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Civil Original No.27 of 1986, decided on 24th June, 1987.

Companies Ordinance (XLVII

of 1984)‑‑

‑‑‑Ss. 405, 410, 391 & 330‑‑West Pakistan Urban Immovable Property Tax Act (V of 1958), S. 3‑‑Voluntary winding up of company‑‑Tenders for outright sale of fixed as well as movable assets of the Company were invited by Official Liquidator and such assets were sold to the highest bidder‑‑Liability of property tax for the period property remained in the custody of Official Liquidator‑‑Property having been retained by Official Liquidator for the benefit of company after commencement of winding up to get highest bidder for sale, Official Liquidator, held, was liable to pay the property tax as expenses in liquidation o the period, the property remained in his lawful custody‑‑Taxing Authority could not claim preferential treatment with respect to the demand raised and recovery through coercive process could not be effected without leave of the Court.

Since 18th February, 1985, the Official Liquidator was prepared and ready to convey the property fully and finally in favour of the higest bidder or its assignee but the execution of the sale deed and its registration was delayed by the highest bidder or its assignee till 9‑4‑1986. The acceptance of bid on 19‑2‑1985, however, created rights in the property in favour of the highest bidder and the right so vesting in the highest bidder was to be secured and got formally conveyed at the volition of the highest bidder. The bidder or its assignee by causing delay due to its own acts or default cannot be allowed to avoid the liability attaching to the right which had come to vest in it already. The assignee is liable to pay the property tax respecting the property purchased by him since February, 1985, the time of acceptance of the bid. As regards the period prior to February, 1985, the tax will be payable by the official liquidator.

In the instant case the liquidator remained in possession of the property after the commencement of the winding‑up with a view to receive highest possible price. The property was obviously retained for the benefit of the company after the commencement of winding‑up. The creditors at the commencement of winding up stand on equal footing as between themselves subject to claim of priority under section 405 of the Companies Ordinance, 1984. But if after that period the company or the liquidator on its behalf remains in occupation of the property, they must do so on the same terms as any other citizen of the land and the tax which has become payable must be paid by him like any other citizen of the State. In case of default the relevant Officer or the authority has the power to distrain invoking the provisions of the relevant law but this power would be invoked only after obtaining leave from the Court. It is this power which is sought to be preserved, under subsection (2) of section 410 of the Ordinance. The liquidator for the period he remained in occupation of the property for the purposes and in the interest of the company, is liable to pay the property tax as expenses in liquidation. In the instant case, Official Liquidator accepted the highest bid on 18th February, 1985 and required the highest bidder to pay the price and to have the sale deed executed within seven days thereof. The Official Liquidator is, therefore, liable to pay half of the tax for 1984‑85i.e. 88.15,187.50 and other half amounting to Rs.15,187.50 for the year 1984‑85 and Rs. 30, 375 for the year 1985‑86 would be the liability of the assignee of the highest bidder as execution and registration of sale deed as well as delivery of possession of the property was unduly delayed by them.

The custody of the assets and properties of the company in liquidation vests in the official liquidator and while he is in occupation, the property tax became leviable and payable. It was argued that in case of non‑payment of the tax, the same is to be recovered through distress or 'coercive process' available under the law and the Company Judge may allow recovery through legal means as is contemplated by section 410(2) of the Ordinance, if such a permission is at all required to be accorded under law.

Taxing Authority cannot claim preferential treatment with respect to the demand raised and recovery through coercive process cannot be effected without the leave of the Company Judge. The amount of property tax which was being demanded pertained to the period when the property vested in the Official Liquidator and not to the period referred to in section 405 of the Ordinance. Thus, reference to section 405 Companies Ordinance would not be appropriate.

Shiromani Sugar Mills v . Governor‑General A I R 1945 All. 354; Sm. Shukantala v. Peoples Bank of Northern India Ltd. A I R 1941 Lah. 392; Begum Anwar Sultana v. A.B.M. Associates Ltd. PLD 1981 Lah. 322; G.G.‑in‑Council v. S.S. Mills A I R 1946 F C 16; International Marine Hydropathic Company (1884) 28 Ch. D 470 and National Arms and Ammunition Company (1885) 28 Ch. D 474 ref.

