9911796707
TMI Blog1998 (12) TMI 477X X X X Extracts X X X X X X X X Extracts X X X X ..... petition was filed on July 8, 1975, 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 outsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that the claim against the bank 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5, onwards. From the other 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 after the commencement of the winding up proceedings. It would not lie in the mouth of the company to say that they were not aware of the commencement of the winding up proceedings before the necessary sanction was given. There was a show-cause notice given to the company on August 1, 1973. The company, therefore, knew well as to what was in the offing and they should have known and probably, they were knowing that there has been the commencement of the winding up proceedings against them before the competent court. But, this all has been done with a view to see that the overdraft amounts are drawn against the deposits so that their deposits before the bank go on vanishing slowly and gradually. This device cannot be said to be an honest transaction by the company meant for keeping the company going." The court further noticed taking in view the clause in the proforma in the printed form by which the pledge of the FDRs was brought into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings 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 the company and any transfer of shares in the company or alteration in the status of its members, made after the commencement of the winding up, shall, unless the court otherwise directs, be void." The language is plain in itself in declaring that only disposition of the property of the company after the commencement of winding up is to be treated as void unless the court otherwise orders. A disposition which has come into existence prior to commencement cannot obviously be hit by the inhibition of section 536(2). The fact that the overdraft account is continued and amounts have been withdrawn by the company at a later stage would itself not affect a transaction of creating a charge on FDRs as a whole prior to the commencement of winding up proceedings. According to the facts disclosed in the order under appeal FDRs amounting to ₹ 3,75,000 were pledged as security with the bank for any outstanding which the bank may have against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 notwithstanding the combined reading of section 441, which dates the commencement of winding up proceedings with effect from the date of presentation of the petition for winding up and section 536(2) which declares the disposition by the company after the commencement of winding up proceeding's to be void does not stop the company from functioning and continuing with its ordinary business in the regular manner. That being the position, in considering the question whether a transaction has to be validated which is void as a result of operation of section 536(2) read with section 441 of the Companies Act, the courts have evolved certain principles. Normally a transaction which has been bona fide entered into and completed in the ordinary course of trade must be protected. So also where the disposition is made for the purpose of preserving the business as a going concern, the discretion must be exercised in favour of protecting the transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 itself is not a disposition of the company's assets by the company in liquidation whose winding up proceedings have commenced. The act of granting loan is the act of the bank. The company's action which comes under section 536(2) is encumbering the company's assets for acquiring such loans. The act of encumbering the company's assets by holding the company's assets as security for its repayment may amount to disposition of the company's assets. The question has never been raised or even agitated that the company is not liable to pay the amounts due under overdraft account to the bank or that the company has not in fact received the overdrafts. The bank's status as a creditor of the company is not at all at issue whose validity was required to be gone into. The question that arose for consideration is whether for the repayment of such overdrafts which have come into existence after the commencement of winding up proceedings if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 proceedings. We are concerned here with the transactions of deposits with the bank and withdrawals from the bank from March, 1975, to January, 1976, a period much after the period which was taken into consideration while making the winding up order. It has been accepted that the company is in receipt of huge amount of cash from its subscribers. If that be so, that amount finding its way to the company by way of fixed deposit or one or other account cannot but be in the ordinary course of business and so far as that part of it is concerned nothing contrary has been found or alleged. If the deposits in question have come out of receipts from the subscribers, and the amount withdrawn has been held to be distributed among subscribers under the chit fund schemes. We do not see how the observations about the previous conduct of the company with reference to dealing with its funds for disbursing loans to its directors can by itself embellish these transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 date of adjudication in the present case is August 17, 1977. The amount of overdraft to which extent the bank is creditor of the company upto January, 1976, has been found to be ₹ 10,04,458.96. This is a date prior to that on which company was adjudged insolvent to be wound up. Learned counsel for the respondent-company (in liquidation) has urged that as the overdrafts have been taken after the commencement of proceedings, the