Athiappa Chettiar vs Ibramsa Pulavar

Venkataramana Rao, J.—This second appeal arises out of an application made by a mortgage-decree-holder for a personal decree under

Order 34, Rule 6, CPC against the second defendant. The relevant facts are these. The appellant who is the mortgagee obtained a preliminary

decree for sale of the property mortgaged to him on 16th August, 1929. A final decree was also passed on 10th December, 1930. The mortgaged

property was brought to sale on 27th August, 1934 and the sale was confirmed on 29th September, 1934. But the second defendant who was

adjudicated insolvent on 21st July, 1933 after the final decree was passed obtained an order of absolute discharge on 10th August, 1934. This

application for a personal decree against the second defendant was made on 28th September, 1937. Both the lower Courts have taken the view

that the order of absolute discharge precludes any relief being granted to the appellant. The question is whether this view is sound.

On this point there is a conflict between Lahore and Nagpur High Courts on the one hand and the Allahabad High Court on the other. In Haveli

Shah v. Mt. Hussaina Jan AIR 1938 Lah. 217 it was held that the personal liability under a mortgage is a debt provable in insolvency within the

meaning of Section 44 (2) of the Provincial Insolvency Act and therefore by the order of absolute discharge this liability has been discharged. This

view has been followed by the Nagpur High Court in Kupchand Nathmal Marwadi v. Rajeswar Shankar Deshpande ILR (1940) Nag. 512. But

the Allahabad High Court has taken a different view. In Niaz Ahmad v. Phul Kunwar I.L.R.(1931) All. 428 the reason for the view is thus stated:

The order of discharge has no more effect upon the right of the secured creditor than the order of adjudication. u/s 45 (2) (of the Presidency

Towns Insolvency Act III of 1909 corresponding to Section 44 (2) of the Provincial Insolvency Act) ""an order of discharge shall release the

insolvent from all debts provable in insolvency"". The debt due to a secured creditor is not a debt provable in insolvency. The order of adjudication

and the subsequent order of discharge cannot affect the rights of the secured creditor which flow from the mortgage contract.

This view has been again followed in Sunder Lal v. Benarsi Das ILR (1939) All. 492. With due respect to the learned Judges I am not able to

agree with this view. u/s 34 (2) of the Provincial Insolvency Act all debts and liabilities, present or future, certain or contingent, to which the debtor

is subject when he is adjudged an insolvent or to which he may become subject before his discharge by reason of any obligation incurred before

the date of such adjudication, shall be deemed to be debts provable under this Act. Therefore the liability to pay the deficit arising after the sale of

the property mortgaged in virtue of the personal covenant or obligation which the mortgagor enters into under the deed of mortgage will be a debt

provable within the meaning of Section 34 (2). It was a liability to which the second defendant will become subject by reason of the obligation

incurred before the date of his adjudication. That such a liability is a debt provable in insolvency is clear from Section 47 of the Act. Under that

section it is open to a secured creditor to adopt any of the three courses specified therein, namely, (1) he can realise the security and prove for the

balance due to him; (2) he can relinquish the security and prove for the whole debt; and (3) he can value the security at a particular amount and

then prove for the balance. This therefore clearly indicates that the liability of a mortgagor under a deed of mortgage is a debt which the mortgagee

can prove in insolvency. It is open to him, as Section 47 (1) provides, to wait until the security is realised and prove for the balance when it is

ascertained, but he takes the risk of not getting any dividend if the insolvent obtains an order of discharge by that date, by reason of the liability

being extinguished u/s 44 (2). If he wants to avoid this risk he ought to take advantage of Clauses 2 and 3. I am therefore inclined to follow the

view of the Lahore and Nagpur High Courts in preference to that of the Allahabad High Court.

Mr. Venkatarama Aiyar contends that by virtue of Section 28 (6) the rights of the secured creditor are not affected by the order of adjudication

and one of such rights is to get a personal decree for the balance due under a personal covenant in the deed of security and therefore his right to

get such a decree remains unaffected by the order of discharge. All that Section 28 (6) says is that the right of a secured creditor to realise the

moneys due to him from and out of the security is not affected. But the liability due under the deed of mortgage is nevertheless a debt in respect

whereof the secured creditor has to adopt the procedure in insolvency before he can get any dividend and in respect whereof he is subject to the

other provisions of the Insolvency Act. Stone, C.J., in Khupchand Nathmal Marwadi v. Rajeswar Shankar Deshpande ILR (1940) Nag. 512 after

mentioning the three courses open to secured creditors u/s 47 observed thus:

If instead of taking one or the other of these courses, he simply ignores the insolvency, then, as above observed he is limited to his security, the

reason being that a mortgagee with a mortgage containing a personal covenant is a secured creditor so far as the mortgage transaction is concerned

and an ordinary creditor so far as the personal covenant is concerned.

I respectfully agree with this observation.

In the result the appeal fails and is dismissed with costs. Leave to appeal refused.