Holding

A preliminary decree that extinguishes an unregistered charge and creates a sale order is not void under Section 125, and Section 446 does not empower the Company Court to declare such a decree void.

Summary

Indian Bank advanced money to Chemmeens Exports Pvt. Ltd. secured by an equitable mortgage and, after the company was wound up, obtained leave to sue the company in liquidation. A preliminary decree was passed ordering the company to pay the debt by a specified date, failing which the bank could obtain a sale order. The Official Liquidator argued that the charge was void under Section 125 of the Companies Act, 1956 because it was not registered, and sought to have the decree declared void. The Supreme Court held that the decree extinguished the unregistered charge and created a sale order, so Section 125 did not render the decree void, and that Section 446 does not empower the Company Court to declare a competent court's decree void. Consequently, the decree remained operative and the appeal by Indian Bank was allowed. The Court also clarified that a decree creating a charge is distinct from a charge created by the company and that res judicata did not bar the liquidator’s plea.

Issues considered

The effect of Section 125 of the Companies Act, 1956 on a preliminary decree based on an unregistered charge.
Whether a decree that extinguishes an unregistered charge is itself void under Section 125.
The applicability of Section 446 of the Companies Act, 1956 to declare a competent court's decree void.
Whether the Official Liquidator can raise the voidness of the decree after it became final (res judicata).
The distinction between a charge created by a company and a charge created by a court decree.

Legislation cited

Companies Act, 1956s. 125, s. 446, s. 460(4)
Companies (Court) Rules, 1959s. 9

Subjects

Companies ActSection 125Section 446unregistered chargemortgagepreliminary decreewinding upofficial liquidatorres judicatajudgment creditorcharge registrationpriority of debts

Judgment

INDIAN BANK A
.. ---- v.
THE OFFICIAL LIQUIDATOR, CHEMMEENS
EXPORTS (P) LTD. AND ORS.

MAYS,1998
B
[B.N. KIRPAL AND S.S. MOHAMMED QUADRI, JJ.]

Companies Act, 1956 :

Sections 125 and 446--Charge created on the company's asset by way C
of mortgage-Non registration of such charge-Effect of-Loan advanced by
bank secured by equitable mortgage by deposit of title deeds uf the debtor
company with the bank-Winding up proceedings initiated against the debtor
company and winding up order passed by the Company Court-Bank moving
on application to the Company Court for leave to file a suit against the D
debtor company under liquidation and the same was allowed-Preliminary
decree passed-No appeal preferred by the Official Liquidator against the
decree -After the expiry of limitation to file the appeal against the decree,
Official Liquidator moved an application before the Company Judge that
under Section 125, charge having been not registered, the decree was void-
Preliminary decree prescribed certain date for deposit of decree amount by E
the company and in default the Bank would be entitled to apply to trial court
for passing final decree and realisation of the decree amount by way of sale
of mortgaged property-Decree amount not deposited within the date fixed
by the Court-Held, if upon construction of a decree, the court found that
the unregistered charge was kept alive, provisions of Section 125 would F
apply and if, on the other hand, the decree extinguished the unregistered
charge, section 125 would not apply and a judgement-creditor will be
entitled to relief from the Company Court-As such the preliminary decree
was not void or inopertative--Companies(Court) Rules, 1959, Rule 9.

Section 446-Applicability of -Power of Company Court-Held, it G
has no power to declare a decree of a competent court void or inoperative-
Hence application filed by Official Liquidator to declare a decree void not
maintainable.

Appellant advanced certain amounts to a Company ("debtor company")
which was secured by an equitable mortgage by deposit of title deeds of the H
255
256 SUPREME COURT REPORTS [1998) 3 S.C.R.

