In Re: Nathuram Gopal Mantri - Court Judgment

Mirza, J.

1. This is a notice of motion taken out by the Official Assignee of Bombay to set aside a deed of second mortgage dated July 31, 1930, executed by the insolvent a month prior to his being adjudged insolvent, The deed is in favour of the respondents and is in respect of a property which belonged to the insolvent. The property has been since sold off at the instance of the first mortgagees and there is a balance of Rs. 3,500 in the hands of the first mortgagees out of the sale proceeds. The application is made under the provisions of Section 7 of the Presidency-towns Insolvency Act, 1909, read with Rule 4 (e) of the Bombay High Court Rules made under Section 112 of the Presidency-towns Insolvency Act.

2. An objection is taken on behalf of the respondents that the procedure adopted by way of notice of motion should not be permitted and that the Official Assignee should be relegated to a civil suit to establish his alleged claim.

3. The facts which have given rise to this notice of motion appear from the affidavits to be as follows: The insolvent prior to his insolvency was the owner of a property situate at Dadar. On November 14, 1924, he executed an indenture of first mortgage in respect of that property in favour jointly of one Reuben Daniel Walvatkar and his wife Simhabai. On September 30, 1927, the insolvent and his son executed a demand promissory note in favour of the respondents for a sum of Rs. 1,085. On January 25, 1928, they executed a second demand promissory note in favour of the respondents for a sum of Rs. 1,000 and on December 12, 1928, they executed a third joint promissory note in favour of the respondents for Rs. 500. On July 31, 1930, the insolvent having committed default the first mortgagees advertised the property for sale. On the same day the insolvent executed a second mortgage of the property in favour of the respondents to secure to them the aggregate sum of Rs. 2,585 and interest on the three demand promissory notes which had remained unpaid. The insolvent's son is not a party to this indenture of second mortgage, the property belonging solely to the insolvent. The second mortgage inter alia recites that the promisees under the three joint promissory notes had pressed the insolvent for payment of the moneys due on the promissory notes and the indenture of mortgage was being executed in consideration of the promisees getting a better security and the mortgagor getting one year's further time for payment of the amount. On August 25,1930, the property was sold at the instance of the first mortgagees when it realised a sum sufficient to pay off the costs of sale, and the amount due to the first mortgagees and left a balance of Rs. 3,500 in the hands of the first mortgagees. On August 26, 1930, the insolvent was adjudged insolvent on his own petition. The Official Assignee at the instance of a creditor, who is a decree-holder for Rs. 8,638-7-5 having obtained the decree on July 11, 1930, gave notice soon after the insolvency to the first mortgagees not to part with the balance in their hands, viz., Rs. 3,500, to the respondents, pending the disposal of this application which the Official Assignee informed them he had made to this Court against the respondents.

4. Reliance is placed on behalf of the Official Assignee on the terms of Section 66 of the Presidency-towns Insolvency Act. That section provides that:-

Every transfer of property...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 official assignee.

5. In this case the indenture of second mortgage having been made on July 31,1930, and the adjudication being on August 26, 1930, the matter would seem to fall within Section 56 of the Presidency-towns Insolvency Act if it is established that the transfer was made by the insolvent with a view to give the respondents a preference over his other creditors. Section 56 of the Insolvency Act confers a preferential right on the Official Assignee in such a Case. He is entitled on behalf of the general body of creditors to challenge the transaction although the insolvent himself in his own right could not have done so.

6. The questions I have to determine are (1) whether this case falls under Section 7 of the Insvolency Act, and (2) if it does whether it should be disposed of in this Court on a notice of motion or the Official Assignee should be relegated to a regular civil suit on the original side of this High Court.

7. Mr. Engineer on behalf of the respondents has contended that the present matter is governed by Section 36 of the Insolvency Act, According to this contention as the respondents have denied their liability the Official Assignee has no other recourse open to him but to file a suit in the civil Court, if he wishes to enforce his claim. The contention is that the property having been sold the surplus sale proceeds with the first mortgagees must be deemed to be held by them on behalf of the respondents who are the second mortgagees. The Official Assignee is claiming in respect of this sum that the respondents are either indebted to or are in possession of property which in law still belongs to the insolvent and the case falls within either Clause 4 or Clause 5 of Section 36 of the Act.

8. Clauses 4 and 5 of Section 36 of the Insolvency Act provide that if on the examination under that section the person examined admits that he is indebted to the insolvent or that he has in his possession any property belonging to the insolvent the Court has the power to make an order on such person to pay the amount or to deliver the property to the Official Assignee and the order so made would have the effect of a decree in a civil suit. An examination under Section 86 of the Insolvency Act may take place on an application by the Official Assignee or by any creditor of the insolvent. The proviso to Section 7 is that unless the parties otherwise agree the power given by Section 7 to the Insolvency Court as such to decide all questions must in' matters arising under Section 36 be exercised in the manner and to the extent provided in Section 36. In this case it appears that neither the Official Assignee nor any creditor has made an application to this Court for an examination under the provisions of Section 36. If such an order had been made and the respondents examined under the provisions of Section 36 and they had then denied their liability it is conceded by Sir Dinshah Mulla that under the proviso to Section 7 of the Insolvency Act the Official Assignee would have to file a suit against the respondents to enforce his claim. As no examination has been held under Section 36 of the Act, I am unable to accede to the contention that the provisions of Clauses 4 and 5 would apply to this case.

