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Ram Lachman Vs. J.K. Kapoor - Court Judgment

LegalCrystal Citation
SubjectCommercial
CourtAllahabad High Court
Decided On
Case NumberS.A.F.O. No. 9 of 1958
Judge
Reported inAIR1965All80
ActsProvincial Insolvency Act, 1920 - Sections 6, 9, 9(1) and 53
AppellantRam Lachman
RespondentJ.K. Kapoor
Advocates:H.P. Gupta, ;B.L. Gupta and ;J. Swarup, Advs.
DispositionAppeal allowed
Excerpt:
.....purchaser in good faith and for valuable consideration and the transfer could not be annulled. the learned insolvency judge went into the evidence adduced by the parties and came to the conclusion that the appellant was a bona fide purchaser for value and in good faith. ' the other conditions mentioned in that section being satisfied and not being in controversy need not be noted. it is not at all necessary for the court to go into the fact whether the purchaser of the property has paid good consideration for the transfer or whether the purchaser is a bona fide purchaser for value. the said section 53 makes the following provision :53 any transfer of properly not being a transfer made before and in consideration of marriage or made in favour of a purchaser or incumbraucer in good faith..........purchaser in good faith and for valuable consideration and the transfer could not be annulled. the learned insolvency judge went into the evidence adduced by the parties and came to the conclusion that the appellant was a bona fide purchaser for value and in good faith. he, therefore, refused to annul the transfer and dismissed the application made by the official receiver, on the 3rd of december, 1954. against that order, the official receiver went up in appeal before the learned district judge and contended that the learned insolvencyjudge was wrong in going into the facts and evidence at that stage. the official receiver pleaded that the adjudication of insolvency itself was based upon a finding that the transfer was made with the intent of delaying and defeating the creditors. that.....
Judgment:

B. Dayal, J.

1. This appeal arises out of anorder passed by the Insolvency Judge refusingannulment of alienation of his property by theinsolvent on the 4th of July, 1950. On appeal,this order was set aside by the learned DistrictJudge and the transfer was annulled. The transferee Ram Lachman has come up to this Court inappeal.

2. The facts may be shortly stated which are not in controversy. Brahma Shankar and others, who were creditors of Bishambhar Nath filed an application for adjudging Bishambhar Nath an insolvent on the 3rd of October, 1950. In that application, they alleged that the judgment-debtor Bishambhar Nath had transferred all his property on the 4th of July, 1950 in favour of Ram Lachman. This transfer was with the object of delaying and defeating the creditors. This application was not opposed and on the 19th of January, 1951, Bishambhar Nath was declared insolvent. On the 4th of February. 1952, the Official Receiver filed an application under Section 53 of the Provincial Insolvency Act for annulment of the transfer, dated the 4th of July, 1950 in favour of the appellant Ram Lachman. The appellant pleaded that he was a bona fide purchaser in good faith and for valuable consideration and the transfer could not be annulled. The learned Insolvency Judge went into the evidence adduced by the parties and came to the conclusion that the appellant was a bona fide purchaser for value and in good faith. He, therefore, refused to annul the transfer and dismissed the application made by the Official Receiver, on the 3rd of December, 1954. Against that order, the Official Receiver went up in appeal before the learned District Judge and contended that the learned InsolvencyJudge was wrong in going into the facts and evidence at that stage.

The Official Receiver pleaded that the adjudication of insolvency itself was based upon a finding that the transfer was made with the intent of delaying and defeating the creditors. That decision was res judicata and was binding on everybody concerned. On an application under Section 53 of the Provincial Insolvency Act, the learned Insolvency Judge was bound to hold that the transaction was invalid and to annul it without deciding the question again. In support of his argument Sheo Raj Bahadur Mathur v. Abdul Aziz : AIR1956All68 was cited. This was a decision by a learned single Judge of this Court and was binding upon the District Judge. The District Judge consequently followed this decision, allowed the appeal and annulled the said transfer. Ram Lachman, appellant, the transferee has appealed against that order and the contention of the learned counsel for the appellant in this appeal is that the decision at the time of adjudication was not res judicata and the question of fact could be gone into by the court while deciding the application under Section 53 of the Provincial Insolvency Act. When the matter came up before the learned single Judge of this Court, he was of the opinion that the aforementioned case of : AIR1956All68 needed a reconsideration. The case has, therefore, been placed before us for disposal.

3. The question for our consideration is therefore one purely of law. The lower appellate courthas not gone into the facts and the case will haveto be remanded to that court as we do not agreewith the decision of the lower appellate court onthat question of law.

