HAZIQUL KHAIRI, J.- The petitioner namely ULBRICHTS is a limited liability Company registered -in Austria and has filed this petition under Section 309 of the Companies Ordinance, 1984 praying for winding up of the respondent Company viz ULBRICHT'S (PAKISTAN) LIMITED (hereinafter called the company).
2. The case of the petitioner is that pursuant to an ^reement dated 27- 5-1975, the company was set up as a joint venture company with petitioner holding 49% of shares and the local group holding 51% shares. The objects of the company, inter alia were to manufacture and assemble un- filed hand-grenade and fuses frQm component supply by the petitioner by using pate'nts and know how under license granted by the petitioner. In the year 1979, there was an understanding on terms indicated in the letter dated 5-6-1979 that local group shall purchase the entire share holding of the petitioner in the company and by a loan agreement dated 5-6-1976, the company undertook inter alia to pay the price of the machinery, moulds and tools and equipment alongwith the interest in instalment in the manner stated therein. By the said agreement the company also hypothicated the machinery and equipment etc. By way of first charge. In the event of default in payment of the price or interest and on the happenings of other events enumerated in the agreement, the petitioner was entitled to terminate the agreement and the entire balance amount would become due immediately. By another agreement dated 5-6-1979 the petitioner undertook to supply necessary technical know how and advise to the Government in connection with the manufacture of hand-grenades in consideration of Rs. 40,000/- only to the petitioner. By the said agreement the petitioner also granted to the company a licence to use the patented process for the manufacture of hand-grenade and mechanism (other then fuses) such licence being co- terminous to the agreement. Yet by another agreement called the "repayment agreement" of the same date the Company undertook to repay the dues of the petitioner in the manner stated therein.
3. According to the petitioner, initially the joint venture proceeded some what smoothly but subsequently the Managing Director of the Company Mr. Iqbal Hussain adopted totally in co- operative, hostile and dictatorial attitude. He started running the company as one men show and totally excluded the petitioner from participating in the affairs of the company despite the fact that the petitioner was holding 5,400/- fully paid shares each of the value of Rs.100/- and had two directors out of a number of 5 directors in the board of directors. Not only this, the said Mr. Iqbal Hussain also started a champaign of vilification against the directors representing the petitioner so much so that they were compelled to tender their resignations at a meeting of the board of directors held on 9-5-1984. Thereafter Mr. Iqbal Hussain assured the petitioner that he would mend his ways and give his solemn under-taking to clear the long outstanding dues of the petitioner. As such the petitioner did not take any legal action and an agreement dated 10-9-1985 was entered into between the petitioner and the company. In this agreement the company admitted and acknowledged its liability and undertook to pay the dues of the petitioner in instalments. Since the company failed to honour its commitment, on 23-2-1988, at a meeting between the petitioner's representative and the said Mr. Iqbal Hussain it was mutually agreed to terminatelIthe joint venture vide letter dated 26-3-1988. Except some payment made on 30-4-| 1981 a total sum of Rs.
11,975,256.00 remained due and payable by the Company to the petitioner. A legal notice dated 2- 4-1988 was sent to the company calling upon it to pay the said amount within thirty days failing which the petitioner shall be at liberty to apply for the winding up of the Company. By another notice dated 2-4-1988 the petitioner terminated the technical assistance agreement and revoked the patent/license granted to the company. The substratum of the company has gone and it is now insolvent.
4. Mr. Iqbal Hussain Managing Director of the Company filed counter affidavit opposing the petition for winding up rebutting the various allegations contained therein. According to him. The petitioner had no direct business in Pakistan and in 1968 an American Company known as Trans-Arrow, failed to supply 83,000/- Hairnet and 5,000/- Parachutes to the Government of Pakistan whereupon through his good offices as agent of the Petitioner, the petitioner company was awarded this contract. A few years latter the Government of Pakistan desired that a Pakistani Company be raised in the manufacture of Inner- Linners of the Helmats with a view to save foreign exchange and also to make Pakistan self-sufficient in the production of Defence Stores. It was denied that the company was incorporated with the object to manufacture and assemble un-filled hand- grenades and fuses. In fact the company was incorporated in August, 1975 initially with a view to manufacture the said Inner-Linners on Hairnets used by the Armed Forces of Pakistan. In 1976, the company was awarded contract to supply moulds and machinery to Government of Pakistan and to provide through the petitioner Industrial know how and technical advise required, for the Pakistan Ordnance Factory. The petitioner made supplies in part only with the result that the Ministry of Defence advised the company not to make payment to the petitioner until the know how was provided by it. Besides the petitioner violated the terms of overriding agreements all dated 5- 5-1979, and not only delayed the supply of all machinery, moulds and tools for a number of years but at the back of the petitioner directly obtained the order for supplies of 2,00,000 hand grenades to Government of Pakistan in 1976-77. In this way, the petitioner at the cost of the company, made profit of 2 million rupees. The company on the other hand incurred liability of Rs. 2.5 million by way of interest at 15% on Rs. 52,50,000/- being loan plus recollection charges at 2%. It was also pointed out that as soon as the Ministry of Pakistan signed a contract with the company, the petitioner unilaterly revised the price of machinery, tools and know how to Rs.1,85,00,000/- imposing further conditions vide their letter dated 6-8-1985. These conditions inter alia were that: 1) the company shall not export/manufacture goods without the permission of the petitioner 2), The petitioner shall be entitled to one German Duetch Mark as commission, for each hairnet exported 3). The company shall always purchase raw material from the petitioner at their price.
