Dewan Bahadur Govindas Chaturbhujdas vs N. Ramadoss

Charles Gordon Spencer, J.—Appellant, Dewa Bahadur Govindas Chaturbhujdas, plaintiff in the Trial Court, was the secured creditor of

respondent N. Ramdoss first defendant in the Trial Court, who pledged with him, through his agent the second defendant, certain jewels as security

for a loan of Rs. 12,000. Respondent was adjudicated insolvent on 20th September 1921. The appellant got no notice from the Official Assignee

and before he attempted to prove for the balance of what was due to him; the adjudication was annulled on the 20th February, 1922. Appellant

brought this suit to recover the balance due to him after deducting the value of his security which he has since realised.

The learned Judge held that he was not entitled to anything and dismissed the suit against this defendant. He acted upon first impressions, as

there is no decided case in this country as to the rights of a secured creditor to recover the balance of any debt which he has failed to prove in

insolvency, when the adjudication has been annulled owing to the debtor having compounded with his other creditors. The learned Judge quoted

the case of Flint v. Barnard (1889) 22 Q.B.D. 90 : 58 L.J.Q.B. 53 : 37 W.R. as being an authority for the principle that the effect of a composition

between a debtor and his creditors is the same as the effect of a discharge, viz., that it releases a debtor from all debts provable in bankruptcy. If I

rightly understand that decision, it only decided what are debts provable in bankruptcy and included among them, liabilities which mature into debts

due after acceptance of composition.

In this country the position of an insolvent whose adjudication has been annulled is not the same as that of a discharged insolvent. The

Presidency Towns Insolvency Act gives the effect of an order of discharge in Section 45. An order of discharge releases an insolvent from all

debts provable in insolvency except certain debts of a special nature, such as debts owing to the Crown. An adjudication may be annulled either

u/s 21 when it is found by the Court that a debtor ought not to have been adjudged insolvent, or where it is proved that all his debts have been

paid in full, or it may be annulled u/s 30 when a proposal of composition has been accepted by a majority of his creditors. The effect of annulment

appears in Section 23; which states that the property of the debtor shall vest in such person as the Court may appoint, or, in default of such an

appointment shall revert to the debtor, to the extent of his interest therein. In Bombay, there are rules for the vesting of the property in a person

appointed by the Court. Here, as there are no such rules and no such appointment has been made, the property must necessarily revert to the

debtor.

In the present case there was no regular scheme of composition laid before the Court but the insolvent filed an affidavit in the Court affirming

that all the creditors had agreed to accept eight-annas in the rupee and had been paid at that rate. As there is no provision for composition which

can be enforced u/s 30, Clause (2), no property of the insolvent is in the hands of the Official Assignee, and no proceedings are now pending in the

matter of the insolvency of N. Rama Doss, it would be futile for us to refer the creditor to the Court of Insolvency for his remedy. He has brought

this suit for the whole of the balance that is due to him, but being one of the creditors whose names were entered in the Schedule (Ex. J), a majority

of whom agreed to accept eight annas in the rupee, he is bound by the result of the composition approved by the Court, for Section 30, Clause (1)

says that upon an order being made annulling the adjudication, the composition or scheme shall be binding on all the creditors so far as it relates to

any debt due to them from the insolvent and provable in insolvency. The appellant''s claim for the unsecured balance was provable in insolvency

though not actually proved, as the adjudication was annulled before he got notice and came in to prove for the balance. In Edwards v. Coombe

(1872) 7 C.P. 519 : 41 L.J.C.P. 202 : 27 L.T. 315 : 21 W.R. 107 the rights of general action of a creditor whose name does not appear in the

statement of composition were held not to be taken away by Section 126 of the Bankruptcy Act of 1869 which provided as follows: ""The

provisions of a composition accepted by an extraordinary resolution in pursuance of this section shall be binding on all the creditors whose names

and addresses, and the amount of debts due to whom are shown in the statement of the debtor, produced to the meetings at which the resolution

was passed, but shall not affect or prejudice the rights of any other creditors."" Under the same Act in In re Best wick, Ex parte Hodgkinson

(1876) 2 Ch. 185 : 45 L.J. Bk. 148 : 34 L T. 784 : 24 W.R. 938 creditors who failed to prove their debt in composition proceedings were

allowed to come in after realizing their security and claim the balance at the rate at which composition was accepted. In the Bankruptcy Act of

1883 this provision was not repeated, but Section 18, Clause (8) of that Act provided: ""A composition or scheme accepted and proved in

pursuance of this section shall be binding on all the creditors so far as it relates to any debts due to them from the debtor and provable in

bankruptcy.

