' SALEEM AKHTAR, J.---By this direct appeal the appellant has challenged the judgment passed by the learned Judge in Chamber of Peshawar High Court whereby its claim to be treated as secured creditor and entitled to priority in the distribution of the property of the company under liquidation was rejected.
2. The question for consideration is whether the appellant is a secured creditor and is it entitled to priority in distribution of property in liquidation proceeding.
3. Pakistan Industrial Credit and Investment Corporation Limited Respondent No,1, had filed a petition for liquidation of Ali Gul Khan Packages Industries Limited which was allowed on 12-12-1987.
The joint liquidators appointed by the Court started liquidation of the company. In this process the appellant being a banker preferred a claim of Rs,622,700 against the company. The appellant claimed that it had advanced a loan against a security of pledge of stocks and spare parts worth Rs,691,66. On the basis of this pledge the appellant claiming to be a secured creditor, requested the Official Liquidators to give priority to its claim in preference to other creditors. This claim was rejected and the Official Liquidators made proposal for distribution of the assets of the Company as provided by section 405 of the Companies Ordinance, 1984. In that process in the ultimate result no asset was left and the liquidators did not propose any payment to be made to the appellant.
The appellant filed appeal before the High Court which was dismissed by the impugned judgment.
The learned Judge in Chamber observed that the loan advanced to the company did not fall within the definition of a secured loan 'as pledge is not included in it and further that the pledge was void because it had not been registered with the Registrar of the Joint Stock Company as provided by Section 121 of the Companies Ordinance. The loan was, therefore, treated as an ordinary loan at par with all other loans of such nature and no preferential treatment was given to it.
4. Mr. Hidayatullah Khan, the learned counsel for the appellant, contended that the loan advanced to the company was a secured loan and, therefore, it was entitled to priority. Such contention was raised on the basis of pledge made by the company in favour of the appellant as security for payment of the loan. In order to substantiate his contention the learned counsel has referred to the definition of 'securities' given in the Capital Issues (Continuance of Control) Act, 1947 (Act No, XXIX of 1947) where it has been defined as follows:--- "2(b)--'securities' means any of the following instruments issued or to be issued, by or for the benefit of a company, whether incorporated in (Pakistan) or not, namely:-
(i) shares, stocks, modarba certificates, mutual fund certificates and trust units.
(ii) debentures; bonds and participation term certificates.
(iii) other instruments creating a charge or lien on the assets of the company.
(iv) instruments acknowledging loan to or indebtedness of the company and guaranteed by a third party or entered into jointly with a third party."
(v) The learned counsel referred to clause (iii) and contended that it covers 'pledge'. Section 2(b) defines the instruments which are securities, issued or to be issued for the benefit of the company.
The term charge has a definite connotation and meaning which is distinct from pledge. However, if by an instrument lien has been created it will be treated as security. But the question is whether such security or lien entitles the creditor to claim property as a secured creditor. The learned counsel also referred to section 5(m) of the Banking Companies Ordinance, 1962 (Ordinance LXVII of 1962) where `secured loan or advance' has been defined as follows:-- - "5(m) 'secured loan or advance' means a loan or advance made on the security of assets and market value of which is not at any time less than the amount of such loan or advance, and 'unsecured loan or advance' means a loan or advance not so secured, or that part of it which is not so secured."
5. By section 5(mm) the definition of 'Security' as provided in the Capital Issues (Continuance of Control) Act, 1947, has been adopted. Under this Ordinance a `secured loan or advance' is that loan which has been made against such security of assets the value of which does not at any time fall less than the loan. However, keeping in view the meaning of unsecured loan or advance provided in the same clause if the value of security at any time falls short of the loan/advance then such part of the loan shall be treated as unsecured loan.
6. As the appellant is claiming priority the claim has to be considered in the light of the provisions of the Companies Ordinance under which the petition for winding up was filed. The Companies Ordinance is a complete code to regulate proceedings of winding up. Section 405 of the.
