Order: This is an application filed by the Andhra Bank, Ltd., for an order validating the charge created in their favour by the company, namely, the Godavari Sugars and Refineries, Ltd., through its Managing Agents, in respect of 224 bags of sugar and 21 bales of gunnies on 24th April, 1952. The petition for the winding up of the said company was filed on 14th March, 1952. Application No.1628 of 1952 was also filed for the appointment of a provisional liquidator. On that application, notice was given to the company and the learned Counsel who appeared for the company stated that it could not possibly oppose the winding up. That being so, the Court thought that it was a fit case for the appointment of a provisional liquidator; and accordingly, a provisional liquidator was appointed on that application by an order dated 18th April, 1952. It may be mentioned chat the company was ordered to be wound up in O.P.No.112 of 1952 on 29th September, 1952. After the appointment of the provisional liquidator on 18th April, 1952 and prior to the order of winding up, the applicant Bank is said to have advanced a sum of Rs.21,000 to the company. This company was under the management of Managing Agents known as the Aidco, Ltd., of which one V. Butchiah Chowdary was the Managing Director. At a meeting of the the Board of Directors of the company in liquidation held on 25th January, 1952, it was resolved to borrow upto Rs.10 lakhs from the Andhra Bank, Ltd., on the pledge of sugar, jaggery and gunnies of the company. It was also resolved to authorise the Managing Agents to execute the necessary documents to the Andhra Bank, Ltd., to give effect to the above resolution. On the same date, there was a meeting of the Board of Directors of the Aidco Ltd., when it was resolved to authorise the Managing Director, V. Butchiah Chowdary, to borrow on behalf of the Aidco Ltd., as Managing Agents for the Godavari Sugars and Refineries, Ltd., from the Andhra Bank, Ltd. (vide the resolutions Exhibits P-5 and P-6.). Accordingly, Butchiah Chowdary, as the Managing Director of the Managing Agents, made the loan application, Exhibit P-7, or 31st January, 1952 to the Andhra Bank (Bhimavaram Branch), while its head office is at Masulipatam. Accordingly, Butchiah Chowdary, as the Managing Director of the Managing Agents, made the loan application, Exhibit P-7, or 31st January, 1952 to the Andhra Bank (Bhimavaram Branch), while its head office is at Masulipatam. A loan of 3 to 4 lakhs of rupees was asked for, “for rotation of business stocks”, offering as security the stocks of sugar, jaggery, gunnies, etc, and also offering the personal security of the partners of the managing agency, namely, Butchiah Chowdary, Saraswathi Bai and Sujata Devi. On that application, the agent of the Bhimavaram Branch of the Andhra Bank examined as P. W. 1, submitted his proposals by a letter of 31st January, 1952, to the head office at Masulipatam. The matter was pending with the head office till 15th April, 1952, when the head office addressed the letter, Exhibit P-8, to the Bhimavaram branch advising the latter of their having tentatively sanctioned to the Godavari Sugars and Refineries, Ltd., who were having their manufactory at Thanuku near Bhimavaram a key-loan cash credit upto a limit of Rs.50,000 on the pledge of stocks of sugar and gunnies and on the personal guarantee of the aforesaid three persons. By a letter of 16th April, 1952, the head office of the Andhra Bank further intimated the agent of the Bhimavaram Branch that they had sanctioned an advance of Rs. 1,25,000 and that for the present, an advance upto Rs.50,000 was permitted. As the loan was thus sanctioned by the Andhra Bank in favour of the company, the Managing Director of the Managing Agents, namely, Butchiah Chowdary,‘saw the agent of the Bhimavaram Branch on 24th April, 1952, and executed in conjunction with the other two persons the security agreement, Exhibit P-2, for a sum of Rs.1,25,000 on the security of 224 bags of sugar and 21 bales of gunnies; and on the same date, they also executed a promissory note, Exhibit P-1 in favour of the Bhimavaram Branch of the Andhra Bank for Rs.1,25,000. Having obtained the documents, Exhibits P-1 and P-2, the agent of the Bhimavaram beanch of the Andhra Bank is said to have advanced a sum of Rs.20,000 on 25th April, 1952 to the company. That is shown in the company’s accounts, Exhibit P-10. Having obtained the documents, Exhibits P-1 and P-2, the agent of the Bhimavaram beanch of the Andhra Bank is said to have advanced a sum of Rs.20,000 on 25th April, 1952 to the company. That is shown in the company’s accounts, Exhibit P-10. It also shows that on the same date, the company paid back a sum of Rs.8,000, so that on that date, the loan obtained by the company from the Andhra, Bank was only Rs.12,000. The accounts also show that the next day, 26th April., 