Polisetty Gurumurthy vs Meda Venkatachalamaiah Setty and others

This second appeal involves an interesting question of law regarding the application of the provisions of the AP Act No.7 of 1977 vis-a-vis the Provincial Insolvency Act. The second appeal arises out of a suit for foreclosure of a mortgage deed dated 24-5-1967 executed by the first defendant in favour of the plaintiff-appellant for a principal amount of Rs.5,000/-. The suit was instituted in the year 1977. Long before the institution of the suit i.e., on 1-9-1972, the first defendant-mortgagor filed IP 13 of 1972 on the file of the Sub-Court, Madanapalle for adjudging him as an insolvent On 31-7-1974, the official receiver was appointed as interim receiver to take possession of the properties of the first defendant and ultimately an order adjudging the first defendant as insolvent was passed on 25-1-1975. In the course of the administration of the estate of the insolvent, the official receiver sold the mortgaged property which is a residential house belonging to the insolvent in March, 1975. In the said sale, the 5th defendant purchased the said property subject to the mortgage in favour of the plaintiff. The sale was duly confirmed by the insolvency Court. The 6th defendant is said to be a subsequent mortgagee. The present suit was instituted in March, 1977 for foreclosure and for sale of the mortgaged property impleading the mortgagor as the first defendant and his undivided sons as defendants 2 to 4, the purchaser from the official receiver as the 5th defendant and the subsequent mortgagee as the 6th defendant. The first defendant alone filed a written statement which was adopted by defendants 2 to 4 contending inter alia that the suit mortgage deed was not fully supported by consideration, that the interest was liable to be scaled down in accordance with the provisions of the Andhra Pradesh Agriculturists Debtors Relief Act (Act 4 of 38), that he was a small fanner entitled to the benefits of Act 7 of 77 and as such the suit debt shall be deemed to have been discharged. The 5th defendant remained exparte. The sixth defendant also did not file a written statement. The trial Court, white upholding the truth and validity of the suit mortgage bond and holding all the other issues in favour of the plaintiff, dismissed the suit on the sole ground that the first defendant is a small farmer within the meaning of Andhra Pradesh Act 7 of 1977 and as such the suit debt shall be deemed to have been abated. The same was confirmed on appeal by the lower appellate Court. Hence this second appeal by the plaintiff.

Sri S.V. Bhat, the learned Counsel for the appellant has contended that as the first defendant was adjudged as an insolvent and all his properties vested in the official receiver and the official receiver sold the suit property to the 5th defendant, the first defendant had no locus standi either to resist the suit or to claim or to invoke the benefit of Andhra Pradesh Act 7 of 1977 and that, in any case, the finding that the first defendant is a small farmer within the meaning of Act 7 of 1977 is erroneous and unsustainable. In support of his contentions, the learned Counsel for the appellant, besides relying on various provisions of the Provincial Insolvency Act, has also placed reliance on (he following decisions:

Kripa Nath v. Ganga Prasad AIR All. 256

Raghubir Sing v. Balkrishnan AIR. All. 328

Narandas Karsondas Vs. S.A. Kamtam and Another,

Masthanaiah v. Veeraiah 1987 (1) ALT 166(FB)

On the other hand, Sri R. Prasad, the learned Counsel appearing for the first defendant has contended that the question regarding the focus standi of the first defendant was not raised by the plaintiff in the two Courts below and as such it cannot be permitted to be raised for the first time in this second appeal. He further contended that insolvency has no effect on the status or right of the first defendant to claim the benefit of Andhra Pradesh Act 7 of 1977 and that the concurrent finding of the two Courts below that the first defendant was a small farmer within the meaning of Act 7 of 1977 is perfectly correct and sound and it is not amenable for interference in the second appeal. He finally submitted that the suit is bad for nonjoinder of the official receiver as a party. In support of his submissions, the learned Counsel for the first defendant has relied on the following decisions:

B. Suryanarayana v. C. Punnayya 1979 (2) APLJ 419

K. Kutuntba Rao v. Basava Purnamma 1979 (2) ALT 353

Veduruvarthi Venkata Chari Vs. Ramalapudi China Demudu,

Kondiba Dagadu Kadam v. Savitribai Sopan Gujar 1999 (4) ALT 11.2 (DNSC)

Before going into the merits of the rival contentions, it is necessary to dispose of the preliminary objection raised by the learned Counsel for the first defendant that as the question of locus standi of the first defendant was not raised in the two Courts below, it cannot be permitted to be raised for the first time in this second appeal. It may, however, be mentioned that issue No.1 framed in the suit is wide enough to comprehend this question. The said issue reads as follows:

"(1) Whether D1 to D4 are small fanners and if so, whether they are entitled to the benefits of Act 7 of 1977."

That apart, this being purely a question of law which arises on the admitted facts of the case, I do not find any valid reason for not permitting this question to be raised in the second appeal. Thus the preliminary objection raised by the learned Counsel for the first defendant fails.

