S. Rangarajan, J.
(1) M/S. Globe Motors Limited (hereinafter called ''the company'), now being managed under a scheme approved by this court claims to have created an. equitable mortgage by deposit of title deeds pertaining to approximately 3250 square yards in Eh No. 152, G.T. Road, Jullundur City, Jullundur, to the extent of Rs. 40 lakhs on 17th February, 1967 to be held as security by the National and Grindlays Bank, Connaught Place, New Delhi (hereinafter called 'the bank') for obligants account or several accounts with the bank in respect of cash credits or overdrafts now due, overdue or pending and/or which may be granted to the obligants hereafter and for all present and future indebtedness of any kind of the obligant to the Ba.nk in any manner whether solely or jointly, primary or collateral, accrued or accruing with all relative interests, charges, costs (as between attorney and client) and expenses.' The documents were deposited by Mr. B. K. Bedi, who was duly authorised under resolution of the company to do so by a resolution of the company, dated 7th January, 1967, true copy of which resolution is Exhibit A.W. 1/5 and proved by Mr. S. K. Kholi, Chief Accountant of the company (A.W.2). A record of the same was made in the equitable mortgage register kept by the Bank, true copy of which has been marked as Exhibit A. W. 1/3 and was also duly proved by R. L. Anand (A.W.I), an Officer-in-charge of the Bank. He also spoke to the amounts due to the bank, which was supplemented by Mr. S. K. Kohli(A.W. 2), Chief Accountant of the company and Mr. R. P. Mehta (A.W. 3) Credit Officer, National & Grindlays Bank, H-Block Connaught Place, New Delhi.
(2) Another equitable mortgage in identical terms was also executed on the same day, copy of which is Exhibit A.W. 1/7 concerning property in Rambag, Delhi, with which, however, we are not concerned because that property was sold and the proceeds credited to the loan account.
(3) In the meantime, an application for winding up the company was filed in March 1968 C.P. 33. In November 1968, Mr. V. K. Mundra, submitted a scheme under Section 391 of the Companies Act. This court appointed a Chairman to preside over the meeting of the creditors, which was duly held; thereafter Company Petition No. 35 of 1969 was filed for accepting the scheme, which had been approved at the said meeting. On 31-5-1969, Hardy J., (as he then was) passed an order provisionally accepting the scheme subject to the propounder entering into appropriate arrangements for payment of dues to the bank, which was a secured creditor. It was realised that being a secured creditor, the bank was strictly speaking outside the winding up and that if it took any steps to enforce the security, the whole scheme would topple over. Eventually, the scheme was sanctioned by S. N. Andley J., (as he then was) on 3rd February, 1970.
(4) What happened pursuant to the creation of the equitable mortgage over the Jullundur property may have to be briefly noticed. The bank wrote under Exhibit A.W. 3/2, to the propounder of the said scheme, Mr. V. K. Mundra, giving particulars of the outstandings of the company as per the books of the company at the close of the business on 22nd August, 1969. The bank gave the following particulars mentioning the terms of arrangement:
WEwould refer you to the discussions we have had over the last few months regarding your taking over Globe Motors Limited. We are pleased to learn that you have finally decided to make an attempt to reopen the steel plant and that you will arrange to liquidate all the outstanding advances of Globe Motors Limited with ourselves. For your information the outstandings of Globe
Motors Limited in our books as at the close of business 22-8-1969 are as follows :- Globe Motors Ltd. Steel Division Overdraft: Rs. 50,78,169/77 Globe Motors Ltd. Number one Account overdraft. Rs. 4,16,475/99 Globe Motors Ltd. Number two account overdraft. Rs. 1,41,627/15 Loans against imported Rs. l,27,462.00 ___ electrode Rs. 57,65,734/91 'Our Head Office now wish the aforementioned advances to be split up as follows: Loan Account-Rs. 27 lacs.
