1. We have before us an application by Seth Mithan Lal against the official liquidators of the Agra Spinning and Weaving Mills Ltd. (in liquidation). His prayer is that the official liquidators should be directed to refund him a sum of Rupees 34,618-10-11 out of a sum of Rs. 72,431-8.6 deposited by him in the Imperial Bank of India Ltd. at Agra. For some time before the year 1928 it appears that the company had not been able to carry on its business owing to lack of the necessary funds and therefore on 26th November 1928 the company through one of its directors, Kunwar Ganesh Singh, whose authority is no longer disputed, entered into an agreement with the applicant, Seth Mithan Lal. In general terms the agreement was that Seth Mithan Lal should supply a certain amount of cotton to the mills in order that they might spin it, that he was to pay spinning charges at a certain rate and that he would advance money to the company to pay for their staff and for the purchase of machinery and other necessary articles. I do not think it would be contested that this was the general idea underlying the agreement, although Seth Mithan Lal expressly covenanted that he would not be bound to make any advances. The matter was left to his discretion, but undoubtedly the parties contemplated that normally Seth Mithan Lal would supply the necessary funds. The arrangement was that he should deduct from funds advanced by him the spinning charges which he had to pay or in the alternative that he should deduct his advances from the spinning charges. The company continued to work under this arrangement, but eventually on 4th May 1931 another director of the company made an application that the company should be wounded up compulsorily. A provisional liquidator was immediately appointed and a winding up order was passed later on 24th June 1931, when official liquidators took charge of the affairs of the company.
2. It appears that the books of the company showed on 31st March 1931 that a sum of Rs. 34,618-10-11 was due from the company to the applicant on account of advances made by the latter. Thereafter certain other advances were made and certain sums accrued on account of spinning charges. The official liquidators after they took charge of the affairs of the company demanded the spinning charges from Seth Mithan Lal who objected upon the ground that he was entitled to deduct his advances to the amount of Rs. 34,618-10-11 before he made any payment. There was a controversy for some time, but eventually the applicant deposited under protest to the account of the official liquidators in the Imperial Bank at Agra a total sum of Rs. 72,431-8-6 on account of spinning charges, it being left to the decision of this Court whether the sum due on account of advances on 31st March 1931 should be deducted from this sum. When the matter came up for decision before us, the application of Seth Mithan Lal was strongly opposed by the debenture-holders of the company and we heard considerable argument on their behalf. Their contention was that we would be giving Seth Mithan Lal a preference over other creditors if we directed that the sum of money claimed was to be paid to him and that he was not entitled to any priority under the terms of the contract. The suggestion was that he was a creditor like any other for this money which he had advanced to the company and that he should rank equally with other creditors. It seems to me, however, that the debenture-holders have not stated the true position. The question is not really whether Seth Mithan Lal is entitled to payment in priority out of the assets of the company but what sum the official liquidators are entitled to claim from him towards those assets. The sum of Rs. 72,431-8-6 which was deposited by Seth Mithan Lal was deposited by him under protest on an understanding between him and the official liquidators that the official liquidators should be entitled to credit to the assets of the company the sum which this Court eventually held to be properly due.
3. The argument addressed to us on behalf of the debenture-holders is based upon the assumption that Seth Mithan Lal gave an unconditional promise to pay certain spinning charges on account of cotton supplied by him and spun by the company. The claim to these spinning charges is based upon a contract between Seth Mithan Lal and the company and the question which we have to decide is what sum is due under the terms of that contract. If Seth Mithan Lal promised to pay without condition the spinning charges calculated at a certain rate, then doubtless he must make the payment and if he has any claim on account of advances, that claim will have to be considered with the claims of other creditors who rank equally with him. On the other hand, if Seth Mithan Lal promised to pay only a balance due on a calculation of the spinning charges as against sums advanced by him to the company, then the company can claim only the balance on the basis of the contract and there is no question of paying Seth Mithan Lal any sum out of the assets of the company. To decide the question, therefore, we must examine the nature of the contract itself. I have already referred to the agreement between the company and Seth Mithan Lal executed on 26th November 1928. I must now explain that this agreement was to be enforced only for a period of eighteen months and that there was another agreement between the parties on 2nd January 1930. This second agreement embodied the terms of the first agreement with certain modifications. It is, therefore, necessary to consider in detail the terms of both agreements.
