Author: Mahima, 5th Year student at School of Law, UPES, Dehradun.
Citation: (1972) 3 SCC 196
Date of Judgment: April 1, 1971
Bench: K.S. Hegde, A N Grover
Original Copy: View
Issues in Question:
- Was the sugar seized by the Government in possession of the Bank as a pledgee at the time of the seizure?
- Can the rights of the Bank as pledgee be determined by the seizure in question?
Background of the Case:
- The Jagdishpore Zamindary Company, under an arrangement, acquired the possession of the manufacturing section of South Bihai Sugar Mills in Bihta from the onset of the crushing season of 1946-47. Early in 1947, the company joined hands in a cash credit agreement with the Bank of Bihar Ltd under which the company was to pledge the entire stock of sugar manufactured in the Mills and to take advances from the Bank under the cash credit system.
- The plaintiff Bank was holding 6239 bags of sugar as pledgee which were stored in the godown provided by the company and guarded by the lock and keys provided by the Bank. The outstanding advances of the Bank stood at Rs. 3,20,486-2-0. The cash credit account was further secured by the personal guarantee of the Directors of the Company.
- The Sugar Controller for India passed an order dated 24th August, 1947 under the Essential Supplies Act, 1946 directing mills to deliver 680 tons of sugar to the Government of Bihar. The Chief Controller of Prices and Supplies, Bihar, following the central order, issued an order dated 27th September, 1947, under Clause 7 of the Sugar and Sugar Products Control Order, directing the said Mills to supply 17441 maunds of sugar to the District Magistrate of Patna which were to be delivered to different stockists as per the District Magistrate or the concerned Subdivisional Magistrates.
- A direction was issued for the Mills on 2nd December, 1947 to supply 14,743 maunds of sugar. The Factory Manager had already received advances from many stockists but no supplies were made which led to the apprehension that Factory was buying time until 8th December, 1947 when the sugar was to be decontrolled. The Government of Bihar, therefore, passed an order dated 5th December, 1947, under Section 3 of the Act, directing seizure of 5,000 maunds of sugar. In pursuance of this order, the Rationing Officer along with the District Magistrate of Patna barged in the godowns of the Bank and authoritatively removed 4999 and a half maunds of sugar.
- The General manager was convicted under Section 186 of the Indian Penal Code for obstructing the seizure as both Patna High Court and the Supreme Court held the seizure to be lawful. The seized sugar was sold and the money earned was deposited in the Government Treasury. Later, the Cane Commissioner got a certificate issued by virtue of the Public Demands Recovery Act against the Company for realisation of arrears of cane cess and the entire sale proceeds deposited in the treasury were made over to the Cane Commissioner.
- The plaintiff Bank received no payment for the commodities it held as pledgee under the cash credit agreement and contended that it was entitled to recover the sugar which was seized illegally or the sale proceeds which it would have earned if the seized sugar was sold on the given day. The plaintiff claimed for the return of the seized sugar and for damages which amounted to Rs. 1,81,700-9-3 with interest against the State of Bihar. Alternatively, it also claimed a decree of Rs. 93,910-10-9 against the company and the directors of the company.
- The Trial Court held the order of seizure to be valid. It also held that the rights of the plaintiff as a pledgee could not be obliterated by seizure of goods in its possession. It further explained that while the attachment order of Certificate Officer was legal, the same was not binding on the bank and was effective only to that amount of sale proceeds which wasn’t required for the liquidation of plaintiff’s dues from the company. A decree for Rs. 93,910-10-9 with rate of interest at 6% per annum from the date of decree until realisation was passed in the favor of the plaintiff solely against the State of Bihar.
- The High Court overturned the decree of the Trial Court against the State and granted the decree against other defendants as it opined that the plaintiff was ineligible to receive any decree against the State but was entitled to a decree against the Company and the directors of the company who furnished personal guarantee as security for cash credit arrangement.
- The High Court relied on Section 180 and 181 of the Indian Contract Act, 1872 and concluded that the pawnee merely has the right of possession of the commodities and is empowered to sell the same on default by the pawnor whereas the ownership residing with the pawnor is limited to the extent of the debt enforceable by exercise of power of sale. It concluded that the plaintiff was entitled to claim against the sale proceeds received but any claim on the pledged property or the sale proceeds against any third party perished as soon as it was legally bereaved of the possession of the pledged goods.
- The Supreme Court observed that the Cane Commissioner was entitled to the surplus money after plaintiff’s dues were cleared in entirety as it had no priority over other creditors of the Company, especially the secured creditors and that the Government was obligated to clear plaintiff’s outstanding amount from the sale proceeds of the good seized before satisfying the claims of other creditors.
- It opined that the judgment of High Court was errored as it considered that the rights of the pawnee can be frustrated if the goods in question are lawfully confiscated by the Government and that the sale proceeds could be distributed among other creditors without the claim of the pawnee being completely gratified.
- It also ruled that the approach of the Trial Court was commendable and unimpeachable. It agreed with the findings of the trial court that right of plaintiff as the pawnee was not extirpated merely by expropriation of goods in its possession as the pledge of the goods didn’t aim at substituting the liability under the cash credit arrangement but to grant the plaintiff with a primary right to sell the goods for discharging the arrears of the pawnor.
- The Supreme Court allowed the appeal. It countermanded the decree of the High Court revoking the suit against the State of Bihar while maintaining that the decree against the Company and its director passed by the High Court would stand as it is, since they didn’t file any appeal.
- This case discusses the special and paramount interests of the ‘pledgee’ under Indian Contract Act, 1872.
- This case explains that the right to property resides with the pledgee only to the extent where it is necessary to secure the debt, thereby establishing that until the pawnee’s debts are satisfied, no other creditor or even the pawner is entitled to take away the items pledged or their sale proceeds.
- In this case, the Court not only discussed the laws of Contract safeguarding the concept of bailment but it also perused the Halsbury’s Laws of England to understand the definition of pawn as well as the definition of pawnee and reached the conclusion that the laws in India regarding the rights of pawnee with respect to other unsecured creditors of the pawnor are not very dissimilar from those of the laws in England.