Gollamudi Venkatappayya vs Official Receiver and Others

Kuppuswami Ayyar, J.—This is an appeal by a person who purchased the properties of an insolvent under a sale deed executed subsequent

to the filing of the petition to adjudge him an insolvent and prior to the passing of the order of adjudication, against the order on a petition filed u/s

1, Provincial Insolvency Act, for a declaration that he has a valid title to them. The properties which he purchased as well as other properties were

brought for sale in execution of a decree obtained against the insolvent debtor before the petition to adjudge him an insolvent was filed. They were

all sold in execution, but during the pendency of the insolvency proceedings, the debtor by selling the properties in dispute to the appellant for Rs.

1750 and by selling other properties for Rs. 4250 or so to another person, raised Rs. 6000 and directed the same to be paid into Court for getting

the court sale set aside. The money was accordingly deposited by the appellant and the other purchaser and the sale was set aside. This was on

20th January 1935. Fifteen days later the order of adjudication was passed. Even before the appellant deposited the money into the executing

Court, the insolvency Court was moved by a creditor to stop the sale in execution of that decree, but the insolvency Court passed an order

directing the executing Court to proceed with the sale and deposit the sale proceeds to the credit of the insolvency petition. Accordingly the money

paid by the appellant for setting aside the sale was credited to the insolvency proceedings. The Official Receiver applied to the insolvency Court

for payment of the amount to him on the ground that the money belonged to the insolvent and that all the creditors were entitled to a share in it. It

was stated then by the Official Receiver that the sale to the petitioner was for a fair price and that it was out of the sale proceeds the amount due

under the decree was deposited into Court to avert the court sale. The insolvency Court overruling the objection of the decree-holder that he was

entitled to be paid the entire amount directed the payment of the money to the Official Receiver and he received the amount for distribution to the

general body of creditors. Subsequently after having had the sale proceeds paid over to him, the Official Receiver claimed a right to the properties

as well and sold some of them at an auction sale held by him.

The appellant before this Court thereupon filed a petition out of which this appeal arises for a declaration that he is entitled to the properties. The

first Court held that inasmuch as the appellant had notice of the insolvency proceedings before the date of the sale itself, the sale was not valid and

that he had hence no valid title to the properties. On appeal, the learned District Judge of Guntur held that the sale was supported by consideration

and that the sale was for the purpose of saving the properties of the debtor from being sold in execution of the decree, but held that it was invalid in

view of the fact that the appellant had notice of the insolvency proceedings before the date of the sale itself. The appellant''s claim accordingly was

disallowed by both the Courts. Hence this appeal. Before this Court it is stated that even though the appellant had notice, in view of the fact that

the Official Receiver applied for payment of the money to him on the ground that it was the money of the insolvent and elected to stand by the sale

and received the sale proceeds, he cannot now go behind his election and claim a right to the properties. It is stated by both sides that there are no

authorities of this Court on this point. As it is an important question of law, the papers may be placed before my Lord the Chief Justice for

considering whether the appeal may be posted before a Bench.

Judgment of Division Bench

Leach, C.J.

This appeal discloses a position of hardship, but after a careful consideration of all the facts we have come to the conclusion that the order of the

District Judge must be affirmed.

On 25th November 1933, a creditor applied in the Court of the Subordinate Judge of Tenali for the adjudication in insolvency of respondent 2.

In O.S. No. 23 of 1933 of the Court of the Subordinate Judge of Bapatla another creditor had obtained a decree against respondent 2 for the

payment of a sum of about Rs. 5000 and on 22nd November 1933 the decree-holder applied for the execution of his decree by the sale of the

immovable properties belonging to the judgment-debtor. The properties were attached and the sale was fixed for 2lst December 1934. On 13th of

that month certain creditors of respondent 2 applied in the insolvency proceedings for an order appointing an interim receiver and this application

was granted. The decree-holder appealed to the District Judge, who on 20th December 1934 discharged the order. He allowed the sale to

proceed but directed that the sale proceeds should be held by the executing Court subject to the orders of the insolvency Court. The sale was held

on the day fixed and all the properties were sold. The prices realised were, however, very unsatisfactory. On 9th January 1935 the judgment-

debtor sold one of the properties to the appellant for the sum of Rs. 1750 and another property to a third party for the sum of Rs. 4250. On 21st

