(1) This is a petition for directions to the Official Liquidator to admit the petitioner's claim for preferential payment.
(2) It is alleged in the petition that in the middle of 1946 the petitioner was approached by S. Sewa Singh Gill, who was his brother-in-law, to promote a Company for the establishment of a vegetable ghee plant at Doraha. The petitioner and S. Sewa Singh Gill raised money from their respective friends and relations and contributed large sums of their own to set up the factory. In order to secure the plants and machinery the petitioner and S. Sewa Singh Gill approached various Bombay dealers including Messrs. Jayems Engineering Company (hereinafter to be called the Engineering Company) who agreed to simply the necessary power plant and it accessories. On 26th November 1946 the petitioner placed the order with the aforesaid Company and paid a sum of Rs. 35,930/- out of his promotion account as 20 per cent advance under the terms of the agreement. In due course the machinery was delivered at Doraha.
In the meantime on 27th May 1947 a Company had been incorporated called the Banaspati and Allied Products Company Limited (to be referred to as the Company) and necessary arrangements had been made for the reception and storage of the machinery at the office premises at Doraha. The order, which had been placed by the petitioner, was duly adopted and confirmed by the Directors of the Company. On 16th November 1949 the Board of Directors acting on the report of certain Engineers to the effect that the steam alternator and some other machinery supplied by the Engineering Company were not according to specification, passed a resolution by which it was decided to file a suit against the Engineering Company. The suit was to be filed before 25th November, 1949, S. Sewa Singh Gill, the Managing Director, was empowered to file the cases on the Company's behalf.
A civil suit was filed in the Bombay High Court on the original side and the petitioner was asked by the Company to join as a co-plaintiff in order to forestall a possible technical objection by the defendants on the ground that the original order was placed with them by the petitioner and not by the Company.
On 21st October 1955 the Company was ordered to be would up by the Pepsu High Court and the Official Liquidator reported to that Court against further prosecution of the Company's suit at Bombay. The Court permitted him to withdraw the suit. The suit was allowed to be dismissed for default in 1956 and the Bombay High Court awarded costs against the Company and the petitioner, who were the plaintiffs, which were later on taxed at Rs. 6,929.19 nP.
According to the petitioner, he informed the Official Liquidator that the sole liability for costs was that of the Company and not of the petitioner and that he had been joined as a co-plaintiff merely to protect the interests if the Company. The Official Liquidator denied the full responsibility of the Company and obtained an ex parte order from this Court admitting the Company's liability to the extent of one half of the costs.
On 25th September 1957 the petitioner moved this Court for directions to the Official Liquidator to pay the entire amount of costs. The Official Liquidator admitted the claim of entire costs. But the payment was to be made pari passu with other creditors.
Later on, the Engineering Company took out execution against the petitioner and in order to avoid attachment of his property the petitioner had to make payment of the entire amount of costs to that Company in full settlement of its claim. This fact was duly recorded by the executing Court at Delhi by which the execution was consigned as fully satisfied on 5th March, 1960. The previous petition (L.M. 108 of 1957) which had been filed by the petitioner was dismissed by Falshaw J. (as he then was) on 9th February 1959 on the ground that it would be only after the execution that it could be seen whether the petitioner would be entitled to make any claim.
(3) Most of these facts are not denied by the Official Liquidator and the position taken up by Mr. Bal Raj Tuli, the learned counsel for the Official Liquidator, is that although the petitioner's claim would be admissible as a creditor along with the other creditors pari passu but that he cannot claim any preferential treatment under the provisions contained in Section 530 of the Companies Act of 1956 which is equivalent to the old Section 230 of the Act of 1913.
Mr. D. N. Awasthy, who appears for the petitioner, does not found his claim on any of the provisions contained in the aforesaid section but he has relied on the preceding section 529 of the new Act (equivalent to section 229 of the old Act) by which it is provided that in the winding up of an insolvent company, the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and to debts provable as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent.
