This matter was before me on the 2nd September 1915 in connection with the claim of the Administrator-General of Bengal for the refund of a certain sum by the Punjab Government, which that Government claimed the right to set off against the amount which was due to it for still-head duty.
The question which now comes up for consideration arises out of the claim of that Government to priority in respect of the said amount for still-head duty over the Alliance Bank of Simla Ld. and the Delhi and London Bank, claimants Nos. 34 and 33, who are mortgagees.
The deceased died on the 20th January 1911. This suit was instituted on the 27th May 1912 by the Plaintiff Bank as unsecured creditors. Letters of administration to the estate were granted by this Court to the Administrator-General on the 28th March 1912. The mortgages to the present claimants were executed on the 10th April 1908 and the 2nd November 1910 respectively. By an order made by this Court on the 29th August 1913 the Administrator-General was appointed Receiver of the Distillery Company with power to carry on the business with a view to sale thereof. There was still-head duty due to the Punjab Government at the time of the death of the deceased. For the purpose of enforcing its claim, warrants of attachment of the machinery, plants, stock and other moveable properties of the distillery at different places were executed under sec. 34 of the Excise Act and sec. 70 of the Punjab Land Revenue Act. These attachments were issued on the 30th September 1913 for Rs. 1,84,926-0-3. The amount owing appears not to have been definitely settled at the time. These attachments were issued in consequence of the proposed sale of some of the properties by the Administrator-General who had obtained the consent of the mortgagees. Certain steps were taken for the sale of those properties and they were sold, but the sale was cancelled, and the property in respect of which the warrants of attachment had been withdrawn were subsequently reattached by the Punjab Government. The Administrator-General then applied to this Court for leave to sell, and on the 13th February, 1914 leave was given to him to sell the land, buildings, plants, machinery, etc., of the Sugar Factories at certain places and to hold the proceeds subject to all encumbrances, attachments and distraints justly made on those properties subject to the further orders of this Court. On the 3rd May 1916 the Administrator-General applied for leave to sell the Amritsar Distillery as a going concern, free from encumbrances, but without prejudice to the rights of the Punjab Government and of the mortgagees. An order was made by consent to that effect on the 2nd June 1915. The Distillery was sold on the 29th March 1916. There was a dispute as to a sum of Rs. 17,167-8 paid to the Government for duty on certain spirits supplied to troops by the Distillery after the death of the Testator. The Administrator-General claimed that it should be refunded, but the Government said that they were willing to refund provided the amount was set off against their claim. I held on the 2nd September 1915 on the materials then before me that this amount was refundable by the Government and it has now been reported by the Assistant Referee as an outstanding asset of the estate. This is the position of the contending parties at present. The attachments by the Government were withdrawn and the sales were effected free from encumbrances, but such sales were without prejudice to their rights. The Government in addition to their rights under the Excise Act claim priority over all other debts as Crown debts. The mortgage to the Alliance Bank is in respect of the leasehold properties mentioned as items 5, 6 and 7 of Part II of Sch. A to the Referee's Report, and upon the Distillery and the buildings, plants and machinery thereof in item 1 of Part II of Sch. A and also upon certain shares belonging to the deceased mentioned as item 7(b) of Part I of the said Schedule. The mortgage to the Delhi and London Bank is a second mortgage of the same properties and a first mortgage of the shares, items X to WW of Part I of the said Schedule, and upon certain other securities held by the Bank mentioned in Sch. E, consisting of shares. The assets of the estate are wholly insufficient to pay off the debts. The administration of the estate therefore being under a decree of this Court is governed by Or. XX, r. 13, sub-cl. (2), under which the same rules have to be observed as to the respective rights of secured and unsecured creditors and as to debts and liabilities proveable as are in force in respect to estates of persons adjudged or declared insolvent within our local limits, that is to say, under sec. 49 of the Presidency Towns Insolvency Act of 1909, which provides that in the distribution of the property all debts due to the Crown shall be paid in priority. The question raised is whether there is such priority against the mortgages in favour of the Alliance Bank of Simla Ld. and the Delhi and London Bank.
In England under the old law it was settled that the Bankruptcy Statutes did not bind the Crown, but owing to the Bankruptcy Act of 1883, as amended, so far as actual proof in bankruptcy goes, the Crown appears to be on the footing of an ordinary creditor, although the provisions relating to the remedies against the property of the debtor and the general effect of sec. 150 of that Act on the rights of the Crown is by no means clear in every respect, but we need hardly refer to the English Law, as under the Civil Procedure Code we have to consider the matter in view of our Insolvency Act”. Or. XX, r. 13(2) provides that the same rules shall be observed “as to respective rights of secured and unsecured creditors and as to debts and liabilities proveable.” This rule closely follows sec. 25 of the Judicature Act of 1873 in which the same words were interpreted by Jessel, M.R, as meaning debts and liabilities which can be proved and the manner in which they are to be proved. [See Mersey Steel and Iron Co. Ld. v. Naylor(1)]. It is argued on behalf of the Punjab Government that in this country a Crown debt is entitled to precedence over every other kind of debt, whether secured or unsecured. This has been based upon a passage in Dr. Ghose's work on Mortgages (4th Edition), Vol. I, p. 415 and the authorities there cited, to which I shall refer.
