1990 PLP 1030 (CLC)

10. The argument has been resisted by Mr. A.I. Chundrigar and in my opinion, rightly so. A perusal of the I.D.B.P. Ordinance shows that section 38 thereof vests the Bank with power to call for the payment due before the agreed period from an industrial concern or a person to which it has granted any loan or swhich is liable for repayment of such loan. Section 39 of the said Ordinance further entitles the bank to apply in such a case to the Court for any one or more of the following reliefs, namely:‑ "(a) an order for the sale of the property pledged, mortgaged, hypothecated or assigned to the Bank as security for the loan and any other properties, disclosed or undisclosed, of the industrial concern or the properties, disclosed or undisclosed, of persons liable for the repayment of the loan, including guarantors; or (b) an order for the transfer of the management of the industrial concern to the Bank or its nominee, provided that when such management is so transferred to the Bank, the Bank shall be deemed to be the agent of the industrial concern on its behalf and all actions taken by the Bank on such transfer shall be deemed to be those of the industrial concern; or (c) an injunction ad interim where there is apprehension that machinery or equipment may be removed from the premises of the concern without the permission of the Board." Section 40 of the said Ordinance further authorises the Bank to take over the management of the concern which is liable to it for payment of money and which makes any default in payment thereof and the bank has been further authorised to sell or realise any property pledged, mortgaged, hypothecated or assigned by the concern to secure its liability to the bank. Section 41 of the said Ordinance further provides that "without prejudice to the provisions of Sections 39 and 40 all sums due to the Bank shall be recoverable as arrears of land revenue:"

11. It will thus be seen that none of the remedies referred to in the aforesaid provisions is akin to the remedy which the petitioner has sought in the present petition. It is therefore clear that the Ordinance and the I.D.B.P. Ordinance do not occupy the same field. No doubt, the Bank, in order to recover its debt from an industrial concern etc. can have resort to any of the remedies referred to in section 38, 39, 40 or 41 of the I.D.B.P. Ordinance, which by no means are less effective, but nothing can be spelt out from the said provisions to suggest that they are in derogation of the provisions of the Ordinance. The Ordinance itself is a special enactment which provides for special remedies in the form of section 309 thereof. Since no intention has been expressed either in the I.D.B.P. Ordinance or in the Companies Ordinance that the provisions contained therein are in derogation of any other law no such construction as suggested by Mr Liaquat Merchant can be placed thereon. I am therefore, unable to agree with the first contention of Mr. Liaquat Merchant.

12. So far as the second contention of Mr. Liaquat Merchant is concerned, the contention is that the Advocate's notice sent by the petitioner to the respondent, dated 28‑2‑1988, cannot be construed as a notice under section 306 of the Ordinance. Section 305 of the Ordinance while enumerating the circumstances in which the Company may be wound up by the Court provides:‑ "

305. Circumstances in which company may be wound up by Court‑‑ A Company be wound up by Court‑‑ (e) if the company is unable to pay its debts; (h) if the Court is of opinion that it is just and equitable that the company should be wound up." Section 306 of the Ordinance further provides that:‑ "Company when deemed unable to pay its debts:‑ (1) A company shall be deemed to be unable to pay its debts:‑‑‑ (a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding one per cent of its paid‑up capital or fifty thousand rupees, whichever is less, than due, has served on the company, by causing the same to be delivered by registered post or otherwise, at its registered office, a demand under his hand requiring the company to pay the sum so due and the company has for thirty days thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor or in part; or (b) if execution or other process issued on a decree or order of any Court or any other competent authority in favour of a creditor of the company is returned unsatisfied in whole or in part; or (c) if it is proved to the satisfaction of the Court that the company is unable to pay its debts, and in determining whether a company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the company. (2) The demand referred to in clause (a) of subsection (1) shall be deemed to have been duly given under the hand of the creditor if it is, signed by an agent or legal adviser duly authorised on his behalf, or in the case of a firm if it is signed by such agent or legal adviser or by any member of the firm on behalf of the firm."

13. Clause (a) of subsection (1) of section 306 ibid thus shows that a company shall be deemed to be unable to pay its debts if its creditor has served on it, a demand requiring it to pay to him the sum due and the company has for thirty days thereafter neglected to pay the sum or to secure or compound the same to the reasonable satisfaction of the creditor. We are not concerned here B with clause (b) of section 306 but clause (c) thereof further shows that it should be proved to the satisfaction of the Court that the company is unable to pay its debts. It is pertinent to point out that all the clauses of section 306(1) are disjunctive and can operate independently of each other.

