9911796707
TMI Blog1968 (8) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... lmost completely ceased working. Early in June, 1967, a creditor of the company presented to this court. Company Petition No. 4 of 1967 for compulsory winding up of the company. After some adjournments granted at the request of the company which was trying to secure financial assistance from the Central Government, an order for compulsory winding up was made on 5th October, 1967. Pursuant to the said order of winding up, the official liquidator of this court proceeded to Davangere, where the office as well as the mills and other properties of the company are situate, to take possession of all the properties and assets of the company. Although he was able to secure the books of account, papers and records of the company available in its office premises, the liquidator could not reduce to possession the immovable properties, machinery and other equipment of the company, for the reason that the possession thereof had already been taken by the Bank of Maharashtra (hereinafter referred to as "the bank") in apparent exercise of its powers as a mortgagee and charge-holder of the immovable and movable properties of the company. The liquidator made a report to that effect which was filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had to be determined before any further steps could be taken in this winding up in respect of the properties taken possession of by the bank, was whether the bank was right in its contention that the mortgages executed in its favour by the company were English mortgages as defined in the Transfer of Property Act and whether the documents of mortgages contained clauses conferring on the bank the power of private sale consistent with the provisions of the Transfer of Property Act in that regard. In the course of the arguments, Mr. Sundaraswamy, appearing for the petitioning-creditor, who argued the general case on behalf of the unsecured creditors as well as the liquidator, stated that in the light of his study of the papers, a further question appeared to arise as to whether the mortgages claimed by the bank were not invalid for non-compliance with the terms of section 293 of the Companies Act, 1956. I observed that if any such objection was capable of being clearly formulated, it was perhaps better to make it the subject of a separate application by the liquidator setting out the case fully, and directed that if any such application is filed, the same may be brought up for hearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld have been paid. Before proceeding to examine this objection, it is necessary now briefly to narrate the undisputed facts. The said facts can be gathered from the further affidavit on behalf of the bank filed on 23rd November, 1967, and the various documents filed by the bank, both on 10th as well as on 23rd November, 1967. For the purpose of finding finance for its scheme of improvement and expansion of business, the company appears to have approached the bank for financial assistance late in 1961 or very early in 1962. The negotiations between the company and the bank resulted in the bank agreeing to lend to the company seven and a half lakhs of rupees to ten lakhs of rupees on the company agreeing to secure due repayment of the same by mortgaging its immovable properties, viz., lands, mills, buildings, etc., and hypothecating all its machinery, vehicles, tools, implements, etc., and also agreeing to certain further conditions enabling the bank to keep a close watch over the working of the company and the handling of its funds. On 15th January, 1962, two deeds were executed in favour of the bank-exhibit R-15, a mortgage of lands and buildings for a principal sum of two and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above facts by Amberkar, ex-managing director of the company, in his affidavit filed into court on 24th November, 1967. In the course of the preparation of the inventory, directed by me in my order dated 10th November, 1967, it was discovered that the mill premises locked by the bank contained not merely machinery and spare parts said to have been hypothecated to it but also several books, papers and records of the company and articles of furniture belonging to the company which are admittedly not part of the properties either mortgaged or hypothecated to the bank. The books and papers have been taken possession of by the liquidator pursuant to my order of 10th November, 1967. The articles of furniture are said to be still lying in the mill premises locked and retained possession of by the bank. In the light of the pleadings in these two applications, the points that arise for consideration at present are : "1.Whether the liquidator's application No. 20 of 1968 is incompetent or unsustainable either because the liquidator should have filed a suit or because the court fee should have been paid on it as for a suit; 2.Is the bank entitled to sell the lands and buildings, mach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany expressly stated in sub-section (2) of section 456 is: "All the property and effects of the company shall be deemed to be in the custody of the court as from the date of the order for the winding up of the company." "Court", of course, by definition means the company court which made the winding up order. Under sub-section (1) of the same section, it is provided: "Where a winding up order has been made.........the liquidator......shall take into his custody or under his control, all the property, effects and actionable claims to which the company is or appears to be entitled." Section 467 of the Act states, among other things: ".........the court.........shall cause the assets of the company to be collected and applied in discharge of its liabilities." According to rule 232 of the Companies (Court) Rules, 1959, the duties imposed on the court by sub-section (1) of section 467 of the Act with regard to the collection of the assets of the company and the application thereof in discharge of the company's liabilities shall be discharged by the official liquidator as an officer of the court, subject to control of the court. Rule 233 states that the official liquidator shall, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, to reduce to his possession properties of the company, whether mortgaged to third parties, or not, the liquidator is not trying to recover any property from anybody; he is acting on behalf of the court into whose custody the properties have already come by virtue of the winding up