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TMI Blog1965 (12) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... ank and for ancillary reliefs. The appellants are some of the respondents in CMP. No. 144 of 1958, who, as creditors, were found by the learned judge to have been preferred by the bank. Others like the appellants, who were also found by the same judgment to have been similarly preferred, have submitted to the judgment and have not appealed. The references in this judgment to respondents are as in CMP. No. 144 of 1958. A.S. No. 544 of 1961 is by respondents Nos. 9 and 10, A.S. No. 594 of 1961 is by the 2nd respondent, A.S. No. 595 of 1961 is by the 21st respondent and A. S. No. 620 of 1961 is by respondents Nos. 1 and 13. The bank suspended its business on 16th August, 1956. Its winding up was ordered on 19th December, 1956, on a petition presented on 27th August, 1956. The impugned entries all purport to have been made shortly before the bank suspended its business and at a time when it had not enough money to make payments. They are of a general pattern, which may best be described in the words of the learned judge. He says in paragraph 2. "............. the device adopted was to transfer amounts from the accounts of creditors to the accounts of debtors, obviously by some arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken or suffered by any person unable to pay his debts as they become due from his own money in favour of any creditor, with a view of giving that creditor a preference over the other creditors, shall, if such person is adjudged insolvent on a petition presented within three months after the date thereof, be deemed fraudulent and void against the receiver and shall be annulled by the court. " The onus is on the liquidator first to prove that, when the impugned entries were made, the bank was unable to pay its debts as they became due from its own money, that is, was in a state of commercial insolvency. The learned judge considered this topic in several aspects in paragraphs 10 to 15 of his judgment and held in paragraph 16 that " at least from April, 1956, the position of the bank was such that it was unable to pay its debts as they became due from its own money." Nothing that was urged at the bar is sufficient, in our opinion, to shake the reasoning of the learned judge or affect his conclusion. We, therefore, do not propose to dwell at length on the point and shall content ourselves with touching on the main aspects and considering the specific arguments addressed to us by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , not necessarily payment in cash but payment by transfer or adjustment in accounts, or any other act relating to property, may be impugned as a fraudulent preference, if the other conditions are fulfilled. In Nattukottai Bank Ltd., In re [1957] 27 Comp Cas 404 , Balakrishna Ayyar J. treated similar entries in the books as "any other act relating to property", but the learned judge in this case was inclined to regard them as evidencing cash payments though payments were to the account of some other person. We are at one with the learned judge in repelling the contention of the appellants that the debtor, viz ., the firm D. Lakshmana Naik Sons, and the creditors, viz ., the appellants, were one and the same and represented their joint family, the business of the former and the deposits of the latter being of the joint family, not so much for defect of pleading, as for the reason that the factual basis cannot be held to be established on the interested testimony of R. W. 10, the 9th respondent's husband. The appellants cannot succeed in the contention without positively establishing that the deposits were made with joint family funds, not even if they had no private funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht is to realise the security they have provided. The rule is stated thus by Rowlatt on The Law of Principal and Surety, 3rd edition, at page 140. " If a surety, being severally liable, has money in the hands of the creditor, who becomes bankrupt, he is entitled before the trustee sues the principal to apply it in satisfaction of the debt. In In re Travancore National Bank Subsiautry Co. Ltd. AIR. 1935 Rang 201 the surety was severally and jointly liable for the principal debt and so Gentle J. allowed set off, but in In re Travancore National Quilon Bank [1941] 11 Comp Cas 163 ; AIR. 1941 Mad. 622 , in which the surety undertook no personal liability, Venkataramana Rao J. distinguished In re Travancore National Bank Subsidiary Co. Ltd. [1940] 10 Comp Cas 87 ; AIR 1940 Mad. 266 and held that there was no question of mutual dealings and therefore of set-off. Leach J., as he then was, rejected the claim for set-off in Official Assignee v. M. C. Harikrishna Sons AIR 1935 Rang 201 as inadmissible for the same reason, under the corresponding provision in section 47 of the Presidency Towns Insolvency Act applicable to Burma at the time. In Mani Bhushan Malik v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tcy, with knowledge "of insolvency, was held, in the absence of proof of some other dominant motive, to be sufficient to establish a fraudulent preference. As held in In re M. Kushler Ltd. [1943] LR. 1 Ch. 248, the dominant intent to prefer may be proved by circumstantial evidence leading to a necessary inference, like any other fact. The rule is stated thus in Halsbury's Laws of England, 3rd edition, volume 2, page 556, paragraph 1103 : " In order that a transaction may be set aside as a fraudulent preference, it is necessary to prove that it was carried out with the substantial or