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In Re: the Swadeshi Steam Navigation Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtChennai
Decided On
Judge
Reported inAIR1916Mad7; 30Ind.Cas.286
AppellantIn Re: the Swadeshi Steam Navigation Co. Ltd.;s.V. Nallaperumal Pillai and ors.
Respondent;s.D. Krishna Aiyangar and anr.
Cases ReferredWright v. Horton
Excerpt:
companies act (vi of 1882), section 68 - charge in favour of officer of company--registration necessary--company--debenture--floating charge--default made by company but business carried on--charge created after default, validity of--crystallisation of floating charge, when takes place. - - the companies act of 1862 whilst providing penalties for failure to register mortgages and charges did not provide that unregistered mortgages and charges should be void, but then there were decisions that it would be inequitable to allow officers of the company to enforce such charges when created in favour of themselves......of floating charge and providing that notwithstanding such charge the company should have power to carry on business and deal with the assets of the company until default should have been made for six calendar months in the payment of the principal amount which, admittedly happened, provided that from and after the happening of such default the liberty and authority hereinbefore given (to carry on business) shall forthwith cease and determine and the charge created by this debenture shall and may be immediately enforceable.3. in this connection, it must be borne in mind that the right of the company to create a charge of this kind is incident to its right to carry on business, and it is quite clear that no such charge can be created after the company had actually stopped business or.....
Judgment:

John Wallis, C.J.

1. These are appeals from an order of the District Judge of Tinnevelly in Original Suit No. 307 of 1911, in the matter of the winding-up of the Swadeshi Steam Navigation Company, Limited. By an order of the 27th April 1912 made in the winding-up the District Judge had held that the charges created by a resolution of the Directors in favour of claimants 23 and 16, the Secretary and Manager of the office of the Company, were not rendered invalid by the provisions of the explanation to Section 68 of the Indian Companies Act, 1882, and that they did not amount to a fraudulent preference. The claimants then put in the petitions now under appeal for payment out of the assets of the amounts of their charges when the debenture-holders of the Company, whose rights as secured creditors had not been considered in the previous application, appeared and opposed the applications on the ground that their floating security had become fixed or crystallised and had attached on the assets of the Company before the creation of these charges. The District Judge having1 overruled the objections the debenture-holders have appealed and have raised three contentions in support of their case.

2. In the first place, they rely on the express provision of the debenture-deed, which, after charging all the assets of the Company by way of floating charge and providing that notwithstanding such charge the Company should have power to carry on business and deal with the assets of the Company until default should have been made for six calendar months in the payment of the principal amount which, admittedly happened, provided that from and after the happening of such default the liberty and authority hereinbefore given (to carry on business) shall forthwith cease and determine and the charge created by this debenture shall and may be immediately enforceable.

3. In this connection, it must be borne in mind that the right of the Company to create a charge of this kind is incident to its right to carry on business, and it is quite clear that no such charge can be created after the Company had actually stopped business or after the debenture-holder had intervened under the powers reserved to him to stop the business by obtaining the appointment of a Receiver or petitioning for the winding-up of the Company. The difficulty arises when, as in the present case, the Company has been allowed to go on carrying on business and creating charges, after the happening of any of the events which determined its right to carry on business. In cases of this kind the Courts have been disposed to hold, at any rate when the language of the deed admits of it, that the right to carry on business is not determined automatically by the happening of one of the events indicated, but continues until the debenture holder intervenes to show his desire that it should cease, as by applying for a Receiver. In Government Stock Investment and Ors. Securities Co. v. Manila Railway Co. Ltd. (1895) 2 Ch. D. 551 Lindley, L.J., pointed out the hardship and injustice that must arise to third parties by the debenture-holders allowing the business to go on after the happening of the specified event and then turning round and treating all the transactions as void under the debenture deed, and held that such a result was so unreasonable and undesirable that in the absence of an express provision to that effect it ought not to be held to have been in contemplation of the parties. On appeal the House of Lords in Government Stock and Ors. Securities Investment Co. v. Manila Railway Co. Ltd. (1897) A.C. 81 took the same view and Lord Macnaughten laid down generally that it was the essence of a floating security that it should remain dormant until the undertaking charged ceases to be a going concern or until the person in whose favour the charge is created intervenes.

