Dronadula Sriramulu vs Ponakavira Reddi

Oldfield, J.—In concurring in the order which my learned brother proposes, I do not desire to follow him further than is necessary to

support his conclusion.

The decision under appeal is in terms that the District Munsif erred in removing the name of the 5th creditor, here respondent, from the list of

creditors; and we have to con sider whether he had power to do this and if so, whether we ran accept the order made in the exercise of that

power. By an irregular and confused course of procedure and pleading, to which my learned brother has referred, that order involved the

conclusion, not only that 5th creditor''s debt was not proveable in the insolvency, but also that the mortgage se curing it was invalid. The objection

thus allowed was taken as follows in a counter-petition of 1st creditor : ""The mort gage for Rs. 500 said to have been executed by petitioner (the

insolvent) and his father in favour of 5th creditor was created for the benefit of the insolvent and with the intention of evading payment of the debts

due to 1st creditor and others and nominally, but is not a true debt. Nothing is payable to the 5th creditor.

This, it is contended, means only that Ex. A. the mortgage, offends against, Section 53, Transfer of Property Act, and that, as it does not come

within Section 35 or 36 of Act III of 1907, which is applicable to this insolvency, there could be no adjudication on its validity by the District

Munsif in insolvency or otherwise than in a separate suit, because, shortly, the insolvency Court cannot adjudicate on claims by or against third

parties. The question thus raised is of some difficulty in connection with Act III of 1907 owing to the absence therefrom of anything corresponding

with Section 4 of the present Act V of 1920 or Section 105 of the English Act or the corresponding provisions of previous statutes.

This contention, it is urged, can be met by reading the objection to Ex. A as being that there was no debt and no transfer at all, but only a

pretence, which could be disregarded and not that there was a transfer, which offended against Section 53, Transfer of Property Act, and had to

be set aside; and if the question were of property to be reduced to the possession of the Receiver on behalf of the creditors, I should be prepared

to adhere to any opinion expressed in The official Receiver Tinnevelly v. Sankaralinga Mudaliar I.L.R.(1920) M. 524, and hold that, so far as the

objection to Ex. A was of the former description and the question was of discovery within the purview of Section 18(1) and (3), the insolvency

Court was competent to decide it. But in fact, Ex. A being a simple mortgage, there is no question of possession, and there is the further difficulty

that the language already quoted from the 1st creditor''s counter-petition is elastic enough to express objections of both the descriptions above

referred to.

It is a better argument and one, which, I agree, must prevail, that the question is of a claim, not by or against a third party or stranger to the

proceedings, but by a creditor, a necessary party to them, which can be made and which the respondent in the present case has chosen to make in

the insolvency and with which the Court u/s 24 must deal after hearing other creditors objections; and, as there is no restriction there or elsewhere

on the grounds, on which objections may be made, the Court must adjudicate on them, whether they are that the transaction relied on resulted in

no debt or that resulting in a debt, it should be annulled. This of course involves that a secured creditor is before the Court primarily to obtain

inclusion of his debt in the schedule and only secondarily because the receiver on behalf of the creditors is concerned to claim the interest in the

insolvent''s property, constituting the security, for their benefit. But the reply attempted is that, if the objection to the decision of the insolvency

Court binding a secured creditor can be met in this manner, it has still to be shown how that Court is empowered to reach a decision at all as to the

validity of a transfer like Ex. A in the present case, to which owing to its date Sections 36 and 37 cannot be applied.

