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Attorney(S)
  • For the Appellant: S. Subramania Iyer N. Ananthakrishna Iyer
  • For the Appellant: S. Narayanan Potti N. K. Varkey P. V. Rajamma
  • For the Appellant: P. H. Sankaranarayana Iyer N. Ananthakrishna Iyer
  • For the Appellant: Mani J. Meenattoor
Judges
  • S. Velu Pillai
  • Anna Chandy, JJ.
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  • For the Appellant: S. Subramania Iyer N. Ananthakrishna Iyer
  • For the Appellant: S. Narayanan Potti N. K. Varkey P. V. Rajamma
  • For the Appellant: P. H. Sankaranarayana Iyer N. Ananthakrishna Iyer
  • For the Appellant: Mani J. Meenattoor
Judges
  • S. Velu Pillai
  • Anna Chandy, JJ.
Acts
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Smart Summary

Judgment Summary — Velu Pillai, J.

Factual and Procedural Background

This judgment arises from four appeals against an order of the learned single Judge allowing C.M.P. 144 of 1958, a petition by the liquidator of the Popular Bank Ltd. under Section 531 of the Companies Act, 1956. The underlying winding-up petition (B.C.P. 8 of 1956 (E)) resulted in an order to wind up the bank; liquidation proceedings are in progress.

The Popular Bank Ltd. suspended business on 16 August 1956 and its winding up was ordered on 19 December 1956 (petition presented 27 August 1956). C.M.P. 144 of 1958 sought a declaration that certain entries in the bank's books (made shortly before suspension) constituted fraudulent preferences in favour of some creditors and ancillary reliefs. The learned single Judge found, on the liquidator's petition, that several creditors had been preferred by the bank and ordered repayment to the liquidator.

Four appeals were preferred against that order: A.S. 544 of 1961 (respondents 9 & 10), A.S. 594 of 1961 (2nd respondent), A.S. 595 of 1961 (21st respondent) and A.S. 620 of 1961 (respondents 1 & 13). Some respondents who were similarly found to have been preferred did not appeal and submitted to the judgment.

The pattern of the impugned transactions, as described by the learned single Judge and adopted by Velu Pillai, J., involved transfers or book adjustments that effectively paid creditors by transferring amounts from creditor accounts to debtor accounts so that the debtor (rather than the bank) became accountable to the creditor, often without any real cash movement because the bank lacked sufficient funds.

Legal Issues Presented

  1. Whether the impugned account entries or adjustments constituted "payments" or "acts relating to property" amounting to fraudulent preferences under Section 531 of the Companies Act, 1956, read with the corresponding insolvency provision (Section 55(1) of the Travancore‑Cochin Insolvency Act, 1955).
  2. Whether, at the time the adjustments were made, the bank was unable to pay its debts as they became due (i.e., whether the bank was commercially insolvent), placing the onus on the liquidator to prove insolvency.
  3. Whether certain transfers could be treated as lawful set‑offs (Section 529 of the Companies Act read with Section 47 of the Insolvency Act) and consequently not a fraudulent preference.
  4. Whether, as a factual matter, particular transactions (separately in each appeal) were motivated by a dominant intent to prefer certain creditors.
  5. Whether the court had jurisdiction under the Companies Act to order repayment by creditors (including by reversal of book entries) where the impugned transfers were adjustments rather than cash payments.
  6. Whether a prior judicial determination (in proceedings under Section 542) that certain transfers were not proved to be fraudulent preferences amounted to res judicata and barred relitigation of the same transfers in the present appeals.

Arguments of the Parties

Liquidator's case (as framed in the petition and accepted by the learned single Judge)

  • The impugned entries in the bank's books, though sometimes only book adjustments, evidenced payments or acts relating to property within six months of winding up and thus fell within Section 531 of the Companies Act.
  • The bank was unable to pay its debts when the entries were made (commercial insolvency), and the adjustments were fraudulent preferences designed to put certain creditors in a better position than others in liquidation.
  • The timing of the entries (shortly before suspension/closure), absence of demands, and the pattern of arrangements demonstrated a dominant intent to prefer.

Appellants' and Respondents' principal arguments (summarised from the opinion)

