Kunhitti and Another vs Cheru and Another

These two appeals arise from as order passed by the learned District Judge of Trichur in the exercise of his insolvency jurisdiction. In I.P. 12 of 1119 one Arya Antherjanom was adjudicated insolvent at the instance of one of her creditors. The adjudication order was made on 25-3-1121. M.P. 807 of 1122, where from these appeals arise, was an application made by the official receiver to declare a transfer made by the insolvent and two subsidiary transfers made by the transferee as invalid and inoperative as against him.

On 20-6-1119 Arya had executed a sale deed (Ext. G.) of all her properties (31 items) in the Cochin State to counter-Petitioner 1 in M. P. 807 mid to his deceased wife. The consideration shown in the document is Rs. 7,000/-. The wife of counter-Petitioner 1 was Arya''s brother''s daughter. Counter-Petitioner 2 is the infant son of counter- Petitioner 1 and his deceased wife. He is the latter''s sole heir. This transfer formed the basis of the creditor''s petition to adjudge Arya an insolvent.

On 4-11-1119 counter-Petitioner 1 and his wife, the transferees under Ext. G, executed two documents, one, a sale deed (Ext. IV) in favour of one Cheru and the other, a mortgage (Ext. XI) in favour of counter-Petitioner 5. Exhibit IV comprised only one item (item 23 in Ext. G) and Ext. XI, 9 items. Cheru, the transferee under Ext. IV, in his turn, sold the property he purchased thereunder to counter-Petitioner 4, as per Ext. II dated 22-12-1120.

The consideration for Ext. IV is Rs. 3,500/- and that for Ext. XI Rs. 2,644/-. Counter-Petitioner 4 purchased item 28 from Cheru for Rs. 9,000/-. Counter-Petitioner 1 did not oppose the petition. In his written objection filed on 6-11-1122 and in a subsequent application he filed before the lower Court (M.P. 1432/22 dated 7-11-1122) he agreed to have Ext. G annulled in respect of the properties not disposed of by Ext. IV and Ext. XI. The official receiver also obtained possession of the properties so disowned by counter-Petitioner 1.

Counter-Petitioners 4 and 5 opposed the petition. The Court in its final order while annulling Ext. G and Ext. XI held that the transfers tinder Exts. II and IV were taken ''bona fide'' and for valuable consideration without notice of Arya''s insolvency. Though Ext. XI has bean annulled consideration for the document was found to be good to the extent of Rs. 2,471/1/6 and provision is made in the order for the mortgagee to recover that amount from the insolvent''s estate.

The official receiver was apparently not interested to pursue the question of the annulment of Exts. IV and XI. Two of the creditors, therefore, with the permission of the Court, filed A. S. 368 challenging the correctness of the order regarding those two documents. Counter-Petitioner 5, the mortgagee has preferred A.S. 380 against the portion of the order annulling Ext. XI

After giving our best attention to the nice and intricate questions involved in these appeals we feel constrained to set aside the order and to direct a re-hearing of the petition by the lower Court. At the same time we propose to give some directions to the lower Court to take some preliminary steps before the petition is re-heard. The object of these steps is to avoid, if possible, a rehearing on the merits of the petition. In all the circumstances of the case we consider the case to be one pre-eminently fit to be so closed.

We have more than one compelling reason to reverse the order and remand the petition for re-hearing. The case which the official receiver sought to make out in his petition was that Ext. G was a mere sham or fictitious document and that under it no title passed to the transferees. No definite finding is recorded by the learned Judge below on this aspect of the case.

In disposing of the petition the learned Judge has not kept before him the distinction between a sham document and a voluntary transfer hit by Section 53, Cochin Insolvency Act 1908 (same as Section 53, Provincial Insolvency Act, 1920). It is difficult to spell out from the order a finding by the learned Judge as Lo the consideration for Ext. G; discussion of that matter is indeed mixed up with the question of the consideration for Ext. IV and Ext. XI.

The character of the original transfer, whether it is sham or one hit by Section 53, has a material bearing on the question whether subsequent transferees are entitled to protection or not. For a proper disposal of the petition a finding as to the true character of Ext. G by the primary Court is essential.

The trend of decisions is that if the original transfer is found to be sham or fictitious the subsequent transfer must also fall with it. As illustrative cases we may refer to - ''Ata Muhammad v. Mehr Chand'' AIR 1935 Lah 368 (A); - Dairbari Ram v. Official Receiver, Lyallpur AIR 1940 Lah 124 (B); - Isamoddin Ajmoddin Vs. Ajmoddin Shamsoddin, - Kandaswami Goundan and Others Vs. Rangaswami Goundan and Others, and - Mt. Garibia Bibi Vs. Mathura Prosad Rajgharia and Others, In a proper case it may, however, be possible to protect a subsequent transfer if it falls within the purview of Section 55(c), Cochin Insolvency Act - (Section 55(c), Provincial Insolvency Act) vide the judgments of Sir Lancelot Sanderson C.J. and Sir Asutosh Mookerjee J. in - ''Gobardhnn Seal v. Rai Kissori Dasi'' AIR 1916 Cal 331 (F).

With respect to transfers falling within the scope of Section 53 there is, however, no express protection clause and ''bona fide'', transfers can be saved only by invoking the aid of general principles, and certain English cases of which the one reported in In re Hart; Ex parte Green'' (1912) 3 KB 6 (G) would appear to be the most outstanding. A few Indian decisions discussing or following the rule of that decision may usefully be mentioned - N.C.T. Chidambaram Pillai Vs. S.V. Subramania Ayyar and Others, - The Official Receiver Vs. Muhammad Meera Saheb and Another, and - Amir Ahmad Vs. Syed Hasan,

The court will, however, have to reckon with the decision in ''In re, Gunsbourg'' (1920) 2 KB 26 (K) also. To apply the law properly to the case in hand we have first to be definite about the true character of the impugned transfer. The order under appeal is far from helpful on the matter.

