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Petitioner: Saudi Pak Industrial & Agricultural Investment Company Ltd VS Respondent: Chenab Limited
Court Name: Lahore High Court Judge(s): Jawad Hassan Title:Saudi Pak Industrial & Agricultural Investment Company Ltd vs Chenab
Limited Case No.: Civil Original No.43 of 2011 Date of Judgment:2019-12-02 Reported As: 2019 LHC 3983 Result: Appeal accepted Judgment JAWAD HASSAN,J. This judgment will dispose of the application, C.M. No.30-C of 2019, filed by the shareholders/contributors/ex-management (the "Applicants") of the Chenab Limite d (the "Company ") for grant of interim relief, under Section 313 of the Companies Act, 2017 (the "Act") read with Order XXXIX Rule 1 & 2 and Section 151 of the Code of Civil Procedure, 1908 (" CPC "). A. BACKGROUND OF CASE 2. At the outset, this High Court has already allowed an application under Section 305, 306 and 309 of the Act for winding up of the Company on 20.06.2017 (the "Winding Up Order"). The Winding Up Order was assailed by the Company through an Appeal before the Honorable Supreme Court of Pakistan, which was upheld vide order dated 08.01.2019 (the "Supreme Court Order"). The Honorable Supreme Court has held in its order that "It was invariably reported by the auditors of the Company that Company may not be able to realize its assets and discharge its liabilities in the normal course of business ?. Thus from record it has become clear that Company is unable to pay its debt. Even no amount is shown to have been paid towards re-payment of the outstanding liability under various facilities extended by the Respondent and availed by the Petitioner -Company since the date of filing winding up petition on 24.08.201 1". 3. After passing of the Winding Up Order , the liquidators appointed by this Court took charge of the assets of the Company and they were paid remuneration under the Act and the Companies (Court) Rules 1997 (the " Rules "). 4. Now, the Applicants have filed an application, C.M. No. 29-C of 2019, attaching the restructuring/rescheduling plan of the Company , alongwith the instant application for grant of interim relief in the form of stay of operation of the Winding Up Order , to restrain the Joint Official Liquidators (the "Official Liquidators") from proceeding further in the matter , and to allow the management of the Company to take steps for rehabi litation of the Spinning, Stitching and W eaving Units of the Company (the "Production Units").
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5. On 19.09.2019, the Applicants had sought permission of this Court to file Application under Section 313 of the Act for withdrawal of the Winding Up Order . On the same day, this Court directed the concerned parties to file their objections on the instant application, if so advised. B. SUBMISSIONS OF THE APPLICANTS 6. During pendency of main application, CM No. 29-C of 2019, the counsel of the Applicants, Mr. Salman Aslam Butt, Sr. ASC submitted that the Applicants, as an interim measure, want to start spinning, waiving and processing units in order to proceed with the production of the Company , as per the provisions of Section 313(1) of the Act read with Rule 95 of the Rules. 7. The counsel has submitted that the Applicants have a prima facie strong case of withdrawal of the Winding Up Order . The Applicants has attached a letter dated 28.09.2019 (the "Bank Letter"), whereby the Habib Bank Limited (the "Bank") has confirmed Mian Muhammad Latif, Ex-Chief Executive Officer of the Company , that the restructuring of the debts of the Company is under process, and is being finalized, in following terms: We, Habib Bank Limited, confirm that we are in the process of finalizing a term sheet for the restructuring of Chenab Limited's debt and entering into a scheme of arrangement for the same . We have engaged legal and financial advisors for this purpose too. Up to now, Habib Bank Limited, Bank of Punjab, Habib Metropolitan Bank and Bank Islami have obtained internal approvals for the draft term sheet and Allied Bank Ltd has also conveyed its verbal consent however their formal approvals are in process . We are still awaiting the approvals of the banks set out in the schedule hereto. Once these approvals are received, we will execute the term sheet and proceed to finalize a scheme of arrangement in accordance with our counsel's advice. (emphasis added) 8. The learned counsel has specified that the Company was wound up on the ground of its inability to pay debts, and now possess a viable restructuring/rescheduling plan and proposals to satisfy this Court under Section 313(1) of the Act - which authorizes this Court to pass an order for interim relief. The reason for immediate production and revival of the Company is to increase the export of Pakistan and to revive the Production Units with the help of the Bank to increase business and employment opportunities in our country and to earn foreign exchange. 9. To strengthen his claim, he has empha sized that the Court must consider winding up of the company as a last resort because of its attached impact and consequences on the tax generation, economy and employment in the country and on general public. He identified that winding up shall certainly amount to heavy tax losses to the Government in the form of custom, excise duties, sales tax etc. and would also be detrimental to the concept of "commercial morality". In order to suppor t his contentions, he has relied on "Consolidated Exports Ltd. Versus Messrs Dyer Textile and Printing Mills Ltd." (PLD 1984 Karachi 541) wherein doctrine of "commercial morality" was discussed. 