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Mysore Silk Waste Merchants and Reelers Association Vs. Official Liquidator and anr. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKarnataka High Court
Decided On
Judge
Reported in[1965]35CompCas107(Kar); (1965)1MysLJ710
ActsCompanies Act, 1956 - Sections 460(6), 483, 529, 530, 530(2) and 530(4)
AppellantMysore Silk Waste Merchants and Reelers Association
RespondentOfficial Liquidator and anr.
Excerpt:
- motor vehicles act, 1988[c.a. no. 59/1988]section 163-a; [chidananda ullal & a.n. venugopala gowda, jj] compensation inadequacy of appealed against- applicability of section 163a held, the claimants whose annual income is not more that rs. 40,000/ can only make the claim under section 163-a of the act. the claim has to be considered and disposed off keeping in view the formula provided in the ii schedule of the act, i.e., on structured formula, having regard to the age of the victim and his income. the award made under the said provision shall be in full and final settlement of the claim. the note appended to column 1 from the total amount of compensation, 1/3rd thereof, has to be reduced in consideration of the expenses, which the victim would have incurred, towards maintaining.....somnath iyer, j.1. this is an appeal preferred under section 483 of the companies act, 1956, by an association called the mysore silk waste merchants and reelers association, channapatna. 2. on august 10, 1959, a company called the mysore spun silk mills ltd., was ordered to be wound up by an order made by this court. the official liquidator published a notice that the creditors should prove their debts before january 26, 1960. the 2nd respondent in this appeal, which is a firm called shan harilal bhikabhai and sons, produced its affidavit in proof of the debt claimed by it, on january 25, 1960, which was followed up by a supplemental affidavit produced on august 11, 1960. in the first affidavit, the firm claimed two sums of money. the first was a sum of rs. 50,000 which was described as.....
Judgment:

Somnath Iyer, J.

1. This is an appeal preferred under section 483 of the Companies Act, 1956, by an association called the Mysore Silk Waste Merchants and Reelers Association, Channapatna.

2. On August 10, 1959, a company called the Mysore Spun Silk Mills Ltd., was ordered to be wound up by an order made by this court. The official liquidator published a notice that the creditors should prove their debts before January 26, 1960. The 2nd respondent in this appeal, which is a firm called Shan Harilal Bhikabhai and Sons, produced its affidavit in proof of the debt claimed by it, on January 25, 1960, which was followed up by a supplemental affidavit produced on August 11, 1960. In the first affidavit, the firm claimed two sums of money. The first was a sum of Rs. 50,000 which was described as trust money deposited on March 26, 1957, with the company. The second sum of money claimed was a sum of Rs, 1,17,350.65 np. which was described as the balance due on August 10, 1959, in a running account. The small sum of money that was claimed in the supplemental affidavit was Rs. 261.10 np., which was stated to be due towards commission on sale of carpets and fabrics effected by the respondent firm.

3. On September 14, 1960, the liquidator accepted the proof of the claim relating to the trust money and also the claim to the extent of Rs. 1,14,892.29 np. in respect of the claim made on the basis of the running account. The proof in respect of the rest of the claim was rejected.

4. From this decision of the liquidator, in so far as it concerned the rejection of a portion of the proof produced by the firm, there was an appeal to this court under rule 164 of the Companies (Court) Rules, 1959. By an order made on July 27, 1961, that appeal was dismissed, but the claim made by the firm that it was entitled to preferential payment of the debts, proof in respect of which had been accepted, was left undecided. This court directed an adjudication on the matter by the official liquidator.

5. On January 18, 1962, the official liquidator made that adjudication. His decision was that in respect of the sum of Rs. 50,000 which represented the trust money, and the sum of Rs. 1,06,983.82 nP. out of what was due on the running account, the respondent firm was entitled to preferential payment. In respect of the remaining sum of Rs. 7,908.46 nP. due on accounts, the liquidator was of the view that the firm was not entitled to any preferential payment.

6. Form this decision of the official liquidator, two matters were brought up before this court. The first of them was an appeal preferred by the firm under rule 164 of the Companies (Court) Rules, 1959, complaining against the refusal of preferential payment to the extent of Rs. 7,908.46 nP. and this appeal was classified as Company Application No. 16 of 1962. The second matter was an application presented under section 460(6) of the Companies Act by the appellant before us, which is another creditor of the company, in which this court was asked to expunge the proof of the claim made by the respondent firm.

7. Narayana Pai J. who heard these two matters, dismissed both of them, upholding the decision of the official liquidator. The appellant appeals.

8. The three submissions that were made before that learned judge by Mr. Ullal on behalf of the appellant are these :

(1) that there was no proof which the official liquidator could have accepted that a sum of Rs. 1,14,892.29 nP. was a debt due by the company to the respondent firm ;

(2) that there was no proof that a sum of Rs. 50,000 was deposited by the firm with the company on March 26, 1957, or that that moneys was trust money ; and

(3) that neither in respect of the sum of Rs. 1,06,983.82 nP. nor in respect of the sum of Rs. 50,000 deposited, even if such deposit had been made, was the respondent firm entitled to claim preferential payment.

