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R.M. Nagarathna Mudaliar and ors. Vs. S.M. Chidambaram Chettiar and ors. - Court Judgment

LegalCrystal Citation
SubjectContract
CourtChennai
Decided On
Reported inAIR1928Mad860; 113Ind.Cas.129
AppellantR.M. Nagarathna Mudaliar and ors.
RespondentS.M. Chidambaram Chettiar and ors.
Cases ReferredMushahar Shau v. Lala Hakim Lal A.I.R.
Excerpt:
- - i may also state that this is not a case where the whole assets of the creditors are placed at the disposal of the transferee so as to leave them nothing to carry on, but only a case where at best a fourth of the lands was sold, leaving three-fourths to the creditors and also other assets with which they could carry on business. 2,000. the fact that the loan was granted is the best evidence of the plaintiffs' belief that though defendants were in financial difficulties they were not unable to pay their debts. and as a creditor he was of course entitled to do what he thought best in his own interests......of his judgment seem to imply that he had these two sections in view. he 'dismissed the suit for specific performance, but passed a decree for rs. 35,525, against defendants 1 to 3 personally and the joint family properties of defendant 4. against this decree the plaintiffs have appealed.4. the main grounds of appeal are based on the findings of fact that consideration was paid in full and that as the document was not fraudulently 'altered, there was no question of its being invalid under the provisions of section 53, t. p. act, and that as regards section 54, prov. ins. act, the matter was one which could not be decided by a civil court, it being entirely within the province of the insolvency court to set aside the transaction if the case fell within section 54, prov. ins. act and.....
Judgment:

Kumaraswami Sastri, J.

1. This appeal arises out of a suit for specific performance filed by the plaintiffs against defendants 1 to 6.

2. The case for the plaintiffs is that defendants 1 to 3 were carrying on business as merchants, that there were dealings between the plaintiffs and defendants 1 to 3, such dealings consisting in the plaintiffs advancing moneys to the defendants and also standing sureties for them in the Bank of Madras, that about the date of the agreement to sell, evidenced by Ex. A, about Rs. 18,000 was due to the bank in respect of the suretyship transaction, that Rs. 8,000 odd was due to the plaintiffs themselves by defendants in respect 'of moneys given as loans, that the defendants wanted money to pay some other pressing debts and asked for a loan and that Rs. 8,000 odd was advanced in cash and that for this sum of Rs. 35,000, made up of these transactions referred to, the defendants executed a promissory note filed as Ex. B in the case and an agreement to sell ten velis of land evidenced by Ex. A in the case, the agreement being that, if the amount due on the promissory note, Ex. B, was not paid in one month, the lands specified in Ex. A covering about 10 velis should behold for the consideration of Rs. 35,000. Defendants 1 to 3 were adjudicated insolvents and the Official Receivers have been brought on the record. The Official Receivers are defendants 7 and 8 in the case. Defendant 5 and 6 are attaching creditors and defendants 4 is the minor brother of defendant 3. Defendant 1 was ex parte and the plea of defendants 2 and 3 was that, as there was no consideration for the agreement, it was not binding on them. It was pleaded that there was a variation, a material alteration, in the agreement Ex. A, that the original agreement which stipulated six months for payment was altered into one month. It is contended that that alteration vitiates the transaction and makes the contract-unenforceable. It is also pleaded that the transaction was a transaction which was entered into not bona fide but to defraud creditors and that the agreement cannot be specifically enforced because it was in fraud of creditors.

3. The Subordinate Judge finds that there was full consideration for this document. He also finds that there was no alteration and that, although six months was 'originally mentioned in the document, it was before execution altered into one month, but he is of the opinion that the transaction evidenced by Ex. A cannot be enforced as, in his view, although the full consideration passed, the transaction was entered into with a view to defeat, defraud and delay creditors. It is not clear from his judgment whether he relies on Section 53, T. P. Act, or Section 54, Prov. Ins. Act. The remarks in the concluding portion of his judgment seem to imply that he had these two sections in view. He 'dismissed the suit for specific performance, but passed a decree for Rs. 35,525, against defendants 1 to 3 personally and the joint family properties of defendant 4. Against this decree the plaintiffs have appealed.

