1. ' SHABBIR AHMED, J.---The basic principle which calls for application herein stems from the maxim of equity `Qui prior est tempore potior est jure', (he has a better title who was first in point of time).
2. ' The point referred to above has arisen in the following circumstances: ' The recapitulation of entire facts are not necessary, same have elaborately been recorded in order dated 10-12-1992 Emirates Bank International Limited v. Adamjee Industries Ltd. 1993 CLC 489, save the relevant facts necessary for the issue involved.
3. ' The respondent-Bank (in short-the EBI) filed Suit No,359 of 1985 against respondent No,2 (in short- the Borrower) for recovery and obtained a restraint order on 30-5-1985, restraining the borrower from removing, selling or dealing with its property, factory together with structure, installation and other articles lying in the factory, on the basis of charges, inter alia, on hypothecation through letter dated 13-4-1982. One of the clause of the hypothecation contained the description of the hypothecated stock and the place of storage thereof as follows:-- "That the whole of the Borrower's stocks of Cloth, Printed Cloth and other trade goods. Whether raw or in process of manufacture and all products goods and movable property of any kind which now or hereafter from time to time during this security shall be brought into, stored or be in or about the Borrower's premises, godowns, or plinths at Plot No,HT/11. Landhi Ind. Area, Karachi or wherever else the same may be (including any goods in the course of transit) (hereinafter collectively referred to as the hypothecated goods) are hereby hypothecated to the Bank and its assigns by way of first charge as security for the payment to the Bank on demand of the balance of accounts at any time and for the payment and charge of all present and future indebtedness and liabilities of the borrower to the bank of any kind in any manner whether solely or jointly, primary or collateral, accrued or accruing, with all relative interest, charges, discounts, commissions, costs as between (attorney and client) and expenses."
4. ' The charge so created through letter of hypothecation dated 13-4-1982 is duly registered under section 121 of the Companies Ordinance on 13-5-1982. The appellant, National Bank of Pakistan (in short-NBP) as intervenor moved C.M.A. No,2277 of 1985 for release from attachment of the stock pledged in their favour by pledge Deed dated 19-6-1983 under their lock and key stored in six Godowns situated in the same factory premises of borrower. On joint statement of N.B.P. And E.B.I., by order dated 12-6-1985 Nazir was appointed to prepare the inventory of the stock and goods under the lock and key of N.B.P. And such stocks were to be excluded from sale with attachment thereon intact. The Nazir prepared the inventory of the pledged goods claimed by N.B.P. And said stock were later on sold by N.B.P.. Prima facie breach was committed of the order referred to above.
5. The contempt proceedings were initiated. As a first step; N.B.P. Was directed to deposit the sale proceed of Rs.29.5 million or thereabout in this Court within 15 days, on deposit by N.B.P. In Court, Nazir was directed to invest the amount in Government Securities bearing six monthly return. The entitlement to receive the said amount was to be determined in due course. To determine the question of entitlement in terms of later part of order dated 25-5-1988 passed in the contempt proceedings, learned Judge after hearing the learned counsel for the parties by order dated 25-5- 1998 treated the sale proceeds as substitute for the goods which were subject-Matter of charge hypothecation held by the E.B.I., which is impugned by the N.B.P. In the present appeal. We have heard Mr. A.I. Chundrigar, and Mr. Sajid Zahid, learned counsel for the contesting parties. Learned counsel had requested that the appeal may be disposed of finally at katcha peshi stage and this appeal would be disposed of finally as such.
6. ' The main contention of Mr. A.I. Chundrigar, learned counsel for the N.B.P. Was that the learned Judge has erred in Law by preferring the charge of hypothecation over the charge of pledge. His further submission was that under section 121 clause (e) of the Companies Ordinance, the pledge is not subject to registration. His further submission was that the pledged goods were under the lock and key of N.B.P., therefore, the N.B.P.'s right, as pawnee who has parted with money in favour of the pawnor on security of goods cannot be defeated, from the right claimed on hypothecation though of prior date. In other words; the, contention of Mr. A.I. Chundrigar was that the position of the N.B.P.