10. He has presented following facts about financial and economic impacts of winding up of the Company: (1) Economic Impact on Export Before winding up, the Company was exporting textile goods from 1990 to 2019 with the total export over Rs.85 billion and had local sales of Rs.70 billion approximately . The learned counsel has attached a chart at page 10 of C.M.No.31/C/2019, which is verified by the Faisalabad Chambers of Commerce ("FCC") on 03.01.2019. He has emphasized on the export need of Pakistan as compared to V ietnam, Sri Lanka and India, in textile. (2) Employment The learned Counsel submitted that before winding up, the Company had approx imately fifteen thousand skilled and unskilled employees, which contributed towards huge employment in the country . (3) Tax Benefits The learned counsel stated that before winding up of the Company , it was the largest taxpayer from the Faisalabad Region. He further stated that the Company has paid all applicable dues/taxes amounting to Rs.1.3 billion to the Government from 2000 to 2017 including (a) the Income Tax amounting to Rs.704,616,859/-, (b) the Sales Tax amounting to Rs.32,812,433/-, (c) Property Tax amounting to Rs.30,596,542/-, (d) PESSI amounting to Rs.234,694,939/-, (e) EOBI amounting to Rs.213,870,719/- and (f) other Government taxes/levies amounting to Rs.13,133,146/-. C. SUBMISSIONS OF THE JOINT OFFICIAL LIQUIDA TORS
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11. The Official Liquidators appeared before this Court and stated that they have no objection on acceptance of the Scheme of Arrangement but have certain reservations qua interim relief and start of the Production Units keeping in view financial discipline. However , they assented to the following proposal submitted by the Applicants: (1) Take steps for rehabilitation and operations of the Production Units; (2) Engage/hire staf f and labour for the said purposes; (3) Commence and undertake business operations of the Company; and (4) Maintain Books of Accounts of the Company , and operate its bank accounts, for meeting the expenses and running the af fairs of the Company . 12. Mr. Jalal Ahsan, FCA, also appeared and stated that he has no objection on the issues of commercial morality if the Company will run the production in order to generate the revenue for foreign exchequer and pay taxes. He relies on Rule 275 of the Rules and Section 387 of the Act. He further submitted that he has no objection if the ex- management of the Company maintains the financial discipline with the proper procedure and accounting of the said commercial production. He stated that they have given various chances by the Court before the winding up order was made but with the new management including JOLs they will not do any measure/step without their consent. 13. It is joint submission of the Parties that direction be also issued that all above mentioned actions with respect to the affairs of the Company may be managed by the Ex-Management of the Company , including, Mian Muhammad Latif (Ex-Chief Executive Of ficer) and Mian Muhammad Naeem (Ex-Director), after consultation with the following: (1) Joint Official Liquidators appointed by this honorable Court, namely Mr. Aurangzeb Mirza (Advocate Supreme Court) and Mr . Jalal Ahsan (FCA); and (2) Nominee of the Habib Bank Limited (Lead Bank) today filed in the Court the joint statement. D. APPLICABLE LA W 14. It is essential to note that the preamble to the Act highlights its purpose, inter alia, to regulate the corporate entities for protecting interest of shareho lders. creditors, stake holders, and ensure general public principles of good governance 15. Section 2(23) of the Act defines the "Court" as the "Company Bench of a High Court having jurisdiction". Section 313(1) of the Act provides powers of the honorable High Court to stay the winding up proceedings, and to make an order on such terms and condit ions as the Court thinks fit, subject to the following conditions: (a) within three (3) years after an order for winding up; (b) on application of any creditor , contributory , Registrar or the Commission; and (c) on proof to the satisf action of the Court that all proceedings in relation to the winding up ought to be stayed, withdrawn, cancelled or revoked. During such application, this honorable Court is also authorized, under Section 313(2), to seek a report of the official liquidators on necessary facts or matters. Section 313 of the Act is reproduced hereunder for clarity: Section 313. Power of Court to stay winding up.- (1) The Court may at any time not later than three years after an order for winding up, on the application of any creditor or contributory or of the registrar or the Commission or a person authorised by it, and on proof to the satisfaction of the Court that all proceedings in relation to the winding up ought to be stayed, withdrawn, cancelled or revoked , make an order accordingly , on such terms and conditions as the Court thinks fit . (2) On any application under sub-section (1), the Court may, before making an order , require the official liquidator to furnish to the Court a report with respect to any facts or matters which are in his opinion relevant to the application. (3) A copy of every order made under sub-section (1) shall forthwith be forwarded by the Court to the registrar , who shall make a minute of the order in his books relating to the company . (emphasis added) 16. Section 314 of the Act, further , empowers the Court to "ascertain" as well as "have regard" to the wishes, value of each debt of the creditor , or voting power exercised by each contributor , of the company in all matters relating to the winding up of such company . Section 314 is reproduced hereunder: 314. Court may ascertain wishes of creditors or contributories. - (1) In all matters relating to the winding up of a company , the Court may -
