abolition of Memorandum of Association, modern companies now possess much more freedom, capacity and discretion to engage in diverse business activities.

11.The modern trend of evolving jurisdiction on the subject is duly recognized in Pakistan through promulgation of the Companies Act, 2017 (the “Act”). Section 18 of the Act stipulates that the effect of registration of the company in terms of its Memorandum and Articles of Association is that it is capable of exercising all the functions of an incorporated company, having perpetual succession and a common seal. Section 30 of the Act provides that notwithstanding anything contained in this Act or any other law for the time being in force or the Memorandum and Articles, the Memorandum and Articles of a company shall be deemed to include and always to have included the power to enter into any agreement for obtaining loans, advances, finances or credit, as defined in the Banking Companies Ordinance, 1962 and to issue other securities not based on interest for raising resources from a scheduled bank, a financial institution or general public. Section 26(1) of the Act states that a company may carry on or undertake any lawful business or activity and do any act or enter into any transaction being incidental and ancillary thereto which is necessary in attaining its business activities provided that the principal line of business of the company shall be mentioned in the Memorandum

of Association of the company which shall always commensurate with name of the company. Further, Section 26(2) thereof proclaims that a company shall not engage in a business which is either prohibited or is restricted by any law, rules or regulations, unless necessary license, registration, permission or approval has been obtained or compliance with any other conditions has been made. Importantly, Section 27 of the Act prescribes the necessary ingredients of Memorandum of Association of a company limited by shares and as part of its objects, it only requires the company to state its principal line of business and allows it to carry on or engage in any business. The prescribed form of Memorandum of Association of a company limited by shares in Table B of First Schedule to the Act requires to list a positive and a negative covenant with respect to the powers of the company which it may or may not do. The positive covenant in Clause 3(ii) thereof provides that except for the businesses mentioned in Clause 3(iii) thereof, the company shall engage in all the lawful businesses and shall be authorized to take all necessary steps and actions in connection therewith and ancillary thereto. The negative covenant in terms of Clause 3(iii) thereof imposes restrictions with respect to regulated businesses requiring licenses or approvals or prohibits businesses or acts which are either unlawful or forbidden or restricted. Therefore, the Act has effectively altered the traditional doctrine of ultra vires vis- à-vis the objects being beyond the scope of Memorandum of Association of a company. Hence, the observations in case titled, “Lucky Cement Ltd. v. Commissioner Income Tax, Zone Companies, Circle-5, Peshawar” (2015 SCMR 1494) are inapplicable after the enactment of the Act regarding the Memorandum of Association of a company.

12.Therefore, it is safely concluded from the above analyses that Defendants No. 1 and 10 being associated companies in terms of Section 2(4) of the Act and being in existence under the Act were fully competent to obtain and secure the Facility and as such, the objection to the effect that extending of corporate guarantee by Defendant No. 10 was beyond the scope of its Memorandum of Association is turned down.”

9.It follows from the above that contention of learned counsel for Defendant No. 5 that law reproduced above is not applicable in the instant case for the reason that corporate guarantees were issued in the year 2012 when the Companies Ordinance was in place as applicable law instead of the Companies Act is misconceived inasmuch as after the promulgation of the Companies Act, all companies including Defendants No. 1 and 5 are existing and operating under the provisions of the Companies Act. The applicability of law in this respect is specifically proclaimed in Section 30 of the Companies Act, notwithstanding anything to the contrary in the Memorandum of Association of an existing company. Above all, in the instant case, the corporate guarantees extended by Defendant No. 5 to the Plaintiff Bank to

secure the liability of Defendant No. 1 were not even otherwise, ultra vires to its Memorandum of Association. This is especially so when Defendant No. 5 is the holding company of Defendant No. 1 and beneficiary of Finances extended to Defendant No. 1. Pakistan Stock Exchange Limited case (supra) relied upon by learned counsel for Defendant No. 5 is based on completely distinguishable facts and is not applicable to the facts and circumstances of this case.

