Doonadula Sriramulu vs Ponakavira Reddi on 21 February, 1923

Madras High Court
Doonadula Sriramulu vs Ponakavira Reddi on 21 February, 1923
Equivalent citations: 72 Ind Cas 805
Author: Oldfield
Bench: Oldfield, V Rao


Oldfield, J.

1. In concurring in the order which my learned brother proposes, I do not desire to follow him further than is necessary to support his conclusion.

2. The decision under appeal is in terms that the District Munsif erred in removing the name of 5th creditor, here respondent, from the list of creditors; and we have to consider whether he had power to do this, and, if so, whether we can accept the order made in the excercise of that power. By an irregular and confused course of procedure and pleading, to which my learned brother has referred, that order involved the conclusion, not only that 5th creditor’s debt was not proveable in the insolvency, but also that the mortgage securing it was invalid. The objection thus allowed was taken as follows in a counter-petition of 1st creditor:–“The mortgage for Rs. 500 said to have been executed by petitioner (the insolvent) and his father in favour of 5th creditor was created for the benefit of the insolvent and with the intention of evading payments of the debts due to 1st creditor and others and nominally, but is not a true debt. Nothing is payable to the 5th creditor.”

2. This, it is contended, means only that Exhibit A, the mortgage, offends against Section 53, Transfer of Property Act, and that as it does not come within Section 35 or 36 of Act III of 1907, which is applicable to this insolvency, there could be no adjudication on its validity by the District Munsif in Insolvency or otherwise than in a separate suit, because, shortly, the Insolvency Court cannot adjudicate on claims by or against third parties. The question thus raided is of some difficulty in connection with Act III of 1907 owing to the absence therefrom of any thing corresponding with Section 4 of the present Act V of 1920 or Section 105 of the English Act or the corresponding provisions of previous, Statutes.

3. This contention, it is urged, can be met by reading the objection to Exhibit A as being that there was no debt and no transfer at all, but only a pretence, which could be disregarded and not that there was a transfer which offended against Section 53, Transfer of Property Act, and had to set aside, and, if the question were of property to be reduced to the possession of the Receiver on behalf of the creditors I should be prepared to adhere to my opinion expressed in Official Receiver, Tinnevelly v. Sankaralinga Mudaliar 62 Ind. Cas. 495 : 44 M. 524 : 40 M.L.J. 219 : (1921) M.W.N. 236 : 14 L.W. 503 and hold that, so far as the objection to Exhibit A was of the former description and the question was of discovery within the purview of Section 18(1) and (3), the Insolvency Court was competent to decide it. But in fact the Exhibit A being a simple mortgage, there is no question of possession ; and there is the further difficulty that the language already quoted from the first creditor’s counter-petition is elastic enough to express objections of both the descriptions above referred to.

4. It is a better argument and one which, I agree, must prevail, that the question is of a claim, not by or against a third party or stranger to the proceedings, but by a creditor, a necessary party to them, which can be made and which the respondent in the present case has chosen to make in the insolvency and with which the Court under Section 24 must deal after hearing other creditors’ objections; and, as there is no restriction there or elsewhere on the ground on which objections may be made, the Court must adjudicate on them, whether they are that the transactions relied on resulted in no debt or that resulting in a debt, it should be annulled. This, of course, involves that a secured creditor is before this Court primarily to obtain inclusion of his debt in the schedule and only secondarily because the Receiver on behalf of the creditors is concerned to claim the interest in the insolvent’s property, constituting the security, for their benefit. But the reply attempted is that, if the objection to the decision of the Insolvency Court binding a secured creditor can be met in this manner, it has still to be shown how that Court is empowered to reach a decision at all as to the validity of a transfer like Exhibit A in the present case, to which, owing to its date, Sections 36 and 37 cannot be applied.

