Ps. Ar. Ar. Arunachalam Chettiar vs Narayanaswami Goundar

Balakristma Ayyar, J.—The two questions referred to the Full Bench are :

Whether a debtor who was an insolvent on 1-10-1937 and 22-3-1938, but whose adjudication was subsequently annulled has saleable

interest in the property on the two crucial dates?

Would it make any difference if, though the adjudication was annulled, the properties of the insolvent, either in whole or in part, were vested in

an appointee of the Court u/s 37, Provincial Insolvency Act and continued to be so vested at the time when the application for scaling down was

filed,

These are the circumstances underwhich the two questions have arisen: In 1927 one Palani Goundan and his son executed a mortgage over

some of their immovable properties in favour of one of their creditors named Somasundaram Chettiar. Another creditor named Arunachalam

Ghettiar applied to have the mortgagors adjudicated insolvents on the ground that the mortgage in favour of Somasundara amounted to a fraudulent

preference. The mortgagors did not enter appearance and in September 1928 an order of adjudication was passed without opposition. Thereafter

in October 1929 Arunachala applied to the Court for an order u/s 54, Provincial Insolvency Act for setting aside the mortgage in favour of

Somasundara. The Subordinate Judge allowed the application and set aside the transaction. In appeal to the District Court the order of the

Subordinate Judge was set aside. Arunachala then came up to this Court in second appeal but this Court agreed with the District Court in holding

that there was no fraudulent preference and dismissed the appeal. It thus having been established that there had been no fraudulent preference the

mortgagors applied in March 1935 to the Sub-Court for annulment of their adjudication. The petition was allowed and the adjudication set aside

u/s 35, Provincial Insolvency Act. On appeal the District Judge reversed that decision whereupon there was a second appeal to this Court which

was disposed of in 1940 (the case has been reported in Periakaruppan v. Arunackalam Chettiar, ILR (1940) Mad. 441: (A.I.R. 1940 Mad. 375

). This Court discharged the order of the District Judge and restored the order of the Subordinate Judge. In respect of the properties of the

insolvent this Court made the following order :

The petitioning creditor hero asks that certain other assets in the hands of the Official Receiver should be distributed by him amongst the creditors.

There are no special circumstances which justify an order of this nature. The Official Receiver will be directed to deliver the assets, other than the

Rs. 3600, to the debtors two months hence. The properties will be handed over to them then, subject, of course, to any order of the Court which

may be passed in the meantime.

In 1946 one Narayanaswami Gounder, a son of one of the mortgagors applied in I. A. No. 905 of 1946 to the District Munsif, Tirupur, to scale

down the decree debt in O. S. No, 109 of 1924 on the file of his Court under the provisions of Madras Act IV [4] of 1938. The decree in that

case had been passed against the father and the grand father of the petitioner, who had been adjudged insolvents. The petition was opposed on the

ground that the petitioner was not an agriculturist either on 1-10-1937 or 22-3-1938 because on those dates both the petitioner''s father and

grand-father had been adjudicated insolvents and their properties remained vested in the Official Receiver. The District Munsif overruled this

objection and held that the petitioner was entitled to have the decree debt scaled down. An appeal to the District Court having failed a second

appeal was preferred to this Court. When the appeal was before a Division Bench Mr. Sivaramakrishna Ayyar the learned counsel for the

appellant contended on the strength of the decision in Kudithipudi Venkatramayya Vs. Mallacheruvu Pundareekakshudu and Others, that

notwithstanding the annulment of the adjudication the insolvent had no saleable interest in any agricultural property either on 1-10-1987 or 22-3-

1938 and that, therefore, the debt was not liable to be scaled down. The learned advocate for the respondent, however, argued on the basis of the

decision in Gamoji Venkata Ramakrishnarao Vs. Gullapalli Sambamurti, that the effect of the annulment of the adjudication was to restore the

status quo ante and that the true position was as if there had been no adjudication at all and that in consequence both on 1-10-1937 and 22-3-

1938 the respondent had a saleable interest in agricultural land. The Division Bench felt that it was difficult to reconcile these two decisions and

hence formulated the two questions extracted above for determination by Full Bench.

So far as the second of these two questions is concerned, it may be stated at once that in view of the fuller exposition of the facts that was made

before us it does not really arise. The direction which this Court gave in 1940 was that except in respect of the sum of Rs. 3600 the Official

Receiver should deliver the hroperties back to the debtors ""two months hence."" That period of two months expired long before Narayanaswami

Goundan made his application out of which the present proceedings have arisen. The properties did not continue to remain vested in an appointee

of the Court u/s 37, Provincial Insolvency Act, at the time when the application for scaling down the debt was filed. It is therefore sufficient to

answer the first question.