A debtor company with the appellant. Thereafter, winding up proceedi11gs were
initiated against the debtor company on 01.03.1979 and winding up order •- ··
was passed. Appellant sought leave of the Company Court to file a suit for
recovery of the debt amount and the same was granted by it on 07.12.1979.
The appellant thereafter, filed .a suit against the debtor company in liquidation
B which was represented by the Official Liquidator. The Official Liquidator
filed written statement and contested the suit inter a/ia on the ground that
the charge against the properties of the debtor company not having been
registered under Section 125 of the Companies Act, it was void. However,
in 28.05.1982, a preliminary decree was passed by the court in favour of the
appellant. No appeal was filed by the Official Liquidator against the said
C decree. However, on 21.03.1983, the Official Liquidator against the said
decree.-However, on 21.03.1983, the Official Liquidator filed an application
before the Company Court for the reliefs as indicated in its written statement
filed in suit for recovery. The appellant resisted the application on the
ground that the decree filed by the court had become final and operated as
res judicata. Company Court referred the matter to a Division Bench
D expressing the view that the question was not free from doubt. The Division
Bench held that the preliminary decree passed in the suit did not operate as
res judicata; that on account of the non-registration of the charge it was void
under Section 125 of the Act and that the decree was void. Hence this appeal.

It was contended by the appellant that since no appeal was preferred
E against the decree passed in the suit on the basis of the prior permission
of the Company Court it had become final; and that under Section 125 of the
Act, what was required to be registered was charge created by the debtor
company and as the preliminary decree in the suit could not be said to be
a charge created by the debtor company, Section 125 had no application. On
F the other hand it was contended by the respondent that as the charge created
by the debtor company on its properties was void in view of mandatory
provision of Section 125, 'the Division Bench had rightly held that the
preliminary decree was also void against the creditor and the liquidator and
that it was of no consequence that the liquidator did not appeal against it and
G that the principal of res judicata had no application.

Allowing the appeal, this Court.

HELD : 1.1. An order or decree of a court creating charge on the
priorities of a company has to be distinguished from a preliminary decree
passed in a mortgage suit based on an unregistered charge, which is hit by
H Section 125 of the Companies Act. The right to recover the amounts pursuant
INDIAN BANK v. OFFICIAL LIQUID. CHEM. EXPORTS (P) LTD. 257
to the counter creating charge, even under the terms of the decree was A
• ~ _. available till the said date and thereafter "the matter had passed from the
domain of the contract to that of Judgement"." The question of applicability
of Section 125 has to be decided on the terms of the decree - whether the
unregistered charge created by the mortgagor was kept alive or extinguished
or replaced by an order of sale created by the decree; if upon a construction B
of the decree, the court found that the unregistered charge was kept alive,
the provisions of Section 125 would apply and if, on the other hand, the
decree extinguished the unregistered charge, the section would not apply. A
Judgement-creditor will be titled to relief from the Company Court
accordingly. [226-D; 267-G)

1.2. In the present case the charge was kept alive till the specified date
c
viz. 28.08.1982 and thereafter in default of payment of decree amount the
sale order would take effect. Admittedly the decree amount was not paid
before 28.08.1982; as such the matter has passed from the domain of contract
to the realm of the judgement. The Official Liquidator filed application on
21.03.1983 seeking to declare the decree as void. By that date, what was D
operative in the decree was not a mere unregistered charge but an order for
sale of mortgaged property for realisation of decree amount. The preliminary
decree cannot therefore be said to be void or inoperative. (268-A-B)

Gyarsi bai v. Dhansukh Lal, AIR (1985) SC 1055, relied on.
E
In re : Overseas Aviation Engineering (G.B.) Ltd., (1963) 33 Comp.
Cases 315; Praga Tools Ltd. v. Official Liquidator of Bengal Engineering
Co. (P) Ltd., (1984) 56 Comp. Cases 214 and Swyakant Natvarlal Surati
v. Kamani Bros. Ltd., (1985) 58 Comp. Cases 121, approved.

Rani Sunder Kaer v. Rai Sham Krishan, (1934) Indian Appeals 9 (P.C.) F
and Kusum Kumari v. Devi Prasad Dhandhania, AIR (1936) PC 63, referred
to.

2. Provisions of Section 446 of the Companies Act, 1956 have no
application to any proceedings pending in appeal before a High Court or this G
Court. From tliis what follows is when a suit is constituted in the court of
competent jurisdiction with the leave of the court under sub-section (1) and
a decree is passed by that court whether on the basis of mortgage or
otherwise, it would be binding on the Official Liquidator and no plea
inconsistent with the decree passed against the Official Liquidator can be
raised while deciding the question of priorities under clause (d) of sub- H
258 SUPREME COURT REPORTS [ 1998] 3 S.C.R.

