1. Defendants 3 to 5 are the appellants. The suit was for recovery of the amount due from defendants 1 and 2 by sale of the plaint schedule properties, and for directing defendants 3 to 5 to deposit Rs. 40,000/- or such other sum as may be found to have been realised by them by sale of the moveables scheduled in the plaint. Plaintiff is a public limited company having its registered office at Calicut. It went into voluntary liquidation on 13-7-1952, and Shri S. Paramasivan was appointed as liquidator and he has tiled the suit on behalf of the company. The 1st defendant in the case is a private company registered under the Indian Companies Act having its registered office in Calicut. 2nd defendant is the Managing Director thereof. The 1st defendant borrowed from the plaintiff money as per hundies dated 134-1952, 20-6-1952 and 17-1952 aggregating to a total of Rs. 55,000/-. Thereafter the 1st defendant requested the plaintiff for further accommodation by way of loan for a sum of Rs. 50,000/-. The plaintiff company evinced its reluctance to advance any further amount unless the 1st defendant was prepared to give sufficient security for the same. The 1st defendant agreed to the proposal of the plaintiff for giving security. The securities, so agreed to be given were a promissory note by the 2nd defendant on behalf of the 1st defendant for Rs. 35,000/-and a hundi for Rs. 15,000/- by the 1st defendant as also the 2nd defendant in his personal capacity. Besides this the 1st defendant also agreed to pledge 'the shares held by it in the Premier Hosiery Works Ltd., by executing transfer forms as collateral security for the entire amount due to the plaintiff company inclusive of the subsisting debt or Rs. 55,000/-. it was also agreed that the 2nd defendant would give by way of equitable mortgage the title deeds relating to certain immoveable properties belonging to him and would also pledge to the plaintiff the snares owned by him in the 1st defendant company as well as in Premier Hosiery Works Ltd. Over and above this, 1st defendant also agreed to hypothecate all the movable properties including plants, machinery, looms, furniture, fittings, etc., as security for the loan. This offer was accepted and the plaintiff company agreed to make a further advance of Rs. 50,000/-. The 1st defendant company accordingly pledged with the plaintiff the shares owned by it in Premier Hosiery Works Ltd., on 2-7-1952. The C schedule in the plaint consists of shares held by the 1st defendant in the Premier Hosiery Works Ltd. The 1st defendant executed a hypothecation bond in respect of the movables be longing to it on 25-7-1952. The movables constitute B schedule items in the plaint. The hypothecation bond was registered with the Assistant Registrar of Joint Stoen Companies under the provisions of the Indian Companies Act. In addition to the above securities the 2nd defendant deposited with the plaintiff title deeds relating to one item of immovable property belonging to him and this is included in A schedule in the plaint. He also deposited the title deed of another property situate in Madras with the plaintiff by way of equitable mortgage. The 2nd defendant also pledged with the plaintiff the shares owned by him in the 1st defendant company and in the Premier Hosiery Works and these are shown in D schedule in the plaint. On the strength of these securities the plaintiff advanced Rs. 50,000/- to the 1st defendant on 2-7-1952. This suit was instituted by the plaintiff claiming to recover an amount of Rs. 58,645/-and interest from defendants 1 and 2. In the plaint there was prayer to sell A, B, C and D schedule items and for recovery from the sale proceeds of the amount claimed. It Is not necessary for us to state the other details mentioned in the plaint for the purpose of deciding this appeal.
