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Judgment
Wallace, J.—This appeal is against the decision of the District Judge of Bellary in an insolvency matter. The facts necessary to be set out are:
In I.P. No. 9 of 1921 one Karugodu Seenappa Chetti was adjudged insolvent on 26th October, 1921. On 22nd December, 1925 a composition
scheme in which all creditors named in the I.P. were to be paid at four annas in the rupee was approved by the Court and the adjudication was
annulled. The scheme was based on a surety bond given by the present appellant, the effect of which will be considered later. By that date 16 out
of 36 creditors named in the I.P. had proved their debts and were included in the scheme schedule. The present respondent was one of those who
had not then proved his debt. The surety undertook to pay the creditors named in the scheme schedule the four-anna dividend provided by the
scheme, and also to pay into Court such sums as the Court ordered to be paid to such creditors as the Court hereafter brought on to the scheme
schedule. In consideration of his surety bond the assets of the insolvent were handed over to the appellant. On 20th December, 1926 the present
respondent, whose name appears in the original insolvency petition schedule, applied to be allowed to prove his debt on foot of the composition
scheme to be included among the scheme schedule creditors and to be given a dividend thereon at four annas in the rupee. The District Judge
found that notice of the scheme had not been served upon him, allowed him to prove his debt, ordered his name to be included in the scheme
schedule, and directed the surety, the appellant, to pay him his four-anna dividend. The appellant appeals. His main contentions are that it is
contrary to law for the Court to allow a creditor to prove his debt after the adjudication has been annulled in consequence of a composition
scheme, that with the annulment the insolvency proceedings came to an end and therefore the Court is no longer functioning as an Insolvency Court
and that the creditor''s only remedy is under the ordinary law, the insolvent being no longer entitled to the protection of the Insolvency Court. Each
of these contentions is open to attack and will be dealt with in detail.
I will first however deal with a contention advanced on behalf of the respondent that, apart from these points of law the contract between the
appellant and the Court embodied in his surety bond is an asolute answer to the appellant. Under that bond, which was executed on 30th
November, 1925, the surety bound himself to pay to the District Judge a sum in all of Rs. 8,479-11-6 and undertook to pay or deposit into Court
within two months the dividend amount in the scheme schedule allotted to the creditors named therein and further ""to pay into Court when ordered
such sums as may hereafter be ordered by the Court to be paid to such creditors as may be ordered to be included in the schedule.'''' The principal
sum secured under the bond is exactly one-fourth, four annas in the rupee, of the sum total of the debts shown in the insolvency petition schedule.
The total dividend which was due to the 16 creditors who had been already placed on the scheme schedule on 22nd December, 1925 at the rate
of four annas in the rupee amounted to Rs. 3,741-1-2, so that the surety was making himself responsible beyond that sum for a further sum of
about Rs. 4,700. It is clear therefore that the schedule approved by the Court provided for each creditor in the insolvency petition schedule being
paid four annas in the rupee if his debt was proved to the satisfaction of the Court. Thus both the Court and the bond contemplated that creditors
who had not yet come on the scheme schedule might be allowed to come on hereafter, that is, might be allowed to prove their debt for the purpose
of being paid the approved dividend of four annas in the rupee.
Now it is contended for the respondent that inasmuch as the Court has now ordered the respondent''s name to be put on the schedule it is not
open to the appellant to contest that order since under the terms of his bond he has to pay whatever sums the Court may order up to the limit of
Rs. 8,479. I do not accept this contention so broadly stated. It is obvious, for example, that the bond implies, though it does not state, that the limit
of the surety''s obligations was not so much the lump sum of Rs. 8,479 as the payment of a four-anna dividend to each of the creditors in the
original insolvency petition schedule, and that if the Court had ordered him to pay to some creditor not on that schedule, the spirit if not the letter,
of the bond would have been broken. In such a case it would be open in my opinion for the surety to plead that the action of the Court was
contrary to the contract. It also appears to me implicit in the contract that the inclusion of other creditors in the scheme schedule by the Court shall
be in accordance with law. It cannot be supposed that the parties contracted with the idea that one party or the other would not conform to the
law. It appears to me therefore that it is open to the appellant to take up the position that the inclusion of this creditor in the scheme schedule and
the consequent order of the Court that the appellant shall pay him a dividend are contrary to law and should be annulled. I therefore proceed to
consider the legality of the Judge''s order.
