Hiralal vs Firm Shivram Surajbhan

A.H. Khan, J.—The Firm of Shri Ram Sooraj Bhan (creditors) presented an application against, Gaya Prashad and Bansidhar s/o Pancham Lal (debtor) on 6-4-53 for their adjudication as insolvent u/s 9 of the Insolvency Act. In para No. 4 of the petition, the following acts of Insolvency were stated to have been committed:-

(1) That the debtors have suspended their business and are secluding themselves so as to deprive creditors of the means of communicating with them.

(2) That the debtors have not paid their debts and have told them that they have nothing to pay.

(3) That on 19th January 1953, they mortgaged a house to Hiralal, Totaram and Dwarka Prashad (the appellants) for Rs. 27,500.

(4) That on 19th January 1953, the debtors executed a release deed of another property in favour of the appellants on the ground that it was purchased Benami for the appellant.

The prayer was that the debtors be adjudged insolvent and the two transfers be set aside as being fraudulent transactions.

The debtors in reply admitted that they owed the creditors (applicant Firm) Rs. 3000/-that the mortgage for Rs. 27,500/- was without consideration and so also the release deed. They stated their incapacity to pay their debts.

The appellants were also noticed and in reply they said that the transfer deeds in their favour were not fraudulent, but were bona fide transactions. The court after recording evidence, passed an adjudication order and held that the transfers to the appellants amounted to fraudulent preferences. Against this order, the appellants, In whose favour the transfer and the release deed were executed have filed this appeal.

A preliminary objection has been taken by Mr. Jai Ram Sharma, learned counsel for the respondents and he contends that the appellants have no right to appeal against the order of adjudication. But section 75 (2) of the Insolvency Act permits every aggrieved person to file an appeal against an order of the District Court. The learned Counsel, however, relies upon an observation of Sen J. in AIR 1947 161 (Nagpur) to the effect that where a transfer forms the basis of an order of adjudication, the title of the transferee not being affected by the order of adjudication, he cannot be regarded as a ''person aggrieved'' within the meaning of Sec. 75 of the Act. and he has therefore no right of appeal against the order of adjudication. But in the same case Bose J. has observed that the transferee is an aggrieved person and so he can appeal. We feel inclined to follow the observations of Bose J. Because since the transfer in this case has been held to be a fraudulent preference, there is no doubt that the rights of the transferee are affected. Bose J. observed that the order of adjudication declares the nature of the transaction and to that extent determines absolutely the rights and liabilities of the insolvent, receiver and the transferee. The order operates in rem and as such it binds the transferee just as it binds other men, not only as regards the fact of insolvency but also as regards the transfer on which it is based. The preliminary objection is, therefore, disallowed.

The questions which arise for consideration in this appeal are three :-

First, whether the Insolvency court was competent to decide that the two transfers made by the insolvents were void as fraudulent preferences u/s 6 of the insolvency Act.

Two, whether the insolvents owed Rs. 3000/- to the Firm Shri Ram Sooraj Bhan petitioners in these proceedings.

Three, whether the mortgage deed and the release deed executed in favour of the appellants were a fraudulent preference or not,

With regard to the first point section 6 of the Insolvency Act is quite clear. It contains a list of acts of insolvency. A debtor commits an act of insolvency in all the cases enumerated In section 6 of the Act. :Section 6 (c) lays down that a debtor commits an act of insolvency if he makes any transfer of his property, which would either under the Insolvency Act or any other enactment be void as a fraudulent preference. From this it is obvious enough that where a fraudulent transfer is the foundation of an act of insolvency, there the court must look into the nature of the transfer and decide whether the impugned transfer amounts to a fraudulent perference or not. Mr. Bhagwandas Gupta, learned counsel for the appellant contends that the determination of the question must be postponed till the proceedings have reached the stage u/s 54 of the Insolvency Act. But section 54 lays down that the effect of a fraudulent preference is, whereas u/s 6 of the Act, the court merely determines whether the act complained of does or does not amount to a fraudulent preference. At the time of determining whether any transfer amounts to a fraudulent preference u/s 6 (c) of the Act, the court does not declare the transfer as void nor does it annul the transfer. The stage of annulment comes later on when a receiver is appointed. My conclusion therefore is that if fraudulent preference is alleged as an act of insolvency, the court is competent to determine it u/s 6 of the Act.

