The Tanjore Permanent Bank Ltd. vs The Indian Overseas Bank Ltd. and Others

Mack, J.—Left to myself and untrammelled by precedents in case law, I would have held that justice and equity required this alienation,

which undoubtedly had the effect not only of preferring the Overseas Bank to the Tanjore Permanent Bank, but also of defrauding the latter, to be

set aside as a fraudulent preference u/s 54 of the Provincial Insolvency Act. My learned brother whose judgment I had the advantage of perusing

has, however, based his decision on principles indoctrinated by a formidable array of case law, into the words ""with a view of"" in this section, of

dominant intention and pressure and voluntary nature, that I feel I would not be justified in expressing a different opinion and referring this case for

resolution by a third Judge. Left to myself, I would have been inclined to give the words ""with a view of"" a more elastic meaning as being the

equivalent to its ordinary dictionary meaning ""with the intention of"", not necessarily a dominant intention to be determined after a psycho-analytical

vivisection of what is in this case the criminal mentality of the insolvent at the time he made this alienation. For instance, the dominant intention of a

robber may be to escape with his booty, and if obstructed, he may cause murder or grievous hurt intending of course to do so in furtherance of his

dominant objective which was to escape. But nonetheless the law affords him no escape from the full consequences of the acts which he intended.

But as my learned brother is not prepared to agree with me, and in the absence of any precedent in case law which affords support to the view I

am taking, I have decided to accord my reluctant concurrence with the judgment he is about to deliver. Although the facts in this case are peculiar

and not on all fours with any other cases placed before us, I cannot say that it is not in accordance with principles laid down in the wealth of case

law which he has cited.

As my learned brother has said, insolvency litigation in its inception adopted practically in toto the English Acts without, however, keeping pace

with some changes in the English Acts in view of difficulties created by English case law which I do not propose to traverse. I will confine myself to

a resulting anomaly in our present Act. Section 6(b) of the Provincial Insolvency Act reproducing the original English Act sets out as one of the acts

of insolvency on which a debtor could be adjudicated a transfer of his property or of any part thereof with intent to defeat or delay his creditors.

This corresponds to Section 1(1)(b) of the English Bankruptcy Act which after amendment in 1914 now reads as follows:

If in England or elsewhere he makes a fraudulent conveyance gift, delivery, or transfer of his property, or any part thereof.

According to Williams on Bankruptcy, sixteenth edition, page 6, the words with intent to defeat and delay his creditors were omitted in the Act of

1914, as superfluous and misleading, and intended to relieve the Court and Jury from having to find an intent which is often contrary to the actual

fact. In this insolvency petition, one of the acts of insolvency alleged was this alienation, exhibit A-14, in favour of the Overseas Bank, as one

coming within the scope of Section 6(c) and void as a fraudulent preference u/s 54. This was not gone into in the insolvency petition, and

adjudication was founded on the departure of the insolvent from his dwelling house and usual place of business, an act of insolvency u/s 6(d). An

anomaly resulting from our decision is therefore, that the alienation under exhibit A-14, though undoubtedly fraudulent viewed from all standpoints,

could not have been made an act of insolvency on which adjudication could have been founded, although by it the insolvent had alienated all his

property for the benefit of two creditors and that too, fraudulently.

In the case before us, the insolvent had mortgaged identical paddy bags in the same godowns to two banks as security for substantial overdrafts

from them. He was, ''therefore, defrauding both banks. Bank B, first discovered a shortage of over 1,700 bags and brought pressure on him to

make good the deficiency in security. Bank A, then, some days later, discovered a shortage of over 4,000 bags and by threatening prosecution is

said to have compelled the insolvent to make this alienation of all his property to them and for the benefit of another creditor. Bank B, who has

been defrauded is left high and dry. They immediately prosecuted the insolvent who was convicted of theft of bags of paddy he had delivered into

their possession as security under key and open loans, and the insolvent sentenced to imprisonment. If a creditor fortuitously discovers that his

debtor has committed a criminal non-compoundable offence and by threat of prosecution compels him to convey to him all his property in

satisfaction of his debt, is it right that he should be permitted to pay himself in full, leaving other creditors in the lurch, this favoured creditor failing

moreover to do his public duty of initiating a prosecution, in fact compounding an offence which is not compoundable, and deriving from this

breach of public duty considerable financial advantage? I can myself see little difference between this kind of pressure and a creditor who

wrongfully confines his debtor and threatens him literally with a big stick held over his head with grievous hurt until he executes a conveyance which

gives him a preference over all other creditors, one which appears to be protected u/s 54, on the principle that the debtor did not make the transfer

voluntarily with a view to prefer, but in order to escape the consequences with which he was threatened.

I am saying all this in order to indicate that Section 54 of the Insolvency Act, in order to harmonise law with justice, equity and good conscience,

appears to be in need of amendment. There is further an inherent anomaly in Section 54 read with Section 6(2) and (3) arising from the judicial

interpretation given to the words ""with a view of, giving that creditor preference"", in that a transfer with this objective though it may not be per se

fraudulent, shall be deemed null and void as against the receiver. But there appears to be no way under the Act itself of declaring an alienation

fraudulent per se. The alienation, exhibit A-14 in this case, undoubtedly was to the knowledge of the insolvent, void as against the receiver. To

avoid these obvious anomalies, in addition to amending Section 6(b) on the lines of the present Section 1(1) of the English Bankruptcy Act, the

following addition to Section 54(1) by way of a proviso appears to be necessary:

Provided that if in the opinion of the Court the transactions was to the knowledge of the insolvent or, in fact, a fraud on creditors, or induced by

pressure or intimidation by a creditor of a kind opposed to law or public policy, it shall be set aside as void, as against the Receiver.

The statute, case law and precedent, being what they are, J, accord my concurrence to the judgment my learned brother is about to deliver with

these recommendations for amendment in legislation.