The appellant contends that after the adjudication has been annulled the Court cannot allow proof of debt by a creditor. He would therefore limit
the word ""hereafter"" in the bond to ""before the date of annulment of adjudication."" Now, is it a correct proposition of law that after the annulment
of an adjudication no proof of debt can be allowed? The appellant argues generally that annulment of adjudication ipso facto puts an end to the
insolvency. This proposition has to be examined. But before proceeding to do so I wish to enter a caveat against my ruling in Alamelu Ammal Vs.
T.S. Venkatarama Aiyar, being regarded as laying down in broad terms that the annulment of an adjudication in all cases puts an end to insolvency
proceedings within the meaning of Section 28 of the Act V of 1920. I have already dealt with that matter in my judgment in C.R.P. No. 170 of
1926.
There are four sections in the Insolvency Act under which annulment of adjudication may be ordered : Sections 35, 36, 39 and 43. An
examination of these will show that in a case u/s 36, the state of insolvency is obviously not put an end to, nor do the insolvency proceedings cease,
since these continue in another Court. In cases under Sections 35 and 39 the annulment is because the debts have been paid either in full or
because creditors have accepted part payment in full satisfaction. In the case u/s 43 the adjudication is annulled as a punishment because the
debtor has not prosecuted his application for discharge. It is clear that in cases under Sections 35 and 39 the state of insolvency ceases because
the debts have been paid so far as the insolvent can ensure that result and in the case of Section 43 it ceases because the debts have not been paid
and the debtor is to blame for not assisting payment. Section 43 (2) also clearly implies that the debtor''s protection has been taken away, that he is
again put in the status quo ante the insolvency proceedings and he is again at the mercy of his creditors. u/s 43 therefore the annulment of
adjudication is evidently intended to put an end to the insolvency proceedings as a whole. Sections 35 and 39 do not contain any provision similar
to Section 43 (2) and clearly the annulment of adjudication under those sections is not by way of punishment. Therefore when the adjudication is
annulled because he has paid his debts so far as he can, it appears to me the intention of the Act is that he shall not be put again in status quo ante
the insolvency at the mercy of his creditors, but that his creditors those of them at least who are willing to come in under the composition scheme
shall be paid in the insolvency proceedings themselves, and that they shall not be left to collect their debts de hors the Insolvency Court.
This involves the corollary that u/s 39 a composition binds all creditors in the insolvency petition schedule and I think it is clear that this is so. No
doubt Section 38 (2) does not have the word ""all"" between the words ""accepted by"" and ""the creditors"" but the meaning is clear. In the English
Bankruptcy Acts of 1883 and 1914 and in the Presidency Towns Insolvency Act, Section 30, it is perfectly clear on the wording that the
composition is binding on all creditors mentioned in the insolvency petition schedule. I think it is therefore clear that a composition approved by the
Court shall be deemed to be accepted by all such creditors; that is, the Insolvency Court by accepting the composition has provided for the
payment of all such creditors in the insolvency proceedings themselves, and no such creditor can after the Court''s approval of such a composition
proceed independently against the insolvent. The appellant''s main contention necessarily involves that when an adjudication has been annulled u/s
39 the insolvent may be arrested at once by any creditor who is not already in the scheme schedule.
No Court can reasonably accept such a position, namely, that the approval by the Court of a composition by the insolvent immediately lays him
open to arrest at a time when he has put all his property at the disposal of his creditors since it has all been handed over to the trustee under the
composition, and when he is therefore unable to satisfy any debt and must go to jail. Under this theory, by accepting a composition a debtor
practically closes the jail doors upon himself. This cannot be the insolvency law and the fallacy in the argument is that any creditor mentioned in the
insolvency petition has, when a composition has been approved, any remedy de hors the insolvency. His remedy is to come in on foot of the
composition which is deemed to be duly accepted by all such creditors and to prove his Bright to the approved dividend. For that purpose the
insolvency proceedings must obviously continue and they do continue. The Court is still bound to see that the composition is carried out--see for
example Section 40--and may even annul it. The position therefore is that while the annulment under a composition puts an end to the insolvent''s
state of insolvency, it does not put an end to the insolvency proceedings and the insolvent is thus protected from arrest by any creditor who is not
in the insolvency petition list by force of Section 28 of the Act, which enacts that a creditor shall not have any remedy against the insolvent while
the insolvency proceedings are pending without leave of the Court.
