1958 (5) TMI 35 - HC - Companies Law

Debenture holders ruled unsecured due to lack of property charge registration

The court held that holders of the third series of debentures were unsecured creditors as the debentures did not create a charge on the company's ... Charges – Registration of Issues:- Declaration of whether holders of the third series of debentures are secured creditors of the company.Analysis:The judgment involves an application by the official liquidator seeking a declaration regarding the status of the holders of the third series of debentures of a company in liquidation. The company had three series of debentures, with the third series issued without a debenture trust deed or registration under the Indian Registration Act. The official liquidator contended that each transaction of debenture issuance should have been registered within 21 days to confer security. The opposing parties argued that registration under section 109 of the Companies Act sufficed, as the debentures intended to create a floating charge. The primary issues for consideration were the necessity of registration under the Registration Act to create a charge on company assets and whether the plant and machinery of the company constituted movable property.The judgment delves into the legal provisions governing registration of charges created by a company under section 109 of the Indian Companies Act, 1913. It stipulates that registration is mandatory for mortgages or charges, including floating charges, and failure to register renders the charge void. Proviso (iv) clarifies that debentures entitling holders to a charge on immovable property do not confer an interest in immovable property. The debenture holders argued that registration with the Registrar of Companies was sufficient notice, as debentures did not create an interest in immovable property requiring Registration Act compliance. However, the court analyzed the specific requirements for registration under the Companies Act, emphasizing the need to provide general property descriptions rather than detailed specifics, highlighting the limitations of such registration in informing potential property dealings.Further, the judgment discusses the purpose of registration in preventing fraud and providing notice of encumbrances, as articulated by previous judicial observations. It underscores the distinctions between registration under the Companies Act and the Registration Act, emphasizing the latter's role in recording property rights and obligations related to immovable properties. The court elucidates that the general property descriptions in Companies Act registration do not equate to the detailed specifics necessitated by the Registration Act for effective notice of encumbrances.Regarding the movable or immovable nature of the company's plant and machinery, the court appointed a Commissioner to inspect and report on the machinery's attachment to the earth. The detailed report confirmed that the machinery was either embedded or permanently fastened to the earth, aligning with the criteria of immovable property. Drawing parallels with a precedent, the court concluded that the machinery's fixed nature indicated immovability, especially considering the machinery's installation for operational purposes rather than temporary use. Consequently, the court declared the holders of the third series of debentures as unsecured creditors, as the debentures failed to create a charge on the company's immovable properties due to non-registration under the Indian Registration Act.