Krishnaswami Nayudu, J.

The Tanjore Permanent Bank, Limited, creditors in the insolvency of second Respondent, are the Appellants, the first Respondent being the

Indian Overseas Bank, Limited at Nagapattinam. The appeal arises out of a petition filed by the Appellants for annulment of a security bond

executed by the insolvent in favour of the first Respondent on 19th December 1947, for Rs. 45,000, u/s 54 of the Provincial Insolvency Act. The

insolvent was carrying on trade in paddy and also owned a rice mill at Puthur situated on the outskirts of Nagapattirnam. He was adjudicated on

22nd January 1948, in Insolvency Petition No. 2 of 1948, on the Appellants'' petition. The insolvent had dealings both with the Appellants'' branch

at Tiruvarur, a place about eighteen miles from Nagapattinam and with the first Respondent bank from 1945, the dealings consisting in borrowing

monies on the pledge of goods. It is the Appellants'' case that by the end of November 1947, the insolvent owed them about Rs. 48,000, on

account of produce loans, that is loans advanced on the pledge of paddy and rice bags, and that on 13th January 1948, the Secretary of the

Appellants-bank and the manager of the Tiruvarur branch went to the business premises of the insolvent and found that the mill was not working

and that all the goods pledged to them had been removed and the debtor was not in his place of residence. The insolvent is charged with having

executed in favour of the first Respondent a security bond on 19th December 1947, for Rs. 45,000, creating a security over all or substantially all

his properties with a view to defeat and defraud his other creditors, and it is urged that the transfer of the properties in favour of the first

Respondent-creditor was with a view to give that creditor a preference over all other creditors and the security bond was, therefore, fraudulent

and void as against the Appellants.

It will be necessary to refer to the following facts to appreciate the contentions of the Appellants as regards the fraudulent nature of the deed of

security (exhibit A-14) executed in favour of the first Respondent-bank. The goods on which loans were raised with both the banks were all

stocked in godowns belonging to the insolvent and it is common ground that the goods, which were the subject-matter of the security in favour of

both the banks, were stocked in the same godowns. On 27th November 1947, P.W. 3, the Inspector of the Appellants-bank, was deputed to

inspect and verify the stock under the produce loans and in his report, exhibit A-5, dated 29th November 1947, he states he inspected the

godowns on 27th November 1947, that there was an outstanding loan of Rs. 54,435 due to the Appellants, that the stock as per books of the

bank should be 6,981 bags of paddy and 30 bags of rice and that on verification of the stock on 27th November 1947, along with the branch

manager, P.W. 5, he found a shortage of 1,394 bags of paddy for which a margin of Rs. 11,152 was to be collected from the insolvent. P.W. 3

stated that the godowns were all found locked and he opened them with the keys produced by P.W. 5, the branch manager, and that at the time of

the inspection as the insolvent was absent, he instructed the accountant of the insolvent to pay the money covering the shortage. After receipt of the

communication by the bank to the insolvent, he paid a sum of Rs. 2,300 on 4th December 1947, Rs. 1,500 on 5th December 1947, Rs. 1,300 on

8th December 1947, and Rs. 2,000 on 10th December 1947, and on the whole a sum of Rs. 7,100 was recovered towards the sum of Rs.

11,152, payable by the insolvent on account of the shortage detected by P.W. 3. From exhibit A-9, dated 10th December 1947, a communication

sent by P.W. 5 to the Appellant''s head office at Tanjore, it is seen that P.W. 5, was assuring the head office that the insolvent was making real

attempts to discharge the loans. But after the last payment of Rs. 2,000, the insolvent wrote to the Appellants on nth December 1947, under

exhibit A-11 asking for thirty days'' time for discharging the entire loans. There is nothing to show that any steps were taken by the Appellants to

recover the balance. P.W. 5 said that he was pressing the insolvent as usual, but there was not much pressure just then from the head office and

that he suspected the bona fides of the insolvent only on 11th January 1948, and thereupon wrote to the head office on 12th January 1948, and

then went to the mill and godowns of the second Respondent and found the godowns empty and the mill not working and the second Respondent

making himself scarce. On a complaint preferred by the Appellants-bank on the 13th January, the insolvent was prosecuted in the Magistrate''s

Court for offences of theft and criminal breach of trust in Criminal Case No. 465 of 1948. This action was taken in pursuance of P.W. 5''s letter,

exhibit A-18.

The impugned document, exhibit A-14, came to be executed in the following circumstances. The insolvent, who was having produce loan

transactions with the first Respondent-bank, was indebted to it in a sum of Rs. 55,000, in the beginning of December 1947. On nth December

1947, the first Respondent issued a notice to the insolvent calling upon him to close his account within a week, but there was no reply to that

notice. The agent of the first Respondent-bank, R.W. 1, suspected from letters written by the Grain Purchasing Officer to three rice mills owners

on 15th December 1947, estimating the stock in the insolvent''s godown at about 2,000 bags, that the stock must have dwindled as on that date

the stock, according to their books, should be 5,800 bags of paddy. He thereupon proceeded to the mill premises on 16th December 1947, for

the purpose of inspecting the godowns and he found that the godowns were locked with the first Respondent-bank''s locks and, on opening the

godowns, found that the stock consisted of paddy bags mixed with husk tags, the husk bags being more than the number of the paddy bags. He

then inspected the doors and found that the padlock of one of the rooms had been tampered with and entry effected into it without opening the

lock, and in another room it looked as if entry had been effected into it by removing the backdoor from its hinges. He counted the paddy bags and

found a large shortage, since, on a rough calculation, there were only 1,100 bags. He took a letter from the insolvent on that date (exhibit B-23)

stating that out of the 5,800 bags of paddy and 92 bags of rice, which were placed as security in the first Respondent''s bank, he had taken about

4,000 bags of paddy and appropriated the same for his own use.

