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Petitioner: HABIB BANK LTD. VS Respondent: HAMZA BOARD MILLS and others
Court Name: Lahore High Court Judge(s): Munir A. Sheikh Title: HABIB BANK LTD. vs HAMZA BOARD MILLS and others Case No.: Civil Original No,133 of 1994, , 1995. Date of Judgment:1995-04-11 Reported As: PLD 1996 Lahore 633 Result: Order accordingly
JUDGMENT
JUDGMENT ' The petitioner as a creditor of respondent No,1 Company through this petition has sought an order for winding up of the said Company. 2. The facts relevant for disposal of this petition shortly stated are that respondent company opened and operated Current Account bearing No,1214-48 with the petitioner since 1992. At the request of the said company the petitioner granted to it Cash Finance Hypothecation Limit to the tune of Rs,10,000 Million (Rupees one crore) with mark-up at the rate of .48/1000 per day. The expiry date of this financial facility was 31-1-1994. In order to secure this facility the company executed agreement for financing on mark-up basis dated 21-1-1993, letter of hypothecation, dated 21-1-1993 letter of hypothecation dated 21-1-1993 D.P. Note dated 21-1-1993 for Rs,12,760 M and Facility letter dated 21-1-1993. This charge was got registered by the Company with the Registrar Joint Stock Company in favour of the petitioner. In consideration of the said facility respondents Nos.2 to 8 also executed personal guarantees in favour of the petitioner by way of security. The respondent No,1 Company as also respondents Nos.2 to 8 along with other shareholders also pledged 2,100,000 shares with the petitioner representing 96.78 per cent. Of the total holding of the Company. 3. Subsequently the company passed a resolution on 27-2-1993 and requested the petitioner to enhance the existing limit of Rs,10,000 Million to Rs,30,000 Million (Rupees three crores). This request was also accepted by the petitioner through sanction letter dated 7-3-1993. The said limit was enhanced to Rs,35,000 Million (Rupees three crores and fifty lacs) on further request of the Company vide petitioner's advice dated 27-6-1993. The respondent-Company executed further documents in favour of petitioner of the like nature as mentioned above to secure the payment of this loan facility. In addition to respondent company respondents Nos.2 to 8 also executed personal
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guarantees in favour of petitioner of the like nature as were earlier executed by them, as aforementioned. 4. The respondent-company again approached the petitioner and requested for further enhancement of this facility from Rs,'55,000 M to Rs,40,000 M (Rupees four crores) in order to meet its daily working capital requirements. This request was approved by the petitioner through sanction advice dated 27-6-1993 which was last renewed up to 30-9-1994 vide petitioner's sanction advice dated 26-1-1994, as the Company stated in its request letter dated 27-11-1993 that in the present circumstances the Company was not in a position to repay the above advance at present. In order to secure this enhanced finance facility the respondent-company further executed documents of similar nature as mentioned above. The charge created was submitted to and got registered by the Company with the Registrar Joint Stock Companies, in favour of the petitioner. In addition to this respondents Nos.2 to 8 also executed documents of similar nature as guarantors in favour of the petitioner by way of security. 5. It has been averred that in disregard of its contractual obligations under the abovementioned facility the respondent-company failed to furnish Stock Reports in time. It has been stated that on a number of occasions when the representatives of the petitioner visited/inspected the factory/go down of the Company it was discovered that the stocks were not available as per the Stock Reports furnished by the Company. The Company was approached by the petitioner on a number of occasions with a request to make up the shortfall in the stocks but the Company failed/neglected to do the needful and as usual remained unresponsive. The expiry date of the last cash finance limit of Rs,40,000 M was 30-9-1994 but the Company despite various reminders miserably failed to liquidate its contractual liabilities to the petitioner. It has been stated that the following amounts are payable by the company to the petitioner: (a) Principal amount Rs,3,99,75,557.81. (b) Mark-up on 30-9-1994 Rs,62,82,757.76. ' The respondent-company was sent various reminders calling upon it to pay its outstanding dues but it failed and neglected to repay the same. 7. The winding up of the respondent-company has been sought on the grounds:-- (a) That the company was to be deemed in law to be unable to pay its debts as contemplated by section 306 of the Companies Ordinance, 1984: (b) That the liquidated resources of the company immediately available or readily realisable assets in its hands were much less than its current liabilities: (c) That there was no reasonable prospects of the company to pay the accrued and prospective liabilities of the petitioner and other creditors by a steady realisation of all of its assets. 