Company Law Board
S.T. Patil And Ors. vs Registrar Of Companies on 13 May, 1997
Equivalent citations: [1998]91COMPCAS578(CLB)
ORDER
K.K. Balu, Member
1. This is a petition under Section 141 of the Companies Act, 1956 (hereinafter referred to as "the Act"), filed on March 19, 1996, for condonation of delay and extension of time for filing the particulars of charge made on July 7, 1988, with Lokapur Cements Private Limited (hereinafter referred to as "the company").
2. The facts alleged in the petition are that the petitioners are the shareholders of the company. The company, incorporated with the objective of promoting a mini cement plant, faced heavy business strain and financial loss, on account of depression in the cement market and withdrawal of incentives to mini cement plants by the Central Government. In these circumstances it was agreed to transfer the shareholding of the petitioners to Arvind Jawalkar and his group for Rs. 193 lakhs, after giving deductions in respect of the liabilities of the company as on June 30, 1988. Accordingly, the entire shareholding of the petitioners was transferred to the Jawalkar group on payment of a part of the consideration of Rs. 50 lakhs. As regards the balance of consideration, the Jawalkar group had executed seven promissory notes for an aggregate sum of Rs. 162 lakhs in favour of the petitioners, securing the dues by a deed of guarantee dated July 7, 1988, undertaking not to transfer any of the shares or alienate or encumber any of the assets of the company. A deed of commitment as well as guarantee was also executed on behalf of the company and individuals of the Jawalkar group. The petitioners being the charge-holders filed Form No. 8 along with the deeds of guarantee and commitment before the Registrar of Companies, Karnataka, Bangalore, with necessary filing fee. However, the office of Registrar of Companies did not register the charge and returned the documents to the petitioners stating that there was no necessity to register the said legal charge. The petitioners' advocate had also advised at that stage that registration need not be sought.
3. In the meanwhile, the company and the Jawalkar group committed default in payment of the amount payable under the promissory notes executed in favour of the petitioners and consequently seven suits were filed by the petitioners for recovery of the instalments due from the Jawalkar group before the court of the principal civil judge, famakhandi. The suit in O. S. No. 40 of 1991 was decreed directing Shri Arvind, one of the members of the Jawalkar group, to pay Rs. 4 lakhs due on July 1, 1989, with interest thereon. It was further ordered and decreed that the members of the Jawalkar group shall not transfer any of the properties of the company including shares, by way of sale, mortgage lease, charge or by any other means, till the bond and guarantees are complied with. The other six suits against the Jawalkar group are all pending, wherein similar order of ad interim injunction against the Jawalkar group is in force.
4. The petitioners on the advice of their advocates filed Forms Nos. 8 and 13 with the Registrar of Companies, Karnataka, Bangalore, on February 7, 1996, for registration of the charge created on July 7, 1988. The Registrar of Companies, however, directed the petitioners to obtain an order under Section 141 of the Act condoning the delay by the Company Law Board. It is further stated that the delay caused in filing the particulars of charges with the Registrar of Companies was not intentional, but due to their bona fide mistake and inadvertence that the said charge did not require registration. There was absolutely no fraudulent intention or any improper motive on the part of the petitioners. In these circumstances, the petitioners have prayed for condoning the delay of seven years, six months and one day in filing the particulars of charges with the Registrar of Companies.
5. When the matter came up for hearing, notice was ordered by this Bench to the company. In response to the notice served upon the company, it has raised objections to the registration of the charges. It is contended on behalf of the company that the deeds of guarantee executed by the company as well as the Jawalkar group are not valid documents creating charge over any of the assets of the company. The said documents are not valid in law, as they are not duly stamped. Nor do they create charge over any specific assets of the company. Moreover, the managing director of the company was not empowered to create charge on the company's assets in favour of the petitioners. The deeds of guarantee do not fall under any of the categories contained in Section 125(4)(a) to (i) of the Act. The petitioners have not made out any valid ground for condonation of the delay in filing the particulars of charges. For these reasons, it was submitted that the petition is liable to be dismissed.
6. During the final hearing on March 17, 1997, Ms. Keertida Kolar, counsel for the petitioners, while reiterating the pleadings made in the petition submitted that the charge was created on July 7, 1988, over the assets of the company by virtue of the deeds of guarantee and consequently the particulars of charges must necessarily be registered in accordance with Section 125 of the Act. This Bench may go by the spirit and not by the form of the instruments. The managing director of the company has the authority to execute the instruments creating charge and his authority cannot be disowned. This Bench need not go into merits of the charge and need not consider whether the charge is validly created or not. On the other hand, the Company Law Board shall be satisfied that the default was accidental or due to inadvertence or to some other sufficient cause or is not of a nature as to prejudice the position of creditors or that on other grounds it is just and equitable to grant relief. It was further urged that the delay caused in filing the particulars of charges in this case was not intentional but due to a bona fide mistake of the petitioners on account of wrong advice of the Registrar of Companies and their counsel and as such the delay may be condoned. Ms. Keertida Kolar, substantiating her above views, has cited the following cases :
I. Kris Cruisers Ltd., In re [1949] 19 Comp Cas 134 (Ch P).-The court must be satisfied that the omission to register was not an omission with any fraudulent intention, but was due to inadvertence, or to some other sufficient cause. In the cited case, the inadvertence due to an obvious mistake on the part of the company's solicitors was held to be sufficient cause for granting necessary relief in favour of the company.
