' Petitioners who are the ex-employees of the respondent Industry seek an order for winding-up of the Company under the provisions of sections 305, 306 of the Companies Ordinance, 1984 (hereinafter referred to as the Ordinance).
2. Essentially case of the petitioners is that the respondent is a public limited Company with a total paid up capital of Rs,50 million. It is their grievance that they had been employed in respondent Industry at Karachi and Gharo for the last several years in different positions when they were sent on forced leave with effect from 16-8-1995 whereas their services were not terminated in accordance with law.
3. According to the petitioners on account of dishonest motives and mismanagement in the affairs of the Company it started showing acute losses and as on 30-6-1994 total liabilities accelerated to Rs,155.694 million as against total assets of Rs,89.39 million. The balance sheet as on 30-6-1994 for the financial year 1993-94 reflects accumulated loss of Rs,164.33 million. It is said that financial crisis reached to a point where the Company failed to pay its dues to K.E.S.C. And Karachi Water and Sewerage Board to the tune of Rs,35 million and Rs,1.50 million respectively with the consequence that electric and water supplies were disconnected. Besides the Company is heavily indebted to United Bank Limited and even Corporate Law Authority issued notices to the Company to show cause as to why Annual General Meeting for the year 1994-95 was not held. It is maintained that the respondent incurred a deferred tax liability for Rs,29 million in the year 1993-94.
Asserting that the petitioners being the employees of the respondent Company are entitled to all rights including salary, provident fund, gratuity, medical allowance and leave fare assistance they alleged that the Company did not pay the salaries for the month of November, 1994 and subsequently from March, 1995 till the filing of this petition. Petitioners have enumerated their outstanding amount of salary amounting in all to Rs,46,42,101. Ultimately the petitioners issued a statutory notice under section 306 of the Ordinance to the Company on 12-6-1996 calling upon it to pay up their debts but the Company by its reply took the position that their services were terminated on 7-1-1996 on the charge of misconduct after observing disciplinary procedure as laid down in the law. However, nonpayment of the salaries for November, 1994 and thereafter from March, 1995 onwards was admitted. Accordingly the petitioners averred that the Company be wound up for the reasons firstly that it is unable to pay its debts, that liabilities of the Company far exceed its assets and it is not financially viable, that it is impossible to achieve the objects for which the Company was incorporated and lastly that it is just and equitable to wind up the Company.
4. In the counter-affidavit respondent Company denied various allegations and took the position that the employment of the petitioners was dispensed with in January, 1996. With regard to the statutory notice it is said that the claim is neither justified nor payable. According to the Company there is a bona fide dispute as regards the alleged debt, thus, the provisions of sections 305 and 306 of the Ordinance are not attracted. It is urged by the respondent that the petitioners should have taken their dispute to a Court of law for adjudication rather than pressurizing the Company to submit to their illegal demand. With regard to dishonest motive and mismanagement in the affairs of the Company allegations were denied with the explanation that on 31-1-1995, Chief Executive of the Company was arrested along with Senator Saeed Qadir for political reasons. On 15-8-1995 the management was left with no option but to send such officers on forced leave who were indulging in sabotaging the smooth functioning of the factory resulting in low production and waste of raw material. On 8-11-1995 the officers were instructed to report for duty at the plant with effect from 16th November, 1995. The dispute with regard to overbilling with K.E.S.C. Was amicably settled while advances by Banks and D.F.Is. Were rescheduled. Negotiations with U.B.L. For settling the controversy were in progress. It is asserted that the Company is being managed efficiently and its unit at Islamabad is functioning whereas its unit at Karachi was temporarily shut down for unavoidable circumstances. With regard to allegations leading to unlawful dismissal the Company took the stand that the petitioners did not challenge their removal from service in any competent Court of law. It is urged that the Company is functioning in accordance with law, holding its Annual General Meeting running the unit and attempting to switch on the unit at Karachi. It is claimed that it has not only protected the substratum of the Company but also added to its capital assets.
5. An affidavit-in-rejoinder. Was filed on behalf of the petitioners reiterating their averments and controverting the respondent's stand.