Assuming that a creditor might enforce the original agreement or resolution by a summary application to the Court of Bankruptcy, it is clear from

these decisions that the jurisdiction of Courts of Common Law has not been ousted thereby. In me last quoted of these decisions, it is stated that a

creditor may wait till he realises his security, but in any case the debt will not be discharged until the amount of composition is paid. It was held by

the Court of Chancery in In re Hardy, Hardy v. Farmer (1896) 1 Ch. 904 : 65 L.J. Ch. 461 : 74 L.T. 403 : 44 W.R. 503 : 3 Mauson 150 that

secured creditors who had not assented to a scheme of composition could bring an action after the death of an adjudicated bankrupt against his

estate for the balance of their debt that remained after valuing their security and that although the Court of Bankruptcy had jurisdiction over such a

claim notwithstanding the bankrupt''s death, the secured creditor s right of action was not barred. In India too it is provided that u/s 17 of the

Presidency Towns insolvency Act a secured creditor''s right of suit is not barred by the making of an order of adjudication.

I think that the plaintiff was clearly entitled to a decree against first defendant for a moiety of the balance that may be found to be due, after

deducting from the amount claimed in the plaint the amount realised by sale of the security, and interest thereon at the contract rate of Rs. 1-3-0 up

to the date of the decree (14th August 1923) of the Court of first instance.

The appeal is accordingly allowed, but without costs as in this Court the case has been placed upon a new footing and a decree will be given to

the plaintiff (appellant) as I have stated.

The memorandum of objections is dismissed.

Srinivasa Iyengar, J.

I agree that the appeal should be allowed. But it must be observed that the point on which the appeal has been argued before us was not only

not argued before the learned Judge at the Original Trial but does not seem to have been even hinted at. The plaintiff-appellant instituted the suit

against two defendants. The first defendant is the only respondent here in appeal before us. The other defendant was the widow and legal

representative of one Oggu Garuswami Chetty. This Guruswami Chetty pledged with the plaintiff two diamond adaigais as security for a loan of

Rs. 12,000, carrying interest at Rs. 1-3-0 per cent. per mensem, and as further security gave his own promissory note therefor to the plaintiff. It is

now admitted that the two jewels which were so pledged by Guruswami belonged to the first defendant and that the pledge was made and the loan

obtained by Guruswami only for and on behalf of the first defendant.

The learned Judge granted a decree against the second defendant limited to the assets of the said Guruswami in her hands, but dismissed the

action--so far as the first defendant was concerned.

The ground on which the learned Judge held that the plaintiff was not entitled to a decree against the first defendant is as follows: The first

defendant had subsequent to the pledge been adjudicated an insolvent, but in the course of the insolvency proceedings the statutory majority of his

creditors agreed to a composition of 8-annas in the rupee and thereupon the insolvent first defendant applied to the Court for the annulment of ins

insolvency on the representation that he had paid all his creditors the composition agreed to The Court sanctioned the compromise and annulled

the insolvency. The plaintiff who had not realised his security, had not proved his debt in insolvency or taken any steps to have it proved in any of

the ways indicated by the rules relating to secured creditors before the insolvency was annulled by the Court. And under some practice for which

there seems to be no warrant, no notice of the application for annulment was given to the plaintiff or any other secured creditor. Even when the suit

was instituted, the plaintiff had not realised his securities, and one of the prayers in the plaint relates to the sale of the securities by or under the

directions of the Court.

The learned Judge referring to the case of Flint v. Barnard (1889) 22 Q.B.D. 90 : 58 L.J.Q.B. 53 : 37 W.R. and the case of Seaton v.

