Mcc Finance Ltd. (In Liquidation) Vs. Reserve Bank of India - Court Judgment

SooperKanoon Citationsooperkanoon.com/823830
SubjectCompany
CourtChennai High Court
Decided OnDec-10-2001
Case NumberCompany Application Nos. 101 and 102 of 2002 In Company Petition No. 494 of 2000
JudgeE. Padmanabhan, J.
Reported in[2002]110CompCas645(Mad); (2001)3MLJ98
ActsCompanies Act, 1956 - Sections 446 and 446(2)
AppellantMcc Finance Ltd. (In Liquidation)
RespondentReserve Bank of India
Appellant AdvocateArvind P. Datar, Adv.
Respondent AdvocateK. Kirubakaran, Adv.
DispositionApplications allowed
Cases ReferredMylapore Permanent Benefit Fund Ltd. v. Arogiaswami Pillai
Excerpt:
(i) company - liquidation - sections 446 and 446 (2) of companies act, 1956 - whether applicant entitled to a direction under section 446 (2) against second respondent on its admission to pay amount claimed by it - second respondent admitted its liability to applicant company - held, applicant entitled to a direction under section 446 (2) against second respondent. (ii) set-off - whether second respondent could plead set off or adjustment of admitted amount due and payable by it as against amount outstanding to sical from mcc finance ltd. - right to set off permissible only in respect of claims that exist between same parties in same right and being mutual - in case there is no modality of debt there could be no right of set off - held, second respondent could not plead set off or adjustment of admitted amount due and payable by it as against amount outstanding to sical from mcc finance ltd. - e. padmanabhan, j.1. c.a. no. 101 of 2001 has been filed by mcc financeltd. represented by the official liquidator praying that this court confirm that the second respondent, pearl ships ltd., now called sical ships (india) ltd. is liable to pay mcc finance ltd. (in liquidation) a sum of rs. 81,34,336 as on 31-12-2000.2. c.a. no. 102 of 2001 has been filed by the very same company against the same respondent praying that this court direct the second respondent, pearl ships ltd., now known as sical ships (india) ltd. to deposit the sum of rs. 78,24,000 to the credit of c.p. no. 496 of 2000 with the official liquidator being the admitted outstanding as per the second respondent's letter of acknowledgement dated 15-5-1999, on or before a date to be fixed by this court.3. heard arvind p. datar, the learned senior counsel appearing for the applicant in both the applications and n. kirubakaran, learned counsel appearing for the second respondent in both the applications.4. this court ordered notice to the respondent on 25-1-2001, returnable by 2-2-2001. the respondent entered appearance and took time to file the counter and the counter was filed on 29-11-2001. with the consent of the counsel for either side, the applications were taken up for final disposal.5. this court appointed the official liquidator as the provisional liquidator in c.p. no. 496 of 2000 with effect from 21-8-2000. according to the applicant, as seen from the books of account, the second respondent has borrowed from the applicant-company in liquidation various amounts from 15-6-1995, onwards repayable with interest at 22.5 per cent per annum. the second respondent also made repayments from time to time, which have been given credit to. the statement of account has been filed as annexure a to the application. as per the statement, the second respondent is due and liable to pay rs. 81,34,336 as on 31-12-2000.6. according to the applicant, the said balance has been confirmed by the second respondent according to the usual commercial practice. on 15-5-1999, the second respondent had confirmed the balance as per its books and admitted its liability to pay rs. 78,24,000 as on 31-3-1999. after the appointment of the administrator, the second respondent-company took a stand that it is a subsidiary of sical ships, that the applicant-company owes rs. 9 crores to sical ships and the amounts due from the second respondent are stated to have been included by sical. according to the applicant, such an unilateral act of sical has not been accepted by the applicant. the second respondent is a separate company, which has its own assets and liabilities, though it is claimed that it is a subsidiary of sical. therefore, the second respondent cannot unilaterally adjust the amounts outstanding against the subsidiary and equally it is not open to sical to stale that amounts admittedly due to the applicant by the second respondent arc being adjusted against the dues of the applicant to the holding company.7. according to the applicant, the second respondent by letters dated 15-5-1999, and 24-3-1999, has admitted the liability and, therefore, the applicant is entitled to a direction on admission in terms of order 12, rule 6 of the code of civil procedure. hence, the present application for direction under section 446(2) of the companies act, 1956.8. per contra, the second respondent filed a common counter in both the applications. according to the counter, sical ships (india) ltd. formerly known as pearl ships ltd., took an intercorporate deposit of rs. 125 lakhs from mcc finance ltd. (in liquidation) during the year 1995 and rs. 1,15,84,931 was repaid on various dates between the years 1996 and 1998. the outstanding as on 31-3-2001, is rs. 81,43,956. the second respondent is unable to repay this amount due to recession in the shipping industry for the past four years and consequent bad financial performance and liquidity crunch. from 1996-97, onwards the second respondent sustained loss in a heavy sum. during 1996-97, the loss was rs. 651.57 lakhs; during 1997-98, the loss was rs. 1,307 lakhs; during 1998-99 the loss was rs. 1,804.71 lakhs; during 1999-2000, the loss sustained being rs. 2,224.12 lakhs and during 2000-2001, the loss sustained being rs. 3,763.89 lakhs.9. it is further stated that the capital and reserve of the second respondent-company which stood at rs. 3,388.25 lakhs as on 31 -3-1996, has been completely eroded and the company has negative net worth of rs. 4,962.03 lakhs. all the fixed assets of the second respondent-company except vehicles acquired under hire-purchase agreement amounting to rs. 23.85 lakhs are mortgaged with icici ltd., a financial institution as security for various loans received by the company amounting to rs. 4,236.26 lakhs as on 31-3-2001. the cash and balance position has worsened since 31-3-2001.10. the second respondent further pleads that due to severe cash shortage, the financial institutions have precluded the second respondent from paying any of the unsecured loans/intercorporate deposits or interest thereon without their prior approval or before completely discharging their obligation and this is one of special conditions imposed by icici ltd, any additional liability now will completely jeopardise