Authored By : Harold Derbyshire, R.F. Lodge

Harold Derbyshire, C.J.

1. This is an appeal from an order made by McNair J. on 13thJanuary 1943. The order was in terms of prayer (a) of the summons which was tothis effect:

That the Official Liquidator may be directed to pay to theapplicant in pari passu with other debenture holders but in priority to othercreditors whether secured or unsecured out of the sale proceeds in his hands aswell as out of money realised for uncalled capital of the company and otherrealisations the sum of Rs. 99875-3-9 with further interest at 5 per cent, upto the date of payment being the sum due on the 151 debentures issued by thecompany in his favour.

2. The legal question in the case is whether debenturesissued by a company charged on the whole of its property which includesimmovable property must be registered under the Registration Act or whetherregistration under the provisions relating to the registration of debentures ofcompanies is sufficient. The facts which led up to this application are shortlythese. The East Bengal Sugar Mills Limited was a company formed to build, equipand operate a Sugar Mill at Dacca in East Bengal. The Appellants, K. Roy andBrothers are building contractors and they built the Mill for the company. Theywere not paid, for their work and the materials with the result that theyeventually went to arbitration and secured an award for their debt. Whilst theMill was being built the company in order to equip it arranged to buy machineryfrom abroad and to pay for the machinery borrowed money on debentures issued tovarious persons. The applicant, Ramanath Das, was a director and one of themanaging agents of the company. He took up 151 of these debentures, each ofthem for Rs. 500 and paid for them. With the money realised from the issue ofthese debentures the company paid for the machinery it had installed. Thedebentures were duly registered under Section 109, Companies Act, but they werenever registered under the provisions of the Registration Act (Act 16) of 1908.The company after working for a time got into financial difficulties and awinding up order was made by this Court. The debenture-holders did not appointa receiver under their debentures. The Official Liquidator appointed by theCourt has taken possession of the land, buildings, plant, machinery andutensils of the company and sold them to a purchaser who has transferred theundertaking to another company known as the Kaligunge Sugar Mills Limited.

3. The debenture-holders claim that they are entitled to afirst charge on the whole of the money received from the sale of the old-companys undertakings. The liquidator has informed them that he considersthat as their debentures were not registered under the Registration Act, itdoes not affect the immovable property of the company and that thedebenture-holders are only entitled to be paid their debt out of the moveableassets of the company. McNair J. decided that the debentures did not need to beregistered under the Registration Act and that therefore there was a goodcharge upon the whole of the companys assets and the proceeds thereof and hemade an order in terms of prayer (a) as referred to above. Messrs K. Roy andBrothers have appealed against that and they claim that the debentures ought tohave been registered under the Registration Act. As they have not beenregistered the debenture-holders are only entitled to what may be obtained fromthe sale of the moveables and that they as creditors will be entitled to ashare in the immovables and their proceeds. The debentures themselves are inthe form which was at one time common in England. (See Palmers CompanyPrecedents, Part, Debentures, 15th Edn. at pp. 272 to 274.) Clause 3 of thedebenture which is headed "Mortgage Debenture" provides as follows:

The company doth hereby as beneficial owner, charge withsuch payments (that is principal and interest at 61/2 per cent.) its undertakingand all its property whatsoever or wheresoever both present and futureincluding its uncalled capital for the time being.

4. Clause 4 reads:

This debenture is issued upon and subject to the conditionsindorsed hereon which shall be and be read as part of this debenture and whichthe company covenants to observe and perform in every respect.

5. The conditions referred to are seventeen in number; Irefer only to the following:

1. This debenture is one of a series of 200 debentures ofRs. 500 each numbered 1 to 200 inclusive of the company issued or about to beissued by the company for an aggregate amount of Rs. 100,000. The company shallbe at liberty to issue further debentures of a like nature to rank pari passuwith the debentures of these series.

2. The debentures of the said series whether original or notare all to rank pari passu as a first charge on the property hereby chargedwithout any preference or priority one over another and such charge shall untilthe money is hereby secured shall become payable, be a floating security andthe company shall not create any mortgage or charge in priority to the saiddebentures.

3. The principal money hereby secured shall immediatelybecome payable if the company make default for a period of three calendarmonths in the payment of any interest hereby secured and the registered. holderthereof for the time being before such interest is paid by notice in writing tothe company calls in such principal money or if a distress or execution islevied upon or against any of the property and the assets of the company and isnot paid out or withdrawn within ten days or if a Receiver of any property andassets of the company is appointed by any Court of competent jurisdiction or ifan order is made or an effective resolution is passed for winding up of thecompany.

16. A Receiver or Receivers so appointed shall have power(a) to take possession of the property charged by the debenture and (b) to sellor concur in selling any of the property charged by the debentures.

