Fraudulent preference in company mortgages: security granted before winding up was void against the liquidator.

A charge in favour of selected creditors shortly before winding up was held to amount to a fraudulent preference where the surrounding circumstances showed a dominant motive to secure an undue advantage, including prolonged unsecured debt, insolvency, the timing of the security and the absence of credible commercial pressure. The court also noted that the respondents were creditors and that the charge documentation and deposit of title deeds could evidence a mortgage, but the later creation and attempted registration occurred after the company had become insolvent and business had ceased. The mortgages therefore did not bind the liquidator and were void as against him.

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Issues: (i) Whether the impugned mortgages were hit by sections 531 and 531A of the Companies Act, 1956 as fraudulent preference or transactions not in the ordinary course of business; (ii) whether the respondents were creditors of the company and the mortgages were validly created and registered so as to bind the liquidator.

Issue (i): Whether the impugned mortgages were hit by sections 531 and 531A of the Companies Act, 1956 as fraudulent preference or transactions not in the ordinary course of business.

Analysis: Fraudulent preference requires more than mere preference in fact; the dominant motive must be to give an improper advantage to particular creditors. On the evidence, the security was demanded, offered and created within the statutory period, after the debts had remained unsecured for a long period and when the company had become unable to pay its debts. The relationship between the parties, the absence of contemporaneous records supporting the alleged advances, the timing of the security, the extent of the charge over almost all remaining immovable assets, and the lack of any credible threat or pressure excluded a bona fide ordinary-course transaction. The circumstances supported an inference of an intention to prefer the respondents.

Conclusion: The mortgages were fraudulent preferences and were not transactions protected as being in the ordinary course of business; the finding was against the respondents.

Issue (ii): Whether the respondents were creditors of the company and the mortgages were validly created and registered so as to bind the liquidator.

Analysis: The materials were sufficient to show that amounts were due to both respondents at the relevant time, though exact quantification was unnecessary for the present enquiry. The charge was not shown to be ultra vires when created, the filing of particulars under section 125 was held not to suffer from a fatal defect, and the memoranda relating to deposit of title deeds were treated as evidencing an equitable mortgage rather than as compulsorily registrable instruments. However, even if the charge could otherwise stand, the later creation and attempted registration took place after the company had become insolvent and after business had ceased, with knowledge of that insolvency.

Conclusion: The respondents were creditors, but the mortgages did not bind the liquidator and were invalid as against him; the finding was against the respondents.

Final Conclusion: The application succeeded and the two mortgages were declared void as against the official liquidator.

Ratio Decidendi: A charge created in favour of selected creditors shortly before winding up, when the company is unable to pay its debts and the surrounding circumstances show a dominant motive to secure an undue advantage, is void as a fraudulent preference and is ineffective against the liquidator.

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