1. This appeal is connected with Revision No. 156 of 1934 and the same question of law is raised in both proceedings. It appears that one Hakim Saiyid Ali Ahmad was adjudged an insolvent in 1910. In the year 1930 he applied under Section 35 for annulment of adjudication, but his application was dismissed and the dismissal order was maintained up-till the High Court. In those proceedings the insolvent made an attempt to obtain a reduction in the contractual rate of interest on his debts and it was held by the learned District Judge that:
An application under Section 35 is something quite different; the Court is not functioning as a distributor of assets at all. It is therefore no part of the Court's duty to start calculating what rate of interest ought to be paid to each creditor. Before the debtor can ask the Court to annul the order of adjudication he has to prove to the Court that he has paid up his total debts in full including all the interest up to the date of payment that he had contracted to pay to each creditor.
2. Having failed in his attempt to obtain a reduction of interest under Section 35 the insolvent submitted a proposal for a composition in satisfaction of his debts under Section 38 of the Act. He proposed to pay all his debts, but expressed his willingness to pay interest at 3 per cent per annum only. On this, notice was sent to the creditors under Sub-clause 1 and the creditors in a body opposed the proposal and demanded interest at the contractual rate 'from the date of the adjudication. The trial Court accepted the proposal of the insolvent with a modification inasmuch as it ordered the payment of interest from the date of the adjudication at 4 per cent per annum. Certain creditors appealed against the order of the trial Court, but the learned District Judge dismissed the appeals and the matter has come before us in these two connected , proceedings.
3. It is contended on behalf of one of the creditors that the order of the Court on the application of the insolvent under Section 35 refusing to reduce interest operates as res judicata. We are of opinion that proceedings under Section 38 are not allied to proceedings under Section 35, for whereas in the latter case the insolvent has to show that the debts have been paid: in full, which implies that the debts have been paid along with interest at the contractual rate, Section 38 contemplates a proposal for a composition in satisfaction of debts and implies a reduction in the claim of the creditors. The main objection however is that the proposal of the insolvent for paying a lesser rate of interest than the contractual rate was objected to by all the creditors in a body and the Court thus had no option but to refuse to give its approval to the proposal.
4. The case for the insolvent is that under Sub-clause 7 the Court has very wide powers either to approve or to refuse the [proposal and although certain restrictions might have been laid down in Sub-clauses 4, 5 and 6 under which the Court has no option but to refuse the proposal, there is no restriction to the inherent power of the Court because of anything contained in Sub-clause 2. It is said that even if 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 refuse to accept the proposal, the Court has the power to approve the same, and this is the view which has found favour with the Court below. Support for this view was sought from the case of Ganga Sahai v. Mukarram Ali Khan 1926 24 ALJ 441. It is necessary at this stage to consider the provisions of Section 38, Insolvency Act of 1920, but before we do so we might mention that the English Bankruptcy Acts form the basis of Indian Insolvency legislation from their earliest times to the enactment of Act 5 of 1920, and if we look at the English Bankruptcy Act of 1914, there can be no doubt that the Court's power to look at the proposal commences after the acceptance of the proposal by the general body of creditors. Section 16, English Act relates to composition or scheme of arrangement and there a debtor who intends to make a proposal for a composition in satisfaction of his debts has to apply to the Official Receiver, who calls a meeting of the creditors, and if at that meeting a majority in number and three-fourths in value of all the creditors who have proved, resolve to accept the proposal, it shall be deemed to be duly accepted by the creditors.
5. It is also open to the debtor at the meeting to amend the terms of the proposal if the amendment is in the opinion of the Official Receiver calculated to benefit the general body of creditors. After all these formalities have been complied with, the debtor or the Official Receiver may, after the proposal is accepted by the creditors, apply to the Court to approve it and notice of the time appointed for hearing the application is given to each creditor who has proved. The English Act then lays down various principles for guidance of the Court which considers the proposal of the debtors, (accepted of course by the creditors) more particularly for refusing the proposal and in Sub-section 11 says that in any other case the Court may either approve or refuse to approve the proposal.
6. The Indian Act of 1920 in all material particulars agrees with the English Bankruptcy Act, only that under the Indian Act the application under Section 38 can be made by an insolvent only after the making of an order of adjudication and differs to this extent that the application has to be made to the Court and not to the Official Receiver, but the underlying principle is the same and the scheme of the Act is also the same. The proposal of the insolvent is not to be deemed to be duly accepted by the creditors unless a majority in number and 3/4ths in value of all the creditors whose debts are proved and who are present in person or by pleader resolve to accept the proposal. A (composition in its essence is an agreement, and agreement has been defined in Sub-clause 2 as an acceptance by a majority in number and 3/4ths in value of all the creditors. Unless therefore this condition is satisfied the proposal cannot be deemed to be duly accepted; the proposal cannot be said to have reached the stage of agreement or a composition and there cannot therefore be a proposal for a composition before the Court for its consideration or acceptance.
