The Judgment of the Court was delivered by

M.S Menon, C.J:— This appeal questions the correctness of the decision in B.C.C No. 1105 of 1961. The order concerned—1962 K.L.J 1401—is a common order dealing with B.C.C No. 1105 of 1961 and B.C.C Nos. 194, 408 and 1003 of 1961.

2. The appellant had deposited a sum of Rs. 13,500/- with the Palai Central Bank Limited—now in liquidation—on 13-1-1959. The deposit was a fixed deposit repayable two years after the date of deposit. The wording of the receipt issued by the bank to the appellant was similar to that of Ext. P. 11. On 23-6-1959 the appellant executed a promissory note in favour of the bank and borrowed a sum of Rs. 10,000/-. Along with the promissory note the appellant also gave to the bank the fixed deposit receipt, stamped, signed and discharged on the back of Ext. P. 11, and a delivery letter and an instruction letter similar to Exts. P. 9 and P. 10 respectively.

3. The material words of Exts. P. 9 and P. 10, marked by way of illustration, read as follows:

Ext. P. 9.

“Please take delivery of your…………Branch Fixed Deposit Receipt No………dated……………………..for Rs…………………………………………favouring…………………………….which has been duly discharged by me/us and hold if as security for an advance of Rs………………………which I/We request you to grant to me/us.

On maturity the proceeds of the above Fixed Deposit Receipt should be credited to my/our Loan account with you.”

Ext. P. 10.

“With reference to your Fixed Deposit Receipt No.………dated………………for Rs……………………which I have discharged and delivered to you to be held as security for Demand Loan No…………for Rs……………………..granted to me by you on……………………..kindly credit all interest on the above deposit receipt as and when it accrues to my Demand Loan Account No…………

This letter cancels any previous instructions I may have given regarding disposal of interest earned on my above Fixed Deposit Receipt.”

4. The sole question for determination in the appeal is whether the appellant is precluded from claiming the set-off he claims in respect of the amount covered by the fixed deposit receipt issued to him by the bank against his liability under the promissory note executed by him to the bank because he also handed over to the bank the fixed deposit receipt with an endorsement of discharge thereon and the delivery and instruction letters mentioned above.

5. It is common ground that in view of section 2 of the Banking Companies Act, 1949, and section 529 of the Companies Act, 1956, the statutory provision in the light of which the claim to a set-off should be evaluated is section 47 of the insolvency Act in force in this State, Act II of 1956. That section corresponds to section 46 of the Provincial Insolvency Act, 1920, and reads as follows:

“Where there have been mutual dealings between an insolvent and a creditor proving or claiming to prove a debt under this Act, an account shall be taken of what is due from the One party to the other in respect of such mutual dealings, and the sum due from the one party shall be set-off against any sum due from the other party, and the balance of the account, and no more, shall be claimed or paid on either side respectively.”

6. It is not disputed that a set-off as claimed by the appellant would have been admissible but for the fact that he handed over to the bank the fixed deposit receipt with an endorsement of discharge thereon, a delivery letter on the lines of Ext. P. 9 and an instruction letter on the lines of Ext. P. 10. That act, so far as we can see, amounted to no more than the creation of a charge on the amount covered by the fixed deposit or a hypothecation of that fund. In other words a debt which would have been unsecured, if the promissory note alone was in existence, became a secured debt as a result of that transaction.

7. It is settled law that the existence of a security will not affect the question of a set-off. An interesting case on the subject is Ex parte Barnett. In re Deveze ((1874) L.R 9 Ch. App. 293). In that case one Barrnett & Company had business transactions with a trader who became bankrupt. At the time of the bankruptcy the bankrupt owed Barrnett & Company £3010 and Barrnett & Company owed the bankrupt £ 88. The bankrupt also held goods of Barrnett & Company upon which he had a lien for the amount—£ 88—that the company owed to him. The trustee in the bankruptcy insisted that Barrnett & Company should pay the debt of £ 88 before the goods were delivered up to them, and that they should prove for the whole sum of £ 3010 against the bankrupt's estate. The court held that Barrnett & Company were entitled to have the sum of £ 88 set-off against their claim, so as to free the goods from the lien, and to prove for the balance against the bankrupt's estate. Lord Selborne L.C, referred to section 39 of the Bankruptcy Act, 1869—

“Where there have been mutual credits, mutual debts, or other mutual dealings between the bankrupt and any other person proving or claiming to prove a debt under his bankruptcy, an account shall be taken of what is due from the one party to the other in respect of such mutual dealings, and the sum due from the one party shall be set-off against any sum due from the other party, and the balance of such account, and no more, shall be claimed or paid on either side respectively; but a person shall not be entitled under this section to claim the benefit of any set-off against the property of a bankrupt in any case where he had at the time of giving credit to the bankrupt notice of an act of bankruptcy committed by such bankrupt and available against him for adjudication.”

