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Judgment
Reilly, J.—This is an appeal against an order of the District Judge of Ramnad approving of a composition scheme u/s 38 of the Provincial
Insolvency Act. The insolvent in this case was adjudicated on the 31st August, 1923. In December, 1924, he submitted a draft scheme of
composition, which was not approved. In September, 1926, he submitted a second scheme with three alternative proposals, the third being that
the whole of his property should be assigned to any person who agreed to pay 6 annas in the rupee to all the creditors. The 17th creditor in the
case, who is the husband of the insolvent''s paternal aunt, offered to take over the insolvent''s assets on those terms. The 6th creditor, who had
obtained a decree against the insolvent for Rs. 51,000, objected to the proposed scheme; but the requisite majority of creditors in number and
amount accepted the scheme. When the matter came before the District Judge, it appeared that claims amounting to Rs. 2,71,000 had been
proved. In November, 1926, the District Judge approved of the scheme after making a slight alteration about the calculation of interest due to the
creditors and annulled the adjudication of the insolvent. He gave the 17th creditor, whose offer he accepted, two months to pay into Court an
amount equivalent to 6 annas in the rupee on the proved claims. It now appears that the 17th creditor did not deposit the whole of the amount in
Court; but within two months he deposited about a half of it and produced before the District Judge acknowledgments from the other creditors that
they had been satisfied to the extent of 6 annas in the rupee. The 6th creditor, who objected to that scheme, has appealed against the District
Judge''s order, and he maintains that the scheme should not have been approved. A number of other creditors have appeared before us as
respondents, and it is represented for them that they are still satisfied with the scheme and have no desire that it should be upset. The ex-insolvent
and the 17th creditor also oppose the appeal.
Now, when we look at the learned District Judge''s order in the matter, it appears that he took three points into consideration. The first was that
the requisite majority of the creditors had approved of the scheme. The second was that it was represented for those creditors that, if the Official
Receiver administered the estate of the insolvent under the Act, that would lead, to considerable delay and expense. The third point was that in the
course of the proceedings the learned District Judge offered the assets of the insolvent to the objecting creditor (the appellant here)-.on the same
terms, that he should take the whole of the assets and pay 6 annas in the rupee to the other creditors, and that he was not willing to accept that
offer.
The learned District judge was certainly right in taking into consideration as a matter of great weight the fact that the majority of the creditors
were in favour of the scheme. It happens that in this case both the insolvent and all the creditors are Nattukottai Chetties; and, as has been
represented for the respondents here, it may be supposed that they are persons quite capable of guarding their own interests. But against that we
must notice that none of those creditors except one had a claim anywhere approaching that of the 6th creditor in magnitude; and we cannot ignore
the possibility that the other Chetti creditors may have been influenced in accepting the scheme by pity or friendship or what they regarded as good
policy in the matter. As for the Suggestion that, if the Official Receiver had administered the estate, there would have been great delay, that was a
matter within the control of the Court and the Official Receiver as an officer of the Court. I do not think the learned District Judge should have paid
very much attention to that. Nor should he have regarded it as of serious weight that, if the Official Receiver administered the estate, there would
be a small � commission to be paid upon his dividends. That is part of the ordinary machinery of the Court, which is not to be set aside for any
such consideration. As for the offer which the learned District Judge made to the 6th creditor, it has been explained to us that in this particular case
the 6th creditor was not in a position to take advantage of that offer. It is admitted that only one part of the assets of the insolvent was Immovable
property in this Presidency. That is a valuable house in Karaikudi.
The rest of the assets were either land in Burma or amounts due from a business which the insolvent was carrying on in Burma or amounts due
from another business in Guroon in the Malay States, in which he was the chief partner, having a 5/8th share, or, as is suggested for the 6th
creditor, money which the insolvent had secreted somewhere. It is quite clear in the circumstances that the 6th creditor would have had very great
difficulty in realising any part of the assets except the house in Karaikudi and possibly the land in Burma unless the insolvent was willing to help him,
which it was not at all likely he would do. And apart from that I do not think that the learned District Judge was justified in putting the 6th creditor
on any such terms. The 6th creditor made no offer to take over the assets on those terms, and he certainly could not be required to do so. The
business of the Court in an insolvency is to see that the assets are administered through the ordinary and proper machinery of the Court, not to
require nor even invite any creditor or other person to take over the estate on certain terms and carry out the functions of the Court for it.
