Hardayan Dass vs Jagarnath

Wort, J.—These are appeals against the decision of the learned Additional District Judge of Bhagalpur, adjudicating the appellants insolvents upon seventeen petitions presented by creditors. The acts of insolvency were substantially the same in all the petitions. The main act of insolvency which was relied upon was that the petitioning creditors had executed a mortgage, dated the 14th October 1931, which was described in the petition as a farzi deed of mortgage with the intent to defeat or delay the creditors. They also relied upon an allegation that the debtors had suspended payment. They further alleged that the debtors within the last few days, to use the words in the petition,

have secreted cloth worth about Rs. 10,000 and other stock in trade.

By that allegation I understand that they were alleging that there was a fraudulent transfer of property. Unless that could be relied upon, it is difficult to understand exactly what, in respect of this allegation, was the act of insolvency upon which the petitioners relied. They also alleged that with the intent to defraud creditors the opposite party No. 2 secluded himself and keeps himself absent from the usual place of business. With regard to the allegation of disposing the stock in trade, it is quite clear that there was no evidence which would in any way substantiate such an allegation.

As regards the statement that the debtors had suspended payments, it is also equally clear that the evidence which was adduced by the petitioners on this point is insufficient to substantiate their case. The evidence which was given on this point was to the effect that although the various creditors had made a demand on the debtors for the payment of their debts the debtors stated that they were unable to pay. This clearly is insufficient and the matter has been dealt with recently by this Court in Lakhi Prasad v. Ugramohan Misra 1933 Pat 461.

It is clear, in order to bring the case within Section 6, Clause (g) of the Provincial Insolvency Act, that it is necessary to establish such facts as indicate that the debtors are not merely refusing to pay particular creditors but that they have declined to pay any creditor or deal with any individual creditor or deal with their creditors as a body. The evidence in the case falls far short of that state of affairs. We are left therefore with the alleged act of insolvency coming under Clause (c) of Section 6, of the Provincial Insolvency Act, that is to say that the debtors have made a transfer of their property which would under the Insolvency Act be void as a fraudulent preference if the debtors ultimately were adjudged insolvents.

One of the difficulties which has arisen in the case is the uncertainty of the petitioners themselves as to whether this was, as they allege in their petition, a farzi transaction, that is to say, a transaction which was merely apparent and not real whether in fact it was a transfer to one or some of the creditors. The learned Judge in the Court below seems to be equally undecided with regard to the matter and has expressed himself in this language:

It is quite possible that the transaction was a fraudulent or collusive one, because besides the oral testimony of the father and the son there is no independent evidence, nor any scrap of paper to prove the dues of Ghanshyam Dass and others.

He then goes on to hold that in any event it would certainly be a fraudulent preference of two or three creditors bearing near relationship with the debtors over a large number of other creditors. It seems to me, however, from the evidence in the case, which is not now seriously disputed, that it was a real transaction in favour of Ghanshyam Das and Jiwan Ram Nagarmal of Calcutta. If it was farzi it could not be a preference but would be liable to be set aside. There are a number of facts which point to that conclusion. The evidence of one of the debtors themselves is to the effect that before entering into the mortgage of October 1931 with particular creditors, they applied to Babu Baijnath Ram for an advance. Baijnath Ram himself denies however that that was the fact but some of the other circumstances in the case seem to me, as I have already stated, to lead to the conclusion that it was a real transaction.

But assuming for the purpose of his argument, that in fact it was a real transaction, that is to say there was a transfer of the property and that in consideration of the transfer certain of the debts of the mortgagees were liquidated and an advance was made by the mortgagees to the debtors, there were circumstances which might lead one to a different conclusion, circumstances upon which the learned Judge in the Court below has relied. For instance the property was situated in one district, the stamp of the mortgage was purchased in another and the document itself was registered in a third; and there is no doubt from the evidence in the case that the transaction was carried out in as secret a manner as possible in the circumstances.

Indeed the debtors themselves admit that fact. But on the assumption above stated, that is on the basis that the transaction was a real one the matter must be determined on that footing. Now the learned Judge in the Court below, as I have stated, has come to the conclusion that the transaction was a fraudulent preference. This is not denied. Indeed it is admitted that if the case comes within the definition of Section 6 (of the Insolvency Act) it is one of those transactions which is referred to in Section 54. The relevant words which it is necessary to consider in that section are these:

Every transfer of property by ... any person unable to pay his dues 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.

The expression "with a view of giving that creditor preference over the other creditors" has received the interpretation by judicial decisions on many occasions. They are words which are found in the Bankruptcy Act of England and have been construed, as I have stated, both in India and in England.

