Govindaraja Gounder (Died) and Others vs Rani and Others

(1) The point that arises for decision in the two revision petitions relates to the scope and applicability of S. 35 of the Provincial Insolvency Act

(referred to herein as the Act).

(2) The brief facts are: One Govindaraju, hereinafter referred to as the petitioning-creditor, filed I.P. 11 of 1951 on the file of the Sub-Court,

Vellore, to adjudicate one Dhanappayhan, his wife Kamakshi and his son Srinivasan as insolvents on the ground that a sum of about Rs. 4,000

was due to Govindaraju under three promissory notes of the year 1948 executed in his favour by Srinivasan as well as a separate sum of Rs. 350

due under a promissory note executed in his favour by Srinivasan and his parents aforesaid in June 1951. The case of the petitioning-creditor was

that Srinivasan''s parents, Dhanappayan and Kamakshi, had guaranteed the liability of Rs. 4,000 of Srinivasan under the three promissory notes,

aforesaid, that Dhanappayan had executed a mortgage in favour of Sivakami Ammal on 25-7-1951 for Rs. 300, that he and his wife Kamakshi

had also executed a sale of all his properties to one Srinivasa Reddiar for a sum of Rs. 3,000 and that these alienations constituted acts of

insolvency. During the pendency of the insolvency proceedings. Dhanappayan died and his sons and daughters and his second wife and son

through the second wife, were impleaded as his legal representatives. At the same time the petitioning-creditor filed O.S. 166 of 1953 on the file of

the Sub-Court, Vellore, against Dhanappayan and his two wives and their children for recovery of a sum of Rs. 4780 due under the three

promissory notes executed by Srinivasan which were guaranteed by his parents under separate letters of guarantee passed by them in favour of the

petitioning-creditor. Both the insolvency petition as well as the suit were resisted by the members of the family of Dhanappayan on the ground that

Dhanappayan and his wife did not guarantee the debts of Srinivasan, and that the letters of guarantee relied upon by the petitioning-creditor,

purporting to bear the thumb impressions of Srinivasan''s parents, were forgeries.

(3) The learned Subordinate Judge (Mr. Sadasivam) on a careful consideration of the oral and documentary evidence, came to the clear

conclusion that Srinivasan''s parents did not pass any letters of guarantee and that it was not proved that those guarantee letters bore their thumb

impressions. It is unnecessary to refer in great detail to the reasonings and findings of the learned Subordinate Judge and it is sufficient to state that

he came to the clear conclusion, on overwhelming evidence, that the petitioning-creditor had not made out that Srinivasan''s parents stood

guarantee for the debts in question. In this connection it may be mentioned that the learned Subordinate Judge in particular adverted to the

important feature that in the insolvency petition filed by the petitioning-creditor, there was no reference to the alleged letters of guarantee. The result

was that the suit O.S. 166 of 1953 and I.P. 11 of 1951 were dismissed as the petitioning-creditor had not proved that Dhanappayan or Kamakshi

was indebted to him in the sum of Rs. 500.

(4) The petitioning-creditor, thereupon filed C.M.A. 4 of 1955 against the order dismissing I.P. 11 of 1951 and A.S. 33 of 1955 against the

dismissal of O.S. No. 166 of 1953. While the aforesaid appeals were pending, both the parties entered into a compromise on 17-6-1955 and

under that compromise, the members of the family agreed to be adjudged insolvents and the suit O.S. 166 of 1953 was decreed against them for

the entire amount claimed with full costs. It is significant to mention that this compromise was entered into even without reference to their counsel.

The result was that amongst other things, the estate of Dhanappayan became vested in the Official Receiver who thereupon filed a petition I.A. 49

of 1956 in I.P. 11 of 1951, to set aside the mortgage deed of 1951 executed by Dhanappayan in favour of Sivakami Ammal and the sale deed

executed by Dhanappayan in favour of Srinivasa Reddiar for Rs. 300.

The heirs of Sivakami Ammal, the mortgagee, in their turn filed I.A. 97 of 1956 in I.P. 11 of 1956 to annual the order of adjudication passed in

pursuance of the compromise dated 17-6-1955 (referred to earlier) on the ground that this compromise was brought about as a result of fraud and

collusion between the petitioning-creditor and the members of the family, solely with a view to defeat the claims of Sivakami, the mortgagee, and

that of Srinivasa Reddiar, the purchaser. The learned Subordinate Judge dismissed the petition filed by the Official Receiver and allowed the

petition filed by the heirs of the mortgagee holding that the compromise in question, which resulted in the adjudication of the members of the family

of Dhanappayan, was clearly vitiated by fraud and collusion. The learned Subordinate Judge therefore annulled the adjudication, exercising the

powers under S. 35 of the Insolvency Act. The defeated petitioning-creditor and the Official Receiver preferred appeals to the learned District

Judge, but without success. The petitioning-creditor and the Official Receiver have filed revision petitions against the order of the learned District

Judge.

