D SUNDARAVARADAN Vs. RNARASIMHACHARI, OFFICIAL LIQUIDATOR

JUDGEMENT

(1.) (Application No. 8415 of 1939): In this application the Official Liquidator seeks directions of the Court in regard to matters set out in prayers 2 and 3. Shortly the points are these: whether a debtor in respect of whose debt there is a surety is entitled to set off against the money owing by the debtor to the company moneys due to the debtor from the company and whether the surety is entitled to set off in respect of his obligation to the company moneys owing to him from the company. The origin of the transactions is a liability which, arose in connexion with a chit fund scheme conducted by the company. Every contributory to a chit fund scheme agrees that he will each month for a specified period pay to the company an agreed amount; each month an auction is held and the successful bidder, being one of the subscribers, is entitled to receive from the company the total amount of all his subscriptions to the fund upon furnishing security by means of a surety and also agreeing to continue to pay each month the amount of his monthly subscription. When a debtor is placed in a position to receive from the company the total amount of his subscriptions the company requires the debtor and a surety or two sureties to enter into an obligation to the company, a draft form of which has been placed before me and it is on account of the obligations under this document that the matter arises in the present application. It has been contended on behalf of the liquidator that the obligation itself in regard both to the debtor and the surety first arises upon the execution of this security bond and on behalf of one of the debtors it has been on the other hand argued that the original contract between the debtor and the company subsisted throughout and continued after the execution of the security bond. Whatever the position may be, it is common ground and it is agreed that the obligations of the debtor and the surety are joint and several.

(2.) The claim to set-off arises in the following way: Section 229, Companies Act, provides that in the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and to debts provable and other liabilities as are in force for the time being under the law of insolvency. Under that Section the provisions of Section 46, Provincial Insolvency Act, are applicable in the liquidation of a company. That Section provides that 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 accounts and no more shall be claimed or paid by either side respectively. The question is whether in respect of either the debtor or the surety in the matter before me, debts owing by the company to the debtor or surety are mutual dealings within the contemplation of Section 46 mentioned above. The provisions of Section 31, English Bankruptcy Act, although. differently worded, it is conceded, do not have any different effect to those of Section 46, Provincial Insolvency Act.

(3.) This matter has been before two other High Courts in this country: In Trimback Gangadhar V/s. Ramachandra Trimbak (1921) 8 A.I.R. Bom. 66, it was held in circumstances more or less similar as in this case that no right to set off arose. A decision somewhat to the same effect is to be found in Allince Bank of Simla V/s. Mohanm Lal (1927) 14 A.I.R. Lah. 228. So long ago as 1806 in Trimback Gangadhar V/s. Ramachandra Trimbak (1921) 8 A.I.R. Bom. 66 the following case is reported. At the time of the bankruptcy of two persons two others were indebted to them in a joint bond, one as principal and the other as surety, and the principal was a creditor on a separate account. Lord Erskine, the Lord Chancellor, made an order upon the petition presented that liberty to set off should be given. The principles laid down in that case have been referred to in modern textbooks. In 2 Halsbury (Hailsham Edition) 285, para. 377, in referring to Ex. parte Hanson (1806) 12 Ves. Jun. 345 and other cases the following appears: In the absence of agreement, express or implied, there is no set-off between joint and separate debts; but if one joint debtor is a surety for the other the principal debtor may set off against the joint debt a debt due to himself; and a person induced to become surety by the creditor's fraud may set off his claim in respect of the fraud against the debt due by the principal debtor.