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Civil Appeals Nos. 177 and 178 of 1972, decided on 17th March, 1986.

(Against the judgment and order of the Lahore High Court, Lahore, dated 10‑4‑1972 in C.O. No. 1 of 1967 and 22 of 1967).

‑‑‑Art. 185(3)‑‑Companies Act (VII of 1913), Ss. 162 & 163‑‑Leave to appeal granted to examine legality and propriety of order of High Court directing the winding up of company pending other proceedings separately instituted by creditor.

‑‑‑Ss. 162 & 163‑‑Secured creditor‑‑Locus standi of secured creditor to file application for winding up of debtor company‑‑Creditor being not satisfied that security was proper and sufficient, held, could move application for winding up of debtor company‑‑Order winding up of such company could, also be passed even on application of a secured creditor.

‑‑‑Ss. 162 & 163‑‑Winding up of company‑‑Mere fact that objection was taken to the claim of creditor on the point of limitation, would not render winding up proceedings to be incompetent‑‑Debtor protracting proceedings, raising objections which it could not subtantiate and was withholding information in its custody in spite of orders of High Court to produce same‑‑With such conduct of debtor company, High Court, held, was not precluded from adjudicating on question of a liability of debtor company to pay its debt notwithstanding that debtor company disputed claim of creditor.

‑‑Ss. 162 & 163‑‑Prolonged non‑functioning of company, its mounting liabilities both secured and unsecured, disputed and undisputed and conduct of Managing Director justifying conclusion that company was in a morbid state with little or no chance of its recovery and rehabilitation‑‑Winding up order of such company, held, was eminently a just and proper order in circumstances.

Sh. Abdul Manan, Advocate Supreme Court with S. Inayat Hussain, Advocate‑on‑Recorded for Appellant.

Raja M. Akram, Advocate Supreme Court and M. Yaqoob Khan, Advocate Supreme Court and M.Z. Khalil, Advocate‑on‑Record for Respondent No.l in Civil Appeal No. 177 of 1972.

Khawaja Mushtaq Ahmad, Advocate‑on‑Record for Respondent No. 2 in Civil Appeal No. 178 of 1972.

Dates of hearing: 12th and 17th March, 1986.

Leave to appeal was granted in two separate matters disposed of by a consolidated judgment of the Lahore High Court, dated 10th of April, 1972 to examine, the legality and propriety of the order directing the winding up the appellant Company in proceedings separately instituted by the respondents under sections 162 and 163 of the Companies Act, 1913.

The appellant is a private limited Company with a nominal capital of 25 lacs of rupees and a paid‑up capital of Rs.5 lacs. The Company was engaged, inter alia, in textile business. The National Bank of Pakistan, a secured creditor, claimed that Rs.6,99, 899.73 were due to it from the appellant on the 30th of November, 1966 against a cash credit limit of Rs.8 lacs on the pledge and hypothecation of textile goods and letters of credit. The appellant company, according to the respondent National Bank, had since about three years before the institution of its application under sections 162 and 163 of the Companies Act on 23rd of December, 1966, suspended its business and closed the mill premises and there was no likelihood of its resuming business. It was also alleged that as on a part of the hypothecated and pledged goods sales tax and other dues had not been paid they could not be cleared and the goods as well as the machinery have depreciated in value and were fast deteriorating. In spite of a notice served on 9/10‑10‑1963 and 16‑6‑1965 the appellant had failed to pay the debt. Finally, it was alleged that:‑

"The company had neglected to pay the sum of Rs.6,99,899.73 which is due from it and apparently it is in no mood to pay the amount. The interest is mounting up and the respondents have neglected to pay or to secure or compound for it to the reasonable satisfaction of the petitioner‑Bank.

That the company is totally unable to pay its debts. The doors of the factory have been closed and it is no longer functioning. The goods and the machinery are deteriorating day by day and it is apprehended that the creditors will not be in a position to fully realize the amounts due to them."

On the basis of these claims, the application under sections 162 and 163 of the Companies Act was filed on 23‑12‑1966 claiming the following reliefs:‑

"(i) That the Punjab National Silk Mills Limited, with its registered office at 326‑Andhi Khui, Multan may kindly be wound up by the Court under the provisions of the Companies Act.

