Chokkalinga Mudali vs Manickka Mudali alias Singara Mudali

Alfred Henry Lionel Leach, C.J.—The question for decision in this appeal is whether a mortgagee is entitled in law to a personal decree for

the balance of the mortgage debt when the mortgagor has been adjudicated an insolvent and has obtained an unconditional order of discharge. The

reported decisions disclose a divergence of opinion. The adjudication in this case was under, the Provincial Insolvency Act, but admittedly there is

no distinction to be drawn between that Act and the Presidency Towns Insolvency Act in this connection.

On the 4th November, 1910 the respondent mortgaged immovable property to the appellant, who on the 10th October, 1916 filed a suit in the

Court of the District Munsif of Poonamallee to enforce his security. On the 8th January, 1917 he obtained a preliminary mortgage decree and on

the 29th January, 1920 a final decree for the sale of the mortgaged property. In the meantime, to be exact, on the 13th November, 1919, the

respondent filed, a petition asking that he be adjudicated an insolvent. This application was granted on the 18th September, 1920. On the 23rd

February, 1926 the respondent was given his discharge unconditionally. !The appellant took no steps to enforce his security-until the year following

the respondent''s discharge. He then instituted proceedings in execution and the property was brought to sale on the 23rd March, 1927. The sale

proceeds fell short of the amount required to discharge the appellant''s debt by the sum of Rs. 383-134. On the 9th July, 1927 the appellant

applied under the provisions of Order 34, Rule 6 of the Code of, Civil Procedure for a personal decree for the balance. His application was

granted on the 27th September, 1927.

The respondent appealed to the District Judge of Chingleput against the order passed on the application under Order 34, Rule 6, but not against

the personal decree itself. The District Judge held that in these circumstances the appeal did not lie and refused to allow the respondent to convert

the appeal into one against the personal decree. The respondent then appealed to this Court which allowed the appeal to the District Judge to be

converted into an appeal against* the personal decree and remanded the case to the District Judge for disposal on the merits. The District Judge in

turn remanded the case to the District Munsif, who held that the appellant was entitled to a personal decree. The respondent challenged this

decision in an appeal to the Subordinate Judge, who reversed the District Munsif''s decision. This resulted in the filing of the present appeal. In the

first instance the appeal came before King, J., who considered that it should be decided by a Bench in view of the conflict of authority.

The sections of the Act which call for consideration here are Sections 28 (2) and (6), 34 (2), 44 and 47 and their provisions will be mentioned

in the order most convenient to the question raised. Section 28 (2) of the Provincial Insolvency Act states that on the making of an order of

adjudication, the whole of the property of the insolvent shall vest in the Court or in a receiver and shall become divisible among the creditors, but

Sub-section (6) says that nothing in the section shall affect the power of a secured creditor to realize or otherwise deal with his security in the same

manner as he would have been entitled to realise or deal with it if the section had not been passed. Section 47 states that where a secured creditor

realizes his security he may prove for the balance due to him after deducting, the net amount realized, or if he relinquishes his security for the

general benefit of the creditors he may prove for his whole debt, or where he does not either realize or relinquish his security he may value it and

prove for the balance. Section 34 42) says that save as provided by Sub-section (1) (which has no bearing in this case) all debts and liabilities,

present or future, certain or contingent, to which a debtor is subject when, he is adjudged an insolvent, or to which he may become subject before

his discharge by reason of an obligation incurred before the date of the adjudication, shall be deemed to be debts provable under the Act. Sub-

section (1) of Section 44, states that an order of discharge shall not release the insolvent from certain specified debts, but Sub-section (2) says that

subject to Sub-section (1) an order of discharge shall release the insolvent from all debts provable tinder the Act. A debt due to a mortgagee is not

one of the specified debts.

