IN THE HIGH COURT OF GUJARAT AT AHMEDABAD O.J.APPEAL No 17 of 1996 in COMPANY APPLICATIONNo 36 of 1978 with CIVIL APPLICATION No 28 of 1996 and O.J.APPEAL No 18 of 1996 in COMPANY APPLICATIONNo 185 of 1995 with CIVIL APPLICATION No 29 of 1996 and OJ APPEAL NO. 19 OF 1996 IN COMPANY APPLICATION NO. 205 OF 1995 WITH OJ CIVIL APPLICATION NO. 30 OF 1996 For Approval and Signature: Hon'ble MR.JUSTICE R.BALIA. and MR.JUSTICE A.R.DAVE ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements? 2. To be referred to the Reporter or not? 3. Whether Their Lordships wish to see the fair copy of the judgement? 4. Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? -------------------------------------------------------------- BANK OF MAHARASHTRA Versus O.L. OF NAVJIVAN TRADING FINANCE PVT.LTD. -------------------------------------------------------------- Appearance: 1. O.J.APPEAL No. 17 of 1996 MR HV CHHATRAPATI for Petitioner MR RAJNI H MEHTA for Respondent No. 1 2. O.J.APPEAL No. 18 of 1996 MR HV CHHATRAPATI for Petitioner MR RAJNI H MEHTA for Respondent No. 1 3. CIVIL APPLICATIONNo 29 of 1996 MR HV CHHATRAPATI for Petitioner MR RAJNI H MEHTA for Respondent No. 1 -------------------------------------------------------------- CORAM : MR.JUSTICE R.BALIA. and MR.JUSTICE A.R.DAVE Date of decision: 02/12/98 ORAL JUDGEMENT 1. As will be presently noticed all the three appeals are inter connected relating to same transaction between the company in liquidation and the Bank of Maharashtra and end relief claimed are integrally interdependent, we have heard and propose to decide them simultaneously by a common order. 2. A winding up order was made on 17.7.77 in Company Petition No. 59 of 1975 for winding up of Navjivan Trading Finance Private Limited, which petition was filed on 8.7.1995 by some creditors of the company. The Bank of Maharashtra is the company's banker with whom the company has multiple dealings. It had 4 different accounts with Gorgeon Branch numbered as 1, 2, 3 and 4. In Account No. 3 of Girgaon branch, company has availed facilities of overdraft. Company had taken out as many as 50 FDRs in the period between March 1975 and July 1976 all prior to the date of order of winding up. Apart from these FDRs, company in various other accounts had small credit balance. The company has during this period utilised 46 FDRs, totalling for a sum of Rs.9,76,000/- by way of security, by pledging the same with the bank for availing overdraft facility, which facility the bank has sanctioned prior to filing of winding up petition in June 1975. Official Liquidator on being appointed Liquidator of the company in liquidation had called upon the bank to deliver to him the said FDRs, for which Company Application No. 146 of 1997 had been moved. 3. In the first instance, in response to that petition, the bank has claimed that it has adjusted amount payable under FDRs against outstanding of the company under the overdraft account which exceeded the amount payable under the FDRs on 25.8.77. On an issue having been raised that most of the FDRs were pledged after the commencement of winding up proceedings, that is to say with effect from presentation of the winding up petition as envisaged under Section 441 of the Companies Act, 1956 (Hereinafter called the Act of 1956) the said disposition is void unless validated by the court in view of the provisions of Section 536(2) of the Act of 1956, those adjustment entries were reversed and Company Application No. 36 of 1978 was filed by the bank seeking to validate the transaction of pledging of FDRs with the bank as security for repayment of amount payable by company in liquidation under overdraft account. In the alternative, it was also prayed that in any case bank is entitled to set off the amount payable by the bank under the FDRs to the company as its debtor against amount due to it as creditor of the company under overdraft account. 4. The Company Application No. 146 of 1977 was decided on 8.5.79. The application was disposed of with a direction that the entries of adjustment shall be treated as rescinded and in respect of amounts payable under FDRs for one year bearing the date of winding up order shall be issued in the name of Official Liquidator in his capacity as receiver. This direction was made in respect of all the 50 FDRs. The court also directed to issue FDRs in respect of various amounts standing to the credit of the company in different accounts, with the same branch or other branches, in the name of Official Liquidator in his capacity as a receiver. The Official Liquidator was directed to hold the FDRs as receiver, subject to decision of the court in regard to bank's claim and/or lien which is the subject matter of Company Application No. 36 of 1978. We are told that all these FDRs renewed in pursuance of the aforesaid order are in the custody of Registrar of this Court on behalf of receiver. 5. Company Application No. 185 of 1995 was moved by Official Liquidator seeking a direction to the bank to renew the FDRs which have been issued in terms of order made in Company Application No. 146 of 1977 and are lying in custody of Registrar of High Court. The bank raised objection to this prayer by contending that the claim against the bank for principal amount or interest amount on such deposits has already become time barred because no claim or demand was made upon the bank within 3 years from the date of maturity of deposits since last renewals after orders in Company Application No. 146 of 1977. It also relied on its plea under application No. 36 of 1978 to deny its responsibility and obligation to renew the said FDRs any further. In the wake of this application Bank of Maharashtra too filed another Company Application No. 205 of 1995 praying for declaration that the Official Liquidator is not entitled to claim renewal of FDRs as claimed in its Application No. 185 of 1995 and also urged that renewal/encashment in respect of the said FDR from time to time is irrelevant and unnecessary at this stage until Company Application No. 36 of 1978 is decided. 