R.S.K. Chandrasekaran vs The Official Receiver and Another

M.M Ismail, C.J.—This is an appeal against the order of N.S. Ramaswami, J. dated 6th October, 1975 made in A.A.O. No. 182 of 1975.

O.S. No. 145 of 1968 on the file of the Court of the Subordinate Judge of Madurai was a suit to enforce a mortgage and in that suit a decree was

passed. E.P. No. 232 of 1970 was filed in that suit to execute the decree and the property was sold in auction on 1st November, 1971, and the

appellant herein was the auction purchaser. The judgment-debtor filed E.A. No. 207 of 1972 under Order 21, rule 90 of the CPC to set aside the

sale, and that application was dismissed on 5th January, 1974. The appeal preferred by the judgment-debtors in A.A.O. No. 51 of 1974 to this

Court also failed, as the same was dismissed on 13th August, 1974. In the meanwhile, a petition to adjudge the judgment-debtors insolvents was

filed on 30th October, 1971, and the order of adjudication itself was made on 17th December, 1971. The Official Receiver, representing the

estate of the insolvents, filed E.A.No. 2 of 1975 to set aside the sale on the ground that no notice was given to him and that the permission of the

Court was also not obtained. The learned Subordinate Judge of Madurai passed an order on 1st March, 1975, dismissing the application, holding

that the adjudication took place only on 17th December, 1971, that on the date when the sale took place, namely, 1st November, 1971, the

Official Receiver was not in the picture, and that therefore there was no question of giving notice to him or obtaining the permission of the Court for

the sale of the property. It was against this order of the learned Subordinate Judge that the Official Receiver filed A.A.O. No. 182 of 1975 before

this Court. The learned Judge, (N.S. Ramaswami, J.) by his order dated 6th October, 1975, reversed the order of the learned Subordinate Judge

of Madurai and allowed the appeal, A.A.O. No. 182 of 1975 allowed E.A. No. 2 of 1975 and set aside the sale. It is against this order the

present appeal has been filed by the auction -purchaser.

The ground on which N.S. Ramaswami, J. reversed the order of the learned Subordinate Judge is that by operation of Section 28(7) of the

Provincial Insolvency Act, the vesting of the property in the Official Receiver on the adjudication of the debtors as insolvents dated back to the

presentation of the petition for adjudication, that in the present case it dated back to 30th October, 1971, that by virtue of this statutory provision

the equity of redemption vested in the Official Receiver and that consequently the decree-holders could not have brought the property to sale

without notice to the Official Receiver. The learned Judge, further held that Section 51(3) of the Provincial Insolvency Act, which corresponded to

Section 53(3) of the Presidency Towns Insolvency Act, saved only those persons who had purchased the property in good faith, that in this case

the auction-purchaser, namely, the appellant herein, had not filed a counter contending that he had purchased the property in good faith for

consideration, and that therefore that question did not arise. It is the correctness of this conclusion of the learned Judge that is canvassed in the

present Letters Patent Appeal.

Section 28(2) of the Provincial Insolvency Act provides for the vesting of the property in the Official Receiver on the making of an order of

adjudication, and it reads as follows:

28(2). -- 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 therefore, except as provided by this Act, no creditor to whom the insolvent is

indebted 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.

Section 28(7) states:

An order of adjudication shall relate back to and take effect from the date of the presentation of the petition on which it is made.

Sub-section (6) of Section 28 states:

Nothing in this section shall affect 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 been passed.

A combined reading of Sub-sections (2), (6) and (7) of Section 28 of the Act will lead to the inference that in the case of a secured creditor his

right to realise or otherwise deal with the security will not be affected either by the vesting provided for in Section 28(2) or by the doctrine of

relation back provided for in Section 28(7) of the Act. As we pointed out already, in this case the decree for the sale of the property must have

been passed much earlier to 30th October, 1971, because the execution petition itself was filed in 1970. Even the order of the Court directing the

sale of the property should have been passed much earlier to 30th October, 1971, because the sale actually took place on 1st November, 1971.

Under these circumstances, the question for consideration is whether there is any reality in the requirement that the decree-holders should have

obtained the permission of the Court for bringing the property to sale or should have given notice to the Official Receiver before obtaining an order

for sale. Even giving lull effect to the doctrine of relation back provided for in Section 28(7) of the Act, the order of the Court directing the sale of

the property having been passed even before 30th October, 197), it could not have been possible in practice for the decree-holders to have given

notice to the Official Receiver or to have applied for and obtained the permission of the Court because on that date even the petition for

adjudication was not there and more so the Official Receiver. Hence, looking at the problem purely from the practical point of view, it could not be

contended that the sale which took place on 1st November, 1971, was liable to be set aside on the ground that the order for sale was made

without notice to the Official Receiver and without the permission of the Court.

