D. Pudumjee And Co. v. N.H Moos .

Coyajee, J.:— This is an appeal from a judgment and order of Mr. Justice Kemp, dated March 27, 1925. The material facts are these:—

On February 9, 1922, the respondent, who is the Receiver in High Court Suit No. 688 of 1917, lent and advanced to F.F Gordon, Ltd., the sum of Rs. 2,00,000, under circumstances more fully stated hereafter. An order for winding up the said company was made on September 1, 1922, and an official liquidator was appointed. On January 17, 1923 the Receiver claimed to be ranked as a secured creditor for the said sum of Rs. 2,00,000. The claim was investigated by the liquidator on March 29, 1923, and he was of opinion that it was a just one lie, therefore, “allowed the same as a preferential claim subject to the sanction of the Court to the extent of moveables” on the ground that the Receiver was a pledgee in possession. On April 7 the liquidator applied for directions, and Mr. Justice Kemp, after hearing counsel for the petitioning creditors, made an order in these terms:—

“The receiver to rank as a secured creditor in respect of the security for the amount of his principal debt and interest. The petitioning creditors now bring this appeal.

2. F.F Gordon, Ltd., was a private company registered under the Indian Companies Act, 1913 on March 3, 1916. Its issued capital was Rs. 2,00,200, consisting of 2,002 fully paid up shares of the nominal value of Rs. 100 each. Two thousand shares were held by Mr. F.F Gordon, and the remaining two by Mr. H.P Byramjee. The main object of the company was to carry on the business of newspaper proprietors, and of newspaper and general printers and publishers, advertisers, and advertising agents and contractors, and to acquire and take over as a going concern the business of newspaper proprietors and printers then carried on by F.F Gordon & Co., at the Advocate of India Printing Press in Bombay. Under the articles of the company Mr. Gordon was its first governing director. In 1917 he left India and never returned. On September 9, 1920, Mr. Gordon executed a power-of-attorney (Ex. B) in favour of Mr. James Cunningham to act for him is managing director” of the company and as editor of the Advocate of India, and in connexion therewith to do “all thing's which may be necessary to manage the business.”. The company found itself in need of money. On February 6, 1922, Cunningham, as the managing director, wrote a letter (Ex. C) to the said Receiver intimating that they were prepared to mortgage to him the plant, machinery, good will of the concern and the building lease as security against the loan of Rs. 2-½ lakhs which was being negotiated.

3. On February 9, three documents came into existence and they are important: (1) a resolution over the signature of Cunningham as “Chairman of the Board” authorizing him to carry out the arrangement set forth therein and to execute the promissory notes, the agreement and all other documents as might be necessary to carry out the same (Ex. D); (2) a demand promissory note for Rs. 2,00,000 in favour of the Receiver, signed by Cunningham as director, and constituted attorney for Mr. Gordon, and in his personal capacity (Ex. F.); and (3) an agreement between the company and the receiver, Cunningham signing it as the managing director (Ex. G). On the same day, Cunningham wrote to the Receiver stating that he had taken possession of the machinery, presses and all moveable property comprised in the said agreement as the Receiver's agent and would continue to hold the same as his agent (Ex. E.).

4. On these facts, the Receiver claims that he is entitled to a preferential charge over the moveables of the company on the ground that he is a pledgee in possession.

5. The petitioning creditors, on the other hand, contend, briefly, as follows:—(1) There is no pledge because there was no complete or effective transfer of possession; (2) Mr. Gordon himself had no authority to borrow money on a pledge; and in any event Mr. Cunningham had none; (3) the charge was intended to operate as a floating security on alt its moveable property, present and future, and was void against the liquidator and also against the other creditors of the company inasmuch as the prescribed particulars of the charge, together with the said agreement or its copy, were not filed with the Registrar for registration, as required Section 109 of the Indian Companies Act, 1913.

