1940 (5) TMI 14 - HC - Companies Law

Court rules on set-off in loan agreement, directs bank to adjust dividend.

The court ruled against allowing a set-off in the case of a loan agreement between the Bank and the applicant, Mr. G. Samuel, but directed the Bank to ... Set-off in liquidation - security by third party - right of a surety to set-off - agreement to appropriate security - effect of liquidation on security value - equitable adjustment of dividendSet-off in liquidation - security by third party - right of a surety to set-off - Whether the applicant (debtor) is entitled to set-off the amount due by the Bank to the third-party security-provider against the debt due from the applicant in the winding up of the Bank. - HELD THAT: - The Fixed Deposit was furnished as security by a third party (Mrs. Srinivasan) who did not personally undertake to repay the applicant's debt; she authorised the Bank to appropriate the deposit towards the loan. The Bank's liability on the deposit, in liquidation, takes the form of a dividend claim and the owner of such security is entitled only to a dividend and not to the full amount as if the Bank remained solvent. There were no mutual dealings between the applicant and the Bank which would create mutual credits giving rise to a statutory set-off in the liquidation. The Court distinguished prior decisions relied upon by the applicant where (i) the surety was severally liable and there were cross-demands between co-liable parties, or (ii) the creditor had wrongfully converted security; neither circumstance exists here. Accordingly, a third party's security-credit in the hands of a creditor in liquidation does not give the principal-debtor a right to set-off that credit against his own liability to the creditor.No set-off allowed in favour of the applicant; the third-party security does not confer on the applicant a right of set-off against his debt in the Bank's liquidation.Agreement to appropriate security - effect of liquidation on security value - Whether the letter of authority from the security-provider constituted an agreement entitling the applicant to insist on set-off, or otherwise to claim the full value of the security diminished by liquidation. - HELD THAT: - The letter authorised the Bank to set-off the deposit if the Bank chose to do so; it vested a right in the Bank to appropriate the security but did not create a contractual right in the applicant to compel set-off. The Bank's going into liquidation does not amount to wrongful conversion of the security by the Bank and does not entitle the owner of the security to claim its full pre-liquidation value; the owner is limited to the dividend receivable in liquidation. Thus the existence of an authorisation to the Bank to appropriate does not transform into an agreement creating a set-off right in the applicant.No binding agreement in favour of the applicant to compel set-off; diminution of security value in liquidation does not entitle the applicant to claim its full amount.Equitable adjustment of dividend - What equitable relief, if any, should be granted to the applicant in view of the security and the Bank's liquidation. - HELD THAT: - Although legal set-off is not available to the applicant, equity requires that the dividend payable under the Fixed Deposit be applied in reduction of the applicant's liability. The Court held that the Bank (through its Official Liquidators) should adjust the dividend arising from the deposit against the amount due from the applicant and recover only the balance. The Court therefore provided an equitable remedy limited to utilising the dividend distributable on the security to reduce the applicant's debt.Direct adjustment of the dividend payable under the Fixed Deposit towards the applicant's debt; applicant liable only for the balance after such adjustment.Final Conclusion: Set-off was refused: a third party's security-credit in the hands of a creditor in liquidation does not afford the principal-debtor a right of set-off or a claim to the full value of the security. The Bank is authorised to appropriate the security, and equity permits the dividend payable on the Fixed Deposit to be adjusted against the applicant's debt; costs awarded against the applicant were not ordered, and specified costs were directed to be paid out of the Bank's assets. Issues:Question of set-off in a loan agreement; Validity of a set-off in the case of a loan secured by a third party; Interpretation of agreement for set-off; Impairment of security due to bank liquidation.Analysis:The judgment addresses a question of set-off in a loan agreement between the Travancore National and Quilon Bank ('Bank') and the applicant, Mr. G. Samuel. The Bank lent Rs. 2,000 to Mr. Samuel, secured by his mother-in-law's fixed deposit of Rs. 4,300. The mother-in-law, Mrs. Srinivasan, authorized the Bank to set-off the deposit against the loan amount. However, the Bank went into liquidation before the fixed deposit matured. Mr. Samuel claims a right to set-off the amount due by the Bank to Mrs. Srinivasan against his debt. The court examines if a set-off can be allowed in law, considering the absence of mutual dealings under Section 229 of the Indian Companies Act.The applicant argues that Mrs. Srinivasan, as a surety, can claim a set-off against the debt due by the principal. He relies on a ruling by a judge in a similar case. However, the court distinguishes the ruling, stating that in the current case, the Bank cannot demand repayment from Mrs. Srinivasan but only realize the security. The court rejects the applicant's contention for a set-off under the Indian Companies Act.The applicant further contends that an agreement for set-off was made at the time of the contract, and the Bank is bound by it. He also argues that the Bank's liquidation has impaired the security, entitling him to a credit for the full value of the security. The court examines previous judgments and concludes that the Bank's liquidation does not allow for a full set-off, but the Bank should adjust the dividend payable under the deposit towards the debt and recover only the balance. The court awards costs to the Official Liquidators and other counsels from the Bank's assets.In summary, the court rules against allowing a set-off in the case but directs the Bank to adjust the dividend towards the debt, considering the equity of the case and the impairment of security due to the Bank's liquidation.