P.S. Narayana Ayyar Vs. Official Receiver - Court Judgment

Pandalai, J.

1. This appeal arises from one out of five petitions filed by the respondent, the Official Receiver of South Malabar, in the Insolvency of a firm of timber merchants to set aside under Sections 4, 53 and 54, Provincial Insolvency Act, five mortgages executed by the insolvents to various creditors before the Insolvency. Two of these petitions were settled in the first Court. Of the alienees in the other three petitions only two appealed to the District Judge who dismissed the appeals. Of these the present appeal concerns only the appellant's mortgage for Rs. 31,000 dated 13th March 1924, the subject matter of O.P. No. 16 of 1925. Prom Section 54 being one of those quoted in the petition and from the grounds stated and the principal prayer therein it would appear that the case against the appellant in both the lower Courts was that his mortgage is invalid as a fraudulent preference.

2. The first Court accepted this. But the learned District Judge held that the appellant's mortgage, which both Courts found was executed on 13th March 1924, though the respondent contended it was antedated, cannot be attacked on the ground of fraudulent preference as it was executed more than 3 months before the presentation of the Insolvency Petition on 16th June 1924, on the re-opening of the District Court after the summer vacation. The Subordinate Judge took the view that by virtue of Section 10, General Clauses Act of 1897, the 3 months mentioned in Section 54, Provincial Insolvency Act, must be understood as if it meant three months and where that period expires during a Court vacation, the further period which may intervene till the Court re-opens. According to the District Judge there is no warrant for such an extension of the 3 months' period mentioned in Section 54, Provincial Insolvency Act, as it is not a period of limitation during which any act or proceeding is directed or allowed to be done or taken in any Court or office; but a period during which transfer by way of preference of creditors by insolvent persons is to be deemed fraudulent. Therefore though for the purpose of Section 9(1)(c) the petition, if based on the appellant's mortgage as an act of insolvency, may be considered as presented in due time as it was presented on the date when the Court re-opened after the vacation which was in progress at the end of the third 'month from that date, yet that is not sufficient to extend the period described by the words in Section 54 'on a petition presented within three months after the date thereof.' On this ground the District Judge held that the mortgage is not assailable under Section '54 but if at all only under Section 53. I had this point re-argued as it was not touched upon at the first hearing. I think the view of the Subordinate Judge is correct as that of the District Judge leads to inconsistencies and inconveniences which could not have been intended by the Legislature.

3. No decision English or Indian determining the point has been cited. In England, Section 145, Bankruptcy Act 1914 corresponding to Section 141 of the Act of 1883 deals with computation of time for doing and taking proceedings under the Act and provides inter alia that if the last day of the limited time falls on a day when the Court does not sit, the act or proceeding shall be considered as done or taken in due time if it is done on the; next day when the Court sits. On this section it is scarcely open to doubt that if three months given by Section 4(c) from, an act of bankruptcy for filing a petition is calculated according to the earlier part of the section by excluding the day on which the act occurred and the period terminates on a Sunday or other Court holiday, a petition presented on the next Court day would be in time by the latter part of Section 145. And if the petition is considered as filed within the 3 months for the purpose of the Act though in fact filed after an additional period when the Court was closed, it seems to follow that that is sufficient to satisfy, the words in Section 44 of the Act that if the particular act of bankruptcy was a transfer by way of fraudulent preference,

the person making, taking, paying or suffering the same is adjudged bankrupt on a bankruptcy petition presented within three months after the date of making, taking, paying or suffering the same.

