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Case Number

O.S Appeal No. 600 of 1983 against the Judgment and Order dated July 22, 1983 by Justice Mrs. Sujata Manohar in Chamber Summons No. 332 of 1983 in Suit No. 308 of 1977

Judges

Rege
Bharucha, JJ.

Acts

provisions of the Transfer of Property Act and the Code of Civil Procedure. Section 58 of the Transfer of Property Act
Order 34, rules 4 and 5 of the Code of Civil Procedure
provisions of Order 34, Civil Procedure Code,
provisions of s. 125 of the Companies Act.
s. 60 of the Transfer of Property Act.26.
s. 95 of the (English) Companies Act, 1948,
S. 76(h) of the Transfer of Property Act.
s. 60 of the Transfer of Property Act
s. 446 of the Companies Act
TRANSFER OF PROPERTY ACT
Companies Act, that s. 125
stage.14. Section 446
Order 34, rule 5,

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Smart Summary

Structured Summary of the Court Opinion

Factual and Procedural Background

On January 18, 1966 Kamani Brothers Pvt. Ltd. (the company) deposited the title deeds of an immovable property called "Kamani House" with trustees of the Kamani Engineering Organisation Limited Employees' Gratuity Fund, intending to create an equitable mortgage. It is admitted that the charge created by this equitable mortgage was not registered under the Companies Act.

The trustees (mortgagees) filed Suit No. 308 of 1977 in this Court seeking realisation of the security. On December 3, 1977 a decree on admission was obtained declaring that, by virtue of the 1966 deposit, the plaintiffs (trustees) were entitled to the mortgage/charge and fixing a date for redemption and a procedure for sale if redemption did not occur.

A winding up petition (Company Petition No. 109 of 1978) was filed on February 16, 1978 and a winding-up order was made on August 3, 1979. After default in payment by the redemption date, the plaintiffs applied (July 10, 1981) under s.446 of the Companies Act for leave to execute the decree against the Official Liquidator and the mortgaged property; leave was granted on August 6, 1981 and steps towards sale by public auction followed.

On June 20, 1983 three contributories issued a chamber summons seeking an injunction restraining further execution steps, contending that (because the charge had not been registered under the Companies Act) s.125 applied and the mortgagees were only ordinary creditors. The chamber summons was dismissed by a learned single judge on July 22, 1983. The Official Liquidator was transposed as appellant before this Court and the Official Liquidator supported the contributories' stand on appeal.

Legal Issues Presented

Whether, under s.125 of the Companies Act, a charge created on a company's property which is unregistered is void ipso facto upon the company being wound up, or whether the Official Liquidator must take steps to have such an unregistered charge declared void.
Whether the fact that a decree (preliminary or for sale) was obtained against the company on the basis of the unregistered mortgage prior to the winding-up order affects the application of s.125 — i.e., does a decree obtained before winding-up prevent s.125 from operating against that mortgage/charge?
As a procedural point: whether the Official Liquidator is precluded by principles of constructive res judicata from raising the non-registration defence at the execution stage because he did not raise it when leave under s.446 was sought and obtained.

Arguments of the Parties

Mortgagees' Arguments (represented by Mr. Tulzapurkar)

The Official Liquidator ought to have raised the plea of non-registration under s.125 at the stage when leave under s.446 was sought; having not done so, principles of constructive res judicata preclude him from raising it at execution.
Once a decree had been passed upon the (allegedly unregistered) charge prior to winding-up, the mortgage merged in the decree and the provisions of s.125 did not apply to the decree; the mortgagees were seeking to execute that decree.
Authorities were relied upon to support the proposition that a mortgage merges in the decree and that the rights thereafter are governed by the decree (examples cited included decisions holding merger and that the decree replaces the mortgage security).

Official Liquidator and Contributories' Arguments (represented by Mr. Nain and Mr. G. A. Thakkar)

The unregistered charge created by the equitable mortgage is void as against the Official Liquidator by virtue of s.125 of the Companies Act and therefore cannot be enforced against the liquidator or the company's assets in liquidation.
The passing of a decree in the suit against the company did not have the effect of extinguishing the unregistered charge; authorities were cited to show that the right of redemption and the mortgage incident can survive a preliminary decree and that merger does not necessarily eliminate the mortgage security.
The Official Liquidator supported the contributories' chamber summons and contended that he was entitled, on the basis of s.125, to object to execution of the decree by sale of the mortgage property.