Deerhurst (1895) 1 Q.B. 853 : 64 L.J.Q.B. 430 : 14 R.p 523 : 72 L.T. 453 : 43 W.R. 436 : 59 J.P. 357 : 2 Manson 355 held that the annulment

following on the composition had the same effect with regard to the insolvent as an order of discharge and that, therefore, the first defendant

became released from liability to the plaintiff with regard to any balance that might be found due to the creditor after the realisation of the securities.

The first question, therefore, that arises in this appeal is whether the annulment of the insolvency in such circumstances has the operation in law

of discharging the insolvent debtor entirely from liability and this will have to be determined apart altogether from any question whether by reason

of the plaintiff not having proved the debt in insolvency he has become precluded or debarred from enforcing any remedies and whether the

appropriate remedy open to such a creditor would be in the Bankruptcy Court or by separate action. The learned Vakil for the appellant did not

seriously press the claim of the plaintiff for the payment of the whole amount of the deficiency in the debt after crediting the proceeds realised by

the sale of the securities but contended only for the recovery of such deficiency at the rate agreed to under the composition, namely, at 8-annas in

the rupee. As I understand Flint v. Barnard (1889) 22 Q.B.D. 90 : 58 L.J.Q.B. 53 : 37 W.R. it is only an authority for two propositions; firstly,

that a composition in the course of the insolvency agreed to by the prescribed statutory majority of the creditors is binding on all creditors of the

insolvent whether they were parties to the composition or not; and secondly, that a debt accrued subsequent to adjudication but before the

composition is a debt provable in insolvency. The plaintiff in the action claimed not to be bound by the composition and not liable to proceed to

recover his debt under the scheme framed and approved of by the Court for the payment of the creditors. Lord Esher, M.R. properly held that

such a debt was a debt provable in insolvency and an agreement in composition bound all the creditors whose debts were debts provable in

insolvency. No question, therefore, arose or was decided whether a creditor in those circumstances was or was not entitled to be paid even at the

rate agreed to under the composition. It seems to me that it was assumed throughout in that case that the creditor had a right at least to be so paid.

In Seaton v. Deerhurst (1895) 1 Q.B. 853 : 64 L.J.Q.B. 430 : 14 R.p 523 : 72 L.T. 453 : 43 W.R. 436 : 59 J.P. 357 : 2 Manson 355 the

question that arose was whether a judgment-creditor whose debt was rejected on its being attempted to be proved before the trustees in

Bankruptcy was entitled, merely because he had not received any dividend, to proceed to have execution of his decree. The Court held that being

a debt provable in bankruptcy and there being a scheme for the payment of all the creditors whose debts were provable in bankruptcy and the

debt due to the judgment creditor being a debt so provable, the trustee in bankruptcy was entitled to reject it as not binding and that the mere fact

that his claim was rejected would not give him a right to proceed in execution. The ratio decidendi in that case obviously was that a judgment-

creditor was not in a better position with regard to the liability to prove his claim before the trustee under a composition arrangement than any other

ordinary creditor whose debt was similarly provable in insolvency. In that case there was clearly a trustee appointed under the composition

arrangement and the creditors who had not been paid were relegated to their remedies against him. In the present case, however, there has been

no arrangement whatever made for the payment of any creditors who might be found not to have been paid the composition agreed to, no amount

or property was set apart for that purpose either in the hands of the Official Assignee or any other trustee and not even an undertaking was given

by the insolvent debtor to make any payments under the composition. This case, therefore, is not one in which a claim was made by the plaintiff to

any trustee in bankruptcy or composition and properly rejected by him. It is clear that no such claim could have been made, for indeed there is no

person before whom such a claim could have been preferred. The case of Seaton v. Deerhurst (1895) 1 Q.B. 853 : 64 L.J.Q.B. 430 : 14 R.p 523

: 72 L.T. 453 : 43 W.R. 436 : 59 J.P. 357 : 2 Manson 355 is, therefore, an authority only for the position that if there is a scheme sanctioned by

the Court for the payment of a composition to all creditors the creditors have only the remedy given to them for getting what they can get under the

scheme and not otherwise.

