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Petitioner: Messrs HABIB BANK LTD. VS Respondent: Messrs GOLDEN PLASTIC (PVT.) LTD.
Court Name: Sindh High Court Judge(s): Syed Haider Ali Pirzada Title: Messrs HABIB BANK LTD. vs Messrs GOLDEN PLASTIC (PVT.) LTD. Case No.: Judicial Miscellaneous No,70 of 1988, Date of Judgment:1989-09-24 Reported As: 1991 MLD 124 Result: Order accordingly
JUDGMENT
JUDGMENT ' This is a petition for winding up Messrs Golden Plastic (Pvt.) Limited (hereinafter referred to as the Company) under section 309 of the Companies Ordinance, 1.984 (hereinafter referred to as the Ordinance). The petitioner is a Banking company and has a branch known as 'SITE Branch'. The case as set out in the petition is that at the request of respondent, the petitioner had granted the respondent Company banking facilities and accommodation by way of advances, overdrafts, running finance, cash finance, demand finance, loans, T.R. Finance, FIM Export Re-finance and other facilities on several accounts. Some of these facilities were granted to the respondent-Company earlier and were renewed/extended from time to time at the request of the respondent. It is the further case of the petitioner that in 198'7 several such facilities were renewed/extended which are due and payable by the respondent to the petitioner. 2. It has been alleged that in respect of aforesaid loans, advances, finances made by the petitioner to the respondent, the following amounts are due and payable by the respondent to the petitioner as on 30-6-1988:- (1)Running Finance A/cRs.10,010,000 (2)Cash Finance A/c Rs.2,715,000 (3)Demand Finance A/cRs.3,532,000 (4)Loan A/c Rs.1,432,000 (5)T.R. Finance Rs.374,000 (6)FIM A/c Rs.6,584,000 (7)Export Finance-I Rs.240,000
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(8)Export Finance-II Rs,530,000 PLS PAD's A/c Rs9,211, 000 Total: Rs34,628,000 3. It has been alleged that the petitioner by its letters by registered post A/D addressed to the respondent and its directors and guarantors, all dated 16-81988, demanded repayment of the aforesaid amount of Rs,34,628,000 as on 30-61988. But the respondent has failed to pay the same. 4. It has been alleged that the Company is unable to pay its debts amounting to Rs,34,552,623.45 to the petitioner, as such the Company is liable to be wound up and Official Liquidator of the respondent-Company be appointed. 5. Hussaini, Director of the company has filed a counter-affidavit on 6-12-1988 and an additional counter-affidavit on contesting the petition. His case is that the balance as per the books of the accounts of the Company outstanding is Rs,29,873,808.39 and not Rs,34,554,623.20. It has been alleged that the said amount of Rs,29,873,808.39 includes an amount of Rs,10,087,050 by way of interest, compound interest and penal interest. It has been stated that under the existing constitutional provision and the decisions of this Court, interest is not payable even to a financial institution or bank. 6. It has further been stated that the total of the nine accounts is calculated at Rs,34,912,589.45 while the correct calculation is Rs,34,553,623.20. Thus there is a difference of Rs,3,59,966.20. 7. It has been further stated in reply that the petitioner has not given any notice to the Company under section 306 of the Ordinance. If such a notice was given by the petitioner to the Company, the Company was able to fully secure the outstanding to the reasonable satisfaction of the petitioner. It has been further stated that the notice sent by the petitioner was for adjustment and/or for recovery of the alleged amount due by way of suit. 8. It has been stated in reply that the present petition has been filed mala fide for ulterior motives and to avenge the demands made by the respondent to be treated equally with other industries. In the counter-affidavit, it has been denied that the Company is liable to be wound up. It has further been stated that the Company is solvent. 9. The notice which is alleged to have been given by the petitioner under section 306(1)(c) of the Ordinance, was given on 16-8-1988. This is Annexure P/1 to the petition. It is quoted below in full. ' Messrs Golden Plastics (Pvt.) Ltd., A-38, S.I.T.E., Regd. A.D. Karachi. Dear Sir, OUTSTANDINGSAGAINST MESSRS GOLDEN PLASTICS (PRIVATE) LTD. IN THEIR (i) Running Finance A/C Rs.10.010 (M) (ii)Cash Finance A/c Rs.2.715 (M) (iii)Demand Finance A/cRs.3.532 (M) (iv)Loan A/c Rs.1.432 (M) (v)'T.R. Finance A/c Rs.0.374 (M) (vi)FIM A/c Rs.6.584 (M) (vii)Export Refinance-I A/CRs.0.240 (M) (viii)Export Refinance-II A/cRs.0.530 (M) (ix)PLS PAD's A/c Rs9.211 (M) Total Rs34.628 (M) AS ON 30-6-1988 AT OUR S.I.T.E. BRANCH KCY.
