OFFICIAL LIQUIDATOR v. B. LAKSHMIKUTTY — 1975 DIGILAW 43 (KAR)

( 1 ) COMPANY Application 241 of 1973 in Coy Petn. 9 of 1969 is filed by the official Liquidator under S. 446 (2) of the Companies Act, 1956 (hereinafter referred tc as the Act) for an order directing the respondent to pay him a sum of Rg. 705-57 with interest from 9-8-1968. Coy App 174 of 1974 in Coy petn. 6 of 1972 is filed under S. 446 (2) for an order directing the respondent therein to pay Rs. 1038-43 with interest from 26-2-1972. Coy Appl 33 of 1974 in Coy. Petn 16 of 1973 is filed by the Addl Liquidator for the issue of a direction to the respondents therein to pay the sums claimed from them. ( 2 ) THE companies in liquidation in all these cases were carrying on chit fund business. In the course of their business they had allowed the respondents to draw monies in some of the chit fund accounts against pronotes executed by them on the understanding that if the respondents paid all the chit instalments regularly as agreed to by them, the promissory notes would not be enforced against them. Before all the instalments were paid by the respondents the companies went into liquidation. In the course of the winding up proceedings the Official Liquidator and the Addl Liquidator applied to the Court on behalf of the companies in question for the issue of a direction to the respondents to pay the balances due by them under the respective chit fund accounts. One of the contentions raised by the respondents in these cases is that they are entitled to claim a set off to the extent of sums paid by them to the concerned companies under other chit fund accounts or by way of fixed deposits. Since a common question of law has arisen in these cases as to the right of set off put forward by the respondents, they are heard together and the question of law is decided by this common order. Since a common question of law has arisen in these cases as to the right of set off put forward by the respondents, they are heard together and the question of law is decided by this common order. ( 3 ) THE rival contentions urged by the parties may be summarised thus: on behalf cf the Official Liquidator and the Addl Liquidator, it is urged that the respondents are liable to pay first the balance due by them under the chit fund accounts in which they have drawn the amounts and in so far as the sums due to them under other chit fund accounts and fixed deposit receipts are concerned they have to prove their claims and claim payment like any other unsecured creditor. The contrition of the respondents is that the claim made by them having arisen out of mutual dealings, they are entitled to claim a set off nunder 8. 529 (1) (c) cf the Act read with S. 46 of the Provincial Insolvency Act and pay only the balance. ( 4 ) IN order to appreciate the contentions of the parties, it is necessary to refer the, relevant provisions of law. Under S. 528 of the Act all claims against the company in liquidation are admissible to proof agamst it. S529 of the Act provides that in the winding up of an insolvent company the same rules shall prevail and be observed witn regard to (a) debts pror vable; (b) the valuation of annuities and future and contingent liabilities; and (c) the respective rights of secured and unsecured creditors, as are in force for the time being under the law of insolvency with respect to estates of persons adjudged insolvent. Sec. 530 of the Act lays down the order in which payments should be made to persons who have proved their debts against the company in liquidation. S. 46 of the Provincial Insolvency Act which is made applicable by S. 529 of the Act reaels :"46. Sec. 530 of the Act lays down the order in which payments should be made to persons who have proved their debts against the company in liquidation. S. 46 of the Provincial Insolvency Act which is made applicable by S. 529 of the Act reaels :"46. Mulual dealings and set off: Where there have been mutual dealings between an insolvent and as creditor proving or claiming to prove a debt under this Act, an account shall be taken of what is due from the one party to the other in respect of such mutual dealings, and the sum due from the one party shall be set off against any sum due from the other party, and the balance of the account, and no more, shall be clarmed or paid on either side respectively. " ( 5 ) IT is argued by the learned Counsel for the respondents that the object of the doctrine of equitable set off embodied in the above section is to avoid cross-claims and to do complete justice. It is contended that it would be inequitable to compel the debtor of the company under one account to pay the entire amount due under it and to ask him to receive less than what is due to him from the company under other accounts with the company along with other unsecured creditors. This submission is met on behalf of the Official Liquidator by stating that the provisions of S. 46 of the Provincial insolvency Act are not applicaple when the claims arise under two different and independent accounts such as two