The Chief Justice:—The Andhra Paper Mills Co., Ltd., a limited company incorporated under the Indian Companies Act, was directed to be wound up by an order of this Court made on the 23rd September 1947 and one Mr. Price was appointed Official Liquidator. The Official Liquidator on behalf of the company in liquidation filed a suit, after obtaining the leave of Court, for the recovery of a sum of Rs. 2,74,734-15-6 with further interest, from the date of suit from Anand Brothers, a firm, carrying on business in Madras. The suit was instituted under the provisions of O. 7 of the Original Side Rules. The defendant firm was the sole selling agent of the plaintiff from 1942. By a resolution of the Board of Directors of the plaintiff company dated 8th February 1947 this agency of the defendant was terminated. The amount claimed in the suit is made up of Rs. 2,39,354-15-6, the balance alleged to be due from the defendant to the plaintiff company in respect of the value of stocks of paper delivered to the defendant after giving credit to the payments made by the defendant from time to time and interest at six per cent per annum from the date of the termination of the agency, namely, 8th February 1947. As the suit had been filed under O. 7 of the Original Side Rules, the defendant took out an application (No. 3037 of 1949) for the grant of leave to appear and defend the suit. In the affidavit filed in support of this application by a partner of the defendant firm, the proposed defence was set out. The defence is adequately summarised by the Master before whom the application came up in the first instance. It comprised several claims by the defendant against the plaintiff company including claims for damages, the total amount of which was pleaded in reduction and discharge of the claim made by the plaintiff. The plaintiff opposed the application. In the counter affidavit filed by the Official Liquidator the merits of the several claims made by the defendant were not traversed, but certain legal objections were raised. It was stated that the several items of claims made by the defendant fell under one or other of the two categories, namely, legal set off or equitable set off and they should be persued, if at all, by the defendant independently and could not form the subject matter of the defence to the action. The claims had to be preferred at the first instance before the Official Liquidator and if they were disallowed, they could be taken up before the Court on appeal. In any event it was said that court-fee had to be paid on the amount of these claims. Other legal pleas with reference to particular claims were also raised, but it is unnecessary to refer to them. The Official Liquidator further submitted that even if the defendant was entitled to succeed in respect of all or any of the claims, it was not entitled to a set off against the claim in suit, as the defendant would be entitled only to a dividend on proof of its claims. As these claims were therefore no defence to the action, it was urged that no leave to defend should be granted to the defendant.

Another application was also filed by the defendant (No. 4188 of 1949) for an order converting the suit brought under the summary provisions of O. 7 of the Original Side Rules into an ordinary suit. The two applications were heard by the Master who granted the defendant leave to defend unconditionally except as regards an amount of Rs. 25,724-5-10 the liability for which was admitted by the defendant. In view of this order, he thought it was unnecessary to pass any separate order on the other application, though he was apparently not inclined to grant it. Mr. Narasimha Aiyar, the learned Counsel for the Official Liquidator who appeared before the Master and who appeared before us contend, ed before him that the various claims made by the defendant were really counter-claims that have to be made with appropriate court-fees and could not be defences to the suit. He also contended that the defendant would only be entitled to dividend in respect of such claims and cannot have a set off against the plaintiff's claim. For the defendant it was contended that a set off could be and had to be allowed and that a set off in bankruptcy and winding up was wider in scope than a set oft under the Civil Procedure Code. The Master did not however, decide any of these questions which he considered to be matters to be decided by Court. He was convinced that some at least of the items of claims put forward by the defendant would constitute pleas in defence requiring investigation as they could not be held to be sham or illusory.

The Official Liquidator preferred an appeal against the order of the Master. The appeal was heard and dismissed by Rajagopalan, J. Before the learned Judge the main, if not the only point, urged on behalf of the company was that as the several claims made by the defendant were in the nature of set off and counter claims, leave of the learned Judge dealing with the winding up should have been obtained by the defendant under S. 171 of the Indian Companies Act and without such leave the defendant could not be permitted to plead any set off or counter claim. It was argued before him that a set off or counter claim was really a suit which would come within the scope of the language of S. 171 On the other hand the defendant contended that leave, was not necessary to raise any plea or set off or counter claim in defence to the suit and even if such leave was necessary it could be obtained later. The learned Judge did not decide any of these questions. He thought that these questions should be tried and decided in the suit itself. All that he had to consider was whether S. 171 was a bar to the grant of leave to defend. He rejected the plaintiff's contention that the application itself was not maintainable because leave had not been obtained under S. 171 to file it. He was of the opinion that S. 171 did not bar a defence to a claim already made by the company. As a plea of set off or a counter claim obviously disclosed a triable issue, whatever may be the other factors which ultimately determine the trial of the suit, leave to defend ought to be granted and unconditionally as there was no proof of bad faith in putting forward those pleas. The appeal before us is against this order of Rajagopalan, J.