the present financial position of the company, which is highly unstable and the business will come to a complete standstill.11. it is further pleaded that the second respondent is honestly trying to meet its liabilities of everyone including the applicant. the second respondent is trying its best to raise money from private sources to fulfil its obligations to the applicant, but the applicant being an unsecured creditor, the restriction imposed by icici ltd., disables the respondent from discharging it, apart from its facing liquidity problem. the secured creditors will have priority over the unsecured creditors and, therefore, the second respondent has to seek the consent of icici ltd., for the waiver of the clause regarding payment to unsecured creditors, especially to the applicant. the second respondent has already by letter dated 29-8-2001, sought permission of icici ltd., for repayment of the outstanding dues to the applicant. if icici ltd. agree to waive the special condition, the respondent will mobilise resources as fast as possible and start paying monthly instalments within two months from the waiver by icici ltd. in twelve monthly instalments. the second respondent states that it is not shirking its responsibility, but it is only prevented from meeting the obligation due to constraints. towards the end of the counter affidavit, the second respondent has stated thus :'12. it is therefore, prayed that this court may be pleased to permit the respondent to pay the outstanding amount to the applicant in twelve monthly instalments commencing from a date to be fixed within two months from the date of waiver of condition received from icici ltd. and pass such further order or orders as this court may deem fit and proper in the circumstances of the case and render justice.'12. in these applications, the following points arise for consideration :'(i) whether the applicant is entitled to a direction under section 446(2) of the companies act, 1956, against the second respondent on its admission to pay the amount claimed by it ?(ii) whether the second respondent could plead set off or adjustment of the admitted amount due and payable by it as against the amount outstanding to sical from mcc finance ltd. ?(iii) whether the second respondent's plea that it as a financing bank had imposed restriction with respect to repayment towards unsecured creditors precluded the applicant herein from claiming the admitted amount ?(iv) whether the second respondent could be permitted to pay the amount in instalments if so, what is the reasonable instalment ?(v) to what relief, if any ?'13. to begin with, it is essential to take up the first point for consideration. according to the applicant-company (in liquidation), the second respondent owes a sum of rs. 81,34,336 as on 31-12-2000, as per the books of account maintained. by letter dated 15-5-1999, and 24-3-1999, by the second respondent-company, it had admitted its liability to the applicant-company. admittedly the second respondent borrowed money from the company (in liquidation). it is an independent transaction between the petitioner-company and the second respondent-company. the second respondent-company had confirmed the liability as seen from its letter dated 15-5-1999. it is not as if the second respondent had denied the borrowal of the loan from the applicant-company (in liquidation). the contents of annexure a--statement of accounts enclosed to the application are not being controverted at all. the learned counsel for the administrator relied upon the letters dated 15-5-1999 and 24-3-1999. the letter dated 15-5-1999, is a confirmation of balance as on 31-3-1999, written by the second respondent-company addressed to the petitioner-company. the letter reads thus :'dear sirs,in connection with the audit of our financial statements, please provide directly to our auditors, fraser and ross, chartered accountants, post box no. 4987, 4, 'a' kences towers, north usman road, t. nagar, chennai-17, e-mail: d_schen@md2.vsnl.net.in fax: (91)(044) 8252273, the confirmation of the balance. as per our books rs. 78,24,001 is payable to you as informed to you vide our letter dated 7-4-1999. a copy is enclosed for your reference.your prompt attention to this request will be appreciated. an addressed reply paid envelope is enclosed for your reply.'14. on 24-3-1999, the second respondent-company once again confirmed the outstanding after reconciliation of accounts and the said letter reads thus :'sub.: reconciliation of accountsref: our earlier letter psl/fin/1234 dated 4-3-1999.please find enclosed our interest workings upto 31-3-1999, on the basis of agreed interest rate of 22.5 per cent. as per our working rs. 78,24,001 is payable as on 31-3-1999.kindly confirm the balance immediately.'the above two letters arc more than sufficient to sustain the claim and it is an admission of liability by the second respondent to the applicant-company.15. that apart, the second respondent in its counter admitted the very liability itself and the admission reads thus :'2.1 state that sical ships india ltd. (known as pearl ships ltd. prior to 24-11-2000) took an intercorporate deposit of rs. 125 lakhs from the applicant, viz., mercantile credit corporation ltd., now known as mcc finance ltd., in the year 1995. out of this amount the principal amounting to rs. 1,15,84,931 was repaid during the years 1996 to 1998. the outstanding as at 31-3-2001 of rs. 81,43,956 comprises the principal amount of rs. 9,15,069 and interest of rs. 72,28,887. the company has been unable to repay this amount due to worldwide recession in the shipping industry for the past four years and the consequent bad financial performance.6. i state that this respondent-company is honestly trying to meet its liabilities to everyone including the applicant. however, the circumstances mentioned above precluded them from paying any amount. the bona fides is apparent from the fact that the principal amount of rs. 1.16 crores has been paid during the years 1996-98. as per the details set out, the major portion has been adjusted towards interest and the principal amount is negligible viz., rs. 9 lakhs.10. i state that if icici ltd. agree to waive the special condition obtained from us, we will immediately mobilise resources as fast as possible and start paying monthly instalments within two months from the waiver by icici ltd., in twelve monthly instalments.12. it is, therefore, prayed that this court may be pleased to permit the respondent to pay the outstanding amount to the applicant in twelve monthly instalments commencing from a date to be fixed within two months from the date of waiver of conditions received from icici ltd. and pass such further order or orders as this court may deem fit and proper in the circumstances of the case and render justice.'16. thus, on