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TMI Blog1965 (4) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... titioner is that he was the secured creditor of the company, being the holder of 200 first mortgage debentures bearing Nos. 101 to 300 and that the East Asiatic Investment Company Ltd., the 3rd respondent in the lower court, as well as before us, was also a holder of 100 first mortgage debentures of Nos. 1 to 100. Each of the debentures was of the value of Rs. 500 and the company had issued debentures of the total value of Rs. 1,50,000 under the debenture trust deed dated February 10, 1947, mortgaging the properties of the company described in the schedule thereunder. Subsequently, the company borrowed Rs. 1,30,000 from the Government and executed a mortgage deed in respect of the properties described in the schedule attached to it on April 4, 1950, as security for the discharge of the said loan. Later on the company was ordered to be wound up on September 11, 1953, by the High Court of Judicature at Madras and a liquidator was appointed. On an application No. 9/54 in O.P. No. 240 of 1952, the High Court of Andhra by its order dated March 6, 1955, directed the liquidator to sell the properties of the company free of charge and that the charge on each of the items sold should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment Company filed a counter supporting the claim of the 1st respondent before us. No evidence was adduced by either party before the learned District Judge. On a consideration of the contentions and the law bearing on the subject, he came to the conclusion that both the debenture holders and the Government being secured creditors, the claim of the debenture-holders would have priority over that of the Government. Before we examine the terms of the debenture trust deed, and the mortgage deed in favour of the Government, and the rights thereby created, it is better to state the legal position. Debentures may be issued either unsecured or secured by a charge on property of the company. Debentures may be secured, (1)by way of a specific charge or mortgage on particular property of the company; or (2)by way of a floating charge ; or (3)by both a specific and a floating charge. It is usual when specifically secured debentures are issued to add, by way of a further security, a floating charge. A specific or fixed charge, or mortgage, securing a debenture, does not raise problems peculiar to company law. Such charge is granted on particular property of the company, normally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp. It is of the essence of a floating charge that it remains dormant until the undertaking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes........ " Mortgage debentures usually contain a charge upon the undertaking of the company and all its property, real or personal, whether present or future, and may or may not give a charge upon uncalled capital. The conditions usually provide that the charge so given shall be a floating security or charge. Where a series of debentures or debenture stock is secured by a trust deed, then, in addition to specific property of the company being thereby assigned to the trustees to secure the debentures or stock, a floating charge is generally given upon all the other property of the company, present or future, and its undertaking and in some cases its uncalled capital. " A general charge may be construed as a floating security, although the instrument does not expressly so describe it. Thus, a charge upon the undertaking of a company constitutes a floating charge upon all its pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tered, and in that list was included " ( c ) a mortgage or charge on any immovable property wherever situate, or any interest therein ; .......... or ( e ) a floating charge on the undertaking or property of the company ". Thus, it would be seen that under the Indian Companies Act mortgages on specific property of the company as well as floating charge are contemplated and the section requires their being registered with the Registrar of Joint Stock Companies. In default of which they shall be void against the liquidator and any creditor of the company. Section 229 of the Act is as follows : "In the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and to debts provable and to the valuation of annuities and future and contingent liabilities as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent; and all person who in any such case would be entitled to prove for and receive dividend's out of the assets of the company may come in under the winding up,/and make such claims against the company as they respectively are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accession is made to the mortgaged property, the mortgagee, in the absence of a contract to the contrary, shall, for the purposes of the security, be entitled to such accession." Illustration ( b ) under the section is as follows : " A mortgages a certain plot of building land to B and afterwards erects a house on the plot. For the purposes of his security B is entitled to the house as well as the plot." In Mulla's Transfer of Property Act, at page 464, the position is stated thus : " Thus, if the mortgagor builds on the property mortgaged, the buildings form part of the mortgagee's security .......... Machinery fixed by bolts and nuts to the concrete floor of a building is an accession to which the mortgagee is entitled." Thus, the