Narayana Pai, J.
1. These are companion application which raise question as to th nature and extent of the rights and powers claimed by the Bank of Maharashtra Ltd. the application in Company Application No. 143 of 1967, under or by virtue of certain deeds of mortgage of immovable properties and hypothecation of movables executed in its favour by the company - Yallamma Cotton, Woollen and Silk Mills Company Ltd.
2. There is little or no controversy about the facts and circumstances year 1966. In the month of March, 1966, it was obliged to lay off its labour force. By about September of that year, it had almost completely ceased working.
3. 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.
4. 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, of the reason that the possession there of had already been taken by the Bank of Maharashtra (hereinafter referred to as ' the bank') in apparent exercise of its powers as a mortgage and charge-holder of the immovable and movable properties of the company.
5. The liquidator made a report to that effect which was filed into this court on 26th October 1967.
6. When the report was first posted for orders before me , Mr. K. Srinivasan took notice on behalf o the bank stated briefly the case of the bank and sought time to place before me the documents and records relating to his client's rights and to state clearly what attitude his clients propose to take vis-a-vis the winding up proceedings.
7. On the next date of hearing viz., 10th November, 1967, Mr. Srinivasan filed several documents to prove the rights claimed by his clients as mortgages of the lands and buildings and as hypothecates of the movables including the machinery belong to the company. He also stated that his clients who are secured creditors would prefer to stand outside the winding up proceedings and realise or recover the amounts due to them by exercising the right of private sale without the intervention of court both in regard to movables as well as the immovables charged and mortgaged in their favour which right he said was in clear terms conferred upon his clients by the documents of mortgage and hypothecation. He also presented company application No. 143 of 1967 by the Bank in which after briefly setting out the rights claimed by it, the bank prayed that it be permitted to remain outside the winding up proceedings and enforce its rights.
8. On the said date - 10th November, 1967 - I made an order recording the claims raised by the bank and adjourned the matter to 24th November 1967, for a fuller and complete examination of the legal position and gave certain directions for the said purpose. Among other things I directed the filing of fuller affidavits by an officer of the bank who was conversant with all the facts as well as the ex-managing director of the company, setting out the circumstances in which the bank took possession of the properties and the preparation by the liquidator of a full inventory of all the article contained in the premises taken possession of by the bank.
9. The above directions were complied with but on account of the other work of the court the matter could not be heard immediately and could be taken up for hearing only on 12th January, 1968.
10. In the meanwhile the bank having engaged Mr. G.S.Ullal after the first adjournment of November, 1967, Mr. K.Srinivasan retired from the case with my permission.
11. The main question which arose for immediate consideration and 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 creditors 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 along with Application No. 143 of 1967 on the next date of hearing viz., 2nd February 1968.
12. Just before the said adjourned date the liquidator filed company Application NO. 20 of 1968. The matter could not be taken up for hearing on 2nd February, 1968, and had to be adjourned to 27th of that month.
13. To the said application objections were filed by the bank on 23rd February, 1968. Among the objections there was one to the effect :
'It is also not clear from the judge's summons whether the application was posted before court for first obtaining orders required by rule 7 of the said Rules. It is submitted that these transgressions of the Rules, which are without justification in this case have caused embarrassment and harassment.'
14. I pointed out to Mr. Ullal that the objection was unmerited that it seemed to ignore my direction in open court that an application,if any filed by the liquidator should be brought up for hearing along with Company Application No. 143 of 1967 at the next date of hearing, viz., 2nd February, 1968, and that on the said date having been made aware of the fact that Mr. Ullal had been served with a copy of the judge's summons and report only on the previous day, I myself suggested an adjournment to enable the bank to state its objections. Though mr. Ullal expressed his readiness to go on with the case the same day, it could not be taken up for the reason that the examination of a witness in an election petition which was then being heard by me could not be completed till late in the evening, making the further adjournment of this matter quite inevitable. When the above circumstances were pointed out by me, an affidavit by an officer of the the bank who was present at all hearings was later filed on 29th February, 1968, expressing apology and stating that the oral order for posting made by me had unfortunately been forgotten. In view of this affidavit and in view of the fact that an adjournment which became inevitable in the circumstances has removed all cause for grievance, if any, nothing more need be said about this objection.
