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The Official Receiver Vs. Sankaralinga Mudaliar and Three ors. - Court Judgment

LegalCrystal Citation
Decided On
Reported in(1921)ILR44Mad524
AppellantThe Official Receiver
RespondentSankaralinga Mudaliar and Three ors.
Cases Referred and Madhu Sudan Pal v. Parbati Sundari Dasya
.....on a lease for a particular period, or is under a usufructuary mortgage, or the like. if i am right in the view that the court sale conferred no right in the property to the purchaser when it was made behind the back of the official receiver, it follows that the insolvent as well as his representative, the official receiver, has a present right to the possession of the collusive or fraudulent, since here he makes no such allegation, but contends only that the sale of property vested in him before its date is a nullity. it has been pointed out that the only provisions of the act relating to court sales do not deal with the method available to the receiver for avoiding them, and there is no provision which places titles acquired at them on any special footing. when, therefore, section 16, on which the vesting in the receiver under section 18(1) follows, is exhaustive, there is no ground on which property alleged to have been transferred after adjudication by court sale can be treated differently from property transferred at that stage in any other way.6. the authorities relied on are in fact concerned rather with the application of the proviso to.....

Oldfield, J.

1. The lower Court's order against the Official Receiver, in Appeal against order No. 128 of 1919, was passed firstly on the short ground that Sections 16, 34, 35 of the Provincial Insolvency Act (III of 1907) specified in the heading of the petition are not 'petitioning sections', the meaning being apparently that the proper remedy was not by petition under that Act, but by suit or otherwise under the direct provisions of the Code of Civil Procedure and the appeal is resisted here firstly on that account.

2. The facts are that, on 23rd September 1914, first to third respondents obtained a compromise decree, Exhibit 1, in the Court of the District Munsif of Ambasamudram against four persons, who were adjudicated insolvents in the lower Court on 23rd March 1917. On 28th June 1918 certain properties of the insolvents were sold in execution of this decree by the District Munsif and purchased by the fourth respondent, after one of the insolvents and the Official Receiver had in circumstances not yet investigated taken objection to the sale proceedings. In the present proceedings the Official Receiver has moved the lower Court, as the Court dealing with the insolvency, to set aside the sale or in the alternative to direct a refund by first to third respondents of their realization in execution. It is not clear whether delivery to fourth respondent has taken place. But there is a further prayer for such other relief as the circumstances may demand, which would cover, if necessary, an order for the return of the property. On these facts, the contentions, as advanced in paragraph 16 of first respondent's counter-petition and in argument before us, are that only the Court which held the sale, can set it aside; that the Insolvency Court has no right to interfere with the proceedings in execution elsewhere; and that the Official Receiver should, as the lower Court held, proceed by suit or otherwise under the Code.

3. The general question thus raised is whether the Court dealing with an insolvency under the Provincial Insolvency Act has either an exclusive jurisdiction or one concurrent with that of the ordinary Courts to deal, for the purpose of the administration of the insolvents' estate, with claims against persons holding it adversely to him, whether they have arisen from purchase at Court sale or otherwise. Before dealing with the provisions of the Act, I observe that such an exclusive jurisdiction is well recognized elsewhere in insolvency systems, which are of longer standing than the Provincial Act, and which are usually referred to in its construction. Reference may be made on this point to the decisions collected under Section 105 of the English Bankruptcy Act, 1914, at page 375, William's Bankruptcy Practice, 11th Edition, and to Section 7 of the Presidency Insolvency Act (III of 1909) of which the material portion was reproduced from the English Act in force at its date; and it is significant that, although there is no reason for presuming any intention to change the law, the legislature has included a similar provision, as Section 4 in the Provincial Insolvency Act (V of 1920), which is now in force, The mention above of concurrent jurisdiction is based solely on Naginlal Chunilal v. The Official Assignee I.L.R(1911) ., Bom., 473 a case under the Presidency Act, which does not appear to have been followed in any other High Court, which makes no reference to Section 8(2)(o) as affording a remedy in the Insolvency Court and deals with Section 7 with very little regard to English authority. The decision in these circumstances is of doubtful authority, and in any case, as it recognizes only a concurrent jurisdiction, it in no degree assists respondents.

