K.P. Ramaswami Naick Vs. Lakshmana Kudumban and anr. - Court Judgment

Venkataramana Rao, J.

1. These two connected second appeals arise out of two suits, O.S. Nos. 237 and 274 of 1928, on the file of the District Munsif 's Court of Koilpatti for a declaration that the properties which they purchased in Court auction in execution of a decree in S.C.S. No. 939 of 1926 on the file of the District Munsif's Court at Koilpatti against the 2nd defendant belong to the 2nd defendant.

2. The case for the plaintiffs is that one Alagirisami Naick, P.W. 3, instituted S.C.S. No. 939 of 1926 on the file of the District Munsif's Court of Koilpatti and obtained a decree on 28th January 1927 against defendant 2, obtained an attachment of his properties on 12th March 1927, and the properties were brought to sale in execution of the decree obtained therein; and on 17th November 1927 the plaintiff in O.S. No. 237 of 1928 purchased seven items and the plaintiff in O.S. 274 of 1928 purchased two items on 4th January 1928 and when the plaintiffs applied for delivery of possession they were obstructed by defendant 1 on the ground that the said properties had been conveyed to his father by a sale deed Ex. 1 dated 3rd January 1927. The plaintiffs filed a petition for removal of the obstruction on 30th January 1928 and the said petitions were dismissed and hence the present suits were instituted for setting aside the order passed and for a declaration that the sale in favour of defendant l's father was a benami transaction brought about to defraud creditors of defendant 2. The case for the defendants is that defendant l's father purchased these properties for valuable consideration, the consideration being discharge of a prior mortgage in favour of one Rama Naick covered by Ex, 2 and another mortgage for Rs. 1,150 covered by Ex. 3 executed by defendant 2 in favour of defendant 1's father and cash Rs. 150. Further, the plaintiffs being auction, purchasers would have no locus standi to maintain the suit.

3. The District Munsif who tried the suits found that at the time when Ex, 1 was executed in favour of defendant l's father, defendant 2 was heavily indebted and there was already an attachment before judgment of the said properties obtained by another creditor, that the consideration recited in Ex. 1, namely mortgage in favour of defendant 1 and the pro-note debt alleged to have been discharged was all fictitious and the whole transaction was a nominal transaction brought about with a view to remove the property from the creditors for the benefit of defendant 2 and decreed the plaintiff's claim. On appeal the learned Subordinate Judge was of opinion that Ex. 1 was supported by consideration to the extent of Rs. 850, namely, Es. 700 paid in respect of the mortgage in favour of the Rama Naick, Ex. 2, and another sum of Rs. 150 being cash paid; but the balance of the consideration covered by Ex. 3 was a fictitous item and that Ex. 3 was not a real transaction but that the property was intended to be conveyed to defendant 1 though the sale must be deemed to have been executed by defendant 2 for the purpose of defeating or defrauding creditors. Nevertheless he held that the plaintiffs being only auction-purchasers who purchased the suit properties more than seven months after Ex. 1 and therefore subsequent transferees are not entitled to impeach the transaction under Section 53, T, P. Act, and therefore dismissed the plaintiff's suits.

4. It was found on the evidence on record that the decree-holder Alagirisami Naick in execution of whose decree the plaintiffs purchased the properties, before he proceeded to attach the properties repudiated Ex. 1 as a fraudulent transaction. Not only did he attach the properties as the properties of defendant 2, but he openly declared in an affidavit filed in O. P. No. 23 of 1927 on the file of the District Munsif's Court of Koilpatti when defendant 1 deposited the amount of the mortgage in favour of Rama Naick under Section 83, T.P. Act, to the effect that defendant 1 had no right to deposit the decree amount, and that the sale in favour of defendant l's father was a fraudulent transaction brought about with a view to defraud the creditors. The decree-holder Alagirisami Naick was impleaded as a party to that O. P. No. 23 of 1927 on the ground that he was the assignee of Rama Naick's interest under Ex. 2. Thus before the properties were brought to sale, Alagirisami Naick by an open and unambiguous declaration of intention, repudiated Ex. 1. The Full Bench decision of the Madras High Court in Ramasami Chettiar v. Mallappa Reddiar 1920 43 Mad 760, has laid down that it is not necessary for a creditor to bring a suit to avoid a transaction by a debtor in fraud of creditors, but he can do so by an unequivocal declaration or by an unequivocal conduct disclosing that he knew of the transaction and treated it as avoided by him. The effect of that avoidance in law is that so far as the creditor is concerned, it must be treated as null and void and becomes a void transaction and the creditor becomes entitled to take steps on that footing to enforce his rights for obtaining satisfaction of his debts. As Stirling, J., observed in In re Kingston Cotton Mills Co. v. Mouat (1899) 1 Ch. 831, :

the assignments became void the moment the creditors claimed to treat them as such and thereupon the property which was comprised in those assignments ceased, as against the creditors, to be the property of the assignee, and became assets for the payment of the creditors in such a way that they had a legal right to be paid out of those assets.

