1. This appeal is preferred by the State of Andhra Pradesh under Section 202 of the Indian Companies Act, 1913 (hereinafter referred to as the Act) against the order of the learned District Judge, Guntur, in I. A. No. 336 of 1959 in O. P. No. 165 of 1955.
2. The facts necessary for a determination of the questions in controversy may briefly be stated: One Sri Rajah Ravu Janardhana Krishna Rangarao Bahadur Varu filed a petition under Sections 229 and 233 of the Act and under Sections 67 to 104 of the Transfer of Property Act requesting the court to decide the question of priority between the first mortgagees viz. the debenture holders of the Guntur Vegetable Oil Industries Ltd., under liquidation (hereinafter called the Company) and me Government. The case of the petitioner is that he was the secured creditor of the Company being the holder of 200 first mortgage debentures bearing Nos. 101 to 300 and that the East Asiatic Investment Com puny Ltd., the 3rd respondent in the lower court, as well as before us, was also a holder of 100 first mortgage debentures of Nos. 1 to 100. Each of the debentures was of the value of Rs. 500 & the Company had issued debentures of the total value of Rs. 1,50,000 under the Debenture Trust Deed dated 10-2-1947 mortgaging the properties of the Company described in the schedule thereunder, the Company borrowed Rs. 1,30,000 from the Government and executed a mortgage deed in respect of the properties described in the schedule attached to it on 4-4-1950 as security for the discharge of the said loan.
Later on the Company was ordered to be wound up on 11-9-1953 by the High Court of Judicature at Madras and a liquidator was appointed. On an application No. 9/54 in O. P. No 240 of 1952 the High Court of Andhra by its order dated 6-3-55 directed the liquidator to sell the properties of the Company free of charge and that the charge on each of the items sold should be transferred to the proceeds, and ordered that the question of priority between the mortgage debenture holders and the Government should be decided after the sale proceeds are realised. Thereafter, the liquidation proceedings were transferred to the District Judge, Guntur. Sri Rajah Ravu Jagannadha Krishna Rangaran Bahadur Varu (the 1st respondent before us) filed I. A. No. 336/59 before the learned District Judge, Guntur, setting out these facts & reques ted the Court to decide the question of priority of claims between the first mortgage debenture bolder and the Government. He contended that as the debenture holders are the first mortgagees of all the properties, present and future, and as the Government arc the subsequent mortgagees under the State Aid to Industries Act, the Government are not entitled to claim priority over them. (3) This application was resisted by tie Government as well as by the liquidator,. The Government contended, inter alia, that there was no effective or valid mortgage created over the properties in favour of the debenture holders under the Debenture Trust Deed dated 10-2-1947, and that even a floating charge was not created, and that the Government advanced Rs. 1,30,000 under the State Aid to Industries Act and became a secured creditor taking precedence over the floating charge, if any, in favour of the debenture holders. Thus, the Government contended that the land, buildings, plant and machinery and all other assets of the Company were mortgaged to them for the discharge of their debt, and that their security takes precedence over the claim of the debenture holders. That right was claimed both under the State Aid to Industries Act as well as under common law.
The Government also pleaded they were not aware of the various provisions of the Debenture Trust Deed. By an additional counter, it was contended by the Government that no part of the machinery of the Company including the boiler and tanks were permanently attached to the land & as such none of it constitutes immoveable property. It was also contended that inasmuch as the buildings or the machinery were not in existence on the date of Debenture Trust Deed, no effective or valid mortgage was created in respect of those properties, and that the floating charge, if any, created would not amount to a fixed charge. The 3rd respondent viz., the East Asiatic Investment Company filed a counter supporting the claim of the 1st respondent before us.
4. No evidence was adduced by either party before the learned District Judge. On a consideration of the contentions and the law bearing on the subject, he came to the conclusion that both the debenture holders and the Government being secured creditors, the claim of the debenture holders would have priority over that of the Government.
5. Before we examine the terms of the Debenture Trust Deed, and the Mortgage Deed in favour of the Government, and the rights thereby created, it is better to state the legal position.
