Andhra HC (Pre-Telangana)
Garware Capital Markets Ltd. vs Jaiswal Granites Ltd. on 13 July, 1997
Equivalent citations: 1997(5)ALT353, [1998]93COMPCAS218(AP)
Author: J. Chelameswar
Bench: J. Chelameswar
JUDGMENT Lingaraja Rath, J.
1. The appellant had preferred this appeal assailing the order of the learned company judge (see page 215 supra) refusing to admit the application under sections 433(e), 434 read with section 439(1)(b) of the Companies Act, 1956, seeking winding up of the respondent-company.
2. The appellant came with the case of having advanced, at the request of the respondent-company, an intercorporate deposit of Rs. 1 crore on May 16, 1995, to the respondent with repayment promised within 90 days. On August 10, 1995, there was a request by the respondent for extension of the deposit by 60 days. The respondent had repaid by that time, Rs. 80 lakhs, but since thereafter they did not clear the balance in spite of several demands, the application for winding up was filed. The application was contested at the admission stage by the respondent taking the stand that since they had paid Rs. 80 lakhs, the appellant was to release the securities held by it proportionately but that it had refused to do so. Such conduct of the appellant made the respondent incapable of raising money on the held up securities as a consequence of which the amounts were not paid. It was also urged that the securities, which were share certificates held by the managing director and others and had been pledged with the appellant, had fallen in value from Rs. 150 lakhs to Rs. 20 lakhs and as such instead of winding up, the appellant should pay compensation to the respondent to make good the loss.
3. The learned company judge after hearing both the sides took the view that the appellant having not disclosed the request made by the respondent for release of proportionate security, the court could have been misled into admitting the application for winding up, and as such taking exception to the conduct of the appellant, dismissed the application.
4. The respondent has appeared in the appeal through Mr. S. Ravi and with the consent of both the parties this appeal has been fully heard at the admission stage and hence the appeal is formally admitted and is also heard and disposed of now.
5. Mr. C. Kodanda Ram, learned counsel appearing for the appellant, submits that the view taken by the learned company judge of the appellant having a duty to release securities proportionately to the amounts repaid is not correct and that the appellant has a lien to hold the entire securities until the total loan was repaid as the loan was advanced on the securities furnished as a whole, and that it is not a part of the stipulation between the parties that the securities must be progressively released in proportion to the amounts repaid.
6. It is conceded by Mr. S. Ravi that in the loan transaction there was no stipulation of proportionate release of the pledged certificates when amounts are repaid. A loan contracted and paid is subject to the terms and conditions settled between the parties as part of the contract. If the contract does not stipulate steps to be taken as are contended by the respondent, a right of proportionate release of the shares on payments being made must be found in the general principles of law governing contracts or as an accepted commercial practice. No such interpretation of law has been brought to our notice and indeed no such general commercial practice has also been pleaded. On the other hand, the correspondence between the parties would reveal the pledge being made for the total amount of the loan. The letter of the respondent on May 16, 1995, from the executive director of the respondent enclosed, inter alia, letters of the shareholders placing the shares as collateral security for the loan of Rs. 100 lakhs. All the shareholders in their respective letters confirmed that in the case of default their shares would be transferred to the appellant-company on presentation by the respondent-company without any recourse to the shareholders. Mr. Kodanda Ram has rightly placed reliance on the decision of the Bombay High Court in Goverdhandas Goculdas Tejpal v. Bank of Bengal [1891] ILR 15 Bom 48, in which a similar contention raised was negatived. Rejecting the argument, his Lordship cited with approval the observation of Justice Blackburn in Ellis v. Emmanuel, L.R.I. Ex. D 157, that :
"I think that the class of cases referred to do not lay down any general doctrine that where there is a surety, with a limit on the amount of his liability, for the whole of a debt exceeding that limit, he is entitled to the benefit of a rateable proportion of the dividends paid on the whole debt; but only that where the surety has given a continuing guarantee, limited in amount, to secure the floating balance which may from time to time be due from the principal to the creditor, the guarantee is as between the surety and the creditor to be construed, both at law and in equity as applicable to a part only of the debt, co-extensive with the amount of his guarantee; and this upon the ground, at first confined to equity, but afterwards extended to law, that it is inequitable in the creditor, who is at liberty to increase the balance or not, to increase it at the expense of the surety."
