Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: CARAVAN EAST FABRICS LIMITED VS Respondent: ASKARI COMMERCIAL BANK LTD., JUDGMENT
Court Name: Sindh High Court Judge(s): Mushir Alam Title:CARAVAN EAST FABRICS LIMITED vs ASKARI COMMERCIAL BANK LTD.,
JUDGMENT
Reported As: 2006 CLD 895 Result: Petition dismissed Judgment JUDGMENT ' MUSHIR ALAM, J.---The petitioner Messrs Caravan East Fabrics Ltd. Has filed instant petition under sections 284 to 288 of the Companies Ordinance, 1984, seeking following relief:- (a) To order to call a meeting of all the shareholders and creditors for the purpose of discussing and to vote on the 'Scheme of Arrangement' filed herewith in terms of section 284(1) and (2) of the Companies Ordinance, rescheduling and conversion into equity of all outstanding liabilities of the petitioner. (b) Official Assignee of this Honourable Court may be directed to conduct the meeting of the shareholders and the creditors along with Mr. Hasnain Abid Ali (ACA) who has been nominated as Financial Controller and that the Official Assignee may please be authorized to chair the meeting of creditors of the petitioner and report the outcome to this Honourable Court. (c) Pending disposed of this petition and the finalization of the proposed "Scheme of Arrangement" all suits, cases, appeals, execution application, proceedings both criminal and civil and all orders and proceedings may kindly be suspended/stayed. (d) Approve/sanction the Scheme of Arrangement after the outcome in the meeting ordered. (e) Award any other relief deemed just and proper. 2. Along with petition, two applications have been filed, one being C.M.A. No,3065 of 2002 under section 284(5) of the Ordinance, 1984 seeking restraining orders against all pending proceedings against the petitioner's Company. Another being C.M.A. No, 3066 of 2002 under Rules 953 to 955 SCCR (O.S.) read with rule 55 of the 'Companies (Court) Rules, 1997', seeking meeting of the creditors of the company consenting or non-consenting.
---
## Page 2
3. On C.M.A. No,3066 of 2002, meeting was directed to be held vide order, dated 2-12-2002, under the chairmanship of Official Assignee of this Court with co-chairmanship of Hasnain Abid Ali the financial controller and facilitator. The meeting was directed to be held after due notice to all the creditors along with all the copy of the scheme of arrangement and to finalize the issue of scheme of arrangement attached to the petition. 4. It appears that meeting as directed above was held, Official Assignee has filed a reference, dated 16-1-2003 available at page 209 of the file which reads as under:-- The Official Assignee/Chairman was informed by the aforesaid creditors, that they had received notices with schedule of arrangement. During the meeting representatives of Askari Commercial Bank Ltd. And AlBaraka Bank Ltd., representing 15.90% of the creditors present in the meeting i,e, 14.5% of the total creditors mentioned in the schedule of arrangement, voted against the schedule of arrangement, while remaining creditors voted in favour of the scheme of arrangement, (85.5%) this position in writing is annexed as 'A'. The representatives of both non-consenting Banks stated that both will file their objections in writing later on. The Official Assignee/Chairman subsequently had received written objections of both Banks, through their Advocate Messrs Mohsin Tayebally & Co., original letter dated 6-1-2003 is annexed as 'B'. 5. Along with report, objections of the non-consenting creditors were also filed. The petitioner filed counter-affidavit to the objections on 3-4-2003. It has come up for hearing of C.M.A. No, 3065 of 2002 under rules 953 to 955 SCCR (0.S.) read with rule 55 of the Companies (Court) Rules, 1997 and for the hearing of the Official Assignee's Report, dated 16-1-2003 as well as Main Application. 6. It may be observed that, relief prayed for at Serial No,(a) and (b) of the prayer clause, as reproduced above, have since been achieved. Even the prayer (c) seeking restraining in respect of cases pending against the petitioner company is also operating. For all practical purposes only prayer (d) needs to be examined and consider by the Court. 7. Mr. Asim Mansoor learned counsel for the petitioner contended that, on the application of the petitioner, the Court directed to hold meeting of all the creditors, which meeting was held, no appeal was filed. The order, dated 2-12-2002 has become final, no exception could be taken now. According to the learned counsel, result of the meeting is manifest, statutory majority of the creditors has approved the scheme, and, therefore, it should be sanctioned by the Court. 8. It was pointed out that the report of the Official Assignee that more than 3/4th per cent of the total creditors have approved the scheme and the objectors representing only 15.90% are opposing of the same. It was, therefore, urged that, wish and will of the majority is to prevail and the scheme of arrangement as proposed should be approved. 9. Mr. Asim, further stated that, since the Court directed to hold meeting of the creditors without distinction as to the secured and unsecured creditors, therefore, objectors who were present in the meeting are bound by the majority decision. 