JAWWAD S. KHAWAJA, J.-- On a petition moved by Orix Leasing Pakistan Ltd. Under Sections 305 and 306 of the Companies Ordinance, 1984, Sunshine Cloth Ltd., (the "Company") was ordered to be wound up compulsorily. The Company (in liquidation) has numerous creditors. Its assets have been sold by the Joint Official Liquidators, in the winding up proceedings, for a sum of Rs.
6,51,11,293.96.
2. Muslim Commercial Bank Ltd. ("MCB") has obtained a decree dated 15.4.1996 from the Banking Court in a separate suit, for a sum of Rs. 128,944,176.42. It claims to be the only secured creditor of the Company on the ground that it had a mortgage and charge over the entire assets of the Company including its land, building and machinery which were sold in the winding up proceedings. The claim of MCB as secured creditor is not disputed by the liquidators or by the other creditors of the Company. However, the other creditors, with include certain government departments such as the Sales Tax Department, the Customs Department and the Income Tax Department have raised claims against the Company which have been verified by the Official Liquidators. These creditors have asserted a right to preferential payments under section 405 of the Companies Ordinance, 1984 (the "Ordinance"). Their contention is that they are entitled to the sale proceeds realised from the sale of the Company's assets, in priority to any payment which may be made to MCB. The claims raised by the aforesaid creditors have been resisted by MCB.
3. It has been argued by learned counsel for MCB that the said bank alone is entitled to the amount realised by the liquidators through sale of the assets of the Company which, admittedly, were mortgaged by way of first charge by the Company in favour of MCB. As such, according to learned counsel for MCB, the other creditors of the Company had no right whatsoever to any payments either under section 405 of the Ordinance or otherwise until the entire decretal amount recoverable by MCB from the Company, was received by it.
4. In support of his contention learned counsel for MCB, firstly, argued that section 405 of the Ordinance itself contained provisions which recognized the ability of a secured creditor to realise his security without subjecting the same to claims by unsecured creditors. He drew the attention of the Court to sub-section (5)(b) of Section 405 of the Ordinance, It is provided therein that preferential claims, mentioned in Section 405(1), shall have priority over the claims of holders of debentures under any floating charge created by the Company. On this basis learned counsel contended that by necessary implication, unsecured creditors including preferred claimants mentioned in Section 405(1) could not claim any priority over secured creditors such as MCB who had a fixed mortgage or charge over the assets of a company being wound up. This contention of learned counsel has much force and is supported by case- law which is discussed below. However, before embarking a on a discussion of the law, it is important to note that Section 404 of the Companies Ordinance stipulates that in the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors as are in force for the time being under the law of insolvency. The rules applicable to insolvency are set of in the Provincial Insolvency Act, 1920 (the "Act"). The Act, inter alia, defines a secured creditor and sets of what a secured creditor can do in relation to the estate of the insolvent. A secured creditor is defined as a person holding a mortgage, charge or lien on the property of the debtor as security for a debt due to him from the debtor. By this definition, MCB undeniably is a secured creditor of the Company.
5. Section 47 of the Act which specifically deals with secured creditors, is relevant to the matter in contention in the present proceedings, It, inter alia, recognizes the right of a secured creditor to realise his security independently of the insolvency proceedings, It is clear from the said provision that a secured creditor may proceed to realise his security by remaining outside the insolvency proceedings. Where a secured creditor realises his security by remaining outside the insolvency proceedings, he is entitled to prove for the balance due to him, in the insolvency proceedings, after deducting the net amount realised by him from his security.
6. Section 47 of the Act also enable a secured creditor, at his option, to relinquish his security for the general benefit of all creditors of an insolvent, In such event, he is entitled to prove for his whole debt in the insolvency proceedings.
7. Sub-section (3) of Section 47 of the Act is particularly relevant in the present dispute between MCB as secured creditor and the other creditors of the Company including those claiming preferential treatment under section 405 of the Ordinance, It provides that where a secured creditor does not either realise or relinquish this security, he shall, before being entitled to have his debt entered in the schedule of creditors, state in his proof the particulars of the security and the value at which he assesses it. The secured creditor, in such event, is only entitled to receive a dividend in respect of the balance due to him after deducting the value assessed by him for his security.
8. The provisions of the Act in the context of the winding up of companies have been dealt with by our own Courts and also in foreign jurisdictions. Learned counsel for MCB, firstly, referred to the case titled United Bank Ltd. Vs. PICIC and others (1992 SCM R 1731). The question, which arose for consideration in the said case, was whether the applicant therein, namely, UBL, was a secured creditor and whether it was entitled to priority in distribution of property in the proceedings for the liquidation of a company which had been ordered to be wound up. It was held by the Honourable Supreme Court that a secured creditor remained unaffected by an order of adjudication made against an insolvent under the provisions of the Act. It was also held that a secured creditor was at liberty to realize his security in the manner he preferred. The rights of the secured creditor to realize his security, were held to be duly protected.
