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Bombay High Court
Govardhandas Vallabhdas vs The Official Liquidator, … on 7 March, 1929
Equivalent citations: (1929) 31 BOMLR 1209, 122 Ind Cas 836
Author: K Amberson Marten
Bench: A Marten, Kt., Murphy


Amberson Marten, Kt., C.J.

1. This appeal was opened to us as depending on the following question of law, viz., whether if a property is seized and attached and an order for sale made, an attaching creditor becomes a secured creditor. But that question is hardly the real point that we have to decide. The papers have been laid before us in a very confused way, and the paper-book omitted to contain a large number of material documents, said Official consequently we have been put to the inconvenience on endeavouring to elucidate the past history of the case by putting questions to counsel and being given extracts from documents or copies of documents at different stages.

2. The first matter to consider is, what is the precise application of the appellant creditor before the Court ? That appears to be contained in an affidavit sworn on September 2, 1928, in which he claims that the applicants are secured creditors and are entitled to payment first in preference to other creditors of the said company. On the appellant’s counsel being asked what security his client claims, we elucidated after considerable trouble, that this particular claimant had never attached anything except an engine. Accordingly, before us his claim was reduced to ranking as a secured creditor of the engine. It was further stated at the bar that he would value his security and prove for the balance, but that he was not in a position are present to say what was the value of the security.

3. In passing, I may observe that the claim originally put forward was obviously misconceived because, in any event, his right was necessarily to be paid in preference to all other creditors of the company. If he was a secured creditor he could do one of three things. He could either rely on his security and ignore the liquidation proceedings. Or, he could value his security and prove for the balance. Or, he could surrender his security and prove for his whole debt. But his affidavit does nothing of the sort. Further, as regards his claim to be paid in priority to all other creditors this could at the most be out of the proceeds of this particular security. There may be other creditors who also have a security on this particular property. And it appears that in fact another creditor named Mangaldas had levied attachment on a large quantity of the property of the company other than the engine and had obtained an order for sale. He, however, is not before us to-day. Accordingly, the appeal proceeded on the above limited basis of the claimant claiming to be a secured creditor of the engine.

4. That brings us again to the question of what are the rights of an attaching creditor. The arguments presented to us have to some degree turned on verbal distinctions as to whether he was a secured creditor or not, and we have been referred to the differences that exist in England and in India respectively as to the position of an attaching creditor. But the real point is that whether or no he is technically a secured creditor, yet as attach has certain rights, and that those rights have to, be dealt with in the insolvency of a private individual or in as winding up of a companyas hereis accordance with the particular statute regulating those rights. Accordingly, speaking for myself, I think it is really unnecessary to decide whether an attaching creditor is a secured creditor or not. As, however, certain authorities were cited to us, I will for a moment digress to mention some of them.

5. In England, Jessel M.R., in In re Printing and Numerical Registering Company (1878) 8 Ch. D. 535, says (p. 538):

The first question, then, I have to consider is are the creditors in question secured or unsecured ? They are certainly secured in a sense, by having taken the property of the company, the debtor, in execution. Under that execution they were entitled to sell the property and pay themselves out of the proceeds: they are secured in that way; they are not secured under contract. Persona holding security, whether under an execution or a garnishee order, or by judgment on tort, or by contract before judicial interposition, are secured creditors.

6. On the other hand, in Mulla’s Civil Procedure Code, 8th Edn., the law as applicable in India is thus summarised (p. 187):

Attachment creates no charge or lien upon the attached property. It merely prevents and avoids private alienations; it does not confer any title on the attaching creditors. There is nothing in any of the provisions of the Code which in terms makes the attaching creditor a secured creditor or creates any charge or Hen in his favour over the property attached. But an attaching creditor acquires, by virtue of the attachment, a right to have the attached property kept in custodia legis for the satisfaction of his debt, and an unlawful interference with that right constitutes an actionable wrong.

7. As authority for part of that proposition the Madras Full Bench case of Kristnamwmy MudaUar v. Official Assignee of Madras (1903) I.L.R. 26 Mad. 673 is cited where it is said (p. 678):

In our judgment the making of an order of attachment in favour of a judgment-creditor obtained under-Section 268 of the Code of Civil Procedure only operates so as to give the judgment-creditor certain rights in execution. It does not operate, when there rights are not exercised before the presentation of a petition in insolvency, so a to create in favour of the judgment creditor a title which prevails against that of the Official assignee under a vesting order in insolvency made after the order of attachment.