9. Narayana Pai J., before whom these submissions were made, repelled every one of them. In respect of the first submission that the proof of the debt accepted by the official liquidator should be expunged in respect of both the sums of money referred to above, the main argument advanced before Narayana Pai J. was that there was no real indebtedness on the part of the company to the respondent firm in those sums of money.

10. To understand the contention, it would be necessary to trace the business association between the respondent firm and the company. It is seen from the report submitted by the official liquidator on January 12, 1960, to the company judge, that the company was incorporated in the year 1936, with a view to find a profitable and steady outlet to the silk waste which was a by-product of silk reeling industry in the country. The management of the company was originally entrusted to a board of directors consisting of nine directors including a chairman. By reason of the large advances made by the Government of Mysore, when the company commenced its business, the Government had the power to nominate three persons to the board. It has also the power to nominate its own chairman amongst those three.

11. Some time during the year 1950, there was an agreement entered into between the respondent firm and the company, under which the respondent became the sole selling agent of all the filature silk manufactured by the company. During a brief period, the firm also became the sole selling agent of the other products of the company on a commission which varied between 2 1/2% and 4%. Some time in March, 1952, the agency in respect of the other products of the company came to an end, and, according to the affidavit produced by the firm, which I have no reason to distrust, although the agency in respect of the filature silk continued, the agency in respect of the other commodities came to an end. Instead the firm was buying the other kinds of silk yarn manufactured by the company at a discount and was making sales of them to its own purchasers.

12. The allegation made by the appellant in the affidavit produced before the company judge was that, even from the inception, there was such gross mismanagement of the affairs of the company that it met very soon with financial crisis in its life and that it was at this stage that the respondent firm agreed to make available to the company all the requisite financial assistance on its own conditions and terms which were extremely onerous to the company. It was stated that after the firm became virtually the banker of the company, it so much dominated the will of the management that it was making the management do what was wanted. It was alleged that the firm was able to persuade the management to raise the commission payable in respect of the agency from 2 1/2% to 4%. The management was accused of having dispensed with the obligation on the part of the firm to furnish particulars of the purchasers, leaving it open to the firm to select its own purchasers, to whom the firm was at liberty to sell the commodities at the prices fixed by itself.

13. The further charge made against the management was that, in respect of the sales of the goods manufactured by the company, the company did not even recover from the firm the cost price, with the result that there were continuous losses during a long period of time between the years 1952 and 1958. That the company in this way abdicated its control over the affairs of the company and that there was gross mismanagement and reckless borrowing on the part of he directors and that, in consequence, the only person who made any gain at all was the respondent firm, between whom and the management there was some sort of secret understanding by which the firm was enable to make unjust gains and secret profits, was also the submission made.

14. That the respondent firm inducted into the board of directors a majority consisting of its own nominees and which it was able to do by reason of its becoming the largest shareholder, and, in that manner, controlled, not only the policy of the business of the company but also the sales, production and manufacture and that the firm was able in that way to purchase goods from the company at arbitrary prices, and that the production programme was similarly regulated by the respondent firm which had become the sole financier of the company, was the allegation made in respect of the plea that there was exercise of undue influence and duress on the part of the respondent firm over the management of the company.

15. On the basis of these facts, what was urged before Narayana Pai J. was that quite enormous profits have been made by the respondent firm in pursuance of a clandestine agreement entered into between the management and the firm while the outstanding due to the firm were shown as still remaining due.

16. Narayana Pai J. was of the view that it was impossible for the appellant to sustain the contention that the indebtedness of the company to the firm was not real. It was not disputed before him that at all times when the company's affairs were in a state of crisis, the respondents firm did make advances so that the company could carry on its affairs ad continue its business.

17. The official liquidator, who examined the books of account maintained by the company, stated that he satisfied himself that on accounts a sum of Rs. 1,14,892.29 nP. was really due by the company to the firm. This balance was what became due, according to the respondent, after considering the credits in favour of the firm and the debits against it. The credits consisted mainly of advances made by the firm towards the working expenses and also payments made towards goods purchased or towards the sale effected by it in the course of the agency of filature silk. The debits consisted of the prices of the goods which had been delivered to the firm either in the course of agency or by way of sale. It was after deducting from the amounts so credited, the amounts so debited, that the balance was arrived at.

18. Before Narayana Pai J., Mr. Ullal, appearing for the appellant, did not dispute that the sums of money stated to have been paid by the firm to the company either through cheques or in the form of delivery against remittance had indeed been paid to the company. But what was, however, contended was that the debits against the firm were much smaller than what they should have been. The argument maintained was that in respect of the goods delivered to the firm, whether they were delivered in the course of agency or because they had been purchased, the price debited to the firm was ;not the real price but was very much less than what it should have been indeed debited, and that the firm was able to persuade the management to make smaller debits which the company did being under the domination of the firm. The form in which this contention was urged before Narayana Pai J. can be best stated in the words of the learned judge. This is what he said :

