1. The question for decision in this appeal is whether the mortgage of a house and land made by an adjudicated insolvent with regard to whose property a vesting order had been passed under Section 7 of the Insolvent Act, 11 and 12 Vic., cap. 21, prior to the acquisition of the property by the insolvent, is binding on the Official Assignee so that the latter can only get possession of the property (under Section 26 of the Act) on paying to the mortgagees the mortgage amount with interest.
2. The findings are that one Annie Smith was duly adjudicated an insolvent in 1888 and had not received a final discharge (under Section 57 of the Act) up to the time of her death (which is said to have taken place in or about May 1892); that on the 3rd April 1891 she acquired the property in question under an absolute deed of gift; that in December 1891 she mortgaged the same to the respondents; that such mortgage was executed bond fide and for valuable consideration; but that the respondents were aware that their mortgagor had been adjudicated an insolvent, and had reasonable means of knowing that she had not obtained her final discharge.
3. The learned Commissioner of the Insolvent Court has, on the above findings, held the mortgage to be valid as against the Official Assignee. He has so hold on the authority of the English Court of Appeal in Cohen v. Mitchell L.R. 25 Q.B.D. 262 in which the following proposition was laid down and adopted, viz., 'Until the trustee intervenes, all transactions by a bankrupt after his bankruptcy with any person dealing with him bond fide and for value in respect of his after-acquired property, whether with or without knowledge of the bankruptcy, are valid against the trustee.' Our attention has, however, been called by appellant's counsel to a more recent English case In re New Land Development Association and Gray (1892) L.R. 2 Ch. 138 in which the Court of Appeal concurred with Chitty, J., in thinking the proposition laid down in Cohen v. Mitchell L.R. 25 Q.B.D. 262 to be inapplicable to real estate. However this may be, the proposition as laid down in Cohen v. Mitchell L.R. 25 Q.B.D. 262 is admittedly in terms 'wider than appears to have been laid down before.' See per Lord Esher, M.R. In fact in Herbert v. Sayer 5 Q.B. 965 which is cited in support of the above proposition, it was merely held that the bankrupt 'acquires property, and contracts for the assignees, who may, whenever they please, disaffirm his act; but until they do so, his acts are all valid.'
4. As observed by FRY, L.J., in the proposition as laid down in Cohen v. Mitchell L.R. 25 Q.B.D. 262 the word 'intervene' is substituted for the words 'disaffirm his acts' in the rule as stated in Herbert v. Sayer 5 Q.B. 965 the object of the alteration being admittedly to deprive the trustee who intervenes of the 'power retrospectively to disaffirm what has otherwise been validly done by the bankrupt.'
5. The facts of Cohen v. Mitchell L.R. 25 Q.B. 262 were as follows: One Arthur Cohen became bankrupt, and subsequently, and before he obtained his discharge, carried on business in buying and selling agricultural machines, and, to enable him to do so, obtained advances of several sums of money from Hyam Cohen. One Foale seized some of the machines, and the bankrupt brought an action against him for a wrongful conversion of the machines so seized. The bankrupt, having no money with which to carry on the action, assigned the cause of action to Hyam Cohen in consideration of the money already due to him and the further sum necessary to carry on the action. The action resulted in a verdict for the plaintiff. The trustee in bankruptcy of Arthur Cohen then intervened and demanded the money of Foale as part of the property of the bankrupt. Hyam Cohen also claimed the amount under an assignment. Foale consequently interpleaded and paid the money into Court, whereupon the issue was tried between Hyam Cohen as plaintiff, and the trustee as defendant. It was with reference to these circumstances that the Court of Appeal laid down the proposition quoted above 'in terms wider than it had been laid down before' in order to preclude the trustee from disaffirming retrospectively what had otherwise been validly done by the bankrupt.'
6. It was held by the Privy Council in Kerakoose v. Brooks 8 M.I.A. 339 with reference to the property acquired by an insolvent subsequent to his adjudication as an insolvent and prior to, his final discharge that the assignee's right under 11 & 12 Vic., cap. 21, is subject to the following two qualifications: (i) property acquired subject to liens and obligations remains subject to those charges and equities even when taken by the assignee; and (ii) if the insolvent carries on trade with the assent of the assignee, the property acquired in such trade will be subject to the charge of the creditors in that trade in priority to the claim of the Official Assignee.
