Janaki Ram Vilas Nidhi Ld. vs Official Receiver

Oldfield, J.—I agree with the judgment my learned brother is about to deliver.

Devadoss, J.

This appeal is against the order of the District Judge of Coimbatore setting aside, under 8. 54 of the Provincial Insolvency Act, a mortgage in

favour of the appellant by the insolvent.

The facts of the ease are : One Sama Naicken who was a trader became involved in debt. On the 7th November 1918 he executed an

hypothecation deed in favour of the appellant which is a Bank called Sri Janaki Rama Vilasa Nidhi for RS. 6,000 the consideration for the

document being Rs. 2,000, due to the B ink itself, Rs. 2,000 for paying Rima Vilas Nidhi of Pappanaiekenpalayam, Piathur, and Rs. 1.000 to

Idigarai Devalaya Paripalana Nidhi and Rs. 973-8-0 principal and interest due to one Kasturi Naicken, and Rs. 26-1-0 received by the mortgagor

in cash. Sama Naicken, the insolvent, according to the Schedule filed by him, was indebted to the extent of Rs. 38,000 at the time of the execution

of the mortgage-deed Exhibit A. On 19th November, 1911 Rama Vilasa Nidhi presented a petition of adjudication of Sama Naicken as insolvent

and he himself presented a petition for adjudication on 28th November, 1918, and he was ''subsequently adjudicated. The Official Receive of

Coimbabatore moved the District Court to set aside the mortgaga either as a voluntary transfer u/s 36 or as a fraudulent preference u/s 37 of the

Provincial Insolvency Act. The appellant contended that it was a bonafide transaction entered into for the purpose of discharging the debt of Sama

Naicken, It is argued in appeal that the onus is upon the Official Receiver to show that the intention of the insolvent was to prefer the appellant to

other creditors, and Nripendro Nath v. Asutosh Chose (1915) 19 C.W.N. 157, is relied on by Mr. Govindaraghava Aiyar who appears for the

appellants. The law as to the burden of proof is stated clearly in Williams on Bankruptcy, 10th Edition, p. 303; ""The balance of authority would

seem, therefore, to be in favour of holding that the trustees must give some evidence) of a view to prefer, on the part of the debtor, other than the

mere fact that he was insolvent."" In this case it is proved that the insolvent was in embarrassed circumstances, that he had debts to the extent of Rs.

38,000 at the time of insolvency and that, according to his own showing, his assets amounted to Rs. 25,000 of which Rs. 16,000 was in the shape

of cotton with one Kuppusami Naidu, and it has not been proved that that quantity of cotton was property in the order and disposition of the

insolvent, or that the Official Receiver was able to get the cotton or its value from Kuppusami Naidu. There is no evidence that the appellant Bank

either pressed for payment of his debt or that there was any strong motive which could influence the insolvent to give a mortgage in favour of the

appellant and which could not be attributable to his intention to prefer. The question whether the rest of the consideration, namely, Rs. 4,000, was

paid by the Bank bana fide, in order to sustain the transaction entered into with a person who was on the brink of in-solvency is not free from

doubt. It was contended, and I think rightly, that though the evidence may be taken to establish that the insolvent had an intention to prefer Rama

Vilas Bank, the Idigarai Bank and Kasturj Naicken, his maternal uncle, that would not vitiate the transaction in favour of the appellant. If money is

raised by pledging property for the purpose of paying creditors, whatever may be the view of the mortgagor in paying the creditors if the

mortgagee acts bona fide the transaction would be valid against the Official Receiver. So far as Rs. 4,000 is concerned, the transaction cannot be

impeached as a fraudulent preference because it was not a debt due to the mortgagee, but it was cash got from the mortgagee for paying certain

creditors of the insolvent it may be with a view to prefer them. Therefore, so far as that amount is concerned, Section 51 of the on sent Provincial

Insolvency Act can have no application. But the question is whether the transaction offends against Section 53 of the present Act or Section 36 of

the previous Act. In this connection, a few facts have to be considered. As I have said, Exhibit A was executed on 7th November 1918.