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' You will please recall that the above advances were allowed at your request and personal guarantee. We regret that in spite of our repeated requests and written demands, the borrower has not yet liquidated his liability. ' In view of, the above facts, we have no alternative, but to call upon you to adjust the aforesaid sum of Rs,34.628 (M) together with all the accrued interest/mark up thereon in discharge of your obligation as a guarantor of our above advance within 7 days from the day hereof, failing which we shall be constrained to file suit against you for recovery of the Bank's dues entirely at your risk as to costs and consequences. Yours faithfully, (Sd.) (Nafisuddin)." 10. From a perusal of the above alleged notice, it is clear that it is actually an advice or request for adjustment of the amount within seven days failing which the petitioner wanted to dispose of the goods pledged with it as security and to appropriate the proceeds towards adjustment. In the notice, there is no indication at all that this is a notice under section 306(1)(c) of the Ordinance. It is not necessary in law, that the notice should specifically mention section 306(1)(c) of the Ordinance but there should be some indication given to the respondent that in case of non-compliance with the terms of a notice, the petitioner will take steps for winding up of the company under the provisions of the Ordinance. The petitioner did only mention the period of 7 days for adjustment. The petitioner only conveniently asked the Company to adjust the amount failing which it would take steps to dispose of the goods and to adjust the proceeds towards adjustment. Thereafter it would take steps to dispose of the goods and to adjust the proceeds towards adjustment, Thereafter, it would take steps to institute the suit for recovery of the amount. This question came up for consideration in Parry & Co. Ltd. v. India Machinery Stores (Pvt.) Ltd. 1979 T L R 1659-1979 C.Cases. It was held that firstly the present petition is based on the notice of demand (Annexure `D') said to have been made expressly in terms of section 434 of Indian Act, 1956 (corresponds to section 306 of our Ordinance). Not only no reference has been made in Annexure 'F to any proceeding which could be taken under Companies Act, but only a fortnight's time was allowed to the company to pay the dues in this letter which is against the statutory period allowed to debtor company to pay the debt after service of notice of demand on it under section 434 of the Indian Act. On the basis of notice of demand (Annexure `D'), it was further held that no winding up proceeding can be maintained. 11. The statutory demand under clause (a) of subsection (1) of section 306 of the Ordinance must be in strict compliance with the provisions of that clause and if these provisions are not strictly complied with, the demand, though followed by neglect of the Company to pay the debt demand, cannot be made the basis of presumption that the Company is unable to pay its debts. Clause (a) of subsection (1) of section 306 of the Ordinance imposes a penal obligation upon the Company and has therefore, to be strictly construed. In the circumstances of the instant case and following the principle in the above case, in my opinion, this cannot constitute as a valid notice under section 306(1)(a) of the Ordinance and no winding up proceedings can be maintained on the basis of the letter (Annexure T/1'). Accordingly, I hold that the notice given by the petitioner is not valid in law but, as I have already stated above even if the notice is invalid, the petition is still maintainable in law and it is open to the petitioner to challenge the inability of the respondent to pay its debts. 12. Mr. Akhtar also submitted that because of financial crisis in the respondent Company, it should be just and equitable to pass an order for winding up. 13. 13. In order to appreciate this contention, it is necessary first to examine the scope and effect of section 305(e) of the Ordinance. Section 305 enumerates the circumstances in which Company may be wound up. It provides as under:-
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"305. Circumstances in which company may be wound up by Court. A company may be wound up by the Court:-- a) b) c) d) e) f) g) if the company is unable to pay its debts; h) Section 305 of the Ordinance provides the circumstances under which the company may be wound up by Court. Under clause (e) if the company is unable to pay its debts, it is liable to be wound up by the Court. Apart from that if the Court is of the opinion that it is just and equitable that the company should be wound up it can do so. Although no statutory notice had been served on the company and as a result, the petitioner is not entitled to take any benefit of the presumption of non-payment or inability to pay, the petitioner may still prove that the company is otherwise unable to pay its debts. The debt of the petitioner is not disputed. 