1. This revision petition arises out of I. P. 12/61 on the file of Sub-Court, Kavali, an insolvency petition filed by the respondent against the petitioner.
2. The allegations in the petition are that the petitioner executed a promissory note for a sum of Rs. 3950 on 27-10-1959 in favour of the respondent comprising of Rs. 3500 paid by the respondent in cash before the Sub-Registrar and the balance of Rs. 450 subsequently taken by the petitioner from the respondent. It was agreed at the time of execution of the promissory note that the petitioner will not alienate the schedule mentioned property, Contrary to that the petitioner alienated the schedule mentioned property in favour of several persons including one Satyanarayana and others. The respondent believes it to be true that the property was also sold in auction several times. The petitioner except the house at Kanigiri and the same is worth Rs. 12,000 and he owes debts to the tune of Rs. 16,000 to Rupees 17,000 to the creditors.
3. The petitioner is unable to discharge the same and has been making an attempt to screen his properties in the name of his partisans. The respondent learns and believes it to be true that the petitioner has sold the schedule mentioned house at Kangiri under a registered sale deed dated 20th April 1961 in favour of his natural brother Pydimarri Bala Venkata Subbaiah fraudulently and with a view to delay and defraud the creditors. It was also alleged that the sale was without any consideration. The recitals therein that the respondent was being paid Rs. 4200/- and respondent's husband Rs. 1500 by the vendee. are all not true or correct. The other debts mentioned in the document are also not true. The respondent therefore, submitted that the petitioner had committed on act of Insolvency under S. 6 of the Provincial Insolvency Act (hereinafter referred to as the Act) having transferred the only property owned by him or a substantial portion of his property and is, therefore, liable to be adjudicated insolvent.
4. The petitioner in his counter denied that he borrowed a sum of Rs. 3950 from the respondent. He admitted that the executed a promissory note for Rs. 3950, in favour of the respondent but that promissory note was merely nominal and not intended to be operated. As the petitioner was indebted to others and was in difficult circumstances, the respondent's husband advised him to execute a promissory note for a sum of Rs. 3950 in favour of the respondent and another promissory note for Rs. 1000 in favour of the respondent's husband with a view to enhance the amount of petitioner's indebtedness and obtain rateable distribution against the creditors. It was also stated that the respondent had no capacity to lend any amount to the petitioner. The insolvency petition, it was alleged, was not maintainable as the respondent was not a creditor of the petitioner. The sale deed executed by the petitioner on 20th April 1961 is not devoid of consideration. The house was sold by the petitioner for Rs. 11,000 with a view to discharge his debts. After three months of sale, out of the sale amount, the petitioner paid all the debts and got several decrees satisfied.
As the petitioner was absent at the time of writing the sale deed, the vendee got the sale deed written with several incorrect recitals. The petitioner did not read the document in that hurry and simply signed it. Later on the petitioner came to learn that it was recited wrongly in the document that the respondent's alleged debt of Rs. 4200 was also paid by the vendee to the respondent. The petitioner issued a notice to the vendee about this wrong recital. The present petition has been filed by the respondent with a view to harass and annoy the petitioner. The insolvency petition has not been filed for the benefit of the petitioner's creditors. The petitioner also contended that the sale deed is not and cannot be fraudulent preference and that the case of the respondent was quite inconsistent and opposed to the original contention that the sale deed was a bona fide transaction.
5. The trial Court considered two points viz., 1. Whether the petitioner is not a creditor of the respondent 2 Whether the respondent is liable to be adjudicated insolvent.
6. On point No. 1 after review of all the evidence and documents produced by the parties, it held that the promissory note was only a nominal document executed by the petitioner and that no consideration passed under it as mentioned therein. It was therefore, held that the respondent was not entitled to file any insolvency petition. On the second point the trial Court held that there was fraudulent transfer and that it was satisfied that the petitioner cannot be adjudicated insolvent even on this ground. While arriving at the conclusion on point No. 2 the trial Court has held that all the debts evidenced by the discharge receipts Exts. B-1 to B-14, had been paid by the petitioner subsequent to the execution of the sale deed. It also held that as the petitioner was in embarrassed circumstances he wanted to pay off the debts. so he sold his property for paying all the genuine debts, according to him. It was also held that there was no fraudulent preference which would be void as against the receiver.