In Edwards v. Hancher (1876) 1 C.P.D. 111 : 33 L.T. 575 there was a composition agreed to of three shillings in the pound for which the

insolvent debtor along with a surety gave a promissory note to the creditor and a receipt was also granted by the creditor for purporting to be in

discharge of the debt. On the note being dishonoured, it was held that the plaintiffs were remitted to their rights to sue on the original debt. Chief

Justice Lord Coleridge held that the actual payment amount arrived at on the basis of the composition is the thing which the creditors resolved to

accept and that, therefore, it is if and when and only if and when that amount is actually paid, there is satisfaction of the debt. The Court held that

on failure of the payment, the plaintiffs were remitted to their original rights and were entitled to a decree in their action against the defendants. This

case was referred to with approval and followed in In re Bestwick, Ex parte Best-wick (1876) 2 Ch. 185 : 45 L.J. Bk. 148 : 34 L T. 784 : 24

W.R. 938 and it was there held that a secured creditor was in no way bound by a compounding debtor''s estimate of the value of his security and

that he was entitled to abstain from proving the claim or taking any part in composition proceedings and that when he has realised his security he

may claim from the debtor payment of the composition on the balance of the debt, which may then remain unsatisfied.

On the authority of these two cases we arrive at the conclusion that though a composition sanctioned by the Court is binding on all the

creditors of the insolvent including the creditors who were not parties to the composition the composition takes effect and operates to discharge

the insolvent from his liability on the debt only if the compensation agreed to is paid or else a scheme is outstanding under which the creditors are

required to proceed and obtain relief. In default of such payment and in the absence of such a scheme, it necessarily follows that the obligation is

laid on the insolvent debtor to pay to all the creditors whose debts are provable in insolvency the amount of the balance of their debt according to

the composition. It is inconceivable that in default of any such payment and in the absence of any such scheme of trust for payment the insolvent

debtor should be entirely discharged from all liability merely on the Court approving of a composition and annulling the adjudication. But that was

the contention put forward by Mr. A. Ramachandra Iyer the learned Vakil for the respondent if I understood his argument alright. It seems to me

that it can scarcely be the law. There are, however, two cases which were relied on and which I may here refer to. In the case of Gilbey v. Jeffries

(1833) 11 Q.B.D. 559 : 52 L.J.Q.B. 601 : 48 L.T. 699, no doubt, Brett, M.R., held that as the composition was binding on the creditor the

debtor became discharged. But that was a case in which under the arrangement of composition all the property of the debtor had been transferred

to a trustee and the remedy of the creditor obviously was against such a trustee. The case of Couldery v. Bartrum (1882) 19 Ch. D. 394 : 51 L.J.

Ch. 205 : 45. L T. 689 : 30 W.R. 141 was also relied on, but that was a case merely relating to valuation of securities and to the liability under the

rules relating thereto of the holder of the security to refund any amount realised by him by the sale of the securities over and above the amount at

which he had valued the securities. Thus if the creditor in circumstances has a remedy, the only question that remains is, what is his remedy?

Whether it is by way of application to the Bankruptcy Court or by a separate action. In the English Bankruptcy Rules, there is a specific Rule 215

which provides that no action to enforce payment shall lie but the remedy shall only be by application to the Bankruptcy Courts if default is made in

payments under a composition scheme either by the debtor or the trustee. No such rule has been framed in this Court. The only provision of law

relating to this matter is contained in Clause (2) of Section 30 of Act III of 1909. It is as follows: ""The provisions of the composition or scheme

may be enforced by the Court on application by any person interested, and any disobedience of an order of the Court made on the application

shall be deemed a contempt of Court."" This is an exact re production of Clause (10) of Section 18 of the English Bankruptcy Act of the year

1883.

In the case of In re Hardy, Hardy v.Farmer (1896) 1 Ch. 904 : 65 L.J. Ch. 461 : 74 L.T. 403 : 44 W.R. 503 : 3 Mauson 150 after the death

of the bankrupt a secured creditor valuing his security under the rules applied in an administration action for the recovery of the balance due to him.

A trustee had been appointed under the composition and objection was taken that no application would lie except to the Bankruptcy Court.

