' Syed Sarwaruddin migrated to Karachi in 1949 and worked as a. Tailor in a tailoring shop for a few days. He then started his own tailoring business in a cabin. In 1957 he entered into the ready-made garments. Business which he carried on with his tailoring business. He invested Rs, 4,500 in this ready made garments business, which he carried on in the name of Azeem Garments. In 1959 he entered into a partnership with his father-in-law, Abdul Rashid Khan, for the running of Azeem Garments. Both the partners invested a sum of Rs, 4,000 and shared equally the profits and losses.
They took a factory on a lease in the Fatima Jinnah Colony, Karachi. But as the business prospered they purchased the factory by a registered sale deed on 8th March, 1963. Meanwhile, as their business was prospering, they had opened a bank account with the National Bank of Pakistan and had taken an overdraft from the said Bank against hypothecation of their stocks. Later they also opened an account with the Standard Bank and obtained a loan from it which was guaranteed by a friend. Finally in 1962, they took a loan from the Industrial Development Bank of Pakistan for the purchase of imported cutting machines and machines for making Collars, which was secured by a mortgage of their factory. The machinery imported under this loan was installed in the factory on or after 1963, and the business of the firm was the manufacture of Karilyin Shirts with turbonised collars. As it was successful, they opened a retail shop both in Lahore and in Karachi for the sale of their products. But after the September War the price of Karilyin fibre slumped and they started making losses. Their losses increased and as they were not able to pay their debts, they filed an insolvency petition in this Court and were adjudicated insolvents on their application on 27th April, 1967.
2. It is not disputed before me that thereafter they had extended the fullest co-operation to the Official Assignee in the realisation of their assets. Their public examination was concluded in September, 1968. A dividend of 29 paisa in a rupee having been paid and preferential payments aggregating Rs, 14,413.35 having also been paid, on 16th November, 1968, they filed this application for their absolute discharge under section 38 of the Presidency Insolvency (Karachi Division and Dacca) Act, 1909 which has now come up for hearing before ma.
3. The Official Assignee and Mr. Mansoorul Arfin, on behalf of the National Bank of Pakistan, have opposed this application for absolute discharge. But as Mr. Mansoorul Arfin has merely relied on the arguments of the Official Assignee, I have only to consider the Official Assignee's, arguments Before I do so, I have to observe that the Official Assignee has pointed out in his report that the proved claims against the insolvents amounted to Rs, 87,074 68 and that their assets had realised only Rs, 42,378.58. He has however stated in para. 14 of the report that the cause of the insolvency was the War in 1965 when the rate for Pollster Fabric, from which Karilyin Shirts are made, fell "very considerably". He has further stated in para. 18 of his report as follows: "The Official Assignee submits that the insolvents have been very honest in their conduct and dealings before him and this is a case where the insolvency has been the result of misfortune."
' Despite this observation, he opposes the absolute discharge of the applicants on the ground that they had contracted debts in contravention of section 39 (2) (d) of the said Act in 1964-65 and for this purpose he relied only on the examination of the insolvent Syed Sarwaruddin. As I was not satisfied with his examination of Syed Sarwaruddin about this allegation, by my order of 11-8-1969 I had permitted him to examine Syed Sarwaruddin again. Syed Sarwaruddin was examined again on 30-9-1969 and the Official Assignee has based his arguments before me on this examination.
The particulars of the loans challenged by him are as follows: On 16-8-1964 the insolvent had borrowed Rs, 5,000 from Mohammad Zamir at 3% interest per mensem and again on 27-10.1964 he had taken another loan for the same amount from the said Mohammad Zamir on the same terms and conditions. On 29-9-1964 he had taken a loan of Rs, 7,000 from Sikandar Bin Younus and again another loan from him of Rs, 1,000 on 26-11-1964. Finally in January, 1965, he had taken a loan of Rs, 5,200 from Kalimullah. All these loans were at the rate of interest of 3 % per annum. The loans aggregate Rs, 23,200. I shall refer to them as the said loans and according to the Official Assignee they fall within the mischief of section 39(2)(d) of the said Act.
