Messrs MA.S. STEELS LTD. Versus THE STATE
1. M/s. MA.S. Steels Ltd. (hereinafter called the `Company') was incorporated as private limited company under the Companies Act, 1913 on 28‑4‑1971 with authorised capital of Rs.20,00,000 and paid‑up capital Rs.5,00,000. The company had its registered office at MA.S. Building, Badami Bagh, Lahore. At the relevant period following were Directors‑of the Company:*‑‑
(i) Muhammad Ahmad
(ii) Aziz Ahmad
(iii) Safia Begum d/o Ghulam Muhammad
(iv) Sajida Aziz d/o Shabbir Ahmad
2. They were all residents of 748, Shadman Colony, Lahore. The Company was engaged in manufacturing steel ingots (billets).
2. M/s. Ashraf Engineering Works Ltd., a private limited Company (hereinafter called `Petitioners') on 25‑3‑1970 invoked the jurisdiction of this Court under section 162 of the Companies Act, 1913 for winding up the Company. The main grounds pressed into service were, that the Company was unable to pay its debts, it was financially and commercially insolvent, it cannot ,~ refund petitioners' money and the factory was closed. At one stage the Company agreed to lease out the factory to the petitioners for five years but due to labour, problems and discovery of large amounts payable by the Company to Wapda, the petitioners found that it was not possible for them to run the factory. Consequently the lease agreement executed between the parties was cancelled and possession of the factory was restored to the Company.
3. Pursuant to aforementioned application under section 162 of the Companies Act, 1913 this Court on 29‑3‑1976 issued notice to Muhammad Ahmad respondent alone, being the Chief Executive of the Company. Simultaneously the Company was restrained from alienating or otherwise disposing of, in any manner, its assets or incurring further liability.
3. On 3‑6‑1976 Muhammad Ahmad respondent appeared in Court. He did not contest the application, rather joined the petitioners in their prayer for winding up of the‑ company, whereupon formal notices were issued. Qazi Muhammad Ashraf, advocate was appointed as provisional Liquidator, hereinafter, referred to as "Official Liquidator". He took over possession of the assets of the Company and invited claims. There being no opposition to the application from any quarter, this Court on 21‑10‑1976 passed order for winding up of the Company. Qazi Muhammad Ashraf, Advocate was then appointed an Official Liquidator. On 20‑1‑1979, the Sales Tax Officer served demand notice on the Official Liquidator for payment of Rs. 2,93,920 for the assessment year 1972-73 and claim to that extent was verified by the official Liquidator nevertheless according to the official Liquidator it could not be paid on priority basis.
4. The Official Liquidator on .29‑6‑1982 submitted report No. 66 wherein indicated verification of the following claims:‑‑
(1) United Bank Ltd. Rs. 37,276.67
(2) National Bank of Pakistan Rs. 23,18,042.00
(3) Wapda Rs. 9,53,000.00
5. The Petitioners' ‑claim, however, could not be verified at that juncture for want of documents. It was, however, verified on 27‑4‑1983 for Rs. 4,60,273.08. With prior Permission of the Court, the Official Liquidator invited bids for the sale of the machinery, On 25‑6‑1980 Muhammad Akram offered the highest bid of Rs.16,00,000 which was accepted. Out of the suit proceeds, Rs. 84,730.92 incurred towards winding up expenses, were directed to be paid on preferential basis to the petitioners. Gazi Zamir Ashraf, who had been assisting Qazi Muhammad Ashraf was appointed on 10‑4‑1985 as Joint Ofrcial Liquidator. On 29‑12‑1985 Wapda's plea for payment of its claim on preferential basis under the relevant provision of law was rejected. It was held that Wapda is not a local authority and its claim cannot be paid on priority basis.
6. 4, On 20‑4‑1980 the Income Tux Department lodged demand of Rs.2,93,920 with the Official Liquidator on account of sales tax payable by the Company for the year 19'12‑73. The Official Liquidator did not oblige the department and on 4‑3‑1986 pointed out that the claim was rot payable on priority basis. The demand for sales tax could not be finalised, for some time as it was not clear as to whether Income Tax Department or Customs Department, was competent to deal with the matter. The revised demand notice was served on the Official Liquidator for the first time, on 21‑4‑1984. No formal claim, however, was filed with him.
7. The question arises as to whether the Income Tax Department can receive priority for payment of its dues under section 230 of the Companies Act, 1913. The Official Liquidator as well as Mr. Muhammad Yaqub Khan, Advocate on behalf of the National Bank of Pakistan contended that the income -tax becomes Glue and payable under section 230(1)(,a) when demand is made. The notice of demand was served long After the winding up order was passed, the Government's claim therefore, cannot be treated on priority basis. The claim shall, however, be considered only as ordinary claim. Reliance was placed on PLD 1954 Sind 222 (in the matter of the Exchange Bank of India and Africa Ltd.) wherein the Bank was ordered to be wound up on 21‑7‑1949 but notice of demand for the income‑tax dues was issued on 2‑1‑1953. It was held that the claim of the Crown had no priority and should be treated as an ordinary claim.
8. The next case cited at the Bar was Pakistan Refugees Rehabilitation‑‑‑Finance Corporation and‑ another v. Qasimpur Glass Industries Ltd‑, Multan V L D 19 77 Lahore 1218, wherein it was held that the Government could recover only debt having fallen due or, the date of winding up order and payable within 12 months before such date.
