Company mortgage under sanctioned scheme not automatically void; equity may protect lender who discharged prior secured debt.

A company transaction under a court-sanctioned scheme is not automatically void merely because the repayment terms depart from the contemplated machinery; where the borrowing power existed, the advance matched the intended purpose, and only the mode of performance differed, the mortgage was not ultra vires, though it was defective in part. A lender cannot claim subrogation to an earlier mortgagee's rights if the underlying borrowing itself is invalid in law. Even so, equity may protect a lender who applied the advance to discharge the company's prior legitimate liabilities, allowing retention of possession where no innocent third-party interests are prejudiced. The challenge to the mortgage failed and the suit was dismissed with costs.

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Issues: (i) Whether the mortgage executed in favour of the bank was ultra vires the company because its terms departed from the court-sanctioned scheme and the financing agreement; (ii) whether the bank could claim subrogation to the rights and securities of the earlier mortgagee after paying off that debt; (iii) whether, even if the mortgage were ultra vires, the bank was entitled in equity to retain possession of the property and resist the plaintiffs' reliefs.

Issue (i): Whether the mortgage executed in favour of the bank was ultra vires the company because its terms departed from the court-sanctioned scheme and the financing agreement.

Analysis: A scheme sanctioned under section 153 of the Indian Companies Act, 1913, binds the company and its constituents, but not every deviation from the machinery of implementation necessarily nullifies the transaction. The borrowing power existed, the amount actually advanced was not less than the amount contemplated for paying off the prior secured debt, and the purpose of the borrowing was achieved. The variation in the mode and period of repayment was a departure from the contemplated terms, but the excess related to the manner of performance and was severable from the substance of the authorised transaction.

Conclusion: The mortgage was not ultra vires or a nullity, though it was defective in some respects.

Issue (ii): Whether the bank could claim subrogation to the rights and securities of the earlier mortgagee after paying off that debt.

Analysis: The statutory law of subrogation requires a valid borrowing and a registered agreement that the lender shall be subrogated. Where the lending transaction itself is ultra vires, no debt arises in law or equity so as to support subrogation to the discharged mortgagee's securities. The clause relied upon by the bank did not displace this difficulty if the underlying transaction failed.

Conclusion: The bank could not, on the footing of subrogation, claim the rights or priorities of the earlier mortgagee.

Issue (iii): Whether, even if the mortgage were ultra vires, the bank was entitled in equity to retain possession of the property and resist the plaintiffs' reliefs.

Analysis: Where money advanced under an unauthorized borrowing is actually applied in discharge of the company's legitimate liabilities, equity may prevent the company from retaining that benefit without restoring the lender to its position, so long as no innocent third-party rights are prejudiced. On the facts, the advance discharged the prior secured debt, the bank was in possession under the transaction, and no competing priority was shown to be endangered. The plaintiffs' requests for declaration and injunction were discretionary remedies and, in these circumstances, would not be granted.

Conclusion: The bank was entitled in equity to retain possession and the plaintiffs were not entitled to the reliefs sought.

Final Conclusion: The challenge to the mortgage failed, and the suit was dismissed with costs as directed by the Court.

Ratio Decidendi: A company's transaction made under a court-sanctioned scheme is not automatically void for every deviation from the contemplated terms; where the authority is substantially pursued and the departure concerns only the mode of performance, the transaction is not ultra vires, and equity may in appropriate cases protect a lender who has applied the advance to discharge the company's prior legitimate liabilities.

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