In Re: M.R. Jayaraj<BR>A.R. Chinnanarayanan

Maruthamuthu, J.—This petition was filed by A.R. Chinnanarayanan as petitioning creditor against (1) M.P. Jayaraj (debtor) and (2)

Southern Investments represented by Abraham Thomas (transferee) under Sections 9 (b), 10, 11 and 12 of the Presidency Towns Insolvency Act

III of 1909 for adjudicating Jayaraj (first respondent-debtor) as insolvent and for directing the vesting of his assets with the Official Assignee

according to law and to set aside the transfer of the property No. 29, Sixth Main Road, Raja Annamalaipuram in favour of Southern Investments

(Second respondent) in August, 1987. The allegation of the petitioning creditor was that Jayaraj along with Bangalore Trading Corporation

borrowed Rs. 1,00,000/- under (sic) promissory note dated 16-4-1983 agreeing to repay the same with interest at 12% per annum, but defaulted.

It was also alleged in the petition that the first respondent owes debts and liabilities to various creditors to the tune of Rs. 20,000/-. It was further

alleged that the first respondent has closed this business at Madras and transferred his only property in favour of the second respondent in fraud of

the creditors and that he has committed an act of insolvency.

The first respondent contested the matter by filing counter. Even evidence of the petitioner''s side and the first respondent''s side was recorded

as the matter went up for enquiry. At that stage, on 21-9-1988, the counsel for the petitioning creditor represented that the claim of the petitioning

creditor was satisfied and that he was not proceeding with the petition further. But, in the meanwhile, six persons claiming themselves to be

creditors had filed applications in Application Nos. 325, 326, 327, 329 and 330 of 1988 on 23-8-1988 and Application No. 346 of 1988 on 30-

8-1988. All these applications were filed by the respective applicants/creditors for substituting themselves in the place of the petitioning creditor in

I.P. No. 61 of 1987 on the ground that the petitioning creditor did not proceed with due diligence on his petition. Objection was raised in the form

of counter on behalf of Jayaraj who is the first respondent in I.P. No. 61 of 1987 and who is shown as a debtor in all the substitution applications

mentioned above stating that he does not owe any liability for any liquidated sum to those applicants and that there is no jural relationship of

creditor and debtor between the applicants and himself and that unless this is proved, those applicants cannot be substituted in the place of the

original petitioning creditor. In support of such a contention, the debtor Jayaraj has been allowed to give evidence as R.W. 1 subsequently.

I find that the contention on behalf of the debtor Jayaraj and the evidence sought to be adduced by him are not in conformity with the due

procedure prescribed under the Presidency Towns Insolvency Act. Once the petitioning creditor in the main Insolvency Petition is not proceeding

with the petition and the Court finds that the said petitioning creditor has not proceeded on his petition with due diligence, the Court has to

automatically substitute the other creditor/creditors who have come forward with applications for substitution in the place of the original petitioning

creditor, of course, in the order of priority on point of time in filing the applications. If that is so, the creditor, has filed the Application No. 325 of

1988 has to be substituted as the petitioning creditor in the place of the original petitioning creditor, namely AR. Chinnanarayanan. The other

applicant/creditor may follow one after the other if the creditor in Application No. 325 of 1988 will not proceed with the petition with due

diligence. At this stage, there is no question of proof or jural relationship of creditor and debtor and the proof of debt, liability and act of insolvency

against the debtor, namely, Jayaraj. This point will arise only after substitution of the applicant/creditor in Application No. 325 of 1988 in the place

of Original petitioning creditor. In the circumstances, the objection raised on behalf of the debtor and the evidence adduced by him must be held as

irrelevant and the same have to be rejected.

Section 92 of the Presidency Towns Insolvency Act which is the relevant provision for substitution of the creditor, is as follows:-

Power to change carriage of petition.- Where the petitioner does not proceed with due diligence on his petition, the Court may substitute as

petitioner any other creditor to whom the debtor is indebted in the amount required by this Act in the case of a petitioning creditor.

This provision is analogous to Section 16 of the Provincial Insolvency Act and it is as follows:-

Power to charge carriage of proceedings.- Where the petitioner does not proceed with due diligence on his petition, the court may substitute

as petitioner any other creditor to whom the debtor may be indebted in the amount required by this Act, in the case of a petitioning creditor.

There is absolutely no change in then sub sections effect of both the provisions which deal with the, circumstances in which a creditor may be

substituted in the place of the original petitioning creditor.

It is common ground that a petitioning creditor in the insolvency petition is representative of the whole body of creditors and if he comes to an

arrangement with the debtor and seeks not to prosecute the petition any further, the presumption is that he is not proceeding on the petition of with

due diligence. Substitution u/s 16 of the Provincial Insolvency Act and S.92 of the Presidency Towns Insolvency Act contemplates a petition of the

petitioning creditor that is alive and pending and has not been dismissed. The petition presented by the first petitioning creditor must be held to

enure to the benefit of all the creditors of the insolvent on that date. Any other creditor whose debt exists on the date of filing of the insolvency

petition and who has come forward with a request for substitution in the place of the first petitioning creditor, can be allowed to proceed with the

insolvency petition as petitioning creditor.

A careful consideration of section 92 of the Presidency Towns Insolvency Act indicates that even an express order of substitution is not

necessary and substitution can be inferred from the Court continuing the proceedings of the application of the creditor applying to be substituted.

After all, the applicant who seeks to substitute himself as a creditor in the place of the first petitioning creditor has to show in his affidavit that the

debtor owes liability to the applicant for a liquidated sum exceeding Rs. 500/- and that the debtor has committed an act of insolvency. Once the

first petitioning creditor goes out, the substituted creditor takes the place of the first creditor ab initio and is entitled to prosecute the original petition

as if it were his own petition. At that state of substitution, the creditor who is substituted cannot be asked to prove the existence of jural relationship

of creditor and debtor the truth of the liability or the debtor and the act of insolvency. Such proof will be required on the part of the substituted

creditor only after substitution and not before. Even if one creditor who has been substituted in the place of the original petitioning creditor would

fail to proceed with the petition with due diligence, the next-creditor who would seek substitution of himself can stake him claim for substitution in

the place of the original petitioning creditor and this may take place in turn depending upon the creditors who have filed application for substitution.

In the present case, we find that the debtor Jayaraj calls upon every applicant who seeks to substitute himself in the place of the original

petitioning creditor to prove the jural relationship of creditor and debtor, the liability, the act of insolvency etc. even before their substitution in the

place of the original petitioning creditor takes place. This is absolutely incorrect. As already pointed out, the question of proof of the relationship of

creditor and debtor act of insolvency etc., will arise only after substitution of the creditor and not before. If the contention raised on behalf of the

debtor in the present case is accepted, it would mean that the substituting creditor has to produce proof not, only before substitution, but also after

substitution and this will amount to double exercise to court and double jeopardy to the creditor. Certainly, Section 92 of the Presidency Towns

Insolvency Act does not contemplate such a procedure.

I hold that no evidence can be adduced in roof of the claim of the substitution creditors before they are substituted in the place of the original

petitioning creditor, that the applicant/creditors will be substituted automatically one after the other according to the priority of their applications in

point of time and that it is open to the debtor to raise his defence according to law after substitution. Accordingly, the applicant/creditor in

Application No. 325 of 1988 is substituted in the place of the original petitioning creditor in I.P. No. 61 of 1987 and the same shall be enquired.