1952, a further sum of Rs. 9,000 was taken by the Company by a self cheque drawn by Butchiah Chowdary. Thus, The Andhra Bank is said to have advanced as loan to the company in liquidation, a sum of Rs.12,000 on 25th April, 1952 and a further sum of Rs.9,000 on 26th April, 1952, on the security of sugar and gunny bags stated above. It will be seen that those two advances were made after the presentation of the petition for winding up, and indeed even after the appointment of the provisional liquidator, and prior to the order for winding up. This application is filed by the Andhra Bank under section 227(2) of the Companies Act for validating the charge in their favour. That section provides that in the case of a winding up by or subject to the supervision of the Court, every disposition of the property (including actionable claims) of the company made after the commencement of the winding up shall, unless the Court otherwise, orders be void. In this case, there was a disposition of the sugar and the gunnies in favour of the applicant Bank after commencement of the winding up. That being so, the security offered in favour of the applicant Bank must be treated as void, unless the Court otherwise orders. This section corresponds to section 277 of the English Act of 1948. Under that section, the principle is well established that the Directors who expend the company’s money pending a winding up petition are prima facie liable, on a winding up, for all such monies not expended by them in the ordinary course of business and that where such payments are honestly made and in the ordinary course of business, it is usual for the Court to allow them (vide Palmer’s Company Law, 19th edition, at pages 193 and 194). In In re Wiltshire Iron Co.,1 Lord Cairns, referring in the course of his judgment to the corresponding section of the English Act, says: "This is a wholesome and necessary provision, to prevent, during the period which must elapse before a petition can be heard, the improper alienation and dissipation of the property of a company in extremis. But where a company actually trading, which it is the interest of everyone 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 paralyze the trade of the company, and great injury, without any counter-balance of advantage, would be done to those interested in the assets of the company. And so, the transactions that would be validated by the Court are transactions which are bona fide entered into and completed in the ordinary course of the company’s current trade. The principle so enunciated by Lord Cairns was applied in a very instructive case reported In re Park Ward and Co.2. In that case the company was carrying on business, employing many workmen. Their wages fell due three days after the presentation of the petition for the winding up of the company which was on 8th December, 1925. On 16th December, 1925, a debenture was issued by the company to secure a sum of £1200 advanced by the debenture-holder for the payment of the wages of the staff of the company. It was found by the learned Judge that that amount was advanced for the purpose of preserving the business as a going concern, and that if he had not done so, the wages would not have been paid and the business temporarily at any rate, would have had to be closed down. In those circumstances, it was held that the transaction was just the sort of transaction which Lord Cairns thought it was the object of the proviso to the section to preserve and which ought to be rendered valid by an order of the Court. In those circumstances, it was held that the transaction was just the sort of transaction which Lord Cairns thought it was the object of the proviso to the section to preserve and which ought to be rendered valid by an order of the Court. In that case, it was also argued that the power under the section ought not be exercised in favour of a person who, at the date of the transaction in question, had knowledge that the winding up petition had been presented. In that case the debenture-holder was aware, when he agreed to advance the money, that a petition had been presented for the winding up of the company. That contention was repelled and Romer, J., observed at page 832: "If, therefore, I were to hold that no one who knows of presentation of a petition can safely enter into any arrangement with the company, I think I should be depriving the company of the benefit which, according to Lord Cairns, the provision of the section was intended to secure to it." It therefore becomes immaterial whether or not in this case the Andhra Bank had knowledge of the presentation of the winding up petition. In Tulsidas Jasraj v. The Industrial Bank of Western India,3the question arose whether the security given by the company in favour of three unsecured creditors, after the commencement of the winding up, should in the circumstances