6. When this petition came up for hearing before me on 13-8-1997 respondent was directed to place on record all original postal registration receipts in token of dispatch of dismissal orders sent to the petitioners and a list of emoluments duly verified by a responsible officer of the Company which they are inclined to pay to the petitioners by way of their legal dues.
7. Statement of dues according to respondents and payable to the petitioners as reflected in the dismissal orders dated 7-1-1996 was filed in respect of 24 petitioners out of 26 petitioners. The petitioners filed a reply affidavit to this statement and there appeared to be a controversy as regards the amount claimed and the amount agreed to be paid by the respondent. A short adjournment was granted to consider the proposal offered by the respondent in full and final settlement of the claims to the petitioners.
8. Later both the learned counsel addressed this Court on merits of the case. While the main contention of Mr. Obaidur Rehman, learned counsel for the respondent is that there is bona fide dispute with regard to the liability of the respondent to pay the dues of the petitioners inasmuch as the Company has worked out their dues and shown its willingness to pay a sum of Rs,31,98,473.53 in full and final settlement of their claims, the debt according to the petitioners is Rs,46,42,101 in addition to contributory general provident fund and other allowances. There was a controversy whether this Court could pass an interim order directing the respondent to deposit the admitted amount with the Nazir for disbursement to the petitioners. While Mr. Hashmi is interested in such order without prejudice to the rights of the petitioners to take a course of action that may be available to them under the law, learned counsel for the respondent is inclined to deposit this amount on behalf of the respondent only in full and final settlement of the claims of the petitioners.
9. The next argument advanced on behalf of the petitioners is that the respondent having admitted its liability and neglected to pay the same to the petitioners is deemed to have been unable to pay the debt. Moreover, the respondent's factory at Karachi is closed since January, 1996, while their unit at Islamabad is operational.
10. Further ground urged in support of the petition is that the Company is rendered insolvent and it appears to have lost its substratum in as much as its liabilities far exceed its assets as reflected in the latest annual report ending 30-6-1996. Learned counsel for respondents Mr. Obaidur Rehman has submitted arguments to the contrary.
11. In support of his contention, Mr.Hashmi has cited Parke Davis & Co. Limited v. Bliss & Co. Limited, Karachi (PLD 1982 Karachi 94) Smith Kline & French of Pakistan Ltd v. Spencer & Co. Pakistan Limited (1989 MLD 38), Trade & Industry Publications Limited v. Industrial Development Bank of Pakistan (PLD 1990 SC 768), Sindh Glass Industries Ltd. v. N.D.F.C. (PLD 1996 SC 601) and unreported judgment by Syed Haider Ali Pirzada (as he then was ) in Judicial Miscellaenous No,72 of 1989 decided on 23- 5-1990.
12. At the hearing learned counsel for the respondents did not cite any judgment which having been reserved, he has cited Abdullah Bhai v. Saria Rope Mills Ltd. (PLD 1971 Karachi 597), Hashmi Can Company Ltd. v. K.K. & Co. (Pvt.) Ltd. (1992 SCMR 1006), Kaikobad Pestanjee Kakalia v. M/s. Almas (Pvt) Ltd. (1997 MLD 149) decided by me on 2-10-1996 and Metito Arabia Industries Ltd. v.
Gammon (Pakistan) Ltd. (1997 CLC 230).
13. It will appear from narration of this judgment that while 26 petitioners have claimed a sum of Rs,46,42,101 as their debt due and payable by the Company in addition to contributory provident fund and other allowances, respondent Company has worked out legal dues of 24 petitioners as against 26 petitioners in the sum of Rs, 31,98,473.53 inclusive of contributory provident fund less advances availed of by such employees. It would further appear that the respondent Company is willing and inclined to pay up this amount to such petitioners directly as well as by depositing such amount in Court but with the condition that such payments shall be made in full and final settlement of their claims. With regard to petitioner No,25 it is urged that he has already accepted a sum of Rs,89,448.96 on 1-6-1996. As regards inability of the respondent Company to pay legal dues of the petitioners it is vehemently and strenuously urged on behalf of the respondent that the Company has been ever ready and willing to pay such dues subject to full and final settlement of the dues.
