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1998 (12) TMI 477

AND CIVIL APPLICATION NO. 28 TO 30 OF 1996 - Dated:- 2-12-1998 - RAJESH BALIA AND A.R. DAVE, JJ. H.V. Chhatrapati for the Appellant. Rajni H. Mehta for the Respondent. JUDGMENT As will be presently noticed all the three appeals are interconnected relating to the same transaction between the company in liquidation and the Bank of Maharashtra and the end reliefs claimed are integrally interdependent, we have heard and propose to decide them simultaneously by a common order. A winding up order was made on August 17, 1977 See Navjivan Trading Finance P. Ltd., In re: Registrar of Companies v. Navjivan Trading Finance P. Ltd. [1978] 48 Comp. Cas. 402 (Guj.), in Company Petition No. 59 of 1975 for winding up of Navjivan Trading Finance Private Limited, which petition was filed on July 8, 1975, by some creditors of the company. The Bank of Maharashtra is the company's banker with whom the company has multiple dealings. It had four different accounts with Girgaon branch numbered as 1, 2, 3 and 4. In account No. 3 of the Girgaon branch, the company has availed of facilities of overdraft. The company had taken out as many as 50 FDRs in the period between March, 1975, and July, 1976, all p .....

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n the name of the official liquidator in his capacity as a receiver. The official liquidator was directed to hold the FDRs as receiver, subject to decision of the court in regard to bank's claim and/or lien which is the subject-matter of Company Application No. 36 of 1978. We are told that all these FDRs renewed in pursuance of the aforesaid order are in the custody of the Registrar of this court on behalf of the receiver. Company Application No. 185 of 1995 was moved by the official liquidator seeking a direction to the bank to renew the FDRs which have been issued in terms of the order made in Company Application No. 146 of 1977 and are lying in the custody of the Registrar of the High Court. The bank raised objection to this prayer by contending that the claim against the bank for the principal amount or interest amount on such deposits has already become time-barred because no claim or demand was made upon the bank within three years from the date of maturity of the deposits since the last renewals after the orders in Company Application No. 146 of 1977. It also relied on its plea under Application No. 36 of 1978 to deny its responsibility and obligation to renew the said F .....

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at (hereinafter called the Act of 1920). While deciding Company Application No. 146 of 1977, the court issued directions to deliver all the FDRs mentioned in the order on Application No. 146 of 1977 after renewing the same for a period of one year to the official liquidator. The other facts about which there is no dispute and as has been noticed by the learned company judge, are that the company in liquidation was carrying on the business of chit funds. For the purpose of its business, it had four current accounts with the Bank of Maharashtra, Girgaon branch known as accounts Nos. 1, 2, 3 and 4. In respect of account No. 3 for the first time an overdraft facility was sanctioned in June, 1975, and overdraft facility was availed of from June, 1975, onwards. From the other three accounts Nos. 1, 2 and 4, the total amount standing in credit of the company in liquidation was transferred to account No. 3 on or about August 18, 1997, and those other three accounts were closed. Apart from the aforesaid dealings with the Girgaon branch of the bank the company in liquidation had a current account at the Chembur branch of the bank, having a credit balance of ₹ 6,412.19. In the Fort bran .....

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by the Registrar of Companies on July 8, 1975." Another important fact which was noticed by the learned company judge was that learned counsel for the bank had urged that all the overdraft money has been paid to various members of the company and, therefore, it can be said that the overdraft facility was obtained and the amounts were received with a view to discharge the liability qua certain members of the company. This fact was not found to be erroneous. However, it is observed that: "Merely because this amount had gone to some selected members of the company, it cannot be said, only on that basis that, the entire transaction was for the purpose of keeping the company going." It was further noticed that: "The first overdraft facility was enjoyed by the company in June, 1975, i.e., a month or so, before the presentation of the winding up petition. The later overdrafts have been taken only after the commencement of the winding up proceedings. It would not lie in the mouth of the company to say that they were not aware of the commencement of the winding up proceedings before the necessary sanction was given. There was a show-cause notice given to the company on .....

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ts against the securities and deposits as has been detailed in the judgment under appeal, which we have reproduced hereinabove, that until June, 1975, the FDRs for amounts of ₹ 3,75,000 had been pledged as security with the bank for providing the company with facilities of overdrafts, withdrawals, though the debit balance until that date was only ₹ 36,584.66. This was the situation prior to the date of presentation of winding up petition on July 7, 1975, that is to say, the pledging of fixed deposit receipts as a security resulting in disposition of property in the FDRs in favour of the bank took place prior to the commencement of the winding up proceedings and cannot be affected by the provisions of section 536(2) which reads as under: "536. (2) In the case of a winding up by or subject to the supervision of the court, any disposition of the property (including actionable claims) of the company and any transfer of shares in the company or alteration in the status of its members, made after the commencement of the winding up, shall, unless the court otherwise directs, be void." The language is plain in itself in declaring that only disposition of the property .....