Mr. Narasimha Aiyar, the learned Counsel for the Official Liquidator, again pressed before us his objection based upon S. 171 of the Indian Companies Act. That was his main objection. At first we were inclined to take the same view as Rajagopalan, J., took, that it was unnecessary to consider whether leave under S. 171 was necessary to put forward a plea of set off or counter claim in defence to an action brought by the company. But on further consideration we think we cannot refrain from deciding the question. Admittedly the entire defence of the defendant consists of the several claims whether they be of the nature of set off or counter claims. There is no other plea in defence. The only plea is that the liability of the defendant to the plaintiff must be ascertained after giving due credit to the several claims made by the defendant against the company. If these claims cannot be allowed to be put forward except with the leave of the Court dealing with the winding up, as is contended by the appellant, then it is obvious that such leave not having been obtained, these claims cannot be made. The inevitable result would be that the action would be defenceless. We therefore think that it is necessary to decide whether S. 171 has any application to this case.

That section runs thus:

“When a winding up order has been made or a provisional liquidator has been appointed, be suit or other legal proceedings shall be proceeded with or commenced against the company except by leave of the Court, and subject to such terms as the Court may impose.”

Mr. Narasimha Aiyar's argument briefly is this. A set off or a cross claim is really a suit. Court-fee has to be paid in respect of it and when the written statement contains a set off or counter claim, it will really amount to a plaint in a cross suit. Therefore. S. 171 would apply. In support of this contention, he invited our attention to a passage in Palmer's Company Law (19th Edn.,) at p. 404:

“The object of the winding up provisions of the Companies Act, 1862’, said Lindley, L.J, in Re Oak Pitts Colliery Co.(1), “is to put all unsecured creditors upon an equality and to pay them pari passu.” To accomplish this it was indispensable that proceedings against the company by way of action, execution, distress or other process should be suspended; otherwise the winding up would resolve itself into a scramble for the assets. Accordingly the Act of 1862 gave the Court jurisdiction in various cases to restrain proceedings. Now by S. 226 of the Act of 1948 the Court can, after presentation of the petition, restrain proceedings and by Ss. 227 and 231, on a winding up order being made, or a provisional liquidator appointed, proceedings are automatically stayed and cannot be proceeded with without leave of the Court. In this way creditors and others are compelled to come in and prove their claims in the winding up, and a rateable and just distribution of the company's assets is effected.”

We are unable to see what bearing this passage has on a construction of S. 171 of the Indian Companies Act. The question before us is whether leave of the Court is necessary to a set off or a counter-claim by a defendant against whom the company has commenced an action. Undoubtedly, even in England and even after the new Act of 1948, proceedings can go on without leave of the Court.

It was conceded by Mr. Narasimha Aiyar—and there can be no doubt that no leave would be necessary for a defendant in a suit brought by a company being wound up to file a written statement denying all liability for the suit claim. This is because the defendant does not commence any suit or legal proceeding and it is only the suit filed by the company which is proceeded with. Lord Davey observed in construing a section of the English Companies Act of 1862 similar to S. 171 of our Act thus:

“When once an action by the company itself has been proceeded with, there is no necessity for the defendants in the action to obtain leave for any defensive proceeding on their part.” [Humber and Co. v. John Griffiths].

No doubt that case related to an appeal by the defendants to the House of Lords against a decision of the Court of Appeal in an action in which the company was the plaintiff but the general principle enunciated by the noble Lord will apply to all defensive proceedings. In Palghat Wariar Bank v. Padmanabhan(2), it was held by a learned Judge of this Court (Raghava Rao, J.) that when a company in winding up attaches certain property in execution of a decree in its favour as that of its judgment debtor, any claim petition by a third party cannot be regarded as “other legal proceeding” within the meaning of S. 171 of the Indian Companies Act and it could be proceeded with without leave of the Court. The principle laid down by the House of Lords in Humber and Co. v. John Griffiths Cycle Co. was followed.

The case in Mersey Steel and Iron Co. v. Naylor(3) is very much in point. The plaintiff was a company which had been ordered to be wound up. It commenced an action to recover a sum of money as the price of goods delivered by them to the defendants. The defendants delivered their defence and set up by way of counter claim that the plaintiffs had committed a breach of the contract and claimed a large amount as damages. The plaintiffs by their reply raised the objection that the defendants had not obtained leave under the Companies Act to make or prosecute a set off or counter claim and that under the Act they were not entitled to recover in respect of the counter claim or to extinguish the plaintiffs' claim by set off. Lord Coleridge gave judgment for the plaintiffs on the merits, but did not deal with the objection raised on the ground that leave had not been obtained. Before the Court of Appeal the objection was again raised. Charles Russel Q.C for the plaintiffs argued thus:

“Then, under S. 87 of the Companies Act, 1862, no proceeding can be taken against a company which is being wound up except with the leave of the Court. Now a counter claim is a fresh action.”

