The Bombay Company Limited vs The Official Assignee of Madras

John Wallis, C.J.—This is an Appeal from an order of Mr. Justice Coutts Trotter in the insolvency of one Sithapati Ayyar, who was

formerly a dubash of Messrs. Dymes & Co. and afterwards of the Bombay Company who took over the business, directing the Bombay

Company to repay to the Official Assignee as representing the estate of the insolvent Rs. 27,243-13-0, which the Bombay Company had

appropriated out of monies belonging to him in redaction of the loss the above firms had sustained in transactions with one V.V. Somasundaram

Chetti which Sithapati had guaranteed under his dubash agreement. The ground upon which the refund was directed was that the effect of the

arrangement entered into by the Bombay Company with Somasundaram Chetti was to release the dubash from his liability as surety. Assuming for

the moment that the effect of this agreement was to release the surety from all further liability, I am not satisfied, and no authority has been cited to

show that this surety also became entitled to recover the monies which he had already paid under his contract of suretyship. But before dealing

further with this point it will be as well to set out the facts as they appear in the evidence.

On June 15th, 1915, as appears from Exhibit IT, the Bombay Company terminated Sithapati''s employment as dubash and about the same time,

as appears from the same Exhibit and their accounts, Exhibit C (3), they realized the promissory notes deposited with them and appropriated the

proceeds and the other monies standing in their books to the dubash''s credit, some Rs. 33,940 in all, to the losses they had sustained on the

various transactions for which he was responsible. There was no specific appropriation to the various heads of loss, but, assuming the other losses

to have been met in full, this balance of Rs. 27,000 remained and must have been appropriated to the loss sustained in the transactions with

Somasundaram.

Somasundaram and Sithapati both became insolvents, and Mr. Rao on behalf of the Bombay Company, in January 1916 tendered proofs in

Somasundaram''s insolvency for the full amount of his indebtedness to Dymes & Co., and the Bombay Company, which eventually came to some

Rs. 54,000 in all without making any reduction on account of the appropriation from the dubash''s account. This, as will be seen, he was entitled in

law to do.

Somasundaram after his insolvency carried on business successfully, and on 14th September 1918 he filed an affidavit in support of an

application to dispense with his public examination on the ground that his creditors with the exception of the Bombay Company had accepted his

friend''s offer to pay 6 annas in the rupee and that the Bombay Company had also agreed to settle out of Court, but Mr. Rao, the Managing

Director, was away in Calcutta and the real loss account had not been adjusted. The Official Assignee who, as appears from his letters, was fully

alive to the fact that the money was coming not from the insolvent''s friends but from his own earnings in the business which he had carried on after

his insolvency and which were at his disposal until the intervention of the Official Assignee, opposed the application at the instance of the present

insolvent, and applied for the public examination of the insolvent Somasundaram, with a view to seeing if better terms could not be arranged.

Before this question came before the Court, the contemplated settlement with the Bombay Company had been arrived at with Mr. May, an

assistant of the Company, and on the 8th November 1918 the Company gave Messrs. Moonuswami Chetty & Sons, who were acting for

Somasundaram, two receipts for Rs. 12,545 and Rs. 6,580 or Rs. 19,125 in full settlement of two debts of Rs. 36,211-12-10 and Rs. 18,989-

11-1, or Rs. 55,201-7-11 in all.

Rs. 19,125 is 6 annas in the rupee on Rs. 51,000 and in his reply affidavit of 28th August 1919 the present insolvent states that he was informed

and believed that it was agreed that Rupees 51,000 was to be taken as the total sum due to the two companies and a composition of 6 annas in

the rupee was accepted thereon. What apparently happened--Mr. May''s evidence on the point is not very clear--is that 6 annas on Rs. 51,000

was tendered, and that Mr. May refused to accept Rs. 19,125 on that basis, as the debt in his books was considerably over Rs. 51,000, but

agreed in the circumstances to accept Rs. 19,125 in full settlement of the whole debt standing in the books and the receipts were made out on that

basis.

On 9th December 1918 the present insolvent Sithapati wrote Exhibit D to the Bombay Company taking exception to their having discharged

Somasundaram without reference to him and without his knowledge.

