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Petitioner: PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED VS Respondent: Messrs AJMA CORPORATION LIMITED
Court Name: Sindh High Court Judge(s): Munib Akhtar Title:PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED vs
Messrs AJMA CORPORATION LIMITED Case No.: J. M. 56 of 2000 in Civil Original No,3 of 1994 and C.M.A. 176 of 2005 Date of Judgment:2014-06-11 Reported As: 2014 CLD 1097 Result: Order accordingly Judgment ORDER ' MUNIB AKHTAR, J.---The petitioner, PICIC, a secured creditor of the respondent company, filed a petition for it to be wound up on the ground of insolvency, i.e,, inability to pay its debts. The petition was in fact filed in the Balochistan High Court, in 1994. By judgment dated 8-5-1995 that High Court was pleased to order the winding up, and by subsequent order dated 3-10-2000 transferred the petition to this Court for purposes of the winding up proceedings. That is how the present petition came to be registered here. The company's property and assets were put up for auction with the consent of the petitioner and other secured creditors. By order dated 7-1-2002 the improved bid of one interested party, in the sum of Rs, 9.5 million, was accepted and the said property and assets sold to it. 2. In the meanwhile the official liquidator had invited claims from the creditors of the company. In the order dated 13-5-2004, it was noted that the claims of ten creditors had been put up for approval, of whom three were secured creditors, including of course the petitioner. The official liquidator was directed to distribute the amount received from the successful bidder pro rata amongst the creditors and it was ordered that this exercise be completed within two months. The petitioner had filed its claim with the official liquidator on 8-5-2000 (i.e,, when the petition was still pending before the Balochistan High Court). The claim was made in the following terms:-- " ... We hereby file an affidavit in proof of debt along with the supporting documents against (the company] and request you to kindly recommend PICIC's claim in the amount of Rs,13,221,738.06 as on 5-5-2000 to the Hon'ble High Court of Balochistan at Quetta, for payment to PICIC."
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' It appears that the official liquidator disallowed a part of the claim, but this was not objected to by the petitioner. As noted, the petitioner's claim, as put up by the official liquidator, was approved by the Court. 3. On 10-11-2004, when the matter came up before the Court, learned counsel for the petitioner submitted that disbursement as per order dated 13-5-2004 had still not taken place. The official liquidator was directed to expedite matters. However, in that very month the official liquidator received two claims, one from the Income Tax Department for a sum of Rs,1,189,899 and the other from the Sales Tax Department for a sum of Rs,153,703. The claimants (who are, for convenience, referred to as the Revenue) claimed priority of payment in terms of section 405 of the Companies Ordinance, 1984. It was in this context that the official liquidator came to file his C.M.A. 176 of 2005 (on 28-1-2005). Reference was made to the Revenue's claim and further 90 days' time was sought to comply with the order of 10-11-2004. By order dated 22-2-2005, the Court directed that a fresh report be submitted by the official liquidator after considering the contentions of the petitioner. Learned counsel for the petitioner appeared before the official liquidator and submitted that since PICIC was the secured creditor, and the company was being wound up in terms of section 404 on the ground of insolvency, its claim took precedence over that of all persons, including the Revenue, claiming under section 405. Learned counsel filed written submissions as well, supported by a number of cases. That case-law was also relied upon before me. 4. When the matter came up before the Court on 18-5-2005, the Revenue's claim was noted and it was ordered as follows:-- "[Learned counsel for the petitioner) contends that no priority could be claimed by the revenue authorities as the amount is to be disbursed in terms of section 404 of the Companies Ordinance, 1984 and not under section 405 thereof. Since the controversy raised requires serious consideration and deliberation, before such controversy is resolved let the amount be paid to the secured creditors excepting the amount claimed by Sales Tax and Income Tax Authorities, fate of which will be decided at a later date." ' In view of the foregoing, a sum of Rs, 3,543,496.54 was disbursed to the petitioner as pro rata payment out of the sale proceeds. The petitioner acknowledged receipt of this amount on 9-8- 2005, noting that this was the amount approved by the Hon'ble Company Judge, High Court of Sindh at Karachi ... To be payable to us as dividend against our claim". 