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  • S.K Desai
  • S.P Bharucha, JJ.
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  • S.K Desai
  • S.P Bharucha, JJ.
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Smart Summary

Structured Summary of the Opinion (Bharucha, J.)

Factual and Procedural Background

This opinion concerns two appeals against orders of the learned company judge made on a judge's summons arising out of competing claims to the proceeds of sale of mortgaged plant and machinery belonging to Steel India Pvt. Ltd. Key events, as given in the opinion, are summarized chronologically:

  • 1972: State Industrial and Investment Corporation of Maharashtra (SICOM) advanced a loan of Rs. 45,20,000 to Steel India Pvt. Ltd., secured by plant and machinery; mortgage deeds executed on April 21, 1973 and May 23, 1974.
  • July 30, 1975: Maharashtra State Financial Corporation (MSFC) sanctioned a loan of Rs. 8.30 lakhs and advanced Rs. 4,52,800.
  • April 23, 1976: MSFC mortgage deed executed in respect of the same property; the company filed particulars of the charge in Form 8 on May 18, 1976 under section 125 of the Companies Act.
  • March 14, 1977: MSFC advanced the balance amount of the loan; August 10, 1977: tripartite agreement between company, SICOM and MSFC providing that SICOM's and MSFC's rights would rank pari passu.
  • July 4, 1980: SICOM entered into possession of the secured property following defaults.
  • March 31, 1982: SICOM sold the secured property to M/s. Kusum Ispat and Wire Products Pvt. Ltd. for Rs. 91.51 lakhs on deferred payment basis, with MSFC entitled to Rs. 15.60 lakhs; possession given April 2, 1983.
  • January 11, 1984: The company was ordered to be wound up by the court, with the winding-up relating back to February 11, 1982.
  • May 29, 1985: The official liquidator wrote to SICOM claiming the MSFC charge had not been registered with the Registrar of Companies and therefore was void against the liquidator; he demanded SICOM pay Rs. 14,22,347.64 (the difference between sale proceeds and SICOM's dues).
  • August 5, 1985: MSFC issued a judge's summons naming the official liquidator and SICOM as parties; prayers sought (a) leave to file under sections 446 and/or 537, (b) declaration that MSFC is a secured creditor and entitled to remain outside the winding-up, (c) declaration MSFC is entitled to Rs. 15,60,000 out of sale proceeds, and (d) restraint on the official liquidator from enforcing his claim for Rs. 14,22,347.64.
  • October 17, 1985: Company judge granted leave under section 446 only, refused prayers (b) and (c), and ordered SICOM to retain Rs. 14,22,347.64 in a scheduled bank pending further orders.
  • October 25, 1985: Application to vary that order was rejected by the company judge.
  • Both MSFC and SICOM appealed: MSFC against the October 17 order; SICOM against both October 17 and October 25 orders.

Legal Issues Presented

  1. Whether the charge created by the April 23, 1976 mortgage deed in favour of MSFC is void against the official liquidator and creditors for non-registration under section 125(1) of the Companies Act.
  2. Whether a certificate of registration under section 132 is indispensable to the validity of the charge (i.e., whether absence of a registration certificate renders the charge void).
  3. Whether the sale by SICOM of the secured property was void under section 537 of the Companies Act because the sale took place after commencement of the winding-up and whether court leave was required.
  4. Whether MSFC is entitled to Rs. 15,60,000 out of the sale proceeds and whether the official liquidator is entitled to any part of those proceeds.

Arguments of the Parties

Official Liquidator's Arguments (as presented through Mr. B. B. Parekh)

  • The MSFC charge was void against the official liquidator because it had not been registered with the Registrar of Companies; registration (and a certificate of registration) was asserted as imperative.
  • Reliance on section 132 to contend that a certificate of registration was essential and that absence of such certificate meant the charge could not be enforced.
  • The Registrar's letter dated May 12, 1977 requesting a copy of an "original deed of hypothecation" was produced to demonstrate that the prescribed particulars had not been furnished, supporting the contention of non-compliance with section 125.
  • From an affidavit filed on behalf of MSFC (by Manohar Vithal Sumbrey) indicating the secured property was sold “with the consent of the parties,” the official liquidator submitted the sale was not in exercise of SICOM's power of sale and therefore was void under section 537.