Having satisfied his creditors in this manner, which whatever may be thought of it, appears not to have been unusual in Madras, Somasnndaram

next approached the Official Assignee with a view to having his composition with his creditors approved and the insolvency annulled, and the

Official Assignee pursuant to Section 28(2) of the Act sent out letters to the creditors on 16th December 1918 informing them of the position and

summoning a meeting of creditors to consider the situation and state whether they agreed to the annulment of the insolvency. The meeting of

creditors was held on 8th January, and there was no opposition except from the present insolvent Sithapati who was not one of the creditors who

had proved in the insolvency. On 6th March 1919 the Official Assignee presented to the Court a report, Exhibit III-A, in which he stated

Sithapati''s objection to the Bombay Company having given a discharge for the full amount of the debt without taking into account the Rs. 27,000

of his which had been appropriated in reduction of it, and also suggested a public examination of the insolvent. The learned Judge dealt with this

question in his order, dated 23rd March 1919, Exhibit VIII, and came to the conclusion that a public examination was not necessary, that the

creditors, who included several of the leading firms in Madras, knew their own business best, and stated that when the question came before him

formally in that shape he should allow Somasundaram Chetti to effect the settlement and get himself discharged from his bankruptcy. A notice

pursuant to Section 29(i) of the Act on behalf of the insolvent, Exhibit VII, supported by an affidavit, Exhibit VI, was then issued to creditors of an

application for the annulment of the insolvency.

The Official Assignee presented a further report (Exhibit III) on 15th April 1919 stating that he had summoned a meeting of creditors and that

no one appeared except himself on behalf of Sithapati and agreeing to the annulment subject to security being given to meet any claim of Sithapai.

On this, the formal order of annulment was made on 22nd April 1919, and there can, in my opinion, be no doubt that in making this order the

learned Judge was acting under the powers given him by Section 30(i) of the Act, to approve the insolvent''s proposals and annul the insolvency.

The section requires the terms, if approved, to be embodied in the order with a view to making it executable as a decree as provided in Sub-

section (2). Possibly, because the payments under the composition had already been made, this provision of the section was not complied with, as

it should have been when the formal order was drawn up in the Insolvency office. This, in my opinion, was a mere formal defect which might be

amended at any time and in no way affected the Court''s approval of the terms of the composition and the consequent annulment of the insolvency.

The learned Judge, whilst expressing some doubts on the last question, preferred to rest his decision on the broader ground that the transaction

at the date when it was carried out was not a composition within the meaning of the material sections of the Act. Now the payment of Rs. 19,125

was tendered solely for the purpose of getting the consent of the company to the annulment of the insolvency and to arriving at terms of settlement

to be approved of by the Court, with a view to annulment. Mr. May was admittedly informed that the other leading firms had accepted a

composition of six annas, and was tendered a sum which amounts to six annas on Rs. 51,000, and which must have been tendered as such, as

there is no other explanation as to how the figure of Rs. 19,125 was arrived at. As he did not accept Rs. 51,000 as representing the correct

amount of the insolvent''s indebtedness, whilst deciding in the interests of the company to accept the sum tendered, he insisted that it should be

received as a lump sum in respect of the debts mentioned in the receipts. These receipts were communicated to the Official Assignee at his request

and he did not, as representing the estate of the present insolvent Sithapati, take any objection to the fact that the composition shown in the

receipts was less than six annas. His only objection as representing the estate of the present insolvent was that the Bombay Company in giving the

receipts had ignored the Rs. 27,000 received from the present insolvent. That was not a question which the Court was then called onto go into,

and the Court, in my opinion, must be taken to have approved the terms arrived at and to have sanctioned the annulment of the insolvency as

suggested by the Official Assignee, or behalf of Sithapati''s estate, on Somasundaram giving security to the satisfaction of the Official Assignee for

