1. The revision petitioner is a creditor whose petition to declare the respondents insolvent was dismissed by the trial Court and the appellate Court.
2. The petitioner filed I. P. No. 23 of 1965 in the Court of the Subordinate Judge, Nellore, with the allegation that the petitioner obtained a decree in O. S. No. 73 of 1956 on the file of the District Munsif, Ongole, for Rs. 4,804-15-0 on 4-6-1956 against respondents 1 and 2 and their father. Proceedings in execution are pending and nothing has been realised till now in execution of that decree. Respondents 1 and 2 their father the late Chaluvadi Venkatasubbiah executed in favour of respondent No. 3 a divided son of Venkatasubbiah a mortgage by deposit of title deeds dated 1st April, 1953 covering all their immovable properties to secure repayment of a sum of Rs. 7,925-7-2 due on an Anthakam executed by the assesses on 31st March 1953. The mortgage was evidenced by a memorandum which was not, however, registered. According to the petitioner, the mortgage was a clandestine transaction by means of which the properties of respondents 1 and 2 were kept beyond the reach of the creditors and the Income-tax Department while making it appear to the outside world that the properties were still theirs.
The respondents and their father were assessed to income-tax of Rs. 55,298-15-0 for the assessment year 1951-52. When the Income-tax Department proceeded to recover the tax, the assessees moved the High Court of Madras in W. P. No. 746 of 1953 on 7-9-1953 for issue of a writ prohibiting the department from collecting the tax. They also filed C. M. P. No. 8503 of 1953 for stay of recovery of tax on which the High Court directed that the tax be paid in 12 monthly instalments of Rs. 5,000 each. The respondents did not comply with the said order, and made a further application to modify the earlier order on which a consent order was passed on 27-11-1953 that all the immovable properties of all the partners will be attached and attachment will continue till the disposal of the writ petition on the file of the High Court. It is alleged by the petitioner that in these writ proceedings, there was no whisper about the mortgage by deposit of title deeds executed by the respondents on 1st April 1953. The attachment under the aforesaid consent order was effected on 16-12-1953. But the third respondent had by that time instituted O. S. No. 316 of 1953 in the Sub-Court, Nellore on 4-12-1953 to obtain a mortgage decree for Rs. 84,000. Respondents 1 and 2 and their father remained ex parte and a preliminary decree was passed on 20th January 1954. Final decree followed on 15-9-1954. The writ petition was dismissed by the High Court and when the Collector proceeded to recover the amount he was confronted with the notice on behalf of the third respondent that the properties could be sold but subject to the mortgage decree in O. S. No. 316 of 1953.
3. The Government of India, therefore, filed O. S. No. 19 of 1957 in the Court of the Subordinate Judge, Nellore, against the mortgagors and the mortgagee for a declaration that the equitable mortgage on 1-4-1953 was sham, nominal and void and that the decree obtained thereon was fraudulent and collusive decree and could not affect the priority of the Income-tax Department in respect of the income-tax arrears. The mortgagors remained ex parte and the suit was contested by the mortgagee alone. The learned Subordinate Judge held that there was no valid and operative mortgage and no mortgage decree. Aggrieved by that decree of the learned Subordinate Judge, the third respondent herein (mortgagee) appealed to the High Court in A. S. No. 188 of 1959. The High Court by its findings of the trial court and held that the equitable mortgage decree and the decree thereon was valid.
4. The petitioner filed this insolvency petition on 16th September 1965 originally against the two respondents but the third respondent was impleaded as per order in I. A. No. 176 of 1966 dated 27th August, 1966. The contention of the petitioner in the insolvency petition was that the mortgage was a fraudulent preference within the meaning of Section 6(c) of the Provincial Insolvency Act (hereinafter referred to as 'the Act') and that respondents 1 and 2 have committed an act of insolvency under the said section. It is further stated that the aforesaid act of insolvency had occurred within three months of the presentation of the petition. The petitioner therefore, prayed that respondents 1 and 2 may be adjudged as insolvents.
5. The respondents contended that the mortgage did not amount to fraudulent preference and that it was not an act of insolvency. The further ground taken by them is that as the alleged act of insolvency had occurred beyond three months prior to the filing of the insolvency petition, the petition did not lie.