One case in the Lahore High Court, reported in Ram Sarup v. Khalil-ul-Rahman 87 Ind.Cas. 348 and confirmed on appeal in Khalil-ul-Rahman
v. Ram Sarup 95 Ind.Cas. 204, has been cited for the contention that all creditors are not bound by the composition. In that case the creditor had
taken no notice of the insolvency proceedings at all and had refused to prove his debt therein. It was held that he was not bound by the
composition and could have his remedy de hors the insolvency. If that case is an authority for the position that the approval by the Court of a
composition ipso facto puts the insolvent at the mercy of any creditor who refused to come in, I must express disagreement with it for reasons
already given.
No limit of time appears to have been fixed in the Act within which the creditor may come in and prove. The appellant argues that he must prove
before the annulment of adjudication because the insolvency proceedings must be considered to have terminated then. That argument has been
dealt with. The appellant argues further that as Section 39 says the schedule has to be framed in accordance with the provisions of Section 33, and
as Section 33 fixes the discharge as the terminus ad quem for tender of proof of debts, and as the annulment of adjudication in this case amounts to
a discharge, therefore no proof can be tendered after the annulment. The fallacy here, I think, is in applying Section 33 (3) to a case to which it
was not intended to apply. There is here in my view no discharge. The date of application for a discharge is ordinarily fixed by the order of
adjudication. If that order is annulled the necessity for applying for discharge must also be annulled. That this must be so appears from a
consideration of Section 43. One cannot hold that an insolvent whose adjudication had been annulled because he had not applied within the time
fixed for discharge had still by force of the original order of adjudication to apply within the time fixed for his discharge. It is absurd to contend that
in spite of the annulment he still has to apply for a discharge when that period has passed and he is being punished for not applying within it.
Support for this view is also found in Section 40, under which a re-adjudication may be made if the Court thinks fit. Such re-adjudication would be
unnecessary if the insolvent had still to be discharged. A case reported in Ex parte Clark, In re Clark (1884) 13 Q.B.D. 426 has been cited in
support of the contention that even after an annulment of adjudication by a composition there must be an order of discharge. That case was with
reference to Section 18 of the English Bankruptcy Act of 1883, which is much more comprehensive in its terms than ours. I do not think it
necessary to discuss it here for it really does not assist the appellant. If an order of discharge is still required, then the creditor can u/s 33 (3) still
prove his debt. Even if Ex parte Clark, In re Clark (1884) 13 Q.B.D. 426 has to be so interpreted it seems hardly in conformity with In re Keet
(1905) 2 K.B. 666, where Stirling, J., interprets an annulment of adjudication in the following way, that is to say, ""wipes out the bankruptcy
altogether and puts the bankrupt in the same position as if there had been no adjudication""--at p. 676. Even if the view of Page, J., in Krishna
Kishore Adhicary, In re (1927) ILR 54 C. 650 be accepted, namely that ""the acceptance of a scheme operates as a conditional discharge,"" it
would make no difference here since the debt could be proved at any period before the final discharge. However in my view Section 33 (3) for
reasons I have given does not apply to the case of an annulment of an adjudication by force of a composition. The general principles of the
insolvency law then apply to determine the limit of time within which the creditor may prove his debt. These are enumerated by Mellish, L.J., so
long ago as 1872 in In re General Rolling Stock Company (1872) 7 Ch.A. 646 as follows at p. 650:
Everybody who had a subsisting claim at the time of the adjudication is entitled to participate in the assets
and
as long as assets remain unadministered, he is at liberty to come in and prove his claim, not disturbing any former dividend.
Reference may also be made to Sivasubramania Pillai Vs. Theethiappa Pillai (dead) and Others, , a ruling of this Court, and the cases cited
therein. There it was held that even after discharge in some cases debts may be proved.