Ijaz Ahmad Chaudhary for Applicant. Ashtar Ausaf Ali for Respondent No.l. Muhammad Yaqoob Khan for Respondent No.2. Date of hearing: 24th June, 1987.

The facts giving rise to this petition under section 391, Companies Ordinance, 1984 are that the Northern Foundry and Works Engineering Limited established as a private limited company in 1962, was converted into public limited company in 1963 and then was nationalized in 1972 under Economic Reforms Order, 1972, The project could not operate economically as it started incurring losses and the accounts for the period ending 31st March, 1984 indicated that the company had accumulated losses of Rs.26.054 million as against paid‑up capital of Rs.8.421 million only. Ultimately, in the extraordinary meeting of the creditors and share‑holders held on 2nd February, 1984, it was decided to wind‑up the company voluntarily. The National Development Finance Corporation, one of the creditors, was appointed as official liquidator. The tenders for the outright sale of the fixed as well as the movable assets of the company were invited in December, 1984 and an offer for Rs.20.36 million was accepted by the liquidator on 18‑2‑1985 after receiving the approval of the creditors. The highest bidder M/s. Transworld Enterprises Limited instead of having the sale deed executed, instituted a suit for perpetual injunction against the company (under liquidation) and an application for temporary injunction was also made in the suit. This application, it appears, was refused vide order dated 23‑12‑1985 of the learned trial Court and thereafter the sale deed was got executed in favour of the assignee of the bidder, namely, Pak Foundry Engineering Works (Private) Limited on 9‑4‑1986.

2. The other important facts relevant for the purposes of the controversy raised are that the creditors were required by the official liquidator to file claims by 30th July, 1984. The claims received within time were verified and no dispute was raised respecting these claims. As regard the realization of assets, the official liquidator realized Rs.24.024 million and the same were apportioned on interim basis in order of preference of payment as provided under Section 405 of Companies Ordinance. The Government dues of different Departments were paid immediately.

3. The official liquidator thereafter received a letter dated 12‑5‑1986 of the Excise and Taxation Officer, respondent No.l wherein payment of Rs.91,125 was demanded on account of property tax as per detail below:‑

Property tax for 1983‑84 .......... fts.30,375

Property tax for 1984‑85 .......... Rs.30,375

Property tax for,1985‑86 . .......... Rs.30,375

The property tax for the year 1983‑84 amounting to Rs.30,375 was paid by the official liquidator in June, 1986 but as regards the demand for the payment of property tax amounting to Rs.60,750 for the years 1984‑85 and 1985‑86, the amount was not released as the official liquidator was of the view that the liability accruing after the date of liquidation of the company cannot be entertained as "preferential payment". Thereafter, the Excise and Taxation Officer served a notice dated 18‑7‑1986 calling upon the official liquidator to pay Rs.60,750 alongwith the penalty of Rs.15,000 by 24‑9‑1986, otherwise, warrants of arrest and attachment will be issued for the recovery of the aforesaid amount. The official liquidator then filed this petition under Section 391 of the Companies Ordinance, 1984 for determination of the following questions:‑

(i) Whether the claim not filed within specified time under Section 191 of the Companies Act, 1913 can be entertained by the Liquidator

(ii) Whether the claim of the respondent for the property tax due after the relevant date can be treated as preferential payment under Section 405 of the Companies Ordinance, 1984

(iii) That in case the claim of the respondent for property tax due after the relevant date is found to be a preferential payment under Section 405 of the Companies Ordinance, 1984, penalty is also payable or not as a preferential payment

These questions have been raised as the official liquidator is of the view that as the last date for the filing of the claims was 30‑7‑1984, the claim of the property tax made on 12‑5‑1986 for the years 1984‑85 and 1985‑86 was barred by time and as such cannot be entertained and even otherwise no preference can be accorded to this claim under Section 405 of the Companies Ordinance, 1984 as under Section 405 (1) (a) of the Ordinance only those taxes are to be accorded priority which were due at the relevant date, and had become due and payable within 12 months next before the relevant date. Subsection 8(c)(ii) of section 405 of the Ordinance provides that the relevant date in case of the company being wound‑up voluntarily is the date of passing of the winding‑up resolution which in the instant case is 2nd February, 1984, so the claim of the respondent for the payment of the tax alongwith penalty cannot be accorded the status of preferential payment.

