1. I propose not to follow a judgment of a learned single Judge of this Court, not because I disagree with what it lays down -- which, with respect, I do --but because it does not follow at least one earlier judgment of this Court, which as I read it, is a binding precedent.
2. The petition is presented for an order of adjudication against the debtor pursuant to non-compliance with an insolvency notice. The act of insolvency was committed on 15th September 1976. When the petition reached hearing before my brother Kania J., Mr. Jain, learned Counsel for the petitioner, stated that consent terms had been arrived at between the petitioner and the debtor and he applied for leave to withdraw the petition. Mr. Jain stated that the consent terms had been arrived at without any pressure or coercion, being exercised upon the debtor Miss Michhanilearned Counsel for another creditor, Govind Bajaj, thereupon applied for leave to be substituted in place of the Petitioner Mr. Jain and Mr. Wadhwa, learned Advocate for the debtor, relied upon an unreported judgment of Mridul J. D/- 7-12-1976 in the case of Fulchand Chokhmal v. Sirajuddia Yusuf Surmawalla (in Insolvency Petn. No. 102 of 1975) (Bom) and contended that where a settlement had been arrived at between a petitioner and a debtor, the petitioner was entitled to leave to withdraw his petition and no order of substitution could be made, Kania J. after considering the arguments and the authorities cited, felt some hesitation in following the judgment of Mridul J. for the reasons which he briefly set out in his order and concluded that the matter could more advantageously be decided by a larger bench. The matter comes back to be decided by me pursuant to administrative directions.
3. Under the consent terms dated 3rd August 1977 the debtor has agreed to pay to the petitioner on or before 15th July 1978 the sum of Rs. 22,500/- and interest at the rate of 6 p. c p. a. and has agreed not to release exhibit, distribute or exploit a motion picture being produced and directed by him till the said sum of Rs. 22,500/- and interest has been paid in full.
4. The creditor seeking substitution has a claim of Rs. 5,850/- based upon a hundi executed by the debtor. The debtor denied his liability to pay the said sum of Rs. 5,850/-but it is agreed that such denial cannot be the basis for refusing substitution; that question could be decided in the petition.
5. Mr. Jain has urged the following contentions before me:--
(a) That if the Court is fairly told of the settlement between a petitioner and a debtor and there is no question of any extortion or pressure having been used to arrive at the settlement, the petitioner is entitled to leave to withdraw the petition under the provisions of Section 13(8) of the Presidency Towns Insolvency Act, 1909 (hereinafter referred to as 'the Act.').
(b) That the provisions of Sections 18(8) and 92 of the Act are independent of each other.
(c) That the prerequisite to the attraction of Section 92 of the Act is the conclusion by the Court that the petitioner is guilty of lack of due diligence in the prosecution of his petition.
(d) That where the petitioner settles with the debtor there is no lack of due diligence In the prosecution of the petition and the provisions of Section 92 are not attracted.
6. His aforesaid contentions, Mr. Jain submits, and correctly, are supported on all fours by the aforesaid judgment of Mridul J.
7. To appreciate the arguments, it is necessary to appreciate the relevant provisions of the Act. Section 10 :--
'Subject to the conditions specified in this Act if a debtor commits an act of insolvency an insolvency-petition may be presented either by a creditor or by the debtor, and the Court may on such petition make an order (hereinafter called an order of adjudication) adjudging him an insolvent.
Explanation: The presentation of a petition by the debtor shall be deemed an act of insolvency within the meaning of this section, and on such petition the Court may make an order of adjudication.'
Section 13(8): 'A creditor's petition shall not after presentation, be withdrawn without the leave of the Court.'
Section 92: 'Where the petitioner does not proceed with the due diligence on the petition the Court may substitute as petitioner any other creditor to whom the debtor is indebted in the amount required by this Act in the case of a petitioning creditor'.
