IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE J.B.KOSHY & THE HONOURABLE MRS. JUSTICE K.HEMA WEDNESDAY, THE 30TH JANUARY 2008 / 10TH MAGHA 1929 M.F.A.No. 401 of 2001 --------------------- AGAINST JUDGEMENT IN M.C.A.No.73/94 IN C.P.No.2/87 Dt. 06/04/2001 .................... APPELLANT/APPELLANT: ----------- Dr. L.P. Prabhu, S/o. Lakshmana Prabhu, 'Lakshmana', Convent Road, Ernakulam. BY ADV. SRI.K.P.DANDAPANI RESPONDENTS/RESPONDENTS: ------------- THE Official Liquidator, High Court of Kerala, Carmel Buildings, Banerji Road, Ernakulam (M/s.Mittal Steel Re-rolling and Allied Industries Limited) (in liquidation) Addl.R2. The Syndicate Bank, Thrichur. (Addl.R2 is impleaded vide order dated 29.11.2001 in C.M.P.No.5690/2001) BY ADV. SRI.DINESH R.SHENOY R1 BY ADV. SRI.K.MONI SRI.K.JAYAKUMAR Addl. R2 by Adv.Shri S.V.Balakrikshna Iyer. THIS MISC. FIRST APPEAL HAVING BEEN FINALLY HEARD ON 30/01/2008, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: J.B. Koshy & K.Hema, JJ. -------------------------------------- M.F.A. No. 401 of 2001 --------------------------------------- Dated this the 30th day of January, 2008 Judgment Koshy,J. Appellant, a surety, claims the benefits of subrogation under section 92 of the Transfer of Properties Act, 1882 (in short 'the T.P.Act'). Apart from issues relating to subrogation by operation of law, effect of registration/non-registration of charges with the Registrar of Companies under section 125 and 135 of the Companies Act and rule 14 of the Companies Rules and application of the principles of estoppel and section 115 of the Evidence Act are the questions to be considered in this case. 2. Appellant was one of the directors of the company, M/s.Mittal Steel Re-rolling and Allied Industries Ltd. (hereinafter referred to as the 'company'). The above company, now in liquidation, applied for and availed of financial facilities from Canara Bank, Wadakkanchery to a limit of Rs.75 lakhs out of which an amount of Rs.22 lakhs and odd was outstanding as payable in June, 1981. The entire assets of the company including the land and machinery were mortgaged to the Canara Bank and directors of the M.F.A. No. 401/2001 2 company including the appellant had executed personal guarantee bonds and stood as sureties for the said loan. On account of the failure of the company to pay back the dues in proper time by 1981 the Canara Bank had expressed its inability to make further advances for the functioning of the company. It is the case of the appellant that in view of the above, he advanced Rs.18,38,852.58 to the company and the company cleared the liabilities of the Canara Bank. According to him, he paid the same as per board resolution and minutes of the discussions of the company dated 20.4.1981 will prove the same. Two resolutions passed in the above meeting are as follows: "RESOLVED unanimously that Dr.L.P.Prabhu be and is hereby authorised to borrow money from him or from his relatives in the name of Mittal Steel Re-Rolling and Allied Industries Limited in order to redeem mortgage debts of the Company to the Canara Bank and Dr.L.P. Prabhu be suborrogated to the position of the Canara Bank on redumption of the mortgage debt of the Company in full to the Canara Bank. RESOLVED unanimously further that Dr. L.P. Prabhu be and is hereby empowered to provide required funds to the Company either by himself or by his group to liquidate the mortgagee debts of the Company to the Canara Bank and Dr. L.P. Prabhu be subrogated to the position of the Canara Bank on redemption of the mortgage debt of the Company in full to the Canara Bank." M.F.A. No. 401/2001 3 But, mortgage was not redeemed by the appellant on the basis of the resolution and the resolution was not acted upon. There were two groups in the directors of the company. Appellant's group was called 'P' group and other group was called 'A' group. There was an agreement on 4.5.1981 regarding selling of shares of 'A' group to 'P' group and 'P' group settling the dues to Canara Bank. Clause 3 (a) of the above agreement reads as follows: "3. The 'A' group will transfer their shareholdings in the company to the 'P' group or their nominees, only if the following conditions are satisfied by the 'P' group in the manner and within the time stipulated hereunder, the time being the essence of this contract. (a) The 'P' group will provide or otherwise arrange enough funds for the company, and pay and settle all the liabilities to the Canara Bank as existing at the time of settlement. Such settlement shall be made on or before 30.6.1981." Therefore, resolution dated 20.4.1981 was not acted upon, but, in settlement of disputes between the two groups, it was agreed