14. Adverting to the case law cited on behalf of the parties, it may be pertinent to observe that in Parke Davis Limited's case late Naeemuddin, J. (as he then was) observed that it is settled law that when there has been a failure to pay a debt in accordance with the statutory notice of demand, insolvency is to be presumed, though no doubt it may also be proved in other ways. In the reported case learned Judge observed that there appeared to be no dispute as to the liability of Rs,63,00,000 on account of stocks supplied but what was, claimed was that the Company had filed a suit for recovery of Rs,49,17,000 and it was therefore submitted by learned counsel for the Company that there was a bona fide dispute. As regards the claim made in the suit filed by the Company even if it was assumed that it would fully succeed in the suit, still there remained an amount of Rs,14,00,000 plus interest on Rs,63,00,000 to be paid by the Company. Learned Judge proceeded to observe that even if it was assumed that the Company would succeed in its suit for damages and would get a decree for the whole amount and such a contingency could be taken into consideration in a winding-up petition still there was no explanation why the Company did not at least pay the amount of rupees over 14,00,000 which was more than 2-1/2 time of the paid up capital of the Company. This was without taking into consideration the amount of interest on Rs,63,00,000 which was also claimed by the creditors. Apart from the presumption the Company had not placed on record any balance sheets, profit and loss accounts or statement of assets and liabilities showing what assets it had and whether it was earning any profit or not. The Company had also not stated anywhere what were its assets and liabilities. Learned Judge, therefore, concluded that the Company was unable to pay its debts and therefore, insolvent and accordingly directed its winding-up. In Smith Kline & French of Pakistan Ltd.'s case, Saiduzzaman Siddiqui, J. (as he then was) dealing with a somewhat identical question passed a conditional order of winding- up the Company by appointing the Official Assignee as Official Liquidator subject to a condition that in case the respondent Company deposited specified sum in Court within specified period which amount may be withdrawn by the petitioner Company when the petition shall be deemed to have been refused. However, in case this amount was not deposited within the prescribed period the order of winding-up shall take effect and further proceedings for winding-up of the Company shall be taken by the Official Liquidator in accordance with the law. In this case learned Judge had recorded a finding that the respondent Company had deliberately failed to pay the amount of Rs,19,53,492 to the petitioner for which they were not only liable to pay legally but for which they had admitted their liability. On inquiry by the Court, learned counsel for the respondent after obtaining instructions from his clients had made an statement that they were willing to deposit this amount subject to the condition that they were allowed to contest their liability to pay this amount in appropriate proceeding. In Trade and Industry Publications case, Supreme Court held that unless a debtor bona fide disputes the claim of the creditor or was able to say that notwithstanding the dispute he was in a position to pay his debts, the plea that I.D.B.P. Should have proceeded under section 38 of the I.D.B.P. Ordinance, 1961 and not by way of a petition for winding-up of Company was not of much substance. It was ruled that when there had been a failure to pay debt in accordance with the statutory notice of demand insolvency is to be presumed though no doubt it may also be proved in other ways. In Sindh Glass Industries Ltd.'s case Honourable Supreme Court observed that where the indebtedness has not been denied but the allegation was levelled that winding-up petition was not bona fide, burden to prove such allegation was on the party alleging the mala fides. The inability to pay an undisputed debt as a rule may lead to conclusive proof of the fact that the Company is unable to pay debts. However, when the Company disputes any debt it should bring forth sufficient material to, rebut the presumption arising from section 306 that the debt is either not due or there is a bona fide dispute. Mere flat denial without showing that there exists bona fide and genuine dispute about the indebtedness will not displace the presumption of liability to pay. In Chase Manhattan Bank v. Firdous Spinning Mills Limited decided by Syed Haider Ali Pirzada, J. (as he then was), respondent Company was directed to make payment of the debt within specified time, Company wound up and Official Liquidator appointed in order to supervise the implementation of the order and the order of winding-up to stand suspended till the specified period. In this case respondent Company had categorically admitted the debts and liability to make payment with undertaking to discharge the liability if reasonable instalments were allowed and time was granted. In Abdullah Bhai's case late Qadeeruddin Ahmed, C.J. (as he then was) dealing with an application for winding-up under the Companies Act, 1913 expressed the view that winding-up proceedings are not a substitute for a suit to recover debts. In the expression "