10. Mr. Arshad Tayebally, learned counsel, appearing for the objectors Askari Commercial Bank Ltd., and Al-Baraka Islamic Bank Ltd., has raised three fold objections firstly, the meeting was not held properly. Secondly, the mandatory requirement of 3/4th of the majority of the different class of creditors was not secured separately and thirdly that, the Court would not act as a post office and sanctions the scheme mechanically. According to him, Court must examine the fairness and otherwise propriety of scheme and to all see that it is not prejudicial and or oppressive of any class of the creditors. 11. To elaborate his first objection, it was contended that, the Court. Vide order, dated 2-12-2002 directed holding of the meeting of the creditors. In terms of rules 60(1) of the Companies Rules, 1997 the result of the meeting is to be placed before the Court. It was urged that, the objector at the very outset raised objection as to the manner in which meeting is being held. According to him, since the report of the 0/A is placed on record, it is for this Court to decide whether the meeting as held
---
## Page 3
was proper and in accordance with law or otherwise. It was next contended that, consenting and non-consenting creditors belong to different class and meeting, if any, should have been held separately of all the classes of creditors. It was argued that one set of creditors cannot bind other set of creditors nor can one class of share holder bind different class of shareholder in support of his contention he has placed reliance on Guha and Manikganj Trading and Banking Company v. Madhabendra Kumar Shakla and another AIR 1936 Calcutta 162 and Kohinoor Raiwand Mills Ltd. v. Kohinoor Gujar Khan Mills 2002 CLD 1314. In the first mentioned case, it was held that, depositors in Banking Company obtaining decree ceases to be a depositors, therefore, not bound by the scheme sanctioned by other depositors. In the last mentioned case Court held that, Agreement by one class of creditors would not bind another class, not party to the agreement. It was contended that, scheme cannot be sanctioned by the Court merely because it has been approved by majority of a particular.- class of creditors. It was urged that, Court has to examine, whether it is in the interest of all the other interest group or the class of a person that may be affected by the proposed scheme. It was stated that, the petitioners have not obtained approval of the scheme from its shareholders, whose interest is being varied. He took me through balance sheet to show that, the shareholding of various shareholders has been reduced without their consent and approval. It was urged that, the shares of Asset Investment Bank have been enhanced considerably irrespective of the fact that, it is not the secured creditor and further shareholding has been increased without there being any corresponding induction of capital or security. 12. Mr. Arshad Tayebally contends that, the scheme that tend to prejudicially affect rights of shareholder cannot be approved behind their back. In support of his contention he has placed reliance on the case reported as Re-Hunza ' Central Textile and Woollen Mills Ltd. PLD 1976 Lah. 851. In the cited case it was held that meeting for the approval of proposed scheme must be meeting of such class as would be effected by proposed compromise and not of other class. In cited case through proposed scheme of arrangement, Petitioner Company, sought reduction of share capital, it was held that compromise or arrangement under section 153 of Companies Act, 1913 does envisage reduction of share capital, in the manner provided by section 55 of Act of 1913 provided other conditions of section 153 Act of 1913 are fulfilled. It was further observed that, the arrangement or compromise is proposed between company and a class of its member must be agreed by majority of 3/4th in value of the class. In cited case, on examining the proposed scheme, Court came to a conclusion that, the reduction of share capital was sought to strangulate opposition and to strengthen the control of the management over affairs of company by curbing any opposition to it, consequently petition was dismissed. 13. Mr. Arshad further contends that, the scheme is malicious and fraudulent inasmuch as the Asset Investment Bank is associated company of the petitioner, therefore, it has direct and conflicting interest as against secured creditors. It was next urged that the liability of Asset Investment Bank is inflated to earn inflated percentage on account of being creditors and so also to increase the shareholding in the proposed scheme of arrangement. According to him the amount of the credit does not correlate to the amount shown in the scheme and book of accounts in the balance sheet. According to him at different places different amounts are shown. He has drawn my attention to page 90 to the explanation of note-4 the amount shown is Rs,30 millions, whereas, at page 107 the amount shown is Rs,66,074,338. According to Mr. Arshad, inflated amount shown is nothing but to earn profit at the cost of secured creditors. He further argued that, admittedly the Asset Investment Bank is not a secured charge holder, it merely hold hypothecation of immovable property, whereas, the objector is a mortgagee and has a charge over immovable assets and property, backed by a mortgage decree pending execution. He contends that, the executions are pending since 2002 and the petitioners are harvesting benefit on account of delay.
