P L D 1970 Karachi 229 (PLP)

13. On the 7th of December 1967, the petitioner demanded payment of the admitted amount, but no reply was given by the Company. He therefore, gave another notice on the 20th of December 1967, under section 163 of the Companies Act, 1913 for winding up the company, but the Company gave no reply to its either. In consequence, the present petition to wind up the Company was presented on the 3rd of February 1968 and a notice was issued to the Company to show cause why the petition should not be advertised. The Company submitted its counter‑affidavit on the 4th of May 1968, and on the 7th of May 1968, it was ordered that the petition would not be advertised if the Company deposited in cash or furnished security in the form of a Bank‑guarantee for the total amount claimed by the petitioner. The Company did not furnish the security but, according to counsel, went in Letters Patent Appeal. The Letters Patent Bench refused to admit the appeal, unless a Bank‑guarantee for the admitted amount namely Rs. 1,37,000 was furnished within three weeks' time. The Company did not fulfill that condition, with the result that the petition for winding the Company was advertised on the 24th of January 1969.

14. On the 17th of March 1969, the Company filed objections to the main petition, supported by an affidavit of Mian Manzoor Hussain, Chairman of the Company and an affidavit in rejoinder was filed by the petitioner on the 28th of March 1969. On the 1st of April 1969, Mian Muhammad Akhtar, the Managing Director of the Company, filed a supple. Mentary affidavit in which the misfortune of the company was attributed to the conditions in which it was born, the failure of the Central Government to fulfill its commitments and mismanagement of its affairs by the nominee of the Commerce Bank Ltd. On the same day, the following issues were framed by me "1 (a) Is the claim of the petitioner disputed by the company bona fide, or (b) The petition has been submitted by the petitioner with a mala fide intention to abuse the process of the Court. (2) Is it just and equitable to wind up the company on the grounds that the company has not replied to the demands of the petitioner, not honoured the agreements dated 14‑10‑1967, allowed its cheques to be dishonoured, handed over its control and Management to the Commerce Bank Ltd., allowed its business to become defunct as well as in view of the circumstances set out in the supplementary affidavit of the company dated the 1st of April 1969." The parties were allowed to submit affidavits and counter affidavits, because Mr. Sheikh Ghias Muhammad said that he wanted to produce oral evidence to prove that the petition was mala fide. Time was given up to the 1st of May 1969, to produce affidavits and counter‑affidavits to enable me to understand the nature of the evidence that was in the mind of Mr. Sheikh Ghias Muhammad. They have accordingly been produced, as mentioned in the first paragraph of this order. I find no justification for allowing oral evidence to be produced in this case. Apart from being time consuming, it will be fruitless also, because all allegations and counter‑allegations have been placed on the record by the parties, and there is no difficulty in deciding on their basis whether the Company should be ordered to be wound up or not. This is not a suit for the recovery of a debt, and should not be treated by the Company as such. See my order of the 1st April 1969, in this case. The petition is to be decided on the basis of the provisions contained in section 162 of the Companies Act, 19 1 3 ordinarily with the help of affidavits submitted in accordance with statutory rules. This cannot be disputed. What has sometimes been disputed on the contrary is the power of the Court to record oral evidence. In this connection, the following observations of a Division Bench of the Madras High Court in Veeramachineni Seethiah v. Bode (A I R 1949 Mad. 675), at page 678 may be quoted with advantage: "From these observations it is sufficiently clear that both in England and in this country there is no inflexible rule or practice prohibiting the adducing of oral evidence or the cross‑examination of the deponents of affidavits in matters like the present." At page 680: "In Chapel House Colliery Co. (1883) 24 Ch. D 259 at p. 267 (52 L J Ch. 934), it is stated that the Court will not, as a B rule, order a petition to stand over for a lengthened period as it would not be just to the Company. Expedition is the very essence of winding up proceedings, and the interests not only of the company but an element of public policy in regard to commercial morality also, should be considered in the disposal of winding up petitions."

