Company Law Board
Central Bank Of India vs Saraf Textile Industries Ltd. on 6 November, 1997
Equivalent citations: [1998]93COMPCAS309(CLB)
JUDGMENT
A.R. Ramanathan, Member
1. This order relates to two petitions filed under Section 141 of the Companies Act, 1956 (hereinafter called "the Act"), by Central Bank of India having its branch office at Sansar Chandra Road, Jaipur. Since both the petitions relate to the same company, viz., Saraf Textiles Industries Ltd. (hereinafter called "the company"), and since the issues involved and reliefs sought are the same, both the petitions are being disposed of by this single order. Both these petitions were filed on July 15, 1997.
2. The brief facts leading to this petition are as follows :
The respondent company has been availing of cash credit limits against hypothecation and overdraft limits against book debts from the petitioner bank since long, which was renewed in 1994. It is gathered from the documents that the petitioner bank has been acting as the bankers for the company since 1987. The renewal of the credit limits was communicated by the bank through a sanction letter dated April 23, 1994, which is available on record. It is also understood that the agreement for hypothecation of goods and relating to book debts was entered into on May 19, 1994. It is the contention of the respondent company that these charges have been already filed by them with the Registrar of Companies and have been taken on record. What the petitioner bank now seeks to register is a modification of that charge in order to cover the various limits by collateral security by way of a second charge on the block of assets of the company. According to the petitioner, the delay in filing this modification was due to the inadvertence and mistake on the part of the company. The bank, however, upon the knowledge of facts took the initiative and filed the above particulars. According to the petitioner, no one will be prejudiced in any manner if the delay in filing the modification is condoned. The petitioner, therefore, has prayed for condonation of delay in filing of the particulars and extension of time up to the date of filing of the relevant forms, i.e., till June 3, 1997, though the particulars should have been filed by June 17, 1994, involving a delay of nearly three years.
3. On notice to the company it filed objections to state that no agreement is in existence for creation of a second charge on the block of assets of the company and even otherwise without the prior permission of the first charge holder, namely, State level institutions, no second charge can be registered. Hence, it is contended that the petition is not maintainable and is liable to be rejected.
4. On the facts, the company has stated that there was an enhancement and sanction of the credit limit in 1994, and as agreed between the parties the particulars of the modification of charge in Forms Nos. 8 and 13 with regard to hypothecation of goods and security of book debts were already filed with the Registrar of Companies. In the circumstances the petitioner's allegation that the particulars of modification were not filed with the Registrar of Companies is not correct. Consequently, there is no inadvertence or mistake on the part of the company in filing the relevant forms. The bank has already ceded the second charge on current assets in favour of the Rajasthan Industrial Development and Investment Corporation Ltd. (RIICO) and expressed no objection for creation of a first charge in favour of RIICO and Rajasthan Financial Corporation (RFC) over immovable property and other assets. However, there is no mention of the second charge on the block of assets in any document.
5. The company has also raised some legal objections regarding maintainability of the petition. According to the reply the petition has not been supported by the required affidavit in the manner prescribed in Regulation 14(5) of the Company Law Board Regulations, 1991. Further, it is stated that it is mandatory for the petitioner to serve a complete copy on the Registrar of Companies with acknowledgment by that office. Moreover, the petition is required to be accompanied by all relevant documents with an index and such documents are to be attested by the party or the authorised representative. In particular along with the petition copies of the agreement creating/ modifying the charge, resolution under Section 292(1)(b) or (c) and Section 293(1)(a) of the Act, inter alia, other documents should have been attached. According to the reply, the above requirements have not been complied with in this petition.
6. It is further pointed out that the statement in Form Nos. 8 and 13 show as if loan documents were executed by the respondent company in favour of the petitioner bank on May 19, 1994, and as if a mortgage of properties has been made which is incorrect.
