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Judicial Miscellaneous No.9 of 1982, decided on 24th April, 1984.

‑‑‑Ss.1.62, 163 b 166‑‑Winding up of company‑‑Contention of creditor, that where surety bond executed by surety had provided for unconditional payment of specific sum to creditor by surety on demand, existence of any dispute between principal debtor and creditor regarding terms and conditions of main agreement executed between them could not come in way of enforcement of liability of surety under bond held, would not necessarily be examined by Court in depth, where object of proceedings initiated before Court by creditor was not to recover amount under surety bond, but was simply to secure from Court's order of winding up of company/surety on account of its inability to pay debts.

R.D. Harbottle (Mercantile) Ltd. and another v. National Westminster Bank Ltd. and others (1977) 2 All. 862; Edward Owen Engineering Ltd. v. Barcleva Bank International Ltd. (1978) 1 All ER ' 978; _ Power Curber International Ltd. v. National Bank of Kuwait SAK (1981) 3 All. E R 607; Bacho & Co. (London) Ltd. v. Anque Vernes Et. Commercial De Paris S.A. Lloyd's Law Report 1973 Vol. 2, 437; Howe Richardson Scale Co. Ltd. v. Polimex Cakep and National Westminster Bank Ltd. Lloyd's Laws Report 1908 Vol. 1, 1961; United Commercial Bank v. Bank of India and others A I R 1981 S C 1426; Messrs Tarapore and Co. Madras v. Messrs v/o Tractorre Export Moscow and another A I R 1970 S C 891; Sirrafi Trading Establishment v. Trading Corporation of Pakistan Ltd. 1984 C L C 381; Province of West Pakistan v. Messrs Mistri Patai t Co. and others PLD 1969 S C 80 and Messrs Jamila Industries Ltd. v. Pakistan National Refinery Ltd., Karachi P L D 1976 Kar. 644 ref.

‑‑‑Ss.162, 163 & 166‑‑Winding up of company by Court‑‑Object and grounds for‑Object of winding up proceedings before Court being to secure discontinuation of functioning of company, which had ceased to be commercially solvent, but not to coerce such company to make payment to unpaid creditor‑‑Principal question before Court, should be whether debt, for which inability was imputed, was disputed or undisputed‑‑‑In case debt was disputed and was denied by company and if, Court after examining material placed before it by company found that denial of liability by company to disputed debt, was based on substantial ground, Court should refuse to make order of winding up.

Bengal Luxmi Cotton Mills Ltd. and others v. Mahaluxmi Cotton Mills Ltd. and others A I. R 1955 Cal. 273 and Messrs Madhusudan Gordhandas & Co. v. Madhu Woollen Industries Private Ltd. A I R 1971 S C 2600 ref.

‑‑‑Ss.162, 163 b 166‑‑Winding up of company‑‑Evidence on record clearly showed that denial of liability by surety in respect of disputed debt, was based on substantial ground and neither was frivolous nor merely cloak to avoid payment under surety bond‑‑Remedy to petitioner, by way of winding up order of company, held, would neither be equitable not justified in circumstances.

‑‑

‑‑‑Ss.162, 163 a 166‑‑Winding up of company‑‑Material placed on record having tentatively beep examined by Court simply to come to conclusion, whether denial of liability by company In respect of disputed debt was based on bona fide and substantial ground‑‑Any expression of opinion by Court in that regard not to be treated as final‑‑Petitioner/creditor would be at liberty to follow such other course available to him under law for enforcement of alleged liability of respondent under disputed bond.

Parvez Hassan for Petitioner.

Muhammad Ali Sayeed and Imtiaz Lari for Respondent.

Dates of hearing: 6th and 7th April, 1986.

This petition under sections 162, 163 and 166 of the Companies Act, 1913, has been presented on behalf of the Federation of Pakistan through the Director‑General, National Highways, Super Market, F‑6, Islamabad, for a winding up order against the Standard Insurance Company Ltd., I.I. Chundrigar Road, Karachi (respondent). The following facts are alleged in the petition.

