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TMI Blog1982 (12) TMI 150X X X X Extracts X X X X X X X X Extracts X X X X ..... by the State Trading Corporation of India, New Delhi, a creditor, inasmuch as the bank was a secured creditor and was entitled to preferential payment even before the tax dues, if any, were settled. While that petition was pending, C.A. No. 49 of 1977 was filed by the bank in the circumstances hereafter to be set out. In the latter application the bank has prayed: (1)For a declaration that the official liquidator is not entitled to go into the question of the status of the bank as a secured creditor on the date of the application; (2)That the official liquidator be directed by an order of the court to pay to the bank the amounts due to it on the basis of the claim already made including interest up to date from out of the sale proceeds of Rs. 85 lakhs realised from the sale of the assets movable and immovable of the company in liquidation as substituted security for the movable and immovable assets charged to the applicant and allowed to be sold in C.P. No. 15 of 1972; (3)For an order or orders to grant such further or other consequential directions as may be necessary in the circumstances in the interest of justice. The bank claims, to the best of its knowledge, to be th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it has neither surrendered nor abandoned its security over the assets of the company in liquidation. In that behalf, the bank has asserted that in the proceedings before the court and the official liquidator, the bank took the plea that it would not come into the winding-up proceedings but would only enforce its own security. Subsequently, however, it felt that this course of action would only involve considerable time and expenditure as well as on account of the circumstances that at one point of time the Karnataka Agro-Industries Corporation, a State Government company, was intending to purchase the assets of the company in liquidation, the bank made its position known that it would allow the assets of the company in liquidation to be sold subject to its right of receiving out of the sale proceeds the amounts due to it on a preferential basis by way of substituted security. It is also asserted by the bank that when the official liquidator called upon the bank to hand over the possession of the assets, books and records in pursuance of the order of this court, the bank had written to the official liquidator on March 31,1973, intimating the security held by it against the asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Company Application No. 116 of 1974 the official liquidator had filed a report in the court opposing payment to some of the ex-employees of the company in liquidation, inter alia , on the ground that the claims of the secured creditor had yet to be discharged in full first, and thereafter only the claims of the employees could be discharged. The bank has also asserted that throughout the proceedings in Company Petition No. 15 of 1972, the official liquidator never questioned the status of the bank as a secured creditor. It is, therefore, the bank's contention that the official liquidator could only determine the exact amount' due to the bank and not to determine whether the bank was a secured creditor or not. The bank also has drawn attention to the fact that the official liquidator in the revised return of income-tax had in fact deducted a sum of Rs. 60,85,560 as the amount due to the bank in whose favour the charge had been created before the order for winding up was made. Soon after the filing of the application, some of the former employees of the company in liquidation filed an application to be impleaded as respondents so that they could contest the claim of the bank to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pleaded as above, Venkatachaliah J., who was the company judge at the relevant time, framed the following issues for determination after hearing the parties on February 24, 1978 : (1)what is the amount due to the State Bank of Mysore from the company (in liquidation) ? (2)whether the amount due to the applicant-bank or any part thereof, is secured by a mortgage by deposit of title deeds of the immovable properties of the company (in liquidation) or by hypothecation or pledge of its movable properties as claimed by the applicant-bank ? (3)Whether the applicant-bank has surrendered or relinquished its security at any stage of the winding-up proceedings ? The bank has led formal evidence and examined four witnesses and has got marked as many as 66 documents in support of its case. The respondents have not led any formal evidence. They have been content with cross-examining the witnesses of the bank and also raising formal objections in regard to the admissibility of certain documents marked for the applicant-bank. It is convenient to take up first, the second of the issues which goes to the very root of the matter. The bank, as already stated, has examined four witnesses t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exhibit P-5. On January 21, 1965, the company executed another demand promissory note for Rs. 5 lakhs as per exhibit P-6. Exhibit P-6, according to the witness, was in relation to cash credits given. Contemporaneously with exhibit