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Kasi Iyer and anr. Vs. Official Receiver and anr. - Court Judgment

LegalCrystal Citation
SubjectCivil
CourtChennai
Decided On
Reported inAIR1929Mad821
AppellantKasi Iyer and anr.
RespondentOfficial Receiver and anr.
Cases ReferredDarby and Co. Ltd. v. Official Assignee of
Excerpt:
.....to them by one ramaswami ayyar who knew both the parties very well. it was mentioned that the insolvent executed a number of documents with a view to prefer the alienees who are either his good friends or relations, without any pressure on their part, in secrecy and without their knowledge :see para. on the evidence the learned judge found that the security bond was fully supported by consideration and that the appellants took it in good faith and without any knowledge that it operated as a fraudulent preference but he held that, when the insolvent executed this document in their favour, he intended to prefer them fraudulently to-the other creditors and therefore he set it aside under section 54, provincial insolvency act. the finding of the learned judge that at the time when ex, d..........act 5 of 1920 on the ground that it operated as a fraudulent preference. it was mentioned that the insolvent executed a number of documents with a view to prefer the alienees who are either his good friends or relations, without any pressure on their part, in secrecy and without their knowledge : see para. 4 of the official receiver's affidavit, and it was alleged that the security bond in question was one of such alienations. these allegations were denied and the petition was strongly resisted by the appellants. on the evidence the learned judge found that the security bond was fully supported by consideration and that the appellants took it in good faith and without any knowledge that it operated as a fraudulent preference but he held that, when the insolvent executed this document in.....
Judgment:

Madhavan Nair, J.

1. This is an appeal by respondents 2 and 3 in Original Petition No. 153-A of 1923 in Insolvency Petition No. 13 of 1922 before the District Judge of West Tanjore, against an order passed under Section 54, Provincial Insolvency Act, in the following circumstances:

At the instance of a creditor who put in an application on 14th December 1921 respondent 1 in the lower Court, one Sivaswami Iyer, was adjudicated an in-solvent in 1923. The insolvent was carrying on business in rice, grains and pulses mainly at Madras, Negapatam, and Rangoon. In the course of his business he used to take' moneys from time to time from the appellants, who are bankers, carrying on a large business at Kallidaikurichi. They had extensive business at Madras, Tinnevelly, Tuticorin and other places also. The insolvent was introduced to them by one Ramaswami Ayyar who knew both the parties very well. In the course of their dealings some hundies to the extent of Rs. 7,000 were drawn by the insolvent in favour of the appellant but these were dishonoured. The insolvent then executed on 20th September 1921 a registered security bond, Ex. D, for Rs. 10,000 to cover the hundi amount and other moneys due from him to them. The. Official Receiver filed an application to; annul this security bond under Section 54,. Act 5 of 1920 on the ground that it operated as a fraudulent preference. It was mentioned that the insolvent executed a number of documents with a view to prefer the alienees who are either his good friends or relations, without any pressure on their part, in secrecy and without their knowledge : see para. 4 of the Official Receiver's affidavit, and it was alleged that the security bond in question was one of such alienations. These allegations were denied and the petition was strongly resisted by the appellants. On the evidence the learned Judge found that the security bond was fully supported by consideration and that the appellants took it in good faith and without any knowledge that it operated as a fraudulent preference but he held that, when the insolvent executed this document in their favour, he intended to prefer them fraudulently to-the other creditors and therefore he set it aside under Section 54, Provincial Insolvency Act. This appeal has been filed by respondents 2 and 3 against this order of the learned Judge.

2. The evidence in the case consists mainly of that given by the insolvent, P.W. 2, Subba Ayyar, R.W. 1; the agent of the appellants; and Ramasamy Ayyar, R.W. 2, the common friend of the parties. The finding of the learned Judge that at the time when Ex, D was executed the appellants did not know of the highly involved circumstances of the insolvent, that they took the document in good faith and that it was fully supported by consideration has not been seriously challenged before us. There is abundant evidence to support the conclusion of the learned Judge on these points. It is not necessary to refer to the evidence at any great length but we would only add to the observations of the lower Court that it was not suggested to Subba Ayyar, the agent, when he was examined, that he knew that Sivasami Ayyar was an insolvent and that both he and Ramaswami Iyer say that they found stock in the insolvent's shop at Madras. As noticed by the learned Judge the appellants advanced some moneys to the insolvent even after June 1921 when he was not in a position to meet the demands of various creditors and the insolvent also appears to have paid moneys afterwards to them. The real question for consideration is whether the document in question was executed by the insolvent 'with a view of giving the appellants a preference over the other creditors' within the meaning of Section 54, Provincial Insolvency Act.