That on 30th of March, 1980, the petitioner awarded a contract for the rehabilitation work on a portion of National Highway from Kot Diji to Rohri to Messrs Continental Engineers Ltd. That on the same date, the respondent executed an Insurance Guarantee Advance Payment Bond (hereinafter to be referred to as the first bond, for the sake of convenience), agreeing to pay unconditionally a sum of Rs.1,74,37,500 on demand. That on 14th of April, 1980, the respondent further executed a performance bond in favour of the petitioner, undertaking to pay a sum of Rs.2,32,50,000 to the petitioner on service of a written demand in that behalf. That on 13th October, 1981, the petitioners by their letter, dated 13th October, 1981, demanded from the respondent the tyro amounts mentioned in the aforesaid bonds, and this demand was followed by their letter, dated 4‑11‑1981. That the respondents on 5th January, 1982 and on 4th of February, 1982, by their two separate letters, denied their liability to pay the sums of Rs.1,74,37,500 and Rs.2,32,50,000 mentioned in the aforesaid bonds. The petitioner accordingly contend that, as a result of refusal by the respondents to discharge their liability under the aforesaid two bonds, it should be held that they are unable to pay their debts, and .a winding up order be passed against the respondent. The petition is very hotly contested by the respondent, and in the reply to the main petition, it has taken up the position that they are neither responsible for any payment under the first bond, dated 30th of March, 1980, nor they are liable under the subsequent performance bond, dated 14th April, 1980. It is alleged by the respondent that the petitioner had invited tenders for the construction and rehabilitation work of the National Highway, in which a joint venture, consisting of Messrs Continental Engineers Ltd., Lahore, Messrs Kampsax of Denmark and Messrs Wahlas (U.K) Limited of London, participated, and the same joint venture was awarded the work of rehabilitation of the National Highway from Kot Diji to Rohri. It is alleged that the two bonds, referred to above, executed by the respondents guaranteed the due performance of the work by the said joint venture, but, upon service of the notice of the petition, the respondent came to know that the two foreign constituents of the joint venture, namely, Messrs Kampsax of Denmark and Messrs Wahlas (U.K.) Limited of London were dropped, and the contract was solely awarded to the local firm, namely, Messrs Continental Engineers Ltd., Lahore. It is accordingly contended on behalf of the respondents that they had never executed any guarantee for the work awarded to Messrs Continental Engineers Ltd., of Lahore and, as such, the question of any payment to the petitioner under the aforesaid guarantee, or, any default on their part did not arise. Alternatively, it is contended by the respondent that the payment under the aforesaid bond being dependent upon establishing of default on the part of the principal debtor in performance of the contract executed by the principal debtor and the creditor the claim of the petitioner for payment of the aforesaid amount by the respondent is premature. It is finally urged on behalf of the respondent that there being substantial dispute with regard to the liability of the petitioner under the bond, referred to above, the petition for winding up filed by the petitioner is misconceived. It may be mentioned here that Dr. Pervez Hassan, learned counsel for the petitioner at the hearing of the petition made a statement that, for the purposes of present winding up petition, he only relies on the first bond executed by the respondent on 30th of March, 1980, and will not press into service the performance bond executed by the respondent in favour of the petitioner on 14th of April, 1980. It is contended by the learned counsel that under the first bond, the respondent had undertaken unconditionally to pay a sum of Rs.1,74,37,500 on demand to the petitioner without any reference to the contractor, and as the respondent failed to pay the said amount after the demand was made in this regard by the petitioner on 13th October, 1981, it should be held that it is unable to pay its debts and an order of winding up may be made accordingly against it. It is urged by the learned counsel that, although in the first bonds, a reference is also made to an agreement of the same date entered into between the contractor and the petitioner, but from the terms of the bond, it is quite clear that there is no nexus between the payment of the amount under the bond and the agreement referred therein. To support the contention that, where a bond executed by a surety provides for unconditional payment of a specific sum to the creditor by the surety on demand, then the existence of a dispute between the principal debtor and the creditor with regard to the terms and conditions of the main agreement executed of the cannot come in the way of enforcement of the liability of the surety under a bond. The learned counsel has cited the case of R.D. Harbottle (Mercantile) Ltd. and another v. National Westminster Bank Ltd. and others (1977) 2 All. 862, Edward Owen Engineering Ltd. v. Barcleva Bank International Ltd. (1978) 1 All E R 976, Power Curber International Ltd. v. National Bank of Kuwait S A K (1981) 3 All. E R 607, Bacho & Co. (London) Ltd. v. Anque Vernes Et. Commercial De Paris S A Lloyd's Law Report (1973) Vol. 2, 437. Howe Richardson Scale Co. Ltd. v. Polimex Cakep and National Westminster Bank Ltd. Lloyd's Laws Report (1908) Vol. 1, 1961, United Commercial Bank v. Bank of India and others A I R 1981 S C 1426, Messrs Tarapore and Co. Madras v. Messrs v/o Tractorre Export Moscow and another A I R 1970 S C 891, Sirafi Trading Establishment v. Trading Corporation of Pakistan Ltd. 1984 C L C 381. The learned counsel very fairly also drew my attention to the cases of Province of West Pakistan v. Messrs Mistri Patal a Co. and others P L D 1969 S C 80 and Messrs Jamila Industries Ltd. v. Pakistan National Refinery Ltd. Karachi P L D 1976 Kar. 644, wherein somewhat contrary opinion has been expressed with regard to the liability of a surety under a bond, which also made reference to the terms and conditions of the agreement entered into between the principal debtor and creditor. The learned counsel after citing the above contrary view in the two cases, attempted to distinguish the same. It is, however, not necessary in these proceedings to examine in depth the above contention of the learned counsel, as the present proceedings are not intended to recover payment of the amount converted under the first bond. The object of the present proceedings initiated by the petitioner is to secure from the Court an order of winding u of the respondent on account of its inability to pay debts, which means that the respondent has ceased to be commercially solvent an 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 debt is disputed by the Company, then such dispute by the Company is based on substantial ground. If the Court, after examining the 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. Reference in this connection may be made to the cases of Bengal Luxmi Cotton Mills Ltd. and others v. Mahaluxmi Cotton Mills Ltd. and others A I R 1955 Cal. 273, the Messrs Madhusudan Gordhandas & Co. v. Madhu Woollen Industries Private Ltd. A I R 1971 S C 2600. In the case of Messrs Madhusudan Gordhandas & Co., the Supreme Court of India, while laying down the principles on which the Court will act in making an order of winding up against a company on the ground of its inability to pay the debts, observed as follows:‑

