1. Is the appellant's claim that the insolvency notice which has been served on him should be set aside on the ground that he has a counterclaim which exceeds the decretal amount ordered to be paid by him justified under Rule 52B(5)(b) of the Rules framed by this Court under the Presidency Towns Insolvency Act, 1909? That is the short question which arises in the present appeal. This question arises in this way.
It appears that the appellant, the respondent and another were partners of Madhubar Pictures, which was a firm dealing in the business of film production. On 31-5-1950, the appellant retired from this partnership and a formal deed of dissolution was drawn up. Under this deed of dissolution the appellant promised to pay the continuing partners Rs. 30,000/- and agreed that the assets of the partnership should likewise remain with them.
In consideration for this promise, the continuing partners undertook the liability to payall debts due by the partnership Including theamount of income-tax payable by the firm on orup to 31-5-1950. As often happens, neither partyto this agreement appeared to be anxious to fulfil his part of the contract. The appellant failedto pay the whole of the amount of Rs. 30,000/-and a suit had to be brought against him to recover the amount due.
A decree was passed against the appellant on 10-4-1951 for Rs. 30,000/-. Under this decree the appellant made several payments from 4-8-1951 to 15-7-1952. Rs. 7,613-4-0, however, still remained to be paid by the appellant. To recover this decretal balance the respondent obtained leave ofthe Court for taking out execution proceedings on 16-7-1954, and on 15-9-1954 insolvency notice was taken out by tne respondent against the appellant.
The said notice was served on the appellant on 22-8-1954. Alter this notice was served on the appellant, he took out a notice of motion on 22-10-1954. By this notice of motion the appellant urged that the insolvency notice served on him should be set aside because he had a counterclaim to make against the respondent and the amount of the counterclaim exceeded the balance due to the respondent under the decree passed in his favour.
Mr. Justice Coyajee, who heard this notice of motion, has taken the view that the plea made by the appellant is premature and that it was impossible to say at the time When the notice of motion was taken out that the appellant was entitled to make any counterclaim against the respondent at all. That is why Coyajee J. dismissed the notice of motion, the appellant has challenged this decision of Coyajee J.
2. Whilst the proceedings between the appellant and the respondent were going on in respect of the suit filed by the respondent against the appellant, some other developments took place, to which it is necessary to refer before dealing with the merits of the contentions raised before us by Mr. Jhaveri on behalf of the appellant. On 30-11-1953 an assessment order was passed by the Income-tax Department determining the liability of the firm of Madhukar Pictures for payment of income-tax.
Notices were issued in respect of this assessment, parties were heard and ultimately the appellant was called upon to pay Rs. 11,848-7-0 as his income-tax for the year 1950-51. The notice which was issued against the appellant calling upon him to pay the said amount also imposed upon him the penalty of Rs. 600/-. After this notice was served on the appellant, he appears to have moved the Income-tax Department and obtained an order for the payment of the said amount by instalments. Accordingly he has in fact paid one instalment of Rs. 1,000/- by cheque on 26-2-1955.
It also appears that a garnishee notice was served on the appellant on 20-10-1954 and in pursuance of this notice the appellant has paid Rs. 2,000/- to the Income-tax Department. Whilst the notice of motion taken out by the appellant was pending in the Court below, he filed a suit in the City Civil Court on 7-4-1955 seeking his remedies under the contract of indemnity included in the deed of dissolution. It is on these facts that the question of the right of the appellant to demand the cancellation of the insolvency notice falls to be considered.
3. Two facts are not in dispute. A decree has been passed against the appellant and a balance of Rs. 7,613-4.0 out of the decretal debt still remains to be paid. This is not disputed by the appellant. On the other hand, the respondent does not dispute the fact that an order has been passed against the appellant by the Income-tax Department calling upon him to pay as his income-tax Rs. 11,848-7-0. Indeed, the notice issued by the Income-tax Department against the appellant has been produced in the present proceedings.
Under the relevant provisions of Section 23, Income-tax Act, it is clear that in the case of a registered firm income-tax is levied against the individual partners of the firm after determining their income in respect of the period in question. A registered firm as such is not directed to payany income-tax in respect of the profits made by the firm.