Those were the considerations which the learned District Judge took into account when he approved of the scheme. But, although it was quite
proper for him to be influenced by the wish of the majority of the creditors in respect of this proposed scheme, he ought, I think, to have realised
that the wish of the creditors by itself was by no means a sufficient reason for approving of the scheme in the circumstances. That was clearly
brought out by the Court of Appeal in Ex parte Merchant Banking Company of London, In re Durham (1881) 16 Ch.D. 623 and In re Burr, Ex
parte Board of Trade (1892) 2 Q.B. 467. Under our own Provincial Insolvency Act, Section 33 restricts the power of the Court to approve a
composition scheme on certain conditions. If those restrictive conditions are fulfilled, the last clause of the section provides that the Court may then
either approve or disapprove of the scheme. That means that, although the section has provided that no scheme should be approved unless the
requisite majority of the creditors consent, still, even if there is that consent of the creditors, the Court must exercise its judicial discretion before
approving of the scheme--that is, a discretion founded on sufficient reasons after considering all aspects of the case and ascertaining the facts so far
as possible. Now it appears to me that in this case there were a number of circumstances which the learned District Judge overlooked. There is
nothing in his order to suggest that he took into consideration the facts that the Official Receiver had reported against the scheme, and had
represented that it was not beneficial to the creditors and not a proper scheme to be approved. Nor is there anything, secondly, in the learned
District Judge''s order to show that he himself considered whether this was a fair scheme. The scheme was that the whole of the insolvent''s assets
should be assigned to the 17th creditor, who should pay the other creditors 6 annas in the rupee. Now the insolvent had represented that his assets
were worth a lakh and a half. I do not think that, as has been suggested for him, we can take it that that is likely to have been an exaggeration of
the value of his assets, as he gave that value not only at the beginning of the insolvency proceedings but when he was putting forward his first
scheme. If his assets were worth a lakh and a half, they would have produced about 9 annas in the rupee on the proved debts. The learned District
Judge does not appear to have observed that fact. Nor does he appear to have made any attempt to satisfy himself that the assets disclosed by the
insolvent, making up a lakh and a half, were all the assets available. Thirdly, the learned District Judge has not commented upon the fact that the
insolvent''s conduct in connection with the insolvency had been bad, and he does not appear to have taken it into consideration. The records show
that after his adjudication the insolvent failed to appear before the Official Receiver when summoned to do so and assist him in the administration of
the estate. That is a very serious matter. Besides that the insolvent professes not to have any accounts or documents to show what was due to him
from that Guroon business, in which he had a 5/8th share. He said vaguely that about Rs. 25,000 was due from it. It is very difficult, indeed, to
believe that the insolvent, a Nattukottai Chetti moneylender, who had a. preponderating share in a business in the Malay States, where he admits
he never went himself, did not keep regular and complete accounts of what was due to him from that business and could not have produced them
before the Official Receiver. One of the most serious offences which have to be taken into consideration when there is a question whether an
insolvent should be discharged or a scheme should be approved is the failure to maintain proper accounts. Apart from the Guroon business the
insolvent, though he has produced accounts showing that about Rs. 46,000 were due to him from the business which he was conducting in Akyab,
has produced no, accounts of his receipts or expenditure at Karaikudi, his headquarters. He maintains that he conducted no business at Karaikudi,
and there is no evidence that he actually did so. But it is highly improbable that he had no accounts of his receipts and expenditure there. The
learned District Judge does not appear to have considered whether it was right that an insolvent who had behaved in this way should be
rehabilitated by the approval of a scheme and the consequent annulment of his insolvency. It is certainly not for the Court to whitewash an insolvent
who behaves like that and to set him on his feet again, so that he may at once start a new business. Fourthly, the learned District Judge does not
appear to me to have paid due attention to the fact that the 17th creditor, who has taken over the whole of the assets of the insolvent under this
scheme, is a very near relation of the insolvent. In the circumstances that appears to me a very suspicious thing. Fifthly, the insolvent at a very early
stage in the proceedings, when he propounded his first scheme, naively admitted that his purpose and hope was that he should be enabled to start
business again. Now it is one of the objects of insolvency legislation that an insolvent, who has placed the whole of his property at the disposal of
his creditors for distribution in the insolvency proceedings, should after a due interval be discharged and have a chance of starting again in life, so
