2003 PLP 1075 (CLD)

Ss.306, 305, 314 & 452

Petition for winding-up of Company

Inability of the Company to pay its debts-- Preliminary objection to the maintainability of the winding -up petition was taken by the Company to the effect that the creditor had failed to comply with the requirement of S.452, Companies Ordinance, 1984

Validity

Company had neither in arbitration proceedings, nor in suits had raised such objection nor appeal was founded thereon

Such objection having been raised for the first time at the stage of winding-up petition was set at rest in the High Court appeal, more so the requisite compliance had been made by the creditor

By entertaining such objection which had been set at rest in High Court appeal, Company Judge would be overstepping his jurisdiction. Shahid Anwar Bajwa for Petitioner. Kazim Hassan for Respondent. Date of hearing: 26th February, 2003. This petition under section 305 of the Companies Ordinance, 1984 has been filed by the petitioner seeking winding-up order of the respondent-Company, beside other consequential reliefs flowing therefrom. Only ground on which winding-up order sought is inability of respondent Company to pay its debts. Brief facts that could be deciphered from the pleadings are that, the petitioner, a Russian International Airlines, appointed the respondent-Company as its General Sales Agent. It is the case of the petitioner that, the respondent-Company failed to make payment of the dues in respect of the amount generated by selling the services through sale of its tickets. Petitioner, through notice terminated the agency giving a cause to the respondent to file a Suit No.252 of 1995 for specific performance of the contract. Petitioner also filed a Suit No.569 of 1995 for the recovery of outstanding dues. Since the agreement between the parties provided for arbitration. Proceedings in both the suits were stayed and the parties were directed to resort to arbitration. From the record, it appears that an award was made in favour of the petitioner on 25-8-1997, same was filed in Court and registered as a Suit No.308 of 1998. Objections were filed by the respondent, such objections were dismissed on merits and an award was made rule of Court.' It was followed by a judgment and decree dated 19-4-1999. Against which, it appears that High Court Appeal No.239 of 1999 has been preferred, said to be still pending. The petitioner, however, instead of filing execution, served a notice in terms of section 306 of the Companies Ordinance, 1984 on 8-7-1999 calling upon the respondent to pay the decretal amount in the sum of Rs.35,356,171.60. Said notice was acknowledged. The amount demanded was not paid on the pretext that High Court appeal is sub judice, the demand raised is premature. Consequently, instant winding-up petition was filed. It may be observed that initially instant petition for winding-up was dismissed by a learned Single Judge in consideration of the fact that, the petitioner, a foreign company having failed to comply with the provision of section 451 of the Companies Ordinance, 1984, therefore, in terms of section 456 thereof, they are not entitled to file the proceedings. However, such order was successively assailed in High Court Appeal No.151 of 2000, the matter was remanded to be decided afresh on merits after hearing the parties in accordance with law. This matter has now come up before me for hearing and disposal in accordance with law. It was contended by learned counsel for the petitioner, Mr. Shahid Anwer Bajwa, that the respondent is liable under an award sanctified by a judgment and decree. He contends that despite notice under section 306 of the Companies Ordinance, 1984 the liability remained un-cleared. According to him, nothing more is required to be established to maintain a petition for winding-up on such ground. He further urged that now there are no reason to assert that the amount claimed by the petition is bona fide disputed-or that such controversy is yet to be decided. He was confronted that since appeal has been preferred and matter is sub judice. He replied that merely pendency of appeal will not, operate as a stay of proceedings nor deprived the petitioner of their rights to seek winding-up of the respondent. In support of his contention, he has relied upon the case-laws reported as (1) Amalgamated Properties of Rhodesia (1913), Limited (Chancery Division) C.A. 1917, Page 115, (2) W.T. Henley's, Telegraph Works Co. Ltd., Calcutta v. Gorakhpur Electric Supply Co. Ltd., Allahabad (AIR 1936 Allahabad 840), (3) National Bank of Pakistan v. The Punjab National Silk Mills Ltd. and others (PLD 1969 Lahore 194), (4) The United Bank Ltd. and others v. Messrs Pakistan Wheat Products Ltd. and others (PLD 1970 Lahore 235), and (5) Mrs. Sabiha Shahid Raza v. Ahmad Construction Company (Private) Limited (PLD 1990 Karachi 191). In contra, Mr. Kazim Hassain, learned counsel appearing for the respondent-company, contended that winding-up petition cannot be used as a substitute for recovery proceedings. According to him, there is a clear-cut distinction between