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in respect of FDRs by the bank to the company would not lose its character as a debt payable by the bank to the company. If, it is a debt payable by the bank to the company, the question which immediately calls for consideration is whether the same is liable to be set off under section 46 of the Act of 1920, read with section 529 of the Companies Act against the debt recoverable by the bank from the company. While the question, whether a disposition which is void under section 536(2) is to be validated calls for consideration that the fundamental object of winding up a company under the supervision of the court is that the assets of the company should be made available for distribution pari passu among the creditors of the company and that no creditor should obtain advantage over its other creditors. At the same time, it is also to be kept in view that mere presentation of a winding up petition notwithstanding the combined reading of section 441, which dates the commencement of winding up proceedings with effect from the date of presentation of the petition for winding up and section 536(2) which declares the disposition by the company after the commencement of winding up proceedin .....

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transactions of borrowings made by a company ordered to be wound up which have taken place since the commencement of winding up proceedings so as to keep it out of consideration while considering the assets available for free distribution. The borrowings which have been made are liabilities to be discharged by the company for discharge of which its assets are available as per the provisions of the Companies Act. In this connection, we find that the learned company judge has started with the assumption that all overdrafts came to be granted and the debits came to be made only after July, 1975. These are the transactions which would fall within the purview of section 536(2) of the Companies Act, 1956. With great respect, the premise does not appear to be correct. The disposition of assets by the company has been made the subject-matter of section 536(2). The receipt of overdrafts by itself is not a disposition of the company's assets by the company in liquidation whose winding up proceedings have commenced. The act of granting loan is the act of the bank. The company's action which comes under section 536(2) is encumbering the company's assets for acquiring such loans. Th .....

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to some selected persons of the company, it cannot be said only on that basis that the entire transaction was for the purpose of keeping the company going. This observation at least goes to show that distribution of the amount withdrawn by way of overdraft amongst its subscribers is not a fact in issue. For not accepting such disbursement in the ordinary course of business, reference has been made to the observation made in the order of winding up of the company that "huge amounts have gone to the directors and their associates by way of loans". However, there is no finding that the amounts in question were utilised for giving loans to directors or their relatives. The finding in the order of winding up has been based on accounts prior to the commencement of winding up proceedings whereas the overdrafts which fell for consideration were after the commencement of the winding up proceedings. We are concerned here with the transactions of deposits with the bank and withdrawals from the bank from March, 1975, to January, 1976, a period much after the period which was taken into consideration while making the winding up order. It has been accepted that the company is in recei .....

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rights of secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent. This provision clearly brings into operation the provisions of the relevant insolvency law governing the individuals in the State in which the company is registered regarding debts provable and the rights of secured and unsecured creditors under such insolvency law. In the State of Gujarat with which we are concerned, the Provincial Insolvency Act, 1920, applies. Section 34 of the Provincial Insolvency Act, 1920, speaks about debts provable under the Act. It in terms states that all debts and liabilities, present or future, certain or contingent, to which the debtor is subject when he is adjudged an insolvent, or to which he may become subject before his discharge by reason of any obligation incurred before the date of such adjudication, shall be deemed to be debts provable under this Act. The date of adjudication in the present case is August 17, 1977. The amount of overdraft to which extent the bank is creditor of the company upto January, 1976, has been found to be ₹ 10,04,458.96. This is a date prior to that .....

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one party to the other in respect of such mutual dealings and the sum due from the one party shall be set off against any sum due from the other party and the balance of the account, and no more shall be claimed or paid on either side respectively. The provision has been expressed in most emphatic mandate, without leaving it to the discretion of any one. To borrow the words of Lord Denning in Rolls Razor Ltd. v. Cox [1967] 1 QB 552 (CA) the parties cannot contract out of the statute. Where there are mutual dealings, the statute says that "the balance of the account, and no more shall be claimed or paid on either side. That is an absolute statutory rule which must be observed". A Division Bench of the Lahore High Court explained the principle in Radha Kishen v. Ganga Ram Radha Kishen, AIR 1914 Lahore 317. A right of set off is a doctrine of equitable jurisdiction and its object is not merely to avoid cross actions, but also to do substantial justice. Therefore, this doctrine would apply to prevent the great injustice which would arise if a person who is the insolvent's creditor on one account and his debtor on the other is compelled to pay 16 annas in the rupee on what .....