---
## Page 4
14. When it was suggested by the Court that, if the meeting of shareholders and different class of creditors may be called now. Mr. Arshad promptly responded that, the scheme cannot be approved and it is too late in the day to direct another meeting either of different class of members and or creditors. It was further urged that, satisfaction of the Court is necessary. Court does not sit merely as a post office but, has to examine the scheme, where the interest of one class is bargained at the cost of other class, where scheme is unfair and unreasonable, than such scheme cannot be approved. In support of his contention he has placed reliance on cases reported as, Hunza Central Asian Textile and Woollen Mills Ltd. PLD 1976 Lah.850. Cited case is already discussed above. In the case of Hamadul Haq v. Taj Company 1991 MLD 841 Court repelled the contentions that, where the scheme is proposed, the Court should prefereably call the meeting of the creditors and thereby leave it to the creditors or members to consider the reasonableness, utility or practicality of the proposal made, as they are the best Judge of their interest. In said case petition was dismissed on the ground that neither the reasonableness nor the feasibility nor the utility of the proposed scheme was established. In re Lipton Pakistan Ltd. 1991 CLC 818, scheme of amalgamation of companies was found to be reasonable and in consonance with the requirement of law, it was approved. In re: BTR PLC (BCLC) i,e, Butterworth Company Law Cases (1999) 2 Ch.D page 675 at 680) in said case also scheme was approved, and the criteria applied were same, as in cases from Pakistan jurisdiction. In the case of Re Empire Mining, (1890) L.r. Ch.D. 402 (Westlaw. Corn) where the scheme between the company and its creditor was extended to the debenture holder, it was held that, the Court has jurisdiction to deprive the debenture holders. Court may deprive dissentient debenture holder of their security and to sanction a scheme, which provides that they shall accept fully paid shares in satisfaction of their claim. It was urged by Mr. Arshad that, in all the above, cited cases same principles throughout have been applied. Court has always vouched for the interest of all the class of members and creditors while sanctioning the scheme. 15. In the context of the judgment relied upon by him and discussed above, it was argued that, object()) s have no commonality of interest with unsecured creditors. When attention of learned counsel was drawn to the case of re: Saadi Cement Ltd. And re: Pakland Cement Limited reported in 2002 CLC 1352 and 2002 CLC 1392 it was urged that, in said cases amount of secured creditors was fully secured. Whereas, in the instant case objectors are offered 2% and 6% shares respectively in the entire share capital according to Mr. Arshad, the entire credit liability and finance of the objectors would virtually be wiped out, in case the proposed scheme is allowed. 16. Mr. Asim Mansoor, exercising right of rebuttal contends that, the company is moving towards progress and making recovery out of the deadlock. He contends that, all efforts are to be made to rescue a going concern rather than to kill it. 17. Mr. Asim Mansoor contended that, as per annual report 2005 there is upward trend, showing progress. He admitted that, still company is going in loss. To a specific query of the Court as to the present market value of the shat e. Mr. 'Asim after obtaining instructions informed the Court that, on the date of arguments in the Stock Exchange, share of Rs,10 face value is quoted at 3.10 per share. 18. Mr. Asim, responding to the objection of Mi. Arshad Tayebally that, the shareholder were not informed of the meeting, urged that, official assignee who attended and chaired the meeting was also representative/Liquidator for Bankers Equity (under liquidation) one of the major shareholder. 19. Addressing to another objection of Mr. Arshad that, the Asset Investment Bank is a sister-ship or associated company of the petitioner, therefore, their consent may be of no value. Mr. Asim argued that, in law, there is no bar on the associated company to extend credit to the Sponsor Company i,e, the petitioner. According to him, objections raised in para.H to the objections filed later on cannot be taken into consideration.