8. I quite appreciate that that was a case of an insolvency of an individual, and therefore a different Act applied from the Act we have to consider, viz, the Indian Companies Act.

9. Bat there is a further reference to a Privy Council decision in Moti Lal v. Karrabuldin (1897) I.L.R. 25 Cal. 179, p.c. where Lord Hobhouse stated (p. 185):

Attachment, however, only prevents alienation, it does not confer title.

10. Similarly, in the Calcutta Full Bench case of Frederick Peacock v. Madan Gopal (1902) I.L.R. 29 Cal. 428, F.B. Sir Francis Maclean, in delivering the judgment of the Full Bench, says (p. 431):

I think, therefore, it must be taken that the attaching creditor here did not obtain by his attachment any charge or lien upon the attached property, and if so, no question as to the Official Assignee only taking the property of the insolvent subject to any equities affecting it, can arise.

11. And Mr. Justice Ghose says (p. 483):

I am clearly of opinion that the attaching creditor did not acquire any title or charge upon the property by reason of the attachment in question.

12. One reason for this difference between Indian and English practice is said to lie in the English writ of fieri facias as compared with the prohibitory orders which are passed in India, and the different forms of the writ of attachment delivered to the sheriff. The bulk of authority, therefore, in India would seem to point to the fact that technically an attaching creditor is not a secured creditor, although, as I have said, he has certain rights by reason of his attachment, And I will now return to consider what those rights are as that in my opinion is the real point.

13. Let us first then see what exactly has taken place. Now, this takes me back to the past history of the case. It is clear that the claimant obtained a judgment, and in execution took out his darkhast No. 763 of 3 922 under which this engine was attached, prior to the date of passing of a resolution by the company on January 28, 1923, for voluntary liquidation. It is also true that an attempt by the voluntary liquidator to have that attachment raised failed. That application was dismissed on February 29, 1924. It could have been effected, no doubt, under the discretionary powers given to the Court of staying liquidation proceedings, viz., Section 215, which gives the Court power to exercise any of the powers which it might exercise if the company was being wound up by the Court. The powers of the Court in a case of that sort were recognized by Sir Lawrence Jenkins in Amrita Lai Kundu v. Anuhul Chandra Das (1915) I.L.R. 43 Cal. 586 although there the Court refused to stay the attachment levied before the resolution for the voluntary winding up.

14. Nest following on the dismissal of that application of the liquidator there was an order for sale, but previously there was an arrangement by which the applicant’s darkhast No. 763 of 1922 was in a way to stand over and the sale was to proceed under darkhast No. 26 of 1923 taken out by the other creditor, Mangaldas, to whom I have already referred. There is an application with certain documents, which is called Exhibit 12, but which appears to be Exhibit 16 in the present case, under which Mangaldas applied that the whole property should he sold together, because if the present applicant’s engine was sold alone, the other property might fetch a worse price. Accordingly on March 14, 1924, the learned Judge directed that the whole property should be put up for sale, and that the value of the engine should be assessed separately. This course was not opposed by Mr. Ranjitbhai who was the pleader for the present applicant. The result as regards this appellant’s darkhast No. 763 of 1922 is thus stated in its roznama against the entry of March 14, 1924: “The Court having granted Exhibit 12, in the proceeding of Darkhast No. 26 of 1923, farther proceeding herein have been closed.”

15. Continuing the history of the case, there was an unsuccessful attempt to sell in March 1924, and then on December 22, 1924, there was an application by another creditor, one Shakarbhai, for a compulsory winding up. That was Miscellaneous Application No. 299 of 1924. That was followed on January 21, 1925, by an application by Shakarbhai for an interim stay of the sale pending the hearing of the petition. The Judge’s order is “Temporary stay, notice.” Apparently, no formal order was drawn up, and accordingly, I should assume that this meant that a stay was granted until the hearing of the petition, and that this interim order was made under Section 169 of the Indian Companies Act.