  • Some appellants contended that deposits represented joint family funds or that debtors and creditors were the same family unit (suggesting the transfers were internal and not preferences).
  • Reliance on set‑off: appellants argued that mutual dealings and rights of set‑off (Section 529 read with Section 47 of the Insolvency Act) meant the bank lawfully adjusted accounts and such set‑offs prior to winding up cannot be invalidated as fraudulent preferences.
  • Reliance on rights under Sections 130 and 134 of the Transfer of Property Act: transferees, pledgees or mortgagees of a chose in action can enforce payment, and so the bank could enforce securities and make adjustments legitimately.
  • Specific factual defences in individual appeals:
    • A.S. 544 (respondents 9 & 10): claimed their deposits were security for an overdraft to a firm run by family members and that entries reflected legitimate adjustments.
    • A.S. 595 (21st respondent): contended that the cheque she drew was presented when the bank refused to pay cash, and the crediting to the overdraft account was not intended by her to operate as a preference; factual story included the manager's alleged statement about shortage of cash.
    • A.S. 620 (first respondent): argued payment was part of a settlement of the nephew's creditors or that stock‑in‑trade had been sold (a version given later by a witness), i.e., asserted a legal or commercial basis for the transfer rather than a dominant intent to prefer.
  • In relation to some transfers attributed to the 2nd respondent, learned counsel relied on an earlier decision in proceedings under Section 542 where a judge said he was not satisfied that those transfers were fraudulent preferences (res judicata argument).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Nattukottai Bank Ltd., In re, (1957) 27 Comp Cas 404 (Mad) Similar book entries can be treated as "any other act relating to property" under Companies Act provision. Cited to support the proposition that transfers effected by book entries may come within Section 531 as acts relating to property; the learned Judge inclined to treat some entries as evidencing cash payments but the appellate court accepted the broader treatment.
In re Washington Diamond Mining Co., (1893) 3 Ch 95 Set‑off before or after bankruptcy is immaterial; mutual debts could be set off either before or after bankruptcy. Quoted to explain the general principle that set‑offs can operate pre‑ or post‑bankruptcy; court examined applicability given requisites of mutual dealings under Section 47 of the Insolvency Act.
In re Travancore National and Quilon Bank Ltd., AIR 1940 Mad 157 Authority on set‑off and treatment of mutual dealings in the context of insolvency; overruled contrary argument. Relied upon to reject the contention that voluntary set‑offs prior to winding up are necessarily immune from being treated as fraudulent preferences; emphasized need to examine whether dealings were truly mutual.
In re T.N. Bank Subsidiary Co., AIR 1940 Mad 266 Distinguished cases where surety had personal liability; allowed set‑off where surety was severally and jointly liable. Used to contrast circumstances where set‑off is permissible (personal liability) with cases where surety undertakes no personal liability and set‑off is not available.
In re Travancore N. and O. Bank, AIR 1941 Mad 622 Held no mutual dealings (and thus no set‑off) where the surety undertook no personal liability. Applied to disallow the set‑off argument where appellants acted as mere providers of security without personal liability.
Official Assignee v. M.C. Harikrishna & Sons, AIR 1935 Rang 201 Rejected claim for set‑off under corresponding insolvency provision where mutual dealings did not exist. Relied upon as authority supporting refusal to allow set‑off where the creditor's claim arises only from securities and there is no personal liability creating mutual dealings.
Mani Bhusan Malik v. Pioneer Bank Ltd., (1960) 30 Comp Cas 473 : AIR 1959 Cal 746 In a similar factual matrix where the surety undertook no personal liability, no set‑off was allowed. Cited to show trend of decided cases against allowing set‑off in the absence of mutual personal obligations; court followed this trend to reject appellants' set‑off contention.
Stephens, Ex parte (1805) 32 ER 996 Historical authority on set‑off; relied upon by appellants but distinguished as a case of fraud on the bank in prior decisions. Distinguished on facts (cited as inapposite) following earlier Madras decision (Gentle, J.) which treated it as involving bank fraud.
Cohen, In re, Trustee, Ex parte, 1924-2 Ch 515 Voluntary payment on the eve of bankruptcy with knowledge of insolvency can, absent other motive, establish a fraudulent preference. Applied as authority for inferring fraudulent preference from timing and circumstances of payments/adjustments near insolvency when no other dominant motive is proved.
In re M. Kushler Ltd., 1943-1 Ch 248 Dominant intent to prefer may be proved by circumstantial evidence leading to a necessary inference. Used to justify inferring dominant intent from circumstances such as timing, absence of demand and the pattern of entries.
Halsbury's Laws of England (3rd ed.), Vol. 2, paras. 1103‑1104 Authoritative statement on the requirement to prove substantial or dominant view of preferring a creditor; existence of other possible explanations does not preclude an inference of intent. Quoted for the legal standard on proving dominant intent to prefer and applied in evaluating the evidence and inferences.
Viswanathan v. Abdul Wajid, AIR 1963 SC 1 Interpretation of 'former suit' in Explanation I to Section 11 of the CPC (res judicata principles). Relied upon to hold that a prior decision in proceedings under Section 542 constituted a 'former suit' and thus gave rise to res judicata, barring relitigation of the same transfers.

Court's Reasoning and Analysis

The court proceeded by addressing the threshold legal and factual elements required to establish that the impugned entries were fraudulent preferences under Section 531 of the Companies Act (which imports the corresponding insolvency provision governing individuals). The analysis unfolded in the following steps:

  1. Burden of proof on liquidator: The court reiterated that the liquidator had the onus to prove that when the entries were made the bank was unable to pay its debts as they became due (a state of commercial insolvency). The learned Judge had carefully examined evidence and concluded that "at least from April 1956" the bank was unable to pay its debts.
  2. Evidence of insolvency: The court accepted the testimony of P.W.2 (former manager) and corroborating evidence (R.W.4), and relied on multiple bank records (ledgers and cash extracts), a resolution passed the day before suspension (Ext. D‑1(b)), and specific balances showing negligible credit with other banks and massive borrowings, to find chronic inability to pay rather than a sudden run.
  3. Characterisation of entries: The court accepted that entries which on the face of the books involved transfers/adjustments rather than physical cash movement could nonetheless be treated as "payment" or "other act relating to property" within the meaning of Section 531. It relied on precedent recognizing book adjustments as capable of constituting acts attracting Section 531.
  4. Dominant intent to prefer: The court applied authorities (Cohen; M. Kushler; Halsbury) to hold that dominant intent to prefer need not be shown by direct evidence but may be inferred from surrounding circumstances. Important indicia used by the court included:
    • Timing — many adjustments were made shortly before suspension and within days of closure;
    • Absence of demand — no contemporaneous demand for payment was proved in many instances;
    • Pattern and method — transfers that resulted in particular creditors receiving full value while the bank lacked cash;
    • Conduct of parties — withdrawals by some depositors (including the 2nd respondent) and the failure of appellants to call for production of documents that would support their narrative.
    On these facts the court concluded that the transfers were made with a dominant intent to prefer in the cases it found against the appellants.
  5. Set‑off and mutual dealings: The court carefully examined the contention that the bank's adjustments were legitimate exercises of rights of set‑off. It reviewed the statutory test in Section 47 (mutual dealings) and a line of decisions: set‑off is permissible where there are truly mutual dealings (including personal liability), but where an account arises only by way of security and the creditor has no personal claim against the surety, set‑off is not available. Applying these principles, the court rejected the set‑off defence where appellants acted only as sureties or provided security without personal liability.
  6. Transfer of Property Act argument: The court accepted that transferees or pledgees of a chose in action may have enforcement rights, but held that the existence of a legal right does not conclusively demonstrate that an act was done in the exercise of that right rather than as a device to prefer a creditor. Where the dominant intent was to prefer, Section 531 applies notwithstanding the asserted legal right.
  7. Application to individual appeals:
    • A.S. 544 (respondents 9 & 10): The conversion of savings deposits to short‑notice deposits and the subsequent transfers (including two payments of Rs. 10,000) were held to have been effected with a dominant intent to prefer. The joint‑family fund argument failed for lack of independent proof; the absence of demand and timing supported inference of preference.
    • A.S. 595 (21st respondent): The cheque for Rs. 2,000 credited to an overdraft account (without demand) was treated as a device to extract funds from a savings account and was held to be a fraudulent preference (taking into account the appellant's husband's position as director and legal adviser).
    • A.S. 620 (respondents 1 & 13): The first respondent's payment of Rs. 8,500 into the nephew's overdraft (seven days before closure) was held to be a fraudulent preference; the later factual explanation (sale of stock) was treated as a subsequent version unsupported by earlier pleadings and evidence. However, in respect of the 13th respondent, the transfer of Rs. 6,000 (and related dealings) was held not to be a fraudulent preference because it was linked to a bona fide agreement to purchase bank property (Ext. D‑6), subsequent credits were made, the sale agreement was not impugned by the liquidator, and the funds remained in the bank pending execution of the sale deed.
    • A.S. 594 (2nd respondent): Several transfers alleged as preferences had been previously considered in proceedings instituted under Section 542 (Application 1 of 1959). A different learned Judge had held (Ext. D‑18) that he was "not in a position to hold definitely that these payments ... were with the knowledge of the insolvent position" and therefore not proved as fraudulent preferences. The appellate court held that issue to have been directly and substantially in issue earlier and applied res judicata (Explanation I to Section 11 CPC as interpreted in Viswanathan v. Abdul Wajid) to bar relitigation of those transfers; accordingly A.S. 594 succeeded on that ground and the court refrained from deciding merits.
  8. Repayment order and jurisdiction: The learned single Judge had directed repayment by preferred creditors to the liquidator with interest. The appellants argued that the court lacked jurisdiction under Section 531 to order such repayment and that, in cases of adjustments (not cash), ordering repayment would unfairly penalize creditors who had not in fact received cash. The appellate court observed force in this contention but did not decide the broader question of jurisdiction. Instead, it set aside the single Judge's direction for repayment on the ground that ordering repayments in the absence of the relative debtors (who would be affected by reversal of entries) could cause grave prejudice because the decision may not bind those debtors. The liquidator was left free to institute appropriate proceedings against concerned parties.

Holding and Implications

Final disposition of the appeals (core rulings):

  • A.S. 544 of 1961 (respondents 9 & 10): Dismissed — costs awarded to the liquidator.
  • A.S. 595 of 1961 (21st respondent): Dismissed — costs awarded to the liquidator.
  • A.S. 594 of 1961 (2nd respondent): Allowed on res judicata grounds (prior decision under Section 542 as to the same transfers) — parties to bear their own costs.
  • A.S. 620 of 1961 (respondents 1 & 13): Partly allowed: in favour of the 13th respondent (no fraudulent preference found) with costs payable to him by the liquidator; dismissed as regards the first respondent (fraudulent preference found) with costs against him.

Consequences and practical implications stated by the Court

  • The appellate court set aside the single Judge's direction requiring creditors to make repayments to the liquidator (with interest) insofar as those directions were made without joining the related debtors to the proceedings; the court held that debtors are proper parties for orders directing repayment or reversal of entries, because the decision may not bind absent debtors.
  • The liquidator remains at liberty to institute appropriate proceedings (including against debtors and others) to obtain payments or to seek reversal of entries; the appellate decision does not prevent the liquidator from pursuing separate remedies in proper proceedings.
  • Res judicata prevented relitigation of certain transfers already considered in proceedings under Section 542; the court relied on a prior judgment (Ext. D‑18) and Supreme Court interpretation (Viswanathan v. Abdul Wajid) to bar rehearing of those issues.
  • No broad novel legal principle was established by this judgment; the court applied existing statutory tests and authorities to the facts, resolved factual disputes, and clarified that book adjustments may be caught by Section 531 when made with a dominant intent to prefer.

Note: This summary is compiled strictly from the text of the provided opinion. No facts, arguments, or holdings not present in the opinion have been added or inferred beyond what the opinion itself states.

Show full summary ...

    Smt. Jayanthi Bai And Others v. Popular Bank Ltd. .

    The Judgment of the Court was delivered by

    Velu Pillai, J.:— These are four appeals against the order of the learned single Judge allowing C.M.P 144 of 1958, a petition by the liquidator of the Popular Bank Ltd., under Section 531 of the Companies Act, 1956. That petition was made in B.C.P 8 of 1956 (E), upon which the Popular Bank Ltd., which may be referred to hereafter as the bank, was ordered to be wound up and in pursuance of which, the liquidation proceedings are now in progress. C.M.P 144 of 1958 was filed for a declaration, that certain entries as to payments or adjustments in the books of the bank were made by way of fraudulent preferences in favour of some of the creditors of the bank and for ancillary reliefs. The appellants are some of the respondents in C.M.P 144 of 1958, who as-creditors, were found by the learned Judge to have been preferred by the bank. Others like the appellants, who were also found by the same judgment to have been similarly preferred, have submitted to the judgment and have not appealed. The references in this judgment to respondents are as in C.M.P 144 of 1958.