5. Reference was also made as to how the petitioner caused huge losses to the respondent company in the sum of Rs. 1,10,000/- by supplying defective I 80,000/- outer shells of steel helmates which were rejected by the Ministry of Defence and how at a low price of Rs. 30/- per piece, the petitioner company sold 40,000/- sets of metal parts for hand-grenades which were available for Rs. 35/- per piece with the respondent company. The petitioner in violation of Clause 11 of agreement dated 10.12.1985 directly obtained a contract for supply of 5,00,000/- hand-grenades from Pakistan Ordinance Factories Government of Pakistan at a price of Rs. 50/- each which was higher than the price of local production and in that manner made profit of Rs.2,60,00,000/-. The demand of the petitioner for payment of the alleged dues is false and not tenable. The petitioner company on the other hand owed to the respondent company a sum of more than Rupees Nine Crores for which a suit has been filed against the petitioner, In order to show its credibility, the company has referred to a number of orders' received by it namely.- a) The respondents received an order for 1,92,000/- Steel Helmets from the Ministry of Defence with an advance of Rs. 10.8 million (Annex:R-2 above). b) The respondent further received another order from the Ministry of Defence for 33,900/- Helmets for Rs.94,58,100/- (Annex:R-27). c) The respondent has supplied 3 lacs of handgrenades under contract to the Ministry of Defence out of 4,36,000/- hand grenades, of a value of Rs. 1,05,00,000/-. d) The respondent has exported 6 lacs Water Coolers to Ittehad-e- Muslemin, Saudi Arabia, Jeddah for Afghan Mohajiden of Rs. 600 million (Annexure R-28).
6. The company further rebutted other allegations stating that the company has developed technical know how from the indigenous sources at its own expense as the petitioner failed' to provide the same. There was no manipulation of accounts and squandering of/yassets. The accounts were duly audited by the petitioner's own appointed' auditors. Despite petitioner's breech of contract and indifference, the company earned Rs. 1133565/- profit in 1987. The company is the only company of its kind which manufactures special goods essential for the defence of the country. There had never been a state of deadlock in the management of the company. Two of the five directors on the board of directors of the company belong to the petitioner but except once or twice, they never participated in the meetings of the board. The petition was filed by the petitioner with a view to pressurise the company to make payment of their alleged dues and it was incorrect to suggest that the substratum of the company had gone. It was denied that the Managing Director of the Company Mr. Iqbal Hussain excluded the petitioner from participating in the affairs of the Company.
7. The first contention raised by Mr. Akber Mirza, learned counsel for the peittioner was that there was deadlock in the affairs of the Company so also there was mistrust among the directors and share holders of the Company. As such, the company being a Private Company, the principles of dissolution of a partnership firm will apply in full force to it and the company is liable to the wound up under the just and equitable clause being (h) of Section 305 of Companies Ordinance, 1984. In support of his contention, learned counsel for the petitioner placed reliance on Ladli Prashad Kaiswa l v. Komai Distillary Co. Ltd., P.L.D. 1965 S.C.,221 in which it was held: "In the case of a private limited company the tendency of the Courts has uniformly been to treat it more or less as a partnership and to apply the same principles in the winding up of a private limited company as would entitle a partner to have a partnership firm dissolved. Commonly the exclusion of a partner from the management of the firm, the extence of a state of deadlock between the partners or the justifiable lack of confidence in the management have been regarded as just and proper grounds for dissolving a private limited company.
