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1958 DIGILAW 32 (MAD)

T R Tyagarajan v. Official Liquidator and Others

1958-01-27

GANAPATIA PILLAI, P.V.RAJAMANNAR

body1958
Judgment :- RAJAMANNAR, C.J. This is an appeal against the order of SUBRAHMANYAM J., passed by him on an application made by the appellant, T.R. Tyagarajan (Appln. No. 584 of 1958) to modify an order of the official liquidator dated 27th January, 1958, passed in the course of the proceedings in the liquidation of a public limited company named Messrs. Kutty and Rao (Engineers)ltd. The Indian National Industries Ltd., were the managing agents of kutty and Rao Ltd. There was another private limited company called Sayanas Ltd., of which the appellant claims to be a secured creditor for a sum of Rs. 21, 180. He alleged that Messrs. Sayanas Ltd., gave, as security for the sums advanced by him, certain moveable properties of the approximate value of Rs. 20, 000. They Comprised Chandler and price Folio size treadle I Hongkong half-crown treadle I Chandler and Price 24" cutting machine I Perforating machine I Lead types 4000 lbs Racks for types 50 Stands 12 Subsequently instead of the indian National Industries ltd., Messrs. Sayanas Ltd. were appointed as managing agents of Messrs. Kutty and Rao ltd. There was an agreement entered into dated 11th May, 1955, in and and by which it was inter alia agreed that there should be a transfer of the assets and liabilities of Sayanas Ltd. to Kutty and Rao Ltd. On 3rd June, 1955, the board of directors of Sayanas Ltd. passed a resolution approving the agreement entered into by its managing director with the then managing director of Messrs. Kutty and Rao Ltd. They further resolved to hand over the fixed assets and liabilities of the company at the time of handling over. On 25th June, 1955, the general body of Kutty and Rao Ltd., passed an extraordinary resolution agreeing to accept the agreement mentioned above and to accept the taking over of the assets and liabilities of Messrs. Sayanas Ltd. at the valuation approved by the board of directors. of Kutty and Rao Ltd. passed the following resolution " That the business of Messrs. Sayanas ltd. Sayanas Ltd. at the valuation approved by the board of directors. of Kutty and Rao Ltd. passed the following resolution " That the business of Messrs. Sayanas ltd. be merged with this company from 25th June, 1955, tentatively the actual de facto merger to take place from the date of approval of the managing agency and issue of consideration shares to the managing agents." * On 11th March 1957, BALAKRISHNA IYER, J., construed the effect of the above transactions to mean that there has been a transfer of the entirety of the assets and liabilities of Sayanas ltd. to Messrs. Kutty and Rao ltd. it is evidently on this footing that the appellant came to make his claim before the official liquidator in the winding up of Messrs. Kutty and Rao Ltd. The claim of the appellant was made under three promissory notes dated November 10, 1952, December, 17, 1952, and November 7, 1955, for Rs, 2, 000 Rs. 8, 000 and Rs. 6, 000 respectively carrying interest at the rate of 12 per cent., 13 per cent, and 10 per cent per annum. The official liquidator admitted the claim of the appellant for principal and interest due on the first two promissory notes but refused to admit his claim in respect of the third promissory note but refused to admit his claim in respect of the third promissory note because it had been executed on November 7, 1955 after the date of the agreement between the two companies in June 25, 1955. The appellant also claimed to be a secured creditor so far as the properties mentioned earlier in this judgment were concerned. He relief upon a letter given by I.S. Rao, managing director of Sayanas ltd., on December 17, 1952. The official liquidator refused to recognise this charge because it had not been registered with the Registrar of Companies and was, therefore void against the official liquidator under section 125 of the (Indian) Companies Act, 1956. The appellant thereupon made an application, out of which this appeal arises, to the judge dealing with company matters praying that the order of the official liquidator may be modified by treating the appellant as a secured creditor for the amount claimed on the ground that even, after the merger between Sayanas Ltd. and Messrs. The appellant thereupon made an application, out of which this appeal arises, to the judge dealing with company matters praying that the order of the official liquidator may be modified by treating the appellant as a secured creditor for the amount claimed on the ground that even, after the merger between Sayanas Ltd. and Messrs. Kutty and Rao ltd., so far as the creditors of Sayanas Ltd. were concerned, they were not to be affected by the merger and the provisions of section 125 of the (Indian) Companies Act do not affect the right of the creditors of Sayanas Ltd., who must be deemed to have the same rights against the company in liquidation so long as they