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E.K. Raghava Reddy Vs. Official Assignee and ors. - Court Judgment

LegalCrystal Citation
SubjectCivil
CourtChennai High Court
Decided On
Case NumberO.S. Appeals No. 16 and 23 of 1963
Judge
Reported inAIR1964Mad549
ActsPresidency Towns Insolvency Act, 1909 - Sections 53(3); Provincial Insolvency Act, 1920 - Sections 51(3)
AppellantE.K. Raghava Reddy
RespondentOfficial Assignee and ors.
Appellant AdvocateG. Ramkrishna Iyer and ;V.N. Srinivasa Rao, Advs. in O.S. App. No. 16/63 and ;T. Aravamudhe Iyengar, Adv. in O.S. App No 23/63
Respondent AdvocateV. Thyagarajan and ;K. Kumaraswami, Advs. in O.S. App No. 16/63 and ;V. Thyagarajan, ;K. Kumaraswami, ;A. Venkataraman, ;C. Govardhan and ;C.P. Rajagopala Iyengar, Advs. in O.S. App No. 23/63
DispositionAppeal dismissed
Cases ReferredIn Tones v. Gordon
Excerpt:
civil - protection to purchaser in execution sale - section 53 of presidency towns insolvency act, 1909 and section 51 of provincial insolvency act, 1920 - whether mere knowledge on part of purchaser about admission of petition to adjudicate judgment debtor insolvent will render purchase in court auction as without good faith and thereby deny him protection of section 53 (3) - person making unfair purchase at auction could not be said to be acting honestly so as to bring his case within protection afforded by section 53 (3) - when purchaser bids at execution sale with knowledge of insolvency proceedings he can be regarded as acting in good faith only when sale can be said to be fair one in all circumstances of case - onus of proving good faith will be on purchaser who must satisfy court.....s. ramachandra iyer, c.j.1. these appeals, filed under clause 15 of the letters patent from the judgment of kailasam j. involve, inter alia, the following question, which has given rise to this reference'whether mere knowledge on the part of a purchaser in an execution sale about the admission of a petition to adjudicate the judgment-debtor insolvent, will render his purchase in court auction as one not made in good faith, and thereby deny him the protection afforded by section 53(3) of the presidency towns insolvency act, which corresponds to section 51(3) of the provincial insolvency act?'by his judgment, the learned judge set aside, on the application of the official assignee under s 7 of the presidency towns insolvency act (which will hereafter be referred to as the act), certain.....
Judgment:

S. Ramachandra Iyer, C.J.

1. These appeals, filed under Clause 15 of the Letters Patent from the judgment of Kailasam J. involve, inter alia, the following question, which has given rise to this reference

'Whether mere knowledge on the part of a purchaser in an execution sale about the admission of a petition to adjudicate the judgment-debtor insolvent, will render his purchase in court auction as one not made in good faith, and thereby deny him the protection afforded by Section 53(3) of the Presidency Towns Insolvency Act, which corresponds to Section 51(3) of the Provincial Insolvency Act?'

By his judgment, the learned Judge set aside, on the application of the Official Assignee under S 7 of the Presidency Towns Insolvency Act (which will hereafter be referred to as the Act), certain sales conducted by the District Munsifs court, Poonamallee, in execution of decrees obtained against one Ramalinga Reddi. E. K. Raghava Reddi, the appellant in O S A. 16 of 1963. is the purchaser in those sales which form the subject matter of these appeals. He subsequently sold a few items of the properties so purchased to the appellants in O S. A No. 23 of 1963.

2. Several persons had filed suits and obtained decrees against Ramalinga Reddi. The first of the suits was O.S. 283 of 1956 on the file of the District Munsiff Court, Poonamallee. Three other decrees had also been passed against the same debtor by the City Civil Court, Madras in O S No. 2457 of 1955 2236 of 1955 and 2458 of 1958. Those decrees were transmitted to the Poonamallee District Munsif Court, for execution against the properties of the judgment-debtor, which were situate within its jurisdiction

3. The decree-holder in O.S. 283 of 1956 executed his decree by attachment and sale of certain agricultural lands. On 1-4-1959, one Mr Suryanarayana purchased at the court auction an extent of Ac. 3.05 cents of land for a sum of Rs, 1150 This purchase forms the subject-matter of an appeal to this court with which we are not at present concerned

