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In Re: Kapila Textiles Mills Ltd., Nanjangud (In Liquidation) - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKarnataka High Court
Decided On
Judge
Reported in[1964]34CompCas1005(Kar)
ActsMysore State Aiod to Industries Act, 1951 - Sections 7, 13, 19(1) and 22; Companies Act - Sections 530(1); Land Revenue Code; Companies (Court) Rules, 1959 - Rule 164
AppellantIn Re: Kapila Textiles Mills Ltd., Nanjangud (In Liquidation)
Excerpt:
.....provisions of act. - while the giving of any time to the mortgagors without consent of the government of mysore or any delay or failure in taking any steps to receiver any instalments of principal or interest shall not discharge the government from the responsibility under this bond, it is understood that the government will be kept informed of the grant of any such time or the steps which may be taken for the recovery of the sums. he nature of service charge and that the government cannot in any event claim that they have rendered any services after the presentation of the petition to wind up the company and that by reason of the government's failure or default to take any steps to enforce payment or tot enforce what he calls 'penal clause' by taking over the management, etc...........having guaranteed due repayment by the company of a loan of rs. 10,00,000 advanced to it by the bank of mysore on the mortgage of its immovable property and hypothecation of its machinery and other movable. 3. among the facts stated in. he order of the official liquidator under appeals, there is no dispute regarding the following facts : late in 1948 , the company appears to have approached the state government for a loan in aid of the industry it was contemplated to set up. the government , however, did not themselves grant the loan but agreed to stand as guarantors in respect of the secured loan if granted by the bank of mysore on certain terms and conditions. the conditions on which the government agreed to guarantee the loan are set out in an order of the government bearing no. d......
Judgment:

1. In this application under rule 164 of the Companies (Court) Rules, 1959 , the applicant -State Government of Mysore appeals against an order of the official liquidator dated 26th November, 1963, totally rejection its claim for payment to it, out of the assets of the company in winding up, of a sum of Rs. 62,817.01 as a preferential claim.

2. The claim is described as guarantee commission payable to the State Government on account of the Government having guaranteed due repayment by the company of a loan of Rs. 10,00,000 advanced to it by the Bank of Mysore on the mortgage of its immovable property and hypothecation of its machinery and other movable.

3. Among the facts stated in. he order of the official liquidator under appeals, there is no dispute regarding the following facts :

Late in 1948 , the company appears to have approached the State Government for a loan in aid of the industry it was contemplated to set up. The Government , however, did not themselves grant the loan but agreed to stand as guarantors in respect of the secured loan if granted by the Bank of Mysore on certain terms and conditions. The conditions on which the Government agreed to guarantee the loan are set out in an order of the Government bearing No. D. 8925-7 dated June, 16, 1949 . Omitting the preamble, which is of no relevance , the operative portion of the order read as follows :

' After carefully considering the request of the management of the Kapila Textiles Ltd., the Government are pleased to direct as follows :

(1) If the Bank of Mysore grants a loan to the company at a rate of interest not exceeding 4 1/2 per cent. to be repaid after a period of two years in equal instalments during the next four years on the security of all the assets of the company , the Government may agree to guarantee the repayment of the loan according to the terms arranged by the Bank of Mysore.

(2) The company should agree to the Government proposal that the assets of the company should be fee form all encumbrances except to the extent secured by the Bank of Mysore.

(3) The company should agree to the payment of a further 1/2 per cent. interest to the Government on such loan as is outstanding from time to time with the Bank of Mysore for service charges.

(4) The company should agree to a director nominated by the Government who will have full powers of inspection and obtaining information on all aspects of the work of the company. The company should further agree to such directions as may be given by the Government from time to time in the conduct and management of the company on the report of their Government director or on any further report that may be received by them from the Bank of Mysore. In case there is default in the payment of any of the instalments, the company should agree to such action as Government may decided upon including the taking over by the Government of the entire management of the concern on such terms as the Government may decide upon.

(5) The Bank of Mysore may be authorised to pay the loan in instalments as and when necessary up to the amount prescribed as soon as all the necessary documents embodying these conditions are signed by the company.

The Comptroller to Government is requested to issue necessary instructions to the Bank of Mysore Ltd. and to take all necessary further action in the matter.'

4. At their meeting held on 19th July, l1949, the board of directors adopted a resolution on this matter. The liquidator has not set out the entire resolution in his order. I think it is necessary to copy the first four paragraphs of that resolution which appears at page 95 of the minutes book of the directions produced before me by the liquidator. They read as follows :

'........... (4) The Government order No. D. 8925-7 I & C 350-48-3 dated 16-6-49 guaranteeing the loan through the Bank of Mysore Ltd. was considered.