The events that took place between the 16th and 19th December 1947, which led to the execution of the document, are spoken to by R.W. 1

and R.W. 2. R.W. 1 says that he went to the lawyer''s house at 11 a.m. and consulted him, and his lawyer represented that it was late that day and

a complaint could be given on the following day. At 1 p.m. on the same day, one Jayaveera Pandya Nadar and R.W. 2 came to his office, and

wanted to know what R.W. 1 proposed to do in regard to the insolvent. R.W. 1 says he told them that he intended to proceed criminally against

him and that they pointed out to him the futility of such action in regard to the recovery of money due to the bank. They then proposed that some

security might be taken from the insolvent and the insolvent came and joined in the discussions and pleaded that, if criminal action was taken, he

would be ruined and undertook to give security for the repayment and also represented that he had large outstandings to collect. Then R.W. 1

consulted his lawyer and, on his advice, agreed to take the security, due provision being made for the payment of not only the amount due to him

but also of the decree debt in Original Suit No. 8 of 1946, due by the insolvent. R.W. 1 came back to his office and told Jayaveera Pandya

Nadar, R.W. 2 and the insolvent that necessary steps could be taken for execution of the security bond. On 19th December 1947, the document

was written in the premises of the insolvent''s rice mill and was executed by the insolvent. The circumstances under which exhibit A-14 was

executed and as spoken to by R.W, 1 are corroborated by R.W. 2, a javali merchant and a constituent of the Indian Overseas Bank. R.W. 2 says

that he accompanied the insolvent and Jayaveera Pandia at their request to the first Respondent-bank in order to pacify R.W. 1. The insolvent was

told by him that the only way out of the difficulty was to give security to the bank.

Exhibit A-14 is styled as a security bond and it recites that in respect of the credit and debit dealings which the insolvent had been having with

the first Respondent-bank, a sum of Rs. 39,000, was payable by him, that apart from the said sum about Rs. 6,000 had to be paid to Seshachala

Naidu, the Plaintiff-decree-holder in Original Suit No. 8 of 1946, that the insolvent had filed an appeal against the said decree and the same was

pending and, if the decree was confirmed in appeal, he would have to pay Rs. 6,000, and that the sum was, therefore, reserved with the bank. This

accounts for the security being for Rs. 45,000. It is further recited that excluding the sum of Rs. 6,000 for the balance of the amount due from the

insolvent, viz., Rs. 39,000, and also in respect of future transactions, and the security over the properties would enure, in any event, to the limit of

Rs. 45,000. The actual amount due to the first Respondent as per the accounts on that date was Rs. 38,624-1-8, and this together with the

amount due under the decree, covered the entire amount for which the security was offered, and there was nothing left as and by way of security to

cover further dealings.

The insolvent''s position at the time with reference to the decree in Original Suit No. 8 of 1946, may now be considered. That decree arose out

of a suit instituted by his uncle and the decree was passed after contest. The insolvent filed an appeal Appeal Suit No. 433 of 1947, on the file of

the High Court, Madras, which was pending. An application was made for stay of execution of the decree (Civil Miscellaneous Petition No. 5786

of 1947) and stay was ordered on 30th October 1947, on his paying a sum of Rs. 2,500 within four weeks and offering security for the balance.

In compliance with that order, on 28th November 1947, he filed an affidavit (exhibit A-13) in the District Court of Nagapattinam stating that he

paid Rs. 2,500 that day and for the balance he was filing a letter of security, and that he had a house worth Rs. 10,000 and rice mill and ration

shop worth Rs. 60,000, By that affidavit, he gave an undertaking that he would not alienate the properties without the permission of that Court.

The security, however, was not accepted and the matter was adjourned to 6th January 1948, for better security. Exhibit B-39 is an. affidavit filed

by the decree-holder in Original Suit No. 8 of 1946, on 19th December 1947, the date of exhibit A-14, in which he states that the security

furnished by the insolvent, who was the judgment-debtor, was not accepted and the Court gave him time till 6th January 1948, for offering better

security, that in the meantime he was reliably informed that the insolvent was offering his property as security to a local bank, apparently the first

Respondent, and that the insolvent was making himself scarce. He, therefore, asked for immediate execution by attachment of the property. These

give an indication that, while the first Respondent-bank was prepared to prosecute the insolvent criminally, the decree-holder in Original Suit No. 8

of 1946, was threatening immediate execution. It was in these circumstances that one finds that exhibit A-14, the impugned document, came into

existence.

The grounds alleged in the petition in respect of the fraudulent transfer are that there was no compelling necessity to offer any security as the

amount due to the first Respondent was already secured by pledge, that the second Respondent had transferred all or substantially all his

properties and there was equally no conceivable necessity to secure future advances or for the payment of Rs. 6,000 to the decree-holder in

Original Suit No. 8 of 1946, that the Nagapattinam agent of the first Respondent was an intimate friend of the insolvent and that, shortly after the

execution of the bond, the insolvent had wound up the mill and made himself scarce. The suggestion of friendship of the agent furnishing a ground

for this transfer was not pressed before us, the contention having been repelled by the learned District Judge. Short of the allegation that the

document was the result of friendship of the agent with the insolvent, the substance of the attack is that there was no compelling necessity to

support the transaction. It is on the facts so far stated depends the decision of the only question in this case as to whether u/s 54 of the Provincial

Insolvency Act, the impugned transfer was made with a view to prefer the Indian Overseas Bank to the other creditors of the insolvent.

Section 54(1) is in the following terms:

Every transfer of property, every payment made, every obligation incurred, and every judicial proceedings taken or suffered by. any person unable

to pay his debts as they become due from his own money in favour of any creditor, with a view of giving that creditor a preference over the other

creditors, shall, if such person is adjudged insolvent on a petition presented within three months after the date thereof, be deemed fraudulent and

void as against the receiver, and shall be annulled by the Court.