4. In execution of the decree in O. S 2457 of 1955, a house in Sriperumbudur belonging to the judgment-debtor, was sold on 15-4-1959 in favour of E. K Raghava Reddi for a sum of Rs 2205 In similar proceedings taken with respect to decrees in O Section 2236 and of 1955 and 2458 of 1958, agricultural lands covering respectively an extent of Ac 2.84 cents and Ac 4 70 cents were sold on 22 4 1959 to E K Raghava Reddi himself for Rs 2281 and Rs 2250 All the sales were duly confirmed, in accordance with the provisions contained in the Civil Procedure Code

5. in the meantime, one of the creditors of the judgment-debtor, filed a petition in this court on 1-11-1958 -- I P 13 of 1959 - to adjudicate him an insolvent. The act of insolvency alleged fell under S 9(e) of the Act. namely that the debtor's properties had suffered attachment for more than 21 days in execution of a decree against him, such period of attachment having been completed by 6-8-1958 The petition was admitted on 25-2-1959, and the actual adjudication was made on 7-9-1959

6. Even during the pendency of the petition the Official Assignee had been appointed as an interim Receiver This was on 1-5-1959 He reduced the debtor's properties to his possession on the 9th and 10th of the following month This happened before the confirmation of the sales by the executing court, to which we have made reference earlier.

7. It will, however, be noticed that although the petition for adjudication was admitted as early as February 1959, no steps had been taken by any one concerned to obtain a stay of execution of the decrees. But on 15-4-1959, the judgment-debtor apprised the executing court in O S 2236 of 1955 and 2458 of 1958 about the pendency of the insolvency petition and applied for an adjournment of the sales. The court granted a week's time to the debtor to produce an order for stay of execution proceedings from this court. But the latter was unable to comply with the direction within the time specified. When the matter came up on 22-4-1959 the District Munsif of Poonamallce observing.

No orders passed as to delivery of proper ties to the Official Receiver This petition is dismissed' directed the sales to be proceeded with. The sales were accordingly held and completed on that date in favour of E K Raghava Reddi Whether, in the circumstances of the case the executing court was right in proceeding with the execution, or whether it should have adjourned the sales further, we need not pause to consider, as that is not material for the purpose of these appeals

8. On 19-1-1961 the Official Assistant in whom the estate of the insolvent vested as from the date of the act of insolvency, namely 6-8-1958, applied to this court Under Section 7 of the Act to have the execution sales declared not binding on him The sole ground on which the sales were impugned was that the purchasers had knowledge of the insolvency proceedings and as such they could not be regarded as purchasers in good faith so as to entitle them to the protection given Under Section 53(3) of the Act

9. Kailasam J was inclined to take the view that the court auction purchaser must have been aware of the insolvency proceedings, as he did not even venture to come forward and give evidence in support of his case But the learned Judge did not consider having regard to the decision of this court in Muthan Chettiar v. Venkitaswami Nicken, ILR 59 Mad 928 : AIR 1936 Mad 819 whether that by itself would be sufficient to invalidate the sales; but he held that as the Official Assignee had taken possession of the properties before the date of confirmation of the court sales the purchasers, who must have been aware of that fact, could not be regarded as acting in good faith when they obtained confirmation of their sales The court sales were accordingly held not to be protected by the terms of S 53(3) of the Act and. therefore, not binding on the Official Assignee

10. We are, however unable to share the view implicit in the learned Judge's conclusion namely that for the purpose of claiming the benefit of clause (3) of S 53 of the Act, the purchaser should show good faith not merely on the date of the court sale, but on the date when such sale was confirmed Secondly, if we were to assume that knowledge on the date of the court sale would not be sufficient to invalidate it. it will be difficult to sustain the view that the same knowledge on the date of confirmation would have a different consequence

11. It is true that a sale by court becomes absolute only on confirmation But confirmation of an execution sale is more or less an administrative act Under XXI Rule 92 C P Code, where no application has been made to set aside the sale held by court in execution of a decree, or where such an application has been made and disallowed, the court will be bound to make an order confirming the sale, and thereupon such a sale will be come absolute When it becomes absolute the title of the purchaser dates back to the date of the sale. Therefore, the relevant date for ascertaining whether the purchaser acted in good faith when he made the purchase will be the date of the auction at which the property was sold, and not the date when the sale comes to be confirmed

12. In the present case the purchaser Raghava Reddi made no attempt to prove that he was acting good faith when he made the purchases by giving evidence in support of his case Beyond the fact that in the cane of the last two purchases the executing court refused to stay the sales but allowed them to proceed there is no evidence of any relevant circumstance from which an inference of good faith on the part of the purchaser can be drawn Let us explain this by giving an illustration Suppose, in a particular case most of the bidders refrained from bidding at the auction on coming to know of the pending insolvency proceedings but one who had come to bid taking advantage of the fact that there was no competition and that he could make a good bargain in that situation, proceeds to buy the property, it cannot be said that he was acting in good faith. As has been pointed out in an unreported judgment of Venkataraman J. in S. A. No. 865 of 1960 (Mad):