LOANaccrued by the following shares which have already been pledged with us and the followmg properties whose title deeds have already been deposited with us by way of equitable mortgage:-
1900 fully paid ordinary shares of Jay kay Automobiles Ltd. of Rs. 100 each. 6000 ' ' of Forgings Pvt. Ltd. of Rs.10 each. 5115 ' ' of Globe Management Ltd. of Rs. 100 each. 10050 ' ' of Luck Auto Ancillary (India) Ltd. of Rs. 100 each. 22500 ' ' of Indian Metallurgical Industries Ltd. of Rs. 10 each. 1450 , ' of Meters & Instrumsnts Pvt. Ltd. of Rs. 100 each 33525 ' partly paid of Globe United Engg. & Foundry Co. Ltd, of Rs. 50 each. Title Deeds iu respect of property at Rambagh, Delhi ' ' ' , at G.T. Road, Jullundur. L.AM, Rs. 1,27,462 Loan against electrodes which will be repaid over the next twelve months. Overdraft Rs. 29.37 lacs.
OVERDRAFTwill be secured by hypothecation over raw materials and finished goods in the plant with a margin of 25 per cent. The deficit in the present stocks is to be made up by you immediately the steel plant has commenced production and the margin of 25 per cent which amounts to Rs. 7.5 lakhs is to be made tip by you at the rate of Rs. 50,000 per month. The overdraft facility of Rs. 29.37 lacs is also to be secured by the personal guarantees of the new directors and yourself.
WEwill require the appropriate board resolution acknowledging the liabilities of Globe Motors Ltd. to the Bank for all the aforementioned facilities and the resolution must incorporate the provision that should the 'loan of Rs. 27 lakhs remain outstanding twelve months after the date of the entries are passed in the books of the bank. the bank may proceed to realise the securities covering the loan without any further reference to the company. In the event of any surplus being available after sale of the securities the same may be utilised in part reduction of the overdraft of Rs. 29.37 lakhs.
'THEarrangement contained herein with all the details duly implemented shall be subject to sanction by the court. Should the scheme under which you are taking over Globe Motors Ltd. cease to be operative for any reason whatsoever, the Bank's rights and remedics already existing shall not be impaired for prejudicial in any manner or to any extent whatsoever.'
(5) On 14th April 1970, the bank again wrote to the convener of the Managing Committee under Ex. A.W. 3/3 appointed by the court for the company giving the amount of the figures as mentioned in the above said letter Exhibit A.W. 3/2, but only indicating the total amount due to the bank up to 31-3-1970 as Rs. 61,28,517.16, the excess over the figure mentioned in Exhibit A.W. 3/2 being due to the accumulation of interest. It was requested that the Managing Committee may pass a resolution acknowledging this liability and that the bank may be requested to adjust the overdrafts described in that letter by granting a overdraft facility to the extent of Rs. 30 lakhs secured by hypothecation over raw materials and finished goods in the steel plants with a margin of 25 per cent and a loan of Rs. 30 lakhs secured by certain shares and title deeds; if the loan of Rs. 30 lakhs was to remain outstanding 12 months after the date of the entires are passed in the books of the bank, the bank could realise the securities covering the loan without any further reference to the company. It also contained some other terms to which it is not necessary to refer at the moment.
(6) On 15th April, 1970, the Managing Committee of the company passed a resolution acknowledging the amounts shown as due to the bank as per Exhibit A.W. 1/6 and also confirming the other terms mentioned in the said letter to the extent of Rs. 30 lacs which was to be the separate over-draft account. The company had authorised two of its officers to execute a promissory note for the said sum which was done.
(7) The present application has been filed by the bank for raising the attachment, which had been levied by the Excise and Taxation Officer, Jullundur, of the Jullundur property said to be for arrears of sales tax etc., and for permission to sell the property with a direction to pay the sale proceeds to the bank. Even earlier, an application had been filed by the company (C.A. 233 of 1971) in this court for selling the Jullundur property for a sum of Rs. 4 lacs to M/s. Gold Finance Private Limited but the sale could not be completed for want of clearance certificate from the Income Tax Authorities at the material time. An earlier attachment had been effected on 25th November, 1967, by the Collector-cum-Deputy Excise and Taxation Commissioner of the jullundur property, It was claimed that the said attachment could not remain in force more than five years from the date of the said attachment and had ceased to be in operation. An earlier application was filed by the company, on 11th December. 1972 (C.A. 710 of 1972) praying that the said attachment may be realised. When it was realised that the attachment could not subsist after 25th November, 1972, the Deputy Excise and Taxation Commissioner-cum-Collector, Jullundur. Jullundur Division, again issued a warrant of attachment for the attachment of the same property against the sales tax demand already made against Highway Motors, in which the company was a partner.
