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Jethmal Narandas Vs. Mahadeo Anandji Dhoria - Court Judgment

LegalCrystal Citation
SubjectCivil
CourtMumbai
Decided On
Case NumberO.C.J. Appeal No. 25 of 1940 and Insolvency No. 230 of 1940
Judge
Reported inAIR1941Bom62; (1940)42BOMLR1078
AppellantJethmal Narandas
RespondentMahadeo Anandji Dhoria
DispositionAppeal allowed
Excerpt:
.....petition-proof of debt to the satisfaction of court-court not bound by any decree between debtor and petitioning-creditor-rights of other creditors to be considered.; under section 13, sub-section (2), of the presidency-towns insolvency act, 1909, the court must be satisfied as to the validity of the debt of the petitioning-creditor in the interest of the other creditors.; in insolvency the question, which arises, is not merely between the petitioning-creditor and the judgment-debtor, but the rights of other creditors of the judgment-debtor have to be considered. if an order of adjudication is made, the rights of those creditors to recover payment independently of their own debts is taken away. the court, therefore, must consider whether the petitioning-creditor in fact has a..........learned judge to be satisfied, before making the order, that that allegation was not true. if the insolvency judge thinks that prima facie the debtor's defence to the debt is not bona fide, he can, under section 13(6), put the debtor on terms requiring him to give security, and on those terms stand the petition over. but, in my opinion, having regard to the fact that the petitioning-creditors put in no answer at all in answer to the debtor's allegation, it is impossible to say that a prima facie case is made out. the judgment by itself does not make out such a prima facie case, and i think that the learned judge should have required evidence as to this alleged sale of ornaments for rs. 9,000. if the respondents had produced their books and an affidavit by the agent disclosing the name.....
Judgment:

John Beaumont, Kt., C.J.

1. This is an appeal from an order made by Mr. Justice Somjee in insolvency adjudicating the appellant an insolvent, and, in my opinion, it is perfectly clear that the order ought not to have been made.

2. The facts are these. The appellant and his wife in the year 1935 obtained an advance of Rs. 14,000 from the respondents on the security of ornaments belonging to the wife, and a promissory note was also given for the debt. It is said that in the year 1935 one of the pledged ornaments was sold for about Rs. 3,000. In 1936 there was a further promissory note for the amount then due, which was Rs. 11,840. Then it: is said that sometime after that another ornament was sold for Rs. 995. In 1939 the respondents as pledgees gave notice to the pledger that they intended to sell the pledged goods, and an arrangement was come to on January 5, 1939, by which the pledgees were to take over the remaining ornaments, and the pledger gave a promissory note for the balance. On that promissory note a summary suit was filed, and on February 12, 1940, there was a consent decree for the amount claimed and costs, time being given to the debtor to redeem the ornaments. But the ornaments were not redeemed. Accordingly an insolvency notice was served on the appellant on July 2, 1940. An application was made by the appellant to set aside that notice, but that application was dismissed, and I think rightly so, because there had been no stay of the consent order, and the debtor did not bring himself within the proviso to Section 9 (i) of the Presidency-towns Insolvency Act. The result, therefore, was that there was an act of insolvency, and on August 13 the creditors presented a petition asking that the judgment-debtor be adjudicated insolvent. On that petition the debtor filed an affidavit, and in paragraph 4 he stated this:-

Until recently both myself and my wife honestly believed in the statement of the plaintiffs regarding the sale proceeds of the said diamond kada and the diamond bracelet.

Those are the two ornaments sold to which I have referred. Then the affidavit goes on:-

Relying on their statement made on oath in the affidavit and their assurance,. I accepted their figures. Very recently, however, I came to know that the plaintiffs had caused the said jewellery to be sold through the said Mohanlal to a member of a Ruling Indian family for Rs. 9,000 but that they have failed to account to me or to my wife for the correct amount of the sale proceeds.

So that the case of the appellant is that certain of the ornaments were sold for a much higher figure than the pledgees admitted, and that if the pledgees had accounted for the true figure, there would have been no debt due; that is' to say, he challenged the consent decree in effect on the ground that it was obtained by fraudulent suppression of material facts. That affidavit was not answered, but the learned Judge made the order of adjudication.

3. Now, under Section 13 of the Presidency-towns Insolvency Act, Sub-Section (2), at the hearing of a petition the Court shall require proof of (a) the debt of the petitioning creditor, and (b) the act of insolvency. Sub-Section (5) provides that the Court may make an order of adjudication if it is satisfied with the proof above referred to. So that the Court must be satisfied as to the validity of the debt of the petitioning-creditor.

4. One has to remember that in insolvency the1 (question, which arises, is not merely one between the petitioning-creditor and the judgment-debtor. The rights of other creditors of the judgment-debtor have to be considered. If an order of adjudication is made, the rights of those creditors to recover payment independently of their own debts is taken away. Therefore, the Court must consider whether the petitioning creditor in fact has a good debt, and it is not bou1nd by any decree as between the creditor and the debtor. The debtor may be estopped from disputing the decree, but the Insolvency Court is not estopped. That principle has been established in many cases. The leading case is Ex parte Lennox: In re Lennox (1885) 16 Q. B. D. 315. That was a very strong case. The debtor had been sued for a sum of . 1,500 due on two promissory notes, and he had obtained unconditional leave to defend and had put in a defence alleging that there never was any consideration for the notes. Subsequently he withdrew his defence and consented to judgment. On that judgment a bankruptcy notice was served, which was not complied with, and a petition was presented to have the debtor adjudicated bankrupt. The Court of Appeal held that the debtor was entitled on the hearing of that petition to challenge the debt on the very grounds which he had set up and abandoned in the suit, the principle being that, however much the debtor might be estopped by his conduct as against the petitioning-creditor, the Court must be satisfied about the validity of the debt in the interests of the other creditors. That case has been followed in In re Fraser: Ex parte Central Bank oj London [18921 2 Q. B. 633; In re Hawkins: Ex parte Troupe [1895] 1 Q. B. 404 and in A Debtor, In re [1927] 2 Ch. 367. The basis of the decision is most clearly stated by Lord Esher M. R. in In re Fraser, where he says (p. 636):-