9. Learned counsel for MCB also argued that the right of the Bank as secured creditor, to stay of of the winding up proceedings and to realize its security by sale of the property mortgaged, was also recognized in the case titled in re: Saifi Development Corporation Ltd. (1989 MLD 3909).
10. It was next contended by learned counsel for MCB that the mortgage created by the Company in its favour constituted a transfer of an interest in the Company's property to MCB. What was left with the company, was a mere equity of redemption. As such, the unsecured creditors and persons claiming preferential payments under Section 405 of the Ordinance could, at best, lay hands on the equity of redemption for whatever it was worth, In the present case the property, which had been mortgaged in favour of MCB, stood transferred to MCB by virtue of the mortgage. It, therefore, was not possible for the general and unsecured creditors of the Company including the claimants specified in Section 404(1) of the Ordinance, to assert a claim on the mortgaged property or on the proceeds realized from the sale thereof. This contention of learned counsel for MCB is also well- founded and is supported by the express provisions of Section 58 of the Transfer of Property Act. If any authority fr the proposition is required, the same can be found in the case titled Industrial Development Bank of Pakistan Vs. Saadi Asmatullah and others (1999 SCM R 2874) and the case of Saifi Development Corporation Ltd., referred to above.
11. The only contention, which could have been raised by the unsecured creditors of the Company, was the manner in which MCB participated in the winding-up proceedings and its acquiescence to the sale of the assets of the Company by the Official Liquidators, It does appear the MCB did not, in any conscious manner, disclose its intent to realize its security by staying outside the winding-up proceedings. On the contrary, MCB joined such proceedings and also submitted a claim of Rs.
240,567,000/- to the Official Liquidators of the Company. Furthermore, in respect of valuing its security or insisting upon its exclusive right to bring the mortgaged property to sale, MCB went alongwith the sale of such property which was affected by the Official Liquidators in the winding up proceedings. On this basis it could have been urged on behalf of the unsecured creditors of the Company that MCB had, in fact, chosen to relinquish its security and to stand in line with the other unsecured creditors. This argument, was advanced only obliquely by Sh. Izhar ul Haq, Advocate, on behalf of the Sales Tax department. However, in the circumstances of the present case this argument has little merit, firstly, because MCB, in a letter dated 20.11.1998 addressed to the liquidators subsequent to the filing of its claim on 8.8.1998, expressly asserted its right as a secured creditor. This was done on the basis of the first mortgage and charge which had been created in its favour by the company and particulars of which had been duly registered with the Registrar of Joint Stock Companies in accordance with the requirement of the Ordinance. Secondly, it was argued, in my opinion rightly so, that thee could not be any implied surrender of a security in terms of Section 47(3) of the Act. Any relinquishment or surrender of MCB's rights in the mortgaged property, could only have been effected by a properly executed instrument setting of the clear and unambiguous intent of the bank to relinquish its security. Lastly, I refer to an aspect of the case which appears to have escaped the attention of learned counsel for MCB. It is clear from the record that MCB had initiated proceedings for execution of the above-referred decree dated 15.4.1996. This was done through the filing of execution petition No. 3-B/98 before an executing Court, outside the winding up proceedings. However, by means of an order dated 2.12.1999 passed by the Court in these winding up proceedings, the aforesaid execution application titled "MCB v. Sunshine Cloth Ltd.," was also summoned by my learned predecessor. This itself is a material circumstance to show MCB's intent to execute its decree through regular execution proceedings outside the winding up. It appears that subsequent to the summoning of the execution application by the Company Bench, the assets of the company were sold by the Liquidators rather than by Court Auctioneers in the execution proceedings. The intention of MCB to realise its security rather than relinquishing it, is manifested in its actions noted above, It is equally clear that there is nothing on the record to show that MCB at any time, whether expressly or impliedly, relinquished its security. The fact that it was the Liquidators who effected the sale of the property instead of an executing Court, in the circumstances of this case, has no material effect on the rights of MCB as a secured creditor of the Company.
