Pannai Ananthanarayana Ayyar vs Sankaranarayana Ayyar and Others

The appellant is one of the two petitioning creditors who applied to the District Court of Tinnevelly in I.P. No. 12 of 1919 to have the third

respondent in this Court adjudicated an insolvent. One of the allegations in the petition was that the hypothecation in favour of the second

respondent was in fraud of creditors. The Official Receiver, Tinnevelly, who is fourth respondent, sold the hypotheca free of encumbrance and

paid the second respondent in full. The petitioning creditors applied to the District Court, Tinnevelly, to have the hypothecation declared void under

Sections 53 and 54 of Act V of 1920. The District Judge held that the application was an appeal against the act of the Official Receiver u/s 68 of

the Act and dismissed it with costs as being barred by limitation, it not having been presented within twenty-one days of the order of the Receiver.

This appeal is against the judgment of the District Judge.

The Appeal came on for hearing on 1st August 1923, when the appellant''s vakil, Mr. P.V. Krishnaswami Ayyar, asked for time to file an

application for leave to appeal u/s 75, Clause (3). Time was granted and the application for leave to appeal was filed on 6th August 1923. Mr.

K.V. Krishnaswami Ayyar objected to leave being granted as the affidavit on behalf of the appellant was not satisfactory and he further contended

that, even if leave was granted, the appeal would be out of time as it was presented on 10th January 1922 without obtaining leave. As the new

Provincial Insolvency Act came into force only in 1920 and as the Insolvency Law is not well understood in the mufassal, we deemed it proper to

grant leave u/s 75, Clause (3), to file an appeal against the District Judge''s order. The appeal as presented u/s 75(2) having been presented in

time, there is no substance in the objection that the appeal is, u/s 75(3), out of time. Even if it is, Section 78, which is a new provision not contained

in the old Act, empowers the Court to excuse delay in the presentation of an appeal or application. This being a fit case for excusing delay, the

appeal was heard on the merits after excusing the delay.

Mr. K.V. Krishnaswami Ayyar raised a preliminary objection that no appeal lay to this Court as the application to the lower Court was u/s 68

of the Provincial Insolvency Act of 1920 and as it was not open to a creditor to move the Court for an order u/s 53 or 54 of the Act against an

alienee or a creditor, and he relied on Mariapa Pillai v. Raman Chettiyar I.L.R.(1919) Mad. 322 and Jhabba Lal v. Shib Charan Das ILR (1917)

All. 152. The application to the District Court was not made u/s 68, as is clear from a perusal of the petition. It follows that the District Judge was

wrong in treating it as out of time under the section. The question for consideration is, can a creditor move the Court u/s 53 or 54 of the Act?

None of the decisions relied on by him go to the length of holding that a creditor could not move the Court at all to set aside a voluntary transfer, or

to avoid a fraudulent preference whatever the circumstances might be. The main point decided in Mariappa Pillai v. Raman Chettiyar I.L.R(1919) .

Mad. 322 was:

No Court has the jurisdiction to annul, as such, a transfer amounting to a fraudulent preference, or a voluntary transfer made within two years of

the adjudication, except a Court exercising insolvency jurisdiction in proceedings which have been instituted to declare the debtor, who made the

transfer, an insolvent by a petition duly presented under the Act.

In the course of the judgment there is an observation that:

It is the Official Receiver who must set the Court in motion to annul a transfer u/s 36 or 37.

This observation has to be read in connexion with the facts of that case. It was neither laid down, nor intended to be laid down, in that case that,

under no circumstances, could a creditor move the Court for an order u/s 53 or 54 of the Provincial Insolvency Act of 1920.

In Jhabba Lal v. Shib Charan Das ILR (1917) All. 152 the petitioning creditor applied to the Insolvency Court for attachment of a certain

property as being that of the insolvent. It did not appear that he had ever moved the Receiver to take steps for attaching the property. The Court

granted the application and directed the Receiver to attach the property which was done. The sons of the insolvent claimed the property as their

own. The Court allowed part of the claim. Both the creditor and the sons appealed to the High Court. Walsh, J., observes at page 155:

Creditors have a right to prove for their own claims, a right to supply the Receiver with information relating to claims which the insolvent''s estate

may have against other persons; and they have a right to bring the Receiver''s conduct and decisions before the Court if he declines to act or

neglects his duties, but they have no legal interests in the insolvent''s estate and no title to represent it. If they want the Receiver to litigate the

question, they can supply him with funds or indemnify him against the costs in the event of failure, if he is unable to proceed for want of funds; but it

would be contrary to the whole scheme of the Insolvency Act, if any one out of a large number of creditors was at liberty to start all kinds of

questions and set the law in motion independently of the Receiver. The proper course, if a creditor is desirous of supporting the Receiver and

securing a decision in his favour, is to attend the Court to watch the proceedings, or obtain the permission of the Court to intervene as amicus

curiae.

