[1983] 54 COMP. CAS. 469 (BOM)

HIGH COURT OF BOMBAY

Om Prakash Berlia

v.

Unit Trust of India

BHARUCHA J.

CIVIL JURISDICTION SUIT NO. 1108 OF 1981

AUGUST 3, 4. 5. 6. 1982

 

 K.S. Cooper, G.A. Thakkar, A.N. Mody and V.C. Kotwal for the Plaintiff.

F.S. Nariman, R.P. Bhatt, I.M. Chagla, R.A. Dada, Ashok Desai, D.R. Dhanuka, T.R. Andhyarujina and G.E. Vahanvatti for the Defendant.

JUDGMENT

Introduction

This is a suit for rectification of the register of shares of the Nationa Rayon Corporation Ltd., the 8th defendant. Rectification is sought in respect of 43,750 shares standing in the names of the Unit Trust of India (UTI), the 1st defendant, Industrial Credit and Investment Corporation of India (ICICI), the 7th defendant, General Insurance Corporation of India (GIC), the 2nd defendant, and four subsidiaries of GIC, being the 3rd, 4th, 5th and 6th defendants. On May 31, 1979, the company issued to the said financial institutions 35,000, 11% convertible debentures of the nominal amount of Rs. 1,000 each, privately placed with them. Each of the debenture-holders was entitled to convert 20% of the value of the debentures held by it into equity shares. Each of the debenture-holders exercised the option to convert to the full extent on May 31, 1979, itself and was allotted the 43.750 shares on June 5, 1979. The shares are more particularly described in Ex. S to the plaint.

The suit is filed by two shareholders of the company, members of the Berlia family who are shareholders of the company in a substantial way.

The plaint is verbose, even argumentative. It sets out the history of the Berlia shareholding in the company, the freezing order under s. 108D of the Companies Act passed in respect thereof, the writ petition filed to quash it, the failure of the company to register further shares of the Berlias, and the proceedings adopted to compel registration thereof. The plaint also sets out the history of the debentures and shares in suit. The plaint challenges the whole issue of the debentures and the issue of the shares upon their conversion. Many of these challenges are not pressed. In considering the challenges that are pressed, it will be necessary to refer to portions of the plaint. It is, therefore, that I do not here undertake the laborious task of summarising the plaint. The written statements are, necessarily, almost as long as the plaint ; they raise some technical defences and, for the rest and for the most part, contain denials. Upon the pleadings a large number of issues were raised, some now rendered redundant.

Little oral evidence has been led : really, only that of two witnesses, Shingal and Atmaramani, officers of the institutions. Two other witnesses on behalf of the institutions gave evidence on tangential points which do not much advance the case. Other witnesses led by both sides proved documents. The plantiffs did not examine themselves; no director or officer of the company was examined. This has caused much comment on either side. The bulk of the evidence on record—and it is of a fair bulk— is documentary and, as the notes of evidence will show, it could not be brought on record before the party seeking to do so had navigated reefs and shoals of objections to admissibility.

Section 81, the Companies Act, 1956

Pivotal to this suit are the provisions of s. 81, sub-ss. (1), (1A) and (3) of the Companies Act. Section 81(1) to (3) reads:

"81. Further issue of capital.—(1) Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, then,—

(a)    such further shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid-up on those shares at that date ;

(b)    the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been declined ;

(c)    unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person ; and the notice referred to in clause (b) shall contain a statement of this right ;

(d)    after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of directors may dispose of them in such manner as they think most beneficial to the company.

Explanation.—In this sub-section, 'equity share capital' and ' equity shares ' have the same meaning as in section 85.

(1A) Notwithstanding anything contained in sub-section (1), the further shares aforesaid may be offered to any persons whether or not those persons include the persons referred to in clause (a) of sub-section (1) in any manner whatsoever—

        (a)    if a special resolution to that effect is passed, by the company in general meeting, or

(b)    where no such special resolution is passed, if the votes cast (whether on a show of hands, or on a poll, as the case may be) in favour of the proposal contained in the resolution moved in that general meeting (including the casting vote, if any, of the Chairman) by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, exceed the votes, if any, cast against the proposal by members so entitled and voting and the Central Government is satisfied, on an application made by the board of directors in this behalf, that the proposal is most beneficial to the company.

(2) Nothing in clause (c) of sub-section (1) shall be deemed—

        (a)    to extend the time within which the offer should be accepted, or

(b)    to authorise any person to exercise the right of renunciation for a second time, on the ground that the person in whose favour the renunciation was first made has declined to take the shares comprised in the renunciation.

(3) Nothing in this section shall apply—

        (a)    to a private company ; or

(b)    to the increase of the subscribed capital of a public company caused by the exercise of an option attached to debentures issued or loans raised by the company—

        (i)         to convert such debentures or loans . into shares in the company, or

        (ii)        to subscribe for shares in the company :

Provided that the terms of issue of such debentures or the terms of such loans include a term providing for such option and such term—

(a)    either had been approved by the Central Government before the issue of debentures or the raising of the loans, or is in conformity with the rules, if any, made by that Government in this behalf ; and

(b)    in the case of debentures or loans other than debentures issued to, or loans obtained from, the Government or any institution specified by the Central Government in this behalf has also been approved by a special resolution passed by the company in general meeting before the issue of the debentures or the raising of the loans."

Excluding verbiage irrelevant for the purposes of this suit, these provisions say this :

Where it is proposed to increase the share capital of the company by allotment of further shares, such further shares shall be offered to the company's shareholders at the date of the offer. The offer shall be made by notice limiting a time within which the offer, if not accepted, will be deemed to have been declined. After the expiry of the time specified in the notice or on receipt of earlier intimation from the shareholder that he declines to accept the shares offered, the board of directors may dispose of them.

The further shares may be offered to any persons other than the shareholders if a special resolution to that effect is passed by the company in general meeting or if the votes cast in favour of the resolution exceed the votes cast against and the Central Govt. is satisfied that the proposal is beneficial to the company.

Nothing in the section shall apply to the increase of the subscribed capital of a public company caused by the exercise of an option attached to debentures issued by the company to convert such debentures into shares in the company, provided that the terms of issue of such debentures include a term providing for such option and such term has been approved by the Central Govt. before the issue of the debentures and, in case of debentures other than debentures issued to any institution specified by the Central Govt. in this behalf, such term has also been approved by a special resolution passed by the company in general meeting before the issue of the debentures.

Proved facts: Surrounding circumstances.

The facts regarding the issue of the debentures and shares have to be appreciated in the light of certain surrounding circumstances commencing with the date, July 11, 1977, when the Company Law Board, in exercise of the powers under s. 408 of the Companies Act, appointed 8 persons to hold office as directors of the company from the date of the order in order to prevent the affairs of the company from being conducted in a manner prejudicial to it. At that point of time, the two plaintiffs held about 26,000 shares in the company. On September 1, 1977, the plaintiffs filed against the company suits in the Bombay City Civil Court for declarations that transfer applications made to the company by the plaintiffs in respect of the company's shares should be deemed to have been accepted and for orders that the company be directed to enter the names of the plaintiffs on the company's share register as transferees and owners of those shares. On September 20, 1977, the plaintiffs filed against the company in this court a petition under s. 155 of the Companies Act requiring the rectification of the register of shares of the company in respect of 27,183 shares (which were some of the shares in the aforesaid suits). A similar petition was later filed in respect of the other shares in the aforesaid suits. On September 21, 1977, this court passed an interim order in the petition wherein it was directed that the annual general meeting of the company scheduled for September 23, 1977, should proceed as scheduled but the item on the agenda thereof to elect a director in place of a retiring director should not be considered until the petition was heard and disposed of. An agreement was arrived at on December 8, 1977, between the Berlias and the company, whereunder the company agreed to transfer 2,633 equity shares of the company lodged by the Berlias to their names and the Berlias agreed to withdraw the aforesaid suits and petitions. The agreement also provided that it would be open to the company to refuse the transfer of further shares that may be lodged by the Berlias and that it would be open to the Berlias to challenge and contest such refusal. Accordingly, the aforesaid suits and petitions were withdrawn.

It appears that the company had moved the Central Govt. for the issuance of directions under s. 108D of the Companies Act in respect of the acquisition of shares in the company by the Berlia group. The application is not on record. On March 15, 1978, the company was informed that it had not submitted adequate grounds for the Central Govt. to issue such directions. On April 26, 1978, a meeting was held under the Chairmanship of the Secretary, Dept. of Company Affairs, to consider steps to be taken to prevent the Berlia group from acquiring shares to gain a controlling interest in the company. The minutes of the meeting are on record. They show that the chairman explained that the Berlias had already registered in their names 68,853 equity shares and they had also got transferred some 6,000 preference shares ; that there was a strong suspicion that most of the transferees of 23,113 equity shares which had been lodged with the company for registration were nominees of the Berlia group ; that according to reports received by the committee, the Berlia group had obtained a total of 1,74,127 proxies as against 1,08,000 mustered by the institutions ; that the Berlias had filed nominations for the appointment of 2 directors on the company's board. In view of the large number of proxies obtained by the Berlias it was obvious to the committee that the Berlias were trying to gain controlling interest in the company and this would be prejudicial to the company's affairs ; besides, if the Berlias were able to put their nominees on the company's board they would be able to gain knowledge of all the happenings in the company to further their interests. It was decided by the committee that directions should be given to the company either under s. 108D or under s. 408 not to effect transfers of shares exceeding a block of 50 shares lodged by any individual or body corporate. In order to protect the interests of persons who wanted to transfer shares for genuine reasons, it was suggested that shares exceeding a block of 50 should be purchased by the institutions. It was also decided that the Dept. of Company Affairs would examine whether the directions to the company should be issued under s. 108D or under s. 408.

On April 28, 1978, the company gave notice that the 31st AGM of the company would be held on June 29, 1978.

On May 5, 1978, the Director, Dept. of Company Affairs, wrote to the Director, Dept. of Economic Affairs, enclosing therewith a copy of the said minutes. He stated that necessary action to issue directions to the company under s. 108D was being taken. He requested that immediate steps be taken for giving directions to the institutions to purchase shares of the company exceeding a block of 50 shares that may be lodged for transfer with the company. On May 15, 1978,the Director (Investment) in the Dept. of Economic Affairs wrote to the Chairman, UTI, enclosing a copy of the letter dated May 5, 1978, and asked for the Chairman's views. On May 23, 1978, UTI's Charman replied. According to him, the matter was rather serious. He felt that the Berlia group with the support of some other group was trying to take control of the company. It was, therefore, of vital importance to protect the interests of the institutions who had sunk huge funds into the company and who had a bigger stake than any other shareholder and also the interests of small shareholders, that the Berlias and their supporters should be prevented from gaining control of the company. The chairman suggested that not only should action be taken under s. 108 but also, simultaneously, under section 408, and it should be taken fast. He was prepared to render all assistance. On May 30, 1978, the Director (Investment), Dept. of Economic Affairs, sent a copy of the Chairman's letter to the Director of Company Affairs.

On June 6, 1978, UTI's and GIC's chairman wrote a confidential letter to the chairman, CLB, stating that they were given to understand that the chairman of the company had by its letter dated April 28, 1978 (which is not on record) advanced cogent reasons why the Company Law Board should take action, inter alia, under s. 108A. The letter stated that the Berlia group had participated in the malpractices of the earlier group in management, the Kapadias. The letter stated that the Berlia group had a large quantity of shares which they had got transferred in their own names or in the names of their nominees. The annual general meeting (AGM) of the company was now scheduled to be held on June 29, 1978. After April 3, 1978, the Berlia group had lodged several transfer applications in respect of equity and preference shares of the company in their names and in the names of their nominees. The shareholders of the company had been issued a circular purported to have been signed by R. M. Goculdas, Chairman of M/s. Dharamsi Morarji Chemical Co. Ltd., R. V. Ramani, Managing Director of Mettur Chemicals and Industrial Corporation Ltd., and S.C.L. Jain, managing director of M/s. Punjab National Fertilisers and Chemicals Ltd. They had been told by Goculdas that he had not signed the circular. They were awaiting replies from the other two gentlemen. The circular recommended to the shareholders that they issue proxies in favour of one or the other of the plaintiffs or their father. The circular had been posted by the Berlia concerns. From this it was obvious that the Berlias were trying to get the control of the company and if they were allowed to control the company it would be most harmful to the interests of the company and to the public interest at large. If they were allowed to appoint a director, he would obtain knowledge of what was happening at the board meetings. For these reasons the signatories asked that directions be given to the company not to give effect to transfers of the blocks of shares listed in the annexure thereto ; where the transfer of such shares had already been registered, not to permit the transferee or any nominee or proxy of the transferee to exercise any voting or other rights attached to such shares ; where the transfer of such shares had not been registered, not to permit any nominee or proxy of the transferor to exercise any rights attached to such shares; and, regardless of whether transfers of such shares had taken place or not, the voting rights in respect of the shares listed in the annexure should be frozen so as to disbar the registered holders thereof, whoever they may be, from exercising them. This would prevent the Berlias from gaining control of the company and from having any of their nominees on the board of directors either at the forthcoming AGM of the shareholders "on June 29, 1978, or at any other general meeting". The list annexed to the letter stated the folio number and the number of the shares, equity or preference, that had been forwarded to the company for transfer and the names and addresses of (apparently) the transferors. It is a long list. It is not clear upon what basis the letter stated that the transferees of these shares were Berlia nominees. It is clear that the list was supplied to the signatories of the letter by the company.

On June 17, 1978,- the Joint Secretary to the Govt. of India in the Dept. of Company Affairs issued an order under s. 108D which can aptly be called the freezing order. The order stated that it had been brought to the notice of the Central Govt. that the Berlia group were making concerted efforts to gain a controlling interest in the company ; that certain persons alleged to belong to the Berlia group had lodged transfers of 27,263 shares in bulk with the company in order to gain controlling interest in the company; that the Berlia group had lodged proxies numbering over 1,74,500 for the extraordinary general meeting of the company held on April 3, 1978, for the appointment of two of their nominees as directors of the company ; that the Berlia group had been involved in a number of irregularities committed by the Kapadia group in the affairs of the company prior to the appointment by the Central Govt. of persons to hold office as directors of the company under s. 408 ; that the Central Govt. was satisfied upon the facts enumerated above and upon the report received from the company that, as a result of the transfer of any share or block of shares of the company, a change in the controlling interest of the company was likely to take place and that such change was prejudicial to the interests of the company. The order directed the company not to to give effect to the transfer of any such shares or block of shares and (a) where the transfer of such share or block of shares had already been registered, not to permit the transferee or any nominee or proxy of the transferee to exercise any voting or other rights attached to such share or block of shares, and (b) where the transfer of such share or block of shares had not been registered, not to permit any nominee or proxy of the transferor to exercise any voting or other rights attached to such share or block of shares. The copy of the freezing order received by the company, which is on record, shows that the company received it on June 19, 1978.

On June 26, 1978, the plaintiffs' attorneys wrote to the company recording that the 2nd plaintiff had attended the registered office of the company to lodge proxies for the AGM of June 29, 1978. He had then been told that the proxies were useless, for, an order had been received by the company, whereby voting by the Berlia group had been frozen. The letter requested the company to forthwith hand over to the 2nd plaintiff, (sic) and their advocate-assistant, who were the bearers of the letter, a copy of the order. The evidence of the advocate-assistant, Mahimkar, discloses what transpired when he went to the company's office and thereafter to the office of the Registrar of Companies. There is also correspondence in this regard. On June 26, 1978, the plaintiff's attorneys wrote to the company recording that the 2nd plaintiff with the advocate assistant had attended the company's office to deliver the said letter. They had been told that the company's chairman was out of station. They had seen T. S. Narayanan, the company's Dy. Secretary, and had handed over the letter to him. They were informed by Narayanan that he had no knowledge of any order and that he would make enquiries and send a reply. The correspondence on record discloses that the advocate-assistant went to the office of the Registrar of Companies to take inspection of the order and was informed that it was not a public document and could not be inspected. Upon inspection of the files relating to the company it was found that the order was not therein. On June 26, 1978, the company wrote to the plaintiffs' attorneys stating that it had handed over the letter containing the demand for the copy of the order to its advocates. The letter was received on June 27, 1978. On June 27, 1978, the plaintiffs' attorneys informed the company that the plaintiffs had lodged a writ petition in this court impugning the order (without annexing it) and that an application for interim relief would be made on the next day. The company was required to produce the order at the time of the application. On June 27, 1978, the company sent the plaintiffs' attorneys a photostat copy of the freezing order. On June 28, 19 78, this court passed the interim order, inter alia, in these terms:

"There would be an injunction in terms of prayer (c) on the following conditions. At the meeting to be held on June 29, 1978, or at the adjourned meeting in respect of items 2 and 4 on the agenda of the meeting or any amendment thereof as mentioned by the learned counsel for respondent No. 3 (the draft of which has been handed over to the court and which is taken on file) the petitioners undertake to the court to exercise their voting rights in respect of their 69,633 shares mentioned in para. I of the petition and in respect of proxies held by them in respect of which the petitioners are entitled to vote in favour of said items and the said amendment thereof.

As regards items 1 and 3 on the said agenda and also as regards those terms or resolution in respect of which notice of moving resolution at the said meeting has been given to the 3rd respondent, the petitioners are at liberty to exercise at the said meeting or adjourned meeting all their rights including voting rights, a right to demand poll and right to contest.

The chairman of the meeting, however, shall not declare the result of the voting on poll being demanded, on any resolution either under the said items 1 and 3 or in respect of any matters for which notice has been given to the 3rd respondent, until further orders of the court............................"

On June 29, 1978, the 31st AGM was held. The plaintiffs voted thereat in accordance with their undertaking. The election results were not declared.

On October 13, 1978, the plaintiffs filed in this court a petition under s. 155 of the Companies Act, 1956, for a rectification of the share register of the company in respect of the shares lodged for transfer by them. A similar petition was filed in respect of other shares some time in the beginning of 1979. On November 11, 1979, Shah J. delivered the judgment in the writ petition filed by the plaintiffs in respect of the freezing order. He quashed the order.

On December 7, 1979, this court delivered a judgment in the two petitions for rectification. It was held therein that the refusal of the company's board to register the shares was inconsistent, arbitrary and capricious. It was observed that the arguments addressed by counsel for the petitioners therein upon the alleged mala fides of the company in harassing the petitioners had not impressed the court.

On December 12, 1979, this court dismissed the appeal filed by the Union of India against the order in the writ petition. To enable the Union of India to prefer an appeal to the Supreme Court of India, it was directed that the results of the voting at the 1978 AGM should not be declared until January 9, 1980.

It appears that on November 28, 1979, a representation was addressed on behalf of the 2nd plaintiff to the Union Minister for Law, Justice and Company Affairs and that on January 4, 1980, the 2nd plaintiff with his counsel and instructing advocate met the CLB. Pursuant to their discussions, the plaintiffs' attorneys on January 5, 1980, wrote to the CLB placing on record proposals with a view to end all disputes and causes of friction between the Berlias, the company and the Government. The proposals suggested, inter alia, that the order under s. 408 be continued for a further period not exceeding 3 years ; that the company should transfer all shares proposed for transfer and register them ; and that the Government should confirm and sanction the appointment of the two directors of the Berlias on the company's board.

On January 9, 1980, the Supreme Court heard the special leave petition filed by the Union of India in respect of the order on the writ petition. The Supreme Court recorded that the Solicitor-General had made a statement on behalf of the CLB and the Govt, of India that the proposals in the letter written by the plaintiffs' advocates to the CLB were acceptable. Accordingly, the Supreme Court passed an order in terms of the proposals contained in the letter and stated that these were deemed to be the directions of the court. The Supreme Court stated that in view of these final orders, the findings of the trial court would not remain in operation but the final order passed by the trial court would. The special leave petition was allowed to be withdrawn.

On January 21,1980, the CLB informed the company of the order passed by the Supreme Court and directed the company to implement fully the proposals in the letter of January 5, 1980, a copy whereof was enclosed.

There was considerable correspondence between the attorneys of the plaintiffs and the attorneys of the company, subsequent to the passing of the order by Shah J. on the writ petition in respect of the declaration of the result of the election at the 1978 AGM. On February 13, 1980, the result was ultimately declared and it was found that the 2nd plaintiff had been elected a director. On March 6, 1980, the CLB confirmed the appointment of the second plaintiff as a director. It appears that the second plaintiff attended his first board meeting on March 27, 1980.

Proved facts : Debentures and shares

It appears that an application for some financial assistance had been made by the company to the institutions. On December 20, 1977, ICICI informed the company that it had considered the company's application and was prepared to provide a rupee term loan of Rs. 58 lakhs to meet a a part of the cost of the company's scheme to complete the nylon tyre cord project, to set up a monomer recovery plant, to complete essential maintenance and to incur capital expenditure deferred earlier. The letter stipulated the terms and conditions upon which the loan would be given. One of the terms stated that ICICI would have the option to convert a part of the loan into shares on terms to be decided later. (It must be immediately mentioned that this loan of Rs. 58 lakhs is the subject-matter not of this suit but of O. O. C. J. Suit No. 1110 of 1981. It is, however, of some relevance to this suit.)

On January 17, 1978, UTI wrote to the company in respect of the company's application for financial assistance for the nylon tyre cord project (phase II). The letter informed the company that UTI was agreeable in principle to provide financial assistance to the extent of Rs. 50 lakhs by way of subscription to the proposed issue of privately placed debentures for financing a part of the costs of phase II of this project. The commitment would be on the understanding and subject to the conditions set out in the letter. Clause 8 of those conditions stated that the company should agree to vest in UTI the option to convert a portion of the amount into shares on terms and conditions to be decided by UTI in consultation with other institutions, which would be advised to the company in due course. The letter concluded that UTI would be prepared to place an advance deposit of Rs. 50 lakhs with the company.

On February 8, 1978, a bridging loan agreement was entered into between ICICI and the company in respect of the sum of Rs. 40 lakhs out of the total loan of Rs. 58 lakhs. On February 9, 1978, and February 13, 1978, respectively, ICICI forwarded to the company cheques for Rs. 20,00,000 each towards the disbursement of the bridging loan of Rs. 40,00,000. On March 8, 1978, ICICI wrote to the company with reference to the loan of Rs. 48 lakhs and sent therewith a draft loan agreement. Article 3(2) of the draft agreement set out the conversion right but left blank the value of the loan which could be converted, the period during which and the price at which the conversion could be effected.

On March 17, 1978, the company wrote to the UTI and confirmed acceptance of the terms contained in UTI's letters dated June 17, 1978, April 24, 1978, and March 13, 1978. The letter stated that the company would be grateful if UTI placed with them the deposit of Rs. 50 lakhs. This was done.

On May 19, 1978, a meeting was held of the special executives of the institutions. The summary record of its proceedings is on record. The terms of option for the conversion of the loan into equity in respect of the aggregate loan of Rs. 108 lakhs for the nylon tyre cord project, phase II, was discussed in relation to the settlement of the terms of an option for the conversion of the loan into shares and it was decided that 20% of the loan would be subject to conversion at a premium of Rs. 60 per share of the face value of Rs. 100, the period of conversion being July 1, 1978, to June 30, 1980, subject to confirmation at an Inter-Institutional Meeting.

On May 17, 1978, the company wrote to UTI a letter regarding the loan for the nylon project, phase II. It stated that in the course of discussions UTI had agreed that the Bank of Baroda would be appointed the debenture trustee in respect of the debentures of Rs. 50 lakhs to be issued to UTI. It asked UTI to confirm this so that the Bank of Baroda could be suitably advised. The letter went on to say this :

"...Incidentally, we may add that the consortium of banks comprising of Bank of Baroda, Dena Bank, Punjab National Bank and Canara Bank are providing additional term loan of Rs. 1 crore to meet company's working capital requirement, and this amount will be secured by a pari passu charge on the security mentioned above................."

On May 19, 1978, UTI wrote a confidential letter to the chairman of the company. It said that UTI found that the company was approaching a consortium of banks for a term loan of Rs. 1 crore to meet its working capital requirements. UTI felt that this means of financing would be costly for the company. UTI was prepared to take up, subject to its board's approval, privately placed debentures of Rs. 1 crore which may be issued by the company upon the terms and conditions mentioned in the letter. Term 4 stated :

"There would be conversion option into equity up to 20% of the face value of the said privately placed debentures. The option would be exercisable by the trust immediately after the company accepts terms and conditions of the issue of the said debentures, subject to the approval of the Controller of Capital Issues."

The UTI were prepared to place an advance deposit of Rs. 1 crore with the company.

On May 29, 1978, the company wrote to UTI that it was grateful for the offer of the term loan assistance of Rs. 1 crore contained in the letter dated May 19, 1978, for meeting the company's working capital requirements. The matter had been discussed by the company's board on May 24, 1978, and the board felt that "......................the offer may be accepted as an additional assistance instead of as an alternative to the consortium term loan.............." The letter went on to say :

"......................The committee of directors and the board of directors have earlier felt that a programme of modernisation/expansion/diversification should be drawn up and implemented to improve the long-term profit profile of the company. We would, therefore, seek your help for the first phase of the programme of modernisation in regard to the following :

 

Rs. lakhs

 

Rayon Plant—8 spinning machines

120

 

            Bleaching machine

80

 

            Evaporation systems

25

 

            Miscellaneous

30

 

 

 

255

Anhydrous Sodium Sulphate Plant

 

100

100 T. Sulphuric Actd Plant

 

100

Rectifier System Changes

 

25

Modernisation Programme Cost

 

480

(Brief note on each item is attached)

 

 

The above figures are very tentative and detailed estimates are being worked out for placing before our board at its next meeting to be held on June 29, 1978. We may mention that out of the above items, we propose to take capital expenditure programme of approximately Rs. 3 crores in the first phase and would be grateful to have your concurrence that you would be able to give us the term loan through privately placed debentures on usual terms and conditions."

On May 31, 1978, a note was prepared by UTI in respect of the letter dated May 29, 1978, received by it from the company for consideration at the Inter-Institutional Meeting (IIM) to be held on May 31, 1978. The note summarised the assistance required by the company as being Rs. 480 lakhs of which Rs. 300 lakhs were to be the capital expenses in the first phase for the proposed modernisation programme ; the company had approached UTI for a term loan of Rs. 300 lakhs by way of privately placed debentures. UTI was prepared to provide Rs. 200 lakhs by way of term loan to the company jointly with other financial institutions for the modernisation programme. The point for consideration at the IIM was stated to be the proposal of UTI to sanction Rs. 200 lakhs to the company for its modernisation programme by way of privately placed debentures on its normal terms and conditions for such assistance. In the meanwhile, it was suggested that ICICI as the lead institution would process the request of the company further. UTI proposed to exercise its right to convert Rs. 40 lakhs (20 per cent. of the proposed assistance) into shares with immediate effect, subject to the approval of the Government, at a premium of Rs. 60 per share of Rs. 100, paid up. If the other institutions wished to participate with UTI in sharing the assistance of Rs. 200 lakhs, the UTI would reduce its assistance to that extent. The note was accompanied by a flash report. The note and the flash report set out the "very tentative" figures and brief facts mentioned in the company's letter dated May 29, 1978, and the note accompanying it.

On record in this suit is the informal summary record of the proceedings of the IIM held on May 31, 1978, in so far as it related to the company. It is stated therein that the proposal of UTI to sanction to the company an assistance of Rs. 200 lakhs contained in its note was discussed. It was observed that the company was yet to furnish firm figures regarding the proposed modernisation programme. The company was expected to show better results from 1978 onwards, and the modernisation scheme was a step in the right direction to improve the long-term profitability of the company, in which UTI had already a substantial stake. It was felt that UTI should extend assistance to the project and ICICI as the lead institution would take up the proposal for further processing for a sanction of the balance assistance required from the other institutions. The consensus was that UTI should sanction the increased assistance of Rs. 300 lakhs and should exercise its conversion option to the extent of 20 per cent. during the period January 15, 1978, to June 14, 1980.

On June 1, 1978, UTI prepared a note for circulation to its executive committee. It recorded that UTI had circulated the note for consideration at the IIM on May 31, 1978. It reproduced the figures contained in the company's letter dated May 19, 1978, and stated that the figures were tentative and detailed estimates were being worked out by the company. The institutions would carry out an appraisal of the modernisation programme and examine it further. The company had not furnished firm figures regarding the proposed modernisation scheme, its financial requirements, profitability estimates after the modernisation scheme was implemented, etc. However, even on the basis of profitability estimates worked out by ICICI in December, 1977, without taking into account the modernisation scheme, the company's operations were likely to show an operating profit of Rs. 56 lakhs in 1978, rising to Rs. 224 lakhs by 1981, and the company was likely to pay dividends from 1979 onwards. It was agreed at the IIM that UTI should sanction assistance of Rs. 300 lakhs and other institutions would indicate their participation, if any, to UTI. It was also agreed that "instead of telescoping conversion option", the period of conversion would be from June 15, 1978, to June 14, 1980, at the option of UTI. UTI would exercise its right to convert 20% of the proposed debenture loan into shares at a premium of Rs. 60 per share of Rs. 100 paid up, subject to government approval, during the period June 15, 1978, to June 14, 1980. In the meantime, ICICI as the lead institution would process the matter further. The members of UTI's executive committee were requested to approve the proposal for subscribing to the privately placed debentures up to Rs. 300 lakhs of the company and for placing an advance deposit of the equivalent amount with the company against. UTI's commitment to subscribe to the privately placed debentures. The evidence of Atmaramani shows that 3 members of UTI's executive committee signed the circular resolution approving the proposal on June 1, 1978.

On June 1, 1978, UTI wrote to the company that it was agreeable in principle.to provide the financial assistance, along with other institutions, of Rs. 300 lakhs for financing a part of the cost of the company's modernisation programme. The assistance would be in the form of subscription to the privately placed debentures and the amount of Rs. 300 lakhs would be reduced to the extent that other institutions indicated their willingness to participate. UTI's commitment to subscribe would be on the understanding and subject to the conditions set out in the letter. Clause (7). which related to the condition regarding conversion, reads thus :

"The company should agree to vest in Unit Trust of India and other financial institutions the option to acquire in lieu of conversion equity shares of Rs. 60 lakhs—the amount of Rs. 60 lakhs is inclusive of premium and constitutes 20 per cent. of the assistance of Rs. 300 lakhs—the trust has agreed to provide. The shares will be acquired at a price on payment of Rs. 160 per share of Rs. 100 (i.e , at Rs. 60 premium) or at such premium as may be approved by the Controller of Capital Issues. The period for conversion would be June 15, 1978, to June 14, 1980. The company should approach the Controller of Capital Issues/Government of India for necessary approval."

In respect of what transpired between May 29, 1978, and June 1, 1978, there is some evidence on record, of Atmaramani, an officer of UTI, and of Shingal, an officer of ICICI. It does not contain much by way of facts. Some reference will be made to it when dealing with the contentions. I do not consider it necessary to set it out here.

On June 2, 1978, the company wrote to UTI in relation to the term loan assistance of Rs. 300 lakhs and the discussions with UTI's Chairman whereat it had learnt that its request had been favourably considered at the IIM of May 31, 1978. The letter recorded that UTI's Chairman had mentioned that the term loan would carry a right to subscribe to shares of the company equivalent to 20% of the term loan at the rate of Rs. 160 per share during the period June 15, 1978, to June 14, 1980. The letter recorded that the proposal had been put up before the company's committee of directors and had been accepted by them, except for the share premium amount, and that the proposal would be put up before the board of directors on June 7, 1978. The letter, after mentioning several considerations, stated that it was felt that the share premium of Rs. 10 per share should be considered reasonable and asked UTI to agree. On June 6, 1978, the company wrote in reply to UTI's letter of intent of June 1, 1978. The letter stated that it required, inter alia, modifications of the clause dealing with the premium and reiterated that the premium should be Rs. 80 per share. The other modifications were trivial.

On June 6, 1978, UTI wrote to the company in respect of the assistance of Rs. 50 lakhs for the nylon tyre cord project. The letter advised that, in terms of cl. 8 of the letter of intent dated June 17, 1978, UTI will have the option to acquire, in lieu of the conversion, equity shares of Rs. 10 lakhs at the premium of Rs. 60 per share. The period for "conversion/ acquiring shares" would be June 15, 1978, to June 14, 1980. The letter went on to say :

"................In pursuance of the above, we hereby give notice of our intention to acquire with effect from June 15, 1978, in lieu of conversion, fully paid up equity shares of your company of a total amount of Rs. 10 lakhs............."

Such equity shares were required to be registered in the name of UTI "immediately on allotment, i.e., from June 15, 1978". Since UTI had already advanced Rs. 50 lakhs as a deposit, the amount of Rs. 10 lakhs thereout should be adjusted as application money for allotment to UTI of the shares in lieu of the conversion with effect from June 15, 1978. It was clearly understood that, after acquiring shares for Rs. 10 lakhs, UTI's commitment to subscribe to the debentures would stand reduced to Rs. 40 lakhs and the company should get the debenture trust deed executed for the amount of Rs. 40 lakhs and should allot debentures of the face value of Rs. 40 lakhs to UTI. The company was asked to confirm that it would be allotting to UTI the shares in lieu of the conversion as stipulated by UTI.

On June 8, 1978, ICICI wrote to the company saying that it was prepared to subscribe to the debentures of the value of Rs. 50 lakhs out of the total amount of Rs. 300 lakhs. The terms and conditions stated, inter alia, that ICICI would have the option to convert debentures of Rs. 10 lakhs into shares during the period June 15, 1978, to June 14, 1980.

On June 8, 1978, UTI wrote a letter to the company. It is necessary to reproduce it in extenso.

"Dear Sir,

Financial assistance for the company's modernisation programme.

Please refer to our letter No. UT-14973/RS(N-14) 78 dated June 1, 1978, agreeing in principle to provide to your company financial assistance of Rs. 300 lakhs jointly with other financial institutions in connection with the company's modernisation programme. In terms of clause (7) of the above letter, the Trust has the right to acquire, in lieu of conversion, fully paid-up equity shares of the company of Rs. 60 lakhs (which is equivalent to 20 per cent. of the debentures agreed to be subscribed by the Trust) at any time during the period June 15, 1978, to June 14, 1980. The amount of 60 lakhs is inclusive of a premium amount of Rs. 22.50 lakhs (i.e., premium of Rs. 60 per share of Rs. 100) or such premium as may be approved by the Controller of Capital Issues.

In pursuance of the said clause, we hereby give notice of our intention to acquire with effect from June 15, 1978, fully paid up equity shares of your company of a total amount of Rs. 60 lakhs (including premium amount of Rs. 22.50 lakhs, i.e., Rs. 60 per share of Rs. 100 or such premium as may be approved by CCI) against payment by us of an amount of Rs. 60 lakhs.

We agree to accept the above equity shares to be issued by the company pursuant hereto subject to the provisions of the memorandum and articles of association of the company.

We advise that such equity shares are required to be registered in the name of the Unit Trust of India immediately on allotment, i.e., from June 15, 1978, and you are hereby authorised to enter our name in the register of members in respect thereof. These shares will rank pari passu in all respects with the existing equity shares of the company except that for the year in which these are issued, these will be entitled only for pro rata dividend from the date of allotment.

Please take steps to complete the necessary formalities in this regard and arrange to issue and allot the equity shares to the Trust at the earliest.

It is clearly understood that, after acquiring equity shares of the company of a total amount Rs. 60 lakhs, our commitment to subscribe to the privately placed debentures will stand reduced to Rs. 240 lakhs. This commitment of Rs. 240 lakhs will stand reduced further to the extent of participation in the assistance to the company to be indicated by other financial institutions. Out of the equity shares to be acquired by the trust in lieu of conversion, the trust would transfer part to other financial institutions, pro rata to their share of assistance to the company.

Please acknowledge receipt and confirm that the company would be allotting to the Trust equity shares in lieu of conversion as stipulated above.

Yours faithfully,"

On June 15, 1978, ICICI wrote to the company a letter relating to the rupee loan of Rs. 58 lakhs. The letter stipulated that ICICI would have the option to convert Rs. 11.60 lakhs out of the loan of Rs. 58 lakhs into shares of the company during the period June 15, 1978, to June 14, 1980, at the rate of Rs. 160 per share. On 20th June, 1978, GIC wrote to the UTI that its board had approved the subscription by it and its subsidiaries to the debentures to the extent of Rs. 50 lakhs; since UTI had agreed to subscribe to debentures of the value of Rs. 300 lakhs, to be reduced to the extent subscribed for by ICICI and GIC and its subsidiaries, GIC enclosed a letter addressed by it on June 19, 1978, to the company agreeing in principle to so subscribe and authorised UTI to release the said letter to the company at an appropriate time. On June 2, 1978, UTI wrote to GIC to state that GIC's letter addressed to the company had been delivered and necessary action regarding conversion of shares would be taken up shortly.

On June 20, 1978, the Controller of Capital Issues wrote to the company consenting to the issue of "51,000 equity shares of Rs. 100 each at the premium of Rs. 60 per share, credited as fully paid up, to ICICI and UTI in conversion of a part of their loan/debentures to the extent of Rs. 81,60,000 (including the premium) out of the loan/debentures sanctioned to the company".

On June 23, 1978, the CLB wrote to the company in respect of the application made by the company under s. 81(3) of the Companies Act for the approval of the raising of convertible debentures. The letter stated that it was observed from UTI's letter of June 6, 1978, that UTI had already given notice for exercising its option to convert an amount of Rs. 10 lakhs out of the total advance deposit of Rs. 50 lakhs against UTI's commitment to subscribe to the proposed privately placed debentures issue and that UTI's commitment to subscribe to the debentures would thereafter stand reduced to Rs. 40 lakhs. The CLB requested the company to clarify whether the company had already issued the debentures to UTI for Rs. 10 lakhs. In case the debentures had not been issued, it was not clear to the CLB how UTI could exercise its option for the conversion of the debentures into equity shares. The company was also required to indicate whether the company had issued any shares to UTI in conversion. On July 6, 1978, the company replied to the CLB. It stated that the company had negotiated for a term loan of Rs. 58 lakhs from ICICI and Rs. 50 lakhs from UTI by privately placed debentures to meet a part of the scheme to complete the nylon tyre cord project, for completing essential maintenance, etc. The company had received Rs. 40 lakhs out of Rs. 48 lakhs term loan as bridging finance from ICICI and Rs. 50 lakhs from UTI as advance deposit. The company had not issued debentures to UTI. UTI had given notice of its intention to acquire with effect from June 15, 1978, in lieu of the conversion, fully paid up equity shares of the company equivalent to 20% of the privately placed debentures for a total amount of Rs. 10 lakhs. The company had not issued any shares to UTI in conversion of the debentures.

On August 17, 1978, the CLB informed the company that it approved the raising of a convertible loan of Rs. 11.60 lakhs out of the total loan of Rs. 58 lakhs from ICICI. The loan would be convertible into equity shares at the rate of Rs. 160 per share during the period June 15, 1978, to June 14, 1980. On the same day, i.e., August 17, 1978, the CLB informed the company that it approved the issue of convertible debentures of the value of Rs. 70 lakhs out of the total debentures of the value of Rs. 350 lakhs to be issued to UTI. The debentures would be convertible into equity shares at the rate of Rs. 160 per share during the period June 15, 1978, to June 14, 1980. On September 4, 1978, the company wrote to the CLB stating that other institutions had agreed to participate in the financial assistance agreed to be provided by UTI thus: ICICI in the sum of Rs. 50 lakhs, GIC and its subsidiaries in the sum of Rs. 50 lakhs and the balance would be provided by UTI. The letter requested that the CLB's letter of approval of August 17, 1978, be amended to include ICICI, GIC and its subsidiaries..

On October 5, 1978, the Controller of Capital Issues wrote to the company that the words "ICICI and UTI" in the consent order of June 20, 1978, should be substituted by the words, "ICICI, UTI, GIC and its subsidiaries". On October 5, 1978, the Controller of Capital Issues wrote to the company regarding the company's request to increase the amount of premium from Rs. 60 to Rs. 80 per share. The letter stated that the Government had considered the matter in the light of the company's representation but regretted its inability to accede to it.

On October 16, 1978, GIC wrote to the company stating its intention to subscribe, along with its subsidiaries, to debentures worth Rs. 50 lakhs out of the total debenture issue of Rs. 300 lakhs. The letter stated the terms and conditions upon which the sanction would be subject to. C1. 4 required the company to agree to vest in GIC and its subsidiaries the option to acquire, in lieu of conversion, shares of Rs. 10 lakhs, the period of conversion being June 15, 1978, to June 14, 1980. The subsidiaries also sent such letters of intent.

On October 18, 1978, the company sent to an officer in the projects dept. of ICICI a copy of the modernisation programme. It is the evidence of Singhal, chief of the projects dept. of the ICICI, that in making the detailed appraisal or assessment of the company's modernisation programme, his department proceeded upon the basis of this document.

On December 1, 1978, the CLB wrote to the company conveying its approval to the issue of convertible debentures of the value of Rs. 50 lakhs to GIC and its subsidiaries, the conversion to be at the rate of Rs. 160 per share during the period June 15, 1978, to June 14, 1980. On December 6, 1978 the company wrote to the CLB and asked for an amendment of the letter of approval so as to include the name of ICICI for the issue of convertible debentures of the value of Rs. 10 lakhs out of the total debentures of the value of Rs. 50 lakhs to be issued to it. On January 5, 1979, the CLB wrote to the company and stated that all the 51,000 shares by the conversion of debentures had already been covered by the approvals of the CLB issued in respect of loan/debentures of ICICI and UTI. On January 9, 1978 the company wrote to the CLB a long letter clarifying the entire position and asked the CLB to suitably amend the letter of approval to approve the issue of convertible debentures of the value of Rs. 70 lakhs out of the total debentures of the value of Rs. 300 lakhs in respect of UTI, ICICI, GIC and its subsidiaries for the amounts mentioned therein.

On January 24, 1979, the Controller of Capital Issues intimated to the company that the entry in the consent order of June 20, 1978, should be substituted to read as follows :

"51,000 equity shares of Rs. 100 each at a premium of Rs. 60 per share credited as fully paid up to the financial institutions in conversion of a part of their loan/debentures into equity shares of the company to the extent of Rs. 81,60,000 (inclusive of the premium out of the loans/ debentures aggregating Rs. 408 lakhs sanctioned, in the following manner :

 

Loans/debentures sanctioned

No. of shares
to be allotted

Value of share including premium of Rs. 60 per share

 

Rs.

 

Rs.

ICICI

108,00,000

13,500

21,60,000

UTI

250,00,000

31,250

50,00,000

GIC and sits subsidiaries

50,00,000

6,250

10,00,000

 

408,00,000

51,000

81,60,000."

On February 6, 1979, the CLB wrote to the company a letter approving the issue of convertible debentures of Rs. 50 lakhs out of total debentures of the value of Rs. 250 lakhs to be issued to UTI, convertible at Rs. 160 per share during the period June 15, 1978, to June 14, 1980. A similar letter approved the issue of convertible debentures of the value of Rs. 50 lakhs to be issued to the ICICI.

On April 7, 1979, M/s. Amarchand & Mangaldas & Hiralal Shroff & Co., the common attorneys for the institutions and the company, wrote to the institutions, the company and the debenture trustee with reference to the previous correspondence and a joint meeting and enclosed therewith a note of the discussion thereat. One of the items discussed was that the company would take steps to approach the CLB for a modification of the sanction granted under s. 81 so as to clearly specify that the convertible debentures would be to the extent of Rs. 350 lakhs in the aggregate and not only Rs. 70 lakhs. Another item discussed was that the company would take expeditious steps for the creation of securities to secure the debentures and the ICICI term loan as the institutions "were anxious to complete the transaction latest by May 30, 1979".

On April 25, 1979, ICICI wrote to the CLB with reference to the orders issued regarding the conversion of debentures. The letter stated that since the company would be actually issuing to ICICI convertible debentures of the value of Rs. 50 lakhs out of which debentures of the value not exceeding Rs. 10 lakhs would be convertible at ICICI's option, ICICI presumed that the order dated February 6, 1979, enabled the company to do so. Similar letters were written by UTI and GIC. On May 14, 1979, the CLB wrote to ICICI to say that in the approval letter of February 6, 1979 "...it has been clearly stated that the debentures of the value of Rs. 10 lakhs will be convertible into equity shares at a rate of Rs. 160 per share...during the period June 15, 1978, to June 14, 1980". Similar letters were also written to the other institutions.

On April 26, 1979, the company issued notice of the AGM to be held on June 28, 1979.

Around April, 1979, the company's nylon tyre cord project, phase II, was completed.

It appears that on May 7, 1979, the permission of the competent authority under the provisions of the Urban Land (Ceiling & Regulation) Act, 1976, was obtained to mortgage the company's lands to create a security for the debentures.

On May 18, 1979, ICICI wrote to the company enclosing a draft of the resolutions required to be passed in connection with the execution of the debenture trust deed, allotment of debentures, etc. On May 24, 1979, a meeting of the board of directors of the company passed the appropriate resolutions. One of the resolutions passed, it is common ground, authorised four directors to finalise, settle and incorporate necessary modifications and changes in the draft debenture trust deed and other documents.

On May 29, 1979, the common attorneys wrote to the institutions, the company, the debenture trustee and its attorneys stating that the transaction relating to the privately placed debentures of the company for Rs. 350 lakhs and the term loan of Rs. 58 lakhs sanctioned by ICICI was scheduled for completion at the office of ICICI at 2.45 p.m. on May 31, 1979. For ready reference, the attorneys, enclosed a short note on the points for completion of the transaction. Item 1 of the note stated that the company had to furnish to each of the debentureholders, the debenture trustee and the attorneys, certified copies of the board resolutions passed by the directors in connection with, inter alia, the acceptance of notices of conversion, entering into of contracts under s. 75 of the Companies Act, issue of equity shares upon conversion and other related matters. Item 3 refered to the execution of the debenture trust deed and the affixing thereon of the company's seal. Item 8 stated that UTI and ICICI would issue letters of adjustment in respect of the advances made by them towards the debenture subscription and also issue cheques for the balance amount and apply for subscription of the debentures. Item 9 stated that GIC and its subsidiaries would also apply for subscription and issue requisite cheques for the value of the debentures to be subscribed for by them. Item 10 stated that the company would issue letters of allotment of debentures to the debentureholders. Item 11 stated that after the letters of allotment were received the debentureholders would issue notices of conversion to the company and upon receipt of such notices of conversion, the company would issue letters of allotment of shares and also execute contracts in respect of the shares to be allotted under s. 75 of the Companies Act. Item 13 stated that the company would issue share certificates for the converted amount to the debentureholders. In respect of ICICI's term loan of Rs. 58 lakhs a similar programme was chalked out.

On May 30, 1979, the common attorneys wrote to the company enclosing a draft of the letter of allotment of the convertible debentures to be issued to ICICI and a draft of the letter of allotment for shares to be issued to ICICI upon conversion. The company was requested to finalise the drafts with ICICI and arrange to issue similar letters of allotment to UTI, GIC and its subsidiaries. The letter asked that the company do ensure that the letters of allotment were duly stamped before issue thereof.

What transpired at the meeting of May 31, 1979, has not been made the subject-matter of any evidence, oral or documentary, tendered by the defendants. Some of the documents executed and/or exchanged at that meeting are on record and some are not.

The debenture trust deed executed at the meeting of May 31, 1979, is on record. It is made between the company and the Bank of Baroda as debenture trustee. It recites that the company was installing equipment to convert nylon tyre yarn into fabric and that it had taken up a scheme to modernise its rayon textile and caustic soda plants and to increase the capacity in its anhydrous sodium sulphate plant. With a view to finance the cost of this project UTI, ICICI, GIC and its 4 subsidiaries had agreed to subscribe for privately placed debentures of the nominal value of Rs. 250 lakhs, Rs. 50 lakhs and Rs. 50 lakhs respectively. (It will be seen that UTI's agreement to provide the loan of Rs. 50 lakhs for the nylon tyre cord project, phase II, is included in the sum of Rs. 250 lakhs mentioned in respect of UTI). By letters dated January 17, 1978, and June 1, 1978, issued by the UTI and accepted by the company, referred to as the "UTI loan agreements", UTI had agreed to subscribe for privately placed debentures of the nominal value of Rs. 250 lakhs upon the terms and conditions therein mentioned. The loan agreements with the other institutions are also recited. The requisite resolutions passed by the company's board are recited. Reference is also made to the consents or permissions received from the various authorities. The last recital states that the debenture trustee had, at the request of the company, "consented to act as trustees of these presents and for the benefit of the debenture-holders on the terms and conditions hereinafter appearing".

Clause 1 of the debenture trust deed defines the "debentures" to mean "the debentures of the company issued under these presents...in accordance with the forms set out in Parts I to VII respectively of the Fifth Schedule hereunder written under the provisions of and secured by these presents.............." The "debenture holders" are defined to mean "the holders for the time being of the debentures so issued............on the conditions endorsed on the debentures............" Under cl. 2, the debentures "issued hereunder and which are entitled to the benefit of these presents" are 35,000 11% convertible debentures of the nominal amount of Rs. 1,000 each and comprised of 25,000 series "A" debentures, 5,000 series "B" debentures, 1,000 debentures each of series C, D, E, F and G, all carrying interest at the rate of 11% per annum and in the forms set out in Pts. I to VII of the Fifth Schedule therein written. Clause 2 contains the covenant to repay and sets out the redemption instalments. It provides that if for any reason the amount of subscription to the debentures of any series was less than the total amount, the relative redemption instalments would stand reduced pro rata.

Clause 4 contains the right of conversion. Sub-clause (a) deals with the right of conversion of UTI. The subsequent sub-clauses deal with the rights of conversion of the other institutions and are in identical terms. Sub-clause (a) reads as follows :

"UTI as the registered holder of the series 'A' debentures shall at any time and from time to time between the 15th day of June, 1978, and 14th day of June, 1980, have the right to convert series 'A' debentures of the nominal amount not exceeding Rs. 50,00,000 (Rupees fifty lakhs) into fully paid up equity shares of the company at a premium of Rs. 60 per share of a face value of Rs. 100 each and shall be entitled as such registered holder to call for allotment of 31,250 fully paid up equity shares of Rs. 100 each of the company at a premium of Rs. 60 per share or pro rata of an equivalent nominal value in respect of such series 'A' debentures for which the right is so exercised by UTI in the manner set out in the form of debentures in Part I of the Fifth Schedule hereunder written."

Under cl. 5, the principal moneys secured under the debenture trust deed is limited to the sum of Rs. 3,50,00,000.

Under sub-cl. (h) of cl. 15 if the company failed to observe or perform any covenants, conditions or provisions therein contained or in the loan agreements the debentures would be deemed to have forthwith become due and payable and the security to have become unenforceable.

Clause 23 reads as follows :

"In the event of any of the debentures being converted into equity shares pursuant to the option in that behalf reserved to the debenture-holders as provided in these presents, the debenture-holders shall surrender such debentures to be so converted to the company within thirty days from the date of notice exercising such option for the purpose of necessary memorandum to be made by the company thereon indicating the cancellation or extinguishment of each of such debentures and the conversion into fully paid up equity shares as aforesaid."

Under cl. 34, the company is required to maintain at its registered office a register of the debentureholders showing, inter alia, the name and address of each holder, the nominal amounts of the debentures held by him, the date on which his name was entered in the register as a debenture-holder, the date on which he ceased to be a debentureholder and subsequent transfers and changes of ownership. Under sub-cl. (B) of cl. 34, the company was required to issue in the first instance, within a period of three months from the date of allotment, to each debentureholder, free of charge, a debenture certificate in respect of his holding showing on the face thereof the denomination, number and the amount of debentures. Under sub-cl. (C)of cl. 36, the company was obliged to duly observe and perform all the terms and conditions contained in the loan agreements and not to commit any breach or default thereof.

The Fifth Schedule of the debenture trust deed sets out the form of debentures to be issued to the institutions. Part I relates to the series A debentures to be issued to UTI. Clause 5 thereof sets out the mode and form in which the debentureholders are required to exercise their right of conversion. Sub-clause (i) of cl. 5 is reproduced :

"UTI as the registered holder of the series 'A' debentures of the aggregate nominal value of Rs. 250,00,000 (Rupees two hundred and fifty lakhs) shall to the extent of such series 'A' debentures of the nominal value of Rs. 50,00,000 (Rupees fifty lakhs) at any time and from time to time between the 15th day of June, 1978, and 14th day of June, 1980, (both days inclusive) by notice in writing of not less than one month given either before or during the said period of conversion and delivered at the registered office of the company accompanied by the relative debenture certificate have the right of conversion conferred under the trust deed and shall be entitled to call for the allotment to UTI as the registered holder of the 31,250 fully paid up equity shares of the company of the face value of Rs. 100 each at a premium of Rs. 60 per share or pro rata of an equivalent nominal value in respect of such series 'A' debentures so intended to be converted and to be applied towards the nominal value of each such equity share and to require the company to apply the nominal value of such converted series 'A' debentures in full payment of such equity shares inclusive of premium and the company shall allot to UTI in satisfaction of the amount of such converted series "A" debentures such equity shares as aforesaid credited as fully paid up and ranking for dividend from the date of allotment of such equity shares and pay to UTI interest in respect of such converted series "A" debentures up to the date of allotment aforesaid."

In respect of each series of the debentures the provisions of mode and form of conversion is identical.

The letter of subscription for the debentures issued by UTI to the company is on record. It is dated May 31, 1979, and it is signed by the witness, Atmaramani. It stated that UTI thereby subscribed to debentures of the aggregate nominal value of Rs. 2.5 crores by adjustment of the advance deposit of Rs. 75 lakhs placed with the company and subscription of Rs. 175 lakhs by cheque. (Rs. 50 lakhs were deposited by UTI with the company in respect of the loan of R?. 50 lakhs for the nylon project, phase II, and Rs. 25 lakhs were advanced earlier in 1979 out of the proposed loan by UTI of Rs. 200 lakhs for the modernisation programme). The letter requested the issue of the letter of allotment of debentures and stated that UTI would be entering into a separate contract with the company for the allotment of equity shares on exercise of UTI's option for conversion. The cheque is on record and has been deposed to by Atmaramani.

The letters of allotment of debentures are not on record.

The notices of conversion given by the institutions to the company are on record. The notice of conversion issued by UTI may be reproduced in full:

"Dear Sirs,

Re : Subscription to convertible debentures of Rs. 2.50 crores option of conversion—exercise of.

Pursuant to our application for subscription in respect of 25,000 convertible debentures of Rs. 1,000 each of the aggregate face value of Rs. 2,50,00,000 (Rupees two crores fifty lakhs only) on the 3 J st day of May, 1979, accompanied by the remittances of the unsubscribed portion being Rs. 175 lakhs and by way of an adjustment against the advance deposit being Rs. 75 lakhs your company has agreed to issue a letter of allotment whereby you would be allotting to us 25,000 convertible debentures of Rs. 1,000 each of your company.

Pursuant to the letter of intent No. UT/9578/RS (N-14) 77-78, dated 17th January, 1978, and further letter No. UT/14973/RS (N-14) 78, dated 1st June, 1978, and accepted by the company all of which represent the loan agreement, and in terms of cl. 4(a) of the debenture trust deed dated the 31st day of May, 1979, made between the company and Bank of Baroda as Trustees, the Unit Trust of India as debenture holders of series 'A' debentures is entitled to call for allotment 31,250 fully paid up equity shares of Rs. 100 each of the company of the aggregate nominal face value of Rs. 31,25,000 (Rupees thirty one lakhs twenty five thousand only) at a premium of Rs. 60 per share on conversion of 5,000 convertible debentures of the aggregate nominal value of Rs. 50,00,000 (Rupees fifty lakhs only) and to require your company to apply the aggregate nominal value of the said 5,000 debentures in full payment of the said equity shares.

We hereby give notice to convert with immediate effect the said 5,000 convertible debentures in series 'A' of the aggregate nominal value of Rs. 50,00,000 (Rupees fifty lakhs only) into 31,250 fully paid up equity shares of Rs. 100 each of the company at a premium of Rs. 60 per share as per the aforesaid loan agreement and the provisions of the said debenture trust deed.

We have also agreed to waive the notice period and have confirmed that against the surrender of the said letter of allotment to the extent of 5,000 debentures you will issue 31,250 fully paid up equity shares to us and issue a letter of allotment for the balance of 20,000 debentures of the nominal value of Rs. 100 each and of the aggregate nominal value of Rs. 2,00,00,000 (Rupees two crores only). We accept the said 31,250 fully paid up equity shares of the company being issued pursuant and subject to the memorandum and articles of association of the company. We desire that the said 31,250 fully paid up equity shares be registered in our name and hereby authorise the entry of our name in the register of members in respect thereof. We would also request you to issue a modified letter of allotment for the remaining 20,000 debentures or have the necessary surrender to the extent of 5,000 debentures endorsed on the original letter of allotment.

Yours faithfully,

Sd. (K. N. Atmaramani)

Joint Director Investment Division."

Atmaramani deposed that at the end of May, 1979, he was instructed by UTI's legal dept. to keep an amount of Rs. 175 lakhs ready for subscription towards the debentures of the company, for, he was told that it was likely that on 31st May, 1979, or 1st June, 1979, the company would execute the debenture trust deed and other documents. In cross-exami-nation he stated that he had been instructed by Shankar, of UTI's legal dept., to keep this money ready for subscription towards the debentures three or four days before 31st May, 1979, and that this was the first time he had been so told. On 30th May, 1979, he had sent a note instructing UTI's accounts dept. to keep the moneys ready on 1st June, 1979, for, he had been told that that was the day on which the company would execute the document. The note is on record. It required that he should be sent the cheque by 4-00 p.m. on 31st May, 1979, but he deposed that he called for it after lunch on 31st May, 1979. He was not present at the meeting of 31st May, 1979, but had handed over the letter of subscription to the debentures, the cheque and the notice of conversion, all signed by him, to Poojara, one of UTI's officers.

On 5th June, 1979, shares pursuant to the conversions were allotted to the institutions.

Plaintiff's Counsel's statement

Before I proceed to discuss the contentions that were pressed, I must record a statement made by Mr. Cooper, learned counsel for the plaintiffs. Mr. Cooper stated that "for the purposes of this suit only—

        (a)            the plaintiffs will not contest that the debenture trust deed dated 31st May, 1979, was void.

(b)            the plaintiffs will not rely on any allegation regarding the conduct of the adjourned 33rd annual general meeting or any contention based thereon, as the 1st plaintiff and another have filed a separate suit in respect thereof.

(c)            the plaintiffs are not making or relying on any allegation against the Controller of Capital Issues or the Company Law Board.

(d)            the plaintiffs will not rely on the grounds alleged in paras. 73(a), 73(b) and 73(c) of the plaint, save and except the submissions, viz :

(1)    The issue in reality was an issue of shares by allotment and of debentures, but was deliberately termed as an issue of debentures.

(2)    The alleged option was such as to be exercisable simultaneously with the issue of debentures and was a mere cloak to obviate falling within the clutches of ss. 81(1)(a) and 81(1A) of the Companies Act, and

(3)    The directors could not by such means defeat and set at nought the provisions of s. 81(1)(a) or s. 81 (1A) of the Companies Act.

(e)            the plaintiffs will not rely on the submission made in para. 73(e) to the extent that the whole issue of the debentures was ultra vires the company and ultra vires the powers of the board of directors.

(f)             the plaintiffs will not contend that the whole issue of debentures is null and void on the ground alleged in para. 73(f) of the plaint."

The rule in Foss v. Harbottle [1843] 2 Hare 461 :

The rule in Foss v. Harbottle [1843] 2 Hare 461 was invoked by the defendants. It was first enunciated in the case of Foss v. Harbottle but waa explained more lucidly in later cases.

In MacDougall v. Gardiner [1875] 1 Ch D 13 (CA), Mellish L.J. explained the rule in terms which have become a classic (p. 25):

"In my opinion, if the thing complained of is a thing which in substance the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use in having a litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes. Is it not better that the rule should be adhered to that if it is a thing which the majority are the masters of, the majority in substance shall be entitled to have their will followed ? If it is a matter of that nature, it only comes to this, that the majority are the only persons who can complain that a thing which they are entitled to do has been done irregularly ; and that, as I understand it, is what has been decided by the cases of Mozley v. Alston [1847] 1 Ph 790 and Fossv. Harbottle [1843] 2 Hare 461."

In Burland v. Earle [1902] AC 83, the Privy Council said that it was an elementary principle of the law relating to joint stock companies that the court would not interfere with the internal management of companies acting within their powers, and in fact had no jurisdiction to do so. Again, it was clear law that in order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company, the action should prima facie be brought by the company itself.

In Edwards v. Halliwell [1950] 2 All ER 1064, Jenkins L.J. said (at p. 1066):

"The rule in Foss v. Harbottle [1843] 2 Hare 461, as I understand it, comes to no more than this. First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadit quaestio. No wrong had been done to the company or association and there is nothing in respect of which anyone can sue. If, on the other hand, a simple majority of members of the company or association is against what has been done, then there is no valid reason why the company or association itself should not sue. In my judgment, it is implicit in the rule that the matter relied on as constituting the cause of action should be a cause of action properly belonging to the general body of corporators or members of the company or association as oppose I to a cause of action which some individual member can assert in his own right."

Halsbury's Laws of England, Fourth Edn., Vol. 7, para. 713, puts it thus:

"The court has no jurisdiction to interfere with the internal management of a company acting within its powers. To redress a wrong done to the company or to recover money or damages due to it the action must prima facie be brought by the company itself, if the matter constituting the cause of action is a cause of action properly belonging to the company or the general body of members."

Counsel for the defendants urged that since upon rectification the plaintiffs' names were not sought to be substituted in the company's register of shares for the names of the institutions in respect of the shares in suit, the suit was not for the redress of a wrong done to the plaintiffs in an individual capacity but for the redress of a wrong done to the company. In their submission, this was a case to which the rule in Fuss v. Harbottle [1843] 2 Hare 461 applied and the suit, having been filed by the plaintiffs in an individual capacity, was not maintainable or, at any rate, the plaintiffs were not entitled to relief therein.

It was contended by Mr. Cooper, learned counsel for the plaintiffs, that the right to rectify the share register of a company was the individual right of each of its shareholders. Each shareholder was entitled to have the register reflect the true position and to take action to ensure that it did. In Mr. Cooper's submission, the shareholder's right to vote, his right to a share in the company's profits and his right to acquire new shares in the company depended upon the entries in the company's share register. In his submission, the individual shareholder's right to rectify the company's share register was recognised by s. 155 of the Companies Act. Reference was made in this context to an unreported judgment of a Division Bench of this court in Appeal No. 344 of 1981 in Company Applica-cation No. 169 of 1981, in Company Petition No. 196 of 1981, delivered on 9th September, 1981—since reported as Killick Nixon Ltd. v.Dhanraj Mills Pvt. Ltd.[1983] 54 Comp Cas 432 (Bom). It was there contended that only a person aggrieved by an incorrect or wrong entry in the share register was entitled to file a petition under s. 155 for a rectification of the register. It was contended that the expression "any member" in that section meant only a member who was aggrieved or who was in a position to show that some prejudice or wrong was caused to him. The court declined to accept the submission and held that any member was entitled to apply for a rectification under s. 155 without being compelled to show that he was aggrieved or any prejudice had been caused to him.

Counsel for the defendants submitted that this judgment, though of a Division Bench of this court, was not binding because it was delivered in an appeal from an interlocutory application. I decline to go into the question ; assuming it to be only of. persuasive value, I am entirely in agreement with the reasoning.

Reference was made by counsel for the defendants to the judgment of this court in Rao Saheb Manilal Gangaram Sindore v. Western India Theatres Ltd. [1962] 64 Bom LR 532 ; [1963] 33 Comp Cas 826. That was a suit for rectification of the share register of a company. The value of the shares which were the subject-matter of the suit was stated in the plaint to be Rs. 1,200 and the interim relief sought was valued at Rs. 100. A preliminary objection was taken that the court had no pecuniary jurisdiction to entertain the suit. It was held that for the relief contemplated by s. 155 a suit was the primary remedy under the general law. The relief contemplated by that section was one which was available at common law. Section 155 merely provided a summary remedy. Its object was not to whittle down or abrogate the procedure by way of a suit for getting the relief contemplated by the section. A long line of judicial decisions recognised that the court was not bound to give relief under s. 155 if it was found that complicated questions of fact were involved but had the power to direct the party concerned to file a proper action in a civil court. When this court entertained a petition under s. 155 it was exercising jurisdiction under the Companies Act but in the case of a suit, the jurisdiction that was exercised was the ordinary original civil jurisdiction, which was entirely different. In exercising the latter jurisdiction, the court was bound to see whether the suit was filed within the scope of its pecuniary jurisdiction. The suit, which was valued at Rs. 1,300, was, therefore, dismissed.

Counsel for the defendants relied upon this judgment to submit that different considerations applied to a petition under s. 155 and to a suit for the same relief. Mr. Cooper relied upon the judgment to submit that the relief of rectification was a relief available at common law.

Reference was also made to the judgment in T. A. K. Mohideen Pichai Taraganar v. Tinnevelly Mills Co. Ltd., AIR 1928 Mad 571. The court held that the true and correct view to take would be that the Companies Act merely legislated for or regulated rights recognised under the common law; this observation was made in the context of s. 38 of the Indian Companies Act, 1913, which provided for a rectification of the share register.

In my view, every shareholder of a company has an individual right and interest in seeing that the share register of the company reflects the true position. Upon the share register rests each shareholder's right to receive his due share of the company's profits by way of dividend, his right to exercise his vote and to have it correctly assessed as against the votes of other rightful shareholders, and his right to acquire new shares in the company pro rata with other rightful shareholders. An entry in the register which is bad or illegal affects these rights of the individual shareholder. He is thereby prejudiced and aggrieved.

The right to rectify was recognised at common law and was translated into the statutes, English and Indian. (The provisions of s. 116 of the English Companies Act, 1948, provide to any member of the company the right to apply for a rectification of the company's share register). The statutes do not create any new right in the member.

In England, as in most High Courts in India, it is recognised that the procedure of rectification made available by the Companies Act is a summary procedure and that the petitioner may, in the court's discretion, if the matter be a complex one, be referred to a suit. It would be anomalous if a shareholder, who can maintain a petition under s. 155 of the Indian Companies Act or s. 116 of the English Act, is directed to file a suit because the matter is complex, and is then told that he is not entitled to maintain the suit because he is not a person aggrieved.

In the view that I take, this suit is maintainable.

It is needless to add that where the suit is filed by the shareholder in an individual capacity it need not be in the representative form, but it may be. (See Gower's Principles of Modern Company Law, fourth edn., p. 655 and Gore-Browne on Companies, 43rd edn., para. 28.8).

Reduction of capital

It was urged by counsel for the defendants as a point of maintainability that the suit involved a reduction of the company's capital and that the reduction of a company's capital could only be achieved by following the procedure laid down in ss. 100 to 105 of the Companies Act. This argument need not detain me long. If the court holds that the issue of the shares in suit is invalid, it is as if the shares were never issued and no question arises of reduction of the share capital or of following the provisions of the Companies Act to reduce it. That must necessarily be consequential upon the order in the suit.

Rectification of debenture register

Counsel for the defendants contended that the relief sought involved the rectification of the company's debenture register ; this had not been expressly sought, nor could it be sought, for, the debenture trustee, a necessary party, was not impleaded. If the court comes to the finding that the issue of the shares in suit is bad and restores the institutions to the position of being debenture holders, rectification of the debenture register will be a necessary consequence of the order. It need not be prayed for nor is it requisite that the debenture trustee be heard in that regard.

Debenture trustee a necessary party

It was urged, first, that the debenture trustee was a necessary party upon the averments in the plaint, notwithstanding the fact that the plaintiffs had given up the contentions that made the debenture trustee a necessary party. I cannot agree, that, though no contention is urged regarding which it is requisite to hear the debenture trustee, by reason of the frame of the suit, it must be held to be bad for non-joinder.

Secondly, it was urged that if the institutions were restored to the position of being debenture holders the debenture trustee would hold the same security for a larger number of debenture holders than heretofore and that, therefore, the debenture trustee is a necessary party. That does not, in my view, make the debenture trustee a party that ought to have been impleaded.

Article 18 of the articles of association

Mr. Cooper argued that no option could be given to any person to call for shares unless the company in general meeting had so resolved and he relied for this purposes upon art. 18 of the company's articles of association ; the general body having passed no such resolution before the shares were allotted to the institutions, the allotment of the shares was bad.

Article 18 reads thus :

"In addition to and without derogating from the powers under article 15, the company in general meeting may determine that any shares (whether forming part of the original capital or of any increased capital of the company) shall be offered to such persons (whether members or not) in such proportion and on such terms and conditions and either at a premium or at par or (subject to compliance with the provisions of section 79 of the Act) at a discount as such general meeting shall determine and with full power to give any person the option to call for or be allotted shares of any class of the company either at premium or at par or (subject to compliance with the provisions of section 79 of the Act) at a discount such option being exercisable at such times and for such consideration as may be directed by such general meeting ; or the company in general meeting may make any other provision whatsoever for the issue, allotment or disposal of any such shares."

As I analyse the material portion of the article, it provides this :

The company in general meeting may determine that any shares shall be offered to such persons (whether members or not)

in such proportion and on such terms and conditions and either at a premium or at par or at a discount as such general meeting shall determine

and with full power to give any person the option to call for and be allotted shares.................

So analysed, it is clear that the. article is applicable only to the issue of shares and to an option contained in the shares issued to call for further shares. It has no application to an option to call for shares contained in debentures.

Option not exercised in respect of convertible debentures

Mr. Cooper relied upon cls. 4 and 23 of the debenture trust deed and cl. 5 of the form of debentures in the Fifth Schedule to the debenture trust deed and submitted that the debenture certificates in respect of which the option of conversion was exercised had to be sent to the company along with the notice of conversion. It was submitted that it was imperative that such debentures as were being converted should be identified, for, all debentures were called convertible but what really made them convertible was the fact of their being sent to the company. This being, in his submission, a matter of substance not of form, there could be no waiver of that which made the debentures convertible.

Clauses 4 and 23 of the debenture trust deed and cl. 5 of the form of debentures have already been quoted in extenso. Clause 4 states that the debenture holder would be entitled to call for the allotment of shares in respect of such debentures "for which the right is so exercised" by the debenture holder "in the manner set out in the form of debentures in the 5th Schedule hereunder written". The form of debentures requires the delivery to the registered office of the company of a notice of conversion of not less than one month "accompanied by the relative debenture certificate" and states that the debenture holder shall be entitled to call for allotment "in respect of such..................debentures so intended to be converted.......". Clause 23 of the debenture trust deed requires the debenture holder "to surrender such debentures to be so converted to the company within thirty days from the date of conversion notice....for the purpose of necessary memorandum to be made by the company thereon indicating the cancellation or extinguishment of each of such debentures and the conversion into fully paid up equity shares..."

It must be noted that the option to convert is vested only in the first holders of the debentures, that is to say, only in the institutions; transferees of the debentures would not be entitled to call for a conversion thereof into shares. It must also be noted, as cl. 23 of the debenture trust deed makes clear, that the debentures that are converted are required to be surrendered to the company to enable the company to endorse thereon their cancellation or extinguishment. Where the institution converts only a portion of its conversion quota it would be necessary to earmark and cancel the debentures of the particular series which are converted but, as I see it, where the institution converts its full quota—and that before the debenture certificates have been issued—the requirement of earmarking and cancellation would not be absolutely necessary and could be dispensed with or waived. The company would then issue debenture certificates only for the remaining debentures of the series and even could endorse thereon that no debentures of the series were convertible. In the instant case, all the institutions have at one time, and that before the issue of the debenture certificates, exercised their rights of conversion to the fullest extent. I am unable to go so far as to hold that the fact that a debenture was sent to the company with a notice that it was to be converted alone made that debenture convertibe. The requirement of sending debentures to be converted to the registered office of the company could, therefore, be waived.

Option not exercised by registered debenture holders

Mr. Cooper argued that only a debenture holder whose name had been entered in the company's register of debenture holders could exercise the option to convert, by reason of the words used in cl. 4 of the debenture trust deed and cl. 5 of the form of debentures. He argued that there was nothing on record to show that the institutions had been registered as debenture holders at the point of time at which they had exercised the option. He relied upon s. 106 of the Evidence Act and urged that, since the point of time at which the names of the institutions were entered in the company's register of debenture holders was within the company's knowledge, the onus lay on the company to prove when this was done ; but the company had led no such evidence.

It does not appear to be the argument of the defendents that the institutions' names were entered on the register of debenture holders before they exercised the option to convert. The case of the defendents is that the company waived its right to insist that the option could be exercised only after the institutions' names were entered upon the register.

In find it difficult to agree with Mr. Cooper's submission that the right or option to convert came to exist only upon registration. Basically, the requirement is set out for the company's benefit, as describing a debenture holder who has been recognised by the company by virtue of the fact that his name has been entered by the company in its register of debenture holders in respect of his debenture certificates. The company would be entitled to refuse to recognise an exercise of the option by a debenture holder whose name is not entered on the register, but there is nothing to prevent the company from recognising and giving effect to the exercise of the option by such a debenture holder. The company is entitled to waive the requirement imposed for its benefit ; and it may do so by express waiver or by conduct.

Option not exercised in due form

Mr. Cooper contended that since the institutions had not given to the company's registered office one month's advance notice of the exercise of the option to convert, the institutions had not exercised the option in the manner and form requisite and, consequently, the issue of the shares upon such conversion was bad. It is cl. 5 of the form of debentures that requires the giving of one month's advance notice to the company's registered office of the exercise of the option. It is a requirement imposed, obviously, for the company's administrative convenience and the company would certainly be entitled to waive the manner and form if it wanted to do so.

Option exercised by party to whom letters of allotment were yet to be issued

Mr. Cooper submitted that the option to convert had been exercised by parties to whom letters of allotment of debentures were yet to be issued. He made the submission based upon a sentence in para. 73(d) of the plaint which reads thus : "The plaintiffs say that the option could have been exercised only by a registered debentureholder and not by a person to whom allotment letter was yet to be issued."

Just before the sentence quoted above the plaint says, "The plaintiffs submit that having regard to the chronology of events which is narrated hereinbelow, it is apparent that the option has not been exercised modo et forma or in strict compliance with the conditions laid down in the 3rd Debenture Trust Deed". A little after the sentence quoted above the plaint reads thus :

        (i)             3rd debenture trust deed was executed on May 31, 1979.

        (ii)            Letters for allotment of debentures were merely issued.

        (iii)           No debenture certificate was issued to any of the defendants on May 31, 1979.

(iv)           On May 31, 1979, itself the defendants Nos. 1 to 7 as alleged debenture holder purported to exercise the option..............."

The plaint, therefore, proceeds upon the factual basis that on May 31, 1979, the debenture trust deed was first executed, letters of allotment of debentures were then issued and thereafter the institutions exercised their options. In view of these averments in the plaint, I must uphold the objection on behalf of the defendants that it is not open to the plaintiffs to urge that letters of allotment of debentures were not issued before the institutions exercised the opitions.

Purchase of shares

Mr. Cooper urged that the transaction that took place at the meeting of May 31, 1979, was not the issue of debentures for the whole amount of Rs. 350 lakhs and the exercise of the option to convert, but was, to the extent of 80%, the giving of a loan and the issue of debentures and, as regards the balance 20%, it was the payment of application monies and the purchase of shares. He urged that the transaction of May 31, 1979, had to be seen as one and indivisible and in its reality.

Reference was made by Mr. Cooper to the judgment of the Court of Appeal in Manksv.Whiteley [1912] 1 Ch. 735. What was relied upon comes from the judgment of Fletcher Moulton L.J. It runs :

".....................But I say it to emphasize the principle that where several deeds form part of one transaction and are contemporaneously executed they have the same effect for all purposes such as are relevant to this case as if they were one deed. Each is executed on the faith of all the others being executed also and is intended to speak only as part of the one transaction, and if one is seeking to make equities apply to the parties they must be equities arising out of the transaction as a whole. It is not open to third parties to treat each one of them as a deed representing a separate and independent transaction for the purpose of claiming rights which would only accrue to them if the transaction represented by the selected deed was operative separately......................"

This decision was followed by the Supreme Court in S. Chattanatha Karayalar v. Central Bank of India Ltd. [1965] 35 Comp Cas 610. The Supreme Court quoted with approval a part of what I have just recited and it observed that the "The principle is well established that if the transaction is contained in more than one document between the same parties they must be read and interpreted together and they have the same legal effect for all purposes as if they are one document."

Mr. Cooper made the argument on two footings. First, he urged that what had been exercised by the institutions was the right to purchase shares in lieu of the right of conversion mentioned in cl. 7 of UTI's letter of June 1, 1978, a letter which was referred to in the debenture trust deed as a loan agreement. Mr. Cooper submitted, and I reproduce the submission virtually in the words used by him.

The agreement between the institutions and the company was in the loan agreement which contained a clause (cl. 7) giving the institutions the right to purchase shares in lieu of the right of conversion.

On June 8, 1978, an attempt was made to exercise the right of purchase. No right of conversion then existed. The right to purchase could only come into effect if there was a right of conversion, being in lieu of that right. The attempt failed.

Before the loan agreement became operative—including the right to purchase—the condition precedent was the signing of the debenture trust deed by the company and the debenture trustee in terms settled by the institutions. This was obligatory upon the company under the loan agreement. On May 31, 1979, the debenture trust deed was signed. Itcontained cl. 4, conferring the right of conversion, and cl. 36(c), which required the company to duly observe and perform all the terms and conditions, covenants and stipulations contained in the loan agreements. By reason of cl. 36(c) the right to acquire shares in lieu of conversion was incorporated into the debenture trust deed. On subscription to the debentures and their allotment the institutions acquired the right of conversion and, simultaneously, the right to purchase shares in lieu of the right of conversion became effective. The institutions purported to exercise the right of conversion or, at least, claimed they were duing so. This was not correct because a true exercise of the right meant the giving of a real loan intended to be used by the borrower. Really, it was the exercise of a right to purchase.

The real transaction between the institutions and the company was not the giving of the loan of Rs. 300 lakhs and the conversion thereof into shares but was the giving of a loan plus the purchase of shares. This transaction was contemplated by the debenture trust deed and would have been a valid transaction if there had been a special resolution in that behalf.

There was nothing which could have prevented the institutions from exercising the right of purchase in a legal manner or of giving up that right and effecting a real conversion of the loan. The debenture trust deed recorded both rights and the fact that parties had agreed to the exercise of the right of purchase did not invalidate the right of conversion. In fact, the whole transaction was on the footing that the right of conversion and was it corollary (sic).

Mr. Cooper's submission has its foundation in this : that the debenture trust deed recorded and conferred upon the institutions the right to acquire shares in lieu of conversion. As I read UTI's letter of June 1, 1978, the right to acquire shares in lieu of the right of conversion mentioned therein was to operate in advance of and in lieu of the conferment of the right of conversion, which would be conferred only under the debenture trust deed. This is clear from the time-limit imposed in the letter written by UTI to the company on June 8, 1978, namely, June 15, 1978. It is difficult to hold that the debenture trust deed conferred the right to acquire shares in lieu of the right of conversion. As I read it, it conferred only the right of conversion. If the right to acquire shares in lieu of the right of conversion was intended to be conferred under the debenture trust deed that would have found place in the debenture trust deed immediately after cl. 4 thereof, and not by oblique implication. Besides, not all the loan agreements stipulate the right to acquire shares in lieu of conversion. Further, the conversion notices themselves state that it was the right of conversion which was being exercised. Mr. Cooper relied on the statements in the agreements to allot shares entered into between the company and the institutions on May 31, 1979, that the shares were to be "in lieu of and in full satisfaction of the conversion rights." The agreements elsewhere clearly state that it was the right of conversion which was being exercised. The argument on the first footing cannot, therefore, be accepted.

The second footing upon which Mr. Cooper argued is this : Assuming cl. 4 of the debenture trust deed constituted the agreement between the institutions and the company, the institutions only purported to carry it out but did not in fact do so ; what they did was to buy shares, not convert debentures.

The emphasis of the argument is on the fact that the options were exercised immediately they came into existence. There was Mr. Cooper submitted, no loan in respect of Rs. 70 lakhs (20% of the total of Rs. 350 lakhs) for the essence of a loan was that the borrower was given the use of it, but it was paid as application monies for shares.

To uphold the argument would mean to read into cl. 4 of the debenture trust deed—and, indeed, into s. 81—a term that the conversion could not be effected or the option could not be exercised until after a reasonable period of time. This would, in my view, be unjustified. I see no bar under the law to the exercise of an option immediately after it comes into existence, and the allotment of shares pursuant to such conversion cannot on that account be voided.

It may also be pointed out that the agreements to allot shares mention that interest would be payable upon the debentures until the shares in conversion thereof were issued. This also goes to establish that Rs. 70 lakhs were not paid, to begin with, as application monies but were intended to be a loan on which interest at the debenture rate was payable until shares in conversion were allotted.

Coming as I do to this conclusion, I do not rely upon the documents on record which prima facie establish that it was the right of conversion which was exercised and that conversion took place.

It was urged by counsel for defendants that it was not open to the plaintiffs to contend that the shares had really been purchased, in view of their counsel's statement that the plaintiffs would not contend that the debenture trust deed was void, and that this would be the inevitable result of the contention being accepted. As I see it, the manner in which the contention has been put by Mr. Cooper does not constitute a challenge to the validity of the statement, which I have earlier set out, expressly reserves this contention (sic).

Mala fides of waiver

Mr. Cooper urged that the waiver by the company of the notice of conversion to be delivered to the company's registered office, accompanied by the relative debenture certificates, one month in advance, as required by cl. 5 of the form of debentures in the debenture trust deed, was vitiated by reason of mala fides and breach of fiduciary duty on the part of the company's directors.