14. The notice sent by the petitioner's Advocate to the respondent dated 28th February, 1988 which has been filed with the present petition as Annexure `Z/7' states in para No.3 thereof as follows:‑ "

3. You have failed to pay our clients various instalments on due dates and failed to comply with various undertakings given by you to our clients. This is, therefore, to recall the various portions of all the loans which have not yet fallen due for payment under the terms of the Agreements and Section 38 of I.D.B.P. Ordinance, 1961." However, the notice in para. No.6 thereof further states:‑ "Upon failure by you to meet the requisition within seven days, we have instructions to file legal proceedings against you at your risk as to costs and consequences and our clients reserve the right either to file legal proceedings under I.D.B.P. Ordinance, 1961 or file a suit for recovery under the Banking Companies (Recovery of Loans) Ordinance, 1979, as amended or any other law."

15. While resisting Mr. Liaquat Merchant's contention, Mr. A. I. Chundrigar has pointed out that, presumption as contemplated by section 306(1)(a) would be drawn if a company after receiving a notice of demand has for thirty days neglected to pay the sum demanded or to secure or compound the same to the reasonable satisfaction of the creditor, but no particular form is required for such notice.

16. A somewhat similar question was dealt with by my learned brother, Syed Haider Ali Pirzada, J. In M/s. Habib Bank Ltd. v. M/s. Golden Plastic (Pvt.) Ltd. (J.Misc. No.70/1988) wherein it has been observed:‑‑ "

10. From a perusal of the above alleged notice, it is clear that it is actually an advice or request for adjustment of the amount within seven days failing which the petitioner wanted to dispose of the goods pledged with it as security and to appropriate the proceeds towards adjustment. In the notice, there is no indication at all that this is a notice under Section 306(1)(c) of the Ordinance. It is not necessary in law, that the notice should specifically mention Section 306(1)(c) of the Ordinance but there should be some indication given to the respondent that in case of non‑compliance with the terms of a notice, the petitioner will take steps for winding up of the Company under the provisions of the Ordinance. The petitioner did only mention the period of 7 days for adjustment. The petitioner only conveniently asked the Company to adjust the amount failing which it would take steps to dispose of the goods and to adjust the proceeds towards adjustment. Thereafter, it would take steps to institute the suit for recovery of the amount." It was consequently held:‑‑ "

11. The statutory demand under clause (a) of subsection (1)of Section 306 of the Ordinance must be in strict compliance with the provisions of that Clause and if these provisions are not strictly complied with, the demand, though followed by neglect of the Company to pay the debt demand, cannot be made the basis of presumption that the Company is unable to pay its debts. Clause (a) of subsection (1) of Section 306 of the Ordinance imposed a penal obligation upon the company and has, therefore, to be strictly construed. In the circumstances of the intant case and. following the principle in the above case, in my opinion, this cannot constitute as a valid notice under Section 306(1)(a) of the Ordinance and no winding up proceedings can be maintained on the basis of the letter (Annexure P/1). Accordingly, I hold that the notice given by the petitioner is not valid in law " Reference was made by my learned brother to the case of Parry & Co. Ltd. v. India Mechinery Stores (Pvt.) Ltd. (1979 TLR 1959‑1979 C.Cases).