4. The first agreement set forth in its preamble that the company had been suffering loss owing to the mills lying idle for a very long time and that there did not appear to be any method of employing the mills other than one under an arrangement by which the mills would spin the raw materials of another party. The preamble then went on to say that Seth Mithan Lal had agreed to supply raw materials to be spun by the company and that he would pay spinning charges at the rate of fourteen annas per bundle of ten pounds in accordance with certain terms which were thereafter expressed. Under these terms, the company bound itself to maintain a staff of clerks and labourers as entered in a list which had been signed by both parties to the contract and undertook further to pay the salaries of the staff of clerks and labourers at the appointed time with the proviso that if it failed to do so, Seth Mithan Lal should be entitled to have them paid under his own supervision out of the charges due from him to the company. The company further undertook to keep in stock certain materials necessary to run the mills and manufacture the yarns, a list of the materials having been supplied to Seth Mithan Lal. Seth Mithan Lal bound himself to pay the spinning charges, but it was specifically stated that he should be entitled to withhold out of the charges approximately an amount which would be equal to the salaries of the servants for fifteen days so that he might pay those salaries if the company was unable to do so. The cotton supplied for spinning was to remain the property of Seth Mithan Lal and he expressly stipulated that he would not be liable for any debts due from the company and would not be bound unless he wished to do so to make any payments towards salaries or the purchase of material, but the agreement was that he would be entitled to deduct out of the amounts due as spinning charges the price of any material which he found it necessary to supply.
5. Finally under para. 20 of the agreement it was stipulated that the accounts between the parties should be settled every month and that each party should pay off the amount due to the other with the exception of such amount as Seth Mithan Lal might be entitled to withhold under the proviso that he could keep sufficient funds out of the charges due from him for the payment of the salaries of the staff for a period of fifteen days. Under para. 22 of the agreement it was stipulated that the company might, if Seth Mithan Lal agreed, take from him a reasonable amount by way of advance for the purchase of material which advance should be afterwards debited against the charges due from him. Under para. 23 of the agreement it was stipulated that the company should be liable to pay water rates, house taxes, etc. whatever they might be, and that Seth Mithan Lal would not be liable to pay in part or entirely any amount which might be due to any one from the company or persons connected with it. This agreement remained in force till the second agreement was executed and we find from the accounts of the company that Seth Mithan Lal did in fact make certain advances not only towards the payment of the salary of the staff and the purchase of materials but also in order to enable the company to meet other charges which were necessary to enable the company to continue spinning his cotton, such as income-tax and payments for boiler inspection.
6. The second agreement set forth in its preamble that the first contract had come into force and the work had been carried on in accordance with it but that the parties felt the necessity in view of the actual circumstances to make certain alterations, additions, and extensions in its terms. The agreement went on to say that the period mentioned in the first agreement should be extended for a further period of five years but that the terms of that agreement were subject to certain additions and alterations which were set forth thereafter. The charges for spinning were increased from 14 annas per bundle of ten pounds to 15 annas. The company was entitled to install new machinery, but they were still to be paid at the rate of 15 annas per bundle even if the new machinery was used for the purpose of spinning Seth Mithan Lal's yarn. Another provision was that the company should pay compound interest at the rate of 10 annas per cent, per mensem on such daily balances which remained due from the company to Seth Mithan Lal from time to time. Seth Mithan Lal was given the right to make up any deficiency in the staff and to recover all expenses and charges if he did so. The company was not entitled to terminate the contract so long as any sum remained due from it to Seth Mithan Lal. At the time when this document was drawn up and executed, certain sums were due on account of advances made by Seth Mithan Lal not only on account of staff and materials but also on the other accounts which I have already mentioned.