Before proceeding to examine the authorities cited on either side let us try to find out what would happen in a simple case like this: let us

suppose that a debtor who owns some agricultural land some flocks of sheep, some money in a savings bank account and some shares in

companies, is adjudicated an insolvent on 1-1-1937. Let us also suppose that the adjudication is annulled on 1-1-1939 and no vesting order is

made in respect of any of these properties u/s 37 of the Act. If during this period arrears of rent have accrued in respect of his lands, if there has

been a natural increase to his flocks, if interest has been earned on his deposits in the savings bank account and if dividends have been declared in

respect of the shares he held who would be entitled to these? Obviously, the debtor. But he would be entitled to them only if he had remained the

owner of these properties throughout the period, which means that on 1-10-1937 and 22-3-1938 also he must have been their owner. And if he

was their owner it goes without saying that he would have a saleable interest in them. That is a conclusion which emerges as a matter of first

impression and also of principle. Now excepting one or two passages in the decision in Kudithipudi Venkatramayya Vs. Mallacheruvu

Pundareekakshudu and Others, which Mr. Sivarama-krishna Aiyar cited, there is nothing in any of the other authorities to which our attention was

drawn which requires or even suggests that a different view should be taken.

The case of White v. Chitty, (1866) 1 Eq. 372; (85 L. J. ch. 343) is the oldest of the cases cited before us. In that a testator devised freeholds

to c for life, with a clause of forfeiture on bankruptcy. In the testator''s lifetime, C was adjudicated a bankrupt, and had not obtained his order of

discharge at the time the testator died. But no creditors'' assignee was appointed and within four months after the death of the testator, the

bankrupt applied for and obtained an annulment of the bankruptcy. The Official Assignee had not, during the interval, applied for or obtained

possession of the rents, C himself having been in occupation of the estate. The Court held that the forfeiture had not occurred. In disposing of that

case the learned Judges observed :

Down to the case of Smallcombe v. Oliver, (1844) 13 M. W. 77 : (13 L. J. Ex. 305) it seems to have been thought that the effect of anuulling a

bankruptcy was to render the state of things such as if the Bankruptcy had never taken place. But the Court of Exchequer held, not only that there

was, or ought to be, indemnity for all acts done before the annulment, but that, before and up to the annulling of the fiat ; everything remained as it

was by force of the bankruptcy--that up to that period the bankruptcy operated fully; and according to that ratio decidendi, although the

adjudication of bankruptcy may have been most improper, the act of the sheriff would have been right; because, at the time of the return, the sheriff

could know no better, and, therefore, made a proper return of nulla bona.

Though Mr. Sivaramakrishna Aiyar did not state so explicitly, he seemed to suggest at one stage of his arguments that the old English rule that on

an annulment of an adjudication the position would be as if there had been no bankruptcy at all would not apply where the properties had vested in

the Official Receiver. We do not think that there is any warrant for such an assumption in this decision. All that this decision is an authority for is

that if there had been no vesting of properties in the Official Eeceiver the position on the annulment of an adjudication would be as if there had been

no bankruptcy at all; but acts done in pursuance of the order of adjudication would be valid. The principle of this decision is that subject to what

has been done the insolvency is wiped out.

The second decision is of the year 1868 and it is reported in Cox y. Fonblanque, (1868) 6 Eq. 482 : (37 L. J. Ch. 622). In that case a legacy

was given to A, ""if not an uncertificated bankrupt at the testator''s death"". A was a bankrupt at the testator''s death, but his bankruptcy was

annulled four months afterwards. The Court held in that case that A was not entitled to the legacy because the bequest of the annuity was made on

the express condition that the annuitant should not be a bankrupt at the testator''s death, and that condition had not been fulfilled. On the question

before us this decision throws no light whatsoever, it turned wholly on the construction of the will.

More interesting is the case of Bailey v. Johnson, (1872) 7 Ex. 263 : (41 L. J. Ex. 211). That was a case decided u/s 81, English Bankruptcy

Act, 1869. The facts were these : The defendant was adjudged a bankrupt on a debtor summons issued by a banking firm of Harvey and Hudson;

a trustee was appointed, who realised the estate and paid the proceeds into the bank of Harvey and Hudson. Subsequently the firm of Harvey and

Hudson were adjudged bankrupts. The sum paid in by the trustee in the bankruptcy of the defendant was then standing to his credit in their books.

