Mandluru Ganagappa vs The Official Receiver

Venkatasubba Rao, J.—I am afraid the learned District Judge has fallen into a serious error in regard to the consideration for the mortgage.

He observes that the trial Court''s view that the mortgage is supported by consideration, is wrong. Out of the alleged consideration of Rs. 5,000, a

sum of Rs. 3,800 is said to represent a past debt. The Official Receiver who moved the Court, says in his petition that the mortgage amounts to a

fraudulent preference, which statement implies the existence of some debt. He also says that the debt ""was purposely inflated"", which again shows

that far from the debt being repudiated, it was admitted. Even the insolvent, who deposes against the alienee, has had to admit that in respect of

past dealings a sum of about Rs. 3,800 was due. That there was consideration, therefore, to this extent, admits of no question. The balance of the

consideration is said to be about Rs. 1,200, paid in cash on the date of the mortgage. Petitioner''s Witness No. 2 (examined for the Official

Receiver), the witness on whom the District Judge relies, says expressly that out of the money the insolvent obtained from the mortgagee, a sum of

Rs. 500, was paid towards his own debt. This payment was made on the very day the mortgage was granted and P.W. No. 2 deposes that he

was informed by the insolvent that the remaining amount due to him would be paid by the mortgagee.

The obviously wrong finding that the mortgage is not supported by consideration, vitiates the judgment of the District Judge. The question,

however, remains, does the transaction constitute a fraudulent preference? The debtor was undoubtedly in an embarrassed state. On February 27,

1930, P.W. No. 2 filed a suit against him and applied for attachment before judgment. On March 5, the debtor assigned some promissory notes in

favour a certain third party; on the 12th the petition in insolvency was filed by a creditor and on the 14th the debtor himself closed his shop. The

mortgage now impeached comprised the whole of the debtor''s immovable property and was executed on February 27. I must, therefore, differing

from the trial Court, hold that the transaction was entered into on the eve of the debtor''s insolvency. At the same time the evidence shows that the

mortgagee pressed the debtor for the payment of his debt and threatened him with a suit. There is nothing to show that the debtor in granting the

mortgage did so with the dominant intention of preferring this particular creditor. As Mr. Narasimhachari rightly points out, if the preferring of the

creditor was the substantial or dominant motive, good faith on the creditor''s part would be immaterial. Under the law prior to the Bankruptcy Act

of 1869 the debtor''s intention alone was material and good faith on the part of the creditor did not save the transaction. But under the Act of 1869

it was held that if the creditor acted in good faith he would be protected. The effect, however, of the later Bankruptcy Acts in England was to

restore the law as it was before the passing of the Act of 1869. Under the present law, both English and Indian, the fact that the preferred creditor

had no knowledge of the debtor''s intent to prefer him, does not save the transaction. But I must hold on the facts, agreeing with the trial Court,

that the guiding or the main motive was not to give this creditor a preference. The effect of the evidence is to my mind clear. The debtor''s object in

granting the mortgage was not to prefer the petitioner but to obtain from him a further loan of about Rs. 1,200. The creditor as anxious to get

security for his debt and the debtor refused to give that security unless a further sum was paid. The giving of the preference was not the dominant

motive; It was not in my opinion even a secondary motive; the debtor''s object was, as in T.S. Ramaswami Iyengar, Official Receiver of Madura

Vs. Chinnathambi Kone, , to get a benefit for himself. In such a case it would be wrong to hold that this dominant motive was to prefer the

creditor. I have in the case just cited dealt with the authorities on the point and do not propose to cover the same ground again.

I must point out that the Official Receiver has not attempted to show what the real value of the properties is; in any case the transaction is a

mortgage and not a sale. The petitioner, on whom the law casts the onus, has adduced no evidence to show that the properties are not worth more

than the mortgage amount.

In the result, the Civil Revision Petition is allowed with costs throughout, to be paid by the Official Receiver from the estate.