These four applications have been made under section 162 of the Companies Act, 1913. J. Misc.
Application No, 10 has been filed under clause (vi) of section 162 of the Act and J. Misc. Nos, 11, 12 and 13 have been filed under clause (v) of section 162 of the Companies Act, 1913. The provisions are as follows :- "162.--A company may be wound up by the Court.
(i).................................................
(ii).................................................
(iii)................................................
(iv)................................................
(v)If the company Is unable to pay its debts;
(vi) if the Court is of opinion that it is just and equitable that the company should be wound up."
2. The facts which form the background are that Saria Rope Mills Ltd. is a private limited company and was registered on the 25th of December 1965 with an authorised capital of Rs, 20 lakhs. Its Memorandum and Articles of Association were subscribed by three persons, namely, Akbar Ali Ghulam Hussain Sarya, Ghulam Abbas Akbar All Sarya and Nooruddin Akbar Ali Sarya. The number of shares shown to be taken by them was 2500 in respect of Akber Ali Ghulam Hussain Sarya and 1250 in respect of the other two persons. After the registration of the Company, steps were taken to set up a factory for manufacturing rope and twine. Money was borrowed in 1967 from the Industrial Development Bank of Pakistan. The amount which was borrowed was Rs, 6,55,00 in foreign exchange and was intended to be used for importing machinery. By the end of 1966, 11000 shares were issued. They are shown as subscribed in the balance-sheet which relates to the period that ended on the 31st of March 1967. The balance-sheet indicates paid up capital of Rs, 5 lakhs out of which 3000 ordinary shares of the face value of Rs, 100 were fully paid up, and 8000 ordinary shares of the face value of Rs, 100 were partly paid up to the extent of Rs, 25 per share. The balance-sheet relating to the period which ended on the 31st of March 1968 shows that the paid up capital was Rs, 6,50,000 out of which 4500 shares of the face value of Rs, 100 each were fully paid up and 8000 ordinary shares of the face value of Rs, 100 each which were partly paid up to the extent of Rs, 25 per share.
3. In February 1968, a group of persons hereinafter referred to as Mulla Abdullah Bhai group became interested in the venture and orally applied between February 1968 and February 1969 for allotment of shares to them. Thus shares of the face value of Rs, 5 lakhs were allotted to the members of that group. All of them were fully paid up.
4. Up to the 28th of July 1967 the three members who were the subscribers to the Memorandum and Articles of Association were the three Directors of the company. The relevant Article of the Articles of Association of the Company was No, 8 and ran as follows :- "8. Unless and until otherwise determined in the General Meeting of the Company, the number of Directors shall not be less than three and not more than five."
On the 28th of July 1967, Akber Ali Ghulam Hussain Sarya died and the case of the respondents is that a resolution was passed by the General Meeting of the Company on the 10th of August 1967 reducing the minimum number of Directors to two. This amendment, according to Mr. Motiur Rehman was submitted to the Registrar of Joint Stock Companies in 1969 and was accepted by him. Up to the death of Akber Ali Ghulam Hussain Sarya the total number of members of the company was also three but on his death the shares which were held by him devolved on his legal representatives who were also three in number; therefore, the total number of the members of the company became eve.
5. After the above changes, between February 1968 and February 1969 the above-mentioned 5000 fully paid up shares were allotted to I t members of the group of Mulla Abdullah Bhai. From February 1969 to October 1969 there were admittedly no disputes between the previous members and the members of Mulla Abdullah Bhai group. Disagreements began, when, according to Mr. Motiur Rehmnan, the previous members did not honour the undertaking which they are said to have orally given to the effect that three Directors would be taken from the group of Mulla Abdullah Bhai and that the voting strength of the previous members and of the new members would be equal. Mr. K. A. Ghani expained that owing to the non-fulfilment of this undertaking the members of Mulla Abdullah Bhai group became suspicious and inspected the returns which were submitted on behalf of the company to the Registrar of Companies. The inspection revealed, according to Mr. Ghani, that the number of shares which were held by the previous members was increased from 5000 to 1100) and that some of the shares were issued for other considerations than cash payment.
The increase in the number of the shares was made, according to Mr. Ghani, without increasing the paid up capital. This was done by adopting the device of allotting partly paid up shires in favour of some of the previous members. Mr. Ghani further said that inspection of the record of the Registrar of Joint Stock Companies revealed that the amendment of Article 8 which was purported to have been made in 1957, was actually made in 196).