4. I have heard the learned counsel for the parties. Learned counsel for Excise and Taxation Officer argued that the property tax is levied, charged and paid on the annual value of the buildings and lands in a rating area under Section 3 of the Urban Immovable Property Tax Act, 1958 and the tax so levied is to be paid by the person in whom the property for the time being vests and as such the tax is to be recovered either from the official liquidator or from the purchaser of the property. Learned counsel for the purchaser namely Pak Foundry Engineering Works (Private) Limited submitted that the property was conveyed vide sale deed dated 9‑4‑1986 and as such the purchaser can be asked to pay the property tax chargeable and payable after the aforesaid date.

5.I have given serious consideration to the respective submissions of the parties. The facts which are relevant for the purpose of determining the liability ‑for payment of property tax are that the highest bid of M/s Transworld Enterprises Limited was accepted on 18‑2‑1985 and there and then they were required to have the legal formalities including the execution of the sale deed etc. completed. The purchaser was intimated that on the payment being made, a notice will be issued for the execution of the documents within seven days thereof. The highest bidder instead of completing the formalities, filed a suit in the Civil Court and then after having failed to obtain the temporary injunction, approached the liquidator to execute the sale deed. It may be added here that the learned Civil Court refused the temporary injunction application vide order dated 23rd December, 1985. On approach being made the sale deed was executed and got registered on 9th April, 1986. The factual position which emerges from these facts is that since 18th February, 1985 the official liquidator was prepared and ready to convey the property fully and finally in favour of the higest bidder or its assignee but the execution of the sale deed and its registration was delayed by the highest bidder or D its assignee till 9‑4‑1986. The acceptance of bid on 19‑2‑1985 however, created rights in the property in favour of the highest bidder and the right so vesting in the highest bidder was to be secured and got formally conveyed at the volition of the highest bidder. The bidder or its assignee by causing delay due to its own acts or default cannot be allowed to avoid the liability attaching to the right which had come to vest in it already. In this view of the matter, the assignee is liable to pay the property tax respecting the property purchased by him since February 1985, the time of acceptance of the bid. As regards the period prior to February, 1985, the tax will be payable by the official liquidator. The reasons for coming to this conclusion may now be stated.

6. The custody of the assets and properties of the company in liquidation vest in the official liquidator under Section 330 of the Companies Ordinance, 1984 (section 178, Companies Act, 1913). A statutory scheme of administration of the assets and properties of the company under liquidation is provided by the various provisions of the Companies Ordinance so that the assets and properties remain available for satisfaction of the claims of the creditors in accordance with the preferential right or treatment envisaged by the Company Law itself. Section 405 of the Ordinance (Section 230 of Companies Act, 1913) provides for the preferential payments. The secured creditors may stand outside and seek satisfaction of their claims from the securities available to them. The scheme of preferential payment provide in section 405 of the Ordinance on the face of its shows that the claims which have to receive preferential treatment pertain to the period prior to the taking over of the property of the company by the official liquidator. The property tax being claimed by the respondent officer admittedly does not pertain to the period contemplated and mentioned in Section 405 of the Ordinance. It is, therefore, apparent that the legality of the demand made is not to be determined with reference to the provisions of section 405 of the Ordinance. It will, therefore, be seen that the three questions referred to this Court for determination do not really arise. The question which in the circumstances of the case requires determination is:‑

"Whether the official liquidator is liable to pay the tax for the period, the property remained in his lawful possession "

Mr. Muhammad Yaqub Khan, Advocate, learned counsel for the purchaser cited Shiromani Sugar Mills v. Governor‑General AIR 1945 All. 354 in support of the contention that the notice dated 18‑7‑1986 issued by the Excise and Taxation Officer demanding payment of the property tax for two years alongwith penalty or to recover the said amount through arrest and attachment, was illegal. In this case, the Income‑tax Department was restrained from proceeding, without the leave of the Court, with the subsisting proceedings before the Collector for the recovery of the amount of the Income‑tax assessed. The view taken in this case was as under:‑