Rs. 9,000 in respect of any dividend which the present insolvent Sithapati might prove entitled to claim in Somasundaram''s insolvency in

consequence of Rs. 27,000 appropriated by the Bombay Company from his monies in payment of Somasundaram''s debt to them not having been

taken into account when the Bombay Company accepted Rs. 19,125 in full discharge of the debts of Somasundaram shown in the receipts. What

he accepted was a composition which was intended to be and was submitted for the approval of the Court, in these circumstances, Rs. 19,125

paid to the Bombay Company, must, in my opinion, be taken to have been sanctioned by the Court. That, however, does not dispose of the

question whether the fact of the Bombay Company having given receipts in full settlement of the debt without waiting for the composition to be

sanctioned by the Court did not thereby discharge the surety from liability by virtue of the provisions of Section 135 of the Indian Contract Act, as

the learned Judge has held. If they had waited for the approval of the Court, and the Court had approved of the composition and annulled the

insolvency, then it is clear on the authority of Ex parte Jacobs. In re Jacobs (1885) 10 Ch. App., 211 , that there would have been a discharge by

operation of law which would in no way have affected the creditors'' remedies against the surety, because in that case, it is the insolvency law and

not the creditor that discharges the insolvent. It is unnecessary for the purposes of the present case to decide the question whether a formal full

discharge granted to the insolvent on receipt of a composition paid with a view to getting the approval of the Court and the annulment of the

insolvency, before such approval and annulment has the effect of relieving the surety from further liability u/s 135 of the Indian Contract Act [as to

which see Cragoe v. Jones (1873) L.R, 8 Ex, 81 , because whether it has that effect or not, it affords the surety, in my opinion, no ground for

claiming a refund of the monies already paid in performance of his contract of suretyship. Section 135 of the Indian Contract Act merely provides

that

a contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to or not to

sue, the principal debtor, discharges the surety unless the surety assents to such contract;

but it by no means follows, nor has any authority been. cited to show, that conduct of the creditor which releases the surety from all further liability

makes the creditor liable to return payments already made to him by the surety. Part-payment by the surety is part-performance of the contract

and a partial discharge thereof and a surety who has made such a part-payment has no further liability as to that part of the contract from which ho

could be discharged. As regards such part-payment he is no longer the surety but the principal creditor, as the effect of the part-payment is to

transfer to him so much of the cause of action against the principal debtor. This cause of action against the principal debtor is not ordinarily affected

by any composition which the principal creditor may subsequently accept from the debtor, and it can therefore give him no cause of action for the

return of the money already paid. When, however, the debtor becomes insolvent not only is the surety debarred from suing by the insolvency, but

his right of proof is restricted. If he is liable for the whole debt, he is not allowed to prove until he has paid the whole debt. If he is liable for any

part of the debt, he cannot prove until he has paid all that he is liable to pay, in which, case he is entitled to prove for the amount of the debt which

he has paid and the principal creditor''s proof must be reduced accordingly. These propositions, must, in my opinion, be considered settled by the

judgment of Vaughan Williams, J., a Judge of great experience in Bankruptcy Law, in In re Sass. Ex parte National Bank of England [1896]

2Q.B., 12. The result, it appears to me, must be that in such a case, as regards his part-payments, the surety is of necessity represented in the

insolvency by the principal creditor who proves for the whole debt, just as a sub-partner is represented in the liquidation of a partnership by his

principal partner, with whose conduct of the liquidation he is not entitled to interfere. If the principal creditor misconducts himself in the insolvency

to the prejudice of the surety who has made payments in partial discharge of the debt, the latter may have a remedy of the same nature against him

as a sub-partner would have against a partner, but there appears to be no reason for holding, and no authority has been cited in support of the

proposition, that the acceptance of a composition by the principal creditor during the insolvency after part-payments by the surety would entitle the

surety to a refund of such part-payments. On the other hand, as I have already said, the part-payments were a part-performance of the contract of

suretyship and so put an end to the relation of principal creditor and surety and to all the incidents arising from that relation. Any other view would

involve great hardship, as it has done in the present case, where the principal creditor has been ordered to refund in consequence of adopting a

course which far from prejudicing his surety in any way had the effect of seriously reducing the balance of the debt which he could be called upon

to pay. Assuming that the acceptance of the composition freed the surety from further liability u/s 135 of the Contract Act, that is surely a sufficient,

not to say excessive remedy for the purely imaginary injury which he may be deemed to have received by the acceptance of the composition.

For these reasons I would allow the Appeal, reverse the ordered dismiss the summons with costs throughout on the Original Side scale.

Seshageri Ayyar, J.

I agree. The facts and dates necessary for appreciating the arguments addressed to us may be thus shortly stated.