Table of Precedents Cited

Precedent	Rule or Principle Cited For (as stated in the opinion)	Application by the Court (how the opinion used the authority)
Balkrishna Mahadeo Vartak v. Indian Association Chemical Industries Limited	Discussed in context of applications under s.446 — object of s.446 to save company from unnecessary litigation and protect assets; used by mortgagees to argue that leave under s.446 determines related issues.	Court considered it and rejected the constructive res judicata submission: held that s.446 applications do not adjudicate the applicant's rights, so constructive res judicata basis is absent.
Independent Automatic Sales Ltd. v. Knowles & Foster	English case cited for the proposition that the liquidator (or liquidator's representative) is the proper party to challenge an unregistered charge and that proceedings should be brought by the liquidator.	Court distinguished the case (not being a proceeding to declare the charge void under statutory registration rule) and concluded s.125 makes an unregistered charge void ipso facto on winding-up; no separate steps were required by the liquidator to make it void.
Thota China Subba Rao v. Mattapalli Raju (Federal Court)	Right of redemption is an incident of a subsisting mortgage; it subsists so long as the mortgage subsists and can be extinguished only as provided in s.60 of the Transfer of Property Act; decree must be in prescribed form.	Cited in support of the proposition that right of redemption survives the passing of a preliminary decree unless properly extinguished according to law.
Rajaram Vithal v. Ramchandra Pandu	Quoted Privy Council in Raghunath Singh v. Hanaraj Kunwar: right to redeem is statutory and can only be deprived by means and manner enacted for that purpose.	Used to support that the right of redemption cannot be taken away except in the manner prescribed by statute (s.60).
Raghunath Singh v. Hanaraj Kunwar (Privy Council)	Principle that the right to redeem is conferred by statute and cannot be extinguished except by means and manner enacted; an old decree cannot be construed as extinguishing the right unless it so purports.	Quoted (via Rajaram Vithal) to underline statutory protection of the right to redeem and the strictness of extinguishment procedures.
Ramchandra Kolaji v. Hanmanta	A view preferred by the Federal Court in relation to the survival of redemption rights (contrasting with a Madras High Court view).	Referenced as part of the line of authorities regarding survival of redemption rights after decree.
Noorudin Famailji Kurwa v. Mahomed Umar Subrati	Observed that under Order 34, rule 5 a mortgagor can redeem until confirmation of sale and there is no merger of the security in the decree.	Cited to show that a mortgagor's redemption right and mortgage security can survive a preliminary decree and that merger is not automatic.
Karam Chand Moola Ram v. Telu Ram (Punjab & Haryana High Court)	Held that mortgage debt merges in the decretal debt under Order 34, CPC; mortgage security also merged in the decree and was replaced by the security of the order for sale; right to redeem extinguished by final decree.	Cited as an authority taking the contrary view (in favour of merger) to the line of cases emphasizing survival of redemption rights; the opinion discusses it as part of conflicting authorities.
Ramchandra Bhagat v. Mrs. Eva Mitra (Patna High Court)	Held that the right of the mortgagor to marshal the mortgage security was lost upon a decree being passed.	Cited among authorities supporting the merger/resulting loss of certain mortgagor rights upon a decree.
Narayanaswami Chetti v. Vellaya Pillai (Madras High Court)	Held that the right to marshal mortgage security was lost upon the passing of a decree.	Cited as another authority supporting the merger/loss-of-rights position.
Managi Singh v. Saheb Ram Singh (Calcutta High Court)	Held that once a decree is made and a date for payment fixed, the matter passes from contract to judgment and rights thereafter are to be ascertained by reference to the decree, not the original contract.	Referred to in support of the proposition that rights are governed by the decree after it is passed.
Gyarsi Bai v. Dhansukh Lal (Supreme Court)	Observed that a mortgage merges in the preliminary decree and the rights of the parties are thereafter governed by that decree, but that a preliminary decree only concerns disputes up to its date; net receipts after preliminary decree are outside its scope.	Cited for the nuanced proposition that preliminary decree governs rights up to its date, illustrating limitations on merger-based arguments.
Satyanarayana v. Suryanarayana (Clark J. observation)	Observation that a mortgage suit continues until final decree and relationship of mortgagor and mortgagee continues until then (noted as somewhat wide in earlier use).	Referenced by the Supreme Court and used in the opinion to illustrate authorities holding that the suit (and mortgage relationship) subsists until final decree.
Kusum Kumari v. Debi Prosad Dhandhania (Privy Council)	Principles that after the date fixed for redemption the matter passes from the domain of contract to that of judgment and rights then depend on the directions in the decree; used to discuss merger of decretal and mortgage debts.	Cited by the Supreme Court and the Punjab & Haryana High Court; discussed in the opinion when reconciling authority on merger and the transition from contract to judgment upon decree.
Subrahnanyan Chettiar v. Muttuswami Goundan (Federal Court)	Held that a debt under a promissory note ceased to be a debt based on the note after it merged in the decree and became a judgment-debt.	Referenced by the Kerala High Court (and discussed by this Court) concerning merger of an underlying obligation into a decretal obligation.
Kerala Financial Corporation v. C.K. Sivasankara Panicker (Kerala High Court)	Held that once a mortgage had merged in the decree the relationship was governed by the decree and that a decree creating a charge was not hit by s.125; relied upon by the single judge below.	Considered and discussed by this Court; the present Court analyzed its reasoning but concluded differently on the facts and statutory effect of s.125.
Mercantile Bank of India Ltd. v. Chartered Bank, Australia and China, and Strauss & Co. Ltd. (in Liquidation) (King's Bench)	In a case of a floating charge, once specific properties were seized they attached and the charge was no longer a floating charge and thus was not bad under the relevant legislation.	Mentioned in passing by the Court and held to be inapplicable to the facts before the Court (floating charge/seizure facts differ from present equitable mortgage/unregistered-charge situation).