the very admission not only in the two confirmation letters extracted above, but also the admission in the counter, the second respondent is liable to pay the amount as claimed by the applicant in this application and the second respondent is bound to discharge the said liability to the applicant. the claim of the applicant against the second respondent is well-founded and the applicant is entitled to a direction under section 446(2) of the companies act, against the second respondent.17. taking up the next point, whether the second respondent could put forward the plea of set off or adjustment of the admitted amount due and payable by it as against the amounts due and payable by the applicant-company (in liquidation) to sical.18. sical is an independent company. with the said independent company, the applicant had dealings and while the applicant-company was in dire financial constraints and suffered liquidity crunch, by an independent transaction sical advanced an intercorporate loan as both the companies were being managed by the same set of directors. the second respondent, claiming to be a subsidiary of sical for the first time during arguments put forward the plea that it is entitled to set off and to adjust the amount payable by it to the applicant (in liquidation) out of the amounts payable by the applicant to sical.19. primarily it has to be pointed out that they are not mutual dealings where alone such set off or adjustment is permissible. the two transactions are independent transactions and, therefore, it has to be examined whether the second respondent could seek to set off or adjustment. if the transaction is between the same two companies, namely, the applicant (in liquidation) and the second respondent, and if they are mutual dealings, it may be open to the second respondent to seek for set off and not otherwise.20. in union of india v. india fisheries (p.) ltd. : [1965]57itr331(sc) the apex court, while considering the scope of section 228 of the companies act, 1913, held thus:'228. debts of all descriptions to be proved.--in every winding up (subject in the case of insolvent companies to the application in accordance with the provisions of this act of the law of insolvency) all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, shall be admissible as proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims as may be subject to any contingency or for sonic other reason do not bear a certain value.'section 229 provides :229. application of insolvency rules in winding up of insolvent companies.--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 to the valuation of annuities and future and contingent liabilities as arc in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent; and all persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company may come in under the winding up, and make such claims against the company as they respectively are entitled to by virtue of this section.the effect of these statutory provisions, is, inter alia, that an unsecured creditor must prove his debts and all unsecured debts are to be paid pari passu....' (p. 334)21. in official liquidator, high court of karnataka v. smt. v. lakshmikutty [1981] 51 comp. cas 566; the apex court, while interpreting sections 529 and 530 of the companies act, 1956, held thus (p. 570):'...section 529 provides that in the winding up of an insolvent company, the same rules shall prevail and be observed with regard to the provable debts as are in force for the time being under the law of insolvency with respect to the estate of persons adjudged insolvent. this provision brings in the applicability of section 46 of the provincial insolvency act, 1920, which reads:'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 account, and no more, shall be claimed or paid on either side respectively.'this rule enacted in section 46 of the provincial insolvency act, with regard to the debts provable by a creditor against the insolvent must, therefore, likewise apply in regard to debts provable against a company in winding up. consequently, when the respondent in the present case claimed to prove her debt against the company in liquidation, she was entitled to the benefit of the rule enacted in section 46 of the provincial insolvency act, and she could legitimately claim that since there were admittedly mutual dealings between her and the company in liquidation, an account should be taken in respect of such mutual dealings and only that amount should be payable or receivable by her which is due at the foot of such account.' (p. 570)22. in the said pronouncement, the apex court had occasion to consider the case where the company in liquidation and creditor had mutual dealings and when dealings are not mutual, it is obvious that legitimately no claim could be made for set off.23. on the facts of the present case, the difference sought to be set off is not between the same parties, though the second respondent may be a subsidiary of sical, it cannot be held that they are between the same parties. the second respondent is a company registered under the indian companies act so also sical, another company. set off, if any, must be between the same parties. difference cannot be set off unless they are out of and from the same persons in the same right.24. section 47 of the presidency-towns insolvency act reads thus :'mutual dealings and set off.--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 note of what is due from the one party to the other in respect of such mutual dealings, and the sum due from one party shall be set off against any sum due from the other party, and the balance of the account, and no more, shall be claimed or paid on either side respectively:provided that a person shall not be entitled under this section to claim the benefits of any set off against the property of an insolvent in any case where he had at the time of giving credit to the insolvent notice of the presentation of any insolvency petition by or against him.'25. by no stretch of imagination, could the dealings between the applicant and sical be considered to be a mutual dealing nor will they fall under section 47 of the presidency-towns insolvency act. sical being an unsecured debtor has to put forward its claim in the line of priority of debts as it is an unsecured debtor as provided under section 49 of the presidency-towns insolvency act. sical, not being a secured creditor to the applicant (in liquidation) cannot seek for preference. however, we are not concerned with the said position of this case.26. the learned administrator relied upon the pronouncement of jagannadhadas, cj. in h. naik, official liquidator, puri bank v. panchanon das, : air1954ori7 , wherein it has been held that only in a case of mutual dealings, set off is a matter of course. in this