that he can use his talents and knowledge and experience and, if he has the opportunity, start a new business. But what kind of business are we to
suppose that this insolvent wanted to start? This insolvent is a money-lender, and, so far as I can gather, the business which he wanted to start as
soon as this scheme was put through and his insolvency was annulled was a money-lending business. A man cannot start a money-lending business
without some capital and some considerable amount of cash in hand. When we take those two things together, the fact that the creditor who has
taken over all the assets is a very near relation of the insolvent and the fact that the insolvent proposed to start a new money-lending business,
surely that raises a very grave suspicion that the 17th creditor was only a mask for the insolvent and that the insolvent was buying back his own
assets at a profitable figure and was so making a profit out of his insolvency, the very trick against which James, L.J., in Ex parte Merchant
Banking Company, In re Durham (1881) 16 Ch.D. 623 said that Courts must be on their guard. Lastly, the learned District Judge does not appear
to me to have asked himself the question of what profit would this proposed scheme be to the creditors? It would provide them with ''6 annas in
the rupee. The house at Karaikudi was valued by the insolvent at from Rs. 75,000 to a lakh of rupees at that time. With the land in Burma and the
amount of Rs. 25,000 which the insolvent said was due to him from his Guroon business, even if there had been nothing else of value in his estate,
more than 6 annas in the rupee should have been paid by the Official Receiver. If the insolvent had remained an undischarged insolvent, he would
have had an inducement to assist the Official Receiver in getting in the rest of his assets for the further benefit of the creditors, an inducement which
disappeared entirely when the scheme was approved.
In those six respects it appears to me that the learned District Judge has failed to take into consideration important aspects of the matter; and he
has fallen into an error in looking at the case as if the approval of the creditors to the proposed scheme was an overmastering reason to influence
him. In my opinion the learned District Judge was not well advised in approving of the scheme, and in the circumstances it was not a scheme which
should have been approved.
If this appeal had come before us within a short time after the learned District Judge''s order had been made, I should have had no hesitation in
expressing my opinion that his order should be set aside. But it happens that we are hearing this appeal four years after the learned District Judge''s
order. That unfortunate delay and its consequences cannot be ignored when we are considering what is the best course to be adopted now. All the
creditors who have proved their claims except the appellant here, the 6th creditor, took their money under the scheme four years ago and have
been enjoying it. The 17th creditor paid that money under the order of the Court, and, if the District Judge''s order is now set aside, he will be
entitled to claim restitution with interest on the amounts that he paid. To upset the payments made to all those creditors four years ago in that way
would be likely to lead to confusion; and it is represented to us that there might be considerable difficulty in working it out. One of the creditors, we
are told, has been adjudged an insolvent; others are dead, and their representatives have not been brought on record. Obviously, there would be
great difficulties and possibly considerable hardship if all that was now to be upset. But, if we were assured that the assets now available would
produce 6 annas in the rupee, I am not sure that I should think that enough to prevent me from proposing that the District Judge''s order should be
set aside. However we have to remember that all this time has elapsed and that claims which the insolvent might have pursued in 1926 may not be
of any avail at this date. And apart from that the main asset in this country, the house at Karaikudi, we may not unreasonably fear in consequence
of unfavourable times has fallen very much in value, and we are not at all sure that it will realise anything like Rs. 75,000 to-day. So, whatever we
may think about the propriety of the learned District Judge''s order made in November, 1926, there are obvious difficulties in trying to put the
clock back; and, if we attempted it, we might be acting unjustly to the creditors in trying to put right what the learned District Judge did wrong in
1926. I regard it as a very unfortunate feature of the case that this insolvent should have been freed by reason of the annulment of his insolvency on
the approval of such a scheme as this. But the law is that, if the scheme is approved, ipso facto the insolvency is ended; and, although the insolvent
may have got a most undeserved advantage in that way by having his scheme approved, we could not properly at this date set that right by
anything which would be unjust to his creditors. In the circumstances, though with considerable regret, it appears to me that we cannot properly
interfere with the learned District Judge''s order at this date. But I think it will be proper that we should require the costs of the, 6th creditor in this
appeal to be paid by the 17th creditor and the ex-insolvent.
