1993 PLP 94 (MLD)

In Union of India v. Gujrat Tobacco Co. and others AIR 1955 Calcutta 448 it was held: ‑‑‑ "Where there has been a failure to pay a debt in accordance with a statutory notice of demand, insolvency is to be presumed, but it may also be proved in other ways." The reference to "other ways" in that case must obviously be read in the light of the fact that there winding up was sought not only on the ground of non-compliance with the statutory notice but also on the ground that the company was insolvent in the facts and circumstances alleged in the petition for winding up. In the case of C. Hariprasad v. Amalgamated Commercial Traders Private Ltd. AIR 1964 Madras 519, the effect of the provisions of section 434(1)(a) of the Indian Companies Act, 1956, which is similar to section 306(1)(a) of our Ordinance of 1984 was considered. There, the observation of Rankin, CJ. in Japan Cotton Trading Ltd. v. Jajodia Cotton Mills Limited cited above, was referred to with approval and it was held:‑‑‑ "The object of section 434 is to create a fiction as to when a company can be deemed to be unable to pay its debts. If the case comes within the scope of that fiction, it will not be open to the company to say that in reality it is in a position to pay its debts. It will follow that in such a case it will really be unnecessary to enquire whether the company is in fact solvent or not:" and further, at page 523, that:‑‑‑ "It is plain, on a reading of section 434 of the Indian Companies Act, that the intention of the legislature was to enact a fiction for the purpose of finding out, where a company fails to meet the demand of a creditor notwithstanding the statutory demand upon it, whether such default must be regarded as tantamount to an inability on the part of the company to pay its debts. As we said, sub‑clause (a) of section 434(1) is distinct from sub‑clause (c) which relates to state of commercial insolvency. In that latter case it will no doubt be open to the Court to find out, on a consideration of the value of the existing assets and liabilities of the company whether it is really in insolvent circumstances. But in the former case no such investigation is called for; nor even can it be undertaken. It will be sufficient for the purpose if there be failure on the part of the company to meet the demand in terms of the statute." Mr. Noor Muhammad invited my attention to the case of Trade and Industry Publications Ltd. v. Industrial Development Bank of Pakistan PLD 1990 SC 768 wherein it has been observed, at page 774, as follows:‑‑ "Now it is well‑settled that when there has been a failure to pay a debt in accordance with the statutory notice of demand, insolvency is to be presumed though no doubt it may be proved in other ways." The observation in no way assists the company. In the first place, it reiterates that on failure to pay after service of statutory notice insolvency "is to be presumed"; and the right of a petitioner to prove insolvency of a company "in other ways" in no manner detracts from the presumption which arises upon the failure of the company to pay; secondly, the observation is supported by the case of Bengal Laxmi Cotton Mills Ltd. v. Mahalaxmi Cotton Mills Ltd. (supra) where, as stated above, winding up was sought not only on the ground of non‑compliance with the statutory notice but also on the ground that the company was, in the facts and circumstances of the case, insolvent, even otherwise; and, thirdly, the following passage from the judgment of Jessel, M.R. In Re: Imperial Hydropathic Hotel Co. (49 LT 147) was referred to with approval: ‑‑‑ "The rule is, no doubt, that when the debt is undisputed and is of sufficient amount, then he has a right to obtain payment by a winding up petition, if he has given statutory notice. Then we have to consider what is the meaning of a debt being undisputed. As I said in this case, there was no reasonable excuse for refusing to pay this debt or neglecting to pay it, but was there, under a mistake in law, a bona fide dispute‑‑something which should have prevented him from presenting the winding‑up petition? I do not think there was. I have looked through the correspondence, and I must say I have come to the conclusion that the writers of the letters on the part of those who disputed the claim of Mr. Batty had no clear idea of their position. They stated in one letter one thing, and in another letter another. But none of the letters appear to me to amount to this; we dispute your debt on any one of these grounds. They said in one letter, You did not lend it to our clients'. In another letter, `We have received no notice of your claim, and cannot admit any claim against these persons without evidence in support of it: Then they ask for particulars, but, when we come to the facts, we find this, that the creditors knew that they had a balance‑sheet with his name in it, and with the amount in; that they had paid him interest in April, receiving this demand in May for the 500‑‑‑the very people, and of course he would naturally think they were trifling with him, and that they knew the particulars. Besides that, he tells them this, and I think he might reasonably believe that they were playing with him. That is the view I take of the correspondence, and I am by no means unprepared to say this, that if they had put all those shadowy claims together in a letter, in the most distinct terms, the creditor would still have been entitled to think they were, to use a common phrase, making game of him‑‑‑that they could not be serious in such line of defence. Then he is entitled to say: `My claim is not bona fide disputed. You are amusing yourselves by weaving some cobwebs; but you do not intend to pay, and you know that this is nonsense, and that it is a mere excuse for non‑payment, or for obtaining delay.' It is not because a man says `I dispute the debt' that that makes it a disputed debt. He must give some reasonable ground, and if he writes a series of non‑sensual