    2. A.S 544 of 1961 is by respondents 9 and 10, A.S 594 of 1961 is by the 2nd respondent, A.S 595 of 1961 is by the 21st respondent and A.S 620 of 1961 is by respondents 1 and 13. The bank suspended its business on August 16, 1956. Its winding up was ordered on December 19, 1956, on a petition presented on August 27, 1956. The impugned entries all purport to have been made shortly before the bank suspended its business and at a time when it had not enough money to make payments. They are of a general pattern, which, may best be described in the words of the learned Judge. He says in paragraph 2;

    “……….the device adopted was to transfer amounts from the accounts of creditors to the accounts of debtors, obviously by some arrangement between the creditor and his chosen debtor so that the debtor instead of the bank became accountable to the creditor in respect of the amount so transferred. No doubt a trusted debtor would be chosen so that the result was that the creditor got his money in full instead of the mere dividend he would get in liquidation. There was a discharge by the debtor to the extent of the-amount transferred; and, but for the transfer, the bank could have recovered the amount from the debtor in full and need have paid the creditor only a dividend. Whatever the form, there was, in effect, a payment by the bank to the creditor of the money due to him, a loan by the creditor to his chosen debtor (or some other adjustment), and a payment by the debtor to the bank of the money due from him. In fact in some cases the payment by the bank to the creditor, and by the debtor to the bank, were shown in the books as cash transactions, but they were in truth mere book adjustments, the bank not having enough money to make the payment to the creditor except by such adjustment.”

    3. The learned Judge regarded the entries as evidence of payments, declared such payments to be fraudulent preferences, and ordered each of the creditors preferred to pay to the liquidator the amount held to have been paid to him together with interest and costs. Section 531(1) aforesaid, without its-proviso which is not material, reads at follows:

    “Any transfer of property, movable or immovable, delivery of goods, payment, execution or other act relating to property made, taken or done; by or against a company within six months before the commencement of its winding up which, had it been made, taken or done by or Against an individual within three months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound up, be deemed a fraudulent preference of its creditors and be invalid accordingly.”

    4. The provision in insolvency to which Section 531(1) makes reference is, in the present case, Section 55(1) of the Travancore-Cochin Insolvency Act, 1955, Act 2 of 1956, which corresponds to Section 54(1) of the Provincial Insolvency Act, 1920, and is in these terms:

    “Every transfer of property, every payment made, every obligation incurred, and every judicial proceeding taken or suffered by any person unable to pay his debts as they become due from his own money in favour of any creditor, with a view of giving that creditor a preference over the other creditors, shall, if such person is adjudged insolvent on a petition presented within three months after the date thereof, be deemed fraudulent and void against the receiver and shall be annulled by the Court.”

    5. The onus is on the liquidator first to prove, that when the impugned entries were made, the bank was unable to pay its debts as they became due from its own money, that is, was in a state of commercial insolvency. The learned Judge considered this topic in several aspects in paragraphs 10 to 15 of his judgment and held in paragraph 16, that “at least from April 1956 the position of the bank was such that it was unable to pay its debts as they became due from its own money”. Nothing that was urged at the bar is sufficient, in our opinion, to shake the reasoning of the learned Judge or affect his conclusion. We therefore, do not propose to dwell at length on the point and shall content ourselves with touching the main aspects and considering the specific arguments addressed to us by learned counsel for the appellants in A.S 620 of 1961 on the basis of certain documents.

    6. A clear insight into the financial condition of the bank and its working from the year 1954 has been furnished by P.W 2, who had been the Manager of the bank from its inception in the year 1944 till the year 1955. It is seen that from the year 1954, the financial condition of the bank had been gradually deteriorating, that a borrowing had to be made on a re pledge of gold security and resolutions had to be passed for further borrowings, that in March, 1956, the second respondent, who had become the General Manager of the bank gave a personal guarantee for 1¾ lakhs of rupees and the chairman of the board of directors for Rs. 50000, and obtained credit facilities, that minimum cash balances were not being maintained as per rules and that various devices such as ‘kite-flying’ were resorted to. The evidence of P.W 2 is corroborated to a large extent by that of R.W 4.

    7. If as was suggested, P.W 2 is not a reliable witness, nothing was easier, than for the first appellant in A.S 620 who was a director of the bank, for the husband of the appellant in A.S 595 who was also a director of the bank and its legal adviser, and above all for the 2nd respondent, the appellant in A.S 594 who was the General Manager of the bank, to A-4 get into the box to give rebutting evidence supported by the books of the bank which were all available. On the day before the bank suspended its business, it passed a resolution Ext. D-1(b) which is nothing less than a confession of its inability to pay and even to raise funds. The financial position of the bank on the 31st July, 1956, as may be seen from pages 133, 145, 152, 270 and 277 and from pages 29, 74, 115, 185, 229, 246 and 259 of the current account ledger Ext. P-44 and from the cash extracts of the Alleppey office and the branches Exts. P-47 page 319, P-48 page 405, P-49 page 170 and P-50 page 328 was correctly stated by the learned Judge in paragraph 15 thus:—

    “……….its credit balance with other banks stood at the negligible figure of Rs. 1883 and odd whereas it had borrowed as much as Rs. 1,67000 and odd. The cash balance held by it in all its branches…….the 4th August”.

    8. The position as on the date of the winding up as regards the realisable assets and the liabilities, also examined by the learned Judge in paragraph 10, showed beyond doubt, that the bank was not solvent. This was not caused by run on the bank or by a sudden turn of events; we fully endorse the view of the learned Judge that “the inability to pay must have been chronic”.

