P L D 1997 Karachi 416 (PLP)

Petitioners, syndicate of Development Finance Institutions have brought this petition under section 305 read with section 309 of the Companies Ordinance, 1984 (hereinafter referred to as the Ordinance) for winding up of the respondent-company for the reasons firstly that the respondent did not commence commercial production within one year of its incorporation which was extended by one year; secondly that it has been unable to pay its debts despite repeated demands; and, thirdly that the project is lying closed since March, 1993.

2. At the request of the respondent, a public limited company for financing their project for manufacturing of PVC/PU coated material at Hub Chowki (Balochistan), petitioner No. 1 by means of letter of sanction dated 5-7-1987 approved financing of the said project in various lines of credit. Different loans both in foreign as well as local currency totalling Rs.69.796 million were .proposed to be advanced by the petitioners as shown in the sanction letter. Before execution of the loan investment agreements, the project was reappraised and finally loans totalling Rs.54.720 million were granted to the respondent for the said project. Pursuant to the sanction of the revised financing as reflected in the Letter of Sanction dated 29-3-1989, the petitioners' syndicate members and the respondent signed and executed loan/investment agreements both in local as well as foreign currency to be utilized for completion of the project. The agreements and the schedules thereto inter alia provided the terms and conditions for disbursement of loan, interest/mark-up, repayment of instalments of loan and other charges, execution and implementation of the said project including cost of plant, machinery, equipment etc. and services relating hereto. Various amounts advanced by the petitioner DFIs are mentioned in para.7(B) of the petition.

3. By way of acknowledgement of respondent's liability for payment of the loan/investment, respondent-company was required to issue in favour of petitioners Nos. 2 to 6 Term Finance Certificates of amount of purchase. Besides it was to appoint a nominee of the petitioner's syndicate as trustee and to execute in its favour registered mortgage over all the movable and immovable assets including its uncalled capital, book debts and investment property to secure payments of purchase price and redemption of the Term Finance Certificates (TFCs) and all other dues payable thereunder. Accordingly a Trust Deed dated 12-3-1990 was executed between respondent and petitioners' nominee which was duly registered with the Sub-Registrar on 12-3-1990. An agreement for financing locally manufactured machinery dated 13-12-1989 was executed between the petitioner No. l and respondent for Rs.1,08,16,000 being contract price of machinery at which the supplier agreed to manufacture and deliver the same in the sum of Rs.2,05,12,090 being the aggregate of the contract price and mark-up thereon at which the respondent agreed to purchase the machinery from the petitioners. The purchase price was to be repaid by the respondents in accordance with the repayment schedule vide Schedule-A to the said agreement. Amounts due from the respondents were secured through a mortgage by deposit of title deeds of all movable and immovable properties of the company and the mortgage so created was to rank pari passu with the mortgages floating charges and hypothecation already existing in favour of the petitioners. Mortgage/charge thus created were duly registered with the Joint Registrar, Joint Stock Companies Sindh. Moreover respondent-company entered into a short-term, Term Financing Certificate agreement for Rs.13.600 million with the Investment Corporation of Pakistan led consortium on 22-5-1990 the purchase price whereof amounting to Rs.23.330 million was to be paid by the respondent-company on or before 30-6-1993 in lump sum out of the proceeds of public issue. A short-term working capital finance amounting to Rs.10.00 million on mark-up basis was approved and sanctioned by the petitioner No. l at the request of the respondent vide sanction letter dated 5-12-1990 which was to be utilized for purchase/manufacture of PVC coating material, the sale price whereof was agreed at Rs.10.00 million and the purchase price at Rs.12;627,

945. Various memorandum of deposit of title deeds and undertakings were executed by Directors of the respondent-company for redemption of the loan/investment However, respondent in breach of terms and conditions of the loan agreements committed default in repayment of the principal as well as interest and mark-up as stipulated in the respective agreements. The company also failed to start commercial production within the stipulated period i.e. May, 1990 which Was extended by 13 - months from May, 1990 to July, 1991. but it failed to sty production. Finally date for commencement of commercial production Was extended up to July 1, 1992 but without any success. In view of poor corporate behaviour of the respondent-company, an officer of petitioner No. f went to the said project's site on 14-7-1993 which was found closed and main gate of the processing hall was sealed/locked from outside. It is the grievance of the petitioners that in spite of attempts to accommodate the respondent by reconstructing and rescheduling the loans, the respondent continued to be persistent defaulter in making repayment of instalments, interest, mark-up Aid other charges as specified in the agreements. Lastly petitioners served statutory notice dated 2U-10-1994 under section 306 of the Ordinance calling upon flit respondent to pay amount due as on 31-12-1993 but they failed to comply with the demand contained in the notice and sent an evasive reply hence this petition.