It was submitted by counsel on behalf of the defendants that there was no such plea in the plaint. The plea upon which the submission was based is contained in para. 73(d) of the plaint and it reads thus :

"The plaintiffs submit that in any event the purported waiver by defendants Nos. 1 to 7 themselves and the purported acceptance thereof by the directors was wholly mala fide and an abuse of the fiduciary position, illegal and invalid. The plaintiffs submit that the directors had no power to waive or accept any waiver and they are guilty of deliberate fraud upon the equity shareholders as a class."

In para. 55 of the written statement of the company, which deals with para. 75(d) of the plaint, the denial is in these terms :

"These defendants deny that the waiver by defendants Nos. 1 to 7 or these defendants is mala fide or is an abuse of the fiduciary position or is illegal or invalid."

In the written statements of the institutions the denial is identically worded. The defendants, therefore, understood that the plaint ascribed mala fides and breach of fiduciary duty to the company and they denied the allegation. They cannot, then, be heard to say that there is no such plea in the plaint.

It was contended by counsel on behalf of the defendants that, assuming that there was such a plea, there were no particulars of the mala fides alleged therein. Let me look through the plaint. The relevant portion begins with para. 71. The opening sentence of para. 71 reads:

"The plaintiffs say that it is thus apparent from the aforesaid facts and those stated hereinafter and in the other suits that there has been consistent and persistent attempt on the part of the Government directors whilst they were acting as the financial institution directors to prevent the lawful exercise of voting by ordinary citizens and to capture more and more voting powers for themselves and prevent the voting power being acquired by any other individual except.those who were willing to support them and thus exercise control over the company."

The paragraph goes on :

"...................With this very motive on 31-5-1979 the debentures were privately placed and issued to the financial institutions and loans raised from them both of which gave an option to the financial institutions to obtain and acquire shares by exercising such option to the extent of 51,000 shares........

On the same day, that is to say, May 31, 1979, options were exercised by the financial institutions (though not in accordance with the terms of the option) and shares are shown to have been registered in the names of the financial instituitions on June 6, 1979."

Sub-paragraph (i) of para. 72F of the plaint avers that the company's directors procured execution of the debenture trust deed on May 31, 1979. Some of its provisions are set out. The manner in which the option had to be exercised, i.e., cl. 5 of the form of debentures, is also set out. In sub-para. (ii) the notice of conversion is extracted. In sub-para. (v) it is averred that the institutions thus acquired for themselves voting power. Paragraph 73 opens with the submission that the allotment of shares was wholly null and void, irregular, illegal and fraudulent and had been made by abusing fiduciary duties and by colourable exercise of powers. In sub-para. (d) of para. 73 the plaintiffs submits that the option to convert the debentures into shares had to be exercised strictly in accordance with the conditions laid down. Sub-para. (d) submits that it was not open to the defendants to waive the notice and alleges that the waiver was wholly mala fide and an abuse of fiduciary position.

As I read the plaint, than (sic) the particulars of mala fides stated in it clearly intended to apply to all the aspects of the issue of the shares, including the act of waiver. It was not necessary for the plaint to repeat the same particulars of mala fides in respect of each aspect.

Mr. Cooper relied upon several circumstances on record and. submitted that, by reason thereof, the plaintiffs had established the prima facie case that the directors of the company had waived the requirements of cl. 5 of the form of debentures with the intention of favouring one group of the company's shareholders, namely, the institutions, against another, namely, the Berlias, and this was a mala fide exercise of powers and was in breach of the directors' fiduciary duties. He submitted that as the defendants had failed to lead evidence to establish that the intentions of the company's directors had not been such, the prima facie case was established.

Counsel for the defendants submitted that the presumption in law was that the directors of a company act bona fide and that, therefore, the plaintiffs had to rebut that presumption. Only if this was done and the circumstances led to the irresistible inference of mala fides and breach of fiduciary duty would the onus shift to establish the contrary.

A presumption of fact determines where the burden of proof lies. Quite apart from the presumption that the directors act bona fide and that, therefore, the burden of proof lies on the plaintiffs, the burden of proving mala fides must rest on the party alleging it. The presumption here would stand rebutted and the evidentiary burden would be satisfied if the plaintiffs made out a prima facie case, a case upon which, in the absence of evidence from the other side, a finding in their favour could reasonably be given upon a balance of the probabilities. The absence of evidence from the other side entitles the court to infer that "the absence of that evidence is to be accounted for by the fact that even if it were adduced it would not displace the prima facie case. But that always presupposes that a prima facie case has been established..." (Cockburn C.J. in McQueen v. Great Western Rail Co. [1875] LR 10 QB 569 at 574). It must also be remembered that animus can only rarely be proved by direct evidence. Generally, the party alleging animus proves the circumstances which make the animus probable and the evidentiary burden then shifts to the party against whom the allegation is made to establish that he acted bona fide.

Upon this basis in law, I proceed to examine Mr. Cooper's submission The circumstances that he relied on are :

That after July, 1977, the Berlias had to file suits in the Bombay City Civil Court and petitions for rectification of the company's share register in this court before the company consented to transfer shares to the names of the Berlias.

That even after the agreement and consent terms of December 8, 1977, the company refused to transfer further shares to the Berlias.

That in April, 1978, the Berlias demonstrated that the majority of the company's shareholders supported them by lodging about 1,74,000 proxies for an extraordinary general meeting while the institutions had proxies and voting strength to the extent of about 1,04,000.

That the company and the institutions had applied to the Central Govt. for the issuance of orders under s. 108D and the Government was told by them that the Berlias would capture the company and control it if the orders were not issued.

That the Central Govt. owned the institutions and, by virtue of the appointment of 8 directors on the company's board, in July, 1977, controlled it.

That the freezing order was issued on June 17, 1978. The company having received it on June 19, 1978, kept it back from the Berlias till they were compelled to lodge a writ petition challenging the order, without annexing its copy, two days before the company's AGM of June 29, 1978.

That on May 31, 1979, the writ petition and two petitions for rectification of the company's share register by placing thereon the names of the Berlias in respect of further shares of the company were pending.

That on May 31, 1979, as a result of the interim order passed in the writ petition, the Berlias were by and large free to exercise the voting rights on their shares.

That on May 31, 1979, it was known to the company's directors that the Berlias had secured a majority of votes at the 1978 AGM in connection with the election of a director.

That the company and the institutions could not, on May 31, 1979, know how the Berlias would vote at the AGM on June 28, 1979, whether they would put up candidates for the board, or oppose the passing of the accounts, and so on ; but they knew that they could not expect support from the Berlias.

That there was one nominee of the institutions and one employee of LIC on the company's board ; seven other directors were government nominees.

That the AGM having been called for June 28, 1979, by notice dated April 26, 1979, it was not possible to obtain additional voting strength except by waiving the one month's notice period and the other requirements for conversion.

That the company had been in terms informed orally as well as by the letter written by the common attorneys that the institutions wanted the shares upon conversion by the end of May, 1979.

That the debentures could not have been issued till the debenture trust deed was registered with the Sub-Registrar of Assurances and the certificate of registration of the charge was obtained from the Registrar of Companies and incorporated in the debentures as provided by the form of debentures.

That in para. 73(2) of the plaint, it was alleged that the Government nominated directors stood to gain by lending support to the institutions and to submit to their demands, for, there was a quid pro quo, inasmuch as the institutions were anxious to have a continuation of the order under s. 408 so that they would have the full control and were requiring the appointment on the board of the same persons as government directors. The paragraphs of the written statements which deal with para. 73(e) of the plaint do not contain a denial of the allegation.

It was pointed out by counsel for the defendants that it was not put to UTI's witness Atmaramani whether there was any apprehension about the conduct of the Berlias at the 1979 AGM. It is not the apprehension of UTI or of Atmaramani that I am really concerned with, but that of the company and its directors ; no director or officer of the company was examined to whom such case could have been put. The letter written by the Chairman of UTI and GIC to the Chairman of the Company Law Board on June 6, 1978, is relevant in this connection. After setting out their apprehensions about the Berlias' intentions the writers asked that the voting rights of the shares lodged with the company for transfer should be frozen so as to debar the registered holders thereof, whoever they may be, from exercising the voting rights thereon ; this would prevent the Berlias from gaining control of the company and from having any nominees or agent on the company's board "either at the forthcoming AGM of the shareholders on June 29, 1978, or at any other general meeting". (Emphasis supplied).

That the company was involved in the preparation of this letter is patent by reason of its annexure listing the shares lodged for transfer with the company, their folio numbers and their holders' names. There is little doubt, in the circumstances, that the apprehension expressed in the letter was also the apprehension of the company and it extended not only to the 1978 AGM but to all subsequent general meetings.

Reliance was put upon the case put to Atmaramani, namely, that the only urgency was the desire of the institutions to see that they acquired more shares and increased their voting strength before the 1978 AGM and that this urgency ceased when the freezing order was obtained. It was commented by counsel for the defendants that no case was put to Atmaramani of any urgency felt by the institutions and the company in 1979. Atmaramani deposed that the urgency of obtaining the loan for working capital and the modernisation programme commenced in 1976 and continued in 1977 and 1978; in 1979 it continued but had abated to some extent. It is not as if it was Atmaramani's evidence that the urgency had ceased in 1979 so that it was necessary to put to him such an express case. In any event, the submission would have acquired substance if the company had examined a director or officer and the express case had not been put to him.

Counsel for the defendants made reference to the period after April 7, 1979, and submitted that the conduct of the defendants belied the inference that the waiver was premeditated or was the result of any apprehension about the Berlias' intentions. Reliance was placed on the letter of April 7, 1979, written by the common attorneys to the institutions and the company wherein it was stated that the institutions were anxious to complete the transaction at the latest by May 30, 1979. It was pointed out that on that day the 1979 AGM had not been notified and the sanctions of the various authorities to the issue of the debentures were still to come. On April 26, 1979, the company notified the AG.M for June 29, 1979. It was submitted that this could have been delayed. The sanctions were yet to come. If any apprehension or animus had existed, it was submitted, the 1 979 AGM would have been scheduled for much later. On May 9, 1979, or thereabouts all the sanctions had come in but the debenture trust deed was not immediately executed. It was suggested that it would have been, if an apprehension or animus had existed, so that there would have been a one month's period before the AGM during which the conversion notice could have been given and the shares issued without waiver. On May 24, 1979, the company's board approved the draft debenture trust deed. It was submitted that on that day there was every intention of operating upon the clause of the form of debenture that required one month's notice of conversion, and that the fact that the board had approved the draft with the clause showed that there was no animus or apprehension. On that day, the board gave powers to four directors to demand or alter the draft. It was submitted that it was nobody's case that the document differed from the draft. That the draft was not amended or altered to delete clause 5, it was submitted, showed that there was no animus or apprehension. Nothing, it was urged, had been brought on record which suggested a reason for any animus or apprehension arising between April 26, 1979, and May 30, 1979. According to counsel for the defendants it was, thus, shown that up to May 31, 1979, there was no apprehension or animus.

What the argument ignores, in my judgment, is that on May 29, 1979, their attorneys sent to the institutions, the company and the debenture trustee a note setting down the programme to be followed at the meeting of May 31, 1979. Clause (1), sub-ss. (i) and (ii) of that note referred to the acceptance of notices of conversion, the entering into of contracts under s. 75 of the Companies Act and the issue of equity shares upon conversion. Clause 11 stated that, after the letters of allotment were received, the debentureholders would issue notices of conversion to the company, upon receipt whereof the company would issue letters of allotment of shares and enter into contracts for the shares. Clause 13 stated that the company would issue share certificates for the converted amount to the debenture holders. Patently, before the note was sent on May 29, 1979, it had been agreed between the institutions and the company that the requirements of cl. 5 would not be enforced. Why, then, was the draft debenture trust deed not amended by deleting cl. 5 ? Why was the debentures trust deed executed making compliance with clause 5 a pre-requisite for conversion and why, immediately upon its execution, was the pre-requisite waived ?

Most important to notice in this regard is that it was agreed that all the institutions were to exercise on May 31, 1979, their rights of conversion to the fullest extent so that cl. 5 was not being retained to be operative in the event of a future exercise of the option.

Counsel for the defendants submitted as part of the earlier argument that, that the company had called the AGM for June 28, 1979, was a fact, which militated against its alleged intention to ensure that the institutions were issued the shares upon conversion before it. Counsel relied upon s. 166 of the Companies Act and said, the AGM could have been delayed till September, 1979, by which time the institutions could have got the shares without recourse to waiver. It seems to me that Mr. Cooper was right when he submitted that, having regard to s. 210 the AGM had to be called by June 30, 1979, to adopt the company's profit and loss account prepared up to December 31, 1978.

It was submitted by counsel for the defendants that the directors could well have acted innocently in waiving the requirements of cl. 5. The circumstances on record do not suggest an inference consonant with innocence. Innocence could, however, have been established, and it is not.

It was said that cl. (5) could have been deleted and nobody would have been any the wiser ; instead cl. (5) was waived. This is not an inference that may be drawn, but is something which the directors could have deposed to. What could have then been deleted, was incorporated in a document and, no sooner was the document signed, waived.

It was submitted that since under the document dealing with ICICI's loan and the conversion thereof into shares no advance notice of conversion was required, the directors merely wanted to put the debentures and the loans on a par and they, therefore, waived the requirement of cl. 5. If so, the first course that would suggest itself would be to delete cl. 5 from the draft debenture trust deed. No such inference can, therefore, be raised.

It was submitted that the directors were not put into the witness-box because the judgment in the company petition for rectification filed by the Berlias said that the court had not been impressed by the arguments advanced by counsel for the Berlias upon the alleged mala fides of the company in harassing the Berlias. The submission does not take into account the fact that that judgment holds that the conduct of the company's board could justly be said to be inconsistent, arbitrary and capricious. It was, patently in connection with the argument of harassment that the observation was made that the court was not impressed. This certainly can, in any case, have been no ground for not putting the directors into the witness-box in this suit.

It was even submitted that the directors did what they did because they considered the Berlias undesirable people. Emphasis was placed upon the circular sent by the Berlia concerns to the company's shareholders recommending the Berlias, and upon the evidence of Goculdas, one of the purported signatories of the circular, that he had neither signed it nor authorised its issuance. It was also emphasised that a specific case of having given authority was put to Goculdas by plaintiffs' counsel but the plaintiffs did not give evidence to support that case. First, if the directors did what they did because they considered the Berlias undesirable persons, they did what they did with the intention that the Berlias should be outvoted. In para. 73(e) of the plaint it is alleged that it was obvious that continuous efforts were made by the company's directors for the time being to deprive the Berlias and other shareholders of voting power and to prevent the Berlias and others from acquiring voting power, and that the directors acted, in the manner they did, so as to acquire voting power for the institutions which they represented or were interested in. In para. 69 of the written statement of the company it is denied that an effort was made by the directors to deprive the Berlias or other shareholders of their voting power or to prevent the Berlias or other shareholders from acquiring voting power or that the directors acted so as to acquire voting power for the financial institutions. In view of this denial, the argument, that the directors did what they did because they considered the Berlias undesirable people, cannot be put forward to justify what the directors did. Secondly, as will be evident from the authorities to which I shall presently refer, the directors of a company may not disfavour one group of shareholders and favour another, it is a breach of their fiduciary duty to do so.

I now proceed to examine the record subsequent to May, 1978, to see what light it throws on the conduct of the company and the institutions. It is necessary to do the latter, in view of the plea that was raised in the course of arguments that, in any event, the institutions were innocent parties who had paid large sums of money by way of loans to the company on condition that they would be entitled to convert a part thereof into shares; against the institutions, therefore, the discretionary relief of rectification should not be granted.

It will be recalled that on March 15, 1978, the company had been informed that it had not submitted adequate grounds to the Central Govt. for the issuance of directions under s. 108D and that on April 28, 1978, the company had notified the date of the AGM to be June 29, 1978.

On May 17, 1978, the company wrote to UTI in respect of the term loan of Rs. 50 lakhs for the nylon tyre cord project, phase II, asking for confirmation that the Bank of Baroda would be appointed the debenture trustee. Incidentally, the company added, a consortium of banks was providing it with an additional term loan of Rs. 1 crore to meet its working capital requirements and this loan would be secured by a pari passu charge on the same security as that provided for the debentures. On May 19, 197 8, UTI wrote to the company with reference to its letter dated May 17, 1978, and expressed the view that financing by the consortium of banks would be costly. UTI said that it was prepared to take up, subject to its board's approval, privately placed debentures of Rs. 1 crore which may be issued by the company, inter alia, on the term that there would be a conversion option into equity up to 20 per cent. of the value of the debentures, which option would be exercisable by UTI immediately after the company accepted its terms and conditions.

On May 23, 1978, the Chairman of UTI wrote to the Director (Investment), Dept. of Economic Affairs, Ministry of Finance, that he felt that the Berlia group was trying to take control of the company and it was, therefore, of vital importance to protect the interests of the institutions and those of small shareholders. It was necessary that the Berlias and their supporters should be prevented from gaining control of the company and action should be taken fast under various provisions of the Companies Act to that end.

On May 29, 1978, the company replied to UTI's letter of May 19, 1978, and stated that, while it was grateful for UTI's offer of Rs. 1 crore it could be accepted only as an additional assistance instead of as an alternative to the consortium term loan. The company said that it would be grateful if UTI gave its assistance in the sum of Rs. 3 crores because it wanted to take up a modernisation programme. What was said about that modernisation programme was said to be very tentative and detailed estimates were being worked out. The note annexed to the letter upon the modernisation programme is patently, as tentative.

On May 17, 1978, no plea had been made by the company to UTI for assistance in the sum of Rs. 1 crore. The company, in fact, said that it was securing such assistance from a consortium of banks. On May 19, 1978, with rather remarkable solicitude and expedition, UTI offered the company, the same amount for the same purpose. No doubt an institution with a large stake in the company might do so with the best interests of the company at heart. What renders this somewhat suspect here is the term that the conversion option would be exercisable immediately after UTI's terms and conditions were accepted by the company, read in the light of the company's desire to get an order under s. 108, a similar desire stated by UTI, and the immediate prospect of the company's AGM.

It is clear from the evidence of (sic) that such details as were mentioned in the company's letter of May 29, 1978, in respect of the modernisation programme were of little value. He said, for example, that nobody replaced spinning machines, although this was what the note attached to the company's letter dated May 29, 1978, said would be done, but only modified them to operate at high speed by adding certain attachments. He also said that though the company's letter of May 29, 1978, estimated the expenditure on this item to be Rs. 120 lakhs, the detailed appraisal estimated this expenditure at Rs. 12 lakhs.

One would reasonably have expected UTI's response to the company's letter of May 29, 1978, to be something like this : "we were offering you Rs. 1 crore on better terms than you got from the consortium of banks, but we will not press you. So far as your modernisation programme is concerned, when you have worked out the details and estimates and placed them before your board you may apply to us and certainly we will consider your proposal".

That is not the response. It is the evidence of Atmaramani that the response of UTI was to expedite the preparation of a note to be placed before the IIM to be held two days later in respect of UTI's intention to advance the company Rs. 200 lakhs for the modernisation programme. Atmaramani was cross-examined at great length on what happened at UTI's office in respect of the company's letter dated 17th day of May, 1978, and its sequel. I accept that the correspondence of that period was exchanged between the company and UTI, but I find Atmaramani's explanation, as to what gave rise to such urgency, strained. He said that a proposal received by an institution had to be placed before the very next IIM. Nothing on record supports this unlikely explanation. He said also that the company was in a hurry to obtain approval for the proposal so that it could have passed the requisite resolution under s. 293 at the June, 1978, AGM. It is a strain on one's credulity to be asked to believe that to oblige the company in this, a public financial institution agreed in principle to advance first Rs. 200 lakhs and then Rs. 300 lakhs within two days, without an appraisal of the project, of which only the sketchiest details and figures were provided by the applicant. Atmaramani even claimed to read urgency in the company's letters which plainly was not there. The company had not asked for any moneys for the modernisation programme until after UTI's letter of May 19, 1978, there plainly, was no urgency for the moneys and no properly evolved proposal upon which they could have immediately been spent.

It is on record that at the IIM of May 31, 1978, the proposal of UTI to advance to the company Rs. 200 lakhs was considered and was modified so that UTI would now advance to the company Rs. 300 lakhs. Shingal deposed that the general procedure of the institutions was that a detailed appraisal of the proposal for financial assistance was carried out by the institutions before acceptance of the proposal, even in principle. He insisted in cross-examination that in the present case that procedure had been followed, but it had been followed in reverse ; the company's proposal was accepted in principle first, in May, 1978, and the detailed appraisal was carried out thereafter, after November, 1978.

It was suggested by counsel for the defendants that UTI and the IIM could so act because of earlier appraisal carried out by ICICI. The appraisal is required to be made of the project for which the Joan is sought, here the modernisation programme. No earlier appraisal had been made of the modernisation programme. UTI and the IIM acted without the benefit of such appraisal.

After the IIM had sanctioned the proposal in principle the sanction of the executive committee of UTI was obtained.

On June 1, 1978, UTI wrote to the company with reference to the letter of May 29, 1978, stating that it was aggreeable in principle to provide financial assistance along with other institutions of Rs. 300 lakhs for financing a part of the company's modernisation programme upon the terms and conditions set out therein. Clause 7 required the company to agree to vest in UTI the option to acquire in lieu of conversion shares of Rs. 60 lakhs, the period for conversion being June 15, 1978, to June 14, 1980. The underlining of the phrase "to acquire in lieu of conversion" is in the letter and it speaks of the urgency felt in respect of the acquisition of shares.

I have already referred to the letter written on June 6, 1978, by the Chairmen of UTI and of GIC to the CLB and to the involvement of the company in its preparation. The letter expressed the apprehension that the Berlias would gain control of the company "either at the forthcoming AGM of the shareholders on June 29, 1978, or at any other general meeting".

On June 6, 1978, UTI wrote to the company with reference to the term loan of Rs. 60 lakhs and to the letter of January 7, 1978, whereby UTI agreed in principle to provide that assistance. It will be recalled that that letter stipulated that the company should agree to vest in UTI the option to convert a portion of the debentures amount into shares on terms and conditions to be decided thereafter. By the letter dated June 6, 1978, UTI advised the company, in terms of that clause, that UTI would have the option to acquire in lieu of conversion equity shares of Rs. 10 lakhs. The words " acquire in lieu of conversion "are again underlined. The letter went on to give notice of UTI's" intention to acquire with effect from June 15, 1978, in lieu of conversion " shares of the value of Rs. 10 lakhs. The letter said that such equity shares were to be " registered in the name of UTI immediately on allotment, i.e., from June 15, 1978". Once again, the urgent desire to acquire as many shares as possible is writ large upon the latter.

On June 8, 1978, UTI wrote to the company in respect of the letter of intent dated June 1, 1978, and stated that, in terms of cl. (7) thereof, it had the right to acquire, in lieu of conversion, shares of the value of Rs. 60 lakhs. The letter advised that such shares were required to be registered in the name of UTI immediately on allotment, i.e., from June 15, 1978. This letter is on the same lines as those that succeeded the company's letter of May 29, 1978, UTI wanted the company's shares as fast as it could get them and was quite willing in the bargain to advance Rs. 300 lakhs for a project the company had not finalised and which the institutions could not, and had not investigated.

On June 17, 1979, the freezing order was passed. A copy was received by the company on June 19, 1978. It is in evidence that the company did not disclose to the Berlias or their attorneys a copy of the freezing order or its contents, even when demanded, and that it was disclosed to them only two days before the 1978 AGM, when the company was called upon to produce it in court at the time of the interim application in the writ petition filed to challenge it. This conduct speaks of animus.

On June 23, 1978, the CLB asked the company to clarify, how UTI could exercise its option for conversion of debentures into equity shares when no debentures had been issued to it. A reply was sent by the company ; it is, I think, a fair reading of it to say that it contains no such clarification.

It appears from the record that, whatever UTI's earlier intentions might have been to acquire shares in lieu of conversion, they ceased after this letter of the CLB.

At the 1978 AGM, by reason of the undertaking given and recorded in the interim order passed in the writ petition, the Berlias voted in favour of the resolution under s. 293 to create a security for the debentures. They were free to exercise their votes in respect of all other items on the agenda, and as the results which were subsequently disclosed showed, the second plaintiff was there elected as director.

There was then a lull till April, 1979, when the prospect of yet another AGM loomed. On April 7, 1979, the attorneys for the institutions and the company sent to them and the debenture trustee a note of discussions that had taken place between their officers. The note stated that the institutions were anxious to complete the transaction at the latest by May 30, 1979. On April 28, 1979, the company issued the notice convening the AGM on June 28, 1979. By May 9, 1979, or thereabouts all the sanctions required prior to the execution of the debentures trust deed had been received. On May 24, 1979, a meeting of the company's board passed the appropriate resolutions. They approved the draft of the debenture trust deed in the form in which the document was executed and they gave to four directors the power, inter alia, to amend the draft.

On May 29, 1979, the attorneys wrote to the institutions, the company and the debenture trustee setting out the programme for completion. I have already referred to the note in some detail. Suffice it to say here that it contemplated the delivery of notices of conversion by the institutions to the company immediately upon the debenture trust deed being executed and letters of allotment of debentures being issued. It also contemplated that letters of allotment of shares in conversion and contracts under s. 75 in respect of those shares would be executed and issued. In fact, it contemplated the issue of the shares themselves.

It is obvious that prior to May 29, 1979, it had been agreed between the institutions and the company that, immediately upon the debenture trust deed being executed, cl. 5 of the form of debentures incorporated therein would be waived. There is nothing upon the record which indicates when such agreement was reached or why.

On May 31, 1979, the transaction was completed. No evidence has been led of what happened then.

Upon a consideration of the circumstances relied upon by Mr. Cooper, by counsel for the defendants and of the record, I cannot but see that the company had sought to prevent the Berlias from adding to their shareholding in the company and from exercising their votes on their existing shares and on proxies secured by them, that the Berlias had the capacity to muster a sufficiently large number of proxies to worry the company's directors and the institutions, and that, moments after the execution of the debenture trust deed that made a month's notice a pre-requisite for conversion, the company waived, as agreed at some prior date, this prerequisite. Without such waiver shares upon conversion could not have been issued to the institutions at the time they were, they could not have been issued before June 28, 1979, the date of the company's AGM.

Having regard to this, I have no doubt that the plaintiffs have established the prima facie case that the waiver was actuated by the desire to increase the voting strength of the institutions at the AGM of June 28, 1979, and thus counter the votes and proxies of the Berlias. No director or officer has been examined to refute the prima facie case. In fact, none of the defendants has examined a witness, who could depose as to what transpired in those last days of May, 1979, or at the meeting of May 31, 1979. I am reluctantly but inevitably impelled to the conclusion that no witness upon this aspect has been examined because his evidence would not have dispelled the prima facie case.

I now turn to the authorities. There are two judgments of the Supreme Court on the point. I need refer to only one English judgment thereafter. The first case is that of Nanalal Zaver v. Bombay Life Assurance Co. [1950] 20 Comp Cas 179 (SC). The company issued shares and it was contended that the shares had been issued not because the company was in need of funds but with the object of retaining to the directors the control of the company. The true approach to a question of this nature was stated by Mahajan J. (p. 195) thus :

"It is well settled that in exercising their powers, whether general or special, the directors must always bear in mind that they hold a fiduciary position and must exercise there powers for the benefit of the company and for that alone and that the court can intervene to prevent the abuse of a power whenever such abuse is held proved, but it is equally settled that where directors have a discretion and are bona fide acting in the exercise of it, it is not the habit of the court to interfere with them. When the company is in no need of further capital, directors are not entitled to use their power of issuing shares merely for the purpose of maintaining themselves and their friends in management over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders."

Mahajan J. held that the controlling factor working in the mind of the directors was the necessity of further funds for the company at the moment they passed the resolution. That being so, the existence of the other motive did not make the action of the directors in respect of the issue of further shares mala fide. Upon the evidence he found that there was no dolus malus in their mind as directors of the company, as affecting the company or its shareholders. Das J. put it this way (p. 207): "If the directors exercise the power for the benefit of the company and at the same time they have a subsidiary motive which in no way affects the company or its interests or the existing shareholders then the very basis of interference of the court is absent, for........................ the court of equity only intervenes in order to prevent a breach of trust on the part of the directors and to protect the cestui que trust, namely, the company and possibly the existing shareholders." He held that the directors' motive of keeping out the Singhania group, who were not yet shareholders but were strangers, did not prejudicially affect the company or the existing shareholders and the presence of such further motive could not vitiate the good motive of finding the necessary funds for the company.

In the instant suit, a prima facie case of dolus malus and breach of fiduciary duty is established. No evidence is led by the company of its motives, whether mixed or otherwise. Upon the reasoning in Nanalal Zaver [1950] 20 Comp Cas 179 (SC), the court must interfere.

In the case of Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 (SC), directors forming the requisite quorum resolved to increase the share capital of the company with the intention of complying with the provisions of the FERA as to foreign holdings. The issue of the shares was challenged on the ground that it constituted an abuse of fiduciary power. A substantial portion of the judgment is devoted to the consideration of what constitutes a breach of fiduciary duty by a company's directors. Several judgments of the English and Commonwealth Courts are referred to. The Supreme Court approved the dictum of Byrnes J. in Punt v. Symons & Co. [1903] 2 Ch 506 (Ch D), that it would be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purposes of destroying the existing majority or creating a new majority which did not previously exist, and to do so was to interfere with that element of the company's constitution which is separate from and set against their powers. The Supreme Court laid emphasis on the fact that the sole, single and simple purpose of the directors must be to destroy the existing majority or create a new majority which did not previously exist. The Supreme Court recalled (p. 813) what was laid down by the Privy Council in Hirsche v. Sims [1894] AC 654:

"If the true effect of the whole evidence is, that the defendants truly and reasonably believed at the time that what they did was for the interest of the company, they are not chargeable with dolus mains or breach of trust merely because in promoting the interest of the company they were also promoting their own ..."

The Supreme Court also approved the decision in Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821 (PC) to which I shall presently refer. The Supreme Court held that if the shares were issued in the larger interest of the company the decision to issue shares could not be struck down on the ground that it had incidentally benefited the directors in their capacity as shareholders.

It is true that, it was the case of the plaintiffs here that the shares had been issued though there was no need for the finance, and that, that case was not urged in the course of Mr. Cooper's final argument. I am, therefore, concerned not with whether the directors issued shares mala fide or in breach of fiduciary duty, but with whether they acted mala fide in breach of the fiduciary duty in waiving the requirement of cl. 5 of the form of debentures, thus enabling the shares to be allotted to the institutions earlier than the prescribed one month's period. There is, to repeat, no evidence which refutes the prima facie case of mala fides and breach of fiduciary duty made out. There is no evidence before me upon which I can conclude, in the words of the Privy Council, that the directors truly and reasonably believed that what they did was for the interest of the company. If they had given such evidence it would not have been possible for the plaintiffs' counsel to argue or for the court to hold that such belief was unjustified, the only question would have been : did they really so believe ?

In Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821, 835, the Privy Council quoted with approval Viscount Finlay in a Scot's case (Hindle v. John Cotton Ltd. [1919] 56 Sc. LR 625, 630, 631):

"Where the question is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstances all the materials which genuinely throw light upon that question of the statement of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting from some bye-motive, possibly, of personal advantage, or for any other reason."

I conclude that the prima facie case, which is not refuted, is established that the company's directors exercised the power of waiver with the object of adding to the voting strength of the institutions, to the detriment of the voting strength of the Berlias and their supporters. They favoured, by so doing, one group of the company's shareholders against another. They acted mala fide and in breach of their fiduciary duty. I also conclude that the institutions were privy and party thereto and at all stages the company and the institutions marched hand-in-hand to the common goal.

The constitutional point:

It is the case of the plaintiffs that the phrase "or any institution specified by the Central Government in this behalf" in cl. (b) of the proviso to sub-s. (3) of s. 81 is ultra vires the Constitution by reason of excessive delegation of power to the Central Govt.

It was urged by counsel for the defendants that if this case is accepted the consequence would be to invalidate the option term contained in the debenture trust deed. They relied upon the statement made by counsel for the plaintiffs which says that the plaintiffs would not contend that the debenture trust deed was void and submitted that it was not open to the plaintiffs to advance any argument which would lead to an invalidation of any part of the debenture trust deed.

I now state the material portion of Mr. Cooper's reply to this in, substantially, his own words :

Section 81, he submitted, applied only when it was "proposed to increase the subscribed capital of the company by allotment of further shares". It was only (when) the increase in the subscribed capital, by allotment of further shares, had been decided upon, that sub-section (1) came into play. Sub-section (1A) began with the words "notwithstanding anything contained in sub-s. (1) the further shares aforesaid may be offered to any persons" if a special resolution was passed. Since the words used in the sub-section were "the further shares aforesaid", it necessarily followed that the further shares referred to were those which fell within the scope of the clause, when it was proposed to increase the subscribed capital of the company by the allotment of "further shares" and the further shares aforesaid in the clause meant such further shares'. It could be suggested that, sub-s. (1) only came into play, and could refer only to the point of time, at which the further shares were to be offered, and that the sub-section could only be applicable to shares to be issued as a result of the exercise of an option clause in a convertible debenture, if the sanction by the special resolution was given before the option was inserted as a covenant. In the alternative, if sanction could be given only after the "proposal to increase the subscribed capital by allotment of further shares" had fructified, that is, by the actual exercise of the option, then the language of sub-s. (1A) would preclude any application of that sub-section to such a situation. This interpretation, however, was completely against the meaning of the section as a whole as could be gathered from a reading of it, including sub-s. (3). The section contemplated that sub-s. (1A) would apply if the conditions laid down in the proviso to sub-s. (3) were not fulfilled, and sub-s. (1A) would apply to "the increase of subscribed capital of a public company caused by the exercise of the option attached to such debentures". In other words, sub-s. (3) negatived any suggestion that sub-s. (1A) was not to apply to such increase of subscribed capital caused by the exercise of such option. Again, the wording of sub-s. (3) would have been different, if a special resolution passed before the option was granted (not exercised) could be passed under sub-s. (1A). It was, therefore, submitted that sub-s. (1A) read with sub-s. (3) clearly contemplated that a special resolution in the case of shares to be issued as a result of the exercise of an option clause in a debenture must be passed before the shares are actually allotted after the exercise of the option.

It was further submitted by Mr. Cooper that even if the sanction contemplated by sub-s. (1A) in respect of the issue of shares as a result of the exercise of the option clause in a debenture had to be given by a special resolution passed before the option was given, this would not render the agreement granting such option invalid but would only mean that the agreement would be subject to the sanction of a special resolution. Every agreement was presumed to be entered into on the footing that it would be carried out in a legal manner with due compliance of all statutory requirements.

In the further alternative, Mr. Cooper submitted that, even assuming that the special resolution was required before the issue of the debentures, it did not make the debenture trust deed void in any way. The debenture trust deed remained valid even if the convertibility of the debentures to be issued thereunder was affected. The debenture trust deed was only a supporting document and it was open to the company to pass a special resolution before issuing the debentures themselves and accepting the subscription moneys. The fact that, in the instant case, it was all done on the same day did not alter this position, because the argument proceeded on the footing that everything done had been done bona fide and the transaction was what it had been made out to be.

I proceed to consider Mr. Cooper's reply.

If the phrase impugned is excluded from cl. (b) of the proviso to sub-s. (3) of s. 81, the term providing for the option to convert the debentures into shares had to be (sic) approval meeting. There is no such approval. Does it mean, then, that s. 80 applies ? As section reads, what would apply is sub-s. (1A), for, the shares were not being offered to all the holders of the company's equity shares. Sub-section (1A) authorises the offer of shares to any person if a special resolution to that effect is passed. It makes the special resolution a precondition to the offer,or the option. Without the special resolution the offer or the option is bad. It would mean, in the instant case, that there being no special resolution, the clause in the debenture trust deed providing the option is bad. This the plaintiffs may not urge having given up the challenge to the debenture trust deed.

But, Mr. Cooper said, "further shares aforesaid" in sub-s. (1A) must be read in the context of "where....................it is proposed to increase the subscribed capital of the company by allotment of further shares" in the opening portion of s. 81. This must be done.

Mr. Cooper submitted that in the case of options given to convert debentures (or loans) into shares the proposal to increase the capital of the company by allotment of further shares would come to be only after the option was exercised. He submitted that, therefore, the special resolution was not a precondition to the giving of the option but to the issue of the shares upon the exercise of the option.

Once the company makes an offer under sub-s. (1) or (1A) and the offeree accepts it, the company is bound to allot the shares accepted. Similarly, once the company gives to any person the option to call for shares, and the person exercises the option, the conpany is bound to allot the shares opted for. It cannot then be said by the company that the shares opted for would be issued provided a special resolution to increase the subscribed capital of the company was passed. Nor, for the same reason, can it be urged that the option to call for shares is not invalid but only subject to the sanction of a special resolution. The special resolution must precede the issue of the debentures containing the option to call for shares, just as much as it must precede the offer of shares, whether sub-s. (3) applies or sub-s. (1A). If the special resolution has not sanctioned the conferment of the option before the issue of the debentures, the conferment is bad.

Let me look at the debenture trust deed to test the argument that the debenture trust deed is unaffected even if the conferment of the option has to be preceded by a special resolution. The argument is that the option would be contained in the debentures that were yet to be issued and the issue thereof could be preceded by a special resolution.

The 22nd recital of the debenture trust deed states that the debenture trustee had at the request of company consented to act as trustees of the deed on the terms and conditions therein after appearing. In cl. 1 debentures are defined to mean the debentures issued under "these presents and in accordance with the forms set out in the Fifth Schedule". The debenture holders are defined to mean the holders for the time being of the debentures so issued on the conditions endorsed on the debentures. Under cl. 2 it is stated that the debentures issued under the debenture trust deed and which were entitled to its benefit would be 35,000, 11% convertible debentures comprised in series A to G. Clause 4 of the debenture trust deed provides the right of conversion and cl. 5 of the form of debentures provides the mode in which the right may be exercised. Both these have been quoted above.

It is patent, therefore, first, that the debentures were to be issued under the debenture trust deed and, secondly, that the debenture trustee accepted the assignment on the terms and conditions contained in the debenture trust deed, including the terms of conversion. The option to convert therein is not made subject to the sanction of a special resolution but is unqualified. To read into it this qualification would, in my view, be unjustified, the more so as it would be done without hearing the debenture trustee, who is not a party to the suit.

As it stands, then, the validity of the option clause in the debenture trust deed is impeached by the argument that the impugned phrase in cl. (b) of the proviso to sub-s. (3) of s. 81 is ultra vires the Constitution. By reason of the statement made on their behalf, the plaintiffs cannot be allowed to impeach the validity of any part of the debenture trust deed. The constitutional argument cannot, therefore, be permitted.

The position is firmly established, in the field of constitutional adjudication, that the court will decide no more than needs to be decided in any particular case. (See Dr. Vasant Kumar Pandit v. Union of India, AIR 1982 SC 710 at 724). Bearing this in mind and having regard to the position that, first, the constitutional argument is not open to the plaintiffs and, secondly, that by virtue of my finding on the aspect of mala fides a decision of the constitutional question would be more than needs to be decided in this case, I refrain from discussing the arguments that were advanced before me on the constitutional question and the conclusion that I have reached.

Approval of Central Government not complied with

Under s. 81(3) a term in a debenture which provides for an option to convert the debenture into shares must be approved by the Central Govt.

If, in Mr. Cooper's submission, there were no such approval or the terms of such approval were not complied with, the provisions of sub-s. (1A) would apply ; since the provisions of sub-s. (1A) had not been complied with, the issue of the shares upon conversion was bad.

In dealing with the constitutional point, I have concluded that if the special resolution required by sub-s. (1A) had not preceded the option to call for shares the option was bad, but that it is not open to the plaintiffs to so contend in the instant case by reason of their counsel's statement.

In any event, it appears to me that there has been substantial compliance with the Central Govt's approval. On December 1, 1978, the CLB granted approval to the company for the issue of convertible debentures to GIC and its subsidiaries of the value of Rs. 10 lakhs out of total debentures of the value of Rs. 50 lakhs. Approval in respect of the other institutions were given in similar terms. On April 7, 1979, the attorneys of the institutions and the company wrote to them regarding discussions that had been held earlier. It was recorded by the attorneys that the company would take steps to approach the CLB for modification of the approvals so as to clearly specify that the convertible debentures would be to the extent of Rs. 350 lakhs in the aggregate and not only Rs. 70 lakhs as stated therein. The letters to the CLB pursuant to this discussion were written not by the company but by the institutions. On May 19, 1979, the CLB replied to GIC and stated that in the approval it had been clearly stated that debentures of the value of Rs. 10 lakhs would be convertible. Replies in similar terms were sent to the other institutions.

It is true that what the company has done is to issue convertible debentures of the aggregate amount of Rs. 350 lakhs of which only 20% in value are convertible. The effect of doing so is the same, substantially, as of issuing non-convertible debentures of the value of Rs. 280 lakhs and convertible debentures of the value of Rs. 70 lakhs.

Acquiescence, laches and ratification

Counsel for the defendants argued that relief in favour of the plaintiffs should not, in any event, be given by reason of acquiescence, laches and ratification.

It was submitted that, having regard to the knowledge of the plaintiffs as shareholders or their means of knowledge, and the plaintiffs' acts of positive assent, the plaintiffs were not entitled to the equitable relief of rectification. It was submitted that by reason of the plaintiff's acquiescence at the meeting of June 29, 1978, and their unconditional undertaking to vote in favour of the resolution under s. 293, amended to include debentures of the value of Rs. 350 lakhs, they were precluded from urging that any part of the issue of convertible debentures were for any reason void. It was also submitted that the plaintiffs were not entitled to the relief because of their acts at and in connection with the AGM of May 15, 1980. The second plaintiff as a director was a party to the directors' report which acknowledged that 51,000 shares were duly issued upon conversion, and to the balance-sheet whose accuracy must be assumed, which showed an increase in the capital due to the issue of the shares and a decrease in the amount of the loan from Rs. 350 lakhs to Rs. 280 lakhs. It was submitted that the 1st plaintiff, having attended this AGM, was a party to the approval of the directors' report and the adoption of the accounts. It was also submitted that the plaintiffs had received dividend for the years ended December, 1979, and December, 1980, on profits due to the utilisation of the loans and issued on the basis of the increased share capital.

Counsel for the plaintiffs relied on authorities to which I now refer. In Phosphate of Lime Co. Ltd. v. Green [1871] LR 7 CP 43, it was observed that the law with respect to ratification was clear. The principle by which a person on whose behalf an act was done without his authority may ratify and adopt it, is as old as any proposition known to law, but it is subject to one condition ; in order to make it binding, it must be either with full knowledge of the character of the act to be adopted, or with intention to adopt it at all events and under whatever circumstances. In regard to the knowledge of the shareholder it was observed by Brett J. that it was sufficient to show that facts were made known to the shareholders, into the effect of which they might and ought to have inquired, and to which they ought to have objected at the time, unless they intended to adopt the transaction.

In re New Zealand Banking Corporation, [1868] 3 Ch App 131, it was held that it was impossible not to impute to every shareholder of the company the knowledge of what the memorandum of association contained, for, if they chose to address their minds, the shareholders had all the facts that were necessary and when, in the face of that, and with that knowledge, they passed resolutions it was to be considered that they had done what was necessary to cure any irregularity that had been committed.

In re Magdalena Steam Navigation Company, 70 English Reports 597, it was held that debentures issued by directors under the seal of their company without due authority could not be enforced by members of the company who accepted them after having been present at the meeting where the issue of the irregular debentures was sanctioned ; and bona fide transferees for value from such shareholders were in no better position. Neither could strangers enforce them as valid legal securities. But where the moneys advanced on such irregular securities had been applied by the directors for the benefit of the company, and the shareholders had acquiesced in the transaction, the company and the shareholders were precluded from disputing their liability to repay the advance. They were bound by acquiescence not to recognise the instruments as valid debentures, but to accept their liability for the advances, regarding the debentures as nothing more than evidence of the debt.

In V. N. Bhajekar v. K.M. Shinkar [1934] 4 Comp Cas 434 (Bom); 36 Bom LR 483, it was held that a company cannot confirm or ratify anything which is beyond its powers, express or implied, in the memorandum or conferred by statute. Short of that, a transaction by the directors which is beyond their own powers but within the powers of the company can be ratified by a resolution of the company in general meeting or even by acquiescence, provided that the shareholders had knowledge of the facts relating to the transaction to be ratified or the means of knowledge are available to them.

Mr. Cooper submitted that acquiescence at the time the impugned action was in progress was different from acquiescence after the act. In the latter case the right to challenge the action had vested and could not be divested except by what amounted to fraud or accord and satisfaction. In such a case delay was irrelevant until the suit was barred by limitation. The doctrine of acquiescence was based on the principle that delay defeated equity and also defeated a legal right where the plaintiffs stood by for an unconscionably long period, for, in England there was no statutory limitation. In India, by reason of statutory limitation, the principle was much weakened. Acquiescence to bar a relief had to amount to fraud and any action of ratification required the intention to ratify with the knowledge of all the relative facts and the knowledge that the act to be ratified was bad. It had to be a conscious act with knowledge and intent. The onus of proving acquiescence was on the other party. In Mr. Cooper's submission not even a prima facie case of acquiescence had been established against the plaintiffs. Mr. Cooper relied upon authorities which I now set out.

In Thakor Fatesingji Dipsingji v. Bamanji Ardeshir Dalai [1903] 5 Bom LR 274, a Division Bench of this cqurt drew a distinction between estoppel and acquiescence. Acquiescence, in an act while it was still in progress, operated as an estoppel if it had induced an action infringing a right. Submission to an action when it had been completed did not change the part, and the right of action once vested could not as a general rule, be divested without accord and satisfaction. Estoppel by acquiescence had no application to an ex post facto submission not amounting to ratification, and inducing no action or omission, and, consequently, insufficient to constitute what in such case would be necessary ; accord and satisfaction with full knowledge. Acquiescence after a fait accompli if not prolonged beyond the verge of limitation, was no bar to a right of suit already accrued.

In Ghasia v. Thakur Ramsingh, AIR 1927 Nag 180, Kinkhede, A.J.C. said that there was a distinction between a case where the acquiescence alleged occurred while the act acquiesced was in progress, and another where the acquiescence took place after the act had been completed. In the former case, the acquiescence under such circumstances that assent might be reasonably inferred from it. In the latter case, when the act was completed without any knowledge or without any assent on the part of the person whose right was infringed, the matter had to be determined on very different legal considerations. A right of action had then vested in him, and a mere delay to take legal proceedings to redress the injury could not, by itself, constitute a bar to such proceedings, unless the delay on his part, after he had acquired full knowledge had affected or altered the position of his opponent. It followed that delay would count against any person who had shown quiescence under the circumstances from which assent could be reasonably inferred as a matter of a legal inference.

In Willmott v. Barber [1880] 15 Ch D 96, Fry J. observed (p. 105):

"It has been said that the acquiescence which will deprive a man of his legal rights must amount to fraud, and in my view that is an abbreviated statement of a very true proposition. A man is not to be deprived of his legal rights unless he has acted in such a way as would make it fraudulent for him to set up those rights. What, then, are the elements or requisites necessary to constitute fraud of that description ? In the first place the plaintiff must have made a mistake as to his legal rights. Secondly, the plaintiff must have expended some money or must have done some act (not necessarily upon the defendant's land) on the faith of his mistaken belief, Thirdly, the defendant, the possessor of the legal right, must know of the existence of his own right which is inconsistent with the right claimed by the plaintiff. If he does not know of it he is in the same position as the plaintiff, and the doctrine of acquiescence is founded upon conduct with a knowledge of your legal rights. Fourthly, the defendant, the possessor of the legal right, must know of the plaintiff's mistaken belief of his rights. If he does not, there is nothing which calls upon him to assert his own rights. Lastly, the defendant, the possessor of the legal right, must have encouraged the plaintiff in his expenditure of money or in the other acts which he has done, either directly or by abstaining from asserting his legal right. Where all these elements exist, there is fraud of such a nature as will entitle the court to restrain the possessor of the legal right from exercising it, but, in my judgment, nothing short of this will do."

In the Hope Mills Ltd. v. Sir Cowasji J. Readymoney [1911] 13 Bom LR 162, Beaman J. quoted and followed the exposition of the principle by Fry J. The principle has also been followed by the Allahabad and Calcutta High Courts.

In S. L. Ramaswamy Chetty v. M.S.A.P.L. Palaniappa Chettiar, AIR 1930 Mad 364, a Division Bench of the Madras High Court observed that (p. 369):

"The ground for admitting the defence of acquiescence or laches according to the doctrine of the English Courts of equity is that a plaintiff in equity is bound to prosecute his claim without undue delay. Where, however, there is, as in India, a statutory time limit to all conceivable kinds of action, the plaintiff is entitled to the full statutory period before his claim becomes unenforceable. Besides, even if in such cases the defence of laches were admissible the defendants would have to show that they had suffered a change of position by reason of the respondent's laches in which it would not be reasonable to allow him to assert his right."

In Smt. Premila Devi v. Peoples Bank of N. India Ltd. [1939] 9 Comp Cas 1 (PC); AIR 1938 PC 284, it was held that (p. 13 of 9 Com Cas):

"There can in truth be no ratification without an intention to ratify, and there can be no intention to ratify an illegal act without knowledge of the illegality."

In Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd. [1971] 41 Comp Cas 377, this court held that there could be no ratification except with full knowledge of the facts and the shareholders were never asked to ratify the resolution in question in that suit after the facts were made known to them. In the context of notice the court approved the observations of a Division Bench of the Calcutta High Court in Shalagram Jhajharia v. National Company Ltd. [1965] 35 Comp Cas 706, 740 thus :

"As the legislature has thought it fit to provide that shareholders must approve of the appointment of selling agents the opportunity given to the shareholders must be full and complete and there must be a full and frank disclosure of the salient features of the agency agreement before the shareholders can be asked to give their sanction. The provision for inspection of the agreement at the registered office of the company is not enough. Few shareholders have either the time or the inclination to go to the registered office to find out what the company is about to do. Moreover, such an opportunity is illusory in the case of shareholders who do not live in Calcutta when the registered office is situate here."

In Tilakdhari Lal v. Khedan Lal, AIR 1921 PC 112, it was held that notice could not in all cases be imputed from the mere fact that a document was to be found upon the Indian register of deeds. This was followed by this court in Peerka Lalka v. Babu Kashiba Mali, AIR 1923 Bom 410.

As I look at it, the matter can be treated on a simpler basis if one keeps in mind that the act of illegality here is the act of waiver. The plaintiffs must be shown to be estopped by reason of acquiescence in the act of waiver. Laches must be shown to have occurred in relation to the act of waiver. Ratification must be of the act of waiver.

A man may be said to have acquiesced in the act of another if, knowing it to be a legal wrong to himself, he stands quiet and lets it happen. He is then estopped by acquiescence from challenging the act. The plaintiffs can be said to have acquiesced in the act of waiver if they had known before May 31, 197,9, that the act of waiver was going to take place. Attributing to the plaintiffs the knowledge of the letters of intent mentioned in the notice of the meeting of June 29, 1978, and taking into account their vote at that AGM in favour of the resolution under s. 293 authorising the creation of the security for the debentures, the plaintiffs could still have had no knowledge or means of knowledge that there was going to be the act of waiver of a precondition mentioned in the debenture trust deed immediately after it was executed. I am, therefore, unable to hold that the plaintiffs are estopped by acquiescence.

A man may be said to have been guilty of laches if, after finding out that an act, which does a legal wrong to himself, has been done, he stands quiet for some substantial period of time. He may then be disentitled to relief by reason of laches. The plaintiffs can be said to have been guilty of laches if, after finding out about the act of waiver, they had stood quiet for some period of time. It is shown that at the June, 1979, AGM, the chairman stated that the institutions had exercised their options to convert and there was a discussion in this behalf. It is not shown, nor was it the defendants' case, that the fact of the waiver was disclosed or discussed or, for that matter, any disclosure was made which could have suggested that the act of waiver had occurred. At the first board meeting that was attended by the 2nd plaintiff in March, 1980, the balance-sheet for the year ended December, 1979, was signed and the directors' report was approved. They were considered and adopted at the AGM of May 15, 1980, when both the plaintiffs were present. There is nothing in the balance-sheet, the accounts or the directors' report which would suggest the fact of the waiver. It is not shown nor is it the defendants' case that the fact of the waiver was disclosed at the board meeting or that any disclosure was made which could have suggested that the act of waiver had occurred. It was urged further that the plaintiffs should be deemed to have constructive notice that the debentures were issued on May 31, 1978, and the shares on conversion were issued on June 5, 1978, by reason of the annual return filed by the company with the Registrar of Companies. A copy of the annual return is on record. Assuming that, it would not dislcose the fact of the waiver to the plaintiffs. That fact they could have inferred only if after inspecting the annual return they had inspected the debenture trust deed at the company's office and ascertained the terms of conversion. This does not appear to be the basis upon which the doctrine of constructive notice can be applied, and that to spell out laches.

It was submitted that the plaintiffs had not given any explanation in the witness box why they had instituted the suit so long after the issue of the shares although they had stated the reason in an affidavit filed in support of their motion for interim relief and that, therefore, they were barred from obtaining the relief sought in the suit. Counsel for the defendants relied upon the relevant portion of that affidavit. This was, quite rightly, objected to. No part of that affidavit is tendered on record and, indeed, it could have been tendered only if the defendants intended to use it as an admission against the plaintiffs, which they did not. What they really say is, a false reason is stated in the affidavit which the plaintiffs do not dare to advance in the box. That the affidavit may not be relied upon is clear from the judgment in Clemens v. Clemens Bros. Ltd. [1976] 2 All ER 268 (Ch D). The court had said that (at p. 277): "...an affidavit sworn in interlocutory proceedings cannot be relied on by the other party at the trial for its full contents as evidence. The plaintiff can, however, rely on any admission to be found in it, just as reliance can be placed on any other document which contains an admission."

There is nothing upon the record that indicates that the plaintiffs took unduly long to institute the suit after acquiring the requisite knowledge.

Ratification may be said to have occurred when the persons concerned approve an act done on their behalf with knowledge of its irregularity or upon the basis that they endorse it, irregular though it may be. There is no evidence that the shareholders of the company ever came to know the fact of the waiver so that they could ratify it, nor is there any evidence that they intended to and did ratify the issue of the shares upon conversion, whether or not it was in order.

I am entirely at a loss to understand how, in the circumstances, the acceptance of dividends upon their shares estops the plaintiffs from claiming relief.

The plaintiff's conduct

It was submitted by counsel for the defendants that the plaintiffs' conduct disentitled them to relief. The circumstances relied on by counsel for the defendants were these :

That the plaintiffs had issued a false circular to get control of the company.

That to the witness Goculdas, shown on the circular to be its signatory, the case has been put in cross-examination that the issue of the circular had been authorised by him but the plaintiffs had not gone into the witness box to prove that case.

That the undertaking to vote in respect of s. 293 resolution at the 1978 AGM, given at the hearing for interim relief on the writ petition challenging the freezing order, is not mentioned in the plaint.

That the issue of debentures is challenged in the plaint but the issues relative thereto had not been pressed.

That, though the plaint stated that the shareholders objected to the conversion option at the 1979 AGM, this had not been proved.

That the allegations against the Controller of Capital Issues and the Company Law Board contained in the plaint had not been pressed.

Now, it is true that to the witness Goculdas the case was put in cross-examination that the circular had been authorised by him and that the plaintiffs did not go into the box to substantiate that case. Goculdas' evidence must, consequently, be accepted that the circular, in so far as it was purported to be signed by him, was false. It is also true that many of the issues raised on the basis of the averments made in the plaint have not been pressed.

In exercising discretion, however, the court must consider not only the plaintiffs' conduct but also that of the defendants. I have held that the company's directors acted mala fide and in breach of fiduciary duty in exercising the power of waiver and that the institutions were privy and party to this. Having weighed the conduct of the one against the findings regarding the other, I believe I would be unjustified in exercising discretion in favour of the defendants.

Restitution

Ordinarily, the institutions would have been entitled to restitution to the position of being holders of convertible debentures with the option to convert 20% of the value thereof into shares during a stated period. I have here held them to be privy and party to the mala fide exercise of the power of waiver by the company's directors so that they could secure the shares in time for voting thereon at the 1979 AGM. It does not advance the defendants' case to say that, in fact, the votes upon these shares were not used at the 1979 AGM. The point is that, as it appears to me upon the prima facie case made out—which has not been refuted—the power of waiver was exercised so that these votes would be available to the institutions to try and outvote the Berlias and their supporters, if this became necessary, at the 1979 AGM.

It was suggested that the company should be ordered to register the shares as on July 1, 1979, instead of June 5, 1978, that is to say, after the expiry of the notice period of one month, which had been waived. The exercise of the power of waiver has not been held by me to be bad by reason of some technical lapse which can be so cured.

In the circumstances, the institutions cannot be restored to the position of being holders of convertible debentures with the option to convert 20% of the value thereof into shares during a stated period, and cannot, justly, complain of it. The institutions shall, however, be restored to the position of debentureholders who have already (but, in view of the finding, unfruitfully) exercised their option to convert. Equities will be adjusted in the sense that the institutions will hold in trust for the company such amounts as they have received from the company as and by way of dividends on the shares as are in excess of interest at the debenture rate of 11% and shall adjust them against future interest.

I answer the issues thus :

"Issues on behalf of the defendants 1 to 7 :.

Issue No. 1

 

In the negative.

Issue No. 2

 

In the negative.

Issue No.3

 

In the negative.

Issue No.4

 

In the negative.

Issue No.5

 

In the affirmative.

Issue No.6

 

Not necessary.

Issue No.7

 

In the negative, in the sense that the exact number of equity shares has not been established.

Issue No.8

 

The suit is maintainable.

Issue No.9

 

The plaintiffs are entitled to urge the contention.

Issue No.10

 

Not pressed.

Issue No.11

 

In the negative.

Issue No.12

 

Not pressed.

Issue No.13

 

Does not service.

Issue No.14

 

In the negative.

Issue No.15

 

In the negative.

Issue No.16

 

In the negative.

Issue No.17

 

There was power to waive thenotice. The act of waiver is, however, vitiated by mala fides.

Issue No.18

 

The 1st to 7th defendants were party to the abuse of power in rel-ation to the issue of the shares.

Issue No.19

 

In the affirmative.

Issue No.20

 

In the negative, this issue was not pressed in final argument.

Issue No.21

 

In the affirmative, in the sense that the conversion of debentures and the allotment of shares pursuant to the mala fide exercise of the power to waive is bad.

Issue No. 22

 

In the negative.

Issue No. 23

 

In the negative.

Issue No. 24

 

In the negative.

Issue No. 25

 

In the negative.

Issue No. 26

 

In the negative.

Issue No. 27

 

The institutions were not allottees in good faith of the shares upon con-version.

Issue No. 28

 

In the negative.

Issue No. 29

 

In the negative.

Issue No. 30

 

Not pressed.

Issue No. 31

 

In the negative, the plaintiffs are entitled to the challenge.

Issue No. 32

 

In the negative, the plaintiffs are entitled to the challenge.

Issue No. 33

 

In the negative.

Issue No. 34

 

In the negative.

Issue No. 35

 

In the negative, not argued.

Issue No. 36

 

This issue has been deleted.

Issue No. 37

 

In the negative.

Issue No. 38

 

In the affirmative, by reason of the mala fides of the waiver.

Issue No. 39

 

In the negative, the suit is main-tainable.

Issue No. 40

 

In the affirmative, the plaintiffs are entitled to the relief.

Issue No. 41

 

In the negative, not argued.

Issue No. 42

 

In the negative.

Issue No. 43

 

In the negative, the plaintiffs arenot precluded or estopped from the challenge.

Issue No. 44

 

In the negative, the plaintiffs havea cause of action.

Issue No. 45

 

In the negative, the plaintiffs are entitled to the relief.

'Additional issues on behalf of defendant No. 8 in addition to those raised by defendents 1 to 7 :

Issue No. 1

 

Not pressed.

Issue No. 2

 

In the affirmative.

Issue No. 3

 

In the negative.

'Further issues on behalf of defendants 1 to 7 arising from the amendment to the pleadings :

Issue Nos. 1

 

The approval covers the option term in the debentures.

Issue No. 2

 

In the negative.

Issue No. 3

 

In the negative, the plaintiffs have a cause of action.

Issue No. 4

 

In the negative.

"Supplemental issues on behalf of defendant No. 8 :

Issue No. 1

 

The approval covers the option term in the debenture.

Issue No. 2

 

In the negative.

Issue No. 3

 

In the negative, the plaintiffs have a cause of action.

Issue No. 4

 

In the negative.

In the premises, I pass the following order : —

It is declared that the entry upon the Register of Members of the 8th defendant as and from June 5, 1979, of the names of the 1st, 2nd, 3rd, 4th, 5th, 6th and 7th defendants in respect of the 43,750 shares, particulars whereof are given in Exhibit S to the plaint, is bad and illegal. The 1st to 7th defendants shall as and from June 5, 1979, continue to hold the debentures in conversion of which the said shares were issued. The 1st to 7th defendants shall not have an option to convert any of 11% privately placed debentures into shares.

It is ordered and decreed that the 8th defendant do rectify its Register of Members by deleting therefrom the names of the 1st to 7th defendants as holders of the said shares. The 1st to 7th defendants are permanently restrained from exercising any voting rights in respect of the said shares in any manner whatsoever. The 8th defendant is permanently restrained from paying to the 1st to 7th defendants any dividends in respect of the said shares.

The 8th defendant is ordered and directed to carry out in its books and registers all alterations consequent upon this order within 30 days from today and to give to the Registrar of Companies all notices consequent upon it within the same period.

The 1st to 7th defendants are ordered to hold in trust for the 8th defendant such amounts as they have received from the 8th defendant as and by way of dividend in respect of the said shares as are in excess of the amounts of interest that would have been payable thereon at the debenture rate of 11% per annum and do adjust the same against future interest payable on the said debentures.

Ordinarily, costs should follow the event. However, a great deal of time has been spent upon issues which have either not been pressed at the stage of final argument or which have been decided against the plaintiffs.

The defendants do pay to the plaintiffs one-half of the total amount of costs that would be payable upon the basis of two counsel being briefed.

 

[1971] 41 COMP. CAS. 1063 (CAL)

HIGH COURT OF CALCUTTA

Calcutta Safe Deposit Co. Ltd

v.

Ranjit Mathuradas Sampat

RAMENDRA MOHAN DATTA J.

COMPANY APPLICATION NO. 126 OF 1970

AUGUST 28, 1970

 

A. Mitter for the Applicant.

A.K. Panja for the Respondent.

JUDGMENT

Ramendra Mohan Datta J.—This is an application for the stay of the winding-up proceedings of Calcutta Safe Deposit Co. Ltd. (hereinafter called "the said company"). The petitioning creditor in the winding-up proceedings is one Ranjit Mathuradas Sampat, the respondent herein. Sampat is one of the debenture-holders of the debentures issued by the applicant company.

According to the petitioner he is the holder in due course of three debentures of the value of Rs. 1,000 each out of 250 first mortgage debentures issued by the company on or about June 19, 1939. Each of the said debentures carried interest at the rate of 44% per annum payable half yearly in June and in December in each year.

The said debentures were issued subject to and with the benefit of the conditions endorsed thereon and in an indenture dated November 22, 1939, made between the company of the one part and Sailcndra Nath Banerjee and others of the other, whereby certain properties of the company were vested in trustees for securing the payment of the principal amount and interest payable in respect of the said debentures.

The relevant clauses of the said debentures as endorsed thereon are as follows:

"(1)  The Calcutta Safe Deposit Co. Ltd. (hereinafter called 'the company') will on the 22nd day of November, 1939, or on such earlier date as the principal monies hereby secured become payable in accordance with the conditions endorsed herein pay to the bearer of this debenture or if registered to the registered holder hereof on the presentation of this debenture Rs. 1,000.

(2)    The company will during the continuance of this security pay interest on the said principal sum of Rs. 1,000 at the rate of 4½% per annum by equal half-yearly payments on every 30th June and 31st December in accordance with the coupons annexed hereto.

(3)    This debenture is issued subject to and with the benefit of the conditions endorsed hereon, which are to be deemed part of it".

The conditions referred to hereinabove and as provided, on the reverse of the said debenture, are as follows:

"(3) If the principal moneys hereby secured shall become payable before the 22nd day of November, 1939, the person presenting this debenture for payment must surrender therewith the coupons representing subsequent interest, the company nevertheless paying the interest for the fraction, if any, of the current half-year.

(4) The registered holder for the time being of this debenture when registered and the bearer thereof for the time being when not registered and the bearer of each of the interest coupons aforesaid, shall be entitled to the principal money and interest secured by such instruments, respectively, free from any equities between the company and the original or any inter mediate holder hereof and all persons may act accordingly, and the receipt of such registered holder or bearer, as the case may be, for such principal money and interest shall be a good discharge to the company which shall not be bound to enquire into the title of such registered holder or bearer or save as herein provided and except as ordered by some court of competent jurisdiction or as by statute required to take notice of any of the equities affecting the ownership of such instruments or moneys....

(12) The principal moneys hereby secured shall immediately become payable:

(a)    if the company makes default for a period of six months in the payment of any interest hereby secured and the bearer or registered holder hereof before such interest is paid by notice in writing to the company calls in such principal moneys, or

(b)    if an order is made or a resolution is passed for the winding up of the company otherwise than for the purpose of reconstruction.

(13) The holders of the debentures of the above issue are and will be entitled pari passu to the benefit of and subject to the provisions contained in an indenture dated 22nd day of November, 1939, and made between the company of the one part and Sailendra Nath Banerjee and others of the other part, whereby certain properties of the company was vested in trustees for securing the payment of the principal moneys and interest payable in respect of the said debenture....

(15) This debenture except when registered is to be treated as negotiable...

(17) This debenture is issued subject to and in terms of the indenture referred to in clause 13 hereof".

The said indenture dated November 22, 1939, inter alia, contained the following provisions:

"(5)The trustees shall permit the company to hold and enjoy all the mortgaged premises and to carry on thereon and therewith the business or any of the businesses mentioned in the memorandum of association of the company until the security hereby constituted shall become enforceable as hereinafter provided and then the trustees may in their discretion without any such request next hereinafter mentioned and shall upon the request in writing of the holder or holders of the one-half of the debentures (but in either case without any further consent on the part of the company or its assigns) enter upon or take possession of the mortgaged premises or any of them and may in the like discretion and shall upon the like request sell, call in, collect and convert into money the same or any part thereof, etc., etc., etc.

(6) The security hereby constituted shall subject to clause 7 hereof become enforceable within the meaning of these presents in each and every of the events following, (1) if the company shall make default in the payment of any principal moneys or interest which ought to be paid in accordance with these presents, (2) if an order shall be made or resolution passed for the winding up of the company otherwise than for the purpose of reconstruction, etc., etc., etc....

(40) The company shall pay the principal moneys and interest secured by the debentures in accordance with the tenor thereof respectively and shall observe and perform the general conditions endorsed thereon respectively.

(41) At any time after the security hereby constituted becomes enforce able and the trustees shall have determined or become bound to enforce the same they may by notice in writing to the company declare that the debentures are payable and the principal moneys thereby secured shall thereupon become payable accordingly".

Mr. Anindya Mitter appearing on behalf of the company contended that it is highly suspicious as to whether the petitioner is the holder in due course in respect of the said three debentures or not. According to the learned counsel the petitioner did not collect any interest by producing his coupons since July 1, 1960, and allowed a considerable time to pass by before the claim was made by the petitioner, That creates a great suspicion so far as the company is concerned, and the company accordingly is justified in asking for particulars of the transfer in favour of the petitioner. In spite thereof the said particulars were not answered satisfactorily. The petitioner did not produce any proof of payment of consideration. Then again a letter was received from the Hongkong and Shanghai Banking Corporation, dated April 20, 1970, whereby the said company intimated that ten debentures Nos. 171 to 180 of Calcutta Safe Deposit Co. Ltd. (which included the said three debentures) were delivered to Messrs. Amritlal Ojha & Co. Ltd., on November 21, 1960. On the basis of that it is contended that the said debentures belonged to some members of the Ojha family. Thereafter, disputes were started amongst the members of the Ojha family and the said debentures were not traceable.

The applicant to the stay application is one Navin Chandra Ojha, in his capacity as the special officer in respect of the said company. The said applicant as such special officer made searches of the old records of the company and found that one G.G. Garapiet and/or his estate collected interest up to June 30, 1960. The said special officer also referred to a letter, dated February 28, 1970, written by one Chimanlal Ojha to him intimating that the said debentures were acquired by some members of the Ojha family and due to some disputes between the members of the Ojha family the present whereabouts of the debentures were not known. The said Chimanlal requested him not to make any payment without making proper enquiry and investigation as to the bona fides of the persons who might present such debentures for payment. Accordingly, the special officer is justified in not making payment in respect of the said debentures without ascertaining as to how, when, where and from whom the petitioner acquired the said debentures and became the holder in due course. The letter was not replied to by the petitioner.

On behalf of the petitioner it is stated that the petitioner was not present in Calcutta at the date when the affidavit-in-opposition to the stay application was filed and as such the petitioner's father had to file the affidavit-in-opposition on behalf of the petitioner. The petitioner's father, Mathura Das Sampat, stated in his affidavit that in the year 1964, his son purchased three debentures from one Kristodhone Chatterjee of J.N. Lahiri Road, Serampore at a price of Rs. 2,250. At the request of the learned counsel appearing on behalf of the petitioner, I gave leave to the petitioner to file a supplementary affidavit to corroborate the statements made by his father. In the said supplementary affidavit affirmed on August 13, 1970, the said petitioner corroborated the aforesaid statements of his father. In this connection the correspondence should be considered to ascertain the conduct of the special officer in refusing to pay the said debentures to the petitioner.

On or about November 22, 1969, the debentures became payable and on the very same date by his letter, Sampat instructed his bankers for collection of the principal amount with interest up to that date in respect of the said three debentures bearing Nos. 175, 176 and 177 and to credit the amount thus realised to the savings bank account held by Sampat with the said bankers. The bankers claimed the amount from the special officer who replied on November 25, 1969, to the effect that he would seek necessary directions from the High Court in that regard and in the meantime he enquired of the bankers to let him know on whose account the said debentures had been sent to the company. By their letter dated November 28, 1969, addressed to the said special officer the bankers informed that the debentures were tendered for collection by Ranjit M. Sampat of 109/2B, Hazra Road, Calcutta-26, and asked for the cheque. By his letter, dated December 22, 1969, the special officer intimated that he was facing difficulty as a court officer to make payment in the absence of relative papers and documents and as such he would seek necessary directions from the court and he assured that he would make such an application. On January 2, 1970, the petitioner wrote to his bankers and supplied a copy thereof to the said special officer, inter alia, intimating that the said debentures and the interest coupons should be returned as it was clear that the special officer had been trying to evade payment as claimed. He contended that the debentures were bearer debentures and as such he had the right to demand payment immediately on presentation. On January 8, 1970, the special officer wrote back stating that as a court officer he was required to verify the records properly and more specially in such a case where there were disputes, and suits were pending. He again emphasised that he was checking up the old records and after completing the same he would place the matter before the High Court. It was recorded therein that he asked for information as to when and how Sampat acquired those debentures and the names and addresses of the persons from whom the same were acquired as also the reasons why interest had not been collected for such a long time. Thereafter, on February 6, 1970, the notice under section 434 of the Companies Act, 1956, was sent by Sampat's solicitor to the company claiming the sum of Rs. 4,282.50. In reply thereto Messrs. T. Banerjee & Co., solicitors for the company, by their letter dated February 25, 1970, inter alia, stated that their client, the special officer, did not receive any records and papers relating to the debentures in question from his predecessor-in-office and that he had been instructed to deny that Sampat acquired the debentures in question in due course, or bona fide or for valuable consideration and thus disputed the claim of Sampat. The right of Sampat to serve a notice under section 434 of the Companies Act, 1956, was also denied and disputed by that letter. Thereafter, the winding-up petition was presented on March 18, 1970.

On the basis of the aforesaid facts as stated in the correspondence Mr. Panja submitted that there could be no question of being suspicious about the said bearer debentures. The suspicion appears to have arisen only after the presentation of the winding-up petition. The special officer repeatedly stated in his letter that he would seek directions from the court but he never did so.

In my opinion, in a case where the debentures are bearer debentures the same are payable upon presentation thereof and upon demand being made by the bearer. In the absence of any claim by any other party in respect of the very same debentures the special officer of the company could not have any cause to be suspicious about the person presenting the same. It is true that as such special officer he ought to be careful to take all reasonable precautions before making payments but that does not mean that on mere suspicion he will withhold payment to the person claiming as bearer thereof on such flimsy ground as he has purported to do. In the absence of any other claimant of the said debenturers and in the absence of any other substantial proof he had no further duty to ask for reasons as to why interest had not been claimed so long or to ask the bearer of the debentures to produce any proof of the payment thereof. It appears that in order to make out a ground in the stay application he wrote to the Hongkong and Shanghai Banking Corporation enquiring of them as to when the debentures were delivered to Messrs. Amritlal Ojha & Co. Ltd. and to that he got the reply from the said bank on April 20, 1970, to the effect that the same were delivered to the said Messrs. Amritlal Ojha & Co. Ltd., on November 21,1960, according to their report. Considering the date of such delivery it does not appear to be in conflict with the petitioner's claim. In the affidavit-in-opposition to the stay application and in the supplementary affidavit of Sampat it is stated that Sampat purchased the debentures in 1964 from one Kristodhone Chatterjee of J.N. Lahiri Road, Serampore, at a price of Rs. 2,250. Accordingly, the bank's letter cannot give rise to any suspicion. The said bank's record does not show what happened to the said debentures after 1960. Accordingly, that letter cannot have any bearing in respect of the purchase of the debentures by Sampat in the year 1964. Then again, the letter of Chimanlal Ojha to the effect that the said debentures belonged to some members of the Ojha family is absolutely vague and in the absence of any positive evidence from any member of the Ojha family to the effect that the said debentures belonged to him or them, the special officer should not have been so suspicious as to withhold the payment for such a long time. If the motive of the special officer had been bona fide there could not have been any difficulty on his part to seek directions from this court by making an application on the materials he had already obtained in his possession. The special officer did nothing of the kind and I have every reason to come to the conclusion that the special officer was not acting reasonably and bona fide in the matter of withholding the payment in the way he has done. Even in the stay application his attitude is such that he would not be satisfied by any explanation and it appears that he is bent upon withholding the payment under any circumstances.

In paragraph 9 of the stay application the special officer stated that he made searches of the old records of the company and he found that a series of debentures containing 10 in number and bearing numbers 171 to 180 belonged to one G.G. Carapiet and interest on the said debentures were collected on behalf of the said G.G. Carapiet and/or his estate after his demise until June 30, 1960. Thereafter, the interest coupons in respect of the said debentures were not presented and out of the said series of 10 debentures 7 were redeemed long before disputes started between the members of the family. In paragraph 8 of the affidavit-in-opposition in the stay application on behalf of Sampat it was stated that by letter dated May 11, 1970, inspection was claimed of the said purported old records to the solicitor but inspection was not given.

It is surprising that even though the special officer came to know that the said debentures belonged to the said G.G. Carapiet and/or his estate up to June, 1960, yet nothing was mentioned about the same in his correspondence and further that even though the names and addresses of the sellers of those debentures were stated in the affidavit-in-opposition which was filed as far back as on June 26, 1970, no enquiry was made by the special officer from the said person to verify the same. Moreover, under section 118 of the Negotiable Instruments Act, until the contrary is proved, every negotiable instrument would be presumed to have been negotiated or transferred for consideration and that a holder is a holder in due course unless fraud or unlawful consideration in obtaining the same would be alleged against such holder. That being the position in law, the bearer had no obligation in the facts and circumstances of this case to explain to the company as to how he became the holder in due course in respect of the said debentures or why he did not collect the interest thereon so long as the company was bound to pay the proceeds thereof as also the arrears of interest to the holder presenting same. It is settled law that the bearer debentures are negotiable instruments and clause 15 of the debentures also makes them negotiable and as such the provisions of section 118 were applicable to the same.

Accordingly, I hold that the dispute sought to be raised by the special officer on this ground is not a bona fide dispute.

The second point urged on behalf of the company was that the contract in issuing the debentures was entered Into by and between the trustees and the company and, accordingly, the bearer debenture bondholders could not have claimed directly against the company without making such claim through the trustees. Mr. Mitter has relied on the indenture, dated November 22, 1939, entered into by and between the trustees and the company and has drawn my attention to clauses 3, 4, 6 and 41 thereof as set out herein-above. Those clauses provide that the company's assets as mentioned therein were charged in favour of the trustees for the purpose of making payment of the debentures and how and in what manner the said security would be enforced by the trustees when the same would be enforceable.

In support of his contention Mr. Mitter has cited before me an English decision in the case of In re Dundsrland Iron Ore Co. Ltd. where it was held that the stock-holders whose interest was in arrears were not entitled to present a winding-up petition as creditors under section 82 of the Companies Act, 1852. That was the case of the registered stock-holders who, according to clause 1 of the trust deed, were the several persons for the time being entered in the register therein mentioned as holders of the stock. According to clause 6 of the said trust deed, the stock could be held subject to the conditions set forth in the first schedule thereto and such conditions would be binding on the company and the stock-holders and all persons claiming through them respectively. The first schedule provided the condition under which, inter alia, interests were payable by the company to the registered stock-holders. Upon the presentation of the petition for winding up by some of the stock-holders for non-payment of interests the same was opposed by the holders of £100,000 prior lien debentures and their trustees, first on the ground that the petitioners were not the creditors within section 82 of the Companies Act, 1862, and secondly, on the merits. In delivering his judgment, Swinfen Eady J. distinguished the case of the debenture stockholders from the case of the bearer debenture-holders. The petitioners being the debenture stock-holders their stock was created by the trust deed of November 29, 1904. The only parties to that deed were the company and the trustees. The learned judge observed:

"In my opinion the true legal position is that the debenture stockholders, although cestui que trust, are not creditors of the company. They have not any direct contract with the-company. The contract is between the company and the trustees, and in these circumstances I am of opinion that the petitioners are not creditors entitled to present a winding-up petition. It is not a case in which there is any negotiable security or any coupons issued. The petitioners are merely the registered holders of debenture stock, and the only covenant to pay the principal and interest to the stock-holders is a covenant made between the company and the trustees".

The above passage would clearly show that the learned judge made a distinction between the case of a registered debenture stock-holder with that of a bearer debenture bond which is a negotiable security. That clearly distinguishes the case reported therein from the instant case before me where the bearer debentures have been expressly declared to be treated as negotiable instruments under clause 15 set out hereinabove.

Mr. Panja, appearing on behalf of Sampat, referred me to clause 40 of the said indenture set out hereinabove and contended that by that clause the company agreed to make the payment of the principal and the interest directly to the bearer debenture-holder. According to him clause 41 is for the purpose of enforcing the security. Here Sampat is not seeking to enforce the security. That question could have arisen if he had filed a suit. Here the only question is whether a claim has arisen and, if so, whether the company under clause 40 of the said indenture and by the conditions mentioned in the debenture-bond, is liable to pay to the bearer debenture-holder directly.

The right of the bearer debenture-holder under clause 40 of the said indenture, in my opinion, in getting payment directly from the company has been recognised and accordingly clause 1 and condition 4 as mentioned in the debenture bond make it obligatory for the company to make the payment directly in accordance with the tenor of the said debenture bond.

Mr. Panja has referred to the case of Bachharaj Factories Ltd. v. Hirjee Mills Ltd. There, the Division Bench of the Bombay High Court, in dealing with bearer debentures, distinguished the case before them from the said English decision in In re Dunderland Iron Ore Co. Ltd. and relied on two other English cases, viz., In re Borough of Portsmouth Tramways Co. and In re Olathe Silver Mining Co. The said Division Bench also relied on the principle set out in a passage in Buckley on the Companies Acts. The said passage appears in the 13th edition, at page 464, as follows:

"But where the obligation to debenture-holders was direct by the company to pay the bearer, the bearer could present a petition".

The principle can best be understood if it is remembered that in making the winding-up petition what is being enforced by the debenture-holder is the right under the bearer debentures to make a claim on the company for the unpaid debt due to him through the machinery of winding up as provided by statute and not the right to enforce the security covered by the debentures. This is a statutory remedy which has been provided not to enforce the claim but to enable the court to decide by using its discretion as to whether the company should be allowed to do its business as a going concern or should be wound up so that all the creditors dues might be paid off in the manner as provided by law. In a case where this remedy is not pursued by the creditor and the suit is filed, the creditor would no doubt think of enforcing his security as well and in doing so has got to make the trustees the parties to the suit inasmuch as the indenture of trust is entered into by and between the company and the trustees and not with the debenture-holders.

In any event, a special right has been given to the debenture-holders and they would be deemed to be the creditors within the meaning of clause (b) of sub-section (1) of section 439 of the Companies Act, 1956. This new definition of the word "creditors" has been introduced by the 1956 Act and, accordingly, the debenture-holders right to present a petition for winding-up has been recognised by the statute.

Accordingly, in my opinion, there is no substance in the contention of Mr. Mitter on this point and I reject the same.

