1. The above company application is a suit filed against the Karnataka Paper Mills Ltd. (in liquidation), which is ordered to be wound up in Company Petition No. 11 of 1970 by this court. The said suit was originally instituted as O.S. No. 32 of 1969 on the file of the Civil Judge, Dharwar, before the company was ordered to be wound up and after the order of winding up was passed, by an order passed under section 446 of the Companies Act, 1956 (hereinafter referred to as 'the Act'), it was withdrawn to this court for disposal, and numbered as Company Application No. 57/72.
2. The parties to the above application shall be referred to as plaintiff and defendant in accordance with their description in the Court of the Civil Judge at Dharwar and the pleadings shall be referred to as the plaint and written statements.
3. The plaintiff is the Bank of Maharashtra and the suit is filed for recovery of Rs. 1,97,343.01 with future interest and costs by sale of mortgaged properties belonging to the first defendant and if necessary by applying for a personal decree against such of the defendants as are liable.
4. The case of the plaintiff is briefly as follows :
5. The plaintiff is engaged in banking business. Defendant No. 1 was a company engaged in the business of manufacturing paper and mill board. Defendants Nos. 2, 3 and 4 are members of the board of directors of defendant No. 1 and defendant No. 2 is its chairman. That in the year 1964 defendant No. 1 was being managed by a firm of managing agents, called M/s Paranjape Shah & Co., and defendants Nos. 4 and 5 were partners of the said firm. That in the year 1964 defendants Nos. 2 to 5 acting on behalf of defendant No. 1 and on their own behalf, opened a cash credit account in the name of defendant No. 1 and borrowed a sum of Rs. 1,50,000 in order to pay the price of the machinery bought by defendant No. 1. In connection with the said loan, defendants Nos. 2 to 4 executed a promissory note dated July 27, 1964, and an agreement dated July 27, 1964, stating that the said promissory note should be regarded as continuing security for the loan, a document dated May 20, 196, hypothecating the goods of defendant No. 1 to secure the demand cash credit and a registered memorandum of equitable mortgage dated May 15, 1964, offering the properties of defendant No. 1 covered by the title deeds referred to in the second schedule of the plaint as security for the said loan. The amount borrowed was repayable with the stipulated interest in five annual installments and that the whole liability was re-payable before May 15, 1969. Defendants Nos. 1 to 5 having committed default in payment of the debt, on the date of the suit, a sum of Rs. 1,97,343.01 was due. It was stated that the equitable mortgage had been duly registered with the Registrar of Companies under section 125 of the Act.
6. Defendant No. 6, which is a registered firm was impleaded as a defendant, as under an agreement dated June 17, 1964, the possession of the assets of defendant No. 1 had been entrusted to it and that defendant No. 6 had filed a suit in O.S. No. 12/67 on the file of the Civil Judge, Dharwar, against defendant No. 1 for specific performance of an agreement to execute a mortgage in favour of defendant No. 6 in respect of the properties of defendant No. 1 Defendant No. 7 was impleaded as he claimed to be a subsequent mortgagee of the properties of defendant No. 1.
7. The plaintiff prayed for a decree for recovery of the money due under the cash credit account by sale of the mortgaged properties of defendant No. 1 and also personally from defendants Nos. 2 to 5.
8. On behalf of defendants Nos. 1 to 3 of a common written statement is filed. They have denied the liability for the suit claim. The promote, the agreement of hypothecation of goods and the equitable mortgage are stated to be neither legal nor valid as they have not been executed by persons authorised to do so. They further pleaded that as defendant No. 6 had been placed in possession of the assets of defendant No. 1 at the instance of the plaintiff, defendant No. 6 was liable to pay the debt.
9. Defendant No. 4 has remained ex parte. Defendant No. 5 has stated that he had no objection for the suit being decreed. But he denied the subsequent mortgage said to have been executed in favour of defendant No. 7.
10. Defendant No. 6 pleaded that there was collusion amongst defendants Nos. 1 to 5 and 7 that no personal decree could be passed against it, as it was in possession of the assets of defendant No. 1 under the agreement dated July 17, 1964, and it had filed a suit for specific performance of the said agreement in O.S. No. 12/67.
11. Defendant No. 7 pleaded that the suit mortgage was not valid and binding.
12. After defendant No. 1 was ordered to be wound up and the official liquidator assumed his duties, an additional written statement was filed and the principal plea raised in that written statement was that the equitable mortgage was not enforceable against the official liquidator as it had not been duly registered with the Registrar of Companies as required by the Act.
