1. Byasni Lakshminarayana Chetty, the appellant in this civil miscellaneous second appeal filed under Section 75 of the Provincial Insolvency Act was adjudicated as an insolvent on 18-4-1962 in I. P. No. 20 of 1961 on the file of the Subordinate Judge's Court, Kurnool. On the very next day, that is on 19-4-1962, he filed I. A. No. 43 of 1962 under Sections 4, 5 and 38 of the Provincial Insolvency Act praying to grant him permission to sell the properties himself instead of by the Official Receiver and pay the rateables to all the creditors, the Official Receiver and the Government and to approve the composition scheme mentioned in the affidavit. In the affidavit it is stated that the insolvent had 55 creditors and his assets are not worth more than Rs. 25,000 whereas his debts amounted to Rs. 85,163. It was alleged that 47 of his creditors had agreed to receive the rateables at Rs. 0-4-0 in a rupee and signed in the accounts books of the insolvent in token of their consent. It was further alleged that a majority in number and 3/4ths in value of all the creditors accepted the proposal to receive the above said rateables. Therefore, he prayed in Paragraph 9 of his affidavit that the Court may be pleased to grant him permission to sell his properties himself instead of by the Official Receiver and pay the rateables at the rate of Rs. 25 for every Rs. 100 to the creditors.
2. This petition came up for orders before the learned Subordinate Judge, Kurnool who ordered notice to the 1st respondent's advocate, the 1st respondent being the petitioning creditor and also to the Official Receiver. He further directed the Publication in 'Sadhana' a Weekly of Anantapur. The case was adjourned to 27-4-1902.
3. On 27-4-1962, it was noted by the office as follows:
'Publication filed. Notice given to Official Receiver and creditor. Creditor has no objection. The Official Receiver filed report and has no objection for the same subjectto conditions. Then, the court passed the following order:Petition allowed subject to conditions proposed by official receiver.'
4. In his report dated 27-4-1962 the Official Receiver stated that the petitioner should deposit a sum of Rs. 300 towards his commission; Rs. 50 towards audit fees and Rs. 2,100 plus interest up-to-date if any due to the Government. In paragraph 5 of his report, hp stated that if the properties were to be sold by him, it would fetch Rs. 10,000 or Rs 15,000 and that if the scheme proposed by the petitioner was accepted, it would benefit the creditors.
5. Against this order, one of the creditors of the insolvent, Ganda Pedda Narayana Chetty, who obtained a decree under which about Rs. 7,000 was due to him, and who was executing the decree, filed an appeal in the Court of the District Judge, Kurnool. His complaint was that notice was not given to him, that of the socalled 47 creditors of the insolvent referred to in I. A. No. 43 of 1962 most of them were bogus creditors of the insolvent and that the proposed scheme was not beneficial to the general body of the crediors. He further complained that the sanctioning of the scheme and the arrangements, without notice to him or without notice to any of the other creditors, is wholly illegal and opposed to sections 38 and 39 of the Provincial Insolvency Act 1920 (hereinafter referred to as the Act).
6. The appeal was heard by the learned District Judge, Kurnool who considered all the aspects of the case and referred to what all transpired and allowed the appeal and set aside the order passed in I. A. 43 of 1962 on 27-4-1962 In his order, the learned District Judge pointed out that if the order of adjudication was passed on the 18th April 1962, how it was possible for the insolvent to get into an arrangement with all his 47 creditors even by next day, that is, the 19th of April 1962 to enable him to file a petition I. A. 43 of 1962? The learned District Judge also wondered and rightly in my opinion, as to how the Official Receiver could in such a short time assess the value of the insolvent's estate and afire? wholly to the proposals of the insolvent These matters naturally looked highly suspicious to the learned District Judge But it must be said to the credit of the learned District Judge that he did not allow himself to be influenced by these suspicions He dealt with the case in a strictly legal manner.
7. This case has been argued by Mr. N. Ramamohana Rao, the learned counsel for the appellant in a very strenuous manner and with persistence On behalf of the respondents also Mr. Venkatarama Sastry argued the case fully and placed all the neces-sary facts before the Court.