7. Is of a secured creditor, whereas, the position of E.B.I. Is of an unsecured creditor. To support such contention, learned counsel for the appellant has referred the case The Bank of Bihar v. The State of Bihar and others AIR 1971 SC 1210. The facts of the case were that Bank made advances to the borrower on the strength of the goods pledged with the Bank. The goods were sold, the proceed was deposited in the Treasury and was attached by the order of certificate officer under the provisions of Public Demand Recovery Act. Suit was filed by the Bank. The trial Court held that the order of seizure in respect of the stock of sugar was valid. It was further held that Bank's right as a pledge could not be extinguished by seizure of the sugar in its possession and though the attachment order of the certificate officer was legally binding on the borrower. It was not binding on the Bank and it should be effective only in respect of that portion of the price which was not necessary for the liquidation of the dues of the Bank from the borrower. A decree was passed in favour of the Bank. The State of Bihar appealed to the High Court. The High Court set aside the decree passed in favour of Bank against State of Bihar with the observations that in the presence of the finding that the Bank had not been wrongfully deprived of the sugar on account of the lawful seizure or its price owing to the certificate proceedings started by the Cane Commissioner, the Bank was not entitled to any decree against the State. The matter went before the Supreme Court and the decree of trial Court was restored with the observation that the sugar had been seized and then sold. The sale proceeds would have been available to the borrower subject to the claim of the bank against them, but it ceased to have any lien on the pledged property or the sale proceeds against any third party including the State as soon as it was legally deprived of the possession of the pledged goods. It was further observed that it has not been shown how the law in India is in any way different from the English Law relating to the rights of the pawnee vis-a-vis other unsecured creditors of the pawnor.
8. ' It was further observed that the High Court is in error in considering that the rights of the pawnee who had parted with money in favour of the pawnor on the security of the goods can be defeated by the goods being lawfully seized by the Government and the money being made available to other creditors of the pawnor without the claim of the pawnee being fully satisfied. The pawnee has special property and a lien which is not of ordinary nature on the _goods and so long as his claim is not satisfied no other creditor of the pawnor has any right to take away the goods or its price.
9. ' Mr. A.I. Chundrigar further submission was that the view taken in case of the Bank of Bihar (supra) was followed in Bank of India v. Messrs. Binod Steel Ltd. And another AIR 1977 Madhya Pradesh 188, wherein the question that falls for decision was whether on the facts and in the circumstances, the Revenue authorities are empowered to attach and sell the machinery and other movables of Messrs Binod Steel Ltd. Co., which were pledged and mortgaged to the petitioner bank for recovery of the dues of the workers and employees of the company without satisfying the debt due and payable to the bank.
10. ' The facts of the case were that the debt due and payable to the Bank had 'come into existence even prior to the incident of liability of the company towards the workers and the bank stands in the position of a secured creditor with legal possession and custody of the machinery and other movables of the company, which were under a pledge. The Court ruled that it must be held to be of the Bank itself. The physical possession of the movables and the machinery of the company may be with the company but in the eye of law the Company must be deemed to be in possession of the same for and on behalf of the Bank, the pledgee and the mortgagee. The legal entity that is entitled to be in possession of these movables must be the Bank and none else. The initiation of recovery proceedings by the Tehsildar, in respect of the amount due and payable by the Company to the workers is on the assumption that the machinery and movables of the Company really, belong to and are in the possession of the company itself. This conception of the Revenue Authorities is erroneous and illegal. The legal rights of the Bank who is the pledgee and who is the custodia legis of the machinery and the movables have been ignored---the authorities on behalf of the workers who initiated recovery proceedings, have no legal right to proceed against the property of the Bank or any property in which the Bank has got the custody and legal possession. It was further held that the right to possess movables and the machinery in the present case is vested in the Bank. No one can touch the pledged property until the claim of the Bank is satisfied."
11. ' The dictum of Bank of Bihar (supra) was also followed by Full Bench of Andhra Pradesh High Court in The State Bank of Hyderabad v. Sucheela and others AIR 1980 Andhra Pradesh 1.
12. ' There is no cavil with the proposition enunciated in the above cases that a secured creditor has the preferential right and that right cannot be defeated by un-secured creditor.
13. ' The main question in the present case is whether the right of the two contesting parties is similar in nature or the N.B.P. Having the custody of the pledged goods has a better right and title over the right and title of the E.B.I. Based on hypothecation though registered under the Companies Ordinance.