This section corresponds to Section 56 of the Presidency-Towns Insolvency Act, and is modelled on the English statute. The corresponding

provision in England was Section 92 of the Bankruptcy Act of 1869. That section contained a saving clause; the section, excepting the saving

clause, was repeated in Section 48 of the Bankruptcy Act, 1883, and Section 54 of the Bankruptcy Act, 1914. The saving clause in Section 92 of

the Bankruptcy Act provided that the section ""shall not affect the rights of a purchaser, payee, or incumbrancer in good faith and for valuable

consideration"". But the saving clause was omitted in Section 48 of the Bankruptcy Act of 1883, and was thereafter not incorporated in the

subsequent enactments. But Sub-section 2, in terms of Sub-section 2 of Section 54 of the Provincial Insolvency Act, came to be added in Section

48 of the Bankruptcy Act, 1883, and Section 44 of the Bankruptcy Act, 1914, with the result that the terms of the Indian Enactment are the same

as found in Section 44 of the Bankruptcy Act of 1914. The removal of the saving clause and the substitution of the sub-section has a material

bearing on the question of the good faith or otherwise of a preferred creditor. While under the Bankruptcy Act of 1869, even if a transaction was

found to be void as a fraudulent preference, if it was shown that the preferred creditor acted in good faith, that is, without the knowledge of the

insolvent condition of the debtor and of his intention to prefer him, such a creditor could be saved by reason of his having acted in good faith, the

good faith of a preferred creditor is no longer material under the law as it prevails now in England, as laid down in the subsequent Bankruptcy Act.

The position in India is the same as in England that the good faith or otherwise of a creditor, who is preferred, is immaterial. In order to bring a

transfer by a debtor in favour of his creditor as an act of fraudulent preference u/s 54, it must be established that the transfer was in favour of a

creditor and it was made within three months of the date of the insolvency by a person unable to pay his debts and that he had creditors other than

the creditor in whose favour the transfer was made and that the transfer was with a view to prefer that particular creditor. The real question that

has to be decided is as to whether the insolvent executed the security bond with a view of giving the Indian Overseas Bank a preference over the

other creditors, the other essential conditions being present in the case.

The law of bankruptcy is foreign to India and there is nothing corresponding to the law of insolvency found in Hindu jurisprudence. Neither the

Smritis nor the texts provide anything approximating to the law of insolvency, though the payment of debts by a debtor to a creditor is regulated

and the means and method of payment and the proceedings for recovery are also provided. The insolvency law is, therefore, one borrowed from

England and the language of the Indian enactment being in terms of the corresponding English statute, English decisions on the interpretation of the

terms of the enactment could be safely applied to cases arising in India u/s 54 of the Provincial Insolvency Act and Section 56 of the Presidency-

Towns Insolvency Act. Whether a particular transfer is a fraudulent preference within the meaning of the provision, has been held to be a question

of fact. To arrive at the finding, it is necessary to make a proper approach to the facts governing the cases having in view the principles that have to

be applied in appreciating the evidence and arriving at the correct conclusion.

In Ex parte Taylor. In re Goldsmid (1886) 18 Q.B.D. 295, 299, it was held that in order that a payment or transfer of property, made by a

bankrupt within three months before the presentation of the petition on which he was adjudicated a bankrupt, should amount to a fraudulent

preference within Section 48 of the Bankruptcy Act, 1883, it is essential that it should have been made by him with a view of giving a preference,

to the creditor to whom it was made; it is not sufficient that the creditor was in fact preferred, and the Court must, therefore, in each case consider

as a question of fact what was the real or dominant motive of the bankrupt in making the payment or transfer, and, if the Court comes to the

conclusion that the bankrupt''s real motive was, e.g., to save himself from exposure or from a criminal prosecution, the payment or transfer is not a

fraudulent preference. In that case, there was a payment to the preferred creditor, which the bankrupt made on his being threatened by the creditor

that he would summon him before the Lord Mayor on a charge of embezzlement and the facts of the case pointed out that the bankrupt had so

conducted himself as to make himself liable for criminal prosecution. Lord Esher, M.R., expounded the manner in which Section 48 of the

Bankruptcy Act had to be construed in the following terms:

The Court must find not only that a payment was made to a particular creditor, but that it was made ''with a view'' of giving him a preference over

the other creditors. It has been said that the Court must be satisfied that the preferring of the creditor was the predominant view of the debtor--that

if he acted from mixed motives, the Court must find out which was the predominant view in his mind. That no doubt is so, though I should have

been content to say that the payment must have been made with a view of preferring the creditor. What is meant by ''with a view''? It is the same

thing as with an ''intent''. The moment you come to this, that you have to perform the metaphysical operation of finding out what a man''s intent

was, surely then you ought not to throw away all the tests which have been adopted by great and careful Judges for the purpose of doing this. You

cannot throw out of account the fact that a man was threatened with something which he would not at all like, in order to see whether he did not

act with the dominant view of getting rid of that pressure. You must also, as James, L.J., said, take into account the man''s own mind, and see

whether, if he has done a very wicked and abominable thing, he may not afterwards have been doing that which, if he had a scrap of conscience

left, he ought to have done--repair his former evil deed. If you come to the conclusion that that was the dominant motive in his mind, you must hold

that he made the payment, not with a view of preferring the person to whom he made it, but in order to satisfy his own conscience. It is impossible

to lay down any exhaustive rule; the Court must judge from the particular facts of each case whether the debtor did make the payment with the

view or intent of preferring the creditor.

Applying the principle to the facts of that case, the learned Law Lord observed that the preference was the result of threat of criminal prosecution

and the bankrupt acted solely with the view of saving himself from exposure, infamy and danger and that in the circumstances there could not be

any fraudulent preference.

