Raman Nayar, J.
1. The question raised is this: When a company that is being wound up is the foreman of a chitty governed by the provisions of the Travancore Chiltics Act. 1120, are the 'prized subscribers' from whom money is due to the chitty entitled to have moneys clue to them from the company under other dealings set off against their chitty debts. In other words, whether what I might call an ordinary debt due by the foreman company can be set off against a chitty debt due to it. It has been argued on behalf of the 'non-prized subscribers' whom I might call chitty creditors of the company, that, in the face of the charge given to them by Section 42 of the Chitties Act, they are in the position of secured creditors who, by reason of Section 529(1)(c) of the Companies Act read with Section 28(6) of the Kerala Inslovency Act, have the right to realise the money due to them from their security and that there can be no set off to the detriment of that right. On the other hand it has been argued on behalf of the prized subscribers who are chitty debtors of the company, but ordinary creditors, that Section 529 of the Companies Act read with Section 47 of the Kerala Insolvency Act gives them the right of set off which they can claim notwithstanding the charge created by Section 42 of the Chitties Act.
2. Section 42 of the Chitties Act reads as follows:
'Where there are debts due from the foreman of a chitty in relation thereto and also other debts due from such foreman the chitty assets shall be a first charge for payment of the chitty debts due to the subscribers.'
What this section does is to create a charge on the assets of the chitty in favour of the chitty creditors so that the ordinary creditors of the foreman cannot be paid out of those assets until the chitty creditors are satisfied. The money due from a prized subscriber to the chitty is undoubtedly a chitty asset, and it follows from this section that on this asset the chitty creditors have a charge. It is their security, and under Section 28(6) of the Kerala Insolvency Act the bankruptcy or the foreman does not affect their power to realise the security.
It therefore follows that the winding up of a company which is a foreman should not affect the power, and that the chitty creditors are entitled to insist that the liquidator, acting on their behalf, should realise the security in full without any deduction by way of set off in respect of a liability of the company by which they are in no way bound. For it is well recognised that in insolvency proceedings, a secured creditor who allows the receiver to realise the security on his behalf, has a claim to be paid first out of the money so realised; and I see nothing either in the Companies Act or in the Insolvency Act which affects the charge created by Section 42 of the Chitties Act.
It is true that the Companies Act does not provide for any priority to chitty creditors. But not withstanding the heading of Section 42 of the Chitties Act, this is not a case of preferential payment to the chitty creditors but of a security created in their favour. And, if a security created by act of parties remains unaffected by the insolvency of the owner of the property charged, I fail to see why a security created y statute should be affected. The argument that Section 50 of the Chitties Act implies that Section 42 will cease to apply, when liquidation of a foreman company supervenes, has no basis in the language of that section. All that it bars during the pendency of winding up proceedings against the company is a separate winding up of the chitty alone under Sections 48 and 49.
3. It is argued on behalf of the prized subscribers, namely, the chitty debtors of the compny, that so far as they are concerned, the money due from them to the chitty is a debt due to the foreman company, nothing more or less, and that the fact that, in the hands of the foreman company, it is an asset on which its chitty creditors have a charge, cannot affect their right to an account and set off under Section 47 of the Insolvency Act. But I look at the matter like this: The money due from the chitty debtors to the company is a chitty asset on which the chitty creditors of the company have a charge. And, once a third party has a charge or other interest in that money, it cannot be the subject matter of an account between the chitty debtor and the foreman creditor to the prejudice of the third party charge-holder.
4. It has been argued that the foreman of a chitty can give a full discharge so far as the debts due to the chitty are concerned and that, that being so, it should follow that if he can give a full discharge on actual payment he can as well give a full and valid discharge by set off or adjustment. It is also argued that, after having realised the money, the chitty foreman may dissipate it and render the charge valueless. But I fail to see how this latter possibility can affect the existence of the charge. And, as for the foreman being able to give a valid discharge, by set off or adjustment that question does not really arise since no such adjustment has actually been made. I might add that it was held in 16 Trav LR 193 that such an adjustment could be set aside at the instance of the chitty creditors.
5. It is said that what Section 42 of the Chitties Act at best does is to create a charge in favour of the chitty creditors as against the ordinary creditors of the foreman and that it creates no charge so far as third parties are concerned. Even accepting this construction of the section I am unable to understand how that can help the chitty debtors who are claiming set off since they cannot, in any event, be regarded as third parties. They are also ordinary creditors of the foreman, and what they are now seeking by way of net off is that other debts due from the foreman shall be paid from the money due from them to the chitty, in other words, from the chitty assets, before the chitty creditors are paid. And this is precisely what Section 42 of the Chitties Act provides against.
6. I hold that the ordinary creditors of the company are not entitled to have the money due to them set off against the money due from them to the chitty.
7. It follows that the liquidator must keep a separate account of the realisations of the assets of each chitty and apply the proceeds first to the satisfaction of the claims of the creditors of that chitty. If anything is left over, that, of course, will be available to the general body of creditors including creditors of other chitties. Conversely if the chitty creditor is not satisfied in full he can prove for the balance like an ordinary creditor.
8. It is at this stage pointed out that a set oft would be permissible in respect of any portion of the chitty debts due to the company left after satisfying the charge, since, in respect of that surplus, no third party has an interest and the matter is entirely one of an account between the chitty debtor concerned and the creditor foreman. It is said, that the foreman should realise only so much of the chitty debts due to him as will suffice to satisfy the charge of his chitty creditors leaving balance in the hands of his chitty debtors so as to be available for set off against the ordinary debts due to them. Alternatively that he should rateably distribute any available surplus amongst his chitty debtors in payment of the ordinary debts due to them. To this extent, it is said my earlier statement that the-surplus would be available to the general body of creditors requires qualification. This, I apprehend is something which will never actually happen and therefore I leave the question entirely open to decision against that most unlikely event.