8. The first point urged by Mr. Ramamohana Rao is that since the notice was published in the weekly paper 'Sadhana' ofAnantapur, it cannot be said that the creditors had no notice of I. A. No. 43 of 1962. From the order of the learned Subordinate judge, Kurnool it appears that the paper 'Sadhana' was a weekly paper published from Anantapur whereas the proceedings were in the Courts in the Kurnool district. It does not appear from the record on what date this publication was made, whether any creditor had sufficient time after seeing the publication; and if really any one after seeing it, attended the Court on the 27th of April 1962 to urge his objection. A copy of the paper in which the notice is said to have been published is not before me.
9. The third party creditor, the contesting respondent in this Civil Miscellaneous Second Appeal obtained a decree as already stated and he was actively executing his decree. In fact, pending this I. A. 43 of 1862 and also pending a prior I. A. which was dismissed, the execution of that decree was tried to be stayed unsuccessfully. In the stay petition filed in I. P. No. 20 of 1861 the decree-holder appeared by counsel but no notice was ordered or given to that counsel. From the order in I. A. No. 43 of 1962 it is quite clear that the judge ordered notice only to the petitioning creditor's advocate and to the Official Receiver and only publication in the weekly 'Sadhana' of Anantapur. The procedure followed by the learned Subordinate Judge is wholly opposed with that prescribed by Sections 38 and 39 of the Act and Rule 10 of the Rules framed under Section 78 of the said Act. Section 38 of the Act is as follows:
'38(1) Where a debtor, after the making of an order of adjudication submits a proposal for a composition in satisfaction of his debts, or a proposal for a scheme of arrangement of his affairs, the Court shall fix a date for the consideration of the proposal, and shall issue a notice to all creditors in such manner as may be prescribed;
(2) If, on the consideration of the proposal, a majority in number and three-fourths in value of all the creditors whose debts are proved and who are present in person or by pleader, resolve to accept the proposal, the same shall be deemed to be duly accepted by the creditors.
(3) The debtor may at the meeting amend the terms of his proposal if the amendment is, in the opinion of the Court, calculated to benefit the general body of creditors.
(4) Where the Court is of opinion after hearing the report of the receiver, if a receiver has been appointed, and after considering any objection which may be made by or on behalf of any creditor, that the terms of the proposal are not reasonable or are not calculated, to benefit the general body of creditors the Court shall refuse to approve the proposal.
(5) If any facts are proved or proof of which the Court would be required eitherto refuse, suspend or attach conditions to the debtor's discharge, the Court shall refuse to approve the proposal unless it provides reasonable security for payment of not less than six annas in the rupee on all the unsecured debts provable against the debtor's estate
(6) No composition scheme shall be approved by the Court which does not provide for the payment in priority to other debts of all debts directed to be so paid in the distribution of the property of an insolvent.
(7) In any other case the Court may either approve or refuse to approve the proposal.'
10. Under clause (1) where a debtor, after the making of an order of adjudication, submits a proposal for a composition in satisfaction of his debts, or a proposal for a scheme of arrangement of his affairs, the Court shall fix a date for the consideration of the proposal, and shall issue a notice to all creditors in such manner as may be prescribed.
11. Section 2 clause (1)(c) defines the word 'Prescribed' as prescribed by rules made under the Act.
12. The relevant Rule is Rule 10 which is as follows:
'10. Consideration of compositions and schemes of arrangement: (1) if a debtor submits a proposal under Section 38(1) of the Act, the Court shall fix a date for the consideration of the proposal and notice thereof together with a copy of the terms of the proposal shall be sent to every creditor who has proved.
2. At the meeting for the consideration of the proposal the debtor shall be entitled to address the Court in person or by pleader in support of the proposal and every creditor who has proved shall be entitled in person or by pleader to question the debtor and to address the Court.'
13. So, it is clear from these provisions of law that it is imperative that notice should be given to the creditors of the proposal for the compositions and schemes of arrangement. A mere direction to publish notice in 'Sadhana' weekly at Anantapur was wholly inadequate and does not satisfy what is prescribed under Section 38(1) of the Act and Rule 10 of the Rules under the Act.
14. It is clear from the decision of the Bench of the Madras High Court reported in Subba Rao v. Seshu Reddi, ILR (1945) Mad 184 = (AIR 1944 Mad 414 (2)) that Section 38 of the Provincial Insolvency Act provides that, in respect of a scheme for composition in satisfaction of the debts of -an insolvent person, notice shall be served on all his creditors. The provision is mandatory and the section contemplates that all the creditors shall have an opportunity of stating their objections to the scheme.