4. On the English Act it seems scarcely arguable that a fraudulent preference on which a bankruptcy petition is based and which is considered as within the three months by the effect of Section 145 can escape the operation of Section 44 on the ground that for the purposes of that section, the three months is an absolute period. And this for the reason which to me seems convincing that 'presented within three months' in Section 44 means three months calculated according to the provisions relating to computation of time for proper presentation. I guard myself against being supposed to interpret the Provincial Insolvency Act by the words of the British Bankruptcy Act. In the Provincial Insolvency Act 1907 there was no provision making the Limitation Act or any part of it generally applicable to proceedings under that Act. Accordingly it was held by a Full Bench of this Court Lingayya v. Chinna Narayana A.I.R. 1918 Mad. 213 that the Limitation Act is not applicable to the Provincial Insolvency Act. As long as this remained, Section 10, General Clauses Act, which is analogous in Section 145, Bankruptcy Act would govern the question whether acts and proceedings under the Provincial Insolvency Act, which had to be done or taken in Court within a particular period could be validly done, where the period expired on a Court holiday, on the next opening day. This was slightly altered by the Provincial Insolvency Act of 1920 which introduced in Section 78 the provision that Sections 5 and 12, Limitation Act, could be applied to Insolvency proceedings. In Ganjee Premjee & Co. v. O.L.M.E.N. Firm, Colombo A.I.R. 1932 Mad. 352, it was held that this did not affect insolvency petitions as they are not included in the category of applications and appeals to which alone those sections apply. In 1922 the Limitation Act, was amended by the introduction of Section 29(2) by which Section 4 and Sections 9 to 18 were made applicable to all Special Laws in which their application was not expressly excluded. Since this enactment; came into force (i.e., when these proceedings began in 1924) Section 10, General Clauses Act, would not by the proviso to that section apply in Provincial Insolvency proceedings but the appropriate section, i.e., Section 4, Limitation Act, applies. The lower Courts therefore erred in dealing with the point under Section 10, General Clauses Act, instead of under Section 4, Lim. Act.

5. In my opinion the effect of Section 4, Lim. Act, is the same in the present matter as that of Section 10, General Clauses Act. The effect of both in the present matter is that an insolvency petition which by Section 9(1)(c) should be presented within three months of the act of insolvency here a transfer by way of preference dated 13th March 1924 would if the three months expired - as it did - during the vacation of the Court, be validly presented on the reopening. Mr. Sitarama Rao for the appellant faintly referred to the difference in language between Section 4, Lim. Act, and S, 10, General Clauses Act. This difference is in the above matter of no moment. He also doubted whether the three months mentioned in Section 9(1)(c) is really a period of limitation and whether it is not as Spencer, J., suggested in Aiyapparaju v. Venkatakrishnayya A.I.R. 1923 Mad. 462, a condition precedent incapable of extension by statutes of limitation. The Bench in Ganjee Premjee & Co. v. O.L.M.K.N. Firm A.I.R. 1932 Mad. 352 did1 not consider it necessary to express any opinion on that. But in my view whatever the origin of the expression condition precedent in this connection in the old law of Bankruptcy in England, that law-has in the course of centuries so changed, especially in the direction of cutting down the period of relation back and-consequently vesting for which there was no specific period under the law prior to 1869 and of the time during., which the petition should be presented which within a century has been cut down successively from one year to six months and from six to three months after the act of Bankruptcy, that little or no guidance is to be obtained from that expression in determining whether under the modern law the period of three months is or is not a period of limitation. I am of opinion that on the words of the Indian statute now in question the period is one of limitation.

6. The next question is seeing that the insolvency petition was by reason of Section 4, Lim. Act, validly presented on the re-opening of the Court on 16th June 1924 based on the act of insolvency the fraudulent preference dated 13th March, whether under Section 54, the adjudication was on a 'petition presented within three: months' of the fraudulent preference. For the reason already stated in respect of the British statute, I think that a valid presentation under Section 9 of the Act is valid for the purposes of the whole Act and the three months in Section 54 is to be understood according to the proper method of calculation prescribed in the Act. A contrary view would lead to the absurdity and inconsistency which could not have been intended that an act of insolvency which is available under Section 9 ceases to be such under Section 54 and cannot be shown to be such thereunder if a Court vacation has in tervened. In short, the longer a Court vacation is, the greater is the diminution from three months allowed for presented an insolvency petition after an act of insolvency. If for instance a vacation lasts two months and an act of insolvency, e.g., a fraudulent preference, occurs a month and one day before the vacation begins, the petition must be presented within the 31 days left before the vacation. In my view this is an impossible result and a construction which leads to it must not be adopted if possible.