7. The respondent filed an appeal aggrieved by the order of the Subordinate Judge. The appellate Court held that the promissory note was a genuine one and supported by consideration. On the second question as to whether the petitioner would be adjudged insolvent, the appellate Court observed:
'Admittedly the house property sold by the respondent (Petitioner) was his only property and he was not owning any other immovable property. If that is so, the result of that transaction is, his only property was alienated by the respondent (Petitioner) without paying the debt of Jalamma, the petitioning creditor (respondent) out of the sale consideration, though it was intended originally as recited in the sale deed that the debt of the petitioner (respondent) also should be paid from out of that consideration amount ............... If the debt of the petitioner (respondent) is true, there is no doubt that the effect of the transaction of sale in question was to defeat the petitioner (respondent) Under those circumstances, in my opinion, the transaction of sale in question would amount to an act of insolvency if Ex. A-3 pronote debt claimed by the petitioner (respondent) was true and supported by consideration and it was not nominally executed.'
In short the Court held that the transaction of sale entered into by the petitioner on 20th April 1961 was an act of insolvency within the meaning of Section 6 of the Act and consequential adjudged the petitioner insolvent. The appellate Court has not stated that the act of insolvency falls within any particular clause of Section 6 but it has merely remarked that it is an act of insolvency.
8. Sri Y. Suryanarayana the learned counsel for the petitioner submits that on the findings of fact which he is not assailing in this revision and which he cannot assail, the decision reached by the appellate Court that an act of insolvency has been committed by the petitioner, is not in accordance with law and, therefore, this Court should interfere under the first proviso to Section 75(1) of the Act.
The findings of fact which are binding on this Court are:
(1) Ex. A-3 the promissory note executed by the petitioner in favour of the respondent is true and binding.
(2) The property sold by the petitioner was his only property.
(3) Originally when the petitioner executed the sale deed, he had an intention to pay the respondent.
(4) According to the sale deed, the vendee had to withhold the amounts payable to various creditors mentioned in the schedule to the sale deed. The petitioner later on directed the vendee not to pay the respondent and consequently the vendee paid the amount to the petitioner.
(5) That at the date of sale the creditors mentioned in the sale deed were the only creditors of the petitioner.
The contention of the learned counsel for the petitioner is that the transaction complained of by the petitioner is not covered by any of the clauses of Section 6 of the Act which can be applied in the present case. It is not disputed that the act of transfer will be an act of insolvency within the provisions of Section 6 if it can be brought under Cls. (a) (b) and (c). The other clauses are not attracted in the instant case. It was contended on behalf of the petitioner that Cl.(a) was not at all adverted to in the petition but the petition rested only on Cls. (b) and (c). I do not agree with this contention. It is no doubt true that the provision of law shown in the petition in Section 6 (b) and (c) but para 5 of the petition specifically says that on the facts mentioned in the petition, the petitioner may be held to have committed an act of insolvency under Section 6 of the Act and be adjudged an insolvent. It is now well settled that if all the facts have been stated in the petition or complaint, the Court is empowered to consider other provisions of law even though not specifically mentioned in the petition. In the instant case that question also does not arise because Section 6 has been referred to in the petition.
The learned counsel for the petitioner relied on Kondappa v. Pullappa, AIR 1929 Mad 910 for the proposition that the persons ought not to be adjudicated on acts of insolvency not relied on by the petitioning creditors. Whether a particular act of insolvency is relied upon or not by creditors, has to be decided on the facts of each and every case.
9. It is necessary to extract the provisions of Cls. (a) (b) and (c) of S.6 which are as follows:
(a) if in India or elsewhere, he makes a transfer of all or substantially all his property to a third person for the benefit of his creditors generally;
(b) if, in India or elsewhere he makes a transfer of his property, or any part thereof with intent to defeat or delay his creditors;
(c) if, in India or elsewhere, he makes any transfer of his property, or of any part thereof which would under this or any other enactment for the time being in force, be void as a fraudulent preference, if he were adjudged an insolvent.'
10. Before considering the provisions of Clause (a) of Section 6, I will first deal with the arguments of the learned counsel for the parties in regard to Cls. (b) and (c) of the said section. Clause (b) is applicable only in cases where a transfer is made with intent to defeat or delay the creditors. Stress is laid on the word 'creditors' and it was not disputed by the respondent that for purposes of a transfer to be brought within the provision of Clause (b) it is necessary that it should have been effected with intent to defeat or delay the whole body of creditors and not a single creditor. This clause is not applicable in cases where the allegation is to defeat or delay a single creditor. As it has been found in the case, the sale deed was executed with intent of paying off all the creditors including the respondent herein but because of the contention of the petitioner that the promissory note executed in favour of the respondent was not a genuine one, the respondent was not paid. In the circumstances the utmost that can be said even assuming that the petitioner when he executed the sale deed never intended to pay the respondent is that it was with the intent to defeat or delay one single creditor i.e., the respondent. But the learned counsel Mr. Ramasarma for the respondent contends that the sale deed was executed on 20-4-1961 and the other creditors mentioned in the sale deed were paid only about three months after as is clear from the dates of Exs. B-1 to B-14. The first of these exhibits in point of time is dated 26-7-1961 and the last 22-9-1961. He therefore urges that there was an intent to delay the creditors if not defeat them. This argument is entirely unfounded. The question of delaying the creditors can only be raised when the transaction is done in such a manner that the property is not available to the creditors for the recovery of the debts due to them. Here in this case the sale deed clearly shows that the vendee was to pay the amounts to the various creditors mentioned in the sale deed and in fact such creditors had been paid even though after a period of three months. Therefore, there was nothing to show that this was a transaction with the intent of delaying the creditors.