13. On the basis of the above pleadings, the following issues have been framed :
1. Whether the promissory note dated July 27, 1964, is executed by defendants Nos. 2 to 5 and if so, is it by persons validly authorised as per provisions of the Companies Act
2. Whether the agreement of hypothecation dated May 20, 1964, is executed by defendants Nos. 1 to 5 and if so, it is by persons validly authorised as per provisions of the Companies Act
3. Whether the mortgage by deposit of title deeds dated may 15, 1964, is executed by the 1st defendant through its constituted attorney, 5th defendant, and if so, is it by persons validly authorised as per provisions of the Companies Act
4. Whether the promissory note agreement of hypothecation and the mortgage by deposit of title deeds are not executed by persons validly authorised as per provisions of the Companies Act and if so, to what effect
5. Whether by virtue of the terms of the agreement dated July 17, 1964, the liability to discharge the suit debt is transferred to the 6th defendant and that at the instance of the plaintiff and consequently the liability of defendants Nos. 1, 2 and 3 is discharged
6. Whether the plaintiff's suit is barred by estoppel as contended in para. 4 of the written statement of defendants Nos. 1 to 3
7. Whether the 6th defendant was clothed with authority from the 1st defendant to acknowledge the liability on December 31, 1966
8. What is the legal effect of the acknowledgment of liability by the 6th defendant on December 31, 1966
9. Whether the 5th and 7th defendants are liable to discharge the suit debt
10. To what relies, if any, are the parties entitled
14. Additional issues :
1. Whether there has been compliance with section 125 of the Companies Act with respect to the claim of the plaintiff
2. Whether the claim of the plaintiff is unsustainable on account of non-compliance with section 125 of the Companies Act
15. Issues Nos. 1 to 4 :
The above issues can be conveniently dealt with together. They relate to the validity and binding nature of the promissory note, agreement of hypothecation and the equitable mortgage. P.W. 1, is one Gopal Shakar Kale. He has stated that he was the agent of the plaintiff's branch at Hubli, between May, 1960, and August 1967, and was acquainted with the facts of the case. He has spoken of exhibit P-1, the promissory note dated July 27, 1964 for Rs. 1,50,000 executed by defendants Nos. 2 to 5 on behalf of defendant No. 1; exhibit P-2 the undertaking given by defendants Nos. 2 to 5 that exhibit P-1 shall be treated as continuing security for the liability under the cash credit account opened in the name of defendant No. 1; exhibit P-3, the agreement hypothecating the goods of defendant No. 1 and exhibit P-4, the memorandum evidencing the equitable mortgage. Exhibit P-5 is the extract of the record of rights relating to the land of defendant No. 1. Exhibit P-6 is the copy of the equitable mortgage bearing the seal of the registrar of Companies. Exhibits P-7 to P-11 are statements of account of the cash credit account under which moneys were advanced to defendant No. 1 for repayment of which exhibits P-1 to P-4 came to be executed. From exhibit P-11 it is seen that on August 1, 1969, a sum of Rs. 1,94,159.38 was due under the said account to the plaintiff. Exhibit P-12 is an acknowledgment dated June 14, 1967, signed by one So dear the (sic) on behalf of defendant No. 6 which was then managing the affairs of the defendant No. 1 stating that on December 31, 1966, a sum of Rs. 1,47,872.76 was due under the cash credit account in question. P.W. - 1 has further deposed that under the articles of association of defendant No. 1, defendant No. 1 was empowered to borrow money for its business though its directors. Article 115 in exhibit P-15, which is the printed memorandum of association and articles of association of defendant No. 1, is relied on in support of the above statement. P. W. - 1 has further deposed that in exhibits P-14 and P-15 which are the annual reports and accounts of defendant No. 1 in respect of the years 1964-65 and 1965-66, there is a reference to the suit loan and it is referred to as a secured loan. Exhibit P-16 is the registered notice issued in June, 1965, on behalf of the plaintiff to defendants Nos. 1 to 6 calling upon them to arrange for payment of the amount due under the cash credit account. Exhibits P-17 and P-18 are the postal acknowledgments of defendants Nos. 2 and 4 acknowledging the receipt of notice.
