(1) O. S. No. 268 of 1953 on the file of the Sub Court, Tiruchirapalli, was a suit on a mortgage dated 30-10-1946, in which a preliminary decree was passed on 9-12-1946. The decree-holder applied for the appointment of a Receiver in I. A. No. 12 of 1955 in respect of the mortgaged property to collect the rents and profits therefrom. By order of court dated 8-2-1955 a Receiver was appointed. The judgment debtor in that suit was assessed to income-tax for the year 1955-56.
On 13-2-1956 the first Additional Income-tax Officer, Triuchi, issued a certificate under Sec. 46 tax due from the assessee and forwarded it to the Collector of Tiruchi. In I. A. No. 245 of 1956 the Collector applied to the Sub Court of Tiruchi for payment of the sum of Rs. 235-10-0, by the issue of a cheque in favour of the first Additional Income-tax Officer, Tiruchi, from and out of the Receiver's collections deposited to the credit of the suit.
This application was opposed by the assignee decree-holder who had by then come upon the scene on the ground that the income from the hypotheca collected by the Receiver formed accretions to the hypotheca, and that such income was liable to be proceeded against in case the corpus was insufficient to satisfy the mortgage decree in full. The Collector of Tiruchi contended that the amount due to the Government by way of income-tax levied on the judgment debtor was a "Crown" debt, the payment of which can be enforced with a right of priority over other unsecured debts which may be owing by the assessee to others.
The learned Subordinate Judge of Tiruchirapalli following the decision reported in paramasivam v. Ramaswami, AIR 1933 Mad 570: ILR 56 Mad 915 (FB), held that, though the mortgagee decree-holder can proceed against the income realised by the Receiver only after exhausting his remedies against the hypotheca, the Government will have no right to proceed against such income at the present moment as the mortgage debt still remains undischarged. The learned Subordinate Judge was of the opinion that the Government can proceed only against the surplus that may be left in court after the mortgage decree was fully satisfied.
C. M. A. No. 120 of 1957 has been preferred by the Collector of Tiruchirapalli against the said order of the learned Subordinate Judge. The Collector has also preferred alternatively C. R. P. No. 512 of 1957 against the same order by way of abundant caution, lest it should be held that the order of the court below is not appealable. C. M. A. No. 120 of 1957 and C. R. P. No. 512 of 1956 therefore go together, raising the question, whether the Collector of Tiruchirapalli is entitled to payment of the sum of Rs. 235-10-0 from and out of the Receiver's deposit to the credit of the suit. O. S. No. 268 of 1953, Sub Court, Tiruchirapalli.
(2) In O. S. No. 76 of 1948 on the file of the Sub Court, Tirunelveli, a decree in terms of a razinama entered into between the parties to the suit was passed on 18-4-1952. The third defendant in that suit was Rao Bahadur P. Muthuswami Reddiar. It is not necessary to refer to the nature of the suit or the f reliefs prayed for therein, or to all the terms of the compromise between the parties. It is sufficient to refer to the following clauses in the compromise decree :
II. That third defendant do pay first plaintiff Rs. 1,00,000 (Rs. One lakh) with interest at 3-1/2 per cent per annum from this date by 17-10-1952, besides the sum of Rs. 50,000 paid this day (18-4-1952)
III. That the third defendant to pay second plaintiff Rs. 1,00,000 (Rs. One lakh) with interest at 3-1/2 percent per annum from this date by 17-10-1952, besides the sum of Rs. 50,000 paid this day (18-4-1952).
o o o o o
VII. That in case of default in payment of the amounts due by 3rd defendant by 17-10-1952, the plaintiffs shall execute this decree and realise from this defendant the respective amounts so due with subsequent interest thereon at six percent per annum i.e., from 17-10-1952 to the date of payment and that the properties in Alaganeri (Schedule I to IX-B) belonging to the third defendant shall be a charge for the realisation of the said amounts and the plaintiffs 1 to 3 shall recover the same by enforcing the charge in this suit.
(3) In the course of execution proceedings of this decree the decree-holder applied in E. A. No. 73 of 1955 for the appointment of a Receiver to take possession of the charged properties and to collect the rents and profits thereform. The receiver realised from the charged property a sum of Rs. 3.100 and deposited it in court. The third defendant in the suit was assessed to income-tax, and a sum of Rs. 30,000 was due from him by way of arrears of income-tax levied.
The Income-tax Officer, Tirunelveli, applied in E. A. No. 423 of 1956 to the Sub Court, Tirunelveli, for the payment out of this sum of Rs. 3,100 in court deposit towards the adjustment of the tax liability of the third defendant. Plaintiffs 1 to 3, the decree-holder, objected to this payment out and resisted the application. Plaintiffs 1 and 2 themselves filed E. A. No. 350 of 1955 on 18-10-1955 for the issue of a cheque for the sum of Rs. 3,100 in their favour on the ground, that the receiver's collections should ensure in their favour.
The application was opposed by the Income-tax Officer, Tirunelveli, who, as stated already, claimed the amount of Rs. 3,100 in court deposit as due and payable to the Government which had a priority right in respect of the said amount. These two applications were heard together by the learned Subordinate Judge of Tirunelveli, who following the decisions of this court in Sambasiva Chettiar v. Secy, of State, 1940-1 Mad LJ 429 : (AIR 1940 Mad 703) and Income-tax Officer, Salem v. Indian Insurance and Banking Corporation Ltd., Salem held that the Income-tax Officer was entitled to the payment out as prayed for by him.
He accordingly allowed E. A. No. 423 of 1956 and dismissed E.A. No. 350 of 1955. The petitioners in E. A. No. 350 of 1955 have preferred C. M. A. No. 103 of 1957 in this court, challenging the correctness of the decision of the learned Subordinate Judge in dismissing their application. They have also filed C. R. P. No. 443 of 1957 therefore raise the question, whether the Income-tax Officer, Thirunelveli is entitled to priority in the matter of payment out of the sum of Rs. 3,100 lying in court deposit from and out of the realisations by the Receiver appointed in execution of the charge decree in O.S. No. 76 of 1948, Sub Court, Tinelveli.
(4) The two civil miscellaneous appeals and the two civil revision petitions referred to above came on for hearing at the first instance before Basheer Ahmed Sayeed, J.who passed the following order on 12-2-1959:
"These civil miscellaneous appeals raise the question as to whether the rents and other profits collected by a receiver in a mortgage action could be claimed by the Income-tax authorities as against the mortgagee. It is represented that there is no settled opinion about this and that there is actual conflict of decisions on the point as to who exactly will be entitled to the collections made by a receiver in such a mortgage action. The latest decision in Adikesavalu v. State of Madras, ILR (1937) Andh pra 505 seems to be in conflict with earlier decisions of two single judges of this court. There is no Bench decision of this court on the point involved. The learned counsel on both sides request that this matter may be referred to a Bench so that the position may be once for all resolved and the conflict set at rest. These matters will therefore be placed before his Lordship the Chief Justice for necessary orders as to posting."
(5) Thereafter the appeals and the revisions were posted before a Division Bench consisting of the learned Chief Justice and Veeraswami J., and their Lordships directed the posting of the cases before a Full Bench by their order dated 28-4-1960.
(6) In both these cases the claim of the government is one for recovery of the amount of income-tax levied and due and payable by the assessee who is the judgment debtor in civil actions instituted against him by his other creditors. Such tax liability is undoubtedly a debt due to the Government by the subject on whom the tax has been imposed, and such a debt often goes by the name of a "crown debt". A debt due to the Sovereign Government of the land carries with it a paramount preferential right to recover and realise the debt from the person liable to pay, the claim of the other creditors being postponed till after the Sovereign authority obtains payment in full. It is now settled law that the Crown or the Sovereign authority over the territory has priority, over creditors of equal degree, to payment out of the assets of a debtor which are distributed by a Receiver or an administrator.
"It is an 'incontrovertible rule of law that where the King's and the subject's title concur the King's shall be preferred". In re, Henley and Co. (1878) 9 Ch. D. 469 at p. 481; The King v. Wells, (1812) 16 East 278 at p. 282.
(7) This rule may be said to be the outcome of the maxim "salus populi suprema lex"; (Regard for the public welfare is the highest law). It is but natural that a debt due to the Crown, as representing the public at large, should be preferred to the debt of a single creditor. But this rule of priority in favour of the Crown for the realisation of its dues can only prevail and be enforceable as between unsecured creditors of equal degree, there being no question of any lien, charge, or mortgage in favour of one other of such creditors. The priority of the Crown cannot rank as against a secured creditor so as to deprive him of his security or to affect or injure his rights as such secured creditor.