A section (2). Under Section 446, no power is conferred on the Company Court
to declare a decree of the competent court void - a prayer which is made by ,,_,. •
the Official Liquidator in the application out of which this appeal arises - and
so to that extent the application filed by the Liquidator in the Company Court
is not maintainable. [264-G-H; 265-AI

B CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4393 of
1986.

From the Judgment and Order dated 29.1.86 of the Kerala High Court
in M.C.A. 11of1983. y ~

c Harish N. Salve, Shanti Bhushan, Sudhir Chandra Aggarwal, R.F.
Nariman, Shailendra Swamp, Ms. Bindu Saxena, Ms. Leena George, K. Ram
Kumar, Ms. Asha G. Nair, C. Balasubramanian, Y. Subba Rao, Ms. Santi
Narayan, Dinesh Mathur, S. Ganesh, K.J. Desai and E.M.S. Anam for the .
appearing parties.
D
The Judgment of the Court was delivered

QUADRI, J. This appeal, by special leave, is directed against the order .._
of the Division Bench of Kerala High Court in M.C.A. No. 11 of 1983 passed
on January 29, 1986. That was an application filed before the learned Single
E Judge of the High Court of Kerala (hereinafter referred to as 'the Company
Court') by the Official Liquidator against the Indian Bank and respondents
Nos.2 to 5 herein under Section 446(2) and Section 460(4) read with Section
125 of the Companies Act, 1956 (for short 'the Act') and Rule 9 of the
Companies (Court) Rules, 1959 praying for a declaration that the charge
created by the company in Liquidation in favour of the Indian Bank against
F the land and buildings of the company, being plaint schedule properties in
O.S.169/80 before the Principal Sub-Court, Cochin, was void and a further
declaration that the preliminary decree passed in the said suit to the extent
that it created three charge on the assets of the company was contrary to the
provisions of Section 125 of the Act and as such void and unenforceable
G against the Official Liquidator representing the General body of creditors
excluding the decree holder.

H
It will be necessary to notice the facts giving rise to this appeal for
a proper appreciation of the questions raised before us. The Indian Bank
advanced certain amounts to Mis. Chemmeens Exports Pvt. Ltd. which was
secured by an equitable mortgage by deposit of title deeds of the debtor
- .~
INDIAN BANK v. OFFICIAL LIQUID. CHEM. EXPORTS (P) LTD. [QUADRI, J ] 259
company with the Bank. Thereafter, winding up proceedings were initiated A
against the debtor-company and on March l, 1979 and winding up order was
passed in Company Petition No.18 of 1978. The bank sought leave of the
Company Court to file a suit for recovery of the debt amount in a sum of Rs.
29,50,609.58 due to it. The permission having been granted by the Company
Court on 7.12.79, the Indian Bank filed the said suit, O.S.No.169/80 in the B
Subordinate Judg's Court, Cochin, against the debtor company in liquidation
which was represented by the Official Liquidator, duly impleading the Directors
of the Company. The Official Liquidator filed written statement and contested
the suit taking, inter alia, the plea that the charge against the properties of
the company not having been registered under Section 125 of the Act, was
void. On 28.5.82, in the said suit the Court passed a preliminary decree in C
favour of the Bank. No appeal was filed by the Official Liquidator against the
said decree.

However, on March 21, 1983, the Official Liquidator filed an application
being C.M.A.No.11 of 1983 before the Company Court for the reliefs indicated
above. The bank resisted the application on the ground that the decree D
passed by the Court had become final and operates as res judicata. The
learned Company Judge referred the case to a Division Bench expressing the
view that the question was not free from doubt. By the imp.ugned order of
January 29, 1986, the Division Bench held that the preliminary decree passed
in the suit did not operate as res judicata; that on account of non-registration E
of the charge it was void under Section 125 of the Act and that plea could
be raised by the Official Liquidator as such and also on behalf of the body
of the creditors in the application and also declared that the preliminary
decree passed on the basis of the charge created by the company in favour
of the bank against the land, buildings and machinery of the company, as set
out in the preliminary decree, was void against the Official Liquidator and the F
creditors of the company and that the same was not enforceable against the
assets of the company.

Shri Ram Kumar, the learned counsel for the appellant, contended that
since no appeal was preferred against the preliminary decree p?.ssed in the
suit filed by the bank with permission of the Company Court against the G
company represented by the liquidator on the basis of equitable mortgage of
the company's property, it had become final, and the Division Bench could
not have gone behind the decree to hold that as the charge, the basis of the
decree, was not registered with the Registrar and was void, the decree itself
was void; that under Section 125 of the Act, what was required to be regi_stered H
260 SUPREME COURT REPORTS [1998) 3 S.C.R.

