1. This appeal arises from an application made by the present appellant to the District Judge under Section 5 of the Provincial Insolvency Act to have the 1st respondent adjudged an insolvent on the ground that he committed an act of insolvency by executing and giving to the 2nd respondent a deed of sale of some of his properties within 3 months previously, with the intent of defeating the appellant's debt. In this petition that deed was stated to be a ' nominal ' deed. The 1st respondent admitted that as he was greatly indebted, and feared that his creditors might take away all his properties he executed the sale-deed in question nominally and for no consideration out of confidence in the 2nd respondent who was a close relation of his. The 2nd respondent who had been made a party to the proceedings pleaded on the other hand that the sale was a valid one made bona fide and for proper consideration.
2. The learned District Judge dismissed the appellant's petition without taking any evidence holding that it did not disclose any act of insolvency, He treated the allegation in the petition that the sale-deed was a nominal one as meaning that the transaction was a sham transaction and as he considered that such a transaction was a pure nullity and did not effect a transfer of the property within the meaning of Section 4, Clause (b) of the Provincial Insolvency Act and as it could not possibly defeat or delay creditors, he held that no act of bankruptcy had been committed by the 1st respondent by executing the sale-deed.
3. If we are to understand by a ' sham ' transaction, a transaction which the parties have no intention whatever to give any effect to and in which the document executed is a mere nullity, a piece of paper of no value or effect regarding the property, it may be that such a transaction, not effecting any transfer of property by its very nature, is insufficient to constitute an act of insolvency, as Section 4(b) requires a transfer to be made. In Isitt v. Beeston (1839) L.R. Exch. 159 it was laid down that an actual transfer of property in or of some interest in goods was necessary to constitute an act of bankruptcy. The same principle will, no doubt, apply to immoveables also. The language of Clause (b) it also clear.
4. But I am of opinion that the District Judge was in error in thinking that the allegation in the present case was of the nature described in the above paragraph. What the appellant stated was that the deed was a nominal one and not that it was asham one. I understand by the expression 'nominal' that the deed was executed to the 2nd respondent and in his name really for the benefit of the 1st respondent himself. The idea is to formally vest the title in one nominee so that he may hold the property openly for himself but secretly for one's own benefit, using the document as a cloak to save it for one's self from his creditors. In such a case far from there being no intention to give any effect to the deed, the parties have the serious intention of defeating creditors by it. For that purpose it is necessary to legally vest the title to the property in the transferee and the deed is executed with that very object. In such a case it seems to me clear that there is a transfer of property effected by the deed if the formalities required by law for a proper document have been complied with as they have been in this case.
5. It is not the case of the petitioner that the document was got up with no intention to give any effect to it as the District Judge supposes, for he says expressly that it was intended to defeat him. In fact it was explained to us by the Government Pleader for the appellant that the word 'nominal' was inadvertently used in the petition and it was quite unnecessary to make an averment that the deed was a nominal one, we have allowed him to amend his petition by omitting that word.
6. On the petition as it now stands, there is no foundation at all for thinking that the deed of sale was alleged to be a 'sham' one. But even on the petition as it stood before I consider that the view taken by the District Judge of the allegation in it is not well founded. It is not the case of the insolvent either that the deed was a mere sham, for he also asserts that though it was for no consideration it was executed to defeat creditors. On the other hand the transferee contends that it was taken by him bona fide for full and proper consideration. The intention to transfer is thus clear according to all parties; the questions whether consideration was paid and whether the transferee was to hold the property for the transferor's benefit are immaterial in this connection, and as a formal deed of sale was executed and registered in the 2nd respondent's name, I must hold that a transfer of the legal title to the property was effected by it and if that transfer is shown to be made with the intent to defeat creditors, it is an act of insolvency.
7. The District Judge has also observed in his Judgment that there must be a real obstacle created in the way of creditors for them to be defeated or delayed, for an act of insolvency to be committed. There can be no doubt that a benami deed executed by a debtor as a cloak to save his properties from his creditors is a very serious obstacle in their way and if they fail to prove its real nature they will not only be delayed but defeated altogether. In fact so far as the creditor is concerned the mischief is greater in such a case for he is unable to have recourse to the consideration money which would presumably be available for him when the transfer-deed is for consideration., There is therefore all the more reason for holding that a nominal deed executed for defeating creditors is an act of bankruptcy. No authority has been cited to show that a deed of transfer can be treated as not amounting to an act of bankruptcy merely because it is a ' nominal ' deed. I think such a deed is as much within the meaning of Clause (b) as any deed for consideration is.
8. I am therefore unable to support the District Judge's view in this case. But before the 1st respondent is adjudged an insolvent it must be established that his intent in executing the deed of sale was to defeat or delay creditors, It is true that he has admitted this intention; but as the transferee has been made a party to these proceedings as 2nd respondent and as he has pleaded that the transfer is a bona fide one made in good faith and for valuable consideration and as the sale-deed to him is the very document relied on as giving rise to the act of Insolvency, I think it is proper that the question whether it does amount to such an act should be tried before the 1st respondent is adjudicated. The matter, I think, should not be left to be disposed of hereafter on an application under Section 36 or Section 37 of the Act in the circumstances of this case.
9. I would therefore reverse the order of the District Judge and remand the application to him for fresh disposal. Costs here to be costs in the cause.
10. As at present advised I concur in the view taken by my learned brother of the meaning of the words ' makes a transfer ' in Section 4(b) of the Provincial Insolvency Act. I speak thus cautiously, because we have not had the benefit of any argument contra and the words are open to the construction placed upon them by the learned District Judge. The broader view is, however, not only as it seems to me, the more reasonable one, but, certainly, the one most in accord with the public interests.
11. I agree in the order proposed.