5. It can serve no useful purpose to repeat my learned brother’s treatment of the English and Indian authorities on this question. For the English Courts were interpreting provision in successive Acts with which nothing in the Indian Law applicable to the present case corresponds; and it is, therefore, inconclusive that in In re Sparke, Ex parte Cohen (1872) 7 Ch. 20 : 41 L.J. Bk. 17 : 25 L.T. 473 : 20 W.R. 69 the power of the Insolvency Court to adjudicate on a secured creditor’s transfer was sustained, that decision having (as I understand it) been in no degree discredited by the subsequent very generally expressed statement in Ellis v. Silber (1873) 8 Ch. 83 : 4a L.J. Ch. 666 : 28 L.T. 156 : 21 W.R. 346 which my learned brother has referred to, of the principle to be followed. The Indian authorities also are indecisive because it does not appear that any is based on comprehensive arguments and some at least are consistent with the view that the Insolvency Court has power to enquire into the validity of all transfers, the question having been only whether it had in the particular case exercised a proper discretion in doing so or refusing to do so. In these circumstances, I can add nothing to my conclusion in the Official Receiver, Tinnevelly v. Sankaralinga Mudaliar 62 Ind. Cas. 495 : 44 M. 524 : 40 M.L.J. 219 : (1921) M.W.N. 236 : 14 L.W. 503, already referred to, except that there the general power of the Court was exercisable under Section 18 whilst here it is under Section 24and that, accordingly, the Court’s power to enquire into the validity of a secured debt exists independently of Sections 36 and 37 those Sections being, as they were there referred to, only rules, of evidence, or, as my learned brother puts it, special rules of substantive law applicable to particular kinds of transfer by the insolvent.

6. Taking this view, I concur in setting aside the lower Appellate Court’s order and, as I agree with my learned brother’s criticisms on the District Munsif’s disposal, also in the remand be proposes. But I cannot part with the case without observing that much of the time taken over its disposal might have been saved, if the latter Court had made an attempt to appreciate and adhere to the proper course of insolvency procedure. It is unnecessary to refer again to the points noticed in my learned brother’s judgment; but I add that, although the present appellant, the 19th creditor, was, as we have ascertained, appointed Receiver on 23rd July 1918, he has never been impleaded in these proceedings in that capacity and was allowed to take the very questionable course of selling the property, the subject of Exhibit A, whilst the validity of that document was still in dispute. It is fortunate that, although according to the record what is described as a final dividend has been distributed, the proceeds of the sale have been retained in Court and are, we are told, sufficient to satisfy any claim which can be made under Exhibit A.

Venkatasubba Rao, J.

7. The District Munsif of Kavali in the exercise of his Insolvency Jurisdiction expunged the debt alleged to be due to Veera Reddi, the respondent before us, from the schedule of the insolvent’s creditors.

8. About 4 years previous to the date of the adjudication, the insolvent had executed a deed of “mortgage in favour of the respondent, and the order of the District, Munsif was made on an objection raised, by several of the other creditors to the validity of the transaction evidenced by the said instrument. On appeal, the District Judge held that the Insolvency Court had no jurisdiction to set aside the deed of mortgage on the ground that Section 36 of the Provincial Insolvency Act, III of 1907, has no application in the case of transfers beyond two years of the adjudication. One of the creditors has filed this Civil Revision Petition questioning the correctness of the order of the District Judge.

9. The arguments covered a wide ground, and the question that was raised was whether the Insolvency Court has jurisdiction under the Provincial Insolvency Act III of 1907, to adjudicate upon claims of third parties as against the insolvent or his estate represented by the Receiver. I must1 state at once that, in my opinion, this question does not arise at all in the present case, and that the matter before us can be decided on a ground very different from the one stated.

10. On the general question argued, there has been a great divergence of judicial opinion. In Guntapalli Narasimhayya v. Malapatti Veeraraghavulu 42 Ind. Cas. 525 : 41 M. 440 : 6 L.W. 694 : (1917) M.W.N. 857 a purchaser from Receiver who had been obstructed by a third party applied to the Insolvency Court, and it was held that the Court had no jurisdiction to decide questions of title. Abdur Rahim, J., makes the following observations ” * * * * * it would be going much too far to say that a Judge in insolvency in the mofussal has powers by a summary proceeding to decide questions of title with respect to property which is claimed by third persons.” In Maddipoti Peramma v. Gandrapu Krishnayya 47 Ind. Cas. 308 : 8 L.W. 136 : (1918) M.W.N. 79 : 4 M.L.T. 106 the learned Judges held that an order passed by the Insolvency Court on the application of the purchaser from the Official Receiver directing a third party to deliver possession of the property purchased to the applicant, was without jurisdiction. Bakcwell, J., expressed the view that the power conferred by Section 18(3) was not intended to provide for the determination of questions of title as between the insolvent and third parties: whereas Krishnan, J., was of the opinion that the Insolvency Court has jurisdiction in a proper proceeding instituted by the Receiver to enquire into and decide on the merits of an adverse claim set up by a stranger. It must be observed, however, that the observations of Krishnan, J., were obitor.