(ii) Or such other order may be made in the petition as shall be just and equitable."

In its written statement dated 13‑4‑1967 the appellant took up the objections that a civil suit had already been filed by the National Bank of Pakistan for recovery of the outstanding amount and that was instituted prior, to the application under sections 162 and 163 of the Companies Act, that the application was not bona fide, that the claim was time‑barred by limitation and was mala fide. On merits, it was contended, that as the respondent‑Bank was a secured creditor such an application for winding up was not competent. The Company was stated to be solvent. The appellant admitted that the Company had to suspend the business for sometime due to circumstances beyond its control. It also stated that the Company's assets far exceeded its liability. A surveyor's report dated 2‑4‑1967 was also appended wherein the value of building land and machinery was worked out at Rs.30,60,983. The following issues were framed on 23‑6‑1967.

"(1) Whether the application for winding up of the company is not maintainable as a civil suit has been filed by the petitioner‑bank against the respondent‑company O. P. R .

(2) Whether the application for winding up has been given with a mala fide intention or for ulterior motives O.P.R.

(3) Whether the winding up proceedings are liable to be stayed on account of the pendency of the civil suit between the parties at Multan O. P. R.

(4) Whether the company had suspended its business on valid and substantial grounds as alleged in para 7 of the written statement O. P. R.

(5) Whether the company is in solvent condition and is able to meet its liabilities O . P . R .

‑‑The onus has been placed on the respondent for the reason that in the statement recorded the respondent was not able to furnish any substantial information as to its affairs).

(6) Whether the winding up of the company shall be just and equitable "

Another application under section 162 of the Companies Act was filed by Commerce Bank Limited on 20th of April, 1967 claiming that the Company was indebted to it to the extent of Rs.56,569.78 as on 7‑4‑1967 and in spite of notice and promises had failed to pay and was in fact unable to pay the debt. The following grounds were taken up for claiming the winding up the Company:‑

"(i) That the Company has suspended its business for a period of over three years.

(ii) That the Company is unable to pay its debts as visualized by section 163 of the Companies Act and has neglected to pay the same due to the petitioner or to secure or compound the same to the reasonable satisfaction of the petitioner.

(iii) That the affairs of the Company are being mismanaged and there is no likelihood of resumption of its business.

(iv) That the liabilities of the Company far exceed its assets and the Company has suspended payments to all its creditors, including National Bank of Pakistan and the Muslim Commercial Bank and also the Government dues have not been paid so far.

(v) That the Directors of the Company, i.e. respondents Nos.2 and 3 are completely indifferent to the affairs of the Company and it would be just and equitable that the Company should be wound up.

This claim too was resisted by the appellant on the ground that the Commerce Bank should have gone for recovery of the loan by filing a civil suit that the application was mala fide, and that proper court‑fee had not paid. On merits, the appellant admitted its indebtness to the extent claimed and stated that more time was sought by the appellant for repayment and concluded its objection as follows:‑

"That the present application is not bona fide and is being filed to put pressure upon the respondents to pay the loan and the proper forum for the recovery is civil Courts and not the proceedings under the Companies Act. This application in fact amounts to black‑mail and is being filed to save the court‑fee which is likely to be paid in case a suit is filed in the civil Courts. "

The following issues were framed on 8‑11‑1968:‑

(1) Whether the application for winding up had been given with a mala fide intention or for ulterior motives O . P . R .

.

(2) Whether the company had suspended its business on valid and substantial grounds as alleged in para. 7 of the written statement O. P. R.

(3) Whether the company is in solvent condition and is able to meet its liabilities O . P . R .

(4) Whether the winding up of the company shall be just and equitable "

The proceedings in the two applications were thereafter consolidated.

A provisional liquidator was appointed by an order dated 20‑7‑1967. The order being reported as National Bank of Pakistan v. Punjab National Silk Mills Limited P L D 1969 Lah. 194. A Letters Patent Appeal against it was also filed by the appellant which was disposed of in terms of an order passed by an agreement of the parties and reported in Punjab National Silk Mills Limited v. National Bank of Pakistan 1983 C L C 600. After recording evidence of the respondent, as the appellant failed to produce its evidence, the learned Judge allowed the application with costs and ordered that the appellant Company be wound up in accordance with law.