"21. 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 S J 396). 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 substance; 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 the light of the above‑stated legal position, I will now proceed to examine, whether the denial by the respondent to pay the sum of Rs.1,74,37,500 under the first bond on demand by the petitioner is based on substantial ground, or, it is just a cloak. The first bond relied by the petitioner in support of the winding up petition reads as follows: ‑

9‑A, Ganga Ram Mansion, Shahrah‑e‑Qusid‑e‑Azam, Lahore, in joint venture with Messrs Kampsax D K‑1553, Dagmarhos, Copenhagon, Denmark and Messrs Wahlas U.K. Ltd., 495, Green Lanes London N‑13.

Messrs The Standard Insurance Co. Ltd., 171‑Wapda House, Lahore.

To,

The President of Islamic Republic of Pakistan,

through the Director General,

National Highway Board,

acting on behalf of Secretary,

Ministry of Communication,

Government of Pakistan,

ISLAMABAD.

Sir,

You have entered into a contract, dated 30th March, 1980 with Messrs Continental Engineers Limited, 9‑A, Ganga Ram Mansion, Shahrah‑e‑Qusid‑e‑Azam, Lahore in joint venture with Messrs Kampsax D K‑1553, Dagmarhos, Copenhagon, Denmark and Messrs Wahlas U.K. Limited, 495, Green Lanes London N‑13, for Rehabilitation of National Highway Section‑VI Kot Diji Mile Stone 301 to Rohri Mile Stone 328, and stipulating payment to you by us on account. of the contract for an amount of 15% of the total value of the contract i.e. Rs.1,74,37,500 (Rupees one crore seventy‑four lac thirty‑seven thousand five hundred only).

We hereby agree:‑

(1) To make an unconditional payment of Rs.1,74,37,500 (Rupees one crore seventy‑four lac thirty‑seven thousand five hundred only) to you on demand without any further question and without reference to the contractor.