(5) S. 35 of the Provincial Insolvency Act, amongst other things provides that where in the opinion of the court, a debtor ought not to have been

adjudged insolvent, or where it is proved to the satisfaction of the court that the debts of the insolvent have been paid in full, the court shall, on the

application of the debtor, or any other person interested, by order in writing, annul the adjudication. It is settled law that under S. 35 an

adjudication is liable to be annulled if the proceedings resulting in the adjudication are vitiated by fraud or collusion, or if it is proved that really no

debt existed and the adjudication was suffered by the debtor fraudulently admitting the existence of a debt. Indeed, the learned counsel for the

petitioner, did not controvert the legal position that if it was proved that there was fraud and collusion between the petitioning-creditor and the

insolvent, such fraud and collusion consisting in the petitioning-creditor relying upon a fictitious and false debt and the debtor admitting the existence

of such a debt, and the debtor was ultimately adjudged insolvent, such adjudication would be liable to be annulled. His contention however is that

when there is an order of adjudication based upon the consent of parties, the burden of proof is on the other side to establish the fraud and

collusion. He urged that apart from filing certain copies of earlier proceedings in O.S. 166 of 1953 and I.P. 11 of 1951, no other evidence has

been adduced and that certified copies of court proceedings are not sufficient to justify the inference of fraud and collusion. Lastly, learned counsel

urged that even if it should be held that the compromise entered into was vitiated by fraud and collusion, the result at the most can only be that the

appeals would be revived and will have to be disposed of on the merits and that straightway the mortgagee is not entitled to have the adjudication

annulled. On a consideration of all the aspects, I am unable to agree with the points raised by the learned counsel for the petitioner. It is true that

the order of adjudication of the insolvency court is a judgment in rem; but if fraud and collusion, as stated above, are made out, it is liable to be

annulled.

(6) Learned counsel for the respondents drew my attention to the statement of the law in Mullah''s Insolvency (2nd Edn.) para 335 at page 314 to

the effect that an adjudication is not conclusive against a transferee of an insolvent and that the latter can apply under S. 35 for annulment of the

adjudication. My attention was also drawn to the two cases. Anila Bala Debi v. Kanai Lal Daga, ILR 1948 Cal 131 and AIR 1948 385 (Nagpur)

. In ILR 1948 Cal 131, Mukherjea J. delivering the judgment on behalf of the Bench, stated the position thus:

So far as the first ground is concerned, it is perfectly true that, if a third party purchases a property belonging to the debtor pending any insolvency

proceeding, which ends in adjudication he cannot acquire any title against the receiver, whose title dates back to the date of presenting the

insolvency petition. But this presupposes that the order of adjudication is validly and properly made. If the order of adjudication itself is challenged

as a nullity, a purchaser of the property after the application for adjudication is presented can certainly maintain an application u/s 35 of the

Provincial Insolvency Act, and if he succeeds in proving that the order of adjudication ought not to have been made, he will be certainly a person

interested"" within the meaning of S. 35 of the Provincial Insolvency Act...... In this case, there is no finding arrived at by the court to the effect that

this condition has been fulfilled. The order of judication, as said above, is grounded entirely on the petition of compromise which was filed on

behalf of the petitioning-creditor and the debtor. It goes without saying that the proceeding in insolvency is a proceeding in rem which binds not

merely the parties to the proceeding but third parties as well. It is extremely doubtful whether an adjudication order can be made on the basis of

compromise at all. At the most, it can be said that the petition of compromise can be looked upon as withdrawal of objection by the debtor to the

application for insolvency presented by the creditor. On such petition being filed the proceeding can take the shape of ex parte proceeding, but

even then evidence must be adduced before the court, and the court must be satisfied upon such evidence that the conditions required by law for

adjudging a debtor insolvent were fulfilled in this particular case.

(7) In AIR 1948 385 (Nagpur) a purchaser from an insolvent filed an application under S. 35 to annul the adjudication on the ground that the act

of insolvency in question took place more than three months prior to the filing of the insolvency petition. The learned Judge on the facts found that

the petition for adjudication was filed more than three months after the alleged act of insolvency and that the purchaser (third party) was entitled to

apply for annulment of a person interested and aggrieved. Reference may also be made to the decision of the Full Bench of this court in

P.R.S.A.R. Periakaruppan Chettiar Vs. P.S.A.R.A.R. Arunachalam Chettiar and Others, . In that case, the act of insolvency relied upon, was

fraudulent preference and the debtor was adjudged insolvent without any opposition on his part. But alter on, in proceedings initiated under S. 54

of the Insolvency Act, it was found that the mortgage which was relied upon as an act of insolvency was not a fraudulent preference. Thereafter the

insolvent filed an application for annulment of the adjudication under S. 35 of the Act. The Full Bench held that the fact that in the initial stage the

debtor did not object to the order of adjudication was not a bar to his right to invoke S. 35 if it was proved that no act of insolvency had been

committed by him. Sir Lionel Leach, C. J. delivering judgment of the Full Bench followed the following observation of Charles J. in In re, Hester;

Ex parte Hester, (1889) 22 QBD 632:

Is it a case in which, if he had been adjudged bankrupt, the court would say that he ought not to have been so adjudged? These words are

undoubtedly very wide, and many grounds can be conceived upon which the court might come to the conclusion that a debtor ought not to have

been adjudged bankrupt. For example, if there was no sufficient petitioning creditor''s debt, or no act of bankruptcy, if it turned out that the

adjudication had been obtained for some sinister purpose, that is, some purpose foreign to the administration of bankruptcy law; all these are

grounds on which the court might be of opinion that the debtor ought not to have been adjudged bankrupt.

