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Judgment
Alfred Henry Lionel Leach, C.J.—In this appeal the Court is called upon to decide what are the rights of a secured creditor of an insolvent
when the adjudication has been annulled as the result of the Court having sanctioned a composition, the creditor not being a party to the
arrangement and having taken no steps to realize his security before the annulment.
On the 19th October, 1937, the first defendant in the suit out of which the appeal arises executed a promissory note in favour of the plaintiff for
Rs. 3,000. The first defendant at that time was joint with his four sons (defendants 2 to 5), all of whom are minors. As security for the advance the
first defendant executed in favour of the plaintiff what has been described as a continuing security bond. The properties covered by the bond
formed part of the family estate. On the 17th December, 1937, two creditors applied to the Subordinate Court of Madura for the adjudication of
the first defendant under the provisions of the Provincial Insolvency Act. On the 21st February, 1938, an order of adjudication was passed, and in
accordance with the provisions of Section 27, the first defendant was directed to apply for his discharge within one year. Within the year the first
defendant submitted to the Insolvency Court a proposal for a composition in satisfaction of his debts. He offered to pay ten annas in the rupee. The
wife of the first defendant, as the guardian of her minor sons, consented to the arrangement. The consent was necessary because the proposal
involved the transfer of properties belonging to the joint family to trustees for the purpose of realisation. There were three secured creditors. The
plaintiff refused to accept the proposal, but the other two secured creditors did so. Apparently, their securities did not represent as much as ten
annas in the rupee. By an order dated the 10th July, 1939, the Court sanctioned the scheme and on the 8th October, 1939, the trust deed was
executed by the father and by the minors acting through their mother. In due course the trustees realised all the assets of the family, except those
charged to the plaintiff and two other lots of Immovable property. The proceeds of the realisation were sufficient to pay all the consenting creditors
ten annas in the rupee. The administration was closed on the 30th November, 1940, when the unsold properties were delivered back to the
minors'' guardian. The properties charged to the plaintiff remained, of course, subject to his charge.
On the 16th March, 1942, the plaintiff filed the present action in the Court of the Subordinate Judge of Sivaganga for a decree directing the
realisation of the properties charged to him, and, in the event of the proceeds proving to be insufficient to pay him in full, directing the balance to be
realised from the other properties of the defendants and from the first defendant personally. The Subordinate Judge held that as the first defendant
had only a one-fifth interest in the properties charged, the plaintiff must, in the first place, look to the proceeds of sale of that interest. If the money
realized was not sufficient to discharge the liability in. full the plaintiff was entitled to have recourse to all the joint family properties in the hands of
the defendants. The sons appealed to the District Judge of Ramnad who agreed with the Subordinate Judge that the first defendant was only
entitled to a one-fifth share of the properties charged to the plaintiff, but he held that if the one-fifth share did not satisfy the claim, the plaintiff could
have recourse to the sons'' interest in the sale proceeds. Should there still be a deficiency, the plaintiff was entitled to proceed against the joint
family properties in the hards of the sons but only to the extent of ten annas in the rupee with interest at six per cent per annum. The plaintiff
appealed to this Court. His appeal was heard by Rajamannar, J., who restored the decree of the Subordinate Court. The learned Judge
considered that the case fell within thejudgment of the Court delivered in Chokkalinga Mudali Vs. Manickka Mudali alias Singara Mudali, . but in
view of the decision in Govindas Chathurbhujadas v. Ramadas (1924) 48 M.L.J. 252 : ILR 48 Mad. 521 he gave the first defendant''s sons leave
to appeal under Clause 15 of the Letters Patent. They availed themselves of the leave and their appeal is now before us.
In Chokkalinga Mudali Vs. Manickka Mudali alias Singara Mudali, . a mortgagee filed a suit on his mortgage and obtained a final decree for
sale. Subsequently the mortgagor was adjudicated insolvent under the Provincial Insolvency Act, but he obtained his discharge unconditionally. The
discharge was the governing factor in the case. During the pendency of the insolvency proceedings the mortgagee took no steps to enforce his
mortgage decree, but he did so after the discharge of the insolvent and in execution proceedings he obtained an order for sale of the hypotheca.
