Statutory first charge on chitty assets prevails over set-off, preventing ordinary creditors from reducing the protected fund.

Section 42 of the Travancore Chitties Act created a statutory first charge over chitty assets for payment of chitty debts, and the amount recoverable from a prized subscriber formed part of that charged fund. That priority was not displaced by liquidation of the foreman company, and neither the Companies Act nor the Kerala Insolvency Act permitted set-off where it would reduce the charged assets to the prejudice of chitty creditors. The ordinary creditors were therefore not entitled to set off their claims against the money due from them to the chitty, and the liquidator had to realise and apply the chitty assets first for that class of creditors.

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Issues: Whether the money due from a prized subscriber to a chitty could be set off against ordinary debts due from the foreman company to that subscriber when the chitty assets were subject to a statutory first charge in favour of chitty creditors.

Analysis: Section 42 of the Travancore Chitties Act, 1120 created a first charge on the chitty assets for payment of chitty debts. The amount recoverable from a prized subscriber formed part of those assets and therefore stood charged in favour of the chitty creditors. The existence of that charge was not displaced by liquidation of the foreman company, and neither the Companies Act nor the Kerala Insolvency Act defeated the statutory security. A set-off could not be permitted where it would diminish the charged asset to the prejudice of the charge-holders.

Conclusion: The ordinary creditors of the company were not entitled to set off their claims against the money due from them to the chitty.

Final Conclusion: The chitty creditors' statutory charge prevailed over any claimed set-off, and the liquidator had to realise and apply the chitty assets first for the benefit of the creditors of that chitty.

Ratio Decidendi: Where a statute creates a first charge over specific assets, an ordinary claim to set-off cannot be enforced so as to prejudice the statutory charge-holder's priority in those assets.

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