The company (in this case) was in substance a partnership, for, its shareholders were only the members of a family and no outsider was interested. Under a unanimous resolution the appellant (who applied for winding up) was made a permanent Director and Chairman of the Board of Directors and he was to have an equal voice in the management of the affairs of the company.
Indeed, no decision could be taken to bind the company which was not arrived at unanimously by all the three directors of the company who together formed the quorum for a directors' meeting. In these circumstances, since the trial Court had found that the resolution which purported to remove the a pellant from the directorship of the company was an illegal resolution and this finding had hot been reversed by the Letters Patent Bench, which had proceeded upon the assumption that resolution was illegal, it clearly followed that the appellant was wrongfully excluded from participation in the management of the affairs of the company and indeed a deadlock was thereafter created by the refusal of the other directors to allow him to participate in the management. The subsequent conduct of the other co-directors and the appellant left no room for doubt that feelings had become so embittered that conciliation was now well nigh impossible.
They were determined to exclude the appellant completely. Indeed, they had gone even to the extent of forfeiting his shares and selling them to others. In the facts proved in the case it had become clearly just and equitable to dissolve the company."
8. Following the dictum laid down by the Supreme Court of Pakistan in Ladli Prasad Jaiswal's case that the principles as would entitle a partner to have a partnership firm dissolved would be applicable to a Private Limited Company, a learned Judge of this Court, Justice Nasir Aslam Zahid (as he then was) in Nagina Films case reported in PLD 1983 Karachi 45 further held that three categories of cases shall fall under the "just and equitable clause", namely, a ) exclusion of a partner from the management of a firm, b) The existence of a state of deadlock between the partners, and c) Justifiable lack of confidence in the management. This decision was followed by another judgment by the said learned Judge in Mansoor Ali Bandey Ali v. Marine Food Industries Ltd. (1985 CLC#1239). In this case five brothers were the only Share-holders of the company and held equal shares. There were three directors of the Company from amongst them and the Company was to be run and managed as if it were a Partnership firm. The petitioner who was the managing director and one of the shareholders was "excluded legally and/or physically for management of the Company". It was held that the petitioner's case for winding up under the just and equitable clause would stand proved in the circumstances.
9. It was contended by Mr. Mohammad Naseem learned counsel for the company that the company was formed as desired by the Government of Pakistan for the purpose of manufacture and supply of defence material to Defence forces which position was not disputed by the petitioner. It was further contended that from the very inception, the Company was being run and managed by the Pakistani Group and the Petitioner remained dorment almost all the time.
Reference was made to the agreement dated 27-5-1975 between the groups pursuant to which the company was incorporated. Clause 7 of the agreement states that "since the party of the recond party is participating in business, in view of the distances involved it is undertaken and ensured by the party of the first part that full efforts shall be made to obtain participation of the party of the second part in the management and control of the business as expedient, commensurate with the business and as is feasible." It was maintained that the petitioner is holding 49% shares in a Private Limited Company which will not by itself entitle it to winding up of the company, more so, when the petitioner has decided to withdraw from the company by agreeing to transfer its entire share holding to Pakistani group for consideration. Learned counsel for the company also referred to the Balance Sheets of the company for the past many years filed by the company at the request of the petitioner. It was pointed out that the company had earned substantial profits in the year 1987 and is likely to earn more profits in future having obtained a number of contracts from Ministry of Defence, Government of Pakistan. The valuation of machinery alone of the company as per independent surveyors of M/s National Bank of Pakistan stood at Rs.
2,13,25,000/- and the present market value of the land would be much more. The assets of the company far exceed its liabilities and there are a number of contracts current and pending from which the company would expect to earn huge profits. It was further contended that the company has been fulfilling the defence requirements of the country and if winding up order is made, no liquidator will be able to handle the intricate production and supplies etc. Of defence material by the company.
10. The present case is entirely distinguishable from the above cited cases, because there was no agreement between the two groups as in the case of Ladli Prasad that "no decision qould be taken to bind the Company which was not arrived at unanimously by all the three Directors of the Company who together formed the quorum for a director's meeting". Not a single instance of deadlock was cited by the learned counsel for the petitioner. Mere disagreement between two groups of a Private Limited Company will not constitute deadlock. Agreement such as in Ladli Prashad's case though enforceable and binding was extraneous to the concept of the internal management and normal institutional activities of a company, which provide inter alia 'rule of the majority.' This Cordinal principle finds expression under Section 13 (c) of the Partnership Act also to the affect that: "(c) any difference arising as to ordinary matters connected with the business may be decided by majority of the partners, and every partner shall have the right to express his opinion before the matter is decided, but no change may be made in the nature of .The business without the consent of all the partners;"
11. Nevertheless, it is not the case of the petitioner that the voting power between the two groups was evenly divided as was in re Yenidi Tobacco Company (1916) 2 Ch. 426. As to the alleged exclusion of the petitioner from the participating in the affairs of the Company, nothing has been brought on record to substantiate the allegation. What transpires, however, is that except a few meetings that to in the beginning, the petitioner remained indifferent to manage the affairs of the company and failed to attend other meetings of the Board. It is also significant to note that neither any request nor any requisition was made by the petitioner for convening a meeting either of the General Body or of the Board touching the disputed matters between it and the Pakistani group.