propositions, it appears to me the creditor is entitled to say: `You are merely amusing yourself by trying to put me off with vague and frivolous excuses‑‑‑you do not see any ground to dispute it in law'. It appears to me that this was not a case in which the creditor had notice of a bona fide dispute as to his debt, which would compel him to refrain from attempting to recover payment of what is really an undisputed debt, an undefended demand, by means of a winding‑up petition, and the result is, in my opinion, that he is entitled to succeed." The purport of the passage cited above is obviously that in a case where a statutory notice has been given and is not complied with, inability to pay the debt has to be presumed and the petitioner is entitled to a winding up order unless the debt is disputed bona fide. It is clear that the object of the legislature in enacting section 306(1)(a) of the Ordinance was to create a fiction for determining when a company was to be considered unable to pay its debts. The fiction so created has to be given full effect. In the present case, the company having failed to pay or secure or compound the debt within thirty days after receipt of the statutory notice, falls within the terms of that provision and must, therefore, be treated as unable to pay its debts even though it may in fact not be insolvent. It remains to be seen whether there is any bona fide dispute regarding the claim of the company. Mr. Noor Muhammad, the learned counsel for the company, submitted that the company does not owe any money to the petitioner because (a) the loan granted to it was not one in foreign currency but in Pakistan Rupees equivalent to specified amount of foreign currency, (b) the company was not responsible for fluctuation in rates of conversion of foreign exchange and (c) in any event the company has not only repaid the loan in full but has in fact paid the petitioner a sum of DM 91,111 in excess. It was contended that the petitioner originally gave the impression that it was advancing to the company a loan of Rs.1,750,000 equivalent to DM 1,470,

000. This impression, according to Mr. Noor Muhammad, was created by the several letters, copies of which are Annexures R/1 to R/9 to the counter affidavit, written by the petitioner to the company, on the subject of `Foreign Currency loan of Rs.17,50,000 (DM 14,70,000) equivalent" and "Foreign currency loan of Rs.17,50,000 equivalent". The counsel, however, made no attempt to explain how these words created or could create the alleged impression in the mind of the respondent. To my mind, the words, quoted above, clearly indicate the intention to grant a loan in foreign currency which was, at the rate then prevailing, equivalent to Pak Rs.1,750,000; otherwise, if the transaction was intended to by merely a loan in Pakistani currency there was no need to make any reference to the foreign currency. In any event, it is not disputed that the agreement dated the 19th January, 1968, expressly provides for a loan of DM 1,470,000; and since the intention of the parties is expressed in the agreement in clear and unambiguous terms, it is not permissible to refer to the letters for the purpose of either construing the agreement or modifying it. It is noteworthy that the plea as to the alleged impression has been advanced for the first time in these proceedings and no such objection was ever taken in response to the 'petitioner's demands‑ for repayment of the loan. The plea, in fact, is entirely frivolous. It was then contended by the counsel for the Company that, as shown by the account (Annexure R/62 to the counter‑affidavit) prepared by the company, not only is the company not liable to pay any money to the petitioner but that it has overpaid to the petitioner a sum of DM 91,

111. Mr. Noor Muhammad stated that this statement had been prepared in accordance with the terms and conditions of the loan agreement. The relevant terms and conditions of the loan agreement are contained in Article 1(5) and (8) and Schedule I to the agreement which are reproduced below: ‑‑ "Article 1(5): ‑‑The borrower shall pay interest on the loan at the rate of 7‑3/4 (seven and three quarter per cent including exchange risk commission) per annum. The interest will be payable semi‑annually on the dates of repayment of the loan on the principal amount of the loan withdrawn from the loan Account and outstanding from time to time. Art. 1(8)(a): ‑‑Except as PICIC shall otherwise require, the borrower shall repay the loan in accordance with the provisions contained in Schedule I annexed hereto. The repayment instalments as determined by PICIC on annuity basis and communicated to the borrower shall be binding on the borrower." Schedule I.‑‑Except as PICIC shall otherwise require the borrower shall repay the loan in twenty‑four (24) semi‑annual instalments commencing from the first day of July, 1971 and ending on the first day of January, 1983. The repayment instalments and interest thereon as determined by PICIC on annuity basis and communicated to the borrower shall be binding on the borrower." The company was, thus, in terms of the above provisions, required to pay the instalments towards repayment of the principal amount and also to pay, "on the dates of repayment of the loan" i.e. the dates on which instalments towards repayment of the principal amount were to be paid, interest on the amount of the principal outstanding from time to time. The argument sought to be advanced, on the basis of the statement (Annexure R/62), would appear to be this‑‑‑(a) that out of a total of Rs.53,96,566.80 paid by the company, the petitioner adjusted Rs.3,32,280.12 towards the principal and Rs.50,64,286.68 towards interest whereas it should have adjusted the amount of Rs.53,96,566.80 (equal to DM 1,153,517.84), as to DM 513,746.34 towards the principal and, as to DM 639,771.50 towards interest leaving a balance of DM 956,253.66 on account of the principal and DM 449,772.72 on account of interest; (b) if the petitioner