6. All the three aforesaid applications were decided by the learned Company Judge by his common order dated 8.5.1996, by which Company Application No. 36 of 1976 and Company Application No. 205 of 1995 filed by the bank were rejected and Company Application No. 185 of 1995 filed by the Official Liquidator has been allowed. Out of the said order these three appeals have been filed by the Bank of Maharashtra. OJ Appeal No. 17 of 1996 has been filed against order in Company Application No. 36 of 1978. O.J. Appeal No. 18 of 1995 arises out of orders made in Company Application No. 185 of 1995. OJ Appeal No. 19 of 1995 arises out of orders made in Company Application No. 205 of 1995. O.J. APPEAL NO. 17 OF 1996 7. This appeal is by Bank of Maharashtra against the rejection of Company Application No. 36 of 1978 filed by the appellant in Company Petition No. 59 of 1975 in the matter of Navjivan Trading Finance Pvt. Ltd. (in liquidation) by order dated 8.5.96, passed by learned Company Judge. 8. As noted above, in view of the contention raised in application No. 146 of 1977, it has moved the application No. 36 of 1978 seeking order of the court under Section 536(2) to declare the creation of charge by pledging FDRs in favour of bank valid so that the same can be treated as security held by the Bank for the repayment of overdraft amount recoverable from the company in liquidation. Alternatively, it was prayed that even if the disposition of FDRs in favour of the bank as security is not validated and is deemed to be void, the bank is entitled to adjust the amount payable by it as Company's debtor under the F.D.Rs. or other accounts to the company against the debt recoverable from the company as its creditor under the overdraft account in view of Section 529 of Act of 1956 read with Section 46 of the Provincial Insolvency Act of 1920, which governs the insolvency law in State of Gujarat, (Hereinafter called the Act of 1920). While deciding the Company Application No. 146 of 1977, the court issued directions to deliver all the FDRs mentioned in the order on application No. 146 of 1977 after renewing the same for a period of one year to the Official Liquidator. 9. The other facts about which there is no dispute and as has been noticed by the learned Company Judge, are that the company in liquidation was carrying on the business of chit funds. For the purpose of its business, it had four current accounts with the Bank of Maharashtra, Girgaon branch known as Accounts Nos. 1, 2, 3 and 4. In respect of Account No.3 for the first time an overdraft facility was sanctioned in June 1975 and overdraft facility was availed from June 1975 onwards. From the other three accounts Nos. 1, 2 and 4, the total amount standing in credit of the company in liquidation was transferred to Account No.3 on or about August 18, 1997 and those other three accounts were closed. Apart from the aforesaid dealings with the Girgaon branch of the Bank the company in liquidation had current account at Chembur branch of the bank, having a credit balance of Rs.6412=19ps. In Fort Branch and in Thakurduar branch, the company was having credit balances of Rs.2608=19ps and Rs.988=56ps respectively. Apart from aforesaid current accounts and 46 FDRs with which we shall presently deal with, the company had 4 FDRs in its name, with Thakurduar branch issued on 15.9.75, 23.6.76, 23.6.76 and 12.7.1976 in the sum of Rs.2500, Rs. 1500, Rs.5000 and Rs.1500 respectively for a period of one year each. The company has availed overdraft facility against the security of fixed deposit receipts for which necessary letters of pledge had been given to the bank by the company (in liquidation). The progressive dealing with the bank by the company (in liquidation) in connection with overdraft account has been noticed in the order under appeal as under: S.No. Month Deposits Overdraft 1. March 1975 83,000/- Cr. Balance 2. April 1975 1,90,000/- " 3. May 1975 2,80,000/ " 4. June 1975 3,75,000/- Debit Balance Rs.36,584.66 5. July 1975 4,65,000/- Debit Balance Rs.2,77,028.54 6. August 1975 5,46,000/- Debit Balance Rs.6,16,761.36 7. Sept. 1975 6,41,000/- Debit Balance Rs.5,38,015.64 8. Octo. 1975 7,56,000/- Debit Balance Rs.7,51,140 9. Nov. 1975 8,41,000/- Debit Balance Rs.8,85,923.07 10. Dec. 1975 9,06,000/- Debit Balance Rs.10,33,276.31 11. Jan. 1976 9,76,000/- Debit Balance Rs.10,04,458.96 10. It has been urged on behalf of the bank that since overdraft facility was sanctioned on a continuing basis prior to the filing of winding up petition, and the company started operation of overdraft account prior to the order of the winding up petition, the same being a continuous account, having come into existence prior to the commencement of winding up proceedings, is not covered under Section 536 and even if it is covered under Section 536, the same having been result of transactions in the ordinary course of business, be validated by the court. Considering this contention, the learned Company Judge observed: "All overdrafts came to be granted and the debits came to be made only after July 1975. These are the transactions which would fall within the purview of Section 536(2) of the Companies Act, 1956" Though the court has also noticed that: "It would become clear that, for the first time, the over draft facility came to be enjoyed by the company in June 1975. This was, of course, prior to the presentation of the winding up petition which came to be presented by the Registrar of the Companies, on July 8, 1975." 