were enforceable against Sayanas ltd., which had gone into liquidationThe only part to the application taken out by the appellant before SUBRAHMANYAM, J., was the official liquidator but it appeared that there were other parties who were vitally interested in the claim made by the appellant as a secured creditor. There was one Kalyanji N. Suchede who had a mortgage executed on August 16, 1956, over all the assets of Messrs. Kutty and Rao ltd., and there was also one P.B. Raju who held a mortgage of the properties of the company created in 1950 and there were also holders of debentures issued with a floating charge over all the assets of the company in liquidation. They were certainly proper parties to the appellant's application before SUBRAHMANYAM J., but notice was not taken to them. It was only on the last day of the hearing of the appellant's application that their advocates were heard. But they were not made parties. Before us they have been added as parties and their counsel were heard SUBRAHMANYAM J., dismissed the application of the appellant, Hence this appeal The following are the provisions of the Companies Act, 1956, in so far as they are material to the purpose of this appeal Section 124 : " Charge" to include mortgage in this part. - in this Part, the expression "charge " includes a mortgage Section 125 : Certain charges to be void against liquidator or creditors unless registered. - in this Part, the expression "charge " includes a mortgage Section 125 : Certain charges to be void against liquidator or creditors unless registered. - (I) Subject to the provisions of this part, every charge created on or after the 1st day of April, 1914, by a company and being a charge to which this section applies shall, so far as ant security on the company's property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge is created or evidenced , or a copy thereof verified in the prescribed manner, are filed with the registrar for registration in the manner required by this Act within 21 days after the date of its creation(2) Nothing in sub-section (I) shall prejudice any contract or obligation for the repayment of the money secured by the charge (3) When a charge becomes void under this section, the money secured thereby shall immediately become payable Section 127 : Registration of charges on properties acquired subject to charge. - (I) Where a company acquires any property which is subject to a charge of any such kind as would, if it had been created by the company after the acquisition of the property, have been required to be registered under this part, the company shall cause the prescribed particulars of the charge, together with a copy (certified in the prescribed manner to be a correct copy) of the instrument, if any, by which the charge was created or is evidenced, to be delivered to the Registrar for registration in the manner required by this Act within 21 days after the date on which the acquisition is completed (2) If default is made in complying with sub-section (I), the company, and every officer of the company who is in default , shall be punishable with fine which may extend to five hundred rupees Section 134 : (I) It shall be the duty of a company to file with the Registrar for registration the particulars of every charge created by the company, and of every issue of debentures of a series, requiring registration under this Part; but registration of any such charge may also be effected on the application of any person interested therein Section 125 of the present Act corresponds to section 109 of the Indian Companies Act, 1913. Sections 127 and 134 (I) of the present Act correspond to section 109-A and 116(I) of the Act of 1913. The several sections are all based on the corresponding sections of the English Act. No direct authority on the question which falls for decision in this appeal was cited to us at the Bar. Learned counsel however relied on the observations in a few decisions to which we shall referObviously neither section 125 (I) of the Act of 1956 nor section 109(I) of the /Act of 1913 in terms applies to the facts of the present case if the properties belonging to Sayanas Ltd. are deemed to have been conveyed by that company to Messrs. Kutty and Rao Ltd. It is only Messrs. Kutty and Rao Ltd. that is in liquidation. Sayanas Ltd. as such has not been wound up. The parties who oppose this appeal are not creditors of Sayanas ltd. They are only creditors of Messrs. Kutty and Rao Ltd. It was on this footing that the learned judge SUBRAHMANYAM, J., disposed of the application before him. He starts by saying that certain properties which belonged to Messrs. Sayanas ltd., were transferred by them to Messrs. Kutty and Rao Ltd., and one item of these properties was subject to a charge created in favour of the appellant in 1952. In another part of his judgment the learned judge proceeds on the footing that Messrs. Kutty and Rao Ltd. purchased the property subject to a charge. Section 127 (I) which deals with a case where the company acquires any