The substance of the decisions is this: that in order to come within the statute it must be shown that the act of the debtor was a voluntary one; in other words the term "preference" or "preferring a creditor" has always been interpreted as meaning purely a voluntary act on the part of the debtors which condition could not exist where there was anything in the nature of pressure or that which would lead the debtor to think that he was compelled to do what he had done. Now in this case the pressure alleged by the debtors was that a number of their creditors came to them and pressed them to pay their debts. The facts which the debtors attempted to prove were these: They first of all tried to raise money from other creditors and then failing to do that entered into negotiations with Ghyansham Das and Jiwan Ram.

The consideration of the bond was upwards of Rs. 50,000 out of which Rs. 32,200 was for the payment of the debts due to Ghyansham Das and Jiwan Ram and the balance was used by them to pay off their creditors. The evidence of pressure by the creditors which the debtors have given in this connection might not be sufficient to establish that they were compelled to do what they in fact did, that is to say that there was such pressure as is contemplated by law. But there is another aspect of the matter and that is this, if as was stated by the debtors they were pressed by certain of their creditors and they proceeded in the course of their business to borrow money for the payment of the debts due to those creditors, it could not be said that that was an act of preferring one creditor or some of the creditors but the whole body of creditors.

The question of preference is always a question of fact. But Lord Halsbury pointed out in Sharp v. Jackson (1899) AC 419 that:

It must be shown not only that he has preferred a creditor, but that he has fraudulently done so. It depends upon what was in his mind. Whether it is called ''intention'' or ''view'' or ''object'' does not appear to me to matter much. The question is whether in fact he had the intention to prefer certain creditors.

Lord Halsbury expressed himself in that manner in a case in which the debtor had been guilty of certain breaches of trust of which the cestui que trust was ignorant, but in order to avoid a possible criminal proceeding he entered into a transaction which was for security for the moneys which ware due to the cestui que trust; in other words his intention was not to prefer particular creditors, namely the cestui que trust but with a view to cover his own conduct and the possible consequences of it. Now, one of the grievances of the debtors in this case was that they were not allowed to adduce their books in evidence and the matter arises under these circumstances.

I have already referred to the passage in the judgment of the learned Judge in which he stated that it was possible that the transaction was a fraudulent one and that there was no scrap of paper to prove the dues of the mortgagees. This was also said in connection with the matter whether the debtors could prove that they were able to pay their debts or not. The debtors complain that they were unable to produce their books in order to substantiate their allegations on this part of the case. But the point is of more importance on the question to which I have already referred namely whether the debtors were by this transaction intending to prefer particular creditors.

If as a fact and as they allege they were raising this money under the mortgage for the purpose of paying some of their more pressing creditors, the circumstances would not be sufficient to establish an act of insolvency in the sense that the debtors were preferring one creditor to another. It would rather negative the suggestion that without any kind of pressure they deliberately and of their own choice preferred one or more creditors to others. The question arises as to whether they could prove, as they alleged in their petition and as they stated in their evidence, that this sum in fact was raised by the mortgage deed of October 1931 and whether as a fact the proceeds were used for the purpose of liquidating the debts of some of their creditors. Without their books it is not unreasonable for them to say that it was impossible for them to substantiate that part of the case and they contend that it was not altogether fair on the part of the learned Judge to refuse on the one hand to accept their books and then on the other hand to say in the course of this judgment that not a scrap of paper was produced in order to substantiate their allegations. The facts were these: The first creditor''s petition was dated the 30th November 1931. Their objection was dated the 12th January 1932 and the first date for the hearing was fixed for the 19th March 1932, and it was on that last date that under Order 13, Rule 2, if the objectors desired as they say--they said they desired to rely upon these books--they would have produced them. Order 13 provides that

the parties or their pleaders shall produce at the first hearing of the suit all the documentary evidence of every description in their possession or power on which they intend to rely.

They contend, however, that their omission to file their books was waived by the subsequent orders. The case was not actually taken up on the 19th March but was adjourned for hearing to the 23rd September 1932, when the learned Judge took up the hearing of all the seventeen applications. Now, it was on that date that the debtors made an application that they may be allowed to bring their evidence on Monday the 26th September. The 23rd September was a Friday. The petition which they filed at the time indicates quite clearly in my judgment that the evidence to which the learned Judge refers in the order-sheet was the books in question. There are two petitions both dated the 23rd September 1932, in which they say that the books of account of the firm of Hardhyam Das Joharmal have been filed in a criminal case in the Court of the Sub-divisional Officer of Bishunpore and that without these books of account the petitioners are unable to proceed with their case.