2. Defendants 3 to 5 were impleaded by I.A. No. 20/ 1957 and the reason why they were impleaded was that the collector of Malabar had attached the B schedule movables and had sold them and credited the proceeds to the account of the 1st defendant for amount due from it by way of arrears of provident fund contribution. The plaintiff challenged the right of the Collector of Malabar to attach and sell these movable properties. The 3rd defendant is the Union of India represented by the Secrtary, Ministry or labour, New Delhi, the 4th defendant is the state of Kerala, represented by the Collector of Koznikode, and the 5th defendant is the Regional Provident Fund Commissioner, Kerala State, Trivandrum. It was at the instance of the 5th defendant that the Collector of Malabar attached the movables and sold them. The plaintiff had intimated the was entitled to recover the amount due to It In priority as the movables were hypothecated to it. The plaintiff had also intimated the Regional provident Fund Commissioner at Madras, about its priority. The Collector of Malabar sent a communication to the plaintiff on 27-7-1954 stating that the said movables had been attached for recovery of the amount due by way of arrears of provident fund continuation payable by the 1st defendant under Section 11 of the Employees Provident Funds Act 1952 and claimed that the amount so due was a first charge. The plaintiff company on receipt of this communication sent a further letter to the Collector of Malabar on 7-8-1954 pointing out that Section 11 had no application to the facts of the case and stating that the plaintiff company was a secured creditor of the 1st defendant so far as the movables were concerned and that it was entitled to priority. This claim of the plaintiff was rejected by the Collector of Malabar and also by the Regional Provident Fund Commissioner, Madras. A notice was, therefore, issued by the plaintiff on 1-9-1955 -both to the Collector and the Central Government intimating that the plaintiff will be constrained to file a suit to enforce its claim. In the meanwhile the movables attached were sold and an amount of Rs. 40,000/- was realised. The claim of the Collector of Malabar and the Regional Provident Fund Commissioner, that there was a first charge on the movables for the amount due from the 1st defendant under Section 11 was subsequently abandoned. The plaintiff therefore claimed that the Regional Provident Fund Commissioner was not entitled to any priority and claimed to recover the sale proceeds from the Collector of Malabar and the Regional Provident Fund Commissioner of Madras. As the Regional Provident Fund Commissioner was an officer of the Union of India acting under the direct control of the Union of India, the Union Government was also sought to be made liable for the claim of the plaintiff. After having issued notice under Section 80 of the Civil Procedure Code to the Union of India, the Provident Commissioner, the Collector of Malabar, and to the State of Madras, the sun was amended by impleading these supplemental defendants.
3. The main contentions put forward by defendants 3 to 5 were that the suit was bad for misjoinder, that there was no cause of action for the plaintiff against these defendants, that there was collusion between the plaintiff and defendants 1 and 2 to defeat the claim of defendants 3 to 5 for arrears of provident fund contribution and that it was with an idea to defeat their claim that the hypothecation dated 1-7-1952 was executed by the 1st defendant charging all the movables belonging to it. They also impeached the validity of the agreement entered into by the 2nd defendant on behalf of the 1st defendant on the ground that the 2nd defendant had no authority to enter into the agreement. They further contended that the plaintiff could not get any right over the movables as the claim of the State was paramount, that the movables included in B schedule were not identical with the movables included in the hypothecation bond dated 25-1-1952, that the plaintiff was not entitled to a first charge, that the attachment and sale were under the orders of the 4th defendant on the request of the 5th defendant for the realisation of the amount due to the 3rd defendant as arrears of provident fund contribution payable by the 1st defendant company, and that they were valid and binding on the plaintiff. They also claimed priority, for the amount as it is due by way of provident fund contribution.
4. On these pleadings issues were framed by the trial Court. The material issue's so fat as defendants 3 to 5 were concerned are whether the plaintiff had a cause of action-against defendants 3 to 5 whether the hypothecation bona dated 25-74952 took in the movables sold under the Revenue Recovery Act for recovery of arrears of Provident Fund-contribution, whether the plaintiff was entitled to claim priority as against the Union Government, and whether the plaintiff was entitled to follow the sale, proceeds in the: hands of the defendants as a substituted security.
5. The trial Court found that the 2nd defendant has authority to enter into the transaction on behalf of the 1st defendant, that the amounts claimed by the plaintiff were really due, that the hypothecation bond and the other securities given to the plaintiff were valid and binding on the 1st defendant, that the plaintiff was entitled to claim priority for the amounts due to it from the sale proceeds of B schedule movables, that the defendants 3 to 5 were not entitled to retain the amount which they got under the revenue sale, that the hypothecation bond created a floating charge over the movable properties of the company which became crystallised on demand of the amount by the plaintiff to the 1st defendant and the failure of the 1st defendant to pay the same, and that after the security became crystallised no creditor of the 1st defendant company could attach and sell the movables and claim priority over the plaintiff's claim.