(8) IN Soniram Rameshur v. Mary Pinto, ILR 11 Rang 467 : (AIR 1934 Rang 8), Leach J., as he then was, held that where there are funds in court belonging to the debtor the court can order payment of a Crown debt due by the debtor on the application of the Crown. In that case the suit was one for recovery of an amount due on mortgage. A receiver was appointed to take charge of the mortgaged premises and to collect the rents therefrom. The defendant was indebted to the Crown to the extent of Rs. 29-5-0 due under the Indian Income-tax Act. The Receiver who collected the rents of the mortgaged premises had sufficient monies in his hand to pay the amount of income-tax due by the defendant. The Commissioner of Income-tax applied for an order directing the receiver to pay him the sum of Rs. 29-5-0. The learned Judge quoted the following observation of parker C. B., in R., v. Curtis, (1750) 145 ER 724,
"By the common law the King has a prerogative of preference in payment to all his subjects, and to be first satisfied; the reason of it is given in Sir William Herbert's case (2 Rep. 12b) Quia Thesaurus Regis est pacia vinculum et bellorum nervi."
"This preference which the King had by the Common law, was the foundation of Magna Carta, c. 18, which was only declaratory of the common law."
At page 470 (of ILR Rang): (at p. 8 of AIR) the learned Judge observed,
"This right to priority has received recognition in India, as far as unsecured creditors are concerned."
(9) In Manickam Chettiar, v. Income-tax Officer, Madura, ILR 1938 Mad 744 : (AIR 1938 Mad 360), a Full Bench of this Court, consisting of Leach C. J., Varadachariar and Mockett JJ., held that the Crown is entitled to prior payment over all unsecured creditors and that there was no reason why the Crown should not be entitled to apply to the court for an order directing its debt to be paid out of monies in court belong to the debtor without having to file a suit.
In that case one Manickam Chettiar obtained a money decree against one Govinda Rao, and in execution thereof attached and brought to sale some moveable properties belonging to the judgment debtor The judgment debtor was in arrears in the matter of payment of income-tax levied upon him and the Income-tax Officer applied to the executing court under S. 151 C.P.C., for an order directing the payment out to him from the sale proceeds, after the sale had taken place, of the amount due by the judgment debtor for arrears of income-tax.
The Full Bench held that the Crown was entitled to priority in respect of arrears of income-tax due to it, and the demand of the Income-tax officer was not open to question. It was contended before the Full Bench on behalf of Manickam Chetir, the decree holder who was pitted against the claim of the Income-tax Officer, that the attachment effected on the property brought to sale in execution of the decree placed him in the position of a secured creditor. This contention was negatived in view of a decision of a Full Bench of this court in Krishnaswami Mudaliar v. Official Assignee, Madras, ILR 26 Mad 673 (FB), Leach C. J., specifically referred to his decision in the Rangoon High Court reported in ILR 11 Rang 467 : (AIR 1934 Rang 8), and observed thus :
"I had occasion to consider this question in the case of ILR 11 Rang. 467 : (AIR 1934 Rang 8), when sitting as a judge of the rangoon High Court, and, following the decision of Sale J in Gayanoda Bala Dassee v. Butta Krishna Dass; ILR 33 Cal 1040 held that inasmuch as the Crown has priority over unsecured creditors in the payment of debts the court can, on application and without a formal attachment being issued, order the payment of a Crown debt due by the debtor where there are funds in court belonging to the debtor. The District Munsif referred to this decision in his order. The order which I passed in that case was passed by consent, and the only arguments were those addressed to the court on behalf of the Crown, but the question has been fully argued before us today, and I see no reason for changing the opinion there expressed.''
(10) There can thus be no doubt that the Income-tax Officers in both the cases will be entitled to be paid out the amounts of tax due from the respective debtors from whose properties the respective receivers have collected the rents and profits and deposited them into court, if the fund in court is not already burdened with any lien or charge or mortgage in favour of the decree holders or not earmarked or appropriated for the benefit of the decree holders at whose instance the Receivers were appointed.
What is the character of the money realised by the receiver in the perception of rents and profits of the hypotheca from the charged property in his possession in a case where he is appointed in a suit commenced by the mortgagee or the charge holder for the recovery of the amounts due to him? The answer to this question will afford a complete solution of the problem now before us. If the appointment of a Receiver in an action to enforce a mortgage or a charge cannot and does not enlarge the rights of the creditor by augmenting his security or by conferring further rights in his favour that what was created by the parties themselves under the terms of their contract or what enures in his favour by the operation of the substantive law governing the contract, the creditor cannot put forward any special right in preference to other simple money creditors of his debtor.
In this view of the matter any debt due by the debtor to the Crown will of court have priority over the claims of all the other creditors of the debtor inclusive of the creditor who made the properties custodia legis by the appointment of a receiver in enforcement of a mortgage or charge over the corpus of the properties. But if it were to be held that a receiver appointed at the instance of a mortgagee or charge holder in the course of his realisation of any amount due under a mortgage or charge functions only for the benefit of the mortgagee or charge holder and that the rents and profits emanating from the huypotheca and the charged property are also stamped with security in favour of the creditor he alone will be entitled to appropriate and adjust them towards his dues even in preference to a Crown debt, as the Crown has no priority over the secured claim against the debtor.
(11) We shall first refer to the decisions cited at the Bar before dealing with the question of the legal effect of the appointment of a Receiver in an action to enforce a mortgage or a charge. IN MADRAS Joo Tean v. Collector of Rangoon, ILR 12 Rang 437 : (AIR 1934 Rang 321), a mortgagee obtained a mortgage decree against his mortgagors. During the pendency of the suit a receiver was appointed by the court at the instance of the mortgagee. The receiver had in his bands monies representing rents collected by him.
The Collector of Rangoon claimed a sum of Rs. 1029, being the amount of forfeiture imposed under S. 10(G) of the Court-fees Act, from the defendants and applied to the court for payment of the sum out of the rents. A Division Bench of the Rangoon High Court, Sir Arthur Page C. J., and Ba U. J., held that the rents and profits arising out of mortgaged land in the hands of a Receiver prima facie are not sums payable to the mortgagor, but form part of the mortgaged property upon which the debt due to the mortgagee was secured, and that the Crown is not entitled to be pai8d such rents and profits in respect of a debt due by the mortgagor to Government in priority to the party entitled to it, viz, the mortgagee-decreeholder. The mortgage in the Rangoon case was in form an English mortgage, under the terms whereof the rents and profits arising out of the hypotheca formed part of the property hypothecated. The learned Chief Justice at page 442 (of ILR Rang) : (at p. 322 at AIR) referring to the form of the mortgage observed thus :
"In my opinion under the express terms of the deed of mortgage the mortgagee was entitled as a secured creditor of the judgment debtor to the rents and profits of the land of which the receiver was in possession."
(12) On the facts of that case it is clear that the rents and profits of the mortgaged property constituted as much security for the repayment of the mortgaged loan as the corpus of the property itself. A receiver collecting such rents and profits could therefore hold the collections only as part of the security in favour of the mortgagee decreeholder. The learned Chief Justice however posed the following question at page 441 (of ILR Rang) : (at p. 322 of AIR):
"Are the sums in the hands of the receiver representing the rents and profits of the land which was subject to the mortgage payable to the defendant, i.e., the mortgagors?"
and answered it thus :
"In my opinion they are not."
(13) The very object of appointing a Receiver in a mortgage action is to intercept the realisations of the rents and profits by the mortgagor and to prevent the mortgagor from exercising any right or control over them. The sequestration of the income from the properties for the reach of the debtor cannot by itself transform its character or create new or fresh rights in respect of them in favour of persons who had no antecedent rights before the appointment of the receiver. At page 444 (of ILR Rang) : (at p. 323 of AIR) the learned Chief Justice observed further as follows:
"...... I am disposed to think that the appointment of a receiver by the court under Or. 40 rule 1, in no way diminishes or enlarges the title to the property which comes into his possession so far as the person otherwise entitled to it is concerned. It follows, therefore, that the sums of money in the hands of the receiver are not sums payable to the mortgagor, but form part of the mortgaged property upon which the debt due to the mortgagee was secured."
All the observations of the learned Chief Justice in the Rangoon case were made in a context where the rents and profits realised by the Receiver were, by the express agreement between the parties, constituted as part of the security.
(14) In Rameshwar Singh v. Chunilal Shaha, ILR 47 Cal 418 : (AIR 1920 Cal 545), the first mortgagee filed a suit to enforce his mortgage making the mortgagors and the second mortgagee defendants in the action. A Receiver was appointed at the instance of the plaintiff, the first mortgagee, the second mortgagee being a party to that application. The Receiver was directed under the terms of his appointment to collect the rents and other income from the hypotheca and to pay the realisations to the first mortgagee in reduction of his claim under the mortgage.
The receiver took possession of the mortgaged properties and carried out the order of court for payment of the profits in reduction of the dues on the first mortgage. The second mortgagee, who was a party to the Receiver application and in whose presence the receiver was directed to pay the rents and profits in reduction of the liability under the first mortgage, instituted in turn a suit to enforce his security without joining the first mortgagee as a party.