    9. Ext. P-5 was the first of the items of evidence relied on specifically in argument by learned counsel for the appellants in A.S 620. It is the current account ledger of the second respondent and was relied on as showing that he helped the bank with funds, which he would not have done, if the financial position was so precarious. But Ext. P-5 also shows, that his credit balance of Rs. 39,487 and odd at the close of the 14th July, 1956, came down to Rs. 3416 and odd by the 14th August, 1956; 4 he had thus pulled out a large part of his funds by then. Ext. P-32 is also his current account ledger till the 7th April, 1956. Ext. P-5 and P-32 are useful to show, that while making deposits in the bank on Thursday and Fridays, presumably to conform to the requirements of Section 18 of the Banking Companies Act, 1949, as to the minimum cash balance, P.W 2 withdrew them on Saturdays or Mondays. To mention one or two instances only, while there was a deposit of Rs. 10,000 on the 22nd March, a Thursday, there was a withdrawal of Rs. 10,000 on the following Saturday, and similarly while there was a deposit of Rs. 48,000 and odd on the 29th March, also a Thursday, there was a withdrawal of Rs. 60,000 on the following. Monday.

    10. Ext. P-45 the abstract of the agent's scroll from the 2nd July, 1956, relied on to show that the bank had substantial receipts daily, also shows that there had been substantial receipts by way of withdrawals from other banks except on very rare occasions. The cash balance of the bank came down from Rs. 20406 and odd on the 2nd July to Rs. 454 and odd on the 14th August, 1956. Ext. P-42, the Vaikom scroll does show that the Vaikom branch had been functioning for a time even after the bank formally suspended its business earlier in the day, but this in itself is no indication as to the commercial solvency of the bank. Ext. P-42 has also disclosed, that as against a receipt of Rs. 4500 on the 16th August, there was a corresponding payment on the same day; these entries concerned respondents 19 and 20, and have been found by the learned Judge to evidence fraudulent preferences. They have not appealed against the finding. This was the situation in the Vaikom branch. Exts. D-2(a) and (b) the renewals of fixed deposits in the, name of the wife of the brother of the accountant of the bank on the 7th August and Ext. D-2(d) the renewal of a fixed deposit in the name of the chairman of the board of directors on the 11th July, 1956, serve no more than to show that those who had the interest of the bank at heart did not want to aggravate the situation, by pulling out their own funds. These were the specific items of evidence relied on and they do not, in our opinion, advance the case of the appellants.

    11. We now come to the several appeals. The facts necessary for the disposal of A.S 544 of 1961 preferred by respondents 9 and 10 have been set out by the learned Judge in paragraph 21 of the judgment, which may be usefully extracted below:

    “The 9th respondent and her mother-in-law, the 10th respondent, had savings banks deposits with the Alleppey office of the bank which they had given as security for the overdraft allowed by the bank to a firm known as D. Lakshmana Naik and Sons, run by the 11th respondent (who is the husband of the 9th respondent and the son of the 10th respondent) and his brother. On the 14th July, 1956 these savings bank deposits were converted into short 1 notice deposits repayable on seven days' notice, the deposit in the name of the 9th respondent amounting to Rs. 12,089-5-11 and that in the name of the 10th respondent to Rs. 11,647-9-8. The deposits continued to be security for the overdraft of D. Lakshmana Naik and Sons. On the 11th August, 1956, at a time when there was not enough money in the bank to repay the deposits in cash, entries were made in the books showing both deposits as having been repaid, two payments of Rs. 10,000 each as having been made into the overdraft account of D. Lakshmana Naik and Sons, and a sum of Rs. 2,116-3-1 as having been deposited by the 9th respondent and a sum of Rs. 1673-7-2 by the 10th respondent this sum in each case representing the original deposit plus interest minus Rs. 10,000”.

    12. The result was, as stated by the learned Judge, that

    “On the 11th August, 1956, the 9th and 10th respondents were each paid Rs. 10,000 from out of their short notice deposits, the payments being actually effected by the transfer of these sums to the account of D. Lakshmana Naik and Sons, which as a result of these payments aggregating Rs. 20,000 ceased to be overdrawn and, in fact, showed a credit balance of Rs. 254-11-3.”

    13. To attract Section 531 of the Companies Act, not necessarily payment in cash but payment by transfer or adjustment in accounts, or any other act relating to property, may be impugned as a fraudulent preference, if the other conditions are fulfilled. In Nattukottai Bank Ltd., In re, (1957) 27 Comp Cas 404 (Mad) Balakrishna Ayyar, J. treated similar entries in the books, as “any other act relating to property”, but the learned Judge in this case was inclined to regard them as evidencing cash payments though payments were to the account of some other person.

    14. We are at one with the learned Judge in repelling the contention of the appellants, that the debtor, viz., the firm D. Lakshmana Naik and Sons and the creditors, viz., the appellants were one and the same and represented their joint family, the business of the former and the deposits of the latter being of the joint family, not so much for defect of pleading, as for the reason that the factual basis cannot be held to be established on the interested testimony of R.W 10, the 9th respondent's husband. The appellants cannot succeed in the contention without positively establishing that the deposits were made with joint family funds, not even if they had no private funds or properties. There is no presumption that a deposit in the name of a female member of a joint family represents joint family funds. There was no specific plea either that the business of the firm was joint family business. Far from raising a specific contention in the objections, that the debtor and creditor are one and the same, the plea was that the appellants are entitled to the money in deposit in their names.

    15. The next argument of counsel was that if the bank can claim a set-off in liquidation under Section 529 of the Companies Act read with Section 47 of the Insolvency Act, such a set-off made prior to the winding up is legal and could not amount to a fraudulent preference. The question is whether the liability of the appellants under Exts. D-11 and D-12 by which they hypothecate and pledged the credit under their fixed deposits as security for the, amount of the overdraft and the liability of the bank to them under the fixed deposit, could be set off mutually in liquidation proceedings, for if they could be, a voluntary set-off before winding up is legal, as none would be prejudiced thereby in the event of winding up. In In re Washington Diamond Mining Co., (1893) 3 Ch 95 at p. III Lindley, L.J observed:

    “The two debts could have been set one against the other after the bankruptcy just as effectually as before, and whether the debts were both paid or were set off against each other before the bankruptcy or after would be perfectly immaterial.”