The amount realised was not sufficient to pay off the mortgage debt and consequently the mortgagee applied for a personal decree for the balance.
It was contended by the mortgagor that in view of his unconditional discharge a personal decree could not be passed against him. According to
him Section 44(2) of the Provincial Insolvency Act stood in the way. The Court refused to accept the contention for these reasons. Section 47 in
effect says that the debt of a secured creditor is not provable until he has realised his security or has abandoned it or valued it. Until one of these
events has happened there is no debt ""provable"" in the insolvency proceedings. A secured creditor may prove, but his right is a contingent one and
until the contingency arises he is outside the Act. When a secured creditor has not during the insolvency proceedings realised his security or
surrendered or valued it, Section 44(2) does not affect him, because no portion of the debt due to him has become provable and the section only
applies to debts which are provable in the insolvency. This means that a secured creditor is entitled to a personal decree if his security has not been
realised before the discharge of the insolvent. If it has been realised during the pendency of the insolvency proceedings and there is a deficiency,
the balance of the debt constitutes a debt provable in the insolvency and in such a case Section 44(a) will operate to cancel it.
The difference between an unconditional discharge of an insolvent and an annulment of insolvency is of importance. When an insolvent has
obtained an order of discharge he is by virtue of Section 44 released from payment of provable debts, except (a) a debt due to the Grown ; (b) a
debt or liability incurred by means of fraud or fraudulent breach of trust to which he was a party ; (c) a debt or liability in respect pf which he has
obtained forbearance by fraud to which he Was a party ; or (d) a liability under an order for maintenance made u/s 488 of the Code of Criminal
Procedure, 1898. An order of annulment in itself does not release an insolvent from the payment of his debts. Section 37 states that when an
adjudication is annulled, all sales and dispositions of property and payments duly made and all acts theretofore done, by the Court or receiver, shall
be valid ; but, subject to this, the property of the debtor who has been adjudged insolvent shall vest in such person as the Court may appoint, or, in
default of an appointment, shall revert to the debtor to the extent of his right or interest therein on such conditions (if any) as the Court may, by
order in writing declare. A vesting order is intended to be for the benefit of the creditors and allows the Court to retain supervision of the
administration of the assets vested. Section 39 provides that if the Court approves the proposal for a composition or a scheme of arrangement, the
order of adjudication shall be annulled, the provisions of Section 37 shall apply, and the composition or scheme shall be binding on all the creditors
so far as it relates to a debt provable under the Act. Section 40 states that if default is made in the payment of an instalment due in pursuance of the
composition or scheme, or if it appears that the composition or scheme cannot proceed without injustice or undue delay, or that the approval of the
Court was obtained by fraud, it may readjudge the debtor insolvent and annul the composition or scheme, but without prejudice to the validity of
any transfer or payment duly made or of any thing duly done under or in pursuance of the composition or scheme. Therefore in the case of
annulment the position is very different from the position which arises when the insolvent has obtained an unconditional order of discharge.
The facts in Govindas Chathurbhujadas v. Ramadas (1924) 48 M.L.J. 252 : ILR 48 Mad. 521 have very little in common with the facts in
Chokkalinga Mudali Vs. Manickka Mudali alias Singara Mudali, . In Govindas Chathurbhujadas v. Ramadas (1924) 48 M.L.J. 252 : ILR 48
Mad. 521 the respondent was adjudicated insolvent under the Presidency Towns Insolvency Act. A statutory majority of his creditors agreed to
accept a composition of eight annas in the rupee. No regular scheme of composition was placed before the Court, but the insolvent filed an
affidavit to the effect that his creditors had agreed to the composition. The Court accepted the statements in the affidavit and annulled the
adjudication. The appellant, a secured creditor, had not realised his security or proved for the balance before the order of annulment was made.
