Palaniyandi Mudaliar and Others vs Palanivel Mudali and Another

Subba Rao, J.—The question in this civil miscellaneous second appeal is one of ''limitation and it turns on the construction of Section 78 of

the Provincial Insolvency Act.

The appellants are the legal representatives of the decree-holder in O.S. No. 875 of 1926 on the file of the District Munsiff''s Court,

Tiruvannamalai. The final decree in the suit was passed on 19th December, 1929. The judgment-debtor was adjudged insolvent on 30th March,

1930. The adjudication was annulled u/s 43 of the Provincial Insolvency Act by an order of the Subordinate Judge of Vellore, dated 7th

December, 1942. Subsequent to the annulment on 26th March, 1943, an affidavit was filed by a clerk of the appellants in the Court of the

Subordinate Judge of Vellore alleging that the appellants'' father died on 8th August, 1941, and that an amount of Rs. 1,600 was due to him by the

insolvent under a decree in O.S. No. 875 of 1925, Tiruvannamalai District Munsiff''s Court. The appellants preferred an appeal against the order

of annulment to the District Court, North Arcot and the learned District Judge by an order, dated 18th August, 1943, confirmed the order of

annulment, but he directed the vesting of the properties of the insolvent in the Official Receiver, North Arcot, for one year from 9th December,

1942, u/s 37 of the Provincial Insolvency Act. On nth October, 1943, the appellants for the first time filed an affidavit before the Official Receiver

proving their claim and by an order, dated 25th November, 1943, the Official Receiver admitted their claim. The legal representatives of the

decree-holder filed E.P. No. 469 of 1943 on 16th April, 1943, more than thirteen years after the final decree; but that execution petition was

dismissed on 4th October, 1943, as not pressed. The present execution application was filed on 6th December, 1944.

The application, dated 16th April, 1943, is clearly barred by time unless the period between the date of adjudication and the date of annulment

is excluded. Both the courts held that in the circumstances of the case, the said period cannot be excluded in computing the period of limitation.

The learned Counsel for the appellants contended that they are entitled to such exclusion u/s 78 (2) of the Provincial Insolvency Act whether

they proved their debt before annulment of the adjudication or after the annulment. The relevant provisions of Section 78 of the Provincial

Insolvency Act read as follows:

(2) Where an order of adjudication has been annulled under this Act, in computing the period of limitation prescribed for any suit or application for

the execution of a decree (other than a suit or application in respect of which the leave of the Court was obtained under Sub-section (a) of Section

28) which might have been brought or made but for the making of an order of adjudication under this Act, the period from the date of the order of

adjudication to the date of the order of annulment shall be excluded:

Provided that nothing in this section shall apply to a suit or application in respect of a debt provable but not proved under this Act.

It will be seen that the decree-holder cannot rely on this section unless his claim is in regard to a debt provable but not proved under the Act.

Section 33 of the Provincial Insolvency Act prescribes the procedure for proof of debts. Under that section when an order of adjudication has

been made under the Act, all persons alleging themselves to be creditors of the insolvent in respect of debts provable under the Act shall tender

proof of their respective debts by producing evidence of the amount and particulars thereof, and the Court shall by order determine the persons

who have proved themselves to be creditors of the insolvent in respect of such debts, and the amount of such debts, respectively, and shall frame a

schedule of such persons and debts. Section 34 gives the kind of debts provable under the Act. Under Clause (2) of the said section all debts and

liabilities, present or future, certain or contingent, to which the debtor is subject when he is adjudged an insolvent or to which he may become

subject before his discharge by reason of any obligation incurred before the date of such adjudication, shall be deemed to be debts provable under

this Act. Section 49 prescribes the mode of proof. It reads:

(1) A debt may be proved under this Act by delivering, or sending by post in a registered letter, to the Court an affidavit verifying the debt.

It has been held that Section 49 does not lay down the only method of proof of debt, but it only prescribes one of the modes in which a debt may

be proved. A combined reading of these provisions makes it abundantly clear that these sections contemplate the proof of debts only between the

date of adjudication and the date of the order of annulment. The scope of these provisions is limited to the pendency of the insolvency proceedings

and the object is to facilitate the ascertainment of the distribution pursuant to the provisions of this Act. During the period, i.e., between the date of

adjudication and the date of the annulment, the property of the insolvent vests in the Official Receiver for the benefit of the creditors and all

personal remedies against the bankrupt are also thereafter stayed except as provided by Section 28 (2). A very clear statement of the mutual rights

of the creditors and the insolvent during that period is contained in the following passage in the judgment of Bacon, C.J., in Ex parte Lancaster

Banking Corporation : In re Westby:

When a bankruptcy ensues there is an end to the operation of that statute, with reference to debtor and creditor. The debtor''s rights are

established and the creditor''s rights are established in the bankruptcy and the statute of Limitation has no application at all to such a case, or to the

principles by which it is governed.