15. Another objection was that the subject-matter of Company Application No. 20 of 1968 could not have been properly brought before court by means of an application but could be made the subject of a regular suit, and that if the application has to be treated as a suit, the proper court-fee as for a suit should have been paid.
16. 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.
17. 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 rupee to ten lakhs of rupee on the company agreeing to secure due repayment of the same by mortgaging its immovable properties, viz., lands. mills, buildings, etc., and also agreeing to certain further conditions enabling the bank to keep a close watch over the working of the company and the handing 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 half lakhs of rupees and exhibit R-8, a deed of hypothecation of movables for a principal sum of four and a half lakhs of rupees. The deed of mortgage was registered with the Sub-Registrar, Bombay,as Document No. 166/62 in Book No. I, on 14th May, 1962. It also appears that the particulars of both the documents have been duly registered with the Registrar of Companies Mysore under the provisions of Party V and a certificate secured from the Registrar, under section 132 of the companies Act, 1956. A deed of modification modifying some of the terms appears to have been executed subsequently but it is not quite necessary to refer to it. There were subsequent or further deeds of hypothecation of movables, viz., exhibits R-21 dated 17th December, 1962,exhibit R-39 dated 17th June, 1963, and exhibit R-31 dated 3rd December, 1964, for principal sums of two lakhs of rupees, one and a half lakhs of rupees and two lakhs of rupees, respectively. On 11th March, 1965, a deed of further charge in respects of lands and buildings (exhibit R-34) was executed for a further sum of three lakhs of rupees. In the bank's affidavit filed on 23rd November, 1967, this deed was described as 'pending registration with the Sub-Registrar of Bombay. On the original deed being produced, it is found that it was actually registered on 11th March, 1965, as Documents No. 771/65 in Book No. 1 with the Sub-Registrar, Bombay. In respect of the said deed as well as the other three, hypothecation mentioned above, the bank appears to have taken care to file Particulars with the Registrar of Companies, Mysore, and obtained certificates of registration under section 132 of the Companies Act.
18. The several deeds set out certain terms for repayment of the loan and also clauses stating the consequences of default. The company according to the bank, having committed some default in the matter of repayment , a demand notice appears to have been served on the company. It is further stated in the bank's affidavit that three electric motors which were part of the hypothecated properties were sold without the consent of the bank. After some correspondence, the local agent of the bank acting on behalf of the bank appears to have taken possession of stores and spares on 15th November, 1966, and locked the main mill premises of the company on 22nd January, 1967.
19. No attempt has been made to deny the truth of the above facts by Amberkar, ex-managing director of the company, in his affidavit filed into court on 24th November, 1967.
20. 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 inn the mill premises locked and retained possession of the bank.
21. 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 machinery, spares and parts mortgaged or hypothecated to it, without the intervention of court
3. Is the bank entitled to retain possession of the said properties, immovable and movable, for the purpose of exercising the right of private sale claimed by it
4. Are the mortgages and hypothecation claimed by the bank in valid for contravention of the provisions of section 293 of the Companies act ?'
22. In support of the contention formulated as Point No. 1 above, Mr. Ullal's argument is that because the bank is secured creditor entitled to stand outside the insolvency and work out its rights in the normal way, any right or recourse which the liquidator can claim or pursue against the bank on behalf of the company in liquidator could only be by means of a regular suit, and that if it should be permissible to him to move the company court by means of an application such application should be regarded as a suit and the court-fee as for a suit should be paid on it. He cites the ruling of this court in official Liquidator v. Muniswamy Achary .
23. The ruling cited by Mr. Ullal is distinguishable and not applicable to the facts of this case. The said ruling dealt with a case where the liquidator o behalf of the company had to recover from a third party a debt due by the said third party to the company. Although upon an admission made by such a third party in answer to a notice under section 477 of the Companies Act, the company court is empowered to pass an order in the nature of a decree, a disputed debt could be recovered only by means of either a regular suit filed with the permission of th company court and tried either by the ordinary civil court before which it is filed or by the company court on withdrawing the same to its file, or by filing a suit before the company court itself, pursuant to sub-section (2) of section 446 of the Companies aCt. It is with reference to such a matter that this court observed that, although the proceeding is instituted in the form of an application under the Rules, it is in substance a suit and that there fore court-fee should be calculated as for a suit.