that appellant's group will provide enough funds to the company and pay off the liabilities to the Canara Bank as existing on the date of settlement. Accordingly, 'P' group advanced money to the company and company paid off the settlement and charge created on the property of the company was released by the Canara Bank. On M.F.A. No. 401/2001 4 4.6.1981, an application was submitted by the company to the Syndicate Bank, Thrissur for financial help and the entire assets of the company was hypothecated to Syndicate Bank for obtaining fresh loan. Title deeds of the company were deposited as security for the loan by letter dated 21.10.1981. In the above letter it is clearly stated that titles of the properties are clear and are not encumbered. There was no mention of first charge in favour of the appellant. There was a declaration signed by all the directors of the company including the appellant in the above letter dated 21.10.1981 (Annexure 'A' produced by the appellant himself) wherein it is stated as follows: "I/We hereby declare that the said properties are not subject to but are free from charge, alienation or encumbrance of any kind whatsoever except those that are disclosed according to the documents submitted to you herewith. I/We further agree that I/We shall not let the properties offered as security suffer any encumbrance hereafter if loan is sanctioned to me/us until they are freed from your charge." Such a declaration was signed for getting overdraft and financial assistance from the Syndicate Bank by pledging and hypothecating all immovable properties as security. Execution certificate to show that assets were free of any charge was also produced. It was followed by another letter from the company dated 21.10.1981 to the following effect: M.F.A. No. 401/2001 5 "We hereby confirm that the change in the Director Board has been informed to the Registrar of Companies and also the assets of the company are free from charge." 3. We also note that after clearing the liabilities of Canara Bank charge on machineries and raw materials etc. in favour of Canara Bank and complete satisfaction of charge in respect of the assets of the company was certified and the release of charge was registered with the Registrar of Companies. ROC was obtained under section 138 of the Companies Act. The above ROC was also produced before Syndicate Bank showing that assets of the company are free of encumbrance. So, the Syndicate Bank acted on the same and advanced money and created fresh charge on the entire assets of the company. The charge on the assets of the company to the Syndicate Bank was also registered with the Registrar of Companies and ROC was obtained. But, with regard to the alleged charge created in favour of the appellant was not registered with the Registrar of Companies and alleged subrogation now claimed by the appellant was not brought to the notice of the Syndicate Bank. Another agreement was executed by two different groups of directors on 18.2.1983. The above agreement shows that both groups agreed to give up some amounts standing to their respective credit in the M.F.A. No. 401/2001 6 back of the company. Amounts due to the appellant by the company was agreed to be only Rs.13,60,000/-. So, after the agreement, in view of clauses 11 and 12 of the agreement, the company is only a debtor to the appellant to the extent of Rs.13,60,000/- to the Prabhu group (appellant's group). Clause 11 and latter part of clause 12 of the agreement are as follows: "(11) It is agreed by both the parties that if any amounts are standing in the books of account of both Messrs Premier Steels Private Limited and Messrs Mittal Steel Re-Rolling and Allied Industries Limited to the credit of the other, much dues or amounts shall be waived or taken as given up by the respective parties." (12) ........................ The creditor status of the Second party in the books of accounts of Mittal Steel Re-Rolling and Allied Industries Limited will be maintained for the aforesaid amount of Rs.13,60,000/- (Rupees Thirteen lakhs and sixty thousand only) till the obligations are discharged fully and finally by the First Party as per the agreement." 