That was a petition in which they asked for an adjournment which adjournment was refused. Then in the second petition of the same date it is stated

that khata books of accounts of the opposite party (Bhagalpur firm) have been filed in the Sub-divisional Officer''s Court at Bishunpore and that the said books of account are necessary papers for the purpose of the case.

The learned Judge on those petitions ordered that

the petitioners may bring their evidence on Monday the 26th and they had agreed to it.

And that they did. Than in hearing the case, the learned Judge refused to allow these books to be proved on account of delay. What happened it appears was this, that on the 30th November 1931, the creditors had made a statement that the opposite party were busy fabricating books. On what ground this statement was made I do not know. There seems to be still less ground for the learned Judge to state in his order dated the 26th September 1932, after referring to their petition of the 30th November 1931.

After that the debtors kept quiet, probably continuing fabrication.

There seems to be no justification for that statement whatever whether the books were fabricated or not is a question to be determined by the Judge but he was not entitled to make a statement of that kind merely based upon unsupported allegations of the creditors. It may be a fact that the debtors were fabricating their books or it may be untrue but on the mere allegations made by the creditors such a statement as that made by the Judge was not justified. Now the point is this. In Jamuna Prasad v. Faujdar Shahni 1929 Pat 254, this Court has held that the question of whether books of account are to be adduced in evidence or not (not a question of their relevancy under the Evidence Act but a question of whether the party producing the books should be allowed to use them) must be determined on the occasion of their being filed. If I may say so that seems to be borne out by Rule 2, Order 13, Civil P.C., which says:

No documentary evidence in the possession or power of any party which should have been but has not been produced in accordance with the requirements of Rule 1 shall be received at any ''subsequent stage'' of the proceeding unless good cause is shown to the satisfaction of the Court, etc.

Now the subsequent date quite clearly in this case was 26th September 1932, as the case might be and according to the decision of this Court it was held that the debtors should be allowed to produce them on that date. But the decision at which I arrive is not necessarily based on that point. First of all I should note that if an insolvency case has to proceed, it is absolutely essential, in order to allow a Receiver to go into the affairs of a debtor, to investigate the books and to come to some conclusion thereon. Without the books it is impossible to say whether, as the debtors say, their debts are something like Rs. 80,000 and their assets upwards of two lakhs. As to the value of the books that is another matter. In connection with the statement of the debtors that they had paid certain creditors, I might observe that only three of the creditor went into the witness-box to support their petitions and in each case they admitted that they had received payment at or about the time that the mortgage was entered into by the debtors. But I come back to the point with which I was dealing with regard to the production of these books.

As I have said it is impossible for the Receiver to investigate the affairs of the debtors without the assistance of these books and one would have supposed that if these allegations were made, as indeed they were made, that the debtors were fabricating the books, then in those circumstances the Judge should have seen that the books were produced at the first possible moment. In my judgment under the law the debtors were obliged to produce their books on the 19th September but as the subsequent order shows the learned Judge waived this production and therefore it seems to me to be illogical for the learned Judge eventually to decide, having regard to his order of the 23rd September 1932, that these debtors should not be allowed to support their case by the production of these books.

Whether the transaction was a fraudulent and a preferential transaction depends, as I have said, upon the circumstances in this case which is a question of fact and if there is anything to indicate either that the money was raised for the purpose of paying off some of the creditors under pressure or there is any evidence to show that this was not a pure voluntary act on the part of the debtors nor done in the course of business, then quite clearly in my judgment there would be no case of a preferential payment. Whether the facts which they allege are substantiated or not it seems to me now to be impossible to determine at this stage. Without any further comment upon the case in my judgment the case could be properly determined only by a consideration of the oral evidence and an investigation of these books.

The matter will therefore go back to the learned Additional District Judge to allow the objectors to produce their books of account and the question of whether the mortgage of the 14th October 1931 was preferential payment or not will be determined in the light of the facts disclosed from the evidence already adduced and from the books which the debtors will now be allowed to produce to support their case.

With these observations I would set aside the order of adjudication and remand the case to the learned Judge to be determined according to law.

The objectors will of course be allowed to produce all the documents which were defined and identified in their petition of the 23rd September 1932, and according to the list filed on the 24th September 1932. The debtors will be allowed to call the creditors whom they allege they have paid out of the proceeds of the mortgage. If the debtors do not intend to call these creditors they must furnish the petitioning creditors with a list of these persons and the petitioning creditors will be allowed to call them. The Receiver will be discharged. We recommend that the learned Judge do expedite the hearing of this case. Costs will abide the result of the hearing in the Court below. Hearing fee 5 gold mohurs.

Agarwala, J.

I agree.