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TMI Blog1954 (9) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany was incorporated in England for carrying on the business of running electric tramways in the city of Madras. The company was ordered to be wound up by this court by order dated 20th January, 1954, on its own petition dated December, 1953, on the ground that it was unable to pay its debts and the Official Receiver, High Court, Madras, has been appointed as the official liquidator of the company. Notwithstanding the winding up order and the appointment of the Official Receiver as the liquidator of the company no assets came into the possession of the liquidator. The reason was this: In or about October, 1924, the company had issued debentures covering a very large sum of money which, with interest on the date of the winding up, came to over Rs. 7 lakhs. These debentures were secured by a trust deed charging the fixed assets of the company by a first mortgage and there Was also a floating charge by way of first charge in favour of the trustees in respect of the undertaking and all the other property and assets of the company for the time being, both present arid future, including its uncalled capital to secure the payment of all monies for the time being owing on the security o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kes was made a defendant to the action and the reliefs were claimed as against him, since the claim was as against the assets in his hands. Immediately after the suit was filed, an application (No. 4552 of 1953) was taken out for restraining Mr. Brookes from effecting a sale of the assets but no order of in junction was passed because of an undertaking given by Mr. Brookes on 14th December, 1953, that he would not dispose of the assets of the undertaking without the specific orders of court. Mr. Brookes advertised for the sale of the assets in one copy of the Hindu, the Madras Mail, the Swadesamitran, the Hindustan Times, the Times of India, and the Andhra Patrika. These advertisements were inserted on or about the 23rd in the last week of January, 1954. In this advertisement it was stated : "Sales are for the time being subject to the approval of the High Court of Madras and it will be for the undersigned (Mr. Brookes) to obtain such approval for accepted offers, free of all costs to the purchaser." In the advertisement it was stated that the offers to purchase would be received up to Wednesday the 17th February, 1954. Offers were being received by Mr. Brookes in response to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vised you) and have completed a sale agreement with the tenderers." The offer that is referred to as having been accepted by Mr. Brookes on 16th July, 1954, was that of a firm by name Messrs. T. Hasanally Company of Bombay, who will be hereafter referred to as the. Bombay firm, at a purchase price of Rs. 4,01,655. This Bom bay firm has been impleaded to the application before Balakrishna Aiyar J. as the second respondent, Mr. Brookes being the first respondent. Only one thing more remains to be stated and that is, that the suit G.S. No. 368 of 1953 has been dismissed, the judgment having been pronounced on 16th March, 1954; and the sale by Mr. Brookes of the assets to the Bombay firm was effected without the sanction of the court. After the sale was effected, the official liquidator took out an application No. 3542 of 1954 in O.P. No. 419 of 1953 for setting aside this sale, and it is the order in this petition that is the subject matter of this original side appeal. The grounds upon which the sale was sought to be set aside would be apparent from the report of the official liquidator filed in support of the application. After referring to the advertisement in the Hindu and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tails and also after giving sufficient time to the Corporation of Madras to come to a final decision after negotiations with the Government whether the tram service should be undertaken by the Corporation. Mr. Brookes filed a counter affidavit in the course of which he explained that the offer by the Bombay firm was the highest offer that he had received and that this had been accepted bona fide. He also explained that in the advertisement the condition as to the previous sanction of the court was inserted because of the undertaking that he had given to the court in C.S. No. 368 of 1953 and that this undertaking lapsed with the dismissal of the suit on 16th March, 1954. Though for his part he was intending to apply to the Court for previous sanction before finally effecting the sale, he had been advised by the solicitors for the debenture trustees in England that it was unnecessary for him to obtain the sanction of the court and that he had been instructed not to apply for such sanction. It was in consequence of this advice that the sale to the Bombay firm was concluded without placing the matter before the court and obtaining its sanction. He asserted that the sale was bona fid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore him and that was an offer by one Ambalavana Chettiar who offered to purchase the identical assets purchased by the Bombay firm for a sum of Rs. 4,25,000 which would have exceeded the price paid by the Bombay firm by about Rs. 24,000. This Ambalavana Chettiar was given time to produce a 'bank guarantee that he was in a position to implement his offer to pay the sum and the hearing of the petition was adjourned to enable this bank guarantee to be produced. Even on the adjourned date this was not forthcoming and, therefore, this offer, of Ambalavana, Chettiar was dismissed from consideration. The learned Judge also heard counsel on behalf of the Corporation of Madras. The Bombay