By enacting Section 78 of the Provincial Insolvency Act the Legislature recognised and adopted that principle. As the creditor''s rights to proceed

in the ordinary course are suspended, the period during which the rights are so suspended is excluded if the creditor adopted the relief given to him

under the Act during that period. It is therefore clear that the proviso to Section 78 refers only to the debts proved during the pendency of the

Insolvency proceedings, i.e., from the date of the order of adjudication to the date of the order of annulment.

If so, the question to be considered is whether the appellants proved their debt before the annulment of the adjudication. Mr. Venkatarama

Aiyar relied on the affidavit, Ex. P-7, filed on behalf of his clients in the Court of the Subordinate Judge on 26th March, 1943, and contended that

by filing the said affidavit, the appellants proved their debt within the meaning of the Act. In that affidavit, the clerk of the appellants states that the

amount due by the insolvent to the appellants'' father was Rs. 1,600 under the decree in O.S. No. 875 of 1926, Tiruvannamalai District Munsiff''s

Court and the said amount was shown in the insolvent''s schedule of debts. It is stated, although there is no evidence, that the Court accepted that

affidavit and recognised the appellants as the legal representatives of the deceased decree-holder. It also appears that the legal representatives

preferred an appeal to the District Court which, as aforesaid, was dismissed by the District Judge with a modification vesting the properties in the

Official Receiver for one year u/s 37 of the Act. It is not necessary to go into the question whether this affidavit constitutes a valid proof within the

meaning of the Provincial Insolvency Act. Section 49 provides the mode of proof. There is a conflict of decisions on the interpretation of that

section and the Madras High Court held in Manicka Nainar v. Murugesa Goundan ILR (1947) Mad. 665, that the operation of Section 78 (2) of

the Provincial Insolvency Act is not confined to the narrow limits of Section 49 j of the Act, but can be applied where there exists on the record of

the insolvency Court sufficient evidence to establish the debt due which the insolvency Court is bound to accept. Whether the allegations in the

affidavit are sufficient evidence to establish the debt due which the insolvency Court is bound to accept it is not necessary to decide in this case as,

in my view, this affidavit was filed after the annulment of adjudication and, therefore, could not be proof within the meaning of the Act.

Mr. Venkatarama Aiyar argued that as the order annulling the adjudication had not become final and as an appeal was filed and disposed of

only on 18th August, 1943, the said affidavit proving the debt must be deemed to have been filed only before the termination of the insolvency

proceedings by annulment. This argument overlooks the obvious fact that the appellate Court confirmed the order of annulment and the only

modification in it related to the vesting of the property in the Official Receiver u/s 37. This affidavit having been filed after the order of annulment

cannot be relied upon as proof of the debt before annulment.

It was next argued by Mr. Venkatarama Aiyar that the proof of the debt before the Official Receiver in whom the properties vested u/s 37 of

the Provincial Insolvency Act would also give him the benefit of Section 78 (2). I have already stated, the proof of the debts under the Act is

confined to the pendency of the insolvency proceedings. The scope of the vesting order after the annulment of adjudication u/s 37 of the Provincial

Insolvency Act was considered in the Full Bench decision in Moturi Veerayya Vs. Rao Bahadur P.V. Srinivasa Rao, The Official Receiver and

Others, , King, J., who delivered the leading judgment has enunciated the legal position in clear terms in the following manner:

The fact that not only the Official Receiver but any other person may be appointed u/s 37 is against the view that an order u/s 37 continues the

insolvency proceedings for all purposes. The person appointed u/s 37 has no longer by the mere fact of his appointment the powers which a

receiver has under the Act. He has only such powers as are necessarily implied by the vesting order which are, as we understood them, to carry

out the directions of the Court, and those directions, as we have said, should, so far as the realisation and distribution of the debtor''s property are

concerned, be in accordance with the provisions of the Insolvency Act. To this extent then we would answer the first question in the affirmative.

It is therefore clear that the powers of the receiver or for the matter of that any other person in whom the properties are vested u/s 37 are derived

only from the express orders of the Court and they are intended only for a particular purpose, viz., for the realisation and distribution of the

debtor''s property. The insolvency proceedings come to an end with the annulment and the subsequent vesting is only for a definite purpose, to

avoid injustice, inter se the various creditors. The receiver''s powers or those of any other person in whom the properties are vested are analogous

to those of an ordinary receiver appointed in a suit. He would have no right to accept proofs of debts or pay any creditor whose debt has already

become barred. If, as I have already stated, there was no proof of the debt during the pendency of the insolvency, the debt was clearly barred

when the Official Receiver admitted the claim of the appellants.

I therefore agree with the conclusions of the lower Courts and dismiss the appeal.