He obtained a decree and in due course of execution brought the hypotheca to sale and purchased it himself. The second mortgagee then made an application to the court for the purpose of intercepting the whole of the income of the property purchased by him and to receive the amount for the satisfaction of his own dues. This application was opposed by the first mortgagee, and the question before the High court was whether the second mortgagee was entitled to the order prayed for by him.
The Calcutta High Court held that the second mortgagee was not entitled to the payment of the rents and profits asked for by him. The one thing which effectively precluded the second mortgagee from asserting any rights to the rents and profits of the hypotheca from the hands of the receiver was an order of the Court dated 15-7-1915, by which the Receiver was directed to pay the income only to the first mortgagee towards the reduction of the amounts due to him.
The actual decision of the calcutta High Court seems to us to rest entirely on the bar operating against the second mortgagee by reason of the order of court to which he was a party. The second mortgagee contended that he was not bound by the previous order of court, as subsequent to that order he obtained a decree on his own mortgage. In dealing with this contention their Lordships observed thus at page 423 (of ILR Cal): (at 546-547 of AIR).
"We are of opinion that there has been no change in his position in relation to the receiver at the instance of the first mortgagee. If neither the second mortgagee nor the mortgagor is entitled to question the propriety of the order for appointment of the receiver, the circumstance that the equity of redemption has been transferred from the mortgagor to the second mortgagee cannot place the latter in a position of advantage. In his character as purchaser in execution of his own decree, he is as much bound by the order for the appointment of the receiver as the mortgagor. If the mortgagor had made an application to the court to modify the order for the appointment of the receiver and had attempted to intercept the profits, no court would have listened to him; the second mortgagee does not now stand in a different position."
This is indeed the ratio of the decision of the Calcutta High Court, and this was enough for the actual decision in the case. But the learned Judges however observed thus at page 422 (of ILR Cal) : (at p. 546 of AIR) :
"Our attention ahs been invited to the case of Penney v. Todd, (1878) 26 WR 502, where it was ruled that the possession of a receiver in mortgagee suit was prima facie for the benefit of the party who had obtained the appointment. On this principle, it has been argued that the receiver who was appointed at the instance of the first mortgagee holds the property for his benefit alone and is bound to make over to him the entire income for the satisfaction of his dues. In our opinion, this contention is clearly well founded." This observation was clearly obiter and event otherwise is very wide in its reach and scope.
(15) IN Maharaja of Pithapuram v. Gokuldas Goverdhandass, ILR 54 Mad 565: (AIR 1931 Mad 626) the Maharajah of Pithapuram instituted a suit, C. S. No. 229 of 1924 on the original side of this court, for recovery of the principal and interest due to him under a mortgage executed by one Gokuldoss, manager of a joint Hindu family trading under the style of Murlidoss Ramadoss and Co. The mortgage sued upon was an equitable mortgage created by deposit of title deeds of ten items of properties.
One of the defendants in the mortgage action filed C. Sl no. 622 of 1923 in the same court against the other members of the firm Murlidoss Ramdoss and Co., for partition of the joint family properties. In the partition suit an advocate of this court was appointed receiver of all the properties belonging to the joint family including the properties mortgaged to the Maharajah. Subsequently the firm was adjudicated insolvent and the Official Assignee was impleaded as the legal representative.
The receiver appointed by the court continued in possession of the properties. The Maharajah made an application for the appointment of an independent receiver for the properties mortgaged to him, but that prayer was not granted, and the court merely directed the receiver in the partition suit already appointed to keep a separate account of the income of the mortgaged properties. Eventually the Maharajah obtained a mortgagee decree in his favour and brought to sale several items of the hypotheca.
At that juncture two advocates of this court were appointed joint receivers of the mortgaged properties, and these receivers collected the income from the properties, subsequent to the date of the mortgage decree. The Maharajah claimed that the income realised from the mortgaged properties should in law be treated as additional security for the amount found due to him under the mortgage, inasmuch as a receiver was appointed at his instance in his mortgage suit and as such the income from the properties should as such the income from the properties should be considered to be earmarked for his own use.
The Official Assignee resisted the claim of the Maharajah and contended that with regard to the income the Maharajah had no preferential rights and that his rights to it are only the same as those of the ordinary creditors. Madhavan Nair, J., upheld the claim of the Maharajah and directed payment out in his favour. At p., 572 (of ILR Mad): (at., 628 of AIR), the learned Judge observed thus:
"Since the receiver in this case was appointed at the instance of the petitioner and since be was not able to realise his decree amount by the sale of the mortgaged properties, it must be held that he is clearly entitled to proceed against the income in the hands of the receiver as one if the steps for realisation of his security."
At page 573 (of ILR Mad): (at. 629 of AIR),
"The right of an equitable mortgagee to get a receiver appointed in a mortgage suit having been extended to a simple mortgagee, neither of them having any right to possession of the properties, I think his admitted right to proceed against the income of the mortgaged property in the hands of the receiver for realising his debt, when the security is insufficient for that purpose, may also be extended to the case of a simple mortgagee in India."
The learned Judge referred to the decision in ILR 47 Cal 418 : (AIR 1920 Cal 545) and relied upon the observations of the learned Judges of the Calcutta High Court extracted above. The principle laid down by this decision is that an order appointing a receiver in a mortgage action at the instance of the mortgagee and entrusting him with the duty of realising the income from the mortgaged properties, does automatically by virtue of the force of the order of appointment itself convert the realisation s as belonging to the mortgagee to be appropriated by him for his dues.
(16) In Pannu Chettiar v. Sambasiva Aiyar, ILR 56 Mad 546: (AIR 1933 Mad 293) a Division Bench of this court, Venkatasubba Rao and Reilly JJ., considered by question of the effect of the appointment of a receiver in a suit to enforce a simple mortgage. The appellant in the case obtained a money decree against one Ganapathia Pillai in the District Munisif's court of Mayuram and in execution of that decree attached certain properties. The respondnet who had obtained a mortgage from the aforesaid Ganapathia Pilllai filed a suit in the Sub-Court of Mayuram for enforcing his mortgage and obtained the appointment of a receiver for the mortgaged properties, which included properties already attached by the appellant in execution of his money decree.
The appellant applied for leave to execute his decree against the receiver, executed his decree, brought the attached properties to sale and purchased them himself. The sale was also in due course confirmed. The appellant attempted to take possession and the respondent made two applications to the court below, one to restrain the appellant from taking possession, and the other to continue the receiver already appointed. These applications were granted. The respondent obtained a mortgagee decree, brought the mortgaged properties to sale and a third party purchased them.
Till the date of this sale the receiver had realised a certain amount as income from the properties and paid the amount into court. As stated already some of the properties had already been purchase by the appellant himself in his execution sale. The appellant applied to the court below for payment out to him of that part of the amount paid by the receiver into court attributable to the properties purchased by him on the ground that the ownership of the income was incidental to the ownership of the income was incidental to the ownership of the property. This application s was rejected by the court below and the correctness of this decision was challenged in the appeal. This court confirmed the order of the court below. At page 549 (of ILR Mad) : (at p. 294 of AIR) Venkatasubba Rao, J., observed thus:
"The effect of the order appointing the receiver was to deprive the mortgagor f his right to deal with the income. It was in order to safeguard the respondents' position that the receiver was appointed. The mortgagor could not defeat the order by assigning the profits to a third party. Could he have, for instance, by private transfer, assigned the income to the appellant? Of course, not. What the appellant purchased was no more that the right, title and interest of the mortgagor. But the latter himself has no right to dispose of the income. The order operated to take away that right, which otherwise, he would have possessed."
Venkatasubba Rao, J., referred to the decision of Madhavan Nair, J., in ILR 54 Mad 565: (AIR 1931 Mad 626) and observed thus :
"..... it is doubtful whether the decision of Madhavan Nair, J., in ILR 54 Mad 565: (AIR 1931 Mad 626) is correct or not, for the claimant, who se right was negatived by the learned judge, was the Official Assigneee; but with that I am not concerned."
Reilly, J., at page 556 (of ILR Mad) : (at p. 297 of AIR) observed:
"But I do not think there is any reason to doubt that a simple mortgagee in this country cannot by getting a receiver appointed in the course of a suit enlarge his security or enlarge his rights to the prejudice of this parties, who have already acquired rights in the equity of redemption."
At page 557 (of ILR Mad): (at p. 297 of AIR),
"..... a judgment debtor cannot deal with property for which a receiver has been appointed so as to defeat the order appointing the receiver or prejudice a judgment creditor at whose instance the order has been obtained."
