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Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2701 OF 2006

Infrastructure Leasing & Financial  Services  Limited ... Appellant

Versus

B.P.L. Limited         ... Respondent

J U D G M E N T

Dipak Misra, J.

BPL Limited, the respondent herein, was incorporated  

under the Companies Act, 1956 (for brevity ‘the Act”) and  

on 16.4.1963, certificate of incorporation in the name of  

the company as British Physical Laboratories India Pvt. Ltd.  

was  issued.   The  company  became  deemed  public  

company and the word “Private” stood deleted with effect  

from 24.3.1981.   Subsequently, the name of the company  

was  changed  to  BPL  Limited  and  fresh  certificate  of  

incorporation was issued by the Registrar of Companies on

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16.3.1992.   In the year 1982 the company had diversified  

its  activities into Consumer Electronics,  Colour Television  

Receivers,  Black  and  White  TV  Receivers  and  Video  

Cassettes Recorders.   The company embarked on various  

diversifications,  expansion programmes and had facilities  

for  manufacture  of  television,  Alkaline  batteries,  colour  

monitors,  etc.    It  also  entered  into  the  arena  of  

manufacturing of refrigerators and electronic components  

through  associate  companies  and  had  grown  into  a  

diversified group with multiple products and services.  Due  

to  manifold  reasons,  the  company  faced  cash  flow  

constraints  which  adversely  affected  its  operations.   It  

suffered a loss of Rs.287.8 crores in the last 18 months for  

the period ending on 30.09.2003 as there was decline of  

sales  of  goods.   Due  to  the  said  loss,  the  debt  of  the  

company increased to 1494.57 crores as on 31.03.2003.  

As many a international brand had entered into the Indian  

market,  the  respondent  company in  order  to  keep pace  

with the technological advancement in the field of business  

initiated  a  comprehensive  restructuring  of  its  operations  

which  primarily  involved  rejuvenating  its  main  business  

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through  a  joint  venture  with  “Sanyo  Electric  Co.  Ltd.”,  

Japan  and  accordingly  entered  into  a  shareholder  

agreement.   In  terms of  the  agreement  the  BPL  had to  

transfer its existing CTV business undertaking to the joint  

venture  constituting  BPL  brand  for  CTV  business  

manufacturing services, marketing and distribution.  Both  

the companies BPL and Sanyo had equal partnership in the  

ratio  50:50 in  the joint  venture.   The CTV business  was  

valued at  Rs.368 crores  and BPL  was required to  invest  

approximately Rs.46 crores in the joint venture company  

and to receive a net cash inflow of Rs.322 crores.  Initially,  

BPL proposed a scheme of arrangement which was finally  

modified  and  in  the  said  scheme  various  business  

institutions  and  banks  were  involved.   There  were  36  

creditors whose names featured in the scheme.   

2. After approval of the scheme the respondent filed  

an application under Section 391 (1) of the Act read with  

Rule  9  the  Companies  (Court)  Rules,  1959  seeking  

permission  for   holding  a  meeting  for  consideration  for  

approval  of  compromise or  arrangement  proposed to  be  

made between companies and the creditors.  The second  

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prayer had been made for orders governing the procedures  

to be complied with.  There were 15 respondents.  After the  

application was filed forming the subject matter of MCA No.  

84  of  2004  notices  were  issued  and  many  financial  

institutions  filed  their  counter  affidavits/objections.   The  

present  appellant,  Infrastructure  Leasing  &  Fin.  Services  

Ltd.,  which  was  the  8th respondent,  filed  its  counter-

affidavit and in it, had  raised objections to the prayer for  

stay  of  various  proceedings  before  number  of  forums  

including Debt Recovery Tribunal,  etc.  on the foundation  

that the Memorandum of Association of the company does  

not authorise it to enter into any arrangement as proposed;  

that the scheme concealed more than it revealed, for when  

such  a  drastic  transformation  was  taking  place  it  was  

imperative that there had to be exhaustive disclosure; that  

the  application  filed  under  Section  391  of  the  Act  was  

totally silent as to how and on what basis the valuation of  

Rs.368 crores had been arrived at, which agency had done  

the  valuation  and  at  whose  instance  the  valuation  was  

done; that the scheme did not mention whether the BPL  

had any other option to raise the capital  when retaining  

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CTV  business;  that  no  detailed  information  had  been  

furnished in the application or in the proposed scheme of  

arrangement as to on what basis the various percentage  

payments  which  were  proposed  to  be  made  to  the  

unsecured creditors were arrived at by the company; and  

that  the  company  court  had  no  jurisdiction  to  stay  the  

criminal  prosecution  under  exercise  of  its  power  under  

Section 391 (6) of the Act.  

3. BPL  filed  a  reply  stating,  inter  alia,  that  very  

purpose of Section 391(6) of the Act is that till  effective  

consideration of the scheme and finalization of the scheme  

under Section 391 of the Act there has to be a stage of  

abeyance from all aspects so that the Company Court can  

examine the workability of the same and grant requisite  

relief.   As  regards  the  non-disclosure  by  BPL,  it  was  

asserted that the disclosure had been adequately made,  

for  what  was  proposed  to  be  transferred  to  the  joint  

venture company was the colour television business of the  

BPL and brand associated with it and the residual company  

would  retain  the  other  business  of  the  group  such  as  

medical  electronics,  batteries,  components,  etc.   It  was  

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also put forth that Price Water House Coopers (PWC) was  

appointed by the ICICI at the instance of all  lenders and  

PWC had assessed that the residual company could sustain  

a debt to the extent of Rs.480 to 520 crores and the report  

submitted by PWC was already in possession of the lenders  

including  8th respondent  therein.  It  was  alleged  as  the  

operation had been stagnated for a period of two years the  

valuation made by the PWC was absolutely fair.   

4. Be  it  stated,  some  of  the  respondents  filed  

affidavits  supporting  the  scheme  and  some  others  

opposing the same,  from many an angle.  

5. The  learned  Company  Judge  taking  note  of  the  

factual matrix, the submissions advanced at the Bar, the  

proceeding before the DRT and the criminal cases, referred  

to the maintainability of the scheme and came to hold that  

the  application  preferred  under  Section  391(1)  was  

maintainable; that the court had the jurisdiction to consider  

the application filed under Section 391(1) of the Act, even  

for the purpose of convening a meeting of its creditors and  

its  jurisdiction  was  not  affected  solely  because  an  

application  had  been  filed  before  the  Debt  Recovery  

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Tribunal;  that  the  company  Court  in  exercise  of  power  

under  Section  391(6)  has  no  jurisdiction  to  stay  the  

criminal  proceeding  initiated  under  Section  138  of  the  

Negotiable  Instrument  Act  or  the  proceeding  pending  

before the Debt Recovery Tribunal under Securitisation and  

Reconstruction  of  Financial  Assets  and  Enforcement  of  

Security Interest Act, 2002;   that it is for the creditors at  

the  first  instance  to  consider  the  scheme proposed  and  

only the approved scheme by the required majority is to be  

considered by the court for grant of sanction under Section  

391  (2)  of  the  Act;   that  there  is  a  distinction  between  

Section 391(1) and 391(2) of the Act regard being had to  

the  language  employed  therein  and  if  the  contentions  

mentioned in the proviso to sub-Section (2) of Section 391  

of  the Act had to be considered at the stage of Section  

391(1) that will amount to reading the latter provision  to  

the earlier one; and that the distinction which has been set  

forth  in  various  sub-Sections  have  to  be  appositely  

understood  because  there  are  various  phases  till  the  

scheme is approved and each stage has its own room to  

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operate. After so stating the court referred to the stand of  

the 8th respondent and came to hold  as follows:-    

“49.   The 8th respondents  among other  things  also taken up the contention that at all material  times they were only an unsecured creditor of  the applicant-Company and according to them,  they  are  wrongly  impleaded  in  C.A.  No.  1718/2004.   Accordingly  to  them,  the  short- terms loan was granted on terms and conditions  agreed upon by the parties and on a reading of  Clause 15 of the terms and conditions security  to be created by the Hewlett Packard (India) Ltd.  through an ascrow account which will separately  open.   According  to  them,  no  account  was  opened  subsequently  and  no  amount  was  channelised  through  the  account  as  contemplated  by  the  mechanism  prescribed.  Hence, no security was created in favour of the  8th respondent.  These conditions were raised in  an  additional  affidavit  filed  by  the  8th  respondent.   The  applicant-company  has  also  filed  an  additional  affidavit  answering  those  conditions.  In the additional reply affidavit filed  on  24/1/2005  the  applicant-company  has  averred that the contention that they are only  unsecured  creditors  was  raised  during  agreement  and  the  affidavit  was  also  filed  during the course of arguments.  The applicant- Company took copies of the documents creating  charge  in  favour  of  the  8th respondent.   They  have produced Annexure-X hypothecation deed  which is executed in 2001.  Copies of Form No. 8  return dated 1.1.2001 and Form No. 13 return  dated  1.1.2001  filed  with  the  Registrar  of  Companies are produced as Annexures-Y and Z.  Annexures-AA in  a copy of  the  letter  ILES  (8th  respondent) dated 4.7.2001.  It is the contention  of the applicant that from the above it is clear  that there is a charge in respect of he specified  assets of the applicant-company in favour of the  

