(1) The two questions that arise for my consideration in this revision petition relate to the effect of an order of annulment passed under Section 35 of the Provincial Insolvency Act on a creditors money claim and the meaning to be given to the words 'the debts of the insolvent have been paid in full' occurring in that Section.
(2) The relevant facts in regard to these two questions are not in dispute. The petitioners instituted O.S. 412 of 1957 against the respondents as the heirs of one Mr. Oliver for recovery of Rs. 960-0-0 with costs and future interest from the assets of the deceased debtor. Oliver executed a promissory note of Rs. 1,000/- in favour of Jabharchand, agreeing to pay interest at Rs. 5/- per cent per mensem. Thereafter, he filed an application for adjudication as an insolvent and was adjudged as such on 2-9-1949. The petitioners proved their debts and were paid Rs. 1028/- on different dates in respect of the dividends declared by the Insolvency Act. Oliver applied for a discharge and he died before any order could be passed on that application. The Petitioners filed an application for an order of annulment and such an order was passed on 12-8-1957. Thereafter, the petitioners instituted a suit on 4-9-1957 against the heirs of Oliver for recovery of Rs. 962/- alleging that the amount was due to them under the promissory note after deducting what had been paid to them prior to the date of annulment.
The suit was resisted by the heirs of Oliver on the ground that the debts had been paid in full prior to the order of annulment and that the plaintiffs had no cause of action to institute the suit for recovery of any amount under the promissory note. The trial Court rejected the contentions on the ground that the amount of Rs. 1028/- paid to the plaintiffs did not amount to payment of the debt in full and that the assets of deceased Oliver were liable for payment of the balance of the debt. The Court accordingly passed a decree in favour of the plaintiffs for Rs. 614-4-0 with future interest at 3 per cent per annum and proportionate costs of the suit. Being aggrieved by the judgment and decree, the defendants filed Regular Appeal No. 4 of 1958 and challenged the correctness of the decree of the trial Court on the very grounds urged by them in the trial Court. The learned Civil Judge who heard the appeal came to the conclusion that the order of annulment had been passed under Section 35 of the Provincial Insolvency Act (which corresponds to an identical Section of the Mysore Insolvency Act--hereinafter referred to as the Act--and that the payment of Rs. 1028/- which according to the Official Receiver in the Insolvency amounted to payment of sixteen annas in a rupee in respect of the proved debt and that the plaintiffs were not entitled to maintain the suit. He accordingly allowed the appeal and dismissed the suit directing the parties to bear their respective costs.
(3) In this petition, Mr. G.S. Ullal appearing for the petitioners has challenged the view taken by the learned appellate Judge. He contended that the order of annulment passed under Section 35 of the Act relegated the debtor to his original position as if no order of adjudication in insolvency had been passed, that the payments made by the Official Receiver did not amount to the payment of debt in full and that the petitioner were entitled to a decree for balance of the debt. Mr. Janardanam appearing for the respondents sought to support the view taken by the learned appellate Judge and further contended that even if there was any liability to pay, the petitioner were entitled to recover interest at 6 per cent only on the balance of the debt.
(4) Section 37 of the Provincial Insolvency Act which deals with the effect of annulment lays down that :
'Where an adjudication is annulled, all sales and dispositions of property and payments duly made and all acts therefore done, by the Court Receiver, shall be valid, but, subject as aforesaid, the property of the debtor who was adjudged insolvent shall vest in such person as the Court may appoint or, in default of any such appointment shall revert to the debtor to the extent of his right of interest therein on such conditions (if any) as the Court, may, by order in writing declare.'
In the present case no order of vesting was passed by the Court. So according to the plain words of the Section, all payments made by the Receiver to the creditors are valid. No question of sale or dispositions of other property by the Receiver arise for consideration in this case. In the absence of any order of vesting, the assets of the deceased in the hands of the Official Receiver reverted to the heirs subject to such rights and liabilities as the debtor had. The rights of the creditors, if any are neither enlarged or impaired by the order of annulment. The Section validates all the sales and dispositions made by the Receiver or the Court prior to the annulment, and provides that the rest of the property reverts to the debtor. The latter is free to deal with it to the extent of his interest as if he had not been adjudged an insolvent. As Court in Subbaiah v. Ramasami, : AIR1954Mad604 , the consequence of annulling an order of adjudication is to wipe out altogether the insolvency and its effect, except to the limited extent preserved under Section 37.
The Legislature has introduced the fiction of vesting the title to his property retrospection the insolvent without invalidating the sales and dispositions of property and payments duly made by the Court or the Official Receiver. What is saved under Section 37 are sales and dispositions of property and payments duly made and the acts done by the Court or Receiver between the date of adjudication and the date of annulment (See Janabai v. Narasimhallu, AIR 1956 Mad 341. A Division Bench of the Andhra High Court in Veeraraju v. Venkataratnam, (S) : AIR1955AP152 took the same view and affirmed that the effect of annulment relates back to the date of adjudication and that the property does no merely revest in the insolvent.