order. In the event of any third party resisting or opposing or questioning his attempts to reduce the property to his possession in the name of the court, if the liquidator considers it necessary to approach the court for directions, he is merely acting under sub-section (4) of section 460 of the Act and invoking the powers of the court under section 446(2)(d) of the Act and rule 233 of the Companies (Court) Rules, 1959. The clearest position therefore is that the liquidator, in such circumstances, is not obliged to file a suit, nor is the filing of a suit or an application in the nature of a suit before the winding up court the only or the necessary way of invoking the jurisdiction of the company court. The proper proceeding is undoubtedly an application made to the winding up court, and the court-fee payable thereon is as for an application and not as for a suit. The proper article applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for payment of all sums due to the bank, the only clause which is of importance to the present discussion is clause No. (6), which reads as follows: "AND IT IS HEREBY MUTUALLY AGREED AND DECLARED as follows : The lenders shall have power to sell the machinery, etc., hereby assigned and charged or any of them, or to take possession of the same upon the happening of any of the following events, that is to say: (i)If payment of money hereby secured has been demanded and the borrowers have made default for one month in paying the same. (ii)If the borrowers shall pass resolution for voluntarily winding up or an order for winding up is made by a court against the borrowers or the borrowers suffer execution to issue against them to enforce any judgment or order or shall suffer any distress to be levied on the said machinery. (iii)If the borrowers shall make default in payment of the whole or any part of the sum due from them to lenders in respect of any negotiable instrument. (iv)If the borrowers fail to observe any of the provisions hereof binding on them." The effect of the said sixth clause taken along with the provision for continuing security is clearly to create what is ordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alling within the scope of the hypothecation. It is equally admitted by the bank that the articles of furniture found in the mill premises are not articles covered by the hypothecation. Hence, I hold that, whereas the bank may retain possession of all items of machinery, spares, machine parts, implements and tools, as forming part of their security, it should deliver to the liquidator all articles of furniture. Regarding immovable property, the case of the bank is that the relevant documents evidence an English mortgage as defined in the Transfer of Property Act and that they confer in clear terms on the banks the right of private sale without the intervention of court. It is also stated that because it is an English mortgage, the bank is entitled to take and retain possession. Exhibit R-15 is the first such mortgage. Clause 2 thereof contains the main provision to the effect that in consideration of the terms the mortgagors-company grant, release, convey and assure unto the lenders' bank all the immovable property described in the schedule, to hold the same subject to the proviso for redemption. The provision for redemption is contained in clause 3, which reads: "If upon such d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of these presents the lenders shall have the right to take over the management of the whole concern and business of the mortgagors as well as the right to sell and realise all the properties and assets mortgaged to the lenders hereunder and the mortgagors shall in such event forthwith on demand by the lenders hand over charge and management of the whole of the business and undertaking of its concern to the lenders AND any transfer of any of the properties and assets made by the lenders in exercise of any of the powers of sale and realisation under the foregoing provisions shall vest in the transferee all rights in or to the property or assets transferred as if the sale had been made by the mortgagors themselves." One other matter which I must mention is that the executants of the mortgage deed are the company itself described as the mortgagors and eight of its directors described as the sureties. The personal covenant in clause 1is an undertaking by both the company as well as the sureties to repay the money jointly and severally. With reference to the said sureties, clause 12 seems to keep their liability alive irrespective of whatever happens to the liability of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be exercised only by a living person and not by a fictitious person like an incorporated company. The argument is not acceptable because the terms "Hindu, Muhammadan, Buddhist" are used to describe a class which is excluded from the larger class of mortgagees, and the term "mortgagee" is defined in section 58 as merely the transferee mentioned in the main definition of a mortgage as a transferee of interest in a specific immovable property for the purpose of securing the payment of money advanced, etc. That term is large enough to include all persons, living or fictitious, capable of bearing rights and liabilities. Another argument based on the same exclusion contained in clause (a) of section 69(1) is that in exhibit R-15, the mortgagors are not only the company but also the eight directors who have joined as sureties, all of whom are Hindus. This again is an argument which cannot be accepted, because the property that is transferred by way of mortgage is undoubtedly that of the company, which alone can transfer it or an interest therein, and which alone can therefore be described as a mortgagor who, according to section 58, is the transferor in a transaction which amounts to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iculty. But here again, the relevant facts are not in dispute. The only controversy is in regard to inferences properly available from the said facts and their legal effect. Portions of section 293 of the Companies Act which are relevant to the discussion are clauses (a) and (d) of sub-section (1). They read as follows: "(1)The board of directors of a public company, or of a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting,- (a)sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking; ...... (d)borrow moneys after the commencement of this Act, where the moneys to be borrowed, together with the moneys already borrowed by the company (apart from temporary