This decision only laid down the principle which is indeed well settled, that the order appointing a receiver whatever may be the nature of the action in which the receiver happens to be appointed operates as an injunction against the parties to the suit their agents and persons claiming under them from interfering with the possession of the receiver in any manner so as to affect the rights of the parties in the pending action.
(17) We shall now refer to the decision of the Full Bench of this court in ILR 56 Mad 915: (AIR 1953 Mad 570) (FB) which, or course, did not deal with the question of the effect of the appointment of a receiver in a suit to enforce a simple mortgage, but which merely dealt with the question whether a receiver can be appointed in a mortgage suit at the instance of this mortgagee, where the mortgagee had lost his personal remedy against the mortgagor.
It is necessary to deal with this case at some length as several of the observations of the learned Judges of the Full Bench were commented upon by the learned Advocate General appearing for the Income-tax Department, and as these very observations were relied upon strongly by learned counsel for the other creditors, Mr. K. S. Champakesa Aiyangar and Mr. R. Ramamurthi Iyer. The facts of the case as set out by Ramesam, J.,, are as follows:
(18) The first defendant in the suit, out of which the Letters Patent appeal arose, executed a deed of mortgage in favour of one Krishna Pillai on 30-5-1924 for Rs. 20,000. Krishna Pillai died and in the family arrangement entered into after his death between the members of his family, the mortgage document was allotted to the share of the plaintiffs and the 7th defendant in the suit. The third defendant in the suit was the son of the purchaser of the properties from defendants 1 and 2, the owners of the hypotheca under a sale deed dated 23-2-59.
Under that sale deed he undertook to pay the sum of Rs. 24,500 towards the mortgage debt. He offered to pay the said amount in full discharge of the mortgage, but the plaintiffs refused to accept it on the ground that more money was due to them. The result was the amount remained unpaid. On 29-9-1930 a preliminary mortgage decree was passed in favour of the plaintiffs. The total amount declared to be due to the plaintiffs was very nearly the sum of Rs. 37,000.
In August 1931 the plaintiffs applied for the appointment of a receiver of these suit properties on the ground that the properties were not of sufficient value for discharging the decree and that there was no other means of realising the decree amount. The Subordinate Judge passed an order appointing a receiver and the receiver took possession of the properties from 1-11-1931. The third defendant preferred an appeal to the High Court against the said order, and Krishnan Pandalai, J., who heard the appeal reversed the order of the Subordinate Judge directing the appointment of a receiver.
A Letter Patent Appeal was preferred against the judgment of Krishann Pandalai, J., and it was this appeal which was heard by the Full Bench. The short question for consideration by the Full Bench was whether it was open to the plaintiffs, who had given up their right to get a personal decree against the mortgagor, to apply to the court for the appointment of a receiver on the ground that the security was insufficient.
In the ordinary course the mortgagee would have only sold the hypotheca and realised only such sum as the sale brought in and would have been without any remedy to recover from the mortgagor any deficit which may occur after adjusting the sale amount towards the mortgage decree. He could not proceed against any of the other assets of the judgment-debtor not included in the mortgage, as the personal remedy against the mortgagor was either barred or given up.
The Full Bench held that it was open to the court to appoint a receiver in a suit on a simple mortgage even though the personal remedy of the mortgagee was no t subsisting on the date of the institution of the suit. Ramesam, J., gave several reasons for holding that a receiver can be appointed. The first reason as set out by the learned Judge was as follows at page 926 (of ILR Mad) : at p. 574 of AIR):
"But where a mortgagee seeks to obtain the appointment of a receiver he does of the mortgagor but wants to proceed against the mortgaged property itself. The underlying idea is that opposite view is that, the profits of the property not being mortgaged, the mortgagee is really trying to proceed against property other that the mortgaged property. But if the idea is carefully examined it seems to me there is a fallacy. In the first place the mortgagee never seeks to obtain possession for himself. Secondly the attempt to place the property in the hands of the receiver is really proceeding against the property so as to utilise it for the discharge of the debt. Now, profits of property are an accession to the property and proceed out of it."
(19) The simple mortgagee is, as observed by the learned Judge, not entitled to recover possession of the mortgaged property from the mortgagor. The security of a simple mortgagee ins only that of the property hypothecated and not the rents and profits therefrom. If so much is clear, we are unable to understand how the profits of property can at all be described as accession to the property by reason only of the fact that they emerged from out of the property. The second reason given by the learned Judge was thus set out by him at page 927 (of ILR Mad) : (at p. 574 of AIR):
"If a decree is promptly passed and the property is sold, the amount realised by the sale goes to the benefit of the mortgagee and from the time he receives the amount he gets interest on it. But instead of the sale promptly following the suit if there is delay, during all the time the sale is delayed the mortgagor will be enjoying the profits of the property which would have been enjoyed by the mortgagee in the shape of interest on the mortgage money if there had been an early sale. The profits of the property correspond to the interest on the money when once it is sold and converted into money and wherever the mortgagor does not keep down the interest, he is really enjoying the profits of the property which in one sense represent the property which would have belonged to the mortgagee but for the delay."
(20) Delay in proceedings before the Court arises out of the exigencies of the business of the court. The rights of the parties to the suit can in no way be affected or be made to depend upon promptness and diligence of one suitor or the dilatoriness and delay of the other suitor. The underlying conception in the remarks of the learned judge seems to be that the mortgagor should not prejudicially affect the mortgagee's rights in the matter of the recovery of his money by including in what may be called delaying tactics.
It may be that the mortgagee can legitimately look to the process of court for the speedy realisation of the debt due to him. Until the hypotheca is sold the mortgagor, the undoubted owner of the property, is entitled to be in possession, and there is nothing improper and unjust if he were to enjoy the rents and profits himself. It cannot be said that by so doing he is battening at the expense of the mortgagee.
The mortgagee is entitled to interest on the mortgage amount throughout the proceeding in the suit, and we do not see how his interest can be said to be affected by reason merely of the pendency of the mortgage action for an inordinately long time. If the hypotheca was insufficient either from the inception of the mortgage or by reason of other circumstances as fall in the value of the property, it is only the misfortune of the mortgagee for which the mortgagor cannot be made to suffer by the deprivation or diminution of his undoubted rights in the property.
(21) The next reason of the learned Judge is thus set out at page 931 (of ILR Mad): (at p. 576 of AIR).
The appointment of a receiver is only a mode of execution (S. 52 of the Code)-to be used, do doubt, with caution and sound judicial discretion. It was ordered by the Judicial Committee in a simple money decree; Vibhudapriya Thirhta Swaminiar v. Lakshmindra Thirtha Swamiar, ILR 50 Mad 497 : (AIR 1927 PC 131). Why should the simple mortgagee be in a worse position that the holder of a money decree? It is said that he has taken property as security what about the case when it has become insufficient?"
With respect we are unable to agree with this observation. A receiver can be appointed under the provisions of the Civil Procedure Code even during the pendency of the suit long before the stage of execution is reached. Where a receiver is so appointed even before the passing of the decree it cannot be a mode of execution. Assuming however that though a receiver is appointed before the passing of the decree the adjustment of the income realised towards the decree can appropriately be called a step in execution or a mode of execution, the learned Judge failed to keep in mind the fact that a simple mortgagee who had lost his personal remedy and who had no security over the rents and profits of the hypotheca had no right to realise the rents and profits in execution of the mortgage decree.
A simple money creditor however stands on a different footing. He can proceed against all the assets of the judgment debtor as long as such assets are available for him to be proceeded against. Any comparison between a simple mortgagee who has lost his personal remedy against the mortgagor and a simple money creditor may not be quite opposite in considering the question either of the propriety of appointing a receiver in such cases or the question of the legal effect of the order of such appointment.
(22) Cornish, J., at page 948 (of ILR Mad): (at p. 582 of AIR) made the following observation:
"The remedy of the simple mortgagee is a judicial sale of the mortgaged property; Sri Raja Pappamma Rao v. Vira Pratapa H. V. Ramachandra Razu, ILR 19 Mad 249 (PC). That is a legal remedy. In the absence of any clear rule to the contrary why is he not to be entitled to crave as auxiliary to his legal remedy the equitable remedy provided by Order XL, rule 1 of the appointment of a receiver?"
The provision of the Civil Procedure Code create only procedural rights which cannot come into play in the absence of substantive rights in favour of the party invoking the procedure.
(23) This Full Bench decision is authority for the legal position, that the court has got jurisdiction to appoint a receiver in a suit for the enforcement of a simple mortgage by the mortgagee who might not have kept his personal remedy against the mortgagor intact and subsisting on the date of the suit. The correctness of this view does not arise for consideration in the case before us and we have necessarily to proceed on the assumption that it is a right decision, though if the matter were res integra we might have considered the question afresh.
