' This petition under sections 305, 306, 309 and 290 of the Companies Ordinance, 1984, for winding up Fazal Sugar Mills Limited, a joint stock company (hereinafter referred to as "the respondents"), has been filed on behalf of the National Development Finance Corporation (hereinafter referred to as "the petitioners"). The facts forming the background of this petition are as follows: ' The respondents had been granted financial assistance by the petitioners in the sum of Rs,39 million for setting up a sugar mill at Tando Muhammad Khan, District Badin, pursuant to a credit agreement executed between the parties, dated 11-7-1984. The respondents, in consideration of the grant of the said facility mortgaged its movable and immovable properties with the petitioneRs, According to the terms of the aforesaid agreement repayment of the loan was to be made in sixteen semi-annual instalments, starting on 31-3-1987 and ending on 30-9-1994. Thereafter, according to a Schedule as agreed to between the parties vide letters dated 17-6-1984 and 26-6- 1984, equity up to Rs,9.5 million was to be deposited by the respondents by 31-7-1984 and the remaining amount of Rs,20 million was to be deposited in monthly instalments of Rs,2.5 million each, starting on 31-9-1984 and ending on 31-3-1985. The respondents, however failed to adhere to the said schedule. The petitioners vide their legal notice dated 15-3-1989 intimated the respondents that the entire amount of the loan had been declared by them as due and payable forthwith in terms of Article VII of the said credit agreement: however, after receving, the notice, the respondents failed and neglected to make any payment to the petitioneRs, According to the petitioners' demand Rs, 55,641,227.62 were due and payable by the respondents to the former besides Rs,32,500 which were payable by the respondents as project examination fee. This amount, according to the petitioners, the respondents are unable to pay and under the circumstances it is also just and equitable that the respondents be ordered to be wound up. It has further been alleged that the project has become defunct for all practical purposes and the assets of the respondents are being wasted.
2. The petition has been resisted by the respondents according to whom, there was neither any debt due and payable by them at the time of receiving of the notice from the petitioners nor it would be just or equitable to order the winding up of the respondents. According to the respondents, they had bona fide dispute with the petitioners in regard to the claim of the petitioners in Suit No,1036/89 which has been filed by the respondents against the petitioners and which is still pending in this Court as it was the petitioners, who had committed breach of contract with the respondents and were liable to pay damages to the respondents to the tune of Rs,500 million.
3. I have heard Mr. Afsar Abidi, learned counsel for the petitioners and Mr. Mohsin Tayebaly, learned counsel for the respondents.
4. In support of the respondents' case, Mr. Mohsin Tayebaly has invited my attention to the plaint filed by the respondents in Suit No,1036/89, a copy of which has been filed with the counter- affidavit sworn by Munir Ahmed, Managing Director of the respondents. According to the said counter-affidavit, although it has not been denied that the respondents had executed the said credit agreement dated 11-7-1984 but reference has been made by the respondents to another agreement dated 25-6-1981, a photo copy of which has been filed as Annexure R/20 to the counter-affidavit, according to which, the petitioners had agreed to finance the respondents.To the extent of Rs,39 million in local currency and Rs, 49.5 million in foreign currency. Reference has also been made to two agreements, dated 20-10-1981 and 14-7-1982, executed by the parties in this regard. However, according to the respondents, the petitioners had failed to honour their commitment under the said agreement and consequently neither they were entitled to receive any payment from the respondents nor there was any justification for institution of the present proceedings against them.
5. Mr. Afsar Abidi, learned counsel for the petitioners, on the other hand, has argued that the said suit has been filed by the respondents only to justify their failure to repay the loan and to create an ostensible defence. According to the learned counsel, the credit agreement (Annexure 'A') was an independent agreement and nothing can be spelt out therefrom to suggest that the same was subject to any other terms as alleged by the respondents. Consequently, according to the learned counsel, under the terms of this agreement, the petitioners were within their right to demand immediate payment of the entire loan and the respondents by neglecting to meet the petitioners' demand or secure or compound the same to the reasonable satisfaction of the petitioners has made themselves liable to be wound up.