8. And said:

“As I understand it, it says, without noticing the subject of security at all, that when there have been mutual credits, debts, or mutual dealings—I say nothing at present upon any distinct meaning of ‘mutual dealings’—and a proof is to be made in bankruptcy, there is to be a rule of set-off, not, as I understand it, at the option of either early, but an absolute statutory rule—‘The balance of such account, and no more, shall be claimed or paid on either side respectively.’ This is clearly a case of mutual credits at the time of the bankruptcy; on the one hand, there was a large debt maturing, though not matured, to Barnett & Co., and there was a small debt actually due from them to the bankrupt. That being so, Barnett & Co. come in to prove, and the statute expressly says that the amount of their proof shall be ascertained by writing off the small debt from the larger, and as debt can co-exist with security, and often does, the fact that nothing is said about security or lien one way or the other in the section seems to me only to show that the existence of security is not to affect its operation. The authorities, as far as they are authorities, are quite consistent with that view.”

9. Sir G. Melliah L.J said that he was also of the same opinion, that the section makes a set-off equivalent to payment, and:

“It appears to me that this construction of the section is altogether in accordance with the general scope of the Bankruptcy Act, because it would be very unjust, and contrary to the spirit of the bankruptcy law, to hold, that where there are mutual debts the one creditor should be paid in full and the other should only receive a dividend.”

10. In this case the charge in favour of the bank in liquidation is on the amount that the appellant seeks to set-off against his liability under the promissory note. Does that make a difference and preclude a set-off? We do not think that it does. The mandate of the statute, as stated by Lord Seaborne, is to effect a set-off irrespective of the existence or otherwise of any security and to arrive at the recoverable residue, if any, by a process of mutual deduction.

11. The learned Judge, in the order under appeal, says:

“To my mind the transactions amount to this: In consideration of, and as security for, the loan advanced by the bank, the bank and the customer enter into an agreement (evidenced by the handing over of the fixed deposit receipt duly discharged and the delivery letter and instruction letter in the case of loans against fixed deposits, and by the lien letter in the case of loans against savings bank deposits) by which nothing is due or payable to the customer in respect of the deposit until he has repaid the loan. On failure of the customer to repay the loan within the time stipulated, the bank is to repay itself from out of the proceeds of the deposit when the deposit becomes repayable. That time had not expired in the present cases when the winding up commenced, and, the loan remaining unpaid at the commencement, there was nothing due to the customer on the deposit to be set off against his loan. The bank is no doubt bound to adjust the proceeds of the deposit against the loan, but the proceeds are now only the dividends paid in the winding up and not the amount of the deposit itself.” (Paragraph 22).

12. It is not clear why the learned Judge says: “on failure of the customer to repay the loan within the time stipulated.” The loan to the appellant was not for any specific term and no time was fixed for its repayment. It was the subject of a promissory note payable on demand.

13. It is also not clear why the learned Judge emphasises the fact that the fixed deposit had not matured at the commencement of the winding up. It is not a material fact when a bankruptcy supervenes and earlier in the judgment—in paragraph 4—the learned Judge himself has stated:

“It is not that the deposits had not become repayable when the winding lip intervened that is the impediment. For, the deposit would nevertheless be something due from the bank to the depositor though not yet become due, and therefore something to be set off against the loan due from the depositor to the bank. It is that nothing at all is due from the bank to the depositor in respect of the deposit until the latter has repaid the loan taken by him from the bank; and that event not having occurred when the winding up intervened there is nothing to be set off against the bank's claim on the loan.”

14. In paragraph 23 of the order under appeal the learned Judge says:

“I would say that the transactions Created an agency in respect of the deposits by way of security for the loans, an agency which, being coupled with an interest, is irrevocable until repayment of the loan in full has been effected. As security for the loan he was taking, the customer authorised the bank to receive the amount due on the fixed deposit or to hold back the amount due on the savings bank deposit, and, if the loan remained unpaid on the expiry of the stipulated period to apply the proceeds in discharge of the loan. The authority enures till the repayment of the loan, and is irrevocable, and, therefore, since the loan remains unpaid, there is nothing due to the customer on the deposit to be set off against the loan.”

15. An agency in the law of contract presupposes a third party, and the parties to the transaction before us are only the appellant and the bank. An ‘agent’, according to section 182 of the Indian Contract Act, 1872, is a person “employed to do any act for another or to represent another in dealings with third persons”.

16. A reference to a “stipulated period” for the repayment of the loan occurs in the above extract as well. That there was no such period for the repayment of the loan has already been indicated.

17. In paragraph 24 the learned Judge says:

“Another way of looking at the matter might be to regard the bank as a receiver appointed in respect of the deposit, by way of security for the loan, holding the deposit in that capacity until the loan is repaid and bound to apply the proceeds of the deposit in discharge of the loan in case the loan is not repaid in time. The result is the same. The loan remaining unpaid at the commencement of the winding up, nothing is due upon the deposit to the customer and there is nothing to best off against the loan taken by him.”

18. Analogies like this are based on approximations and afford no assistance in, any process of analysis; and as pointed out by the learned Judge himself “it is really not necessary to find a name for the position occupied by the bank in relation to the deposits”.

19. It will be clear from the extracts given above that the rear foundation for denying the set-off claimed by the appellant is the Judge's conclusion that nothing was due to the appellant in respect of his deposit at the commencement of the winding up. This is a conclusion to which we cannot subscribe.