of that case, be upheld by the Court. That is to say, there was a disposition of the property of the company made after the commencement of the winding up and unsecured creditors, at the date of the commencement of the winding up, had been converted into secured creditors. It was contended that the Court should make an order under section 227(2) on the ground that the dispositions were all bona fide and in the ordinary course of business. Having regard to the circumstances of that case, the court declined to validate the dispositions, because, as observed at page 739, the fundamental principle is that in winding up, all unsecured creditors are to be paid pari passu, the object being to prevent the injustice and scrambles and intrigues which would arise if the company were to be at liberty to prefer one creditor to another. Marten, C.J., enunciated the general principle as well as the exception thereto embodied in section 227(2) of the Act in the following terms at pages 742 and 743. “Now, here, as regards section 227(2), the Court has to steer a middle course between two extremes. On the one hand, the words of the section are wide enough to include any sale or payment that a company may make after the date of the winding up petition. On that oasis, any business would practically have to be stopped if a petition was presented, because it would be unsafe to dispose of any of the company’s assets. For instance, a Mill company might not be able to buy a ton of coal for the use of its furnaces, or, on the other hand, it might not be able to sell any of its goods in the ordinary course of business. Consequently, the Court has very properly laic down that speaking generally any bona fide transaction carried out and completed in the ordinary course of current business will be sanctioned by the Court under section 227(2). On the other hand it will not allow the assets to be disposed of at the mere pleasure of the company, and thus cause the fundamental principle of equality amongst creditors to be violated. To do so would in effect be to add to the preferential debts enumerated in section 230 a further category of all debts which the company might choose to pay wholly or in part.” The learned Chief Justice also propounded at page 728 the following test for the proper exercise of the Court’s discretion: “And as the Court’s sanction is now asked for ex post facto, I think it a fair test 13 consider whether the Court would have sanctioned the giving of these securities, supposing it had been asked to do so at the time”. In Official Liquidators, Gorakhpur Electric Supply Co. v. Siemens (India) Ltd.,1the learned Judge sums up the principle as well as the exception thereto in these words at pages 733 and 734: “There can be no doubt that the ordinary principle is that all creditors to whom money is due at the date of the petition for winding up, should be treated equally, with certain exceptions in favour of those who have priority under the express provisions of the Act. Where the company or its officers make preferential payments to some creditors, they are obviously acting in contravention of this rule. On the other hand, where the business of the company is continued in good faith cither because it is hoped that it may not be necessary eventually to wind up the company, or because in the interests of all concerned it is better that the company should, on being wound up, be transferred as a going concern, it is necessary for the company to enter into various transactions and it would be impossible for it to do so if it was not able to make any transfers”. Having regard to these principles, it becomes necessary to (decide in the circumstances of this case whether the Court would be justified in the exercise of its discretion to validate the transaction evidenced by Exhibit P-2 in favour of the applicant Bank. The fundamental principle should be borne in mind, namely, that the assets of the company should be made available for distribution pari passu amongst the creditors of the company and that no creditor should ob:ain an advantage over his fellow-creditor. In this case, there is no accusation of any fraud or collusion on the part of the applicant Bank. On the evidence and having regard to the entries in the accounts of the company, Exhibit D-1, as well as the accounts of the applicant Bank, Ex. P-10 there can be little doubt that the said sums of Rs.12,000 and Rs.9,000 were advanced by the Bank to the company in liquidation after the commencement of the winding up proceedings. It may also be taken on the evidence that the Andhra Bank had no notice of the presentation of the winding up petition. As I have stated above, even such notice would not make much difference. It is also necessary to bear in mind the test that was applied in the Bombay case referred to above. The result of judicial decisions is that a