9. In Official Assignee, Madras v. Narasimha Mudaliar ILR (1929) Mad. 717. a full bench of the Madras High Court has held that the only limitation placed on the jurisdiction of the Insolvency Court under Section 7 of the Act is when once the Official Assignee has summoned a witness under Section 36 of the Act and that witness disputes his indebtedness the Official Assignee has no option but to proceed by way of suit. The same full bench has also held that where the Official Assignee standing in no higher position by reason of the special provisions of the insolvency law than the bankrupt himself seeks to recover a debt which is not admitted it is a matter of discretion for the Judge sitting in insolvency whether in any given case he should deal with the claim in the Insolvency Court or refer it to the machinery of the ordinary civil Courts.

10. In Official Assignee, Bombay v. Sundarachari ILR (1927) Mad. 776 a division bench of the Madras High Court held that any question as to the invalidity of a transaction, raised by the Official Assignee under the special provisions contained in Sections 55 and 56 of the Presidency-towns Insolvency Act, can be determined only by the Insolvency Court constituted under the Act and not by the ordinary civil Courts.

11. Sir Dinshah Mulla, the learned Counsel for the Official Assignee, has conceded that he cannot rely on the authority of this decision as correct law. Sir Dinshah Mulla has commented on this case in his ' Lectures on the law of insolvency (Tagore Law Lectures for 1929)' at page 48 as follows:-

The High Court of Madras has held that the Insolvency Court has exclusive jurisdiction under the Presidency-towns Insolvency Act in matters of voluntary transfers (s. 55) and fraudulent preferences (s. 56), and that no suit lies in the ordinary tribunals in respect thereof...This decision, it is submitted, is not correct.

12. At p, 47 of the same Lectures Sir Dinshah Mulla observes as follows:-

It is believed that notwithstanding the Madras decision, a Judge sitting in insolvency in Calcutta or Bombay would not try money claims, however small the amount may be, but leave them to be tried by the ordinary tribunals.

13. With great respect I am of opinion that the ruling in Official Assignee, Bombay v. Sundarachari should not be accepted as correct law by our Courts.

14. The intention of the legislature in enacting Section 7 and later the proviso to Section 7 seems to have been to introduce in our Act the terms of Section 102 and of the proviso to Section 102 of the English Bankruptcy Act of 1883. The terms of Section 102 correspond with the provisions of Section 7. But in enacting the proviso to Section 7 our legislature seems to have made a departure from the proviso to Section 102 of the English Bankruptcy Act of 1883. The proviso to Section 102 of the English Act is as follows:-

Provided that the jurisdiction hereby given shall not be exercised by the county court for the purpose of adjudicating upon any claim, not arising out of the bankruptcy, which might heretofore have been enforced by action in the High Court, unless all parties to the proceeding consent thereto, or the money, money's worth, or right in dispute does not in the opinion of the judge exceed in value two hundred pounds.

15. It is clear from the terms of the proviso to a 102 of the English Act of 1883 that what was sought to be excluded from the terms of the section were mainly claims not arising out of the bankruptcy. The terms of our proviso to Section 7 are of a general nature. The proviso is in the following terms:-

Provided that, unless all the parties otherwise agree, the power hereby given shall, for the purpose of deciding any matter arising under Section 36, be exercised only in the manner and to the extent provided in that section.

16. In my opinion it is open to this Court to exercise a discretion whether to try this matter on a notice of motion in the Insolvency Court or to relegate the Official Assignee to a suit in the civil Courts, The Insolvency Court possesses all the powers of a civil Court and can follow the like procedure as the High Court in the exercise of its ordinary original civil jurisdiction. But the machinery of our Insolvency Court is not suited for conducting actions with the same facilities as are to be found on the original civil side. The amount involved in this matter cannot be regarded as trivial or unsubstantial, although it is not very large. The Privy Council ruling in Sime Derby & Co., Ltd., v. Official Assignee (1927) 30 Bom. L.R. 290. is to the effect that when the Official Assignee seeks to establish that a transfer by the debtor is void as a fraudulent preference the onus of proof is on the Official Assignee. The Official Assignee in this case will have to show that the transfer by the debtor was a fraudulent preference. It will probably require considerable evidence to establish the state of mind of the debtor: whether it could be said that what he did he did with a view to give this particular creditor a preference over other creditors. The state of mind in which the insolvent was at the date of the second mortgage would be a matter of inference from the evidence which may be adduced. I am of opinion that the matters in dispute between the Official Assignee and the respondents on this notice of motion could be better dealt with in a regular civil suit.

17. I direct that the Official Assignee do, if so advised, file a suit within three weeks against the respondents in respect of the present claim. In that event there will be no order on this motion except that the costs of the motion will be dealt with by the Court trying the suit, which is to be filed. In case the Official Assignee does not file the suit within three weeks as directed the notice of motion will stand discharged with costs.

18. Mr. Engineer undertakes on behalf of his clients that on receipt of the amount from the first mortgagees they will deposit the same with their attorneys if the Official Assignee files the contemplated suit as here directed. The attorneys undertake not to claim any lien for their costs on the amount so deposited and undertake further to hold the same until the further orders of the Court which may hear that suit I am satisfied that the interest of the general body of creditors represented by the Official Assignee would be sufficiently safeguarded by the undertaking which has been given before me. The respondents are to be at liberty to withdraw the amount from the first mortgagees on the expiry of three weeks from now free from any undertaking by them if no suit is filed. The undertaking given before me is to come into operation if and when the suit is filed by the Official Assignee as directed. The respondents and their attorneys are to be at liberty to invest the amount they may receive in authorized securities pending further orders of the Court which may hear the contemplated suit.