4. On 23.8.1986, winding up notice was issued by the appellant and his brother for winding up of the company stating that an amount of Rs.10,00,000/- is due from the company to them. In the notice dated 23.8.1986 for winding up of the company under section 431 1 (a), only an amount of Rs.10,00,000/- was allegedly due from the company to the appellant and his brother. They had no M.F.A. No. 401/2001 7 case that the above was a secured debt or that they are subrogated to the position of prior mortgagee. On 22.12.1986, winding up petition was filed by the appellant and his brother wherein it was stated that they gave an advance of Rs.18,38,852/- to the company which is again reduced to Rs.13,60,000/- by agreement and again to Rs.10,00,000/- by supplementary agreement. Therefore, on the date of winding up petition only amount due to the appellant and his brother as per the claim was only Rs.10,00,000/- and he had no claim that the above debt was charged on the assets of the company. In the winding up petition, appellant has no case that appellant is a secured creditor. 5. A suit, O.S. No.525 of 1987, was filed by the Syndicate Bank, secured creditors, for recovery of the amounts due to it. Decree was passed and steps were in progress for recovery of the above amount through Debt Recovery Tribunal. Company petition dated 22.12.1986 filed before the Company Court by the appellant and his brother is numbered as C.P. No.2 of 1987 for winding up. The above petition was allowed by the company court on 8.2.1988. In the winding up petition also, claim was limited to Rs.10,00,000/= and there was no contention that appellant was a secured creditor. For the first time on 7th October, 1991, a claim was submitted to the M.F.A. No. 401/2001 8 Official Liquidator by the appellant that he is a secured creditor who stepped into the prior mortgagee, Canara Bank because he satisfied the amount due to the Canara Bank and he was subrogated to its position. He submitted clarifications to the query made by the Liquidator. An adjudicated award was passed by the Official Liquidator dismissing the claim of the appellant and an appeal was filed before the company court under section 460 (6) of the Companies Act. Contention of the appellant is that since he being the sureties to the Canara Bank redeemed the mortgage to Canara Bank, a secured creditor, he is subrogated to the position of the Canara Bank by operation of law and the properties mortgaged to the Canara Bank stands mortgaged to the appellant. Further, it is the contention of the appellant that he wanted to adduce evidence before the company court and filed an application to that effect. The company court did not pass any order on that, but, passed the impugned order dismissing his appeal. The learned counsel for the bank submitted that the appellant himself has filed the winding up petition. In the statement, he has no case that he was subrogated to the position to the Canara Bank and he has got first charge over the properties and assets of the company by the Syndicate Bank would not have accepted this property as security for granting a huge loan M.F.A. No. 401/2001 9 to the company if there was a prior charge. Alleged modification of the charge in respect of the appellant was not registered as provided under section 135 of the Companies Act. Because of the declaration by the directors of the company indicating the appellant that the property was free of encumbrance and because of the release of charge by the Canara Bank and issuance of ROC to that effect and registration of fresh ROC in favour of Syndicate Bank, contention of subrogation was not accepted by the official liquidator. It was submitted by the Official Liquidator that before rejecting the claim, appellant was asked for particulars and after hearing him and considering his reply, the adjudicated order was passed after perusing the entire documents relied on by the appellant. He has no case that he wanted to adduce further evidence. What was filed before the company court is only an appeal. In appeal, his contentions were rejected on the basis of admitted facts and documents. Further, since winding up petition was pending, the entire records were in the company court. In the nature of the proceedings, we are of the opinion that no prejudice is caused by not allowing further evidence before the company court in the appeal proceedings. No additional documents or evidenced was adduced in the appeal also other than the documents available before the M.F.A. No. 401/2001 10 company court and the matter was decided by the company court on the basis of the undisputed facts. Hence, we see no ground in the contention that he was denied an opportunity to adduce evidence. Appellant miserably failed to evidence that any prejudice has been caused to him by not allowing further evidence in appellate stage or he has a further right to adduce at the appellate stage. 