On the basis of the aforesaid point Mr. Mitter submits that, in any event, this is a point of law of great substance and, accordingly, it raises a substantial dispute which the winding-up court should not go into or decide and in support of that relied on the case of Amalgamated Commercial Traders (P.) Ltd. v. A.C.K. Krishnaswami . There the company declared dividend which according to law was to be paid within three months from the date of declaration. The declaration of the dividend was made on the basis of a resolution that the payment of the dividend was contingent on the receipt of the commission from other concerns. It transpired that the said commission was not. received within the time of three months. Before the trial court the company's solvency was proved. The Supreme Court, at page 463, observed :

"Further we are satisfied that the question whether the declaration of dividend dated December 30, 1959, is valid or not raises a substantial question as to the interpretation of section 207 of the Companies Act. Further, whether the declaration dated December 30, 1959, is severable or not, is also a substantial question. We do not propose to decide whether the declaration of dividend was valid or not or whether it was severable or not, because in these proceedings we are only concerned with the question whether the debt was bona fide disputed by the company on substantial grounds. If the debt was bona fide disputed, as we hold it was, there cannot be 'neglect to pay' within section 434(1)(a) of the Companies Act.

If there is no neglect, the deeming provision does not come into play and the ground of winding-up, namely, that the company is unable to pay its debts is not substantiated".

In the instant case before me in the correspondence no such grounds were made out. The company disputed the claim of the petitioner on different grounds as mentioned hereinabove and as such, in my opinion, the deeming clause will operate and the company would be deemed to be unable to pay its debts within the meaning of the. said provision. The debt, in my opinion, was disputed by the company on the ground that the petitioner was not a holder in due course in respect of the debentures. In other words, if the company would have been satisfied with the particulars about the petitioner being the. holder in due course the company would have made payment to the bearer as the company had done in other cases. What has been called a substantial ground is really a ground which was sought to be made out by the company when the matter reached the hands of the lawyer in the stay application. Such ground can, of course, be decided by the winding-up court, however difficult it might be. In my opinion, the Supreme Court has not observed anywhere in their judgment that if and as soon as any substantial point of law would be raised in the stay application the same should not be decided by the winding-up court. What it lays down is that if the debt is bona fide disputed by the company on substantial ground it would not be deemed to be unable to pay its debts and as such the deeming provision as provided, under section 434 would not come into play on the basis that there would be no neglect to pay the debt. If it is a substantial question of law which is raised by the company to express its inability to pay and if it is bona fide disputed, the winding-up court will not decide the same to find out whether the point of law is correct or not and would leave the parties to have the point decided elsewhere by suit or otherwise. Accordingly, the Supreme Court case has no application to the facts of the case before me and I reject the contention of Mr. Mitter on this point.

The last point which has been raised by Mr. Mitter is that a secured creditor, unless his security is insufficient, has no right to present a winding-up petition. Mr. Mitter contends that there is no averment that the security-is insufficient. Mr. Mitter has relied on the case of Karnatak Vegetable Oils and Refineries Ltd. v. Madras Industrial Investment Corporation, where the Division Bench of the Madras High Court held that a winding-up would not be ordered where the security was rather an ample security and there was no averment that the security was insufficient.

That was a case which was decided under the provisions of the Indian Companies Act, 1913. Under the Companies Act, 1956, the definition of the word "creditor" has undergone a radical change so as to include therein a secured creditor as well and such right has been provided under sub-section (2) of section 439 of the Companies Act, 1956, by virtue of which a secured creditor shall be deemed to be a creditor within the meaning of clause (b) of sub-section (1) of section 439 of the Companies Act, 1956.

Mr. Mitter admits the position up to that but contends that even then the deeming provision of section 434 will not come into play and the company will not be deemed to be unable to pay unless it is shown that the security is insufficient. The question, therefore, is whether the company should be deemed to be unable to pay its debts if the security for the debt is sufficient. In my opinion the decision of this question involves the interpretation of clause (a) of sub-section (1) of section 434 of the Companies Act, 1956. The said section is set out below:

"434. (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 five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks 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 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 any agent or legal adviser duly authorised on his behalf, or in the case of a firm, if it is signed by any such agent or legal adviser or by any member of the firm".

It would appear that sub-section (1)(a) provides, inter alia, that in order to attract the said provision all that the creditor would do is to deliver the demand letter to the registered office of the company requiring the company to pay the sum due to him and, thereafter, the company, in its turn, has (a) neglected to pay the same, (b) or has neglected to secure the sum so due to the reasonable satisfaction of the creditor, and (c) or has neglected to compound for it to the reasonable satisfaction of the creditor.

Mr. Mitter argued that if the sum so due is already secured, does this sub-section require further security within the period of the said three weeks ? He contends that it cannot be the intention of the legislature to get a further security from the company if the creditor is already secured. If Mr. Mitter's contentions are accepted as correct it would amount to this that the secured creditor has no fight to present a winding-up petition. If that was the intention of the legislature, then, how could the new sub-section (2) be enacted under the Act of 1956 so as to recognise the right of the secured creditor and also of the debenture-holders including debenture stockholders to present a winding-up petition as creditors for non-payment of the dues by the company ? In my opinion, if a secured creditor would serve a notice under section 434, then, within the period of the said three weeks, the company must take action in the matter and satisfy the creditor that his claim would either be paid or that his security is intact. It must, in such a case, come to some arrangement with such creditor so that the creditor would be satisfied that there would not be any difficulty in his obtaining payment at some point of time as would be agreed upon by and between the creditor and the company.

In the case before me the bearer debentures having become payable on maturity in terms of the debenture-bonds and a notice of demand under section 434 of the Companies Act, 1956, having been received by the company, the company became liable to pay the sum covered by the debenture-bonds within the statutory period. If in spite thereof the company would choose not to come to some arrangement with the secured creditor then the same would amount to neglect to pay or to secure or to compound for it to the reasonable satisfaction of the creditor. In other words, the company got the opportunity but did not avail of it.

Under such circumstances, he can pursue the remedy as provided by the Companies Act, 1956, and ask the winding-up court to exercise its discretion and, if thought fit, to wind up the company. The remedy provided by the said statute is not to recover the petitioning creditor's dues alone but if an order for winding up is made such creditor would be ranked pari passu with all other creditors of his class and all such creditors would be paid to the extent of the assets available to the winding-up court. Accordingly, such remedy is quite different from his right to recover his dues which he pursues by way of a suit under the general law of the land against the company as a going concern. All that the Companies Act, under such circumstances, provides for them is that the creditor gets a right to present the winding-up petition. Such right accrues to the creditor because of neglect of the company to pay or to secure or to compound within the meaning of section 434 of the Companies Act, 1956. Here the right to present the petition accrues because of the company's failure to perform the statutory obligation as stated above. This right is different from the right to enforce the security.

In this case far from paying or securing the claim of the petitioner within the statutory period the company by the solicitor's letter, as stated above, disputed the claim of the petitioner. The company denies that the petitioner is the rightful claimant. According to my finding as stated herein above that contention of the company has no force behind it and the petitioner had the right to make the claim against the company in respect of the said bearer debentures.

Accordingly, the contention that the claim of the petitioner was already secured and that if the claim was to be further secured after the statutory notice the same would amount to double security is illusory. The question of double security could only arise if the existing security was admitted. It follows that for the purpose of the winding-up petition there is no security so far as the claim of Sampat is concerned. That being the position, there is neglect on the part of the company to secure the claim of the petitioner within the meaning of section 434 of the Companies Act, 1956, and the deeming provision would be attracted after the expiry of three weeks mentioned therein.

In a winding-up petition presented by the secured creditor the company can be said to have raised a substantial and bona fide dispute in the stay application, if the company would admit the transactions with such secured creditor and would reasonably satisfy the secured creditor that his security is intact and that the company is in a position to pay either in the correspondence prior to the statutory notice or within the statutory period as provided under section 434 of the Companies Act, 1956. In such a case and under such circumstances the right of the secured creditor to present the winding-up petition would also be lost inasmuch as that would amount to an abuse of the process of the court and the remedy provided under the Companies Act, 1956, would not be available to the secured creditor. Under such circumstances, he has to pursue his remedy through the ordinary process of law.

To my mind, that is the correct interpretation and the only meaning of the expression "to secure or compound for it to the reasonable satisfaction of the creditor" in relation to the secured creditor.

The result is that Mr. Mitter's contentions on this point fail and the same are rejected.

The overall result is that none of the grounds raised by Mr. Mitter can amount to a bona fide or substantial dispute in respect of the claim put forward by the petitioner in his winding-up petition and accordingly this application must be and is hereby dismissed with costs.

Application dismissed.

[1989] 65 COMP. CAS. 427 (KAR.)

HIGH COURT OF KARNATAKA (FULL BENCH)

Chief Controlling Revenue Authority

v.

Manager, State Bank of Mysore

M.P. CHANDRAKANTARAJ URS, S.R. RAJASHEKHARA MURTHY AND

M. RAMAKRISHNA JJ.

Civil Referred Case No. 13 of 1984

AUGUST 17, 1987

 V.G. Sabhahit for the petitioner.

C.B. Srinivasan for the Respondent.

JUDGMENT

Chandrakantaraj Urs, J.—This matter has come before us by way of reference made by the Chief Controlling Revenue Authority in Karnataka under section 54(1) of the Karnataka Stamp Act, 1957 (hereinafter referred to as "the Act"), for adjudication as to whether the instrument in question is an "instrument of trust" as claimed by the author of the trust, viz., the State Bank of Mysore, a subsidiary of the State Bank of India (hereinafter referred to as "the bank") or it is a "deed of mortgage" as claimed by the Revenue (State) and if not either, what instrument it is on a correct interpretation of its contents and chargeable under which entry in the Schedule to the Act?

We may at the outset state, if the instrument is but a trust deed, it is chargeable to stamp duty under the Act at Rs. 90 under article 54A in the Schedule to the Act and at the rate specified in article 34 of the Schedule to the Act on the market value of the properties secured (which is Rs 125 lakhs) if it is a deed of mortgage and duty payable will be 10 per cent, of the market value of the properties together with such surcharge as may be payable to the local authority as if it is a deed of conveyance.

The facts leading to the controversy may be stated and they are as follows:

By a deed dated March 23, 1982, executed by the bank styling itself as "debenture trustee" in favour of the Unit Trust of India (hereinafter referred to as "the UTI") concerning certain debentures issued by the New Government Electric Factory Ltd. (a company incorporated under the Companies Act) (heinafter referred to as NGEF) of the total value of Rs. 125 lakhs in two series was presented for registration before the Sub-Registrar having jurisdiction who refused to register the same and did not pass any order rejecting registration. Therefore, the bank, the UTI and the NGEF presented an appeal to the District Registrar who refused to pass any order on the appeal as there was no written order by the Sub-Registrar. Thereupon, he was moved under section 31 of the Act for adjudication of the proper stamp duty payable on the instrument in question. The District Registrar in turn referred the matter to the Chief Controlling Revenue Authority in the State under section 53(2) of the Act. The Chief Controlling Revenue Authority gave a hearing to the parties who were represented by counsel. The parties contended before him that the document in question did not transfer, create, modify, abrogate, vary or extinguish any right of any person to any specific immovable property or properties but merely declared a trust, that in considering the nature of the instrument, what was relevant was the normal and natural meaning of the words employed in the document together with its construction and intention and that article 54A in the Schedule to the Act specifically provided for the duty payable in respect of declaration of trust concerning any property when made by any writing (not being a will) subject to a maximum of Rs 90 and, therefore, there should be an adjudication accordingly. But the Chief Controlling Revenue Authority had many doubts such as that the instrument had only some characteristics of a trust as defined under the Indian Trusts Act, and not all; that the trustee (the bank) itself was being benefited by charging an annual fee till the liability of the NGEF was discharged under the debentures to the debenture-holder; that there being other benefits provided to the debenture trustee such as reimbursement of out of pocket expenses, not ascertainable, the instrument may fall to be covered by section 26 of the Act; and that the instrument had the character as the bank was to hold the debentures as security for acting as trustee for advancing money and further that the document was so drawn up so as to be covered by several entries or articles of the Schedule, and, therefore, has referred the matter to the High Court for adjudication under section 54 of the Act opining that the instrument is a deed of mortgage.

Before us, the Chief Controlling Revenue Authority (hereinafter referred to as "the Revenue") is the petitioner and the NGEF, the bank and the UTI are the respondents. Arguments for the Revenue have been advanced by the learned High Court Government Pleader, Shri V.G. Sabhahit, while Mr. C.B. Srinivasan, learned advocate appearing for the bank, has advanced the main arguments which have been adopted by the other counsel appearing for the other respondents.

For the Revenue it is contended that the instrument in question is one of mortgage or assignment of mortgage as the author of the trust, the bank, admits taking charge of all title deeds and deed of hypothecation relating to immovable properties and plant and machinery of the NGEF to hold the same for the benefit of the UTI, the debenture-holder, with power to enforce the security for the benefit of the UTI and, therefore, it should be adjudicated to be a deed of mortgage. In the alternative, it is contended, if it is not a deed of mortgage, it should be held to be a "bond" within the meaning of that expression as defined in section 2(1)(a) of the Act having regard to the undertaking given by the bank to pay the UTI the money secured by the debentures of the value of Rs 125 lakhs.

As against the above contentions, counsel for the respondents have asserted that the instrument is no more than a declaration of trust together with the obligations of the trustee clearly spelt out and what is narrated in the preamble to the document should be ignored in determining the true intent of the author of the trust as, at best, what the preamble states is no more than something which indicates the creation of mortgage by deposit of title deeds and hypothecation of plant and machinery and, therefore, cannot be construed as if the instrument created the mortgage by deposit of title deeds of immovable properties or the hypothecation of the plant and machinery.

The undisputed facts are:

(1)            The NGEF issued the debentures privately placed to the UTI on terms and conditions agreed to between them and contained in the deed of agreement dated March 23, 1982 (see paras 6 and 7 of the instrument under reference);

(2)            That on March 23, 1982, mortgage by deposit of title deeds was created by the NGEF in respect of the immovable properties owned by it in favour of ten financial institutions including the bank, the author of the trust (see para. 11 of the instrument under reference); and

(3)            That on March 23, 1982, the NGEF also executed a deed of hypothecation for consideration, namely, to secure the repayment and redemption of the debentures in question of all its movables including plant and machinery fixed, (see para. 12 of the instrument under reference) in favour of the bank which is also the debenture-trustee.

All the above documents and the one under reference were all created on the same day presumably after the debentures had been issued and paid for.

In order to appreciate the arguments advanced to further the contentions, it is necessary to understand the meaning of the terms, debenture, debenture-trust and debenture-trustee.

"Debenture "is defined as follows in the Companies Act, 1956:

"2(12) 'debenture' includes debenture stock, bonds and any other securities of the company, whether constituting a charge on the assets of the company or not;"

From the above, it is obvious that the meaning is still obscure. In Palmer's Company Law, volume I, 23rd edition, the following passage is found:

"In modern commercial usage a debenture denotes an instrument issued by the company, normally—but not necessarily—called on the face of it a debenture and providing for the payment of, or acknowledging the indebtedness in, a specified sum—say, £100—at a fixed date, with interest thereon. It usually—but not necessarily—gives a charge by way of security, and is often—though not invariably—expressed to be one of a series of like debentures.

But the term, as used in modern commercial parlance, is of extremely elastic character"

It has a historical background with which we may not now concern ourselves. The meaning of the term implies on the facts of this case that the NGEF is the debtor and the UTI is the creditor and, therefore, the debenture-holder.

The next questions we should ask ourselves are what is a debenture-trust? and who is a debenture-trustee?

Section 118 of the Companies Act, 1956, provides that any trust deed for securing any issue of debentures shall be forwarded to the holder of such debentures or any member of the company at his request within seven days of the making of the trust deed on payment of the fee specified in that section itself. It further provides the consequences of refusal to furnish copies of the trust deed and the court's power to direct such furnishing. Apart from the above, the trust deed is required to be available for inspection by any member or debenture holder on payment of a fee. Similarly, section 119 of the Companies Act provides for the liability of the trustees to debenture holders with certain consequences and exceptions.

It is stated in Pennington's Company Law, 5th edition, that trusts of registered debentures are created in the same way as trusts of shares (see page 516). The learned author has stated that trusts of shares registered in the company's register of members are created by transferring the shares to trustees upon trusts declared by the settlor in a separate document or upon trusts declared by the trustees themselves after the transfer has taken place (see page 438).

In Palmer's Company Law (volume I, 23rd edition), we notice under the heading "trust deeds", the following:

"Debentures and debenture stock are often secured by a trust or covering deed, conveying property of the company to trustees in favour of the debenture holders, charging other property and containing a number of ancillary provisions regulating the respective rights of the company and the debenture holders. Whether there should be a trust deed or not must depend on the circumstances; where the debentures are issued only for a temporary purpose, e.g., to bankers as security for an overdraft or to other persons for a short term, or are to be taken up by the directors, a deed may be dispensed with; but where the transaction is of some magnitude, in particular where large scale borrowing by companies from the public is in question, a trust deed is commonly used.

Advantages of a trust deed:

The advantages of a trust deed may be briefly summarised as follows:

1.     It constitutes trustees charged with the duty of looking after the rights and interests of the debenture-holders. Thus, they may vote as they consider best in respect of any shares which may be vested in them as trustees.

        2.     The debenture-holders can by these trustees enter and sell the property comprised in the security.

        3.     A legal estate is sometimes vested in the trustees with the protection which is conferred thereby"

From the above, it is clear that the practice in India as well as in England appears to be to ensure repayment of the debt to the debenture-holder by an instrument of trust by which the trustee ensures repayment of the interest as well as the principal advanced against the debentures to the holder of the debentures.

What emerges from what has been stated above is that the debenture-trust has to be created expressly by an instrument of trust; the author of such trust transfers the properties movable or immovable to the trust and the trustee or the trustees hold such properties in trust for the benefit of the beneficiary, viz., the debenture holder to be used in the event of default of payment of interest or principal amount of debt advanced as per terms agreed by selling such properties in the hands of the trustee or trustees. In this content, it is useful to refer to another passage in Palmer's Company Law, and it is as follows:

"A trust deed usually contains a legal mortgage of the freehold and leasehold properties, e.g., in the case of a brewery, the brewery and tied houses, and a general charge by way of floating security on the rest of the assets and undertaking. Under the Law of Property Act, 1925, section 87, the legal mortgage takes the form of a demise to the trustees for a term of years or a charge by way of a legal mortgage.

Following on the charge comes a clause specifying the various events on the happening of which the security is to become enforceable. These usually are I

        1.     default in payment of principal or interest;

        2.     winding up;

        3.     breach of covenant; or

        4.     appointment of receiver.

Other events are sometimes added.

The trust deed then provides that, when the security becomes enforceable, the trustees may, at their discretion and shall, at the request of a specified proportion of the debenture or debenture stockholders, sell the mortgaged premises, and apply the net proceeds in paying off the debentures or debenture stock and hand over the balance to the company."

We see from the above the form and contents generally in vogue in England. But, here in India, we have to assume that the form and contents are similar to the document under reference.

Therefore, it is now useful for us to set out the form and contents of the document under reference and then proceed to construe it with reference to the provisions of the Companies Act, 1956, the Indian Trusts Act, 1882, and the Act.

The bank is the sole author of the trust; it describes itself as the debenture-trustees. It refers to the trust being in favour of and for the benefit of holders for the time being of the mortgage debentures in two series totalling in value in the sum of Rs. 125 lakhs by private placement with the UTI issued by the NGEF.

In the preamble portion (paras 1 to 12), the instrument makes a reference to the encumbrances of NGEF by way of mortgages and deed of hypothecation in favour of certain financial institutions including the debenture-trustees. It also refers to an agreement between the UTI and the NGEF and the earlier correspondence between them regarding the issue and subscription of the debentures.

In para 13, it is stated that pursuant to the request of NGEF, the declaration of trust is being made and registered. We feel that the declaration in form is the crucial clause and we have, therefore, set out that portion of the instrument or recitals therein, in extenso:

"NOW THESE PRESENTS WITNESS AND IT IS HEREBY DECLARED BY THE debenture-trustees for the benefit of the UTI in respect of the said debentures as follows:

1. The debenture-trustees hereby declare that the debenture-trustees shall hold the securities created in their favour by the company under the joint mortgage by deposit of title deeds in respect of the land and other immovable properties more particularly described in the First Schedule hereunder written and under the said hypothecation of movable machinery and other assets as hereinbefore recited upon trust and with subject to the powers and provisions hereinafter declared and contained and concerning the same, that is to say, in trust for the benefit of the UTI in respect of the said debentures being 7500 Series "A" and 5000 Series "B"—11% mortgage debentures of Rs. 1,000 each for the time being issued and outstanding and entered in the register of debenture-holders maintained by the company ranking inter se pari passu without any preference or priority of one over the other or others and so that the debenture-trustees shall hold upon trust the moneys which shall arise or may be obtained by enforcement of the said securities or any part thereof or from any sale, collection, conversion or receipt by the debenture-trustees of the proceeds thereof if the said securities have become enforceable and shall in the first place pay and reimburse to themselves and to retain and discharge all the costs, charges and expenses incurred in or about the enforcement, sale, collection or conversion or exercise of the powers, of the trust of the debenture-trustees and shall apply the residue of the said moneys, subject to the prior charge of the company's stocks of raw-materials, semi-finished and finished products, consumable stores and stores and spares not relating to the plant and machinery on the security of which the company has obtained various banking facilities for working capital requirements and subject to the pari passu rights of ICICI, IDBI, IFCI. LIC, GIC, OFGI, NIC, NIA, UTI under or by virtue of the mortgages, charges and securities already created or to be created as also under or by virtue of the provisions of the inter se agreement to be hereafter executed as provided herein :

Firstly, in or towards payment of the said debentures of all arrears of interest including time overdue interest (which shall be deemed to accrue from day-to-day) remaining unpaid on the mortgage debentures held by them respectively;

Secondly, in or towards payment of all principal moneys owing on the said debentures whether the said principal moneys shall not then be due and payable; and

Thirdly, the surplus (if any) of such moneys in payment to the person or persons entitled thereto:

Provided that if the debenture-trustees are of the opinion that it is expedient so to do, payment may be made on account of principal before the whole or part of the interest due on the said debentures has been paid, but such alternative in the order of payment of principal and interest thereon prescribed shall not prejudice the right of the UTI to receive the full amount to which they have been entitled if the ordinary order of payment has been observed or any less amount which ultimately being realised from the security may be sufficient to pay."

The declaration is followed by conditions subject to which the trustees will discharge their duties and obligations and leave the NGEF to manage its affairs. There are certain rights reserved in favour of the trustees such as appointment of receivers or agents, etc., with which we may not concern ourselves.

The main contention advanced for the Revenue is that the instrument under reference creates mortgage by deposit of title deeds in favour of the bank. We should reject that contention without any hesitation. Firstly, the executant of the document is not the NGEF which is the owner of the immovable properties mentioned in the schedules. Secondly, no transfer of interest in the immovable and movable properties including the plant and machinery of NGEF is made in favour of UTI under the instrument in question.

Equitable mortgage by deposit of title deeds may be created by the mere act of depositing deeds of title or even evidence of title like tax receipts evidencing payment of property tax on immovable properties. It is not necessary to reduce to writing the transfer of interest in the immovable property by way of security as in the case of other forms of mortgage. If reduced to writing, the creation of equitable mortgage would also attract the same rigour as other mortgages, the stamp duty payment and compulsory registration under the Registration Act.

Merely because there is a recital about the creation on the same day, viz., March 23, 1982, of a joint mortgage by deposit of title deeds along with other documents in favour of certain institutions including the bank (para. 11 of the instrument under reference), the instrument under reference cannot be construed as a deed of mortgage.

This court in the case of Murugharajendra Co. v. Chief Controlling Revenue Authority [1974] 1 Kar LJ 177; AIR 1974 Kar 60, has explained when exactly an instrument of equitable mortgage, if at all, is liable to be charged to stamp duty under the Act. After adverting to the definition of the term "instrument" in section 2(j) of the Act and the decision of the Supreme Court in the case of United Bank of India Ltd. v. Lekharam Sonaram and Co. [1965] 35 Comp Cas 471 (SC), this court ruled as follows (at page 62 of AIR 1974 Kar):

"It is clear from the opinion of the Supreme Court extracted above that a mortgage by deposit of title deeds can be created by handing over the title deeds by the borrower to the lender with the intention that these documents shall constitute the security for the debt. But if the parties choose to reduce the contract to writing, that document alone would be the sole evidence of its terms. In the latter case, the document shall have to be treated as an instrument creating a right in favour of the mortgagee to recover the loan from the properties to which the title deeds relate. Such an instrument requires to be registered under section 17 of the Registration Act, as a non-testamentary instrument creating an interest of the value of Rs. 100 and upwards in immovable property. It would also become liable for stamp duty under article 6 of the Schedule to the Act. Hence, the essential factor which determines whether a document is one by which an equitable mortgage is created is the intention of the parties. The existence or otherwise of such intention can be established either by the documents produced by the parties or by oral evidence or by both"

From the above, it is obvious that the instrument which we are required to adjudicate is not executed by the owner of the immovable properties, viz., the NGEF. A mere reference to creation of joint mortgage of properties in favour of the bank and other institutions referred to in para 11 of the instrument is not evidence of NGEF depositing the title deeds. It is the bank, the executant of the instrument, which has stated a fact and no more.

Therefore, we should not hesitate to hold that the instrument is not a deed of mortgage, for the simple reason there is no mortgagor who can be said to have deposited the title deeds relating to any immovable property as owner thereof with any one else as security for loans advanced. On the other hand, what is obvious by the reference in para 11 and the contents of the declaration extracted earlier is that the bank is holding the title deeds for and on behalf of itself and the other nine financial institutions and the title deeds relate to immovable properties owned by NGEF and obviously deposited by NGEF with the bank.

In the view we have taken having regard to the enunciation of the law by the Supreme Court and our own High Court, reliance placed on the decision of the Madras High Court in the case of Secretary to the Commissioner of Salt, Abkari and Separate Revenue, Revenue Board, Madras v. Mrs. E.M. Orr and the Bank of Madras [1915] 38 ILR Mad 646, by the Revenue is not on a correct understanding of the law and certainly without reference to the facts of the case we have on hand. In the Madras case, Mrs. Orr executed the document in question which provided for the Bank of Madras advancing moneys to her to carry on her deceased husband's business against the plant and machinery belonging to the business which was entrusted to the bank as trustee with power to use, sell or employ, exchange or otherwise deal with the trust property, etc. In those circumstances, it was held by the Madras High Court that, having regard to the true intention of the parties, namely, the executant and the executee of the document, which was to give control of the properties of the business to the bank as trustee together with certain rights by way of security, the document was a deed of mortgage liable to be stamped as such. On the facts of that case, we could not have come to a different conclusion either.

This takes us to the next question, that is, whether the instrument under reference is a bond executed in favour of UTI by the bank. The term "bond" is denned in section 2(1)(a) of the Act as follows: .

"2. Definitions.—(1) In this Act, unless the context otherwise requires,—

        (a)    'bond' includes—

(i)         any instrument whereby a person obliges himself to pay money to another, on condition that the obligation shall be void if a specified act is performed or is not performed, as the case may be;

(ii)        any instrument attested by a witness and not payable to order or bearer, whereby a person obliges himself to pay money to another; and

(iii)       any instrument so attested whereby a person obliges himself to deliver grain or other agricultural produce to another;"

The learned Government Pleader, Shri V.G. Sabhahit, has contended that the instrument under reference clearly falls within the ambit of sub-clause (ii) of clause (a) of sub-section (1) of section 2 of the Act as the document read as a whole is no more than an obligation on the part of the bank to pay money to UTI and the document is attested and not payable to bearer or order and, therefore, the instrument is liable to be stamped as a "bond" falling under article 12 of the Schedule to the Act.

The argument is attractive. But, on a close scrutiny of the language employed in the declaration extracted earlier or the conditions that follow the declaration, we find that there is no obligation to pay its funds or out of its funds anything to UTI towards the unpaid interest or the principal of the debentures in question. The bank has undertaken to apply the money realised from the enforcement of securities it holds only if and when the securities become enforceable and not otherwise. What it has undertaken to do as trustee or debenture trustee is payment of money belonging to the NGEF held by it as such trustee when the contingency arises. It has no obligation to pay out of its own funds and, therefore, falls outside the ambit of the definition "bond". In other words, if the securities bring forth nothing, then there is no obligation to pay. If NGEF has paid off the debenture-holder, the bank or the debenture trustee has no obligation to pay money. It is true that the definition of the term "bond" is not exhaustive as held by some High Courts over the years (see Wadhawa Mai v. Karim Baksh, AIR 1925 Lahore 415 ; 6 Lahore 276). It is also well-settled that in deciding the question whether an instrument does or does not fall within the purview of a bond as defined in section 2(1)(a) of the Act, the instrument should be considered as a whole and it is not permissible to divide it into several parts and look at it piecemeal and then to assign each one of such parts to some other articles in the Schedule to the Act (see L.H. Sugar Factory, Pilibhit v. Moti, AIR 1941 All 243 [FB]). To be a "bond", the executor of the instrument must expressly undertake to pay money as an obligation arising out of the instrument. It shall not be a matter to be inferred.

In these circumstances, we are of the view that the instrument under reference, read as a whole, does not answer to the definition of "bond" in the Act. We have relied mainly on the language employed in the declaration to which we will make a more detailed reference later in the course of this opinion.

This takes us to the contention of the respondents before us that the document in question is a trust simpliciter notwithstanding the long preamble and its contents as well as the several provisions made in the instrument regarding the rights and obligations of the trustee/debenture trustee. However, learned Government pleader pointed out that there is no trust property or properties held by the bank as debenture-trustee as the mortgaged properties (immovable) and the hypothecated plant and machinery continue to be in the possession and control of the NGEF and with no property vesting in the trustee to hold, control and apply to the benefit of the beneficiary, the instrument cannot be considered to be a deed of trust or instrument of trust.

The fallacy in the contention or argument of the learned Government pleader lies in not noticing the language of the declaration in the instrument. The bank, the debenture-trustee, has never claimed to be in possession of any trust properties, movable or immovable. It only claims that it holds securities in respect of such properties having stated that the immovable properties are mortgaged jointly by deposit of title deeds in favour of the bank and the nine other financial institutions as well as the deed of hypothecation by which the plant and machinery is hypothecated to the bank. In other words, the force or thrust of the argument is that possession, actual and physical, of the properties of the NGEF is not necessary but securities, as above, themselves constitute the trust property or properties which is required to be applied, used or enforced for the benefit of the UTI and, therefore, it is a trust within the meaning of that term as defined in the Indian Trusts Act.

The definition of "trust" is to be found in section 3 of the said Act and it is as follows :

"3. A 'trust' is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner:"

In order to satisfy the requirements of the above definition, there should be three things; (1) a person whose duty it is to carry out the trust, (2) property which is vested at law in the trustee and which he is bound to deal with in accordance with the provisions of the trust, (3) a person who is entitled to enforce the provisions of the trust.

The contention, as noticed earlier, is that the bank is the author of the trust as well as the trustee and it holds the securities, the mortgage as well as the deed of hypothecation of plant and machinery that are the subject of the trust and the UTI is the one to enforce the provisions of the trust if the benefit is not given to it.

That the bank is the author of the trust cannot be disputed as it is the executants debenture-trustee that has made the declaration as evidenced by the instrument itself.

Are the securities, the mortgage by deposit of title deeds and the deed of hypothecation both of which do not give possession of the properties to the bank capable of being held as properties ? The answer seems to be in the affirmative.

Mortgage of any kind under the-Transfer of Property Act is an acquisition of interest in immovable property capable of being transferred in like manner to others and, therefore, the mortgage acquired by the bank jointly constitutes its property and that of the other mortgagees who apparently have agreed that the bank shall hold the title deeds in its possession and as the bank ranks pari passu with the other institutions, it is capable of realising its securities in its own right. This is obvious to any reader of the instrument in question.

Similarly, by deed of hypothecation, the NGEF has pledged its machinery and plant with the bank while retaining possession of the same. But, then, at law, the owner is in possession only as bailee, as the pledgee is the real owner. This becomes clear having regard, to section 172 of the Contract Act. A passage from Paget on the Law of Banking, Eighth Edition, at page 566, is as follows:

"This difficulty in the way of the owner's being in a position to pledge goods in his own possession has been circumvented by the institution of letters of lien or letters of hypothecation.

The distinction seems a narrow one, but it is clear that an owner, though he cannot himself pledge, may, by agreement, change his possession into that of a bailee for the pledgee, and that the instrument constituting him as such is 'one used in the ordinary course of business as proof of the possession or control of goods' within the exception to the Bills of Sale Act, and takes the goods out of his 'order and disposition '"

From the above, it is clear that the bank is in a position to treat the securities in its possession as properties of the trust it has authored.

This becomes clearer when one looks at the origin of debenture trustee historically. A passage from Pennington's Company Law, 5th Edition, at page 475, is useful in this context and it is quoted below:

"By the end of the last century, public companies found that their issues of debentures were being subscribed for by so great a number of investors that it was inconvenient to employ the form of debenture currently in use. If the company mortgaged its assets to a thousand persons, it had to get a thousand consents when it wished to sell an asset which was specifically mortgaged, or to depart in the smallest degree from the terms of its debentures. The problem was solved by the introduction of the trust deed by which trustees were appointed to represent the interests of the debenture-holders. The trustees were given a legal mortgage of the company's fixed assets and a floating charge over its other property, were empowered to consent on the debenture holders' behalf to minor departures by the company from the terms of the debentures, and were authorised to call meetings of debenture-holders to decide whether the trustees should enforce the security given by the trust deed when a case arose for doing so, or whether the debenture-holders should agree to a modification of their rights when the company was unable to meet its obligations in full."

In the instant case, there is only one debenture-holder, viz., the UTI. That should not make any difference to the practice of creating debenture-trustees.

We have essentially relied on the language of the declaration contained in the instrument, particularly the following passages;

"....Debenture trustees shall hold the securities created in their favour.... shall hold upon trust the moneys which shall arise.... by enforcement of the said securities.... if the said securities have become enforceable........ shall apply the residue of the said moneys...... as provided herein"

First: in or towards payment of the said debentures..... etc.

That the bank is to charge a fee for its services as a trustee annually is neither breach of trust nor opposed to any provision of the Indian Trusts Act. It is but legitimate that the trustee has to defray expenses incurred by it or him or her or them while discharging its, his or her or their obligations under the provisions of the trust. In Hodgson v. Accles [1902] 51 W.R 57, it has been held that the trustees are commonly given remuneration by the deed, but, unless otherwise provided, this ranks after the debenture or debenture stock-holders. Therefore, the argument that the trustee has himself benefited has no force to construe the document or instrument for what it is, an instrument of trust.

In the result, our adjudication is that the instrument under reference is liable to be charged stamp duty under article 54A of the Schedule to the Act.

We have made a liberal approach in adopting the well-known rule of construction, the rule of "beneficial" construction. Debenture is a means of raising funds by any one but generally by companies in the interest of trade, commerce and industry. Trusts equally play an important role in the same field as well as in other fields. It is best expressed by quoting from Reeton on Trusts:

"The trust is one of the most important, and flexible, institutions of modern English Law, being rivalled in this respect only by the modern limited liability company. To some extent, moreover, the functions of these two great institutions may overlap. Many associations and organisations (including schools outside the state system) exist under trust deeds, but their objects could be carried out as effectively if some of the more active members of the governing body were incorporated under the Companies Acts, and indeed, this sometimes occurs."

 

SECTIONS 124 TO 145

 

Registration of charges

[1962] 32 COMP. CAS. 925 (ALL.)

HIGH COURT OF ALLAHABAD

Krishna Deva Bhargava

v

Official Liquidator, U.P. Oil Industrial Ltd.

N. U. BEG AND A. P. SRIVASTAVA, JJ.

MARCH 13, 1961

BEG, J. - This is an appeal arising out of an application given by the official liquidator of th3e U.P.Oil Industries Limited, hereinafter called “the company”. The company went into liquidation and was ordered to be wound up on May 11, 1956. An investigation into the assets and liabilities of the company b the liquidator revealed that it had three series of debentures. The first series of debentures were allotted on April 8, 1947, for a total sum of Rs. 1,50,000. A debentures trust deed in respect of this series was executed and registered with the Registrar of Joint Stock Companies, Lucknow, and also in the office of the Sub-Registrar, Lucknow, under the Indian Registration Act. The second series of debentures were issued on June 23, 1950, for a sum of Rs. 1,00,000 For this series also a debentures trust deed was executed and it was registered with the Registered,Joint Stock companies, Lucknow, as well as in the office of the Sub-Registrar, Lucknow under the Indian registration Act. By a resolution dated March 23, 1952, the board of director s authorised Sri B.P.Agarwala , who was managing the affairs of the company to issue a third series of debentures foe Rs. 4,50,000, and a committee was appointed to allot these debentures. In Pursuance of the above resolution on April 7, 1952, the committee allotted debenture bonds Nos. 1 to 4 for Rs. 2,000 to Rai Sahib Pandit Sri Krishna Deva Bhargava o Khatauli and four bonds Nos. 5 to l8 for Rs. 3,000 to Smt. Rajeshwari Devi of Karol Bagh, Delhi. In receipt of this series of debentures, no trust was executed nor was any registration effected in the office of the Sub-Registrar as required under the Indian Registration Act. The Company, however, registered with the Registrar, Joint Stock Companies, the particulars of this series of debentures on April 18, 1952, under section 109 of the Indian Companies Act. In view of this situation, the liquidator moved an application in the High Court before the company judge praying for the relief tot he effect that a declaration be made that the holders of the third series of debentures are not secured creditors but ordinary but ordinary unsecured creditors. The company judge before whom the matter came up of determination allowed this application an made the declaration prayed foe . Dissatisfied with the said order of the learned judge, the appellants, who were holders of the third series of debentures , filed the present appeal.

On behalf of the appellants, learned counsel advanced two arguments before us. The first argument was that the third series of debentures, having been registered under section 109 of the Indian Companies Act, 1913, were not required to be future registered under the Indian Registration Act. The second argument advanced by him was that, in any case, the declaration prayed for should not have been given in respect of the movable properties of the company . So far as the first arguments is concerned it involves a discussion of the following two questions:

“1. Is a charge compulsorily registrable under the Indian Registration Act?

2. How far is a clouting charge created by the third series of debentures, in the present case, compulsorily registrable under the said Act?”

We have no doubt in our mind that an ordinary charge created under the Transfer of Property Act, is compulsorily registrable . Such a charge is created under section100 of the Transfer of Property Act (4of 1882). The first portion of section 100 lays down that where the immoveable property off one person is b act of parties or by operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property; and all the provisions therein made applicable stoa simple mortgage shall, so refer as may be, apply to such a charge. It may be noted in this connection that the words “which apply to a simple mortgage shall so far as may be, apply to such charge” in this section were substituted by section 53 of the Transfer of Property (Amendment) Act, 1929 (XX of 1929), for the words “as to mortgagor shall, so far as may be, apply to the owner of such property and the provisions of sections 81 and 82 shall , so far as may be, apply to the persons having such charge”. The effect of the amendment was that all the provisions of the Transfer of Property Act which apply o simple mortgages were, so far as possible, made applicable to charges.

Section 59 of the Transfer of Property Act Makes a;; simple mortgages in which the principal money secured is one hundred rupee or upwards compulsorily registrable. Section 4 of the Transfer of Property Act (4 of 1882), as amended by Act 3 of 1885 , lays down that sections 54, paragraphs 2 and 3, 59, 107 and 123 of the Transfer of Property Act shall be read as supplemental to the Indian Registration Act (16 of 1908). The combined effect of sections 4,59 and 100 of the Transfer of Property Act is, therefore, to make all charges in respect of immoveable properties compulsorily registrable under the Registration Act provided that the amount secured exceeds Rs. 100 The cases, Khoo Sain Ban v. Tan Guat Tean 1 and Viswanathan v. M.S. Menon support the same conclusion.

A floating change is, however, special charge which is recognied lay the Indian Companies Act. In the Present case, we are concerned with the Indian Companies Act (VII of 1913) which was the Act in force at the relevant date. A floating charge is created by making the assets or the undertaking of the company a security foe the payment of debts into which a company enters. Such a charge might cover properties which may be specified or unspecified in the document creating the charge. The description may be a general one. Peculiar feature of this transaction, however, is that it is not possible to predicate the exact property on which the charge would operate until the happening of a future event. This future event may be the appointment of a receiver at the instance of the creditors of a company for the realisation of their debts or the a winding up of the company itself. Till such a future event happens, the charge is of an ambulatory or roaming character. It remains in this hovering condition until the contemplated future event takes place. Once, however, this future event occurs the charge settles down ad attaches itself to a fixed property. The right created under it is no doubt a right in prescient. The security in respect of which the right is created, however, becomes crystallised only when the future event takes place. It may, therefore, be said that until the time that such further event occurs the right created thereby is a dormant right. The moment such future event takes place, this dormant right assumes a dynamic form ad becomes capable of enforcement against certain specified property to properties which answer the description of the properties given in the debenture. Section 109(1)(f) of the Indian Companies Act of 1913 lays down that every mortgage or charge created y a company after the commencement of the said Act which is a floating charge on the undertaking or property of company shall, in respect of such security, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge, together with the instrument (if any) by which the charge is created or evidenced or a copy thereof verified in the prescribed manner are filed with the Registrar for registration in the manner required by the Act within twenty-one days after the date of its creation. Section 110 of the Indian Companies Act specifies the particulars which are to be filed with the Registrar when a registration as contemplated by section 109 of the said Act is sought t be effected. The provisions of clause (c) of section 110 would indicate that, in the case of such a registration, a general description of the property charged is quite enough.

In the present case it is the admitted case of the parties that the third series of debentures were registered as required by section 109 and 110 of the Companies Act (VII of 1913). On behalf of the appellants it is argued that a floating change is a statutory charge under the Companies Act. A registration of the same, therefore, under the aforesaid sections is quite sufficient. On the other hand on behalf of the respondents the learned counsel has argued that the fact that under r the Companies Act such debentures are made compulsory registrable in a certain manner with the Registrar of Joint Stock Companies does not absolve the parties from the necessity of having the said documents registered under the Registration Act where such documents are compulsorily registrable under section 17 of the Indian Registration A t (16 of 1908) if they are to the t4rated as valid and effective documents creating a charge on immoveable property. Both the parties have advanced detailed arguments before us in support of their respective contentions. We are, however, of opinion that the answer to this question would depend on the particular circumstances of each case. It is, therefore, necessary to look at the terms of the particular debentures by which the charge in question in the present case is sought to be created bearing in mind the specific property in respect of which the dispute has arisen. In the present case, we have looked at a company of the debentures in question . Condition No.3 of the printed form of this series of debentures is relevant in this connection. It specified the property which was sought to be made the subject-matter of the floating charge. It runs as follows:

“3. The company hereby charges with such payments its under taking land allies property present and future.”

The above description shows that the debentures in question related to two types of properties. Firstly, they covered all the present property of the company-both movable as well as immovable. Secondly, they covered all the future property of the company both movable as well as immoveable. So far as the movable property is concerned, it is conceded by both the parties that the charge would not be compulsorily registrable under the Indian Registration Act. So far, however, as the immoveable property is concerned, it has been argued on behalf of the appellants the floating charge is not registrable even though it might embrace within its ambit immoveable property. By the present immoveable property is meant the property which was in the ownership of the company at the date when the charge was created. On the other hand by the future immoveable property is meant the property which was to in the ownership of the company at the date of the creation of the charge but came into its ownership at a subsequent date. In the present case it is admitted that the land to which the mill in question is attached was in the ownership of the company at the date of the creation of the charge. The mill, therefore, constitutes a mere accretion to the land which was already owned by the company at the relevant date. This land is admittedly covered by the property described as present immoveable property the debenture. We, therefore, want to make it cleat that the conclusion arrived at by us in the instate case applies only to a case where the dispute creates to such property as was the ownership of the company on date of the creation of the charge or its accretion, and the observations made by us inn this judgment would be confined to such a case only. So far as the future immoveable property so concerned, we do not wish to express any opinion in this case. We must confess that the question appeal to bristle with difficulties at every stage, and it is not easy to reconcile the conflicting considerations that arise in such a case.

In our opinion, section 17 of the Indian Registration Act (XVI of 1908) would be attracted in a case where the dispute relates to charge sought to the created by debentures on immoveable property which was existent at the date of the a creation of the charge and was in the ownership of the company at that date. The relevant provision of law in this regard is section 17(1)(b) of the Indian Registration Act. Under section 17(1)(b) of the Indian Registration Act the documents made compulsorily registrable are described as follows:

“17. (1)(b) other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immoveable property.”

In the present case the debentures in question are admittedly non-testamentary instruments of the type indicated by section 17(1)(b) above and are of value above one hundred rupees. Further, they purport to create a charge on the immoveable property which was in the ownership of the company at the date of the creation of the charge, In this connection we have already held above that the right created by such a debenture is a right in praesenti although it is dormant at that stage. It can, therefore, be said that the document in question does operate to create a right.

Further, the debenture in question also purports to declare that on the heaping of a certain contingency in future, it would be open to the creditor to enforce the realisation of the debt owned to him by taking steps in that regard against immoveable property of the company, provided of course that on that future date the said property happened to be in the ownership f the company. The fact that a charge has been created by debenture, no doubt does not Prevent the company from alienating the property or creating mortgages on the same. If the company alienates the property prior t the happening of the future event, the alienee takes the property immune from such a charge, Further, the said rights of the chargeholder might be subject to the prior rights of a mortgage. The fact that a chargeholder is entitled to take steps against the company only on the happening of a future event does not, however, affect the matter. The declaration itself may relate to a future contingency and may be of conditional nature. The section does not restrict the operation of its provisions to a declaration of an absolute or unqualified nature.

It can also be said that the verb “limit” in section 17(1)(b)would also cover a transaction of this nature . As observed by us, the happening of the future event does have the effect of limiting the rights of the company to a certain extent. Whereas before the happening of the future event the company did possess ad unlimited power to dispose of absolutely the property which as sought to be made the subject -matter of the charge, after the happening of the said event the charge fastens itself on the specified property thereby altering the situation. The crystallization of the security in this manner does to a certain extent limit the right of the company, for it can be said that thereafter the property which is the subject-matter of the charge having been specified and fixed becomes subject the charge created property begin to attach to such a property. The unrestricted right of the company to deal with the said property can thus be said to have been limited.

It may also be noticed that clause (b) of section 17(1) of the Registration Act is worded in a very wide form. Every portion of this section bears the imprint of its extensive character and seems to be designed to emphasize the same. Clauses (a) and (b) of section 17(1) together cover all kinds of non-testamentary instruments relating to immoveable property. Section 17(1)(b) embraces not only rights which become operative in the immediate present but also in future. This is borne out by the clause “whether in present or in future” in the said provision of law. It is also significant to note that this clause covers not only titles and interests in immoveable property but also rites in them. Further, the section uses the word “to” as well as the word “in” when describing such rights, titles or interest. Its ambit is further extended byte inclusion within it not only of vested but also of continent rights, titles or interests. A floating charges cannot, therefore, escape the clutches of this section merely because although it may come into existence in praesenti., its actual operation is postponed to a future date. A floating charge can be said to be a cotangent right in the sense that the charge attach itself to the property on the happening of a future event. The wide character of the section is further emphasized by the use of the words “purport” as well “operate” both of which precede, assign limit or extinguish “. the profusion of these verbs shows that the intention of the legislature was to include within the ambit of the is section a large variety of legal transactions, and their collection in this clause indicates that the legislature intended to include within the wide sweep of this provisos of law every type of document that may affect any right, title for interest nor to immoveable property. The section appears to be so designed as to make it exhaustive of the entire category of such transactions.

The conclusion reached by us is fortifies by a reference to causes (ii) and (iii) of sub-section(2) of section 17 of she Indian Registration Act. These clauses would indicate that while enacting section17 of the Indian Registration Act, the legislature had in view the provisions of the company law also. Clause (ii) of sub-section 92) of section 17 lays down that any instrument relating to shares in a joint stock company would be exempt from the operation of clauses (b) and (c) of sub-section (1) of section 17, notwithstanding that the assets of such company consist in whole or in part of immoveable property.

Clause (iii) of sub-section (2) of section 17 is, however, more relevant in the present case. This provision of law carves out an exception to the application of clauses (b) and (c) of sub- section 91) of section 17 of the Indian Registration Act in the case of a debenture issued by a joint stock company only if it does not declare, assign, limit or extinguish any right, title or interest, to or in immoveable property. It would, therefore, necessary follow from it that a debenture which does seek to create, declare or limit any right, title or interest to or in immoveable property would be covered up by clause (b) of sub- section (1) of section 17 of the Indian Registration Act.

It is also noteworthy that there is no specific provisions in the Indian Companies Act itself exempting debentures creating charges on immoveable properties from the mandatory provisions of the Indian Registration Act. On the other hand, one does find that while enacting section17 of the Indian Registration Act, the legislature did have in view debentures which are the creations ofthe company law, and did not intend to exempt from its operation debentures affecting immoveable property. It also appears that the purpose of registration under the Companies Act is quite different from the purpose of registration under the Registration Act. In the case of registration under section 109 of the Indian Companies Act, 1913, as section l110(c) of the same Act shows, a general description under the Registration Act. has got to be specific land definite (vide section 21, Registration Act). The purpose of registration under the Companies Act, therefore, appeal to be to give a general idea if the financial condition and the status of the company to persons who want to deal with it. On the other hand, the provisions of the Registration Act are framed for the purpose of giving full and detailed information of a reliable type to persons a wanting to have dealings in respect of specific immoveable properties of a company by a search of local registry where such formation would be available. Reference in this connection may be made to sections 64 and 65 of the Registration Act which are designed to effectuate this purpose.

It may also be noted in this connection that section 109 of the Indian Companies Act, 1913, applies equally to both charges as ell as mortgages. The result is that if its provisions are interpreted as engrafting an exception on section 17 of the Registration Act, then it can be argued that even a mortgages of immoveable proper created by a company would be exempt from registration under the Registration Act. This would not only make a serious inroad on the provisions of the Registration Act, but would also have the effect of creating a good deal of confusion and uncertainty in transactions relating to immoveable properties. the Registration Act has placed transactions relating to immoveable properties on a special pedestal, and has, for that reason, attached certain formality and solemnity to such transactions. The purpose of making registration compulsory under the registration Act in respect of transactions relating to immoveable properties above a certain value is not only to create certainty in them and thereby facilitate dealings therewith. Registration of such documents not only serves to provide unimpeachable evidence of dealings affecting immoveable properties, but also lends assurance to persons entering into them regarding their legal rights and obligations. A contrary view is likely not only to result impractical difficulties and serious inconveniences bust also in the preparation of fraud and deception. In the long run it is likely to have repercussions on the day-to-day business of the companies themselves. If persons dealings with the companies cannot be sure of their position, they would be reluctant to have dealings with them. The companies might, therefore, find it difficult to borrow moneys from creditors to enable them to sustain and to advance their business. Such a view would , therefore , be prejudicial not only to the interests of the creditors but also to that of the companies themselves. We would therefore, require something more to be able to hold that such salutary and imperative provisions of the Registration Act as are embodied in section 17 are completely swept any by the Companies Act. Unless, therefore, we find ourselves constrained by considerations of a strong, cleat and compelling nature, we would be reluctant to endorse the argument so vehemently advanced before us by the learned counsel for the appellants. The view taken by us above would also find support from the line of reasoning adopted in Imperial Bank of Idea v. Bengal National Bank Ltd.1, K. Roy and Bros. v. Ramanath Das2 and State of Madras v. Madras Electric Tramways (1904) Ltd.3 It may be noted that the first case was reversed by the Privy Council in Imperial Bank of India v. bengal National Bank Ltd.4 but not so far as this particular point was concerned.

Learned counsel for the appellant also relies on proviso (iv) to section 109(1) of the Companies Act, 1913, which states that:

“The holding of debentures entitling the holder to a charge on immovable property shall not be deemed to be a interest in immoveable property.”

This argument seems to ignore the width of the provisions of section 17(1)(b) ofthe Registration Act which make it applicable not only to “an interest in immoveable property” but also to a right” to immoveable properties given as security to the debentures holders. Otherwise, the mortgage on the immoveable properties in favour of the debenture holders need not be registered under the Registration Act.”

Learned counsel of the appellant also cited before us a large number of English authorities in support of this submission that the English doctrines of equity would be applicable to such a case. we do not think it necessary to deal with the English l cases cited by him as, in our opinion ,the English doctrines of equity cannot be invoked for the purpose of modifying or nullifying the clear provisions of the Indian statutory law:vide G.H. C. Ariff v. Jadunath Majumdar Bahadur 1 and Ram Kinkar Banerjee v. Satya charan Srimini.2

On behalf of the learned lcounsel has drawn our attention to the provisions of sub-section (10 of section 21 of the Indian Registration Act which lays down that no non-testamentary document relating to immoveable property shall be accepted for registration unless it contains a description of such property sufficient to identify the same. In this connection, the learned lcounsel argued that it was not possible for the parties to give a description of the property sought to be charged because immoveable property sought to be charged might not be in the ownership of the company when the charge was created. This criticism cannot, however, apply to the present case, because the property in question was in the possession and ownership of the company at the date of the creation of the charge. The aspect of the matter might, however, present a real difficulty in the case of registration of a debenture in so far as future immoveable property is concerned. As we have already observed above , we do not propose to express any opinion on this aspect of the matter, because this question does not specifically arise in the case before us.

In this connection, the learned counsel for the appellant also argued that the factory which was installed on the land was future property as is was affixed the land subsequent to the creation of the charge. That , however, would not make any difference. the fact that the machinery was affixed to the land subsequent to the date of the creation of the charge has the effect of making the machinery in question a part ad parcel of the immoveable property. In other words, the machinery which is embedded in the land should be considered to be appurtenant to it or rather an accretion to it. The situation in such a case would be analogous to that of a house which is subsequently constructed or a tree which is subsequently planted on a land which is already mortgaged. Reference in this connection might be made to the following cases: Reynolds v. Ashby & S0n3, R.M.P.M. Chettiar Firm v. Siemens (india) Ltd.4 and Mohammed Ibrahim v. Northern Circars

Fibre Trading Co.1. The basis of accretion inthe present case being admittedly in existence and in the ownership of the company at the date of the execution of the deed, specification of the immoveable property could be given and registration cannot be said to be impossible on that score. Learned counsel concedes that ,apart from the land on which the mill stands there is no other independent immoveable property which can be said to be after-acquired or future and to which the charge in the present case can be said to have attached itself.

For the above reasons, we would hold that so far as the charge in question in the present case is concerned, the debenture of the third series required registration under section 17(1)(b) of the Registration Act.

Section 49 of the Indian Registration Act provides for the consequences of non-registration of documents which are compulsorily registrable under section 17 of the said Act or under the provisions of the Transfer of Property Act. According to it no document which is required to be registered under section 17 of the Registration Act or under the Transfer or Property Act which is not registered shall so affect any immoveable property comprised there in, nor shall it be received as evidence of any transaction of affecting such property. The combined effect of sections 17 and 49 of the Indian Registration Act, therefore, in our opinion is to make the debentures of the third series ineffective so far as they seek to create a charge on the immoveable property of the company.

In the end, the learned counsel argued that, in any case l, the appellant should be declared to be secured creditors so far as movable property is concerned. In this connection he wanted to take us into the report of the Commissioner and to argue with respect to every specific item as to whether it should be considered to be movable or immoveable property. Whether a property which is affixed to the earth should be treated as immoveable or movable is a matter depending on the question as to how ad in what manner it is affixed to the earth and what was the real intention of such affixation. If the property was affixed in such a manner as to indicate that the intention of such affixation was to use the machinery in such a way as to make it a permanent part and parcel of the land in which it is embedded, in our opinion, it should be deemed to be an immoveable property. On the other hand, if it consists of tools or other items which are not intended to be used thus ad are not attached to the earth in such a manner and with this intent, such articles should be deemed to be movable properties. On behalf of the respondent, the learned counsel has stated that the question as to whether any particular property is movable or immoveable should be left open to be determined by the learned company judge when the case goes back to him. Learned counsel for the appellant agrees to this procedure. We have already pointed out the broad lies of distinction between movable and immoveable property lad when the question does arise before the learned company judge, we have no doubt that, as agreed by the parties before us, he would go into the matter again and re-determine the question with reference to the specific items in connection with which it is raised . In this view of the matter, the declaration made by the learned company judge will have to be modified.

This appeal is, therefore, partly allowed and the holders of the third series of debentures are hereby declared to be secured creditors in respect of the movable properties but to in respect of the immoveable properties in the ownership of the company at the date of the execution of the debentures or subsequent accretions to the said immoveable properties.

In the circumstances or the case we make no order as to costs.

 

[1931] 1 COMP. CAS. 159 (CAL.)

HIGH COURT OF CALCUTTA

Imperial Bank Of India

v.

Bengal National Bank Ltd.

RANKIN, C.J.

AND C.C. GHOSE, J.

APPEAL NO. 112 OF 1929

MARCH 18, 1930

 

 N.N. Sircar, Page and N.C. Chatterjee, for the Appellant.

J. Ameer Ali and Westmacott, for the Respondent.

Judgment

Rankin, C.J.—The Imperial Bank of India appeals from an order dated 26th August, 1929, made by my learned brother Buckland, J., upon an application for directions made by the liquidators in the winding up of the Bengal National Bank Ltd. In May, 1923, the Imperial Bank advanced to the Bangal National Bank Rs. 10, 00,000 upon the security of a debenture dated 4th May, 1923, which purported to charge the whole undertaking, properties, assets and interests, present and future, including the uncalled capital, of the borrowing Bank for the repayment of the loan with interest. In July of the same year, the Imperial Bank made a further loan of Rs. 10,00,000 upon the security of a debenture dated 4th August, 1923, which also created a charge upon the whole of the undertaking, properties, assets and interests, present and future, including the uncalled capital, of the borrowing Bank. These debentures were duly registered under the Companies Act with the Registrar of Joint Stock Companies but neither debenture was registered under the Registration Act of 1908 and it is this circumstance which gives rise to question in the present case. On 28th April, 1927, the Bengal National Bank suspended payment and the Imperial Bank appointed receivers on that date. A debenture-holder's suit was instituted on 26th May 1927. On 1st June, 1927, the Court appointed certain persons to be receivers in the debenture-holder's suit. On 2nd August of that year, a compulsory winding up order was made against the Bengal National Bank; the liquidators, with the exception of a Mr. Carater, are also the receivers by the Court for the debenture-holders.

The present appeal arises out of an application by the liquidators for directions and the sole question before us has reference to the respective rights of the Imperial Bank and the Bengal National Bank, Limited (in liquidation) as regards cases in which the latter had given loans or overdrafts upon the security of title-deeds deposited with it. The question is whether the security held by the Imperial Bank extends to and is effective over, the debts due to the Bengal National Bank from customers who had in this way obtained advances upon security, and whether the Imperial Bank is entitled to the benefit of the security as part of the property charged by the debentures, in cases where possession of the title-deeds was never given to the Imperial Bank. It appears that in some cases title-deeds which formed security for overdrafts had been sub-mortgaged with the Imperial Bank by being deposited with it by the Bengal National Bank but these cases are excluded from the question which was raised before us upon this appeal.

The learned Judge took the view that whether or not the security held by the Imperial Bank is valid and effective as regards the debts, it is not valid and effective as regards any title-deeds originally deposited as security with the Bengal National Bank in cases in which possession of the title-deeds was never given to the Imperial Bank.

Mr. Page for the Imperial Bank contended that it is against all principle to hold that the Imperial Bank has a right under its charge to the debts and yet has no right to the security given therefor. Mr. Ameer Ali, on behalf of the liquidators, did not contest that this position was difficult to maintain but contended that the question to be answered first is whether in the circumstances these secured debts are available at all to the Imperial Bank under their charge.

On this the argument for the liquidators is rested upon s. 17, Registration Act of 1908:

"The following shall be registered, if the property to which they relate is situate in the district in which, and if they have been executed on or after the date on which, Act XVI of 1864, or the Registration Act XX of 1866, or Registration Act VIII of 1871, or the Registration Act III of 1877, or this Act came into force, namely:

        (a)    Instruments of gift of immovable property;

(b)    Other non-testamentary instruments which purport or operate, to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of Rs. 100 and upwards to or in immovable property."

By s. 49 of the same Act:

"No document required by s. 17 to be registered shall (a) affect any immovable property comprised therein or …………….. (c) be received as evidence of any transaction  affecting such property unless it has been registered."

It is said that if it can be shown that a debt secured by mortgage upon immovable property is for the purposes of the Registration Act, immovable property, the debentures held by the Imperial Bank can take no effect upon these mortgage debts. Now, that a mortgage debt is immovable property for purposes of the Transfer of Property Act and the Registration Act was held by this Court in the case of Sakhiuddin Saha v. Sonaullah Sarkar. In that case a debt secured upon mortgage was part of the property of a joint family and an instrument was tendered in evidence which purported to show that on a partition this asset had been allotted in severalty to one of the co-sharers. The document was not registered and it was held that it could not be put in evidence. Richardson, J., pointed to the amendment of the Transfer of Property Act made by Act II of 1900 which excluded mortgage-debts from the definition of "actionable claims."

He held that "it can hardly be supposed that debts secured by mortgages of immovable property were excluded from the definition of actionable claims in order that they might pass by word of mouth without any writing. The inference would seem to be that the Legislature regarded such debts as immovable property within the definition in s. 3 (25), General Clauses Act," from which it would follow that a mortgage debt is within the definition of immovable property in s. 2 (6), Registration Act of 1908.

Again, in Perumal Ammal v. Perumal Naicker the instrument was an unregistered instrument purporting to make a gift to the plaintiff of certain outstanding dues of the donor, consisting of certain mortgage-debts, book debts and promissory notes. Section 123, Transfer of Property Act, requires gifts of immovable property to be made by registered instrument. Accordingly the first question for decision was whether the gifts of the mortgages were to be held bad as gifts of immovable property not made by registered instrument. Wallis, C.J., reviewed the statue law and the authorities. He pointed out that before 1900 mortgage-debts could be transferred as actionable claims and on the transfer of the debts, the securities passed by operation of law, but that when in 1900, secured debts were excluded from the class of actionable claims, the intention of the Legislature must have been that in general, mortgage-debts should only be transferred with the mortgagee's interest in the land and, therefore, by registered instrument. He held, however, that where the law still admits a separate transfer of the mortgage-debt, as by endorsement of a promissory note, or by attachment and sale under the Civil Procedure Code, the right to the security would pass with the right to the debt.

In Elumalai Chetty v. P. Balkrishna a Division Bench of the Madras High Court disagreed with the view that the endorsee for value of a negotiable instrument, the amount of which had been secured by mortgage by deposit of title deeds could make any claim to enforce the mortgage in the absence of a registered instrument conveying the mortgage right to him. Krishnan, J., said: "It seems to me quite clear that a mortgage of immovable property is itself immovable property under the Transfer of Property Act, whatever the form of the mortgage may be and a transfer of ownership of such a right falls under s. 54 and will require a registered instrument for the purpose."

He held, however, that "the fact that the promissory note can be transferred by endorsement, it seems to me, does not make any real difference to the question before us. When the note amount is so transferred, it seems to me, it is not transferred as a secured debt at all. The negotiable Instruments Act, makes no provision with reference to securities. In my view, it is only if the mortgage-debt is transferred as a secured debt that it will carry the securities with it, on the principle embodied in s. 8, and not otherwise. Even in the case of a mortgage where there is no promissory note, it cannot, I think, be said that the law does not allow the mortgagee to transfer the debt as an unsecured or simple debt without a registered instrument if he thinks fit to do so. The security is for his benefit and he can give it up if he likes, and the transferee will then get right to the debt, but not to the security. Thus, as regards transferability in law as an unsecured debt, a mortgage-debt for which a negotiable instrument has been taken does not seem to me to differ fundamentally from one where none such has been taken. In my view, in either case, if the debt is transferred by endorsement or otherwise, without the transferor taking care to transfer the mortgage right by registered instrument, the debt and the security will get dissociated and the security may possibly cease."

Now, it may be as well with reference to the case before us to make clear two matters. For the purpose of getting a complete register of titles to land and interests in land, the Legislature has not required that equitable mortgages by deposit, if made in Calcutta, should come upon the register at all, and they do not come upon the register unless the contract is contained in an instrument in writing. If the mortgage is made by deposit of title-deeds in Calcutta, the immovable property which thus becomes the subject-matter of the security may be situated anywhere in British India. The Registration Act, however, requires many instruments to be registered if they effect transactions with reference to immovable property although the transactions are not necessarily required to be carried out by written instruments at all, and s. 48 gives priority to registered instruments as against an oral agreement or declaration. This brings many transactions upon the register but in addition to this purpose a main purpose of the Act is to prevent a party from setting up forged or false instruments by rendering inadmissible in evidence instruments which have not, within a limited time, been taken to the registry and authenticated. This second purpose my be thought to be attained in the case of securities granted by companies by the provisions of s. 109, Companies Act, but it is clear upon the face of the Registration Act, s. 17, that there is no special treatment for such securities on account of the Company Register.

In the second place, the only parties before us upon this summons are the Imperial Bank, on the one hand, and the Bengal National Bank by its liquidators, on the other. We cannot, on this appeal, deal with any argument such as that indicated in the passage which I have quoted from the Judgment of Krishnan, J., to the effect that the debt and the security having become dissociated, the Bengal National Bank's customer or borrower is in a position, as against that Bank, to say that his security is no longer available to it but has ceased altogether to have effect. Whether there is any ground in law or in fact for such a contention, must be decided in a proceeding to which the customer is a party. Any direction to be given upon the summons before us must proceed upon the assumption that, as against its customer, the Bengal National Bank is still entitled to the debt and the security and on this assumption the question is as to the respective rights of the debenture-holders and the unsecured creditors of the Bengal National Bank.

I turn now to examine the matter from this point of view. Act IV of 1882 deals with transfer of property and "transfer of property" by s. 5 means "an act by which a living person conveys property, in present or in future to one or more other living persons, or to himself and one or more other living persons."

Section 7 says that a transfer may be made of property either wholly or in part and either absolutely or conditionally and s. 8 says that unless a different intention is expressed or necessarily implied, a transfer of property passes forthwith to the transferee all the interest which the transferor is then capable of passing in the property and in the legal incidents thereof. "Sale" is denned by s. 54 as "a transfer of ownership in exchange for a price" and such transfer in the case of tangible immovable property of the value of Rs. 100 and upwards, or in the case of a reversion or other intangible thing, is to be made only by a registered instrument. It is not unimportant to observe that this provision applies only to cases of sale. A "mortgage" is defined as "the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced, etc."

Where the principal sum secured is Rs. 100 or upwards, a mortgage can be effected only by a registered instrument signed by the mortgagor and attested by at least two witnesses (s. 59); "but nothing in this section shall be deemed to render invalid mortgages made in the towns of Calcutta, Madras, Bombay, etc., by delivery to a creditor or his agent of documents of title to immovable property, with intent to create a security thereon."

Section 100 provides for the case where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage. In that case there is said to be a charge. "Lease" is denned by s. 105 as the "transfer of a right to enjoy immovable property." Leases from year to year or for more than a year or reserving a yearly rent can be made only by registered instrument. Exchange by s. 118 can only be made in manner provided for the transfer of property by sale. "Gift" is "a transfer of existing movable or immovable property made voluntarily and without consideration."

Save that the gift of movable property may be made by delivery, a gift must be effected by registered instrument (s. 123). Actionable claims do not include claims to a debt secured by a mortgage of immovable property, or by hypothecation or pledge of movable property, but s. 130 provides that the transfer of an actionable claim shall be effected only by the execution of an instrument in writing.

Now cl. 25, s. 3, General Clauses Act (X of 1897), does not define immovable property, but states that it shall include land, benefits to arise out of land and certain other things. I think we may safely reject the idea that a mortgage is a "benefit to arise out of land" within the meaning of this clause. Section 3, Transfer of Property Act, does not affect the matter before us. Clause 6, s. 2, Registration Act, save that it throws some light on the expression "benefits to arise out of land" takes us no further. "Immovable property" includes "land" that is all. Now we know from s. 58, Transfer of Property Act, that by a mortgage the mortgagee has "an interest in specific immovable property" and if we assume, as we fairly may, that an interest in immovable property is immovable property, we may proceed to a further inference that if he wants to sell, sub-mortgage, lease, exchange or make a gift of his interest, he must do so by registered instrument as provided in the Act. Partition, release, surrender, are all forms of transfer of immovable property but so far as the Act is concerned they come under no restrictions and by s. 9 "a transfer of property may be made without writing in every case in which a writing is not expressly required by law."

In this category also come charges of immovable property. The Act does not address itself to the question: How is a mortgage right to be charged? or even to the question : How is any immoveable property to be charged? Whether a charge is a transfer or is not a transfer at all, the Act puts no restrictions upon the manner in which charges can be made or given over immovable property. It recognizes by s. 100 that by the act of the parties immovable property may be made security for the payment of money in ways which do not amount to a mortgage, but it does not limit or define those ways.

In Mulraj v. Vishwanath the Judicial Committee dealt with the question of the manner in which a charge could be given over an actionable claim. The appellant had in 1909 taken what was in form an absolute assignment in writing of the moneys payable under a policy of insurance. The respondents claimed that in 1904 the assured had desposited the policy with them as security for a debt then existing and for any indebtedness which might subsequently arise. The deposit was unaccompained by anything in writing. Lord Moulton said:

"In the present case the respondent bases his claim on a deposit of the policy and not under a written transfer, and claims that this creates a charge on the policy. The section specifically enacts that such a proceeding shall not have any such effect; such a charge can only be created by a written document. It follows that the respondent acquired no right whatever to the policy or its proceeds by reason of the deposit."

Thus the Board rejected the respondent's contention that s. 130, as amended in 1900, referred to the transfer of absolute rights and not to the creation of a mere charge.

When we turn to the Registration Act, we find that the language of cl. (b), sub-s. 1, s. 17 is not limited expressly by reference to particular kinds of transfer. An instrument comes within cl. (b), if it purports or operates to create, declare assign, limit or extinguish any right, title or interest to or in immovable property. The words "any right, title or interest" are intended to be very wide, they are the words usually employed to denote what passes upon an execution sale. In drawing a distinction between a charge and a mortgage it has often been said that while a mortgage, even a simple mortgage, involves the transfer of an interest in specific immovable property a charge transfers no such interest. The entire interest remaining in the owner, the consequence has been drawn that a charge cannot be enforced against a purchaser for value without notice: Royzuddi v. Kali Nath , Gobinda v. Dwarka Nath and Akhoy v. Corporation of Calcutta. Even so, however, I think a mere charge on immovable property is within the clause of s. 17. It is a right in immovable property; a right to have it brought to sale to realize a sum of money to be paid to the chargee.

I cannot say that I have been able to find any real authority upon the point. An opinion to this effect was intimated by Richards, J., in Mania v. Bachchi but in that case he held that a charge was good against a purchaser for value without notice. Again Bengal Banking Corporation v. Mackertich was a case of an agreement "to assign by way of mortgage." It is certainly true that by a charge the title is not transferred; on the other hand, as Cotton, L.J., said in Ashworth v. Munn at page 374 "if a charge, then it was an interest." Again, while the language of cl. (b), s. 17, is too general to be read as stopping short at a point between a simple mortgage and a charge, it must be admitted to be a defect in the Transfer of Property Act that it maintains a distinction between these two species—distinction with important consequences—while in no way exhibiting the differentia.

For the like reason under s. 49, Registration Act, a plaintiff who sues to enforce a charge on land created by an instrument must be taken to put forward the instrument as affecting the land or as evidence of a transaction affecting the land. The language of s. 49 has given rise to considerable difficulty, but I think it safe to say that cls. (a) and (c) have reference to the fact that certain kinds of transfer of immovables can only be effected by written instruments (e.g., sale, mortgage other than, mortgage by deposit, lease, gift); whereas in other cases, (e.g., partition, surrender release) the transaction is not required to be in writing but, if it is in writing, the instrument is required to be registered. Clause (a), as I think, deals with the former case, cl. (c) with the latter. In either case the circumstance which subjects the instrument to the requirement of registration is that it purports or operates to create, declare, assign, limit or extinguish a right, title or interest to or in the immovable property. It is this which makes the registration necessary, and if it be not registered, it is in this that the instrument is to fail of its effect. The right, title or interest is, as a consequence, not created, declared, assigned, limited or extinguished even although no written instrument was necessary. The Registration Act is not to be defeated in such a case by a contention to the effect that as no written instrument was necessary the transaction itself is independent of the written instrument which can be regarded simply as evidence thereof.  Clause (c) makes the instrument inadmissible as evidence of the transaction.  Unless, therefore, there has, in fact, been a transaction independent of the written instrument, and capable of proof without the evidence thereof, the right, title or interest in question has not been created, declared, assigned, limited or extinguished. This is the principle which in my judgment must be applied to these debentures so far as they purport or operate to create a right in immovable property.

The language of the debentures as is usual is very wide but we must not test the argument on behalf of the liquidators by asking ourselves whether, if the debentures had purported merely to confer a charge over they Bengal National Bank's book debts or ledger balances or overdrafts, they would be an effective charge over any sums repayable in respect of loans given upon security of title-deeds. I put aside the suggestion that either in the General Clauses Act or in the Registration Act there is anything to the effect that a mortgage-debt is not a debt, or that it is nothing but an interest in land. I accept as correct the view that the word "operate" in the phrase "purport or operate" in cl. (b), s. 17, Registration Act, refers to the immediate intention of the instrument and not to ultimate consequences or collateral effects: Jivan AH v. Basa Mal. For simplicity we may take first the case of a loan originally advanced by the Bengal National Bank upon security of title-deeds before the date of these debentures. Is there anything to show that a charge cannot be given over such a debt by an instrument in writing but unregistered? As the debt is not an "actionable claim" it is not touched by Chap. VIII, Transfer of Property Act, and even the requirement of an instrument in writing does not apply to any transfer of it. It is not possible on the face of the Transfer of Property Act to maintain that a debt or any other form of property cannot be transferred unless it has been especially made transferable and a special method provided by the Act. Sections 6 and 9 are express to the contrary. If in 1900 the Legislature meant to enact that no debt, if secured, should be transferred save by transfer of the security and in manner prescribed for a transfer of the security, one method of procedure would have been to say so. If the idea was that when such a debt ceased to be an "actionable claim" an intending transferor minded to deal with it as a debt would be paralyzed by the absence of a special provision applicable to the case, I think, this reasoning omitted to notice a salient feature of the Act. The position, however, was this. The Act as it then stood appeared to provide two ways in which mortgages could be assigned : one by registered instrument with or without other safeguards, the other by mere assignment of the debt which under s. 8 drew after it the security. The provisions of ss.'54 and 59 were brought to nothing by Chap. VIII and s.8.

This, moreover, was not the whole of the difficulty. There was trouble over the question whether the provisions of the then existing s. 135 should apply to assignments of mortgages and over the right of officers of the Court to take such an assignment in view of s. 136: see per Prinsep, J., in Muchiram Batik v. Ishan Chunder. The arguments in favour of regarding mortgage-debts as coming under Chap. VIII may have been right or wrong, but they had always been resisted on the ground that in Chap. IV there were special provisions for mortgages and a special procedure for recovering money due thereon and that the object of the Legislature was to make a simple law dealing exhaustively with this subject and to provide once for all in this chapter of the Act for all matters relating to mortgages of immovable property.

In settling this controversy the Legislature may well have thought that if mortgage-debts were included from the class of actionable claims they would no longer escape the provisions of Chap. IV. It was open to it, especially as s. 135 was being abrogated, to leave such debts in the class of actionable claims but to provide that when dealt with as such, the transfer should not carry the security under s. 8. It was, as it seems to me, careful to avoid such a divorce between debt and security, doubtless thinking that it is one thing for an informal transfer to fail of effect and another thing for an informal transfer to destroy the asset.

Now the judgments in Sakhiuddin Saha v. Sonaulla Sircar (supra p. 163) (Richardson, J.) and Perumal Animal v. Perumal Naicker (supra p. 164), (Wallis, C.J.), proceed upon the basis that it is more reasonable to hold that the provisions in Chap. IV, Transfer of Property Act, are intended to have effect over all mortgages and dealings with mortgage rights than to hold that transfer of such rights may in effect be made by mere oral assignment and in a manner not specifically provided by the Act or any other law applicable thereto. The draftsmanship of 1900 is not too good but so far the intention of the Legislature can be discerned, I think it is impossible to resist this argument. No doubt, a mortgagee may release his security and then proceed to assign by unregistered instrument and if ever such a transaction is met with, it will give rise to little difficulty. But the giving up of the security is a transaction between himself and the mortgagor. The permissible method of transfer would seem to depend upon what the debt in fact is and it is just because on principle the security must follow the debt that the debt must be dealt with as Chap. IV provides, if it is in fact secured. We are not here concerned with promissory notes or sales in execution. Putting aside transfers which come under any special law, I agree with the view taken by Wallis, C.J., of the intention of the Transfer of Property Act, viz., that in general mortgage-debts should only be transferred by way of sale, sub-mortgage, exchange or gift with the mortgagee's interest in the land and, therefore, (speaking broadly) by registered instrument; Perutnal Ammal v. Perumal Naicker (supra p. 164) at page 201. The view taken by Krishnan, J., in Elumalai's case (supra p. 164) seems to me to depend upon the supposition that the debt will not draw after it the security unless the case comes within the penultimate clause in s. 8, Transfer of Property Act, or unless the debt is transferred as a secured debt. But no statute has said so and between assignor and assignee elementary principle is all the other way. Moreover, if a secured debt is to be dealt with as unsecured, it is being dealt with either as an actionable claim (so that s. 8 would apply) or as an innominate form of property free even from the provisions of Chap. VIII which cannot have been intended.

It seems to me that the same reasoning must apply to a charge, so that a debt secured upon specific immovable property, while it can without writing be charged as an interest in land, must be charged by a registered instrument, if it is to be charged by an instrument at all. If it cannot be charged as an actionable claim it must be charged as an interest in land under the Transfer of Property Act which deals with both the charges and with this kind of interest in land. The decision of Richardson, J., already cited, was in a case of partitition and the Transfer of Property Act does not deal with partition by any special provisions. It is true that the language of s. 49 appears to be exceeded if this view is right but it is not really exceeded if we are obliged to regard the mortgage-debt solely as part of the mortgagee's interest which is an interest in land, or as transferable or chargeable only as attendant thereupon, and not as a right independent thereof. It cannot, I think, be that though the debt cannot be charged on its own account as an actionable claim, it will be divorced from the security and charged by an informal document which cannot take effect upon an interest in land.

Coming now to the case of debentures, cls. 3 and 4, sub-s. 2, s. 17, Registration Act, make it clear that, save as therein provided, debentures are subject to the same requirements in the matter of registration as other forms of non-testamentary instruments. There is no room here for some such reason as was employed by the Court of Appeal in In re Standard Manufacturing Co., where it was held that debentures did not come within the earlier Bills of Sale Act. Section 137, Transfer of Property Act, provides that nothing in Chap. VIII applies to stocks, shares or debentures or to instruments which are for the time being by law or custom negotiable or to any mercantile document of title to goods. The meaning of this section seems to be that debentures and certain other things may be transferred otherwise than in the manner provided by s. 130 and that the effect of transfer is not controlled by the subsequent sections. I do not think it has reference to debentures considered as transfers but only as the subject matter of a transfer. But if a mortgage-debt is not an actionable claim, nothing would seem to depend upon the decision of this point. Again, proviso 4, s. 109, Companies Act, seems merely to mean that a mortgage or charge granted by a company is not to be deemed to be an interest in immovable property merely by reason that it comprises or takes effect over debentures held by the company and that such debentures constitute a charge on immovable property of the company issuing the same. The proviso is taken from the English Companies Act and has reference solely to the purposes of s. 109, though it may well be that cases under the Statute of Mortmain Myers v. Perigall , and under s. 4, Statute of Frauds Driver v. Broad , drew attention to the need for this proviso.

It is necessary, however, to consider the effect of s. 17, Registration Act, upon a floating charge over the whole undertaking, properties, assets and interests, present and future of the issuing company. The opening words of s. 17, make the liability to registration depend upon the district in which the immovable property is situate. There are no such words in s. 18. Section 21 deals with non-testamentary documents relating to immovable property—a phrase which is wider than the scope of s. 17. It provides that no non-testamentary document relating to immovable property shall be acceptable for registration unless it contains a description of such property sufficient to identify the same. By s. 23 all the documents required to be registered under s. 17, and three classes of documents, which under s. 18 are registrable at the option of the party, are required to be presented for registration in the office of the Sub-Registrar within whose sub-district the whole or some portion of the property to which the document relates, is situate. By s. 51 all documents or memoranda registered under ss. 17 and 18 which relate to immovable property and are not wills, are required to be registered in Book 1, and by s. 55 an index is to be kept of the names of the parties and another index shall contain such particulars mentioned in s. 21 that is, particulars of the description of the property as the Inspector-General from time to time directs. By ss. 64 and 65, the Sub-Registrar, where the whole of the property is not within his own sub-district, has to make a memorandum and send it to every other Sub-Registrar in whose sub-district any part of the property is situate or to the Registrar of every district in which any part of the property is situate. These last are provisions upon which the utility of registration almost entirely depends and s. 21 should be considered with reference to them.