same cannot be taken into account. Obviously, it cannot be sustained in view of the clear language of section 34 of the Provincial Insolvency Act. The relevant date for a debt provable to exist is the date of adjudication, and not the deemed date of commencement of proceedings under section 441. There is no deeming provision for pre-dating the date of adjudication as an insolvent for the purpose of finding debts provable. Moreover, it not only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatutory 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 jurisdiction and its object is not merely to avoid cross actions, but also to do substantial justice. Therefore, this doctrine would apply to prevent the great injustice which would arise if a person who is the insolvent's creditor on one account and his debtor on the other is compelled to pay 16 annas in the rupee on what he owed to the insolvent and to receive less than that amount on what the insolvent owed him. A Division Bench of the Calcutta High Court in Krishna Chandra Boumich v. Pabna Dhanabhandar Co. Ltd. 1935] 5 Comp. Cas. 462, 465; AIR 1935 Cal 225, while considering section 46 of the Provincial Insolvency Act and corresponding section 47 of the Presidency Towns Insolvency Act, held: "Long before the making of statutory provisions on the subject it was the practice in bankruptcy, where there was a debtor and creditor account between the bankrupt and another person, to take the account between them and to adjust the balance, provided that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 rule are in no way referable to matters arising in insolvency or liquidation and in my view no help is obtained from that rule. . . . .In my view that cannot be. There being moneys which can be set off, this right is not lost when a surety is obtained in respect of the debtor's debt to the company." The principle was succinctly stated in H. Naik v. Panchanon Das [1953] 23 Comp. Cas. 369 ; AIR 1954 Orissa 7. The court was considering what was the meaning of mutual dealings in section 46 of the Provincial Insolvency Act in the context of section 229 of the Companies Act, 1913. Section 229 of the Companies Act, 1913, was the corresponding provision to section 536 of the Companies Act, 1956. The case was very much similar to the one at hand. It was a case where the respondent had a fixed deposit with the bank and the said respondent was also indebted to the bank on an overdraft amount. The bank went into liquidation and the question arose whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sory 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 facts before the Orissa as well as Kerala High Courts. The effect of section 536(2) can be no more than that a disposition of the FDR by way of creating hypothecation would fail. None the less, it would not alter the nature of the FDR with the bank from an actionable claim owned by the company or a debt owed by the bank to the company (in liquidation) to anything else, or the overdraft facility enjoyed by the company (in liquidation) resulting in a debt owed by the company (in liquidation) to the bank. The company stood as a debtor of the bank in respect of the overdraft account and it stood as a creditor in respect of the FDRs, unembellished by the creation of a charge. Section 46 which is a statutory provision governing the case where there are mutual dealings between the insolvent or the company (in liquidation) and its debtor or creditor in the same capacity, the set off must follow. The question again arose before the Karnataka High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ankruptcy." 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 while affirming the decision of the Karnataka High Court [1981] 51 Comp. Cas. 567. The court quoted with approval, the opinion of Pollock M. R. referred to above in City Life Assurance Company Limited., In re [1925] 1 All ER 453 (CA), and said (page 570): "It is true that section 530 provides for preferential payments, but that provision cannot in any way detract from full effect being given to section 529 and in fact the only way in which these two sections can be reconciled is by reading them together so as to provide that whenever any creditor seeks to prove his debt against the company in liquidation, the rule enacted in section 46 of the Provincial Insolvency Act, should apply and only that amount which is ultimately found due from him at the foot of the account in respect of mutual dealings should be recoverable from him and not that the amount due from him should be recovered fully while the amount due to him from the company in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assumed to be considered void, under the provisions of the Contract Act, any consideration under a void contract would be returnable by the company (in liquidation) to the person from whom such consideration has flown becoming a debt payable by it. This is not to say that section 536(2) applies to the loans procured or liabilities incurred by the company between the date of commencement of proceedings and the date of adjudication. To accept this part of the consequence would amount to saying that with effect from the date of presentation of a winding up petition, the company is precluded from carrying on its regular activities and is absolved from the liabilities arising in the course of transacting such business as well. So far as depositing the company's funds with the bank is concerned, by itself, the deposit does not amount to disposition of the company's assets thereby creating any interest in such assets in a third party. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision 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 means discharge of an existing liability or an act on the part of the insolvent which may result in a discharge of one liability over others to give the former a favourable treatment, which under the provisions of insolvency law is considered a fraudulent preference. A fraudulent preference has a definite connotation. Section 531 clearly envisages that what shall be treated as fraudulent preference in the case of an individual adjudged as insolvent under the insolvency law applicable to him shall be treated as a fraudulent preference of its creditors under the Companies Act also. Section 54 of the Act of 1920, provides what is to be considered fraudulent preference. Section 54 of the Provincial Insolvency Act reads as under: "54. Avoidance of preference in certain cases.-(1) Every transfer of property, every payment made, every obligation incurred, and every judicial proceeding taken or suffered by any person unable to pay his debts as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 company (in liquidation) to make a preferential payment was neither raised nor argued at any stage of the proceedings. What really has been contended is that if the set off under section 46 of the Act 1920, is allowed, it would result in fraudulent preference. This contention in our opinion, must fail on the ground that the provision for set off is a statutory provision and it has been enacted with the object which we have already discussed above and the provision which has been found to have a mandatory character in it that in respect of a person who stands vis-a-vis the company as a creditor and also as a debtor, only the balance amount should be taken into consideration and nothing more. A result which flows from a statutory provision in our opinion can never be attributed as an intended act of the insolvent which can be branded as a fraudulent preference. In giving effect to a provision of law, the intention of the company (in liquidation) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dulent 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 company's debtor in respect of amounts due from the company to it. In the present circumstances, obviously, had the bank demanded for payment of sum due to it under overdraft, the company (in liquidation) was entitled to claim set off against the amount due under the FDRs notwithstanding that the same were not hypothecated as security for discharge of the debts due. If that could be done, we see no reason, why the bank could not claim the set off because the company (in liquidation) has taken the initiative to call upon the bank to pay the amount due under the FDRs. Buckley on the Companies Acts (13th edition) says at page 635: "Where a company is being wound up, whether an action is brought by the company or a proof is carried in by a creditor of the company in the winding-up, a set off of a liquidated sum was always admissible." On the aforesaid premise, we are of the opinion, that the appellant must succeed in this appeal, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (in liquidation) to the bank under the overdraft account which is a debt owed by the company (in liquidation) to the bank as on the date of winding-up order, which is a debt provable under section 529 of the Act of 1956, read with section 34 of the Act of 1920. The company (in liquidation) shall be liable to pay or receive only the balance amounts due as on the date of winding-up order as a result of such set off, under section 46 of the Act of 1920. O.J. Appeal Nos. 18 and 19 of 1996: In these two appeals, the question raised to be decided is whether the renewal of the FDRs is to be directed now. This brings into question as to what ought to be the date on which set off is to take place. Section 46 of the Provincial Insolvency Act, 1920, reads as under: "46. Mutual dealings and set off.-Where there have been mutual dealings between an insolvent and a creditor proving or claiming to prove a debt under this Act, an account shall be taken of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provision shows that the crucial date with reference to which the debt is to be proved is the date of adjudication of an individual as insolvent or the order of winding-up in the case of a company. "All debts to which the debtor is subject when he is adjudged an insolvent" are key words as to the date with reference to which the debt is to be proved. The fact that the liability may be present or future only goes to show that notwithstanding that the debt is not payable in presenti, if an obligation in that respect has arisen prior to the date of adjudication, the existing liability against such claim as on the date of adjudication, is a debt provable under the Act. This is further corroborated from the fact that interest payable in respect of such debt under section 48 of the Act of 1920 is also to be calculated at the rate envisaged thereunder after adjudication until the date of payment. With these two premises, that the requirement of set o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 only be that in case on such set off anything is found payable by the bank to the company, the bank may be called upon to pay that sum to the official liquidator. That will arise only when the question of set off is determined and the balance is found out. 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. As on today, the claims of set off have not been determined and are yet to be determined under the provisions of law. As a result of the aforesaid discussion, these two appeals are disposed of with a direction to the bank that the bank shall within six weeks, prepare an account of balance payable or receivable by it as on the date of the winding-up order to the official liquidator for his verification. The official liquidator shall verify such claim within a further period of six weeks. If as a result of such verification any sum is f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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