a company that is unable to pay its debts and unwilling company. He further argued that there is nothing on record to show that the company is unable to pay its debts. As it is still a going concern. He further urged that since appeal has been preferred the bona fide dispute is still open to debate and final determination. In support of his contention, he has relied-upon the case-laws reported as (1) Mulla Abdullabhai and 9 others v. Saria Rope Mills Ltd. (PLD 1971 Karachi 597), (2) Messrs Khyber Textile Mills Ltd. v. Messrs Allied Textile Mills Ltd. (1989 CLC 1167), (3) Federation of Pakistan v. The Standard Insurance Company Ltd., Karachi (PLD 1986 Karachi 409), and (4) Pakistan Industrial Credit and Investment Corporation Limited, Karachi v. Messrs Bawany Industries Limited, Karachi (PLD 1998 Karachi 45). He further contended that merely unwillingness to clear the alleged liability, is no ground to maintain a winding-up petition. According to him, it is only when a company is unable to pay its debts winding-up could be resorted. To back-up such proposition, he has placed reliance on United Bank Limited v. Golden Textile Mills Limited (PLD 1998 Karachi 330) and K. F. Development Corporation Ltd. v. Messrs Dawood Cotton Mills Ltd. (1999 MLD Karachi 3260). He further urged that since judgment and decree is sub judice in appeal, entire matter has re-opened before the Court. It cannot be said that the disputed amount has been finally adjudicated, therefore, according to him; claim of the petitioner is still subject to adjudication and determination of the appeal and before it is finally decided up to the Supreme Court it cannot be said that the amount is due and payable. He lastly contended that winding-up petition in view of section 456 of the Companies Ordinance, 1984 is barred as the petitioner-Company admittedly maintaining its office, at Karachi and not complied with the requirements of section 451 of the Companies Ordinance, 1984. He further urged that section 456 of the said Ordinance, 1984 is analogous to the provision of section 69 of the Partnership Act, which bars filing of any suit or proceedings unless it is registered. He has placed reliance on (1) China Annang Construction Corporation through Project Manager v. K.A. Construction Co. through Attorney (2001 SCMR 1877), (2) Messrs Taj Construction Company v. Federation of Pakistan and 9 others (PLD 1982 Karachi 378), (3) Usman and another v. Haji Omer Haji Ayub and others (PLD 1966 SC 328), (4) K.K.A. Ponnuchami Goundar v. Muthusami Goundar and another (AIR (29) 1942 Madras 252), and (5) Messrs Shreeram Finance Corporation v. Yasin Khan and others (AIR 1989 SC 1769). Mr. Shahid Anwer Bajwa, learned counsel for the petitioner exercising right of rebuttal urged that the objections as to the bar of the proceedings was not raised neither before the Arbitrator nor in suit nor even in appeal, such objection cannot be raised at the time of arguments. He further urged that there is distinction in phraseology between section 69 of the Partnership Act and section 456 of the Companies Ordinance, 1984, according to him, section 69 of Partnership Act places a bar whereas the section 456, Companies Ordinance, 1984 does not bar the filing of the proceedings. He has relied upon a Division Bench judgment reported as Abdul Jamil v. Registrar of Trade Unions, West Pakistan, Lahore and. another (1971 PLC 507) to support his contention. After hearing the arguments of both the learned counsel, perused the material available on record and carefully scanned the case-laws cited at bar. Winding-up petition can be maintained by a creditor in terms of section 305 on various grounds enumerated therein. The ground which is relevant for the purpose of instant proceedings is section 305(e) i.e. "if the company is unable to pay its debts". What is meant by a company unable to pay its debts? Is further elaborated by section 306, which postulates the situation when company, is deemed to be unable to pay its debt for the purpose of bringing a winding-up petition. The deeming provision becomes effective when a demand is made by a creditor to whom the company is indebted in a sum exceeding one percent. of its paid-up capital or fifty thousand rupees. whichever is less and such demand is to be duly given under the hands of the creditors or any person duly authorized by him 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 creditors. Admittedly in the instant case, specified sum was outstanding against the respondent-Company, which led to termination of agreement of General Sales Agency. Both the petitioner and respondent filed suit against each other. The Arbitration culminated into award endorsed by judgment and decree of this Court. On such determination of the amount by the Arbitrator and confirmation thereof by the Court, the demand as contemplated in terms of section 306(1)(a) of the Companies Ordinance, 1984 admittedly was served on respondent on 8-7-1999. Demand notice was duly acknowledged without being satisfied. The Company Court in terms of section 314 on hearing a winding-up petition may