Kokku Rama Row and Another vs The Official Assignee of Madras

Bhashyam Aiyangar, J.—In this case two persons, Kasi Viswanatha Mudali and Balasundaram, were adjudicated insolvents on the 22nd

July, 1929, on a creditor''s petition presented on the 2nd March, 1929. Some time before the presentation of that petition, that is on the 23rd

August, 1928, the first insolvent, Kasi Viswanatha Mudali, had transferred all his property to himself and two of his numerous creditors, namely K.

Rama Rao and B. Kottayya, jointly, on trust for the benefit of his creditors. The deed of trust recites that the arrangement evidenced by it was

come to and settled by the six creditors specified in list A thereof after looking into the accounts of the transferor and ""a discussion amongst

themselves and with the transferor of the financial position of the transferor"" and that the transferor ""intimated unto the said creditors in list A that

the other creditors (of whom there were more than 60 as specified in list C) would not disturb the arrangement now come to."" After the

adjudication, the Official Assignee applied by a notice of motion, dated the 23rd August, 1929, to declare that the said deed of trust was void as

against him u/s 55 of the Presidency Towns Insolvency Act (III of 1909) and to direct the trustees to deliver over to him all the properties of the

insolvent in their possession and for mother ancillary reliefs. This application was contested by the two co-trustees of the insolvent but was granted

by the learned trial Judge. The trustees have appealed.

Now, the ground on which the learned trial Judge has held that the trust in question is voidable by the Official Assignee is that it is an act of

insolvency and opposed to the spirit and policy of the law of insolvency. The debtor having transferred all his property under the said trust for the

benefit of his creditors generally, it was undoubtedly an act of insolvency (section 9 (a) of the Act). But it had been effected more than three

months before the presentation of the insolvency petition. The insolvency petition could not be and was not therefore grounded on it. It was based

on a later and different act of the debtor. The learned Judge however thought that this did not make a difference. He held ""that an act of insolvency

is an act of insolvency whenever it is committed"" and that once an adjudication was made on some act of insolvency the Official Assignee was

entitled to have any earlier act of insolvency set aside. He relied in support of this on the observation of Lord Hobhouse in Khoo Kwat Siew v.

Wooi Talk Hwat (1891) L.R. 19 IndAp 15 : ILR 19 C. 223 (P.C.), namely:

The well-known rule of law is, that if a trader assigns all his property ... that is an act of bankruptcy, and is void against the creditors and the

assignee, simply because nothing is left with which to carry on his business,

and also the remarks of Lord Eldon to the same effect in Button v. Morrison (1810) 17 Ves. Jun. 193 : 34 E.R. 75.

It is contended before us that the view taken by the learned Judge is not correct. The argument is that apart from Sections 55 and 56 of the Act

an act of insolvency can only be avoided if the adjudication is based on it or it is affected by a relation back of the assignee''s title provided in

Section 51. It is urged that as in this case the adjudication is not based on the making of the transfer in question and the transfer was effected more

than the full period of three months referred to in Section 51, previous to the presentation of the insolvency petition, the Official Assignee is not

entitled to avoid it except under the two sections mentioned above.

I think this contention is valid. Neither of the authorities cited by the learned Judge appears to bear out the conclusion that an act of insolvency is

ipso facto void. What all was laid down in Dutton v. Morrison (1810) 17 Ves. Jun. 193 : 34 E.R. 75 was that a conveyance by a trader of all his

estate and effects was an act of bankruptcy. It does not follow from it that such a conveyance, whatever its nature, can be avoided by the assignee

in bankruptcy either when it does not form the basis of adjudication or after any length of time. In the other case the Privy Council have no doubt

observed that such a conveyance except when made ""on some substantially contemporaneous payment or some substantial undertaking to make

payment in future"" was void against the creditors and the assignee, but the particular conveyance which was before them in that case was one in

favour of a creditor and not a trust for the benefit of all creditors generally. It has been held in several cases decided by the English Courts

subsequent to Dutton v. Morrison (1810) 17 Ves. Jun. 193 : 34 E.R. 75 that

Conveyances, transfers, etc., which are merely void as acts of bankruptcy (and not only as against creditors, irrespective of bankruptcy, such as

conveyance fraudulent by the Statute of Elizabeth) will not be treated as void unless executed within the time to which the title of the trustee relates,

that is, under the present Act within three months of the presentation of the petition."" (See William on Bankruptcy, 13th Edition, page 15, where

the cases are referred to. See also Hobson on Bankruptcy, 7th Edition, page 173).