I think therefore the correct view of the position is that although the annulment of adjudication puts an end to the insolvent''s state of insolvency,
it does not, in cases such as are contemplated by Section 37 where the Court still retains control of the insolvent''s assets, put an end to the
insolvency proceedings within the meaning of Section 28, that all creditors named in the insolvency petition schedule are bound by a composition
which has been approved by the Court-and must come in on foot of it and cannot have any remedy de hors the insolvency proceedings, and that
any creditor is entitled, unless the Court thinks his application is unduly delayed, to prove his debt at any time before the final dividend has been
paid, and will, when he proves his debt, be admitted on foot of the composition to have his name added to those already in the scheme schedule
u/s 29 and get his dividend at the scheme rate so far as there are still assets available for distribution. Reference may be made in this connection to
the ruling in Sivasubramania Pillai Vs. Theethiappa Pillai (dead) and Others, and to the general principles enunciated in a decision of this Court in
Govindas Ckaturbhujadas v. Ramadoss ILR (1924) M. 521 : 1924 48 M.L.J. 252 on the analogous provisions in the Presidency Towns
Insolvency Act (III of 1909).
Now in the present case as noted the creditor was in the insolvency petition schedule and his debt was taken into the reckoning of the amount
for which the surety gave his bond. He was not given notice, as he ought to have been given notice of the proposed composition and therefore he
did not come earlier to prove his debt. But he is willing to accept the composition rate, and he is, as I have shown reasons for holding, entitled to
be paid at that rate and to recover from the surety according to the terms of his bond, since there is money still available for the purpose. I am
therefore of opinion that the order of the learned District Judge is right and I would dismiss this appeal with costs.
Thiruvenkatachiariar, J.
This appeal is preferred against an order of the District Court of Bellary in an insolvency matter. In Insolvency Petition No. 9 of 1921 one
Karugodu Seenappa was adjudged an insolvent. The time fixed for the insolvent''s application for discharge was on his application extended from
time to time till 2nd March, 1925. On that date the insolvent filed a petition u/s 38 of the Provincial Insolvency Act, 1920, submitting for the
approval of the Court a proposal for a composition in satisfaction of his debts. The main terms of the proposal were : (1) the creditors of the
insolvent should accept four annas in the rupee in full satisfaction of their debts and forego the balance; (2) the amounts payable to the creditors
according to the said composition should be paid to them by Timmappa, son of Kamireddi Lingappa, within two months from the date of the
approval by the Court of the proposal for composition; and upon such payment being made the property of the insolvent still undisposed of and the
debts remaining uncollected by the Receiver should be handed over to the said Timmappa who shall be at liberty to make good the payments
made by him by the sale of the properties and collection of debts so handed over to him by the Receiver. The insolvent stated in the said
application that the proposed composition is beneficial to the general body of creditors, most of whom had signified their acceptance of the same
and that the said Timmappa has with the help of the relations of the insolvent come forward to pay up the liabilities of the insolvent as proposed.
Upon this petition notice was ordered to all the creditors and after several adjournments the Court on the 22nd October, 1925 passed the
following order:
No creditor has objected to the scheme which the Receiver reports is to the great advantage of the creditors in general. I therefore approve of the
scheme. For framing schedule and for petitioner to issue notices by registered post to all creditors who have not yet proved to prove their debts on
or before the 21st December, 1925. To 6th November, 192S for security bond of the proposed surety.
The said Timmappa filed his security bond in Court on the 30th November, 1925 and it was approved by the District Judge on the 1st
December, 1925. Under the said bond he bound himself to the District Judge of Bellary in the sum of Rs. 8,479-11-6, subject to the conditions
stated therein. Those conditions are (1) that the said Timmappa should within two months pay the creditors their respective dividend amounts
noted in the schedule of creditors who have proved their debts attached to the order accepting the composition, and (2) pay in Court when
ordered such sums as may hereafter be ordered by the Court to be paid to such creditors as may be ordered to be included in the schedule.