5. Thus by virtue of the avoidance, the -plaintiffs as auction-purchasers, obtained a, valid title by their purchase at the Court sale. Mr. Sankara Iyer relied upon the ruling in Vasudeo Raghunath v. Janardhan Sadashiv 1915 39 Bom 507, in support of his contention that though Alagirisami Naick, the decree-holder, might have avoided it, he, not having taken steps to do so, the auction-purchaser had no locus standi. No doubt Vasudeo Raghunath v. Janardhan Sadashiv 1915 39 Bom 507, in a way supports his contention. Shah, J., referring to the auction-purchaser who was the defendant in that case observes:

It is quite clear that the defendant is not a creditor and that he does not seek to avoid the document for the benefit of any creditors. But the defendant is an auction-purchaser at a Court sale, and not a transferee by any act of the original owner. A person who steps in by operation of law and not by any act of the owner is not a subsequent transferee. He is clearly not a person having an interest in the property within the meaning of the section, which apparently refers to interest, which exists in fact at the time of the transfer objected to. It is clear therefore that the deed is not voidable at the option of the defendant.

6. The judgment proceeds on the basis that the transaction in fraud of creditors can only be avoided by a suit. If it is law that a suit is not necessary and that by an open declaration or unequivocal conduct as aforesaid a creditor can avoid the transaction and thereupon the transaction becomes avoided and void from the beginning there is no necessity for the auction-purchaser to avoid the transaction again though he may be a subsequent transferee as stated in Vasudeo Raghunath v. Janardhan Sadashiv 1915 39 Bom 507. The transaction having been avoided and the property in the language of Stirling, J., was the asset of the judgment-debtor available for satisfaction of the decree-holder's debts, the auction-purchaser gets a clear title and his suit is based upon that title. The only question in that suit is, whether the transaction has been avoided as being in fraud of creditors, and if that is found, the auction-purchaser's right for a declaration cannot be questioned. The decision in Vasudeo Raghunath v. Janardhan Sadashiv 1915 39 Bom 507, has been rightly dissented from by Sadasiva Aiyar, J., in Sami Asari v. Azhagiya Pillai 1921 12 MLW 718, wherein he observes:

If, however, Vasudeo Raghunath v. Janardhan Sadashiv 1915 39 Bom 507 intended to hold that, notwithstanding that a suit to set aside the sale by a creditor was unnecessary, and the creditor could set it aside by an unequivocal expression of intention, the auction purchaser could not take advantage of the act of the decree-holder, I must with great respect say that the decision is, in my opinion, erroneous because the protection given to the creditor and the privilege given to him to recover his debt by bringing the property to Court auction sale, notwithstanding the prior fraudulent purchase by another could be made of no effect and become a purely illusory right, if the Court auction-purchaser is not to get a clear title overriding the fraudulent purchase. The very object of allowing the creditor or decree-holder to take advantage of his avoidance of a fraudulent transaction is to give the auction-purchaser in the sale brought about by the creditor a clear title.

7. It may be noticed that an earlier decision of the Bombay High Court in Hormusji v. Cowasji (1889)13 Bom 297, took the view that it would be open to an auction-purchaser to plead that a transaction by a creditor was in fraud of creditors and should not prevail over the purchase by him in the Court sale. In that case the defendant Cowasji was an auction-purchaser at a Court sale held on 26th and 27th June 1879 in execution of a decree obtained by one Bhikaji against one Ardesir Edulji. The property was gifted away by Edulji to his sons and wife, the plaintiffs in that case, by a deed of gift dated 19th June 1875. On the strength of that sale the plaintiffs sought to recover possession of the properties from 'the defendant Cowasji. The defendant pleaded that the deed of gift was avoided against the creditors and therefore could not be said to invalidate his title under the auction sale and it was held that the defence was good. Sargent, C.J., observes:

There can, therefore, be no doubt upon the above authorities, of which it is only necessary to refer to the decisions of Lord Westbury in Spirett v. Willows (1865) 34 LJ Ch 365 and of Lord Justice Gifford in Freeman v. Pope (1870) 5 Ch 538 that the gift to the plaintiffs was void at least as against all existing creditors at the time, of whom Bhikaji was one. The plaintiffs cannot therefore now be allowed to set up their deed of gift as against the proceedings in execution by Bhikaji under which the defendant Cowasji acquired his title to 5/7ths of the property as purchaser at the auction sale.

18. Thus on avoidance the transaction becomes void, and must be treated as non-existent between the creditor and the alienee the title still continuing in the judgment-debtor, and the property vests in the auction-purchaser. The plaintiffs therefore are entitled to the declaration prayed for in the plaint. Defendant 1 is however entitled to be paid the amount that went in discharge of the mortgage under Ex. 2 and he is therefore entitled to draw the amount in deposit in O. P. No. 23/27 on the file of the District Munsif's Court at Koilpatti.

19. I must therefore reverse the decrees of the Subordinate Judge with this modification and restore the decrees of the District Munsif with costs throughout. Leave refused.