A was charge created by the company and as the preliminary decree in the suit
could not be said to be a charge created by the company, Section 125 had
no application to the decree of the court. In any event, submitted the learned
counsel, the liquidator himself being a party to the decree, it was binding on
him and he could not be permitted to plead to the contrary. Shri E.M.S.Anam,
B the learned counsel appearing for the contesting respondent, argued that
because the charge created by the company on its properties was void in
view of mandatory provision of Section 125, the Division Bench had rightly
held that the preliminary decree was also void against the creditors and the
liquidator and that it was of no consequence that the liquidator did not appeal
against it and that the principle of res judicata had no application. " -
c
On these submissions, the question which falls for consideration is :
what is the effect of Section 125 of the Act on a preliminary decree in a
mortgage suit passed on the basis of an unregistered charge; and what is
relief to which the judgment creditor will be entitled to in such a case?

D Since the preliminary decree is assailed as being void under Section 125
of the Act, it would be useful to read here ihe said provision, insofar as it
is relevant for our purposes.

It reads :

E "Certain charges to be void against liquidator or creditors unless
registered.

125. (1) Subject to th~ provisions of this Part, every charge created
on or after the !st day of April, 1914, by a company and being a
charge to which this section applies shall, so far as any security on
F the company's property or undertaking is conferred thereby, be void
against the liquidator and any creditor of the company, unless the
prescribed particulars of the charge, together with instrument, if any,
by which the charge is created or evidenced, or a copy thereof
verified in the prescribed manner, are filed with the Registrar for
G registration in the manner required by this Act within thirty days after
the date of its creation :

Provided that the Registrar may allow the particulars and instrument
or copy as aforesaid to be filed within thirty days next following the ...-
expiry of the said period of thirty days on payment of such additional
H fee not exceeding ten times the amount of fee specified in Schedule
INDIAN BANK v. OFFICIAL LIQUID. CHEM. EXPORTS (P) LTD. [QUADRI, J.] 261
X as the Registrar may detennine, ifthe company satisfies the Registrar A
that it had sufficient cause for not filing the particulars and instrument
or copy within that period.

(2) Nothing in sub-section (I) shall prejudice any contract or obligation
for the repayment of the money secured by the charge.
B
(3) When a charge becomes void under this section, the money
secured thereby shall immediately become payable.

(4) This section applies to the following charges :

(a) a charge for the purpose of securing any issue of debentures:
c
(b) a charge on uncalled share capital of the company;

(c) a charge on any immovable property, wherever situate, or any
interest therein:

(d) a charge on any book debts of the company;
D
(e) a charge, not being a pledge, on any movable property of the
company;

(f) a floating charge on the undertaking or any property of the
company including stock-in-trade;
E
(g) a charge on calls made but not paid;

(h) a charge on a ship or any share in a ship;

0) a charge on goodwill, on a patent or a licence under a patent,
on a trade mark, or on a copyright or a licence under the F
copyright.

Sub-sections (5) to (8) *** *** ***"

On a plain reading of sub-section (I) it become clear that if a company
creates a charge of the nature enumerated in sub-section (4), after !st day of G
,April, 1914, on its properties, and fails to have the charge together with
instrument, if any, by which the charge is created, registered with the Registrar
of the Companies within thirty days, it shall be void against the liquidator and
any creditor of the company. This, however, is subject to the provisions of
Part-V of the Act. The proviso enables the Registrar to relax the period of
limitation of thirty days on payment of specified additional fees, on being H
262 SUPREME COURT REPORTS [ 1998] 3 S.C.R.

A satisfied that there has been sufficient cause for not filing the particulars and
instrument or a copy thereof within the specified period. Sub-sections (2)
and (3) deal with repayment of money secured by the charge. Sub-section
(2) provides. that the provision of sub-section (I) shall not prejudice the
contract or obligation for repayment of money secured by the charge and
B sub-section (3) says that when a charge becomes void under the section,
the .money secured shall become payable immediately. Though as a
consequence of non-registration of charge under Part- V of the Act, a creditor
may not be able to enforce the charge against the properties of the company
as a secured creditor in the event of liquidation of the company as the
charge becomes void against the liquidator and the creditor, yet he will be
C entitled to recover the debt due by the company on par with other unsecured
creditors. It is also evident that Section 125 applies to every charge created
by the company on or after the !st day of April, 1914. But where the charge
is by operation of law or is created by an order or decree of the court,
Se~tion 125 has no application.