But the profits are determined in the first instance, they are apportioned to the respective partners having regard to their shares in the partnership, and the respective partners are then called upon to pay the respective amounts of income-tax in the light of the said apportionment of profit.
If the amount thus assessed is not paid by the assessee, it is liable to be recovered as arrears of land revenue. In other words, it is not disputed that the balance due to be paid by the appellant in respect of the amount of income-tax levied against him for the year 1950-51 can be recovered by the Department as arrears of land revenue.
4. The first point which we have to consider is whether the material clauses in the deed of dissolution constitute a contract of indemnity as alleged by the appellant or not. The appellant relies on two clauses in the deed of dissolution.
Clause 5 provides that the continuing partners jointly and severally covenanted with the retiring partner that they would duly pay and satisfy or cause to be paid and satisfied all debts and liabilities of the partnership which was then dissolved and that, they would from time to time thereafter effectually indemnify and keep indemnified the retiring partner his estate and effects from the said debts and liabilities and from all actions and proceedings in respect thereof.
There can be no doubt that this clause clearly constitutes an agreement of indemnity and covers all the debts and liabilities of the partnership which was then dissolved. Clause 7 made a specific provision in respect of income-tax. It provides that the continuing partners agreed and undertook to pay the income-tax, if any, payable by the firm on and up to 31-5-1950. It has been faintly argued before us by Mr. Chagla that Clause 7 cannot be read as amounting to a contract of indemnity.
It is true that this clause is not as specific and unambiguous as Clause 5. But we have no hesitation in holding that, like Clause 5, Clause 7 also constitutes a contract of indemnity. I have already stated that in regard to a registered firm Income-tax has to be paid, not by the registered firm as such, but by its partners individually, and the liability of the partners to pay income-tax is several and individual.
In our opinion, therefore, it is clear that, by virtue of Clauses 5 and 7 of the deed of dissolution, the continuing partners executed a contract of indemnity arid by this contract of indemnity the appellant would be entitled to claim reliefs which may be relevant and legitimate under the law of the contract of indemnity.
5. What then are the rights to which the appellant is entitled under this contract of indemnity? The material provision with regard to such contracts of indemnity is to be found in Section 125, Contract Act. This section deals with the rights of the indemnity-holder and it provides that the promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies.
It also provides for the indemnity-holder's right to recover costs and other sums as mentioned in Sub-sections (2) and (3) of Section 125. It is true that, if this section is literally construed, the right of the indemnity-holder to sue the promiseeunder a contract of indemnity would arise only after the indemnity-holder has incurred damages.
In terms, Sub-section (1) of Section 125 provides for a decree for damages and such a decree can be passed only if and after the indemnity-holder has had to incur damages by being compelled to discharge an obligation in respect of which a contract of indemnity has been executed in his favour. But, in our opinion, the provisions contained in Section 125 cannot be regarded as an exhaustive statement of the law applicable to contracts of indemnity.
If Section 125 was held to include an exhaustive statement of the law on this point, it would obviously lead to unreasonable consequences. The object of obtaining a contract of indemnity is to protect the indemnity-holder from a claim made by a third party against him. If it is held that despite such a contract of indemnity the indemnity-holder cannot make a claim against the in-demnifier unless and until he suffers damage, it might, in a sense, defeat the object of the contract of indemnity itself.
That is why it has been held, following equitable principles, that a contract to indemnify does not mean a contract merely to reimburse in respect of monies paid, but it also means in a derivative sense the liability of the indemnifier to save the indemnity-holder from a claim by a third party in respect of which the contract of indemnity has been made.
On this view, an indemnity-holder is entitled to sue the indemnifier even before he has incurred any damage, provided of course the indemnity-holder is able to satisfy the Court about the existence of a clear enforceable claim against him and is able to show that it is in respect of such a clear enforceable claim that a contract of indemnity has been executed.