Lindley, L.J., in the course pf his judgment, repelling the contention that it would be sufficient if the creditor was actually preferred and that was

the meaning of ""with a view"" observed at page 301:

That would be to strike out from Section 48 the words ''with a view of giving such creditor a preference over the other creditors.'' It is impossible

to infer the debtor''s view from the mere fact that the creditor was preferred. But, looking at the facts of this case, I think that Cave, J., drew the

right inference, that the bankrupt''s sole motive was to prevent an exposure of his conduct.

Lopes L.J., observed at page 302:

The mere making of a preferential payment is not a fraudulent preference. The substantial motive of the debtor in making it must be looked at. If

the substantial motive is to prefer the creditor, the payment is a fraudulent preference. If the substantial motive is reparation for past wrong, or to

avid evil consequences to the debtor himself, the payment is not a fraudulent preference.

That an actual threat or actual pressure of creditors is not necessary but if the transfer proceeds under an apprehension of legal process as if the

Defendant had actually threatened her (the bankrupt) so that the execution of the transfer was not a voluntary transfer, but the effect of fear,

however, groundless that might be that would not make the transaction void was the view taken in Thompson v. Freeman (1786) ITR 155. That

view was considered to be good law even after the lapse of one hundred and ten years by Lord Halsbury, in Sharp v. Jackson (1899) A.C. 419,

where a trustee, who had committed breaches of trust and was insolvent, on the eve of his bankruptcy conveyed an estate to make good the

breaches of trust, without any pressure or request by his cestuis que trust, it was held that there was no fraudulent preference within Section 48 of

the Bankruptcy Act, 1883, the debtor''s object being to shield himself from the consequences of his breaches of trust. With reference to a

contention that since there was no pressure the debtor was free to do the one thing or the other and when he executed the transfer in favour of one

of the creditors, whatever the debtor''s motive might have been his view or intention was to benefit certain creditors and he must be taken to have

intended the natural consequences of his act, Lord Halsbury quotes with approval the view of the construction of the statute by Lord Esher, and

observed that the answer,

would depend upon what was in his mind. Whether it is called ''intention'' or ''view'' or ''object'' does not appear to me to matter much. The

question is whether in fact he had the intention to prefer certain creditors. It has been argued that the debtor must be taken to have intended the

natural consequences of his act. I do not think that is true for this purpose. I think one must find out what he really did intend.... It seems to me

clear, therefore, that he made this conveyance not with the ''intention'' or ''view'' or ''object'' or whatever it may be called of preferring these

persons, but for the sole purpose of shielding himself. Under these circumstances, what he did is not a fraudulent preference within the Bankruptcy

Act.

In Ramsay, In re. Deacon, Ex parte (1913) 2 K.B. 80, Phillimore, J. observed at pages 84-85 that the proper view of the law is that

...the Court must be satisfied that the dominant or substantial motive was to prefer the creditor, and was not to obtain some advantage to the

debtor, or rather, to get rid of the negative expression, that there was no substantial advantage to the debtor likely to accrue by reason of the act of

preference, no escape from criminal prosecution, no escape from being declared, whether criminally or not, a trustee who had failed in his trust, no

advantage which would enable him to keep afloat and carry oh his business.

On the facts of that case it was found that the master motive was in the direction of fraudulent preference.

In Tomkins v. Saffery (1877) 3 App. Case 213, relied upon by the Appellants, the debtor was a member of the stock exchange and he

became unable to meet his stock exchange engagements and gave notice thereof to the secretary. Under the rules of the stock exchange, in such

circumstances, the defaulter ceases to be a member of the body. Under the rules, two of the members of the body act as official assignees of the

defaulter, a meeting of the creditor is called, the defaulter (as he is required to do) makes his statement, and the assembled creditors having

decided what is to be done, the official assignees carry the decision into execution. The Committee of the stock exchange had the power to re-

admit the defaulter. The debtor made his statement declaring that at that time he had no debts outside the stock exchange. His stock exchange

creditors then consented to accept a composition, and to provide for a part of it he gave them a cheque for �5,000, then standing to his credit in

the Bank of England. The official assignees obtained the money and apportioned it among his stock exchange creditors. He afterwards confessed

to owing debts to a large amount to outside creditors, and was declared a bankrupt. In a motion by the trustee in bankruptcy to recover the sum of

Rs. 5,000 from the assignees of the stock exchange, it was held that he was entitled to claim it, for that what was done by the debtor amounted to

a cessio bonorum, and constituted an act of bankruptcy. Lord Cairns (Lord Chancellor) held that there was on the part of the bankrupt a cession

of all he possessed for the purpose of business, and as for the question whether it was a fraudulent preference u/s 92 of the Bankruptcy Act of

1869, which contained a saving clause protecting bona fide transferees, after referring to the facts of the case, posed the following question ""Was

the payment made under pressure?"" and in answer observed at page 235:

It was said, if it was made under pressure, it is the pressure you are to look to, it is the pressure you are to take as the causa causans of the

payment, and not any intention of giving a preference to particular creditors. I will accept for this purpose that statement of the law, and accepting

it, I am bound to say, and to say without the slightest hesitation, that in my opinion there was no pressure whatever here leading to the making of

this payment. The creditors upon the Stock Exchange were not the originators of that which was done. The person who set the machinery in

motion which was brought into active operation over this �5,000 on the 28th of April was Mr. Cooke (the debtor) himself. It, was he

who...endeavouring to comply with the rules of the body to which he belonged, announced to that body that he was unable to fulfil his

engagements, and being a defaulter, and making it known to his Stock Exchange creditors that he was a defaulter, thereupon received a summons

to attend a meeting of those creditors; he was the person who set the machinery in motion.... Pressure, therefore, there was none. The act was

done, the payment was made, as a part and parcel of that machinery which was set in motion by the bankrupt himself.