9. In the other case viz. Habib Bank Ltd., Karachi v. Sind Employees' Social Security Institution (East Directorate) and 2 others (1982 PLC 316); it was held that unless otherwise provided by Statute, mere accrual of dues/debts does not entitle the Government to claim priority over the secured creditor. The preferential right of the Government to recover the amount is established when process or attachment against the property of the debtors is issued. In the instant case no process or attachment order against the property of the debtor (company) was‑issued.
10. Mr. Muhammad Ilyas Khan, Advocate for Income Tax Department on the contrary contended that the Government dues shall receive priority for payment not only under section 230 of the Companies Act, 1913 but also under section 73(3), C.P.C. It was submitted that a sum of Rs.2,93,920 regarding which a demand notice was also served upon the Official Liquidator merited its payment on p6ority basis. In support of his contention he relied on Oudh Commercial Bank Ltd v. Secretary of State (AIR 1935 Lahore 319), O.S. Varadachari v. Secretary of State (AIR 1936 Madras 602) and Lala Muni Lai v. Diwan Chand (A.IR 1939 Lahore . Another case namely, Begum Anwar Sultan v. A.B.M. associates Ltd. Faisalabad (PLD 1981 Lahore 322) was also cited at the Bar for its payment.
11. I have considered the contentions raised by learned counsel for the parties and have also gone through the documents on the file. Learned counsel for respondents has not denied that the United Bank Ltd. as well as National Bank of Pakistan Ltd. are secured creditors of the Company.. It is also a fact established on record that on 3‑6‑1976) when Muhammad Ahmad respondent did not oppose the winding up of the Company, Qazi Muhammad Ashraf, Advocate was appointed as Provisional Liquidator who took over possession of the assets of the company. It is, therefore, clear that when the winding up order of the company was passed, the Income Tax Department had not even assessed the liability of the company. The assessment order was passed on 29‑6‑1977 and notice was issued on 2‑1‑1979 to ‑the Official Liquidator for payment of Rs.2,93,920. It means that the amount in question had not become due and payable on the day winding up order was passed as such, cannot be paid on priority basis under section 230(1) of the Companies Act, 1913. Section 230 of the aforesaid Act provides:‑‑
12. "230. Preferential payments .
(1) In a winding up there shall be paid in priority to all other debts;
(a) all revenue, taxes, cesses and rates, whether payable to the Government or to a local authority, due from the company at the date hereinafter mentioned and having become flue and payable within the twelve months before that date;
(2) XXXXXXXXXXXXXXXXXXXXXXXXXX
(3) XXXXXXXXXXXXXXXXXXXXXXXXXX
(a) XXXXXXXXXXXXXXXXXXXXXXXXXX'
(5) The date hereinbefore in this section referred to is‑‑
(a) in the case of a company ordered to he wound up compulsorily, which had not previously commenced to be wound up voluntarily, the date of the winding up order."
13. The company has been ordered to be wound up compulsorily. The disputed is amount did not fall due even within twelve months next before the date of ~‑ ceding up order. The claim of Income Tax Department merited, therefore, no preferential treatment for its payment. In Pakistan Refugees Rehabilitation Finance Corporation and another's case, it was held that the Government can recover on priority basis only debt having fallen due, on the date of winding up order, and payable within twelve months before such date.
14. Similarly in Habib Bank Ltd's case referred to above, it was held that the preferential right of the Government to recover the amount is established only when process or order of attachment against the property of the debtors is issued.
15. The case‑law cited by learned counsel for the respondents is of no help to the question involved in the matter. The precedent cases related to rateable distribution of assets under section 73, C.P.C. Section 73, C.P.C. relevant to the extent, is reproduced hereunder:‑‑
16. "73. Proceeds of execution sale to be rateably distributed among decree‑holders :‑
(1) Where assets are held by a Court and more persons than one have, before the receipt of such assets, made application to the Court for the execution of decrees for the payment of money passed against the same judgment‑debtor and have not obtained satisfaction thereof the assets, after deducting the costs of realisation, shall be rateably distributed among all such persons:
(2) XXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXX
(3) Nothing in this section affects any right of the Government:"
17. In Oudh Commercial Bank's case, Bhide, J quoted subsection (3) of Section 73, C.P.C. and observed:
18. "I am unable to see that this subsection confers any jurisdiction on the executing Court to entertain a claim on behalf of the Government in the absence of any decree in support of it. The subsection only saves the rights of the Government, independent of the section, such as they might be and merely appears to have reference to the right of priority which can be ordinarily claimed in respect of debts due to the Crown."
5. In the instant case, however, distribution of the assets of the defunct company is to be made under section 230 of the Companies Act, 1913 which provides different mode of distribution of assets, than as envisaged under section 73, . C.P.C. Admittedly the provisions of the special statute shall have precedence over the provisions of general law in their application.
19. The next case, namely O.S. Varadachari's case has no relevance. In that case the question was as to whether the Government court‑fee payable by the pauper, makes the defendant judgment‑debtor to that extent and Government, a decree‑holder and entitled to receive that amount on priority basis, whereas in 'the instant case, the distribution of the assets of the company are to be made to the creditors under the relevant provisions of the Company Law.
20. Lala Muni Lal's case also related to distribution of the proceeds of sale in execution of the decree. The decree in favour of the Crown for an amount of court‑fee sought to be satisfied on priority basis under section 73, C.P.C. was maintained. In the instant case neither the Income Tax Department is a decree‑If) holder nor the proceedings arc in execution of a decree under section 73, C.P.C. The Income Tax Department thus is to be treated as an ordinary claimant like other creditors. The objection raised by learned counsel for the respondent is, therefore, repelled.
21. The case now to come up for further proceedings on 13‑9‑1988.
22. M.Y.H./M‑945/L Order accordingly.