16. However, the petition itself was heard a few days afterwards, viz., on January 26, 1925, when a winding up order was made. Consequently, the result was this: Under Section 171 of the Indian Companies Act no legal proceeding could be proceeded with except by leave of the Court, and subject to such terms as the Court might impose. On the other hand, if one looks at Section 232, it would appear that the execution in question levied by the creditor Mangaldas was not void under Section 232, having regard to the exception in that section. I think it is reasonably clear here that this execution of the creditor Mangaldas had been put in force against the property of the company prior to the winding up. And my own view is that in effect the present appellant’s execution had also been put in force against the engine in question, for that engine had been separately attached as far back as December 1922, and the order for sale made in March 1924 in eluded the engine as well as the rest on the property by an arrangement between the two attaching creditors.

17. What then did the present applicant do when that winding up order was made ? One would have thought that he would have applied in the winding up for leave to continue the attachment. He, however, did nothing of the sort. On the contrary, this somewhat extraordinary procedure took place. Mr. M.M. Bhatt, the official liquidator, wrote a letter of February 13, 1925, to Mr. P.M. Bhatt, the First Class Subordinate Judge at Ahmedabad headed in the matter on the company and of the company’s winding up and asked that the Nazir, who was in possession of the property under the attachment, should be directed to hand over all the property to the liquidator of the company. The endorsement made on the next day, February 14, 1925, by Mr. P.M. Bhatt, as Judge is as follows:

The Nazir is directed to comply with the request of the Liquidator forthwith.

18. It does not appear that notice was given to either of the attaching creditors. On the other hand the order was carried out at once, because the endorsement of the official liquidator on February 17 is, “Received according to the inventory.” However, neither of the attaching creditors took any steps to set aside this order. Consequently, in fact the attachment was raised and the Court seals, which the liquidator says were on the property, must have been removed.

19. Farther, when we come to the two darkhasts we find that this is what took place. As regards the appellant’s darkhast No. 763 of 1922 we find this endorsement on January 30, 1926 :

This Darkhast is disposed of because Court Darkhast No. 26 of 1823 has been removed from the file.

20. And when we look at darkhast No. 26 of 1923, of the other attaching creditor, Mangaldas, we find that on January 29, 1926, there was this endorsement :

The matter is placed today, The defendant Company has gone into liquidation. Nothing remains to be done in this Darkhast, which is therefore struck off the file. The costs, viz., Rs. 12-8-0 to be borne by the defendants.

21. It will be noticed that the one darkhast says ‘ struck off’ and the other note says ‘ disposed of.’ There has been some difference of opinion as to the correct translation of the present darkhast, but counsel eventually agreed that as regards present Darkhast No. 763 of 1922 the more correct word was ‘ disposed of,1 and on the other hand, the expression ‘ struck off the file’ is the correct translation in the other darkhast, So far then as those darkhasts are concerned the matter has ended. There has been no application by either of these attaching creditors to restore the darkhast or to discharge that order. There has been no new darkhast filed in execution; nor, as I have already pointed out, has there been any application for leave to proceed with the execution under Section 171 of the Companies Act.

22. In Passing, I may mention, that the proper mode of disposing of a darkhastas has been pointed out by my brother Murphy is under Order XXI, Rule 57, which provides that if by reason of the decree-holder’s default the Court is unable to proceed further with the application for execution, it shall either dismiss the application or for any sufficient reason adjourn the proceedings to a future date, and that upon the dismissal of such application the attachment shall cease. Then, if one refers to the notes in Mulla’s Civil Procedure Code, 8th Edn., at page 663 it says:

The object of the rule is to put an end to doubts which have arisen from time to time as to the continuance of an attachment by reason of the practice of ‘ Striking off proceedings’ or ‘removing proceedings from the file ‘ for which there was no justification under any of the earlier Codes.

23. And in the notes to Section 64 of the Act, a reference is made at page 186 to the trouble caused on the previous authorities, and as to what was the effect of an execution proceeding being “struck off” or “removed” from the file. It is there stated:

An attachment is not necessarily at an end because the execution case is struck off or removed from the file. The effect of such a proceeding depends on the circumstances of each case.

24. We regret then to find that this obsolete form of order was adopted in the present case. We think that the learned Subordinate Judge should have dealt with the case as provided by the Code and that he should have dismissed the darkhast or else adjourned it, if sufficient cause was shown. The course actually adopted by him was an erroneous one, and we think that this may be brought to the attention of the learned District Judge so that he may take the necessary steps to ensure that the Subordinate Judges in his District observe the correct procedure in future.

