1961 (4) TMI 46 - HC - Companies Law

Summary

Issues Involved:
1. Authority of managing agents to issue debentures.
2. Validity and enforceability of the promise to issue debentures.
3. Creation of an equitable charge.
4. Delay in seeking relief and limitation.
5. Prejudice to other creditors.

Issue-wise Detailed Analysis:

1. Authority of Managing Agents to Issue Debentures:
The managing agents of Trivellore Oil Mills Ltd. promised to treat a loan of Rs. 20,000 as a debenture loan. However, the managing agents had no authority to issue debentures without the directors' approval, as per Section 87(G) of the Indian Companies Act. This provision explicitly prohibits managing agents from issuing debentures without the directors' authorization, rendering any such promise legally unenforceable. The court held that the managing agents' promise was void due to lack of authority.

2. Validity and Enforceability of the Promise to Issue Debentures:
The court examined whether the company had ratified the managing agents' promise or undertaken a fresh obligation to issue debentures. Despite a tripartite agreement in 1952, which included provisions for issuing debentures to the first respondent, the directors did not formally adopt this agreement. The minutes of the board meeting merely recorded the agreement without a resolution to issue debentures. Consequently, there was no enforceable agreement by any competent party to issue debentures or create a charge.

3. Creation of an Equitable Charge:
The court considered the principle that "Equity treats that as done which ought to be done," which can create an equitable charge based on an agreement to issue debentures. However, this principle applies only when there is an enforceable agreement by a competent party. In this case, the managing agents' promise was void, and the company did not ratify or adopt the promise. Therefore, no equitable charge was created in favor of the first respondent.

4. Delay in Seeking Relief and Limitation:
The first respondent's application was filed several years after the loan was advanced. The court noted that if the first respondent had sought specific performance shortly after lending the money, he might have succeeded. However, due to the delay and the subsequent liquidation of the company, the court found no basis to grant specific performance or create a charge on the company's assets.

5. Prejudice to Other Creditors:
The court addressed the concern that granting the first respondent a first charge would prejudice other creditors. The tripartite agreement provided for issuing debentures to multiple creditors, not just the first respondent. Granting a first charge to the first respondent would exclude other creditors from similar rights. The court concluded that the terms of the tripartite agreement did not confer any special rights on the first respondent or other creditors to claim a first charge.

Conclusion:
The appeal was allowed, and the first respondent's application was dismissed. The court held that the managing agents' promise to issue debentures was void due to lack of authority, and no enforceable agreement or equitable charge was created. The delay in seeking relief and the potential prejudice to other creditors further supported the decision to dismiss the application. The liquidators were entitled to recover their costs from the company's funds.