3. The law is well settled that in cases of this kind what the Court has to determine is:

was the dominant motive actuating the debtor in making the transfer a desire to prefer the particular creditor or was it of a different character.

4. This is a question of fact. If the Court after inquiry finds that the insolvent's dominant motive in making the transfer was to prefer one particular creditor over others then the transaction amounts to a fraudulent preference and will be set aside. It is also well settled that the burden of proving that the transaction in question comes within the scope of Section 54, Provincial Insolvency Act, and is bad as a fraudulent preference lies heavily on the Official Receiver: see Sime, Darby and Co. Ltd. v. Official Assignee of the Estate of Lee Pang Seng A.I.R. 1928 P.C. 77. We have to see from the evidence in the case whether the Official Receiver has successfully discharged his burden.

5. The learned Judge found in favour of the Official Receiver mainly on the following grounds : namely, that, evidence in the case showed that in the middle of 1921, i e., about three months before Ex. D was executed, the insolvent was not in a position to meet the demands of his various creditors, that he admitted that he stopped his trade at about that time, that he had a large amount of debts when he executed this document, that immediately after he became unable to meet the demands of the creditors he executed a few documents secretly and without the knowledge of the alienees alienating almost the whole of the property, that the document in question as well as the other documents were brought into existence at the instance of Ramaswami Iyer and, finally, that no real pressure was brought to bear on the insolvent when the document in question was executed.

6. It is true that, when the petition was filed, the insolvent had debts to the extent of Rs. 40,000 but he had not stopped all his business. He says that he stopped his business at Negapatam and Madras but he was carrying on the business at Rangoon through his agent and he was also sending raw tamarind to Italy. The insolvent's evidence shows that though he was not able to pay off all his creditors and though he had stopped his business in some places, he was struggling hard to keep his business going, with the hope of finally recovering his lost business. He says in his evidence 'I never thought I was failing in my business.' He also says that at the time when he executed the security bond he was making arrangements to pay the petitioning creditor and that he expected to discharge the debt due to him by the balance of sale proceeds and by the decree amount due from a Karaikal merchant. We see no reason why we should disbelieve these statements of the insolvent. He was not altogether without funds; for it is clear that he had a decree for Rs. 10,000 and he says there were outstandings worth several thousands. The latter portion of the statement may or may not be true. The agent of the petitioning creditor went to Negapatam to effect a settlement by taking a transfer of the decree debt but the compromise failed and the petitioning creditor evidently precipitated matters by filing the application for adjudicating him as an insolvent.

7. As soon as the hundies were dishonoured pressure was brought to bear on the insolvent at the instance of the appellants in two ways. Ramaswami Iyer, the common friend who introduced the insolvent to the appellants, was made to take the initiative in the matter. He wrote Ex. 3 to the insolvent on 17th July 1921, i.e., soon after the hundies were dishonoured in May. In that letter he says that the respondents are not satisfied with the way in which the insolvent was doing business and he emphasises about his own responsibility in the matter, apparently referring to the fact that he himself was as much responsible as the insolvent as it was he who introduced him to the appellants. He also says that one of the appellants asked him to go to Madras and reduce the outstandings as much as possible. The Jotter conveys a clear hint that Sivaswami should do something to relieve the situation. It is stated that this letter was written about two months before the execution of Ex. D and cannot ho considered as putting effective pressure on the insolvent but it is clear that action was taken at the instance of the appellants not very long after the hundies were dishonoured. If the matter had ended there, probably it may be said that no effective pressure was exerted by the appellants but the evidence also allows that the appellants asked their agent at Madras, Subba Iyer, to press the insolvent 'to give cash or security.' The insolvent says:

When I was in Madras at that time, almost every other day their man showed a letter to me saying that unless I gave security for the amount 1 would be harassed.

