K. Maranaicken vs R.S. Saradhambal

In this revision under the Provincial Insolvency Act, 1920 from the appellate order of the District Court, the question is whether an order of

adjudication passed against a debtor is valid ? The act of insolvency alleged by the petitioning creditor against the debtor was that within three

months of the presentation of the insolvency petition, the debtor has alienated the most valuable property of his to a third party. The debt due to the

petitioning creditor was under a promissory note. It was for Rs. 5350. The debtor has realized Rs. 33,000 from the sale of some of his properties

and Yet from out of the proceeds, he did not pay anything, towards the discharge of the debts.- It was alleged by the petitioning creditor that the

sale by the debtor of his properties was with intent to defeat and delay his creditors. The debtor denied this act of insolvency. He asserted that the

sale effected by him was bona fide, He said that out of the proceeds of sale, he had discharged certain debts to an extent of Rs. 8000 and the

balance was utilised for conducting the marriage of his two sons, for ''seers, or presents to his daughter and for digging a well. The debtor also

submitted that even after the sale of the properties, he retained with him a considerable extent of immovable properties including an extent of 5

acres of nanja land worth at least Rs. 1,00,000. In these circumstances. the debtor denied there was any intention on his part to defeat or delay his

creditors by the mere act of selling some of his properties. He also submitted that the insolvency petition against him was mala fide and was

intended to circumvent the provisions of the. Tamil Nadu Act. 10 of 1975, which imposes a bar on the petitioning creditor from realizing her debt

for the period of the moratorium laid down under that Act.

Both the Sub Court in the first instance and the District Court in appeal, held, that the sale by the debtor of his properties was without making

any provision for the petitioning creditor and it amounted to, an act of, insolvency. They- accepted the position that even after the sale, the debtor

had with him considerable properties, Both the courts. however. dismissed the continued existence of other items of immovable property of the

debtor as irrelevant to the discussion, expressing the view that a debtor could successfully resist an order of adjudication on the creditors petition

only if he could satisfy the court that he is able to pay his debts and not by showing that he was possessed of Immovable property. The Sub Court

found that there was no evidence to show that the debtor had applied the sale proceeds of Rs. 33,000 either for payment of some of his credit the

marriage of giving presents to his digging a well. Both the Sub Court and the District Court accepted the position that by reason of Act 10 of 1975,

the petitioning creditor would have been barred from filing a suit against the debtor for realization of the amount. They, however, held that Act 10

of 1975 cannot be a bar to the insolvency petition. The Sub Court further observed that although the filing of the petition was to circumvent the bar

imposed by Act 10 of 1975, still it cannot be an answer to an order of adjudication passed, on the act of insolvency alleged by the petitioning

creditor in this case.

The order of adjudication supported by the reasons aforesaid, is now being challenged in this revision by the debtor. Under the scheme of the

Provincial Insolvency Act, a creditor can only petition for adjudicating his debtor an insolvent by alleging the act of insolvency occurring within

three months before the presentation of the petition. S. 6 lists out in cls, (a) to (h), what are acts of insolvency. In this case, the act of insolvency

alleged against the debtor was stated to fall under cl. (b) which lays down that a debtor commits an act of insolvency if he makes a transfer of his

property or any part thereof with intent to defeat or delay his creditors. S. 9 sets out the circumstances under which a'' creditor may file an

insolvencv petition. S. 13(2) enacts what are the particulars which a creditor should set i forth in his insolvency petition. S '' 24 lays down the

procedure at the hearing of in insolvency, p6tition. S. 27 provides when and in, what circumstances the order of adjudication caft, be passed'' by-

the-:court. S. 25(1) enacts,jtors or for performing his sons or for daughter or for when and in what circumstances the insolvency petition must be

dismissed by the court, for ,instance, the court must dismiss a creditor''s insolvency petition if the Proof adduced by the creditor on the act of

insolvency alleged by him against the debtor is not regarded as by the court as satisfactory proof. Again, the court must dismiss the creditor''s

insolvency petition if, in its opinion, there is sufficient cause which warrants that there should be no order of adjudication against a debtor.