6. It is pertinent to point out that according to section 305 of the Companies Ordinance, a company may be wound up by the Court under certain circumstances and according to clause (e) of the said section, one of the reasons for which a company may be ordered to be wound up by the Court is "if the company is unable to pay its debts". Reference may also be made to clause (h) of section 305, as according to the same, a company may also be wound up if the Court is of opinion that it is just and equitable that the company should be wound up". Section 306 of the said Ordinance which is equally pertinent provides that:-- "306. Company when deemed unable to pay its .Debts.---
(1) A company shall be deemed to be unable to pay its debts---
(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding one per cent. Of its paid-up capital or fifty thousand rupees, whichever is less, than due, has served on the company, by causing the same to be delivered by registered post or otherwise, at its registered office, a demand under his hand requiring the company to pay the sum so due and the company has for thirty days thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor; or
(b) if execution or other process issued on a decree or order of any Court or any other competent authority in favour of a creditor of the company is returned unsatisfied in whole or in part; or
(c) if it is proved to the satisfaction of the Court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the company.
(2) The demand referred to in clause (a) of subsection (1) shall be deemed to have been duly given under the hand of the creditor if it is signed by an agent or legal adviser duly authorised on his behalf, or in the case of firm if it is signed by such agent or legal adviser or by any member of the firm on behalf of the firm.'
7. Turning to clause (a) of section 306, the significance of the word "neglected" occurring in the said clause cannot be overlooked because "negligence" means "omission to do a duty which a party is liable to do". "Neglect" has been defined by Ballentine's Law Dictionary as" to omit to do or perform some work, act, or duty, required in one's business or occupation, or required as a legal obligation, such as that of making a payment". Although there is no controversy as to the fact that a notice addressed by the petitioners to the respondents dated 15-3-1989 demanding their entire dues from the respondents was received by the respondents and thereafter the respondents failed either to pay the petitioners' dues or make any effort to compound their debt but in this regard, the contention of Mr. Mohsin Tayebaly is that, the word "debt" visualised by section 306 is an undisputed debt, therefore, the provisions of section 306 of the Ordinance would not be attracted in a case where the company has raised a bona fide dispute over such debt. According to the learned counsel, the question of neglect to pay would arise only if there existed a valid debt which the respondents were liable to pay. Reliance was placed by the learned counsel upon P.R.
Doraiswa mi Ayyar v. Coimbatore Easwara Sahaya Nidhi Ltd. (AIR 1929 Madras 265), P. Satyarazu v.
Guntur Cotton Jute and Paper Mills Co. Ltd. (AIR 1925 Madras 199) and Mullah Abdullah Bhai and 9 others v. Saria Rope Mills Ltd. (PLD 1971 Kar. 597).
8. In the first case, it was held by the Madras High Court that where there is a bona fide dispute as to the company's laibility to pay the debt, the Courts will not allow creditors of the company to invoke the assistance of the Companies Act for getting payment of their debt; they must be referred to a suit. It was further held that mere failure to comply with a statutory demand would not entitle the creditor to come before the Court and ask as a matter of right for the winding up of the company. In the next case, which was also decided by the Madras High Court, it was held that where the object of a petition to wind up the company is to bring pressure upon the company in order to make it pay the petitioners cheaply and expeditiously which the company desires to dispute in the Civil Court, the petition is an abuse of the process of the Court and should be dismissed. The third case cited by Mr. Mohsin Tayebaly was decided by this Court. In this case, it was held that the expression "company is unable to pay its debts" does not mean that it is unwilling to pay and the word "debt" refers to all creditors as a class. It was further held that 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. It was further observed in the judgment that 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 object which is scrutiny into the solvency or insolvency of the company would be relegated to the background. Mr. Mohsin Tayebaly has also invited my attention to Palmer's Company Law (Twenty-fourth Edition) where the author at page 1366 has observed: "We have already seen how, where there is a bona fide dispute as to the debt, the company cannot be said to have neglected to pay on a statutory demand. Coupled with this is a related general principle that a petition for winding up with a view to enforcing payment of a disputed debt is an abuse of the process of the Court and should be dismissed with costs. Each case ultimately turns on its facts but the following points arise from the cases:-- "Where a debt is not disputed or the claim is substantial a creditor may present a petition with the object of forcing the company to pay. `Substantial' word here means having substance. In such a case pursuit of the claim with personal hostility, even venom and an ulterior motive, do not constitute an abuse of the process of the Court. Similarly where the company is proved by other means to be insolvent or where the dispute is as to amount only an order will be made."