Resolved (1) that all the terms and conditions contained in the above Government order be and are hereby accepted.

(2) To borrow up to the limit of ten lakhs of rupees from the Bank of Mysore Ltd., against mortgage of the company's lands, buildings, plant and machinery and against hypothecation of tools and spare parts, at one and a half per cent. per annum over the rate of the Reserve Bank of India.

(3) That the chairman and two directions of the company , of whom one will be a special director, be authorised to execute the documents in respect of the loan to be raised from the Bank and the guarantee papers to the Government .

(4) That the Government of Mysore be paid a half per cent. per annum on the loan as service charge , on sums as may be outstanding from time to time.

5. The Bank of Mysore agreed to grant the loan but with some variations regarding the terms, particularly on the question of rate of interest . Where -as the Government in their order cited above stipulated a rate of interest not exceeding 4 1/2 per cent. per annum, the bank stipulated a rate of 1 1/2 per cent. above the rate of the Reserve Bank of India. The necessary documents of loan were later executed by the company in favour of the bank on October 31, 1949. The documents were two in number - a registered simple mortgage in respect of lands and buildings for a principal sum of two lakhs or rupees and a deed of hypothecation of movable for a principal sum of eight lakhs of rupees. Before these deeds were executed, to board of directions adopted a further resolution by circulation on October 26, 1949 (which was later confirmed at the meeting held on November 23, 1949), to the effect that the common seal of the company be affixed to the mortgage deed and other documents to be executed in connection with the loan of ten lakhs of rupees to be executed in connection with the loan of ten lakhs of rupees to be granted to the company by the Bank of Mysore on the guarantee of the Government of Mysore.

6. On the day on which the land documents were exerted in favour of the bank, i.e., October 31, 1949, the Government passed letter No. D.O.D. 30 to the manager of the Bank of Mysore which reads as follows :

' In accordance with Government order No. D. 8925-7/I & C/350/48/3 dated June 16, 1949 , under which a loan of rupees , ten lakhs is to be advanced to the kapila Textiles Mills Ltd., Mysore, by the Bank of Mysore Ltd., under the terms and conditions contained in the deed of simple mortgagee dated October 31, 1949, and the deed of hypothecation of movable dated October, 31, 1949, executed by the mills in favour of the bank, the Government of Mysore hereby guarantee the due repayment by the mortgagors of the amount due to the Bank of Mysore with all interest and costs which may be due and payable under the said deeds..

If the mills do not pay the amounts due to the bank for interest and installments of principal regularly in accordance with the terms of the said deeds, the Government of Mysore will on demand pay the amount payable to the bank in accordance with the said deeds and thereupon the bank will transfer and assign in favour of the Government of Mysore all their rights, title and interest under the mortgage deed and deed of hypothecation of movable including the rights and remedies in the matter of collection and in the policies of insurance, if any, which may have been taken out in accordance with paragraph 4, of the mortgagee deed and thereafter the Government shall stand subrogated to all the rights of the banks as the first mortgage and the Government shall be entitled to recover from the mortgage the amounts so paid by them with interest due by the mortgagors under the deeds together with high rate of interest or other service charges which may be due and payable to the Government by the mortgagors.

While the giving of any time to the mortgagors without consent of the Government of Mysore or any delay or failure in taking any steps to receiver any instalments of principal or interest shall not discharge the Government from the responsibility under this bond, it is understood that the Government will be kept informed of the grant of any such time or the steps which may be taken for the recovery of the sums.'

7. No separate document appears to have been executed by the company in favour of the Government in regard to the payment required to be made to the Government under clause 93) of the Government order dated June 16, 1949, or agreeing to act upon other conditions and stipulations made by the Government in the said order. No such documents was produced either before the liquidator or before me during the hearing of this application.

8. In the proof first presented to the liquidator the amount claimed was Rs. 69,097.03 . Later , however, the amount was reduced to Rs. 62,817.01 by producing an affidavit in which it was admitted on behalf of the Government that after enquiry they had discovered that the following five payments had been made to the credit of the Government either at the District Treasury at Mysore or the Taluk Treasury at Nanjangud, by the Company:

Rs. As. Ps30-9-1954 1,260 1 616-12-1954 1,246 9 317-5-1956 1,249 1 316-7-1956 1,260 4 624-1-1957 1,263 12 9

9. The affidavit further states that the officer who swore to it, viz., Shafiqur Rahman, Deputy Director of Industries and Commerce, Bangalore, states that he had deputed one of his official to check up the entries in the Treasury schedules of the District Treasury at Mysore and the Taluk Treasure at Nanjangud and that he was able to collect only five challans relating to the above five payments.