The learned counsel for the appellant contended on the basis of section 162 read with section 163, clause (i) that a secured creditor, as was the National Bank of Pakistan, had no locus standi to move an application for the winding up of the . Company. Besides, according to the learned counsel, the amount claimed by National Bank was disputed bona fide as it had become time‑barred and the National Bank had already elected to file a civil suit. It could not be permitted to invoke the provisions regarding the winding up of the Company for enforcing the recovery of its debt. Further, it was contended that the land and machinery forming the assets of the Company were highly valuable and as borne out by the surveyor's report the assets of the Company far exceeded the liabilities. It was also contended that the refusal to pay a debt should not have been confused with the capacity to pay the debt.

In any case, according to the learned counsel for the appellant, the learned Judge in the impugned judgment recorded no finding with regard to the incapacity of the appellant to pay its debt nor did the learned Judge take into consideration the value of the assets while adjudging its capacity to pay its debt and clear its liabilities. It was also urged that the appellant had given a list of the witnesses, deposited their expenses and still he was denied the opportunity of producing its evidence and not even the appellants Managing Director was allowed to appear in the witness‑box as his own witness. Finally, it is contended that as the judgment was announced in the case by the High Court more than two years after the conclusion of the arguments, most of the legal grounds taken up and urged were omitted from consideration and disposal. All these grounds are noted in the order granting leave to appeal. What is further noted therein is the competence of a direct appeal from the judgment of the learned Judge of the High Court in Chambers without availing of the forum of appeal as prescribed under section 202 of the Companies Act.

Raja Muhammad Akram, the learned counsel representing the National Bank of Pakistan, pointed out that there was no law which debarred the secured creditors from moving an application for winding up of the Company instead of proceeding against the secured goods. He has relied in support of his claim on a judgment of the Lahore High Court (I. C . A . 2 of 1977) against which leave to appeal was refused by this Court in C.P. No.166 of 1980, decided on 18‑5‑1982. It was next contended that the National Bank of Pakistan had disclosed in the application itself and thereafter supported by evidence that in spite of the debt being secured why such an application was filed. The goods were liable to tax and could not be secured without discharing that burden. The goods had lost their market value in view of prolonged closure of the Mills and disturbance of the cycle of production and marketing. The learned counsel has demonstrated from the record that more than reasonable opportunity was given at all stages to the appellant to produce its evidence to supply the vital data for arriving at a just and equitable order and every time it was the appellant who was in default seriously prejudicing the proceedings in Court. According to the learned counsel, it was incorrect that the National Bank elected to file a civil suit first and then filed an application for winding up. In fact, it was just the reverse.

As regards, the assets and its value according to the learned counsel for the respondent, it was an exaggerated value which was being projected by the appellant and it was contradicted by the basic record of the Company itself which the appellant failed to produce to substantiate its claim in proceedings before the appointment of the provisional liquidator and even thereafter the appellant was himself shy of appearing as a witness or producing its evidence and in fact did not at any stage come forward to do so. As regards, the objection to the competence of this appeal without availing of the appellate forum of the High Court, the learned counsel for the respondent conceded that he would not press this objection in order to get a decision on merits rather than on that techinicality. Besides, this appeal has remained pending in the Court since 1972 and it is only fit and proper that it should be disposed of on merits rather than on such a technical objection.

Khwaja Mushtaq Ahmed, the learned counsel representing the respondent Commerce Bank, stated that there was no such defect in its claim, of its being disputed, or of its being time‑barred and a decree has also been subsequently obtained by the Bank in respect of that amount and on account of accumulation of interest the liability of the appellant has further increased substantially and the decree remains unsatisfied.

As regards the locus standi of a secured creditor to file an application for winding up, we find that there is nothing in the law expressly adverse to it. In the matter of security even under section 163 of the Companies Act relied upon by the learned counsel for the appellant, the satisfaction has to be of the creditor. In the present case, the respondent National Bank of Pakistan had amply demonstrated by recital in the plaint and by the evidence produced at the trial with no rebuttal whatsoever that the security was not proper and sufficient in the circumstances of the case. It was not satisfied with it. It could, therefore, move an application for winding up, the other objections apart. This objection of being a secured creditor is not available against Commerce Bank. The order of winding up could be passed even on that application to which no such objection existed. We also take note of the fact that a decision on the same legal issue was brought to this Court and leave to appeal was refused in that case.