11. In Official Receiver, Tinnevelly v. Sankaralinga Mudaliar 62 Ind. Cas. 495 : 44 M. 524 : 40 M.L.J. 219 : (1921) M.W.N. 236 : 14 L.W. 503 the question that arose was of a very different character. After the Receiver had been appointed for the estate of an insolvent the latter’s properties were sold in auction by a District Munsif’s Court in execution of a decree for money, passed by the latter Court prior to the order of adjudication. It was held that the Insolvency Court was competent on the application of the Receiver to annul the sale and direct delivery of possession to the Receiver. The sale was held after the date of adjudication, but the Receiver was not a party to the proceedings, and the ground of the decision seems to be that a dealing with the property which had vested in the Receiver without notice to him was unauthorised and that under, Section 18(3) the Court was competent to direct delivery of possession of the property to the Receiver on his application.

12. On the general question of the power of the Insolvency Court to decide claims of or against a third party, the judgments contain some observations and the dictum, especially of Seshagiri Iyer, J., “I am of opinion that Section 4 declares what has been the law all through,” was strongly pressed upon us, but the observations were not necessary for the determination of the question before the Court and the decision cannot be said to be authority either way.

13. In Ratnaswami Chettiar v. Ramaswami Iyengar 65 Ind. Cas. 394 : 45 M. 434 : 15 L.W. 273 : (1922) M.W.N. 110 : 42 M.L.J. 185 : 31 M.L.T. 86 : (1922) A.I.R. (M.) 147 on facts similar to those that existed in Gurdapalli Narasimhayya v. Malapati Veeratagkavulu 42 Ind. Cas. 525 : 41 M. 440 : 6 L.W. 694 : (1917) M.W.N. 857 and Maddipoti Peramma v. Gandiapu Krishnayya 47 Ind. Cas. 308 : 8 L.W. 136 : (1918) M.W.N. 79 : 4 M.L.T. 106, it was held that the Insolvency Court had iurisdiction to deal with claims of third parties, but it was a decision under the Provincial Insolvency Act of 1920.

14. Turning to the cases decided by the Calcutta High Court, we have first Satya Kumar Mukherjee v. Manage, Benares Bank, Limited 46 Ind. Cas. 335 : 22 C.W.N. 700. I understand the effect of this decision to be that the question of title can be decided only in a regular suit and not in insolvency. I may, however, state that there is a passage in the judgment which may lend support to the argument that the learned Judges did not decide that the Insolvency Court had no jurisdiction, but merely held that it had a discretion and that the proper excercise of the discretion would be to refer the parties to a regular suit. The passage to which I refer is this:

If the question of title is seriously in dispute, we state for the information of the Judge that we think he should direct the Receiver to bring a suit to have the question determined.

15. In Nilmony Chowdhury v. Durga Charan Chander 46 Ind. Cas. 377 : 22 C.W.N. 704 the transfer having been admitted not to be within two years of adjudication, it was held that Section 18(3) did not authorise the removal of a person whom the insolvent could not remove without the aid of legal proceedings. Again, I must add that the observation in the judgment “if the veil is transparent the Court may order the delivery of the property to the Receiver,” impairs the value of this decision and in this respect this case bears a strong resemblance to the case already referred to. Satya Kumar Mukherjee v. Manager, Benares Bank, Limited 46 Ind. Cas. 335 : 22 C.W.N. 700.

16. Joy Chandra Das v. Mahamed Amir 44 Ind. Cas. 143 : 22 C.W.N. 703 is more direct on the point. A creditor alleged that the insolvent’s wife was merely a benamidar for the insolvent, and the question was whether the Insolvency Court had jurisdiction to summon the insolvent’s wife to examine her and direct her to transfer to the Receiver the property which stood in her name if the property was proved to belong to the insolvent. It was held that the Insolvency Court had no power to adjudicate upon the title of the third party under the provisions of the Provincial Insolvency Act, III of 1907.

17. To the same effect was the decision of another Bench of the Calcutta High Court in Amina Khatun v. Nafar Chandra Pal Chowdhury 45 Ind. Cas. 180.

