The General Produce Dealers (Madras) Ltd. vs A. MK. MK. Karuppan Chettiar (died) and others

Rajamannar, C.J.—This is an appeal from the judgment of Balakrishna Aiyar, J. on an application made to him in the matter of the Trivellore Oil Mills Ltd., in voluntary liquidation. That company was incorporated in 1946. In December 1948 the Central Indian Agencies were appointed the Managing Agents of the company. It has been found - and it is not disputed - that on or about 23rd March 1949 the first respondent in this appeal advanced a sum of Rs. 20,000 to the company. On that date, the Managing Agents passed a receipt to the first respondent in the following terms: Received with thanks from Mr. A. MK. MK. Karuppan Chettiar, Madras, the sum of Rs. 20,000 (Rs. Twenty thousand only, being the amount towards debenture loan, by cheque No. W.47/111390 dated 23rd March 1949 on the Indian Bank Ltd, Madras.

It is common ground that no debentures were ever issued by the Company. The first respondent was paid various amount''s aggregating to Rs. 7428. Apparently the affair of the company were not as satisfactory as they should have been and there was an attempt to put things into some order as a result of which we find a memorandum of agreement in re: the affairs of the company (Ex. R. 4) which is dated 10th December 1950. The parties to this agreement were some of the directors of the company and the managing agents. None of the creditors of the company was a party. Paragraph 6 of the Memorandum sets out the amounts due by the company and among the items is included the debt due to the first respondent. It is thus set out:

Rs. 23,445 besides interest at 12 per cent per annum as from 1st December 1950 due as on this date from the company on proposed debenture account as per its books to Sri. A. MK. MK. Karuppan Chettiar.

The arrangement to pay off the creditors is set out in paragraph 8 It is not necessary to state that arrangement, as nothing came out of it. At a meeting of the Board of Directors held on 12th December 1950 it was resolved inter alia that a promissory note for Rs. 20,000 for the balance amount due to Sri A. MK. MK. Karuppan Cheitiar with interest at 12 per cent as from 1st January 1950 be executed in his favour by the company and the managing agents and directors Mr. T.R. Doraiswarai Naidu and K.P. Varadachari were authorised to execute the promissory note on behalf of the company. There is no mention in this resolution either of a charge or of the issue of debentures. Subsequently there was a tripartie agreement, Ex. P.1, dated 26th November 1952. There were three parties to this agreement. Party A represented the managing agents, Party B, two directors, who were not members of the managing agency firm and Party C, the appellant before us, the General Produce Dealers (Madras) Ltd., who were the financiers and Creditors of the company and to whom a very large amount was due and payable. The debts due by the company to various parties including the first respondent are mentioned, the debt to the first respondent being Rs. 20333-5-4 as on 31st December, 1952. The agreement provided for the issue by the company of first mortgage debentures, 1250 of Rs. 100 each, of the total value of Rs. 1,25,003 secured on the lands, buildings, plant and machinery and other fixed assets of the company and its uncalled capital. The debentures were to carry interest at six per cent per annum free of income tax. The said debentures for the total sum of Rs. 1,25,000 were to be disposed of by allotment of several debentures to meet the liabilities of the company to the several creditors. The relevant provision for the first respondent was thus made :

Issue and deliver debentures for Rs. 20.000 in favour of Sri A. MK. MK. Karuppan Chettiar or his nominees towards discharge in full of the sum of Rs. 20,333-5-4 due to him as aforestated.

The first respondent himself was not a party to this agreement. There is nothing on record to show that he was agreeable to accept debentures for Rs. 20,000 in full satisfaction of his claim for Rs. 20,333-5-4. The agreement further provided as follows :

Party C (the appellant before us) hereby undertakes to purchase at par for principal plus accrued interest, if any, Sri A. MK. MK. Karuppan Chettiar''s entire debentures of the value of Rs. 20,000 within a period of one year from date.

On the same day, i.e., 26th November, 1952, there was a meeting of the Board of Directors at which the said memorandum of agreement was read and simply recorded. There was no formal resolution of the Board of Directors adopting the agreement. The Minutes contained the following note:

It is stated and recorded that payment of amount due to Sri A MK. MK. Karuppan Chettiar stands on a different footing from the other debts of the company. This amount was taken by the managing agents on behalf of the company on the distinct condition that the loan be treated as a first mortgage loan or that first mortgage debentures from the amount due should be given to the said creditor. Nevertheless, the creditor being willing to receive cash forthwith in repayment and in view of the assurance of early payment of party C the appellant before us the question of creating a charge in respect of A. MK. MK. Karuppan Chettiar''s debt may be deferred for the present.

