1941 (9) TMI 7 - HC - Companies Law

Summary

Issues Involved:
1. Employment and Security Deposit Arrangement
2. Legal Effect of the Transaction
3. Applicability of Section 227(2) of the Indian Companies Act
4. Discretionary Powers of the Court under Section 227(2)
5. Fundamental Principles of Insolvency Administration
6. Judicial Precedents and Principles

Issue-wise Detailed Analysis:

1. Employment and Security Deposit Arrangement:
The appellant, referred to as the "cashier," had been employed at the Saharanpur Branch of the Benares Bank Limited, initially as an employee of L. Revti Raman. The cashier maintained a personal deposit account of a thousand rupees, pledged as security for his good behavior. In June 1939, due to reorganization, the cashier ceased to be employed by L. Revti Raman and applied directly to the Bank for the post of cashier, offering a security deposit of a thousand rupees. Upon his appointment on November 3, 1939, the cashier obtained a release of his security from L. Revti Raman and transferred the deposit account to the Bank as a security deposit.

2. Legal Effect of the Transaction:
The main question was the legal effect of the transaction where the cashier's personal deposit account was converted into a security deposit account held by the Bank. The transaction involved a notional repayment by the Bank to the cashier and an immediate re-deposit by the cashier as security. The relationship between the Bank and the cashier changed from that of debtor and creditor to that of a beneficiary in relation to a trust fund. This transaction was attacked as it took place after the commencement of the winding-up but before the winding-up order.

3. Applicability of Section 227(2) of the Indian Companies Act:
The Official Liquidator rejected the cashier's claim, considering the transaction void under Section 227(2) of the Indian Companies Act, which states that any disposition of the company's property made after the commencement of the winding-up is void unless the court orders otherwise. The transaction was deemed a "disposition" by the Company of its property, altering the rights of the cashier from an unsecured creditor to a beneficiary of a trust fund.

4. Discretionary Powers of the Court under Section 227(2):
Section 227(2) provides the court with discretionary powers to validate a disposition made after the commencement of the winding-up. The court had to decide whether to exercise its discretion in favor of the appellant. The fundamental principle in insolvency administration is the pari passu distribution of assets among creditors, ensuring no creditor gains an advantage over others. The court considered whether it would have sanctioned the transaction at the time, knowing that the winding-up petition was pending and the creditors would not be paid in full.

5. Fundamental Principles of Insolvency Administration:
The court emphasized the fundamental principle of pari passu distribution among creditors in insolvency administration. The appellant was aware of the winding-up petition, and the transaction was not entered into with any fraudulent intent. However, the principle that no creditor should gain an undue advantage over others had to be maintained. The court found no exceptional circumstances to justify departing from this principle.

6. Judicial Precedents and Principles:
The court referred to several cases, including Tulsidas Jasraj v. The Industrial Bank of Western India, The Official Liquidators, Gorakhpur Electric Supply Company Limited v. Siemens (India) Limited, and In re Park, Ward & Company Limited. These cases highlighted the principles governing the court's discretion under Section 227(2). The court applied the test of whether it would have sanctioned the transaction at the time, concluding that it would not have done so, as it would result in an undue advantage to the appellant over other creditors.

Conclusion:
The court concluded that the principle of pari passu distribution among creditors must prevail. The transaction was not one of necessity or aimed at keeping the Company going. It was a standard transaction where the Company chose a cashier who was also an unsecured creditor. The application was dismissed, and the appellant's claim was rejected.