firm agreed to prove that the sale to them was not at an undervalue, by offering to part with what they had bought to the Corporation of Madras at the same price and were willing to give them a fortnight's time within which to make payment. Counsel for the Corporation, however, was not willing to commit himself to the purchase, but merely wanted time to consider whether his clients would think of purchasing. In the circum stances, the learned Judge thought that no purpose would be served by adjourning the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were proceeding between the Workers' Associations with the Government on the one hand and the Corporation on the other, for the revival of the tramways as a going concern. Now and then, information was published in the newspapers, sometimes consisting of press notes and on other occasions of interviews by correspondents stating the result of the discussions which were proceeding between the parties. Those negotiations started soon after the date of the advertisement and it is not unreasonable to hold that by reason of this information which was in the possession of the public, even people who would otherwise take any interest in the purchase of the assets which was the subject matter of the advertisement might not have made tenders because of their feelings that the Sale might not ultimately come off. As stated before, those negotiations continued right up to 5th July, 1954. Mr. Brookes had himself not definitely rejected all ideas in such a direction in the interview with the Chief Minister on the 3rd July, 1954. While so, Suddenly on the 16th July without any further notice and without any further advertisement of an intention to the public of the failure of the Negotiations and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, it is only necessary to add that Mr. Nambiar appearing for Mr. Brookes stated that he was merely anxious to establish that his client had acted bona fide and in the best interests of the parties and that though as one who had effected the sale his client was naturally interested to support its validity, he was willing to leave the matter in the bands of the court and to abide by any orders it might pass in regard to the sale effected by him. Though this was the attitude of Mr. Brookes, it certainly does not preclude the Bombay firm from insisting upon its legal rights to maintain the sale, and we will next proceed to consider the correctness of the legal position taken up by the learned counsel on its behalf. In the present case the facts necessary to be mentioned in regard to this point are that under clause 5 of the indenture date 30th October, 1924, between the Electric Tramways and the trustees for the debenture holders by name the Beaver Trust Ltd. the company coven anted with the trustees "that they will forthwith effect in; favour of the trustees and to their satisfaction a first mortgage of the hereditaments specified in the second schedule thereto and all other fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the power." Similarly, the provision in section 8 of the Trustees and Mortgagee's Powers Act, XXVIII of 1866, may be noticed : "No such sale as last aforesaid shall be made until after six months' notice in writing given to the person or one of the persons entitled to the property subject to the charge, or affixed to some conspicuous part of such property; but when a sale has been effected in professed exercise of the powers hereby conferred, the title of the purchaser shall not be liable to be impeached on the ground that no case had arisen to authorise the exercise of such power or that no such notice as aforesaid had been given ; but any person damnified by any such un authorised exercise of such power shall have his remedy in damages against the person or persons selling." There is abundance of authority in favour of the position that a mortgagee's sale in exercise of the power reserved in that behalf is not liable to be impeached on account of want of publicity or want of notice as required either by the instrument of mortgage or by the law. There fore, if the sale had been effected by Mr. Brookes, as receiver, without the liquidation supervening, there would have been n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent company in liquidation under section 46(1) of the Indian Income-tax Act without applying to the court for sanction under section 171 of the Indian Companies Act would or would not render the sale effected in the course of such realisation void under section 232 of the Indian Companies Act. The question therefore was whether the proceeding under section 46 of the Indian Income-tax Act was covered by the phrase " other legal proceeding " within section 171 of the Indian Companies Act. Dealing with this, Spens C. J., delivering the judgment of the court, said : "Section 171 must, in our judgment, be construed with reference to other sections of the Act and the general scheme of administration of the assets of a company in liquidation laid down by the Act. In particular, we would refer to section 232. Section 232 appears to us to be supplementary to section 171 by providing that any creditor (other than Government) who goes ahead, notwithstanding a winding up order or in ignorance of it, with any attachment, distress, execution or sale, without the previous leave of the court, will find that such steps are void. The reference to ' distress ' indicates that leave of the court is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding and Banking Corporation Ltd. v. Satnarain Singh [1921] 43 All. 433 . Piggott and Walsh J J. had held in that decision that though leave of court was required to put an execution into force under the terms of section 232 as it then stood, i.e., in