Anantakrishna Aiyar, J.
I entirely agree. I wish, however, to add a few words of my own, because I think that the learned Judge''s order does not disclose that due
weight has been attached to the provision of law that the responsibility of sanctioning a composition is of the Court. The learned District Judge has
given. three reasons in support of his order. The second of the reasons, namely, that administration through the agency of the Official Receiver is
likely to cause undue delay should not be taken to be a circumstance peculiar to this case. If the learned Judge thought that any peculiar
circumstances existed in this case, which were likely to cause undue delay, the remedy was in his own hands.
Another reason mentioned by the learned Judge, namely, that the 6th defendant, to whom a similar offer was made, was not prepared to accept
the same, is in my opinion no ground at all by itself for approving the scheme proposed by the insolvent. Every creditor is prima facie entitled to
have the estate of the insolvent administered in the manner prescribed by law through the agency of the Court. There are manifest advantages
accruing to creditors by the said course being adopted. The Official Receiver is given special powers and facilities which are not available to the
ordinary creditors. Therefore, to draw any inference from the circumstance that a creditor of the insolvent to whom an offer was made to, take
over en bloc all the assets of the insolvent declined to accept such an offer is by itself no ground for holding that the proposed scheme is beneficial
to the general body of creditors. I think that the main consideration which weighed with the learned Judge was the first reason assigned by him in
his order, namely, that the scheme was approved by a majority of the creditors of the insolvent. I think that the learned Judge has attached too
much weight to that circumstance in this case. No doubt in the absence of consent by the statutory majority with reference to number and amount
of the debt, an arrangement like the one mentioned in Section 38 could not be accepted by the Court. But such consent is only one of the many
facts that the Court would have to take into consideration. No doubt it is an important circumstance to be taken into account. But at the same time
it is material to remember that the consent of the majority of the creditors referred to in the section is not the consent of the majority of all the
creditors to whom the, insolvent owes, debts. It is only the consent of the majority in number and three-fourths in value of all the creditors whose
debts are proved and who are present in person or by pleader before the Court. No doubt if all the creditors of an insolvent were to agree to any
particular course, there is ordinarily an end of the matter. The Court may take it for granted that nothing better could possibly be done in the case,
and may straightaway sanction the proposal, unless the insolvent had some very good grounds to urge to the contrary. But the consent of the
statutory majority mentioned in the section is not the same as the consent of the real majority of all the creditors of the insolvent. Apathy of
creditors to go to Court in matters relating to insolvency is well known. In fact, even in England learned Judges had to remark that creditors
generally would rather like to take the chance of getting whatever they could than take active steps and contest matters in Court. In Ex parte
Campbell, In re Wallace (1885) 15 Q.B.D. 213 this is what Brett, M.R., said with reference to the general attitude taken by the creditors there:
It is not generosity on the part of creditors, it is mere laziness; when they think a debt is a bad one they would rather write it off at once than take
any trouble about the debtor''s estate.