Jessel M.R repelled this argument with the following observation:

“It is in the nature of a defence. A defendant sued by a company must be entitled to raise any defence without leave.”

The Court of appeal allowed the appeal and reversed the decision of Lord Coleridge, C.J and it was declared that the defendants were entitled to set off against the amount admitted to be due to the plaintiffs such damages as they, the defendants, may have sustained by reason of any breach of the contract by the plaintiffs. This decision of the Court of Appeal was upheld by the House of Lords in Mersey Steel and Iron Co. v. Naylor Benson and Co.(4). In Halsbury, 2nd Edn. p. 718 (para 1202 of Vol. V) this case is treated as ah authority for the position that leave is not necessary to put forward a counter claim against the company in the nature of a defence.

On principle and in the interests of fairness and justice, we think that a party against whom the company has instituted a suit, should not be prevented from establishing that on a proper taking of the account between the company and the party i.e, after adjusting mutual credits and debits, no amount is due to the company or that the extent of its liability is more or less reduced. When the company has made a claim, any plea which has the effect of reducing the claim if successful would be a plea in defence. It may be for certain purposes as for example, for court-fees a written statement containing a plea of set off or counter-claim is treated as a cross-suit, but that is not conclusive of the matter. There can be no doubt that the pleading by the defendant is defensive in character. If it is so, then S. 171 cannot apply.

We do not think it necessary to deal fully or finally with the other questions raised by Mr. Narasimha Aiyar, namely, whether the various claims in the nature of set off and counter claims would be open to the defendant having regard to the general scheme of distribution among unsecured creditors which does not recognise any preferential rights except in very special cases, and whether the only course open to the defendant is to prove his claim before the Official Liquidator. These questions really fall to be decided in the suit itself. They would be among the triable issues.

Nor are we impressed with the fact that applications are pending before the Official Liquidator in respect of the several claims proposed to be set up in defence of the suit. It suffices to refer to the following plea set up by the Official Liquidator himself in those applications.

“I am advised that the proper course, if any, for the applicant is to have his right, if any, gone into and determined by filing a counter claim or claiming a set off in that suit and he cannot have such right, if any, on his part to be agitated by means of an application like the present one.”

It was not even suggested in the course of the argument that the several claims made by the defendant are unsubstantial and unfounded. It was not said by Mr. Narasimha Aiyar that if there was no legal impediment in the way of the defendant setting off these claims, there would be no triable issues in the suit. In fact, two of the claims have been partly allowed by the Official Liquidator.

As we have held that S. 171 does hot apply and therefore leave of the Judge dealing with the winding up was not necessary for the defendant to set up any claims in the nature of set off or counter claim, it follows that the Master and the learned Judge were right in granting the defendant leave to defend. The appeal is therefore dismissed with costs.

By consent the appellant will have two weeks time from today to file the written statement. He will pay Rs. 17-8-0 as costs of the defendant.

Viswanatha Sastri, J.—I entirely agree with the judgment of my Lord and add a few words of mine as the question under debate is not covered by any direct Indian authority. Mr. Narasimha Aiyar for the Official Liquidator, plaintiff in the trial Court and here appellant, raised two contentions: (1) The only right of the defendant, here respondent, was to prove his claim for debts or damages alleged to be due to him from the company before the Official Liquidator and rank pari passu with other creditors and take a dividend. He could not indirectly obtain payment of his debt in full from the company by pleading a set off. (2) The plea of set off is in the nature of a cross suit or cross claim against the company and cannot be put forward by the respondent without the leave of the company Judge which in this case, had not been sought or obtained.

The argument on the first point overlooks S. 229 of the Indian Companies Act which, by reference, incorporates S. 47 of the Presidency Towns Insolvency Act and S. 46 of the Provincial Act. The result is that where there have been mutual dealings between a company and a creditor proving or claiming to prove a debt in the course of the winding up of the company, an account should be taken of what is due from the one party to the other in respect of such dealings and the sum due from the one party has to be set off against any sum due from the other party and the balance of the amount and not more, has to be received or paid by either side respectively. The view of the Legislature evidently is that it would be unjust if the Official Liquidator could demand and recover in full moneys due by a debtor, but that very debtor, if he happens to be a creditor of the company for an equal sum, must rest content with a dividend representing a fraction of the debt due to him from the company. The principle is the same whether this right of the creditor to a set off is asserted before the Official Liquidator or in answer to a claim of the Official Liquidator in a suit filed by him.