case, the dealing not being mutual and dealings not being between the applicant and the second respondent-company, there could be no claim of set off by the second respondent against the applicant-company (in liquidation) with respect to the debts payable by the company under liquidation to sical.27. section 47 of the presidency-towns insolvency act and section 46 of the provincial insolvency act, which are the principles to be followed as in the winding-up proceedings as provided in the companies act as well as the pronouncement of the apex court, there could be a set off in a case of mutual dealings between the insolvent and his creditors and there could be no set off unless there are mutual dealings. the said principle of set off in insolvency is a doctrine of equality and this object is not merely to avoid cross actions, but to do substantial justice. this cannot be extended to a case where at the time of insolvency a debtor or the insolvent has full knowledge that the latter has become hopelessly involved.28. as already pointed out, section 529 of the companies act provides that in the winding-up of an insolvent company, the same rules shall prevail and be observed with regard to debts payable, the valuation of annuities, the respective rights of secured and unsecured creditors. in thirunageswaram janopakara saswatha nidhi ltd. v. p.k. doraiswami mudaliar : (1953)illj326mad , a division bench of this court held thus :'the amount due from the fund became payable long ago as all the instalments have been paid by the mortgagor. if, as pointed out in mylapore permanent benefit fund ltd. v. arogiaswami pillai air 1918 mad. 995(a), after the calls have matured at the end of the 84th month, the balance becomes due and there is a statement of account, there is nothing to prevent the adjustment of the two claims at the end of the 84th month. in that case what happened was that the period of maturity had not arrived and therefore the adjustment could not be availed of. in view of section 229 of the companies act, which attracts the provision in section 46, provincial insolvency act, the mortgagor has got the right to claim a set off of the amount due to him from the fund in respect of the matured claim as against the amount due from him under the mortgage. this is not like a case of a contributory in a limited company who, as a creditor of the company, cannot, in winding up, set off his debt against a call made on him by the liquidator, until the creditors have been paid in full. there is no question of the mortgagor being a contributory.the amount due to him became payable under a contract with the fund by which he had to keep up the payment of the instalments for a period of 84 months at the end of which the fund in its turn promised to pay to the person who entered into the contract not only the amount he paid but also some bonus and this amount undoubtedly became payable at the end of the 84th month. that amount is a debt due to the mortgagor from the fund. the fund is now claiming an amount due to it under a mortgage. these two amounts can be set off and i sec no objection for adjusting the one against the other as pointed out by the decision in mylapore permanent benefit fund ltd. v. arogiaswami pillai air 1981 mad. 995 (a) 1006. the view taken therefore by the lower court is correct and the second appeal is dismissed with costs.' (p. 611)29. thus, it is the settled law that the right to set off is permissible only in respect of the claims that exist between the same parties in the same right and being mutual. if there is no modality of debt, there could be no right of set off. therefore, it follows that the second respondent cannot put forward the plea of set off nor could it seek adjustment of the admitted amount due and payable by it to the applicant herein towards the outstanding payable by the applicant (in liquidation) to another company, sical ships (india) ltd.30. in fact, such a plea also had not been put forward in the counter, probably realising the legal position. hence, this point is also answered against the second respondent.31. nextly, it was pleaded by the second respondent that it had availed of a huge loan from icici ltd., the said bank had imposed certain restrictions with respect to repayment of loan and, therefore, it is not in a position to pay or discharge the liability as a whole to the applicant in liquidation. this pica in no way bars the applicant from claiming the amount due to it nor a restriction imposed by icici bank would in any manner take away the rights of the applicant (in liquidation) to seek for recovery of the amount due to it. it is not as if such a condition has been imposed by a statutory provision nor any statutory provision has been shown to bar such discharge. it may be an internal arrangement between the second respondent and the said icici bank with which the third parties like the applicant arc not concerned. in fact, the second respondent has already addressed the said banker, namely icici bank, and is awaiting its clearance. it is needless to add that the second respondent is obliged to pay the entire amount and liquidate the debt, else the second respondent will be liable to be proceeded against. therefore, the plea that a restriction has been imposed by its banker on the second respondent is neither here nor there nor will it in any manner exonerate the second respondent from discharging the liability. hence, this contention has to be answered against the second respondent.32. lastly, it was contended that the second respondent be permitted to pay the amount in instalments. the second respondent, it is claimed, is carrying on business, but it has availed of credit facilities with icici bank and it is not possible for the second respondent to pay the entire amount outstanding in one lump sum since it may result in hardship to the second respondent-company and may even lead the second respondent-company to unintended results, where a number of workers are employed. though the plea is attractive, this court will not be justified in granting instalments as prayed for by the second respondent. instead, this court is of the considered view that the second respondent is granted time to pay the amount as claimed by the applicant in three equal bi-monthly instalments from the date of this order and in the event of the second respondent failing to pay anyone of the instalments, the entire amount will become payable and it is open to the applicant to recover the entire amount due.33. in the circumstances, both the applications arc allowed with costs of rs. 3,000 against the second respondent and the respondent is directed to pay the sum of rs. 81,34,336 claimed by the applicant with interest at 9 per cent per annum commencing from 31-12-2001, in three equal bi-monthly instalments.
Judgment:

E. Padmanabhan, J.

1. C.A. No. 101 of 2001 has been filed by MCC FinanceLtd. represented by the official liquidator praying that this Court confirm that the second respondent, Pearl Ships Ltd., now called Sical Ships (India) Ltd. is liable to pay MCC Finance Ltd. (in liquidation) a sum of Rs. 81,34,336 as on 31-12-2000.

2. C.A. No. 102 of 2001 has been filed by the very same company against the same respondent praying that this Court direct the second respondent, Pearl Ships Ltd., now known as Sical Ships (India) Ltd. to deposit the sum of Rs. 78,24,000 to the credit of C.P. No. 496 of 2000 with the official liquidator being the admitted outstanding as per the second respondent's letter of acknowledgement dated 15-5-1999, on or before a date to be fixed by this Court.

3. Heard Arvind P. Datar, the learned senior counsel appearing for the applicant in both the applications and N. Kirubakaran, learned counsel appearing for the second respondent in both the applications.

4. This Court ordered notice to the respondent on 25-1-2001, returnable by 2-2-2001. The respondent entered appearance and took time to file the counter and the counter was filed on 29-11-2001. With the consent of the counsel for either side, the applications were taken up for final disposal.

5. This Court appointed the official liquidator as the provisional liquidator in C.P. No. 496 of 2000 with effect from 21-8-2000. According to the applicant, as seen from the books of account, the second respondent has borrowed from the applicant-company in liquidation various amounts from 15-6-1995, onwards repayable with interest at 22.5 per cent per annum. The second respondent also made repayments from time to time, which have been given credit to. The statement of account has been filed as Annexure A to the application. As per the statement, the second respondent is due and liable to pay Rs. 81,34,336 as on 31-12-2000.

6. According to the applicant, the said balance has been confirmed by the second respondent according to the usual commercial practice. On 15-5-1999, the second respondent had confirmed the balance as per its books and admitted its liability to pay Rs. 78,24,000 as on 31-3-1999. After the appointment of the administrator, the second respondent-company took a stand that it is a subsidiary of Sical Ships, that the applicant-company owes Rs. 9 crores to Sical Ships and the amounts due from the second respondent are stated to have been included by Sical. According to the applicant, such an unilateral act of Sical has not been accepted by the applicant. The second respondent is a separate company, which has its own assets and liabilities, though it is claimed that it is a subsidiary of Sical. Therefore, the second respondent cannot unilaterally adjust the amounts outstanding against the subsidiary and equally it is not open to Sical to stale that amounts admittedly due to the applicant by the second respondent arc being adjusted against the dues of the applicant to the holding company.

7. According to the applicant, the second respondent by letters dated 15-5-1999, and 24-3-1999, has admitted the liability and, therefore, the applicant is entitled to a direction on admission in terms of Order 12, Rule 6 of the Code of Civil Procedure. Hence, the present application for direction under Section 446(2) of the Companies Act, 1956.

8. Per contra, the second respondent filed a common counter in both the applications. According to the counter, Sical Ships (India) Ltd. formerly known as Pearl Ships Ltd., took an intercorporate deposit of Rs. 125 lakhs from MCC Finance Ltd. (in liquidation) during the year 1995 and Rs. 1,15,84,931 was repaid on various dates between the years 1996 and 1998. The outstanding as on 31-3-2001, is Rs. 81,43,956. The second respondent is unable to repay this amount due to recession in the shipping industry for the past four years and consequent bad financial performance and liquidity crunch. From 1996-97, onwards the second respondent sustained loss in a heavy sum. During 1996-97, the loss was Rs. 651.57 lakhs; during 1997-98, the loss was Rs. 1,307 lakhs; during 1998-99 the loss was Rs. 1,804.71 lakhs; during 1999-2000, the loss sustained being Rs. 2,224.12 lakhs and during 2000-2001, the loss sustained being Rs. 3,763.89 lakhs.

9. It is further stated that the capital and reserve of the second respondent-company which stood at Rs. 3,388.25 lakhs as on 31 -3-1996, has been completely eroded and the company has negative net worth of Rs. 4,962.03 lakhs. All the fixed assets of the second respondent-company except vehicles acquired under hire-purchase agreement amounting to Rs. 23.85 lakhs are mortgaged with ICICI Ltd., a financial institution as security for various loans received by the company amounting to Rs. 4,236.26 lakhs as on 31-3-2001. The cash and balance position has worsened since 31-3-2001.

10. The second respondent further pleads that due to severe cash shortage, the financial institutions have precluded the second respondent from paying any of the unsecured loans/intercorporate deposits or interest thereon without their prior approval or before completely discharging their obligation and this is one of special conditions imposed by ICICI Ltd, Any additional liability now will completely jeopardise the present financial position of the company, which is highly unstable and the business will come to a complete standstill.

