AJMAL MIAN, C.J.--- This is a direct appeal under section 10 of the Companies Ordinance, 1984 (hereinafter referred to as the Ordinance), against judgment dated 25.4.1997 of the learned Company Judge of the High Court of Sindh, allowing the respondent's petition under sections 306 and 309 of the Ordinance (J. Misc. No. 124 of 1994) for winding up of the appellant Company.
2. The brief facts are that the respondent, which is a Company registered in South Korea, was awarded the contract for the construction of Lahore-Islamabad Motorway Project by the Government of Pakistan in or about the year 1993. it appears that the respondent gave certain portions of the above work on sub-contracts to various sub-contractors including M/s. Highway Bridges Constructors International (Pvt.) Limited, Islamabad (hereinafter referred to as the sub- contractor). The sub-contractor was given contract for the portion KM 0+20 under a sub-contract agreement dated 21.5.1993 and for the portion KM 40+80 under the sub-contract agreement dated 20.1.1993 (hereinafter referred to as the sub-contract agreement in question). Pursuant to the sub- contract agreement in question the respondent paid Mobilisation Advance amounting to Rs.
1,26,00,000/- to the sub-contractor on furnishing of an unconditional Mobilisation Advance Guarantee of the appellant. Besides the above Mobilisation Advance Guarantee, the sub- contractor also furnished a Performance Bond Guarantee in the sum of Rs. 1,88,00,000/- executed by the appellant in respect of the sub-contract agreement in question, in addition to that the sub- contractor also furnished bank guarantees/performance bond guarantees from M/s. Emirates Bank International Limited in respect of the above subcontract agreement dated 21.5.1993. it appears that after the commencement of the works under the sub-contracts, it was discovered by the respondent that the guarantees of M/s. Emirates Bank International Limited furnished by the subcontractor were fake, it seems that a dispute arose between the sub-contractor and the respondent, inasmuch as the subcontract agreements were terminated by the respondent through its letter dated 6.2.1994. After that the respondent, through its letter dated 12.2.1994, called upon the appellant to pay the above sum of Rs. 1,26,00,000/- against Mobilisation Advance Guarantee and Rs. 1,88,00,000/- against the above Performance Bond Guarantee. This was following by another legal notice of 30 days on 26.3.1994. The above notice was responded to by the appellant through its Advocate's letter dated 6.4.1994. Appellant's Advocate's letter was replied to by the respondent through its Advocate's letter dated 17.4.1994, and the appellant was again called upon to pay the above sums.
3. That since no payment was made within notice period of 30 days, the above petition under sections 306 and 309 of the Ordinance was filed, on the basis of the averment that in spite of the service of the notices, the appellant Company had not paid the amounts due from it, or any part thereof, and in fact it was unable to pay the said guaranteed debts, it was further pleaded that the appellant Company was therefore liable to be wound up/liquidated on account of its inability to pay its debts duly guaranteed under the guarantees issued by it.
4. The above petition was resisted by the appellant, inasmuch as a written statement was filed in which inter alia it was pleaded that the Mobilisation Advance Guarantee was issued on the assurance that besides the Performance Bond Guarantee the sub-contractor would also furnish bank guarantee in respect of Mobilisation Advance, in addition to that, the sub-contractor as security for Mobilisation Advance from the respondent also executed a Letter of Hypothecation, whereby it hypothecated moveable construction machinery valued at US$ 27.3 million, it was further pleaded that Mobilisation Advance Insurance Guarantee was taken on the understanding that Mobilisation Advance was fully guaranteed by the bank and by hypothecation of machinery and, as such, the risk assessed by the appellant was nil.
5. it was also pleaded that the respondent had invoked the Mobilisation Advance Guarantee on the refusal by the bank to honour the bank guarantees on the ground that bank guarantees were false documents, it was also pleaded that Mobilisation Advance was to be repaid by the sub-contractor on pro rata basis in accordance with his running bills and that the respondent had not shown how much amount was deducted from the running bills of the sub-contractor, who had allegedly performed 28% of the work, it was also denied that requisite notice under section 305 of the Ordinance was served.
6. it may be stated that when the above case was heard by the learned Company Judge, the respondent Company did not press its petition in respect of the non-payment of the amount of Rs.
1,88,00,000/- under the Performance Bond and confined the petition to the non-payment of the Mobilisation Advance Guarantee. The learned Company Judge after hearing the learned counsel for the parties, and referring to the documentary evidence and the case-law cited by the parties, concluded as under:- "For the aforesaid facts and reasons and in the light of the case law on the subject, I am of the confirmed view that the respondent company is hopelessly unable to pay its debt and the circumstances of the case fully justify to hold that it is just and convenient- to direct the winding up of the company. Accordingly petition is accepted and company ordered to be wound up. With the decision of the main petition, two CMAs heard alongwith the petition stand disposed of. Official Assignee of Karachi is appointed as Official Liquidator to take over the affairs of the company with all powers under the law."