According to Mr. K. A. Ghani the members of Mulla Abdullah Bhai group tried to settle the differences by direct negotiations as well as with the help of common friends. Their effort was that three Directors be taken from amongst them and that the voting strength of the members of their group and of the previous members should become equal. The efforts failed; therefore, a notice was given by them on the 16.h of October 1969 calling upon the company to fulfil the undertakings but with no effect. Thereafter a final notice was given on the 5th of December 1970 calling upon the company to do the needful. The notice also contained a warning that in default an application for winding up the company would he moved. J. Misc. Application No, 10 of 1971 was accordingly submitted to this Court on the 16th of December 1970.
7. On the same date three more applications were submit-ted. They are J. Misc. Applications Nos, 11, 12 and 13 of 1971. J. Misc. Application No, 11 of 1971 has been filed by M/s. S. Mohammad & Co. who claim to be the creditors of the company in the amount of Rs, 1,41,441-11-0. This amount is claimed by the applicants as their outstanding loan. It is the last balance of the account which began on the 10th of January 1968. Some of the money was paid in cash to the company and some of it was paid on the company's behalf to the suppliers of goods to the company.
J. Misc. Application No, 12 of 1971 was filed by M/s. Saifee Trading Corporation which is a firm. It claims Rs, 16,633.91 on account of the price of hemp which was allegedly supplied to the company. J. Misc. Application No, 13 of 1971 was filed by Ghabruddin, the proprietor of Hafeez Construction Co. He claims Rs, 2,42,639 for constructing the building of the factory. The construction had commenced in September 1968 and was completed on the 20th of October 1968. The original claim was for Rs, 3,27,726 but the architect certified it to be correct for Rs, 2,86,052.29.
9. After the above-mentioned four applications were filed an interlocutory application was made on behalf of the applicants under Order XXX1X, rules 1 and 2, C. P. C. to restrain the company from borrowing a further amount of Rs, 3 lakhs from the Industrial Development Bank of Pakistan. Notice of this application was issued to the company as well as to the I. D. B. P. in response to which Mr. Inamul Haq, Advocate, appeared for the company and Mr. Muhammad Akram appeared on behalf of I.D.P.P. On my inquiry, Mr. Akram stated that the I.D.B.P. had satisfied itself about the capacity of the company to repay the additional loan and waited for the orders of the Court. When I heard counsel for the parties, I felt that on the same considerations on which the interlocutory application could be decided it was possible to decide the main applications also. I, therefore, ordered on the 1st of March 1971 that the interlocutory application as well as the main application will be disposed of simultaaneously.
10.I have now heard counsel for the parties on three days and tried to understand the trends of the main disputes as well as the legal contentions which have been raised by them. Counsel for the applicants have taken the stand that the members of Mulla Abdullah Bhai group have been defrauded because they were assured when they applied to become members of the company that three Directors would be taken from their group and that the voting strength of the previous members and the members of their group will he equal. This undertaking has been violated through a fraud which has been committed, according to counsel, by adopting two methods for doing so. One of them was that the shares which were originally issued as fully paid up to the previous members were later on converted into partly paid up shares and this change was concealed by rubbing but from the record of the Registrar of Companies the previous figures and typing out altered figures on it. The second method, according to Mr. Motiur Rehman, was that the minimum number of Directors was reduced from three to two in a surreptitious manner. In support of the first allegation a photostat copy of Form XV which was submitted by the company in October 1966 has been produced. Mr. K. A Ghani says that on the first page of the return, in column 3, the amount was originally Rs, 5,00,000 which has been altered to Rs, 8,000,00 and that on the second page the three figures of allotted shares were originally WO, 500 and 500 but they were fraudulently altered to 4000, 2000 and 2000.
11.The above allegations imply that forgery was made when the document was in the possession of the Registrar of Joint Stock Companies which means the allegation presumes the implication of the Registrar or the employees of his office. I, therefore, inquired from Mr. K. A, Ghani as to why, according to him, the crude method of rubbing out was adopted instead of replacing the form, to which question he has given no direct reply. It is noteworthy that the allegation of forgery with respect to the first page is founded on the fact that figure '8' in column 3, is heavily typed but I have noted that there is no such defect in column 2 in which also the amount of Rs, 8 lakhs is written.