25. As regards the remaining history of the case there is little to be said. There was an affidavit of claim made by the present claimant on September 13, 1925, many months after the property had been given up to the liquidator. And then on August 25, 1926, his claim was admitted to a certain extent, viz., Rs. 22,248-15-9, but his claim to rank as a secured creditor was rejected.

26. Then followed the affidavit of claim of September 2, 1926, which, I have already mentioned. This was answered by the liquidator. And the appellant put in an affidavit in reply on November 3, 1926, from which it would appear that his view as was that on the order for winding up being made, and the official liquidator being appointed, all pending proceedings in all Courts necessarily ceased under the provisions of the Indian Companies Act, and that the official liquidator took possession of the properties of the company in pursuance of the orders passed by the Court and that it was on this account that the First Class Subordinate Judge stopped all further proceedings, including the sale of the properties attached and removed the darkhast from his file. That will be found in paragraph 8.

27. Under those circumstances, what rights of the claimants, as attaching creditors, remain before us to-day? They are not asking for leave under Section 171 to continue the attachment proceedingsthere is, of course, no such application before us, There is no darkhast in any of the civil suits, And so we have only got this present application asking, in effect, for a declaration that they are secured creditors. On this objection being pointed out to counsel, one answer given to us was that we might declare that they were secured creditors and then leave it to some future proceedings to determine what their security was. That, however, is not a course which has commended itself to this Court.

28. It seems to us then that the appellants have really misconceived their remedy. If they have still any remedy as attaching creditors, it must be obtained in some totally different proceedings. I do not say whether it is open to them now to ask for leave to proceed with the attachment. As far as I can see their attachment has gone, because the Nazir has been removed from possession, and possession has been given to the liquidator. But if any such application was made, then the Court would have to consider whether it would give leave or whether it would not, and whether any terms were to be imposed. But that raises matters for the decision of which we have not got the proper materials.

29. As regards the authorities, in the case of Kayastha Trading and Banking Corporation, (Ltd.) v. Sat Narain Singh (1921) 1. L. R. 43 All. 433 Mr. Justice Walsh, stated (p. 437) :

Moreover, if the matter had come before me sitting as the Judge in winding-up and there had been an application by the Company, either before the actual winding-up order or after it, to stay further proceedings by the decree holder under this decree, I am quite satisfied after examining the authorities on the subject in England, that it would have been my duty to have allowed the execution to proceed…. If a sale were shown to be likely to be ruinous to the goodwill or assets of the Company the creditor would, according to the English practice, be restrained from selling but allowed a first charge on the assets of the Company in the winding-up for his debt and costs as a condition of granting the stay.

30. So, too, in In re Richards & Co. (1879) H Chi I). 676. Mr. Justice Fry says (p. 679):-

Therefore I am of opinion that if there had been a winding-up the Court would nevertheless have given leave for this execution to be issued, and it follows that I ought not now to sanction the arrangement which would be inconsistent with such leave, unless the Judicature Act has altered the practice.

31. On the other hand, in Westbury v. Twigg & Co, (2) [1892] 1 Q.B. 77, the Court held that it had jurisdiction to stay further proceedings after the passing of a resolution for the voluntary winding up of the company, and Mr, Justice Day says (p. 80):

I am of opinion that until the execution is completed by seizure and sale, the Court has power to restrain such proceedings, and will not hesitate to exercise that power.

32. I appreciate that in that case, the Court treated the application as if it was one to stay the execution and then directed a stay accordingly. Unfortunately, we do not fee] ourselves to be in a position to adopt the course that was taken by the learned Judges in that case, and to treat the present application as if it was an application for stay in the winding up.

33. One other case was referred to us, viz,, In re Withernsea Brickworks (3)(1880) 16 Ch, D. 337,which was cited to show, that the effect of Section 229 of the Indian Companies Act in directing that as to the rights of secured and unsecured creditors the same rules shall prevail and be observed as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent does not extend so as to include Section 51 of the Provincial Insolvency Act. That section directs that no person shall be entitled to the benefit of an execution as against the receiver except in respect of assets realised in the course of the execution by sale or otherwise before the date of the admission of the petition. But, my judgment in this present case is quite irrespective of Section 51.