7. Against the above judgment of the learned Company Judge, the appellant Company has filed this direct appeal.
8. in support of the above Mr. Fazal-e-Ghani Khan, learned senior counsel appearing for the appellant has contended as follows:-
(i) That the Mobilisation Advance Guarantee cannot be read in isolation, but it is to be read in conjunction with the other documents which were executed as a part of the above transaction of sub-contract agreement, performance bond and the bank guarantees executed by M/s. Emirates Bank International Limited.
(ii) That there was bon-a fide dispute as to the liability of the appellant Company under the above Mobilisation Advance Guarantee, inasmuch as the respondent had not shown the adjustment of the Mobilisation Advance in terms of Article 4 of the sub-contract agreement, which provided repayment of the Mobilisation Advance on pro rata basis in accordance with progress rate commencing from second interim payment certificate up to the last payment certificate, as admittedly the sub-contractor had executed about 28% work.
(iii) That simpliciter alleged non-payment of due amount to a single creditor is not sufficient to conclude that the appellant Company is deemed to be unable to pay its debts in terms of sections 306 as clauses (a) and (c) of the above section are to be read together in conjunction with each other and not independently.
(iv) That the respondent failed to bring any material on record to show that the appellant Company was unable to pay its debts in terms of clause (c) of section 306 of the Ordinance.
(v) That the respondent cannot invoke sections 306 and 309 of the Ordinance, with the object to bring pressure on the appellant Company, and to coerce it to pay the above amount under the Mobilisation Advance Guarantee.
9. On the other hand Mr. Aftab Khan, learned counsel for the respondent company has urged as follows:-
(i) That the Mobilisation Advance Guarantee was unconditional and independent, and therefore, the liability thereunder to pay the amount of Rs. 1,26,00,000/- on the part of the appellant was unconditional, and hence no reference can be made to the sub-contract agreement or to the performance bond guarantee/bank guarantee.
(ii) That in terms of the Mobilisation Advance Guarantee the appellant was estopped from raising any dispute as to the quantum and even otherwise on the basis of the material on record there was no dispute as to the quantum, what to say of a bona fide dispute.
(iii) That clause (a) of section 306 of the Ordinance is explicit inasmuch as it provides that a company shall be deemed to be unable to pay its debts if it neglects to pay a due sum exceeding one per cent of its paid-up capital or fifty thousand rupees, whichever was less, after service of a notice of 30 days, and since the appellant Company in spite of receipt of a notice under section 306 of the Ordinance neglected to pay the due amount payable under the above guarantee fell within the ambit of the above provision.
(iv) That the burden of proof that the appellant Company was able to pay its debts in terms of clause (c) of section 306 of the Ordinance, was on the appellant company and not on the respondent company.
(v) That the respondent company was entitled to invoke whatever legal remedies were available to it against the appellant Company or against the sub-contractor.
10. Adverting to the above first submission of Mr. Fazal-e- Ghani Khan, ASC that the Mobilisation Advance Guarantee cannot be read in isolation but is to be read in conjunction with the other documents which were executed as a part of the above transaction of sub-contract agreement, it may be observed that in support of his above submission he has referred to the wording of the Performance Bond Guarantee and the various terms of the sub-contract agreement in order to demonstrate that factually the Mobilisation Advance Guarantee was dependent on the terms and conditions contained in the sub-contract agreement and the Performance Bond. The above contention is not tenable, it may be observed that in building/construction contracts it is common practice that an employer pays certain amount as mobilisation advance to the contractor upon the execution of the contract document against an unconditional bank guarantee or an Insurance Company guarantee, in order to enable the contractor to commence execution of the work by bringing at the site the equipment and material. Whereas a performance bond is executed on behalf of a contractor in order to ensure that the contract work is completed and in case of failure the surety who executed the performance bond has to indemnify the employer. If we were to compare the language used in the Mobilisation Advance Guarantee and the language employed in the Performance Bond, it becomes evident that the former is unconditional, whereas the latter is conditional. At this juncture, we may reproduce the relevant portion of the Mobilisation Advance Guarantee, which reads as under:- "IN CONSIDERATION of the premises, WE, MESSRS, PLATINUM INSURANCE COMPANY LIMITED., having registered Office at 8th Floor, UNI CENTRE, I.I. CHUNDRIGAR ROAD., KARACHI (HEREINAFTER CALLED THE 'SURETY'), hereby Guarantee irrevocably and unconditionally to pay forthwith to the CONTRACTOR without any reference to the SUB-CONTRACTOR on the Contractor's first demand in writing that the said MOBILIZATION, ADVANCE or any part thereof, is due and has not been paid by the SUB- CONTRACTOR notwithstanding any contestation by the SUB-CONTRACTOR such sum not exceeding to Rs. 126,00,000/- (RUPEES TWELVE MILLIONS, SIX HUNDRED THOUSANDS ONLY)."
