Canara Bank Ltd. vs Thribhuvandas Jatha Bhai and Another

M.S. Menon, J.—The Canara Bank Ltd. Mattancherry, the Plaintiff in O.S. No. 169 of 1124 of the District Court of Ajijkaimal, is the; Appellant before us. The suit was for money due from Defendants 1 and 2 and paragraphs 10 and 11 of the plaint, hereunder reproduced, deal with the question of the paramount lien Maimed by the Plaintiff and denied by the trial Court.

The first Defendant holds 30 Preference shares and 15 ordinary shares in the shareholding of Plaintiff Bank, as detailed in schedule G below. For all amount due to the Bank from the first "Defendant, the Bank has a first and paramount lien on these shares under Article 3 of the Articles of Association of the Bank, and the Bank claims to enforce the said, lien, Pay calls of these, shares in enforcement of the ''amounts'' due to the Bank, as aforesaid.

The third Defendant is impleaded in this suit as he also claims a lien over the said shares of the first Defendant. The third Defendant''s lien, if any is available to him, cap only be had subject to the first and paramount lien of the Plaintiff Bank respecting the amounts due to the bank as aforesaid. No other relief is claimed against the third Defendant, except that of the Plaintiff Bank''s right to a proper lien over there shares as against the third Defendant, who is slated to be in possession of these shares.

Issue No. 5. Has the Plaintiff not got a paramount lien over the C schedule shares for all the plaint amounts in priority to the third Defendant''s claim ......relates to this matter. The lower court has dealt with the issue as follows:

The shares mentioned in C schedule are Ext. Sy 1 to I (C). Admittedly they were offered in the open market for sale without notice of the lien if'' any which Plaintiff Bank had under Article 36 of the Articles of Association of the said bank. These shares are my paid up and Article 36 cannot apply, in the are of such shares. Further if the Plaintiff Bank, to have any lien, it should have taken deposit of these shares. But these shares have been, produced by the third Defendant. In these circumstances I am satisfied that third Defendant who is unison of these shares has a prior charge over that of the Plaintiff. Issue found accordingly.

This is a very unsatisfactory disposal of the points-that Aally arise for consideration.

Article 38 of the Articles of Association of the Bank (Ext. AA) is in the following terms:

The Bank shall have a first charge and paramount lien upon all the shares registered in the name-of each member (whether solely or jointly with others) and on all dividends declared or payable in respect thereof as also upon the, deposits of, or any amounts due by the Bank to, a member other person, for his debts, liabilities or engagements solely or jointly with any other, person to or with the Bank,, whether the. lime for he payment, fulfillment or discharge thereof shall have actually arrived or not and no equiable interest in any share or in any deposit or money payable by the Bank shall be created except upon the footing and condition that in the case of shares Article 6'' hereof is to have lull effect. Unless otherwise agreed, the registration of a trans-; for of shares shall operate as a waiver of the Bank''s lion, if any, on such share.

As staled in Palmer''s Company Law (19th Edn. p. 134.) "A company has, prima facie, no lien on the share of a member; but the Articles may, and usually do, provide that the company shall have a paramount lien on the shares of each member for his debts and liabilities to the company, whether matured or not" and this is exactly what has been done by Article 36. There can be no doubt that such a provision is effective and that its either cannot be destroyed - as the lower court seems to think - either by the fact that the shares are bought and sold in the open market or that they are fully paid up or because of the company''s failure to obtain custody of the shares.

The controversy that has engaged the attention of courts has never been on the existence or validity of such a lien but its availability after notice in'' respect of transactions subsequent to the receipt of the notice. As observed by Palmer "A lien clause in the articles not infrequently gives rise to questions of priority between the company asserting the lien and persons claiming under the shareholder. For example, the company may receive notice that the shareholder has mortgaged or sold the shares, and the question then arises whether,. if the shareholder subsequently becomes indebted to the company, the company''s lien will rank in priority to the mortgagee or purchaser" (Palmer''s Company Law, 19th Edn. p. 134).

The third Defendant informed the Bank of the'' equitable mortgage created in his favour by the deposit of the shares apparently by a letter dated 9-7-1948. That letter is not before us. The Bank''s reply to that letter has, however, been produced. It is Ext. A. C. dated 24-7-1948 which is in the following terms:

As we are entitled to a first charge and paramount lien under Article 36 of the Articles of Association of the Bank we can recognise your lien on the; above shares only subject to our paramount lien.

The total amount claimed in the plaint is made up of amounts falling under three distinct heads and in paragraph 13 of the plaint the cause of action for the suit is stated as follows:

The cause of action for the suit arose on, from 13-10-1947 to 2-7-1948 respecting the Demand Bill amounts; on 10-8-1948, 17-8-1948 and 30-12-1948 relating to overdraft amounts and 8-1-1947 and 3-4-1947 relating to Gold loans and thereafter within the jurisdiction of this Hon''ble Court at Mattancherry, Cochin where the Plaint transactions look place and where all the Defendants reside.

It is clear from the above that the claim in respect of the overdraft alone arose subsequent to tire notice given by the third Defendant and as the learned Counsel for the Appellant is prepared to confine the claim for priority to the other two heads of claim it is unnecessary for us to consider the effect of the notice dated 9-7-1948, section 33 of the Indian Companies Act, 1913, and the exemption Clause (Article 6) in Ext. AA:

The Bank shall be entitled to treat the registered holder of any share as the absolute owner thereof; and accordingly shall not be bound to recognise notwithstanding any notice thereof any mortgage or charge thereof or thereon or other claim to or interest in such share on the part of any person other than the registered holder, his executors, administrators or holders of Succession Certificates under the Indian Succession Act, 1925 in respect of his share, and other than such rights upon transmission as hereinafter mentioned.

We entertain no doubt that as regards the two "heads of claim in respect of which priority is claimed before us (items 2 and 3 of the particulars of Claim given in the Plaint) the Bank is entitled to succeed on the basis of Article 36 of Ext. AA and decide accordingly.

The appeal is allowed to the extent indicated above; but in the circumstances of the case without any order as to costs.