4. We will therefore proceed to consider the provisions of the Provincial Insolvency Act and then deal with the case law which has been cited before us by the learned counsel for the appellant

5. A creditor has a right to present an application for the adjudication of a person as an insolvent on the grounds mentioned in Section 9 of the Provincial Insolvency Act. The relevant part of this section reads as follows:

'9(1) A creditor shall not be entitled io present an insolvency petition against a debtor unless-

...................................................

(c) the act of insolvency on which the petition is grounded has occurred within three months before the presentation of the petition.' The other conditions mentioned in that section being satisfied and not being in controversy need not be noted.

6. Section 6 of the Act gives the acts of insolvency on which a petition can be based In this case only Sub-sections (b) and (d) of Section 6 were alleged by the creditor as authorising the presentation of the petition. This section is as follows:

'6. A debtor commits an act of insolvency in each of the following cases namely:

(b) If, in India or elsewhere, he makes a transfer of his property or of any part thereof with intent to defeat or delay his creditors:

(d) if, with intent to defeat or delay his creditors

(i) .............................

(ii) he departs from his dwelling house or usual place of business or otherwise absents himself.

(iii) he secludes himself so as to deprive his creditors of the means of communicating with him.

7. It will thus be seen that the act of insolvency is committed by the insolvent if he makes a transfer of his property with intent to defeat or delay his creditors and with similar intent he departs from his dwelling house and secludes himself. In order therefore to find whether an act of insolvency has been committed, the Insolvency Judge at that stage has merely to see the intention of the debtor while making the alienation or while absenting himself from his place of residence etc. It is not at all necessary for the Court to go into the fact whether the purchaser of the property has paid good consideration for the transfer or whether the purchaser is a bona fide purchaser for value. The court at that stage, therefore, need not record any findings as to the bona fides of the purchaser or the consideration that was paid. It may also be noted that at the stage of declaring a person an insolvent no notice is required by the Act to be served on the transferee or on the creditors who have not applied.

8. If the debtor is declared as an insolvent and the Official Receiver or the creditor wants the alienation to be annulled, an application under Section 53 of the Provincial Insolvency Act has to be made. The said Section 53 makes the Following provision :

'53 Any transfer of properly not being a transfer made before and in consideration of marriage or made in favour of a purchaser or incumbraucer in good faith and for valuable consideration shall, if the transferor is adjudged insolvent on a petition presented within two years after the date of the transfer, be voidable as against the Receiver and may be annulled by the Court.'

The essential ingredients of this section therefore are that a transfer can be annulled by a court only if it is not a transfer in favour of a purchaser or encumbrancer in good faith and for valuable consideration, of course, apart from a transfer in consideration of marriage which is not the case here. If therefore the transferee proves that he is the purchaser in good faith and for valuable consideration, the Court will have no power to annul the transfer.

As we have already seen under Section 6, the court was not to consider good faith or consideration paid by the purchaser and any finding recorded at that stage cannot possibly debar the purchaser from pleading these facts when the transfer in his favour is sought to be annulled. Moreover, the purchaser not being a party to the proceedings at the stage of adjudication can also plead that it is against the principles of natural justice that his rights be adjudicated upon In his absence. On the basis of the provisions of these sections, we have no doubt that the Insolvency Judge was not barred by any principle of res judicata to take into consideration the plea raised by the appellant in this case. This leads us to a consideration of the case law on the point. In : AIR1956All68 , a learned single Judge of this Court relying upon the case of Mohd. Siddique Yousuf v. Official Assignee of Calcutta AIR 1948 PC 130 held as follow :

'In view of the decision of the Privy Council just noticed, I must hold that it was not open to Abdul Aziz the transferee from Noor Ahmad to contest that the transfer in favour of Abdul Aziz dated 4th July, 1947 was not void and could not be set aside under Section 53 of the Provincial Insolvency Act.'

In this ruling the sections of the relevant Act were not analysed and the decision was given solely on the basis of the observation in the said Privy Council case. It is, therefore, necessary to examine the ruling of their Lordships of the Judicial Committee in order to see whether it is applicable to cases like the one decided by the learned single Judge and one which is before us. That was a case which arose in the Presidency Town of Calcutta and was governed by the Presidency Insolvency Act and not by the Provincial Insolvency Act. Moreover in that case, the transfer had been made in favour of one of the creditors and the question that was under consideration was whether the transaction amounted to a fraudulent preference. The corresponding section of the Presidency Towns Insolvency Act defining the acts of insolvency is Section 9. Sub-sections (b) and (c) of that section are as follows:

'9. A debtor commits an act of insolvency in each of the following cases, namely:

(a) .....

(b) if in the States or elsewhere he makes a transfer of his property or of any part thereof with intent to defeat or delay his creditors;

(c) if, in the States 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'.