11. The perusal of the above-quoted portion of the Mobilisation Advance Guarantee indicates that the appellant undertook irrevocably and unconditionally to pay forthwith to the contractor without reference to the sub-contractor, on the contractor's first demand in writing the Mobilisation Advance, or any part thereof which is due. The unconditionality of the above Mobilisation Advance Guarantee is reinforced by the subsequent portion of the same, which reads as under:- "...And WE, MESSRS PLATINUM INSURANCE COMPANY LIMITED, do hereby further declare that no alternation in the terms of tine Contract or of the Conditions of which the MOBILIZATION ADVANCE is paid by agreement between the 'CONTRACTOR' and the SUB-CONTRACTOR' under the Contract nor any forbearance or forgiveness in or in respect of any matter or thing concerning the Contract or the MOBILIZATION ADVANCE on the part of CONTRACTOR or the said SUB-CONTRACTOR shall in any way release this INSURANCE GUARANTEE, from any liability under this MOBILIZATION ADVANCE."
12. in view of the language employed in the above Mobilisation Advance Guarantee, it is not open to the appellant Company to urge that the same was contingent on the terms and conditions of the sub-contract agreement in question or the performance bond guarantee or the bank guarantees which, were executed in respect of the other sub-contract agreement referred to hereinabove.
13. As regards the second submission of Mr. Fazal-e- Ghani, learned counsel for the appellant, that there was bona fide dispute as to the liability of the appellant Company under the above Mobilisation Advance Guarantee, inasmuch as the respondent had not shown the adjustment of the Mobilisation Advance in terms of Article 4 of the sub-contract agreement, which provided repayment of the Mobilisation Advance on pro rata basis in accordance with progress rate, commencing from second interim payment certificate up to the last payment certificate as admittedly the sub-contractor had executed about 28% work, it may be observed that there is no doubt that under Article 4 of the sub-contract agreement the mode of repayment of the Mobilisation Advance has been provided for, inasmuch as it has been stated that the repayment of the Mobilisation Advance shall be made on "pro rata" basis in accordance with progress rate commencing from the second Interim Payment Certificate up to the last Payment Certificate and that the balance will be adjusted in the last Payment Certificate, it is also true that a portion of the work under the sub-contract agreement in question was executed and, therefore, the respondent should have adjusted portion of Mobilisation Advance on pro rata basis in the running bills.
However, from the documents on record, it is evident that at no point of time the sub-contractor raised the plea to the effect that factually any portion of the Mobilisation Advance was adjusted in its running bills. On the contrary, from the contents of the plaint of Suit No. 852 of 1994 filed by the appellant against the. Sub-contractor for recovery of Rs. 3,15,98,483/- in the High Court of Sindh at Karachi, it is clear that the sub-contractor admitted the factum that he was liable to pay the full amount under Mobilisation Advance Guarantee to the appellant. Factually the appellant got a decree for the amount of Mobilisation Advance Guarantee as well as Performance Bond Guarantee on 5 3.1997 from the above High Court (pages 10 to 17 of the paper book Part-III), it may also be pointed out that sub-contractor in this correspondence addressed to the appellant or to the respondent never raised the plea that any of the above Mobilisation Advance was adjusted in any of the running bills. The omission, if any, on the part of the respondent does not absolve the appellant from its liability under the above Mobilisation Advance Guarantee in view of the second quoted portion of the above guarantee, which inter alia clearly provides that "nor any forbearance or forgiveness in or in respect of any matter or thing concerning the contract or the MOBILIZATION ADVANCE on the part of CONTRACTOR or the said SUB-CONTRACTOR shall in any way release this INSURANCE GUARANTEE, from any liability under this MOBILIZATION ADVANCE."
14. We are, therefore, of the view that there was prima facie no bona fide dispute as to the liability of the appellant under the Mobilisation Advance Guarantee which could have furnished a valid defence to the above petition for winding up.
'15. Adverting to the third submission of Mr. Fazal-e-Ghani Khan that simpliciter alleged non- payment of due amount to a single creditor is not sufficient to conclude that the appellant Company is deemed to be unable to pay its debts, in terms of Section 306 of the Ordinance, as clauses (a) and (c) of the above section are to be read together in conjunction with each other and not independently, it may be pertinent to observe that section 305 of the Ordinance lays down the circumstances in which a company can be wound up by the Court, which inter alia under clause (e) thereof includes "if the company is unable to pay its debts." it may further be observed that section 306 of the Ordinance defines the circumstances, from which a company shall be deemed to be unable to pay its debts. At this juncture it may be pertinent to reproduce above- referred section 306, which reads as follows:- "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 thirsty 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 sub-section (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 a firm if it is signed by such agent or legal adviser or by any member of the firm on behalf of the firm."