11. Another argument was also advanced on behalf of the respondent that both the lower Courts have not adverted to Exts. A-7 & A-8 which are the decrees against the petitioner dated 6-12-1958 and 25-7-1961 respectively. The names of these decree-holder creditors have not been mentioned in the sale deed and it can therefore be said that the sale deed has been executed with the intent to defeat or delay the creditors in Exts. A-7 and A-8 along with respondent. This is entirely a new argument which has been advanced at this stage: which I am not prepared to consider. None of the lower Courts have adverted to this argument and the finding of fact being that there were no other creditors than those mentioned in the sale deed, I am not prepared to consider these exhibits and reverse the finding of both the Courts in this respect.
12. The question that for purposes of Clause (b) the transfer should be with the intent to defeat or delay the whole body of creditors and the transfer with the intention of defeating or delaying a single creditor is not within the ambit of Clause (b) is now well settled and it will be sufficient to refer to only a recent decision of this High Court in Sanjeeva Reddy v. Ellappa Reddy, : AIR1967AP243 wherein my learned brother Gopal Rao Ekbote, J., held that S. 6(b) of the Provincial Insolvency Act applied only where a debtor transferred his property to defeat or delay all his creditors as a whole and not one of them alone. Where a debtor therefore, transferred his property to any creditor of his and paid out of the sale proceeds, some of his creditors, a transfer not being with an intent to defeat or delay all the creditors did not amount to an act of insolvency within the meaning of Section 6(b).
13. In order to hold that a debtor has committed an act of insolvency under Clause (c) it is necessary that the following conditions are fulfilled: (1) there should be a transfer of property (2) such a transfer should be void as a fraudulent preference if he were adjudged an insolvent under the present or any other enactment for the time being in force. As far as the first condition is concerned, it is applicable. The dispute has arisen whether the second condition is fulfilled in the present case. It is the contention of the learned counsel for the petitioner that to attract Clause (c) a transfer would have to be void as a fraudulent preference under Sec. 54 of the Act or under Section 52 of the Transfer of Property Act. It is not very seriously disputed that Section 54 of the Act and Sec. 52 of the Transfer of Property Act is not attracted. though it was contended by the learned counsel for the respondent that Section 54 of the Act is only applicable in cases where a receiver wants to avoid a transfer made by an insolvent. Obviously this argument cannot be accepted.
For purposes of ascertaining whether a transfer is covered by Clause (c) it will have to be found out whether such transfer is void as a fraudulent preference if the transferor were to be adjudged insolvent and for purposes of finding out whether it is void for the reason given, one has necessarily to consider the provisions of the Act and any other enactment. It is not disputed that Section 54 is the only provision of the Act which speaks of transfer of property being void for fraudulent preference. The learned counsel for the respondent argues that Sec. 54(1) of the Act deals not only with transfer of property but also refers to 'every payment made, every obligation incurred and every judicial proceeding taken or suffered by any person unable to pay his debts as they become due in favour of any creditor' Therefore, the whole Section 54 of the Act will have to be read with Clause (c) of Section 6. This argument is obviously untenable. Clause (c) of Section 6 of the Act refers to transfer of property alone and not to payment or obligations or judicial proceedings. IT, therefore, follows that the provisions of S.54 of the Act as far as they relate to transfer of property will have to be considered alone for purposes of Clause (c) and not other provisions included in Section 54. In other words for purposes of Clause (c) of Section 6, Section 54(1) will have to be read after leaving out the portions of the section which are not Applicable:
'Every transfer of property in favour of any creditor with a view of giving that creditor a preference over other creditors shall, if such person is adjudged insolvent be deemed fraudulent and void.'
