Case: Infrastructure Leasing &amp;Fin.Services Ltd Vs. B.P.L. Limited

remains with the owner i.e. the pawnor. Though such a distinction exists, yet it is an accepted legal principle that hypothecation is treated as a sub-species of pledge and virtually has the same legal effect. In this context, reference to a passage from Lallan Prasad V. Rahmat Ali and another (AIR 1967 SC 1322 ), would be seemly. “17. There is no difference between the common law of England and the law with regard to pledge as codified in sections 172 to 176 of the Contract Act. Under section 172 a pledge is a bailment of the goods as security for payment of a debt or performance of a promise. Section 173 entitles a pawnee to retain the goods pledged as security for payment of a debt and under section 175 he is entitled to receive from the pawner any extraordinary expenses he incurs for the preservation of the goods pledged with him. Section 176 deals with the rights of a pawnee and provides that in case of default by the pawner the pawnee has (1) the right to sue upon the debt and to retain the goods as collateral security and (2) to sell the goods after reasonable notice of the intended sale to the pawner. Once the pawnee by virtue of his right under section 176 sells the goods the right of the pawner to redeem them is of course extinguished. But as aforesaid the pawnee is bound to apply the sale proceeds towards satisfaction of the debt and pay the surplus, if any, to the pawner. So long, however, as the sale does not take place the pawner is entitled to redeem the goods on payment of the debt. It follows therefore that where a pawnee files a suit for recovery of debt, though he is entitled to retain the goods he is bound to return them on payment of the debt. The right to sue on the debt assumes that he is in a position to redeliver the goods on payment of the debt and therefore if he has put himself in a position where he is not able to redeliver the goods he cannot obtain a decree. If it were otherwise, the result would be that he would recover the debt and also retain the goods pledged and the pawner in such a case would be placed in a position where he incurs a greater liability than he bargained for under the contract of pledge. The pawnee therefore can sue on the debt retaining the pledged goods as collateral security. If the debt is ordered to be paid he has to return the goods or if the goods are sold with or without the assistance of the court appropriate the sale proceeds towards the debt. But if he sues on the debt denying the pledge, and it is found that he was given possession of the goods pledged and had retained the same, the pawner has the right to redeem the goods so pledged by payment of the debt. If the pawnee is not in a position to redeliver the goods he cannot have both the payment of the debt and also the goods. Where the value of the pledged property is less than the debt and in a suit for recovery of debt by the pledgee, the pledge denies the pledge or is otherwise not in a position to return the pledged goods he has to give credit for the value of the goods and would be entitled then to recover only the balance”. 43. More than eight decades back, the Bombay High Court in Gulamhusain Lalji Sajan V. Clara D’Souza (AIR 1929 Bom. 471 ), while dealing with the applicability of Section 176 of the Contract Act to a case of hypothecation, had opined thus: “Under S.176, Contract Act, the pledge has a right to bring a suit against the pledgor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged in giving the pledgor reasonable notice of the sale.It is clear under the law applicable to cases of a pledge that the creditor has two rights which are concurrent, and the right to proceed against the property pledged is not merely accessory to the right to proceed against the debtor personally.For the pledge may have a right to sue for sale of the property even in the absence of a right to sue for a personal decree.The same principles would apply to the case of hypothecation or mortgages of moveable property.” Be it noted, in the said case reliance was placed on Nim Chad Babu v. Jagabandhu Ghose ([1894] 22 Ca. 21)and Mahalinga Nadar v. Ganapathi Subbien ([1902] 27 Mad. 528).44. We will be failing in our duty if we do not advert to the issue that the appellant shall remain as a secured creditor, for it was registered as such under the Registrar of Companies. The formalities for creating the charge having duly followed, the Division Bench has referred to the Form No. 8 and 13 and also adverted to the power of Registrar to make entries of satisfaction and release, as provided under Sections 138 and 139 of the Act. It has also expressed the view that in the absence of any proceeding, the status of the company as a secured creditor continues.45. After registration of the deed of hypothecation, if a condition subsequent is not satisfied, that would be in a different realm altogether. In any case, the finding has been recorded that the respondent was not at fault and, in any case, that would not change the status of the appellant as a secured creditor.46. In view of the aforesaid analysis, we are of the considered opinion that the appellant cannot be treated as an unsecured creditor and it is not permissible for him to put forth a stand that it would not be bound by the Scheme that has been approved by the learned Company Judge.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]18. From the narration of facts and the contentions which have been highlighted, it is clear that two facts are beyond dispute. First, the appellant stands registered as a secured creditor of the respondent company on the record of the Registrar of Companies under the Act; and second, the arbitral tribunal has passed an award on the basis of consent and it has the status of a decree which is executable in law. Keeping in view these two undisputed facts, we have to appreciate the rival submissions raised at theobserved that the nature of compromise or arrangement between the company and the creditors and the members has to be kept in view, for it is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it by the requisite majority vote. Therefore, the Court does not act as a Court of Appeal and sit in judgment over the informed view of the parties concerned to the compromise as the same would be in the realm of corporate and commercial wisdom of the parties concerned and further the Court has neither the expertise nor the jurisdiction to dig deep into the commercial wisdom exercised by the creditors and the members of the company who have ratified the scheme by the requisite majority. The Court eventually held that it has the supervisory jurisdiction which is also in consonance with the language employed under Section 392 of the Act.The purpose of the classification of creditors has its significance. It is with this object that when a class has to be restricted, the principle has to be founded on homogeneity and commonality of interest. It is to be seen that dissimilar classes with conflicting interest are not put in one compartment to avoid any kind of injustice.The aforesaid being the position relating to the