It can serve no useful purpose to repeat my learned brother''s treatment of the English and Indian authorities on this question. For the English

Courts were interpreting provisions in successive Acts, with which nothing in the Indian Law applicable to the present case corresponds ; and it is

therefore inconclusive that in Ex parte Cohen : In re Sparke (1871) 7 Ch. Ap. 20 , the power of the insolvency Court to adjudicate on a secured

creditor''s transfer was sustained, that decision having (as I understand it) been in no degree discredited by the subsequent very generally

expressed statement in Ellis v. Silber (1872) 2 Ch. Ap. 83, to which my learned brother has referred to, of the principle to be followed. The Indian

authorities also are indecisive, because it does not appear that any is based on comprehensive argument and some at least are consistent with the

view that the insolvency Court has power to enquire into the validity of all transfers, the question having been only whether it had in the particular

case exercised a proper discretion in doing so or refusing to do so. In these circumstances I can add nothing to my conclusion in The Official

Receiver of Tinnevelly v. Sankaralinga Mudaliar ILR (1920) M. 524 already referred to, except that there the general power of the Court was

exerciseable u/s 18, whilst here it is u/s 24, and that accordingly the Court''s power to enquire into the validity of a secured debt exists

independently of Sections 36 and 37, those Sections being, as they were there referred to, only rules of evidence or, as my learned brother puts it,

special rules of substantive law applicable to particular kinds of transfer by the insolvent.

Taking this view, I concur in setting aside the lower appellate Court''s order and, as I agree with my learned brother''s criticisms on the District

Munsif''s disposal, also in the remand he proposes. But I cannot part with the case without observing that much of the time taken over its disposal

might have been saved, if the latter Court had made an attempt to appreciate and adhere to the proper course of insolvency procedure. It is

unnecessary to refer again to the points noticed in my learned brother''s judgment : but I add that, although the present appellant, the 19th creditor,

was, as we have ascertained, appointed receiver on 23-7-1918, he has never been impleaded in these proceedings in that capacity and was

allowed to take the very questionable course of selling the property, the subject of Ex. A whilst the validity of that document was still in dispute. It

is fortunate that although according to the record what is described as a final dividend has been distributed, the proceeds of the sale have been

retained in Court and are, we are told, sufficient to satisfy any claim which can be made under Ex. A.

Venkatasubba Rao, J.

The District Munsif of Kavali in the exercise of his insolvency jurisdiction expunged the debt alleged to be due to Veera Reddi, the respondent

before us, from the schedule of the insolvent''s creditors.

About 4 years previous to the date of the adjudication the insolvent had executed a deed of mortgage in favour of the respondent, and the order

of the District Munsif was made on an objection raised by several of the other creditors to the validity of the transaction evidenced by the said

instrument. On appeal the District Judge held that the insolvency Court had no jurisdiction to set aside the deed of mortgage on the ground that

Section 36 of the Provincial Insolvency Act III of 1907, has no application in the case of transfers beyond two years of the adjudication. One of

the creditors has filed this Civil Revision Petition questioning the correctness of the order of the District Judge.

The arguments covered a wide ground, and the question that was raised was whether the insolvency Court has jurisdiction under the Provincial

Insolvency Act III of 1907 to adjudicate upon claims of third parties as against the insolvent or his estate represented by the receiver. I must state

at once that, in my opinion, this question does not arise at all in the present case, and that the matter before us can be decided on a ground very

different from the one stated.

On the general question argued, there has been a great divergence of judicial opinion. In Narasimhaya v. Veeraghavalu ILR (1917) M. 440, a

purchaser from receiver who had been obstructed by a third party applied to the insolvency Court, and it was held that the Court had no

jurisdiction to decide questions of title. Abdur Rahim, J. makes the following observations ""* * * * * * * * * * * * It would be going much too far

to say that a Judge in insolvency in the mufussal has powers by a summary proceeding to decide questions of title with respect to property which is

claimed by third persons."" In Maddipoli Peramma v. Gandarapu Krishnayya (1918) 8 L.W. 136, the learned Judges held that an order passed by

the insolvency Court on the application of the purchaser from the official receiver directing a third party to deliver possession of the property

purchased, to the applicant, was without jurisdiction. Bakewell, J. expressed the view that the power conferred by Section 18(3) was not intended

to provide for the determination of questions of title as between the insolvent and third parties; whereas Krishnan J., was of the opinion that the

insolvency Court has jurisdiction in a proper proceeding instituted by the receiver to enquire into and decide on the merits of an adverse claim set

up by a stranger. It must be observed however that the observations of Krishnan J, were obiter.