No notice had in fact been given to him of the application for annulment. Subsequently, he instituted a suit for a decree directing the sale of the
securities through the Court and the payment by the insolvent personally of the balance should the sale proceeds prove to be insufficient. It was
held that the annulment of an adjudication u/s 30 of the Act did not amount to a discharge or release of the insolvent in respect of debts provable in
insolvency, that the secured creditor''s claim for the balance after realisation of the security was a debt provable in insolvency, that notwithstanding
that the secured creditor was not a party to the composition, he was bound by it in respect of the unsecured balance of his debt and that he was
not restricted to an application in insolvency by way of remedy but could file a suit on the basis of the composition. The relevant provisions of the
Presidency Towns Insolvency Act do not differ materially from the corresponding provisions of the Provincial Insolvency Act.
The judgment in Govindas Chathurbhujadas v. Ramadas (1924) 48 M.L.J. 252 : ILR 48 Mad. 521 has direct bearing here. When the facts in
the two cases are fully understood it is manifest that there is no conflict between Chokkalinga Mudali Vs. Manickka Mudali alias Singara Mudali,
and Govindas Chathurbhujadas v. Ramadas (1924) 48 M.L.J. 252 : ILR 48 Mad. 521 and we see no reason to doubt the correctness of either
decision. The fundamental difference between the two is that in the former case the insolvent received an unconditional discharge before the
secured creditor took action while in the latter case there was no discharge, but merely an annulment of the adjudication as the result of the
acceptance of a composition. Section 33(3) says that a creditor whose debt is provable under the Act may, at any time before the insolvent''s
discharge, tender proof of his debt and apply to the Court for an order directing his name to be entered in the schedule. Consequently until an
order of discharge is passed a secured creditor can at any time come in and prove the balance owing to him after the realisation of his security.
Section 126 of the Bankruptcy Act of 1869 provided that a composition which had been accepted by a resolution of the creditors should be
binding on all those included in the statement of the debtor produced at the meetings at which the resolution was passed, but should not affect or
prejudice the rights of other creditors. Referring to this section, James, L.J., in In re Bestwick: Ex parte Bestwick (1876) 8 Ch. D. 485 said:
Section 126 indeed says that the composition is to be accepted in satisfaction of the debts ; it says nothing about the debts of those creditors who
may hold security, and the words, if taken literally, would compel a secured creditor to accept the composition in satisfaction of the whole amount
of his debt, but they have been always construed as meaning that he is to take the composition only on the ultimate balance of his debt which may
remain due after realising his security. When he has realised his security he has a right to say to the debtor so much remains due to me pay me the
composition upon that.
As pointed out in Govindas Chathurbhujadas v. Ramadas (1924) 48 M.L.J. 252 : ILR 48 Mad. 521 Section 126 of the Bankruptcy Act of 1869
was not reproduced in the Bankruptcy Act of 1883, but similar provision was made. Section 18(8) of the Act of 1883 provided that an accepted
composition should be binding on all the creditors so far as it related to debts due, to them from the debtor and provable in bankruptcy.
The principle laid down in In re Bestwick: Ex parte Bestwick (1876) 8 Ch. D. 485 has-been accepted in India. The provisions of Section 39 of
the Provincial Insolvency Act, as amended by the Provincial Insolvency (Amendment) Act, 1935, follow the provisions of Section 18(8) of the
English Act of 1883. Before the amendment, Section 39 of the Provincial Insolvency Act made the scheme binding on all creditors entered in the
schedule so far as it related to a debt entered therein. Now it expressly binds all the creditors so far as debts provable under the Act are
concerned. Therefore where there has been no order discharging the insolvent, but merely an annulment of the order of adjudication a secured
creditor is bound by a composition of which the Court has approved in so far as the balance of his debt is concerned after the realisation of his
security. The fact that he has taken no part in the composition proceedings makes no difference. He can realise his security at any time, but when
he does and there is a deficiency he can only get payment on the basis of the composition, because the unsatisfied portion of the debt is ""provable
in the Insolvency Court in the absence of an unconditional order of discharge.
For these reasons the appeal must be allowed and the decree of the District Judge restored with costs throughout.