Mr. Bhagwandas Gupta, in support of his contention has relied upon N. Subramania Iyer Vs. The Official Receiver, Quilon, . On a perusal of the Supreme Court case, I do not find that their Lordships ever considered the point that has been canvassed before us and the case does not therefore, help the appellant.

The second point to be considered is whether the insolvents owed Rs. 300- to the respondents (who were petitioners before the lower court). But from the evidence of Jawaharlal, a partner, it is clear that amount is due. The appellants have led no evidence to disprove this fact, and, in the circumstances we think that the trial Court has rightly held that the insolvents owe the amount to the firm of Shriram Sooraj Bhan.

With regard to the mortgage-deed, it is alleged to have been executed in consideration of old debts. Out Of a mortgage of Rs. 27,500- only Rs. 500- were paid in cash and the rest of the amount was supposed to be on account of old debts. The appellants are businessmen, but they have not produced their account-books to show the existence of any Old debt or debts. We, therefore, think that the trial court has rightly held that the transaction was fraudulent.

Regarding the release-deed, Mr. Bhagwan Das Gupta, contends that it is not a transfer. But I am unable to agree with this contention because the release is a sort of surrender of rights in favour of another person and for all Intends and purposes it is a transfer of the rights. It has been contended that the land was bought by the insolvents for the appellants and that the building on this land was made by the appellants. But the appellants have again not produced their account-books to show that at the time of the purchase of the land, they paid the money, or, that the building was constructed by the money which they supplied. In this view of the matter the conclusion of the trial court that the release-deed is also a fraudulent preference is correct.

For reasons stated above, the appeal is dismissed with costs.

Shivdayal J-13. This appeal arises out of an order of adjudication passed by the Addl. District Judge, Morena, u/s 9 of the provincial Insolvency Act (hereinafter called the Act) on a creditor''s petition. Firm Shriram Surajbhan made an application to the Insolvency court for adjudicating Gaya Pd. and Bansidhar, their debtors, as insolvents. It was alleged by the petitioning creditors that the debtors borrowed from them Rs. 3000 on August 26, 1950, but did not repay the loan and that within three months of the petition the debtors had committed the following acts of insolvency among others:

(a) They stopped their business and were concealing their presence;

(b) They did not make any payment to any creditor;

(c) They fraudulently transferred a house and a shop to Hiralal, Totaram and Dwarka Prasad proprietors of firm Ramchandra Hiralal without consideration, by executing a mortgage deed for Rs. 27,500 on January 19,1953,

(d) They fictitiously and without consideration transferred, by a surrender deed, a shop of theirs to firm Ramchandra Hiralal on the same date (January 19, 1953) wrongly stating that it had been constructed with the money of the transferee who was the real owner; and

(e) They were heavily indebted and were unable to repay their debts, The debtors admitted that they bad borrowed Rs. 3000 from the petitioning creditors, that they had closed their business, that they had executed the mortgag deed and the surrender deed without consideration they were heaviy indebted and they were unable to replay their debts They, however, denied to have made the transfers with intent to delay or defeat the creditors and prayed that the petition be dismissed. Hiralal, Totaram and Dwarka Prasad insisted the petition, contending that the mortgage and the surrender were good and valid While the petitioning creditors alleged the transfers to be fictitious because the contesting transferees were cousins. (maternal uncle''s sons) of the debtors, the transferees alleged collusion between the petitioning creditors and the debtors because they were brothers-in-law

The insolvency Court after recording evidence of the parties held that although actually Rs. 500 were paid in cash at the tune of the transfer and subsequently the transferees paid Rs. 2000- more to the transferer, yet the mortgage was executed for Rs. 27500-. As regards the surrender deed the court held that even if it be assumed that the shop had been constructed with the money of the opposing creditors, yet the surrender was a fraudulent preference within the meaning of S. 6 (c) of the Provincial Insolvency Act In the result, it adjudicated the debtors insolvents Against the order of adjudication, the transferees have come up in appeal here.

