1. The petitioning creditors alleged that the debtor who is the first respondent, has committed acts of insolvency under Ss. 9(b), 9(g) and 9(d)(ii) and (iii) of the Presidency Towns Insolvency Act, and that therefore he has to be adjudicated as insolvent. The case of the petitioning creditors is as follows: Through a Finance Broker, one Mr. N. Gurumukal, examined as P. W. 2, the first petitioner and the second petitioner claimed that they have advanced on 6-5-1976 and 17-3-1976 respectively sums Rs. 5000/- and Rs. 6000/- on promissory notes executed in their favour in and by which the first respondent agreed to repay the same with interest at 24% per annum. Towards the promissory note executed in favour of the first petitioning creditor, no amount has been paid. But it is said that towards the second promissory note in favour of the second petitioning creditor, a sum of Rs. 1000/- and interest up to 17-4-1976 is said to have been paid. The balance amount die and payable under the above said two promissory notes still remained unpaid. As on the date of the filing of the petition, it is said that a sun of Rs. 10,675/- in all is payable by the debtor-first respondent to the petitioning creditors. The petitioning creditors would say that the first respondent is heavily indebted besides the liability to pay the debts due and payable to them and that with intent to defeat and delay the creditors, the debtor who was trading under the name and style of Nirmala Textiles at No. 54 L B Road, Adyar Madras-20, has transferred his business to his father, the second respondent herein who is now said to be carrying on the same business under the name of Nirmalatha Textiles at the same address. The transfer, as above, is attacked as a fraudulent transfer being void of consideration and it is also alleged that it is a preferential treatment given by the debtor in favour of the second respondent who claims to be a creditor of the first respondent. The said transfer made by the debtor in favour of the second respondent in or about 17-5-1976 is therefore attacked as an act of insolvency within the meaning of S. 9(d) of the Act. The further ground alleged is that the debtor on 25-5-1976 and 8-6-1976 gave to Gurumuklal and the second petitioning creditor, notices of suspension of payment to all his creditors in general that he has sustained loss and transferred his business to his father. It is said that on 8-6-1976, the debtor informed the broker Mr. N. Gurumuklal that he could only pay 30 paise in the rupee to all creditors. By such representation made to the second petitioning creditor and the finance broker on 25-5-1976 and 8-6-76, the debtor has committed an act of insolvency under S. 9(g) of the Act. The third ground, on which the present petition is founded, is that the debtor was evading the creditors and departed from his usual place of business and secluded himself so as to deprive the creditors of all the means of communicating with him. It is alleged that the second petitioning creditor examined as P. W. 1 and P. W. 2 attempted to contact the debtor on three occasions in June, 1976, to wit. on 18th June, 23rd June and 28th June, but the debtor was not available. Hence it is said that an act of insolvency within S. 9(d)(ii) and 9(d)(iii) of the Act has been committed. It is further alleged that a notice of demand was sent on behalf of the second petitioning creditor on 21-7-1976 and the cover was returned with the endorsement 'left'. The transferee, however, received the notice and replied admitting the transfer, but contending that he was one of the creditors of his son and that the transfer was made because he pressed for repayment and that after taking over, he has discharged debts of the first respondent to the tune of about Rs. 70,000/- . This is brought out in the evidence of the transferee examined as R. W. 2. It is in these circumstances, that the petition has been filed.
