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Judgment
Venkataramana Rao, J.—The question in this appeal relates to the validity of a sale of immovable property in execution of the decree in
O.S. No. 290 of 1934 on the file of the District Munsif''s Court of Narsapur obtained by the appellant against one Nekkanti Suryanarayana and
his two sons. The property was sold on 2nd October, 1935 and purchased by the appellant the decree-holder himself. An application was made
by the said Nekkanti Suryanarayana the first judgment-debtor to set aside the sale alleging that there were material irregularities and fraud in the
conduct of the sale in consequence whereof the property did not fetch a fair price. He also impeached the sale on the ground that before the date
of the sale he had filed an application in the Sub-Court of Narsapur for his being declared an insolvent, that the said petition was admitted and an
interim receiver appointed, that he applied to the Court (the District Munsif of Narsapur) to stop the sale but the Court declined to do so and the
sale was therefore in contravention of Section 52 of the Provincial Insolvency Act. The learned District Munsif, on a consideration of the evidence
adduced, came to the conclusion that there was no fraud or material irregularity in the conduct of the sale that the price realised at the time of the
sale was a reasonable price and in regard to the second objection he held that there was no substance in it. The learned Subordinate Judge in
appeal concurred in the view of the learned District Munsif in regard to the finding as to the material irregularity and reasonable price but he was of
the opinion that the sale was in contravention of Section 52 of the Provincial Insolvency Act and therefore he allowed the appeal and set aside the
sale. It is this order that is being attacked in this Civil Miscellaneous Second Appeal.
So far as the questions of material irregularity and fraud are concerned, there are concurrent findings of fact and they cannot be challenged in
second appeal.
The question therefore for consideration is whether the sale is invalid. It is contended that once an interim receiver has been appointed and the
fact of such appointment is brought to the notice of the executing Court, it is bound to stay the sale and a sale held after such notice is invalid and
the purchase at any such sale with notice of the insolvency could not be held to be a purchase in good faith. To test the soundness of this
contention it will be necessary to examine the relevant provisions of the Provincial Insolvency Act bearing on the matter. They are Sections 28, 51
and 52. In construing these provisions two principles have to be kept in view : (1) It is the policy of the law of insolvency that when a debtor
commits an act of insolvency, there must be an even distribution of his property among his creditors and no creditor of his should be entitled to
receive more than a rateable proportion of the amount realised from the property of the insolvent and available for distribution equally with other
creditors. (2) It is the policy of the law not to frustrate the effort of a diligent execution creditor and deprive him of the fruits of his execution. I think
the provisions of the Insolvency Act have been enacted to secure the object underlying these principles. u/s 28(2) of the Provincial insolvency Act,
on the making of an order of adjudication, the whole of the property of the insolvent vests in the Court or in an Official Receiver appointed by the
Court but until then the property of the insolvent is not divested from him and every creditor is free to have recourse to all available remedies
against the debtor for realisation of his debt. The section clearly provides that the disability of the creditor to have any remedy against the property
of the insolvent is only after the order of adjudication. This is clear from the expression ""thereafter"" in the section. Even then it is not an absolute
disability imposed by the Act but only subject to the provisions of the Act as indicated by the words ""except as provided by this Act."" From the
provisions of Section 28(2) it is clear that a decree-holder can attach and bring the property to sale and have the property sold till the date of the
order of adjudication. The question therefore is if, before the date of the order of adjudication, the property is sold and the sale proceeds are
deposited into Court, what are the rights of a creditor, the purchaser and the receiver in regard to the property and the sale proceeds?