24. The position in the present case, however, is quite different, the liquidator is not suing to recover any debt or to recover any property belonging to the company. One of the consequences of making an order for the winding up of any company expressly stated in sub-section (2) of section 456 is :
'All the property and effects of the company shall be deemed to be the in the custody of the court as from the date of the order for the winding up of the company.'
25. '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 taken into his custody or under his control, all the property effects and actionable claims to which the company is or appears to be entitled.
26. 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 to its liabilities.'
27. 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 there of 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, for the purpose of acquiring and retaining possession of the property of the company be in the same position as if he were a receiver of the property appointed by the court and that the court may on his application enforce such acquisition or retention accordingly. Under sub-section (4) of section 460, the liquidator is authorised to apply to the court for a direction in relation to any particular matter arising in the winding up.
28. The powers of the winding up court under sub-section (2) of section 446 include the jurisdiction to entertain and dispose of any question of priorities or any other question whatsoever, whether of law or of fact, which any relate to or arise in the course of winding up of a company, notwithstanding anything contained in any other law for the time being in force.
29. The total effect of all these provisions is that all property and assets of the company, which has been ordered, to be wound up, immediately come under the custody of the winding up court and are, inn the eye of law, property in custodia legis. The official liquidator is in the position of a receiver appointed by the court purpose of acquiring and retaining the possession of all property and assets of the company, acting subjects to and in accordance with the directions from time to time given by the winding up court.
30. Even in the case of properties of a company which are mortgaged or charged in favour of any of its creditors, the creditor does not acquire rights which are exhaustive of the entire title of the company in respect of the properties. The properties continue to be the properties of the company, although by reason of a transfer of some interest therein by way of security, the creditor is enabled by a law to enforce his security in the manner provided by law for the purpose of recovering moneys due to him. Hence, even when a secured creditor wants to exercise the option given to him by law to stand outside the insolvency and work out his rights, it cannot b said that the winding up courts is totally powerless or has no jurisdiction what-ever in respect of him or in respect of the property over which he claims a certain right by way of security. In regard to such properties, questions may and do often arise, either in respect of priorities or in respect of any other matter whatsoever, which may relate to the winding up of the company's affairs.
31. In trying, there fore, 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.
32. 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 proceedings 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 is article 11(u) of Schedule II of the Mysore Court-fees and Suits Valuation Act, 1957.
33. This objection is therefore overruled.
34. Points Nos. 2 and 3 may be taken up together. While dealing with the case under these points, I shall assume that the transactions are not open to attack under section 293 of Companies Act. My findings on points Nos. 2 and 3 are subject to my finding on point No. 4 which I Shall discuss later.
35. The facture of the execution of these documents and the borrowings by the company under the same from the bank have not been denied by Amberkar, ex-managing director of the company. The truth of the transactions therefore can be taken as established. Although it is not necessary for the purpose of these applications to decide or determining the exact amount lent by the bank and now remaining due by the company, (nor do I propose to go into that question) it is clear that considerable amounts are due to the bank from the company and that the documents charging the properties described in the schedules to the respective documents have been executed by the company represented by its directors in favour of the bank.
36. The question raised by points Nos. 2 and 3 are therefore questions which should be answered upon an interpretations of the terms of the relative documents. It is enough to examine the terms of the two documents dated 15th January, 1962 - exhibit R-8 and exhibit R-15 - because the subsequent documents simply copy the same language.
37. The question relating to movables is simpler and depends upon the terms of the hypothecation deed, exhibit R-8. Although the language used appears to copy or follow the language ordinarily used in the case of English mortgages of immovable properties, the substance of the transaction and the effect of the documents is clearly to create a hypothecation of movables with power to convert it into a pledge by taking possession of the hypothecated movables in certain circumstances. The operative clause No. 2 purports to assign absolutely to the lenders (bank) machinery, vehicles, tools, implements, and other paraphernalia lying in the mill premises of the company. It is expressly stated to be subject to redemption by the borrowers (company). Apart from the various clauses intended for the protection of the interest of the lenders including a clause for providing that the deed shall constitute a continuing security 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 or them.'