D In re: Overseas Aviation Engineering (G.B.) ltd, (1963) 33 Company
Cases 3 I 5, the Court of appeal held, inter alia, that an order passed by the
court giving effect to the charge unregistered under Section 95 of the
English Companies Act (which is not only in pari materia with Section 125
of the Companies Act but is also identical in terms) was not void against
E the liquidator of the company on its winding up.

In Praga Tools Ltd. v. Official Liquidator of the Bengal Engineering
Co. (P) Ltd., (1984) 56 Company Cases 214, a consent decree for repayment
of money was passed against the Bengal Engineering Company on the suit
filed by Praga Tools Company. The decree provided, inter alia, that in the
F event of non-payment of the decreed amount, the praga Tools Company
would be entitled to execute the decree and in the event of execution of the
decree, the security furnished by the Bengal Engineering Company with the
Registrar under an earlier order of the court to the extent of Rs. 53,000 would
continue as security for the decree. That decree was not registered. Thereafter,
G Bengal E[lgineering Company went into liquidation and its entire assets were
sold by the official liquidator. The Praga Tools Company applied claiming to
be a secured creditor to the extent of Rs.50,000. A learned Single Judge of
the Calcutta High Court held that as the charge was created by an order of
the court, it would not require registration under Section 125 of the Companies
Act and th~t the Praga Tools Company should be treated as secured creditor
H to the extent of Rs. 50,000 and was entitled to recover the amount from the
INDIAN BANK''· OFFICIAL LIQUID. CHEM. EXPORTS (P) LTD. [QUADRI. J] 263
official liquidator. We approve the principle laid down by the learned Single A
> , ...,.
Judge of the Calcutta High Court. We also make it clear that an order or decree
of a Court creating charge on the properties of a company has to be
distinguished from a preliminary decree passed in a mortgage suit based on
an unregistered charge which is hit by Section 125 of the Act. We shall advert
to this aspect presently.
B
Now, it will be necessary to read here Section 446 of the Act. It deals
with the effect of winding up order on the suits and other proceedings
pending or in the offing. Section 446 is in the following terms :
•
"Suits stayed on winding up order,
c
446. (l) When a winding up order has been made or the Official
Liquidator has been appointed as provisional liquidator, no suit or
other legal proceeding shall be commenced, or if pending at the date
of the winding up order, shall be proceeded with, against the company,
except by leave of the Court and subject to such terms as the Court
D
may impose.

:=-- (2) The Court which is winding up the comp<iny shall, notwithstanding
anything contained in any other law for the time being in force, have
jurisdiction to entertain, or dispose of -

(a) any suit or proceeding by or against the company; E
(b) any claim made by or against the company (including claims by
or against any of its branches in India);

(c) any application made under Section 391 by or in respect of the
company;
F
-" (d) any question of priorities or any other question whatsoever,
whether of law or fact, which may relate to or arise in course of
the winding up of the company;

Whether such suit or proceeding has been instituted, or is instituted,
or such claim or question has arisen or arises or such application has G
been made or is made before or after the order for the winding up of
the company, or before or after the commencement of the Companies
(Amendment) Act, 1960.
-...(

(3) Any suit or proceeding by or against the company which is
pending in any Court other than that in which the winding up of the H
264 SUPREME COURT REPORTS [1998] 3 S.C.R.

A company is proceeding may, notwithstanding anything contained in
any other law for the 'time being in force, be transferred to and
disposed of by that Court.

(4) Nothing in sub-section (I) or sub-section (3) shall apply to any
proceeding pending in appeal before the Supreme Court or a High
B Court."