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8th respondent.  Annexure-X  is  an  unattested  deed  of  hypothecation  executed  by  the  Applicant in favour of the 8th respondent.  The  applicant is described as “Borrower”.  This is a  hypothecation  deed  creating  exclusive  charge  involving all monies and right, title and interest,  to be received from and or payable by Hewlett  Packard Ltd., towards sale of colour monitors, to  the  borrower  as  security  for  the  said  facility  arranged by the 8th respondents as security for  the  payment  by  the  borrower  of  the  balance  outstanding.  Annexure-Y is Form No.8 filed by  the applicant-Company under Section 125 of the  Companies  Act.   The  hypothecation  deed  executed by the applicant-Company in favour of  the 8th respondent is an instrumental creating a  charge and amount secured is contained as Rs.  150 millions.   It  shows that  the  above charge  was registered with the Registrar of Companies  as  per  the  provisions  of  the  Companies  Act.  Annexure-Z is From No. 13 in which the amount  secured is shown as Rs. 150 million. Annexure- AA is the letter of consent by the 8th respondent  which  shows  that  the  8th respondents  has  offered for providing short-term loan facility upto  Rs.  150  million  and  the  term  loan  facility  is  enclosed  in  the  Annexure.   The  loan  facility  availed by them to  the BPL Ltd.  is  also to  be  considered  as  part  of  the  above-mentioned  facility.   Annexure-AA  attached  therein  would  show that the lender is 8th respondent and the  borrower is BPL Ltd. and the purpose for which  the  loan  advanced  is  to  meet  working  capital  requirements  and  the  security  offered  is  first  and exclusive charge on receivables of Hewlett  Packard  (India)  Ltd.   It  is  also  seen  that  the  applicant-Company  has  to  undertake  to  complete  all  formalities  towards  creation  of  charge and the escrow arrangement within 30  days  from  the  date  of  disbursement.   The  proposal  made  even  as  per  the  Scheme  of  Arrangement is  to  apply to  all  existing charge  

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holders and 8th respondent is one such charge  holder, to whom the Scheme is extended.  

50. In the light of the above facts, I do not find  any  merit  in  the  contention  that  the  Scheme  proposed will not cover the 8th respondent or that  they  are  not  secured  creditors,  to  whom  the  Scheme will not apply. ”  

6. Be it stated, the court did not accept the contention  

that the scheme could not be worked out on the ground  

that the scheme was entitled to be amended either in the  

meeting or even subsequently by the Court and it was not  

the  stage  to  suggest  any  amendment  and  accordingly  

contentions raised by the respondents in that regard were  

kept open.  

7. On the basis of the aforesaid analysis, the Company  

Judge held  that  MCA No.  84/2004 was maintainable  and  

other applications seeking grant of stay were sans merit  

and accordingly dismissed the same.  Certain applications  

were kept to be considered at a later stage.  The prayer of  

the respondents that they were not covered by the scheme  

proposed  by  the  amendment  and  they  are  not  secured  

creditors  was  rejected.   Ultimately  the  Company  Judge  

issued the following directions:-  

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“54. M.C.A. No. 84/2004 is allowed. It is ordered  that  a  meeting  of  secured  creditors  (working  Capital Lenders and Term Lenders) be convened  and held at the Registered office of he Applicant  Company at Palghat on 16.04.2005 at 2.00 P.M.  for the purpose of considering and if thought fit,  approving  with  or  without  modification  of  he  compromise/arrangement proposed as Annexure- G  as  modified  by  Annexure-N  to  be  made  between  the  Company  and  the  creditors  abovenamed.  

55.  Mr.  Justice  T.  V.  Ramakrishnan,  a  Retired  Judge  of  the  High  Court  is  appointed  as  the  Chairman for the Meeting

56.  Notice convening the above meeting shall be  published  in  all  editions  of  Economic  Times,  Indian Express and Malayala Manorama giving 21  days clear notice.

   xxx xxx xxx  58. That the value each member/creditor shall be  in  accordance  with  the  books  of  the  Company  and  in  case  of  dispute,  the  Chairman  shall  determine the value.”

8. Being  aggrieved  by  the  aforesaid  order,  the  8th  

respondent filed Company Appeal No. 5 of 2005.  Before  

the appellate Court, it was contended that   Section 391 of  

the Act, although refers to the power of companies to make  

arrangements  with  creditors  and  members,  such  

compromise  could  have  only  been  possible  between  a  

company and its creditors or any class of them, and when  

an application was filed before the court, where it had been  

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possible to find out that the arrangement was not intended  

to be made with a homogeneous class,  the court should  

have accepted the objection so raised. It was also urged,  

ignoring the same, a binding order, could not have been  

issued.  It was contended that the meeting was proposed  

to be held between the company and its secured creditors  

and  even  if  it  was  to  be  presumed  that  the  appellant  

initially was a secured creditor, it had been disrobed of the  

said  status  consequent  to  subsequent  developments,  

including an arbitration award, well before the application  

came to be filed in the court.  

9. The appellant  argued that  though as required by  

the hypothecation deed, Form Nos. 8 and 13 thereof had  

been submitted before the Registrar of Companies, yet no  

further action was taken by BPL Ltd. to fulfil  the agreed  

arrangement between the parties.  It was asserted that as  

per the deed of hypothecation, the borrower was obliged to  

open  an  escrow  and  no-lien  account  with  a  designated  

bank, and was to undertake to deposit all the receivables  

from Hewlett Packard India Ltd. in the said escrow account  

only,  however,  no escrow account had been opened and  

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the  agreed  arrangement  remained  only  on  paper.  The  

escrow mechanism was the essence of the agreement, but  

it had never been put into operation and, therefore, it was  

not permissible for BPL Ltd. to contend that the appellant  

was  a  secured  creditor  and  the  original  claims  of  the  

appellant could not have been watered down.

10. The  next  contention  that  was  advanced  in  the  

company  appeal  was  that  even  if  it  could  have  been  

assumed that because of the hypothecation deed, at one  

point of time, the appellant could have been considered as  

a secured creditor,  the position had changed because of  

the arbitration award which has been passed on consent.  

Emphasis was laid on the fact that there was an agreement  

recorded in the award that the criminal proceedings would  

not be pursued and more importantly it was a settlement  

of  money claim and nothing  remained in  respect  of  the  

claims on hypothecation, which originally had been entered  

into by the parties. Thus, the status of a secured creditor  

thereby irrevocably had been metamorphosed.  Relying on  

the authority Deva Ram v. Ishwar Chand1, a submission  

was advanced that on principles gatherable from Order II,  1  AIR 1996 SC 378

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Rule 2, of CPC, after the award had come into existence, it  

would not have been possible for the appellant to pursue  

his claims on the basis of the hypothecation deed, for the  

rights of the parties got crystallised to a pure and simple  

money claim, and hence, the security earlier offered and  

created had lost its relevance and transformed itself to a  

decree debt.   

11. Apart  from  the  above  contentions,  it  was  also  

propounded  that  the  appellant  deemed  to  have  

relinquished rights of hypothecation security and being a  

party to the proceedings, BPL Ltd. could not have turned  

round  and  put  forward  a  technical  contention  that  the  

appellant continued to be a secured creditor.  To buttress  

the said stand, reliance was placed upon the dictum laid  

down  in  K.V.  George  v. Secretary  to  Government,  

Water and Power Department2.

12. The  aforesaid  contentions  were  resisted  by  the  

counsel for  the BPL that the  order passed by the learned  

company Judge was absolutely flawless; that the stand that  

the appellant was no more a secured creditor because of  

the award passed between the parties was totally devoid of  2  AIR 1990 SC 53

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any merit;  that the scheme or arrangement was approved  

in  the  meeting  of  the  secured  creditors  held  by  the  

Chairman and the appellant company had been issued a  

substantial sum but it had refused to accept the same; that  

the  appellant  remained  a  secured  creditor  for  all  legal  

purposes  and  hence,  it  was  bound  by  the  scheme  in  

question.  

13. The  Division  Bench  adverted  to  the  deed  of  

hypothecation  executed  by  the  BPL  in  favour  of  the  

appellant  company  and  opined   that  the  appellant-

company  had  failed  to  take  follow  up  action  to  get  an  

escrow account; that the formalities relating to creation of  

charge  had  been  duly  followed;  that  in  the  arbitration  

award there was no reference that BPL had agreed to lift  

the charge created; in the absence of the agreed position  

that the charge be got lifted, and the appellant continued  

to  be  a  secured  creditor  and  passing  of  the  arbitration  

award did not create any change in the status.  

14. The  Division  Bench  appreciating  the  contentions  

further  came  to  hold  that  the  appellant  was  a  secured  

creditor after the hypothecation deed was executed; that  

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once the charge had been created it continued to bind the  

parties  till  steps  were  regressed;  and  that  the  finding  

recorded  by  the  learned  company  Judge  was  

unexceptionable.  That apart, the Division Bench also took  

note of the fact that the persons who had to be adversely  

affected were not parties to the appeal.  Being of the view,  

it dismissed the appeal.   The said judgment and order are  

the subject matter of assail in this appeal.  

15. We have heard  Mr.  Shyam Divan,  learned senior  

counsel  for  the appellant  and Mr.  V.  Giri,  learned senior  

counsel for the respondent.   

