Tansukhrai M. Karundia vs The Official Liquidator, Andhra Paper Mills Co. Ltd., (In liqn.)

Panchapagesa Sastry, J.—This is an application to vary the order of the Official Liquidator of the Andhra Paper Mills Co. Ltd. (in

liquidation) disallowing the claim of the applicant to have a charge over the movable assets of the company for a sum of Rs. 1,01,172-15-2. The

liquidator admitted that the amount claimed was due, but he disallowed the claim to rank as secured creditor on the ground that the document

creating the security was not registered with the Assistant Registrar of Joint Stock Companies, Cocanada, as required by Section 109 of the Indian

Companies Act. This order further states that in any event, the amount of Rs. 34,000 included in the claim representing payment made on 15th July

1947 to Messrs. Natwarlal Shamaldas and Co., cannot be treated as a secured debt. No grounds for the same are however mentioned in the

order.

The applicant Tansukhrai M. Karundia claims to have advanced the aforesaid sums in circumstances set out below. The Andhra Paper Mills

would appear to have issued debentures to the extent of eleven lakhs. By about 1945 interest on the same had accumulated to another six lakhs.

The company having made default in payment under the terms of the debenture document, the debenture trustees had taken possession, but they

were themselves unable to work the concern. They seem to have delivered over the premises again to the Mills on certain conditions, which were

not fulfilled and the trustees again entered into possession of the debenture premises on the 14th February 1947. Certain proposals would appear

to have been made by the trustees to the Board of Directors as to the terms upon which moneys could be borrowed for running the concern and at

the suggestion of the trustees the company had agreed to execute deeds giving a lien or charge to any person who might be found by the debenture

trustees to be willing to advance funds. A resolution to this effect was passed on 10th March 1947 (Ex. P. 1) and on the same day a draft

agreement between the company and the company''s banker and treasurer was also approved by them (Ex. P. 2). In pursuance of the draft so

approved, Ex. P. 3 was executed on the 21st March 1947 between the company and the applicant, therein referred to as the treasurer. It is under

this document that the applicant claims to have advanced moneys from time to time to the company and now claims to have a security over the

properties mentioned in the document for the balance of the amounts due to him. In view of the contentions urged regarding the invalidity of the

document, as against the liquidator, it is necessary to set out its main terms, which are as follows :

These presents witness: That in consideration of the said Tansukhrai M. Karundia having agreed to lend and advance to the company such sums

or moneys or credit of any nature and kind whatsoever for the purpose of carrying on the business and affairs of the company and working the

factory at Rajahmundry, the company hereby agrees and binds itself as under:

All movable properties of every description in the treasurer''s possession on the company''s account, or for the time being held by the treasurer

on company''s behalf whether alone or jointly or with others in India or elsewhere including any bullion, deposit receipts, promissory notes, bills of

exchange, hundies, bills of lading, railway receipts, other documents of title, to goods, any other negotiable or transferable instruments or securities,

bills or other documents relating to supplies made or services rendered to Government or to any other person or mercantile documents of every

description or contracts other than those pertaining to immovable properties requiring registration in India and other documents evidencing the

company''s title as creditors or members of any corporation, association, company or syndicate in India or elsewhere, are hereby hypothecated for

and shall stand charged with, and

all marketable securities and goods coming into the treasurer''s possession on the company''s account or deposited with the treasurer or for the

time being held by treasurer on the company''s behalf, are hereby pledged for and shall stand charged with the due payment of the amount of any

advance or credits with interest thereon at one per cent over the bank rate with a minimum of 4 per cent per annum with six monthly rests and all

costs, charges and expenses incurred by the treasurer in connection with such advances or credits.

The document contains various other clauses which are also important in this connection. It is stated to be a continuing security to cover the amount

of advance. It is provided that the treasurer shall not be responsible for any loss, damage or depreciation suffered by the movable properties,

securities and books in his possession or in the course of realisation, nor bear loss or damage caused by theft or burglary. The company

undertakes to maintain a margin on the said movable properties, securities or goods and failing repayment on demand of the amount of advance

with interest etc., the treasurer is entitled, but not bound to sell or otherwise dispose of all or any of the movable property, marketable securities or

goods by public auction or by private sale without reference to the company or without obtaining its consent. The proceeds of such sale should be

applied in payment of all costs and in relaying the amounts due to the treasurer and, if there is any balance, to be paid over to the company. The

treasurer is to carry on business and maintain the necessary staff for which the company will pay the salaries, wages and expenses. The company is

to give an irrevocable power of attorney to the treasurer with necessary powers to manage the concern. The power is not to be revoked until all

the moneys due to the treasurer are fully paid up. Another clause expressly provides that all movable property in any shape or form including raw

materials, stores and finished products etc., shall be in the treasurer''s possession and control and he shall be entitled to deal with the same as he

thinks fit. The treasurer has a right to sub-delegate his powers under the power-of-attorney to be granted to him and to grant power-of-attorney

on his own behalf to other persons. On the same date the company gave a power-of-attorney as contemplated to the applicant, a copy of which is

Ex. P. 4. It is therein recited ''inter alia'' that he has power to hold moneys, negotiable instruments, goods, hundies, promissory notes, cheques, bills

of lading, railway receipts etc., and the proceeds thereof in his possession and to appropriate the same towards the moneys due to him as the

company''s banker. Further all moneys and all movable property belonging to the company, whether actually received or likely to be received by

the treasurer and all goods actually held by the attorney or to be received by him on behalf of the company ,are to be received, held and

appropriated by him towards liquidation of the moneys advanced by the attorney. In pursuance of the power-of-attorney the applicant appointed

one Mr. N. K. Gokhale as attorney to be in charge of the Mills at Rajahmundry and run the concern. This arrangement was acted upon until the

company was ordered to be wound up by order of this Court dated 23rd September 1947 in O. P. No. 235 of 1947 filed on 22nd August 1947.