7. The second of these qualifications requires that the trade shall have been carried on 'with the assent of the assignee.' It was the want of this assent, I imagine, in Cohen v. Mitchell L.R. 25 Q.B.D. 252 that necessitated the adoption of the proposition there laid down, the object being to prevent an 'otherwise valid' claim being defeated, and as remarked by Chitty, J., in the more recent case' it is a fair observation to make on all dicta of this kind that they are enunciated with reference to the particular question then before the Court.' The reason for the rule as recognized in Herbert v. Sayer 5 Q.B. 965 is stated by the Lord Chief Justice of the Common Pleas to be that 'otherwise there would be no protection to persons dealing with an uncertificated bankrupt; not only would they acquire no title by purchases from him, but payments for such purchases and for all other debts due to the uncertificated bankrupt would be invalidated.'
8. The question for decision in Herbert v. Sayer 5 Q.B. 965 was merely as to the right of the bankrupt to maintain a suit as indorsee of a bill of exchange, and all that was then decided was that he had such right 'except as against the assignees'; and this is all that was decided in Fowler v. Down 1 Bos. & Pul. 44 and the other cases cited in Herbert v. Sayer 6 Q.B. 965 So also in Drayton v. Dale referred to by the learned Commissioner and in Fatima Bibi v. Fatima Bibi I.L.R. 16 Bom. 452 As remarked by Kay, L.J., in the recent case of hi re New Land Development Association and Gray (1892) L.R. 2 Ch. 138--the rule was only applied in Cohen v. Mitchell L.R. 25 Q.B.D. 262 for the purpose of protecting persons who had been 'trading with the bankrupt and dealing with personal estate.'
9. The only case brought to our notice in which the rule has been applied to veal estate is Kristocomul Mitter v. Suresh Chunder Deb I.L.R. 8 Cal. 556 in which Wilson, J., upheld as against a subsequent purchaser from the Official Assignee the claim of a prior purchaser from an undischarged insolvent, of the hitter's share in family property which presumably was or at least included real property. This decision purports to proceed on the authority of Herbert v. Sayer 5 Q.B. 965 but, as already observed, the only question in that case was the right of the bankrupt to maintain a suit in the absence of the trustee. It was, however, expressly held in Herbert v. Sayer 5 Q.B. 965 that all acquisitions and contracts made by an adjudicated bankrupt were made for the trustee and subject to disaffirmance by the trustee.
10. On a consideration of the various cases that we have been referred to, the conclusion at which I arrive is that in order to be binding on the Official Assignee a charge on after-acquired property created by an adjudicated insolvent, who has not obtained his final discharge, must come within the scope of one or other of the two qualifications stated in Kerakoose v. Brooks 8 M.I.A. 339 and that Cohen v. Mitchell L.R. 25 Q.B.D. 262 is merely authority for the proposition that when an insolvent is allowed to carry on trade or other business, the Official Assignee's assent thereto required under the second of the two qualifications mentioned in Kerakoose v. Brooks 8 M.I.A. 339 will be presumed up to such time as he may intervene.
11. As the mortgage to the respondents in the present case does not come within either of these qualifications, I would allow this appeal and set aside so much of the order of the learned Commissioner of the Insolvent Court as directs the Official Assignee to pay to the respondents the mortgage amount and interest thereon.
12. Respondents must pay the Official Assignee's costs both in this Court and in the Court below.
Muttusami Ayyar, J.
13. I come to the same conclusion, though not upon the same ground. The facts of the case are shortly these: In February 1888 Annie Smith was declared an insolvent and a vesting order was made under 11 and 12 Vic, cap. 21, Section 7. In April 1891 she obtained under a deed of gift a house and land called River Ville and she was also possessed of certain articles of furniture in and about the house. In December 1891 she mortgaged the said property to Messrs. Champion and Short for a sum of Rs. 3,500 with a power of sale. In May 1892 Annie Smith died intestate, and she had never obtained her final discharge under Section 59 of the Insolvency Act. In June 1892 Messrs. Champion and Short took possession of the house, land and furniture, and they have since let the house from time to time to tenants for short periods. The learned Commissioner has found that the mortgagees were aware that Annie Smith had been adjudicated an insolvent and had reasonable means of knowing that she had not obtained her final discharge. The Official Assignee stated in his petition that on the 7th September 1892 he saw a notice in the Madras Times whereby the house in question was advertised for sale as the property of the late Mrs. Annie Smith. On the 8th September 1892 he intervened and claimed the property free of the mortgage. The question arising for determination upon these facts was whether the mortgage was binding on the Official Assignee, and the learned Commissioner determined it in the affirmative, the ground of decision being that the decisions on a similar question arising under the English Bankruptcy Acts are applicable to cases arising under 11 and 12 Vic, cap. 21, that according to those decisions the after-acquired property continued in the insolvent until the Assignee interfered to claim it, and that meanwhile the insolvent could, for valuable consideration, part with it so as to give a good title to his alienee. Hence this appeal.
