P L D 1957 (W (PLP)

MUHAMMAD SHAFI, J.‑

The Frontier Sugar Mills and Distillery Limited with its Head Office at Takhtbai, District Mardan, hereinafter called the Company, was incorporated in 1938 with an authorised capital of twenty lacs of rupees later on increased to thirty lacs. It has eight Directors, namely, Fida Muhammad Khan, Advocate, Chairman, Mr. Taj Muhammad Khanzada, Managing Director, Mr. Dost Muhammad Khan of Sher Pao, Sahibzada Muhammad Alamzeb Khan of Kotah, Mr. Abdus Sattar Khan of Takhtbai, Mr. Muhammad Ali Khan of Hoti, Mr. Khawas Khan of Shadi Khan and Mr. Sorab Hayat Khan of Baghdada. I am informed that it has about 1200 shareholders. Out of them. six share holders by the name of Salahuddin Khan, Jamshed Khan. Abdul Akbar Khan, Muhammad Yaqub Khan, Muhammad Ayyub Khan and Taj Muhammad Khan (not the Managing Director) have made an application under sections 162 and 166 of the Companies Act VII of 1913, for the winding up of the Com pany. They have in the meantime applied under section 175 (2) of the Companies Act, for the appointment of a Provisional liquidator of the Company. It is this application which is required to be determined by me. At the very outset I wish to make it perfectly clear that whatever I say or hold in this order will be strictly restricted to the question whether or not on the material placed upon the record, a case for the appointment of provisional liquidator has been made out. I must not be taken to express any opinion in respect of the main petition which shall have to be decided on the evidence that the parties may like to adduce. At the present moment all that I have before me is the affidavits and counter‑affidavits thrust upon me as the occa sion arose and which for the obvious reason that the makers thereof have not been subjected to cross, examination by the opposite party cannot be accepted as legal evidence as the is understood to mean by the Evidence Act. On several points assertions made in one affidavit are refuted by the counter‑affidavit, and therefore, it will entail an elaborate and detailed inquires before a final opinion is formed on the disputed points. It will, therefore, be dangerous to hold certain points as proved or disproved on these affidavits alone at this very‑ preliminary stage of the case, although they may afford good ground to form a prima facie view on some of its aspects. Section 175, subsection (2) of the Companies Act which empowers the Court to appoint a provisional liquidator in so far as its terms go is general in character and absolutely unqualified. This shows that no hard and fast rule is laid down in this respect and the question must be determined by the Courts with reference to the facts and circumstances on each particular case. This power, however, should not be exercised arbitrarily or capriciously, but reasonably, ‑and in accordance with the recognised principles of natural justice. While appointing a provisional liquidator it must be borne in mind that the consequences that may flow from it may well be very grave It may paralyse the affairs of the Company permanently and disrupt it while it still has all the prospects of being run smoothly and slovenly. It is a very drastic step which must only be taken when absolutely essential and as a last resort. Section 174 of the Companies Act makes it the statutory duty of a Court on all matters relating to winding up to have regard to the wishes of the creditors or contributories as proved to it by any sufficient evidence. Although the word used in this section is may the very insertion of this section in the Companies Act shows that normally the Court must give serious consideration to the wishes of the majority of the creditors or contributories. The use of the word "may" only shows that the Court has the discretion to disregard such wishes in certain circumstances, for example "where a single person has a controlling interest or where the majority consists of persons whose conduct is impugned or where the scheme of reconstruction suggested by the creditors is entirely illusionary and unpractical." This section applies as soon as a petition for winding up is presented, and therefore, in the question of the appointment of a provisional liquidator also what has to be kept in mind is me greater interests and wishes of the contri butories and the creditors. Request for the appointment of the provisional liquidator may be the result of one or more disgruntled shareholders' spite or it may be full of dangerous potentialities which may not be very easy to see in the early stages of the case. So the Courts have to be extremely cautious. They must suppress all attempts calculated to destroy the Company, and thus by diminishing the sense of confidence which the public would have in it force it to become insolvent. It is for these reasons that the Courts generally have not appointed the provisional liquidators unless the Company is plainly, commercially