34. The result then of the whole case, in my opinion, is that even if the applicant fails to establish his claim to be a secured creditorwhich technically he seems not to beand if his real position was only that of an attaching creditor, yet he has apparently lost that position by reason of the events that have happened. There is, at present, no application before the Court to allow him to proceed with his rights in execution as an attaching creditor, if any. Under those circumstances his present application to be treated as a secured creditor in respect of this engine and to be paid out of the proceeds of the engine in priority to liquidator, the other creditors, is misconceived, and must be dismissed. The result, in my opinion, will, therefore, be that the appeal will be dismissed with costs.

35. Speaking for myself, I do not necessarily preclude the applicant from making any application that he may be advised to make for liberty to proceed with his execution, but, on the other hand, having regard to what I have already said, I can hold out no hopes that any such application will be attended with any more success than his present unsuccessful application.

Murphy, J.

36. The appellant’s contention has been all along that he is a secured creditor in connection with the insolvency of the Electric Metal Refining Company, Ltd, Ahmedabad, and that the District Judge Ahmedabad’s order holding that he is not such a creditor is wrong.

37. The facts are that the appellant and another decree-holder against the company had attached its engine, and its immovable property respectively, and proceedings went on in the First Class Subordinate Judge’s Court in Ahmedabad in execution, the appellant’s application being, apparently by consent, more or less amalgamated with that of his fellow decree-holder, the order being that the proclamation should be issued in the other decree-holder’s proceedings, viz, No. 26 of 1953. This was done to enable the property as a whole to be sold and so to get a better price for it. A sale was held, but sufficiently high bids were not obtained, and matters were proceeding in this fashion when, first of all, an attempt was made at voluntary liquidation and an application in that matter for a stay was rejected by the District Judge of Ahmedabad, and ultimately, one of the other creditors of the company obtained a temporary stay order, and in the end a winding up order was also made in the matter. Some time after this both the execution applications werewhat iB called”disposed of,’ that of the appellant being so treated on account of the similar order made in the one filed by bis fellow decree-holder. The Nazir, who had go far been in possession of the property, was, on the application of the liquidator, directed to hand it over to that officer, and he did so. The ground of disposal of the application for execution is stated to have been that the winding up order had been made in the matter. On these facts the appellant claims to be a secured creditor.

38. It is well settled law in India that an attachment creates no charge in favour of the attaching creditor, and that it merely prevents and avoids alienation, and confers no right on the attaching creditor. So far, therefore, the appellant is not a secured creditor, and the answer to the appellant’s question of what his position was can only be found in the provisions of the Indian Companies Act in connection with winding up proceedings. By Section 171 of that Act, on the making of a winding up order, no suit or legal proceeding can be proceeded with or commenced, except by leave of the Court, and subject to such terms as the Court may impose.

39. Since the appellant’s execution proceedings were pending when this winding up order was made, his real remedy then was to make an application to the District Judge to be allowed to proceed unrestrictedly, or on such terms as the Court might impose, with his application for execution. He, in fact, did nothing of the sort, but ultimately supported the winding up proceedings, though at the same time reiterating his claims to be a secured creditor.

40. I think that though the appellant’s firm had some rights in some of the insolvent company’s property at the date of the winding up order, his rights were not really those of a secured creditor, but the ones indicated in Section 171 of the Indian Companies Act, and that his contention that he is a secured creditor is baseless. Having allowed an order, that it was “disposed of,” to be made in his execution application, it is clear that his remedy, if any, is not on the ground he has now put forward, and that this appeal must be dismissed with costs.

Amberson Marten, Kt., C.J.

41. We wish to draw the express attention of the learned District Judge to the apparent serious delay that has taken place in this case in realising the property of the company. The liquidation resolution was as long ago as January 1923. Over six years have elapsed since that date. The winding up resolution was on December 22, 1924, So over four years have elapsed from that date. Apparently the factory has not been carried on as a going concern, and the machinery has been lying idle, and presumably some over-head charges and costs of maintenance have been incurred. The sensible thing would seem to be to have sold this property years ago. The present litigation affords I think no reason for delaying such a sale. All parties interested agreed to it long ago.

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