either dismiss it with or without cots, or adjourn the hearing or make any interim order or an order of winding-up of the company or any, other order that it deems just. It is further provided that' the winding-up order shall not be refused by the Court only on the ground that the assets of the company are in excess of its mortgaged liability or that company has no assets. Contention of Mr. Kazim Hassan, learned counsel for the respondent that it is not a case where it could be considered that the company is unable to pay its debt. According to him, the company is still a going concern. His further contention that since controversy is still sub judice in appeal, therefore, it cannot be said at the moment without such controversy is finally resolved up to the level of Supreme Court that the company is unable to pay its debts. Large number of cases in such context referred to above were relied on "Indeed there is a clear-cut distinction between inability of a company to pay its debts and unwillingness on the part of the company to pay its debts. Earlier mentioned condition if established may entail consequence of winding-up as contemplated under section 305(e) of the Companies Ordinance, whereas later situation does not warrant winding-up. Such controversy has often been mooted in Court when a "company is said to be unable to pay its debts" the answer is provided under the Companies Ordinance, 1984 itself in section 306 ibid. To appreciate the connotation unable to pay its debts, section 306 of the Companies Ordinance, 1984 is relevant which is reproduced as follows:

306. 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 percent. 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 (b) ______________ (c) ______________ (2) ______________ A creditor, in term of section 306 ibid to foist the clog of "unable to pay debit on a company" is required to show that:-- (1) Company is indebted to the creditor/petitioner in a sum exceeding one percent. of its paid-up capital or fifty thousand rupees whichever is less. (2) Creditor had served, under his hand, a clear-cut 30 days' notice demanding the company to pay the `sum so due'. (3) There is neglect on the part of the company to clear the demand for thirty days from the date of demand or where the company had failed to secure or compound the demand to the reasonable satisfaction of the creditor. Examining the case of the petitioner in the light of 'above. Admittedly petitioner had a demand against the respondent exceeding rupees fifty thousand, such demand was subject-matter of Arbitration proceedings, it materialized in form of an award. The demand withstood the test of objection to the award and finally translated into a judgment and decree. Whatever bona fide dispute as to such demand agitated were finally determined. For the purpose of instant proceedings the decretal amount is "sum so due" with the contemplation of section 306(a) of the Companies Ordinance, 1984. As far as second condition of notice is concerned, admittedly the petitioner had made a demand of "sum so due" after the judgment and decree, through demand notice dated July 8, 1999 which demand notice was duly acknowledged vide reply dated July 14, 1999, whereby, the claim was refuted on the ground, inter alia, that appeal against the judgment and decree is proposed to be filed, demand is premature. Second condition is complied with. Adverting to last condition, admittedly more than 30 days have passed from the date of demand. Neither the respondent has paid nor cleared the liability or "sum so due" nor, had secured nor compounded the demand to the reasonable satisfaction of the creditor/ petitioner. Once the creditor has successfully established all the three requirements of section 306(a). By fiction of law "company is deemed unable to pay its debts". Contention of Mr. Kazim Hassan, that winding-up petition cannot be used as a pressure tool or as a substitute for any other remedy. Since, according to him, remedy by way of execution is available, petition for winding-up is misconceived. The jurisdiction to wind-up a company is circumscribed by limitation laid down under section 314 of the Companies Ordinance, 1984 usually such discretion is to be exercised in extreme cases. Courts in the firs instance try to find ways and means to remedy the wrong complained of and pass such orders as may be appropriate and that may be deem just to regulate the conduct of affair of the company. One should not be unmindful of the fact that in case where winding-up of the company is sought on the ground that it is just an equitable, it is only then specifically provided for, in terms of subsection (2) to section 314 of the Companies Ordinance, 1984 that the Court may refuse to make an order of winding-up, if it is of opinion that, some, other remedy is available to the petitioners and that, they are acting unreasonably in seeking to have the company wound-up instead of pursuing that other remedy. The Court will also refuse to exercise such discretion, when winding-up is sought on the ground of default in delivering statutory report