16. It  is  submitted  by  Mr.  Divan  that  that  once  an  

arbitral  award has been passed on consent between the  

parties  it  extinguishes  the  status  of  the  appellant  as  a  

secured  creditor  and  it  stands  on  a  different  footing  

altogether.   It  is  further urged that the registration as a  

secured creditor does not bind the appellant and, more so,  

when the arbitral award has come into existence.  It is his  

submission  that  after  the  parties  settled  by  way  of  

arbitration, the conceptual requisites of a secured creditor  

became  non-existent.   Learned  senior  counsel  would  

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further put forth that the hypothecation had never become  

operational as is evident from various documents on record  

and  hence,  the  analysis  made  by  the  High  Court  is  

absolutely fallible.   It is contended that once the deed of  

hypothecation  is  not  fructified,  mere  registration  as  a  

secured creditor with the Registrar of Companies would not  

confer  on the appellant  the status  of  a  secured creditor  

and, in any case, the said registration would not bind it.  It  

is canvassed by him that once the appellant has accepted  

the award as passed by the arbitrator, it operates as  res  

judicata  against  the  respondent  company  to  treat  the  

appellant  company  as  a  secured  creditor.   That  apart,  

urges the learned senior counsel, the principles inherent in  

Order II, Rule 2 would be attracted and the High Court has  

completely erred by totally brushing it aside. The learned  

senior counsel, to support his submissions raised by him,  

has referred to  various  provisions  of  the Companies  Act  

and placed reliance  on  the  authorities  in  Firm Chunna  

Mal  Ram  Nath  v.  Firm  Mool  Chand  Ram  Bhagat3,  

Jagad Bandu Chatterjee v. Nilima Rani4, Indian Bank  

3 AIR 1928 PC 99 4 (1969) 3 SCC 445

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v. Official Liquidator, Chemmeens Exports (P) Ltd5.,  

Ranganayakamma v. K.S. Prakash6 and Jitendra Nath  

Singh v. Official Liquidator and ors.7  

17. Mr. Giri,  learned senior counsel appearing for the  

respondent,  resisting the aforesaid  proponements,  would  

submit that the arbitral award, whether passed on consent  

or on contest, has the status of a decree but such a decree  

does  not  extinguish  the  charge  and  thereby  does  not  

disrobe the status of a secured creditor.  Learned senior  

counsel  would  contend  that  despite  the  relinquishment  

made by the appellant, it would not take away the legal  

status conferred by it in law.  Emphasis has been laid on  

the  issue  of  registration  before  the  Registrar  under  

Sections  138  and  139  of  the  Act  and  how  the  record  

establishes that the status and the arbitral award will not  

change the registered status.  It is contended by Mr. Giri  

that  by  no  stretch  of  imagination,  the  principle  of  

resjudicata  would  apply  to  the  case  at  hand,  for  the  

proceedings are of different nature.  He would also urge  

that the lis would not be hit by the bar created under Order  

5 (1998) 5 SCC 401 6 (2008) 15 SC 673 7 (2013) 1 SCC 462

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II,  Rule  2  of  the  CPC.  Learned  senior  counsel  has  

commended  us  to  the  decisions  in  Lonankutty  v.  

Thomman and Another8, Harbans Singh and others  

v. Sant Hari Singh and others9, and Indian Bank v.  

Official Liquidator, Chemmeens Exports (P) Ltd. and  

others10.

18. From  the  narration  of  facts  and  the  contentions  

which have been highlighted, it is clear that two facts are  

beyond dispute.  First, the appellant stands registered as a  

secured creditor of the respondent company on the record  

of the Registrar of Companies under the Act; and second,  

the arbitral tribunal has passed an award on the basis of  

consent  and  it  has  the  status  of  a  decree  which  is  

executable in law.  Keeping in view these two undisputed  

facts, we have to appreciate the rival submissions raised at  

the Bar.  In this context, reference to relevant portions of  

Sections  391  and  393  of  the  Act  would  be  appropriate.  

They are as follows:

“391. (1) Where a compromise or arrangement  is proposed—

8 (1976) 3  SCC 528  9  (2009) 2 SCC 526 10 (1998) 5 SCC 401

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(a) between a company and its creditors or  any class of them; or (b) between a company and its members or  any class of them;

the  Court  may,  on  the  application  of  the  company or of  any creditor  or  member  of  the  company, or in the case of a company which is  being  wound  up,  of  the  liquidator,  order  a  meeting of the creditors or class of creditors, or  of  the  members  or  class  of  members,  as  the  case may be, to be called, held and conducted in  such manner as the Court directs. (2) If a majority in number representing three- fourths  in  value  of  the  creditors,  or  class  of  creditors, or members, or class of members as  the case may be, present and voting either in  person or, where proxies are allowed under the  rules made under Section 643, by proxy, at the  meeting,  agree  to  any  compromise  or  arrangement,  the  compromise  or  arrangement  shall, if sanctioned by the Court, be binding on  all the creditors, all the creditors of the class, all  the members, or all the members of the class,  as the case may be, and also on the company,  or,  in  the  case  of  a  company  which  is  being  wound up, on the liquidator and contributories of  the company:

Provided  that  no  order  sanctioning  any  compromise or arrangement shall  be made by  the Court unless the Court is satisfied that the  company  or  any  other  person  by  whom  an  application has been made under sub-section (1)  has  disclosed  to  the  Court,  by  affidavit  or  otherwise,  all  material  facts  relating  to  the  company, such as the latest financial position of  the company, the latest auditor’s report on the  accounts of the company, the pendency of any  investigation  proceedings  in  relation  to  the  company  under  Sections  235  to  251,  and  the  like.”

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xxxxx xxxxx xxxxx

“393. (1) Where a meeting of creditors or any  class of creditors, or of members or any class of  members, is called under Section 391,—

(a) with every notice calling the meeting which  is sent to a creditor or member, there shall be  sent also a statement setting forth the terms of  the compromise or arrangement and explaining  its effect, and in particular, stating any material  interests  of  the  directors,  managing  directors,  managing agents, secretaries and treasurers or  manager  of  the  company,  whether  in  their  capacity as such or as members or creditors of  the  company  or  otherwise,  and  the  effect  on  those  interests,  of  the  compromise  or  arrangement,  if,  and  insofar  as,  it  is  different  from  the  effect  on  the  like  interests  of  other  persons; and

(b) in every notice calling the meeting which is  given by advertisement, there shall be included  either  such  a  statement  as  aforesaid  or  a  notification  of  the  place  at  which  and  the  manner in which creditors or members entitled  to attend the meeting may obtain copies of such  a statement as aforesaid.”

19. Sub-Section  (1)  of  Section  391  stipulates  that  a  

compromise or arrangement can be proposed between a  

company or its creditor or any class of them or between a  

company and its members or any class of them.  It need  

not  be  between  all  the  creditors  or  all  the  members.  

Contextually,  “class  of  creditors”  or  “class  of  members”  

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has  a  different  meaning  and  connotation.   It  gains  

significance  when  the  question  of  approval  of  scheme  

under the Act arises for consideration.  While dealing with  

the approval of a scheme, the Company Court is required  

to direct holding of meeting of the said class of creditors or  

members  concerned  and  only  when  the  scheme  is  

approved by the majority in number representing 3/4th in  

value by the class of creditors, or members present either  

in person or through proxy, the same becomes binding on  

the said class of creditors or members.  Once there is a  

voting and the 3/4th majority  has  voted in  favour  of  the  

scheme, it is binding on those who have dissented and had  

voted against the scheme or those who remained silent.  

20. While analyzing the scope and ambit of the powers  

of the Company Court in respect of Section 391 and 393 of  

the Act  and the role  of  the Court  a  two-Judge Bench in  

Miheer H. Mafatlal  V.  Mafatlal  Industries Ltd.11 has  

observed thus:-

“Before sanctioning such a scheme even though  approved  by  a  majority  of  the  concerned  creditors  or  members  the  Court  has  to  be  satisfied that the company or any other person  moving such an application for  sanction under  

11  (1997) 1 SCC 579

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sub-section (2) of Section 391 has disclosed all  the relevant matters mentioned in the proviso to  sub-section  (2)  of  that  section.  So  far  as  the  meetings of the creditors or members, or their  respective  classes  for  whom  the  Scheme  is  proposed  are  concerned,  it  is  enjoined  by  Section 391(1)(a) that the requisite information  as  contemplated  by  the  said  provision  is  also  required  to  be placed for  consideration of  the  voters concerned so that the parties concerned  before  whom the  scheme is  placed for  voting  can  take  an  informed  and  objective  decision  whether to vote for the scheme or against it. On  a conjoint reading of the relevant provisions of  Sections 391 and 393 it becomes at once clear  that the Company Court which is called upon to  sanction such a scheme has not merely to go by  the ipse dixit of the majority of the shareholders  or  creditors  or  their  respective  classes  who  might  have voted in  favour  of  the scheme by  requisite majority but the Court has to consider  the pros and cons of the scheme with a view to  finding out whether the scheme is fair, just and  reasonable and is not contrary to any provisions  of law and it does not violate any public policy.  This  is  implicit  in  the  very  concept  of  compromise or arrangement which is required to  receive  the  imprimatur  of  a  court  of  law.  No  court  of  law  would  ever  countenance  any  scheme of compromise or arrangement arrived  at  between  the  parties  and  which  might  be  supported by the requisite majority if the Court  finds that  it  is  an unconscionable or an illegal  scheme or is otherwise unfair  or unjust to the  class of shareholders or creditors for whom it is  meant.  Consequently  it  cannot  be  said  that  a  Company Court before whom an application is  moved  for  sanctioning  such  a  scheme  which  might have got the requisite majority support of  the creditors or members or any class of them  for whom the scheme is mooted by the company  concerned, has to act merely as a rubber stamp  

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and must  almost  automatically  put  its  seal  of  approval on such a scheme. It is trite to say that  once the scheme gets sanctioned by the Court it  would  bind  even  the  dissenting  minority  shareholders or creditors. Therefore, the fairness  of the scheme qua them also has to be kept in  view by the Company Court while putting its seal  of approval on the scheme concerned placed for  its sanction.”  