In this connection, we may refer to the decision of Mr. Justice Chagla, as he then was, in -- 'Gajanan Moreshwar v. Moreshwar Madan', AIR 1942 Bom 302 (A). In considering the scope and. effect of the provisions of Sections 124 and 125, Contract Act, Chagla J. has observed that Section 124 deals only with one particular kind of indemnity which arises from a promise made by the indemnifier to save the indemnified from the loss caused to him by the conduct of the indemnifier himself or by the conduct of any other person; but that it does not deal with those classes of cases where the indemnity arises from loss caused by events or accidents which do not or may not depend upon the conduct of the indemnifier or any other person.
In other words, according to the learned Judge, Section 124 does not exhaustively deal with all classes and kinds of contracts of indemnity. Similarly, Section 125 deals only with the rights of the indemnity-holder in the event of being sued, and it is by no means exhaustive of the rights of the indemnity-holder who has other rights besides those mentioned in the section.
With respect, we agree with the view thus expressed by Chagla J. In our opinion, in dealing with the rights and obligations flowing from a contract of indemnity, the Court must always ask itself whether the indemnified party has incurred a liability, and if it shown that liability has been incurred and is absolute, then he has a cause of action to call upon the indemnifler to save him from that liability and to meet that obligation.
It is true that in an earlier decision of this Court in -- 'Shankar Nimbaji v. Laxman Supdu' : AIR1940Bom161 (B), some general observations have been made which appear 'prima facie' to be inconsistent with the view taken by Chagla J.
If these observations had amounted to a decision properly so-called on the point with which we are concerned, we may have had seriously to consider whether the point in question should not be referred to a larger bench.
But it appears to us that the observations made by Lokur J., who delivered the judgment of the Bench, clearly amount, to 'obiter dicta' having regard to the acts with which the Court was concerned in the said case. It appears that in that case one Supdu used to deposit monies with defendant 2. After Supdu's death defendant 2 withdrew Rs. 5,000/- from Supdu's 'Khata' and lent it to defendant 1 on a mortgage-bond in his own favour.
The plaintiffs in the case were the sons of Supdu. They had protested against the conduct of defendant 2, but after some correspondence defendant 2 passed a promissory-note for Rs. 5,000/-in favour of the plaintiffs. The plaintiffs then filed a suit to recover this amount from defendant 1 by sale of the mortgaged property and they prayed that in case of deficit a decree against the estate of defendant 2 should be passed.
It would appear that, before the suit was filed, defendant 2 had died and his estate had come into the hands of his sons. It was on these facts that the Court was called upon to consider the question of the plaintiffs' rights against defendant 2's estate. The promissory-note on which the suit was primarily based was construed by the Court as an indemnity given by defendant 3 to the plaintiffs in case any loss was caused to them by his unauthorised meddling with their monies.
It would thus appear that on the view taken by the Court it was open to the plaintiffs to repudiate the mortgage transaction altogether and then claim the whole of the amount from defendant 2. But the plaintiffs had elected to accept the mortgage transaction and to treat defendant 2 as their benamidar.
In that view of the matter, It was clear that the only right which the plaintiffs could claim against the estate of defendant 2 was to recover the loss, if any, that they might suffer in consequence of the mortgage transaction; and so until the mortgaged property was sold and it was shown that toe sale proceeds were not enough to meet the plaintiffs' claim there would be no justification for a claim against the estate of defendant 2.
The decision of the Court in this case, therefore, turned upon the special facts of the case and the decisive factor clearly was the attitude adopted by the plaintiffs themselves in accepting the mortgage transaction & consequently treating defendant 2 as their benamidar. With respect, we think that the general observations made in the course of the judgment, which suggest that under a contract of indemnity the cause of action arises when the damage which the indemnity is intended to cover is suffered and that a suit brought before actual loss accrues is premature must be regarded as 'obiter'.
The question as to whether the provisions contained in Section 125, Contract Act, exhaustively dealt with the rights of the indemnity-holder and the remedies available to him does not appear to have been argued before the Court, and indeed on the facts found by the Court the question which really arose for the decision of the Court lay within a narrower compass.