11. Another important fact which was noticed by learned company Judge that learned counsel for the bank had urged that all these overdraft money has been paid to various members of the company and therefore it can be said that overdraft facility was obtained and the amounts were received with a view to discharge the liability qua certain members of the company. This fact was not found to be erroneous. However, it is observed that : "Merely because this amount had gone to some selected members of the company, it cannot be said, only on that basis that, the entire transaction was for the purpose of keeping the company going." It was further noticed that : "First Overdraft facility was enjoyed by the company in June 1975, i.e., before a month or so, before the presentation of the winding up petition. The later overdrafts have been taken only after the commencement of the winding up proceedings. It would not lie in the mouth of the Company to say that they were not aware of the commencement of the winding up proceedings before the necessary sanction was given. There was a show cause notice given to the company on August 1, 1973. The company, therefore, knew well as to what was in the offing and they should have known and probably, they were knowing that there has been the commencement of the winding up proceedings against them before the competent court. But, this all has been done with a view to see that the over draft amounts are drawn against the deposits so that their deposits before the bank goes on vanishing slowly and gradually. This device cannot be said to be an honest transaction by the company meant for keeping the company going." 12. The court further noticed taking in view the clause in proforma in the printed form by which the pledge of the FDRs was brought into existence that the FDR deposit with the bank was not only with respect to a particular account but for any other account whatsoever giving the bank a right to set off in other account, vis-a-vis by different deposit receipts. 13. With all these precincts, the learned Company Judge was of the view that the transaction was not with a view to get the company going. The plea for validating the transaction creating a charge in favour of the bank in respect of the FDRs was rejected. 14. The plea on behalf of the bank that it has a lien under Section 171 of the Indian Contract Act was rejected on the ground that the General provisions of the Contract Act cannot have precedence over special provisions of the Companies Act under Section 531 and 536 of the Companies Act. 15. The another plea of the bank that the debt due to the company from the bank under FDRs has become barred by time also did not find favour with the Company Judge. 16. The alternative contention that even if the FDRs cannot be considered to be held by the bank as security for the repayment of amount due from the company (in liquidation) to the bank on overdrafts account, the two being separate accounts between the same parties one resulting in a debt payable to the company and another being debt payable by the company, in respect of the same person, namely, the bank, the same are liable to be set off under Section 529 of the Act of 1956 read with Section 46 of the Act of 1920 is not entitled to recover the same without set off of the two accounts also did not find favour with the learned Company Judge, because of the provisions of Section 531 and 536 of the Companies Act. 17. At the outset we may notice from the schedule of deposits and debts against the securities and deposits as has been detailed in the judgment under appeal, which we have reproduced hereinabove, that until June 1975 the FDRs for amounts of Rs.3,75,000/- had been pledged as security with the bank for providing the company with facilities of overdrafts, withdrawals, though the debt balance until that date was only Rs.36,584.66ps. This was the situation prior to the date of presentation of winding up petition on 7.7.75, that is to say, the pledging of fixed deposit receipts as a security resulting in disposition of property in the FDRs in favour of bank took place prior to the commencement of winding up proceedings and cannot be affected by the provisions of Section 536(2) which reads as under: "Section 536(1) xxxxxxxxxx 536(2) In the case of a winding up by or subject to the supervision of the court, any disposition of the property (including actionable claims) of the Company and any transfer of shares in the company or alteration in the status of its members, made after the commencement of the winding up, shall, unless the court otherwise directs, be void." 18. The language is plain in itself in declaring only disposition of the property of the Company after the commencement of winding up is to be treated void unless the court otherwise orders. A disposition which has come into existence prior to commencement cannot obviously be hit by the inhibition of Section 536(2). The fact that overdraft account is continued and amount has been withdrawn by the company at later stage would itself not affect a transaction of creating a charge on FDRs as a whole prior to the commencement of winding up proceedings. According to the facts disclosed in the order under appeal FDRs amount to Rs.3,75,000/- were pledged as security with the bank for any outstanding which the bank may have against the company as on that date or which may come into being on a future date, by availing overdraft facilities. The charge does not come into existence on withdrawal or drawing money from the bank. The charge has come into existence as on the date when the FDRs were pledged. The extent to