Then the Lord Chancellor proceeds to examine the application of the saving clause to Section 92, which, however, does not arise for consideration

here.

In Ex parte Hall. In re Cooper (1882) 19 Ch. D. 580, a trader told one of his creditors on the 17th February 1873, that he was about to stop

payment. The creditor then pressed for security for his debt and threatened to commence proceedings against the debtor at once. On the 19th

February, the debtor delivered two bills of exchange accepted by some other person, to a third person, telling him to hand them to the creditor. On

the 24th of February, the. debtor filed a liquidation petition and oh the 10th of March, he was adjudicated a bankrupt. It was held that the delivery

of the bills of exchange amounted to a fraudulent preference of the creditor, and that it was void as against the trustee in the bankruptcy u/s 92 of

the Bankruptcy Act of 1869. JESSEL, M.R., observed at page 585:

It is plain that it was the voluntary act of the bankrupt. It appears to me that it would be absurd to call it pressure. A man says to his creditor, '' I

am about to become bankrupt, or I shall stop payment in a week.'' The creditor says, ''Pay me my debt, or I will sue you for it.'' Can that he called

bona fide pressure by the creditor? When you consider the matter, it seems to me that it would he absurd so to call it. And that is exactly what

occurred in the present case Of course it would be an entirely different matter if the creditor did not know of the state of his debtor''s affairs. It is

suggested that there was pressure by the creditor on the 14th of February, hut it is plain that that pressure had produced no effect.

The view of the construction of the corresponding provision in the Bankruptcy Act has been adopted and followed by Judges in India in a

number of decisions arising under cases of fraudulent preference. The cases where the principles laid down in the English decisions have been cited

and followed, are: Dist. Official Receiver Vs. S.V. Nallaperumal Pillai and Others, ; Kasi Iyer and Another Vs. Official Receiver and Another, ;

T.S. Ramaswami Iyengar, Official Receiver of Madura Vs. Chinnathambi Kone, ; Mundluru Gangappa Vs. Official Receiver, , V.E.R.M.K.

Krishnan Chettiar by agent Rama Ayyangar Vs. P.L.P. Devarayan Chettiar, , Nripendra Nath Sahu v. Ashutosh Ghose (1915) ILR 43 Cal. 640,

Ranga Reddy v. Official Receiver, Anantapur (1937) 2 M.L.J. 868, The Official Assignee, Madras v. T.B. Mehta and Sons (1918) ILR 42 Mad.

510 and Arunachalam Chettiar v. Official Receiver of Tanjore (1925) 49 M.L.J. 562.

In Arunachalam Chettiar v. Official Receiver of Tanjore (1925) 49 M.L.J. 562, relied on by the Appellants, the facts were that the debtors

were heavily involved in October 1921, and were threatened with suits and applications for attachment and arrest before judgment and there

seemed to be very little hope of averting bankruptcy. In those circumstances, they executed a mortgage in favour of a creditor, the Appellant in that

case, the debt due to him being Rs. 10,900 and odd and the mortgage was executed to secure Rs. 10,000, out of that sum. The creditor in whose

favour the mortgage was executed was found to be aware of the condition of the debtors'' affairs. There was no other immovable property

excepting the one that was given as security; but the debtors executed over the identical property two mortgages one in favour of the Appellant

and the other in favour of third parties. They closed their business subsequently. On these facts, Venkatasubba Rao, J., found that the motive that

operated in the mind of the debtors could not be the safeguarding of their interests and the averting of unpleasant consequences and the so called

pressure was not real and that the mortgage amounted to a fraudulent preference.

In Ranga Reddy v. Official Receiver, Anantapur (1937) 2 M.L.J. 868, a sale deed executed by the insolvent in favour of his nephew and son-

in-law was sought to be set aside u/s 54 of the Provincial Insolvency Act. The insolvent was the guardian appointed under the Guardians and

Wards Act of the transferee. On his attaining majority the transferee, the erstwhile minor, complained to the Court that the insolvent had

misappropriated the ward''s funds and asked for an account for the amount in respect of the alleged breach of trust. The impugned sale deed was

then executed by the insolvent. Venkatasubba Rao, J., observed, on the facts of the case, that,

the test in such cases is, what is the dominant or operative motive of the debtor in making the transfer. Is it a reasonable inference from the facts

above mentioned that the dominant view which influenced the second Respondent (insolvent) was to prefer a particular creditor, or, is more

reasonable to hold that he acted with a view to protect himself from exposure or from any sort of proceedings?

The learned Judge further observed at pages 870-871:

The question is not whether several motives have not operated on the mind of the creditor but what among them was the dominant or effectual

motive. If the debtor is influenced solely by one motive, the case presents no difficulty whatsoever; but when the Court has to ascertain which of

the several motives is the operative or substantial motive, its task becomes difficult. In the present case, there is on the one hand the desire on the

part of the debtor to protect himself; there may be on the other, in view of the admission referred to above, some desire to benefit his own near

relative. In a case like the present, it is natural, if not inevitable, that the'' debtor has present to his mind, as one view among several, the giving of a

preference to the particular creditor benefited; that could hardly be decisive of the matter.

and following the words of Bowen L.J., in Ex Parte Hill. In re Bird (1883) 23 Ch. D. 695, viz.:

It is a very difficult matter to prove that the dominant motive was the sole motive, and I think that the true test u/s 92 is this: (i) had the debtor a

view of giving a preference to the creditor? and (ii) was that the operative effectual view?

held that the transfer could not be deemed to be a fraudulent preference.

The true rule of construction of Section 54 being almost identical with the language of the corresponding provision in the English enactment, we

have fortunately the guidance of very eminent Judges in England, where similar language of the English statute was carefully and exhaustively

analysed and has been correctly construed by those learned Judges. There is no difficulty, therefore, in knowing what the correct and proper

meaning is of the language of the provision. But the real difficulty that arises in any case is as to the correct approach that requires to be made

keeping in mind the proper view of the construction of the section.