6. The learned Company Judge after going through the documentary evidence and contentions based on admitted facts found that it is not a case where appellant directly paid the amount as a co-surety to the Canara Bank and subrogated to the position by operation of law under first paragraph of section 92 of the T.P. Act. There was no registered deed crediting mortgage in favour of appellant as provided under paragraph 3 of section 92. But, the appellant advanced money to the company. The company paid the amount due to the bank using the money advanced by the appellant's group. No modification of charge was mentioned in favour of the appellant. Fresh charge was registered against Syndicate Bank for obtaining fresh loan. At that time also, he was in the board of directors of the company. At the time when winding up application was filed in 1987, he has no case that there is a charge for the property. So, he was not subrogated to the position of the M.F.A. No. 401/2001 11 Canara Bank. Further amount due to him from the company is only Rs.10,00,000/- as on the date of filing of the winding up application, as stated by him in the winding up application. From his conduct, he is estopped from contending that he is having a prior and super charge through the Syndicate Bank over the property of the company. On these set of undisputed facts, the learned Company Judge held as follows: "14. As found above, the alleged charge acquired by the appellant by advancing amounts to the company for discharging the liability has not been kept alive. The conduct of the appellant shows that when the documents were subsequently deposited with the Syndicate Bank, the appellant did not intend to keep alive any such charge. On the other hand, the charge in favour of the Canara Bank was shown as extinguished by the report to the Registrar of Companies. The appellant is also estopped from making a claim for a first charge over the Syndicate Bank." 7. It is contended before us that since he has paid up all the amount due to the prior mortgagee, Canara Bank, he is subrogated to the position of the mortgagee, he is entitled to all the rights of the mortgage including the charge over the property in question. It is further submitted that since he is entitled to subrogation to the position of Canara Bank to create a charge in his favour, no separate deed is necessary or registration of charges M.F.A. No. 401/2001 12 (ROC) under the Companies Act in his favour as he is subrogated to the position of the mortgagee by operation of law as provided under paragraph 1 or 2 of section 92 of the Transfer of Properties Act and rule of estoppel is not applicable in this case. 8. To understand the nature of arguments, we quote below section 92 of the Transfer of Property Act: "92. Subrogation:- Any of the persons referred to in section 91 (other than the mortgagor) and any co-mortgagor shall, on redeeming property subject to the mortgage, have, so far as regards redemption, foreclosure or sale of such property, the same rights as the mortgagee whose mortgage he redeems may have against the mortgagor or any other mortgagee. The right conferred by this section is called the right of subrogation, and a person acquiring the same is said to be subrogated to the rights of the mortgagee whose mortgage he redeemed. A person who has advanced to a mortgagor money with which the mortgage has been redeemed shall be subrogated to the rights of the mortgagee whose mortgage has been redeemed, if the mortgagor has by a registered instrument agreed that such persons shall be so subrogated. Nothing in this section shall be deemed to confer a right of subrogation on any person unless the mortgage in respect of which the right is claimed has been redeemed in full." M.F.A. No. 401/2001 13 The above section 92 has got four paragraphs. First two paragraphs are regarding subrogation by operation of law. As regards redemption, foreclosure or sale of the property, the co-mortgagor or persons mentioned in section 91 of the Act will step into the shoes of the mortgagee if he redeems the properties subjected to the mortgage. Third paragraph is applicable to not only the co- mortgagee or persons mentioned in section 91 like sureties or mortgagors, but also to any person who is advancing money to the mortgagor to redeem the property. But, he will get the right of subrogation only if a registered document is executed with the mortgagor subrogating the rights. This is more or less like an assignment or delegation of mortgage by another registered deed. 9. Subrogation is a doctrine primarily of equity jurisprudence. The word 'subrogate' is defined in the Chambers 20th Century Dictionary as 'to substitute'. The meaning of the word 'subrogation' in legal parlance is explained in Dixon on 'Subrogation' as follows: " 'Subrogation' is the substitution of another person in the place of a creditor to whose rights he succeeds in relation to the debt. Personal subrogation is of two