8. The original of this letter has not boon produced but the fact of its non-production does not seem to us to be totally destructive of the appellants' case on this point. The evidence of the insolvent on this and on the other matters has the ring of truth and no satisfactory reason has been given as to why we should disbelieve him. Regarding the demands made on the insolvent the clerk of the appellant corroborates him. He says that he was making demands very hour after the hundies were dishonoured. This evidence cannot altogether be ignored as interested. Then, we have the evidence of Ramaswami Iyer, R.W. 2. Realizing his own responsibility in the matter to which he referred in Ex. 3 he went to Madras, as appears from his evidence, 10 or 15 days after writing it and he asked the insolvent ' to pay the money at once or give security bond.' He then says the insolvent came to Kumbakonam and executed the security bond which he sent by post to Madras. His evidence makes it clear that the appellants wanted immediate payment of money, or in the alternative, substantial security from the insolvent. The value of this evidence has not been properly appreciated by the learned District Judge The suggestion that because he owes Rs. 5,000 to the appellants he is giving evidence in their favour cannot be accepted; for, this witness realizing his serious responsibility in the matter took the initiative by writing the letter, Ex. 3, and so, when he says that he pressed the insolvent to execute the document, got it executed and sent it to Madras we believe he is giving a correct version of what actually happened. It seems to us, therefore, that the document was executed as a result of the effective pressure that was brought to bear upon the insolvent by the appellants through their agent and also through common friend, Ramaswami Iyer.

9. It is then said that just at the same time four documents, Exs. C series were executed by the insolvent in favour of other creditors and that as these have been set aside under Section 54, Provl. Ins. Act, Ex. D also must be annulled on the same ground. We do not know the exact circumstances in which those documents were executed. One of them was executed in favour of a relative of the insolvent. Whatever value the fact of the execution of these documents may have in finding out the intention of the insolvent when he executed Ex. D, the learned Judge has evidently attached undue importance to this fact because he thinks that they were all executed at the instance of Ramaswami Iyer and so he infers Ex. D must also be bad for the same reason. But on examining the evidence we find that the learned Judge has fallen into an error when he says that:

Ramaswami Iyer seems to have brought into existence the security bond along with other alienations;

for the evidence does not support this remark. On the other hand, the evidence is that Ramaswami Iyer did not know of the execution of Ex. O. He was interested only in the appellants and naturally he took an important part in getting Ex. D executed by the insolvent. As the evidence shows that the insolvent was trying his beat to arrange his business affairs in such a way as to ward off insolvency, the fact that these documents were executed secretly does not matter very much; for if publicity was given to them it is obvious his attempts to recover his position will be rendered nugatory.

10. In considering the motive of the insolvent when he executed Ex. D we mast not lose sight of the important fact that there wag no reason for him to prefer the appellants who are not his friends or relations. In this connexion it is interesting to note that one of the reasons alleged by the Official Receiver for annulling these documents was that they were executed to the insolvent's friends or relations with a view to prefer them. This reason has failed so far as the present appellants are concerned, because, as we have said, no evidence has been given to show that they are his friends or relations.

11. On a careful consideration of the probabilities of the case it does not seem to us that the insolvent executed Ex. D 'with the dominant motive of preferring the appellants to the other creditors.; As observed, the insolvent, though he was unable to pay his creditors and had stopped a considerable portion of his ''business, was all the while making genuine efforts to set right his financial 'position without admitting defeat and in such circumstances when the appellants who had a legitimate grievance against him and who are bankers whose assistance would be useful to him in carrying on his business affairs exerted severe pressure on him he executed the document in question. This seems to us to be the truth of the whole matter. We cannot say in the circumstances that the document should be set aside on the ground that the insolvent executed it with a view of giving the appellants a preference over the other creditors with in the meaning of Section 54, Provl. Ins. Act. The lower Court's order must, therefore, be set aside and this appeal should be allowed with costs here and in the Court below.


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