10. The company's general ledgers for the year 1955-56 , and for the period from July I, 1956 , to June , 30 1957 produced before me by the liquidator show that after crediting the payments made up to June 30, 1956 , the arrears of guarantee commission due to the Government stood at Rs. 19,572- 5-3 , that thereafter two payments were made, - one in July , 1956 , and the other in January, 1957,-leaving a balance of Rs. 17,048.25 due to the Government and that no further debits in commissioner account or corresponding credits in the name of the Government for guarantee commissioner were made.

11. On June, 14, 1958, the Government issue an order or notification bearing No. CI.18 F. A.S. 57 under section 22 of the Mysore State Aiod to Industries Act, 1951 , reading as follows :

' In exercise of the powers conferred by section 22 of the Mysore State Aid to Industries Act, 1951 (Mysore Act, XX of 1951) , the Government of Mysore hereby orders that the guarantee given by Government in respect of a loan of Rs. 10,00,000 advanced by the Bank of Mysore to Messrs. Kapila Textile Mills Ltd., Nanjangud, on October 31, 1949 , as per Government Order No. D. 8925-7 , dated June 16, 1949 , shall be deemed to be aid given under the Mysore State Aid to Industries Act to 1951.'

12. The petition to wind up the company was presented to this court on June 19, 1958 , and the company was ordered to be wound up on January 19, 1959.

13. There was considerable delay in presenting the claim to the liquidator but that delay was condoned by me by an order dated September, 6, 1963, in Company Application No. 62, of 1963.

14. In rejecting the claim the liquidator has proceeded on the footing that the guarantee given by the Government was only for a stipulated period which expired some time in 1951 , but was from time to time extended, that, the later extension expired on October 31, 1953, after which there had been no extension, except that the Government have from time to time acknowledged their liability to the bank, the latest such acknowledgment being by letter dated 19/21st July , 1958 . He also thought that having regard to the provisions of section 13 of the Mysore State Aid to Industries Act, 1951, there could be no guarantee beyond the maximum period of ten years stipulated in. the section. The other reasons stated by him are that according to clause (3) of the Government order dated June 16, 1949, the payment was intended to be in. he nature of service charge and that the Government cannot in any event claim that they have rendered any services after the presentation of the petition to wind up the company and that by reason of the Government's failure or default to take any steps to enforce payment or tot enforce what he calls ' penal clause' by taking over the management, etc., it was not equitable on the part of the Government to make this claim at this stage.

15. It has been contended on behalf of the applicant - the Government- before me that these reason stated by the liquidator are neither sound nor sufficient to reject their claims.

16. It seems to me that the reasons stated are either weak or actually irrelevant. The Government have taken steps, by extending the guarantee period (if at all such extension was considered necessary in law,) and by acknowledging its liability to the said bank to keep the guarantee alive. It does not appear that the Government disclaimed their liability to the bank as guarantors . Keeping alive the granite may itself in one sense be said to amount to service rendered to the company. No question of any equity arises because if the claim is enforceable and is not barred by the law of limitation or for any other reason, the fact that they did not pursue any special remedies available to them is not sufficient to wholly destroy their claim.

17. I therefore proceed to examine the claim afresh in the light of the facts stated above.

18. The first question for examination is whether there is any contract binding on the company for payment to the Government of the guarantee commission claimed in this application which is enforceable at the instance of th Government against the company.

19. So far as the affidavit in support of the proof goes, the only basis appeals to be what is stated in paragraph 4 of the affidavit which reads :

' The company had agreed as stated in clause (3) of Government order dated June 16, 1949, to pay half per cent. interest per annum to the Government of Mysore on the loan outstanding from time to time.'

20. The statement, on the face of it, is inaccurate. It suggests that there had already been an agreement by the company to make this payment and that clause [3] of the Government order merely recorded a completed agreement. The position is quite the reverse. The order of the Government dated June 16, 1949. merely made an offer to the company that it would guarantee a loan which the company may take from the Bank of Mysore it the company would abide by the conditions stipulated in the order. At the highest, therefore, clause [3] of the order of the government may be read only as a stipulation by the Government.

21. The resolution of the board of directors dated July 19, 1948, indicates that the directors were willing to accept all the terms stipulated by the Government unloading the payment now claimed. But, as already stated, no document was executed by the directors on behalf of the company under taking its liability to the Government, not is there any proof of even this resolution having been formally communicated to the Government. In contrast, we may notice that so far as the bank is concerned, the directors took all steps to execute the documents and also take power to affix the seal of the company to the contracts they were going to enter into on behalf of the company with the bank. The Government while they issued a formal letter of guarantee to the Bank of Mysore, do not appear to have obtained any document from the company or its directors in regard to the payment of guarantee commission.