18. Gaura v. Nawab Mohammad Abdul Majid 64 Ind. Cas. 523 : (1922) A.I.R. (A.) 443 is a decision of the Allahabad High Court, but it contains only a non-committal statement and it cannot be regarded as an authority on the subject.

19. Bansidhar v. Kharagjit 26 Ind. Cas. 926 : 37 A. 65 : 12 A.L.J. 1373 decided that the Insolvency Court had jurisdiction to adjudicate upon claims against third parties.

20. On a review of these decisions it seems to me that the preponderance of authority is in favour of holding that under Act III of 1907 the Court in the exercise of its? Insolvency Jurisdiction cannot decide questions relating to adverse claims by or against third parties.

21. In my opinion, however, as I observed at the outset, the case before us can be decided with reference to altogether different considerations. Section 16(5) of Act III of 1907 saves the rights of secured creditors but the Court has in certain circumstances to decide questions in relation to secured creditors in the course of its administration of the insolvent’s property. Section 21(c) is an instance in point. Section 24 deals with proof of debts and Section 38 enumerates the debts which are proveable in insolvency. Secured debt are net excluded. Section 31 re1ates to proof of debts due to secured creditors. It will be seen from the sections to which I have adverted that a secure creditor may tender proof of his debt subject to certain conditions and limitations. Section 26 empowers the Court when a debt has been improperly entered in the schedule to expunge the debt in its entirety or reduce the amount of the debt. The power is expressed in general terms and no distinction is drawn between debts unsecured and debts secured. The Court has to prepare a schedule of creditors, which may be amended from time to time and this function cannot be properly or adequately performed unless the Court has equal power to deal with secured as well as unsecured debts. To a proceeding appropriate to this enquiry the parties are not a person subject to the Insolvency Court and a stranger, On the other hand, the secured creditor whose debt is attacked is as much subject to the jurisdiction of the Insolvency Court as any other creditor, the Receiver or the insolvent. The authorities to which reference has been made deal with claims as between the insolvent’s estate and third parties, but the respondent before us is not a third party. On the contrary, lie alleges himself to be a creditor and it is impossible to f tame a proper schedule with* out determining the existence of his debt and the extent of it.

22. In Ellis v. Silber (1873) 8 Ch. 83 : 4a L.J. Ch. 666 : 28 L.T. 156 : 21 W.R. 346 the distinction I have indicated is clearly set forth in the following passage in the judgment of Lord Selbourne, L.C. The passage is at page 86:

That which has to be; done in bankruptcy is the administration in bankruptcy. The debtor and the creditors, as the parties to the administration in bankruptcy, are subject to that jurisdiction. The trustees or the assignees as the persons entrusted with that administration, are subjet to that jurisdiction. The assets which come to their hands and the mode of administering them are subject to that jurisdiction; and there may be, and I believe are, some special classes of transactions which, under special clauses of the Acts of Parliament, may be specially dealt with as regards third parties. But the general proposition, that whenever the assignees or trustees in bankruptcy or the trustees under such deeds as these have a demand at law or in equity as against a stranger to the bankruptcy, then that demand is to be prosecuted in the Court of Bankruptcy, appears to me to be a proposition entirely without the warrant of any thing in the Acts of Parliament and wholly unsupported by any trace or vestige whatever of authority.

23. In this connection I. may refer to Khushaliram v. Bholar Mal 28 Ind. Cas. 573 : 37 A. 252 : 13 A.L.J. 720. It was held that when a creditor of the insolvent challenged the validity of a debt set up by another creditor the Judge was bound to enquire into the truth of the allegation in insolvency and the parties should not be referred to a regular suit. The case would be exceedingly valuable as an authority but for the fact that the mortgage-deed which was questioned was within two years of the adjudication and the decision could, therefore, be founded on the express terms of Section 36 of the Provincial Insolvency Act, but the observation at page 253*” whether the application is to be regarded a? one asking for the removal of the name of Bholar Mal from the schedule of creditors, as one falling under the provisions of Section 36 of the Provincial Insolvency Act, III of 1907, the matter was one which required investigation ” and certain other similar observations to the same effect at page 254* lend support to the view I am Inclined to take.

24. I am, therefore, of the opinion that the Insolvency Court has jurisdiction to record a finding as to the existence of the debt alleged to be due to the respondent.

