C.D. Parthasarathy vs The Madras Publishing House Ltd. and Others

Alfred Henry Lionel Leach, C.J.—This appeal raises a question of priority in the distribution of the assets of the Madras Publishing House

Ltd., which by an order of this Court went into compulsory liquidation on the 12th January, 1940. The assets of the company were mortgaged or

charged to the third respondent under a registered deed dated the 31st August, 1937. By that deed all the Immovable properties, the machinery,

plant, stock-in-trade, fixtures, fittings and other chattels were mortgaged to the third respondent and he was given a floating charge over the book

debts of the company. The properties which were subject to the mortgage were described in separate paragraphs and there was a separate

paragraph with reference to the floating charge over the book debts. The properties which were subject to the mortgage were by an order of the

Court sold to the mortgagee for Rs. 1,89,000 which amount was set off against the mortgage-debt. At a later stage the book debts of the

undertaking were sold to him for Rs. 20,994 and this was also set off against the mortgage-debt. The appellant says that by virtue of Section 230

of ''the Indian Companies Act the Court had no power to sell the book debts to the mortgagee without providing for the priorities provided for in

that section. The appellant was the Secretary of the company and he says that at the date of the liquidation there was due to him by way of salary a

sum of Rs. 2,400.

Section 230 (1) (b) says that in a winding-up there shall be paid in priority to all other debts, the wages or salary of any?clerk or servant in

respect of service rendered to the company within the two months next before the date of the winding-up, not exceeding one thousand rupees for

each clerk or servant. Sub-section 2 (b) provides that the debts in respect of which priority is given by Sub-section (1) shall so far as the assets of

the company available for the payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures

under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to the charge. In other

words, a person or a company entitled to a floating charge created by a debenture is postponed to a clerk or servant to the extent stated in Sub-

section (1).

The appellant''s case is that as the third respondent has only a floating charge over the book debts he is entitled to have the book debts realised

and out of the proceeds to be paid Rs. 1,000 before the third respondent receives anything from this source. This was not the claim advanced

before Gentle, J., who heard the appellant''s petition. Before the learned Judge the appellant boldly asserted that he was entitled by virtue of

Section 230 to priority over the third respondent in respect of all assets of the company, including those assets which are admittedly subject to the

registered mortgage. The learned Judge rightly rejected this contention, but he did not consider whether the appellant''s case with regard to the

book debts stood on a different basis. He did not consider this question as it was not raised before him. It has been raised in the memorandum of

appeal and the Court must consider it.

Section 230 makes it quite clear that where there is a floating charge created by a debenture the debenture-holder does not get priority over the

debts contemplated in Sub-section (1). In the past there has been a great ""deal of discussion as to what the word ''debenture'' implies, but it is not

necessary to decide on a definition here because it is accepted by all parties to this appeal that the deed created by the company in favour of the

third respondent is a debenture within the meaning of the section. In In re Lewis Merthyr Consolidated Collieries, Ltd. Lloyds Bank Ltd. v. The

Company (1929) 1 Ch. 498 the Court of Appeal had to consider the effect of a debenture which created a fixed first charge on certain assets of

the company and a floating charge on other assets. It was held that the priority given by Section 107 of the Companies (Consolidation) Act, 1908,

is, in such a case, given in respect of assets subject to the floating charge but not in respect of assets which are subject to the fixed charge. The

fixed charge and the floating charge are separable. In the present case, we have certain fixed charges and we have a floating charge in respect of

the book debts of the company and as that charge was still a floating charge at the date of the winding-up the provisions of Section 230 apply. In

these circumstances the Court had no power to sell the debts to the third respondent, ignoring the provisions of Section 230.

The appellant''s claim is not admitted and therefore the question whether he is entitled to rank as a creditor for Rs. 2,400 or for any part of that

sum remains to be decided. In view of our decision the case will be remanded to the Original Side for the determination of this question. If the

appellant succeeds in establishing his claim he will be entitled to be paid out of the proceeds of the book debts to the extent of Rs. 1,000, and any

lesser sum proved will stand on the same basis. If necessary, there will be a re-sale of those assets. The question how the appellant''s claim should

be satisfied, supposing he establishes it, will be left to the Original Side to be decided in the light of this judgment. The appellant''s rights, whatever

they may be, will, of course, be subject to the rights of the liquidator under Sub-section (3) of Section 230.

The appellant has succeeded but we do not think that he is entitled to an order for costs. If he had raised before Gentle, J., the question which

he has raised now, this appeal would have been avoided. The costs allowed in the Court below will stand.