status of a class, at this juncture, it is necessary to appreciate the basic facts which are determinative in the case at hand. As the exposition of facts would uncurtain, the appellant company had extended a short-term loan facility of Rs.150 million to the respondent company on 4.7.2001; that the respondent company had executed a deed of hypothecation in favour of the appellant hypothecating by way of an exclusive charge of the monies and right, title and interest relating to amounts, both present and future to be received or payable by M/s. Hewlett Packard Ltd.; that the respondent had filed Forms 8 and 13 and the charge by way of hypothecation was duly registered with the Registrar of Companies; that the appellant had initiated an arbitration proceeding which eventually resulted in the consent award dated 1.7.2004 whereby the arbitral tribunal directed a sum of Rs.48,683,710/- as due on 30.06.2004 along with interest @ 20% p.a. on the principal amount of Rs.36,360,000/- from 01.07.2004 till realization; that the award stipulated due discharge of the liability on payment of Rs.36,360,000/- in four instalments for the purpose of which post-dated cheques were issued; that there was a postulate that in case of default of payment of any instalment, the entire amount may become due and payable and the appellant would be entitled in law to execute the award for recovery of the entire due without prejudice to and in addition to entitlement to institute criminal proceedings under the Negotiable Instruments Act; that the respondent failed to pay the first instalment of Rs.17,500,000/- on or before 30.09.2004; that on 30.09.2004 the respondent filed a petition under Sections 391-394 of the Act for sanction of the scheme; that the appellant initially filed objections to the scheme in the form of a counter affidavit on 25.11.2004 on merits and thereafter at a subsequent stage on 20.1.2005 filed an additional affidavit stating, inter alia, that it was an unsecured creditor; that an affidavit was filed in oppugnation asserting that the appellant was a secured creditor, regard being had to the hypothecation deed and the registration having been effected with the Registrar of Companies; that meeting of the secured creditors and guarantors was held on 6.4.2005 and a Chairperson was appointed; that the said order was challenged by IndusInd Bank Ltd., WTI Bank Ltd. and Bank of Rajasthan Ltd. In appeals but the same were dismissed by the Division Bench on 17.06.2005; that the appellant preferred an appeal which was dismissed by the judgment on 17.1.2006, which is impugned herein; that the scheme which has been amended was put to vote and was duly approved by the three-fourth of the secured creditors present and voting in value terms; and that the Court has approved and accepted the modified Scheme.Keeping in view the factual backdrop, we have to appreciate the principal contentions. The seminal contention of the appellant is that it does not fall into the class of secured creditors, for it had initiated the arbitration proceeding and an award has been passed on consent which is a simple money decree and, therefore, the deed of hypothecation, even if assumed to be executed at one point of time, has become irrelevant. To elaborate, the status of the appellant had changed from a secured creditor to that of an unsecured creditor. On this foundation, a stance has been taken that the principles of Order II, Rule 2, C.P.C. would be applicable as the appellant would be debarred to issue on the basis of the charge of hypothecation. Emphasis has been laid on the factum that there having been a change of status, the appellant company cannot be clubbed with the secured creditors as a class and even if it is kept in homogenous category of secured creditors, it should still fall under a separate class, regard being had to the fact it has obtained an award from the arbitral tribunal. In this context, it is to be seen that whether the arbitration award has the effect of obliterating or nullifying the status of the appellant and making him an unsecured creditor as a consequence of which it would not be able to sue on the basis of a charge created in its favour.Applying the said test to the present case, it can be stated with certitude that there is no shadow of doubt that the consent award in an arbitral proceeding would not bar a suit for enforcement of the charge for the same reasons and it would not be hit by Order II, Rule 2 CPC. We are absolutely conscious that the present case does not relate to a charge as engrafted under Section 100 of the Transfer of Property Act, or simply for equitable mortgage. In the present case, the charge is by hypothecation and relates to movable property. Needless to say, provisions of Rules 14 and 15 of Order XXXIV would not be directly applicable but the principle inherent under the said Rules, as enunciated would be applicable. In fact, the ratio laid down in S. Nazeer Ahmed (supra), as we understand, makes it equally applicable to different causes of action. The said principle would apply, if we accept that the cause of action is distinct.The said plea has been advanced on the foundation that the controversy between the parties having been finally put to rest by the arbitral award, the respondent would not have dragged the appellant to the said proceeding as that would vex him twice. The issue before the Company Court was quite different than that was before the Arbitral Tribunal. True it is, it has the status of a decree which is executable, as a decree having gone unchallenged, but the lis of framing a Scheme under the Act is of different character. It could not have been directly or substantially in issue before the learned Arbitrator. That apart, we have already held the status of the appellant as a secured creditor has not changed. Therefore, in our considered opinion, the plea of resjudicata which has been canvassed by the learned senior counsel for the appellant does not commend acceptance and we so hold.44. We will be failing in our duty if we do not advert to the issue that the appellant shall remain as a secured creditor, for it was registered as such under the Registrar of Companies. The formalities for creating the charge having duly followed, the Division Bench has referred to the Form No. 8 and 13 and also adverted to the power of Registrar to make entries of satisfaction and release, as provided under Sections 138 and 139 of the Act. It has also expressed the view that in the absence of any proceeding, the status of the company as a secured creditor continues.45. After registration of the deed of hypothecation, if a condition subsequent is not satisfied, that would be in a different realm altogether. In any case, the finding has been recorded that the respondent was not at fault and, in any case, that would not change the status of the appellant as a secured creditor.46. In view of the aforesaid analysis, we are of the considered opinion that the appellant cannot be treated as an unsecured creditor and it is not permissible for him to put forth a stand that it would not be bound by the Scheme that has been approved by the learned Company Judge.