8. Apart from the above grounds it has also been alleged that the company is being run and managed by persons who have failed to maintain true and proper accounts and have committed misfeasance or malfeasance in relation to the company as is evident, inter alia, from the failure of the Company to furnish monthly stock reports and other important information to the petitioner. In the facts and circumstances of the case it will be just and equitable to pass an order for winding up of the company. 9. An allegation has also been made that the company is being run and managed by persons who have a long history of borrowing huge funds from nationalised banks and development finance institutions without even repaying the same and that funds and resources of the company have been syphoned off by respondents Nos.2 to 8. It has further been averred that respondents Nos.2 to 8 have unlawfully depleted the stocks and securities enumerated above and the petitioner has reason to believe that the stocks position prevalent in the factory/go down of the company is meagre and inadequate thus rendering the security of hypothecation of stocks in favour of the
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petitioner to be worthless which tantamount to misappropriation of the stocks hypothecated with the petitioner. 10. The respondents have opposed this petition by filing written statement. In reply to paragrapn No,6 of the petition in which it has been stated that respondents Nos.2 to 8 being shareholders of the company as well as its Directors, were jointly and severally liable for their individual and collective acts of omission and commission constituting matters congnizable by this Court under the provisions of the Companies Ordinance, 1984, they have stated as under: "Para. 6. That the Directors are responsible only to the extent that the law has to put that responsibility on them." ' There is no denial directly or indirectly even remotely about the assertion of the petitioner that respondents Nos.2 to 8 are the Directors of respondent No, I Company. It has not been denied that the respondent No, I Company opened Account No,1214-48 with the petitioner as alleged in para. No,10 of the petition. 11. In reply to paragraph No,11(a) of the petition in which the facts regarding grounds of cash finance facility of Rs,10,000 M along with documents executed by the company as also respondents Nos.2 to 8 have been given, the respondents in the written statement have stated as under: "Para. 11 (a), (b), (c), (d) & (e). That the documents mentioned in this paragraph are wanting in execution in so far as they have not even been duly filed in and are not complete in themselves for the purposes of supporting the assertion therein." 12. In reply to paragraph No,12 (a) to (c) in which facts regarding enhancement of cash finance facility to Rs,30,000 M and then to Rs,35,000 M, have been given, it been stated as follows: "Para. 12 (a), (b), (c). That the enhancement of facility from Rs,10,000 M to Rs,30.000 M is referable to the record of the company. Documents mentioned herein being incomplete are not valid documents." 13. In reply to paragraph No,13 (a) to (d) in which facts regarding enhancement of cash finance facility to Rs,40,000 M have been given. It has been stated as under in the written statement: "Para. 13. That the enhancement of the facility and the documentation mentioned therein shows that most of the paragraphs have been left blank. Such blank documents are not valid in the eye of law." 14. The respondents pleaded that no statutory notice according to law was given. It has been stated that the provisions of sections 305 and 306 of the Companies Ordinance were to be read together. From the portions of the written statement reproduced above it is manifest that so far as availing of cash finance facilities as stated in the petition firstly for an amount of Rs,10,000 M then Rs,30,000 M which was enhanced to Rs,35,000 M, as also the last finance facility as enhanced to Rs,40,000 M is an admitted fact having not been denied. Objections have, however, been taken as regards contents of documents executed by the company and respondents Nos.2 to 8 to secure the said cash finance facility on the ground that many of them were blank. It may significantly be mentioned here that no allegation has been made that the signatures on these documents were not of respondents Nos.2 to 8 or that the same were obtained through any misstatement of fact, misrepresentation or under undue influence. 15. Coming to the question as to how much amount was outstanding against respondent No,1 Company and payable on the date of institution of winding up petition, it may be mentioned that in paragraph No,15 of the petition the petitioner has specifically asserted that an amount of Rs,3,99,75,557.81 was payable as principal amount, whereas the amount payable on account of mark-up as on 30-9-1994 was Rs,62,82,757.76. In reply to this paragraph in the written statement it has been pleaded as under:--