6. The first question for consideration then is: What is the nature of the transaction between the Receiver and Mr. Cunningham? For this purpose, a reference to the agreement (Ex. G) is necessary. In recites that:

“The borrowers are possessed of or otherwise will and sufficiently entitled to the unexpired residue of the term of twenty years in the land and building thereon situate at Dalal Street, Port, Bombay, and more particularly described in the schedule hereto and the engine, boiler, machinery, plant, printing presses, foundry, types, implements, tools specified in the list hereto annexed and marked B, and all furniture, papers, stock-in-trade and other moveable property fixed now lying and being or which may hereafter be fixed and lying and being on the said premises.”

7. It then recites the loan of Rs. 2,00,000 on a demand promissory note and provides that on the company executing within two months from the date of the agreement a first mortgage “of the said property” the Receiver shall extend the time for repayment to one year. By the 7th clause, which is material, it is provided:

“That pending execution of the mortgage deed the borrowers shall put the lender in possession of all property of the borrowers (except the leaseholds and the goodwill) and the director or governing director of the borrowers shall hold possession of the same from to-day for and on behalf of and as agent of the lender and the borrowers shall not sell, assign, transfer, hypothecate, or otherwise deal with the same or any part thereof or with the business of the company or the leasehold premises or any of them without the consent in writing of the lender personally.”

8. The eighth clause required the company forthwith to make an entry of the said agreement in their register of mortgages. This requirement was intended to satisfy the provisions of Section 123 of the Act; and an entry (it is admitted) was made accordingly. By the tenth clause it was provided that the borrowers should pass such resolutions of the Board and execute such documents for the proper security of the lender as his solicitors might require.

9. The agreement (Ex. G) shows, in my opinion, that the parties intended to create a charge upon all the company's property, present and future, “except the leaseholds and the goodwill.” The recitals make it clear; the seventh clause speaks of “all property of the borrowers, (except the leaseholds and the goodwill), and the eighth clause is appropriate to a transaction of such a nature. The transaction was intended to improve the business, and not to put an end to it. The business of the company was to continue to be carried on in the ordinary way. Its continuance involved the using up of various goods forming part of the company's stock-in-trade including paper, type, etc. the document does not speak only of the goods then existing a it contemplates also the possibility of some of those goods being used up and others taking their place: Illingworth v. Houldsworth(1). This is not a case of specific goods being marked off and given over to the Receiver. The possession contemplated in Cl. 7 was a temporary arrangement until a mortgage was executed. In the opinion of the learned Judge, however, the seventh clause created merely a pledge of the then property of the company, except the leaseholds and goodwill. He says:

“I think there was no necessity to go through any further formalities to evidence the handing over of possession, though the Receiver's counsel, who however, did not put the Receiver in the box, says such formalities were performed.”

10. On the question of transfer of possession, the parties are not in agreement. The petitioning creditors say:

“As a matter of fact, the company continued to carry on its business to the knowledge of the Receiver in the ordinary course, and to deal with and case up its stock of paper and other stock-in-trade, alleged by the said Receiver to have been pledged with him, in the ordinary course of business as if there was no pledge, and practically ignored the alleged pledge and treated the said goods as their own. None of the goods alleged to have been pledged was earmarked or set apart. The same continued to be on the company's premises. It is not contended that the receiver was given any right to go to the company's premises and remove the goods at any time:” (paper-book, part I, P. 10.)

11. Mr. Gordon died in England in February 1922, and his sister, Miss Gordon, who claims to be the sole beneficiary under his Will, arrived in Bombay in July 1922. Differences soon arose between her and the Receiver (see the correspondence Ex. H.), and then, some time after July 28, the Receiver's board as pledgee in possession (Ex. R.) was affixed to the company's buildings. In the circumstances, the appellants are, I think, right in contending that there was no complete and effective transfer of possession.

12. In my opinion the parties did not create a pledge of existing properties; they intended to create a floating charge on all the properties of the company, “except the leaseholds and the goodwill,” within the meaning of Section 109 of the Indian Companies Act, 1913 but the charge is void for want of registration.

13. On the question whether Mr. Gordon himself had power to make a pledge, lam inclined to think he had. But the pledge was made not by him but by Mr. Cunningham and I agree with the learned Judge in holding that neither was the latter a properly appointed managing director under the articles, nor could Mr. Gordon appoint him as his constituted attorney to act as such in his absence.