Shri Sharma took a preliminary objection that the appeal was not competent because it was not filed by the debtors or petitioning creditors Relying on AIR 1947 161 (Nagpur) , learned Counsel argued that the transferee could not be regarded as a "person aggrieved" within the meaning of section 75 of the Act. In that case the question referred to the Full Bench was :-

"When an act of insolvency which forms the basis of the order of adjudication consists, of a certain transfer, can the transferee question the correctness of that order in the subsequent proceeding for annulment and contend that the transfer is good when he was not a party to the adjudication proceedings ? "

Pollock and Sen JJ. in their separate judgments agreed to answer the question in the affirmative while Bose J., in his dissenting judgment, was of the opinion that the transferee was precluded from questioning the order of adjudication in the annulment proceeding either in regard to the fact of insolvency or in regard to the fact on which the order was founded. It was in this context that Bose J. held that the remedy of the transferee was to appeal under S. 75 as a person aggrieved and if his appeal was beyond time, the Court should be liberal in applying section 5 of the Limitation Act. On the other hand Sen J. observed: -

" The title of a transferee under a transfer made before the filing of an insolvency application is not affected by the order of adjudication and he cannot be regarded as a person aggrieved by the order of adjudication within the meaning of section 75, Provincial Insolvency Act, 1920. He has thus no right of appeal against the order and is not precluded from challenging the facts on which the order of adjudication is made."

These observations of Sen J. are strenuously relied on in support of the preliminery objection. It seems to me that the question before the full bench in the Nagpur case was not directly the one with which we are dealing. There the transferee was not a party to the adjudication proceeding. Here the appellants had not only opposed the petition but also produced evidence. Moreover, Pollock J. recorded no opinion as to whether a transferee could appeal under S. 75 if he was aggrieved by an order of adjudication. Thus there was no decision of the court on the question of appealability. It appears to me that the language of section 75 (2) is wide enough to enable a transferee to prefer an appeal against the order of adjudication. It is provided in section 75 (2) that

" The debtor, any creditor, receiver or any other person aggrieved by a decision come to, or an order made in exercise of insolvency jurisdiction...may appeal......"

As I read the section, any other person aggrieved, is in addition to the main parties to an insolvency proceedings (debtor, creditor and receiver). The expression is wide enough to include a transferee who is aggrieved by an order of adjudication inasmuch as transfer in his favour is impeached. I do not see any restrictive words in the section to exclude a transferee, if he is aggrieved, and the provision being a procedural one that interpretation must be favoured which advances the remedy. I would, therefore, reject the preliminary objection

The first contention of Shri Gupta, learned counsel for the appellants, was that since the setitioning creditors could not prove the alleged deed of Rs. 3000/-, the petition should have been dismissed. There is no sub stance in this contention. As the learned Additional District Judge held on the basis of the evidence before him, it was proved by the evidence of Jawaharlal, a partner in the petitioning firm, that a sum of Rs. 3000/- has been borrowed by the debtors from the petitioning creditors and this was supported by entries in their cash book. The debtors also admitted the loan. No evidence to rebut this was produced by the appellants. At this stage the insolvecy Court was not required to finally adjudge the amount due by the debtors to the petitioning creditors; all that was to be seen was whether the debt owed by debtors exceeded Rs. 500/-. The appellants themselves claim to be creditors of a sum of above 500/-. That is the end of the point.