4. Section 39 deals with the grounds on which the Court may refuse the application of an insolvent for his discharge and as the Official Assignee relies solely on the provisions of subsection 2(d) of section 39 I shall quote the said subsection. This subsection reads: "That the insolvent has contracted any debt provable under this Act without having at the time of contracting it any reasonable or probable ground of expectation (the burden of proving which shall lie on him) that he would be able to pay it."
' It may observe here that not only were the said loans not specified in the Official Assignee's report, but as I have already pointed out, the examination of the insolvent with regard to these loans was cursory, therefore I had ordered his further examination. In his examination on 30th September, 1959, the insolvent Syed Sarwaruddin has given full particulars of the said loans. With regard to the first loan of Rs, 5,000 from Mr. Mohammad Zamir he has said "1 expected that I would be in a position to repay that loan and I did have means to repay it. I had taken the aforesaid loan to expand the business as one of the conditions of Industrial Development Bank of Pakistan for advancing loan was that I would employ more man power and increase machinery from other sources to expand the output. The aforesaid amount of Rs, 5,000 was utilised over purchase of cloth within about eight days from getting it". Then he stated that his gross income per day was about Rs, 200 and some times much more, and further said "I took another loan of Rs, 5,000 from the same Mohammad Zamir on 27-10-1964. I did expect that I would be able to repay the loan.. I utilised this amount also over purchase of cloth. There was increase in the income." The honesty of the witness has not been challenged before me, nor did the Official Assignee care to examine the Industrial Development Bank of Pakistan to refute the applicant's statement that the Industrial Development Bank of Pakistan had, as a condition of its loan, advised him to expand his business.
This advice may have been in order to make the size of the firm an Optimum unit or it may have been given because the Industrial Development Bank of Pakistan was so certain of the prospects of the firm that it considered its further expansion desirable. As the evidence of the insolvent Syed Sarwaruddin is not challenged with regard to these loans obtained from Mr. Zamir he has established beyond doubt that these two loans were borrowed with a reasonable and perhaps an overwhelming expectation of repaying them, because they were incurred on expert advice.
5. The insolvent had also taken loans aggregating Rs, 13,200 from Sikandar Bin Younus and Kalimullah. As he has not said that these loans were taken on the advice of the Industrial Development Bank, can it be said that they were incurred recklessly? As that bank had, with its expert knowledge advised him to expand his business and as these loans aggregate only Rs, 13.200, this is a piece of evidence to show that they were also taken with a reasonable expectation of repaying them out of future profits. However the Official Assignee sought to argue that all the loans were incurred recklessly because the applicants were already in debt to the National Bank of Pakistan, and the Standard Bank. When I pointed out to him that it was never his case that the loans from those banks had been taken recklessly, he submitted that he relied on those loans only to show that the applicants were incurring debts so recklessly that they must have known that they could not repay them. But banks are supposed to be expert institutions which do not lend money to a business unless they are certain of its prospects. In this view of the matter the fact that both these banks had earlier advanced loans to the applicants means that they had considered the business of the applicants to be a good risk, and this is a piece of evidence in support of their claim that their losses had been caused by circumstances beyond their control.
6. It is true that under section 39(2)(d) of the said Act an insolvent has to prove that he had contracted debts with a reasonable expectation of repaying them. But in the instant case there is no evidence to rebut the evidence of Syed Sarwaruddin that he and his partner had contracted debts with a reasonable expectation of repaying them as their business was then flourishing, therefore the only question is whether there is any reason to disbelieve this evidence. Here Mr. Raymond submitted that, as the value of the factory of the insolvents was admittedly much higher in 1964-65 than in 1967, when it was sold, this was sufficient to prove that the assets of the insolvents were sufficient to enable them to discharge all their liabilities, including the said loans.
This was because, according to learned counsel, as the factory had been sold in 1967, after insolvency, for Rs, 40,000 its value in 1964-65 was much higher. The argument of Mr. Raymond is correct. First of all sales of the properties of insolvents generally fetch a very low price in Karachi.
