N. Subramania Sastrulu of Kandukur and Another vs The Official Receiver of Chittoor

King, J.—The subject-matter of these two appeals is two mortgages executed on the 15th October, 1932 in favour of two of the creditors

of Padmavati Ammal, against whom an insolvency petition was filed on 7th November, 1932 and who was finally adjudicated insolvent in 1934.

The proceedings by the Official Receiver were, in the first instance, taken against three mortgages, all of which were executed, on the same day.

They were taken under Sections 4, 53 and 54 of the Provincial Insolvency Act. The learned Subordinate Judge of Chittoor dismissed the Official

Receiver''s applications. The learned District Judge of Chittoor has set aside the learned Subordinate Judge''s order and annulled all the three

mortgages. These are appeals by two of the mortgagees against the learned District Judge''s order. The annulment by the District Judge, it must be

mentioned, has been based on Section 54 alone; he does not hold that the mortgages are not fully supported by-consideration; but he holds that

they were fraudulent preferences of some of the insolvent''s creditors to the detriment of the others.

I think these appeals must be allowed. The learned District Judge has held that the insolvent has fraudulently preferred these appellants not so

much upon the finding of any positive facts which constitute any intention on her behalf to defraud, but mainly for the reason that a preference in

favour of the appellants inevitably followed from her action. The learned Judge says:

Intentions of persons must be judged, as intentions can only be, by the obvious and natural consequences of their acts

No doubt, this is a legal maxim which applies very often when the Court has to find what the intentions of a particular party are, but, with regard

to Section 54 of the Provincial Insolvency Act where the burden of proof is upon 4he Official Receiver this method of discovering the intentions of

a person who shortly afterwards becomes insolvent is not the correct method to adopt. The authorities in England are very clear in this matter, see

Sharp Official Receiver v. Jackson (1899) A.C. 419 and Ex parte Taylor : In re Goldsmid (1886) 18 Q.B.D. 295 and this principle, that the

dominant intention in the mind of the insolvent must be found to have been actually to prefer a creditor before his alienation could be set aside, has

also been adopted in India - see Buchayyagari Ranga Reddy Vs. The Official Receiver, . It is impossible therefore to support the learned District

Judges order, merely upon the fact that the appellants have actually received a preference in the disposal of the insolvent''s estate.

I have been taken through the evidence with a view to examine whether on the evidence it is possible to hold that there was the dominant

intention in the mind of the insolvent fraudulently to prefer the appellants. I am unable to hold that there is any material for any such finding. In the

first place, it is conceded by the learned advocate for the Official Receiver that putting his case at the best, on the evidence available, the assets of

the insolvent were, at the time these mortgages were executed, very nearly equal to her liabilities. The learned District Judge, it may be mentioned,

refuses to consider any of the statements of the witnesses with regard to the value of the insolvent''s properties. He refers to them as vague

surmises and says that the only important fact is that when the properties other than the mortgaged properties were sold by the Official Receiver,

only Rs. 400 were realised, and also that the Official Receiver leased them on a rental of Rs. 35 a year. These are no doubt important facts if the

task of the Court were to estimate the real value of the insolvent''s estate. But I do not think that the statements made by those very creditors

themselves who support the Official Receiver in this case can be ignored, and one of them, - the principal opponent of the appellants

Bhaskararamayya, has actually given evidence in this very case that the property of the insolvent which was not mortgaged was worth Rs. 14,000.

Even taking as true the contention of the learned advocate for the Official Receiver that the actual value of the estate, was less than the liabilities at

the time of the mortgages, as the learned District Judge has himself pointed out, it is a truism that landed property is always over valued by the

owner. It is therefore extremely probable that the insolvent here thought that her property was worth considerably more than what it was really

worth. If that were so, it seems clear to me that she must at the time she executed these mortgages have entertained honestly the belief that she

could also deal with the other creditors in due course by the same method. The question to be decided is not whether her assets were actually less

than her liabilities but whether she honestly thought that they were more. I think there is enough evidence in this case to justify the finding that she

may have honestly so thought. The learned Judge also refers in para. 5 of his judgment to the fact that the question at issue in insolvency is not

whether the assets are sufficient to pay the liabilities but whether the liabilities can be met, as they arise, by money payment. That is no doubt quite

correct when the Court has to decide whether a person who is said to be insolvent should be adjudicated insolvent or not, but, when the question

is to decide the intention which is present in a person''s mind, it seems to me that unless it is presumed that the person in question knows the law of

insolvency and points such as these, it is impossible to say that anyone who believes that, he is possessed of landed property which is worth more

than his liabilities is aware that insolvency is imminent. I am not prepared to hold that on the 15th October, 1932, the insolvent had any reason to

believe that within two or three weeks an insolvency petition would be filed against her.

There is another point which, I think, should be considered in connection with Section 54. The learned Judge in the 5th paragraph of his

judgment says that

Where all a man''s creditors are pressing for payment and he cannot pay them all with money, the honest thing, the truly voluntary thing, the thing

which the law insists on, is that he should pay them all he can rateably.

There is no finding in this particular case that all the creditors of the insolvent were in fact pressing her for payment. Two of the principal

creditors have given evidence, and they are not prepared to state distinctly and definitely that they exerted any pressure upon the insolvent or upon

the insolvent''s relative, Dhurvasa Rao. It is true that one of them, Bhaskararamayya, had filed a suit against the insolvent about three weeks before,

but there is no proof that any intimation of that fact was given to the insolvent. The other creditor had not filed a suit at all, and there is no evidence

that either of them had issued any kind of registered letter to her. On the other hand, both the appellants had not only filed suits, but had also

applied for and obtained attachment. No doubt they also have not used any particular threatening language in any particular document sent to the

insolvent, but it is clear that the actual attachment of the insolvent''s properties amounts to such pressure as would reasonably lead the insolvent to

take steps, to deal with the debts owing to these creditors.

On a review of the whole evidence, I am of the opinion that there is no proof in this case that the dominant motive in the ,mind of the insolvent in

executing these mortgages in favour of persons who were not related to her or for whose preference no special private reasons existed, was, to

prefer them fraudulently to the prejudice of her other creditors. The evidence seems to me to suggest rather that this was an honest attempt to deal

with the more pressing claims upon her by mortgaging certain of her assets, and at the time she did so, she must have bona fide thought that she

would be able to deal with the other debts in due course.

In the result, I set aside the order of the learned District Judge and restore the order of the learned Subordinate Judge, dismissing the Official

Receiver''s applications with costs throughout.

Leave to appeal is refused.