Thus, an act of bankruptcy is not ipso facto void and unless it be a fraudulent transaction, the lapse of the period within which it can be availed

of to support an application for adjudication will place it beyond attack.

This being so under the English Law itself, we have to see if a different view can be justified on the provisions or the spirit of the Indian Law

which has to be applied in this case, that is, the Presidency Towns Insolvency Act (III of 1909). Now taking this Act, we find that Section 9

describes what are acts of insolvency, and one of such acts is no doubt a transfer by a debtor of all or substantially all his property to a third

person for the benefit of his creditors generally. Section 10 lays down that if a debtor commits an act of insolvency ""an insolvency petition may be

presented either by the creditor or by the debtor"" on which he may be adjudged an insolvent and Section 12 provides infer alia that the act of

insolvency on which the creditor grounds his petition should have occurred within three months before the presentation of the petition. There is

nothing in these sections to show that beyond furnishing ground for the presentation of a petition within three months to obtain an order of

adjudication, an act of insolvency has in itself any other legal consequence. The only other material sections which have to be considered in this

connection are sections 51 and 52 The first of these sections deals with the subject of relation back. It provides in brief that the insolvency of a

debtor shall be deemed to have relation back to and to commence at the time of commission of the earliest act of insolvency proved to have been

committed by the insolvent within three months next preceding the date of the presentation of the insolvency petition. The next section lays down,

so far as it is relevant at present, that the property of the insolvent divisible amongst his creditors shall comprise ""all such property as may belong to

or be vested in the insolvent at the commencement of the insolvency."" The combined effect of these two sections is to invalidate or render

ineffectual the transactions entered into by the insolvent with reference to his property during the period of the relation back. But neither of these

sections nor the others already referred to have any bearing on the transactions entered into and completed before that period.

Our attention has been drawn to the case of Manmohan Das v. N.C. Macleod ILR (1902) B. 765. In that case two debtors assigned the whole

of their property to trustees for the benefit of such of their creditors as should accept and sign the deed within two months from the date thereof.

This was held to be an act of insolvency and the debtors were adjudicated insolvents on its basis on the application of certain creditors who had

not signed that deed. The Official Assignee having then applied to avoid the said deed, it was considered that the application did not fall u/s 24 of

the Indian Insolvency Act (11 and 12 Vic, c. 21) then in force, but it was still granted on general principles. This decision cannot, however, be held

to apply to the present case, for, firstly, it was given under the old Act, in which there was no provision corresponding to Section 55 of the present

Act, and secondly, it was a case of an act of bankruptcy on which the adjudication was obtained. That an act of insolvency only affords ground for

adjudication and is not ipso facto void has also been held in the Official Assignee of Madras v. U.R.M.O.R.S. Firm ILR (1926) M. 541 : 52

M.L.J. 352.

As regards the spirit and policy of the insolvency law referred to by the learned judge it may be observed that whatever justification there might

have been under the old Act to have recourse to it for setting aside transfers made by insolvents prior to their adjudication, there appears to be

none such under the present Act, for this has been modelled after the later Bankruptcy Acts of England, and contains specific provisions to meet all

cases of avoidable transfers. No decision under the present Act has been cited to us in which any transfer not falling under any of its specific

provisions (sections 51, 52, 55 and 56) was set aside as opposed to its spirit or policy.