14. The word 'may' in the opening part of the section, clearly indicates that even if the company is unable to pay its debts, it is the matter of discretion of the Court whether, in the circumstances of the case, it would be in the interest of justice to wind up the company. I am of the humble view that although the power to wind up is discretionary, it has to be exercised judicially. This means that it is only where the balance of equities is shown by petitioner to tilt appreciably in favour of a winding up order that it will be made 'ex debito justitiae'. It is in this special sense that a petitioner relying on grounds contained in section 305 can get a winding up order as a matter of right. It is issued as a matter of right when the proved contents of the right produce a compelling effect. It is not granted mechanically as a matter of course on proof of certain facts. In other words, equitable considerations have a decisive effect even when the power to wind up a company is involved under a clause of section 305 other than the general just and equitable clause (h). 15. I am unable to take a different view of the power contained in provisions of section 305 of the Ordinance. 16. In Bowes v. Hope Life Insurance and Guarantee Company (1865) XI H L C 389 11 E.R. 1383, Lord Cranworth observed as under:-- "I agree with what has been said, that it is not a discretionary matter with the Court when a debt is established, and not satisfied, to say whether the company shall be wound up or not; that is to say, if there be a valid debt established, valid both at law and in equity." ' In re Brighton Hotel Company (1868) LR 6 Equity Cases 339, it was held:-- "The Court is not bound ex debito justitix to make an immediate order to wind up a company upon the petition of a creditor whose debt is admitted and not paid, but may, under the 86th and 91st sections of the Companies Act, 1862, order the petitioner to stand 'over to enable the company to make arrangements for the payment of its debts, and the carrying on of its business, and will make such order where there is a reasonable hope of such arrangements being made." ' In re Western of Canada Oil, Lands, and Works Company ((1874) XVII Equity Cases 1) it has been held as follows:-- "A creditor of a company who cannot get paid without a winding-up is entitled ex debito justitix to a winding-up order. ' A creditor of a company who has, under section 80 of the Companies Act, 1862, served on the company a demand for payment of his debt, but has not been paid within the three weeks, is not necessarily entitled to an immediate order for winding up the company."
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' In W.T. Henley's Telegraph Works Co. Ltd., Calcutta v. Gorakhpur Electric Supply Co. Ltd., Allahabad AIR 1936 All. 840, Iqbal Ahmed, J. Observed with regard to Court's discretionary power, now found in section 305 of the Ordinance, to wind up a company: "It would thus appear that the company is unable to pay its debts. This fact, however, does not necessarily entitle the petitioner to an order for the winding up of the company, as the discretion to pass such an order, even in the case of the inability of a company to pay its debts, is by section 162 vested in the Court." 17. Section 306 of the Ordinance enumerates the circumstances when it would be deemed that the company is unable to pay its debts. Subsection (1) of section 306 provides as under:-- "306. Company when deemed unable to pay its debts. (1) A company shall be deemed to be unable to pay its debts--- (a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding one per cent of its paid-up capital or fifty thousand rupees, whichever is less, than due, has served on the company, by causing the same to be delivered by registered post or otherwise at its registered office, a demand under his hand requiring the company to pay the sum so due and the company has for thirty days thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor; or (b) if execution or other process issued on a decree or order of any Court or any other competent authority in favour of a creditor of the company is returned unsatisfied in whole or in part; or (c) if it is proved to the satisfaction of the Court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the company." In clause (a) above, if a creditor has served on a company a demand requiring the company to pay a sum so due and the company has neglected to pay the sum, then it would be deemed that the company is unable to pay its debts. Clause (b) provides that if execution or other process issued on a decree or order of any Court in favour of a creditor of a company is returned unsatisfied in whole or in part, it shall be deemed that the company is unable to pay its debts. Clause (c) further provides that if a Court is satisfied that the company is unable to pay its debts, then also the company will be deemed to pay its debts. All the three clauses, mentioned above, are disjunctive and if the petitioner is able to establish D the circumstances, mentioned