ORDER
Dr. M.K. Sharma, J.
1. This is an application filed by the Official Liquidator under Section
446 of the Companies Act praying for a payment order against the respondent
for a sum of Rs. 21,573 with future pendente lite interest of 12% per annum
from the date of filing of the application till the date of realisation.
The applicant company on whose behalf this application has been filed by
the Official Liquidator had its registered office at New Delhi. The main
object with which the company was incorporated was the business of chit
fund and of finance. In C.A. 91/84, an order was passed by this Court on
11.10.1984 appointing the Official Liquidator attached to this Court as the
Provisional Liquidator. Subsequently, the applicant company was wound up by
an order passed by this Court on 21.8.1987.
2. The respondent applied and became a member of a chit of the company
bearing No. DLD-9/15 for Rs. 20,000/- payable in 40 instalments of Rs.
500/- per month. The respondent became the successful bidder at the auction
held on 16.8.1983 having bid at a discount of Rs. 5,000/- and thus became
entitled to receive the prized amount of Rs. 15,000/- with the attendant
liability to subscribe for the remaining istalments. The aforesaid amount
of Rs. 15,000/- was paid to the respondent by the applicant company by a
Cheque No. 787611 dated 13.9.1983 and the said cheque was encashed. As per
the account as standing in the chit ledger of the company which is being
kept in the regular course of business, it appears that the respondent made
certain payments by way of instalments. However, as on 17.7.1984, as per
the aforesaid books of account of the company, the respondent was liable to
pay an amount of Rs. 12,955.50. From the said ledger account, it further
appears that on 27.10.1984 two entries came to be made in the said account
and brought the account of the respondent to Nil.
3. The respondent has stated that out of the two entries, an amount of
Rs. 5,660.25 was adjusted out of Chit No. DLD-9/14 in which account, ac-
cording to the respondent, the aforesaid amount was due and payable to the
respondent. The next entry dated 27.10.1984 is in respect of Rs. 6,0.9.75
which, according to the respondent, was adjusted as against the payment due
and payable to Smt. Prakash Wanti who was holding Chit No. DLD-7/30. The
respondent has taken a stand that the aforesaid two transactions giving
adjustment of the amount on the account of the respondent was made in good
faith and the said entries are supported by documentary evidence. It is
also further case of the respondent that the aforesaid sum of Rs. 5,660.25
plus Rs. 650/- as dividend was adjusted from Chit No. DLD-9/14 which was a
non-prized chit held by the respondent. The respondent, therefore, denies
that although a sum of Rs. 12,955.50 was due to the applicant against Chit
No. DLD-9/15, the said amount stood paid in full and final settlement on
27.10.1984 against receipts and return of the original documents and,
therefore, nothing is due and payable by the respondent to the applicant.
The respondent has also placed on record two receipts dated 27.10.1984
showing payment of Rs. 5,660.25 and the receipt for Rs. 6,039.75. The
respondent has also placed on record a no-dues certificate dated 27.10.1984
issued by Shri Ashwani Kumar who was a Director of the company. The respondent has also placed on record a copy of the cancelled demand promissory note. Relying on the contents of the aforesaid documents, the respondent stated that the aforesaid transaction by way of adjustment of accounts was made bona fide and without knowledge of appointment of the Provisional Liquidator by the respondent and, therefore, neither the provisions of
Section 531 or 531A of the Companies Act could be attracted to the facts of the present case.
4. Ms. Zubeda Begum appearing for the Official Liquidator submitted that
the Provisional Liquidator in the present case as appointed on 11.10.1984
and therefore the alleged transaction entered into between the then Direc-
tor of the company and the respondent on 27.10.1984 by giving adjustment of
the accounts is void since the same was entered into with dishonest inten-
tion and is the outcome of fraud being played on the creditors of the
company. My attention was also drawn to the provisions of Section 531 and
531A of the Companies Act in support of her submission that the present
transaction alleged by the respondent by way of adjustment showing two
entries on 27.10.1984 is void. Mr. Dhir appearing for the respondent, on
the other hand, submitted that there is nothing on record to show that the
respondent had knowledge about the appointment of the Official Liquidator
as the Provisional Liquidator on 11.10.1984. According to him, the Official
Liquidator has failed to allege, prove and establish a case of fraudulent
transfer in respect of the present transaction.
