M.V. Marula Sidhayya vs Gadigi Muddappa

King, J.—The appellant here was a creditor of three brothers who were adjudicated insolvents in I.P. No. 18 of 1922, on the file of the

District Court of Bellary, In October 1924 a proposal for a composition in satisfaction of the insolvents'' debts was submitted to the Court u/s 38,

Provincial Insolvency Act. The terms of the composition were that two sureties bound themselves to pay the creditors a dividend at five annas in

the rupee, and were to be empowered to reimburse themselves out of the insolvents'' estate. A first charge over the entire estate with the exception

of a house and a shop was to be given to the sureties. This proposal was approved by the Court in March 1925 and u/s 39 the adjudication was

annulled. A list of creditors prepared by a vakil was declared to be the ''schedule'' of creditors, and the sureties were asked to give notice to such

of those creditors as had not yet proved their debts. The appellant as one of these creditors submitted claims in respect of two debts. One was

admitted by the sureties; the other; which was a claim upon a hundi, was disputed in a written note by one of the sureties, evidently acting for them

both, which ends with the following passage:

The said debt should not be allowed to be proved. As this matter is in dispute it should not be allowed to be proved in the Insolvency, but the

creditor should, if he thinks he has any right, take an action.

On being informed of this objection the vakil for the creditor did not press his petition for proof of the debt, and on 29th September 1925 the

District Judge passed the following order:

Mr. P.V.R. saya that he does not press this petition, and will have recourse to other means Lodged. Return his documents.

A few days later the appellant filed a suit upon this Hundi debt in the Court of the District Munsif of Bellary (O.S. No. 900 of 1925) impleading

the two sureties as well as the three insolvent brothers. The District Munsif gave him a decree for the sum claimed, personally as against the

insolvents and to the extent of their properties in the hands of the sureties. In appeal the learned District Judge following the decision reported in

Kamireddi Timmappa v. Devasi Harpal 1929 Mad. 167 dismissed the suit holding that the appellant''s only remedy lay in the insolvency

proceedings themselves, and that no suit was maintainable. Against this decree appellant has filed this second appeal to which the insolvents alone,

and not the sureties, are parties. The question for our decision is whether appellant''s suit is or is not maintainable.

The determination of this question in the Courts below turned upon the interpretation of Section 39 of the Act which runs as follows:

If the Court approves the proposal, the terms 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.

Now it is clear from Section 33 that such a schedule can contain only debts which have been proved. The present debt, as already mentioned,

was not proved. Though it no doubt found a place in the vakil''s list referred to by the District Judge, this debt could not therefore appear in, any

schedule framed in accordance with the provisions of Section 33, and prima facie the composition cannot he binding upon it. There is no

adjudication rejecting this debt as untrue. If would seem therefore that Section 39 presents no obstacle to the appellant.

The learned Advocate for the respondents still however relies strongly upon; Kamireddi Timmappa v. Devasi Harpal 1929 Mad. 167 and it is

necessary to examine that case. There was there an insolvent with thirty-six creditors, and on his behalf a surety undertook to pay all the creditors

at the rate of four annas in the rupee. At the time when the adjudication was annulled u/s 39, sixteen of these thirty-six creditors had proved their

debts, but the surety definitely undertook to pay the remaining creditors if and when their debts were proved. Only sixteen names were entered in

the schedule prepared u/s 39, but it was contemplated by the surety himself, as well as by the Court, that further names would be added to the

schedule in due course. One of the remaining twenty creditors applied several months later for proof of his debt and for its inclusion in the

schedule. His application was allowed, and the surety was called upon to pay him his dividend. The surety declined to do so-on the ground that

with the annulment of the adjudication all the insolvency proceedings had come to an end. It was held that the creditor had every right to make his

application; that the insolvency proceedings continued and that he had no rights outside the insolvency. Incidentally it was held that u/s 39 a

composition approved by the Court is binding upon all creditors mentioned in the insolvency petition.