4. The main grounds of appeal are based on the findings of fact that consideration was paid in full and that as the document was not fraudulently 'altered, there was no question of its being invalid under the provisions of Section 53, T. P. Act, and that as regards Section 54, Prov. Ins. Act, the matter was one which could not be decided by a civil Court, it being entirely within the province of the insolvency Court to set aside the transaction if the case fell within Section 54, Prov. Ins. Act and that in any view there is nothing in this case to support the inference that the transaction was one which was liable to be set aside as a fraudulent preference coming under Section 54, Prov. Ins. Act.

5. We may dispose of the contention as regards the jurisdiction of the Court, under Section 54, Prov. Ins. Act, shortly. If the suit were one to set aside an alienation or to set aside a contract as being a fraudulent preference, it is clear from the Official Assignee of Bombay v. Sundarachari A.I.R 1927 Mad. 684, which follows the earlier decision in the Official Receiver, Coimbatore v. Palaniswami Chetti A.I.R. 1925 Mad. 1051, that the Subordinate Judge would have had no jurisdiction to set aside the alienation as a fraudulent preference. It is argued by Mr. Ramachandra Ayyar that this objection as to the competency of the Subordinate Judge to enter into the details of the transaction to ascertain whether it was a fraudulent preference or not is not open to the appellants by reason of their conduct in an application' filed before the District Judge under the Provincial Insolvency Act to set aside the transaction under Section 54. It is argued that they appeared before the District Judge and stated that, as a civil suit was pending before the Subordinate Judge raising all the issues that were then sought to be raised before the District Judge, this petition was incompetent. The District Judge dismissed the application on the ground that the issues raised before him were covered by the issues in the Subordinate Judge's Court. It is contended that, having got that petition dismissed, it is not open to the plaintiffs to say that the Sub-Court had no jurisdiction to go into the transaction so far as it could be said to be a fraudulent preference and therefore voidable on that. ground.

6. Mr. Ramachandra Ayyar also states that the suit being one for' specific performance of a contract the Court would not grant a decree for specific performance where the facts show that it was one which could be avoided as a fraudulent preference, there being no equity in such a transaction in favour of the plaintiff who seeks specific performance of the contract. With regard to the first objection, it does not appear from the record that the plaintiffs did anything which prevented the District Judge from going into the question of fraudulent preference. The opposition of the plaintiffs was to stay the suit which was being part heard in the Subordinate Judge's Court on the ground that an application was being made to set aside the transaction as a fraudulent-preference. Reading the counter-petition and the affidavit carefully, it seems to me that all that the plaintiffs said was that the petition was put in unnecessarily late, the written statements having been filed in 1920 and issues framed and that there was no provision of law for staying the proceedings in the Subordinate Judge's Court. The Official Receiver in his application expressly stated that the application to set aside the transaction as a fraudulent preference was not cognizable by the Subordinate Judge's Court and Official Receiver, Coimbatore v. Palaniswami Chetti A.I.R. 1925 Mad. 1051 was a clear authority for the Official Receiver's view. It does not appear why the District Judge dismissed the whole application instead of investigating the question as to whether it was fraudulent and dismissing the application in so far as it wanted to stay the suit before the Subordinate Judge. However, he dismissed the whole application but it is difficult to say that anything that the plaintiffs did invited that decision, having regard to the careful way in which the counter-petition was drafted. However, on the second point raised by Mr. Ramachandra Ayyar, we think that we cannot shut our eyes to circumstances which would render the transaction a fraudulent preference. Specific performance being one which is (discretionary and a relief which is granted where parties come to Court with clean hands, circumstances which would render la transaction unfair and avoidable as a fraudulent preference would materially influence the Court in decreeing specific performance. Mr. Varadachariar states that he does not object to the Court deciding the question even under Section 54, Provincial Insolvency Act and he does not raise any question as regards the jurisdiction as he wants some finality for this litigation which has been going on for several years. Under these circumstances Mr. Ramachandra Ayyar also stated that he was not anxious to shut out the question. We have therefore gone into the evidence having regard to both the aspects of the case and arguments were addressed to us on both sides, one side impeaching the transaction both under Section 53, T. P. Act, and 54, Provincial Insolvency Act, and the other side supporting it on the ground that it does not offend against either of the provisions of either Act.