On the 22nd December, 1925 the Court finally accepted the proposal and passed an order u/s 39 embodying the terms of the proposal and
annexing thereto a schedule of the creditors who had proved their debts and also annulling the order of adjudication of the insolvent. The schedule
to the said order comprised only 16 creditors who had proved their debts out of the total number of 36 creditors mentioned in the insolvent''s
schedule. The 16 creditors were paid their dividend amounts aggregating to Us. 3,381-11-7 and the properties of the insolvent were thereafter
handed over to the surety Timmappa as provided in the order accepting the composition.
On 20th December, 1926 one Devasi Harpal, who is the 29th creditor in the insolvent''s schedule, applied to the Court praying that he may be
allowed to prove his debt and his name be included in the schedule of creditors attached to the order approving the composition. He stated that he
had no notice of the proposal for composition and that he is prepared to accept a dividend for his decree debt under the composition. The learned
District Judge being of opinion that this creditor had not been served with notice of the proposal for composition allowed him to prove his debt, but
before passing final orders issued notice to the surety Timmappa to show cause why the application of this creditor should not be granted.
The surety Timmappa filed a counter in which he contended (1) that the only liability which he undertook under his security bond was to pay all
the creditors who proved their debts before the annulment of adjudication of the insolvent, (2) that by the annulment of adjudication the insolvency
proceedings came to a close and his security bond was fully discharged by his payment to all the creditors included in the schedule, the dividends
payable to them, and (3) that the petitioning creditor not having been included in that schedule is not bound by the composition scheme and he may
seek his remedy, if any, in the ordinary Courts of law.
The learned District Judge by his order, dated 19th August, 1927 overruled the surety''s objections. He held that the surety under the terms of
his bond bound him self not only to pay the dividends noted in the schedule attached to the order approving the composition, but also such sums as
he may thereafter be ordered by the Court to pay to such creditors as he may be ordered to be included in the said schedule. He therefore
ordered the inclusion of this creditor''s name in the schedule and directed the surety to deposit within a month Us. 542-1-3 being the amount of the
dividend payable to him under the composition scheme. Against this order the surety Timmappa has preferred this appeal.
The main contentions urged on behalf of the appellant are:
(1) That the order passed u/s 39 annulling the adjudication of the insolvent puts an end to his insolvency and the Court cannot thereafter allow any
creditor to prove his debt as if the insolvency proceedings are still pending before it.
(2) That under the terms of the surety bond, the appellant undertook to pay only those creditors whose debts are proved and whose names are
included in the schedule attached to the order made u/s 39. He is not therefore liable to be called upon to pay the dividend to any creditor whose
name is not then included in that schedule.
(3) Even if under the security bond he had undertaken to pay the dividend to the creditors not included in the said schedule but who may thereafter
be allowed to prove their debts, such a condition will be inoperative in law, as the Court after annulling the adjudication u/s 39 has no jurisdiction
to amend the schedule of creditors attached to the order passed u/s 39 and the surety can avail himself of that defence.
The questions we have to determine in this appeal are whether the above contentions of the appellant are to any and to what extent well
founded.
First as regards the extent of the surety''s obligations under his bond, I have no doubt that the view taken by the District Judge is correct. It is
quite clear from a perusal of the terms of the proposal for a composition which was submitted by the insolvent for the approval of the Court on 2nd
March, 1925 that the surety Timmappa was put forward as willing to pay all the creditors of the insolvent the dividends they would be entitled to
under the composition. On the date of that petition only some of the creditors had proved their debts. The Court in its order approving the
composition ordered a further notice to issue to the creditors who had not proved their debts in order that the names of such of them as prove their
debts may be included in the schedule to be prepared u/s 39. At the same time the Court, having regard evidently to the likelihood of some of the
creditors not proving their debts within the time limited in the said order, wanted not to shut them out from the benefits of the composition on the
ground merely that they had not proved their debts within the time fixed for the order to be passed u/s 39. It was in view of that consideration that
the maximum amount of the surety''s liability was fixed in his bond at Rs. 8,479-11-6 which represents the dividends payable to all the creditors in
the insolvent''s schedule at four annas in the rupee, and the conditions of the bond were not only the surety should pay the dividends to the
creditors mentioned in the schedule to the order passed u/s 39 within two months'' time from the date of that order, but that he should also pay into
Court when ordered the dividends which are payable to any other creditor whose name may thereafter be included in the schedule. In the face of
this explicit undertaking by the surety it is futile to contend that he undertook to pay the dividend only to those creditors who prove their debts
before the order accepting the composition and annulling the adjudication is passed u/s 39 and whose names are included in the schedule annexed
to the said order.