A perusal of the provisions, extracted above, makes it clear that when
a winding up order has been made or the official liquidator has been appointed
as provisional liquidator in respect of a company, the Court passing the
winding up order is empowered to adopt any of the following courses :
c
(I) To grant leave to any person to institute or continue suit or legal
proceeding, pending at the date OTwinding up against the company subject
to such terms as that court may impose;

(2) to entertain or dispose of
D
(a) any suit or proceeding by or against the company;

(b) any claim made by or against the company; including claims by
or against any of its branches in India;

(c) any application made under Section 391 by or in respect of the
E
company; and

(d) any question of priorities or any other question whatsoever
whether of law or fact which may relate to or arise in the course
of winding up of the company; and

F (3) to transfer to itself any suit or proceedings by or against the
company which is pending in any court (other than that in which the winding
up of the company is proceeding) and disposed of the same.

It may be noted that these provisions have no application to any
G proceeding pending in appeal before a High Court or the Supreme Court. From
this what follows is when a suit is instituted in the court of competent
jurisdiction with the leave of the court under sub-section (!) and a decree is
passed by that court whether on the basis of mortgage or otherwise, it would
be binding on the official liquidator and no plea inconsistent with the decree
passed against the. official liquidator can be raised while deciding the questions
H of priorities under clause (d) ofsub-section{2). We wish to make it clear that
INDIAN BANK v.OFICIAL LIQ. ,CHEMMEENS EXPORTS (P)L TD. [QUADRI, J.], 265

under Section 446, no power is conferred on the company court to declare A
a decree of the competent court void - a prayer which is made by the official
liquidator in the application out of which this appeal arises - so to that extent
the application filed by the liquidator in the company court is not maintainable.

The question, however, remains what is the effect of the preliminary
decree passed by the court against the official liquidator on May 28, 1982. B
It will be useful to read here the material portion of the preliminary decree :

"It is ordered and decreed that a preliminary decree is passed and that
the plaintiff is entitled to re.alise from the defendants a sum of Rs.
29,50,605.59 with interest at 14% from the date of suit till the realization
and that plaintiff is entitled to the cost of the suit also and that the C
defendants 1 to 3 will deposit in Court on or before 28.8.1982 the
above said amount and cost of the suit and on payment of the amount
the equitable mortgage will stand discharged and the documents of
title deposited with the plaintiff by the defendants and which are
produced by the plaintiff in Court will be delivered to the defendants D
and that in default of payment as aforesaid, the plaintiff may apply to
the court for passing a final decree for the sale of the plaint schedule
property and that the money realised by such sale shall be applied in
payment of the amount due under the decree, and the balance if any,
shall be paid to the !st defendant and that if the money realised by
the sale of the plaint schedule property is insufficient for payment of E
the decree debt in full, the plaintiff shall be at liberty to apply for a
personal decree against defendants 2 to 5 for the balance and that the
defendants will suffer cost hitherto incurred."

From the above quoted extract of the decree the following directions of F
the Court may be noticed :

(I) that the appellant (plaintiff therein) became entitled to realize from
the respondent (defendants therein which included company represented by
the official liquidator) a sum of Rs. 2,50,605.59 with interest and costs of the
suit;
G
(2) the respondents were given liberty to deposit the said amounts on
or before August 28, 1982;

(3) if the amounts are deposited, the equitable mortgage will stand
discharged and the documents of title deposited with the appdlant-Bank by
the respondents will be delivered to them; H
266 SUPREME COURT REPORTS (1998) 3 S.C.R.

A (4) in default of payment of the amounts, the appellant was authorised
to apply to the court for passing the final decree for the sale of the company's
property and realisation of the decreed amount; and

(5) in the event of the sale proceedings being less than the amount
decreed, a personal decree was also passed against Defendants 2 to 5 therein
B for recovery of the unrealised amount.

The afon:mentioned preliminary decree was passed by the Court even
though the official liquidator raised the plea in the written statement that the
charge created on the company's property was void under Section 125 of the
Act. But it may be that plea was not argued at the hearing. However, what
C is clear from the material on recm·d is that no appeal was filed against the said
preliminary decree by the official liquidator and the preliminary decree has
attained finality.

From the above discussion, it follows that the right of the respondents
D including the company represented by the official liquidator to deposit the
decree amount was available till August 28, 1982. In other words, the right
to recover the amounts pursuant to the contract creating charge, even under
the terms of the decree was available till the said date and thereafter 'the
matter had passed from the domain of the contract to ~t of judgment'.