Court's Reasoning and Analysis

The Court structured its reasoning around statutory interpretation of s.125 of the Companies Act, the nature and effect of a decree in a mortgage suit, and reconciling conflicting authorities on whether a mortgage/charge merges into a decree so as to prevent the operation of s.125 upon winding-up.

Preliminary procedural point — constructive res judicata:

The mortgagees argued the Official Liquidator should have raised the non-registration plea when leave under s.446 was sought; relying on earlier authority they urged constructive res judicata.
The Court analysed the purpose and effect of s.446: an order under s.446 grants liberty to commence or continue proceedings against a company in liquidation but does not adjudicate the applicant's rights or claims. Even where leave is refused, the rights or claim remain provable in liquidation.
Accordingly, the Court held the basis for constructive res judicata is absent: an order under s.446 does not decide the rights of the applicant and hence the Official Liquidator was not precluded from raising the statutory defence later.

Statutory construction of s.125 — does non-registration render a charge void automatically on winding-up?

The Court quoted s.125 in full (as reproduced in the opinion) and concluded that every charge created by a company which is not registered under the Companies Act is expressly made "void against the liquidator" by the section. Consequently, on the company being ordered to be wound up, such an unregistered charge is void ipso facto against the liquidator and creditors; no procedural steps by the liquidator are required to render it void.
The Court rejected the submission that the Official Liquidator needed to institute separate proceedings to make the charge void, distinguishing the English authority relied upon (Independent Automatic Sales Ltd.) as inapposite to the statutory language and context of s.125.

Does a decree obtained prior to winding-up prevent s.125 from operating?

The Court examined authorities on the effect of decrees in mortgage suits: some courts had held that mortgage debt/security merges in the decretal debt and rights thereafter are governed by the decree (leading to a position that a decree might replace the mortgage security); other authorities emphasised that the right of redemption and the mortgage incident survive the preliminary decree unless the statutory mode (s.60 Transfer of Property Act and Order 34, CPC) for extinguishment is followed.
The Court noted conflicting precedents: Federal Court and this Court had emphasised survival of redemption; Punjab & Haryana and other High Courts had emphasised merger. The Supreme Court and Privy Council were also cited for principles that (a) after the date fixed for redemption rights move into the domain of judgment and (b) preliminary decrees govern relations up to their date.
The Court held that the correct approach for applying s.125 is to construe the decree: if the decree, by its terms, keeps the unregistered charge alive (for example by declaring the mortgage/charge and permitting redemption within a specified period), then s.125 applies to that unregistered charge; if the decree expressly extinguishes or replaces the charge by an order of sale that operates independently of the mortgage security, s.125 may not apply.

Application to the present decree:

The Court analysed the decree on admission in the present suit. The decree declared that the plaintiffs were entitled to the mortgage/charge by virtue of the 1966 deposit, fixed a date for redemption of the "mortgage or charge", and ordered that upon payment by that date the plaintiffs deliver up deeds relating to the property.
From these provisions the Court concluded that the unregistered equitable charge was expressly kept alive by the decree, with a redemption period provided. The order for sale was to operate only if redemption by the specified period did not occur; only upon sale could the charge be extinguished.
Because the unregistered charge remained alive under the terms of the decree, s.125 applied and rendered the unregistered charge void as against the Official Liquidator when the company was wound up. Consequently, the mortgagees could not, notwithstanding the prior decree, proceed to sell the mortgage property in execution as against the Official Liquidator or the company's assets in liquidation.

Other observations:

The Court expressly declined to decide a hypothetical separate question whether the Official Liquidator would be entitled to claim sale proceeds if the mortgage property had been sold; no opinion was expressed on that point.
The Court also noted an inapplicable English King's Bench decision concerning floating charges and seizures of specific property, and therefore did not rely upon it in resolving the present dispute.

Holding and Implications

Holding:

The appeal is allowed. The impugned judgment and order of the learned single judge are set aside. The Court ordered that the plaintiffs, their servants and agents are restrained from taking any further steps for sale of the immovable property known as "Kamani House" in execution of the decree dated December 3, 1977 in Suit No. 308 of 1977. There shall be no order as to costs.

Implications:

Direct effect on the parties: The unregistered equitable charge created by the 1966 deposit, although the subject of a decree obtained before the winding-up order, was held to be kept alive by the terms of that decree and is nevertheless void as against the Official Liquidator under s.125 of the Companies Act once the company is in liquidation. The mortgagees are restrained from proceeding with sale of the property in execution against the liquidator.
Procedural consequence: The Official Liquidator is entitled (and not precluded by constructive res judicata arising from s.446 leave proceedings) to raise the defence of non-registration under s.125 at the execution stage.
Broader precedent note: The Court resolved the issue by construing the terms of the decree against the backdrop of s.125; the opinion does not purport to lay down a universal rule that every decree always preserves or extinguishes an unregistered charge — instead the decree's terms must be interpreted to see whether the charge is kept alive. The Court did not express an opinion on whether the Official Liquidator would be entitled to sale proceeds if a sale had already occurred.

Disposition recorded in the opinion: "Appeal allowed." (No costs ordered.)

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The Official Liquidator, High Court, Bombay And The Liquidator Of Kamani Brothers Private Ltd. (In Liquidation) v. Suryakant Natvarlal Surati

Bharucha, J.:— This appeal is directed against the judgment and order of a learned single judge dismissing an applicants' chamber summons in execution proceedings of a decree passed on admission.