4. Respondent resisted the petition and filed a counter-affidavit stating that the respondent is a solvent company which could not be said to be unable to run the project or to liquidate its liabilities. According to company assets thereof are of higher value than its liabilities and there is no mismanagement, malfeasance or misfeasance in the company. It is denied that the project is closed since March, 1993. According to the respondent with great efforts and by investing huge amounts from its own sources the companys became able to operate the project into full swim of commercial production when the petitioners filed this petition with mala fide intention to ruin the company and to recover huge unjustified excess amount. The respondent has questioned the conditions of interest, penal interest, mark up on mark-up, penal mark-up and liquidated damages as unlawful and un-Islamic. As to the repayment of loan/finance, it said that it was payable after one year of the commencement of the commercial production thus the petition is premature and filed mala fide. Without asserting whether any instalment was paid, respondent denied that the company is unable to pay its debt::. Counter-affidavit was followed by an affidavit in rejoinder controverting the position taken by the respondent and supported by detailed statements of accounts in respect of the respondent-company reflecting outstanding balance of Rs.8,59,08,696 as on 31-10-1996. `

5. At the hearing of the petitioner, learned counsel for the respondent seriously assailed and impugned various allegations made by the petitioners and submitted that non-commencement of commercial production was due to technical factors and paucity of funds up to 1-7-1991. He referred to the averments in the petition reflecting that the period for commercial production was extended from time to time due to technical difficulties faced by the respondent-company in the execution and implementation of the project and company.. It has, therefore, been said that a company may not be solvent and yet be wealthy at the same time. It will be so when it has locked up investments but has not assets available to meet its current liabilities. Surely such a company, would be commercially insolvent. " In para. '14 of the report Supreme Court observed that they had to confine their decision to the requirement of section 305 of the Companies Ordinance which provides tire situations in which _a company, may be wound up. Their Lordships expressed the view that the substratum of the company had disappeared and it was no longer possible for it to commence operation. In these circumstances Supreme Court formed the view that it is just and equitable that the company should be wound up.

10. In- Ali Woollen Mills Ltd. v. Industrial Development Bank of Pakistan PLD. 1990 SC 763 it was held.. that a company may be rich, yet it may be commercially insolvent. The real criterion is whether it could meet its liabilities. The Court has to see whether the company is commercially insolvent i.e. whether it is unable to meet its current demands although the assets when realised may exceed its liabilities. If the company ,is commercially insolvent it may be wound up. In the said report Supreme Court observed that the substratum of the company would be gone as the company's mill was closed since 1983 and it had been incurring losses year -after yeas with no immediate prospects of reversing the positron. The substratum of the company must be deemed to be gone so as to entitled the Court to pass a winding up order when the subject-matter of the company was ,.,gone or the object for which it was incorporated had substantially failed', or it was impossible to carry on the business of the company except at a -loss or the probable assets were insufficient to meet the existing liabilities. ' - ''

11. In the present case respondent-company has not cared to bring on record any material to show even prima facie whether the assets of the company exceed the liabilities against it. Needless to observe the huge amount received from the petitioners' syndicate 11 'seems' to have been misappropriated and not utilized for the project as no evidence is forthcoming to reflect that the respondent bona fide tried their level best to accomplish the task. . 12, _ For the aforesaid facts and, reasons, I am of the confirmed view that a fit case for winding up of the respondent-company is made out and apart from the , fact that the respondent-company could not commence. its commercial production within more than reasonable time and it is lying closed since March. 1993, it is unable to pay its debts and thus it is just and equitable to .direct its winding up. It is ordered accordingly. Official Assignee of Karachi is appointed as Official Liquidator, with, all powers under the Ordinance to take over the affairs of the company. ,..: A.A. /B-18/K Order accordingly