The second point relates to the proper interpretation of S. 171 of the Indian Companies Act. S. 47 of the Presidency Towns Insolvency Act and S. 46 of the Provincial Act which are made applicable to proceedings for the winding up of a company and the realisation and distribution of its assets are wider in scope than O. 8, R. 6 of the Civil Procedure Code and would permit, for instance, even a claim for unliquidated damages to be set off against the claim of the Official Liquidator to recover a debt or other sum of money due to the company: Mersey Steel and Iron Co. v. Naylor Benson and Co., , Peat v. Jones and Co., , Jack v. Kipping, Re City Equitable Fire Insurance Co., . Where such a set off is claimed and established, there is in substance a deduction from one demand for money of another cross demand between the same partities with the result that the claim of the Official Liquidator stands liquidated in whole or in part as the case might be. The Tight of set off is a ground of defence and is required by O. 8, R. 6 of the Civil Procedure Code to be pleaded as part of the written statement of the defendant. If established it is an answer to the plaintiff's claim wholly or pro tanto as the case might be. The defendant, if entitled to a set off, is not liable to make satisfaction of the claim made against him or so much of it as equals the amount which he is entitled to set off. If a set off equal to the plaintiff's claim is established, it is an absolute defence entitling the defendant to a decree of dismissal of the suit. The processual law provides that the written statement containing a set off has the same effect as a plaint in a cross suit so as to enable the Court to pronounce a final judgment and pass a single decree in respect of both the original claim and the set off. See O. 8, R. 6(2) and O. 20, R. 19 of the Civil Procedure Code. This, however, does not mean that a written statement containing a plea of set off is to be treated as a plaint in all respects and for all purposes. The set off allowed by S. 229 of the Companies Act is a weapon of defence and a written statement pleading a set off filed in answer to a suit by the Official Liquidator, is a defensive proceeding. The Official Liquidator having brought the defendant before Court, the latter must in common justice, have a right to contest the suit by raising all defences allowed to him by law including a defence of set off.

There is high authority in England for the view that leave of the company Judge is not necessary for raising a plea of set off in defence to a suit by the Official Liquidator or for taking other defensive proceedings in such suit. With reference to a counter claim by the defendant for damages for breach of contract in a suit by the liquidator of a company for recovery of the price of goods sold and delivered by the company, Jessel M.R remarked:

“It is in the nature of a defence. A defendant sued by a company must be entitled to raise any defence without leave.” [Mersey Steel and Iron Co. v. Naylor Benson and Co. (4-a)].

The objection on the ground of want of leave which was overruled by Jessel, M.R in the Court of Appeal was apparently given up when the case reached the House of Lords in Mersey Steel and Iron Co. v. Naylor Benson and Co., . In Humber v. John Griffith Cycle Co.(5), a limited company whose suit had been, dismissed preferred an appeal. The company was wound up during the pendency of the appeal. The appeal was thereafter allowed. The defendant appealed to the House of Lords against the decision of the Court of Appeal without leave of the Company Judge. Lord Davey observed:

“When once an action by the company itself has been proceeded with, there is no necessity for the defendants in the action to obtain leave for any defensive proceeding on their part. The liquidator was either party or privy to the proceedings in the Court of Appeal and the respondent having been successful in that appeal cannot now object to the appellants defending themselves against the con sequences of the judgment by the ordinary means of an appeal to this House.”

The House of Lords held that an appeal from a decision in which the company was originally the plaintiff was not a proceeding against the company within the meaning of S. 87 of the English Companies Act of 1862.

The principle of the case last mentioned has been followed by the Lahore High Court in Jiwandas v. Peoples Bank and Simla Banking and Industrial Co., Ltd. v. Indo Swiss Trading Co., by the Patna High Court in Benares Bank v. Sashibhushan, and by Raghava Rao, J., in this Court in Palghat Wariar Bank Ltd. v. Padamanabhan, the only dissenting note being struck by Braund, J., in Raj Kumar Singh v. Benares Bank.

A defendant pleading a set off in defence is not commencing or proceeding with a suit or other legal proceeding against the company within the meaning of S. 171 of the Companies Act and the leave of the company Judge is not required to entitle him to resist or defend a suit filed by the Official Liquidator by pleading a set off in his written statement. Here the claims advanced by the Official Liquidator and the defendant against each other are money claims which fall within the purview of S. 229 of the Indian Companies Act, the set off claimed by the defendant is really a defence to the plaintiff's claim for recovery of money and S. 171 does not apply. Where in a suit for recovery of money by the Official Liquidator the defendant counter claims with a prayer for injunction or cancellation or specific performance or declaratory relief, different considerations might possibly arise, for there the counter claim is an independent claim affording no defence to the plaintiff's claim though the processual law might allow the counter claim to be tried in the suit itself as effectually as in an independent suit, if that can conveniently be done.

V.C.S