The Full Bench had not to consider the question whether the collections made by the receiver become impressed with the same character as the mortgaged property itself. The course of reasoning adopted by the learned Judges was only a guide to reach the final conclusion that the court had power to appoint a receiver. Neither the implication of the decision nor the necessary consequence following from it can exclude the ascertainment of the correct legal position by us in this proceeding.
(24) In Ally RamzanYezdi v. Balthzar and Son Ltd., ILR 14 Rang 292: (AIR 1936 Rang 290) a suit was brought to recover the amount due under a mortgage created by a deposit of title deeds. On the day when the mortgage suit was filed at the instance of the mortgagee an order was passed appointing a receiver to take possession of the mortgaged property and to collect the rents and profits accruing therefrom. The mortgagee had allowed his right to obtain a personal decree against the mortgagor to become barred by limitation.
The hypotheca was brought to sale in execution of the decree, but the proceeds of the sale were not sufficient to cover the amount due under the mortgage. Between the date when the receiver was appointed and the date upon which the sale took place the receiver collected Rs. 5,067-12-0 as rents and profits due and owing in respect of that period from the tenants of the property. That sum was less than the amount due under the mortgage after deducting the proceeds of the sale of the property.
The mortgagee applied for an order that the sum in the possession of the receiver should be allocated to him. The mortgagor opposed the application and the question was whether the mortgagee was entitled to the amount. The Division Bench of the Rangoon High Court held that, apart from the express agreement a mortgage by deposit of title deeds does not possess as part of the interest that is transferred to him under the mortgage the right to possession of the property or the right to the rents and profits accruing thereform during the subsistence of the mortgage. But nevertheless the learned Judges upheld the claim of the mortgagee to appropriate the sum in the hands of the receiver to the balance of amount due under the mortgage decree. At page 301 (of ILR Rang): (at p. 292 of AIR) Page, C. J., observed thus :
"But, in my opinion, it is consonant alike with reason and equity, if a mortgagee is diligent and applies that a receiver should be appointed and in the event he succeeds in the suit, that the rents and profits in the hands of the receiver should be allocated to the mortgagee who during the period between the time when he filed the suit to enforce his security and the date of the sale has been deprived of the interest and profits which otherwise might have accrued to him if he had been in possession of the proceeds of the sale during that period. It is upon that ground and not upon the footing that a mortgagee by deposit of title deeds possesses a substantive right to the rents and profits of the property subject to the mortgage that the courts in England from the earliest times have allocated to the mortgagee the rents in the hands of the receiver that have accrued after the order appointing the receiver was made."
It is but proper that the court should work out the rights of the parties as far as possible as they stood on the date of the institution of the suit. But allowing the mortgagee to have interest on the mortgage amount till it is realised and permitting him to have the rents and profits from the hypothecate through the machinery of the appointment of a receiver do not achieve that result. A simple mortgagee or other mortgagee similarly placed whose personal remedy is lost can only recover the mortgage amount by a judicial sale of the hypothecate. The analogy of English law cannot help us, as the Indian statute law of mortgage is of a different pattern.
(25) In Arunachalm Chettiar v. Ramanathan Chettiar, 41 Mad LW 495: (AIR 1935 Mad 410) the appellant in this court obtained a simple money decree against his judgment debtor. In execution of that decree he brought to sale and purchased the equity of redemption in a certain property. The sale was held on 15-4-1929 but delivery was not effected till 5-1-1930. The respondent in the appeal was a simple mortgagee of the same property and he sued to in enforce his mortgage and obtained a decree on 5-11-1927 to sell the property.
He applied for the appointment of a receiver in the mortgage action and obtained an order in his favor on 16-12-1929, that is after the sale to the appellant but before the delivery. The receiver harvested the crops on the lands and deposited the value of the proceeds into the court. The appellant contended that the title to the lands vested in him from the date of the sale, 15-4-1929, that the gathered crops did not form part of the mortgage security and that therefore he was entitled to the sum in court deposit. This contention was however repelled. The learned Judges followed the decision of the Full Bench in ILR 56 Mad 915: (AIR 1938 Mad 570) (FB) and observed as follows:
".... the only practicable principle seems to be that all proceeds from the land realised after the receiver takes possession are to go to the credit of the mortgage debt and are not the property of the mortgagor or of the purchaser of the equity of redemption, although he may have raised them."
(26) In Khader Mohideen v. Nagu Bai, ILR 1939 Mad 496: (AIR 1939 Mad 402) the question for consideration was whether the holder of a money decree or an equitable mortgagee had a preferential right in the profits of the mortgaged properties where a receiver had been appointed at the instance of the holder of the money decree in execution proceedings and also appointed to act in a suit instituted by the mortgagee to enforce his mortgage. A Division Bench of this court, Sir Lionel Leach, Chief Justice and Madhavan nair, J., held that the equitable mortgagee was entitled to preferential payment of the proceeds of the mortgaged properties as against the holder of the money decree.
The learned Chief Justice based his decision on the following observation at page 501 (of ILR Mad) : (at p. 404 of AIR):
"As an equitable mortgagee is entitled as against the mortgagor to the rents and profits of the mortgage security if it is insufficient for the discharge of the mortgage debt and as the holder of a money decree who obtains the appointment of a receiver is not in the position of a secured creditor, I am of the opinion that the equitable mortgagee has the better title when there is a contest between the two. I am of course referring to a case where the order of appointment contains no charge and the creditor merely stands in the shoes of his judgment debtor."
(27) Madhavan Nair, J., referred to his earlier decision in ILR 54 Mad 565 and referred also to the observation of Venkatasubba Rao, J., doubting that decision, in ILR 56 Mad 546. The observation of Madhavan Nair, J., in this decision explaining his previous decision gives the key to the proper interpretation of the learned Judge's view in this matter. At page 506 (of ILR Mad) : (at pp.405-406 of AIR) he observed thus :
"The question therefore reduces itself to one of interpretation of the order passed by the court. In ILR 54 Mad 565: (AIR 1931 Mad 626) besides referring to the arguments advanced on the general principles arising from the position of the decree-holder as equitable mortgagee, I drew attention also to the order of the learned Judge appointing the receiver-the only point that received and could receive attention at the hands of the learned Judges in the English cases already referred to. In that case the order stated that the receiver 'shall pay the net receipts into court to the credit of this suit', C. S. No. 229 of 1924, the suit instituted by the equitable mortgagee in which he eventually obtained a decree. It seemed to me that according to this order the money in the hands of the receiver was not to be dealt with "except in one way" that is, except to put it to the "credit of this suit," which means to the credit of the mortgagee-decreeholder in the event of his success in the case, and to no one else. According this interpretation it follows that the mortgagee-decree-holder in ILR 54 Mad 565: (AIR 1931 Mad 626) was in the position of a secured creditor as against the Official Assignee..."
In a case where the mortgagee can obtain a personal decree against the mortgagor once the hypothecate is exhausted and found deficient to satisfy the mortgage decree in full, the order of the appointment of a receiver and the perception of the rents and profits from the hypothecate though his medium may be treated as an order of attachment before judgment which can avail the creditor once the personal decree is passed. IN this view of the matter the observation of the learned Chief Justice is not explicable. The view of Madhavan Niar, J., that very much would depend upon the terms of the order appointing the receiver is unexceptionable.
(28) In 1940-1 Mad LJ 429: (AIR 1940 Mad 703), a receiver was appointed over the mortgaged properties n an action to enforce a simple mortgage. An amount was due from the mortgagor to the Government in respect of kudimaramath which had accrued due before the appointment of the receiver. The Collector filed an application praying the court to pay the money due to the Government by direction to the receiver to pay from and out of the collections made by him. The question for consideration was whether the debt due to the Crown was entitled to priority over the debt due to the mortgagee in respect of the amount recoverable from the income of the mortgaged property.
Wadsworth, J., held that the appointment of a receiver in a suit on a simple mortgage die not really enlarge the scope of the mortgage, that the mortgagee had no charge over the rents and profits in the hands of the receiver, and that the collector was entitled to be paid in recognition of the priority of Crown debt. At p. 431 (of Mad LJ) : (at pp. 703-704 of AIR) the learned Judge after referring to ILR 54 Mad 565 : (AIR 1931 Mad 626) and ILR 56 Mad 915 : (AIR 1933 Mad 570) (FB) and ILR 1939 Mad 496 : (AIR 1939 Mad 402) observed thus :
"It is true that there are in these judgments phrases which give some colour to the theory that when a receiver has been appointed the right of the mortgagee to a preferential lien over the rent in respect of his mortgage-debt to the extent to which it is not covered by the hypotheca, is based on the theory that the rents are regarded as being added to the security for the mortgage-debt. But it seems to me that this view is clearly erroneous and that it was not in fact the basis of the decision in the three cases above referred to. In India at any rate a simple mortgage does not bind the rents and profits of the hypotheca. The appointment of a receiver in a suit on a simple mortgage does not really enlarge the scope of the mortgage. The true nature of the proceeding is that the court creates a machinery whereby the mortgagor is prevented from dissipating the funds which would normally be used to defray the interest on the mortgage, the object of the machinery being simply to prevent the mortgagor from profiting by the law's delays. The receiver collects the rents in the first instance for the benefit of the mortgagee against the contingency of the hypotheca being insufficient."