It is however contended that even if the surety''s contention on that point is wrong and it must be held that he had also undertaken to the Court
to pay when ordered the dividends to other creditors of the insolvent who may prove their debts thereafter, that undertaking cannot be enforced
because the Court has no jurisdiction to entertain proof of any debts after the insolvency is annulled, and the schedule of creditors prepared u/s 39
cannot thereafter be amended. It is argued that the annulment of the adjudication of an insolvent u/s 39 in consequence of the Court approving the
composition has the same effect as his absolute discharge as by the annulment the debtor ceases to be an insolvent and is therefore in the same
position as if he had been discharged.
It is further argued that u/s 39 of the Provincial Insolvency Act the composition approved by the Court is binding only on the creditors entered
in the schedule annexed to the order annulling the adjudication and that therefore it is open to a creditor not entered in the said schedule to seek his
remedy against the debtor by independent proceedings. The question what exactly is the effect of an annulment of adjudication of an insolvent u/s
39 of the Act turns upon the relevant provisions of the Act. u/s 39 the terms of the composition shall be embodied in an order of the Court and the
Court shall frame a schedule in accordance with the provisions of Section 33. The order of adjudication shall be annulled and the provisions of
Section 37 shall apply and the composition or scheme shall be binding on all the creditors entered in the said schedule so far as relates to any debts
entered therein. Section 37 is in these terms:
Where an adjudication is annulled, all sales and dispositions of property and payments duly made, and all acts theretofore done, by the Court or
Receiver, shall be valid; but, subject as aforesaid, the property of the debtor who was adjudged insolvent shall vest in such person as the Court
may appoint, or, in default of any such appointment, shall revert to the debtor to the extent of his right or interest therein on such conditions (if any)
as the Court may by order in writing declare.
Under the Act an annulment of adjudication may be made on various grounds. To all such cases the first part of the above section applies and
all sales and dispositions of property which had been made prior to the annulment will stand good. The latter part of the section deals with the
particular order which the Court may pass at the time of annulling the adjudication. The nature of that order will, of course, depend upon the
ground on which the adjudication is annulled and on the circumstances of the particular case. When the annulment is ordered in consequence of the
composition being accepted by the Court, it is empowered to pass such order as it may consider necessary for giving full effect to the composition
approved by it. We have therefore to see what the conditions are which have been laid down by the Court in its order annulling the adjudication
with regard to the vesting of the debtor''s property in this case. In order to ascertain those conditions we have to look not only at the terms of the
order annulling the adjudication which was passed on 20th December, 1925, but we have also to consider the terms of the proposal as set out in
the insolvent''s application put in u/s 38 which were approved by the Court by its previous order, dated 22nd October, 1925, pursuant to which
the surety bond with the conditions already referred to was accepted and the final order annulling the adjudication was passed on 20th December,
1925. A perusal of the said orders and the bond executed by the surety clearly shows that on the surety paying within two months the dividends
payable to the creditors entered in the schedule prepared u/s 39 all the properties of the insolvent which according to his schedule were worth Rs.
10,845 were to be handed over to the surety subject to the. further obligation expressly undertaken by him in his bond to pay when ordered by the
Court the dividends which may be payable to any other creditors who may thereafter be allowed to prove their debts and to be entered in the said
schedule. The surety is empowered to reimburse himself the payments made by him on account of the insolvent by the sale of the insolvent''s
properties. It follows that if any residue is left after payment of dividends to all the creditors as ordered by the Court such residue will revert to the
debtor. In other words, the surety is in the position of a trustee to whom all the properties of the insolvent are assigned on his undertaking to be
personally responsible for the payment of dividends to all the creditors of the insolvent as ordered by the Court up to the total amount mentioned in
his bond, namely Rs. 8,479-11-6 and with liberty to recoup himself out of the insolvent''s estate. Those are the conditions of the Court''s order
subject to which the annulment was made and which are binding on the surety to whom the insolvent''s properties were handed over subject to the
said conditions. The effect of the order is that though the annulment u/s 39 has put an end to the status of the debtor as an insolvent, the Court has
still control over the insolvency proceedings for the purpose of giving effect to the composition approved by it. For that purpose it is competent to
the Court to enforce all the conditions laid down by it subject to which the annulment was made. That by an annulment u/s 39 the Court does not
cease to have jurisdiction over the insolvency proceedings is also clear from Section 40 under which it is open to the Court to annul the
composition or scheme and re-adjudge the debtor-insolvent but without prejudice to the validity of any transfer or payment duly made or of
anything duly done under or in pursuance of the composition or scheme.