7. It is further contended that the petitioner has misused the process of law by filing the present petition since the bank is aware that on account of an earlier agreement in favour of RIICO, no second charge could be created as the "no-objection certificate" has not been given by RIICO. The petitioner has suppressed this material fact that without the permission of RIICO no further charge could be created. In fact, the company has given an undertaking to this effect to RIICO. The petitioner bank itself has addressed letters seeking RIICO's consent for creation of a second charge. It had also addressed similar letters to the respondent company. The suppression of all the above facts proves the mala fide intention on the part of the petitioner and, therefore, the bank does not deserve any relief. A counter reply has also been filed on behalf of the petitioner bank to the above reply of the respondent company.
8. At the hearing held on October 21, 1997, Mrs. Sara Sancheti, company secretary in practice appearing for the petitioner, stated that the evidence of charge on the block of assets has to be ascertained from the sanction letter dated April 23, 1994, duly received by the company, the admissions made by the company, in its audited balance-sheet to the effect that the bank has a second charge on the block of assets of the company and, thirdly, the correspondence between the company, the bank and RIICO in this regard. The company committed a breach of trust by not complying with the agreed conditions as set out in the sanction letter though it has operated the credit limits as sanctioned. She further stated that there are various modes and circumstances by which a charge can be created including an implied creation of the charge and constructive delivery in the case of an equitable mortgage. In fact, according to her it is the duty of the company, as per Section 134 of the Act, to have filed particulars with the Registrar of Companies which the company has failed to do. Consequently, as a person interested, as contemplated in the Act, the bank has now filed the particulars of the charge.
9. On behalf of the respondent company, Shri P. R. Kulwal, chartered accountant, deposed that though there might have been an intention to create a second charge on the block of assets, it was subject to the company obtaining a "no-objection certificate" from the Rajasthan Industrial Development and Investment Corporation (RIICO), the first charge holder of the block of assets. The agreement in 1994 had offered only the book debts and stocks as security and no fixed assets were stated as security therein in the agreement. These charges have been promptly registered by the company as per the provisions of law. He further contended that if at all the bank claims the second charge on the assets it should have done so in 1987 itself when the Company Law Board considered condonation of delay with regard to the original creation of charge where credit facilities were first granted as the company had been continuing to bank with the petitioner since then. On the other hand, the petitioner bank did not raise any such objection on the earlier occasion and hence the same cannot be raised now. He, therefore, submitted that since actually there was no modification carried out, there is no question of condonation of delay for filing particulars. As such the petition should be dismissed.
10. I have carefully considered the pleadings and the rival contentions at the time of hearing. The jurisdiction of the Company Law Board under Section 141(1)(b) consists of two parts, namely, (a) direction with regard to the extension of time for the filing of the particulars or for registration or for giving intimation of payment or satisfaction, and (b) direction for rectification of mis-statement or omissions, if any. In this particular case, the prayer of the petitioner is for extension of time for filing particulars only. With regard to extension of time also, the Bench cannot pass an order if effectively no charge existed to be filed at all. Though there is no harm in registering the particulars by the Registrar of Companies even if there is no charge, but when the matter is contested it is considered appropriate to decide whether a charge at all existed. Otherwise, an order to merely extend the time for filing particulars without the charge being there will amount to operating in a vacuum. In this connection, reliance has to be placed on the decision of the Company Law Board, Southern Region Bench in S.T. Patil v. Registrar of Companies [1998] 91 Comp Cas 578, wherein it is observed that (page 585) ". . . it is free from doubt that Section 141 is attracted provided a 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". In the present case, one ingredient, namely, that the subject-matter claimed is an interest in immovable property which falls under Section 125(4)(c) of the Act is satisfied. It is only necessary to be satisfied about the second ingredient, namely, whether the company has created a charge on the assets. In this connection, a reference to the decision of the Madras High Court in T. V. Sundaram Iyengar and Sons Private Ltd. v. Official Liquidator [1972] 42 Comp Cas 359 indicates that one has to look for a contract creating the charge. In this case, it was stated that a charge by mere operation of law need not be registered under Section 125. In other words, an evidence of the creation of a charge is necessary and that precisely is the contention of the respondent company. In this connection, it is necessary to carefully analyse the provisions of Section 125(1) of the Act. This sub-section is reproduced below :
"(1) Subject to the provisions of this Part, every charge created on or after the first day of April, 1914, by a company and being a charge to which this section applies shall, so far as any security on the company's property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge, together with the instrument, if any, by which the charge is created or evidenced or a copy thereof verified in the prescribed manner, are filed with the Registrar for registration in the manner required by this Act within 'thirty' days after the date of its creation :
Provided that the Registrar may allow the particulars and instrument or copy as aforesaid to be filed within thirty days next following the expiry of the said period of thirty days on payment of such additional fee not exceeding ten times the amount of fee specified in Schedule X as the Registrar may determine, if the company satisfies the Registrar that it had sufficient cause for not filing the particulars and instrument or copy within that period."