"In our view, S. 232 has nothing to do with S.171 nor with the question before us. It simply says that certain proceedings shall be void, but that, if they are by the Government, they shall not be void ...........................................Section 171 refers to any "suit or proceedings (other than a suit) which is a 'legal' proceedings. In short the word 'other' has no ejusdem generis significance, but is used in a purely alternative sense . Having given this somewhat difficult question the best consideration of which we are capable we have therefore, formed the view, first, that the expression 'suit or other legal proceedings' in 5.171, Companies Act, ought not to be given an artificially narrow construction by confining it to proceedings of the technical nature of a 'suit' and secondly that, with reference to facts before us, resort by the Income‑tax Department to proceedings under S.46,

Income‑tax Act, did constitute the commencement of, or proceeding with, a legal proceedings".

It may be noted that the learned Judges in this case did not agree with somewhat restrictive interpretation placed on these very words in the Full Bench case of Sm. Shukantala v. Peoples Bank of Northern India Ltd. (AIR 1941 Lah. 392). The view expressed in the Allahabad case was dissented from by a learned Judge of this Court in the case of Begum Anwar Sultana v. A.B.M. Associates (PLD 1981 Lah. 322). The learned Judge observed:

"There is another way of looking at this. Section 171 speaks of suit and other legal proceedings. If this phrase includes, 'attachment' distress or execution' then and only then the above discussion will be necessary. On the other hand, if they are species apart, the question of redundancy, superfluity or even reconciliation will not arise."

After quoting the observations recorded in the Full Bench case of Shakuntla, it was observed as under:‑

" ---The learned Judges further observed at page 772 that the expression "legal proceedings" in the section appears to us to mean original proceedings analogous to a suit and not proceedings arising in the suit, though carried on in the Court of appeal or revision. They observed that Kishan Singh v. Industrial Bank of India in Liquidation rightly interpreted the decision of the House of Lords in Humber's case. The view given above has been followed throughout. The different view taken by a Full Bench by a Allahabad High Court in Shiromani Sugar Mills thus cannot be followed even on this ground."

Unfortunately, it was not brought to the notice of the learned Judge that the judgment in case of S.S. Mills was appealed against and the Federal Court in its Judgment in case G.G. In Council v. S.S. Mills (AIR 1946 F C 16) on the question of interpretation of Sections 171, 230 and 230 (2) agreed with the view expressed by the learned Judges of the Allahabad High Court and did not approve the narrow interpretation placed by the Lahore Full Bench. The following paragraph from the judgment of Federal Court may be quoted for ready reference:‑

"But the observations of the learned Judges (Lahore Full Bench) must of course be read in the light of the point before them for decision which was a very narrow one. As a statement of law of general application, we as were the learned Judges in the Allahabad High Court in this case, are unable to accept the narrow construction put upon the expression 'or other legal proceedings' in the judgment of the Lahore Full Bench. In our judgment, it need not and therefore should not, be confined to "original proceedings in a Court of first instance, analogous to a suit, initiated by means of a petition similar to a plaint." Section 171 must, in our judgment, be construed with reference to other sections of the Act and the general scheme of administration of the assets of a company in liquidation laid down by the Act. In particular, we would refer to S.232. Section 232 appears to us to be Supplementary to 5.171 by providing that any creditor (other than Government) who goes ahead, notwithstanding a winding up order or in ignorance of it, with any attachment, distress, execution or sale, without the previous leave of the Court, will find that such steps are void. The reference to distress indicates that leave of the Court is required nor more than the initiation of original proceedings in the nature of a suit in an ordinary Court of law. Moreover, the scheme of the application of the company's property in the pari passu satisfaction of its liabilities, envisaged in 5.211 and other sections of the Act, cannot be made to work in co‑ordination unless all creditors (except such secured creditors as are "outside the winding up" in the sense indicated by Lord Wrenbury in his speech in 1923 A . C .647 at P.671 are subjected as to their actions against the property of the company to the control of the Court. Accordingly in our judgment no narrow construction should be placed upon the words "or other legal proceedings" in S. 171. In our judgment, the words can and should be held to cover distress and execution proceedings in the ordinary Courts. In our view, such proceedings are other legal proceedings against the company, as contrasted with ordinary suits against the company.