21. Thereafter, the Court referred to Section 392 of the  

Act.   The  said  provision  deals  with  the  supervisory  

jurisdiction  of  the  Company  Court.   It  is  necessary  to  

reproduce the same:

“392.  (1)  Where a  High Court  makes  an order  under Section 391 sanctioning a compromise or  an arrangement in respect of a company, it—

(a) shall have power to supervise the carrying  out of the compromise or arrangement; and

(b) may, at the time of making such order or  at any time thereafter, give such directions  in  regard  to  any  matter  or  make  such  modifications  in  the  compromise  or  arrangement as it may consider necessary  for the proper working of the compromise or  arrangement.

(2)  If  the  Court  aforesaid  is  satisfied  that  a  compromise  or  arrangement  sanctioned  under  Section 391 cannot be worked satisfactorily with  or  without  modifications,  it  may,  either  on  its  own motion or on the application of any person  interested in the affairs of the company, make an  order  winding  up  the  company,  and  such  an  order  shall  be  deemed  to  be  an  order  made  under Section 433 of this Act.

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(3) The provisions of this section shall, so far as  may be, also apply to a company in respect of  which  an  order  has  been  made  before  the  commencement of this Act under Section 153 of  the  Indian  Companies  Act,  1913  (7  of  1913),  sanctioning a compromise or an arrangement.”

22. In the said context, the Court posed the question  

whether it has the jurisdiction of an appellate authority to  

minutely  scrutinize  the  scheme  and  to  arrive  at  an  

independent  conclusion  whether  the  scheme  should  be  

permitted to go through or not and whether the majority  

creditors or members, through their respective class, have  

approved the scheme as required under sub-Section (2) of  

Section 391.  It observed that the nature of compromise or  

arrangement between the company and the creditors and  

the  members  has  to  be  kept  in  view,  for  it  is  the  

commercial wisdom of the parties to the scheme who have  

taken  an  informed  decision  about  the  usefulness  and  

propriety of the scheme by supporting it by the requisite  

majority vote.  Therefore, the Court does not act as a Court  

of Appeal and sit in judgment over the informed view of the  

parties concerned to the compromise as the same would  

be in the realm of corporate and commercial wisdom of the  

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parties  concerned and further  the  Court  has  neither  the  

expertise  nor  the  jurisdiction  to  dig  deep  into  the  

commercial  wisdom  exercised  by  the  creditors  and  the  

members of the company who have ratified the scheme by  

the requisite majority.   The Court eventually held that it  

has the supervisory jurisdiction which is also in consonance  

with the language employed under Section 392 of the Act.  

In  that  context,  the  Court  referred  to  the  observations  

found  in  the  oft-quoted  passage  in  Buckley  on  the  

Companies Act, 14th Edn.  It is as follows:

“In  exercising  its  power  of  sanction  the  court  will  see,  first that  the  provisions  of  the  statute have been complied with,  second,  that  the  class  was  fairly  represented by  those who  attended  the  meeting  and  that  the  statutory  majority  are  acting  bona  fide  and  are  not  coercing  the  minority  in  order  to  promote  interest adverse to those of the class whom they  purport  to  represent,  and  thirdly,  that  the  arrangement is such as an intelligent and honest  man,  a  member  of  the  class  concerned  and  acting  in  respect  of  his  interest,  might  reasonably approve.

The court does not sit  merely to see that  the majority are acting bona fide and thereupon  to register the decision of the meeting, but at the  same time, the court will be slow to differ from  the meeting, unless either the class has not been  properly  consulted,  or  the  meeting  has  not  considered the matter with a view to the interest  

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of the class which it  is  empowered to bind,  or  some blot is found in the scheme.”

23. The  Court  also  referred  to  the  decision  in  

Alabama,  New Orleans,  Texas  and Pacific  Junction  

Rly. Co. Re12  to cull out the principle relating to the power  

and jurisdiction of the Company Court which is called upon  

to  sanction the scheme of  arrangements  or  compromise  

between the  company and its  creditors  or  shareholders.  

The  observations  of  Lindley,  L.J.  as  quoted  in  the  said  

authority read as under:

“What the court has to do is to see,  first of all,  that  the  provisions  of  that  statute  have  been  complied with; and,  secondly, that the minority  has been acting bona fide. The court also has to  see that the minority is not being overridden by  a majority having interests of its own clashing  with those of the minority whom they seek to  coerce. Further than that, the court has to look  at the scheme and see whether it is one as to  which persons acting honestly, and viewing the  scheme  laid  before  them  in  the  interests  of  those whom they represent, take a view which  can reasonably be taken by businessmen. The  court must look at the scheme, and see whether  the  Act  has  been  complied  with,  whether  the  majority are acting bona fide, and whether they  are coercing  the  minority  in  order  to  promote  interests  adverse  to  those  of  the  class  whom  they purport to represent; and then see whether  the  scheme  is  a  reasonable  one  or  whether  there is any reasonable objection to it, or such  

12  (1891) 1 Ch 213

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an objection to it  as that any reasonable man  might say that he could not approve it.”

24. The observations of Fry, L.J. were also reproduced.  

A  reference  was  made  to  the  decision  in  Anglo-

Continental Supply Co. Ltd. Re13 and the judgment by a  

three-Judge Bench in  Employees’ Union V. Hindustan  

Lever Ltd.14 and eventually, the following principles were  

culled out:

“In view of the aforesaid settled legal  position,  therefore, the scope and ambit of the jurisdiction  of the Company Court has clearly got earmarked.  The following broad contours of such jurisdiction  have emerged:

1. The sanctioning court has to see to it that  all  the  requisite  statutory  procedure  for  supporting  such  a  scheme  has  been  complied  with  and  that  the  requisite  meetings  as  contemplated  by  Section  391(1)(a) have been held.

2. That the scheme put up for sanction of  the  Court  is  backed  up  by  the  requisite  majority  vote  as  required  by  Section  391  sub-section (2).

3. That  the  meetings  concerned  of  the  creditors or members or any class of them  had  the  relevant  material  to  enable  the  voters to arrive at an informed decision for  approving the scheme in question. That the  majority decision of the concerned class of  voters is just and fair to the class as a whole  

13  (1922) 2 Ch 723 14   (1995) Supp (1) SCC 499

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so  as  to  legitimately  bind  even  the  dissenting members of that class.

4. That all  necessary material indicated by  Section  393(1)(a)  is  placed  before  the  voters  at  the  meetings  concerned  as  contemplated  by  Section  391  sub-section  (1).

5. That  all  the  requisite  material  contemplated by the proviso of sub-section  (2)  of  Section  391  of  the  Act  is  placed  before the Court by the applicant concerned  seeking sanction for such a scheme and the  Court gets satisfied about the same.

6. That  the  proposed  scheme  of  compromise and arrangement is not found  to be violative of any provision of law and is  not  contrary  to  public  policy.  For  ascertaining  the  real  purpose  underlying  the scheme with a view to be satisfied on  this  aspect,  the  Court,  if  necessary,  can  pierce  the  veil  of  apparent  corporate  purpose  underlying  the  scheme  and  can  judiciously X-ray the same.

7. That  the  Company  Court  has  also  to  satisfy  itself  that  members  or  class  of  members or creditors or class of creditors,  as the case may be, were acting bona fide  and in good faith and were not coercing the  minority  in  order  to  promote  any  interest  adverse to that of the latter comprising the  same  class  whom  they  purported  to  represent.

8. That the scheme as a whole is also found  to  be  just,  fair  and  reasonable  from  the  point  of  view of  prudent  men of  business  taking a commercial  decision beneficial  to  

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the class represented by them for whom the  scheme is meant.

9. Once  the  aforesaid  broad  parameters  about  the  requirements  of  a  scheme  for  getting sanction of the Court are found to  have  been  met,  the  Court  will  have  no  further jurisdiction to sit in appeal over the  commercial  wisdom of the majority of the  class of persons who with their open eyes  have  given  their  approval  to  the  scheme  even if in the view of the Court there would  be a better scheme for the company and its  members or creditors for whom the scheme  is  framed.  The  Court  cannot  refuse  to  sanction such a scheme on that ground as it  would  otherwise  amount  to  the  Court  exercising  appellate  jurisdiction  over  the  scheme  rather  than  its  supervisory  jurisdiction.

The  aforesaid  parameters  of  the  scope  and  ambit of the jurisdiction of the Company Court  which  is  called  upon  to  sanction  a  scheme of  compromise  and  arrangement  are  not  exhaustive  but  only  broadly  illustrative  of  the  contours of the Court’s jurisdiction.”

25. In this context, we may usefully refer to Palmer’s  

Treatise  on  `Company  Law,  25th edition,  wherein  

delineating with the concept of class,  it  has been stated  

thus:-

“What constitutes a class:  The court does not itself consider at this point  what classes of creditors or members should be  made  parties  to  the  scheme.  This  is  for  the  company to decide, in accordance with what the  scheme purports to achieve. The application for  

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an order for meetings is a preliminary step, the  applicant taking the risk that the classes which  are fixed by the judge, usually on the applicant's  request,  are sufficient for the ultimate purpose  of the section, the risk being that if in the result,  and we emphasize the words 'in the result', they  reveal  inadequacies,  the  scheme  will  not  be  approved'.  If,  e.g.,  rights  of  ordinary  shareholders  are  to  be  altered,  but  those  of  preference shares are not touched, a meeting of  ordinary shareholders will be necessary but not  of preference shareholders. If there are different  groups within a class the interests of which are  different from the rest of the class, or which are  to be treated differently under the scheme, such  groups must be treated as separate class for the  purpose  of  the  scheme.  Moreover,  when  the  company  has  decided  what  classes  are  necessary parties to the scheme, it may happen  that one class will consist of a small number of  persons who will all be willing to be bound by the  scheme. In that case it is not the practice to hold  a meeting of that class, but to make the class a  party to the scheme and to obtain the consent of  all  its  members  to  be  bound.  It  is,  however,  necessary for at least one class meeting to be  held in order to give the court jurisdiction under  the section.”