and technically insolvent. If the Com pany suspends its business and refuses to pay to its creditors and no doubt whatsoever is left that it must go into liquidation, then it is plainly, commercially and technically insolvent, and therefore, the appointment of a provisional liquidator is urgently called for. Such an appointment is also necessary if the directors of the Company themselves demand it or do not oppose it. Again in cases where it is quite apparent that the Directors or the servants of the Company are tampering with the records or destroying them or are misappropriating the Company's money then it may become necessary in the larger interests of the contributories and the creditors to appoint a provisional liquidator in order to protect the assets of the Company. Such a liquidator may also be appointed if a fair majority of .shareholders passed a genuine resolution that the Company should be wound up or the creditors in spite of their best efforts have not been able to realise their debts and this can by clear evidence be attributed to the financial difficulties of the Company. The authorities on the subject are very few but are very definite. The leading and the basic authority is London, Hamburg and Continental Exchange Bank case popularly known as Emerson's case (1886 L R 2 E C 231), Lord Romilly, the Master of Rolls, observed in his judgment as under :‑ "It is perhaps convenient that I should state what my practice is with reference to the appointment of provisional liquidators. Where there is no opposition to the winding up, I appoint a provisional liquidator as a matter of course on the presentation of a petition. But when there is an opposition to it, I never do, because I might paralyse all the affairs of the company and afterwards refuse to make the winding up order at all. But when the directors themselves apply or do not oppose the winding up, then I appoint the provisional liquidator." Lord Romilly modified his view in a subsequent case in The Railway Finance Company Limited (14 W R 754), by saying "I do not appoint a provisional liquidator unless it appears that the Company cannot go on". The earliest case of India that has been cited at the Bar concerning this matter is Peoples Bank of India, etc. v. Narain Dass and others (31 P R 1914). In this case, Hon'ble Mr. Justice Rattigan appointed the provisional liquidator, because the Bank had admittedly suspended its business in its all branches and there was no doubt left that it must inevitably go into liquidation. In another case reported as the Punjab Pictures Limited Karnal v. Jhabar Mal‑Ganga Dhar (A I R 1949 (Punj.) 139), a Division Bench consisting of Teja Singh and Khosla, JJ. set aside the order of the single judge of that Court appointing a provisional liquidator. In that case, the appointment of the provisional liquidator was demanded on the ground that there was serious apprehension that unless such an appointment was made the accounts would be tampered with and such money and property as then remained would be misappropriated. His Lordship Teja Singh, J. who wrote the judgment accepting the appeal, observed as follows :‑ "Serious, though some of the allegations contained in the petition were, in my view, none of them justified the appointment of a provisional liquidator. It is not denied that the Company had all along been functioning and it was carrying on business in the ordinary course. Placing the entire management and conduct of such a Company in the hands of a provisional liquidator is in effect to put a stop to its business and it is well settled law that before such drastic step can be taken the Court must be satisfied that it is abso lutely necessary to do so." The last case cited is Gava Sugar Mills Ltd. (A I R 1950 Pat. 237), Mr. Justice Shearer ; dismissing the application for the appointment of the provisional liquidator, made the following observations:‑-- "Such an application is not ordinarily allowed except on the petition of a creditor who has been unable to obtain pay ment of his money, or unless the company asks for or agrees to the appointment. The dangers involved in appointing a provisional liquidator and then finding that there is no justification for making a winding up order are obvious. The consequences to the company of the making of a wrong order in such a matter are far more serious than the granting of an injunction which has ultimately to be dis solved. The object in appointing a provisional liquidator is to ensure that there will be a fair distribution of the assets of the company and that one creditor will not be permitted to benefit at the expense of the others". Some other cases were also cited at the Bar but I have not been able to find any relevancy of them to the facts of this case. The present case must now be examined in the light of the above observations in order to determine whether a provisional liquidator should be appointed or not. Point No. 1.