38. The effect of the said sixth clause taken along with the provision for continuing security is clearly to create what is ordinarily known as a floating charge. The machinery and movables which are charged in favour of the bank for securing the recovery of moneys lent by it are left in the possession of the company, so that it may work and earn money and repay the loans raised for the purpose of running the business. It is only when certain contingencies arise as set out in clause (6) that the bank as a lender becomes entitled to enforce its security by taking possession of the goods and selling them for the purpose of recovering its dues. One of the contingencies it may be noted, is the making of an order for winding up by a court against the company.
39. In the case of hypothecation or pledges of movable goods, there is no doubt about the creditor's right to take possession to retain possession and to sell the goods directly without the intervention of court for the purpose of recovering his dues. The position in the case of a regular pledge completed by possession is undoubted and set out in the relevant sections of the Contract ACt. Hypothecation is only an extended idea of a pledge, the creditor permitting the debtor to retain possession either on behalf of or in trust for himself (the creditor).
40. Hence, so far as the movables actually covered by the hypothecation deeds are concerned, there can be no doubt that the bank is entitled to retain possession and also to exercise the right of private sale.
41. In this regard, the only question is what are the articles actually covered by the documents of hypothecation. Their general description I have already given, viz., the machinery vehicles tools and implements and other paraphernalia. All words, except the last would 'paraphernalia', have a clearly ascertainable meaning. 'Paraphernalia', in the context, cannot, in my opinion, mean to taken in other than what may be clearly regarded as accessories of the main machinery used for the manufacture of textiles. The description of the article in the schedule annexed to the hypothecation deeds also leads to the same conclusion. Because the subsection documents have merely copied the language and the schedule of the first documents exhibits R-8 there appears to have been some little difficulty in the matter of identifying a few items of spares, tools or machine parts with the property subject to hypothecation. But the liquidator has stated that all such items may reasonably be regarded as falling 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 put of their security it should deliver to the liquidator all articles of furniture.
42. 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.
43. 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 provision for redemption. The provision for redemption is contained in clause 3, which reads :
'If upon such demand as aforesaid the mortgages and/or the sureties shall pay to the lenders all moneys hereby covenanted to be paid, the lenders will at the request of the mortgagors and/or the sureties duly recovery the said land hereby conveyed.'
44. Then follows a long clause containing provisions intended for the protection of the interests of the lenders-bank. The first clause of the documents contains a personal covenant for repayment of money and clause 9(g) contains stipulations for repayment of specified sums of moneys at specified intervals. Clues 5 is importance from the point of view of both the parties before me, particularly sub-clauses (a), (e) and (i) thereof, Sub-clause (a) reads :
'(a) That it shall be lawful for the lenders at any time without any further consent of the mortgagors and the serenities to sell or to concur with any other persons in selling the said land, hereditaments and premises or any part thereof either by public auction or private contract with liberty also to make such conditions or stipulations respecting title or evidence of title or other matters as the lenders may deem proper with power to buy inn the said land hereditaments and premises at any sale by auction or to rescind or vary any contract for sale and to resell the same without being answerable or responsible for any loss or diminution occasioned thereby and with power also for any loss or diminution occasioned thereby and with power also to execute assurances and give effectual receipts for the purchase money and do all other act and things for completing the sale which the person or person exercising the power of sale shall think proper AND the aforesaid power shall be deemed to be a power to sell and concur in selling the mortgaged premises without the intervention of the court within the meaning of section 69 of the Transfer of Property Act, 1882.'
45. Sub-section (b), (c), (d) and (e) contain consequential or related conditions regarding the right of sale, Sub-clause (f) reads as follows :
'That it shall be lawful for the mortgagors to retain possession of and use the mortgaged premises until the lenders shall be entitled to take possession thereof under these presents.'
46. Sub-clause (i) reads as follows :
'That over and above other provisions herein contained and without prejudice thereto in the event of the mortgagors making any default inn the repayment of the mortgage debt hereby secured of failing to company with any of the terms and 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 mortgagors to the lenders here under 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 power of sale and realisation under the foregoing provisions 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.'