In  this  regard,  reference  to  a  passage  from  

Sovereign Life Assurance Co. Ltd. v. Dodd15, as stated  

by Bowen, L.J., would be apt.  It reads as follows:

“it  seems  plain  that  we  must  give  such  a  meaning to “Class” as will  prevent the section  being so worked as to result in confiscation and  injustice, and that it must be confined to those  persons whose rights are not so dissimilar as to  

15  1892 (2) Q.B. 573 CA

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make it impossible for them to consult together  with a view to their common interest.”

26. The purpose of the classification of creditors has its  

significance.  It is with this object that when a class has to  

be  restricted,  the  principle  has  to  be  founded  on  

homogeneity and commonality of interest.  It is to be seen  

that dissimilar classes with conflicting interest are not put  

in  one compartment  to  avoid any kind of  injustice.   For  

example, an unsecured creditor who has filed a suit and  

obtained a decree would not become a secured creditor.  

He has to be put  in  the same class as other  unsecured  

creditors (See Halsbury’s Laws of India, 2007, Vol. 27).

27. The  aforesaid  being  the  position  relating  to  the  

status  of  a  class,  at  this  juncture,  it  is  necessary  to  

appreciate the basic facts which are determinative in the  

case at hand.  As the exposition of facts would uncurtain,  

the  appellant  company  had  extended  a  short-term  loan  

facility  of  Rs.150  million  to  the  respondent  company on  

4.7.2001;  that  the  respondent  company had executed a  

deed  of  hypothecation  in  favour  of  the  appellant  

hypothecating by way of an exclusive charge of the monies  

and  right,  title  and  interest  relating  to  amounts,  both  

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present  and  future  to  be  received  or  payable  by  M/s.  

Hewlett Packard Ltd.; that the respondent had filed Forms  

8 and 13 and the charge by way of hypothecation was duly  

registered  with  the  Registrar  of  Companies;  that  the  

appellant  had  initiated  an  arbitration  proceeding  which  

eventually resulted in the consent award dated 1.7.2004  

whereby  the  arbitral  tribunal  directed  a  sum  of  

Rs.48,683,710/- as due on 30.06.2004 along with interest  

@ 20% p.a.  on  the  principal  amount  of  Rs.36,360,000/-  

from 01.07.2004 till realization; that the award stipulated  

due  discharge  of  the  liability  on  payment  of  

Rs.36,360,000/-  in  four  instalments  for  the  purpose  of  

which post-dated cheques were issued; that there was a  

postulate  that  in  case  of  default  of  payment  of  any  

instalment,  the  entire  amount  may  become  due  and  

payable  and  the  appellant  would  be  entitled  in  law  to  

execute the award for recovery of the entire due without  

prejudice  to  and  in  addition  to  entitlement  to  institute  

criminal proceedings under the Negotiable Instruments Act;  

that  the respondent  failed to  pay the first  instalment  of  

Rs.17,500,000/-  on  or  before  30.09.2004;  that  on  

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30.09.2004 the respondent filed a petition under Sections  

391-394 of the Act for  sanction of the scheme; that the  

appellant initially filed objections to the scheme in the form  

of  a  counter  affidavit  on  25.11.2004  on  merits  and  

thereafter  at  a  subsequent  stage  on  20.1.2005  filed  an  

additional  affidavit  stating,  inter  alia,  that  it  was  an  

unsecured  creditor;  that  an  affidavit  was  filed  in  

oppugnation  asserting  that  the  appellant  was  a  secured  

creditor, regard being had to the hypothecation deed and  

the registration having been effected with the Registrar of  

Companies;  that  meeting  of  the  secured  creditors  and  

guarantors was held on 6.4.2005 and a Chairperson was  

appointed; that the said order was challenged by IndusInd  

Bank Ltd.,  WTI  Bank Ltd.  and Bank of  Rajasthan Ltd.  in  

appeals  but  the  same  were  dismissed  by  the  Division  

Bench  on  17.06.2005;  that  the  appellant  preferred  an  

appeal  which  was  dismissed  by  the  judgment  on  

17.1.2006,  which  is  impugned  herein;  that  the  scheme  

which has been amended was put to vote and was duly  

approved  by  the  three-fourth  of  the  secured  creditors  

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present and voting in value terms; and that the Court has  

approved and accepted the modified Scheme.   

28. We have, hereinabove, referred to the fact that the  

Scheme was amended and approved in the meetings held  

by the secured creditors.  For the sake of completeness, we  

think it appropriate to reproduce how the learned Company  

Judge had approved the Scheme.

“(i) The scheme of arrangement as amended by  amendments  approved  at  the  meeting  of  the  secured  creditors  on  April  16,  2005,  being  Annexure  D1  to  the  Company  Petition  No.  13/2004 is sanctioned so as to be binding with  effect  from  31.03.2003,  on  the  petitioner  company  and  all  of  its  secured  creditors  and  preference shareholders,  including any secured  creditor  and preference  shareholders  that  may  have  obtained  any  decree,  order  or  direction  from any court tribunal  or any other authority,  without any further act or deed by the petitioner  company, in respect of the outstanding debt of  the petitioner company as of March 31, 2003 to  all  its  secured  creditors  and  preference  shareholders, which amount shall be as has been  determined on the  basis  of  the  figures  agreed  and accepted  between the  petitioner  company  and each of the secured creditors at the meeting  of the secured creditors convened and held on  April  16,  2005,  and  hence  the  figure  as  was  specified in the application filed by the petitioner  Company  under  section  391  (1)  of  the  Companies Act stands/ modified accordingly.  

(ii) The  petitioner  Company  shall  within  30  days after the date of sealing of this order cause  

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a certified copy thereof  to  be delivered to  the  Registrar of Companies, Kerala of registration.  

(iii) On the coming into effect by the Scheme of  Arrangement  being  filed  by  the  petitioner  Company  with  the  Registrar  of  Companies,  Kerala  and  with  effect  from  31.03.2003,  the  outstanding debt of the petitioner company owed  to  all  secured  creditors  and  Preference  Shareholders  as  of  31.03.2003  shall  be  restructured on the terms and conditions and in  the  manner  provided  for  in  the  Scheme  of  Arrangement as annexed in Annexure D1 to the  petition.  

(iv) The total outstanding debt of the petitioner  company  to  all  is  Secured  Creditors  and  Preference Shareholders as of 31.03.2003 of the  petitioner Company shall  be restructured under  the scheme of  arrangement  and all  rights  and  liabilities  relating  to  such  outstanding  debt  to  secured  Creditors  and  Preference  Shareholders  as of 31.03.2003 shall  stand created under the  Scheme  of  Arrangement.   In  addition,  the  petitioner  company  and  the  Secured  Creditors  and Preference Shareholders shall enter into any  documentation  that  may  be  required,  only  to  give formal effect to the restricting and for the  modification of the security contemplated by the  Scheme  of  Arrangement,  and  to  govern  the  prospective/ongoing  relationship  between  the  petitioner  Company  and  its  Secured  Creditors  and  Preference  Shareholders  (including  covenants of the petitioner company, supervision  of the management of the petitioner Company,  Event of Default etc). However, upon the Scheme  of  Arrangement  coming  into  effect,  in  the  absence of the formal documentation referred to  above,  the  rights  obligations  and  privileges  of  the  petitioner  Company  and  the  Secured  Creditors  and Preference Shareholders  shall  be  governed  by  the  provisions  of  the  Scheme  of  

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Arrangement as detailed in Annexure D1 to the  petition.  

(v) Any  legal  or  other  proceedings  pending  against  the  petitioner  Company,  in  India  or  abroad, relating to any of the outstanding debt,  of the petitioner company to Secured Creditors  and  Preference  Shareholders  shall,  on  the  effectiveness of the Scheme of Arrangement, be  terminated  and  the  rights,  obligations  and  liabilities of the parties shall be governed by the  terms of the Scheme of Arrangement.   

That  the  parties  to  the  compromise  of  arrangement or other persons interested shall be  at liberty to apply to this court for any directions  that may be necessary in regard to the working  of the Compromise or arrangement and that the  said  company  do  file  with  the  Registrar  of  Companies a certified copy of this order within  14 days from the date.

29. Keeping in view the factual backdrop, we have to  

appreciate  the  principal  contentions.   The  seminal  

contention of the appellant is that it does not fall into the  

class of secured creditors, for it had initiated the arbitration  

proceeding  and  an  award  has  been  passed  on  consent  

which is a simple money decree and, therefore, the deed of  

hypothecation,  even  if  assumed  to  be  executed  at  one  

point  of  time,  has become irrelevant.   To elaborate,  the  

status  of  the  appellant  had  changed  from  a  secured  

creditor  to  that  of  an  unsecured  creditor.   On  this  

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foundation, a stance has been taken that the principles of  

Order II, Rule 2, C.P.C. would be applicable as the appellant  

would be debarred to issue on the basis of the charge of  

hypothecation.  Emphasis has been laid on the factum that  

there  having  been  a  change  of  status,  the  appellant  

company cannot be clubbed with the secured creditors as a  

class  and  even  if  it  is  kept  in  homogenous  category  of  

secured creditors, it should still fall under a separate class,  

regard being had to the fact it has obtained an award from  

the arbitral tribunal.  In this context, it is to be seen that  

whether the arbitration award has the effect of obliterating  

or nullifying the status of the appellant and making him an  

unsecured creditor as a consequence of which it would not  

be  able  to  sue  on  the  basis  of  a  charge  created  in  its  

favour.    