17. A closer look at the notice in the present case shows that although there was reference therein to section 38 of the I.D.B.P. Ordinance, yet it was a pure notice of demand. Reference was also made therein to a suit which may be filed under the Banking Companies (Recovery of Loans) Ordinance, 1979 or any other remedy to which the petitioner may have recourse under any other law, and there was no specific reference to the provisions of section 306 of the Ordinance. However, notice may not specifically refer to section 306 of the Ordinance and still it may be construed as a notice under that section. Besides that, although only seven days' time had been given to the respondent to meet the demand or the requirements of the petitioner whereas, as pointed out earlier, the period referred to in section 306 which can attract the said presumption against a company is of thirty days but it is pertinent to note that under section 306 of the Ordinance, a I presumption against a company can be drawn if it has neglected to make payment within thirty days after ‑receiving such notice or has neglected to compund or secure the debt to the satisfaction of the creditor, but no obligation has been placed by the section upon the creditor to demand payment within a particular period of time or to intimate to the company that in case it fails to make payment or compound or secure the debt a presumption as contemplated by section 306 would be drawn or proceedings for its winding up would be initiated against it. Consequently, even if no period is specified in the notice by the creditor within which compliance is demanded by him or the period mentioned is other than that of thirty days, the law would still take its course and a presumption under section 306 of the Ordinance may still be drawn. Consequently, notwithstanding the fact that the period referred to in the notice, dated 28‑2‑1988, for compliance with the petitioner's demand was only of seven days and no option was given to the respondent to compound or secure ‑the debt, still presumption under section 306 of the Ordinance can be drawn. No doubt, my learned brother, Hyder Ali Pirzada, J., has held in the case of Habib Bank Ltd., referred to by me earlier, that notice of demand by the creditor to the company must give an indication that the former intends to initiate proceedings for winding up in case of non compliance with the terms of the notice by the latter, but with utmost respect, it may be pointed out that nothing can be spelt out from section 306 to support the view. Ignorance of law can hardly be pleaded as an excuse and if a company after receiving a notice of demand from its creditor as contemplated by section 306 of the Companies Ordinance, neglects to comply with its terms, it shall be deemed D to be unable to pay its debts and the onus, in that case shall be on the company to show that either the amount claimed by the creditor is not due or that the I company is commercially solvent, as the case may be.

18. It now remains to be considered whether the respondent has ceas9d to be commercially solvent, or that it is just and equitable that it should be wound up. In Messrs Madhusudan Gordhandas & Co, v. Madu Woollen Industries Private Ltd. (A I R 1971 S.C. 2600), the Supreme Court of India while determining a some what similar issue observed: "

21. Where the debt is undisputed the Court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt (See Re: A Company 94 S.J. 369). Where however there is no doubt that the company owes the creditor a debt entitling him to a winding up order but the exact amount of the debt is disputed the Court will make a winding up order without requiring the creditor to quantify debt precisely (see Re: Tweeds Garages Ltd., 1962 Ch. 406). The principles on which the Court acts are first that the defence of the Company is in good faith and one of substance, secondly, the defence is likely to succeed in point of law and thirdly the company adduces prima facie proof of the facts on which the defence depends." This case was followed by my learned brother, Saeeduzzaman Siddiqui, J., in Federation of Pakistan v. The Standard Insurance Company Ltd. P L D 1986 Kar. 409). In this case a petition for winding up of a company had been filed on the ground of its inability to pay its debts and it was held that where a denial of the company to pay the alleged debts is based on triable issues and is neither frivolous nor a cloak to avoid payment, the remedy by way of winding up thereof would neither be equitable nor justified in the circumstances.

19. Mr. A.I. Chundrigar has also invited my attention to a number of cases on the point. In the case of The Dinajpur Talkies, Ltd. (P L D 1959 Dacca 389), the winding up of Dinajpur Talkies Ltd., a private limited company incorporated under the Companies Act, was held to be just and equitable as the Court held that the company was not commercially solvent and there was no reasonable chance for it to do business in near future at a profit. Another case cited by Mr. Chundrigar is the case of Pakistan Industrial Credit and Investment Corporation Ltd., Karaachi v. National Silk and Rayon Mills Ltd. Lyallpur (P L D 1976 Lah. 1538), although in this case, the question before the Court was as to the appointment of a provisional liquidator. It was observed therein: "I am of the view that while dealing with the question of appointment of Provisional Liquidator and or winding‑up, "commercial and technical solvency" or otherwise is one of the relevant considerations, but this expression itself is a relative one. It depends upon the circumstances of each case whether a company is plainly, commercially and technically insolvent. In some cases, when it suspends its business and refuses to pay its creditors, it might be possible to give such a finding. In others, the adverse conduct of the Directors coupled with the bad state of affairs of the company, company qua its income, assets and/or liabilities might justify this finding; while some times the rate and speed of geometrical increase in debt liability exceeding the paid up capital on the one hand and refusal to pay the debts on the other hand, might be relevant factors for determining the commercial insolvency for the purpose of appointing Provisional Liquidator. In yet another category of cases, this point might be determined by consideration of the question whether the company can meet its current demands. In that context it would not be the determining factor as to `whether a company after conversion will be worth how much" See United Bank Ltd. v. Pak., Wheat Products Ltd. PLD 1970 Lah.