or in holding the statutory meeting or any two consecutive AGM (section 305 (b)). As such grievance could be effectively remedied under section 314(3) of the Ordinance, 1984 by directing the company to deliver the statutory report or the requisite meeting be held as the case may be. The powers of the Court to wind-up a company on the ground that it is unable to pay its debts is not circumscribed by the limitation as provided for winding-up orders on the ground that it is just and equitable or that there is failure to comply with requirement of statutory report or statutory meetings. Therefore, contention of Mr. Kazim Hassan that company is a going concern or that it is a viable company are not good defence in a case where winding-up is sought on the ground that company is unable to pay its debts, such inability in terms of deeming provision of section 306(1) of the Ordinance, 1984, in instant case, has been established by the petitioner. As far as other defence of the respondent-Company that, other remedy (by way of execution) is available. In my humble estimation it is no defence at all. Availability or other remedy is a statutory defence available under section 314(2) of the Ordinance, 1984, where winding-up is sought on "just and equitable ground", which is not so in the instant case. Even otherwise a defaulting party cannot direct the complainant to adopt a particular course or remedy. Where more than one remedy is available and there is no bar or restriction imposed by law then it is the prerogative and discretion of the petitioner to adopt a course or remedy that may be considered most suited to the petitioner and defaulting party has no say in the matter. Contention of Mr. Kazim Hassan that since the appeal is pending and the debts are not finally determines as the controversy before the Appellate Court re-opens the entire issue. Contention indeed engages one's attention bur when examined exposes its fallacy. Such proposition indeed may be true where the matter relates to the appellate proceedings for the purpose of deciding the appeal. Such proposition cannot be extended for other collateral proceedings. More particularly where the order appealed against has not been stayed by the Appellate Court. Merely filing of an appeal will not operate as suspension or stay of the judgment appealed against (see Order 41, rule 5(1) C.P.C.), therefore, in view of the foregoing it cannot be said that merely filing of an appeal would render the controversy exposed open or subject to determination. Once the petitioner is armed with an award and a decree. It can be safely said that, such debt has been determined and prima facie are due and payable. Such liability is further determined and crystallized on expiry of the notice in terms of section 306(1) of the Companies Ordinance, 1984 when the company had "neglected to pay the sum due" or to offer any security to the "reasonable satisfaction of the creditor". It may be noted that to determine when a company is "deemed unable to pay its debts" under section 306(1) ibid, the satisfaction of the creditor has preference over the satisfaction of the Court. As observed above, conduct of parties is, relevant consideration in winding-up petition. Likewise, bona fide dispute as regards the liability of a company could be gauged from the conduct of the parties. It is an admitted position in this case that the dispute as to the determination of the liability and dues of the petitioner has been set at rest by an award followed by a decree. Section 305(e) ibid gives independent right to a creditor to seek an order of winding-up provided conditions set out in section 306 ibid are met. Even the neglect on the part of the company to pay the sum due by fiction of law (as embodied in section 306 ibid) company is deemed unable to pay debt for the purpose of section 305(e). Such neglect to pay `sum due' furnishes a ground for winding-up of the company. Irrespective of the fact that the company is a` viable proposition and has other considerable assets and property more than its liability such being not the relevant consideration in view of section 314(1) of the Companies Ordinance, 1984 while considering the winding-up on the ground of inability to pay the debts. From the conduct of the respondent, it appears that the neglect to pay the debt is not premised on bona fide dispute. It appears that plea of bona fide dispute has been raised to avoid the liability. The `sum due' is not being paid in order to withhold it and to use and exploit it for its own benefit and advantage at the cost and detriment of the petitioner. Very fact, the' respondent had merely filed an appeal against the judgment and decree without obtaining any order for the suspension and stay of such judgment and decree at least reflect that "respondent is not interested to" secure or compound the debt` to the reasonable satisfaction on the creditor s postulated under section 306(1) of the Companies Ordinance, 1984". Contention of Mr. Kazim Hassan that since the company is solvent execution should have been filed by the petitioner for the recovery