'Now, it should be noticed that in accepting a certain sum of money as due by the company to the creditor, the official liquidator has accepted after scrutiny the entries in the books of account maintained by the company. The sum of Rs. 50,000 said to be in deposit account is found entered in a separate book maintained by the company. The rest of the claim is a result of the credit and debit entries in the ledger account in the name of the creditor-firm maintained in the books of the company,--all the credits therein representing advances in cash made by the creditor, and the debits representing the value of goods either purchased by the creditor outright or sold by him as the selling agent of the company. The general statement that no reliance could be placed on the books of account maintained by the company no doubt amounts to attaching suspicion to both the credit and debit entries in the company's books. So far, however, as the truth of the creditor's claim that he did make advances represented by the credit entries found in the company's books in concerned, the evidence,e on which the creditor relies or on the strength of which he supports his claim of having made those advances, does not consist merely in the fact that there exist certain credit entries in the company's books in his favour. The creditor made payments into the bank account of the company or issued cheques drawn on his own bank account in favour of the company. Hence, he could rely and did rely before the liquidator on entries in the bank pass- books of the company and the cheques drawn by him as well as on the challans or paying-in-slips issued by the company's bank evidencing payments having been made by the creditor into the company's bank evidencing payments having been made by the creditor into the company's bank account. No suspicion is sought to be case on this category of evidence relied upon by the creditor. Indeed, Mr. Ullal, learned counsel for the petitioning creditor, did not say that the creditor never made any payment or that the entries representing payments made by the creditor are of a larger amount than actually paid by the creditor. His real and substantial case is that the debit entries representing the value of goods purchased by the creditor or sold by him on behalf of the company do not represent the real price or value of the goods.'

19. Mr. Ullal did not deviate before us from the stand which he adopted before Narayana Pai J. The argument maintained before us was the same as that maintained before that learned judge. He did not dispute the credits in favour of the firm. The controversy before us surrounded entirely the debits. That the debits should have been mush larger and that they should have been larger because the firm should have been charged higher prices for the goods delivered to the firm, was the submission made to us. It was also contended that the reason why the firm was able to obtain goods from the company at smaller prices was that the company was so much under the domination of the firm that the prices at which the goods were sold or delivered to the firm were those fixed by the firm and not by those in charge of the management of the company.

20. The two questions which arise in this context are, whether the indebtedness revealed by the account books of the company, which are undoubtedly maintained in the usual course of business, can be disputed by the appellant firm and, whether, if it can be disputed, there is sufficient ground for thinking that the sum claimed by the firm was not really due to it.

21. The relevant statutory provision, which is of importance in this context, is section 529 of the Companies Act. That section directs that in the winding-up of an insolvent company, the same rules shall prevail and be observed with regard to debts provable which are in force for the time being under the law of insolvency. The relevant of the insolvency law, to which section 529 of the Companies Act obviously refers, is section 33, of the Mysore Insolvency Act, under the provisions of which it is for the court to determine the persons who have proved themselves to be creditors of the insolvent in respect of the debts. It is obvious that the determination to be made under this section of the Insolvency Act is a judicial determination which means that the official liquidator who should, in the first instance, accept proof of the debt under the Companies (Court) Rules, 1959, is also similarly under a duty to make a judicial determination in regard to that matter.

22. Mr. Ullal maintained that, in the course of such determination, the official liquidator has a duty to make a full and thorough investigation into the truth of the indebtedness and to satisfy himself that the debt is real and just and that there was consideration which flowed in respect of that debt from the creditor to the company.

23. It is a firmly established rule that when a creditor makes a claim that a debt was due to him by he insolvent, neither the admission made by the insolvent that the debt was due, nor even a judgment obtained by the creditor against him, can conclude the matter. The official receive in insolvency proceedings and the official liquidator under the Companies Act are under an obligation to satisfy themselves, notwithstanding the admission or the judgment, that there was a real debt payable to the creditor and whether there is any circumstances of suspicion excited by the surrounding facts and circumstances which require a fuller probe into the matter. The extent of such probe and the necessity for it are all matters which depend entirely in each case upon its own facts and circumstances, the cardinal principle being that an endeavor should be made for the determination of the question whether the debt claimed is or is not real. The most accurate statement of the law on this matter is what was made by Bighanm J. in Van Laum, In re : Ex parte Pattullo (1) [1907] 1 K.B. 155. At page 162 he said this :

I am dealing with the rights between Mr. Chatterton and the general body of creditors as represented by the trustee. The trustee's right and duty when examining a proof for the purpose of admitting or rejecting it is to require some satisfactory evidence that the debt on which the proof is founded is a real debt. No judgment recovered against the bankrupt, no covenant given by or account stated with him, can deprive the trustee of this right. He is entitled to go behind such forms to get at the truth, and the estoppel to which the bankrupt may have subjected himself will not prevail against him. In the present case, the trustee desires to satisfy himself that the claims for costs represent a real indebtedness. He can only do this by seeing and examining the bills. When he sees them it may be that he will think them fair and reasonable and, if so, he will probably admit the proof. But until Mr. Chatterton furnishes him with the means of forming an opinion I think the trustee cannot do otherwise than reject the proof.'

24. The Court of Appeal fully concurred with this view.

25. In Van Laun, In re : Ex parte Chatterton (1) [1907] 2 K.B. 23,30, 31., Cozens-Hardy M.R. stated that he could not put his propositions in such free and good language as Bigham J. did. He observed that the trustee was entitled to say : 'I will not admit your proof until you have given me reasonable means of satisfying myself whether the debt in respect of which you are proving is to any and what extent justifiable and reasonable.'