We are, therefore, disposed to take the view that the rights of the indemnity-holder should not and need not be confined to those mentioned in Section 125, Contract Act. Even before damage is incurred by the indemnity-holder, it would beopen to him to sue for the specific performance of the contract of indemnity, provided of course it is shown that an absolute liability has been incurred by him and that the contract of indemnity covers the said liability.
We may point out that the view which we are disposed to take in this matter has been taken by the High Courts of Calcutta, Madras and Allahabad Vide -- 'Kumar Nath Bhuttacharjee v. Nobo Kumar' 26 Cal 241 (C); -- 'Ramalingathudayan v. Unnamalai Achi' AIR 1914 Mad 655 (D); and -- 'Shiam Lal v. Abdul Salal' : AIR1931All754 (E), and has besides received the approval of the commentators in Pollock and Mulla's Indian Contract Act.
6. That raises the question as to whether the right of the indemnity-holder to sue for the specific performance of the contract can be regarded as a counterclaim within the meaning of Rule 52B (5)(b) of the Rules framed by this Court under the Presidency Towns Insolvency Act, 1909. In dealing with this question, it would be necessary to examine more carefully the contents of this right.
It is true that the indemnity-holder can sue the indemnifier even before he has incurred any damage. But the indemnity-holder can sue for the specific performance of the contract. He may, in such a suit, implead his own creditor and the indemnifier and may ask for a decree directing the indemnifier to pay the amount due to his own creditor. He may meet the liability himself and then sue the indemnifier for the recovery of the amount which he had to pay.
On the other hand, he may also sue merely the Indemnifier without impleading the creditor and without meeting his liability towards the creditor; and even in such a suit it may be open to him to claim either that the indemnifier should deposit the amount in Court to be paid to his creditor or that he should pay the said amount to himself. Dealing with the rights of the indemnity-holder both at law and in equity, this is what Halsbury says ('Halsbury', Vol. 16, pp. 14-15):
''At law an action on the contract of indemnity normally does not lie until the promisee has been actually damnified by paying the third party's claim. ....... The right to indemnity, however, may arise under a special contract, on the true construction of which the right may be enforced, even at law, before actual loss has been sustained.
But in equity, the rules of which now prevail in all Courts, even in the absence of such a special agreement, the person entitled to the indemnity may enforce his right as soon as his liability to the third party has arisen, and therefore he may obtain relief before he has actually suffered loss.
He may, therefore, in an appropriate case obtain an order compelling the promisor to set aside a fund out of which the liability may be met, or to pay the amount due directly to the third party, or even, when the promisor is under no liability to the third party, as is the case in contracts of mere Indemnity, to the promisee himself ......'
Naturally, Halsbury has also added that in the case of such claims the equitable right to enforce the indemnity does not constitute a debt. It would thus be seen that on this statement of the law it is only in one class of cases that the indemnity-holder' is not entitled to ask for a decree for payment of money to himself and that class of cases is one where the indemnifier ishimself interested in the application of the money.
In this class of cases, the only relief to which the indemnity-holder is entitled is to call upon the indemnifier to perform specifically the contract of indemnity and pay the amount in question to the creditor concerned. In all other cases it may be open to the indemnity-holder to ask for a decree for the amount in question in his own favour. This statement of the law is borne out by the English decisions to which our attention has been invited by Mr. Jhaveri. In --'Lacey v. Hill' (1874) 18 Eq 182 (P), Sir G. Jessel, M.R., had occasion to deal with this point and he observed:
'......Whatever may be the case at law (as to which I say nothing, because it is not necessary), it is quite plain that in this Court any one having a right to be indemnified has a right to have a sufficient sum set apart for that indemnity. It is not very material to consider whether he is entitled to have that sum paid to him, or whether it must be paid direct over to the creditor. If the creditor is not a party, I believe that it has been decided that the party seeking indemnity may be entitled to have the money paid over to him.'
These observations were cited with approval and applied in -- 'British Union and National Insurance Co. v. Rawson' (1916) 2 Ch 476 (G). The plaintiff company in this case had recovered judgment against a married woman in respect of unpaid calls on shares against which the defendant had indemnified her. The woman had no separate property of her own, but she assigned the benefit of her right of indemnity to the plaintiff company, who, after written notice of the assignment, sued the defendant for the full amount of their judgment.