5. The ledger account of the company on the account of the respondent has
been placed on record on careful perusal of which I find that as per entry
dated 17.7.1984, an amount of Rs. 12,955.50 was due from the respondent
payable to the applicant. The respondent in its reply to paragraph 6 of the
application admitted that a sum of Rs. 12,955.50 was due to the petitioner
against Chit No.DLD-9/15, but it is the case of the respondent that the
said amount stood paid in full and final settlement on 27.10.1984 against
receipts and return of the original documents by adjusting the entire
amount of the deponent by purported transfer of a sum of Rs. 6,039.75 out
of Chit No. DLD-7/30 wherein Mrs. Prakash Wanti was a member and a sum of
Rs. 5,660.25 purported to be paid by the respondent out of his own Chit No.
DLD-9/14 which was also a non-prized chit. The aforesaid adjustment has
been given by one of the Directors of the company on 27.10.1984 after the
company was provisionally wound up on 11.10.1984. The company was finally
wound up by order dated 27.8.1987. Therefore, if any of the provisions of
Section 531 or 531A of the Companies Act is attracted to the facts of the
present case, these transactions admittedly could be declared void and
consequently a payment order, as sought for by the applicant, could be
made.
6. Ms. Zubeda Begum appearing for the Official Liquidator relief upon the
provisions of Section 531 to state that it was a pure and simple case of
fraudulent preference given by the then Director of the Company to the
respondent in order to give the respondent undue and fraudulent advantage.
In order to constitute fraudulent preference, there need not be a transfer
of property nor is any cash payment necessary. Even when there is payment
or transfer of payment or adjustment in accounts or any other act relating
to property, then also the provisions of Section 531 of the Act could get
attracted provided the other conditions as set out in the said section are
fulfilled. To establish fraudulent preference under Section 531, it may not
be enough to show that preference was shown to a particular creditor. It
must also be shown that it was done with a view to give him favoured treat-
ment. The dominant motive attending the transaction has to be ascertained
and if it is tainted with an element of fraud, then only the provisions of
Section 531 could get attracted, to set aside a transaction as fraudulent
preference under Section 531 of the Companies Act. This Court in Official
Liquidator, Victor Chit Fund Vs. Kanhiya Lal & Others reported in 1972 Vol.
42 Company Cases Page 396 held that fraud must be clearly alleged, proved
and established. It was also held that the petition containing mere general
allegations and lacking in material particulars relating to fraud is liable
to be dismissed. To the same effect in the decision in Official Liquidator
Vs. V. R. Venkataratnam when it
held that onus is on the person who impugned a transaction as being a
fraudulent preference to make it out. To prove and establish fraudulent
preference, such material particulars for foundation to establish fraudu-
lent preference under Section 531, in my considered opinion, are lacking in
the present case. Therefore, the application cannot plead for relief in
this case without laying foundation for making out a case under Section 531
of the Companies, Act. However, the applicant shall be still entitled to a
relief provided the provisions of Section 531A could be said to be attract-
ed to the facts and circumstances of the present case. For ready reference,
it is necessary to extract the provisions of Section 531A which are ex-
tracted below:-
S.531-A. Avoidance of voluntary transfer: Any transfer of proper-
ty, movable or immovable, or any delivery of goods, made by a
company, not being a transfer or delivery made in the ordinary
course of its business or in favour of a purchaser or encumbranc-
er in good faith and for valuable consideration, if made within a
period of one year before the presentation of a petition for
winding up by or subject to the supervision of the Court or the
passing of a resolution for voluntary winding up of the company,
shall be void against the liquidator.
7. The substance of the aforesaid section is that any transfer of proper-
ty or goods held by a company otherwise than in the ordinary course of
business or such transfer in favour of a purchaser or encumbrance not in
good faith and valuable consideration would be void if it had been made
within one year before the presentation of a winding up petition or the
passing of a resolution for voluntary winding up. In my considered opinion,
to attract the Provisions of Section 531-A of the Companies Act also, like
the provisions of Section 531 of the Companies Act, it is not necessary
that payment has to be made in cash. Even payment by transfer or adjustment
in accounts or any other act relating to property could also be challenged
if the other requirements of the provisions are met with or fulfillled. The
expression “good faith” is defined in the General Clauses Act to the effect
“an entry shall be deemed to be done in good faith where it is in fact done
honestly whether it is done negligently or not”. In absence of a separate
definition under the Companies Act, in my considered opinion, the defini-
tion as given in the General Clauses Act for the aforesaid expression “good
faith” must apply.
