(Firm) Baijnath Rameshwar Lal vs Atal Prasad Kumar and Others

Mohamad Noor, J.—This is an appeal against an order of the District Judge of Bhagalpur dismissing an insolvency petition of the appellant, one of the creditors of the respondents who are ten in number and are members of the same family. The learned District Judge has refused to pass the order of adjudication. The ground on which the petition was pressed before the learned District Judge was that the respondents have made some transfer of their properties for inadequate consideration with a view to defeat or delay the creditors. The respondents objected to their being adjudged insolvents, denied the allegation of the petitioner and contended that they were not members of a joint family but were separate. The learned District Judge examined the transactions relied on by the petitioner, and has held that they were bona fide transfers for sufficient consideration. The petitioner has preferred this appeal. In my opinion the proceeding in the lower Court was not conducted according to the provisions of law which govern this case. Neither of the parties, nor unfortunately the learned District Judge, realised the correct position. Section 7, Provincial Insolvency Act, authorizes either the debtor or any of his creditors under some restrictions to apply for an order of adjudication. Section 9 places (restrictions upon the creditor when he applies for such an order. They are three:

(1) That the debt due to the creditor or to the creditors, if there are more than one, should be not less than Rs. 500; (2) that the debt be a liquidated sum payable either immediately or at some certain future time; and (3) that the act of insolvency on which the petition is grounded was committed within three months of the presentation of the petition.

Acts of insolvency are described in Section 6 of the Act. Clauses (b) and (c) of that section, which are relevant for the purposes of the present appeal, are these:

(b) If in British India or elsewhere, he (the debtor) makes any transfer of his property, or any part thereof with intent to defeat or delay his creditors; (c) if in British India or elsewhere he (the debtor) makes any transfer of his property., or any part thereof, which would, under this or any other enactment for the time being in force, be void as a fraudulent preference if he were adjudged an insolvent.

It will be noticed that these two subsections refer to any transfer. The question of inadequacy or otherwise of the consideration is not an element of the transfer which constitutes an act of insolvency. It seems that perhaps the parties and the learned District Judge had in their minds Section 53, Insolvency Act, which makes certain transfers made within two years of the presentation of the petition for adjudication voidable as against the receiver and liable to be annulled by the Court. In that case inadequacy of consideration or the bona fide nature of the transaction are matters which have to be gone into; but for the purpose of adjudication whether the case comes under Clause (b) or Clause (c) it is not necessary that the transfers should be for inadequate consideration. If a man who is heavily in debt begins to dispose of his properties with intent to defeat or delay his creditors, or being unable to pay his debts, transfers them to one or more of his creditors with a view to give him or them fraudulent preference, he commits acts of insolvency, though he may have transferred the properties for a very adequate consideration or for consideration much higher than the value of the properties. In order to find out what preference is liable to be held fraudulent if the debtor is adjudged insolvent, one has to examine the provisions of Section 54, Provincial Insolvency Act, which runs thus:

Every transfer of property ... 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.

This provision is subject to the right of some third party who in good faith and for valuable consideration has acquired a title in the property so transferred from the creditor to whom the transfer was made. Therefore in order to make Clause (b), Section 6, applicable it has only to be shown that the debtor transferred his properties with intent to defeat or delay his creditors and in order to make Clause (c) applicable it has to be shown (1) that there was a transfer of property in favour of a creditor or creditors; (2) that the debtor was unable to pay his debts when he made the transfer; (3) that the transfer was with a view to give a creditor or creditors preference; and (4) that the transfer was within three months of the date of the presentation of the petition. In this case two or perhaps three transfers were in favour of the creditors and all of them were within three months of the date of the presentation of the petition. They are these (1): sale deed in favour of Ambica Prasad Chaudhary dated 21st December 1932; (2) sale deed dated 20th January 1933 in favour of Shibnath Marwari; and (3) perpetual lease dated 21st February 1933 in favour of Chhabu Mandar. We are told that there were certain usufructuary mortgages in favour of other creditors executed within three months of the presentation of the petition; but they do not seem to have been examined by the learned District Judge because the petitioners, under a wrong impression that inadequacy of consideration is an essential factor to be gone into in order to determine whether a transfer comes within the mischief of Section 54, did not press them for his consideration.

Now if these transactions are admitted, and three of them, which I have enumerated above, were admittedly in favour of the creditor, the only questions which arose for the consideration of the learned District Judge were: (1) whether at the time of these transactions the opposite party respondents were or were not in a position to pay their debts; and (2) whether these transfers were with a view to give preference to those creditors. Now "intent to defeat or delay the creditors" or having a "view to give preference to a creditor" are, as has been pointed out by the learned advocate appearing on behalf of the respondents, mental acts and can only be determined if one looks into the surrounding circumstances. If a man who is in serious pecuniary difficulties, his debts surpassing his assets, transfers a considerable portion of his properties or transfers properties in favour of some of the creditors having made no provision for the payment of debts due to others, perhaps a Court may come to the conclusion that the transfers were made with intent to defeat or delay the creditors or with a view to give preference to a particular creditor.

Unfortunately, as I have said, this case was not approached with due regard to the law on the subject and the most important facts necessary for its determination were left out of consideration altogether, namely, the financial condition of the debtors and their ability or otherwise to pay their debts when the transfers complained of were made. The other consideration, namely, the transfers being for inadequate consideration, as I have already pointed out, can properly arise after and if the order of adjudication is made and proceedings for annulling the transfer are taken at the instance of the receiver or the creditors. As important facts necessary for deciding whether an order of adjudication should or should not be made have not been determined by the Court below, the only course left open to us is to remand the case for a rehearing. The points to be decided will be: (1) whether or not at the time of the transfers the respondents were able to pay their debts, (2) whether they were transfers with intent to defeat or delay the creditors, and (3) whether the transfers made in favour of the creditors within three months of the date of the presentation of the petition were with a view to give them preference. After determining these points the learned District Judge will dispose of the case according to law. The parties will be at liberty to adduce additional evidence bearing op the points indicated above.

The findings of the learned District Judge about the bona fide nature of the transfers and the adequacy of their consideration are set aside. These matter will be gone into if and when proceedings are taken after an order of adjudication. One thing more, and it is this. The petitioner alleged that the opposite parties were members of a joint Hindu family. It was stated by the respondents that they were separate. The debts are said to be joint. The question of their being joint or separate is not therefore of any material importance; but as difficulties may arise in future, a clear finding in this respect should be arrived at before the passing of an order of adjudication, if such order be passed. The case is remanded for rehearing on the aforesaid lines. As the situation has arisen on account of the fault of the parties themselves, I would direct that they bear their own costs in this Court.

Madan, J.

I agree.