As regards the objection that National Bank had already filed a civil suit and then filed the application for winding up of the Company, there appears to be a slight distortion of fact. We cannot say whether it was intentional or deliberate or inadvertent and only a mistake. The record shows that the application for winding up was filed on the 23rd of December, 1966 the suit was filed on 2nd January, 1967 and the dates are so mentioned in para. 2 of the petition for leave to appeal in this Court. In spite of the dates being these what is mentioned in the petition is as follows:‑

"While the aforementioned suit was pending, the respondent‑bank instituted a petition on 23‑12‑1966 under section 162, Companies Act, for winding up the petitioner company in the High Court, Lahore. alleging inter alia, that the petitioner had neglected to pay the aforesaid amount of Rs.6, 99, 899.73 and had suspended its business and was unable to pay its debts."

It was in this manner that in the leave granting order also the ground was reproduced that National Bank having already elected to file a civil suit was debarred from filing the winding up application. This argument would be not of avail to the appellant if the correct dates are kept in view, for the respondent elected to file a winding up application and not a civil suit.

As regards the objection that the claim of the National Bank was disputed, we find that the only objection taken to it was with regard to limitation and not the substance of the claim. The learned Judge held that there was acknowledgment in writing, that the debt was not barred by limitation and the application for winding up was not' mala fide. It cannot be urged that whatever be the nature of the objection once an objection is taken to the liability then the winding up proceedings must be held to be incompetent. The record amply demonstrates that the appellant was protracting the proceedings, raising objection which it could not substantiate and was withholding information in its custody in spite of orders of the High Court to produce the same either personally or through its agent. With such a conduct of the, appellant, the High Court was not precluded from adjudicating on the question of liability of the appellant to pay its debt notwithstanding that the appellant disputed that the claim of National Bank as time‑barred.

As regards, the denial of an opportunity to the appellant to lead or produce its evidence or to examine himself as a witness, we find that there is little merit. It will be seen that while framing the issues, .the Court had placed onus on the appellant and had given a note also why it was doing so. When it came to recording the evidence of the National Bank, the following statement was made by its counsel on 20‑7‑1967:‑

My two witnesses, namely, Mr. Muhammad Rashid and Mr. Muhammad Sadiq, Managers of the Bank, are present in Court, but I will produce them after the evidence of. the respondent's witnesses has been recorded and they deny the loan advanced to the respondent‑Company by the petitioner‑Bank. R.O. & A.C."

Sh. Abdul Manan, Advocate, who was then appearing for the appellant made the following statement recorded in Question and Answer form the same day:‑

"I seek an adjournment. I have not brought any evidence.

‑ Did you summon any witness

‑ No.

‑ Did you produce any document

No.

R.O. & A.C."

The case was adjourned to 9‑10‑1967 with the direction that if they wanted to summon any witness, they should furnish necessary particulars of the witnesses and also deposit the process‑fee and the diet money within a week. It was made clear that no further adjournment would be granted. The case had thereafter gone in appeal before the Letters Patent Bench and the recording of evidence was taken up on 21‑2‑1969 and 11‑.4‑1969 on which dates three witnesses were examined by the respondent and it closed its affirmative evidence on that date.

Again an order was passed for appellant's evidence with the direction that diet money and process‑fee should be paid within a week and witnesses be summoned and the next date was left to be given by office. On 2‑12‑1969 when the case came up for appellant's evidence none was produced and the following order was recorded by the Court:‑

"In spite of the opportunity allowed to the respondent, he has neither summoned nor brought any witnesses today for examination. Even he is not present today for his statement as a witness. There is no explanation for this default and in these circumstances, I close his evidence. But the learned counsel for the respondent maintains that these proceedings are liable to be stayed and that he has already made an application for the purpose and in the first instance a proper order should be passed by me in C.M. No.55/L of 1969, filed by him on behalf of the respondent. I find that on the 11th of April, 1969, when this application was presented, Sh. Mahboob Elahi was present in Court and a notice of this was given to him although his name in the order sheet has been wrongly given as 'Sh. Maqbool Elahi Advocate for the respondent‑Bank'. The respondent‑Bank has failed to submit any written reply to this application. No adjournment is allowed to him for the reply. For arguments on this application, the case is adjourned to 3rd December, 1969, at the request of the parties."