14. ' Conversely, Mr. Sajid Zahid, learned counsel for the E.B.I. Contention was that N.B.P. In its application has given description and location of the pledged stock in para.1 of their application, whereas, E.B.I. Has given details of the hypothecated goods present and future. The essence of the deed of hypothecation is a floating charge not only in respect of the present stocks but also that may be come on future date. His submission was that the Law on the point is very clear. The E.B.I.
15. Has a charge over the stocks present and future and such charge is registered in terms of section 121 of the Companies Ordinance. Once the charge is registered in pursuance of section 121, such certificate is conclusive evidence and notice to all with regard to registration of charge. His further contention was that there is no difference between the hypothecation and pledged. He pointed out that in pledge one is in actual physical possession whereas, in case of hypothecation, the goods are in constructive possession. He pointed out that pledge and hypothecation have been lucidly illustrated in Messrs. Gopal Singh Hira Singh, Merchants v. Punjab National Bank and another AIR 1976 Delhi 115. The learned Single Judge of Delhi High Court has drawn the distinction between the 'hypothecation of goods' and `pledge of goods' as follows:-- "It is true that there is distinction between hypothecation of goods and pledge of goods, in that, the hypothecated goods need not be in the physical possession of the bank but may remain under the actual physical possession of the borrower with a view to enable the borrower to use the same either as raw material or in the process of fabrication of goods or as finished goods. This is a facility granted to the borrower by the banking institutions so that the actual operations of the borrower are not affected. In such cases, the borrower, is in actual physical possession but the constructive possession is still of the bank because according to the deed of hypothecation, the borrower holds the actual physical possession not in his own right as an owner of the goods but as the agent of the bank.
16. ' It was further observed that 'in law, however, there is no difference with regard to the legal possession of the bank. In both the cases, the goods are under the constructive possession of the bank while in the case of pledge they are also in the actual physical possession with regard to the hypothecated goods, these are strictly speaking not under the lock and key of the bank but are supposed to be under constructive possession of the bank by virtue of the deed of hypothecation which obliges the borrower to submit the regular return to the bank as its Agent. (Emphasis underlined).
17. ' Learned counsel for the EBI also maintained that the rights under the hypothecation and pledge are of the same effect and in such eventuality, the right of the priority is to be determined on the principle of equity and argued that where there is dispute as to the priority between two similarly placed creditors, the matter is to be resolved by applying the principle of equity enshrined in qui prior est tempore potior est jure. He also emphasized that registration of charge in favour of the EBI is sufficient notice to everyone including NBP, therefore, if a second charge by pledge or hypothecation is created in favour of any third party, it was incumbent, upon the borrower to obtain permission from the first charge holder. His plea was that the EBI, being a prior charge holder in time is entitled for the amount and in support of this contention he referred the pronouncement in Bibhuti Bhusan Shome v. Baidya Nath Dey and another 40 C.W.N. 625, a matter involving contest between two persons both of whom lent money to the defendant Baidyanath Dey and in favour of each of whom he executed instruments whereby he hypothecated his printing press to secure repayment of loan with interest on 28-8-1928, the defendant Baidyanath Dey hypothecated the same printing press in favour of the defendant Ashutosh Pyne, on 19-1-1929 to secure repayment of a loan with interest thereon. On the basis of priority between the instrument there was no difference as to the right of the plaintiff and the defendant Ashutosh Pyne. The right was decided on the basis of rule of equity enshrined in qui prior est tempore potior est jure by holding that the plaintiff is entitled to priority in respect of his hypothecation dated 18-8-1928.
18. ' Mr. Sajid Zahid lastly referred the case of Noor Dirt v. Abdul Qayyum and another PLD 1979 Rev. 39, decided by the Member (Colonies), Board of Revenue, Punjab, wherein the question requires determination was as to how in case of transfer by different sale deeds executed in respect of same property in favour of different vendees by same vendor by means of different sale deeds executed simultaneously and registered also on date at the same time. In such case the above rule was not applied.
19. ' Pledge is defined in section 172 of the Contract Act. It is in the following terms:-- "Bailment of goods as security for payment of a debt or performance of a promise is called pledge.
20. The bailer is in this case called the pawner. The bailee is called the Pawnee. It is seen from the definition that three essential ingredients of the pledge:-- ' There must be bailment of goods are as defined in section 148 of the Contract Act i.e. Delivery of goods.