6. Debentures may be issued either unsecured or secured by a charge on property of the Company. Debentures may be secured
(1) by way of a specific charge or mortgage on particular property of the Company, or
(2) by way of a floating chrage; or
(3) by both a specific and floating charge. It is usual when specifically secured debentures are issued to add, by way of a further security, a floating charge.
7. A specific or fixed charge, or mortgage, securing a debenture does not raise problems peculiar to Company Law. Such charge is granted on particular property of the Company, normally, land, interests in land or ships, in the same manner in which a physical person owning property would grant such charge or mortgage, In the winding up of the company, a debenture holder secured by a specific charge is in highest ranking class of creditors viz., in that of secured creditors. The priority of several specific charges on the same property it determined by the general rules relating to the priority of charges.
8. Where a particular property of the company is specifically charged in favour of debenture holders, the company cannot dispose of it unencumbered by the charge without having obtained the consent of the holders of the charge.
9. In the case of a debenture secured solely by a floating charge the position is different; in this case the company may dispose of the property on which the charge exists unencumbered without consulting the holders of the charge until an event happens on which the floating charge, according to its terms, 'crystallises' i.e. becomes a fixed charge. Before crystallisation of the floating charge, the Company has a free hand to deal with and dispose of the property charged in the ordinary course of the company's business. It may do so by way of sale tease, exchange, specific mortgage, or otherwise as it deems most expedient. Thus, an assignment by the company of arrears of rent made before the appointment of a receiver gives the assignees a good title as against debenture holders having only a floating charge; but if the land is specifically charged by the debentures, the debeture holders can claim the rents (Vide Palmer's Company Law, 1959 Edition, pages 39R and 404).
10. The same principle was laid down in Halsbury's Laws of England, 3rd Edition Volume 6. In (paragraph 914 it is stated thus:
'The terms 'floating security' and 'floating charge' mean a security or charge which is not to be put into immediate operation, but is to float so that the company is to be allowed to carry on its business, it contemplates, for instance, that hook debts may be extinguished by payment, and other book debts may come in and take place of those that have disappeared. While a specific charge is one that, without more, fastens on ascertained and definite property or property capable of being ascertained and defined, a floating charge moves with the property which it is intended to affect, until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp. It is of the essence of a floating charge that if remains dormant until the undertaking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes....
'Mortgage debentures unusually contain upon the undertaking of the company and all its property real or personal, whether present or future and may or may not give a charge upon uncalled capital. The condition usually provides that the charge so given shall be a floating security or charge. Where a series of debentures or debenture stock is secured by a trust deed, then, in addition to specific property or the company being thereby assigned to the trustees to secure the debentures or stock, a floating charge is generally given upon all the other property of the company present or future, and its undertaking, and in some cases its uncalled capital.
'A general charge may be construed as a floating security, although the instrument does not expressly so describe it. Thus, a charge upon the undertaking of a company constitutes a floating charge upon all its property, and debentures given to bind a company and all its estate, property and effects, or its real and personal estate, constitute a floating security.
* * * *' In paragraph 915 it is stated thus:
'A floating security being only a charge on the assets for the time being, the company may in the ordinary course of its business, unless it is otherwise agreed and until the security becomes fixed, sell, let, mortgage, or otherwise deal with any of its assets, and pay dividends out of profits, just as if the floating charge had not been created :-
* * * *' In paragraph 917 it is stated thus:-
'If the company is wound up, or if a receiver is appointed, or some event happens upon which the charge is to become a fixed charge, the security ceases to be a floating security and becomes a fixed charge, and the company cannot thereafter deal with any part of the property so charged except subject to such charge. * * * *'
11. The posit km is the same under the Indian Law. In 'the Indian Company Law' by K. M. Ghosh, 10th Edition. 1956, at page 343, the law is stated thus:-
'The charge may be either 'fixed' or 'floating' When the charge is 'fixed' if affects the title to the property and the company can only deal with the property affected subject to the charge. But when the charge is a 'floating' one the company may, in the ordinary course of business, deal with the property covered by the charge, mortgaging, selling, disposing of it or using it up as the business requires at any time before the charge attaches. The term 'floating security' and 'floatingcharge' are synonymous. ****'
The learned Commentator followed the principle laid down by Lord Macnaghten in Illingworth v. Houldsworth, 1904 AC 355 to the effect that 'a floating security is an equitable charge on the assets for the time being of going concern; it attaches to the subject charged in the varying conditions it happens to he from time to time.