5. Thus, the substantial part of the sale proceeds have been disbursed pro rata, with only a relatively small portion remaining with the official liquidator, its fate hanging in the balance since 2005. (The said amount is hereinafter referred to as the "withheld amount".) The question is whether the withheld amount is to go to the secured creditors on account of their position as such, or to the Revenue by way of a preferential payment? (For present purposes. It suffices to refer only to the petitioner, since it appears to be the only secured creditor that is pursuing the matter.) Before me, the point was fully and ably argued by learned counsel for the petitioner and the learned official liquidator. However, it is to be kept in mind that the point was taken on lines somewhat different from that as recorded earlier. Before me, the learned official liquidator submitted that by filing its claim before him, the petitioner had relinquished the security. In other words, it no longer stood outside the winding up as a secured creditor asserting and enforcing its rights as such, but on account of the relinquishment became entitled only to a pro rata share in the proceeds. In view of this position, the claim of the Revenue took priority and the withheld amount had to be disbursed to the latter. Learned counsel for the petitioner strongly opposed any such conclusion. His case was that the petitioner was always, and throughout remained and retained its position as, .a secured creditor. The fact that it had filed a claim before the official liquidator or received a dividend did not amount to any relinquishment of the security. Since it had never abandoned this position, the petitioner as secured creditor was entitled to the withheld amount.
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This was the basis on which the matter was argued before me, and it is on this basis that I intend to decide the issue. 6. Learned counsel for the petitioner submitted that it had filed a claim for the full amount, as then outstanding, before the official liquidator. However, the claim was by way of a continuing liability of the company to the petitioner, i.e,, it was not a final statement of what was owed. Insofar as the amount paid over was concerned, that was not received by way of.a final payment or settlement but only as a dividend. The receipt of 9-8-2005 therefore had to be read and construed accordingly. The security was never relinquished. ' The petitioner (and of course, the other secured creditors) simply allowed the sale of the property and assets through the official liquidator to facilitate matters. Indeed, it was submitted, without such consent the property and assets could never have been sold. Since the company was being wound up as an insolvent concern, and section 404 of the Companies Ordinance provides that such a company is to be subjected to the insolvency rules, learned counsel relied on section 47 of the Provincial Insolvency Act, 1920 C 1920 Act"). This section relates to secured creditors. Learned counsel emphasized that the nature of the petitioner's security interest was as mortgagee and this created an interest in the property, which .Could not be denied or defeated. The petitioner could not be deprived of this right and interest in any manner whatsoever. Furthermore, the interest of the morgagee was not something separate from the value of the property. The law gave an actual right and interest in the property itself to the mortgagee. Learned counsel strongly relied on the decisions that had been earlier cited before the official liquidator in 2005, as noted above. Learned counsel reiterated that neither the claim as filed nor the receipt as issued by the petitioner showed any intention to relinquish the security. The petitioner had only received partial satisfaction of its claim. As the secured creditor, it was entitled to the full amount still lying with the official liquidator. It was emphasized that even this would leave a significant portion of the petitioner's claim outstanding. But in any case, learned counsel submitted, the Revenue could not possibly claim priority over the petitioner. 7. The learned official liquidator submitted that the petitioner had never earlier contended that it had not relinquished its security or that it stood outside the winding up. This claim was being made for the first time. The petitioner had fully participated in the auction and the sale of the property and assets. The entire exercise had been undertaken with its approval and consent. It was therefore not possible for the petitioner to claim that it had not relinquished its security. The learned official liquidator further submitted that the petitioner's claim had, after due scrutiny, been partially disallowed. The petitioner had never taken any objection to this. Pro rata payments had been made to all the creditors and not merely the secured creditors. The petitioner had raised no objection in this regard either. It had participated in various meetings in the winding up proceedings from time to time, and had never raised any such objection or claim. All of this, it was submitted, clearly demonstrated that the petitioner had relinquished its security and assumed the position of an unsecured creditor of the company (though certainly one of the most substantial ones). This was the petitioner's own choice, in keeping with the law and in particular the provisions of the 1920 Act. The petitioner was therefore not entitled to the priority that it was claiming. Its position was that of any other creditor. The learned official liquidator prayed on the foregoing basis that since the Revenue was clearly entitled to preferential payment the withheld amount should go to the latter and not the petitioner. 