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(a) have regard to the wishes of creditors or contributories of the company , as proved to it by any sufficient evidence in a manner as provided under this Act; (b) if it thinks fit for the purpose of ascertaining their wishes , order meetings of the creditors or contri butories to be called, held and conducted in such manner as may be directed; and (c) appoint a person to act as chairman of any such meeting and to submit a report in this regard. (2) While ascertaining the wishes of creditors or contributories under sub-section (1), regard shall be had to the value of each debt of the creditor or the voting power exercised by each contributory , as the case may be. (emphasis added) 17. Moreover , Rule 95 of Rules requires an application for stay of winding up proceedings to be made upon notice to the parties to the winding up petition and other persons and the official liquidator . It further requires the Court to pass a direction to file a certified copy of the such order with the Registrar of Companies. Rule 95 of the Rules is produced hereunder: 95. Application for stay of winding up proceedings. - (1) An application under section 319 (now , 313 of the Act) for stay of proceedings in the winding up shall be made upon notice to the parties to the winding up petition and to such other persons as the Court may direct , and where he application is made by any person other than the official liquidator , notice shall he given to the official liquidator . (2) Where an order is made for stay of the winding up proceedings, the order shall direct that the applicant shall forthwith file a certified copy thereof with the Registrar of Companies . (emphasis added) E. RELEV ANT CASE LA W FROM P AKIST ANI JURISDICTION 18. The august Supreme Court in Hala Spinning Mills Ltd ( 2002 SCMR 450 ) has held as follows: "It is to be observed that whenever a case of winding up of a running company is placed before a Company Judge or the Appellate Court they should examine such matter differently other than a company which is not in a running condition. In this behalf efforts should be made by the judicial forums to adopt such a device so the project may remain continue running commercially so its financial liabilities start reducing gradually. The business trend in the market is that if running concern is put to sale it fetches high price of its assets which can substantially clear proportionate liability of the creditors". 19. The honorable Sindh High Court has already set the criteria for similar Section 319 of the Companies Ordinance, 1984 (now Section 313 of the Act) for stay of the winding up proce edings, in the case of Zulfiqar Hussain vs. Bambino (Pvt.) Ltd. ( 2013 CLD 34 Sindh) , and has exercised its jurisdiction in following terms: 11. As these provisions immediately make clear , section 319 is cast in terms rathe r different from other legislation. Whereas all the other sections are (or were) limited to the "stay" of winding up proceedings, section 319 uses broader language, empowering the court not merely to stay but also to "withdraw", "cancel" or "revoke" the proceedings. ... In my view the clear inten t of the law maker in using words in addition to "stay" was to change the law, and this intent must be given due effect. .... 12. The second point that requires attention is that although the additional words have been used, they all (like "stay") refer to the winding up "proceedings" and not, as such, to the winding up order itself. Proceedings pursuant to an order can certainly be stayed while leaving the order intact. ... It must be kept in mind that the section provides for "all" proceedings to be stayed, withdrawn, cancelled or revoked (as the case may be). ... I would also note that, as is clear from the statutory provisions other than section 319 reproduced above, where the power of the court is limited only to grant a stay, such order may stay the proceedings "altogether" or for a limited time. Clearly , if a winding up proceedings are stayed altogether , the order itself is essentially rendered redundant: it is not thereafter to be given effect. ... Keeping all of the foregoing factors in mind, in my view, the only sensible meaning and effect of the additional words used is that the Court is now armed with power to withdraw , cancel or revoke (as the case may be) the winding up order itself, while still retaining the power as before, in appropriate cases, to simply stay the proceedings and leave the order intact . 13. ... An application under section 319 had to accept the order as valid and thus applied only in relation to events or situations that arose or developed after the order . ... The section itself uses the word "may" but in any case, it is well settled that jurisdiction in company law matters is equitable jurisdiction and at the discretion of the court. The
