JUDGMENT Ghulam Hasan and Madeley, JJ. - This appeal by creditor arising out of proceedings under the U.P. Encumbered Estates Act is directed against an order dated the 21st September, 1939, pasted by the Special Judge, first grade, Fyzabad. 2. The facts lie within a narrow compass. An application u/s 4 of the U.P. Encumbered Estates Act was filed by two persons in 1936. The Appellants who were the creditors put forward their claim for Rs. 9,769-12 9 on the basis of a promissory note accompanied by a pawn of gold ornaments weighing about 372 tolas made on the 12th May, 1933. A decree was passed on the 19th September, 1939, in favour of the Appellants for Rs. 8,992-14-0. Before this decree was obtained and during the pendency of the Encumbered Estates Act proceedings the Appellants in exercise of their powers u/s 176 of the Indian Contract Act sold the gold for Rs. 11,325. Two days after the passing of the decree, viz. on the 21st September the Appellants made an application intimating to the Court the sale of the ornaments which they stated had been sold after giving notice to and obtaining the permission of the landlords-debtors. They asked that they should be allowed to deduct the money due to them and deposit the balance in Court. Should their prayer be granted they suggested that their decree should not be sent to the Collector for execution. The learned Special Judge rejected this application. He held that the Appellants had no right to sell the ornaments to satisfy their own debt in contravention of the provisions and spirit of the Encumbered Estates Act. Accordingly he called upon the Appellants to deposit the entire sum of Rs. 11,325. This sum, we understand, has been deposited by the Appellants. 3. After this order was passed the learned Special Judge on the same day passed an order u/s 16 of the Act ranking the Appellant's debt as an unsecured debt under class (6) of that section The Appellants have filed an appeal against the order dated the 21st September 1939, which is described in the memorandum as an order by which the debtors have been called upon to pay to the Appellants the sum of Rs. 8, 992.14 with interest at a certain rate.
8, 992.14 with interest at a certain rate. In the memorandum of appeal, apart from the objections taken to the order of the Special Judge directing them to deposit the entire amount. They have also raised the objection that the Court below ought to have ranked the Appellant's debt for priority under class (3) and not under class (6). Along with the memorandum of appeal the Appellants have filed the order dated the 21st September, 1939, dismissing the Appellant's application to deposit only the balance of the money after satisfying their decretal debt but have not filed the ranking order. However, the Appellants have now filed an application accompanied by an affidavit along with which they have filed the ranking order of the 21st September, 1939. This application states that the certified copy of the two portions of the order dated the 21st September, 1939, obtained by the guardian of the Appellants, who are all minors, that both portions of the order were made over to the Appellants' Counsel with necessary power to file the appeal with instructions to question both the parts of the order dated the 21st September, 1939, but the Counsel through a bona fide mistake, omitted to file the ranking order. Having heard learned Counsel for parties, we allow the application and have admitted the order filed. 4. The landlords-debtors have not teen made parties to the appeal. 5. A preliminary objection has been taken on behalf of the Respondents creditors that as the landlords-debtors have not been made parties to the appeal, the appeal is not maintainable. A further objection has been raised that there is no appeal against the ranking order and consequently the Appellants are not entitled to argue the point that their debts should have been ranked under class (3) and not under class (6). 6. We are of opinion that there is no substance in these objections. As regards the first objection, the failure to implead the debtors as parties to the appeal will not be prejudicial to their interest. All the creditors have been made parties. The real dispute lies as between the creditors. While on the one hand, the Appellants claim that their debt should rank under class (3), the other creditors contend that it should rank under class (6).
All the creditors have been made parties. The real dispute lies as between the creditors. While on the one hand, the Appellants claim that their debt should rank under class (3), the other creditors contend that it should rank under class (6). Class (3) read as follows:-- "Class (3)--Debts secured upon property against which the Collector may take action under the provision of Section 24 up to the value of the security." 7. Class (4) mentions other secured debts and class (6) unsecured debts. It is clear that class (3) refers to a debt secured upon property other than proprietary rights in land. As the security in the present case was the gold ornaments, there can be no doubt whatever that the debt was originally a Secured debt. If the Appellant's debt is ranked under class (3), they will have the advantage of satisfying their entire debt decreed to them out of the security of ornaments which is now replaced by money. This will give them an advantage over other secured creditors of class (4). These creditors will be entitled to share only in a rateable distribution of assets, while unsecured creditors will come last after the claims of the first five classes have been satisfied. If the appeal succeeds the other creditors will be placed at a disadvantage and as they have been made parties, their rights are fully protected. The landlords-debtors are not likely to suffer by such a result. 8. As regards the second objection, we are not prepared to bold that no appeal has been filed against the ranking order. It is true that the ranking order was not filed along with the memorandum of appeal but ground No. 5 clearly raises the objection regarding the ranking of the Appellant's debt. The description in the memorandum of appeal affords no assistance to the Respondent's contention. All that it says is that the order of the Special Judge dated the 21st September 1939, decided that the debtors do pay to the Appellants the sum of Rs. 8,992-14-0 with interest at a certain rate As a matter of fact if this description is held to apply to the first order dated the 21st September, 1939, upon the Appellant's application, it is a clear misdescription, because that order definitely says that the Appellants should deposit the sum of Rs.