E In Rani Sundar Koer v. Rai sham Krishan, (1934) Indian Appeals P.9
(P.C.), Lord Davey observed as follows :

"Their Lordships think that the scheme and intention of the Transfer
of Property Act (now the corresponding provisions of the Civil
Procedure Code) was that a general account should be taken once for
F all, and an aggregate amount be stated in the decree for principal,
interest and costs due on a fixed day, and that after the expiration of
that day, if the property should not be redeemed, the matter should
pass from the domain of contract to that of judgment and the rights
of the mortgagee should thenceforth depend, not on the contents of
G his bond, but on the directions in the decree."

That principle was followed by the Privy Council in Kusum Kumari v. Debi
Prasad Dhandhania & Ors., (1936) P.C. 63 where the question of granting
interest under Regulation 6 of 1872 fell for consideration. Regulation 6 provided,
"the total interest decreed on any loan or debt shall never exceed one-fourth
H of the principal sum, if the period be not more than one year, and shall not
JNDIAN BANK"· OFFICIAL LIQUID CHEM. EXPORTS (P) LTD. [QUADRI, J.] 267

. ,. ~·
in any other case exceed the principal of the original debt or loan". The trial A
court decreed the suit based on mortgage with interest at six per cent per
annum from the date of the decree till its realisation. The amount of interest
so decreed exceeded the limitation prescribed under the said Regulation. The
Privy Council has observed that once a decree had been passed, the loan or
debt as the subject of enforcement no longer exists; it was in effect merged
in the decree and the allowance of interest on the decree was not the allowance
B
of additional interest on the loan or debt. The same principle was reiterated
by this Court in Gyarsi Bai v. Dhansukh Lal, AIR (1965) SC 1055. This Court
- observed, "it cannot also be disputed that a mortgage merges in the preliminary
decree and the rights of the parties are thereafter governed by the said
decree". c
In Suryakant Natvarial Surati & Ors., v. Kamani Bros Pvt. Ltd., [1985]
58 Company Cases 121, the company created a charge under a mortgage in
favour of the trustees of the Employees' Gratuity Fund. The creditors by a
preliminary decree of December 3, 1977 were entitled to receive the amount
secured on the property of the company; the court fixed December 8, 1988 as D
the date for redemption and ordered that in default of payment of the sum
-" due by that date, the property was to be sold by public auction. On an
application made on February 16, 1978, the company was ordered to be
wound up by and order dated August 3, 1979. As default in payment of the
decreed amount was committed, the mortgagees applied for leave of the court
under Section 446 to execute the decree against the official liquidator by E
application dated July 10, 1981. Three contributories sought injunction against
taking any further action on the ground that the charge created by the
company was not registered under Section 125 of the Companies Act, therefore,
the mortgagees should be treated only as unsecured creditor. Their application
was dismissed by a learned Single Judge. On appeal, speaking for the Division F
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Bench of the Bombay High Court Justice Bharucha (as he then was) laid
down, inter alia, the principle that the question of applicability of Section 125
had to be decided on the terms of the decree - whether the unregistered
charged created by the mortgagor was kept alive or extinguished or replaced
by an order of sale created by the decree; if upon a construction of the
decree, the court found that the unregistered charge was kept alive, the G
provisions of Section 125 would apply and if, on the other hand, the decree
extinguished the unregistered charge, the section would not apply. We are in
. "" respectful agreement with that principle. We hold that a judgment creditor will
be entitled to relief from the Company Court accordingly.

Reverting to the facts of this case, on the construction of the decree H
268 SUPREME COURT REPORTS [1998] 3 S.C.R

A we have already held that the charge was kept alive till August 28, 1982 and
thereafter in default of payment of decree amount the sale order would take
effect. In this case, admittedly the decree amount was not paid before August
28, 1982, as such the matter had passed from the domain of contract to the
realm of the judgment. The official liquidator filed application on March 21,
B 1983 seeking to declare th&. decree as void. By that dates what was operative
in the decree was not a mere unregistered charge but an order for sale of
mortgaged property for realisation of decree amount. The preliminary decree
cannot therefore by said to be void and inoperative.

For the above reasons w.: hold that the Division Bench ought not to
C have held that the preliminary decree passed by the competent court on May
25, 1980 was void and un-enforceable and accordingly we set aside the order
under appeal dated January 29, 1986 by allowing the appeal with costs.

R.K.S Appeal allowed.

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