If is of the essence of such a charge that it re mains dormant until the undertaking charged ceases to be a going concern or until the person in whose favour the charge is treated intervenes. His right to intervene may of course be suspended by agreement. But if there is no suspention, he may exercise his right whenever he pleases after default.'
12. Section 109 of the Indian Companies Act enumerates the mortgages and charges which shall be void if not registered, and in that list was included '(e) a mortgage or charge on any immoveable property whatever situate, or any interest therein; or (e) a floating charge on the undertaking or properly of the company'. Thus, it would be seen that under the Indian Companies Act mortgages on specific property of the Company as well as floating charges are contemplated and the Section requires their being registered with the Registrar of Joint Stock Companies. In default of which they shall be void against the liquidator and any creditor of the Company.
13. Section 229 of the Act is as follows:-
'In the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and to debts provable and to the valuation of annuities and further and contingent liabilities as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent; and all persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company may come in under the winding up, and make such claims against the company as they respectively are entitled to by virtue of this Section.'
14. This Section therefore makes it clear that all the rules obtaining in the insolvency of an individual shall prevail in the winding up of an insolvent company, and in particular the rules with regard to the respective rights of secured and unsecured creditors. From this it follows that in determining the rights of a mortgagee, or a person having a specific or a fixed charge it is not the provisions of the Company Law that govern the case but the law of mortgages.
15. It may be useful in this context to refer to Section 230 of the Act which deals with the preferential payments, and amongst the several debts entitled to preferential payments are mentioned 'all revenue, taxes, cesses and rates, whether payable to the Crown or to a local authority, due from the Company at the date hereinafter mentioned and having become due and payable within twelve months next before that date.' It will therefore be noticed that the sums in respect of which the Government are entitled to preferential payments are revenue, taxes, cesses and rates and we shall presently consider whether the loan advanced under the State Aid to Industries Act answers that description.
16. We shall now advert to the provisions of the Transfer of Property Act
17. Section 18 of the Transfer of Property Act is in the following terms:
'Where a person purports to create by transfer at different limes rights in or over the same immoveable property, mid such lights cannot all exist or be exercised to their full extent together, each later created right shall, in the absence of a special contract or reservation binding the earlier transferees, be subject to the rights previously created.'
18. This Section reproduces the well established equitable maxim qui prior est tempore potior est jure and lays down that the transferor cannot prejudice the rights of the transferee by any subsequent dealing with the property. In other words, if there are successive transfers of the same property, the later transfer is subject to the prior transfer. It follows that in the case of two successive mortgages the later or puisne mortgage is subject to the prior mortgage.
19. Chapter 4 of the Transfer of Property Act deals with mortgages of immoveable property and charges and Section 70 incorporated in this chapter is in the following terms:
'If, after the date of a mortgage, any accession is made to the mortgaged property, the mortgagee, in the absence or a contract to the contrary shall, for the purposes of the security, be entitled to such accession.'
Illustration (b) under the Section is as follows:-
'A mortgages a certain plot of building land to B and afterwards erects a house on the plot. For the purposes of his security B is entitled to the house as well as the plot.'
In Mulla's Transfer of Property Act at page 464 the position is stated thus:
'Thus, if the mortgagor builds on the property mortgaged, the buildings form part of the mortgagee's security ....... ....... machinery fixed by bolts and nuts to the concrete floor of a building is an accession to which the mortgagee is entitled ......'