    16. In In re, Travancore National and Quilon Bank Ltd., AIR 1940 Mad 157 Gentle, J. overruled an argument to the contrary as unsound. The question in final analysis is whether the two are mutual dealings as could be set off under Section 47. That section is 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, end no more, shall be claimed or paid on either side respectively.”

    17. The appellants may be deemed to be sureties of the firm, but without a personal obligation of their own. The bank could not call upon them to pay the amount of the debt personally and its only right is to realise the security they have provided. The rule is stated thus by Rowlatt on the Law of Principal and Surety, 3rd edition at page 140:

    “If a surety, being severally liable, has money in the hands of the creditor, who becomes bankrupt, he is entitled before the trustee sues the principal to apply it in satisfaction of the debt.”

    18. In In re, T.N Bank Subsidiary Co., AIR 1940 Mad 266 the surety was severally and jointly liable for the principal debt and so Gentle, J. allowed set off, but in In re, Travancore N. and O. Bank, AIR 1941 Mad 622 in which the surety undertook no personal liability, Venkataramana Rao, J. distinguished, AIR 1940 Mad 266, and held that there was no question of mutual dealings and therefore, of set off. Leach, J., as he then was, rejected the claim for set off in Official Assignee v. M.C Harikrishna and Sons, AIR 1935 Rang 201 as inadmissible for the same reason, under the corresponding provision in Section 47 of the Presidency-Towns Insolvency Act applicable to Burma at the time. In Mani Bhusan Malik v. Pioneer Bank Ltd., (1960) 30 Com Cas 473 : (AIR 1959 Cal 746), decided by a division bench of the Calcutta High Court, in which the facts were similar and the surety undertook no personal liability, no set off was allowed. Stephens, Ex parte (1805) 32 ER 996 relied on for the appellants was distinguished by Gentle, J. in AIR 1940 Mad 266 as a case of fraud on the part of the bank. The contention that in order to attract the rule of set off the surety need not be personally liable, is thus opposed not only to the terms of Section 47 of the Insolvency Act referred to earlier, which contemplates mutual dealings or demands, but also to the trend of decided cases, and we have no hesitation in rejecting it.

    19. It was also contended, relying on Sections 130 and 134 of the Transfer of Property Act that the transferee, including a pledgee or mortgagee of a chose in action, is the only person who can enforce payment, and so the bank could enforce Ext. D-11 and Ext. D-12, and in the present case the securities being a debt due from the bank itself, it had every right to adjust it towards the debt due to it. The further argument was that the bank had in the exercise of its right made the impugned adjustment of Rs. 20000. So stated, the argument is plausible and requires examination. Conceding that the bank had such a right, the question is what exactly the bank did in the particular circumstances. The bank cannot with a dominant intent, prefer one creditor over the others in the guise of making an adjustment or payment. The existence of a legal right is not conclusive that what was done was in the exercise of such right, though in normal circumstances the action would be referable to it. In many instances, except perhaps in the case of naked or patent fraud, there might be some antecedent right to serve as the ostensible basis of a fraudulent preference. But once it is seen that what was achieved was the preferring of one creditor over the others with a dominant intent so to do. The vice of Section 531 of the Companies Act is attracted, and the transaction is in fact a fraudulent preference.

    20. Direct evidence of such preference is not often forthcoming and is not necessary either. In Cohen, In re, Trustee, Ex parte, 1924-2 Ch 515 a voluntary payment, made on the eve of the bankruptcy, with knowledge of insolvency, was held, in the absence of proof of some other dominant motive, to be sufficient to establish a fraudulent preference. As held in In re, M. Kushler Ltd., 1943-1 Ch 248 the dominant intent to prefer may be proved by circumstantial evidence leading to a necessary inference, like any other fact. The rule is stated thus in Halsbury's Laws of England, 3rd edition, Volume 2, page 556, paragraph 1103:

    “In order that a transaction may be set aside as a fraudulent preference, it is necessary to prove that it was carried out with the substantial or dominant view of giving the creditor, or surety or guarantor for the debt a preference over the other creditors. This need not be the primary result aimed at; it is sufficient that it should be the object aimed at in bringing about the primary result. If the transaction can properly to referred to some other motive than that of giving a particular creditor or surely a preference over the other creditors, the payment is not fraudulent and void, for it is from the intention of the debtor to act in fraud of the law (i.e to prevent the distribution of the bankrupt's properly rateable among all his creditors) that the invalidity of the transaction arises.”

    and at page 557, paragraph 1104:

    “On the other hand, in the absence of direct evidence, the existence of some other possible explanation for the transaction will not of itself exclude the drawing of an inference that there was an intention to prefer.”

    21. It is not necessary to discuss decided cases cited at the bar, in which the debtor was found to have acted not with such a dominant intent, but say, with a belief that he was under a legal obligation to do the act whether such belief was well founded or not, or with an intent to keep his business going or to set right his financial position, or even to lake an advantage for himself if the law would permit such a course. If on the facts and circumstances there is room for more than one explanation, an intent, to prefer is not of necessity to be drawn. The onus of proof is of course on the liquidator. We may examine the circumstances, having regard to these considerations.

