1968 (8) TMI 83 - HC - Companies Law

Payments of certain debts out of assets subject to floating charge in priority to claims under the charge, Directors - Power of, Winding up Exercise and control of liquidator s powers

Issues Involved:
1. Competency and sustainability of the liquidator's application.
2. Bank's entitlement to sell mortgaged and hypothecated properties without court intervention.
3. Bank's entitlement to retain possession of the properties for private sale.
4. Validity of the mortgages and hypothecations under Section 293 of the Companies Act, 1956.

Issue 1: Competency and Sustainability of the Liquidator's Application
The bank argued that the liquidator should have filed a regular suit rather than an application, and that the application should be treated as a suit with the appropriate court fee. The court distinguished this case from the cited ruling in Official Liquidator v. Muniswamy Achary, noting that the liquidator was not seeking to recover a debt but to take possession of the company's property, which is already in the court's custody due to the winding-up order. The court held that the liquidator's application was competent and sustainable, and the proper proceeding was an application made to the winding-up court with the appropriate court fee for an application, not a suit.

Issue 2: Bank's Entitlement to Sell Mortgaged and Hypothecated Properties Without Court Intervention
The court examined the terms of the mortgage and hypothecation deeds. For the hypothecated movables, the court found that the bank had the right to take possession and sell the goods without court intervention upon certain contingencies, including the company's winding up. Regarding the immovable properties, the court determined that the mortgage deeds were English mortgages as defined in the Transfer of Property Act, conferring the right of private sale without court intervention. The court held that the bank was entitled to sell the properties without court intervention, subject to compliance with the relevant provisions of the Transfer of Property Act and the Contract Act.

Issue 3: Bank's Entitlement to Retain Possession of the Properties for Private Sale
The court found that the bank, as a mortgagee under an English mortgage, had the right to immediate possession and could retain possession until repayment. The court noted that the company had voluntarily handed over possession of the properties to the bank, recognizing the bank's right to take possession. The court held that the bank was entitled to retain possession of the properties for the purpose of exercising its right of private sale.

Issue 4: Validity of the Mortgages and Hypothecations Under Section 293 of the Companies Act, 1956
The court examined whether the transactions amounted to a disposal of the whole or a substantial part of the company's undertaking, which would require the consent of the company in a general meeting under Section 293(1)(a) of the Companies Act. The court found that the transactions, in substance, created a floating charge, allowing the company to continue its business while securing the bank's loans. The court noted that the company's general meeting had resolved to borrow up to Rs. 20 lakhs, which included ratification of past borrowings. However, the court found that one clause in the mortgage deed, which allowed the bank to take over the management of the company's business, was invalid as it could be seen as a disposal of the company's undertaking. The court held that this clause alone was invalid and unenforceable, but the rest of the transactions were valid and did not contravene Section 293(1)(a).

Conclusion:
1. The liquidator's application was competent and sustainable as an application, not requiring a suit.
2. The bank was entitled to sell the mortgaged and hypothecated properties without court intervention.
3. The bank was entitled to retain possession of the properties for the purpose of private sale.
4. The mortgages and hypothecations were valid except for the clause allowing the bank to take over the management of the company's business, which was invalid and unenforceable.

Order:
1. The bank is entitled to take and retain possession of the properties and sell them without court intervention, subject to accountability for the proceeds.
2. The court expressed no opinion on the exact amount due to the bank.
3. The bank must deliver all articles of furniture belonging to the company to the official liquidator.
4. Each party will bear its own costs.

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