Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: Mirza MUNAWAR AHMAD AND ANOTHER VS Respondent: OFFICIAL LIQUIDATOR AND 3 JUDGMENT
Court Name: Lahore High Court Judge(s): Shafi-ur-Rehman, Gul Muhammad Khan Title:Mirza MUNAWAR AHMAD AND ANOTHER vs OFFICIAL LIQUIDATOR AND 3
JUDGMENT
Reported As: PLD 1980 Lahore 86 Result: Appeal allowed Judgment JUDGMENT ' GUL MUHAMMAD KHAN, J.-Two appeals (I. C. A. 4-Com-77 and 1. C. A. 5-Com-77) filed against the order dated 12th January 1977, of the learned Company Judge shall be disposed of together by this order. They arose out of C. M. 101/L-71 and C. M. 102/L-71 in C. 0. 14-70, in which all the. Parties consented to winding up of the Company. An order dated 1st February 1971, was passed accordingly. It was prayed in C. M. 101/L-71 filed by the Industrial Development Bank of Pakistan (hereinafter referred to as the Bank) that the property sought to be auctioned by the Official Liquidator through Pakistan Times, dated 22nd September 1971, be released. The prayer made in the second case C. M. 102/L-71 was that the property mentioned in Schedule 'A' attached to their petition did not belong to the Company and may be released so that loan taken by the partnership from the Bank may be paid off. The learned Company Judge came to the conclusion that as the property in question stood validly transferred to the Company, there was no merit in the two applications. 2. The facts leading to these appeals are that on 4th November 1954, Mirza Munawwar Ahmad, appellant, alongwith Mirza Masood Ahmad, Mirza Muhammad Sadiq Beg (deceased now represented by his legal representatives) and Mirza Walayat Beg, formed a partnership under the name and style of 'Hospital Equipment Supply Company' (hereinafter referred to as the Firm). This Firm was registered with the Registrar of Firms, Lahore Division, on 10th June 1975. It carried on the business of manufacturing hospital equipment. On 16th December 1966, the Firm executed a credit agreement with the Industrial Development Bank of Pakistan for a loan of Rs, 1,24,000, for the import/purchase of machinery, construction of building and shifting of the operation of the Firm
---
## Page 2
from Lahore to Gujranwala. As a security for repayment of loan the Firm mortgaged/hypothecated in favour of the Bank its entire movable and immovable property including leasehold rights of the plot of land bearing No, 60-A in the Small Industries Estate, Gujranwala, on which the factory of the Firm is situate. 3. One of the conditions of the loan of the Bank was that the partners will neither effect any change in the structure of the Firm nor would they dispose of any of the assets of the Firm, without prior approval in writing of the Bank. On 28th June 1967, the Firm sought for a permission from the West Pakistan Small Industries Corporation thereinafter referred to as the Corporation) through its Deputy Manager to form a limited company and to transfer its assets to it. Admittedly, no company was in existence and no such request was made to the Bank. In respect of that matter. On 30th June 1967 an 'agreement Exh. R. W. 7/1', signed by four partners on the one side and two of them as Directors of the would-be company on the other, was executed. This agreement purported to sell assets and liabilities of the Firm to the Company. 4. However, without waiting for the permission a company was formed and incorporated in the name of the Hospital Equipment Supply Company Limited (hereinafter to be called the Company) on 2nd August 1967. Its authorised capital was Rs, 10,00,00), divided into 10000 ordinary shares of Rs, 10 each. Shares worth Rs, 1,30,000 were allotted to the four partners in lieu of their shares in the Firm, in the following manner :- {{TABLE}} Mirza Munawwar Ahmad 400 Managing Director Mirza Masood Ahmad 300 Mirza Muhammad Sadiq Beg 200 Mirza Walayat Beg 400 {{TABLE}} ' The latter two were taken Directors of the Company while Mirza Munawwar Ahmad as the Managing Director. A further capital of Rs, 1,70,000 was raised by issuing 1,700 shares and three other Directors, namely Muhammad Yunis Qamar, Muhammad Aslam Khan and Mirza Jatfer Beg were made. 5. The business, assets and liabilities of the Firm are also said to have been actually taken over by the Company in view of the agreement (Exh. R. W. 7/1) dated 30th June 1967. Photo-copy of an unsigned agreement has been placed on record to show its contents but the original is not forthcoming. 6. It appears that the application for obtaining sanction submitted by the Firm on 28th June 1967, was recommended by the Deputy Manager of the Corporation on 30th March 1968, vide Exh. P/2. There was further correspondence but the request was finally turned down by the Chairman of the Corporation on 2nd May 1968. The appellant repeated the same request in another letter dated 11th June (1968, Exh. 'B') but it was also rejected on 14th May 1969, by Manager-I of the Corporation (Exh. R/1). Its communication was, however, made to the Firm on 23rd February 1970 (Exh. R/5) by the Deputy Manager. The last request made at the instance of the respondents on 14th May 1970 (Exh. R/3) was also refused on 1st June 1970 by the Director vide Exh. R/4. The result is that at no stage was the request of the Firm or the Company allowed. 7. Meanwhile, disputes arose between the Managing Director and the other Directors of the Company which led to criminal as well as civil litigation. The appellant was removed as Managing Director on 1st January 1970. He withdrew his letter dated 11th June 1963 (Exh. `B'), requesting conversion of the Firm into Company vide his letter dated 19th January 1970. It appears that he was ignorant of the fact that even his second request had already been refused by Manager-I, referred