I shall now turn to Sections 51 and 52 of the Act. Section 51 says that where execution of a decree has issued against the property of a debtor,
a creditor shall not be entitled to the benefit of the execution against the receiver except in respect of assets realised in the course of the execution
by sale or otherwise before the date of the admission of the petition. By virtue of this provision the creditor can only claim the sale proceeds of a
sale in execution of the decree obtained by him only if they have been realised before the date of the admission of the petition. But for this provision
it will be open to the Official Receiver to contend that the creditor is not entitled to the sale proceeds because by virtue of the provisions of Section
28(7) of the Act, the property must be deemed to have vested in him from the date of the presentation of the petition and hence by virtue of the
statutory title thus conferred on him he will be the person entitled to the sale proceeds of the property which in law belong to him. By the combined
operations of Sections 28 and 51 it is clear that a sale of the property until the date of the order of adjudication is not prohibited in spite of the
presentation of and the admission of the insolvency petition, but the creditor is not given the benefit of the remedy had by him. But the law protects
the title of the auction-purchaser to the property sold in auction because Section 51(3) provides that:
A person who in good faith purchases the property of a debtor under a sale in execution shall in all cases acquire a good title to it against the
receiver.
If therefore a purchaser can say that the purchase was made in good faith, in spite of the fact that there has been an order of adjudication
subsequent to the sale, his title to the property will remain unaffected. Therefore the doctrine of relation back of the title of the Official Receiver is
subject to the exception enacted in Section 51(3). Vide Cornish, J.''s observations in Muthan Chettiar and Another Vs. Venkituswami Naicken, .
It is unnecessary for me now to consider for the purpose of this case whether a purchaser in good faith can acquire good title to the property sold
even after the order of adjudication, because in this case the property has been sold before the date of the order of adjudication.
The question now arises as to the scope and operation of Section 52 of the Act. I may here mention a few facts and dates. The petition for
insolvency was made after the order for sale was passed and the date of sale was fixed for 30th September, 1935, but the petition was admitted
and an interim receiver appointed on 30th September, 1935, u/s 20 of the Act. The interim receiver did not make any application as required by
Section 52 of the Act to deliver to him the property which was being brought to sale and the only application that was made was by the insolvent
to stay the sale. The Court refused to stay the sale and the sale was held and at such a sale the property was purchased by the decree-holder. The
question on these facts is, is the purchase by the decree-holder invalid? I have already stated that neither Section 28 nor Section 51 prohibits the
sale until the date of the order of adjudication nor does Section 52, because what that section says is before the property is brought to sale if notice
is given to the executing Court that an insolvency petition by or against the debtor has been admitted, the Court shall on application direct the
property to be delivered to the receiver. The duty which is enjoined on the executing Court is to deliver the property to the receiver if an
application is made in that behalf, and I shall assume for the purpose of this case that the ''receiver'' in Section 52 includes an interim receiver. But if
no application is made, what should the executing Court do? It is bound to proceed with the sale of the property. There is nothing in the section to
indicate that the executing Court is prohibited from doing what it is obliged to do and its power to sell the property remains ''unaltered and
unaffected'' vide the observations of Lord Esher in Trustee of Woolford''s Estate v. Levy (1892) 1 Q.B. 772 on the analogous Sections 45 and 46
of the Bankruptcy Act of 1883). Therefore the sale by the Court is prima facie valid.
The questions that now fall to be decided are, does the auction-purchaser get a good title to the property and who is entitled to the sale
proceeds? These questions turn upon the other provisions of the Insolvency Act and they have been already adverted to, namely, Sections 28 and
In a recent decision reported in Muthan Chettiar and Another Vs. Venkituswami Naicken, , Venkatasubba Rao and Cornish, JJ., upheld a sale
in favour of a purchaser, even though the sale was held after an application was made u/s 52 by the Official Receiver and refused, on the ground
that the purchaser acquired valid title u/s 51(3) of the Act. But the present case is a stronger one in that no application has been made by either the
Official Receiver or by the judgment-debtor to direct delivery of the property and I am of the opinion that the application for stay of the sale is not
in conformity with the provisions of Section 52.
