1955 (8) TMI 29 - HC - Companies Law

Court upholds mortgage validity despite reorganization deviations. Plaintiffs directed to pay costs.

Deonarayan Prasad Bhadani Versus Bank of Baroda Ltd.

The court dismissed the suit challenging the validity of a mortgage created by the defendant company in favor of the defendant bank. Despite deviations ... Requirements with respect to memorandum Issues Involved:1. Validity of the mortgage created by the defendant company in favor of the defendant bank.2. Compliance with the scheme of reorganization sanctioned by the court.3. Subrogation rights of the defendant bank.4. Equitable principles and restitution.5. Maintainability of the suit by the plaintiffs.Issue-wise Detailed Analysis:1. Validity of the Mortgage Created by the Defendant Company in Favor of the Defendant Bank:The plaintiffs sought a declaration that the first English mortgage created by the defendant company in favor of the defendant bank was ultra vires and of no effect. The court examined whether the mortgage was valid under the terms of the scheme of reorganization sanctioned by the court. The plaintiffs argued that the terms of the mortgage, specifically regarding the quantum of the loan and the repayment schedule, deviated materially from the sanctioned scheme, rendering the mortgage unauthorized and ultra vires. However, the court concluded that although there were deviations, the mortgage was not a nullity. The deviations were considered excesses in the execution of the authority but did not affect the purpose of the incorporation of the company or the creation of the contract.2. Compliance with the Scheme of Reorganization Sanctioned by the Court:The court analyzed whether the terms of the mortgage complied with the scheme of reorganization sanctioned by the court. The plaintiffs contended that the mortgage terms, particularly the loan amount and repayment schedule, were at variance with the scheme, which required a loan of Rs. 30,00,000 to be repaid over five years with specific conditions for the first two installments. The court found that the deviations did not render the entire transaction ultra vires. The mortgage was held to be good to the extent of the mandate or authority, and the excess was considered irregular but not entirely void.3. Subrogation Rights of the Defendant Bank:The defendant bank argued that even if the mortgage was ultra vires, it was subrogated to the rights of the Bank of India, whose mortgage had been redeemed by the bank. The court examined the clause in the mortgage deed that purported to create an agreement for subrogation. The court held that the clause did not amount to an agreement of subrogation as required by section 92 of the Transfer of Property Act, which necessitates a registered instrument for subrogation. The court concluded that the bank could not claim subrogation rights under the ultra vires transaction.4. Equitable Principles and Restitution:The court considered the equitable principle that those who pay legitimate demands and have had the benefit of other people's money should not retain that benefit unjustly. The defendant bank argued that it should be allowed to retain possession of the mortgaged property as it had paid off the company's debt to the Bank of India. The court agreed, holding that even if the mortgage was ultra vires, the bank was entitled to retain possession of the property on equitable grounds until restitution was made. The court emphasized that this principle did not extend the doctrine of subrogation but was based on general principles of equity.5. Maintainability of the Suit by the Plaintiffs:The defendant bank raised several contentions regarding the maintainability of the suit, including the locus standi of the plaintiffs and the necessity of exhausting efforts to secure the joinder of the company as plaintiff. The court found that the plaintiffs, as shareholders and unsecured creditors, had the right to maintain the suit. The court also noted that all shareholders supported the plaintiffs, and the plaintiffs had called upon the company to take action before filing the suit. The court rejected the bank's contentions on maintainability.Conclusion:The court dismissed the suit, holding that the mortgage, while irregular in some respects, was not ultra vires and a nullity. The court recognized an equity in favor of the defendant bank, allowing it to retain possession of the property until restitution was made. The plaintiffs were ordered to pay the general costs of the suit and the costs of the issues decided in favor of the defendant bank. However, the defendant bank was ordered to pay the plaintiffs the costs of the issues decided against it. The plaintiffs were also ordered to pay the costs of the defendant company represented by the liquidator.