235. Thus to contend whenever it is found that the company has enough assets or that its current balance‑sheet gives a good picture, by itself, is enough to show that it is plainly, commercial and technically solvent, in the context of appointment of a Provisional Liquidator, would amount to laying down a very wide proposition which is not in accord either with the language of the statute or its plain meaning, and is therefore repelled." In the case of Khan Salah‑Din Khan v. The Frontier Sugar Mills (P L D 1957 W.P. Lah. 844), again the question before the Court was as to the appointment of a provisional liquidator. It was held that if the company suspends its business and refuses to pay its creditors, it must go into liquidation as it is plainly commercially and technically insolvent, and therefore, the appointment of a provisional liquidator would be urgently called for. In National Bank of Pakistan v. The Punjab National Silk Mills (P L D 1969 Lah 194), it was held that a creditor who is unable to obtain the payment of his debt has a right ex debite justitiae to a winding up order. In M/s. Khyber Textile Mills Ltd. v. M/s. Allied Textile Mills Ltd. (1989 C L C 1167), once again similar issues arose before a learned Single Judge of this Court and it was held that the object of the liquidation proceedings under the Companies Act was to find out solvency or insolvency of a company and not to settle claims of the Creditors. It was held that: "

7. The forum created under the Companies Act is not a substiuGute for a suit to recover debts, and as has been pithily remarked in Mullah Abdullah and another v. Saraya Rope Mills Ltd. (P L D 1971 Karachi 759) "unable" does not mean "unwilling". The main object of these proceedings, is to find out the solvency or the insolvency of the company, and not to settle the claims of the creditors. (See P. Satyarazu v. Guntur Cotton, Jute & Papers Mill Co., Ltd. (A I R 1925 Mad. 199) Mr. Ali Ahmed Fazeel has also referred to the case of In Re Cine Industries and Recording Co. Ltd. (A I R 1942 Bombay 231) wherein, on an analysis of the case of D. Devis & Co. Ltd. v. Brunswick Australia) Ltd. (A I R 1936 P.C. 114), the following tests were laid:‑ (a) Whether the substratum of the company is deemed to be gone (b) the object for which it was incorporated, had substantially failed (c) whether it is impossible to carry on the business of the company except at loss, (d) that there is no reasonable hope that the object of the trading at a profit can be attained (e) or that the existing or probable assets are insufficient to meet the existing liabilities. All that need to be said in this context is, that there was a lay‑off of the workers only for the period from March, 1976 to May, 1977. It is common knowledge that because of the international stagflation, the majority of the industries specially in the developing countries, Pakistan being one of them, had to pass throughsome trying period. The textile mills in particularly presented a pathetic picture: quite a number of them earned the dubious, distinction of being called sick mills. Prima facie, the respondents' company had assets enough to meet its obligations, in case it is found later on, to be liable for the same, Reliance was also placed by Mr. Ali Ahmed Fazeel on a number of authorities from these Courts and from foreign jurisdiction, in which the attempt by a creditor to bring pressure to bear upon its debtors to make them pay cheaply and expeditiously through winding up proceedings, has been deprecated as an abuse of the process of the Court. It is not necessary to refer to them, the principle being a settled one:' Reference has also been made by Mr. A.I. Chundrigar to the case of Cine Industries and Recording Co., Ltd. (A I R 1942 Bombay 231). In this case the test for determining whether a company should be wound up or whether a company is commercially insolvent at the date of the petition for winding up was held to depend upon the following factors: "Therefore on the authorities the position seems to be that the substratum of the company is deemed to be gone when (a) the subject matter of the company is gone, or (b) the object for which it was incorporated has substantially failed, or (c) it is impossible to carry on the business of the company except at a loss which has been construed by the Privy Council to mean that there is no reasonable hope that the object of trading at a profit can be attained, or (d) the existing and probable assets are insufficient to meet the existing liabilities:" In the case of Bengal Luxmi Cotton Mills Ltd. v. Mahaluxmi Cotton Mills Ltd. AIR 1955 Cal. 273, while deciding a similar question the Court held: "(6) In order to appreciate the passage correctly, it may be useful to recall what the position is as to making a winding‑up order against a company on the ground of its inability to pay its debts. The basis of such an order is that the company has ceased to be commercially solvent and, accordingly, it is fit and proper in the interest of the creditors and share‑holders not to allow it to function further as a company. When there has been a failure to pay a debt in accordance with statutory notice of demand, insolvency is to be presumed, but it may also be proved in other ways. The basis of a winding‑up order on the ground of a company's inability to pay its debts is however, always insolvency." In Parke Davis & Co. Ltd. Karachi v. Bliss & Co. Ltd., Karachi (P L D 1982 Kar. 94) winding up of the company was ordered on its failure to pay a debt in accordance with statutory notice of demand as no evidence .was brought on' record to show that the Company was otherwise solvent.