6. It was contended in the trial Court and the appellate Court that the act of insolvency occurred on 17th June 1965 the date on which the High Court allowed the appeal filed by the third respondent and held that that mortgage was a valid transaction and the decree obtained thereon was valid and therefore the application filed on 16-9-1965 was within three months of the alleged act of insolvency. The learned Subordinate Judge did not agree with the aforesaid contention and held that the act of insolvency had taken place on 1st April, 1953, the date on which respondents 1 and 2 and their father created equitable mortgage in favour of the third respondent. The Sub-Judge, therefore, dismissed the insolvency petition aggrieved by which the petitioner filed A. S. No. 89 of 1966 which was also dismissed by the District Judge, Nellore, on the ground that the alleged act of insolvency was not within three months on the date of the petition.
7. Shri Kondandaramaiah, the learned counsel for the petitioner, argued that in cases where an equitable mortgage is pleaded as an act of insolvency, the date of knowledge of the equitable mortgage will be the date on which it can be said that the act of insolvency was committed by the mortgagor. The essence of the transaction of an equitable mortgage being the intention that the title deeds should be the security for the debt, the creditor cannot come to know of such a transaction. For all intents and purposes under the equitable mortgage the property continues to be that of the mortgagor. The agreement of deposit of title deeds need not be registered and no possession is given under the equitable mortgage for years together. He further contended that the learned subordinate Judge in O. S. No. 19 of 1957 having held that the mortgage was invalid, the petitioner could not have filed any insolvency petition on the basis of that mortgage alleging it to be an act of insolvency. It is only after the decision of the High Court on 17th June 1965 that the equitable mortgage was declared to be valid and the petitioner could urge the same as an act of insolvency.
8. In order to appreciate the contention raised by the learned counsel for the petitioner, it is necessary to consider the provisions of the act under which the application was filed. Section 6 of the Act enumerates nine cases of act of insolvency. In the instant case I am only concerned with clause (c) of Section 6 of the Act on which reliance was placed by the petitioner. That clause reads:-
'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.'
Section 9 of the Act prescribes the conditions on which a creditor shall be entitled to file an insolvency petition. Out of the three conditions laid down in sub-section (1) of that Section, the third condition mentioned in Clause (c) is for determination before me. According to that clause for entitling a creditor to file an insolvency petition, 'the act of insolvency on which the petition is grounded has occurred within three months before the presentation of the petition' The proviso to the sub-section says that where the said period of three months expires on a day when the Court is closed the insolvency petition may be presented on the day on which the Court reopens.
9. Under Clause (c) of Section 6 of the Act the debtor commits an act of insolvency if he makes any transfer of his property or any part thereof which would be void as a fraudulent preference if adjudged insolvent. According to this clause it is the transfer which is the act of insolvency the date of the knowledge of the transfer being entirely immaterial. In the case of equitable mortgage it is not doubt true that the intention to deposit title deeds by way of security for the repayment of the debt is the essence of the transaction. But the moment the title deeds are deposited with that intention, it is a mortgage by deposit of title deeds within the meaning of Section 58(f) of the Transfer of Property Act and the mortgage will take effect from the date of the deposit of title deeds and the rights and liabilities of the mortgagor and the mortgagee will arise on the date of deposit of title deeds and not on any future date. It, therefore, cannot be said that the transfer is not complete on the date of deposit of title deeds. If there is no intention to make the deposit for purposes of securing a debt, it will not be a mortgage the date of transfer will be the date of deposit of title deeds and such a date will be the date on which the act of insolvency is committed if that transfer would be void as fraudulent preference if the mortgagor was adjudged insolvent. By virtue of Sec. 9(1)(c) if a creditor wants to ground his petition on such an act of insolvency, that act should have occurred within three months from the date of the petition, i.e., within three months of the deposit of title deeds. It may be that in an equitable mortgage the world may not come to know of it for a considerable time but it has to be remembered that for purposes of Sec. 9(1)(c) the transfer in its inception is not void. It may become void as a fraudulent preference if the transferor is adjudged insolvent. Till such contingency happens the transfer is perfectly valid and the rights and liabilities of the transferor and the transferee cannot be affected. If the creditor does not file his petition within three months of the commission of the act of insolvency. that act ceases to be available for any purposes qua an act of insolvency at the expiration of three months after it has been committed. A Full bench of the Madras High Court in Kaku Chenchuramana Reddy v. Palapu Arunachalam, AIR 1935 Mad 857 (FB) has held that Section 9(1)(c) of the Act does not provide a period of limitation but is the condition precedent to the filing of the petition, that is to say, the petitioning creditor must on the day when he presents his petition, have in view some act of insolvency which the debtor has committed within the preceding three months. He has to see on that date and on that date only, what acts of insolvency are available to him and he cannot make use of any act of insolvency which has been committed outside the period of three months as that has ceased to be an act of insolvency.'
