Winding up securities and management clauses: secured assets enforceable, private sale valid, but takeover of management is invalid and severable

In winding up, a liquidator's request for directions to recover or retain company property in the court's custody is maintainable by application, not by suit with suit court-fee. A bank holding an English mortgage and hypothecation with contractual power of sale may retain and sell the secured assets without court intervention, but only to the extent the assets are actually covered by the securities; furniture outside the security must be returned to the liquidator. A security arrangement is not invalid merely because it creates a floating charge or leaves the company in possession, but any clause allowing the lender to take over management is contrary to section 293(1)(a) and is severable.

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Issues: (i) Whether the liquidator's application was maintainable by application and not required to be filed as a suit with suit court-fee; (ii) Whether the bank, as mortgagee and hypothecatee, could retain possession of the secured properties and sell them without intervention of court; (iii) Whether the mortgage and hypothecation deeds were invalid for contravention of section 293 of the Companies Act, 1956.

Issue (i): Whether the liquidator's application was maintainable by application and not required to be filed as a suit with suit court-fee.

Analysis: On a winding up order, the company's property comes into the custody of the court and the official liquidator acts as an officer of the court for collection and retention of assets. Where the liquidator seeks directions to recover or retain custody of property already vested in the court's control, the proceeding is one for directions in winding up and not a suit for recovery of a debt or property from a third party. The relevant company-court jurisdiction and court-fee provisions therefore support an application rather than a suit.

Conclusion: The objection was overruled, and the liquidator's application was held maintainable as an application.

Issue (ii): Whether the bank, as mortgagee and hypothecatee, could retain possession of the secured properties and sell them without intervention of court.

Analysis: The hypothecation deeds created a floating security over movables with power to take possession on default and to sell the secured assets. The mortgage deed was in substance an English mortgage and expressly conferred a power of sale without court intervention within section 69 of the Transfer of Property Act, 1882. The bank's right to possession followed from the nature of the security and the contractual terms, but only in relation to the properties actually covered by the securities; furniture not comprised in the security could not be retained.

Conclusion: The bank was entitled to retain possession of the mortgaged and hypothecated assets covered by the securities and to sell them without intervention of court, but it had to deliver the furniture to the liquidator.

Issue (iii): Whether the mortgage and hypothecation deeds were invalid for contravention of section 293 of the Companies Act, 1956.

Analysis: A security arrangement that leaves the company in possession and use of its assets for the conduct of business does not, merely by creating extensive security or a floating charge, amount to a disposal of the whole or substantially the whole of the undertaking. However, a clause authorising the lender to take over the management of the company's business goes beyond security enforcement and is inconsistent with section 293(1)(a). That offending clause could be severed without upsetting the rest of the transaction.

Conclusion: The security documents were not invalid as a whole; only the clauses empowering takeover of management were invalid and unenforceable to that extent.

Final Conclusion: The bank succeeded in establishing its security rights over the covered assets and its power of private sale, while the liquidator succeeded only to the limited extent of recovering the furniture and defeating the management-takeover clauses.

Ratio Decidendi: In winding up, securities over company assets remain enforceable according to their terms where they merely secure repayment and preserve the company's possession for business, but a lender's contractual right to take over the company's management amounts to an invalid disposal of the undertaking under section 293(1)(a) of the Companies Act, 1956 and is severable from the valid security.

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