4. To turn to the Provincial Act, it is material first that, as appears from its preamble, its comprehensive character, and the repeal by it of the existing Insolvency Law, Sections 341 and 844 to 360-A of the Code in force at its date, it is a special law and its provisions are, except as specially provided under Section 4 of the Code of Civil Procedure (Act V of 1908) in force at the date of these proceedings, unaffected by anything therein. Of the provisions in the Act relating to property held actually or colourably against insolvents, Sections 36 and 87 merely prescribe a rule of evidence applicable to two classes of alienations, those completed within particular periods before the adjudication, not, like the sale now in question, after it, and it is material only that they assume and do not confer the power of cancellation, which they imply, but which must be looked for in another place. There are next, Sections 34(I) and 35, the only provisions relating to execution proceedings, the former to assets realized before the insolvency began and still remaining in the executing Court, the latter to cases in which an adjudication has taken place after the issue of execution and property is under some description of attachment. To the application of Section 35(1) to what happened in the present case it will be necessary to return, although it may at once be pointed out that in Kashi Nath v. Kanhaiya Lal Sharma I.L.R(1915) . All, 452 proceedings for the recovery of the property subsequently to the sale eventually held were taken by the Receiver in the Insolvency Court without objection to its jurisdiction. The material point at present, however, is that these are the only two provisions in the Act for the intervention of a Court other than the Insolvency Court in the administration of the insolvent's estate; that they deal with the only cases, which have been suggested, in which conflict between the Insolvency Court and another would be inevitable in spite of the former's exclusive jurisdiction; and that the intervention authorized by them consists in no adjudication on the interests in conflict, but is limited to delivery of the assets of the property under the executing Court's control to the Receiver. These sections, the only ones in which an executing Court is referred to, therefore, impose no limitation on the provisions of Sections 16 and 18(1) and (3) which read together confer power on the Insolvency Court to reduce the insolvent's property, which has vested in the Receiver under the former, to his possession. Two observations may be made, that Section 16 vests in the Court, and therefore Section 18(1) in the Receiver appointed by it all the property with exceptions not at present material, and that Section 18(3) is subject to the proviso restricting the Court's power of removal from property of persons whom the insolvent has a present right to remove.

5. These observations are material in connexion with the suggestion involved in respondents' argument that special considerations apply to titles acquired by third parties at Court sales, and to the first set of authorities relied on by them. It is not necessary for the present purpose to deal with cases in which a Court sale is attacked by the Receiver as collusive or fraudulent, since here he makes no such allegation, but contends only that the sale of property vested in him before its date is a nullity. It has been pointed out that the only provisions of the Act relating to Court sales do not deal with the method available to the Receiver for avoiding them, and there is no provision which places titles acquired at them on any special footing. When, therefore, Section 16, on which the vesting in the Receiver under Section 18(1) follows, is exhaustive, there is no ground on which property alleged to have been transferred after adjudication by Court sale can be treated differently from property transferred at that stage in any other way.

6. The authorities relied on are in fact concerned rather with the application of the proviso to Section 18(3) than with any attempt to distinguish the remedies open to the Receiver with reference to the origin of the title he desires to displace. In Nilmoni Choudhury v. Durga Charan Choudhury (1918) 22 C.W.N., 704, the Court no doubt held that Section 18(3) was not intended to authorize the removal of any person whom the insolvent could not himself remove without legal proceedings, and in Maddipoti Peramma v. Gandrapu Krishnayya (1918) 8 L.W., 136, Bakewell, J., said that it was not intended to confer jurisdiction over a person against whom the insolvent had merely a right enforceable by suit, this view being explained in the former case as authorizing removal of a benamidar, 'when the veil was transparent and the insolvent was in substantial beneficial possession'. These judgments however do not account for a power being conferred on the Court, which would, if they are correct, be useless, if it were not coercive; or for the present well-established exercise of such a power in cases to which the mere rules of evidence in Sections 36 and 37 are applied. In the second case cited, Krishnan, J., held that the Court had power under the section to deal with adverse claims by third parties; and that is not inconsistent with Jagrup Sahu v. Ramanand Sahu I.L.R.(1911) All., 633 and is supported fully by Bansidhar v. Kharagjit I.L.R.(1915) , All., 65 in which the question arose directly. The restriction in the proviso of the Court's right to disturb possession will receive full effect, if it is read with reference, not to the method by which the insolvent can regain possession of which it says nothing, but to a qualification of his right to possession, such as an outstanding lease or life estate would involve; and I would respectfully follow the opinion of Krishnan, J., and the Allahabad cases cited on the point.

