SAIFEE DEVELOPMENT CORPORATION LTD. IN RE Versus SAIFEE DEVELOPMENT CORPORATION LTD. IN RE

ORDER

1. The Official Liquidator in his reference has sought permission to sell the assets of Company in liquidation. The reference is opposed by M/s. National Bank of Pakistan, who claims to be the mortgagee of immovable assets of M/s. Saifee Development Corporation Ltd., S.I.T.E., Karachi (Company in liquidation); The learned counsel for National Bank of Pakistan contends that in view of the provision of Section 404 of Companies Ordinance, 1984, which provides that Insolvency Rules, will be applicable in winding up of an insolvent company, his client is not bound to prove his debt against the Company in liquidation proceedings and that they are entitled to stay out of these proceedings and realise their debt against the Company by sale of mortgage security and if there is still any balance against the Company after sale of mortgage property and his client chooses to make a claim for such balance that he will be required to make a claim before the Official Liquidator and prove the same in the liquidation proceedings. M/s. National Bank of Pakistan has also filed a separate application (C.MA. No. 349/87) praying for exclusion of mortgage property from winding up proceedings. The learned counsel for the petitioner and the Official Liquidator on the other hand jointly contend that as a result of order of winding up of M/s. Saifee Development Corporation Ltd., all its assets vested in the liquidator appointed by the Court and M/s. National Bank of Pakistan as a secured creditor is only entitled to a preferential payment of their claim against the Company over claims of other unsecured creditors, provided they prove their debt against the Company in the liquidation proceedings according to law. With regard to application of insolvency rules in the present case, the learned counsel for the petitioner contended that it cannot be said at this stage that M/s. Saifee Development Corporation is an 'insolvent company' as this fact -can only be determined by the Court after all the assets of the Company are sold and the proceeds so realised by Official Liquidator are compared with the existing liabilities of the Company. After hearing the learned counsel for National Bank of Pakistan and the petitioner and Official Liquidator at length I find that the contentions of learned counsel for National Bank of Pakistan are not without force. Section 404 of Companies Ordinance (which is equivalent to section 229 of Companies Act 1913) reads as follows:-

2. "440. Application of insolvency rules in winding up of insolvent companies. --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 and to debts provable and to the valuation of annuities and future and contingent liabilities as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent; and all persons who in any such case would be entitled to prove for and receive dividend out of the assets of the company may come in under the winding up, and make such claims against the company as they respectively are entitled to by virtue of this section:"

3. The above section of the Companies Ordinance clearly provides that in case of 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 and to debts provable and to valuation of annuities and future and contingent liabilities as are in force for the fime being under the law of insolvency with regard to estates of a person adjudged insolvent. It is admitted that the insolvency proceedings in Karachi Division, are governed under the Insolvency (Karachi Division) Act 1908. It is, therefore quite clear that in the case of winding up of an insolvent company, the provisions of Insolvency (Karachi Division) Act 1908, will be applicable. The contention of learned counsel for the petitioner in the case, however, is that firstly, there is nothing before this Court to show that M/s. Saifee Development Corporation is an insolvent company, and, secondly this fact can only be determined by the Court when all the assets of the company in liquidation are disposed of by the Official Liquidator and the proceeds thereof are compared with the existing liabilities of the Company. The expression "insolvent company" is not defined in the Companies Ordinance. According to Stroud's Judicial Dictionary (Fourth Edition) 'An insolvent' in ordinary acceptation, is a person who cannot pay his debts, a person who is incapable of paying his debts. It also states that under Sale of Goods Act 1893 a person is deemed to be insolvent, who either has ceased to pay his debts in the ordinary course of business or cannot pay his debts as they become due, whether he has committed an act of bankruptcy or not and whether he has become a notour bankrupt or not. Similarly in Webster's New World Dictionary of the American Language (College Edition), insolvent is defined as not solvent, unable to pay debts, bankrupt; not enough to pay all debts. In view of the above definition of the word 'Insolvent', a Company shall be deemed to be an Insolvent Company if it is unable to meet its due liabilities or pay off all its creditors in full. In the case of Bengal L.C. Mills v. -Mahaluxmi Cotton Mills (A.I.R. 1955 Cal. 273) the inability of a company to pay its debts has been considered as a sufficient circumstance to hold the company as commercially insolvent. The learned counsel for National Bank of Pakistan contended that in view of the averments made in the petition for winding up against the company which were never controverted, the Company shall be deemed to be an insolvent company. In paragraphs 18,21 and 22 of the winding up petition, the following allegations are made against the Company:-

4. "18. ????? The respondents are also plainly insolvent in the sense their liability greatly exceeds their assets and they are not in a liquid position. In fact their liquidity is almost nil. The substratum of the business has also disappeared and it is not reasonably possible to carry on business except at a loss.