8. The provisions of Section 14 of the Provincial Insolvency Act, 1920, are identical to those of Section 13(8) of the Act; the provisions of Section 16 of the Provincial Act are identical to those of Section 92 of the Act. The provisions of Section 5 (7) of the English Bankruptcy Act, 1914, are identical to those of Section 13(8) of the Act; the provisions of Section 111 of the Bankruptcy Act are identical to those of Section 92 of the said Act.
9. In the judgment in the case of Jivraj Gordhandas v. Gaganmal : AIR1953Bom430 a Division Bench of this Court applied the provisions of Section 92 of the Act. In that case a petition was presented for adjudicating the appellants insolvents on 3rd December 1951. On 1st April 1952 the petition came up for hearing before Coyajee J. The advocate for the petitioners informed the Court that he had no evidence to lead and the petition was dismissed. On 11th October 1952 the respondents applied to the then Insolvency Judge, Desai J., to set aside the order of dismissal and to substitute them in place of the petitioner. The respondents showed on affidavit that in March 1952, while the petition was still pending, the petitioners and the debtors had settled the claim, that a false statement was made to Coyajee, J. to induce him to pass an order of dismissal and that on the clay after the order of dismissal was made, the debtors had paid tothe petitioners the amount settled between them. Desai J. rescinded the order of dismissal passed on 1st April 1952 and, under Section 92 of the Act, substituted the respondents as petitioners. Against this order, the appellants went in appeal. The Division Bench of Chagla C. J. and Shah J. held that the Insolvency Judge had jurisdiction under Section 7(1) of the Act to set aside the order of dismissal and 'having set aside that order, he was competent to substitute the respondents in place of the petitioners'. There are two passages in that judgment that should be set out (at pp. 432-33);--
'There cannot be the slightest doubt that if the facts which are now put on affidavit were present to the mind of Mr. Justice Coyajee, he would never have dismissed the petition. He would at least have directed the petitioning creditors to give notice of the fact that the petition was going to be put on board for dismissal. That would have given an opportunity to the other creditors, if they were so minded, to come forward and apply to lead evidence to adjudicate the debtors insolvents'.
'We would like to suggest to the judges doing insolvency work that they might adopt a rule of practice whereby, if a petitioning creditor does not want to prosecute his petition or when he wants the petition to be dismissed for want of evidence, before an order of dismissal is made the petitioning creditors should be directed to advertise the fact that they want to apply to the Court for substitution.'
Once the order of dismissal was set aside and the petition was restored to file, the facts before the Courts in that case were identical to the facts before me, in the sense that the petitioner had settled with the debtor and there was another creditor seeking substitution. The Division Bench upheld the application of Section 92 of the Act to those facts and the substitution of the creditor as petitioner.
10. The Division Bench judgment, as I read it, constitutes a precedent binding upon a single judge of this Court. The last paragraph of the judgment, though couched as a suggestion in the Chief Justice's courteous language, is nonetheless binding on Insolvency Judges for it is the corollary to the conclusions set down in the preceding paragraphs. As I see it, I am bound to follow this precedent in preference to the single judge's judgment delivered by Mridul J. I may mention that Mridul J. has not considered the Division Bench a binding precedent; I respectfully disagree.
11. Mr. Jain contended that the Division Bench was not alive to the prerequisite of Section 92 of the Act and it was not contended before the Division Bench that lack of due diligence in the prosecution of the petition was an essential pre-condition to the application of Section 92 of the Act. I would rather attribute to the court full knowledge and appreciation of the requirement of the section which it applied. There is certainly nothing in the judgment to show the contrary. That the argument now advanced by Mr. Jain upon 'lack of due diligence' was not addressed to the Division Bench, cannot mean that the Division Bench judgment is not binding upon me.
12. Mr. Jain then contended that the Division Bench upheld the substitution only because the petitioners had played a fraud upon the court by not informing Coyajee J. that the matter had been settled. I do not see it that way; as I read the judgment, it is clear that the Division Bench upheld the substitution as petitioner of a creditor because the debtor and the original petitioner had settled the claim. In fact, the Division Bench has stated that had Coyajee J. been informed of the true facts, he would not have passed an order of dismissal but would have had the matter shown on board for dismissal to give an opportunity to other creditors to come forward to be substituted.