16. The perusal of the above-quoted sub-section (1) of section 306 of the Ordinance indicates that it provides, by fiction of law, three events/circumstances from which it can be inferred that a company is deemed to be unable to pay its debts for the purpose of a winding up petition, namely,
(i) 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; (ii) 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; and (iii) 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 continent and prospective liabilities of the company.
17. it may further be noticed that under above-quoted subsection (2) of section 306 of the Ordinance, it has been laid down that the demand referred to in clause (a) of sub-section (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 a firm if it is signed by such agent or legal adviser or by any member of the firm on behalf of the firm.
18. The moot question which requires consideration is as to, whether clause (a) and clause (c) of sub-section (1) of above-quoted section 306 of the Ordinance are to be read together, or the same can operate independently. Secondly, under what circumstances, a company shall be deemed to be unable to pay its debts.
19. in support of the above appeal Mr. Fazal-e-Ghani Khan, learned counsel for the appellant has referred to the following cases:-
(i) Mullah Abdullah Bhai and 9 others versus Saria Rope Mills Ltd. (PLD 1971 Karachi 597)
20. in the above case Qadeeruddin, C.J. Of the erstwhile High Court of Sindh and Balochistan, while construing section 162 (v) of the Companies Act, 1913 (hereinafter referred to as the late Companies Act) has held that 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. His lordship highlighted the ingredients which were necessary for sustaining a petition for winding up a company in the following words:- "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. The basic object of security in such proceedings is the solvency or insolvency of the company and not the truth of the claims of the creditors. 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 will be relegated to the background. A company which is able to pay its debts cannot in terms of section 162 (v) be ordered to be wound up except in the sense that refusal to pay a genuine debt is usually accompanied with the existence of a state of insolvency. 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 debtor- company, files an application for winding it up, I always ask, myself, why has he done so, instead of following the straight forward course of proving his claim directly and then executing the decree? If his debt is undisputed, then the decree will follow easily. 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 a problem of proving insolvency of the company which is different from a temporary misfortune of a company."
(ii) Messrs Adaqe Advertising, Lahore v. Messrs Shezan International Ltd., Lahore (1970 SCMR 184).
21. in this case Court declined a petition for leave to appeal against the dismissal of a Letter Patent Appeal by a Division Bench against the order of the Company Judge declining a petition for winding up by holding as under: "in all cases where an application under Section 162 of the Companies Act is based on the allegation that the respondent-company is unable to pay its debt, the question always arises whether the respondent-company is not in a position to pay its debt and whether the Company concerned has a bona fide dispute with the petitioner who has come to the Court. This point was considered at length by the learned Judges of the High Court and on the facts of the present case they have come to the conclusion that there is a bona fide amount due to the petitioner from the respondent. in Hals bury's Law of England (Vol. 6), the statement of law on this subject is as under:- 'A winding-up order will not be made on a debt which is bona fide disputed by the company, but the Court must see that the dispute is based on a substantial ground. If there is a genuine dispute, the petition may be dismissed or stayed and an injunction may be granted restraining the advertisement of the petition.
22. it was found by this Court that factually there was a bona fide dispute as to the liability.
(iii) Hashmi Can Company Ltd. v. K.K. & Co. (Private) Limited (1992 SC MR 1006)
23. in the above case this Court maintained the judgment of a Division Bench of the Peshawar High Court dismissing ICA against the refusal order of the learned Company Judge to wind up the company under section 305 of the Ordinance and thus declined leave to appeal by holding as follows: "The conjoint reading of sections 305 and 306 makes it amply clear 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 creditors the debt remains unpaid. Obviously the same 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 the creditor is informed of the reasons why the 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. Both the lower forums had the discretion of allow or disallow winding up of the company and we have not been convinced that the lower two forums have exercised their discretion illegally or with material irregularity."
(iv) Federation of Pakistan v. The Standard Insurance Company Ltd., Karachi (PLD 1986 Karachi 409). in this case a learned Single Judge of the High Court of Sindh while declining a petition of winding up under
(vi) Ulbricht's Wwe. GES Austria v. Ulbricht's (Pakistan) (Pvt) Ltd. (PLD 1992 Karachi 249).
24. in this case also a learned Single Judge of the High Court of Sindh held that a petition for winding up by a creditor was not a substitute for a suit for recovery of debts, and that if the object of a creditor in applying for winding up was to bring pressure on debtor company, the same would be an abuse of legal process and by itself sufficient to displace prima facie position that a creditor was entitled to ex-debito justitiae to winding up. Petition for winding up was dismissed as it was found that there was dispute as to the entitlement to the share under the agreement of collaboration between a foreign company and a local company in Pakistan.
(vii) Messrs Mesto Arabia Industries Ltd. v. Messrs Gammon (Pakistan) Ltd. (1997 CLC 230).
25. in the above case also a learned Single Judge of the High Court of Sindh while construing the provisions of sections 305 and 306 of the Ordinance held that the object was not to coerce a company to make payment to unpaid creditors, but to secure discontinuation of functions of such company which held ceased to be commercially solvent, and that mere unwillingness on the part of company to pay its debt would not mean "inability", it has been further held that when company had persistently failed to pay its debts, only then it was liable to be wound up at the instance of its creditors.