Secondly, the Official Assignee has himself admitted in his report that the market of polister fibre had collapsed after September War. As the value of a factory depends on its prospects it is obvious that the value of the insolvent's factory must have been much more than Rs, 40,000 in 1964-65 when the said debts were contracted. It is relevant to observe here that the Official Assignee has said in his report and in his arguments before me that the insolvents have given him the fullest cooperation in producing all vouchers, bills, books of account etc. And that the prospects of their business had been good before the September War. In these circumstances there is no reason to doubt the statement of the insolvent Syed Sarwaruddin that he had genuinely believed in 1964.65 at the time when he had contracted the said debts that the firm was in a position to repay all its borrowings.
7. But even if an insolvent has sufficient assets to repay a loan when le takes the loan, it does not necessarily mean that the loan was not taken recklessly. If for instance, an insolvent knows that his business is going to run into losses it would be foolish of him either to incur debts or to expand his business. On the other hand, if his prospects are favourable he will be acting reasonably even if he incurs loans in excess of his assets. In this view of the matter, as the honesty of Syed Sarwaruddin has not been challenged before me and, as he has said that he believed he had sufficient means to repay all his debts in 1964-65, it was for the Official Assignee to show that Syed Sarwaruddin's claim was belied by the prospects of his firm. Not only has the Official Assignee not produced any evidence in this respect but the candid admission made by him that the prospects of the pollster fibre industry had changed after the September War lends support to the case of the insolvents.
Additionally, as the Industrial Development Bank had given the loans to the insolvents for the import of machinery and advised them to expand their business this is a strong piece of evidence in their favour. Mr. Raymond also pointed out to me that in order to prove the bona fides of the insolvents he had sought on 30th September, i969 to examine the insolvent Syed Sarwaruddin about the Industrial Development Bank's opinion of his business but the learned Additional Registrar (0. S.) had disallowed his questions at the instance of the Official Assignee. I have examined the evidence recorded and I find that learned counsel's objection is correct. The learned Additional Registrar (0. S.) has disallowed learned counsel's questions on the ground that the examination had to be confined "to private loans". But in order to disprove the charge against the insolvent that he had contracted debts without any reasonable expectation of repaying them, learned counsel was entitled to question him not only on his own Assessment of the prospects of his business but also on the Industrial Development Bank's assessment of the prospects of his business, because that was an assessment which was not only independent but based on expert know-- ledge. It was therefore unfortunate that learned counsel's questions were disallowed and it is even more unfortunate that they were not recorded. I have also to observe here that as these questions were disallowed at the instance of the Official Assignee, having thus prevented the applicant from giving evidence about the reasonableness of his expectations of repaying the loans, it is not proper for him now to contend that the applicants have failed to prove that they had a reasonable expectation of repaying their debts when they had incurred them.
8. Confronted with this difficulty, he submitted that the mere fact that the applicants had incurred heavy loans was by itself sufficient to attract the provisions of section 39 (2) (d) of the said Act, therefore the discharge of the insolvents should be suspended for two years, and in support of his argument he relied on a judgment of the Rangoon High Court which I shall presently consider.
9. It is strange that the provisions of section 39 of the said Act have not yet been construed by or Courts, but as subsection (2) (d) is identical to the corresponding provisions of the English Bankruptcy Act, Mr. Raymond referred me to judgments of the English Courts which have been of assistance to me. In re a Marks (1) as the insolvent had incurred debts recklessly he had been sentenced to imprisonment by the Commissioner under the Bankruptcy Act. Although the debts were petty, the order of the Commissioner was challenged in appeal to the House of Lords and in setting it aside Lord Cranworth, L. C. Observed with regard to the insolvent's conduct at page 336 as follows: "Now the only offence relied upon as proved is that at the time when some of his debts were contracted, the bankrupt could not have had any reasonable or probable ground of expectation of being able to pay the same, and this, in my opinion, has not only been proved, but he might well have had means of paying the debt in question. He had been for some time going on very badly and recklessly; but I see nothing to lead me to suppose that he might not think that he should sell these goods so as to be able to pay for them."