14. For the appellant it is contended (i) that the English decisions relied on by the learned Commissioner do not apply to cases arising under the Indian Insolvency Act; (ii) that assuming that they are applicable, the decision under appeal is at variance with the case of re New Land Development Association and Gray 1892 L.R. 2 Ch. 138 and (iii) that according to the true construction of 11 and 12 Vic, cap. 21, Section 7, and to the decision of the Privy Council in Kerakoose v. Brooks 8 M.I.A. 339 property acquired by the insolvent subsequent to the vesting order and prior to his final discharge vests at once in the Official Assignee, whether he intervenes or not, and that it is not competent to the insolvent to mortgage or otherwise alienate it.
15. The main question for decision is, what is the true interpretation of 11 & 12 Vic, cap. 21, Section 7, as regards the mode of vesting in the Official Assignee of property acquired by the insolvent subsequent to the vesting order and prior to his final discharge. The language of the section throws no light on the point beyond the fact that the word 'vest' is used both with reference to property already in existence and to after-acquired property. There is no doubt that property which is in existence when the insolvent files his petition vests at once in the Official Assignee, and no one but the Assignee is since competent to alienate it. In the case of subsequently-acquired property however there is this peculiarity. The insolvent being the acquirer, it must vest in him at least for an instant and then vest in the Official Assignee. The exact point for consideration is, as stated by the learned Chief Justice of the Common Pleas, this: 'Is it the intention of the Legislature that such property should vest in the insolvent as acquirer but for an instant and then vest in the Official Assignee, or is it the intention that the Official Assignee should have the beneficial interest and the insolvent should acquire such property for his benefit in the capacity of an agent so as to be competent to deal with it subject to the intervention of the Official Assignee?'
16. The latter is declared to be the real intention of the Legislature in cases decided under the English Bankruptcy Acts, Herbert v. Sayer Q.B. 965 and Cohan v. Mitchell L.R. 25 Q.B.D. 262 are the leading cases on the subject. The reasons for adopting the latter intention as the real intention are lucidly explained in the first-mentioned case by the learned Chief Justice of the Court of Common Pleas in the following terms: 'The effect of the statutory enactments may be either to transfer immediately such property or contracts from the bankrupt to the assignees, vesting the property in the bankrupt for an instant only, or to give the assignees the beneficial interest and to make the bankrupt acquire property or contract for their benefit only in the nature of an agent. The cases accord with the latter construction of the statute, and it is most consistent with convenience; for, otherwise, there would be no protection to persons dealing with an uncertificated bankrupt. Not only would they acquire no title by purchases from him, but payments for such purchases, and for all debts due to the uncertificated bankrupt would be invalidated. The Legislature, by several statutes, have protected all such payments, by and to, and all dealings and transactions with, the bankrupt bona fide made of entered into without notice of the act of bankruptcy before the fiat; but there-is no provision by the statute law for such payments, dealings or transactions, after the fiat; and the only way by which they can be rendered valid and. great confusion, inconvenience and hardship prevented, is by adopting the latter construction, and holding that the bankrupt acquires the property, and contracts, for the assignees, who may, whenever they please, disaffirm his act, but until they do so, his acts are all valid.' It is thus clear that the English, cases deal with the question as one of reasonable construction, and it appears to mo that the whole of the reasoning is applicable under the Indian Insolvency Act. I see no substantial difference on the point now before us between the Indian Insolvency Act and the English Bankruptcy Acts, viz., 6 Geo. IV, cap. 16, Sections 63 and 127, 1 & 2 Will. IV, cap. 56, Section 25, and the Bankruptcy Act, 1883, Sections 44, 58 and 118. The provisions as to vesting are similar. I agree with the learned Chief Justice that they are applicable under 11 and 12 Vic, cap. 21, especially as the question is one of reasonable construction to be put on similar provisions. I also agree in the opinion that the decision of the Privy Council in Kerakoose v. Brooks 8 M.I.A. 339 is not an authority against their