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The Sholapur Spinning and Weaving Co. Ltd. Vs. Pandharinath Martand Sulakhe - Court Judgment

LegalCrystal Citation
SubjectProperty
CourtMumbai
Decided On
Case NumberSecond Appeal No. 794 of 1926
Judge
Reported inAIR1928Bom341; (1928)30BOMLR893; 113Ind.Cas.148
AppellantThe Sholapur Spinning and Weaving Co. Ltd.
RespondentPandharinath Martand Sulakhe
DispositionAppeal dismissed
Excerpt:
.....creditor, and spinnihg therefore, the sale of the house could not be said to be an alienation by a debtor to a creditor, but was in consideration of an amount remaining as a balance out of the amount sent for a specific purpose, and also held that the sale-deed, exhibit 73, was taken in good faith and neither with the intention of cheating other creditors, nor with the intention of taking preference over them. 2 and 3 and that the sale of the house was a transfer of property in favour of the creditor, but held that it was made in favour of the purchaser in good faith and for valuable consideration. 1 in good faith as it was passed two days before the filing of the petition in insolvency; where the debtor desired to make reparation for a past wrong, as by restoring trust moneys he had..........be shown not to have existed, it is of no importance that the creditor had knowledge of the debtor's insolvency.it is clear, therefore, that the sale-deed in question would not be void under section 54 of the provincial insolvency act.8. the next question is whether the sale-deed is voidable under section 58 of the provincial. insolvency act. it would be voidable unless it is shown that it was made in favour of respondent no. 1 in good faith and for valuable consideration, it in not denied that there was valuable consideration. the only question is whether the transfer in favour of respondent no. 1, was in good faith within the meaning of section 53. it is urged on behalf of the respondents that section 53, according to the marginal note, relates to the avoidance of a voluntary.....
Judgment:

Patkar, J.

1. In this case, respondents Nos. 2 and 8 presented their insolvency petition on March 1, 1923. On February 27, 1923, two days before the presentation of the insolvency petition, they sold their house in Sholapur to respondent No. 1, the firm of Pandharinath Martand Sulakhe of Barsi, for Rs. 15,000. Respondent No. 1 firm sent, on February 6, 1923, Rs. 44,000 to respondents Nos. 2 and 3 to purchase hundis. The respondents Nos. 2 and 3 sent hundis for Rs. 27,000. Respondent No. 1 made several demands for the balance out of the money sent to the insolvents for a specific purpose. The firm was also a creditor for the balance of Rs. 10,000 due to the firm's shop in Bombay. At the end of February, Dattatraya, one of the owners and manager of respondent No. 1 firm, came to Sholapur and threatened respondents Nos. 2 and 3 with criminal prosecution. Respondents Nos. 2 and 3 then sold the house to respondent No. 1 firm for Rs. 15,000 as stated above on February 27, 1923. After the insolvency petition was admitted, an ad interim receiver was appointed, and he made an application to set aside the sale of the house under Section 53 of the Provincial Insolvency Act, V of 1920.

2. The First Class Subordinate Judge held that the firm was a creditor for the amount of Rs. 10,000 due to the firm's shop in Bombay, but with regard to balance of the amount sent for the purchase of hundis, respondent No. 1 was not a creditor, and Spinnihg therefore, the sale of the house could not be said to be an alienation by a debtor to a creditor, but was in consideration of an amount remaining as a balance out of the amount sent for a specific purpose, and also held that the sale-deed, Exhibit 73, was taken in good faith and neither with the intention of cheating other creditors, nor with the intention of taking preference over them.

3. The appellant, who is one of the creditors, filed an appeal to the District Judge. It is not necessary to go into the question discussed by the learned District Judge whether the creditor could file an appeal under Section 75 of the Provincial Insolvency Act. On appeal, the learned District Judge held that respondent No. 1 was a creditor of respondents Nos. 2 and 3 and that the sale of the house was a transfer of property in favour of the creditor, but held that it was made in favour of the purchaser in good faith and for valuable consideration.

4. It is urged on behalf of the appellant that the lower Court erred in holding that the sale-deed was passed in favour of respondent No. 1 in good faith as it was passed two days before the filing of the petition in insolvency; that respondents Nos. 2 and 3 continued in possession of the said house; that no rent was paid by, debited to or demanded from respondents Nos. 2 and 3; that the credit for the sum of Rs. 15,000 was not given to respondents Nos. 2 and 8 in the books of respondent No. 1 till a considerable time afterwards; and that the alleged sale comprised the whole of the property of the insolvents and was in consideration of a past debt.