11. It is further pleaded that the second respondent is honestly trying to meet its liabilities of everyone including the applicant. The second respondent is trying its best to raise money from private sources to fulfil its obligations to the applicant, but the applicant being an unsecured creditor, the restriction imposed by ICICI Ltd., disables the respondent from discharging it, apart from its facing liquidity problem. The secured creditors will have priority over the unsecured creditors and, therefore, the second respondent has to seek the consent of ICICI Ltd., for the waiver of the Clause regarding payment to unsecured creditors, especially to the applicant. The second respondent has already by letter dated 29-8-2001, sought permission of ICICI Ltd., for repayment of the outstanding dues to the applicant. If ICICI Ltd. agree to waive the special condition, the respondent will mobilise resources as fast as possible and start paying monthly instalments within two months from the waiver by ICICI Ltd. in twelve monthly instalments. The second respondent states that it is not shirking its responsibility, but it is only prevented from meeting the obligation due to constraints. Towards the end of the counter affidavit, the second respondent has stated thus :

'12. It is therefore, prayed that this court may be pleased to permit the respondent to pay the outstanding amount to the applicant in twelve monthly instalments commencing from a date to be fixed within two months from the date of waiver of condition received from ICICI Ltd. and pass such further order or orders as this court may deem fit and proper in the circumstances of the case and render justice.'

12. In these applications, the following points arise for consideration :

'(i) Whether the applicant is entitled to a direction under Section 446(2) of the Companies Act, 1956, against the second respondent on its admission to pay the amount claimed by it ?

(ii) Whether the second respondent could plead set off or adjustment of the admitted amount due and payable by it as against the amount outstanding to Sical from MCC Finance Ltd. ?

(iii) Whether the second respondent's plea that it as a financing bank had imposed restriction with respect to repayment towards unsecured creditors precluded the applicant herein from claiming the admitted amount ?

(iv) Whether the second respondent could be permitted to pay the amount in instalments If so, what is the reasonable instalment ?

(v) To what relief, if any ?'

13. To begin with, it is essential to take up the first point for consideration. According to the applicant-company (in liquidation), the second respondent owes a sum of Rs. 81,34,336 as on 31-12-2000, as per the books of account maintained. By letter dated 15-5-1999, and 24-3-1999, by the second respondent-company, it had admitted its liability to the applicant-company. Admittedly the second respondent borrowed money from the company (in liquidation). It is an independent transaction between the petitioner-company and the second respondent-company. The second respondent-company had confirmed the liability as seen from its letter dated 15-5-1999. It is not as if the second respondent had denied the borrowal of the loan from the applicant-company (in liquidation). The contents of Annexure A--statement of accounts enclosed to the application are not being controverted at all. The learned counsel for the administrator relied upon the letters dated 15-5-1999 and 24-3-1999. The letter dated 15-5-1999, is a confirmation of balance as on 31-3-1999, written by the second respondent-company addressed to the petitioner-company. The letter reads thus :

'Dear Sirs,

In connection with the audit of our financial statements, please provide directly to our auditors, Fraser and Ross, Chartered Accountants, Post Box No. 4987, 4, 'A' Kences Towers, North Usman Road, T. Nagar, Chennai-17, e-mail: d_schen@md2.vsnl.net.in Fax: (91)(044) 8252273, the confirmation of the balance. As per our books Rs. 78,24,001 is payable to you as informed to you vide our letter dated 7-4-1999. A copy is enclosed for your reference.

Your prompt attention to this request will be appreciated. An addressed reply paid envelope is enclosed for your reply.'

14. On 24-3-1999, the second respondent-company once again confirmed the outstanding after reconciliation of accounts and the said letter reads thus :

'Sub.: Reconciliation of accounts

Ref: Our earlier letter PSL/FIN/1234 dated 4-3-1999.

Please find enclosed our interest workings upto 31-3-1999, on the basis of agreed interest rate of 22.5 per cent. As per our working Rs. 78,24,001 is payable as on 31-3-1999.

Kindly confirm the balance immediately.'

The above two letters arc more than sufficient to sustain the claim and it is an admission of liability by the second respondent to the applicant-company.

15. That apart, the second respondent in its counter admitted the very liability itself and the admission reads thus :

'2.1 state that Sical Ships India Ltd. (known as Pearl Ships Ltd. prior to 24-11-2000) took an intercorporate deposit of Rs. 125 lakhs from the applicant, viz., Mercantile Credit Corporation Ltd., now known as MCC Finance Ltd., in the year 1995. Out of this amount the principal amounting to Rs. 1,15,84,931 was repaid during the years 1996 to 1998. The outstanding as at 31-3-2001 of Rs. 81,43,956 comprises the principal amount of Rs. 9,15,069 and interest of Rs. 72,28,887. The company has been unable to repay this amount due to worldwide recession in the shipping industry for the past four years and the consequent bad financial performance.

6. I state that this respondent-company is honestly trying to meet its liabilities to everyone including the applicant. However, the circumstances mentioned above precluded them from paying any amount. The bona fides is apparent from the fact that the principal amount of Rs. 1.16 crores has been paid during the years 1996-98. As per the details set out, the major portion has been adjusted towards interest and the principal amount is negligible viz., Rs. 9 lakhs.

10. I state that if ICICI Ltd. agree to waive the special condition obtained from us, we will immediately mobilise resources as fast as possible and start paying monthly instalments within two months from the waiver by ICICI Ltd., in twelve monthly instalments.

12. It is, therefore, prayed that this court may be pleased to permit the respondent to pay the outstanding amount to the applicant in twelve monthly instalments commencing from a date to be fixed within two months from the date of waiver of conditions received from ICICI Ltd. and pass such further order or orders as this court may deem fit and proper in the circumstances of the case and render justice.'

