TMI Blog1961 (9) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... arly, a second deed of floating charge, exhibit A-15, was executed by the bank on August 20, 1953; but, by that date, actual loans advanced on various occasions after the first floating charge aggregated to only a sum of Rs. 1,53,000; A pronote for that sum was executed on that date. Thereafter, between August 22, 1953, and September 1, 1953, further sums aggregating to Rs. 46,000 were advanced. Thus, the total advances under the second' deed of floating charge aggregated to Rs. 1,99,000. He therefore, claimed in his affidavit the entire principal sum of Rs. 3,99,000 together with interest up to date as a secured creditor of the bank. The other creditors of the company disputed the legality and validity of the alleged floating charge, and consequently, his status as a secured creditor. In view of this dispute, the official liquidator by his Application No. 26/1954 sought for an order from the court adjudicating upon the claim of the respondent for a charge for his debt on the assets of the bank. This application came up for hearing before Viswanatha Sastri J., who after considering the claims of the parties and the evidence on record, passed an order on August 10, 1956, holding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ters. They, however, submitted their arguments in the matter. The only question for determination is whether the secured creditor is entitled to interest subsequent to the date of the order of winding up of the bank which is January 19, 1954. There are no express provisions in the present Companies Act. We have therefore to look into the old Act (VII of 1913). Section 229 of this Act reads thus: "In the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and to debts provable and to the valuation of annuities and future and contingent liabilities as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent; and all persons who in any such case would be entitled to prove for and receive 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 by virtue of this section." On the clear language of this section, the relevant provisions of Insolvency Act shall govern the position with regard to the rights of secured and unsecure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constitutes a debt provable in insolvency. His debt does not become provable under the Insolvency Act until he brings himself within any of the three categories in section 47 of the Provincial Insolvency Act. So long as he does not choose to come in by adopting one of the courses in section 47, he is outside the Act. Till then, he can neither claim any benefit nor suffer from any disadvantages under the Act. He will not be entitled to any share in the dividend under section 47(6). He will not be subjected to the baneful effect of section 44(2). Thus, a secured creditor's rights under the contract are safe so long as the security is sufficient to meet his full demand. But if there is any deficiency, unless he comes in and proves his claim for the balance he may not get anything. Such being the position in law, the secured creditor hardly comes in under bankruptcy when the security is sufficient to pay his claim in full. Of course, notwithstanding the same, he has a right in law to come in for it is open to him to relinquish his security for the general benefit of the creditors and prove for his whole debt. But, usually he may feel inclined to come in only if the security is insuffic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter was submitted for adjudication to the court, it was in fact found that only a part of his debt was a secured debt, that, as regards the other part, he was only an unsecured creditor. He was brought on the schedule of creditors and his debt as an unsecured debt became provable within the meaning of section 34 of the Provincial Insolvency Act. The question then is, whether the debt, as a secured creditor, had also by his conduct become provable within the meaning of the Insolvency Act so that he (the respondent) may be deemed to have come under insolvency. The definition of the term "secured creditor" as in section 2(1)( e ) is to be understood as confined to his capacity as regards the secured debt only and not comprehending his capacity as regards debts for which there is no security at all. So then, when a creditor combines in his dual capacity, his capacity as a secured creditor should not be mixed or confused with his capacity as an unsecured creditor. Under section 47 of the Insolvency Act, the debt of a secured creditor does not become provable unless has adopts any of the methods in section 47. The learned counsel contends that none of the three courses prescribed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmined and the nature of which had also been brought in dispute. Besides, as an unsecured creditor, he had to bring his debt necessarily on schedule and comply with section 49 read with sections 33 and 34. The unsecured debt was indeed a provable debt in the insolvency but not the secured debt, unless the provisions of section 47 are complied with. The participation of the respondent then in the proceedings of the insolvency court is either to get his status determined or to prove his unsecured debt. His right as a secured creditor must remain unaffected by the order of adjudication under the clear provisions of law. Notwithstanding adjudication, he had still power to deal with his security without coming in under insolvency, for then, he will not be proving in bankrupt's estate. What is vested in the court of official liquidator by reason of adjudication is only the equity of redemption. So, then, if the respondent had accepted the payment of Rs. 2,00,000 from the official liquidator in part payment of his security, he cannot be deemed to have forfeited his right, as a secured creditor, to rely on his security for payment of the balance. He will yet remain outside the insolvency a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reditor in the insolvency proceedings held that a secured creditor was entitled to look to the security to realise the amount of the debt secured thereon and that, therefore, the secured creditor was clearly entitled to receive out of the sale of the mortgaged property his principal, interest and costs. He was entitled to receive interest up to the date of payment. The next case cited is of the Oudh Chief Court in Sharfuzzaman v. H. Hunter AIR 1930 Oudh 20 but this is a case where the secured creditor had come in under section 47(1). The learned judges differed from the rule laid down in Quarter Maine's case [1892] 1 Ch. 639, wherein it was held that the theory in bankruptcy is to stop all things at the date of the bankruptcy and to divide the wreck of the man's property as it stood at that time, on the ground that section 48 was not intended to apply as a restriction on the amount of balance due under section 47. They held that interest due after the date of adjudication cannot be excluded from the balance amount provable. With respect, I cannot agree with this proposition. Chokkalinga Mudali v. Manickka Mudalir AIR 1942 Mad. 273 is an authority for the proposition tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manifest, therefore, in the matter of interest, secured creditors who rely on their security stand on a different footing from the unsecured creditors unless they choose to compete with the unsecured creditors. D. F. Mulla in his book, The Law of Insolvency in India (second edition), at page 430, states the law thus: "That in the bankruptcy proceedings interest accruing after adjudication was not admitted to proof, and this is still the general rule. To this rule there are two exceptions, one where the debt is payable at a future date with interest, and the other where there is a surplus. The reason why interest accruing after adjudication is not to be admitted to proof is that the theory in bankruptcy is to stop all things at the date of bankruptcy, and to divide the wreck of the man's property as it stood at that date." Buckley on the Companies Acts (13th edition), at page 628, has stated thus: "There is, however, one case where interest accruing after the commencement of the winding up can be proved for, namely; when a debt is payable at a future date with interest in the meantime and the winding-up commences before the future date has arrived. In such a case, the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest as provided by the Act and this will go to the coffers of the insolvent. The expressions "payment in full" and "with interest as provided by the Act" used in this section 35 also refers to payment in full which should in the context mean nothing but payment in accordance with the contract rate. In other words, it means payment of principal and also of interest in full according to the contract rate. The scheme of the Act thus contemplates payment of claim in full with interest if the assets are available. That is the reason why section 48(2) refers to the right of a creditor to receive out of the debtor's estate interest at a rate higher than 6% to which he is entitled under the contract, provided the assets are available after the debts proved, are paid in full. The expression "debts proved" implies the principal plus interest up to the date of adjudication at the contract rate. Thus, if there be surplus, the creditor will be entitled not merely to interest of 6% from the date of adjudication as provided in section 61(6) but to a higher rate to which he is entitled under the contract. In this way, section 61(6) read with section 48(2) makes it abundantly clear that the r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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