property which is subject to a charge to the Registrar within 21 days after the date on which the acquisition is completed. But there is not further provision as is contained in section 125 that if the company fails to comply with this requirement the charge would be void against either the liquidator or the creditors of the acquiring company. Sub-section (2) of section 127 only provides that if default is made in complying with sub- section (I) the company and every officer of the company who is in default shall be punishable with fine. Nevertheless the learned judge held that the unregistered charge in favour of the appellant was void not only against the liquidator and creditors of Messrs. Sayanas Ltd. but also against the liquidator and creditors of the company which acquired the subject-matter of the charge. Nevertheless the learned judge held that the unregistered charge in favour of the appellant was void not only against the liquidator and creditors of Messrs. Sayanas Ltd. but also against the liquidator and creditors of the company which acquired the subject-matter of the charge. He came to this conclusion by construing the word "created " in section 125 (I) as including ' accepted ." His reasoning can be set out in his own words " It is obvious that in order that the policy underlying section 125, 127 and 134 of Central Act I of 1956 ( and the corresponding sections of the Act of 19130 might be given full effect to, it is necessary to construe the word 'created' in section 125 (I) as including 'accepted' . Where a charge is created by one company and the company or the charge holder neglects to have the charge registered and the property subject to the charge is acquired by another company and such subsequent company also neglects to have the charge registered then unless the word `created' is interpreted as including the word 'accepted' the policy of the law that a charge not registered with the Registrar of Companies should be void as against the creditors or the liquidators would, in cases like the present , be defeated." * He based this reasoning on a canon of statutory construction that where in order to give effect to the policy of an Act it is necessary to extend the literal meaning of a word, such extension is not only permissible but obligatory. The learned judge thought that it would not be permissible but obligatory. The learned judge thought that it would not be correct to hold that the content of the charge got enlarged by reason of the acquisition of the property by Messrs. Kutty and Rao Ltd Learned counsel for the appellant contended that there was no warrant for the interpretation placed by SUBRAHMANYAM, J., on sections 125 and 127 of the (Indian) Companies Act, 1956 Sections 125 in terms renders an unregistered charge created by a company void only against the liquidator and the creditors of the company. An unregistered charge is not void for all purposes. It is binding on the company itself, of course, so long as it is a going concern. So the argument ran. This argument is certainly supported by authority. An unregistered charge is not void for all purposes. It is binding on the company itself, of course, so long as it is a going concern. So the argument ran. This argument is certainly supported by authority. In In re Monolithic Building Co. : Tacon v. The Company (I) 1915 I Ch. 643 at 667. LORD COZENS HARDY, M.R., made the following observations about an unregistered encumbrance " Of course the deed is not void to all intents and purposes. It is a perfectly good dead against the company so long as it is a going concern. It is not void to all intents and purposes, but it is void as between the two incumbrancers ." * PHILLIMORE. L. J., said "We have to construe section 93 of the statute. It makes void a security; not the debt, not the cause of action, but the security, and not as against everybody, not as against the company grant or, but against the liquidator, and against any creditor, and it leaves the security to stand as against the company while it is a going concern." * The decision of the Rangoon High Court in Aung Ban Zeya v. C.R.M.A. Chettiar Firm (2) 1927 (5) ILR(Rang) 585. is direct authority for the position that a mortgage created by a company if not registered with the Registrar as required by law is void only as against the liquidator and any creditor of the company but cannot be repudiated on that ground by the company itself while it is a going concern. The company could have sold away the properties by the charge and with the proceeds repaid the charge holder. Learned counsel further relied on the contrast between section 125 and 127 of the Act. Whereas in the case of an unregistered charge created by a company it is declared that the charge is void against the liquidator and the creditors of the company (section 125) when a company acquires a property subject to such a charge, there is no similar declaration that that charge is not binding against the liquidator or the creditors of the purchasing company Mr. Vepa in his able