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annot be entertained was negated, The court said (headnote): "The privileges and rights which are given in section 46, Provincial Insolvency Act, which applies to proceedings under section 229 of the Companies Act, are based upon equity and fair dealing. It is recognised that it would be very harsh if the official assignee or the official liquidator of a company could demand full money, due by a debtor and at the same time that person being a creditor for an equal or a larger sum of the company must be content with a dividend dependent on the distribution which can be made from the assets." Referring to the provisions of Order 8, rule 6 of the Civil Procedure Code, the court observed that the right of set off is not high because the creditor has obtained surety for repayment of debt due to him (page 91 of 10 Comp. Cas.). "The provisions of the above rule are in no way referable to matters arising in insolvency or liquidation and in my view no help is obtained from that rule. . . . .In my view that cannot be. There being moneys which can be set off, this right is not lost when a surety is obtained in respect of the debtor's debt to the company." The principle .....

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the maturity of the fixed deposit, A claimed set off in respect of the proceeds of the fixed deposit against his loan under the promissory note. The contention was raised that because the loan had become a secured loan, because of the hypothecation, it was not eligible for set off. The court said (headnote of AIR): "The fact that A handed over to the bank the FDR with an endorsement of discharge thereon, a delivery letter and an instruction letter, amounted to no more than the creation of a charge on the amount covered by the fixed deposit or a hypothecation of that fund. A debt which would have been unsecured, if the promissory note alone was in existence, became a secured debt as a result of that transaction. The existence of such a security did not affect the question of a set off." Pausing here, the similarity with the present case may be noticed with the facts before the Orissa as well as Kerala High Courts. The effect of section 536(2) can be no more than that a disposition of the FDR by way of creating hypothecation would fail. None the less, it would not alter the nature of the FDR with the bank from an actionable claim owned by the company or a debt owed by the b .....

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gland is a provision similar to section 46 which we have under the Act of 1920. Considering that provision in City Life Assurance Company Limited., In re [1925] 1 All ER 453 (CA), Pollock M.R. said (page 571 of 51 Comp. Cas.): "It is to be observed that section 31 of the Bankruptcy Act, 1914, is definite in its terms that where there is a mutual credit, mutual debt or other mutual dealings, the sums are to be set off and the balance of the account and no more shall be claimed or paid on either side respectively. It is not merely permissive, it is a direct statutory enactment that the balance only is to be claimed in bankruptcy." What has been stated with reference to bankruptcy law in England which we have referred to above has been approved by the Supreme Court in Official Liquidator v. Smt. V. Lakshmikutty [1981] 51 Comp. Cas. 566 ; AIR 1981 SC 1483 while affirming the decision of the Karnataka High Court [1981] 51 Comp. Cas. 567. The court quoted with approval, the opinion of Pollock M. R. referred to above in City Life Assurance Company Limited., In re [1925] 1 All ER 453 (CA), and said (page 570): "It is true that section 530 provides for preferential payments, .....

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f section 536, we have noticed above that so far as incurring liability or securing loans are concerned that by itself does not amount to disposition of the company's assets. If that were so, the contention would be that the loan transaction being void, no amount is payable. This result on the face of it cannot be accepted. Even that is not the suggestion that no amount is payable by the company to the bank. The fact that the request is to stand in the queue, is acceptance of the liability to pay. The direct consequence of the argument to raise the plea of section 536 with reference to overdrafts is even to negate the existence of such a debt. It cannot be accepted that the debt is existing for rateable distribution, but is non-existent for set off under section 46 notwithstanding the statutory mandate. For the sake of argument even if the transaction is assumed to be considered void, under the provisions of the Contract Act, any consideration under a void contract would be returnable by the company (in liquidation) to the person from whom such consideration has flown becoming a debt payable by it. This is not to say that section 536(2) applies to the loans procured or liabilit .....

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presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being would up, be deemed a fraudulent preference of its creditors and be invalid accordingly: Provided that, in relation to things made, taken or done before the commencement of this Act, this sub-section shall have effect with the substitution, for the reference to six months, of a reference to three months. (2) For the purposes of sub-section (1), the presentation of a petition for winding up in the case of a winding up by or subject to the supervision of the court, and the passing of a resolution for winding up in the case of a voluntary winding up, shall be deemed to correspond to the act of insolvency in the case of an individual". Without anything more a fraudulent preference means discharge of an existing liability or an act on the part of the insolvent which may result in a discharge of one liability over others to give the former a favourable treatment, which under the provisions of insolvency law is considered a fraudulent preference. A fraudulent preference has a definite connotation. Section 531 clea .....

