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PETITIONER: YENUMULA MALLU DORA

       Vs.

RESPONDENT: PERURI SEETHARATNAM AND OTHERS

DATE OF JUDGMENT: 14/10/1965

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. GAJENDRAGADKAR, P.B. (CJ) WANCHOO, K.N. RAMASWAMI, V.

CITATION:  1966 AIR  918            1966 SCR  (2) 209

ACT: Provincial   Insolvency   Act,   1920,   s.   6(e)-Act    of insolvency--when once committed whether purged by satisfying only  some of the creditors Therefore whether  available  to other  creditors for the purpose of an application under  s. 7-Section 25--Scope of.

HEADNOTE: On  the  application of two creditors (respondents  in  this appeal)  the  appellant  was  adjudged  a  bankrupt  by  the Subordinate  Judge,  Kakinada,  and a  receiving  order  was passed against him.  This adjudication was based on the  one act  of insolvency out of three alleged in  the  application which was accepted by the sub-judge, i.e., the sale of  some of  his properties in execution of a money decree.   Appeals against  the order to the District Judge, and later  to  the High Court, were dismissed. It was contended on behalf of the appellant that the alleged act  of insolvency was not established as he had  deposited, within  one month of the sale, the entire  decretal  amount, and the sale was set aside on a petition by him under  Order 21,  rule  89 of the Code of Civil Procedure;  that  in  any event  he  was entitled to have  the  application  dismissed under  s. 25 of the Provincial Insolvency Act,  1920,  which allows   a  creditor’s  application  to  be   dismissed   on sufficient cause. HELD:     The adjudication of the appellant as an  insolvent and the receiving order against him were properly made. [214 E] An  act of insolvency once committed cannot be explained  or purged by subsequent events.  The insolvent cannot claim  to wipe it off by paying some of his creditors; the same act of insolvency  is  available to all his creditors  and  is  not erased  unless  all  creditors are satisfied.   The  act  of insolvency  which the appellant had committed  had  remained and  was not purged by payment of the decretal amount  after the  sale in execution of the money decree; the  respondents could therefore rely on it even though one or more creditors might have been paid in full. 1212 F-H] (ii) Although  s. 25 of the Provincial Insolvency Act is  in

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wide terms, it cannot be given effect to so as to ignore  an act  of insolvency in cases such as the present  one,  where the debtor continues to be heavily indebted and there is  no proof that he is able to pay his debts. [213 A-B] Venkatakrishnayya  v.  Malakondayya, A.I.R. 1942  Mad.  306; Pratapmall  Rameshwar v. Chunnilal Jahuri, A.I.R. 1933  Cal. 417 and Lal Chand Changhuri v. Bogha Ram & Ors., A.I.R. 1938 Lah. 819, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 474 of 1964. Appeal  by special leave from the judgment and  order  dated March  14, 1963 of the Andhra Pradesh High Court  in  C.R.P. No. 1725 of 1959. 210 M. C. Setalvad, and T. V. R. Tatachari for the appellant. Kirpa Narain and T. Satyanarayana, for respondent Nos. 1 and 9. The Judgment of the Court was delivered by Hidayatullah  J.  On the application of  two  creditors  the appellant Yenumula Mallu Dora has been adjudged insolvent by the  Subordinate Judge, Kakinada and a receiving  order  has been passed against him.  The respondents before us are  one of  the petitioning creditors and the legal  representatives of  the  other petitioning creditor who  died  during  these proceedings.   The first petitioning creditor held a  decree for money which he had obtained in O.S. 67 of 1949.  He also held  another money decree in O.S. 473 of 1948.  The  second petitioning creditor held a decree which she had obtained in O.S. 17 of 1955.  The application was based upon three  acts of  insolvency  which  the  appellant  was  stated  to  have committed  and on the general facts that he was indebted  to the tune of Rs. two lakhs, and was unable to pay his  debts. The  three acts of insolvency alleged against him  were  (a) evasion  of arrest in execution of the money decree in  O.S. 67 of 1949; (b) sale of some of his properties on  September 26, 1956 in execution arising from O.S. 73 of 1952; and  (c) sale  of  some of his properties on September  19,  1956  in execution  of money decree in O.S. 9 of 1950.  It  was  also alleged that he was fraudulently transferring properties  in the  name of his wife and brother-in-law and had suffered  a collusive  charge decree for maintenance ’in favour  of  his wife, to delay and defeat his creditors. The Subordinate Judge, Kakinada did not accept the first two acts  of  insolvency.   The evidence  regarding  evasion  of arrest  was  not  found convincing and  the  second  act  of insolvency was rejected because the sale of the property was in execution of a mortgage decree.  In respect of the  third art  of  insolvency  the  Subordinate  Judge  held  that  it satisfied  S. 6(e) of the Provincial Insolvency Act  and  an adjudication  and  a receiving order were justified  in  the case.   An  appeal  was  taken  to  the  District  Court  at Rajahmundry (C.A. 41 of 1958) which was dismissed on October 15,  1959.  A Revision Application filed under S. 75 of  the Provincial Insolvency Act was dismissed by the High Court of Andhra  Pradesh on March 14, 1963.  The appellant,  however, obtained  special  leave  of this Court and  has  filed  the present appeal against the order of the High Court. The contention of the appellant was, and still is, that  the third  act  of  insolvency was not  established  as  he  had deposited, within                             211 one  month of the sale, the entire decretal amount  together