20. Thus, the foregoing discussion makes it clear that where a specific charge is created on immoveable property, an equitable charge or a floating charge if any, created cannot have priority. Even if there be any other specific charge created on the same property, the specific charge which is the first in point of time takes priority over the second. In a case where buildings are constructed or machinery is fixed to the earth for its beneficial use after mortgaging the land, the buildings and the machinery or plant would constitute immoveable property as an accession to the land, and form part of mortgagee's security. So that, the mortgagee can claim security not merely in respect of the land mortgaged but also the buildings and the machinery fixed to the earth subsequently. The principle that plant and machinery imbedded in earth become immoveable property has been recently laid down by one of us (Venkatesam, J) as a member of the Bench which decided Firm Kuppanna Chetty v. Collector of Anantapur, (1965) 1 Andh WR 183:(AIR 1965 Andh Pra 157).
21. It remains to be considered what rights are conferred by the indenture in favour of the Government. The scheme and the object of the Madras State Aid to Industries Act, V of 1923, may now be briefly considered. In the preamble it is stated that the Act was passed as it was expedient to give power to the local Government to assist in the establishment and development of industries in the Presidency of Madras. Section 6 of the above Act enumerates the method of giving State aid, and is in the following terms:-
'Subject to the provisions of this Act and the rules framed thereunder, the (State Government) shall have power to give aid to an industrial business or enterprise in one or more of the following ways:-
(a) by granting a loan * * * *'
22. Section 9 of that Act lays down that no loan should be granted for an amount exceeding 50 per cent of the (net value of assets of the industrial business or enterprise and of any other property offered as collateral security for the loan, after deducting in both cases existing encumbrances) such value to be ascertained by such person as may be appointed by the State Government and in accordance with such rules as may be prescribed; and that for the purpose of this valuation the additional assets which may be created by the expenditure of the sums granted may be taken into account to such extent as may be prescribed.
23. Section 10 of the above Act reads thus:-
'Every loan granted under this Act shall be secured by a mortgage or floating charge upon the whole of the assets of the business or enterprise, subject to any encumbrance existing at the time of the grant, and by such collateral security, If any, as may be required by the (State Government) and shall bear interest payable on such dates and at such rates as the (State Government) may determine.'
The Act also provides that the money payable under the Act including interest may be recovered from the person concerned and his security, as if they were arrears of land revenue.
24. Sections 9 and 10, fur from giving priority to the Government loan, make it manifest that the loan by the Government under that Act shall be secured as a mortgage or floating charge upon the assets of the business or enterprise, and that it shall be subject to encumbrances then existing. In other words, the mortgage or charge in favour of the Government is expressly made subject to the rights of a prior mortgage, if any.
25. We shall not examine the terms of the Debenture Trust Deed dated 10-2-1947, described as an indenture between the Guntur Vegetable Oil Industries Ltd., and one G.S. Reddy, the trustee. Clauses 5 to 7 are important and may be extracted:
'(5)(a) For more effectually securing payment to the Debenture holders, the Company as beneficial owner hereby mortgages (without possession) unto the Trustee all the properly specified in the First Schedule hereto.
(b) The Company as beneficial owner hereby charges the payment of the Debenture amount and interest thereon by way of the Floating security upon all the undertaking and all assets and other property of the Company both present and future; all of which property and assets assured or charged by the Clauses (5)(a) and (b) are hereinafter referred to as 'Mortgaged Premises'.
(6) Except with the sanction of the Debenture holders, the company shall not have power to create Debentures ranking prior to or pari passu with the security hereby, constituted, until these debentures are fully redeemed.
