TMI Blog1968 (8) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1967. 4. 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, of 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. 5. The liquidator made a report to that effect which was filed into this court on 26th October 1967. 6. When the report was first posted for orders before me , Mr. K. Srinivasan took notice on behalf o 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 creditors 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. 12. 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. 13. To the said application objections were filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 67. 17. 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 rupee to ten lakhs of rupee on the company agreeing to secure due repayment of the same by mortgaging its immovable properties, viz., lands. mills, buildings, etc., and also agreeing to certain further conditions enabling the bank to keep a close watch over the working of the company and the handing 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 provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 inn the mill premises locked and retained possession of the bank. 21. 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 hypothecation claimed by the bank in valied for contravention of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided : Where a winding up order has been made..... the liquidator ........ shall taken into his custody or under his control, all the property effects and actionable claims to which the company is or appears to be entitled. 26. 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 to its liabilities. 27. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 32. 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 proceedings 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. 33. This objection is therefore overruled. 34. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igned 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 or them. 38. 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 pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of all items of machinery spares machine parts, implements and tools, as forming put of their security it should deliver to the liquidator all articles of furniture. 42. 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. 43. 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 provision for redemption. The provision for redemption is contained in clause 3, which reads : If upon such demand as aforesaid the mortgages 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 recovery the said land hereby con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gagors as well as the right to sell and realise all the properties and assets mortgagors to the lenders here under 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 power of sale and realisation under the foregoing provisions 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. 47. 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 as the sureties. The personal covenant inn clause I is an undertaking by both the company as well as 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he argument is not acceptable because the terms Hindu Muhammadan, Buddhist are 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 property and could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not in dispute. The only controversy is in regard to inferences property available from the said facts and their legal effect. 59. Portion 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 directors of a public company, or of a private to 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 form 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. 60. The facts are the following:-On 27th September, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. 62. 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 ₹ 7,00,000 from the Bank of Maharashtra Ltd. The said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than 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 hypothecation. He also suggested 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 transaction by the company agreeing to the amendment of the articles of association under th resolution, exhibit P-1(b). 65. 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, 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. 70. 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 work 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. 71. Now, to understand the effect of the above judgment of Giffard I., 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 th e 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 inn 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the contingencies in which th 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 . 75. 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. 76. It cannot therefore be contended that the company has disposed of the whole or any part of its undertaking understood in the correct sense. 77. THere is , however, only one clause which appears to be our of tune with that I have stated above, and that is clause 5(1) of the deed of mortgage, exhibit R-15. The effect of that clause is to empower the bank not merely to take possession as mortgage for the purpose of realising its dues from out of the 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 appears to me that the said clause is invalid, because to permit the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. start form page no. 489. (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. 80. In both these applications the parties will bear their own costs. 81. The judgment in the case cited at P.474 supra is printed below as an Appendix.] Appendix Mysore OFFICIAL LIQUIDATOR HIGH COURT OF MYSORE V. T. MUNISWAMY ACHARY AND OTHERS A. Narayana Pai J. March 17, 1967 Company Petition No. 10 of 1963. JUDGMENT Narayana Pai, J. 82. As there were many persons from whom moneys were due to the company the liquidator under my direction originally took out notices to all such debtors under section 477 of the companies Act which were dealt with under single Application No. 26 /1965 Majority of the debtors served wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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