15. There is also the fact that the Court did not exercise its own discretion whilesanctioning the arrangement mentioned in I. A. 43 of 1962. No doubt, the arrangement cannot be sanctioned unless a majority in number and 3/4ths in value of the creditors whose debts are proved and who are present in person or by pleader resolve to accept the proposal. But even though the conditions prescribed by Sub-section (2) of 6. 38 are satisfied, if the Court is of the opinion, after hearing the report of the Receiver and after considering any of the objections on behalf of any creditors, that the terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors, the Court shall refuse to approve the proposal. That it was the duty of the Court to consider whether the proposed scheme is for the benefit of the general body of the creditors though the majority of the creditors agreed to the same is held in Sevugan Chettiar v. Murugappa Chettiar, ILR 54 Mad 823 at p 827 = (AIR 1931 Mad 344 at p. 346).
This is what Reilly J. observed at page 827 (of ILR Mad) = (at p. 346 of AIR):
'But, although it was quite proper for him to be influenced by the wish of the majority of the creditors in respect of this proposed scheme, he ought, I think, to have realised that the wish of the creditors by itself was by no means a sufficient reason for approving of the scheme in the circumstances -- That was clearly brought out by the Court of Appeal in Ex Parte Merchant Banking Company of London v. Durham, (1881) 16 Ch D 623 and In re Burr. Ex Parte Board of Trade, (1892) 2 QB 467. Under our own Provincial Insolvency Act. Section 38 restricts the power of the Court to approve a composition scheme by certain conditions. If those restrictive conditions are fulfilled, the last clause of the section provides that the Court may then either approve or disapprove of the scheme. That means that, although the section has provided that no scheme shall be approved unless the requisite majority of the creditors, the Court must exercise its judicial discretion before approving of the scheme, that is a discretion founded on sufficient reasons after considering all aspects of the case and ascertaining the facts so far as possible.'
16. There is the further fact that on the adjudication, the insolvent was divested of his property which vested either in the Court or in the Official Receiver. I find that in the present case, the order of adjudication having been passed, the property vested in the Official Receiver and I do not see how permission could be granted to the insolvent to sell the property himself without reference to the Official Receiver. That is one illegality that is pointed out by the learned District Judge.
17. See the decision reported in Satya-narayanamurthi v. Papayya, (1941) 2 Mad LJ 834 = (AIR 1941 Mad 713). No doubt, that was a case under clause 4 of Section 28 of theProvincial Insolvency Act. But I do not find any difference in this regard between clauses 2 and 4
18. There is one further aspect of the case which may be noticed. Under clause 2 of Section 38 of the Act, if on the consideration of the proposal, a majority in number and three-fourths in value of all the creditors whose debts are proved and who are present in person or by pleader, resolve to accept the proposal, the same shall be dee-med to be duly accepted by the creditors. This clause pre-supposes the existence of a list of creditors who have proved their debts Rule 10 already referred to above requires notice of the petition together with a copy of the terms of the proposal to be sent to every creditor who has proved his debt. This again pre-supposes the existence of a list of creditors after the proof of debts. Therefore, it is argued by Mr. Venkatarama Sastry, the learned counsel for the respondent that there cannot be any approval of a composition scheme at all on the next day after the date of adjudication and even before the framing up of a list of creditors is thought of. I think there is great force in this contention. A scheme cannot be proved unless a majority in number and three-fourths in value of all the creditors whose debts are proved and who are present in person or by pleader, resolve to accept the proposal. That cannot be satisfied at all unless a schedule of approved creditors is prepared. For that reason also, the order passed in I. A 43 of 1062 permitting the insolvent to sell his properties himself and to pay his creditors at Rs. 0-4-0 in the rupee appears to be illegal
19. It is also alleged by the objecting decree-holder that most of the debts alleged by the insolvent to the tune of Rs. 60,000 are bogus debts. As regards the sale of the properties it is alleged that the garden land was sold to the petitioning creditor and the other properties were sold to the insolvent's son-in-law and a relation of his brother-in-law. It is not necessary for me to consider the truth or otherwise of these allegations. Since the order dated 27-4-1962 passed in I. A 43 of 1962 by the learned Subordinate Judge Kurnool is illegal and contrary to the provisions of Section 38 of the Act, the learned District Judge, Kurnool is right in allowing the appeal and in dismissing the I. A. No. 43 of 1962.
20. This Civil Miscellaneous SecondAppeal therefore falls and is dismissed withcosts of the 1st respondent.