The question in the Secretary of State for India v. Bombay Landing and Shiping Co. Ld. was whether a judgment recovered by the Secretary of State was entitled to precedence over the claims of ordinary creditors who sought the benefit of a winding-up order. The Court held that the Crown was not, either expressly or even by implication, bound by the Indian Companies Act (X of 1866), inasmuch as that Act had not worked any alteration in the ownership in the property against which the Secretary of State sought execution. The ownership still remaining in the Company, the doctrine which prevailed in Giles v. Grover(3) was applied. The King v. Cotton(4) was referred to, and the following observation of Chief Baron Parker was cited with approval, viz., “that the property was not altered was the true reason.” Gunput Pataya v. The Collector of Kanara(5) merely decided that the Crown had the first claim for levying Court-fees on the proceeds of a pauper suit. Puthia Valappil Barga v. Veloth Assenar(6) decided that inasmuch as the stamp fees recoverable by the Government in connection with a pauper suit was a first charge under sec. 411, C.P.C, purchase of property sold to recover the amount due to the Government prevailed against the subsequent purchase of the same property sold in execution of any other decree. In Gayanoda Bala Dassee v. Butto Kristo Bairagee the amount of Court-fees was declared as the first charge on the premises in which the pauper Plaintiff succeeded, in getting her right declared, and Sale, J., decided that inasmuch as the Crown had the prerogative of precedence, it was not necessary for the Crown to attach the fund in Court which represented the proceeds of the property sold. These cases do not directly deal with the question now before me and do not appear to me to support the passage cited from Dr. Ghose. Sale, J., relied upon the The Collector Of Moradabad…(Defendant); v. Muhammad Daim Khan…(Plaintiff).(8), where it was held that the principle that the Government took precedence of all other creditors is not liable to exception in the case of lien-holders upon, the strength of Gunput v. Collector of Kanara, I have already referred to, which does not appear to me to support the principle enunciated by the Allahabad Court in The Collector Of Moradabad…(Defendant); v. Muhammad Daim Khan…(Plaintiff). which has now been expressly overruled by a Full Bench of that Court, see Dost Mohammad v. Mani Ram. I find Stanley, C.J, took the same view of the Bombay case and said “I am at a loss to see how the Government's claim in respect of the Court-fee in such a case can be properly satisfied out of the property of the mortgagee who is in no way liable for its payment. The Court-fee is, no doubt, a first charge upon the interest of the mortgagor, but before the mortgagor is entitled to any benefit from the property mortgaged, he must satisfy the subsisting mortgage. The question of the precedence of a Crown debt over private hypothecation-debts was discussed in Ramachandra v. Pitchaikanni. The learned Judges in that case were not prepared to accept ‘The Collector Of Moradabad…(Defendant); v. Muhammad Daim Khan…(Plaintiff). and said they “hesitated to import into places outside the Presidency towns the doctrine of the common law of England relating to Crown debts.” They held that the right of Government to priority to a mortgagee was not recognised in the mofussil, as was shown by the express language of the Act which declared the land revenue to be a first charge on the land—an unnecessary provision, if by common law every debt due to the Crown was a first charge on the land. This case has been followed in Ibrahim Khan v. Ranga Sami Naichen. The Madras cases arose out of sales for Abkari revenue and in the last case I have referred to the learned Judges held that the sale did not affect a mortgage which had been created prior to the sale. In some of the cases above referred to, a view seems to have been taken that the law rlating to the priority of Crown debts in a Presidency town where the common law of England may be applied, is different from the law applicable to the mofussil.
The English law relating to the matter is conveniently summed up in Coote on Mortgages, 8th Ed., pp. 1386-1388. It says that a mortgagee is liable to have his security postponed to certain claims of the Crown which, by virtue of its prerogative, has the right to issue an “extent” or execution against all the lands of its debtors, except copyholds, and to follow such lands into the hands of subsequent mortgagees or purchasers, though without notice. The Crown claiming under an extent is like a judgment-creditor, subject to prior equities and to such encumbrances as the debtor has lawfully created. Not only all interests actually created by the debtor before the lien of the Crown has attached, but also the conditions to which the lands have been subjected prior to the date of such lien are binding upon the Crown.
