1998 (12) TMI 477 - HC - Companies Law

Summary

Issues Involved:
1. Validity of pledging Fixed Deposit Receipts (FDRs) as security for overdraft facilities u/s 536(2) of the Companies Act, 1956.
2. Entitlement of the bank to set off amounts payable under FDRs against amounts due under the overdraft account u/s 529 of the Companies Act, 1956, read with section 46 of the Provincial Insolvency Act, 1920.
3. Renewal of FDRs and the impact of limitation on claims against the bank.

Summary of Judgment:

Issue 1: Validity of Pledging FDRs as Security
The court held that the pledging of FDRs amounting to Rs. 3,75,000 as security with the bank prior to the commencement of winding-up proceedings is not affected by section 536(2) of the Companies Act, 1956. The court stated, "A disposition which has come into existence prior to commencement cannot obviously be hit by the inhibition of section 536(2)." However, pledging of FDRs after the commencement of winding-up proceedings is void unless validated by the court. The court observed that the transactions were not bona fide for keeping the company going, thus rejecting the plea for validating the transaction creating a charge in favour of the bank.

Issue 2: Entitlement to Set Off
The court concluded that the bank is entitled to set off the amount payable under the FDRs against the debt recoverable from the company under the overdraft account. The court stated, "Section 46 obviously casts an obligation on the creditor as well as on the insolvent to set off one claim against another claim existing between them on the date of adjudication." The court emphasized that mutual dealings must be set off against each other, and only the balance amount should be claimed or paid. It was held that the statutory provision for set off is mandatory and cannot be contracted out.

Issue 3: Renewal of FDRs and Limitation
The court directed that the bank must prepare an account of balance payable or receivable as on the date of the winding-up order for verification by the official liquidator. The court clarified that the question of limitation does not arise until the claims of set off are determined. The court stated, "The question of renewal of FDR or making any demand on the bank in respect of their encashment at this stage has no bearing on the question of limitation." The court provided a timeline for the bank to prepare and the official liquidator to verify the accounts, with subsequent steps based on the outcome of this verification.

Conclusion:
The appeals were allowed, and the court held that the bank is entitled to set off its dues from the company against the amounts payable under the FDRs. The court directed the preparation and verification of accounts to determine the balance payable or receivable. The question of renewal of FDRs was considered irrelevant to the issue of limitation. The court emphasized the mandatory nature of set off under section 46 of the Provincial Insolvency Act, 1920, read with section 529 of the Companies Act, 1956.