transaction bona fide entered into and completed in the ordinary course of the company’s current trade should be protected; for, otherwise, 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 would be done to those interested in the assets of the company, as was pointed out by Lord Cairns. It is equally clear from the decisions that even if a winding up petition is well founded, if the disposition is made for the purpose of preserving the business as a going concern, then also the discretion of the Court should be exercised, as neatly summarised, if I may say so with respect, in Randal v. Official Liquidator, Benares Bank, Ltd.1. “The principle must prevail, that is, the principle of pari passu distribution among the creditors It was not a case of salvage, of real necessity, nor of the transaction having been the only means of keeping the company going.” It may be that in this case, the Andhra Bank were bona fide in having advanced the said sums to the company without any notice of the presentation of the winding up petition. Merely because they were bona fide lenders, it does not at once follow that the transaction in their favour should be validated. This is a case in which one of two innocent pearties has to suffer, the applicant Bank on the one hand and the general body of creditors on the other. It is for the applicant Bank to make out a case why they should be preferred to the general body of creditors and why the discretion of the Court should be exercised in their favour under section 227(2) of the Act. That leads us to the consideration of the circumstances in which the loans were advanced by the Bank to the company in liquidation. In considering those circumstances, it is well to emphasise one important fact, which I have already referred to, namely, that even on 18th April, 1952, when the provisional liquidator was appointed, the learned counsel who appeared for the company stated that the company could not possibly oppose the winding up petition. It is therefore clear that the winding up petition was well founded, and not groundless. There was therefore no possibility of the company thereafter continuing to carry on its current business in the ordinary course. The company was by that time completely dead and incapable of being resuscitated. There was therefore no question of Butchiah Chowdary as the Managing Director of the Managing Agents, bona fide borrowing those two sums in the ordinary course of the company’s current trade. It is true that the loan was applied for, even as early as January, 1952. The company was by that time completely dead and incapable of being resuscitated. There was therefore no question of Butchiah Chowdary as the Managing Director of the Managing Agents, bona fide borrowing those two sums in the ordinary course of the company’s current trade. It is true that the loan was applied for, even as early as January, 1952. But the sanction was made only in April, 1952, and the loans were actually advanced only on 25th and 26th April, 1952. The question is, for what purpose was the loan of Rs.12,000 taken on 25th April, 1952 and the further loan of Rs.9,000 taken on 26th April, 1952? It is obvious that the loans would not have been taken for the ordinary purpose of the company’s current trade, for, as I said, on the admission of the company’s learned counsel on 18th April, 1952, there was no alternative for the company except to face the winding up. That being so, the question is, was this a case of salvage or of any other real necessity or of keeping the company going, as was observed in Ramlal v Official Liquidator, Benares Bank, Ltd.1 quoted above. The only evidence We have got on that point is the interested and unsatisfactory testimony of the Bank’s Bhimavaram agent examined as P.W.1. His evidence is that the Managing Director, Butchiah Chowdary, told him that the loans were required for payment of wages and for payment to sugarcane growers who supplied sugarcane to the factory. In cross-examination, he stated that he went to the factory on 24th April, 1952, and there, came to know that the loan was required for payment of wages and price of sugarcane, and that he found that the factory workers were all there and they had come from the Uttar Pradesh and had to be sent away. He learnt from the workmen that their salaries were in arrears and they were anxious to return to their home in U.P. and so, he inferred that the money was required for payment of the staff. But it appears in his evidence that by that time the sugarcane crushing season’ was over, as ordinarily it would be over by the end of March. The season is between October and March. But it appears in his evidence that by that time the sugarcane crushing season’ was over, as ordinarily it would be over by the end of March. The season is between October and March. It is therefore clear that in April, 1952, there