21. ' Bailment must be by way of security.
22. ' Security must be for payment of debt or performance of promise.
23. ' Therefore, pledge is the delivery of goods by the pledgor to the pledgee by way of security upon a contract that they shall when the debt, is paid or the promise is performed, be returned or otherwise disposed of according to the directions of the pledgor. A pledgor would, therefore, create an estate which vests in the pledgee, which is distinguishable from ownership since an owner owns
(a) the right of possession (b) the right of enjoyment and (c) the right of disposition. But a pledgee does not have the right of ownership though he has the rights of a pledge which include only the right of possession but not the right of enjoyment. A pledgee has the right of disposition which is limited to disposition of pledgee rights only and of a sale only after notice and subject to certain limitations, as is clear from the various provisions of the Contract Act.
24. ' Whereas 'hypothecation' and 'mortgage of movables' are not specifically mentioned in the Contract Act. The Courts of Sub-Continent have decided the rights based on hypothecation according to justice, equity and good conscience based on English Law, wherever such law is applied and it is only under this principle that the hypothecation or mortgage of movable property, although not specifically provided for in the Contract Act, are valid.
25. ' Sir Hari Singh Gour in Law of Transfer, Volume, II, Sixth Edition while tracing the History of Hypothecation said that it is a right in rem and nearer to mortgage of movables. He commented at page 891 in para.1422 as follows:-- "1422. History of Hypothecation:---The security of hypothecation was borrowed from the civil law. It marked the final stage of the right in rem which the Roman jurisprudence gradually developed and recognized. The earliest form of the Roman security, called fiduciae, may be regarded as the prototype of the English mortgage. In this security an. Actual conveyance was executed by the debtor to the creditor on condition (contractus fiduciae) that if the purchase-money were repaid by a day named the creditor would reconvey the property to the debtor. In this security the debtor naturally ran a great risk, for having parted with his ownership he had only a personal action against the creditor. The intervention of the proctor was only a matter of time. The law was next modified by an edict declaring that while the creditor retained possession of the property, its ownership remained with the debtor. This is Pignus and marked the second stage in the history of civil mortgages. But the creditor did not always care to take possession of the thing pledged, nor did the debtor always wish to part with the possession. And so Servius dispensed with the transfer of possession and thus arose the hypotheca or pledga of a thing by mere agreement, without any formality and without the delivery of possession. Servius gave the creditor remedy not only against the debtor, but against all other persons, and thus established a true right in rem. The creditor's remedies in a hypothecation were-(a) rights in rem, i.e., he could recover the very thing pledged
(b) the right of sale. As regards the latter right Justinian enacted that if the creditor had possession of the hypotheca he could not sue without giving a previous formal notice to the debtor, and if he had not possession he must obtain a judicial decree. In either case he could not sell except after two years from either the notice or the decree. Hypothecation may be created by (a) agreement (nuda consentio), or (b) by operation of law (tacita hypotheca). The security given by the debtor was collateral to his own personal security, which is not determined by sale of the hypotheca except insofar as the amount obtained sufficed. Hypothecation, as such has long since ceased to exist except that it survives only in a modified form in cases of holders of bottomry bonds, and of seamen in merchant service in respect of their unpaid wages and who have a claim against the ship in rem. But even these cases are, strictly speaking, cases of liens rather than of hypothecation.
26. A mortgage of movable property without possession is perhaps the nearest survival of this form of absolute security."
27. ' Equivalence terms for pledge and hypothecation prevalent in mercantile world are 'key loan system' and "open credit system'. The loans are advanced by bank to its customers in said forms. In key loan system, the goods pledged are under the lock of the pledgee and the pledgor has no access to them, whereas in the open credit system, the goods pledged are in actual possession of the pledgor and the pledgee has constructive possession over them. In the former system, the pledgor cannot deal with the goods, unless the pledgee gives their possession to him, whereas in the latter system, he has freedom to deal with them. In the open credit system, however, the formal character of pledge is maintained. The loan advanced on the basis of key loan system is also called loan by pledge of goods and the loan advanced on open credit system is also called factory type loan or loan on the basis of hypothecation.