The evidence of P.W. - 1 remains unchallenged. None of the defendants Nos. 2 to 5 has entered the witness box. It is clear from the statements of account, exhibits P-7 to P-11, issued by the plaintiff, which is a banker, that as on August 1, 1969, a sum of Rs. 1,94,159.38 was due to the plaintiff under the cash credit account. Exhibits P-1 to P-4 have been duly proved. They are not also denied by defendants Nos. 2 to 5 who have executed them. Exhibits P-1 to P-4 are executed on behalf of defendant No. 1. Defendants Nos. 2 to 4 are the members of the board of directors and defendants Nos. 4 and 5 are partners of the managing agency firm managing defendant No. 1. They are authorised under the articles of association of defendant No. 1 to borrow money on behalf of defendant No. 1. Hence, there is no substance in the plea that exhibits P-1 to P-4 are not binding on defendant No. 1. Exhibits P-1 to P-4 having been executed to secure the loan due under the cash credit account opened in the name of defendant No. 1, the plaintiff is entitled to enforce exhibits P-1 to P-4 for recovering the amount due under the said account. I may add that at the time of hearing, no arguments were addressed on these issues. There is also no dispute about the actual amount claimed by the plaintiff. Hence, the plaintiff is entitled to recover the same accordance with the terms of exhibits P-1 to P-4. I hold that exhibits P-1 to P-4 are valid and binding on defendant No. 1.
16. Issue Nos. 5 to 8 :
These issues relate to the liability of defendant No. 6. Defendants Nos. 1 to 3 have pleaded that defendant No. 6 is liable to pay the amount after the agreement dated July 17, 1964, was entered into between defendant No. 1 and defendant No. 6. It is not shown that the liability of defendant No. 1 under exhibits P-1 to P-4 has come to an end on the agreement dated July 17, 1964, coming into existence. In fact no argument was addressed on the above point at the time of the hearing. Hence, it is unnecessary to deal with the evidence of D.W. - 1 Parkhe Sudhakar, one of the partners of defendant No. 6, in the course of which he has disowned the liability of defendant No. 6 to discharge the suit liability. The plaintiff is not, however, estoppel from recovering the amount from the assets of defendant No. 1.
17. Issue 9 :
The above issue relates to the liability of defendants Nos. 5 and 7. Defendant No. 5 has no objection for a decree made as can be seen from the written statement. Defendant No. 7 claims to be the subsequent mortgagee. His rights are, therefore, subject to the rights of the plaintiff who is a prior mortgagee.
18. Issue 10 :
this issue relates to the relief to which the plaintiff is entitled. I shall deal with this at the end of this judgment.
19. Additional Issues Nos. 1 and 2 :
These two issues were framed by this court after the case was withdrawn to the file of this court under section 446 of the Act. They arise out of the additional written statement filed by the official liquidator in which he has pleaded that the mortgage created by exhibit P-4 is not binding on him on the ground that the mortgage had not been duly registered with the Registrar of Companies as required by section 125 of the Act. The Registrar of Companies has been examined as witness of behalf of the official liquidator in this case and he had produced the relevant documents which were in custody. He has no personal knowledge about the registration of the charge. The question has to be decided only on the basis of the documents marked in the case. Exhibit D-2 is the prescribed form (Form No. 8) signed by defendant No. 5. It relates to the mortgage created P-4. It is dated July 28, 1964, and bears the seal of the Registrar of Companies. It is seen that it was received by the Registrar on September 1, 1964. It is further seen that the said form had been received earlier on June 11, 1964, but had been returned in order to rectify certain mistakes. As the time prescribed for filing expired, defendant No. 1 applied to the District Judge, Dharwar, in Misc. Case No. 75 of 1964, as per exhibit D-4 under section 141 of the Act for condoning the delay in registering the mortgage created under exhibit P-4. The district judge extended the time at the first instance by three and a half months from May 20, 1964, and later on till August 18, 1965, for registering the mortgage. Thereafter, defendant No. 1 forwarded the application for registering the mortgage in Form No. 8 on august 10, 1965, and it was received by the Registrar before the date up to which time had been extended by the district judge. Exhibit P-21, dated August 19, 1965, is the certificate of registration of mortgage issued by the Registrar under section 132 of the Act certifying that the equitable mortgage dated May 20, 1964 (exhibit P-4) for Rs. 1,50,000 in favour of the plaintiff had been duly registered in his office. It was argued that the district judge had by his order extended time for registering the mortgage and not for filing the particulars, and, hence, the mortgage had not been duly registered. Reliance was placed on the words 'direct that time for filing of the particulars or for the registration of the charge or for the giving of intimation of payment of satisfaction shall be extended' in clause (b) of section 141(1) of the Act in support of the contention that 'filing' was different from 'registration'. I do not think that there is any substance in the above contention. Section 125 prescribes only the time within which the particulars of a mortgage have to be filed and does not prescribe the time within which the Registrar should register it. Secondly, clause (b) of section 141(1) empowers the court to extend the time on an application filed by the company or any person interested in the mortgage or charge being registered, but not by the Registrar. What all a company is expected to do under section 125 is to file the particulars in time. The act of registration has to be performed by the Registrar. If there is delay in registration then the only consequence may be that the registration may not prejudice any rights acquired in respect of the property before the mortgage or charge is actually registered. But it cannot be said that the registration itself if ineffective for all purposes.
