2013 (11) TMI 493 - HC - Companies Law

Hypothecation of assets - Whether on account of the hypothecation of the goods of EHPL in its favour PICUP can be said to be a secured creditor - Held that - Although the hypothecation as a legal concept is not explicitly recognized under the ICA, the said legislation is not exhaustive of all possible arrangements that the financial institutions may have in securing the moneys advanced by them. Section 29 of the SFC Act recognizes the hypothecation as a possible means of enforcing liability - Consequently, it is futile for ETC to contend that only because hypothecation does not form part of a species of pledge under Sections 172 to 179 of the ICA, it cannot be legally enforced by PICUP. It is apparent on the facts of the present case that the DOH referred to above, makes it explicit that the constructive possession of the goods remained throughout with the PICUP; that EHPL was holding the goods only as an agent of PICUP; the effective control of the goods always remained with PICUP and the constructive possession could be converted into the actual possession by PICUP. More importantly, it is made explicit both in the CLA as well as DOH that prior permission of PICUP had to be taken if any attempt was made to sell any part of the goods at any time. That there was a charge created in favour of PICUP in respect of the goods is evident from the fact that EHPL itself registered the charge with ROC under Forms 8 and 13. Both the Agreement and the DOH made it clear that PICUP was a secured creditor and could enforce the hypothecation in its favour by bringing the said goods to sale - Decided in favour of petitioner. Effect of the proceedings under the SFC Act - Held that - ETC was aware of the charge on the goods in favour of PICUP even on the date of Agreement - Agreement between ETC and EHPL having been entered without prior clearance of PICUP is not binding on PICUP - plant and machinery of EHPL were sold by it without the permission of PICUP. Therefore the sale, which was in violation of the CLA, the DOH and Clause 3 of the Agreement, was not valid - Decided against petitioner. Even if ETC paid Rs. 29.15 lacs to EHPL for purchasing its plant and machinery it cannot seek to recover the said sum from PICUP. ETC is at best in the position of an unsecured creditor of EHPL in the winding up proceedings - ETC by appointing its watch and ward security did not actually take physical possession of the goods. Constructive possession thereof was already with PICUP. EHPL never parted with physical possession of the goods. EHPL was holding the goods as an agent of PICUP. Therefore, the question of ETC being forcibly deprived of possession of the goods by PICUP by misusing its position did not arise - given the clear wording of the clauses of the CLA and DOH, there was no need for PICUP to approach a Court designated under the SFC Act for enforcement of the hypothecation in its favour - property in the goods did not pass to ETC and it did not become the owner thereof prior to PICUP enforcing the hypothecation - sum paid by ETC to EHPL or to PICUP on behalf of EHPL should be treated as sums advanced to EHPL by ETC as an unsecured creditor. Issue No.14 is answered by holding that the payment of Rs. 3.30 lacs by ETC to PICUP was on behalf of EHPL consistent with ETC being an unsecured creditor of EHPL. Given the negative fund position of EHPL, and there being no assets of EHPL available for recovery, the question of ETC being entitled to recover the sum of Rs. 29.15 lacs much less any loss of profit does not arise.

Issues Involved:
1. Whether PICUP is an unsecured creditor.
2. Whether hypothecation of goods by the company makes PICUP a secured creditor.
3. Whether hypothecation of goods is recognized by law in India.
4. Whether the word 'hypothecated' in Section 29 of the SFC Act creates an enforceable lien.
5. Whether the petitioner was aware of the hypothecation of assets to PICUP at the time of the agreement.
6. Whether the agreement between the petitioner and the company is binding on PICUP.
7. Whether the plant and machinery were sold by the company with PICUP's permission.
8. Whether the petitioner paid Rs. 29.15 lacs to the company for purchasing its plant and machinery.
9. Whether the petitioner is entitled to recover Rs. 29.15 lacs from PICUP.
10. Whether the petitioner had taken physical possession of the goods and was deprived of them by PICUP.
11. Whether Section 29 of the SFC Act converts hypothecation into a pledge.
12. Whether the property in goods had passed to the petitioner before PICUP converted its hypothecation into a pledge.
13. Whether the consideration paid by the petitioner was trust money and not the property of the company or PICUP.
14. The effect of the petitioner paying Rs. 3.30 lacs by a bank draft to PICUP.
15. Whether the petitioner is entitled to recover the loss of profit from PICUP.

Detailed Analysis:

Issue 1 to 4:
The court examined the legal distinction between hypothecation and pledge, noting that hypothecated goods need not be in the physical possession of the creditor, but the borrower holds them as an agent of the creditor. The court concluded that PICUP was a secured creditor because the constructive possession of the goods remained with PICUP, and EHPL held the goods as an agent of PICUP. The hypothecation was recognized and enforceable under the SFC Act and the Indian Contract Act. Therefore, PICUP was a secured creditor, and the hypothecation created an enforceable lien.

Issue 5:
The court found that ETC was aware of the charge on the goods in favor of PICUP at the time of the agreement. The agreement itself acknowledged the lien of PICUP and other creditors, mandating their clearance before further payments.

Issue 6:
The agreement between ETC and EHPL was not binding on PICUP because it was entered without PICUP's prior clearance, violating the terms of the Common Loan Agreement (CLA) and the Deed of Hypothecation (DOH).

Issue 7:
The plant and machinery were sold by EHPL without PICUP's permission, making the sale invalid as it violated the CLA, DOH, and the agreement terms.

Issue 8 and 9:
The court acknowledged that ETC paid Rs. 29.15 lacs to EHPL but held that ETC could not recover this amount from PICUP. ETC was deemed an unsecured creditor of EHPL.

Issue 10:
ETC did not take physical possession of the goods; the constructive possession remained with PICUP. Therefore, ETC was not forcibly deprived of the goods by PICUP.

Issue 11:
PICUP did not need to approach a court for enforcing the hypothecation, given the clear terms of the CLA and DOH.

Issue 12:
The property in the goods did not pass to ETC before PICUP enforced the hypothecation.

Issue 13:
The sum paid by ETC to EHPL or on behalf of EHPL should be treated as sums advanced to EHPL by ETC as an unsecured creditor.

Issue 14:
The payment of Rs. 3.30 lacs by ETC to PICUP was consistent with ETC being an unsecured creditor of EHPL.

Issue 15:
Given the negative fund position of EHPL, ETC was not entitled to recover Rs. 29.15 lacs or any loss of profit from PICUP.

Conclusion:
C.A. No. 477 of 2005 was dismissed with no order as to costs. EHPL was directed to be dissolved, and the Official Liquidator was discharged. The amount in the FDR deposited in the Registry was ordered to be paid to PICUP.

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