different chit fund accounts though of the same subscriber or under a chit fund account and a fixed deposit account, because the claims are not then mutual. It is further argued that in view of S. 530 of the Act which prescribes the priority of payments, it would not be open to a person who has borrowed money from the company to claim a set off in respect of the entire amount due to him under another head when another unsecured creditor who has not borrowed has to receive proportionately less than what is actually due to him when the assets of the company are insufficient to pay the whole amount after meeting prior charges. ( 6 ) RELIANCE was placed by the parties on several decisions of English and indian Courts in support of their respective stands. In Naoroji v. Chartered Bank of India, (1868) LR. 3 CP. 444. it was admitted that there was a debt due from the plaintiffs to the defendants but the question in the suit to recover an amount due by the defendants to the plaintiffs was whether the case was one involving mutual credits within the meaning of bankurptcy Act, 1849. The Court on the construction of S. 171 of that Act held where there were reciprocal demands which must naturally terminate in a debt, there was a case of mutual creditors attracting Sec. 171 of that Act which enabled the defendants to raise a plea of set off. ( 7 ) IN Sovereign Life Insurance Co v. Dodd, (1881-4) Allr. 241. S. 10 of the Supreme ccurt Judicature Act, 1875, which was more or less similar to 3. 317 of the companies Act, 1948 (which is now in force in England) came up for consideration. That section provided that in the winding of any company the same rules should prevail and be observed as to respective rights of secured and unsecured creditors as might be in force for the time being under the law of bankruptcy with respect to the estates of persons adjudged bankrupt. It, therefore, became necessary fox the Court to apply S. 38 of the bankruptcy Act, 1883, which was similar to S. 46 of the Indian Provincial insolvency Act, 1920. In that case the, plaintiff company which was in liquidation brought an action to recover a sum of money lent by the company to the; defendant before the liquidation and the defendant set up as a defence a right of set off against the company and the Liquidator. The plaintiffs asserted that the defendant had no right of set off. The Court over ruled the plea of the plaintiffs observing that the right of set off depended upon the existence of a debt due to the defendant and the fact that his debtor was a bankrupt could not prevent the right of set off arising, though it did prevent him obtaining in the bankrptey more than his share of assets. The Court over ruled the plea of the plaintiffs observing that the right of set off depended upon the existence of a debt due to the defendant and the fact that his debtor was a bankrupt could not prevent the right of set off arising, though it did prevent him obtaining in the bankrptey more than his share of assets. ( 8 ) THE meaning of the expression 'mutual dealings' which was found in s. 31 of English Bankruptcy Act, 1914 which was made applicable by virtue of S. 317 of the English Companies Act, 1948, fo settlement of claims of a company in liquidation against an unsecured creditor, came up for interpretation in Cox v. Rolls Razor Ltd, (1957) 1 Coylj. 249. In that case the Liquidator claimed that the defendant who was selling the goods belonging to the company in liquidation should pay the price realised by him by selling the goods and also return the unsold goods. The defendant pleaded that he was entitled to set off the sums which the company owed him by way of commission on sales and 'retention fund', which the company held in his behalf. The Liquidator stated that the defendant should prove his claims like any other unsecured creditor and that the dividend might not be as much as six Pence in the Pound. Rejecting the claim of the Liquidator, Lord Denning observed :" Counsel for the company also argued that the agreement expressly provided that there was to be no set off. The agent was to 'pay over all moneys received by him' on Monday of each week: his commission 'shall in no case be deductible by the agent from moneys received by him'; and the 'agent shall not utilise his retention fund to off set any moneys collected by him'. I cannot accept this contention either: for the simple reason that the parties cannot contract out of the statute. Where there are mutual dealings, the statute says that "the balance of the account, and no more, shall be claimed or paid on either side". That is an absolute statutory rule which must be observed, Lord selborne, L. C.) I hold, therefore, that there is set off in respect of the money claims. Where there are mutual dealings, the statute says that "the balance of the account, and no more, shall be claimed or paid on either side". That is an absolute statutory rule which must be observed, Lord selborne, L. C.) I hold, therefore, that there is set off in respect of the money claims. " ( 9 ) RELIANCE was