1965 (4) TMI 64 - HC - Companies Law

Summary

Issues Involved:
1. Priority of claims between first mortgage debenture-holders and the Government.
2. Validity and effect of the debenture trust deed and mortgage deed.
3. Nature of the security created by the debenture trust deed.
4. Rights of secured creditors in the winding-up of an insolvent company.
5. Applicability of the State Aid to Industries Act and the Transfer of Property Act.

Detailed Analysis:

1. Priority of Claims Between First Mortgage Debenture-Holders and the Government:
The primary issue was to determine the priority between the first mortgage debenture-holders of Guntur Vegetable Oil Industries Ltd., under liquidation, and the Government, which had subsequently lent money to the company and secured it by a mortgage deed. The court held that the debenture-holders, being the first mortgagees, had priority over the Government's claim.

2. Validity and Effect of the Debenture Trust Deed and Mortgage Deed:
The debenture trust deed dated February 10, 1947, created a mortgage over the company's properties, including land, buildings, and machinery, both present and future. The Government contended that no effective or valid mortgage was created in favor of the debenture-holders and that their subsequent mortgage should take precedence. However, the court found that the debenture trust deed did create a valid mortgage and that the Government's mortgage was subject to this prior charge.

3. Nature of the Security Created by the Debenture Trust Deed:
The debenture trust deed created both a specific charge on the land and a floating charge on all the company's undertakings and assets. The court emphasized that a specific charge takes precedence over a floating charge and that the debenture-holders had a specific charge on the land and buildings, which included any future additions. The Government's mortgage, executed later, was therefore subordinate to this specific charge.

4. Rights of Secured Creditors in the Winding-Up of an Insolvent Company:
The court referred to the Indian Companies Act and the Transfer of Property Act to clarify the rights of secured creditors. It was noted that in the winding-up of an insolvent company, the rights of secured creditors are determined by the law of mortgages, not company law. The court reiterated that the first mortgagee has priority over subsequent mortgagees, and this principle applied to the debenture-holders' claim.

5. Applicability of the State Aid to Industries Act and the Transfer of Property Act:
The Government's loan was granted under the Madras State Aid to Industries Act, which required the loan to be secured by a mortgage or floating charge subject to existing encumbrances. The court found that the Government's mortgage was expressly subject to the prior mortgage created by the debenture trust deed. The Transfer of Property Act's provisions on accession and priority of charges further supported the debenture-holders' claim, as the buildings and machinery added after the initial mortgage were considered part of the mortgaged property.

Conclusion:
The court concluded that the debenture-holders, having a specific charge created by the debenture trust deed, had priority over the Government's subsequent mortgage. The Government's claim did not qualify for preferential payment under section 230 of the Indian Companies Act, as it did not fall under the category of revenue, taxes, cesses, or rates. Consequently, the debenture-holders were entitled to be paid in full before the Government could claim any portion of the sale proceeds from the liquidation. The appeal by the State of Andhra Pradesh was dismissed with costs awarded to the contesting respondents.