7. The question we have got to determine is whether this is a transaction of which specific performance ought to be enforced. As I said before, the Subordinate Judge finds that the promissory note and the agreement Exs. A and B are fully supported by consideration. (Here his Lordship discussed the evidence in detail and then proceeded as follows:) Having regard to the nature of the transaction, we do not think that it can be said that it was merely an attempt to give the plaintiffs a fraudulent preference over the other creditors. I may also state that this is not a case where the whole assets of the creditors are placed at the disposal of the transferee so as to leave them nothing to carry on, but only a case where at best a fourth of the lands was sold, leaving three-fourths to the creditors and also other assets with which they could carry on business. It is also not a case where there has been a sale of valuable property for low consideration as is often the case in the case of fraudulent preference or transactions. There are several elements wanting in this case which are found in cases where transactions have been set aside on the ground of fraudulent preference. It cannot be said that there was no demand or no pressure for the reasons already given, because Ex. G series and the evidence of P.W. 7 show that there were demands being made.

8. It cannot also be said that the plaintiffs knew that the position of the defendants was so hopeless that pressure was only a cloak to hide a voluntary transfer of properties in their favour. The Subordinate Judge think that Ex. T which is a letter requesting a loan of Rs. 2,000 promising to repay it with interest at 18 per cent. in two weeks shows that plaintiffs knew that defendant 1 was paid up. The Subordinate Judge forgets that the loan was given and that if plaintiffs knew that defendants were hopelessly insolvent or unable to pay their debts they would not have lent Rs. 2,000. The fact that the loan was granted is the best evidence of the plaintiffs' belief that though defendants were in financial difficulties they were not unable to pay their debts. The form of the transaction, as I said before, was not one which a person who was intending to take a transfer of the properties on the verge of insolvency would have entered into.

9. So far as the law on this subject is concerned, I think that several of the cases cited proceed on the facts in those cases which as found attract the application of the general principles as to whether a transaction is a transaction intended to defeat the creditors or a transaction intended to give undue preference.

10. As regards Section 53, T. P. Act, on the findings in this case of the Subordinate Judge which we accept, for the reasons given by us, no case under Section 53 could arise. A debt was already due to the plaintiffs and it is clear that there is no case under Section 53, the elements required to constitute a fraudulent transfer being entirely absent in this case. We would only refer to the decision in Musahar Sahu v. Hakim Lal A.I.R. 1915 P.C. 115 and Hakim Lal v. Musahar Sahu [1907] 34 Cal. 999, from which 43 Cal. was an appeal in the Privy Council. As regards the question of fraudulent preference, the real question is what was the dominant motive of the transfer, or was it to give a preference to one creditor over the rest. This point has been considered in Official Assignee of Madras v. T.B. Mehta & Sons [1919] 42 Mad. 510, and it is clear from that authority that where a debtor acts under pressure of his creditor and gives security the case is taken out of the category of cases of fraudulent preference. Having regard to the facts, which we have already set out, it cannot be said that the dominant motive of the defendants in entering into the agreement was to prefer the plaintiffs and give them undue advantage over the other creditors. We do not think that the facts in this case bring the case either within Section 53, T. P. Act, or Section 54, Provincial Insolvency Act. We cannot refuse specific performance if in other ways it could be granted merely on the ground that the transfer is one which gives plaintiffs a security which other creditors who were less diligent do not have. There is no finding and no suggestion that there, was any undue influence or any fraud as between the plaintiffs and defendants 1 to 3 and no circumstances have been invoked which would render a contract between two normal individuals unenforceable in a Court of equity. No doubt the sub' sequent adjudication has raised complications but, as observed before, there is nothing to show that this offends against either the Transfer of Property Act or the insolvency law.

