Thakur Das vs Ram Gulam Singh and Others

Courtney-Terrell, C.J.—These two appeals are by defendant 2 against the preliminary and final decrees, respectively, granted by the Subordinate Judge in a suit to enforce a simple mortgage. A company named the Vishvakarna Mills Ltd., on 7th March 1925 borrowed from the Government under the Bihar and Orissa State Aid to Industries Act 1923, a sum of Rs. 75,000. Under the contract of loan the Secretary of State for India guaranteed a cash credit overdraft in favour of the borrower at the Imperial Bank of India, Patna Branch, and the borrower was to repay annually Rs. 5,000 in March of each succeeding year. The Company, in consideration of the loan, also executed a deed of mortgage of all its assets in favour of the Government. For some reason the Government neglected to register this mortgage and the Directors of the Company similarly omitted to take any steps in the matter. The instalments for March 1926 and March 1927 were duly paid by the Company, and on 5th March 1928 the third instalment fell due. Before this date, however, Government had become aware of the non-registration of the mortgage, and on 20th January 1928 had caused the Company to execute a promissory note for Rs. 60,000 being the balance of the principal, after deducting the instalments which had been paid up to that time. The Company seems to have been throughout in financial difficulties, and the loan by the Government does not seem to have been a very judicious investment.

In the month of April 1926, the Company borrowed Rs. 10,000 from the Bank of Bihar Ltd. On 26th January 1928 the Bank were demanding repayment of this loan with interest, and on 16th May the Bank brought a money suit in the Patna civil Court for the recovery of this loan. The plaintiff, Ramgulam Singh, was a share holder and a Director of the Company. There were two classes of Directors, ''Honorary'' and ''Permanent'' and by the Articles of Association the former had merely an advisory function whereas the latter were to conduct the business of the Company. There is no doubt that the plaintiff was a permanent Director although his services, from the point of view of any right to Directors'' fees, may have been honorary. The plaintiff was a guarantor of the loan by the Bihar Bank and in the subsequent litigation he was sued in that capacity. The Company fully availed itself of the overdraft guaranteed by the Government and had withdrawn nearly Rs. 60,000. In these circum stances the finances of the Company were in a very parlous condition.

3.On 4th March 1928 there was a meeting of the Directors of the Company at which five persons are recorded as having been present, one of whom was the Managing Director, Deodhari Singh, one was Saiyid Sultan Husain, a Director, who from his evidence, would appear to have had little comprehension of the business to be transacted. Mithila Saran Singh and Permeshwar Prasad Varma, two other Directors, were present. Babu Ramgulam Singh was also present, but there is recorded this note: "N.B. Babu Ram Gulam Singh is present but takes no active part." Babu Permeshwar Prasad Varma, M.A., B.L., was elected President of the meeting and the Managing Director was authorized to execute an agreement with Babu Ramgulam Singh according to which Ramgulam Singh & Sons were to pay the next instalment of Rs. 5,000 to the Imperial Bank which would fall due on 7th March and further would pay off the loan due to the Bank of Bihar, and that the Company through the Managing Director, would execute a mortgage in his favour of the profits and assets of the Company. It appears that it had earlier been contemplated that Babu Ramgulam Singh would take a lease of the whole of the Company''s assets, but this proposal was abandoned in favour of a mortgage. On 9th March there was a further Directors'' meeting at which the same persons were present, with the exception of Babu Permeshawar Prasad Varma, and Babu Mithila Saran Singh was appointed to the chair. A memorandum of agreement was read, of which we have not seen a copy, but there is a note that "the second party Babu Ramgulam Singh wants five days time to consult his legal adviser on the point," and 15th March was accordingly appointed for reconsideration, with the further sentence that "it would be executed and registered immediately."

On 26th March there was an emergent general meeting of the Directors, but the only Directors present were Babu Mithila Saran Singh, Babu Ramgulam Singh, and the Managing Director, Babu Deodhari Singh. On this occasion Babu Mithila Saran Singh was unanimously voted to the chair. It was proposed that an extraordinary general meeting should be called to consider:

(a) That the Company''s business be settled at the impending session (sic) if any on the terms as may be agreed upon to conduct the business of the company; (b) that the business of the company be sent to liquidation.