Companies Ordinance specifies the claims which are to be paid in priority to all other debts but it does not include any debt as claimed by the appellant. However, section 404 of the Compaines Ordinance provides that in winding up of an insolvent company same rules shall' prevail and be observed with regard to respective right of secured and unsecured creditors and to debts provable as are in force for the time being under the law of insolvency with respect to the estate of the insolvants. Therefore, by virtue of this section the provisions of the Provincial Insolvency Act, 1920, hereinafter referred as 'the Act' are attracted. Section 2(e) of the Act defines 'secured creditor' as follows:- "Secured creditor means a person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor."
Thus, any creditor holding a mortgage, charge or lien on the property of a debtor as a security for repayment of the debt is a secured creditor.
7. According to the definition of the term 'secured creditor' under the Act he must hold a mortgage, charge or lien on the property of the debtor and not of any third party. This definition has been taken from section 168(1) of the English Bankruptcy Act (46 and 47, Victoria 'C' 52). Mortgage is understood in the same manner as defined in section 58 of the Transfer of Property Act and charge as defined in section 100 of the same Act. The mortgage is a form of transfer while charge does not have this attribute (Royzaddi v. Krithartha Nath) 33 Calcutta. The word 'lien' is nearer to charge and refers to both movable and immovable property. Charge as defined in section 100 is confined to immovable property. The pledge is to be understood as defined in the Contract Ad. Delivery of goods as security for repayment of loan or performance of promise is called pledge (section 172).
The delivery of the article actual or constructive is the main ingredient of pledge. The pawnee has a right to retain the goods pledged, inter alia, for payment of debt (section 173). In case of default in payment of debt the pawnee after giving reasonable notice of sale to the pawnor, can sell the pledged articles (section 176). A banker has a general lien over the goods which have been pledged as security-for repayment of loan (section 172). The appellant was, therefore, a secured creditor.
8. The question arises whether a creditor holding a pledge on the property of a debtor as security for payment of debt is entitled to priority over other debts and claims. Section 61 of the Act specified the debts which will have priority over other debts in distribution of the property of the insolvent. Section 0 reads as follows:-- "61--(1) In the distribution of the property of the insolvent, there shall be paid in priority to all other debts--
(a) all debts due to the (Government) or to any local authority; and
(b) all salary or wages not exceeding twenty rupees in all, of any clerk, servant or labourer in respect of services rendered to the insolvent during four months before the date of the presentation of the petition.
(2) The debts specified in subsection (1) shall rank equally between themselves and shall be paid in full, unless the property of the insolvent is insufficient to meet them, in which case they shall abate in equal proportion between themselves.
(3) Subject to the retention of such sums as may be necessary for the expenses of administration or otherwise, the debts specified in subsection (1) shall be discharged forthwith in so far as the property of the insolvent is sufficient to meet them.
(4) In the case of partners, the partnership property shall be applicable in the first instance in payment of the partnership debts, and the separate property of each partner shall be applicable in the first instance in payment of his separate debts. Where there is a surplus of the separate property of the partners, it shall be dealt with as part of the partnership property; and where there is a surplus of the partnership property, it shall be dealt with as part of the respective separate property in proportion to the rights and interests of each partner in the partnership property.
(5) Subject to the provisions of this Act, all debts entered in the schedule shall be paid rateably according to the amounts of such debts respectively and without any preference.
(6) Where there is any surplus after payment of the foregoing debts, it shall be applied in payment of interest from the date on which the debtor is adjudged an insolvent at the rate of six percentum per annum on all debts entered in the schedule."
It does not give any priority to a secured creditor. Similar provision is G found under section 405 of the Companies Ordinance referred above in which priority has been given to the revenue and taxes of the Government, the I specified payments to be made to the employees and workers but the secured G creditors do not find any place in it.