21. It is submitted that the company had incurred heavy losses and the substratum of ? the company is gone. The business was at stand still and main plant had not been operating since long time. The company had incurred losses both in the private management and public management. Paid up Capital is wiped out. The company is indebted to various banks and creditors.

22. It is submitted that the substratum of the company must be deemed to be gone when (a) the subject matter of the company is gone or (b) the object for which it is incoroporated has substantially failed or (c) it is impossible to carry on business of the company except at a loss or (d) the existing and probable assets are insufficient to meet the existing liabilities.

5. At no stage of the proceedings the above allegations were controverted by the company. The order of, winding up was passed by me in the case on 22-2-1987 which reads as follows:- .

6. "The petition has been published in accordance with rule 781 of the Original Side Rules and no one has opposed the petition. The respondent company was duly served and they had made an application dated 18-9-1986 requesting for time to engage an advocate. However, thereafter the case has been fixed on several dates in Court but no one has appeared on behalf of the respondent company. No counter-affidavit has been filed. The inventory has already been prepared by the Official Assignee. In view of the fact that the statement made in the petition that the company is not working for the last about one year is not disputed and there are two consent decrees against the company which they have failed to pay. I hold that the company is unable to pay its debts and accordingly make an order for its winding up. The Official Assignee is appointed as the Official Liquidator for purposes of drawing winding up further proceedings. A sum of Rs. one-thousand is to be deposited by the petitioner towards initial expenses of Official Liquidator within two weeks from today."

7. After reading the petition of winding up and the order dated 22-2-1987 reproduced above, there can be no doubt that M/s. Saifee Development Corporation, which is being wound up is an Insolvent Company. In the case of M.K.Ranganathan and another v. Govt. of Madras and others (AIR 1955 S.C. 604), the Supreme Court of India while considering the scope of application of Insolvency Rules by virtue of Section 229 of the Company Act 1913 (which is equivalent to Section 404 of Companies Ordinance 1984), held in paragraphs 15 and 20 of the judgment as follows:-

8. "(15) The position of a secured creditor in the winding up of a company has been thus stated by Lord Wrenbury in--'Food Controller v. Cork' 1923 AC 647 (A):

9. "The phrase' outside the winding up' is an intelligible phrase if used, as it often is, with reference to a secured creditor, say a mortgagee. The mortgagee of a company in liquidation is in a position to say "the mortgaged property is to the extent of the mortgage my property. 1t is immaterial to me whether my mortgage is in winding up or not. I remain outside the `winding up' and shall enforce my rights as mortgagee. "This is to be contrasted with the case in which such a creditor prefers to assert his right, not as a mortgagee, but as a creditor. He may say 'I will prove in respect of my debt'. If so, he comes into the winding up'. It is also summarised in Palmer's Company precedents, Vo1.II,p.415.

10. "Sometimes the mortgagee sells, with or without the concurrence of the liquidator, in exercise of a power of sale vested in him by the mortgage. It is not necessary to obtain liberty to exercise the power of ,sale, although orders giving such liberty have some times been made.

11. The secured creditor is thus outside the winding up and can realise his security without the leave of the winding up Court, though if he files a suit or takes other legal proceedings for the realisation of his security he is bound under Section 231 (corresponding with Section 171, Indian Companies Act) to obtain the leave of the winding up Court before he can do so although such (cave would almost automatically be granted.

(20) Even apart from this intendment there are certain canons of construction which also tend to support the same conclusion. Prior to the amendment the law was well-settled both in England and in India that the secured creditor was outside the winding up and he could realise his security without the intervention of the Court by effecting a sale of the mortgaged premises by private treaty or by public auction.

12. It was only when the intervention of the Court was sought either by putting in force any attachment, distress or execution within the meaning of S. 232 (1) as it stood before the amendment or proceeding with or commencing a suit or other legal proceedings against the company within the meaning of S. 171 that leave of the Court was necessary and if no such leave was obtained the remedy could be availed of by the secured creditor.

13. In the light of above discussion as I have reached the conclusion that the Company under liquidation is an insolvent company, the provisions contained in the Insolvency (Karachi Division)Act (Act III of 1908) will be applicable by virtue of Section 404 of Companies Ordinance. Section 48 of Act III of 1908 reads as follows:-

14. "48. With respect to the mode of proving debts, the right of proof by secured and other creditors, the admission and rejection of proofs, and the other matters referred to in the Second Schedule, the rules in that Schedule shall be observed.