28. ' In Nadar Bank Ltd. Madurai v. Canara Bank Ltd. And others AIR 1961 Madras 326, the Division Bench of Madras High Court has illustrated the essential of the two systems by stating that:- 'We would here emphasise that, in such a matter, the form of the juridical relationship is very important, and that, it cannot be divorced from the substance, merely because, in mercantile practice, there is a certain flexibility and freedom for the borrower under the 'open credit system'.
29. On the contrary, the system seems to have been devised for this very reasons, in effect, it secures for the borrower a certain freedom to deal with the goods, provided a stipulated margin above the value of the advance is maintained, though the formal character of the pledge is throughout preserved. Under the `key loan' system, the goods are equally secured by pledge, and in the possession of the creditor bank, but there is far less freedom for the borrower to deal with the goods in any manner, even with the express permission of the creditor bank, and under its authority, as the keys of the godowns are in the physical possession of bank.'
30. It was further observed that the law is not that the character of the pledge is lost, unless the pledgee retains manual possession of the goods offered as security. On the contrary, firstly, as stated by Erie C.J. In Martin v. Reed (1862) 142 ER 982, in order to constitute a valid pledge, what is essential is that there must be a delivery of the article, either actual or constructive, to the Pawnee.
31. Possession is an equivocal term; it may mean either mere manual possession, or the mere right to possession. Also H see Chitty on Contracts, Volume II, 21st Edn, Para.130 at page 73. Constructive delivery will be adequate to constitute a pledge, and it applies to all those cases where the pledgor remains in possession of the goods under this specific authority of the pledgee, or for limited purposes.
32. ' A review of foregoing discussions makes it clear that there is no difference in law with regard to the right of pledgee and hypothecatee, both are of the same nature. In former, the bank retains the manual possession, whereas, in later case, the bank remains in constructive possession, whereas, manual possession remains with the borrower as agent of the Bank.
33. ' Now adverting to the facts of the present case, the N.B.P. Claim is based on pledge deed dated 19- 6-1983, whereas, the EBI under letter of 'hypothecation dated 13-5-1982 with registration under section 121 of the Companies Ordinance. The effect of registration of charge was dealt with by the Division Bench of Lahore High Court in Messrs Capital Farms, Islamabad v. National Development Finance Corporation PLD 1996 Lahore 99 as follows:-- "That a mortgage created in favour of a Company having been certified under the provisions of section 127 of the Companies Ordinance shall be deemed to be a registered transaction and, hence, shall create a first charge on the property satisfaction whereof cannot be objected to by a person in whose favour either subsequent charge is created or a subsequent agreement for sale has been executed.'
34. ' The charge has been created by deposit of title deeds and has been certified by the Registrar of Joint Stock Companies, Islamabad under the provisions of section 127 of the Companies Ordinance, 1984.
35. 127 Certificate of Registration.---The Registrar shall give a certificate under his hand of the registration of any mortgage or charge registered in pursuance of section 121, stating the amount thereby secured and the certificate shall be conclusive evidence that the requirements of sections 121 to 125 as to registration have been complied with.'
9. A perusal of the above said provision of law clearly shows that if the deed of mortgage is executed for a financial institution and is certified by the Registrar in terms of section 127, the deed shall be deemed to be a registered document."
36. ' In the instant case, the charge in favour of the EBI is registered on 13-5-1982, whereas, the pledge in favour of N.B.P. Is dated 19-6-1983 under the provision of subsection (2) of section 121 ibid, any mortgage or charge under subsection (1) once registered, any person acquiring any interest in the property shall be deemed to have notice of such charge from the date of registration. Equity followed the Law and equitable encumbrances ranked as a rule, according to the date of their securities. Qui prior est tempore potior est jure, the first grantee was potior, that is potentior, he had a better and superior right, because of perior, equity Beddes v. Shamo 137 Ch.
81. Therefore, the EBI being first in point of time. Whereas, the N.B.P. Has acquired interest in the stocks by pledge on later date, with notice of prior charge of the EBI under the Law. Therefore, the principle of equity enshrined in maxim 'Qui prior est tempore potior est jure', gives priority to the EBI, who has a better and superior right because of prior equity. Therefore, the EBI is entitled for the sale amount with profit under the rule of priority over the subsequent charge holder i.e. N.B.P. The impugned order is in accordance with the law needs no interference. Resultantly, the appeal is dismissed in limine, however, with no order as to costs.