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Petitioner: Summit Bank Limited VS Respondent: Tanveer Cotton Mills (Pvt.) Ltd
Court Name: Lahore High Court Judge(s): Shahid Karim Title: Summit Bank Limited vs Tanveer Cotton Mills (Pvt.) Ltd Case No.: Civil Original No. 28 of 2013 Date of Judgment:2021-06-17 Reported As: 2021 CLD 1351, 2021 LHC 2366, 2022 PCTLR 1392 Result: Petition allowed
JUDGMENT
JUDGMENT SHAHID KARIM, J .---This judgment will also decide C.0 No.29 of 2013. 2. The litigation in these two petitions seeks the winding up of two companies filed by Summit Bank Ltd. (Summit ) and MCB Bank Ltd. (MCB) who claim to be the creditors of these companies viz. Tanveer Cotton Mills Ltd. ("Tanveer Cotton ") and Tanveer Spinning and Weaving Mills Ltd. ("Tanveer Spinning "). These petitions were filed under the repealed Companies Ordinance, 1984. The only ground urged in these petitions is that the companies are unable to pay their debts and their operations are unsustainable as also it is just and equitable for these companies to be wound up. Facts in C.O No.28 of 2013: 3. The MCB and Summit are banking companies and have extended finance facilities to Tanveer Cotton and Tanveer Spinning. Tanveer Cotton was established as a composite cotton mill and dyeing of different varieties of yarn. In 2006, Tanveer Cotton approached a syndicate of banks including Summit Bank Ltd. and MCB Bank Ltd. for finance facility which was extended throug h a Syndicated Term Finance facility of Rs.400,000,000/- and Syndicated Term Finance Agreement dated 7.9.2006 was executed. Through a novation agreement dated 28.12.2006 and supplemental Syndicated Term Finance Agreement of the same date, the exposure of MCB was reduced to the tune of Rs.125,000,000/-. Various security documents were executed, the details of which have been given in the contents of the petition. Subsequently , the original finance facilities extended to Tanveer Cotton were re-scheduled and restructured on 15.10.2009. Simply put, the case of the Summit Bank and MCB Bank is that there is a substantial amount outstanding against Tanveer Cotton. The amount which is claimed to be outstanding and is sought to be recovered by MCB is to the tune of Rs.199,875,521.85 (which keeps increasing exponentially on account of default by Tanveer Cotton) and in respect of Summit Bank the amount due is Rs.423,226,628.36. A notice of demand was served on Tanveer Cotton on 18.5.2013 in terms of section 306 of the repealed Ordinance. A
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similar notice of demand was served by Summit as well on 8.5.2013. Reliance has been placed on the directors' report for the year ending on 30.06.2012, auditors report dated 31.8.2012 and the serge report dated 8.8.2009. Subsequently , C.M. No.1 of 2020 was filed by the petitioners to place on record documents which are events which took place after the filing of the petitions. Firstly , letter dated 5.4.2018 has been relied upon by which Tanveer Cotton has offered to settle the liabilities. Audited accounts of Tanveer Cotton for the years 2015-2017 and letter dated 11.3.2020 by SECP confirming that audited accounts for the year 2013 having been filed by Tanveer Cotton, have also been made part of the record through this application. 4. Summit filed a recovery Suit No.47 of 2014 before the Banking Court which was decreed on 7.2.2019. An appeal to the Division Bench of this Court R.F.A. No.14559 of 2019 is pending adjudicatio n. Similarly , MCB filed a suit of recovery in the banking jurisdiction which is pending adjudication and in which leave to appeal has been granted by the Sindh High Court on 02.1 1.2016. Facts in C.O. No.29 of 2013: 5. This petition entails similar facts. Tanveer Spinning availed finance facilities from Summit Bank Ltd. for the year 2007 comprising Running finance facility of Rs.45 Million, Cash finance facility (FIM) of Rs.250 Million, letter of credit for Rs.250 Million and letter of guarantee of Rs.12.34 Million. The overall amount of finance availed by Tanveer Spinning comes to Rs.307.348 Million. In 2010, Tanveer Spinning again applied to Summit for the enhancement and restructuring of existing finance facilities which was extended to Rs.573.234 Million. The letter of acceptance of offer for restructuring of finance facilities was executed on 29.05.2012. The facilities were secured by the execution of various security documents, the details of which have been given in the contents of the petition. Similarly , in 2004, PICIC (which merged in NIB and later with MCB Bank Ltd.) extended Term Finance Facility to Tanveer Spinning. Simultaneously , various other finance facilities were extended to Tanveer Spinning which included Cash Finance of Rs.100 Million, Running Finance of Rs.1.5 Million and letter of guarantee of Rs.1.5 million. The finance facilities were renew ed, restructured and enhanced but Tanveer Spinning failed to fulfill its contractual obligations and committed a default of Rs.72,809,501.67 as principal sand Rs.32,316,792.44 towards