    22. From the 22nd February, 1956, when Exts. D-11 and D-12 were passed by the appellants in favour of the bank till the 11th August, 1956, when the adjustments were made, no demand by the bank for payment was proved to have been made on them. On the 14th July, 1956, the fixed deposits were converted into short-term deposits, liable to withdrawal on seven days' notice. The payments or adjustments were made just within five days of the closure of business. An attempt was made by R.W 10 to prove, that the bank called upon the appellants to pay, about six weeks before closure and that even a demand in writing signed by the parties was got ready by the General Manager. The appellants did not even call upon the liquidator to produce evidence of the same, which if it exists, must be in his possession. Though the bank was in dire need for cash to carry on, it gained no immediate financial advantage by this adjustment. The only reasonable inference in these circumstances is, that what the bank did on the 11th August was not to adjust the amount of the deposit in the exercise of its right under Exts. D-11 and D-12, but was to prefer the appellants over the other creditors. This suffices to answer the points urged on behalf of the appellants in A.S 594 of 1961.

    23. In A.S 595 of 1961 preferred by the 21st respondent the fact may be briefly stated. She had a savings-banks account with the bank. On the 11th August, 1956, she drew a cheque on the bank in favour of one Sreenivasa Mallan, the 22nd respondent R.W 3, for Rs. 2000. He had an overdraft account with the bank, which at the time, was overdrawn to the extent of Rs. 3256-9-10. The amount of the cheque was credited in the overdraft account and the balance was thereby reduced. The contention was that R.W 3 was a longstanding client and family friend of the husband of the appellant, an advocate, that he use to borrow money from him and his father from time to time, that on shat particular occasion he was in need of funds for repairing his coir factory, that when he took the cheque to the bank for encashment the Manager told him that they were short of cash and could not pay, that in spite of his protests the bank credited the amount, of the cheque in his account, and did not return the cheque and that finally he was content to effect some small repairs to the factory with other funds.

    24. Apart from the inherent improbability of this case, the circumstances are so telling, that we cannot but come to the conclusion, that the payment of Rs. 2000 was a fraudulent preference in favour of the appellant. The position of the bank as on the 11th August which has been sketched above, must have been well-known to the appellant's husband, who was, as noticed, not only a director but was also the legal adviser of the bank. The appellant would never have drawn the cheque intending that it should be cashed. It was through the appellant's husband that the transaction was arranged. R.W 3 admitted, that there had been no demand on him by the bank to pay his dues and that there was no pressure by the appellant on the bank to pay her dues. R.W 3 was worth two lakhs of rupees and the appellant's husband had confidence in him. He had executed a promissory note Ext. D-8 in favour of the appellant on the 11th August for the sum of Rs. 2,000 and it now stands discharged. We agree with the learned Judge in holding, that by this device the appellant had managed to pull out Rs. 2,000 from her savings-bank account. That, as argued, she might have pulled out the whole amount, would have rendered the transaction quite transparent. We have no doubt that was a fraudulent preference.

    25. In A.S 620 of 1961 preferred by respondents 1 and 13, their cases have to be treated separately. The first respondent was a director of the bank and had a current account in which the credit balance was Rs. 20,000 at the time. On the 8th August, 1956, he withdrew Rs. 8,500 and on the same day paid the same amount by cheque on the bank into the account of his nephew, the 15th respondent, which was credited in his overdraft account, thereby reducing its debit balance to Rs. 3176-10-0. The case of the first respondent as set out in the objection was that the payment was made in the course of a settlement of the claims of the creditors of the 15th respondent. It was stated that the bank had made demands on the 15th respondent on the 17th January, 1955, by Ext. D-10 and on the 16th March, 1956, by Ext. D-10(a) to make payment. The first respondent did not get into the box, and only the 10th respondent did. As R.W 7, he came out with the version, which did not find a place in the objections, that his entire stock-in-trade had been sold to the first respondent for Rs. 15,000, suggesting that the responsibility for the discharge of all his debts including that due to the bank, had been undertaken by the latter, and that the payment of Rs. 8,500 was in pursuance of this arrangement.

    26. This was a later development. The broad circumstances surrounding this payment are similar to those discussed above; in addition, there is the fact that the 15th respondent is the nephew of the first respondent. This is not a case, as was urged, of the bank benefiting itself. Even if the bank had demanded payment a few months before, it did not pursue the matter till it came out with this adjustment just seven days before closure. If the first respondent had undertaken to discharge the debts of his nephew, the payment would have been made long ago. It is unnecessary to deal with the cases cited before us, where without a dominant intent to prefer, the debtor acted with a motive to secure some benefit for himself of made a transfer under pressure of attachment or other legal proceedings or took an assignment of a debt due to the bank. The impugned transaction was not a payment made under a legal obligation to pay the amount of the cheque under Section 31 of the Negotiable Instruments Act as contended, because the payment was made into another account with a dominant intent to prefer as we have found. We agree with the learned Judge in holding that the transaction impugned was a fraudulent preference.

    27. The 13th respondent had an overdraft account with the bank, which on the 10th August, 1956, showed a debit balance of Rs. 9,574 and odd, and also a savings-bank account which at the time showed a credit balance of Rs. 16,075 and which was secured for the liability under the former. On that day, Rs. 6,000 was transferred from the savings-bank account to an account newly opened, entitled Sundry liabilities account, as “the amount remitted by V.A Peethambaran (the 13th respondent) to be accounted when the sale deed of the bank's property is executed in his favour”. It would appear that the bank owned and possessed a property which it could not retain, by reason of the provision in Section 9 of the Banking Companies Act and which had necessarily to be disposed of. The bank resolved to do so by Ext. D-4 on the 22nd June, 1956, but the negotiations it put through did not succeed. Eventually, by Ext. D-6 dated the 10th August, 1956, it agreed in writing to sell the property to the 13th respondent for Rs. 16,000. This accounted for the transfer of the fund to the new account. The amount of the savings-bank being a charge for the liability under the overdraft, if this was all the transfer of Rs. 16,000 ignoring the charge, might generate a suspicion in the mind of the Court as to the true character of the transfer.