2. To appreciate the contentions, the facts need to be set out. On January 18, 1966 Kamani Brothers Pvt. Ltd. (now referred to as ‘the company’) deposited, with intention to create an equitable mortgage, the title deeds of an immovable property called “Kamani House” with the trustees of the Kamani Engineering Organisation Limited Employees' Gratuity Fund. It is an admitted position that the charge created by the equitable mortgage was not registered under the provisions of the companies act. The trustees of the Gratuity Fund filed in this court a suit (being Suit No. 308 of 1977) against the company on the equitable mortgage and prayed for realisation of the security.

3. On December 3, 1977 a decree on admission was obtained in the suit. The decree recorded that the mortgagors (the company) admitted the claim of the mortgagees (the trustees). The decree declared that

“under or by virtue of the deposit made on or about February 18, 1966 by the defendants with the plaintiffs of the title deeds of the property described in the plaint and in the schedule hereto the plaintiffs are entitled to the mortgage or charge on the defendants' property described in the schedule hereto.”

4. It declared the sum that was due and owing by the mortgagors to the mortgagees “on the security of the said mortgage”. It ordered and decreed that upon the mortgagors paying into Court on behalf of mortagees on or before December 3, 1980, being the date of redemption, the sum so declared to be due and owing,

“the plaintiffs do deliver up all deeds, documents and writings of or relating to the property described in the schedule hereto in their possession custody or control.”

5. It ordered that in ??? of the mortgagors committing default in payment of such sum and costs by the date of redemption”

“the Commissioner of this Hon'ble Court for Taking Accounts do sell by public auction the mortgaged property.”

6. Liberty was given under the decree to the mortgagees to apply for a personal decree in the event of the net sale proceeds being insufficient to pay off the balance remaining due.

7. On February 16, 1978 a company petition (being Company Petition No. 109 of 1978) was filed in this court for winding up the company. On August 3, 1979 a winding up order was passed.

8. Default having been made in payment of the sum due and owing under the decree by the date of redemption, the plaintiffs applied on July 10, 1981 by way of Judge's summons taken out in the company petition for winding up for leave under s. 446 of the Companies Act to execute against the Official Liquidator as liquidator of the company the decree dated December 3, 1977 and execute it against the mortgage property. Notice was given to the Official Liquidator of the Judge's summons. On August 6, 1981 the Judge's summons was made absolute. Thereafter the Commissioner for Taking Accounts directed the giving of advertisements in respect of the sale of the mortgage property. On April 21, 1983 the Official Liquidator was present at a meeting before the Commissioner for Taking Accounts.

9. On June 20, 1983 the present chamber summons was issued by three contributories of the company. The chamber summons sought an injunction restraining the taking of any further steps in execution of the decree by sale of the mortgage property. It was contended in the affidavit in support of the chamber summons that the charge claimed by the mortgagees over the mortgage property was not registered under the Companies Act, that s. 125 thereof applied and that, therefore, the mortgagees could be treated only as ordinary creditors without preferential rights. The chamber summons was contested on behalf of the company. The Official Liquidator supported the stand of the contributories.

10. On July 22, 1983, the chamber summons was, as aforestated, dismissed. The learned single judge noted that what was required to be determined was whether s. 125 could be applied to a mortgage decree which had been passed on an unregistered mortgage against a company prior to its being wound-up so that such decree became void as against the liquidator. The learned single judge found that the decree was not a charge created by the company. It was, therefore, not covered by s. 125. The rights of the decree-holder flowed from the decree itself. A decree enforcing the mortgage or charge was distinct from the mortgage or charge which it enforced. A decree on a mortgage, especially one obtained prior to winding-up of the company, was, therefore, not governed by s. 125. The rights under the mortgage had, as a result of the decree, become crystallised in the decree for sale which had been passed. It might be that the mortgagors' right of redemption was continued upto a period prescribed in the decree and even thereafter until the sale of the mortgage property under statutory provisions, but this did not mean that the decree itself was merely a charge. In the present case rights under the mortgage had become finalised in the decree for sale which had been validly passed at a time when there was no winding-up petition pending against the company. The mortgage as against the company was valid and a valid decree had been passed pursuant to that mortgage and it was not open to the Official Liquidator to consider that decree as void as against him.

11. During the course of the hearing before us, an order was made transposing the Official Liquidator as the applicant in the chamber summons as the appellant. The order was made on the application of counsel on behalf of the Official Liquidator and without any objection being raised on behalf of any of the parties appearing before us.

12. It is convenient to dispose of, first, a preliminary point taken by Mr. Tulzapurkar, learned counsel for the mortgagees. It was contended by Mr. Tulzapurkar that since the Official Liquidator had not raised the plea that the unregistered charge was void against him at the stage of the application for leave under s. 446, the principles of constructive res judicata applied and the court could not now consider his objection to the execution of the decree by sale of the mortgage property on that basis.