Now a floating charge is a present charge though it does not finally attach or crystallize upon any specific property until the happening of some event which puts an end to the right of the company to deal with the property in the course of the business. I will not here set out the description given of floating charge by Lord Macnaghten in Tailby v. Official Receiver, Government Stock, etc., Co. v. Manila Ry. Co. , Illingworth v. Holsworth , as these have often been reported but in Evans v. Reval Granite Quarries Ltd. , Buckley, L.J. summarizing the decisions said: "A floating security is not a future security ; it is a present security which presently affects all the assets of the company expressed to be included in it. On the other hand, it is not a specific security. The holder cannot affirm that the assets are specially mortgaged to him. The assets are mortgaged in such a way that the mortgagor can deal with them without the concurrence of the mortgagee. A floating security is not a specific mortgage of the assets plus a license to the mortgagor to dispose of them in the course of his business but is a floating mortgage applying to every item comprised in the security but not specifically affecting any item until some event occurs or some act on the part, of the mortgagee is done which causes it to crystallize into a fixed security."

The two debentures now before the Court charged the company's property and assets present as well as future. In the absence of a stipulation to qualify the elasticity of the floating charge, it leaves the company at liberty to create specific mortgages or charges in priority to itself Florence Land Co., and Colonial Trust , but it is not uncommon to insert in a debenture words to the effect that the floating charge is not to authorize the company to create any mortgage or charge ranking in priority to the debenture. Of the two debentures before us, one contains such a restriction, though the other does not.

In applying s. 17, Registration Act, to such instruments as these it is difficult to deny that the requirement of registration must attach to all specific property capable of identification at the date of execution of the instrument and that as regards immovable property every sort of which the company was at that time possessed, the instrument in the absence of registration cannot take effect. I am not prepared to hold that although a specific mortgage of such property would require registration a charge given upon such property would be exempt from this requirement by reason merely of the fact that the right of the company to use its assets in the course of its business is a condition of the charge. Registration of the floating charge with respect to specific immovable property is by no means without its use.

Again, speaking still of specific property ascertainable at the date of debenture, it is to be observed that future interests in property may be treated or transferred (cl. s. 5, Transfer of Property Act), and that cl. (b), sub-s. (1), s. 17, Registration Act, contains the words "in present or in future…..whether vested or contingent."

Even so, however, the application of the Registration Act to debentures bristles with difficulty. The language, the machinery and the objects of the Registration Act would seem to confine s. 17 to property which is specific in the sense of being ascertainable and capable of identification at the date of the instrument. The two debentures before us give no particulars of any property and I do not see how either instrument could have been accepted for registration by any Sub-Registrar except indeed upon the footing that there is nothing on their face to show that the Bengal National Bank had any immovable property, on which footing they could have been registered in Book 4. "A floating charge on the undertaking or property of the company" is a form of charge recognized by the Statute Book as may be seen from cl. (e), s. 109, Companies Act. It is of the essence of such a charge that it will take effect over property which may in the future be acquired in the course of trading; that is to say, over property which cannot possibly be identified at the time of the creation of the charge. As the word " debenture" does not necessarily import a charge of this character, there is room for a contention to the effect that this form of charge is outside the requirements of the Registration Act, both upon a strict construction of its language and also upon the consideration that the machinery of the Registration Act cannot cope with it, there being no certainty whether the property affected would turn out to be property in one part of India or another, or whether it would be derived from A or from B. To uphold this contention would, however, make a very serious breach in the Registration system, and in so far as a debenture creates a charge upon immovable property possessed by the company at the time of the instrument, the breach would seem to be unnecessarily wide. In the present case, for example, it seems more reasonable to hold that to make these debentures effective over the immovable property held by the Bengal Nationl Bank in 1923, they should have contained a sufficient description of such property and should have been registered accordingly.

It may, however, be contended that under s. 21 a document which creates interest in immovable property should be refused registration altogether unless all the immovable property comprised in it can be, and is, identified. Alternatively it may be contended that these debentures cannot take effect as regards immovable property ascertainable and identifiable in 1923, but that they are good as regards property since acquired but not capable of identification at the time; that is all property which is excluded by the test quod certum reddi potest.

I did not understand the learned Advocate for the Imperial Bank to advance either of these contentions before us, and in the present case I am not prepared to give effect to them. By the decree dated 6th May, 1929, made in the debenture-holder's action, it was declared :

"And the plaintiff Bank by its Advocate admitting that by reason of the fact that the two debentures in the plaint in this suit mentioned having not been registered in accordance with the provisions of the Registration Act of 1908 the said debentures did not operate to affect any immovable property of the defendant Bank, it is declared that the said debentures constitute charges upon all the undertaking, property, assets including uncalled capital, of the defendant Bank other than the immovable property of the defandant Bank."

The contention of the debenture-holders before us has throughout been that their security takes effect upon the debts which draw after them the security given therefor; and that it is possible in law to create such a charge otherwise than as a charge upon the Bangal National Bank's interest in the immovable property. This contention failing, it appears to me that the proper direction to be given upon the summons now before us on appeal is that the Imperial Bank is not entitled by virtue of the said debentures to any charge upon the sums payable to the Bengal National Bank in respect of advances or upon its security therefor in any case in which such advances were, at the date on which the charge created by the said debentures ceased to float, secured by the deposit of title-deeds and such title-deeds had not at the said date been deposited with the Imperial Bank.

I would only add that I greatly regret this conclusion.

The appellants must pay the liquidators their costs of this appeal. The liquidators may take their attorney-and-client costs out of the assets of the Bengal National Bank in due course of administration.

C.C. Ghose, J.—I agree.

[1938] 8 Comp. Cas. 241 (ALL.)

High Court of Allahabad

Indra Sugar Works Ltd.

v.

Official Liquidators, Indra Sugar Works Ltd.

Harries, J.

August 19, 1938

 

 N.P. Asthana, E.V. David, Gopi Nath Kunzru and Ram Nama Prasad, for the Applicants.

Shah Zamir Alam, Shiv Charan Lal and C.B. Agarwala, for the Opposite Parties.

JUDGMENT

Harries, J.—This is an application by Messrs. Maheshwari Brothers under Section 183 of the Indian Companies Act praying that this Court should set aside the decision of the Official Liquidators in which they held that the petitioners' claim for the sum due under an agreement dated December 2, 1934, was not trust money and that the applicants were merely ordinary creditors in respect of the same.

The applicants Messrs. Maheshwari Brothers entered into an agreement on December 2, 1934, with the Indra Sugar Works Ltd., which is now in liquidation. By that agreement the applicants were appointed the sole selling agents of the company for the period of one year. It was a term of the agreement that the applicants should deposit a sum of Rs. 50,000 with the Company as security for the fulfilment of their obligations under the agreement and such money was to a carry interest at the rate of 5% per annum and was to be refunded to the applicants at the date of the expiry of the agreement. According to the terms the agreement was to expire on November 30, 1935. On this latter date the applicants ceased to be selling agents of the Company and demanded a refund of the security money which they had deposited. On failure to obtain this or any sum from the Company the applicants on January 3, 1936, applied to this Court for an order winding up the Company. On May 5, 1936, a winding-up-order was passed but no liquidators were then appointed. In delivering judgment on the winding up petition the learned Judges who heard the case framed certain issues and directed that the case should be again listed before that Bench on October 5, 1936, for the decision of such issues. On September 18, 1936, however, Liquidators were appointed and on January 18, 1937, the Bench who heared the winding up petition passed a further order directing the Liquidators to proceed in certain matters and making it clear that they did not think it necessary to proceed further and decide any of the issues which they had previously framed. It appears to me that the effect of this order of January 18, 1937, was to leave all matters arising in the winding up to be dealt with in the first place by the Liquidators. The moment the Liquidators were appointed they would in the ordinary course have moved in all the matters which have been made the subject-matter of the issues. The Bench on January 18, 1937, made it abundantly clear, in my view, that they did not propose to proceed any further with the decision of any of the issues framed.

One of the issues which had been framed related to the very question which is now before me and it has been argued by Mr. David that I have no power to deal with this application and that the matter must be decided by the Bench which passed the winding up order. As I have pointed out that Bench has made it clear that it does not propose to proceed any further in the matter and has left the questions to which the issues related to be dealt with by theLiquidators in the ordinary course of Liquidation.

The Liquidators called upon all creditors to establish their debts and the applicants claimed that the Company were indebted to them to the extent of Rs. 55,437-8-0 and they further claimed that in respect of this sum they were preferential creditors or chargees. The Official Liquidators allowed the petitioners' claim for Rs. 52,694-8-0 but disallowed their claim to be preferential creditors or chargees in respect of this sum. There is no dispute now as to the correctness of the Official Liquidators' finding as to the amount due and the only contention now is as to whether or not the applicants are preferential creditors or chargees for this sum.

Mr. David on behalf of the applicants has argued that there was a fiduciary relationship existing between the parties and that the sum of Rs. 50,000 deposited with the Company must be regarded as trust money and that being so he is entitled to reclaim such money in preference to the other creditors. Secondly he has argued that the agreement between the parties creates a second charge and that in the events that have happened he is now the holder of a first charge upon all the assets of the Company. I shall deal with these contentions separately.

In my view this agreement did not create a relationship of trustee and cestui qui trust between the parties. The relationship created was rather one between creditor and debtor. In my view this point is completely covered by a Bench case of this Court, viz., In the matter of Annapurna Co. Ltd. re Dr. S.S. Tug. The facts of that case were that by an agreement entered into between Dr. Tug and the Company the latter agreed to employ Dr. Tug's 9 son. Dr. Tug or his son agreed to furnish security for Rs, 10,000 which money was to be repaid by the Company upon the expiry of the term of employment. It was further provided that in case the Company went into liquidation the applicant would have the position of a preferential creditor. The sum of Rs. 10,000 was paid to the Company and the latter utilised Rs. 3,500 from the said sum to purchase a mill and used the remainder of the money in paying off a creditor of the Company. Upon the Company going into liquidation the Liquidators sought the directions of the Court to sell the mill which had been purchased out of part of the moneys which had been deposited with the Company as security. Dr. Tug objected and claimed that the sum of Rs. 10,060 deposited with the Company was in the nature of turst money and which could be followed. That being so, he contended that he was either the owner of the mill or had a first charge upon it by reason of the fact that it had been purchased out of the moneys which he had deposited with the Company under the agreement of employment. A Bench of this Court held that the agreement in question did not create a trust or anything in the nature of a trust. The Bench emphasises that the document contained no direction that the money handed over by Dr. Tug was to be kept aside in trust for him or was not to be utilised by the Company for any purpose. That being so it was held that Dr. Tug was merely a creditor of the Company and therefore could not claim any interest in the mill which had been purchased out of the moneys he had deposited with the Company.

The same view appears to have been taken by the Bombay High Court in the case of G.K. Malvankar v. The Credit Bank of India Ltd., and In re Manekji Petit Manufacturing Co. Ltd.

A contrary view was taken by a single Judge of the Madras High Court in In the matter of Hindustan Commercial Bank (India) Ltd., Madras. In that case Gentle, J., held that where an employee of a bank deposits a certain sum for security for good behaviour and honesty and as a part of the engagement transaction, the security deposited is placed upon fixed deposit in the name of the employee, the moneys are held by the bank in trust. He further held that the agreement to pay interest on such money deposited cannot destroy the character, as such, of those moneys and that if the bank subsequently became insolvent the trust moneys could be followed.

There is one very important distinction of fact between this Madras case and the present case. In the Madras case the sum of money handed to the Bank by way of security deposited was placed to a special account in the bank, that is, was placed in a fixed deposit account in the name of the employee who deposited such sums.

In the present case the receipt which is before me shows that the Company merely acknowledged the receipt of Rs. 50,000 from the applicants and did not deposit it in any account in the name of the applicants. In fact Mr. David tells me it was paid into the account of the Company with the Imperial Bank of India and was undoubtedly used as the money of the Company for carrying on the business. Even if this distinction of fact is not of importance, I am unable to follow the view expressed by the Madras High Court and I am bound to follow the Bench decision of this Court which is binding upon me as a single Judge. I therefore hold that on the facts of this case the applicants are not entitled to any preferential treatment in respect of this debt by reason of any fiduciary relationship created by the agreement. In my view they are ordinary creditors for this sum under the agreement.

Clause (14) of the agreement is in these terms:—

That the amount of security money will be the second charge on the machinery and other goods of the company.

It has been contended by Mr. David that the agreement clearly creates a charge in respect of the security money handed over to the Company and at first sight that would appear to be the case. On the other hand it has been argued that this charge is of no effect by reason of the fact that it was not registered. It is admitted on behalf of the applicants that no registration took place. Reliance has been placed on behalf of the Liquidators on Section 109 of the Indian Companies Act, 1913, which was in force when this sum became due. By that section all mortgages or charges on any immoveable property or floating charges on an undertaking or property of the Company shall, so far as any security on the Company's property or undertaking is concerned, be void against the Liquidators and any creditor of the Company unless the mortgage or charge together with the instrument creating it is filed with the Registrar for registration as required by the Act within 21 days of its date. No such registration took place and it is therefore contended that this charge is void as against the Liquidators. Mr. David, on the other hand, contends that this is not a floating charge but a charge upon the moveable property of the Company and as such it did not require registration in the year 1935 though after the amendment of the Companies' Act in 1936 such a charge would require registration. In my view the charge created is clearly a floating charge and as such required registration. It must be remembered that the Company was a going concern and it was clearly never the intention of the parties that the property actually charged should remain for ever subject to the charge. If that was the intention then the goods of the Company could never have been sold and the machinery of the Company could never have been replaced when it became obsolete. It appears to me that the parties intended to create a floating charge, that is a charge which would fasten on the property when the time arrived for the charge to be enforced. It has been held by the Privy Council in the case of the Imperial Bank of India Ltd. v. The Bengal National Bank Ltd., that a floating charge can be created on part of the assets of a Company and such was the case here. The principal tests as to whether a charge is a floating one are:—

        (1)            Is it a charge upon all or a certain class of assets, present or future?

        (2)            Would the assets charged in the ordinary course of business be changed from time to time?

(3)            Has the Company power until such step is taken by the chargees to carry on the business of the Company in the ordinary way?

It appears to me that if these tests are applied to the present charge it is clear that the charge is a floating one. That being so, the charge is void as against Liquidators for non-registration by reason of Section 109(1)(e) of the Indian Companies Act, 1913.

It has been further argued that the charge is void against the Liquidators by reason of Section 109(1)(c) as it is a charge on immoveable property and as such requires registration. In certain circumstances machinery might be immoveable property but it is difficult for me upon the materials before me to decide whether the machinery charged in this case was or was not affixed to the soil as to become immoveable property. That machinery can be immoveable property is clear from the definition of that latter term in Section 3 (29) of the General Clauses Act. However, on the material before me it is impossible for me to say whether in this particular case the machinery should be regarded as immoveable property. That being so I am unable to hold that the change is bad by reason of Section 109(c). My findings, however, on the other points are sufficient to dispose of this case.

The result therefore is that this application fails and is dismissed. I shall consider the question as to whether the applicants should pay any costs to the Liquidators on Friday August 19 when the Official Liquidator will be present.

Harries, J.—I have considered the question of costs in this case. In my view the liquidators are not entitled to any costs and neither is the creditor who appeared to oppose the application because no notice was served on him and he appeared voluntarily.

 

[1970] 40 COMP. CAS. 751 (AP)

HIGH COURT OF ANDHRA PRADESH

Marturi Umamaheshwara Rao

v.

Pendyala Venkatrayudu

VENKATESAM AND VAIDYA, JJ.

APPEAL NO. 269 OF 1963

JULY 1, 1968

 K. B. Krishnamoorthy and T. Raman for the appellant.

B. Ramalingeswara Rao for the respondent.

JUDGMENT

Venkatesam, J —This is an appeal preferred by defendants 1 to 7 against the judgment and decree of the learned Subordinate Judge, Rajahmundry, in O.S. No. 9/61 on his file.

The relevant facts may be stated as follows: Gopal Glass Works Ltd., a company registered under the Indian Companies Act of1913, having its registered office at Rajahmundry, borrrowed Rs. 60,000 from late P.S.R.V. K. Ranga Rao on January 19, 1948, and for its due repayment, executed a mortgage-cum-debenture deed (Ext. A-9) dated June 5, 1948, agreeing to repay the same with interest at 71% per annum on the terms and conditions set out therein. The bond provided for the issue of debentures, but eventually they were not issued. Though some attempts were made to have the bond registered with the Registrar of Joint Stock Companies under section 109 of that Act, the bond was also not registered.

The plaintiffs' case is that the plaintiffs, who are fourteen in number, are the legal representatives of late Rangarao (hereinafter referred to as the mortgagee) and they have agreed that by virtue of a registered partition deed, the 1st plaintiff alone became entitled to the money due under this deed, and prayed for a decree in his favour and, if that is not possible, in favour of all the plaintiffs. As per the terms of the bond, the interest has to be paid every year and the principal shall be repayable on or before June 5, 1954, and in default of payment of interest in any year, the entire principal money as well as the interest accrued shall become immediately payable and security become enforceable after the expiry of 30 days from such due date. The company having committed default in payment of even the first year's interest (which was due by June 5, 1949), the entire principal and interest became payable by July 5, 1949. One Boda Venkataratnam obtained a decree against the company in O.S. No. 39/49 on the file of the District Munsif's Court, Rajahnmndry, which was transmitted to District Munsif's Court, Peddapuram, for execution and in E.P. No. 87/50, some of the suit mortgaged properties were sold in auction on July 26, 1951, and purchased by the 1st defendant for Rs. 3,045, subject to the debt due under Ext. A-9. The sale was confirmed on September 1, 1951, as evidenced by the sale certificate, Ext. A-25. The 1st defendant applied in E.A. No. 38/52 for delivery of the property purchased by him to one Palakurti Kameswararao on behalf of Kotha Suryanarayana, on the ground that the said Kotha Suryanarayana agreed to purchase the properties from the 1st defendant for Rs. 3,100 under the agreement dated January 15, 1952. On that application the court passed an order that the property may be delivered to Palakurti Kameswararao instead of the 1st defendant. The property was accordingly delivered to Kameswararao on January17, 1952, as per the delivery receipt, Ext. B-3. It may be mentioned here that on the date the sale took place, the company was a going concern. Subsequently, as the company had sustained losses it went into voluntary liquidation by resolution of the directors dated May 17, 1958, and the resolution of the extraordinary general body dated June 10, 1958 (Ext. A-15). After the completion of the liquidation proceedings, the name of the company was also struck off by the Registrar of Companies and the company ceased to exist. After the death of the mortgagee, the plaintiffs issued notices to the defendant No. 1 demanding repayment of the mortgage debt, but he failed to do so, and hence they filed the present suit on March 20, 1961.

The suit was resisted by the 1st defendant, as well as by defendants 2 to 7, the legal representatives of Kotha Suryanarayana, on several grounds. The 1st defendant contended that the Subordinate Judge's Court, Rajahmundry, had no jurisdiction to entertain the suit as per section 10 of the Indian Companies Act, 1956 (hereinafter referred to as the Act). The debentures and debenture certificates not having been issued as per the mortgage deed, the mortgage itself is void and unenforceable, and the mortgage deed as well as the debentures not having been registered with the Registrar of Joint Stock Companies, the mortgage became void and unenforceable under section 125. As the mortgage itself was void, even though the properties were sold subject to the mortgage, the 1st defendant is not liable to discharge the same. The properties purchased by the 1st defendant having been delivered through court to Kameswararao, the remedy of the plaintiffs is only to proceed against Kotha Suryanarayana, who, it was contended, was a bona fide purchaser for value without notice of the mortgage. The 1st defendant did not undertake to discharge the mortgage liability. He did not sell any of the items of the machinery mortgaged under Ext. A-9 nor realised any substantial sums thereby and that he is not a trustee nor personally liable. He never gave any personal undertaking to discharge the mortgage debt. Some of the mortgaged properties were subject to the first charge in favour of one Chauhan as stated in the deed itself. As the mortgage deed was not registered under the Companies Act, the amount thereunder became immediately payable under the provisions thereof and the suit is barred by limitation.

Defendants 2 to 7 were impleaded as parties to the suit on 16th February, 1962, by an order on LA. No. 789/61. They substantially adopted the contentions of the 1st defendant and also raised the plea of limitation. It was averred that as per the terms of the mortgage deed executed on 5th June, 1945, both the principal and interest became due on the failure of payment of one year's interest, and as the first year's interest itself due on 5th June, 1949, was not paid the suit should have been filed within 12 years thereafter, i.e., 5th June, 1961, but inasmuch as they were impleaded on 16th February, 1962, the suit as against them was time barred.

On these contentions, the learned Subordinate Judge framed appropriate issues and he rejected all the material contentions of the defendants and granted a preliminary mortgage decree directing the defendants to pay on or before 29th March, 1963, or any extended date Rs. 70,076.34 with interest at 51/2% per annum on Rs. 60,000 from the date of the decree. In default of such payment, he directed that the plaintiffs may apply for a final decree for sale of the mortgage property and on such application, the mortgage property or sufficient part thereof shall be directed to be sold and the money realised by such sale shall be paid to the 1st plaintiff under this decree. The 1st plaintiff was also given the liberty to take such further proceedings as are open to him against the 1st defendant, if any part of the plaint schedule property did not exist.

Aggrieved by this judgment and decree, this appeal was preferred by the defendants.

Sri T. Raman, the learned counsel for the appellants, raised before us the following contentions:

        (1)            The Subordinate Judge's Court, Rajahmundry, had no jurisdiction to entertain the suit;

(2)            The mortgage deed, Ext.A-9, is void and unenforceable under section 125 of the Companies Act and as such the suit is not maintainable;

(3)            Kotha Suryanarayana, the predecessor-in-title of defendants 2 to 7, was a bona fide purchaser for value without notice, and the properties purchased by him were not subject to the mortgage debt;

        (4)            The suit is barred by limitation.

After hearing Sri Raman and the counsel for the respondents, we posted the case for judgment today, giving leave to Mr. Raman to cite any authorities which he wanted. Today Sri K. B. Krishnamurthy, appearing for Mr. Raman raises a few more contentions, viz.:

(i)             Ext. A-9 had only created a floating charge but not a fixed charge, and, therefore, the only remedy of the plaintiffs was to sue for specific performance of the contract, Ext. A-9, for the issue of debentures.

(ii)            The several clauses in Ext. A-9 provided only for redemption of the debentures and for payment of the interest due thereunder but not for payment of interest or principal under the mortgage deed, and as the mortgage debt became immediately payable and the suit filed beyond 12 years from June 5, 1948, is barred by limitation.

We shall now consider the validity of all these contentions. The first contention of the appellants is that it is only the District Court, Rajahmundry, that had the jurisdiction to entertain the suit, but not the Subordinate Judge's Court. In order to appreciate this contention, it may be relevant to note that the suit was filed, as is evident from paragraph 14 of the plaint, to enforce the mortgage by sale of the mortgaged properties under Order 34, rule 1, C.P.C., and for recovery of the suit amount of Rs. 60,000 with interest at 5 1/2 per annum and costs by sale of the mortgaged properties or a sufficient part thereof. The suit was filed only against the 1st defendant purchaser of the suit properties, subject to the mortgage debt. By way of abundant caution, defendants 2 to 7 were also impleaded as the 1st defendant contended that he sold the properties in favour of Kotha Suryanarayana, their predecessor-in-title. The relevant provisions of the Act may now be referred to.

Section 2(ii) defines 'court' to mean, with respect to any matter relating to a company, the court having jurisdiction under this Act with respect to that matter in relation to that company, as provided in section 10. Section 10 lays down that the court having jurisdiction under this Act shall be —(a) the High Court having jurisdiction in relation to the place at which the registered office of the company concerned is situate, except to the extent to which jurisdiction has been conferred on any District Court under sub-section (2). On a plain reading of these provisions it is clear that the High Court or the District Court, where the jurisdiction has been transferred to it, is the court having jurisdiction under this Act, i.e., to deal with matters provided for by the Act, and it is not correct to say that the company court has exclusive jurisdiction in matters falling outside the Companies Act, e.g., suits on contracts or mortgage bonds executed by companies. As already stated, the present suit is filed for recovery of the mortgaged amount by sale of the mortgaged properties under Order 34, rule 1, C.P.C., and we fail to see how the Subordinate Judge's Court at Rajahmundry which is the original court with unlimited jurisdiction cannot entertain the suit. We accordingly reject this contention.

The next argument is that the mortgage deed, Ext. A-9, is void and unenforceable under section 125 of the Companies Act. Section 125, omitting unnecessary words, is in the following terms:

"Subject to the provisions of this Part, every charge created on or after the 1st day of April, 1914, by a company and being a charge to which this section applies shall, so far as any security on the company's property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge, together with the instrument, if any, by which the charge is created or..... filed with the Registrar for registration in the manner required by this Act within twenty-one days after the date of its creation."

The Registrar is given the power to register it in seven days thereafter, if he is satisfied that there is sufficient cause for not filing the instrument within the particular period. Sub-section (2) lays down that:

"Nothing in sub-section (1) shall prejudice any contract or obligation for the repayment of the money secured by the charge."

Sub-section (3) provides that:

"When a charge becomes void under this section, the money secured thereby shall immediately become payable."

According to sub-section (4), this section applies to the following charges:

        (a)            a charge for the purpose of securing any issue of debentures;

        (b)            a charge on uncalled share capital of the company;

        (c)            a charge on any immovable property, wherever situate, or any interest therein;

        (d)            a charge on any book debts of the company;

        (e)            a charge, not being a pledge, on any movable property of the company;

        (f)             a floating charge on the undertaking or any property of the com pany including stock-in-trade;

        (g)            a charge on calls made but not paid;

        (h)            a charge on a ship or any share in a ship;

(i)             a charge on goodwill, on a patent or a licence under a patent, on a trade mark, or on a copyright or a licence under a copyright.

Sub-section (8) provides that the holding of debentures entitling the holder to a charge on immovable property shall not, for the purposes of this section, be deemed to be an interest in immovable property. Section 141 provides for rectification of the register of charges on the ground of any mistake having crept in, and section 142, the penalties for non-compliance with these provisions.

The distinction between a specific charge and a floating charge is well settled in law and may be stated at the outset. A specific charge is one that, without more, fastens on ascertained or definite property or property capable of being ascertained and defined, whereas a floating charge is ambulatory and shifting in its nature, hovering over and, so to speak, floating with the property which it is intended to affect, until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp (per Lord Macnaghten in Illingworth v. Houldsworth). Debentures may create a fixed or floating charge or both. When the charge is fixed, it affects the title of the property and transfer of interest take place immediately and the company can only deal with the property affected, subject to the charge. But when the charge is a floating one, the company may, in the ordinary course of business, deal with the property covered by the charge mortgaging, selling, disposing of it or using it up as the business requires, at any time before the charge attaches. A liability in a floating charge for the recovery of money from the general assets is contingent, i.e., on the occurrence of some event a fixed sum of money becomes recoverable from the specific assets which are in existence at the time. When the contingency arises, the charge is crystallised and then becomes a fixed charge. In other words, a floating charge is an agreement by which the creator of the charge stipulates that in the event of certain contingencies an interest in the property, which happens to be in his possession at the time, shall be conveyed to the holder of that charge.

The scope of section 125 (corresponding to section 109 of the Companies Act, 1913) is well settled by authorities. Its non-compliance only makes the security void, not against everybody but as against the liquidator and any creditor of the company. It leaves the security to stand as against the company while it is a going concern, but does not make the security binding on the liquidator as successor of the company. In Aung Ban Zeya v. Chettiar Firm the suit was filed for recovery of a sum of money as being due on a mortgage of the company's mill and other properties. The mortgagors admitted the debt and the mortgage but pleaded that the mortgagees were not entitled to a mortgage decree because under section 109 of the Indian Companies Act of 1913, the security on the company's property was void against the liquidator or any creditor of the company, since the prescribed particulars of the mortgage and a copy thereof were not filed with the Registrar. That contention was rejected by the trial court on the ground that there was no question in that case of any claim by a liquidator or any creditor of the company, and gave the respondents a mortgage decree. On appeal the same contention was repeated and a Bench of the Rangoon High Court rejected that contention summarily. An application for leave to the Privy Council was rejected by the Bench of that High Court quoting with approval the observations of the Master of the Rolls and Phillimore L.J. in In re Monolithic Building Company, Tacon v. The Company: which construed section 93 of the corresponding provisions of the English Companies Consolidation Act of 1908. With regard to a deed which is not registered, the Master of the Rolls observed:

"Of course the deed is not void to all intents and purposes. It is a perfectly good deed against the company so long as it is a going concern."

Phillimore L.J. observed:

"We have to construe section 93 of the statute. It makes void a security; not the debt, not the cause of action, but the security, and not as against everybody, not as against the company grantor, but against the liquidator, and against any creditor, and it leaves the security to stand as against the company while it is a going concern." (Underlining ours) .

These two cases are authority for the position that the failure to have the mortgage registered under section 125 of the Act does not in any way invalidate it as against the company when it is a going concern, and its only effect is that the security created by the mortgage is rendered void against the liquidator and the creditor in winding up proceedings. In the instant case, as already noticed, even before the company went into liquidation the mortgaged property was sold in execution of a money decree against the company and the property was purchased by the 1st defendant, subject to the mortgage. We also noticed that the company, subsequently, not only went into liquidation but after the conclusion of winding up proceedings its name was struck off the register of companies.

The next case where the facts are similar is a decision of a Bench of the Assam High Court in Bharamar Lal v. Promode Ranjan. In that case a company executed a mortgage in respect of its properties but it was not registered with the Registrar of Companies. Pursuant to the mortgage, the mortgagee was also put in possession of the property. The mortgaged property was subsequently brought to sale and purchased by a third party, who contended that the possession of the mortgagee was illegal and was that of a trespasser, because the mortgage not having been registered, it was void. On a review of the case law, Mehrotra C.J. and C.S. Nayudu J. rejected this contention. The position was summed up by the learned Chief Justice thus:

"To our mind on the plain reading of section 109 it cannot be said that the failure to register the mortgage renders the mortgage invalid and a nullity. The effect of the section is that if the mortgage is not registered, the liquidator is not to take notice of it as a mortgage. The debt will survive and it will be treated on a par with other debts. The property which is the subject matter of the security will be available as the assets of the company to the liquidator for payment to the creditors. The creditors in liquidation will not be affected by the mortgage. This section does not take away the right of the company to deal with its property. If the company can validly deal with its property, any transfer made by the company will be binding on the company. If the company mortgages certain property, any person who subsequently purchases the property from the company will take it subject to the mortgage and section 109 is no bar to the mortgagee enforcing his mortgage as against the transferee of the company simply because it has not been registered under section 109.

In the present case there is no evidence to show that the company has gone in liquidation. It is not the liquidator who in the course of the liquidation proceeding is contending that the mortgage is not binding on him. It is the creditor of the company who in execution of his decree has purchased the property and is contending that his purchase is free from the mortgage. Section 109 does not warrant such an interpretation ....

The question of the liquidator's avoiding it would only arise if the company has gone into liquidation. So far as the creditor is concerned, the right to avoid would also arise in liquidation. The purpose of section 109 in calling upon a company to register the charge or mortgage is for the benefit of the liquidator and the creditors in liquidation. A creditor who has no interest in the property cannot put any restraint on the powers of the company to mortgage its property. Neither the language of section 109 nor the purpose behind it can justify such an interpretation. In effect the contention of the plaintiff is that from the date of the auction purchase he became the owner of the property free from encumbrance. The possession of the mortgagee or his lessee became illegal. What he purchased was the property and not only the right of redemption." (Underlining ours).

The learned Chief Justice extracted the observations of Phillimore L.J. in the case already cited and followed the decision of the Rangoon High Court in Aung Ban Zeya v. Chetttiar Firm. This case is an authority for the position that even though the mortgage is not registered under the Companies Act, a person claiming to have purchased the mortgaged property in execution of a money decree, cannot contend that his purchase is free from the mortgage, nor is section 109 a bar to the mortgagee enforcing his mortgage as against the transferee of the company. We follow this decision and hold that in the case before us, the mortgaged property having been purchased by the 1st defendant subject to the mortgage, it is not open to him to contend that the mortgage is a nullity, or that the properties purchased by him are not subject to the rights of the mortgagee. In this view, this contention also has to be rejected.

One of the contentions raised before us by Mr. K.B. Krishnamurthy is that the remedy of the plaintiffs is only to ask for specific performance of the contract embodied in Ext. A-9 for the issue of debentures within the prescribed period, but not to sue for sale of the mortgage properties. Though this contention was not raised in the lower court, since it goes to the root of the matter, we shall decide that question also. There is no substance in the contention, as we have held that the right to obtain debentures is not the only right conferred on the plaintiff. In our judgment, Ext. A-9 created both a specific as well as a floating charge, and the right to obtain debentures, and the mere fact that the debentures were not issued, would not take away the rights, otherwise conferred on the mortgagee.

We shall now consider the plea of limitation. In doing so, it may be helpful to dispose of this contention in relation to defendants 2 to 7 first. As already stated, their plea was that they were impleaded as defendants on 16th February, 1962. According to Ext. A-9 both the principal and interest become due on the date of the default in paying the first year's interest on 5th June, 1949, and the suit should have been filed against them within 12 years, i.e., on or before June 5,1961 and since they have been impleaded on February16,1962, the suit is barred by limitation. This contention is on the assumption that defendants Nos. 2 to 7 were the purchasers of a portion of the mortgage property. The trial judge found issue No. 3, viz., "Whether the sale to Kotha Suryanarayana by the defendant is true", in the negative and held that by the date the suit was filed or even by now the legal title continued to remain in the name of the first defendant, and if the suit was in time against the first defendant, it would also be within time against defendants 2 to 7. The question incidentally for consideration is, whether there was a valid sale by the 1st defendant in favour of Kotha Suryanarayana. There are a number of circumstances which lead to an irresistible conclusion to the contrary. The first and foremost circumstance is that the property in question consists of land, buildings and also machinery, embedded in earth which constitute immovable property, and any title therein can only be conveyed by means of a registered instrument. Admittedly, there was no registered sale deed. The 1st defendant only stated that there was an agreement entered into between him and Suryanarayana for the sale of the property purchased by him, but an agreement by itself would not convey any title. From the evidence of D.W. 1, Kotha Venkataratnam, son of Suryanarayana (3rd defendant), it is evident that their family had no property except a small Kirana shop in Pithapuram, which they were running till one year after the death of Suryanarayana. It is unimaginable that Suryanarayana would, in those circumstances, have ventured to purchase the suit properties subject to the discharge of the mortgage debt. The evidence of D.W. 1 reveals that he was absolutely ignorant of any details of the property, which would not have been the case, if his father was the purchaser. It is also an admitted fact that the 1st defendant and Suryanarayana married the daughters of sisters. It is, therefore, clear that the 1st defendant hit upon the idea of creating, if possible, a semblance of title in Suryanarayana in order to evade the discharge of the mortgage liability. For all these reasons, we agree with the learned Subordinate Judge that there was no sale in favour of Kotha Suryanarayana and the device of making Kameswara Rao take delivery of the property on behalf of Suryanarayana on the ground that he agreed to purchase the properties, was only a vain attempt to evade the mortgage liability. We have no doubt that the legal title as well as possession of the suit property always remained in the 1st defendant, and even if any of the defendants Nos. 2 to 7 are in possession of the mortgaged property, it is only on behalf of the 1st defendant. It, therefore, follows that the plea of limitation has to be considered only from the standpoint of the 1st defendant.

In the written statement of the 1st defendant, he pleaded that inasmuch as Ext. A-9 was not registered under section 125 of the Companies Act, it became void and the money secured became immediately payable. But, as already stated, the contention of Sri K.B. Krishnamurthy, now, is different, viz., that there is no clause in Ext. A-9 creating a fixed charge and all the clauses only provide for a floating charge. His further contention is that none of the clauses contemplated the payment of interest or the principal advanced under Ext. A-9, apart from the redemption of the debentures. For appreciating this contention, it is necessary to construe the several terms of Ext. A-9. Before doing so, it may be as well to state briefly what preceded the execution of Ext. A-9. By a resolution dated December 2, 1947, (Ext. A-1) the company had first authorised the managing agents to raise a loan to the extent of Rs. 50,000 on the first charge of the assets of the company and then on January12,1948 (Ext. A-4), there was another resolution whereby it resolved that Rangarao should advance Rs. 60,000 as against Rs. 50,000 previously resolved to be borrowed, and that should carry interest at 7½% per annum, and that debentures that may be sanctioned at the ensuing general body meeting be allotted in full to the value of the loan, and that in failure of the issue of such debentures, the directors shall create a first charge on the assets of the company by a registered mortgage deed. Thereafter there was an agreement entered into between the company and Rangarao (Ext. A-9) on January 19, 1948, by which the company requested him to grant a loan of Rs. 60,000 for the working capital of the company, and that the directors would summon a special general body meeting authorising the issue of debentures of. that value to be allotted to the creditor or his nominee and that the debentures will carry interest at 7½% per annum, and that they will have the first charge on all the assets of the company, viz., land, buildings, plant and machinery, manufactured goods, stock-in-trade, raw materials, debts owing to the company, and bank balances. It also provided that if within one month from that date the necessary resolution authorising the issue of debentures was not forthcoming, the company agreed to give a registered mortgage deed covering all immovable properties of the company to the creditor. Pursuant to that agreement, Rangarao paid Rs. 60,000 by a cheque dated January19,1948. Thereafter a special general body resolution was passed authorising the directors to borrow not exceeding Rs. 60,000 at 7% per annum and to issue debentures of the denomination of Rs. 100 each. The board of directors passed a resolution on February17,1948, stating that as no application having been received from any shareholder for debentures in response to the notice dated February 7,1948, the managing agents were authorised to allot and issue all the debentures of the value of Rs. 60,000 to Rangarao or his nominees.

Pursuant to these resolutions, Ext. A-9 was executed on June 5, 1948. This document is styled a debenture deed and executed by the company in favour of Rangarao who was described as the mortgagee. It acknowledged the receipt of the sum of Rs. 60,000 from the mortgagee and recites that it is executed to secure the repayment of the principal monies and the payment of interest thereon for the time being accrued and payable in the manner appearing therein, and that the mortgagee had consented to the terms therein. Ext. A-9 states that 'debenture-holder' means the said mortgagee, Sri Rangarao, his heirs or his legal representatives or administrators for the time being. The important recital is that the company granted and assigned to the mortgagee as security for the debentures all and singular the lands and premises described in the first schedule annexed thereto, with all buildings annexed to or erected thereon or on some part thereof and all trees, fences, hedges, ditches, ways, sewers, drains, water courses, liberties, privileges, etc., and to the security of the mortgagee for the purpose therein mentioned and concerning the same. The company also assigned as security to the mortgagee the machinery, plant, engines, boilers, mill, etc., set out in the second schedule which now are or shall from time to time during the continuance of this security be in or upon or about the premises to hold the same premises unto the mortgagee as security. It also recites that there was a first charge in favour of one H.V. Chauhan, in respect of some of the engines, dynamoes, air-compressors, etc., mentioned in the 3rd schedule and that the mortgagee will have only the rights of a second mortgagee in respect of the same. Clause IX of the deed provides that the principal monies and interest payable in respect of the debentures shall be a first mortgage charge on the premises and plant and machinery and also a first charge on the properties detailed under schedules 1 and 2 and shall be a second mortgage charge ranking next to the first charge in respect of the property in the third schedule. The relevant portion in clause X may be usefully extracted. The principal money as well as the interest accrued and payable up to date shall immediately become payable and the security hereby constituted shall after the expiry of 30 days of grace from such due date become enforceable:

        (a)            if the company makes default in the payment of interest on the stipulated date in any year;

        (b)            if the company makes default in the payment of the principal amount at the time stipulated therein;

(c)            If a distress or execution is levied upon any part of the mortgaged premises or if a receiver of the company's undertakings or property or any part thereof is appointed by any court and such distress or execution is not satisfied or such receiver is not discharged within fifteen days from the date of the levy or the appointment of the receiver, as the case may be;

(d)            if the company committed a breach of any of the presents or provisions herein contained and on its part to be observed and performed;

**        **        **

Clause XI then provides that when and so soon as the principal money secured shall have become immediately payable, the registered holder was entitled to appoint a receiver of the premises charged and such receiver shall conform to all the lawful directions given to him by the mortgagee and the mortgagee may in writing under his hand remove any receiver and appoint another. Clause XIV recites that the debentures shall be redeemed in accordance with the contingency mentioned therein, inter alia:

That (a) the company will on the 5th day of June, 1954, or on such earlier day as the principal money hereby secured becomes payable in accordance with the conditions therein mentioned, pay the registered debenture-holder hereof for the time being the full and entire sum of Rs. 60,000. It also provides that the company will during the continuance of this security pay such registered holder interest on the said principal sum of Rs. 60,000 or such less amount as is unpaid at the rate of 7 per cent, per annum subject to deduction of income-tax by annual payments on the 5th day of June in every year.

To this document were attached three schedules as already referred to. The first schedule consists of land, site, factory office, buildings, etc. The second and third schedules described the machinery. It is needless to point out that the machinery described in schedules 2 and 3 were those in existence on the date of the mortgage, and were embedded in or attached to the earth and therefore formed part of the factory itself and immovable property, along with the site and buildings. Clause IX of Ext. A-9, already referred to, created a first charge for the repayment of Rs. 60,000 advanced by the mortgagee on the properties described in schedules 1 and 2 and a second charge on the property described in schedule 3. In addition to the said first charge the document also created a charge on the items mentioned in clauses III to V and a floating charge on the machinery which may be brought in future on the premises, its uncalled capital, its goodwill and undertaking, the monies now standing or hereafter carried to the credit of the reserve fund, depreciation fund, etc. There can, therefore, be little doubt that in addition to creating a specific charge on the existing immovable properties, Ext. A-9 also created a floating charge. This is also made clear in clause V which says that the charge created by way of floating charge is in addition to the specific charge.

Sri Krishnamurthi, the learned counsel, relying upon some clauses of the deed, dealing with the issue of debentures and the other ancillary matters, contends that Ext. A-9 only created a floating charge for the debentures intended to be issued and that the debentures could be redeemed only as per the clauses mentioned therein, and that a specific charge was not created by it, though the counsel concedes that a specific charge in addition to a floating charge can also be created.

Having referred to the several clauses of Ext. A-9 extracted above, we have no doubt in our mind that a floating charge was created in addition to the specific charge on the properties described in the schedules. It follows that the rights which the mortgagee may have in respect of the specific charge would not be destroyed or impaired by reason of additional rights intended to be conferred as the holder of the floating charge. We therefore agree with the learned Subordinate Judge that this action for the sale of the properties which were specifically charged under Ext. A-9 would lie even though a floating charge was also created under Ext. A-9.

The next argument of Sri Krishnamurthi is that granting for the sake of argument that a specific charge was also created, there is no period of redemption provided therefor in Ext. A-9 and the suit for enforcement of the charge should have been filed within 12 years thereof, i.e., on or before June 5, 1960, and the present suit filed on March 20, 1961, is barred by limitation. We are unable to accept this contention for the following reasons. As already noticed, the mortgagee is the person to whom all the 600 debentures were intended to be allotted, but in fact never allotted. The rights as a debenture-holder as well as mortgagee were all vested only in Rangarao, and it is for that reason that the phrase "mortgagee" and registered holder of the debentures were used as interchangeable terms. The undisputed fact is that the entire sum of Rs. 60,030 was advanced by Rangarao to the company, and a fixed charge, apart from the floating charge, was created as security for the discharge of that mortgage debt. It is against this background that we have to construe the clauses in Ext. A-9 in this context. Clause X already referred to provides that the principal money as well as the interest accrued and payable up to date shall immediately become payable and the security hereby constituted shall after the expiry of 30 days of grace from such due date become enforceable, if the company makes default in the payment of interest on the stipulated date in any year. In order to ascertain the stipulated date, reference has to be made to clause XIV(b) which provides that the company will during the continuance of this security pay such registered holder interest on the said principal sum of Rs. 60,000 or such less amount as is unpaid at the rate of 7½ per cent, per annum on the 5th day of June in every year. According to these two clauses, the first year's interest became payable on 5th June, 1949, and admittedly that was not paid. The company had 30 days of grace and hence the right to enforce the security for the realisation of interest and principal accrued on 5th July, 1949, and the suit could be filed on or before 5th June,1961.

The present suit having been filed on March 20, 1961, we have no hesitation in holding that it is filed within time. In another view also we must find that the suit is within time. Clause X(c) provides that "if a distress or execution is levied upon any part of the mortgaged premises or if a receiver of the company's undertakings or property or any part thereof is appointed by any court and such distress or execution is not satisfied or such receiver is not discharged within fifteen days from the date of the levy or the appointment of the receiver, as the case may be, the principal and interest became payable." In this case, admittedly, Venkataratnam filed E.P. No. 87/50 which resulted not only in execution but also a sale on 26th July, 1951 in favour of the 1st defendant. The execution petition was filed some time in 1950 and even assuming that it was filed on 2nd January, 1950, and was ordered the very day, a suit for enforcing the mortgage security could be filed within 12 years thereafter, i.e., on or before 2nd January, 1962.

There is yet another reason for holding that the suit is within time. It is no doubt true that the first year's interest due on 5th June, 1949, itself was not paid and the mortgagor could not take advantage of his own default. The mortgage money does not become due within the meaning of article 132 until both the mortgagor's right to redeem and the mortgagee's right to enforce his security have accrued. As laid down by the Privy Council in Lasa Din v. Mt. Gulab Kunwar the clauses which empower the mortgagee to enforce security for non-payment of interest of any particular year would not entitle the mortgagor to rely upon article 132 and contend that the mortgagor is bound to file the suit within 12 years from the date he committed default in paying interest. At page 211, Sir George Lowndes, speaking on behalf of the Judicial Committee, observed thus:

"There can be no doubt that as pointed out by Lord Blanesburgh, a proviso of this nature is inserted in a mortgage deed 'exclusively for the benefit of the mortgagees' and that it purports to give them an option either to enforce their security at once, or, if the security is ample to stand by their investment for the full term of the mortgage. If on the default of the mortgagor—in other words, by the breach of his contract—the mortgage money becomes immediately 'due' it is clear that the intention of the parties is defeated and that what was agreed to by them as an option in the mortgagees is in effect converted into an option in the mortgagor. For if the latter after the deed has been duly executed and registered finds that he can make a better bargain elsewhere, he has only to break his contract by refusing to pay the interest and co instanti, as Lord Blanesburgh says, he is entitled to redeem. If the principal money is 'due' and the stipulated term has gone out of the contract it follows in their Lordships' opinion that the mortgagor can claim to repay it, as was recognized by Vazir Hasan J. in his judgment in the Chief Court. Their Lordships think that this is an impossible result. They are not prepared to hold that the mortgagor could in this way take advantage of his own default: they do not think that upon such default he would have the right to redeem and in their opinion the mortgage money does not 'become due' within the meaning of art. 132, Limitation Act, until both the mortgagor's right to redeem and the mortgagee's right to enforce his security have accrued. This would, of course, also be the position if the mortgagee exercised the option reserved to him."

Since we have already held that the registered holder of debentures means the mortgagee, the aforesaid clauses in Ext. A-9 are to be understood as giving an option to the mortgagee to enforce security in default of payment of the first year's interest, or wait till the period of redemption, i.e., 5th June, 1954, provided for in the document. A contrary construction is not only not warranted by the terms of the deed, but would result in manifest injustice as pointed out by the Privy Council. Once it is held that the date for redemption is 5th June, 1954, the mortgagee could file his suit at any time on or before 5th June, 1966. In this view also the suit is not barred by limitation against the 1st defendant.

Sri Krishnamurthi, the learned counsel, drew our attention to the several clauses in Ext. A-9 dealing with the rights of the debenture-holder and contended that what all was provided by Ext. A-9 was only redemption of the debentures but not redemption of the mortgage security on the fixed charge. His argument as already stated was that the only effect of Ext. A-9 was to create debentures with floating charge, and that all the other clauses have to be read as relating to debentures. But, as already stated, we are unable to accept that contention especially in view of clause V ' that the additional securities are created in addition to the specific mortgage premises ' which means that the premises mentioned in schedules 1 to 3 were specifically mortgaged. For all these reasons, this contention has to be rejected.

Before we conclude we must advert to the submission of Sri Krishnamurthi, that clause 5 of the decree of the trial court is not correctly worded. What all was meant by that clause was that the first plaintiff was at liberty to take such further proceedings as are open to him against the 1st defendant if any part of the plaint schedule property purchased by him was not existing. We are making it clear that there can be no question of any such steps being taken by the plaintiff in respect of the property not purchased by the 1st defendant.

In the result all the contentions fail and the appeal is hereby dismissed with costs.

 

[1970] 40 COMP. CAS. 466 (MYS)

HIGH COURT OF MYSORE

Yallamma Cotton, Woollen & Silk Mills Co. Ltd., In re

Bank Of Maharashtra Ltd.

v.

Official Liquidator

A. NARAYANA PAI J.

COMPANY APPLICATION NOS. 143 OF 1967

AND 20 OF 1968 IN COMPANY PETITION NO. 4 OF 1967

August 30, 1968

 G. S. Ullal and P. Venkataraman for the applicant.

B. Gopalaiah for the respondent.

JUDGMENT

Narayana Pai, J.—These are companion applications which raise questions as to the nature and extent of the rights and powers claimed by the Bank of Maharashtra Ltd., the applicant in Company Application No. 143 of 1967, under or by virtue of certain deeds of mortgage of immovable properties and hypothecation of movables executed in its favour by the company —Yallamma Cotton, Woollen and Silk Mills Company Ltd.

There is little or no controversy about the facts and circumstances necessary for the determination of the points of law raised by the parties.

The company encountered considerable financial difficulties early in the year 1966. In the month of March, 1966, it was obliged to lay off its labour force. By about September of that year, it had almost completely ceased working.

Early in June, 1967, a creditor of the company presented to this court. Company Petition No. 4 of 1967 for compulsory winding up of the company. After some adjournments granted at the request of the company which was trying to secure financial assistance from the Central Government, an order for compulsory winding up was made on 5th October, 1967.

Pursuant to the said order of winding up, the official liquidator of this court proceeded to Davangere, where the office as well as the mills and other properties of the company are situate, to take possession of all the properties and assets of the company. Although he was able to secure the books of account, papers and records of the company available in its office premises, the liquidator could not reduce to possession the immovable properties, machinery and other equipment of the company, for the reason that the possession thereof had already been taken by the Bank of Maharashtra (hereinafter referred to as "the bank") in apparent exercise of its powers as a mortgagee and charge-holder of the immovable and movable properties of the company.

The liquidator made a report to that effect which was filed into this court on 26th October, 1967.

When the report was first posted for orders before me, Mr. K. Srini-vasan took notice on behalf of the bank, stated briefly the case of the bank and sought time to place before me the documents and records relating to his client's rights and to state clearly what attitude his clients propose to take vis-a-vis the winding up proceedings.

On the next date of hearing, viz., 10th November, 1967, Mr. Srinivasan filed several documents to prove the rights claimed by his clients as mortgagees of the lands and buildings and as hypothecatees of the movables including the machinery belonging to the company. He also stated that his clients, who are secured creditors, would prefer to stand outside the winding up proceedings and realise or recover the amounts due to them by exercising the right of private sale without the intervention of court both in regard to movables as well as the immovables charged and mortgaged in their favour, which right he said was in clear terms conferred upon his clients by the documents of mortgage and hypothecation. He also presented Company Application No. 143 of 1967 by the bank in which, after briefly setting out the rights claimed by it, the bank prayed that it be permitted to remain outside the winding up proceedings and enforce its rights.

On the said date—10th November, 1967—I made an order recording the claims raised by the bank and adjourned the matter to 24th November, 1967, for a fuller and complete examination of the legal position and gave certain directions for the said purpose. Among other things, 1 directed the filing of fuller affidavits by an officer of the bank who was conversant with all the facts as well as the ex-managing director of the company, setting out the circumstances in which the bank took possession of the properties, and the preparation by the liquidator of a full inventory of all the articles contained in the premises taken possession of by the bank.

The above directions were complied with, but on account of the other work of the court, the matter could not be heard immediately and could be taken up for hearing only on 12th January, 1968.

In the meanwhile, the bank having engaged Mr. G. S. Ullal after the first adjournment of November, 1967, Mr. K. Srinivasan retired from the case with my permission.

The main question, which arose for immediate consideration and had to be determined before any further steps could be taken in this winding up in respect of the properties taken possession of by the bank, was whether the bank was right in its contention that the mortgages executed in its favour by the company were English mortgages as defined in the Transfer of Property Act and whether the documents of mortgages contained clauses conferring on the bank the power of private sale consistent with the provisions of the Transfer of Property Act in that regard. In the course of the arguments, Mr. Sundaraswamy, appearing for the petitioning-creditor, who argued the general case on behalf of the unsecured creditors as well as the liquidator, stated that in the light of his study of the papers, a further question appeared to arise as to whether the mortgages claimed by the bank were not invalid for non-compliance with the terms of section 293 of the Companies Act, 1956. I observed that if any such objection was capable of being clearly formulated, it was perhaps better to make it the subject of a separate application by the liquidator setting out the case fully, and directed that if any such application is filed, the same may be brought up for hearing along with Application No. 143 of 1967 on the next date of hearing, viz., 2nd February, 1968.

Just before the said adjourned date, the liquidator filed Company Application No. 20 of 1968. The matter could not be taken up for hearing on 2nd February, 1968, and had to be adjourned to 27th of that month.

To the said application objections were filed by the bank on 23rd February, 1968. Among the objections there was one to the effect:

"It is also not clear from the judge's summons whether the application was posted before court for first obtaining orders required by rule 7 of the said Rules. It is submitted that these transgressions of the Rules, which are without justification in this case, have caused embarrassment and harassment."

I pointed out to Mr. Ullal that the objection was unmerited, that it seemed to ignore my direction in open court that an application, if any, filed by the liquidator should be brought up for hearing along with Company Application No. 143 of 1967 at the next date of hearing, viz., 2nd February, 1968, and that on the said date having been made aware of the fact that Mr. Ullal had been served with a copy of the judge's summons and report only on the previous day, I myself suggested an adjournment to enable the bank to state its objections. Though Mr. Ullal expressed his readiness to go on with the case the same day, it could not be taken up for the reason that the examination of a witness in an election petition which was then being heard by me could not be completed till late in the evening, making the further adjournment of this matter quite inevitable. When the above circumstances were pointed out by me, an affidavit by an officer of the bank who was present at all hearings was later filed on 29th February, 1968, expressing apology and stating that the oral order for posting made by me had unfortunately been forgotten. In view of this affidavit and in view of the fact that an adjournment which became inevitable in the circumstances has removed all cause for grievance, if any, nothing more need be said about this objection.

Another objection was that the subject-matter of Company Application No. 20 of 1968 could not have been properly brought before court by means of an application but could only be made the subject of a regular suit, and that if the application has to be treated as a suit, the proper  court-fee as for a suit should have been paid.

Before proceeding to examine this objection, it is necessary now briefly to narrate the undisputed facts. The said facts can be gathered from the further affidavit on behalf of the bank filed on 23rd November, 1967, and the various documents filed by the bank, both on 10th as well as on 23rd November, 1967.

For the purpose of finding finance for its scheme of improvement and expansion of business, the company appears to have approached the bank for financial assistance late in 1961 or very early in 1962. The negotiations between the company and the bank resulted in the bank agreeing to lend to the company seven and a half lakhs of rupees to ten lakhs of rupees on the company agreeing to secure due repayment of the same by mortgaging its immovable properties, viz., lands, mills, buildings, etc., and hypothecating all its machinery, vehicles, tools, implements, etc., and also agreeing to certain further conditions enabling the bank to keep a close watch over the working of the company and the handling of its funds. On 15th January, 1962, two deeds were executed in favour of the bank—exhibit R-15, a mortgage of lands and buildings for a principal sum of two and a half lakhs of rupees and exhibit R-8, a deed of hypothecation of movables for a principal sum of four and a half lakhs of rupees. The deed of mortgage was registered with the Sub-Registrar, Bombay, as Document No. 166/62 in Book No. I, on 14th May, 1962. It also appears that the particulars of both the documents have been duly registered with the Registrar of Companies, Mysore, under the provisions of Part V and a certificate secured from the Registrar, under section 132 of the Companies Act, 1956. A deed of modification modifying some of the terms appears to have been executed subsequently, but it is not quite necessary to refer to it. There were subsequent or further deeds of hypothecation of movables, viz., exhibits R-21 dated 17th December, 1962, exhibit R-39, dated 17th June, 1963, and exhibit R-31, dated 3rd December, 1964, for principal sums of two lakhs of rupees, one and a half lakhs of rupees and two lakhs of rupees, respectively. On 11th March, 1965, a deed of further charge in respect of lands and buildings (exhibit R-34) was executed for a further sum of three lakhs of rupees. In the bank's affidavit filed on 23rd November, 1967, this deed was described as "pending registration with the Sub-Registrar of Bombay". On the original deed being produced, it is found that it was actually registered on 11th March, 1965, as Document No. 771/65 in Book No. I with the Sub-Registrar, Bombay. In respect of the said deed as well as the other three hypothecations mentioned above, the bank appears to have taken care to file particulars with the Registrar of Companies, Mysore, and obtained certificates of registration under section 132 of the Companies Act.

The several deeds set out certain terms for repayment of the loan and also clauses stating the consequences of default. The company, according to the bank, having committed some default in the matter of repayment, a demand notice appears to have been served on the company. It is further stated in the bank's affidavit that three electric motors which were part of the hypothecated properties were sold without the consent of the bank. After some correspondence, the local agent of the bank acting on behalf of the bank appears to have taken possession of stores and spares on 15th November, 1966, and locked the main mill premises of the company on 22nd January, 1967.

No attempt has been made to deny the truth of the above facts by Amberkar, ex-managing director of the company, in his affidavit filed into court on 24th November, 1967.

In the course of the preparation of the inventory, directed by me in my order dated 10th November, 1967, it was discovered that the mill premises locked by the bank contained not merely machinery and spare parts said to have been hypothecated to it but also several books, papers and records of the company and articles of furniture belonging to the company which are admittedly not part of the properties either mortgaged or hypothecated to the bank. The books and papers have been taken possession of by the liquidator pursuant to my order of 10th November, 1967. The articles of furniture are said to be still lying in the mill premises locked and retained possession of by the bank.

In the light of the pleadings in these two applications, the points that arise for consideration at present are :

"1.    Whether the liquidator's application No. 20 of 1968 is incompetent or unsustainable either because the liquidator should have filed a suit or because the court fee should have been paid on it as for a suit;

2.     Is the bank entitled to sell the lands and buildings, machinery, spares and parts mortgaged or hypothecated to it, without the  intervention of court ?

3.     Is the bank entitled to retain possession of the said properties, immovable and movable, for the purpose of exercising the right of private sale claimed by it?

4.     Are the mortgages and hypothecations claimed by the bank invalid for contravention of the provisions of section 293 of the Companies Act?"

In support of the contention formulated as Point No. 1 above, Mr. Ullal's argument is that because the bank is a secured creditor entitled to stand outside the insolvency and work out its rights in the normal way, any right or recourse which the liquidator can claim or pursue against the bank on behalf of the company in liquidation could only be by means of a regular suit, and that even if it should be permissible to him to move the company court by means of an application, such application should be regarded as a suit and the court-fee as for a suit should be paid on it. He cites the ruling of this court in Official Liquidator v. Muniswamy Achary .

The ruling cited by Mr. Ullal is distinguishable and not applicable to the facts of this case. The said ruling dealt with a case where the liquidator on behalf of the company had to recover from a third party a debt due by the said third party to the company. Although upon an admission made by such a third party in answer to a notice under section 477 of the Companies Act, the company court is empowered to pass an order in the nature of a decree, a disputed debt could be recovered only by means of either a regular suit filed with the permission of the company court and tried either by the ordinary civil court before which it is filed or by the company court on withdrawing the same to its file, or by filing a suit before the company court itself, pursuant to sub-section (2) of section 446 of the Companies Act. It is with reference to such a matter that this court observed that, although the proceeding is instituted in the form of an application under the Rules, it is in substance a suit and that therefore court-fee should be calculated as for a suit.

The position in the present case, however, is quite different. The liquidator is not suing to recover any debt or to recover any property belonging to the company. One of the consequences of making an order for the winding up of any company expressly stated in sub-section (2) of section 456 is:

"All the property and effects of the company shall be deemed to be in the custody of the court as from the date of the order for the winding up of the company."

"Court", of course, by definition means the company court which made the winding up order. Under sub-section (1) of the same section, it is provided:

"Where a winding up order has been made.........the liquidator......shall take into his custody or under his control, all the property, effects and actionable claims to which the company is or appears to be entitled."

Section 467 of the Act states, among other things:

".........the court.........shall cause the assets of the company to be collected and applied in discharge of its liabilities."

According to rule 232 of the Companies (Court) Rules, 1959, the duties imposed on the court by sub-section (1) of section 467 of the Act with regard to the collection of the assets of the company and the application thereof in discharge of the company's liabilities shall be discharged by the official liquidator as an officer of the court, subject to control of the court. Rule 233 states that the official liquidator shall, for the purpose of acquiring and retaining possession of the property of the company, be in the same position as if he were a receiver of the property appointed by the court and that the court may on his application enforce such acquisition or retention accordingly. Under sub-section (4) of section 460, the liquidator is authorised to apply to the court for a direction in relation to any particular matter arising in the winding up.

The powers of the winding up court under sub-section (2) of section 446 include the jurisdiction to entertain and dispose of any question of priorities or any other question whatsoever, whether of law or of fact, which may relate to or arise in the course of winding up of a company, notwithstanding anything contained in any other law for the time being in force.

The total effect of all these provisions is that all property and assets of the company, which has been ordered to be wound up, immediately come under the custody of the winding up court and are, in the eye of law, property in custodia legis. The official liquidator is in the position of a receiver appointed by the court for the purpose of acquiring and retaining the possession of all property and assets of the company, acting subject to and in accordance with the directions from time to time given by the winding up court.

Even in the case of properties of a company which are mortgaged or charged in favour of any of its creditors, the creditor does not acquire rights which are exhaustive of the entire title of the company in respect of the properties. The properties continue to be the properties of the company, although by reason of a transfer of some interest therein by way of security, the creditor is enabled by law to enforce his security in the manner provided by law for the purpose of recovering moneys due to him. Hence, even when a secured creditor wants to exercise the option given to him by law to stand outside the insolvency and work out his rights, it cannot be said that the winding up court is totally powerless or has no jurisdiction whatever in respect of him or in respect of the property over which he claims a certain right by way of security. In regard to such properties, questions may and do often arise either in respect of priorities or in respect of any other matter whatsoever, which may relate to the winding up of the company's affairs.

In trying, therefore, to reduce to his possession properties of the company, whether mortgaged to third parties, or not, the liquidator is not trying to recover any property from anybody; he is acting on behalf of the court into whose custody the properties have already come by virtue of the winding up order. In the event of any third party resisting or opposing or questioning his attempts to reduce the property to his possession in the name of the court, if the liquidator considers it necessary to approach the court for directions, he is merely acting under sub-section (4) of section 460 of the Act and invoking the powers of the court under section 446(2)(d) of the Act and rule 233 of the Companies (Court) Rules, 1959.

The clearest position therefore is that the liquidator, in such circumstances, is not obliged to file a suit, nor is the filing of a suit or an application in the nature of a suit before the winding up court the only or the necessary way of invoking the jurisdiction of the company court. The proper proceeding is undoubtedly an application made to the winding up court, and the court-fee payable thereon is as for an application and not as for a suit. The proper article applicable is article 11(u) of Schedule II of the Mysore Court-fees and Suits Valuation Act, 1957.

This objection is therefore overruled.

Points Nos. 2 and 3 may be taken up together. While dealing with the case under these points, I shall assume that the transactions are not open to attack under section 293 of the Companies Act. My findings on points Nos. 2 and 3 are subject to my finding on point No. 4 which I shall discuss later.

The factum of the execution of these documents and the borrowings by the company under the same from the bank have not been denied by Amberkar, ex-managing director of the company. The truth of the transactions therefore can be taken as established. Although it is not necessary for the purpose of these applications to decide or determine the exact amount lent by the bank and now remaining due by the company, (nor do I propose to go into that question), it is clear that considerable amounts are due to the bank from the company and that the documents charging the properties described in the schedules to the respective documents have been executed by the company represented by its directors in favour of the bank.

The questions raised by points Nos. 2 and 3 are therefore questions which should be answered upon an interpretation of the terms of the relative documents. It is enough to examine the terms of the two documents dated 15th January, 1962—exhibit R-8 and exhibit R-15—because the subsequent documents simply copy the same language.

The question relating to movables is simpler and depends upon the terms of the hypothecation deed, exhibit R-8. Although the language used appears to copy or follow the language ordinarily used in the case of English mortgages of immovable properties, the substance of the transaction and the effect of the document is clearly to create a hypothecation of movables with power to convert it into a pledge by taking possession of the hypothecated movables in certain circumstances. The operative clause No. 2 purports to assign absolutely to the lenders (bank) machinery, vehicles, tools, implements and other paraphernalia lying in the mill premises of the company. It is expressly stated to be subject to redemption by the borrowers (company). Apart from the various clauses intended for the protection of the interest of the lenders including a clause for providing that the deed shall constitute a continuing security for payment of all sums due to the bank, the only clause which is of importance to the present discussion is clause No. (6), which reads as follows:

"AND IT IS HEREBY MUTUALLY AGREED AND DECLARED as follows :

The lenders shall have power to sell the machinery, etc., hereby assigned and charged or any of them, or to take possession of the same upon the happening of any of the following events, that is to say:

(i)     If payment of money hereby secured has been demanded and the borrowers have made default for one month in paying the same.

(ii)    If the borrowers shall pass resolution for voluntarily winding up or an order for winding up is made by a court against the borrowers or the borrowers suffer execution to issue against them to enforce any judgment or order or shall suffer any distress to be levied on the said machinery.

(iii)   If the borrowers shall make default in payment of the whole or any part of the sum due from them to lenders in respect of any negotiable instrument.

        (iv)   If the borrowers fail to observe any of the provisions hereof binding on them."

The effect of the said sixth clause taken along with the provision for continuing security is clearly to create what is ordinarily known as a floating charge. The machinery and movables which are charged in favour of the bank for securing the recovery of moneys lent by it are left in the possession of the company, so that it may work and earn money and repay the loans raised for the purpose of running the business. It is only when certain contingencies arise as set out in clause (6) that the bank as a lender becomes entitled to enforce its security by taking possession of the goods and selling them for the purpose of recovering its dues. One of the contingencies, it may be noted, is the making of an order for winding up by a court against the company.

In the case of hypothecation or pledges of movable goods, there is no doubt about the creditor's right to take possession, to retain possession and to sell the goods directly without the intervention of court for the purpose of recovering his dues. The position in the case of a regular pledge completed by possession is undoubted and set out in the relevant sections of the Contract Act. Hypothecation is only an extended idea of a pledge, the creditor permitting the debtor to retain possession either on behalf of or in trust for himself (the creditor).

Hence, so far as the movables actually covered by the hypothecation deeds are concerned, there can be no doubt that the bank is entitled to retain possession and also to exercise the right of private sale.

In this regard, the only question is what are the articles actually covered by the documents of hypothecation. Their general description I have already given, viz., the machinery, vehicles, tools and implements and other paraphernalia. All words, except the last word "paraphernalia", have a clearly ascertainable meaning. "Paraphernalia", in the context, cannot, in my opinion, mean to take in other than what may be clearly regarded as accessories of the main machinery used for the manufacture of textiles. The description of the articles in the schedule annexed to the hypothecation deeds also leads to the same conclusion. Because the subsequent documents have merely copied the language and the schedule of the first document, exhibit R-8, there appears to have been some little difficulty in the matter of identifying a few items of spares, tools or machine parts with the property subject to hypothecation. But the liquidator has stated that all such items may reasonably be regarded as falling within the scope of the hypothecation. It is equally admitted by the bank that the articles of furniture found in the mill premises are not articles covered by the hypothecation. Hence, I hold that, whereas the bank may retain possession of all items of machinery, spares, machine parts, implements and tools, as forming part of their security, it should deliver to the liquidator all articles of furniture.

Regarding immovable property, the case of the bank is that the relevant documents evidence an English mortgage as defined in the Transfer of Property Act and that they confer in clear terms on the banks the right of private sale without the intervention of court. It is also stated that because it is an English mortgage, the bank is entitled to take and retain possession.

Exhibit R-15 is the first such mortgage. Clause 2 thereof contains the main provision to the effect that in consideration of the terms the mortgagors-company grant, release, convey and assure unto the lenders' bank all the immovable property described in the schedule, to hold the same subject to the proviso for redemption. The provision for redemption is contained in clause 3, which reads:

"If upon such demand as aforesaid the mortgagors and/or the sureties shall pay to the lenders all moneys hereby covenanted to be paid, the lenders will at the request of the mortgagors and/or the sureties duly reconvey the said land hereby conveyed."

Then follows a long clause containing provisions intended for the protection of the interests of the lenders-bank. The first clause of the document contains a personal covenant for repayment of money and clause 9(g) contains stipulations for repayment of specified sums of moneys at specified intervals. Clause 5 is of importance from the point of view of both the parties before me, particularly sub-clauses (a), (e) and (i) thereof. Sub-clause (a) reads:

"(a)   That it shall be lawful for the lenders at any time without any further consent of the mortgagors and the sureties to sell or to concur with any other person in selling the said land, hereditaments and premises or any part thereof either by public auction or private contract with liberty also to make such conditions or stipulations respecting title or evidence of title or other matters as the lenders may deem proper with power to buy in the said land hereditaments and premises at any sale by auction or to rescind or vary any contract for sale and to resell the same without being answerable or responsible for any loss or diminution occasioned thereby and with power also to execute assurances and give effectual receipts for the purchase money and do all other acts and things for completing the sale which the person or persons exercising the power of sale shall think proper and the aforesaid power shall be deemed to be a power to sell and concur in selling the mortgaged premises without the intervention of the court within the meaning of section 69 of the Transfer of Property Act, 1882."

Sub-clauses (b), (c), (d) and (e) contain consequential or related conditions regarding the right of sale. Sub-clause (f) reads as follows:

"That it shall be lawful for the mortgagors to retain possession of and use the mortgaged premises until the lenders shall be entitled to take possession thereof under these presents."

Sub-clause (i) reads as follows:

"That over and above other provisions herein contained and without prejudice thereto in the event of the mortgagors making any default in the repayment of the mortgage debt hereby secured or failing to comply with any of the terms and provisions of these presents the lenders shall have the right to take over the management of the whole concern and business of the mortgagors as well as the right to sell and realise all the properties and assets mortgaged to the lenders hereunder and the mortgagors shall in such event forthwith on demand by the lenders hand over charge and management of the whole of the business and undertaking of its concern to the lenders and any transfer of any of the properties and assets made by the lenders in exercise of any of the powers of sale and realisation under the foregoing provisions shall vest in the transferee all rights in or to the property or assets transferred as if the sale had been made by the mortgagors themselves."

One other matter which I must mention is that the executants of the mortgage deed are the company itself described as the mortgagors and eight of its directors described as the sureties. The personal covenant in clause 1is an undertaking by both the company as well as the sureties to repay the money jointly and severally. With reference to the said sureties, clause 12 seems to keep their liability alive irrespective of whatever happens to the liability of the company itself and prevents them from insisting upon the bank exhausting its remedies against the company before proceeding against them.

An English mortgage is defied in clause (e) of section 58 of the Transfer of Property Act as follows:

"English mortgage.—Where the mortgagor binds himself to repay the mortgage-money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will re-transfer it to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an English mortgage."

The clauses of the document already copied or summarised by me clearly bring the transaction within this definition. Nor has any serious attempt been made by the liquidator or Mr. Sundaraswamy to argue the contrary.

Clause 5(a) also expressly confers upon the bank, the mortgagee, the right of sale without the intervention of court which is described to be such a right within the meaning of section 69 of the Transfer of Property Act. The relevant portion of section 69 reads as follows :

"(1)  A mortgagee, or any person acting on his behalf, shall, subject to the provisions of this section, have power to sell or concur in selling the mortgaged property, or any part thereof, in default of payment of the mortgage-money, without the intervention of the court, in the following cases and in no others, namely:

(a)        where the mortgage is an English mortgage, and neither the mortgagor nor the mortgagee is a Hindu, Muhammadan or Buddhist or a member of any other race, sect, tribe or class from time to time specified in this behalf by the State Government in the Official Gazette."

The remaining sub-sections of the section deal with the conditions and restrictions subject to which the right is to be exercised.

Prima facie, therefore, the bank has the right of private sale. I must, however, add that the right described in the expression "with power to buy in the said land, hereditaments and premises at any sale by auction or to rescind or vary any contract for sale" cannot be relied upon to authorise the bank to buy the mortgaged property for themselves—vide Mulraj Virji v. Pratapmal.

The argument advanced against the right of private sale is that the refe rence to a mortgagee as a Hindu, Muhammadan or Buddhist in clause (a) may suggest that the right conferred by the section is a right which can be exercised only by a living person and not by a fictitious person like an incorporated company. The argument is not acceptable because the terms "Hindu, Muhammadan, Buddhist" are used to describe a class which is excluded from the larger class of mortgagees, and the term "mortgagee" is defined in section 58 as merely the transferee mentioned in the main definition of a mortgage as a transferee of interest in a specific immovable property for the purpose of securing the payment of money advanced, etc. That term is large enough to include all persons, living or fictitious, capable of bearing rights and liabilities. Another argument based on the same exclusion contained in clause (a) of section 69(1) is that in exhibit R-15, the mortgagors are not only the company but also the eight directors who have joined as sureties, all of whom are Hindus. This again is an argument which cannot be accepted, because the property that is transferred by way of mortgage is undoubtedly that of the company, which alone can transfer it or an interest therein, and which alone can therefore be described as a mortgagor who, according to section 58, is the transferor in a transaction which amounts to a mortgage. The directors who joined merely as sureties were not owners of any interest in the property and could not therefore be described as transferors so as to become mortgagors within the meaning of section 58.

As to the bank's right to possession, it is clearly traceable to the nature of the mortgage itself. It is an English mortgage, and by the very definition it is in the nature of a conveyance or transfer of the mortgaged property absolutely to the mortgagee; the redemption of the mortgage also is in the nature of a proviso for re-transfer or reconveyance of the property to the mortgagor upon discharge of the mortgage. Absolute transfer must therefore comprehend the transfer of the right to possession also. In fact, a mortgagee under English mortgage is entitled to immediate possession and is also entitled to retain possession until he is repaid—vide Rukmini Kanta v. Baldeo Das  and Lutchmiput Singh v. Land Mortgage Bank of India Ltd.

In the document exhibit R-15, it will be noticed, express provision is made to the effect that it is lawful for the mortgagors to retain possession and use the mortgaged properties until the bank becomes entitled to take possession under the document. The right to take possession arises in the comply with any of the terms of the document.

It is admitted in this case that by virtue of the above provisions the company retained possession of the lands and buildings notwithstanding the mortgage and continued to use the same for the company's business until in exercise of the rights claimed by the bank under the document the bank took possession of the properties in January, 1967. The circumstances in which such possession was taken as stated by the bank are not denied by Amberkar, ex-managing director. In fact, Amberkar's affidavit expressly states that possession was taken by the bank in his presence after preparing an inventory of the machinery and other articles and handing over a copy thereof to him. Therefore, it is a case of voluntary handing over possession by the company as mortgagor in recognition of the mortgagee-bank's right to take possession or upon an admission that the circumstances had arisen such as to entitle the bank to take possession.

Points Nos. 2 and 3 therefore are held in favour of the bank.

The question raised by point No. 4 is not quite free from difficulty. But here again, the relevant facts are not in dispute. The only controversy is in regard to inferences properly available from the said facts and their legal effect.

Portions of section 293 of the Companies Act which are relevant to the discussion are clauses (a) and (d) of sub-section (1). They read as follows:

"(1)  The board of directors of a public company, or of a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting,—

(a)        sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking; ......

(d)        borrow moneys after the commencement of this Act, where the moneys to be borrowed, together with the moneys already borrowed by the company (apart from temporary loans obtained from the company's bankers in the ordinary course of business), will exceed the aggregate of the paid up capital of the company and its free reserves, that is to say, reserves not set apart for any specific purpose."

The facts are the following :—On 27th September, 1961, the board of directors resolved to raise loans under various accounts from the bank to the extent of ten lakhs of rupees on the pledge of movable and mortgage of immovables. On 30th November, 1961, they resolved that similar loans may be raised to the extent of seven lakhs of rupees with the approval of the company in general meeting as required by section 293(1)(d) and subject to various conditions apparently agreed upon between the bank and the company. On 11th January, 1962, an extraordinary general meeting of the shareholders of the company was held at which the following resolution was passed :

"Resolved that the consent be and is hereby accorded to the board of directors of the company under the provisions of section 293 of the Companies Act, 1956, that the directors may borrow and continue to borrow rnoneys (apart from temporary loans obtained from the company's  bankers in the ordinary course of business) for and on behalf of the company up to Rs. 20,00,000 (twenty lakhs).

Resolved further that the company ratifies and confirms the borrowings hitherto made in excess of the limit prescribed by section 293(l)(d)of the Companies Act, 1956."

The general body minutes book of the company is marked exhibit P-1, and the proceedings of the said general meeting are written on pages 46 and 47 thereof (exhibit P-l (a)). The resolution is at page 47. The notice calling the meeting was called for from the files of the Registrar of Companies, Mysore, and marked exhibit P-2. The explanatory statement as required by section 173 of the Companies Act appended to the notice reads as follows.

"The company started the production of yarn from cotton in January, 1961, with 3,300 spindles. The company has a licence to instal 12,000 spindles. The company intends to instal the balance of 8,700 spindles in two stages. In the I stage 4,700 spindles will be installed by June, 1962. The installation of the remaining 4,000 spindles will be taken up soon after the unit of 8,000 spindles is set in regular working. The cost of installing and operating additional 8,700 spindles, 4,700 in the I stage and 4,000 in the II stage, is estimated to be about Rs. 14,00,000. The paid up capital of the company to date is Rs. 5,74,570. The borrowing to this date amounts to Rs. 7,14,500. It is considered that raising funds for the purposes of the proposed expansion of the company's activities by way of subscription of more capital will not be convenient at this stage. It is proposed therefore to raise funds by way of borrowing moneys from various sources. The borrowings made to date as also the borrowings required to be made hereafter will exceed the limits prescribed by section 293 of the Companies Act. It is therefore considered necessary to get the approval of the shareholders to the borrowings proposed to be made as also to the borrowings already made."

There was a subsequent extraordinary general meeting of the company held on 24th May, 1962, at which an amendment to the articles of association of the company was carried out with a view to authorise the bank to appoint special directors to sit on the board of directors of the company to protect its interests in view of large loans made by it to the company. Exhibit P-3 produced from the records of the Registrar of Companies is the notice convening the said meeting. The explanatory statement under section 173 in regard to the said amendment appended to the notice reads as follows :

"The company has taken a loan of Rs. 7,00,000 from the Bank of Maharashtra Ltd. The said bank requires as one of the conditions of advancing the loan that they should have power to nominate two directors on the board of directors of this company, who will be non-rotating and need not hold qualification shares of directorship. It is, therefore, necessary to amend the articles of association of the company to confer on the said bank the power to nominate two directors as long as any moneys due under the loan advanced by them shall be outstanding and due. Accordingly the special resolutions are proposed as set out in the notice."

The argument strongly presented by Mr. Sundaraswamy is that although there are several documents, some in the form of mortgages of immovable property and some in the form of hypothecations of movables, the transaction in substance was a single transaction under which the bank lent money against the security of all the properties, both movable and immovable, belonging to the company, that the provisions of the mortgage deed, particularly in clause 5(i), are such as to empower the bank to take over the entire management of the business of the company, that by other engagements or agreements entered into by the company with the bank, the bank obtained the right to appoint special directors and also an undertaking by the managing agents not to plead their agreement with the company against the bank when occasion arises for the bank to take over the management pursuant to the terms of the mortgage deed and that, therefore, taken as a whole, the position is nothing short of a total disposal of the whole undertaking of the company in favour of the bank. Such a transaction resulting in such a disposal of the whole undertaking of the company, he argues, could not be entered into without the consent of the company expressly taken pursuant to clause (a) of sub-section (1) of section 293 of the Companies Act. He points out, further, that in regard to these transactions the only resolution of the general body of the shareholders of the company got passed was the resolution of 11th January, 1962, exhibit P-1(a), and that the said resolution is limited to clause (d) of subsection (1) of section 293, with the result that the only consent of the company in the general meeting secured was the consent for borrowing sums in excess of the paid up capital and reserves, and not for the disposal of the whole undertaking of the company.

Mr. Ullal answers that the transaction, whether it consists of more parts lthan one independent of each other or as a single transaction, is no more than a mortgage or a security and cannot therefore be regarded as a disposal of its undertaking, meaning a parting away with its enterprise or its profit-earning capacities. An undertaking, according to Webster's Dictionary, only means something that is undertaken or a business, work or project which one engages in or attempts, or an enterprise. The undertaking of the company in that sense has not been, according to Mr. Ullal, parted with by the company under or by virtue of the mortgages and hypothecations. He also suggests that the resolution, exhibit P-1(a), should not be read in the limited way in which Mr. Sundaraswamy wants to do or that, in any event, it must be  held that there has been ratification of all  the transactions by the company agreeing to the amendment of the articles of association under the resolution, exhibit P-1(b).

Mr. Sundaraswamy contends in reply to Mr. Ullal that in view of the express words of the language used in the resolution, exhibit P-1(a), there can be no doubt that the attention of the company was confined to clause (d) of sub-section (1) of section 293 and that the case of the acquiescence or ratification has not only been not pleaded in the counter-affidavit of the bank but also is incapable of being made out on the facts of this case, because there can never be an acquiescence in law unless the party said to have acquiesced in a state of affairs had done so with the full knowledge of the details thereof. He also points out that even in the explanatory statements annexed to the notices, exhibits P-2 and P-3, pointed attention of the shareholders was drawn to the fact that the loans exceed the paid up capital and reserves of the company and not to the effect of the transactions being an actual disposal of the whole undertaking of the company.