26. Buckley L.J. proceeded to observe :

'I agree with Mr. Hamilton's argument to this extent, that it is true as a general proposition that the trustee takes the estate as he finds, it and if the debtor before the bankruptcy has done acts which bind his assets, the trustee is bound by them. That is a general proposition, but I think that the trustee is entitled, whether there be account stated or covenant or judgment, to deal with the matter in the way which I will endeavor to express shortly thus : Suppose there were no account stated, no covenant or no judgment, and that the creditor brought his action for the amount of the debt, the defendant in the action would be entitled to say to him, `Prove your case, vouch your payments, show me your books, give me such discovery as I, as defendant in the action, am entitled to before you get judgment in he action,' and in that sense he is entitled to say, ` I do not say that your claim is fraudulent or collusive, but I will say that it rests with you to prove it. Satisfy me that it is right.' Of course that results in this, that the man must produce his books or vouch his payments, and must, in short, make out his case. I think the trustee is entitled in every case, whether there be account stated, covenant or judgment, to say to the whether there be account stated, covenant or judgment, to say to the creditor who comes into the bankruptcy to prove, `Very well, you say you are a creditor ; make our your case as if there was no account stated or no covenant or no judgment. Satisfy me that the amount for which your say you are creditor is right'. That, of course, must be done reasonably.'

27. It is thus clear that the official liquidator in the case before us had;no only a right but was also under a duty to satisfy himself that the sums claimed by the respondent firm were really due to it. On that question, the official liquidator had the power to insist on proof from the respondent firm notwithstanding the entries in the account books of th company which, prima facie, establish the indebtedness. That the official liquidator so satisfied himself upon the materials before him is clear from the report which he made to the company judge. That the official liquidator was right in depending upon the credit entries in the books of the company is clear from the admission made before Narayana Pai J. that those credit entries likewise reflected the prices for which the company sold the goods to the respondent firm or which were debited against the firm in respect of the goods entrusted to the firm, in the course of the agency, is equally clear.

28. No evidence was produced by the firm either before Narayana Pai J. nor was any endeavor made in that direction that a debit was omitted to be made in respect of any consignment of goods supplied or that there was any deliberate under-valuation of the goods supplied. The extremely slender foundation for the allegation was that the company recovered from the firm prices far too inadequate and that such inadequate recovery was attributable to the clandestine agreement between the firm and the company.

29. Mr. Advocate-General, to my mind, is quite right in submitting to us that when the matter was taken before the company judge under section 460(6) of the Act, it became necessary for the appellant association, as elucidated by the Supreme Court in Bishundeo Narain v. Seogeni Rai (1) : [1951]2SCR548 ., to furnish full and sufficient particulars of the accusations made against the conduct of the firm. Besides leveling against those in charge of the management of the company charges of mismanagement and gross dereliction in the performance of their duties, no foundation at all was laid to support the theory that there was any fraud or conspiracy between the management and the firm, in consequence of which any loss was occasioned to the company or any gains were made by the firm in the manner represented on behalf of the association.

30. The sheet-anchor of the argument before Narayana Pai J. was that there were two documents available in the case which substantiate the appellant's contention that the management of the company was everything that it should not have been. The first was a report made by a committee which was called the Central Silk Board Technical Survey Team. The second was the memorandum of discussion which the special officer, Efficiency Audit, had with the chairman of the company.

31. According to the first document, there were as many as six reasons which contributed to the tottering condition of the company in which it was found when that report was made in the year 1959. The low share capital and want of necessary provision towards working capital, the purchase and sales policy of the company which was unrelated to direct control over suppliers of raw materials, dependence on certain regular suppliers who were in a position to extend credit facilities to the company, the inability on the part of the company to make purchases of proper quality and quantities, payment of commission at high rates, non-adherence to a regular programme of production and low production efficiently were those causes, according to the report. The only matter which emerges from the memorandum of discussion which the special officer of the Efficiency Audit had with the chairman of the company,as pointed out by Narayana Pai J., was that the dealings between the company and the respondent firm were not in the interests of the company but to the advantage of the firm.

32. Narayana Pai J. was of the view that neither the opinion of the Technical Survey Team nor that of the special officer of the Efficiency Audit could be regarded as evidence and that even if any dependence were placed upon their opinion, it was not possible to say that the debt claimed by the respondent firm was not real.

33. I entirely agree with this view taken by Narayana Pai J. Quite apart from the fact that it is surely unsafe and certainly not permissible in a matter like this to depend to any extent upon the opinions formed by the members of the Technical Survey Team or the special officer of the Efficiency Audit, it is clear that none of the two documents on which the appellant wishes to rely, to any extent, can persuade the view that the amount shown to be due to the respondent firm in the books of the company did not constitute a real debt. Although it is true that, according to the special officer of the Efficiency Audit, the transaction between the company and the respondent firm resulted in a gain only for the firm and not for the company, it is seen that the correctness of that view taken by the special officer is open to grave doubt. That doubt is what arises out of annexure I to the report produced by the official liquidator before the company judge. That annexure purports to be a communication from the Secretary to the Government in the department of Commerce and Industries enclosing the audit objections based on the memorandum of discussion which the special officer, Efficiency Audit, had with the chairman of the company, and the reply thereto by the management of the company. In respect of each of these objections, the management had something to say by way of explanation. Whether the objection is not adequately met by its explanation is not a matter on which it is really possible for us to say anything. But, what is, however, clear is that there is nothing in any of those three documents which could dies-establish the truth of the claim made by the respondent firm. No proof is produced that in respect of any particular consignment of goods by the company to the firm, the price debited to the firm was less than what it should have been, nor was evidence given that there was any secret understanding between the firm and the management that the firm should be debited with a smaller price than it normally would have been liable to pay.