The third resolution is as follows:

That the second mortgage bond be executed in favour of Babu Ramgulam Singh who paid Rs. 5,000 (five thousand) the said (?) instalment of the Imperial Bank on 5th March 1928 to the amount of Rs. 5,000 aforesaid to be paid within a year with interest at 12 annas per cent per month and the interest to be paid every six months, i.e., on the 30th of the month; six monthly interest will be incorporated with the principal and interest will run on the aggregate at the rate of 12 annas per cent per month.

Accordingly on 20th May 1928 the mortgage bond in question was executed and in it the earlier mortgage bond to the Government of 7th March 1925 was recited, as were the payment of the two instalments of 1926 and 1927 and the fact that the third instalment had become due on 6th March 1928. There was a recital that the Company had no money to pay the third instalment. No mention was made of any other indebtedness of the Company and in particular there was no reference to the loan by the Bihar Bank. The loan by Babu Ramgulam Singh of Rs. 5,000 to pay the said third instalment was recited and there is no doubt that in fact Babu Ramgulam Singh did find the necessary sum of Rs. 5,000 and paid it to the Imperial Bank to discharge the liability of the instalment. The bond also recites the failure of the original proposal for a lease to Babu Ramgulam Singh. Therefore, the Company agreed to repay the loan with interest at the rate of 12 annas per cent per month within a period of one year from 5th March 1928 (when the instalment to the Government was paid). If interest should be in arrears for six months then the amount of arrears was to be incorporated with the principal, that is to say the loan was to be with interest to be compounded at six monthly rests if unpaid. The mortgage was expressly stated to be a second mortgage, the Secretary of State for India in Council being recited as first mortgagee.

Now at the time when this document was executed it must have been perfectly clear to the directors that the original mortgage was defective by reason of nonregistration, and moreover the promissory note to the Government in respect of the unpaid debt had been executed so that although it was piously recited that from the point of view of priority of mortgages Babu Ramgulam Singh held only a second mortgage, this on the contention of the plaintiff had very little significance. On the other hand it may perhaps be said with more credit to Babu Ramgulam Singh that at the time he desired to express that the debt to him was to be considered as secondary to the debt to the Government mortgage or no mortgage. On 24th September 1928 the Bihar Bank applied to the Court for a compulsory winding up order and this was made on 21st March 1928. The Government being unable to enforce their mortgage took the course of proceeding under the Public Demands Recovery Act and obtained an order of the Court, and on 21st January 1930 sold up the assets of the Company for Rs. 33,000, defendant 2, Thakur Das, being the purchaser.

On 24th September 1932, Babu Ramgulam Singh brought this suit to enforce his mortgage claiming about Rs. 7,500 and making Thakur Das defendant 2 and the Company defendant 1. In the winding up proceedings an application was made to the High Court to stay the suit as against the Company and this was accordingly done and the suit has proceeded against Thakur Das alone, the Company taking no part. The learned Subordinate Judge dismissed the suit against the Company, but without costs having regard to the order for stay, but he granted a decree against defendant 2 with costs.

The plaintiff took his stand upon the following contentions: It was pointed out on his behalf that the Government had not sued on their mortgage but had proceeded under the Public Demands Recovery Act and accordingly what had been sold was the right, title and interest of the judgment-debtor at the date of the sale. Therefore, it was argued that no question of priority of mortgages arose. It was conceded that had the Government been able to proceed upon its mortgage Babu Ramghulam Singh would have been merely a second mortgagee as contemplated by his mortgage bond, and it was suggested that there was nothing in the bond which put the Government debt before the plaintiff''s debt otherwise than as a mere matter of priority of mortgages. It was argued that although possibly in the winding up proceedings the liquidator, under the provisions of Section 231, Companies Act, and Section 54, Provincial Insolvency Act, (but for the fact that there was a period of more than three months between the date of the bond and the application for the winding up order) might have had the mortgage bond set aside as fraudulent and void, they had not done so, and in any case it was said that only the liquidator or some creditor could have taken this course.