(viii) Messrs Industrial Development Bank of Pakistan v. Messrs Sarela Cement Ltd. Company (1993 CLC 1540).
26. in this case a learned Single Judge of the High Court of Balochistan while construing section 9(3) of the Ordinance held that no doubt the above provision permits adoption of summary procedure, but nevertheless to effectively decide the matter the Court was under obligation to carefully apply its judicial mind so the cases were disposed of by an intelligent judicial act. While construing section 306 of the Ordinance, it was further held that the Company's inability to discharge its liability was to be presumed when the required notice in terms of section 306 of the Ordinance was delivered by registered post or otherwise at the registered office of the company calling upon the company to repay the outstanding amount and the company neglected within thirty days after the receipt of the notice to pay the dues or to secure compound for such amount to the reasonable satisfaction of creditor, it was held that before passing the final order of winding up against any company, the Court would be under legal obligation to form opinion under section 305, clause (h), of the Ordinance on the question whether it was just and equitable that the company should be wound up, keeping in view that the company had become commercially insolvent and there were no chances of its future prospects.
(ix) Bengal Luxmi Cotton Mills Ltd. And others v. Mahaluxmi Cotton Mills Ltd. And others (AIR 1955 Calcutta 273)
27. in the above case a Division Bench of the Calcutta High Court while construing sections 162 and 163 of the late Companies Act, highlighted that the winding up proceedings were not intended to be exploited as a normal alternative to the ordinary mode of debt realisation, and that it was more convenient that claims should be investigated and decided in a regular manner, it was further held that the basis of an order for winding up against a company was that the company had ceased to be commercially solvent and accordingly, it was fit and proper in the interest of the creditors and share-holders not to allow it to function further as a company. The Division Bench adjourned the hearing of the appeal against the order of the Company Judge refusing to order the winding up of the company till the decision of a suit then pending.
(x) New State of India Insurance Co. v. Superintendent of Insurance, New Delhi (AIR 1943 Lahore 109).
28. in this case a Division Bench of the Lahore High Court held that the fact that Insurance Company was at a loss, was no ground for winding it up, specially when not a single shareholder had come forward to support the petition for winding up. in the same case while construing section 53 (2)(b) (iii) of the. Insurance Act, 1938, it was held that in judging the financial position of an insurance company at a given moment, while it was not possible to regard the entire unpaid capital as available to the creditors at its face value, it was equally wrong to leave it out of consideration altogether regardless of the position and solvency of the Share-holders.
(xi) Stonegate Securities Ltd. v. Gregory, (1980) 1 All ER 241)
29. in the above case the Court of Appeal of England, while allowing an appeal against the order of Blackett-Ord. V-C, sitting as a Judge of the High Court in Leeds on 20th March, 1979, whereby he granted an injunction restraining the defendant, Philip Howard Gregory, for a period of three weeks from 20.3.1979 (if during that period of three weeks all the directors of the company made a declaration of solvency of the company as at 21st March, 1979) and thereafter until the trial of the company's action against the defendant or further order, from presenting a petition under the Companies Act, 1948, for winding up the company in respect of an alleged debt of 33,000/- referred to in a notice dated 25.1.1979 and purported to be served on the company under section 223(a) of the Act, 1948 (supra), it was held that since there was a bona fide dispute whether the money i.e. 33,000/- was presently due from the company to the defendant and there was evidence that the defendant was nonetheless threatening to presenting a petition on the basis that it was so due, the company was entitled as to right to an injunction restraining the defendant from present a petition for the winding up of the company on that basis or any basis other than being treated for the purpose of the petition as a contingent creditor of the company for 33,000/-.
(xii) Re a company [1984] 3 All England Reporter 78],
30. in this case a learned Single Judge* of the Chancery Division of England, held that a statutory demand for payment under section 223(a) of the 1948 Act, could not be made unless the creditor was in a position to make a genuine demand for a specified sum exceeding 200/ that could not be seriously questioned. Since at the date when the section 223 demand was made the amount due to the creditors was not known to the company, but on the contrary was in dispute, and since the fact that the company had previously offered to pay 2,234.38 did not mean that they knew that was the sum which was due from them, the winding up petition was dismissed.
(xiii) Pakistan Industrial Credit and Investment Corporation Ltd. Versus Barany Industries Ltd. (PLD 1998 Karachi 45).
31. in the above case a learned Single Judge of the High Court of Sindh held that the effect of non- service of statutory notice on the respondent would not be of much consequence for, in that event only a presumption arising under section 306 of the Companies Ordinance might not be lawfully drawn.
(xiv) Bukhtiarpur Bihar Light Railway Co. Ltd. Versus Union of India and another (AIR 1954 Calcutta 499).
