' BASHARAT AHMAD SHAIKH, J.---An application for winding up of Kalyal Kashmir Tanneries Limited, a Company registered under the Companies Act, was moved by the appellant, Pakistan Industrial, Credit and Investment Corporation Ltd. The application has been dismissed by the High Court. The present appeal has been filed to challenge that order of the High Court.
2. Pakistan Industrial Credit and Investment Corporation Ltd., commonly known as PICIC, is a Company registered under the Companies Act and inter alia advances loans for setting up of industries. The respondent, K alyal Kashmir Tanneries, Ltd. Was formed as well as registered in the year 1979. Towards the end of the same year the respondent was granted by the appellant- Company a loan of Duetsche Marks 2,32,750 in foreign currency as well as an amount of Rs,12,56,000 in Pakistan Currency. Through a supplementary loan agreement executed on 31st of January, 1982 the amount of foreign currency was reduced from Deutsche Marks 2,32,750 to D.M.
2,12,689.51, the actual amount utilized by the respondent-Company. It is claimed by the appellant that due to failure of the respondent-Company to make payments according to the schedule settled between the parties, the repayable amount, after adding interest and penal interest, had arisen to Rs,1,60,54,802.29 on 31st of December, 1990. In 1982 another agreement was signed between the parties under which change of management was affected. New Directors accepted the liability as mentioned above and it was agreed that all the terms and conditions of the principal loan agreement would be effective and binding on the parties.
3. The petition for winding up of the respondent-Company was filed on 20th of July, 1991. While stating the details leading up to the filing of the petition, it was averred that the respondent- Company failed or neglected to pay the instalments of loan on due dates and heavy dues had thus built up. Among the large number of documents filed by PICIC; there was a document (Annexure K) described as summary of Loan Balances in which it was shown that the amount of Rs,1,60,54,802.29 was outstanding against Kalyal Kashmir Tanneries Ltd. On 31st of December, 1990.
It was stated in the petition that PICIC served a legal notice on 4th of October, 1990 demanding repayment of the loan within thirty days, but no payment was made.
4. When winding up petition was filed in the High Court, notice was issued to the Kalyal Kashmir Tanneries Ltd., but it was reported that premises of the respondent-Company were locked for which reason service could not be effected. Thereupon, a proclamation was issued in a newspaper.
In response thereof Khurshid Ali Mirza appeared in the Court, engaged a counsel and filed objections. On the Vakalatnama signed by him in favour of Mr. Muhammad Riaz Tabassum, Advocate, he described himself as the. Proprietor of S.M.K. Enterprises Rawalpindi and also Kalyal Kashmir Tanneries Ltd. Mirpur. The objections filed in the Court were described to be on behalf of Khurshid Ali Mirza and not on behalf of Kalyal Kashmir Tanneries Ltd. In reply to para 7 of the petition, wherein it was averred that respondent failed to pay instalments of loan, it was stated by Khurshid Ali Mirza that PICIC persuaded him to by all the shares of Kalyal Kashmir Tanneries and run the factory. As a result of that persuation he decided to purchase the Tanneries by paying Rs,35,000 per share to the Directors. PICIC demanded of him to pay Rs,1 million against existing loan in return whereof PICIC agreed to accept him as the management of the Company. It was further stated that he (Khurshid Ali Mirza) paid off Col. (Rd.). Muhammad Yaseen Khan, Managing Director, and other Directors. However, the said Managing Director left the country and entries of new management could not be registered in the Law Corporate Authority. This is the position which was claimed by Khurshid Ali Mirza. Apart from the objections filed by Khurshid Ali Mirza there is no other set of objections on behalf of respondent-Company. In this Court the learned counsel who appeared for the Kalyal Kashmir Tanneries Ltd. Has been engaged by Khurshid All Mirza and no other person has given any authority to Ch. Muhammad Riaz Alam, the learned counsel, to appear on behalf of the Kalayal Kashmir Tanneries Limited.