6. It was contended for the appellants that the plaintiff had no priority over the claims of the 3rd defendant for arrears of provident fund contribution due from, the 1st defendant company. Practically the only point that was pressed before us was that the Union Government was entitled to recover the amount due to them from the 1st defendant in priority to the claim of the plaintiff, in order to decide that question an understanding of the nature of the security created under Ext. All is material, under Ext. All the 1st defendant company hypothecated all its movables including its entire stock in trade. The provision in Ext. A-11 is that these movables will be a security for the then existing debt due to the plaintiff and for future' advances. It is also provided therein that the plaintiff company will have a charge over any movables acquired by the 1st defendant in the course of its business. There was no dispute at the Bar that this document created a floating charge over all the movable properties of the 1st defendant-company.
7. In this connection it may be remembered that the Collector of Malabar attached these movables in pursuance of the direction of the 5th defendant on 18-7-1954 The present suit was Instituted on 2-7-1955, and on 25-11-1955 a preliminary decree was passed. The movables were sold by the Collector between the period from 5-3-1956. to 2-8-1956. Therefore the question for decision is whether the security had become crystallised on the date of the revenue sale. It must be stated at the outset that Ext. A-11 does not contain any specific provision on this matter. Therefore we will have to find out what in law are the events or the acts on the occurrence or the doing of which the security would become crystallised.
8. The best description of what a floating charge will be found in the classical speach of Lord Macnaghten in Govt. Stock and Other Securities Investment Co. v. Manila Rly, Co; 1897 AC 81:
'A floating security is an equitable charge on the assets for the time being of a going concern. It attaches to the subject charged in the varying condition in which It happens to be from lime to time, it is of the essence of such a charge that, it remains dormant until the under taking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes. His right to intervene may of course be suspended by agreement. But if there is no agreement for suspension, he may exercise his right whenever he pleases alter default.' We would like to emphasise that according to Lord Macnaghten the event that transforms a floating security to a fixed charge is either the cessation of the carrying on or business by the company, or the actual intervention by the debenture-holder. A mere right on the part of the debenture-holders to intervene or a mere default on the part of the company to pay the amount on the due date is not sufficient to crystallize the security. This description of floating charge by Lord Macnaghten, was the subject or criticism by Vaughan Williams L, J., and in the case reported in Illlingworth v. Houldsworth, 1904 AC 355 at p. 358 Lord Macnaghten referring to this criticism says: 'With regard to the criticism which Vaughan Williams L. J., passed, not I think unkindly, on some words of mine in the Manila Case 1897 AC 81, I only wish to observe that what I said was intended as a description, not as a definition, of a floating security. I should have thought there was no much difficulty in defining what a floating charge is in contrast to what is called a specific charge, A specific charge, I think, is one that without more fastens on ascertained and definite property or property capable of being ascertained and defined; a floating charge, on the other hand, is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs of some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp.'
The two characteristics of a floating charge, therefore, are (1) non-permanence of the property which is the subject or the charge, and its constant change from time to time, and (2) that it does not of itself fasten and settle down even on the property existing at the time of the creation of the security. The gloss in the later case by Lord Macnaghten himself removes all difficulties arising from the decisions which speak of a floating charge as an existing charge. It is no doubt an existing charge, and is rightly termed so, but care must be taken to remember that it does not settle down and fasten on the property which is the subject of the charge until a particular event occurs or until a particular act is done. If that is the essence of a floating charge then, does the existence of such a charge prevent a creditor of the mortgagor or hypothecate from seizing the property in execution or prevent the debtor from disposing of the property to a creditor in the ordinary course of business
9. The existence of a floating charge does not prevent the company from carrying on its business. The burden of a floating charge cannot clog the right of the company to carry on the business. If the company is allowed to carry on the business in the ordinary course and If it incurs debts in carrying on that business it is only logical to hold that the creditor must also have the right to levy the execution or recover his amount through any other process of law before the security becomes crystallised. It is impossible to hold that the law intended to confer upon a company complete commercial freedom without commercial responsibility.