The decision [in Ex parte Lennox] is based upon the highest ground-viz., that in making a receiving order, the Court is not dealing simply between the petitioning creditor and the debtor, but it is interfering with the rights of his other creditors, who, if the order is made, will not be able to sue the debtor for their debts, and that the Court ought not to exercise this extraordinary power unless it is satisfied that there is a good debt due to the petitioning-creditor.

5. In this case it seems to me that, on the materials before the learned Judge, it was wrong for him to hold that he was satisfied as to the validity of the debt. In the affidavit of the debtor the point is made that pledged ornaments had been sold at a much higher price than that admitted to a Ruling Prince through a named agent, and it was for the learned Judge to be satisfied, before making the order, that that allegation was not true. If the Insolvency Judge thinks that prima facie the debtor's defence to the debt is not bona fide, he can, under Section 13(6), put the debtor on terms requiring him to give security, and on those terms stand the petition over. But, in my opinion, having regard to the fact that the petitioning-creditors put in no answer at all in answer to the debtor's allegation, it is impossible to say that a prima facie case is made out. The judgment by itself does not make out such a prima facie case, and I think that the learned Judge should have required evidence as to this alleged sale of ornaments for Rs. 9,000. If the respondents had produced their books and an affidavit by the agent disclosing the name of the purchaser, it may be that that would have been sufficient prima facie evidence, but at the moment there is nothing of that sort.

6. We must, therefore, allow the appeal, set aside the order of adjudication, and remit the petition to the Insolvency Judge with a direction to him to satisfy himself as to the validity of the petitioning creditors' debt. Respondents to pay to the appellant his costs of the appeal, but to be at liberty to set off those costs against any costs which they may incur in obtaining an order of adjudication against the appellant.

Kania, J.

1. The relevant facts and dates are stated in the judgment Just delivered by the learned Chief Justice. Two points arise for consideration. In an application for adjudication under Section 13 of the Presidency-towns In-. solvency Act the petitioning creditor has to prove (1) that there is a debt of the petitioning-creditor and (2) an act of insolvency. By reason of the petitioning creditors obtaining a decree and serving a notice as provided by Section 2 of Bombay Act XV of 1939, which notice was made absolute, it may be held that an act of insolvency was proved. When the Court, however, has to make an order under Section 13, the first requirement, namely, that the debt of the petitioning-creditor was proved, still remains to be satisfied. A petitioning-creditor may rely on the decree which he has obtained, but it is not conclusive. As held in Ex parte Lennox: In re Lennox (1885) 16 Q. B. D. 315 the Insolvency Court has to be satisfied in spite of prima facie evidence contained in the decree that the debt of the petitioning-creditor exists. In this case we have not the benefit of the judgment of the lower Court, and, therefore, we do not know whether the learned Judge made the order holding that by reason of the decree the debt was proved. We are told the relevant passage from William's ' Law of Bankruptcy ' was cited to the Judge. It appears more probable, therefore, that he held that while it was the duty of the Court to inquire and determine whether a debt of the petitioning-creditors existed, on the affidavits, in his view, the same was proved.

2. The question, therefore, is whether on the materials before the Court it could come to the conclusion that the debt was proved. In that connection it has to be remembered that paragraph 4 of the affidavit of the debtor distinctly stated the ground on which he challenged the consent decree obtained between the parties. No affidavit in reply was filed, and throughout the record it does not appear that the names of the parties and the exact price realised from the parties are mentioned at any place. It was argued that the learned Judge considered that the allegations in the affidavit of the debtor were vague as the source of information was not disclosed. If so, the source of information may be required to be stated. I do not think under the circumstances of the case it would be proper to say that because the source of information was not disclosed the affidavits should be discarded and it should be held that the. debt was proved. Holding, therefore, that it was the duty of the trial Court to inquire whether the debt of the petitioning-creditors was proved, I am not satisfied that the affidavits as made were sufficient to come to the conclusion at which the learned trial Judge reached. It was pointed out here in the course of arguments that the ornaments in question were sold by Mohanlal. It is disputed that Mohanlal was the agent of the petitioning-creditors. It was argued that the petitioning creditors gave credit for the full amount which they had received and, therefore, there was no fraud. We are not determining any of those questions which the learned trial Judge ought to have inquired into. The judgment pronounced here is not a decision for or against any of those arguments which are advanced on behalf of the petitioning-creditors. The only thing which is held here is that it was the duty of the trial Court to determine whether the debt of the petitioning-creditors was proved, and on affidavits alone the question should not have been decided in this case.

3. I agree, therefore, that the appeal should be allowed, and the matter should he remanded to the trial Court for inquiring whether the petitioning-creditors had proved their debt within the meaning of Section 13 of the Presidency-towns Insolvency Act.


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