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court will act in accordance with well established principles regulating the exercis e of equitable and discretionary powers. Much would of course depend on the relevant facts and circumstances of the case before the court and the relative weight and importance that it assigns to these factors, but certainly the power conferred by section 319 is not open ended nor can relief thereunder be claimed ex debito justitiae. Thirdly , the scope of section 319 is time bound: the application must be moved within three years of the winding up order . ... (emphasis added) 20. In the case of J Investment Corporation of Pakistan vs. Sunshine Jute Mills Limited (2005 CLD 713 (Lahore), the honorable Lahore High Court has held that the time limit of three years prescribed in Section 319 of the Companies Ordinance, 1984 (now 313 of the Act) is directory and not mandatory as the violation has not been visited with any consequence or penalty , and the High Court has also the power , in the case of a company being wound up to sanction any compromise or arrangement. Similarly , in the case of Additional Registrar of Companies, SECP vs. Schon Textile Limited (2008 CLD 475 Sindh) , the honorable Sindh High Court has decided the application for suspension of winding up order filed on the ground that company had improved its commercial viability . The honorable Court has held that the company had sufficiently fixed assets and interest of shareholders could be safeguarded by imposing restriction upon company not to dispose of fixed assets without permission of the court; if winding up order was maintained, the shareholders would get a meagre amount against their investment; if the company was allowed to function under the supervision and control of SECP and official liquidator , the same would be beneficial to the share holders; by revival of the company , there was a chance that value of shares would be increased and share-holders would be benefited; and bona fides of the company could also be judged by suspending winding up order and to allow the company to implement scheme of revival under supervision of official liquidator and SECP . In another case, National Bank of Pakistan vs. Punjab National Silk Mills Ltd. (1989 MLD 2963 Lahore), the honorable Lahore High Court has withdrawn the winding up order which was passed only because the company was unable to pay its debts, and now had the requisite funds to discharge its liabilities and miscellaneous expenditures. 21. Further , in the case titled Abdul Rasheed Mughal vs. ECSA (PK) (Pvt.) Ltd. (2006 CLD 852 Lahore), the honorable Lahore High Court has held that 7. The nature, extent and the principles for exercise of the powers to stay winding up proceedings as set out in Halsbury's Laws of England Fourth Edition 1996 Reissue V olume 7(3) reads as follows:- "2662. Exercise of power to stay winding-up proceedings. In the exercise of its jurisdiction to stay the Court will refuse to act upon the mere assent of the creditors in the matter , and will consider whether what is proposed is for their benefit , and also whether the stay will be conducive or detrimental to commercial morality and to the interests of the public at large . ... 8. The principle for exercise of powers invoked by the instant application has also been dilated upon in the judgment reported as Mahabir Prasad Agarwala v. Ashkaran Chattar Singh, (1980-81) 85 CWN 557 at 581, 582, (as reproduced in AIR 1996 Calcutta 171) in the following terms: (1) if the Court is satisfied on the materials before it that the application is bona fide; (2) the Court would be guided by the principles and definitely come to the finding that the principles are applicable to the facts of a particular case; (3) mere consent of all the creditors for stay of winding up is not enough; (4) the offer to pay in full or make satisfactory provisions for the payment of the creditors is not enough; (5) Court will consider the interest of commercial morality and not merely the wishes of the creditors and contributories; (6) Court will refuse an order if there is evidence of misfeasance or of irregularity demanding investigation; (7) a firm and accepted proposal for satisfying all the creditors must be before the Court with material particulars; (8) the jurisdiction for stay can be used only to allow in proper circumstances of resumption of the business of the company; (9) the Court is to consider not only the question whether the proposal for revival of the company is for benefit of the creditors but also whether the stay will be conduciv e or detrimental to commercial morality and to the interest of the public at large; (10) before making any order Court must see whether the ex- directors have complied with their statutor y duties as to giving information to the Official Liquidator by furnishing the statement of affairs; (11) and any other relevant fact which the Court thinks fit to be considered for granting or not granting the stay having regard to the particular facts of a particular case.