On the facts of this case, I must express that I have the least difficulty in coming to the conclusion that the view taken by the learned District

Judge that the impugned transfer does not amount to a fraudulent preference is correct. Here is the case of a debtor, who became heavily involved

on the date of the transfer and successfully managed to obtain credit from two banks on the same goods for a considerable period of time without

the fraud being detected. He had also been disposing of the pledged goods without the knowledge of the respective banks, and this depleting of

the stock secured by loans from the banks was first detected by the Tanjore Bank on 27th November 1947, when the Inspector of the Tanjore

Bank inspected and found the shortage and the insolvent was asked to make good the amount which he tried to do by payment of several sums

amounting to Rs. 7,100 out of a total of, Rs. 11,152, being the value of the shortage. The last of such payment was made on 10th December

1947. After that no definite step was taken nor any proceedings contemplated by the Appellant-bank. By exhibit A-11, dated nth December

1947, the insolvent informed the Appellant-bank that he had till then paid Rs. 7,100, and that he would pay the balance of the amount within two

or three days and asked for thirty days'' time for discharging the entire loans. There is a letter written by P.W. 5, Panchanathan, the manager of the

Appellant-bank, to the insolvent (exhibit B-9, dated 16th December 1947) which discloses that the insolvent had been asking P.W. 5 to sell

certain jewels probably for making a further payment towards the dues to the Appellant. The learned District Judge has commented on the conduct

of P.W. 5 and the friendly letter he wrote, exhibit B-9, which indicates that P.W. 5 had been hand in glove with the insolvent and he must have

been very friendly and must have known even the disappearance of the bulk of the goods by 16th December 1947, when the Indian Overseas

Bank eventually detected the disappearance of the stock. There is room for believing that P.W. 5 and the insolvent were good friends. In the

schedule of assets and liabilities of the insolvent he had shown the Tanjore Bank as creditor only to the extent of Rs. 20,000, and he had included

P.W. 5 himself as creditor to the extent of Rs. 14,500, the suggestion being that P.W. 5 had a share in the loan obtained from his bank and that the

entire amount obtained as loan from the bank was not intended for the insolvent but the amount was shared by P.W. 5 and the insolvent. It is

unfortunate that in this case the insolvent has not been examined; his evidence could have been very valuable for more than one reason not only on

the question of collusion of P.W. 5, but also on the other and more important question as to what considerations prevailed upon the insolvent in

executing the security bond. But, in view of the other evidence in this case, the decision on the latter question, however, does not present any

difficulty.

It is not disputed that the first Respondent-bank was not aware of the extent of the liabilities of the insolvent, nor of his indebtedness to the

Tanjore Bank on the security of the very same goods over which the first Respondent had advanced monies. On the 16th December 1947, as a

result of the surprise inspection by R.W. 1, the shortage was detected and from the evidence of R.W. 1 and of R.W. 2--whose evidence has been

accepted by the lower Court and about whose veracity nothing could be suggested, the events that led up to the execution of exhibit A-14 can be

clearly understood. There was undoubtedly a threat of criminal prosecution, which was imminent and which, but for the intervention of Jayaveera

Pandya Nadar, would have been put into execution. The decision taken by the insolvent to execute the security bond was made practically on the

spot on 16th December 1947, and it is here that one has to judge what was it that made the insolvent to come to that decision. One can picture or

imagine what could have passed in the mind of the insolvent at the time when R.W. 1 threatened to criminally prosecute him. The insolvent must

have been satisfied that he could not escape by making any assurances as to payment as in the case of the Tanjore Bank, where, however, there

was no threat or suggestion of criminal prosecution on 27th November 1947, or subsequently at any time, the insolvent knowing full well that in the

first Respondent-bank he had no obliging friend like P.W. 5 and that it was certain that R.W. 1 would criminally prosecute him for which purpose

he had already consulted his local lawyer. Whether it is a case of analysing mentally the state of insolvent''s mind, or call it psycho-analysis, or

reading his mind at the psychological moment the decision to execute the security bond was come to such analysis could only be based on the

evidence in this case, and not on what the insolvent could say since he was not examined. This is not a case, however, where there is paucity of

evidence as to the circumstances that attended the execution of the security, when'' it might be difficult, especially in the absence of the insolvent''s

evidence, to find out, what could have been the state of his mind. There is clear evidence that there was that threat of criminal prosecution, not an

empty threat, but a threat which was sure to be put into action and the avoidance of the criminal prosecution has been spoken to which must

necessarily be the causa causans and the motive force in the insolvent agreeing to give security. The test is to find, what is it that eventually and

effectually operated in the mind of the insolvent or what is the compelling force that induced him, or what is the immediate cause for the insolvent to

enter into a transaction of this nature. The term ""with a view"" has been explained by the learned Judges in England elaborately and vividly by the

use of such phraseology as the English language would permit, all of which provide only one test for understanding the meaning of ""with a view"",

that is, if no other consideration prevailed but the only object was to prefer the first Respondent-bank, then it could be said it was done voluntarily,

nothing else influencing his decision to make the preference. If the sole view or the only view was to prefer the creditor, then undoubtedly the

transaction could not be supported. But, if there are several considerations which must have prevailed upon the insolvent other than merely

preferring a particular creditor, then the Court has to examine such considerations and find out which of those considerations eventually led him into

the transaction.

