1986 (10) TMI 300 - HC - Companies Law

Appellate court affirms mortgage validity, but deems part unlawful. Plaintiff denied recovery of Rs. 12,000.

The appellate court affirmed that the entire mortgage transaction was not invalid, but the part concerning Rs. 12,000 was unlawful. Consequently, the ... Power of company to purchase its own securities Issues Involved:1. Locus standi of the plaintiff-corporation.2. Validity of the mortgage transaction.3. Jurisdiction of the civil court.4. Alleged fraud and suppression of facts by the company.5. Consideration of Rs. 30,000 and its components.6. Applicability of Sections 23 and 24 of the Indian Contract Act and Section 54A of the Indian Companies Act, 1913.Issue-Wise Detailed Analysis:1. Locus Standi of the Plaintiff-Corporation:The defendants contended that the plaintiff-corporation had no locus standi to institute the suit as the benefit of the mortgage had not vested in the plaintiff-corporation. The trial court rejected this contention, but the appellate court held that the mortgage transaction did not form part of the controlled business of the company, and consequently, the right of action did not vest in the plaintiff-corporation under Section 7 of the Life Insurance Corporation Act, 1956.2. Validity of the Mortgage Transaction:The mortgage deed dated April 1, 1952, for Rs. 30,000 was executed by the defendants in favor of the company. The appellate court found that Rs. 12,000 of the consideration was retained by the company as an interest-free deposit to be used for allotment of shares, making this part of the consideration invalid. The court held that the adjustment of Rs. 12,000 towards the share capital was forbidden by Section 54A(2) of the Indian Companies Act, 1913, and thus, the mortgage was void to that extent.3. Jurisdiction of the Civil Court:The defendants argued that the civil court had no jurisdiction to entertain and decide the suit. The trial court rejected this argument, and it was not pressed in the appellate court.4. Alleged Fraud and Suppression of Facts by the Company:The defendants claimed that the company suppressed the fact that its registration to carry on life insurance business was canceled, constituting fraud. The trial court rejected this claim, but the appellate court found that the company was in a position to dominate and influence the defendants regarding the consideration of Rs. 12,000, thus vitiating that part of the transaction.5. Consideration of Rs. 30,000 and Its Components:The appellate court found that out of the Rs. 30,000, Rs. 12,000 was not paid in cash but was retained as an interest-free deposit for share allotment, making this part of the consideration unlawful. The remaining Rs. 18,000 was paid by the defendants before the suit, and the suit claim related wholly to the disputed sum of Rs. 12,000 and interest thereon.6. Applicability of Sections 23 and 24 of the Indian Contract Act and Section 54A of the Indian Companies Act, 1913:The appellate court held that the transaction was void to the extent of Rs. 12,000, as it contravened Section 54A of the Indian Companies Act, 1913. The court examined whether the entire mortgage was void or only the part concerning Rs. 12,000. It concluded that Section 24 of the Indian Contract Act, which renders an agreement void if any part of the consideration is unlawful, did not apply to the transfer of property. The court held that the invalid portion of the debt was severable, and the valid portion had already been paid.Conclusion:The appellate court affirmed that the entire mortgage transaction was not invalid, but the part concerning Rs. 12,000 was unlawful. Consequently, the plaintiff-corporation was not entitled to recover the disputed sum of Rs. 12,000 and interest thereon. The suit was dismissed, but the dismissal did not preclude the United Karnataka Insurance Co. Ltd. from calling upon the defendants to surrender the shares. The appeal was dismissed with no order as to costs.