H. Chennana Gowd and Others vs Official Receiver and Others

Stodart, J.—This is an appeal against an order in insolvency by which the learned District Judge, Bellary, adjudicated seven persons

insolvent. The first five of these are brothers, the sons of Ayyanna Gowd, deceased. The sixth and seventh are sons of another brother Mallanna

Gowd who died in 1915. The first and third do not appeal. They had already filed an insolvency petition when the present petition was filed. The

others are the appellants in this appeal. The petition was filed on 29th July 1936 by four creditors. The admitted facts are that Ayyanna Gowd had

a shop in Bellary and that was a family business carried on for the benefit of the joint family consisting of himself and his sons; and on his death this

shop was continued by the first and second sons Ranganna Gowd and Narasanna Gowd trading under the name of Ranganna Gowd and brothers.

The four petitioning creditors based their right to file this petition on debts due to them by this firm. They alleged that the other three brothers and

two nephews (the present five appellants) took an active part in the business of the firm and so were also personally liable to them in respect of the

said debts; and one of the questions we have to decide is whether the appellants did in fact take a part in the management of the business.

Secondly, the petitioners contended that certain acts of insolvency were committed which must be deemed to be the acts of all the seven persons

aforesaid. The learned District Judge held in effect that all seven counter, petitioners participated in the business and were personally liable for its

debts and from this finding it would follow that they were jointly indebted to the petitioners. As for the acts of insolvency the Judge''s finding is not

very clear. He found that the execution of a sale deed, Ex. G of a large portion of the family lands by the two nephews (appellants 4 and 5) less

than three months before the petition was filed, was an act of insolvency, and that the other members of the family took part in it. He said:

Ex. G is an act of insolvency and the respondents took part in it apart from their liability on account of the other acts of insolvency - the closing of

the business.

Various acts of insolvency were alleged by the petitioners but the learned District Judge has recorded no clear finding whether, in his opinion,

any or all of them were committed except in the sentence just quoted. In one part of his judgment he states that.

after the business was finally closed there was some difficulty in tracing respondents 1 and 3 and in discovering the accounts and the first counter-

petitioner was ultimately found with the accounts in a building attached to a ginning factory, where he was apparently secreting himself.

In another part, referring to Ex. G, he states that it was executed at the time the shop was closed, or closing, and there appeared no reason for

its execution unless it was really for the purpose of protecting the property against the creditors of the business. The only acts of insolvency

therefore which appear to have been relied on by the learned District Judge are (1) that respondents 1 and 3 absented themselves and secluded

themselves and (2) that respondents 6 and 7 executed Ex. G in order to defeat the creditors of the firm in circumstances which show that. Ex. G

was the act of all the members of the family. These appellants now appeal on the grounds : (1) That they are not indebted to the petitioner. (2) That

they have not committed any acts of insolvency. (3) That they are not affected by any act of insolvency which may have been committed by

Ranganna Gowd and Narasanna Gowd.

It may be stated at the outset that the plea of partition advanced by these appellants and negatived in the Insolvency Court has not been pressed

before us. The facts are, that these appellants with Ranganna Gowd and Narasanna Gowd formed a Hindu joint family, that they owned landed

property and that Eanganna Gowd and Narasanna Gowd had the shop in Bellary which was a joint family business. The first question we have to

decide is whether appellants are right in their contention that they took no part in that business. We think that they are. The learned District Judge

was not particularly impressed with the evidence led on behalf of the petitioners to prove that these appellants personally at-tended to the business

of the shop. That evidence only amounted to this: that one or other of the appellants was occasionally seen in the shop helping to write up the

accounts. That in itself would not be proof that they had any say in the direction of the business. But the learned Judge relies on the fact that the

shop went by the name of Ranganna Gowd and brothers and on certain documentary evidence. That documentary evidence consisted in (a) a

promissory note Ex. J-1, executed by all five brothers in renewal of a promissory note executed previously by Ranganna Gowd alone. The

promisee, Mundlur Gangappa, examined on behalf of the appellants - he is not one of the petitioning creditors - deposed that this was for a trade

debt contracted by Ranganna Gowd, (b) entries in the ledgers of two creditors of the firm showing that moneys were paid out to, and received

from, appellants 1, 2 and 3. We do not think that this documentary evidence is at all conclusive on the point in issue. The payments out to and

receipts from appellants 1, 2 and 3 are of small sums and look as if the money was conveyed by them as messengers. It is not alleged that they had

any authority to pledge the credit of the firm nor do their names appear as debtors in the books of the firm''s creditors. As for the promissory note