13. Reference was made by Mr. Tulzapurkar to the judgment in Balkrishna Mahadeo Vartak v. Indian Association Chemical Industries Limited*. The principal question to be decided in that case was whether an order on an application under s. 446 of the Companies Act was appealable under s. 483 thereof. The court observed that the object of s. 446 was to save the company which was being wound up from unnecessary litigation and to protect its assets for equitable distribution amongst its creditors and its shareholders. In dealing with an application under s. 446 the court had to consider the interest of the company and to see that its assets were not wasted in frivolous and unnecessary litigation. It was Mr. Tulzapurkar's sub-mission, based upon this judgment, that on order under s. 446 was not merely procedural; that a lis existed between the parties to an application under s. 446; that the Official Liquidator ought to have raised the plea under s. 125 at the stage of the application under s. 446; and that, since he had not opposed leave under s. 446 upon that plea, the principles of constructive res judicata debarred the court from considering his plea at the later stage.

14. Section 446 provides that where a winding-up order has been made or the Official Liquidator has been appointed provisional liquidator, no suit or other legal proceeding shall be commenced, or, if pending at the date of winding-up order, shall be proceeded with, against the company, except by leave of the court and subject to such terms as the court may impose. An order under s. 446 grants the applicant for it liberty to take legal proceedings against the company in liquidation wherein the applicant's rights or claim will be adjudicated upon. The rights or claim of the applicant are not adjudicated upon in proceedings under s. 446. Even where leave is refused the rights or claim of the applicant is provable in the liquidation proceedings. In our view, therefore, the very basis for the creation of constructive res judicata is absent.

15. The real questions to be decided in this appeal concern the provisions of s. 125 of the Companies Act. It reads thus:

“S. 125. Certain charges to be void against liquidator or creditors unless registered (1) Subject to the provisions of this Part, every charge created on or after the 1st day of April 1914, by a company and being a charge to which this section applies shall, so far as any security on the company's property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge together with the instrument, if any, by which the charge is created or evidenced or a copy thereof verified in the prescribed manner, are filed with the Registrar for registration in the manner required by this Act within thirty days after the date of its creation:

Provided that the Registrar may allow the particulars and instrument or copy as aforesaid to be filed within seven days next following the expiry of the said period of thirty days if the company satisfies the Registrar that it had sufficient cause for not filing the particulars and instrument or copy within that period.

(2) Nothing in sub-section (1) shall prejudice any contract or obligation for the repayment of the money secured by the charge.

(3) When a charge becomes void under this section, the money secured thereby shall immediately become payable.

(4) This section applies to the following charges:

(a) a charge for the purpose of securing any issue of debentures;

(b) a charge on uncalled share capital of the company;

(d) a charge on any book debts of the company;

(e) a charge, not being a pledge, on any movable property of the company;

(f) a floating charge on the undertaking or any property of the company including stock-in-trade;

(g) a charge on calls made but not paid;

(h) a charge on a ship or any share in a ship;

(i) a charge on goodwill, on a patent or a licence under a patent, on a trade-mark, or on a copyright, or a licence under a copyright.

(5) In the case of a charge created out of India, and comprising solely property situate outside India, “thirty” days after the date on which the instrument creating or evidencing the charge or a copy thereof could, in due course of post and if despatched with due diligence, have been received in India shall be substituted for “thirty days” after the date of the creation of the charge, as the time within which the particulars and instrument or copy are to be filed within the Registrar.

(6) Where a charge is created in India but comprises property outside India, the instrument creating or purporting to create the charge under this section or a copy thereof verified in the prescribed manner, may be filed for registration, notwithstanding that further proceedings may be necessary to make the charge valid or effectual according to he law of the country in which the property is situate.

(7) Where a negotiable instrument has been given to secure the payment of any book debts of a company, the deposit of the instrument for the purpose of securing an advance to the company shall not, for the purposes of this section, be treated as a charge on those book debts.

(8) The holding of debentures entitling the holder to a charge on immovable property shall not, for the purposes of this section, be deemed to be an interest in immovable property.”

16. The first question is: Is a charge on the company's property which is unregistered under the provisions of the companies act void ipso facto upon the winding-up of the company or has the Official Liquidator to take steps to make it void?

17. It was the sub-mission of Mr. Tulzapurkar that the Official Liquidator had to take steps to have the unregistered charge declared void as against the company in liquidation. He relied in this context upon the judgment in Independent Automatic Sales Ltd. v. Knowles & Foster. This was a case in which a company carried on the business of manufacturing and dealing in machines and had entered into hire-purchase agreements for their disposal. It opened an account with the defendants with a view to obtaining finance for its business, and signed a letter of hypothecation in their favour whereby it was agreed that all bills of exchange and other documents, securities and property whatsoever belonging to the company then or thereafter deposited with the defendants by the company and the proceeds thereof should remain pledged to the defendants as continuing security for the due payment to the defendants of all moneys and satisfaction of all liabilities for which the company were then or might at any time thereafter be indebted or liable to the defendants. The company deposited 53 hire-purchase agreements with the defendants and the defendants advanced to it 80 per cent of the outstanding instalments thereunder. No registration was effected under s. 95 of the (English) Companies Act, 1948, in respect of the letter of hypothecation or the deposit of the hire-purchase agreements. The company went into voluntary liquidation. It then claimed delivery by the defendants of the hire-purchase agreements and an account of all money received under and by virtue of them on the ground that the charge created by the deposit of the agreements was void as against its liquidator for non-registration under s. 95 since the debts under the agreements were book-debts within the meaning of that section. The defendants took the preliminary point that the company could not sustain the action since, under s. 95(1), the charge was not void as against the company but only against its liquidator. Buckley J., sitting singly, held that, having regard to the provisions of s. 95, the company was not the proper party to assert that the charge was void for lack of registration for it was not made void as against the company but against the liquidator. The purpose of the section was to enable the liquidator to deal with the assets of the company in the liquidation in a way which he would not otherwise be able to adopt for the benefit of the company's creditors. He observed:

“that the right course in a case of this kind is for the proceedings to be brought by the liquidator.”