In The Official Receiver Tinnevelly v. Sankaralinga Mudaliar ILR (1920) M. 524, the question that arose was of a very different character.

After the receiver had been appointed for the estate of an insolvent, the latter''s properties were sold in auction by a District Munsif''s Court in

execution of a decree for money passed by the latter Court prior to the order of adjudication, It was held that the insolvency Court was competent

on the application of the receiver to annul the sale and direct delivery of possession to the Receiver. The sale was held after the date of

adjudication, but the receiver was not a party to the proceedings, and the ground of the decision seems to be that a dealing with the property which

had vested in the receiver without notice to him was unauthorised and that u/s 18(3) the Court was competent to direct delivery of possession of

the property to the receiver on his application.

On the general question of the power of the insolvency Court to decide claims of or against a third party, the judgments contain some

observations and the dictum, especially of Seshagiri Aiyar J, ""I am of opinion that Section 4 declares what has been the law all through,"" was

strongly pressed upon us, but the observations were not necessary for the determination of the question before the Court and the decision cannot

be said to be authority either way.

In Ramaswami Chettiar v. Ramaswami Iyengar 42 M.L.J. 185 on facts similar to those that existed in The official Receiver, Tinnevelly v.

Sankaralinga Mudaliar I.L.R.(1920) M. 524 and Meddipoli Peramma v. Gandara for Krishnayya (1918) 8 L.W. 136 it was held that the

Insolvency Court had jurisdiction to deal with claims of third parties, but it was a decision undr the Provincial Insolvency Act of 1920.

Turning to the case decided by the Calcutta High Court we have first Satya Kumar Mukherjee v. The Manager Benares Bank Ltd. (1917) 22

C.W.N. 700. I understand the effect of this decision to be that the question of title can be decided only in a regular suit and not in insolvency. I

may however state that there is a passage in the judgment which may lend support to the argument that the learned Judges did not decide that the

Insolvency Court had no jurisdiction, but merely held that it had a discretion and that the proper exercise of the discretion would be to refer the

parties to a regular suit. The passage to which I refer is this : ""If the question of title is seriously in dispute we state for the information of the Judge

that we think he should direct the receiver to bring a suit to have the question determined."" In Nilmoni Choudhury v. Durga Charan Chowdhury

(1917) 22 C.W.N. 704, the transfer having been admitted not to be within two years of the adjudication, it was held that Section 18(3) did not

authorize the removal of a person whom the insolvent could not remove without the aid of legal proceedings. Again I must add that the observation

in the judgment ""if the veil is transparent the Court may order the delivery of the property to the receiver"" impairs the value of this decision and in

this respect this case bears a strong resemblance to the case already referred to, Satya Kumar Mukherjee v. The Manager, Benares Bank, Ltd.

(1917) 22 C.W.N. 700.

Joy Chandra Das v. Mahomed Amir (1917) 22 C.W.N. 702 is more direct on the point. A creditor alleged that the insolvent''s wife was

merely a benamidar for the insolvent, and the question was whether the insolvency Court had jurisdiction to summon the insolvent''s wife to

examine her and direct her to transfer to the receiver the property which stood in her name if the property was proved to belong to the insolvent. It

was held that the insolvency Court had no power to adjudicate upon the title of the third party under the provisions of the Provincial Insol vency

Act III of 1907.

To the same effect was the decision of another Bench of the Calcutta High Court in Amina Khatun v. Nafar Chandra Pal Chowdhury (1917)

45 I.C. 180.

Gaurab v. Nawab Mohammad Abdul Majid (1921) 64 I.C. 523 is a decision of the Allahabad High Court but it contains only a non-commttal

statement, and it cannot be regarded as an authority on the subject.

Bansidhar v. Kharagjit ILR (1916) All. 65 decided that the insolvency Court had jurisdiction to adjudicate upon claims against third parties.