13. Mr. Jain also contended that the settlement in the matter before the Division Bench was materially different from the settlement arrived at between his client and the debtor. This I am unable to see. In the matter before the Division Bench the settlement contemplated the payment of money by the debtors to the petitioners after the order of dismissal was made; in the matter before me the settlement contemplates payment of moneys some months after the date of the consent terms. This does not materially alter the position. The point to be noticed is that by entering into a compromise with the debtors, in both cases, the petitioners rendered themselves ineligible to continue to prosecute the petition and made other creditors eligible for substitution. In my view, therefore, the Division Bench judgment applies on all fours to the case before me, and is binding upon me.
14. The next judgment to which I would make reference is that of Rajadhyakasha, J. sitting as a single Judge in the case of Keshav Appa Bhagat v. Sitaram Hanumandas, 47 BomLR 441 : (AIR 1946 Bom 20. The learned Judge was considering the effect of Sections 14 and 16 of the Provincial Act. Heheld that if a petition was dismissed for default of the petitioner, it could be revived under the court's inherent jurisdiction under Section 151 of the Code of Civil Procedure, 1908, on the application of another creditor for substitution under Section 16 of the Provincial Act. The learned Judge approved the observations of the Madras High Court in the case of Venkata Hanumantha Rao v. Gangayya, ILR Mad 594 : AIR 1928 Mad 608 which read as follows:--
'The object of the section is to prevent other creditors from being injured by the action of one creditor, who, by reason of collusion or otherwise, may not diligently prosecute the petition.' Rajadhyaksha J. also observed;--
'Under Section 14 of the Act, no petition whether presented by a debtor or by a creditor shall be withdrawn without the leave of the court. As pointed out in the commentary on that section by Rameshwar Dayal in his book on the Provincial Insolvency Act, 'The petition once presented, the petitioner is no longer in unfettered control of it. The insolvency proceedings are for the administration of the estate of the debtor for the benefit of not any particular creditor but for the general body of creditors. Very often petitions are made not with the bona fide intention of getting the debtor's estate administered under the Insolvency laws but for the collateral purpose of bringing pressure to bear upon the debtor. It is to check this abuse of the process of the Court that the section has been enacted'. Similarly, Section 16 makes a special provision which enables another creditor to be substituted when the original petitioner does not proceed with due diligence on his petition. The object is to serve as a check on the fraud of either the debtor or the creditor who has presented the application for insolvency. It is not difficult to imagine the case of a creditor who has presented the application for insolvency, against the debtor, having entered into a private treaty with his debtor, not prosecuting his application with diligence and allowing it to be struck off for default. The creditor presenting the petition is regarded as prosecuting the petition not only for his own benefit but also for the benefit of the creditors generally. It would be an easy way of circumventing the statutory provision contained in Section 14 of the Act, if the petitioning Creditor was allowed to let the application be dismissed for default when he would not be allowed to withdraw it without the permission of the Court. In cases such as these, I think, it is desirable that the Courtbefore making an order of dismissal should wait for some time specially as Section 16 provides a special procedure which enables any creditor to have his name brought on record as a petitioner if the original petitioner does not proceed with due diligence on his petition'. This judgment establishes the nexus between Section 14 of the Provincial Act (Section 13(8) of the Act) and Section 16 of the Provincial Act (Section 92 of the Act). It lays down that when the petitioner seeks leave to withdraw his petition, substitution of another creditor is permissible. It also lays down that when an application for leave to withdraw a petition is made, the court should wait to see whether any other creditor desires to have his name brought on record as petitioner. This judgment, being that of a court of coordinate jurisdiction is also binding upon me. I may mention that this was not the view taken by Mridul J.
15. In regard to this judgment Mr. Jain raised before me the same contention that he raised in regard to the Division Bench judgment namely that the Court was not made alive to the requirement of Section 16 of the Provincial Act. I see no reason to attribute to a learned Judge of this court any less aware ness of what the law is than I would to a Division Bench of this Court. I would rather assume that Rajadhyaksha J. knew what the requirements of Section 16 of the Provincial Act were and, being aware of those requirements, he upheld the making of an order of substitution.