7. Some 3upport for the contrary view was sought from the recent amendment of Section 53 by which the words 'on a petition presented' were added after the word 'insolvent,' thus bringing the period of two years therein date back from the presentation of the petition instead of the adjudication as formerly. There was much difference of opinion whether the section as it formerly stood meant the actual date of adjudication or whether as this Court among others thought it meant the date to which by Section 28(7) the adjudication relates back. The amendment was intended to set this controversy at rest and favours the view of this Court as it adopts the date of presentation both as the date of relation back under Section 28(7) and the material date for Section 53. But the present point is whether if the word 'presented' is read in Section 54 as including oases of presentation on the expiry of any pariod during which the Court is closed at the expiry of the three months, a similar construction will have to be given to Section 53 which involves a similar extension of the two years therein. It is enough to say that the question does not arise for decision now and must be left open. I will only remark that that construction can be adopted only if the period of two years in Section 53 is regarded as a period of limitation prescribed for an application. There is no other provision in the Act prescribing such a period and it will be for consideration whether Section 53 may itself be regarded as prescribing it and also enacting the consequences to an alienation occurring within the period and answering the other requisities. But I see nothing in this sufficient to overthrow what seems to me to be the reasonable meaning of Section 54 taken-along with Section 9(1)(c) of the Act and Section 4, Lim. Act.

8. The result is that as the respondent's mortgage was made within three months before presentation of the petition the learned District Judge should have considered whether in other respects is amounted to a fraudulent preference. This he omitted to do in consequence of his view about the computation of time. Before deciding bow this omission is to be rectified, I shall refer to the opinion, of the Judge about the mortgage in the way he regarded it, as an alienation falling under Section 53. Both Courts have found that the appellant's mortgage is fully supported by consideration. Out of the Rs. 31,000 and Rs. 27,601 was already due to the appellant's father Samu Pattar who is since dead, Rs. 1,678 was due to an undivided nephew and Rs. 717 was the only cash paid, probably for expenses of stamp and registration. In these circumstances the question considered by the learned District Judge was whether a mortgage given to a creditor for his debt more than three months before the petition which could not be attacked as a fraudulent preference under Section 54 could be attacked under Section 53; as one not made in good faith.

9. The learned Judge has answered the question in the affirmative. His reason is that the object or view of the insolvents in executing the five mortgages in. February, March and April 1924 was to give certain creditors a preference over other creditors. He draws attention to the fact that to the Imperial Bank, the petitioning creditor to whom Rs. 10,000 was due, no mortgage was executed though they were pressing for payment since September 1923, and threatened a suit. On these premises he concludes by quoting Lord Hatherley from Butcher v. Stead (1876) 7 H.L. 839 that if the debtor for the purpose of avoiding the operation of the Bankruptcy laws and in order to give a fraudulent preference makes a payment or a charge it shall be wholly done away with except in cases where the person favoured is wholly ignorant of the debtor's intention to favour him and receives payment simply for valuable consideration and without notice of any intention on the debtor's part to favour one creditor above another. Applying this doctrine he found that Samu Pattar was 'not wholly ignorant' of the intention of the insolvent to favour him and on this finding set aside the mortgages under Section 53.

10. It is now settled that except under the law of insolvency, a transfer for consideration whose only fault is that it prefers a particular creditor to others is not for that reason alone fraudulent or in bad faith under Section 53, T.P. Act. In fact except in the law of insolvency the position of a creditor to whom money is already due is, so far as good faith is concerned in accepting security from his debtor for his debt, said to be in a more favoured position than one who having nothing previously at stake purchases or takes a mortgage from a person in embarrassed circumstances for present consideration : Hakim Lal v. Mooshahar Sahu (1907) 34 Cal. 999. Security given by a debtor to one creditor upon a portion of or upon his whole property although the effect of it or even the intention of the debtor in making it may be to defeat an expected execution of another creditor is into a fraud within the statute. Musahar Sahu v. Hakim Lal A.I.R. 1915 P.C. 115 citing with approval Re Morony (1915) 21 Ir R. 27 and itself cited and followed in Ma Pwa May v. S.R.M.M.A. Chettyar Firm A.I.R. 1929 P.C. 279. If the transfer be to an existing creditor to whom the transferor already owed money then even though the transferee had notice that the effect of the transfer would be to remove that property not only from the reach of the executing decree-holder's expected execution but also from the reach of other creditors the transfer would nevertheless be valid and not open to objection under Section 53 31 nee it is open to every creditor to try his best to realize his debt from the common debtor and ordinarily in the race between the creditors he who lags behind could not complain of him who proceeded fast and succeeded in getting at the property of the debtor : Moihideen v. Md. Mustappah : AIR1930Mad665 . It is needless to cite more authority for the proposition that the appellant's mortgage is not open to objection at all under Section 53, T.P. Act, even if Samu Pattar was 'not wholly ignorant' that he was being preferred.

