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Issues: (i) whether the holder of debentures secured by a floating charge continued to be a secured creditor after the charged properties were sold free from encumbrances and after the debenture scrips were lost; (ii) whether such holder, despite inability to produce the original debenture scrips, was entitled to payment on furnishing indemnity and security; and (iii) whether the debts specified in section 230(1) of the Indian Companies Act, 1913, had priority over the debenture holder's claim.
Issue (i): whether the holder of debentures secured by a floating charge continued to be a secured creditor after the charged properties were sold free from encumbrances and after the debenture scrips were lost.
Analysis: The charge attached to the sale proceeds under the doctrine of substituted security. A charge is not destroyed by a sale free from encumbrance when the sale is made on the footing that the secured claimant is to be satisfied first out of the proceeds. Loss or non-possession of the debenture scrips affected the mode of payment and discharge, but did not alter the creditor's underlying security or status. The debentures created a floating charge simpliciter, and the holder remained entered in the company's register as holder for value.
Conclusion: The holder continued to be a secured creditor.
Issue (ii): whether such holder, despite inability to produce the original debenture scrips, was entitled to payment on furnishing indemnity and security.
Analysis: Where a negotiable instrument is lost, the law recognises payment against indemnity and security as a just method of protecting the debtor or liquidator against double liability. The principles reflected in the law of insolvency, negotiable instruments, and civil procedure permit relief where the claimant is otherwise entitled and offers adequate indemnity. The inability to produce the scrips therefore did not justify refusal of payment if proper security was furnished.
Conclusion: The holder was entitled to payment upon executing an indemnity bond and furnishing a scheduled bank guarantee.
Issue (iii): whether the debts specified in section 230(1) of the Indian Companies Act, 1913, had priority over the debenture holder's claim.
Analysis: Section 230(1) gives preferential payment to specified debts out of assets available for general creditors, and section 230(2)(b) makes those debts payable in priority over debentures under a floating charge. Since the debentures created only a floating charge, the statutory preferential debts had precedence over the appellant's claim.
Conclusion: The statutory preferential debts had priority over the debenture holder's claim.
Final Conclusion: The appeals were disposed of by holding that the appellant remained a secured creditor and could obtain payment on indemnity and bank guarantee, but his claim was postponed to the preferential debts protected by section 230 of the Indian Companies Act, 1913.
Ratio Decidendi: A floating charge attaches to substituted sale proceeds, loss of debenture scrips does not by itself divest secured status, and a secured claimant may be paid on adequate indemnity where the law otherwise recognises a right to payment, while statutory preferential debts rank ahead of debentures under a floating charge.
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