II. Akkirath Mandanat Manahkal Tiiuppan Nambudiri v. Official Liquidator, Malayalee Bank Ltd. [1954] 24 Comp Cas 489 (Mad).-The court is entitled to extend the time, provided the court is satisfied that any one of the following conditions is satisfied, viz.,
(a) The omission was accidental or due to inadvertence or to some other sufficient cause.
(b) The omission is not of a nature as to prejudice the position of creditors or shareholders of the company.
III. Kent and Sussex Sawmills Ltd., In re [1947] 17 Comp Cas 169 (Ch D).--Whether a particular transaction is a charge or not is to be determined not by the form in which it is couched but by looking at the substance of it. Though a document is given in the form of an assignment, if, in reality, it is an instrument creating a security, registration as a charge cannot be evaded.
IV. Heathstar Properties Ltd. (No. 2), In re [1966] 36 Comp Cas 768 ; [1966] 2 Comp LJ 247 (Ch D).-It is not necessary to prove the validity of a charge in an application for extension of time for registration of the particulars of charge.
V. Sundaram Finance Ltd. v. State of Kerala, AIR 1966 SC 1178 ; . [1967] 1 SCJ 705.--A hire purchase agreement, though a financing transaction, secures the return of loans advanced to borrowers resulting in a charge on the security offered.
VI. Capital Finance Co. Ltd. v. Stokes [1968] 3 All ER 625 ; [1969] 1 Comp LJ 341 (CA).--A legal mortgage of property before or after acquisition by a company to secure part of the unpaid purchase price is required to be registered. Otherwise, the charge would be void as against the liquidator and creditors of the company. On creation of an equitable charge, the vendor's lien for the unpaid purchase money stands abandoned or excluded.
VII. Bond Worth Ltd., In re [1980] 1 Ch. 228.-The charge created under the retention of title clause was a floating charge on the property of a company within the meaning of Section 95(2)(f) of the Companies Act, 1948.
VIII. T. V. Sundaram Iyengar and Sons (P.) Ltd. v. Official Liquidator [1972] 42 Comp Cas 359 (Mad).-Section 125 of the Companies Act, 1956, is applicable to a charge created by a company and not to a charge arising by operation of law. The fact that the lien claimed both as a bailee and as an unpaid seller is not registered, would not disentitle the holder of the lien from working out his rights arising under the lien.
IX. Official Liquidator v. Suryakant Natvarlal Surati [1986] 59 Comp Cas 147 (Bom).-Though the mortgage was created by deposit of title deeds and the court passed a preliminary decree declaring the mortgagee as entitled to a charge on the property of the company and fixing the date for payment of the amount due for redemption, unless the charge is registered it is void against the liquidator.
X. Official Liquidator, Manasuba and Co. Pvt. Ltd. v. Commissioner of Police [1968] 38 Comp Cas 884 ; [1969] 1 Comp LJ 5 (Mad).-The managing director of a company has the actual and ostensible authority and the document executed by the managing director is enforceable on the strength of his signature.
7. Shri B. S. Shankarnarayan, counsel for the company, submitted that the deeds of guarantee dated July 7, 1988, are not in favour of the petitioners. Nor did the instruments create a charge on the assets of the company. The suits filed by the petitioners are money suits simultaneously seeking an order for injunction against the Jawalkar group. The transaction covered under the aforesaid deeds of guarantee do not fall under any of the clauses of Section 125(4)(a) to (i). The transaction, as described by the petitioners, amount to a loan by the company for purchase of its own shares which is prohibited within the meaning of Section 77 of the Act. When the charge is not registrable, the question of condonation of delay and consequent registration thereof does not arise. He has also pointed out that the cases cited by counsel for the petitioners are different from the facts of this case and hence inapplicable. In these circumstances, Shri B. S. Shankarnarayan submitted that the petition is liable to be dismissed.
8. I have considered the pleadings and heard the arguments of learned counsel for the petitioners and the company. The issues that arise for consideration are :
(a) Whether the transaction covered under the deeds of guarantee and commitment dated July 7, 1988, is registrable under Section 125 of the Act ?
(b) If so, whether the petitioners have given sufficient justification for condoning the delay in filing the particulars of charge.