---
## Page 3
to above as Exh. R/l. On 18th March 1970, Mirza Munawwar Ahmad, Mirza Masood Ahmad and four others filed Civil Original No 14 of 1970 praying for compulsory winding up of the Company. 8. To begin with the respondents in their reply objected to the winding up. In para. 2(a)(iv) they stated that no meeting of the Board of Directors or the General House had been held from 2nd August 1967 (the date of incorporation) to 19th September 1969. They referred to three meetings held on 19th September 1969, 26th December 1969, and 1st January 1970, but their minutes do not show any resolution to take over the property of the Firm was passed. It is quite clear from the stand taken by the respondents that no agreement was entered into by the Company, at any stage after its formation, with the Firm, for the purchase of the property in question. In reply to para. 5 of the petition the respondents stated that after the refusal of the Corporatior/Bank to recognise conversion of the Firm into Company, they, while in charge, worte again on 14th May 1970, to the Corporation (Exh. R/3) for reconsideration of their decision. The only case made out by the respondents in their reply was that the Bank had always reacted favourably to the request for sanction of transfer and having also accepted the instalments towards the loan from the Company it could not change its position. The locus standi of the other petitioners was also challenged. A number of allegations were made by the respondents against Mirza Munawwar Ahmad appellant. 9. The Standard Bank, a creditor, supported the proceedings under section 175 of the Companies Act. The Corporation in its reply pleaded that the change in the status of the Firm into a Company was effected illegally. In para. 7 it opposed the application for liquidation. The Bank, however, pleaded vide an application dated 7th April 1970, that its loan was fully secured. The Bank also expressed its inability to release the securities. In the alternative it was urged that in case the Company is ordered to be wound up the claim of the Bank may be satisfied in preference to all other creditors. 10. On 1st February 1971, the respondents also changed their position and consented to the winding up of the Company. Consequently, an order to that effect was passed the same day by the learned Company Judge and Mr. Nazir Ahmad, Advocate was appointed as the Official Liquidator. 11. On 3rd August 1971, the Bank moved an application to the Official Liquidator to hand over possession of the morale and immovable property of the Firm as it was entitled to assume possession in view of its agreement dated 16th December 1966, with the Firm. The Official Liquidator rejected the application on 17th September 1971. 12. Consequently on 4th October 1971, the Bank filed C. M. 101/L-71 stating that since the partners could not effect any change in the structure of the Firm and could not dispose of its assets, the transfer of the assets of the Firm to the Company was illegal. The Bank also relied on sections 39 and 40 of the Industrial Development Bank of Pakistan Ordinance, 1961, to recover the amount due from the Firm by attachment and sale of the mortgaged/hypothecated property. It was, therefore, prayed that directions be issued to the Official Liquidator, to release the property of the Firm, detailed in Schedule Annex. 'C' to the application. Alternatively, it was prayed that if it was held that the property of the Firm stood transferred to the Company, permission be accorded to the Bank for the institution of proceedings under section 39 of the Ordinance against the Company. 13. Meanwhile, the Official Liquidator put in an advertisement for sale of the property in question. On 6th October 1971, Mirza Munawwar Ahmad and Mirza Masood Ahmad submitted another application C. M. 102/L-71. It was stated in it that the property of the Firm could never be transferred to the Company without the permission of the Corporation/Bank and that the advertisement for sale of the property made by the Official Liquidator was illegal. A prayer was also made for release of the suit property to enable the Firm to pay up the debts. 14. The learned counsel for the respondents raised a preliminary objection to the maintainability of the appeals under section 202 of the Companies Act and section 3 of the Law Reforms Ordinance.