15. In view of the above provision rules contained in the second schedule to Act III of 1908 will be applicable to the present case. On a careful examination of these rules the following position emerges with regard to the rights of a secured creditor in relation to liquidation proceedings.(1) The creditor may realise his security and after deducting the net amount so realised may prove for the balance in the liquidation proceedings before the Official Liquidator (Rule,9). (2) The creditor may surrender his security to the Official Liquidator for the general benefit of creditor and then prove for his whole debts. (Rule 10). (3) If the oreditor neither surrenders his security nor realises the same he shall before ranking for dividend state in his proof before the liquidator the particulars of his security, the date when it was given and the value at which he assesses it, and shall be entitled to receive dividend only in respect of the balance due to him after deducting the value so assessed.(Rule 11). (4) Where the creditor has valued his security, the Official Liquidator may redeem the property any time on payment of the assessed value to the creditor. If the Official Liquidator is dissatisfied with the value assessed by the creditor, he may require the mortgaged property to be offered for sale at such time and on such terms and conditions as may be agreed upon between the Official Liquidator and the Creditor. In the event of a disagreement between the creditor and the Official Liquidator with regard to terms and conditions of such sale, it may be sold by Court. If the sale of mortgaged property is by public auction, the creditor of the Official Liquidator on behalf of the company may bid or purchase the property. The creditor may, however, at any time by notice in writing require the Official Liquidator to elect whether he will or will not exercise his power of redeeming the security or requiring it to be realised, and if the Official Liquidator does not within six months of receiving the notice, signify in writing to the creditor his election to exercise it, he shall not be entitled to exercise the same thereafter, and the equity of redemption or any other interest in the property comprised is the security which is vested in the Official Liquidator shall vest in the creditor and the amount of his debt shall be reduced by the amount at which the security has been valued (Rule 12). (5) Where the creditor has valued his security he may at any time amend the valuation and proof on showing to the satisfaction of Official Liquidator or Court that the valuation and proof were based on a bona fide mistake of that the value of the security has since increased or decreased since its last valuation, but every such amendment shall be made at the cost of creditor and upon such terms as the Court shall order unless the Official Liquidator allows it without application to Court (Rule 13). (6) Where valuation of the security has been amended as stated above the creditor shall forthwith refund any surplus dividend received in excess of that which be would have received on the amended valuation. Similarly, he shall be entitled to be paid out of the money for the time being available for dividend, any dividend or share of dividend which he has failed to receive by reason of inaccuracy of the original valuation, before that money is applied for payment of any future dividend. But this right of the creditor to receive dividend shall not disturb the distribution of any dividend declared before the date of such amendment in the valuation of property (Rule 14). (7) Where the creditor after having valued his security subsequently realises it, either under Rule 9 or Rule 12 ibid, the net amount realised shall be substituted for the amount of any valuation previously made by the creditor and shall be treated in all respects as an amended valuation made by the creditor. (Rule 15). (8) If the secured creditor does not comply with the foregoing rules, he shall be excluded from all shares in any dividend (Rule 16). (9) No creditor shall be paid in any case more than 16 annas in the rupee and the interest as admissible under Act III of 1909. (Rule 17). (10) The Court shall, either upon the application by any person claiming to be a mortgagee of any part of the company's real or lease-hold estate, whether such mortgage is by a deed or otherwise and whether the same is of a legal or equitable nature, or upon the application of Official Liquidator with the consent of such person, proceed to inquire whether such person is such mortgagee and for what consideration and under what circumstances and if it is found that such person is such mortgagee, and if no sufficient objection appears to the title of such person to the same claimed by him under such mortgage, the Court shall direct such accounts and inquiries to be taken as may be necessary for ascertaining the principal, interest and costs due upon such mortgage and of the rents and profits, or dividends, interest or other proceeds received by such person or by any other person by his order or for his use in case he is in possession of the property, over which the mortgage extends or any part thereof, and the Court if satisfied that there ought to be a sale, shall direct notice to be given in such newspapers as the Court thinks fit, when and where and by whom and in what way, the said premises or property, or the interest therein so mortgaged, are to be sold, and that such sale be made accordingly and that the official liquidator (unless otherwise ordered) shall have the conduct of such sale. It is however., not necessary on any mortgagee to make such an application to the Court. At any such sale the mortgagee may bid and purchase (Rule 18). Considered in the light of above rules of insolvency, I am of the view that the application (C.MA. No. 349 of 1987) filed by M/s. National Bank of Pakistan, substantially falls under Rule 18 of the Second Schedule to Act III of 1908. I accordingly direct that the case may be fixed for holding an enquiry into the facts alleged m the application in accordance with the provision of rule 18 ibid.

16. M.Y.H./S-453/K

17. Order accordingly.