If the case were to rest exclusively on the ascertainable meaning or the legal effect of the resolutions of the general body of shareholders, it would have been somewhat difficult for the bank to make out that there has been at least a substantial compliance with the provisions of section 293(1)(a) of the Act. The meaning and effect of the notices convening the meetings and the resolutions adopted at the said meetings, as interpreted and suggested by Mr. Sundaraswamy, are not matters which can be easily discounted or contradicted.

It appears to me, however, that the question of substance which is of greater importance and which should receive greater attention is the question whether Mr. Sundaraswamy is right in saying that the impugned transactions really amount to a disposal of the whole or the substantial portion of the undertaking of the company.

The word "undertaking" is not defined in the Act. One has, therefore, necessarily to depend upon the dictionary meaning or such secondary meaning the term might have acquired by commercial usage or long practice governing the workings of and borrowings by companies.

The ordinary dictionary meaning is what has already been referred to by me while summarising Mr. Ullal's arguments. It is not in its real meaning anything which may be described as a tangible piece of property like land, machinery or the equipment; it is in actual effect an activity of man which in commercial or business parlance means an activity engaged in with a view to earn profit. Property, movable or immovable, used in the course of or for the purpose of such business can more accurately be described as the tools of business or undertaking, i.e., things or articles which are necessarily to be used to keep the undertaking going or to assist the carrying on of the activities leading to the earning of profits.

Mr. Sundaraswamy has placed strong reliance on the observations of Giffard L.J. in his judgment in the case of In re Panama, New Zealand and Australian Royal Mail Company . Dealing with certain floating charge, which used the term "undertaking", his Lordship stated that the word "undertaking" there used had reference to all the property of the company not only existing on the date of the debenture but what might afterwards become property of the company.

Now, to understand the effect of the above judgment of Giffard L.J., and the principles derivable therefrom, it is necessary to point out that the said judgment is a landmark in the legal history of what are called floating charges in English company law. Floating charge is a peculiar legal concept specially developed in English law in consonance with the interests and successful working of manufacturing or trading companies. Having regard to the nature and extent of the operations of such companies, it was impossible to meet all their financial needs from out of their paid up capital alone. They had necessarily to depend upon large finances made available to them either by banks or other financiers. In fact, such borrowings in course of time came to be called working capital as distinguished from the paid up share capital. Most of the assets of such companies were fixed assets like lands and buildings and were absolutely necessary for the operations and activities of such companies. Banks or financiers who lent moneys naturally looked for security for their loans. Essentially and fundamentally the source of recovery was the profitable working of the companies. The working of companies was impossible if they were deprived of their fixed assets like land and machinery ; at the same time, such fixed assets were the only tangible security which the companies could offer. It is in such circumstances that the idea of a floating charge was developed whereby all the fixed assets of a company as well as the goods in the process of manufacture and unsold manufactured goods so long as they continued in the custody of the company were wholly and totally mortgaged or hypothecated to the lender. But the company was left free to use its fixed assets and machinery, and to sell goods manufactured by them without any hindrance or interference by the lender so long as the company worked and continued to make periodical repayments with interest on portions of moneys borrowed by it, the lender being given and retaining the ultimate power of taking possession of fixed assets and all available properties, immovable and movable, as soon as the company committed default, stopped working or went into liquidation. Technically, it was stated that at that point of time the floating charge got fixed on the properties and the lender became immediately entitled to realise his moneys from out of those properties.

It is in the light of this history of the concept of floating charges that the judgment of Giffard L.J., cited above, should be read. I give below a sufficient portion of his Lordship's judgment for a full understanding of the true legal position. After stating that the company was empowered to execute mortgages as well as issue debentures and that they could exercise both these powers by a single instrument, his Lordship proceeded to describe the legal position in the following words :

"Accordingly they did issue what they called a mortgage debenture, which was, in substance, a bond, and a charge upon their property for the sum borrowed on bond. The form of the instrument is not an assignment but a charge; the company charge the undertaking, and all sums of money arising therefrom, and all estate, right, title, and interest of the company therein, with payment of the principal sum and interest. I asked in the course of the argument what could be the subject matter of that charge, and the answer given was, that there were valuable contracts, and that all that the charge was meant to cover was the income arising from the business being carried on, and that it would not extend to property, such as the ships and other property of that nature, which were absolutely essential to the carrying on of the concern. I cannot accede to any such proposition as that. I have no hesitation in saying that in this particular case, and having regard to the state of this particular company, the word 'undertaking' had reference to all the property of the company, not only which existed at the date of the debenture, but which might afterwards become the property of the company. And I take the object and meaning of the debenture to be this, that the word ' undertaking ' necessarily infers that the company will go on, and that the debenture-holder could not interfere until either the interest which was due was unpaid, or until the period had arrived for the payment of his principal, and that principal was unpaid. I think the meaning and object of the security was this, that the company might go on during that interval, and, furthermore, that during the interval the debenture-holder would not be entitled to any account of mesne profits, or of any dealing with the property of the company in the ordinary course of carrying on their business. I do not refer to such things as sales or mortgages of property, but to the ordinary application of funds which came into the hands of the company in the usual course of business. I see no difficulty or inconvenience in giving that effect to this instrument. But the moment the company comes to be wound up, and the property has to be realised, that moment the rights of these parties, beyond all question, attach.''

Now, it will be noticed that the essence of the transaction is that the company is permitted to retain the use of all its property and continue to engage in its manufacturing or business activity and is not to be interfered with so long as it continues to work and continues to make repayment in the manner agreed upon between it and its lender. So long as this result is ensured and the company continues to engage in its work, the form or language of the instruments under which money is borrowed is of little or no consequence, and so long as such position is assured, I do not think it can be rightly contended that the company has parted with its undertaking or business or disposed of its undertaking within the meaning of clause (a) of sub-section (1) of section 293. All that it has done is, mortgaged all its properties for raising funds for its working.

In the documents with which we are now concerned, it will be seen that, although the mortgage is drafted in the form of an English mortgage under which the mortgagee is entitled to immediate possession of the property, the mortgagor-company is permitted to continue in possession and the mortgagee-bank is not to take possession of the properties until the company commits default in observing the terms of the instrument. In the deed of hypothecation of movables, the contingencies in which the bank can take possession of the hypothecated properties are more elaborately enumerated and they include not only defaults on the part of the company but also winding up, whether voluntary or compulsory.

In actual effect, therefore, the documents create what can rightly be described as a floating charge or more accurately, the documents, properly understood, have the same effect as a floating charge described above.

It cannot therefore be contended that the company has disposed of the whole or any part of its undertaking understood in the correct sense.

There is, however, only one clause which appears to be out of tune with that I have stated above, and that is clause 5(i) of the deed of mortgage, exhibit R-15. The effect of that clause is to empower the bank not merely to take possession as mortgagee for the purpose of realising its dues from out of the property expressly given to it; as security but also to actually take over the management of the business of the company. It appears to me that the said clause is invalid, because to permit the bank to take over the management of the company's business itself may be regarded as a disposal by the company of the whole of its undertaking to the bank. But the invalidity of this one clause in the document need not, in my opinion, be said to have a fatal effect on the entire transaction itself. This clause alone can be struck down to the extent it empowers the taking over of the management of the business of the company without affecting the validity of the enforceability of the rest of the terms. In actual event, the bank has not taken possession of the management; it has simply taken over the mortgaged properties into its possession and that taking of possession should be related in the normal course to a legal right properly and lawfully exercisable by the bank, viz., the right to take possession for the purpose of realising its securities and recovering the moneys due to it from out of the properties expressly mortgaged or charged in its favour.

My finding on the 4th point therefore is that except to the extent clause 5(i) of exhibit R-15 and the corresponding clause of exhibit R-34, which empower the bank to take over the management of the business of the company, neither the mortgages nor the hypothecations are invalid for contravention of clause (a) of sub-section (1) of section 293 of the Companies Act, 1956, and that the said offending clauses are alone invalid and unenforceable to the extent mentioned above.

In the light of my findings, I make the following common order on both these Applications Nos. 143 of 1967 and 20 of 1968:

(1)            The Bank of Maharashtra, the applicant in Company Application No. 143 of 1967, is a mortgagee of the immovable properties and hypothecatee of the movable properties of the company described in exhibits R-8, R-15, R-21, R-31, R-34 and R-39, and that in exercise of the rights  and powers conferred upon it by the said documents, it is entitled to take and retain possession of the properties described in the said documents for the purpose of recovering the moneys due to it by enforcing its security against the said properties. It has also the power of selling the said properties without the intervention of court for the purpose of recovering the moneys due to it in accordance with and by complying with the provisions of the Transfer of Property Act and the Contract Act governing the exercise of such power. The bank will be accountable to the company in liquidation as a mortgagee in possession, and if it exercises its power of sale without the intervention of court, it will be accountable for the moneys realised by sale in accordance with or in terms of sub-section (4) of section 69 of the Transfer of Property Act.

        (2)            I express no opinion as to the exact amount now due to the bank.

(3)            The bank is directed to deliver all articles of furniture belonging to the company now in its possession to the official liquidator.

In both these applications, the parties will bear their own costs.

 

[1942] 12 COMP CAS 75 (ALL.)(FB)

FULL BENCH

HIGH COURT OF ALLAAHABAD

Maheshwari Brothers

v.

Official Liquidators, Indra Sugar Works Ltd.

IQBAL AHMAD, C.J. AND

GANGA NATH AND BRAUND, JJ.

LETTERS PATENT APPEAL NO. 55 OF 1938

DECEMBER 9, 1941

 

 S.N. Sen, G.S. Pathak and M.B. Bhatnagar, for the Appellant.

C.B. Agarwala, for the Respondent.

JUDGMENT

Ganga Nath, J.—This is an appeal against the order of the learned Company Judge. It arises out of an application made by the appellants under Section 183 of the Indian Companies Act. The appellants were appointed managing agents by the Indra Sugar Works Ltd. under an agreement, dated 22nd December 1934. According to the agreement, the appellants deposited Rs. 50,000 with the company as security for the fulfilment of their obligations under the agreement. The company was ordered to be wound up by this Court on a petition of the appellants, and liquidators were appointed. The liquidators called on all creditors to establish their debts. The applicants claimed that the company were indebted to them to the extent of Rs. 55,437-8-0. They further claimed that in respect of this sum they were preferential creditors and held a charge on the machinery and other goods of the company. The Official Liquidators allowed the petitioners' claim for Rs. 52,694-8-0, but disallowed their claim that the sum of Rs. 50,000 which constituted the "security deposit" was held by the company as a trust fund and ought to be repaid in fact to the petitioners with interest in priority to the creditors. Against this order the applicants made an application to this Court under Section 183 of the Indian Companies Act. The learned Company Judge upheld the order of the Official Liquidators. It is against this order that the present appeal has been filed.

It has been contended on behalf of the appellants that under clause 14 of the agreement the amount of security money was a second charge on the machinery and other goods of the company. The agreement is not registered. It has been contended on behalf of the Official Liquidators that the charge is invalid for want of registration under Section 109(1)(c). It is contended on behalf of the appellants that the machinery was not immovable property and therefore the charge was valid so far as the machinery was concerned. The following issue was remitted to the learned Company Judge for a finding:—

"Whether, and to what extent, the charge of the appellants on the machinery, though unregistered, is valid ?"

The learned Company Judge's finding is "that the charge of the appellants on machinery is not valid at all." This finding has not been challenged before us. Clause 14 of the agreement " that the amount of security money will be the second charge on the machinery and other goods of the company" purported to create a charge, that is, a charge which would fasten on to the property that might exist when the time arrived for the charge to be enforced. In the case of The Imperial Bank of India Ltd. v. The Bengal National Bank Ltd. the principal tests as to whether a charge is a floating one or not were laid down by their Lordships of the Privy Council.

They are:—

        "(1)  Is it a charge upon all or a certain class of assets. Present or future ?

        (2)    Would the assets charged in the ordinary course of business be changed from time to time ?

(3)    Has the company power until such step is taken by the charges to carry on the business of the company in the ordinary way?"

If these tests are applied to the present charge, there can be no doubt that the charge was a floating one. This being so, the charge is void under Section 109 for non-registration.

It was further contended for the appellants that the money deposited by the appellants with the company was trust money and, as such, was not part of the assets of the company and should be returned to them. It is not disputed that this money was deposited by the appellants themselves in the general accounts of the company. It was agreed between the parties that the appellants would get interest on this money and that the money would be a second charge on the machinery and other assets of the company. These circumstances clearly point to the intention of the parties at the time the money was deposited. They leave no room for doubt that the parties never intended that this money was to be kept aside in trust for the appellants or that it was not to be utilised by the company for any purpose.

A similar question arose in In re Annapurna Co., Ltd. There by an agreement entered into between Dr. Tug and the company the latter agreed to employ Dr. Tug's son. Dr. Tug and his son agreed to furnish security for Rs. 10,000, which money was to be repaid by the company on the expiry of the term of employment. It was further provided that, in case the company went into liquidation, Dr. Tug and his son would have the position of a preferential claimant. It was held there that the agreement in question did not create a trust or anything in the nature of a trust and that Dr. Tug was merely a creditor of the company, as the document contained no direction that the money handed over by him was to be kept aside in trust for him or was not to be utilised by the company for any purpose.

The same view was taken by the Bombay High Court in the case of G.K. Malvankar v. The Credit Bank of India Ltd. and In re ; Manekji Petit Manufacturing Co. Ltd.

Learned counsel for the appellants relies on the case reported in In the matter of Hindustan Commercial Bank (India) Ltd. This case is distinguishable inasmuch as there the money was placed in a fixed deposit account in the name of the employee, who deposited the money apart from the funds of the Bank.

We think that every case of this kind will fall to be considered on its own facts and circumstances. In the one before us, we find two indications that it was not within the contemplation of the parties to the transaction that the sum of money in question should be treated as a segregated trust fund—first, the provision contained in the agreement of December 22, 1934, that is repayment should be secured by a charge on the company's assets and, secondly, the provision for the payment of interest by the company. The former, if not wholly inconsistent with the constitution of a trust fund, at least points to the view that the money was to be "repaid" in the sense that it would constitute a "debt" from the company to the petitioners. The latter provision also, in our view, points strongly in the same direction, as, if the fund had been a trust fund, the interest it earned would itself belong to the petitioners and no question of the payment of interest by the company would arise.

We think that a fair test of whether a sum of money of this kind is to be held as a trust fund or not is to ask whether, in the circumstances, it was intended that it should remain a segregated fund, or whether it should, on payment, become the property of the company and be compensated for by the company's express or implied covenant to repay it in exactly the same way as the customer's deposit in a bank creates the relationship of debtor and creditor. We think that the circumstance that it passed into the general assets of the company and was utilised by them for their general purposes is a strong indication that the latter view is the correct one, as the first duty of a ' trustee ' is to avoid mixing the trust funds with his own or to use them for other than trust purposes.

For these reasons, therefore, we find that the money deposited by the appellants was not trust money and the appellants have no preferential claim.

There is no force in the appeal. It is therefore ordered that it be dismissed with costs.

 

[1939] 9 COMP CAS 166 (SIND)

JUDICIAL COMMISSIONERS COURT OF SIND

Indus Film Corporation Ltd., In re

LOBO, J.

Miscellaneous No; 308 of 1936

AUGUST 17, 1938

 Khanchand Gopaldas, for Official Liquidator.

Dingomal Narainsing, for Claimants.

JUDGMENT

Lobo, J.—In connexion with the liquidation proceedings relating to the concern known as the Indus Film Corporation Ltd., a point has arisen which has been referred to the Court for decision. In February 1936 when the Corporation was a going concern Amiji Valiji Sons & advanced to the Corporation a sum of Rs. 5,000. This money remained unpaid when the Corporation went into liquidation. Amiji Valiji & Sons in the course of liquidation proceedings have presented a claim for Rs. 5,000 which the Official Liquidator is prepared to admit; but Amiji Valiji & Sons further claim to be. secured creditors with a lien on all the assets of the Corporation including machinery, shed, laboratory, &c, in the Corporation studio on Lawrence Road, and the Official Liquidator who disputes this latter claim has referred the point to the Court for determination. To understand the legal issues involved it is very necessary to have a clear idea of the facts, and these are to be gathered from the evidence of the witnesses examined before me and the documents exhibited. It seems clear that early in 1936 the Corporation was in sore need of funds. Mr. Dastur (Ex. 11) at present Manager of the Sind Provincial Co-operative Bank who in 1936 was for some time a director of the Indus Film Corporation Ltd., states:

"I was a director of the Indus Film Corporation Ltd. I know Dr. G.L, Dudani. He was Chairman of the Corporation. I know Amiji Valiji & Sons. In February 1936 the Corporation wanted money; they had not sufficient liquid assets. I was approached to secure a loan for the Corporation. I was approached by Lalji Mahrotra and Dr. Dudani. The latter used to carry on the business of the Corporation. I approached Moosaji of Amiji Valiji & Sons for a loan of Rs. 5,000. He agreed, but wanted security in the form of a lien on the Corporation's property. Dr. Dudani agreed to give the security asked for, but said he would consult the other directors. He must have consulted the directors. The loan was given and two cheques of Rs. 2,500 each passed through my hands. This is the pronote for the loan (Ex. 12). This is the letter of lien executed by Dr. Dudani, the Chairman (Ex. 13). This was dated 29th February 1936. The dates of Exs. 12 and 13 are different because I detained the second cheque till Ex. 13 was handed to me. The first cheque was dated 12th February 1936."

"The witness has also stated that he himself advanced Rs. 2,000 to the Corporation on 31st January 1936 and that Lalji Mahrotra, another director of the Corporation, had also given a loan of Rs. 2,500. It would appear therefore that in January and February 1936 the Corporation had raised loans to the extent of Rs. 9,500. Ex. 12 is the demand pronote for the loan of Rupees 5,000 from Amiji Valiji & Sons: it is dated 11th February 1936, and it is signed For the Indus Film Corporation, Ltd., G.L. Dudani, Chairman."

Exhibit 14 is a letter dated 12th February 1936 from the Indus Film Corporation Ltd., to M/s Amiji Valiji & Sons. It refers to the pronote for Rs. 6,000 and states:

"We confirm having received from you payment by two cheques for Rs. 2,500 each dated 12th and 17th February 1936 respectively."

Exhibit 13 is the letter of lien and must be set out in full. It reads thus:

"With reference to the loan of Rs. 5,000 advanced by you to us as per our promissory note for Rupees 5,000 dated 11th February 1936, we hereby declare that you will have lien on all our assets including machinery, shed, laboratory materials, settings now lying or that may be brought hereafter in our studio on Lawrence Road in Garden quarter until repayment of the aforesaid loan and interest thereon. We hereby declare that we have not given any lien or right to any other person and that the same are free from any incumbrance."

Exhibit 23 is the entry relating to Rs. 5,000 in the cash book of the Corporation. This entry appears at page 143 of the cash book and is dated 11/13th February 1936. It refers to a voucher No. 611 which has been produced and is Ex. 24 in the case. But it makes no reference to any lien. The corresponding entry in the Corporation ledger is Ex. 25. Ex. 17 is a resolution of the Board of Directors of the Indus Film Corporation Ltd., dated 22nd February 1936. It reads thus:

"Resolved that the loan of Rs. 9,500 taken by the Managing Agents in anticipation of sanction is hereby sanctioned."

The amount of Rs. 9,500 referred to in the resolution has been explained in the evidence of Mr. Dastur. It consists of the Rs. 5,000 obtained from Amiji Valiji & Sons and the sums of Rs. 2,( 00 and Rs. 2,600 lent to the Corporation by Mr. Dastur himself and Lalji Mahrotra. It would appear from the evidence of Mr. Dastur that Dr. G.L. Dudani was attending to all the business concerns of the Corporation in his capacity as Chairman of the Board of Directors. Dr. Dudani appears to have considered that the lien granted to Amiji Valiji & Sons fell under the provisions of Section 109, Companies Act, and required to be registered with the Registrar of Joint Stock Companies. On 10th March 1936, he wrote to the Registrar a letter, Ex. 15, which reads:

"We are herewith sending you for registration a statement showing the charges incurred by the Corporation."

The statement referred to is Ex. 15/1. It refers to the loans of Rs. 5,000 from Amiji Valiji & Sons and states that the property charged in respect of this loan is all assets including " machinery, shed, laboratory materials, settings." Ex. 15/4 is the reply sent to the Indus Film Corporation Ltd. by the Registrar of Companies, returning the papers sent to him with the letter Ex. 15. Ex. 15/4 reads:

''The statement of charges created by the company is not required to be filed. What is required to be registered are the actual mortgages or charges together with their particulars in the prescribed Form IX within 20 days after the date of creation of each charge (vide Section 109, Companies Act, 1913)."

All the papers received with your above letter are returned herewith.

At the meeting of the Board of Directors of the Corporation held on 26th July 1936 a resolution was passed which reads:

"That a, committee of Messrs. Partahm Daooji and Ishwardas Mallik be and is hereby appointed to look into the loans by the Corporation and have the loans secured as they consider. proper.”

This is Ex. 19. On 8th August 1936 at a meeting of the Board of Directors of the Corporation one of the resolutions passed was this:

"The loans as registered in the books of the Corporation to date were admitted and the report of the Committee to secure them was approved and the necessary documents may be got executed."

It is next necessary to a proper appreciation of the legal issues involved in this matter to be clear about the constitution of the Corporation and the provisions relating to its management. The Indus Film Corporation Ltd., was incorporated under the Companies Act of 1913, and Ex. 5 is a copy of the Memorandum and Articles of Association of the Corporation. The Memorandum of Association does not contain any express provision for the raising of loans by the Corporation but in (S) of para. 3 in which the objects of the Corporation are set out the Corporation is given power to do all such things as are incidental or convenient to the attainment of the objects of the Corporation and this no doubt will include the power to raise money on loans for the carrying on of the business of the Corporation. Article 4 of the Articles of Association reads thus:

"The company shall forthwith enter into two agreements with the Sind Talkies, Karachi, and the Silver Screen Syndicate, Karachi as the Managing Agents and Distributors respectively in terms of the draft agreements which have, for the purpose of identification, been signed by three of the subscribers to the Memorandum of Association and the Directors shall carry the same into effect."

Article 78 reads thus:

"The Directors shall every year appoint one from among themselves as Chairman. He will be the Chairman of the Board of Directors as well as of the Company. He shall hold office for so long as he continues to be a Director and until a new Chairman is appointed."

Article 84 reads thus:

"The control of the management of the business of the company shall be vested in the Directors, who shall manage through the Managing Agents, the Sind Talkies, Karachi, with whom the company has entered into an agreement and the Directors may exercise all such powers and do all such acts and things as the company is, by its memorandum or otherwise, authorized to exercise and do...,.."

Article 89 reads:

"The Directors shall duly comply with the provisions of the Companies Act, 1913, or any statutory modification thereof for the time being in force and shall appoint a person who shall be the principal officer of the company for the purpose of discharging the statutory duties mentioned in the Companies Act."

By a resolution of the Board of Directors dated 16th February 1935, Ex. 18 in the case, Dr. G.L. Dudani was elected Chairman of the Board of Directors of the Corporation for the first year of the Corporation and Mr. Ramchand Jiwanlal was appointed Secretary of the Board of Directors of the Corporation for the first year of the Corporation. By a resolution of the same date the Chairman (Dr. Dudani) was appointed to act as the principal officer of the Corporation for the period during which he was Chairman of the Corporation. By a resolution of the Board of Directors dated 31st March 1936 (Ex. 18) Dr. G.L. Dudani was again elected as Chairman of the Board of Directors of the Corporation. Nowhere in the Articles of Association of the Corporation is there any express provision as to the making and signing of contracts for and on behalf of the Corporation. Ex. 26 is the agreement between the Corporation and its Managing Agents, the Sind Talkies. Cl. 5 (d) thereof provides that subject to the general control of the Directors the Managing Agents may

"borrow or raise any sum of money by loan or otherwise on mortgage or hypothecation, on such securities and the terms as deems fit, and execute, sign and seal, or deliver all necessary documents or do any other acts in that behalf."

It is certainty not dear on the record when this agreement (Ex. 26) was executed. It bears the date 23rd February 1935. But the signatures appear on p. 4 on which no part of the agreement has been typed. There is no date for any of the signatures. Below the signatures there is an endorsement by one Govindanand dated 28th July 1936. It reads:

"I hereby certify that I have this day witnessed this original document and that it does not bear any endorsement in favour of any person or persons."

Govindanand has signed this endorsement in the presence of Hoosainbhoy Esmailji, First Class Magistrate, Karachi, on 28th July 1936. This point has apparently escaped the learned advocates who argued the matter before me, but as the document stands, it is to my mind very doubtful as to when the agreement (Ex. 26) was executed. The Managing Agents have signed Ex. 26 thus: "Per Pro. Sind Talkies, Karachi, Kamchand Jivanlal." Ramchand Jiwanlal was the Secretary of the Board of Directors and of the Corporation. Mr. Dastur in his evidence has stated:

"The managing Agents were the Sind Talkies as far as I know. Mr. Ramchand and Dr. Dudani were partners in 'The Sind Talkies'."

At another place in his evidence Mr. Dastur has distinctly stated that Dr. Dudani used to carry on the business of the Corporation. At the meetings of the Board of Directors at which the resolutions Exs. 16, 16/1, 17, 18, 19 and 20 were passed, Ramchand Jivanlal of the Sind Talkies was present. It would appear, therefore, that whether as a partner in 'The Sind Talkies', the Managing Agents of the Indus Film Corporation Ltd., or as Chairman of the Board of Directors and of the Corporation it was Dr. G.L. Dudani who was carrying on the business of the Corporation at the time when the loan of Rs. 5,000 was taken from Amiji Valiji & Sons and for some considerable time thereafter.

Now, the points that arise for decision from the rival contentions of the parties are these: (1) Was any charge created in respect of the loan of Rs. 5,000 from Amiji Valiji & Sons? (2) Is the charge valid in law? (3) Is it binding on the Corporation? I will deal with these points in the order in which I have stated them. As regards the creation of the charge the learned advocate for the Official Liquidator argues that the language of Ex. 13 clearly shows that at that time the Corporation merely agreed to give a lien at some future date. Thus no lien was in fact created by the document Ex. 13. He has relied on the words: "We hereby declare that you will have lien on all our assets including machinery, etc."

I do not however agree that there is any force in this argument. There can be no doubt to my mind that Ex. 13 created and intended to create an immediate charge. If the phrase used is not accurate and unambiguous, this is clearly attributable to the fact that Dr. Dudani does not appear to be an English scholar. Reliance has also been placed by the learned advocate for the Official Liquidator upon the fact that in the account books of the Corporation. Exs. 23 and 25, there is no mention of any lien and that no register of charges has been produced. On the other hand, there is the clear and definite evidence of Mr. Dastur and I have no reason whatever to reject the word of this witness. Mr. Dastur is a very respectable gentleman. He is the present Manager of the Sind Provincial Co-operative Bank and was in 1936 a Director of the Indus Film Corporation Ltd. I hold therefore on this point that a charge was created in respect of Amiji Valiji's loan of Rs. 5,000 and Ex. 13 is that charge. A much more important question however is whether this charge is valid in law. Its validity is attacked by reason of Section 109, Companies Act, which provides that certain mortgages and charges referred to therein

"shall, so far as any security on the Company's property, or undertaking is thereby confirmed, be void against the liquidator and any creditor of the Company, unless the prescribed particulars of the mortgage or charge together with the instrument (if any) by which the mortgage or charge is created or evidenced, or a copy thereof verified in the prescribed manner, are filed with the Registrar for registration in manner required by this Act within 21 days after the date of its creation."

Now Ex. 13, it is common ground' was not registered with the Registrar in the manner provided by Section 109, Companies Act, and the whole argument as to the validity of the lien has turned upon the question whether or not the document (Ex. 13) constitutes a floating charge on the property of the Corporation falling under Clause (F) of sub-section 1 of Section 109, Companies Act-It is common ground that Clause (E) of the section which relates to a mortgage or charge not being a pledge on moveable property of the Company can have no application because Ex. 13 is dated 29th February 1936 and Clause (E) came to be inserted in Section 109 only in October 1936.

This question has caused me much anxious thought, but after a careful consideration of the matter from every aspect I have come to the conclusion that Ex. 13 creates a floating charge on the assets of the Corporation within the meaning of Cl. (F) of sub-section 1 of S. 109, Companies Act and that not having been registered as required by S. 109 it is void against the Official Liquidator. A floating charge has thus been described by Romer L.J. in Houldsworth v. Yorkshire Woolcombers Association Ltd.

"The term ' floating' is one that until recently was a mere popular term. It certainly had no distinct legal meaning. It is not a legal term. It has recently been used in more than one statute but when the Courts have to consider whether the charge is a floating one within the meaning of the term as used in the Acts of Parliament, and in particular within the meaning of the Companies Act, 1000, one must, I think, deal with the question of substance to be answered according to the circumstances of each particular case. I certainly do not intend to attempt to give an exact definition of the term ' floating charge' nor am I prepared to say that there will not be a floating charge within the meaning of the Act, which does not contain all the three characteristics that I am about to mention, but I certainly think that if a charge has the three characteristics that I am about to mention, it is a floating charge. (1) If it is a charge on a class of assets of a company present and future; (2) if that class is one which, in the ordinary course of the business of the company, would be changing from time to time; and (3) if you find that by the charge it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets I am dealing with."

In the same case Cozens-Hardy L.J., gave a more positive description of a floating charge. He says:

"My view is that the floating charge need not be on the whole undertaking nor on the whole property of the Company. It mu9t I think, embrace both present and future property and property of a particular class. It must, I think, contain expressly or by necessary implication a right to the company to deal with it for a certain time as though the charge had never been executed. When these conditions are found, I think you have a floating charge within the meaning of the Act."

These descriptions of a floating charge were supplemented in a later case by Buckley L.J., who, in Evans v. Rival Granite Quarries Ltd., summarized the decisions as follows:

"A floating security, is not a future security; it is a present security, which presently affects all the assets of the company expressed to be included in it. On the other hand, it is not a specific security; the holder cannot affirm that the assets are specifically mortgaged to him. The assets are mortgaged in such a way that the mortgagor can deal with them without the concurrence of the mortgagee. A floating security is not a specific mortgage of the assets, plus a licence to the mortgagor to dispose of them in the course of his business, but is a floating mortgage applying to every item comprised in the security but not specifically affecting any item until some event occurs or some act on the part of the mortgagee is done which causes it to crystallize into a fixed security.”

As Lord Macnaghten observes in Illingworth v. Houldsworth, a floating charge is

"ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp."

The latest English case in which the nature and elements of a floating charge have been discussed is the case in Mercantile Bank of India Ltd. v. Chartered Bank of India, Australia and China, and Strauss & Co., Ltd. It is a judgment of Porter, J., in the K. B. Dn. The learned Judge was there dealing with a case of money borrowed upon the security of letters of hypothecation relating to goods and produce in the borrowers' godowns. The borrowers were free to deal with the goods and produce in the ordinary course of business and the contents of their godowns changed frequently. Referring to the charge in this case Porter, J., states:

"But when one comes to the question of what a floating charge is, in my view, one gets the best description from what was said by a learned Lord Justice. I will not say ' definition' because one learned Lord of Appeal said he need not define the meaning of the phrase, and a learned Lord Justice, whose definition I propose to adopt, said, to start with: " It is not difficult to define a floating charge," and then proceeded to give what I should have considered a definition if he did not afterwards himself refer to it as a description. In these circumstances, I prefer the description of Fletcher Moulton, L.J., which is contained in Evans v. Rival Granite Quarries, Ltd. I think that case in effect says, without limiting or trying to be too exact in the matter, that the main and substantial question is: are you altering from time to time the security which you have given so as to leave that security free for the person making the pledge to deal with, or are you not leaving it free, but are you restraining him from dealing with it in the sense that he has either got to pay the money for which the pledge was given as security to him, or on his behalf, or in the sense that it actually is made his property for the time being though when it is parted with the money may be substituted for the security given. In my view, in the case of the Mercantile Bank of India, Strauss & Co. Ltd., were entirely at liberty to deal with the goods which were pledged, subject to their being a general charge over the property which did not light upon any of their property until the seizure of the goods."

The principle set out in the leading English cases on the subject of a floating charge which have been referred to above has been sought to be applied in several cases in India which have been referred to before me in argument. In Bank of Baroda v. H.B. Shivdasani, the facts were that the directors of a company executed an instrument creating a charge in favour of the bank. The instrument states that in consideration of bank advancing a loan of two lacs, the company had "deposited and pledged with and to the bank as security for the repayment of the loan all the liquid assets including stock in process now or at any time hereafter to be stored by the company in its godowns," the keys of which had been delivered to the bank and were to remain in the possession of the bank. The bank took possession of the liquid assets and its clerk was retained in charge thereof. The company agreed to maintain the goods in the godowns at a value of 33 per cent. above the amount for the time being due. The question having arisen were the instrument created a floating charge, it was held by a Bench of the High Court that the charge created was not a floating charge; it was a mortgage of specific assets with a licence to the mortgagor to dispose of them in the course of the business subject to prescribed conditions. The facts of this case are entirely distinguishable from those in the case before me and this decision is therefore not helpful.

The next case in which the matter of a floating charge has been considered in India is the case in D. Pudumjee & Co. v. N.H. Moos, a decision of a Bench of the same learned Judges as decided the case in Bank of Baroda v. H. B. Shivdasani. In this case the respondent N.H. Moos, a receiver in a suit in the Bombay High Court, lent and advanced to F.F. Gordon Ltd., a sum of rupees two lacs. In respect of the loan three documents were executed, a resolution authorizing one Mr. Cunnigham to arrange a loan, a demand pronote for Rs. 2,00,000 and an agreement between the company and the receiver signed by Cunnigham. There was also a letter written by Cunnigham to the receiver stating that he had taken possession of the machinery, presses and all moveable property comprised in the said agreement as the receiver's agent and would continue to hold the same as his agent. F.F. Gordon, Ltd., it may be explained, were the proprietors of a printing press and Mr. Gunnigham was the managing director of the company and editor of the "Advocate of India." On the company going into liquidation, the receiver claimed that he was entitled to a preferential charge over the moveables of the company on the ground that he was a pledgee in possession. In deciding the case against the receiver, Coyajee, J., who delivered the judgment in the case states:

"In my opinion the parties did not create a pledge of existing properties; they intended to create a floating charge on all the properties of the company "except the leaseholds and the goodwill," within the meaning of Section 109, Companies Act, 1913, but the charge is void for want of registration."

Macleod, C.J., added:

"The document of 9th February 1922 did not create a pledge of specific assets belonging to the company in favour of the receiver, but created a floating charge on all the company's assets, and was therefore compulsorily registrable under Section 109, Companies Act."

Yet another case in which the subject of a floating charge has received careful consideration on the basis of the leading English cases on the point is the case in H.V. Low & Co. Ltd. v. Pulinbiharilal Singha. In that case the document in question was a kabuliyat in respect of a mining lease containing the following stipulation:

"Further, the right I have got on the basis of this settlement, the machineries of the said kuthi, the engine and the boilers, etc., will all along remain under first charge for the said royalty and minimum royalty."

After an exhaustive review of the English cases on the point Mukerji, J., states as follows:

"Bearing these observations in mind, if one examines the character of the charge created in the present case, one finds certain elements present or absent.............. It may be conceded that, for a floating charge, it is not necessary that the entire book debts or the entire assets of the business should be charged but it is nevertheless apparent that the governing idea is to allow a going concern to carry on its business in the ordinary course, the effect of which would be to make the assets liable to constant fluctuation. This element is entirely absent in the present case; what is charged being the leasehold and the machineries, engines, boilers, etc., that is to say, the moveables that would be brought on to the premises. With the charge on them, not a single screw could be removed except perhaps for the purpose of being replaced and neither the moveables nor any parts of them could be disposed of by the lessee. The element of fluctuation due to ordinary wear and tear that is present here is widely different from what would be consequent on the power of disposal in the ordinary course of business, which marks the outstanding feature of property subject to a floating charge."

After quoting Buckley, L.J.'s remarks in Evans v. Rival Granite Quarries, Ltd. the learned Judge proceeds:

"Now, what is the event, on the happening of which, or what is the act or the nature of intervention of the mortgagee, which is required to crystallize the security in the present case? Clearly, no act or intervention on the part of the mortgagee is necessary. What however is said is that until royalty or minimum royalty is due or is in default, the charge will not fasten on the property. This, in our opinion, is not the kind of event contemplated; as soon as the royalty or minimum royalty accrues due, it forms a charge on the assets specified, and no extraneous event is necessary for the charge to fasten itself. This element too is wanting in the present case."

On the facts of the case before me, it appears to me that the case in D. Pudumjee & Co. v. N.H. Moos bears the closest analogy to the present case. Under Exhibit 13 what is charged is

"our assets, including machinery, shed, laboratory materials, settings, now lying or that may be brought hereafter in our studio."

These assets are undoubtedly of a fluctuating nature. It may be that the machinery, shed and laboratory are not assets which would fluctuate to any considerable extent, but materials, settings and other things appeartaining to a film business are undoubtedly of an extremely fluctuating nature and must change from time to time in the ordinary conduct of the business of a film corporation. This, in the words of Romer, L.J., is the first characteristic of a floating charge. Then again, by reason of Ex. 13 no restraint of any kind whatever is placed upon the Indus Film Corporation Ltd. in the carrying on of the business. In the words of Cozens-Hardy, L.J., in Houldsworth v. Yorkshire Woolcombers Association Ltd. here is a second characteristic of a floating charge. Cozens-Hardy, L.J., said:

"It must, I think, contain expressly or by necessary implication a right to the company to deal with it for a certain time as though the charge had never been executed"

Even the third characteristic referred to by Romer, L.J., in the same case is to be found in the present case. Not till Amiji Valiji & Sons demand payment of the money lent by them and institute a suit for the recovery thereof does the charge in this case, in the words of Buckley, L.J., "crystallize into a fixed security." Or in the words of Lord Macnaghten in Illingworth v. Houlds-worih " settle and fasten on the subject of the charge within its reach and grasp ". The learned advocate for Amiji Valiji & Sons has urged before me that the case really applicable in this matter is the case in H.V. Low & Co. Ltd. v. Pulinbihanlal Singha, but I cannot agree. What was charged in that case was the leasehold Tight granted by the settlement, the machineries of the kuthi and the engines and boilers, etc. These were assets which were not of a fluctuating nature as the learned Judge himself points out; the element of fluctuation was entirely absent. I am therefore of opinion that Ex. 13 constitutes a floating charge of the assets of the Indus Film Corporation, Ltd., falling within the meaning of Clause (F) Section 108, Companies Act and not having been registered it is void as against the Official Liquidator.

In view of my decision the third point for decision which has been set out above does not really arise. If there is no charge valid in law then there is nothing to bind the Corporation. I would however record a finding on this point briefly stating my reasons. Under Section 88, Companies Act, a contract on behalf of a company if it is a contract in writing may be made on behalf of the company and signed by any person acting under its authority express or implied. In the present case, the Articles of Association of the Corporation are silent on the point. The agreement with the Managing Agents (Ex. 26) does make specific provision for the entering into and execution of contracts, but, as I have said above, there is considerable doubt as to whether the agreement (Ex. 26) had been executed and was in force in February 1930. But even if it was it makes no material difference. According to the evidence of Mr. Dastur, the business of the Corporation was carried on by Dr. Dudani. The Managing Agents were the Sind Talkies and Mr. Dastur states:

"As far as I know Mr. Ramchand and Dr. Dudani were partners in 'The Sind Talkies'."

There is no ether evidence on the record on the point. Ex. 13 was executed by Dr. Dudani as Chairman of the Corporation. Dr. Dudani was elected as Chairman of the Board of Directors and the Corporation on 31st March 1936 by the document (Ex. 18). He had already been elected Chairman of the Board of Directors and the Corporation and the principal Officer of the Corporation in 1935 by resolution Exs. 16 and 16/1. By the Board's resolution Ex. 17, dated 22nd February 1936, the raising of the loan from Amiji Valiji & Sons had been sanctioned. There is every reason to believe that the resolution of the Board dated 8th August 1936, Ex. 20 admitting the loans registered in the books of the Corporation and accepting the report of the Committee that they should be secured and formal documents made out covered the loan of Amiji Valiji & Sons. In these circumstances and in the face of these facts it is extremely difficult to accept the argument that Dr. Dudani was not authorized to raise a loan from Amiji Valiji & Sons and execute the document Ex. 13. If there was no express, there was undoubtedly implied authority to Dr. Dudani. I have omitted to mention that at all the meetings of the Board of Directors at which the resolutions Exs. 16,16/1,17,18, 19 and 20 were passed, Ramchand Jiwanlal, the Secretary of the Board of Directors and a partner in the firm of the Managing Agents, was present. Reference has been made to passages in Halsbury's Laws of England, Vol. 5, at pp. 464, 467 and 468 and to several English cases such as In re County Life Assurance Co. and Royal British Bank v. Turquand on the question as to the binding effect of the Memorandum and Articles of Association upon persons dealing with a company and upon the question as to how far such a person is under obligation to inquire into the constitution and inner working of the company. It is unnecessary for me however to refer to all these decisions at any length, for it appears to me that in this case the facts make it obvious that Dr. Dudani was authorized to execute the document (Ex. 13) giving a charge to Messrs. Amiji Valiji & Sons. As however I hold that the charge is invalid by reason of the provisions of Section 109, Companies Act 1913, my decision must be in favour of the Official Liquidator.

As regards costs, I am not inclined to grant costs in this matter to the Official Liquidator against Amiji Valiji & Sons because for the charge being held invalid the party responsible is the Indus Film Corporation Ltd., who did not take the necessary steps to have the charge registered as required by law.

 

[1959] 29 COMP. CAS. 476 (ALL)

HIGH COURT OF ALLAHABAD

Official Liquidator

V.

Sri Krishna Deo

UPADHYA, J.

APPLICATION NO. 3 OF 1957

MAY 16, 1958.

UPADHYA, J. - This is an application by the official liquidator praying for a declaration that the holders of the third series of debentures of the U.P. Oil Industries Ltd., now in liquidation, are not secured creditors of the company.

This company was ordered to be wound up on May 11, 1956. After investigating into the assets and liabilities of the company the liquidator found that it had three series of debentures. The first series of debentures were allotted on April 8, 1948, for a total sum of Rs. 1,50,000. A debenture trust deed was executed and registered with the Registrar, Joint Stock Companies, Lucknow, and also in the Office of the Sub-Registrar, Lucknow, under the Indian Registration Act.

The second series of debentures were issued on June 23, 1950, for a sums of Rs. 1,00,000. For this series also a debenture trust deed was executed and it was registered with the Registrar, Joint Stock Companies, Lucknow, as well as in the Office of the Sub-Registrar, Lucknow, under the Indian Registration Act. By a resolution dated the 23rd March, 1952, the board of directors authorised Sri B. P. Agarwal who was managing the affairs of the company to issue a third series of debentures for Rs. 4,50,000 and a Committee was appointed to allot these debentures.

In pursuance of the above resolution the committee on the 7th April, 1952, allotted debenture bonds Nos. 1 to 4 for Rs. 2,000 to Rai Sahib Pt. Sri Krishna Deva Bhargava of Khatauli and four bonds Nos. 5 to 8 for Rs. 3,000 to Smt. Rajeshwari Devi of Karol Bagh, Delhi. No debenture trust deed was executed for this series and there was no registration in the Office of the Sub-Registrar under the Indian Registration Act.

The Company however appears to have registered with the Registrar, Joint Stock Companies, the particulars of this third series of debentures on the 18th April, 1952, under section 109 of the Indian Companies Act, 1913, and it further appears that a printed form of the debentures of this series along with the conditions under which they were issued was also filed in the Office of the Registrar of Companies, there being no trust deed relating to this third series of debenture. Each debenture allotted to each person is alleged to be a different transaction and the official liquidator contends that each such transaction should have been registered within 21 days of the date on which the debenture was issued. The holders of the third series of debentures are, therefore, said to be unsecured creditors and entitled to no preference.

Notice was issued of this petition and the petition was opposed both on behalf of the company as well as on behalf of these debenture holders. It is contended that registration under section 109 of the Companies Act is all that is needed under the law and as the issue of debentures was intended to create only a floating charge on all the assets of the company generally no registration under the Registration Act was either necessary or practicable.

In this connection it was also urged that the plant and the machinery of the company, at least the major and more substantial part of it, was movable property within the meaning of the law and even if the third series of debentures were not registered under the Registration Act such plant and machinery being movable property could be held to be under a charge so far as these debentures were concerned.

Two questions thus arise for consideration. The first is whether registration under the Registration Act is essential to create a charge on the assets of a company and the second is as to whether the plant and machinery of the company or any part thereof is movable property. Section 109 of the Indian Companies Act, 1913, requires that every mortgage or charge created by a company should be registered with the Registrar of Companies.

This is necessary whether the mortgage or charge is for the purpose of securing any issue of debenture or whether it is a mortgage or charge on the uncalled share capital of the company or any immovable property or interest therein or is a floating charge on the undertaking of the company generally and the provision says that where necessary particulars of the mortgage or charge are not filed with the Registrar for registration in the manner prescribed, within 21 days of the date of its creation, the mortgage or charge would be void and inoperative as such.

Proviso (iv) to this section says that the holding of debentures entitling the holder to a charge on immovable property shall not be deemed to be an interest in immovable property. Learned counsel for the debenture holders contended that the provisions of section 109 and proviso (iv) referred to above indicate that while registration with the Registrar of Companies is intended to give notice to all who may be concerned with the charge created, it is clear that the holding of debentures under which the charge is said to have been created is not to be considered as having interest in immoveable property. The debenture creating any interest in immoveable property is not a transfer within the meaning of section 17 of the Registration Act and, therefore, registration under the Act is not necessary.

Section 110 of the Companies Act deals with the particulars that are required to be registered with the Registrar of Companies. These particulars are :

(a)        the total amount secured by the whole series and

(b)        the date of resolution authorising the issue of the series and the date of the covering deed (if any) by which the security is created or defined, and

(c)        a general description of the property charged, and

(d)        the names of the trustees (if any) for the debenture-holders.

These particulars are to be filed with the deed or a verified copy thereof, and if there is no such deed one of the debentures of the series should be filed and the Registrar on payment of the prescribed fee is to enter all these particulars in a register. From the fact that a general description of the property charged only is required to be given under section 110(c) of the Companies Act and that it is not necessary to give any further details of the property it is apparent that such registration is not intended to inform any person as to what the immoveable property is on which the charge is created.

The purpose of the registration of the debentures, charges and mortgages under the Companies Act is to give notice to persons dealing with the company of the encumbrances on the properties of the company. This encumbrance may be found by a search of the registry of the place where the company is registered or by proper enquiries in the office of the Registrar of Companies. But a company may have a large number of branches situate at different places and there may be immoveable property pertaining to these branches.

In case any such immoveable property is intended to be hypothecated or transferred, the person who is to accept such hypothecation or transfer ought to know whether that particular property is or is not subject to any encumbrance. To collect the necessary information he may make inspection at the registration office of the place where the company has its head office. In case there is no trust deed registered in respect of a series of debentures he cannot get any information from such inspection.

He may also make inquiries at the office of the Registrar of Companies. But in as much as the particulars required to be registered under section 109 are of too general a character so far as the details of the properties are concerned, he is likely to have no clue to encumbrances on the property with which he is about to deal. In case there is no registration under the Indian Registration Act of the debentures issued specifying the properties purported to be encumbered, there will be no information available from the registration office of the place where the property is situate.

Thus in the absence of registration under the provisions of the Indian Registration Act such a person cannot get any information of the charge that might be claimed by a debenture-holder.

I am, therefore, of the opinion that the registration of the debentures under section 109 of the Companies Act does not adequately inform any person who may have to deal with any particular immoveable property of the company.

One of the objects of registration is to provide information to persons dealing with the property with a view to prevent fraud. DERBYSHIRE C.J. in Roy & Bros. v. Ramnath Das observed that the Registration Act is intended to afford warning to people in the district in which the land is situate as regards the charges affecting that land so that they may not suffer through lack of knowledge.

Of the other objects of registration one is to give solemnity of form and legal importance to certain classes of documents and another is to perpetuate documents which may afterwards be of legal importance and the general purpose appears to be to ensure a record of the rights and obligations relating to immoveable properties. It is difficult to hold that the registration of a general description of the property charged under section 109 read with section 110 of the Companies Act has the same effect as the registration under the Registration Act.

Section 17(1)(b) of the Indian Registration Act requires to be registered non testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immoveable property.

As observed by DERBYSHIRE C.J. in the case referred to above, the issue of a debenture does limit the right of a company to its property and creates from the moment it is executed a floating charge over the whole of the company's property immoveable and moveable and that though the floating charge may become fixed on the happening of one of the events mentioned in the conditions of the debentures, the issue of debentures is a mutation of the right of the company to its immoveable property contingent upon the happening of one of the events specified in the condition.

Referring to section 100 of the Transfer of Property Act which describes a charge the learned Chief Justice held that the issue of a debenture does purport to create a charge on the property of the company. The provisions of section 17(1)(b) are mandatory and it is, therefore, clear that the third series of debentures which were not registered under the Indian Registration Act failed to create a charge on the immoveable properties of the company.

The other question as to whether the plant and machinery of the company are moveable or immoveable properties does not admit of much discussion. Mr. S. N. Varma, advocate of this court, was appointed a Commissioner to inspect the premises of the company and to ascertain whether the machinery and plant belonging to the company were fixed and were things attached to the earth or permanently fastened to anything which was attached to the earth as mentioned in section 2(6) of the Indian Registration Act.

The report submitted by Mr. Varma is a very careful and detailed report containing as many as 44 photographs. He has given as accurate a description of the machinery and the plant set up in the premises as could be possible. In fact the report was so exhaustive and gave the facts so clearly that the parties found it unnecessary to lead evidence and the report was of considerable assistance to the court.

From this report it is clear that the plant and machinery of the company are either embedded in the earth or they are permanently fastened to things attached to the earth. It is contended that most parts of the machinery are fixed to their bases with bolts and nuts and they can be removed by removing the nuts. It is, therefore, contended that such machinery as can be moved away by removing the nuts should be held to be movable property.

A similar question went up for consideration to the House of Lords in Reynolds v. Ashby & Sons. Machines in that case were fixed to concrete beds in the floor of the factory by bolts and nuts and could have been removed without injury to the building or the beds. LORD LINDLEY observed :

“The purpose for which the machines were obtained and fixed seems to me unmistakable; it was to complete and use the building as a factory. It is true that the machines could be removed if necessary, but the concrete beds and bolts prepared for them negative any idea of treating the machines when fixed as moveable chattels."

In the present case it is clear from the Commissioner's report that the machines are permanently fastened to things attached to the earth. They were set up there with the definite intention of running the oil mills and not with the idea of being removed after temporary use. I have, therefore, no hesitation in holding that the plant and machinery of the company is not moveable property.

In the result the official liquidator is entitled to the declaration prayed for. It is hereby declared that the holders of the third series of debentures are not secured creditors of the company but are only unsecured creditors.

Application allowed.

[1962] 32 COMP. CAS. 925 (ALL.)

HIGH COURT OF ALLAHABAD

Krishna Deva Bhargava

v

Official Liquidator, U.P. Oil Industrial Ltd.

N. U. BEG AND A. P. SRIVASTAVA, JJ.

MARCH 13, 1961

 

BEG, J. - This is an appeal arising out of an application given by the official liquidator of th3e U.P.Oil Industries Limited, hereinafter called “the company”. The company went into liquidation and was ordered to be wound up on May 11, 1956. An investigation into the assets and liabilities of the company b the liquidator revealed that it had three series of debentures. The first series of debentures were allotted on April 8, 1947, for a total sum of Rs. 1,50,000. A debentures trust deed in respect of this series was executed and registered with the Registrar of Joint Stock Companies, Lucknow, and also in the office of the Sub-Registrar, Lucknow, under the Indian Registration Act. The second series of debentures were issued on June 23, 1950, for a sum of Rs. 1,00,000 For this series also a debentures trust deed was executed and it was registered with the Registered,Joint Stock companies, Lucknow, as well as in the office of the Sub-Registrar, Lucknow under the Indian registration Act. By a resolution dated March 23, 1952, the board of director s authorised Sri B.P.Agarwala , who was managing the affairs of the company to issue a third series of debentures foe Rs. 4,50,000, and a committee was appointed to allot these debentures. In Pursuance of the above resolution on April 7, 1952, the committee allotted debenture bonds Nos. 1 to 4 for Rs. 2,000 to Rai Sahib Pandit Sri Krishna Deva Bhargava o Khatauli and four bonds Nos. 5 to l8 for Rs. 3,000 to Smt. Rajeshwari Devi of Karol Bagh, Delhi. In receipt of this series of debentures, no trust was executed nor was any registration effected in the office of the Sub-Registrar as required under the Indian Registration Act. The Company, however, registered with the Registrar, Joint Stock Companies, the particulars of this series of debentures on April 18, 1952, under section 109 of the Indian Companies Act. In view of this situation, the liquidator moved an application in the High Court before the company judge praying for the relief tot he effect that a declaration be made that the holders of the third series of debentures are not secured creditors but ordinary but ordinary unsecured creditors. The company judge before whom the matter came up of determination allowed this application an made the declaration prayed foe . Dissatisfied with the said order of the learned judge, the appellants, who were holders of the third series of debentures , filed the present appeal.

On behalf of the appellants, learned counsel advanced two arguments before us. The first argument was that the third series of debentures, having been registered under section 109 of the Indian Companies Act, 1913, were not required to be future registered under the Indian Registration Act. The second argument advanced by him was that, in any case, the declaration prayed for should not have been given in respect of the movable properties of the company . So far as the first arguments is concerned it involves a discussion of the following two questions:

“1. Is a charge compulsorily registrable under the Indian Registration Act?

2. How far is a clouting charge created by the third series of debentures, in the present case, compulsorily registrable under the said Act?”

We have no doubt in our mind that an ordinary charge created under the Transfer of Property Act, is compulsorily registrable . Such a charge is created under section100 of the Transfer of Property Act (4of 1882). The first portion of section 100 lays down that where the immoveable property off one person is b act of parties or by operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property; and all the provisions therein made applicable stoa simple mortgage shall, so refer as may be, apply to such a charge. It may be noted in this connection that the words “which apply to a simple mortgage shall so far as may be, apply to such charge” in this section were substituted by section 53 of the Transfer of Property (Amendment) Act, 1929 (XX of 1929), for the words “as to mortgagor shall, so far as may be, apply to the owner of such property and the provisions of sections 81 and 82 shall , so far as may be, apply to the persons having such charge”. The effect of the amendment was that all the provisions of the Transfer of Property Act which apply o simple mortgages were, so far as possible, made applicable to charges.

Section 59 of the Transfer of Property Act Makes a;; simple mortgages in which the principal money secured is one hundred rupee or upwards compulsorily registrable. Section 4 of the Transfer of Property Act (4 of 1882), as amended by Act 3 of 1885 , lays down that sections 54, paragraphs 2 and 3, 59, 107 and 123 of the Transfer of Property Act shall be read as supplemental to the Indian Registration Act (16 of 1908). The combined effect of sections 4,59 and 100 of the Transfer of Property Act is, therefore, to make all charges in respect of immoveable properties compulsorily registrable under the Registration Act provided that the amount secured exceeds Rs. 100 The cases, Khoo Sain Ban v. Tan Guat Tean 1 and Viswanathan v. M.S. Menon support the same conclusion.

A floating change is, however, special charge which is recognied lay the Indian Companies Act. In the Present case, we are concerned with the Indian Companies Act (VII of 1913) which was the Act in force at the relevant date. A floating charge is created by making the assets or the undertaking of the company a security foe the payment of debts into which a company enters. Such a charge might cover properties which may be specified or unspecified in the document creating the charge. The description may be a general one. Peculiar feature of this transaction, however, is that it is not possible to predicate the exact property on which the charge would operate until the happening of a future event. This future event may be the appointment of a receiver at the instance of the creditors of a company for the realisation of their debts or the a winding up of the company itself. Till such a future event happens, the charge is of an ambulatory or roaming character. It remains in this hovering condition until the contemplated future event takes place. Once, however, this future event occurs the charge settles down ad attaches itself to a fixed property. The right created under it is no doubt a right in prescient. The security in respect of which the right is created, however, becomes crystallised only when the future event takes place. It may, therefore, be said that until the time that such further event occurs the right created thereby is a dormant right. The moment such future event takes place, this dormant right assumes a dynamic form ad becomes capable of enforcement against certain specified property to properties which answer the description of the properties given in the debenture. Section 109(1)(f) of the Indian Companies Act of 1913 lays down that every mortgage or charge created y a company after the commencement of the said Act which is a floating charge on the undertaking or property of company shall, in respect of such security, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge, together with the instrument (if any) by which the charge is created or evidenced or a copy thereof verified in the prescribed manner are filed with the Registrar for registration in the manner required by the Act within twenty-one days after the date of its creation. Section 110 of the Indian Companies Act specifies the particulars which are to be filed with the Registrar when a registration as contemplated by section 109 of the said Act is sought t be effected. The provisions of clause (c) of section 110 would indicate that, in the case of such a registration, a general description of the property charged is quite enough.

In the present case it is the admitted case of the parties that the third series of debentures were registered as required by section 109 and 110 of the Companies Act (VII of 1913). On behalf of the appellants it is argued that a floating change is a statutory charge under the Companies Act. A registration of the same, therefore, under the aforesaid sections is quite sufficient. On the other hand on behalf of the respondents the learned counsel has argued that the fact that under r the Companies Act such debentures are made compulsory registrable in a certain manner with the Registrar of Joint Stock Companies does not absolve the parties from the necessity of having the said documents registered under the Registration Act where such documents are compulsorily registrable under section 17 of the Indian Registration A t (16 of 1908) if they are to the t4rated as valid and effective documents creating a charge on immoveable property. Both the parties have advanced detailed arguments before us in support of their respective contentions. We are, however, of opinion that the answer to this question would depend on the particular circumstances of each case. It is, therefore, necessary to look at the terms of the particular debentures by which the charge in question in the present case is sought to be created bearing in mind the specific property in respect of which the dispute has arisen. In the present case, we have looked at a company of the debentures in question . Condition No.3 of the printed form of this series of debentures is relevant in this connection. It specified the property which was sought to be made the subject-matter of the floating charge. It runs as follows:

“3. The company hereby charges with such payments its under taking land allies property present and future.”

The above description shows that the debentures in question related to two types of properties. Firstly, they covered all the present property of the company-both movable as well as immovable. Secondly, they covered all the future property of the company both movable as well as immoveable. So far as the movable property is concerned, it is conceded by both the parties that the charge would not be compulsorily registrable under the Indian Registration Act. So far, however, as the immoveable property is concerned, it has been argued on behalf of the appellants the floating charge is not registrable even though it might embrace within its ambit immoveable property. By the present immoveable property is meant the property which was in the ownership of the company at the date when the charge was created. On the other hand by the future immoveable property is meant the property which was to in the ownership of the company at the date of the creation of the charge but came into its ownership at a subsequent date. In the present case it is admitted that the land to which the mill in question is attached was in the ownership of the company at the date of the creation of the charge. The mill, therefore, constitutes a mere accretion to the land which was already owned by the company at the relevant date. This land is admittedly covered by the property described as present immoveable property the debenture. We, therefore, want to make it cleat that the conclusion arrived at by us in the instate case applies only to a case where the dispute creates to such property as was the ownership of the company on date of the creation of the charge or its accretion, and the observations made by us inn this judgment would be confined to such a case only. So far as the future immoveable property so concerned, we do not wish to express any opinion in this case. We must confess that the question appeal to bristle with difficulties at every stage, and it is not easy to reconcile the conflicting considerations that arise in such a case.

In our opinion, section 17 of the Indian Registration Act (XVI of 1908) would be attracted in a case where the dispute relates to charge sought to the created by debentures on immoveable property which was existent at the date of the a creation of the charge and was in the ownership of the company at that date. The relevant provision of law in this regard is section 17(1)(b) of the Indian Registration Act. Under section 17(1)(b) of the Indian Registration Act the documents made compulsorily registrable are described as follows:

“17. (1)(b) other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immoveable property.”

In the present case the debentures in question are admittedly non-testamentary instruments of the type indicated by section 17(1)(b) above and are of value above one hundred rupees. Further, they purport to create a charge on the immoveable property which was in the ownership of the company at the date of the creation of the charge, In this connection we have already held above that the right created by such a debenture is a right in praesenti although it is dormant at that stage. It can, therefore, be said that the document in question does operate to create a right.

Further, the debenture in question also purports to declare that on the heaping of a certain contingency in future, it would be open to the creditor to enforce the realisation of the debt owned to him by taking steps in that regard against immoveable property of the company, provided of course that on that future date the said property happened to be in the ownership f the company. The fact that a charge has been created by debenture, no doubt does not Prevent the company from alienating the property or creating mortgages on the same. If the company alienates the property prior t the happening of the future event, the alienee takes the property immune from such a charge, Further, the said rights of the chargeholder might be subject to the prior rights of a mortgage. The fact that a chargeholder is entitled to take steps against the company only on the happening of a future event does not, however, affect the matter. The declaration itself may relate to a future contingency and may be of conditional nature. The section does not restrict the operation of its provisions to a declaration of an absolute or unqualified nature.

It can also be said that the verb “limit” in section 17(1)(b)would also cover a transaction of this nature . As observed by us, the happening of the future event does have the effect of limiting the rights of the company to a certain extent. Whereas before the happening of the future event the company did possess ad unlimited power to dispose of absolutely the property which as sought to be made the subject -matter of the charge, after the happening of the said event the charge fastens itself on the specified property thereby altering the situation. The crystallization of the security in this manner does to a certain extent limit the right of the company, for it can be said that thereafter the property which is the subject-matter of the charge having been specified and fixed becomes subject the charge created property begin to attach to such a property. The unrestricted right of the company to deal with the said property can thus be said to have been limited.

It may also be noticed that clause (b) of section 17(1) of the Registration Act is worded in a very wide form. Every portion of this section bears the imprint of its extensive character and seems to be designed to emphasize the same. Clauses (a) and (b) of section 17(1) together cover all kinds of non-testamentary instruments relating to immoveable property. Section 17(1)(b) embraces not only rights which become operative in the immediate present but also in future. This is borne out by the clause “whether in present or in future” in the said provision of law. It is also significant to note that this clause covers not only titles and interests in immoveable property but also rites in them. Further, the section uses the word “to” as well as the word “in” when describing such rights, titles or interest. Its ambit is further extended byte inclusion within it not only of vested but also of continent rights, titles or interests. A floating charges cannot, therefore, escape the clutches of this section merely because although it may come into existence in praesenti., its actual operation is postponed to a future date. A floating charge can be said to be a cotangent right in the sense that the charge attach itself to the property on the happening of a future event. The wide character of the section is further emphasized by the use of the words “purport” as well “operate” both of which precede, assign limit or extinguish “. the profusion of these verbs shows that the intention of the legislature was to include within the ambit of the is section a large variety of legal transactions, and their collection in this clause indicates that the legislature intended to include within the wide sweep of this provisos of law every type of document that may affect any right, title for interest nor to immoveable property. The section appears to be so designed as to make it exhaustive of the entire category of such transactions.

The conclusion reached by us is fortifies by a reference to causes (ii) and (iii) of sub-section(2) of section 17 of she Indian Registration Act. These clauses would indicate that while enacting section17 of the Indian Registration Act, the legislature had in view the provisions of the company law also. Clause (ii) of sub-section 92) of section 17 lays down that any instrument relating to shares in a joint stock company would be exempt from the operation of clauses (b) and (c) of sub-section (1) of section 17, notwithstanding that the assets of such company consist in whole or in part of immoveable property.

Clause (iii) of sub-section (2) of section 17 is, however, more relevant in the present case. This provision of law carves out an exception to the application of clauses (b) and (c) of sub- section 91) of section 17 of the Indian Registration Act in the case of a debenture issued by a joint stock company only if it does not declare, assign, limit or extinguish any right, title or interest, to or in immoveable property. It would, therefore, necessary follow from it that a debenture which does seek to create, declare or limit any right, title or interest to or in immoveable property would be covered up by clause (b) of sub- section (1) of section 17 of the Indian Registration Act.

It is also noteworthy that there is no specific provisions in the Indian Companies Act itself exempting debentures creating charges on immoveable properties from the mandatory provisions of the Indian Registration Act. On the other hand, one does find that while enacting section17 of the Indian Registration Act, the legislature did have in view debentures which are the creations ofthe company law, and did not intend to exempt from its operation debentures affecting immoveable property. It also appears that the purpose of registration under the Companies Act is quite different from the purpose of registration under the Registration Act. In the case of registration under section 109 of the Indian Companies Act, 1913, as section l110(c) of the same Act shows, a general description under the Registration Act. has got to be specific land definite (vide section 21, Registration Act). The purpose of registration under the Companies Act, therefore, appeal to be to give a general idea if the financial condition and the status of the company to persons who want to deal with it. On the other hand, the provisions of the Registration Act are framed for the purpose of giving full and detailed information of a reliable type to persons a wanting to have dealings in respect of specific immoveable properties of a company by a search of local registry where such formation would be available. Reference in this connection may be made to sections 64 and 65 of the Registration Act which are designed to effectuate this purpose.

It may also be noted in this connection that section 109 of the Indian Companies Act, 1913, applies equally to both charges as ell as mortgages. The result is that if its provisions are interpreted as engrafting an exception on section 17 of the Registration Act, then it can be argued that even a mortgages of immoveable proper created by a company would be exempt from registration under the Registration Act. This would not only make a serious inroad on the provisions of the Registration Act, but would also have the effect of creating a good deal of confusion and uncertainty in transactions relating to immoveable properties. the Registration Act has placed transactions relating to immoveable properties on a special pedestal, and has, for that reason, attached certain formality and solemnity to such transactions. The purpose of making registration compulsory under the registration Act in respect of transactions relating to immoveable properties above a certain value is not only to create certainty in them and thereby facilitate dealings therewith. Registration of such documents not only serves to provide unimpeachable evidence of dealings affecting immoveable properties, but also lends assurance to persons entering into them regarding their legal rights and obligations. A contrary view is likely not only to result impractical difficulties and serious inconveniences bust also in the preparation of fraud and deception. In the long run it is likely to have repercussions on the day-to-day business of the companies themselves. If persons dealings with the companies cannot be sure of their position, they would be reluctant to have dealings with them. The companies might, therefore, find it difficult to borrow moneys from creditors to enable them to sustain and to advance their business. Such a view would , therefore , be prejudicial not only to the interests of the creditors but also to that of the companies themselves. We would therefore, require something more to be able to hold that such salutary and imperative provisions of the Registration Act as are embodied in section 17 are completely swept any by the Companies Act. Unless, therefore, we find ourselves constrained by considerations of a strong, cleat and compelling nature, we would be reluctant to endorse the argument so vehemently advanced before us by the learned counsel for the appellants. The view taken by us above would also find support from the line of reasoning adopted in Imperial Bank of Idea v. Bengal National Bank Ltd.1, K. Roy and Bros. v. Ramanath Das2 and State of Madras v. Madras Electric Tramways (1904) Ltd.3 It may be noted that the first case was reversed by the Privy Council in Imperial Bank of India v. bengal National Bank Ltd.4 but not so far as this particular point was concerned.

Learned counsel for the appellant also relies on proviso (iv) to section 109(1) of the Companies Act, 1913, which states that:

“The holding of debentures entitling the holder to a charge on immovable property shall not be deemed to be a interest in immoveable property.”

This argument seems to ignore the width of the provisions of section 17(1)(b) ofthe Registration Act which make it applicable not only to “an interest in immoveable property” but also to a right” to immoveable properties given as security to the debentures holders. Otherwise, the mortgage on the immoveable properties in favour of the debenture holders need not be registered under the Registration Act.”

Learned counsel of the appellant also cited before us a large number of English authorities in support of this submission that the English doctrines of equity would be applicable to such a case. we do not think it necessary to deal with the English l cases cited by him as, in our opinion ,the English doctrines of equity cannot be invoked for the purpose of modifying or nullifying the clear provisions of the Indian statutory law:vide G.H. C. Ariff v. Jadunath Majumdar Bahadur 1 and Ram Kinkar Banerjee v. Satya charan Srimini.2

On behalf of the learned lcounsel has drawn our attention to the provisions of sub-section (10 of section 21 of the Indian Registration Act which lays down that no non-testamentary document relating to immoveable property shall be accepted for registration unless it contains a description of such property sufficient to identify the same. In this connection, the learned lcounsel argued that it was not possible for the parties to give a description of the property sought to be charged because immoveable property sought to be charged might not be in the ownership of the company when the charge was created. This criticism cannot, however, apply to the present case, because the property in question was in the possession and ownership of the company at the date of the creation of the charge. The aspect of the matter might, however, present a real difficulty in the case of registration of a debenture in so far as future immoveable property is concerned. As we have already observed above , we do not propose to express any opinion on this aspect of the matter, because this question does not specifically arise in the case before us.

In this connection, the learned counsel for the appellant also argued that the factory which was installed on the land was future property as is was affixed the land subsequent to the creation of the charge. That , however, would not make any difference. the fact that the machinery was affixed to the land subsequent to the date of the creation of the charge has the effect of making the machinery in question a part ad parcel of the immoveable property. In other words, the machinery which is embedded in the land should be considered to be appurtenant to it or rather an accretion to it. The situation in such a case would be analogous to that of a house which is subsequently constructed or a tree which is subsequently planted on a land which is already mortgaged. Reference in this connection might be made to the following cases: Reynolds v. Ashby & S0n3, R.M.P.M. Chettiar Firm v. Siemens (india) Ltd.4 and Mohammed Ibrahim v. Northern Circars

Fibre Trading Co.1. The basis of accretion inthe present case being admittedly in existence and in the ownership of the company at the date of the execution of the deed, specification of the immoveable property could be given and registration cannot be said to be impossible on that score. Learned counsel concedes that ,apart from the land on which the mill stands there is no other independent immoveable property which can be said to be after-acquired or future and to which the charge in the present case can be said to have attached itself.

For the above reasons, we would hold that so far as the charge in question in the present case is concerned, the debenture of the third series required registration under section 17(1)(b) of the Registration Act.

Section 49 of the Indian Registration Act provides for the consequences of non-registration of documents which are compulsorily registrable under section 17 of the said Act or under the provisions of the Transfer of Property Act. According to it no document which is required to be registered under section 17 of the Registration Act or under the Transfer or Property Act which is not registered shall so affect any immoveable property comprised there in, nor shall it be received as evidence of any transaction of affecting such property. The combined effect of sections 17 and 49 of the Indian Registration Act, therefore, in our opinion is to make the debentures of the third series ineffective so far as they seek to create a charge on the immoveable property of the company.

In the end, the learned counsel argued that, in any case l, the appellant should be declared to be secured creditors so far as movable property is concerned. In this connection he wanted to take us into the report of the Commissioner and to argue with respect to every specific item as to whether it should be considered to be movable or immoveable property. Whether a property which is affixed to the earth should be treated as immoveable or movable is a matter depending on the question as to how ad in what manner it is affixed to the earth and what was the real intention of such affixation. If the property was affixed in such a manner as to indicate that the intention of such affixation was to use the machinery in such a way as to make it a permanent part and parcel of the land in which it is embedded, in our opinion, it should be deemed to be an immoveable property. On the other hand, if it consists of tools or other items which are not intended to be used thus ad are not attached to the earth in such a manner and with this intent, such articles should be deemed to be movable properties. On behalf of the respondent, the learned counsel has stated that the question as to whether any particular property is movable or immoveable should be left open to be determined by the learned company judge when the case goes back to him. Learned counsel for the appellant agrees to this procedure. We have already pointed out the broad lies of distinction between movable and immoveable property lad when the question does arise before the learned company judge, we have no doubt that, as agreed by the parties before us, he would go into the matter again and re-determine the question with reference to the specific items in connection with which it is raised . In this view of the matter, the declaration made by the learned company judge will have to be modified.

This appeal is, therefore, partly allowed and the holders of the third series of debentures are hereby declared to be secured creditors in respect of the movable properties but to in respect of the immoveable properties in the ownership of the company at the date of the execution of the debentures or subsequent accretions to the said immoveable properties.

In the circumstances or the case we make no order as to costs.

 

[1945] 15 COMP. CAS. 69 (CAL.)

HIGH COURT OF CALCUTTA

K. Roy and Bros.

v.

Ramanath Das

DERBYSHIRE, C. J., AND LODGE, J.

APPEAL NO. 7 OF 1943

APRIL 13, 1943

 Sir Asoka Roy, Advocate-General, and P.B. Mukerji, for the Appellant.

S.C. Roy and M.M. Hazra, for the Respondent.

Dr. Sudhir Roy, for the official Liquidator.

JUDGMENT

Derbyshire, C.J.—This is an appeal from an order made by McNair, J., on 13th January 1943. The order was in terms of prayer (a) of the summons which was to this effect:

"That the official liquidator may be directed to pay to the applicant in pari passu with other debenture-holders but in priority to other creditors whether secured or unsecured out of the sale proceeds in his hands as well as out of money realised for uncalled capital of the company and other realisations the sum of Rs. 99,875-3-9 with further interest at 5 per cent. up to the date of payment being the sum due on the 151 debentures issued by the company in his favour."

The legal question in the case is whether debentures issued by a company charged on the whole of its property which includes immovable property must be registered under the Registration Act or whether registration under the provisions relating to the registration of debentures of companies is sufficient. The facts which led up to this application are shortly these. The East Bengal Sugar Mills Limited was a company formed to build, equip and operate a sugar mill at Dacca in East Bengal. The appellants, K. Roy and Brothers are building contractors and they built the mill for the company. They were not paid for their work and the materials with the result that they eventually went to arbitration and secured an award for their debt. Whilst the mill was being built the company in order to equip it arranged to buy machinery from abroad and, to pay for the machinery, borrowed money on debentures issued to various persons. The applicant, Ramanath Das, was a director and one of the managing agents of the company. He took up 151 of these debentures, each of them for Rs. 500 and paid for them. With the money realised from the issue of these debentures the company paid for the machinery it had installed. The debentures were duly registered under Section 109 of the Companies Act, but they were never registered under the provisions of the Registration Act (Act XVI) of 1908. The company after working for a time got into financial difficulties and a winding up order was made by this Court. The debenture-holders did not appoint a receiver under their debentures. The official liquidator appointed by the Court has taken possession of the land, buildings, plant, machinery and utensils of the company and sold them to a purchaser who has transferred the undertaking to another company known as the Kaligunge Sugar Mills Limited.

The debenture-holders claim that they are entitled to a first charge on the whole of the money received from the sale of the old company's undertakings. The liquidator has informed them that he considers that as their debentures were not registered under the Registration Act, it does not affect the immovable property of the company and that the debenture-holders are only entitled to be paid their debt out of the movable assets of the company. McNair, J., decided that the debentures did not need to be registered under the Registration Act and that therefore there was a good charge upon the whole of the company's assets and the proceeds thereof and he made an order in terms of prayer (a) as referred to above. Messrs. K. Roy and Brothers have appealed against that and they claim that the debentures ought to have been registered under the Registration Act. As they have not been registered the debenture-holders are only entitled to what may be obtained from the sale of the movables and that they as creditors will be entitled to a share in the immovables and their proceeds. The dedentures themselves are in the form which was at one time common in England. (See Palmer's Company Precedents, Part I, Debentures, 15th Edn. at pp. 272 to 274.) Clause 3 of the debenture which is headed "Mortgage Debenture" provides as follows:—

"The company doth hereby as beneficial owner, charge with such payments (that is principal and interest at 6½ per cent.) its undertaking and all its property whatsoever or wheresoever both present and future including its uncalled capital for the time being."

Clause 4 reads:—

"This debenture is issued upon and subject to the conditions indorsed here-on which shall be and be read as part of this debenture and which the company covenants to observe and perform in every respect."

The conditions referred to are seventeen in number; I refer only to the following:—

"1.  This debenture is one of a series of 200 debentures of Rs, 500 each numbered 1 to 200 inclusive of the company issued or about to be issued by the company for an aggregate amount of Rs, 100,000. The company shall be at liberty to issue further debentures of a like nature to rank pari passu with the debentures of these series.

2.   The debentures of the said series whether original or not are all to rank pari passu as a first charge on the property hereby charged without any preference or priority one over another and such charge shall until the money hereby secured shall become payable, be a floating security and the company shall not create any mortgage or charge in priority to the said debentures.

3.   The principal money hereby secured shall immediately become payable if the company make default for a period of three calendar months in the payment of any interest hereby secured and the registered holder thereof for the time being before such interest is paid by notice in writing to the company calls in such principal money or if a distress or execution is levied upon or against any of the property and the assets of the company and is not paid out or withdrawn within ten days or if a receiver of any property and assets of the company is appointed by any Court of competent jurisdiction or if an order is made or an effective resolution is passed for winding up of the company.

16. A receiver or receivers so appointed shall have power (a) to take possession of the property charged by debenture and (b) to sell or concur in selling any of the property charged by the debentures."

No receiver was appointed, and as I have said an order was made by thi9 Court for the winding-up of the company and the official liquidator was appointed liquidator. Now that debenture and its series were duly registered under the provisions of Section 109 of the Companies Act (Act VII of 1913 as amended by Act XXII of 1936). They were registered with the Registrar of Joint Stock Companies in Calcutta. It may be mentioned in passing that there is a Registrar of Joint Stock Companies appointed in each of the large provinces; there is one in Calcutta, there is one for Assam, there is one for Bombay and so on. By the provisions of Section 109, proviso (4) it is enacted:

"The holding of debentures entitling the holder to a charge on immovable property shall not be deemed to be an interest in immovable property."

Sub-section (2) which was added by Section 60 of Act XXII of 1936 provides:

"Where any mortgage or charge on any property of a company required to be registered under this section has been so registered, any person acquiring such property or any part thereof, or any share or interest therein, shall be deemed to have notice of the said mortgage or charge as from the date of such registration."

Section 109A deals with some of the requirements of registration and Section 110 deals with the particulars that are required in case of registration. Particular (c) is as follows: "A general description of the property charged" (i.e., what is required to be registered under the provisions of the Companies Act). I must mention here that there was no debenture trust deed accompanying the issue of these debentures. In the debenture deed itself the only reference to the property charged is its undertaking for all its property whatsoever, and wheresoever present and future. That description apparently satisfies the requirements of Section 110 of the Companies Act, and nothing more is required as for as the Companies Act is concerned. It is said that the effect of Section 109(2) of the Companies Act, is to give any body who deals with the property notice that it has been made subject to a floating charge. It must be pointed out at once that as Section 110(c) indicates that only a general description of the property is required and there is nothing making it compulsory to give any further details of property, so that there is nothing in the registration under the Companies Act of these debentures which would inform any person exactly what the immovable property was that was charged. It should be remembered that under the provisions of Section 109 a company is required to keep a register of its mortgages and charges specifically affecting property of the company and all floating charges on the undertakings or on any property of the company. That register would be kept, of course, at the company's head office.

The purpose of the registration of debentures, charges, and mortgages under the Companies Act is to give notice to persons dealing with the company that there are certain encumbrances on its property. Those encumbrances can be discovered by a search of the registry of the place where the company is registered and by a search or an application made at the company's head office. Of course it does not follow that a company is registered or has its head office at the place or even in the province where the immovable property that may be charged is situate. Those who deal with the company in the ordinary way of business can have searches made and they can discover the general nature and the financial extent of the charges, but they cannot discover what particular pieces of land or immovable property have been charged. The Registration Act of 1908 is the successor of two previous Acts requiring registration of certain kinds of documents. It is like the Companies Act, an All-India Act. Section 17(1) of the Registration Act, provides:

"The following documents shall be registered, if the property to which they relate is situate in a district in which, and if they have been executed on or after the date on which, Act No. XVI of 1864, or the Indian Registration Act, 1866, or the Indian Registration Act, 1871, or the Indian Registration Act, 1877, or this Act came or comes into force, namely:—

        (a)    instruments of gift of immovable property;

(b)    other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immovable property."

It will be noted that the registration is a local registration in the district in which the property is situate. Section 21 provides:

"(1)  No non-testamentary document relating to immovable property shall be accepted for registration unless it contains a description of such property sufficient to identify the same.

(2)    Houses in towns shall be described as situate on the north or other side of the street or road (which should be specified) to which they front, and by their existing and former occupancies, and by their numbers if the houses in such street or road are numbered.

(3)    Other houses and lands shall be described by their name, if any, and as being in the territorial division in which they are situate, and by their superficial contents, the roads and other properties on which they abut, and their existing occupancies, and also, whenever it is practicable, by reference to a Government map or survey."

Section 28 provides that save as otherwise provided in Part 5

"every document mentioned in Section 17, sub-section (1), clauses (a) and (b), in so far as such document affects immovable property, shall be presented for registration at the sub-registry within whose sub-district the whole or some portion of the property to which such document relates, is situate."

Section 49 provides:

"No document required by Section 17 or by any provision of the Transfer of Property Act, 1882, to be registered, shall (a) affect any immovable property comprised therein unless it has been registered."

