A.R.S.M.A.R.L. Arunachalam Chettiar by Power of Attorney Agent, G.S. Raghavachariar vs The Official Receiver of Tanjore and Others

Venkatasubba Rao, J.—Is the transaction impeached by the Official Receiver fraudulent u/s 54 of the Provincial Insolvency Act ? The

learned District Judge has come to the conclusion that it is and, in my opinion, he is right. On the evidence, the debtors were heavily involved in

October, 1921. They were threatened with suits and applications for attachment and arrest before judgment. There seemed to be very little hope

of averting bankruptcy. In these circumstances they executed a mortgage in favour of the appellant, a Nattukottai Chetty. The debt due to him was

about Rs. 10,900 and odd and this mortgage was executed to secure Rs. 10,000 out of that sum. There is little reason to doubt that Raghavachari

who was then acting for the Chetty was aware of the condition of the debtors'' affairs and of the fact that numerous other creditors were pressing

them for repayment of amounts due. The other facts material for this appeal are the following : The debtors were said to be possessed of property

worth about a lakh and five thousand. Their debts were admitted to amount to about the same figure. The Immovable property over which the

appellant was given security was worth Rs. 30,000. The debtors did not own any other Immovable property. They executed over the identical

property at the same time two mortgages, one in favour of the appellant and the other in favour of third parties who have also filed an appeal

before us and with whose appeal I shall presently deal. So far as the transaction impeached in that other appeal is concerned, 1 cannot but come

to the conclusion that the security was created with the express object of preferring those creditors, namely, the appellants in the other appeal. A

man by name Venkatramier plays a very prominent part in bringing about the two transactions. Indeed the facts relating to the two mortgages are

so inextricably mixed with each other that it is impossible for the purpose of deciding the question at issue, to deal with each as absolutely

disconnected with the other. A ratham (car) which the debtors allege, (in an affidavit to which our attention has been directed) was theirs, they

appear to have also disposed of, about the 25th of October. They closed their place of business on the 26th and they were declared insolvents on

the 1st November. It must be pointed out that the appellants are not related to the insolvents nor has it been shown by direct evidence that the

debtors were interested in this particular creditor, the appellant.

On these facts, what is to be our finding u/s 54 of the Insolvency Act ?

The word ''preference'' as used in this section does not; connote priority in respect of payment of a debt ; that no doubt is one meaning of the

word '' preference, '' but it means in the context the favouring of one creditor to the detriment of others. In the sense of one creditor being given

priority the result of the transaction always is a preference of that creditor : reference in that sense is the occasion for the moving of the Court u/s

As Cozens-Hardy, J. puts in Hastings Brothers v. The Stenotyper Limited (1901) 1 Ch 250. ""The Court is bound to look at the motive and

not at the result. "" Lord Esher, M. R. in New Prance and Garrard''s Trustee v. Hunting (1897) 2 QB 19. expresses the same idea thus : "" The

question whether there has been a fraudulent preference depends, not upon the mere fact that there has been a preference but also on the state of

mind of the person who made it."" The learned Master of the Rolls applied the test :--Was the debtor actuated by any feeling of bounty towards the

creditor or was he doing what he did for his own benefit ? In the words of Lord Macnaghten in Sharp v. Jackson (3) was the debtor under an

overwhelming sense of imminent peril ? Did he have before his mind a sense of his dangerous position ? In other words, the test is, did the debtor

execute the deed with a view to protect himself or with a view to benefit the creditors ?

English judges dealing with this subject express the same idea also in a slightly different way. What is fraudulent within the policy of the

Bankruptcy Law is a voluntary act of preferring one creditor to another. Preference imports the act of a person who is free to do either the one

thing or the other as he prefers. But if an advantage is given to one creditor under pressure the act is not done voluntarily and there is no

preference. Lord Halsbury cites with approval in Sharp v. Jackson (1899) AC 419. the following observations of Lord Cairns in Butcher v. Stead

(1875) LR 7 HL 846.:

The Act, however, did not profess to express the existing law without waking considerable changes in it. In the case of fraudulent preference, for

example, in place of raising an inquiry whether it was done in contemplation of bankruptcy, the Act provided certain definite tests, namely, that the

bankrupt should have been at the time unable to pay his debts, as they became due, from his own moneys, and that he should become bankrupt

within three months from the date of payment. The Act appears to have left the question of pressure as it stood under the old law, and, indeed, the

use of the word ''preference'' implying an act of free will, would, of itself, make it necessary to consider whether pressure had or had not been

used.

To the same effect are observations in my judgment in Dronadula Sriramulu Vs. Ponakavira Reddi, . After pointing out the distinction between

the scope of Section 53 of the Transfer of Property Act on the one hand and Sections 36 and 37 of the old Provincial Insolvency Act on the other,

I observe thus:

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 strong.

In this passage and in the two sentences that followed it, it is in this sense that I used the words "" prefer "" and "" preference."" These words used in

such context have acquired a well-defined meaning. The judgment of Lord Halsbury in Sharp v. Jackson (1899) AC 419. shows that by authority

dating back more than a century this matter is now well settled.

The learned Lord also observes in the course of his judgment that preference is not voluntary not merely when there is pressure from fear of

legal process but that pressure is not the less, because ""it is pressure upon the debtor''s own mind and his own consciousness--from an

apprehension of what will happen if bankruptcy takes place ; not a pressure by threats of creditors to assert their rights.

The question of dominant motive does not arise in this case, because the object of the insolvents was either to benefit the creditor or to save

themselves. There is no intermediate position. If, for instance, a relation of the debtors is preferred and the question arises, was he preferred

because he was a relation or in order to make that creditor disinclined to proceed to extremities against them, in such a case, the question of

overriding or dominant motive may arise. The motive then may be various and the Court may then be called on to determine which was the

substantial motive. In this case no such question arises.