The learned Judge observed that, if the Receiver declined to move in the matter, the proper course for the creditor was to apply to the Court u/s

22 of Act III of 1907. Section 22, now Section 68, gives a right of appeal to a person aggrieved by any act or decision of the Receiver. The word

act"" must be understood in its ordinary sense. It cannot mean a mere omission or refusal to take steps at the request of a creditor. It is not defined

in this Act. The General Clauses Act defines the word ""act"" as including illegal omissions when it is used with reference to an offence or a civil

wrong. A mere refusal of the Official Receiver to take action at the request of a creditor cannot therefore be called an ""act"" of the Official Receiver

as contemplated by Section 68 of the Act. It would be a different matter, if, after hearing the parties, he passes an order that the transaction is a

valid one. What he does then would amount to a decision against which there is an appeal provided. Section 68 contemplates acts of the Official

Receiver, such as selling the property of the insolvent, taking possession of property, and decisions on creditors'' proofs of debt, either admitting

them or rejecting them. The whole tenor of Section 68 is against the view of the learned Judge that a creditor''s only remedy against the refusal of

the Official Receiver to take action u/s 53 or 54 of the Act is by way of appeal u/s 68. A creditor can at any time during the pendency of the

insolvency proceedings move the Court u/s 53 or 54 on the ground that the Official Receiver has refused to move in the matter, as there is no

period of limitation provided for such an application. It may be seen from the recital of the facts in Jhabba Lal v. Shib Charan Das I.L.R.(1917)

All. 152 that what the creditor did in that case was to go over the head of the Receiver and apply to the Court to attach property claimed by

persons who were not parties to the Insolvency proceedings. The creditor''s application was not described as one u/s 53 or 54. The Insolvency

Court exercised powers of taking possession of property similar to those conferred by Section 56(3). There is an earlier decision of the same

Court in Khushhali Ram v. Bholar Mal ILR (1915) All. 252 to the effect that one creditor can impeach the validity of another creditor''s debt and

that the Judge is bound to enquire into his petition. The earlier case is not overruled in the later one and must therefore be regarded as representing

the prevailing law in the United Provinces.

It is no doubt the policy of the Insolvency law to prevent a scramble among creditors to avoid a multiplicity of actions and to have the

insolvent''s estate wound up with the best possible expedition, and with the least amount of expense, in the interests of the creditors as well as of

the insolvent. The jurisdiction of the Court to make an order u/s 53 or 54 of the Act, on a proper consideration of the facts, no matter who moves

the Court, is not restricted by any of the provisions of the Provincial Insolvency Act. Any order made u/s 53 or 54 enures for the benefit of all

creditors and not merely for the benefit of any particular creditor. There is no rule that the Official Receiver alone should move in the matter, and

the provisions of Sections 53 or 54 do not support the contention that the Official Receiver alone and nobody else can move in the matter. The

sections lay down in what circumstances transfers and preferences shall be deemed void against the Official Receiver. It was held by the Patna

High Court in Hemraj Champa Lall v. Ramkishen Ram (1917) 2 P.L.J. 101 that:

What was contemplated by the procedure provided for by this statute was that the Receiver was the person to impeach any fraudulent transfer or

conveyance by the insolvent of his property. If the Receiver refuses to do so, then it would be open to any creditor to apply to the Judge for leave

to institute a proceeding u/s 36 on his own behalf and on behalf of other creditors. But until the Receiver refuses or declines to act, no one else can

do so, because he is the person to set the proceeding u/s 36 in motion.

In Ex parte Kearsley: In re Genese (1886) 17 Q.B.D., 1, Cave, J., laid down the course to be pursued by a creditor if the trustee refused to

act:

Now the proper course for creditors, if the trustee refuses to act or to allow his name to be used, is for them to come to the Court and apply for

leave to use the name of the trustee on giving him an indemnity against costs. On such an application the Court will consider the nature of the

proposed proceedings, and if satisfied that there are prima facie grounds for allowing the creditors to proceed, will grant the application.