markup. Once again, Tanveer Spinning 'applied to MCB Bank for restructuring of the existing facilities which request was considered and a facility offer letter dated 15.6.2009 was delive red to Tanveer Spinning. The restructuring agreement was executed on 15.6.2009. For the third time, Tanveer Spinning made a request for rescheduling and restructuring of the finance facilities. The request of Tanveer- Spinning was again approved by MCB vide facility offer letter dated 2.11.2010 whose terms were accepted by the competent officer on behalf of Tanveer Spinning. Finance agreement dated 21.9.2010 was executed between the parties. Thus, cumulatively Tanveer Spinning is the defaulter to Summit for a sum of Rs.395,590,071.31 against funded liability while Rs.22,559,831.00 as a contingent liability as on 17.6.2013. Similarly , it is alleged to be a defaulter of MCB for a sum of Rs.439,737,927.90 as on 31.3.20 13 under the restructuring agreement. The notices of demand were also served on Tanveer Spinning as they were served on Tanveer Cotton on 18.5.2013 which were not responded nor were the allegations denied. Determination: 6. As adumbrated, the primary and only ground for seeking the winding up of Tanveer Cotton and Tanveer Spinning is that these companies have fallen in default of their contractual obligations towards their creditors and are unable to pay their debts. As a prefatory , it will be useful to refer to the rule vouched by respectable authority which governs matters of winding up of a company where the allegation is that the company is unable to pay its debts. The principles have recently been brought out in Messrs United Ethanol Industries Ltd. v. Messrs JDW Sugar Mills Ltd. (2020 CLD 945 ) and the following observations may pertinently be reproduced:: "10. The basic judgment which lays down the guiding principles to be followed in such matters is Messrs Adage Advertising, Lahore v. Messrs Shezan International Ltd. Lahore (1970 SCMR 184) and the following observations in this regard: "...In all cases where an application under section 162 of the Companies Act is based on the allegation that the respondent-company is unable to pay its debt, the question always arises whether the respondent-company is not in a position to pay its debt and whether the Company concerned has a bona fide dispute with the petitioner who
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has come to the Court. This point was considered at length by the learned Judges of the High Court and on the facts of the present case they have come to the conclusion that there is a bona fide dispute between the parties about the amount due to the petitioner from the respondent..." "...It is in evidence that the respondent-company is financially sound. In our opinion, the provisions of the Companies Act are not vehicle of oppression. In these circumstances, the High Court was perfectly justified in refusing to exercise its discretion to wind up the respondent-company ." 11. The above said judgment was the harbinger for the subsequent jurisprudence development over the years. The conclusion at the heart of the "Messrs Adage Advertising" is the observation by the Supreme Court of Pakistan that if a company is financially sound, the provisions of Companies Ordinance cannot be used as vehicle of oppression. Also, in case a bona fide dispute has been set up, there is no cause for ordering the winding up of a company and the parties must be relegated to the civil court for the determination of their rights. 12. Messrs Platinum Insurance Co. Ltd. Karachi v. Daewoo Corporation, Sheikhupura (PLD 1999 SC 1) is an authority for the proposition that if a debtor -company was merely unable to pay its debts but was otherwise commercially solvent, then the normal course available to a creditor was a suit for the recovery of the amount and not a petition for winding up. Again Messrs Khyber Textile Mills Ltd v. Allied Textile Mills Ltd. (1989 CLC 1167) settled the principles that the object of a winding up petition was to find out the solvency or otherwise of a company and not to settle claims of creditors." 7. Similarly , in Saudi Pak Ltd. v. Chenab (C.P. No.43 of 2011) the legal principles which must guide the courts have been culled out from the precedents of superior courts and encapsulated in the following words: "7. On the threshold, the rule relating to the manner in which a winding up petition is to be dealt with if it has been brought on the ground that a company is unable to pay its debts must be alluded to. The rule has been vouched by respectable authority and states that the unwillingness to pay a debt is not to be equated with inability to pay debts. Inability to pay debt would presuppose that a company is commercially insolvent and its future financial viability is in serious doubt on the basis of documents and other material brought forth on record. Unwillingness to pay debt will take the case in the realm of a bona fide dispute to have been raised by the company based on substantial grounds as to the entitlement of