1. This appeal raises a question under Section 53 of the Transfer of Property Act. The appellant, who was the plaintiff in the Court below, got a small cause decree against the second defendant and in discharge of that decree he got a mortgage from the second defendant for a sum of Rs. 1,000 on 23rd March, 1934. Besides the amount of Rs. 450 which went to discharge the small cause decree, there were two other debts of the second defendant which were purported to have been discharged out of the consideration for the mortgage. These two debts have been found to be fictitious. In a suit of 1931 the first defendant had got a decree for rent against the second defendant and on 8th May, 1934, in execution of that rent decree he attached the property covered by the mortgage in favour of the appellant. Presumably this property was not the property on which the rent decreed fell due, so that there was no question of a first charge for rent. The appellant filed a claim in the execution proceedings on the strength of his mortgage. The claim petition was rejected and hence he had to file the present suit. The first Court found that the mortgage was good to the extent of Rs. 450 which went to discharge the small cause decree, that the other items of consideration were not true and gave a decree that the mortgage was valid and binding to the extent of Rs. 450 only. The lower appellate Court agreed with the findings of fact, namely, that the consideration was true to the extent of Rs. 450 which went to the discharge of the small cause decree but that the balance of Rs. 550 represented fictitious payments, one of which was alleged to have been made by the appellant, the mortgagee, himself. The lower appellate Court also came to the conclusion that the transaction as a whole being in fraud of creditors, it must be declared void as a whole and could not be held valid to the extent to which the money went in discharge of a prior debt due to the mortgagee.
2. Now in dealing with cases falling under Section 53 of the Transfer of Property Act in which the consideration is held to be partly good, it is necessary to distinguish between certain classes of cases and to remember that Section 53 of the Transfer of Property Act does not apply to transactions which, though supported by good consideration, might in case of an insolvency be impeached as fraudulent preferences. There are three main classes of cases : (1) those in which that portion of the consideration which is true goes to discharge a prior simple debt of the transferee himself (as in the present case) ; (2) cases in which that portion of the consideration which is true goes to the discharge of a prior mortgage-debt on the property transferred. These cases raise questions of subrogation and, under Section 92 of the Transfer of Property Act as amended in 1929, questions of registration, with which we are not now concerned; (3) cases in which that portion of the consideration which is true goes to discharge prior simple debts due to third parties and not to the transferee. In such cases the transfer cannot be supported by the argument that the transferee is to some extent getting a payment of his own debt and at the most conniving at what might be considered a fraudulent preference. Although in Loorthi Odayar v. Gopalaswami Aiyar (1923) 46 M.L.J. 125 such a transaction, being in the form of a mortgage, was held to be good to the extent to which the consideration went in discharge of other debts of the transferor, this decision has been criticised in Appalaraju v. Krishnamurthy (1931) 34 L.W. 949 and Muthuvasu Chettiar v. Velu Muruga Nadar : (1939)2MLJ362 , and it is doubtful whether it can now be considered good law. A further distinction has been made in some of the cases between fraudulent transfers by way of sale and fraudulent transfers by way of mortgage and there has been a tendency to regard a mortgage which is supported by good consideration only to the extent to which it discharges a prior simple debt due to the mortgagee as standing in a better position than a sale carried out in similar circumstances This distinction has been by no means universally accepted and it is difficult to see how the general body of creditors are in any better position when the debtor's property is put out of their reach by a mortgage for a consideration which is largely fictitious, than when the same object is achieved by a fraudulent sale.
3. The appellant relies strongly on the decision of Sundara Aiyar, J., sitting singly in China Pitchiah v. Peda Kotiah I.L.R.(1911) Mad. 29. The facts of that case are not very fully stated, but it appears that the mortgage which was attacked was to a certain extent supported by the discharge of a prior debt to the mortgagee and that the rest of the consideration was fictitious, the debtor being not at the time in a position to pay all his debts. The learned Judge points out that in so far as the mortgage was a fraudulent preference, it does not come within the mischief of Section 53 of the Transfer of Property Act and he seems to draw a distinction between a simple mortgage the effect of which is to give the real creditor only a security for his true debt, though fictitious debts are joined along with the true debt and a similar case where the transaction is in the nature of a sale or a mortgage with possession. The learned Judge states that the plaintiff's claim is only that of a simple mortgagee and his claim is simply to recover his money and the fact that the mortgage is for an amount larger than he really paid, could be no reason for not upholding it to the extent that it is supported by a debt existing at the date of the mortgage and the learned Judge distinguishes Chidambaram Chettiar v. Sami Aiyar : (1906)16MLJ427 , as being a case of sale. Sundara Aiyar, J.'s decision has been referred to frequently in subsequent cases of this Court. In some of those cases it has been merely differentiated on the ground that it relates to a mortgage held to be in part a fraudulent preference and has no bearing on cases of a sale--cf. Muthuvasu Chettiar v. Velu Muruga Nadar : (1939)2MLJ362 . In Sama Row v. Doraisami Chettiar (1912) 24 M.L.J. 266 the case is distinguished on the ground that there was no finding of any collusion between the mortgagor and the mortgagee whereby the fictitious sum was to be held by the mortgagee to defeat the creditors of the mortgagor; and though the facts in Sama Row v. Doraisami Chettiar (1912) 24 M.L.J. 266 are almost identical with those in China Pitchiah v. Peda Kotiah I.L.R.