Then it was urged with great vehemence that the insolvency court gave a premature finding as to the validity of the two transfers, which could be done only under S. 54 of the Act. The question is whether at the stage of adjudication, the insolvency court can or cannot find that a certain transfer made by the debtor was fraudulent, without consideration, fictitious etc. Before dealing with that question I must examine whether this is really a case under clause (c) of section 6 of the Act. Acts of Insolvency are of three kinds :-

(1) those which arise from dealings by a debtor with his property;

(2) those which consist of personal acts or defaults by him; and

(3) those which arise from the condition of his affairs showing him to be insolvent.

A transfer of property with intent to delay or defeat his creditors falls under clause (b), a transfer by way of fraudulent preference comes under clause (c). Clauses (b) and (c) both fall under the first head but the main distinction between them is that clause (c) is applicable only when inter alia it is shown that there was a transfer by the debtor in favour of a creditor as a fraudulent preference while clause(b) applies to every transfer made with the intent to delay or defeat his creditors. Paragraph 4 of the insolvency petition leaves no manner of doubt that the petitioning creditors set out a case of clause (b) only, on the allegation of an ''''intent to delay or defeat his creditors". There is whisper in that petition of clause (c) not has the expression fraudulent preference employed any where. The petitioning creditors nor the debtors admitted that the debtors owed any previous debt to the transferees, has the Additional District judge arrived at such a finding. I shall discuss the evidence later to show that in respect of neither of the two transactions of January 19, 1953, can the transferees be called creditors. The very word "preference" envisages at least two creditors and a preference to one of them. If the very act of the impugned transfer ( i. e. a mortgage creates a debt, the mortgagee no doubt becomes a creditor by virtue thereof but it cannot be said to be fraudulent preference for the transferee ( as a creditor ) to others. I am, therefore, clearly of the view that this was a case under clause (b) alone, and clause (c) was inapplicable, and the finding of the insolvency court to the contrary is not correct.

Adverting to the appellants'' contention that a finding as to the alleged acts of insolvency would be premature, I have formed the opinion that the contention must be rejected. Much stress was laid by Shri Gupta on section 53 of the Act and it was strenuously urged that the only stage where the Insolvency court could go into the alleged nature of a transfer was when it was sought to be annulled and that such a finding in the order of adjudication could not be given. If I may say so, the argument is in utter disregard to the true meaning and scope of section 6 of the Act. The scheme of the Act clearly shows that the court has got to record a finding about it in its order of adjudication. Section 6 enumerates the "acts of insolvency", and provides inter alia : -

"6. (b) A debtor commits an act of insolvency, if in India or elsewhere, he makes a transfer of his property or any part thereof with intent to defeat or delay his creditors.

Section 7 enables the debtor or a creditor to present an insolvency petition. u/s 24, the court requires proof of the fact that the petitioner, is entitled to present the petition and, further that the debtor has committed the act of insolvency alleged against him. Then u/s 25, if the court is not satisfied of any of these facts, the petition is dismissed; otherwise an order of adjudication is made u/s 27. In view of these clear provisions it cannot be urged with any amount of conviction that the court cannot give any finding at this stage that the debtor transferred his property in order to delay or defeat the creditors. In a case where only one act of insolvency is alleged and it falls within clause (b) of section 6, it will be impossible to say that a finding can be given only u/s 53 because that stage can never reach unless an order of adjudication is made and that order cannot be made unless and until there is finding that the debtor committed the alleged act of insolvency u/s 6 (b)"

Moreover, the scope of inquiry u/s 6 (b) is quite different from that u/s 53. It is the intention and conduct of the debtor, in making the transfer, which determines whether it constitutes or not an act of insolvency. But on an application for avoidance of a transfer u/s 53 what is to be established is want of good faith of the transferee. Section 53 runs thus:-

"53. Any transfer of property not being a transfer made before and in consideration of marriage or made in favour of a purchaser or incumbrancer in good faith and for valuable consideration shall, if the transferor is adjudged insolvent (on a petition presented) within two years after the date of the transfer, be voidable as against the receiver and may be annulled by the Court."