It was the endeavour of Mrs. Mohana S. Nair that there was sufficient cause in this case which warranted the courts below in dismissing the

insolvency petition. According to her, sufficient cause was provided by the fact that at the material time the petitioning creditor was barred from

proceeding to recover the debt from the debtor by reason of the moratorium in Act 10 of 1975, and that was the reason why the petitioning

creditor has taken resort to file the insolvency proceeding against the debtor both as a means of circumventing the provisions of Act 10 of 1975

and as a pressure tactics to reduce the debtor to submission. Learned counsel conceded that Act 10 of 1975 did not, in terms, bar an insolvency

petition against an agriculturist who was a debtor. But the fact that the debtor was protected by the Moratorium under this Act should have been

held to be a sufficient cause within the meaning of S. 25(1) of the Provincial Insolvency Act, and the creditor''s petition in this case ought to have

been dismissed on that ground.

There is considerable force in this contention and in the way it was urged by learned counsel. Although Act 10 of 1975 only imposes a bar

against the filing of a suit or execution petition for the period of the Moratorium covered by the Act and it does not prohibit the creditor from

maintaining an insolvency petition against an agriculturist. yet. in my judgment, the Legislature policy behind this Act is that it does provide a

compelling gr6und for not allowing insolvency proceedings to be directed against the debtor in question. The preamble to Act 10 of 1975, to the

extent material, reads as follows""Whereas there has been wides I pread drought, and whereas the agriculturists ''have borrowed debts,. and, may,

-if free& for a, time from their pressure of creditors, be enabled to rehabilitate themselves, And whereas it is in the interests of the general public

that, at the present time, agriculturists be spared the distractions and expenditure involved in litigation launched by their creditors, in order that the

maximum possible advantage may result to the State in the matter of production of food crops"".

The clear legislative intention and policy expressed by this preamble is to protect agriculturists, who had incurred debts from the distractions and

pressures of creditors so as to enable them to rehabilitate themselves. while the operative provisions of Act 10 of 1975 are limited to stay or bar of

suits alone. yet, in my judgment, the high mind and purpose of this legislation cannot be thrown to the winds by the insolvency court while disposing

of a petition for adjudication of the debtor as an insolvent. It would not be sensible to protect a debtor from being sued on his debt, while at the

same time exposing him to proceedings by his creditors under the law of insolvency. The Sub Court in this case had given express thought to the

effect that the petitioning creditor had approached the insolvency Court for putting pressure on the debtor, finding that an institution of a suit to

recover the debt had been blocked by Act 10 of 1975. The debtor had characterised the strategy of the petitioning creditor as an abuse of the

process of court. While it is not necessary to say that the action of the creditor involves a misuse of court process or is a fraud on Act 10 of 1975,

1 should think that the present position of the parties under Act 10 of 1975 by itself provides ample and sufficient cause on the basis of which the

insolvency court should have come to the~ conclusion that no order be made on the creditor''s petition adjudicating the debtor as an insolvent.

Even otherwise, on the evidence which both ,the Sub Court and the District Court had before them: I do not think there was any warrant for

their decision that the sale by the debtor of some of his properties was with intent to defeat or delay his creditors. The Sub Court had analysed the

evidence on record. particularly that of the debtor himself. In the course of discussing the evidence, the Sub Court rejected the. assertion of the

debtor that ,he had appricated Rs. 33~000, which he obtained on the sale of his prorperties, for payment to his creditors, meeting the marriage

expenses of the sons and the like. According to the Sub Court, there was no proof at all that the creditors were paid, that the money was utilised

for the sons'' marriages, or for digging a well or for providing the daughter with presents. On this finding, the Sub Court''s conclusion was that the

sale was intended to defeat the creditors. One could understand a conclusion of this kind being drawn if the evidence showed that the sale

proceeds had been frittered away by the debtor in meeting sundry expenses and not in the repaying of the debts. But when once the court had

rejected the evidence of the debtor as to the appropriation made by him of the sale Proceeds, then there is no basis on which it could be held that

the proceeds were utilised in some fashion which would indicate that the very intention of the sale was to defeat the creditors. The intention to

defeat the creditors might very well be established by showing that the sale proceeds were frittered away in meeting the sundry expenses and not in

repaying of the debts. Where the only evidence as to the disbursement of the sale proceeds is rejected, then it is not possible to draw an inference

thereafter as to the intention with which the sale had been effected. This shows there is no evidence even as to the appropriation of the sale

proceeds. There would, therefore, be much less evidence as to the intention with which the sale would have been effect10d.