It is strongly urged for the appellant that the evidence discloses that he brought pressure to bear on the debtors and it was that pressure that was

responsible for the giving of security. But what was the pressure worth ? The debtors were on the verge of bankruptcy. If one creditor was paid

off, there was another creditor ready to file a suit and get arrests or attachments. The insolvency was in the case of these debtors a certain

impending fact. Can it be said that in these circumstances the motive that operated on the mind of the debtors was the safeguarding of their own

interests and the averting of unpleasant consequences ? I cannot do better than adopt the language of Phillimore, J., in In re Ramsay (1913) 2 KB

80 : "" And although in some cases a writ may be pressure, there are cases where writs are of absolutely no importance to the debtor, no terror ;

and in such cases I do not think that the threat of a writ or the issuing of a writ ought to be called pressure."" There is a striking similarity in this

respect between the facts of the present case and the facts with which Phillimore, J., had to deal and the test laid down by him seems to be

particularly appropriate to the facts before us. I am quite alive to the fact that the onus is upon the Official Receiver. See Williams on Bankruptcy,

12th Edition, page 296, where the learned author observes thus:

The balance of authority would seem, therefore, to be in favour of holding that the trustee must give some evidence of a view to prefer on the part

of the debtor other than the mere fact that he was insolvent.

It is also true that the Official Receiver has not conducted his case with that care or diligence that is required of him. No reason has been

shown why the insolvents have not been examined or why their account books have not been filed. Still, on a consideration of the circumstances, I

am inclined to the view that the mortgage amounts to a fraudulent preference. One of the strongest reasons which has weighed with me in coming

to this conclusion is, that the other mortgage deed which is the subject of the next appeal is undoubtedly a fraudulent transaction and, as I have

observed, it is impossible in deciding the question of motive to treat the two transactions as absolutely distinct and separate from each other. As

Phillimore, J., observed in the case I have referred to above "" when one has to look into the mind of the bankrupt, any act of his at the time or

about the time, any matters in pari materia, may be looked into to see what was passing in his mind. "" We confirm the order of the Lower Court

and the appeal is accordingly dismissed with costs.

C.M. A. No. 47 of 1924 :--It is unnecessary to repeat the facts which led to the filing of this petition by the Official Receiver, as I have just set

them forth in the judgment delivered in the connected appeal. The facts that distinguish this from the other appeal are : (1) There is no evidence that

the bulk of the consideration for the mortgage deed in favour of the appellant represents any real debt due by the insolvents. Neither Venkatramier

nor the brother of the appellant has been examined and there is no evidence that any amount was due to either of them. (2) It is not alleged that

there was any written demand by the appellant for the repayment of his debt. If the amount that was due to the appellant was Rs. 1,200 and odd

and to his daughter Rs. 500 and odd, why was the mortgage deed taken for Rs. 10,000 ? Why did the appellant undertake to pay a large sum of

money to Venkatramier and why was a provision made for the payment of Rs. 900 and odd to the Chetty whose appeal we have just disposed of

? The mere natural thing would have been to execute a mortgage deed in favour of the Chetty for Rs. 10,900. There is no satisfactory explanation

for splitting this amount into two sums and execute two separate documents in respect of this debt. It is unnecessary to pursue this matter further,

because there can be no doubt that the circumstances of the case lead only to one inference, namely. that the debtors executed the mortgage in

question with the express object of giving an advantage to the appellant. The appeal, therefore, fails and is dismissed with costs.

Madhavan Nair, J.

I agree, but I would add a few words. The main argument that has been put before us in connection with these two appeals on behalf of the

appellants is that the two documents, Exs. A and B, have been executed on account of the "" real "" pressure that was brought to bear upon the

insolvents by the respective appellants and therefore it cannot be said that these documents were executed with a view of preferring them to the

other creditors u/s 54 of the Provincial Insolvency Act. The facts of the case do not support this view The two documents were executed on the

25th October, 1921. The business was practically closed on the 26th and the brothers were adjudicated insolvents on the 19th December, 1921.

From their own statement it becomes clear that they were on the verge of bankruptcy at the time when Exs. A and B were executed. The

statement of assets and liabilities referred to in their petition for interim protection shows that they were in very embarrassed circumstances. The

oral evidence in the case makes it clear that they were parting with whatever property they had. One car which is referred to as belonging to them

in their petition was transferred to a person named Singara Chetty and under these two documents A and B they parted with most of their

Immovable properties. The evidence of the adjudicating creditor proves that they were hard pressed with the creditors'' demands and that there

were various creditors in their house when he went there to make his demand. Under these circumstances, we have to consider whether the written

notice threatening legal proceedings that was sent by the appellant in C.M. A. No. 11 of 1924 on 10th October, 1921, and the oral demand made

in the other case really operated on the minds of the insolvents in bringing about the execution of the documents in question. The facts show that at

this time the insolvents being in desperate circumstances were trying to part with their Immovable property and the other assets at their disposal

recklessly and desperately not caring as to what may be the consequences. The following observations of Phillimore, J. in In re Ramsay (1913) 2

KB 80. may well be applied to the facts before us:--"" And although in some cases a writ may be pressure, there are cases where writs are

absolutely of no importance to the debtor, no terror ; and in such cases I do not think that the threat of a writ, or the issuing of a writ, ought to be

called pressure."" In view of the circumstances already pointed out it cannot be said that the two documents in these two cases were executed on

account of genuine pressure. I therefore think that the conclusion of the learned Judge that these were executed by the insolvents in desperate

circumstances and not on account of any real pressure is perfectly justified by the evidence. I agree that the appeals should be dismissed with

costs.