The question of lack of confidence in the management assumes importance as the petitioner represents the other big group of the company with 49% share holding but is not justifiable in the circumstances of the case, since as early as 1985 when the petitioner had no grievance against the Pakistani group it had decided to withdraw from the company without winding it up. Instead it had agreed to transfer its share to the Pakistani Group. In fact the only interest of the petitioner in the Company is to receive its alleged dues. Resultantly the petition fails on just and equitable ground.
12. Next contention raised by Mr. Akbar Mirza, learned counsel for petitioner was that the company is liable to be wound up as it was unable to pay its debts within the meaning of Section 305(e) read with Seciton 306 of the Act to the petitioner who is also a creditor of the company. Reference was made to the repayment agreement dated 5-6-79 entered into between the petitioner and the company under which the company undertook to repay the dues of his petitioner Subsequently, by another agreement dated 10.9.85 the company undertook to repay the dues of the petitioner in instalnients. On the failure of the company to honour its commitment the petitioner was left with no choice but to serve the company with a thirty days' notice as contemplated under section 305 of the Companies Ordinance, 1984.
13. According to Mr. Akbar Mirza there is no bonafide didpute against the petitioner's debt. The Company has put up a defence which is a comouflage to cover up its insolvency. The company has failed to pay the debt on statutory notice and the only course open to Court is to order its winding up. In support of his contention learned counsel placed reliance on National Bank of Pakistan v. The Punjab National Silk Mills Ltd. And others (PLD 1969 Lahore 194), Parke Davis Co. Ltd.
Karachi v. Bliss & Co. Ltd. Karachi (PLD 1982 Karachi 94) and M. Gordhandas Co. v. M.W. Industries (AIR 1971 S.C. 2600).
14. Learned counsel for the Company Mr. Nasim Ahmed first brought to my notice the case oi Abdul Rashid v. Nibbon Rottm Company (Pakistan) (1986 MLD 2762) in which it was held that in case debt was disputed and was denied by the company which was found a substantial ground, court should refuse to make order of winding up. Then reference was made to Muhammad Amin Bros.
Ltd. v. Dominion of India (AIR (30) 1952) Calcutta 323) where it was held that "where court was satisfied that debt upon which the petitioner of winding up is founded is a hotly contested debt and doubtful, the Court should not make a winding up order based upon such debt. In Bukhtiarpur Bihar Light Railway Co. Ltd. v. Union of India and another (AIR 1954 Calcutta 499) the view of the Court was that where there is a bonafide dispute as to an alleged debt the appropriate remedy for the creditor is to prove that the debt/liability is real and the appropriate course for him is to file a suit and not an application for winding up and that "even assuming that the company was deliberately avoiding or delaying payment, this was not a case of inability to pay, but a case where the company was failing and neglecting to pay".
15. Admittedly our Courts have repeatedly held that a petition for winding up by a creditor is not a substitute for a suit for recovery of debts. Reference was made to PLD 1971 Karachi 597 in which it was held that where the object of a creditor in applying winding up is to bring pressure on a debtor company, it would be an abuse of legal process and by itself sufficient to displace prima facie position that a creditor is entitled to co-exdebito justifiae to a winding up. The company has made serious allegations against the petitioner and has claimed more than Rs. 9 Crores from it in the said suit. In Ladli Prashad v. Komai Distillery Co. Ltd. (PLD 1965 SC 221), the Managing Director of the company had set up a rival business in his own name and made profits at the expense of other share-holders but in the present case the petitioner who seeks winding up of the company is alleged to have carried on business in competition with the company, and made huge profit at the cost of the company. There are other allegetions of serious nature against the petitioner as well in which compensation is claimed by the company. The proper course for the petitioner would have been to file a suit for recovery of its dues rather than to pressurise the company to pay its alleged debt by filing the winding up petition. Hence this ground also fails. The petition is accordingly dismissed with costs.