6. No Receiver was appointed, and as I have said an orderwas made by this Court for the winding-up of the company and the OfficialLiquidator was appointed liquidator. Now that debenture and its series wereduly registered under the provisions Section 109 Companies Act (Act 7 of 1913as amended by Act 22 of 1936). They were registered with the Registrar of JointStock Companies in Calcutta. It may be mentioned in passing that there is aRegistrar of Joint Stock companies appointed in each of the large provinces;there is one in Calcutta, there is one for Assam, there is one for Bombay andso on. By the provisions of Section 109, proviso (4) it is enacted:

The holding of debentures entitling the holder to a chargeon immovable property shall not be deemed to be an interest in immovableproperty.

7. Sub-section (2) which was added by Section 60 of Act 22of 1936 provides,

Where any mortgage or charge on any property of a Companyrequired to be registered under this section has been so registered any personacquiring such property or any part thereof or any share or interest thereinshall be deemed to have notice of the said mortgage or charge as from the dateof such registration.

8. Section 109A deals with some of the requirements ofregistration and Section 110 deals with the particulars that are required incase of registration. Particular (c) is as follows : "A generaldescription of the property charged" (i. e., what is required to beregistered under the provisions of the Companies Act). I must mention here thatthere was no debenture trust deed accompanying the issue of these debentures.In the debenture deed itself the only reference to the property charged is itsundertaking for all, its property whatsoever, and wheresoever present andfuture. That description apparently satisfies the requirements of Section 110,Companies Act, and nothing more is required as far as the Companies Act isconcerned. It is said that the effect of Section 109(2), Companies Act, is togive anybody who deals with the property notice that it has been made subjectto a floating charge. It must be pointed out at once that as Section 110(c)indicates that only a general description of the property is required and thereis nothing making it compulsory to give any further details of property, sothat there is nothing in the registration under the Companies Act of thesedebentures which would inform any person exactly what the immovable propertywas that was charged. It should be remembered that under the provisions ofSection 109 a company is required to keep a register of its mortgages andcharges specifically affecting property of the company and all floating chargeson the undertakings or on any property of the company. That register would bekept, of course, at the companys head office.

9. The purpose of the registration of debentures, charges,and mortgages under the Companies Act is to give notice to persons dealing withthe company that there are certain encumbrances on its property. Thoseencumbrances can be discovered by a search of the registry of the place wherethe company is registered and by a search or an application made at thecompanys head office. Of course it does not follow that a company isregistered or has its head office at the place or even in the province wherethe immovable property that may be charged is situate. Those who deal with thecompany in the ordinary way of business can have searches made and they candiscover the general nature and the financial extent of the charges, but theycannot discover what particular pieces of land or immovable property have beencharged. The Registration Act of 1908 is the successor of two previous Actsrequiring registration of certain kinds of documents. It is like the CompaniesAct, an all India Act. Section 17(1), Registration Act, provides:

The following documents shall be registered if the propertyto which they relate is situate in a District in which, and if they have beenexecuted on or after the date on which, Act No. 16 of 1864, or the IndianRegistration Act, 1866, or the Indian Registration Act, 1871, or the IndianRegistration Act, 1877, or this Act came or comes into force, namely:

(a) instruments of gift of immovable property:

(b) other non-testamentary instruments which purport oroperate to create, declare, assign, limit or extinguish, whether in present orin future any right, title or interest, whether vested or contingent, of thevalue of one hundred rupees and upwards, to or in immovable property."

10. It will be noted that the registration is a localregistration in the district in which the property is situate. Section 21provides:

(1) No non-testamentary document relating to Immovableproperty shall be accepted for registration unless it contains a description ofsuch property sufficient to identify the same.

(2) Houses in towns shall be described as situate on thenorth or other side of the street or road (which should be specified) to whichthey front and by their existing and former occupancies, and by their numbersif the houses in such street or road are numbered.

(3) Other houses and lands shall be described by theirnames, if any, and as being in the territorial division in which they aresituate, and by their superficial contents, the roads and other properties onwhich they abut, and their existing occupancies and also, whenever it ispracticable, by reference to Government map or survey.

11. Section 28 provides that save as otherwise provided inpart 5

every document mentioned in Section 17, Sub-section (1),Clauses (a) and (b), in so far as such document affects immovable property,shall be presented for registration at the sub-registry within whosesub-district the whole or some portion of the property to which such documentrelates, is situate.

12. Section 49 provides:

No document required by Section 17 or by any provision ofthe Transfer of Property Act, 1882, to be registered, shall (a) affect anyimmovable property comprised therein unless it has been registered.