18. In Mr. Tulzapurkar's sub-mission, this judgment showed that the Official Liquidator had to take proceedings to have the unregistered charge declared or made void.

19. In the first place, the application that was heard by Buckley, J. was for delivery of the hire-purchase agreements and an account of the moneys received thereunder. It was not an application for making, or declaring the charge void as against the liquidator for non-registration under s. 95. In the second place, having regard to the language of s. 125, it is clear that every charge created by a company which is not registered under the provision of the companies act is “void against the liquidator.” There is, therefore, no question but that a charge on the company's property which is unregistered under the provisions of the companies act is void ipso facto upon the company being ordered to be wound up. Such a charge has no effect upon the company's property once the order of winding-up is made. No steps are required to make or declare it void.

20. The second question that arises in regard to s. 125 is this: Does the fact that a decree has been passed against the company upon the unregistered charge before the company is ordered to be wound-up make any difference to this position?

21. It was contended by Mr. Nain, learned counsel for the Official Liquidator and by Mr. G.A Thakkar, learned counsel for the three contributories, that it did not. In Mr. Tulzapurkar's sub-mission, once a decree was passed upon the unregistered charge, the provisions of s. 125 had no application.

22. Before we deal with the authorities which were cited before us, it is convenient to refer to some of the provisions of the Transfer of Property Act and the Code of Civil Procedure. Section 58 of the Transfer of Property Act defines a mortgage to be the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced. Under s. 60 the mortgagor has the right, upon payment of the mortgage debt, to require the mortgagee to deliver to him the mortgage property. Section 91 provides that besides the mortgagor, any other person who has any interest in, or charge upon, the property mortgaged, any surety for the payment of the mortgage debt, and any creditor of the mortgagor who has in a suit for the administration of his estate obtained a decree for sale of the mortgage property also have a right of redemption. Order 34, rules 4 and 5 of the Code of Civil Procedure provide for the preliminary and final decree that may be passed in a redemption suit. Under the provisions of r. 4, the court is obliged in a suit for sale of mortgage property, where the plaintiff succeeds, to pass a decree ordering the taking of an account of the amount due under the mortgage, declaring that amount, and directing that, if the mortgagor pays the amount found due within six months, the plaintiff shall deliver up to him the mortgage property. In the event of this not being done the plaintiff is to be made entitled by the preliminary decree to apply for a final decree directing that the mortgage property be sold.

23. Reliance was placed by Mr. Thakkar and Mr. Nain upon the judgment of the Federal Court in Thota China Subba Rao v. Mattapalli Raju. The Federal Court held that the right of redemption was an incident of a subsisting mortgage and it subsisted so long as the mortgage itself subsisted. It could be extinguished as provided in s. 60 of the Transfer of Property Act and, when it was alleged to have been extinguished by a decree, the decree should run strictly in accordance with the form prescribed for the purpose. Unless the equity of redemption was so extinguished, a second suit for redemption by the mortgagor, if filed within the period of limitation, was not barred. The Federal Court preferred in this behalf the view of this Court in Ramchandra Kolaji v. Hanmanta, to the contrary view taken by the Madras High Court.

24. Reference was also made to this Court's judgment in Rajaram Vithal v. Ramchandra Pandu. The court quoted the judgment of the Privy Council in Raghunath Singh v. Hanaraj Kunwar, to this effect:

“The right to redeem is a right conferred upon the mortgagor by enactment, of which he can only be deprived by means and in manner enacted for that purpose, and strictly complied with. In the present case the only basis for the claim that the right to redeem has been extinguished is s. 60; but in their Lordships' view the old decree cannot properly be construed as doing that which it does not purport to do—namely, as extinguishing the right to redeem.”

25. The court held that it was clear from this that the right of redemption could not be taken away from the morgagor except in the manner provided in s. 60 of the Transfer of Property Act.

26. Reliance was also placed upon this court's judgment in Noorudin Famailji Kurwa v. Mahomed Umar Subrati. Referring to the contention that the mortgage had been merged in the decree in an earlier suit and that by reason of that earlier decree the plaintiff was precluded from seeking rectification of the mortgage, Blackwell, J. observed that under Order 34, rule 5, a mortgagor can redeem until confirmation of the sale of the mortgage property and that there was no merger of the security in the decree.

27. Basing themselves upon these decisions Mr. Nain and Mr. Thakkar submitted that the passing of the decree in the suit against the company did not have the effect of extinguishing the unregistered charge created by the equitable mortgage. That the charge created by a mortgage survived the passing of the preliminary decree was, they submitted, borne out by the authorities just mentioned which held that the right to redemption survived the passing of the preliminary decree.