9. It would not be out of place to mention that in the Act due care has been taken to protect the interest of secured creditors. After an order of adjudication has been made all persons claiming to be creditors of the insolvent are required to prove their respective debts and as provided by section 33 of the Act a schedule of such persons and debts is framed. Section 47 provides procedure for proof of debts by a secured creditor and reads as follows:--- "47-41) Where a secured creditor realises his security, he may prove for the balance due to him, after deducting the net amount realised.
(2) Where a secured creditor relinquishes his security for the general benefit of the creditors, he may prove for his whole debt.
(3) Where a secured creditor does not either realise or relinquish his security, he shall before being entitled to have his debt entered in the schedule, state in his proof the particulars of his security and the value at which he assessees it; and shall be entitled to receive a dividend only in respect of the balance due to him after deducing the value so assessed.
(4) Where a security is so valued, the Court may at any time before realization redeem it on payment to the creditor of the assessed value.
(5) Where a creditor after having valued his security, subsequently realises it, the net amount realised shall be submitted for the amount of any valuation previously made by the creditor and shall be treated in all respects as an amended valuation made by the creditor.
(6) Where a secured creditor does not comply with the provisions of this section, he shall be excluded from all share in any dividend."
Section 47 clearly demonstrates that it deals with three situations.
(1) Where the secured creditor realises his security.
(2) Where the secured creditor relinquishes his security for the general benefit of the creditors.
(3) Where the secured creditor does not realize or relinquish his security.
10. In the first situation if the secured creditor realise's his security he will be entitled to prove the debt to the extent of the balance left after satisfaction from the securities. He has, thus, been benefited with the security in full. The second category of secured creditor is that who relinquishes his security for the benefit of the creditors and, therefore, he is entitled to prove his entire debt.
' No credit is given for the security he holds. In the third category falls such a creditor who has neither realised nor relinquished his security. He holds the security intact for satisfaction of his debt.
Before the debt of such a creditor is entered in the schedule he is required to state the particulars of his security and the value at which he assesses it. At the time of distribution of the insolvent properties such a creditor will be entitled to receive dividend in respect of the balance due to him after deducting the value of the security so assessed. A secured creditor if he has not relinquished his security is, thus, provided adjustment of the security and he can make claim in respect of such balance amount of debt which remains unsatisfied after realization of the security.
11. The scheme of the Act is such that a secured creditor cannot claim any preferential treatment in distribution of the assets of the insolvent. He has a right to realise the security or to relinquish as provided by section, 47 of the Act. It is significant to note that under section 28 of the Act on making of an order of adjudication the whole of the property of the insolvent shall vest in Court or in the receiver but subsection (6) provides that "nothing in this section shall affect the power of any secured creditor to realise or otherwise deal with the security in the same manner as he would have been entitled to realise or deal with it if this section had not been passed. A secured creditor as defined, is, therefore, free to deal with his security and to realise it for the repayment of the debt.
The order of adjudication does not affect the position of a secured creditor. See AIR 1923 Allahabad
159. He is at liberty to realise his security in any manner he likes. Thus, as the right of a secured creditor has sufficiently been protected and liberty to deal with the security has been given to him it was not necessary to give any preferential treatment or priority to him in respect of the debt which remains unsatisfied after realization of the security.
12. The learned counsel for the appellant contended that the observation of the learned Single Judge that the pledge is void for non-registration with the Registrar of the Company is not correct.
Section 121 of the Companies Ordinance, 1984, is a complete answer to it. It provides that every mortgage, charge or other interest created after the commencement of the Ordinance by a Company not being a pledge, on any immovable property of the company shall be void against the liquidator and any creditor of the company unless it is registered with the Registrar of Companies in the prescribed manner. Therefore, section 121(1)(e) excludes pledge from the category of mortgage or charge requiring registration. In our view a pledge does not require any registration under section 121 of the Companies Ordinance. However, this does not save the situation as the appellant cannot claim priority on the basis of the pledge which was obtained by it as a security for repayment of the loan. The appeal is, therefore, dismissed.