(1911) Mad. 29 the learned Judges, on a clear finding that there was collusion, hold that the mortgage though supported by prior debts to the mortgagee to the extent of more than half of the consideration was a fraudulent transfer taken as a whole and could not be split into two transactions one of which was good and the other was bad. A similar view was taken by the Bench which decided Rajabhadar Mudaliar v. Thiruvengada Mudaliar : AIR1928Mad20 , which was also a mortgage case and the learned judges observed that if it is proved satisfactorily that only a portion of the consideration recited in the document did really pass, it is open to the Court to come to the conclusion that the transaction was intended to defeat or delay creditors and that in such a case, the proper order of the Court should be to set aside the transaction as a whole, because a transaction which is intended to defeat or delay creditors cannot be good in part and bad in part. This decision does not actually refer to the ruling in China Pitchiah v. Peda Kotiah I.L.R.(1911) Mad. 29 though the reasoning of the decision must be deemed incompatible with that case. In Visvanatha Reddi v. Venkata Reddi : AIR1927Mad278 , the learned Judges had to deal with a case of a sale for Rs. 2,000 which was supported by good consideration only to the extent of Rs. 500 and in dealing with the case in China Pitchiah v. Peda Kotiah I.L.R.(1911) Mad. 29, they observe:
If the learned Judge meant to lay down that in all cases where a mortgagee paid only a portion of the consideration that he should be given a decree for that portion on the footing of that mortgage, with due respect, we are unable to agree. If a person who is in embarrassed circumstances in order to shield his property from his creditors transfers it to another and if only a portion of the consideration recited in the document of transfer is paid and the balance is left with the transferee for his benefit and if this is done to the knowledge of the transferee, then the transaction is one coming under Section 53....Where the transfer is bad under Section 53, the transferee is not entitled as a matter of right to get a mortgage decree for the amount actually paid by him. The decision in China Pitchiah v. Peda Kotiah I.L.R.(1911) Mad. 29 is opposed to the decisions of this Court as well as of the Privy Council.
4. The case in Ponnuswami Pilial v. Quadir Mohideen Rowther (1930) M.W.N. 1145 was one of an usufructuary mortgage with a provision for the transaction to be treated as a sale if the money was not repaid within five years. Of the consideration for this deed, part was due to the mortgagee himself and it was held that this sum and one other item of consideration was true, but that the rest was fictitious and that the whole transaction was intended to defraud creditors. The learned Judges consider the leading cases including the decision in China Pitchiah v. Peda Kotiah I.L.R.(1911) Mad. 29 and hold that the decision in Chidambaram Chettiar v. Sami Aiyar : (1906)16MLJ427 , which was confirmed by the Privy Council in Chidambaram Chettiar v. Srinivasa Sastrigal (1914) 26 M.L.J. 473 : I.L.R. 37 Mad. 227 (P.C.) establishes that where a transaction is intended to defeat and delay creditors, the mere fact that a portion of the consideration was paid is no ground for not setting aside the transaction entirely and that in such a case the whole transaction has to be set aside. They also observe that the trend of authority clearly is in support of the view that unless there is a previous charge or mortgage which has been paid off, the mere fact that a portion of the consideration has been proved to have been paid is no ground for supporting a transaction entered into to defeat or delay creditors as valid to the extent of the consideration actually paid. It is true that this was not a case of a simple mortgage. But the general pronouncement of the law on the subject is quite inconsistent with the view taken by Sundara Aiyar, J., in China Pitchiah v. Peda Kotiah I.L.R.(1911) Mad. 29.
5. It must, I think, be taken as established so far as Madras is concerned that when a debtor with a view to defeat or delay his creditors colludes with one of those creditors and creates a mortgage in his favour for a consideration which is partly fictitious and partly made up of a true money debt due to that creditor, on the finding that the transaction as a whole was a collusive transaction intended to defeat and delay creditors, the transaction should be set aside as a whole and the creditor who is a party to the fraud should not be allowed the protection of the transaction to the extent of his prior debt discharged there-by.
6. It is contended that even assuming so much, there should be a finding that the mortgagee was a party to the fraud. Now, ordinarily speaking, when a transaction is attacked under Section 53 of the Transfer of Property Act, the burden lies upon the attacking party to show in the first instance that the transaction was a fraudulent transaction intended to defeat and delay creditors. When a prima facie case has been established on that basis, then the burden shifts to the alienee to show that he is a transferee in good faith for valuable consideration. In Narayana Pattar v. Viraraghavan Pattar I.L.R.(1899) Mad. 184 which is a mortgage case similar to the present case, the learned Judges observed:
We think that the inclusion of such debts (that is fictitious debts) in a document which would otherwise not be within the section, is prima facie evidence of an intention to defeat or delay the creditors, and it would lie upon the parties who wish to take advantage of the document to show that there was no such intention.
7. Now in the present case it has been found that out of a consideration of Rs. 1,000, Rs. 450 represented a good debt due to the transferee and the balance was made up of two fictitious debts, one of which is alleged to have been discharged by the transferee himself and it is found that the evidence of this alleged payment by the mortgagee is not true evidence and that the transaction as a whole was intended to defeat and delay creditors. In the face of such findings, it seems to me impossible to contend that the mortgagee was an innocent party who played no part in the fraud, except in so far as he secured the payment of his own debt. When once it is established that the mortgagee has set up as true an item of consideration which to his knowledge was false and that the transaction as a whole was intended to defeat and delay creditors, the inference is irresistible that the mortgagee himself was a party to this scheme of fraud. It follows therefore that even assuming that it is necessary to prove that the mortgagee was an active party to the scheme of fraud, the findings in the present case make such an inference irresistible.
8. In the result, therefore, I agree with the conclusion of the lower appellate Court and dismiss the appeal with costs. (One set of costs for the two appeals before the lower appellate Court.)
9. Leave refused.