The question in England does not now depend merely upon the common law which has been largely modified by special statutes. There is no general priority in all cases for Crown debts over the debts of the subject. The matter before me is a matter solely of the administration of assets under the direction of the Court. In such a case it has been held by James, L.J, in Re Henley & Co., that whenever the right of the Crown and the right of the subject with respect to payment of a debt of equal degree come into competition, the Crown right prevails. It was held that the Crown having a right of distress which was not taken away by the Company's Act of 1862, could proceed to distress and it was therefore right that the Crown debt should be paid in priority to the other creditors. Cotton, L.J, held that this right existed even when the Crown submitted to come in under the administration of the assets in the winding-up of the Company. A distinction has always been drawn between a bankruptcy and winding-up, inasmuch as in the former the whole of the property is divested out of the bankrupt and passes to the trustee and becomes his property, while in the case of winding-up there is no such divesting. The decision of the Court of Appeal in Re Henley & Co. rested upon both grounds, namely, that the property had not passed out of the Company, and also on the right of the Crown to be paid in priority to all other creditors of equal degree. This case was considered in New South Wales Taxation Commissioner v. Palmer. In England it has been held that if for any reason the Crown loses its prerogative remedies, such as extent, or does not choose to avail itself of them, it can still come in and claim priority of payment in administration by virtue “of the incontrovertible rule of law that where the King's and the subjects' title concur, the King's shall be preferred.” [King v. Wells]. Except so far as the legislature has thought fit to interfere with it, this rule appears to be one of universal application. In the present case there is no question of divesting, because the assets are in the hands of the ‘Administrator-General as Receiver.
The question so far as we are concerned depends upon section 49 of the Presidency Towns Insolvency Act. The position of secured creditors in that Act is different from that of unsecured creditors, see sec. 12, cl. (2). A secured creditor may not petition for adjudication of an Insolvent unless he is willing to relinquish his security for the benefit of the general body of creditors, or gives an estimate of the value of his security, and in the latter case he may be admitted as a petitioning creditor to the extent of the balance of the debt due to him after deducting the value so estimated. Sch. II of that Act provides for the proof of debts by secured and other creditors. Cls. 9 to 16 are the rules applicable to the former. A secured creditor may realise his security, or choose to surrender it to the Official Assignee and may prove for the balance. These rules are the same as under the English Bankruptcy Act, 1883.
The mortgages in favour of the Alliance Bank and the Delhi and London Bank are English mortgages. In such mortgages the ownership is wholly transferred to the creditor, which is, however, liable to be divested by the repayment of the loan on the appointed day. The mortgagees have the right to enter upon possession of the property immediately upon execution of the deed, but the possession of the mortgagor is protected by a covenant for quiet enjoyment till default. The mortgagor has only the right to redeem. The mortgagee is not obliged to apply for-sale of the property mortgaged under r. 18 of the Presidency Town Insolvency Act. He has no debt proveable in the insolvency until his security has been valued or realised. He stands outside the bankruptcy, I therefore hold that the Crown is not entitled to priority over the immoveable properties so mortgaged. In this I am supported by Dost Mohammad v. Mani Ram and Ibrahim Khan v. Ranga Sami Naicken. The general rule is that unless a contrary intention is shown, a mortgage of land or buildings passes the right to the fixtures then upon the premises, and fixtures attached by the mortgagor to the property after the date of the mortgage will also,.except under an agreement to the contrary, pass to the mortgagee.
In respect of the mortgages, the Alliance Bank ranks first. The second mortgagee has a right to redeem, so has the Official Assignee on behalf of the insolvent-debtor. The ownership of the property passes to the first mortgagee in an English mortgage, but not to the puisne mortgagee. I therefore hold that he is not entitled to priority over the Crown.
The next question is as to the shares. The Alliance Bank claims paramount title to certain of their own shares registered in the name of the deceased, which were not mortgaged to them. The claim arises upon clause 35 of their Articles of Association. I do not think this article affects the right of the Crown. In Harrold v. Plenty, the deposit of a certificate of shares as security for a debt was held to create an equitable mortgage, or, in other words, to an agreement to execute a transfer of the shares by way of mortgage. It was not treated as a pledge on the ground that a share is a chose-in-action and the certificate is merely evidence of title. Shares merely deposited and not actually transferred do not seem to me to create a right in favour of the depositee, superior to the right of the Crown. I hold the same in respect of what is claimed as hypothecation of moveables.
Mr. G.G Pearse, Solicitor, for the Bank of Upper India Ld.
Messrs Leslie & Hinds, Solicitors, for the Administrator-General of Bengal.
Messrs Orr. Dignam, Solicitors, for the Alliance Bank of Simla Ld.
Messrs Morgan & Co., Solicitors, for the Delhi and London Bank Ld.
Mr. Kesteven of Messrs Sanderson & Co., Solicitors, for the Government of the Punjab.
M.N.K