1962 (3) TMI 50 - HC - Companies Law

Summary

Issues Involved:
1. Validity of the claim by debentureholders of the second series.
2. Capacity to give a valid discharge of the debentures.
3. Rights and options of secured creditors under liquidation.
4. Right to claim a set-off in respect of the debentures during the liquidation process.

Detailed Analysis:

1. Validity of the Claim by Debentureholders of the Second Series:
The case revolves around the U.P. Oil Industries Ltd. going into liquidation and the claim by debentureholders of the second series, specifically Raja Sharda Narayan Singh & Company, which consisted of twenty debentures of Rs. 5,000 each, totaling Rs. 1,00,000. The fact that these debentures were recorded in the name of Raja Sharda Narayan Singh & Company and that the consideration of Rs. 1,00,000 was paid and credited in the company's books was not disputed.

2. Capacity to Give a Valid Discharge of the Debentures:
The main controversy arose when the official liquidator questioned the capacity of the debentureholders to give a valid discharge due to the inability to produce the original debenture scrips, which were reported missing. The appellants contended that the debentures were lost, and they were prepared to execute an indemnity bond to safeguard the official liquidator against any future claims. However, the learned company judge was not satisfied with the proof of loss and held that the appellants were not in a position to give an effective discharge.

3. Rights and Options of Secured Creditors Under Liquidation:
Under Section 229 of the Indian Companies Act, 1913, and Section 47 of the Provincial Insolvency Act, secured creditors had three options: (1) realize their security and prove for the balance, (2) relinquish their security and prove for the whole debt, and (3) value their security and prove for the balance. The appellants chose the third option, valuing their security and proving for the balance. The official liquidator accepted this valuation without challenge.

4. Right to Claim a Set-Off in Respect of the Debentures During the Liquidation Process:
The appellants offered to bid for the mills up for auction and requested to set off the value of their debentures against the sale price. The learned company judge and the court held that the appellants had no right to claim a set-off for the debentures of the second series. The court emphasized that a secured creditor choosing to value their security and prove for the balance does not have the right to have their security recognized in liquidation proceedings for set-off purposes. The court could redeem the security by paying the assessed value, but there was no offer to redeem the debentures of the second series.

Conclusion:
The appeal was dismissed, and the court upheld the order of the learned company judge, concluding that the appellants were not entitled to claim a set-off in respect of the debentures of the second series. The appellants' legal rights in respect of the debentures remain intact, but they must bear their own costs of the appeal.