(29) The decision of the learned Judges rests upon the simple ground, that the mortgage has no charge over the rents and profits collected by the receiver and that at best he can occupy only the position of a simple money creditor in which case his claim will have to be postponed to the claim of the Crown.
(30) In , the question raised was whether a Crown debt for income-tax due by mortgagor is payable on the application of the Income-tax Officer in priority out of the rents and profits collected by a receiver appointed in a simple mortgage suit filed by the mortgagee. Mack, J., held that although such rents and profits can be held by the mortgagee in priority to other simple creditors, they cannot be appropriated by the mortgagee in priority over a Crown debt. At page 498 (of in priority over a Crown debt. At page 498 (of Mad LJ): (at pp. 198-199 of AIR) the learned Judges observed thus:
"The rents and profits collected by a receiver appointed by a court cannot strictly be regarded as property charged with the debt. Wadsworth, J., took the view that the court gave preference to the mortgagee over the simple creditors, merely by way of justice and equity, to ensure that the mortgagee shall not be damnified by the protraction of the suit. I find it difficult to accept this as the basis for giving preference to the mortgagee over simple creditors, in view of the mortgagee being more often than not responsible for his own difficulties, in not suing on his mortgage earlier and h is not bringing the property to quick sale. It is not always easy to lay down precise reasons to support every just and equitable principle laid down by the courts. Mr. Nambiar urges that if the mortgagee is given a preferential claim to simple creditors, a Crown debt which is also in the category of an unsecured debt has no claims to priority. I am unable to agree. A Crown debt is not a secured debt in the sense that there is no specific property charged with its payment. It is given a privileged priority over other debts by judicial decisions and also under statutes... They occupy a special and privileged category of their own. It is only a secured debt, that is, one in respect of a strictly specified security which can have priority over a Crown debt. I have no hesitation in agreement with Wadsworth, J., in holding that the rents and profits collected by a receiver appointed by a court in a simple mortgage suit in prosecution of an equitable remedy open to the mortgagee do not constitute part of the security as such. Although such rents and profits can be claimed by the mortgagee in priority to other simple creditors, they cannot be appropriated by the mortgagee in priority over a Crown debt."
With respect to the learned Judge, we find it difficult to follow his reasoning. The major premise of the learned Judge was that there is no security attached to the rents and profits. Upon that the only conclusion possible was that the mortgagee cannot treat the amount as having been ear-marked for him. If the learned Judge was right in holding that the mortgagee could claim a preferential right against the other simple money creditors such preferential right could also be enforced against the Crown. We are unable to see how any distinction can be made between a Crown debt and other simple money debts owing by the mortgagor.
(31) In ILR (1957) Andh Pra 505 a simple mortgagee filed a suit to recover the mortgage amount and had a receiver appointed for the mortgaged property who collected the rents and profits from the mortgaged property and deposited them in court. The State of Madras had a claim for a sum of Rs. 1,325-9-2 against the mortgagors in respect of sales-tax and they filed an application in the mortgage suit for the payment out to them of the said amount from an out of the rents realised by the receiver.
The mortgagee opposed the application but the learned subordinate Judge before whom the application was made ordered payment out. The correctness of this order was questioned before the Andhra High Court and a Division Bench of that court consisting of Subba Rao, C.J., as he then was, and Jagan Mohan Reddi, J., set aside the order of the court below and negatived the claim of the State. After a review of all the cases referred to above Subba Rao, C.J., observed thus:
"The law on the subject may now be summarised. An appointment of a Receiver in a mortgage action to collect rents of the mortgaged property and deposit the same to the credit of the suit is one of the equitable modes of proceeding against the mortgaged property itself. On the making of that order, the mortgagor is deprived of his right to possession and to collect the rents. Thereafter neither the mortgagor nor persons claiming under him such as the purchaser or a mortgagee of the equity of redemption can have a higher right than the mortgagor himself. So too, all creditors, who have no prior mortgage or security over the property, can claim to have a right to the amounts realised so far as the said amounts were necessary to discharge the mortgage debts for, in the case of unsecured creditors, they can claim that amount in the shoes of the mortgagor and when the mortgagor himself has no right a fortiori they will have none. Whatever privileged position the Corn occupies, in a competition inter se among unsecured creditors it is settled law that the Crown is not a secured creditor, and, therefore, it can only claim just like any other unsecured creditor and as the mortgagor lost the right to possession and to collect there rent, to the extent, indicated above, the State also cannot claim any priority in the sums collected by the receiver."
(32) There is complete concurrence of judicial opinion holding that the simple mortgagee and the equitable mortgagee have no legal right to take possession of the mortgaged property or to claim any security in the rents and profits accruing from that property. The broad grounds on which such mortgagees were afforded preferential rights in the rents and profits collected by a receiver appointed at their instance are: firstly, the appointment of a receiver is an equitable mode of execution permissible under the provisions of the Code of Civil Procedure; secondly, law's delays ought not to prejudice the mortgagee in realising the amount due to him and thirdly, the English law has always recognised and upheld by mortgagee's right to have a receiver appointed for the liquidation of the mortgage debt.
(33) The right to levy execution by the appointment of a receiver cannot alter the substantive rights governing the parties to the suit. The rights of the decree-holder are primarily regulated by the terms of the decree and neither the fact that he has obtained a decree nor the fact that he is permitted to have a receiver appointed as a mode of execution of the decree can clothe him with better rights than what the law otherwise affords him. Delay in the proceedings of courts is perhaps inevitable and no suitor, however just his claim in the suit may be, can invoke the aid of the court for reliefs to which be will not be entitled under the substantive law, in anticipation of any prejudice that he may suffer in consequence of a delayed adjudication in his favour.
In applying the principles evolved by the English courts in mortgage action to mortgage actions in India we should be chary. We shall now briefly refer to the English law on the subject of mortgages. The history of the mortgages under the English law is the history of the interaction of the forces of the Common law, equity and statute. The ancients knew only of two kinds of mortgages, one by which the lender got possession of the property of the debtor with the stipulation that the rents and profits should go in reduction and in discharge of the principle and interest on the loan, called vivum vadium (living pledge), and the other by which the lender took possession of the mortgaged land on the agreement to adjust the rents and profits towards the payment of interest alone called mortuum vadium (a dead pledge).
By the time of Littleton in the 15th century the mortgage transaction assumed a different complexion. The mortgagee obtained a conveyance of the fee simple in the lands subject to defeasance by the mortgagor repaying the loan on or before the appointed day fixed by the agreement of the parties. ON default of such repayment the mortgagee's ownership of the fee became indefeasible. But this is not the only hardship suffered by the mortgagor.
Though the land was forfeited to the mortgagee by the non-payment of the debt in due time, the debt remained subsisting and could be recovered from the mortgagor. This rigour of the common law which did great hardship and injustice to the borrower came to be mellowed by equity. The object of the mortgage was only to afford security to the lender for the advances made by him, and this true perspective of the transaction came to be recognised by the Equity courts.
Granting relief against forfeiture for breach of a penal condition was one of the essential features of the equity administration. The mortgagor was therefore not expropriated by failure to adhere to the time schedule enjoined by the terms of the contract. Even after the lapse of the time prescribed equity allowed the mortgagor to redeem. Technically a legal title was in the mortgagee and the mortgagor was only the equitable owner. Besides the legal mortgage which involved transfer of a legal estate equitable mortgages were also possible.
A puisne mortgage was an equitable mortgage, as the mortgagor could only deal with his equitable interest as there was no residue of legal interest in his hands after his first mortgage. An agreement to create a legal mortgage in favour of the mortgagee could only operate as an equitable mortgage entitling the lender to enforce specific performance of the promise. The Law of Property Act, 1925 brought in radical changes in the legal conception of mortgages.
(34) The modern law of creating a legal mortgage, is thus set out by Chesie in his Real Property, 8th Edn. Page 550:
"A legal mortgage of an estate in fee simple must be effected by either-(1) a demise for a term of years absolute, subject to a provision (called a provision for Caesar) that the term shall cease if the repayment is made on a fixed day; (2) a legal charge by deed."
"To confine our attention for the moment to the former method, the Act does not state for what period the lease must be made, but it enacts that if any person in future attempts to create a mortgage by the old method of a transfer of the fee simple, the conveyance shall operate as a lease of the land for 3000 years, without impeachment for waster, but subject to a Caesar on redemption. There is, of course no obligation for a mortgage term to be granted for so long a period as this.