11. It was argued by Mr. Jayarama Ayyar for defendant 5 that the Court ought not to give specific performance because of the insolvency and the vesting of the properties in the Official Receiver. His argument shortly is that the Official Receiver is not representative-in-interest of the insolvent, that a decree for specific performance can only be granted against the persons entering into the contract or their representatives-in-interest and, not falling within those two categories, the Court ought to refuse specific performance. I find it difficult to follow this argument the result of which will be that all contracts enforceable against the insolvent at the date of his insolvency would cease to be enforceable against the Official Receiver in whom the properties vest by reason of the insolvency. Section 55, Insolvency Act, I think, makes the matter quite clear and, if any authority were needed, I may refer to Purushotham Naidu v. Ponnurangam Naidu [1913] M.W.N. 897, where a similar question was decided by Sir Arnold White, C.J., and Oldfield, 3., where it was held that specific performance of an agreement can be enforced against the trustee in bankruptcy of a vendor. No authority has been cited to support the view that specific performance ought not to be granted simply because a person becomes insolvent and the property vests in the Official Receiver. As I said before, the judgment of the Subordinate Judge is not clear as to whether he dismissed the suit because it offends against Section 53, T. P. Act, or against Section 54, Provincial Insolvency Act. He thinks that the defendant's position was desperate, that the plaintiffs must have known that their position was at that time one of virtual insolvency without any hope of redemption and that therefore the transfer though one for full consideration is one whose object is to prefer the plaintiffs to other creditors. We have given reasons for holding that none of these conclusions follow from the facts. Taking the transaction as a whole, we have to see the position of the defendants at that time and also whether the transaction is one which is not enforceable. Having regard to the facts set out above, we think that the Subordinate Judge was wrong in holding that the contract was not capable of specific performance.

12. We set aside the decree of the Subordinate Judge and direct that a decree be passed that the defendants (except defendants 5 and 6 who are merely attaching creditors) do convey to the plaintiffs the lands mentioned in the agreement Ex. A within two months from this date. On execution of the conveyance, the promissory note (Ex. B) will be cancelled and delivered over to the Receiver. We do not think we need make a declaration as regards mesne profits and, if the plaintiffs are so advised, they can file a separate suit.

13. Costs in the lower Court and in appeal will be paid by the Official Receiver out of the estate of the insolvent in his hands. Costs will be paid by defendant 5 personally and defendant 8 will pay out of the estate of the insolvents in his hands.

Reilly, J.

14. I agree that we would not be justified in differing from the Subordinate Judge's finding of fact on the oral evidence that the allegation that a material alteration was made in Ex. A after its execution by changing six months into one month has not been made out. The plea set up by defendant 5 that that document was antedated was not even mentioned before us; and the plea of defendants 2 and 3 that their signatures were obtained to Ex. A by coercion and undue influence appears to have been dropped.

15. The learned Subordinate Judge appears to have been under the impression that he could apply to this case the principles of Section 53, T. P. Act, and Section 54, Prov. Ins. Act, or a mixture of both. But I did not understand Mr. Ramachandra Ayyar, who appears for the Official Receiver, seriously to contend that the principles of Section 53, T. P. Act, were applicable at all, and I think it is [quite clear that they are not. That section, so far as it deals with defeating or delaying creditors, is aimed, not at;a debtor who chooses to prefer one creditor to another, to transfer his property in satisfaction of one debt rather than another, but at a debtor who transfers his property with the object of screening it permanently or temporarily from all his creditors, who uses the transfer as a cloak to preserve the benefited the property for himself or for some person in whom he is interested, instead of letting it go towards the payment of any of his debts. If any authority is needed for that reading of the section, we need not go further than the remarks of their Lordships of the Privy Council in Mushahar Shau v. Lala Hakim Lal A.I.R. 1915 P.C. 115,. to find it. As for Section 54, Prov. Ins. Act, as the Subordinate Judge was not sitting in insolvency, he was not directly concerned with it, nor are we in this appeal. But I agree with Mr. Ramachandra Ayyar that he can legitimately ask us to look into this transaction and see whether it is one which would or could be annulled under the provisions of Section 54. Prov. Ins. Act, had the transfer actually been made, and, if we come to that conclusion, to consider whether this is a proper case for making a decree for specific performance. On the record, as it stands, I do-not think that this is a case in which the principles of Section 54, Prov. Ins. Act, could be applied. (After dealing with the evidence His Lordship proceeded.) In my opinion, if we had been sitting in insolvency, this is not a casein which we could have annulled the transaction had it matured into transfer,, under the provisions of Section 54, Prov. Ins. Act.