15. I have heard counsel for the parties in support of their respective points of view. Mr. Sharaf Faridi has argued in respect of issue No. 1 that the petition is mala fide, because the petitioner has in fact no claim against the Company. Counsel's stand was that at the time of executing the two agree ments‑dated the 14th of October 1967, Annexures "C" and "D"‑the company was not aware of the true financial situation because its Management and control was with the Industrial Managements Limited; therefore, the admissions contained in the agreement Annexure "C" that the Company was liable to Rs. 1,37,000 was the result of a mistaken notion of the real situation, and not binding on the Company. The amount, which was the subject‑matter of the second agreement, namely Rs. 1,37,733 and which was to. be ascertained could, according to counsel be checked only after the necessary documents were received back by the 'Company from the nominees of the Commerce Band Ltd. Some of them were received back after the 1st of January 1969, when the Industrial Managements Ltd., relinquished its charge, and some in April 1969. The Commerce Bank Ltd., had permitted its nominee to return them to enable the Company to file the affidavits which were allowed by the Court to be submitted before the 1st of May 1969. The affidavit of Muhammad Azam, a former Accountant, dated the 22nd of April 1969, was filed after examining the second lot of documents. Counsel says that the documents, which were received by the Company in April 1969, proved that the peti tioner had over‑paid Rs. 1,02,258.02. Thus nothing was, nor is due to the petitioner after that payment. On the contrary, the over‑paid amount is recoverable from him.

16. From the point of view of the plea of over‑payment the affidavit of Muhammad Azam is the main document. According to paragraph 7 of it, even goods of the value of Rs. 2,54,733 were not received by the Company, because the Company had received the goods of the value of Rs. 1,04,168/48 only. Mr. Sharaf Faridi has explained that the receipt of goods of this value only is shown in the Store Ledger, but the name of the petitioner is not mentioned with respect to goods of the value of Rs. 42,464/95 out of the total amount ; therefore, in paragraph 9 of the affidavit, it is stated that even if the receipt of this latter amount of goods is attributed to the petitioner, he has been over‑paid by Rs. 59,793.07. The over payments are mentioned in detail in paragraph 8 of the affidavit in which it is stated that payment of a total amount of Rs. 66,926.50 was made in addition to the amounts admitted by the petitioner to have been received by him. This is the entire case of the Company in support of the allegation of over payment and mala fides of the claim of the petitioner.

17. In reply to the above case of the Company, Mr. Sayeed A. Sheikh has pointed out that the Company admitted its liability to pay Rs. 1,37,000 vide agreement Annexure "C" dated the i 4th of October 1967. There was no doubt expressed about that liability although a doubt was expressed at that time with respect to the other part of the claim for Rs. 1,37,

737. The plea that necessary documents were not available to the Company, cannot be genuine because even if the Company was managed by the Industrial Managements Limited, it was an organization about which there is no allegation of non cooperation in this respect. Moreover, it was equally interested in reducing the claims of the creditors. The allegations that some documents were received after the 1st of January 1969, and some in April 1969, are not satisfactory because in April 1969, according to counsel himself, it was the co‑operation of the Commerce Bank Ltd., which enabled the Company to produce the documents. If the company really felt the need of examining documents, there is nothing to show that there were obstacles in the way of the Company. Not only that the Company unconditionally admitted its liability to pay Rs. 1,37,000 in agreement, Annexure " C ", but the agreements were also admitted by the Company in its counter‑affidavit of the 4th of May 1968, as well as in the objections dated the 17th of March 1969. Mr. Sharaf Faridi says that in paragraph 7 of the counter affidavit and in paragraph 4 of the objections it was stated that over‑payment was made.

18. The above reply of Mr. Sharaf Faridi raises the question as to what is the value of such a vague and general statement made in those two counter‑affidavits when the necessary details were supplied by Muhammad Azam only in his affidavit of the 22nd of April 1969. In order to appreciate this aspect of the case, it should be noted that the agreements were executed by the Company as a compromise to ward off the decision of the first petition made by the petitioner to wind up the Company in 1967. Having obtained the agreement of the petitioner to withdraw that petition, and having executed 23 post‑dated cheques towards the payment of the admitted amount in the first agreement and payment of two cheques, a summersault was taken by the Company without supplying or disclosing any details and explanations in support of the subsequent claim of over‑payment, right up to April 1969.