20. The argument urged on behalf of the official liquidator may be repelled on another ground in this case. Exhibit P-21 is the certificate of registration issued under section 132 of the Act. Section 132 reads :
'132. Certificate of registration. - The Registrar shall give a certificate under his hand of the registration of any charge registered in pursuance of this Part, stating the amount thereby secured; and the certificate shall be conclusive evidence that the requirements of this Part as to registration have been complied with.'
21. The language of section 132 is similar to section 93(5) of the Companies (Consolidation) Act, 1908, of England. Dealing with the conclusive nature of the certificate of registration issued by the Registrar, Scrutton L.J. observed in National Provincial and Union Bank of England v. Charnley as follows :
'The object of the certificate in that case is to prevent the debenture-holders' security from being upset if it turns out that the company or the registrar has made a mistake as to what has been put on the register. I am bound to say that the language of the statute is rather puzzling : 'Every mortgage or charge created by a company ..... shall be void unless the prescribed particulars of the mortgage or charge ..... are delivered ...... to the registrar ..... within twenty-one days.' That makes the avoidance depend on the neglect to send in the particulars. The neglect to register the charge will not make it void. then when the registrar has got the particulars and the instrument creating the charge, he is to enter in the register, not he particulars delivered by the company, but the date of the instrument and its description, the amount secured, short particulars of the property mortgaged or charged, and the names of the mortgagees or persons entitled to the charge. So that there is a possibility, first, of the company making an error in delivering the particulars, and, secondly, of the registrar making an error either in omitting to enter something specified in the particulars, or in misunderstanding the instrument of charge delivered to with the particulars; and for that reason one can well understand a clause being put in favour of the grantees of the charge, who are not the persons whose duty it is to deliver the particulars, that if the registrar gives a certificate that all is order that certificate shall be conclusive evidence that the requirements as to registration have been complied with. The result of the legislation as it appears to me is that if the document sent in for registration does contain a charge on particular property, even if the company sending it in, has misstated that charge, or the registrar considering it judicially has misunderstood it, when once the certificate has been given the grantees are safe. Though one can see that this may cause great hardship to a person who gives credit to the company in reliance on a defective register, one can also see that equal hardship would be caused to secured creditors if their security was to be upset for reasons connected with the action of persons over whom they had no control. For these reasons I take the view which was taken in In re Yolland, Husson and Birkett Ltd. and Cunard Steamship Co. v. Hopwood that giving of the certificate by the registrar is conclusive that the document creating the charge was properly registered, even if in fact it was not properly registered.'
22. While construing section 95(5) of the Companies Act, 1948, which is similar to section 132 of the Act, the view expressed by Scrutton L.J. in the case referred to above has been followed in In re Mechanizations (Eaglescliffe) Ltd. and In re Eric Holmes (Property) Ltd. (In Liquidation). In Benares Bank Ltd. v. Bank of Bihar Ltd., it was held that when once a certificate of registration was issued under section 114 of the Indian Companies Act, 1913, it was no longer open challenge any of the mechanical steps of registration including the delivery of particulars or payment of prescribed fees. Following the decisions referred to above, I hold that it is not open to the official liquidator to contend that the mortgage created by exhibit P-4 is not enforceable against the assets of defendant No. 1 in his hands. My findings on the additional issues Nos. 1 and 2 are, therefore, against the official liquidator.
23. The next question relates to the nature of relief which may be granted in this case. The assets of defendant No. 1 which had been mortgaged under exhibit P-4 have been sold by the official liquidator pursuant to the orders passed by this court free from encumbrances and therefore no question of passing a decree for sale arises in this case. The plaintiff is entitled to recover the money due to him from out of the moneys realised on sale of the mortgaged properties.
24. In the result, the suit is decreed declaring that the plaintiff is entitled to recover from out of the sale proceeds of the mortgaged properties (after defraying or providing for payment of any prior liabilities) in the hands of the official liquidator a sum of Rs. 1,97,343.01 with interest at six per cent. per annum on Rs. 1.50,000 from the date of the suit till the date of payment. The plaintiff is entitled to recover costs also. Advocate's fee shall be calculated in accordance with the rules governing the same in original suit instituted before civil courts in the state. If the sale proceeds (after defraying or providing for payment of any prior liabilities) are found to be insufficient, the plaintiff is permitted to make an application for payment of the balance of the decretal amount from out of the other assets of defendant No. 1 in the capacity of an unsecured creditor.
25. A decree shall be drawn up accordingly.