20. While keeping the above principles in view, it will now be seen on the basis of the facts disclosed in the respective affidavits filed on behalf of the parties, whether the respondent is unable to pay its debt to the petitioner or it has ceased to be commercially solvent.

21. There is no doubt that various amounts stated in the petition were advanced by the petitioner to the respondent as, there appears to be no controversy in this regard. The respondent has contended that the repayment of instalments had not yet fallen due but, according to the petitioner, in view of the terms agreed between the parties the petitioner had reserved for itself a right to reschedule the installments. Annexure A‑2, relied upon by the respondent itself, in C1.3 thereof at page 5, makes the following provisions in regard to repayment of debts: DURATION AND REPAYMENT: FOREIGN CURRENCY: Loan to be repaid in 10‑1/2 years including a grace period of 2‑1/2 years in 17 half‑yearly instalments commencing 2‑1/2 years after opening of L'C or in such instalments payable on different dates as the Bank may finally determine. LOCAL CURRENCY LOAN: Repayable in,16 equal half yearly instalments falling due on 31st March and 30th September whichever date occurs first after 24 months from the date of first disbursement." Clause (3) of annexure A‑2, therefore, shows that different terms have been agreed upon by the parties for repayment of foreign currency and local currency loans, respectively. Annexure A‑2 further shows that in respect of the foreign currency loan a clear power vests in the petitioner to reschedule the payment of instalments and the same could be done unilaterally by the petitioner. As far as the repayment of local currency loan is concerned Clause (3) of Annexure A‑2 shows that the same was repayable in 16 equal half‑yearly instalments falling due on 31st March, and 30th September, whichever date occurs after 24 months from the date of the first disbursement. Consequently, the contention of the respondent that none of the instalments had fallen due according to the agreed schedule of repayment appears to be devoid of force ex facie. The petitioner by virtue of section 38 of I.D.B.P. Ordinance was empowered to recall all such loans where the instalments had become overdue and were not paid by the respondent. It may be pointed out that it is not possible for this Court to go into the details of all the instalments due from and payable by the respondent but this is the position which has prima facie emerged from the respective affidavits filed by the parties. Mr. Chundrigar has also invited my attention to a letter dated 14‑6‑1984 written by the respondent to the petitioner, wherein the former has shown its inability to pay the latter's overdues and requested for a further loan of Rs. 7.5 million.

22. It has further been contended by the respondent that it is financially sound and possessed of favourable growth rate and its creditors and shareholders are fully satisfied with the functions of the company which, according to the respondent, is in good corporate health. However, no proof has been furnished by the respondent that its shareholders are satisfied with its functioning. An affidavit of one of the shareholders, S. Sabir Ahmed, has been filed but the same, in my view, is not sufficient to establish that even the other share‑holders are satisfied with the functioning of the respondent. The respondent has also shown that during the year 1987‑88 it had earned a profit of Rs.2.5 million but neither a certified annual balance‑sheet has been produced by the respondent nor an explanation has been furnished as to way the said loans have not yet been repaid by the respondent. A statement has been filed by the respondent (Annexure H) showing the present market value of the respondent as on 30‑6‑1988 as Rs. 3,24,10,263.80 but again, the question cannot be determined on the basis of the present market value of the respondent alone. No documentary proof has been furnished by the respondent to show that it is doing any business. There is, therefore, no documentary proof worth consideration furnished by the respondent to show that it is commercially solvent. On the other hand there is evidence to indicate that the respondent owes large sums of money to the petitioner which it has neglected to repay. There is also no evidence that any effort was made by the respondent either to discharge its liablities or compound or secure the debt to the satisfaction of the petitioner. Consequently, in my F opinion the presumption that the respondent is unable to pay its debts has not been rebutted by it. No doubt, a petition for winding up cannot become a substitute for recovery of dues, but the mere fact that the petitioner can also file a suit or similar proceedings for recovery of its dues cannot be pleaded as a valid defence to a winding up petition.

23. In the result, the respondent company is ordered to be wound up. The consequential orders in regard to the appointment of the official liquidator, etc shall be passed at the time of the announcement of this order. A.A./I‑105/K Order accordingly,