In our opinion, it is not even necessary to go so far, in view of the provision contained in Sub-section (6) of Section 28, that nothing contained in

the section shall affect the power of any secured creditor to realise or otherwise deal with the security in the same manner as he would be entitled

to, realise or deal with it, if that section had not been passed, and, when it so provides it proceeds to create a fiction that, with regard to the rights

of a secured creditor referred to in Sub-section (6) of Section 28 neither Sub-section (2) nor Sub-section (7) of Section 28 should be deemed to

have been in existence or enacted. If so, there is no scope for applying either the provision of vesting or the theory of relation back, so as to

restrain or curtail the power of the secured creditor saved under Sub-section (6) of Section 28.

Mr. D.C. Krishnamurthy, the learned counsel for the Official Receiver, brought to our notice the decision of the Bombay High Court in Babu

Rama Chaugule Vs. The Goodwill Bank Ltd., Miraj, . In that case the Court had no occasion to consider the practical implications of the doctrine

of relation back provided for in Section 28(7) of the Act. In that case a final decree in a mortgage suit was passed on 31st October, 1949. A

petition for adjudication of the debtor as insolvent was made in 1960 and the actual order of adjudication was passed on 6th December, 1957.

The execution petition with which the Bombay High Court was concerned was filed on 7th February, 1963. It was in that set up the question that

came to be considered was whether the Official Receiver should have been made a party to the execution petition filed on 7th February, 1963.

The Bombay High Court held that the only person to represent the estate of the judgment-debtor on 7th February, 1963, was the Official

Receiver, that therefore he should have been made a party and that the execution proceedings instituted against the original judgment-debtor

without impleading the Official Receiver, who alone represented the estate, were misconceived. It was in that context only that the Bombay High

Court observed:

To be more explicit, if a secured creditor has a right to sell the property through Court or privately, or to foreclose it, that right is not affected. The

manner of enforcing the security, viz-, selling privately or through Court foreclosing through the same manner is also not affected. This does not

mean that the secured creditor could deal with the property in the absence of any legal representation of that property. If by operation of law from

the date of the adjudication the insolvent ceases to represent the property altogether and the only person that can represent that property and deal

with it is the receiver appointed by the Insolvency Court, the secured creditor cannot ignore this fact. In other words, a devolution by the operation

of law pending suit cannot be ignored by the secured creditor.

It is pertinent to point out that in the above case the Bombay High Court referred to the ''date of the adjudication'', and not the ''date of the

presentation of the petition for adjudication'' with reference to the operation of Section 28(7) of the Act, and that is the reason why we pointed out

that the Bombay High Court had no occasion to consider the scope of the doctrine of relation back provided for in Section 28(7) of the Act, on

which alone N.S. Ramaswami, J. relied for reversing the conclusion of the learned Subordinate Judge.

N. S. Ramaswami, J. himself has relied on the decision of a Full Bench of this Court in E.K. Raghava Reddy Vs. Official Assignee and Others, .

That case was not concerned with a mort gage decree and therefore the learned Judges had no occasion to consider the exact scope of Section

28(6) of the Act. What the learned Judges, after elaborately considering the statutory provisiors are some of the decisions, held was:

To sum up, the title of a purchaser in an execution sale against a debtor, after the admission of a petition to adjudicate, the latter as insolvent is a

defensible title. If, the insolvency petition is dismissed he gets good title. If, however, an adjudication is made, his title would normally be displaced

by the Official Assignee or Official Receiver, as the case may be, but this rule is subject to an exception: in favour a of purchaser in good faith, who

will be protected by reason of such good faith. Section 53(3) being, therefore, an exception to the general rule of relation back of the Official

Assignee''s title, the operation of which makes the statutory title of the Official Assignee to give-way before it, the burden of proving good faith will

be on the person seeking advantage of the exception.

Having regard to the fact that the Full Bench was not considering a mortgage decree and therefore was not considering the scope of Section

28(6) of the Act, that decision has no application to the present case. Under these circumstances, the appeal is allowed, the order of N.S.

Ramaswami. J. dated 6th October, 1975, is set aside and the order of the learned Subordinate Judge dated 1st March, 1975, is restored. There

will be no older as to costs.