22. It has, therefore, to be held that there is no proof of a completed agreement or contract between the company and the Government undertaking this recurring future liability of having to pay guarantee commission which the Government may enforce.

23. No attempt has been made before me to question the correctness of this conclusion. the argument however, has been addressed on behalf of the applicant the Government that though there is no such written contract, the company must be taken to have accepted that liability by conduct. The only conduct relied upon is the payment of guarantee commission from time to time right up to January, 1957. It is therefore necessary to assessee the legal effect of this conduct.

24. It must first be pointed out that the conduct which is of relevance would be not the individual conduct of the directors or even the board of d9rectors but such conduct on their part as may rightly be attributed tot he company as an entity. The payment undoubtedly may be taken as having been made on the orders of the directors; but not having been made on the basis of any contract regularly entered into by them on behalf of the company and binding on the company, such payments were open to question by the company in general meeting and may be taken as having been validly made only if ratified by the company.

25. On this aspect of the matter, there is no material brought on record in this application. Fortunately, however, for the government there is some material accepted and acted upon by this court in company Application No.45 of 1961 to which both the liquidator and the State government were parties. In that application in which some of the unsecured creditors questioned the availability of the mortgage and hypothecation as security to the bank, certain confirmations of the balances stated as due to the bank signed by the directors and the balance sheets of the company were produced. The latest balance sheet produced therein and relied upon by the court as constituting an acknowledgment of liability by the company was the one as on June 30, 1956. I have already notice above that, according to the ledgers of the company produced before me in this application there was a balance of Rs. 19,575.25 shown as due of the government as arrears of guarantee commission. That among, we may take it, must have been included in the figures of the balance sheet as on June 30, 1956. To the extent of that amount therefore, the government may be taken to have succeeded in establishing their claim, because by adopting the said balance sheet the company must be taken to have ratified the actions of its directors resulting in that liability and to have accepted that liability. For the period subsequent thereto, there are neither debits in commission account nor credits in the name of the Government in the books of the company nor any proof of the company itself having acknowledged its liability to the Government.

26. since then, as already pointed out, there have been two payments made to the Government which brought the liability down to Rs. 17,048.25 np.

27. I hold therefore that the only amount out of the claim made by the Government which can be admitted is the said amount of Rs. 17,048.25Np.

28. The next question is whether the Government is right in claiming preferential payment in respect of this amount.

29. The claim is made on the basis that the amount due to the government falls under clause [a] o sub section [1] of section 530 of the Companies act as being in the nature of revenue due to the Government. that it is of such a nature is sought to be made out in the following manner:

By the notification under section 22 of the Mysore State aid to Industries Act, 1951, published in June, 1958 [copied above] the guarantee given by the Government was treated as a aid given under the said ACt. According to section 7 of the ACt. aid includes aid extended to an industries by guaranteeing cash credit, overdraft or fixed advance with a bank. section 19[1] read as follows:

19, [1] All moneys payable under this act, including any interest chargeable thereon and cots, if any, incurred it not paid when due,may be recovered from the person aided and his surety, if any under the law for the time being in force, as if they were arrears of land revenue.'

30. The liquidator has taken the view that the notification is ineffective because it purports to give retrospective effect to the ACt. That view is wrong. when section 22 of the Act itself states that any aid of the type referred to in section 7 given to any industry prior to the commencement of the act, shall, on the issue of a notification by the government to that effect, be deemed to be aid given under the . Act and that thereupon all provisions of the said act and Rules shall apply thereto, a notification pursuant to and in accordance with that section cannot be held to be ineffective. this view, however, is not sufficient to uphold the claim for preferential payment made by the government. The only effect of the provisions of section 19[1] is that the amount due to the Government may be recovered as if it were land revenue. The very expression as if it were land revenue means that the same in its proper nature is not land revenue at all. the effect of the section is that the procedure for recovery of land revenue prescribed under the land Revenue code is made available to the Government for the purpose of recovering any amount due to it in respect of any aid given by it under the act to an industry. It cannot be read as converting the aid itself into land revenue.

31. I hold, therefore, that the guarantee commission recoverable by the government is not land revenue or a tax due to the Government entitled to preferential payment under clause [a] of sub section [1] of section 530 of the Companies act.

32. In the result, in partial reversal of the order of the liquidator, I admit the claim of the applicant - the Government to the extent of Rs. 17,048.25np. as an ordinary unsecured debt ranking for payment pro rata along with other unsecured debts . The claim in case of the said amount is rejected.

33. The parties will bear their own costs in this application.


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