By reason of the provisions of Section 47, the debt of a secured creditor is not provable until he has realized his security or has abandoned it or

valued it. Until one of these events has happened there is no debt provable in the insolvency proceedings. In the course of the arguments it has

been suggested by the learned advocate for the respondent that a secured debt is at all times a provable debt within the meaning of Section 44 (2)

and in support of this argument he has pointed to Section 34 (2). The argument overlooks, however, the provisions of Section 28 (6) and Section

47 Which are the governing provisions so far as the secured creditor is concerned. If the argument were to be accepted it would mean that once

an insolvent had obtained his discharge unconditionally the secured creditor would be deprived of the benefit of his security. He could not retain the

security if the mortgagor. were released from all liability under the mortgage. This could never have been the intention of the Legislature in inserting

Sub-section (2) in Section 44.

The real position is that a secured creditor may prove in the insolvency proceedings, but his right is a contingent one and until the contingency

happens he is outside the Act, If the secured creditor has not during the insolvency proceedings realised his security, or surrendered or valued it,

Section 44 (2) cannot affect him, because no portion of the debt due to him has become provable and the section only applies to debts which are

provable in the insolvency. This means that he is entitled to a personal decree if the security has not been realized before the discharge of the

insolvent. If it has and there is a deficiency the balance of the debt constitutes a debt provable in the insolvency and Section 44 (2) will operate to

cancel it.

Turning now to the reported cases the Allahabad High Court in Niaz Ahmad v. Phul Kunwar I.L.R.(1931) All. 488 held that an order of

discharge has no more effect upon the fights of a secured credit or than an order of adjudication and consequently he is entitled to a personal

decree whenever he has realised his security. The basis of this decision was the opinion that the debt due to a secured creditor is riot a debt

provable in insolvency and the order of adjudication and the subsequent order of discharge cannot affect the rights of the secured creditor which

flow from the mortgage contract. The report does not, however, show at what stage the order of discharge, was obtained. The question was again

raised in the Allahabad High Court in Sundar Lal v. Bamarsi Das ILR (1939) All. 492. The report here mentions the date of the order of

discharge, but the date of the realisation of the property is not given. The judgment in Niaz Ahmad v. Phul Kunwr I.L.R.(1931) All. 428 was

however, followed. It would appear that the opinion of the Allahabad High Court is that the secured creditor is at all times outside the Act and may

obtain a personal decree even if the property has been realized before the passing of the order of discharge. In our opinion this is going too far.

The Lahore High Court in Haveli Shah v. Mt. Hussaina Jan AIR 1938 Lah. 217 held that where a creditor of an insolvent holding a mortgage

decree realizes the security before the mortgagor obtains his discharge the order of discharge prevents the mortgagee obtaining a personal decree.

It follows from what we have said that we regard this case as having been rightly decided. In Khupchand Nathmal Marwudi v. Rajeshwar

Shankar, Deshpande ILR (1940) Nag. 512 the Nagpur High Court, however held that a secured creditor is debarred from obtaining a personal

decree when the mortgaged property has been realized after the discharge of the insolvent. In this case part of the property was realized on the

23rd February, 1929, but the remainder was not sold until the 21st March. 1930 and until all the properties had been sold the mortgagee creditor

could not ask for a personal decree. Before the 21st March, 1930 the insolvent had obtained his discharge. It also follows from what we have said

that we are unable to agree with this decision. At no stage of the insolvency proceedings was there a provable debt.

After the present case had been referred to a Bench by King, J., the question was considered by Venkataramana Rao, J., in the unreported

ease of Atkiappa Chettiar v. Ibramsa, Pulawar S.A. No. 257 of 1939. Since reported in Athiappa Chettiar Vs. Ibramsa Pulavar, . Venkataramana

Rao, J., accepted the opinion of the Nagpur High Court, but as already indicated we do not share this opinion.

In the present case there was no surrender or valuation of the security and it was not realized during the pendency of the insolvency

proceedings. Therefore during the pendency of those proceedings there was no provable debt and Section 44 (2) could have no application.

Consequently we hold that the Subordinate Judge was wrong in reversing the decision of the District Munsif.

The appeal will be allowed with costs throughout.