It was held that although the married woman had paid nothing, nevertheless she was entitled to have the amount of the calls paid by the defendant either to the plaintiffs or to herself and this right was capable of assignment. Accordingly the plaintiffs as assignees were held entitled to have the contract of indemnity enforced by an order directing payment of themselves. It would be noticed that the plaintiff company in this case was itself the creditor of the indemnity-holder, so that it was not very difficult for the said company to succeed in its claim for a decree for the amount covered by the contract of indemnity. In effect, the plaintiff company sued to recover the amount due under the indemnity bond, not so much as the creditor of the indemnity-holder, but as the assignee of the rights under the contract of indemnity.
Both the rights had been combined in the plaintiff company and so the main -and substantial defence which could be raised, and was in fact raised, was whether such a right can be assigned at law. It was held that the right was capable of assignment and a decree was passed in favour of the plaintiff company for the amount in question.
Dealing with the plaintiff company's right as assignee to recover the amount, Warrington LJ., came to the conclusion that the claim was well-founded and that in equity it was open to the assignee to claim the amount even though the indemnity-holder may have incurred no damage. In this connection, the observations made by Sir George Jessel M.R., to which I have just referred, were cited.
7. The distinction between cases where the indemnifier is not concerned with the application of the amount and those where he is so con-cerned was pointedly drawn out by another judgment to which our attention has been invited by Mr. Jhaveri.
In 'Liverpool Mortgage Insurance Company's Case' (1914) 2 Ch 617 (H), Buckley LJ., in the course of his judgment, cited with approval the observations of Lord Lindley in his work on Partnership to the effect that, if one person has covenanted to indemnify another, an action for specific performance may be sustained before the plaintiff has actually been damnified, and that the limit of the defendant's liability to the plaintiff is the full amount for which he is liable-or, if he is dead or insolvent, the full amount provable against his estate, and not only the amount of dividend which such estate can pay. The position, however, would be different where the indemnifier is himself concerned with the application of the money.
In such a case, the indemnifier cannot be directed to pay the amount to the indemnity-holder. Vide -- 'In re Richardson' (1911) 2 KB 705 (I). - Therefore, it must be conceded in favour of Mr. Jhaveri that in a proper case it would be open to the indemnity-holder not to implead his creditor to his suit, but to claim a decree for the payment of the amount in question directly to himself. Incidentally we may point out that the final order passed by Chagla J., in 'Gajanan's case (A)', directed the defendant to procure from the mortgagee a release of the plaintiff from all liabilities under the deed of mortgage and further charges.
It also directed that in default of his doing so the defendant should pay into the Court the amount required to pay off the whole amount due to the mortgagee under the mortgage and further charge and that the amount so brought into Court should be utilised for the purpose of paying off the said mortgage and further charge. This order was, with respect, rightly passed in this case because the indemnifier was concerned with the appropriation of the amount in question and so the indemnity-holder was not entitled to a decree for the payment of the amount to himself.
If that be the nature of the appellant's rights against the respondent, does it follow that the claim which he set up under the present notice of motion and in respect of which he has filed a suit in the City Civil Court amounts to a counterclaim within Rule 52B (5) (b)? Mr. Jhaveri has relied upon the provisions of Rule 131 of the Rules and Forms of this Court on the Original Side in support of his argument that the right which vests in his client should be regarded as constituting a counterclaim.
Rule 131 enables the defendant to set up by way of counterclaim against the claims of the plaintiff any right or claim in respect of a cause of action accruing to the defendant either before or after the filing of the suit, but before the defendant has delivered his defence and before the time for delivering his defence has expired, whether such counterclaim sounds in damages or not.
Mr. Jhaveri has also relied upon the decision of Bhagwati J., in -- 'Framroze Merwanji v. Hormasji Maneckji' AIR 1947 Bom 204 (J). where the learned Judge has expressed the view that, in considering whether a person seeking to have an insolvency notice set aside sets up a counterclaim, it would be unnecessary to decide the merits of the counterclaim at that stage; all that the Court would be concerned to' consider at that stage would be whether 'prima facie' theparty invoking Rule 62B (5) (b) has a counter, claim to make against his creditor or not.