(2) To keep this guarantee in force till the due completion of the contract on the date given in the contract or as further extended from time to time and the final adjustment of accounts and the discharge of liability of the contractor in the above contract.

(3) If any amendments to the contract under reference are made on behalf of the President the contract so amended shall be needed to be continuing for the purpose of clause (2) above.

(4) To waive our consent/notice to any amendment and to the granting of any extension of time with mutual consent of the contracting parties or for any forebearance/indulgence allowed to the contractor.

(5) The guarantee hereinbefore given shall not be effected by any change in the constitution of the Insurance Company or the contractor.

(6) This guarantee shall remain in force for twenty‑four (24) months i.e. from 30th March, 1980 to 29th March, 1982 (or upto the completion of the project whichever occurs earlier).

(7) This guarantee shall be binding on the successors of the Insurance Company or assignees of the said Insurance Co.

(8) After the expiry date, this guarantee shall be void and without any legal force unless extended by us in writing before the date of its expiry i.e. 29th March, 1982.

SIGNED at Lahore, this day of 30th March, 1980."

A careful reading of the above bond will show that it was executed by the respondent on behalf of a joint venture, which consisted of Messrs Continental Engineers Ltd. of Lahore, Messrs Kampsax of Denmark, and Messrs Wahlas (U.K.) Limited of London. It is significant that both, the agreement between the contractor and the petitioner as well as the first bond were executed on 30th March, 1980, but the place of execution of the agreement is Islamabad, while that of the bond is Lahore. It is the case of the respondents that, at the time they executed the first bond, 'they were given to understand by the petitioners that the contract has been awarded to the joint venture, consisting of Messrs Continental Engineers Ltd. of Lahore, Messrs Kampsax of Denmark and Messrs Wahlas (U.K.) Limited of London, and it is for this reason that, both in the title of the bond as well as in the body, the contractor has been referred to with full description of the joint venture. It is contended on the basis of the stipulation in the bond that the respondents never undertook any liability under the first bond, with regard to the Messrs Continental Engineers Ltd., alone. The liability, it is urged, if any, was for the joint venture, which, alongwith the local firm of Messrs Continental Engineers Ltd. , included two foreign constituents, namely, Messrs Kampsax of Denmark and Messrs Wahlas (U.K.) Limited of London, and, as the two foreign constituents of the joint venture were not awarded the contract, dated 30th of March, 1980, referred in the bond, there is no guarantee in the eye of law existing in favour of the petitioner for the contract or Messrs Continental Engineers Ltd. The learned counsel for the respondent, in this connection, also referred to several other documents on record, including the letter of Messrs Nespak, who were appointed by the petitioner to supervise the work, to demonstrate that, even to their own engineering consultants, the petitioners all along represented that the work is to be carried on by a joint venture, consisting of Messrs Continental Engineers Ltd. of Lahore, Messrs Kampsax of Denmark and Messrs Wahlas (U.K) Ltd. of London. In this connection, the learned counsel for the respondent also referred to the subsequent performance bond executed by the respondent in favour of the petitioner, which also referred to the contractor as consisting of a joint venture of Messrs Continental Engineers Ltd. of Lahore, Messrs Kampsax of Denmark and Messrs Wahlas (U.K.) Limited of London. It is an admitted position in the case that the contract, dated 30th of March, 1980, was awarded exclusively to Messrs Continental Engineers Ltd. of Lahore, and in that agreement, there is no mention at all of Messrs Kampsax of Denmark and Messrs Wahlas (U.K.) Ltd. of London. The learned counsel for the petitioner was unable to, explain the reason for accepting the guarantee by the respondent for the joint venture, in spite of the fact that the agreement, dated 30th March, 1980, was executed only between the petitioner and Messrs Continental Engineers Ltd. of Lahore. There is also no satisfactory explanation on record with regard to the performance bond, dated 14th of April, 1980, which was executed much after the execution of the principal agreement, dated 30th of March, 1980, and, in which again, reference to the contractor has been made as a joint venture, consisting of Messrs Continental Engineers Ltd. of Lahore, Messrs Kampsax of Denmark and Messrs Wahlas (U.K.) Limited of London. Dr. Pervez Hassan, learned counsel for the petitioner contends that, since in the agreement, dated 30‑3‑1980, only Messrs Continental Engineers Ltd. is shown as the contractor, it should be presumed that the respondent while executing the 1st bond had notice of this fact. as the agreement dated 30‑3‑1980 is specifically referred in the two bonds executed by the respondent in favour of the petitioner. It is accordingly urged that the description of the joint venture in the two bonds as the contractor was a mistake, which was committed by the respondent, and the respondent cannot be permitted to take advantage of its own wrong. The contention of the learned counsel for the petitioner is not borne out from the material on record. In spite of the fact that, in the first bond, dated 30th of March, 1980, and the subsequent performance bond, dated 14th April, 1980, the respondent specifically and deliberately referred the name of contractor as the joint venture, consisting of Messrs Continental Engineers Ltd. of Lahore. Messrs Kampsax of Denmark and Messrs Wahlas (U.K.) Ltd. of London, and these documents were in possession of the petitioner all along, they had at no stage, raised any objection with regard to the mention of the above joint venture as the contractor in the two bonds. The learned counsel for the petitioner is also unable to explain the reason for mention of this joint venture of the contractor in the letter of. Messrs Nespak, who were admittedly appointed by the petitioner as the technical adviser to supervise the contract awarded to Messrs Continental Engineers Ltd. In this connection, it will be advantageous to refer to a letter of Messrs Nespak Ltd., addressed to Messrs Continental Engineers Ltd., and copy endorsed to the petitioner, dated 22nd of April, 1980. It is as follows:‑

