Important Points
1. Section 125, Companies Act, 1956 has no application where the charge is by operation of law or is created by an order or decree of the Court.
2. Under Section 446, Companies Act, 1956, no power is conferred on the Company Court to declare a decree of the competent Court void and inoperative and hence when a suit is instituted in the Court of competent jurisdiction with the leave of the Court under sub-section (1) of Section 446 and a decree is passed by that Court whether on the basis of mortgage or otherwise, it would be binding on the official liquidator and no plea inconsistent with the decree passed against the official liquidator can be raised while deciding the questions of priorities under clause (d) of sub-section (2) of Section 446 of the Act.

Headnote:Companies Act, 1956 - Sections 125 and 446-Charge-Non-registration - Effect - Equitable mortgage of company’s property- Winding-up proceedings-Bank filing suit with leave of Company Court for recovery of debt due from Company-Preliminary decree in favour of Bank-Decree becoming final in absence of appeal against it by Official Liquidator of Company -Plea by Official Liquidator that non-registration of charge makes preliminary decree void under Section 125 of the Act-Not maintainable as Section 125 has no application in case of charge created by decree of Court and no power is conferred by Section 446 on Company Court to declare decree passed by a Competent Court void and moreover on default of payment of decreed amount till the date fixed by Court, the matter passes from domain of contract to that of judgment and the decree extinguishes and replaces the unregistered charge.
       Held : The question of applicability of Section 125 had to be decided on the terms of the decree-whether the unregistered charge created by the mortgagor was kept alive or extinguished or replaced by an order of sale created by the decree: if upon a construction of the decree, the court found that the unregistered charge was kept alive, the provisions of Section 125 would apply and if, on the other hand, the decree extinguished the unregistered charge, the section would not apply. (Para 18)
       Section 125 applies to every charge created by the company on or after the 1st day of April, 1914. But where the charge is by operation of law or is created by an order or decree of the court, Section 125 has no application. (Para 7)
       An order or decree of a Court creating charge on the properties of a company has to be distinguished from a preliminary decree passed in a mortgage suit based on an unregistered charge which is hit by Section 125 of the Act. (Para 9)
       It may be noted that Section 446 of the Act have no application to any proceeding pending in appeal before a High Court or the Supreme Court. From this what follows is when a suit is instituted in the court of competent jurisdiction with the leave of the court under sub-section (1) and a decree is passed by that court whether on the basis of mortgage or otherwise, it would be binding on the official liquidator and no plea inconsistent with the decree passed against the official liquidator can be raised while deciding the questions of priorities under clause (d) of sub-section (2). We wish to make it clear that under Section 446, no power is conferred on the company court to declare a decree of the competent court void-a prayer which is made by the official liquidator in the application out of which this appeal arises-so to that extent the application filed by the liquidator in the company court is not maintainable. (Para 12)
       The right of the respondents including the company represented by the official liquidator to deposit the decree amount was available till August 28, 1982. In other words, the right to recover the amounts pursuant to the contract creating charge, even under the terms of the decree was available till the said date and thereafter ‘the matter had passed from the domain of the contract to that of judgment’. By that date what was operative in the decree was not a mere unregistered charge but an order for sale of mortgaged property for realisation of decree amount. The preliminary decree cannot therefore be said to be void and inoperative. (Paras 16 & 19)
       Consequently held : For the above reasons we hold that the Division Bench ought not to have held that the preliminary decree passed by the competent court on May 25, 1980 was void and un-enforceable and accordingly we set aside the order. (Para 20)

Judgment

Quadri, J.-This appeal, by special leave, is directed against the order of the Division Bench of Kerala High Court in M.C.A. No. 11 of 1983 passed on January 29, 1986. That was an application filed before the learned Single Judge of the High Court of Kerala (hereinafter referred to as ‘the Company Court’) by the Official Liquidator against the Indian Bank and respondents Nos. 2 to 5 herein under Section 446(2) and Section 460(4) read with Section 125 of the Companies Act, 1956 (for short ‘the Act’) and Rule 9 of the Companies (Court) Rules, 1959 praying for a declaration that the charge created by the company in liquidation in favour of the Indian Bank against the land and buildings of the company, being plaint schedule properties in O.S. 169/80 before the Principal Sub-Court, Cochin, was void and a further declaration that the preliminary decree passed in the said suit to the extent that it created three charge on the assets of the company was contrary to the provisions of Section 125 of the Act and as such void and unenforceable against the Official Liquidator representing the General body of creditors excluding the decree holder.

2. It will be necessary to notice the facts giving rise to this appeal for a proper appreciation of the questions raised before us. The Indian Bank advanced certain amounts to M/s. Chemmeens Exports Pvt. Ltd. which was secured by an equitable mortgage by deposit of title deeds of the debtor company with the Bank. Thereafter, winding up proceedings were initiated against the debtor-company and on March 1, 1979 and winding up order was passed in Company Petition No. 18 of 1978. The bank sought leave of the Company Court to file a suit for recovery of the debt amount in a sum of Rs. 29,50,609.58 due to it. The permission having been granted by the Company Court on 7.12.79, the Indian Bank filed the said suit, O.S. No. 169/80 in the Subordinate Judge’s Court, Cochin, against the debtor company in liquidation which was represented by the Official Liquidator, duly impleading the Directors of the Company. The Official Liquidator filed written statement and contested the suit taking, inter alia, the plea that the charge against the properties of the company not having been registered under Section 125 of the Act, was void. On 28.5.82, in the said suit the Court passed a preliminary decree in favour of the Bank. No appeal was filed by the Official Liquidator against the said decree.

3. However, on March 21, 1983, the Official Liquidator filed an application being C.M.A. No. 11 of 1983 before the Company Court for the reliefs indicated above. The bank resisted the application on the ground that the decree passed by the Court had become final and operates as res judicata. The learned Company Judge referred the case to a Division Bench expressing the view that the question was not free from doubt. By the impugned order of January 29, 1986, the Division Bench held that the preliminary decree passed in the suit did not operate as res judicata; that on account of non-registration of the charge it was void under Section 125 of the Act and that plea could be raised by the Official Liquidator as such and also on behalf of the body of the creditors in the application and also declared that the preliminary decree passed on the basis of the charge created by the company in favour of the bank against the land, buildings and machinery of the company, as set out in the preliminary decree, was void against the Official Liquidator and the creditors of the company and that the same was not enforceable against the assets of the company.

4. Shri Ram Kumar, the learned counsel for the appellant, contended that since no appeal was preferred against the preliminary decree passed in the suit filed by the bank with permission of the Company Court against the company represented by the liquidator on the basis of equitable mortgage of the company’s property, it had become final, and the Division Bench could not have

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1998 Supreme(SC) 603

Cases Referred (1)