The main legal point established in the judgment is that while the impugned entries in the bank's books evidenced fraudulent preferences, the court set aside the direction for repayment, stating that it may cause grave prejudice to the debtors and that the debtors should be parties to the proceedings for obtaining payments.

Headnote:
Fraudulent Preferences - Companies Act, 1956 - S.531, S.532(2)(a) - S.55(1) of the Travancore-Cochin Insolvency Act, 1955, Act 2 of 1956, corresponding to S.54(1) of the Provincial Insolvency Act, 1920 - Nattukottai Bank Ltd., In re (1957) 27 Com. Cas. 404 - In re Washington Diamond Mining Company (1893) 3 Ch. 95 at 111 - In re Travancore National and Quilon Bank Ltd. AIR. 1940 Madras 157 - Rowlatt on The Law of Principal and Surety, 3rd edition - Official Assignee v. M. C. Harikrishna and Sons AIR. 1935 Rangoon 201 - Mani Bhusan Malik v. Pioneer Bank Ltd., (I960) 30 Comp. Cas. 473 - Cohen. In re Trustee, Ex parte (1924)2 Ch. 515 - In re M. Kushler Limited (1943) 1 Ch. 248 - Halsbury's Laws of England, 3rd edition, Volume 2, page 556, Para.1103 - Halsbury's Laws of England, 3rd edition, Volume 2, page 557, Para.1104 - Viswanathan v. Abdul Wajid AIR. 1963 S. C. 1
Fact of the Case:

The liquidator of the Popular Bank Ltd. filed a petition under S.531 of the Companies Act, 1956, seeking a declaration that certain entries as to payments or adjustments in the books of the bank were made by way of fraudulent preferences in favor of some of the creditors of the bank. The appellants, as creditors, were found to have been preferred by the bank. The court ordered each of the preferred creditors to repay the amount held to have been paid to them together with interest and costs.
Finding of the Court:

The court found that the impugned entries in the bank's books evidenced fraudulent preferences and ordered the preferred creditors to repay the amounts received. However, the court set aside the direction for repayment, stating that it may cause grave prejudice to the debtors and that the debtors should be parties to the proceedings for obtaining payments.
Issues: The issues included whether the impugned entries in the bank's books constituted fraudulent preferences, whether the court had jurisdiction to order repayment, and whether the debtors should be parties to the proceedings for obtaining payments.
Ratio Decidendi: The court held that the impugned entries in the bank's books evidenced fraudulent preferences, but set aside the direction for repayment, stating that it may cause grave prejudice to the debtors and that the debtors should be parties to the proceedings for obtaining payments. The court also noted that the debtors are at least proper parties to these proceedings.
Final Decision: A. S.544 and 595 of 1961 were dismissed with costs to the liquidator. A. S.594 of 1961 was allowed, but the court directed the parties to bear their costs. A. S.620 of 1961 was partly allowed so far as the 13th respondent is concerned with costs payable to him by the liquidator and was dismissed with costs so far as the first respondent is concerned.

Judgment :-

1. 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 S.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 Para.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."

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.

3. S.531 (1) aforesaid, without its proviso which is not material, reads as 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."

The provision in insolvency to which S.531 (1) makes reference is, in the present case, S.55 (1) of the Travancore-Cochin Insolvency Act, 1955, Act 2 of 1956, which corresponds to S.54(1) of the Prov

Click Here to Read the rest of this document

1965 Supreme(Ker) 323

Cases Referred (1)