19. Here it may be noted that the facts which have been stated by Muhammad Azam in his affidavit dated the 22nd of April 1969, do not very much advance the case of the Company for purposes of this petition, because the petitioner has explained in reply that all the payments to which Muhammad Azam has referred, are included in the petitioner's own statement of account.

20. Turning to the second issue, Mr. Sharaf Faridi has argued that the claim of the petitioner is not bona fide; there fore, the defenses which have been raised by the company should be considered to be adequate for dismissing the petition for, winding up the Company and leaving the petitioner to file a suit to establish his claim. This contention could have force if the Company had not admitted its liability in writing and obtained an advantage by getting the previous petition to wind it up dismissed on that basis, or at least it had submitted some satis factory explanation to show as to why from the 14th of October 1967, up to the 22nd of April 1969, it was not able to give the details on which the affidavit of Muhammad Azam is based. The plea that the company was under the Management of Industrial Managements Limited, is no good excuse at all firstly, because it was Company's own doing that its Management passed over to the Industrial Managements Limited, and secondly because the Industrial Managements Limited was a friendly and not an antagonistic organization of the Company, so much so that the interest of the Industrial Managements Limited and the Company in respect of disproving the claims of the creditors was common. I am, therefore, not able to see any mala fide motive in the conduct or the claim of the petitioner. Mr. Sharaf Faridi has referred to Ust. Pranlachhi Kuer v. Jageshar Sahi (1061 C 423), Coalfields of Burma Ltd. v. H. H. Johsnson (A I R 1925 Rang. 128), Muhammed Amin Pros. Ltd. v. Dominion of India and others (A I R 1952 Cal. 323), in support of the proposition that a petition of a creditor to wind up a company should be dismissed if the Company is able to disclose a plausible defence. It is unnecessary to refer to the facts of each of the judgments, because they differ materially from the facts of this case. What is important in this case to note, is that far from the defenses raised by the Company in this petition being plausible, they do not even appear to be conceived in good faith.

21. Mr. Sharaf Faridi has further argued that a Company should not be wound up merely in deference to the desire of one of the creditors, because it is necessary under section 174 of the Companies Act, 1913 to ascertain the wishes of the creditors and contributors. In support of this proposition, he has referred to Greenwood & Co. ((1900) 2 Q B 306) and In re : Chapel House Colliery Company ((1883) 25 Ch. D. 259). In order to appreciate this contention, it will be proper to reproduce section 174 of the Companies Act, 1913 here. It is as follows: "The Court may, as to all matters relating to a winding up, have regard to the wishes of the creditors or contributors as proved to it by any sufficient evidence." In the commentary on the above section K. M. Ghosh has written in the 1949 Edition of his book on Company Law as follows: The rule that the opinion of the creditors and share holders including carrying on the liquidation should be followed as generally applied in England should not apply so, strictly to India. Limited liability companies in India are in their infancy. Share‑holders and creditors are easily misled. In addition to the above commentary, the word "may" which occurs in section 174 should be noted, because the circum stances of this case explained above and those which are to be stated presently will show that in this case the discretion is not to be exercised in favour of the Company.

22. In addition to facts that the company is indebted to the Central Government in the amount of Rs. 67,00,000 and that the Commerce Bank Ltd., has filed a suit against it for the recovery of a crore of rupees, Mr. Sharaf Faridi has further admitted at the Bar that the company owes about Rs. 22,00,000 to Burmahshell and Caltex. He has also admitted that 10 suits are pending against the company involving claims for more than Rs. 10,00,000 and that there are decrees against the company, the total amount of which comes to about Rs. 4,00,