5. In the replication filed by PICIC it was stated that objections filed under the authority of Khurshid Ali Mirza may be rejected because he had not legal connection with respondent-Company. It was stated that the registered Directors of the Company were Ch. Shaukat Ali, Ch. Mahmood, Mrs. Rashida Begum, Mrs. Mumtaz Begum, Mrs. Najmul Nisa, Miss Nusrat and Col.(Rtd.) Muhammad Yaseen Khan Raja. It was admitted that these Directors entered in some understanding with Khurshid Ali Mirza, who wanted his substitution for all the Directors and agreement was reached between them. When the matter was brought to the notice of PICIC it was agreed that if Khurshid All Mirza fulfilled some conditions specified in a written document, dated 12th September, 1989 PICIC would have no objection if Khurshid Ali Mirza took over management of the Kalyal Kashmir Tanneries. It was asserted that Khurshid All Mirza did not fulfil those obligations and change of management could not be effected. It was further stated that if Khurshid All Mirza had spent any amount in pursuance of the understanding which he reached with Directors of the Company it was not binding on PICIC.
6. We have heard lengthy arguments from Ch. Muhammad Sharif Tariq, the learned counsel for the appellant, and Ch. Muhammad Riaz Alam, the learned counsel for Khurshid All Mirza who is impleaded in this appeal as respondent No,2, about the status of Khurshid Ali Mirza. We may observe that Kalyal Kashmir Tanneries Ltd. Being a limited Company is a legal person and Courts have to deal with it as such. So far as management is concerned, it is A the job of the Registrar of Companies to effect any change in it. In doing so, he acts in accordance with the laid down procedure. The legal position is clear that on the question of repayment of loan the schedule arrived at between the parties binds the respondent-Company. Whether its management has changed or has not changed will not make any material difference so far as the question of repayment is concerned. It also does not affect the question which we are called upon to decide, namely, whether the Company be wound up or not.
7. We find from the judgment of the High Court that the following grounds were urged in support of liquidation application:- "(i) That the non-petitioner was unable to pay its liability due to the petitioner;
(ii) that on account of financial liabilities, the substratum of the non-petitioner seems to have disappeared;
(iii) that serious irregularities in acts of omission in the affairs of the management of the non- petitioner have been committed;
(iv) that the Directors of non-petitioner have committed serious default and grave breaches in performance of their duties, in violation to the loan-agreement;
(v) that under the present circumstances, there is no likelihood of successful running of business of the non-petitioner; and
(vi) that it was just and equitable to wind-up the non-petitioner/Company. The petition was moved on July 20,1991."
8. In rejecting the application the main reason recorded by the High Court is that the amount of debt is in dispute as the parties are not in agreement about the amount of loan and there was also dispute about the rate penal interest, compound interest and also about the rate of foreign interest. The High Court relied on Messrs Adage Advertising,. Lahore v. Messrs Shezan International Ltd. Lahore (1970 SCMR 184) and held that winding up could not be ordered since the amount of loan was in dispute. The other reason mentioned in the judgment under appeal is that the appellant had failed to bring on record material to show that substratum of the Company had disappeared. It was opined that solitary statement of an officer of the PICIC was not sufficient, particularly in view of explanation that the new management was totally blocked by conduct of the petitioner from running the factory. It was also held that "evidence on record reflects obdurate attitude of the petitioner in disallowing the non-petitioner to run the factory in its ordinary course:.