A transfer may be for adequate consideration and the transferee may accept the transfer in good faith, but the intention of the debtor may be to defeat or delay his creditors. In such a case although the transfer is an act of insolvency within the meaning of section 6 (b), the transfer cannot be avoided under S. 53. Under S. 53 the principal test is whether the transferee, at the time of the transfer, did or did not honestly know that the transferor was so heavily burdened that there was no property left for him more than what was needed to discharge his obligation towards his creditors. And if there are indications sufficient to prove that the transferee had such knowledge, It cannot be said that the transferee when taking the transfer acted in good faith. The transfer in that case may be proved to have been entered into in collusion with the transferor to screen the properties from the reach of the creditors. If, however, the transferee only knew that the properties were more than the obligation standing against the transferor he may succeed in showing that there was no bad faith on his part.

Shri Gupta urged that the appellants were misled in not leading their evidence because they were under the impression that the real opportunity for them would be in annulment proceedings under Ss. 53 and 54 and that interests of justice required that the case should be sent back to the insolvency court. On going through the record I find that the insolvency court first of all allowed the petitioning creditors to lead their evidence, as soon as the first witness, jawaharlal, was examined by them and the debtor cross examined him, the appellants sought to cross-examine the witness. This was opposed by the petitioning creditors. But the court by its order dated March 31, 1954 held that the transferee was entitled to cross-examine the witness. The court relied on the decision reported in AIR 1947 161 (Nagpur) . Thereafter the transferee took part in the whole of the proceeding. After the close of the evidence produced by the debtors, the appellants sought to produce rebutting evidence. This application was again opposed by the petitioning creditors and they urged that the transferee had no right at this stage to lead any evidence because the order of adjudication was not made till then. The court heard the parties on this issue and by its order dated August 6, 1954, it allowed the transferees to produce their evidence in rebuttal because it was a judicial inquiry and reliance was placed on the decision reported in AIR 1936 499 (Lahore) . After this the appellant produced Chaturbhuj Manik Chand, Bharosilal, Jagannath and Bansidhar; they abandoned two of the witnesses whom they had summoned, namely, Balkishan and Hiralal

The learned counsel for the appellants feared that the order of adjudication would operate as res judicata, in proceedings u/s 53 of the Act or when the mortgagees bring a suit for sale against the mortgagor, and this is based on the observations of the Privy Council in the case of Mohammad Siddiqui vs. Official Assignee of Calcutta, AIR 17 IP 93:

"The order of adjudication is conclusive and cannot be disputed. Hence a transfer which has been found to be an act of insolvency in the order of adjudication can no longer be alleged by the transferee not to be void on that ground although the order affects his rights and is passed in his obsence."

That was a case from Calcutta under the Presidency towns Insolvency Act of 1909. Their Lordships of the judicial Committee followed the decision in Exparte Learoyd (1879) 10 Ch D 3. That leading case was applied to the Calcutta case because the provisions in the Presidency towns Insolvency Act were found similar in terms to those contained in the English Bankruptcy Act of 1869. However, in Mohd. Siddique''s case the Privy Council observed;

"No doubt it is anomalous that a decision affecting the right of a third party should be conclusively determined against him in his absence and even without notice to him, but the words of the section and the importance of maintaining the status of the debtor as determined by an order of adjudication, and the necessity of securing the stability of administration of the debtor''s estate once his status has been fixed have been justly held to outweigh the consideration of hardship to the private citizen."

It must be pointed out that there is no provision in the Provincial Insolvency Act corresponding to section 116 of the Presidency towns Insolvency Act. This question arose in N. Subramania Iyer Vs. The Official Receiver, Quilon, That was a case u/s 53 of the Provincial Insolvency Act read with section 35 of the Travancore Insolvency Regulation No. 8 of 1890. The Supreme Court chose not to decide whether the decision in Mohd. Siddiques case applied to cases arising under the Provincial Insolvency Act. Their Lordships however, observed that even assuming that Mohammad Siddique''s case applied, the controversy which arose in proceedings under S. 53 of the Provincial Insolvency Act was not barred by any finding in the order of adjudication because in any proceedings for avoidance of transfer the court was "concerned with the bona fides of the transferee."