(8) The company is disputing the validity and legality of the said demand; it is stated that the other undisputed demands had been paid by the company. It is common ground that though there was an order of. assessment made prior to 17th February. 1967, an appeal there from had been filed but dismissed without hearing the company. The High Court of Punjab and Haryana set aside the dismissal and directed a rehearing of the appeal which is now pending, It was claimed that the bank being a secured creditor in respect of the property, the attachment contrary to the said security in favor of the bank is illegal. The Managing Committee of the company had also approved of the idea of selling the property which has since been sold for a sum of Rs. 6,75,000.00 as ordered by Rajindar Sachar, J. In its reply, the State of Punjab claims priority in respect of. the sales tax arrears due to it under the demands which have not yet been set aside. It is conceded that even the earliest attachment to be effected in this case for recovery of sales tax etc., dues was itself made only on 25th November, 1967, after the creation of the equitable mortgage by the company in favor of the bank in question, namely, on 17th February, 1967, over the property attached. It is pointed out that the State of Punjab had also field an appeal against the above said order dated 31-5-1969 passed by Hardy J., on C.P. 35 of 1968 provisionally accepting the scheme and that the same is pending, but no order staying of further proceedings in this application has been obtained.
(9) It is now stated that a sum of Rs. 9,36,005.81 paise was due as arrears of sales tax from the Highway Motors, in which the company had 13/16th partnership interest. Though some averments were made concerning some irregularities committed by the Directors of the company of collusion between the bank and the company and the bank being interested in getting preference over other creditors of the company, there has been no allegation that the said security was a fraud on creditors including the State of Punjab. No suit under Section 53 of the Transfer of Properly Act has been admittedly filed till today questioning the mortgage transaction by way of equitable mortgage even though more than six years have elapsed since then.
(10) After hearing both sides, I passed an order on 16-8-1974 as follows, disposing of C.A. 710 of 1972 and C.A. 164 of 1974 on the same day:
'INview of orders passed today in C.A. No. 710/72 and C.A. 164/72, the only question to be decided in this application is whether the National and Grindlays Bank is entitled to precedence as a secured creditor over the State of Punjab and if so in respect of what amount.
THISis the only issue on which both sides adduced evidence and addressed arguments. The bank examined the aforesaid three witnesses. Mr. Sharda, Assistant Excise and Taxation Officer, Jullundur, was alone examined for the State of Punjab and since he was not in a position to give the particulars regarding the assessments, he was allowed to be recalled and examined further on 2-12-1974. It was stated by Mr. Anoop Singn, learned counsel for the State of Punjab, that he did not wish to examine Mr. Sharda further and it would be sufficient if the particulars concerning the assessments were marked as Exhibits D1 to D3 that would dispense with the need for further examination of Mr. Sharda. Mr. S. N. Chopra, A learned counsel for the bank, who had no objection to the said course, consented to Exhibits D1 to D3 being marked by consent. Mr. K. K. Bhatia, learned counsel for the company, however, did not admit the correctness of the orders passed or demands but still he had no objection to the present application being disposed of on the footing that the assessment had been made as stated and that the appeal against the same is pending.
(11) Mr. R. L. Anand (A.W.1) has sworn that in the presence of M/s. W. S. Stuff (Manager), P. B. Allison (Accountant) and C. L. Handa (Local Officer) Globe Motors Limited created equitable mortgage by deposit of the deeds in respect of the above said immoveable property in Jullundur by Mr. B. K. Bedi, Governing Director of the company. The title deeds so deposited, which were originals of Exhibits A.W.I/I and A.W. 1/2 respectively, arc the certificate of sale in respect of sale by public auction of the said property under Section 20 of the Displaced Persons (Compensation and Rehabilitation) Act and the registered sale deed in favor of the company by the family of the purchasers under the auction sale.
(12) In the register maintained by the Bank, where entries concerning equitable mortgages are entered, the relevant particulars to the equitable mortgage have also been incorporated as noticed above (copy of which is Exhibit A.W.1/3). The security itself, which is not seriously questioned, has thus been fully proved.