9. It was rightly contended by Ch. Muhammad Sharif Tariq that the High Court misconstrued the dictum of Supreme Court in Adage Advertising case mentioned above which had no application to facts of the present case. The facts of that case were that Messrs Adage Advertising, a firm, filed an application for winding up of Shezan International Ltd. It was alleged that the petitioner Firm was dealing with advertisement business of the respondent-Company and an amount of Rs,58,933.72 had fallen due to them. However, in spite of repeated demands the respondent failed to pay the debt. The High Court dismissed that application on the ground that there was a bona fide dispute between the parties about the payment of debt. The judgment was upheld by the Supreme Court and it was observed that respondent was disputing to pay the entire amount on the ground that they had paid a large amount out of it to the principals of the petitioner. Their case was that the petitioner-Firm was only entitled to 15% commission and the rest of the amount was payable to their principals. It was not disputed before the Supreme Court that Shezan International had paid some amount to the principals of the petitioner but it was contended that respondent had no business to pay any amount directly to the petitioner and they were bound to pay entire amount to Adage Advertising. After noting these facts the Supreme Court held:- "The dispute between the parties, therefore, is whether the respondent-Company could pay any amount out of the money due to the petitioner-firm to its principals. It seems to us that on the facts of the present cast, it cannot be said that there is no genuine dispute between the parties. This can only be resolved in a Civil Court. It is in evidence that respondent-Company is financially sound. In our opinion, the provisions of the Companies Act are not vehicle of oppression. In these circumstances, the High Court was perfectly justified in refusing to exercise its discretion to wind up the respondent-Company."
' It was also observed that the Court must see that the dispute is based on a substantial ground.
10. In the present case the facts are entirely different. Here there is a company about which it cannot be said that it was financially sound. In his statement, which was the only one on behalf of the respondents, Khurshid Ali Mirza did not state that PICIC did not advance the loan mentioned in the agreement. He did not say that interest levied by the PICIC was in violation of the agreement. In fact he did not dispute the correctness of the claim. His main plea was that he had pleaded with PICIC that the Kalyal Kashmir Tanneries Ltd. May be treated as a sick unit, that penal interest may not be recovered and there should be "relaxation" in interest also. His case was that such promises had been made to him but were not fulfilled. His main argument was that he had not been allowed to work. However, he did not dispute the liability, as a whole or in part. He did not state that the loan had been repaid or that the Company was in a position to re-pay the loan.
11.. It is proved from oral and documentary evidence that since inception of the Company in 1979 to the date of filing of winding up application on 20th of July, 1991 the loan taken from PICIC had not been re-paid. The statement of Khurshid Ali Mirza is in itself a proof that the Company is not able to pay its debts.
12. The other reason recorded by the High Court in dismissing the plea that the respondent- Company was unable to pay its assets was that the land, the factory area, the premises, the machinery and raw material had not been assessed for value and that assets of the shareholders were not brought on record to prove that the Company was unable to discharge its liabilities. In our view reason is also not sustainable. While determining the question whether a company is able to pay its debts or not, what is to be seen is whether the Company is commercially solvent, that is to say, whether it is unable to meet its current demands. For that purpose it is not relevant as to whether the assets exceed the liabilities or not. If a Company is running its business and is unable to pay its liabilities from the running capital, value of the land and machinery is C not brought under consideration because if the Company pays its debts by selling the machinery and the land then it would cease to function which is precisely what is done by winding up of a Company. It has, therefore, been said that a Company may not be solvent and yet be wealthy at the same time. It will be so when it has locked-up investments but has not assets available to meet its current liabilities. Surely such a Company would be commercially insolvent.
13 In respect of ground No,ll raised before the High Court, the following observations were made: "The substratum of the Company is believed to have disappeared, when the subject-matter of the Company is gone or it has failed to achieve its object or it is impossible to carry on the business except at loss, or when the existing and probable assets are in sufficient to meet the existing liabilities. All these conditions rest on question of facts. In present case, the petitioner has failed to bring on record the evidence in support of either of these conditions, to satisfy that the substratum of the Company has disappeared. The solitary statement of an Officer of the petitioner-Company is insufficient, particularly in view of the explanation of the non-petitioner, as the non-petitioner was neither allowed to run the factory nor he was given enough time to carry on the business. The new management, as a matter of fact, was totally blocked by the conduct of the petitioner to run the factory in its ordinary manner. In such situation, the Court is not in a position to come to a definite conclusion so as to believe that the substratum of the Company has also disappeared."