11. But is the mortgage liable to question under Section 53, Provincial Insolvency Act, as an act of bad faith for that reason? The learned Judge's reliance on Butcher v. Stead (1876) 7 H.L. 839 was wrong because that was a decision on fraudulent preference, the precise question being whether a creditor who received payment within three months of the bankruptcy from a person unable to pay his debts could claim protection under the proviso to Section 92, Bankruptcy Act, 1869, (corresponding to Section 55, Provincial Insolvency Act), if he was unaware of the debtor's position and took the payment (in that case price of goods sold) in good faith. The answer was that he was entitled to protection and the judgments show that there was no such protection in the old law before the proviso accorded it for the first time. It was in connexion with the proviso that the passage quoted from Lord Hatherley occurs and it had nothing to do with the question before the learned Judge.

12. There is no doubt that under Section 53, Provincial Insolvency Act, a transfer for consideration must also be bona fide to be free from attack and it is for the Official Receiver to prove mala fides : Official Receiver v. P.L.K.M.B.M. Chettyar Firm . But is it mala fide for a creditor (except where his transfer occurs in three months before the petition and may become fraudulent under Section 54) to accept security for his debt merely because he may 'not be wholly ignorant' that the debtor is so embarrassed that there may not be enough left for all the creditors and that some of them may receive less than he has got in case the debtor becomes insolvent on a petition presented within two years after his mortgage? Such a doctrine would almost automatically enlarge the period of fraudulent preference from three months to two years. I am of opinion that no such inference can be drawn and that the learned Judge after holding that the mortgage is not a fraudulent preference fell into the confusion of applying considerations that are applicable only to transfers which are capable of being fraudulent preferences by their being within three months of the petition.

13. The respondent's advocate relied on Official Assignee, Madras v. Moideen Rowther A.I.R. 1927 Mad. 1013, for the proposition that the knowledge of a debtor's embarrassed Position may be an element from which bad faith may be inferred. The facts of that case however were entirely different. The transfer was of all the in solvent's property. The transfer was antedated and the transferee, a relation, knew all these facts. The observations must be understood as limited to those facts and have no general application. Here the debtors though embarrassed did not mortgage all their property to Samu Pattar. Though the Official Receiver alleged antedating of the mortgage both Courts have found against it. In fact there is nothing more to indicate any bad faith except that when the debtors were adjudged insolvents, their assets were found insufficient to pay all the creditors. In these circumstances, in Kunj Behari Lal v. Madhsodan Lal : AIR1919All348 a mortgage for existing debts was held good and it was held that there is no reason for imputing bad faith to a mortgagee who takes security for his debt merely because some two years or 18 months afterwards his debtor becomes insolvent: see also Mulla p. 415 and Williams on Bankruptcy, pp. 16 and 17. I am therefore of opinion that the learned Judge's view on this part of the case cannot be legally supported.

14. It becomes necessary to examine whether the mortgage is bad as a fraudulent preference. On this point also the burden of proof was upon the Official Receiver. In fact the only evidence tendered by the Official Receiver was, besides a few letters, not of much moment, the oral evidence of the cashier of the Calicut branch of the Imperial Bank, the petitioning creditor. Neither of the insolvents was called nor was Subbiah, the son of the junior partner of the firm whose name appears in the evidence, called. In these circumstances the judgment of the learned Subordinate Judge who alone considered to question of fraudulent preference seems to have mixed up the evidence in the other cases which were then pending before him with the evidence which alone could be admitted against the appellant. The learned advocate here for the Official Receiver has not urged that there was any consent by which the evidence in these cases was admissible in each other. There is no such consent on record nor in fact do the Judges refer to any. On the contrary what indication there is, is to the contrary. Thus on a point on which the, most important question is the intention of the insolvents in executing the mortgage challenged no one has been examined who had first hand knowledge. The mortgagee Samu Pattar was dead. None of his legal representatives (the respondents) was called and none of the insolvents or their relations or their gumastahs called.