34. The only material to which our attention was drawn is annexure III in the report of the Technical Survey Team in which it is shown that in respect of the sale proceeds between APril and June, 1957, whereas the cost of production was Rs. 42,530 for each point of such silk, the selling price was only Rs. 38,250. But it is seen from annexure II that, on another occasion, the selling rate was higher than the cost price. It may be that on some occasions the cost price was higher than the selling price and that may be due to the fact that there was no market for the goods manufactured by the company. But to point out one solitary occasion on which the cost price was higher than the selling price and depend upon it as a circumstances supporting the charge that there was a systematic under- valuation of the goods, and that that under-valuation was in consequence of some kind of oblique understanding the firm and the company, is in my opinion, going too far.

35. In a case like this, where the transactions between the parties occupies a long tract of time between the years 1950 and 1958, it is not enough for the appellant to point out that the respondent firm was the only person who was willing to finance the company when every one had declined to do so. It may be that on account of the advantageous position occupied by the firm, it was able to drive a hard bargain, and it may be that, in some cases, it was an unreasonable bargain, and it was able to walk away with the goods manufactured by the company for much smaller prices than the company would have been able to realise elsewhere. That does not mean that the money payable by the company on accounts in respect of the prices actually debited and the monies actually paid is not a real debt. It is as real as it could be. It is certainly not open for us to investigate into the long course of transactions between the parties and to pronounce upon the reasonableness or otherwise of each of the transactions between the company and the firm, and even if we could say that there was an unreasonable term in the contract between the parties, it cannot sustain the conclusion that the liability arising under the contract is not a real liability.

36. Having regard to all the circumstances of the case, it is, in my opinion, impossible to say that there is any evidence before us that the debits made against the firm were smaller than they should have been. It is equally impossible for us to say that even if those debits were smaller in size, the ultimate indebtedness emerging from the transactions is not a real indebtedness.

37. Mr. Ullal further contended that there was an unreasonable refusal of opportunity to produce further evidence in the case. It is seen that Mr. Ullal filed a memo on behalf of the appellant in which he wanted permission to produce further evidence in support of his contentions. Narayana Pai J. was of the view that no part of the evidence which the appellant proposed to produce in that way had any relevance to the matter before him. I entirely agree with that view.

38. What the appellant proposed to do was first to summon the report of the Technical Survey Team of the Central Silk board and, secondly, to summon the final report of the official liquidator. The first report, I have already demonstrated, could really have been of no assistance. The final report filed by the official liquidator was also before the company judge, and there is nothing in that report, so far as I am able to see, which could have been of any assistance to the appellant.

39. What the appellant next proposed to do was to examine an official of the Silk Board to show that there was no foreign competition worth mentioning during the relevant period. In my opinion, evidence of that character can have no relevance.

40. What was next proposed was to examine an official of the State Bank of Mysore to show the manner in which the company was operating on its accounts and that it had exhausted its credit between the years 1952 and 1958. that was again a matter which would not to any extent diminish or decrease the indebtedness of the company.

41. What the appellant next wanted was to examine the letters of instruction issued by the company to persons from whom it purchased goods, directing them to go to the respondent firm and obtain payments and that such payments related to very small amounts. May be, it was so. BUt what I do not understand is how the fact that the respondent firm came to the succour of the company on such occasions can be of any significance. The affidavits of the firm produced during the course of the main winding up petition, which the appellant next wanted to be perused, have been pointed out by Narayana Pai J. to have no materiality, since all that is established from the affidavits was that, at one stage, there was a proposal for reconstruction and that the respondent-firm offered to take a lease of the business of the company. That there was such an offer by the respondent firm is again really of no consequence.

42. The appellant next wished to summon the State Government to produce the report made by the Director of Efficiency Audit and Anti corruption appointed by it to investigate into the affairs of the company, to which I have already adverted.

43. I am, therefore, not convinced that there was any opportunity sought by the appellant to produce any relevant evidence which was unreasonably refused.

44. In my opinion, it is not, therefore, possible to dissent from the view taken by Narayana Pai J. that it was not possible to expunge the proof relating to the claim made by the firm to the extent of Rs. 1,14,892.20 nP.

45. What should next be considered is the claim made in respect of the sum of Rs. 50,000 which was described as trust money made by way of deposit. That there was a deposit made by the respondent firm on the 25th of March,1957, is more than clearly established in this case. THe correspondence between the company and the firm was produced before Narayana Pai J., although they were not before the official liquidator and it is not disputed by Mr.Ullal that Narayana Pai J. could direct the parties to make available to him such further proof as he considered to be necessary to satisfy himself about the adjudication made by the official liquidator. The finding of Narayana Pai J. was that a sum of Rs. 50,000 was always in deposit with the company and that it was made by the firm as security for the fulfillment of the conditions of the agency relating to filature silk. It is true that this deposit did not continue to remain with the company, in the sense that the sum of money remained with the company all along. What used to happened was that at the end of each term of agency, the deposit was renewed. It may be, as Mr. Ullal says, that during some period of the agency, there was no deposit by the respondent firm. What is of importance is that there was a deposit made on March 26,1957, and that such deposit was made was more than fully established.