(7) The Company shall be permitted to carry on the business with the mortgaged premises and to deal with the same in the ordinary course of business of the Company and also pledge charge or create any security over any or all of the stock in trade of the Company in favour of any Bank or Banks for the due repayment of any loan, overdraft account or other debt borrowed or to be borrowed by the Company from such Bank or Banks, notwithstanding the provisions in Clause 5(b) above: Provided however that they shall not deal with the property specifically mortgaged to the Trustee by Clause 5(a) so as to affect the security and the rights of the Debenture holders, and shall also be permitted to pay dividends out of profits, as the Company may deem fit or otherwise deal with the profits as the Company deem fit until the principal monies shall become payable under Clause 8 below. * * * * *'
26. In the first schedule to the indenture, the mortgaged property is stated to be all the pieces and parcels of land situated in the Koritipadu village, bearing 8 acres 55 cents, assessment Rs. 9-10-0 in north portion of the land in area 10-8 cents of assessment Rs. 25-1-0 comprised in Patta No. 64. Division No. 186, with the boundaries described therein and is followed by the words 'together with all machinery permanently attached thereto and all buildings, factories and oil mills and other machinery that have been or may in future be erected thereon.'
27. It would thus be seen that the property given as security is Ac. 3-65 cents of land together with buildings factories, machinery and oil mills etc., which have already been in existence or may in future be erected thereon. There can therefore be no doubt that the buildings to be constructed at a later date and the plant and machinery to be fixed in the factory also formed part of the security given under this indenture. As already noticed under Section 70 of the Transfer of Property Act even in the absence of a contract to that effect, the buildings and the machinery constitute an accession to the land mortgaged, and would enure for the benefit of the mortgagee. In this case, there is an express clause to the effect that they constitute the mortgage security. There can, therefore, be no doubt that the debenture security has been created not merely on land, but also on the buildings and the plant and machinery erected or to be erected thereon at a later date.
28. In order to get over this difficulty, the learned Government Pleader contended on behalf of the State that the indenture in question had not created a specific mortgage or a floating charge in respect of the property. His argument, so far as we can understand, is that by Clause (5)(a) the property specified in the first schedule had been mortgaged, and by Clause (5)(b) a floating security was created on all the undertaking and all assets and other property of the company both present and future. The property specifically mortgaged under Clause (5)(a), and all the undertaking and assets and properties of the company, present and future, are made subject to a floating charge under Clause (5)(b), and all the properties charged by Clauses (5)(a) and (b) were described as mortgaged premises. But according to clause 7, the Government has permitted to carry on the business with the mortgaged premises and to deal with the same in the ordinary course of the business of the Company, and pursuant to that clause the company created a mortgage in favour of the Government under the State Aid to Industries Act, and hence the rights, if any, created under Clause (5)(a) must yield to the mortgage created by the Company in favour of Government pursuant to the power conferred under Clause 7.
29. There is an obvious fallacy in this contention. Clause 6 forbade the Company from creating debentures, except with the permission of the debenture-holders to rank pari passu with the security thereby constituted until the debentures were redeemed. Further, Clause 7 contains a proviso in the following terms:
'Provided however that they shall not deal with the property specifically mortgaged to the Trustee by Clause 5(a) so as to affect the security and the rights of the Debenture holders * * * *'
This proviso and Clause 6 make it manifest It the power given under Clause 7 is subject to rights of the mortgage under Clause 5(a).
30. It is an elementary rule of construction that all the clauses of an instrument must be read together harmoniously. If the indenture is so construed, the result is that under Clause 5(a), a specific charge has been created in respect of the property described in the first schedule, and a power to create a floating charge on all properties is created under Clause 5(b). But this is made subject to Clause 6 referred to above. The power to deal with the mortgaged premises, which is incidental to the creation of floating charge was also conferred by Clause 7, but according to the proviso that is made subject to the rights of the mortgagees under Clause 5(a). We cannot therefore, hold that the rights of a mortgagee under Clause 5(a) are, in any way, affected by any exercise of the power under Clause 7. It therefore follows that the mortgage created in favour of the Government can, both under the law as well as under the terms of this indenture, only be subject to the rights of the debenture holders.