47. 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 as the sureties. The personal covenant inn clause I is an undertaking by both the company as well as 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 company itself and prevents them from insisting upon the bank exhausting its remedies against the company before proceeding against them.
48. An English mortgage is defined in clause (e) of section 58 of the Transfer of Property ACt as follows :
'English mortgage - where the mortgagor binds himself to repay the mortgage-money on a certain, date, and transfers the mortgaged property absolutely to the mortgages, but subject to a proviso that he will re-transfer it to the mortgage upon payment to the mortgage - money as agreed, the transaction is called an English mortgage.'
49. The clause of the document already copied or summarised by me clearly bring the transaction within this definition . Nor has any serious attempt been made by the liquidator or Mr. Sundaraswamy to argue the contrary.
50. Clause 5(a) also expressly confers upon the bank,the mortgage, the right of sale without th intervention of court which is described to be such a right within the meaning of section 69 of the Transfer of Property Act. The relevant portion of section 69 reads as follows :
'(1) A mortgage, or any person acting on his behalf, shall, subject to the provisions of this section, have power to sell or concur in selling the mortgaged property, or any part thereof, in default of payment of the mortgage-money, with out the intervention of the court, in the following cases and in no others, namely : (a) where the mortgage is an English mortgage, and neither the mortgagor nor the mortgage is a Hindu Muhammadan or Buddhist or a member of any other race, sect, tribe or class 'from time to time specified in this behalf by the State Government in the official Gazette.'
51. THe remaining sub-sections of the section deal with the conditions and restrictions subject to which the right is to be exercised.
52. Prima facie, therefore, the bank has the right of private sale. I must, however, add that the right described in the expression 'with power to buy in the said land, hereditaments and premises at any sale by auction or to rescind or vary and contract for sale' cannot be relied upon to authorise the bank to buy the mortgaged property for themselves - vide Mulraj Virji v. Pratapmal .
53. The argument advanced against, the right of private sale is that the reference to a mortgage as a Hindu, Muhammadan or Buddhist in clause (a) may suggest that the right conferred by the section is a right which 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 to describe a class which is excluded from the larger class of mortgages, and the term 'mortgage' 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 a mortgage. The directors who joined merely as sureties were not owners of any interest in property and could not therefore be described as transferors so as to become mortgagors within the meaning of section 58.
54. As to the bank's right to possession, it is clearly traceable to the nature of the mortgage itself. It is an English mortgage, and by the very definition it is in the nature of a conveyance or transfer of the mortgaged property absolutely to the mortgage; the redemption of the mortgage also is in the nature or a proviso for re-transfer or reconveyance of the property to the mortgagor upon discharge of the mortgage. Absolute transfer must there-fore comprehend the transfer of the right to possession also. In fact, a mortgage under English mortgage is entitled to immediate possession and is also entitled to retain possession until he is repaid - vide Rukmini Kanta v. baldeo das and Lutchmiput Singh v. Land Mortgages bank of India Ltd.
55. In the document exhibit R-15,it will be noticed, express provision is made to the effect that it is lawful for the mortgagors to retain possession and use the mortgaged properties until the bank becomes entitled to take possession under th document. The right to take possession arises in the event of the mortgaged making nay default inn repayment of failing to comply with any of the terms of the document.
56. It is admitted in this case that by virtue of the above provision the company retained possession of the land and buildings notwithstanding the mortgage and continued to use the same for the company's business until the exercise of the right claimed by the bank under the document the bank took possession of the properties in January, 1967. The circumstances in which such possession was taken as stated by the bank are not denied by Amberkar, ex-managing director. In fact, Amberkar, affidavit expressly sates that possession was taken by the bank in his presence after preparing in inventory of the machinery and other articles and handing over a copy thereof to him. Therefore, it is a case of voluntary handing over possession by the company as mortgagor in recognition of the mortgage-bank's right to take possession or upon an admission that the circumstances had arisen such as to entitle the bank to take possession.
