' FAISAL ARAB, J.---In the year 2000, the plaintiff through a cotton broker Mr. Mustafa Hussain so] d several consignments of cotton bales to defendant No,1 on c-edit. The plaintiff then issued invoices to defendant No,1 for payment. The cotton bales were transported from Nawabshah and delivered into defendant No, l's godown in Hawksbay, Karachi. Copies of invoices, transport's bilti receipts, weighbridge receipts and defendant No, l's gate passes have been annexed with the plaint.
2. The plaintiff remained unpaid for the cotton bales sold. This led to filing of the present recovery suit. Went a- is the position in the two other connected Suits Nos. 1003 and 1004 of 2000.
3. The documents annexed with the plaint are not disputed. The plaintiff in the plaint has made both defendants Nos.1 and 2 jointly responsible for the unpaid cotton bales. The defendants Nos.3 to 5, which are commercial banks, were made party to the suit as the defendant No,1 pledged the cotton bales purchased from the plaintiff with these banks and the plaintiff being unpaid seller claimed ownership to the sold cotton bales until such time it realized the entire sale consideration.
4. The plaintiff has averred in the plaint that when its partners contacted the office of the defendant No,1 for payments, its staff avoided their calls. The plaintiff then learnt that the defendant No,2 had fled the country as the defendants Nos.1 and 2 have availed financial facilitates to the tune of million of rupees from various banks, without any intention to repay.
5. In this background, the plaintiff sought following reliefs:--
(a) Declaration that the plaintiff as an unpaid seller is the first owner of all raw cotton bales lying at the defendants godowns, including godowns on Plot No,24 Trans Lyari quarters, Hawksbay Road, Karachi, and (9)'S Site, Gulbai, Karachi, and or removed else where by the defendants.
(b) Declaration that the alleged pledge of goods claimed by the defendants 3 to 5 is illegal and to no legal effect, as the goods remain vested in the plaintiff.
(c) That an injunction to issue to the defendants 1 or 2 or any person claiming through or under them from taking possession, selling, or disposing off the plaintiffs goods lying at the godowns of the defendants, including godown on Plot 24 Trans Lyari Quarters, Hawksbay Road, Karachi and (9)'S Site, Gulbai, Karachi.
(d) An injunction be issued by way of attachment and by way of restraint to the defendants Nos.1 and 2 from disposing off, encumbering any of its assets, listed in para.6 of the plaint, and others which may be discovered during the pendency of proceedings till full and final' realization of the plaintiffs claim.
(e) A decree for recovery of Rs,80,64,593 with interest/ mark-up at 16% from date of suit till realization, along with costs.
6. The defendants Nos.1 and 2 failed to appear and contest the proceedings and were declared ex parte vide order dated 10-11-2000. On 12-12-2000 the plaintiff did not press the suit against defendants Nos.3 to 5. On 20-12-2000 the plaintiff s witnesses were examined and on 26-1-2001 suit was decreed against the defendants Nos.1 and 2 and defendant No,2 was restrained from disposing off his house.
7. After obtaining ex parte decree, the plaintiff filed execution application against defendants Nos.1 and 2. At this stage the defendant No,2 moved an application for setting aside the ex parte decree dated 26-1-2001 against him which was allowed with the consent of the parties vide order dated 1- 3-2002. The defendant No,2 then filed his written statement and along with the written statement filed application under Order VII, rule 11, C.P.C. In Order VII, rule 11, C.P.C. Application, the defendant No,2 sought rejection of the plaint on the ground that cause of action shown in the suit is barred by law against defendant No,2 who being a Director of defendant No,1 cannot be made personally liable for its liabilities on the principles of limited liability.
8. Mr. Muhammad Ali Saeed, learned counsel for defendant No,2 has argued that from Annexure A to the plaint which is plaintiffs invoice for the cotton bales it is evident that cotton was sold to defendant No,1, a limited company and therefore, the defendant No,2 cannot be made personally liable for the obligations of defendant No,1 merely because he is its Managing Director. Mr. Muhammad Ali Saeed further argued that all other documents such as gate passes, bilti receipts, transporter's receipts and weighbridge receipts also establish that the purchaser of cotton is defendant No,
1. He therefore, contended that no recovery proceedings could be maintained against defendant No,2 for the obligations of defendant No,1 and therefore, plaint is liable to be rejected or suit is to be dismissed against defendant No,2.
9. Mr. Yawar Faruqi, learned counsel for the plaintiff on the other hand has argued that cotton bales were in fact sold to defendant No,2 personally and plaintiff never had any business relationship with defendant No,
1. He further argued that even if it is assumed that sales were made to defendant No,1, the defendant No,2 is also liable as letter dated 28-6-2000 filed as Annexure P-23 to the plaint is signed by defendant No,2 and the word "we" appearing in the said letter means that defendants Nos.1 and 2 both are liable. He lastly argued that defendant No,2 is a dishonest person who has fled the country leaving millions of liabilities of defendant No,1 unpaid and therefore, equity demands that defendant No,2 be made accountable for the unpaid cotton bales.