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9. ... And a close and careful analysis of the statutory provision (section 319) and the aforequoted judicial precedents reveal that in essence a power has been conferred upon the Court to stay winding up proceedings on an application of a person or party mentioned in the said provision and within the period specified therein where it is proved to the satisfaction of the Court that the cause for the winding up order has disappeared or is likely to disappear . In other words, the mischief prompting the winding up order has been set at right or the company or its shareholders are able and willing to set it right either by arrangement, compromise or settlement and a proposal in this behalf for the revival of the company is submitted to the Court. Usually , such proposal would include an arrangement or settlement with the creditors especially if the winding up order has been passed on account of the inability of the company and its debts. The power conferred is primarily to consider a proposal for revival of the company and an eventual revocation or withdrawal of the winding up order . This is also evident from the wording of the statutory provision (section 319) whereby the word stay has been used along with withdrawn, cancelled or revoked, with reference to the winding up order . It is no coincidence that such power and jurisdiction has been exercised by this Court and by the apex Court to consider and approve arrangements for payment of debts and revocation of winding up order . Some of such cases in our jurisdiction include Mst. Dilshad Hussain v. PICIC and others 1986 SCMR 276, National Bank of Pakistan v. The Punjab National Silk Mills Ltd. and two others 1989 MLD 2963 and Messrs Consolidated Exports Ltd. v. Messrs Dyer Textile and Printing Mills Ltd. PLD 1984 Karachi 541 . 10. It is equally clear that powers conferred are discretionary in nature and can only be exercised in furtherance of commercial morality and after bona fides of the parties have been established on the record. Such powers will not be exercised to permit the cover up of any malfeasances illegality or irregularity in the conduct of the affairs of the company . (emphasis added) F. RELEV ANT CASE LA W FROM FOREIGN JURISDICTIONS 22. I would like to reproduce some judicial pronouncements from foreign jurisdictions as well, while discussing pros and cons of winding up of a running company . In Sevior vs. Morga, [2012] VSC 480, the Victorian Supreme Court, Australia has discussed some parameters and things to be taken into consideration by the court while deciding a petition regarding winding up of a company: [28] Secondly , in considering the applicati on, the Court is to have regard not merely to the interests of creditors but to the public interest , including whether granting the order would be detrimental to commercial morality : [29] In the context of public interest and commercial morality Buckley J in Re Telescriptor Syndicate Ltd required to be satisfied that the trading operations of the company had been "fair and above board" and that there was not "an ugly side to the picture ", [30] However , concepts of commercial morality and public interest are not narrow . 23. In Prendergast vs. Roclcross [2008] NSWSC 14, the New South Wales Supreme Court, Australia, after exhaustive discussion on an application to terminate winding up proceedings of a company has held as under: [25] The question rather is whether it appears that it would be, or may be, contrary to the public interest if the company were permitted to resume opera tions. In a case such as the present where all of the shares are held by the plaintiff, the public interest means primarily the interests…
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