9. As far as the first issue is concerned, a reading of Section 141 of the Act clearly shows that the Company Law Board has to satisfy itself that the delay in registering the charges within the prescribed period was accidental or due to inadvertence or to some other sufficient cause or is not of a nature as to prejudice the position of creditors or shareholders of the company, or on other grounds that are just and equitable. There is nothing in the Section to suggest that the Company Law Board should be satisfied about the validity of the charge. By virtue of Section 141, the Company Law Board is empowered to extend time for registration provided the transaction is a "charge". In the present context, the expression "charge" also includes a "mortgage" as per Section 124 of the Act. Section 125(4) requires that the following charges when created by a company must be registered with the Registrar,
(a) a charge for the purpose of securing any issue of debentures ;
(b) a charge on uncalled share capital of the company ;
(c) a charge on any immovable property, wherever situate, or any interest therein ;
(d) a charge on any book debts of the company ;
(e) a charge, not being a pledge, on any movable property of the company ;
(f) a floating charge on the undertaking or any property of the company including stock-in-trade ;
(g) a charge on calls made but not paid ;
(h) a charge on a ship or any share in a ship ;
(i) a charge on goodwill, on a patent or a licence under a patent, on a trade mark, or on a copyright or a licence under a copyright.
10. In these circumstances, it is far from doubt that Section 141 is attracted provided the transaction is "charge" within the meaning of Section 124 created by a company and falling under any of the categories contained in Section 125(4)(a) to (i) of the Act. In the absence of any of these ingredients, the Company Law Board cannot exercise its authority under Section 141 of the Act.
11. In this case, the petitioners are seeking extension of time for registration of the particulars of charge covered by the following deeds dated July 7, 1988.
(a) Deed of guarantee executed by the company through its chairman and managing director and one of the directors (annexure "J") undertaking not to transfer or mortgage or hypothecate or alienate by any other means the company's assets till discharge of the liabilities.
(b) Deed of guarantee executed by the newly constituted board of directors and shareholders of the company undertaking to clear all the liabilities of the company and relieve the erstwhile chairman, managing director, director and other shareholders from the liabilities (annexure "K") and
(c) Deed of guarantee executed by the chairman and managing director of the company in his official as well as individual capacity undertaking not to mortgage or sell the company's assets or the shares till settlement of the entire dues (annexure "L").
12. It is clear from the deeds of guarantee that the undertaking was not to encumber the company's assets till closure of the liabilities due to the petitioners. None of the deeds of guarantee created a charge on the company's assets. The learned principal civil judge, Jamakhandi in O. S. No. 40/1991/LQs had upheld execution of the aforesaid deeds undertaking not to transfer shares or by any means encumber the company's assets and also found that the Jawalkar group created a charge on the assets of the company in favour of the State Bank of India, in violation of terms of the deeds of guarantee dated July 7, 1988. The decree and judgment in O. S. No. 40 of 1991 do not come to the rescue of the petitioners in establishing the charge on the company's assets for the amount due to the former. The suit proceedings claiming a money decree and a permanent injunction against the Jawalkar group go to prove that the petitioners had not claimed a charge over the company's assets. Guarantees do not require registration under Section 125 of the Act. It is in this connection, reference may be made to the decision in Paul and Frank Ltd. v. Discount Bank (Overseas) Ltd. and the Board of Trade [1967] 37 Comp Cas 76 {Ch D), wherein it has been held that contracts of insurance, guarantee, indemnity, etc., do not require registration. In these circumstances, the decision of Kent and Sussex Sawmills Ltd., In re [1947] 17 Comp Cas 169 (Ch D) has no bearing on this case. Moreover, this Bench is not going into the validity of the charge ; but it is duty bound to see whether the transaction covered by the deeds of guarantee dated July 7, 1988, is a registrable charge within the purview of Section 125(4)(a) to (i) of the Act. In this context, the decision in Heathstar Properties Ltd. (No. 2), In re [1966] 36 Comp Cas 768 ; [1966] 2 Comp LJ 246 (Ch D) relied upon by counsel for the petitioners, has no relevance for the issue before this Bench. It may be worthwhile to quote the words of the learned judge (Plowman J.) in the said decision at page 777 which run as follows :
"If the case were one which the document sought to be registered could not in any circumstances be described as a charge, the position might be different. . ."
13. It is, therefore, clear that the validity of a charge need not be proved in an application for extension of time for registration of charge, but the charge must be a registrable charge. In the case before this Bench, the question is not whether there is a valid charge, but whether there is a registrable charge.
14. The other decisions cited by counsel for the petitioners, viz., Sundaram Finance Ltd. v. State of Kerala, AIR 1966 SC 1178 ; [1967] 1 SCJ 705 ; Capital Finance Co. Ltd. v. Stokes [1968J 3 All ER 625 ; [1969] 1 Comp LJ 341 (CA); Bond Worth Ltd., In re [1980] 1 Ch. 228 ; Official Liquidator v. Suryakant Natvarlal Surati [1986] 59 Comp Cas 147 (Bom) and Saradambal v. Jagannathan and Brothers [1972] 42 Comp Cas 359 (Mad) are not applicable to the facts and circumstances of this case.
15. Thus, considering all facts and circumstances mentioned in the petition and the legal position as explained above, I am of the view that the transaction covered by the deeds of guarantee dated July 7, 1988, (annexures "J", "K" and "L") is not a registrable charge under the provisions of Section 125 of the Act.
16. In view of the above, the second issue whether the petitioners have given sufficient justification for condoning the delay in filing the particulars of charge does not arise for consideration before this Bench. I am not, therefore, going into the merits of the other contentions of the petitioners and the decisions cited in this behalf.