That being so, the Indian Act specifically provides that the responsibility in the matter of approving composition proposed by the insolvent is
upon the Court. It may be asked why the Court should trouble itself when the majority of creditors as mentioned in Section 38 agree to a
proposal. I have given one reason why the Court should really judicially consider the matter in spite of the above circumstances. A statutory
majority does not really mean a majority in fact of the number of creditors either as regards number or as regards the amount of their debts. In
England I find that a notion prevailed at one time that if a majority of creditors agreed to a composition the Court had nothing further to do in the
matter but to sanction the same. In Ex parte Merchant Banking Company of London, In re Durham (1881) 16 Ch.D. 623 that was the view
entertained by Bacon, C.J. At page 630 we find the following:
There is no part of the Act of Parliament, and no feature in the administration of bankruptcy, which says that the voice of a creditor, voting in a
minority, shall be heard against a resolution of a majority.... There is no principle, reason or authority suggested why the unquestionable power of
the majority to decide upon what is best for their interests should be overruled by the Court, on any notion that the Court can make a better
bargain for them than they can make themselves.
The Court of Appeal had to consider the correctness of that position on appeal from the decision of Bacon, C.J. In delivering the judgment of
the Court of Appeal, Jessel, M.R., observed at p. 635, that the rule laid down by the learned Chief Justice was not the correct rule. After
observing the practice which prevailed in the Chancery Division when the Court is called upon to administer estates of infants, or when it is called
upon to approve or sanction arrangements come to under the Companies Act or under the Bankruptcy Act, the learned M.R. stated as follows:
I never heard the proposition doubted that where the approval or sanction of the Court is required--whether in an administration suit on behalf of
infants or persons incapacitated, or in a partnership suit where there is a sale of assets, or under the Companies Acts, where it is of constant
occurrence to sell assets or to approve of arrangements--that it is the duty of the Judge fairly to investigate the objections brought before him to the
proposed arrangements, and to give his opinion upon them judicially, of course, and with sufficient reasons. I never heard that proposition doubted.
Therefore, on general principles, unless there is some decision to the contrary, I should say that this section means what it says, that the resolution
of the creditors is to be subject to the approval of the Court, to be given or withheld according to the weight and sufficiency of the reasons which
are brought before the Judge to induce him to give or withhold that approval.
The other learned Lords also gave similar reasons why the Court should not blindly accept the proposal made by the majority. In Halsbury''s
Laws of England, Vol. II, page 81 (paragraph 125), this is how the law is stated : ""The wishes of the creditors may also be regarded, but they are
not to override the discretion of the Court."" It, therefore, seems to me that in this, as in other matters that arise in the administration of an
insolvent''s estate, the wishes of the creditors, though undoubtedly an important matter to be taken into account, are by no means to be taken as
conclusive or in any way as relieving the responsibility that rests upon the Court that, any order it passes, whether in the matter of approving a
scheme or otherwise, is supported by the evidence on record and is clearly for the general benefit of the creditors of the insolvent. The same view
was held in In re Burr, Ex parte Board of Trade (1892) 2 Q.13. 467. I do not, however, propose to quote passages from that judgment.
It is thus clear that the learned Judge in this case has, in my opinion, attached too much weight to the circumstance; that a majority of the
creditors of the insolvent accepted the proposal before the Court and did not duly consider the other circumstances in the case.
Having come to the conclusion that the Court has also to consider the other evidence in the case and the other circumstances disclosed by the
record, I think it is clear that some prominent facts have not been duly considered by the learned Judge. The insolvent is a Nattukottai Chetti. He is
a businessman. He has got money-lending, etc., business in Arakkan and Guroon. His case is that he never went outside the Madras Presidency,
and yet he does not produce any accounts of the Guroon business. The business at Guroon is carried on in his name. He owns 5 out of 8 shares in
the same. It is absolutely certain that the insolvent would have received, in the usual course of business, statements of accounts from time to time
with reference to Guroon business. He has not produced any of those papers or accounts. He had the audacity to state, in the affidavit that he filed
in Court, as follows:
I apprehend that my agents and partners in Arakkan and Guroou will never show any response to the mere letters which the Official Receiver or I
may write to them.
I think it is (to say the least) a most ill-advised statement made on behalf of the insolvent. Instead of assisting the Court he thought that he had
discharged his duty by swearing to an affidavit like that and by not producing his accounts.