10. In Evans v. Rival Granite Quarries Ltd, 1910 2 KBD 979 the question was considered whether after the creation of a floating charge over the undertaking and assets of a company It was open to a judgment-creditor or the company to levy execution and see the properties comprised in the security, it was held there that before the security became crystallised an execution creditor is entitled to levy execution and retain the fruits thereof, and the possibility of the charge becoming crystallised in a future contingency is no answer to his claim to retain it. Vaughan Williams L. J., in considering the relative rights of the debenture-holder and the execution creditor of the mortgagor has the following observations to make at page 986:
'It is said that, although in one sense the debenture-holder gets an immediate equity or charge on the assets of the company, it was not intended that he should exercise it by enforcing his security so long as he allowed the company to carry on its business in the ordinary way. That being so, it is said in reply that such instruments usually provide for various occasions on the happening of which the right of the company, or the licence given to the company, to carry on its business shall come to an end Generally that right is determined by the happening of something which entitles the making of an application to the Court for the appointment of a receiver. This is a case in which a receiver could be appointed without an order of the Court it is not a case in which persons claiming to be secured creditors could exercise the full rights of legal mortgagees. But it is a case in which, when an occasion arises for entirely putting an end to the company's jus dispopendi, an application may be made to the court for the appointment of a receiver. In my opinion, unless something has occurred entitling the denture-holder to make such an application, and the application has in fact been made for the appointment of a receiver, or an action brought by them or on their behalf to realise their security, or unless something has happened which entitles the debenture-holders to determine their licence to the company to carry on their business and they have actually done so, the company is entitled to do all the things which the licence entitles them to do. it is admitted that in the present case the debenture-holder allowed the company to carry on its business, to make contracts, and to pay its debts; but it is said that, though it is entitled to carry on business and has incurred debts In carrying it on, and although it might take upon itself to pay a particular dent and sell the assets of the company to enable its payment, yet, if the debt were paid by the machinery of an execution by the sheriff completed by seizure and sale of the company's goods, the execution creditor would have to return the money.'
Robinson v. Burnell's Vienna Bakery Co., 1904-2 KB 624. is a case where there was no actual sale by the sheriff, but a seizure of the goods by him and a compulsion of the payment or payment being made by the company to -the sheriff in order to avoid a sale. Channel L.J., said :
'The debenture-holders were the holders of a floating security over the assets of the company, and no doubt when the company's goods were taken in execution by the sheriff they were only seized subject to the equities attaching to them, and the title of the debenture-holders would have prevailed had it been perfected in time. I express no opinion upon the point whether, if the debenture-holder, or the receiver on his behalf, does not interfere until the -execution is completed and the execution creditor has got the money in his own hands, his interference would to too late; the question does not arise in the present case. What clearly happened in the present case was that there was part payment by the company, the execution debtors, on account of their debt made whilst they were still carrying on business and with the view of enabling them to continue to carry it on. It is true that the payments of instalments of their debt by the defendants were made under pressure of the execution that had been levied by the sheriff; but does that fact by itself bring into force the debenture-holder's security? Does it determine the licence to the company to carry on their business in the ordinary way so as to make the company's property the property of the debenture-holder, 'and to enable him to say that the Instalments are being paid with his money? That is what must be made out in order to enable the defenture-holder to succeed in his claim, and it has not been made out to my satisfaction. I think that Robson v. Smith, 1895 2 Ch. 118 is an authority for the proposition that if the money is paid in payment of debt, or as an instalment of a debt, it does not signify if it is paid under pressure; and if that is a correct view of that decision, it covers the point which I should otherwise have had to thrash out for myself.'
Quoting the above observation of Channel L.J., Vaugnan Williams L.J., in 1910 2 KB 979 made the following comment:
'Under the circumstances of the present case it seems to me that there is authority for saying that, whatever the ultimate result may be, it is impossible, if that decision is right, to say that an execution may not be enforced so long as the debenture-holders have not got a receiver appointed or have not done something in regard to the licence to the company to continue carrying on its business.'