On a review of these decisions it seems to me that the preponderance of authority is in favour of holding that under Act III of 1907 the Court

in the exercise of its insolvency jurisdiction cannot decide questions relating to adverse claims by or against third parties.

In my opinion, however, as I observed at the outset, the case before us can be decided with reference to altogether different considerations.

Section 16(5) of Act III of 1907 saves the rights of secured creditors, but the Court has in certain circumstances to decide questions in relation to

secured creditors in the course of its administration of the insolvent''s property. Section 21(c) is an instance in point. Section 24 deals with proof of

debts, and Section 28 enumerates the debts which are provable in insolvency. Secured debts are not excluded. Section 31 relates to proof of

debts due to secured creditors. It will be seen from the sections to which I have adverted that secured creditor may tender proof of his debt

subject to certain conditions and limitations. Section 26 empowers the Court when a debt has been improperly entered in the schedule to expunge

the debt in its entirety or reduce the amount of the debt. The power is expressed in general terms and no distinction is drawn between debts

unsecured and debts secured. The Court has to prepare a schedule of creditors, which may be amended from time to time and this function cannot

be properly or adequately performed unless the Court has equal power to deal with secured as well as unsecured debts. To a proceeding

appropriate to this enquiry the parties are not a person subject to the insolvency Court and a stranger. On the other hand, the secured creditor

whose debt is attacked is as much subject to the jurisdiction of the insolvency Court as any other creditor, the receiver or the insolvent. The

authorities to which reference has been made deal with claims as between the insolvent''s estate and third parties, but the Respondent before us is

not a third party. On the contrary, he alleges himself to be a creditor and it is impossible to frame a proper schedule without determining the

existence of his debt and the extent of it.

In Ellis v. Silber (1872) 8 Ch. Ap. 83, the distinction I have indicated is clearly set forth in the following passage in the judgment of Lord

Selbourne L.C. The passage is at 86. ""That which is to be done in bankruptcy is the administration in bankruptcy. The debtor and the creditors, as

the parties to the administration in bankruptcy, are subject to that jurisdiction. The trustees or assignees, as the persons intrusted with that

administration, are subject to that jurisdiction. The assets which come to their hands and the mode of administering them are subject to that

jurisdiction; and there may be, and I believe are, some special classes of transactions which, under special clauses of the Acts of Parliament, may

be specially dealt with as regards third parties. But the general proposition, that whenever the assignees or trustees in bankruptcy or the trustees

under such deeds as these have a demand at law or in equity as against a stranger to the bankruptcy, then that demand is to be prosecuted in the

Court of Bankruptcy, appears to me to be a proposition entirely without the warrant of anything in the Acts of Parliament, and wholly unsupported

by any trace or vestige whatever of authority.

In this connection I may refer to Khushhali Ram v. Bhola Mai ILR (1915) All 252. It was held that when a creditor of the insolvent challenged

the validity of a debt set up by another creditor, the judge was bound to enquire into the truth of the allegation in insolvency and the parties should

not be referred to a regular suit. The case would be exceedingly valuable as an authority but for the fact that the mortgage deed which was

questioned was within two years of the adjudication and the decision could therefore be founded on the express terms of Section 36 of the

Provincial Insolvency Act, but the observation at page 253 ""Whether the application is to be regarded as one asking for the removal of the name of

Bholar Mal from the schedule of creditors, or as one falling under the provisions of Section 36 of the Provincial Insolvency Act (III of 1907), the

matter was one which required investigation"" and certain other similar observations to the same effect at page 254 lend support to the view I am

inclined to take.

I am therefore of the opinion that the insolvency Court had jurisdiction to record a finding as to the existence of the debt alleged to be due to

the Respondent.

