1945 (3) TMI 12 - HC - Companies Law

Privy Council affirms lender's priority over debenture holders in landmark ruling

Lakshman Prasad Versus John

The Privy Council held that the High Court's judgment was erroneous as it failed to consider the operative part of the agreement that granted the lender ... Winding up - Preferential payments Issues:Priority of the appellant over debenture holders in a company's property subject to charge.Analysis:The case involved a dispute over the priority of the appellant, referred to as 'the appellant,' against the debenture holders of a company named Agra United Mills, Ltd. The company had issued debentures secured by a trust deed, including a specific charge on certain assets and a floating charge on the rest of its property. The appellant's father had provided financial assistance to the company under an agreement that granted him a lien on specific company assets. Subsequently, a receiver was appointed in a suit by the debenture trustees to enforce their security. The receiver entered into an agreement with the appellant's father to borrow money for paying off salaries and running the mill, with the provision for hypothecating sufficient property worth a specified amount. The High Court limited the appellant's priority to the property subject to the floating charge, differing from the Subordinate Judge who granted priority over all charged property.The disagreement centered on the interpretation of the agreement between the receiver and the appellant's father. The High Court's judgment was based on the assumption that the agreement aimed to provide the lender with rights similar to preferential payment as prescribed by the Indian Companies Act for laborers and workmen, limited to property under a floating charge. However, the crucial aspect was the part of the agreement where the receiver agreed to hypothecate property worth a specific amount to the lender. This operational part of the agreement entitled the lender to a charge in priority over the debenture holders, as ruled by the Subordinate Judge and upheld by the Privy Council.The Privy Council held that the High Court's judgment was erroneous as it failed to consider the operative part of the agreement that granted the lender priority. The order implicitly authorized the creation of a prior charge to salvage the property, even though there was no actual hypothecation. The Court emphasized that an agreement to hypothecate was as effective as an actual hypothecation against the debenture holders. Therefore, the Privy Council set aside the High Court's order, restored the Subordinate Judge's order granting priority to the appellant, and directed the respondents to pay the appellant's costs for the appeals.