MSFC and SICOM's Arguments

  • Counsel for MSFC and SICOM brought the court's attention to section 125 of the Companies Act and asserted compliance with the filing requirements.
  • The opinion records that the prescribed particulars of the charge and a duly verified copy of the mortgage deed were filed with the Registrar by the company in Form 8 within thirty days after April 23, 1976 (this was not disputed by Mr. Parekh when asked by the court).
  • MSFC advanced evidence (affidavit of Manohar Vithal Sumbrey) stating the secured property was sold “with the consent of the parties”; respondents (SICOM/MSFC) also asserted the sale was in exercise of SICOM's powers of sale under its mortgage deeds.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
M.K. Ranganathan v. Government of Madras, [1955] 25 Comp Cas 344; AIR 1955 SC 604 Interpretation of a provision in the 1913 Companies Act analogous to section 537: leave of the court is required only when the secured creditor seeks the intervention of the court by attachment, distress, execution or by commencing or proceeding with legal proceedings against the company. The court applied the Supreme Court's interpretation to section 537 of the present Act, concluding that sale by a secured creditor effected outside the winding-up and without court intervention (i.e., without initiating attachment, execution, suit, etc.) is not void for want of leave.

Court's Reasoning and Analysis

The court's analysis proceeded by focussing on the two statutory provisions chiefly relied on by the parties: section 125(1) and section 537 of the Companies Act, with reference to section 132 on the question of certification.

  1. Section 125(1): The court extracted and analysed the statutory text, emphasizing that a charge is void against the liquidator and any creditor only if the prescribed particulars of the charge and the instrument (or a duly verified copy) are not filed with the Registrar within thirty days after creation. The court clarified that the operative cause of voidness is the company's failure to file the particulars and instrument within the thirty-day period; whether the charge is later entered on the register is immaterial to that statutory ground.
  2. Application to the facts: The court asked Mr. Parekh (official liquidator's counsel) whether the prescribed particulars and a duly verified copy of the mortgage deed had been filed in Form 8 within thirty days after April 23, 1976. Mr. Parekh did not dispute that these had been filed; the court also noted that the official liquidator's affidavit acknowledged the filing. On that basis, the statutory condition for voidness under section 125(1) was not satisfied.
  3. Section 132 (certificate of registration): Mr. Parekh relied on section 132 to argue a certificate of registration was imperative for validity. The court rejected that submission, explaining that section 132 only provides that a certificate of registration, where issued, is conclusive evidence that registration requirements have been complied with. The absence of such a certificate does not itself render a charge void; validity is governed by section 125(1)'s filing requirement.
  4. Registrar's letter: The court examined the Registrar's letter of May 12, 1977 and concluded it sought a copy of another document and did not indicate that the prescribed particulars or a duly verified copy of the mortgage deed had not been forwarded within the thirty-day period; thus the letter did not support the contention of non-compliance.
  5. Section 537 (sale during winding-up): Mr. Parekh argued the sale was void under section 537 because the affidavit averred the sale was “with the consent of the parties,” suggesting the sale may not have been in exercise of SICOM's power. The court found it difficult to accept Mr. Parekh's reading of the affidavit, and independently verified that the sale was "in exercise of the powers of sale vested" in SICOM. The court then referred to the Supreme Court's interpretation of the analogous 1913 Act provision in M.K. Ranganathan, holding that leave of the court under section 537 is required only when the creditor seeks the court's intervention; where the sale is effected outside the winding-up without court intervention, it is not void.
  6. Conclusion from analysis: Because the prescribed particulars and a duly verified copy of the mortgage deed had been filed within the statutory thirty days, and because the sale by SICOM was in exercise of its powers and not void under section 537, the MSFC charge was not void. Consequently, MSFC was entitled to its portion of the sale proceeds (Rs. 15,60,000), and the official liquidator had no entitlement to those proceeds.

Holding and Implications

Holding:

The court set aside the orders of the learned company judge dated October 17, 1985 and October 25, 1985, and made the judge's summons absolute in terms of prayers (b), (c) and (d).

Specific effects and implications (as stated in the opinion):

  • The charge created by the mortgage deed dated April 23, 1976 in favour of MSFC is not void under section 125(1) of the Companies Act because the prescribed particulars and a duly verified copy of the mortgage deed were filed with the Registrar within thirty days of creation.
  • MSFC is entitled to the sum of Rs. 15,60,000 out of the price realised by SICOM on sale of the secured property; the official liquidator is entitled to no part of those sale proceeds.
  • The company judge's orders directing retention/investment of Rs. 14,22,347.64 and refusing MSFC's claims were set aside and replaced by an order making the judge's summons absolute as to the specified prayers.
  • No broader precedent beyond applying the established interpretation of section 537 (via M.K. Ranganathan) was stated; the court confined its decision to the statutory interpretation and application to the facts. The parties were directed to bear their own costs throughout.