But then-it is argued that Sections 36 and 37 confer a limited jurisdiction upon the insolvency Courts and that to hold that the Court possesses

the power in question will be inconsistent with the assumption involved in the said provisions. In my opinion, these two sections enact special rules

of substantive law to be followed by the Courts in the exercise of insolvency jurisdiction. The law enunciated in the said sections is not a part of the

general law and is to be applied only in cases which come up before the tribunals exercising powers conferred by the Insolvency Act. A

comparison of the terms of Section 53 of the Transfer of Property Act with the terms of Section 36 of the Provincial Insolvency, Act III of 1907,

will make the point, clear. A settlement made by a person whose solvency is be yond question, but who, owing to unforeseen circumstances,

becomes an insolvent within two years of the date of the settlement, cannot be set aside under the general law which is contained in Section 53 of

the Transfer of Property Act. But it can be annulled u/s 36 of the Provincial Insolvency Act. I have said that Sections 36 and 37 enact rules of

substantive law for the insolvency Courts. Looking at the sections from a slightly different point of view, they may, in my opinion, be described as

laying down rules of evidence. Wherever a voluntary transfer or a preference of a creditor on the one hand and adjudication of the transferor or the

debtor on the other hand, are brought into contiguity, the law peremptorily requires a certain inference to be made, enquiry is altogether excluded

and the inference will not be allowed to be displaced by any contrary proof however strong. The insolvency Courts shall presume that the transfer

was made or preference shown by the insolvent with the intent to defeat his creditors. The presumption to be made is absolute or irrebuttable like

the. presumption contained in Section 112 of the. Indian Evidence Act as to the paternity of a child whose parents had access to each other.

In this view, Sections 36 and 37 do not deal with the jurisdiction of the insolvency Courts, and if on a reference to other sections of the Act the

Courts are found to possess certain powers, the jurisdiction is not affected by anything contained in the two sections above referred to.

Here I must turn to the unfortunate course the proceedings took before the District Munsif. The insolvency petition was presented by the

debtor. His adjudication was opposed by several creditors and they filed what are described as counter-petitions. Some of the creditors objected

that the amount due to the respondent (secured creditor) was considerably less than what was alleged by the insolvent to be due to him. Others

took a different line and made an allegation which is very indistinct in character but which is practically tantamount to an attack on the genuineness

of the mortgage transaction. Although one of the creditors had by then been appointed a receiver, he in that capacity took no action to question the

debt. The District Munsif however proceeded to enquire into the existence or otherwise of the debt upon the petition and the counter-petitions

before him thus adopting a course which has been condemned in Appireddi v. Appireddi ILR (1922) M. 189. In his judgment he states that the

only point to be considered was whether the deed of mortgage was supported by consideration. He is alive to the fact that Section 36 had no

application because the transfer was made about 4 years previous to the date of adjudication. Still having recorded a bare finding that the deed

was not supported by consideration he directed that the name of the respondent should be deleted from the list of creditors. This course was

obviously wrong. The mere fact that a transfer is voluntary will not justify the insolvency Court in setting aside the transfer. The District Munsif has

not found that the mortgage amounted to a fraudulent transfer u/s 55 of the Transfer of Property Act. He has not found that the transaction was

fictitious or was a mere pretence and there was no intention to transfer; that is to say, that there was in effect no transfer at all, in other words, that

the transferee was a mere benamidar for the transferor.

It is argued before us that there is a distinction between a transfer intended to defeat creditors and ""a sham transfer so intended,"" and reliance

was placed on Sivaminatha Aiyar v. Rukmani Ammal (1920) 11 L.W. 106. I do not feel myself called upon to express my view of this ruling

because in the present case it is immaterial whether the transfer is merely declared fictitious or an order is made annulling it. In either event the

effect will be to refuse recognition to the debt evidenced by the transfer. It was the duty of the District Munsif to have directed his attention to this

aspect of the case and then only to have pronounced upon the validity or otherwise of the transaction in question. While disagreeing with the

District Judge in his view that the insolvency Court had no jurisdiction to deal with the question, I cannot however owing to the irregular and

defective trial before the District Munsif, restore the order of the latter. He must be directed to frame proper issues and after giving the parties an

opportunity to let in evidence, adjudicate upon the question which has been raised.

Costs will be costs in the cause and will be provided for in the order to be made by the District Munsif.