Ex. J-1 it is consistent with the appellant''s case. The fact that this single liability of Ranganna Gowd, namely the debt evidenced by Ex. J-2, wan

guaranteed as it were by his four brothers would show that in respect of his liabilities in general they did not hold themselves personally responsible.

We have no difficulty in finding therefore that the firm Ranganna Gowd and brothers was solely managed by Ranganna Gowd and Narasanna

Gowd. It was urged nevertheless by learned Counsel for the creditors (who appear as respondents in this appeal) that since the shop was a family

business respondents 1 and 3 in contracting debts acted as the agents for the other members of the family so that the latter are personally liable for

the shop debts. In this view we cannot concur. Members of a joint family may be jointly concerned in a commercial venture just like any other

association of partners. In that case they are all personally liable for debts contracted in the course of the business and the acts of one will bind the

rest. But conversely these members who do not partake in the direction of a joint family business are not personally liable for the debts of these

members who actually conduct the business. The ordinary law is that a member of a joint Hindu family is not personally liable for a debt contracted

by another member but that if the money was borrowed for a necessary purpose binding on the family the undivided family property can be sold in

order to discharge the debt including that interest in the property which belongs to the members who did not join in the borrowing: see Chalamayya

v. Varadayya (1899) 22 Mad. 166. We do not see that it makes any difference to this principle that the money was borrowed by one member

who was in sole charge of a family business. In Bishambar Nath v. Fateh Lal. (1907) 29 All. 176 it was held that a member of a joint Hindu

trading family who after attaining majority never took any active part in the business or had any concern with its management could not be held

personally liable for debts incurred by the managing member of the business. Amar Nath v. Hukam Chand Nathmal (1921) 8 AIR 35. was a case

where two members of a family one being an advocate and one a member of the Indian Civil Service were sought to be made liable for a debt

incurred by a firm carried on by other undivided members of their family. The District Judge held that they were personally liable. On appeal the

Chief Court of the Punjab held that they were liable not personally but only to the extent of their interest in the partible property. This case was

taken on appeal by Amar Nath one of the brothers, to the Privy Council but not on the point now in issue.

The Privy Council judgment however concludes with the words, ""the appellant''s liability is of course a liability in respect of his share in the family

property."" There was no cross-appeal by the respondent in that case objecting to the finding of the Punjab Chief Court that the appellant was not

personally liable. Then there is the case, N.C. Krishna Ayyar and Others Vs. Pierce Leslie and Co., , decided by Cornish J., lately of this Court,

sitting singly. That case is on all fours with the present. Three persons, members of a joint family, having been adjudicated insolvents, on the petition

of a creditor to whom money was due in the course of a business carried on for the benefit of the family but carried on only by one of them, the

others appealed. Cornish, J. held that unless there is a personal liability in respect of the debt there is no such relation of debtor and creditor as will

serve to support an adjudication order. And he held that the petitioners before him were not proved to have taken such a part in the management

of the business that it could be inferred that they were parties to the contract upon which the debt arose. In our opinion, the mere fact of the

present appellants being members of the joint family to which this business belonged cannot make them parties to the contracts entered into by

those who conducted the business. It is only by importing into the argument the notion that in respect of a family business the members of the family

are in the position of partners that personal liability can be imputed to them. This proposition seems at one time to have found some favour in the

Courts. See the judgment of Sadasiva Ayyar J. in the Full Bench decision of this Court in Official Assignee v. Palaniappa Chetti (1919) 6 AIR