At page 449, the learned Chief Justice applied the principle of the decision in In re, Stanger. Ex parte Geisel, (1882) 22 Ch D 436 where it was

held that S. 10 of the Bankruptcy Act of 1869 had no application and that an adjudication could be annulled even after the time for appeal had

elapsed.

(8) Reference may also be made to the statement of fact in Mullah''s Insolvency at page 167 in para 161, where the learned author refers to the

decision in Ex parte Kibble, (1875) 10 Ch A 373 which is to the effect that the judgment obtained against the insolvent was not final and

conclusive in determining whether the adjudication was liable to be annulled, as otherwise a man might allow any number of judgements to be

obtained against him by his friends or relatives without any debt being due to them at all. In such a situation the court should have undoubted

jurisdiction to consider and investigate into the truth of the debt. I and clearly of opinion that the insolvency court has undoubted jurisdiction to

enquire into the factum of the debt and also to determine whether any judgment obtained against an insolvent as evidence of the debt was vitiated

by fraud and collusion when an application is filed under S. 35 for the annulment of the adjudication.

(9) I shall now consider as to whether the materials placed before the learned Subordinate Judge justify the inference of fraud and collusion. It may

be mentioned at the outset that in a majority of cases, direct evidence of fraud and collusion may not be available and the decision of the court may

have to rest upon circumstantial evidence. The circumstances under which the compromise was entered into between the parties, in the face of

clear and categorical findings referred by the learned Subordinate Judge, in my opinion, lead to the clear and irresistible inference that the

compromise was brought about as a result of fraud and collusion. Otherwise, one is not able to understand why the parties submitted to a decree

for the entire amount with full costs. Why should the other members of the family readily agree to an adjudication (which means their own separate

properties would vest in the Official Receiver) when the adjudication should have been in a restricted form in terms of S. 17 of the Act for the

limited purpose of administration of Dhanappayan''s estate? Having so vehemently fought out the matter in the trial Court one is not able to

understand why the parties exhibited such anxiety and readiness to compromise the matter in such an unqualified manner. There is the further fact

that the compromise was brought about by the parties without reference to their counsel. This background of the case, in my opinion, constitutes

powerful circumstantial evidence of fraud and collusion.

(10) In my opinion, the question of burden of proof has no significance on the facts in the instant case. It must be noticed that all the members of

the family are undoubtedly making common cause with the petitioning-creditor which of course, is obvious from the very terms of the compromise

decree. In those circumstances, the mortgagee, that is, the petitioner in I.A. 97 of 1956, would not be expected to examine the members of the

family. In view of the written statement in O.S. 166 of 1953 and the objection statement in I.P. 11 of 1951 filed by the members of the family, it is

the duty of the Official Receiver and the petitioning-creditor Govindaraju to submit the members of the family for cross-examination. In view of the

changed attitude of the members of the family, the duty to examine them is clearly upon the petitioning-creditor and the Official Receiver and an

adverse inference has necessarily to be drawn against them for the non-examination of the members of the family. I am, therefore, satisfied that the

inference drawn by the court below, on the materials placed and in the light of the conduct and actings of the parties, clearly justifies the finding of

fraud and collusion.

(11) Lastly, learned counsel for the petitioner, relying upon the procedure adopted in ILR 1948 Cal 131, urged that lower appellate Court should

be directed to here both the appeals, C.M.A. 4 of 1955 & A.S. 33 of 1955 starting from the date of the compromise. In other words, he urged

that even if the compromise is held to be bad, the parties must have liberty to prosecute further C.M.A. 4 of 1955 and A.S. 33 of 1955. I am

unable to agree with this contention, as it proceeds upon an incorrect appreciation of the nature of the proceedings under S. 35 of the Act.

Whether the adjudication is the result of the compromise decree or whether it is an adjudication on the merits, it is always open to any person

interested to apply for an annulment under S. 35 if he satisfies the court that an adjudication ought not to have been made or that the adjudication

was obtained by fraud and collusion. It may be that the decree passed upon consent in O.S. 166 of 1953 may be binding between the parties. But

so far as the adjudication is concerned, it should be annulled once for all. The argument of the learned counsel overlooks the fact that the heirs of

Sivakami are not parties to the appeals C.M.A. 4 of 1955 and A.S. 33 of 1955 and they cannot be made party respondents in that appeal to

support the findings of the learned Subordinate Judge. They are absolute strangers to those proceedings. Whatever may be the result of those

proceedings, they are always entitled to have the adjudication annulled if they establish fraud and collusion. For all these reasons, I dismiss the

revision petitions with costs.

(12) Revision dismissed.