Sadasivam vs M. Muthuswamy and two others

The revision petitioner is the third respondent in I.P.No.5 of 1984 on the file of the II Additional Subordinate Judge, Erode and the third

respondent in CMA No.37 of 1990 on the file of the District Judge, Erode. The first respondent is the petitioning creditor before the Insolvency

Court and the appellant before the lower appellate Court. The second and third respondents herein are the respondents 1 and 2 before the

Insolvency Court and respondents 1 and 2 before the lower appellate Court. In this order, the parties to this revision will hereinafter be referred to

as the petitioning creditor and the respondents respectively as they were described before the Insolvency Court. The petitioning creditor filed

I.P.No.5 of 1984 to adjudicate the first respondent before the Insolvency Court. That was dismissed on merits. On appeal by the petitioning

creditor, the order of the Insolvency Court was set aside and thus the first respondent came to be adjudicated as an insolvent. Hence the present

revision before this Court at the instance of the third respondent.

I heard Mr.V. Narayanaswamy, learned counsel appearing for the revision petitioner and though the contesting first respondent has been

served, yet he has not chosen either to engage a counsel or to be present in Court when the case was taken up. The facts leading to the present

revision are as follows: The second respondent had obtained a money decree against the first respondent in O.S.No.1073 of 1979 on the file of

the District Munsif, Erode. That decree was put in execution by the second respondent in E.P.No.71 of 1981. Ultimately, the property was sold

through Court auction in that execution proceedings. The sale through Court was held on 2.11.1983 in which, the third respondent became the

successful bidder. The sale in favour of the third respondent was confirmed on 9.1.1984. Alleging that the first respondent is a debtor for a sum

exceeding Rs.500 to the petitioning creditor under a promissory note dated 5.2.1982, I.P.No.5 of 1984 came to be filed by him before the

Insolvency Court to have the first respondent adjudicated as an insolvent. The second respondent filed a detailed counter which was adopted to by

the first respondent and the third respondent. The petitioning creditor examined himself as P.W.1 and marked a promissory note in his favour as

Ex.A-1. On the side of the respondents, a witness was examined on behalf of the respondent No.2 as R.W.1. As many as 13 exhibits were

marked as Exs.B-1 to B-13 on the side of the respondents. The case of the petitioning creditor in his petition was that the first respondent owes

only the decree debt in favour of the second respondent; another debt due on a promissory note to one Ramasamy Mudaliar to the tune of

Rs.3,000 besides the debt in favour of the petitioning creditor. The first respondent borrowed on 5.2.1982 a sum of Rs.9,500 from the petitioning

creditor under Ex.A-1. The property was brought to sale for a price of Rs.15,000 when it''s actual value was not less than Rs.30,000. The sale in

favour of the third respondent is a fraudulent preference. In the counter filed before the Insolvency Court, it was stated that the insolvency petition

is an abuse of the process of the Court. The promissory note is a concoted one and that the debt under Ex.A-1 itself is denied. The application has

been filed with mala fide intentions. The promissory note had been created for the occasion of filing the insolvency application. The sale proceeds

of the Court sale that took place on 2.11.1983 is very much available in tact in Court custody and the petitioning creditor can always move the

Civil Court to realise the amount stated to be due under the promissory note and till he gets a decree, the amount lying in Court deposit as referred

to above may be secured.

The insolvency Court on going through the pleadings and materials placed before it, found that the application filed by the petitioning creditor is a

mala fide one and is an abuse of process of the Court. The insolvency Court also found that the debt itself is not established and there is no

creditor-debtor relationship between the petitioning creditor and the first respondent. Therefore the petition itself is not maintainable. The

Insolvency Court also found that since the Court sale took place within three months prior to the filing of the insolvency proceeding itself, an act of

insolvency was in fact committed. It also found that the first respondent had not placed any material before the Court to establish her capacity to

repay the debts or ability to pay off the debt. However holding that the entire proceedings before the insolvency Court appears to be a mala fide

one, it dismissed that petition. The appellate Judge however reversed the order of the insolvency Court holding that there is no need for the

insolvency Court to go into the genuineness or otherwise of the debt placed as a cause of action before the Court and that the question whether the

debt is true or not should have to be necessarily decided only before the regular Civil Forum. According to the lower appellate Judge, it is enough

if the petitioning creditor shows prima facie materials about the existence of a debt and there is no need for the insolvency Court to take upon itself

the question of deciding the truth or otherwise of the debt.