Sub-sequently the order adjudicating the defendant bankrupt, was reversed on appeal, and no vesting order was made u/s 81, Bankruptcy Act as

to his property. The plaintiff as trustee in the bankruptcy of Harvey and Hudson, sued the defendant to recover the amount due from him. The

defendant then claimed to set off the money that had been paid by the trustee in his bankruptcy. The Court of Exchequer allowed the set off and

there was an appeal from that decision. Affirming the decision of the Court of Exchequer Cockburn C. J. observed as follows ""The effect of

Section 81 is, subject to any bona fide disposition lawfully made by the trustee prior to the annulling of the bankruptcy, and subject to any

condition which the Court annulling the bankruptcy may by its order impose, to remit the party whose bankruptcy is set aside to his original

situation. Here the Court of Bankruptcy has imposed no condition; the general provision of the section has therefore its full effect, and that effect is

to remit the bankrupt, at the moment the decree annulling his bankruptcy is pronounced, to his original powers and rights in respect of his property.

We must therefore look at the money as though it were money paid in his name instead of in the name of Bullard, (the trustee for the estate of the

defendant) for having become his by virtue of the annulling of his bankruptcy, it is to be considered as his at the moment when it was paid in;.....

Brett J. in concurring stated :

I am of the same opinion, and I agree with the Lord Chief Justice that it is impossible logically to stop short of giving to the word revert in Section

81 the full interpretation which he has placed upon it.

That the English Bankruptcy Act, 1914, has made no change as regards this part of the Bankruptcy Law appears from p. 152, 16th Edn. of

William''s on Bankruptcy :

As to the consequences of ''annulling'' the law was but little changed by the Act of 1869, and in this respect the present section does not seem to

differ from Section 81 of that Act.

Now, Section 87, Provincial Insolvency Act, is practically in the same terms as Section 29, English Bankruptcy Act, 1914.

Coming to the decisions of this Court : The case in Kolaparathi Venkatasubbiah Vs. Madallapalli Venkatasubbiah and Another, throws no light

on the question before us because in that case there was an order u/s 37 of the Act vesting the properties in the Official Receiver and it was held

that the properties did not revert to the insolvent. The case in Noony Suryanarayanamurthi represented by next friend and maternal grandfather

Chode-China Pattabhiramayya Vs. Noony Veerraiu and Others, is more to the point. The material facts in that case were these : A Hindu father

was adjudged an insolvent. He had only one son at the time and that son filed a suit for partition. Subsequently, a second son was born to him.

Thereafter, the adjudication was annulled. The District Court passed a vesting order u/s 37, Insolvency Act, but on appeal this Court set aside the

order of the District Judge in so far as it vested the properties of the insolvent in the Official Receiver but directed that officer to retain the cash

realisations in his hands pending the disposal of certain appeals. On this state of things Patanjali Sastri J. who delivered the judgment of the Court

remarked:

The position, therefore, is that the properties of defendant 1 which had, on his adjudication, vested in the Official Receiver, now ''reverted to him

as provided in Section 87, Provincial Insolvency Act.

The question next arises as to whether, on such reverter, the properties are held by defendant 1 as his separate properties, or as family properties

liable to be divided among the members along with the other assets of the family; for, as has been stated, defendant 3 was born after defendant 1

was adjudicated and his share (then one half) in the family properties was vested in the Official Receiver, and if such share now reverts to him as

his separate property the plaintiff and defendant 3 would each be entitled only to a fourth share, while, if defendant 1''s share comes back to him

only as family property, which it undoubtedly was when it vested in the Official Receiver, the father and the sons would each be entitled to a third

share in the entire properties.

The Court decided :

We are accordingly of opinion that on the annulment of the adjudication the surplus assets in the hands of the Official Keceiver reverted to

defendant 1 as joint family property.

Now this decision practically destroys the case which Mr. Sivaramakrisbna Aiyar had been consistently urging. His reasoning was that when an

adjudication is annulled and no vesting order is made u/s 37 the property merely re-vests in the insolvent and does not revert to him. In other

words, the argument of Mr. Sivaramakrishna Aiyar was that though the property goes back to the insolvent it goes back only with effect from the

date of annulment and not with effect from any anterior date. It must be clear that if the true legal position is that the property merely re-vests in the

insolvent and does not revert to him the Court could not have given the decision it did in Noony Suryanarayanamurthi represented by next friend

and maternal grandfather Chode-China Pattabhiramayya Vs. Noony Veerraiu and Others, .