(13) The first contention of Shri Anoop Singh was that the advantage of the said security would not accrue to the Bank having regard to the manner in which the Bank was keeping its account, adjusting the accounts under various heads from the company and also allowing overdraft facility to the extent of Rs. 30 lacs as noticed above. To appreciate this contention it would be necessary to set out the net position, as it emerges from the accounts of the Bank. It was noticed that under four heads, a sum of Rs. 57,65, 734/91 was due at the close of business on 22-8-1969 as mentioned in the above letter Exhibit A.W. 3/2. The said amount had swollen to Rs. 61,28,517.16 by 31-3-1970 and it can be seen from Exhibit A.W. 3/2. The Managing Committee of the company, which has been functioning as per the order passed by this court in pursuance of the scheme passed a resolution acknowledging the said liability; it had also requested for the grant of an overdraft facility to the extent of Rs. 30 lakhs, which was granted as per original of Exhibit A.W. 1/6.
(14) When Mr. Anoop Singh attempted to cross-examine the Banks, witnesses about how various loan accounts between the company and the Bank were maintained and split. The State to Punjab was given facilities to inspect the entire accounts of the bank pertaining to the equitable mortgage in question as well as all other accounts between the bank and the company. Mr. Anoop Singh could not make any further submissions on the basis of the accounts. The bank was directed to file a consolidated statement showing the net position. The bank accordingly did file Exhibit A.W. 3/1, to which reference has already been made, which shows that after adjusting all the accounts and giving credit to whatever amounts were being paid by sale of certain shares held by the company in other companies and all immoveable property belonging to the company, Rs. 15,66,483.83 was the balance due to the bank as on 19-11-1974 which by far exceeds the amount of the proceeds of the property, namely, Rs. 6.75 lacs. It is needless to set out once again the contents of Exhibits A.W. 3/2 and A.W. 3/3; the later shows that an overdraft facility to the extent of Rs. 30 lacs was also extended by the bank to the company on the hypothecation of raw materials and finished goods in the steel plant with an usual margin of 25 per cent. Exhibit A.W. 3/4 is the statement of the company showing the balance of various accounts outstanding as on 17th February, 1967, which reads as follows :
'Globe Motors Limited Balance of various accounts outstanding as on 17. 2. 1967 No. 1 A/C. Rs. 5,15.295.29 No. 2 A./C. Rs. 95,745.77 No. spare parts A;C Rs. 2,02,791.45 Steet Devision Rs. 24,92,120.16 Rs. 33,05,952.16 '
(15) Exhibit A.W. 3/5 not only shows the balance in the number one loan accounts as on 17th February, 1967, but also how it was adjusted up to 5-5-1970-a sum of Rs. 4,48,965.24 paise was transferred to the loan account No. 108/122 which is the first entry in Exhibit A.W. 3/1. Exhibit A.W. 3/6 shows the balance in the No. 2 account as on 17th February, 1967, and adjustments made till 5-5-1970; Rs. 1,52,345.15 paise was transferred to loan account No. 108/122. That is the second entry in Exhibit A.W. 3/1 (entries in Exhibit A.W. 3/1 pertain to loan account of 108/122). It is needless to be detained by Exhibit A.W. 3/7 because it relates to the spare parts account of the company with the bank, which account had been closed even on 8-12-1967. Exhibit A.W. 3/8 is the account of the company's Steel Division showing the position from 17th February, 1967; on 5-5-1970 a sum of Rs. 24,35,106.61 paise was transferred to loan account No. 108/122, which is the third entry in Exhibit A.W. 3/1. Loan Account No. 108/122 contains entries from and after 5th May, 1970.
(16) Having regard to the manner in which the accounts have been maintained, as seen earlier, and the clear terms of the equitable mortgage as seen from Exhibit A.W. 1/3 to the tune of Rs. 40 lacs in respect of 'cash credits or overdrafts now due overdue or pending and/or which may be granted to the obligants hereafter and for all present and future indebtedness of any kind of the obligant to the Bank in any manner whether solely or jointly, primary or collateral, accrued or accruing with all relative interests, charges, costs (as between attorney and client) and expenses', there is no force at all in the contention that the security had become unavailable to the bank by vertue of the payments made by the company subsequent to the equitable mortgage and adjustments made by the bank.