Additionally, as already mentioned above, there are balance-sheets of March 1967, March 1968 and March 1969 in which partly paid up shares are shown. The members of Mullah Abdullah Bhai group joined the company between February 1968 and February 1969; therefore, the balance-sheets of the period which ended in March 1967 and March 1968 could have nothing to do with their interest and cannot be said to have been falsely prepared. If one figure of b000 is correct and is supported by the balance-sheets, then the heavily or doubly typed figures on the first page or on second page of the form make no difference.
12.The second method of fraud which has been urged on behalf of the petitioners, namely, that Article 8 of the Articles of Association was amended in 1969 but was surreptitiously shown to have been amended in 1967 is obviously mis-conceived. The alleged amendment cannot be said to have any fraudulent effect on the alleged rights of the members of Mulla Abdullah Bhai group according to whom three more Directors were to be taken from themselves. In fact the reduction of the minimum number of Directors from 3 to 2 without altering the maximum number of five Directors has made it practicable, if there was an agreement and intention that three more Directors should be appointed, to fulfil that commitment.
13.What is quite obvious and has been repeatedly empahsised by counsel for the applicants is that the members of Mulla Abdullah Bhai group want to have equal voting strength with the previous members and also want to have three Directors from themselves on the Board of Directors. The basis of this claim and consequent grievance is that there were allegedly oral negotiations and agreement between the previous members and the members of Mulla Abdullah Bhai group to this effect. There was no writing of this undertaking. What is stranger than that is that nobody seems to have taken the trouble of examining the previous balance-sheets and the group has contributed Rs, 5,00,000 for fully paid up shares of that face value without any reference to the alleged undertaking.
14.The above circumstances become more significant when we take into consideration the fact that the applications for winding up the company have been admittedly filed by the Mulla Abdullah Bhai group on the ground that the alleged promises were not fulfilled. In other words, the emphasis is not on the solvency or insolvency of the company nor on the future prospects of the achievement of the objects of the company but on specific performance of an alleged agreement.
This is an irrelevant as well as an objectionable object for purposes of winding up the company. It is an indication of lack of straightforwardness; therefore, it is the duty of the Court to prevent such use of the process of law.
15. I may point out here what I have already mentioned above that three applications were filed along with J. Misc. Application No, 10 of 1971 by three creditors also. Why all the three creditors thought of rushing to the Court together and along with the members of Mullah Abdullah Bhai group for applying to the Court to get the company wound up can easily perceived.
16.A look at the four applications invites attention to an important aspect of the matter which is that the applicants have neither criticised the managment nor indicated any risk or danger to the future of the company. In these circumstances the opposition of the applicants to the grant of a loan of Rs, 3 lakhs by the I.D.B.P. to the company reveals its own meaning. If the creditors were anxious to get money they should have been happy that more money was going to the company and that its chances were becoming better to pay up the debts. As it is, the balance-sheets do not indicate that the liabilities of the company are bigger than its assets. Even if they were bigger, that would not by itself be sufficient for ordering a company to be wound up because there are ups and downs in trade and this being an industrial company has to face heavy initial expenditure and has to wait for a fairly long time for income to flow in.
17.As far as I am able to assess the situation, my impression is that these applications have not been made with the purpose of liquidating the company. There is obviously a dispute about the alleged promises and these winding up proceedings are being utilized for ventilating grievances relating to them.
18.As to merits of the applications of the creditors, counsel for the respondent has stated that the claim of M/s. S. Mohammad & Co. in J. Misc. Application No, 11 of 1971 is exaggerated and has been the subject of a dispute. According to him, the applicants are not entitled to more than Rs, 50,000 out of their entire claim but they are pressing for the whole of it. With respect to the claim of M/s. Saifee Trading Corporation contained in J. Misc. Application No, 12 of 1971 Mr. Motiur Rehman conceded that the whole of it was in dispute. As to the claim of Ghabruddin' proprietor of Hafeez Construction Co. in J. Misc. Application No, 13 of 1971, counsel for the company admitted it to the extent of Rs, 1,59,657 but according to him the creditors pressed for the whole of it.
