Nath Sah v. Official Liquidator

Thom, C.J Ganga Nath and Braund, JJ.:— Sri Nath Sah, who is contributory of the Benares Bank, Ltd., (in liquidation) presented an application under section 183(5) of the Indian Companies Act. Subsequemly during the course of the proceedings on his application the official liquidator of the Benares Bank preferred an application under section 186 of the Companies Act. The question referred to this Bench has arisen out of the latter application.

Sri Nath Sah was a shareholder in the Benares Bank. The shares he held were of the value of Rs. 50 each. He has paid Rs. 6-4-0 upon each of his shares. There has been a further call of Rs. 6-4-0 per share which. However, he has not paid. Rs. 37-8-0 per share remains uncalled.

Sri Nath Sah further claims to be a creditor of the Bank. He has deposited a sum of Rs. 5,000 in fixed deposit and the total amount due by the Bank to him upon his deposit is Rs. 5,117-12-11. The deposit of Rs. 5,000 was made as a security in respect of overdraft on his current account. It appears that for about 23 months after he made the fixed deposit of Rs. 5,000 he was in credit so far as his current account was concerned, but when the winding up order was passed by this Court against the Benares Bank Sri Nath Sah had overdrawn, his current account by Rs. 3,882-9-9. This latter sum the liquidator now seeks to recover and in his application under section 186 of the Companies Act he prays for an order for payment of that amount. Sri Nath maintains that he is entitled to a set-off and that in fact he owes nothing to the Bank but that the Bank owes Rs. 1,283-3-2 to him.

The question for consideration is whether it is open to the court before which the liquidation proceedings are pending in its discretion to grant an order or refuse to grant an order on an application under section 186 or whether the amount of the debt to the Bank being proved to court is bound to make an order for payment Section 186 is in the following terms:

“(1) The court may, at any time after making a winding up order, make an order on any contributory for the time being settled on the list of contributories to pay, in manner directed by the order, any money due from him or from the estate of the person whom he represents to the company, exclusive of any money payable by him or the estate by virtue of any call in pursuance of this Act.

“(2) The court in making such an order may, in the case of an unlimited company, allow to the contributory by way of set-off any money due to him or to the estate which he represents from the company on any independent dealing or contract with the company, but not any money due to him as a member of the company in respect of any dividend or profit; and may, in the case of a limited company, make to am director whose liability is unlimited or to his estate the like allowance: Provided that, in the case of any company, whether limited or unlimited, when all the creditors are paid in full, any money-due on any account whatever to a contributory from the company may be allowed to him by way of set-off against any subsequent call.”

It was contended for the liquidator that in view of the provisions of section 186, in the case of a limited company—and the Benares Bank is a limited company—the court has no power to allow a set-off in favour of a contributory. Whether the court may or may not allow a set-off in favour of a contributory in such an application is a question upon which we do not consider we are called upon to pronounce in the disposing of the matter before us. If the court refuses in a particular case to make an order under section 186(1), the liquidator to enforce his claim must proceed by way of a civil suit against the contributory and in this suit the contributory would be permitted to maintain the ordinary legal defences to such a claim. The real question for decision therefore is whether the court in control of liquidation proceedings has any discretion in the matter and may refuse—should that appear just—an application under section 186.

We would observe in the first place that the provisions of section 186(1) are not mandatory. The wording of the section certainly suggests that the legislature intended to allow the court a discretion in the matter as to whether an order under section 186 should or should not be made.

It was urged, however, for the liquidator that in refusing to grant an order under section 186 the court would be defeating the intention of the legislature, which was to deprive a contributory of the right to set off. In support of this contention reference was made to the following cases: In re Overend Gurney and, Co., Grissell's case. In re Whitehouse & Co.(2), and In re Anglo-French Co-operative Society, Ex. Parte Petty(3). The decisions in these cases, however, do not touch the question which we have to decide. These decisions establish the principle that in a case of a call upon a contributory in respect of his shares or in the case of a claim against a director in respect of misfeasance no set-off may be permitted as against the liquidator. In the cases referred to the rights of a contributory to set-off in a claim by the liquidator in respect of an ordinary debt due by the contributory to the company were not in issue. Learned counsel for the liquidator, however, founded specially upon a passage in the judgment of Jessel, M.R in the case of In re Anglo-French Co-operative Society, Ex parte Petty. The learned Master of the Rolls had under consideration the terms of section 101 of the English Companies Act of 1862, the terms of which are identical with the provisions of section 186 of the Indian Companies Act. In the course of his judgment he observes: “By the 101st section contributories of a limited company who owe money to the company must pay it to the company, although the company may owe them money. That is the meaning which has been attributed to that section, although it does not say so in so many words; but that is the result of the authorities upon it. If an ordinary contributory, perfectly innocent is deprived of the right of set-off which he would have had in an action, what is to be said as to a director, manager, or any other officer of a company who has misapplied money? Is it to be supposed that the framers of the statute who have deprived an ordinary innocent contributory of the right he would otherwise have had of ser-off against the company if he had brought an action, could have intended to give such a benefit to the persons who have committed what is described in the 165th section as an offence? I think if ire wanted an additional argument to show that no such set-off was intended by the legislature, we have it in the construction which has been put on the 101st section.”