P-6, another agreement of hypothecation of goods was executed by the company in favour of the bank as per exhibit P-7. On June 29, 1966, the company executed a demand promissory note for Rs. 30 lakhs as well as a deed of pledge for the said amount of Rs. 30 lakhs as per exhibit P-9. On June 8, 1965, according to P.W. 1, the company executed in favour of the bank yet another demand promissory note for Rs. 25 lakhs and also a deed of pledge of goods as per exhibits P-10 and P-11 respectively. On December 26, 1966, the company executed in favour of the bank another demand promissory note for Rs. 50 lakhs as per exhibit P-12 as well as another deed of pledge as per exhibit P-13. On July 29, 1966, the company executed in favour of the bank another demand promissory note for Rs. 10 lakhs accompanied by a deed of pledge on the same day, as per exhibits P-14 and P-15 respectively. The witness also has deposed to the fact that on November 18, 1964, the company cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated the mortgage and, therefore, that was a document which was required to be registered under the Registration Act as well as under the Transfer of Property Act and not having been so registered was inadmissible in evidence. The documents were, however, received in evidence subject to the ruling of the court at the appropriate time and I think this is the appropriate stage at which these matters should be dealt with. The settled law in relation to what constitutes movable property and immovable property is to see whether things embedded in the earth are so embedded with the intention of making it permanently a part of the building or land in which they are so embedded. The plant and machinery in a factory premises can by no stretch of imagination be said to have been embedded in the earth with the intention of making it permanently a part of the land or the building. It is common knowledge that plant and machineries even though embedded in the earth are liable for removal either for repairs or for replacement. Therefore, the deed of hypothecation of the plant and machinery cannot be said to be in respect of part of the immovable property of the company in liquidation. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier by the constructive delivery of title deeds with the intention to create an equitable mortgage is not an instrument evidencing deposit of title deeds and is not liable to stamp duty under article 6 of the Schedule to the Mysore Stamp Act." From the above ruling, it is clear that exhibit P-18 cannot be construed as an instrument evidencing creation of a mortgage. Therefore, the objections raised by the learned counsel for some of the respondents is not tenable and, therefore, the same is overruled. The documents in question are liable to be received in evidence. P.W. 1 has further stated that on August 31, 1966, the company in liquidation deposited some more documents and that on March 10, 1966, the deposit of title deeds till then made and affirmed by a resolution of the board of directors of the company was also indicated to the bank. He has stated that the said resolution was accompanied by a complete list of documents till then deposited with the bank. The letter dated March 10, 1967, from the company in that behalf, the copy of the resolution furnished to the bank and the list of documents are maked as exhibits P-17, P-18 and P-19 respectively. The witness has then spok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of the bank, for the period between June 23, 1967, and January 4, 1971. He has stated that he took over from P.W. 1. He has stated that the company in liquidation was a constituent of the Mysore branch at the time when he took charge of that branch. He has stated that as part of taking over charge, he took possession and charge of all the documents executed by the company as security in favour of the bank. He has spoken to exhibit P-26, a deed of pledge. It was executed by the company in liquidation when he was in charge of the branch at Mysore. That deed of pledge, according to the witness, was for securing a sum of Rs. 55 lakhs which had been advanced on cash credit account. He has asserted that exhibit P-26 was executed in his presence at the bank. He has spoken in exhibit P-27 being a certified copy of the registration of charge with the Registrar of Companies. He has spoken in exhibit P-28 being a modification of that charge. In the cross-examination, nothing very useful has been elicited by the learned counsel for the interveners in so far as it touches upon issue No. 2. However, an attempt has been made to get P.W. 2 to estimate the value of the land in 1964 and 1967. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged from December 8, 1971, onwards. He has stated that the rates of interest were linked to the Reserve Bank of India advance rates till January 8, 1971, and thereafter were linked to the State Bank of India rates. He has also stated that no penal interest was charged to the company in liquidation even though the terms of the loans permitted the same. In cross-examination by Shri Shivaramaiah, the learned counsel for the interveners, witness has denied the suggestion that exhibits P-29 and P-30 are not true extracts of the corresponding books of account of the bank. He has, however, stated that the extracts at exhibits P-29 and P-30 did not contain all that is to be found in the ledger such as the rates of interest, etc . He has stated in cross-examination that exhibits P-31 and P-32 relate to the medium-term loan and that so far they had not produced the ledgers relating to the cash credit account. He has admitted in his cross-examination that no vouchers or cheques have been produced by the bank in favour of the company in support of the books of account. On further examination-in-chief with the permission of the court, the witness has produced exhibit P-34, the cash credit ledg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned counsel, exhibit P-38 is a mere copy of the Government order sanctioning the acquisition of a small bit of land for the company in liquidation in 1941 while exhibits P-39 to P-64 are mere encumbrance certificates in respect of certain lands which by no means could be called, much less answer to the description of title deeds to immovable property. Shri S.G. Sundaraswamy, learned counsel for the bank, has drawn my attention to several decisions but it will suffice it to notice a decision of the Division Bench of the High Court of Madras in the case of Angu Pillai v. M.S.M. Kasiviswanafhan Cltettiar, AIR 1974 Mad. 16. In the said case, the learned judges had to decide whether tax receipt issued in favour of the mortgagor together with an agreement of sale to purchase the property in in respect of which he had paid the tax satisfied the requirement of section 58( f ) of the Transfer of Property Act. Learned judges of the Madras High Court approving the Full Bench decision of the Rangoon High Court in K.L.C.T. Chidambaram Chettyar v. Aziz Meah, AIR 1938 Rang. 149, came to the conclusion that it is not necessary that the most material of the document of title should be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... larly, the parties have not led any evidence in these proceedings on this issue but have relied, by consent, on the records of C.P. No. 15 of 1972 to make their points. It is seen from the affidavit of the then official liquidator, dated January 8, 1974, filed in C.A. No. 24 of 1974 that the bank which had intervened therein as seventh respondent had by its letter dated December 31, 1973, had furnished to him the details of its interest in the assets of the company as a secured creditor claiming a sum of Rs. 56,17,164.01 under cash credit loan as well as the medium-term loan. By his letter dated January 31, 1974, the official liquidator requested the bank to send all the title deeds held by it in respect of the two loans advanced to the company in liquidation for purposes of verification promising to return the same after verification. The bank replied to the same by stating that they were not willing to do so unless there was an order of the court to that effect and that the representative of the official liquidator could have inspection of the same at its Mysore branch. In the report dated April 4, 1974, the official liquidator in C.A, No. 24 of 1974 prayed for an order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... willingness to stand within the liquidation proceedings subject, however, to receiving out of the sale proceeds on a preferential basis the amounts due to it as secured creditor as notified to the official liquidator on August 31, 1974. The bank further stated in the said affidavit that the official liquidator may be directed to negotiate the sale of assets with the Karnataka Agro-Industries Corporation or in the alternative to sell the assets en bloc by open auction. The bank further offered its full cooperation to the official liquidator as may be directed by the court. It was in these circumstances that the court on March 25, 1975, made the order in C.A. No. 38 of 1975 permitting the sale of the assets by 1974, public auction after proper advertisement and publicity as directed in the order. In the result, at the auction held in court on May 27, 1975 ) M/s. Gammon India Ltd. came to purchase the assets for Rs. 85 lakhs. This, in spite of the fact that the valuer appointed by the court had valued all the assets at rupees one crore eighty lakhs. After hearing all parties concerned on July 11, 1975, the court confirmed the sale in favour of the auction purchaser. From the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. In the case of Kanniappa Mudali v. P.V. Raju Chettiar, AIR 1924 Mad. 761, a Division Bench of that High Court deciding a question arising under section 16(5) and section 31 of the Provincial Insolvency Act of 1907 corresponding to section 28(2) and 47(3) of the Insolvency Act, 1920, ruled as follows (p. 762): "...Sale by mortgagor without a relinquishment by the mortgage, but merely with the consent of the mortgage expressed in an unregistered document, cannot be valid unless the facts amount to an authorisation of the mortgagor to sell on the mortgage's behalf or to an agreement by the mortgage to accept such sum as may be realised in the sale in discharge of his debt." All that the bank has done in the instant case is to consent to the sale of assets subject to payment of its dues on a preferential basis. Mere fact of giving consent cannot have the effect of destroying its security. Similarly, in the case of Govinda