If the debenture-holder chooses to intervene in the affairs of the company without interrupting its licence to carry on its business, certainly the execution creditor will be entitled to retain the fruits of his execution, in the very same case fletcher Moulton L. J., in a concurring judgment made the following observations:
'While it is a floating security the company has a right, not a mere licence, to carry on its business until the debenture-holder intervenes, and when the debenture-holder does intervene he must do so with the intention of making his security a fixed security. In my opinion it is a breach of contract on the part of the debenture-holder to interfere in the conduct of the business so long as his security is only a floating security;'
Counsel relied upon these rulings as establishing his contention that the charge in favour of the plaintiff had not become crystallized when the Collector sold the movables. But we think that the charge had become crystailized when the movables were sold by the Collector. The attachment and seizure by the Collector was on 18-1-1954. The movables were actually sold during the period from 5-3-1956 to 2-8-1956. The effect of the attachment and seizure of all the movables was that the business of the company came to a standstill. In paragraph 17, the trial Court found :
'In the present case before us the 1st defendant company has ceased to function by December 1953. Besides these circumstances, in this case 1st defendant company has defaulted payment of interest on the promissory note debt as well as payment of the hundi loan as agreed upon and the plaintiff company has issued notices demanding the entire claim from the 1st defendant company. So, on making such demands by the 1st plaintiff company, the floating charge will become a specific charge and the plaintiff is therefore entitled to enforce the hypothecation bond as against the 1st defendant company.'
We think that the company ceased to be a going concern after the attachment and seizure of all its movables including all its machinery: thereafter it ceased to carry on the business. We do not think that the view expressed by the lower Court namely that by making the demand for the amount the floating charge became a specific charge and therefore the plaintiff company was entitled to enforce that charge and claim priority as against the defendants is correct. We rest our conclusion on the ground that, the floating charge became a fixed charge when all the company's movables were attached by the Collector on 18-7-1954. That put an end to the business of the company. The attachment, as it created an embargo upon the alienation of the movables, effectually made the company moribund. The company, according to the evidence in this case, had no other resources to carry on its business. Already it was owing a large sum to the plaintiff. It had no means of raising any money on its credit, and therefore, when once all the movables and stock-in-trade were attached and seized by the Collector there was no longer any prospect of the company carrying on its business in the then near future also, in these circumstances, we hold that the company ceased to carry on the business after all its movables including the stock-in-trade were attached by the Collector.
11. In G. Bhar and Co. v. United Bank of India Ltd., : AIR1961Cal308 the question whether an attachment by a creditor of the mortgagor of all the properties comprised in a floating charge would crystallise the security wag considered, and this is what Mukherjee J., says at page 310 :
'In the present case, the charge or mortgage became crystallised as soon as the attachment before judgment was effected at the instance of the appellant, because, after that date, the stock-in-trade of the business became fixed, and the borrower could not possibly deal with the stock-in-trade after the attachment. The mortgage suit was, no doubt, instituted some time after attachment. That does not mean that the stock-in-trade was not the subject matter of the mortgage from the very date of the execution of the bond.'
This reasoning appeals to us. So we hold that the effect of the attachment and seizure of the movables by the Collector, was that the company became unable thereafter to carry on its business, and that it virtually ceased to carry on the business from that day. If that is so there was a crystallisation of the security, as the cessation of the company to carry on the business is one of the events which in law would operate to crystallise the security.
12. Counsel contended that the company had not actually ceased to carry on the business. His contention was that until the company was dissolved under the companies Act it cannot be said that the company has ceased to carry on the business. He relief upon certain rulings. The first ruling upon which he relied was the one reported in General Corporation Ltd. v. Commr. of Income-tax, Madras, : 3ITR350(Mad) . There the question was whether certain items of expenditure were liable to be deducted as against the profits of the assessee. The point considered was whether an assessee carrying on a business in Mica and who was obliged to stop it on account of a cyclone, but who still continued to incur expenditure during the year of account, with the intention to resume the business, if the conditions and prospects proved favourable, but the business in fact was never resumed, is entitled to have the expenditure deducted. Matthavan Nair J., in considering the question whether the company had ceased to carry on the business with the occurrence of the cyclone, remarked:
'It appears to us that the fact that there was some period of inactivity in the carrying on of the business does not really affect the question nor in the question affected by the consideration that the business was not resumed after the expenses had been incurred.'