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"Para. 15. The company has not violated the terms of contract." It is clear from this that so far as the quantum of the amount due and payable on account of the abovementioned cash finance facilities as mentioned in paragraph No,15 of the petition is concerned, there was no dispute and the only defence taken was that the respondent-company did not violate the terms and conditions of the contract. 16. The respondents have pleaded that the winding up petition was not maintainable because the security on the basis of which the facility of loan was granted was ample. It has also been stated that since no other creditor had supported the winding up petition, therefore, the same was not maintainable. An objection has also been raised that in case a creditor has alternate remedy of filing a suit for recovery of the loan no winding up was permissible in law. It has been pointed out that the petitioner had already filed suit for recovery of the amount. 17. It has also been stated that the fact that finance facility was enhanced three times by the petitioner was itself proof of the fact that the respondent-company was doing good business otherwise it would not have been enhanced. It has further been averred that the respondent- company was commercially solvent as the mill has never been closed even for a day and it was on account of temporary misfortune that payment could not be made which is different from a case of permanent insolvency. It has been stated that mere inability to make immediate payment cannot be a ground for winding up. 18. From the written statement filed by the respondents it is demonstrably clear as observed above that so far as the factum of availing of different cash finance hypothecation limits as mentioned in the winding up petition is concerned, the same has been admitted and acknowledged without any qualification as to the liability arising therefrom. Since Mr. Abdullah Khan Dogar, Advocate, learned counsel for respondents, laid a great deal of stress and rather his argument centered around his submissions that it was a case where the payment of the said amount is not due recoverable at present as such the question of inability of the company to pay cannot be raised. He argued that the company has got sufficient assets and stocks as security and is not in fact insolvent, therefore, I will in the first instance deal with this aspect of the case. 19. An order for winding up of a company can be sought or made on all or any of the grounds mentioned in section 305 of the Company Ordinance, 1984, one of which is inability of the company to pay its debts. Section 306(1-A)(a), however, provides that in case 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, then due, serves on the Company a notice through 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, it shall be deemed to be unable to pay its debts. It is manifest from this provision of law that mere nonpayment of the debt due on the service of notice by the Company by fiction of law is to be deemed to be its inability to pay its debts for the purpose of section 305 as regards ground for winding up of the company on account of inability of the company to pay it debts. The petitioner issued a notice/letter on 24-8-1994 to respondent No,1 Company, a copy of which was also forwarded to respondent No,1 in the capacity of Chairman of M/s. Lttefaq Group. It was demanded through this letter/notice that an amount of Rs,4.370 M was due from respondent No,1-Company as on 1-7-1993 on account of the said finance hypothecation limits, therefore, the same should be paid at the earliest without further loss of time. Earlier on 29-6-1994 a similar notice was also written by the petitioner to which reference was made in the said notice dated 24-8-1994. Another notice was issued to respondent No,1-Company on the same date i,e, 24-8-1994 that the limit of the cash finance of Rs,40.000 M was going to expire on 30-9-1994, therefore, if the company was
