1986 PLP 1989 (CLC)

The plaintiff desirous of making investment in an industrial undertaking at Karachi was approached by defendant No. 4 the son of defendant No.1, representing to be the authorised representative of the share holders of A1‑Athar Limited the defendant No. 2, for the sale of the entire undertaking of the defendant No.2 free from all encumbrances and transfer of the entire share holding of the Company to the plaintiff for Rs.13, 50,

000. It was represented that the defendant No.2 hereinafter referred as the company was equipped with new machinery installed in the year 1965, had the capacity of manufacturing 80 sheets of chip board per shift of eight hours and was making an annual profit of Rs.2 lacs. Kurban Hussain defendant No.4 undertook to supply all the balance‑sheets, profit and loss account, Income‑tax assessments and statutory records of the company for scrutiny by the plaintiff before entering into agreement of sale of the share holding of the company. On the representation of defendant No.4 the plaintiff was agreeable to purchase the share holding of defendant No. 2 on the aforesaid condition. It is alleged that defendant No.1 requested that he needed money urgently to clear outstanding dues of the company which money would be kept as 'Amanat' and will be refundable if the present transaction failed. The plaintiff paid to defendant No.1 $x.1,50,000 against a receipt, dated 2‑6‑1971. The plaintiff was waiting for the documents and records for inspection but instead he received a letter, dated 17‑6‑1971 from the defendant's representative calling upon him to make further payments of Rs.3,00,000 which was payable on 15th June 1971 and the balance of Rs.9, 00, 000 by the 30th June, 1971. The plaintiff replied denying the allegations and contended that Rs.1,50,000 was deemed to be 'Amanat' till necessary documents and records were furnished for inspection and called upon the defendants to produce the said documents. There was lengthy correspondence between the Advocates of the parties and ultimately the plaintiff filed this suit for recovery of Rs.1, 50,

000. Originally the suit was filed against defendants Nos.1 to 5 but latter on defendant No. 6 was added. During the pendency of the suit the defendant No. 1 also died. The defendants Nos. 3, 4, 5 and 6 are the legal representative of defendant No.1. The defendants filed their written statement and denied that the defendant No.4 had approached the plaintiff for sale of the entire undertaking of the company. It was pleaded that the plaintiff had approached through his agent. It was denied that any representation was made by defendant No.2 regarding the machinery having been installed in the year 1965 and the, company making profit of Rs.2 lacs annually. It was, however, admitted that during preliminary negotiation tile defendant No. 4 had indicated the capacity of the machinery for manufacturing 80 sheets of chip board per shift. The defendant No. 4 had offered to produce for inspection the documents required by the plaintiff for his satisfaction before and not after entering into an agreement of sale. it is denied that the defendant No. 1 made a request for payment of Rs.1,50,000 but it is admitted that the said amount was received but not as 'Amanat'. It is pleaded that after thorough scrutiny of all the documents and repeated inspection of machinery, building and records the plaintiff entered into an agreement for purchase of entire share free from all encumbrances and paid Rs.1,50,000 by way of advance and or part payment towards sale price of Rs.13,50,

