Tejmal Marwari vs Jokiram Surajmal and Others

Mohammad Noor, J.—The facts of the case, so far as they are relevant to this appeal, are these: On 24th February 1926, one Chouthmal Bhagirath applied that one Gurdat Singh be adjudged an insolvent. An ad interim Receiver was appointed by the Court during the pendency of the insolvency proceeding, but later on the application was refused on 20th February 1927. Chouthmal Bhagirath preferred an appeal to this Court, and on 25th May 1927 an ad interim receiver was again appointed. Ultimately, this Court on 8th November 1927, adjudged Gurdat Singh to be an insolvent. In between these two dates, namely the refusal of the application by the District Judge on 20th February 1927, and the order of adjudication by this Court on 8th November 1927 the respondents, who were creditors Nos. 2 and 3, brought to sale certain unliquidated debt due to the insolvent from the Bengal Nagpur Railway Company and realised Rs. 5,750 as its sale proceeds. Later on, the order of adjudication was annulled. Thereafter the appellant, who is one of the creditors, applied to the District Judge for an order that the amount of Rs. 5,750 which was taken by the creditors Nos. 2 and 3 towards the satisfaction of their decrees during the pendency of the insolvency proceedings be realised from them and be rateably distributed among all the creditors of the insolvent. The learned District Judge being of opinion that after the order of annulment of adjudication there was no insolvency proceeding before him, refused this application. The appellant came up in appeal. (Miscellaneous Appeal No. 217 of 1930). This Court held that the insolvency proceeding had not come to an end by the annulment of adjudication and that it was open to the Court to continue to administer the estate of the insolvent for the benefit of his creditors. The effective part of the order was that the learned District Judge was directed to proceed with the application of the appellant and dispose of it according to law. It was further ordered that the learned District Judge should take steps to realise the assets of Gurdat Singh vested in the Receiver, wherever they may be found, and which may be lawfully realisable and to take such legal steps for their realisation as the parties may ask him to take. When the case went back to the learned District Judge, the appellant asked him for calling upon the respondents, the creditors Nos. 2 and 3, to refund the amount of Rs. 5,750 for the purpose of rateable distribution. The learned District Judge again refused this request and hence this appeal.

In my opinion the learned District Judge''s order cannot be upheld. His reason for refusing the prayer of the appellant seems to be that creditors Nos. 2 and 3 brought the insolvent''s property to sale and appropriated its sale proceeds towards the satisfaction of their decrees at a time when there was no Receiver of the insolvent''s estate and that the debt due from the Bengal Nagpur Railway Company, which was sold, was never vested in any Receiver and therefore the sale proceeds of that property could not be rateably distributed. In my opinion, the learned District Judge has misconstrued Section 51 which has been referred to by him and obviously ignored Section 28, Insolvency Act. Section 28, Clause (2) says:

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 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 on such terms as the Court may impose.

Clause (7) of this section provides:

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.

It is clear that the order of adjudication passed by this Court in November 1927 related back to the date when the application for insolvency was admitted by the learned District Judge, and the effect of the two clauses of S.28 is that the properties of the insolvent, wherever they may have been and whoever may have been in possession of them, automatically vested in the Court. It is immaterial whether there was at that time any Receiver appointed by the Court or not. The vesting of the property of the insolvent in the Court is not dependent upon there being a Receiver. One of the properties, however, namely, the unliquidated debt due from the Bengal Nagpur Railway, had been sold before the order of adjudication, but the sale proceed thereof was in possession of a creditor who got it during the pendency of the proceeding. The Court sold the debt not knowing of the pendency of the insolvency proceeding. Section 52, Insolvency Act, provides that when execution is issued against any property of a debtor and the executing Court is informed that an insolvency petition against the debtor has been admitted, the Court on application shall direct the property to be made over to the Receiver if it is in possession of the Court. It is obvious that the Court would not have proceeded to sell the debt had it been informed that an insolvency application against the judgment-debtor was pending. The effect of such sale can only be to protect a bona fide purchaser, but it will have absolutely no effect upon the rights of the creditors inter se, which are governed by Section 51. This section has been referred to by the learned District Judge, and, in my opinion, as I have said he has misconstrued it. Clause 1 of it says:

Where execution of a decree has issued against the property of a debtor, no person shall be entitled to the benefit of the execution against the receiver except in respect of assets realized in the course of the execution by sale or otherwise before the date of the admission of the petition.

The learned District Judge seems to have been of the view that as the sale proceed was never vested in the Receiver the respondents were not liable to refund it. This is not so. What the section means is that if a creditor has proceeded to execute a decree he will not be entitled as against the Receiver to the benefit of the execution except so far as he may have been able to realise the assets before the admission of the petition for insolvency. If he has derived any benefit from that execution when the application for insolvency was pending, he cannot keep that benefit to himself as against the Receiver. In this case during the pendency of the insolvency proceeding, one of the creditors brought a property of the insolvent to sale and realised a certain amount of money from the sale of that property. The simple proposition of law is whether he can retain the whole amount, or he must share it along with the other creditors. Section 28, read with Section 51, makes it perfectly clear that when the Receiver appointed calls upon him to make over the benefit he has derived from the execution he must do so. The learned Advocate, who has appeared on behalf of the respondents, has referred us to Section 37, Insolvency Act, which refers to the situation which may arise after the annulment of the order of adjudication. In my opinion that section has got no application. It refers to the vesting of the property of the insolvent after an order of annulment has been made; but in this case there is no question of vesting of any property when the order of annulment was made. The property of the insolvent was a debt due from the B.N. Ry. Co. The debt had been sold long before, and what was there was the sale proceed of that property which was in possession of one of the creditors. That creditor under the express terms of Section 51 cannot retain it as against the receiver whenever that Receiver may have been appointed.

I would allow this appeal and direct that the learned District Judge should proceed to realise the amount of Rs. 5,750, from the respondents, the creditors Nos. 2 and 3, and distribute it rateably among the creditors. In making rateable distribution, the debt due to these two creditors from the insolvent should be fixed, ignoring the realisation of this Rs. 5,750, that is to say, this amount should be treated as an unrealized debt. It will be open to the learned District Judge to call upon the respondents to refund only the amount which may be in excess of the amount to which they themselves may be entitled out of Rs. 5,750, under rateable distribution. The respondents will pay the costs of the appellant in both the Courts.

Courtney-Terrell, C.J.

I agree.