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interested in renewal of the same, it should apply alongwith the following documents immediately:-- (1) Request letter. (2) Resolution of the Company. (3) Stock Report. (4) Latest audited balance-sheet. (5) Insurance of the Stocks hypothecated. 20. In response to earlier letter dated 29-6-1994 for repayment of the amount no reply was given. As to the second letter dated 24-8-1994 the re.'oondent No,1-Company did not provide the documents as mentioned in the saic, letter. There is no averment in the written statement that in response to the said etter the Company provided the said documents to the Bank to process the same for taking a decision for renewal. It may be mentioned here that if the said documents had been provided to the petitioner, the petitioner bank could take any decision either for acceding to the request otherwise keeping in view the previous conduct of respondent No,1-Company as regards non-payment of the amount due under the said facility Mr. Abdullah Khan Dogar, Advocate, learned counsel for respondents, has placed on record a copy of letter dated 29-9-1994 attached with Civil Miscellaneous No,230/L of 1995 moved on 3-4-1995 during the hearing of the arguments, which is a letter in response to one of the letter dated 24-8-1994 calling upon the company to pay its outstanding dues. It has been acknowledged in this letter that under the present circumstances and unfavourable cash flow position the company was not in a position to repay the finance facility. It was requested that the above-referred limit may be renewed for another period of one year i,e, 30-6-1995. It has been stated in this that necessary charge certificate had already been provided to the bank. There is no mention that the five documents which the company was required to provide if wanted to make a request for renewal of the cash finance facility as noted above were ever provided. This aspect of the case gains significances as Mr. Abdullah Khan Dogar attempted to argue that the petitioner bank once having made an offer to the respondent-Company to make a request for renewal of the facility and the same having been responded through letter dated 29-9-1994 as aforementioned, as such, an agreement between the parties came into being and the petitioner bank was bound to renew the cash finance facility. 21. Letter dated 24-8-1994 written by the petitioner was in the nature of reminder to the respondent-Company that the limit of cash finance facility was expiring and if the company wanted to get it renewed it should make a formal request along with the documents mentioned therein. There was no promise or even any undertaking that in case the company would make such a request along with the said documents the bank would necessarily or was bound to renew it. Apart from this even if the submission of learned counsel for respondents is accepted for the sake of argument the offer was not unqualified and it was required that the respondent-Company must make a formal request based on a resolution passed by the company coupled with overt act of providing to the bank the documents for its consideration to process the case for renewal. As pointed out above there is no averment in the written statement that the said docments were provided on account of which a fresh agreement for renewal of the facility had come into existence. Faced with this difficulty Mr. Adbullah Khan Dogar made Civil Miscellaneous No,287/L-95 after the Court reserved the judgment, praying that respondent-Company should be granted opportunity to produce evidence to establish the factual points as also an opportunity to cross- examine the author of the winding up petition Mr. Abdullah Khan Dogar moved another application C.M. No,286/L-95 with which certain documents have been appended, one of which is an extract of resolution allegedly passed at the meeting of the Board of Directors of the company on 27-8-1994 at 10-00 a.m. Resolving that the Company should approach the petitioner Bank for renewal of
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working capital facility up to Rs,40,000 M. Learned counsel for the petitioner has taken strong exception to the genuineness of this document who submitted that such a document could be fabricated by respondent No,1-Company at its convenience to use it as evidence. He submitted that though this resolution is shown to have been passed on 27-8-1994 strangely in the letter to the petitioner in response to letter dated 24-8-1994 through which production of a number of documents was called was allegedly issued on 29-9-1994 there is no mention of it or explanation of this delay for if resolution had in fact been passed on 27-8-1994 the respondent-Company would have approached the petitioner bank immediately thereafter. The argument of Mr. M. Saleem Sahgal. Advocate, has force. This document is purported to be a copy of resolution, the record of which is in the possession and control of respondent No,1-Company and it is clear that the same had been cooked up in order to produce before the Court at this late stage in order to meet an objection that in response to letter dated 24-8-1994 no such document was provided to the petitioner Bank particularly when no mention of any of the documents required to be produced was made in the reply letter dated 29-9-1994. Even if it is presumed that such a resolution was passed but it is clear that the same was never provided to the petitioner Bank in response to letter dated 24-8-1994, therefore, even if the same was available in the record of the Company it would not advance the case of respondent No,1-Company. Mi. M. Saleem Sahgal, Advocate, learned counsel for petitioner has seriously dispute correctness of even issuance of letter dazed 29-9-1994 as alleged by the respondent He maintained that this letter was not relied upon by the respondent in the written lent and no plea was even otherwise raised that the bank was approached in response to letter dated 24-8-1994 for renewal of facility along with five documents mentioned in it. The argument has force. The plea that the respondent-Company issued the said letter cannot in these circumstances be accepted. 