Canara Bank vs Official Assignee, High Court

Srinivasan, J.—The question arises for consideration in these cases is whether u/s 52(2)(c) of the Presidency Towns Insolvency Act (Act III

of 1909), hereinafter referred to as ""the Act"", a creditor who claims hypothecation of machinery and movables of the insolvent, can claim priority

creditor and also seek a direction from the court for delivery of possession of such machinery and movables to him.

An insolvency petition in Petition No. 58 of 1986 was filed by P.K. Pattabhiraman and his wife, P. Kantha. The husband was carrying on

business under the name and style of ""Sri Prosperity Industries"" while the wide was carrying on business under the name and style of ""Quality

Metal Products"". In the joint petition for adjudication they disclosed on overall joint liability of Rs. 1,34,59,539.36. The assets comprised

immovable properties as well as machinery and stock-in-trade available in the business premises for both the businesses. The order of adjudication

was made on August 19, 1986. The official assignee filed Application No. 293 of 1986 for an order that all the machinery and stock pertaining to

the business of wife, viz., Quality Metal Products, should vest with him free from any hypothecation in favour of the appellant herein by virtue of

section 52(2)(c) of the Act. He also filed Application No. 294 of 1986 with a similar prayer with reference to the machinery and stock pertaining

to the business of the husband, viz., Sri Prosperity Industries. The appellant filed Application No. 309 of 1986 for a direction to the official

assignee to hand over the machinery, electrical equipment, furniture and fixtures which were found specifically in the hypothecation agreements

executed in favour of the appellant by the two insolvents, and also permit the appellant to sell the same and appropriate the net aside proceeds

after defraying the expenses of the same in his liability due to the appellant from the said debtors.

In the course of enquiry, the first insolvent, namely, Pattabhiraman, was examined as a court-witness on a request made by the appellant. The

learned judge held that the appellant could not claim as a secured creditor in view of the fact that the hypothecation was not displayed in any of the

machinery or other movables found in the business premises. The learned judge referred to the fact that a detailed inventory was taken in the

presence of a representative of the appellant by the staff of the official assignee on September 27, 1986, and it was found that there was no display

board indicating that the machinery or movables were hypothecated in favour of the appellant. The learned judge also pointed out that the debtors

were carrying on business actively till August 12, 1986, that is, a week prior to the order of adjudication and they were using the machinery and

movables in their business. In that view, the learned judge held that it was not possible to identify the machinery or goods hypothecated in favour of

the bank and, therefore, the appellant can be ranked only as a general creditor. The learned judge relied on the principles set out in Lewin on

Trusts, 12th edition, page 217, Chartered Bank of India Vs. Imperial Bank of India, and Ghulamali v. Official Assignee, AIR 1937 Sind 37. The

learned judge held that the remedy of the appellant was to prove its claim before the official assignee as an unsecured creditor. Consequently,

Application No. 309 of 1986 was dismissed and Applications Nos. 293 of 294 of 1986 were allowed. These three appeals have been filed by the

appellant against the said order of the learned judge.

It is the contention of learned counsel for the appellant that there was a display as a matter of fact on the machinery as well as the goods of the

factum of hypothecation in favour of the appellant. Alternatively, he contends that even assuming that there was no display, the appellant-bank

being a secured creditor will not lose its security or claim of priority and the learned judge was in error in holding that the remedy of the bank was

to make a claim as an unsecured creditor. Learned counsel placed reliance on the judgement of a Division Bench of this court in The Official

Assignee of Madras Vs. Suresh Electric Company, . Learned counsel had also invited out attention to some portions of the deposition of the first

insolvent in which he has stated that the raw material of the customers would be kept separately with a board indicating that they are customer''s

materials and the materials of the bank will be kept separately with another board indicating the bank''s hypothecation materials. He also relies on

another statement of the first insolvent that the customers were aware of the hypothecation in favour of the bank. It is, therefore, contended by him

that the insolvents cannot be said to be reputed owners within the meaning of section 52(2)(c) of the Act.

One other contention is advanced by learned counsel that there is a trust in favour of the bank and the insolvent were in possession only as

trustees and the matter would fall u/s 52(2)(c) of the Act.

Section 52 of the Act read as follows :

Description of insolvent''s property divisible amongst creditors. - (1) The property of the insolvent divisible amongst his creditors, and in this

Act referred to as the property of the insolvent, shall not comprise the following particulars, namely :-

(a) property held by the insolvent on trust for any other person;

(b) the tools (if any) of his trade and the necessary wearing, apparel, bedding, cooking vessel, and furniture of himself, his wife and children, to a

value, inclusive of tools and apparels and other necessaries as aforesaid not exceeding three husband rupees in the whole.

(2) Subject as aforesaid, the property of the insolvent shall comprise the following particulars, namely :-

(a) all such property as may belong to or be vested in the insolvent at the commencement of the insolvency or may be acquired by or devolve on

him before his discharge;

(b) the capacity to exercise and to take proceedings for exercising all such powers in or over or in respect of property as might have been

exercised by the insolvent for his own benefit at the commencement of his insolvency or before his discharge; and

(c) all goods, being at the commencement of the insolvency in the possession, order or disposition of the insolvent, in his trade or business by the

consent and permission of the true owner under such circumstances that he is the reputed owner thereof :

Provided that things in action other than debts due or growing due to the insolvent in the course of this trade or business shall not be deemed goods

within the meaning of clause (c) :

Provided also that the true owner of any goods which have become divisible the creditors of the insolvent under the provisions clause (c) may

prove for the value of such goods"".