(5) While the learned Advocate for the respondents does not dispute that the legal effect of an order of annulment is to relegate the debtor to his original position as if no order of adjudication had been passed, he contends that the order of annulment passed under Section 35 of the Act fully discharged the debtor and his assets from all liability under the promissory note as according to the report of the Official Receiver the debt had been paid at the rate of sixteen annas in a rupee. In order to test the validity of this contention it would be necessary to refer to Section 35 of the Act which empowers the Court to pass an order of annulment. That Section reads :
'Where, in the opinion of the Court, a debtor ought not to have been adjudged insolvent, or where it is proved to the satisfaction of the Court that the debts of the insolvent have been paid in full, the Court shall, on the application of the debtor, or of any other person interested, by order in writing, annul the adjudication and the Court may, of its own motion or an application made by the Receiver or any creditor, annul any adjudication made on the petition of a debtor who was, by reason of the provisions of sub-section (2) of Section 10, not entitled to present such petition.'
In the present case, the order of annulment is very laconic and does not disclose the grounds on the ground on which it was based. This has given scope for unnecessary contentions and speculation in the Courts below. The order of annulment passed on 12-8-1957 as reproduced by the appellate Judge reads thus :
'Petitioner by Shri...........................
First respondent by Shri K.S. Second respondent by Agent.
Objections on I.A. XXIV. To hear regarding death of the petitioner. Heard Petitioner, dismissed. Adjudication annulled.'
The learned Judge has wholly overlooked the fact that apart from the working of Section 35 of the Act, the facts of the present case as were before him required him to apply his mind and pass a considered order indicating on which ground he had annulled the order of adjudication. It is obvious from Section 35 that an order of annulment can be passed either where the Court considers that the debtor ought not have been adjudged an insolvent or where it is proved to its satisfaction that the debts of the insolvent have been paid in full. Such an order could be passed by the Court either on its own motion or on the application of the Receiver or of any of the creditors before it. It is in evidence that the debtor himself had filed an application for discharge. It is also in evidence that the plaintiffs had filed an application for annulling the order of adjudication on the ground that the debtor had obtained the order of adjudication from the Court without bringing to its notice all his assets.
It seems to have been contended by the plaintiffs in opposing the application for discharge that the debtor was a subscriber to the Provident Fund and that he was entitled to draw Rs. 5,000/- on that count and also to get a sum of Rs. 4,500/- on his retirement. It is not clear what was the full report of the Official Receiver as regards the assets in his hand. Under these circumstances it was obligatory on the Court to have considered all the evidence before it and indicated that the annulment of adjudication was either on the ground that it considered that the debtor ought not to have been adjudged an insolvent or that his debts had been paid in full. Some time after the institution of the present suit, an attempt seems to have been made by the respondents by filing an application before the Insolvency Court for clarification of the order. It appears that the Civil Judge presiding over the Insolvency Court passed an order to the effect that as the Official Receiver had reported that all the dividends declared so far would amount to payment of sixteen annas in a rupee of the proved debts, the order of annulment passed on 12-8-1957 was apparently under S. 35 of the Insolvency Act.
This evidence was produced in the appellate Court and its admission was hotly contested by the plaintiffs. In my opinion, this clarification is of little consequent since it is not disputed by any of the parties that the annulment order of the instant case was one under Section 35 of the Act.
(6) Mr. Janardanam appearing for the respondents, however, submitted that in view of the clarification made by the Judge on 10-3-1958 the debts of the insolvent had been paid in full and therefore no liability subsisted against the estate of the deceased debtor to enable the plaintiffs to institute the suit. As observed above, the effect of annulment is merely to relegate the debtor to his original position as if no order of adjudication had been passed. It is seen from Section 37 that while all dispositions and sales effected an payments made are validated, the debtor does not get any further advantage except that of being free from the disqualification and disabilities imposed on an insolvent under the Act.
(7) It is, therefore, necessary to decide whether in this case the debts of the insolvent, particularly of the present plaintiffs, had been paid in full as contemplated by Section 35 of the Act. Most of the decisions of the Indian High Courts have relied upon the decision in In Re Keet, (1905) 2 KB 666 where Section 35 of the Bankruptcy Act, 1883, came up for discussion. Section 35 of the Bankruptcy Act also requires proof that 'the debts of the bankrupt had been paid in full' before the Court exercised its jurisdiction to annul adjudication in bankruptcy. Interpreting the Section, Sterling L. J. delivering the concurrent judgment, observed :
'.... The language of the Act, interpreted according to its natural meaning, appears to me to require a payment in full, a payment of money, something which in action of law could, under the old practice, have been pleaded as a payment.'
