Fraudulent preference and res judicata shaped the winding-up dispute over book adjustments and repayment relief

Book adjustments, transfers and other account entries made shortly before winding up may constitute fraudulent preference under the Companies Act, 1956 where the company was commercially insolvent and the surrounding circumstances show a dominant intention to prefer one creditor over others. The Court treated an earlier final determination under section 542 as res judicata, so the same issue could not be reopened between the same parties. It also held that repayment directions against creditors alone were not sustainable where the alleged preference consisted of adjustments affecting absent parties' accounts, leaving the liquidator to pursue appropriate proceedings instead.

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Issues: (i) Whether the impugned book adjustments and transfers made shortly before the bank's winding up amounted to fraudulent preferences under the Companies Act, 1956; (ii) whether the finding on fraudulent preference in respect of the second respondent's transactions was barred by res judicata in view of the earlier proceeding under section 542 of the Companies Act, 1956; (iii) whether the direction requiring repayment to the liquidator could be sustained.

Issue (i): Whether the impugned book adjustments and transfers made shortly before the bank's winding up amounted to fraudulent preferences under the Companies Act, 1956.

Analysis: Section 531 of the Companies Act, 1956 attracts not merely cash payments but also transfers, adjustments in accounts, and other acts relating to property made within the relevant period before winding up, if they would be fraudulent preferences in insolvency. The material test is whether the company was commercially insolvent when the transactions were made and whether the dominant intention was to prefer one creditor over others. The Court found that several transactions were made when the bank was unable to pay its debts from its own money, and in the cases upheld against the appellants the surrounding circumstances supported the inference of a deliberate preference rather than a genuine exercise of any claimed right of set-off or adjustment.

Conclusion: The transactions in A.S. Nos. 544 and 595 of 1961 and in part of A.S. No. 620 of 1961 were fraudulent preferences; the challenge in A.S. No. 594 of 1961 succeeded because the issue was controlled by res judicata, and the 13th respondent's transaction was not proved to be a fraudulent preference.

Issue (ii): Whether the finding on fraudulent preference in respect of the second respondent's transactions was barred by res judicata in view of the earlier proceeding under section 542 of the Companies Act, 1956.

Analysis: The earlier order in the proceeding under section 542 had directly and substantially determined that the Court was not satisfied that the questioned transfers were fraudulent preferences. That determination was treated as a final decision in a former suit for the purposes of section 11 of the Code of Civil Procedure, 1908. Since the same issue was again raised between the same parties, the Court held that the rule of res judicata applied and the merits of those transactions need not be reconsidered.

Conclusion: The second respondent's appeal succeeded on the ground of res judicata.

Issue (iii): Whether the direction requiring repayment to the liquidator could be sustained.

Analysis: Section 532(2)(a) of the Companies Act, 1956 permits consequential relief, but the Court held that in cases where the alleged preference took the form of adjustments and not actual cash payments, an order of repayment against the creditors alone would prejudice the absent debtors whose accounts had been adjusted. The Court therefore declined to sustain the repayment direction and held that, at least on the facts of these appeals, the proper course was to leave the liquidator to take appropriate proceedings against the persons concerned.

Conclusion: The repayment directions were set aside.

Final Conclusion: The appeals produced mixed results: two appeals were dismissed, one was allowed on res judicata, and one was partly allowed by setting aside the repayment direction while sustaining the finding of fraudulent preference against one respondent and rejecting it as to another.

Ratio Decidendi: A transaction may be struck down as a fraudulent preference if, on the surrounding circumstances, the dominant intention was to prefer one creditor over others, and a prior final finding on the same issue between the same parties operates as res judicata; consequential repayment relief cannot be sustained where it would prejudice absent parties whose accounts were adjusted.

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