It is argued for the appellant that u/s 39 the composition is binding only on the creditors whose names are entered in the schedule annexed to
the order of annulment and that the other creditors have their ordinary remedies against him as he is no longer an insolvent and that therefore the
composition is fully worked out when the schedule creditors are paid their dividends and thereupon the surety''s obligation with reference to the
composition also comes to an end. It is no doubt correct to say that no creditor can claim the benefit of the composition unless and until his name is
entered in the schedule, but Section 39 does not say that the schedule of creditors as it stood when the order of annulment was passed cannot be
amended by the addition of the names of other creditors who may be allowed to prove their debt after that order is made.
u/s 33 (3) any creditor of the insolvent may at any time before the discharge of the insolvent tender proof of his debt and apply to the Court for
an order directing his name to be entered in the schedule as a creditor in respect of any debt provable under the act and not entered in the schedule
and the Court after causing notice to be served on the insolvent and the other creditors who have proved their debts and hearing their objections, if
any, shall comply with or reject the application. An order of annulment does not amount to a discharge of the insolvent which has the effect of
wiping off all the debts of the insolvent provable in the insolvency. There is, therefore, no reason why a creditor who has not proved his debt when
the order u/s 39 was passed should not subsequently be allowed to prove his debt and to have his name entered in the schedule prepared u/s 39 if
he wants to have the benefit of the composition, it being of course open to the Court to accept or reject his application as it thinks fit. So long as
the assets out of which the composition is to be paid are not exhausted, there is no reason why proof of further debts should not be allowed by the
Court especially as the Court before approving the composition has to be satisfied that the composition is for the benefit of the general body of
creditors and though accepted only by a majority in number and three-fourths in value of those creditors only have proved their debts, it shall be
deemed to be duly accepted by the creditors, i.e., by the entire body of creditors. The opposite view contended for on behalf of the appellant,
namely, that the Court has no power to amend the schedule prepared u/s 39 would lead to the result, viz., that the creditors who have not proved
their debts when that schedule is prepared either lose their rights altogether if they have no other remedy as a penalty so to speak for not proving
their debts within time, or they are at liberty after the annulment to proceed against the debtor by suit or execution proceedings to enforce their
claims against him, he being no longer an insolvent. In support of the latter view the case in Khalil-ul-Rahmaii v. Ram Sarup 95 Ind.Cas. 204
decided by the learned Chief justice and another learned Judge of the Lahore High Court is relied on. In that case the learned Judges held that
when the adjudication of an insolvent is annulled u/s 39
a creditor who docs not choose to take advantage of the composition and to prove his debts for participation in the funds made available under the
composition is not bound to do so. He may take his chance and recover what proportion of his debt he can in due course of law. The binding
force of a composition is due to the law which is embodied in Section 39 and that law must be applied subject to all the restrictions set forth in the
section. The composition cannot be held to be binding except on creditors who caused their debts to be entered in the schedule contemplated by
the section.
Assuming this decision to be correct with reference to the wording of Section 39 it is no authority for the proposition that a creditor who
desires to avail himself of the composition cannot apply to the Court to be permitted to prove his debt and to have his name entered in the schedule
which is the case before us. The question whether a creditor who is not allowed to prove his debt after the order of annulment is made has any
other and what remedy open to him does not arise in this case. We are therefore not called upon in the present case to say whether the
interpretation of Section 39 in Khalil-ut-Rahman v. Ram Sarup 95 Ind.Cas. 204, which confirmed in appeal a decision to the same effect, passed
by a single Judge of the same High Court is correct or not. If the effect of Section 39 is as stated in Khalil-ul-Rahman v. Ram Sarup 95 Ind.Cas.