Is the Company plainly, commercially and technically insolvent ? Before going further into this question, I wish to reproduce here what the learned counsel appearing for the petitioners himself stated at the Bar, "The Company is commercially insol vent though not in fact insolvent". When asked what is the distinction between 'commercially insolvent' and 'in fact insol vent', the learned counsel submitted that if the liquid assets of the Company are sufficient to meet the creditors' demands, then it is commercially solvent, otherwise not. He admitted that the Company's total assets are more than sufficient to meet the creditors' demands, but he submitted that they. are not in liquid form, and so not easily available. The distinction in my view is extremely superficial. If the Company has got the assets, whether liquid or not, which can meet the demands of the creditors, then the Company is neither 'commercially insolvent' nor 'in fact insolvent'. The learned counsel, therefore, on his own admission is completely out of Court. In his reply, he made another significant admission that it is not the intention of the petitioners to stop the functioning of the Company. On the contrary, it is their desire that the Company should function, but under somebody else's management. This admission made it absolutely clear to me that the sole purpose of the application is to change the management of the Company, otherwise no one is anxious to have the Company wound up. The balance‑sheet and the accounts for the year ending the 30th of June, 1955, which seem to have been accepted by the shareholders, show that apart from the stock in hand and advance deposits, forward payments and sundry debtors, the Company has invested a considerable amount in National Saving Certificates, Defence Saving Certificates, Post Office Saving Certificates, Post Office National Service Certificates, Indian Government Loans and the Purchase of Shares in the Frontier Co‑operative Bank Ltd. It is stated on solemn affirmation in reply that ten lacs of rupees are at present lying to the credit of the Company in the National Bank of Pakistan in Mardan, and this fact has not been contradicted by a counter‑affidavit on behalf of the petitioners. There have then been placed upon this record letters from different banks allowing the Company to take advances to the extent of several lacs. The letter of the State Bank of Pakistan dated the 31st of August, 1956, fixes the limit at Rs. twenty five lacs. The National Bank of Pakistan has fixed this limit at Rs. twenty lacs by its letter, dated the 16th of August, 7957. The Australasia Bank Ltd., Peshawar City, and Frontier Co‑operative Bank Ltd. allowed the Company credit facilities upto Rs. twenty‑five lacs and Rs. thirty‑nine lacs respectively. These are all assets which are readily available. Surely if the Company was insolvent, all these Banks, and particularly the State Bank of Pakistan and National Bank of Pakistan would not have written these letters and placed huge amounts in jeopardy. All these facts prove affirmatively that prima facie the Company is not insolvent, either plainly, technically or commercially. Point No.

2. Has the Company failed to meet the demands of the creditors ? On this point, the learned counsel for the petitioners has not addressed me at all from which 1 gather that the petitioners have not been able to secure any creditor to complain that the Company has failed to meet his demand. Needless to say that no creditor has come forward to support the petitioners in their demand for the appointment of a provisional liquidator, Point No.

3. Is it the wish, or in the interest of the shareholders or the contributories, that the provisional liquidator should be appointed in the case ? As I have already stated in this judgment, out of 1200 shareholders only six have come forward to make this application. Salahuddin Khan (petitioner No. 1) is the sister's) son of Jamshed Khan (petitioner No. 2), who is the paternal uncle of Taj Muhammad Khan (petitioner No. 6). Petitioners Nos. 4 and 5, Muhammad Yaqub Khan and Muhammad Ayub Khan, are the sons of petitioner No. 3, namely, Abdul Akbar Khan, who also seems to be related to Salahuddin Khan. Later on, Abdus Sattar Khan, one of the Directors, also joined the petitioners in their prayer for the appointment of the provisional liquidator, but then this Abdus Sattar Khan is very closely related to Salahuddin Khan (petitioner No. 1) as has been admitted by the learned counsel for the petitioners. Abdus Sattar Khan's support was an invitation to the rest of the Directors to come into the field opposing the application; so amongst the Directors it is a case of one against nine. As regards the remaining shareholders, learned counsel for the petitioners stated that they would have joined the petitioners, ‑but they could not do so on account of the shortness of time. The petitions for winding up the Company and for the appointment of the provisional liquidator were presented to this Court on the 5th of August, 1957. This latter application was heard by me on 19th to 21st August, 1957. If more shareholders than those who had made this petition wanted the appointment of the provisional liquidator then they had ample opportunity to either put in an independent application or get themselves impleaded as petitioners