The set-off claimed in that case was claimed by a director against whom proceedings for misfeasance had been taken under section 165 of the Companies Act. The reference to section 101, therefore, in the passage above quoted is obiter; it is a dictum nevertheless which clearly supports the contention which has been advanced by the official liquidator in this case. There is high authority, however, to which we shall refer later, which is quite inconsistent with this statement of the law.

We would observe, at this stage that the right of set off is a valuable right recognized by the provisions of the Civil Procedure Code. A creditors right of set off in bankruptcy proceedings is preserved by section 46 of the Provincial Insolvency Act and in liquidation proceedings by section 229 of the Indian Companies Act which is in terms identical with section 262 of the English Companies Act. Now if as was contended by learned counsel for the liquidator, the intention of the legislature had been to deprive a contributory of the right of set-off the legislature would without doubt, in our judgment, have enacted such a far reaching provision in clear and specific terms. There is nothing in section 186 of the Companies Act in our view which can reasonably be construed as a general deprivation of contributories to companies in liquidation of the right of, set-off. That is our view upon a consideration of the general principles of set-off and of the statutory provisions to which we have referred. The matter in our opinion, however, is put beyond doubt by a dictum in the judgment of the Privy Council in the case of Hansraj Gupta v. Official Liquidators of Dehra Dun etc. Company. In that case the Board had under consideration the provisions of section 186. In the course of the judgment of the Board Lord Russell of Killowen observed:

“Now, in considering the meaning and effect of section 186 it is impossible to overlook the fact that it is verbatim identical with the corresponding section in the legislation of this country, a section which dates back some 70 years to 1862, and which has appeared in our company legislation ever since. It is therefore a section with an ancestral history. Three features of the section call for notice: (1) It is concerned only with moneys due from a contributory, other than money payable by virtue of a call in pursuance of the Act. A debtor who is not a contributory is untouched by it. Moneys due from him are recoverable only by suit in the company's name. (2) It is a section which creates a special procedure for obtaining payment of moneys; it is not a section which purports to create a foundation upon which to base a claim for payment. It creates no new rights. (3) The power of the court to order payment is discretionary. It may refuse to act under the section, leaving the liquidator to sue in the name of the company, and it will readily take that course in any case in which it is made apparent that the respondent under this procedure, if continued, would be deprived of some defence or answer open to him in a suit for the same moneys.”

It is true that the facts in the case just referred to differ somewhat from the facts of the present case. The observations of the Board may be obiter; nevertheless the Board did in fact interpret section 186 and their interpretation must be followed in this Court.

Learned counsel for the liquidator relied on the decision in Purshottam Das v. Gorakhpur Electric Supply Co.. This is the decision of a single Judge of this Court and directly, supports the liquidator's contention. The observations of the Privy Council above referred to however, were not brought to the notice of the learned Judge and his decision can no longer be considered good law.

The question referred to this Bench for decision is in the following terms: “Whether having regard to the observations made by their Lordships of the Privy Council in the case of Hansraj Gupta v. Official Liquidators of Dehra Dun etc. Company, and in a case in which the contributory of a company in compulsory or voluntary liquidation would, or might but for the liquidation, have an accrued legal right to set off a debt due to him from the company against a debt due by him to the company (other than in respect, of calls on shares), the court; exercising jurisdiction in the winding up ought to refuse an application by the official liquidators or liquidator as the case may be under section 186 of the Indian Companies Act and leave the official liquidators or liquidator to sue the contributory in the ordinary course.”

In disposing of the matter referred to us we consider it sufficient to hold that it is open to the court exercising jurisdiction in the winding up of a company in its discretion to grant or to reject an application under section 186 of the Indian Companies Act.

We direct that the case be sent to the learned Judge before whom the proceedings in the liquidation of the Benares Bank. Limited, are pending for disposal according to law. The question of costs will be decided by the learned Judge.