16. Miss Michhani has drawn my attention to the judgment of the Division Bench of the High Court of Travancore and Cochin in the case of Pushkaran v. Ramkrishnan, AIR 1955 Tra-Co 49, in which the Court quoted with approval a portion of the aforesaid judgment of Rajadhyaksha J. The Court also stated as under:--
'Again as observed in Sagarmal Hanoman Prasad v. Abdul Rahaman AIR 1938 Oudh 101 where a petitioning creditor, who is a representative of the whole body of creditors, comes to an arrangement with the debtor and seeks not to prosecute his application any further, his action amounts to a failure to proceed with due diligence in the highest degree and Section 10 which permits substitution has to be invoked.'
17. Thus, the failure to prosecute a petition consequent upon a settlement with the debtor has been considered by Indian Courts, in my view rightly, a failure to proceed with the petition with due diligence.
18. In Halsbury's Laws of England, 4th Edition, Volume III, p. 208 Article 347 Note II,it is stated 'where the petitioning creditor has been paid but other creditors have appeared, a receiving order should not be made until a new petitioner has been substituted'. In Williams on Bankruptcy, 18th Edition, p. 76, it is stated that where the petitioning creditor has been paid and applies for leave to withdraw his petition leave cannot be refused unless there is another creditor willing and duly qualified to be substituted.
19. Reference must also be made to the Judgment of a Division Bench of the English Court of Chancery in the case of in re Mann (a debtor), (1958) 3 All ER 660. In that case, a creditor presented a petition in bankruptcy in respect of debt which was paid by a third party before the hearing. When the petition came up for hearing, the creditor applied for leave to withdraw the petition. The Registrar refused leave and adjourned the petition for evidence to be brought that there was no other creditor. At the adjourned hearing other creditors attended but the petition was further adjourned because it was indicated that it might be possible to pay all creditors in full. Thereafter, without substituting another creditor in place of the original petitioner, who had been paid off, the Registrar made a receiving order. In appeal, the Court observed that the right procedure would have been to exercise the jurisdiction given under Section 111 of the Bankruptcy Act and substitute another creditor as the petitioner if any wished to be substituted. This judgment establishes that upon identical provisions under the Bankruptcy Act, the view has been taken in England that after being informed of a settlement between the petitioner and the debtor the Court must ascertain whether there are other creditors willing to be substituted and, if they are, to make any order of substitution.
20. It is now incumbent upon me to consider the submissions, made by Mr. Jain, which have been encapsulated above. The first submission is that leave must be granted to a petitioner to withdraw the petition under Section 13(8) of the Act if the Court is fairly told of the settlement between the petitioner and the debtor and there is no reason to suspect extortion or pressure. The Division Bench Judgment 55 BomLR 562 : AIR 1953 Bom 480 and Rajadhyaksha J's judgment 47 BomLR 441 : AIR 1946 Bom 20 provide, I think, the answer to this contention. It has also been controverted by the Madras, Travancore-Cochin and Oudh judgments referred to above. It is also contrary to the view taken by English Courts.
21. Mr. Jain has very strongly relied upon the judgment of the English Court of Appeal in Re: Bebro (1900) 2 Q. B. 316. What the Court was there concerned with was this : A petitioner and a debtor arrived at a settlement wherein the debtor agreed to pay to the petitioner a fresh debt of an increased amount. Upon this settlement being arrived at, the petitioner consented to the petition's dismissal. The debtor failed to pay the fresh debt of the increased amount and the petitioner presented a second petition. It was contended that he could not and that it amounted to an abuse of the process of the court. The Court of Appeal rejected this contention. The Court stated that no petition should be allowed to be withdrawn without the leave of the court and that such leave should be given only after an exercise of judgment as to whether the case was a proper one for withdrawal. The Court opined that it would be wrong to hold that an honest debtor should not be allowed to rehabilitate himself in trade by coming to an arrangement with his creditor if there was no extortion on the part of the creditor. It is significant to note that there was no other creditor before the Court of Appeal. The question of substitution was not before the Court at all.