The purpose of the Registration Act as disclosed in its provisions is to provide information to people who may deal with property as to the nature and extent of the rights which persons may have affecting that property, in other words, to enable people to find out whether any particular piece of property with which they may be concerned has been made subject to some particular legal obligation. There are other purposes of the Registration Act. One is to give solemnity of form and legal importance to certain classes of documents by directing that they shall be registered. For some purposes a document which is directed to be registered creates similar rights and obligations to the documents under seal in England. Another purpose is to perpetuate documents which may afterwards be of legal importance and the general purpose is to put on record somewhere, where people may see the record and enquire what the particulars are and as far as land is concerned what obligations exist with regard to them. The purpose of this is to prevent fraud. I ought to have mentioned that in Section 17(8)(iii) there is this provision:

"Nothing in clauses (b) and (c) of sub-section (1) applies to any debenture issued by any such company and not creating, declaring, assigning, limiting or extinguishing any right, title or interest, to or in immovable property except id So far as it entitles the holder of the security afforded by a registered instrument whereby the company has mortgaged, conveyed or otherwise transferred the whole or part of its immovable property or any interest therein to trustees upon trust for the benefit of the holders of such debentures."

That provision is designed to exempt from registration debentures issued, may be in a series under a trust deed, or debentures which of course, may, include both movable and immovable property. The trust deed itself might have to be registered, but the separate debentures issued under the trust deed would not require registration. The debentures we are concerned with were not issued under a debenture trust deed and the question is whether they should be registered under Section 17(1)(b). Now it bat been pointed out that in Section 109 proviso (4) of the Companies Act, it is provided that the holding of debentures entitling the holder to a charge on immovable property shall not be deemed to be an interest in immovable property. It is contended that these debentures do not create an interest in immovable property and therefore do not require registration. It is not, however, merely an interest in property that is mentioned in Section 17(1)(b), (but something more); a non-testamentary instrument (like the present debentures) which purports or operates to create, declare, assign, limit or extinguish whether in present or in future, any right, title or interest, whether vested or contingent, of the value of Rs. 100 and upwards, to or in immovable property, must be registered. The present document does purport on the face of it to limit the right of the company to its property. It creates from the moment it was executed a floating charge over the whole of the company's property immovable and movable. That floating charge may become fixed on the happening of one of the events mentioned in condition 3 endorsed on the debentures, so that at the moment of issue there was a limitation of the right of the company to its immovable property contingent upon the happening of one of the events specified in the condition. A charge on the property is defined by Section 100 of the Transfer of Property Act:

"Where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge OB the property."

Clearly there was a charge on the property here limiting the right of tbe company to that property and in my opinion, for that reason this document comes within the meaning of Section 17(1)(b) of the Registration Act, and ought, therefore, to be registered as regards the immovable property covered by it in the appropriate local registry under the Registration Act (Act XVI of 1908). It is said: "Oh, but that is impossible, because the debenture itself contains no reference to any specific piece of property. It simply charges all its property whatsoever and wheresoever present and future. That being so, we cannot register in this particular registry or that particular registry." In my opinion that is beside the question. If the debenture creates a charge over the company's property it must be registered in the proper registry. Of course there is no difficulty where there is a trust deed. The difficulty arises in this particular form of debenture which as I said previously is a common form in England. It may be a suitable form of debenture in England because England is a country where, except for two countries, Middlesex and Yorkshire, there is no system of land registration and this form may be well adapted for that purpose, but it may be ill adapted for countries where such a form of land registration is compulsory. In Section 79 of the English Companies Act of 1929, which deals with the registration of charges with the Registrar of Companies it is clearly contemplated that there may have to be double registration, namely, registration with the Registrar of Companies under the provisions of the Companies Act and registration of land or immovable property belonging to the company in the country where such land or immovable property is situate and is required to be registered. For instance, Section 79(4) provides:

"Where a charge is created in the United Kingdom but comprises property outside the United Kingdom, the instrument creating or purporting to create the charge may be sent for registration under this section notwithstanding that further proceedings may be necessary to make the charge valid or effectual according to the law of the country in which the property is situate."

Sub-section (5) provides:

"Where a charge comprises property situate in Scotland or Northern Ireland and registration in the country where the property is situate is necessary to make the charge valid or effectual according to the law of that country, the delivery to and the receipt by the Registrar of a copy verified in the prescribed manner of the instrument by which the charge is created or evidenced, together with a certificate in the prescribed form stating that the charge was presented for registration in Scotland or Northern Ireland, as the case may be, on the date on which it was so presented shall, for the purposes of this section, have the same effect as the delivery and receipt of the instrument itself."

There is no corresponding provision in the Indian Companies Act. India is a very much bigger country than Great Britain and Ireland and the distances of places apart may be so great as to make virtually ineffective the provisions for safety and warning which the Companies Act gives. I put one illustration to Mr. Roy in course of argument and it was this. Suppose that a company is registered in Bombay and has its head office in Bombay and that it is engaged in carrying on business throughout India. One of its places of business is in town far away say Madras or Calcutta or some other town in which mortgage of land by deposit of title deeds is made legal now or in the future by the Provincial Government under Section 88 of the Transfer Property Act. The company is in difficulties and issues debentures by floating charge over the whole of its property in the form in which it has been done in this case. Those debentures will be registered with the Registrar of Companies in Bombay and a record of them will be kept in the registered office of the Company in Bombay and any one who wishes to know to what extent the company is embarrassed or has created encumbrances over its property can find that out by searching the office of the Registrar of Companies in Bombay or at the office of the company in Bombay. But all that that search reveals is the extent of the indebtedness of the company and the extend to which its property generally has been charged, but it does not show what particular items of its property have been charged. Whilst the company is embarrassed, the manager of this distant branch finds difficulty in meeting the wage bills there and he asks a local person to lend money—say a thousand rupees—to meet the monthly wages. He has with him in safe custody the documents of title to some land which the company owns locally. The person to whom he applies for money may be willing to lend one thousand rupees provided he has proper security and he is offered the documents of title relating to that land. He would, if he were an ordinary prudent person, enquire at the local Registry whether there were any charges created on the land. If registration under the Companies Act of debentures of floating charges is in Bombay and is sufficient he would find nothing in the local Registry under the Registration Act. He might, therefore, on searching and finding nothing lend the money only to discover later before the money had been repaid that some one who had a floating charge had taken steps to crystallise it and that the security on which he had lent the money was valueless to him. Neither Mr. Roy nor the Advocate-General was able to say that there was anything either improbable or fallacious in that argument and it seems to point to the necessity for observing the law strictly as it is laid down in the Registration Act. The Registration Act is intended to afford warning to people in the district in which the land is situate as regards charges affecting that land so that they may not suffer through lack of knowledge. If we are to say that registration under the Companies Act was sufficient then it means that the security which the Registration Act has provided for local man goes and he is left at the mercy of the debenture-holder who is elsewhere.

In my opinion for the reasons I have given it is necessary that a debenture creating a charge whether floating or fixed over any immovable property should be registered according to the provisions of law laid down in Section 17 of the Registration Act, in addition to the provisions of the Companies Act. The provisions of the Companies Act are intended to protect people who have business dealings with companies and to warn them to the extent to which the companies have created obligations over their property. The provisions of the Registration Act are intended to protect all who may have dealings with land so that those persons, particularly those local persons, may have knowledge of the obligations which have been created over and in respect of the land.

There is one other matter. A question arose in the Court below as to whether the machinery of the sugar mill was fixed to the soil of the buildings so as to be immovable property. The learned Judge did not find it necessary to decide that question owing to the view he took on the question whether the debentures should be registered or not. But he expressed the view that whether the machinery was immovable property or whether it was not, was a question of fact. I agree that it is a question of fact and it is for the learned Judge to determine whether a particular piece of machinery is immovable property or whether it is not. For these reasons this appeal must be allowed. The applicant Ramanath Das has a first charge on the movable properties and uncalled capital of the company pari passu with other debenture-holders. There will be an enquiry by the trial Court to ascertain: (a) what the movable properties of the company and their value at the time of the sale were; (b) whether the machinery and plant, etc., or any part thereof is movable or immovable property; and (c) how much of the money paid by the purchasers to the liquidator for the assets of the company, namely, Rs. 1,61,000 represents the sale proceeds of (i) movable and (ii) immovable property. The respondent Ramanath Das will pay the costs of the appellants, K. Roy and Brothers both in the appeal Court and in the trial Court. Costs will be as of a hearing. Certified for two counsel. The liquidator is entitled to the costs here and below to be reimbursed out of the assets of the movable properties which come to his hands. Ramanath Das repeats the undertaking that he will return the sum of Rs. 25,000 by 13th May 1943.

Lodge, J.—I agree.

[1956] 26 COMP. CAS. 398 (MAD.)

State of Madras

V.

Madras Electric Tramways (1904) Ltd., (In Liquidation).

RAJAMANNAR, C.J.

PANCHAPAKESA AYYAR, J.

APRIL 18, 1956

 

PANCHAPAKESA AYYAR, J.-These are two closely connected appeals against the judgments and decrees of BALAKRISHNA AYYAR J. in C.S. Nos. 191 of 1952 and 368 of 1953. The appellant in both these appeals is the State of Madras, and the respondent is the Madras Electric Tramways Ltd. (in liquidation), represented by the official liquidator, official receiver of this court.

The facts are briefly these: By an agreement, dated 15th July, 1907, Exhibit D 3, entered into between the Madras Electric Supply Corporation Ltd. and the Madras Electric Tramways Ltd. (incorporated in 1904) the former agreed to supply and the latter agreed to receive electrical energy required by the latter, subject to the following man conditions: The Tramway Company was to take all the electrical energy it required from the Electric Supply Corporation. This energy was to be delivered by the Electric Supply Corporation at the switchboard of the Tramway Company, located at its tramway depot in Egmore. The energy was to be delivered as "direct current" at a pressure of 500 volts ( at no load) to 550 volts (at full load). The entire energy supplied was to be charged as a whole, at a tapering rate, the rate becoming lower as the quantity of the current taken became higher. There was a clause providing for revision of the rates at the instance of either party, after the expiration of every period of 7 years from the date of the agreement, by three months' notice in writing. An engineer appointed by the President of the Institution of Electrical Engineers in England was to determine what the revised rate, if any, should be. The agreement was not to be determined by the Tramway Company or the Electric Supply Corporation, the intention of the parties being that the benefit thereof, subject to the rights, duties and obligations of the parties respectively, should be annexed to, and constitute part of the respective undertakings of the Tramway Company and the Electric Supply Corporation. Any dispute or difference between the Tramway Company and the Electric Supply Corporation was to be determined by a single arbitrator to be appointed on the application of either party by the President of the Institution of Electrical Engineers in England. One million units of electrical energy was to be taken by the Tramway Company, unless there was an accident or other unavoidable reason.

In 1907, the Tramway Company had only one depot, at Egmore. Before 1923, it opened a sub-station at Mount Road. A supplemental agreement, Exhibit D 4, was entered into with the Madras Electric Supply Corporation, providing for the supply of electrical energy at the Mount Road sub-station also, in addition to the Tramway Company's depot in Egmore. There was also a "coal clause", providing for an additional payment by the Madras Tramway Company to compensate the Electric Supply Corporation for the fluctuations in the price of coal, from which the Electric Supply Corporation was generating its current.

On 7th January, 1932, there was also another supplemental agreement, Exhibit D5. Under this agreement, the quantity of electrical energy to be taken by the Tramway Company was raised to two million units, instead of one million units, and there was a small reduction in the price charged per unit. There was also a provision for the increase of the maximum demand of 1,500 K.V.A. by ten per cent. in order to allow for the estimated conversion loss, incurred by reason of conversion from high tension to low tension current and from A.C. to D.C. The Electric Supply Corporation was to bear the cost of conversion, as before.

Some time before 1947, the Tramway Company opened a second sub-station in East George Town. The Electric Supply Corporation agreed to supply electrical energy at the East George Town sub-station also. The entire supply to all the three depots, namely, those at Egmore, Mount Road and East George Town, was treated as one consolidated supply, and charged under the tapering system referred to above.

The Madras Electric Supply Corporation was operating under a licence, Exhibit P 2, issued on 21st August, 1905. That licence was liable to revocation for any breach of the conditions. There was also control over the price charged for the electrical energy supplied. There was an option given to the Government to purchase the electricity concern at the 3nd of 42 years from 21st August, 1905, and at the end of every ten years thereafter. In 1945, the State Government notified the Electric Supply Corporation of their intention to exercise the option of purchase given to them by clause 10 of Exhibits P2.

In anticipation of such taking over, the Chief Engineer to the Government of Madras wrote a letter, Exhibit P.4, to the Tramway Company, as well as to other consumers. It stated:

"The terms and conditions in the agreement now existing between you and the Madras Electric Supply Corporation Ltd. for supply of electricity will be examined by Government after 29th August, 1947. Pending final decision of Government and the execution of a fresh agreement, the existing agreement between you and the Madras Electricity Supply Corporation Ltd. will be deemed to continue to be in force."

A reply was requested. The Madras Tramway Company sent the following reply, Exhibit P 4(a):

"We hereby signify our acceptance of the agreement specified in paragraph 2 of your letter quoted above in regard to the provisional continuance of the agreements dated as above with the M.E.S.C. Ltd. for supply of electricity."

The Government took over the concern of the Madras Electric Supply Corporation on 29th August, 1947, and continued to supply electrical energy to the consumers, including the Tramway Company. On examining the agreements of the Madras Electric Supply Corporation Ltd. with the Madras Tramway Company, the Government found three main discrepancies between their departmental practice and the conditions in the agreement. The first was that, according to the departmental practice, the supply at each depot was charged for separately on the tapering system, whereas, under the agreements supply to all the three depots of the Tramway Company, at Egmore, Mount Road and East George Town, was consolidated before being charged on the tapering system. The Government were anxious to follow their own departmental practice, especially as it would yield them a higher revenue. The Tramways were equally anxious to continue the old practice, as they would have otherwise to pay much more. The second sore point with the Government was that, under the departmental practice, the consumer paid for the conversion of high tension current to low tension current and labour to do the conversion and about 30 per cent. of the energy was also being lost in the process. So, they wanted to charge the Tramway Company for such conversion and revise the old agreements to that effect. The Tramway Company naturally did not want to pay anything for the conversion, and stuck to the old agreements. The third difference was this. The Tramway Company had installed three traction panels in the premises of the Electric Supply Corporation for which it paid no rent at all. The panels were also being operated by the Electric Supply Corporation employees without any extra charge. The Government wanted to charge a rent of Rs. 100 per month for the traction panels in each of the sub-station, and Rs. 328 per month for each panel as operation charges, or in all Rs. 1,284 per month extra. The Chief Electrical Engineer writes letters to the Tramway Company, proposing to make the above increased charges. The Tramway Company did not agree.

Two conferences were held between the Government's officials running the Madras Electric Supply Corporation and the officials of the Madras Tramway Company to thrash out the matter. The first was on 21st October, 1948, and the second on 17th February, 1949. Mr. Elphic, for the Tramway Company, accepted Rs. 328 per panel per mensem regarding the operation charges, but wanted the rent to be reduced to Rs. 75 per month for each of the three panels. Regarding the other two matters, namely, separate charging for the energy supplied to each of the three sub-stations, and conversion charges, there was no agreement. The Tramway Company would not agree to the increase of Rs. 30,000 to Rs. 46,000 per mensem involved by all these additions, as it would mean an addition of 53 per cent. to what they were paying under the old agreements. In the end, the Tramway Company officials demurred to any additional charge whatsoever over the old rates, though they said that even if additional charges were legally leviable from them they would never exceed Rs. 4,659 per month. They contended that it was unfair to treat the three sub-stations separately regarding the energy supplied, as if they were three different tramway companies and that it was also unfair to charge them for conversion of energy contrary to the previous practice, and to charge them panel rent and labour charges when they had not been charged before. The lengthy exchange of letters between the Chief Engineer for Electricity, Government of Madras, and the Tramway Company led to no settlement.

On 9th September, 1950, the Government issued an order, Exhibit P 22, containing the following passage:

"His Excellency the Governor of Madras hereby directs that the existing agreements with Madras Electric Tramways should be terminated and a fresh agreement should be entered into with the Tramway Company providing for the following terms."

This provision directed that for the period from 29th August, 1947, to 9th May, 1948, the Tramway Company should pay Rs. 300 per month as rent for the panels and Rs. 984 per month as labour charges for working of the panels. It also directed that for the period from 10th May, 1948, the Tramway Company should pay a consolidated sum of Rs. 10,000, per month as conversion charges, including losses etc., and that the bills for the supply of energy to the Egmore, Mount Road and East George Town sub-stations should be prepared separately and charged, and instead of being clubbed together and charged as one bill on the tapering system. The Superintending Engineer, Madras Electricity System, sent bills to the Tramway Company on the basis of the instructions in the Government's order, Exhibit P.22.

The Tramway Company had felt highly aggrieved at the proposed additional charges. Its affairs were none too prosperous, and it was heading the rocks. On 29th July, 1949, it had submitted a petition, Exhibit D.13, to Sri M. Bhaktavatsalam, the Minister of Public Works, complaining against the proposed increasing charges and pointing out how this company had been carrying 1,50,000 citizens of Madras daily as passengers for years, at cheap rates, and how it had begun to work at a loss, and was unable to pay any dividend, and how its financial condition had deteriorated progressively, and it was unable to pay the conversion charges demanded of it or to buy the conversion plant required to do the conversion itself and escape paying this unjustifiable levy. The petition yielded no satisfactory result.

The Tramway Company paid the dues for the period from 29th August, 1947, to 31st March, 1950. It paid the bills at the enhanced rates from 1st September, 1950, to 31st August, 1951, under protest through it solicitors, and without prejudice to its right to claim a refund of the excess. On 26th April, 1952, the Tramway Company filed C.S. No.191 of 1952 on the original side of this court against the State of Madras, claiming Rs. 1,41,423-3-10 from the Government, said to represent the excess paid by it for the period from September, 1950 to August, 1951, under protest, and subsequent interest. For the third period, namely, 1st September, 1951, to 31st July, 1952, though the bills were sent to them at the enhanced rates, the Tramway Company paid only at the lower rates as per the agreements with the Madras Electric Supply Corporation before the Government purchased it. For the period from 1st August, 1952, the Tramway Company did not make any payment at all, at the old rates, or at the new rates, on the ground that it had filed a suit regarding the admissible rates, and was awaiting the decree of court.

The Government filed C.S. No.368 of 1953 on the original side of this court against the Madras Tramway Company on 30th October, 1953, for recovering Rs. 9,26,186-2-3, the alleged arrears due, with subsequent interest and costs, and for a declaration that it was entitled to a first charge over the assets of the first defendant and to priority in respect of the decree amount, and for declaring that it was entitled to priority of payments out of the assets of the first defendant in preference to all its other debts and liabilities, and, in default of payment of the same, for the sale of the entire assets of the first defendant, the Tramway Company, including the specific and floating security in favour of the debenture holders. We may add that the debenture holders, who had to recover pounds 130,000, or more than 17 lakhs of rupees from the Tramway Company, had, through their trustee, the Beaver Trust, appointed the second defendant, Mr. Brookes, as receiver to take over the assets of the company on their behalf, as they claimed specific and floating security over the entire assets under Exhibit D 10, dated 26th March, 1925, a mortgage executed by the Tramway Company in favour of the Beaver Trust Ltd. the trustee for the debenture holders. Mr. Brookes had resigned his post as managing director of the Tramway Company on 1st April, 1953. He took possession of the Tramway Company's properties, movable and immovable, on 11th April, 1953, as receiver for the debenture holders. The Government made Mr. Brookes a party to its suit, as second defendant, as he was in possession of the Tramway Company's properties and was also interested in resisting its claim to priority over the debenture holders.

The Tramway Company ceased to take electric supply from 11th April, 1953 (see Exhibit P 75). Its affairs went from bad to worse, and liquidation proceedings were instituted on 11th December, 1953, and the official receiver of this court was appointed as official liquidator on behalf of the creditors on 20th January, 1954, as it was proved that the company was unable to pay its debts. The Government added the official receiver as third defendant in C.S. No.368 of 1953 on 18th February, 1954.

Both the suits were strongly contested. The nature of the contentions will be clear from the issues.

The issues framed in C.S. No.191 of 1952 were:

1.         Are the rights and liabilities as between the plaintiff and the defendant in regard to the supply of electric energy by the defendant to the plaintiff governed by the agreements and the course of conduct between the plaintiff and the Madras Electric Supply Corporation referred to in the plaint for the reasons stated therein?

2.         Was the plaintiff liable to pay the defendant the amounts shown as excess payments in paragraph 22 of                     the plant and were the said amounts wrongly collected by the defendant from the plaintiff?

3.         Is the consent of the plaintiff not necessary for the introduction of modified conditions as alleged in paragraphs 6 and 7 of the written statements?

4.         Is the plaintiff entitled to a refund of the plaint- mentioned amount with interest as claimed therein?

5.         Is the plaintiff estopped from questioning the rates approved by the Government as alleged in paragraph 11 of the written statement?

6.         To what relief is the plaintiff entitled?

In C.S. No.368 of 1953 the following issues were framed:

1.         Is the first defendant liable to pay for the electrical energy supplied in accordance with the revised bills with penal surcharge and rent as shown in the second schedule to the plaint?

2.         Is the electrical energy supplied to be charged for in accordance with, and are the rights and liabilities between the plaintiff and the first defendant governed by, the agreements between the Madras Electric Supply Corporation Ltd. and the plaintiff and the long course of conduct between the first defendant and the said Corporation as alleged in paragraph 5 of the first defendant's written statement?

3.         Is the plaintiff entitled to issue separate bills for the three points of supply as alleged in paragraph 9 of the plaint?

4.         Is the defendant liable to pay any charges for electrical energy supplied in question? If so, for what period, and at what rate?

5.         Is the first defendant liable to pay any penal surcharge and, if so, what amount?

6.         Is the plaintiff entitled to a decree against any of the assets in the hands of the second defendant?

7.         Is the plaintiff entitled to a first charge on all the assets of the first defendant and to a priority over all the liabilities and debts of the first defendant as alleged in paragraph 13 of the plaint?

8.         Is the plaintiff entitled to a paramount right of priority of payment as alleged in paragraph 14 of the plaint over all other creditors of the first defendant including the mortgagee debenture holders?

9.         Is the claim for Rs. 3,30,894-2-0 for the period from 29th August, 1947, to 31st August, 1950, barred by limitation?

10.       To what relief (if any) is the plaintiff entitled?

As the suits were very intimately connected, they were tried together, at the request and with the consent of all the parties. The only oral evidence let in consisted of the evidence of Mr. Narayana Rao, who was the Superintending Engineer, Madras Electricity Department, from 1941 to 1951. He spoke to the taking over of the Madras Electricity concern on 29th August, 1947, and to his correspondence with the Madras Tramway Company about the increased rates. He stated that the Government had to install two separate rectifier stations for transforming A.C. to D.C. and high tension to low tension current, for the sake of the Tramway Company, at a cost of Rs. 5 lakhs, besides incurring reconditioning charges amounting to Rs. 60,000. He said that these expenses had to be incurred only in order to supply low tension D.C. to the Madras Tramway Company. He added that Mr. Elphic of the Tramway Company had telephoned to him that the company would be requiring additional current, as it intended to put more trams. Numerous documents were filed by the Tramway Company as well as by the Madras State in support of their respective cases.

BALAKRISHNA AYYAR J. discussed the entire evidence, oral and documentary, and the rulings cited on all sides, and the arguments advanced. he then gave his findings. On issue 1 in C.S. No.191 of 1952, and issue 2 in C.S. No. 368 of 1953, which were in substance the same and were the most important issues in the two suits, he found that the Tramway Company was liable to pay the Madras Government for the current it consumed at the rates specified in the agreements between it and the Electric Supply Corporation, whose successor was the Madras State, and that in addition, the company was bound to pay the Government charges at Rs. 1,284 per month for the housing and operation of the traction panels. On issue 1 in C.S. No.368 of 1953, and issue 5 in C.S. No. 191 of 1952, he found that the Tramway Company was not estopped from questioning the new and enhanced rates approved by the Government, and that it was not liable to pay, as per the revised bills, the penal surcharge and rent. On issue 4 in C.S. No.368 of 1953, he found that the Tramway Company was not liable to pay the whole or any part of the enhanced charges on the principle of quantum merit, or under section 70 of the Indian Contract Act, or on any principle analogous to section 70 of the Indian Contract Act. On issues 7 and 8 in C.S. No.368 of 1953, he found that the State of Madras was not entitled to a first charge on all the assets of the first defendant and to a priority over all the liabilities and debts of the first defendant, as claimed by it, either on the ground of their being Crown debts, or on the principle of salvage, or on any other principle known to law, and that it was not entitled to a permanent right of priority of payment over all other creditors of the first defendant, and was certainly not entitled to any priority over the debenture holders. He held that this was a mere mercantile debt, and would not be a tax or cess or revenue, and, so, the Government would only rank as unsecured creditor regarding any decree amount obtained by it in this suit. He discussed section 230 of the Companies Act and the preferential payments mentioned in it also in this connection. He held that the debenture holders would be entitled to a charge on all the assets of the company, movable and immovable, in preference to all other creditors, since there was "specific security" given in their favour in respect of Nos. 1 and 2 of Rundall's Road and other immovable properties covered by valid registration, and there was "floating security" over all the movable assets and other immovable properties, which floating security had become crystallized on the receiver appointed by the debenture holders taking possession of the properties on 11th April, 1953. Even though the Mylapore immovable properties, covered by Exhibit D 11, had not been registered under section 109 of the Companies Act, and were only registered under the Registration Act, as security for the debenture holders to the extent of Rs. 53,000 and the learned counsel for the Tramway Company had not disputed that Exhibit D 11 would be void as a special mortgage, he held that the floating charge created over the property under the debenture deed as over all the properties of the company, movables or immovables, and on the "undertaking" fastened on these and other similar properties on 11th April, 1953, when the receiver took possession of the properties and crystallised the floating charge. On issue 3 in C.S. No.368 of 1953, he held that the Government were not entitled to bill the company separately in respect of each source of supply, and then work out the tapering charges, as it was bound by the agreements entered into by the Madras Electric Supply Corporation, its transferor. On issue 5 in C.S. No.368 of 1953,, he found that the Tramway Company was not liable to pay any penal surcharge, but only interest at five per cent. per annum, as provided for in the agreements. On issue 6 in C.S. No.368 of 1953, he found that the Government would be entitled to a decree for the amounts due to them under the original agreements plus the rent and operation charges for the three traction panels. Issue 9 in C.S. No.368 of 1953 was not pressed by Mr. Nambiar. In the end, he gave the Government a decree for Rs. 3,41,317-2-9 against the first defendant, the Tramway Company, and made the decree amount subject to the claim of the debenture holders against that company, and directed the third defendant, the official receiver liquidator, to pay the amount with interest at 6 per cent. per annum, from 30th October, 1953, the date of the plaint, till the date of payment, subject to such priority, and directed the State of Madras and the Tramway Company to give and take proportionate costs.

ON issue 2 in C.S. No.191 of 1952, he found that the Tramway Company was not liable to pay the Government the enhanced charges, and that the Tramway Company was entitled to recover the excess paid less the rent and operation charges of the traction panels. he allowed the "coal charges" to be worked out annually as claimed by the Government, and not monthly, as contended by the Tramway Company. He also rejected the claim of the Tramway Company to escape payment regarding the minimum energy which it was bound to take, on the score that it had to stop its business for causes beyond its control, since it was not proved that the stoppage of its business was due to causes beyond its control. On issue 3 in C.S. No. 191 of 1952, he found that the consent of the plaintiff was necessary for the increased charges, since the old agreements continued to operate and had not been cancelled by the Government or substituted by a new agreement between the parties. On issue 4, he held that the plaintiff was entitled to a refund of the excess amount claimed minus the traction panels' rent and operation charges. In the end, therefore, he gave a decree to the plaintiff in C.S. No. 191 of 1952 for Rs. 1,17,796-9-0, with interest at 6 per cent. per annum from the date of the plaint, and directed the Government and the Tramway Company to give and take proportionate costs in the suit.

O.S.A.No.93 of 1954 has been filed by the Madras State against the judgment and decree in C.S. No.368 of 1953, in so far as it went against them and disallowed some of the amounts claimed by them O.S.A.No. 168 of 1954 has been filed by the State of Madras against the judgment and decree in C.S.No. 191 of 1952.

We have perused the entire records and heard the learned Advocate-General for the State, and Mr. O.T.G. Nambiar for the debenture holders, and the arguments adduced on behalf of the Tramway Company. The learned Advocate-General raised several contentions. The first was that BALAKRISHNA AIYAR J. erred in holding that the rights and liabilities of the appellant and the first respondent were governed by the agreements, that existed prior to the electricity undertaking being taken over by the State on 29th August, 1947, and that he should have held that the old agreements lapsed on 29th August, 1947, with the cessation of the licence of the Madras Electric Supply Corporation and that the State could not be held to be the transferee or assignee from the Madras Electric Supply Corporation and bound to carry out the terms of the old agreements, especially in view of the circular, Exhibit P 4, dated 4th August, 1947, to the Tramway Company, and the order in Exhibit P 22 dated 9th September, 1950. We cannot agree. There is absolutely no doubt that the Madras State had merely exercised its option, under section 7 of the Indian Electricity Act of 1910, to purchase the undertaking of the Madras Electric Supply Corporation. The State did not get the undertaking under the state, but only the right to purchase the undertaking. In other words, it was a purchaser and a transferee from the Madras Electric Supply Corporation and was bound by all the obligation of the Madras Electric Supply Corporation under its existing contract. Section 7(3)(a) of the Electricity Act itself says "where a purchase has been effected under sub-section (1) or sub-section (2)," making it plain that it is only under the purchase that the state gets title to its undertaking, and not under the statute itself. In paragraph 3 of the written statement in C.S. No.368 of 1953, the Tramway Company definitely asserted that the Madras Electric Supply Corporation had executed and registered in favour of the State a deed of conveyance conveying and assigning to the State its properties. That allegation was not controverted by the State in its written statement, and, therefore, the position of the State, is that of one who has obtained an assignment from the Madras Electric Supply Corporation of its entire business and undertaking, with all its rights and obligations. The State is certainly a "successor" of the Madras Electric Supply Corporation, as held by BALAKRISHNA AIYAR J. In Exhibit P 18, the Tramway Company had expressly stated that the State was the successor of the Madras Electric Supply Corporation. A "successor" means, as BALAKRISHNA AIYAR J. has rightly remarked, "he that followed or cometh in another's place." See Stroud's Judicial Dictionary. So, the Madras State was both the successor and assignee from the Madras Electric Supply Corporation and was bound by the agreements entered into by that Corporation with the Tramway Company till they were validly terminated.

After the decision of BALAKRISHNA AIYAR J. the House of Lords has held in Madras Electric Supply Corporation Ltd. v. Boarland (Inspector of Taxes), that the Madras Electric Supply Corporation has sold its undertaking to the Madras State which had carried it on, so that the trade was not discontinued. We may add here that there is also a reported Bench decision of this court regarding the Madras Tramway Company. It is P.G. Brookes v. Industrial Tribunal, Madras, where it was held that the order bringing on record Mr. Brookes, the receiver of the debenture holders, as representing the employers of the Madras Tramway Company in an industrial dispute between the Tramway Company and its workers, though it might be a wrong order on merits, court not be said to be an order vitiated by an error apparent on the face of the record, and, so Mr. Brookes' remedy, if any, would be to prefer an appeal to the Labour Appellate Tribunal against the order of the Industrial Tribunal, Madras, bringing him on record on behalf of the employers, and get it rectified. Mr. Brookes was in charge of the entire assets of the Madras Tramway Company, and it was held that the Industrial Tribunal had acted within its jurisdiction in bringing him on record on behalf of the Tramway Company even though it was conceivable that it was a wrong order on merits.

The workers of the Tramway Company are now claiming some eight lakhs as their dues in liquidation, according to counsel on all sides. It was represented to us by the learned Advocate-General, as well as by Mr. O.T.G. Nambiar for the debenture holders of the Tramway Company, that the entire realisable assets of the Tramway Company in liquidation would not exceed 8 or 9 lakhs, and that the company's debts due to the debenture holders, aggregating pounds 130,000, or more than 17 lakh of rupees, would exceed the entire assets, if the debenture holders were given the first priority, and the workers and the State of Madras would get nothing in that event except to the extent the preference and priorities under section 230 of the Companies Act would help them, if that matter is left open.

The learned Advocate-General next contended that though the Madras State did not expressly cancel the agreements entered into with the Madras Tramway Company by the Madras Electric Supply Corporation an implied cancellation of the old agreements could be inferred by the irresistible inference drawn from the letters, Exhibits P 4 and P 4(a), and the G.O. in Exhibit P 22 and urged that after the issue of the G.O. in Exhibit P 22 on 9th September, 1950, the old agreements regarding the terms and rates were replaced by a new agreement, embodying the new terms and rates mentioned in Exhibit P 22. We cannot agree. Exhibit P 4, far from cancelling the previous agreements, expressly stated "pending the final decision of Government and the execution of a fresh agreement, the existing agreements between you and the Madras Electric Supply Corporation Ltd. will be deemed to continue in force," thus expressly extending the lifetime of the previous agreement till such time as a fresh agreement was entered into between the Madras State and the Tramway Company. In Exhibit P 4(a), the Tramway Company simply signified their acceptance of the previous agreements till a fresh agreement was entered into. No fresh agreement was admittedly entered into between the Madras State and the Tramway Company, owing to the dispute regarding the enhancement of rates, threefold division of the energy supplied, rent and operation charges of the traction panels etc. So, it is obvious that the previous agreements continued to be in operation till 11th April, 1953. Under Exhibit P 22, dated 9th September, 1950, the Governor of Madras directed that the existing agreements with the Madras Electric Tramways should be terminated, and a fresh agreement entered into with the Tramway Company, providing for the new terms and rates embodied in the G.O. He also requested the Chief Engineer of the Madras State Electricity Department to take necessary action to enter into a fresh agreement with the Madras Electric Tramways and submit a report to the Government as soon as the agreement was completed. It is significant that he did not terminate the old agreements, but directed the taking of a fresh agreement, which was obviously, in his opinion, necessary to take the place of the old agreements. The learned Advocate- General had to admit that the old agreements were never terminated in terms, and that the electric supply was not cut off in view of the Tramway Company's refusing to agree to a new agreement. Of course, the motive behind the Government's not terminating the old agreements, and cutting off the electric supply was fear of public commotion in Madras, the capital of the State, by the Tramway Company's stopping its trams and leaving 1,50,000 citizens of Madras to shift for themselves regarding their daily transport. As BALAKRISHNA AIYAR J. has rightly observed, the Tramway Company would have decided to stop the trams, if the electricity was cut off, and might not have used animals or other forms of mechanical power to propel the trams. It is clear from the Chief Engineer's letters, Exhibit P 5 dated 10th May, 1948, and Exhibit P 8 dated 26th May, 1948, requesting the Tramway Company to give its concurrence to the terms of a draft agreement, before it was formally drawn up, that he and the State were fully aware that its concurrence to the new terms was essential before a fresh agreement could be substituted.

The next contention of the learned Advocate-General was that the Madras State took the old agreements as terminated from 9th September, 1950, the date of Exhibit P 22, and that the Tramway Company acquiesced in it. We cannot agree. The fact that the phrase used in the order was "should be terminated" and not "is terminated" and that a fresh agreement was directed to be entered into, will show that the Madras State did not consider that the old agreements were terminated on 9th September, 1950, the date of the order. The mere fact that, under the old agreements, the State had the right to apply for a revision of rates on the expiry of every seven years from the date of the agreements, namely, 15th September, 1907, will not help the State, as it did not take action under that provision of the agreements and give three months' notice and apply for the appointment of an Engineer by the president of the Institution of Electrical Engineers in England to determine the dispute. The mere opinions of the Madras Governor and the Chief Engineer that the old agreements had been terminated, by directing those agreements to be terminated, or that the new terms and rates in Exhibit P 22 had taken the place of the old terms and rates, will not make the slightest difference to the legal position. It has been observed by the Privy Council in E.H. Battat v. The King:

"It is difficult to see the necessity for inserting words save for the purpose of giving to the section the interpretation contended for by the Crown but not borne by the language used in its natural meaning. Giving the words their natural meaning, this appears to be an instance of the principle that an Act of Parliament, and a fortiori delegated legislation, does not alter the law by betraying an erroneous opinion of it. Their Lordships are of the opinion that it would be an unjustifiable strain on the language used in section 2 and 42 to give them the interpretation for which the Crown contends."

The same remarks will apply a fortiori to the erroneous opinions held by the Government and the Chief Engineer regarding the real meaning of the clauses in the original contracts and the phrase in Exhibits P 4, P4(a) and P 22.

It was next urged by the learned Advocate-General that, even so, BALAKRISHNA AIYAR J. should have held that the Tramway Company was estopped from contending that the old agreements had not ceased to exist, and the new terms and rates mentioned in Exhibit P 22 had not come into force on 9th August, 1950, especially in view of their exchanging letters regarding the new terms and rates, and making the Government loss Rs. 5,60,000, by installing two separate rectifier stations and reconditioning the transformers for converting high tension current to low tension current and A.C. to D.C. on the representation of the Tramway Company, that it was not financially able to buy the machinery for conversion, and the telephone conversation of Mr. Elphic with P.W.1, the Superintending Engineer, that the Tramway Company required even more electrical energy. We cannot agree. As BALAKRISHNA AIYAR J. has observed, there can be no question of estoppel based on a mere intention or promise regarding the future. LORD DENMAN in Pickard v. Sears has stated the principle of estoppel as follows:

"Where one, by his words or conduct, willfully causes another to believe the existence of a certain state of things and induces him to act on that belief, so as to alter his own previous position, the former is concluded from averring against the latter a different state of things as existing at the same time."

That principle was amplified and restated by LORD SELBORNE in Citizen's Bank of Louisiana v. First National of Bank New Orleans, in these terms:

"The foundation of that doctrine, which is a very important one, and certainly not one likely to be departed from, is this, that if a man dealing with another for value make statements to him as to the existing facts, which being stated would affect the contract and without reliance upon which or without the statement of which the party would not enter into the contract and which being otherwise than as they were stated would leave the situation after the contract different from what it would have been if the representations had not been made, then the person making those representations shall, so far as the powers of a court of equity extend, be treated as if the representations were true and shall be compelled to make the good."

LORD SELBORNE then added an important qualification, "but these must be representations concerning existing facts" and thereby emphasised the statement of LORD CRANWORTH in the case of Jorden v. Money, to the effect that "in order to found an estoppel the representation must be of existing facts and not of mere intention." So, the mere expression of the intention of the Tramway Company to put more trams on the road, with the need for extra energy, would not bring about estoppels. Nor was the Tramway Company estopped from questioning the new and enhanced rates, as they had not greed to them and were contending that the old agreements, with the lesser rates, were still in full force. Nor will the inability of the Tramway Company to buy the rectifiers costing five lakhs, and recondition the rotaries at an extra cost of Rs. 60,000, when they were asked to do conversion themselves or pay for it, bring about estoppel, since their contention was that the old agreements, with the lesser rates and the liability of the State to convert the energy at its own expense and to give it in one consolidated bill stood and that they could not agree to pay any higher rates. Nor will their conceding that if higher rates were found to be legally immpossiable on them there was no justification for levying more than Rs. 4,659 a month, bring about estoppel even to that extent, since they were contending vigorously that the old agreements and old rates stood, and that there was no justification for enhancing them to any extent, and had clearly stated this in their letter, Exhibit P 9 dated 27th May, 1948, followed up by Exhibit P 25 and the petition to the Minister. After all, the company, which was progressively deteriorating in its finances, was faced by a powerful Government, which had the monopoly of the electric supply in Madras, by reason of its purchase of the undertaking from the Madras Electric Supply Corporation, and it was being given a Hobson's choice. So, their naming Rs. 4,659 as the maximum imposable on them, if anything was to be imposed on them extra, for fear of three times that sum named by the Chief Engineer being imposed on them, will not bring about estoppel of any kind. Nor will their payment of the bills with the new rates for the period from 1st September, 1950, to 31st August, 1951, bring about any estoppel, as those payments were made under protest through the company's solicitors and reserving the right of the company to recover the excess and was followed by the filing of the suit, C.S. No.191 of 1952, for recovering the excess.

The ruling of the Court of Appeal in Lyle Meller v. A. Lewis and Co. (Westminster) Ltd., relied on by the Advocate- General, will not help him in the facts of this case. There, the payment of royalties to the plaintiff, as per an agreement in writing, was made willingly for two years without any protest, and then sought to be stopped on the ground that the lighters and refills did not embody the plaintiff's invention, and, so, it was held that estoppel would operate. But, here, the payment of the bills with new charges was not made willingly or as per any agreement, but under protest and with a reservation of the right to sue for recovering the excess.

The learned Advocate-General then urged that the Government had a right to alter the rates themselves without any agreement on the part of the Tramway Company, and that such a right to alter the rates existed in every public utility company. We cannot agree. The Government was bound by the old rates stipulated under the old agreements till they were repudiated or terminated, and had no right to impose an agreement with the higher terms under Exhibit P 22, in the guise of a G. O., on the Tramway Company. The Government did not terminate the agreements. They were only undertaking a commercial enterprise in running the Madras Electric Supply Corporation after purchasing it from it. Regarding their commercial undertakings, they could claim no more rights than other commercial undertakings, and would be bound by the terms of the existing contracts till they were validly repudiated or terminated. Assuming the sovereign power of a State in such matters is unjustifiable. To issue a G.O. to the other party to the contract, and claiming that the G.O. will be sufficient to impose new terms on the company, was beyond the State's powers and jurisdiction and cannot be upheld.

The next contention of the learned Advocate-General was that the State could recover at least a reasonable increase over the old rates and terms on the principle of quantum meruit, or on a principle analogous to it, or on the principle embodied in section 70 of the Indian Contract Act. We cannot agree. The short answer to this is that the principle of quantum meruit has no application to cases where there are specific contracts in operation, and has only application to cases where there are specific contracts in operation, and has only application to cases where there is no contract in operation. As held in D. Vanjeswara v. District Board, South Arcort:

"The principle of quantum meruit is often applied, where, for technical reasons, a contract is held to be invalid. Under such circumstances an implied contract is assumed, by which the person, for whom the work is to be done, contracts to pay the person, who does the work, a reasonable sum for the work done. There is no room however for an implied contract where there is an express contract in existence."

As we have held that the original contracts with the Madras Electric Supply Corporation were assigned to the Madras State, there is no question of giving the Madras State any increase whatever on the principle of quantum meruit, or under section 70 of the Indian Contract Act, which cannot be brought into operation at all.

It follows from our observations above that the agreements between the Electric Supply Corporation and the Madras Tramway Company remained in full force and effect for the periods covered by the suits, and that the claims of the parties must be settled on that basis, except regarding the rent and operation charges of the traction panels to the extent allowed by BALAKRISHNA AIYAR J. So the amounts decreed by BALAKRISHNA AIYAR J. in both the suits were correct, and we confirm them.

The learned Advocate-General urged next that, even so, BALAKRISHNA AIYAR J. should have directed the decree amounts to be set off against each other, as the suits were intimately connected together, and the claims and counter claims related to the same matter, and should have allowed the State of Madras to set off the amount decreed in favour of the Tramway Company in C.S. No.191 of 1952 against the amount decreed to the State against the Tramway Company in C.S. No.368 of 1953. Though Mr. O.T.G. Nambiar objected to This at the outset, he had to finally agree that the learned Advocate-General's request was just and proper. BALAKRISHNA AIYAR J., we may add, did not consider the question at all, and did not, therefore, pass any order either allowing or refusing the set off-now requested by the learned Advocate- General. As the decrees stand, the Madras State will have to pay the Madras Tramway Company the amount decreed in C.s. No.191 of 1952, which will at once be appropriated by the debenture holders towards their dues of 17 and odd lakhs, and the State will have to execute the decree in C.S. No.368 of 1953, given in its favour of Rs. 3,09,000 against the Tramway Company, without any prospect of recovering more than a miserable fraction: if at all that. It may even be that it will only lose its execution costs, as the learned Advocate-General pointed out. BALAKRISHNA AIYAR J. himself has remarked in the very first sentence of his judgment: "These two suits are so connected that it is, convenient to deal with them together." C.S. No.191 of 1952 is, as already stated, by the Tramway Company to recover the excess for the second period out of the four periods covered by C.s. No.368 of 1953. It is something like a suit by a tenant for recovering the excess rent for a house paid for some months, in view of the fixation of fair rent at a lower rate, and another suit filed by the landlord for the deficit rent or no rent regarding the same house by the same tenant for some other months. Mr. O.T.G. Nambiar had finally to concede, that, in cases like these, the excess rent payable by the landlord and covered by the decree in one suit should be allowed to be set off against the sum due to him for the same house in the other suit. It is not as if these two suits are concerned with two separate unconnected claims. Indeed, the Tramway Company had claimed in its written statement in C.S. No.368 of 1953 that it was entitled to have the sum claimed in C.S. No.191 of 1952 set off against any sum found due by it in C.S. No.368 of 1953. No doubt, the Government could have filed a counter claim in C.S. No. 191 of 1952, claiming the amounts due to it. Instead of doing so, it filed a separate suit, C.S. No.368 of 1953. That cannot prevent its claiming a set-off before us now. We allow the request of the learned "Advocate-General and modify the decree in both the suits by putting a clause in the decree in C.S. no.191 of 1952 to the effect that the amount decreed thereunder to the Tramway Company could be set off by the State of Madras towards its decree in C.S. No.368 of 1953, and by adding a clause in the decree in C.s. No.368 of 1953 to the effect that the State could adjust and set off the decree in C.S. No.191 of 1952 towards the amount due to it under this decree.

The learned Advocate-General did not contend, and indeed he could not, that the amount due to the Government should have priority over the debenture holders or secured creditors as a Crown debt. BALAKRISHNA AIYAR J. was right in negativing this contention raised before him.

The learned Advocate-General urged that BALAKRISHNA AIYAR J. was not justified in discussing in these suits the priority of the decree amount of the State in C.s. No.368 of 1953 over all other unsecured creditors, as that is a matter not arising in these suits and has to be gone into and decided by the official liquidator and the court dealing with the liquidation proceedings. He, therefore, wanted the matter to be reserved for being agitated in future. Mr. O.T.G. Nambiar had no serious objection to this, though he pointed out that the matter had been argued exhaustively before BALAKRISHNA AIYAR J. and it was a pity that this decision on this point should be held not to be binding on the State and fit to be reserved and allowed to be agitated again before the official liquidator and the court in seisin of the liquidator proceedings. We agree with the contention of the learned Advocate-General and reserve the right of the State to agitate the matter of priority for its dues over other unsecured creditors before the official liquidator, and the court in seisin of the liquidation proceedings, and set aside the findings of BALAKRISHNA AIYAR J. on this point. We may add here that the question of priority of the workers' dues over other unsecured debts is also left open to be decided by the official liquidator and the court is seisin of the liquidator proceedings.

Mr. O.T.G. Nambiar as well as the learned Advocate-General cited the ruling of the Privy Council in Ripon Press and Sugar Mills Co. v. Gopal Chetti, for the position that the duty of the liquidator is to act with complete impartiality between the contending creditors, and not to take sides. We agree. We may add that the official liquidator has, in these proceedings, acted with impartiality between the Government, the workers, the debenture holders and the other contending creditors clamouring for their dues. His only difficulty is that he has not enough funds with him to pay all of them in full, owing to the bankrupt state of the Tramway Company.

The learned Advocate-General wanted us to reserve also the right of the Government to agitate the question of fraudulent preference by the Tramway Company in favour of the debenture holders under section 231 of the Companies Act. Mr. O.T.G. Nambiar pointed out that neither the Government nor the workers nor any other creditors had brought any petition under section 231 of the Companies Act for declaring any transfer by the company to the debenture holders to be void. But that will not conclude the issue. The Government, the workers and other creditors are free to file any petition under section 2311 of the Companies Act, regarding any alleged fraudulent preference, if so advised, and subject to the rule of limitation etc.

Now we come to the claim of the debenture holders to a charge over the specific security and floating security over the assets of the Tramway Company under the mortgages Exhibits D 10, D 11, etc. As remarked by Palmer, Ashburner and other leading writers on company law, a class of securities known as "floating charge" has been created by limited companies within recent times. A charge by a company on its general "undertaking" constitutes a floating charge. Such a charge is an equitable charge on the assets, for the time being, of the company as a going concern. It attaches to the subject charged in the varying conditions in which it happens to be from time to time. It gives an immediate equitable charge on the assets, subject to the right of the company in the ordinary course and for the purposes of its business, but not otherwise, to dispose of the assets as though the charge did not exist. It is of the essence of such a charge that it remains dormant until the undertaking charged ceases to be a going concern, or until the person intervenes in whose favour the charge is created. He may intervene whenever he pleases after default, but his right to intervene may be suspended by agreement. The priority of mortgages and charges made subsequently under such a power is a question of construction. There may be also a power to create a second floating charge ranking in priority. Under the old English law, there was no right to create a charge or interest in after-acquired or future- acquired properties. A person could not create a charge on property in which he had no present vested interest.

But equity made a revolutionary change in this conception. Even as early as 1749 in Row v. Dawson, it was held by LORD CHANCELLOR HARDWICKE that a chose in action, though not assignable at law, was assignable in equity, and that, no particular form of words was necessary for such assignment. This was the thin end of the wedge, and the beginning of the revolutionary change. In Holroyd v. Marshall, the revolutionary change was carried huge step further. It was held by LORD WESTBURY as follows:

"In equity it is not necessary for the alienation of property that there should be a formal deed of conveyance. A contract for valuable consideration, by which it is agreed to make a present transfer of property, passes at once the beneficial interest, provided the contract is one of which a court of equity will decree specific performance. In the language of LORD HARDWICKE, the vendor becomes a trustee for the vendee; subject, of course, to the contract being one fit to be specifically performed. And this is true, not only of contracts relating to real estates but also of contracts relating to personal property, provided that the latter are such as a court of equity would direct to be specifically performed....But if a vendor or mortgagor agrees to sell or mortgage property, real or personal, of which he is not possessed at the time, and he receives consideration for the contract, and afterwards becomes possessed of property answering the description in the contract, there is no doubt that a court of equity would compel him to perform the contract, and that the contract would, in equity, transfer the beneficial interest to the mortgagee or purchaser immediately on the property being acquired."

LORD CHELMSFORD observed:

"At law property non existing, but to be acquired at a future time, is not assignable; in equity it is so. At law (as we have seen), although a power is given in the deed of assignment to take possession of after-acquired property, no interest is transferred even as between the parties themselves, unless possession is actually taken; in equity it is not disputed that the moment the property comes into existence the agreement operates upon it."

The reason for these rulings is that equity would treat as done what ought to be done, and, therefore, would enforce a contract regarding after-acquired properties, ignoring the absence of formal sale deeds etc.

In In re Panama New Zealand and Australian Royal Mail Co., LORD JUSTICE GIFFARD held that the debenture holders acquired a charge upon all the property of the company, present and future, when the company had charged the "undertaking" in their favour, and that the debenture holders were entitled to be paid out of the property of the company in priority to the general creditors and that even if the company had not stopped, but had made default, the debenture holders could step in and seize the assets of the company and realise the security. In In re Florence Land and Public Works Co.: ex parte Moor, JESSEL M.R. held that despite the charge on the property in favour of the debenture holders the power of the directors to dispose of any part of such property, in the ordinary course of business, till default was committed and the debenture holders had seized the property, continued to exist. In In re Clarke: Coombe v. Carter, it was held that the assignment of after-acquired property would be enforced in equity. In Tailby v. Official Receiver, the House of Lords held that the assignment of future book debts, though not limited to book debts in any particular business, was sufficiently defined and passed the equitable interest in book debts incurred after the assignment, whether in the business carried on by the mortgagor at the time of the assignment or in any other business. So "floating security" came into existence apart from "specific security."

In Illingworth v. Houldsworth the EARL OF HALSBURY observed that the essential characteristic of a floating security was that it was something which was to float and was not to be put into immediate operation, but such that the company was to carry on its business.

"They shew an intention on the part of both the parties that the business of the company shall continue to be carried on in the ordinary way, that the book debts shall be at the command of, and for the purpose of being used by, the company. Of course, if there was an absolute assignment of them which fixed the property in them, the company would have no more interest in them, and would not be allowed to touch them, whereas as a matter of fact it seems to me that the whole purport of this instrument is to enable the company to carry on its business in the ordinary way, to receive the book debts that were due to them, to incur new debts, and to carry on their business exactly as if this deed had not been executed at all. That is what we mean by a floating security."

LORD MACNAGHTEN observed in the same case:

"I should have thought there was not much difficulty in defining what a floating charge is in contrast to what is called a specific charge. A specific charge, I think, is one that without more fastens on ascertained and definite property or property capable of being ascertained and defined; a floating charge, on the other hand, is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp."

In In re Lloyd's Furniture Palace Ltd.: Evans v. The Company, it has been held that the claim of the debenture holders does not become voidable when the company goes into liquidation and can be enforced against the liquidator in liquidation proceedings. It was held in Government Stock and Other Securities Investment Co. v. Manila Railway Co. by the House of Lords, that the Security for the debentures remained as floating security till the debenture holders took some steps to enforce it and prevented the company from dealing with its property, and that the debenture holders were not entitled to an injunction restraining the company from paying interest to the bondholders. In evans v. Rival Granite Quarries Ltd., it was held that the demand by the debenture holder would not be of any use against the judgment debtor under a garnishee order, for there was no equity in a debenture holder whose security was a floating charge arising from merely giving notice to seize a particular asset of the company. In Yorkshire Woolcombers Association Ltd., In re: Houldsworth v. Yorkshire Woolcomber Association Ltd. ROMER L.J. held that a mortgage or a charge by a company which contains the three following characteristics is a floating charge, namely, (1) if it is a charge on a class of assets both present and future; (2) if that class is one which in the ordinary course of the business of the company would be changing from time to time; and (3) if it is contemplated by the charge that, until some future step is taken by or on behalf of the mortgagee, the company may carry on its business in the ordinary way so far as concerns the particular class of assets charge. BUCKLEY L.J. has observed in Evans v. Rival Granite Quarries Ltd. as follows:

"A floating security is not a future security; it is a present security, which presently affects all the assets of the company expressed to be included in it. On the other hand, it is not a specific security: the holder cannot affirm that the assets are specifically mortgaged to him. The assets are mortgaged in such a way that the mortgagor can deal with them without the concurrence of the mortgagee. A floating security is not a specific mortgage of the assets, plus a licence to the mortgagor to dispose of them in the course of his business, but is a floating mortgage applying to every item comprised in the security, but not specifically affecting any item until some event occurs or some act on the part of the mortgagee is done which causes it to crystallize into a fixed security."

In In re Lind: Industrials Finance Syndicate Ltd. v. Lind, it was held that the assignment by the next of kin presumptively entitled to a share in his mother's estate would have priority over all other assignments despite bankruptcy, though it was after-acquired property, the principles applied being that a court of conscience would enforce all obligations supported by consideration and not tainted by fraud etc., despite the absence of a legal title in law, and that equity would treat as done what ought to be done, and would fasten upon the after-acquired property the obligations under the assignment as soon as the assignor had acquired it. In Regulation and Control of Radio Communication in Canada, In re, in D. N. Banerji v. P.R. Mukherjee, and in R. v. Industrial Disputes Tribunal, the word "undertaking" with reference to a company has been given a very wide meaning and made to include all present and future properties. In In Panama, New Zealand and Australian Royal Mail Co., it has been held to include all the properties of the company, present and future. Even a trustee's savings bank accounts was included in it by R. v. Industrial Disputes Tribunal.

In Halsbury's Laws of England, 3rd Edn., Volume 6, it has been stated that a specific legal mortgagee or equitable charge given by a company can be enforced in the same manner as similar securities given by an individual. A debenture- holder may obtain the appointment of a receiver, or receiver and manager and crystallise the floating security. When a floating security upon all the property or assets of the company is thus crystallised or fixed, it constitutes a charge upon all the property or assets then belonging to the company. It has priority over any subsequent equitable charges and over unsecured creditors and over moneys advanced to the liquidator to carry on the business of the company, although the advances were made with the sanction of the court in winding up, and over the costs of the liquidators other than costs of realisation; but it is subject to all the then existing charges and to the payment of debts which by statute are made payable out of property subject to a floating security in priority to the moneys thereby secured. It is obvious, therefore, that all existing valid mortgages in favour of other creditors, and even unpaid vendor's lien, whether in respect of immovable properties, or in respect of machinery or movables, will take precedence over the claims of the debenture-holders regarding the floating security, till the moment of its crystallisation by cessation of the company or the seizing of the property through the receiver appointed by the debenture holders after default has occurred.

In M.K. Ranganathan v. Government of Madras, a Bench of this court, to which one of us was a party, has held that regarding a floating charge created over the assets of a company other creditors got preferential payment over the debenture holders under section 230(2) of the Companies Act only if at the moment of the winding up it is still a floating charge, and that once a receiver is appointed by the debenture holders and he takes charge of the assets of the company, that charge ceases to float and becomes crystallised and fixed, and the provisions of section 230(2) of the Companies cannot apply. We have left the question of preference under section 230(2) of the Companies Act open, as stated before.

The learned Advocate-General contended that the rules of equity applied in England may not apply in full in India and may not have application in India regarding after-acquired properties, and regarding the validity of mortgages of immovable properties or contracts in regard to immovable property, present or future, unless registered under the Registration Act and also under section 109 of the Companies Act. He even doubted whether a "floating security" is recognised in England, as seen from the rulings cited above. He pointed out that in an article in the Hardward Law Reports in June, 1906, the learned author has observed that mortgages of after-acquired immovable properties have been held to be invalid in many of the States in U.S.A. He had to concede that "floating security" has been referred to in section 230(2) of the Companies Act and in some other sections of the Act. Mr. O.T.G. Nambiar pointed out that "floating security" in favour of debenture holders has been recognised as valid in India by several decisions. We agree. In Nallaperumal Pillai v. Krishna Aiyangar, it has been held by a Bench of this court consisting of SIR JOHN WALLIS C.J. and TYABJI J. as early as 1915, that a floating security is valid in India, that the company's right to carry on business did not come to an end automatically on the happening of the default, but continued until the debenture holder intervened to show his desire that it should cease, as by applying for a receiver; that the charges created by the company after default and before the seizure of the assets by the receiver were not void; and that the floating security remained dormant and could not become fixed or crystallised until the company ceased to be a going concern, or until the debenture holder intervened. It however stated that a charge created in favour of the officers of a company could not be availed of if it was not registered under the Companies Act. In Official Assignee, Madras v. Mercantile Bank of India, the Privy Council has held that delivery of a railway receipt in respect of consigned goods constitutes an equitable charge upon the goods. In Maheshwari Bros v. Official Liquidator, a floating security was recognised, though registration was required under the Registration Act and the Companies Act regarding immovable properties. In an appeal against that decision, a Full Bench of the Allahabad High Court held in Maheshwari Bros. v. Official Liquidator, that a floating charge was recognised in India. They added that the principal test regarding a floating charge were whether it was a charge upon all or a certain class of assets, present or future; whether the assets charged in the ordinary course of business would change from time to time; and whether the company creating the charge had power until such step was taken by the chargee to crystallise the floating charge, to carry on the business of the company in the ordinary way. They also held that a charge would be void for absence of registration under section 109 of the Companies Act. As already stated, the ruling of a Bench of this court in M.K. Ranganathan v. Government of Madras, also recognises the validity of a floating charge regarding a limited company in India, and goes on to state how it crystallises and how debts are to be paid in the priority indicated under section 230(2) of the Companies Act, on the company becoming unable to pay it debts and being put into liquidation. So, it is clear that a floating security or charge, in much the same terms as in England, is recognised regarding limited companies in India, except for the important limitation that a floating charge regarding immovable properties is to be registered both under the Registration Act and also under section 109 of the Companies Act after 15th January, 1937, when the requirement came into force.

The learned Advocate-General then contended that, even so, the floating charge would ensure in favour of the debenture holders, and subject to the reservation made by us regarding the rights of priority under section 230(2) of the Companies Act to be agitated before the liquidator and the judge in seisin of the liquidation proceedings, only with regard to the movables. He urged that with regard to the immovable properties, present or future, included in such floating charge, there would be no charge in favour of the debenture holders in the absence of registration under the Registration Act and also under section 109 of the Companies Act, since the rules of equity in England would not be applicable in their entirety in India. He pointed out that in Annada Mohan Roy v. Gour Mohan Mullick, the Privy Council has held that a contract by a Hindu to sell immovable property to which he is then only a reversionary heir, expectant upon the death of a widow in possession, and to transfer it upon possession accruing to him, is void. That is so. The Privy Council held that section 6(a) of the Transfer of Property Act, forbidding the transfer of expectancies, would be futile if a contract of the above description was made enforceable in India. Of course, this ruling goes quite contrary to the ruling in In re Lind: Industrials Finance Syndicate Ltd. v. Lind, which held such transfer of expectancy to be valid in England. The reason for this is that in India there is no such conception as legal estates and equitable estates, and, under section 23 of the Indian Contract Act, a contract will be void if it is opposed to law or to public policy, as observed by a Full Bench of the Calcutta High Court in Ali Hossain Mian v. Rajkumar Haldar.

It was contended by the learned Advocate-General, and we agree with him, that there will be no charge on the immovable properties covered by Exhibit D 11 and other immovable properties of the Tramway Company where the security was not registered both under the Registration Act and under section 109 of the Companies Act (after 15th January, 1937). In In re East Bengal Sugar Mills Ltd., it has been held by a Bench of the Calcutta High Court that in order to constitute a valid security in favour of the debenture holders a charge, whether floating or fixed, over any immovable property should be registered according to the provisions of the Indian Registration Act, in addition to being registered under section 109 of the Companies Act. DERBYSHIRE C.J. has observed at pages 130 and 131:

"The Registration Act is intended to afford warning to people in the district in which the land is situate as regards charges affecting that land so that they may not suffer through lack of knowledge. If we are to say registration under the Companies Act was sufficient, then it means that the security which the Registration Act has provided for the local man goes and he is left at the mercy of the debenture holder who is elsewhere.

In my opinion, for the reasons I have given, it is necessary that a debenture creating a charge, whether floating or fixed, over any immovable property should be registered according to the provisions of law laid down in section 17 of the Registration Act, in addition to the provisions of the Companies Act. The provisions of the Companies Act are intended to protect people who have business dealings with companies and to warn them of the extent to which the companies have created obligations over their property. The provisions of the Registration Act are intended to protect all who may have dealings with land so that those persons, particularly, those local persons, may have knowledge of the obligations which have been created over and in respect of the land."

With great respect, we entirely agree with those observations. Before BALAKRISHNA AIYAR J. it was admitted on behalf of the Tramway Company that registration under the Registration Act was necessary in respect of immovable properties in order to make the charge in favour of the debenture holders valid.

The learned Judge has observed:

"It is incontrovertible that a floating charge in relation to immovable property must be registered under the Indian Registration Act."

It was also conceded before the learned Judge that regarding the Mylapore immovable properties of the Tramway Company, covered by Exhibit D 11, they were only registered under the Indian-Registration Act, but not under the Indian Companies Act; and on behalf of the Tramway Company it was not disputed that, as it was not registered under the Indian Companies Act, it would be void as a special mortgage. But it was contended on behalf of the debenture holders that by reason of Exhibit D9, the trust deed executed by the Tramway Company in favour of the Beaver Trust Ltd., a floating charge was created over the Mylapore properties also, and that this floating charge fastened on the property on 11th April, 1953, when the receiver stepped in and took possession, and that the invalidity of Exhibit D11, as a special mortgage did not invalidate the floating charge over the property under the earlier document, Exhibit D 9. BALAKRISHNA AIYAR J. agreed with this argument and considered that the decision in In re East Bengal Sugar Mills Ltd., would not apply to this case, as, in that case, there was no debenture trust deed accompanying the issue of the debentures, and in the debenture trust deed itself the only reference to the property charged was its undertaking that all the property whatsoever and wheresoever situate, present and future, was given as security to the debenture holders, and the debenture deed was not registered under the Registration Act, though registered under the Companies Act. The learned Judge relied on the fourth proviso to section 109(1) of the Companies Act which runs as follows: "The holding of debentures entitling the holder to a charge on immovable property shall not be deemed to be an interest in immovable property," and on the fact that section 109(1)(f) of the Companies Act spoke of "a floating charge on the undertaking or property of the company." We are of the opinion that the distinction sought to be made out by BALAKRISHNA AIYAR J. is not valid. We agree with the learned Advocate-General that the fourth proviso to section 109(1) of the Companies Act will only exempt the debenture from being registered, and not the immovable properties given as security to the debenture holders. Otherwise, the mortgage on the immovable properties in favour of the debenture holders need not be registered under the Registration Act. BALAKRISHNA AIYAR J. himself has held that they must be registered under the Registration Act. It is clear from the rulings in Webb v. Macpherson, Shiva Rao v. Shanmuga Sundaraswami, Imperial Bank of India v. Bengal National Bank, Maheswari Bros v. Official Liquidators, Maheswari Bros v. Official liquidator, Annamalai Chettiar v. Malayandi Appayya Naik, Skinner v. Skinner, and nallaperumal Pillai v. Krishna Aiyangar, that registration under the Registration Act is essential to make a charge in respect of immovable properties in favour of debenture holders valid and enforceable. In P. Venkatapathi Raju v. Venkatasubadrayamma, a Bench of this court, consisting of AYLING and SHEHAGIRI AIYAR, JJ., held that non-registration of the security would only deprive the promisee of his right in the immovable property and would not affect his rights in the movable property, thus showing clearly that regarding immovable properties registration under the Registration Act was essential in order to create a valid security. In appeal, in Subhadramma v. Venkatapathi Raju, the Privy Council did not dissent from this observation, obviously because it was settled law.

Mr. O.T.G. Nambiar relied on the rulings in Gayadin v. Kashi Gir, but had to concede, after looking into it, that there was a registered mortgage in that case, and that the ruling would, therefore, not help him. He then fell back on the English rules of equity, as laid down in Holroyd v. Marshall, and other cases, and urged that all English rules of equity would apply to India also. We have already stated our opinion to the contrary, and have cited some rulings in support of our view. We may add that in Ariff v. Jadunath Majumdar, LORD RUSSELL has observed as follows:

"Whether an English equitable doctrine should in any case be applied so as to modify the effect of an Indian statute may well be doubted; but that an English equitable doctrine affecting the provisions of an English statute relating to the right to sue upon a contract, should be applied by analogy to such a statute as the Transfer of Property Act, and with such a result as to create without any writing an interest which the statute says can only be created by means of a registered instrument, appears to their Lordships, in the absence of some binding authority to that effect, to be impossible....The matter which was relied upon by the respondent consisted of certain obiter dicta in the course of which English doctrines of equity were described in terms of the law of Scotland and stated to be applicable in India...Their Lordships cannot find that the facts of this case raise any equity in favour of the respondent. Even if any such equity was established, their Lordships are of opinion that it could not operate to nullify the provisions of the Indian Code relating to property and transfer of property."

In Ram Kinkar Banerjee v. Satyacharan Srimani, LORD PORTER observed as follows:

"Up to the time of the passing of the Transfer of Property Act, the rights of the mortgagors and mortgagees of land in India were subject to much controversy, though, in general, the law of England, subject to such modification as justice, equity and good conscience required, was recognised as the law of India also. But whether the English rules of equity were applicable to such cases was not certain. Since the passing of that Act, however, the distinction drawn in England between law and equity in such cases does not exist in India."

As SIR GEORGE RANKIN says in Bengal National Bank ltd. v. Janaki Nath Roy, "The Transfer of Property act has left no room for such a distinction."

"The Indian mortgagor, however, retains some rights, though the English rules of equity do not apply."

Mr. O.T.G. Nambiar then raised his last contention in favour of the validity of the security regarding the Mylapore immovable property and other similar immovable properties of the Tramway Company, not registered under the Companies Act, by urging that they should be deemed to be registered under the Companies Act by the debenture deed, Exhibit D9, having been registered. This will not help him, as these immovable properties were not the properties of the company at the time of the registration of the debenture deed, Exhibit D 10 dated 26th March, 1925, or of Exhibit D 9 dated 13th February, 1947. These properties were acquired after 1947, that is, after Exhibit D9 and Exhibit D 10, and, under the ruling in Annada Mohan Roy v. Gour Mohan Mullick, suc transfer of an after-acquired immovable property will be futile under the Transfer of Property Act. registration both under the registration Act and the companies Act would be required after the acquisition of the immovable properties by the company. The decision or the Federal Court in Governor-General in Council v. Shiromani Sugar Mills, shows how even the Crown or the State is bound by the provisions of the Companies Act. The Rundalls Road properties did not require registration under the Companies Act, as that was not prescribed at that time (before 15th January, 1937). Only the mortgage of the Rundalls Road property will constitute valid security for the debenture holders, among the immovable properties.

The learned Advocate-General did not contend that the State had any priority for this debt on the ground of salvage. BALAKRISHNA AIYAR J. rightly rejected such a contention raised before him.

Exhibit D 9, did not require registration under the Companies Act as this requirement came into being only on 15th January, 1937.

In the end, therefore, the judgment and decree of BALAKRISHNA AIYAR J. in C.S. 368 of 1955, will be modified in three respects: first by allowing the decree amount, including the costs, in C.s. No.191 of 1952, in favour of the Tramway Company, to be set off against the decree amount in favour of the Madras State in C.s. No.368 of 1953; secondly, by taking out the security of the Mylapore immovable properties, covered by Exhibit D 11, and other immovable properties not registered under the Registration Act and the Companies act (except the Rundalls Road properties) from the security available to the debenture holder in priority to all other creditors, and reducing the debenture holders to the status of unsecured creditors regarding the balance due to them after exhausting the security of the movable properties covered by the crystallised floating charge and the immovable properties in Rundalls Road, registered under the Registration Act and the Companies Act; and, thirdly, by reserving the right of the Madras State to file a petition under section 231 of the Companies Act, subject to limitation etc., to agitate the question of fraudulent preference by the Tramway Company in favour of the debenture holders and by reserving the right of the Madras State to agitate for priority of its decree debt in C.S. No.368 of 1953 over other unsecured creditors before the liquidator and the Judge in seisin of the liquidation proceedings. The judgment and decree of BALAKRISHNA AIYAR J. in C.s. No.368 of 1953 are confirmed in all other respects. In the circumstances, we direct the Madras State to pay half the costs of the Tramway Company (in liquidation) in both these appeals, but allow it to set off such costs also against the decree in its favour in O.S. No.368 of 1953. The Tramway Company will bear the rest of the costs itself. The other parties to these appeals will bear their own costs.

 

[1935] 5 Comp. Cas. 281 (CAL.)

High Court of Calcutta

Ranjit Ray

v.

D.A. David

COSTELLO AND LORD WILLIAMS, JJ.

Appeal No. 100 of 1933

June 1, 1934

 S.M. Bose and A.N. Bose for the Appellant.

Sudhish Ray for the Respondent.

judgement

Costello, J. — The facts of the case out of which this appeal arises are fairly simple. The point of law which has to be determined upon a consideration of those facts is however one of some difficulty. A suit was brought by the liquidator of the Co-operative Hindustan Bank, Limited, to recover from certain persons, who are the Wardens of the Armenian Church, a sum of money for work and labour done on behalf of the Wardens of the Church by a firm named, Carf Morrison & Co., Ltd. That firm has gone into liquidation and the liquidator of it, Mr. G. C. Read, is a party to this suit. The Wardens of the Armenian Church, so far as these proceedings are concerned, have in effect called upon the other two parties to interplead. They have paid into the Court a sum of Rs. 2,971-12-9 which was the amount ultimately agreed as being owing in respect of the work done by Carr Morrison & Co. The conflict of claims between the liquidator of the bank and the liquidator of Carr Morrison & Co., arises from the fact that Carr Morrison & Co., borrowed from the bank the sum of Rs. 3,000 and executed in favour of the bank a promissory note, dated 8th July, 1930. In addition, the company assigned two bills, or rather ' invoices, which were made out by Carr Morrison & Co., as builders and contractors, addressed to the Wardens of the Armenian Church of Calcutta. One of those bills was for a sum of Rs. 5,737-10-0 and the other bill was for Rs. 6985-3-0. The bills were numbered respectively 166 and 167 and they were both dated 5th July, 1930. On the same date, a letter was addressed by Carr Morrison & Co., to the Wardens of the Armenian Church in these terms :

Re : No. 2, Middleton Row.

We beg to hand you herewith our final bills in respect of the above work (repairs, sanitary and plumbing), for favour of payment, at your early convenience.

The enclosed bills aggregate Rs. 12,720-13-0, against which you have, from time to time, advanced the sum of Rs. 7,000 only, leaving a balance of Rs. 5,720-13-0 still due.

These final bills cancel the running bills previously issued, viz., Nos. 122, 123, 125 and 126.

These bills are assigned and endorsed for valuable consideration to the Co-operative Hindustan Bank, Ltd., Calcutta, and we will thank you to make payment to them direct to our a/c, at 12-2, Clive Row, Calcutta . . . .

Upon the back of the bills there was the following endorsement :

Please pay to Co-operative Hindusthan Bank, Ltd.,

Carr Morrison & Co., Ltd.,

(Sd.) P. M. Morrison,

Managing Director.

Carr Morrison, & Co., Ltd.,

(Sd.) C. Carmichael,

Managing Director.

The position therefore was that by the endorsement on the back of the bills, coupled with the notification contained in the letter of the same date, Carr Morrison and Co. assigned to the bank the benefit of the debt then owing to them by the Wardens of the Armenian Church. The bills and the letter of 5th July were sent through the bank and, on the 8th July, were forwarded by the bank to the Wardens of the Armenian Church, under cover of a letter, which is in these terms :

"Please receive the following bills which have been endorsed to this bank for valuable consideration and the cheque for which when passed should be drawn in favour of this bank and sent to us for credit of the account of Carr Morrison & Co., Ltd., with this bank.

At the foot of the letter, there is a tabular statement in the following form:

No.

Drawer.

Currency.

Amount.

 

 

 

Rs.     As. P.

26-493 ..

Yourselves.

D                   ..

5,720  3 0

Enclosures :—

(1)        One letter dated 5th July, 1930 of Carr Morrison & Co., Limited.

(2)        Bills Nos. 166 and 167 dated 5th July, 1930 for Rs. 5,737-13-0 and Rs. 6,985-3-0.

Certain correspondence passed between the bank and the Wardens of Armenian Church, in which it appears that the Wardens of the Church disputed the amount said to be due from them to Carr Morrison and Co., but ultimately, after two of the Wardens had gone into the matter, they admitted liability to the extent of Rs. 2,971-12-9, which, as I have already said, is the amount claimed in the suit, out of which this appeal arises.

The defendants, Carr Morrison & Co. (in liquidation), by their liquidator, G.C. Read, contended in the suit that the plaintiff, as the liquidator of the Co-operative Hindusthan Bank was not entitled to recover the amount from the Wardens of the Armenian Church and that the sum owing by the Wardens of the Armenian Church should be treated as a debt due to Carr Morrison & Co. (in liquidation), and the liquidator of Carr Morrison & Co., took the point that the assignment of the debt due from the Wardens to the bank was of such a nature that we ought to treat it as if it were a mortage and being a mortgage, it ought to have been registered under the provisions of Section 109(d), Companies Act. That Section provides that certain mortgages and charges are to be void, if not registered. The words of the section, so far as material for our present purposes, are these:

"Every mortgage or charge created………by a company and being either a mortgage or charge on any book-debts of the company, shall so far as any security on the company's property or undertaking is thereby conferred, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the mortgage or charge, together with the instrument (if any) by which the mortgage or charge is created or evidenced, or a copy thereof verified in the prescribed manner, are filed with the Registrar for registration ……… within twenty-one days after the date of its creation, but without prejudice to any contract or obligation for repayment of the money thereby secured, and when a mortgage or charge becomes void under this section, the money secured thereby shall immediately become payable."

Then there are certain provisos which are not relevant to our present inquiry. The liquidator of Carr Morrison & Co., contended that the assignment constituted by the letter of 5th July, 1930, and the endorsement on the bills dated 5th July, 1960, was of such a nature that it ought to be considered as a mortgage and therefore subject to the provisions of Section 109 which I have just read. The learned Judge at the trial, by his judgment dated 31st May, 1933, stated the point which he had to determine in this form :

"He (i.e., the liquidator of Carr Morrison and Co.) puts in issue the validity of the alleged assignment of the plaintiff bank. He says that the assignment was not absolute but was by way of charge and that, inasmuch as it was not registered, it is inoperative against the defendant company by reason of Section 109(1)(d) Companies Act……"

The matter falls to be decided upon a consideration of the provisions of Section 130, Transfer of Property Act, which by sub-Section (1) provides that:

"The transfer of an actionable claim, whether with or with out consideration, shall be effected only by the execution of an instrument in writing signed by the transferor or his duly authorized agent……..shall be complete and effectual upon the execution of such instrument, and thereupon all the rights and remedies of the transferor, whether by way of damages or otherwise, shall vest in the transferee, whether such notice of the transfer …….be given or not."

It seems clear that in this case there was a transfer by Carr Morrison and Co., to the bank of an actionable claim and that such transfer was by an instrument in writing signed by the transferors. It follows therefore that the transfer was complete and effectual upon the execution of the instrument in writing, that is to say, the letter of 5th July, taken in conjunction with the endorsements on the two bills Nos. 166 and 167. It also follows that on the execution of those documents all the rights and remedies of the transferors, that is to say, Carr Marrion and Co., vested in the transferees, the Co-operative Hidusthan Bank, Ltd. Actually in the present case, notice of the transfer was given to the debtors by the letter of 8th July, 1930, which I have already quoted. Sub-Section (2) of Section 130 provides that:

"The transferee of an actionable claim may, upon the execution of the instrument of transfer ……… sue or institute proceedings for the same in his own name without obtaining the transferor's consent to such suit or proceedings and without making him a party thereto."

It is manifest from the judgment of the present Chief Justice in Sadasook Ramprotap v. Hoare Miller and Co., that Section 130, Transfer of Property Act, contains a special scheme which has some of the features both of the English common law and of the principle of equity and it is analogous to the provisions which are contained in Section 25(b), Judicature Act, 1873, which are now enacted in Section 126, Law of Property Act, 1925. It is unsafe however to endeavour to decide the point of the kind now before us by any extensive reference of the English authorities. For the purpose of the present case, it is important at the outset to recall that the Judicial Committee have decided that the assignment as an actionable claim, such as debt, although absolute in form may nevertheless in its effect operate by way of security only. The authority for that proposition is to be found in the judgment of Lord Moulton in Mulraj Khatau v. Vishwanath Prabhuram, where his Lordship said :

"The appellant bases his claim on an assignment in writing………dated 13th August, 1909. It is in form an absolute assignment and was according to the evidence given under pres sure from the appellant to whom Dwarkadas Dharamsey was then indebted in a much larger sum. The validity of the assignment is therefore established. It may well be that although absolute in form it was intended to be only by way of security so as to be subject to a right of redemption, but this does not affect the rights of the parties under the circumstances of the present case."

The assignment effected by the letter and the endorement of 5th July, 1930, was apparently intended to operate as an absolute agreement so as to pass to the bank the whole of the rights and interest of Carr Morrison and Co. It may be that, upon a scrutiny of the exact language used in the letter of 5th July, 1930, it was the intention of Carr Morrison and Co., that the whole of the amount properly recoverable by them from the Wardens of the Armenian Church should be paid to the bank and credited to the account of Carr Morrison and Co., with the result that if the amount paid by the Wardens of the Armenian Church was in excess of the amount owing by Carr Morrison and Co., to the bank on their overdraft, the balance would remain to the credit of the account of Carr Morrison and Co. But it is not possible for us to consider or even to speculate as to what the result would have been upon the adoption of that view of the transaction, because the learned Judge found as a fact that the debts were assigned not as an out-and-out transaction but merely as security for the over-draft. The relevant passage in the judgment is in these words :

I should hold that the words were sufficient to effect a transfer of the debt to the bank, even if any of the parties were at liberty in view of their pleadings to dispute that proposition—a matter of some doubt. The question then is whether evidence is admissible to show a collateral agreement between the parties that the assignment of the debt was not absolute but was by way of security for the loan by the bank. The evidence on which the liquidator relies and which the bank seeks to exclude is contained in a letter of 2nd March, 1931, written by the bank's solicitor and stating that bills were assigned by Carr Morrison & Co., to the bank for security. It has also been pointed out that when the Wardens questioned the amount of the bills, the bank declined to discuss the question without reference to Carr Morrison & Co., Ltd., thereby admitting that Carr Morrison & Co., Ltd., had still an interest in the debt. I am prepared on the letter to say that the issue of fact raised by Carr Morrison & Co., Ltd., should be decided in their favour. I am of opinion that there was an agreement between Carr Morrion & Co., Ltd., and the bank that the debts were assigned not as an out-and-out transfer but as security for an overdraft. I have now to decide whether evidence is admissible in proof of an oral agreement to this effect having regard to the language of Section 92, Evidence Act.

We have not to concern ourselves in this appeal as to whether the learned Judge was right in resorting to the letter of 2nd March, 1931, and the course of dealings between the parties subsequent to the assignment, in order to arrive at a decision as to what in substance was the nature of the transfer effected by the endorsement of 5th July, 1930, because no objection has been taken on that score and moreover the learned counsel who appeared for the liquidator of the bank have conceded that the assignment was by way of security only, even though in form it may have been an out-and-out transfer of all the rights and interest of Carr Morrison & Co., in the book-debt in respect of the liability of the Wardens of the Armenian Church towards Carr Morrison & Co. We, therefore, have to decide the matter on the footing that there was an assignment of a book-debt by way of security to ensure repayment by Carr Morrison & Co. to the bank of the overdraft. Put into figures, the position was that there was an assignment of the debt due on a bill for Rs. 5,720-13-0 in order to secure repayment of a debt to the amount of Rs. 3.500. In those circumstances, Section 134, Transfer of Property Act, comes into action if I may so put it. Section 134 says :

Where a debt is transferred for the purpose of securing an existing or future debt, the debt so transferred, if received by the transferor or recovered by the transferee, is applicable, first, in payment of the costs of such recovery ; secondly, in or towards satisfaction of the amount for the time being secured by the transfer; and the residue, if any, belongs to the transferor or other person entitled to receive the same.

