1. These two appeals arise out of an application under Section 12, Encumbered Estates Act.
2. On 22nd November 1935, two separate application were made under Section 4, E. E. Act, one by Ram Sarup, Girwardhari and their minor sons, and the other by Govind Prasad and his sons. The application of Bam Sarup and others was numbered as 89 of 1936 and the other application of Govind Prasad and others was number, ed as 160 of 1936. First Appeal No. 258 of 1942 arises out of case No. 160 of 1936, while the other First Appeal No. 271 of 1942 arises out of case No. 89 of 1936. Proceedings under Section 14, E. E. Act, were being taken in Court. When all the evidence was finished, on 29th November 1941, an application was put in by one of the creditors, namely, Mt. Pushpawati Devi, under Section 12 of the Act, alleging that four mortgages made by the applicants in the two cases in favour of certain creditors were invalid as they had not been made in good faith after chap. I of the said Act had come into force and before the applications were filed by the landlord-applicants. These four mortgages were as follows: (a) Mortgage deed dated 8th May 1935, executed by the landlord-applicants in favour of one Bengali Bhushan for Rs. 5000. It was alleged in this mortgage that the money was required by the landlord-applicants for carrying on their business (b) Usufructuary mortgage deed dated 25th June 1935, executed by the landlord-applicants in favour of Chandammi Lal, the present appellant. In this mortgage, one of the shops belonging to the landlord-applicants was mortgaged for a sum of Rs. 4000. (c) Mortgage deed dated 26th June 1935, executed in favour of the same creditor, Chadammi Lal, in this the same shop as was mortgaged in the usufructuary mortgage of the same date was mortgaged for a sum of Rs. 2000, and (d) mortgage deed dated 16th August 1935, executed in favour of Krishna Narain and Satya Narain Bank Ltd. for Rs 11,100.
3. No notice was issued of this application. It appears that the creditors who were concerned in the different mortgages took notice of it and arguments were addressed to Court by counsel on their behalf and also by counsel on behalf of Pushpawati Devi.
4. The learned Special Judge gave a judgment under Section 14 of the Act, and in that judgment, also dealt with the application of Mt. Pushpwati Devi under Section 12 of the Act. He held that all the four mortgages were not made in good faith and, therefore, were void. He gave a simple money decree in respect of the amounts due under the mortgages in favour of the' creditors.
5. Against the order of the Special Judge, three appeals were filed in this Court. One was filed by Satya Narain Bank Ltd. which has been dismissed by us to-day, as it was not pressed, the amount due to the creditor having been paid up. The other two appeals were filed by Chadammi Lal. These two appeals are now before us.
6. The only ground on which the learned Special Judge held that the mortgages in favour of Chadammi Lal appellant were liable to be avoided is that the landlord-applicants executed the four mortgages in quick succession and that two of the creditors, Bengali Bhushan and Chadammi Lal, being residents of Ferozabad, must be fully aware of the financial condition of the landlord-applicants, when they advanced Rs. 5000 and Rs. 6000 respectively.
7. Now, it appears that the landlord applicants carried on a business of manufacturing glass bangles at Ferozabad, which is a well-known centre for this industry. They seem to have pawned their stock in trade with the Allahabad Bank, The mortgage executed in favour of Bengali Bhushan states that they wanted Rs. 5000 in order to carry on their bangle business. The usufructuary mortgage executed by them in favour of Chadammi Lal for Rs. 4000 states that Rs. 1300 out of it were to be set off, in payment of the balance due on the pronote executed by the landlords in favour of the mortgagee and that Rs. 2700 were to be paid to the Allahabad Bank so that the pawned goods may be redeemed. In the simple mortgage in favour of Chadammi Lal it was stated that the amount of Rs. 2700 available under the previous mortgage of Rs. 4000 would not be sufficient to pay off the amount due to the Allahabad Bank in its entirety that a sum of Rs. 2000 more was required and that it was being borrowed from the creditor. There is no evidence on the record to show that the amount was not due to the Allahabad Bank.
8. One witness Khub Chand was examined on behalf of Chadammi Lal in the Court below and he stated that the two amounts that were borrowed under the mortgages were in fact paid to the Allahabad Bank. There can thus be no doubt that the amounts borrowed were partly in payment of an earlier debt due to Chadammi Lal and partly in payment of the debt due to the Allahabad Bank.
9. The lower Court came to the conclusion that the facts narrated in the mortgage deeds were correct, vide the judgment of the lower Court in proceedings under Section 14, Encumbered Estates Act. There is no evidence on the record to show that Chadammi Lal and Bengali Bhushan knew about the financial condition of the landlord applicants or about their intention to make an application under the Encumbered Estates Act.
10. The mortgage executed in favour of Krishna Narain and Satya Narain Bank was made on 10th August 1935 and as that matter is not before us, it is not necessary to express any opinion with regard to that mortgage. Any intention entertained at the time of the execution of that mortgage cannot affect the case of the appellant whose mortgages were prior in date.