Turning to insolvency law and in particular to section 28(5) of the Provincial Insolvency Act, there can be no doubt that property held by the insolvent on trust for others is not divisible among the creditors and, therefore, does not pass to the Official Assignee or the Receiver, According to the Law of Insolvency by Mulla (2nd Edition) pages 449 and 450, the rule that property held by the insolvent on trust for others does not pass to the Official Assignee or Receiver applies not only to the property held by the insolvent as a trustee in the strict sense of the term but also to property held by him as executor or administrator or in any fiduciary capacity. Section 28(5) provides that the property of the insolvent for the purpose of the section shall not include any property which is exempt by the Code of Civil Procedure, 1908 or by any other enactment for the time being in force from liability to attachment and sale in execution of a decree.
According to Mr. Awasthy, Section 88 of the Indian Trusts Act, 1882, would be attracted by virtue of these provisions which provides that where a trustee, executor, partner, agent, director of a company, legal adviser, or other person bound in a fiduciary character to protect the interests of another person, by availing himself of the character, gains for himself any pecuniary advantage, or where any person so bound enters into any dealings under circumstances in which his own interests are, or may be, adverse to those of such other persons and thereby gains for himself a pecuniary advantage, he must hold for the benefit of such other person the advantage so gained.
Mr. Awasthy has largely relied on Kodak Ltd. v. South Indian Firm Corporation Ltd., AIR 1937 Mad 833 where the claim of a certain creditor had been admitted by the liquidator and the question was whether preferential payment should be made to the creditor. The creditor's contention was that the sum of Rs. 250/- which had been deposited by him with the Company which went into liquiditors. Gentle J. referred to Section 229 of the Companies Act, 1913, and to section 52(1) of the Presidency Towns Insolvency Act as also to section 94 of the Trusts Act. On the facts of that case it was found that the sum of Rs. 250/- in the circumstances in which it came to be deposited with the Company was not divisible under Section 229 of the Companies Act among the general body of creditors. It is not possible to see how this authority can afford any assistance to Mr. Awasthy for the principle which he is seeking to press into service. The plain language of Section 28(5) of the Provincial Insolvency Act refers only to the property of insolvent which can be made available for distribution among the creditors. No such question is involved in the present case and all the effort that Mr. Awasthy has made has been concentrate on showing that a fiduciary relationship had been created between the petitioner and the Company for certain reasons, which will be presently stated, appears to lead to no result.
I cannot further see how section 88 of the Indian Trusts Act can be made applicable by referring to section 28(5) of the Provincial Insolvency Act and Section 529 of the Companies Act, 1956. For these it is altogether unnecessary to refer to some other English cases which Mr. Awasthy cited containing general observations with regard to the manner in which fiduciary relationship can be created.
(4) Mr. Awasthy has contended all along that Section 530 is not exhaustive and that if it can be proved that the petitioner reposed confidence in the Company or the Official Liquidator and allowed himself to be joined as a co-plaintiff in the suit at Bombay for the benefit of the Company to enable it to avoid any technical objections on behalf of the defendants in that suit, the petitioner would be entitled to reimbursement in respect of the amount which he had been compelled to pay for no fault of his own but because costs had been awarded against the Company as well for which also the responsibility largely was of the Official Liquidator as no appearance was entered in the Bombay Court and the suit was allowed to go by default.
There can be no doubt that the petitioner can justly say that he could have been made to pay the amount in question to the Engineering Company in case there was any claim personally against him but simply because he had the misfortune to be a co-plaintiff with the Company in the Bombay suit, he should not be made to suffer the loss. It is, however, not possible to see how the petitioner can be in a better position that the Engineering Company itself for it is common ground that the Engineering Company could not have claimed preferential treatment in the matter of satisfaction of its claim for costs under the decree and as a creditor the Engineering Company itself would have ranked as an ordinary creditor and not as a preferential one.
Mr. Awasthy had not been able to satisfy me by referring to the statutory provisions or any authoritative decisions that Section 530 is not exhaustive and that it is possible to hold that as a creditor in the circumstances which obtain in this case the petitioner can base his claim for preferential treatment outside section 530. I would hold that the petitioner's claim should be admitted in the sum of Rs. 6,929.19 nP. but that he will rank as an ordinary creditor.
(5) Considering all the circumstances, I make no order as to costs.
(6) Order accordingly.