10.The next issue requires this Court to examine if the corporate guarantees issued by Defendant No. 5 are void and thus, unenforceable on account of alleged violation of Section 208 of the Companies Ordinance read with the Regulations. Although, no specific issue was framed in this behalf yet the same is broadly covered under issue No. 1 and was within the contemplation of the parties. The plea was taken by Defendant No. 5 in its application for leave to defend. The witness of Defendant No. 5 deposed to this effect in his affidavit as examination-in-chief. He was cross-examined in this behalf if Defendant No. 5 obtained requisite approvals and consents required under the law before issuance of corporate guarantees to which the witness positively acknowledged that the covenants of the corporate guarantees proclaim that all requisite consents, approvals, resolutions and permissions were indeed obtained before issuance of corporate guarantees.

11.Section 208 of the Companies Ordinance existing at the relevant time deals with investments in associated companies and undertakings. It requires a company not exempted by Securities & Exchange Commission of Pakistan (the “Commission”) to pass a special resolution before making any investment in any of its associated companies or associated undertakings indicating the nature, period and amount of investment and terms and conditions attached thereto. The above provision secures the rights and interests of the shareholders vis-à-vis its directors so that they are not adversely affected and they may know the nature, period and amount of investment as well as terms and conditions attached thereto. The term ‘investment’ includes ‘guarantees’ as per Regulation 2(b)(ii) of the applicable Regulations notified vide S.R.O.27(I)/2012 dated 16.01.2012. At the same time, Defendant No. 5 was prima facie an exempted company from the requirements of Section 208 of the Companies Ordinance in terms of clause

(f)of S.R.O.704(I)/2011 notified on 13.07.2011 as applicable at the relevant time which provides an exemption to a holding company, to the extent of investments made in its wholly owned subsidiary except where disinvestment by a holding company which would reduce its holding in the subsidiary, in which an investment was made pursuant to this exemption, to less than 75%. Notwithstanding the above, the determination of the facts if ‘investment’ includes ‘corporate guarantee’ or if Defendant No. 5 was exempted from the provisions of Section 208 of the Companies Ordinance in terms of the referred Notification are not the concern or mandate of this Court. The matter is solely between the directors of a company and its shareholders. Section 208 of the Companies Ordinance read with the Regulations is regulated by the Commission which has the mandate and prerogative to determine compliance or non-compliance thereof by the directors of a company. If default is made in complying with such requirements, the Commission may determine such default and levy monetary fine prescribed therein on every director of a company who is knowingly and willfully in default and may hold the directors jointly and severally liable to reimburse to the company any loss sustained by it. Conspicuously, provisions of Section 208 of the Companies Ordinance do not prescribe any consequence in terms of invalidity of an investment or transaction qua the rights and interests of third parties in whose favor such an investment or transaction has been made or effected. Once the directors of Defendant No. 5 gave an unequivocal assurance to the Plaintiff Bank that they have complied with all applicable laws before the issuance of corporate guarantees, the rights and interests of the Plaintiff Bank as lender are fully protected and in case of any violation of Section 208 of the Companies Ordinance, the penal consequences listed therein may be enforced by the Commission against the directors of Defendant No. 5. Hence, the argument that corporate guarantees extended by Defendant No. 5 are void and not enforceable by the Plaintiff Bank is discarded.

12.Therefore, it is explicitly established that Defendant No. 5 by issuing and executing corporate guarantees in favor of the Plaintiff Bank guaranteeing the liability of Defendant No. 1 has obtained complete benefit of the Finances extended to its associated company / Defendant No. 1 in which it holds more than 99% shares and as such, cannot wriggle out of its responsibility to repay the defaulted amount. Hence, Defendant No. 5 is a

customer of the Plaintiff Bank in terms of Section 2(c) of the FIO, as such, the suit of the Plaintiff Bank against Defendant No. 5 is maintainable and the corporate guarantees executed by Defendant No. 5 are valid and enforceable. Accordingly, issues No. 1 & 2 are decided against Defendant No. 5 and in favour of the Plaintiff Bank.

13.In view of the above, the suit of the Plaintiff Bank is also decreed against Defendant No. 5 who shall, jointly and severally, pay the decreed amount along with Defendants No. 1 to 4 as per the terms of already passed Decree dated 17.10.2019. Decree sheet be prepared, accordingly.

(Abid Hussain Chattha) Judge

Approved for reporting.

Judge

Announced in open Court on 07.04.2026.

Judge *Abu Bakker*