7. Next, it is material that Section 18(3) empowers the Court to reduce property to the possession only of the Receiver. The existence of the power is accordingly in no way inconsistent with the cases relied on by respondents, in which other persons, in some of them claiming under him, have proceeded by suit or have been held to be entitled to proceed only in that manner. The effect of the first class of cases, for example Raghunath Das v. Sundar Das Khetri I.L.R.,(1915) Calc., 72 , is in any case only negative. In the second class, it is significant that the power of the Insolvency Court relied on and regarded as inapplicable was not that conferred by Section 18(3) at all, but the general power exercised by it in its ordinary civil jurisdiction as extended to proceedings in insolvency by Section 47(1) and such extension was held, unauthorized, because the section allows it only in proceedings under the Act and not in proceedings for which the Code, and not the Act, affords the only warrant. That was statedly the ground of decision in Maddipoti Peramvia v. Gandrapu Krishnayya (1918) 8 L.W., 136 , already referred to. See also Bashyam Reddi v. Somasundaram Chetti (1916) 3 L.W., 251, and Cheda Lal v. Lachman Prasad I.L.R.,(1917) All., 267. In Narasimhaya v. Veeraraghavulu I.L.R(1918) ., Mad., 440, one statement made in connexion with Section 47 is relied on by respondents:

It would be going too far to say that a judge in insolvency in the mufassal has power by a summary proceeding to decide questions of title to property claimed by third persons.

8. But this does not support their argument, since the proceeding consisted Only in an attempt to utilize the obstruction procedure under the Code in a dispute between a third party and the Receiver's transferee, which the Act in no way permitted. Only one case has been cited by respondents, to which the Receiver was a party and in which Section 18(3) could legitimately have been relied on: Anantharama Iyer v. Kovilarama (1916) 3 L.W. 504. In it no doubt the proceedings were taken under Order 21, Rule 90, and regarded as under Section 47 of the Code of Civil Procedure; But the case was dealt with in revision; it is not dear whether the insolvency and executing Courts were distinct; and no objection to the jurisdiction of the latter or the procedure applied was considered, Sections 34 and 35 of the Provincial Insolvency Act being in fact referred to. The decision, therefore, does not assist respondents or affect the conclusion that, when the receiver is the claimant and the property claimed has vested in him, his claim should be made under Section 18(3) in the Insolvency Court.

9. The Lower Court therefore erred in refusing to enquire into the Receiver's petition. The other point decided in its judgment was that Exhibit I, the compromise decree under execution, was not simply for money, but secured the amount due on particular properties. In terms Exhibit I only provides that the insolvents shall pay an amount agreed on by a specified date, and that in case of their default it shall be recoverable by sale of properties attached before judgment, the attachment before judgment to continue in force until payment is made. The Lower Court's decision purports to be based only on Exhibit I and that document contains none of the characteristics of a decree for a charge and adds nothing to the rights of the first to third respondents as holders of a money decree, in execution of which an attachment has been made. The decision under appeal, however, was based mainly on the conclusion against the procedure adopted by appellant. In setting that decision aside we therefore direct a rehearing in respect of the character of the decree under execution with reference to any considerations other than those referred to, which may be relied on.

10. At the rehearing the Lower Court will also consider any argument based on the application made by one of the insolvents to the executing Court, in which appellant participated. As the facts are not in evidence, it is not clear whether his participation was by way of an application under Section 35 of the Provincial Insolvency Act or otherwise. In any event the effect of the appellant's acquiescence in the adverse order actually passed by the Subordinate Judge on appeal from the order of the executing Court must be considered with reference to Section 34(3) and the good faith of the fourth respondent's purchase.

11. The Appeal is allowed and the petition remanded for re-admission and rehearing in the light of the foregoing. Costs to date in the Lower Court and here will be costs in the cause and will be provided for in the order to be passed.

Seshagiri Ayyar, J.