v. Abdul Kadir (Khansahib) AIR 1923 Nag. 150, Acting Judicial Commissioner, Nagpur, in deciding as to what were the available assets for distribution by the receiver under section 56 of the Insolvency Act held that where any part of the insolvent's p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which the property was sold ; the mortgage claimed that the amount realised should be paid to him on a preferential basis as he had retained the lien on the mortgage amount. The official receiver accepted that plea and proceeded to pay the mortgage amount preferentially to the mortgage. That was objected to by others and they filed an appeal before the sub-judge against the decision of the official receiver. The sub-judge upheld the decision of the official receiver rejecting the contention of the appellants that by permitting the sale of the mortgage property, the mortgage had relinquished any rights which had accrued to him in accordance with law. On further appeal, the District Judge confirmed that view. Therefore, a revision petition was filed before the High Court. The learned judge, dealing with the questions raised before him and particularly dealing with the contention advanced that the mortgage who had given permission to the sale subject to the mortgage amount being paid to him had relinquished his right to claim preferential treatment in terms of sub-section (3) of section 47 of the Insolvency Act, held as follows: "In order to understand the implications of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words in exhibit B-1 which warrant any conclusion that the mortgage had relinquished his security...." In fact, sub-section (3) of section 47 lends support to this method of payment to the mortgage. If the official receiver proceeds to sell the security, the court first has to pay the amount at which the security was valued to the secured creditor out of the sale proceeds. Whatever may be the position in regard to the balance in so far as the value of his assessment is concerned, he can be preferentially paid out of the sale proceeds. If the sale was valid, I fail to see how the mortgage could be deprived of his security, particularly when he had not relinquished. The property was sold with a clear understanding that the mortgage will be paid first from the sale proceeds. This mode of realisation of security is not, in my view, derogatory either to section 47 or to section 59 of the Act.... I am in respectful agreement with the reasoning of the learned single judge for the reasons already stated, supported by the authority of the Supreme Court decision, that the mortgage cannot relinquish his rights except by an instrument provided for the relinquishment of rights under law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But in the affidavit of proof of debt filed before this court by the bank as on August 31, 1974, a sum of Rs. 29,32,708.06 has been claimed against cash credit facilities and for the same period ending August 31, 1974, the term loan is claimed at Rs. 11,25,002.33. The bank has further claimed a sum of Rs. 13,925 as other expenses in the affidavit of proof. It can straightaway be said that the claim of Rs. 13,925 cannot be treated as an amount due to the bank as a secured creditor and in respect of that amount, they have to stand in the queue as ordinary creditors. But, in the course of the argument it has been brought out that the bank has arrived at those figures as evidenced by annexures A and B to the affidavit of the bank filed on August 17, 1976. Unpaid interest has been treated as loan advanced and for the subsequent period, interest is charged on such interest. This is usurious in character. But no evidence has been led in regard to this matter. In fact, the counsel at the Bar were unable to submit as to which law governed the usurious nature of the transactions both in respect of cash credit facilities and the term loan at the relevant time, but brought to my notice the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, was never treated as evidence in these proceedings. But, what is evidence in these proceedings is the oral testimony of P.W. 2, B.C. Mallaraj Urs, one of the bank managers at the relevant time at the Mysore City branch, He has stated that for the period, i.e ., in 1967-68 when he had occasion to deal with the company in liquidation for giving the loans, the land value was in the region of 10 to 15 thousand rupees. The valuer also in his report has mentioned 16 thousand rupees as the value of the land which had been converted but that report was after the liquidation proceedings had commenced. It is safe to rely upon the estimate made by one of the bank's own officers at the time of giving loan and add some increase to the price on the date of sale having regard to general rise in the value of land in the area and that rise in price may be taken at 25 per cent, between 1967 and 1975. Thus, the land value should be arrived at for purposes of deciding this issue at 15 thousand rupees. Giving margin for roads and wastage at 10 per cent, the value of the land would still be Rs. 13,500 per acre. Therefore, 214 acres and 11 guntas of land should be valued at Rs. 13,500 per acre by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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