argument in support of the judgment under appeal contended that the learned judge's interpretation accords with the policy underlying sections 125, 127 and 134 and to give effect to that policy it was permissible to give an extended meaning to the term "created ". He relied on the following observations of BUCKLEY, J. In re Cardiff Workmen's Cottage Co. Ltd. (1) 1906 (2) Ch 627 at 629 "The purpose of the Act of Parliament in requiring within 21 days registration of securities on the company's property is to ensure the means of notice to those who contemplate giving credit to the company." * It is not always safe to construe the language of an enactment to accord with the supposed intention of the Legislature. That is why courts have been careful whenever they refer to the intention to confine it to the intention as expressed in the statute itself. Ample authority can be found in text books on interpretation of the words used in a statute as well as in support of an extension of meaning when such extension is considered necessary in certain circumstances. For the former rule of construction we may refer to the following observations of the Privy Council in Commissioner of Income-tax v. Buckingham and Carnatic Co. Ltd. (2) 1936 (59) ILR(Mad) 175 ; "Where there in no ambiguity in the provisions of a section in an enactment the words must properly be construed in their ordinary and natural meaning. The court cannot countenance a construction involving an insertion in the section of words which are not found therein and are not in the least necessary for an intelligible construction thereof." * In our opinion this is a salutary rule and departure from this rule can only be justified in extreme cases where the words construed in their ordinary and natural meaning clearly conflict with the obvious intention of an enactment as gathered from the enactment itself As LORD MACMILLAN said in Mayor etc. of the Borough of New Plymouth v. Taranaki Electric Power Board (3) 1934 (66) MLJ 67 ; 1933 AIR(PC) 216.: it is the rule that words are used in an Act of Parliament correctly and exactly and not loosely and inexactly. of the Borough of New Plymouth v. Taranaki Electric Power Board (3) 1934 (66) MLJ 67 ; 1933 AIR(PC) 216.: it is the rule that words are used in an Act of Parliament correctly and exactly and not loosely and inexactly. Upon those who assert that that rule has been broken the burden of establishing their proposition lies heavily."After giving the matter our best consideration we are clearly of the view that the word "created" in section 125(I) does not include in its meaning 'accepted". it is not clear what the learned judge meant by the word "accepted." Evidently he was referring to a case when a company acquires property with notice of an and subject to a charge. For one thing if the word "created " is given an extension of meaning as to include also "accepted" in the above sense then there is no purpose served by section 127 because section 127 specifically deals with a case where a company acquires property which is subject to a charge which requires registration if it had been created by the company It must overlooked that a company may acquire a property subject to a charge not by any company but by a private individuals. In such a case what the company acquires is only the equity of redemption. To give a concrete case suppose a company purchases immoveable property worth Rs. 50, 000 subject to a mortgage for Rs, 20, 000 for a consideration of Rs. 30, 000. This value obviously represents the value of the equity of redemption (Rs. 50, 000 minus Rs. 20, 000 = Rs. 30, 000 ). We fail to see any justice or equity in holding that if the company making such a purchase fails to furnish the Registrar with particulars of the charge within the prescribed time, the mortgage loses all his rights under the mortgage as against the liquidator or the creditor of the purchasing company. To so hold would mean that the liquidator and the creditors would have recourse to what could in no sense be described as assets of the company. In the illustration we have given above the creditors would become entitled to property worth Rs. 50, 000 though all that the company purchased was only property worth Rs. 30, 000. it is impossible for us to subscribe to this proposition. In the illustration we have given above the creditors would become entitled to property worth Rs. 50, 000 though all that the company purchased was only property worth Rs. 30, 000. it is impossible for us to subscribe to this proposition. Under section 127 it is true that the acquiring company is directed to furnish the Registrar with particulars of the charge and for default in complying with this direction the company and the officers of the company are made punishable, but section 127 does not purport to enlarge the extent of the property acquired by the company. Such a construction could be laying a premium on dishonesty. A company has only to acquire a property subject to a mortgage and deliberately fail to comply with