31. Reference may now be made to the indenture (mortgage) in favour of the Government. This indenture was made on 20th April, 1950 between the Company and the Government of Madras. The relevant clauses provide that the consideration for the indenture was Rs. 1,30,000 paid to the Company and that is repayable with the interest at 5% per annum Clause 2 provided that in consideration for the payment of that amount the piece and parcel of land described in the first schedule with the buildings and erections now existing, or hereinafter to be constructed thereon, and the machinery plant and other property described in the second schedule and other machinery plant and other property that may be placed thereon in addition to or in substitution thereof, and the goodwill of the mortgagor in the said business of refined oils and soaps carried on by the Company According to Sub-clause (2) of Clause 4 those presents and the consideration granted are subject to the provisions of the State Aid to Industries Act, 1922, and the rules framed thereunder. The schedule attached to the indenture refers to three items of properties, viz.
(b) building; and
(c) plant and machinery.
The land mortgaged and described in the annexure to the Debenture Trust Deed is the land mortgaged to the Government. In addition, as many as 9 buildings described under item (b) were also mortgaged to the Government. All of them must have come into existence subsequent to the Debenture Trust Deed, and must undoubtedly have come into existence prior to the indenture in favour of the Government. Similarly, under the heading 'plant and machinery'', as many as 6 items of plant and machinery were described which also must have been in existence at the time of Debenture Trust Deed, or come into existence prior to the indenture in favour of the Government.
32. There cannot be any doubt that these buildings, plants and machinery brought thereon also constitute the security created under the Debenture Trust Deed. That being so, even though they have also been mortgaged to the Government, we cannot hold that the Government acquired any right of, priority over the debenture holders.
33. It may also be mentioned that in the Company's balance sheet dated 31-3-1951, the debenture debt of Rs. 1,50,000 as well as interest of Rs. 1,2,50 thereon was shown on the liabilities side. The loan from the Government was also shown in the balance sheet. The balance-sheet mentioned that the loan of Rs. 1,30,000 granted under the Madras State Aid to Industries Act was secured by a mortgage of land, buildings, plant and machinery, and a note was appended that it was 'subject to the existing charge in favour of the debenture holders'. The Government had never taken an objection to the Company treating its rights as being subject to those of the debenture holders.
34. The learned Government Pleader cited a number of cases before us dealing with the rights acquired under a floating charge or floating security. We do not consider it necessary to express our opinion on the correctness of the several contentions raised, as we are firmly of the opinion that the Debenture Trust Deed created a mortgage or a specific charge in favour of the debenture holders in respect of the land, the building, plant, machinery etc., which were subsequently mortgaged to the Government. In this view, we do not think it necessary to refer in the decision of a Bench of the Madras High Court in State of Madras v. Madras Electric Tramways, AIR 1957 Mad 109, relied on by learned Government Pleader. We may however observe that the facts in that case are distinguishable from those in the case before us.
35. The next contention raised on behalf of the Government is that whatever might be the position with regard to the plant and machinery which is imbedded in earth, the mortgage debenture holders cannot claim a specific charge on all the machinery. The contention is that some machinery was not imbedded or planted in the earth, and, therefore, did not constitute immovable property entitling the debenture holders to claim me first charge. No evidence was adduced in the lower Court on this question not has any material been placed before us to come to the conclusion that the sale proceeds in the hands of the liquidator represented the proceeds realised by the sale of any items of machinery which had not been planted in earth. In the absence of any such material we cannot hold that the priority in favour of the debenture holders does not extend to any part of the sale proceeds in the hands of the liquidator.
36. As already noticed that under Section 20 of the Act, the Government can claim priority against the debenture holders only in respect of revenue taxes, cesses and rates. The loan under the State Aid to Industries Act does not answer that description and we hold that the Government cannot claim any preferential payment under Section 230(a) of the Act. The Government must work out its rights only on the basis that the debenture holders are the first mortgagees and the Government are the second mortgagees. That being so, the mortgage debenture holders are entitled to the priority and be paid in full before the Government are entitled to claim any portion of the sale proceeds in the hands of the official liquidator.
37. In the result all the contentions fall and the appeal is dismissed with costs of the contesting respondents one set. The costs shall he shared by the first respondent and the 3rd respondent in the proportion of 2:1.