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Judgment
Spencer, J.—Appellant, Diwan Bahadur Govindoss Chaturbhujadoss, plaintiff in the trial Court, was the secured creditor of the Respondent
N. Ramadoss, 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 20th February 1922. Appellant brought this suit to
recover the balance due to him after deducting the value of his security, which lie has since realized.
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 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
28, 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 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. Ramadoss, 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 (Exhibit 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 arid came in to prove for the balance. In Edwards v. Goombe
(1872) 7 C.P., 519, 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 Bestwick, Ex-parte Bestwick (1876) 2 Ch. D., 485, 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, bat 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 the last quoted of these decisions it is stated that a
creditor may wait till he realizes 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 v. Farmer [1896] 1 Ch., 904 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 realized by sale of the security, and interest thereon at the contract rate of 1 rupee 3
annas 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 Ayyangar, 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 Gurusami Chetty. This Grurusami Chetty pledged with the plaintiff two diamond addigais 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 there for to the plaintiff. It is now
admitted that the two jewels which were so pledged by Gurusami belonged to the first defendant and that the pledge was made and the loan
obtained by Grurusami 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 Gurusami 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 his
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 realized 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 realized 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 and the case of Seaton v. Lord
Deerhurst [1895] 1 Q.B., 853 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 creditors after the realization 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 realized by
the sale of the securities but contended only for the recovery of such deficiency at the the rate agreed to under the composition, namely, at 8 annas
in the rupee. As I understand Mint v. Barnard (1889) 22 Q.R.D., 90 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 the question that arose was whether a judgment-creditor whose debt was rejected on its being
attempted to be proved before the trustee 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 for 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. Lord
Deerhnrst [1895] 1 Q.B., 853 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 the 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 (1875) 1 C.P.D., 111 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 purporting to be in discharge of the debt.
On the note being dishonored, 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 of the 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 Bestwick (1876) 2 Ch.D., 485 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 realized 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 composition 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 or 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 or 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 Ayyar, the learned vakil for the respond-out, if I understood his argument aright. 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 (1883) 11 Q.B.D., 559 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 (1881) 19 Ch.D., 394 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
realized 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 the
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, 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 payment 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 80 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 reproduction of Clause (10) of Section 18 of the English Bankruptcy Act of the year 1883.
In the case of Hardy v. Farmer [1896], Ch., 904 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 Chitty, 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 80 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 absence 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
80 has no application.
The case of Edwards v. Coombe (1872) 7 C.P., 519 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 of
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
composition 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 Willes, J., 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 he 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 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 a 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 on 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 decrees of the Original Court will therefore accordingly be modified and a decree will be passed against the first defendant for the amount
of such balance at 8 annas in the rupee or in other words for the moiety of such balance. As the point, on which the appellant has now succeeded,
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.