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 individual creditor. The basic object of the scrutiny in such proceedings is the solvency or insolvency of the Company and not truth of claims of the creditors. There may be a Company which is in reality under the 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 will be relegated to the background. If a debtor is merely unwilling to pay his debts, then the normal remedy is a suit. If a creditor, instead of instituting a suit against the debtor Company, files an application for winding it up and 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. If on the other hand the object of a creditor in applying for winding-up a debtor Company is to bring pressure on it, then it is an abuse of legal process and by itself sufficient to displace the prima facie position that a creditor entitled ex debito justitiae to a winding-up order. In Hashmi Can Company's case, Supreme Court of Pakistan held that the Company Judge has a discretion to order winding-up of a Company if it is unable to pay its debts and in spite of demand made by the creditor the debts remain unpaid. Obviously debt refers to the undisputed amounts payable by the Company and not those which may be in dispute bona fide. More so, when immediately on receipt of notice under section 306 of the Ordinance the creditor is informed of the reason why alleged debt is disputed and the matter is taken to the Court of law for adjudication. Refusal for cause to pay such debts cannot be regarded as negligence to pay as contemplated under section 306. In Metito Arabia Industries Limited case, Rashid Ahmed Razvi, J. Took the view that mere unwillingness on the part of the Company to pay its debts would not mean inability. Where Company had persistently failed to pay its debts, only then it was liable to be wound up at the instance of its creditors. Where, however, claim of the creditor was doubtful and where Company was disputing such claim bona fide then in such circumstances creditor was not entitled to seek winding-up of Company. In the last case decided by me and referred at the Bar, I had taken the view that settlement of disputed claims between the parties, however, could not be undertaken in exercise of Company jurisdiction which being unique in its nature, debts or claim of party against Company could not be settled in winding-up proceedings which were not substitute for sorting out dispute before Court of plenary jurisdiction. In the reported case I had observed that presumption drawn by petitioner in terms of section 306(8) of the Ordinance was completely misconceived.
' From the resume of the case law discussed above, following principles are spelt out:
(i) Winding-up proceedings are not a substitute for a suit to recover a debt.
(ii) Expression " unable" does not necessarily mean "unwilling- while word "debt" refers to all creditors as a class.
(iii) Basic object of scrutiny in winding-up proceedings is to ascertain solvency or insolvency of a Company and not to investigate into truth or otherwise into claims of creditors.
(iv) Winding-up proceedings filed with intention to pressurize the Company to settle disputed debts amounts to abuse of process of law.
(v) Presumption arising under sections 305 and 306 of the Ordinance that a Company is unable to pay its debts would not arise in the event of bona fide dispute as to liability.
(vi) Where liability to pay debt was not denied but allegations of mala fide were raised against the petitioner, heavy burden lay on the Company to establish the allegations.
(vii) Any debt which cannot be disputed on legitimate and bona fide grounds, in the event of inability to pay, would furnish a valid ground for winding-up.
15. Judged in the backdrop of the controversy between the parties and in the light of principles enumerated above, it would seem that the respondent Company has not disputed its liability to pay the dues of at least 24 petitioners in terms of the statement filed in this Court. Technically, it may be said that the Company is not unwilling to discharge such liability but the exception put forward on behalf of the respondent Company is that this amount is payable in full and final settlement of the claims of the petitioners which, however, remains unpaid and undisbursed.
Notwithstanding the fact that the balance sheet of the Company reflects 'incurring losses and its liabilities exceed the assets of the Company, I am of the definite view that the spirit and object of law is to save industry rather than to destroy it. Technically, this may not be a fit case for winding- up but in order to foster the ends of justice and equity and with a view to save the parties from unnecessary litigation, I direct conditional winding-up of the Company by appointing Official Assignee of Karachi to act as Official Liquidator of the respondent Company. Winding-up order, however, shall remain suspended in case the respondent Company deposits an amount of Rs,31,98,473.53 with the Official Assignee of this Court within a period of 30 days which may be withdrawn by each of the petitioners in terms of the statement filed in Court. The petition is disposed of.