4. There was no difficulty in applying that doctrine to the facts of that case, but there is more difficulty when, as in the debenture in Edward Nelson and Co. Ltd. v. Faber and Co. (1903) 2 K.B. 367: 10 Manson 427 which is in terms identical with the debenture here except in a particular which does not seem very material, it is expressly provided that on the happening of a specified event the liberty and authority of the Company to carry on business shall forthwith cease and the charge created by the debenture shall and may be immediately enforceable. In this case, it would almost seem as if these words had been expressly inserted to take the case out of the decision in Government Stock and Ors. Securities Investment Co. v. Manila Railway Co. Ltd. (1897) A.C. 81 and to determine the Company's authority to carry on business automatically without any intervention of the debenture-holders. The Courts, however, lean strongly against such a contention, and Joyce, J., has rejected it in Edward Nelson and Co. v. Faber & Co. (1903) 2 K.B. 367 a decision which is not appealed against, has been since cited without comment in some cases and in most text-boobs, though it is omitted from the last edition of Buckley on Companies. In a still later case, Evans v. Rival Granite Quarries Co. Ltd. (1910) 2 K.B. 979, Fletcher Moulton L. J., after referring to the leading cases as to the incidents of a floating security of this kind, observed that in all of the cases the Courts realized that it was impossible to come to any other conclusion than that it was intended to leave the Company free to carry on its business until the time arrived when debenture-holders enforced their security upon the Company's assets and undertaking. And the learned Lord Justice went on to say, not without reference, I cannot help thinking to Edward Nelson's case (1903) 2 K.B. 367 which had been cited in the argument that, though in the earlier cases the actual words of a particular document may have influenced the Courts, it early became clear to the Judges that this did not depend on the special language used but upon the essence and nature of a security of this kind. On the other hand, Lord Justice Buckley in the same case, seems still to have relied on the language of the document and speaking of the various ways in which crystallization may happen and the security become fixed, he said: 'A Receiver may be appointed, or the Company may go into liquidation and the Liquidator be appointed, or any event may happen which is defined as bringing to an end the license to the Company to carry on business.'

5. In this state of the authorities I hesitate to differ from the decision of Joyce, J., reinforced as it is by the observations of Fletcher Moulton, L.J. although it is not strictly binding on me.

6. As regards the second point, the appellants do not seem to have relied in the lower Court on the fact that the Company had stopped business before the granting of the charges and the evidence taken by the District Judge in the earlier case sufficiently shows that it had not.

7. The third point is that the charges having been created in favour of officers of the Company--one of them is Secretary and the other had been appointed by resolution Manager of the Company's office--and not having been registered as required by Section 68 of the Indian Companies Act of 1882, were not available to the claimants within the meaning of the explanation of that section. This objection was taken by the Liquidator in the earlier case and was overruled by the District Judge, now Mr. Justice Oldfield.

8. It was again expressly taken in the lower Court in this case but was apparently not argued in view of Mr. Oldfield's decision at an earlier stage. It is not expressly mentioned in the grounds of appeal to us, but as the facts are such as to bring the case prima facie within the terms of the statutory provision, we think that we ought to enforce the provisions of the section if they are applicable. The Companies Act of 1862 whilst providing penalties for failure to register mortgages and charges did not provide that unregistered mortgages and charges should be void, but then there were decisions that it would be inequitable to allow officers of the Company to enforce such charges when created in favour of themselves. The late Sir George Vessel criticised these decisions in several cases, pointing out that they imposed an additional penalty not warranted by the Statute and his view was finally upheld in 1887 by the House of Lords in Wright v. Horton (1887) 12 A.C. 371. At the time when the Indian Companies Act of 1882 was being drafted and passed into law, the other view still prevailed and the Legislature endeavoured to give effect to it as nearly as possible in the words used in the decided cases. In Patent Bread Machinery Company, In re Valpy and Chaplin, ex parte (1872) 7 Ch. App. 289, Lord Justice James after observing that the mortgage was not void for want of registration went on: 'But as it is the duty of the officers of the Company to see that every charge specifically affecting property of the Company is registered, I am of opinion that no Director, Manager, or other officer of the Company, can avail himself of a charge which is not registered,' and he applied the doctrine to a person who had acted as Solicitor of the Company. The same language was used by the Court of Appeal in South Durham Iron Company, In re, Smith's case (1879) 11 Ch. D. 579, where Sir George Jessel interpreted the decisions as meaning that a Director, Manager or officer cannot avail himself of the security. These are all cases in which the officer had taken a charge in respect of advance made by him to the Company and not for arrears of salary due to him.

9. The explanation to Section 68, which appears to be intended to reproduce the ruling of Lord Justice James, in Patent Bread Machinery Co. In re, Valpy and Chaplin, Ex parte (1872) 7 Ch. App. 289, as far as possible in his own language, is as follows: 'Omission to register under this section a mortgage or charge does not render it invalid, but the officers of the Company cannot avail themselves as such of a mortgage or charge specifically affecting the property of the Company and not so registered.' The words 'as such' present some difficulty if they mean as 'officers of the Company.' It is difficult to see what is meant by the officers of the Company availing themselves of a mortgage or charge, unless it be that they cannot take such mortgages or charges when they are officers of the Company, which is what was laid down in the cases referred to. It is I think, clear, that the Legislature was anxious to reproduce not only the substance but as far as possible the very language of the decisions and that this must be accepted as the meaning of the explanation.

10. The only other point is whether both the claimants were officers of the Company. The Secretary admitted lie was; the other claimant denies that he was an officer of the Company within the meaning of the section and although he would prima facie appear to be such yet, as he appears to rely on special facts which he has not had an opportunity of proving, we have decided to call for a finding as to whether he was an officer of the Company within the meaning of the section when he obtained the charges. Fresh evidence may be taken.

11. The finding should be submitted in one month after the re-opening of the lower Court after the midsummer vacation. Seven days will be allowed for filing objections.

12. The appeals against orders Nos. 24 and 29 to 31 of 1914 are allowed as against the 23rd claimant with costs.


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