    28. But payments had been made subsequent to the 10th August to the credit of the overdraft account, no doubt chiefly with funds said to have been furnished by the second respondent, with the result, that on the 14th August the account showed a credit balance nearly Rs. 10. We are constrained to hold in A.S 594 of 1961, the appeal preferred by the second respondent, as will be seen later, that the payments or adjustments in his favour, as part of which these credits were made in the overdraft account of the 13th respondent, were not fraudulent preferences. So there was no more a liability or charge on the amount of the savings-bank account. Nothing precluded the 13th respondent from making a purchase of the property; neither the resolution for the disposal of the property nor the agreement of sale in his favour was impugned by the liquidator, and the learned Judge has not held the transaction to be a fraudulent contrivance. It is also seen, that on the 14th August the property was put in the possession of the 13th respondent, apparently in part performance.

    29. The right of the, 13th respondent to obtain specific performance of the agreement was thus assured. The overdraft liability apart, nothing precluded the 13th respondent from withdrawing from the savings-bank account for payment of the sale consideration. The fact, that the fund was transferred to an account, headed. “Sundry liabilities account” in order that it may he available for effectuating the sale, is not per se evidence of a dominant intent to prefer the 13th respondent, so long as the agreement for sale has not been questioned. The 13th respondent and the bank were justified in all the circumstances of the case, in having the amount transferred to the account. That amount is still with the bank and can be availed of when the sale deed is executed. We hold that the has not been proved to be a fraudulent preference. A direction to the liquidator to execute the sale deed does not fall within the purview of these proceedings; the Court in charge of liquidation may perhaps have to be moved.

    30. In A.S 594 of 1961 preferred by the second respondent, four transfers have been alleged, of Rs. 5,000 from his current account to the overdraft account of Veeraiah Reddiar R.W 4 on the 31st July, of Rs. 6,000 from his current account to the overdraft account of the 13th respondent on the 11th August, of Rs. 2,900 from his current account to the overdraft account of the 13th respondent on the 14th August and of Rs. 3,500 from his current account to the overdraft account of Kamath Brothers, also on the 14th August, 1956. These have been found to be fraudulent preferences by the learned Judge. Subsequently, in application 1 of 1959 instituted by the liquidator under Section 542 of the Companies Act, these and others were alleged to be fraudulent preferences in favour of the second respondent and to form part of the fraudulent conduct of the officers of the bank. This was enquired into and disposed of by another learned Judge of this Court. The charges were grouped under various ‘heads’ and these fraudulent preferences were dealt with under ‘head B’. The second respondent was the 9th respondent and the transfers alleged were items 4 to 7 of Schedule VI in application 1 of 1959. The finding of the learned Judge with respect to these and two others, also alleged to be fraudulent preferences was as follows:

    “I am not in a position to hold definitely that these payments even by way of transfer were with the knowledge of the insolvent position of the Bank and to prefer some creditors over the others”.

    31. The liquidator has not appealed against that judgment so far as these transactions are concerned. Learned counsel for the appellant has furnished a copy of that judgment, which was delivered on the 19th November, 1962. We have admitted it in evidence and marked it Ext. D-18. Upon this, learned counsel for the appellant contended, that the trial of the issue as to fraudulent preferences in respect of these transactions is barred by res judicata. The only ground on which learned counsel for the liquidator tried to meet the argument, was that what has been extracted above as the finding of the Judge, does not amount to a finding. We do not think we can accept this argument. The Judge has held that he was not satisfied that these impugned transactions are fraudulent preferences. That the matter was directly and substantially in issue in proceedings under S. 542 was not disputed and in our opinion rightly. We therefore hold that this appeal has to succeed on the application of the rule of res judicata. Ext. D-18 must be taken to be the decision in a ‘former suit’ within the meaning of Explanation I to Section 11 of the CPC, and as interpreted by the Supreme Court in Viswanathan v. Abdul Wajid, AIR 1963 SC 1. We refrain from considering the merits of this appeal.

    32. One common question which has been raised in these appeals, relates to the propriety of the order made by the learned Judge calling upon the respective creditors to make repayments to the liquidator of the amounts paid to them by adjustment, with interest. It was contended, that under Section 531 of the Companies Act, the Court has no jurisdiction to order repayment, upon a declaration that the transaction is a fraudulent preference. Our attention was invited to the provision in Section 532(2)(a) of the Companies Act under which consequential orders may be passed. It was also contended, that whatever payment there had been in these cases, had been by adjustment and not in cash, and that to call upon the creditors to repay what they had not in fact received, would be to penalize or punish them for fraudulent preferences committed by the bank. There appears to be much force in the latter contention, and perhaps all that can of ought to be done is to direct a ‘reversal of the entries’ in the books of the bank.

    33. But we do not think it necessary to decide even the question of jurisdiction, because we feel, that a direction to the creditors to make repayment would, in cases like these of payments by adjustments, in the absence of the relative debtors as parties to the record, cause grave prejudice to them, because the decision we give in these proceedings may not bind the relative debtors.

    34. We venture to think, that the debtors are at least proper parties to these proceedings, for making an order of repayment whether in cash or by reversal of entries. In these circumstances, we set aside the direction of the learned Judge directing repayment to the liquidator. The liquidator is at liberty to institute appropriate proceedings against the parties concerned for obtaining payments and to collect the amount.

    35. The result is that A.S 544 and 595 of 1961 are dismissed with costs to the liquidator. A.S 594 of 1961 is allowed but in the circumstances we direct the parties to bear their costs. A.S 620 of 1961 is partly allowed so far as the 13th respondent is concerned with costs payable to him by the liquidator and is dismissed with costs so far as the first respondent is concerned.

    HJ/JHS/D.V.C

    36. Order accordingly.

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    Smt. Jayanthi Bai And Others v. Popular Bank Ltd. .
    (Dec 6, 1965)