the requirements of section 127(I) and the result is that the creditors of the company will be benefited by having recourse to the property free of the mortgage. The mortgage cannot be blamed at all because he took the mortgage from an individual under a registered deed and at the time of the mortgage there was nothing to compel either the mortgagor or the mortgagee to comply with the provisions of the Companies Act. Why should such a mortgagee lose the benefit of his mortgage when without his being a party to the transaction the mortgagor sells the equity of redemption to a company and that company fails to do its duty, that is, fails to furnish the registrar with the particulars of the charge? There is only one case to which we shall refer though it is not a direct decision on the construction of the language of the corresponding provision of the English Companies Act. In In re Connolly Bros. Ltd. : Wood v. The Company (I) 1912 (2) Ch 25 , the facts were these : A company issued debentures creating a floating charge upon their undertaking and all their properties, one of the condition of the debentures being that the company should not be at liberty to create any other mortgage or charge in priority to the debentures. The company thereafter desiring to purchase certain property which they had not the money to pay for, borrowed 1000 Pounds from O upon terms that she should have a charge upon the property so purchased. The company thereafter desiring to purchase certain property which they had not the money to pay for, borrowed 1000 Pounds from O upon terms that she should have a charge upon the property so purchased. The company then bought the property for 1100 Pounds out of which 1000 pounds came from O. After the purchase the company executed in favour of O a memorandum of equitable charge upon the property for 1000 pounds. It was held by the court of Appeal that what the company acquired upon the purchase was only the equity of redemption in the property subject to the equitable charge of O, who was accordingly entitled to priority over the debentures. COZENS HARDY, M.R. , tersely put it, " We should be shutting our eyes to the real transaction if we were to hold that the unencumbered fee simple in the property was over in the company so that it became subject to the charge of the debenture holders." * If Kutty and Rao Ltd. purchased a certain property from Sayanas Ltd., on the footing that it was subject to a charge in favour of the appellant and the consideration paid by Kutty and Rao Ltd. represented only the equity of redemption then it would be not only shutting our eyes but also perpetrating an injustice if we were to hold that the creditors of Kutty and Rao ltd. failed to do their duty laid on them under section 127(I) of the Act. If it were necessary to decide this case on the footing that Kutty and Rao Ltd. purchased the property over which the appellant held a charge then it would have been necessary to go into the facts to ascertain what exactly was purchased and subject to what terms and conditions But in our opinion this appeal can be disposed of on a short ground. From the records it appears that Kutty and Rao ltd. took over the entire assets and liabilities of Sayanas Ltd., by the transactions referred to earlier in this judgment. It was because of this fact that though it was only kutty and Rao Ltd. which went into liquidation the creditors of Sayanas Ltd. were also permitted to file their claims before the official liquidator. In paragraph 5 of the affidavit filed on behalf of the appellant it is stated that in the winding up proceedings the creditors of Sayanas ltd. In paragraph 5 of the affidavit filed on behalf of the appellant it is stated that in the winding up proceedings the creditors of Sayanas ltd. had also been directed to file their claims relating to the respective amounts due to them. The judgment of BALAKRISHNA AIYAR , J., dated March 11, 1957, in Application No. 2799 of 1956, is based on this assumption. He inter alia stated :" As I read the documents, there has been a transfer of the entirety of the assets and liabilities of Sayanas Ltd., to Kutty and Rao (Engineers) Ltd." The learned judge, therefore held that the official liquidator would be entitled to collect all the moneys due and payable to Sayanas Ltd. It follows that on and from and after the date of such transfer the appellant must be deemed to be a creditor of Kutty and Rao Ltd., and Kutty and Rao Ltd. is in liquidation. The appellant cannot, therefore, rely on his unregistered charge as against the other creditors of Kutty and Rao Ltd., who would include also the other creditors of Sayanas Ltd. This flows from the provisions of section 125(1) read without giving any extended definition to the word "created". It follows that the claim of the appellant to be recognised as a secured creditor was rightly rejected by the official liquidator and by the learned judgeThe appeal fails and is dismissed but, in the circumstances, there will be no order as to costs Appeal dismissed.