Vedamony Nadar, Jnanaprakasam Nadar and Others vs The Palai Central Bank Ltd.

Sankaran, J.—This appeal arises out of an order passed in Insolvency petition No. 39/1123 on the file of the Kottayam District Court. The order was passed under following circumstances. One Thangaiah Nadar who had dealings with the Respondent Bank owed considerable amounts to the bank. Without discharging that debt he is stated to have been fraudulently and collusively alienating his assets with the object defeating his creditors. The execution of two such sale deeds on 31-9-1123 was alleged at an act of insolvency committed by Thangaiah Nadar and it was on that allegation that insolvency petition No. 39/23 was filed by the bank praying that the Appellant may be adjudicated as an insolvent. Along with this petition, the creditor bank filed a separate petition praying that an interim receiver may be appointed to take possession and preserve ail the assets of the debtor. That petition was allowed by the Court on 2-1-1124. The interim receiver thus appointed was directed to take possession of all the movable and immovable properties of the debtor forthwith. The receiver carried out this direction and took possession of the moveable and Immovable properties as specified in his report. It is seen from this report that such possession was taken by the receiver on 2-1-1124 and 3-1-1124.

The debtor was conducting transport business called "Kumara Das Transport". The movable properties taken possession of by receiver included certain lorries and buses and other accessories, used in she business. Since the next few days happened to be holidays, the Appellant appeared in the High Court before the Judge on duty during the holidays and presented a petition C. M. P. 22/24 praying that the vehicles and other accessories belonging to the Kumara Das Transport may be excluded from the operation of the order adopting the interim receiver on the ground that all those articles had already been sold to the Appellant by Thangaiah Nadar on 31-9-1123. Another petition C. M. P. 21/1124 was also filed by the Appellant along with C. M. P. 22/23 praying that an order may be issued staying the operation of the order appointing interim receiver so far as the motor vehicles are concerned, until the disposal of his objection petition. Accordingly an order of interim stay was passed on 4-1-1124 and communicated to the lower Court and the original petition filed by the Appellant claimant was also sent to the lower Court with a direction to hear and dispose of it within two weeks.

The claimant appears to have felt that the stay order would be, ineffective in view of the fact that the receiver had already taken possession of the motor vehicles and other accessories and therefore on 4-1-1124 itself he filed Anr. petition C. M. P. 23/24 before the High Court praying that the interim receiver may be directed to hand over possession of these vehicles to him Such a direction was also issued to the receiver. It is obvious that the direction was without prejudice to the consequence that were to follow from the final order on the claimant''s objection petition. When the three petitions were received before the lower Court, they were respectively numbered as C. M. Ps. 11, 12 and 13 of 1124. On getting notice of these petitions, the Respondent bank entered appearance and filed objections to the several petitions of the claimant.

The bank contended that the sale deed relied on by the claimant was only a fraudulent and sham document, that it did not come into effect and that in spite of the sale deed the ownership as well as possession of the properties of Kumaradas Transport continued to be with Thangaiah Nadar himself and that therefore the possession taken from him by the interim receiver could not be divested at the instance of the claimant. Both sides produced certain documents in support of these contentions. The matter was posted for evidence to 17-4-1124. At this stage the claimant filed Anr. petition C. M. P. 220 questioning the jurisdiction of the insolvency Court to investigate into the question as to whether the sale deed in his favour represented a bona fide and genuine transaction and whether it has come into effect and also praying for an order that the interim receiver had no right to take possession of the properties covered by that sale deed. The objection thus raised by him was overruled by the lower Court which ordered that the claim will be decided after due investigation. This appeal is against that order. Pending appeal the Appellant died and his legal representatives were brought on record as additional Appellants 2 to 4.

It is argued on behalf of the Appellant that there is no provision in the Provincial Insolvency Act empowering the Insolvency Court to investigate into end decide upon the validity of a transfer effected by the alleged insolvent at any stage prior to his adjudication. It is pointed out that the power conferred by clause 3 of Section 56 of the Provincial Insolvency Act on the receiver appointed by the Court to remove a third party from the possession and custody of the property of the insolvent, cannot be exercised against such third party in a summary manner and that where such third party puts forth a claim however flimsy it may be, the same has to be duly investigated and decided upon and only if the Court finds that the third party''s claim is unsustainable and the insolvent continues to be the owner of the property, the receiver would be entitled to take possession of such properties. Section 4 of the Act empowers the Court to conduct such an investigation. According to the Appellant the necessity for exercising, this power will arise only after the debtor is adjudicated as an insolvent and when an application is filed by the official Receiver to annul the transfer effected in favour of the third party. The rulings in - Chittammal and Another Vs. Ponnuswami Naicker and Another, and in - ''Mt. Jasodabai v. Firm Srikrishna Radhakrishan AIR 1939 Nag 10 (B) and in - ''Bibhuti Bhushan v. Birandra Nath AIR 1935 Cal 553 (C) are relied on in support of this position.