"If it is desired to create further legal mortgages in the same land, the mortgagor may lease the land to each mortgagee after the first for a terms which is usually at least one day longer than the term limited to the immediately preceding mortgagee. If, for instance, the mortgagor raises money first from A, then from B and then from C on the security of Blackacre, there may be a lease to A for 3000 years, a lease to B for 3000 years and one day (subject to A's term), and a lease to C for 3000 years and two days (subject to the terms of A and B). The effect in such a case is that the second and all subsequent motgagees now take legal interest in the land instead of mere equitable interest as formerly. This is a radical change in the law."
(35) An equitable mortgage may be made either (1) by an agreement to create a legal mortgage; (2) by a mortgage of an equitable interest; (3) by a deposit of title deeds; or (4) by an equitable charge. (Halsbury Vol. 27, 3rd Edn, page 157).
(36) In Prudential Assurance Co. Ltd., v. J. C. Galastaun, ILR (1940) 1 Cal 197 : (AIR 1940 Cal 429), Sen, J., at page 204 (of ILR Cal) : (at p. 431 of AIR) made the following observation:
"I realise that the English law regarding mortgages is not always a safe guide for the determination of all questions regarding the respective rights of mortgagors and mortgagees in this country, and that, wherever rights have been regulated by the statute law of this country, there can be no scope for a reference to the English law regarding those rights. I realise also that the relative rights of the mortgagor and mortgagee in England have to a very large extent been influenced and regulated by the principles which flow from the distinction which prevails there between the legal and equitable estate and that in this country, there being no such distinction, the respective rights of the mortgagor and mortgagee would not be affected by those principles."
With respect we agree with this observation of the learned Judge.
(37) In this connection we may usefully refer to the decision of the Judicial Committee in Ram Kinkar v. Satyacharan, 66 Ind App 50: (AIR 1939 PC 14). Lord Porter at page 59 (of Ind App): (at p. 17 of AIR) observed thus :
"Upto the time of the passing of the Transfer of Property Act the rights of mortgagors and mortgagees of land in India were subject to much controversy, though in general the law of England, subject to such modification as justice, equity and good conscience required, was recognised as the law of India also. But whether the English rules of equity were applicable to such cases was not certain. Since the passing of that Act, however, the distinction drawn in England between law and equity in such cases does not exist in India."
Again at page 60 (of Ind App): (at p. 17 of AIR):
"..... the Indian authorities recognise the principle that the distinction between law and equity has no place in Indian law.... The Act (Transfer of Property Act) was a self-contained Code by which alone the rights of mortgagor and mortgagee were to be ascertained and under which statutory and not equitable rights were brought into existence."
Again at the same page,
"The outlook is different. By Indian law the interest which remains in the mortgagor is a legal interest and its retention may therefore prevent the whole of the mortgagor's interest from passing to the mortgagee-a result which would not follow if an equitable interest only were retained."
(38) Under the Indian statue law a mortgage is defined as a transfer of an interest in an immoveable property and it is never a transfer of ownership in such property. The English mortgage and the equitable mortgage created by deposit of title deeds are only two different kinds of statutory mortgages recognised by S. 58 of the Transfer of Property Act, ans so far as the rights of parties in such mortgages are concerned they bear no resemblance to their analogues under the English law. The rights under mortgage transactions in India should not be coloured by English doctrines of mortgage law.
(39) What is the legal effect of the appointment of a receiver by a court in a pending action? The receiver in a suit is nothing more than the hand of the court so to speak, for the purpose of holding the property of the litigants whenever it is necessary that it should be kept in the grasp of the court in order to preserve the subject matter of the suit pendente lite; and the possession of the receiver is simply the possession of the court. (Wilkinson v. Gangadhar, 6 Beng LR 486).
A receiver appointed by the court is in no sense an agent or trustee for the party at whose instance the appointment is made. He is an officer of the court appointed for the benefit of all the parties to the action and their rights inter se are not affected. As between the mortgagee and the mortgagor, therefore, if the receiver embezzles or otherwise wasters the rents and profits, the loss must fall primarily on the mortgagor (Halsbury 32, 3rd Edn. 382).
(40) in Orr V. Muthia Chetty, ILR 17 Mad 501, Muthuswami Aiyar, J., described the status of the receiver thus:
"The appointment is the act of the Court and once made in the interest of justice or exdebito justitiae, he is an officer or representative of the court, and subject to its orders. His possession is the possession of the court by its receiver, and the tenants in possession is the possession of the court by its receiver, and the tenants in possession, when he is appointed to receiver rents and profits of immoveable property, become virtually tenants pro hac vice of the court, their landlord. His possession is the possession of the all the parties to the proceeding according to their titles. The monies in his hands are in custodia legis for the person who can make a title to them."
It is clear that the appointment of a receiver in a mortgage action at the instance of the mortgagee with a view to appropriate the rents and profits from the mortgaged property towards his mortgage dues cannot by itself improve his subsisting rights as a mortgagee. If on the date of the suit his relief to obtain personal remedy against the mortgagor was not barred by limitation and was also capable of enforcement, the appointment of a receiver can at best be in the nature of an attachment before judgment, of the properties of the mortgagor other than the hypotheca.
It is settled law at least so far as this court is concerned ILR 26 Mad 673 (FB) that an attachment of property does not create a security in favour of the person who obtains the attachment. The legal result of an order appointing a receiver cannot in any way be different from the result flowing from an order of attachment.
(41) Kaluram v. Shyam Sunder, ILR 27 Pat 816: (AIR 1949Pat 128) dealt with a case of a receiver appointed in execution of a simple money decree. The properties of a judgment debtor were placed under the management of a receiver appointed in an execution proceeding and the receiver realised a large amount by granting leases of coal mines in a village which were attached in execution of another decree and the amount was lying with the receiver. An application for reteable distribution was filed by the person who had obtained decrees against the judgment debtor.
On an objection being raised that the money could not be rateably distributed, it was held that the receiver having been appointed in execution, and execution by appointing a receiver being one of the modes of execution sanctioned by law, the money in the hands of the receiver should be treated as assets held by a court within the meaning of S. 73 C.P.C., and that therefore the decree-holders were entitled to rateable distribution of the money in the hands of the receiver.
(42) Mr. R. Ramamurthi Aiyar, learned counsel for the respondents contended that the mortgagee acquired a lien on the amounts realised by the receiver form and out of the rents and profits of the hypotheca, and that such a lien came into existence by virtue of the order of appointment and the relationship of mortgagor and mortgagee between the parties to the action.
"Liens arise either by operation of law or by agreement between the parties. Liens arising by operation of law (liens by implication, implied liens) are those which rise from the relation of the parties, without express or tacit stipulation, and by the rules of the common law (as in the case of the vendor's lien for unpaid purchase money.....) or under the provisions of a statute (statutory liens). Liens by agreement between the parties (conventional liens) are those created intentionally in cases where the relation between the parties is not such as to give rise to a lien by operation of law, as where a carrier stipulates for a general lien on goods sent to him for transmission....." (Earl Jowitt-The Dictionary of English Law, page 1092).
(43) It must be mentioned by that neither the jural relationship of the parties as mortgagor and mortgagee nor the vesting of the mortgaged properties is custodia legis can give rise to a lien in favour of the mortgagee over the realisations of the receiver. In its secondary sense the word "lien" may be applied to a right subsisting in a person who has no possession of the property concerned but who nevertheless has a right against the owner analogous to a legal lien. Such a right may arise in equity by statute or under an order of the court. (Halsbury Vol. 24, page 143). The foot-note (r) in Halsbury Vol. 24 page 143, is as follows:
"There would seem to be no purpose in so describing a right arising under an order of the court for such a right arising under an order of the court for such a right would be enforceable in the same way as any other provision of the order and is not subject to special consideration."
An order of court ear-marking certain funds to the benefit of a party will bind the parties to the order, and it is not necessary to invoke any theory of lien to support the order or to benefit the person in whose favour the order was made.
(44) It is not possible to infer a lien form the fact that the receiver has to deposit the amount realised by him to the credit of the suit in which he is so appointed. In in re, Potts; exparte Taylor, (1893) 1 QB 648, Messrs. Taylor and Sons recovered judgment against Potts in an action in the Queen's Bench division for 316-10 for goods sold and delivered and 7-10-0 for costs. Before the money could be realised by execution Potts' mother died and he thereupon became entitled under her will to a share in her residuary real and personal estate.
Taylor and Sons obtained an ex parte order appointing one E. C. Moore as receiver to receiver to which Potts was entitled in the residuary estate under the will of his mother. It was order that the receiver should pay be balance or balances appearing due on the accounts left or such part thereof as should be certified as proper to be so paid in or towards the satisfaction of what should for the time being be due n respect of the judgment signed on 25th July, 1891 for the sum of .316-15-0 debt and .7-10-0 for costs.