Application for loan was made on 13th November 1918 and the report as regards the sufficiency of the security was made on the same day by the

Secretary of the Bank. The insolvent''s father was one of the Directors of the appellant-Bank and, according to the appellant''s first witness, ""Rama

Naicken, the Director who has sanctioned the loan in Exhibit II, is insolvent''s father."" Exhibit II is the application by the insolvent to the appellant-

Bank for the loan of Rs. 6,000. One Narayana Naicken filed a suit, O.S. No. 97 of 1918, against the insolvent and presented an application on

11th November 1918 for a temporary injunction restraining the appellant Bank from paying the mortgage amount of Rs. 6,000 to Sanaa

Naieken''s creditors till the disposal of the suit. The appellant-Bank objected to the injunction on the ground that the appellant was not a party to

the suit and that no injunction could, therefore, issue against one who was not a party to the suit. The District Muneif cancelled the temporary

injunction on 3rd December 1918. The Rama Vilas Bank presented a petition on 19th November 1918 for the adjudication of Sama Naicken as

insolvent and he himself presented a petition for the same purpose on 28th November 1918. The appellant-Bank paid, through its Vakil by insured

post, Rama Vilas Bank Rs. 2,000 on 18th December, 1918 and Idigarai Bank Rs. 1,000 on 16th February, 1918. u/s 16(6) of the Provincial

Insolvency Act ""an order of adjudication shall relate back to and take effect from the date of the presentation of the petition on which it is made.

The payments by the appellant-Bank to the creditors of Sama Naicken after the presentation of the Insolvency Petition upon which an order of

adjudication is made would not be valid against the Official Receiver. The property of the insolvent, by reason of the principle of relation back, on

the date the insolvency petition was presented, became the property of the Official Receiver, and a payment made by the appellant-Bank to the

creditors would not relieve it from its liability to pay the amount to the Official Receiver. It is not suggested that the appellant-Bank was unaware of

the presentation of the insolvency petition. On the other hand, there is a statement of the 1st witness for the appellant ""We sent the money by

insured post of our own accord. Before we remitted money, Rama Vilas Bank had applied to declare the debtor an insolvent."" It is also in

evidence that the appellant-Bank was aware that the insolvent had other debts to discharge and that he would not give security to the Rama Vilas

Bank as he had a large number of debts to pay. It is not suggested that the appellant-Bank had undertaken to pay the three creditors to whom the

amount of Rs. 4,000 was due and that the appellant-Bank could not after undertaking to pay, withdraw that undertaking on hearing that Sama

Naieken had presented a petition for adjudication. Prom the evidence it is clear that the appellant-Bank paid these sums voluntarily to the creditors

of Sama Naieken. From a reading of Exhibit A it is clear that the mortgage amount was to be paid to the mortgagor himself, and there is no

undertaking in Exhibit A that the appellant-Bank do pay directly any of the creditors of the insolvent.

Taking all these circumstances into consideration, I hold that the mortgage under Exhibit A is not a bona fide transaction and is, therefore, void

against the Official Receiver u/s 36 of the Provincial Insolvency Act.

Mr. Govindaraghava Iyer on behalf of the appellant suggested that if that wag the view that would be taken, he should be given an opportunity

to meet the case and that such a case was not put forward in the lower Court. The Official Receiver made his application under Sections 53 and

54 of the present Act, corresponding to Sections 36 and 37 of the old Act, and it cannot be said that the appellant had not an opportunity of

meeting the case put forward by the Official Receiver.

The next question is, what is the order to pass. So far as Rs. 2,000, a portion of the consideration of the mortgage under Exhibit A is

concerned, it was with the view to prefer the appellant-Bank that security under Exhibit A was given. As regards Rs. 4,000 the appellant-Bank

paid the creditors knowing the circumstances, evidently with the object of screening the property from the creditors and in the circumstances, it

cannot be said to be acting bona fide in paying the creditors of the insolvent after an application for adjudication was made. The order of the

learned District Judge is confirmed with the variation that the transaction is void u/s 30 of the Provincial Insolvency Act. The appeal fails and is

dismissed with costs. The Official Receiver may take any action he thinks proper against Rama Vilas Bank, Idigarai Bank and Kasturi Naieken

who have been paid in full by the insolvent, The attention of the Official Receiver is drawn to Paine, in re, Read ex parte (1897) 1 Q.B. 122, and

Blackpool Motor Car Co. Ltd, In re Hamilton v. Blackpool Motor Car Co. Ltd. (1901) 1 Ch. 77.