15. In this state of the evidence it is no wonder that the Official Receiver's learned advocate has found his task difficult. But he relies upon the general circumstances of the insolvents' estate which are relied upon by the Subordinate Judge to show that at time of the mortgage, viz., 13th March 1924, the insolvents were undoubtedly unable to pay their debts and that must have been known to Samu Pattar. Assuming this to be a fact, it does not offer any explanation or answer to the indisputable fact found by the Subordinate Judge himself that the mortgage of 13th March 1924 was itself executed in pursuance of an undertaking or agreements between the creditor and the insolvent on or about 25th December 1923 which itself must have been the result of a previous pressure of the creditor. It is undoubtedly the law that if security is given to a creditor by a debtor in insolvent circumstances not as an act of preference but in pursuance of a previous contract to do so the security cannot be attacked on the ground of fraudulent preference. The facts relating to this part of the case are practically all of them found by the Subordinate Judge and appear from the face of the mortgage document itself. I have already alluded to the fact that both Courts find that the mortgage Ex. 8 is fully sup ported by consideration the bulk of it being a debt due to Samu Fattar himself who bad been financing the insolvent's firm, Rs. 1,700 or thereabouts being due to a nephew of Samu Pattar and about Rs. 700 paid in cash.

16. Now it is accepted by the Subordinate Judge and undisputed because it is indisputable that the mortgage Ex. 8 was first prepared on or about 25th December 1923 as for a sum of Rs. 30,000. 10 out of the 12 stamp papers on which it is now engrossed bear this out because they were purchased on 18th December by a Karistan in the employment of the insolvent's firm. In the body of the document the amount for which it was prepared is seen to have been Rs. 30,000 and it is seen that the additional amount of Rs. 1,000 being the interest on the Rs. 30,000 from December 1923 to March 1924 was afterwards added by an interlineation. Except the interlineation necessitated by this alteration of the total amount and the addition of two new stamp papers of the value of Sections 7-8-0 which became necessary by the addition of Rs. 1,000 to the total it is seen from an examination of the original document, Ex. 8, that the whole of it was prepared and engrossed on or about 25th December 1923. The Official Receiver does not appear to have been table to attack this as a fact and it is not attacked here as untrue. Though thus prepared in December 1923 its execution and registration was delayed till 13th March 1924. The only explanation for it in the case is that afforded by the appellants' witnesses. It is that Samu Pattar was himself ill at Palghat and that Nanjappa Chetti the senior partner of the insolvents' firm was ill at Olavakode their place of business and afterwards had to go to Coonoor for the benefit of his health. There being absolutely no ground to distrust this explanation, I have to accept it. What we then see is that on 13th March the document as prepared in December was altered as to the total figure and executed and registered on 2ith March.

17. It is seen from the recitals in Ex.8 that it was by no means such an advantageous transaction to Samu Pattar as to throw suspicion on its bona fides. Of the 38 properties included in the hypothecated items the first 30 had already been hypothecated first to one Lakshmaca Pattar for Sections 7,500 then in or about June ,1923 to Samu Pattar himself for Bs. 22,000 on account of a kuri in which, the insolvent's firm had taken the prize. Item 31 had been mortgaged for Rs. 8,250 to one Seshan Pattar for another kuri and items 32 to 36 were separately mortgaged for Rs. 4,500 for a third' kuri to Samu Pattar himself. The only unencumbered properties were 37 and' 38. All the rest were already encumbered to the extent of more than. Rs. 42,000. It is stated that the mortgage for Rs. 4,500 just above referred to was the subject matter of O.P. No. 14r of 1925. It is however dear that Ex. 8 was a subsequent mortgage subject to at least 3 prior mortgages. It had long ago been arranged, and was all but completed in December 1923 and the completion was put off on account of the ill-health of one or more of the parties. No better evidence is possible of an agreement between an unsecured creditor and a debtor to give security than; the facts stated above. Undoubtedly if the insolvents had after all that happened in December refused to complete the mortgage they could have been legally compelled to do so in a proper proceeding and any one who took further security of the same property with knowledge of all that had happened would be postponed to the appellant.