5. The sale-deed in question was held by the lower Court not to be a fraudulent preference within the meaning of Section 54 of the Provincial Insolvency Act which renders a transfer of property in favour of any creditor, with a view of giving that creditor a preference over the other creditors, void as against the receiver if the debtor is adjudged insolvent on a petition presented within three months after the date thereof. The word 'preference' imports and involves freedom of choice, and no transfer which is not voluntary in the sense that it is a free act of the insolvent, is a preference which can be deemed to be fraudulent and void as against the receiver. See Sharp v. Jackson (1899) A.c. 419. In Nripendra Nath Sahu V. Ashutosh Ghose I.L.R (1915) Cal. 640, it was held an follows:-

The question whether there has been a fraudulent preference depends not upon the mere fact that there had been a preference but also on the state of mind of the person who made it. It must be shown not only that he had preferred a creditor but that he has fraudulently done so. It depends upon what was in his mind, for this purpose it is not true that the debtor must be taken to have intended the natural consequences of his acts. One must find out what he really did intend.... It is not necesssary to threaten criminal proceedings to constitute pressure. The threat of civil suits is enough. If it is established that the transaction was the result of real pressure brought to bear by a creditor on his debtor, it cannot be deemed as a spontaneous act.

6. In Sime Darby & Co. v. Official Assignee (1927) 30 Bom. L.R. 290, p.c., it was held by their Lordships of the Privy Council that where the proper inference to draw from the facts was that in making the transfer to his creditor, the debtor was only doing what he felt bound or compelled to do and where it must have appeared to him that the alternative to handling over was a prosecution for criminal breach of trust, the ease is not one of fraudulent preference within the statute.

7. The sale-deed in this case was passed in favour of respondent No. 1 as a result of the threat of criminal prosecution by respondent No. 1 in respect of the moneys sent to respondents Nos. 2 and 8 for a (specific purpose and which they had misappropriated. Where the debtor desired to make reparation for a past wrong, as by restoring trust moneys he had misappropriated, or to avoid evil consequences to himself, or he believed that he was bound by a contract, or he believed that he was under a legal obligation to do as he did, whether such belief was well founded or not, in none of these or like cases will the transfer be set aside. See Halsbury's Laws of England, Vol. II, page 285. It is also stated on the same page :-

In every ease the state of mind of the debtor is the paramount consideration. The intention or view to prefer the creditor us the causa causans of the debtor's conduct is the cardinal point round which the whole question turns; if that intention be shown not to have existed, it is of no importance that the creditor had knowledge of the debtor's insolvency.

It is clear, therefore, that the sale-deed in question would not be void under Section 54 of the Provincial Insolvency Act.

8. The next question is whether the sale-deed is voidable under Section 58 of the Provincial. Insolvency Act. It would be voidable unless it is shown that it was made in favour of respondent No. 1 in good faith and for valuable consideration, It in not denied that there was valuable consideration. The only question is whether the transfer in favour of respondent No. 1, was in good faith within the meaning of Section 53. It is urged on behalf of the respondents that Section 53, according to the marginal note, relates to the avoidance of a voluntary transfer, and that the word 'voluntary' means freely and uninfluenced by pressure as contemplated in Section 51 of the Provincial Insolvency Act. The marginal note is not, however, a part of the Act. See Dukhi Mullah v. Halway I.L.R (1895) Cal. 55; Re Vinayak Narayan I.L.R (1899) Bom. 120: 1 Bom. L.R. 645; and Thakurain v. Jagatpal (1904) 11 Bom. L.R. 516. I think, however, the word 'voluntary' in the marginal note to Section 53 means gratuitous or without consideration. The lower Court held that the sale-deed was perfectly bonafide in the sense that the vendors intended to part with their whole interest and was not a mere cloak for retaining a benefit to themselves. It is urged on behalf of the appellant that the finding of the District Judge is not conclusive on the question whether the sale-deed was bona fide or made in good faith, and that if the vendors did not intend to part with the whole of their interest, the sale-deed would not be a real transfer at all, and that Section 53 requires that there should be a real sale-deed for valuable consideration and in good faith. The finding of the District Judge that it was perfectly bonafide, that the vendors intended to part with their whole interest and that it was not a mere cloak, is a sufficient answer to the objections raised by the appellant that the sale-deed was passed shortly before the petition of insolvency, that respondents Nos. 2 and 3 continued in possession of their house, that no rent was paid by, or debited to or demanded from, respondent Nos. 2 and 3, that the rent note was not produced before the Court, and that credit was not given for the amount of the consideration of Rs. 15,000 in the books of respondent No. 1 till a considerable time afterwards.