16. Thus, on the very admission not only in the two confirmation letters extracted above, but also the admission in the counter, the second respondent is liable to pay the amount as claimed by the applicant in this application and the second respondent is bound to discharge the said liability to the applicant. The claim of the applicant against the second respondent is well-founded and the applicant is entitled to a direction under Section 446(2) of the Companies Act, against the second respondent.

17. Taking up the next point, whether the second respondent could put forward the plea of set off or adjustment of the admitted amount due and payable by it as against the amounts due and payable by the applicant-company (in liquidation) to Sical.

18. Sical is an independent company. With the said independent company, the applicant had dealings and while the applicant-company was in dire financial constraints and suffered liquidity crunch, by an independent transaction Sical advanced an intercorporate loan as both the companies were being managed by the same set of directors. The second respondent, claiming to be a subsidiary of Sical for the first time during arguments put forward the plea that it is entitled to set off and to adjust the amount payable by it to the applicant (in liquidation) out of the amounts payable by the applicant to Sical.

19. Primarily it has to be pointed out that they are not mutual dealings where alone such set off or adjustment is permissible. The two transactions are independent transactions and, therefore, it has to be examined whether the second respondent could seek to set off or adjustment. If the transaction is between the same two companies, namely, the applicant (in liquidation) and the second respondent, and if they are mutual dealings, it may be open to the second respondent to seek for set off and not otherwise.

20. In Union of India v. India Fisheries (P.) Ltd. : [1965]57ITR331(SC) the Apex Court, while considering the scope of Section 228 of the Companies Act, 1913, held thus:

'228. Debts of all descriptions to be proved.--In every winding up (subject in the case of insolvent companies to the application in accordance with the provisions of this Act of the law of insolvency) all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, shall be admissible as proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims as may be subject to any contingency or for sonic other reason do not bear a certain value.'

Section 229 provides :

229. Application of insolvency rules in winding up of insolvent companies.--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 to the valuation of annuities and future and contingent liabilities as arc in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent; and all persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company may come in under the winding up, and make such claims against the company as they respectively are entitled to by virtue of this section.

The effect of these statutory provisions, is, inter alia, that an unsecured creditor must prove his debts and all unsecured debts are to be paid pari passu....' (p. 334)

21. In Official Liquidator, High Court of Karnataka v. Smt. V. Lakshmikutty [1981] 51 Comp. Cas 566; the Apex Court, while interpreting Sections 529 and 530 of the Companies Act, 1956, held thus (p. 570):

'...Section 529 provides that in the winding up of an insolvent company, the same rules shall prevail and be observed with regard to the provable debts as are in force for the time being under the law of insolvency with respect to the estate of persons adjudged insolvent. This provision brings in the applicability of Section 46 of the Provincial Insolvency Act, 1920, which reads:

'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 account, and no more, shall be claimed or paid on either side respectively.'

This rule enacted in Section 46 of the Provincial Insolvency Act, with regard to the debts provable by a creditor against the insolvent must, therefore, likewise apply in regard to debts provable against a company in winding up. Consequently, when the respondent in the present case claimed to prove her debt against the company in liquidation, she was entitled to the benefit of the rule enacted in Section 46 of the Provincial Insolvency Act, and she could legitimately claim that since there were admittedly mutual dealings between her and the company in liquidation, an account should be taken in respect of such mutual dealings and only that amount should be payable or receivable by her which is due at the foot of such account.' (p. 570)

22. In the said pronouncement, the Apex Court had occasion to consider the case where the company in liquidation and creditor had mutual dealings and when dealings are not mutual, it is obvious that legitimately no claim could be made for set off.

23. On the facts of the present case, the difference sought to be set off is not between the same parties, though the second respondent may be a subsidiary of Sical, it cannot be held that they are between the same parties. The second respondent is a company registered under the Indian Companies Act so also Sical, another company. Set off, if any, must be between the same parties. Difference cannot be set off unless they are out of and from the same persons in the same right.

24. Section 47 of the Presidency-Towns Insolvency Act reads thus :

'Mutual dealings and set off.--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 note of what is due from the one party to the other in respect of such mutual dealings, and the sum due from one party shall be set off against any sum due from the other party, and the balance of the account, and no more, shall be claimed or paid on either side respectively:

Provided that a person shall not be entitled under this section to claim the benefits of any set off against the property of an insolvent in any case where he had at the time of giving credit to the insolvent notice of the presentation of any insolvency petition by or against him.'

25. By no stretch of imagination, could the dealings between the applicant and Sical be considered to be a mutual dealing nor will they fall under Section 47 of the Presidency-Towns Insolvency Act. Sical being an unsecured debtor has to put forward its claim in the line of priority of debts as it is an unsecured debtor as provided under Section 49 of the Presidency-Towns Insolvency Act. Sical, not being a secured creditor to the applicant (in liquidation) cannot seek for preference. However, we are not concerned with the said position of this case.

26. The learned administrator relied upon the pronouncement of Jagannadhadas, CJ. in H. Naik, Official Liquidator, Puri Bank v. Panchanon Das, : AIR1954Ori7 , wherein it has been held that only in a case of mutual dealings, set off is a matter of course. In this case, the dealing not being mutual and dealings not being between the applicant and the second respondent-company, there could be no claim of set off by the second respondent against the applicant-company (in liquidation) with respect to the debts payable by the company under liquidation to Sical.