---
## Page 4
It may be stated at the outset that section 3 of the Law Reforms Ordinance is not applicable to company cases as held in. Eastern Company (Private) Ltd. v. Mst. Gul BeguM (I), by this Court. The criterion of appeal ability under section 202 is the same as in an order passed by a Judge on original side of the High Court, under clause 10 of the Letters Patent. An order, refusing to wind up a company and adjourning the petition after hearing it on merit was held B to be appealable in Bachhery Factories Ltd. v. Hirjee Mills Ltd. (2). It was held in Seth Haribans v. National Sugar Mills (3) and Lala Mulk Raj Bhalla v. Official Liquidator Peoples Bank (4), that this section is wide enough to cover (1) PLD 1980 Lah. 69 (2) AIR 1955 Born. 355 (3) AIR 1931 Lah. 8 (4) AIR 1938 Lah. 658 appeals against any order made in the matter of winding up provided such an order finally decides a dispute between the parties or deprives the applicant of a substantial or important right and is not a mere formal or interlocutory order. Same view was taken in the case of Sausar Chand v. Punjab Industrial Bank (1). In G. M. Bahri v. Maudaland Bahri Ltd. (2), an order for voluntary liquidation under supervision was held appealable, Reference be also made to the case of Dayabhai v. Murugappa Chettyar (3), where it was held as under ' I am of opinion that in the Letters Patent of the High Courts, the word 'judgment' means and is a decree in a suit by which the rights of the parties at issue in the suit are determined. The term `suit' in the Letters Patent includes suits instituted by a plaint or by an originating summons in the manner prescribed under the rules of the Court. ' A final judgment is a decree in a suit by which all the matters at issue therein are decided. A preliminary or interlocutory judgment is a decree in a suit by which the right to the relief claimed in the suit is decided, but under which further proceedings are necessary before the suit in its entirety can be determined. All other decisions are orders, and are not 'judgments' under the Letters Patent, or appealable as such......'' ' Undoubtedly, the learned Company Judge has finally decided about the ownership of the property. That question is not only substantial and important but stands decided finally between the parties. As for the Bank also the decision is not only final but important. The legal right of the Bank has been taken away and the property has been removed from it lawful authority. 15. This controversy has in fact been considered deeply in Industrial Sales and Service v. Archifar Opal Laboratories Ltd. (4). It was held that if judgment or order determines the right to any relief claimed by any party to the proceedings and does not merely regulate a procedure and is not merely a technical step towards obtaining final adjudication it will be a judgment under clause 10 of the Letters Patent. The Supreme Court in Mumtaz Khan v. Chief Settlement and Rehabilitation Commissioner (5), ruled that the term 'judgment' in clause 10 shall not be confined to decree but is of wider import and would merely mean a judicial determination or a final decision of a Court but not an interlocutory order. An order directing holding of a meeting in contravention of the procedure as laid down in the Articles of Association was held to be a judgment in Mirza Munawwar Ahmad v. Mirza Jaffa,. Beg (6), and hence appealable. 16. The second preliminary objection was that the appellants could not file their application before the learned Company Judge without taking his leave first. Admittedly, this objection was not raised before the learned Company Judge. As it is an intra-Court appeal such an objection at the appellate stage cannot be allowed as held in Muhammad Ayub Khan v. Chief Settlement Commissioner (7). The Supreme Court took the same view in Mst. Zamro Jan v. Fateh Khan (8). Even otherwise, the objection is (1) AIR 1929 Lah. 707 (2) AIR 1930 Lah. 721 (3) AIR 1935 Rang. 267 (4) PLD 1969 Kar. 418 (5) PLD 1966 SC 276 (6) Law Notes 1970 Lah. 566
---
## Page 5
(7) PLD 1968 Lah. 495 (8) 1971 SCMR 385 misconceived. Leave may be required under section 171 of the Companies Act for a suit or proceedings other than those taken in defence. The two applications before the learned Company Judge arose out of the liquidation proceedings under which the property in which the appellants claimed interest was being taken over as the property of the Company. The appellants were thus acting in defence and in the same winding up proceedings before the same Court. In Jewan Das v. Peoples Bank (1), it was held that once an action by the Company in liquidation itself has been proceeded with and is successful then there is no necessity for the defendants in the action to obtain leave. 