TMI Blog1961 (3) TMI 146X X X X Extracts X X X X X X X X Extracts X X X X ..... ut of the Receiver's collections deposited to the credit of the suit. This application was opposed by the assignee decree-holder who had by then come upon the scene on the ground that the income from the hypotheca collected by the Receiver formed accretions to the hypotheca, and that such income was liable to be proceeded against in case the corpus was insufficient to satisfy the mortgage decree in full. The Collector of Tiruchi contended that the amount due to the Government by way of Income Tax levied on the judgment debtor was a Crown debt, the payment of which can be enforced with a right of priority over other unsecured debts which may be owing by the assessee to others. The learned Subordinate Judge of Tiruchirapalli following the decision reported in paramasivam v. Ramaswami, AIR 1933 Mad 570: ILR 56 Mad 915 (FB), held that, though the mortgagee decree-holder can proceed against the income realised by the Receiver only after exhausting his remedies against the hypotheca, the Government will have no right to proceed against such income at the present moment as the mortgage debt still remains undischarged. The learned Subordinate Judge was of the opinion that the G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged properties and to collect the rents and profits thereform. The receiver realised from the charged property a sum of ₹ 3.100 and deposited it in court. The third defendant in the suit was assessed to Income Tax, and a sum of ₹ 30,000 was due from him by way of arrears of Income Tax levied. The Income Tax Officer, Tirunelveli, applied in E. A. No. 423 of 1956 to the Sub Court, Tirunelveli, for the payment out of this sum of ₹ 3,100 in court deposit towards the adjustment of the tax liability of the third defendant. Plaintiffs 1 to 3, the decree-holder, objected to this payment out and resisted the application. Plaintiffs 1 and 2 themselves filed E. A. No. 350 of 1955 on 18-10-1955 for the issue of a cheque for the sum of ₹ 3,100 in their favour on the ground, that the receiver's collections should ensure in their favour. The application was opposed by the Income Tax Officer, Tirunelveli, who, as stated already, claimed the amount of ₹ 3,100 in court deposit as due and payable to the Government which had a priority right in respect of the said amount. These two applications were heard together by the learned Subordinate Judge of Tirunelv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment is one for recovery of the amount of Income Tax levied and due and payable by the assessee who is the judgment debtor in civil actions instituted against him by his other creditors. Such tax liability is undoubtedly a debt due to the Government by the subject on whom the tax has been imposed, and such a debt often goes by the name of a crown debt . A debt due to the Sovereign Government of the land carries with it a paramount preferential right to recover and realise the debt from the person liable to pay, the claim of the other creditors being postponed till after the Sovereign authority obtains payment in full. It is now settled law that the Crown or the Sovereign authority over the territory has priority, over creditors of equal degree, to payment out of the assets of a debtor which are distributed by a Receiver or an administrator. It is an 'incontrovertible rule of law that where the King's and the subject's title concur the King's shall be preferred . In re, Henley and Co. (1878) 9 Ch. D. 469; The King v. Wells, (1812) 16 East 278. (7) This rule may be said to be the outcome of the maxim salus populi suprema lex ; (Regard for the public welfa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be entitled to apply to the court for an order directing its debt to be paid out of monies in court belong to the debtor without having to file a suit. In that case one Manickam Chettiar obtained a money decree against one Govinda Rao, and in execution thereof attached and brought to sale some moveable properties belonging to the judgment debtor The judgment debtor was in arrears in the matter of payment of Income Tax levied upon him and the Income Tax Officer applied to the executing court under S. 151 C.P.C., for an order directing the payment out to him from the sale proceeds, after the sale had taken place, of the amount due by the judgment debtor for arrears of Income Tax. The Full Bench held that the Crown was entitled to priority in respect of arrears of Income Tax due to it, and the demand of the Income Tax officer was not open to question. It was contended before the Full Bench on behalf of Manickam Chetir, the decree holder who was pitted against the claim of the Income Tax Officer, that the attachment effected on the property brought to sale in execution of the decree placed him in the position of a secured creditor. This contention was negatived in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditor cannot put forward any special right in preference to other simple money creditors of his debtor. In this view of the matter any debt due by the debtor to the Crown will of court have priority over the claims of all the other creditors of the debtor inclusive of the creditor who made the properties custodia legis by the appointment of a receiver in enforcement of a mortgage or charge over the corpus of the properties. But if it were to be held that a receiver appointed at the instance of a mortgagee or charge holder in the course of his realisation of any amount due under a mortgage or charge functions only for the benefit of the mortgagee or charge holder and that the rents and profits emanating from the huypotheca and the charged property are also stamped with security in favour of the creditor he alone will be entitled to appropriate and adjust them towards his dues even in preference to a Crown debt, as the Crown has no priority over the secured claim against the debtor. (11) We shall first refer to the decisions cited at the Bar before dealing with the question of the legal effect of the appointment of a Receiver in an action to enforce a mortgage or a charge. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rents and profits by the mortgagor and to prevent the mortgagor from exercising any right or control over them. The sequestration of the income from the properties for the reach of the debtor cannot by itself transform its character or create new or fresh rights in respect of them in favour of persons who had no antecedent rights before the appointment of the receiver. At page 444 (of ILR Rang) : (at p. 323 of AIR) the learned Chief Justice observed further as follows: ...... I am disposed to think that the appointment of a receiver by the court under Or. 40 rule 1, in no way diminishes or enlarges the title to the property which comes into his possession so far as the person otherwise entitled to it is concerned. It follows, therefore, that the sums of money in the hands of the receiver are not sums payable to the mortgagor, but form part of the mortgaged property upon which the debt due to the mortgagee was secured. All the observations of the learned Chief Justice in the Rangoon case were made in a context where the rents and profits realised by the Receiver were, by the express agreement between the parties, constituted as part of the security. (14) In Rameshwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : (at 546-547 of AIR). We are of opinion that there has been no change in his position in relation to the receiver at the instance of the first mortgagee. If neither the second mortgagee nor the mortgagor is entitled to question the propriety of the order for appointment of the receiver, the circumstance that the equity of redemption has been transferred from the mortgagor to the second mortgagee cannot place the latter in a position of advantage. In his character as purchaser in execution of his own decree, he is as much bound by the order for the appointment of the receiver as the mortgagor. If the mortgagor had made an application to the court to modify the order for the appointment of the receiver and had attempted to intercept the profits, no court would have listened to him; the second mortgagee does not now stand in a different position. This is indeed the ratio of the decision of the Calcutta High Court, and this was enough for the actual decision in the case. But the learned Judges however observed thus at page 422 (of ILR Cal) : (at p. 546 of AIR) : Our attention ahs been invited to the case of Penney v. Todd, (1878) 26 WR 502, where it was ruled that the po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inasmuch as a receiver was appointed at his instance in his mortgage suit and as such the income from the properties should as such the income from the properties should be considered to be earmarked for his own use. The Official Assignee resisted the claim of the Maharajah and contended that with regard to the income the Maharajah had no preferential rights and that his rights to it are only the same as those of the ordinary creditors. Madhavan Nair, J., upheld the claim of the Maharajah and directed payment out in his favour. At p., 572 (of ILR Mad): (at., 628 of AIR), the learned Judge observed thus: Since the receiver in this case was appointed at the instance of the petitioner and since be was not able to realise his decree amount by the sale of the mortgaged properties, it must be held that he is clearly entitled to proceed against the income in the hands of the receiver as one if the steps for realisation of his security. At page 573 (of ILR Mad): (at. 629 of AIR), The right of an equitable mortgagee to get a receiver appointed in a mortgage suit having been extended to a simple mortgagee, neither of them having any right to possession of the properties, I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s execution sale. The appellant applied to the court below for payment out to him of that part of the amount paid by the receiver into court attributable to the properties purchased by him on the ground that the ownership of the income was incidental to the ownership of the income was incidental to the ownership of the property. This application s was rejected by the court below and the correctness of this decision was challenged in the appeal. This court confirmed the order of the court below. At page 549 (of ILR Mad) : (at p. 294 of AIR) Venkatasubba Rao, J., observed thus: The effect of the order appointing the receiver was to deprive the mortgagor f his right to deal with the income. It was in order to safeguard the respondents' position that the receiver was appointed. The mortgagor could not defeat the order by assigning the profits to a third party. Could he have, for instance, by private transfer, assigned the income to the appellant? Of course, not. What the appellant purchased was no more that the right, title and interest of the mortgagor. But the latter himself has no right to dispose of the income. The order operated to take away that right, which otherwise, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defendant in the suit, out of which the Letters Patent appeal arose, executed a deed of mortgage in favour of one Krishna Pillai on 30-5-1924 for ₹ 20,000. Krishna Pillai died and in the family arrangement entered into after his death between the members of his family, the mortgage document was allotted to the share of the plaintiffs and the 7th defendant in the suit. The third defendant in the suit was the son of the purchaser of the properties from defendants 1 and 2, the owners of the hypotheca under a sale deed dated 23-2-59. Under that sale deed he undertook to pay the sum of ₹ 24,500 towards the mortgage debt. He offered to pay the said amount in full discharge of the mortgage, but the plaintiffs refused to accept it