Mad. 690. But we have now Section 5, Partnership Act, 1932, which sets that somewhat debatable point at rest, The relevant words of that

Section are, ""the members of a Hindu undivided family carrying on a family business as such are not partners in such business."" Prior to 1932 the

law of partnership was contained in Sections 239 to 266, Contract Act, 1872.

u/s 248 of that Act a partner who did not on coming of age repudiate his liability, became liable for the debts of a business to the benefits of

which he had been admitted during minority even including debts contracted during his minority. In the case cited Sadasiva Ayyar J. held that

Section 248 applied, when the business was a business belonging to a Hindu joint family; so that the minor members of the family became on

attaining majority personally liable for the debts of the business. After the passing of the Partnership Act, it is no longer possible to apply the rules

relating to partnership to a Hindu joint family. It appears to us that in the case of a family business these members only are personally liable for the

debts of the business who are'' in control and management of it or who, to borrow the words of Cornish J. in N.C. Krishna Ayyar and Others Vs.

Pierce Leslie and Co., , have acquiesced.

in the course of the business in which the particular contract was entered into, so as to warrant their being treated as parties to the contract.

In the case of other members, it appears to us that business debts are on exactly the same footing as other family debts. If they are lawfully

incurred for the benefit of the family or for the necessary purposes of the family, then to discharge them the family property may be sold without

excluding the interest therein of the coparceners who were no parties to the contract. But they cannot be levied from the latter in any other way.

Learned Counsel for the respondents has relied very strongly on Kommareddi Ramachandrayya and Others Vs. Vodury Venkataratnam, . In that

case the debt on foot of which the petitioning creditor sought to adjudicate the respondent, was incurred by the respondent''s father and in the

insolvency petition which was filed to adjudicate the son after the latter''s death it was alleged that the creditor had pressed the respondent to pay

the debt and the respondent had asked for time. The District Judge dismissed the petition holding that since the respondent was not personally

liable for the debt the relation of debtor and creditor did not exist between him and the petitioning creditor. Devadoss and Waller JJ., reversing this

decision, held:

There is nothing in the Insolvency Act which prevents the undivided members of a joint Hindu family from being adjudicated insolvents in respect of

debts due by the family. Each case would depend on its circumstances. If the petitioner makes the necessary allegations and proves them then the

Court would be justified in adjudging the members of a joint family insolvents.

Then, after observing that on the death of a father the debts are binding on the other members of the family who succeed to him the Court

referred to an unreported case of a Bench of this Court (A.A.O. No. 47 of 1916) in which it was laid down that the relation of creditor and debtor

existed between the lender and the members of a joint family in respect of debts incurred by the family. And finally the Court remanded the petition

for disposal according to the provision of Section 24, Provincial Insolvency Act. So far as we can see, all that this decision meant was that there

were grounds for inquiry whether the relation of creditor and debtor existed. ""Each case,"" the Court said, ""would depend on its circumstances,

which implies that, in its opinion, mere membership of a joint Hindu family did not carry with it a personal liability for the family debts. And the

Court as we have said, remanded the case for disposal u/s 24 of the Act. Section 24 is:

On the day fixed for the hearing of the petition the Court shall require proof (a) that the creditor... is entitled to present the petition, etc.,

which means that the creditor must prove u/s 9 that there is a debt owing to him by the person whom he wishes to have declared insolvent and that

the debt amounts to at least five hundred rupees. This case was considered in the following year by another Bench of this Court in

Nagasubramania Mudaliar v. Krishnamachariar (1927) 14 AIR Mad. 922. The facts in that case were somewhat similar to those in Kommareddi

Ramachandrayya and Others Vs. Vodury Venkataratnam, . A son had succeeded to the estate of his father on the latter''s death and was sought to

be adjudicated on the strength of a debt due to the petitioning creditor by the father on which the creditor had obtained a decree against the son.

