Secured Creditor Interest: contractual interest on secured portion continues; unsecured interest stops at adjudication unless surplus.

A secured creditor who preserves and enforces his security remains outside the insolvency for the secured portion and is entitled to contractual interest on that secured portion until payment out of the security; by contrast, a secured creditor who realises, relinquishes, or values and proves the security becomes a creditor in insolvency and the unsecured balance ranks with other unsecured creditors, with interest on that balance ceasing as at adjudication except to the extent of any surplus available for distribution.

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Issues: Whether a secured creditor who has not come into insolvency under section 47 is entitled to contractual interest on his secured debt after the date of adjudication/winding up.

Analysis: The court examined Section 229 of the Companies Act, 1913, which imports the insolvency law, and the provisions of the Provincial Insolvency Act, 1920, in particular sections 28, 33, 34, 44(2), 47, 48, 61 and 67 to determine the effect of adjudication on secured creditors. Section 28(6) preserves a secured creditor's power to realise or deal with his security despite adjudication. Under section 47 a secured creditor is brought into insolvency only if he realises or relinquishes his security or states particulars and values the security and thereby proves for the balance. Debts provable under the Act include principal and interest up to the date of adjudication; post-adjudication interest on provable debts is generally subject to the insolvency scheme and, absent surplus, limited for dividend purposes. The court applied these provisions to the facts where the creditor had both secured and unsecured components, found that the creditor had not adopted any of the section 47 courses so as to render his secured debt provable, and therefore remained outside the insolvency in respect of the secured portion. Authority and secondary texts were considered to distinguish the position of secured creditors who rely on their security from unsecured creditors who compete in the insolvency estate.

Conclusion: The secured creditor is entitled, in respect of the secured portion of his debt, to contractual interest up to the date of payment out of his security; in respect of the unsecured balance he ranks with unsecured creditors and interest on that part ceases as at the date of adjudication unless there is surplus. The respondent secured creditor therefore succeeds.

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