17. The third preliminary objection was that the appellants are not aggrieved parties. Even -this objection was not raised by the respondents before the learned Company Judge. In any case, as both the appellants claimed interest in the property in dispute they did have the locus standi to move the matter before the learned Company Judge and come to this Court in appeal after failing there. No authority is needed for this proposition but one may rely on the case of Fazal Din (2) and of Sh. Amir-udDin (3). 18. The learned counsel then submitted that as the Firm had been dissolved with the consent of the partners no one of them has any interest left in the previous property of the Firm and so they could not make any grievance before the learned Company Judge. It is a well-established position of law that dissolution of a partnership is complete only after all of its assets have been realised and divided. Reference be made to the following passage from the judgment of the Privy Council in Sathappa Chetty v. S. N. Subrahmanyan Chetty (4) : 64. . . If the partnership was put an end to some years ago his rights arose then and either the parties ought at once to have contributed such a sum as would make up to him his share of the loss, or they ought to have in some way disposed of the remaining assets and then met the remainder of the loss by their contributions. But no one at the time suggested this. On the other hand they were entitled to say to the plaintiff: `Until all the assets are relised we cannot tell how much we owe to you, and we claim not to pay you anything until all the assets are realised.' ' If so, for that purpose the partnership went on; it went on, not because it would do any more business, until those assets were realized, the final dissolution of the partnership could not take place... ." ' Therefore, as the ownership of the Firm's assets is in dispute the partners have a right to pursue the matter. It is surprising that the learned counsel contested the two applications of the appellants for about 6 years from 1971 to 1977 but did not think of any such objection. 19. The learned Company Judge had on 3rd February 1972, framed the following issues :- (1) Whether the firm Hospital Equipment Supply Company entered into a vendor's agreement with the Company now under liquidation on 30-6-1967? (1) AIR 1937 Lab. 926 (2) PLD 1969 SC 223 (3) PLD 1968 SC 165 (4) AIR 1917 P C 70 (2) If the answer be in the affirmative, whether the property aforesaid was actually transferred to the Company under liquidation in pursuance of this agreement? (3) Whether the property mentioned in Schedule 'A' to C. M. 102-L/71 was ever transferred to the Company under liquidation? (4) Whether the Bank is estopped by its conduct from disputing the transfer of the property? (5) Whether Mirza Munawwar Ahmad is similarly estopped? (6) Relief. Ali of them were found against the appellants and so their applications dismissed.
---
## Page 6
20. It was contended by the learned counsel for the appellants that as the original agreement Exh. R. W. 7/1 had not been produced and proved, it could not be relied upon. In the alternative it was pleaded that even if the finding of fact of the learned Company Judge be accepted as correct about its actual execution and contents, it could not be held that there was any agreement with the Company, which was incorporated more than a month thereafter. Admittedly the Company was not in existence when the agreement Exh. R, W. 7/1 was executed. It became a legal person or say was born after its incorporation as held in the case of Messrs Haripur Rosin and Turpentine Factory Ltd. (1). Thus without going into the controversy about its execution or genuineness, we agree with the learned counsel that even if there was an agreement, it was between the partners interse or partners and promoters but not with the Company. The Company which was incorporated more than a month later on 2nd August 1967, could not be a party to that deed and so issue No, 1 could not have been decided in the affirmative. 21. As regards issues Nos, 2 and 3 the case of the respondents was that immediately after the execution of the agreement Exh. R. W. 7/1 on 30th June 1967, all the assets and liabilities were transferred to the Company. In every transaction of sale or acquisition of an interest, there must be two parties, a seller and a buyer. Exh. R. W. 7/1 shows that the seller had agreed. The four partners of their own evaluated the assets and the liabilities of the Firm. The document was executed before the incorporation of the Company. Exh. R. W. 7/1 could thus at the most be an offer by the Firm to be considered by the Company after its formation. Admittedly, one of the objects of the Company in the Memorandum of Association, t. e. 1(a) was `to acquire and take over as going concern the business now carried on under the name and style of Hospital Equipment Supply Company. Lahore, and all the assistant and with a view thereto enter into the agreement and to carry on the same into effect with or without modification.' 