Note: This summary has been prepared strictly on the basis of the text of the provided opinion. No facts, arguments or legal propositions not appearing in that opinion have been added.

Show full summary ...

    State Industrial And Investment Corporation Of Maharashtra Limited v. Maharashtra State Financial Corporation And Another

    Bharucha, J.:— Both these appeals are directed against the orders of the learned company judge passed upon a judge's summons.

    2. In 1972, the State Industrial and Investment Corporation of Maharashtra (SICOM) advanced a loan of Rs. 45,20,000 to a company called Steel India Pvt. Ltd. upon the security of plant and machinery belonging to it. Mortgage deeds were executed by the company in favour of SICOM on April 21, 1973, and May 23, 1974. On July 30, 1975, the Maharashtra State Financial Corporation (MSFC) sanctioned a loan of Rs. 8.30 lakhs to the company and advanced a sum of Rs. 4,52,800. On April 23, 1976, a mortgage deed (now called “the mortgage deed”) was executed by the company in favour of MSFC in respect of the same property as was mortgaged to SICOM (now called “the secured property”). On May 18, 1976, the company filed with the Registrar of Companies, Bombay, particulars of the charge created by the mortgage deed in the requisite Form 8 under the provisions of section 125 of the Companies Act. On March 14, 1977, MSFC advanced to the company the balance amount of the loan. On August 10, 1977, a tripartite agreement was entered into between the company, SICOM and MSFC which provided that the rights of SICOM and MSFC in respect of the secured property would rank pari passu.

    3. In consequence of defaults committed by the company, SICOM entered into possession of the secured property on July 4, 1980. On March 31, 1982, SICOM sold to M/s. Kusum Ispat and Wire Products Pvt. Ltd. the secured property in exercise of the power of sale vested in SICOM under its mortgage deeds. The sale was with the consent of MSFC. It was for the sum of Rs. 91.51 lakhs on deferred payment basis. MSFC was entitled to receive Rs. 15.60 lakhs thereof. On April 2, 1983, possession of the secured property was given to the buyer.

    4. On January 11, 1984, the company was ordered to be wound up by this court. The winding-up related back to February 11, 1982. On May 29, 1985, the official liquidator wrote to SICOM noting the sale of the secured property for the price of Rs. 91.51 lakhs and that the dues of SICOM were, in the aggregate, in the sum of Rs. 77,28,652.36. The letter alleged that the charge of the MSFC under the mortgage deed had not been registered with the Registrar of Companies; as such, the charge was void against the official liquidator and could not be enforced. The official liquidator, therefore, called upon SICOM to pay to him the sum of Rs. 14,22,34764, being the difference between the sale proceeds of Rs. 91.51 lakhs and its dues of Rs. 77,28,652.36 within two weeks. On July 19, 1985, and July 22, 1985, replies were addressed to the official liquidator on behalf of SICOM claiming that his contention was not correct.

    5. On August 5, 1985, the MSFC issued a judge's summons to which the official liquidator and SICOM were made parties. Prayer (a) thereof sought leave under section 446 and/or 537 of the Companies Act to file it. Prayer (b) sought a declaration that MSFC was a secured creditor of the company in respect of the secured property and, hence, entitled to remain outside the winding-up. Prayer (c) sought a declaration that MSFC was entitled to the sum of Rs. 15,60,000 aforementioned payable out of the sale proceeds of the secured property. By prayer (d), the official liquidator was sought to be restrained from enforcing upon MSFC or SICOM his claim in the sum of Rs. 14,22,347.64 or any other amount.

    6. On October 17, 1985, the learned company judge heard and disposed of the judge's summons by an order which reads thus:

    “Leave under section 446 only granted. Prayers (b) and (c) refused. As regards prayer (d), in my opinion, the appropriate order is that the second respondent, SICOM, will continue to retain Rs. 14,22,347.64 and are directed to invest the same in a scheduled bank forthwith, and not to pay the amount until further orders of this court. Investment be made for a period of six months to be renewed from time to time thereafter. Order accordingly. No order as to costs.”

    7. On October 25, 1985, the order was mentioned to the learned judge for speaking to the minutes. The order then passed reads thus:

    “Heard Mr. Rao again on his request. He argued the matter to show that the order requires variation. Application rejected because it seems that the second respondent has entered into an arrangement of deferred payment with the auction purchaser. That is a separate deal. The second respondent in that event should provide the amount from its pocket. Had the second respondent not entered into the arrangement, the entire Rs. 91 “5 lakhs would have been received.”

