1956 (5) TMI 19 - HC - Companies Law

Summary

Issues Involved:
1. Entitlement of the appellant to be treated as a preferential creditor.
2. Validity and implications of the repledge of securities by the Pioneer Bank.
3. Character and distribution of the surplus amount from the realization of securities.

Issue-wise Detailed Analysis:

1. Entitlement of the appellant to be treated as a preferential creditor:

The appellant, a customer of the Pioneer Bank Limited, opened an overdraft account with a limit of Rs. 25,000, secured by hypothecating pulses and grains and executing a hundi for Rs. 25,000. Upon the bank's liquidation, the appellant claimed the surplus amount of Rs. 3,112-14-3 as a preferential creditor. The appellant argued that the security was given for a specific purpose, and any surplus should not become part of the general assets of the company. The court agreed, stating, "The proceeds of the security...cannot...ever become a part of the general assets of the company." The court held that the appellant must be ranked as a preferential creditor in respect of the surplus amount.

2. Validity and implications of the repledge of securities by the Pioneer Bank:

The Pioneer Bank repledged the appellant's securities to the Reserve Bank of India. Although there was some argument about whether the Pioneer Bank had the right to repledge the securities, the court found it unnecessary to decide this point. The appellant appeared to have acquiesced in the transaction and redeemed the pledge by paying off the Reserve Bank. The court emphasized that the real question was the character of the surplus held by the respondent bank, not the process of conversion of the securities into money.

3. Character and distribution of the surplus amount from the realization of securities:

The court found that the sum of Rs. 3,112-14-3 in the hands of the liquidator came from the security furnished by the appellant. The court noted, "The security was given for the specific purpose...and the money into which the securities were converted and now represents them is stamped with the same purpose." The court rejected the liquidator's argument based on Paget's Law of Banking and English case law, which suggested that the bank had a general lien on the surplus. The court concluded that the surplus should be repaid to the appellant and not distributed among the general creditors, stating, "It is impossible to see how it could become the property of the bank or a part of its general assets."

Conclusion:

The appeal was allowed, and the order of Banerjee J. was set aside. The court held that the appellant must be treated as a preferential creditor in respect of the sum of Rs. 3,112-14-3 and entitled to receive this amount from the liquidator. The appellant was also awarded costs for the appeal and the trial.