Charlo Seshu Reddi vs Amperayani Subbarao and Others

Kunhi Raman, J.—This case arises under the Provincial Insolvency Act. Respondent 2 is the appellant. He was adjudicated insolvent on

30th August 1933 in I. P. No. 50 of 1932 on the file of the District Court at Nellore. He then filed I.A. No. 326 of 1934 u/s 38, Provincial

Insolvency Act, submitting a proposal for composition of his debts. The names of 24 creditors were given in this petition. The matter was notified

in the papers and 22 creditors who were served with notice consented to the composition. The 13th creditor was declared ex parte. The 3rd

creditor opposed the application. Since the amount due to him was only Rs. 5500 and the amount due to the remaining 23 creditors was Rs.

59,000, the statutory requirement about the majority of creditors who should consent to the composition was fulfilled and the proposal for

composition submitted in the application was accepted by the Court. The adjudication was accordingly annulled on 18th April 1935. At the time

that the scheme for composition was submitted, a doubt seems to have arisen as to whether the respondent to this appeal, who was the 25th

creditor of the insolvent, had proved his debt or not. It appears from the records that it was brought to the notice of the Court that there was such

a creditor and that the debt due to him was about Rs. 2500. In view of the amount of the debt due to this creditor who was not impleaded as a

party to the proceedings, the Court seems to have felt that there was no necessity to inquire further into the matter and that the ends of justice and

the requirements of law would be satisfied if provision was made in the composition arrangement for payment of dues to this additional creditor as

well in case he came forward and proved his claim. It now transpires that prior to the acceptance of the scheme for composition, the respondent

had proved his claim to the extent of Rs. 754-11-8. This was due to him under the decree in O.S. No. 623 of 1938 which was passed in a suit for

possession of property together with. mesne profits. In the decree there was. provision for payment of future mesne profits and such future profits

have since been ascertained. According to the petition filed in the Court below the total amount due to this creditor under the decree is Rs. 2550.

After the composition scheme was approved by the Court and the total amount required for paying a dividend at six annas in the rupee, which

was the arrangement in the composition deed, was deposited into Court, notice was served on the respondent by the special receiver appointed

for carrying out the scheme on 12th November 1940 intimating that the amount that was payable to him under the arrangement was in Court

deposit and that it was open to him to draw it out. It is the respondent''s case that that was the first notice that he had of the composition

arrangement having been accepted by the Court. He thereupon filed a petition u/s 4, Provincial Insolvency Act, in the Court below on 21st January

1941. It is from this petition that the present appeal arises. The main allegations in the petition were that prior to the acceptance of the scheme for

composition the respondent here was not served with notice as required by law and that therefore he is not in any way bound by the composition

scheme approved by the Court. He asked for a declaration to that effect so that it may be possible for him to execute the decree that he had

obtained against the insolvent without being hampered by the composition scheme approved by the Court. The learned District Judge has granted

this declaration holding that since the respondent to this appeal had received no notice of the proceedings u/s 38, Provincial Insolvency Act, he

was not bound by the composition scheme approved by the Court.

Mr. Subba Rao, the learned advocate for the appellant, urges three main contentions in this appeal. These are : (i) since the proceedings in

insolvency had terminated and the adjudication had been annulled by the lower Court, it was not open to the respondent here to have filed his

petition u/s 4, Provincial Insolvency Act; (ii) the respondent was an ""aggrieved"" person within the meaning of Section 75, Provincial Insolvency Act

if, as he says, he had no notice of the composition scheme which was approved by the lower Court and therefore the proper remedy open to him

was to appeal u/s 75, Provincial Insolvency Act, and not to file an application u/s 4. Since no such appeal had been filed within the time allowed by

law, his application u/s 4 was not competent; (iii) by merely proving that he was not served with notice prior to the approval of the scheme for

composition the respondent did not become entitled to the relief that he asked for in his application in the lower Court. He ought to go further and

make out a case u/s 38, Provincial Insolvency Act.