loans obtained from the company's bankers in the ordinary course of business), will exceed the aggregate of the paid up capital of the company and its free reserves, that is to say, reserves not set apart for any specific purpose." The facts are the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company's activities by way of subscription of more capital will not be convenient at this stage. It is proposed therefore to raise funds by way of borrowing moneys from various sources. The borrowings made to date as also the borrowings required to be made hereafter will exceed the limits prescribed by section 293 of the Companies Act. It is therefore considered necessary to get the approval of the shareholders to the borrowings proposed to be made as also to the borrowings already made." There was a subsequent extraordinary general meeting of the company held on 24th May, 1962, at which an amendment to the articles of association of the company was carried out with a view to authorise the bank to appoint special directors to sit on the board of directors of the company to protect its interests in view of large loans made by it to the company. Exhibit P-3 produced from the records of the Registrar of Companies is the notice convening the said meeting. The explanatory statement under section 173 in regard to the said amendment appended to the notice reads as follows : "The company has taken a loan of Rs. 7,00,000 from the Bank of Maharashtra Ltd. The said bank requires as one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction, whether it consists of more parts lthan one independent of each other or as a single transaction, is no more than a mortgage or a security and cannot therefore be regarded as a disposal of its undertaking, meaning a parting away with its enterprise or its profit-earning capacities. An undertaking, according to Webster's Dictionary, only means something that is undertaken or a business, work or project which one engages in or attempts, or an enterprise. The undertaking of the company in that sense has not been, according to Mr. Ullal, parted with by the company under or by virtue of the mortgages and hypothecations. He also suggests that the resolution, exhibit P-1(a), should not be read in the limited way in which Mr. Sundaraswamy wants to do or that, in any event, it must be held that there has been ratification of all the transactions by the company agreeing to the amendment of the articles of association under the resolution, exhibit P-1(b). Mr. Sundaraswamy contends in reply to Mr. Ullal that in view of the express words of the language used in the resolution, exhibit P-1(a), there can be no doubt that the attention of the company was confined to clause (d) of sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss or undertaking, i.e., things or articles which are necessarily to be used to keep the undertaking going or to assist the carrying on of the activities leading to the earning of profits. Mr. Sundaraswamy has placed strong reliance on the observations of Giffard L.J. in his judgment in the case of In re Panama, New Zealand and Australian Royal Mail Company [1870] 5 Ch. App. 318. Dealing with certain floating charge, which used the term "undertaking", his Lordship stated that the word "undertaking" there used had reference to all the property of the company not only existing on the date of the debenture but what might afterwards become property of the company. Now, to understand the effect of the above judgment of Giffard L.J., and the principles derivable therefrom, it is necessary to point out that the said judgment is a landmark in the legal history of what are called floating charges in English company law. Floating charge is a peculiar legal concept specially developed in English law in consonance with the interests and successful working of manufacturing or trading companies. Having regard to the nature and extent of the operations of such companies, it was impossible to me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... App. 318, 322: "Accordingly they did issue what they called a mortgage debenture, which was, in substance, a bond, and a charge upon their property for the sum borrowed on bond. The form of the instrument is not an assignment but a charge; the company charge the undertaking, and all sums of money arising therefrom, and all estate, right, title, and interest of the company therein, with payment of the principal sum and interest. I asked in the course of the argument what could be the subject matter of that charge, and the answer given was, that there were valuable contracts, and that all that the charge was meant to cover was the income arising from the business being carried on, and that it would not extend to property, such as the ships and other property of that nature, which were absolutely essential to the carrying on of the concern. I cannot accede to any such proposition as that. I have no hesitation in saying that in this particular case, and having regard to the state of this particular company, the word 'undertaking' had reference to all the property of the company, not only which existed at the date of the debenture, but which might afterwards become the property of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f hypothecation of movables, the contingencies in which the bank can take possession of the hypothecated properties are more elaborately enumerated and they include not only defaults on the part of the company but also winding up, whether voluntary or compulsory. In actual effect, therefore, the documents create what can rightly be described as a floating charge or more accurately, the documents, properly understood, have the same effect as a floating charge described above. It cannot therefore be contended that the company has disposed of the whole or any part of its undertaking understood in the correct sense. There is, however, only one clause which appears to be out of tune with that I have stated above, and that is clause 5(i) of the deed of mortgage, exhibit R-15. The effect of that clause is to empower the bank not merely to take possession as mortgagee for the purpose of realising its dues from out of the property expressly given to it; as security but also to actually take over the management of the business of the company. It appears to me that the said clause is invalid, because to permit the bank to take over the management of the company's business itself may be reg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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