14. The Receiver, however, contends that Cunningham being permitted to carry on the company's business as the director, persons dealing with the company were entitled to assume that he was the director de jure; it did not matter to them that in fact he had not been duly appointed, for that was part of “the indoor management”: Mahony v. East Holy ford Mining Co.(2). The appellants reply that: (1) Section 87 of the Indian Companies Act requires every company to keep a register of the names of its directors, to file with the registrar a copy of it, and from time to time to file with him notice of any change among its directors; the Receiver was, therefore, affected with notice of such register, and if he had only taken the trouble to see it, he would have found that Cunningham was not a director; and (2) the Receiver had notice of the defect in Cunningham's authority, the promissory note (Ex. F) being sufficient to put him on his guard.

15. The evidence adduced in this case establishes the fact that Cunningham was acting as the managing director of the company from June 1920. He carried on its business, signed cheques, signed the correspondence, and corresponded with the appellants themselves as the managing director. He was, therefore; permitted to be in actual possession of the directorship, and the Receiver was entitled to assume that he was the director de jure. Was the Received then bound to search and look into the register (S. 87)? No doubt, persons contracting with a company are bound to know, or are precluded from denying that they know, the constitution of the company and its powers as given by statute and the memorandum and articles (Halsbury's Laws of England. Vol. V, S. 495) Are they also affected with notice of all that is contained in the register of directors kept as required by Section 87 of the Act, which corresponds to Section 75 of the Companies (Consolidation) Act, 1908 (8 Edw. VII, c. 69)? We are not referred to any direct authority on this question. In my opinion, notwithstanding the provisions of S. 87, the appointment of a director still remains part of “the indoor management” of the company. It would hardly conduce to facility of business if outsiders were compelled to search the register and find for themselves whether a person who was permitted to act as a director of the company for some length of time was also its director de jure. The Receiver was, therefore, entitled to deal with Cunningham as if he was a duly appointed director.

16. The next question is whether the Receiver had notice of the defect in Cunningham's authority. The learned Judge says:

“The only arguments on which the receiver's position, as thus considered, can really be assailed is that he did not go into the witness-box to swear he had no knowledge of the flaw in Cunningham's authority; but to this there is the obvious reply that the Receiver would scarcely deliberately close his eyes to the possibility of a flaw in the title when as an officer of the Court he was making so large a loan from the estate of which he was Receiver.”

17. With great respect, that reply is not obvious. Nevertheless, I think, the appellants' contention is sufficiently answered by the learned Judge in the preceding paragraph of his judgment. The contention was that the promissory note (Ex. F) should have put the Receiver on his guard. That note was signed by Mr. Cunningham as the director and also as the constituted attorney of Mr. Gordon; none the less he signed it as the director and there is, so far as I can see, nothing in that note which would lead the Receiver to doubt Cunningham's authority to sign it as the director.

18. The result is that the charge which the parties intended to create was void to the extent indicated in Section 109 of the Act.

19. As regards Ground No. 11 of the memo of appeal, which relates to interest accruing due after the date of the winding up, it is sufficient to say that, as pointed out in the course of the arguments, the liquidator had allowed the claim to the extent of Rs. 2,00,000 only (see paper-book, part I, p. 4), and, therefore, the question did not arise in these proceedings. I would, for these reasons, allow the appeal.

20. Macleod, C.J:— I agree generally with the judgment of my brother Coyajee. The document of February 9, 1922, did not create a pledge of specific assets belonging to the company in favour of the Receiver, but created a floating charge on all the company's assets, and was, therefore, compulsorily registrable under Section 109 of the Indian Companies Act. I feel doubtful whether, owing to the peculiar constitution of the company, and in particular to the nature of the memorandum and Articles of Association, the Receiver was not put on inquiry as to the powers of Cunningham to execute the agreement but it is not necessary to form a definite opinion on that question.

21. The respondent must pay the appellants' costs in both Courts.

22. Appeal allowed.