See also Williams on Bankruptcy, 10th edition, p. 373. The practice in English Bankruptcy Courts appears to all intents and purposes to be

the same as in India. The petition of the appellant in this case is in substance, such an application. The petitioners alleged that the Official Receiver

not only failed to more the Court to set aside the alienation in question, but also that he acted against the interest of the creditors. In the absence of

any rule framed under the Act in regard to this matter when an Official Receiver declines to assert his rights, a creditor can apply to the Court to

allow him to use the Official Receiver''s name in order to recover the insolvent''s property, or set aside a voluntary transfer, or to avoid a fraudulent

preference for the benefit of the creditors. In this case, the requirements of the law have been satisfied by making the Official Receiver a party to

the application and the respondent''s contention fails.

It is next contended that no appeal lies against the order of the lower Court, as the appellant is not a person aggrieved by the order and

reliance is placed in support of this contention upon Jhabba Lal v. Shib Charan Das ILR (1917) All. 152 and Ishar Das v. Ladha Ram (1921) 62

I.C. 824. In Jhabba Lal v. Shib Charan Das I.L.R.(1917) All. 152 the Court held that the appellant was not a proper party to the application and

he could not appeal against the order except in the event of an order for costs being made against him which ought not to have been made and he

was not a person aggrieved u/s 46 of the old Act. In Ishar Das v. Ladha Ram (1921) 62 I.C. 824 the Lahore High Court followed the decision in

Jhabba Lal v. Shib Charan Das I.L.R.(1917) All. 152. In Kumarappa Chettiar v. Murugappa Chettiar (1916) 36 I.C. 771 Oldfield and Krishnan,

JJ., held that a creditor was a person aggrieved by an order in favour of another creditor in a proceeding u/s 36 of the Provincial Insolvency Act,

III of 1907, to which the Official Receiver, the appellant, and the other creditor were parties. This decision was followed by Oldfield and Seshagiri

Ayyar, JJ., in another decision in Jagannatha Ayyangar v. Narayana Ayyangar (1919) 52 I.C. 761. We see no reason why we should not follow

these decisions of our Court and hold that a creditor can appeal when he is a party to the decision appealed against. In Nikka Mal v. Marwar

Bank Ltd. (1919) 52 I.C 188 a creditor applied to have a sale by the insolvent declared null and void against the Official Receiver. Though his

attention was called to the matter by the Court the Official Receiver took no action. It was held that the Court under the circumstances:

had power to entertain the application and further that it was the duty of the Court to judicially enquire into the matter when it was brought to its

notice. This view is strongly supported by the decision in Khushhali Ram v. Bholar Mal ILR (1915) All. 252 already referred to.

In Appireddi v. Appireddi I.L.R.(1922) Mad. 189 Ayling, Offg. C.J., and Odgers, J., refer to Nikka Mal v. Marwar Bank, Ltd. (1919) 52

L.C. 188 and remark, with reference to an application to set aside a transfer:

It may well be that, when the Receiver fails to move in the matter, a creditor may do so.

In the face of these authorities it cannot be contended successfully that a creditor can never apply to the Court u/s 53 or 54 of the Provincial

Insolvency Act when the Official Receiver refuses to act, but it is urged that a creditor is not a person aggrieved by the order of the lower Court,

even though it be held that he could move the lower Court for an order under either of the sections. If he could move the lower Court to set aside a

transfer or to avoid a preference u/s 53 or 54 he cannot be said to be a person not aggrieved by the order of the lower Court passed against him.

In Kumarappa Chettiar v. Murugappa Chettiar (1916) 36 I.C 771 a Bench of this Court held that:

any appeal against an order passed under Sections 36 and 37 of the Provincial Insolvency Act need not necessarily be presented by the Official

Receiver, but may be presented by a creditor of the insolvent.

This was again decided in Jagannatha Ayyangar v. Narayana Ayyangar (1919) 52 I.C. 761. We do not rest our decision that an appeal lies in

this case upon the slender ground that there is an order for costs against the appellant though that is sufficient to dispose of the respondent''s

objection. If the Official Receiver refuses to move the Court u/s 53 or 54 even though a creditor offers to indemnify him against costs in the event

of an adverse order against him, such creditor can apply to the Court to permit him to use the Official Receiver''s name or make him a party to the

proceedings and may move for an order u/s 53 or 54 and if the order is against him, if the Official Receiver refuses to appeal notwithstanding the

offer of indemnity against costs, the creditor can appeal against the order and may make the Official Receiver a party to the appeal. In this case the

learned Judge declined to hear the case on the merits and the appellant suffered a legal grievance and, therefore, has a right of appeal. In the well-

known case of Ex parte Sidebotham, In re Sidebotham (1880) 14 Ch. D., 458 James, L.J., in the course of his judgment, referred to the case of

In re Webb, Ex parte Walter (1876) 2 Ch. D., 326, in which it was held that a creditor, who had not been heard before the Registrar on the

question of the registration of liquidation resolutions, was entitled to appeal from the Registrar''s order, because the question of registration or non-

registration of such resolutions was one which affected the interests of all the creditors.