In the case in hand, it is of interest to note that the petitioning creditors and the debtors opposed the transferee''s application for cross-examining the witnesses and another for producing evidence in rebuttal This shows that all the parties were fully alive to the fact that the proceedings at the stage before the order of adjudication was passed were confined to the inquiry into the alleged acts of insolvency under S 6 of the Act. The learned Additional District Judge has no-where recorded a finding that the transferees took the transfers without good faith. As regards consideration also be has not yet recorded any categorical finding and it appears clear to me that he has come to the conclusion merely that both the transfers effected on Jan. 19, 1953 were made with intent to delay or defeat the creditors.

However. I must say that that question is entirely irrelevant for the purposes of this appeal Today we are not concerned as to the effect of the order of adjudication on subsequent proceeding; what we are called upon to answer is whether it was premature for the insolvency court to have determined whether, the alleged act of insolvency, namely, the mortgage of January 19, 1953 was or was not made with intent to delay or defeat the creditors. The arguments of both the sides before us as to the effect of the order of adjudication on the contemplated proceedings for annulment were premature, for it will be seen at the proper stage how far the order of adjudication would be binding on the transferees in annulment proceedings.

25 It was then contended by Shri Gupta that the petitioning creditors did not succeed in proving that the transfers in favour of the appellants were with intent to delay or defeat the creditors. This contention too is devoid of substance. No doubt the burden of proof in insolvency proceedings is not upon the transferee but is on the official receiver or the creditors who challenges the transfer, but it is competent for the Court to draw the inference of intention from the totality of circumstances See T. W. Cuttes Vs. Trustees in Bankruptcy 1956 (2) All ER 537.

It is quite clear from the evidence produced by the petitioning creditors and the debtors that at the time of the mortgage nothing was paid to the mortgagors. In the mortgage deed it is stated that the mortgagee had paid Rs. 500/- to the mortgagor before the execution of the deed and that a sum of Rs. 27,000/ was owed by the mortgagors on some previous account. The transferees made no endeavour while cross-examing Bansidhar to produce either their own account books or the account books of the debtors, nor did the transferees produce their own account books when another opportunity was made available to them that is when they produced their evidence in rebuttal, Likewise, as regards the surrender deed, it was stated therein that the property really belonged to the firm Ramchand Hiralal, the appellant firm and that Gaya Prasad and Bansidhar were Benamidars. When Bansidhar examined himself he attacked this transaction also as fictitious and he made a bold statement that both these transfers were made with a view to delay and defeat the creditors. The transferees at this stage did not show that the property about which the deed of surrender was executed by the debtors was really owned by them. Even in their rebuttal evidence they did not produce any evidence to show that the investment in the shop construction of the shop was theirs and that Bansidhar and Gaya Prasad were only Benamis. It is true that the burden, of proof was on the petitioning creditors, but it was discharged as soon as it was shown that the property stood in the name of the debtors. It was then for the appellants to prove that they were the real owners and the debtors were only Benamidars. This is a well settled position, but if any authority is needed reference may be made to the decision of the Federal Court in AIR 1949 88 (Federal Court) . The Additional District Judge has fully discussed the statement of the witnesses produced before him and I find that the conclusion reached by him is correct. However, I do not agree that the act of insolvency falls within the purview of section 5 (C). I am satisfied that having regard to all the circumstances, both the transactions namely the mortgage and the so-called surrender which were effected on Junuary 19, 1953 were made with the intent to defeat or delay the creditors. How far the transferees contributed to this intention is to be seen at its proper time.

Although for different reasons, in the result I agree with my learned brother that this appeal must be dismissed with costs.