Hypothecation of goods is valid despite lack of specific statutory provisions if common law principles are applied, granting priority to secured creditors over state tax claims.

1. Defendants 1 and 2 viz. the State of Andhra Pradesh represented by the Collector, West Godavari District, Eluru and the Director of Agriculture (Cane Commissioner), Government of Andhra Pradesh, in O.S. No. 33 of 1973 on the file of the Subordinate Judge, Tanuku are the appellants. The 1st respondent herein viz., the Andhra Bank Limited filed the suit for a declaration that the plaintiff is entitled to certain sums, in the alternative for a money decree against some of the defendants. The 3rd defendant in the suit is the Sivakami Reserve Area Cane Producers and Suppliers and the 4th defendant is the Sivakami Sugars Ltd. a Public Limited Company now at Madurai. 5th defendant is the Managing Director of Sivakami Sugars Ltd., who died and defendants 6 to 19 are his legal representatives.

2. The plaintiff provided certain credit facilities to the 4th defendant, Sivakmi Sugars Ltd. and allowed open cash credit to the extent of Rs. 5,00,000/- and key cash credit to the extent of Rs. 15,00,000/- besides some other facilities totalling to Rs. 27,00,000/- and the 5th defendant executed a letter of guarantee on 22-1-1970 in favour of the plaintiff - Bank for the aforesaid credit facilities. The 4th defendant, Sivakami Sugars Ltd., had three godowns. The stock in godown No. 1 was the subject - matter of the hypothecation to the plaintiff - Bank under the open cash credit system to an extent of Rs. 5,00,000/- and a promissory note for the same was executed by the 4th defendant on 22-1-1970 in favour of the plaintiff. Similarly the sugar stocks in godown Nos. 2 and 3 were pledged to the plaintiff Bank to an extent of Rs. 15,00,000/- under key cash credit loan. The latter stocks viz. in godown Nos. 2 and 3 were under lock and key of the plaintiff. While so, the Tahsildar, Tanuku acting on the instructions of defendants 1 and 2 attached the stocks of sugar in godown No. 1 hypothecated to the plaintiff Bank for recovery of a sum of Rs. 5,20,682-96 said to be due towards sugarcane purchase tax to the State under the provisions of the Andhra Pradesh Sugarcane (Regulation of Supply and Purchase) Act, 1961 (hereinafter referred to as "the Act"). The 4th defendant filed writ petition No. 1558 of 1970 before this court challenging the attachment by the Tahsildar and also filed WPMP No. 6044/1970 for interim orders relating to the stock of 4331 bags of sugar in godown No. 1 hypothecated to the plaintiff. Pursuant to the directions given by this court, the stocks in godown No. 1 were sold and the amount realised was deposited 4th defendant filed another writ petition in respect of godown No. 2. It was found out later that the Tahsildar did not attach any stocks in godown Nos. 2 and 3 and that writ petition was dismissed as not necessary. Now coming to the stocks contained in godown No. 1, the plaintiff - Bank came forward with the present suit claiming that as it is hypothecated, the Bank is entitled to preferential first charge and lien to recover the suit amount due to it under the open cash credit loan from the 4th defendant and the defendants 1 and 2 being simple money creditors are entitled to any surplus that may be left over. After due notice u/s. 80 of the CPC, the suit was filed. The 5th defendant died pending the suit and defendants 6 to 19 were added as his legal representatives.

3. The 2nd defendant filed written statement which was adopted by the 1st defendant. It is admitted that the stocks in godown No. 1 were att