Raja Bahadur Motilal Shivlal v. Poona Cotton And Silk Manufacturing Company, Limited

Kemp, J.:— It appears from the reasons given by the District Judge for his order that he considered that as the liquidators had no moneys in their hands and it was contended that the mortgages of the plaintiff and the second defendant were open to defects he was justified in giving a first charge in respect of the proposed loan of Rs. 25,000. The way in which the District Judge's order is worded really gives the first charge on the assets and this of course would save the rights of the plaintiff and second defendant under their mortgages but there is no doubt the District Judge intended to give Rs. 25,000 priority over them. The assets really are whatever remains over after the claims of the secured creditors under their securities have been satisfied. Bo that if I take it that the District Judge's order means only the assets after satisfaction of the claims of the secured creditors it is not open to objection although the amount of the claims of the secured creditors under their mortgages leave nothing over for the unsecured creditors and there would, therefore, be nothing on a first charge of which the liquidators could raise Rs. 25,000. Clearly, on this construction of the order, the plaintiff who himself subsequently advanced the sum the liquidators required, viz., Rs. 20,000, could have no right to credit for that sum in priority to the claim of the second defendant under his mortgage, in the price at which he (plaintiff) purchased the mill.

If, however, the District Judge's order is to be taken as expressing what he undoubtedly meant, viz., that the first, charge for the proposed loan was to have priority over the mortgages of the plaintiff and second defendant then I am of opinion that that order was not only wrong but passed entirely without jurisdiction. The District Judge could not by any order passed on that petition take away the rights of secured creditors without their consent. The sections of the Indian Companies’ Act cited by Mr. Mulla regarding preferential payments and the priority of payment out of the assets of a company of the costs and expenses of winding up refer only to the fund available as assets, i.e, after the claims of secured creditors have been satisfied. If the liquidators themselves realise property subject to a specific charge the proceeds are distributable in priority of the following order, viz., firstly, to the costs of realisation; secondly, in payment of the costs of preservation, strictly so described, so far as the other assets of the company are not sufficient; and thirdly, in payment of the principal, interest and mortgagees’ costs, all of which have priority over the general costs of the liquidation and the costs of the carrying on the business of the company. In the present case the money raised by the liquidators under the District Judge's order has been and is being spent partly in litigating with the second defendant-mortgagee regarding a claim for two lacs by the mill against that defendant and partly in the public examination of the agents of the mill. I think it unnecessary to labour the point. It seems to me quite clear that the loan raised by the liquidators under the Poona Court's order of the 22nd of November 1915 is not entitled to priority over the mortgages of plaintiff and second defendant and I, therefore, hold the plaintiff is not entitled to credit for this sum in the price at which he purchased the mill and that Rs. 20,000 must be postponed to second defendant's mortgage. It is only necessary to add that Es. 20,000 were advanced to the liquidators by the plaintiff himself under a deed of charge dated the 10th of July 1916 and a deed of further charge dated the 19th August 1916 for Rs. 10,000 each which have been put in and marked Exhibits G and H in the case. Nor can the plaintiff complain that he was misled into a belief that Rs. 20,000 would have a first charge because he was a party to the petition to the Poona Court and vehemently opposed it and even commenced proceedings for an appeal against the order. The plaintiff must pay Rs. 20,273-1-0 with interest at 2 per cent. to the liquidators.

The plaintiff appealed. The 3rd defendant was not made a party to the appeal, the only respondents being the 1st and the 2nd defendant.

Strangman with Inverarity, Desai and Mulla, for the appellants.

Kanga and Taraporevala, for the second respondent.

Scott, C.J:— This is a mortgage suit instituted in this High Court by the present appellant against the mortgagor, the Poona Cotton & Silk Manufacturing Co., in liquidation, the Poona Bank, the second mortgagees and the Poona Swadeshi Company.

On the 9th October 1915, leave was obtained from the Court for the plaintiff to proceed with this suit against the Company in liquidation. Subsequently, the liquidators applied to the Poona District Coart in which the liquidation proceedings were going on for sanction to raise Rs. 25,000 for costs of litigation on the security of the assets of the Company except the goods pledged to the plaintiff. On this application both the plaintiff and the second mortgagees contended that the sanction should not be given so as to affect their security as the ‘assets’ would not include the interests in the property held by the mortgagees. The District Judge, however, on the 22nd November 1915, gave the liquidators the sanction and apparently decided that the mortgaged property was assets which could be charged. The liquidators, thereafter, on the 10th July and the 19th August 1916, executed two documents of charge for Rs. 10,000, each in favour of the present plaintiff reciting the decision of the District Judge and agreed that upon the sale of the mortgaged premises the sums so charged and all interest due thereon should be payable out of the sale proceeds in priority to all other payments.

On notice of motion for sale of the mortgaged properties made in this suit on the 17th November 1915, an order had been passed by consent on the 13th March 1916 for sale of the mortgaged properties by the liquidators reserving the contentions of all the parties. The surplus sale-proceeds after satisfaction of the plaintiff's mortgage claim in the suit amount to Rs. 81,000 or thereabouts and the plaintiff now claims by virtue of the documents of charge to be paid the amount secured thereby in priority to the claim of the second mortgagees, the Poona Bank.

Kemp J. has decided that the Bank as second mortgagees have priority on the ground that the District Judge had no jurisdiction to sanction the first charge of mortgaged property as assets of the Company in liquidation to the prejudice of the mortgagees.

It is not contended that the decision of the learned District Judge can be supported as a correct decision in law, but the appellant relies upon it as effective as an estoppel because the second mortgagees appeared before the District Judge and did not appeal against his decision.

It appears to us that whether or not the decision is binding as a sanction in face of the mortgagees’ protest to the charging by way of first charge assets already mortgaged, the second mortgagees are as parties to the pending mortgage suit protected by section 52 of the Transfer of Property Act, against any postponement of their security by the charges created pendente lite by the liquidators, for the authority of the District Court in Poona cannot affect orders in a pending suit in the Bombay High Court. We cannot hold that the liquidators’ charges were transfers in execution of an order of a Court within the scope of section 2 (d) of the Transfer of Property Act. The Poona Court's sanction was not an order capable of execution but merely an authority to the liquidators to act in a certain manner if occasion should arise.

We affirm the order of the lower Court and dismiss the appeal with costs.

Solicitors for appellants: Messrs. Ardeshir, Hormusji, Dinshaw & Co.

Solicitors for respondents: Messrs. Bhaishankar, Kanga & Girdharlal.

Appeal dismissed.

G.G.N