46. What happened on the occasion of this deposit was that the firm first requested the company to debit its own account in a sum of Rs. 50,000 and treat that sum of money as a deposit made by the firm. But this instruction was country amended by the letter addressed by the firm on March 25, 1957 by which the company was informed that a sum Rs. 50,000 had been remitted to the current account of the company with the Bank of Mysore, Ltd., and that that sum of money should be treated as a deposit. In consequence, a receipt bearing the date March 26,1957 was issued by the company to the firm, which reads :

'Received with thanks from Shah Harilal BHikabhai & Sons ,83 Mamulpet, Bangalore-2 the sum of Rupees Fifty Thousand only on account of Failure Silk Deposit a/c..... Bank CHallan on the Bank of Mysore Ltd. H.O.'

47. There can thus be no doubt that there was a deposit made by the respondent firm with the company of a sum of Rs. 50,000 on March 25,1957. Is it thus clear that the official liquidator was right in reaching the decision that the proof of the debt of Rs. 50,000 was likewise acceptable. The appellant cannot, therefore, ask us to expunge that proof.

48. The next question is whether the respondent firm was rightly declared to be entitled to preferential payment of a sum of Rs. 1,06,983.82 nP. out of the sum of Rs. 1,14,892.20 nP. due on accounts, and of the sum of Rs. 50,000 deposited on March 25,1957. The official liquidator was of the view that the respondent firm was entitled to such preferential payment,a nd that view was upheld by Narayana Pai J. The correctness of the view taken by Narayana Pai J. is assailed before us by Mr. Ullal who has made two submissions in that context.

49. Before referring to these submissions, I should mention that the respondent firm was held to be entitled to preferential payment of the sum of Rs. 1,06,983.82 nP. for the reason that the payment was what was enjoined by section 530(4)(i) of the Companies Act. Narayana Pai J. had no doubt in his mind that the accounts of the company fully established the fact that this sum of Rs. 1,06,983.82 nP. was advanced by the respondent firm for the purpose of making payments of wages to the employees of the company.

50. That this sum of money was so paid by the company towards wages and salaries of its employees during the months of September, October and November, 1958, is clear from annexure II to the liquidator's decision, which was challenged before the company judge. In the very clear analysis contained in annexure Ii, it is pointed out that a sum of Rs. 45,688.11 nP. was advanced by the respondent firm in September, 1958, that the sum of Rs. 60,000 was advanced in October, 1958, and that a sum of Rs. 7,265.65 nP. was advanced in the month of November, 1958, and that all these advances were made by the respondent firm towards payment of wages and salaries. Although the aggregate of these three sums of money is Rs. 1,12,9563.76 nP. the official liquidator deducted from out of that sum of money, certain sums of money due by the respondent firm towards trade dues and determined the amount advanced by the respondent firm towards wages and salaries to be Rs. 1,06,983.82 nP. Whether the deductions made by the official liquidator in that way are or are not legitimate deductions is not the question which is before us since there is no appeal by the respondent firm in regard to that matter. Although the correctness of those deductions was challenged before Narayana Pai J. who overruled the objections to the deductions, the respondent firm has allowed that matter to rest there.

51. however that may be, what is clear beyond doubt is that at least a sum of Rs. 1,06,983.82 nP. was advanced by the respondent firm towards wages and salaries and that the sum was paid by way of wages and salaries for the months of September, October and November 1958 . The question is whether in respect of that sum of money, the respondent firm is entitled to priority.

52. What creates a right of priority is section 530(4) of the Companies Act. Before setting out the provisions of this sub-section, it would be necessary to point out that section 530 creates a right of more than one category to preferential payment. We are concerned in this appeal with sub- section (1)(b), sub-section (2) and sub-section (4) of this section. These parts of the section read as follows :

'530. (1) In a winding up, there shall be paid in priority to all other debts....

(b) all wages or salary (including wages payable for time or piece-work and salary earned wholly or in part by way of commission) of any employee, in respect of services rendered to the company and due for a period not exceeding four months within the twelve months next before the relevant date and any compensation payable to any workman under any of the provisions of Chapter VA of the industrial Disputes Act, 1947, subject to the limit specified in sub-section (2).....

(2) The sum to which priority is to be given under clause (b) of sub- section (1) shall not in the case of any one claimant, exceed one thousand rupees:.....

(4) Where any payment has been made to any employee of a company,0

(i) on account of wages or salary; or

(ii) to him or in the case of his death, to any other person in his right, on account of accrued holiday remuneration

Out of money advanced by some person for that purpose, the person by whom the money was advanced shall, in a winding-up, have right of priority in respect of the money so advanced and paid, up to the amount by which the sum in respect of which the employee or other person in his right, the sum in respect of which the employee or other person in his right, would have been entitled to priority in the winding-up has been diminished by reason of the payment having been made.'