2. The first respondent's case is that the petition is not maintainable as the cause of action in favour of each of the petitioning creditors is different. He denies having has any dealings with the petitioners and says that he does not know them. The promissory notes, on which the cause of action is based. In this petition by the petitioners are stated to be without consideration. He however, admits that P. W. 2, the broker, was having transactions with him and the said broker might have filled in certain blank promissory notes which he might have obtained in the course of his regular dealings with the broker. He says that no amount was received by him under the promissory notes in question. The case of the first respondent is that on 7-5-1976, he executed a blank promissory note on the representation of the broker that a sum of Rupees 2500/- was due under earlier transactions and similarly a promissory note on 17-3-1976 in blank was signed by him on the representation of P. W. 2 that certain other amounts were payable towards the earlier dealings with the debtor. After denying the quantum of the debt and pleading that he does not know the creditors at all, he would deny that the paid any money under any one of the promissory notes. He would say that his father who was one of his creditors, took over his entire liabilities, excepting the liability of about Rs. 4000/- due under the two promissory notes referred to above and the transfer made of his business of Nirmala Textiles was for sufficient consideration. He would add that he did not apprise his father of his liability of Rs. 4000/- of Nirmala Textiles. According to him, he was carrying on business of film distribution apart from the textile business, and the present application for adjudication has been filed with ulterior motives. He denies that he transferred the business of Nirmala textiles to his father in order to defeat and delay the creditors. He would also deny that he ever represented to anyone that he was suspending payments generally to his creditors and that he offered to pay only thirty paise in the rupee to them. He would emphatically urge that P. W. 2 knew his place of business of Kavitha Pictures and that at no time he called on him along with the second petitioning creditor at his quondam business place. Under all these circumstances, the insolvency petition is resisted. The second respondent as transferee, pleads ignorance of the debt alleged to be due by the debtor to the petitioning creditors. He says that he has become separate from his son and that he was living in Elurpatti in Musiri Taluk, Trichy District. As his son owed him large amounts and when he pressed for repayment of the same, the debtor was willing to transfer his textile business run under the name of Nirmala textiles provided he was willing to discharge all the debts payable by the debtor to his creditors. According to R. W. 2 (the second respondent) a list of the assets and liabilities together with the outstandings payable by the debtor was prepared and it was in those circumstances that he took over the business of Nirmala Textiles. He would concede that after taking over the business, he has been running the same under the name and style of Nirmalatha Textiles. He denied that the transfer was with intent to defeat creditors. He would also add that he is a bona fide purchaser for value and that the debtor, in the circumstances, did not commit any act of insolvency.
3. P. W. 1 is the second petitioning creditor. He proves the promissory note Ex. P.1 dated 17-3-1976 under which he lent a sum of Rs. 6000/- to the debtor who was doing textile business under the name of Nirmala Textiles. He alleges that the debtor has transferred his business to his father and that the second respondent is carrying on the old trade under a new name of Nirmalatha Textiles. He swears that the transfer was to cheat and defeat the creditors of the first respondent. He would also refer to his attempts to contact him on the 25th of May 1976 and 8th of June, 1976. He says that when he demanded repayment of his debt, the debtor is said to have represented that the could pay only thirty paise in the rupee. He speaks of his attempt to contact him at the shop of the first respondent. But he could not find him, but on the other hand, found his father doing business there. He marked Ex. P. 2 which is the notice of demand and says that it was received by the father. But the letter addressed to his son, namely, the first respondent was returned with endorsement 'left'. In the cross-examination he admits that he knew only the debtor, the first respondent, only for about a few months before the lent the money and that he came to know of him through the finance broker. He says that he went to the shop and gave the money. To a suggestion that certain blank notes with the finance broker were used by P. W. 1, he denied it. He said that P. W. 2 wrote the promissory note and that the debtor signed it. He denies that the promissory note was blank at the time when the debtor put his signature therein. He says that the representation regarding suspension of payments was oral. He emphasised that he contacted the first respondent along with Gurumuklal as alleged in the petition and pleads ignorance of the other business carried on by the debtor. Cross-examined by the transferee, he would say that he saw the second respondent only on the 25th of May, 1976 and later in June, 1976. He says that he went to the business place to meet the first respondent. But he found only the second respondent there. P. W. 2, Gurumuklal says that the debtor is known to him for the past three years, and says that he arranged loans for the debtor. He says that the promissory notes executed by the debtor were in connection with such lending. As a finance broker, he said that he has arranged for loans to the tune of Rs. 46,000/- to the debtor and that a sum of Rs. 27,000/- is still due. He filed Ex. P. 4 containing the list of the creditors of the debtor. Thereafter, he speaks about the transfer of Nirmala Textiles to the second respondent. He says that he met Durairaj in May 1976 and when he demanded repayment of his debts, he expressed his inability to pay. He does not know whether Durairaj was carrying on business in film distribution under the name of Kavitha Pictures. In the cross-examination, he denied that as a finance broker, he was taking blank promissory notes and was filling the names to suit his own purpose. He would say that the debtor knew the petitioning creditors. He denies having misused his position and reiterates that he filled the promissory notes in the presence of the debtor. When confronted with Ex. P.4 and asked about any evidence to show that he acted as a finance broker for all these creditors shown in Ex. P.4 he had to admit that he did not have any proof. He claims that he collected information and prepared Ex. P.4. he had to admit that sometimes the party never accompanied him to the financier. He would add that the financier used to go to the debtor. Her denies having filled up Exs. R. 1 to R.3 which were other promissory notes in connection with the dealings of the first respondent. P. W. 2 was cross-examined in detail that the promissory notes now produced by the petitioning creditors were only in renewal of earlier debts and that they are not supported by consideration. P. W. 2 denied the suggestion. He would say that he accompanied the creditors in March and May 1976 and it was then that the money was lent and the promissory notes executed. He does not know whether the debtor was carrying on business in the name of Kavitha Pictures. Cross-examined by the transferee, he would say that he met the second respondent in May, 1976 when he went to Adyar to meet the debtor. To a question by the Court that he remembered all the names of parties, without keeping any record of it, he said that he knows the names and can also say when he met them and the dates when he contacted them. He said that he was told that the debtor transferred the business and that he was not in a position to say whether the transferee paid the debts of the transferor. The husband of the first petitioner was examined as P. W. 3. He proved the advance made by him under Ex. P.5 and says that the debtor has transferred his business only to cheat the creditors and that the broker told him that the debtor wanted to settle by paying all the creditors twenty or thirty paise in the rupee. He placed complete reliance on the representation of P. W. 2. He admits that Ex. P-5 was written by the broker and that he saw Durairaj only once when he paid the money, in May, 1976. He said that when he was casually going through Adayar, he saw the change of the board and denied the suggestion that Ex. P-5 was blank and it was filled up by the broker and that no consideration was paid by him.
