TMI Blog1998 (12) TMI 477X X X X Extracts X X X X X X X X Extracts X X X X ..... 75, 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 prior to the date of the order of winding up. Apart from these FDRs, the company in various other accounts had small credit balance. The company has during this period utilised 46 FDRs, totalling for a sum of ₹ 9,76,000 by way of security, by pledging the same with the bank for availing of overdraft facility, which facility the bank has sanctioned prior to the filing of the winding up petition in June, 1975. The official liquidator on being appointed liquidator of the company in liquidation had called upon the bank to deliver to him the said FDRs, for which Company Application No. 146 of 1997 had been moved. In the first instance, in response to that petition, the bank has claimed that it has adjusted the amounts payable under FDRs against outstandings of the company under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 FDRs any further. In the wake of this application, Bank of Maharashtra too filed another Company Application No. 205 of 1995 praying for declaration that the official liquidator is not entitled to claim renewal of the FDRs as claimed in its Application No. 185 of 1995 and also urged that renewal/encashment in respect of the said FDRs from time to time is irrelevant and unnecessary at this stage until Company Application No. 36 of 1978 is decided. All the three aforesaid applications were decided by the learned company judge by his common order dated May 8, 1996, by which Company Application No. 36 of 1978 and Company Application No. 205 of 1995 filed by the bank were rejected and Company Application No. 185 of 1995 filed by the official liquidator has been allowed. Out of the said o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther 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 branch and in the Thakurduar branch, the company was having credit balances of ₹ 2,608.19 and ₹ 988.56, respectively. Apart from aforesaid current accounts and 46 FDRs with which we shall presently deal, the company had four FDRs in its name, with the Thakurduar branch issued on September 15, 1975, June 23, 1976, June 23, 1976, and July 12, 1976, in the sum of ₹ 2,500, ₹ 1,500, ₹ 5,000 and ₹ 1,500, respectively, for a period of one year each. The company has availed of overdraft facility against the security of fixed deposit receipts for which necessary letters of pledge had been given to the bank by the company (in liquidation). The progressive dealing with the bank by the company (in liquidation) in connection with overdraft account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1956. Though the court has also noticed that: It would become clear that, for the first time, the overdraft facility came to be enjoyed by the company in June, 1975. This was, of course, prior to the presentation of the winding up petition which came to be presented 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 aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act of 1920, is not entitled to recover the same without set off of the two accounts also did not find favour with the learned company judge, because of the provisions of sections 531 and 536 of the Companies Act. At the outset we may notice from the schedule of deposits and debts 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not validated will result in losing its character as security and in that event the bank will not be entitled to exercise its right of enforcing a charge or realising its security remaining outside winding up proceedings. However, in losing that status as a security, the amount payable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y winding up it is achieved by section 227. Section 227 of the Companies Act in England corresponds to section 441 of the Indian Companies Act, 1956. The statute in principle applies only to the disposition made by the company of its assets. Section 536(2) cannot have any application to indict 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 itse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were deposited in FDR to earn interest over it for the unutilised period and monies were withdrawn from time to time under the overdraft account by paying interest on such withdrawals to keep the accounts separate. It has been observed in the judgment under appeal that merely because this amount had gone 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 proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability to pay or receive is reduced to one balance. Section 529 of the Companies Act envisages that in the winding up of an insolvent company, the same rule shall prevail and will be observed with regard to debts provable, the valuation of annuities and future and contingent liabilities; and the respective 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set off one claim against another claim existing between them on the date of adjudication. The statutory provision has emanated from the equitable doctrine of right to set off not only with the object to avoid cross actions but to do substantial justice. It envisages that an account shall be taken of what is due from the 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 j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 229 of the Indian Companies Act, 1913, read with section 46 of the Provincial Insolvency Act, where a creditor who in addition to being a creditor simpliciter has obtained a surety was held to have right of set off and a contention to the contrary that because of the surety agreement, the claim of set off cannot 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong with the promissory note he also handed over to the bank the fixed deposit receipt with an endorsement of discharge thereon and the delivery and instruction letters containing a direction that on maturity the proceeds of the deposit receipt should be credited to A's loan account. On insolvency of the bank before 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m by way of set off if suits had been filed before liquidation. The question is whether that right is destroyed by the companies going into liquidation? I do not think so, as there is no provision in the Act which takes away that right. Law in England too has been alike. Section 31 of the Bankruptcy Act, 1914, in England 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 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the realisation of the company's assets for the debt that the company owes to it as unsecured creditor standing in the queue. It was urged that is so because the transaction of overdraft is void under section 536(2) of the Act of 1956. Under the scheme of the Act, if we examine the two transactions on the touchstone of 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31. (1) Any transfer of property, movable or immovable, delivery of goods, payment, execution or other act relating to property made, taken or done by or against a company within six months before the commencement of its winding up which, had it been made, taken or done by or against an individual within three months before the 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 me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it was done with a view to give him preferential treatment. For the purpose of assuming a transaction as a fraudulent preference, the discharge of a debt within the stipulated period, namely six months before the presentation of the petition for winding up is to be considered and what is to be considered is not the incurring of the 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... standing whether resulting in the company becoming ultimately a creditor or a debtor. There shall remain between the same parties only one status. If the company ultimately ends up the debtor, vis-a-vis the claimant, he will be entitled to prove only the debt to that extent. If on the other hand on balance the claimant becomes the debtor of the company (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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the facts and circumstances of the present case, the transactions of creating security since July, 1975, in favour of the bank need be validated. The question becomes academic. The contention of learned counsel for the appellant that it is otherwise entitled to realise from the FDRs available with it because of the lien it holds in respect of section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on either side respectively. This leaves no room for doubt that requirement of section 46 to set off of claims arising out of mutual dealings is a requirement at the time the claim is made by or against the company (in liquidation). Set off being the mandatory requirement enquiry takes us to section 34 of the Provincial Insolvency Act which is applicable in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be also the line for defining what cross claims are to be set off in the case of a creditor whose set off is not stopped at an earlier date by notice of an act of bankruptcy. If the line were to be drawn at different times for the two purposes of proof and set off the result might be unjust. Once we reach this conclusion that the bank in question is entitled 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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