18. In these circumstances according to-well established authority no question of fraudulent preference can arise. In Ex parte Kevan, In re Crawford (1874) 9 Ch. 752, a debtor who on 5th November 1872 committed an act of bankruptcy and was adjudicated thereon on the 28bh and who owed 4,000 to his mother's estate being pressed by the executrix for payment promised to send 2,350 on account of the debt to the estate On 4th November, i.e., the day previous to the act of bankruptcy he sent bills for 4,000 of which 2,350 was appropriated towards the debt due to the mother's estate and the remainder to an account between the insolvent and the executrix. On these facts the Court of appeal held that there was no fraudulent preference because the remittance on 4th November was made in pursuance of a previous promise. This was followed in Ex parte Hodqkin In re, Softley (1875) 20 Eq 746 in which a bank to whom a shipbuilder owed money for advances made towards the building of a ship and to whom the ship-builder offered security which was refused, by the bank which said that they did not want any security at the moment but that circumstances might arise which would induce them to call upon him to perfect the offer which he made, did afterwards accept as security the ship, then in an unfinished condition, at a time when he was in insolvent circumstances and it was not doubted that the bank was aware of the fact. On this Sir James Bacon, C.J., said that the question was whether the former promise is one which according to the authorities will sustain the subsequent transaction:

The promise was plain. It is proved beyond all doubt that the offer was made, that it was not accepted at that time, but that it was intimated, 'whenever we call for it, you must perform the offer you have now made' and, upon the faith of that promise, the bankers go on making very large advances to the debtor to enable him to carry on his business up to the time when his failure took place.... If it were proved far more clearly than it is (I admit that a great deal towards it is proved) that they knew that the debtor was then in failing circumstances, still, on the authority of the cases which have been referred to, they were not precluded from insisting on the performance of that promise on which they had acted for several months since it was made.

19. In India the decisions in Nripendra Nath Sahu v. Ashutosh Ghose : AIR1915Cal460 and Nripendra Nath Sahu v. Ashutosh Ghose A.I.R. 1916 Cal. 975 are authorities for the same doctrine. In the former report the proposition under discussion was stated that the presumption of fraudulent intention would be repelled if it was apparent that the debtor acted in fulfilment of a prior agreement, and the case was remitted, In the latter report of the game case after remand proposition was further considered and it was held that a previous oral agreement to mortgage sufficient property would take a mortgage given later on out of the operation of Section 37 (corresponding to the present Section 54). In this state of the admitted facts and the legal result following therefrom it is unnecessary to further discuss the only evidence given by the Official Receiver, viz., the oral evidence of the cashier. But I may say that there is nothing in it which in any way affects the validity of what has already been said and all that it shows is that Satnu Pattar when he was first interviewed by the witness in or about January 1924 about the affairs of the insolvents' firm made no secret of the proposal to take a mortgage for his own debts. The witness acting on behalf of the bank seems not to have been disturbed at this at all as he took no further steps till the end of March. It is in evidence that the bank themselves discounted three bills of the insolvents' firm in or about January 1924 and Samu Pattar did likewise. It was really only at the end of March that the insolvents' failure was known as a fact to the bank and then this witness made another visit to Olavakode, Palghat and Mannarghat.

20. Samu Pattar seems to have informed him at that time that he was taking his mortgage of which he had previously informed the witness and that if the bank would not rush matters the insolvent's business might yet be saved the witness took some steps to see whether the bank could get security in the same way as the appellant had done but for some reason which does not appear as neither the insolvents nor their son. Subbiah has been called, it did not materialise. The bank seems to have had reason to think at one time that Samu Pattar might advance the insolvents' money enough to pay the bank but later on withdrew from that offer. The witness prepared during his tour a rough estimate of the assets and liabilities of the insolvents' firm (Ex. J) and when he asked the insolvents why they had given mortgages to other creditors one of them said that Samu Pattar and Unnikanu had been his great benefactors. This was after the mortgage had been executed and registered and there is nothing in that evidence which can furnish any reasonable answer to the aspect of the case to which I have referred. I therefore find that the appellants' mortgage Ex. 8 is not assailable on the ground of fraudulent preference under Section 54.

21. The result is that the decision of the lower Court must be set aside and O.P. No. 16 of 1925 must be dismissed. The appellant will have his costs in all the Courts out of the estate.