4. The first question that arises for consideration is whether the dispute about the debt by the debtor is bona fide and whether the relationship of debtor and creditor subsisted on the date when the insolvency petition has been filed. P. W. 1 filed the insolvency petition on the ground that there was has been transfer of the assets of the debtor with intent to defeat or delay his creditors. We shall advert to this aspect sometime later. Under S. 12 of the Presidency Towns Insolvency Act, a creditor shall not be entitled to present an insolvency petition against a debtor unless the debt said to be owing by the debtor to the creditor is over Rs. 500 and that the said debt is a liquidated sum payable either immediately or at some certain future time and above all an act of insolvency within the meaning of S. 9 of the Act has been committed by the debtor. Under S. 13(2)(a) of the Act it is obligatory on the part of the creditor to prove the existence of the debt and of course, the act of insolvency, and it is equally the duty of the Court to dismiss the petition, if it is not satisfied with the proof of the facts referred to in sub-sec. (2) of S. 13 of the Act which provided for the proof of the debt as also the act of insolvency. The relevant provision which arises for consideration in this case is S. 13(6) of the Presidency Towns Insolvency Act, which runs as follows :-
'Where the debtor appears on the petition and denies that he is indebted to the petitioner, or that he is indebted to such an amount as would justify the petitioner in presenting a petition against him, the Court on such security (if any) being given as the Court may require for payment to the petitioner of any debt which may be established against the debtor in due course of law, and of the costs of establishing the debt, may, instead of dismissing the petition, stay all proceedings on the petition for such time as may be required for trial of the question relating to the debt.'
It is, therefore, seen that if there is a bona fide denial of the debt, and if there is evidence to support the contention of the debtor that he is not indebted to the petitioning creditor, the court has the option to stay all proceedings in insolvency in order to enable the petitioning creditor to secure a decision on the question whether a debt is payable by the debtor to the creditor. While doing so, the Court can demand such security as is prescribed under sub-sec. (6) of S. 13. We have seen from the testimony of P. W. 1 that he knew the debtor only for about a few months before he lent the money and that the finance broker examined as P. W. 2 introduced the debtor to him. From the evidence of P. W. 2 it is seen that he was the person, who ought to have played an important role in the matter of the advance under the promissory note. No doubt P. W. 2 would corroborate P. W. 1. P. W. 1 would say that he met the debtor before March 1976 and saw the shop and gave the money. He vaguely answers a specific question put by the debtors' counsel thus :
'Q I put it to you that you had never seen Durairaj at any point of time when he executed the promissory note?
A. Two or three times I went to his shop.'
He admits that the promissory note was filled up by P. W. 2, the finance broker. To another question i.e.
Q. My suggestion is that Durairaj has never seen you nor have you seen him at any point of time?
His answer was :