8. I have heard learned counsel and the official liquidator as above, examined the record and considered the case-law. The issue that arises is important and interesting, but not without difficulty. It is common ground that winding up has proceeded in terms of section 404 of the Companies Ordinance. This provides in material part as follows:--
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"404. Application of insolvency rules in winding up of insolvent companies. ---In the winding up of an insolvent company the same rules shall prevail and be observed with regard to the - respective rights of secured and unsecured creditors ... As are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent; ...." ' As noted above, the applicable insolvency law is the 1920 Act. Section 47 provides as follows:-- "47. Secured creditors. ---(1) Where a secured creditor realises his security, he may prove for the balance due to him, after deducting the net amount realised. (2) Where a secured creditor relinquishes his security for the general benefit of the creditors, he may prove for his whole debt. (3) Where a secured creditor does not either realise or relinquish his security, he shall, before being entitled to have his debt entered in the schedule, state in his proof the particulars of his security, and the value at which he assesses It and shall be entitled to receive a dividend only in respect of the balance due to him after deducting the value so assessed. (4) Where a security is so valued, the Court may at any time before realisation redeem it on payment to the creditor of the assessed value. (5) Where a creditor, after having valued his security, subsequently realises it, the net amount realised shall be substituted for the amount of any valuation previously made by the creditor, and shall be treated in all respects as an amended valuation made by the creditor. (6) Where a secured creditor does not comply with the provisions of this section, he shall be excluded from all share in any dividend." 9. Insofar as the position of a secured creditor who is a mortgagee is concerned, there can be no cavil with the proposition that he has an interest in the property. This position remains unaffected by the fact that the company has been put in liquidation. It is for this reason that a secured creditor has the option of remaining outside the winding up, and may proceed entirely on the basis of the security. The point was explained in Re David Llotid & Co. (1877) 6 Ch D 339. The context was an application by a secured creditor under the then English law equivalent of what is section 316 of the Companies Ordinance. In explaining why such leave, if required, would be almost invariably granted, James, LJ stated as follows:-- "But that i.e,, the need to seek leave under what is now section 316] has really nothing to do with the case of a man who for the present purpose is to be considered as entirely outside the company, who is merely seeking to enforce a claim, not against the company, but to his own property. The position of a mortgagee under such circumstances is, to my mind, exactly similar to that of a man who said, 'You the company have got property which you have taken from me; you are in possession of my property by way of trespass, and I want to get it back again' ... The mortgagee says, 'There is some property upon which I have a certain specific charge, and I want to realise that charge. I have nothing to do with distribution of your property among your creditors. This is my property.' Why a mortgagee should be prevented from doing that I cannot understand." (pp. 344- 5) ' As I understand it, the foregoing passage encapsulates the submissions made by learned counsel as to the petitioner's position in law with respect to the property, on account of its interest therein as mortgagee. As James, LJ made clear, the mortgagee can proceed in relation to his interest unaffected by the factum of the winding up. This remains equally true even when the company is in liquidation on account of insolvency. This result obtains by reason of section 404 of the Companies Ordinance read with section 28(6) of the 1920 Act. Subsection (2) of the latter section vests "the whole of the property of the insolvent in the Court or in a receiver", but subsection (6) makes clear that: "Nothing in this section shall affect the power of any secured creditor to realise or otherwise deal with his security, in the same manner as he would have been entitled to realise or deal with it if this section had not been passed." There can obviously be no cavil with the foregoing.
