1976 (8) TMI 172 - HC - Indian Laws

Legal ruling: Set-off granted in chit fund transactions under Insolvency Act.

Gokul Chit Funds and Trades Private Ltd. Versus Thoundasseri Kochu Ouseph Vareed and Ors.

The court held that the respondents were entitled to a set-off under Section 47 of the Insolvency Act, 1955, as the transactions between the parties ... - Issues Involved:1. Right of set-off under Section 47 of the Insolvency Act, 1955.2. Applicability of Section 70 of the Kerala Chitties Act, 1975.3. Interpretation of Section 39 of the Kerala Chitties Act, 1975.4. Mutual dealings and set-off in the context of chit fund transactions.Detailed Analysis:1. Right of Set-Off Under Section 47 of the Insolvency Act, 1955The respondents in these cases claimed a set-off against the amounts due from them to the companies in liquidation. They argued that they were entitled to set-off the amounts paid by them to the companies either by way of term deposits or by way of subscriptions to other chits. Section 47 of the Insolvency Act, 1955 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.' The court held that the respondents were entitled to set-off under this provision, as the transactions between the parties constituted mutual dealings.2. Applicability of Section 70 of the Kerala Chitties Act, 1975The Official Liquidator contended that Section 39 of the Kerala Chitties Act, 1975, which provides for a first charge in favor of chitty creditors, should apply to these cases by virtue of Section 70 of the same Act. Section 70 states that the provisions of the Act, except for certain specified sections, shall apply to chitties started before the commencement of the Act in the Malabar District. The court, however, rejected this contention, holding that Section 70 applies only to chitties that were in existence as live-chit fund transactions on the date of the commencement of the Act. Therefore, Section 39 of the Kerala Chitties Act, 1975, does not apply to the present cases.3. Interpretation of Section 39 of the Kerala Chitties Act, 1975The court examined whether Section 39 of the Kerala Chitties Act, 1975, creates a charge over the chitty assets in favor of the chitty creditors. Section 39 states, 'Where there are debts due from the foreman of a chitty in relation thereto and also other debts due from such foreman, the chitty assets shall be a first charge for payment of the chitty debts due to the subscribers.' The court concluded that this section only provides for a rule of preference in the matter of utilization of the chitty assets for payment of the debts due from the foreman and does not create a charge over the chitty assets. Therefore, the respondents' right to set-off under Section 47 of the Insolvency Act, 1955, is not adversely affected by Section 39 of the Kerala Chitties Act, 1975.4. Mutual Dealings and Set-Off in the Context of Chit Fund TransactionsThe court held that the transactions between the companies and the respondents constituted mutual dealings within the meaning of Section 47 of the Insolvency Act, 1955. The court noted that the companies, in accepting term deposits and receiving subscriptions towards unprized chits, were functioning in the same capacity as when they advanced amounts to the respondents on their prized tickets. The respondents, in turn, carried on transactions with the companies in their individual capacity. Therefore, the claims on each side resulted in pecuniary liabilities arising out of contract, and the respondents were entitled to set-off under Section 47 of the Insolvency Act, 1955.ConclusionThe court concluded that the respondents are entitled to a set-off in all three categories of cases mentioned: (1) where the set-off is claimed in respect of amounts paid by way of subscriptions on unprized tickets in the same kuri; (2) where the set-off is claimed in respect of amounts paid by way of subscriptions on unprized tickets in different kuries conducted by the same companies; and (3) where the set-off is claimed in respect of amounts deposited with the companies as term deposits. The cases were remanded to the learned single judge for disposal on the merits in light of this legal position. No order as to costs was made for the hearing before the Division Bench.