---
## Page 5
20. Mr. Asim was confronted, as to the effect of the judgment and decree held by some of the creditors, and whether the objector formed different class of creditor. It was urged that, the term 'creditor' is of wide connotation. It encompasses all the categories of the creditors including secured as well as unsecured and so also a person merely having verifiable or otherwise claim against the Company. He contended that, since the Court directed holding of a meeting of all the categories of the creditors, therefore, no distinction between various categories of creditors could be drawn now, as regard the consenting and non-consenting (objectors) creditors. In support of his contention, he has relied upon the large number of cases as follows:- ' In re: Messrs Pakland Cement Limited through Director Shamim Musheq Siddiqui, 2002 CLD 1392; (ii) In re: Messrs Saddi Cement Limited through Director, Shamim Musheq Siddiqui, 2002 CLD 1352; (iii) Messrs Shakarganj Mills Limited and another v. Crescent Ujala Limited 2005 CLD 36; (iv) Capital Assets Leasing Corporation Ltd. v. International Multi Leasing Corporation Ltd., 2003 CLD 1713; (v) International Multi Leasing Company .v. Capital Assets Leasing Corporation Limited and another 2004 CLD 1; (vi) New Swadeshi Mills of Ahmedabad Ltd. v. Dye-Chem Corporation, (1986) 59 Corn. Cases 183 [Gujrarat High Court]; (vii) Sudarsan Chits (India) Ltd. v. Sukumaran Pillai and others (1985) 57 Corn. Cases 85 [Kerala High Court]; (viii) In re: Pak Water Bottlers (Pvt.) Limited and 2 others 2003 CLD 1634; (ix) ACE Insurance Limited, in the matter of Judicial Miscellaneous No,19 of 2001, 2002 CLD 171; (x) Messrs Platinum Insurance Company Limited, Karachi through Managing Director v. Daewoo Corporation, Sheikhupura through Director, Administration and Finance, PLD 1999 SC 1; (xi) Messrs. Habib Bank Ltd. v. Messrs Golden Plastic (Pvt.) Ltd. 1991 MLD 124; (xii) International Finance Corporation, Washington D.C. 20433 U.S.A. v.. Hala Spinning Ltd., Gulberg II, Lahore PLD 2000 Lah. 323; (xiii) Rouf B. Kadri v. State Bank of Pakistan and another PLD 2002 SC 1111; (xiv) Hala Spinning Mills Ltd. v. International Finance, Corporation and another, 2002 SCMR 450; (xv) A.C.K. Krishnaswa mi v. Stressed Concrete Constructions Private Ltd. (1964) 34 Corn. Cases 6 [Madras High Court]; (xvi) S. Krishnamurthy, Registrar of Companies, Punjab v. Rohtak Hissor Transport Company (P.) Ltd. (1966) 36 Co. Cases 9 [Punjab High Court at Chandigarh]; (xvii) In re: Alliance Motors (Pvt.) Ltd. 1997 MLD 1966; (xviii) Messrs United Bank Limited v. Messrs Taj Company Limited and 2 others 1996 CLC 890; (xix) Registrar of Companies, Punjab v. Ajanta Lucky Scheme and Investment Company Private Ltd. And others (1974) 43 Corn. Cases 314 [Punjab and Haryana High Court]; (xx) Kohinoor Textile Mills Ltd. Through Company Secretary v. Monopoly Control Authority through Chairman, Government of Pakistan, 2002 CLD 1844; (xxi) Messrs Industrial Development Bank of Pakistan v. Messrs Sarela Cement Limited Company, 1993 CLC 1540. 21. In cases mentioned at serial numbers (i) and (ii) viz re: Pak Land Cement Limited (2002 CLD 1392) and in re: Messrs Saddi Cement Limited 2002 CLD 1352; scheme of arrangement was approved by the majority of creditors having liabilities of over 97%. No objections were filed, scheme envisaged payment of the entire amount of principal as well as mark-up within 10 years. In addition of payment of entire liabilities, scheme also provided additional securities. Creditors were put on more advantageous position then before accordingly the scheme was approved. Case of Messrs Shakarganj Mills Limited and another 2005 CLD 36 is in relation of amalgamation and merger of two companies and objection of 0.01% were not given any credence. In the case of Capital Assets Leasing Corporation Ltd. 2003 CLD 1713. It was ruled that, ground as to jurisdiction should have been raised in the first instance. Any ground not urged in the petition could not be raised subsequently. In the case of International Multi Leasing Company 2004 CLD 1; effect of order of merger and amalgamation is outlined. It was held that, when the scheme is allowed by the Court, it does not merely operate as an agreement between the parties and the matter goes beyond the domain of contract, it becomes an order of the Court has the force of judicial pronouncement and assumes statutory force. It is binding not only on the company tut also on dissenting creditors and members as the case may b e. Case reported as New Swadeshi Mills of
---
