The Bank of Bihar Ltd. vs Secy. of State and Others

Courtney-Terrell, C.J.—Under the Bihar and Orissa State Aid to Industries Act, 1923, the Local Government is empowered to grant aid to the local industries. In the year 1925 the Vishwakarma Mills Ltd., hereinafter called the company applied for assistance which the Local Government decided to grant u/s 4, Sub-section (b) of the Act in the form of guarantee of cash credit overdraft at the Imperial Bank.

On 7th March 1925, the company executed the deed of simple mortgage of its premises and plant in favour of the Secretary of State for India in Council and the Secretary of State therein agreed to guarantee the cash credit overdraft with the Patna branch of the Imperial Bank to the extent of Rs. 7,500 reduceable annually by Rs. 500. This deed has not been produced before us but it is agreed that the terms are as above stated. No money was actually advanced however at that time.

On 20th January 1928 a promissory note payable on demand was executed by the company in favour of the Government for Rs. 60,000 with interest. This promissory note was endorsed by the Local Government to the Imperial Bank on the same day the Local Government entered into an agreement in writing with the Imperial Bank by which it was agreed that the Imperial Bank should open a cash credit overdraft in favour of the company for Rs. 60,000 that the Government should guarantee such overdraft and should endorse the promissory note to the Imperial Bank. The company overdrew its account at the Imperial Bank to an amount exceeding Rupees 60,000 but the Local Government did not in fact effect actual payment to the Imperial Bank under its guarantee until 27th September 1929. The position therefore was that the company were debtor to the Imperial Bank in respect of their overdraft but after 27th September 1929, the Local Government could have proceeded to recover from the company the amount paid under the guarantee u/s 145, Contract Act.

This course was not however followed. On 14th August 1928, the Government filed certificate proceedings u/s 20, State Aid to Industries Act, Sub-section (1) which is as follows:

All money recoverable under this chapter including the interest chargeable there on and costs if any incurred if not paid when they are due may be recovered by the Director from the person aided and his surety, if any as if they were public demands.

It is to be noticed that Ch. 3 of the said Act provides for the method by which the loans may be secured and Section 13 gives power to the Government to recover such loans from the borrower and by Section 15 it is enacted:

The provisions of Sections 9 to 13 (both inclusive) in respect of loans shall subject to any rules that may be made under this Act apply so far as may be to guarantee of cash credits, overdrafts and fixed advances with banks.

In my opinion this section merely put the Government into the position that it should be able to recover the amount paid by it under a guarantee in the same way as it might recover the amount of a loan but it did not have the effect of giving the Government power to recover the amount of guaranteed overdraft from the principal debtor unless the Government had been obliged to fulfill the terms of its guarantee. The fact that the Government endorsed to the Bank the promissory note executed by the company did not amount to a payment of the debt: see Maxwell v. Jameson [1821] 2 B. & Ald. 51. Never the less on 11th November 1928, the Certificate Officer decreed the claims of the Government and the company appealed to the Collector who on 7th January 1929 dismissed the said appeal. In November 1928, the Certificate Officer attached the mortgaged properties of the company for the realization of the certificate debt and issued a sale proclamation. The company appealed to the Commissioner who postponed the sale pending the appeal which was ultimately withdrawn by the company on 20th April 1929, and the Certificate Officer after the withdrawal of the appeal issued a proclamation for a fresh sale for the recovery of the certificate debt.

In the meantime on 16th April 1926, the Bank of Bihar advanced Rs. 10,000 to the company and on 16th May 1928, sued the company for the recovery of that sum. On 24th September 1928, the Bank of Bihar filed a petition in the High Court for the compulsory winding up of the company. On 21st March 1929, a winding up order was made by the High Court and the order had the effect u/s 232, Companies Act, 1913, of compelling the suspension of the certificate execution proceedings then in progress against the company on the petition of the Government until the leave of the Court had been obtained to proceed with such execution. On 21st August 1929 therefore the Government applied in the winding up proceedings for the leave of the Court to proceed with the execution and on 25th September 1929, Wort, J., made an order, the effect of which was to allow those proceedings to continue. The Bank of Bihar and the company were made parties to the application before the learned Judge and from the order made by him the Bank of Bihar now appeals to this Bench.

Now as between the Government and the company the judgment obtained is the certificate proceeding is binding and the company cannot dispute their liability to the Government for the original debt has now become merged in the judgment. But Mr. Das contends that his client the Bank of Bihar are in no way bound by the judgment and he contends that the effect of allowing the execution obtained by the Government to proceed notwithstanding the winding up order will be to give to the Government a preference over other creditors in the winding up proceedings. But the judgment establishes a liability of the company which the other creditors cannot now question. But he argues that Sections 207 and 230, Companies Act, lay down the duties of the liquidator in the distribution of the assets of the company and specify the priority in which the debts are to be paid and that a debt to the Government of this character is not of the nature which under the terms of the statute is entitled to priority. He points out that these sections correspond with similar sections in the English Companies Act and that so far as the English Act is concerned it was decided by the House of Lords in the case of Food Controller v. Cork [1923] A.C. 647 that Crown debts have no claim to priority owing to the effect of these sections. In my opinion this argument is well founded. The learned Judge who heard this case in the first instance based his decision upon Section 232, Sub-section (2), Companies Act. The two Sub-sections are as follows:

(1) Where any company is being wound up by or subject to the supervision of the Court, any attachment, distress or execution put in force without leave of the Court, against the estate or effects of the company after the commencement of the winding up shall be void.

(2) Nothing in this section applies to proceedings by the Government.

By Section 171:

When a winding up order has been made no suit or other legal proceedings, shall be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court may impose.

To this section there is no exception. The leave of the Court was therefore essential and indeed has been treated as essential by the Government for the purpose of proceeding in the execution and it was not the intention of the legislature that the Court should be given discretion to permit proceedings which would have the effect of giving to any particular creditor a priority to which he was not otherwise entitled and which would have the effect, as in the case of absorbing all the available assets. I do not mean to say that there may not be exceptional cases in which the discretion undoubtedly given to the Court may not wisely be exercised. I would therefore reverse the decision of the learned Judge.

The Official Liquidator will remain in possession of the property and will distribute the assets of the company in accordance with its statutory obligations. I would allow the appeal of the Bank of Bihar with costs which must be paid by the Local Government and the Collector will hand over the assets to the Official Liquidator for distribution.

Kulwant Sahay, J.

I agree.