Dwarka Prasad vs Dharamnath Sah and Others

Wort, J.—This is an appeal, from the order of the Additional District Judge of Chapra made on 6th September 1938, dismissing a creditor''s petition to declare one Dharamnath Sah an insolvent. It appears that Dharamnath Sah was the debtor of Narayan Prasad, the father of the petitioner before us, who is now dead and who filed the petition in the Court below with the result I have stated. The petition in the Court below was opposed by one other creditor who has been described in these proceedings as the transferee. By a deed of sale, dated 7th September 1937, certain properties were transferred to the transferee for a consideration of Rs. 1500. On the same day, there was an assignment of a usufructuary mortgage for a consideration of Rs. 1880. It was contended by the petitioning creditor in the Court below that it was the transfer of the whole of the judgment-debtor''s property and that it was a fraudulent preference within the meaning of Section 54, Provincial Insolvency Act.

I should state that the petitioning creditor rested his petition on these transfers as being acts of insolvency u/s 6(c) read with Section 54, Provincial Insolvency Act. It would appear from the case which has been argued before us and from the order sheet in the Court below that the case in its initial state was based upon the act of insolvency contemplated by Clause (b) of Section 6 but at a later stage the petitioner relied upon Clause (c) of that Section. The learned Judge in the Court below has come to the conclusion, as a reason for dismissing the petition of the creditor, that even after the transfers on 7th September 1937, the debtor had more than sufficient property to pay his debts. It appears that only two known creditors of the debtor were the present appellant and the respondent and that the property remaining after the transfers to which I have referred was more than sufficient to pay the debts of the petitioner.

It was on 8th April 1937, that the transferee, who is a respondent before us, obtained a decree for the sum of Rs. 847-5-0 and again on 2nd August of the same year he obtained a mortgage decree valued at Rs. 2520-10-6. The appellant on the other hand obtained a Small Cause Court decree on 13th August 1937, for the sum of Rs. 504-14-6. With regard to these debts or the petitioner''s portion thereof, the learned Judge in the Court below was of the opinion that the property left over after the transfers was sufficient to pay off the same.

Mr. Rai, the learned advocate for the appellant at first argued that the debtor had transferred the whole of his properties. He also argued that, on a proper construction of Section 54, Insolvency Act, it was sufficient for him to show that by the transfer itself the debtor was reduced to the condition of being unable to pay his debts. In my judgment the contention of the appellant cannot possibly be supported on a plain reading of the Section. Section 54 of the Act provides:

Every transfer of property, every payment made, every obligation incurred, etc, etc, by any person unable to pay his debts as they become due from his own money in favour of any creditor, with a. view of giving that creditor a preference over the other creditors, shall, if such person is adjudged insolvent on a petition presented within three months after the date thereof, be deemed fraudulent and void as against the receiver, and shall be annulled by the Court.

That it was necessary for the petitioner in this case to have established that the debtor was unable to pay his debts at the time when he executed the transfers, there could be no doubt. Section 44, Bankruptcy Act, in England is in almost the precise words of Section 54, Provincial Insolvency Act. They have been construed on many occasions, and it would perhaps be convenient to refer to the words of the Master of the Rolls In re Cohan (1924) 2 Ch D 615 for the purpose of a concise statement of what is necessary to be proved in circumstances such as the present:

The conditions which Section 44 requires are plain. First that the payment is made by a person unable to pay his debts as they become due from his own money. Secondly, that it in fact prefers one creditor over others. Thirdly, that the dominant motive with which the payment was made was a desire to prefer that creditor to whom the payment was made.

The answer to the appellant''s case is first, (although the learned Judge does not deal precisely with the first point) that there was more than sufficient to pay the debts of the debtor, and therefore he could not be described as a person who was unable to pay his debts. Secondly, that there was no reason for the debtor to prefer the transferee to his other creditor (the appellant). And if that is a correct reasoning, it necessarily follows that it could not be said that the dominant motive of the debtor was to prefer the transferee to his other creditor.

Now, during the course of the argument Mr. Rai (as I understood his case) abandoned very largely the argument which he had addressed to us in his opening and it came to a question in the result whether the learned Judge in the Court below was right in coming to the conclusion that the debtor had sufficient money to pay all his creditors. I propose only to refer to certain facts very briefly. Mr. Rai contended that one of the difficulties under which his client (the appellant) was working in the Court below was the fact that the evidence upon which the learned Judge in the Court below relied for the purpose of determining the question to which I have just referred, was produced at a late stage and that he was unable therefore to meet the case of the respondents.