22. Article 54(b) of the Articles of Association confers power on the Directors `to take on lease, purchase or otherwise acquire for the Company any property, rights or privileges, which the Company is authorised to acquire at such price and generally on such terms and conditions as they think fit'. No meeting of the Directors was held up to 19th September 1969, and no decision taken as stated by the respondents in their objections supported by an affidavit filed in C. 0. 14-70 and referred to in para. 8 above. The Managing Director who was corresponding with the Corporation had no power on behalf of the Company to take any action or enter (1) PLD 1973 Lab. 361 into any agreement. The subscribed capital of the new share-holders was more than what the partners of the Firm thought would bring after the take over of the Firm was complete. The offer by the Firm was, therefore, never accepted by the Company and hence no contract enforceable at law. Mere correspondence on the part of the Managing Director for permission to convert Firm into Company could not attract any legal consequence and no property of the Firm would vest in the Company. 23. In Newborne v. Sensolid (Great Britain) Ltd. (1), tinned ham was sold to S. Ltd. The contract was 'We have this day sold to you .. . (signed) Leopold Newborne (London) Ltd.'. The signature was typed and underneath was written 'Leopold Newborne'. The market fell and S. Ltd. Refused to take delivery. When an action was brought it was found that Leopold Newborne (London) Ltd. Had not been incorported at the time of the contract and Leopold New Bprne tried to enforce the contract in his own name. Held, neither Leopoled Newborne (London) Ltd., nor Leopoled Newborne could enforce the contract, as 'This company was not in existence and. .. The signature on that document, and, indeed, the 'document itself. .. Is a complete nullity.' 24. Notwithstanding what has been said above, none of the partners can sue on their agreement or the Memorandum and Articles of Association. The following passage from Halsbury's Laws of England, Vol. 7, para. 118 (end part) page 72 (4th Edition) may be reproduced : -
---
## Page 7
"Where the articles provide that the company on incorporation is to enter into an agreement for the purchase of property and for the appointment of the vendor as a Director, the vendor who becomes a share-holder cannot sue nor can any person claiming through the vendor sue or rely on the articles as constituting a contract . . . . 25. The respondents are also relying on clause 1(b) of the Memorandum of Association. While requesting the Corporation to reconsider their request for getting approval from the Bank for transfer of property from the Firm to the Company on 14th May 1970 (Exh. R/3), they referred to that provision as their mainstay. Clause 1(b) requires the Company to enter into an agreement for the purpose but admittedly that was never done. There is thus a clear violation of the Memorandum of Association with respect to the claim that the Company has already acquired the assets and liabilities of the Firm. It is, however, an established position of law that any act of the Company in violation of the Memorandum is ultra vires and so void and cannot even be ratified. Reference be made to Re Birkbeck Building Society (2). It was held in Sardar Gulab Singh v. Punjab Zamindara Bank Ltd. (3), that a resolution removing a Managing Director being in violation of Articles of Association and law was void and ineffective. In any case, the contents of a Memorandum of Association do not bind a third party even though named therein as held in Ram Kumar Pettdar v. Sholapur Spinning & Weaving Factory (4). The Court further observed that a company cannot be bound by a contract entered into on its behalf before the company was formed and that it is for the company to consider after its formation whether it will enter into a contract or not. It was held in Wearne Brothers Ltd. (5), that a company cannot be bound by (1) (1954) 1 Q B 45 (2) (1912) 2 Ch. 183 (3) AIR 1940 Lah. 243 (4) AIR 1934 Born. 427 (5) (1928) 7 Rang. 144 (P any contract made on its behalf before it comes into existence nor can it subsequent to its formation ratify such a contract. 26. The English Law on the point is also the same. There also if any person purports to make a contract on behalf of a company, or as trustee for it, e.g. a contract for the purchase of property by the company, before the formation of a company, the contract is not binding on the company even if the company takes the benefit of the contract. The reason is that before incorporation the company lacks capacity to make the contract and nothing can be done by an agent which cannot be done by the principal. 27. In re : English & Colonial Produce Co. Ltd. (1), Solicitors, on the instructions of persons who afterwards became directors of the company, prepared the memorandum and articles of association of the company and paid the registration fees. It was held that the company was not liable to pay their…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.