which this charge can be enforced or can be utilised is a question that depends on the actual sum due ultimately at the time when such charge is to be enforced. The question that because of the very nature of transaction those FDRs were renewed later on would not result in creation of a fresh charge but would only amount to an acknowledgment of existing charge. That also in our opinion cannot be subject matter of inhibition under Section 536(2). Even if it is so, in the facts and circumstances of the case, one cannot find any ground not to validate the same. 19. Coming to the question of effect of winding up proceedings in respect of any charge or security created since July 1975, the creation of a security or charge by pledging the FDRs with the bank undoubtedly amounts to disposition of the FDRs by way of encumbering the same and that being a disposition after commencement of the Act unless validated must be held to be void. 20. The question in the background of controversies raised above have two facets. Treating the same from the point of view as a security, held by the bank, for recovery of debt due to it by the company, if it is not validated will result in losing its character as security and in that event the bank will not be entitled to exercise its right of enforcing a charge or realising its security remaining outside winding up proceedings. However, in losing that status as a security, the amount payable in respect of FDRs by the bank to company would not lose its character as a debt payable by the bank to the company. If, it is a debt payable by the bank to the company, the question which immediately calls for consideration is whether the same is liable to be set off under Section 46 of the Act of 1920 read with Section 529 of the Companies Act against the debt recoverable by the bank from the company. 21. While, the question, whether a disposition which is void under Section 536(2) is to be validated calls for consideration that fundamental object of winding up a company under the supervision of the court is that the assets of the company should be made available for distribution pari pasu among the creditors of the company and that no creditor should obtain advantage over its other creditors. At the same time, it is also to be kept in view that mere presentation of winding up petition notwithstanding the combined reading of Section 441, which dates the commencement of winding up proceedings with effect from the date of presentation of the petition for winding up and Section 536(2) which declares the disposition by the company after the commencement of winding up proceedings to be void does not stop the company from functioning and continuing with its ordinary business in regular manner. That being the position, in considering the question whether a transaction has to be validated which is void as a result of operation of Section 536(2) read with Section 441 of the Companies Act, the courts have evolved certain principles. Normally a transaction which has been bonafide entered into and completed in the ordinary course of trade must be protected. So also where the disposition is made for the purpose of preserving the business as a going concern, the discretion must be exercised in favour of protecting the transaction. At the same time, merely because the party enters into transaction bonafide by itself may not be sufficient to validate such transaction. If that were so, like Section 531, the Legislature would have provided differently, by declaring only such transactions to be void which are not bonafide. While bonafide requirement of transaction is relevant consideration, it cannot be sole consideration. It should be coupled with ensuring that a company is not to put to a disadvantageous position in disposing its property after the commencement of winding up proceedings to the detriment of general body of creditors for the benefit of transferees only. The principle on which the statute declares the transaction disposing assets of the company since commencement of the proceeding to be void has been succinctly stated by Buckley, J. in the case of Gray's Inn Construction Co. Ltd., In re, (1980) 1 All ER 814: "It is a basic concept of our law governing the liquidation of insolvent estates, whether in bankruptcy or under the Companies Act, that the free assets of the insolvent at the commencement of the liquidation shall be distributed rateably amongst the insolvent's unsecured creditors as at that date. In bankruptcy this is achieved by the relation of the trustee's title to the bankrupt's assets back to the commencement of the bankruptcy. In a company's compulsory winding up it is achieved by section 227." 22. Setion 227 of the Companies Act in England corresponds to Section 441 of Indian Companies Act, 1956. The statute in principle applies only to the disposition made by the company of its assets. Section 536(2) cannot have any application to indict transactions of borrowings made by a company ordered to be wound up which has taken place since the commencement of winding up proceedings so as to keep it out of consideration while considering the assets available for free distribution. The borrowings which have been made are liability to be discharged by the company for discharge of which its assets are available as per the provisions of the Companies Act. 23. In this connection, we find that learned company judge has started with the assumption that all overdrafts came to be granted and the debits came to be made only after July 1975. These are the transactions which would fall within the purview of Section 536(2) of the Companies Act, 1956. With great respect, the premise does not appear to be correct. The disposition of assets by the company