TMI Blog1980 (6) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... , on September 9, 1973. They were created by deposit of title deeds on August 30, 1973, one in favour of "Victory " for Rs. 88,167 17 covering 40 acres of coffee plantation and some other land, and the other, in favour of the 2nd respondent for Rs. 22,855 46 covering over 16 acres of land in Ernad Taluk. The liquidator's case as set out in the application is as follows: It was from the Registrar's office and from the statement of affairs filed by two of the former directors of the company that he came to learn about the mortgages in question. The former managing director had stated that respondents Nos. 1 and 2 had advanced some amounts to the company between 1969 and 1972 and that the mortgages were created when legal action was threatened. Two of the former directors of the company were also directors of Victory. The 2nd respondent himself was the managing director of Wandoor Jupiter till March 30, 1972. The company had a large number of other creditors. The creation of the charges in favour of a former managing director and in favour of Victory managed by him just one month before the commencement of the winding-up was an attempt to secure debts which remained unsecured all al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese were assigned to the other creditors under similar circumstances. Respondents Nos. 1 and 2 were not recipients of undue favours. The company was in solvent circumstances at the time the advances were made. It had a fixed deposit of Rs. 1 lakh in the bank, and a fleet of 20 cars. It had opened new branches thereafter and it had also an ambitious project to start a scooter tyre factory investing Rs. 25 lakhs. The company was solvent even at the time the mortgages were executed. The liquidator filed a reply affidavit asserting that there was nothing in the records of the company to show that any request as alleged was made on April 2, 1972, or that any payment was made on April 5, 1972. The company was also not empowered to borrow such a huge sum. The mortgages were not registered within 30 days of their creation and their registration itself was, therefore, invalid. The company was in insolvent circumstances at the relevant period. On the above pleadings, the following issues were framed : (1) Whether the documents impugned in the application violate section 531 and/or 531A of the Companies Act ? (2)Whether the respondents were creditors of the company and if so for what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n with a view to screen the assets from the liquidator. If it is seen that the attempt has been to shield the assets against the claims of creditors in general, or to derive an undue advantage for the transferor or the transferee, suggesting that such a transaction could not have been entered into in the ordinary course of business, the transaction will be annulled. The law of insolvency recognises a higher title in favour of the official assignee or receiver than the insolvent himself, so that the former could impeach transactions which the latter himself could not have, had he not been adjudged insolvent. The same rule applies to companies under sections 531 and 531 A. To establish fraudulent preference under section 531, it is not enough to show that preference was shown to a particular creditor; it must also be shown that it was done "with a view" to give him favoured treatment. The dominant motive attending the transaction has to be ascertained and if it is tainted with an element of dishonesty, questions of fraud arise. A probe into the debtor's mind, an assessment of the various motives that animate human conduct, is thus involved ; and as pointed out by Lord Greene M.R. i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ictory was a creditor of the company to the tune of Rs. 52,735 as per the sundry creditors' ledger for the year ending December 31, 1972 ; and in para 5 of the reply, it is also admitted that the 2nd respondent was likewise a creditor for Rs. 70,809 45. He, however, is not sure of the correctness of the relevant entries ; but Ex. P-9 letter, and the entries in the other books made available are sufficient to hold that some amounts were due to the respondents at the relevant time. It is unnecessary to determine what amounts were actually due, since no outright conveyance requiring an investigation into the adequacy of consideration, is involved. If the transaction is avoided, the liabilities will remain as provable unsecured debts, the extent whereof will be decided by the liquidator in appropriate proceedings, and if the charges are held to be valid, then again a separate adjudication of what is due to the respondents will be necessary. It is enough for the present to hold, under issue No. 2, that the respondents were creditors of the company at the relevant time. On the question whether the mortgages were otherwise validly created the first contention of the liquidator is