had adjusted . the payments in the above manner, the amount remaining due to it would have been, as on the 1st January, 1983, DM 956,253.66, on account of the principal, and DM 449,772.72, on account of "accrued interest capitalised", making a total of DM 1,406,026.38; and (c) that as against the amount of DM 1,406,026.38 and interest due thereon up to the 1st July, 1988, making a total of DM 1,760,169.30, the company has paid the petitioner a total of DM 1,851,280/662, thus making excess payment to the extent of DM 91,111/362. There is no substance in the argument and it is, in fact, an obvious attempt to mislead. The company, as stated above, was bound to make payment of instalments in repayment of the principal on specified dates and, on the same dates, to pay the accrued interest on the amount of the principal which was outstanding. It is not the case of the company that, while making payment, it had stipulated that any payment was to be appropriated towards either the principal or the interest either wholly or in part. The petitioner was, therefore, entitled to appropriate the payment either towards the principal or the interest and the company cannot be heard to complain against the manner in which the petitioner appropriated the payments; and since‑the argument is structured on a false premise, it falls to the ground with the premise. Further, Mr. Hamid Hussain, the learned counsel for the petitioner, submitted that the statement is not correct because interest has not been calculated on the amount of the principal outstanding from time to time as stipulated by Article 1(5) of the agreement. Mr. Noor Muhammad did not contest this submission. Mr. Hamid Hussain also pointed out that the company has, by its several letters (including Annexure R/24 to the counter‑affidavit) admitted its liability. This, again, was not contested by Mr. Noor Muhammad. Thus, the statement (Annexure R/62) is not only without any basis, but has obviously been contrived by the company for the purposes of the present proceedings, for had it overpaid the petitioner to the extent of substantial amount of DM 91,111 as far back as 1988 it would certainly have attempted to recover it from the petitioner when notice of demand, dated the 9th January, 1989, was delivered to it or at least before the present petition was filed. It was then contended, on the basis of the judgment in the case of Pakistan Industrial Credit and Investment Corporation v. Mehboob Industries Ltd. 1980 CLC 249 that the company is not responsible for fluctuation in the rates of foreign exchange and that the liability of the company has to be calculated at the rate of exchange prevailing on the date when each instalment became due and payable. Mr. Noor Muhammad, however, conceded that, in view of the provisions of the Foreign Currency Loans (Rate of Exchange) Order, 1982 (President's Order No.3 of 1982) the rate of exchange applicable is the rate in force on the day on which the loan is actually repaid. Mr. Noor Muhammad then referred to the pleas, taken in the counter affidavit, to the effect that the President's Order No.3 of 1982 is discriminatory and that claim of the petitioner is ultra vires objects. He, however, did no more than mention those pleas in passing and advanced no argument whatsoever in support thereof. Finally, the learned counsel for the Company submitted that the financial position of the company is sound and that it has assets of more than Rs.19 crores. In support of the submission he relied on Annexures R/60 and R/61 to the counter‑affidavit. The argument does not pertain to the question of bona fide dispute regarding the debt and is, therefore, not relevant; and, if it was intended to show that the company is solvent, it is not available in view of the consequences of the statutory notice given to it and its non‑compliance therewith. Similar argument was advanced in the case of Trade and Industry Publications Limited v. Industrial Development Bank of Pakistan (supra) and was repelled because the appellant had failed to reply to the notice served under section 306 of the Ordinance; and in the case of Modern Poultry Farm Limited v. Industrial Development Bank of Pakistan (Civil Appeal No.4 K/1990) the argument that the assets of the company were greater than its liabilities was rejected and it was held that a company with assets larger than its liabilities may be wound up if it is unable to pay its debts in terms of section 306 of the Ordinance or if it becomes commercially insolvent or when it is just and equitable that it should be wound up. Mr. Noor Muhammad cited the cases of Mulla Abdullabhai v. Industrial Development Bank of Pakistan PLD 1971 Kar. 597; Khyber Textile Mills Ltd. v. Allied Textile Mills Ltd. 1989 CLC 1167; Satyarazu v. The Guntur Mills Co. Ltd. AIR 1925 Mad. 199; Federation of Pakistan v. Standard Insurance Company Ltd. PLD 1986 Kar.409; Industrial Development Bank of Pakistan v. Modern Poultry Farm Limited 1990 CLC 1030 and Trade and Industry Publications Ltd. v. Industrial Development Bank of Paksitan PLD 1990 SC

768. The rules that a company cannot be wound up if there is a substantial and bona fide dispute regarding the debt claimed and that presenting a petition for winding up with the object of only bringing pressure to bear upon a company to make it pay cheaply and expeditiously a debt which is disputed have been reaffirmed in those cases; but in the light of the foregoing discussion, those rules are not germane to the facts of the present case. In the event, I direct the company be wound up. The Official Assignee shall be the Official Liquidator of the Company. Mr. Noor Muhammad had requested that if the company is ordered to be wound up, the order may be suspended for six months to enable the company to negotiate a settlement with the petitioner. The request for a suspension for six months is not reasonable. The order, however, will not take effect for a period of one month from today. AA./P‑254/K Order accordingly.