The provisional liquidator, who was appointed. took possession of the Mills on 6th September 1947 from the said Gokhale, who was admittedly

in possession, till then on behalf of the applicant.

The question for decision is whether the document, Ex. P. 3, is void against the liquidator for the reason that it has not been registered with the

Assistant Registrar of Joint Stock Companies as required by Section 109 . The applicant''s advocate contends that this document created a pledge

on the movable properties of the company and does not require registration u/s 109(1) (c). Although the order of the Official Liquidator does not

refer to any particular clause of Section 109, in the counter affidavit filed by him in this application, it is stated that the document requires

registration, as the applicant claims a charge on the stock-in-trade of the company. The learned advocate for the applicant conceded that a pledge

on stock-in-trade would require registration, but he submitted that he was willing to give up his claim for security over stock-in-trade and was

content with a declaration that he is entitled to have his security over all the properties covered by the document, Ex. P. 3, other than stock-in-

trade. In the argument before me however, the advocate for the liquidator took a different line and contended that the entire document is void

against the liquidator for the reason that it amounted to creating a floating charge and hence required registration under Clause (f). He relied on the

decision of the Judicial Committee in ''Imperial Bank of India v. Bengal National Bank'', 59 Cal 377 and that of the High Court of Allahabad in

''Babu Nandan Lal v. Parsottam Sahu'', ILR (1942) A11119. As pointed out by Buckley L. J. in ''Evans v. Rival Granite Quarries Ltd.'', (1910) 2

K B 979 , a floating security is not a specific security; it is only one which affects the assets included in it, which are mortgaged in such a way that

the mortgagor can deal with them without the concurrence of the mortgagee. ""A floating security is not a specific mortgage of the assets, plus a

license to the mortgagor to dispose of them in the course of his business, but is a floating mortgage applying to every item comprised in the security

but not specifically affecting any item until some event occurs or some act on the part of the mortgagee is done which causes it to crystallise into a

fixed security."" In the present case it will be noted that the applicant was given possession of the items pledged to him. As and when other movable

properties come into his possession, they also stand pledged to him. The security itself is expressly stated to be a continuing one. On default of

payment when demanded; he is given the right to have the properties in his possession sold by public or private auction and apply the net proceeds

in liquidation of the amounts due to him. No doubt, the company is allowed to run its business, but it is only run by him as an agent under an

irrevocable power-of-attorney. This scheme was devised apparently to ensure his possession of the properties delivered to him and also his

continued possession of all the movable properties covered by the document. These characteristic features are sufficient to negative the contention

that this is a mere floating charge coming under Clause (f) of Section 109. As pointed out by Rankin C. J. in ''Jones & Co. v. Ranjit Roy'', 54 Cal

513, the element of possession, which is contemplated by the deed and which was actually given, is an important factor, which stands in the way of

the document being regarded as creating a purely equitable charge of a character coming fairly within the description of a floating charge. The

decision in ''Bank of Baroda v. Shivdasani'', 50 Bom 547 is also in point. In the present case, the possession of the movable properties should be

taken to be with the applicant in his capacity as pledgee and not merely and solely as an agent of the company. I am of opinion, therefore, that

Clause (f) is not applicable and that the document does not require registration, as a floating charge.

If it is a pledge of movable properties other than stock-in-trade, the document does not require registration either under Clause (e). In answer to

a specific question from the Court the learned advocate for the liquidator admitted that the document can be given effect to as regards all movables

contained therein other than stock-in-trade in spite of the inclusion of the stock-in-trade also in the document and it non-registration. It was not

contended that the document is bad ''in toto.'' As I stated already it was admitted that it may be enforced as creating a good security over the rest

of the properties other than the stock-in-trade. In view of that admission, it is not necessary to deal with that point.

It is next argued that, at any rate, a sum of Rs. 34,000 cannot be treated as a secured advance. No reasons are given why this amount is treated

in a different manner from the rest of the advances either in the order of the liquidator, or in the counter affidavit filed by him. In the arguments,

however, the advocate for the liquidator stated that this amount was advanced within three months prior to the winding up order and hence it was

bad u/s 231 as a fraudulent preference. No evidence was let in to show that the payment was made by the applicant with a view to give that

creditor a preference over other creditors. The mere fact that the money was paid within three months prior to the presentation of the petition for

winding up is not by itself sufficient to avoid the transfer or payment as invalid u/s 231. When this was pointed out, the learned advocate for the

liquidator tacitly gave up his contention, as he had no evidence to let in.

In the result, the applicant is entitled to a declaration that he has a valid security over such of the movable assets of the company as are

comprised in the document, Ex. P. 3, but excluding stock-in-trade therefrom for the total sum of Rs. 1,01,172-15-2. The order of the liquidator is

varied accordingly to that extent. The applicant will get his costs from the respondent. The liquidator will have his costs from out of the company''s

funds. I fix advocate''s fee for each side at Rs. 350/-.