As already mentioned, no debentures were ever issued by the company, per was any charge specifically created in favour of the first appellant. In April, 1954, it was realized that the company could no longer carry on business and on 30th May, 1954, the company went into voluntary liquidation. Mr. M.S. Vara dacharya, Advocate of this Court and Mr. Sitaram, Managing Director of the appellant company were appointed liquidators.

The first respondent filed an application (No. 1388 of 1955) on the Original Side of this Court in the matter of the voluntary liquidation of the company praying that directions be given to the joint voluntary liquidators to pay him a sum of Rs. 27541-1-0 and further interest from 22nd March, 1955, up to date of payment out of the first assets of the company coming into their hands, or in the alternative, that directions be given to the joint voluntary liquidators to issue a debenture certificate for the said sum of Rs. 27541-1-0 carrying interest at 12 per cent per annum from 22nd March, 1955, and to have the same registered in the Office of the Registrar of Joint Stock Companies and that the joint voluntary liquidators representing the company be directed to specifically perform the contract dated 23rd March, 1949 and issue in favour of the applicant a debenture certificate and secure the moveable and immoveable assets of the company for the sum of Rs. 27541-1-0 carrying interest at 12 per cent per annum from 22nd March, 1955. This last prayer was added by way of an amendment made after the filing of the application. One of the joint liquidators. Mr. Varadacharya, who obviously did not have any personal knowledge of the transactions, merely staled that the applicant did pay on 23rd March, 1949, a sum of Rs. 20,000 to the Managing Agents of the company on their promise to treat the same as a debenture loan and that the managing Agents did not carry out their promise and issued a debenture certificate to the applicant. The other liquidator, who, as already mentioned, was the Managing Director of a company, which was the largest creditor of the company in liquidation, opposed the application. He stressed on the fact that his company was made to invest large sums on the specific understanding that it would be treated as a debenture holder and that the managing agents had been promising to issue debenture certificates for Rs. 1,50,000, and they failed and neglected to do so. If anybody was entitled to a preferential treatment, he submitted that his firm was so entitled.

Balakrishna, Aiyar J. allowed the application and held that the first respondent was entitled to a first charge for a sum of Rs. 25,890-0-2 as on 22nd March 1955 on the net sale proceeds of the company''s assets subject to the prior claims of the Government of Madras and the Municipality of Trivellore. The learned Judge held that the amount of Rs. 20,000 was advanced to the Managing Agents on behalf of the company by the first respondent on the distinct understanding that the loan would be treated as a first mortgage loan or a first mortgage debenture for the amount due. The learned Judge overruled the objection raised on behalf of the appellant that the Managing Agents had no authority to enter into an Agreement to grant debentures, because there was no resolution of the Directors authorizing the Managing Agents to raise any money by the issue of debentures. The learned Judge referred to Cl. (38) of the Memorandum of Association of the Company and Art. 82 of the Articles of Association and the Managing Agency Agreement, in particular to Cls. (f), (g) and (h) of paragraph 5 and came to the conclusion that the managing agents had the power to raise money on such security as may be necessary and they would, therefore, have also the power and authority to make the promise, which they did in their receipt passed to the first respondent. The learned Judge also refused to accept the contentions raised on behalf of the appellant that specific performance should be refused because of the vagueness in respect of material terms, as for example, the rate of interest and as regards the property secured for the debentures. The learned Judge had no doubt whatever that if the applicant had come to Court shortly after he had lent the money and asked for specific performance of the agreement that the Managing Agents had entered into with him, he could have obtained an order in his favour. The learned Judge was of course alive to the fact that no debentures had actually been issued and no charge had been created to secure the amount advanced by the first respondent, but he followed the principles laid down in several leading English decisions that a contract to give a charge in equity would amount to the creation of a charge, the basis of the rule being the maxim "Equity treats that as done which ought to be done".

The other objections raised on behalf of the appellant were that there was considerable delay on the part of the first respondent in seeking relief, that the claim was barred by limitation and that if the application were to be allowed, other creditors of the company would be entitled to similar rights and they would be prejudiced. The learned Judge held that there was no question of directing the issue of a debenture because the assets of the company had been sold and converted into cash. So he observed:

The only relief that can be given to the applicant is a direction that he should have a first charge on the net proceeds of the sale of the company''s assets subject of course to the prior claims of the Government of Madras and the Municipality of Triyellore.

The above appeal is against this order of the learned Judge.