(17) It seems worth repeating that the present equitable mortgage was not to secure a particahir overdraft or a particular suit in which event the bank could not be allowed to enforce that security against another overdraft or another sum. Such an agreement, if it had been entered into, would have permitted the operation of what is known as the rule in Clayton's case (15 The Revised Reports 161) but that is not the agreement in this case.
(18) In Clayton, it was pointed out that in case of a banking account where there has been a continuation of dealings the appropriation (in the absence of express declaration) can only be made on the 'round of presumption arising from the priority of receipts and payments, if any other appropriation is to be made, it is incumbent on the creditor to declare his intention at the time of payment. The Master of Rolls referred to the possibility of payments, placed in opposition to debts, which on the ordinary principles on which amounts are settled, extinguish the debt. This ordinary principle of setting accounts could be inverted by a contract. The contract in the present case is a case of such inversion. The terms of the equitable mortage set out fully above are totally different clayton besides other English decisions, was discussed by a Division Bench of the Patna High Court in Chota Nagpur Banking Association Ltd., Purulia v. Lal Mohan Trivedi and others AIR (30) 1943 Patna 301,. In that case, the bank allowed the defendant to overdraw and then pay any such sums as the defendant chose to pay to his credit and all these went to reduce the overdraft from time to time according to the company practice in Indian Banks. In the suit on the mortgage bond the defendant contended that, after that limit a.grced upon (Rs. 15,000.00 in that case) was. reached all the payments should go to wipe off the whole of the advance (Rs. 15,000.00 ) and that only a personal decree could be obtained for any further amounts overdrawn from the bank. The Divi- sion Bench had no difficulty in repelling this contention on the language of the bond as well on the practice of Indian Banks. The terms of the mortage in that case clearly brought out the intention of the parties, (as in the present case also). It was held that the mortgage would be a continuing security and that the rule in Clayton's case would not apply in such a situation. I am in respectful agreement with the above view and the reasoning in the above said case; it would be unnecessary to set out once again the detailed reasoning in that case.
(19) The next contention of Mr. Anoop Singh was that an equitable mortgage which could be created at Delhi (among other places) court not be created at Jullundher where the property is situate and for that reason, what he chose to call, the law of lex situs alone would apply but not the lex contractus, the law of the place where the contract of the equitable mortgage was entered into, namely, Delhi. This contention seems entirely misconceived. Mr. Anoop Singh could not support his contention by reference to any principle or authority. He only brought to my notice a decision of the Full Bench of the Lahore High Court in Mt. Iqbal Begum v. Uttamachand and others AIR (34) 1947 Lah 324. It will be necessary to notice briefly the facts that led to that decision. There was a mortgage with possession executed with reference to the property. The fact that it was attested as required by Section 59 of the Transfer of Property Act had not been proved-a requirement according to the place where the property was situate. This was held to be fetal, the property (hypotheca) being situate outside the area to which the Transfer of Property Act could apply. It was in this context that the conflict between the lex contractus and tex situs was considered, and was held that the law of tex situs governed. This is not the question which arises for decision in this case. There is no legal prohibition of any kind here in the matter of creating an equitable mortgage at Delhi of properties situate outside and hence there is no scope for any conflict of the law applicable to the place where the property is situate or where the contract was entered into.
(20) This position would become clearer when one peruses the decision in Varden Seth Sam v. Luckpathy Royjee Lallah, Bunhah Lall, Sadaseva Tanker, and James Ouchterlony (Moore's Indian Appeals Vol. 9, page 307), which was referred to in the order of reference of S. A, Rehman J., and the further observations made by Abdur Rchman J., who wrote for the Full Bench as follows: 'The transactions which were permissible either according to law or equity where they were made and not prohibited by the law of the place where the property covered by them was situ ale (lex situs) were held to be enforceable by their Lordships of the Privy Council and a large number of learned Judges of the Courts in India.'
(21) In the present case there was no law in Jullundur preventing the creation of an equitable mortgage nor is there any prohibition of creating an equitable mortgage at Delhi over property outside Delhi. There is no scope at all here for any conflict between tex contracts and tex situs. There is no force, thereforee, in the above said contention of Mr. Anoop Singh.