Now it is certainly true that we are not here concerned with either Section 231, Companies Act, or Section 54, Provincial Insolvency Act. These sections deal with matters of procedure governing the relief to be accorded to a liquidator or to a rival creditor, but in considering the position of defendant 2, the auction-purchaser, we must remember that he stands in the shoes of the judgment-debtor, that is to say the Company, and is entitled to and affected by the same equities and estoppels as those which the company might have laboured under or enjoyed. Therefore the question really resolves itself into whether the plaintiff in any contest with the company would have insisted that his mortgage debt should take precedence of the debt which was due to the Government. In my opinion he certainly could not have done so.

It is true that the sections of the Indian Companies Act and Provincial Insolvency Act furnish the procedure for setting aside a transfer as fraudulent in certain circumstances only, and that the absence of those circumstances will prevent the adoption of the specified procedure, but that does not imply that the transfer was not fraudulent in fact although the judgment of the learned Judge would seem to suggest that this is so. There are several circumstances from which it may be inferred that Babu Ramgulam Singh was not acting in the interests of the company: firstly the position with regard to the Government mortgage must have been well within his knowledge, for it is a specific duty imposed upon Directors to see to any necessary registration of documents to which the company is a party; he must have been aware that the document was not registered. Secondly, that he was uneasy about the position is shown by the note in the minutes of the meeting of the 4th March to the effect that Babu Ramgulam Singh was present but took no active part: also from the note in the minutes of the 15th March that Babu Ramgulam Singh wanted five days to consult his legal adviser and that the document when completed was to be executed and registered immediately. Thirdly he was well aware that the company was in desperate financial circumstances and that its assets were in jeopardy, and that he knew on the 26th March that a liquidation had actually been decided upon; fourthly, it may be observed that notwithstanding that at the meeting of the 4th March Babu Ramgulam Singh had agreed to pay off the claim to the Bank of Bihar, he had not in fact done so, and fifthly, notwithstanding the entry in the minutes of the 4th March that a mortgage should be executed, it was not in fact executed until very much later, that is to say the 20th May.

Babu Ramgulam Singh therefore either knew that the Government would be unable to sue on their mortgage in which case the provision in his mortgage bond to the effect that his mortgage was to be considered secondary to the Government mortgage was meaningless, or was intended that the Government debt as such should take priority over the debt to him. This is not a case in which a contract is entered into between two independent persons; it is in the nature of a contract between the trustee and his cestui que trust; the trustee by discharging a small portion of the cestui que trust''s indebtedness puts himself in the position of a secured creditor as against the unsecured creditor, the Government, and therefore prevents the company from paying off its creditors equitably. It is true that the mortgage to the plaintiff was executed for good consideration and that he supplied Rs. 5,000 for payment of the Government instalment but in taking security from the company which he knew to be in an insolvent condition he acted inconsistently with his duties as a director. The case in The Gaslight Improvement Co. v. Terrell (1871) 10 Eq 168 is an illustration of the principle involved. It was a suit by the company in liquidation to set aside a security given by the company to the defendant directors as being an undue and fraudulent preference over the general creditors. The directors had borrowed money for the sake of the company and quite properly became creditors of the company. It was clear that the directors knew that the company was in a state of insolvency and could not avoid being wound up, and in those circumstances they took security in the shape of an assignment of the assets. Lord Romilly dealing with the facts said:

The directors of the company think fit to pay themselves. It is to be observed that the directors of every company who are also creditors fill two distinct and antagonistic characters. In the first place, they are trustees for the benefit of the company, and are trustees for the creditors to this extent; that they are bound to apply all the assets for the benefit of the creditors as far as they will extend; they themselves are also creditors, and have an interest to have their own debts paid.

No doubt in this case the defendants had taken an assignment in payment of their debts and not a mortgage, but the difference in this matter between this and the present case is one of degree and not of principle. In my opinion it is of no avail to contend in this case that the Company by merely paying off the plaintiff''s mortgage could have freed the assets from the plaintiff''s debt. It is not right that the director of an insolvent company about to go into liquidation should be allowed the privileged position of a secured creditor by merely discharging a small portion of the company''s indebtedness. As against an innocent purchaser for value of property sold in execution of a debt due to an unsecured creditor, the plaintiff director should not be allowed to enforce his security. I would therefore allow both the appeals and dismiss the plaintiff''s suit with costs throughout.

James, J.

I agree.