The order of the learned Judge does not therefore appear to be supportable on the grounds on which it is rested, but, that does not dispose of

the matter, for, it is contended for the respondent that the trust in question is void as against him u/s 55 of the Act. Indeed, this, as stated already, is

the specific ground on which he sought its avoidance. Now applying that section to the facts of this case, the point is whether the disputed deed of

trust which came into existence within two years prior to the adjudication is a transfer of property in favour of (1) a purchaser, (2) in good faith,

and (3) for valuable consideration. The burden is undoubtedly on the trustees-appellants to make out that the transfer satisfies all the three

conditions just mentioned (see The Official Assignee of Madras v. Sambanda Mudaliar ILR (1920) M. 739 : 39 M.L.J. 345. Now, I think it

unnecessary to consider in this case whether the trustees are purchasers and whether the transfer was for valuable consideration within the meaning

of the said section, for I am quite satisfied on the evidence that it is entirely lacking in good faith.

It will be seen in the first place that although the debtor, Kasi Viswanatha Mudali, was according to the deed of trust itself indebted to nearly

70 persons, the trust was arranged and come to between six only of those creditors (namely, those specified in list A) and the debtor. There is no

evidence that any notice was given to the other creditors or that they were consulted in the matter. The deed recites that the debtor-transferor

intimated unto the said creditors in list A that the other creditors would not disturb the arrangement now come to."" But it does not appear on what

basis the debtor gave that ""intimation"" and it is obvious that no value or significance can be attached to a recital of that sort. The six creditors

referred to in list A are said to have signified their assent to the deed of trust but even that assent was not taken and does not appear on the deed.

The man who is stated to have looked into the accounts of the debtor on behalf of himself and the other five creditors in list A and ascertained the

financial position of the debtor is K. Rama. Rao who was appointed one of the trustees, but this man is, for all that his evidence shows, an

undischarged insolvent and it is also more than doubtful whether he was a creditor at all in any substantial sense. Another trustee was the debtor

himself, a circumstance which is certainly not calculated to inspire confidence in the bona fides of the transaction, especially taking into

consideration that it was made ""lawful for the trustees to appoint any two of them to be in charge of the cash and account books."" There is a letter

referred to in the deposition of Mr. S. G. Sadagopa Mudaliar, the attorney who drafted the trust deed in question, which shows that those who

arranged this transaction were more concerned with seeing that somehow or other nobody jeopardised it within the space of three months than

with trying to notify it to all the creditors and obtaining their assent thereto. This is accentuated by the admitted conduct of the trustees with

reference to the Multanese creditors (one of whom filed the petition on which the adjudication was made) who did not consent to the trust and

actually repudiated it. it is apparent from the evidence of K. Rama Rao himself, that those creditors were inveigled into inaction by a promise to

pay up their debts by weekly instalments and by actual payments from time to time which were, however, abruptly stopped immediately on the

expiry of the period o. three months. One does not wonder under these circumstances that the administration of the estate by the trustees, so far as

it went, was by no means fair. They distributed some moneys among the creditors but it was not rateable, one of the creditors having admittedly

been paid thirteen annas in the rupee, whereas others were paid very much less and some nothing at all. There are also other circumstances which

cast suspicion on the deed of trust, but it does not appear necessary to dilate on them. I am clear on the evidence as a whole that the deed of trust

was not entered into in good faith for the benefit of all the creditors and it was only a hole and corner affair.

On this footing it is clearly not binding on the Official Assignee and must be set aside as against him. The appeal thus fails and is dismissed with

costs.

Curgenven, J

My learned brother, whose judgment I have had the advantage of reading, has dealt with this case so fully that 1 wish only to add a few words

with regard to Official Receiver of Cuddapah v. Subbiah ILR (1927) M. 815 : 53 M.L.J. 742, to which I was a party. That case, which arose

under the Provincial Insolvency Act (V of 1920), related to a deed of trust executed by a debtor with a view to the distribution of his assets among

his creditors, and much the same questions arose then as now for decision. I think however that in the present case it is unnecessary to deal with

the matter in its broader aspects because, on the special facts, the appellants have conspicuously failed to prove that the transfer, granting that it

was in favour of a purchaser for valuable consideration, was made in good faith. I agree that for this reason alone the transfer is, u/s 55 of the

Presidency Towns Insolvency Act (III of 1909), not binding upon the Official Assignee. The appeal is dismissed with taxed costs on the Original

Side scale.