9. It is urged, however, on behalf of the appellant that the house was the only property of the insolvents and the transfer was substantially of the whole of the property of the debtors in payment of a past debt with notice that there were other creditors, and could not, therefore, be said to be made in good faith on the authority of Juices, In re : Official Receiver, Exparte (1902) 2 K.B. 58; Dadapa v. Vishnudas I.L.R (1887) Bom. 424 and Muhammad Habib-ullah v. Mushtaq Husain I.L.R (1916) All. 95. The trial Court held that the sale-deed, Exhibit 73, was made in good faith and neither with the intention of cheating other creditors nor with the intention of giving any preference to respondent No. 1, that respondent No. 1 did not know that respondents Nos. 2 and 3 were on the point of becoming in Solvent, that he had no intention of cheating other creditors, find that he did not know that there were debts due to any other parsons. The case before the Subordinate Judge was that the transaction was a hollow one, and witnesses Exhibits 80 and 81 were examined. The learned Subordinate Judge believed Dattatraya (Exhibit 71), one of the owners of respondent No. 1 firm. He is a graduate and a respectable trader and paying income-tax of Rs. 4,500. The lower appellate Court did not rely upon the evidence of witnesses Exhibits 80 and 81, who were cited to prove that the sale-deed was a hollow transaction, and held that respondent No. 1 had no suspicion of the debtors' financial stability, otherwise he would not have remitted Rs. 44,000 to them on February 6, 1923, only three weeks before the filing of the insolvency petition. The appellant lays stress upon the sentence in the judgment of the District Judge, viz., 'It is possible, and perhaps probable, that he was aware of the state of affairs before he purchased the house from them.' There is no distinct finding that respondent No. 1, as a matter of fact, knew the actual state of affairs when he purchased the house from the debtors, or that he knew that the house was the only property belonging to the debtors and available for payment of the debts of other creditors. 1 have gone through the evidence in the case, and I. agree with the view of the trial Judge that respondent No. 1 did not know that the debtors were on the point of bankruptcy and had no intention to cheat the other creditors and had no knowledge either that he was purchasing the whole of the property belonging to the debtors or that there were debts due to other creditors. Each ease must depend upon its own circumstances, and the question is one of fact whether the transaction was bonafide or was a contrivance to defraud the creditors. See Corlett v. Radcliffe (1860) 14 M.P.C. 121 In Pope, In re (1908) 2 K.B. 169 it was held as follows (p. 174) :-

The language of the section is 'purchaser or incumbrancer in good faith and for valuable consideration.' The words 'in good faith' exclude colourable transactions. The inquiry, therefore, must be whether the transaction being a real one, is for valuable consideration, and for such valuable consideration as constitutes the giver a purchaser, that is a buyer.

10. In Jukes, In re (1902) 2 K.B. 58 Wright J. referred to the case of Shears v. Goddard (1896) 1 Q.B. which was distinguished on the ground that the purchasers did not know that they were taking all the property of the debtor or were aware of anything that rendered the transaction fraudulent, and were purchasers in good faith and for valuable consideration.

11. In the present case, on the evidence, I think respondent No. 1 was trying to get back the balance of the money which he had entrusted to his debtors and which was misappropriated by them and was not aware that the debtors were on the brink of insolvency, that there were other creditors who had unsatisfied claims against his debtors, and that the property he was purchasing was the only property belonging to his debtors. On these grounds, I think that respondent No. 1 was a purchaser in good faith and for valuable consideration and was protected under Section 53 of the Provincial Insolvency Act.

12. I would, therefore, dismiss the appeal with costs.

Baker, J.

13. This is an appeal under Section 75 of the Provincial Insolvency Act. The facts are simple. The appellant is a creditor, respondents Nos. 2 and 3 are insolvents, respondent No. 4 is the interim receiver and respondent No. 1 is the person to whom the insolvents' property was transferred. The insolvents, who carried on a firm at Sholapur, were indebted to respondent No. 1. On February 27, 1923, they sold the whole of their property to respondent No. 1 and on March 1, 1923, they presented a petition in insolvency. The creditors impeached the sale under Section 53 of the Provincial Insolvency Act.

14. The First Glass Subordinate Judge held that the sale-deed was taken in good faith, for valuable consideration and not by way of preference. On appeal the District Judge dismissed the appeal, and the creditor makes this second appeal.