Briefly stated, the effect of that section is this: that if a debt is transferred by way of security, the transferee is entitled to discharge the debt due by the transferor to him. Then, if there is any residue, that is after payment of the cost of recovery and the amount actually due by the transferor to the transferee, that belongs to the transferor. The position created by the precise language of Section 134 seems to be somewhat anomalous, because where there is a transfer under Section 130, all the rights and remedies of the transferor vest in the transferee. The expression "all rights" must of course include the right of ownership, and yet Section 134 says that the residue, if any, belongs to the transferor which is only another way of saying that if there is anything left over, after the debt between the transferor and the transferee is satisfied, the transferor is the owner of the balance whatever it may be. The anomaly consists in this, that there is a contradiction between the provisions of Section 130 and those of Section 134. One would have expected that instead of saying any "residue belongs to the transferor," the section would have said "the residue, if any, shall be re-transferred by the original transferee to the original transferor.'' However, it seems reasonably clear that what is intended is that where a debt is transferred for the purpose of securing an existing debt then the whole matter should be interpreted, as far as possible, upon the analogy of a mortgage of any other kind of property. That the transferor still has some residuary interest in the transfer is clear from the fact that under the terms of Section 134 it would be possible for him to receive the original debt and as I have already pointed out the residue actually belongs to him. It seems to me, therefore that even if there had been in form an absolute assignment and subsequently the transferor pays off his debt to the transferee then the transferor would be in the position of being entitled to receive from his debtor the whole amount of the debt which had been transferred upon the basis that in those circumstances the residue would, in fact, be the whole debt. I have no doubt whatever, even without referring to the marginal note, that this Section 134 is intended to deal with a case of mortgage of a debt.

The main difficulty which confronts us in the present instance is to determine whether an assignment for the purpose of securing an existing debt is a mortgage of such a character as falls within the ambit of Section 109(d), Companies Act. To put the matter tersely, the difficulty which I first felt in the matter is the determination of the question whether or not an assignment of book-debt is really a mortgage of that book-debt but I think that difficulty is entirely solved by the judgment of Lush, J. in Sanderson & Co. v. Clark. In that case, a limited company, in consideration of an advance from their bankers, executed an assignment which, after reciting that the company were entitled to £ 807s. from the defendant, that it had been agreed that that debt should be assigned to the bankers, and that by a letter of even date the defendant had been directed by the company to pay the debt in question to the bankers, assigned unto the bankers so much of the defendant's debt as may be necessary to indemnify "the assignees" for the amount advanced by them to the company. After executing that deed, the company wrote to the defendant requesting him to pay the debt due to them to the bankers. A few days later the company went into voluntary liquidation. The assignment to the bankers was not registered. The liquidator claimed to recover the debt from the defendant on the ground that the assignment to the bankers, being unregistered, was void against him, but the defendant insisted upon paying the debt to the bankers. It was held that the liquidator was entitled to recover, inasmuch as by Section 93 Companies (Consolidation) Act, 1908, the unregistered assignment was void as against him, and because it was impossible for the parties to a transaction by way of mortgage or charge to alter the effect of Section 93, Companies (Consolidation) Act, 1908, by adopting a form which does not accord with the real transaction between them. Section 93, Companies (Consolidation) Act, 1908, was the section corresponding to Section 109, Companies Act. The corresponding provisions of the English Law are now contained in Section 79, English Companies Act (1929). The passage in the report of the judgment of Lush, J., which has most bearing on the present problem occurs at p. 580 and is in these words :

"Mr. Schiller on behalf of the defendant had contended that the deed operated as an absolute assignment of the book-debt, a sale in fact, in consideration of the advance. He (Lush, J.,) did not think that the deed was capable of that construction. The recital appeared to suggest it, but the operative part treats the book-debt as given only as an indemnity, which must mean as a security, and it provides for payment of interest by the company on the advance, thus treating them as debtors. Moreover, it had been given along with a director's guarantee, and the banking account, which was in evidence, showed that the company were debited as debtors with the amount of the advance. The bankers themselves called their interest in the book-debt a charge in a letter they wrote to the defendant, dated 4th January, 1910."

In passing I may recall that the bankers in the present case in their letter of 2nd March, 1931, described the assignment as being a further security. Lush, J., continued thus :

"The legal effect of the deed of 24th December, 1909, therefore was this. The company, accepting the loan as a loan to themselves, transferred their interest in the book-debt to the bankers as a security, and were consequently entitled to a re-transfer on paying off the loan. In other words, they mortgaged the book-debt to secure an advance. On 1st January, 1910, the company went into voluntary liquidation, and the mortgage therefore became subject to the provisions of the Companies Act, 1908, Section 93."

The words of Lush, J., to my mind indicate that if there is an assignment of a book-debt as security (to use the words of Section 134) for the purpose of securing an existing debt, then that constitutes a mortgage of that debt. Therefore the provisions of Section 134 are applicable and the matter must be dealt with as directed by that section. The moment one comes to the conclusion that a mortgage has been effected by means of an assignment, even though the transfer might in form be an absolute assignment, it inevitably follows that the transaction should have been registered as required by Section 109, Companies Act; or to put the matter the other way round it follows that unless it is registered as required by the provisions of that Act, the assignment will be inoperative as against the liquidator and the creditors of the company. In that view of the matter, and having regard to the fact that counsel for the appellant admitted that this was an assignment by way of security, it follows that the decision arrived at by the learned Judge was correct and this appeal must be dismissed with costs. As regards payment of costs in this appeal, we make the appellant liable personally.

Lort-Williams, J. — I agree. But I desire to say that, in my opinion, the letter of 2nd March, 1931, upon which Panckridge, J., has relied was not admissible in evidence within the meaning of Section 92, proviso (2), Evidence Act, or otherwise. The three documents dated 5th July 1930, coupled with the covering letter dated 8th July 1930, in my opinion, are unambiguous, and amount to an absolute transfer of the debts to the bank, and not one by way of security only. The agreement sought to be established by reference to the letter of 2nd March is inconsistent with these documents and may not be proved. If and when the bank had collected the debt, they would have become the debtors of Carr Morrison & Co., to the extent of the sum collected, subject of course to the state of Carr Morrison & Co.'s account, and to whether they were in debt or credit at that time.

In view however of the fact that counsel for the bank has conceded, for the purpose of the decision in this case, that the documents amount to a transfer by way of security, such as is contemplated by Section 134, Transfer of Property Act, and that, in my opinion, such an assignment is a mortgage of book-debts within the meaning of Section 109, Companies Act, and is void against the liquidator unless registered, this appeal must be dismissed with costs.

 

[1962] 32 COMP. CAS. 1090 (CD)

Independent Automatic Sales Ltd.

v.

Knowles & Foster

BUCKLEY, J.

MAY 28, 29; JUNE 8, 1962

JUGMENT

BUCKLEY, J.-Preliminary point arises in this action. The company is in creditors’ voluntary liquidation. It is asserting in the action that certain hire purchase agreements are not the subject of a charge in favour of the defendants by reason of the fact that any charge which may have been created over them has not been registered in accordance with the provisions of section 95 of the Act or 1948. The defendants have two other defenses to the action, which I need not at the moment consider or mention, but the point is taken on their behalf that the company is not a proper plaintiff in such proceedings, on the ground that section 95 does not avoid a charge which is not duly registered as against the company itself, but makes the charge void against the liquidator of the company and any creditor of the company. In those circumstances, it is said that the company itself cannot sustain an action in effect asking for a declaration that the charge is void.

The defendants have not raised this point specifically in their pleading. It is, it is true, a pure point of law. Nevertheless, it’s , I think, a point taken by the defendants which in , in substance, is a demurrer to the action, and I have had to consider R.S. C. Ord. 25, 11. 1, 2 and 3, high are the rules which now apply in cases were, under the old procedure, a defendant would have demurred to the plaintiff’s action. Rule 1 provides that no demurrer shall be allowed. Rule 2 provides that “any party shall be entitled to rise by his pleding any point of law, and unless the court or a judge otherwise orders, any point so raised shall be disposed of by the judge who tries the cause at or after the trieal....” Rule 3 states: “If , in the opinion of the court or a judge, the decision of such point of law substantially disposes of the whole action, or of any distinct cause of action, ground of defence, set-off , counterclaim, or reply rerein, the court or judge may thereupon dismiss the action, or of any distinct cause of action, ground of defense, set-off counterclaim, or reply therein, the court or judge may thereupon dismiss the action or make such other therein as may be just.”

In practice, where a defendant demurs to a plaintiff,’ action, one course open to him is to raise the ground of demurrer in the pleading and bring that point of law on to be heard and determined as a preliminary point with a view to avoiding having to incur the costs of preparing for the full trial of the action before the point is disposed of Nevertheless, Mr. Bagnall for the defendants here saws that at the trial the defendants are not precluded by these rules from raising a pure point of law which dispose of the action, or may dispose of the action, notwithstanding that it is not mentioned at align the pleading.

At first glance it may appeal that rule 2 of Order 25 is somewhat against Mr. Bagnall’s submission; but we have, I think, to bear in mind the gems of Order 19, rule 4, which provides that “Every pleading shall contain, and contain only , a statement in a summary form of the material facts on which the party pleading relies....”; and undoubtedly, a party is not bound ,and indeed normally ought not, to plead points of law but to plead the facts upon which he relies.

In the notes to Order 25, rule 3, I find, under the heading “Objection inpoint of law, “ the following note: “If party intends to apply for determination of a point of law he must raise it on his pleading. But at the trial itself he may raise a point of law one too him pleading .But at the trial itself he may raise a point of law open to him even though not pleaded.” I think that the first sentence there must be intended to relate to the determination of the point of law as a preliminary point, not at the trial. I think that the right view for me to take, in the circumstances , is that the defendants here are not precluded from raising this point by the fact that they have not expressly taken it on their pleading. But it does not seem to me tone a convenient course normally to be followed, where there’s a substantial point of law which may dispose of the whole action, not to make any mention of it in the pleading, because if nomination of it is made in the pleading , the other side may be lulled into a sense of false security in that particular respect, and may appeat before the court less ready and able to argue what may be a difficult matter. However, this present point is not one of very great complexity ,and I do not think that the plaintiff here will really be exposed to any great embarrassment by not being told until this morning that this point was going to be taken by the defendants.

I now pass on to the substance of the point which is raised by Mr. Bagnall, which is that the company are nor a proper palintiff to assert that a charge is void as against the liquidator and any creditor of the company. Mr. Lawson, for the company, has referred me to Order 3, rule2, and Order 5, rule 2, under which one finds notes relating to the way in which an action should framed where a liquidator sues on behalf of a company. In such an action it is no doubt right that the liquidator should sure in the name of the company. but the question here is whether this is an action in which the liquidator could sue in the name of the company or whether it is not an action in which he ought to proceed in this own name. I do to think those notes really give me any assistance. What I have to consider is whether the company itself can have any good cause of action arising our of the non registration of a charge regisreable under section 95 of the Act of 1948, and I think the answer to that question is in.the negative. The charge is not made void as against the company; the charge is only made void as against the liquidator and as against creditors of the company.

The purpose of the section is to enable to the liquidator to deal with the assets of the company in the liquidation in a way which he would not otherwise be able to adopt for the benefit of the company’s creditors. But if, in the event, the company turns out to be to any extent solvent, so that the subject -matter of the charge eventually comes back into the unfettered ownership of the company, it comes back encumbered with the charge notwithstanding the non-registration.

It seems to me that the rights of the company are wholly unaffected by the section, and consequently, I think on that ground the company is not a proper party to assert that the charge is void for lack of registration . Moreover , as Mr. Bagnall points out , section 96 of the Act of 1948 imposes upon the company a statutory duty to register any registrable charge; and consequently ex hypothesis-where a charge has not been registered, the company is in default of that statutory obligation, and in an action directed to avoiding such charge for non-registration must necessarily placed its own default. That is a position which, it seems to me, the company ought not to be allowed to take up, and it teinforces the view which I have reached, on consideration of section 95, that in fact company is not a proper party to make any such assertion.

Accordingly., I think that the right course in a case of this kind is for the proceedings to be brought by the liquidator. Mr. :Lawson has asked me , in those circumstances, to permit him to amend by joining the liquidator as a co-plaintiff of the company. I grant him that permission. In view of the fact that this point was not raised in the pleadings and no notice was given of it until this morning , I think that is all I need say on this part of the case.

A argument was then addressed to the court on the substantive point in the action.

The following cases, in addition to those referred to in the judgment, were cited in argument: Lawson v. I see ; Old Discounts Co. Ltd. v. Join Plugger Ltd., Little woods Mail Order Stores Ltd. v. Inland Revenue Commissioners; lingworth v. Houldswarth; Ex parte Keep, In re Fastnedge; In re Kent and Sussex Sawmills Ltd.

Cur. adv. vult.

JUNE 8. BUCKLEY J. delivered the following judgment which, after stating the facts substantially as set out above, cottoned: The only kind of charge referred to in section 95(2) within which it was suggested that the transaction with which I am concerned can falls is that referred to in section 95(2) (e), namely, a charge on book-debts of the company.

Mr. Bagnall has submitted that what was charged by the deposit of the agreements was not any debts exiting or which might come into existence thereunder, but in the case of each agreement an indivisible chose inaction, namely, the benefit of the agreement. The owners have, he says , other rights under the agreement besides the right to receive moneys and it is impermissible to isolate the right to treceive moneys and say that that right is charged. In my judgment, the charge constituted by the deposit of one of these agreements was a charge upon each and all of the benefits of the company under that agreement . If those benefits included any rights which can properly he described as ‘book- debts’ the charge was, in part at least, a charge on book-debts and therefor registrable under the section.

Nearly 100 years ago in Shapely v. Marshall the Court of Common Please considered the meaning of the term ‘book-debts’ as used in section 137 of the Bankruptcy Act, 1861. Erle C.J. said “By ‘book-debts’ , the legislature doubtless intended to describe debts in some way connected with the trade of the bankrupt; and I am inclined to give the term a wider range . But it is enough today that this was debt connected with and growing out of the plaintiff ‘s take. Williams J. said.; “The words of section 137 rate no doubt as Mr. Graphites has pointed out, authorizing th4 assignees to sell the `book-debts due or growing due to the bankkrupt, and the books relating thereto.’ This it is said, can only mean debts which are actually entered some book kept bath bankrupt in the course of his trade. I cannot, however, accede to that construction, I think the meaning of the statute is, that the assigness shall dispose of all debts due to the bankrupt in respect of which entries could be made in the ordinary course of his business: other wise, adept by accident omitted to be entered would not pass by the assignment.” Byles J. said : “It is said that `book-debts’ must mean debts which are entered in the trade books of the bankrupt. I agree with my Brother Williams that they must be such debts as are commonly entered in books. And a little later he said; “Suppose the trader kept no books or was blind and could not write, and did not choose to incur the expense of keeping a clerk or book-keeper, -upon the construction contended for by the defendant, there could be no book-debts which could be made the subject of sale and assignment under section 137 of the Bankruptcy Act, 1861. That surely would not be a very sensible construction to put upon the statute.”

So far as I am aware, no more precise definition of the meaning of the term “book-debts “ has ever been attempted judicial and I shall not attempt one. Shapely v. Marshall, I think, established that , if it can said of a debt arising in the course of a business and sue or growing due to the proprietor of that business that such a debt would or could in the ordinary course of such a business be entered in well-kept books relating to that business, the debt can properly be called a shook-debt whether it is in fact entered in the books of the business or not.

Mr. Bagnall says (and with justice) that nothing can be a book- debt which is not a debt, debitum in present, whether solvendum in present or infuturee.

Mr. Bagnall has contended that in the present case, if the hire made his payments punctually there could never be any debt due from him to the company. Although I am not sure that he put this contention in exactly these terms, I believe I accurately state its substance as being that the agreement gives the hirer a series of options to continue his hiring and an ultimate option of buying the goods; as each due date for payment arrivered, the hirer can (so the argument goes) renew his hiring by paying the installment or he can terminate the agreements, and as the obligation of the hirer to make the periodic payments only continues so long as the agreement continues, the hirer can by determining the agreement on or before any due date for payment avoid the liability to make the payment which would otherwise then become due. Whether the hirer will or will not become liable for any particular installment is thus, it is said, dependent on the hirer’s option. Only if the hirer permits the agreement of remain in force beyond a due date for payment and fails to make the appropriate payment on that day will debt arise in respect of which the company could sue the hirer.

I feel unable to accept this view of the effect of the agreement. It is in my judgment, clear from the reference to apportionment in clause 9 of the agreement that the hire rent, which by clause 2 the hirer agrees to pay to the owner, is payable in arrear and accrues day by say so that by determining the agreement either on or before a due date for payment the hirer would not avoid liablity for the instalment then becoming due or an appropriate part of it. In other words, although the agreement is of course determinable, by which means the hirer can limit the extent of his liabilities under it, the payments which may fall be made by him thereunder are not optional. Moreover the argument seems to me to ignore the fact that under clause 9 of the agreement and paragraph 2 of the schedule the hirer’s minimum liabilty is half the total hire-purchase price. When he signs the agreement, the hirer comes under a firm obligation to pay at least that amount. To this extent he becomes liable as soon as the agreements if binding upon the parties for a debt debitum in presenti although inpart solven dum in futur, and to this extent at least the hire’s indebt ness to the company, could (and I think, would) in the ordinary course of a business of this character be entered in well-kept books of the business. If this is right, debts under the agreements already existed at the date of the deposit although they were not due to be paid until later. The fact that they were not then immediately payable would not make them any the less debts nor, in my judgment, any the less book- debts.

Mr. Bagnall has further argued that any debts which could arise under the agreements could only have come into existence after the date of deposit . I will assume, as seems probable that at that date all the amounts payable on the singing of the agreements had been paid and that no installments of hire rent were inarrear. Mr. Bagnall’s submission was that in these circumstances there would at the date of the deposit have been no book -debts in existence and that since he say’s one cannot charge what does not exit, the deposits did not perse constitute any charge on book-debts, although he conceded that if and when a book -debts came into existence under any of the agreements that book debts would immediately become charged by reason of the deposit. He contends that section 95 does no on is true construction require a charge on future book-debts to be registered and that “book-debts” in sub-section (2)(e) means only existing book-debts In this connection , he drew my attention to the fat that in section 43 of the Bankrupt Act, 1914 the legislature was not content to refer merely to book debts but used the expression ‘his existing or future book-debts and section 38 of the same act employed the era” debts due or growing due,” and to the decision in Blacks v. Pendlebury Property Trustees under the latter section.

I think that there are two answers to this argument. First, for reasons I have already given, I am of opinion that upon the true interpretation of the form of agreement used in this case the hirer became liable immediately upon the agreements coming into operation to the extent of his minimum liability under it notwithstanding that some part of that liability was to be discharged by future payments and that the debts so constituted were existing book-debts at the date of the deposit. The proposition that when the agreements were deposited there were no book-debts in existence which could be charged is, in my judgment, untenable.

Secondly, in my judgment, a charge on future book-debts of a company is registrable under section 95. That it is competent for anyone to whom book debts may accrue in the future to create an equitable charge upon those book-debt which will attach to them as soon as them come into existence is not disputed (see Tailby v. Official Receiver). That such a charge can accurately be described as a charge on book-debts does not appear to me to be open to question. Such a charge would not of course, be effective until a book-debt came into existence upon which it could operate. Nevertheless, I think it would be accurate to speak of the charge being created at the date of the instrument, deposit or other act giving rise to it, for no further action on the part of the grantor would be required to bring the charge to life. A charge on book-debts, present and future, is not an unusual form of security oil the commercial world and it would seem to me strange if such a charge were registrable, (as it undoubtedly is) and a charge confine to future book-debts were not, I find nothing in the language of section 95 requiring me to read sub-section (2)(e) in so restricted a way as to confine it to a charge on existing book-debts. I do not think that consideration of the language used in the Bankruptcy Act, 1914, assists me in construing this section of the Companies Act, 1948.

I reach this view of the effect of section 95 as regards book- debt without reference to authority, but it appears to me to have been the view held also by Eve J. (see In re George Inglefield).

Accordingly, in my judgment the charges created by the deposit of 53 agreements were registrable under section 95, and no having been registered they are void as against the plaintiff liquidator. There will be a declaration that the charges are void as again the plaintiff liquidator and an order for the delivery up of the agreement.

 

[1997] 88 COMP. CAS 192 (RAJ.)

HIGH COURT OF RAJASTHAN

Rajasthan Financial Corporation

v.

Official Liquidator, Jaipur Spinning and Weaving Mills Ltd.

V.K. SINGHAL J.

S.B. COMPANY MISCELLANEOUS APPEAL NO. 1 OF 1991

FEBRUARY 25, 1994

 

Paras Sharma for the Appellant.

JUDGMENT

V.K. Singhal, J.—This appeal has been filed under rule 164 of the Companies (Court) Rules, 1959, against the order dated August 29, 1991, passed by the official liquidator attached to this court by which the claim of the Rajasthan Financial Corporation was not allowed in respect of the following three items:

(i)     The claim of the appellant has been admitted as an ordinary claim instead of preferential claim.

(ii)    Interest has been allowed up to December 1, 1983, and claim of interest for subsidy period has not been allowed.

        (iii)   The expenses of Rs. 15,040 have not been allowed.

Jaipur Spinning and Weaving Mills Ltd. (in liquidation) applied for a loan to the appellant. A loan for a sum of Rs. 19.50 lakhs was sanctioned but an amount of Rs. 16,88,000 was disbursed. A claim was filed as a secured creditor for Rs. 18.87 lakhs in respect of principal and interest from August 15, 1981, to February 28, 1991. The amount of Rs. 15,040 was also claimed on account of expenses incurred in connection with the loan. The claim was admitted for a sum of Rs. 16.88 lakhs as principal which was advanced by the appellant and the interest of Rs. 11,11,656 up to December 1, 1983. This claim was allowed as an ordinary creditor and the plea of the Rajasthan Financial Corporation that it was a secured creditor was not accepted.

I have considered over the matter. So far as the question of considering the claim of the appellant as a secured creditor is concerned, the provisions of section 125 of the Companies Act provide that a charge has to be created and the instrument by which the charge is created is filed with the Registrar of Companies for registration. It is only after the registration of the charge that the claim of the appellant could have been considered as a secured one and in the absence of creating such a charge the official liquidator was not bound by it. It is considered as void against the official liquidator. In the absence of registration, therefore, the official liquidator was justified in treating the claim as an ordinary one and not as secured one. The application which has been filed after nine years of the winding up proceedings cannot be of any assistance to the appellant as the position has to be seen on the date of order of liquidation. The charge was filed in the year 1990 and before that time the assets were already taken in custody of the official liquidator. The compliance with the provisions of section 529 was also not made by the appellant. Besides this, in the resolution dated May 30, 1981, a four party agreement was required to be executed between the appellant, SBI, Government of Rajasthan, and the company. The agreement in accordance with the resolution dated May 30,1981, was not executed. Section 534 provides that where a company is being wound up a floating charge on the undertaking or property of the company created within twelve months immediately preceding the commencement of the winding up shall, unless it is proved that the company immediately after the creation of the charge was solvent, be invalid except to the amount of any cash paid to the company at the time or subsequently to creation or in consideration for the charge together with interest on that amount at the rate of 5 per cent. per annum or such other rate as may for the time being be notified by the Central Government in this behalf in the Official Gazette. In the present case, the charge was created as a third charge in respect of all present and future assets in addition to the first charge on the diesel generating set. Since the charge was not created within 12 months preceding the commencement of winding up the appellant cannot claim to be a secured creditor. The movable and immovable properties of the company in liquidation were already having first charge in favour of the SBI and the Government of Rajasthan is also a guarantor and the second charge was created in favour of the guarantor. No document was produced before the official liquidator that no objection certificate from the SBI or from the Government was taken even in respect of creation of first charge on the generating set. Any modification of the charge as required under law was not filed with the Registrar of Companies and the order of the official liquidator, therefore, on this point is upheld and the contention of the appellant is rejected.

In respect of the claim of the appellant for expenses and interest from the order passed by the official liquidator, I find that the said order is neither speaking nor the provisions of law have been considered. With regard to expenditure incurred the estimate has to be made in accordance with rule 154 of the Companies (Court) Rules, 1959, and for the purpose of interest provisions exist under rule 156 of the said rules. The responsibility remains of the creditor for proving the debt. In the order of the official liquidator though it is mentioned that entries in respect of expenditure are not existing in the books of the company in liquidation, it has to be seen as to whether the creditor has been able to establish the claim and the same is the position in respect of interest as to under law how much interest could be allowed. The order of the official liquidator in this regard cannot be sustained.

Consequently, the appeal is partly allowed and the official liquidator is directed to pass a fresh order in respect of the claim of the appellant in respect of expenses and interest.

 

[1938] 8 COMP. CAS. 111 (CA)

COURT OF APPEAL

Ashby Warner and Co.

v.

Simmons

GREER, L.J., GREENE, L.J., SCOTT, L.J.

JUNE 9, 10, 11, 1936

 Sutton, K.C, and H.G. Garland, for the appellant.

Farwell, for the respondents.

JUDGMENT

Greer, L.J.—In this case, we have listened for over a day to a long and forcible and well stated argument in favour of a proposition that is really not arguable at all. The learned Judges in the Court below decided, at any rate as regards one point, on the meaning and effect of section 79 of the Companies Act, 1929, which enacts that if a charge to which the section applies is created, the charge shall be void if it is not registered in accordance with the provisions of that section. By sub-section (2)(e) the section applies to a charge on book debts of the company. There is not, and cannot be any dispute that if the transaction in question was a charge it was a charge on something which was a book debt and should have been registered. Be that as it may, it falls to be determined in the first place, namely, whether or not the transaction which was relied upon was or was not a charge, or was something different from a charge. In a case to which our attention was called—Saunderson and Co. v. Clark—where a matter of this kind came up for decision before Lush, J., that learned Judge pointed out what was also pointed out in Tailby v. Official Receiver, that the question involved is one of substance and not merely one in reference to the form of the document.

Before dealing with the question, I think I ought to state how this question arises between these parties.(His Lordship then stated the facts and continued): there were three separate sub-contracts entered into by Ashby Warner and Co., with the head contractor.

On the second contract, moneys were due within a certain period after the delivery of the materials upon the site, and, moneys having become due upon bills, the bills were not met. Before these transactions had arisen, the debenture holder had insisted upon her right to enforce her debenture, and Mr. Simmons, the respondent was, upon that made receiver for the debenture holder. Messrs. Ashby Warner & Co., wrote to the company before the appointment of the receiver—"As per your request to our representative Mr. John E. Blakeborough we beg to formally advise you that your acceptance for £200 had been lodged with our Bankers, Messrs. The Midland Bank Ltd., 5 Princess Street, E.C. 2, and will be falling due at the end of this month. The answer was in these terms on June 27: "We thank you for your letter of the 26th instant. When Mr. Blakeborough last called on us he informed us about your difficulty in discounting our bills and we discussed with him quite frankly the position we found ourselves in as regards your account. We explained to him that we relied on a settlement from the London County Council with which to meet your bills. The subscriber has just returned from an interview, with the Chief Engineer who states that although the covering has progressed satisfactorily no part of it has been completed yet, and consequently we cannot have a draw thereon. We explained the position to him as regards your bills and he stated that a special measurement could be made for the covering installed with a view to making you a payment direct. You will thus appreciate that we would prefer you to retire the bill from your bankers pending an arrangement with the L.C.C. You can confirm the above if you will ring up Mr. Ray, Chief Engineer's Department, Public Institutions, London County Council. If your Mr. Blakeborough will call on us we shall be only too pleased to arrange the matter to your entire satisfaction". Thereupon Messrs. Ashby Warner and Co., wrote the letter which is dated June 29. As I have said, the receiver had not been appointed until after these transactions: "As mentioned by our representative Mr. John E. Blakeborough at his interview with your Mr. Graham this has already been lodged with our bankers and we cannot possibly withdraw the same now, and therefore trust that the bill will be duly met upon presentation to your bankers. If this bill is met we agree to accept an assignment for the balance of the contract and will have to make the necessary arrangements with your good selves. That is a proposal to accept not as security, but to accept an assignment. Thereupon on July 8, 1933, Messrs. Ashby Warner and Co. wrote;

''We beg to refer to our telephonic conversation of this morning with your Mr. Kirk and as arranged our Mr. Blakeborough will be calling on Monday morning next at n a.m. to pick up cheque for £100 as promised, and we shall also be glad if you will arrange at the same time to give him a letter of Assignment addressed to the solicitor of the London County Council for the sum of £536 19s. 11d." So that what they are asking for is not security for the payment of the money due to them, but an assignment addressed to the solicitor of the London County Council for the sum of £536 19s. 11d.

In view of the correspondence, the National Heating Company on July 14 wrote declining an assignment for £536 19s. 11d. and expressing their willingness to give an assignment in respect of the £338 19s. 11d., the amount due on the second contract. They then go on to say: "This charge clears our account in connection with Lambeth Hospital with the exception of your invoice for £98 10s. which my directors have asked me to hold over for a few days for the following reasons. There has been nothing drawn from the London County Council during July for account of Lambeth Hospital and there is more likelihood of your being paid the sum of £338 9s. 11d. in to during July than if we made the charge for the total of your account. Furthermore there is a strong possibility of fresh capital being put into our business in the course of the next few days, and once this is effected it would alter our proposals as regards the final settlement of the balance of £198 10s". I read that as meaning we are about to "make our, payment, by means of an order on the London County Council, of the sum of £338 9s. 11., leaving to be settled in the future what is to be done with regard to the £198 10s. Then comes the document which is alleged to be a charge within the meaning of Section 79 of the Companies Act. It is in these terms. It is addressed to the Solicitors' Department, London County Council. " We, the National Heating Company [1928] Limited of 41 Westminster Bridge Road, London S.E.I, hereby authorise and direct you to pay to Ashby Warner and Co., Ltd., of Lee Conservancy Road Homerton London E. 9 (whose receipt shall be a good and sufficient discharge) the sum of three hundred and thirty eight pounds nine shillings and eleven pence (£338 9s. 11d.) out of the next certificate to be issued by the Chief Engineer under the contract, it being understood that such payment is not to prejudice or affect in any way our obligations and liabilities under or in respect of the said contract".

Mr. Blakeborough gave this evidence in chief. He said: "On July 14, I enquired as to what he wanted to do to bills presented and dishonoured telling him that obviously I could not accept any further bills, it must be a cheque of equal value. He asked me if I'd take an assignment authorising the L.C.C. to pay us direct. I agreed on condition that the assignment was for the full amount outstanding. I came away under that impression and certain letters passed." So the assignment turned out not to be for the full amount outstanding, but only for what was outstanding under the second and third contracts. Then he says: "Nothing was said about security: It was not a question of security." It is quite true that one has to take his evidence in chief with his cross-examination, in which he said: "When I took the assignment I was not taking it in full payment: it spreads over the whole." That I understand to mean he was not taking it in fulfilment of all the moneys that would become due, but was taking it in fulfilment of that which was due, admittedly due, under the second contract: "I did not finish the contract therefore. I was told to stop it. We treated it as payment in advance. There is no entry of it in our books, for the reason that we treated this as a post dated cheque. Now a postdated cheque, until the time has come when it has to be met, is payment; it is not a security at all. It is in fact a payment for the time being and the debt has gone when that cheque is drawn, unless, the cheque not having been met, the rule of common law prevails, that the debt revives on failure to meet the cheque.

Those being the facts, we have to consider what is the position, first of all at common law, and secondly in equity. At common law a clear distinction has been drawn between a security and an assignment but the common law failed to recognise that any common law rights could be created by an order for payment of a sum out of a larger sum. It was not regarded at common law either as a security or as an assignment. But equity, which now prevails in all Courts did justice to the party who obtained an assignment of part of a larger sum by holding that that assignment gave him an equitable claim on the fund when the fund came into existence.

Following the principles stated by Lush, J., in Saunderson & Co. v. Clark it seems to me that the Divisional Court were clearly right holding that this was not a case of the giving of a security at all, but was a case of an acceptance of an assignment of moneys which were undoubtedly expected to become due from the London County Council at a future date.

The next certificate was, I think, only a certificate for £ 27 but it is admitted that no point is made on that now: and we are to treat the final certificate given for a sum of just over £ 800 as the next certificate within the meaning of the contract.

A number of observations by Judges of high authority were cited by counsel, in his forceful and persistent argument, to the effect that there is no distinction in law between a contract to assign part of a larger debt and a security. Undoubtedly there are passages in some judgments in which, as a matter of expression, Judges have used the words as if an assignment of part of a debt and a security were identical. I asked counsel if he could call our attention to any cases where the rights of the parties depended upon a decision as to whether the transaction in question was a security or was an assignment and he was not able to call our attention to any such case, and I do not think that has ever happened except in the case of Ladenburg & Co. v. Goodwin Ferriera & Co., in which there is a decision by Pickford, J., as Lord Stern-dale then was. There, it is quite clear that what the learned Judge was dealing with was a document which hypothecated the goods and the proceeds thereof. Inasmuch as it was expressly a hypothecation of goods it was clearly a charge and not an assignment. On those grounds the decision rests. There is no reference in the document in the present case to anything of that kind. It is a document which, in equity, is regarded as a good assignment. If it be a good assignment in law, the effect of such an assignment appears to be that it gives to the assignee a right to make a claim upon the fund in equity when the fund comes into existence, but it does not make it a charge.

The sole question we have to determine on this part of the case is whether or not the transaction in question was a charge within the meaning of Section 79. The two cases referred to in the judgment of the learned Judges in the Divisional Court appear to me to afford strong authority—if any authority be required— for the view that an assignment of a debt is something quite distinct from a charge or a hypothecation.

In this case, looking at the substance of the matter and having regard to the surrounding circumstances, I am satisfied the learned Judges were right in saying this was not a charge and was therefore not avoided by the provisions of Section 79 because it had not been registered. That disposes of the main question in this case, which is the one I have attempted to describe. I have come to the conclusion that the learned Judges in the Divisional Court were right in the view they took and, so far as that point is concerned, the appeal will be dismissed.

But another point was raised to this effect, that an order ought not to be made in favour of the receiver for the whole amount of the £ 338, but that there should be a set off against that of the £ 301 which was the expense the contractor was put to in order to complete that which he would have completed by Messrs. Ashby Warner & Co., if the transaction had gone through and if the head contractor had not, by parting with his business to the receiver, requdiated liability to the sub-contractor. I speak with some hesitation on a question of that sort, which depends upon matters of equity, but we have had an opportunity of discussing the question with Greene, L.J., and know what he is going to say about it; we have agreed with his view on that subject, and it will be taken as the view of the court. I think it had better be expressed in his words rather than in words which may be imperfectly used by a Judge who is not so familiar with equitable principles.

For those reasons, I think the appeal must be dismissed with costs.

Greene, L.J.—I agree. With regard to the argument addressed to us on Section 79 of the Companies Act, it falls as my Lord has said into two parts. The first part is this, that the document of July 14,1933, was a charge on book debts of the company within the meaning of the section, using the word "charge" in the sense of a hypothecation. The document in question upon its face, is nothing more than an absolute assignment of a part of a debt which was to fall due in the future. As an equitable assignment of part of that debt the document was, of course, indisputably effective, on the face of the document it contains no suggestion that it is a hypothecation. I do not, myself, attach very much importance to that circumstance, because as it is a document to be addressed to a third person, who is the debtor, namely, the London County Council, you would not expect it to record the bargain between the contractor and the sub-contractor, as the result of which, it came into existence. Whether that document is or is not a document of hypothecation must be ascertained by a examining the bargain between the parties which brought the thing into existence. When that is looked at—and it has to be collected and inferred from the correspondence between the parties, and the oral evidence—It seems td me clear beyond possibility of doubt that when that letter was given and taken the intention of the parties was that it should be a satisfaction of that amount of the debt, namely, £ 338 9s. 11d., which appears on its face. There is not only no suggestion in the correspondence or in the oral evidence that the parties regarded this transaction as a transaction of hypothecation, but when one looks at the probabilities of the case, there was no reason that I can understand why business people should intend it to be such and for this reason; the sub-contractors were obtaining by that document a right of recourse against the London County Council, by the appropriate procedure, and were giving up, if they were accepting it in satisfaction, a right against a company which was proved to be insolvent. Therefore, so far as I am concerned, it seems to me clear beyond question that this document was not a hypothecation, but was intended to be an absolute assignment up to the amount specified in satisfaction of that part of the debt.

On that assumption, the appellant's second argument on the section is to this effect: that in the case of book debts, a charge within the meaning of the section includes an equitable assignment of part of a book debt that is to say it includes an abolute equitable assignment and is not confined to assignments by way of hypothecation. Why he should confine that proposition to book debts and not extend it to all the other items of property mentioned in the section in respect of which the word "charge" is used, I for one, am unable to follow. The proposition involves this, that the word "charge" in this section is used in a sense which covers any equitable assignment of an interest in a fund consisting of book debts. Let me see what that means. It means that if a person, being a creditor in respect of book debts, creates in respect of those debts an equitable interest in a third person, whether by assigning the whole or by assigning part, or by declaring himself trustee of part of it, the document, if any, by which the transaction is effected, must be delivered to the Registrar with the prescribed particulars under the section. I am referring to documents which are not in their nature hypothecations, but are documents under which the person in whom the interest is. created receives anabsolute interest in the whole or in part of the subject matter affected. That proposition has the merit of novelty as well as the element of surprise, because I have never heard it suggested nor is there a trace of a suggestion so far as I am aware, in any authority, or in any textbook on the subject, that the scope of Section 79 is such as to cover anything but what might call security documents, or documents effecting hypothecations. The principle, if it were accepted, would produce far-reaching results and I, for one, am quite un able to see how anything of the kind could be extracted from the language of the section. Indeed, if I may say so, with respect to the sustained and learned argument of counsel for the appellant, if that argument had dealt with the language of the section, which is the matter in hand, instead of dealing with authorities where the word "charge" is used in quite different context the argument could not have been maintained. I think for quite so long, because when the section is looked as it is clear, in my judgment that the section dealing and only dealing with what I have ventured to call security documents or documents of hypothecation. I do not propose to examine the section, or sections, from which this appears in any detail, but I may call attention to the fact that the concluding words of sub-section (1) of section 79 are these: "When a charge becomes void under this section the money secured there by shall immediately become payable." I may also refer to two more sections in the same part of the Act: Section 84, which deals with entry of satisfaction says: "The Registrar of Companies may, on evidence being given to his satisfaction that the debt for which any registered charge was given has been paid or satisfied, order that a memorandum of satisfaction be entered in the register," and not to multiply further examples, it will be found that in section 82, which sets out the matters which are to be entered in the register in respect of charges which fall under the section, one of the matters to be entered is the amount secured by the charge.

I need not carry the matter any further, but if judicial opinion is required it will be found in the judgment of Romer, L.J., in the case of Inglefield, Ltd., In re. The passage begins 101 L.J. Ch. at p. 371; (1933 Ch. at p. 27). I do not cite it, but the learned Judge, in dealing with a case which it was alleged fell under the section, draws a distinction between transactions of sale which do not fall under the section and transactions of mortgage or charge which do, and he examines the characteristics of the latter class as distinguished from the former class, and shows exactly what the line of demarcation is. It is clear that the learned Judge was dealing there with what is really the subject-matter of this section, and although the case with which he contrasts mortgage or charge is a case of sale, the reasoning applies to every case of an absolute assignment, by which I mean a non-hypothecation assignment, whether it be by way of sale for cash, or whether it be made in consideration of the release of a debt, or in consideration of the transfer of property, or any other consideration whatsoever. There is no magic in the word sale. The true distinction is between an absolute assignment of the whole or part of the debt and an assignment by way of hypothecation.

Counsel referred to a number of cases in which the person who has received either a total or a partial assignment of a debt which only operates in equity, is described in the judgments of learned judges as being entitled to a charge upon the debt. That expression used in that context means nothing more than this. It means that as the result of the transaction the claimant has got something more than some merely personal right; he has got an interest in the specific fund, in this sense, that he is entitled to go to a Court of Equity and demand that the fund be administered in such a way that he will receive out of it payment of the amount which has been assigned to him. The position of a person who is entitled to such a right is described in may cases, and in current language, as the position of a person holding an equitable charge on the fund. Now the word "charge" in that context does not of course include any conception of hypothecation, or anything of the kind. It merely means that he has got an equitable right against the fund, as distinguished from a merely personal right against the individual with whom he has dealt.

It seems to me that to endeavour to extract from those cases, where the word "charge" is used in a totally different context, authority for the proposition that the word "charge" in this section of this Act of Parliament covers that sort of case is quite unwarranted. I say no more about that part of the case.

With regard to the last proposition, I must confess I have had some little difficulty in following it. It appears to be of this nature, that in order that the sub-contractor should be able to obtain payment of the amount specified in the letter of July 14, it was essential that the contract with the London County Council should be completed because unless it were completed it is said, the result would be that the county council would never pay, and therefore the fund out of which the £ 338 was to be paid would never come existence. It is said that in so far as it was by means of moneys provided by the receiver that the contract was completed and the fund came into existence, there is some equity in the receiver to say that the sub-contractors are to give credit for the amount which the receiver has expended in that way. I myself have endeavoured to understand on what principle such an equity could be said to be based, and I am afraid that I have been unable to understand it. It is to be observed, when the circumstances of this case are looked at, that the receiver was taking up this attitude. He was saying: 'The document written to the London County Council was written without authority of the board of directors of the company, and I repudiate it: and what is more, I propose to go on and get this contract finished, and I am preparing to do so, and inviting the sub-contractors to tender for the work. If any inference is to be drawn from the correspondence and from the attitude of the receiver disclosed therein, it appears to me to be this, that the receiver thought it was good business to take up that attitude and, as he was repudiating the letter of assignment and going on with the work, the inference I should draw would be that he was not doing it out of kindness to the sub-contractors so that they could get payment, but he was doing it because he thought it was good business, and very good business. It might have been if he could have got the letter of assignment declared void for some reason, or have got it out of the way and had been able to complete the work for a less sum, the result would have been that he would have secured the moneys for the debenture-holders, and I have not the faintest doubt myself that the reason, or one of the reasons, why he took up the attitude he did in respect of the completion of the contract, was that he thought he was going to benefit by it.

There is this further matter, that the company was contractually bound to the London County Council to carry out that contract to a conclusion and if it had not done so it would have committed a breach of that contract. It is perfectly true that the county council if they had been minded to sue the company for breach of contract, would not have obtained very much satisfaction, if one supposes, as is not improbable, that the assets of the company were not more than sufficient to satisfy the debenture-holders. On the other hand, the receiver for the debenture-holders in respect of a going business is always, as anyone familiar with the practice in these cases knows, anxious, if he possibly can, to carry out any current contract of importance, in order that the goodwill of the company or so much of it as remains, may not be completely destroyed by the repudiation of contracts of importance; and if the Court is to draw any inference, as to the reasons why the receiver acted as he did, I, for one, would draw the inference that he did it simply and solely for the benefit, or what he thought was for the benefit, of his debenture-holders. Why, in those circumstances, the receiver is entitled to turn round and say, 'You are not entitled to the amount except upon the terms that you give credit for what I, for my own purposes, have chosen to spend, I am afraid I am quite incapable of understanding.

A point was put, and I think it is substantially the same point but expressed in rather a different way, by council for the appellant. Counsel, as I understand, framed it in this way, that it would be for some reason inequitable to allow those sub-contractors to receive payment of the amount in question when they themselves had not completed the work. If the receiver thinks that this company has got a claim against the sub-contractors in damages for breach of contract for not completing the work, he is perfectly entitled, if he is so advised, to bring such an action. Whether he would succeed upon it is another matter, having regard to the correspondence which took place. However, I say nothing about that, because, whether or not the receiver in the name of the company, has got a claim in damages for breach of contract in respect of non-completion of the works by the subcontractors, it seems to me quite impossible to suggest that there is any reason why the sub-contractors' assignment which they took, and took for value at the time, should not be given its full effect. It cannot alter the nature of that document; it cannot go to the rights of the sub-contractors under it, and if there be any cross claim in damages for breach of contract, it is not one which can be given effect to in these proceedings.

I think I have done justice to both points as put by each counsel for the appellant. If there be any difference between them, my view is that on neither ground is there any right in the receiver to claim to have credit in account for the expense to which he was put in respect of the work: nor is he entitled to say that the sub-contractors are not entitled to payment, in view of the fact, if fact it be, or in so far as it is fact, that they did not complete the whole of the contractual work. I agree that the appeal must be dismissed with costs.

Scott L.J.—I agree, arid have nothing to add.

 

[1943] 13 COMP CAS 21 (MAD.)

HIGH COURT OF MADRAS

T. Radhakrishnan Chettiar

v.

Official Liquidator, Madras Peoples Bank Ltd.

LEACH, C.J., AND BELL, J.

O.S.A. No. 32 of 1941

FEBRUARY 5, 1942

 V.V. Srinivasa Ayyangar for M. Ranganatha Sastri, for the Appellant.

O.T.G. Nambiar (Official Liquidator) for the Respondent.

JUDGMENT

Leach, C.J.—This appeal raises a question with regard to the meaning of Section 109(1)(e) of the Indian Companies Act. On the 5th February 1938 the appellant placed with the Madras Peoples' Bank Limited, a sum of Rs. 3,000 on fixed deposit for the period of one year. The bank did not repay the money when it fell due and it was agreed that it should be redeposited but that the amount should be split up into four sums of Rs, 500 each and one of Rs. 1,000 repayable on the 10th April, 25th April, 10th May, 25th May and 5th June 1939 respectively. Being in financial difficulties the bank was not able to repay any of these sums on the due date, but offered to indorse five promissory notes to the appellant as security for its indebtedness to him. The appellant agreed to this course and the terms of the arrangement were embodied in a document which was duly executed, but it was not registered with the Registrar of Joint Stock Companies.

On the 2nd November 1939 this Court passed an order for the compulsory winding up of the bank. The promissory notes indorsed to the appellant were of the aggregate face value of Rs. 4,476-13-3. They had been executed by debtors of the bank as security for the moneys owed by them. It is common ground that after endorsement the promissory notes were delivered to the appellant, who instituted suits against the makers of these promissory notes and that the net realisation was Rs. 1,173-3-9. On the 20th February 1941 the Official Liquidator took out a Judge's sommons calling upon the appellant to show cause why the agreement between the bank and the appellant should not be declared void and why he should not pay over to the Official Liquidator the moneys collected on the promissory notes and indorse the instruments to him. The case of the Official Liquidator was that the agreement of the 29th June 1939 required registration under Section 109 of the Indian Companies Act and as this had not been done it was void as against him. The case was heard by Gentle, J., who found for the Official Liquidator and passed an order in terms of the prayers in the petition. The appeal is from that order.

Section 109(1)(e) provides that a mortgage or a charge, not being a pledge, on any moveable property of a company, except stock-in-trade, shall, so far as any security on the company's property or undertaking is thereby conferred, be void against the Official Liquidator and any creditor of the company, unless the mortgage or charge has been registered with the Registrar of Joint Stock Companies within twenty-one days after the date of its creation. The learned Judge held that there Was here a mortgage, not a pledge; and it was on this ground that he held the document to be void as against the Official Liquidator. For the appellant it is said that the transaction constituted a pledge and therefore registration of the document was not necessary. Other contentions have been advanced on behalf of the appellant, but as we consider that this argument is well founded it is not necessary to refer to them.

In the agreement of the 29th June 1939 the bank is referred to as the borrower and the appellant as the lender. Paragraph 1 states that the borrower in order to secure the sum of Rs. 3,000 and the interest thereon as and by way of security shall transfer by endorsement to the lender the promissory notes. Paragraph 2 provides that the appellant shall be at liberty to collect the amounts due on the promissory notes and shall credit the net realisations towards the amount due by the bank. Paragraph 5 says that on payment to the appellant of any balance due to him he shall re-transfer to the bank such of the promissory notes as may be outstanding. Admittedly the appellant became entitled to realise the securities as and how he pleased.

In Halliday v. Holgate, Willes, J., in delivering the judgment of the Exchequer Chamber, the other members of the Court being Blackburn, Keating, Montague Smith, and Lush JJ., said:

"There are three kinds of security: the first, a simple lien ; the second, a mortgage, passing the property out and out; the third, a security intermediate between a lien and a mortgage —viz., a pledge-whereby a contract a deposit of goods is made a security for a debt, and the right to the property vests in the pledgee so far as is necessary to secure the debt. It is true the pledger has such a property in the article pledged as he can convey to a third person, but he has no right to the goods without paying off the debt, and until the debt is paid off the pledgee has the whole present interest."

Therefore the difference between a mortgage and a pledge of goods is that in the case of a mortgage the ownership of the goods passes, whereas in the case of a pledge the pledgee gets possession; but no right to the goods beyond what is necessary to secure the debt.

Section 172 of the Indian Contract Act defines "pledge" in these words:

"The bailment of goods as security for payment of a debt or performance of a promise is called 'pledge'. The bailor is in this case called the 'pawnor'. The bailee is called the 'pawnee'."

Section 148 which defines "bailment" reads as follows:

" A 'bailment' is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the 'bailor.' The person to whom they are delivered is called the ' bailee'."

Promissory notes are goods within the meaning of the Sale of Goods Act, See Section 2(7).

The transaction of the 29th June 1939 amounted to a bailment of the promissory notes and a bailment as security for the payment of the debt due to the appellant by the bank. Therefore all the requirements of the Contract Act for a valid pledge were fulfilled. While agreeing that this is so the learned Official Liquidator says that, inasmuch as the promissory notes were endorsed to the appellant, there was a transfer of the property to the appellant and therefore a mortgage. He then says that as there is a mortgage which is something more than a pledge, the transaction cannot be regarded as being a pledge. It seems to me that to accept this argument would amount to amending Section 109(1)(e) of the Indian Companies Act. The section clearly contemplates that there can be a mortgage which is also a pledge. In inserting the words "not being a pledge" in this clause the Legislature must have had some object in view and the only object I can see it could have had was to provide that registration should not be necessary where the person entitled to the security has obtained possession of the goods. The transaction now in question may amount to a mortgage, but as there are here all the requirements for a valid pledge it is also a pledge, and being a pledge did not require registration. I would allow the appeal with costs, Rs. 250.

The Official Liquidator should refund the amount which he has received from the appellant and re-transfer the promissory notes and decrees to him.

Bell, J.—I agree.

 

[1960] 30 COMP CAS 390 (CAL.)

Motilal Kejriwal

V.

Indian Overseas Airlines Ltd.

MUKHARJI AND BACHAWAT, JJ.

A.F.O.D.NO. 59 OF 1955

SEPTEMBER 3, 1958

BACHAWAT, J. - The plaintiff, Motilal Kejriwal, is an unsecured creditor of the defendant No. 1, Indian Overseas Airlines Ltd. Previously, the plaintiff had instituted against the defendant No. 1 another suit, being suit No. 4676 of 1950, for the recovery of his dues. In that suit, the plaintiff obtained an order of appointment of the official receiver as receiver of the Dakota aircraft No. VT-AZV on the allegation that the aircraft belonged to defendant No. 1 absolutely . The official receiver took possession of the aircraft on or about December 24, 1950. On February, 2, 1951, the defendant No. 2, Messrs. Air Friends, made an application in that suit for its examination pro interesse suo and for an order discharging the receiver on the allegation that the aircraft belonged to defendant No. 2 and that neither defendant no. 1 nor any body else had any interest in the aircraft. In its petition the defendant no.2 referred to and relied upon two agreements dated July 16, 1950, and also claimed that the aircraft was sold to the defendant no. 2 by the defendant No. 1 on November 20, 1950.The application of by an order dated March 14, 1951. The order embodies certain terms of settlement agreed to between the plaintiff and the defendant No. 2 Clauses I and 2 of the terms of settlement are as follows :

" 1. Official receiver will be forthwith discharged and he will make over possession to the applicant of the Dakota VT-AZV on counsel's endorsement without the order being drawn up.

2. in the event of the plaintiff in this suit instituting a suit within April 3, 1951, and establishing therein that the transfer of the Dakota aircraft VT-AZV by Indian Overseas Airlines Ltd. to Air Friends who is the applicant in these proceedings is a sham or a fraudulent transaction and /or that the said applicant was not and/or did not become the owner of the said aircraft at the time of the appointment of the receiver in suit No. 4676 of 1950 (Motilal Kejriwal v.Indian overseas Airlines Ltd.) the said Air friends will remain liable to and agree to pay to the plaintiff in the fresh suit up to a sum of Rs. 44,500 or such sum as may remain outstanding in respest of the claim of the plaintiff in the said suit no. 4670 of 1950 against the defendant therein, the Indian Overseas Airlines Ltd. In the event of the plaintiff in the said suit No. 4676 of 1950 getting a decree against the said defendant therein he shall have to take all such steps in execution excluding personal execution or otherwise of realising the future decretal amount from the said defendant and in case of any such deficiency also and in the event of his establishing the said fact as hereinbefore mentioned to the said Air Friends hereby agrees to be liable and/or to pay such claim to the plaintiff."

The subsequent clauses of the terms of settlement provided that the liability for the costs of the examination pro interesse suo proceedings, and of the costs, charges and dues of the receiver would abide the result of the fresh suit and that in the event of the plaintiff not filing the suit within the time mentioned the plaintiff would bear such costs.

By a subsequent order the time to institute the fresh suit was extended by consent of the parties up to April 9, 1951. The plaintiff instituted this fresh suit on the 9th April claiming a decree against both defendants for Rs. 44,500 and for other moneys payable under the aforesaid order dated march 14, 1951, and a declaration that the defendant No. 2 was not the owner and did not have any right, title and interest in the aircraft VT-AZV at the time of the appointment of the receiver of the aircraft in suit No. 4676 of 1950. The plaintiff asserts that the alleged transfer of the aircraft by the defendant no.1 to defendant no.2 had never taken place; that the defendant no.2 never acquired any right, title or interest to the aircraft that in any event the alleged transfer was a sham and/ or a fraudulent transaction and/or was made with intent to defeat or delay the creditors of the defendant No. 1 including the plaintiff. These allegations were disputed by the defendant No. 2.

During the pendency of this suit the plaintiff obtained a decree in suit No. 4676 of 1950 against the defendant No. 1 for Rs. 44,500 with interest and costs and an order for sale of certain shares pledged by the defendant No. 1 and for appropriation of the sale proceeds towards satisfaction of the plaintiff's claim.

The following issues were raised at the trial of this suit ;

"1.        Did the defendant No. 2 become the owner of Dakota aircraft VT-AZV at the time of the appointment of receiver in suit No. 4676 of 1950 ?

2.         Was the transfer of the Dakota aircraft VT-AZV by defendant No. 1 to defendant No. 2 a sham or fraudulent transaction?

3.         Has the plaintiff taken all steps in execution of the decree as provided in the consent order dated March, 14, 1951, to realise the decretal amount in suit No. 4676 of 1950?

4.         Is the suit maintainable in the event of the plaintiff not establishing any of the facts mentioned in issues Nos. 1, 2 and 3?

5.         Is the defendant No. 2 a necessary or proper party to the suit ?

6.         To what relief, if any, is the plaintiff entitled?"

At the trial the defendant No. 2 claimed title to the aircraft both under the agreement dated July 16, 1950, as also by virtue of the transaction of sale of November, 1950. The point was also made clear by Champalal Chandak in his evidence.

The learned trial judge BOSE J. found that large sums of money were advanced by the defendant No. 2 under the two agreements dated July 16, 1950. he also found that the defendant No. 2 was a secured creditor of the defendant No. 1 and that the defendant No. 2 procured a transfer of the aircraft VT-AZV in part satisfaction of the outstanding debt. He held that the transfer was not a fraudulent or a sham transfer. He also came to the conclusion that the defendant no. 2 did not become the owner of the aircraft Vt-AZV on December 24, 1950, and that the letters and documents dated November 20, 1950, relating to the sale of the aircraft were brought into existence in January, 1951. He found that the plaintiff had not taken all steps in execution or otherwise to get the pledged shares sold. He ruled that in the circumstances the condition precedent to the liability of the defendant No. 2 under the order dated March, 14, 1951, had not been fulfilled and that the plaintiff could not maintain the suit. On these findings, BOSE J. dismissed the suit. The plaintiff has preferred this appeal from the decree. The defendant No. 2 has preferred cross-objects.

The evidence on the record clearly establishes that on July 16, 1950, the defendant no. 1 and the defendant No. 2 entered into a financing agreement as also a partnership agreement. Both the agreements were executed by Champalal Chandak, Ram Gopal Saharia, Nihar Ranjan Sen, Parashram Bawari on behalf of the defendant No. 2 and by J.M. Akhani and J.S. Rutnagar on behalf of the defendant No. 1 and were witnessed by S.C. Palit, Solicitor. The genuineness of these agreements was not challenged by Mr. Bhabra. It is not suggested by Mr. Bhabra that these agreements are sham or fraudulent transactions. The defendant No. 1 was in financial difficulties since prior to 1950. All its aircrafts, raw materials, stores and accessories were pledged with the Exchange Bank of India and Africa Ltd. Funds were required to recondition and ply the aircrafts. The defendent no. 2 agreed to render financial assistance and eventually the two agreements dated July 16, 1950, were executed. Large sums of money were advanced by the defendant No. 2 to the defendant No. 1 both before and after the two agreements. The genuineness of the receipt, cheques and books of account tendered on behalf of the defendant No. 2 were not challenged by the appellant before us.

The defendant No. 2 advanced the sum of Rs. 45,000 required for the release of the aircraft VT-AZV and large sums of moneys for purchase of Dakota aircraft engines for being fitted in the aircrafts and for meeting the salaries and remuneration of the staff of the defendant No. 2 and other expenses. The aircraft VT-AZV was released and engines were bought with the aid of the funds so advanced.

The aircraft VT-AZV was taken to Bangalore shortly after its release and was fitted with engines so purchased.

The financing agreement provided that the aircraft VT-AZV would be employed by the defendant No. 2 for the carriage of passengers and air freight, that the net profits would be shared equally by both the defendants. The agreed terms and conditions of the partnership were embodied in the separate partnership agreement dated July 16, 1950. The partnership agreement was acted upon. The partnership continued from August, 1950, to November, 1950. The aircraft VT-AZV was flown from August 4, 1950, till about November 5, 1950.

The evidence of Chandak with regard to the total sum of money advanced by the defendant No. 2 to the defendant No. 1 and with regard to the dues outstanding on November 20, 1950, as also on January 13, 1951, is confused and unsatisfactory. We are, however, satisfied that on November 20, 1950, the dues of the defendant No. 2 exceeded Rs. 1,20,000. The mortgage deed dated January 13, 1951, and the oral evidence also show that even on January 13, 1951, a sum of Rs. 1,25,000 was due to the defendant No. 2 from the defendant No. 1 upon adjustment of accounts and after giving to the defendant No. 1 credit for the price of the aircraft VT-AZV. BOSE J. found that the defendant No. 2 who was a secured creditor procured a transfer of the aircraft in satisfaction of its outstanding dues. Mr. Bhabra on behalf of the appellant formally conceded before us that he did not challenge the correctness of this finding.

The defendant No. 2 was a secured creditor and the mortgagee in possession of the aircraft VT-AZV. Clause I of the financing agreement dated July 16, 1950, provides that possession of the aircraft would be made over to and would remain with the defendant No. 2 by way of security for the advances. Clause 2 of the agreement provides that as soon as the sum of Rs. 45,0000, is paid by the defendant No. 2 to the liquidator of the Exchange bank of India and Africa Ltd., the aircraft would be considered as the property of the defendant No. 2 subject to the condition that upon payment and discharge of the full amount due on account of advances, the aircraft would become the property of the defendant No. 1.Clause 3 of the agreement provides that the money required for the purchase of engines for being fitted in the aircraft would be advanced by the defendant No. 2 and the engines so purchased would remain the properties of the defendant No. 2 and that upon payment in full of the amount advanced the property in the aircraft as well as the engines to be so purchased would pass on to the defendant No. 1 but not otherwise. Clearly the agreement transferred the ownership of and the general property in the aircraft VT-AZV to the defendant No. 2 and the aircraft was thenceforth held by the defendant No. 2 as mortgagee. This conclusion is reinforced by clause II of that agreement which provides that upon payment of the aforesaid sum of Rs. 45,000 and before delivery of possession of the aircraft VT_AZV and at all times during the subsistence of the agreement and if and when the aircraft would come or remain in the control or power of Mr. Akhaney he would be deemed to hold the same as trustee for and on behalf of the defendant No. 2 and not for and on behalf of the defendant No. 1.

Quite clearly the financing agreement dated July, 16, 1950, created a mortgage of the aircraft VT-AZV in favour of the defendant No. 2. On general principles and even apart from the expenses terms of the agreement the mortgage of the aircraft transferred the general property in the aircraft to the defendant No. 2. The effect of a mortgage of goods is explained thus in Story's law of Bailments, 9th edition, article 287, page 256:

" A mortgage of goods, is in the common law, distinguished from a mere pawn. By a grant or conveyance of goods in gage or mortgage, the whole legal title passes conditionally to the mortgagee; and if the goods are not redeemed at the time stipulated, the title becomes absolute at law, although equity will interfere to compel a redemption. But in a pledge, a special property only, as we shall presently see, passes to the pledgee, the general property remaining in the pledgor."

In keith v. Burrows {(1) (1876) 1 C.P.D. 722 at 731.} LINDLEY J. observed :

" A mortgage is a transfer of all the mortgagor's interest in the thing mortgaged : but such transfer is not absolute; it is made only by way of security; or in other words, it is subject to redemption. Unless, therefore, there is any statutory enactment to the contrary, and so far as there is no enactment to the company the plaintiffs in this case acquired by their mortgage the whole of the mortgagor's interest in the ship, or, in other words, the legal title to the ship as a security."

The mortgage of the aircraft VT-AZV in favour of the defendant No. 2 was, therefore, a transfer of the ownership and of all the interest of the defendant No. 1 in the aircraft. The transfer was not absolute and was by way of security only. The ownership of the defendant No. 2 was subject to defeasance on redemption. None the less the defendant No. 2 became the owner of the aircraft as contemplated by the terms of settlement dated March 2, 1951.

The defendant No. 2 as the morgagee in possession of the aircraft was entitled to an unconditional order of discharge of the receiver appointed on December 24, 1950, even assuming that it was not the purchaser on that date. The plaintiff could not realise any part of his dues by proceeding against the aircraft as the secured dues of the defendant No. 2 exceeded the value of the aircraft. In these circumstances, it is difficult to impute to the parties an intention that the defendant No. 2 would be liable to pay the dues of the plaintiff even though it be found that the defendant No. 2 was the mortgagee of the aircraft and that the ownership of the aircraft was vested in the defendant No. 2 as such mortgagee. Though the petition for examination pro interesse suo refers to both the mortgage as also the subsequent sale of the aircraft the terms of settlement do not purport to impose any liability on the defendant No. 2 if it be found that it was a qualified owner of the aircraft on the material date.

The partnership agreement dated July 16, 1950, emphasises and recognises the property rights of the defendant No. 2 in the aircraft acquired under the financing agreement. Clause IO of the partnership agreement provides that during the continuance of the partnership and until full payment or satisfaction of the moneys advanced by the defendant No. 2 for the purpose of the partnership or otherwise, all aircrafts released or refitted with the money so advanced would remain in the custody and managed of the defendant No. 2 in the same matter as if the said aircrafts were the properties of the defendant No. 2. The aircraft VT-AZV was undoubtedly used for the purposes of the partnership and the net profits earned by its employment were to be shared by the partners. It does not appear however that the aircraft was brought into the stock of or become the property of the partnership. the property right in the aircraft acquired by the defendant No. 2 under the financing agreement continued to remain with the defendant No. 2 in spite of the partnership agreement.

The mortgage of the aircraft VT-AZV created by the financing agreement dated July 16, 1950, was not registered with the Registrar of Companies. Mr. Bhabra contended that the mortgage was "a mortgage or change, not being a pledge on any movable property of the company except stock-in-trade" and that therefore in view of section 109(i)(e) of the Indian Companies Act, 1913, in force at the relevant time the security is void against the plaintiff who is an unsecured creditor of the company. I am unable to accept this contention. Possession of the aircraft was given to the defendant No. 2 by way of security. Though the defendant No. 2 employed the aircraft for purposes of the partnership, the aircraft continued to be in the possession of the defendant no. 2 as contemplated by clause IO of the partnership agreement and clauses I and 6 of the financing agreement. On December 24, 1950, the defendant No. 2 was in exclusive possession of the aircraft. There was a bailment of the air craft to the defendant No. 2 as security for payment of a debt and the transaction satisfied all the essential requirements of a valid pledge.

Though a possessary mortgage is not directly a pawn or a pledge, section 109(I)(e) of the Indian Companies Act, 1913, contemplated that there can be a mortgage which is not a pledge. The section does not require registration of a mortgage which is also a pledge. The mortgage of the aircraft is therefore not a “mortgage or charge not being a pledge” and as such it is excepted from the operation of section 109(I)(e) of the Indian Companies Act, 1913. I respectfully agree with the following observations of LEACH C.J. in Radhakrishnan Chettiar v. Madras People Bank Ltd.:

“ The section clearly contemplates that there can be a mortgage which is also a pledge. In inserting the words not being a pledge in this clause the Legislature must have had some object in view and the only object I can see it could have was to provide that registration should not be necessary where the person entitled to the security has obtained possession of the goods. The transaction now in question may amount to mortgage, but as there are here all the requirements for a valid pledge it is also pledge, being a pledge did not require registration.”

Mr. Bhabra next contended that the aircraft VT-AZV was part of the stock-in- trade of the defendant No. 1 and that section 109(I)(e) did not except from its operation a pledge of the stock-in-trade. I am unable to accept this contention. In my opinion the section does not require registration of a pledge of any moveable property of the company whatsoever. It is impossible to read these words "except stock-in-trade" as qualifying the word “pledge” The words “on any moveable property of the company except stock-in-trade” must be read as qualifying the words " a mortgage or charge not being a pledge." All mortgages or charges on the property of the company are not within the purview of section 109(I)(e). The preceding sub-clause of sub-section 109(I) deal with mortgages and charges of different types and on the different classes of the properties of the company. Section 109(I)(e) specially deals with and enjoins registration of a mortgage or charge on any movable property of the company. At the same time section 109(I)(e) excepts from its operation (I) a mortgage or charge which is a pledge and also (2) a mortgage or a charge on stock-in-trade .With respect I am unable to agree with the observations of CHANDRA REDDY J. in Rajah of Vizianagaram v. Vizianagaram Mining Co. Ltd. (1) [1952] 22 Comp. Cas I. that " what is exempted from registration is a pledge of movable property of the company other than the stock-in-trade." I may add that there is no evidence on the record to show that the aircraft VT-AZV was part of the stock-in-trade of the defendant No. 1.

section 109(I) of the Indian Companies Act, 1913, does not therefore require registration of the mortgage of the aircraft and the mortgage cannot be avoided under that sub-section. It is therefore not necessary to decide the further question whether in the absence of an order of winding up of the company an unsecured creditor having no interest in the mortgaged property can at all avoid a mortgage under section 109(I)(e).

Mr. Bhabra next contended that the defendant No. 2 has abandoned and relinquished its rights as mortgagee acquired under the financing agreement dated July I6, I950. He relies upon the admission of Champalal Chandak in paragraph 6 of the petition for examination pro interesse suo that "on or about September I, I950, it was inter alia agreed in writing between the parties that the aforesaid agreement dated July I6, I950, would stand superseded and/or be treated as cancelled and void subject to the terms and conditions thereof. The writing referred to in the paragraph is not produced. The context of paragraph 6 of the petition shows that the allegation of supersession and cancellation relates to the partnership agreement dated July I6, I950. the point is made clear by the oral evidence on the record. See evidence of J. S. Rutnagar (Qs. 442 to 452) and Champalal Chandak, (Qs. 635 to 64I). the evidence on the record shows that in September, I950, the defendant No. 2 decided to stop making further advances and to close the partnership business. subsequently the partnership was terminated by mutual consent as from November I5, I950. It is impossible to hold that in September, I950, the defendant No.2 abandoned and relinquished its rights as secured creditor under the financing agreement dated July I6, I950. I am satisfied that the mortgage created by the financing agreement dated July I6, I950, was operative and subsisting after September, I950.

The ownership of the aircraft VT-Azv was vested in the defendant No.2 as mortgagee and for the purpose of securing its dues by virtue of the financing agreement dated July I6, I950. It follows that even assuming that the aircraft was not sold to the defendant No.2 in November, I950, the plaintiff has failed to establish that the defendant No. 2 was not the owner of the aircraft on December 24, I950. This finding by itself is sufficient to dispose of the appeal.

The defendant No. 2 also contends that in November, I950, it bought the aircraft VT-AZV from the defendant No. 1 for the price of Rs. I,20,000. We have to approach this part of the case of the defendant No. 2 with great caution. [His Lordship discussed the evidence and proceeded:]

I find that in fact the defendant No. I sold the aircraft to the defendant No. 2 at and for the price of Rs. I,20,000. I also find that the sale is not a fraudulent or a sham transaction. The dispute is as to the date of the sale. The respondents' case is that the sale took place on or about November 20, I950. The appellant's version is that the sale mist have taken placed sometime in the middle of January, I95I. We are asked by the appellant to hold that the several documents dated November 20, I950 have been fabricated and brought into existence as a result of a fraudulent conspiracy between defendant No. I and defendant No. 2. We asked Mr. Bhabra again and again what motive he could ascribe to the defendants for entering into this fraudulent conspiracy. Mr. Bhabra was unable to assign any motive for this conspiracy. The petition for examination pro interesse suo is dated February 2, I95I. Assuming that there was no sale on November 20,I950, the defendant No. 2 was on November 24, I950 in possession of the aircraft as a secured creditor. The dues of defendant No.2, the exceeded Rs. 1,20,000. On proof of the mortgage and the possession and of the indebtedness of defendant No. I to defendant No.2,the defendant No. 2 was entitled to an immediate order of release of the aircraft. The plaintiff could not realise any part of his dues by proceeding against the aircraft. On February 2, 1951,for the purpose of obtaining release of the aircraft it was not necessary for the defendant No.2 to set up a false and fictitious sale. It is not shown that the sum of Rs. 1,20,000 is not the fair price price of the aircraft. It is not suggested that the sale was at an under-valuation. There was no question of shielding the aircraft from the creditors of defendant No. I. The defendant No. I could not gain anything by ante- dating the sale and by entering into the conspiracy. In the absence of any motive for the ante-dating of the documents and for the alleged fraudulent conspiracy, many of the criticisms of the evidence lose their force. I am satisfied that the aircraft was sold by the defendant No. 1 to the defendant No. 2 in November, I950. Having regard to the surrounding circumstances and the probabilities of the case we accept the evidence of Champalal Chandak that the sale took place in November, 1950. IL am satisfied that the several documents relating to the transaction and dated November 20, I950, were written on or about the date which they bear and that they were not brought into existence in January, I95I, and that the finding of Bose J. to the contrary should be set aside. We hold that the defendant No. 2was the owner of the aircraft on December 24, I950.

On the question of maintainability of the suit., I agree with Bose J. that the plaintiff did not take all steps in execution for realisation of the decree in suit No. 4676 of I950. He did not even move the Registrar for the sale of the pledged shares. I am however unable to hold that the plaintiff is not entitled to maintain his suit because he did not take such steps in execution for realising the decretal amount. The terms of settlement dated March 14, I95I, require the plaintiff to institute a suit against the defendant No. 2 within the time mentioned. If the plaintiff did not institute a suit within that time he would have been deprived for ever from claiming the valuable rights conferred upon him by the terms of settlement. On a fair reading of the terms of settlement, it is impossible to hold that a suit instituted by the plaintiff within the time mentioned is premature. In a suit so instituted the plaintiff is entitled to establish the facts enumerated in the first sentence of clause 2 of the terms of settlement. Such a suit so far as it seeks to establish these fact and to obtain a consequential declaration cannot be said to be premature or not maintainable. I am also inclined to think that the parties intended that the plaintiff should not be driven to a third suit for the purpose of obtaining a decree against the defendant No. 2. In my opinon the parties intended that if the plaintiff was successful in establishing the facts mentioned he would be entitled not only to a suitable declaration but also to an order giving him liberty to apply in that very suit for a decree against the defendant no.2 for the amount which may remain outstanding in respect of the decree in suit No. 4676 of 1950 after he has taken all steps in execution for the realisation of the decretal amount. As the plaintiff has failed to establish the facts mentioned he is not entitled to any relief.

In my opinion, the decree for dismissal of the suit must be affirmed for the reasons already given and not on the ground that the plaintiff is not entitled to maintain the suit.

The appeal is dismissed. The finding of the learned trial judge that the defendant Air Friends was not the owner of the aircraft VT_AZV on December 24,I950 is set aside and to that extent the cross-objection is allowed.

Having regard to all the circumstances of the case, we direct that each party will pay and bear his or its own costs of the appeal and of the cross- objection. The direction of the learned trial judge with regard to the costs of the trial as also of the pro interesse suo proceedings in suit No. 4676 of I950 is affirmed. Certified for two counsel.

MUKHARJI J.-I agree.

I wish only to add a few observations on section I09 of the Indian Companies Act, I9I3, as amended by the Act of I936, which applies to the point raised in this appeal, section I25 of the Companies Act of I956 not being applicable.

Section I09 originally did not include movable property within the orbit of registration under the Company Law. It was for the first time introduced by section 60 of the Indian Companies (Amendment) Act, I936.

A glance at the scheme of section 109 of the Act makes it clear at once that the subject that it deals with is a mortgage or a charge . The opening words of section I09(I) of the Act says that "every mortgage or charge created after the commencement of this Act by a company and being either etc." Then follow sub-clauses (a), (b),(c),(d),(e) and (f) which in every clause refers to "a mortgage or a charge". On plain language, therefore, it seems to me that "pledge" is outside the purview of this theme of " mortgage or charge" as contemplated in section I09 of the Act.

Mortgage or charge on immovable property was already there in section I09 of the statute of 1913. Movable property was brought in much later but under considerable qualifications as the words of subclause (e) sufficiently indicate. Business practice and commercial considerations alike dictated that the requirement of registration of a mortgage or a charge on movable property should not be so unqualified as to cripple the commercial flexibility of securing money by the use of "pledge" or "stock-in-trade', normally resorted to in business to tide over difficulties and obtain temporary accommodation. Two exceptions are, therefore, expressly indicated in sub-clause (e) of section 109 of the Act. They are (I) pledge and (2) stock-in-trade.

To invest more meaning than the words indicate or the policy justifies would be erroneous both from the point of view of legal construction and interpretation as well as from the point of view of practical business considerations.

The interpretation of section I09 from this point of view follows logically. Registration is necessary for a mortgage or charge on movable property. Exception is expressly and clearly made in favour of (I) pledge and (2) stock-in-trade. the reason for excluding pledge is not far to seek because pledge of movables usually means parting with possession.

The argument of the appellant that the finance agreement of July I6, I950, is void because it was not registered, cannot be sustained because under section I09(I) (e), it cannot be said that this document is a "mortgage or charge not being a pledge' within the meaning of section I09(I)(e). A second more important reason is that this Dakota was not the "movable property of the company" within the meaning of section I09(I)(e) of the Indian Companies Act. Movable property, in this context, appears to me to mean the property which belongs to the company. Such property may be the possessory property in the shape of control, custody, possession or management or titular property in the sense of the title or ownership. Now, the company, in this case, was the Indian Overseas Airlines Ltd., who had not this Dakota either in its control or in its management or in its possession at the time or this document of July I6, I950. It had at best a right to redeem the dakota which was already charged with the Exchange Bank of India and Africa and who in turn pledged it with the Reserve Bank of India and the possession of this Dakota was not with the Indian Overseas Airlines Ltd. Therefore, it is clear that the Indian Overseas Airlines Ltd. had no possessory title over this Dakota. It had also no titular property either. In fact, this document of July I6, I950, expressly provides for the release of the Dakota but that release was only on the express condition that the property in this Dakota would be not of the Indian Overseas Airlines Ltd. but of the Air Friends until their dues were paid up in which event the Dakota in the future would belong to the company. Therefor, the Dakota was not the "movable property of the company" at the time of the finance agreement of July I6, I950, within the meaning of that expression in section I09(I)(e) of the Companies Act. Lastly, the Indian Overseas Airlines Ltd. had at best only a right to redeem the Dakota. Aright to redeem is not itself such a "movable"property as is contemplated in section I09(I)(e) of the Companies Act.

In that view of the matter, it is no longer necessary in this appeal to decide whether the Dakota was a "stock-in-trade" or the more vexed question whether "any creditor" in section I09 means any and every creditor or means a creditor having a charge or mortgage on the property of the company such as was discussed by LORD COZENS-HARDY M.R., PHILLIMORE L.J., and JOYCE J., in the well-known case of In re Monolithic Building Co.: Tacon v. The Company [(I) {I9I5} I Ch. 643].

Certain cases were relied on at the Bar. My learned brother has already dealt with the case of Radhakrishnan Chettiar v. Madras Peoples Bank Ltd. [(2) {I943} I3 Comp.Cas. 2I.]. That is a decision of a Division Bench of LEACH C.J. and Bell J. of the Madras High Court. At page 24 of that report LEACH C.J. puts the construction of section I09 very forcibly in the following words:

"The section clearly contemplates that there can be a mortgage which is also a pledge. In inserting the words, `not being a pledge', in this clause, the Legislature must have had some object in view and the only object I can see it could have had was to provide that registration should not bed necessary where the person entitled to the security has obtained possession of the goods. The transaction now in question may amount to a mortgage, but as there are here all the requirements for a valid pledge, it is also a pledge, and being a pledge, did not require registration."

We respectfully agree with this view of the construction of section I09 of the Companies Act.

Reliance was also placed by Mr. Bhabra on the Privy Council decision in Ram Narain v. Radha Kishen Moti Chamaria [(I) {I930} 57 I.A. 76; A.I.R. I930 P.C.66.] and specially on the observation of SIR LANCELOT SANDERSON at page 83 where it was said:

"Section I09 provides that a mortgage, such as the bank's mortgage of August I0, I922, shall so far as any security on the company's property or undertaking is thereby conferred, be void against the liquidator and any creditor of the company unless the prescribed particulars are filed with the Registrar within twenty-one days after the date of its creation It is to be noted that the section does not avoid the mortgage absolutely, but only so far as any security is given thereby on the company's property or undertaking. The effect, therefore, is that if a mortgage is not registered, it is valid as an admission of debt, but as against a creditor or the liquidator, it could not be said that a valid charge on the company's property had been created." This decision does not help the question at all. In the first place, this was a decision on mortgage of immovable property. In the second place it was a decision before the new amendment of mortgage on movable property was introduced within the purview of company registration with the exception of pledge and stock-in-trade.

TENDOLKAR J., in In re East Africa Hardware Co.{(1930) 57 I.A. 76; A.I.R. 1930 P.C. 66.}, came to the conclusion:

"The result would be that a pledge would not require registration, though a mortgage or a charge on movable property would require registration provided the movable property was not stock-in-trade. The proviso leads to the result that mortgage or a charge on stock-in-trade would not require any registration."

This view supports the construction that we have taken. In the decision reported in Raja of Vizianagaram v. Vizianagaram Mining Co. Ltd.{[1992]22 Comp. Cas, I.}a Division Bench of the Madras High Court disagreed with the views of TENDOLKAR J. GOVINDA MENON J. at page 22 observed:

"In our opinion , what the clause contemplates is that where there is a mortgage or a charge on the stock-in-trade of a company, which is a moveable property of the company, such mortgage or charge requires registration. But what is exempted from registration is a pledge of moveable property of the company other than the stock-in-trade. We do not agree with the learned Judge [TENDOLKAR J.]that the preposition `on after the word `pledge` is inapposite. Though in common parlance one speaks of a pledge of property. There is nothing incongruous or ungrammatical in saying that there can be a pledge on property. The word `pledge` connotes possession as well as right and in both cases the preposition `on` cannot be said to be inaccurate. The clause is not so inartistically worded as TENDOLKAR J. seems to think. In our opinion, where stock-in-trade is made the subject of a mortgage or charge it should be registered."

I have already expressed my own reasons and I am afraid it is not a question of the preposition "on" and the felicity of such preposition in describing whether a pledge is a pledge on property or a pledge of property. Even on the assumption that the preposition "on" is a correct preposition, there are larger questions which,as I have already indicated, seem to suggest both on the language as well as in the context of section 109 as well as on business considerations and the history of the introduction of movable property within the orbit of registration under the Companies Act, that clear exceptions were made in favour of {[1952] 22 Comp. Cas, 1.} pledge and {[1943]13 Comp, Cas, 21.}stock-in-trade. It is noticeable that this subsequent Division Bench decision of the Madras High Court in Rajah of Vizianagaram's case {1952] 22 Comp. Cas, 1.} did not notice the older Division Bench decision of the same High Court of 1943. We prefer the view expressed in the older Division Bench case of the Madras High Court in Radhakrishnan Chettiar v. Madras Peoples Bank Ltd.{[1943] 13 Comp. Cas, 21.} as being more in accord with the language and intention of the statue.