11. It may be noted that the language of Section 12, Encumbered Estates Act, is very much similar to the language of Section 53, Provincial Insolvency Act. Section 53, Insolvency Act is in these words :
'Any transfer of property not being a transfer made before and in consideration of marriage or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration shall, if the transferor is adjudged insolvent within two years after the date of the transfer, be voidab'e as against the receiver and may be annulled by the Court.'
Section 12, Encumbered Estates Act provides :
'Any transfer of property made by a landlord or other person acting on his behalf between the day on which the first Chapter of this Act comes into force and day on which he applies under Section 4, not being a transfer made before and in consideration of marriage or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration, may be annulled at the instance of any creditor, if the Special. Judge finds that such transfer was made with a view to deprive the landlord's creditors of their rights under this Act.'
12. In view of the provisions contained in these sections, transfers made before and in consideration of marriage or made in favour of an encumbrancer in good faith and for valuable consideration are not to be set aside. It has been held that is transfers under Section 53, Insolvency Act, the burden of proof is on the person who challenges the transfers as not being in good faith, vide Official Receiver v. P L K. M. R. M. Chettyar Firm . This has been followed in numerous oases in India. One cage of our own Court is reported in Munu Lal v. P. K. Benerji : AIR1938All555 . If the burden is on the person who challenges a transfer, it is obvious that the presumption, in the first instance, is that a transfer which has been admittedly made for valuable consideration is also made in good faith. It is on the person who challenges the transfer as not being made in food faith that the burden lies to displace the original presumption. This rule of burden of proof and presumption as applicable to applications under Section 53, Provincial Insolvency Act, is also applicable to applications under Section 12, Encumbered Estates Act.
13. In the present case the mere fact that the landlords applicants executed one mortgage on 8th May 1935 in favour of Bengali Bhushan and two mortgages in favour of the appellant on 25th June 1935, does not necessarily lead to the conclusion that the transfers were made not for the purpose for which they were stated to have been made in the mortgage deeds but for an ulterior purpose, namely, to deprive the other creditors of their rights under the Act. Nor can the mere fact that Bengali Bhushan and Chadammi Lal, two of the creditors, belonged to Ferozabad itself, lead to the conclusion that they must have known of the intention of the landlords applicants or of the fact that they were heavily indebted, in the absence of any evidence to establish that fact. There was, therefore, in our opinion, no evidence on the record which could warrant the Special Judge to come to the conclusion that the transactions were not made in good faith.
14. It has been urged by Mr. Lakshman Sarup that the words 'if the Special Judge finds that such transfer was made with a view to deprive the landlord's creditors of their rights under this Act' in Section 12, Encumbered Estates Act show that it is the Special Judge's opinion which should be considered final at least on matters of fact and this Court should treat this appeal as if it was a second appeal and should not interfere with the Special Judge's opinion as to the facts. We are of opinion that there is no force in this contention. From every order passed by a Special Judge covered by Section 45, an appeal is provided. This is a first appeal and questions of facts and law both can be canvassed before us. The language used in Section 12 does not imply that the Special Judge's opinion is final on questions of fact.
15. It has been urged that so far as First Appeal No. 271 of 1942 is concerned, some of the creditors respondents have not been served with the notice of the appeal. It has been pointed out to us that respondent 17, Chandramal Indra Kumar, respondent 30, the National Industrial Bank Ltd,, and respondent 37, D. B. Lal & Co., have not been properly served. It is contended that since some of the creditors have not been served, the whole appeal has become incompetent. In support of this argument reliance has been placed upon the case of Banaras Bank v. Bhagwan Das, 1946 A. L. J. 402 : (A. I. R. (34) 1947 ALL. 18 F.B.). In our opinion this contention is well founded. It is true that the application was made by Mt. Pushpawati Devi at a very late stage and no formal notices were issued to any of the creditors. But it appears that arguments were heard, and an order, declaring the mortgages is favour of the appellant void, was made in the proceedings, under Section 14, Encumbered Estates Act. No separate formal order was prepared in pursuance of the order on the application made by Pushpawati Devi, under Section 12 of the Act. But, in view of that order the debt due under mortgages in question was treated as an unsecured debt. The relief claimed in the appeal was that the debt be declared a secured debt, and this prayer affected all the creditors and for that reason the appellant had impleaded, in his appeal, all the creditors. They were all necessary parties to the appeal and if some of them have not been duly served and the appeal has been allowed to proceed without serving ail of them, it is impossible to set aside the order of the Court below as it would affect ail the creditors, including the creditors who have not been properly served. In the circumstances, First Appeal No. 271 of 1942 has to be dismissed as not maintainable.
16. The result, therefore, is that we dismiss First Appeal No. 271 of 1942 and allow First Appeal No. 258 of 1942. So far as the Encumbered Estates Act case No. 160 of 1936 is concerned, the two mortgages in favour of the appellant Chadammi Lal dated 25th June 1935 shall be deemed to be valid. The order of the Special Judge concerning these mortgages is set aside.
17. In view of the divided success of the parties, we order that they shall bear their own costs in both the Courts.