TMI Blog1963 (2) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... emplating to set up. The Government, however, did not themselves grant, the loan but agreed to stand as guarantors in respect of secured loan if granted by the Bank of Mysore on certain terms and conditions. The conditions on which the Government agreed to guarantee the loan are set out in an order of the Government bearing No. D. 8925-7 dated June 16, 1949. Omitting the preamble, which is of no relevance, the operative portion of the order read as follows : "After carefully considering the request of the management of the Kapila Textiles Ltd., the Government are pleased to direct as follows: (1)If the Bank of Mysore grants a loan to the company at a rate of interest not exceeding 4 per cent. to be repaid after a period of two years in equal instalments during the next four years on the security of all the assets of the company, the Government may agree to guarantee the repayment of the loan according to the terms arranged by the Bank of Mysore. (2)The company should agree to the Government's proposal that the assets of the company should be free from all encumbrances except to the extent secured by the Bank of Mysore. (3)The company should agree to the payment of a furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Government of Mysore be paid a half per cent, per annum on the loan as service charges, on sums as may be outstanding from time to time." The Bank of Mysore agreed to grant the loan but with some variations regarding the terms, particularly on the question of rate of interest. Whereas the Government in their order cited above stipulated a rate of interest not exceeding 4 per cent. per annum, the bank stipulated a rate of 1 per cent, above the rate of the Reserve Bank of India. The necessary documents of loan were later executed by the company in favour of the bank on October 31, 1949. The documents were two in number a registered simple mortgage in respect of lands and buildings for a principal sum of two lakhs of rupees and a deed of hypothecation of movables for a principal sum of eight lakhs of rupees. Before these deeds were executed, the board of directors adopted a further resolution by circulation on October 26, 1949 (which was later confirmed at the meeting held on November 23, 1949). to the effect that the common seal of the company be affixed to the mortgage deed and other documents to be executed in connection with the loan of ten lakhs of rupees to be grante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the company in favour of the Government in regard to the payment required to be made to the Government under clause (3) of the Government order dated June 16, 1949, or agreeing to act upon other conditions and stipulations made by the Government in the said order. No such document was produced either before the liquidator or before me during the hearing of this application. In the proof first presented to the liquidator the amount claimed was Rs. 69,097.03. Later, however, the amount was reduced to Rs. 62,817.01 by producing an affidavit in which it was admitted on behalf of the Government that after enquiry they had discovered that the following five payments had been made to the credit of the Government either at the District Treasury at Mysore or the Taluk Treasury at Nanjangud, by the company: Rs. As. Ps. 30-9-1954 1,260 1 6 16-12-1954 1,246 9 3 17-5-1956 1,249 1 3 16-7-1956 1,260 4 6 24-1-1957 1,263 12 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... latest such acknowledgment being by letter dated 19/21st July, 1958. He also thought that having regard to the provisions of section 13 of the Mysore State Aid to Industries Act, 1951, there could be no guarantee beyond the maximum period of ten years stipulated in the section. The other reasons stated by him are that according to clause (3) of the Government order dated June 16, 1949, the payment was intended to be in the nature of service charge and that the Government cannot in any event claim that they have rendered any services after the presentation of the petition to wind up the company and that by reason of the Government's failure or default to take any steps to enforce payment or to enforce what he calls "penal clauses" by taking over the management, etc. , it was not equitable on the part of the Government to make this claim at this stage. It has been contended on behalf of the applicant the Government before me that these reasons stated by the liquidator are neither sound nor sufficient to reject their claims. It seems to me that the reasons stated are either weak or actually irrelevant. The Government have taken steps, by extending the guarantee period (if at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment. In contrast, we may notice that so far as the bank is concerned, the directors took all steps to execute the documents and also take power to affix the seal of the company to the contracts they wore going to enter into on behalf of the company with the bank. The Government, while they issued a formal letter of guarantee to the Bank of Mysore do not appear to have obtained any document from the company or its directors in regard to the payment of guarantee commission. It has, therefore, to be held that there is no proof of a completed agreement or contract between the company and the Government undertaking this recurring future liability of having to pay guarantee commission which the Government may enforce. No attempt has been made before me to question the correctness of this conclusion. The argument, however, has been addressed on behalf of the applicant the Government that though there is no such written contract, the company must be taken to have accepted that liability by conduct. The only conduct relied upon is the payment of guarantee commission from time to time right up to January, 1957. It is therefore necessary to assess the legal effect of this conduct. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re that the only amount out of the claim made by the Government which can be admitted is the said amount of Rs. 17,048.25 nP. The next question is whether the Government is right in claiming preferential payment in respect of this amount. The claim is made on the basis that the amount due to the Government falls under clause ( a ) of sub-section (1) of section 530 of the Companies Act as being in the nature of revenue due to the Government. That it is of such a nature is sought to be made out in the following manner : By the notification under section 22 of the Mysore State Aid to Industries Act, 1951, published in June, 1958 (copied above), the guarantee given by the Government was treated as aid given under the said Act. According to section 7 of the Act, "aid" includes aid extended to an industry by guaranteeing cash credit, overdraft or fixed advance with a bank. Section 19(1) reads as follows : "19. (1) All moneys payable under this act, including any interest chargeable thereon and costs, if any, incurred, if not paid when due, may be recovered from the person aided and his surety, if any, under the law for the time being in force, as if they were arrears of land reve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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