32. - in the above-cited case a Division Bench of the Calcutta High Court while construing section 163 (1) (i) of the late Companies Act held that the fact that a creditor could not rely upon any statutory notice of demand merely meant that no presumptive or constructive liability to pay the debts, as contemplated by section 163 (1) (i) of the Act, was available to the creditor, it was further held that the creditor was at liberty to prove still, in other ways that, in fact, the company is unable to pay its debts within the meaning of item (v) of section 162 of the Act. The winding up order was maintained by the Division Bench on the ground that the company was unable to pay the debts.
(xv) M/s. Madhusudan Gordhandas and Co. Versus Madhu Woolen Industries Private Ltd. (AIR 1971 SC 2600)
33. in the above case the Indian Supreme Court while dealing with an appeal against the order of the High Court of Bombay confirming the order of the learned Single Judge refusing to wind up the respondent company dismissed the same, but observed that improper motive can be spelt out when the petition is presented to coerce the company in satisfying some groundless claims and against it by the petitioner. However, while dismissing the appeal it was ordered that the amount of Rs. 72,000/- which was deposited in the Court would remain deposited in the Court for a period of eight weeks from the date of the order, and if in the meantime no suit was filed by the appellant within eight weeks the company would be at liberty to withdraw the amount by filing the necessary application, it was further ordered that in the event of suit being filed within the period the amount would remain to the credit of the suit.
34. Whereas Mr. Aftab Ahmed Khan, learned counsel for the respondent Company has referred to the following cases:-
(i) National Bank of Pakistan versus The Punjab National Silk Mills Ltd. And others (PLD 1969 Lahore, 194).
35. in the above case a learned Single Judge of the erstwhile West Pakistan at Lahore while construing sections 162 and 163 the late Companies Act, 1913, inter alia held that a creditor who is unable to obtain payment of his debt has the right ex debito justitiae to a winding up order, it was further held that the debt being time-barred is not itself sufficient to conclude that the debt is disputed bona fide and on sound, legitimate and substantial grounds, in the above case the paid- up capital of the respondent company was Rs. 5,00,000/- whereas it owed a sum of Rs.6,99,899.73 to the petitioner-bank on 30th November, 1966. On the basis of the above fact the winding up petition was allowed.
(ii) Abdur Rasheed versus Messrs Nippon Rabbin Company (Pakistan) Ltd. And 6 others (PLD 1982 Lah. 103).
36. in this case a learned Single Judge of the Lahore High Court declined a winding up petition filed under sections 162 and 163 of the late Companies Act on the ground that no debt due was shown to exist, it was further held that the petitioner's right under the agreement, which according to him, was not honoured, depended on the respective rights and liabilities of the parties to be determined, which could have been done only after evidence was led by the parties and not in a summary jurisdiction under section 162 of the late Act.
(iii) Cornhill Insurance RLC v. Improvement Services Ltd. And others (1986 (1) Weekly Law Reports 114).
37. in the above case the plaintiff company sought an injunction against the respondent restraining it from presenting a petition for winding up. Herman, J. While declining the application for injunction held that where a company was under an undisputed obligation to pay a specific sum and failed to do so, and it could be inferred that it was unable to do so, hence the defendant can properly swear to their belief in the plaintiff company's insolvency and present a petition for its winding up.
(iv) C. Hariprasad versus Amalgamated Commercial Traders Private Limited (AIR 1964 Madras 5118).
38. in this case a Division Bench of the Madras High Court, while interpreting section 434 of the Indian Companies Act, 1956, held that a company can be wound up on the petition of a creditor for its inability to pay his claim after proper demand had been made by him and on the lapse of three weeks from the date of service of such demand, even though the company is commercially solvent, it was further held that the object of above section 434 is to create a fiction as to when a company can be deemed to be unable to pay its debts, and if the case comes within the scope of that fiction, it will not be open to the company to say that in reality it is in a position to pay its debts, it has also been held that in such a case it will be really unnecessary to enquire whether the company is in fact solvent or not.
39. in the above case the facts were that the shareholders who were not paid the declared dividend brought a petition for winding up the company, it was held that the amount of dividend would become payable forthwith on such a declaration and that the amount not having been paid, there will be a valid debt on which the petition for winding up of the company could be founded. The petition for winding up the company could be founded. The petition for winding up was allowed on the ground that the company was unable to pay its debts but at the same time the Court directed that the order of winding up was to be kept in abeyance for a period of three weeks in order to enable the company to pay the dividend to the two creditors for the year 1959 whose winding up petition was found competent.
(v) Sree Shanmugar Mills Ltd. By Managina Agents Sri Alagai Ltd. Versus S.K. Dharmaraja Nadar and another (AIR 1970 Madras 203).