16. If we were dealing with a case under that section, we should be mainly concerned with the intention of defendant 1 in the master. But in the present case what is really of more importance to us is the conduct and intention of Munuswami Mudaliar. We are only asked to look into the transaction in order to see whether he and his representatives, the plaintiffs, are persons in whose favour we can properly make a decree for specific performance. Now, as I have mentioned,, out of the Rs. 35,000 which was consideration for Exs. A and B, less than a. fourth represented the debt due to Munuswami Mudaliar. For more than half of the consideration he was merely a surety for a loan from the Bank of Madras to defendant 1, out of which he himself had not got any benefit, and as a surety he was entitled to, take steps to indemnify himself in case the bank came down upon him. And as a creditor he was of course entitled to do what he thought best in his own interests. In regard to the Rs. 9,000, as I have mentioned, he was not then a creditor in any sense, either an ordinary creditor or a surety; he merely advanced a further sum to defendant 1. Is he to suffer for doing that? So far as I can see, he appears to have been a man who, when the business of defendants 1 to 4 was in difficulties, came to their help in order to enable them to carry on and was not, as has been represented to us, just an ordinary creditor trying to steal a march on other creditors. In these circumstances ought we to refuse a decree for specific performance? Mr. Jayarama Ayyar has argued that because to give a decree for specific performance to the plaintiff will diminish the amount available for the other creditors we ought not to make that decree and we ought to leave the Subordinate Judge's decree as it is, a mere money-decree for Rs. 35,000, which will result in the plaintiffs being creditors in the insolvency and getting such proportion of what is due to them as the other creditors get. But, if we look into the transaction represented by Exs. A and B, in its essence it was a transaction by which it was intended that Munuswami Mudaliar should have security for what was due to him and for the large amounts which he was then advancing. In my opinion it would be inequitable, when he was in effect a secured creditor, to relegate him to the position of an unsecured creditor. And I agree that Mr. Jayarama Ayyar's contention that a decree for specific performance cannot or ought not to be made against the Official Receiver cannot be upheld.

17. Mr. Ramachandra Ayyar raises one other contention. He urged that during the course of the suit, the plaintiffs, by a manoeuvre before the District Judge, got a petition which the Official Receiver had presented under Section 54, Prov. Ins. Act-S. 53 is obviously a mistake-dismissed on the representation that all questions arising in that petition could be disposed of in this suit and then turned round and said that in these proceedings, which are not in insolvency, such questions could not be raised. I do not think that it has been established that the plaintiffs indulged in any such manoeuvre, though at one stage of his arguments in this appeal Mr. Varadachari raised the question whether the principles of Section 54, Prov. Ins. Act, could be applied in disposing of this suit. The District Judge certainly appears to have thought that the petition of the Official Receiver under Section 54, Prov. Ins. Act, was unnecessary as this suit was going on; but all that, so far as we can see, the plaintiffs did in the matter was to represent to the District Judge that it would be a hardship to them if the trial of this suit was stayed while the belated petition of the Official Receiver under Section 54, Prov. Ins. Act, was inquired into. I am reminded that the suit was actually part heard at that time. That objection appears to have been a reasonable one for them to take. And, although the District Judge was wrong in saying that the petition did not lie at that stage, has any harm to the defendants really been done by the dismissal of that petition? All the questions which could have been raised in that petition and all the evidence which could have been given on that petition were before the Subordinate Judge; and, if we had come to the conclusion that no decree for specific performance should be made, then that petition would obviously have been unnecessary, as there would have been no transfer to annul or to fear. As the defendants were in effect invited to give all their evidence on the questions which would arise on that petition and had the opportunity of giving all their evidence in the suit, I cannot see that they have been prejudiced in any way or that the plaintiffs have been guilty of any conduct in the course of the litigation which would disentitle them to a decree for specific performance. I agree therefore with the order proposed by my learned brother.


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