In every case of a preference of one creditor to another there might arise a feeling among the other creditors that injustice has been done to

them by reason of the properties not being available for distribution under the Insolvency Law. We are not concerned with the propriety or the

morality of the insolvent''s conduct in obtaining large sums from the Appellant-bank and others and by execution of the security depriving them of

the rateable distribution which they would be entitled to get if the properties had been made available for their benefit as well; but we are only

concerned with the examination of the facts that led to the execution of the security and applying the principle of Section 54 to a given case and

finding whether the facts come within the four corners of the terms of that section. The facts have to be judged not by the result, since the result in

such cases is likely to be to the detriment of other creditors and deprive them of the benefit of the Insolvency Law. Equally the bona fides or

otherwise of the preferred creditor are immaterial. It may be, though not in the present case, that the preferred creditor might be having full

knowledge of the bankrupt circumstances of the insolvent and with that knowledge he might in a given case, where the debtor has so placed

himself in a position as to be liable to be proceeded against criminally by a threat of such prosecution, obtain a transfer of his properties and such

transfer could not be assailed u/s 54.

If the mere preference was what was intended to bring it within the language of Section 54, as Lord Halsbury pointed out in Sharp v. Jackson

(1899) A.C. 419, 423,

Nothing could have been easier than to hare enacted, if they had thought proper to do so, that any preference to one creditor over another

creditor, or any greater advantage...but any advantage given by previous payment to one creditor, to which advantage all the other creditors were

not a party, should of itself be a preference which should be void under the statute. Nothing, I say, could have been easier than to have made such

an enactment, if that was intended, but, in my opinion, no such intention is to be gathered from the statute.

Considerations such as whether the security bond result in stifling criminal prosecution and as such against public policy u/s 23 of the Indian

Contract Act are all extraneous to the only point to be decided, viz., whether the transfer has been made with a view of giving that creditor a

preference over other creditors u/s 54. The security bond in this case might be open to attack under other provisions of law, which, however, have

not been raised or argued in this appeal; the only point on which this security is sought to be avoided is that it offends Section 54 of the Provincial

Insolvency Act. Considerations such as whether the transaction could be considered to be a moral act or whether it is inequitable or whether it

offends the other provisions of law are all foreign to the scope of an enquiry as to whether a particular transaction is affected by Section 54 of the

Act. These matters could not enter into the consideration of the question of finding out whether the transaction impugned u/s 54 has been made

with a view to prefer the creditor or otherwise.

It was argued with considerable emphasis that if the motive or the intention, or whatever that persuaded the insolvent to execute the security

bond, was the avoidance of a criminal prosecution, the facts and circumstances of this case would show that he not only defrauded the first

Respondent-bank, but he had equally made himself liable for similar offences and liable to be proceded against by the Appellant-bank and when

he agreed to execute the security bond he must have been aware that he had defrauded the Appellant-bank and they were likely to proceed

against him criminally and that, even though he might escape such a prosecution from the first Respondent-bank by agreeing to execute the security

bond, he could not by agreeing to execute the security bond avoid criminal prosecution altogether. It is, therefore, urged that the threat of criminal

prosecution could not have had any effect in the insolvent''s mind and that could not, therefore, be considered to be a factor, which urged him to

execute the document. The fallacy of this argument lies in assuming that this aspect, namely, that he might not escape a prosecution from the

Appellant-bank was present and could reasonably be expected to have been present in his mind at the time. On the other hand, in spite of the

detection of the fraud by the Appellant-bank, not only did they not threaten any criminal prosecution, but they did not even take steps in any civil

Court for the enforcement of their right and were content to receive the payment in instalments. It is not unreasonable to expect the insolvent to

have been under the belief,. especially in view of the very friendly relations he had with the manager of the Appellant-bank, P.W.5, that there was

not likely to be any trouble from the quarter and the prosecution, if any, in so far as the first Respondent was concerned, was not only real but

imminent. Here again, even assuming he had in his mind that he had another criminal prosecution to face--and which he eventually faced at the

instance of the Appellant-bank--so long as it has been found on the evidence that it was the threat of criminal prosecution from the first

Respondent-bank that immediately induced him to offer to execute the security bond, that is sufficient to hold that the document was the result of

that threat. It is here that the dominant motive that prevailed upon the insolvent was to escape the criminal prosecution, not for ever and from every

quarter, but from the first Respondent-bank.

Apart from the imminent prosecution from the first Respondent-bank the insolvent had to face the execution proceedings in Original Suit No. 8

of 1946. Exhibit B-39 is an affidavit filed by the decree-holder in Original Suit No. 8 of 1946, and immediate execution by attaching emergently

the properties of the insolvent was asked for on the ground that the insolvent did not furnish security in pursuance of the order of the High Court

which granted stay pending disposal of the appeal filed against the decree in the said suit. This affidavit asking for immediate execution is dated

19th December 1947. The inclusion, therefore, of the sum of Rs. 6,000 to be reserved in the hands of the first Respondent-bank for payment to

the decree-holder in case eventually the insolvent did not succeed in the appeal against the decree, was necessitated by the execution, proceedings

asking for immediate execution. Further, it has to be noted that the insolvent gave an undertaking by his affidavit, exhibit A-13, filed in the District

Court of Nagapattinam that he would not alienate the properties till the disposal of the said appeal. Apart from the pressure by the decree-holder

in Original Suit No. 8 of 1946, applying for immediate, execution, provision had to be made, if the insolvent was to carry out his agreement with

the first Respondent-bank to execute the security over the immovable properties, for the payment of the decree amount in view of the undertaking

not to alienate the properties. The inclusion, therefore, of Rs. 6,000 in the security bond was to avoid attachment of the properties and also to

escape proceedings for contempt in view of the undertaking given to the Court. The circumstance that the decree-holder in Original Suit No. 8 of

1946, was the insolvent''s uncle could in no view be considered to be a ground for the insolvent to make arrangement for payment of his debt and

thus to prefer him to the other creditors. It will, therefore, be seen that the arrangement for payment of two of the creditors of the insolvent in

preference to other creditors could not, therefore, be considered to have been with a view to prefer those creditors.

In the result, the appeal is dismissed; in the circumstances of the case, each party will bear his respective costs throughout.