A. He knows me very well.'
He again answered to a question that there was no allegation in the position that the debtor has told him that he was going to suspend the payments to his creditors. He again vaguely answers that the debtor told him that he incurred loss in his business and the petition does not contain a specific allegation P. W. 2 who was the finance broker, after denying that he would take blank promissory notes from the persons to whom monies are advanced, would say that P. W. 1 was present at the time of the advance. He is aware of the various debts payable by the debtor as is seen from the list of creditors of the debtor produced by him (Ex. P-4). To a question put by Court as to how he prepared Ex. P-4, he would pretend that he collected the information. He would confess that sometimes they would not. He would pretend that he will fill up promissory notes in the presence of the debtors and the lenders. Several suggestions were made to the finance broker as to the fact that he filled up several blank promissory notes and P. W. 2 of course, denied them. He would say that he took P. W. 1 on 17th March 1976 to the debtor and the promissory note was taken in that connection. P. W. 3 is the husband of the first petitioner. He would honestly confess that generally financiers used to rely upon the broker and through brokers alone they used to advance money. He has not even read through the petition which his wife has filed in Court and would say that it is not necessary to say in the insolvency petition that the creditor has advanced money through him. He admits that he paid the money only through the broker. He was not sure of the date when he met the broker. At one time he would say that it was on the 5th of July 1976 and at another time he would say that he does not remember the date as Ex. P-5 gives the date as 7-5-1976. R. W. 1 is the debtor. He emphatically denies any knowledge about the petitioning creditors or of P. Ws. 1 and 3. He would say that he signed the blank promissory notes as usual and gave them to the broker P. W. 2 and that it was in connection with a running account which he had with the broker. He would only admit liability to various parties to the tune of Rs. 4,000 and he would not admit that the claims made by the petitioning creditors are due by him. He denies that the petitioning creditors or their representatives contacted him in June 1976 as alleged. It is in the light of this evidence that the contention of the learned counsel for the debtor that there is a bona fide dispute about the debt and that therefore, action should be taken if at all under S. 13(6) of the Presidency Towns Insolvency Act and the debtor cannot be adjudicated before a decision is given whether the debt is due or not looms large.
5. In Gangi Reddi v. Narasimha Reddi : AIR1941Mad895 a Division Bench of this Court no doubt has expressed the view under the provisions of the Provincial Insolvency Act that the insolvency Court ought not to mechanically say that it will not decide the question whether the relationship of creditor and debtor exists between an adjudicating creditor and an alleged debtor and that it is for that Court to decide on it and ultimately held that the Insolvency Court has no jurisdiction in such circumstances to dismiss the creditors' petition. That was a case where the Court was considering the propriety of an order of a District Judge, who dismissed the creditor's petition on the ground that the case involved a decision of complicated questions of law and fact before it can be held that a subsisting relationship of a creditor and debtor has been satisfactorily established. Apart from the fact that there is no express provision which is similar to S. 13(6) of the Presidency Towns Insolvency Act in the Provincial Insolvency Act, I am of the view that the decision in Gangi Reddi v. Narasimha Reddi : AIR1941Mad895 does not prevent the Insolvency Court functioning under the Presidency Towns Insolvency Act from staying the proceedings until a decision on the subsistence of the relationship of creditor and debtor is established in a civil court. I am unable to agree with the learned counsel for the petitioning creditor that in all circumstances, the Court exercising jurisdiction under the Presidency Towns Insolvency Act, is bound to go into the question whether the debt subsists. In a case like this where prima facie it appears that the petitioning creditors could not have met the debtor at all and the transactions were put only through the finance broker, then an investigation is necessary whether the promissory note in question is supported by consideration or not. My attention has been drawn to S. 20 of the Negotiable Instruments Act. This has no application to the instant case because the debtor complains that the blank instrument was given in the course of dealings which he had with P. W. 2 as finance broker and that he does not owe the money as claimed by the petitioning creditors. Ex. P-4 establishes that there were such dealings between the finance broker and the first respondent. The usual presumption therefore, which would arise under S. 20 of the Negotiable Instruments Act, is not invocable in the facts of this case. It is not a case in which the name of they payee alone is said to be left blank but the case is that the instrument was blank not even indicating the amount now claimed under it. Therefore, it cannot be said that at this stage it can be safely presumed that the debt as claimed is due and that the relationship of debtor and creditor assumed to be subsisting as between the petitioning creditors and the first respondent in the manner stated in the insolvency petition.
6. I am, therefore, constrained to exercise my jurisdiction u/s. 13(6) of the Presidency towns Insolvency Act. Here is a case where the debtor denies that he is indebted to the petitioning creditors. In any event he would say that the indebtedness as claimed is not true. I direct, therefore, the respondents to furnish security for the value of the debt as also the costs which would be required to establish the debt within three months from the date of this order to the satisfaction of the Registrar, High Court, Madras. On such security being given, this insolvency petition is stayed until the creditors establish in a civil court that the debt claimed by them is due and payable by the first respondent on the date when the insolvency petition was laid.
7. Call this petition after the security is furnished. It is made clear that after the creditors establish the subsistence of the relationship of creditor and debtor, as between themselves, the other question whether the debtors have committed an act of insolvency as stated in the petition shall be gone into.
8. Order accordingly.