sorts, (1) conventional, and (2) legal. The difference between them in regard to the effects of subrogation in general results only from the M.F.A. No. 401/2001 14 modifications of rights which are constituted by express agreement. Subrogation differs from delegation in this respect, that it is the substitution of a new creditor; whereas delegation introduces a new debtor in the place of the former, who is discharged. Subrogation differs from a transfer or assignment of a debt, and from delegation, in the circumstance that it does not, necessarily, depend upon the creditor, but may be made independently of him. It is, properly speaking, but a fictitious cession made to one who has a right to offer payment; it is not a true cession nor sale of a debt, but such as is conceded by law and may have effect by operation of law and the act of the debtor, even without the consent of the creditor from whom the debt proceeds." The law on the subject as laid down by the decisions of English and American courts was summarised by Sheldon in his treatise on 'Law of Subrogation' as follows: "Subrogation is a doctrine primarily of equity jurisprudence....... It is a substitution, ordinarily the substitution of another person in the place of a creditor, so that the person in whose favour it is exercised succeeds to the rights of the creditor in relation to the debt. It is broad enough to include every instance in which one party pays a debt for which another is primarily answerable, and which, in equity and good conscience, should have been discharged by the latter...... It is a legal fiction, by force of which an obligation extinguished by a payment made by a third person is treated as still subsisting for the benefit of this third person, who is thus substituted to the rights, remedies, and securities of another. Subrogation is an exercise of the equitable powers of the Court, to M.F.A. No. 401/2001 15 relieve a meritorious creditor, who might otherwise be subjected to loss by his funds being applied to pay another's debt .......... Subrogation to the rights of a creditor differs from an assignment of the debt, in that the latter assumes the continued existence of the debt, while the former follows only upon its payment. Before the right of subrogation accrues, the legal obligation resting upon the ultimate debtor must be discharged ...... And the party for whose benefit the doctrine of subrogation is exercised can acquire no greater; rights than those of the party for whom he is substituted; if the latter had not a right of recovery, the former can acquire none." These principles were accepted by the Supreme Court in Ganeshi Lal v. Joti Pershad (AIR 1953 SC 1) at paragraph 9 of the judgment. The Apex Court held as follows: "If we remember that the doctrine of subrogation which means substitution of one person in place of another and giving him the rights of the latter is essentially an equitable doctrine in its origin and application, and if we examine the reason behind it, the answer to the question which we have to decide in this appeal is not difficult. Equity insists on the ultimate payment of a debt by one who in justice and good conscience is bound to pay it, and it is well recognised that where there are several joint debtors, the person making the payment is a principal debtor as regards the part of the liability he is to discharge and a surety in respect of the shares of the rest of debtors. Such being the legal position as among the co- mortgagors, if one of them redeem a mortgage over the property which belongs jointly to himself and the rest, equity confers on him a M.F.A. No. 401/2001 16 right to reimburse himself for the amount spent in excess by him in the matter of redemption; he can call upon the co-mortgagors to contribute towards the excess which he has paid over his own share. This proposition is postulated in several authorities. The position is therefore well established that the doctrine of subrogation is only a rule evolved by equity by which a surety paying a debt of the principal debtor, or a co-mortgagor who is compelled to pay more than his share of the common debt, is allowed to stand in the place of the original creditor and have the benefit of the securities which the creditor had , for the limited purpose of obtaining reimbursement from the persons whose liability he has discharged. It is undoubtedly of the essence of this doctrine that the benefit of the equity can be availed of only by one who has actually performed the obligations of another and has thereby become entitled to a right of reimbursement, for the protection of which right alone the security will be treated as kept alive for his benefit by a legal