Now it does not seem to us that this last proposition can be laid down as one of universal application. In Kamireddi Timmappa v. Devasi Harpal

1929 Mad. 167 itself no particular difficulty arose as the composition there clearly contemplated the whole of the insolvent''s debts. But a situation

might arise in which some debts were to be excluded and in that case it seems to us that that debt would necessarily be excluded from the schedule

framed u/s 39 and on the clear language of that section such a debt would not be bound by the composition. And such a situation has in fact been

considered by Ramesam and Cornish, JJ., in a recent case reported in Gopalu Pillai v. Kothandarama 1934 Mad. 529. There a particular debt

was mentioned in, the insolvency petition but not acknowledged to be due and in the composition no provision was made for discharging it. It was

held that the creditor could maintain a suit upon the debt, and that the provisions of Section 39 did not stand in his way. The situation in the present

case appears to be very similar to that in Gopalu Pillai v. Kothandarama 1934 Mad. 529. The sureties, who have taken over the insolvent''s

liabilities, will not acknowledge the truth of the appellant''s claim on the hundi, and request the insolvency Court as it is disputed, not to admit proof

of it. No doubt the Court passes no orders accepting the sureties'' contention, and the withdrawal of the claim was a voluntary act of the appellant

but the situation in essence is just this, that the sureties and the appellant agree that this particular debt is to be excluded from the composition. We

agree with the learned Judges who decided Gopalu Pillai v. Kothandarama 1934 Mad. 529 that in those circumstances Section 39 cannot of itself

oppose any bar to a suit upon the excluded claim.

It was next however contended before us for the respondents that when the appellant filed his suit, proceedings in insolvency were still pending,

and that no suit would lie without the permission of the insolvency Court. For this position also some support is afforded by Kamireddi Timmappa

v. Devasi Harpal 1929 Mad. 167 but in Gopalu Pillai v. Kothandarama 1934 Mad. 529 that objection is definitely overruled by both learned

Judges. We think that the latter view is clearly right. The insolvency Court no doubt retains control of the insolvency even after orders are passed

u/s 39 in order that the composition may be in fact carried out, and it has powers u/s 40 to re-adjudge the debtor an insolvent in certain

circumstances, but as is pointed out at p. 1088 of 57 Mad in-solvency proceedings continue only for the purpose of giving effect to the

composition. When an adjudication is annulled, whether u/s 39 or any other section, the Court is empowered u/s 37 to vest the debtor''s property

in an appointee or impose conditions Upon which it shall revert to the debtor. The effect of a vesting order u/s 37 has recently been considered by

a Full Bench of which one of us was a member, and it has been held that the property of the insolvent continued within the control of the insolvency

Court and must be distributed by the appointee under the insolvency Court''s orders in accordance with the principles and provisions of the

Insolvency Act. For certain purposes therefore proceedings in insolvency may be said to continue after an adjudication is annulled. But they do not

continue for all purposes. Except in so far as Sections 37 and 40 require their continuance, an annulment is an annulment and proceedings are at an

end. It can never be said that every section in the Act continues applicable. As the Full Bench has pointed out, for instance no new application u/s

53 or Section 5i can be entertained. In the present case we can see no reason why leave of the insolvency Court should be required u/s 28. The

appellant is not bound, in respect of this debt, by the composition, and his suit in no way interferes with the working out of that composition. Nor

does his suit in itself affect the control of the insolvency Court over the insolvents'' assets. In the present case there was no vesting order u/s 37 and

it would be only in execution that any question would arise as to the extent of the insolvent''s property and the conditions under which it has

reverted to him. We are accordingly of opinion that no leave of insolvency Court was necessary for appellant''s suit which is barred therefore

neither by Section 28 nor by Section 39 of the Act. The appeal is accordingly allowed with costs throughout and the decree of the District Munsif

restored as against defendants 1 to 3.