"Messrs Continental Engineers Ltd.,

Designers & Builders,

9/A, Ganga Ram Mansion,

Shahrah‑e‑Qusid‑e‑Azam,

LAHORE.

Subject: Contract No.7‑Third

IBRO Highway Project.

Joint Venture Agreement.

Reference: Our letter No.NESPAK/HWD/KR./747, dated 3rd April, 1980

Dear Sir,

You have been informed in a meeting on 21st April, 1980 held in National Highways Board, Islamabad that in order to release the Mobilization advance and subsequent payments, a Power of Attorney should be obtained from Messrs Kampsax Denmark and Messrs Wahlas (U.K.) Limited, that all payments shall be made to Messrs Continental Engineers Limited (Pakistan) in their name concerning the Rehabilitation of National Highway Kot Diji to Rohri.

In order to avoid delays in the payment of mobilization advance the other two Companies may communicate their agreement through Telex No.4730 NESPAK Lahore, but written power of attorney shall be mailed by them immediately which should also be confirmed in the above telex.

Yours faithfully,

For NATIONAL ENGINEERING SERVICES

(PAKISTAN) LTD.

(INAM BARI PERVAIZE),

Project Manager."

The .learned counsel for the petitioner attempted to meet the above argument, by saying that, under clause (5) of the first bond, it is specifically provided that the guarantee given by the respondents under the bond shall not be affected by any change in the constitution of the Insurance Company, or, the contractor. It is true that such a provision exists in the first bond, but prima facie this clause will refer to a change, which may take place in the constitution of the respondent and the contractor subsequent to the execution of the bond. This provision, on a tentative examination, will not cover a re‑constitution of the joint venture, which was mentioned as the contractor in the first bond, and for whom the respondent had executed the guarantee frond. I have only examined the material placed in this case tentatively for the purposes of examining, whether the defences raised by the respondent in denying the liability of the claim made by the petitioner under the first bond is based on bona fide pleas and substantial ground, and therefore, any expression of opinion in this regard should not be treated as final, as this has to be determined conclusively in proceedings, which the petitioners may choose to initiate against the respondents for the purposes of enforcing their liability under the aforesaid bond After examining the above material, which has been placed by the parties before me, I am of the view that the denial made by the respondent is based on triable issues and is neither frivolous nor is merely a cloak to avoid payment under the first bond. As I have reached the conclusion that the denial of liability made by the respondent is based on substantial ground, the remedy by way of winding up order of the respondent is neither equitable nor justified in the circumstances of the case. I accordingly dismiss this petition, but leave the parties to bear their respective costs. The petitioner is at liberty to follow such other course as is available to him under the law for enforcement of the alleged liability of the respondent under the first bond.

H . B . T Petition dismissed.

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