25. But then it is argued that Sections 36 and 37 confer a limited jurisdiction upon the Insolvency Courts and that to hold that the Court possesses the power in question will be inconsistent with the assumption involved in the said provisions. In my opinion, these two sections enact special rules of substantive law to be followed by the Courts in the exercise of insolvency jurisdiction. The law enunciated in the said sections is not a part of the general law and is to be applied only in cases which come up before the Tribunals exercising powers conferred by the Insolvency Act. A comparison of the terms of Section 53 of the Transfer of Property Act with the terms of Section 36 of the Provincial Insolvency Act, III of 1967, will make the point clear. A settlement made by a person whose insolvency is beyond question, but who, owing to unforeseen circumstances, becomes an insolvent within two years of the date of the settlement cannot -he set aside under the general law which is contained in Section 53 of the Transfer of Property Act. But it can be annulled under Section 36 of the Provincial Insolvency Act. I have said that Sections 36 and 37 enact rules of substantive law 101 the Insolvency Courts. Looking at the Sections from a slightly different point to view, they may, in my opinion, be described as laying down rules of evidence. Wherever a voluntary transfer or a preference of a creditor on the one hand and adjudication of the transferor or the debtor on the other hand, are brought into contiguity, the law peremptorily^ requires a certain inference to be made, enquiry is altogether excluded and the inference will not be allowed to be displaced by any contrary proof, however string. The Insolvency Court shall presume that the transfer was made or preference shown by the insolvent with the intent to defeat his creditors. The presumption to be made is absolute or irrebuttable like the presumption captained in Section 112 of the Indian Evidence Act as to the paternity of a child whose parents had access to each other.

26. In this view, Sections 36 and 37 do not deal with the jurisdiction of the Insolvency Court and if, on a reference to other sections of the Act, the Courts are found to possess certain powers, the jurisdiction is not affected by anything contained in the two sections above referred to.

27. Here I must turn to the unfortunate course the proceedings took before the District Munsif. The insolvency petition was presented by the debtor. His adjudication was opposed by several creditors and they filed what are described as counter-petitions. Some of the creditors objected that the amount due to the respondent (secured creditors) was considerably less than what was alleged by the insolvent to foe due to him. Others took a different line and made an allegation which is very indistinct in character but which is practically tantamount to an attack on the genuineness of the mortgage transaction. Although one of the creditors had by then been appointed a Receiver, he in that capacity took no action to question the debt. The District Munsif, however, proceeded to enquire into the existence or otherwise of the debt upon the petition and the counter-petitions before him thus adopting a course which has been condemned in Guntu Appireddi v. Gontu Chinna Appireddi 66 Ind. Cas. 271 : 45 M. 189 : 14 L.W.. 639 : 41 M.L.J. 606 : (1921) M.W.N. 816 : (1922) A.I.R. (M.) 246. In his judgment he states that the only point to be considered was whether the deed of mortgage was supported by consideration. He is alive to the fact that Section 36 had no application because the transfer was made about four years previous to the date of adjudication. Still, having recorded a bare finding that the deed was not supported by consideration, he directed that the name of the respondent should be deleted from the list of the creditors. This course was obviously wrong. The mere fact that a transfer is voluntary will not justify the Insolvency Court in setting aside the transfer. The District Munsif has not found that the mortgage amounted to a fradulent transfer under Section 53 of the Transfer of Property Act. He has not found that the transaction was fictitious or was a mere pretence and there was no intention to transfer ; that is to say, that there was in effect no transfer at all, in other words, that the transferee was a mere benamidar for the transferor.

28. It is argued before us that there is a distinction between a transfer intended to defeat creditors and “a sham transfer so intended,” and reliance was placed on Swaminatha Aiyar v. Rukmani Ammal 55 Ind. Cas. 766 : 11 L.W. 106. I do not feel myself called upon to express my view of this ruling because in the present case it is immaterial whether the transfer is merely declared fictitious or an order is made annulling it. In either event, the effect will be to refuse recognition to the debt evidenced by the transfer. It was the duty of the District Munsif to have directed his attention to this aspect of the case and then only to have pronounced upon the validity or otherwise of the transaction in question. While disagreeing with the District Judge in his view that the Insolvency Court had no jurisdiction to deal with the question, I cannot, however, owing to the irregular and defective trial before the District Munsif, restore the order of the latter. He must be directed to frame proper issues and after giving the parties an opportunity to let in evidence, adjudicate upon the question which has been raised.

29. Costs will be costs in the cause and will be provided for in the order to be made by the District Munsif.

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