P. Sithapati Ayyar was employed as a dubash in the Bombay Company on the terms embodied in Exhibit 1, dated 27th April 1915. He was

apparently similarly employed by Dymes & Co. He introduced customers to both these firms. Very soon a good number of them made default in

payment. Somasundaram, one of the principal customers, was in embarrassed circumstances. The Bombay Company sold the Government

promissory notes deposited by Sithapati and realized about Rs. 3 7,000 in July 1915. To his credit with the Bank there was a sum of Rs. 10,000

due to him for commission already earned. The total sum of Rs. 27,000 and odd was originally held in deposit in the books of the Company

against losses which were sustained by the two firms by the non-payment in time by the customers introduced by Sithapati. I am clear that in July

1915, the money realized was not appropriated towards the debt due from any particular customer.

In August 1915, Somasundaram applied to be adjudicated an insolvent. Soon after, Sithapati also applied for the benefit of the Act. Both the

estates vested in the Official Assignee. Exhibit II, dated 28th January 1916, a letter from Sithapati, shows that, on that date, he had no information

as to what particular debt the money realized by the sale of the promissory notes was appropriated, either by the Bombay Company or by Dymes

& Co. The statement of Mr. Rao of Dymes & Co., dated 6th February 1916, also shows that no appropriation was made till then.

Then we come to the attempt made by Somauundaram to settle with creditors. It is common ground that in the beginning of 1918,

Somasundaram privately approached his creditors and offered to pay them six annas in the rupee. He apparently A induced them to accept the

composition and obtained receipts. Then he approached the Bombay Company with a similar request. The two receipts filed in the case, dated 8th

November 1918, show that the Bombay Company received a sum of Rs. 19,125 both for themselves and on behalf of Dymes & Co.

There has been some controversy as to whether this represented six annas on the total debt. Mr. Grant contended that Mr. May who acted in

this matter did not accept the composition of six annas in the rupee, but received the money in full satisfaction of all that was due to the two

companies from Somasundaram. The evidence of Mr. May has two sides if I may say so, the one side speaking to actual facts and the other

referring to impressions and beliefs. He says in his evidence that as he had already appropriated Rs. 27,000 and odd towards the total

indebtedness of Rs. 54,000, he did not consider it necessary to acquaint himself regarding the exact proportion which the sum covered by Exhibits

A and B bore to what was due. In another place he says that by 31st July 1917, the company had appropriated Rs. 27,000 towards the amount

due from Somasundaram. Reading his evidence as a whole, toy opinion is that the sum of Rs. 27,000 and odd was appropriated by the Bombay

Company towards the debt due from Somasundaram, at least before granting the two receipts A and B. I do not accept the suggestion of Mr.

Chamier that this money was appropriated in July 1915. For the reasons already given, and in view of the evidence given by Mr. May, that

suggestion must be ruled out. But I see no reasons for not accepting the evidence of Mr. May that before the date of Exhibits A and B, the

appropriation had been made.

I tried to understand why Somasundaram paid the Company the odd sum of Rs. 19,125. Some clue to its significance is gatherable from the

statement of Sithapati that Somasundaram was indebted to the two companies only in the sum of Rs. 51,000. In paragraph 6 of the reply affidavit,

dated 28th August 1919, Sithapati says, ""I am informed and believed that on the 8th November 1919, it was agreed that the sum of Rs. 51,000

was to be taken as the total amount due to the two companies by Somasundaram Chetti & Co. and Mr. Goff accepted a composition of six annas

in the rupee thereon.""Very likely Mr. May was led to think that the total indebtedness on which he was entitled to the composition was Rs.

51,000, and without caring to look into the account, he accepted the suggestion made by Sithapati or by some one else in the office. Apparently

Mr. May when he gave his deposition did not remember these facts.

After giving my full consideration to the evidence in the case, it seems to me that the only reasonable hypothesis for explaining the receipt of the

odd figure of Rs. 19,125 is to regard that as the equivalent of the six annas in the rupee for what was at that time regarded as the total

indebtedness of Somasundaram.