The last contention of learned counsel that there is a trust in favour of the bank and the insolvents were holding as trustees has no merit

whatever. By no stretch of imagination can it be said that the bank, which claims to be an hypothecatee, is having a trust and the insolvent are

trustees. Section 52(2)(c) refers to property held by the insolvent on trust for any other person. The pledger or hypothecator cannot be said to

hold the property pledged or hypothecated on trust. Hence, this contention is rejected.

Turning to sub-section (2) of section 52 of the Act, clause (c) is in very clear terms. It refers to all goods being at the commencement of the

insolvency in the possession of the insolvent, in his trade or business. The latter part of the clause refers to the consent and permission of the true

owner under such circumstances that the insolvent is the reputed owner thereof. With regard to the first part of the clause there is no dispute that

the insolvents are in factual possession of the machinery and materials. The fact that they are using them in trade or business is established on the

evidence. The accounts of the insolvents show that the businesses were being carried on till at least August 12, 1986, one week prior to the

passing of the adjudication order. Learned counsel for the appellant contends that in answer to a question put by the bank''s counsel, the first

insolvent had said that the business was stopped when they found it difficult to run the same. But counsel has not elicited as to the time when the

business was closed. The only evidence available with regard to the carrying on of the business is the account books of the insolvents and the

learned judge has rightly placed reliance on them. Unless some other evidence is produced before the court to show that the business was stopped

much earlier in order to contend that the machinery or materials were not used in the business, the court is justified in holding that the business was

being carried on till the filing of the insolvency petition. Hence, the first part of clause (c) is satisfied inasmuch as the insolvent are in actual

possession of the goods and the machinery, which are used in their trade or business.

Turning to the second part of clause (c), the question arises whether the circumstances are such that the insolvents are the reputed owners of the

machinery and the goods. At first, it must be pointed out that the bank cannot claim to be the true owner of the goods. Mere hypothecation will not

make the bank the owner of the goods. The bank can, if at all, claim to be secured creditor with a charge over the goods. The bank must have

taken care to take possession of the machinery and the materials as they are movables. In the absence thereof, the bank must have taken care to

affix a notice containing the information that the machinery and the materials are hypothecated to the bank. It is common knowledge that in case of

hypothecation, a metal plate will be fixed on the machinery to it will be written in indelible ink that the machinery is hypothecated, to such and such

bank. In this case, the evidence shows that there was no such display at the time when the inspection was made by the staff of the official assignee

and inventory was taken in the presence of the representative of the bank. If there was such a display, it was the duty of the representative of the

bank to point out the same to the staff of the official assignee.

Learned counsel for the appellant-bank contends that no question was put to the representative of the bank by the staff of the official assignee

regarding the display. That is really the burden on the staff of the official assignee. It is the duty of the representative of the bank to have pointed

out the display if it was there to the staff of the official assignee at the time of inventory. In the absence of such display having been found by the

staff of the official assignee, the court is justified in holding that there was no display that the machinery and the materials were hypothecated in

favour of the appellant-bank.

Consequently, it follows that there was no possibility of identifying the goods which are said to have been hypothecated in favour of the bank.

The principle laid down in Chartered Bank of India Vs. Imperial Bank of India, and Ghulamali v. Official Assignee, AIR 1937 Sind 37, will come

into play. It has been held that when property possessed with his general property that it can no longer be identified, the representative of the trust

has no lien upon the movable assets of the debtor and he cannot claim to be paid before the other creditors, and his only remedy is to come in as a

general creditor and prove for the amount of the loss. We are of opinion that his principle will apply to the facts of the present case.

Strong reliance is place by learned counsel for the appellant on the Division Bench judgement of this court in The Official Assignee of Madras

Vs. Suresh Electric Company, On the facts it was found that the business, which was carried on by the insolvent was stopped long prior to the

adjudication. It was also found that there was nothing to show that the machinery was used in the trade of the insolvent at the time of adjudication.

The principle has been succinctly stated by the Division Bench in the following terms (at page 37) :

In order to invoke the principle of reputed ownership u/s 52(2)(c) not only the property must be good that should be in possession of the insolvent,

but they should have been used in his trade and what is even more important is that it should have been so used in the circumstance that the

insolvent was the reputed owner of the goods.

It is clear from the above passage that what is important is that the machinery or movables should have been used in the trade and so used in

the circumstances that the insolvent was the reputed owner of the goods.

On the facts of this case, we find that the machinery and materials have been used in the business of the insolvents in such manner and in such

circumstances that the insolvents are the reputed owners of the same. Hence, the matter falls clearly u/s 52(2)(c) of the Act.

It follows, therefore, that the application of the official assignee have been rightly allowed and the application of the appellant-bank has been

rightly dismissed by the learned judge.

In the result, all the appeals fail and are dismissed. No costs.