Justice Chatty having regard to the terms of Rule 211 of the Bankruptcy Rules of 1886 which had been passed by that time, which rule was

identical in terms with the present Rule 215 already referred to, held that the proper remedy was by way of application in the Bankruptcy Court,

and the learned Judge apparently adjourned the hearing of the application in the Chancery Court for the purpose of enabling the applicant to move

the Bankruptcy Court. In this case two points are clear; firstly, that a trustee had been appointed for the purpose of carrying out the composition;

and secondly, that but for Rule 211 referred to by the learned Judge which had the force of law and which laid down that no separate action would

lie and that the remedy would be by application to the Bankruptcy Court, the learned Judge would have held he had jurisdiction. In the absence of

such a rule in this Court, there is, therefore, no reason whatever to hold that the right of separate action is precluded or barred.

Further Clause (2) of Section 30 is merely enabling. It is a summary remedy given by the Statute There are no words there excluding the

jurisdiction of the ordinary Courts. In the sense of express statutory provision excluding the jurisdiction of the ordinary Tribunals no right of action

could be deemed to have been taken away. Furthermore, Clause (2) of Section 30 refers obviously only to cases where there is something in the

provisions of the composition or scheme which are capable of being enforced in the Bankruptcy Court. In the present case, however, no such

provision would seem to exist capable of enforcement on application to the Bankruptcy Court. On that ground also, therefore, Clause (2) of

Section 30 has no application.

The case of Edwards v. Coombe (1872) 7 C.P. 519 : 41 L.J.C.P. 202 : 27 L.T. 315 : 21 W.R. 107 is a decision which throws considerable

light on the question now under discussion. That was in the year 1872. There was then no such rule as the present Rule 215 or Rule 211 of the

Bankruptcy rules of the year 1886 justice Willes in that case decided that it was competent to a non-assenting creditor notwithstanding a resolution

for composition u/s 126 of the Bankruptcy Act on 1869 to sue for his original debt where the debtor has failed to pay or tender the composition

within the time agreed or within a reasonable time, and that the creditor was not restricted to the summary remedy by application to the Courts of

Bankruptcy provided by that section. I may here observe that the provision for summary remedy referred to in that section is in terms identical with

Clause (2) of Section 30 of the Presidency Towns Insolvency Act of 1909. That learned Judge referring to the summary remedy states that a

remedy given in Bankruptcy Courts may be very valuable, that a creditor may avail himself of the course of proceedings if he thinks fit, but his

ordinary common law remedy still subsists until he elects to avail himself of the powers of the Court of Bankruptcy. At another place in the same

judgment that learned Judge observes that it is the com- position that has to be accepted and not a mere agreement of the other creditors and that

the non-payment of composition was the failure of a condition going to the root of the arrangement and that the original debt remains and may be

resorted to notwithstanding the resolution.

The following sentence, however, from the concluding portion of the judgment of Justice Willes may have some bearing and may also require

to be considered: ""We dispose of this case without entering into a consideration as to whether it might be more or less desirable that the equitable

summary remedy of the creditor should be enforced rather than the ordinary common law remedy.

In spite of the fact that in our judgment the plaintiff-appellant in this case has got a concurrent remedy by separate action, we should have been

disposed to refer him to the summary remedy indicated in Clause 2 of Section 30 of the Presidency Towns Insolvency Act on the general principle

that the parties should as far as possible be relegated to the remedies provided in special enactments, were it not for the circumstance that there

appears to be no provision in the composition and arrangement in this case, which is capable of any summary enforcement. Any other remedy that

may be open to the plaintiff under that Act could scarcely be called summary. It, therefore, follows that there is nothing in the Bankruptcy Law

which renders the present suit unsustainable. The plaintiff is clearly, entitled to be paid as composition, in respect of the balance due to him in the

amount of the debt with interest thereon at Rs. 1-3-0 per cent. per mensem from the date of the loan till the date of the decree of the Original Side

after giving credit for the sale-proceeds of the securities, and the learned Judge erred in dismissing the suit entirely against the first defendant.

The decree of the Original Court will, therefore, accordingly be modified and a decree will be passed against the first defendant for the amount

of such a balance at 8-annas in the rupee or in other words for the moiety of such balance. As the point on which the appellant had now succeed-

ed, was not argued before the learned Judge in the Original Court, there will be no order as to the costs of the appeal. The memorandum of

objections is also dismissed v. N.V. Memorandum of objections dismissed.