22. Now, whereas in this case, there is a creditor who seeks substitution there is no question of the debtor being able to rehabilitate himself. In such circumstances, under the terms of the judgment of the Court of Appeal, discretion would, in any view, have to be exercised by the Court only to refuse leave to withdraw the petition. Bebro's judgment does not help Mr. Jain.
23. The second submission of Mr. Jain was that the provisions of Section 13(8) and of Section 92 of the Act are independent of each other. This point is in terms covered by the aforesaid judgment of Rajadhyaksha J. which lays down that there is a link between these sections.
24. There remains for me to consider Mr. Jain's later submissions that lack of due diligence is a pre-requisite to the application of Section 92 of the Act, and that where the petitioner and debtor settle and the petitioner applies (for) leave to withdraw the petition, there is no lack of due diligence on the part of the petitioner to prosecute the petition and Section 92 of the Act has no application. As I have already mentioned, this court and other courts have taken the view that Section 92 applies after the petitioner has settled with the debtor, if there is another creditor who seeks substitution. Quite apart from this,upon a plain reading of Section 92, it seems to me that the emphasis must be on the words 'the petitioner does not proceed on his petition' and not on the words 'with due diligence'. In other words, if the section were to be analysed it would read thus :
'Where the petitioner does not proceed, or does not proceed with due diligence on his petition the Court may substitute.....,' To accept Mr. Jain's argument would lead to I his position; if a petitioner says blatantly to the Court, 'I will not proceed with the petition', Section 92 of the Act will not be attracted and no order of substitution can be made. It is only if the petitioner neglects, whether deliberately or otherwise, to proceed on his petition that Section 92 of the Act would be attracted and an order of substitution can be made. I find that this is unacceptable and defeating the purposes of the Act.
25. Mr. Jain referred me to the judgment of the Lahore High Court in Lorind Singh v. Gulab Singh, AIR 1940 Lahore 470. He relied upon a statement therein that a finding by the Insolvency Court that the petitioner was not proceeding with his petition with due diligence was a condition precedent to the making of order of substitution under the provisions of Section 16 of the Provincial Act. That judgment also states as follows :---
'The Peoples Bank which had originally lodged a petition against the debtor expressed the desire to effect a compromise with the debtor some months before the order was made granting leave to the Bank to withdraw. If the Insolvency Court was of the opinion that the conduct of the Bank amounted to such want of due diligence as is contemplated by Section 16, it should have made an order substituting for the Bank one of the creditors qualified under the Act'. Thus, in the view of the Lahore High Court also, a compromise between a debtor and a petitioner could amount to want of due diligence under Section 16 of the Provincial Act. This judgment, then, that Mr. Jain has cited does not avail him.
26. In conclusion, I must hold that if a petitioner informs the Insolvency Court of a settlement arrived at between him and the debtor and seeks leave to withdraw his petition under the provisions of Section 13(8) of the Act, the Court must proceed to ascertain if there are other creditors of the debtor and, for that purpose, must adjourn the matter and order it to be shown on the adjourned date on board for withdrawal. If another creditor appears on the adjourned day and seeks substitution the Insolvency Court must ascertain whether hisdebt is in the amount required by the Act and, if it is, should refuse leave to withdraw the petitioner under the provisions of Section 13(8) of the Act and substitute the creditor as petitioner under the provisions of Section 92 of the said Act.
27. In consequence of what I hold, I refuse to the petitioner Mr. Jain's client, leave to withdraw the petition and substitute in his place Govind Bajaj, Miss Nichani's client, whose debt exceeds the amount required by the Act. In the circumstances of the case, there shall be no order as to costs.
28. The substituted creditor must carry out the necessary amendments to the petition within two weeks and serve a copy thereof upon the debtor.
29. Upon the application of Mr. Jain, and Mr. Waclhwa, the aforesaid order is stayed for four weeks from today.
30. Order accordingly.