8. On scrutiny of the records, it is apparent that by making entries in
the ledger account on 27.10.1984 and giving adjustment to the respondent in
the said account by way of transfer from other accounts, there was indeed
transfer of movable property by the company. Therefore, the issue that
arises for my consideration is whether such transfer made by way of adjust-
ment to the account of the respondent by making it a nil liability was not
made in the ordinary course of business or in good faith. Since the afore-
said entries came to be entered into the ledger account of the respondent
on 27.10.1984, that is, after 16 days of appointment of the Provisional
Liquidator in respect of the company in question, the said transfer of
movable property made by the Director of the Company after appointment of
the Provisional Liquidator cannot be said to have been made in the ordinary
course of its business.
9. The next issue, therefore, to be decided in the present case is wheth-
er the said entries by way of transfer of property could be said to have
been made in favour of a purchaser or encumbrancer in good faith. On scru-
tiny of the records, it is disclosed that in the present case adjustment
was given in the account of the respondent from the account in Chit No.DLD-
9/14 which also belonged to the respondent. The other adjustment for the
balance amount is from Chit No.DLD-7/30 which stood in the name of Smt.
Prakash Wanti from whose account an amount of Rs. 6,039.75 is shown to have
been adjusted in the present account held by the respondent. Said Smt.
Prakash Wanti is stated to have given a no objection certificate which fact
is not denied by the Official Liquidator in his pleadings. If said Smt.
Prakash Wanti permitted such adjustment by way of transfer from her ac-
count, the said transfer cannot be said to be without consent and, there-
fore, illegal.
10. Although Ms. Begum appearing for the Official Liquidator laid much
stress on the issue of time factor of giving the adjustment and thereby
absolving the respondent from making any payment to the company, in my
considered opinion, it is a pure and simple case of giving adjustment of
amount due and payable to the respondent and to Smt. Prakash Wanti by the
company to an account of the respondent in respect of which the present
claim is made. The intention of giving such a benefit to the respondent, by
giving adjustment of the amount from one of the chit accounts belonging to
the respondent himself and also from another account in respect of which
consent was given by its holder, cannot be said to be not bona fide and
with honest intention. The said respondent and Smt. Prakash Wanti were
entitled to receive back from the company in liquidation the amount due and
payable to them, of course, in accordance with the provisions of the Act,
after the winding up order was passed.
11. The Official Liquidator has neither alleged nor led any evidence to
show and establish that the said transfer made in favour of the respondent
by giving adjustment was done with dishonest intention. In terms of the
definition of the expression “good faith”, as appearing in the General
Clauses Act, reference to which has already been made, in my considered
opinion, the onus is on the Official Liquidator to allege, prove and establish that the aforesaid entries in favour of the respondent were not done
in good faith, that is, the same is not done honestly. There is nothing on
record to prove and establish that the aforesaid adjustments were given in
favour of the respondent dishonestly. In absence of any evidence in that
respect and in the facts and circumstances of the present case, I would
hold that the said action of transferring the property by way of giving
adjustment was bona fide and in good faith.
12. In this connection, reference may also be made to a decision of the
Punjab High Court in the First National Bank Ltd. Vs. Om Prakash Sharma &
others wherein it was held that it is open
for the Court to validate transactions which is made by the company bona
fide entered into by the company for its benefits. It is true that once the
Court appoints a Provisional Liquidator and directs him to take over into
his possession and custody the assets of the Company, the Director’s powers
cannot be exercised in respect of the property and assets of the company,
the same having come into the custody of the Official Liquidator. It is
also settled law that so long as the order of the appointment of a Provisional Liquidator is operative, the powers of the Directors must remain in abeyance and, therefore, all dispositions of the property of the company made between the date of presentation of the petition for winding up and the winding up order would be void unless the Court otherwise orders. The Court, however, has also been given the power and jurisdiction to validate such dispositions if they have been made honestly.
13. Since I have already held that the Official Liquidator has failed to
prove and establish any dishonest intention in transferring the property by
giving adjustment, in my considered opinion, the said entries cannot be
held to be void. This is therefore, not a case where in provisions of
section 531-A is attracted. As the aforesaid transfer has been held to have
been done bona fide and with honest intention, by giving adjustment of the
amount due and payable to the respondent and another depositor to the
present account of the respondent, this petition is dismissed as having no
merit. However, on the facts and circumstances of the case, the parties
shall bear their own cost.