11. The important, relevant features which attract the provisions of this section are :
(a) The charge should have been created by a company.
(b) This should be a charge to which this section applies.
(c) The charge should offer a security on the company's property or undertaking.
(d) The prescribed particulars are to be filed along with the instrument by which the charge is created or evidenced.
12. The respondent company in this case contends that there is no instrument creating the charge nor there is any evidence of the charge having been created. If there had been a contract as in the case of hypothecation of goods as executed on May 9, 1994, there cannot be a question of absence of contract or evidence of creation of charge. In the absence of a specific contract the petitioner bank has relied on the following which was contested by the company :
(a) The letter of sanction dated April 23, 1994, which contains one of the terms of sanction regarding the security for the limits in the nature of a second charge on the block of assets of the company. However, specifically the terms and conditions have not been accepted by the company whereas the company has merely acknowledged the receipt of a copy of this letter.
(b) The balance-sheet of the company for the year ended March 51, 1995, duly audited by the auditors of the company in which the credit limits are admittedly secured by a second charge of equitable mortgage of land, buildings and hypothecation of plant and machinery and other movable assets. According to the company, there is no commitment by the company.
(c) The correspondence between the company and the bankers which adits that the company undertakes to obtain a certificate of registration after creating a second charge on block of assets. According to the company what it had agreed was to create a second charge subject to the no objection certificate to be obtained from RIICO. As such no second charge has been actually created.
13. A charge is in the nature of an interest in the property of the company in exchange for any borrowings made by the company or on its behalf. It is appropriate to note in this connection that the Companies Bill, 1997, has set out a definition under clause 2(11) as follows :
"'charge' means an interest created on the property of a company or its undertaking or both as a security . . ."
14. Where in a transaction for value both the parties evince an intention that property existing or future, shall be made available as security for the payment of a debt and that the creditors shall have a present right to have it made available, there is a charge even though the present legal right which is contemplated can only be enforced on some future date and that the creditor gets no legal right to property or any legal right of possession, but only gets the right to have the security made available by an order of the court. (Dutta on the Company Law, 5th Edition, page 411). In practice the creation of the interest and the complete documentation evidencing the interest do not always take place at the same time. They may be separated by a period of time pending compliance with technical formalities. However, the interest of the creditor in the property comes into existence the moment both the parties have expressed their intention, though the formal documentation will follow. The intentions of the parties are patently clear from the balance-sheet, correspondence read with the sanction letter. The sanction letter which is the originating point with regard to the interest of the bank in the property sets out the terms and conditions for availing of the credit facility. The respondent company has undisputedly availed of the credit facilities which is evidenced by the audited balance-sheet of the company. Further, the correspondence between the company and the bank, in particular the letter dated December 26, 1995, clearly shows that the condition of second charge has been accepted, but the formality of a no-objection certificate stood in the way of actually executing the documents. Thus, the intentions have been established beyond doubt and the charge had come into existence.