That still leaves open the question whether action under S.46, Income‑tax Act, is covered by the phrase "other legal proceedings". Clearly it is not a proceeding in an ordinary Court of law. But we see no reason why in British India no "legal proceedings" can be taken otherwise than in an ordinary Court of law, or why a proceeding taken elsewhere than in an ordinary Court of law, provided it be taken in a manner prescribed by law and in pursuance of law or legal enactment, cannot properly be described as a "legal proceedings". If it be considered that the effect of the income‑tax authorities putting the machinery of S.46, Income‑tax Act, in motion for the collection of arrears of income‑tax is to bring into operation all the appropriate legal enactments relating to the collection of land revenue in the province concerned, it is, in our judgment, very difficult to say that they are not taking a "legal proceeding" : .

Accordingly we agree with the learned Judges of the Allahabad High Court in holding that the words 'other legal proceeding' in S.171, Companies Act, 1913, comprise any proceeding by the revenue authorities under S.46 (2), Income‑tax Act, and that accordingly before forwarding the requisite certificate under S.46 (2) to the Collector, which would put the machinery for the collection of the arrears of income‑tax as arrears of land revenue into motion, the appellant should have applied in the liquidation under S.171, Companies Act, for leave of the winding up Court."

It was also held in this very case that:‑

"The Crown is bound by the provisions of the Companies Act, and is bound, in regard to the provisions relating to the liquidation of companies, to a statutory scheme of administration wherein the prerogative right of the Crown to priority no longer exists. The Crown is accordingly not entitled to any prerogative, priority or preferential rights or treatment, in payment of its claims save those expressly conferred and limited by the Act itself, in particular by 5.230 and subsection (2) of S.232 (now subsection (2) of Section 410)".

In view of above, it is apparent that respondent officer cannot claim preferential treatment with respect to the demand raised and recovery through coercive process cannot be effected without the leave of the Company Judge. The amount of Property Tax which is B being demanded pertains to the period when the property vested in the official liquidator and not to the period referred to in Section 405 of the Ordinance. Thus, as observed in one of the paras above, reference to Section 405 Companies Ordinance would not be appropriate.

7. The stage is now set to answer the question whether the official liquidator is liable to pay the property tax. The custody of the assets and properties of the company in liquidation vests in the official liquidator and while he is in occupation, the property tax C became leviable and payable. It was argued that in case of non‑payment of the tax, the same is to be recovered through distress or 'coercive process' available under the law and the company Judge may allow recovery through legal means as is contemplated by Section 410 (2) of the Ordinance, if such a permission is at all required to be accorded under law. For answering the aforenoted question, reference may be made to In re: International Marine Hydropathic Company (1884) 28 Chancery Division 470. In this case a hotel company was wound up under the order of the Court and the liquidator was directed to sell the hotel

but with liberty to carry on the business till the sale, so as to sell it as a going concern. The liquidator accordingly carried on the business in the hotel, but made no profit by it. Shortly after the commencement of the winding‑up, a poor‑rate was made, and the overseers claimed payment of the rate from the liquidator in respect of his occupation of the hotel. The Vice‑Chancellor of the county ordered that the rate must be paid in full. In appeal, Beggallay, L.J. of the Court of Appeal upheld the order observing that "the business was accordingly carried on an and the poor‑rate was made on the property upon which the business was so carried on with a view to making a profit. Whether it resulted in making a profit would be immaterial; the object was to make an advantageous sale of the property, and it was carried on to save a loss in selling it. Leave was given by the Vice‑Chancellor to the overseers to distrain for the rate if the rate was not paid and I should have thought it was a case free from all questions whatever". Fry L.J. while agreeing with the opinion remarked:‑

"The rule has been laid down in the Court of Appeal in the case of In re :Oak Pits Colliery Company (21 Ch. D. 322) and that rule I take to be this:‑ If the debt or liability is incurred by the liquidator or by the company after the winding‑up in the course of carrying on the business of the company, it must be paid in full. Such debts and liabilities are not debts and liabilities of the company in liquidation. They are debts and liabilities incurred subsequently to the liquidation, and it seems monstrous that the company should be allowed to carry on its business for its own purpose without

paying the debts which have been incurred by so carrying it on."