28. Mr. Tulzapurkar argued that upon the passing of the decree the unregistered charge created by the equitable mortgage merged in the decree and that what his clients were seeking to execute was that decree. He relied in support of this contention upon a number of authorities to which we now advert.

29. A Division Bench of the Punjab and Haryana High Court considered in Karam Chand Moola Ram v. Telu Ram, the effect of the passing of a final decree for sale on a mortgage on the right of the mortgagor to partial redemption. It held that the wording of s. 60 of the Transfer of Property Act showed clearly that the right of partial redemption recognised thereby was a right corresponding in all essential respects to the right to redeem conferred upon the mortgagor, but this right was expressly stated as a right to redeem the mortgage money which, in s. 58, was referred to as “the principal money and interest of which payment is secured for the time being”. These moneys were commonly referred to as the mortgage debt and

“there is no doubt whatever that, upon the ordinary rules as to res judicata, the mortgage debt merges in the decretal debt, and that is so under the provisions of Order 34, Civil Procedure Code, is clear from the judgment of their Lordships of the Privy Council in Kusum Kumari v. Debi Prasad. That being so, the moment the final decree is passed, there is no longer any mortgage debt or mortgage money which the mortgagor can pay or tender to the mortgagee.”

30. Upon this it followed that not only was the mortgage debt merged in the decretal debt but also, firstly, that the mortgage security merged in the decree and was replaced by the security of the order for sale which merger was also in accordance with the ordinary principles of res judicata, the lower mortgage security which the mortgagee necessarily relied upon in his suit for sale merging in the higher security of the resulting decree; and, secondly, the right to redeem conferred by s. 60, including the corresponding right of partial, redemption thereby conferred, was extinguished by the final decree passed under O. 34, r. 5(3) and the mortgagor received in exchange the right to redeem the whole property by payment of the full decretal debt.

31. The Patna High Court in Ramchandra Bhagat v. Mrs. Eva Mitra, and the Madras High Court in Narayanaswami Chetti v. Vellaya Pillai, held that the right of the mortgagor to marshal the mortgage security was lost upon a decree being passed.

32. In Managi Singh v. Saheb Ram Singh, a Division Bench of the Calcutta High Court held that when a decree had been made on the basis of a mortgage and a date for payment of whatever might be due thereupon had been fixed in the decree, the matter in controversy passed from the domain of contract to the domain of judgment. The decree decided firmly the rights and liabilities of the parties, which must thenceforth be ascertained by reference to the decree and not by reference to the terms of the original contract.

33. Much emphasis was laid upon the observation of the Supreme Court in Gyarsi Bai v. Dhansukh Lal. The suit in respect of which the appeal was preferred before the Supreme Court was by a mortgagee to enforce the mortgage. The principal question to be determined by the Supreme Court was whether the preliminary decree passed in the suit debarred the morgagor from claiming that the mortgagee had to account for the profits realized by him from the mortgage properties in his possession and, if he was not so debarred, what the period was for which the mortgagee could be compelled to render accounts in respect of such profits. The Supreme Court observed that it was indisputable that in a mortgage suit there would be two decrees, namely, the preliminary and final decrees, and that, ordinarily, the preliminary decree settled the rights of the parties and the final decree worked out those rights. The observation of the Supreme Court upon which stress was placed reads thus (at p. 1059, para 6):—

“It cannot also be disputed that a mortgage merges in the preliminary decree and the rights of the parties are thereafter governed by the said decree: See Kusum Kumari v. Debi Prosad Dhandhania. But we do not see any relevancy of the said principles to the problem that arises in this case in regard to the liability of the mortgagee to account for the net receipts under S. 76(h) of the Transfer of Property Act. A preliminary decree is only concerned with disputes germane to the suit upto the date of the passing of the said decree. The net receipts of the mortgaged property by the mortgagee subsequent to the preliminary decree are outside the scope of the preliminary decree: they are analogous to amounts paid to a mortgagee by a mortgagor subsequent to the preliminary decree.”

34. The Supreme Court went on to agree with the observation of Clark J., in Satyanarayana v. Suryanarayana, inter alia to the effect that a mortgage suit continued until the final decree was passed and the relationship of a mortgagor and mortgagee continued until then, with the limitation that the observations quoted appeared to the court to be rather wide and comprehensive.

35. Reference may be made to the judgment in Kusum Kumari v. Debt Prosad Dhandhania (supra), relied upon by the Supreme Court in the case just referred to and by the Punjab and Haryana High Court in the case quoted earlier. The question that arose here was in regard to the quantum upon which interest was payable. On behalf of the mortgagor the complaint was of the allowance of interest on the decretal amount at the rate of 6 per cent until realisation. On behalf of the mortgagees the complaint was that they had not been allowed interest between the dates of the institution of the suit and the final decree. The Privy Council affirmed the observations of Lord Davey in an earlier case to the effect that the scheme and intention of the Transfer of Property Act was that a general account should be taken once and for all, and an aggregate amount be stated in the decree for principal, interest, and costs due on a fixed day, and that after the expiration of that day, if the property should not be redeemed, the matter should pass from the domain of contract to that of judgment and the rights of the mortgagee should thenceforth depend, not on the contents of his bond, but on the directions in the decree. With regard to the case before it the Privy Council observed that upto the date fixed for redemption the matter between the parties was one of their contract, and what the court had to consider was how much the law allowed them to recover under it. This was limited to twice the amount of the principal. If that limit had been reached before the institution of the suit, no further interest could be allowed between that date and the date fixed for redemption.