the petitioner to the amount which has been demanded and on the basis of which a winding up order has been sought. Thus, if a company puts forth a good faith defence and disputes the amount to be due from it on substantial grounds, a winding up petition cannot be used as a tool for the recovery of an amount in case of which the normal remedy available to a petitioner would be filing a suit for recovery and not use the provisions of sections 305 and 306 of the Ordinance as a coercive measure to extract an amount in which a dispute is shown to exist. It is on the touchstone of this principle that the facts will have to be analyzed in the instant case." "10. Significantly , the Auditors have drawn the attention of the members to the fact that Chenab had incurred huge operating losses and its current liabilities exceeded its current assets by Rs. 3,624.179 Million. Therefore, the annual report 2010 paints a bleak picture of the financial viability and commercial health of Chenab on the basis of which Saudi Pak contends that there is no prospect of the company coming out of its financial crisis or fulfilling its current and future liabilities and caught to be wound up. The facts mentioned in the annual report 2010 lend credence to the statement made by learned counsel for Saudi Pak." 8. In this case, the entire reliance of the Summit and MCB is on the auditors reports and the observations in the audited accounts starting from the year 2012 and stretching into the year 2018. There is a common thread running through these reports and which will be alluded to by reference to these reports . In respect of continuous loss argument, Summit and MCB relied upon audited accounts of the companies which clearly depict that the companies are suffering a continuous loss since 2008. The audited accounts for the years 2008 to 2018 have been placed on record and it is apparent from their perusal that both the companies are accumulating losses over the years and the negative equity of these companies has continued to accrue through this period. There is a consistent observation of the auditors regarding the current liabilities exceeding the current assets and the accumulated losses by the two companies to accrue over the years. A chart prepared by the petitioners (and not
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denied by either Tanveer Cotton or Tanveer Spinning) would give a bird's eye view of the accumulated losses which the companies have suf fered starting from the year 2012 till date: Year Loss Suf fered Accumulated LossNegative Equity CurrentLiabilities exceed Current Assets by 2012 Rs.191,100,732/- ' (@Page 174 of the main file)Rs.206,045,303/- @Page 174 of the main file)Rs.26,045,303/- (@Page 174 of the main file)Rs.494,068,695/- (@Page of the main file) 2013 (filed on 01.12.2020 (@ Page 139 of Amendment Reply) 65.163 Million (@Page 140 of Amended Reply) 624.814 Million (@Page 140 of Amended Reply) 2014 Rs.125.914 Million (@ Page 11 of C.M. No.1/2020)Rs.667.321 Million (@ Page 11 of C.M. No.1/2020)Rs.667.321 Million (CO Page 11 of C.M. No.1/2020) 2015 Rs.85.315 Million Rs.21 1.228 MillionRs.31.228 Million (@ Page 11 of C.M. No.1/2020)Rs.745.176 Million (CO Page 11 of C.M. No.) 2016 Rs.49.222 Million (@ Page 34 of C.M. No.1/2020)Rs.379.442 Million (@ Page 34 of C.M. No.1/2020)Rs.199.442 Million (Page 34 of C.M. No.1/2020)Rs.967.656 Million (@ Page 34 of C.M.No.1/2020) 2017 Rs.106.823 Million (@ Page 58 of C.M. No.1/2020)Rs.486.265 Million (@ Page 58 of C.M. No.1/2020)Rs.306.265 Million (@ Page 58 of C.M. No.1/2020)Rs.1099.735 Million (@ Page 58 of C.M. No.1/2020) 2018 (filed on 01.12.2020 @ Pg. 139 of Amended Reply 454.224 Million (@ Pg. 82 of Amended Reply) 274.224 Million (@ Pg. 82 of Amended Reply)1058.948 Million ((@ Page 82 of Amended Reply) 9. When these petitions were filed, the entire reliance was placed on the directors report (in the case of Tanveer Cotton) for the year ended 30th June, 2012 which makes the following observations: "The company made huge losses this year due to exceptional inventory losses on stocks of cotton and yarn losses of fall in cotton prices by more than fifty percent. Such losses were encountered by all textile mills holding stocks. As a result company was unable to make repayment to banks. Company management is under rescheduling negotiation with bank. Although apparently going concern question has been raised, but the management of the company has alternate financing arrangement with lending entities to secure the operation. We assure smooth running of the Company operations in future." 10. In the auditors report for the same year, the auditors had the following observ ations to make in respect of the viability of Tanveer Cotton:
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"a) the company has incurred a gross loss of Rs.28,165,670/- and net loss of Rs.191,100,732/- during the year ended June 30, 2012 and as application for leave to contest that date, accumulated losses comes to Rs.206,045,303/- resulting in negative equity of Rs.26,045,303/-. Further , its current liabilities exceed its current assets by Rs.494,068,695. These factors, alongwith matter mentioned in paragraph "b" below , indicate a material uncertainty which may cast significant doubt on the company's ability to continue as a going concern and therefore it may be unable to realize its assets and discharge its liabilities in the normal course of business. The financial statements, however , do not disclose this fact and any adjustment to that effect." Interestingly , except for the amounts, the exact same observations found mention in the Directors' report of Tanveer Spinning for the year ended 30th June, 2012. 11. Three factors have been flagged in the auditors report, firstly that the companies had incurred a gross loss of Rs.28,165,670/- during the year ended June, 2012 and the accumulated losses come to Rs.206,045,303/- which resulted in negative equity of Rs.26,045,303/-. Secondly , the current liabilities exceed the current assets by Rs.494,068,695/-, Surely and more significantly the auditors cast a doubt on the companies' ability to continue as a going concern and that they may be unable to realize their assets and discharge their liability in, the normal course of business. Further , in the auditors report, it was-specifically mentioned that in the opinion of the auditors, the balance sheet, profit and loss account, statement of comprehensive income, cash flow statement and statement of changes in equity together with the notes forming part thereof did not conform with approved accounting standard as applicable in Pakistan. It is not necessary to refer to the auditors report for the following years which reflect a similar picture. It is also not necessary to allude to the auditors report for Tanveer Spinning since apart from difference in amounts, similar observations have been made by the auditors in respect of Tanveer Spinning as well. 12. The annual report 2019 for Tanveer Cotton as well as Tanveer Spinning has been filed with the amended reply filed by these companies. It is accompanied by independent auditors report which paints a picture not dissimilar to the auditors report for the year 2012. Therefore, no significant change has occurred either in the current liabilities of the companies, in the position of their negative equities as well as the aspect of current liabilities exceeding the current assets which compromises the ability of these companies to continue as a going concern. Firstly , it may be stated that the financial statements and accounts of a company are prepared by the internal auditors of the company itself. The external auditors merely review those accounts and financial statements and make a report as independent auditors to the Board of Directors and Members of the company . In respect of statement of financial position as at June 30, 2019, the auditors gave their qualified opinion to the following ef fect: "Long term financing amounting to Rs.525 .198 million (2018: Rs.515.302 million), short term borrowings amounting to Rs.478.197 million (2018: Rs.474.863 million) and deferred markup amounting to Rs.457.340 million (2018: Restated Rs.407.524 million) remains unconfirmed / un-reconciled in the absence of direct balance confirmation and relevant information. The Company is in litigation with various banks that have extended long and short term financing to the company and against some cases, court has granted decree. The matter is still under litigation as the company has filed appeals there against. Keeping this in view, the company has classified the loan and accrued markup amount in non-current liabilities instead of current liabilities which in our opinion is not in accordance with the requirements of paragraph 74 of IAS 1 "Presentation of Financial Statements". Had the correct classification been made in these financial statements, the long term financing and deferred markup would have been decreased by Rs.525.198 million and Rs.457.340 million respectively while short term borrowings, accrued markup and current portion of long term financing would have been increased by Rs.9.896 million, Rs.457.340 Million and Rs.515.302 million, respectively ." 13. Thus, the auditors gave a qualified opinion on the financial statements prepared by the companies in which true depiction regarding finance facilities towards the creditor banks Was brought forth. While forming a qualified opinion, it was stated by the auditors that the long term financing, short term borrow ing as well as deferred markup remained unconfirmed/ un-reconciled in the absence of direct balance confirmation and relevant information. This only means that these figures were not confirmed by creditor banks nor were they verified by the auditors from their own calculations. This led the auditors into giving a qualified opinion on this aspect of the matter . Further , the