Then, after obtaining the two receipts from the Bombay Company, Somasundaram made endeavours to get his adjudication annulled. He first

made an application to the Insolvency Commissioner for an order in that behalf. Apparently that application was adjourned pending a report from

the Official Assignee. Then, in December 1918, the Official Assignee informed the Bombay Company that he intended holding a meeting of the

creditors of Somasundaram Chetti ""to consider the situation and to state whether they agree to the annulment of adjudication. A meeting was held

on 8th January 1919. Everybody agreed to the composition excepting Sithapati. By this time the Official Assignee was acting for Sithapati. In

Exhibit G, the Official Assignee wrote to the solicitors of the Bombay Company asking them to produce a receipt as to whose account they

appropriated the Rs. 27,000 realized on behalf of Sithapathi. A reply was sent on 10th January stating that Rs. 27,000 had been appropriated to

Somasundaram''s account. On 11th January, the Official Assignee disputed this right of the Bombay Company. After some further

correspondence, on 6th March 1919, the Official Assignee submitted a report to the Court. In that he stated, ""the Bombay Company subsequently

settled with the insolvent at the rate of six annas in the rupee but not on the sum of Us. 27,000 which was really due to them; but on the full sum of

Rs. 54,000 and they granted him a receipt in full satisfaction of their claim of Rs. 54,000."" Then he says, ""it would be well for me to settle the

question of whether the six annas was or was not a fair settlement, and in order to do this it is necessary for me to examine the insolvent with a

view to ascertaining what profits he has made."" This was really a report against dispensing with the public examination of Somasundaram as

requested by him. On 23rd March 1919, Mr. Justice Coutts Trotter, after considering the report and the application, came to the conclusion that

Somasundaram need not be publicly examined. On 31st March a formal application was presented by Somasundaram for the annulment of his

insolvency. Notice went to all the creditors. A further report was submitted by the Official Assignee on 15th April 1919. He said in that ""I called a

meeting at which no one opposed except one P. Sithapati Ayyar, or rather myself on his behalf. He was the guarantee broker of the Bombay

Company, Limited, and Rs. 27,343 of his money was taken by them, to the credit of this insolvent''s account. In spite of this they again took six

annas in the rupee on the full account of this insolvent and this insolvent now refuses to recognize Sithapati Ayyar as a creditor or that the Bombay

Company have taken his Rs. 27,000."" Then at the end of his report, he said, ""I am entitled for the benefit of Sithapati Ayyar estate to six annas in

the rupee on Rs. 27,000 from this insolvent and I ask that the annulment be made conditional upon this."" Thereupon the learned Judge ordered that

on the insolvent''s giving security for Rs. 9,000 the order adjudicating Somasundaram an insolvent be annulled. This was on the 22nd day of April

1919. No appeal was preferred against this order.

The present application was filed on 26th March 1919 by the Official Assignee for a direction that the Bombay Company should pay to him

Rs. 27,000 and odd, which they had realized out of the deposit made by Sithapati with them. The learned Judge has made the order and this

appeal is against it.

I give the learned Judge''s reasons for his conclusion in his own words; firstly ""my order (referring to the annulment) provided for annulment of

the adjudication and did not embody the terms of the proposal,"" secondly, the arrangement which led up to the annulment ""was not at the date on

which it was carried out a composition within the meaning of the material section,"" and thirdly ""that the Bombay Company, after giving the

discharge which they did, could never have been heard to say that their debt was not extinguished as between themselves and Somasundaram

Chetti, even though all the other creditors had rejected his overtures and had declined to settle with him.

The fact that the order did not contain the particulars which u/s 30 of the Insolvency Act should be contained in it is not a ground for holding

that the order is infructuous. It is true that the arrangement for the composition emanated from Somasundaram; it is also true that he dealt with the

creditors himself. No doubt the proper procedure was to have approached these creditors through the Official Assignee. That is what Section 28

of the Act contemplates. But we have evidence to show that for a long time, it has been customary in Madras to allow insolvents to adjust ""matters

with the creditors and then to report the settlement to the Official Assignee to enable him to take action. It may be that the procedure is irregular,

but I am not satisfied that there is anything illegal in what had been done. Having regard to the fact that subsequently the Official Assignee

summoned the creditors and submitted a report on which the final order was passed by the learned Judge, I am of opinion that the action taken by

Somasundaram may be regarded as having been done by him as the agent of the Official Assignee. Even though there was no authorization at the

outset, the insolvent''s action was accepted and ratified by the Official Assignee by the subsequent steps he took in the matter.

