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PETITIONER: CANARA BANK

       Vs.

RESPONDENT: THE OFFICIAL ASSIGNEE, MADRAS

DATE OF JUDGMENT:       17/12/1996

BENCH: G.K. RAY, B.L. HANSARIA

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T      G.N. RAY,J.      Leave granted.      Heard learned  counsel for  the parties. This appeal is directed against  judgment dated  29.6.1995  passed  by  the Division Bench of the Madras High Court in O.S.A. No. 134 to 136 of 1988. By the impugned judgment, the appellant’s claim for being  treated as  secured creditor under the proviso to Section  17   of  the   Presidency   Town   Insolvency   Act (hereinafter referred  to as  the Act)  read with Section 52 (2)(a) of  the  Act  has  been  disallowed.  The  appellants claimed that  the  goods  which  were  hypothecated  to  the appellant bank  by the  insolvents could be sold by the bank for  recovery  of  its  dues  as  secured  creditor  without approaching the Official Assignee like an ordinary creditor.      The main  contention of the appellant is that the goods hypothecated to the appellant belonged to the insolvents who had created  a charge  over the  said goods in favour of the appellant.  In  such  circumstances  Section  17  read  with Section 52(2)(a)  of the  Act. and  not Section 52 (2)(c) of the Act.  is applicable.  It will be appropriate to refer to Section 52  of the Act for appreciating rival contentions of the parties:      "52.  Description   of  Insolvent’s      Property     Divisible      Amongst      Creditors.      (1) The  property of  the insolvent      divisible  amongst  his  creditors,      and in  this Act referred to as the      property of  the  insolvent.  Shall      not    comprise    the    following      particulars, namely      (a) property  held by the insolvent      on trust for any other person:      (b) the tools (if any) of his trade      and the  necessary wearing apparel,      bedding,   cooking   vessels,   and      furniture, of himself, hi wife, and      children to  a value,  inclusive of      tools   and   apparel   and   other

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    necessaries   as   aforesaid,   not      exceeding three  hundred rupees  in      the whole.      (2)  Subject   as   aforesaid   the      property  of  the  insolvent  shall      comprise the following particulars,      namely:-      (a) all such property as may belong      to, or  be vested in, the insolvent      at   the    commencement   of   the      insolvency, or  may be acquired by,      or  devolve   on,  him  before  his      discharge;      (b) the  capacity to  exercise, and      to take proceedings for exercising,      all such  powers in  or over, or in      respect of  property as  might have      been exercised by the insolvent for      his own benefit at the commencement      of his  insolvency  or  before  his      discharge; and      (c)  all   goods,  being   at   the      commencement of  the insolvency, in      the    possession,     order,    or      disposition of  the  insolvent,  in      his  trade   or  business   by  the      consent and  permission of the true      owner,  under   such  circumstances      that  he   is  the   reputed  owner      thereof;      Provided  that   things  in  action      other than debts due or growing due      to the  insolvent in  the course of      his trade  or business shall not be      deemed goods  within the meaning of      clause (c):      Provided also  that the  true owner      of  any  goods  which  have  become      divisible among  the  creditors  of      the insolvent  under the provisions      of clause  (c) may  prove  for  the      value of such goods.      It is thus apparent that while Section 52(2) (a) of the Act refers to all the properties as may belong to or vest in the insolvent  at the time of commencement of the insolvency or acquired  by or  devolved on  the  insolvent  before  his discharge, Section 52(2)(c) refers to specified goods namely goods in  possession  of  the  insolvent  in  his  trade  or business with the consent and provisions of the true owner.      Mr. Promod  B. Agarwalla,  the learned  counsel for the appellant, has  submitted that  the insolvents in respect of the  goods  hypothecated  to  the  appellant  bank  were  in possession  of   such  goods  at  the  commencement  of  the bankruptcy  as   its  true  owners,  and  had  not  been  in possession of  such goods  belonging to a third party by the consent of  such party.  The appellant  bank as  a mortgagee cannot be  termed  as  a  true  owner  of  the  hypothecated property.  According   to  the   learned  counsel,   when  a hypothedated is created, a floating charge is created on the hypothecated goods, and the title to such goods continues to remain with  the mortgagor. Mr. Agarwalla has submitted that the property  in the  possession of  an insolvent  may  fall either under  Section 52(2)  (a) of 52(2) (c) of the Act. In the instant  case, hypothecated  goods are identifiable. The goods which  do not  belong  to  the  mortgagor  put  simply