13. The purpose of the Registration Act as disclosed in itsprovisions is to provide information to people who may deal with property as tonature and extent of the rights which persons may have affecting that property,in other words, to enable people to find out whether any particular piece ofproperty with which they may be concerned has been made subject to someparticular legal obligation. There are other purposes of the Registration Act.One is to give solemnity of form and legal importance to certain classes ofdocuments by directing that they shall be registered. For some purposes adocument which is directed to be registered creates similar rights andobligations to the documents under Seal in England. Another purpose is toperpetuate documents which may afterwards be of legal importance and thegeneral purpose is to put on record somewhere, where people may see the recordand enquire what the particulars are and as far as land is concerned whatobligations exist with regard to them. The purpose of this is to prevent fraud.I ought to have mentioned that in Section 17(2) (iii) there is this provision:

Nothing in Clauses (b) and (e) of Sub-section (1) applies toany debenture issued by any such company and not creating, declaring ,assigning, limiting or extinguishing any right, title or interest to or inimmovable property except in so far as it entitles the holder of the securityafforded by a registered instrument whereby the company has mortgaged, conveyedor otherwise transferred the whole or part of its immovable property or anyinterest therein to trustees upon trust for the benefit of the holders of suchdebentures.

14. That provision is designed to exempt from registrationdebentures issued, may be in a series under a trust deed, or debentures whichof course, may include both moveable and immovable property. The trust deeditself might have to be registered, but the separate debentures issued underthe trust deed would not require registration. The debentures we are concernedwith were not issued under a debenture trust deed and the question is whether theyshould be registered under Section 17(1) (b). Now it has been pointed out thatin Section 109 proviso (4), Companies Act, it is provided that the holding ofdebentures entitling the holder to a charge on immovable property shall not bedeemed to be an interest in immovable property. It is contended that thesedebentures do not create an interest in immovable property and therefore do notrequire registration. It is not, however, merely an interest in property thatis mentioned in Section 17(1) (b), (but something more) a non-testamentaryinstrument (like the present debentures) which purports or operates to create,declare, assign, limit or extinguish whether in present or in future, anyright, title or interest, whether vested or contingent, of the value of Rs. 100and upwards, to or in immovable property must be registered. The presentdocument does purport on the face of it to limit the right of the company toits property. It creates from the moment it was executed a floating charge overthe whole of the companys property immovable and moveable. That floatingcharge may become fixed on the happening of one of the events mentioned incondition 3 endorsed on the debentures, so that at the moment of issue therewas a limitation of the right of the company to its immovable propertycontingent upon the happening of one of the events specified in the condition.A charge on the property is defined by Section 100, T. P. Act:

Where immovable property of one person is by act of partiesor by operation of law made security for the payment of money to another, andthe transaction does not amount to a mortgage, the latter person is said tohave a charge on the property.

15. Clearly there was a charge on the property here limitingthe right of the company to that property and in my opinion, for that reasonthis document comes within the meaning of Section 17(1) (b), Registration Act,and ought, therefore, to be registered as regards the immovable propertycovered by it in the appropriate local registry under the Registration Act (Act16 of 1908). It is said: "Oh, but that is impossible, because thedebenture itself contains no reference to any specific piece of property. Itsimply charges all its property whatsoever and wheresoever present and future.That being so, we cannot register in this particular registry or thatparticular registry." In my opinion that is beside the question. If thedebenture creates a charge over the companys property it must be registered inthe proper registry. Of course there is no difficulty where there is a trustdeed. The difficulty arises in this particular form of debenture which as Isaid previously is a common form in England. It may be a suitable form ofdebenture in England because England is a country where, except for two counties,Middlesex and Yorkshire, there is no system of land registration and this formmay be well adapted for that purpose, but it may be ill adapted for countrieswhere such a form of land registration is compulsory. In Section 79 of theEnglish Companies Act of 1929, which deals with the registration of chargeswith the Registrar of Companies it is clearly contemplated that there may haveto be double registration, namely, registration with the Registrar of Companiesunder the provisions of the Companies Act and registration of land or immovableproperty belonging to the company in the country where such land or immovableproperty is situate and is required to be registered. For instance, Section79(4) provides:

Where a charge is created in the United Kingdom butcomprises property outside the United Kingdom, the instrument creating orpurporting to create the charge may be sent for registration under this sectionnotwithstanding that further proceedings may be necessary to make the chargevalid or effectual according to the law of the country in which the property issituate.

16. Sub-section (5) provides:

Where a charge comprises property situate in Scotland orNorthern Ireland and registration in the country where the property is situateis necessary to make the charge valid or effectual according to the law of thatcountry the delivery to and receipt by the Registrar of a copy verified in theprescribed manner of the instrument by which the charge is created orevidenced, together with a certificate in the prescribed form stating that thecharge was presented for registration in Scotland or Northern Ireland, as thecase may be, on the date on which it was so presented shall for the purposes ofthis section, have the same effect as the delivery and receipt of theinstrument itself.