So far as the procedure to be followed by the insolvency Court and its receiver subsequent to the adjudication of the debtor as an insolvent, is concerned these rulings support the position taken by the Appellant. But these rulings do not go to the extent of laying down that prior to such adjudication the Court has no jurisdiction at all to get at the properties of the insolvent and to preserve them. Special provisions in that direction are contained in Sections 20 and 21 of the Insolvency Act. Section 20 lays down that the Court while making an order admitting the petition for adjudication of the debtor as an insolvent, may appoint an interim receiver for the property of the debtor, and that, such interim receiver shall have such of the powers conferable on a receive under the Code of Civil Procedure. Similarly Section 21 empowers the Court while admitting the petition to order the attachment by actual seizure of the property in the possession or under the control of the debtor. These powers are conferred on the Court to see that the property of the insolvent is not wasted or taken out of the reach of the Court during the pendency of the insolvency petition. In the present case the, Court was satisfied that the appointment of interim receiver was necessary for the preservation of the property of the insolvent and accordingly an interim receiver was appointed on 2-1-1124.

It is clear from Section 20 of the Act that such a receiver has all the powers of a receiver appointed under the Code of Civil Procedure, i.e. as defined in Rule 1 of Order 40 of the Code. Just as the I receiver appointed under Rule 1 of Order 40 Code of Civil Procedure, an interim receiver appointed u/s 20 of the Insolvency Act shall have no power to remove from the possession or custody of property any person whom the party at whose instance the receiver was appointed has not a present right so to remove. This does not mean that the receiver should stay his hands merely because a third party., sets up a claim of title and possession of the property alleged to belong to the debtor himself and to be really in his possession and custody. Such disputes will have to be reported to the Court for necessary directions. Thereupon the Court has to conduct a summary enquiry as to the sustainability or otherwise of the claim put forward by the third party and if the finding recorded as a result of such enquiry is against the claimant the receiver will be entitled to remove the third party from the custody of the property and to take possession and custody of the same on behalf of the Court. There may be instances where the enquiry into the sustainability of the claim put forward by the third party could be conveniently deferred to be conducted u/s 4 of the Insolvency Act, subsequent to the adjudication of the debtor as an insolvent. There may also be instances where the postponing of such enquiry to a later stage may result in the destruction or disappearance in the meanwhile of the property altogether. In such cases, it is essential that the summary enquiry should be conducted by the Court at the very outset so that the pro-party may be safely preserved in case it is found that the property really belongs to and is in the custody of the debtor. The failure to act in that direction would defeat the very purpose of Sections 20 and 21 of the Provincial Insolvency Act. The enquiry conducted at the initial stage of the insolvency proceedings will be different from the enquiry contemplated by Section 4 which is to take place only after the passing of the order adjudicating the debtor as an insolvent and as such the order passed at the earlier stage will not be final and conclusive as against the parties to it. Such a final and conclusive order may still be passed u/s 4 when the receiver seeks to annul the document in favour of the third party concerned and for inclusion of the property covered by that document also among the assets of the insolvent.

The ruling in - Bibhuti Bhusan Khan Vs. Birendra Nath Roy, relied on by the Appellant does not lay down as a general proposition that in no case can the insolvency Court enquire into the validity of any transfer in favour of a third party at a stage prior to the passing of the adjudication order. In that case an interim receiver had been appointed at the time of the admission of the insolvency petition and when the receiver attempted to take possession of a mill said to belong to the debtor, a third party objected by setting up independent title and possession. Such objection was upheld by the Court. In spite of that order, the receiver contended that the transfer in favour of the third party was a mere sham transaction and accordingly sought for an enquiry u/s 4, Insolvency Act. It was under such circumstances that the Court held that an enquiry u/s 4 was not called for at that stage and that such an enquiry had to be made only after the debtor was adjudicated as an insolvent. It is clear from this ruling also that a summary enquiry at the earlier stage of the proceedings is permissible, in order that the prima facie nature of the claim put forward by the third party may be ascertained before authorising the interim receiver to take possession of the property.

In the present case the interita receiver did not meet with any obstruction at the stage of taking possession of the motor vehicles and other accessories to which the present claim relates. It is seen from the receiver''s report that he found these articles in the possession and custody of the debtor himself and that the receiver was able to take them into his own custody from the debtor''s possession. The receiver was quite in order in having done so. The claimant has come for ward only subsequently seeking an order of the Court directing surrender of the articles to him. But when the Court proceeded to enquire into the merits of his claim he has chosen to question the jurisdiction of the Court to do so obviously he wants the Court to uphold his claim without any enquiry at all. The attitude taken by the claimant is strange indeed. Since the receiver''s action prima facie seems to be justified, the Court can cancel the same only if it is satisfied, after a proper enquiry, that the receiver was acting improperly and in excess of his powers. If the claimant is not prepared to face an enquiry in that direction it will be open to him to withdraw his claim petition and in that case the articles will be restored to the possession of the receiver. If on the other hand, the claimant elects to have an enquiry by the Court he will have to abide by the result of such enquiry. He cannot avoid the enquiry and at the same time retain possession of articles which were handed over to him under the orders of the Court pending enquiry into the merits of his claim. The lower Court was therefore right in overruling the objection raised by the claimant and in proceeding to record evidence regarding the merits of the claim in question.

In the result this appeal is dismissed with costs.