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possessed with  the permission  and consent  of true  owner, cannot be  mortgaged. Hence.  the identifiable  goods  which belonged to  the  mortgagor  and  was  hypothecated  to  the appellant bank  must come under the provisions of Section 52 (2) (a)  of the  Act, and  not under Section 52(2)(c) of the Act.      Mr. Agarwalla has submitted that the view as propounded by the  respondent, that  a secured  creditor holding charge over debts  due to  a person  omitting to give notice to the debtor and  allowing the debtor to hold the secured goods in his possession, order or disposition would, upon such debtor becoming insolvent,  be disentitled  to proceed  against the securities under  the reputed  ownership clause, will render Section 17  of the  Act ptoise.  Mr. Agarwalla has contanded that Section  17 nowhere  provides that  a secured  creditor will not  be entitled  to  proceed  against  the  securities unless he  would have  given a  prior notice  to perfect his title. It is also contended by Mr. Agarwalla that Section 52 does not  have a  non obstante  clause. Hence,  it cannot be contended that  Section 52(2)(d)  is an exception to Section 17 of the Act.      Mr. V.R.  Krishnamurthy, the  learned counsel  for  the respondent, on the other hand has submitted that law is well settled by a catena of decisions of different High Courts in India ever  since  1924  that  in  cases  of  goods  in  the possession and  disposition of the insolvent in his trade or business with  the  consent  of  true  owner,  only  Section 52(2)(c) applies  which gets  attracted both  in  the  cases where the  insolvent is  the owner  of the  property and has created a charge over the same by pledging, hypothecating or mortgaging the  same to a creditor, as held in the decisions reported in (1912) 22 Madras Law Journal 441.AIR 1924 Madras 214. AIR  1929 Sind  167, AIR 1931 Sind 40, AIR 1931 Sind 44 AIR 1964  Madras 47  and 1977  (1) Madras  Law Journal 36 so also in  the cases of the property belonging to the creditor out allowed  to  be  kept  in  possession  or  used  by  the insolvent with the consent of such owner and the same was in possession and  disposition of  the insolvent at the time of insolvency, as  held n  the decisions  reported in  AIR 1930 Calcutta 171,  AIR 1932  Calcutta 680, AIR 1933 Calcutta 366 and AIR 1937 Sind 37.      Mr.  Krishnamurthy   has  also   submitted   that   the contention of the appellant that in case of secured creditor section 17 of the Act will apply and not Section 52 (2) (c), cannot be  accepted. The  term true owner includes the owner of an  acquitable interest.  In support of such contention a decision of  Madras High  Court reported  in AIR 1924 Madras 214 was  relied on.  Mr. Krishnamurthy  has  submitted  that Section  52(2)(c)  applies  to  cases  where  the  insolvent pledges the  property or  gives the property as security but was in possession and disposition of the their security with the consent  of the creditor. That Section is attracted only when secured  creditor omits  to give  notice.  In  case  of omission to  give notice, protection under Section 17 is not available. In support of such contention, reference has been made  to   the  decision   reported  in  AIR  1931  Sind  44 (Dhanrajmal  Kishan   Das  vs.   Official   Assignee).   Mr. Krishnamurthy has submitted that in view of such settled law no interference is called for in this appeal.      Mr. Agarwalla  has however  refuted the  contentions of Mr. Krishnamurthy.  He has  submitted that  in  the  instant case, the High Court (Division Bench) has held: "At first it must be  pointed out  that the  bank cannot claim to be true owner of  the goods.  Mere hypothecation  will not  make the bank owner  of the goods." He has further submitted that the

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concept of reputed ownership need not be kept in mind in the facts of  this case.  Mr. Agarwalla  has submitted  that  in Dhanrajmal’s case,  the High  Court proceeded on the footing that  the  book  debt  (which  was  the  subject  matter  of security) which were shown in the books of insolvent and had been assigned  by him  would be the property of the assignee and would  thus attract  rebuted ownership  clause. The High Court followed  the views  given in  Mulla’s book  on law of Insolvency to  the  effect;  that  a  secured  creditor  was required to  perfect his  title  by  giving  notice  to  the original debtor  and in case he omits to do so and allow the security to  remain in  the possession of the insolvent, the property would  rest in  the  official  assignee  under  the reputed ownership clause.      Mr.   Agarwalla   has   further   submitted   that   in Dhanrajmal’s case, the High Court held that the insolent was the reputed  owner of  the book  debt standing  in its books with the  consent of  assignee who was the real owner of the book debts.  According to Mr. Agarwalla such findings cannot be  made  in  the  facts  of  this  case.  That  apart,  the applicability of reputed ownership clause in case of secured creditor failing  to give  notice to the mortgagor militates against Section 17 read with Section 52(2)(a) of the Act and such view, therefore, requires rejection by this Court.      Considering the facts of the case and that the mortgage is a  nationalised bank  and goods  in question undisputedly belonged to  the mortgagors  being the  insolvents, and such mortgaged goods  were found  to be clearly identifiable from other  goods   belonging  to   the  insolvents,   and   also considering the  submission of  the learned  counsel of  the appellant that  the amount involved in the claim of the bank is small. We feel that justice of the case requires that the appellant ought to be allowed to recover its dues by sale of the hypothecated goods, and we order accordingly at the call of justice. The contentions raised by the respective parties in this  appeal as to the import of reputed ownership clause and the  overriding effect on Section 17 and 52(2)(a) of the Act when  a mortgagee fails to give notice to the mortgagor, namely, the  debtor insolvent  to  perfect  his  title  even though hypothecated  goods belonged  to the  mortgagor,  are kept open to be decided in an appropriate case.      These appeals  are accordingly  disposed of without any order as to cost.