10. A debtor making a fraudulent transfer knows that within three months from the date of transfer a petition in insolvency may be prescribed against him the transferee-creditor also knows that he is running a risk within three months of having a transfer set aside as a fraudulent preference under the Act. As soon as three months' period expires , the transaction ceases to be impeachable under the Act and there is no reason that after the period of three months the debtor and the creditor should be subject any longer to their respective risks. The object the Act is to prevent a debtor on the eve of his insolvency from intentionally preferring a creditor to his other creditors and the Legislature in its wisdom has fixed a period of three months within which an act of insolvency should be committed to enable a creditor to have debtor declared as insolvent.
11. In this view of the matter the question of knowledge of the creditor is entirely irrelevant for the application of Clause (c) of Section 9(1) of the Act. Further the petitioner has nowhere in his application stated that she came to know of the equitable mortgage within three months prior to the date of her petition. Her case is that as the equitable mortgage was declared to be a valid one by the decision of the High Court dated 17-6-1965, her petition is within the period of three months prescribed under the Act. But it is needless to say that the decision of the High Court is not the date on which the transfer was effected. At the most, it is the date on which it was held to be valid the date on which the transfer is the date on which the title deeds were deposited and not the date on which the High Court gave its decision. It is also to be remembered that by the time the suit was filed in the Sub-Judge's Court, Nellore, in 1957, for declaration that the equitable mortgage was void, the period of three months had already form the date of deposit of title deeds. On the basis of that deed the mortgagee had filed O. S. No. 316 of 1953 and had obtained a final decree on 15th September 1954.
12. It is also argued by the learned counsel for the petitioner by relying on the definition of 'Act' in Stroud's Judicial Dictionary, i.e., continuing a thing in its former condition is not an act done. It was argued that mere deposit of title deeds will not be an act of insolvency unless something further is done. This argument has to be rejected. By virtue of the provisions of Section 6(c) of the Act it is the transfer which is the act of insolvency and as the transfer takes place on the day on which the title deeds are deposited, the act of insolvency is committed on that date.
13. The learned counsel also placed reliance on Nandigam Rama Rao v. Burugupalli Sri Krishnamurthy, : AIR1962AP226 . In that case the insolvency petition was filed within three months of the date of registration of the deed evidencing the transfer. It was argued that as under the provisions of the Registration Act, the deed operates from the date of execution, the application which was beyond three months from the date of execution was barred by limitation. It was held that in order to entitle a creditor to file a petition under Section 9 of the Act on the ground that the debtor had made a fraudulent preference under Sec. 6(c) of the Act, the transfer must be a valid, effective and complete transfer. The transfer of immovable property does not become valid, effective and complete until it is registered. The date of registration, therefore, will be the date on which the transfer became valid, effective and complete though it may operate from the date of execution. The fiction of relation back which is provided for under Sections 47 and 75 of the Registration Act does not find a place in the Act. It was, therefore, held:
'For purposes of Sections 9(1)(c), 53 and 54 of the Provincial Insolvency Act, the date of transfer of property is the date on which the document purporting to transfer property is registered and not the date on which it is executed or the date when the document was first presented for registration.'
The argument that as there is no registration of the memorandum of equitable mortgage and no possession is given under the said mortgage the creditors and others are not in a position to know of the transfer is also irrelevant. Neither registration not possession is necessary for a mortgage by deposit of title deeds and the transfer is complete the moment the title deeds are deposited with the intention of creating a security for the repayment of a debt.
14. The equitable mortgage being of 1-4-1953, the application filed on 16-9-1965 is beyond a period of three months prescribed by Section 9(1)(c) of the Act. The petitioner, therefore, cannot ground his application on that equitable mortgage alleging it as an act of insolvency. I do not find any reason to differ with the decision of the lower Courts. In the result, the revision petition is dismissed with costs.
15. Revision dismissed.