' This case was followed by the Court of Appeal in Ex parte Bayley, In re Ainsworth (1). There the facts were that the insolvent had been running his business at a heavy loss for nearly three years, yet he had borrowed heavily for his business, and it was contended that this was sufficient to establish that he had contracted debts without any reasonable expectation of repaying them. In rejecting this contention, Lord Cairns L. J. (as he then was) observed at page 246 with regard to the corresponding provisions of the English Bankruptcy Act, 1861 as follow: "This section is a penal one, and a bankrupt can be brought within it only by averments and proofs as precise as would be required in a criminal proceeding. Now, where a manufacturer buys goods to a reasonable amount for the purposes of his manufacture I cannot say that because he is insolvent at the time he must have bought them, without any reasonable expectation of being able to pay for them. These bankrupts might not unreasonably entertain the idea that they should be able to pay for the drugs they bought, and by the use of {{FOOT NOTE}}
(1) (1866) 1 Ch. App. 334 (2) (1867) 3 Ch. App. 244 {{FOOT NOTE}} ' them make profits which would by degrees pay off their old debts. This is very like the case of In re: Marks from which I should be slow to depart even if I did not agree with its principle."
' The principle laid down in the judgments cited is that the mere fact that an insolvent has contracted debts is not sufficient by itself to lead to the inference that he had contracted them without any reasonable expectation of repaying them. I am in respectful agreement with the principle laid down in these judgments, because optimism is the driving force of modern capitalism. Further, as business can see the future "only through a glass and but darkly," errors in the anticipation of economic fluctuations in industry are inevitable, and A such errors will be more frequent and more likely in industries whose markets are affected by economic conditions in the outside world, as in the instant case; therefore merely because an insolvent has contracted debts on the basis of expectations of making profits which have not materialised, it cannot be said that he has contracted debts without any reasonable or probable ground of repaying them. Any other view, in my humble opinion, would defeat the object of the insolvency laws which is to give relief to those who have been honest but have suffered on account of circumstances beyond their control.
10. I now turn to the judgment of the Rangoon High Court in Lobo v. Official Assignee (I) on which the Official Assignee relies. There, as in the instant case, an insolvent had applied for his discharge after his public examination, but, unlike the instant case, the Court held on the facts that the insolvent had "failed to account satifactorily for the loss of his assets, and certainly there were grounds upon which it could also be said under clause (d) that, at the time of contracting his debts, he had not shown that he had any reasonable or probable expectation that he would be able to repay them," Accordingly the application for an immediate discharge was refused and the learned Judges of the Division Bench further observed at page 128 as follows: "The principle which we have to bear in mind is a straightforward one. Dr. Rauf referred to the dicta of the learned Judges in Bankruptcy Courts in England (which have always been followed in this Court) which are to the effect that the object of the order of the discharge is to enable a person to recommence with a clean slate, and that it is desirable that he should be given the opportunity of making a fresh start. But, on the other hand, it is undesirable that a man who has brought himself within the ambit of the Act, should as it were, walk through the Bankruptcy Court without some period during which his discharge shall be suspended. And, we think, in all the circumstances, that or order ought only to be an ing the discharge for a specific time, and we suspend the discharge of the insolvent for a period of six months."
' No reasons have been given by the learned Judges for these observations, and it seems to me that they have to be confined to the peculiar facts of the case. But if the observations were intended to lay down a general principle of law, with great respect, 1 am not able to agree with the view taken in these observations, and I prefer to follow the view taken by Lord Cranworth, L. C. And by Lord Cairns L. J. In the judgments cited, therefore the only question in the instant case is of the bona fides of the insolvents and the reasonableness of their belief in 1964.65 that they were in a position to repay the said loans.
11. The insolvents have claimed that their losses were caused by circumstances beyond their control and the Official Assignee has admitted {{FOOT NOTE}}
(1) AIR 1941 Rang. 127 {{FOOT NOTE}} ' that their losses had bean caused by a slump in the polister fibre market after the September War.
A dividend exceeding 25 paisa in the rupee has been paid and it is also not alleged that the insolvents have concealed any assets or that they have been guilty of extravagance or of indulging in rash and speculative transactions. On the other hand, the Official Assignee has stated that they had given him the fullest cooperation in the insolvency proceedings. It is true that their expectations of repaying the said loans have failed, but in the circumstances discussed, bearing in mind the value of their factory and the prospects of their business when they contracted the said loans, I am satisfied that their expectation of repaying the said loans was both sincere and reasonable. They are therefore entitled to a discharge without any conditions and I allow their applications.