The position is made even clearer in the decision that appears as Sakhamuri Peraya and Others Vs. Nimmaraju Kondayya and Others, :

The effect of the present Section 37 has been considered by Beasley C. J. in Bhyradevanhalli Lingappa Vs. Official Receiver, , King J. in

Dharmasamarajayya Vs. Sankamma and Others, and Sommayya J. in Ratnavelu Chettiar by mother and guardian Madhuravalli Ammal and

Another Vs. Franciscu Udayar and Others, and the learned Judges have held that the effect of the annulment of the adjudication relates back to the

date of the adjudication and is as if no adjudication had taken place, except as regards the acts of the Court and the Official Receiver which are

validated by that section. Section 37 says. .... Somayya J. very pertinently points out in Ratnavelu Chettiar by mother and guardian Madhuravalli

Ammal and Another Vs. Franciscu Udayar and Others, , that if the annulment was not to have retrospective effect, there would be no need for the

clause validating acts done by the Court or by the Receiver, as they would be valid; because they were done at a time when the insolvent had been

adjudicated and before the adjudication had been annulled; and so had jurisdiction to do the acts they did. If however, the annulment were to date

back to the date of adjudication, it would, unless validating clauses were introduced, have the effect of setting at nought all that they had done to

disturb the rights in property created, by the Court and the receiver.

And this legal position is stated again in Gamoji Venkata Ramakrishnarao Vs. Gullapalli Sambamurti, .

It will thus be seen that of the decisions that have been placed before us the only one that can be pressed into service to support the contention

of Mr. Sivaramakrishna Aiyar is the one in Kudithipudi Venkatramayya Vs. Mallacheruvu Pundareekakshudu and Others, . In the penultimate

paragraph of the judgment in that case, the following sentences occur:

The position therefore is that the appellant on 1-10-1937, and on 22-3-1938, was not an agriculturist because His proprety was vested in the

Official Receiver and he had no saleable interest therein. We cannot accept the view of the District Judge that after the annulment of the

adjudication he had a saleable interest in the properties vested in the Official Receiver. The most that he could have had in those properties was a

possible expectation of a surplus, if any, after satisfying the creditors. That is not, in our opinion, to be treated as a saleable interest in those

properties.

The argument of Mr. Sivaramakrishna Aiyar here was that the learned Judges meant to say that because the properties remained vested in the

Official Receiver on 1-10-1937 and on 22-3-1938, the insolvent could have bad no saleable interest in them on either of those dates. In view of

the earlier statement in the same paragraph that

the annulment of the adjudication relegates the debtor to the position which he occupied before he was adjudicated, except in so far as the vesting

order places the residue of the properties at the disposition of the appointee for the benefit of the creditors.

It is not very clear whether the learned Judges meant to go as far as Mr. Sivaramakrishna Aiyar suggests they did. However if they did mean to go

so far and say that because on 1-10-1937 and 22-8-1938, the properties remained vested in the Official Receiver, the result would be that in spite

of the reverter on the annulment of the adjudication the insolvent would not be the owner of the properties on 1-10-1937 and 22-3-1938. I would

say with respect that they were wrong.

The answer to the first question referred to the Full Bench is, therefore, in the affirmative.

Subba Rao, J.

I agree. I am not expressing my views on the second question referred to the Full Bench as it does not arise for consideration.

Panchapakesa Ayyar, J.

I agree. I too consider that the second question does not arise for consideration here. So I do not express any opinion on it.

(This appeal coming on for final hearing before the Court, Subba Rao J., after the expression of the opinion of the Full Bench, the Court delivered

the following judgment : 8-9-1950):

JUDGMENT

After the judgment delivered by the Full Bench this case comes up before me for final disposal. Mr. Sivaramakrishna Aiyar raised a further

point, namely, that u/s 21, Madras Agriculturists Relief Act if, prior to the coming into force of the Act, a dividend has been declared out of the

assets of an insolvent, the fact that the adjudication has been subsequently annulled would not affect his rights. This question was expressly raised in

Kudithipudi Venkatramayya Vs. Mallacheruvu Pundareekakshudu and Others, and negatived by a Bench of this Court. I am bound by this

decision. The civil miscellaneous second appeal, therefore, fails and is dismissed with costs.

(Leave to appeal is refused).