40. in the above case a winding up petition. Was filed under Sections 433 (e) and 434 (c) of the Indian Companies Act, 1956, on the ground that the company was unable to pay its debts within the meaning of the above provision of the Act. The above petition was resisted by the company and inter alia it was pleaded that its liability amounted only to Rs. 8,72,414/- whereas the value of its assets was Rs. 10,79,130/-, which also included the value of the building and machinery without which the company could not function. A Division Bench of the Madras High Court held that for determining the question as to, whether the company would be able to meet its then demands, the value of such assets without which it could not carry on business, should not be taken into account, it was further held that the test of inability to pay the debt under section 433 (e) was not whether the company, if it converted all its assets into cash, would be able to discharge its debts, but whether in a commercial sense the existing liabilities could be paid by it while it continued to carry on as a company, and thus the company must be considered unable to pay its debts within the meaning of the above provision for the reason that after the value of the building and machinery the total amount available was a sum of Rs.3,00,000/- against the aforesaid liability of Rs.
8,72,414/-. Accordingly the winding up petition was granted.
(vi) Pakistan Industrial Credit and Investment Corporation Limited versus M/s. Indus Steel Pipe Limited (PLJ 1993 Karachi 90).
41. in the above case a learned Single Judge of the High Court of Sindh while dealing with a petition of winding up under section 305 read with section 306 held that a company cannot be wound up if there is substantial and bona fide dispute regarding debt claimed, and that presenting a petition for winding up with the object only to bringing pressure to make company pay debt are not germane to facts of the case for ordering winding up. But the petition for winding up was allowed as it was found that the respondent company was unable to pay its debts. The contention that the assets of the company were greater than its liability was
(vii) Trade and Industry Publications Limited versus Industrial Development Bank of Pakistan (PLD 1990 SC 768).
42. in the above case this Court dismissed the appeal of the company ordered to be wound up by the Company Judge of the High Court of Sindh by holding inter alia as follows:- "As regards the submission that the respondent should have proceeded under section 38 of the I.D.B.P. Ordinance and not by way of a petition for winding up, it may be stated that unless a debtor bona fide disputes the claim of the creditor or is able to show that notwithstanding the dispute he is in a position to pay his debts, the plea is not of much substance. Now it is well-settled 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. Reliance is placed on Bengal Luxmi Cotton Mills Ltd. And others v. Mahaluxmi Cotton Mills Ltd. And others (A.I.R.
1955 Cal. 273). Reference may also be made to in re: Doughlas (Griggs) Engineering Ltd. (1962) All ER 498. in this case it was observed by Pennycuick, J:- 'it seems to me that thus the prima facie right of the petitioning creditor to a winding-up order based on the judgment of November 14, 1961, was not displaced merely by showing that the company had a disputed claim against the petitioning creditor which was the subject of litigation in other proceedings."'
(viii) Messrs Sindh Glass Industries Ltd., Karachi versus Messrs National Development Finance Corporation, Karachi and 2 others (PLD 1996 SC 601).
43. in this case this Court declined the direct appeals against the judgment of the learned Company Judge ordering winding up of the appellant company by holding as follows:- "The inability to pay its debts can be demonstrated from the Company's contingent and prospective liability and the debts which are immediately payable. The insolvency of the company is established if it is unable to pay debts due and payable from the, realisable assets in hand and the fact that the debts can be paid out of the assets over a lengthy period of time will be immaterial. According to Pennington, 'the company will also be unable to pay its debts if it has no reasonable prospect of paying all of them, both accrued and prospective, by a steady realisation of all its assets, and in this case it will be immaterial that it can pay its accrued debts out of its liquid resources'.
Applying these principles to the facts of the present case, we find that the indebtedness has not been denied, but it has been alleged that the winding up petition is not bona fide. If a party challenges bona tides, it must state facts to show that the action taken against it suffers from mala fides. Mere statement that it was intended to frustrate the proceedings before the Ombudsman can hardly demonstrate mala fide of the respondent because considering the nature of jurisdiction Ombudsman exercises, this plea can hardly sustain. Even otherwise, the Ombudsman had heard the case and decided it, which is not of much help to the appellant."
44. From the above-cited and discussed cases, the following legal position emerges:-
(i) That if a debtor company is merely unwilling to pay its debts but other wise is commercially solvent, then the normal remedy available to a creditor is a suit for the recovery of the amount and not a petition for winding up.
(ii) That if the Court finds that the negligence on the part of the debtor company to pay the sum demanded in terms of clause (a) of sub-section (1) of section 306 of the Ordinance is not on account of want of commercial solvency, but because of bona fide dispute based on a substantial ground as to the entitlement of the creditor to the amount demanded, application under section 306 read with section 309 of the Ordinance will not be sustainable.
(iii) that clause (a) of sub-section (1) of section 306 of the Ordinance raises a presumption as to the fact that the debtor company is deemed to be unable to pay its debts, if in spite of the receipt of demand in terms of the above clause, the debtor company neglects to pay the sum demanded within thirty days of the receipt of notice of demand, or neglects to secure or to compound for it to the reasonable satisfaction of the creditor. But this presumption is rebuttable by the debtor company, if it can show that it is commercially solvent and is in a position to meet its liability on due dates.