7. The acceptance by a majority and 3/4ths in value of all the creditors seems to be a condition precedent before the Court can proceed to consider it. This undoubtedly is the case in the English Bankruptcy law and there is nothing in the language of the Indian law to suggest that a departure was intended. The debtor is, of course, given the option before the proposal is placed before the creditors at the meeting to amend the proposal if the amendment is in the opinion of the Court calculated to benefit the general body of creditors.
8. Under Sub-clauses 4, 5 and 6 the Court is told that if the terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors or if under certain circumstances reasonable security for payment of not less than six annas in the rupee is provided for or if certain priority is not safeguarded the Court shall necessarily refuse the proposal. The Act then says that in any other case the Court may either approve or refuse to approve the proposal. It follows therefore that the conditions laid down in Sub-clauses 2, 4, 5 and 6 must be fulfilled before a Court can approve the proposal. It is however argued that when the legislature has given complete details of the conditions on which a proposal is to be refused, including the condition that the terms of the proposal ought to be reasonable and calculated to benefit the general body of creditors, it is almost impossible to imagine a case where a Court can. refuse to approve the proposal on any other ground. But it is possible to think of a case where the Court might feel inclined to refuse a proposal on other grounds, where, for instance, the scheme is in disregard of the demands of commercial and public morality or of justice.... The conduct of the insolvent in connexion with the insolvency might also be taken. into consideration and the scheme might only be a device to enable the insolvent to buy back his own assets at a profitable figure and to make a profit out of his insolvency. It is therefore not impossible to think of a case where the Court will not give its sanction to a proposal even if it is not opposed to Sub-clauses 4, 5 and 6 and the case of Sevugan Chettiar v. Murugappa Chettiar. 1931 54 Mad 823 ,might be cited as one of such cases. We now propose to consider the cases that have been cited before us at the Bar. In the Madras case just referred to, although the point for decision was a different one, the learned Judges observed at p. 828 as follows:
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 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 consent, still, even if there is that consent of the creditors, the Court must exercise its judicial discretion before approving of the scheme.
9. The learned Judges in this passage clearly mean to hold that the scheme will not be approved unless the requisite majority of the creditors consent. In Shafiq-uz-Zaman v. Deputy Commissioner, Barabanki 1915 18 PC 125 the learned Judicial Commissioners commented on the provisions of Section 27, Act 3 of 1907 (corresponding to Section 38, Act 5 of 1920) and observed that the first step was to bring the scheme to the notice of the creditors and the next step was to ascertain their views at a meeting convened under the provisions of the section and if 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 Court notes that the proposal is-duly accepted by the creditors. They then, go on to say
But if on a consideration of the proposal there is not 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 in favour of the acceptance of the scheme, the proposal will stand rejected, whatever be the opinion of the Court as to its merits.
10. This case fully supports the contention of the appellants and the view which we ourselves have taken of the matter. It now remains for us to consider the case on which reliance was placed by the trial Court. In that case the point was whether under Section 38, Insolvency Act, the debtor was entitled to ask the Court for a scrutiny into the scheduled debts and while considering that point Sulaiman, J., at p. 442 observed in passing that:
If a majority in number and three-fourths in value of all the creditors, whose debts were proved, resolve to accept the proposal, it is deemed to be duly accepted. If they do not, then unless the proposal contravenes the provisions of Sub-clauses 4, 5 or 6 the Court has power to approve of it.
11. Boys, J., at p. 451 said:
But I am unable to find in the terms of Section 38 any limitation whatsoever of the nature of the proposal which the Judge may entertain subject only to this that he shall consider it reasonable and to the general benefit of the creditors.
12. If this last passage were taken literally and to have a bearing on the point at issue before us, it would mean that the limitations contained in Clauses 5 and 6 do not exist, and it is obvious that the learned Judge was not laying down any general principle but was referring to the matter in controversy before him in that particular case. So far as the observations of the other learned Judge are concerned we are of opinion that they are a pure obiter inasmuch as it was not necessary to consider that particular point in the case before him. We feel that we are therefore in no way bound by the observations contained in that case and on a proper interpretation of Section 38 the fulfilment of the conditions laid down in Sub-clause 2 is a condition precedent to the acceptance of the proposal by the Court. For the reasons given above, we allow this appeal with costs against the insolvent, set aside the order of the Court below and dismiss the insolvent's application under Section 38.