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However, with respect, this does not address the issue at hand. It is not the existence of the security or the interest that it created in the property that is in question. Rather, the question is whether that security has been relinquished? This question must be addressed not on the basis of the general rules that apply to secured creditors such as mortgagees, but rather with reference to the special provisions that apply to insolvents and in particular, to an insolvent company that is in the process of being wound up. As section 404 of the Companies Ordinance read with section 47 of the 1920 Act make clear, the secured creditor is free-to relinquish his security. He may choose not to do so. But if, and once, he does then his position alters. The option that was earlier available to him A (i.e,, to realize his security by standing outside the winding up) is no longer at hand. His position is relegated to that of any other creditor who has proved his debt before the official liquidator, in accordance with the relevant provisions. 10. The position at law as presently relevant was stated as follows in the leading case of Moor v. Anqlo-Italian Bank (1879) 10 Ch D 681, 689-90 (emphasis supplied): "In bankruptcy, if a secured creditor wants to prove, he must do one of three things: he may give up his security altogether and prove for the full amount, or he may get his security valued and prove for the difference, or he may sell and realize his security and then prove for the difference. If, without doing either of the latter two things, he proves for the full amount, as he cannot prove for the full amount and receive a dividend except on the theory of giving up the security, he shews by that an intention to give up his security; and, if he so proves and receives a dividend or votes, he shews pretty conclusively that he has finally elected to give up his security and take his dividend; in other words, having two funds to resort to, the bankrupt's general estate, so as to get a dividend on the whole amount of his debt, or his security, he elects to take the bankrupt's estate, and in that way gives up his security. It is not forfeiture, it is election; but, the petitioning creditor gets nothing unless he proves. There is no obligation on the petitioning creditor to prove; he may make the man a bankrupt, and then he may be satisfied as far as he is concerned, and leave other creditors to prove; he does not elect simply by making a man a bankrupt." (per Jessel, MR) ' These observations are reflected in section 47 of the 1920 Act, where the same result obtains as a result of the statutory provisions: see, e.g., Mulla on the Law of Insolvency in India, 5th ed. (2013), paras 436, 437 and (in particular) 439. The key question therefore is: can it be concluded in the facts and circumstances of the present case that the petitioner had relinquished its security? 11. It will be seen from the passage extracted above that Jessel, MR regarded proving by a secured creditor for the full amount of his claim, his receipt of a dividend and participation in voting as "pretty conclusive" that the security had been relinquished. In the present case, the petitioner did prove for the full amount of the claim on 8-5-2000. With respect, I am unable to agree that this was only some sort of a partial claim or one on a "continuing" basis. Furthermore, the petitioner suffered the disallowance of part of the claim by the official liquidator without challenge or objection. It then received a dividend in 2005 without in any manner qualifying the receipt with reference to its security interest. According to the learned official liquidator, the petitioner fully participated in the winding up, including by way of attending meetings, without raising any claim or objection on the basis of its position as a secured creditor. Thus, it would seem on the basis of what was said in Moor v. Anglo-Italian ' Bank that the facts in the present case show "pretty conclusively" that the petitioner must be regarded as having relinquished its claim. 12. The situation of the petitioner may be contrasted with that of the secured creditor in National Development Finance Corporation v. Rawal Papers (Pvt.) Ltd. 1993 M LD 1562 (SHC; SB). The respondent company was put in liquidation on the ground of insolvency. The official liquidator asked for the title documents of the company's property from the secured creditor ("NDFC") in order to sell the property. The latter delivered the said documents, but expressly stated that this