22. The availment of cash finance facility, the liability arising therefrom and non-payment of the same even after notice dated 24-8-1994 are the facts about the correctness of which there is no denial rather they are admitted facts. Learned counsel for respondents when questioned as to how respondent No,1- .Company can avoid the presumption arising from these facts under section 306 of the Companies Ordinance that respondent-Company shall be deemed to be unable to pay its debts, made the following submissions:-- (a) That the admission of availment of cash finance facility has a legal effect of making respondent-Company liable to pay but failure of repayment of the same in order to constitute inability to pay as contemplated under section 306 of the Companies Ordinance could only be if the debt had become payable/recoverable as per terms of the contract on the date of issuance of notice and the date of institution of the winding up petition. (b) That in this case the transaction of cash finance facility was not in fact transaction of ordinary loan in which a specific date is always fixed for repayment of the loan whereas according to commercial practice and usage which has the force Of law, such a facility is a continuing process which is usually renewed on the expiry of the last date fixed. (c) That under section 306 of the Companies Ordinance no order for winding up of a company can be made on presumptive insolvency of a company on its mere failure to pay debt, whereas it is to be established that the company was in fact insolvent. (b) That there was no date fixed in the agreement regarding cash finance facility before which the liability was required to be liquidated therefore, it is a case in which the debt had not become due or payable, as such, the winding up petition is premature. (e) That the debt in such-like finance facility would be payable only as and when me fixed assets and other assets of the Company including the security was rendered insufficient or destroyed rendering the company unable to discharge its liability from such assets.
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23. In amplification of his argument he submitted that the documents placed on record by the petitioner relating to cash finance facilities show that various columns of the same have been left blank. There is no date fixed as such as the last date before which the debt was to be repaid, therefore, the same was not due payable as envisaged by section 306 of the Companies Ordinance, therefore, the winding up petition was not maintainable. 24. The first sanction advice dated 14-2-1993 through which cash finance facility of Rs,10.000 M was granted, provides unambiguously that the expiry/validity date was 31-1-1994 and it was provided therein that the same had been sanctioned subject to adjustment mark-up and overdue PADs in other concerns of the group up to 31-1-1994. In pursuance thereto the respondent-Company executed an agreement for financing on 21st January, 1993, in which it was provided that the company had agreed to sell to the bank during the period ending 31-1-1994 the goods up to a total of Rs,10.000 M. Against another column which had been duly filled the respondent-Company agreed to purchase immediately the said goods from the bank at price of Rs,12,760,000. The signatures on this document on behalf of the company have not been denied. Since it was a finance facility debt advanced on the basis of mark-up system it was provided that the respondent-Company had agreed to sell to the bank the goods of the value mentioned therein as under such system the mode of payment of loan is in the form of sale of goods secured. In the letter of hypothecation under the head "schedule" it had been mentioned that hard and soft board chip and particle board stores and spares had been hypothecated. On 21-1-1993 a promissory note in the sum of Rs,12,760,000 was also executed in favour of the petitioner. As required under section 127 of the Companies Ordinance, 1984, the respondent-Company got a charge registered with the Registrar of Joint Stock Companies. In the same manner personal guarantees were provided by respondents Nos.2 to 8. In the said document the relevant columns as to date, the name of guarantor and the sum for which he stood as guarantee, have also been filled. Respondents Nos.2 to 8 also pledged their shares. 25. The respondent-Company approached the petitioner-Bank through…
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