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Syndicate Bank v. Official Liquidator, M/S. Prashant Engg. Co. (P) Ltd. .
Factual and Procedural Background
Syndicate Bank, claiming to be a secured creditor of Prashant Engineering Company (P) Ltd., in liquidation, obtained a simple money decree of Rs. 2,11,897-20 against the Company. The Bank applied under Rule 9 of the Company Court Rules, 1959, seeking direction to the Official Liquidator to pay sale proceeds of Rs. 85,500/- from a diesel generating set and to hand over other hypothecated machines belonging to the Company, alleging these were hypothecated as security for the Bank’s advance. The Bank contended that the Official Liquidator disposed of the generating set without notice to it.
The Official Liquidator denied knowledge of any hypothecation and asserted no diesel generating set was taken or sold by him, though certain machinery was sold under Court orders. The Official Liquidator argued the Bank held only a simple money decree and thus ranked as an unsecured creditor, with no enforceable right over the sale proceeds of the assets. The Official Liquidator also denied any obligation to notify the Bank of asset sales during winding up.
The Bank reiterated its claim, emphasizing the hypothecation mentioned in the suit leading to the decree and challenged the Official Liquidator’s right to dispose of hypothecated assets without reimbursing the Bank. The Court framed the issue as whether the petitioner Bank was entitled to payment of Rs. 90,500/-.
Both parties filed affidavits and supporting documents including the hypothecation agreement, plaint, decree, and commissioner’s report. The winding up order was dated September 26, 1980. The suit was filed on March 18, 1981, without impleading the Official Liquidator, as the Bank was unaware of the winding up at that time. The Bank sought only a simple money decree despite mentioning hypothecation in its plaint and later obtained leave to continue the suit after learning of the winding up.
Legal Issues Presented
- Whether the petitioner Bank is entitled to payment of Rs. 90,500/- from the sale proceeds of the hypothecated assets of the Company held or disposed of by the Official Liquidator.
Arguments of the Parties
Appellant's Arguments (Syndicate Bank)
- The diesel generating set and other machines were hypothecated to the Bank as security for advances.
- The Official Liquidator disposed of hypothecated assets without notifying the Bank.
- The Bank, as a secured creditor, is entitled to the sale proceeds of the hypothecated assets.
- A receiver was appointed during suit proceedings who inventoried the machines, supporting the Bank’s claim.
- The Official Liquidator’s right to sell hypothecated assets without reimbursement to the Bank is challenged.
Respondent's Arguments (Official Liquidator)
- No knowledge or possession of the hypothecated diesel generating set or its sale.
- Only certain machinery was sold under Court orders, generating about Rs. 90,000/-.
- The Bank holds only a simple money decree and ranks as an unsecured creditor along with others.
- The Bank’s rights under the hypothecation merged into the decree and cannot be enforced against sale proceeds.
- No obligation existed to notify the Bank of asset sales during winding up.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| AIR 1933 Bom 51 | Effect of hypothecation and enforcement of security rights in winding up | Supported the principle that hypothecation rights merge into the decree if not enforced, rendering the Bank an unsecured creditor. |
| AIR 1933 Bom 437 | Priority and ranking of creditors holding simple money decrees in liquidation | Reinforced that the Bank’s claim on sale proceeds is barred, and it must rank as an unsecured creditor. |
Court's Reasoning and Analysis
The Court analyzed the nature of hypothecation, distinguishing it from mortgage and pledge. Hypothecation creates a special property right without transferring possession; the hypothecatee has the right to take possession and sell the property to realize the secured debt. The Bank could have enforced its rights by taking possession or seeking relief in the suit but chose only to claim a simple money decree without seeking relief on the hypothecated security.
The winding up order predated the suit, yet the Bank did not implead the Official Liquidator or seek security enforcement in the suit. The Court found that mere mention of hypothecation in the plaint was insufficient to preserve security rights. Consequently, under Order 2 Rule 2 of the Code, the Bank’s claim on the hypothecated assets or sale proceeds is barred, and the Bank must rank as an unsecured creditor. The Court emphasized that the Bank’s failure to enforce its security rights in the suit and during winding up led to this result.
Holding and Implications
DISMISSED
The Court dismissed the Bank’s application, holding that the Bank is not entitled to the sale proceeds of the hypothecated assets and must rank as an unsecured creditor. The Bank’s failure to enforce its security rights prior to obtaining the simple money decree and during the winding up process bars its claim on the assets or proceeds. The parties are left to bear their own costs. No new precedent was established; the decision applies the established principles governing hypothecation and creditor ranking in liquidation.
By this application under Rule 9 of the Company Court Rules, 1959, Syndicate Bank, who claims to be a secured creditor of Prashant Engineering Company (P) Ltd., in liquidation, and has secured a simple money decree of Rs. 2,11,897-20 together with costs and future interest against the Company, prays that the Official Liquidator be directed to pay to the bank sale proceeds of Rs. 85,500/- in respect of a diesel generating set towards part satisfaction of the decree and to hand over the other hypothecated machines belonging to the Company that may be held by the Official Liquidator to the Bank on the allegations that all the machines installed in the factory of the Company, including the generating set aforesaid, were hypothecated by the Company in favour of the Bank as security for the money advanced by the Bank to the Company, which formed subject-matter of the Suit and the decree. It is claimed that the aforesaid generating set was disposed of by the Official Liquidator without notice to the Bank.