12. Learned counsel for MCB also argued that MCB was entitled to request the Court to have the mortgaged property sold even in the present winding up proceedings for the recovery of the mortgage debt. This contention appears to be well founded and is, in fact, supported by the authority of Gopal Gunaji Vs. Balaji and others (AIR 1930 Nagpur 196). A useful discussion on this issue can also be found in the judgment of the Karnataka High Court in the case titled State Bank of Mysore Vs. Official Liquidator and others (1985] 58 Company Cases 609) which supports the position adopted by learned counsel for MCB.
13. As for the other creditors of the Company, the income Tax Department has moved C.M. No. 357- L/2001 to assert a claim of Rs. 10,58,507/- as the outstanding amount of income tax payable by the Company. Learned counsel for the department referred to Section 76 of the Income Tax Ordinance to support his assertion. I have gone through the said statutory provision with the assistance of learned counsel, It does require the liquidator of a Company being wound up to notify his appointment to the Deputy Commissioner of income Tax having jurisdiction to assess the Company. However, sub-section (3) of Section 76 of the Income Tax Ordinance expressly stipulates that the legally recognised rights of secured creditors cannot be adversely effected by any claim made by the Income Tax Department.
14. The Sales Tax Department had also made a claim which originally was for a sum of Rs.
3,210,420/- but, according to learned counsel for the department, has increased manifold due to the application of additional tax and penalties, It was argued by learned counsel for the Sales Tax Department that because MCB had not realized its security independently of the winding-up proceedings, it had thereby lost the said security. This argument is not legally well-founded for the reasons which have already been discussed above and in view of the finding that there was, in fact, no relinquishment of MCB's security.
15. Learned counsel for the department also contended that the department was wide powers to enforce recovery of outstanding dues including powers vested in it under Section 48 of the Sales Tax Act The said provision does, indeed, contain extensive powers but the same are not relevant for the purpose of the present petition. Section 49 of the Sales Tax Act, however, does provide that the amount of any unpaid tax shall be the first charge on the assets of the business, It is to be noted that, the right, if any of the Sales Tax Department even if it is to be considered as the holder of a first charge, cannot effect the proprietary rights which stand vested in MCH by virtue of the mortgage/charge created in its favour by the Company.
16. Furthermore, the provisions of Section 49 of the Sales Tax Act, which were relied upon by learned counsel for the Sales Tax Department, can only be invoked if there is an assertion that there were taxable goods in the possession of a registered person in the circumstances envisaged by Section 49 of the Sales Tax Act. There is not even a suggestion on the part of learned counsel for the Sales Tax Department that there were, in fact, any taxable goods in the possession of the Company justifying the invocation of Section 49 of the Sales Tax Act.
17. In the forgoing circumstances, the provisions of Section 49 of the Sales Tax Act are not attracted to the present case and the Sales Tax Department cannot be said to have any valid claim on the property of the Company or to the sale proceeds thereof.
18. WAPDA has also made a claim of Rs. 17,78,698/- for electricity supplied by it to the Company, It was conceded by learned counsel for WAPDA that the claim had arisen more than twelve months prior to the date of the winding up order and, as such WAPDA could not make any claim under Section 405 of the Companies Ordinance. Even otherwise it has been held in the case titled Pakistan Industrial Credit and Investment Corporation Ltd. Vs. Ali Gul Khan Packages Ltd. (1989 CLC 1774) that WAPDA being a statutory Corporation does not fall within the definition of government and is therefore, not entitled to make any claim under Section 405 of the Companies Ordinance.
19. It was further argued by learned counsel for WAPDA that WAPDA had the power to recover its dues as arrears of land revenue. This assertion was based on the provisions of Section 54-A of the Electricity Act. He also referred to Section 24 of the said Act to show that WAPDA had special statutory powers to enforce recovery of its dues. The aforesaid provisions, however, merely provide a mode of recovery but do not, in any manner, make WAPDA a secured creditor of the Company nor do these provisions have the effect of precluding MCB from asserting its exclusive claim to the security created in its favour by the Company and to the proceeds realized through the sale of such security.
20. No one has appeared for the Customs Department today, although I note that the department was represented on 30.4.2001. For the reasons given above, the claim of the Customs Department also cannot be given preference over MCB.
21. The foreign manufacturer, which had supplied machinery to the Company on credit and the customs clearing agent which has rendered services to the Company, have also filed claims with the Official Liquidators in respect of amounts owning to them by the Company. They, however, being unsecured creditors cannot be paid any dividend because of MCB' entitlement as secured creditor.
22. The result of the above discussion is that the various unsecured creditors including the government departments claiming preferential treatment under Section 405 of the Companies Ordinance, do not have any right to receive payments from the sale proceeds of the assets forming part of MCB's security, because MCB has the first claim to same and the said proceeds are not sufficient to satisfy the decree obtained by MCB against the Company.