In that particular case releases given by the creditors in consideration of small payments made were held as not full payments within the meaning of that Section. In In Re Shivlal Rathi, 40 Ind Cas 207 : (AIR 1917 Bom 239(2)) the Bombay High Court considered the meaning of the words 'payment in full' occurring in Section 21 of the Presidency Towns insolvency Act, which corresponds to S. 35 of the Provincial Insolvency Act. According to that High Court, such
'....... payment must be in cash in full of the claims and the insolvent cannot escape the result of the adjudicating order and prevent the Court from enquiring fully into his affairs, by adjusting his claims and getting creditors to accept less than what they considered due to them; nor by thus getting a receipt in full, can be then contend that his debts have been paid in full, and the adjudication should be annulled.'
It, therefore, follows that the words paid in full occurring in Section 35 mean payment of the full amount as the creditor would be entitled to, as if no order of adjudication had been passed against the debtor. Rankin, J. took the same view in In Re A. A. Hailes, ILR 47 Cal 914 : (AIR 1920 Cal 684). His Lordship held that
'The insolvent cannot bring himself within the language of Section 21 of the Presidency Towns Insolvency Act unless he satisfied me that he has paid to the creditor, being a creditor, in respect of a debt which was proved, such sum as would have been complete discharge to him spect of that debt, had 'there been no bankruptcy at all.
Under S. 21 the position is that an insolvent is entitled to claim a right which the section gives him, if it is proved to the satisfaction of the Court that the debts of the insolvent are paid in full.
X X X X
But such a person coming to the Court in the middle of a pending bankruptcy and asking the Court to determine his bankruptcy must show, independently of any rights given to him by the Bankruptcy Act, that he has paid off his creditors as one man pays another, apart from the Bankruptcy Act altogether. He is asking the Court to bring the bankruptcy to a sudden stop because it is no longer necessary. In my opinion the only person who is in that position is the person who made such a payment as could be pleaded between two ordinary parties as amounting to a complete discharge of the debt.'
It is clear from these observations that a person who seeks to set aside an adjudication altogether, must show that independently of the insolvency he had cleared off his debts and satisfied the creditor in full. The Oudh High Court considered the meaning of these words occurring in Section 35 in Pat Ram v. Mt. Sukhdei, AIR 1947 Oudh 202 and pronounced as follows :
'If the insolvent applies for the indulgence which S. 35 gives him, namely to be relegated to the original position as if he has not been adjudicated, it is clear that he must pay what he would have had to pay, had the proceedings in bankruptcy not intervened. Under Section 35, the onus is on him to establish that independently of the Bankruptcy Law he has satisfied his debts in their entirety.'
It is manifest from these decisions that the liability of the debtor for the balance of the debt remaining unpaid at the date of the annulment remains unaffected and can be enforced by the creditor as if there had been no proceeding in insolvency against the debtor. The Report of the Official Receiver that sixteen annas in the rupee had been paid to the creditor was founded on the accounts taken under the Act with interest at a rate not exceeding 6 per cent per annum normally upto the date of adjudication. The payments made on that basis are valid but do not put an end to the debtor's liability under the terms of his contract and the common law, when the effect of adjudication is wiped out by an order of annulment.
(8) In this view, the learned Appellate Judge was in error in holding that the plaintiff had no right to recover the balance of the debt according to the report of Official Receiver they had been paid at the rate of sixteen annas in a rupee. When the order of annulment was passed on 12-8-1957, the creditor became entitled to recover the principal amount of Rs. 1000/- with interest at 12 per cent per annum. The trial Court was therefore right in holding that the plaintiffs were entitled to a decree for Rs. 614-4-0.
(9) Mr. Janardanam, however, contended that the plaintiffs were entitled to interest only at 6 per cent per annum under Section 61(6) of the Act. Section 61 provides for the mode of distribution of property of the insolvent and prescribe the properties for payment of debts. Sub-section (6) which is relied upon, reads-
'Where there is any surplus after payments of the foregoing debts, it shall be applied in payment of interest from the date on which the debtor is adjudged an insolvent at the rate of six per centum per annum on all debts entered in the schedule.'
The sub-section is obviously applicable to cases where the order of adjudication is not annulled and the assets of the insolvent in the hands of the Receiver are found to be surplus. After the annulment, the debtor's liability to pay interest at the contract rate and where the contract rate is usurious, at such rate as the Court thinks reasonable, cannot be denied. Section 48(2) of the Act which deals with proof interest expressly provides that the creditor may prove for interest 'at a rate not exceeding six per cent per annum' is 'without prejudice do the right of a creditor to receive out of the debtor's estate any higher rate of interest to which he may be entitled after all the debts proved have been paid in full'. It is 12 per cent interest per annum as claimed in the plaint. The plea for reduction of that rate under Section 61(6) of the Act has no substance.
(10) In the result, the petition is allowed the judgment and decree passed by the appellate court are set aside and those passed by the trial Court are restored. The petitioners shall get costs of this Court and of the first appellate Court from the assets of the deceased in the hands of the respondents who shall bear their own costs.
(11) Petition allowed