8,992-14-0 with interest at a certain rate As a matter of fact if this description is held to apply to the first order dated the 21st September, 1939, upon the Appellant's application, it is a clear misdescription, because that order definitely says that the Appellants should deposit the sum of Rs. 11,326 with interest thereon from the 2nd October, 1938, when the ornaments were sold. The ranking order itself shows that it was passed immediately after the Appellant's application was dismissed. It seems to us that the order dated the 21st September is a composite order dismissing the Appellant's application and ranking of debts. The fact that the Appellants have clearly objected to the ranking order in their memorandum of appeal is sufficient in our opinion to show that, the Appellants had filed the appeal in respect of the ranking order as well. For all practical purposes the two orders form an integral whole and cannot be regarded as separate orders. In any view of the matter, it appears to as that the objection raised on behalf of the Respondents is highly technical and cannot be allowed. 9. As to the merits, learned Counsel for the Appellants does not press the grounds of appeal relating to the order about the deposit of the entire amount of the sale proceeds and has confined his argument only to the point that the Appellant's debt should have been ranked under class (3) and not under class (6). On behalf of the Respondents, it has been objected that the Appellant's debt can no longer be regarded as a secured debt inasmuch as, although it was originally a secured debt, the security disappeared upon the sale of the pawned ornaments by a deliberate act of the Appellants themselves. It is also urged that the Appellant claimed only a personal decree and cannot ask to be classed under class (3) of Section 18. The latter objection is devoid of force.
It is also urged that the Appellant claimed only a personal decree and cannot ask to be classed under class (3) of Section 18. The latter objection is devoid of force. Every creditor in the Encumbered Estates Act proceedings, whether secured or unsecured, is entitled only to a simple money decree u/s 14(7) of the Act, and the effect of such a decree is to extinguish the previously existing rights, if any, of the creditor together with all rights, if any, of mortgage or lien by which the same are secured and, where any decree is given by the Special Judge to substitute for those rights a right to recover the amount of the decree in the manner and to the extent laid down (vide Section 18). Regarding the former objection, we are of opinion that the proper date for determining whether the debt is a secured debt or not is the date on which the debt was taken and not the subsequent date when the security disappeared. If this be the correct view, then there can be no doubt that the Appellant's debt which was originally secured continued to remain so far the purposes of ranking u/s 16 of the Encumbered Estates Act. 10. In Kunj Behari Lal v. Ketki Kunwar 1937 A.W.R. 166, a question arose with reference to Section 30 of the U.P. Agriculturists' Relief Act whether the loan should be treated as a secured loan or unsecured loan. Originally the loan was secured by a mortgage. The mortgagee gave up the security and obtained a simple money decree. If the loan was treated as a secured loan, the creditor was entitled to a lesser amount of interest than if was treated as an unsecured loan. The learned Judge held that the correct date to take for the division of loans into the classes, secured or unsecured, is the date on which the loan was taken. Accordingly they treated the loan as a secured loan. 11. The principle enunciated in the above case was followed in Kushal Chand v. Pirthipal Singh 1937 O.W.N. 876, by a Bench of this Court where the facts were just the reverse of those in the Allahabad case, lathis case the loan was originally unsecured but the creditor obtained some property as security by the terms of a compromise decree.
11. The principle enunciated in the above case was followed in Kushal Chand v. Pirthipal Singh 1937 O.W.N. 876, by a Bench of this Court where the facts were just the reverse of those in the Allahabad case, lathis case the loan was originally unsecured but the creditor obtained some property as security by the terms of a compromise decree. It was held that the loan must be treated as an unsecured loan as it originally was. 12. We hold, therefore, that the Appellant's debt must be treated as a secured debt and the order of the Court below should be set aside. Accordingly we set aside the decision of the Special Judge and order that the Appellant's debt should be ranked under class (3) and not under class (6) of Section 16 of the Encumbered Estates Act. 13. The appeal is allowed with coats.