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TMI Blog1941 (9) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Saharanpur Branch of the Bank for a thousand rupees in his own name and had, in effect, charged that deposit account of his own in favour of his employer, L. Revti Raman, as security to answer for his good behaviour. That is made clear if one looks at the pass book of this account in the name of the cashier. A note is found there in these words: "This account is pledged with L. Revti Raman Saheb ..as security and the principal deposit will be paid to the depositor on his written permission ." In June 1939 some re-organization took place in the Bank among its staff with the effect that the cashier ceased to be employed by L. Revti Raman in connection with the Bank's affairs. I am told that L. Revti Raman was himself the treasurer of the Bank and that at this point his own employment as treasurer came to an end with the result that he ceased to employ the cashier. On August 23, 1939, the cashier, that is L. Ram Lal, applied to the Bank's agent at Saharanpur for the post of cashier at the Saharanpur Branch directly under the Bank and in that application he offered to make a security deposit of a thousand rupees. On November 3, 1939, L. Ram Lal was appointed cashi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our of L. Revti Raman was deleted in red ink both in the ledger folio and in the pass book and instead the words "security deposit" were added to the account in both places. Then, on December 30, 1939, the whole account was closed and we find an entry in the ledger "account transferred to H.O. A/C", that is, to the Head Office account. I do not doubt that the effect of these transactions, in form at least, was that the Bank had taken over the cashier's personal deposit account as the security which it had required from him on his appointment as cashier. The question at issue in this case is what was the legal effect of the transaction in the form in which it took place. Before dealing with the law, it is necessary to analyse the transaction a little further. At the instant of time at which L. Revti Raman released his own security over the fund, it no doubt reverted to the cashier as his own unencumbered property. At that instant of time the relationship between him and the Bank was one simply of banker and customer, or, in other words, of debtor and creditor. He was, in short, a mere depositor in the Bank. The effect of what followed was that the Bank took the cashier's own perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n I have been discussing took place after the date of the commencement of the winding up, but before the date of the winding-up order. In those circumstances, the cashier preferred a claim to the Official Liquidator to be paid the amount of his so called security deposit in full upon the footing that it was a trust fund and, as such, never formed part of the assets of the Bank available for distribution among the creditors. The Official Liquidator, however, took the view that the whole transaction was void under section 227 (2) of the Indian Companies Act as a disposition by the Company of its property made after the commencement of the winding-up. If that is true, then, unless the Court should think fit otherwise to order, the transaction will be wholly void ab initio and the result would be that the money in question will still be standing as an ordinary deposit account and the cashier will still be an ordinary unsecured creditor in respect of it. That is what the Official Liquidator has decided. This is a matter which is governed by section 227 (2) of the Indian Companies Act, I have no doubt. I have already at some length set out the details of the transaction. It see ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udicial discretion the principle may be departed from. It is, nevertheless, important that the principle should be borne in mind. It has also to be noticed that in this particular case it is impossible to believe and indeed, it has not been alleged that the appellant entered into the transaction in ignorance of the fact that a winding-up petition had been presented. We start, therefore, apart from the question of principle, with the circumstance that the cashier must be taken to have known at all material times that a winding-up petition had been presented and, on well known principles, he must be taken to have known that any disposition by the Company of its property was liable to be void. There is no suggestion from first to last that there was any ulterior motive in the mind of the appellant and I think it is fair to say that no question of any conscious fraud on the creditors has been raised in the case. It is simply a matter in which one or two innocent parties have to suffer, the appellant on the one hand or the general body of creditors on the other. Nor, in my view, does any question of fraudulent preference arise, because the whole foundation of the transaction is admitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, and what is the ordinary course afterwards. Before a petition is presented, it is in the ordinary course of business for a Company to pay all its debts, and incidentally to give security to its Bankers or any overdraft or loan it may arrange. But after a petition is presented, the situation is different. Prima facie all debts will have to be paid pari passu. There fore it is no longer in the ordinary course of business to pay one creditor in full to the detriment of his fellow creditors .." That does not, of course, refer to the conscious payment of one creditor to the detriment of his fellow creditors. That is covered by the fraudulent preference doctrines of insolvency law. What I venture to think the learned Chief Justice meant was that, even in carrying on its ordinary business in the interval between the presentation of a petition and the making of a winding-up order, the Company must never forget that the principle of pari passu distribution among the creditors must prevail in the absence of most exceptional circumstances. And finally at page 728 the learned Chief Justice applied a test. He said : "The real point then to my mind is to determine what was rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and dissipation of the property of a company in extremis. But where a company actually trading, which it is the interest of every one to preserve and ultimately to sell, as a going concern, is made the object of a winding-up petition, which may fail or may succeed, if it were to be supposed that transactions in the ordinary course of its current trade bona fide entered into and completed, would be avoided, and would not, in the discretion given to the Court, be maintained, the result would be that the presentation of a petition groundless or well-founded, would ipso facto paralyse the trade of the company, and great injury, without any counterbalance of advantage, would be done to those interested in the assets of the company." Mr. Justice Romer in the case before him applied that principle and he decided that the borrowing of the money was, in effect, a matter both of necessity and of prudence and that, in the result, it had been justified by the eventual sale of the business as a going concern. Now, I have to try to apply those principles to this case and I shall begin by applying that test which the learned Chief Justice of the Bombay High Court himself applied. I b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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