Again there is reference in the records that were read to us of transactions at Karaikudi. The insolvent himself admits that during the course of
about four years he received Rs. 19,000 and odd at Karaikudi. The circumstance that no accounts of Guroon or Karaikudi are produced is a
matter which ought to have been duly considered by the learned Judge before approving of the arrangement put forward by the insolvent. For
aught one knows, there may be (or ought to have been) some cash available at Karaikudi, if the accounts had been produced. Without knowing
more about the state of the business at Guroon, the Court should not properly pass an order approving or disapproving of the arrangement that
was proposed by the insolvent. The creditor who agreed to purchase the whole concern was a near relation of the insolvent. In the absence of
accounts, it was not possible to fix a fair price. The Official Receiver in his report had urged some reasons against accepting the proposal.
These are undoubtedly very relevant considerations if we look at the thing from the point of view of the creditors generally. In considering their
effect on the insolvent--the debtor--it is necessary to see whether a person who has been carrying on large business, and who has not produced all
the material accounts, should be given a discharge so that he may again set up business at once. The effect of accepting the composition
arrangement would be, u/s 39, to annul the adjudication, with the results that would follow from the same. Non-production of accounts has been
declared by Judges, time after time, to be the most serious offence that a trader could commit, especially in matters relating to insolvents. In Ex
parte Campbell, In re Wallace (1885) 15 Q.B.D. 213 Brett, M.R., made the following observation:
In my opinion, the not keeping of books is one of the greatest offences which can be committed by a trader. It is said that it is a very common,
thing for traders not to keep books; it may be so in the case of traders who become bankrupt. It shows the utter recklessness of a man who does
so; it shows that he is carrying on business with an utter disregard of the interests of any one but himself.
Therefore if, as a matter of fact, the insolvent did not keep accounts, that circumstance shows the recklessness of the person in the matter of
carrying on his business. If, on the other hand, he kept accounts but did not produce the same, then the Court should not be too ready to help such
insolvents in the matter of getting their adjudications annulled. Having regard to the relationship between the insolvent and the 17th creditor, and
having regard to the extreme anxiety shown by the insolvent to start a fresh trade which he could do only after the scheme is approved by the
Court, it seems to me that the present is a case where the Court should very carefully scrutinise the proposal before sanctioning the same. That
persons in the position of the present insolvent should not be too readily set at large, with a view to start a fresh trade at once, was the opinion
entertained by some learned Judges in England; and in In re Burr, Ex parte Board of Trade (1892) 2 Q.B.D. 462 this is what Lord Esher, M.R.,
stated with reference to what should be the guiding principle of the Court in such matters (though mere delay in granting discharge might not at all
by itself be sufficient punishment to such insolvents):
It would be of the worst possible example if he could escape from those consequences, and,, obtain his discharge without the delay which would
be certainly imposed if the bankruptcy proceedings were to go on, even if he were to pay more than 7s. 6d. in the pound.
Courts are entitled to have regard to commercial morality and general public interests in sanctioning composition and schemes of arrangement
proposed by the insolvents. See In re Flatau, Ex parte Official Receiver (1893) 2 Q.B.D. 219 and In re Hester, Ex parte Hester (1889) 22
Q.B.D. 632. See also Halsbury''s Laws of England, Vol. II, page 80.
For the above reasons, I am inclined to think that the order passed by the learned District judge does not duly take into consideration those
matters; and under ordinary circumstances (not complicated by effects of delay and intervening circumstances), it seems to me that this is a case
where we should interfere with the order passed by the Lower Court. But in disposing of the appeal before us, we have to remember that four
years have elapsed from the date of the Lower Court''s order, and in the interval the 17th defendant would naturally have been dealing with the
assets and business of the insolvent, and with the debts, etc., due to him. It is not clear to me that interfering with the Lower Court''s order at this
stage in this case would ultimately materially benefit the general body of creditors. In these special circumstances, the appeal has to be dismissed. I
agree in the order as to costs proposed by my learned brother. C.M.A. No. 361 of 1925 will be dismissed without costs.
C.M.A. No. 361 of 1925.--There is another appeal connected with this, C.M.A. No. 361 of 1925. That refers to an order made by the
learned District Judge regarding a proposed sale of the house at Karaikudi. In the view we have expressed, there is no point in that appeal now,
and it should also be dismissed, but without costs.