7. Considering the question of balancing the equities of a surety and a creditor vis-a-vis the principal debtor, it was observed that the equity between the creditor and the surety is for the creditor not to do anything to deprive the surety of his right. The application of the principle to indemnify the surety was decide in Duncan, Fox v. North and South Wales Bank, L.R. 6 App. Cas 1, at page 13. That case itself yielded the reading "that the creditor's right to hold his security until his whole debt is paid is paramount to the surety's claim upon such securities, which only arises when the creditor's claim against such securities has been satisfied. In Gedye v. Matson, 25 Beav 310, the creditor's right is laid down as being superior to that of the surety". We must, accordingly, hold that the creditor has a right to hold on to the pledge until the whole of the loan has been repaid. The pledge is made as a security for the entire loan and there cannot be a right in the debtor to get proportionate release of the securities in accordance with the repayment of the loan.
8. Section 433 of the Companies Act, 1956, states the circumstances under which the company may be wound up. Out of the different circumstances enumerated, sub-clause (e) provides, when the company is unable to pay its debts, as one of such circumstances. Section 434 provides when the company would be deemed as being unable to pay its debts. Sub-clause (a) of section 434(1) is as follows :
"If a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor."
9. From the correspondence between the parties it is seen that on August 10, 1995, the respondents made a request to the appellant for extension of the time for payment by 60 days. A fax message was sent by the appellant regarding non-receipt of Rs. 20 lakhs. On August 20, 1995, the respondent sent a communication replying to the fax message, that the decision of the appellant not to give the intercorporate deposit would be a big disaster for the respondent-company, that the amount to be repaid was in the bank but that due to the survey conducted by the income-tax department the banks were under prohibitory orders for one week. It was urged that immediately on lifting of the orders they would send the amount to the appellant. Meanwhile, an appeal was made by the respondent to revolve the previous amount repaid so that during times of difficulties their factory does not stop. On September 2, 1995, the respondent sent a fax message to the appellant that the prohibitory orders were still continuing and that they have been fervently appealing to the income-tax department orally and in writing for lifting of the ban. Their business came to a total standstill and hence they requested the appellant to give some more time so that they could repay the balance of the intercorporate deposit with interest. They reported that at the moment they were helpless and looked forward to the appellant's kindness and understanding. On September 6, 1995, a fax message was released by the respondent requesting the appellant not to deposit the cheques which had been kept as security earlier. On September 16, 1995, the respondent addressed, a letter to roll over the intercorporate deposit for Rs. 20 lakhs and the entire interest accrued for another 90 days, and to release the security for the amounts already paid. It was for the first time that such a request was made for proportionate release of the security. Such a stand had not been taken earlier. On November 5, 1995, again another letter was sent requesting for further 90 days time for repayment of Rs. 20 lakhs with interest. On November 18, 1995, the appellant sent a reply disagreeing to release the security but indicating their co-operation for pledging the security with any other party as per the instructions of the respondent. But the offer was not availed of and instead the respondent insisted through different correspondence for release of the security which we have already found was an untenable position. On December 15, 1995, the appellant presented the cheques of the respondent for an amount of Rs. 2,78,925 which had been issued by the respondent on November 19, 1995, for encashment. But the cheques were dishonoured which fact the appellant communicated to the respondent on December 27, 1995. On January 8, 1996, a registered call notice was issued by the appellant under section 434 of the Companies Act, and section 138 of the Negotiable Instruments Act, 1881. The reply of the respondent on March 4, 1996, was an acknowledgment of the debt but sticking to their stand for release of the securities proportionately. The appellant sent the pledged shares for transfer in their favour but the respondent has not effected the transfers.
10. The resume of the facts would show prima facie, of there being a case of the respondent having not been able to clear off the debts. In such circumstance the appellants had the right to file an application under section 433(e) of the Companies Act. Since such a prima facie case has been made out, the application is entitled to be considered as to whether a winding up proceeding is warranted.
11. In the result the appeal is allowed and the judgment of the learned company judge is set aside. The application is directed to be admitted and registered and proceeded with in accordance with law.