000. It is denied that subsequent to the agreement the plaintiff requested to defendant No. l to produce any documents. It was agreed that Rs.3,00,000 will be paid by the plaintiff on or before 15‑6‑1971 and balance of Rs.9,00,000 on or before 30‑6‑‑1971. The defendant No.1 tried to contact the plaintiff on telephone on 16‑6‑1971 but as he could not be contacted a letter was addressed on 17‑6‑1971. The defendants further pleaded that they have been ready and willing to perform their part of the agreement. The exchange of letters was admitted by the defendants and it was pleaded that as Rs .1,50,000 was paid by way of advance and not as 'Amanat' and breach has been committed by the defendant. they reserve their right to claim damages or for specific performance of the agreement. On the basis of pleading the following issues were framed:‑ (1) Whether the amount of Rs.1,50,000 paid by the plaintiff to the defendant No.1 was by way of Amanat or by way of advance and/or part payment towards the sale price of Rs.13,50,000 of the share holdings of At‑Athar Limited? If so, what is the effect? (2) Whether the plaint discloses any cause of action against the defendants Nos. 2, 3, 4 and 5? (3) Whether the plaintiff is entitled to the refund of the said amount? (4) Relief? Issues Nos. 1 and 3: The plaintiff has claimed Rs.1,50,000 which according to him was paid to defendants Nos. 1 and 2 as Amanat which was to be kept by these defendants on the condition that in case the transaction materialised it was adjustable in the sale consideration but if it failed this amount was to be refunded to the plaintiff. There is no dispute that the amount claimed by the plaintiff was paid by him to defendants No.1 and 2 towards that transaction for purchase of share holdings, assets and machinery etc. of the company. The defendant No. 4 is the son of the defendant No.1 and had representated himself to be the duly authorised representative of the share‑holders of the company and had negotiated sale with the plaintiff. The point of dispute between them is that the plaintiff claims that Rs.150,000 was paid as Amanat on conditions stated above. The defendants have taken the plea that the amount was paid as an advance towards sale consideration and the question of refund in view of breach committed by the plaintiff does not arise. It is also stated by the defendants that this amount was paid after the parties had agreed and firm deal had been made and not that the agreement was to be made subsequently. This amount was paid on 2‑6‑1971 and a receipt was executed by the defendants which reads as follows: "Received with thanks Rs.1,50,000 (Rupees one lac and fifty thousand only) from Mr. Sajjad Hussain son of Mr. Jiwaji as advance against sale of Al‑Athar Limited with all its assets for Rs.13,50,000 (Rupees thirteen lacs and fifty thousand only) without cash in hand bank balances and Sundry Debtors, and free from all encumbrances." From the evidence it is clear that the plaintiff was interested in purchasing; the running factory of defendant No. 2 with all its assets free from encumbrances. The mode of transfer was by transferring the share holdings of the company in favour of the plaintiff. The plaintiff has stated that he was taken by defendant No. 4 to his father the defendant No.1 and there it was agreed that the running factory will be sold to him for a sum of Rs.13,50,000 and during this deal the defendant No. 1 asked for advance payment for documentation which was paid on the understanding that in case the dealing is finalized the amount will be adjusted and if dealing falls through it will be refunded. The defendants do not deny the transaction but their contention is that Rs.1,50,000 was paid by the plaintiff after due inspection of records and machinery when he had agreed to purchase it. It is clear that although no formal agreement was executed, the defendant No.1 had agreed for sale of the factory for Rs.13,50,000 and an advance amount of Rs.1,50.000 was paid by the plaintiff. If the amount was to be paid as Amanat it ought to have been mentioned in Exh.5. There is no reference to the nature of payment as Amanat. On the other hand it clearly states that Rs.1,50,000 was paid as advance against sale of A1‑Athar Limited and the sale consideration of Rs.13,50,000 was also specified in it. According to the defendants prior to the agreement as witnessed by Exh.5, dated 2‑6‑1971 the plaintiff had thoroughly examined the documents, machinery and affairs of the company. The defendants have, however, avoided to give any specific date of such investigation which were made by the plaintiff. The plaintiff has stated that he had seen the factory from inside but did not. thoroughly inspect. He was shown the grinding machine and motor in working condition. The presses were not shown in running condition and he had inquired about the ownership of the factory. The defendant No. 4 had agreed to show the documents afterward. The statement of the plaintiff seems to be correct as there is nothing on record to show what documents were shown and in what manner the plaintiff was satisfied with the working and marketable clear title of the defendant No. 2 and its share holdings. It clearly emerges from the evidence that at no stage any document was furnished to the plaintiff. The defendant No.4 has stated that a copy of the audited balance‑sheet was given to the plaintiff but the same has not been filed in Court. Audited balance‑sheet is not the only document from which a purchase can satisfy himself about the working, production capacity, title and nature of encumbrance and liabilities. This could be ascertined by inspection of account books, title documents, income‑tax record and record of production, etc. The statement of D.W.1 is vague, most unspecific and does not inspire confidence. D.W.1 was not the director or share‑holder of the company. He does not state that he had personally given documents for inspection. The inspection if any would have been offered by any director, secretary accountant or employee of the company. No such person has been examined to prove it. In fact the defendants have not produced any independent witness to establish their plea. It is clearly established from the evidence of D. W.1 that necessary documents were not supplied by the defendants to the plaintiff. D.W. 1 in his cross‑examination has stated as follows:‑ "It is correct that we contracted to sell the factory to plaintiff free from all encumbrances. The occasion for supplying documents to show that it was free from all encumbrances did not arrive." The defendants were bound to furnish and supply documents to prove that the defendants had dear and marketable title free from all encumbrances and liabilities. This is the duty of a seller which he has to comply even if there is a concluded contract between the parties to purchase the factory. The defendants failed to perform their part of the agreement. It, therefore, seems clear that without such documents having been supplied to the plaintiff he could not have proceeded further to discharge his obligations. My finding is that the amount was paid by way of an advance towards the sale price of Rs.13,50,

000. It is to be considered whether the plaintiffs are entitled to the refund of Rs.1,50,

000. The advance paid by the plaintiff was 'to be treated as part of the purchase money if the transaction had completed and not fallen through. 1`f was in the nature of earnest money. Where the transaction fails due,1 to the default of the vendee, the vendor is entitled to forfeit the entire or part of the earnest money, depending on the circumstances of the case. The earnest money or the advance amount is paid at the time of the contract it order to bind the party to the bargain. In Ebrahim Saley Mayet v. Ghulam Hussain Pakseema PLD 1960 Kar. 297 it was observed that earnest money is part of the purchase price when the transaction goes forward It is forfeited when the transaction falls through by reasons of the fault or failure of the purchaser. In Tanzeem Overseas v. Zainab Bibi P L D ly65 Kar. 274 it was held that where the contract is illegally rescinded by the vendee, the vendor is entitled to forfeit the entire or part of the earnest money. The entire earnest money cannot be forfeited unless the vendee proves to have suffered damages to that extent. In this regard instructive discussion is found in Mistri Patel's case P L D 1969 S C

80. On the other hand if the vendor commits breach and the transaction does not go forward he is liable to repay the earnest money to the vendee. In the present case the defendants have committed breach inasmuch as they had failed to supply documents to show clear title, therefore, the contact could not go forward. D.W.1 has stated that they have sold the factory for Rs.12,00,000 but no proof of sale has been produced. In the circumstances the defendants are not entitled to forfeit or appropriate Rs.1,50,000 which the plaintiff is entitled to recover from them. Issue No. 2: The defendant No. 4 had negotiated sale on behalf of the defendants and Rs.1,50, 000 were paid to defendant No.

1. During the pendency of the suit the defendant No.1 died. The defendants Nos. 3 to 6 are his legal representatives who have inherited his interest in the property. In the facts and circumstances stated under issues Nos. 1 and 3 and this issue the plaintiff has cause of action against all the defendants. Issue No.4: The suit is decreed for Rs.1,50,000 against the defendants jointly and severally with interest at 10% P. A. from the date of suit till recovery with costs. M'Y.H. Suit decreed.