We hold the respondent''s contention that no appeal lies in this case to be untenable. In his deposition in the District Court the appellant alleged

that he asked the Official Receiver to take proceedings under Sections 53 and 54 of the Act and that the Official Receiver promised to do so but

failed to take any action. The Official Receiver did not go into the witness box and deny the first petitioner''s statement that he informed the Official

Receiver about the suit transaction. He contented himself with denying it in his Memorandum of 11th October 1921. The District Judge has not

found the first petitioner''s statement to be untrue but he remarks in paragraph 8 of his Judgment:

It is worthy of note that the condition of sale that the property was to be sold free of encumbrance and subject to discharge of the amount due to

the first respondent out of the sale-proceeds was only announced to the bidders on the day of the sale and before the sale commenced and was

not mentioned either in the sale notice (Exhibit IV (a) posted on the notice board of the Official Receiver''s office, nor in the brief notice of sale sent

by post card to creditors (Exhibits II, IV, etc.)

The mortgage is one of four alienations made at or about the same time and within three months of the presentation of the petition for

adjudication of the third respondent as an insolvent, one of which was set aside by the Court, one was given up by the mortgagee and one was not

registered and, therefore, invalid. Any expression of opinion on the evidence might prejudice the trial of the case by the lower Court, but it is

sufficient to say that there is a case for enquiry on the merits. It is urged for the respondent that a notice was sent to the appellant as well as to the

other creditors and that he did not take steps in time to have the hypothecation in question set aside. It would not be proper to express any opinion

on the conduct of the Official Receiver as he is not before us, but the memorandum put in on his behalf shows that he has not correctly understood

what his duty is in matters of this kind. When a creditor challenges an alienation or a payment as being in fraud of creditors, it is the Official

Receiver''s duty to give notice to such creditor and ask him to substantiate his allegation. In this case the allegation that the hypothecation in

question was a fraudulent one was made in the petition presented for adjudication of the third respondent as an insolvent. A general notice, which

is sent as soon as a person is adjudicated an insolvent, asking the creditors to prove their claims, is not such a notice as should be given to a

creditor who impeaches a particular transaction of the insolvent as being in fraud of creditors. The Official Receiver should fix a date for enquiring

into the bona fides of particular transactions of the insolvent and should give notice to such creditors as have already informed him of the nature of

the transaction and should also give notice to others to appear before him and state their objections, if any, to the alienations or alleged fraudulent

preferences by the insolvent. He should examine the insolvent as regards the transactions which have come to his knowledge and the substance of

his examination should be reduced to writing and the statements of the creditors and witnesses whom they produce in support of their allegations

should also be reduced to writing. If he finds that a certain alienation or other transaction is in fraud of creditors he should himself move to have it

set aside by a Court. But if he is not satisfied that such is the case and if a creditor is willing to indemnify him against cost in the event of failure, it is

his duty to move the Court for setting aside the alienation or other transaction as being in fraud of creditors. He should not in such cases express his

own opinion as to the nature of the transaction but should place before the Court such evidence as the creditor is prepared to produce, for the

finding of the Court may differ from that of the Official Receiver, and a trial before the Court will bring out many facts which perhaps the Official

Receiver may not be able to get at, and in the event of an adverse decision of the District Court, if a creditor is willing to indemnify him for the

costs of an appeal against the order of the Court, the Official Receiver should prefer an appeal after taking security for costs. The Official Receiver

should not consider it the duty of creditors alone to bring to his knowledge the nature of any doubtful transaction, but it is his duty to enquire into

the nature of every transaction which prima facie does not appear to be proper and bona fide and valid. In cases where the transaction is within

three months, he should enquire fully into the matter before satisfying himself that it is above board, and, in such cases, it is his duty to call upon the

creditors to appear before him on a date fixed for the purpose to prove their allegations against the bona fides of the transaction. The Official

Receiver should give every facility to the creditors to impugn the transactions of the insolvent which are ostensibly within three months of the

insolvency.

The order of the District Judge is set aside and he is directed to restore the petition to file and dispose of it according to law.

The appellant''s cost of this appeal will be borne by the second respondent.