The case then came up on 3‑12‑1969 and the following order was passed by the Court on that date:‑

"3‑12‑1969. Sh. Ghias Muhammad Advocate. Sh. Mahboob Elahi, Advocate for the Bank. This is an application praying for the stay of these proceedings. A similar petition was dismissed by this Court on 7‑4‑1967. There is already an issue No.3 framed in the main case covering this aspect. The evidence of the parties have already concluded and the case is now ripe for arguments. In these circumstances this petition is rejected. The learned counsel for the respondent in the main case has prayed for an adjournment to examine Sh. Muhammad Hussain, Managing Director who is not present in Court. He informs me that on 2‑12‑1969 he sent a telegram to him. But his son has informed him that he was out of station having gone to Rawalpindi. The request for an adjournment is rejected. His case was already closed by me on 2‑12‑1969. Adjourned for arguments in the main case.

(Sd.) Muhammad Akram, J.

Thereafter, the adjournment took place and the arguments concluded on the 22nd of August, 1971. The judgment was announced on the 10th of April, 1972.

There are two submissions of the learned counsel for the appellant with regard to the production of evidence and the denial of an opportunity to produce evidence. The first is that as a stay application was already filed and pending that should have been decided first before closing the evidence and only after decision of that application, the matter of closure of evidence should have come up. The second is, that an application was filed in the High Court on 6th of March, 1970 complaining that a list of witnesses to be summoned on behalf of the appellant had been submitted in the High Court on 18th of September, 1967 with a sum of Rs.38 as process‑fee. The witness were not summoned. The fee remained unutilised and the fact that this was so could not be brought to the notice of the Court as the counsel had no knowledge of it and Sh. Muhammad Hussain, Managing Director was himself not present.

The order of the High Court shows that a similar stay application was filed earlier and had been dismissed on 7‑4‑1967. By filing an identical application a second time the appellant could not interrupt the proceedings and dictate its disposal first, particularly so when an issue had already been framed on this specific point.

As regards the submission of the list of witnesses and the deposit of process‑fee etc. , the appellant has not satisfied the High Court nor has it brought to our attention any such application or list of witnesses which he claims to have filed in 1967. The Order Sheet reproduced shows that at no stage did he bring to the notice of the Court that he had filed the list of witnesses as early as 1967. He had been on the other hand seeking adjournment for summoning his witnesses. This plea, therefore, cannot prevail.

As regards the conduct of the Managing Director in handling the conduct of the case on behalf of the appellant the note recorded by the Court at the stage of placing of the onus and also the order appointing a provisional liquidator give a fair indication of evasiveness and avoidance on the part of the appellant to furnish the required information to the Court for proper decision. The record of the proceedings conducted in the High Court on 21‑10‑1968 contains the following recital.

"But from the report dated 13th August, 1968, submitted by the learned Provisional Liquidator, it appears to me that the Managing Director in the company are evading and have failed to assist him in the preparation of the necessary inventory. Today Sh. Muhammad Hussain, the Managing Director of the company has expressed his willingness to extend his co‑operation to the Provisional Liquidator in the preparation of this inventory. In consultation with the parties. I have therefore, fixed 9‑11‑1968 for the preparation of this inventory by the Provisional Liquidator. Sh. Muhammad Hussain shall be present at 8 a.m. at 'the premises of the factory to afford him all necessary facilities in the matter. In case he fails to turn up at the site at the appointed time, the Provisional Liquidator shall be authorised to break open the locks of the premises with a view to prepare the inventory. Sh. Muhammad Hussain is hereby directed to produce all the necessary documents in his possession for facility of reference in the preparation of the inventories relating to all the assets of the company. He has undertaken to do so."

Taking an overall view of the case, in particular, the prolonged non‑functioning of the company, its mounting liabilities both secured and unsecured, disputed and undisputed and the conduct of the Managing Director, all justified the conclusion of the High Court that Company is in a merit state with little or no chance of its recovery and rehabilitation and a winding up order was eminently a just and proper order. The two appeals are found to be without merit and are dismissed with costs.

M.B.A. Appeals dismissed.

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