53. The meaning of these parts of section 530 is clearly this. Under clause (b) of sub-section (1), wages or salary in respect of which priority could be claimed cannot exceed the wages due for a period of four months out of the twelve months preceding the relevant date. The relevant date is defined by clause (c) of sub-section (8) which says that the relevant date is either the date of appointment of a provisional liquidator, or if no such appointment was made, the date of the winding up order in cases in which the company had not commenced voluntary liquidation proceedings.

54. This case being one in which there was no such voluntary liquidation and in which a provisional liquidator was appointed on January 20,1959, the relevant date for the purpose of clause 9b) of sub-section (1) is January 20,1959. that being so, the employees of the company were entitled to a right of priority for wages due for a period of four months which forms part of the larger period of twelve months preceding January 20,1959.

55. It is, of course, true that sub-section (2) forbids a preferential payment of wages exceeding Rs. 1,000 in the case of any individual employee. It is not the case of any one that the provisions of sub-clause (2) had been transgressed by the company in this case.

56. What should next be considered is sub-section (4) which consists of more than one part. It first creates a right of priority in a creditor who advances money for the payment of wages or salary or holiday remuneration to an employee of the company, or in the event of his death, to his legal representative. It, of course, insists that before a right of priority could be claimed, it should be established that the creditor advancing money, advanced it for the purpose of such payment.

57. What it next does is to limit the amount in respect of which that right of priority could be claimed. Although the language of sub-section (4) is a little involved, its meaning, however, is unambiguous. What it says is that the maximum amount in respect of which the right of priority could be claimed is the amount by which there is a diminution of the liability of the company by reason of the payment of wages or salary or holiday remuneration out of the amount advanced by the creditor. In simple language, what the sub-section means is that the only amount in respect of which a creditor could claim a preferential payment is that the amount which has been applied by the company towards payment of wages or salary or holiday remuneration and in respect of which if it had not been paid, the employee or his legal representative would have been entitled to a right of priority himself. In other words, the amount in respect of which a creditor could claim a right of priority cannot exceed the amount in respect of which the employee or his legal representative could have claimed a right of priority for either wages or holiday remuneration. The measure in both the cases is the same.

58. Now it is clear from the report of the official liquidator, which is fully supported by the entries made in the account books of the company, that the advances made by the respondent firm during the months of September, October and November, 1958, were all utilised and paid towards the wages or salaries of employees due to them during those three months. These three months fall within the twelve months preceding the relevant date, which is the date on which the provisional liquidator was appointed, namely, January 20,1959. SO it becomes clear that the amount advanced by the respondent firm is less than the amount in respect of which there would have been a right of preferential payment in the employees of the company under the provisions of section 530(2)9b) of the Companies Act. So the respondent firm became entitled under sub-section (4) of that section to a right of priority in respect of that amount. This, in my opinion, is the correct position and we should not, therefore, dissent from the view taken by Narayana Pai J. that the official liquidator was right in thinking that in respect of the sum of Rs. 1,06,983.82 nP. the respondent firm was entitled to preferential payment. Since the claim to preferential payment to this extent falls fully within sub-section (4) of section 530 of the Companies Act, and the sum claimed represents the measure of the diminution of the liability of the company about which this sub=section speaks, no other conclusion is possible.

59. What next has to be considered is the claim to preferential payment of the deposit made on March 25,1957. Section 530 of the Companies Act is not the statutory provision which creates any right of preferential payment of that amount. But section 530 is not an exhaustive provision on the subject of preferential payment since section 529 expressly provides that in respect of the debts provable under the Companies Act, the rules under the law of insolvency are applicable and, as provided by section 529, any provision in the law of insolvency as to preferential payment must be considered to be a supplementary provision regulating preferential payments.

60. The argument maintained before us by Mr. Advocate General was that if the deposit made is impressed with the character of a trust and so becomes trust money, that money does not vest in the official receiver under the law of insolvency and, therefore, does not vest in the liquidator under the companies Act. It is clear that if the deposit was trust money, that money does not vest in the official receiver under the law of insolvency and, therefore, does not vest in the liquidator under the Companies Act. It is clear that if the deposit was trust money as contended, it, of course, does not vest in the official liquidator since that is how we should understand section 529 of the Companies Act read with the relevant provisions of the insolvency law. Mr. Ullal appearing for the appellant does not also dispute the proposition that if the deposit was trust money, it did not vest in the liquidator and the respondent firm would be entitled to preferential payment of that amount.

61. Now section 52 of the Presidency Towns Insolvency Act contains an express provision that a property held by an insolvent on trust for any other Provincial Insolvency Act nor the Mysore Insolvency Act contains a provision similar to section 52 of the Presidency Towns Insolvency Act, it is clear from the provisions of section 28 of the other two enactments that what vests in the official receiver is only the property of the insolvent, and since the property held in the insolvent in trust for others is not his own property, it does not vest in him. That, indeed, is the pronouncement of the Privy Council in H.Hunter, Liquidator, Bank of Upper India Ltd. v. Rani Kaniz Abid . That was a case to which the provisions of the Provincial Insolvency Act were applicable, and the board pointed out that if a person has effected a mortgage in respect of his property and subsequently executes a trust deed, appointing certain other persons as trustees, on his insolvency ,the properties did no vest in the receiver. So there is no reason to think that the absence of an express provision in the other two laws similar to that contained in the Presidency Towns Insolvency Act has the effect of vesting the trust money in the receiver or in the liquidator.