It is not in dispute that the first defendant was adjudicated as an insolvent on 25-1-1975 and all his properties were vested in the official receiver and that the official receiver sold the property to the 5th defendant in March, 1975 subject to the suit mortgage. It is also not in dispute that after the completion of insolvency proceedings, an order of final discharge was also granted to the insolvent. Section 28 of the Provincial Insolvency Act deals with the effect of an order of adjudication. Sub-section (2) of that section provides that on the making of an order of adjudication, the whole of the property of the insolvent shall vest in the Court or in a receiver as hereinafter provided and shall become divisible among the creditors, and thereafter, except as provided by this Act, no creditor to whom the insolvent is in debt in respect of any debt provable under this Act shall during the pendency of the insolvency proceedings have any remedy against the property of the insolvent in respect of the debt, or commence any suit or other legal proceeding, except with the leave of the Court and on such terms as the Court may impose. Sub-section (6), however, provides that nothing in this section shall effect the power of any secured creditor to realise or otherwise deal with his security, in the same manner as he would have been entitled to realise or deal with it if this section had not bee passed.

It is manifest from a reading of this section that on the making of an order of adjudication, the entire property of the insolvent is vested in the official receiver by operation of law.

In Kripanath v. Ganga Prasad (supra), it is held that vesting of property in the Court or the receiver not only gives the Court or the receiver the right to take possession of the property and deal with in a certain manner but amounts to a legal transfer of the right, title and interest of the insolvent in the Court or the receiver as the case may be and as a result of the vesting, the property for the purposes of the Insolvency Court becomes the property of the Court or the receiver and ceases to be the property of the insolvent. After the order of adjudication either the Court or the receiver as the case may be becomes the owner and the insolvent is divested of his rights with respect to the property under adjudication. It is also held in the same judgment that on the making of an order of adjudication, the equity of redemption gets vested first in the Insolvency Court and then in the receiver and that a decree obtained by a secured creditor against an adjudged insolvent without impleading the insolvency Court or the receiver as a defendant is ineffective.

In Narandas v. S.A. Kamtam (supra), it is held that the equity of redemption is not extinguished by a mere contract for sale and the mortgagor does not lose the right of redemption till the execution and registration of a proper conveyance is completed. In the instant case undoubtedly there was a completed sale by the official receiver, in whom the property stood vested in favour of the 5th defendant. As such it cannot be said that the mortgagor''s right of redemption was not extinguished. In view of the settled legal position that on the making of an order of adjudication, the title and ownership in the property is transferred to the official receiver by operation of law, the contention of the learned Counsel for the first defendant that the property is vested in the official receiver for the limited purpose of administration of the estate and distribution of the same among the creditors of the insolvent and the title of the insolvent as such is not extinguished cannot be accepted.

In support of his contention that despite the order of adjudication, the insolvent can still involve the benefit of Andhra Pradesh Act 7 of 1977, the learned Counsel for the first defendant sought to place reliance on two decisions of this Court.

In B. Suryanarayana v. C. Punnayya (supra), the debtor was adjudged as an insolvent and the official receiver in whom his lands were vested was getting the same cultivated under the orders of the Court on behalf of the debtor. It was held that irrespective of the fact that his property was vested in the Court or the official receiver, if his holding is below the limit prescribed by Section 3(f) of the Andhra Pradesh Act 7 of 1977, the debtor should be deemed to be cultivating the land personally and accordingly he was a small farmer within the meaning of the Act and he is entitled to the benefits of the Act. This case is easily distinguishable from the case on hand since in that case the property of the insolvent was not yet sold by the official receiver as in our case. The moment the property of the insolvent is sold by the official receiver, the property ceased to be that of the insolvent and he has no subsisting interest whatsoever in the same and the question of the insolvent claiming that he is a small farmer within the meaning of the Act does not arise.

The other case relied on by the learned Counsel for the first defendant, namely, K. Kutumba Rao v. K Basava Purnamma (supra), also is a case where the insolvency proceedings were pending and no sale was held by the official receiver. It was held therein that a debtor against whom an insolvency proceeding is pending can still invoke the provisions of the Andhra Pradesh Act 7 of 1977 and claim the benefits thereunder. This decision also is, therefore, not applicable to the case on hand.

For the foregoing reasons I have no hesitation in holding that the first defendant, who ceased to have any subsisting interest in the suit land and whose right of redemption stood extinguished has no right or locus standi to invoke the benefit of Act 7 of 1977. The 5th defendant to whom the equity of redemption passed on account of the sale in his favour has not chosen to claim the benefit of the said Act. As such there was no occasion for the Courts below to go into this question at all since no personal decree was claimed in the suit as against the 1st defendant and only a decree for sale of the mortgaged property was prayed for.

As regards the finding that the first defendant was a small farmer within the meaning of the said Act, though the learned Counsel for the appellant sought to assail the said finding on merits, I do not find any valid grounds to interfere with the concurrent finding recorded by the two Courts below on the said question having regard to the limitations of a second appeal u/s 100 CPC. This, however, does not make any difference so far as the result is concerned in view of my finding that the first defendant has no locus standi to invoke the benefit of the said Act.

As regards the submission of the learned Counsel for the first defendant that the suit is bad for non-joinder of the official receiver, I do not find any substance in the said contention in view of the fact that the 5th defendant, who purchased the property from the official receiver and in whom the equity of redemption vested has been impleaded as a party to the suit. Further admittedly the insolvency proceedings have been completed and an order of final discharge has also been granted to the insolvent long prior to the institution of the suit. As such the official receiver is not a necessary party to the suit.

For the foregoing reasons, the second appeal is allowed. The judgments and decrees of the two Courts below are set aside and the suit is decreed with costs as prayed for. Each party shall bear its own costs in this second appeal. Time for redemption: 6 months.