Venkatasubba Rao 7. (as he then was) stated the question for decision as follows:

When a debt is due from a person in his representative character is he liable to be adjudicated an insolvent under the Provincial Insolvency Act?

and after stating the facts said:

There is no doubt that the decree as it now stands excludes altogether the personal liability of the appellant... The proposition that any person who

happens to be a debtor in his representative capacity is liable to be adjudicated an insolvent cannot be seriously argued... It is said that in the case

of a coparcener in a Hindu joint family the position is different. I am not prepared to accept this contention.

Then referring to the case in Official Assignee v. Palaniappa Chetti (1919) 6 AIR Mad. 690 the learned Judge said;

It will be seen that on whatever other matter there was a difference of opinion, all the Judges were agreed in this, that if the debts could not be

personally enforced the debtor could not be adjudicated an insolvent.

And construing Kommareddi Ramachandrayya and Others Vs. Vodury Venkataratnam, and the argument based on it by counsel for the

respondent the learned Judge said:

I do not think that the learned Judges intended to lay down the general rule that a coparcener as such is liable to be adjudicated an insolvent in

respect of the debts incurred by the manager and binding on the family.

The case here, we think, is stronger. There is no decree against these appellants. They are not personally liable for the debt. Their only liability

arises out of the fact that the debt was contracted in the course of a family business so that assuming that it was properly incurred and binding on

the family, property of the family may be sold to discharge it without excluding the appellants'' interest in that property. One case has been cited to

support the opposite view, namely Somasundaram Chettiar Vs. Kanoo Chettiar (died) and Others, . But in that case though the debt due to the

petitioning creditor was a decree debt which could only be recovered by sale of the family property and not from the debtor personally,

nevertheless, Phillips J. (as he then was) held that the debtor was personally liable for the debts of the firm. The debtor in that case was actually a

member of the firm the business of which, was carried on by all the members of the family consisting of the debtor and his uncle and his uncle''s

son. The observations of Reilly J. in the concluding portion of his judgment in that case are clearly made with reference to the circumstances of the

case. We do not think we can give them general application.

On this part of the appeal therefore we find : (1) on the question of fact that the appellants took no part in the conduct of the business so as to

make them personally liable for the debts of that business, and (2) on the point of law that merely as members of the undivided family to which the

business belonged they are not personally liable for its debts. From these findings it follows that the relation of debtor and creditor did not exist

between these appellants and the petitioning creditors, the respondent. That is sufficient to dispose of this appeal.

The second main point raised in the appeal however is important and has been argued before us at some length. It is that even if these

appellants are held to be indebted to the respondents within the meaning of the Provincial Insolvency Act, they have committed no acts of

insolvency. The acts of insolvency which, so far as we have been able to discover were relied on by the learned District Judge, were (a) the

execution of the sale deed, Ex. 6 by the nephews (appellants 4 and 5) which was attested by all their uncles and (2) the fact that Ranganna Gowd

and Narasanna Gowd who conducted the business of the shop, absented and secluded themselves at or about the time of the closing of the shop.

On the point of fact we do not think that these acts of insolvency have been made out. The sale deed was certainly executed. And it certainly

disposes of a large amount of property. The learned District Judge held that there appeared to be no reason for the sale unless it was really for the

purpose of protecting the property against the creditors of the business. The learned Judge was obviously of opinion that this sale deed fell under

the class of acts described in Section 6(b) of the Act: making a transfer of property with intent to defeat or delay creditors. But he does not state

the facts on which he based his opinion that that was the intention of Ex. G nor does he cite any circumstances which show that Ex. G did in fact

operate so as to defeat or delay creditors. Twelve witnesses were examined for the respondents in the Insolvency Court. Nowhere in their

evidence is any single fact alleged which would lead to the inference that Ex. G was executed with the intention aforesaid or that the family property

which remained after taking away the property alienated in Ex. G was not sufficient to discharge the debts of the firm.

Then there are the acts of Ranganna Gowd and Narasanna Gowd consisting in their absenting themselves or secluding themselves. The

questions that arise in regard to these acts are : (1) Are they proved to have been committed? (2) Can they be deemed to be the acts of these

appellants? The learned District Judge if in fact he takes these acts as proved is evidently referring them to Sections 6(d)(ii) and (iii) of the Act.