Mr. Tarwady, learned Counsel for the appellant, at the outset pressed upon us a point, which does not appear to have been pressed before Balakrishna Aiyar J., but which we allowed him to raise, as it is a legal plea, which goes to the root of the matter. The plea is founded on the provision in S. 87 (G) of the Indian Companies Act, as amended by Act XXII of 1936. That section runs thus :

A Managing Agent shall not exercise in respect of any company of which he is a managing agent a power to issue debentures or, except with, the authority of the directors, and within the limits fixed by them, a power to invest the funds of the company, and any delegation of any such power by a company to a managing agent shall be void.

He contended that this provision, which is explicit and mandatory makes the promise, which might be contained in the receipt passed by the Managing Agents legally unenforceable. The first respondent, even if he had brought a suit for specific performance, would be met with this bar on the powers of the Managing Agents and the Court could not and would not have directed the Managing Agents to do something, which is specially prohibited by the above provision, S. 87 (G). Learned Counsel for the first respondent was compelled to concede that this contention was unassailable, but he attempted to get over this difficulty by contending that the Company had promised to issue debentures and had thus either ratified the promise made by the Managing Agents, or had undertaken a fresh obligation. The facts, however, do not support this contention of the first respondent. It is true that in 1952 there was a tripartite agreement, which provided for the issue by the company of debentures, some of which were to be allotted to the first respondent to secure the payment of the amount due to him. The tripartite agreement of 26th November, 1952, was not accepted and acted upon by the Directors of the Company. It was no doubt placed before the meeting of the Board of Directors held on the same day, but it was only read and recorded. There is no resolution directing the issue of debentures as provided in the agreement. So far as the debt due to the first respondent was concerned, there is a special note in the minutes of the meeting of the Board on 26th November, 1952, which we have extracted above. That clearly shows that up to that date the company had not decided to create a charge in favour of the first respondent either by issue of debentures or otherwise.

We do not think it necessary to discuss the English rule relating to equitable charges and the application of the maxim that "Equity treats that as done which ought to be done." Those decisions related to cases where there was an express agreement to create a charge, but no document was executed embodying the charge. As was pointed out in Levy v. Abercorris Slate and Slab Co. 37 Ch. 260, even a mere agreement to issue debentures were sufficient to operate as a debenture. The rule is thus stated in National Provincial and Union Bank of England v. Charnley (1924) 1 K.B. 431:

If an agreement be made to grant some interest in existing or future property for the purpose of securing the payment of a debt that agreement to give the security confers an equitable security or charge though all the formalities necessary to create the actual security have not yet been complied with

In the present case, however, there is no scope for the application of this rule because there was no enforceable agreement by any competent party to issue debentures, or to create a charge. The contract, which the first respondent sought to specifically enforce, was a contract contained in the receipt passed by the Managing Agents. The provisions of S. 87 (G) render such a promise illegal and therefore useless. The position, therefore, is this. The Managing Agents had no power to issue debentures and, therefore, it follows that a promise by them to issue debentures would be equally of no avail.

The tripartite agreement and the resolutions of the Board of Directors already referred to do not materially assist the first respondent. There is no evidence that any of these resolutions was communicated to the first respondent and that the first respondent agreed to the several proposals made from time to time. We have seen that at one time the company only authorised the execution of a promissory note. There was no mention of any charge or debenture. Subsequently there was a proposal 10 issue debentures, but nothing came out of that proposal. On the facts and circumstances set out above, we are clearly of opinion that the first respondent did not obtain a charge either by way of debenture or otherwise, to secure the amount due to him. If the first respondent were to take up his stand on the tripartite agreement, it cannot be overlooked that the same agreement provided pari passu for the issue of debentures to other creditors as well for total claims aggregating to about Rs. 1,25,000. That would have the effect of destroying the first respondent''s claim to a first charge in the net sale proceeds of the company to the exclusion of other creditors. The learned Judge disposed of this matter by observing that if the other creditors of the company are also entitled to similar rights, it was for them to present their case to Court If they did, they would not obtain any relief, because the learned Judge directed that the first respondent was to have a first charge on the net proceeds of the sale of the company''s assets. We understand that the balance in the hands of the joint liquidators will hardly suffice to discharge the debt due to the first respondent. The truth of the matter appears to be that the other creditors realised that the terms of the tripartite agreement by themselves could not confer any right on them, either as debenture holders or as charge holders. In the result, we allow the appeal and dismiss the first respondent''s application. There would be no order as to costs, but the liquidators will be entitled to take their costs from the funds in their hands.