that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstance that the registering authority himself had not declined registration on any such ground. Section 132 itself stipulates that the Registrar's certificate "shall be conclusive evidence" that all the requirements of the statute have been complied with. Exhibits D-12 and D-13, the memoranda evidencing deposits of title deeds, 'were admitted in evidence subject to the liquidator's objection that they were not registered ; and Sri. T.V. Ramakrishnan contends, on the basis of the Supreme Court's decision in United Bank of India Ltd. v. Lekharam Sonaram Co., AIR 1965 SC 1591, that if they are inadmissible for want of registration under the Registration Act, the transaction itself cannot be proved by oral evidence. In other words, he contends that no equitable mortgage as contemplated in law was created on August 30, 1973. It is settled law that where title deeds are handed over with an intention to create security, the law implies a contract of mortgage without anything more. But where titles are handed over along with a written bargain, the bargain must rule if it is an integral part of the transaction. When the parties intend to reduce their bargain into writing so that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber, 1972. There was a board meeting on March 30, 1972, during which the resignation of the 2nd respondent from the office of the director and managing director was accepted ; and the next recorded board meeting was on April 15, 1972. The minutes of these two meetings do not disclose that any loan was applied for or obtained. Nor does Ex. P-2, day book, show that such advances were received from respondents Nos. 1 and 2. The ledgers (p. 50 of Ex. P-4 and p. 2 of Ex. P-6) also do not reflect receipt of any such amounts. In the normal course of business when a company with a paid up capital of only Rs. 49,000 applies for and obtains a loan of this size from the respondents who were its major creditors even otherwise, one should expect some record of the transaction; but none is there. Again, the 1st respondent is said to have paid over Rs. 70,000 in cash on April 5, 1972. Normally companies do not make such payments in cash. Exhibit D-20 cash book of Victory no doubt shows a payment of Rs. 70,252 74 to the company on April 5, 1972, but this entry follows two other entries made on April 6, 1972. Many of the pages in this book are seen to be so written up as to leave sufficient spac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... office of Victory was also situated in the Jupiter buildings till at least September 29, 1972 ( see p. 47 of Ex. D-10). Thus, the two companies had a common founder, the same managing director till March 30, 1972, and a few directors in common all the while. Their offices were housed in the same building for long, and the last managing director of Jupiter continued to be a director of Victory till the equitable mortgages were created on August 30, 1973. The respondents' case that the mortgages were created when the company was threatened with civil and criminal action when its cheques for interest were dishonoured, does not stand close scrutiny. If the advances were made on the footing of the letter dated April 2, 1972, that letter itself contained an offer to give adequate security "Depositinde urappilaikku madiyaya lakshyangal tharukaiyum chaiyum": if any security is required for the deposit I will also give it. So that there was no need to administer a threat more than a year later for that purpose. That apart, Victory's board resolution dated April 29, 1972 ( see Ex. D-10) records a decision "to receive necessary documents for the security of the deposit" and another "to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the effect that it would give a mortgage over 65 acres of coffee estate at Kalpetta and another 16 acres of land at Wandoor. Then comes Ex. D-l, said to be a copy of the resolution passed by Jupiter on August 20, 1973, authorising Sri. K.P. Damodaran Namboodiri to create the mortgage in favour of respondents Nos. 1 and 2. Three title deeds were to be delivered to the first respondent-company to secure the principal of Rs. 70,254-74 and interest thereon, totalling Rs. 88,167-17, and one was deliverable to the 2nd respondent to secure the principal amount of Rs. 22,855'46. (The 2nd respondent was apparently not keen to get interest at 18%) The above is seen followed by a board resolution of Victory (at p. 63 of Ex. D-10) taken on August 25, 1973, authorising the 2nd respondent to receive deposit of the three title deeds at Trichur, in consultation with the advocate, Sri. M.S. Kartha of that place. Exhibits D-l2 and D-l3, memoranda of deposits, were then apparently drawn up at Trichur on August 30, 1973. According to R.W. 1, the directors of Wandoor Jupiter were lax in the matter of furnishing the requisite particulars under section 125, and he, therefore, had to take the initiati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions ; but even