These clauses are:

A debtor commits an act of insolvency if with intent to defeat or delay his creditors (ii) he departs from his dwelling house or usual place of

business or otherwise absents himself; (iii) he secludes himself so as to deprive his creditors of the means of communicating with him.

We do not find sufficient warrant in the evidence for the conclusion that either Ranganna Gowd or Narasanna Gowd committed these acts.

[After examining the, evidence of certain witnesses the judgment proceeded further.] In this state of the evidence we are unable to hold that

Ranganna Gowd either departed from his dwelling house or otherwise absented himself or that he secluded himself so as to deprive his creditors of

the means of communicating with him. As far the other partner Narasanna Gowd, there is no evidence about him at all tending to show that he

committed an act of insolvency by absenting himself or secluding himself from his creditors. Next we have to decide whether even if Ranganna

Gowd did commit acts of insolvency of the nature described in Sections 6(d)(ii) and 6(d)(iii) of the Act, these acts can be imputed to the

appellants. Learned Counsel for the respondents relies on the explanation to Section 6 which is ""for the purposes of this Section the act of an agent

may be the act of the principal."" The terms of this explanatory clause imply that there may be acts of the agent which amount to acts of insolvency

but which do not become the acts of the principal. Act authorized by the principal either expressly or by implication would presumably be acts of

the principal. If the matter were one of first impression, we would find it difficult to hold that by reason! of the agent committing the acts described

in Section 6(d)(ii) or Section 6(d)(iii) the principal had committed an act of insolvency unless of course he had expressly commanded or authorized

the agent to do what he did. There is however authority in the point which we have no hesitation in following. On the particular case provided for in

Section 6(d)(iii) it has been recently held by a Bench of this Court, in a case where three brothers were partners in a business that the act of

secluding himself by the managing partner who had been left in sole charge of tie business was not attributable to the other partners : see Shiva

Reddy v. Offical Reciver Bellary (1937) 24 AIR Mad. 13. On the much broader question of law, whether when the manager of an undivided

family commits Jan act of insolvency, the other coparceners lean be deemed to have committed that act, ''there is also a very recent case decided

by a Bench of the Patna High Court in which the point was directly in issue : see Mahabir Prasad v. Ram Tahal Mandar (1937) 24 AIR Pat. 665.

Manohar Lal J. observed in that case:

Although the manager of a joint Hindu family can act on behalf of the family, the recognized restrictions on his power, so to act in his representative

capacity as to impose any personal liability on other members of the family, render it impossible to treat any act of insolvency committed by him as

an act committed by other members of the family also.

In that opinion we respectfully agree. We think it contrary both to good sense and natural justice that a person should be liable to be

adjudicated insolvent for an act done by another which he has never authorized either expressly or by a course of conduct from which authority

might be implied. The state of being insolvent involves many and onerous personal disabilities. If, for the debts lawfully incurred by a family

manager in the ordinary course of business the other members are not personally liable, much more are they personally exempt from the

consequences of acts done by the manager which amount to acts of insolvency.

On the case generally we think that it is ^pushing the theory of joint family responsibility to extremes to hold that a man can be adjudicated

insolvent at the instance of a creditor with whom he has never had any dealings express or implied and for an act which he had never committed or

acquiesced in. How anomalous for instance it would be if in Amar Nath v. Hukam Chand Nathmal (1921) 8 AIR 35, the Indian Civil Servant

holding a post in the Central Provinces could be adjudicated at the instance of a creditor of his father''s firm in Ferozepore in the Punjab, and on

the strength of an act of insolvency committed at Ferozepore by a member of that firm. In the result holding that these appellants are not debtors

within the meaning of the Provincial Insolvency Act and that moreover they have not committed any acts of insolvency we set aside the order of the

lower Court. These appellants will have their costs of this appeal and of the proceedings in the lower Court.