on the ground that more money was due to them. The result was the amount remained unpaid. On 29-9-1930 a preliminary mortgage decree was passed in favour of the plaintiffs. The total amount declared to be due to the plaintiffs was very nearly the sum of ₹ 37,000. In August 1931 the plaintiffs applied for the appointment of a receiver of these suit properties on the ground that the properties were not of sufficient value for discharging th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f property are an accession to the property and proceed out of it. (19) The simple mortgagee is, as observed by the learned Judge, not entitled to recover possession of the mortgaged property from the mortgagor. The security of a simple mortgagee ins only that of the property hypothecated and not the rents and profits therefrom. If so much is clear, we are unable to understand how the profits of property can at all be described as accession to the property by reason only of the fact that they emerged from out of the property. The second reason given by the learned Judge was thus set out by him at page 927 (of ILR Mad) : (at p. 574 of AIR): If a decree is promptly passed and the property is sold, the amount realised by the sale goes to the benefit of the mortgagee and from the time he receives the amount he gets interest on it. But instead of the sale promptly following the suit if there is delay, during all the time the sale is delayed the mortgagor will be enjoying the profits of the property which would have been enjoyed by the mortgagee in the shape of interest on the mortgage money if there had been an early sale. The profits of the property correspond to the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to agree with this observation. A receiver can be appointed under the provisions of the Civil Procedure Code even during the pendency of the suit long before the stage of execution is reached. Where a receiver is so appointed even before the passing of the decree it cannot be a mode of execution. Assuming however that though a receiver is appointed before the passing of the decree the adjustment of the income realised towards the decree can appropriately be called a step in execution or a mode of execution, the learned Judge failed to keep in mind the fact that a simple mortgagee who had lost his personal remedy and who had no security over the rents and profits of the hypotheca had no right to realise the rents and profits in execution of the mortgage decree. A simple money creditor however stands on a different footing. He can proceed against all the assets of the judgment debtor as long as such assets are available for him to be proceeded against. Any comparison between a simple mortgagee who has lost his personal remedy against the mortgagor and a simple money creditor may not be quite opposite in considering the question either of the propriety of appointing a receiver i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decree, but the proceeds of the sale were not sufficient to cover the amount due under the mortgage. Between the date when the receiver was appointed and the date upon which the sale took place the receiver collected ₹ 5,067-12-0 as rents and profits due and owing in respect of that period from the tenants of the property. That sum was less than the amount due under the mortgage after deducting the proceeds of the sale of the property. The mortgagee applied for an order that the sum in the possession of the receiver should be allocated to him. The mortgagor opposed the application and the question was whether the mortgagee was entitled to the amount. The Division Bench of the Rangoon High Court held that, apart from the express agreement a mortgage by deposit of title deeds does not possess as part of the interest that is transferred to him under the mortgage the right to possession of the property or the right to the rents and profits accruing thereform during the subsistence of the mortgage. But nevertheless the learned Judges upheld the claim of the mortgagee to appropriate the sum in the hands of the receiver to the balance of amount due under the mortgage decree. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on the lands and deposited the value of the proceeds into the court. The appellant contended that the title to the lands vested in him from the date of the sale, 15-4-1929, that the gathered crops did not form part of the mortgage security and that therefore he was entitled to the sum in court deposit. This contention was however repelled. The learned Judges followed the decision of the Full Bench in ILR 56 Mad 915: AIR 1938 Mad 570 and observed as follows: .... the only practicable principle seems to be that all proceeds from the land realised after the receiver takes possession are to go to the credit of the mortgage debt and are not the property of the mortgagor or of the purchaser of the equity of redemption, although he may have raised them. (26) In Khader Mohideen v. Nagu Bai, ILR 1939 Mad 496: AIR 1939 Mad 402 the question for consideration was whether the holder of a money decree or an equitable mortgagee had a preferential right in the profits of the mortgaged properties where a receiver had been appointed at the instance of the holder of the money decree in execution proceedings and also appointed to act in a suit instituted by the mortgagee to enforce his mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... else. According this interpretation it follows that the mortgagee-decree-holder in ILR 54 Mad 565: AIR 1931 Mad 626 was in the position of a secured creditor as against the Official Assignee... In a case where the mortgagee can obtain a personal decree against the mortgagor once the hypothecate is exhausted and found deficient to satisfy the mortgage decree in full, the order of the appointment of a receiver and the perception of the rents and profits from the hypothecate though his medium may