I am not satisfied that the first and second contentions referred to above are well founded. Although the proceedings in insolvency might have

terminated, the trend of decisions establishes clearly that the insolvency Court retains control over the proceedings for certain limited purposes. If a

creditor who has not been served with notice before a scheme for composition is approved by a Court is able to satisfy the Court that there are

valid reasons for not approving this composition scheme I do not see any reason why the Court should not exercise jurisdiction to re-open the

whole matter and dispose of the application for recognising the composition after considering the objections urged on behalf of the creditor who

had no notice of the prior proceedings. There is nothing to show that the Court which dealt with the matter in the absence of such a creditor is not

vested with jurisdiction to deal with his objections when properly presented.

This will dispose of the second argument addressed on behalf of the appellant as well. It may be possible for the creditor in the position of the

respondent to appeal u/s 75 but that cannot stand in the way of his asking for relief under S. i of the Act when his object is to have the proceedings

in the trial Court re-opened so that the matter may be disposed of after considering his objections.

The third contention urged on behalf of the appellant seems to me to be well founded. It is stated by the learned Counsel on both sides that there

is no direct authority which covers the point and that the case has to be decided in the light of the provisions of the Provincial Insolvency Act. The

respondent''s learned advocate wants to rely upon the decision reported in Valliappa Chettiar v. Arandi AIR 1942 Mad. 706. On the authority of

that decision he contends that according to the provisions of the Provincial Insolvency Act notice to every creditor is mandatory before a Court

deals with a proposal for composition and that if such notice is not served then the whole proceedings must be regarded as void. The decision

relied on did not arise under the Provincial Insolvency Act but under the Hindu Religious Endowments Act and it seems to me that the view taken

in that case was based upon the provisions of that enactment and the circumstances of that particular case. Here the statute provides for what is

usually referred to as a statutory majority of creditors whose consent would be sufficient to enable the Court to approve the composition scheme.

Even if there are a few creditors strenuously resisting the application made on behalf of the debtor for composition, the existence of the majority

would be sufficient to entitle the Court to act and accept the scheme. In the present case undoubtedly there was such a majority and it appears

from the records that although the fact that there was an additional creditor like the respondent was brought to the notice of the Court before the

composition scheme was accepted by it, the Court approved the scheme for composition without insisting upon notice being served upon the

respondent as well; because apart from the claim of the respondent the requirements of the Act With regard to a majority happened to be fulfilled.

Had the respondent been served with notice of the scheme submitted by the debtor and had he come and expressed his disapproval of the scheme

his voice would not have prevailed. But had he gone further and had he been able to satisfy the Court that there were equities in the case which

made it improper for the Court to accept the scheme put forward by the debtor, then the position might have been different. In the present case all

that the respondent alleged and established was that he had no notice prior to the acceptance of the scheme by the Court. According to Section

38, Sub-section (4) if the Court is of opinion after considering any objection which may be made on behalf of any creditor that the terms of the

proposal are not reasonable or not calculated to benefit the general body of creditors, the Court shall refuse to approve the proposal. No

suggestion was made by or on behalf of the respondent in the present case that he had any objections that could be regarded as tenable within the

meaning of Clause (4) of Section 38. It was certainly open to the respondent here to have satisfied the Court below that had he been served with

notice he would have been able to come forward and urge objection of the kind referred to in the provision of law mentioned above and that

because he was not served with notice it was not possible for him to have done so. If that was the case made out by the respondent in the Court

below it would in my judgment have been a sufficient ground to entitle the Court below to re-open the proceedings that had taken place in the

absence of the respondent on the prior occasion when the composition scheme was approved and deal with the matter afresh. If there was

fraudulent conduct on the part of the debtor and the respondent was prevented from putting forward his objections by the application being

proceeded with without serving notice on him, there would have been sufficient justification for interference by the Court below and re-opening the

whole proceedings. But in view of the provisions of the Provincial Insolvency Act according to which it is competent for the Insolvency Court to

sanction the adoption of a composition scheme which is approved by the prescribed majority of creditors in spite of opposition from a minority, the

respondent has not made out any case which would warrant the granting of the prayer in his petition.

Again, according to Section 39 before it was amended in 1935 which contained the rule in force at the time when the matter was dealt with by

the Court below, if the Court approve 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. In the present

case the respondent''s name was entered in the scheme and the provisions of this section seem to me to constitute another obstacle in the way of

the respondent. In these circumstances this appeal must be allowed with costs payable by respondent 1 and the order made by the Court below

must be set aside.