30. What  is  contended  by  Mr.  Divan,  learned  senior  

counsel for the appellant is that any further lis would be hit  

by principles enshrined under Order II, Rule 2 as well as by  

resjudicata.   It  is  urged  by  him  that  the  claim  of  the  

appellant  company having been heard and decided in  a  

formal  proceeding,  i.e.  the  arbitration,  it  is  binding  and,  

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therefore, the principle under Order II, Rule 2 would come  

into  play.   For  the  said  proposition,  he  has  drawn  

inspiration  from  Deva  Ram  (supra).   The  Court,  after  

analyzing the Order II, Rule 2 CPC, observed thus:

“A bare perusal  of  the above provisions would  indicate that if  a plaintiff  is  entitled to several  reliefs  against  the defendant  in  respect  of  the  same  cause  of  action,  he  cannot  split  up  the  claim so as to omit one part of the claim and sue  for the other. If the cause of action is the same,  the plaintiff has to place all his claims before the  court in one suit as Order II Rule 2 is based on  the cardinal principle that the defendant should  not be vexed twice for the same cause.”

31. In  that  context,  reference  was  made  to  

Palaniappa Chettiar v. Alagan Chettiar16.   The Court  

also observed that the Rule requires the unity of all claims  

based on the same cause of action in one suit but it does  

not  contemplate  unity  of  separate  causes  of  action.   If,  

therefore, the subsequent suit is based on a different cause  

of action, the rule will not operate as a bar.  For the said  

purpose,  reliance  was  placed  on  Arjun  Lal  Gupta  V.  

Mriganka Mohan Sur17,  State of Madhya Pradesh V.  

16  AIR 1922 PC 228 17  AIR 1975 SC 207

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State  of  Maharashtra18,  and  Kewal  Singh  V.  Mt.  

Lajwanti19.   

32. In this regard, immense emphasis has been placed  

by Mr. Divan, learned senior counsel, on the authority in  

Official  Liquidator,  Chemmeens  Exports  (P)  Ltd.  

(supra), especially paragraphs 13, 15 and 18.  Paras 15 and  

18 which  have been pressed into  service  with  immense  

inspiration read as follows:

“The  aforementioned  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 the plea was not  argued at  the hearing.  However,  what is  clear  from the material  on  record is  that  no appeal  was filed against the said preliminary decree by  the Official Liquidator and the preliminary decree  has attained finality.

xxxx xxxx xxxx

In  Suryakant  Natvarlal  Surati v.  Kamani  Bros.  Ltd.20 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 3-12-1977 were entitled to  receive the amount secured on the property of  the  Company; the Court fixed 8-12-1988 as 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  

18  AIR 1977 SC 1466 19  AIR 1980 SC 161 20  (1985) 58 Comp Cas 121 (Bom)

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application  made  on  16-2-1978,  the  Company  was ordered to be wound up by an order dated 3- 8-1979.  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  application  dated  10-7-1981.  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  creditors.  Their  application  was  dismissed by a learned Single Judge. On appeal,  speaking for  the Division 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  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 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.  We  are  in  respectful  agreement  with  that  principle.  We hold  that  a judgment-creditor  will  be  entitled  to  relief  from  the  Company  Court  accordingly.”

33. Relying on the said passages, it is urged that when  

the award has been passed on consent and has the status  

of a decree that makes him an unsecured creditor, for it  

has attained finalilty.  To appreciate the said submission,  

the quoted passages are to be appositely appreciated.  As  

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is  evident,  this  Court  has  concurred  with  the  view  

expressed  by  the  Bombay  High  Court  in  Suryakant  

Natvarlal  Surati (supra).   The  Division  Bench  of  the  

Bombay  High  Court  had  opined  that  the  question  of  

applicability of Section 125 of the Act 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  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.  To elucidate, it would depend upon the  

terms  of  the  decree.   In  the  case  at  hand,  the  learned  

Arbitrator has passed an award on consent.  It is trite that  

it has the status of a decree but there is nothing expressed  

in the award that the decree has extinguished the charge.  

It was not extinguished because the award does not say so.  

To  have  a  complete  picture,  we  think  it  necessary  to  

reproduce the relevant portion of the operative part of the  

award:

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“I. Award  on  admission  in  the  sum  of  Rs.48,683,710/-  (due  as  on  June  30,  2004)  in  favour of the Claimants against the Respondents  together with further interest @ 20% p.a. on the  principal  sum  of  Rs.36,360,000/-  from  1st July,  2004 till payment and/or realization.

II. The  aforesaid  Award  against  the  Respondents shall be marked as fully satisfied in  the even of the Respondents making payment to  the Claimants of the sum of Rs.36,360,000/-  in  the following installments:-

i. Rs.17,500,000/-  on  or  before  30th  Septemebr, 2004

ii. Rs.6,287,000/- on or before 15th April,  2017

iii. Rs.6,287,000/- on or before 15th April,  2018

iv. Rs.6,287,000/- on or before 15th April,  2019

III. Simultaneously  with  the  signing  of  these  Consent Terms, the Respondents have handed  over to the Claimants one post dated cheque in  favour of the Claimants for Rs.17,500,000/- and  3 post dated cheques in favour of the Claimants  for Rs.6,287,000/- each falling due on the date  of the respective instalments.  

IV. The  Respondents  hereby  agree  and  undertake  that  the  Respondents  shall  make  payment of the said sum of Rs.36,360,000/- to  the  Claimants  as  per  the  Schedule  set  out  in  Clause 2 above and shall honour the post dated  cheques  on  their  respective  due  dates.   This  undertaking is  given by the Respondents after  satisfying  themselves  that  they  have  the  financial ability to make the said payment on the  respective due dates.

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V. In the event of the Respondents committing  default  in  payment  of  any  of  the  installments  including the last installment on the due date for  any reason whatsoever, the entire dues together  with  interest  as  provided  on  Clause  I  hereinabove and outstanding due and payable  by the Respondents to the Claimants as on that  date shall become forthwith due and payable by  the  Respondents  to  the  Claimants  and  the  Claimants shall be entitled to forthwith execute  the Award against the Respondents and recover  the entire dues.  In that even, any installments/s  paid  under  Clause  2  will  be  first  appropriated  towards  the  interest  payable  under  Clause  I  without  prejudice  and  in  addition  thereto,  the  Claimants  shall  also  be  entitled  to  institute  criminal  legal  proceedings  against  the  Respondents including for dishonor of cheque/s  under  the  provisions  of  the  Negotiable  Instruments Act, 1881.”   

  In view of the aforesaid conclusions, in the award, we  

have  no  scintilla  of  doubt  that  the  decision  in  Official  

Liquidator,  Chemmeens  Exports  (P)  Ltd. (supra)  is  

distinguishable.  

34. In  this  backdrop,  we  are  to  analyse  whether  the  

deed  of  hypothecation  would  continue  in  spite  of  the  

arbitration award.  Mr. Divan submitted that it would not  

survive  because  of  the  provisions  contained  in  Order  II,  

Rule 2 of the CPC.  We have already referred to the decree  

and  distinguished  the  decision  in  Official  Liquidator,  

Chemmeens Exports (P) Ltd  (supra).   In  this  context,  

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reference to Order XXXIV Rule 14 and 15 of the CPC would  

be apposite.  They read as follows:

14. Suit  for  sale  necessary  for  bringing  mortgaged property  to  sale –  (1)  Where  a  mortgagee  has  obtained  a  decree  for  the  payment  of  money  in  satisfaction  of  a  claim  arising  under  the  mortgage,  he  shall  not  be  entitled to bring the mortgaged property to sale  otherwise than by instituting a suit  for  sale in  enforcement  of  the  mortgage,  and  he  may  institute  such  suit  notwithstanding  anything  contained in Order II, rule 2.

(2) Nothing in  sub-rule (1)  shall  apply to  any  territories to which the Transfer of Property Act,  1882(4 of 1882), has not been extended.   

15. Mortgages  by  the  deposit  of  title- deeds  and  charges  –  (1)  All  the  provisions  contained in this Order which apply to a simple  mortgage  shall,  so  far  as  may be,  apply  to  a  mortgage  by  deposit  of  title-deeds  within  the  meaning of section 58, and to a charge within  the meaning of section 100 of the Transfer  of  Property Act, 1882 (4 of 1882).  

(2) Where a decree orders payment of money  and charges it on immovable property on default  of payment, the amount may be realized by sale  of that property in execution of that decree.

35. The said provisions came to be interpreted in  S.  

Nazeer Ahmed V. State Bank of Mysore and Others21.  