204, then the annulment of the insolvency of the debtor results in giving a free hand to the creditors not included in the schedule prepared under
that section who do not wish to accept the composition and they may at once proceed against him to enforce their debts. As all the properties
possessed by the debtor at the date of the annulment are under the control of the Insolvency Court for payment of dividends due to the scheduled
creditors, the other creditors will have in most cases nothing more than the future earnings of the debtor to look to for payment of their debts and
any decree they may get can be enforced only against such earnings or any other after-acquired property of the debtor or by his arrest. The
position of the insolvent is thus rendered even more precarious than it was when he was adjudged an insolvent and much more harassing if he is
liable to be arrested for the debts which were provable in the insolvency notwithstanding that he has parted with all his properties for the benefit of
his creditors. I therefore fully share the reluctance expressed by my learned brother during the course of the arguments that an interpretation of
Section 39 which leads to such a result should not be accepted as correct unless we are forced to it by the clear language of the section.
The question as to the right of an unscheduled creditor to enforce his debt by recourse to ordinary remedies against a debtor whose
adjudication has been annulled u/s 39 does not arise in this case, but I may observe that the view taken by the learned Judges of the Lahore High
Court seems to be warranted by the difference between the wording of Section 39 of the Provincial Insolvency Act (V of 1920) and the wording
of the corresponding section, viz., Section 30 of the Presidency Towns Insolvency Act (III of 1909). u/s 39 of the Provincial Insolvency Act the
composition or scheme shall be binding on all the creditors entered in the said schedule so far as relates to any debt entered therein. But u/s 30 of
the Presidency Towns Insolvency Act the composition or scheme shall be binding on all the creditors so far as relates to any debt due to them from
the insolvent and provable in insolvency. In all other respects the provisions of Sections 38 and 39 of the Provincial Insolvency Act correspond to
the provisions of Sections 28, 29 and 30 of the Presidency Towns Insolvency Act. Under both the Acts notice of the proposal of the composition
has to be given to all the creditors. If the proposal is accepted by a majority in number and three-fourths in value of all the creditors whose debts
are proved the same shall be deemed to be duly accepted by the creditors, i.e., all the creditors including those who had not proved their debts.
The difference between the two Acts comes in only with regard to the statement as to the binding effect of the composition approved by the Court.
Section 30 of the Presidency Towns Insolvency Act adopts the language of the corresponding section of the English Bankruptcy Act:
A composition or scheme accepted and approved in pursuance of this section shall be binding on all the creditors so far as relates to any debts due
to them from the debtor and provable in bankruptcy.
It will thus be seen that so far as the effect of an annulment of adjudication in consequence of the Court approving the proposal of a
composition is concerned the Legislature in Section 39 of the Provincial Insolvency Act now in force merely re-enacted the old Section 27 of the
repealed Provincial Insolvency Act in preference to the wording of Section 30 of the Presidency Towns Insolvency Act, 1909. Having regard to
this difference in language between the two enactments relating to the same subject passed by the same legislature I am not prepared to say that
Khalil-ul-Rahman v. Ram Sarup 95 Ind.Cas. 204 was wrongly decided, but at the same time I cannot help observing that there does not seem to
be any sufficient reason for the order of annulment passed in consequence of the Insolvency Court approving the composition having different
results under the two Acts or why the provision in the Presidency Towns Insolvency Act on that question which seems to me the more appropriate
one and which follows the corresponding provision in the English Bankruptcy Act is less suitable to annulments of adjudications u/s 39 of the
Provincial Insolvency Act.
For the reasons stated the contention of the appellant that the action of the Insolvency Court in this case in allowing the respondent to prove his
debt and including his name in the schedule was ultra vires and that therefore the condition in his bond that he is liable when ordered by the Court
to pay the dividends to the creditors who may thereafter be included in the schedule is unenforceable cannot be accepted as correct.
In the result this appeal fails and is dismissed with costs.