15. The principal contention on behalf of the appellant is that the lower Courts have mixed up Sections 53 and 54, Provincial Insolvency Act, and have applied to this case the provisions which apply to cases of preference under Section 54 and not those which apply to transfers under Section 53. It is contended that the onus of proof that the transfer was in good faith and for valuable consideration rests on the purchasers. The case in Joakim v. The Secretary of State for India I.L.R (1881) All. 530, on which the lower appellate Court relies, has been expressly dissented from in Dadapa v. Vishnudas. I.L.R (1887) Bom. 424.

16. The circumstances under which the transfer came to be made are that on February 6, 1923, respondent No. 1 who was a firm at Barsi sent to respondents Nos. 2 and 3 Rs. 44,000 for the purchase of hundis. Respondents Nos. 2 and 3, purchased hundis for Rs. 27,000, but failed to account for the, balance. In consequence of thia respondent No. 1 threatened to take criminal proceedings against them for the balance which amounted with interest to about Rs. 15,000 and in consequence of the pressure put upon them the respondents Nos. 2 and 3 transferred the whole of their property to respondent No. 1 for Rs. 15,000, two days before they presented their petition in insolvency.

17. The case is almost exactly on all fours with the very recent decision of the Privy Council in Sime Darby & Co. v. Official Assignee (1927) 30 Bom. L.R. 290, p.c. In that case the debtor who was unable to pay his debts as they became due from his own money, transferred to the appellants, to whom he was largely indebted, a quantity of rubber as security for their debt. The question arose whether the transfer was to be deemed fraudulent and void as against the Official Assignee in the bankruptcy. It was held that:

The question to be determined is one of fact, whether the dominant motive actuating the debtor in making the transfer was a desire to prefer the particular creditor or was it of a different character. As the solution of this question involves an inquiry into the state of a man's mind and as it must very seldom be the case that there is direct evidence on the point, the decision generally depends on the inference properly to be drawn from the circumstances attending the transfer as established by the evidence. Where the proper inference to draw from the facts was that the dominant motive actuating the debtor was that, in making the transfer to his creditor, he (the debtor) was only doing what lie felt himself bound or compelled to do, and where it must have appeared to him that the alternative to handing over was a prosecution for criminal breach of trust, the case is not one of fraudulent preference within the statute.

18. It was further held :

When the Official Assignee in the bankruptcy peeks to establish that a transfer by the debtor is void as a fraudulent preference, the onus of proof is on the assignee-he has to show that the case is within the statute.

19. The circumstances of this case are precisely the same as those of the present case. The dominant motive of the debtors, respondents Nos. 2 and 3, in transferring their property to respondent No. 1 was that they were doing what they felt themselves bound or compelled to do, as if they were unable to satisfy the claim of respondent No. 1, they were liable for a prosecution for criminal breach of trust. There can be no doubt, therefore, on the Privy Council ruling, that the present is not a case of a fraudulent preference, and in view of this clear ruling on facts, so similar to those in the present case, I do not think that it is necessary to refer to any of the other cases which have been quoted by the learned Counsel for the respondent.

20. It is further contended that the present is not a case of fraudulent preference under Section 54, but of a voluntary transfer under Section 53 of the Provincial Insolvency Act. Section 53 says:-

53. Any transfer of property not being a transfer made before and in consideration of marriage or made in favour of a purchaser or incumbrancer in good faith and for valuable consideration shall, if the transferor is adjudged insolvent within two years after the date of the transfer, be voidable as against the receiver and may be annulled by the Court.

21. But in view of the circumstances of the present transfer I am of opinion that it distinctly falls within Section 54 The transfer contemplated by Section 53 appears to be a transfer to some third party by which the debtor either receives consideration which is not available to his creditors or renders a portion of his property incapable of being taken possession of by the receiver. What has happened In the present case is that the respondent No. 1, who is a creditor of the insolvents, respondents Nos. 2 and 3, has been paid a debt and the insolvents' property is thus not available for satisfying the claim of the other creditors. It is really a case of preference under Section 54 and as has been shown in the Privy Council case quoted above, the pressure put upon the debtor takes the case out of the statute regarding the fraudulent preference. This, in my opinion, is not a case of a voluntary transfer at all. The debtor was compelled to do what he did. The fact that the whole of his property was transferred makes no difference, because the whole of the property was only sufficient to meet the claim of respondent No. 1.

22. The eases quoted by the learned Counsel for the appellant are not on facts similar to the present case, which is, in my opinion, exactly covered by the Privy Council decision referred to above in Sime Darby & Co. v. Official Assignee (1927) 30 Bom. L.R. 290 and relying on that decision I agree that the appeal should be dismissed with costs.


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