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auditors referred to the litigation with the creditor banks and the decrees which had been issued by the court of competent jurisdiction. It took exception to the act of the companies which had classified the loan and accrued markup in non-current liabilities instead of current liabilities and it was opined by the auditors that this was not in accord with the requirements of internatio nal standards of auditing. Clearly , the companies thought that they should be part of non-current liabilities but the auditors were of a different opinion and cited the relevant provisions of international standards of auditing in this regard. Crucially , the auditors gave their opinion on the ability of Tanveer Cotton as a going concern in the following observations: "We draw attention to Note 2, which indica te that as at balance sheet date, the accumulated losses are Rs.208.502 million, and the company is defendant/petitioner in various law suits as mentioned in Note 21 to the financial statements. These factors along with matters discussed in "Basis of Qualified Opinion" section of our report indicate a material uncertainty which may cause significant doubt on the company's ability to continue as a going concern. However , these financial statements have been prepared on "going concern basis" in consideration of mitigating factors mentioned in Note 2 of these financial statements. Our opinion is not modified in respect of this matter ." 14. A reference to the auditors report in respect of financial statements of 2018 would show that similar observations have been made and the auditors clearly indicated that: "...These factors, along with matters mentioned in paragraphs (b) and (c) below , indicate a material uncertainty which may cast significant doubt on the company's ability to continue as a going concern and therefore, it may be unable to realize its assets and discharge its liabilities in the normal course of business. The financial statements, however , do not disclose this fact and any adjustment to that effect." 15. In the opinion of the auditors set out above, there was a material uncertainty which cast significant doubt on the companies' ability to continue as a going concern and so it may be unable to realize its assets and discharge its liabilities in the normal course of business. The learned counsel for Tanveer Cotton and Tanveer Spinning tried to controvert the arguments made on the independent auditors report by referring to the financial statements prepared by the companies. Suffice to say that when the independent auditors report is juxtaposed with the financial statements prepared by the companies, greater weight must be assigned to the report prepared by the independent auditors in this regard. 16. As explicated, it is unnecessary to refer to the case of Tanveer Spinning independently as not only the contents of the auditors report but also other docu ments are precisely of the same nature and the arguments in respect of Tanveer Cotton can validly be raised in respect of Tanveer Spinning as the two companies follow a similar pattern not only in accumulating loss, negative equity but also in the observations of the independent auditors regarding their ability as a going concern. , 17. On the threshold, the learned counsel for the respondents took objection to the maintainability of these petitions for winding up on the ground that since suits for recovery have been filed by both Summit and MCB, these petitions ought to be dismissed as proper remedies under the law for the recovery of sums allegedly due to them have been availed. In a nub, the contention is that both the remedies cannot be simultaneously availed. However , this objection cannot prosper . In a cluster of judgments of the superior courts it has been settled by now that both the remedies can simultaneously be availed. This will however remain subject to the conditions which have been brought forth in the two judgments cited above to the effect that unwillingness to pay debts is not to be equated with inability to pay debts. Inability to pay debts is an independent cause of action and must be predicated on the material brought on record which would show that the company is commercially insolvent and its future financial viability is in serious doubt. However , unwillingness to pay debts will take the case in the realm of bona fide dispute which the company sought to be liquidated has raised on substantial grounds. Thus, if a company puts forth a good faith defence and disputes the amount to be due on substantial questions of law and fact, a winding up petition cannot be used as a tool for the recovery of an amount for which a normal remedy available to the petitioner would be the filing of a suit for recovery and the provisions of the Companies Act, 2017 cannot be used as an engine of coercive measures to extract an amount regarding which a dispute is shown to exist. In short, the object of winding up petition is to gauge factors regarding solvency or otherwise of a company and not to settle claims of creditors.
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For the purpose, the court will look at all…
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