According to Mr.V.Narayanaswami, learned counsel appearing for the revision petitioner, once the debt pleaded by the creditor is disputed by

the debtor, then the Insolvency Court is bound to decide that and it has no jurisdiction to refer the parties to a regular Civil Forum on that issue.

Therefore the appellate Court has definitely committed an error of law. The learned counsel further submitted that the facts placed before the Court

clearly establish the mala fide intention on the part of the petitioning creditor and he is definitely guilty of abusing the process of Court. These

aspects, which have gone into the mind of the insolvency Court, had been completely ignored by the lower appellate Judge.

In the back-ground of these arguments, and in the light of the materials available in this case, I perused the records as well as the order under

challenge. I find from the records, the Insolvency Court after analysing the evidence of P.W.1 very meticulously came to the conclusion that the

debt pleaded by him is not established. Unless the creditor-debtor relationship is established the question of proceeding further to adjudicate the

alleged debtor as an insolvent will not arise at all. Unfortunately, the appellate Judge took a contrary view holding that such a decision is not called

for at all before the Insolvency Court and it is enough if the petitioning creditor shows the existence of a debt with prima facie material. The

appellate Judge was also of the view that the denial of the debt cannot be decided by the Insolvency Court and the parties have therefore to have

their rights decided on that question only before the proper Civil Forum. This view of the appellate Judge is contrary to a Division Bench judgment

of this Court reported in Mundla Gangi Reddi Vs. Golla Narasimha Reddi, wherein it has been held as follows:

Under the Provincial Insolvency Act (V of 1920) an insolvency Court cannot dismiss an insolvency petition by a creditor and refer him to a suit on

the ground that the questions raised in it are too difficult or complicated for the Insolvency Court to decide.

The question whether the relation of Creditor and debtor still exists between an adjudicating creditor and an alleged debtor is a question expressly

and explicitly for the decision of the insolvency Court and the insolvency Court has decide this question merely because difficult questions of fact

and law arise.

Sanjiva Rao''s commentary on Law of Insolvency (6th Edition) also states that where a debt is alleged and it is denied by a debtor, the duty of the

Insolvency Court is to examine into the existence of a debt and it cannot refer the creditor to another civil suit. The trend of judgment appears to be

that the Insolvency Court can even go into a judgment debt. When this being the position in law, I have to necessarily hold that the appellate Judge

had committed an error of law in refusing to decide the question on the existence of a debt between the petitioning creditor and the first

respondent. This failure on his part has definitely resulted in affecting his judgment.

u/s 25 of the Provincial Insolvency Act, the Insolvency Court has the power to dismiss the insolvency petition, even if the petitioning creditor had

satisfied all the requirements of the Act and that his petition is well founded, on certain stated circumstances. One of the circumstances is if the

insolvency ""Court is satisfied with the debtor that he is able to pay his debts"" and the other circumstances is ""that for any other sufficient cause no

order ought to be made."" In Yenumula Mallu Dora Vs. Peruri Seetharatnam and Others, it has been held that the last of the circumstances referred

to above viz., ""that for any other sufficient cause"" need not necessarily be read ejusdem generis"" with the previous ones. The learned Judges in that

case went on to say as follows:

The discretion to dismiss the petition can only be exercised under very different circumstances. What those circumstances would be, it is neither

easy nor necessary to specify, but examples of sufficient cause are to be found when the petition is malicious and has been made for some

collateral or inequitable purpose such as putting pressure upon the debtor or for extorting money from him, or where the petitioning creditor having

refused tender of money, fraudulently and maliciously files the application.

It is also found by the insolvency Court in this case that the amount lying in Court deposit to the credit of the first respondent is much more than the

money stated to be due to the petitioning creditor. When the petitioning creditor was in the witness box as P.W.1 he was confronted with the

question as to whether he is ready to initiate any action in a Civil Forum against the first respondent and then take steps to secure the money

available in Court deposit to meet his decree, he flatly refused to do so and said in categorical terms that he is not prepared for it. He would state

that prior to the filing of the insolvency petition he gave a lawyer''s notice to the first respondent, but yet he has not produced it in Court. His case

that besides the decree debt in favour of the second respondent, there are two other debts of the first respondent viz., one in his favour and the

other in favour of one Ramaswamy Mudaliar on a promissory-note for Rs.3,000. However I find that he has not established before the Court

about the debt stated to be due to the said Ramasami Mudaliar. On the materials placed and on analysing the evidence of P.W.1 the Insolvency

Court has also decided that the conduct of the petitioning creditor is not free from mala fides and that abusing the process of Court is writ large in

this case. The appellate Judge had not gone into this aspect at all. If the mala fide intentions and the abusing of the process of Court as found by the

insolvency Court are well established then, this case can certainly be brought under the last clause in Section 25 of the Provincial Insolvency Act

which enables the Court to dismiss the insolvency petition, however well founded it is.