12. I agree. The respondents obtained a money decree against the insolvents and some others on 23rd October 1914. On 31st January 1917 an application for adjudication was made. Notice was given on 19th February 1917 to the respondents, and the order of adjudication was made on 23rd March 1917. In June, the respondent applied for sale of the insolvents property. An application to stop the sale was then made. Apparently, the Official Receiver was not a party to the application although he seems to have supported the insolvents' application by a written statement. It also appears that an application to make the Receivers party was rejected in April 1918. On 6th July 1917 the District Munsif stopped the sale. On appeal the Subordinate Judge reversed that order. There can be no doubt that this order was wrong and it is to this wrong view of the Subordinate Judge that all the subsequent complications are attributable. The sale was made on 28th June 1918. An application to set aside the sale was made by some of the scheduled creditors. Apparently it was not granted. The present application was made on 23rd September 1918 to the District Court to annul the sale. It may be that when the case goes back the petition will have to be amended by asking for possession of the property as well. The District Judge has held that the Official Receiver had no locus standi to impeach the sale by means of a petition to the insolvency Court. Hence this Appeal.

13. I shall state my conclusions very shortly. Under Section 16 of the Provincial Insolvency Act the property vests in the Official Receiver as soon as an order for adjudication is made. Any dealing with that property by any Court without notice to him will be ultra vires. Anantharama Iyer v. Kovilamma (1916) 3 L.W., 504 , and Devaraja Aiyangar v. Tirumalasami Naidu (1916) 32 I.C., 489, support this view. If the sale held behind the back of the Official Receiver is a nullity, the further question is what is the remedy he is entitled to. Mr. S. Ramaswami Ayyar contended that he must bring a suit in the ordinary Courts to have his rights established. He mainly relied upon the absence of a provision in the Provincial Insolvency Act like Section 7 of the Indian Insolvency Act and the corresponding provisions in the English Bankruptcy Act. I do not think this contention is well founded. There was a conflict of decisions in the various High Courts as to whether even without a provision similar to Section 7 of the Indian Insolvency Act, the Provincial Insolvency Courts had no jurisdiction to direct delivery of property to the Receiver when it is moved by means of a petition. Section 4 of the present Act has been so altered as to confer such a power. The amendment should not be regarded as if for the first time a new power has been conferred. I am of opinion that Section 4 declares what has been the law all through. Apart from this, I think that Sections 10 and 18 read together do invest the Insolvency Court with jurisdiction to direct that property in the hands of a third party be delivered over to the insolvent. Mr. S. Ramaswami Ayyar relied upon the analogy of Order XL, Code of Civil Procedure, relating to Receivers. I am prepared to accept the analogy but I do not think that any of the cases quoted by him hold that where a sale is a nullity, the Receiver is not entitled to move the Court for possession being given to him of the property. Reliance was placed upon the express provision in Section 37 of the Act for annulling sales made in anticipation of insolvency. It was necessary to give such an express power to set aside a conveyance which prima facie vests the property in a third party, but where the property vests in the Official Receiver the legislature apparently did not consider it necessary that a special provision should be made that his rights should be dealt with in a particular manner. The real question is whether the language of Section 18(3) is not comprehensive enough to confer jurisdiction upon a Court of Insolvency to direct that possession be given to the Receiver. It clearly enacts that the Court may remove the person in whose possession or custody any such property is, from the possession or custody thereof. This implies that the property so removed can be put in possession of the Receiver. The learned vakil for the respondent relied upon the proviso which lays down that the Insolvent himself must have a present right in order that the Official Receiver may exercise the right. The mere fact that there has been a Court sale is not a ground for holding that the insolvent has no present right to the property. The proviso refers to cases where owing to the act of the insolvent the property is substantially on a lease for a particular period, or is under a usufructuary mortgage, or the like. If I am right in the view that the Court sale conferred no right in the property to the purchaser when it was made behind the back of the Official Receiver, it follows that the insolvent as well as his representative, the Official Receiver, has a present right to the possession of the property. The decision in Nilmoni Choudhury v. Durga Charan Choudhury (1918) 22 C.W.N., 704 dealt with the case of a benamidar. It was held by the learned Judge's that an apparent title in a third party cannot be summarily dealt with in the Insolvency Court. That decision does not affect the present case and I therefore do not discuss it further. On the other hand the decisions quoted by Mr. K.V. Sesha Ayyangar, namely, Raghunath Das v. Sundar Das Khetri I.L.R., (1915) Calc., 72 , Anup Kumar v. Kesho Das, I.L.R.(1917) , All., 547 and Madhu Sudan Pal v. Parbati Sundari Dasya (1916) 35 I.C., 643 , support his contention.

14. I therefore agree in holding that the order of the District Judge in Civil Miscellaneous Petition No. 566 of 1918 must be reversed. The question as to whether the Receiver is estopped, and other defences that may be open to the respondents, will have to be considered at the trial. I agree with the order as to costs.

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