Referring to the said provisions, the Court held the suit for  

enforcement of mortgage could be filed even when in the  

21  (2007) 11 SCC 75

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earlier civil proceedings, the plaintiff had omitted to sue on  

the  basis  of  equitable  mortgage  and  in  such  cases,  

principle  of  constructive  resjudicata  or  Order  II,  Rule  2  

would not apply.  The two-Judge Bench has opined that in  

such cases a suit for enforcement of the mortgage would  

lie under Order XXXIV notwithstanding that in the earlier  

suit  the  plaintiff  had  not  asked  for  enforcement  of  the  

mortgage.   As the factual  matrix in the said case would  

unfurl, the Bank had advanced a loan by hypothecating a  

bus  and  further  by  equitable  mortgaging  two  items  of  

immovable  properties.   It  had  at  first  filed  a  suit  for  

recovery  of  money  and  sought  to  proceed  against  the  

hypothecated  bus  which  could  not  be  traced  and  

recovered.  In the said suit, the Bank had not prayed for a  

decree under Order XXXIV on the basis of mortgage.  There  

was an attempt to enforce the mortgaged property in the  

execution  proceeding  but  the  same  was  rejected  as  no  

decree  of  mortgage  has  been  passed.   Thereafter,  the  

Bank,  the  respondent  therein,  instituted another  suit  for  

enforcement of equitable mortgage.  The second suit was  

held to be maintainable, regard being had to the language  

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employed in Rules 14 and 15 of Order XXXIV, holding, inter  

alia,  that  said  Rules  had  been  enacted  to  protect  the  

mortgagor,  etc.  and,  therefore,  the  plea  of  constructive  

resjudicata relying upon Order II, Rule 2 of the Code was  

erroneous.   The  two-Judge  Bench held  that  for  Order  II,  

Rule 2 to apply, the cause of action in the two suits should  

be similar and the bar of constructive resjudicata, as was  

held,  was not applicable.   Analysing the facts,  the Court  

held:

“That apart, the cause of action for recovery of  money based on a medium-term loan transaction  simpliciter  or  in  enforcement  of  the  hypothecation of the bus available in the present  case,  is  a  cause  of  action  different  from  the  cause  of  action  arising  out  of  an  equitable  mortgage,  though  the  ultimate  relief  that  the  plaintiff Bank is entitled to is the recovery of the  term loan that was granted to the appellant. On  the scope of Order II Rule 2, the Privy Council in  Payana  Reena  Saminathan v.  Pana  Lana  Palaniappa22 has  held  that  Order  II  Rule  2  is  directed to securing an exhaustion of the relief in  respect  of  a  cause  of  action  and  not  to  the  inclusion in one and the same action of different  causes  of  action,  even  though  they  may  arise  from the same transactions. In Mohd. Khalil Khan  v.  Mahbub  Ali  Mian23,  the  Privy  Council  has  summarised the principle thus: (IA pp. 143-44)

“The principles laid down in the cases thus far  discussed may be thus summarised:

22 (1913-14) 41 IA 142  23 (1947-48) 75 IA 121

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(1)  The  correct  test  in  cases  falling  under  Order II Rule 2, is ‘whether the claim in the new  suit  is,  in  fact,  founded  on  a  cause  of  action  distinct from that which was the foundation for  the former suit’.  (Moonshee Buzloor Ruheem v.  Shumsoonnissa Begum24)

(2)  The  cause  of  action  means  every  fact  which will be necessary for the plaintiff to prove,  if traversed, in order to support his right to the  judgment. (Read v. Brown25)

(3) If the evidence to support the two claims is  different,  then  the  causes  of  action  are  also  different. (Brunsden v. Humphrey26)

(4) The causes of action in the two suits may  be  considered  to  be  the  same  if  in  substance  they are identical. (Brunsden v. Humphrey)

(5)  The  cause  of  action  has  no  relation  whatever to the defence that may be set up by  the  defendant,  nor  does  it  depend  on  the  character of the relief prayed for by the plaintiff.  It  refers  ‘to  the media upon which the plaintiff  asks  the  Court  to  arrive  at  a  conclusion  in  his  favour’.  (Chand  Kour v.  Partab  Singh27)  This  observation was made by Lord Watson in a case  under  Section  43  of  the  Act  of  1882  (corresponding to Order II Rule 2), where plaintiff  made various claims in the same suit.”

A  Constitution  Bench  of  this  Court  has  explained the scope of the plea based on Order II  Rule 2 of the Code in Gurbux Singh v. Bhooralal1.  It  will  be useful to quote from the headnote of  that decision: (SCR Headnote pp. 831-32)

24 (1867) 11 MIA 551  25 (1888) 22 QBD 128 26 (1884) 14 QBD 141  27 (1887-88) 15 IA 156 : ILR 16 Cal 98 (PC)

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“Held: (i) A plea under Order II  Rule 2 of the  Code  based  on  the  existence  of  a  former  pleading  cannot  be  entertained  when  the  pleading  on  which  it  rests  has  not  been  produced. It is for this reason that a plea of a  bar under Order II Rule 2 of the Code can be  established  only  if  the  defendant  files  in  evidence the pleadings in the previous suit and  thereby proves to the court the identity of the  cause of action in the two suits. In other words  a plea under Order II Rule 2 of the Code cannot  be made out except on proof of the plaint in  the previous suit the filing of which is said to  create  the  bar.  Without  placing  before  the  court  the  plaint  in  which  those  facts  were  alleged, the defendant cannot invite the court  to speculate or infer by a process of deduction  what  those facts  might  be  with  reference to  the  reliefs  which  were  then claimed.  On  the  facts of this case it has to be held that the plea  of  a  bar  under  Order  II  Rule  2  of  the  Code  should not have been entertained at all by the  trial  court because the pleadings in Civil  Suit  No. 28 of 1950 were not filed by the appellant  in support of this plea.

(ii) In order that a plea of a bar under Order II  Rule  2(3)  of  the  Code  should  succeed  the  defendant who raises the plea must make out  (i) that the second suit was in respect of the  same  cause  of  action  as  that  on  which  the  previous suit was based; (ii) that in respect of  that cause of action the plaintiff was entitled to  more  than  one  relief;  (iii)  that  being  thus  entitled to more than one relief  the plaintiff,  without leave obtained from the Court omitted  to sue for the relief for which the second suit  had been filed.”

It is not necessary to multiply authorities except  to  notice  that  the  decisions  in  Sidramappa v.  

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Rajashetty28,  Deva  Ram v.  Ishwar  Chand29 and  State  of  Maharashtra v.  National  Construction  Co.30 have  reiterated  and  re-emphasised  this  principle.”

36. Applying the said test to the present case, it can be  

stated with certitude that there is no shadow of doubt that  

the consent award in an arbitral proceeding would not bar  

a suit for enforcement of the charge for the same reasons  

and it would not be hit by Order II, Rule 2 CPC.  We are  

absolutely conscious that the present case does not relate  

to a charge as engrafted under Section 100 of the Transfer  

of Property Act, or simply for equitable mortgage.  In the  

present case, the charge is by hypothecation and relates to  

movable property.  Needless to say, provisions of Rules 14  

and 15 of Order XXXIV would not be directly applicable but  

the principle inherent under the said Rules, as enunciated  

would  be  applicable.   In  fact,  the  ratio  laid  down in  S.  

Nazeer  Ahmed (supra),  as  we  understand,  makes  it  

equally applicable to different causes of action.  The said  

principle would apply, if we accept that the cause of action  

is distinct.  

28 (1970) 1 SCC 186 29 (1995) 6 SCC 733 30 (1996) 1 SCC 735

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37. The  next  aspect  we  shall  advert  to  is  the  

applicability  of  doctrine  of  resjudicata.   In  Deva  Ram  

(supra), the Court while dealing with the said doctrine has  

opined thus:  

“Section 11 contains the rule of conclusiveness  of  the  judgment  which  is  based  partly  on  the  maxim  of  Roman  Jurisprudence  “Interest  reipublicae  ut  sit  finis  litium”  (it  concerns  the  State  that  there  be  an  end  to  law  suits)  and  partly on the maxim “Nemo debet bis vexari pro  una at eadem causa” (no man should be vexed  twice over for the same cause). The section does  not  affect  the  jurisdiction  of  the  court  but  operates as a bar to the trial of the suit or issue,  if  the  matter  in  the  suit  was  directly  and  substantially in issue (and finally decided) in the  previous suit between the same parties litigating  under the same title in a court, competent to try  the  subsequent  suit  in  which  such  issue  has  been raised.”

Mr. Divan, learned senior counsel has also drawn our  

attention to  Harbans Singh  (supra) wherein it has been  

held that when no appeal was preferred by the Union of  

India,  while  accepting  the  award  in  favour  of  the  first  

respondent  therein,  it  had attained finality  and thus the  

principle of resjudicata was applicable.  Reliance has also  

been placed on Ranganayakamma (supra).   

38. The said plea has been advanced on the foundation  

that  the  controversy  between  the  parties  having  been  

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finally  put  to  rest  by the arbitral  award,  the respondent  

would  not  have  dragged  the  appellant  to  the  said  

proceeding as that would vex him twice.  The issue before  

the  Company  Court  was  quite  different  than  that  was  

before the Arbitral Tribunal.  True it is, it has the status of a  

decree  which  is  executable,  as  a  decree  having  gone  

unchallenged, but the lis of framing a Scheme under the  

Act is of different character.  It could not have been directly  

or substantially in issue before the learned Arbitrator.  That  

apart, we have already held the status of the appellant as a  

secured  creditor  has  not  changed.   Therefore,  in  our  

considered opinion, the plea of resjudicata which has been  

canvassed by the learned senior counsel for the appellant  

does not commend acceptance and we so hold.  

39. Mr.  Divan,  learned senior  counsel  has  drawn our  

attention to Section 63 of the Contract Act.   To buttress  

the applicability of the said provision, he has commended  

us  to  the  decision  in  Firm  Chunna  Mal  Ram  Nath  

(supra).  The relevant portion reads as under:

“The contentions raised on these sections were  as follows.  The respondents, relying on Sections  39 and 63, said that the appellants had put and  end  to  the  agreement  and  had  expressly  

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dispensed  them  from  delivery  at  all.   The  appellants  contended  that  Section  63  applied  only where there was an agreement to dispense  or a contract, supported by consideration to do  so, and that in any case it could only operate,  when  the  party  dispensing  had  performed  his  part  of  the  contract  and  only  something  remained  to  be  performed  on  the  other  side,  unless  dispensed  with  Abaji  Sitaram Modok  v.  Trimbak Municipality 28 B. 66; 5 Bom. L.R. 689.  They further said that, if they had been wrong in  refusing  in  advance  to  accept  bales,  this  repudiation  had  not  been  accepted  by  the  respondents,  and,  therefore,  the  contract  remained  alive  and  ought  to  have  been  performed.   It  is  evident  that  the  alleged  dispensation  under  Section  63  is  by  itself  a  complete answer, unless the absence of contract  or consideration is fatal, for the appellants again  and again  dispensed with  the  performance by  the respondents of their promise to deliver the  goods  contracted for  and they  cannot  recover  damages for the breach of a promise touching  the performance of a thing they wholly dispense  with.