be treated as an order of attachment before judgment which can avail the creditor once the personal decree is passed. IN this view of the matter the observation of the learned Chief Justice is not explicable. The view of Madhavan Niar, J., that very much would depend upon the terms of the order appointing the receiver is unexceptionable. (28) In AIR1940Mad703 , a receiver was appointed over the mortgaged properties n an action to enforce a simple mortgage. An amount was due from the mortgagor to the Government in respect of kudimaramath which had accrued due before the appointment of the receiver. The Collector filed an application praying the court to pay the money due to the Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was whether a Crown debt for Income Tax due by mortgagor is payable on the application of the Income Tax Officer in priority out of the rents and profits collected by a receiver appointed in a simple mortgage suit filed by the mortgagee. Mack, J., held that although such rents and profits can be held by the mortgagee in priority to other simple creditors, they cannot be appropriated by the mortgagee in priority over a Crown debt. At page 498 (of in priority over a Crown debt. At page 498 (of Mad LJ): (at pp. 198-199 of AIR) the learned Judges observed thus: The rents and profits collected by a receiver appointed by a court cannot strictly be regarded as property charged with the debt. Wadsworth, J., took the view that the court gave preference to the mortgagee over the simple creditors, merely by way of justice and equity, to ensure that the mortgagee shall not be damnified by the protraction of the suit. I find it difficult to accept this as the basis for giving preference to the mortgagee over simple creditors, in view of the mortgagee being more often than not responsible for his own difficulties, in not suing on his mortgage earlier and h is not bringing the property to qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e whom the application was made ordered payment out. The correctness of this order was questioned before the Andhra High Court and a Division Bench of that court consisting of Subba Rao, C.J., as he then was, and Jagan Mohan Reddi, J., set aside the order of the court below and negatived the claim of the State. After a review of all the cases referred to above Subba Rao, C.J., observed thus: The law on the subject may now be summarised. An appointment of a Receiver in a mortgage action to collect rents of the mortgaged property and deposit the same to the credit of the suit is one of the equitable modes of proceeding against the mortgaged property itself. On the making of that order, the mortgagor is deprived of his right to possession and to collect the rents. Thereafter neither the mortgagor nor persons claiming under him such as the purchaser or a mortgagee of the equity of redemption can have a higher right than the mortgagor himself. So too, all creditors, who have no prior mortgage or security over the property, can claim to have a right to the amounts realised so far as the said amounts were necessary to discharge the mortgage debts for, in the case of unsecured credito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lish law is the history of the interaction of the forces of the Common law, equity and statute. The ancients knew only of two kinds of mortgages, one by which the lender got possession of the property of the debtor with the stipulation that the rents and profits should go in reduction and in discharge of the principle and interest on the loan, called vivum vadium (living pledge), and the other by which the lender took possession of the mortgaged land on the agreement to adjust the rents and profits towards the payment of interest alone called mortuum vadium (a dead pledge). By the time of Littleton in the 15th century the mortgage transaction assumed a different complexion. The mortgagee obtained a conveyance of the fee simple in the lands subject to defeasance by the mortgagor repaying the loan on or before the appointed day fixed by the agreement of the parties. ON default of such repayment the mortgagee's ownership of the fee became indefeasible. But this is not the only hardship suffered by the mortgagor. Though the land was forfeited to the mortgagee by the non-payment of the debt in due time, the debt remained subsisting and could be recovered from the mortgagor. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term limited to the immediately preceding mortgagee. If, for instance, the mortgagor raises money first from A, then from B and then from C on the security of Blackacre, there may be a lease to A for 3000 years, a lease to B for 3000 years and one day (subject to A's term), and a lease to C for 3000 years and two days (subject to the terms of A and B). The effect in such a case is that the second and all subsequent mortgagees now take legal interest in the land instead of mere equitable interest as formerly. This is a radical change in the law. (35) An equitable mortgage may be made either (1) by an agreement to create a legal mortgage; (2) by a mortgage of an equitable interest; (3) by a deposit of title deeds; or (4) by an equitable charge. (Halsbury Vol. 27, 3rd Edn, page 157). (36) In Prudential Assurance Co. Ltd., v. J. C. Galastaun AIR1940Cal429, Sen, J., at page 204 (of ILR Cal) : (at p. 431 of AIR) made the following observation: I realise that the English law regarding mortgages is not always a safe guide for the determination of all questions regarding the respective rights of mortgagors and mortgagees in this country, and that, wherever rights have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer of Property Act, and so far as the rights of parties in such mortgages are concerned they bear no resemblance to their analogues under the English law. The rights under mortgage transactions in India should not be coloured by English doctrines of