Therefore the question is, is the appellant a purchaser in good faith within the meaning of Section 51(3) of the Act? So far as the sale is
concerned, it was for a proper price and there was no irregularity or fraud in the conduct of the sale and no bad faith was attributed to the decree-
holder. All that is asserted is that the fact of his purchasing the property with notice of the insolvency is enough to negative the existence of good
faith. I am not inclined to agree with this contention. In Muthan Chettiar and Another Vs. Venkituswami Naicken, , the learned Judges were
inclined to the view that the mere fact that the purchaser had notice of the insolvency cannot connote want of good faith on the part of the
purchaser. They further held in that case that a purchase made on the faith of a Court''s order would negative all inferences of bad faith. No doubt,
in that case the auction-purchaser was a stranger but I do not think, having regard to the plain language of the section, any difference ought to be
made between a decree-holder purchaser and a stranger auction-purchaser. Section 51(3) says a ""person"". If, in pursuance of a valid order of
Court, the decree-holder purchases the property with the leave of the Court entitling him to bid, I do not see any reason why the fact of his being a
decree-holder should lay him under a disability to purchase the property. The only question is one of good faith. If he has purchased the property
in good faith, there is no reason why the purchase by him should not be upheld. The fact that he had notice of insolvency would not in my opinion
indicate any absence of good faith on his part. Good faith implies honesty and there is nothing to indicate here that the purchase was dishonest or
colourable or fraudulent. There is nothing in the provisions of the Insolvency Act, to preclude a decree-holder from proceeding with the sale with
the knowledge of the insolvency vide Sri Chand v. Murari Lal I.L.R.(1912) 34. All. 628 and Ralla Ram v. Ram Labhaya (1924) 6 Lah.L.J. 232.
The only disability under which he lies is that he will not be entitled to the benefit of the execution, that is, he cannot setoff the amount of the decree
debt against the purchase price but he is bound to pay the amount of the purchase; money into Court just like any other stranger purchaser and
share in the sale proceeds rateably along with other creditors. This position has not been disputed by Mr. Appa Row and I think rightly. I do not
see why the mere fact of knowledge of insolvency should preclude the decree-holder from proceeding with the sale of the property. It may be that
no order of adjudication would be made at all, and if he should only stay his hand in the meanwhile, some other creditor might also attach the
property and completely deprive him of the advantage of his having taken proceedings earlier. It may be by staying his hand and postponing the
sale, the property might not fetch a fair price at a subsequent sale and it will be more advantageous to have an immediate sale and get a fair price
and even though he may be deprived of the fruits of the execution, he will be entitled to get a fair dividend by reason of the property fetching a
good price. Neither in principle nor in reason does it seem to me that notice of insolvency should operate as a bar to a decree-holder proceeding
with the sale of the property. A recent decision of Pandrang Row, J., in Cheedalla Polamma Vs. Official Receiver and Others, , has been cited
before me. The facts in that case are different because the learned Judge found that the circumstances of that case warranted a finding of absence
of good faith. I do not find the learned Judge laying down that mere knowledge of the insolvency imports bad faith. On the other hand he observes
thus:
It may be that where the fact of the pending insolvency is brought to the notice of the Court and the Court nevertheless proceeds with the sale as
happened in Muthan Chettiar and Another Vs. Venkituswami Naicken, , the mere knowledge of the insolvency possessed by the purchaser may
not be sufficient to show that the purchaser acted in bad faith or did not act in good faith. But that is not the case here.
I do not think the learned Judge intended to law down any principle in conflict with the view which I have now expressed. Further, in this case it
is only the father that has become an insolvent and his share alone would vest in the Official Receiver and the shares of his sons would not vest in
him. Prima facie, the decree-holder would be entitled to bring to sale the sons'' share in the property. Under such circumstances, it would be more
advantageous to bring the entire property to sale and that is probably the reason why the interim receiver did not choose to interfere thinking that
he might claim the proceeds of the sale without interfering with the sale.
I am therefore of the opinion that the sale held on 2nd October, 1935, is perfectly valid and that the appellant has acquired good title to the
property. I accordingly set aside the order of the learned Subordinate Judge and restore that of the District Munsif with costs throughout.
Leave to appeal refused.