order to effect an attachment, where an attachment had been effected prior to the winding up, but a sale was held subsequently, in pursuance of that attachment, the sale was not avoided by reason of the winding up order. In other words, the reason for the amendment was to make it clear that proceedings in execution continue to be in force and are being put into force right up to the date of the sale. Its effect, however, is not to effect a sale held without legal proceedings as provided for by section 171 of the Indian Companies Act to which we have already referred. We are clearly of the opinion that the scope of section 232 of the Indian Companies Act is not wider than that of section 171 and the language of the provision is not apt to include within its purview cases where no legal proceedings are at all involved. This is made clear by the use of the expression "held" occurring after the word "sale". When a sale is effected s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the mortgage my property. It is immaterial to me whether my mortgagor is in winding up or not. I remain ''outside the winding up" and shall enforce my rights as mortgagee.' This is to be contrasted with the case in which such a creditor prefers to assert his right, not as a mortgagee, but as a creditor. He may say 'I will prove in respect of my debt.' If so, he comes into the winding up." In view of these observations in the House of Lords, it would be unnecessary to cite further authority in support of the proposition that a secured creditor realising his security without seeking the assistance of the court is outside the winding up. But if such were necessary, reference may be made to a few decisions of the English courts. The first ca se to be referred to is a decision of the Court of Appeal in Lloyd v. David Lloyd and Co. [1877] 6 Ch. D. 339. A mortgagee had instituted an action and this was pending when an order was made to wind up the mortgagor company. The mortgagee made an application to the court under section 87 of the Companies Act of 1862 corresponding to section 171 of the Indian Companies Act for leave to proceed with the action. Malins V. C. imposed certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king and property. An order was made for the winding up of the company and an official liquidator was appointed. The debenture holders, under their powers, appointed a receiver and applied to the court that, notwithstanding the appointment of the liquidator, the receiver might be at liberty forthwith to take possession of all the company's undertaking and property." Kay J., before whom the application came on for hearing, appointed the official liquidator as receiver on behalf of the debenture holders, directing him to treat himself as the receiver of the debenture holders. The debenture holders filed an appeal and the question which the court had to consider was whether the right of the debenture holders to appoint their own trustee should not be given effect to by the court not with standing the winding up. The appeal was allowed, Cotton L.J. stating : "I cannot understand, I must say, with great respect, how Mr. Justice Kay could appoint the liquidator receiver, because there was no action in which any receiver could be appointed by the court, and if he did not give to the receiver appointed under this deed what I think was the right of the debenture holders to take possession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er assets of the company. The argument that was sought to be raised was based upon this distinction between the two parts of the security by reason of the provision in section 230(2) of the Indian Companies Act. The provision is to this effect: section 230(1) enumerates the debts which have to be paid in priority in a winding up and section 230(2)( b ) enacts : "So far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge." The argument on this head was this : The receiver for the debenture holders could not sell without the leave of the court because of the provision in section 230(2)( b ) as the bulk of the assets which have been sold were comprised in the floating charge. In this connection reference was also made to section 129 of the Indian Companies Act which enacts : "Where either a receiver is appointed on behalf of the holders of any debentures of a company secured by a floating charge, or possession is taken by or on behalf of those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 and 230(2) which are word for word identical with that in the English enactment in a case where the receiver appointed by the debenture holders had taken possession of the security and said : "In my judgment, sub-section (4)(b) of section 264 (corresponding to section 230(2) (b) of the Indian Companies Act) only operates if at the moment of the winding up there is still floating a charge created by the company and it only gives the preferential creditors a priority over the claims of the debenture holders in any property which at that moment of time is comprised in or subject to that charge. In the present case the debentures held by the plaintiffs contained a floating charge over all the borrowers' property. On December 9, 1938, that charge ceased to float on the property and assets of which Mr. Vealo was appointed receiver. The charge on that day crystallised and became fixed on that property and those assets." These observations, are, in our opinion, pertinent and make it clear that in the present case also the security ceased to float when Mr. Brookes as receiver took charge of the assets comprised in the floating charge on the 11th of April, 1953. There is no question of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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