in clause (a) or (b) or (c), it would be deemed that the company is unable to its debts. If a notice given under clause (a) is held to be invalid, then too it would be open to the petitioner to satisfy the Court that the Company is unable to pay its debts. In Tripura Administrative v. Tripura State Bank Ltd. AIR 1959 Tripura 41 it has been laid down that the proper demand made in accordance with the provisions of section 434(1)(a) of the Indian Companies Act, 1956 (section 306(1)(a) of our Ordinance) only gives the benefit of the presumption that arises under it, but if the demand is found to be invalid for any reason, then it is still open to the creditor to fall back upon section 434(1)(c) and prove that the company cannot pay its debts. I agree with the view given in this case. 18. In general terms, if it is established that the company is unable to pay its debts as deemed under section 306(1)(a) of the Ordinance, it is called as a commercial insolvent and, as such, liable to be wound up after the Court takes into account the contingent and the prospective liabilities of the Company. 19. In re Cine Industries and Recording Company Ltd. AIR (29) 1942 Born. 231 it was held that the main consideration in a winding up petition is the interest of the share-holders and creditors. There in a petition for winding up, the Court had to consider the test for determining whether a company should be wound up on the ground that the company is commercially insolvent at the date of the petition for winding up. It was held that the expression 'commercially insolvent' means that the existing assets and liabilities of the company are such as to make it reasonably certain as to make
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the Court satisfied that the existing and probable assets would be insufficient to meet the existing liabilities. Again the other test is whether at the date of the presentation of the winding up petition, there was any reasonable hope that the object of trading at a profit with the view to which the company was formed, could be attained, it was further held:-- "The test for determining whether a company should be wound up is whether the company is commercially insolvent at the date of the petition for winding up. The expression 'commercially insolvent' means that the existing assets and liabilities of the company are such as to make it reasonably certain as to make the Court satisfied that the existing and probable assets would be insufficient to meet the existing liabilities. ' The other test is whether at the date of the presentation of the winding-up petition there was any reasonable hope that the object of trading at a profit, with a view to which the company was formed, could be attained. ' It is for the petitioner to prove that the test is satisfied in the case of the particular company which he asks the Court to wind up. The substratum of the company must be deemed to be gone so as to entitle the Court to pass a winding up order when (a) the subject-matter of the company is gone, or (b) the object for which it was incorporated has substantially failed, or (c) it is impossible to carry on the business of the company except at a loss which means that there is no reasonable hope that the object of trading at a profit can be attained, or (d) the existing and probable assets are insufficient to meet the existing liabilities. When none of the four tests can be applied to the facts of the particular case the compar.;' cannot be wound up." 20. It is well-settled principle that the petition for winding up can be refused when the claim of the petitioner is bona fide disputed by the company. Where the petition is filed out of improper motive to coerce the company and in satisfying some groundless claim made against it by the petitioner, the Court will refuse to pass an order inasmuch as the petition was presented out of improper motive. In the instant case, the claim of the petitioner is not disputed, nor is the claim of the petitioner based on groundless claim inasmuch as it is an admitted fact that the company defaulted in clearing the outstanding dues. Under the circumstances the instant case cannot be held to be an abuse of the process of the Court. There had been an admission of the liability in the counter-affidavit. Under the circumstances, the petitioner's claim does not appear to be groundless or frivolous. 