Another consideration which has influenced us to remand the case is that we are not satisfied on the records, that a direction which the High Court (Cochin) gave to the lower Court and to the official receiver to take some preliminary steps before disposing of M. P. 807 was filed and after the official receiver got possession of some properties he sought to sell among Ors. the equity of redemption of the properties comprised in the mortgage, Ext. XI.

The Court sanctioned it and one creditor took the matter in appeal to the High Court in A. S. 55 of 1123. The decision rendered in that case is reported in 40 CLR 210 (K). There, while pointing out that it would not be proper to sell the equity of redemption when a petition to impugn the mortgage was pending enquiry, the Court gave a direction that attempts should first be made to ascertain whether the creditors could be satisfied in full by the sale of properties other than those claimed by counter-Petitioners 4 and 5.

The mortgaged properties were also to be sold, but the surplus over the mortgage money was alone to be made available in the first instance to pay the general creditors. The mortgage money so reserved was to be made available for creditors only if without it their claims could not be settled and the official receiver''s petition ultimately succeeded. The mortgagee had given his consent for a sale free of encumbrances subject to the condition mentioned.

The judgment in A.S. 55 of 1123 shows that according to the representations made by Counsel appearing in the case the value of the properties other than that dealt with by Ex. IV, even after reserving the mortgage money as per Ext. XI together with the amounts already in Court deposit would be adequate for a full discharge of the claims of the creditors.

The reports dated 15-6-1123 and 23-6-1123 filed by the then official receiver which are among the case records really supported the said view as to the value of the properties.'' These reports were made some months before the decision in A.S. 55 of 1123 was made. An examination of the records of the case does not satisfy us that a proper attempt was made to comply with the direction given there.

Even if a sale as directed did not bring in all the money needed to pay the creditors in full, not to proceed with the sale was to honour the letter of the direction but not the spirit of it. Even if the subsequent transfers were annulled, if it afterwards turns out that the sale proceeds of the other properties were sufficient to pay off the creditors the transferees will have to be reinstated to their former position.

See - ''Thimmappa v. L. Balayya'' AIR 1949 Mad 472 (M). This decision was referred to in 40 CLR 210 (L). If the sale as directed in the decision did not bring in the amounts needed, subsequent transferees could at that stage have stepped in and made good the deficit with a view to retain unhampered the transfers in their favour see (Gunturu) Pullayya and Another Vs. Official Receiver of Kistna and Others,

In all the circumstance of the case we therefore feel that before the petition is reheard by the lower Court the receive should sell the properties other than that covered by Ext. IV. The mortgaged properties will be sold free of encumbrances and sufficient amounts will be reserved for the mortgagee.

If the money obtained by the sale in this manner, together with the amounts already in Court deposit, is not sufficient it would then be for the transferees to think whether they should make good the deficit and retain their transfers or permit further hearing of the petition to proceed.

It would appear the insolvent is now dead. The adjudication order had long before that event been annulled by the Court. One Kesavan Namburi claiming to be the heir or a later assignee of the insolvent has got himself impleaded in the proceeding in this Court and his petition shows that he is in certain eventualities prepared to pay off the creditors.

We are not now pronouncing any opinion about the validity of the sale in his favour. As one claiming under the ''insolvent'' he could not claim her properties in derogation of the rights of counter-Petitioners 4 and 5. We are informed he has filed a similar petition before the lower Court. If so advised, he can now take advantage of the remand and seek to implement his offer.

In the result we allow both the appeals, set aside the order of the lower Court and direct that Court to dispose of the matter afresh according to law and in the light of the observations herein contained. In the circumstances of the case we make no order for costs in this Court.

Before proceeding to rehear the matter the Court will take the following steps:

(i) Ascertain whether Kesavan Namburi, the Petitioner, in C. M. P. 1807 of 1953 on the file of this Court, is prepared to find the money to pay off the creditors on his getting the properties remaining undisposed of by counter-Petitioner 1 and his deceased wife or the official receiver.

It would appear the Official Receiver has already sold some properties and an amount of Rs. 5,000/- or more is in Court deposit. If he desires to implement his offer on terms hereinbefore mentioned the balance money needed must be deposited within a period of not exceeding six weeks as fixed by the lower Court after the records are received there.

(ii) In case the offer Kesavan Namboori made does not materialise the lower Court will get the receiver to sell by public auction the properties remaining undisposed of, except item 28. The items mortgaged to counter-Petitioner 5 under Ext. XI will be sold free of encumbrances but the surplus after reserving the mortgage money will alone be made available (in the first instance) for payment to the creditors. If the amount thus realised together with the amounts already in Court are sufficient there will be no need to proceed with the further hearing of the petition.

(iii) If the amounts are insufficient and counter-Petitioners 4 and 5 do not make good the deficit the Court will of course have to rehear and dispose the petition on the merits.

(iv) In so doing the Court will take such steps as are necessary to place on record the oral evidence of tie vendee under Ext. IV. His evidence would not only be useful but is also absolutely necessary for a proper disposal of the petition on the merits. Counter-Petitioner 4 ought to have called him at the enquiry. If the parties do not seek to call him now, the Court will do the needful to examine him as a court witness.