dominant view of giving the creditor or surety or guarantor for the debt, a preference over the other creditors. This need not be the primary result aimed at; it is sufficient that it should be the object aimed at in bringing about the primary result. If the transaction can properly be referred to some other motive than that of giving a particular creditor or surety a preference over the other creditors, the payment is not fraudulent and void, for it is from the intention of the debtor to act in fraud of the law ( i.e ., to prevent the distribution of the bankrupt's property rateably among all his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bank. On the nth August, 1956, she drew a cheque on the bank in favour of one Sreenivasa Mallan, the 22nd respondent, R. W. 3, for Rs. 2,000. He had an overdraft account with the bank, which at the time was overdrawn to the extent of Rs. 3,256-9-10. The amount of the cheque was credited in the overdraft account and the balance was thereby reduced. The contention was that R. W- 3 was a longstanding client and family friend of the husband of the appellant, an advocate, that he used to borrow money from him and his father from time to time, that on that particular occasion he was in need of funds for repairing his coir factory, that when he took the cheque, to the bank for encashment, the manager told him that they were short of cash and could not pay, that in spite of his protests, the bank credited the amount of the cheque in his account and did not return the cheque' and that finally he was content to effect some small repairs to the factory with other funds. Apart from the inherent improbability of this case, the circumstances are so telling that we cannot but come to the conclusion that the payment of Rs. 2,000 was a fraudulent preference in favour of the appellant. The posi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his arrangement. This was a later development. The broad circumstances surrounding this payment are similar to those discussed above ; in addition there is the fact that the 15th respondent is the nephew of the first respondent. This is not a case, as was urged of the bank, benefiting itself. Even if the bank had demanded payment a few months before, it did not pursue the matter till it came out with this adjustment, just seven days before closure. If the first respondent had undertaken to discharge the debts of his nephew, the payment would have been made long ago. It is unnecessary to deal with the cases cited before us, where, without a dominant intent to prefer, the debtor acted with a motive to secure some benefit for himself or made a transfer under pressure of attachment or other legal proceedings or took an assignment of a debt due to the bank. The impugned transaction was not a payment made under a legal obligation to pay the amount of the cheque under section 31 of the Negotiable Instruments Act as contended, because the payment was made into another account with a dominant intent to prefer as we have found. We agree with the learned judge in holding that the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the 13th respondent, apparently in part performance. The right of the 13th respondent to obtain specific performance of the agreement was thus assured. The overdraft liability apart, nothing precluded the 13th respondent from withdrawing from the savings bank account for payment of the sale consideration. The fact that the fund was transferred to an account headed "Sundry liabilities account", in order that it may be available for effectuating the sale, is not per se evidence of a dominant intent to prefer the 13th respondent, so long as the agreement for sale has not been questioned. The 13th respondent and the bank were justified, in all the circumstances of the case, in having the amount transferred to the account. That amount is still with the bank and can be availed of when the sale deed is executed. We hold that this has not been proved to be a fraudulent preference. A direction to the liquidator to execute the sale deed does not fall within the purview of these proceedings ; the court in charge of liquidation may perhaps have to be moved. In A.S. No. 594 of 1961, preferred by the second respondent, four transfers have been alleged, of Rs. 5,000 from his current account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the rule of res judicata . Exhibit D-18 must be taken to be the decision in a "former suit" within the meaning of Explanation I to section 11 of the Civil Procedure Code, and as interpreted by the Supreme Court in Viswanathan v. Abdul Wajid [1963] 3 SCR. 22 AIR 1963 SC, 1 . We refrain from considering the merits of this appeal. One common question, which has been raised in these appeals, relates to the propriety of the order made by the learned judge, calling upon the respective creditors to make repayments to the liquidator of the amounts paid to them by adjustment with interest. It was contended that under section 531 of the Companies Act, the court has no jurisdiction to order repayment, upon a declaration that the transaction is a fraudulent preference. Our attention was invited to the provision in section 532(2)( a ) of the Companies Act, under which consequential orders may be passed. It was also contended that whatever payment there had been in these cases had been by adjustment and not in cash, and that to call upon the creditors to repay what they had not in fact received would be to penalise or punish them for fraudulent preferences committed by the bank. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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