applicability, and that, on the other hand, it is a clear authority in favour of their applicability. In that case, the uncertificated insolvent borrowed money for the purpose of purchasing goods to carry on a business; and in order to secure the advances, gave a bond and agreed in writing to execute a mortgage of the goods so purchased to the lender to secure repayment. He afterwards executed an assignment of the goods for that purpose. The business was carried on with the knowledge of, and without any objection by, the Official Assignee. The lender had never possession of the goods assigned to him by the insolvent and the same remained in possession. of the insolvent until his death. The Privy Council held that the insolvent's after-acquired property was subject to the Hen of the lender and that such lien was paramount to any claim of the Official Assignee under the insolvency. In their judgment the Lords of the Privy Council said : 'The Assignee's right to the subsequently-acquired property is subject to two qualifications. In the first place, if the insolvent has acquired property subject to liens and obligations, then any property taken by the assignee under that state of things is taken subject to those charges and equities which affect the property in the hands of the insolvent. The second qualification is this, that if the insolvent carries on trade at a subsequent period with the assent of the assignee of the estate under the Act, in the first instance the property which is acquired in the subsequent trade will be subject in equity to the charge of the creditors in that trade, in priority to the claim of the assignee under the first insolvency.' These qualifications are enunciated with reference to the particular facts of the case, and I agree in the opinion of the learned Commissioner that they are not exhaustive.
17. The substantial question is whether according to the recent case of the New Land Development Association and Gray 1892 L.R. 2 Ch. D. 138 the rule laid down in Herbert v. Sayer 5 Q.B. 965 and Cohen v. Mitchell L.R. 25 Q.B.D. 262 is applicable to immoveable or real property and is not limited in its scope to moveable property.
18. This case was decided in April 1892 and does not appear to have been cited before the learned Commissioner. The facts of that case were that a testatrix devised her real estate to her nephews, William Shurley and Joseph Shurley, as tenants in common. The nephews purported to convey the estate to a land company, who, in May 1891, entered into a contract for its sale to a purchaser. The purchaser discovered before completion that in 1888 William Shurley had been adjudicated bankrupt and that he was still undischarged. The trustee in bankruptcy then intervened and claimed to be entitled to a moiety of the estate. The question for decision was whether an undischarged bankrupt could, even before the intervention of the trustee in bankruptcy, convey real estate acquired after the bankruptcy, to a bona fide purchaser for value, so as to give a good title to the purchaser as against the trustee. Whether the rule laid down in Cohen v. Mitchell L.R. 25 Q.B. 262 was not limited to goods was considered by Chitty, J., and by the Lords Justices on appeal. They all held that it was so limited. Chitty, J., referring to the argument that after-acquired real estate vests in the bankrupt and remains vested in him till the trustee intervenes and claims it, said: 'I see no justification in the statute or the authorities for holding that the legal estate will first vest in the bankrupt and then shift to the trustee when he intervenes.'
19. On appeal the Lords Justices expressed the same opinion. Lord Justice KAY considered that 'where a bankrupt is carrying on business and dealing with personal property, such dealing will to some extent consume it. And if the trustee looks on and does not intervene, then the consumption of the property goes on as a consequence of the carrying on of the business by the bankrupt.' He thought that it had nothing to do with real estate. Lord Justice Lindley said, ' there is some sense in the doctrine as to personal estate. But I have never heard it suggested by anybody that it had the slightest application to real estate which passes by conveyance and not by delivery.' This case clearly limits the rule in Herbert v. Sayer 5 Q.B. 965 and Cohen v. Mitchell L.R. 25 Q.B.D. 262 to personal estate. Though there was also another ground on which the decision was supported, I feel myself bound to adopt the proposition laid down in that case by the Court of Appeal, even assuming that it was in the nature of a dictum.
20. The property in the case before us being what is known to English law as real property, I concur in the order proposed by my learned colleague.