20. We find it equally impossible to endorse the alternative approach made in paragraph 27 of the order under appeal. The material portion of that paragraph reads as follows:

“Even if I am wrong in thinking that, by reason of the deposits being given as security in the manner described above, nothing is due to the respondents on the deposits and that the true position is that the deposits are debts payable on a contingency, the contingency being their release from, the security arrangement, and are therefore admissible, to proof under section 528 of the Companies Act, a just estimate of the Value of the deposits, subject to the Contingency of release from the security, would be only the dividends payable in respect of the deposits and not the their face value; The dividends alone would therefore be available for being set off.”

21. The essence of the arrangement between the appellant and the bank, as we understand it, was to set-off the amount of the, fixed deposit in favour of the appellant on the date of its maturity against the loan granted to him by the bank and outstanding on that date; and to restrict the appellant's right and the bank's liability thereafter to the balance remaining after the set-off was effected-This is evident from Exts. P. 9 and P. 10, and especially from the last sentence of Ext. P. 9 which directs that on maturity the proceeds of the deposit receipt should be credited to the appellant's loan account with the bank.

22. The maturity of a claim at the commencement of a winding up is not essential for its availability for the purpose of a set-off. That a debt, although not presently payable, can be set-off against moneys owing to a company in liquidation was conceded in In re Travancore National and Quilon Bank Ltd. (A.I.R 1940 Madras 157). The correctness of the proposition was accepted by the learned Judge in paragraph 4 of his order, and it has not been disputed before us by counsel for the liquidator.

23. A case of considerable interest is Chunnu Lal v. Bank of Upper India, Ltd. (A.I.R 1917 Lahore 386). In that case the plaintiff had a deposit of Rs. 4,000/- in the defendant bank payable on the 10th October, 1914. On the 3rd September, 1914 he borrowed Rs. 2,000/- from the bank on the security of his deposit and executed a promissory note for the amount. On the 8th October the bank suspended payment and on the 12th and 13th October the plaintiff wrote to the bank to pay him the balance of Rs. 2,000/- after deducting his debt of Rs. 2,000/- from his deposit of Rs. 4,000/-, and received a reply that as the bank had stopped business no action could be taken. The question for decision was whether the plaintiff's debt had come to an end and he was a creditor to the extent of Rs. 2,000/-. Shadi Lal and Le Rossignol, JJ. said:

“The plaintiff's case is that on the 10th October, 1914, when the deposit of Rs. 4,000/- fell due, his liability on the pro-note came to an end, and that he became a creditor to the extent of the balance. In answer to this case it is contended on behalf of the Bank that the plaintiff is a creditor in respect of the entire amount of Rs. 4,000/-, that the loan taken by him on the pro-note has not been discharged, and that he is liable to pay the same with interest at the stipulated rate. To obtain an adjudication upon the rights inter se of the parties the plaintiff brought the present action for a declaration that his liability on the pro-note had come to an end.”; and

“There can be no manner of doubt that on the 10th October, 1914, when the deposit matured, the defendant Bank was not entitled to call upon the plaintiff to pay the debt due on the pro-note, considering that it had already in its possession Rs. 4,000/- belonging to the plaintiff and payable to him at once. As observed already the debt was secured on the deposit, and the plaintiff took the further precaution of writing to the Bank to appropriate part of the money, which had become due to him, to the debt due by him on the pro-note. Whether we apply the rule of set off which finds expression in the Code of Civil Procedure (of which the application to companies in liquidation has been recognised in a Division Bench judgment of this Court reported as Mehr Chand v. Amritsar Bank (28 I.C 975) or treat the case as one of payment, it is manifest and indeed it is not contested by the defendant, that apart from the scheme sanctioned by the High Court in June 1915, the Bank could not have successfully maintained a suit for the recovery of Rs. 2,000/-. It is further clear that if the plaintiff had, prior to the enforcement of the scheme in question, brought an action for the balance of the deposit after giving credit for Rs. 2,000/-, the Bank could not have offered any resistance to that suit and could not have claimed that the debt on the pro-note had not been extinguished.”

24. This decision is quoted with approval in Mohanlal Malpani v. Loan Company Of Assam Ltd. ((1961) 31 Comp. Cas. 91).

25. No scheme sanctioned by the High Court complicates the issue in this case. And on the basis of the Lahore decision the set-off claimed by the appellant is certainly justified and should be entertained. Our conclusions can be summed up as follows:

(1) that a question of set-off under section 47 of Act II of 1956 should normally be considered without reference to the existence of any security;

(2) that the arrangement between the appellant and the bank was itself to effect a set-off on the maturity of the fixed deposit;

(3) that the fact that the deposit had not matured when the winding up commenced is not of material consequence;

(4) that the effect of the bank's insolvency was to accelerate the date on which the set-off should be effected and to make the commencement of the winding up the time for that purpose; and

(5) that in the light of what has been stated the appellant's claim to a set-off is valid and should be admitted.

26. The appeal succeeds and is hereby allowed. In the circumstances of the case, however, there will be no order as to costs.