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with  poundage and commission and the sale was set aside  on his  petition  under  Or.  21 r. 89 of  the  Code  of  Civil Procedure.   He  contended, therefore, that as none  of  the acts of insolvency remained, the petition ought to have been dismissed  as  incompetent or he was. entitled to  have  the petition  dismissed  in  any  event,  under  s.  25  of  the Provincial Insolvency Act which allows a creditor’s petition to  be dismissed on sufficient cause.  He submitted that  as the sale was set aside before the order of adjudication  was made  the preexisted sufficient cause for the  dismissal  of the creditors’ petition.  The Subordinate Judge relying upon Venkatakrishnayya v. Malakondayya(1) and on decisions of the Lahore and the Calcutta High Courts rejected the  submission and  made  the order against the  appellant.   The  District Judge,  Rajahmundry  agreed  with  the,  conclusion  of  the Subordinate Judge and the High Court rejected’ the  petition for  revision.   In this appeal the same points  are  urged’ again  for our acceptance.  In our judgment the view of  the law taken in this case by the Subordinate Judge and approved by  the,  District Court is right and does not  warrant  any interference. The object of the law of insolvency is to seize the property of’ an insolvent before he can squander it and to distribute it amongst his creditors.  It is, however, not every debtor, who  has  borrowed’  beyond his assets  or  even  one  whose property  is attached in execution of his debts, who can  be subjected  to such control.  The jurisdiction of  the  court commences  when certain acts take place which are  known  as acts of insolvency and which give a right to, his  creditors to apply to the Court for his adjudication as an  insolvent. The  Provincial Insolvency Act lays down in s. 6 what  acts. are  to  be regarded as acts of insolvency.  It  is  a  long list.   Some  are voluntary acts of the insolvent  and  some others, are involuntary.. The involuntary acts are of a kind by which a creditor is able to, compel a debtor to  disclose his  insolvent  condition even if the insolvent  is  careful enough  not  to commit a voluntary act of  insolvency.   One such  act  is  that the insolvent  has  been  imprisoned  in execution of a decree of any court for payment of money, and another  is  that  any  of his property  has  been  sold  in execution of a decree of any court for payment of money.  In this  case  the  property  of  the  appellant  was  sold  on September  19, 1956 in execution of a money  decree  against him and therefore there is no question that he was guilty of an act of insolvency described in s. 6(e); of the Provincial Insolvency Act. (1) A.I.R, 1942 Mad, 306, 212 Under S. 7, a creditor is entitled to present a petition  in the Insolvency Court against a debtor if he has committed an act of insolvency provided [as laid down in S. 9(i) (c)] the petition  is  made  within  three  months  of  the  act   of insolvency on which the petition is grounded.  In this  case both these conditions are fulfilled.  There is thus no doubt that  the  petitioning  creditors’ application  under  S.  7 complied with S. 6 (e) and S. 9 ( 1 ) (c) of the  Provincial Insolvency Act.  The petitioning creditors alleged that  the appellant  was indebted to the extent of Rs. two  lakhs  and this  was not denied by the appellant.  In the trial of  one of  the execution petitions filed against him by  a  decree- holder  the appellant admitted that he had "no means to  pay the  decree debt" because "all his properties"  were  "under attachment and were being brought to sale".  He also  stated that he was not "in a position to discharge the debts".   It is, therefore, clear that the appellant who was in more than