62. The question, therefore, to which this discussion leads is, whether the money deposited was trust money or was impressed with the character of a trust. In the affidavit before the company judge and also in that produced before the official liquidator, the respondent firm asserted that the money deposited was trust money. It is abundantly clear that the deposit was made as security for the purpose of the fulfillment of the obligations of the respondent firm as agent of the company in respect of the filature silk business.

63. Although in the letter addressed by the company on August 23,1952 to the respondent firm, in which are recorded the terms of the agency, there is a term that the firm should deposit a sum of Rs. 50,000 as a permanent advance and that that sum of money would carry interest at 6% per annum, this term was altered by a letter addressed by the company on May 20, 1953, to the firm in which it was stated that from May 1,1953, the deposit will not carry any interest. It is not shown to us that there was any subsequently agreement under which the company became liable to pay interest. So it has to be taken that the deposit made on March 25,1957, did not also carry interest.

64. The question is whether this deposit was impressed with the character of a trust and whether it was trust money. There was, at one stage a view taken by the High Courts of Allahabad, Bombay and Lahore that if a security deposit was made by an agent or an employee and that deposit earned interest or had been mixed up with the other assets of the employer or the principal, the deposit was a loan and there was no relationship of a trustee and beneficiary (see Maneckji Petit ., In re [1933] 3 COmp. Cas. 50; Malvankar (G.K.) v. Credit Bank of India Ltd. (1915) 27 I.C> 343, Ram chand V. Mohd. Akram Khan Sahib A.I.R. 1937 Lah. 444 and Maheshwari Brothers v. Official Liquidators, Indra Sugar Works Ltd. [p1942] 12 Comp. Cas 75. In a later decision of the High Court of Bombay in the National Petroleum Company Ltd. v. Popatlal Mulji [1936] I.L.R. 60 Bom. 954, Chief Justice Beaumont was having before him a case in which there was an express term in the contract that 'the company shall be entitled to utilise and use the deposit whether in cash or Government securities.' The learned Chief Justice, in coming to the conclusion that the obligation to return the deposit was a mere obligation in contract and not in trust, depended principally upon that term in the contract.

65. But there is another line of cases which took the view that in a case where there was a deposit as security either by the employee or by an agent for the fulfillment of the terms of the agency contract, that deposit was impressed with the character of a trust notwithstanding the stipulation for payment of interest (see In re Hindustan Commercial Bank (India) Ltd. [1938] 8 Comp. Cas. 101; Ganesh Export and Import Co. V. Mhaadeolal Nathmal [1955] 25 Comp. Cas 357; Karnataka Films Ltd. v. Official Liquidator of Chitrakala Movietone [1951] 21 Comp. Cas. 138; In re Fazalbhai Mills Ltd. [1936] 6 Comp. Cas. 351; Thakur Sri Sri Raghunath Jiew v. Ganga Gobinda Pati : AIR1937Cal305 and In re Travancore National & Quilon Bank Ltd. [1939] 9 Comp. Cas. 14.

66. That neither the stipulation to pay interest nor the fact that the person making the deposit consented to the mixing up of the sum deposited with the assets of the depositee could be regarded as a circumstance divesting a deposit of the character of a trust impressed upon it was the view which was deduced in these cases from the pronouncement of the Privy Council in Official Assignee of Madras v. Krishnaji Bhat (1933) I.L.R. 56 Mad. 570 (P.C.).

67. Although it is true that in the appeal before the High Court of Madras, it was not disputed that the deposit made in that case was impressed with the character of a trust, it will be seen that there was a controversy in that matter before the court of first instance, and, as pointed out by Mitter J. in Kishetra Mohan Das v. D.C. Basu (1943) I.L.R. 1 Cal. 313, the dispute in regard to that matter was not carried to the appellate court since it was not a matter worth disputing.

68. It seems to me, if I may say so with great respect, that we should accept the view in the later decisions of the high Courts of Bombay, Calcutta and Madras as the correct view in the matter.

69. The definition of 'trust' contained in the Indian Trusts Act is :

'A 'trust' is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.'

70. That a deposit made by an agent with the principal for the fulfillment of the terms of an agency agreement is made because he reposes confidence in the principal which is accepted by him and that the acceptance of that confidence is for the benefit of the agent cannot, in my opinion, be disputed. When an agent deposits for that purpose a sum of money with the principal, the principal holds that money in trust for the agent and agrees to do so, and the agent, on the termination of the contract of agency is entitled to claim the payment of that money which is clearly impressed with the character of a trust. That is the principle which was accepted in all the later decisions to which I have referred, and in In re Fazalbhai Mills Ltd. the sum of money was a provident fund to which the employees were entitled.

71. I am, therefore, clearly of the view that the deposit made by the respondent firm in this case was clearly impressed with the character of a trust, and so did not vest in the official liquidator and could not be distributed among the creditors of the company. The respondent firm was thus plainly entitled to preferential payment of that deposit.

72. This appeal, therefore, fails and should, in my opinion, be dismissed.

73. In the circumstances there will be no direction as to costs.

Kalagate, J.

74. I agree.

75. Appeal dismissed.


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