2. The claim of the Bank is resisted by the Official Liquidator, who has denied any knowledge of the hypothecation. It is submitted that no diesel generating set was taken into possession or sold by the Official Liquidator. It is, however, admitted that certain items of machinery belonging to the Company were sold under the orders of this Court for about Rs. 90,000/-. It is further urged that the claims for the proceeds of sale of any assets of the Company is misconceived and untenable as the Bank obtained a simple money decree and could only rank as an unsecured creditor along with others and that the claim of the Bank against the Company under the decree would be dealt with in accordance with law. It is further claimed that the rights of the Bank under the alleged hypothecation could not be enforced against the proceeds of sale of the assets of the Company as the decree was obtained long after the sale and that the rights of the Bank, if any, under the hypothecation agreement merged in the decree and that the Bank could only prove its claim when claims are invited in the course of winding up. It is denied that the Official Liquidator was under any obligation to give notice to the Bank of the proposed sale of the assets of the Company, that came into the possession of the Official Liquidator in the course of winding up.
3. In its rejoinder, the Bank, by and large, reiterated the allegations made in the application and alleged that the factum of hypothecation was mentioned by the Bank in the Suit, which led to the decree. It was further claimed that the official liquidator having sold the hypothecated assets of the Company, was bound to reimburse the sale proceeds to the Bank, who was a secured creditor, and that in the course of the proceedings of the Suit, a receiver was appointed to make an inventory of the various machines and the receiver had submitted his report to the Court seized of the Suit. The right of the Official Liquidator to dispose of the hypothecated assets of the Company was also challenged.
4. On the pleadings of the parties, following issue was framed:
“Is the petitioner entitled to payment of Rs. 90,500/-”
5. In support of their respective cases, parties were allowed to produce evidence by affidavits. On behalf of the Bank, affidavit of its Manager was filed and on behalf of the Company, the affidavit of the Official Liquidator was filed The Bank also filed a copy of the agreement of hypothecation, a copy of the plaint in the suit, a copy of the judgment of this Court on the Original Side, decreeing the suit, and a copy of the Report of the Commissioner appointed in the proceedings of the suit. The two affidavits are, by and large, a re-affirmation of the respective cases of the parties as set out in the pleadings.
6. I have heard learned Counsel for the parties.
7. The winding up order was made on September 26, 1980. Pursuant to the winding up order, the Official Liquidator took possession of the entire assets of the Company. The suit was filed by the Bank on March 18, 1981, without impleading the Official Liquidator although the winding up order had already been made apparently because the Bank was not aware of the fact that the Company was in winding up. In the suit, the Bank sought a simple money decree even though the factum of the hypothecation agreement was mentioned in para-8 of the plaint. For reasons which are not clear, no relief was sought in the suit with regard to the security. The Bank, no doubt, sought the appointment of a Commissioner to visit the factory and submit a report “as to whether the factory was lying closed and, if so, since, when and whether it was in charge of any person or was actually running”. The Commissioner submitted his report on March 24, 1981 and this report mentions that the factory was closed and there were locks on the shutter and “was under seal”, but there is no mention that the property was in the possession of the Official Liquidator. The Bank apparently came to know of the winding up order in 1982 because by its application, C.A.3/82, it sought from this Court leave u/s. 446 of the Companies Act to continue the suit, which was allowed on February 11, 1982.
8. Unlike a mortgage, a pledge or hypothecation does not have the effect of transferring any “interest” in the property in favour of the pledgee or the hypothecatee. The pledge and hypothecation, however, create a special property in the goods in favour of the pledgee or the hypothecatee. In the case of pledge, the special property is to keep possession of the pledged goods and to dispose them of for the realisation of the debt for which it is held as security. In the case of hypothecation, possession remains with the hypothecator but the hypothecatee has the right to take possession of the hypothecated property and to sell it for the realisation of the debt secured by hypothecation. It was open to the Bank to take possession of the hypothecated property on its own or through the Court, but it failed to do so. It was also open to the Bank to enforce the security by the suit that it filed but there again the Bank chose to seek a simple money decree. Mere mention of hypothecation in the suit was not sufficient. The Bank would, therefore, be deemed to have waived its right as hypothecatee and was satisfied with a simple money decree. The Bank having filed a suit for the recovery of money and having failed to make a claim on the security, any claim on the security or the sale proceeds thereof would now be barred under Order 2 Rule 2 of the Code with the result that the Bank has no subsisting claim on the machinery or any part of the sale proceeds thereof and must rank as an unsecured creditor along with the other creditors of the Company, and prove its claim before the official liquidator at the appropriate time. See AIR 1933 Bom 51 and AIR 1933 Bom 437. The Bank is itself to blame for the course that it chose to adopt.
9. The claim of the Bank accordingly fails and the application is hereby dismissed, leaving the parties to bear their respective costs.
Application dismissed.
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