7. The accounts further show that from the date of the second agreement up to the time of the appointment of the provisional liquidator the parties continued to deal with each other as they had done before. In other words Seth Mithan Lal made certain advances on various accounts and those advances were set-off against the spinning charges and the balances were adjusted accordingly and paid. We have to deduce from these terms what the real intentions of the parties were and I think we are justified, when we come to consider the terms of the document, also to consider the course of conduct between the parties who were in the best position to know what they intended. The contention on behalf of the debenture-holders is that we should not look beyond the actual words in the agreements and that in accordance with those words Seth Mithan Lal had undertaken to pay the spinning charges and was entitled at the best only to deduct sums which he had paid as salaries or as the price of necessary materials. It seems to me however that this is too narrow an interpretation. It is clear that Seth Mithan Lal was safeguarding himself from liabilities on account of the debts of the company and that he was reserving to himself the Tight to exercise his discretion in making advances but, on the other hand, I have no doubt that the parties clearly intended that he was to be given the right to expend any sums which might be necessary to enable the mills to continue spinning his cotton in a satisfactory manner and that any sums which he did so expend should be set-off by him against anything due from him on account of the spinning charges. I do not think that we should overlook the express provision that balances were to be made up every month and that the parties were liable to each other to pay only the sums due on the balances. It is clear from the accounts that the parties themselves acted on that assumption. There was a running account in the books of the company which showed on the one side the amounts due on account of spinning charges and on the other all advances and payments made by Seth Mithan Lal.
8. Learned counsel for the debenture-holders has argued that Seth Mithan Lal was not entitled under the agreement to set-off against the spinning charges any advances or payments made by him in connexion with any matter other than salaries or the purchase of materials and that any such advances or payments made were made under separate contracts and give rise to independent claims. It is clear however that the company kept only one account of all these transactions and I do not think that anybody would seriously doubt that the parties, who were in the best position to know what their intentions were, acted as if those intentions justified the setting off of all payments and advances made by Seth Mithan Lal against all charges due from him on account of spinning. In my judgment, Seth Mithan Lal contracted not to pay unconditionally all spinning charges calculated at a certain rate but to pay any balance which might be due when such charges were set off against the advances which he had made on one account or another in order to enable the mills to continue in operation. If that was the contract, then the official liquidators, when they seek to recover any sum on the basis of it, must show what the balance in their favour was on the date when the liability arose. It is not sufficient for them to show only what sums were due on account of spinning charges calculated at a certain rate without any reference to sums of money which might be due on the other hand to Seth Mithan Lal from the company.
9. I think I may add that the conduct of the official liquidators after they took charge of the affairs of the company was based on the same assumption that Seth Mithan Lal would be entitled to deduct from the spinning charges any advances made by him. The company continued to operate the mills after the winding up order was passed and thereafter Seth Mithan Lal continued to make advances for payments such as income-tax and the official liquidators allowed him to deduct those payments from the charges due from him. When the official liquidators sought to obtain the sanction of the Court that the company should continue working, they reported that it was advisable that the status quo should be maintained and their notion of the relations between the company and Seth Mithan Lal is evidenced by their own conduct in respect of advances made by the latter. It has been argued on behalf of the debenture-holders that they are not bound by any thing done by the official liquidators and, of course, in a sense they are not, but it is obvious that they have no better claim than the company itself. They have a charge on the assets of the company but what those assets are depends on the rights of the company. The debenture-holders can have no greater rights than the company from which their rights are derived.
10. I think I had better once more emphasize the fact that the question before us is whether the company can claim the full amount of spinning charges or whether it can claim only the balance between the spinning charges and the advances made by Seth Mithan Lal. The claim of the company is based on a contract and the company is entitled to recover only what Seth Mithan Lal in the contract promised to pay. In my judgment on an interpretation of the contract expressed in the two agreements, Seth Mithan Lal promised to pay only the balance due from him after his advances had been deducted from the spinning charges calculated at a certain rate. I would therefore hold that the applicant is entitled to deduct the sum of Rs. 34,618-10-11 from the sum deposited by him in the bank towards the spinning charges for which he became liable before and after the petition for winding up was presented and I would direct the official liquidators to pay this sum back to the applicant. If any interest has accrued upon the money while it has been in deposit in the Bank that should also be paid to the applicant.
Iqbal Ahmad, J.
11. I agree.
12. Out of the sum deposited in the bank the official liquidators shall return to the applicant, Seth Mithan Lal, a sum of Rs. 34,618-10-11 together with any interest which the bank may have paid or may pay on this sum for the period during which it has been in deposit.