(iv) That the object of sections 305 and 306 of the Ordinance is- hot to coerce a debtor company to make payment to an unpaid creditor, but to secure discontinuation of functioning of such company which has ceased to be commercially solvent.
(v) That though under section 9(3) of the Ordinance it is permissible to adopt summary procedure, but the procedure adopted should be fair and just which may ensure equal opportunities to the contesting parties.
(vi) That the effect of lack of proof of service of a demand notice by a creditor in terms of clause
(a) of subsection (1) of section 306 of the Ordinance is that the presumption that the debtor company shall be deemed to be unable to pay its debts will not be available to the creditor in a petition for winding up, but the creditor will be at liberty to prove that, in fact, the company is unable to pay its debts within the meaning of clause (c) of sub-section (1) of section 306 of the Ordinance by other evidence.
(vii) That though clause (a) of sub-section (1) of section 306 of the Ordinance seems to be independent of clause (c) thereof, but the conjoint reading of sections 305 and 306 makes it amply clear that the Company Judge has a discretion to order, or not to order, winding up of a company after taking into consideration all the relevant facts. The approach should be to see that a commercially insolvent company cases to operate and not to provide a forum for the recovery of certain due amounts to a particular creditor.
(viii) That in order to determine whether a debtor company is commercially insolvent, the value of such assets without which it could not carry on its business should not be taken into account, but the amount available to the debtor company, or which may become available in normal course of business without disposing of the above assets will have to be taken into consideration.
(ix) That the factum that a creditor has other or alternate remedy under general law or a special law, does not debar him from pressing in aid the provision of section 306 read with section 309 of the Ordinance, for seeking the winding up of the debtor company.
(x) That a debtor company is unable to pay debts can be demonstrated from the company's contingent and prospective liabilities and the debts which are immediately payable.
45. Even if we were to read the above clauses (a) and (c) of sub-section (1) of section 306 of the Ordinance together or in conjunction, the conclusion recorded by the learned Company Judge that the appellant Company is deemed to be unable to pay its debts seems to be correct, in our view, once a creditor proves the service of a demand notice in terms of clause (a) of sub-section (1) of section 306 of the Ordinance the burden is shifted on the debtor company to rebut the presumption created by fiction of law by virtue of the above clause (a) of sub-section (1) of section 306 of the Ordinance, by showing that it is, in fact, commercially solvent and will be able to pay its contingent and prospective liabilities and the debts which are immediately payable by bringing sufficient material on record, in the instant case the appellant Company had not shown that it was in a position to pay Rs. 1,26,00,000/-, and was commercially solvent keeping in view its contingent and prospective liabilities in terms of clause (c) of sub-section (1) of section 306 of the Ordinance.
46. As regards the fourth contention of Mr. Fazal-e-Ghani Khan, learned counsel, that the respondent Company failed to bring any material on record to show that the appellant Company was unable to pay its debts in terms of clause (c) of sub-section (1) of section 306 of the Ordinance, it may be observed that the above submission has been dealt with hereinabove while dealing with the above-mentioned third submission and need not be repeated, it will suffice to observe that the burden to prove otherwise, was on the appellant Company as the respondent Company was able to prove that it had served the notice in terms of clause (a) of sub-section (1) of section 306 of the Ordinance, and that the appellant Company neglected to pay the due amount within the notice period of thirty days.
47. Adverting to the fifth submission of the learned counsel for the appellant Company that the respondent Company cannot invoke the provisions of sections 306 and 309 of the Ordinance, with the object to bring pressure on the appellant Company and to coerce it to pay the above amount under the Mobilisation Advance Guarantee, it may be stated that though it is correct that the above provision of the Ordinance cannot be invoked to bring pressure on the appellant or to coerce them to pay the amount of debt, but in the present case we have held that conclusion of the Company Judge that the appellant Company is unable to pay its debts is correct and therefore, it is wrong to urge that the above provisions of the Ordinance were invoked mala fidely by the respondent Company.
48. it was also urged by the Mr. Fazal-e-Ghani Khan, learned counsel that since the liability of the appellant Company and the sub-contractor was joint, the respondent should have realised the alleged due amount from the sale proceeds of the hypothecated machinery and from the other bank guarantees furnished. The answer to the above contention is provided under section 128 of the Contract Act which lays down that the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. The above contention has, therefore, no force.
49. The upshot of the above discussion is that the appeal is dismissed in terms of the short order of even date which reads as follows and which has been incorporated as a part of this judgment.
50. For the reasons to be recorded later on, the appeal is dismissed with the observation that in case the appellant deposits the mobilisation bond amount, namely, Rs. 1,26,00,000/- payable to the respondent within a period of six months, the winding up order will stand set aside, in case of default, it will remain in the field and it will be deemed to have been maintained by this Court."