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was "without prejudice to NDFC's right as a secured creditor being mortgagee" and with the further stipulation that the surrender of the documents was not to be "construed as surrendering any of our rights as mortgagee" (p. 1564). This position was accepted by the official liquidator (p. 1565). NDFC apparently also did not file any claim before the official liquidator. On this basis, when the property came to be sold it was held that this was merely a realization of the security by NDFC and it was therefore entitled to its rights as such. Obviously, the material facts before me are quite different from the reported case, and the contrast between the two situations are striking. (I may note that the learned Single Judge applied the provisions of the Insolvency (Karachi Division) Act, 1909, since the registered office of the company was at Karachi. In the present case of course, the registered office of the company was in Balochistan and hence the 1920 Act is applicable.) 13. Learned counsel for the petitioner relied in particular on United Bank Ltd. v. PICIC and others 1992 SCM R 1731. The matter came to the Supreme Court by way of an appeal against a decision of the Peshawar High Court. With respect, this decision has no direct relevance in the facts and circumstances of the present case. Two questions were before the Supreme Court: whether the appellant was a secured creditor within the meaning of the 1920 Act, and if so, was it entitled to priority in terms of section 405 of the Companies Ordinance? The appellant claimed to be a secured creditor on the basis of its security by way of pledge of stocks and spare parts. The first question was answered in the affirmative. The second question was answered in the negative, primarily with reference to section 61 of the 1920 Act and section 405 of the Companies Ordinance. Reference was also made to section 47, and the scheme therein envisaged was considered (pp. 1739-40). The Supreme Court observed as follows (pg. 1740; emphasis supplied): "11. The scheme of the [1920] Act is such that a secured creditor cannot claim any preferential treatment in distribution of the assets of the insolvent. ... A secured creditor as defined, is, therefore, free to deal with his security and to realize it for the repayment of the debt. The order of adjudication does not affect the position of a secured creditor.... He is at liberty to realize his security in any manner he likes. Thus, as the right of a secured creditor has sufficiently been protected and liberty to deal with the security has been given to him it was not necessary to give any preferential treatment or priority to him in respect of the debt which remains unsatisfied after realization of the security." ' It would seem that the issue before the Supreme Court (on the second 'question) related to the aspect that has been emphasized in the foregoing passage. As is clear, this is not the situation at hand. The petitioner does not seek preferential payment for any balance amount left outstanding after it has realized its security. Rather, the issue is whether that security has been relinquished. That, with respect, is a different matter altogether. 14. The case-law cited by learned counsel before the official liquidator in 2005, and again before me, may now be considered. In Mst. Shansi v. Karachi Transport Corporation and others 2000 CLC 595 (SHC; SB), PICIC v. Allied Textile Mills Ltd. 1991 M LD 2301 (SHC; SB), (Firm) Malik Muhammad Saeed Muhammad Azam and others v. Saraodha Central Cooperative Bank Ltd. PLD 1973 Lahore 682 (SB), an unreported judgment of the Peshawar High Court and Kanaivalal Kripa Sankar Bijou Sankar Gobinda Sarkar Dikshit Firm v. Shah Mahmud Palwan and others PLD 1959 Dacca 939 (DB), the issue was in relation to the execution of decrees and preferences in respect of the disbursement of amounts received in execution proceedings. No issue arose of insolvency, especially of a company in winding up. These cases are therefore, with respect, of no relevance for the question at hand. In Federation of Pakistan v. Pioneer Bank Ltd. PLD 1958 Dacca 535 (SB) the respondent bank had obtained a mortgage over certain property, which was subsequently attached by the Income Tax authorities. The bank filed a suit seeking appropriate declaratory and injunctive relief against such attachment on the basis of its prior mortgage. The suit was decreed. The Government's appeal was allowed in part, on a point not presently material. It however failed
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insofar as the High Court confirmed that the bank was entitled to its priority. As is obvious, the facts in the cited decision were totally different from those at hand. In Pakistan Industrial Credit and Investment Corporation Ltd. v. All Gul Khan Packages Ltd. 1989 CLC 1774 (PHC; SB), the respondent company was wound up by consent (pg. 1776) and no question of section 404 of the Companies Ordinance and/or the 1920 Act was involved. The only issue was in relation to section 405 and that too, with regard to certain dues claimed by WAPDA. This decision also, with respect, is of no relevance for the case at hand. 15. This leaves only a judgment of the Lahore High Court to consider. Although learned counsel filed a certified copy of…
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