of amount. I have already discussed above that availability of the alternate remedy may not bar the winding-up petition on the ground of inability to pay its debts. It may be a valid defence against winding-up on the ground of just and equitable clause which is independent ground to seek winding-up Each ground so enumerated under section 305 of the Companies Ordinance, 1984 are disjunctive and independent of each other. In the case of Amalgamated Properties of Rhodesia (1913), Limited ((Chancery Division) C.A. 1917, page 115). In somewhat similar circumstances, where a claim was determined in a proceeding, winding-up was filed instead of bringing an execution. Similar objections that appeal is pending were dispelled, it was held that the appeal does not stay the execution and the winding-up petition was no bar. In the case of W.T. Henley's Telegraph Works Co. Ltd., Calcutta v. Gorakhpur Electric Supply Co. Ltd., Allahabad (AIR 1986 Allahabad 840), the Court even had gone to an extent to hold that it is not necessary for a' decree-holder to take recourse to execution. It was further held that such demand could be raised under section 163(1) of the Companies Ordinance, 1913 (corresponding to section 306(1)). Therefore, in my opinion where a company has no bona fide reason but some other motive to deprive the creditor of its due amount which has been prima facie established in a contentious legal proceedings and materialized into a decree, it cannot be said that respondent's dispute is bona fide anymore. For the purpose of present proceedings, in my opinion a company which is neither interested to pay the sum due nor is interested to `secure or compound the debt to the reasonable satisfaction of the creditor'. (As suspension of such judgment and decree is only possible on furnishing security for due performance of such decree), such orders for obvious reason respondent has not obtained. Defence of the respondents to drive the petitioner/creditor to adopt legal proceedings by way of a protracted litigation, is not reflective of a good conduct on the part of the respondent. If defaulting companies who neglect to pay and discharge legitimate demand are allowed to seek shelter behind a provision of law to retain a benefit which they are otherwise liable to restore, thereby depriving a rightful claimant and holder of a decree its due sum, then such conduct is nothing short of abuse of process of law, Courts do not approve of such conduct. Respondent was not able to show that petition has been made either as a pressure tactic or for some ulterior motive. Since discretion of a Court in terms of section 314 of the Companies Ordinance, 1984 provides that even if the Court is of the opinion that the fact justify making in winding-up order, Court may pass other order as it may deem just. Under the facts and circumstances, the petitioner has made out a case for winding-up order against the respondent-Company on the ground that company is unable to pay its debts. But before such winding-up orders come into operation as it may tend to prejudice other creditors of the company, I would direct that the respondent-Company to furnish solvent security in the sum of Rs.3,53,56,171.60 (Rupees thirty-five Million three hundred fifty-six thousand one hundred seventy-one and paisa sixty only) the decretal amount in Suit No.308 of 1998 together with cost of instant petition in the sum of Rupees 25,000 (twenty-five thousand only) to the satisfaction of Nazir of this Court within four weeks from the date of this order and on failure to give such security within four weeks. Company is ordered to be wound-up, such order then be communicated to the Registrar of the Companies as required under the Companies Ordinance. The security so furnished shall be utilized for payment of the petitioner debit/decretal amount and cost subject to the determination of HCA No.239 of 1999. In case the respondent furnishes solvent security as set out and directed above, the winding-up petition shall be deemed to have been refused. As far as preliminary objections of Mr. Kazim Hassan as to maintainability of winding-up petition on the ground that petitioner failed to comply with the requirement of section 452 of the Companies Ordinance, 1984. It may not be out of place to mention here that neither in arbitration proceedings, nor in suits such objections were raised by the respondent nor appeal is founded on such objection. Such objection, first time urged in this petition, was set at rest in H.C.A. No. 151 of 2000. more so, requisite compliance has been made by the petitioner. By entertaining such objection which has been set at rest, I will be over-stepping my jurisdiction. The winding-up order is to be drawn in case respondent fails to furnish security, as ordered within the time and manner set out above. In case winding-up order is carried out, Official Assignee is appointed as Liquidator to carry out the winding-up of the respondent as provided for under the Companies Ordinance, 1984. The petition stands disposed of in terms set out above. M.B.A./A-425/K Order accordingly.