14. The solitary statement of an officer of the appellant-Company as has been held to be insufficient but the High Court has not analysed in detail as to why the statement was insufficient.
The statement of Javid Zaffar is elaborate and a large number of documents were exhibited without any objection about their admissibility. These documents include certificate of an incorporation, memorandum of articles, loan agreement executed between the parties on 19th of November, 1979 spreading over 24 pages by which the amount mentioned so as was sanctioned by PICIC and schedule of its repayment was settled, title deeds of the respondent-Company. The witness made a statement that the factory was completely out of action but the statement was not challenged. We have read the statement of Khurshid Ali Mirza. From the two statements and the voluminous documentary evidence on the record it is clear that apart from the fact that the Company is unable to pay debts from its present resources, it stands proved there is no likelihood of successful running of the factory installed by the respondent-Company. It appears from the record that after the incorporation, of the Company in 1979 the factory has not been in production.
If ever it went into operation, it is clear that for the last many years the factory is closed. Khurshid Ali Mirza has only one grievance which he stated in the written objections as well as in his statement recorded by the High Court that he was not allowed to work and hindrances were created. It may be pointed out that although Khurshid Ali Mirza did make some payment in pursuance of negotiations with the PICIC but he never became a Director of the respondent-Company. From his statement it appears that immediately after the payment a dispute arose between him and PICIC.
It is on the record that PICIC raised an objection that one of his cheques had been dishonoured and that he failed to make full payment of Rs,1 million which he had undertaken to pay during the negotiations. It is alleged by Khurshid Ali Mirza that he was stopped from running the factory in the year 1989. Since Khurshid Ali Mirza had not legally become the Managing Director of the respondent-Company there might have been justification for stopping him from operating the factory. If there was any illegality committed by PICIC, Khurshid Ali Mirza could have sought redressal of his grievance from a Court of law but no such step was taken by him. We are viewing the whole thing from only one angle: whether in the prevalant conditions there is possibility that the factory may be put into operation. We are not legally called upon in the present proceedings to investigate the causes or to apportion the blame, if any. We have to confine our decision to the requirements of section 305 of the Companies Ordinance which provides the situations in which a Company may be wound up. In our view it is clear that the substratum of the Company has disappeared and it is no longer possible for it to commence operation. Therefore, we also form the view that it is just and equitable that the Company should be wound up. Our view gets support from some decided cases.
' In Pakistan Industrial Credit and Investment Corporation Ltd., Karachi v. United Textile Mills Ltd., Multan (PLD 1977 Lah. 787) business of a factory was closed for one year on account of the fact that supply of energy had been discontinued because of non-payment of electricity bills. It was held by the Lahore High Court that the Company could not claim to be solvent.
' In National Bank of Pakistan v. The Punjab National Silk Mills Ltd. (PLD 1969 Lah. 194), respondent- Company did not dispute the debt and did not claim that the responsibility has been discharged.
In these circumstances the Lahore High Court formed the view that winding up proceedings were competent.
' In Muhammad Shabbir Khan v. Muhammad Anwar (1988 CLC. 1955), there was complete mistrust between Directors and there was a deadlock in the Company. It was found just and equitable to order the winding up the Company.
' In Mahmood Ahmad v. Karachi Road Transport Corporation Ltd. (PLD 1970 Kar.229) a Company, after having run in loss since inception without any prospects of resuscitation, it was held that it was eminently suitable for a winding up order.
' In Parke Davis & Co. Ltd., Karachi v. Bliss & Co. Ltd., Karachi (PLD 1982 Kar. 94) a company failed to pay a debt in accordance with statutory notice of demand. No evidence was brought on record to show that Company was otherwise solvent. In these circumstances the Karachi High Court held that it could be rightly concluded that the Company was unable to pay its debt and, therefore, was insolvent.
We, therefore, accept the appeal and order acceptance of the petition moved by the appellant.
The order passed by the High Court will stand vacated and the case is sent back to the High Court for completing the winding up proceedings in accordance with law.