Reference may also be invited to In re National Arms and Ammunition Company (1885) 28 Chancery Division 474. In this case a company was being wound up under supervision, the liquidation commencing in 1882. The liquidator did not keep the concern in full work but remained in occupation of the business premises for the purpose of carrying out some pending contracts, finishing a quantity of unfinished articles, and storing and keeping in order a quantity of completed articles with a view of selling them. In March, 1883, a rating authority made a rate for 1883 on all the property within the district. The liquidator allowed the time for appealing against the assessment to go by. The rating authority applied to the Court for payment of rate in full. The learned Judge in Chamber did not grant the request and dismissed the application with cost and gave a certificate that the case might be brought direct to the Court of Appeal. The Court of Appeal accepted the appeal and directed that the rate be paid in full and in default the corporation should be at liberty to destrain. Beggallay L.J. in his judgment quoted the following observations of Lindley, L. J made in case of In re: Oak Pits Colliery Company:

"When the liquidator retains the property for the purpose of advantageously disposing of it, or when he continues to use it the rent of it ought to be regarded as a debt contracted for the purpose of winding up the company, and ought to be paid in full like any other debt or expense properly incurred by the liquidator for the same purpose, and in such a case it appears to us that the rent for the whole period during which the property is so retained or used, ought to be paid in full without reference to the amount which could be realised by a distress."

Thereafter, Beggallay L.J. observed that:‑

"It would not require much to lead me to the conclusion that by parity of reasoning a rate which is levied upon property while retained by the liquidator with a view to the more advantageous realization of the company's property, or used by him for profitable purpose, must be paid in full."

The observations recorded by Bowen L.J. in this very case may also be quoted:‑

"Persons having claims which have accrued due before the winding‑up must come in as creditors pari passu. But on principle there is no reason why a debt properly incurred by the liquidator after the commencement of the winding‑up should not be paid in full, nor can I see why sums becoming due after the commencement of the winding‑up, in respect of property of which the liquidator retains possession for the purposes of the company, should not be paid. It does not appear to me that we ought to enter into particular inquiries what is the nature of the occupation, or whether it has been in the result profitable. The precise nature of the occupation is no doubt under the ordinary law of rating material as regards the amount to be assessed on the property; but it does not seem to me that it ought to be held material in any other way.. If the company ratains the possession of property which would be ratable in the hands of anyone else, it is only reasonable that it should be ratable in the hands of the company. If the retaining the possession of property after the commencement of the winding‑up makes the company liable for the rent, why should not rates be paid in respects of property the possession of which is retained for the benefit of the company If the liquidator is bound to discharge the claim of the landlord, why should he not be liable to pay the rates imposed by statute."

In the instant case the liquidator remained in possession of the property after the commencement of the winding‑up with a view to receive highest possible price. The property was obviously retained for the benefit of the company after the commencement of winding‑up. The creditors at the commencement of winding‑up stand on equal footing as between themselves subject to claim of priority under Section 405. But if after that period the company or the liquidator on its behalf remains in occupation of the property, they must do so on the same terms of any other citizen of the land and the tax which has become payable must be paid by him like any other citizen of the State. In case of default the relevant officer or the authority has the power to destrain invoking the provisions of the relevant law but this power would be invoked only after

obtaining leave from the Court. It is e this power which to my mind is sought to be preserved, under sub‑section (2) of section 410 of the Ordinance. The liquidator for the period he remained in occupation of the property for the purposes and in the interest of the company, is liable to pay the property tax as expenses in liquidation. In the instant case, official liquidator accepted the highest bid on 18th February, 1985 and required the highest bidder to pay the price and to have the sale deed executed within seven days thereof. The official liquidator is, therefore, liable to pay half of the tax for 1984‑85 i.e. Rs.15,187.50 and other half amounting to Rs.15,187.50 for the year 1984‑85 and Rs.30,375 for the year 1985‑86 would be the liability of Pak Foundry Engineering Works (Private) Limited, the assignee of the highest bidder as execution and registration of sale deed as well as delivery of possession of the property was unduly delayed by them. Mr. Muhammad Yaqub Khan, Advocate for the assignee agreed to make the payment of the tax for one and a half years as indicated above. In the above terms, the petition stands disposed of. The parties are left to bear their own costs.

M. B. A./N‑56/L Order accordingly.

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