57. Points Nos. 2 and 3 therefore are held in favour of the bank.
58. The question raised by point No. 4 is not quite free from difficulty. But here again, the relevant facts are not in dispute. The only controversy is in regard to inferences property available from the said facts and their legal effect.
59. Portion 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 directors of a public company, or of a private to 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 form 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.'
60. The facts are the following:-On 27th September, 1961,the board of directors resolved to raise loans under various accounts form the bank to the extent of ten lakhs of rupees on the pledge of movable and mortgage of immovables. On 30th November, 1961,they resolved that similar loans may be raised to the extent of seven lakhs of rupees with the approval of the company in general meeting as required by section 293(1)(d) and subject to various conditions apparently agreed upon between the bank and the company. On 11th January, 1962, an extraordinary general meeting of the shareholders of the company was held at which the following resolution was passed:
'Resolved that the consent be and is hereby accorded to the board of directors of the company under the provisions of section 293 of the Companies Act, 1956 that the directors may borrow and continue to borrow moneys (apart from temporary loans obtained from the company's bankers in the ordinary course of business) for and on behalf of the company up to Rs. 20,00,000 (twenty lakhs.).
Resolved further that the company ratifies and confirms the borrowings hitherto made in excess of the limit prescribed by section 293(1)(d) of the companies Act, 1956.'
61. The general body minutes book of the company is marked exhibit P-1, and the proceedings of the said general meeting are written on page 46 and 47 thereof (exhibit P-1 (a)). The resolution is at page 47. The notice calling the meeting was called for from the files of the Registrar of companies, Mysore, and marked exhibit P-2. The explanatory statement as required by section 173 of the Companies act appended to the notice reads as follows.
'The company started the production of yarn from cotton in January 1961, with 3,300 spindles. The company has license to install 12,000 spindles. The company intends to install the balance of 8,700 spindles in two stages. In the I stage 4,700 spindles will be installed by June, 1962. The installation of the remaining 4,000 spindles will be taken up soon after the unit of 8,000 spindles is set in regular working. The cost of installing and operating additional 8,700 spindles, 4,700 in the I stage and 4,000 in the II stage, is estimated to be about Rs. 14,00,000. The paid up capital of the company to date is Rs. 5,74,570. The borrowing to this date amounts to Rs. 7,14,500. It is considered that raising funds for the purposes of the proposed expansion of 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.'
62. 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 of the conditions of advancing the loan that they should have power to nominate two directors on the board of directors of this company, who will be non- rotating and need not hold qualification shares of directorship. It is, therefore, necessary to amend the articles of association of the company to confer on the said bank the power to nominate two directors as long as any moneys due under the loan advanced by them shall be outstanding and due. Accordingly the special resolutions are proposed as set out in the notice.'
63. The argument strongly presented by Mr. Sundaraswamy is that although there are several documents, some in the form of mortgages of immovable property and some in the form of hypothecation of movables, the transaction in substance was a single transaction under which the bank lent money against the security of all the properties, both movable and immovable, belonging to the company, that the provisions of the mortgage deed, particularly in clause 5(i), are such as to empower the bank to take over the entire management of the business of the company, that by others engagements or agreements entered into by the company with the bank, the bank obtained the right to appoint special directors and also an undertaking by the managing agents not to plead their agreement with the company against the bank when occasion arises for the bank to take over the management pursuant to the terms of the mortgage deed and that, of the whole undertaking of the company in favour of the bank. Such a transaction resulting in such a disposal of the whole undertaking of the company, he argues, could not be entered into without the consent of the company expressly taken pursuant to clause (a) of sub-section (1) of section 293 of the Companies Act. He points out, further, that in regard to these transactions the only resolution of the general body of the shareholders of the company got passed was the resolution of 11th January, 1962, exhibit P-1(a), and that the said resolution is limited to clause (d) of subsection (i) of section 293, with the result that the only consent of the company in the general meeting secured was the consent for borrowing sums in excess of the paid up capital and reserves, and not for the disposal of the whole undertaking of the company.
64. Mr. Ullal answers that the transaction, whether is consists of more parts than 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 hypothecation. He also suggested 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 transaction by the company agreeing to the amendment of the articles of association under th resolution, exhibit P-1(b).