Ultimately the learned Judge concluded by saying that the question whether the company carries on the business must depend upon the facts of each case. Counsel then relied upon the decision reported in Union Bank of Bijapur and Sholapur, Ltd., In re, : 10ITR21(Bom) , mat case has nothing to do with the question now under consideration. The question there was whether the business carried on by a company came within the ambit of the expression 'trade', in Section 234 of the English Income-tax Act. counsel referred us to the decision in Commr. of Inland Revenue v. Korean Syndicate, (1928) 12 Tax Cas 181. in the Judgment of Atkin L.J., it was observed that the question whether a company carries on a business has to be decided on the facts and circumstances of each casa and tneretore that case also cannot be of any assistance to the appellant. Reliance was also placed upon a passage occurring at I page 33 of Income-tax, by Kanga and palkhivala.
'A company may not obtain or be able to execute a single business contract for a period of months or even years, yet it may be deemed to carry on its business it during the period of lull and inactivity it performs its internal functions, that is to say, retains its registered office, holds its meetings year after year, pays director's fees and incurs other expenses. The question whether the business is being carried on must depend in each case on its own facts and not on any general theory of law.'
This also does not throw any light on the proposition of counsel that the company can be considered to have ceased to be a going concern only when it is dissolved. We cannot say that simply because the name of the company remained on the Register of the companies it must be deemed to carry on the business. Therefore we think that there is no substance in the argument of counsel that because the company was not dissolved it must be deemed to carry on the business, although by every known standard it had ceased to be a going concern.
13. Secondly, we think that the institution of the sun by the plaintiff on 2-7-1955 claiming a charge on the movables, was an act sufficient in law or to bring about a crystallisation of the security, as that would come expressly within the words of Vaughan Williams L. J., in 1910-2 K B 979, when ho said 'that not only the appointment of a receiver, but also the bringing of an action to enforce security would work a crystallisation of the charge.'
14. We hold that it was only after the security became crystallised that the movables were sold by the Collector and that the attachment of the movables did not create a charge in favour of the appellants. It only put the movables under the custody of the Collector, and effectually put an end to the company's jus disponendi; it was only by sale of the movables that the creditor's execution, if we may say so, became complete; but before the movables could be sold the 1st defendant company had ceased to be a going concern by virtue of the attachment and seizure of all its movables. In addition to it the plaintiff had brought the action to enforce the security, and obtained a decrees the effect of which also was to crystallize the security before the sale by the Collector.
'When in these cases the goods were seized in execution, the goods were not by such seizure finally alienated from the company (for the company might have paid out the execution), so that time was left for the rights of the debenture-holders to develop into a fixed charge on the goods. This was effected before the sheriff could sell, and therefore the goods could only be dealt with subject to the equities of the debenture-holders.'
(See Fletcher Moulton L.J., in 1910-2 KB 979 at p. 996)
15. Therefore our conclusion is that the plaintiff is entitled to recover the amount from the sale proceeds of the movables in the hands of the defendants. There was a contention that the defendants 3 to 5 were entitled to a prior charge under Section 11 of the Provident Fund contribution Act, but that was given up in the lower Court and the argument based upon Section 11 of the Act was not pressed before us and that rightly too. As we hold that the charge became crystallised before the sale of the movable properties by the Collector the plaintiff is entitled to recover the amount realised by the Collector by the sale of the movables. We hold that the plaintiff is entitled to recover the amount which defendants 3 to 5 got by the sale of the movable properties specified in B schedule to the plaint.
16. In the result, the decree of the lower Court is confirmed and this appeal dismissed with costs.