21. In the case of Messrs Madhusudan Cordhandas & Co. v. Madhu Woollen Industries Private Ltd. AIR 1971 SC 2600 in paragraph 21, it had been held by the Supreme Court of India as under:-- "Where the debt is undisputed the Court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt (see re: a company 94 SJ 369). Where, however, there is no doubt that the company owes the creditor a debt entitling him to a winding up order but the exact amount of the debt is disputed the Court will make a winding up order without requiring the creditor to quantify the debt precisely (See re. Tweeds Garages Ltd., 1962 Ch. 406). The principles on which the Court acts are first that the defence of the company is in good faith and one of subtance, secondly, the defence is likely to succeed in point of law and thirdly the company adduces prima facie proof of the facts on which the defence depends." ' In Federation of Pakistan v. The Standard Insurance Company Ltd. Karachi PLD 1986 Kar. 409 Mr. Saeediizzaman Siddiqui, J. Held as follows:-- ' The object of the present proceedings initiated by the petitioner is to secure from the Court an order of winding up of the respondent on account of its inability to pay its debts, which means that the respondent has ceased to be commercially solvent and viable, and its continuation will be prejudicial to its creditors and the share-holders. In such proceedings, the principal question before the Court is, whether the debt, for which the inability is imputed, is disputed or not, and, if the
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debt is disputed by the company, then such a dispute by the company is based on substantial ground. If the Court, after examining material placed by the company, reaches the conclusion that the denial of the liability by the company to a particular debt is based on substantial ground, then it will refuse to make an order of winding up, as the object of these proceedings is not to coerce the company to make payment to an unpaid creditor, but to secure discontinuation of the functioning of a company, which has ceased to be commercially solvent." 22. Section 305 of the Ordinance is similar to section 222 of the English Companies Act of 1948 while our section 306(1) corresponds to section 223 of the English Act. There are four clauses in section 223 of the English Companies Act, while our section 306(1) contains three such clauses. Clause (c) of section 306 of our Ordinance is similar to clause (d) of section 223 of the English Act. Now the position regarding that clause has been stated as follows in Halsbury's Laws of England, third Edition, Volume 6, paragraph 1033:-- "Inability to pay debts. A company (not being an unregistered company (0 is deemed to be unable to pay its debts:-- (1) if a creditor (g), by assignment or otherwise, to whom the company is indebted in a sum exceeding L50 then due, has served on the company, by leaving the same at its registered office, a demand under his hand requiring the company to pay the sum so due, and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor; or (2) if, in England or Northern Ireland execution or other process issued on a judgment, decree or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part; or (3) if, in Scotland, the induciae of a charge for payment on an extract decree, or an extract registered bond, or an extract registered protest, have expired without payment being made; or (4) if it is proved to the satisfaction of the Court that the company is unable to pay its debts; and, in determining whether a company is unable to pay its debts, the Court is to take into account the contingent and prospective liabilities of the company. ' In the case of failure to satisfy the statutory demand, the petition must not be presented before the three weeks have expired. Omission by a company to pay a debt by reason of a bona fide dispute does not amount to a neglect to comply with the statutory demand. Default in complying with the statutory demand of a creditor gives not only him, but other creditors and contributories, the right to petition for a winding up. ' Inability to pay debts may be shown in other ways than by proof of noncompliance with the statutory demand, as, for instance, where a bill or note has been dishonoured at maturity, or a judgment creditor has not issued execution because the company's solicitor has told him that there are no assets, or no unmortgaged assets, on which he can levy. ' A company, not being a life assurance company, may also be wound up on the ground of inability to pay debts when it is commercially insolvent namely, unable to pay its debts as they become due, although its assets when realised, including uncalled capital, exceed its liabilities." 23. It, therefore, appears that the inability to pay the debts has to be examined with reference to the period of time when 'they become due'. 24. The point was expressly examined in re European Life Assurance Society (1869) IX LR (Equity Cases) 122 and it was held as follows:-- ".... Inability to pay debts must refer to debts absolutely due that is to say, debts for which a creditor may go at once to the company's office and demand payment." 25. A reference to Bucklay on the Companies Act (12th Edition) shows that the position has been clearly brought out there. It has been stated at page 462 that clauses (a), (b) and (c) are all included in clause (d) of section 223 of the Companies Act of 1948 and they are all instances of
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'commercial insolvency' that is of the company being unable to meet current demands upon it. Dealing with clause (d) of…
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