65. 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-section (1) of section 293 and that the case of the acquiescence or ratification has not only been not pleaded in the counter-affidavit of the bank but also is incapable of being made out on the facts of this case, because there can never be an acquiescence in law unless the party said to have acquiesced in a state of affairs had done so with the full knowledge of the details thereof. He also points out that even in the explanatory statements annexed to the notices, exhibits P-2 and P-3, pointed attention of the shareholders was drawn to the fact that the loans exceed the paid up capital and reserves of the company and not to the effect of the transactions being an actual disposal of the whole undertaking of the company.
66. If the case were to rest exclusively on the ascertainable meaning or the legal effect of the resolutions of the general body of shareholders, it would have been somewhat difficult for the bank of make out that there has been at least a substantial compliance with the provisions of section 293(1)(a) of the Act. The meaning and effect of the notices convening the meetings and the resolutions adopted at the said meetings, as interpreted and suggested by Mr. Sundaraswamy, are not matters which can be easily discounted or contradicted.
67. It appears to me, however, that the question of substance which is of greater importance and which should receive greater attention is the question whether Mr. Sundaraswamy is right in saying that the impugned transactions really amount to a disposal of the whole or the substantial portion of the undertaking of the company.
68. The word 'undertaking' is not defined in the Act. One has, therefore, necessarily to depend upon the dictionary meaning or such secondary meaning the term might have acquired by commercial usage or long practice governing the workings of and borrowings by companies.
69. The ordinary dictionary meaning is what has already been referred to by me while summarising Mr. Ullal's arguments. It is not in its real meaning anything which may be described as a tangible piece of property like land, machinery or the equipment; it is in actual effect an activity of man which in commercial or business parlance means an activity engaged in with a view to earn profit. Property, movable or immovable, used in the course of or for the purpose of such business can more accurately be described as the tools of business 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.
70. 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. Dealing with certain floating charge, which used the term 'undertaking', his Lordship stated that the work '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.
71. Now, to understand the effect of the above judgment of Giffard I., 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 meet all their financial needs from out of their paid up capital alone. They had necessarily to depend upon large finances made available to them either by banks or other financiers. In fact, such borrowings in course of time came to be called working capital as distinguished from the paid up share capital. Most of the assets of such companies were fixed assets like lands and buildings and were absolutely necessary for the operations and activities of such companies. Banks or financiers who lent moneys naturally looked for security for their loans. Essentially and fundamentally the source of recovery was the profitable working of the companies. The working of companies was impossible if they were deprived of their fixed assets lime land and machinery ; at the same time, such fixed assets were the only tangible security which the companies could offer. It is in such circumstances that the idea of a floating charge was developed whereby all the fixed assets of a company as well as the goods in the process of manufacture and unsold manufactured goods so long as they continued in the custody of the company were wholly and totally mortgaged or hypothecated to the lender. But the company was left free to use its fixed assets and machinery, and to sell goods manufactured by them without any hindrance or interference by the lender so long as the company worked and continued to make periodical repayments with interest on portions of moneys borrowed by it, the lender being given and retaining the ultimate power of taking possession of fixed assets and all available properties, immovable and movable, as soon as the company committed default, stopped working or went into liquidation. Technically, it was stated that at that point of time the floating charge got fixed on the properties and the lender became immediately entitled to relies his moneys from out of those properties.
72. It is in the light of this history of the concept of floating charges that the judgment of Giffard L.J., cited above, should be read. I give below a sufficient portion of his Lordship's judgment for a full understanding of the true legal position. After stating that the company was empowered to execute mortgages as well as issue debentures and that they could exercise both these powers by a single instrument, his Lordship proceeded to describe the legal position in the following words :
'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 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 th e 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 inn 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 company. And I take the object and meaning of the debenture to be this, that the word `undertaking' necessarily infers that the company will go no, and that the debenture-holder could not interfere until either the interest which was due was unpaid, or until the period had arrived for the payment of his principal, and that principal was unpaid. I think the meaning and object of the security was this , that the company might go on during that interval, and, furthermore, that during the interval the debenture-holder would not be entitled to any account of mesne profits,or of any dealing with the property of the company in the ordinary course of carrying on their business I do not refer to such things as sales or mortgages of property, but to the ordinary application of funds which came into the hands of the company in the usual course of business. I see no difficulty or inconvenience in giving that effect to this instrument. But the moment the company comes to be wound up, and the property has to be realised, that moment the rights of these parties, beyond all question attach.'