Under Section 54 for purposes of transfer of property to be void as a fraudulent preference, the essential condition is that such a transfer should be in favour of a creditor. The second essential is that the creditor in whose favour such transfer is effected is given preference over other creditors. Obviously these two essential conditions are not fulfilled where the transfer is not in favour of a creditor but a third person. Section 54 is therefore, not at all attracted and consequently Clause (c) of Section 6 also is not attracted. Admittedly in case before me, the transferee of the sale deed Ex. A-3 is not a creditor at all. On this short ground it had to be held that the transfer cannot become an act of insolvency under Cl.(c) of Section 6. It is suffice to refer to a decision of this Court in : AIR1967AP243 .
14. It was also argued on behalf of the petitioner that as the sale deed was executed by the petitioner under pressure of creditors, it cannot be called a fraudulent preference within the meaning of Section 54 of the Act. It is not necessary for me to consider this aspect of the question.
15. The learned counsel for the respondent contends that even if Cls. (b) and (c) are held t be not applicable, the transfer effected by the petitioner is within Clause (a) of Section 6. His argument is that for purposes of application of Clause (a) what is necessary is that there should be a transfer of all or substantially all the property of the debtor to a third person and such a transfer must be for the benefit of his creditors generally. It cannot be disputed in the present case that the petitioner has transferred all his property to a third person. The first limb of Clause (a) is thus attracted. It is not also disputed that the transfer was with the intention of paying off all the creditors. According to the learned counsel for the respondent therefore, the second limb of Cl.(a) is also attracted as in the circumstances the transfer is for the benefit of the debtor's creditors generally.
16. The question for consideration is what is the meaning of a transfer for 'benefit of creditors generally' Can it be said that Cl.(a) is applicable only in cases where the debtor transfers all or substantially all his property to a trustee or trustees for the purpose of paying of his creditors generally or to composition deeds executed for the purpose of paying off the creditors? The learned counsel for the respondent on a comparison of the English Bankruptcy Act submits that the provisions of Clause (a) of Section 6 in the Act are wider than the provisions of the English Bankruptcy Act 1914 as amended by the Act of 1926. The provisions of the English Act that are applicable are Section 1(1)(a) which reads that a 'debtor commits an act of bankruptcy in each of the following cases; (a) if in English (England ?) or elsewhere he makes a conveyance of his property to a trustee or trustees for the benefit of his creditors generally.' The words 'trustee' or 'trustees' have been omitted from the Indian Act from which it is contended that the intention is not to limit Cl. (a) of S. 6 only to transfer of property in favour of trustee or trustees.
Any transfer to a third person for the benefit of the creditors generally is covered by Clause (a); whereas it was contended by the learned counsel for the petitioner that even though the words 'trustee' or 'trustees' have been omitted from Clause (a) the expression 'for the benefit of his creditors' is applicable only to cases analogous to conveyance or assignment in favour of trustee or trustees. What is intended by this expression is that there is no absolute transfer in favour of a third person. The transfer is with a specified purpose of benefiting the creditors i.e., for making arrangements for their being paid off or for paying them. It is not intended in such cases to make the transferor an absolute owner of the property but only to make him a legal owner for a particular purpose so that after the purpose is served, and if anything from the property remains, it may be retransferred to the transferor.
A transferor for the benefit of the creditors generally was not expressly mentioned as an act of bankruptcy in the English Bankruptcy Act prior to Act of 1869 but always treated as an act of bankruptcy, the reason being that the transferor thereby deprives himself of the power of carrying on his trade and endeavours to put his property into a course of distribution among his creditors different from that which would take place under the bankruptcy laws and without the safeguards which that law provides. It was expressly mentioned for the first time to bean act of bankruptcy by the Bankruptcy Act, 1869, Section 1(2). It has been held in England that in order that a transfer for benefit of creditors may be an act of insolvency, it is necessary that transfer must be for the benefit of all the creditors and not a particular class of creditors. A transfer by a debtor for the benefit of his creditors only is not an act of insolvency under clause (a) though it may amount to fraudulent preference under Cl.(c) of that section. (Vide the law of insolvency in India by D. E. Mulla, 2nd Edn. Para 96).
17. From this exposition of law it becomes apparent that to bring a transfer within clause (a) or Section 6 it should be an endeavour on the part of the debtor to put his property into a course of distribution among his creditors. It also further shows that a transfer in favour of a class of creditors is not an act of insolvency because in such a case there is no endeavour to put the property into a course of distribution among the creditors. Such an endeavour is considered to be an act of bankruptcy because it is an attempt to divide the property in a manner different from that which would take place under the bankruptcy law and without the safeguards which that law provides. It is also to be seen that 'transfer for the benefit or creditors' can also be expressed as 'transfer where the creditors are beneficiaries' For a creditor to be a beneficiary under a transfer, it is necessary even though the strict rules of law of trust are not applied, that the creditor gets certain rights under the transfer which he will be in a position to enforce as against the transferee. Where the transfer in itself does not create any benefit in favour of the creditors, it cannot be said that under such transfer, the creditor will have any right to proceed as against the transferee. Even if transfer makes a provision that the transferee will withhold amounts for purposes of paying off the creditors, such a transfer will not create any right in favour of the creditors which would enable them to claim the amount from the transferee direct.
