A. Subba Rao vs C. Seshu Reddi

Leach, C.J.—The question in this appeal is whether a creditor is bound by a scheme of composition approved of under the Provincial

Insolvency Act entirely behind his back. On 30th August 1933 respondent 1 was adjudicated an insolvent by the District Judge of Nellore. A

proposal was made for the acceptance by the creditors of a scheme of composition which provided for the payment of six annas in the rupee. This

scheme was sanctioned by an order of Court dated 18th April 1935, whereupon the order of adjudication was annulled. The appellant was a

creditor. On 29th October 1934 he proved for the sum of Rs. 754-10-9 then due to him under a decree. The decree provided for the payment to

him of future mense profits. These were subsequently found to amount to Rs. 1684-1-6. The appellant was given no notice of the proposal for a

composition and the scheme was approved of without it being brought to his knowledge. On the approval of the scheme a Special Receiver was

appointed to carry out its terms. The Special Receiver gave notice to the appellant. On 21st January 1941 the appellant applied to the Insolvency

Court to be allowed to execute his. decree. He contended that as the scheme had been sanctioned without notice to him, in spite of the mandatory

provisions of Section 38, Provincial Insolvency Act, he was not bound by it. He wished to have a declaration to this effect in order that he could

proceed in execution without being hampered by the composition scheme. The District Judge held that his application was well founded and

consequently granted it. Respondent 1 appealed to this Court and his appeal was heard by Kunhi Raman J., who held that the District Judge was

wrong.'' The learned Judge considered that the composition scheme was binding on the appellant, notwithstanding that it had been approved of

without notice to him. Sub-section (1) of Section 38, Provincial Insolvency Act, states that where a debtor after the making of an order of

adjudication, submits a proposal for a composition in satisfaction of his debts, or a proposal for a scheme of arrangement of his affairs, the Court

shall fix a date for the consideration of the proposal, and shall issue a notice to ""all"" creditors in such manner as may be prescribed. Sub-section (2)

says that if, on the consideration of the proposal, a majority in number and three-fourths in value of all the creditors whose debts are proved and

who are present in person or by pleader, resolve to accept the proposal, it shall be deemed to be duly accepted by the creditors. Sub-section (4)

says that where the Court is of opinion, after hearing the report of the Receiver, if a Receiver has been appointed, and after considering any

objections which may be made by or on behalf of any creditor, that the terms of the proposal are not reasonable or are not calculated to benefit

the general body of creditors, the Court shall refuse to approve the proposal.

Section 39, as it stood at the date of the approval of this scheme of composition, read as follows : ""If the Court approves the proposal, the

terms shall be embodied in an order of the Court and the Court shall frame a schedule in accordance with the provisions of Section 33, the order

of adjudication shall be annulled, and the provisions of Section 37 shall apply, and the composition or scheme shall be binding on all the creditors

entered in the said schedule so far as relates to any debts entered therein."" The directions in Section 38 that notice shall be served on all creditors is

mandatory and the section clearly contemplates that all the creditors shall have an opportunity of stating their objections to the scheme. It is true

that here the scheme was approved of by the necessary majority of creditors, but the provisions of the section with regard to notice to the

appellant were entirely ignored. It would be unreasonable in these circumstances to hold that the scheme is binding on the appellant; but even if this

construction were open to question, Section 39 makes it quite clear that the scheme is not binding on him. The section says that it is binding on all

the creditors who are entered in the schedule. His name was not entered in the schedule. Therefore the scheme is not binding on him. It maybe

mentioned that when the scheme was approved, the Court was aware that the appellant was a creditor and set aside sufficient to pay him six annas

in the rupee. It is astonishing that, notwithstanding its knowledge of the appellant''s debt, the Court did not direct notice to him. Kunhi Raman J. in

setting aside the order of the District Judge, states that even if the appellant had been given notice and had expressed disapproval of the scheme,

his voice would not have prevailed. This is an assumption which the learned Judge was not entitled to make. Unless the appellant had an

opportunity of stating his reasons, it could not be said what weight they would carry. His reasons for opposing the scheme might have been so

cogent that he would have carried the other creditors with him and have convinced the Court. An appellate Court is not entitled to enter into a

speculation of this kind. It can only have regard to the provisions of Sections 38 and 39, and if these provisions are to be observed, as they must

be, it is clear that the appellant cannot be held bound by the scheme. The appeal will be allowed with costs against respondent 1 in this Court and

before Kunhi Raman J.