10. It is an admitted position that plaintiff issued invoices in the name of defendant No,1 only. With regard to signature of defendant No,2 on letter dated 28-6-2000 it is evident it was written on the letterhead of defendant No,1 and defendant No,2 signed it in his capacity as "authorized signatory" of defendant No,1. The use of word "we" therefore, refers to defendant No,1 only as normally a company addresses itself in plural. Even otherwise the said letter was signed by defendant No,2 on the letterhead of defendant No,1 in his capacity as Managing Director of the former. The plaintiff therefore, cannot maintain that it sold cotton bales to defendant No,2 as well or that defendant No,2 made himself personally liable by signing letter dated 28-6-2000.
11. Next it is to be examined whether under the law, defendant No,2 can in any way be made liable for d.Fendant No, I's obligations. First, the concept of limited liability is to be examined in order to see whether defendant No,2 being Managing Director of defendant No,1 can in any way be made personally liable for the obligations of defendant No,1. The word limited used in section 2(8) of the Companies Ordinance, 1984 clearly means that the liability of shareholders for the debts or any other obligation of the company is limited to the extent contributed by them in the share capital.
Therefore, a shareholder cannot be made liable beyond the extent of his contribution towards the share capital. For any unsettled liability it is only the assets of the company which can be proceeded against by an unpaid creditor or claimant. The shareholders cannot be treated as principals for the company and company cannot be treated as agent of the shareholders so as to make the shareholders liable for the transactions entered into by the company. The defendant No,2 therefore, cannot be made liable for the obligations of defendant No,1 simply because he was its Managing Director.
12. In AIR 1994 Orissa 98 a Director's personal phone was not allowed to be disconnected for company's arrears. In Rundan Singh v. Moga Transport Company Private Limited (1987) 62 Com Cases 600 (P&H) it was held that a Managing Director was not personally liable for the unpaid dues of the workers and in Surinder Nath Khosla v. Excise and Taxation Commissioner, Punjab (1995) 4 Comp LJ 343 (Punj.) it was held that proceedings against Managing Director's and shareholder's personal assets for recovery of sales tax dues of the company were void.
13. This brings this Court to examine another question i,e, can on any principle of law a shareholder be made personally liable for the obligation of a limited company. The law is not static but is ever changing process. The task of judicial interpretation is not always to reiterate but also to create with rigorous discipline in harmony with the statute law and its previous growth. The doctrine of piercing the veil of incorporation is the product of judicial interpretation necessitated by the exigencies of modern commercial practices. However while resorting to the doctrine of piercing the corporate veil the Courts have always been cautious and circumspect. Through the device of liberal interpretation the very object of providing statutory protection to a shareholder of a limited liability cannot be defeated on every occasion when a company defaults. It would then certainly defeat and not advance the very object of statutory protection.
14. I have examined the situations in which the Courts have rent the veil woven by the famous case of Salomon v. Salomon & Co. 1897 AC 22 by cracking open the corporate shell. These situations are as follows:--
(i) Where the companies are in relationship of holding and subsidiary companies or where there is a group of companies working under a common control.
(ii) Where the company continued to carry on business by its members well after it ceased to exist and thereafter its members attempted to use their sheltered position of limited liability.
(iii) Prohibition of trading with the enemy is circumveted by using corporate cover of a Company.
(iv) Matters pertaining to taxation laws, where the question of controlling interest is in issue.
(v) Merging of companies with each other.
(vi) Formation of new company by members holding absolute majority in an existing company solely for the purpose of expropriating the shares of the minority shareholders in the existing company.
(vii) Transfer of company's assets to another company or entity to avoid liabilities of transferor company.
(viii) Members using corporate structure for hiding their crimes in order to avoid criminal punishment to t hem.
15. Above are situations in which Courts have lifted the corporate veil.
16. There is also another aspect of the case. The house personally owned by defendant No,2 was attached so that in case any decree is passed against defendant No,1 the same could be satisfied from its sale. It is not the case of the plaintiff that such property was purchased by defendant No,2 from the funds of defendant No,1, which would have also called for the invocation of doctrine of lifting the corporate veil. The doctrine of lifting of the corporate veil does not mean that shareholders are also to be made equally liable with the company. .It only means that any undue benefit drawn by a shareholder any other entity to the detriment of a company is to be returned back to company so that its creditors could successfully settle their account with the company, which they otherwise would not have.
17. Another important aspect of the case which needs to be considered is that after defendant No,2 filed his written stat :Trent and application under Order VII, rule 11 application, the plaintiff immediately filed application under Order VI, rule 17, C.P.C. Seeking following amendment to the plaint:- "The defendant No,2 Nayar Mahmood is the owner of his company Mahmood Pvt. Ltd. That he had personally guaranteed the repayment of the plaintiffs monies. That the plaintiffs business under the style of Messrs Mahmood Pvt. Ltd. Is essentially a partnership in the form of a family owned business. That the defendant ' No,2 personally undertook and made repeated promises to the plaintiffs partners that he personally guaranteed the repayment of the plaintiffs dues as promised by him in his letter personally signed by him."