15. Let us look at this situation from a different legal angle. It is undisputed that the company has already acted upon the terms and conditions of the letter of sanction in more than one way which by implication means the terms as proposed have been accepted. In this connection, the provisions of section 9 of the Indian Contract Act, 1872, with regard to implied promises is relevant. A reference to the various case law on this subject leads one to the conclusion that "where a relation exists between two parties which involves performance of certain duties by one of them and the payment of reward to him by the other, the law implies a promise by each party to do what is to be done by him". (Principles and Practice of Indian Contract Act by A. C. Moitra, page 101). In this connection, the decision of the Calcutta High Court in Hulas Kumar v. Allahabad Bank, AIR 1958 Cal 644, is relevant. The facts in this case are akin to the present case. It was decided by a Division Bench of the Calcutta High Court in this case that where a person after receiving a notice from his bank which impliedly proposes to him that it would be keep his overdraft account alive and also make further advances only at a high rate of interest, renews his overdraft account and also obtains further advances, it is to be taken that he has agreed to pay the higher rate of interest stipulated by the bank. In other words, a contract complete with a promise and an acceptance of the promise is deemed to have come into existence with all the relevant terms and conditions. The sanctioning and availing of the credit limit from the bank by the company by implication is a tacit acceptance of the conditions of sanction, namely, that a second charge on the block of assets shall be created. Thus, the existence of a contract is also established. The company, however, could not complete the documentation without obtaining the no-objection certificate from the first charge holder. If the company proceeds to execute any document in this regard without the no-objection certificate from RIICO according to the company, it may be a breach of the contract with RIICO. It appears from the correspondence with RIICO that the no-objection certificate could not be obtained due to disputes regarding payment of penal interest to RIICO by the company. In other words, apparently RIICO appears to be having no objection provided the company settles its claim with regard to penal interest. In other words, the non-issuance of the no-objection certificate again arises out of the respondent company's own default in setting the claims of RIICO. In the circumstances, it would not be fair for the company to take advantage of its own default and put a charge holder to a disadvantage in the process, for a mere technicality of a no objection certificate. Thus, the charge exists by virtue of an implied contract even though the formal documentation is pending.
16. As already stated and as held by the Chancery Division in Heathstar Properties Ltd. (No. 2), In re [1966] 36 Comp Cas 768 ; [1966] 2 Comp LJ 247, notwithstanding the existence of proceedings regarding the validity of a charge, so long as evidence of the charge-exists the court will exercise its discretion to extend the time for filing the particulars. It was held in that case that for the purpose of extension of time only a prima facie view is necessary and it does not preclude the company from contesting the claim of the petitioner as and when the charge is sought to be enforced. As further observed in that case any refusal to extend the time-limit may put the petitioner in a more disadvantageous position than the prejudice that may be caused to the respondent company by allowing the extension of time subject of course to the prima facie satisfaction of the existence of the charge. In view of the above, also it is necessary to consider the extension of time for filing the particulars.
17. Having been satisfied that a charge does exist which has to be registered it is necessary to also examine whether sufficient reasons are adduced for granting the extension of time. The legal position is, primarily it is the duty of the petitioner company to file the particulars for the registration on pain of penalty. Though the company filed the particulars in respect of other securities, it did not file the particulars in respect of the second charge. A glance through the correspondence shows that the bank had been pursuing with the company as well as RICCO for complying with the technicality of a "no-objection certificate". Since no positive results have been obtained, as an interested party the bank has made the petition. In this connection, the contention of the respondent company that the bank did not object while extension of time was granted for the original charge created in 1987 is not relevant, since in those proceedings before the Company Law Board, the bank was neither the petitioner nor a party. It is, therefore, clear that it is due to the inadvertence of the company and active persuasion by the bank that the petition had to be filed. Hence, the delay in filing the particulars is fully justified.
18. The respondent company has raised certain legal objections on maintainability of this petition. All these objections relate to certain deficiencies in the petition and in the affidavit. On a careful scrutiny of the petition and the affidavit on record, I am satisfied that these objections have no substance and cannot operate as ground against the maintainability of the petition. Further, the procedural matters as contained in the regulations have to be considered keeping in view the substance of the case put forward by both the sides. Keeping this in view there is nothing which goes to establish that the petition is not maintainable.
19. In view of the above, the petition is allowed and extension of time granted up to the actual date of filing of particulars, and the Registrar of Companies is directed to register the charge within 30 days from the date of receipt of a copy of this order. The petitioner bank shall pay to the Registrar of Companies a cost of Rs. 1,000 each for the two petitions in view of the delay in filing.