9. Mr. Afsar Abidi, learned counsel for the petitioners, has however placed reliance upon the case of National Development Bank of Pakistan v. Modern Poultry Farm Limited (1990 CLC 1030), which was recently decided by me. In this case, indebtedness of the company to the petitioners in a large sum of money coupled with neglect on its part to compound or secure the debt to the satisfaction of the petitioners after receiving a notice of demand therefrom was held to be sufficient to raise a presumption against the company that it was unable to pay its debts. The mere fact that the petitioner could also file a suit or similar proceedings for recovery of its dues was held not to be a valid defence to winding up proceedings. Failure of the company to establish its solvency was also held to be a contributory factor in the winding up proceedings.
10. The question which first requires to be considered is, whether there is any bona fide dispute raised by the respondents in respect of their liability to pay the petitioneRs, In this regard, it is pertinent to refer to the defence of the respondents, which has been raised in their counter- affidavit. The respondents, as already pointed out, have firstly alleged that the breach of contract, in fact, was committed by the petitioners as they failed to carry out their entire obligation of providing assistance to the tune of Rs,49.5 million in foreign currency for the import of foreign equipment in terms of their letter dated the 25th June, 1981 (Annexure R/20). The respondents have claimed damages on account of such failure of the petitioners to honour their said commitment. In this background, the respondents assert that nothing has become due and payable from them to the petitioneRs,
11. Without going into the merits of the respondent's claim in the suit filed by them, it may be pointed out that nothing can be spelt out from the said letter dated 5th June, 1981 to indicate that it embodied within itself any proposal which, if accepted by the respondents, would have given rise to a contract. The Credit Agreement (Annexure A) which was entered into subsequently by the parties also makes no reference to the said letter. No doubt, the respondents have filed a suit against the petitioners, claiming damages against them, but the question can only be determined by the Court before which the suit is pending at the time of its final disposal. This petition has to be decided on its own merits. Turning once again to the main contention of Mr. Mohsin Tayebaly, there can of course be no cavil with the dictum laid down in AIR 1929 Mad. 265, viz., if the company has a bona fide dispute with its creditor in regard to its liability to pay, the parties in that case must be referred to a suit, however, the onus to show that the respondents have a bona fide dispute in regard to their liability to pay the petitioners would be on the former. Such onus cannot be discharged merely by the fact that the respondents have filed a suit against the petitioners claiming damages from them. Unless evidence has been led in the suit and the respondents' claim has been established it cannot be said that the respondents have a bona fide claim against the petitioneRs, The expression "bona fide" has been defined by Black's Law Dictionary, 4th Edn. As "In or with good faith, honestly; openly; and sincerely; without deceit or fraud; truly; actually; without simulation or pretence. Innocently; in the attitude of trust and confidence; without notice of fraud, etc. Real, actual genuine, and not feigned." Consequently, the Court while holding that something was done bona fide, excludes the possibility of the same having been done without simulation or pretence. Such a conclusion can only be drawn after evidence has been led by the parties in the said suit, as pointed out earlier. That there was any concluded contract between the parties whereby the petitioners were obliged to render assistance to the respondents in foreign exchange to the extent of Rs,49.5 million (equivalent to FF 25 million) vide Annexure R/20 and if there was any, that all other contracts entered into between the parties were subservient thereto, cannot prima facie be spelt out from any of the documents respectively filed by the parties in the present proceedings. No doubt, the respondents may ultimately succeed in establishing their claim in the said suit but, at present, in absence of prima facie proof, it cannot be said that the respondents have any bona fide dispute against the petitioneRs, On the other hand, it has not been denied that the respondents cannot put up a sugar mill without obtaining further assistance from the petitioneRs, Besides that admittedly on account of the failure of the respondents to put up the project, its sanction has been cancelled by the Government of Sindh. Thus the project has become more or less defunct. Furthermore, the respondents have also failed to establish that they are commercially sound or would be able to pay their debts or complete or operate the said project.
Therefore, in my opinion,. The petitioners are justified in apprehending that the assets of the respondents might be wasted or illegally disposed of and the rights of the creditors might be defeated. It, therefore, only appears to be just and equitable that the respondents be wound up.
12. In the result, the respondents are ordered to be wound up and the Official Assignee is appointed Official Liquidator to perform all the powers and functions vesting in him under the Companies Ordinance, 1984.
Winding up Ordered