18. The application for amendment was initially allowed vide order dated 25-2-2003. The defendant No,2 challenged the order permitting aforesaid amendment in High Court Appeal No,76 of 2003.
The defendant No,2 succeeded in his appeal which was allowed vide Division Bench's order dated 7-6-2005. No further appeal was taken and application seeking amendments stood finally rejected. The observations made by the Division Bench in High Court appeal are pertinent for decision on defendant No,2's application for rejection of the plaint. The relevant excerpts from the order in appeal are reproduced below:-- "When placed the two i,e, original plaint and the amendment sought by the respondent in juxtaposition to each other it was found that in the original plaint the grievance of the plaintiff was that the company after receiving the goods from the respondent failed to make payment thereof.
It was further found that the appellant acted as the Chief Executive of the company."
"A perusal of the plaint further reveals that the suit was filed by the respondent for recovery of the amount of the goods sold/delivered by them to the company through the appellant. The goods were delivered to the company. The cheques which were handed over by the appellant to the respondent were signed by him for the company."
"We have very minutely examined the plaint filed and the proposed amendment with a view to find whether there was any consistency between the two and whether the amendment sought, if allowed, will not change very character of the suit. With no disrespect, we found that the amendment sought by the respondent was actually creating a fresh case and a fresh cause of action against the company as well as the appellant. With the amendments, absolutely new issues will arise out of the pleadings, which were not even remotely suggested in the original plaint. In that case, two new issues as to whether the plaintiff personally promised or guaranteed the payment of the amount to the respondent and secondly whether the company was a limited company or a partnership firm shall arise. We have not been able to digest that these amendments were harmless and not inconsistent with the original plaint, and that if allowed would not change the nature and character of the suit as well as the cause of action."
"At no point of time before the learned single Judge or before this Court, the respondents have placed any documentary evidence in support of the amendment sought. Nothing has been brought on record that the appellant personally promised or guaranteed the payment of the goods supplied to the company and/or that the company was run as a proprietorship or partnership concern by the appellant. On the contrary Mr. Sayeed has placed before us, the copies of depositions of the witnesses of the respondent recorded before the learned single Judge while proceedings ex parte. In their depositions also none of the witnesses even suggested anything, which would support the case of the respondent for seeking amendment. The case of the witnesses was the same as that of the plaint filed by the respondent."
(Underling is mine)
19. Had the plaintiff succeeded in seeking amendment to the plaint that would have also been sufficient to give an opportunity to the plaintiff to establish its claim against defendant No,2 as proof of facts averred in the proposed amendments would have made defendant No,2 personally liable for the transactions in question and he would have been treated as the alter ego of the defendant No,
1. As there exists no plea on the plaint as was attempted through proposed amendments, this Court cannot consider a situation which has been rejected by the Division Bench vide its order dated 7-6-2005.
20. After carefully reading the decision of the Davison Bench it clearly appears that Division Bench read the plaint to contain following facts:--
(a) Defendant No,1 after receiving the goods from the plaintiff failed to make payment and defendant No,2 acted only as the Chief Executive of defendant No,1.
(b) The goods were sold and delivered by the plaintiff to defendant No,1
(c) The cheques which were handed over by the defendant No,2 to the plaintiff were signed by him for defendant No,1.
(d) The amendment sought by the plaintiff was actually creating a fresh case and a fresh cause of action against the defendants Nos.1 and 2 and if allowed would not only give rise to absolutely new issues not even remotely suggested in the original plaint but would also change the nature and character of the suit as well as the cause of action.
(e) Nothing has been brought on record to establish that defendant No,1 was being run as a proprietorship or partnership concern of defendant No,2.
21. On account of the findings of the Division Bench this Court while deciding Order VII, rule 11, C.P.C.
Application cannot take any other view of the pleas taken in the plaint which might come in conflict with the findings of the Division Bench as the same are binding on this Court. I therefore, hold that it was defendant No,1 who purchased the cotton bales from the plaintiff and the delivery of cotton bales was made to defendant No,
1. It was defendant No,1 which issued cheques for payments. The defendant No,1 was not being run as a proprietorship or partnership concern of defendant No,2 so as to make him personally liable for the defendant No, is obligations towards the plaintiff.
22. Though the defendant No,2 has sought rejection of the plaint under Order VII, rule 11, C.P.C., however, such relief cannot be granted as it would amount to defeat the decree which has already been passed against defendant No,
1. In the case of Imran Raza Shaikh v. Zarina Gul reported in 2003 YLR 943 the Division Bench of this Court held that where suit is not maintainable against one of the defendant, it should be dismissed against him and plaint cannot be rejected.
23. I therefore, hold that cause of action shown in the plaint can only be directed against defendant No,1 as the defendant No,2 being a Director cannot be made personally liable for the liabilities of defendant No,1, a limited company. I therefore, allow defendant No,2's application and dismiss the suit against defendant No,2. The decree already passed against defendant No,1 shall remain intact.
As defendant No,2 was the only contesting defendant left in the suit, with the disposal of present application, the entire suit stands disposed off with no order as to costs.