This position cannot be disputed. But the difficulty in the way of Mr. Jhaveri is that the right which he claims, and which undoubtedly vests in him by virtue of the contract of indemnity, merely gives him a cause of action to claim specific performance of the contract of indemnity. It is obvious that even in a case where the plaintiff prays for a decree for the payment of the amount to himself, his claim can be defeated if the indemnifier proceeds to satisfy the claim of the creditor of the plaintiff.
In substance, the indemnity-holder claims the amount, not for himself, but for his creditor; the amount is really not due to the indemnity-holder personally, but from him to his creditor. Indeed, in the suit filed by the appellant, he has been content to make an alternative claim. It is not as if he has claimed only one relief and has asked for a decree to be passed in his favour in respect of the amount in question.
Having made this claim, he has alternatively claimed that a decree may be passed calling upon the respondent to pay the amount to the Income-tax Department. When it is remembered that this suit was filed after the present notice of motion was taken out, presumably at the suggestion of Coyajee J., the alternative claim made in the plaint assumes some significance. The plaintiff must have been advised that in law it was necessary that he should make such an alternative claim.
But apart from that, the very nature of the right to claim specific performance of the contract of indemnity cannot, in our opinion, be regarded as a counterclaim at all. This right may mature into a counterclaim if the indemnity holder actually pays the amount to his creditor or if and after he obtains a decree for the payment of the amount in a Court of competent jurisdiction. In the present Case, the amount has not been paid and the decree for the payment of the amount in question is yet to be passed. The right which can be properly regarded as a counterclaim does not, therefore, vest in the appellant at this stage.
What vests in him at present, considered in the light of the legal denotation of a counterclaim, is inchoate and incomplete. He is entitled to claim specific performance of the contract and no more. If the present claim is compared with an ordinary claim for money, which can and would be regarded as a counter-claim, the distinction would be obvious. A claim on a promissory-note, for instance, bears obvious marks of dissimilarity and difference with the claim which the plaintiff is entitled to make on the bond of Indemnity.
A counterclaim properly so-called, if decreed should be able to wipe out the claim made against the alleged insolvent. It is not possible to assume at present that the claim made by the appellant would necessarily and in a decree or that the decree would necessarily be in favour of the appellant so as to enable him to wipe out the respondent's claim against him. The contract of indemnity by itself does not make the indemnity-holder a creditor of the indemnifier. Therefore, in our opinion, with respect, Coyajee J., was right in coming to the conclusion that the notice of motion based on the appellant's right under the contract of indemnity was premature.
It is somewhat unfortunate that the present insolvency proceedings will have to continue though It is common ground that besides the res-pondent the appellant has no other creditor with a subsisting claim. But however much we may deplore the present development between persons who were once partners in a firm, that cannot affect the decision of the point of law which has been raised before us by Mr. Jhaveri.
8. After this appeal was argued fully before us, and even while it was being argued, we gave the parties ample opportunity to settle this dispute between themselves amicably. Indeed, after the arguments were over, at the request of both Counsel we did not proceed to deliver judgment in order to give time to the parties to settle if they could. Efforts at settlement, we are told, have failed, and when the matter was called out to day for judgment Mr. Jhaveri attempted to refer to Ground No. 7 in his memorandum of appeal.
We have not allowed Mr. Jhaveri to refer to this ground or to address us on the merits of this ground. When the appeal was adjourned on the last occasion, it was clearly understood that the arguments were over and that counsel were to tell us on the next day whether the matter had been compromised or not and counsel were told in clear and unambiguous terms that, if the Court was informed that the matter is compromised, an order in terms of compromise would be passed; otherwise we would proceed to deliver judgment. That is why we have not heard Mr. Jhaveri on Ground No. 7 to which he attempted to invite our attention.
9. The appeal fails and must be dismissed with costs.
10. Appeal dismissed.