    8. The appeals which are now before us are filed by MSFC and SICOM, respectively: MSFC's appeal impugns the order dated October 17, 1985. SICOM's appeal impugns the orders of October 17 and October 25, 1985.

    9. Counsel for MSFC and SICOM have drawn our attention to section 125 of the Companies Act. Sub-section (I) of section 125 needs to be extracted.

    “125(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.”

    10. It is clear from the phraseology of section 125(1) that a charge created by a company is void against its liquidator or any creditor unless particulars of the charge together with the instrument, if any, by which the charge is created or a duly verified copy thereof are filed with the Registrar of Companies within thirty days after the date of its creation. What makes a charge void is the failure of the company to file with the Registrar the particulars of the charge and the instrument (or a copy of it) by which the charge is created within thirty days of its creation. That the charge is not thereafter entered on the register is not material in this regard.

    11. Mr. B.B Parekh, learned advocate for the official liquidator, did not, when we asked him, dispute that the prescribed particulars of the charge and a duly verified copy of the mortgage deed were filed with the Registrar by the company in Form 8 as required within thirty days after April 23, 1976. This appears also to be acknowledged in para 9 of the affidavit of the official liquidator dated September 13, 1985, in reply to the judges summons.

    12. Mr. Parekh relied upon section 132 of the Companies Act in support of his submission that a certificate of registration was imperative for the charge to be valid. Section 132 states that the Registrar shall give a certificate under his hand of the registration of any charge that is registered stating the amounts thereby secured and the certificate shall be conclusive evidence that the requirements had been complied with. This provision in no way assists Mr. Parekh. All that it says is that a certificate of registration shall be issued and shall be conclusive evidence of registration. Wherever there is a certificate of registration of a charge, the registration cannot be challenged. That is not to say that where there is no registration certificate, the charge is void. The validity or voidness of the charge is, as aforesaid, governed by the provisions of section 125(1).

    13. Mr. Parekh drew our attention to a letter dated May 12, 1977, addressed by the Registrar to the company asking for a copy of the “original deed of hypothecation…to which the agreement of April 23, 1976, for a loan of Rs. 8.3 lakhs is supplemental”. In Mr. Parekh's submission, the company had, therefore, failed to furnish the prescribed particulars to the Registrar. Apart from the fact that this submission runs counter to Mr. Parekh's answer to the court and the terms of the official liquidator's affidavit in reply hereinabove mentioned, this letter of the Registrar seeks a copy not of the document by which the charge was created, but of another document. It does not indicate that the prescribed particulars of the charge and a duly verified copy of the mortgage deed had not been forwarded to the Registrar within the period of thirty days prescribed by section 125.

    14. Mr. Parekh drew our attention to the affidavit filed by Manohar Vithal Sumbrey on behalf of MSFC in support of the judges summons. It is stated in the affidavit that the secured property was sold by SICOM “with the consent of the parties”. In Mr. Parekh's submission, this indicated that the secured property had not been sold by SICOM in pursuance of the power of sale that it had; and, accordingly, the sale was void having regard to section 537 of the Companies Act. We find it difficult to read the averment in the affidavit in the manner Mr. Parekh wishes us to do. In any event, we have verified that the sale was “in exercise of the powers of sale vested” in SICOM.

    15. Section 537 states that where a company is being wound up by or subject to the supervision of the court, any sale held without leave of the court of any of the properties or effects of the company after commencement of the winding-up shall be void. A similar provision in the 1913 Act was interpreted by the Supreme Court in M.K Ranganathan v. 1. Government Of Madras, [1955] 25 Comp Cas 344; AIR 1955 SC 604. It was held that it was only when the intervention of the court was sought, either by putting in force any attachment, distress or execution or proceeding with or commencing a suit or other legal proceedings against the company, that the leave of the court was necessary and if no such leave was obtained, the remedy could not be availed of by the secured creditor. section 537 of the present act must be interpreted in the same manner. The sale by SICOM having been effected outside the winding-up and without the intervention of the court, it is not void.

    16. In the result, we hold that the charge created by the mortgage deed is not void and, accordingly, that MSFC is entitled to the sum of Rs. 15,60,000 from out of the price realised by SICOM by sale of the secured property. The consequence is that the official liquidator is entitled to no part of those sale proceeds.

    17. The order of the learned company judge dated October 17, 1985, is, therefore, set aside.

    18. Consequently, his order dated October 25, 1985, is also set aside. These orders shall be substituted by the following:

    Leave to take out the judges summons under section 440. The judges summons is made absolute in terms of prayers (b), (c) and (d).

    19. The parties to bear and pay their own costs throughout.

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