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e debt, but the payments made to discharge that debt. Mere discharge of debt resulting in preference will not make it fraudulent. Such discharge of debt must be coupled with intent to give such creditor a preferential treatment. We have already assumed the transactions of pledging the FDRs for the present purpose to be void under section 536(2). Independent of it, we have not been shown that any debt has been discharged by the company whether six months before the filing of the petition or after the filing of the petition in any manner whatsoever. It is not the case, either that a debt was pre-existing and the deposits with the bank were merely a camouflage to discharge those existing debts with a view to raise the plea of set off in case winding up is ordered, but in fact it constituted payment of debt. In fact this intention on the part of the company (in liquidation) to make a preferential payment was neither raised nor argued at any stage of the proceedings. What really has been contended is that if the set off under section 46 of the Act 1920, is allowed, it would result in fraudulent preference. This contention in our opinion, must fail on the ground that the provision for se .....

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pany (in liquidation), the insolvent or the company shall have a right to recover only that much amount which is outstanding in balance. Howsoever wide a meaning may be given to the expression "other act relating to property" under section 531 of the Companies Act, it must have reference to discharge of a debt and not with reference to right of the parties to claim set off in respect of existing claims against each other. Mere exercise of that right cannot amount to fraudulent preference within the meaning of section 531 or section 531A read with section 54 of the Act of 1920. The question of fraudulent preference also cannot depend on the fact whether the demand is made by the creditor of the company (in liquidation) or a demand is first made by the company (in liquidation) in respect of its claim and the set off is pleaded by the company's debtor in respect of amounts due from the company to it. In the present circumstances, obviously, had the bank demanded for payment of sum due to it under overdraft, the company (in liquidation) was entitled to claim set off against the amount due under the FDRs notwithstanding that the same were not hypothecated as security for d .....

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ection 171 is only stated to be rejected. A plain reading of section 171 of the Indian Contract Act goes to show that it applies only in the case of goods bailed to bankers, wharfingers, etc., but does not apply to FDRs which are actionable claims and cannot in any sense be termed as goods, bailed to the company, within the meaning of section 171 of the Contract Act. As a result, this appeal is allowed. The order under appeal is set aside, and we hold that in terms of section 46 of the Provincial Insolvency Act, 1920, read with section 529 of the Indian Companies Act, 1956, the amount payable by the appellant-bank to the company (in liquidation) on various accounts including under various FDRs referred to above which is a debt owed by it to the company (in liquidation) has to be set off towards repayment of monies due by the company (in liquidation) to the bank under the overdraft account which is a debt owed by the company (in liquidation) to the bank as on the date of winding-up order, which is a debt provable under section 529 of the Act of 1956, read with section 34 of the Act of 1920. The company (in liquidation) shall be liable to pay or receive only the balance amounts due a .....

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matter of debts provable in winding-up proceedings as per section 529 of the Companies Act. Section 34 reads as under: "34. Debts provable under the Act.-(1) Debts which have been excluded from the schedule on the ground that their value is incapable of being fairly estimated and demands in the nature of unliquidated damages arising otherwise than by reason of a contract or a breach of trust shall not be provable under this Act. (2) Save as provided by sub-section (1), all debts and liabilities, present or future, certain or contingent, to which the debtor is subject when he is adjudged an insolvent, or to which he may become subject before his discharge by reason of any obligation incurred before the date of such adjudication, shall be deemed to be debts provable under this Act." The perusal of the aforesaid provision shows that the crucial date with reference to which the debt is to be proved is the date of adjudication of an individual as insolvent or the order of winding-up in the case of a company. "All debts to which the debtor is subject when he is adjudged an insolvent" are key words as to the date with reference to which the debt is to be proved. The f .....

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tled to set off, its claim in the overdraft account against the amounts payable under the FDRs to the company in liquidation the further conclusion is irresistible, that the claim against the company in liquidation must be set off against dues from the company as on the date of the winding-up order and its dealings in future with effect from that date depends on whether any amount is found payable to the company in liquidation by the bank or vice versa, and it shall be confined to such balance only. That being the position, and it being nobody's case that as on the date of winding-up any of the claims were barred by time, the contention raised on behalf of the bank that the debt payable by it under FDRs has become barred by time subsequently is wholly irrelevant and does not arise for consideration at all. The question would only be that in case on such set off anything is found payable by the bank to the company, the bank may be called upon to pay that sum to the official liquidator. That will arise only when the question of set off is determined and the balance is found out. The question of renewal of FDR or making any demand on the bank in respect of their encashment at this .....

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