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embarrassed  pecuniary circumstances was unable to  pay  his debts.   It  was  also clear from the  evidence,  which  the District  Court and the Subordinate Judge have  concurrently accepted,  that  he had made some transfers  to  screen  his properties from his creditors and had suffered a decree  for maintenance in a suit by his wife.  In view of these  facts, which the appellant cannot now deny, he is driven to support his case by argument on law.  The argument, as we have seen, is  two-fold.  We, are not inclined to accept either leg  of the argument. An act of insolvency once, committed cannot be explained  or purged by subsequent events.  The insolvent cannot claim  to wipe  it  off  by paying some of  his  creditors.   This  is because  the same act of insolvency is available to all  his creditors.   By satisfying one of the creditors the  act  of insolvency is not erased unless all creditors are  satisfied because  till all creditors are paid the debtor  must  prove his  ability  to  meet his liabilities.  In  this  case  the petitioning creditors had their own decrees.  It was in  the decree  of  another creditor that the payment was  made  but only after the act of insolvency was committed.  Besides the petitioning creditors there were several other creditors  to whom  the  appellant owed large sum of money and  his  total debts aggregated to Rs. two lakhs.  It is plain that any  of the   remaining   creditors,   including   the   petitioning creditors, could rely upon the act of insolvency even though one or more creditors might have been paid in full.  The act of  insolvency  which  the  appellant  had  committed   thus remained  and was not purged by payment of  decretal  amount after the sale in execution of the money decree. 21 3 The  next question is whether the Subordinate  Judge  should have  exercised his discretion under s. 25, to  dismiss  the petition of the creditors treating the deposit of the  money as   sufficient  cause.   Section  25  of   the   Provincial Insolvency  Act  is, in wide terms but it is  impossible  to give  effect  to  those  wide  terms  so  as  to  confer   a jurisdiction  to  ignore an act of insolvency  at  least  in cases where the debtor continues to be heavily indebted and there is  no  proof  that  he  is  able  to  pay  As  debts. The section reads as     follows               "25.  Dismissal of petition.               (1)  In the case of a petition presented by  a               creditor,  where  the Court is  not  satisfied               with  the  proof of his right to  present  the               petition  or of the service on the  debtor  of               notice of the order admitting the petition, or               of  the  alleged  act  of  insolvency,  or  is               satisfied by the debtor that he is able to pay               his  debts, or that for any  other  sufficient               cause  no  order ought to be made,  the  Court               shall dismiss the petition,               (2)...................................." The section expressly mentions three circumstances in  which the  petition made by a creditor must be dismissed,  namely, (i)  the  absence of the right of the creditor to  make  the application (ii) failure to serve the debtor with the notice of  the admission of the petition; and (iii) the ability  of the  debtor  to pay his debts.  In addition, the  Court  has been  given  a discretion to dismiss the petition if  it  is satisfied  that  there  is other sufficient  cause  for  not making the order against the debtor.  The last clause of the section need not necessarily be read ejusdm generis with the previous  ones but even so there can be no sufficient  cause if, after an act of insolvency is established, the debtor is

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unable  to  pay his debts.  The discretion  to  dismiss  the petition   can  only  be  exercised  under  very   different circumstances.   What  those cases would be, it  is  neither easy  nor necessary to specify, but examples  of  sufficient cause are to be found when the petition is malicious and has been made for some collateral or inequitable purpose such as putting pressure upon the debtor or for extorting money from him, or where the petitioning creditor having refused tender of   money,   fraudulently   and   maliciously   files   the application.   An  order is sometimes not made when  by  the receiving  order  the  only asset of  the  debtor  would  be destroyed  such as a life interest which would cease on  his bankruptcy.  Cases have also occurred 214 where  a receiving order was not made because there were  no assets  and it would have been a waste of time and money  to make  a receiving order against the debtor.  These  examples merely illustrate the grounds on which orders are  generally made in the exercise of the discretion conferred by the last clause  of s. 25.  This case is clearly one which cannot  be treated  under  that clause.  There are huge  debts  and  no means  to  pay even though there are  properties  which,  if realised, may satisfy at least in part the creditors of  the appellant.   The appellant was clearly guilty of an  act  of insolvency  and  an act of insolvency cannot  be  purged  by anything  he may have done subsequently.  There is no  proof of  malicious  or  inequitable dealing on the  part  of  the petitioning creditors.  They have proved the necessary facts and  have  established both the act of  insolvency  and  the inability of the appellant to pay his debts.  The  appellant has not been able to prove that he is able to pay.  In fact, he has admitted that he is unable to pay his debts. The  High  Courts have taken a similar and uniform  view  of such  cases.   These  rulings are  quite  numerous  but  the following  may  be seen: Pratapmall Rameshwar  v.  Chunnilal Jahuri,(1)  Lal Chand Chaughuri v. Bogha Ram  and  others(2) and   Venkatakrishnayya  v.  Malakondayya(3).   We  do   not consider  it necessary to examine the facts in  those  cases because  they apply correctly the principles, which we  have set  out above to the facts in the cases then  present.   It is,  therefore,  quite clear that the  adjudication  of  the appellant and the receiving order against him were  properly made.   In  the result the appeal fails  and  is  dismissed. There will be no order as to costs. Appeal dismissed. (1) A.I.R. (1933) Cal. 417. (2) A.I.R. (1938) Lah. 819, (3)  A.I.R.(1942) Mad. 306. 215