however placed on behalf of Official Liquidator on the following passage at 539 in Buckley on the Companies Act (13th Edn):" After the decisions in Black and Co's case ( (1872) 8 Ch. App254) and Re Whitehouse and Co ( (1878) 9 Ch. D. , 595), it is conceived that brighton Arcade Co v. Dowling ( (1868) L. R. 3 C. P. 175) may be treated as over ruled. And, premising this, the judgment in Re White house and Co renders the true construction of this section a matter of much less difficulty. The bases off that judgment are (1) that contributions under s. 212 of this Act are not debts to the company, but contributions to the assets enforceable by the liquidator; (2) that such contributions include all that is unpaid on shares at the commencement of the winding up, including, therefore, calls made before, as well as calls made in winding up; and (3) that this being so, there is no set off under the Statutes of Set-off because it is the liquidator who enforces the calls, while it is not the liquidator but the company that owes the debt, and therefore to establish a set off the person asserting it must find in the Companies Acts some provision giving a right of set off. " ( 10 ) I do not think that the above passage has any relevance to the cases on hand. The learned author has observed as stated above while commenting upon S. 259 of the English Companies Act, 1948, which is similar to S. 469 of the Act. These two sections deal with the extent of the right of set off of contributories and not of creditors. The learned author has in fact observed at page 635 dealing with S. 317 (similar to 9. These two sections deal with the extent of the right of set off of contributories and not of creditors. The learned author has in fact observed at page 635 dealing with S. 317 (similar to 9. 529 of the Indian act) as follows :" 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. "a similar view has been expressed in Palmer's Co Law (21st Edn) at pages 761 and 762 in the following passage :" In the winding up of an insolvent company the bankruptcy rules apply as regards the rights of secured and unsecured creditors, debts provable, valuation of annuities and future and contingent liabilitief (S. 317 ). This section incorporates into the winding up of companies s. 31 of the Bankruptcy Act 1914, which allows set off where there have been mutual credits, mutual debts, or other mutual dealings. Where therefore, at the commencement of the winding up A has a money claim against the company, and the company has a money claim against A, one claim can be set off against the other; an account must be taken and the balance only can be proved for. " ( 11 ) NOW turning to the Indian cases, I shall first refer to the decision of this Court in Paschdl Nazareth v. Denis Lobo, 1858 Myslj. 57 = AIR 1958 Mys. 126. In Mangalore Town a chit fund was being run by an individual. The defendant was a member of the chit fund. He executed a promissory note in favour of the chit fund for a sum of Rs. 500 as security fox due payment of the future instalments of a chit purchased by him. The proprietor of the chit fund having been adjudged an insolvent, the Official Receiver took charge of his estate. Thereafter the Official Receiver assigned the pronote executed by the defendant in favour of the plaintiff who filed the suit to recover the sum due under it. The defendant pleaded that the liabilities under the chit account in question was only Rs. 55 as he had to pay only eleven instalments of Rs. 5 each, and also claimed as set off of Rs. The defendant pleaded that the liabilities under the chit account in question was only Rs. 55 as he had to pay only eleven instalments of Rs. 5 each, and also claimed as set off of Rs. 185 in respect of the 37 instalments paid by him to the said chit fund under a separate chit. The suit was dismissed by the trial Court. When the matter came up before this court it was held that under Sec. 46 of the Provincial Insolvency Act such a set off could be pleaded in insolvency proceedings and the rule of equity embodied in it could be extended to a suit also where the debtor of the defendant had been adiudged sn insolvent and the suit was filed by the assignee of the pronote executed in favour of the debtor by the defendant. This Court upheld the plea of set off. ( 12 ) IN re Travancore National Bank Subsidiary Co Ltd, AIR 1940 Mad. 266 . (In liquidation), it was observed as follows :" The privileges and rights which are given in R 46, Provincial insolvency Act. are based upon equity and fair dealing It is recognised that it would be very harsh if the Official Assignee or the Official liquidator of a companv could demand in full, moneys due by a debtor and at the same time that person being a creditor for an equal or a larger sum, of the companv must be content with a dividend dependent on the distribution which can be made from the assets "mv attention was drawn by the learned Counsel for the official Liquidator and the Addl Liquidator to two cases of Kerala High Court I shall deal with them one by one the first