36. It is necessary to refer to the judgment of the Kerala High Court in Kerala Financial Corporation v. C.K Sivasankara Panicker, which was relied upon by the learned single Judge to come to the conclusion that the mortgage merged with the decree. The observations of the Kerala High Court read thus:—

“With great respect, I am not able to adopt that reasoning in this case. Section 125 applies to every charge created by the company in so far as any security of the company's property is conferred thereby. It cannot be said that a decree by which the company's property is ordered to be sold for realisation of the amount due to the creditor is a charge created by the company. It may be that the decree is based on a mortgage created by the company. But, once that mortgage has merged in the decree the relationship of the parties is governed by the terms of the decree and the decree creating a charge is not hit by Section 125 of the Act. (See Subrahmanyan v. Muttuswami). If the charge has not matured in a decree, no doubt, s. 125 will apply and the charge will be void against all creditors and the Liquidator. It is not possible to extend the scope of that Section to cases where there are supervening events which are not covered by the Section.”

37. It will be noted that the learned Judge of the Kerala High Court relied upon the judgment of the Federal Court in Subrahnanyan Chettiar v. Muttuswami Goundan in concluding that once the mortgage had merged in the decree the relationship of the parties was governed by the terms of the decree and the decree creating the charge was not hit by s. 125 of the Act. In the Federal Court case what was in question was a debt under a promissory note and it was held that the liability ceased to be a debt evidenced by or based on the promissory note after it had merged in the decree and become a judgment-debt.

38. To recapitulate, it is held by the Federal Court and this court that the right of redemption is an incident of a subsisting mortgage. This court has held that there is no merger of the mortgage security in the decree. To the contrary is the view of the Punjab and Haryana High Court which has held that, because the mortgage debt merges in the decretal debt.

“the mortgage security merged in the decree and was replaced by the security of the order for sale”.

39. The Supreme Court, the Privy Council and the Calcutta High Court have held that after the passing of the preliminary decree the rights of the parties are governed by it.

40. For the application of the provisions of s. 125 of the Companies Act we must see whether under the terms of the decree the unregistered charge created by the mortgage is kept alive or is extinguished or replaced by an order of sale created by the decree. If, upon a construction of the decree, we find that the undegistered charge is kept alive, the provisions of s. 125 apply. If, on the other hand, the decree extinguishes the unregistered charge they do not apply.

41. In the decree on admission obtained in the suit, the court declared

“that under or by virtue of the deposit made on or about February 18, 1966 by the defendants with the plaintiffs of the title deeds of the property described in the plaint and in the Schedule hereto the plaintiffs are entitled to the mortgage or charge on the defendants' property described in the Schedule hereto.”

42. The decree fixed a date for redemption of the “mortgage or charge” so declared. It ordered the mortgagees to deliver up all deeds relating to the mortgage property to the mortgagors (the company) should the mortgagors make payment on or before the date of redemption of the amount declared by the decree to be due under the mortgage. From these provisions of the decree declaring the equitable mortgage and the charge created thereby and permitting redemption thereof within the stated period, we find that the unregistered charge created by the company in favour of the mortgagees is kept alive. The order of sale of the mortgage property under the decree is to operate only if by the stated period redemption has not been effected. Upon such sale the charge could be extinguished. The provisions of s. 125, therefore, apply to the unregistered charge created by the equitable mortgage and declared by the decree and it is void as against the Official Liquidator. The unregistered charge has no effect upon the property of the company in liquidation. The mortgagees cannot sell the mortgage property notwithstanding the decree obtained prior to the order winding-up the company.

43. We mention a judgment of the King's Bench in Mercantile Bank of India Ltd. v. Chartered Bank, Australia and China, and Strauss & Co. Ltd. (in Liquidation) cited by Mr. Tulzarpurkar in passing because it appears to us to have no application to the facts before us. It was a case in which a floating charge was created. In execution of the floating charge specific properties were seized. It was held that, having regard to the legislation concerned there having been a seizure of specific properties, the charge was no longer a floating charge but attached to the specific properties and was, therefore, not bad.

44. It was contended by Mr. Tulzapurkar that the Official Liquidator could not go behind the decree unless there be fraud or collusion. In view of the provisions of s. 125 the Official Liquidator is entitled, if not obliged, to place before the executing court his objection based thereon.

45. We do not go into and express no opinion about the question, hypothetical here, whether in circumstances such as these the Official Liquidator would be entitled to claim the sale proceeds if the mortgage property had been sold.

46. In this view of the matter, the appeal is allowed, and the impugned judgment and order are set aside. The plaintiffs, their servants and agents are restrained from taking any further steps for sale of the immovable property known as “Kamani House” in execution of the decree dated December 3, 1977 in Suit No. 308 of 1977. There shall be no order as to costs.

47. Appeal allowed.

The Official Liquida... v. Suryakant Natvarlal ...