There was much argument at the Bar as to whether the existence of other properties and assets in the hands of the debtor can amount to means

to pay and the existence of means in the hands of the debtor to pay the debts. Mr. S. Sitharama Iyer, learned counsel for the petitioning creditor,,

referred to a judgment of the Calcutta High Court in Pratapmal Rameshwar Vs. Chunilal Jahuri, , which was to the effect that a debtor may have

assets which, if liquidated, may provide sufficient money to discharge his debts, and yet if he had no liquid assets where with to pay his debts at

present, he would not be regarded as ''one able to pay his debts'' within the meaning of S. 13(4)(b) of the Presidency Towns Insolvency Act,

1909, which corresponds to S. 25 of the Provincial Insolvency Act 1920. Mr. Sitarama 1yer ''also pointed out that the judgment of the Calcutta

High Court had been followed and applied by this court in T.S. Sankara Aiyar Vs. Muhammad Gani Rowther and Others, and Devarinti Dasi

Reddi Annaji Chinnappa Reddi and Others Vs. Dasari Venkobayya, . These cases have reference to that portion of S. 25(1) of the Provincial

Insolvency Act. which compelled the insolvency court to dismiss a creditors petition ''if it is satisfied by the debtor that he is able to Pay his debts''.

I have earlier pointed out that S. 25(1) lays down a number of compelling circumstances in which the court ought to pass an order dismissing a

creditor''s petition to adjudicate his debtor as an insolvent. I had earlier referred to two of the grounds, one being that the court is not satisfied with

the proof adduced by the creditor as to the act of insolvencv alleged by him against his debtor: and the other ground which I had earlier referred to

is that which compels the court to dismiss a creditor''s petition on some sufficient cause which enables the court to form the belief that an order of

adjudication ought not to be made against a debtor. The learned Chief Justice of the Calcutta High Court was dealing with yet another ground on

which a creditor''s petition has got to be dismissed by the insolvency Court and that is where the debtor comes forward and satisfies that court that

he is able to pay his debts. This ground is open to the debtor despite the fact that a creditor is in a position to adduce sufficient proof of the act of

insolvency alleged by him.

The grounds on which the creditor''s petition should be dismissed are independent grounds, the presence of one alone would be sufficient to

compel a court to dismiss a creditor''s petition. This being so, it may not be) necessary at all for me to go into the applicability of the rule laid down

by the learned Chief Justice of the Calcutta High Court to the facts of the present case since I had already held that the circumustances in the

present case warrant that-an order of adjudication ought not to be made because the proceedings had been launched by the creditors not bona

fide but in order to circumvent the provisions of Act 10 Of 1975. Besides, I have also held that there is yet another independent ground on which

the court ought to have dis missed the insolvency petition and that is on the score that there is no Proof adduced by the creditor in this case that the

sale of some of the debtor''s property for Rs. 33000, was in fact effected with intent to defraud the creditors.

Mr. Sitarama 1yer submitted that although there may not be sufficient evidence to show that the debtor intended to defeat the creditor by the

sale of the properties, yet his own evidence to the effect that he would lore repaying the debt from out of the income from the lands within a period

of ''11hree years showed that his intention was to delay the payment. I do not accept this argument as tenable. If the debtor were to say that he

would not sell his properies, but he would utilise the income from the properties, to repay his debts, that cannot be regarded as an intention to

delay the creditors. There is no law I know of which compels a debtor to sell his assets to pay his debts exceptIng the law relating to execution of

money decrees. Therefore, where a debor announces that it is his intention to old his property intact, but to utilise the income there from to pay off

his creditors, that cannot be regarded as delaying his creditors. In any case, that cannot fail under S. 6(b) of the provincial Insolvency Act. For

mere delaying the payment to the creditors is not per se an act of insolvency. S. 6(b) lays down that the sale of the debtor''s properties must be

with intent to delay the creditors. The act of sale itself is the method by which the debtor carries out his intention to delay the creditor. Where a

debtor does not want to dispose of his properties but wishes to retain them, earn income there from and then pay the creditors, the process may,

according to circumstances, involve delay in Payment of the creditors. But that would not bring the case under S. 6(b) of the Act.

For all the above reasons, I am satisfied that the order of adjudication passed by the Sub Court and confirmed by the District Court is not only

illegal, but against the mandate of S. 25(1) of the Act and therefore without jurisdiction, while the court ought to have allowed and dismissed the

insolvency petition they had done quite the Opposite thing and this involves an error of Jurisdiction apart from an error in the application of the law.

This revision is accordingly the orders of the Sub Court and the District Court are setaside. The result is that the insolvency petition flied against the

debtor in this case stands dismissed. The petitioner will have his costs from the respondent in this court,

Revision allowed.