27. Section 47 of the Presidency-Towns Insolvency Act and Section 46 of the Provincial Insolvency Act, which are the principles to be followed as in the winding-up proceedings as provided in the Companies Act as well as the pronouncement of the Apex Court, there could be a set off in a case of mutual dealings between the insolvent and his creditors and there could be no set off unless there are mutual dealings. The said principle of set off in insolvency is a doctrine of equality and this object is not merely to avoid cross actions, but to do substantial justice. This cannot be extended to a case where at the time of insolvency a debtor or the insolvent has full knowledge that the latter has become hopelessly involved.

28. As already pointed out, Section 529 of the Companies Act provides that in the winding-up of an insolvent company, the same rules shall prevail and be observed with regard to debts payable, the valuation of annuities, the respective rights of secured and unsecured creditors. In Thirunageswaram Janopakara Saswatha Nidhi Ltd. v. P.K. Doraiswami Mudaliar : (1953)ILLJ326Mad , a Division Bench of this Court held thus :

'The amount due from the fund became payable long ago as all the instalments have been paid by the mortgagor. If, as pointed out in Mylapore Permanent Benefit Fund Ltd. v. Arogiaswami Pillai AIR 1918 Mad. 995(A), after the calls have matured at the end of the 84th month, the balance becomes due and there is a statement of account, there is nothing to prevent the adjustment of the two claims at the end of the 84th month. In that case what happened was that the period of maturity had not arrived and therefore the adjustment could not be availed of. In view of Section 229 of the Companies Act, which attracts the provision in Section 46, Provincial Insolvency Act, the mortgagor has got the right to claim a set off of the amount due to him from the fund in respect of the matured claim as against the amount due from him under the mortgage. This is not like a case of a contributory in a limited company who, as a creditor of the company, cannot, in winding up, set off his debt against a call made on him by the liquidator, until the creditors have been paid in full. There is no question of the mortgagor being a contributory.

The amount due to him became payable under a contract with the fund by which he had to keep up the payment of the instalments for a period of 84 months at the end of which the fund in its turn promised to pay to the person who entered into the contract not only the amount he paid but also some bonus and this amount undoubtedly became payable at the end of the 84th month. That amount is a debt due to the mortgagor from the fund. The fund is now claiming an amount due to it under a mortgage. These two amounts can be set off and I sec no objection for adjusting the one against the other as pointed out by the decision in Mylapore Permanent Benefit Fund Ltd. v. Arogiaswami Pillai AIR 1981 Mad. 995 (A) 1006. The view taken therefore by the lower court is correct and the second appeal is dismissed with costs.' (p. 611)

29. Thus, it is the settled law that the right to set off is permissible only in respect of the claims that exist between the same parties in the same right and being mutual. If there is no modality of debt, there could be no right of set off. Therefore, it follows that the second respondent cannot put forward the plea of set off nor could it seek adjustment of the admitted amount due and payable by it to the applicant herein towards the outstanding payable by the applicant (in liquidation) to another company, Sical Ships (India) Ltd.

30. In fact, such a plea also had not been put forward in the counter, probably realising the legal position. Hence, this point is also answered against the second respondent.

31. Nextly, it was pleaded by the second respondent that it had availed of a huge loan from ICICI Ltd., the said bank had imposed certain restrictions with respect to repayment of loan and, therefore, it is not in a position to pay or discharge the liability as a whole to the applicant in liquidation. This pica in no way bars the applicant from claiming the amount due to it nor a restriction imposed by ICICI Bank would in any manner take away the rights of the applicant (in liquidation) to seek for recovery of the amount due to it. It is not as if such a condition has been imposed by a statutory provision nor any statutory provision has been shown to bar such discharge. It may be an internal arrangement between the second respondent and the said ICICI Bank with which the third parties like the applicant arc not concerned. In fact, the second respondent has already addressed the said banker, namely ICICI Bank, and is awaiting its clearance. It is needless to add that the second respondent is obliged to pay the entire amount and liquidate the debt, else the second respondent will be liable to be proceeded against. Therefore, the plea that a restriction has been imposed by its banker on the second respondent is neither here nor there nor will it in any manner exonerate the second respondent from discharging the liability. Hence, this contention has to be answered against the second respondent.

32. Lastly, it was contended that the second respondent be permitted to pay the amount in instalments. The second respondent, it is claimed, is carrying on business, but it has availed of credit facilities with ICICI Bank and it is not possible for the second respondent to pay the entire amount outstanding in one lump sum since it may result in hardship to the second respondent-company and may even lead the second respondent-company to unintended results, where a number of workers are employed. Though the plea is attractive, this Court will not be justified in granting instalments as prayed for by the second respondent. Instead, this Court is of the considered view that the second respondent is granted time to pay the amount as claimed by the applicant in three equal bi-monthly instalments from the date of this order and in the event of the second respondent failing to pay anyone of the instalments, the entire amount will become payable and it is open to the applicant to recover the entire amount due.

33. In the circumstances, both the applications arc allowed with costs of Rs. 3,000 against the second respondent and the respondent is directed to pay the sum of Rs. 81,34,336 claimed by the applicant with interest at 9 per cent per annum commencing from 31-12-2001, in three equal bi-monthly instalments.