73. Now, it will be noticed that the essence of the transaction is that the company is permitted to retain the use of all its property and continue to engage in its manufacturing of business activity and is not to be interfered with so long as it continues to work and continues to make repayment in the manner agreed upon between it and its lender. So long as this result is ensured and the company continues to engages in its work the form or languages of the instruments under which money is borrowed is of little or no consequence, and so long as such position is assured. I do not think it can be rightly contended that the company has parted wit its undertaking or business or disposed of its undertaken within the meaning of clause (a) of sub-section (1) of section 293. All that is has done, is mortgaged all its properties for raising funds for its working.
74. In the documents with which we are now concerned, it will be seen that, although the mortgage is drafted in the form of an English mortgage under which the mortgage is entitled to immediate possession of the property, the mortgagor-company is permitted to continue in possession and the mortgage-bank is not to take possession of the properties until the company commits default in observing the terms of the instrument. In the deed of hypothecation of movables, the contingencies in which th 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 .
75. 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.
76. It cannot therefore be contended that the company has disposed of the whole or any part of its undertaking understood in the correct sense.
77. There is , however, only one clause which appears to be our of tune with that I have stated above, and that is clause 5(1) of the deed of mortgage, exhibit R-15. The effect of that clause is to empower the bank not merely to take possession as mortgage for the purpose of realising its dues from out of the 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 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 regarded as a disposal by the company of the whole of its undertaking to the bank . But the invalidity of this one clause in the document need not, in my opinion, be said to have a fatal effect o the entire transaction itself. This clause alone can be struck down to the extent it empowers the taking over of the management of the business of the company without affecting the validity of the enforceability of the rest of the terms, In actual event the bank has not taken possession of the management ; it is has simply taken over the mortgaged properties into its possession and that taking of possession should be related in the normal course to a legal right properly and lawfully exercisable by the bank, viz., the right to take possession for the purpose of realising its securities and recovering th moneys due to it from out of the properties expressly mortgaged or charged in its favour.
78. My finding on the 4th point therefore is that except to the extent clause 5(i) of exhibit R-15 and the corresponding clause of exhibit R- 34, which empowers the bank to take over the management of the business of the company, neither the mortgages nor the hypothecations are invalid for contravention of clause (a) of sub-section (1) of section 293 of the Companies Act, 1956, and that the said offending clauses are alone invalid and unenforceable to the extent mentioned above.
79. In the light of my findings I make the following common order on both case these Applications Nos. 143 of 1967 and 20 of 1968 :
(1) The Bank of Maharashtra the applicant in Company Application No. 143 of 1967 is a mortgages of the immovable properties and hypothecatee of the movable properties of the company described in exhibits R-8, R-15, R-21, R-31, R-34 and R-39 and that in exercise of the rights and powers conferred upon it by the said documents it is entitled to take and retain possession of the properties described in the said documents for the purpose of recovering the moneys due to it by enforcing its security against the said properties. It has also the power of selling the said properties without the intervention of court for the purpose of recovering the moneys due to it an accordance with and by complying with the provision s of the Transfer of Property Act and the Contract Act governing the exercise of such power. The bank will be accountable to the company in liquidation as a mortgage in possession and if it exercises its power of sale without the intervention of court it will be accountable for the moneys realised by sale in accordance with or in terms of sub-section (4) of section 69 of the Transfer of Property Act. start form page no. 489.
(2) I express no opinion as to the exact amount now due to the bank.
(3) The bank is directed to deliver all articles of furniture belonging to the company now in its possession to the official liquidator.
80. In both these applications the parties will bear their own costs.
81. The judgment in the case cited at P.474 supra is printed below as an Appendix.]
OFFICIAL LIQUIDATOR HIGH COURT OF MYSORE V. T. MUNISWAMY ACHARY AND OTHERS
A. Narayana Pai J.
March 17, 1967
Company Petition No. 10 of 1963.