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TMI Blog1976 (8) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... ery of the balances due from them under the prized chit accounts. The main contention put forward by the respondents is that they are entitled to a set-off in respect of amounts paid by them to the concerned Companies either by way of term deposits or by way of subscriptions (instalments) to other chits in which also they had joined and which had not been prized. In view of the importance of the common question of law relating to the right of set-off involved in these cases the learned single Judge, before whom the matter came up in the first instance, considered it desirable that the said question should be decided by a Division Bench. Accordingly these cases have come up before us. 2. The course that we propose to adopt is to consider and decide only the question of law arising out of the plea for set-off put forward by the respondents and to leave the remaining questions to be dealt with by the learned single Judge. Hence it is unnecessary for us to set out in detail the facts pertaining to each of these cases and it would suffice to say that in relation to the plea for set off these cases can be classified into three different categories. The first category consists of cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by them with the Company. This contention is strongly opposed by the Official Liquidator. According to the Liquidator the amount due to the foreman from a prized subscriber is a fund impressed with the character of a trust and the said fund cannot be utilised by the foreman for any purpose other than for payment to the unprized subscribers of that particular kuri. It is said that the unprized subscribers of a particular kuri have a lien on the fund consisting of the amounts due to the foreman from the unprized subscribers of that particular kuri and that where such a lien exists in favour of third parties the provisions of Section 47 can have no application. In support of this contention strong reliance was placed by the Liquidator on the decision of Raman Nayar, J., as he then was, in In Re Free India Bank Ltd. (In Liquidation) AIR 1960 Ker 168) : 1959 Ker LT 1307, wherein the learned Judge has expressed, the view that the effect of Section 42 of the Tranvancore Chitties Act is to create a charge on the assets of the chitty in favour of the chitty creditors and that since the money due from the prized subscribers to the Company is a chitty asset on which the said charge operate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o exist long prior to the commencement of that Act, whether such cessation be due to the natural termination of the normal period of duration fixed for the kuri, or due to any default or abandonment by the foreman or the liquidation of the foreman Company. We are unable to uphold this contention put forward by the Liquidator. An examination of the provisions of the Kerala Chitties Act unmistakably shows that their underlying purpose is to regulate and control the conduct of chitties in the State in order to effectively check and prevent various types of irregularities and malpractices in relation to the conduct of such transactions and thereby safeguard the interests of the members of the public subscribing to the chit fund schemes. The object of Section 70 of the said Act as we see it, is to enable such effective check and control being exercised even in respect of chit fund transactions which were started in the Malabar area prior to the commencement of the Act and which were in existence on the date of such commencement. Any ambiguity or doubt that might have otherwise existed in regard to this matter is effectively dispelled by the wording used in the heading of the section whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a first charge for payment of the chitty debts due to the subscribers. In our opinion what has been done by the section is only to lay down a rule of preference in the matter of utilisation of the chitty assets for payment of the debts due from the foreman of a chitty by providing that chitty debts to the subscribers shall have preference over other debts. Though the language used in the section lacks clarity and precision and the use of the expression 'first charge' does create a certain amount of confusion, it seems to us clear on a careful examination of the section that what the legislature has intended is only to provide for a preferential payment to the chitty creditors. The heading given to the section, viz.. 'Preference of subscribers over chitty assets' also indicates that the intention was not to create a charge over the chitty assets but only to lay down a rule of preference as between creditors. If the intention was to create a charge over the chitty assets the language of the section ought to have been that the chitty debts due from the foreman of a chitty to the subscribers shall be the first charge on the assets. Significantly that is not what is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to prove a debt under the receiving order--see Section 31 of the Bankruptcy Act, 1914. The expression 'mutual dealings' has been construed by the English courts as a term of wide import. The provisions for set-off incorporated in the insolvency statutes of this country are modelled on the section contained in the English Bankruptcy Act. As already noticed, the statutory provision for set-off in bankruptcy was originally introduced in England was narrow in its content but by successive statutes the principle was developed and widened. The last step in that process of enlarging the scope of the section was taken in 1869 when the expression 'mutual dealings' was also added in the section--Section 39 of the Bankruptcy Act, 1869--thereby bringing within the scope' of the principle of set-off all provable claims provided there is mutuality. It is significant that the Indian legislature while enacting Section 47 of the Presidency-Towns Insolvency Act, 1909 (Act 3 of 1909) as well as Section 46 of the Provincial Insolvency Act, 1920 (Act 5 of 1920) omitted the words 'mutual credits' and 'mutual debts' occurring in the English statute and has used onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to cases where a person who owes a debt to another has a claim against that other person in respect of damages where liquidated or unliquidated, arising out of contract--see Peat v. Jones (1881) 8 QBD 147, Jack v. Kipping (1882) 9 QBD 113, Palmer v. Day Sons (1895) 2 QB 618 and Krishna Chandra v. Pabna Dhanbhandar Co. Ltd. AIR 1935 Cal 225. 7. The only condition specified in Section 47 of the Insolvency Act, 1955 for attracting its applicability is that there should have been 'mutual dealings' between the insolvent and the person claiming the benefit of set-off and the reciprocal claims should have arisen out of such mutual dealings. The 'mutual dealings' referred to in the section may consist of several distinct or independent transactions entered into between the same parties functioning in the same right or capacity. It is not, therefore, necessary that the debts or claims sought to be set-off against each other should have arisen out of one and the same transaction. As observed by Montague Smith, J. in the leading case Naoroji v. Chartered Bank of India, (1868) 3 CP 444, to bring a case within the Act, it is not necessary that the credits should be depende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondents the insolvent Companies were functioning in the very same right and capacity in which they had advanced to the respondents the amounts due to them on their prized tickets. The Companies were conducting chit fund business and it is in the course of that business that term deposits were being received from the chit subscribers. The different series of' chit funds were conducted by the respective Companies in one and the same capacity, namely that of the foreman conducting chitty transactions, and it was in that capacity that the Company advanced the chit amounts to the prized subscribers, received the subscriptions from the prized as well as unprized subscribers and also accepted the term deposits. All these dealings had been effected by the Companies in the same right or capacity. The respondents had carried on the transactions with the Companies only in their individual or personal capacity and they had functioned only in the same capacity or right in relation to all the distinct or separate dealings that they may have had with the Companies. 9. It is contended by the Liquidator that each particular kuri is a distinct and self-contained transaction which is unrelated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of the preceding discussion it is manifest that this contention put forward by the Liquidator cannot be sustained. We hold that the respondents are entitled to a set-off' in all the three categories of cases mentioned above. 11. In Official Liquidator v. Smt. B. Lakshmikutty 1075 TaxLR 1949 (Kant), a learned single Judge of the Karnataka High Court recently had occasion to consider an almost identical question. In that case also certain Companies which were carrying on chit fund business went into liquidation and claims were filed by the Official Liquidator against the prized subscribers for the recovery of the balance amounts due from them under the respective chit fund accounts. The respondents contended inter alia that they were entitled to a set-off to the extent of the sums paid by them to the concerned Companies under other chit fund accounts or by way of fixed deposits. This contention was upheld by the learned Judge and it was held that the respondents were liable to pay only the balances remaining after giving credit to the sums in respect of which set-off was pleaded. This decision fully supports the conclusions that we have reached in these cases and with re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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