It will thus be seen at once that in case the act of insolvency falls under Sub-section (b) it will be enough for the court to find that the transfer has been made with intent to defeat or delay the creditors and this by itself would not be sufficient to hold that the transfer was invalid but It would be sufficient to declare the person an insolvent while under Sub-section (c) the transfer which amounts to a fraudulent preference must be such as is sufficient under the law to declare the transfer itself void. Thus where an application for adjudication is made on the ground that the debtor had committed an act of insolvency by fraudulent preference of one or other of his creditors, then the court can adjudicate the transferor as an insolvent only upon the finding which would be sufficient to hold that the transaction was void and in such a case, if the Official Receiver makes an application praying that the transaction be held void, the same ground will have to be covered by the court if it again starts investigation into the facts to come to a conclusion whether it amounted to a fraudulent preference or not

9. The corresponding sections of the Presidency Towns Insolvency Act relating to avoidance of transfer made privately by the debtor are also materially different from those in the Provincial Insolvency Act Section 53 of the Provincial Insolvency Act quoted above is equivalent to Section 55 of the Presidency Towns Insolvency Act, which is as follows:

'55. Any transfer of property.....not being a transfer made.....and in favour of a purchaser or incumbrancer in good faith and for valuable consideration shall, if the transferor is adjudged insolvent within two years after the date of the transfer, be void against the Official Assignee'

It wilt thus be noted that under Section 55 the transaction is declared void against the Official Receiver while under Section 53 of the Provincial Insolvency Act it has been declared to be only voidable but in both the sections where the challenge against the transfer is on a basis other than the fraudulent preference, then the transaction in which the purchaser has acted in good faith and has paid valuable consideration is safe under both these sections. As against this Section 56 of the Presidency Towns Insolvency Act provides as follows :

'Every transfer of property .....by any person unable to pay his debts in favour of any creditor with a view of giving that creditor a preference over the other creditors, shall, if such person is adjudged insolvent on a petition presented within three months after the date thereof, be deemed fraudulent and void as against the Official Assignee.'

Under this section, a transfer in favour of a creditor with a view to prefer him fraudulently must be deemed to he void and no question of giving any evidence in order to save the transaction can possibly arise. Thus the observation of their Lordships of the Privy Council in the case of Mohd, Siddique must be read in connection with the provisions of the Presidency Towns Insolvency Act relating to transfers which amount to fraudulent preferences. When their Lordships observed that the very fact of adjudication on that ground finally decided that the transaction amounted to a fraudulent preference and the alienee was bound by it although he had no opportunity of being heard, they had those provisions in view and those observations cannot be applied to a case under the Provincial Insolvency Act where an alienation has been made in favour of a third party who is not a creditor. The same view has been taken in D. G. Sahasrabudhe v. Kilachand Deochand and Co. AIR 1947 Nag 161; Official Receiver Guntur v. Gopalakrishniah, reported in AIR 1945 Mad 66 (FB) and Ram Chand Puri v. Lahore Enamelling and Stamping Co . We need not consider these cases any further as the matter has since come up before their Lordships of the Supreme Court and at least one of the learned Judges constituting the Bench has clearly approved this view of the law. The other learned Judges did not express any contrary opinion on that point. In Ramaswami Chettiar v. Official Receiver Ramanathapuram : [1960]1SCR616 Mr. Justice Subba Rao quoted with approval an observation of this Court in Amir Ahmad v. Syed Hasan : AIR1935All671 :

'It seems quite clear that if a transfer made by a debtor is wholly fictitious and bogus and no interest in the property passes to the transferee, then the transfer is void ab initio and subsequent transferees can never be protected because the foundation of their title does not exist There would be no necessity for the official receiver to have such a wholly ineffective, void and ficti-tious transfer annulled under Section 53 or Section 54 of the Provincial Insolvency Act. In case of dispute he can always ignore it and treat it as a nullity either in a separate suit or in a proceeding under Section 4, Insolvency Act.

On the other hand, it the transfer made by the debtor was not wholly fictitious and bogus but the intention of the parties was that property should in fact pass to the transferee, then the result would depend on whether the transferee was a purchaser in good faith and for valuable consideration or not. The transfer for the time being is valid, though it is voidable at the option of the receiver, and it is discretionary with the court to annul it under Section 53, Provincial Insolvency Act.'

His Lordship went on to state as follows after the above quotation:

'The said observations will apply mutatis mutandis to a situation under Section 54 of the Act.'

After this approval by the Supreme Court of the observation in an earlier Division Bench of this Court, it is not possible to take a different view

10. The result is that the appeal is allowedand the case is sent back to the lower appellatecourt for deciding other questions of fact and lawwhich arose in the case. The costs of this Courtwill abide the result.


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