It was argued by the learned counsel for the respondent that when the transferee withholds the amounts payable to the creditors such a transferee is a trustee and even if Clause (a) of Section 6 is interpreted so as to be applicable only to trust or composition deeds, the instant case is also covered by the provisions of Clause (a). This argument cannot be accepted. The provision for withholding a part of the whole of the consideration from the transferor for a particular purpose, will not constitute the transferee a trustee of that consideration as far as third parties are concerned. Such provision is introduced evidently with the intention of safeguarding the interest of a transferee and by such a provision it cannot be said that the transferee has declared himself to be a trustee or that the transferor has settled a trust in his favour. Even if the word 'transfer' is taken in its wider sense, the riding condition is that such transfer should be for the benefit of the creditors generally.
As already stated the word 'benefit' has a significance of its own and only such transfers are taken in by the said clause as would give right t the creditors to proceed as against the transferee. In this view it cannot be stated that an out and out sale in favour of a third person will be a transfer for the benefit of creditors, even though such transfer is for the purpose of paying off all the creditors and the transferee retain the consideration for that purpose. In Subbu Chetti v. Arunachalam Chettiar, AIR 1930 Mad 382 a Full bench has considered the question whether a suit can lie by a third party to enforce the stipulation in a deed of transfer by a person to another that the payment of money by a purchase will be made to that third party. The facts of the case were that defendant No. 1 executed a sale deed in favour of defendant No. 3 and he directed the vendee to pay the plaintiff the amount which defendant No. 1 owed to the plaintiff. The plaintiff sued to recover the balance due on the promissory note executed by defendants No. 3 a party on the ground that he was the vendee from defendant No. 1 under obligation to pay the debt due by defendant No. 1 to the plaintiff. The Full Bench held that on the terms of the sale deed 'there was no trust express or implied created and the sale deed merely constituted the vendee the agent of the vendor to pay some of his creditors' It was held that the suit to enforce such a stipulation by a third party did not lie. Section 6(a) of the Act is, therefore, not applicable.
18. The learned counsel for the respondent relied on Ramathai Anni v. Kanniappa Mudaliar, AIR 1928 Mad 480 for the proposition that in a case where a transfer is executed that in favour of a person who is a near relation of the debtor with the purpose of paying off the creditors, such a transfer is fraudulent and is an act of bankruptcy under Section 6 of the Act. The facts of that case were that the debtor transferred a large portion of his property in favour of a near relation for an amount for Rs. 48,000 and the debtor did not present advantage by transferring that property. The debtor was in embarrassed circumstances at the time as was clear from the evidence. He could not have derived any benefit himself by selling the property at that time and the consideration of the sale deed was a large amount nearly whole of which was paid to the creditors. After paying off the creditors the only amount of Rs. 439 remained with the debtor. It was found that a large sum of money was due to the petitioning creditor and that no provision had been made by the debtor for the payment of that sum.
On these facts and on the evidence recorded in the case, the Court came to the conclusion that the transaction was a fraudulent one and under Section 6 such a transfer was an act of bankruptcy. In that case it was not stated as to under which clause of Section 6 it was held to be an act of bankruptcy. This case is not applicable to the present case. Here from the document it is clear that it was executed for the purpose of paying off the respondent also, but because it was disputed that she was not a creditor and that the promissory note was a sham and nominal one, the respondent was not paid.
19. The learned counsel for the petitioner has filed Q. M. P. 7353/67 for admitting additional evidence. That additional evidence is a certified copy of the plaint filed by the respondent against the petitioner on 29th October 1962 after the Subordinate Court dismissed I. P. 12/61 filed by her on 1st October 1962. That plaint was rejected on 23rd November 1962. No further proceedings were taken by the respondent. It was argued if the respondent files any suit as against the petitioner for the recovery of the suit amount, that will be time barred in view of the provisions of Section 78(2) of the Act. It was submitted on behalf of the petitioner, therefore, that plaint may be accepted as additional evidence. The admission of that plaint is not at all necessary for the purpose of deciding the questions that have been raised before me. I therefore, dismiss that application.
20. In the result, the revision petition is allowed with costs throughout and the judgment of the appellate Court is set aside.
21. Petition allowed.