19.I inquired from Mr. Motiur Rehman as to whether the applicants in J. Misc. Applications Nos, 11, 12 and 13 of 1971 thought that winding up application was a substitute for filing a suit to recover an outstanding debt to which he replied that it was a statutory right of the creditors to file an application for winding up limited companies if they were indebted in a bigger amount than Rs, 500 and did not pay the debt and In support of this proposition relied on National Bank of Pakistan v. The Punjab National Silk Mills Ltd. . He further stated that they could file civil suits also but there were two forums available to them and that it was for them to select any one of those forums. Mr. Inamul Haq said in reply that the respondent-company was prepared to pay the amounts of the debts which were admitted by it but Mr. Motiur Rehman was not prepared to consider this offer because, according to him, it was too late for the company to make it.
20. I feel that the law relating to the winding up of companies has either not been correctly appreciated by the applicants or they have knowingly tried to misuse it. The creditors are clearly in error in entertaining the view that winding up proceedings are a substitute for a suit to recover their debt. See the following quotation from Nawabzada Captain Sped Murtaza Ali Khan v. Stressed Concrete Construction (Private) Ltd. : "Ile principle upon which the Court will forbear from deciding the dispute as to liability from for immediate payment maKing and winding up older in case it decides it against the company, is that winding up proceedings are not intended to be exploited as a normal alternative to the ordinary mode ofdebt-realisation, and that it is more convenient that claims should be investigated and decided in a regular action. Even though there is no dispute as to the existence of the debt, where there is a bona fide dispute as to the company's liability for immediate payment, no winding up order can be made till the dispute is decided. If it finds the issue regarding bona fides in favour of the company, it will ordinarily not proceed further and decide the dispute itself, or it will either dismiss the petition for winding up or keep it pending till the creditor has established his claim in a regular action."
The reason why an application for winding up is not a substi-tute for a suit, is that in a suit for the recovery of a debt the creditor has to prove what is due to him, whereas in winding up proceedings under section 162(v) he has also to establish that the "company is unable to pay its debts". The word "unable" does not mean "unwilling" and the word "debts," refers to all the creditors as a class and not separately to the interest of each individualcreditor. See the 6thEdition of Company Law by Ghosh at page 465 and Crigglestone Coal Company Ltd. . There should, firstly, exist a debt, secondly, it should, not be the subject of an honest dispute, and, thirdly, the company should be unable to pay its debts. The basic object of security in such proceedings is the solvency or insolvency of the company and not the truth of the claims of the creditors. There may be a company which is in reality under an obligation to pay huge debts but may be honestly disputing them and therefore refusing to pay them. In such circumstances, if the winding up proceedings were continued, they would be converted into proof and disproof of the debts and the main object1 2 3 which is scrutiny into the solvency or insolvency of the company will be relegated to the background. A company which is able to pay its debts cannot in terms of section 162(v be ordered to be wound up except in the sense that refusal to pay a genuine debt is usually accompanied with the existence of a state of insolvency.
21.If a debtor is merely unwilling to pay his debts the normal remedy is a suit. If a creditor, instead of instituting a suit against debtor-company, files an application for winding it up, I always ask myself, why has he done so, instead of following the straight forward course of proving his claim directly and then executing the decree? If his debt is undisputed, then the decree will follow easily.
If he simply desires to save Court-fee, then the consideration of loss to the State revenue may not be in his way, but he involves himself in the problem of proving insolvency of the company which is different from a temporary misfortune of a company. See Naresh Narayan Roy v. Secretary of State for India , D. Devis & Co. Ltd. v. Brunswick (Australia) Ltd. and others . If, on the other hand, the object of a creditor applying for winding up a debtor-company is to bring pressure on it, then it is an abuse of legal process and by itself a sufficient to displace the prima facie position that a creditor is entitled ex debito justitiae to a winding up order. See Nawabzada Captain Syed Murtaza All Khan v. Stressed Concrete Construction (Private) Ltd. It is wrong to unnecessarily resort to winding up E proceedings because there is an implied threat in them to bring disaster to the company and because an odium is also attached to such proceedings.
22.In this case, as explained above, no attempt was made by the applicants to prove that the company is insolvent. On the contrary, there is evidence on record to establish that the primary purpose of the applications is to enforce an alleged agreement. They are in consequence dismissed with costs. PLD 1969 Lah. 194 AIR 1960 Mad. 254 (1906) 2 Ch. D 327 AIR 1923 P C 1 AIR 1936 P C 114