The remarks of Lord Justice Rigby in In re Izod [1898] 1 Q.B.,241 have been quoted by the learned Judge and have been strongly relied on

by Mr. Grant in this Court. In the first place that case relates to the rescinding of a receiving order. In the second place, notwithstanding the

adverse remarks of the learned Lord Justice, the decision of the Court was that the order should be rescinded, although the initial steps were taken

by the insolvent himself. It is unnecessary to consider whether the strictures passed by the Lord Justice in allowing the insolvent to deal with

creditors behind the back of the Official Assignee are applicable in their entirety to circumstances in this country. As was pointed out by the

learned Chief Justice, in very many cases, even in England, settlement with creditors with a view to composition are begun by persons interested in

the insolvent. There is nothing immoral in such a procedure; and especially as the act makes provision for the public examination of the insolvent if it

is desired by any of the parties, I see no reason for holding that the procedure adopted vitiates the whole proceeding.

It was open to Mr. Justice Coutts Trotter to have refused to annul the adjudication on the ground that the composition was not at the instance

of the Official Assignee; on the other hand, the learned Judge, after full consideration of all the circumstances, dispensed with the public

examination of Somasundaram and directed the annulment. That order has not been appealed against and is binding upon all the parties who

appeared before the learned Judge.

The circumstance that the office did not embody the terms of the composition as required by Section 30 does not in my opinion make the

order a nullity. With great respect, I am unable to agree with the learned Judge that it was open either to him or to us to go behind the order.

Now this disposes of the first two reasons given by the learned Judge for re-opening the annulment.

It was strenuously contended by Mr. Grant that there was no appropriation of Rs. 27,000 towards the debt due from Somasundaram at the

date when Exhibits A and B were passed. I have already given reasons for holding that the evidence of Mr. May should be accepted. It is true that

Mr. May says that at the time he gave the receipt he had not made himself acquainted with the law which would enable him to claim a dividend on

the whole amount, notwithstanding that the surety had paid a portion of it. But that is no ground for not accepting his statement that he, as a matter

of fact, made the appropriation. Even if we take it that Rs. 27,000 was not appropriated for the debt due from Somasundaram alone but was

retained by the Bombay Company as part payment towards the general indebtedness of their dubash, I fail to see how the Official Assignee is

entitled to a refund of Rs. 27,000. The suggestion of the learned Counsel that even after the passing of Exhibits A and B, the money was held in

suspense to the credit of Sithapathi is not borne out by any record before us. Either that money was appropriated to the debt of Somasundaram or

was debited to the general account of Sithapathi. In either case, on the date of the receipts A and B, there was no money to the credit of Sithapati.

On the general question whether a creditor is entitled to claim a dividend in a composition in respect of the whole amount, notwithstanding a

portion of the debt has been received from a surety, the law is well settled. In In re Sass. Ex parte National Bank of England [1896] 2 Q.B., 12,

Vaughan Williams, J., enunciated this proposition very distinctly, and it has never since been questioned. In Ellis v. Emmanuel (1876) 1 Ex.D., 157,

the same view was taken. That was a suit by the surety against the principal creditor for receiving a proportionate share of the dividend received by

the latter in the insolvency of the principal debtor. It was held that the creditor was entitled to retain not only the amount of the dividend but also the

amount received from the surety. That case goes even further than In re Sass. Ex parte National Bank of England [1896] 2 Q.B., 12 . It is clear

that there is nothing in the Presidency Towns Insolvency Act which in any way detracts from the principles enunciated in the cases already referred

to.

Therefore, I am of opinion that as Rs. 27,000 was appropriated before the grant of receipts A and B, the two receipts did not operate to

extinguish the entire debt owed by Somasundaram to the two companies. Even otherwise, I agree with the learned Chief Justice that the Official

Assignee is not entitled to a refund of the amount appropriated by the Bombay Company for debts due. The learned Counsel for the respondent

contended that as the composition had been completed behind the back of the surety by the Bombay Company, the surety was discharged and

was entitled to a refund of the amount. It may be that if there was a private composition and the matter did not come before the Insolvency Court,

such a dealing with the principal debtor behind the back of the surety may have the effect of discharging the surety, but where after notice to the

surety, the composition was accepted by the Court, it becomes an act of the Court and the principle of Sections 134 and 185 can have no

application.

For all these reasons, I agree that the order of the learned Judge should be reversed and that the petition of the Official Assignee should be

dismissed with costs on the Original Side scale.