1. The appellant in this case is an insolvent who applied to the Insolvency Court under Sections 8 and 9 of Madras Act IV of 1938 to scale down the amount due on a mortgage. The mortgage in question is Ex. I dated 15th July, 1931, for a principal sum of Rs. 10,650, made up of four items of consideration. One is a prior mortgage on which Rs. 7000 was due for principal and Rs. 1858-8-0 was due for interest. Ex. I stipulates that the properties shall be enjoyed by the mortgagee for two years in lieu of interest, that on the expiry of two years, the mortgagor shall pay the amount due and if he fails to do so, the mortgagee shall retain the right to enjoy the , usufruct of the properties and shall also be entitled to interest at three per cent per annum in addition to the usufruct. The Courts below have held that this provision for interest is to be regarded as a penalty and that for the purposes of Section 10(2)(i) of the Act it may be ignored and the mortgage treated as a possessory mortgage without any rate of interest stipulated and therefore immune from the scaling down provisions of the Act. It seems to me that these decisions overlook the plain terms of Section 10(2)(1) of the Act. That clause recites:
Nothing contained in Sections 8 and 9 shall affect any mortgage by virtue of which the mortgagee is in possession of the property mortgaged, where no rate of interest is stipulated as due to the mortgagee.
2. I am asked to add to this clause the words 'in respect of such possession', and to treat this contract as a contract in which there is no rate of interest stipulated so far as the right to possession is concerned and to regard the provision for interest in default as a sort of additional contract which is liable to be scaled down, leaving the main contract immune from the provisions of the Act. It seems to me improper to put into this clause words which are not there and equally improper to treat this single contract as if it were two separate contracts. No doubt, the mortgage with which we have to deal is not, strictly speaking, a usufructuary mortgage, for it contains a covenant to pay and it contains a stipulation for cash interest in addition to the right to the usufruct in case of a breach of this covenant. But Section 10(2) (1) is not confined to mortgages which are usufructuary mortgages within the terms of Section 58(d) of the Transfer of Property Act. The clause provides a special exemption for any mortgage under which the mortgagee has possession and no rate of interest is stipulated. It does not apply to a mortgage in which, although the mortgagee is in possession, a rate of interest is stipulated and it seems to me to make no difference whether the rate of interest stipulated in the mortgage is one which might be regarded as a penalty or not. I wish to make it clear that I express no opinion on the question whether on the terms of this particular mortgage the default rate should or should not be regarded as penal. To my mind, this is a mortgage under which a rate of interest is stipulated. It is therefore not saved by Section 10(2)(1) of the Act and it is liable to be scaled down.
3. It remains to consider how the scaling down process is to be carried out. It is contended for the petitioner that the Court should calculate the cash value of the produce enjoyed by the mortgagee and treat this cash value as a payment made by way of interest to the mortgagee and apply the rule in Section 8(2) of the Act. This contention overloooks the fact that there has been no payment to the mortgagee at all. All that has happened is that the mortgagee has had the right to enjoy whatever produce the land might yield. His enjoyment of this produce is not a payment by the mortgagor for principal or interest to the mortgagee. It is a special arrangement whereby the mortgage is to some extent free of interest, the mortgagee getting his compensation by the enjoyment of the produce. To my mind, such enjoyment of the produce cannot be deemed to be a payment to the creditor by the debtor falling under Section 8(2) of the Act. When so much is decided, the scaling down process becomes simple. The amount of Rs. 1858-8-0 representing interest on the prior mortgage is to be deducted from the principal under the explanation to Section 8, so that the principal amount due will be Rs. 8791-8-0. This sum will carry interest at three per cent from 1-10-1937.
4. A question has been raised as to the procedure under Section 21 of the Act, where the application is made by or on behalf of a person who would have been an agriculturist but for his adjudication in insolvency. The question is not one of any importance in this appeal, for, though the insolvent himself has filed the application, the Official Receiver has been impleaded both here and in the Court of first instance. Section 21 in its plain terms seems to me to contemplate an application by the person who would have been an agriculturist but for his adjudication. But it seems to me proper that to such an application, the Official Receiver in whom the estate vests should be impleaded as a party.
5. In the result, therefore, the appeal is allowed and the debt will be scaled down in the manner indicated above. The parties will pay and receive costs throughout proportionate to their failure or success in all the Courts, the appellant having contended that the debt was entirely discharged except for a sum of Rs. 3183 and succeeding only to the extent of Rs. 1858-8-0 with interest up to 1st October, 1937.