Certainly mala fide intention and the abuse of the process of Court would come within the term ""that for any other sufficient cause."" In Vemuri

Nagiah and Another Vs. Vasi Reddi Venkata Satyanarayana Prasad and Others, two learned Judges of this Court held as follows:

An adjudication order was refused by the Court on an insolvency petition filed under the Presidency Towns Insolvency Act on the ground that it

had been presented mala fide with an ulterior object. It was found that the creditors had refused to receive moneys deposited in Court though they

were entitled to receive payment under an order of Court.

On appeal, held, that the conduct of the creditors in refusing to receive payment out of the moneys to receive payment out of the moneys deposited

in Court was sufficient proof of their mala fides and their action amounted to an abuse of the process of the Court.

To the same effect there are two more judgments of this Court and they are reported in S.A. Ramalinga Mudaliar Vs. T.K. Ratna Mudaliar and

Another, and Munaga Venkataramaiah, etc. v. P.Bujjamma and another, 1993 (1) LW 511. In the first case, it had been held as follows:

The words ''other sufficient cause'' in section 13(4)(b) of Presidency Towns Insolvency Act should be interpreted in the widest possible manner

and not ejusdem generis in relation to the earlier clauses in the section.

If the object of the adjudication is not the result of a genuine desire to have the property of the debtor administered in insolvency, but one solely

with a view to disgrace him or to utilise the machinery of Court for other purposes, the petition cannot be said to be a bona fide one. Section 13

gives power to the Court in those cases to dismiss it.

An adjudication of a debtor as a bankrupt, is not a method of collecting a debt, though, as a result of it, the creditor may get paid. Essentially, an

adjudication brings about a change in the status of a debtor and enables the Official Assignee or Receiver in whom the property of the debtor gets

vested to administer or sell it to pay off his creditors. It is only a particular class of creditors (vide section 12) that can file a petition for

adjudication. And no absolute right is given to them to obtain an adjudication as the Court will dismiss the petition if the conditions laid down in

section 13 are satisfied.

The last of the cases referred to above, is on the same lines as in the first two cases of this Court referred to above.

I am unable to understand the attitude of the petitioning creditor when he answered that he is not prepared to take any action against the first

respondent in a civil forum and get the amount standing in deposit to the credit of the first respondent in the suit secured for him. The petitioning

creditor had not established not only his debt but the other debts stated to be due to Ramaswamy Mudaliar also. The first respondent was

contesting the proceedings by engaging a counsel who appeared for the third respondent as well and the second respondent/decree- holder was

having his own counsel. However the counter-affidavit of the second respondent was adopted by the first and third respondents. P.W.l was cross-

examined not only by the second respondent''s counsel but also by the third respondent''s counsel. There is an averment in the counter statement of

the second respondent that the sale proceeds of the Court sale in favour of the third respondent is available in Court custody and that the

petitioning creditor would well be justified in having that money secured for him in an. appropriate proceedings. This counter-statement of the

second respondent, as already stated by me, had been adopted by the. first respondent. Therefore, it implies an express willingness on the part of

the first respondent also in the petitioning creditor proceeding against the money lying to her credit in the Court deposit. Under these

circumstances, if the petitioning creditor had taken any steps to proceed against the first respondent on the alleged promissory-note before the Civil

Forum, he would not have had any difficulty at all in securing money lying in the Court deposit for a decree, if it eventually comes in his favour.

These circumstances in the context of the petitioning creditor''s refusal to take advantage of this situation made the insolvency Court to believe that

the present action appears to be a mala fide one. After carefu! application of mind, I am in full agreement with the insolvency Court on this point

also. Therefore, I confirm the finding of the insolvency Court that the petitioning creditor had not established the existing debt between him and the

first respondent and his, action is mala fide, leaving no room to doubt that the process of the Court is abused.

Accordingly, the judgment and decree dated 18.12.I990 in CMA No.37 of 1990 on the file of the District Judge, Erode are set aside and the

order and decretal order dated 21.7.1989 in I.P.No.5 of 1984 on the file of the II Additional Sub Judge, Erode is restored. i.e. The civil revision

petition is accordingly allowed and there is no order as to costs.