Appeal dismissed.

[1972] 42 COMP. CAS. 359 (MAD.)

HIGH COURT OF MADRAS

K. Saradambal

v.

Jagannathan & Bros.

PALANISWAMY, J.

C.P. NO. 89 OF 1967 AND C.A. NO. 180 OF 1971

OCTOBER 22, 1971

 ORDER

Palaniswamy, J.—In this application, an interesting but a bit difficult point of law under the Companies Act, 1956 (hereinafter referred to as “the Act”), arises for consideration, though the amount of money value involved in this controversy is negligible. The question is whether a person, having a statutory lien on a property of a company, is in the position of a secured creditor and stands outside the winding-up proceedings of the company. The relevant facts, which are not in controversy, may be briefly stated. By order dated 25th October, 1968, in C.P. No. 89 of 1967, this court directed the winding-up of Sri Jagannathan and Brothers, Automobile Engineers and Motor Works Private Ltd., Erode, at the instance of a creditor, who had filed that petition under section 433(e) of the Act. In May, 1966, the company had entrusted two machineries belonging to it to Messrs. T.V. Sundaram Iyengar & Sons Private Ltd., Madurai, the applicant herein, for carrying out certain repairs. The applicant-company carried out repairs by supplying certain spare parts. The repairs were completed in July, 1967. The applicant-company issued debit notes for a sum of Rs. 489.04. This amount carried interest. By August, 1970, the amount, including interest, was Rs. 649.21. In spite of repeated demands, the amount remained unpaid. After the winding-up order was passed, the affairs of the company were taken over by the official liquidator, the respondent in this application. When the applicant-company demanded payment of the amount due to it the official liquidator took up the position that the charge claimed by the applicant was void against him as it had not been registered under section 125 of the Act and that the applicant-company had no right to retain possession of the machineries but should return them to him and rank only as an ordinary creditor and prove its claim. It is in these circumstances that the applicant-company has come forward with this application contending, inter alia, that it is entitled to a statutory lien on the machineries and is a secured creditor, and that appropriate directions should be given for the sale of the machineries for adjustment of the amount due to it and for deposit of the balance, if any. The official liquidator opposes the application reiterating the stand taken by him in reply to the demand made by the applicant-company for payment of the amount.

The necessity for an examination of the right of the applicant as a holder of a lien has arisen for the reason that the Act does not define who a secured creditor is and who an unsecured creditor is. As already observed, the facts not being in controversy, the applicant-company claims two kinds of liens: (1) particular lien as an unpaid vendor of the spare parts supplied for carrying out the repairs to the machineries. Section 148 of the Contract Act defines “bailment”, “bailor” and “bailee” thus :

“148. A ‘bailment’ is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the ‘bailor’. The person to whom they are delivered is called the ‘bailee’ ”.

Section 170 of the Contract Act provides:

“170. Where the bailee has, in accordance with the purpose of the bailment, rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has, in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the services he has rendered in respect of them.”

So far as repair charges are concerned, the applicant-company claims the lien under section 170 of the Contract Act. Dealing with the principle underlying this lien, the learned author, W. Paine, in The Law of Bailments observed at page 233:

“And this rule is of general application ‘ where a bailee has expended his labour and skill in the improvement of a chattel delivered to him...... Thus, the articles to whom goods are delivered for the purpose of being worked up into form, or the carrier by whose skill the animal is cured of a disease, or the horse-breaker by whose skill he is rendered manageable, have liens on the chattels in respect of their charges. And all such specific liens, being consistent with the principles of natural equity, are favoured by the law which is construed liberally in such cases.”

That the applicant has a right to retain the repaired machineries until it receives the due remuneration for the services rendered is thus clear. This right is only a right to retain the goods until payment and does not carry with it a right of sale to secure the amount. That is the distinction between the lien under section 170 of the Contract Act and a pledge carrying with it the right of sale.

That the applicant-company has sold spare parts and has made use of those spare parts in carrying out the repairs of the machineries is also not in controversy. The amount due to the applicant-company, by way of sale amount of such spares supplied, has not been paid. Thus, the applicant-company is in the position of an unpaid seller. Under section 46 of the Sale of Goods Act, an unpaid seller has, notwithstanding that the property in the goods may have passed to the buyer, a right of re-sale as limited by that Act. Where the property in the goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies, a right of withholding delivery similar to and co-extensive with his rights of lien and a stoppage in transit where the property has passed to the buyer. Section 47 of the /Sale of Goods Act, inter alia, provides that the unpaid seller of goods who is in possession of them is entitled to retain possession of them until payment or tender of the price. He is also entitled to exercise the right of lien notwithstanding that he is in possession of the goods as agent or bailee for the buyer. Dealing with the vendor’s lien it is observed in Halsbury’s Laws of England, volume 34, third edition, at page 296:

“The right of the vendor to receive the purchase money is secured, first, by a lien upon the property, and secondly, by his right, in the absence of express stipulation as to the time of delivering possession, to retain possession until the purchase-money is paid....... The vendor’s lien is a charge upon the property subject to which a beneficiary under a will takes a property under a contract for sale uncompleted at the death of the testator.”

An unpaid seller is not a bailee in the absence of a contract to that effect, but he has a lien as regards the price and also a right of resale, whereas the bailee has only a right to retain possession without a right of sale.

Elaborate citations were made by the applicant’s counsel as well as the official liquidator with a view to show the distinction between lien, mortgage and pledge. It is unnecessary to encumber this order with those citations, as it is not the case of the applicant-company that, apart from the statutory lien, it has any right as a mortgagee or as a pledgee. It would be sufficient only to refer to the following observation in Halsbury’s Laws of England, third edition, volume 24, at page 143:

“A legal lien differs from a mortgage and a pledge in being an un-assignable personal right which subsists only so long as possession of the goods subsists. A mortgage is an assignable right in the property charged and does not depend on possession. A pawn or pledge gives a special assignable interest in the property to the pawnee. A lien is, however, included in the definition of mortgage in the Law of Property Act, 1925. Where an equitable mortgage is created by deposit of title deeds, the mortgagee has a legal lien on the deeds deposited.”

That the applicant-company has lien both as a bailee and as an unpaid seller is thus clear. As a matter of fact that position was not controverted by the official liquidator. But his contention was that, as a holder of a lien, the applicant-company did not have the lien registered as required by section 125 of the Act (Companies Act, 1956) and that in the absence of registration the lien is void as against him. Sub-section (1) of section 125, which alone is relevant, reads :

“125. Certain charges to be void against liquidator or creditors unless registered.—(1) Subject to the provisions of this Part, every charge created on or after the 1st day of April, 1914, by a company and being a charge to which this section applies shall, so far as any security on the company’s property or undertaking is conferred thereby, be void against the liquidator and any Creditor of the company, unless the prescribed particulars of the charge, together with the instrument, if any, by which the charge is created or evidenced or a copy thereof verified in the prescribed manner, are filed with the Registrar for registration in the manner required by this Act within thirty days after the date of its creation..........”

(Proviso omitted)

Placing reliance upon this provision, the official liquidator contended that inasmuch as the lien claimed by the applicant-company is not registered, it is of no avail. A careful examination of the foregoing provision would show that it is applicable only to a charge created by the company and not to a charge arising by operation of law. Section 125 of the present Act corresponds to section 109 of the Companies Act, 1913. Dealing with the question as to whether that section was applicable to a charge arising by operation of law, a Bench of the Oudh High Court in Hukmichand v. Pioneer Mills Ltd. held that the said section was applicable only to a charge created by the company by contract and not to a charge arising by operation of law. The same principle applies to section 125 also. Therefore, the. fact that the lien claimed by the applicant-company is not registered does not disentitle the applicant-company from working out its rights arising under the lien.

This leads us to the question as to what right is available to the applicant-company, as the holder of lien. That again takes us to the question as to what is meant by “lien”. The word “lien” is defined in the Law Lexicon by Ramanatha Iyer as:

“A lien may be defined to be a charge on property for the payment of a debt or duty, and for which it may be sold in discharge of the lien...... A lien, in a limited and technical sense, signifies the right by which a person in possession of personal property holds and retains it against the owner in satisfaction of a demand due to the party retaining it; but in its more extensive meaning and common acceptation it is understood and used to denote a legal claim or charge on property, either real or personal, as security for the payment of some debt or obligation; it is not strictly a right in or fight to the thing itself but more properly constitutes a charge or security thereon.”

The word “lien” is defined in Stroud’s Judicial Dictionary, third edition, at page.1644, as:

“A lien—(without effecting a transference of the property in a thing)—is the right to retain possession of a thing until a claim be satisfied; and it is either particular or general.”

Having regard to the foregoing definitions the question arises whether the holder of a lien, as the applicant-company in the instant case, can be considered to be a secured creditor under the company law. Section 529 of the Act is important, and it reads:

“529. Application of insolvency rules in winding up of insolvent companies.—(1) In the winding up of an insolvent company, the same, rules shall prevail and be observed with regard to—

        (a)    debts provable;

        (b)    the valuation of annuities and future and contingent liabilities; and

        (c)    the respective rights of secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent.

(2) All persons who in any such case would be entitled to prove for and receive dividends 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 make by virtue of this section.

Provided that if a secured creditor instead of relinquishing his security and proving for his debt proceeds to realise his security, he shall be liable to pay the expenses incurred by the liquidator (including a provisional liquidator, if any), for the preservation of the security before its realisation by the secured creditor.”

Though the expression “insolvent company” is not defined, obviously it refers to a company which has been ordered to be wound up on a petition founded upon section 433(c), that is, the company being unable to pay its debts. According to section 529, in the winding-up of such a company, the same rules shall prevail and be observed with regard to debts provable as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent. The question is whether only the insolvency rules are applicable or all the relevant provision of the insolvency law are applicable to a case of winding-up of an insolvent company. The intention underlying section 529 is that all the provisions of the insolvency law are applicable to the case of winding-up of an insolvent company with regard to matters enumerated in section 529. That was also the view taken by a Full Bench of the Allahabad High Court in Hansraj v. Official Liquidators, Dehra Dun Mussoorie Electric Tramway Co. Ltd   A similar view was taken by the Oudh Chief Court in B. Anand Behari Lal v. Dinshaw and Co. Thus, according to section 529, the provisions of the insolvency law are applicable to debts provable in the winding-up of an insolvent company. That takes us to the question as to what are the provisions of the insolvency law that are applicable to a debt covered by a lien. The Provincial Insolvency Act, 1920, and the Presidency Towns Insolvency Act, 1909, define “secured creditor”. In the former Act. section 2(e) defines that expression as:

“2. (e) ‘Secured creditor’ means a person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor.”

In the latter Act, section 2(g) defines that expression as:

“ ‘Secured creditor’ includes a landlord who under any enactment for the time being in force has a charge on land for the rent of that land.”

The latter definition is an inclusive definition. According to the former definition even a person holding a lien on the property of a debtor is a secured creditor. In dealing with the question as to who a secured creditor is in company law, it is observed in Palmer’s Company Law, 21st edition, at page 765:

“Secured creditor is one who has some mortgage, charge or lien on the company’s property....... A solicitor who holds a lien on documents of a liquidating company for his costs against the company is a secured creditor, and must mention his lien in his proof.”

On a consideration of section 529 read with the relevant provisions of the insolvency law, I come to the conclusion that the holder of a statutory lien or the holder of a lien created by contract and registered as required by section 125 is a secured creditor in the matter of winding up of the insolvent company with regard to, among other things, debts provable in the winding up proceedings. The applicant-company being the holder of a statutory lien is thus in the position of a secured creditor. Though the lien to retain possession of the goods as a bailor does not confer a right of sale on the applicant-company, the applicant-company, as an unpaid vendor of the spare parts supplied, has a right of re-sale. Having regard to these circumstances, I am of the view that in the interest of justice and for the purpose of closing the administration of the insolvent-company, it is necessary that the machineries, which are in the possession of the applicant-company, are ordered to be sold in public auction by the applicant company after due publicity so as to enable the applicant-company to adjust its dues including the cost of sale out 6f the sale proceeds. If there is any balance left, it shall be paid over to the official liquidator. The application is ordered in these terms. No order as to costs.

 

[1952] 22 Comp Cas 1 (MAD.)

HIGH COURT OF MADRAS

Raja of Vizianagaram

v.

Official Liquidator, Vizianagaram Mining Co. Ltd.

GOVINDA MENON AND CHANDRA REDDI, JJ.

C.M.A. NOS. 80 OF 1948, 249 TO 252 OF 1949 AND 103 OF 1950

FEBRUARY 9, 1951

 V.K. Tiruvenkatachari, P. Rami Reddi, V. Venkatarama Reddi, C.V. Dikshitulu, for the Appellant.

P. Satyanarayana Raju (Government Pleader), E. Venkatesam, E.L. Bhagiratha Rao, K. Rajah Aiyar, C.V. Dikshitulu, P. Rami Reddi, V. V. Venkatarama Reddi, E. Venkatesman and E.L. Bhagiratha Rao for the Respondents.

JUDGMENT

Govinda Menon, J.—These appeals arise out of the winding up proceedings of the Vizianagaram Mining Co. Ltd., which had been incorporated and registered under the Companies Act then in force in England on 8th December, 1894. The main location of its business was in the Vizagapatam District of the then Presidency of Madras, where various minerals were mined by the company. Its principal place of business for the address to be given under Section 277 of the Companies Act was Kodur. In that company, the Raja of Vizianagaram was a shareholder and he had also leased out to the company the lands on which the mining was going on under three separate leases. While matters were in this state, O.P. No. 25 of 1946 was filed on the Original Side of this court by the Raja on 29th January, 1946, for winding up the company, which was ordered on 6th March, 1946. Thereafter, further proceedings relating to the winding up were transferred to the District Court of Visakhapatnam and the petitions out of which the above appeals have arisen were taken in the said District Court. On 11th July, 1950, in Application No. 732 of 1950 the proceedings have been re-transferred to the Original Side of this court and we are informed that the Official Receiver, Madras, is now in charge of the liquidation proceedings. C. M. A. No. 80 of 1948 and C. M. A. No. 251 of 1949 go together, and the other appeals, viz., C.M. A. Nos. 249, 250 and 252 of 1949 can also be considered together.

We will first of all consider the main appeal, viz., C. M. A. No. 249 of 1949. This arises out of LA. No. 135 of 1948 in which the petitioner, the Raja of Vizianagaram, was the third creditor and the respondents 2 to 9 were the foreign creditors. The Raja of Vizianagaram applied to the lower court for an order that the proof of the foreign creditors be expunged and that their names be deleted from the certificate of the Official Receiver filed under Rule 90 of the Indian Companies Rules. The learned District Judge, on a consideration of Section 271 of the Indian Companies Act as well as the arguments addressed to him, came to the conclusion that foreign creditors are entitled to prove their claims in liquidation proceedings under Part IX of the Indian Companies Act and therefore dismissed the application. C.M.A. No. 249 of 1949 is by the Raja of Vizianagaram against the order dismissing I. A. No. 135 of 1948.

CM.A. No. 250 of 1949 arises out of an application by one of the foreign creditors, viz, S. A. Beige Miniers et Commerceale filed under Section 183 (5) of the Act and Rule 85 of the rules framed thereunder, praying that the order of the Official Liquidator rejecting their claim be set aside and the claim be allowed in full. After setting aside the order of the Official Liquidator the learned District Judge allowed the claim of this creditor to the extent of the principal loan subsisting, viz., £9,500. The Raja of Vizianagaram appeals in C.M.A. No. 250 of 1949 against the allowance by the District Judge of this claim.

C.M.A. No. 252 of 1949 arises out of LA. No. 124 of 1948 in which the petitioner was one Arthur Stanley Lindley, who applied under Section 183 (5) of the Indian Companies Act against the order of the Official Liquidator rejecting his claim for a sum of £746-1-2 on the ground that it was time-barred. The learned District Judge found that the sum of £746-1-2 was included in the sum of £4,897-7-7 mentioned in the balance sheet, Ex. P-1, and that the sum was admitted in the affidavit submitted by Mr. John Hawkins in support of the application. He therefore held that there was no bar of limitation. The Raja of Vizianagaram appeals against this order by C.M.A. No. 252 of 1949.

C.M.A. No. 80 of 1948 arises out of LA. No. 225 of 1946 by which the Raja of Vizianagaram applied for an order of delivery of certain leasehold properties, for the sale of certain machinery, etc., and for permission to levy distraint. The learned District Judge found that the Raja, as the lessor was entitled to re-enter, that is to say, the Official Liquidator should not sell any leasehold right as being an asset of the company; but that the actual re-entry will be postponed for a period of 6 months or until further orders till the Official Liquidator completes the liquidation. It was also held that the Raja was entitled to enforce the right of pre-emption, but only with regard to particular things comprised in the clauses in particular leases for which a commissioner was appointed. Against the disallowance of the distraint in respect of rents C.M.A. No. 80 of 1948 has been preferred.

C.M.A. No. 251 of 1949 is against the order in LA. No. 136 of 1948 which was an application by the Raja under Section 183 (5) of the Act and Rule 85 of the rules framed thereunder praying that the court may vary an order of the Official Liquidator dated 13th April, 1948, by adding back to the proof of the applicant as creditor the sums disallowed by the Official Liquidator. The learned District Judge modified the order of the Official Liquidator by allowing a further sum of Rs. 2,189-6-5 but in other respects the order of the Official Liquidator was confirmed; but permission was granted to the Raja to file a suit for a declaration that the acts of the Court of Wards in allowing remissions to the Vizianagaram Mining Co. will not bind him, and if he succeeds in that suit, to prove his claim for those amounts.

C.M.A. No 103 of 1950 is connected with C.M.A. No. 250 of 1949 and is against the disallowance by the District Judge in LA. No. 126 of 1948 of a sum of £3,358 claimed by S.A. Beige Miniers et Commer-ceale as interest on £9,500 allowed by the District Judge as due to them. In this appeal, a further question is also raised as to whether the creditor is entitled to a charge on the mineral ore quarried by the company for the sum of £9,500 due as principal and £3,358 due as interest. The learned District Judge as mentioned already, has found that the creditor is entitled only to the extent of the principal loan subsisting, viz., £9,500 without any kind of charge and disallowed the amount claimed as interest.

It will be useful to set out the amounts due to the various creditors. We are informed that the second respondent in LA. No. 135 of 1948, viz., National Bank of India Ltd., London, creditor No. 4, claims a sum of Rs. 1,02,146-8-0. Creditor No. 5, S.A. Beige Miniers et Commerceale claim a principal of £9,500 and an interest of £3,358, making a total of £12,858, but the amount allowed was only the principal loan of £9,500 which when converted into Indian currency would be equivalent to Rs. 1,26,666-10-8. The fourth respondent in CM.A. No. 249 of 1949, A. S. Lindley, represented by the power-of-attorney-holder Mr. H.M. Small, Madras, who is creditor No. 8, claims a sum of £746-1-2 which in Indian currency comes to Rs. 9,947-7-1. The fifth respondent, F. J. Hawkins, claims a sum of Rs. 2,246-10-1. The sixth respondent, R. H. Dunn, creditor No. 11, claims a sum of Rs. 2,833-5-0; and the seventh respondent, Cie. Beige des Mines Minerals and Mutaux represented by J. S. Williams, Nagpur. claim Rs. 16,284. On the whole the total amounts claimed by the foreign creditors comes to Rs. 2,60,142, and odd. The general question of law common to all the appeals is whether the foreign creditors are to be allowed to prove their claims in the winding up proceedings in India.

This question that has been very elaborately discussed is bereft of direct authority and the learned counsel for the appellants desires the court to pronounce a verdict on that point by considering the principles deducible from various decisions, English and Indian, cited before us. Before discussing the various authorities quoted, it would be useful to refer to the statutory provisions dealing with the winding up of an unregistered company. Section 2 (1), clause (2), of the Indian Companies Act defines a "company" as a company formed and registered under the Act or an existing company; and an "existing company" is defined in clause (7) as a company formed and registered under the Indian Companies Act, 1866, or under any Act or Acts repealed thereby, or under the Indian Companies Act, 1882. The winding up of such a company is governed by the provisions of Part V of the Act containing Sections 155 to 247; and Part IX which contains Sections 270 to 276 refers to the winding up of unregistered companies, which expression, according to Section 270, "shall not include a railway company incorporated by Act of Parliament or by an Indian law, nor a company registered under the Indian Companies Act, 1866, or under any Act repealed hereby, or under the Indian Companies Act of 1882, or under this Act, but...shall include any partnership, association or company consisting of more than seven members." It is in accordance with the provisions contained in Part IX that the company under consideration has been ordered to be wound up. Section 271 is important, because that deals with the winding up of unregistered companies and it says that the provisions of the Act relating to winding up of companies (Part V, Sections 155 to 247) shall apply to the winding up of an unregistered company, with the exceptions and additions referred to in that section. Section 271 (3) has particular reference to the present proceedings, because it says that where a company incorporated outside the Indian Union, which has been carrying on business in India, ceases to carry on business in India, it may be wound up as an unregistered company under Part IX, notwithstanding that it has been dissolved or otherwise ceased to exist as a company under or by virtue of the laws of the country under which it was incorporated. Unlike the general law in winding up proceedings, by which during the course of winding up the property of the company does not become vested in the Official Liquidator, so far as unregistered companies are concerned, by Section 275 the court has power to vest the properties of the company in the Official Liquidator by his official name. This is analogous to bankruptcy proceedings where the property of the insolvent becomes vested in the Official Receiver or the Official Assignee as the case may be. The contentions put forward by Mr. V. K. Tiruvenkatachari supported by a wealth of legal learning is in its enunciation not complex. But the decision is a difficult one. According to him, the winding up proceedings of an unregistered company in India are proceedings of an independent character by which the unregistered company is treated as a separate entity for the purpose of winding up and therefore any foreign creditor of the company has no right to prove his claim in a winding up in India. The various steps in the argument can be briefly detailed as follows:—

1.             A true and proper construction of Sections 270 to 276 coupled with the provisions regarding ordinary winding up would show that an unregistered company is, for the purpose of an Indian winding up, a separate concern.

2.             In the winding up of such a company, it is not within the powers of the court, or the liquidator, to get at the assets which are outside the court's jurisdiction, and it is not possible to settle the contributories also among persons who are not subject to the court's jurisdiction.

3.             Such being the case, the winding up here is not an ancillary proceeding to the winding up, if there be any, in the country in which the company is registered, and therefore, if the winding up here is an independent proceeding, the creditors of the company who are resident outside India, cannot be recognised as creditors entitled to receive from the assets of the company.

On the other hand, Mr. Rajah Aiyar for some of the foreign creditors stresses the fact that even in the case of a foreign company doing business in India, there is only one company and not as many companies as there are places in which it carries on business, because the company is a single legal entity carrying on business in a number of branches. If that argument is accepted, then, Mr. Rajah Aiyar says, in finding out the creditors of such a company, the question of the domicile of the creditors is irrelevant. It is open to find out who the creditors of that single company are. In the case of an ordinary creditor, the monies due to him can be realised from the assets of the company, wherever they may be; but the question in what way the creditor can realise it depends upon the law of the country where the assets are situated. If that were so, though the company is registered in England and is carrying on business in India, by the application of Part IX of the Companies Act, when it is wound up, it is open to the creditors resident outside India to prove in such liquidation proceedings what is due to them. But it is pointed out by the learned counsel for the appellant, the Raja, that in the present case there are no liquidation proceedings in the place where the company is registered and therefore a foreign creditor cannot get his debts proved in India and realise the dividends here, whereas at the same time he is able to file a suit for the entire amount in England and get a decree against the company's assets there for the whole amount. The short answer to this question, according to the respondents' learned counsel, is that if it is one and the same company and a creditor has received part of his dues by liquidation proceedings of an unregistered company in one place, he can only sue for the balance amount due to him after crediting what he has received in such liquidation proceedings. Likewise it is conceded by the learned counsel for the respondents that it is open to an Indian creditor, after realising a part of his dues in liquidation proceedings in India, to proceed against the company for the balance sum, if there are no liquidation proceedings, by suing for the balance amount according to the law of the country.

It therefore becomes necessary to decide whether the winding up of an unregistered company which has its place of registration in a foreign country is a proceeding relating to an independent entity in which only the creditors who are subject to the jurisdiction of the court in India can prove their claims. In the treatise on Foreign Companies and Other Corporations by E. Hilton Young, the learned author observes at page 182 that the law of the country in which a company is domestic determines the constitution of a foreign corporation, the legal relations of its members inter se and towards the corporation, and their liabilities towards third parties. This statement is mainly based upon the decision in In the matter of the Madrid and Valencia Railway Co. In all common law countries, such as England and America, a corporation lives under the law under which it has been created or "incorporated," the law from which it "derives its existence." In most civil law countries, the personal law of a private law corporation is that of the state in which it has its centre of "domicile" : See The Conflict of Laws, A Comparative Study by Rabel, Volume II, pages 31 and 33. Are we therefore constrained to hold that on this principle the foreign creditors of an unregistered company which is being liquidated in India are to be denied the right to prove their debts in Indian courts? For the contention that even if the company is being wound up in the place of its origin, when there is a winding up in India under Part IX of the Act, the proceedings here cannot be called ancillary to the winding up in the place of origin, Mr. Tiruvenkatachari has delved deep into the historical origin of such winding up proceedings and relies upon the dicta contained in various English cases to substantiate his argument that the foreign creditors cannot prove their claim here. In re Matheson Brothers Ltd. was a case where a company registered in New Zealand and having its principal place of business there, but having a branch office, agent, assets, and liabilities in England was being wound up in New Zealand and the question arose whether the English courts can make a winding up order. Kay J. was of opinion that the English court had the power, and in doing so he expressed the opinion that the English courts, upon principles of international comity, would no doubt have great regard to the winding up order in New Zealand and would be influenced thereby. But the mere existence of a winding up order made by a foreign court did not take away the right of the courts in England to make a winding up order, though it would no doubt exercise an influence upon the English courts in making the order.

North J. in In re Commercial Bank of South Australia had to consider the case of a company which was registered in Australia and being wound up there. Since it was carrying on business in England also, the question arose whether it could be wound up in England and the learned Judge observed thus:—

"I think, therefore, that the English creditors are entitled to have a winding up order made by this court. I do not think it would be right to insert any special directions in the order, this is not the proper time for giving such directions. But I will say this, that I think the Winding up here will be ancillary to a winding up in Australia, and if I have the control of the proceedings here, I will take care that there shall be no conflict between the two courts, and I shall have regard to the interests of all the creditors and all the contributories, and shall endeavour to keep down the expenses of the winding up so far as it is possible. I think it clear that there is jurisdiction to make a winding up order.………."

Observations of Kay J. in North Australian Territory Co. v. Goldsbrough, Mort & Co. Ltd. have been very much sought in aid by the learned counsel for the appellants. At page 717 of the report Kay J. states:—

"In Australia an order has been made for a compulsory winding up. According to our law such an order might be done, but in the case of an Australian company it would be confined to the property existing in this country, and would only be by way of assisting a winding up which either was going on or was completed in Australia. It would be only to protect the property in this country, and the creditors in this country. That would be the only purpose of such an order."

In In re Federal Bank of Australia Ltd. the judgment of Williams J. in the court of first instance, following the observations of North J. in In re Commercial Bank of South Australia, contains similar observations. What should be the proper procedure when a company is being liquidated in more than one place, viz., at the place of its origin and its branches outside, has been laid down by Vaughan Williams J. in In re English Scottish and Australian Chartered Bank. At page 394 the learned Judge says that, where there is a liquidation of one concern the general principle is ascertain what is the domicile of the company in liquidation; let the court of the country of domicile act as the principal court to govern the liquidation; and let the other courts act as ancillary, as far as they can, to the principal liquidation. He further expressed the opinion that the court dealing with the principal liquidation is bound to make provision for creditors in all parts of the world coming in and being heard if they think fit. Since the learned Judge held that the court dealing with the principal liquidation should make provision for creditors in all parts of the world, are we to take it that the courts where ancillary proceedings are going on are not justified in making provision for the entire body of creditors of the company, but only for such of the creditors as are within the jurisdiction of the court conducting the ancillary liquidation? The foreign cases so far discussed envisage a principal liquidation and ancillary proceedings. But they do not give any definite guidance as to what the powers and duties of a court conducting ancillary liquidation proceedings are. By the time we come to the case in New Zealand Loan and Mercantile Agency Co. v. Morrison, it looks as if, according to the learned counsel for the appellants there was a change in the approach to the question, as may be seen from the observation of Lord Davey that a scheme of arrangement sanctioned by an English court with regard to a joint stock company which is being liquidated in England but which has branches in the colonies cannot be pleaded by the company in a colonial court as a defence to an action by a non-assenting creditor for the full amount of the claim. For the elucidation of the present point it is difficult to find any helpful observations in the judgment. But the difference between bankruptcy proceedings and winding up proceedings is stressed by the Hon'ble Lord when he states that in cases of bankruptcy the whole property of the bankrupt is taken out of him whilst in the case of winding up the property remains vested in title and in fact in the company, subject only to its being administered for the purposes of the winding up under the direction of the English courts.

We have next to consider the judgment of Maugham J. in In re Vocation (Foreign) Limited, as well as the speech of Lord Atkin in Russian and English Bank v. Baring Brothers & Co., on both of which the learned counsel for the appellants placed much reliance. After considering the earlier authorities, Maugham J. stated as follows at page 206:

"Finally it must be remembered that there may be winding up orders made in the foreign country where the company has carried on business and possesses assets. The view of this court is that the principal winding up should be in the principal domicile of the corporation and that any other winding up order should be ancillary to the principal winding up.

The effect of one winding up being ancillary to the principal winding up has not, I think, been much considered in our courts. This court no doubt holds that in the winding up here all creditors, whether British or foreign, who can prove their debts have equal rights; but it would seem that foreign courts do not always take the same view... .if there are two winding up orders, one here and one abroad, it would seem to be impossible to contend that a foreign creditor is not to be allowed to prove his debt abroad, and, if the lex fori permits it, to bring an action abroad."

It is doubtful whether the following observations of Lord Atkin at page 428 really mean that foreign creditors cannot prove their debts in liquidation proceedings in an English court:—

"But if the corporation does trade here, acquires assets here and incurs debts here we shall not accept its dissolution abroad without a stipulation that if desirable it may be wound up here so that its assets here shall be distributed amongst its creditors (I do not stay to consider whether its English creditors or creditors generally) and for the purpose of the winding up it shall be deemed not to have been dissolved; for that event would defeat our municipal provisions for winding up a corporation."

Some of the learned Law Lords especially Lord Russell of Kilowen and Lord Maugham did not see eye to eye with Lord Atkin in most of the conclusions arrived at by him. In this state of conflicting views expressed by the House of Lords, however much one might have respected the great eminence of Lord Atkin, this court cannot follow preferentially his observations, which are far from being unanimously accepted by the other Law Lords. One finds it difficult to construe the reading of Wynn-Parry J. in In re Suidair Ltd., relying upon the dictum of Vaughan Williams J. in In re English Scottish and Australian Chartered Bank, as tending to take a view that in ancillary liquidation proceedings, a foreign creditor cannot prove his debt. If at all; the learned Judge's observations can be understood as justifying the view that foreign creditors will have the right to prove their debts.

I have already referred to the contention advanced on behalf of the respondent that in cases where a foreign company is carrying on business in India, though its principal place of incorporation is elsewhere, there is only one legal entity and no separate company as such and if there is only one company, the creditors all over the world of such a company are creditors in so far as it carries on business in India and the position of an ordinary creditor is that he can realise the amount due from out of the assets of the company wherever they may be, and whether the creditor can realise his debt depends upon the law of the country where the assets are, i.e., the principle of lex fori determines the method of such realisation.

That a foreign company which does business in England in such a way as to be resident there may be sued there and a writ may be served on its officer there is clear from the decision of the House of Lords in Compagnie Generate Translantique v. Thomas Law and Co., and Indian law as formulated in Section 20 of the Code of Civil Procedure, contemplates such a suit. See also clause 12 of the Letters Patent of the High Court. If a foreign creditor can file a suit for the realisation of the amounts due to him, is there anything which prevents him from applying for liquidation of a foreign company which carries on business in India? In that respect we have to consider Sections 162, 163 and 166 of the Indian Companies Act read with Section 271. Moreover, Sections 169 and 171 of the Act restrain the further proceedings in any suit, or the filing of a suit when there are liquidation proceedings, and therefore if a creditor is prevented from filing a suit, it is contended that in the liquidation proceedings, by the combined application of Sections 169 and 171, he is unable to apply for the payment of the dividends in such proceedings. The further question as to whether a foreign creditor can be deemed to be a creditor within the meaning of the Companies Act can be determined by a reference to various provisions of the Act. Our attention was invited to very many provisions of the Companies Act, Sections 58, 59, 60 and 64, 153, 163,166,167, 169, 171, 173 and 174 as well as to Section 177A onwards. The fasciculus of sections beginning with Section 221 may also be referred to. Section 228 mentions all the debts and does not exclude a creditor resident in a foreign country and Section 271 expressly states that all the provisions in Part V shall apply with the exceptions and additions contained in Part IX. One has necessarily to say that if under Part V a foreign creditor can come in and apply for payment of his debt, then there is nothing to prevent the application of the same law even with respect to winding up proceedings under Part IX.

The entire discussion so far has proceeded upon the likeness and similarity between the provisions of the English law as well as those of the Companies Act and both the learned counsel have conceded that if under the English law it is possible for a foreign creditor to claim payment when a foreign company is wound up in England under the provisions of the English Companies Act, then in India also it is possible. That is why we have taken pains to discuss at some length the various decisions of the English courts as well as the observations contained therein.

Now let us see how the text-book writers in England as well as in India have dealt with the question. In Palmer's Company Law, nineteenth edition, at page 379, in dealing with the question as to who is a creditor, the learned author does not discriminate between an English creditor and a foreign creditor. At pages 379 and 380 the various categories of persons who can claim to be creditors have been enumerated and there is no discussion there that a creditor resident in a foreign country is excluded from consideration. We may also refer to Indian authors such as Ghosh and Venkoba Rao, who also have discussed this question. At pages 353 and 359 of Indian Company Law by Ghosh and at pages 604 and 605 of Indian Companies Act by Venkoba Rao, the question is discussed and nowhere has any of the learned authors attempted, or even suggested, the discrimination of foreign creditors with regard to the winding up of a company under Part IX. Text-book writers on international law such as Cheshire and Dicey have also expressed the opinion from which one can gather the impression that foreign creditors are not excluded.

By way of analogy it will be useful to refer to the position in case of bankruptcy. Where an individual is declared bankrupt and his assets vest in the Official Receiver or Official Assignee, is it open to a creditor in a foreign country to prove his claims in the insolvency proceedings either in England or in India? In this connection it may be helpful to refer to a few passages both in Private International Law by Cheshire (third edition) and Dicey's Conflict of Laws (sixth edition) at pages 632 and 647 in the former and at pages 330, 331 and 809 in the latter. That a foreigner is entitled to prove in an English and an Indian bankruptcy even though the debt which he claims is contracted abroad, is clear from the above citations. That a foreign creditor will be allowed to prove his claim in bankruptcy in England with regard to a debt contracted abroad with the sole restriction that he must bring into account the part of the assets which he has got hold of in a foreign country, as only one estate is being administered, is clear from In re Douglas, Banco de Portugal v. Waddell and Wiskemann, In re. Mellish L. J. at page 494 of In re Douglas observes that it is not a case where there are two distinct estates, one being administered by the law of Brazil and another being administered by the law of England, but that it is a case in which the same estate is being distributed, partly in Brazil and partly in England, but where the Brazilian law says that a certain class of creditors are to have a preference and where the law of England says that all creditors should take equally. In those circumstances Mellish L. J. was of opinion that there was nothing to prevent the application of the common rule that if a creditor comes to take the benefit of the English law and proves against the English estate, he cannot take advantage of the preference that he has received under the law of a foreign state. This decision was approved by the House of Lords in Banco de Portugal v. Waddell. To the same effect are the observations of Lawrence J. in Wiskemann, In re. See also Nelson In re; Dare and Dolphin Ex parte. If further authority on this part of the discussion is necessary, one may also refer to Halsbury's Laws of England, Hailsham Edn., Vol. II, page 278, paragraph 367. It is therefore unmistakably clear that in insolvency or bankruptcy proceedings, a foreign creditor has the right to prove his claim in England or in India, as the case may be, but the only restriction that is imposed upon him is that he should bring into account the assets realised by him in the foreign country. That the principle applicable is the same when the estate of a deceased person is being administered is also clear from authorities. In the administration of the English estate of a deceased domiciled abroad, foreign creditors are entitled to dividends pari passu with English creditors: vide . In re Kloebe Kannreuther v. Geiselbrecht.

Section 153 of the Indian Companies Act deals with compositions and power to compromise with creditors and members during the course of the winding up of a company and Indian decisions are to the effect that in such cases it is open to the foreign creditors also to join in such composition. See the observations of Venkataramana Rao J. in In re Travancore Quilon Bank Ltd., where the learned Judge says that all endeavours should be made, as far as possible, to secure equal distribution for all creditors, British, Indian or foreign. See also Mohan Lal v. Chawla Bank Ltd., and a recent judgment in In re Frontier Bank Ltd. We find observations akin to the above view point in Buckley on the Companies Act, twelfth edition, at pages 404 and 407. The learned author at page 407 refers to New Zealand Loan and Mercantile Agency Co. v. Morrison. We may also refer to various statements at pages 731, 736 and 738.

The preponderance of authority therefore is to the effect that no distinction can be made in the matter of the distribution of assets between a creditor resident in the place where the winding up is going on and a creditor resident abroad. But Mr. Tiruvenkatachari contends that equal treatment can be meted out only if the company is wound up in the place where it has its principal seat and not where an ancillary liquidation, as it were, is being conducted as under Part IX of the Indian Companies Act. Having given the matter our earnest consideration, we find it very difficult to accede to the very ingenious and learned arguments on which Mr. Tiruvenkatachari sought to rest his contention, as he himself stated that the point raised by him is bereft of direct authority: and while it does credit to his ingenuity, we feel constrained to hold that the argument is unacceptable.

We are pressed with passages occurring at pages 333 and 334 of Dicey's Conflict of Laws, sixth edition, where the learned author in rule 56 concerning winding up mentions that the winding up of a company under the Companies Act of 1948 impresses the whole of the property of the company in the United Kingdom with a trust for the application, in the course of the winding up, for the benefit of persons interested in the winding up. The case of a winding up of a company not registered in England, according to the learned author, stands on a different footing. Such a winding up can deal only with the corporate character of the company in England, and it does not appear that in such a case, in the distribution of the effects, any regard can be had to matters affecting the. company outside the United Kingdom. At page 264 it is also stated that the effect of the winding up of such a company by the court is merely to terminate its existence as a company so far as England is concerned. The very learned article at page 31 of the journal portion of [1945] 1 M.L.J. relating to foreign companies deserves a perusal with profit; but even there, in the very exhaustive discussion of the case law we do not find anything definite regarding the question now raised before us. Our attention was also drawn to passages in In re Russo Asiatic Bank, Bank of Ethiopia v. National Bank of Egypt and Liguori and Banco de Bilbao v. Sancha. These authorities recognise that if there is a winding up of the company in the place where it is registered, that is, in the place of its origin, such a winding up will be recognised in other parts of the world. But all these cannot help the elucidation of the question under consideration. The underlying principle in some of the other cases referred to, viz., In re Eastern Telegraph Co. Ltd. and Employers' Liability Assurance Corporation v. Sedgwick Collins & Co. is to the effect that it is the duty of the liquidator to ascertain all the creditors of the company. That being so, it seems to us that even where there is a winding up under Part IX of the Indian Companies Act, the liquidator appointed has to find out the entire body of creditors wherever they may be resident.

We have further to consider another branch of the argument relating to the situs of the debt. It is the contention of learned counsel for the appellant that even if in proceedings for winding up under Part IX creditors resident in foreign countries can be recognized, still their debts should have some relation to the business of the company in India where it is being wound up. In other words, what he contends is that the situs of the debt should not be outside the jurisdiction of the Indian courts. That means that if the debt was incurred by the company for purposes outside India, such a debt cannot be recognised in the winding up proceedings here. Paragraph 779 in Halsbury's Laws of England, Hailsham edition, Vol. IV, dealing with the caption "where company is debtor" wherein occurs an observation that "the company may, however, have localised its obligation to the creditor by the course of its business," and the cases given in the foot note were brought to our notice. The arguments of the learned counsel in the case in In re Russo-Asiatic Bank to the effect that in that particular case, the debt must be deemed to be in Russia for the reason (i) the locality of the debt of a bank with several branches is the place where it is to be discharged; (ii) on the true construction of the documents the debt was an obligation of the head office; and (iii) the contract was made in Russia, and no negotiations were ever carried on through the branch house in London, were sought in aid for the contention regarding the situs of the debt. Though there are stray sentences here and there in the judgment of Eve J. regarding the situs of the debt, it seems to us that there are no explicit declarations which can be considered as a guiding principle in a matter like this in that judgment. Other cases relied upon for this branch of the argument are Rex v. Lovitt, New York Life Insurance Co. v, Public Trustee, a well known case, English Scottish and Australian Bank Ltd. v. Inland Revenue Commissioners, and British Columbia Electric Rly. Co. Ltd. v. The King. In Rex v. Levitt, their Lordships of the Judicial Committee were dealing with the actual situs of the property which consisted of simple contract debts, and as such could have no local situation other than the residence of the debtor where the assets to satisfy them would presumably be. Their Lordships observed at page 219 that although branch banks are agencies of one principal firm, it is well settled that for certain special purposes of banking business they may be regarded as distinct trading bodies. In the well-known case in New York Life Insurance Co. v. Public Trustee, the construction in the Peace Treaty of Versailles regarding property rights and interests of German nationals the point at issue and in the discussion Pollock, M. R., observes at page 111:—

"Then how is the determination to be reached whether they are to be treated as subject to the present jurisdiction, so that it may be said that the debt is due from the plaintiffs as being resident here, inasmuch as the debtors reside both in London and in New York? It seems to me we are entitled, in those circumstances, to look at the terms of the contract, and to determine from them what, for this purpose, is to be the place in which, and at which, the debt would be recoverable."

The case in English Scottish and Australian Bank Ltd. v. Inland Revenue Commissioners, related to the stamp duty leviable on an agreement for sale of simple contract debts owned by debtors resident, abroad and it was held that an agreement for sale of simple contract debts owed by debtors resident out of the United Kingdom is exempt from ad valorem stamp duty in respect of such debts upon the ground that they are "property locally situate out of the United Kingdom". The case in British Columbia Electric Ry. Co. Ltd. v. The King also deals with a matter relating to revenue and the question regarding residence as test of a Canadian debtor. The observations of Viscount Simon at page 537 regarding "who is a Canadian debtor" also deal with the case of an incorporated company, and it is there said that in the case of an incorporated company the test was the place of the incorporation of the company and not its place of residence as understood in the law relating to companies, i.e., the place where the company had its "head and seat". A careful reading of all the decisions above referred to does not show that in the matter of winding up the question as to where the debt was incurred has assumed any importance. If, as we have held, all the creditors of the company have to be recognised as being entitled to be paid out of its assets, the location or the place where the debts were incurred cannot be considered as a prime factor. The situs of the debt becomes important, only with regard to administration and succession. See Dicey's Conflict of Laws, pages ;303 and 307 where the situation of property is discussed.: See also Private International Law by Cheshire, third edition, at pages 595, 597, 599, 602 and 608 and 612.

It was further contended that in fixing the contributories of a company that is being wound up, it is only those who are resident in India that can be made to contribute for the debts and conversely with regard to creditors resident outside, they cannot be entitled to prove their claims here. A judgment of this court in Application No. 1847 in O.P. No. 158 of 1938 as well as the decisions in In re The Indian Companies Act and In re Strauss & Co. Ltd. were referred to. We do not think that anything useful can be derived from these authorities for the determination of the present question. It seems to us that the Privy Council in State Aided Bank of Travancore Ltd. v. Dhrit Ram, while holding that where a bank was incorporated in Travancore and a fixed deposit was made with that bank by a creditor resident in Bombay by remitting the money in the bank's account in another bank in Bombay, the place where the contract was made as well as where the contract was to be performed Was; Travancore and the law of that State governs the transaction, did not lay down that in the matter of a winding up the situs of the debt should be taken into consideration in liquidation proceedings under Part IX of the Indian Companies Act.

It is contended by the learned counsel for the Raja of Vizianagaram that the Belgian company which is the contesting respondent in C.M.A. No. 250 of 1949 the appellant in CM.A. No 103 of 1950 cannot claim either the amount of the principal loan or the interest because the whole liability, if it existed, was barred by limitation. On the other hand, counsel for the company asks us to hold that by various letters and proceedings, the bar of limitation1 is saved and points out that Exhibit P-7, dated 23rd June, 1937; a letter from the Vizianagaram Mining Company to S.A. Beige Miniers et Commerciale, Brussels, Belgium, acknowledges the liability and as such for three years thereafter the claim cannot be barred. In that letter a director in the Vizianagaram Mining Company must be deemed to have admitted the existence of a liability. Therefore we may take it that till 23rd June, 1940, the creditor's claim will not be barred. Exhibit P-14 is a copy of a letter, dated 20th April, 1946, in which the Vizianagaram Mining Company through its director and secretary states that a sum of £9,500 is still subsisting as a loan in the name of S. A. Beige. Miniers et Commerciale. But the hiatus between June 1940 and April 1946 has not been explained. If the claim was barred after June 1940, the fact that there was an acknowledgment of liability in April 1946 will not resuscitate a barred claim because under the Indian law an acknowledgment can be only of a subsisting liability. But it is contended by Mr. Dikshitulu that from June 1940 till 1st April, 1946, Belgium was an enemy occupied country and therefore according to the provisions of Section 3 of Ordinance XXXIII of 1945 the period of limitation is suspended and such being the case the claim is not barred by limitation. Though the liquidation was ordered by this Court on 6th March, 1946, the application was filed on 29th January, 1946, and therefore if at that time the debt was subsisting, then there is no difficulty with regard to the proof of it. The learned District Judge refers to Exhibit P-16 also where the provisional liquidator is said to have acknowledged the liability, but neither Exhibit P-14 nor Exhibit P-15 can revise the liability if it was not subsisting after June 1940. Our attention was drawn to Exhibit P-1 filed in I.A. No. 124 of 1948, dated 6th October, 1944, which is a report of the directors of the Vizianagaram Mining Company for the year ended 31st December, 1943, where among the liabilities there is an entry, "Sundry creditors, London, £ 17,541." We are told that the sum of £ 9,500 is included in this sum of £ 17,541. That is proved by the affidavit of one of the directors. It is further contended that in accordance with the decision in Jones v. Bellyrqve Properties Ltd. such a statement in a balance sheet would be sufficient to save limitation. The learned counsel for the Raja invites our attention to Mitra's Law of Limitation and Prescription, Volume I, page 180, seventh edition, as well as to. a decision of this court in Sundaramma v. Abdul Khadar, to the effect that equitable considerations have no place in considering questions of limitation. It was also argued that even though Belgium became an enemy occupied country from May 1940, still there was a Custodian of Enemy Property in England who could have filed a suit for the recovery of the amounts due in England against the Vizianagaram Mining Company and as such it cannot be said that there was any suspension of limitation by reason of hostilities existing between Germany and England while the former forcibly was in possession of Belgium. The application of Section 3 of the Ordinance XXXIII of 1945 as well as the question whether the claim was subsisting after June 1940 had not received consideration at the hands of the learned Judge. We feel that the question of limitation has to be considered more fully and further points have to be elucidated before the claim is allowed. In such circumstances, it seems to us that the order of the learned Judge in LA. No. 126 of 1948 allowing the claim for the principal of £9,500 cannot be justified. The order of the lower court to the extent of allowing £9,500 is set aside and LA. No. 126 of 1948 is remanded to the lower court for fresh disposal in the light of the observations contained in this judgment. The parties are at liberty to adduce fresh evidence if necessary.

C.M.A. No. 103 of 1950.—Even granting that the claim of £9,500 in not barred by limitation the question still remains whether the appellants are entitled to £3,358 claimed as interest. There is no document produced evidencing an agreement to pay interest; but Mr. Dikshitulu contends that paragraph 1 of Exhibit P-6 wherein a director of the Vizianagaram Mining Company states that interest at the rate of 5 per cent. per annum is payable on a sum of £14,000 fixed as due on 1st July, 1936, shows that there, is an agreement to pay interest. We are not satisfied that the sum of £14,000 referred to therein has anything to do with £9,500 claimed now. The learned counsel has not been able to bring to our notice any other piece of evidence from which it can be inferred that interest at 5 per cent. is agreed to be paid and we also observe that the question regarding interest did not seem to have loomed large in the proceedings before the lower court. Moreover, if during the period when Belgium was under enemy occupation the company could not have sued for the amount due to them as they were detained in enemy occupied country, in the words of Section S of Ordinance XXXIII of 1945, then it stands to reason that the debtor in India could not also have paid the amount to the creditor as the latter was in enemy occupied country. Under such circumstances, it cannot be said that the debtor, who, though he would have been ready and willing to pay the amount still for no fault of his was unable to pay to the creditor, should be mulcted with the liability of interest running against him. This also is a consideration for refusing interest during the intervening period even if there has been an agreement to pay interest.

The other question which Mr. Dikshitulu has argued is that on a proper construction of Exhibit P-12, the agreement between Vizianagaram Mining Company and the S. A. Beige Miniers et Commerciale, dated 31st December, 1930, there is a charge on the ore quarried from the mines for the loans advanced and therefore the company is entitled to a preferential claim on £9,500. The learned District Judge holds that section 109 of the Indian Companies Act is quite clear that every mortgage or charge created after the commencement of the Act by a company be void against the liquidator unless it is registered with the Registrar of Joint Stock Companies. Paragraph 8 of the agreement is in the following terms:—

"The agents undertake to make advances to the company by acceptances on London payable ninety days after date after sales have been effected as desired by them as against stocks of ore ready for shipment and awaiting despatch on the basis of seventy five per cent. of the approximate fee on board value, the property in the ore being thereupon deemed to be transferred to the agents and held in trust for the agents by the company subject to final adjustment of the balance due when shipped."

From this paragraph it is contended that the respondents S.A. Beige Miniers et Commerciale have a lien for all the manganese ore not disposed of at the time of the liquidation proceedings. Our attention was drawn to the various other exhibits, viz., Exhibit P-2, where it is stated that with regard to stocks of ore it is clearly on record that they are held on trust on behalf of the creditor. Relevant passages in Exhibits P-3, P-4, P-5, P-6 and P-7 were also brought to our notice. We do not think that a true interpretation of these documents can show that there is any such charge as claimed. For one thing the charge under Exhibit P-12 is, if at all, only against stocks of ore ready for shipment and awaiting despatch. It is not suggested that at the time of liquidation there was any quantity of ore ready for shipment and awaiting despatch. The clause implies that the quantity of ore must be on the verge of being shipped and be stocked in godowns in a port wherefrom it has to be shipped. There is no such evidence and it is not claimed that there was ore of that description anywhere. That itself would be sufficient to disallow the claim for a charge. Moreover, even if there is a charge, it can only be a floating charge and in view of Section 109 of the Act we have to hold that the floating charge has to be registered.

The learned District Judge was of opinion that every mortgage or charge created after the commencement of the Companies Act by a company will be void against the liquidator and any creditor of the company unless the prescribed particulars of the mortgage or charge together with the instrument, if any, by which the mortgage or charge is created or evidenced, or a copy thereof verified in the prescribed manner, are filed with the registrar for registration in the manner required by the Act within 21 days after the date of its creation. It is urged before us that on a true and proper construction Section 109(1) (e) and (f) of the Act cannot have any application to the facts of the present case and reliance is placed upon In re East Africa Hardware Company where Tendolkar J. held that if the moveable property is stock-in-trade it would not require registration for creating a mortgage or charge. The learned Judge was of opinion that in the punctuation of clause (3) one must read after the word "pledge" a comma in order that the clause may be properly understood and reading in that way, the result would foe that a pledge would not require registration, though a mortgage or a charge on moveable property would require registration provided the moveable property was not stock-in-trade. We feel that the learned Judge's construction of clause (e) is one that does not commend itself to us. The expression stock-in-trade at the end of the clause is intended to govern moveable property of the company referred to earlier. In our opinion what the clause contemplates is that where there is a mortgage or a charge on the stock-in-trade of a company, which is moveable property of the company, such mortgage or charge requires registration. But what is exempted from registration is a pledge of moveable property of the company other than the stock-in-trade. We do not agree with the learned Judge that the preposition "on" alter the word "pledge" is inapposite. Though in common parlance one speaks of a pledge of property, there is nothing incongruous or ungrammatical in saying that there can be a pledge on property. The word "pledge" connotes possession as well as right and in both cases the preposition "on" cannot be said to be inaccurate. The clause is not so inartistically worded as Tendolkar J. seems to think. In our opinion, where stock-in-trade is made the subject of a mortgage or charge it should be registered. Otherwise the result would be incongruous that a company can create a mortgage or a charge over its stock-in-trade without registration and registration will be necessary if it has to create a charge over other moveables. In any event the parties, if they intended to create a charge could not be said to have done so by Exhibit P-12 and the correspondence, on any property in existence at the time Exhibit P-12 was executed, What was contemplated was that there should be a floating charge on the mineral ore made ready for shipment and awaiting shipment. That substance was to come into existence on a future date and not on the date of Exhibit P-12. Such being the case, the charge that was intended to be created was a floating charge and would necessarily require registration under Section 109 (1). The meaning of the expression "stock-in trade" as contained in Stroud's Judicial Dictionary, second edition, Volume III, at page 1940, was referred to for the purpose of showing that the manganese ore in question cannot come within the term "stock-in-trade." In our opinion, if the Vizianagaram Mining Company has any stock-in-trade at all, it can only be the manganese ore or other mineral ore quarried from the mines. It is not suggested that the company was incorporated for any other purpose or, that after incorporation, it was doing any other category of business. We have no hesitation in holding that the mineral ore would come within the meaning of the term "stock-in trade."

Section 277-D was also relied upon to show that no registration is necessary. In view of our interpretation of Section 109 (1) (e) and (f) we cannot say that Section 277-D takes away the compulsory nature of the registration.

The above discussion proceeded on the footing that Exhibit P-12 is a valid and concluded agreement between the parties, but Mr. E. Venkatesam for the Official Liquidator contends that Exhibit P-12 has not been signed by anyone on behalf of the company but that it is a unilateral document to which only the Belgian Company's representative has affixed his signature. The Official Liquidator was of opinion that the agreement cannot be accepted as a concluded contract between the Vizianagaram Mining Company and the fifth creditor, the appellant in C.M.A. No. 103 of 1950. He has given various reasons for holding that it is not a completed contract. While not disagreeing with the Official Liquidator in his conclusions, we do not wish to rest our decision on the basis that Exhibit P-12 was a unilateral transaction to which the Vizianagaram Mining Company was not an assenting party, because the subsequent correspondence between the representative of both the companies shows that there was an idea of some kind of a charge being created. For the reasons given above, it seems to us that C.M.A. No. 103 of 1950 has to be dismissed, but in the circumstances without costs.

C.M.A. No. 80 of 1948.—In this appeal the Raja of Vizianagaram contends that he is entitled to the payment of rents and royalties reserved by the three lease deeds, Exhibits P-1.P-2 and P-3, in full in respect of the charge after 29th January, 1946, being the date of the commencement of the winding up, and distraint should be allowed for that purpose. In I. A. No. 225 of 1946, from out of which this appeal arises, the learned District Judge has held that the lessor is entitled to re-enter, i.e., the Official Liquidator will not sell any leasehold right as being an asset of the company but the actual re-entry will be postponed for a period of six month's or until further orders till the Official Liquidator completes the liquidation. With regard to the right of pre-emption claimed, that was also allowed. The Official Liquidator has allowed a sum of Rs. 10,695 being the arrears of rent on buildings at Kodur at Rs. 280 per mensem from January, 1943, till 6th March, 1946 and this has been confirmed by the District Judge. The Official Liquidator also allowed royalties for the year 1943-44 to the tune of Rs. 3,111-4-3 and Rs. 1,307-6-0 respectively. On this also there is no dispute. The two other amounts, Rs. 6,709-1-0 and Rs. 5,026-2-10 allowed by the Official Liquidator are also not disputed. But what is claimed in this appeal is that the royalties for the year 1945 have not been allowed as well as the rent for the buildings at Kodur at the rate of Rs. 280 from the date of the liquidation till the date of surrender of those properties. The Official Liquidator holds that he is not liable to pay cents on bungalows subsequent to the winding up order on May 6, 1946. The learned District Judge has not dissented from that view of the Official Liquidator. In our opinion the Raja of Vizianagaram is entitled to claim the rents for the buildings at Kodur at the rate of Rs. 280 per mensem from 6th March, 1946, till the date of the actual surrender. In this matter the Raja's claim is that of a landlord of a building in which the winding up process of the company is going on. He is exactly in the same position as the landlord of a building leased out to a company where the liquidator functions. We are therefore of opinion that the Official Liquidator must pay the Raja of Vizianagaram rent for the building at Rs. 280 per mensem from 6th March, 1946, till the date of surrender. Section 230 of the Act cannot deprive the Raja of his right to be paid rent up to the date of surrender. Mr. Venkatesam contends that with regard to the royalties for 1945 the books of the company were inspected by the Raja's agents and they were not able to find out that any minerals were quarried during that period and as such in the absence of any work having been turned out, the Raja was not entitled to any royalty. Mr. Rami Reddi for the Raja is not able to controvert this statement and therefore we are not in a position to say whether any royalties were due to the Raja for the year 1945. If the Raja is able to show hereafter that there was any working during 1945, then he is entitled to claim royalty on that account also. Exhibits P-1, P-2 and P-3 do not show that there was any rent reserved for the working of the mines except the royalty. With regard to the claim of the Raja to distraint, we agree with the learned District Judge that he is not entitled to distraint. The result is that subject to the modifications with regard to the rent on the buildings at Kodur subsequent to 6th March, 1946, and the claim for royalty for the year 1945, if it is proved, on the other points decided by the District Judge we see no reason to differ from the District Judge. This appeal, subject to the above modification, is dismissed. Each party will bear his own costs.

CM.A. No. 251 OF 1949.—What is contended here is that the District Judge should have allowed the proof in respect of Rs. 1,13,035-3-0 and Rs. 86,673-6-9 which are purported to have been written off by the Court of Wards. The learned District Judge held that the Court of Wards had the power according to Section 35, to make remissions of rent or other dues for the advantage of the ward or for the benefit of the ward and the action of the Court of Wards in writing off these amounts is binding on the Raja of Vizianagaram. Nothing has been proved to our satisfaction that the action of the Court of Wards is prima facie in derogation of its powers. The learned District Judge has held that it is open to the Raja to file a suit against the Court of Wards for a declaration that its action will not be binding on him and if he succeeds he may prove his claim for those amounts in the liquidation proceedings. Without establishing that the action of the Court of Wards is ultra vires and not binding on the ward, the Raja is not entitled to claim the amounts in liquidation proceedings. We agree therefore with the District Judge that the Raja cannot be allowed to prove the amounts in these proceedings. In our opinion the proper procedure for the Raja to take is, if so advised, to file a suit for a declaration against the Court of Wards after due and proper notice as laid down by law and implead in such a suit, the Official Liquidator after getting the permission of the court which has seisin of the liquidation proceedings. If in such a suit, a declaration that the writing off of these amounts was without jurisdiction and was therefore ultra vires is obtained, it would be binding on the Official Liquidator as well, he having been made a party to that suit, and in that case the Raja can prove the amounts and claim them from the Official Liquidator. We do not think that it is possible to do any thing more in this appeal which is dismissed. There will be no order as to costs.

C.M.A. No. 252 of 1949.—In this appeal, Arthur Stanley Lindley, the petitioner in the lower court, claimed a sum of £ 746-1-2 as being due to him and the question here is one of Imitation. The lower court has held that it is included in the item of £ 4,897-7-7 relating to sundry creditors as contained in the balance sheet Exhibit P-1. In Jones v. Bellgrove Properties Ltd., the Court of Appeal held that where a balance sheet presented to the shareholders at an annual general meeting of a limited liability company signed by the chartered accountants, etc., contained the statement "to sundry creditors £ 7,638 6s. 10d." and it was proved by a witness from the firm of chartered accountants which had signed the balance sheet that the debt of £1,807 owed by the company to the plaintiff was included in the sum of £7,638 6s. 10d. stated in the balance sheet to be due to sundry creditors, the balance sheet contained an acknowledgment to the plaintiff in writing signed by the agents of the company that the debt of £ 1,807 at the date of the annual general meeting remained unpaid and due to the plaintiff. Therefore by virtue of Sections 23 and 24 of the Limitation Act, 1939, the debt was held to be recoverable. Mr. Tiruvenkatachari contends that this decision should not be applied and is erroneous. On the other hand Mr. Rajah Aiyar contends that the observations of the Privy Council in Maniram Seth v. Seth Rupchand are to the effect that the provisions of the Limitation Act in England regarding acknowledgment are more stringent than what they are in India. We have not been shown any reason why the judgment of the Court of Appeal should not be followed by us. From the affidavit submitted by John Hawkins it is clear that £746-1-2 is included in the debts due to sundry creditors. In these circumstances we feel that the decision of the District Judge is right and this appeal is dismissed with costs.

As we have held that foreign creditors are entitled to prove their claims in proceedings in liquidation under Part IX of the Companies Act, CM.A. No. 249 of 1949 has also to be dismissed but in the circumstances without costs. In all these appeals, the Official Liquidator is entitled to reimburse himself of all expenses incurred by him out of the estate. The fee of the advocates for the Official Liquidator in all the appeals together is fixed at Rs. 1,000.

Chandra Reddi J.—I have had the advantage of perusing the judgment prepared by my learned brother, Govinda Menok J. which is thorough and exhaustive and I entirely agree with his conclusions. But having regard to the importance of the main question raised in these appeals, 1 would like to add a few words. The facts leading up to these appeals are contained in the judgments of my learned brother. However, I shall briefly refer to them to appreciate the main question involved in these appeals.

A company called the Vizianagaram Mining Company was incorporated on the 8th December, 1894, in England under the old English Act, the object of the company being to mine manganese ore and some other minerals in India. For this purpose, the company took on lease large extents of land from the Raja of Vizianagaram in the Vizagapatam District. As required under Part X of the Indian Companies Act, its principal place of business in India was shown as the Kodur Mines, Vizagapatam District. The Raja of Vizianagaram subsequently took some shares in the company and thus he became not only the lessor of the company but one of the shareholders therein. As the concern does not seem to have turned out to be a profitable one and the company was not in a position to pay either the rents to the lessor or its creditors, the Court of Wards on behalf of the present Raja of Vizianagaram filed O.P. No. 25 of 1946 in this court on 29th January, 1946, for the winding up of the company and the same was ordered on 6th March, 1946, and the Official Receiver of Visakhapatnam has been appointed the Official Liquidator of the company. Thereafter it was transferred to the District Court of Visakhapatnam for further proceedings. Subsequently on an application, LA. No. 732 of 1950, it was re-transferred to this court In the winding up proceedings, all the available assets of the company in India were sold and a sum of about two lakhs of rupees was realised.

In these proceedings, the foreign creditors of the company, most of whom are either the respondents or the appellants in these appeals, also filed proof of their claims before the Official Liquidator. The Raja of Vizianagaram, who is one of the creditors of the company in respect of the various transactions, objected to the claims of the foreign creditors being entertained on the ground that the present liquidation is only for the benefit of Indian creditors and that the foreign creditors are not entitled to prove their debts in this liquidation. The Official Liquidator overruled this objection and allowed the foreign creditors also to prove their claims.

Thereupon, the Raja of Vizianagaram filed an application under Section 183 of the Indian Companies Act and rule 87 of the Indian Companies Rules, Madras, 1940, in the Court of the District Judge, Visakhapatnam, for expunging the proof of all the foreign creditors and for deleting their names from the certificate of the Official Liquidator filed under rule 90 of the Indian Companies Rules in the Court of the District Judge at Visakhapatnam. The learned District Judge, agreeing with the view taken by the Official Liquidator that the foreign creditors are entitled to participate in the assets of the company in India, dismissed the application filed on behalf of the Raja of Vizianagaram. It is not necessary here to state the extent of the claims of the foreign creditors allowed either by the Official Liquidator or by the District Judge.

It is against that order of the District Judge that the Raja has filed C.M.A. No. 249 of 1949. He has also filed other appeals against the order of the District Judge disallowing claim for the rents, etc., written off by the Court of Wards during their management and some other sums claimed by him. I will now confine myself in these appeals to the question whether the foreign creditors can prove their debts in this liquidation.

The main argument advanced by Mr. Tiruvenkatachari, learned counsel for the appellant, is that a winding up of an unregistered company under Part IX of the Indian Companies Act is a winding up only for the benefit of the Indian creditors and that the creditors who are not resident in India are not entitled to share in the assets of the company. The main grounds on which this contention is rested are that since the provisions of Part IX of the Indian Companies Act have a limited territorial application to foreign companies and are not enforceable beyond the Indian Union, and the courts in India have no jurisdiction either to realise the assets of the company outside India or over the foreign contributories, it is but reasonable and equitable that the assets of the company in India should be limited to the Indian creditors of the company. According to him, if the foreign creditors are allowed to get a dividend here, that would militate against the principle of equality which underlies the scheme of the Bankruptcy Act as well as of the Companies Act. It is urged by him that while the creditors of Indian nationality are precluded from proving their claims in the liquidation of the foreign concern in the country of its domicile or to take any other appropriate proceedings in respect of the balance of amount due to them, the foreign creditors, if allowed to prove their debts here and get a dividend, could proceed against the foreign company and its assets elsewhere which amounts to an invidious distinction between the two sets of creditors. It should therefore be held, argues Mr. Tiruvenkatachari, that the liquidation of the company in India is for the benefit of the local creditors only.

According to him Part IX of the Indian Companies Act creates a new statutory entity so far as the Indian branch of the foreign company is concerned and the winding up can only be in regard to the working of the company in India as under Sections 270 to 276 of the Companies Act it is treated as a separate concern.

The answer given by Mr. Rajah Aiyar, the learned counsel for some of the respondents, is that for all purposes there is only one company, that there could not be as many companies as there are branches and that the winding up proceedings of one of the branches would not have the effect of making that branch a separate legal entity. He maintains that the acceptance of the right of the foreign creditors to file proof of their debts would not in any way militate against the principle of equality and that, on the other hand, to deprive them of their right to get back the amounts advanced by them would be inequitable and unjust. He contends that a creditor irrespective of his nationality can realise his debt from the assets of the company wherever they may be, the mode of his realisation depending upon the lex fori of the country in which these assets are situated. There is no disability, according to him, attaching to the Indian creditors to prove for the balance of their debts in the liquidation proceedings of the foreign concern or to file a suit in England for the debt due to him and obtain a decree.

I have now to consider which of the two contentions should prevail. In my opinion, though this question is bereft of authority, it does not present much of difficulty. The point that falls to be decided is whether the winding up of an unregistered company which is incorporated in a foreign country is a proceeding relating to an independent entity in which the Indian creditors alone can prove their debts. To substantiate his contention, Mr. Tiruvenkatachari has relied upon some decisions of English courts and of Indian courts and upon the provisions of Part IX and Part X of the Indian Companies Act.

It is necessary for me at this stage to examine the decisions placed by him before us. The learned counsel submitted that the view that such a winding up creates an independent and separate legal entity has been gaining ground in England as disclosed in the recent decisions of English courts and that the view, that the winding up proceedings of an unregistered company incorporated in a foreign country is ancillary to the liquidation of the parent company, taken earlier by English courts did not meet with approval in the later decisions.

In In re Maiheson Brothers Limited, the question was whether an English court had jurisdiction to wind up a concern incorporated in New Zealand and having a branch in England. Kay J. held that though, having regard to the principles of international comity, the English court would have great regard to the winding up order made in the country of domicile and be mainly influenced thereby, the existence of the winding up of the parent concern did not take away the jurisdiction of the English court to make a winding up order in En-land. The observations of the learned Judge at page 231 are apposite:—

''……….I consider that I am justified in taking steps to secure the English assets until I see that proceedings are taken in the New Zealand liquidation to make the English assets available for the English creditors part passu with the creditors in New Zealand."

In In re Commercial Bank of South Australia, a similar question arose, and there also it was held that the fact that at the time when the petition for winding up the English branch of the Commercial Bank of South Australia incorporated in Australia was filed, winding up proceedings in respect of the main concern were pending in Australia, would not affect the jurisdiction of the English court within whose jurisdiction the branch is located. But the learned Judge, North J., expressed the opinion that the winding up in England would be ancillary to a winding up in Australia and that there should be no conflict between the two courts and that due regard should be had to the interest of all creditors and all contributories.

The procedure to be followed in the case of a winding up of a company, with branches in foreign countries, in the country of its domicile, is laid down by Vaughan Williams J. in In re English Scottish and Australian Chartered Bank, as follows:—

"……… In construing the statute, one must bear in mind the principles upon which liquidations are conducted, in different countries and in different courts, of one concern. One knows that where there is a liquidation of one concern the general principle is—ascertain what is the domicile of the company in liquidation; let the court of the country of domicile act as the principal court to govern the liquidation; and let the other courts act as ancillary, as far as they can, to the principal liquidation."

In this case the Australian voters were admitted to vote with other creditors. Mr. Tiruvenkatachari has called into aid the following observations of the learned Judge in that case, in support of his contention:—

"It seems to me that the right course to take under the section may vary according as the court has to deal with a principal or ancillary liquidation. According to my view, I have here to deal with a principal liquidation, and, that being so, I am bound to make provision for creditors in all parts of the world coming in and being heard if they think fit."

I do not think that these observations can be interpreted to mean that in the case of an ancillary liquidation the assets of the branch or the assets in that liquidation should be limited to the creditors of that country.

The principle that the liquidation of an unregistered company should be treated as ancillary and the courts dealing with it should act in aid of the liquidation of the company in the country of its incorporation which is the principal liquidation is recognised also in North Australian Territory Co. v. Goldsbrough Mort and Co. and also in In re Federal Bank of Australia Limited.

In New Zealand Loan and Mercantile Agency v. Co. Ltd. x. Morrison the main question that arose was whether an ''arrangement" made under the Joint Stock Companies Arrangement Act and agreed to by the statutory majority of the creditors in the winding up of an English company having a branch in Victoria would bind a non-assenting creditor who has filed a suit against the company in Victoria to recover a loan advanced in Victoria to the company and whether such a scheme of arrangement was a bar to his action in Victoria. Dealing with that question Lord Davey observed that all the creditors of a company are entitled to be summoned to any meeting ordered by the court and to participate therein and that the words ''all creditors" refer to the creditors not only resident in the United Kingdom but in the colonies or in foreign countries.

The views of Maugham J. in In re Vocation (Foreign) Limited may be referred to usefully. There, a company incorporated in England which was carrying on business in Australia also was ordered to be wound up. An English creditor who had a claim against an Australian branch filed a suit in Australia. The question arose whether the creditor should be restrained from proceeding with his suit. In dealing with that point, Maugham J., at page 207, after stating that it has been the view of the English courts that the principal winding up should be in the principal domicile of the company, and that any other winding up is ancillary to the principal winding up, states,

"The effect of one winding up being ancillary to the principal winding up has, I think, been much considered in our courts. This court no doubt holds that in the winding up here all creditors, whether British or foreign who can prove their debts have equal rights."

Further down in the same page, it is observed:—

"If there are two winding up orders, one here and one abroad, it would seem to be impossible to contend that a foreign creditor is not to be allowed to prove his debt abroad and, if the lex fori permits it, to bring an action abroad."

It looks to me that the principle deducible from these decisions is that, in the winding up of a company, all the creditors have to be treated alike irrespective of their nationality.

I will now examine the rulings cited to us by Mr. Tiruvenkatachar as marking a change in the approach to this question. Reliance was placed by him on the speech of Lord Atkin in Russian and English Bank v. Baring Brothers & Co. There, their Lordships of the Privy Council had to consider whether a suit could be filed in the name of a foreign company which after carrying on the business in England was dissolved in the country of its domicile and was wound up as an unregistered company in England, to recover a debt due to the company in England, at the time of its dissolution and still unpaid. The majority of the Lords, Lord Blanesburgh, Lord Atkin and Lord Macmillan took the view that such a suit could be maintained despite its dissolution, while Lord Russell of Killowen and Lord Maugham held otherwise. The relevant portion of the speech of Lord Atkin relied on by Mr. Tiru-venkatachari which is at page 428 is as follows:

"But, if the corporation does trade here, acquires assets here and incurs debts here, we shall not accept its dissolution abroad without a stipulation that, if desirable, it may be wound up here, so that its assets here shall be distributed amongst its creditors (I do not stay to consider whether its English creditors or creditors generally) and for the purpose of the winding up, it shall be deemed not to have been dissolved; for that event would defeat our municipal provisions for winding up a corporation."

I think these observations cannot lend themselves to the interpretation that the foreign creditors cannot participate in the dividends. They only indicate that the question was left open.

In re Banca Commerciale Italiana, the Banca Commerciale Italiana which was a bank established under the laws of Italy was carrying on banking business in England also. The English branch of the bank was directed to be wound up by an order made under the Defence (Trading with the Enemy) Regulation?, 1940, It was held there that the winding up order under the Regulations created a new entity which can take into consideration its assets and liabilities in England only. But this case does not afford us any help as the liquidation was under the Defence Regulation of 1940 which has specifically provided for such a procedure.

In In re Suidair Ltd, Wynn-Parry J. laid down that although the court of the country of domicil acts as the principal court to govern the liquidation and the other courts act as ancillary to the principal liquidation, the desire to assist in the main liquidation should not make the court acting as the ancillary to give up the forensic rules which govern the conduct of its own liquidation. The passage on which reliance was placed by the counsel for the appellants occurs at page 924:

"It appears to me that the simple principle is that this court sits to deal with the assets of the South African company which are within its jurisdiction, and for that purpose administers, and administers only, the relevant English law—that is, primarily the law as stated in the Companies Act, 1948, looked at in the light, where necessary, of the decided cases. If that principle be adhered to, no confusion will result. If it is departed from, I cannot see any other result would follow than the utmost possible confusion."

We do not think that this statement of law enunciated by Wynn-Parry J. in any way supports the contention urged by Mr. Tiruvenkatachari. Nor does the decision of Venkataramana Rao J. in an unreported case in Application No. 1897 of 1939 (In re Liquidation of the Travancore National Bank) lend any support to the argument of Mr. Tiruvenkatachari, where the learned Judge confined the list of contributories to those in British India.

Another decision cited to us by Mr. Tiruvenkatachari in support of his arguments is In re Travancore Quilon Bank Ltd. There, the learned Judge laid down inter alia that, though the principal domicile of the bank was Travancore, the courts in the State of Madras, which had seisin of the liquidation proceedings of the Madras branch which is an unregistered company, to which Part IX of the Indian Companies Act was applicable, had complete control over its own liquidation according to its lex fori, and could pass an order of winding up which would secure its assets in British India and for the benefit of the British Indian creditors. Mr. Tiruvenkatachari maintained that this statement of law substantiates his contention that the liquidation of an unregistered company should be confined to the assets and liabilities over which the courts in British India have jurisdiction. We are not able to accede to this. That it was not the intention of the learned Judge that the foreign creditors should be excluded from participation in the assets of an unregistered company is clear from a passage which occurs at page 325:

"A separate order for winding up will be passed in this court for the purpose of having control over the British Indian assets in the interests of the British Indian creditors and this court will not permit a foreign court in any way to interfere with the just rights of the British Indian creditors and the endeavours will be as far as possible to secure equal distribution for all creditors, British India or foreign. The underlying principle seems to be one of co-operation based on the essential principles of justice and equity".

A reference to the relevant passages in the standard books on company law has convinced us that there is no basis for a distinction based on the nationality of a creditor as sought to be drawn by the learned counsel for the appellants, that is, between the creditors of the company resident within the jurisdiction of the court over the unregistered company and its foreign creditors. At page 409 of Buckley on the Companies Acts, 12th edition, under the topic 'Class of Creditors', it is stated that,

"Foreign or colonial creditors (in the sense in which these words are used above) may of course come in and prove; and as against the assets within the jurisdiction, they may, upon the principles above suggested, be bound by the scheme."

Palmer in his book on Company Law (19th Edition by Topham) says at page 379 that any person to whom money is due by a company is a creditor entitled to present a petition for the winding up of the company. This view seems to be shared by the other writers on the subject.

The passages referred to above seem to negative the contention put forward by Mr. Tiruvenkatachari.

As I have already pointed out, Mr. Rajah Aiyar contended that in the case of a company like the present there is only one legal entity and not as many companies as there are branches in foreign countries and that a creditor who advances money to the company expects to be paid out of its assets wherever he may be, whether the creditor can reach the assets of the company at any particular place depending upon the law of the country where those assets are to be found. As substantiating this proposition he placed reliance upon a decision of the House of Lords in Compagnie Generate Transatlantique v. Thomas Law & Co. There, a French company formed under the French law with its head office at Paris which was doing part of its business in England in such a way as could be said to be resident in England was sued in England for enforcing a claim for damages. It was held, affirming the decision of the Court of Appeal, that such an action was maintainable in England. No ruling was cited to us which has taken a contrary view.

There can be no doubt that the law is the same in India. The relevant provision of law is enacted in Section 20 of the Civil Procedure Code which provides that, "a corporation shall be deemed to carry on business at its sole or principal office in British India or, in respect of any cause of action arising at any place where it has also a subordinate office at such place." It is clear that under the Civil Procedure Code of India a suit could be filed by a creditor against a foreign company which is carrying on business in the Indian Union. That being so, can it be said that a person who can enforce his claim against an unregistered company is precluded from proving his debt if the affairs of that company are wound up? That such a creditor can present a petition for winding up an unregistered company is seen from Sections 162, 163 and 166 of the Indian Companies Act. Though these provisions of law are contained in Part V of the Companies Act, by virtue of the provisions of Section 276 of the Companies Act all these provisions of Part V relating to the liquidation of companies are applicable to an unregistered company also. It cannot with any reason be postulated that a creditor who could enforce a claim against an unregistered company and could also apply for its liquidation, is precluded from proving his debt the moment that company's affairs are wound up. It has also to be noted that by reason of Sections 169 and 171, a creditor is prevented either from filing a suit or from continuing it if he has already filed it the moment the company is liquidated. It follows that if a creditor is prevented from pursuing his remedies against the company by the intervention of its liquidation, he would be entitled to prove his claim in liquidation, and the winding up cannot be to his disadvantage. Further an examination of relevant sections of the Companies Act shows that no such distinction between the creditors resident in India and foreign creditors as sought to be made on behalf of the appellants is contemplated under the Act. It is not necessary to refer to them in detail. Suffice it to say that the scheme of the Act seems to be to treat all the creditors alike irrespective of their nationality.

In reaching a conclusion on this question, I think the principle laid down in the following cases with regard to the proof of debts in bankruptcy is a valuable guide: Graham v. Chambell, Banco de Portugal v. Waddell and Wiskemann, In re. The rule of law stated in these decisions is that a foreign creditor can prove his debt in bankruptcy irrespective of his nationality subject to the condition that he must bring into the estate whatever dividend he has received elsewhere. (Vide also Halsbury's Laws of England, 2nd edition by Hailsham, page 278, paragraph 367) The same statement of law is contained at page 808 of Dicey's Conflict of Laws, 6th edition, where the learned author says that a foreigner proving (e.g., for a foreign debt) stands in the same position as does an English creditor proving for an English debt. To the same effect is the passage in Private International Law by Cheshire. At page 647, it is stated that a foreigner could prove his debt in an English bankruptcy in spite of the debt having been contracted abroad, and that he is in the same position as the English creditor in all matters concerning the administration of the estate. I think there is no difference between the English law and the Indian law in this respect. I feel that the principle governing the proof of debts by foreign creditors in the bankruptcy proceedings is applicable to that of the winding up proceedings also, 1 have therefore arrived at the conclusion that a foreign creditor is as much entitled to a share in the assets of an unregistered company in liquidation as a creditor resident in the country where the unregistered company is situated, the nationality of the creditor not making a point of difference.

Alternatively, it was argued by Mr. Tiruvenkatachari that the situs of the debt not being in India, a foreign creditor cannot prove his debt in the liquidation of an unregistered company. According to him, unless the debt has some relation to the business of the unregistered company in India the foreign creditor cannot claim to participate in the assets of an unregistered company in liquidation.

For the position that a debt is capable of local situation Mr. Tiruvenkatchari referred us to a number of decisions of English courts and to passages in Cheshire's Private International Law and Dicey's Conflict of Laws. But I think the question of situs of a debt has not much of a bearing on the point whether a foreign creditor is excluded from participation in the assets of an unregistered company which is wound up. I think it is in connection with administration and succession actions that the situs of a debt has relevancy. In Cheshire's Private International Law, it is stated at page 595, "The fact, however, that a debt possesses a definite situation for some purposes does not necessarily imply that its assignment should be governed by the lex situs."

Even apart from that, the provision of law enacted in Section 20 of the Civil Procedure Code is an answer to the argument based upon the situation of the debt. In this view of the matter it is not necessary for me to refer to the various decisions cited to us by Mr. Tiruvenkatachari on the question of situs of debt.

For the feregoing reasons, the contention urged on behalf of the appellant that the proof of debts of the foreign creditors should be expunged is not acceptable to us. I entirely agree with my learned brother in his conclusions in other respects.