17. There is no corresponding provision in the IndianCompanies Act. India is a very much bigger country than Great Britain andIreland and the distances of places apart may be so great as to make virtuallyineffective the provisions for safety and warning which the Companies Actgives. I put one illustration to Mr. Roy in course of argument and it was this.Suppose that a company is registered in Bombay and has its head office inBombay and that it is engaged in carrying on business throughout India. One ofits places of business is in town far away say Madras or Calcutta or some othertown in which mortgage of land by deposit of title deeds is made legal now orin the future by the Provincial Government under Section 58, T. P. Act. Thecompany is in difficulties and issues debentures by floating charge over thewhole of its property in the form in which it has been done in this case. Thosedebentures will be registered with the Registrar of Companies in Bombay and arecord of them will be kept in the registered office of the Company in Bombayand any one who wishes to know to what extent the company is embarrassed or hascreated encumbrances over its property can find that out by searching theoffice of the Registrar of Companies in Bombay or at the office of the companyin Bombay. But all that that search reveals is the extent of the indebtednessof the company and the extent to which its property generally has been charged,but it does not show what particular items of its property has been charged.Whilst the company is embarrassed, the manager of this distant branch findsdifficulty in meeting the wage bills there and he asks a local person to lendmoney--say a thousand rupees--to meet the monthly wages. He has with him insafe custody the documents of title to some land which the company ownslocally. The person to whom he applies for money may be willing to lend onethousand rupees provided he has proper security and he is offered the documentsof title relating to that land. He would, if he were an ordinary prudentperson, enquire at the local Registry whether there were any charges created onthe land. If registration under the Companies Act of debentures of floatingcharges is in Bombay and is sufficient he would find nothing in the localRegistry under the Registration Act. He might, therefore, on searching andfinding nothing lend the money only to discover later before the money had beenrepaid that some one who had a floating charge had taken steps to crystalliseit and that the security on which he had lent the money was valueless to him.Neither Mr. Roy nor the Advocate-General was able to say that there wasanything either improbable or fallacious in that argument and it seems to pointto the necessity for observing the law strictly as it is laid down in theRegistration Act. The Registration Act is intended to afford warning to peoplein the district in which the land is situate as regards charges affecting thatland so that they may not suffer through lack of knowledge. If we are to saythat registration under the Companies Act was sufficient then it means that thesecurity which the Registration Act has provided for local man goes and he isleft at the mercy of the debenture-holder who is elsewhere.

18. In my opinion for the reasons I have given it isnecessary that a debenture creating a charge whether floating or fixed over anyimmovable property should be registered according to the provisions of law laiddown in Section 17, Registration Act, in addition to the provisions of theCompanies Act. The provisions of the Companies Act are intended to protectpeople who have business dealings with companies and to warn them to the extentto which the companies have created obligations over their property. Theprovisions of the Registration Act are intended to protect all who may havedealings with land so that those persons, particularly those local persons, mayhave knowledge of the obligations which have been created over and in respectof the land.

19. There is one other matter. A question arose in the Courtbelow as to whether the machinery of the sugar mill was fixed to the soil ofthe buildings so as to be immovable property. The learned Judge did not find itnecessary to decide that question owing to the view he took on the questionwhether the debentures should be registered or not. But he expressed the viewthat whether the machinery was immovable property or whether it was not, was aquestion of fact. I agree that it is a question of fact and it is for thelearned Judge to determine whether a particular piece of machinery is immovableproperty or whether it is not. For these reasons this appeal must be allowed.The applicant Ramanath Das has a first charge on the moveable properties anduncalled capital of the company pari passu with other debenture-holders. Therewill be an enquiry by the trial Court to ascertain: (a) what the moveableproperties of the company and their value at the time of the sale were; (b)whether the machinery and plant, etc., or any part thereof is moveable orimmovable property; and (c) how much of the money paid by the purchasers to theliquidator for the assets of the company, namely, Rs. 1,61,000 represents thesale proceeds of (i) moveable and (ii) immovable property. The respondentRamanath Das will pay the costs of the appellants, K. Roy and Brothers both inthe appeal Court and in the trial Court. Costs will be as of a hearing.Certified for two counsel. The liquidator is entitled to the costs here andbelow to be reimbursed out of the assets of the moveable properties which cometo his hands. Ramanath Das repeats the undertaking that he will return the sumof Rs. 25,000 by 13th May 1943.

R.F. Lodge, J.

20. I agree.

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K. Roy and Bros. vs.Ramanath Das and Ors. (13.04.1943 -CALHC)