000. After the advertisement of the petition, only one creditor has appeared in these proceedings and he has supported this petition. No creditor has opposed it. Additionally, the insistence of the company is that it was floated in adverse circumstances and that it has continuously suffered losses and was also mismanaged. It appears that the initial misfortune of the company is regarded by the company as a good excuse for continuing to exist without any prospects of recovery merely because the Industrial Managements Limited has allegedly mismanaged the affairs and relinquished its charge in January 1969. Since then admittedly, the company has done no business. A look at the feasibility reports, which were prepared by the Commerce Bank Ltd., and were accepted by the company by handing over the entire Management of the company to the nominee of the Commerce Bank Ltd., shows that the company could perhaps only partly pay up its debts after 5 years if loans to the tune of Rs. 1, 31,00,000 were raised. A debt of Rs. 36,00,000 would still remain due to the Commerce Bank Ltd.‑See the first and eleventh paragraphs of the feasibility report dated the 26th of April 1966 Annexure R/A/6. Mr. Sharaf Faridi has argued that the present troubles of the company are of a temporary nature and has referred to D. Davis & Co. Ltd. v. Brunswick (Australia) Ltd. (A I R 1936 P C 114) but my appreciation of the situation, set above, does not enable me to agree to this suggestion because the malady which has afflicted the company from the date of its birth cannot be said to be of the temporary nature. The company has apparently seen some good days but that was a transitory experience. There is little hope of its resuscitation and this is a decisive consideration against allowing it to linger on‑See D. Davis & Co. Ltd. v. Brunswick (Australia) Ltd. Mr. Sharaf Faridi does not appear to have realised the seriousness of the adverse situation which was created by the entrustment of the affairs of the company to the nominee of the Commerce Bank Ltd. The company lost its identity and the Commerce Bank Limited became its de facto head, in such dire circumstances as to make the Board of Directors of the company defunct. The company became a helpless sycophant of the Commerce Bank Ltd. and on being released from its self abnegation is now left without business without the means to support itself and engulfed in litigation. The surrender of its affairs to the Commerce Bank, Ltd. amounted to its self effacement and that too in favour of only one of its creditors. The other creditors became dependent on the Commerce Bank Ltd., for their dealings and recoveries

See in this regard the following remarks of K. M. Ghosh in his commentary (8th Edition) on section 162 of the Companies Act, 1913: "Where in consequence of an onerous contract with a director the company loses its identity and the creditor becomes de facto the company with a power to bring it to an end whenever it suited him, and in accordance with the stipulation in the contract seizes the machinery and plant of the company with the result that the company is unable to carry on its business and to pay its debts, it is just and equitable to wind up the company." The authority for the above remarks are the observations of Their Lordships of the Privy Council in Ernest Hugh Cunning v. Soobran Partap (A I R 1941 P C 106). Luxmoore, L. J. who delivered the judgment of the Board observed that: "Clearly the company is unable to pay its debts and having regard to the seizure by De Sliva of its machinery and plant (under the so‑called powers to destrain conferred on him by his agreement with the company) it is also (proved that it is) unable to carry on its business. It is impossible to suppose in such circumstances that any independent creditor could have any good reason for wishing that the company should not be wound up." It is worth mentioning that counsel for the Company appeared to think that if the company could show that its present plight was the inevitable result of its history then it could be saved from liquidation. In reality, this is no defence to a petition for winding up. The sad financial state of affairs of the company and huge amounts of admitted debts prove that it is com mercially insolvent. In tile words of Tek Chand, J. in Punjab Flying Club Ltd. (A I R 1933 Lah. 301). "It is settled law that what the Court has to see fn a case like this is whether the company is `commercially insolvent; i.e. whether it is unable to meet its current demands, although the assets when realized including uncalled capital exceed its liabilities." and in the words of Halsbury's Laws of England, Vol. V, p. 397: It is useless to say that if the assets of the company are realized there will be ample to pay 20 shillings in the pound: this is not the test. A company may be at the same time insolvent and wealthy. It may have wealth locked up in investment not presently realizable but although this be so, yet if it have not assets available to meet its current liabilities it is commercially insolvent and may be wound up.

23. Lastly, Mr. Sharaf Faridi has referred to the suit of the company which it has filed against the Government for specific performance of the undertaking to issue licence to the company for importing buses and argued that the suit would become infructuous if the company was ordered to be wound up. I do not agree with this proposition because, prima facie the suit may well be continued if the Official Liquidator considers it worthwhile to do so.

24. No other argument was advanced by Mr. Sharaf Faridi. To my mind this is an eminently suitable case for making an order to wind up the company. I accordingly accept this petition, order the company to be wound up and appoint the Official Assignee to be the Official Liquidator. He is ordered to take over the possession of the assets of the company and to manage the affairs of the company for purposes of winding it up in accordance with the best interest of all con cerned. He is authorised to exercise all the necessary powers available to an Official Liquidator under the law for discharging his duties. Petition accepted.