## Page 6
Ahmedabad Ltd. (1986) 59 Corn. Cases 183, where it was noted that spite of giving ample time company was still making efforts but had not succeeded in persuading further financial assistance, company was ordered to be wound up. This case in fact goes against the petitioner company. In Sudarsan Chits (India) Ltd. (1985) 57 Com. Cases 85; in said case, principal laid down is that, even where scheme of settlement is mad& Court may proceed with the petition for winding up. It was also ruled that Court must study the scheme and make all endeavours to revive the company. If it were not possible then to bury it deep and distribute its assets, whatever is available to the creditors. In re: Pak Water Bottlers (Pvt.) Limited and 2 others, (2003 CLD 1634); it was a case of merger and amalgamation of three companies, Court examined the effect of adverse swap ratio applicable to minority shareholders. It was further held that, only requirement for the sanction of the Scheme was that, it should not be mala fide, oppressive, unreasonable and unjust. In the case of Re: ACE Insurance Limited 2002 CLD 171; a foreign insurance company to meet the requirement of Insurance Ordinance, 2000 applied for the sanction to bifurcate its operations in Pakistan and to convert its branch office into a public company. Cases of Messrs Platinum Insurance Company Limited PLD 1999 SC 1; Messrs Habib Bank Ltd. 1991 MLD 124; International Finance Corporation, PLD 2000 Lahore 323, Rauf B. Kadri PLD 2002 SC 1111; Hala Spinning Mills Ltd. 2002 SCMR 450. A.C.K. Krishnaswa mi (1964) 34 Corn. Cases 6; S. Krishnamurthy, Registrar of Companies, Punjab (1966) 36 Corn. Cases 9; Re: Alliance Motors (Pvt.) Ltd., 1997 MLD 1966; have no relevance with the facts in instant case. The entire last mentioned cases are for winding up of a company, for failure to pay debts. Case of Messrs United Bank Limited 1996 CLC 890; is also order in appeal in winding up proceedings. Similarly case cited as Registrar of Companies, Punjab (1974) 43 Corn. Cases 314 is also in respect of proceeding in winding up matter. Case of Kohinoor Textile Mills (2002 CLD 1844); also has no relevance to the facts of present case. It is a case under Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance, 1970. Case reported as Messrs Industrial Development Bank of Pakistan 1993 CLC 1540; also relates to winding up proceedings. 22. I have heard the arguments and perused the record. 23. As is manifest from the preamble, object of the Companies Ordinance, 1984 appears is to protect the interest of the creditors and investors and promotion of investment and development of economy and matter arising out of or connected therewith. 24. It appears that the Objector Banks have obtained mortgage decree against the petitioner, executions have been filed. It also appears from the record that, other creditors have also filed as many as seven suits, except one pending before the Banking Court, all are pending in this Court, proceedings in executions, as well as in suits, have been stayed under section 284(5) ibid in instant proceedings. The petitioner has filed instant petition to seek approval of the scheme, whereby, it is proposed that, the principal dues of both secured and unsecured creditors may be converted into equity, and that all the creditors shall waive mark-up. 25. In order to appreciate the arguments of both learned counsel. It will be beneficial to browse through section 284 of the Companies Ordinance, 1984:-- 284. Power to compromise with creditors and members.---(1) where compromise or arrangement is proposed between a company and its creditors or any class of them, or between the company and its members or any class of them, the Court may, on the application in a summary was of the company or of any creditor or member of the company or, in the case of a company being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class or members, as the case may be, to be called, held and conducted in such manner as the Court directors. (2) If a majority in number representing three-fourths in value of the creditors or class of creditors, or members, as the case may be, present and voting either in person or, where proxies are allowed, by proxy at the meeting, agree to any compromise or arrangement, the compromise or
---
## Page 7
arrangement shall, if sanctioned by the Court be binding on all the creditors or the class of creditors or on all the members or class of members, as the case may be, and also on the company, or, in the case of a company in the course of being wound up, on the Liquidator and contributors of the company: ' Provided that no order sanctioning any compromise or arrangement shall be made by the Court unless the Court is satisfied that the Company or any other person by whom an application has been made under subsection (1) has disclosed to the Court, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company, the pendency of any investigation proceedings in relation to the company and the like. (3) An order made under subsection (2) shall have no effect until a certified copy of the order has been filed…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.