would have been no necessity to keep the factory on as a going concern, be- cause the crushing season will commence only in the following October. Moreover, the money was required even according to the evidence of P.W.1, to pay off the wages of workmen who had finished the work and who were anxious to return home. The payments to those workmen were obviously not intended to keep them in the factory so as to keep it going. So also, the payments said to have been made to the sugarcane growers who supplied sugarcane cannot be for the purpose of keeping the factory as a going concern, for, the supply has already been made and the next supply will only be in the following October. It will also be seen that the evidence of P.W.1 in cross-examination shows that the only enquiry which he made in the factory was about its financial stability and that he put no other question. In fact, he expressly admitted that so far as the second loan of Rs.9,000 was concerned, he did not know for what purpose it was taken. That being so, it appears doubtful whether this witness made any enquiry as to the purpose for which the loan was required by the company in April, 1952, and whether it was really required for payment to workmen and sugarcane suppliers. Even assuming that the loan was required for those purposes, that would not be, as I stated for the purpose of preserving the factory as a going concern as the crushing season had by that time come to an end. Even if the company wanted to pay the sugarcane suppliers and also the workmen, it would appear from the company’s accounts, Exhibit D-1, that they had ample monies for those purposes. Those accounts show that between 21st April, 1952 and 30th April, 1952, the company had over Rs.89,000 of which about Rs.47,000 represented the sale proceeds of sugar. Even if the company wanted to pay the sugarcane suppliers and also the workmen, it would appear from the company’s accounts, Exhibit D-1, that they had ample monies for those purposes. Those accounts show that between 21st April, 1952 and 30th April, 1952, the company had over Rs.89,000 of which about Rs.47,000 represented the sale proceeds of sugar. It will be seen from those accounts that on 30th April, 1952, numerous debit items were made; and there is nothing to show what necessity there was for the company to make those disbursements after the appointment of the provisional liquidator. In these circumstances, I am not satisfied on the evidence of P.W.1 that these two loans were taken from the applicant Bank either for the purpose of its ordinary current trade or for the purpose of preserving the factory as a going concern for the benefit of all concerned. At least, on 18th April, 1952, the company knew of the petition for winding up. It stated on that date, through its learred Counsel, that it could not possibly oppose the winding up. It also knew that a provisional liquidator had been appointed on that date itself. That being so, the borrowings by the Managing Director of the Managing Agents, namely, Butchiah Chowdary, from the applicant Bank on 25th and 26th April, 1952, on the security of the Company’s goods must be characterised as a flagrant violation of the provisions of the company law. They were not for any bona fide purposes, which would justify the Court in upholding them. It is clear applying the test laid down in the Bombay case, that if the application were made at that time to sanction the transaction, the Court would have declined to do so. It was further contended by the learned Official Liquidator that in this case, there was a change in the constitution of the Managing Agents and inasmuch as the change had not been recognised under section 87-BB, the Managing Agents ceased to function, and that therefore they became wholly incompetent to borrow any loan on behalf of the company. It was further contended by the learned Official Liquidator that in this case, there was a change in the constitution of the Managing Agents and inasmuch as the change had not been recognised under section 87-BB, the Managing Agents ceased to function, and that therefore they became wholly incompetent to borrow any loan on behalf of the company. There is no evidence now placed before me as to the time or nature of the change in the constitution of the managing agency; and even otherwise, that may not make much difference, because the same result should flow from the fact that prior to the present loans, a provisional liquidator was appointed. However, it is unnecessary to consider this question further; and it will be left open to the Official Liquidator to examine it in case the: Andhra Bank chooses to prefer a claim as an ordinary creditor. The application fails and is dismissed with costs of the Official Liquidator and the contesting creditor, Messrs. Soundararajan & Co. Counsel’s fee Rs.250. V.P.S. ----- Application dismissed.