On 16th May, 1892, a receiving order was made against Potts on his own petition and on May 19 he was adjudicated a ankrupt. The question for consideration was whether money in the hands of the receiver can be claimed by the trustee in bankruptcy or can be claimed by the was contended on behalf of Messrs. Taylor and Sons that there was an equitable lien in their favour on the fund in court. This argument was negatived. At page 659 Lord Esher M. R. Observed thus:
"An order appointing a receiver can only amount to a charge if it charges the person in whose hands the money is, not to deal with it except in one way. In my opinion, therefore, this order was not a 'charge', was not 'a mortgage' and was not a 'lien', either legal or equitable, and consequently Taylor and Sons were not 'secured creditors' within the meaning of sub-sec. 2 of S. 9, and by virtue of sub-sec. 1 the bankruptcy took away from them the right to receive this money in priority to the other creditors."
Lindley, L. J., made the following observation at page 661 :
"It is simply an uncompleted process to obtain payment of money. It is not a charge, because there is no order upon the executors to pay the money. If they did not choose to pay it to the receiver they could not be attached for disobeying the order. It is true that by proper proceedings an order for payment could be obtained against them. It would be almost of course, and, unless they could give some good reason for not paying the receiver, they would probably have to pay the costs of the application. But still the property was not yet the judgment creditors; it was short of that; they had not acquired an equitable interest in the property as distinguished from a right to get it by a process which was not yet complete."
Bowen, L.J., stated thus at page 662:
"It seems to me that it does not amount to the creation of an equitable interest in the nature of a charge upon the fund. It falls short of that. It is a mere direction to the receiver to receive money, and to pay it over to the creditors when he does receive it. There is nothing to create an interest in the fund, nor could such an interest, as it seems to me, be created by a judge at Chambers in this way."
(45) In in re, Pearce; Ex parte, Official Receiver, (Trustee) (1919) 1 KB 354, two creditors Pearce and Jones recovered judgment against their debtor for certain sums of money. On 23rd December, 1915, an order was made in both the actions appointing a receiver in respect of the debtor's interest in a hotel called by Opera Hotel of which he was the lessee. Under the order, the receiver was to apply the profits received by him in carrying on the business through the existing manager in making certain specified payments, and 'in making such further payments as may hereafter be directed', and the order provided 'that the receiver do retain the balance of the said profits, to be applied in discharge of the debt and costs due to the plaintiffs as and when may be hereafter ordered.' On 12th March, 1918 a receiving order was made against the debtor who was adjudicated a bankrupt on 8th May, 1918. The Official Receiver became the trustee of the property of the debtor. The trustee claimed the money received by the receiver and his claim was upheld by the court of appeal. The Master of the Rolls observed thus at page 363:
"Counsel for the plaintiffs said that he had to satisfy this Court that the order, if it was to amount to a charge, must come within Lord Esher's expression in In re Potts: 'An order appointing a receiver can only amount to a charge if it charges the person in whose hands the money is not to deal with it except in one way.' That must mean 'except to pay it to, or hold it for, the execution creditor.' In this case it does not come to anything of the sort; it comes nowhere near it. The effect of the order is simply that the whole fund is to be held at the disposal of the court; it is liable to have paid cut of it such further payments as may thereafter be directed by the court before there is any question of any balance being dealt with at all. I think it is quite manifest that the orders do not amount to any positive direction either ordering payment to the execution creditors or ordering the fund to be held for the execution creditors or restricting its being dealt with except by being paid to, or held for, the benefit of the execution "creditors."
Eve J., observed thus at page 365:
"These orders did not, in my opinion, confer on the judgment creditors any equitable interest in the monies as distinguished from a right to get them by a process not yet completed. Until that process is completed by an order for payment the moneys are held by the receiver in medio between the parties, and as the debtor has become bankrupt, and the title of his trustee has supervened before there has been any order for payment, the title of the trustee must prevail."
(46) The two English decisions referred to above are clear authority for the position that the judgment creditor can have no right in the receiver's collections unless and until there is an order of appropriation towards the mortgage debt by the court. Till then the fund in court is in medio. As Varadachariar J., pointed out in Jagannatha Rao v. Maharajah of Pittapur, 69 Mad LJ 534 : (AIR 1935 Mad 1946), it is not correct to view all money in the hands of the receiver as necessarily appropriated towards the satisfaction of the decree. The court has got the power to give directions to him in respect of the disbursement of the moneys and in proper circumstances such directions may also be for the benefit of the judgment debtor. Depositing the money collected by the receiver to the credit of the suit cannot have the effect of appropriation or allocation of the amount towards the discharge of the decree in the suit.
(47) In Ramiah Aiyar v. Gopala Aiyar, ILR 41 Mad 1953 : (AIR 1919 Mad 607), the defendant in a suit was arrested before judgment and was ordered to be realised from custody on depositing into court a sum of money sufficient to meet the plaintiff's claim in the suit, under O. XXXVIII, R. 2 C.P.C. There was subsequently an attachment of the money by a decreeholder and an adjudication of the defendant as an insolvent. It was held that the money was paid into court to the general credit of the action and charged with a lien in favour of the plaintiff on the latter obtaining a decree in his favour and that the attaching creditor and the Official Receiver's claims were subject to this lien. At page 1056 (of ILR Mad) : (at p. 608 of AIR) Coutts Trotter J., observed as follows :
"...... where money is not deposited in court in order to secure something being done by the person who deposited it, such as abstaining from going away or removing his property from the jurisdiction of the court but where money is paid to the credit of the suit or ear-marked for the suit, the courts have always held that, when that is done, the money belongs to the plaintiff in the event of his success and that it cannot pass to the general creditors of the person who pays it is or to any person who claims under him."
(48) This decision was one based upon the language of Order XXXVIII, R. 2 C.P.C., Which is as follows :
"(1) Where the defendant fails to show such cause the court shall order him either to deposit in court money or other property sufficient to answer the claim against him, or to furnish security for his appearance at any time when called upon while the suit is pending and until satisfaction of any decree that may be passed against him in the suit, or make such order as it thinks fit in regard to the sum which may have been paid by the defendant under the proviso to the last preceding rule."
(49) The deposit made in that case was held to fall within the first portion of rule 2 set out above and as the deposit was intended to answer the claim the learned Judge held that the amount so deposited was charged with lien on the plaintiff obtaining a decree in his favour. That decision cannot be treated as an authority that whenever a sum of money is deposited in Court to the credit of a particular suit a charge or lien inheres to the deposit in favour of the party succeeding in the suit.
(50) The true position, in our opinion, is that the order of appointment of a receiver in an action of a simple mortgagee or an equitable mortgagee to recover the mortgagee amount with a direction to him to bring in the rents and profits from the hypotheca to the credit of the suit without an orders of appropriation or allocation in favour of the mortgagee does not amount to a charging order in favour of the mortgagee.
Independently of the order appointing a receiver a simple mortgagee or an equitable mortgagee or a charge holder in respect of an immoveable property has no security over the rents and profits accruing from that property. Whatever disabilities the mortgagor may suffer by the receiver taking possession of the hypotheca as the hand of the Court, no special rights are conferred in favour of the mortgagee by reason only of such appointment.
(51) We are of opinion that the decision reported in ILR 54 Mad 565 : (AIR 1931 Mad 410), ILR 1939) Mad 496 : (AIR 1939 Mad 402), were wrongly decided, and that they must be overruled. We agree with the conclusion reached by Wadsworth, J., in 1940-1 Mad LJ 429 : (AIR 1939 Mad 402), were wrongly decided, and that they must be overruled. We agree with the conclusion reached by Wadsworth, J., in 1940-1 Mad LJ 429 : (AIR 1940 Mad 703), and that of Mack, J., in , but not with the reasoning contained in their judgments. WE express our concurrence with the decision of the RangoonHigh Court in ILR 11 Rang 467 : (AIR 1934 Rang 8) but our respectful dissent from the decision n ILR 12 Rang 437 : (AIR 1934 Rang 321), 14 Rang 292 : (AIR 1936 Rang 290) and that of the High Court of Andhra Pradesh in ILR (1957) Andh-Pra 505.
(52) In the result C. M. A. No. 120 of 1957 is allowed and the judgment of the Court below in I. A. No. 245 of 1956, Sub-Court, Tiruchi, is set aside, and there will be an order in favour of the Collector as prayed for by him in that application. AS the order of the Court below ah s been set aside in the C. M. A.., C. R. P. No. 512 of 1957 is unnecessary and it is hereby directed to be dismissed.
(53) C. M. A. No. 103 of 1957 and C. R. P. No. 443 of 1957 are dismissed and the order of the Court below in E. A. Nos. 350 of 1955 and 423 of 1956 are hereby confirmed.
(54) There will be no order to costs in all the civil miscellaneous appeals and the civil revision petitions.
(55) Order accordingly.