mortgage law. (39) What is the legal effect of the appointment of a receiver by a court in a pending action? The receiver in a suit is nothing more than the hand of the court so to speak, for the purpose of holding the property of the litigants whenever it is necessary that it should be kept in the grasp of the court in order to preserve the subject matter of the suit pendente lite; and the possession of the receiver is simply the possession of the court. (Wilkinson v. Gangadhar, 6 Beng LR 486). A receiver appointed by the court is in no sense an agent or trustee for the party at whose instance the appointment is made. He is an officer of the court appointed for the benefit of all the parties to the action and their rights inter se are not affected. As between the mortgagee and the mortgagor, therefore, if the receiver embezzles or otherwise wasters the rents and profits, the loss must fall primarily on the mortgagor (Halsbury ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppointed in execution, and execution by appointing a receiver being one of the modes of execution sanctioned by law, the money in the hands of the receiver should be treated as assets held by a court within the meaning of S. 73 C.P.C., and that therefore the decree-holders were entitled to rateable distribution of the money in the hands of the receiver. (42) Mr. R. Ramamurthi Aiyar, learned counsel for the respondents contended that the mortgagee acquired a lien on the amounts realised by the receiver form and out of the rents and profits of the hypotheca, and that such a lien came into existence by virtue of the order of appointment and the relationship of mortgagor and mortgagee between the parties to the action. Liens arise either by operation of law or by agreement between the parties. Liens arising by operation of law (liens by implication, implied liens) are those which rise from the relation of the parties, without express or tacit stipulation, and by the rules of the common law (as in the case of the vendor's lien for unpaid purchase money.....) or under the provisions of a statute (statutory liens). Liens by agreement between the parties (conventional liens) are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... faction of what should for the time being be due n respect of the judgment signed on 25th July, 1891 for the sum of .316-15-0 debt and .7-10-0 for costs. On 16th May, 1892, a receiving order was made against Potts on his own petition and on May 19 he was adjudicated a bankrupt .The question for consideration was whether money in the hands of the receiver can be claimed by the trustee in bankruptcy or can be claimed by the was contended on behalf of Messrs. Taylor and Sons that there was an equitable lien in their favour on the fund in court. This argument was negatived. At page 659 Lord Esher M. R. Observed thus: An order appointing a receiver can only amount to a charge if it charges the person in whose hands the money is, not to deal with it except in one way. In my opinion, therefore, this order was not a 'charge', was not 'a mortgage' and was not a 'lien', either legal or equitable, and consequently Taylor and Sons were not 'secured creditors' within the meaning of sub-sec. 2 of S. 9, and by virtue of sub-sec. 1 the bankruptcy took away from them the right to receive this money in priority to the other creditors. Lindley, L. J., ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the plaintiffs said that he had to satisfy this Court that the order, if it was to amount to a charge, must come within Lord Esher's expression in In re Potts: 'An order appointing a receiver can only amount to a charge if it charges the person in whose hands the money is not to deal with it except in one way.' That must mean 'except to pay it to, or hold it for, the execution creditor.' In this case it does not come to anything of the sort; it comes nowhere near it. The effect of the order is simply that the whole fund is to be held at the disposal of the court; it is liable to have paid cut of it such further payments as may thereafter be directed by the court before there is any question of any balance being dealt with at all. I think it is quite manifest that the orders do not amount to any positive direction either ordering payment to the execution creditors or ordering the fund to be held for the execution creditors or restricting its being dealt with except by being paid to, or held for, the benefit of the execution creditors. Eve J., observed thus at page 365: These orders did not, in my opinion, confer on the judgment creditors any equita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the suit, the courts have always held that, when that is done, the money belongs to the plaintiff in the event of his success and that it cannot pass to the general creditors of the person who pays it is or to any person who claims under him. (48) This decision was one based upon the language of Order XXXVIII, R. 2 C.P.C., Which is as follows : (1) Where the defendant fails to show such cause the court shall order him either to deposit in court money or other property sufficient to answer the claim against him, or to furnish security for his appearance at any time when called upon while the suit is pending and until satisfaction of any decree that may be passed against him in the suit, or make such order as it thinks fit in regard to the sum which may have been paid by the defendant under the proviso to the last preceding rule. (49) The deposit made in that case was held to fall within the first portion of rule 2 set out above and as the deposit was intended to answer the claim the learned Judge held that the amount so deposited was charged with lien on the plaintiff obtaining a decree in his favour. That decision cannot be treated as an authority that whenever a sum ..... X X X X Extracts X X X X X X X X Extracts X X X X
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