January 1935, out of the total sum of Rs. 6000 obtained from these sales, the judgment-debtor deposited Rs. 5532-3-0 into the executing Court

under Order 21, Rule 89, Civil P.C. This sum was sufficient to comply with the provisions of the section and accordingly an order was passed

setting aside the sales. On 5th February 1935 the judgment-debtor was adjudicated insolvent on the petition which had been filed on 25th

November 1933. On 5th April 1935 the decree-holder withdrew from Court the Rs. 5532-3-0; but when the Official Receiver discovered this, he

filed an application in the insolvency proceedings for an order directing the decree-holder to repay the amount into Court. He contended that the

money was that of the insolvent and the decree-holder was only entitled to share rateably with the other creditors. His application was allowed.

The decree-holder appealed to the District Judge without success, and an application filed in this Court in revision was also dismissed.

On 9th May 1935 the Official Receiver purported to sell to respondent 3 the property which the appellant had bought from the judgment-

debtor on 9th January 1935. This sale was subject to confirmation by the insolvency Court. On 12th July 1935 the appellant filed an application

with the object of obtaining an order declaring his title to this property. This application purported to be under Sections 4, 5 and 55, Provincial

Insolvency Act. The Subordinate Judge held that the appellant had notice of the presentation of the insolvency petition at the time when he

purported to buy the property from the insolvent and therefore was not protected by Section 55. On appeal the District Judge concurred in this

decision, but directed that the appellant should be allowed to prove his claim in insolvency and share in the distribution of the assets. This appeal is

from the order of the District Judge.

Mr. B. V. Ramanarasu, on behalf of the appellant, has contended that the Official Receiver wishes to avoid a transaction of which he has had

the benefit and has adopted. He says that the judgments in Brewer v. Sparro (1837) 7 B. & C. 310 and Smith v. Baker (1873) 8 C.P. 350 show

that he cannot do this. We are unable to accept the argument. The money which the insolvent paid into Court on 21st January 1935 in order to

have the sales in execution set aside was his own money. He had certainly obtained it by sales which offended against the law of insolvency, but the

money had been paid to him on the execution of the registered instruments of sale and when he deposited it in Court it belonged to him. It is said

that the Official Receiver obtained benefit by the payment into Court because the prices realised were far below the true values of the properties

and if the two properties had not been sold by the judgment-debtor the sales could not have been set aside. This is true, but this does not mean

that the transactions were binding on the Official Receiver or that he adopted them. The allegation that the Official Receiver made these sales his

own is based on the fact that he referred to them in his application for an order directing the decree-holder to repay the money into Court. This

does not bring the case within the principle relied upon on behalf of the appellant. The sale to the appellant conferred no title upon him and because

the Official Receiver may have been pleased by what had happened it does not mean that he adopted the sale to the appellant. The fact that he

sold the property to respondent 3 on 9th May 1935 shows that he had not adopted it.

That the appellant obtained no title to the property is quite clear. Section 28 (7), Provincial Insolvency Act, says that an order of adjudication

shall relate back to, and take effect from, the date of the presentation of the petition and therefore all the properties which the insolvent had on 25th

November 1933 vested in the Official Receiver. These properties included the property sold to the appellant on 9th January 1935. The appellant

cannot claim protection u/s 55 because he knew that the insolvency petition was pending when he agreed to buy the property from the insolvent. It

has been suggested on behalf of the appellant that the transaction must stand until it is set aside. It is not necessary to go into the question whether it

was incumbent upon the Official Receiver to apply u/s 1 for an order declaring that the transaction conferred no title, because the question of the

validity of the title conferred on the appellant has been raised by the appellant himself in these proceedings and he can only have his petition granted

if he can show that he obtained a legal title, and that he certainly cannot do. In these circumstances his petition was rightly dismissed and the appeal

must be dismissed. The appellant will, of course, be entitled to prove in the insolvency proceedings for Rs. 1750 the amount which he paid for the

property. The appellant must pay the costs of the respondents, one set.