1. Company Application No. 241 of 1973, in Company Petition No. 9 of 1969, is filed by the official liquidator under section 446(2) of the Companies Act, 1956 (hereinafter referred to as 'the Act'), for an order directing the respondent to pay him the sum of Rs. 705.57 with interest from August 9, 1968. Company application No. 174 of 1974, in Company Petition No. 6 of 1972, is filed under section 446(2) for an order directing the respondent therein to pay Rs. 1,038.43 with interest from February 26, 1972. Company application No. 33 of 1974, in Company Petition No. 16 of 1973, is filed by the additional 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 understating that if the respondents paid all the chit installments regularly as agreed to by them, the promissory notes would not be enforced against them. Before all the installments are paid by the respondents the companies went into liquidation. In the course of the winding-up proceedings the official liquidator and the additional liquidator applied to the court on behalf of the companies in question for the issue of a direction to the respondents to pay the balance 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.
3. The rival contentions urged by the parties may be summarised thus : On behalf of the official liquidator and the additional 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 contention of the respondents is that the claim made by them having arisen out of mutual dealings, they are entitled to claim a set-off under section 529(1)(c) of the Act read with section 46 of the Provincial Insolvency Act, 1920, and pay only the balance.
4. In order to appreciate the contentions of the parties, it is necessary to refer to the relevant provisions of law. Under section 528 of the Act all claims against the company in liquidation are admissible to proof against it. Section 529 of the Act provides that in the winding-up of an insolvent company the same rules shall prevail and be observed with regard to : (a) debts provable; (b) the valuation of annuities and future and contingent liabilities; and (c) the respective rights of secured and unsecured creditors, are in force for the time being under the law of insolvency with respect to estates of persons adjudged insolvent. Section 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. Section 46 of the Provincial Insolvency Act which is made applicable by section 529 of the Act reads :
'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 what is due from the one party to the other in respect of such mutual dealings, and the sum due form 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 claimed or paid on either side respectively.'
5. It is argued by the learned counsel for the respondent 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 section 46 of the Provincial Insolvency Act are not applicable 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 section 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.
7. In Naoroji v. Chartered Bank of India, 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 the Bankruptcy Act, 1849. The court on the construction of section 171 of that Act held where there were reciprocal demands which must naturally terminate in a debt, there was a case of mutual credits attracting section 171 of that Act which enabled the defendants to raise a plea of set-off.
8. In Sovereign Life Insurance Company v. Dodd section 10 of the Supreme Court Judicature Act, 1875, which was more or less similar to section 317 of the Companies Act, 1948 (which is now in force in England) came up for consideration. That section provided the in the winding up 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 for the court to apply section 38 of the Bankruptcy Act, 1883, which was similar to section 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 overruled 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 bankruptcy more than his share of assets.
9. The making of the expression 'mutual dealings' which was found in section 31 of the English Bankruptcy Act, 1914, which was made applicable by virtue of section 317 of the English Companies Act, 1948, to settlement of claims of a company in liquidation against an unsecured creditor, came up for interpretation in Cox v. Rolls Razor Ltd. 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 offset 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 (see In re Deveze : Ex parte Barnett, per Lord Selborne L.C.) I hold, therefore, that there is a set-off in respect of the money claims'.
10. Reliance was, however, placed on behalf of the official liquidator on the following passage at page 539 in Buckley on the Companies Acts (13th edition) :
'After the decisions in Black & Co.'s case and In re Whitehouse & Co., it is conceived that Brighten Arcade Co. v. Dowling may be treated as overruled. And, promising this, the judgment in In re Whitehouse & Co renders the true construction of this section a matter of much less difficulty. The bases of that judgment are, (1) that contributions under section 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 the 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 that 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 Act some provision giving a right of set-off.'
11. 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 section 259 of the English Companies Act, 1948, which is similar to section 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 section 317 (similar to section 529 of the Indian Act) as follows :
'When 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.'
12. A similar view has been expressed in Palmer's Company Law (21st edition) 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 liabilities (section 317). This section incorporates into the winding up of companies section 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 others; an account must be taken and the balance only can be proved for.'
13. Now turning to the Indian Cases, I shall first refer to the decision of this court in Paschal Nazareth v. Denis Lobo. 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 not in favour of the chit fund for a sum of Rs. 500 as security for due payment of the future installments 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 installments of Rs. 5 each, and also claimed a set-off of Rs. 185 in respect of the 37 installments 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 the under section 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 adjudged an 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.
14. In re Travancore National Bank subsidiary Co. Ltd. (In liquidation), it was observed as follows :
'The privileges and rights which are given in section 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 company 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 company must be content with a dividend dependent on the distribution which can be made from the assets.'
15. My attention was drawn by the learned counsel for the official liquidator and the additional liquidator to two cases of the Kerala High Court. I shall deal with them one by one.
16. The first case is In re Free Indian Bank India Ltd. (In liquidation) The question involved in that case was 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 section 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.
17. The next case which need to be considered is State of Kerala v. Kerala Water Transport Corporation Ltd. (In liquidation). In that case the court was considering the question whether the State Government could claim priority for its debts otherwise than under section 530(1)(a) of the Act. It was of the opinion the section 64 of the Provincial Insolvency Act could not be relied upon by the State Government ins support of its claim for priority as it was inconsistent with section 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 section 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 section 46 of the Provincial 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 section 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.
18. The decision of the Supreme Court in Kesharichand Jaisukhala v. Shillong Banking Corporation Ltd. (In liquidation) and the decision in Motichand Manaji Lengade v. Hukumchand Amokichand Lengade, which deal with article 85 of the Limitation Act, 1908, are of no assistance in interpreting section 529 of the Act. Mutual credit or mutual dealings simply mean reciprocal demands which must naturally terminate in a debt (see Rose v. Hart). There can be no doubt that in these cases the reciprocal demands must in the normal course terminate in debts owing by one party to the other.
19. It is contended the if the respondents in these cases are allowed to plead set-off then it would be contrary to section 530 of the Act which lays down the priorities in the matter of payments from out of the assets of the company in liquidation. It is also urged that the sums due by the respondents form part 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 these case. The assets of the company in liquidation can consist of only the sums which can be realised in liquidation and how much can be realised is laid down by section 529 of the Act. I am of the view that section 529 which makes section 46 of the Provincial Insolvency Act applicable does no more than recognise the rights of a debtor under ordinary law. There is no dispute that under ordinary law the respondents could have pleaded the 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 so, there is no provision in the Act which takes away that right.
20. In the result, I hold that the respondents herein are entitled to plead by was 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.
21. Accordingly, the objections raised by the official liquidator and the additional liquidator are overruled.