The learned Judge came to the conclusion that the debtor had sufficient property on the footing of a decree of March 1937 in a partition suit, under which the judgment-debtor was entitled to Rupees 1467 odd in cash, hand-notes of the value of Rs. 969. Mr. Rai''s argument was this that there was no evidence on the part of transferee to show that these debts owing to the debtor were still subsisting. With regard to this I would make one statement, and that is that even supposing that this partition decree was produced at a late stage of the proceedings and after the first argument in the case had been concluded (which I believe is not a fact as my learned brother pointed out during the course of the argument), it seems to me that the appellant took no steps to have an opportunity of meeting the case which the partition decree disclosed. In my judgment, it was clearly for him to show that the decree of March 1937, was not available to the judgment, debtor.

It must be remembered that if the decree was subsisting, there is no reason why the present appellant should not have attached it and by that means paid off the debt owing to him by the debtor. I would dispose of this case by stating that in my judgment the appellant has not proved that the debtor was unable to pay his debts; he has not established any fact which would entitle us to come to the conclusion that the debtor intended to prefer the transferee, the mere fact of the transfers to the transferee being insufficient; and he certainly has not established that the dominant motive of the debtor was to prefer the transferee amongst his creditors.

There is one matter to which I would like to refer and that is a question which was briefly referred to by Mr. Rai in his reply, namely the question of pressure. It was contended, as I understood the argument, that the mere fact that the transferee had a decree out against the debtor was not sufficient to make the transfer anything but a voluntary act. In this connexion I would refer to the decision of the House of Lords in the leading case in Sharp v. Jackson (1899) AC 419 . The Lord Chancellor in delivering one of the judgments of their Lordships, referred to the judgment of Lord Mansfield in Thomson v. Freeman (1986) 1 TR 155, and then made this observation:

My Lords, it seems to me that after that decision which, as I say, has now lasted more than a hundred years, and has never, so far as 1 know been controverted or qualified, it is idle to suggest that you must have an actual threat or the actual pressure of a creditor.

In my judgment the necessary matters which the appellant was under an obligation to establish in this case have not been established, and in my view the decision of the learned Judge in the Court below was right and must be affirmed and the appeal must be dismissed with costs.

Meredith, J.

I agree. In order to establish an act of insolvency u/s 6(b), it was necessary to prove that the transfers were made to defeat or delay the creditors. In order to prove an act of insolvency u/s 6(c), it was necessary to establish that the debtor had made transfers with a view to give some of the creditors preference over others (such being the dominant motive), and, secondly, that when he made these transfers, he was unable to pay his debts. The onus to prove these things was entirely on the appellant, and in my opinion, he did not succeed in establishing any one of the three. Indeed, with regard to the contention, that when he made the transfers, the debtor was unable to pay his debts, there was no evidence at all, nor was it even pleaded. I was at first impressed with the argument put forward for the appellant, that he was prejudiced by the fact that after the case had been argued, a partition decree was put in to show that the debtors still had property after the transfers, and that thereby the appellant was taken by surprise and was given no opportunity to rebut that evidence.

I find however that there was actually no laches on the part of the opposite party, and no case of prejudice at all. The appellant had ample notice of this partition decree. It was mentioned in the petition of rejoinder of the opposite party; a certified copy was put in at an early stage of the case, and the original was called for from the record-room and kept on the record. When the case was taken up for hearing, the pleader for the appellant opened it by saying that he was going to rely on Section 6(b), Insolvency Act, and evidence was led on this supposition. Now u/s 6(b), the question of the inability of the debtor to pay his debts is not directly relevant, though it would be relevant in considering the application of Section 6(c) which depends on Section 54. In these circumstances, it appears that the pleader for the opposite party did not ask that the partition decree should be formally marked as an exhibit though it had been actually on the record for a long time. Next day when the case came to be argued after the conclusion of the evidence, the pleader for the applicant stated that he proposed to rely, not on Section 6(b), but on Section 6(c).

The pleader for the opposite party then got up and said that in that case the question of the remaining property of the debtor was a material circumstance, and the partition decree which had been long on the record might therefore be marked. This was accordingly done. It does not appear that the appellant made any objection or made any application to adduce rebutting evidence. Further argument was of course allowed. I find, moreover, that the document was actually marked at that stage without any objection by the appellant, as the exhibit list shows. In these circumstances there is no substance whatever in the contention that the appellant was in any way prejudiced, and there is no case for a remand to give him the opportunity of adducing further evidence.