In Abaji Sitaram Modok v. Trimbak Municipality31,  Chief Justice Jenkins deals with Section 63, and  holds that the promise mentioned in Section 63,  can,  only  do  the  acts  he  is  by  that  section  empowered to do, if there be an agreement (as  defined  by  2(e))  amongst  the  parties  to  that  effect.  At page 72 of the report of this case the  learned  Judge  is  reported  to  have  expressed  himself thus:-

Therefore  we  hold  that  assuming  there  was  a  legal  resolution  and  that  it  was  communicated as alleged, still inasmuch  as  a  dispensation  or  remission  under  Section  63  requires  an  agreement  or  

31  5 Bom. L.R. 689

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contract,  the resolution was of  no legal  effect  since  the  provisions  of  s.30  of  Bombay  Act  II  of  1884  have  not  been  observed.

With this their Lordships are unable to agree The  language of  the section does not  refer  to  any  such agreement and ought not to be enlarged  by any implication of English doctrines.  On this  they agree with the learned Judges of the High  Court.”

40. He has also drawn inspiration from  Jagad Bandu  

Chatterjee (supra),  wherein  after  referring  to  the  

observations  of  Lord  Russell  of  Killowen  in  Dawson’s  

Bank Limited V. Nippon Menkwa Kabushiki Kaisha32  

and the well known work of Sir William P. Anson “Principles  

of the English Law of Contract”, 22nd Edn., the Court opined  

thus:

“In  India  the  general  principle  with  regard  to  waiver of contractual obligation is to be found in  Section 63 of the Indian Contract Act. Under that  section it is open to a promisee to dispense with  or remit,  wholly or in part,  the performance of  the  promise  made  to  him  or  he  can  accept  instead of it any satisfaction which he thinks fit.  Under the Indian law neither consideration nor  an agreement would be necessary to constitute  waiver.  This  Court  has  already  laid  down  in  Waman Shriniwas Kini v.  Ratilal Bhagwandas &  Co.33 that waiver is the abandonment of a right  which normally everybody is at liberty to waive.  “A  waiver  is  nothing  unless  it  amounts  to  a  

32  62 IA 100, 108 33  (1959) Supp 2 SCR 217, 226

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release.  It  signifies  nothing  more  than  an  intention not to insist upon the right”.....

41. The  stress  on  the  aforesaid  decisions  by  the  

learned senior counsel is to highlight that the respondent  

have  waived  the  hypothecation  by  accepting  the  

arbitration award.  The said submission has its own fallacy.  

The arbitral  award was passed on consent and from the  

same  it  would  be  inappropriate  to  deduce  that  the  

hypothecation  stood  annulled.   In  this  context,  we  may  

fruitfully refer to Sections 176 and 177 of the Contract Act,  

1872,  which  pertain  to  the  rights  of  pawnee  on  default  

made by the pawnor.  The said provisions read as under:

176. Pawnee’s right where pawnor makes  default. - If  the  pawnor  makes  default  in  payment  of  the  debt,  or  performance;  at  the  stipulated  time  or  the  promise,  in  respect  of  which the goods were pledged, the pawnee may  bring a suit against the pawnor upon the debt or  promise,  and  retain  the  goods  pledged  as  a  collateral  security;  or  he  may  sell  the  thing  pledged, on giving the pawnor reasonable notice  of the sale.

If  the proceeds of  such sale are less than the  amount due in respect of the debt or promise,  the pawnor is still liable to pay the balance.  If  the  proceeds  of  the  sale  are  greater  than the  amount so due, the pawnee shall pay over the  surplus to the pawnor.

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177.Defaulting pawnor’s right to redeem –  If  a  time  is  stipulated  for  the  payment  of  the  debt, or performance of the promise, for which  the  pledge  is  made,  and  the  pawnor  makes  default in payment of the debt or performance of  the  promise  at  the  stipulated  time,  he  may  redeem the goods  pledged at  any  subsequent  time before the actual sale of them, but he must,  in  that  case,  pay,  in  addition,  any  expenses  which have arisen from his default.”

42. The  aforesaid  two  provisions  when  read  in  a  

conjoint manner clearly establish that a pledge does not  

get  extinguished  and,  in  fact,  continues  even  when  the  

pawnee has sued and recovered a part of the debt without  

enforcement of the pledge or the security.  As per Section  

176,  when  the  pawnor  makes  default  in  making  the  

payment, the pawnee may bring a suit upon the debt or  

promise  and  retain  the  good(s)  pledged  as  a  collateral  

security.   A  pawnee  has  both  collateral  and  concurrent  

rights and can institute a suit for the purpose of realization  

of the said debt or promise while retaining the goods as a  

collateral security.  Section 176 also makes it clear that it is  

the discretion of the pawnee and it gives an option to him  

and merely because pawnee has filed a suit for recovery,  

that would not affect or destroy the charge or the right of  

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the pawnee in respect of a pledged goods or the collateral  

security.   Thus,  it  is  within  the  domain  of  discretion  of  

pawnee to file a suit for recovery of a debt and yet retain  

the collateral security or pledged goods.  It would not bar  

or prohibit a pawnee from subsequently selling the pledged  

goods or the collateral security.  It is pertinent to mention  

here that  there is  a  difference between a hypothecation  

and a pledge.  In the case of a pledge, the security is in  

possession of the pledge, but in the case of hypothecation,  

the  possession  remains  with  the  owner  i.e.  the  pawnor.  

Though such a distinction exists, yet it is an accepted legal  

principle that hypothecation is treated as a sub-species of  

pledge  and  virtually  has  the  same  legal  effect.   In  this  

context,  reference to a passage from  Lallan Prasad V.  

Rahmat Ali and another34, would be seemly.

“17. There is no difference between the common  law of England and the law with regard to pledge  as codified in sections 172 to 176 of the Contract  Act. Under section 172 a pledge is a bailment of  the goods as security for payment of a debt or  performance of a promise. Section 173 entitles a  pawnee to retain the goods pledged as security  for payment of a debt and under section 175 he  is  entitled  to  receive  from  the  pawner  any  extraordinary  expenses  he  incurs  for  the  preservation  of  the  goods  pledged  with  him.  

34  AIR 1967 SC 1322

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than the debt and in a suit for recovery of debt  by the pledgee, the pledge denies the pledge or  is  otherwise  not  in  a  position  to  return  the  pledged goods he has to give credit for the value  of  the  goods  and  would  be  entitled  then  to  recover only the balance”.

43. More than eight  decades back,  the Bombay High  

Court in  Gulamhusain Lalji  Sajan V. Clara D’Souza35,  

while dealing with the applicability of Section 176 of the  

Contract Act to a case of hypothecation, had opined thus:

“Under  S.176,  Contract  Act,  the  pledge  has  a  right to bring a suit against the pledgor upon the  debt or promise, and retain the goods pledged  as a collateral security; or he may sell the thing  pledged in giving the pledgor reasonable notice  of the sale.

It is clear under the law applicable to cases of a  pledge that the creditor has two rights which are  concurrent, and the right to proceed against the  property pledged is not merely accessory to the  right to proceed against the debtor personally.  For the pledge may have a right to sue for sale  of the property even in the absence of a right to  sue for a personal decree.  

The same principles would apply to the case of  hypothecation  or  mortgages  of  moveable  property.”  

35  AIR 1929 Bom. 471

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Be it noted, in the said case reliance was placed on  

Nim Chad Babu v. Jagabandhu Ghose36 and Mahalinga  

Nadar v. Ganapathi Subbien37.

44. We will be failing in our duty if we do not advert to  

the  issue  that  the  appellant  shall  remain  as  a  secured  

creditor, for it was registered as such under the Registrar  

of  Companies.   The  formalities  for  creating  the  charge  

having duly followed, the Division Bench has referred to  

the Form No. 8 and 13 and also adverted to the power of  

Registrar  to  make entries of  satisfaction and release,  as  

provided under Sections 138 and 139 of the Act.   It  has  

also  expressed  the  view  that  in  the  absence  of  any  

proceeding,  the  status  of  the  company  as  a  secured  

creditor continues.  

45. After registration of the deed of hypothecation, if a  

condition subsequent is not satisfied,  that would be in a  

different  realm altogether.   In  any case,  the finding has  

been recorded that the respondent was not at fault and, in  

any case, that would not change the status of the appellant  

as a secured creditor.  

36  [1894] 22 Ca. 21 37  [1902] 27 Mad. 528

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46. In  view  of  the  aforesaid  analysis,  we  are  of  the  

considered opinion that the appellant cannot be treated as  

an unsecured creditor and it is not permissible for him to  

put forth a stand that it would not be bound by the Scheme  

that has been approved by the learned Company Judge.  

47. The  aforesaid  conclusion  of  ours  leads  to  the  

inevitable  dismissal  of  the  appeal,  which  we  direct.  

However,  in  the  factum and  circumstances  of  the  case,  

there shall be no order as to costs.

.............................J. [Anil R. Dave]

...........................J.             [Dipak Misra ]         

New Delhi; January 09, 2015

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