foregoing discussion makes it clear that where a specific charge is created on immovable property, an equitable charge or a floating charge, if any, created cannot have priority. Even if there be any other * specific charge created on the same property, this specific charge which is the first in point of time takes priority over the second. In a case where buildings are constructed or machinery is fixed to the earth for its beneficial "use a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermine." The Act also provides that the money payable under the Act including interest may be recovered from the person concerned and his security, as- if they were arrears of land revenue. Sections 9 and no far from giving priority to the Government loan, make it manifest that the loan by the Government under that Act shall be secured as a mortgage or floating charge upon the assets of the business or enterprise, and that it shall be subject to encumbrances then existing. In other words, the mortgage or charge in favour of the Government-is expressly made subject to the rights of a prior mortgage, if any. We shall now examine the terms of the debenture trust deed dated February 10, 1947, described as an indenture between the Guntur Vegetable Oil Industries Ltd. and one G. S. Reddy, the trustee. Clauses 5 to 7 are important and may be extracted : " 5( a ) For more effectually securing payment to the debenture-holders, the company as beneficial owner hereby mortgages (without possession) unto the trustee all the property specified in the first schedule hereto. ( b ) The company as beneficial owner hereby charges the payment of the debenture amount and interest thereon by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, under section 70 of the Transfer of Property Act, even in the absence of a contract to that effect, the buildings and the machinery constitute an accession to the land mortgaged, and would enure for the benefit of the mortgagee. In this case, there is an express clause to the effect that they constitute the mortgage security. There can, therefore, be no doubt that the debenture security has been created not merely on land, but also on the buildings and the plant and machinery erected or to be erected thereon at a later date. In order to get over this difficulty, the learned Government Pleaded-contended on behalf of the State that the indenture in question had not created a specific mortgage or a floating charge in respect of the property. His argument, so far as we can understand, is that by clause 5( a ) the property specified in the first schedule had been-mortgaged, and by clause 5( b ), a floating security was created on all the undertakings and all assets and other property of the company, both present and future. The property specifically mortgaged under clause 5( a ), and all the undertakings and all assets and properties of the company, present and future, are made sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. This indenture was made on 20th April, 1950, between, the company and the Government of Madras. The relevant clauses provide that the consideration for the indenture was Rs. 1,30,000 paid to the company and that is repayable with interest at 5 per cent, per annum, pause 2 provided that in consideration for the payment of that amount the piece and parcel of land described in the first schedule with the buildings and erections now existing, or hereinafter to be constructed thereon, and the machinery, plant and other property described in the second schedule and 1 other machinery, plant and other property that may be placed thereon in addition to or in substitution thereof and the goodwill of the mortgagor in the said business of refined oils and soaps carried on by the company ( sic ) . According to sub-clause ( 2 ) of clause 4 those presents and the consideration grant the subject to the provisions of the State Aid to Industries Act, 1923, and the rules framed thereunder. The schedule attached to the indenture refers three items of properties, viz .: ( a )and ; ( b )buildings ; and ( c )plant and machinery. The land mortgaged and described in the annexure to the debent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e distinguishable from those in the case before us. The next contention raised on behalf of the Government is that whatever might be the position with regard to the plant and machinery which imbedded in the earth, the mortgage debenture-holders cannot claim a special charge on all the machinery. The contention is that some machinery was no imbedded or planted in the earth, and, therefore, did not constitute immovable property entitling the debenture-holders to claim the first charge. No evidences was adduced in the lower court on this question nor has any material been placed before us to come to the conclusion that the sale proceeds in the hands of the liquidator represented the proceeds realised by the sale of any items of machinery which had not been planted in the earth. In the absence of any such material we cannot hold that the priority in favour of the debenture-holders does not extend to any part of the sale proceeds in the hands of the liquidator. As already noticed that, under section 230 of the Act, the Government can claim priority against the debenture-holders only in respect of revenues, taxes cesses and rates. The loan under the State Aid to Industries Act does ' ..... X X X X Extracts X X X X X X X X Extracts X X X X
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