1. One Adamali Mahomadali Nulvala was adjudicated insolvent on August 13, 1931, on the petition of Messrs. Wagner and Englert, petitioning creditors, The petitioning creditors allege in their petition that the insolvent was indebted to them in the sum of Rs. 1856-5-6 being the amount of three D/A drafts which were honoured by the insolvent by acceptance but subsequently dishonoured by non-payment. The act of insolvency alleged in the petition is that the insolvent within three months before the date of the petition executed a deed of sale in favour of one Jafferji Pirbhai assigning to him all the good-will and interest in his business which he carried on in his shop at Kika Street together with all its stock-in-trade etc. with intent to defeat or delay his creditors.
2. The insolvent applies for an annulment of the adjudication order on the ground that he is not indebted to the petitioning creditors in the sum of Re. 1,856-5-6 as alleged, and that he has not committed the act of insolvency alleged or any other. With regard to the first ground the insolvent has stated in the affidavit in support of his application that in respect of the three drafts the petitioning creditors had agreed to give him credit for Rs. 500, and that as to the balance nothing would be found due from him if an account was taken of some amount of refund and discount, and also discount and godown, warehouse and other charges on certain goods supplied by the petitioning creditors to another party and subsequently taken over by the insolvent. As against that statement two clerks in the office of Messrs. Little & Co., the attorneys for the petitioning creditors, have made an affidavit in which they rely on a letter written by the agents of the petitioning creditors to the solicitors dated July 7,1931. On reading the affidavits I am not satisfied that the debt has been paid off by the insolvent as alleged, and it is open to the Court under Section 13(6) of the Presidency-towns Insolvency Act to have the question relating to the debt tried in Court.
3. With regard to the alleged act of insolvency the petitioning creditors rely on Section 9(6) of the Act which says that a debtor commits an act of insolvency if in British India or elsewhere he makes a transfer of his property or of any part thereof with intent to defeat or delay his creditors. It appears that the insolvent had borrowed Rs. 5,000 from one Jafferji Pirbhai, and on October 1, 1930, he mortgaged the assets of his said business to Jafferji and put the mortgagee in possession thereof. Thereafter the mortgagee through his solicitors threatened to sell the mortgaged property and to file a suit to recover from the insolvent any deficit that may arise on the sale. The insolvent thereupon agreed to sell the assets of his business to Jafferji Pirbhai for Rs 4,000 and to pass a promissory note for the balance of the amount due, and he accordingly executed a deed of sale on May 18, 1931, which has been duly registered. It is not alleged in the petition that the assets of the business are all the property that the insolvent bad, and there is also no statement to the contrary by the insolvent It has been laid down that a transfer by the debtor of his property may be an act of bankruptcy or insolvency, upon either of two grounds, (1) where the necessary consequence of the transfer is to produce insolvency, as for instance where the debtor transfers the whole of his property or the greater portion of it with a colourable or a trifling exception, in which case the intent to defeat or defraud the creditors is implied; (2) where the debtor transfers a portion only of his property but is shown to have done so with the intention of defeating or delaying his creditors, A sale or mortgage by the debtor of the whole or substantially the whole of his property in consideration of a past debt, that is a debt already incurred, is an act of insolvency, whatever the motives of the parties may have been. Such a transfer has the effect of withdrawing all the debtor's property from the legal process which his creditors have a right to enforce against him. It necessarily defeats or delays the other creditors of the debtor by preventing them from issuing execution. It has always, therefore, been considered to be a fraudulent act in bankruptcy, because as was said by Pollock B. in In re Cranston, Ex parte Cranston (1892) 9 Morrell'a Bankruptey Reports, 160 (p, 168):-.a bankrupt by so doing takes away from his creditors all potentiality of carrying on his business or paying his debts. It is the shutting up of shop in the fulles) sense, and it is a giving up that which in truth belongs to the creditors, and that to which they have a right to look for the payment of their debts.
4. It was held in In re Wood (1872) L.R. 7 Ch. App. 302 that an assignment of the whole of the debtor's property is an act of bankruptcy, even though the words 'to defeat or delay creditors' are omitted from Section 6(2) of the Bankruptcy Act of 1869 and also in the subsequent Acts. In such a case no evidence of intention in the mind of the debtor to defeat or delay his creditors is necessary, because the intent is implied by the law. See also Smith v. Cannian (1853) 2 El, & Bl. 35 in which case the property that was conveyed in the bill of sale by way of security exceeded the value of the debtor's liability by two-thirds, and there was a trust of the surplus for the benefit of the bankrupt. It was still held that the execution of the bill of sale amounted to an act of bankruptcy.
5. In Worseley et al v. Demattos and Slader (1758) 1 Burr 467 Lord Mansfield C.J. points out at p. 478 the distinction between the two classes of cases as follows:-
There is a great difference between the conveyance of all, and of a part, A conveyance of a part may be public, fair and honest; as a trader may sell; as he may openly transfer many kinds of property, by way of security ; but a conveyance of All, must either be fraudulently kept secret: or produce an immediate absolute bankruptcy.
6. If, therefore, a debtor transfers only a part of his property in consideration of a past debt, the transfer does not by itself amount to an act of insolvency, unless it is made with the intent to defeat or delay his creditors, and that intent must be proved. It may even be inferred from surrounding circumstances. Such a transfer cannot constitute an act of insolvency by itself in the absence of evidence of such intention, because it is competent to a trader to appropriate specific portions of his property in payment of or by way of security for particular debts. It has also been held that a transfer of part only of a debtor's property in consideration of a present advance is not by itself an act of insolvency. In Young v. Waud (1852) S Ex. 221 there was an assignment by way of mortgage by a trader of a portion of his effects as security for an existing debt, and it was held that the assignment was not per se an act of bankruptcy in the absence of fraud, though the effect of putting the instrument in force would be to stop the trader's business, If there is fraud, the assignment is void; if not, it cannot be questioned. See also Pennell v. Reynolds (1861) 11 C.B.N.S. 709 and Ex parte Fisher: In re Ash (1872) L.R. 7 Oh. App, 636 The portion, however, which is excepted, mast be real and substantial; it must not be a mere colourable exception of a part of the debtor's property.
7. In the case before me the mortgage is recited in the deed of gale, and there is no dispute that the past debt was a valid one. It is not alleged that the sale is collusive or that it is not bona fide. The question, therefore, is whether the deed of sale comprised all the insolvent's available property. As I have said before, it is not so alleged in the petition, and an act of insolvency must be strictly proved. The burden of proving that the transfer, is calculated to defeat or delay creditors lies upon the person who sets up the transfer as an act of insolvency, and in the case before me the burden has not been discharged, because in the petition there is nothing beyond the bare allegation of the petitioning creditors that the deed of sale was executed with the intent to defeat or delay. In my opinion no act of insolvency having been proved, it is not necessary to have the question relating to the debt proved in Court. The application must, therefore, be allowed and the adjudication order annulled. I have already stated before that there is no allegation in the petition that the deed of sale comprised all the available property of the insolvent; on the other hand I have no statement by the insolvent that he had any other property. Taking all the circumstances of the case into consideration I make no order as to the costs of the application.