case in re Free India Bank Ltd (in liqn), AIR. I960 Kerala 168. The question involved in that case whether the 'prized subscribers' from whom money is due to the chitty were entitled to have moneys due to them from the company under other dealings set off against their chitty debts The above question was answered in the negative because of the provisions of S 42 of the Travancore Chitties Act, 1120, which created a first charge on the chitty assets in favour of the subscribers There is no such law in force in our State Hence no reliance can be placed on the above case. ( 13 ) THE next case which needs to be considered is State of Kerala v Kerala water Corpn Ltd (in liqn), AIR 1967 Ker. 150 . In that case the Court was considering the question whether the State Govt could claim priority for its debts otherwise than under S 530 (1) (a) of the Act It was of the opinion that 9 64 of the Provincial Insolvency Act, could not be relied upon by the State Govt in support of its claim for priority as it was inconsistent with 9 530 (1) of the Act. The Court however was not called upon to decide whether a set off could be pleaded by an unsecured creditor or not But it was argued that the observation made therein to the effect that the words "the respective rights of secured and unsecured creditors" in S 529 could mean merely the rights of the class of secured creditors on the one hand as against the class of unsecured creditors on the other or the rights of secured creditors inter-se and of unsecured creditors inter-se militated against the contention that the unsecured creditor could plead a set off relying upon S 46 of the Provincial ( 14 ) INSOLVENCY Act. The above observation which was made in the context of the question which the Court was called upon to decide in that case would not be of any assistance to decide the question which has arisen in these cases. Moreover, as stated earlier, both the English Courts and the indian Courts have relied upon the provisions similar to S 529 of the Act to hold that the right of set off which was conferred on the unsecured creditor under the law relating to insolvency or bankruptcy, was available to an unsecured creditor under the law relating to the winding up of companies. The decision of the Supreme Court in Kesarichand Jaisukhlal v. Shillong Banking Corpn Ltd (in liqn), AIR. 1965 SC. 1711. and the decision in Motichand manaji Lenqade v. Hukumchand Amokichand Lengade, ILR (1973) Kar. 769. which deal with Art. 85 of the Limitation Act, 1908, are of no assistance in interpreting Sec. 529 of the Act. Mutual credit or mutual dealings simply mean reciprocal demands which must be naturally terminate in a debt (see Rosa v. Hart ( (1818) 129 E. R. 477 ). 769. which deal with Art. 85 of the Limitation Act, 1908, are of no assistance in interpreting Sec. 529 of the Act. Mutual credit or mutual dealings simply mean reciprocal demands which must be naturally terminate in a debt (see Rosa v. Hart ( (1818) 129 E. R. 477 ). There can be no doubt that in these capes the reciprocal demands must in the normal course terminate in debts owning by one party to the other. ( 15 ) IT is contended that if the respondents in these cases are allowed to plead set off then it would be contrary to S. 530 of the Act which lavs down the priorities in the matter of payments from out of the assets of the Coy in liquidation. It is also urged that the sums due by the respondents form parts of the assets of the companies and the assets cannot be allowed to diminish in the absence of express provision of law. I do not think that any of the provisions of the Act would be contravened if the pleas of set off are accepted in these cases. The assets of the company in linuidation can consist of only the sums which can be realised in liquidation and how much can be realised is laid down by S. 52s of the Act. I am of the view that s. 529 which makes S. 46 of the Provincial Insolvency Act applicable does no more than recognising the rights of a debtor under ordinary law. There is no dispute that under ordinary law the respondents could have pleaded sums due to them by way of set off if suits had been filed before liquidation. The question is. whether that right is destroyed by the companies going into liquidation? I do not think go, as there is no provision in the Act which takes away that right. ( 16 ) IN the result, I hold that the respondents herein are entitled to plead by way of set off the amounts which they were entitled to recover from the company in question under other chit fund accounts or fixed deposits with the company. They are liable to pay only the balances as remaining after giving credit to the sums in respect of which set off is pleaded. Accordingly, the objections raised by the Official Liquidator and the additional Liquidator are over-ruled. They are liable to pay only the balances as remaining after giving credit to the sums in respect of which set off is pleaded. Accordingly, the objections raised by the Official Liquidator and the additional Liquidator are over-ruled. --- *** --- .