in this case. The fact that no other shareholder has come forward in support of the application leads me to the irresistible conclusion that barring the six petitioners the rest of the shareholders are quite content with the present management and do not want any change to be brought about in it. It is difficult to accept these six shareholders as representing the view‑point of even the majority of the shareholders, what to say of all. That by itself refutes the argument that it is in the interest or desire of the share holders and contributories to appoint a provisional liquidator. In support of this argument some most serious and reckless charges have been brought against the Managing Director Khanzada Taj Muhammad Khan. He is said to have criminally misappropriated a large sum of money belonging to the Company, tampered with its record, fabricated false account‑books and lastly put the Company's property to his own private use. It is difficult to hold on mere affidavits that these exceedingly serious charges are proved against the Managing Director. It was open to the petitioners if they were sure that the Managing Director had misappro priated the money or tampered with the records to walk into the appropriate police station and lodge a report or put in a complaint in a Court of Law, or pass a resolution to that effect by simple majority in a Shareholders' Meeting. A fantastic statement, if I am permitted to say so with all respect to the learned counsel for the petitioners, has been made by him at the Bar, that right from the Ex‑Chief Minister Dr. Khan Sahib and the present Chief Minister Sardar Abdur Rashid down to the Muharrir of the Thana whose duty it is to record the report, every one is in the hands of Khanzada Taj Muhammad Khan, and they are protecting and shielding him and are not allowing any criminal proceedings to be started against him. It is difficult for me to believe that there is not one single individual in the hierarchy mentioned above, if the facts as alleged by the petitioners are correct, willing to take effective steps in the matter and stop Khanzada Taj Muhammad Khan from committing criminal acts. It is even now open to the petitioners to take such steps as they consider necessary in order to bring Taj Muhammad Khan to book. The learned counsel made an alarming statement at the Bar that Mr. Hukmet Khan, the Director of Industries, and Mr. Muhammad Ali, the Advocate‑General of the defunct North‑West Frontier Province fully knew of the criminal activities of Taj Muhammad Khan, but they did not take any step to prosecute him criminally. I am sure it is not true, but if it is, it is extremely regrettable. Still until it is definitely proved that Khanzada Taj Muhammad Khan is guilty of the offences enumerated by the learned counsel for the petitioners it is not possible for me to take notice of them and appoint a provisional liquidator for that reason. I must, however, make a pointed reference to the fact that Khanzada Tai Muhammad Khan around whom the controversy has raged has a predominant influence in the Company, because he has somehow or other managed to have all his relations posted at the key‑posts. ' It may not be illegal, but it is certainly undesirable and sooner this defect is removed the better, because if it is allowed to continue a stage may reach when the interests of the shareholders will be put in a precarious state. It is then submitted that most H of the Directors are the relations of Khanzada Taj Muhammad Khan and it is, therefore, difficult to conduct the business of the Company satisfactorily and independently of him. I admit it is also full of dangerous potentialities, but then there is nothing to show that any duly qualified shareholder who desired a seat on the Board was ever excluded there from. Since the day Taj Muhammad Khan has taken over the charge, it appears that the Directors and the shareholders for benefits resulting to them were well content to leave the management and the Company's affairs in his hands. If they want to bring about a change in the Company's management, then the Companies Act makes ample provision G for the same. The remedy surely does not lie in the appointment of the provisional liquidator. Thus, according to the material made available both by the petitioners and the respondents, the Company is carrying on business successfully, getting the accounts regularly audited and was also paying dividends to the shareholders and was meeting its current demands. The value of the shares has gone up considerably. There is nothing at present on the record to show that there are existing debts which the Company is unable to pay or it has failed to pay a debt in accordance with a statutory notice of demand. I also cannot find any material to show that it is the wish of, or would be in the interest of the general body of the shareholders to appoint a provisional liquidator. Proper business of the Company cannot be conducted if every shareholder out of sheer malice or who considers himself harmed, was allowed to run up to a Court of Law for the appointment of the provisional liquidator. There was, I think, no justification for snaking this application, and still less to accept it and appoint a provisional liquidator. It is, therefore, dismissed with costs. Counsel's fee Rs.

200. A.H. Petition dismissed.