ignoring them, what is the picture one gets ? On April 5, 1972, when more than Rs. 45,000 were already due to it, the 1st respondent made a further advance of over Rs. 70,000 to the company making use of almost the last paise it had by way of liquid resources (the bank balances at the time stood at Rs. 207 as per Ex. D-20); and the 2nd respondent, to whom more than Rs. 70,000 was due, also made a further unsecured advance of Rs. 22,000 odd. The arrangement was that interest would be paid every month, but nothing was paid till a solitary cheque for Rs. 5,000 was issued in February, 1973. All that the 1st respondent had done in the meanwhile was to take a decision in December, 1972, to get certain decrees assigned, and another decision in March, 1973, to acquire 40 acres of rubber estate, and that too at the "request" of the borrower. Exhibit D-11 undertaking of June, 1973, related only to the debts due to the 1st respondent : the 2nd respondent had apparently done nothing even by that time to seek security for the amount of more than Rs. 1 lakh due to him. He had not even issued a notice of dishonour in connection with Ex. D-7 cheque. The understanding to give and ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll readily infer that the intention of the debtor is to prefer the creditor." When Ex. D-5 letter of the debtor is read along with Victory's board resolution dated April 29, 1972, a promise to give security at the request of the creditor is clearly deducible; and when the debtor actually executed the charge just a month before commencement of winding up, at the request of the creditor, the ingredients of the above rule seem to be fully satisfied, unless other circumstances are brought out. Pressure or threat will be some of the "other circumstances", but I have already found that such things were absent in this case. A bona fide hope that keeping good faith would bring in further advances may also be a relevant circumstance, as pointed out in F. L. E. Holdings' case [1967] 1 WLR 1409 ; [1968] 38 Comp. Cas. 214 (Ch D); but that again cannot be inferred when the case actually set up by the creditors is different, and in view of the admitted circumstance to be presently noticed, that the company had actually folded up its activities within a week of the execution of the mortgages. The inference to be legitimately drawn, therefore, is that the equitable mortgages were given with an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the books produced also, the picture one gets is of a company moving into the twilight zone even by the end of 1972. As against an interest receipt of Rs. 28,218 during seven months of 1970, the figure came down to Rs. 6,514 for the whole of 1972, while interest payments mounted from Rs. 5,668 to Rs. 63,172 for the same periods ( see Exs. P-7 and P-8). A fixed deposit of Rs. 1 lakh available on January 1, 1972, was completely eaten up by the end of 1972 (see pp. 48 and 49 of Ex. P-7). The bank balances as on December 31, 1972 (in six separate accounts) stood at the miserably low figure of Rs. 15,000 odd, as against sundry creditors' liabilities alone, running into lakhs. The paid up capital which stood at Rs. 49,000 on December 31, 1971, was raised by Rs. 12,000 during 1972 by allotting 90 shares to one Padmanabhan Namboodiri and 30 shares to one M.C.S. Nair, appointing them at the same time as directors on monthly remuneration of Rs. 750 each (see pp. 90 to 92 of Ex. P-l and p. 29 of Ex. P-7). On April 19, 1972, the directors decided to sell the company's vehicles "one by one", and four of them were actually sold in 1972. On December 8, 1972, the board resolved, "to take loans f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors at a time when the company was unable to pay its debts as they became due from its funds." The second is that some of the entries in the books referred to in para 24 above have not been got explained through P.W. 1 who produced them. This witness had stated more than once that he was in charge of the work relating to winding up the company, that he had examined its books in that connection, that the petition itself was prepared on the basis of the data gathered from them, and that they disclosed that the company's financial position was bad in 1973. And when those books are produced to substantiate the said case, with an opportunity to the respondents to challenge the data and the inference drawn from them, I think it is legitimate for the court to take note of them. P.W. 1 is only an employee of the liquidator's office, and the records in question were not being maintained by him. They were being maintained by the company in the usual course of business, and the respondents themselves have been relying on them for other purposes. It is also useful to add that the records referred to include many produced by the respondents themselves. In my view, the following conclusions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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