(22) Yet another question raised by Mr. Anoop Singh was that the State of Punjab had a priority in respect of sales tax dues. This contention is again misconceived. A long series of decisions have established that the question of priority in favor of the Crown (as it was then) will arise only among creditors of equal degree but will not apply to a case where there is a secured creditor (the bank) as in the present case. It is sufficient to refer to the decision of Leach .I., in Soniram Rameshur v. Mary Pinto AIR 1934 Rang 8 which he (as Chief justice, Madras) followed when he spoke for a Full Bench in Muniakaram Chettiar v. Income-tax Officer, Madura and another AIR 1938 Mad 360. The same view was taken by a Division Bench of the Bombay High Court in Bank of India. v. John Bowman and others : AIR1955Bom305 . Chagla C. J., speaking for the Division Bench, discussed the entire law at length and stressed the principle that in order to claim priority by the Crown (by the State) the debts due to a private citizen arid to the Crown (state) must be of equal degree.
(23) speaking for the Supreme Court in Builders Supply Corporation v. The Union of India and others : 56ITR91(SC) concurred with the view taken by Chagia C.J., and also followed an earlier decision of the same Court in Director of Rationing and Distribution v. The Corporation of Calcutta : 1960CriLJ1684 . According to the Indian Constitution, the law in force at the commencement of the Constitution would continue and have to be followed, even in the new set up. except in so far as such law came into conflict with any express provision of the Constitution. As explained by Gajendragadkar C. J..., the common law doctrine which was followed in India prior to 1958 constituted 'law in force' within the meaning of Article 372(1) to Constitution and continue to be in force. The view of Chagia C. J.. that the principle of priority would apply only if the debts arc of equal degree was also approved. The Stale of Punjab, thereforee, is not entitled to any priority.
(24) A feeble contention was raised that the Sales Tax Authorities of the State of Punjab had made a demand in respect of sales tax etc.. due and which was earlier than the equitable mortgage in this case, but I have not been shown any provision of law which will enable a claim of priority as against a secured creditor merely on the basis of the assessment which only crystalises, in the form of an order, the earlier liability for tax which might have arisen earlier. The State of Punjab is unable to rely on the date of the present attachment in this case or even the earlier one dated 25-11-1967 because both were only subsequent to the equitable mortgage (17-2-67); the attachment or the demand for which it was trade cannot claim priority over a charge which had been created earlier.
(25) Mr. Anoop Singh referred to the fact that he has filed an appeal against the Order of Hardy J.. (as he then was) dated 31-5-1969 which provisionally accepted the scheme. There has been no order of stay and the scheme is being worked. There was no request ever for a postporrement of these proceedings on that ground. In the event of Si.ai:c of Punjab ultimately succeeding in claiming priority. the Bank, which will recover the entire amount due to it under the equitable moriage, may be procceded against by the State of Punjab. In the absence of any stay of these proceedings, it is even needless to refer to this aspect.
(26) Mr. Anoop Singh also contends that the resolution referred to above (A.W. 1/6) in pursuance of the letters Exs A.W.s 3/2 and 3/3 constitute a novation and that it amounts to an amendment of the charge, which should have been registered with the Registrar of Companies as required by Section 135 of the Companies Act. As the contents of the letters set out elaborately and the resolution do not show that there is any novation at ail. the consequent need for novation docs not arise.
(27) In the result, the question which has been raised concerning the equitable mortgage to the National & Grindlays Bank is answered in favor of the bank and against the State of Punjab. It is hereby declared that the National & Grindlays Bank is entitled to precedence as a secured creditor and it will be entitled to draw the entire amount (Rs. 6,75,000.00 ) being the sale proceeds of the above said Jullundur property in partial discharge of the amounts due to the bank under the equitable mortgage.
(28) The State of Punjab is directed, in terms of the order dated 16-5-1974 of Rajindar Sachar J., in C.A. 710 of 1972, based on the undertaking of the State of Punjab to immediately to the National and Grindlays Bank within a week from the date of this order. If any interest had accrued to the State of Punjab from any bank on the said amount that will also be paid over to the National and Grindlays Bank accordingly,
(29) This application is accordingly allowed in the above terms withcosts. Counsel fee Rs. 500.00 to be paid to the applicant by the State of Punjab.