'........the relevant criteria for determining good faith Under Section 51(8) of the Provincial Insolvency Act must be determined with reference to the general scheme of the Insolvency Act and the context in which Section 51(8) has been enacted'

The fundamental aim of bankruptcy law is to combine and regulate two great objects, namely, the distribution of the debtor's properties in the most expeditious, equal and economical manner, and, secondly, to secure his release from his creditors, if certain conditions prescribed in the statute have been satisfied. The scheme of the insolvency enactment will require that the best price possible for the debtor's properties should be secured, so that the creditors might get as much as possible for their dues. Any purchase, as has been referred to above, in the very nature of things, cannot be regarded as one made in good faith

13. Counsel appearing for the Official Assignee before Kailasam J. tried to argue that the properties were sold in the present case for very much below the market value. But the learned Judge declined to permit that contention to be raised, as in his view, there was no specific ground taken in the Official Assignee's report in regard to the matter. If the case were to be looked at as one where the Official Assignee challenged the court sale for insufficiency of price, the ruling, if we may say so, will be perfectly justified. But, if the inadequacy of the price obtained at the auction sale were to be regarded as a circumstance militating against the bona fides of the purchaser we must, with respect, point out that the contention cannot be overruled, as that arose only in answer to the claim in defence raised by the purchaser that he was acting in good faith, when he made the purchase.

14. One of the important matters to be considered in this case is, whether the purchaser had knowledge of the pendency of the insolvency proceedings at the time when he bought the properties. Admittedly, the purchaser had come to bid at the auction on 15-4-1959. On that date three sales were to be held. The judgment debtor had applied to the court for adjournment of two of the execution sales, disclosing the fact that a petition had been filed by a creditor to adjudicate him insolvent. It was on that date that Raghava Reddi purchased, in the court auction held then, the house belonging to the judgment-debtor at Sriperumbudur There is no evidence in the case to show as to when the applications to adjourn the two execution sales were filed, whether it was after the bid for the house had been knocked down, or before it. This is a matter on which the purchaser could, if he chose, have given evidence saying that he was not aware of the application by the judgment-debtor for the adjournment of the sales, or of the contents of such an application. There can be little doubt that even on 15-4-1959 the purchaser had come to court with the object of purchasing not merely the house but the other properties, if possible. The later sales were, however, adjourned at the request of the judgment-debtor. In those circumstances, one can reasonably infer that the purchaser was aware of the insolvency proceedings even at the time when the sale of the house was held. As we pointed out, he kept himself aloof from the witness box. We can, therefore, take it as proved, that the purchaser had knowledge of the pendency of the insolvency proceedings against the debtor before his purchase.

15. The question then is, whether that knowledge would disentitle him to claim the benefit conferred by Section 53(3) of the Act. Before considering that question, it would be appropriate if we consider first on whom lies the burden of proving that a purchase has been made in good faith, in order to entitle the purchaser to the protection, conferred by Section 53(3) of the Act.

16. On the adjudication of a debtor as insolvent, all properties belonging to or vested in him at the commencement of the insolvency, will pass on to the Official Assignee or Official Receiver, as the case may be, from the date of the act of insolvency on which the petition to adjudicate is founded takes place, in the case of a petition under the Presidency Towns Insolvency Act, and from the date of the petition, in the case of a petition under the Provincial Insolvency Act. In the former case, where the relevant act of insolvency happens to be proceedings in invitum, e.g. an attachment of the debtor's property subsisting for 21 days, the relation back of the Official Assignee's title will be from the point of time at which the proceedings which constitute the act of insolvency are completed. Thus, in the present case, the act of insolvency should be held to have taken place on 6-8-1958, when the three weeks' duration of the attachment had concluded. The consequence of the doctrine of relation back will be to render void against the Official Assignee, all transactions entered into by or on behalf of the insolvent with respect to his property, after the act of bankruptcy giving rise to the petition on which the adjudication has been made. Referring to the position of a debtor who had committed an act of insolvency on which an application for adjudication could be filed, Fletcher-Moulton L J. observed in Ponsford Baker and Co v. Union of London and Smith's Bank Ltd. 1906 2 Ch. 444, thus:

'Until commission of the act of bankruptcy he (debtor) was, of course, the beneficial owner of whatever assets he possessed, but by the act of bankruptcy his title to be regarded as such beneficial owner is no longer absolute, but is contingent on no bankruptcy petition being presented within 3 months of the date of the act of bankruptcy which leads to a receiving order being made. It such receiving order be made the whole of the assets vest in his trustee as from the date of the act of bankruptcy. He is therefore, in the position that should such a contingency occur he is from the date of the act of bankruptcy something less than a mere trustee of his assets for the creditors in his bankruptcy Until this state of suspense has been removed either by a receiving order or by lapse of time, he has no right to deal with those assets that were in his hands, and can give no title in them to any transferee with notice'

Therefore generally speaking in eases arising under the Presidency Towns Insolvency Act when a petition to adjudicate a debtor as insolvent, on an act of insolvency being committed, has been filed, and it ultimately results in his adjudication, neither the insolvent can give title to any person with respect to his property after the date of the act of insolvency, nor his rights could validly be sold in proceedings in invitum, as what can be sold thereunder is only the right title and interest of the debtor. An exception has, however, been engrafted to this rule both in regard to voluntary transfers effected by the debtor (See S 57) and to proceedings in invitum (See Section 53) In other words, except in the cases specifically saved by the provisions contained in the statute, neither the debtor not the court, in sales held in execution of decrees can give good title to the purchaser Section 53 so far as it is relevant for the present purpose runs:

'Section 53(1). Where execution of a decree has issued against the property of a debtor, no person shall be entitled to the benefit of the execution against the Official Assignee, except in respect of assets realised in the course of the execution by sale or otherwise before the date of the admission of the insolvency petition

(3) A person who in good faith purchases the property of a debtor under a sale in execution shall in all cases acquire a good title to it against the Official Assignee '

Section 57 protects bona fide transactions, like pay merits made by or to the insolvent, or transfer by the insolvent etc., if

'Such transaction takes place before the date of the order of adjudication and that the person with whom such transaction takes place has not at the time, notice of the presentation of any insolvency petition by or against the debtor '

17. It will be noticed that Sections 53 and 57 employ significantly different language, In the latter eases, it will be sufficient to invalidate the transaction if the person with whom the transaction takes place has notice of the presentation of the insolvency petition, whereas, under S 53, what has to be proved is that the purchaser made the purchase in good faith.

18. Coming to Section 53, it will be clear that sub-sections (1) and (3) can only relate to the same category of cases, i.e., where the purchase in execution had been made in good faith. The decree-holder is in such a case held not entitled to the benefits of execution, while the purchaser will get title to the property sold Thus, it is the good faith on the part of the purchaser that renders the court sale valid against the Official Assignee; but for it, the sale would not be binding on him. In other words, Section 53(3) makes valid, the interests of persons bona fide obtaining property in court sale held after the admission of the insolvency petition, which would otherwise not be binding on the Official Assignee. This is not the same thing us saying that the executing court can validly convey the property of the debtor in spite of the rule as to relation back of the Official Assignee's title. On the other hand, it is only an exception to the rules as to the relation back of his title. To sum up, the title of a purchaser in an execution sale against a debtor, after the admission of a petition to adjudicate the latter as insolvent, is a defeasible title. If the insolvency petition is dismissed, he gets good title. If however an adjudication is made, his title would normally be displaced by the Official Assignee or Official Receiver, as the case may be; but this rule is subject to an exception in favour of a purchaser in good faith, who will be protected by reason of such good faith Section 53(3) being, therefore, an exception to the general rule of relation back of the Official Assignee's title, the operation of which makes even the statutory title of the Official Assignee to give way before it, the burden of proving good faith, will be on the person seeking advantage of the exception

19. In Venkatasivayya v. Suryanarayana, : AIR1938Mad906 Venkataramana Rao J. held that the doctrine of relation back of the title of the Official Receiver was

'subject to the exception enacted in Section 51(3) of the Provincial Insolvency Act'.

The learned Judge relied, for this proposition, on the observations of Cornish J. in ILR 59 Mad 928 : AIR 1936 Mad 819 where the learned fudge observed:

'In other words, the right which the Official Receiver gets by relation back from the order of adjudication, to have vested in him all the property which the debtor had at the date of the insolvency petition, will not prevail against the purchaser in good faith at an execution sale prior to the adjudication '

With respect, we would like to point out that the statement of the position in the above cases though they might be regarded as correct substantially, is yet apt to mislead. For, if the learned Judges had intended to imply by their observations that the burden of proving that the purchaser was not acting in good faith was on the Official Assignee, we must express our respectful dissent. To obtain the protection given under sub-section (3) of Section 53, the burden unlike in eases coming Under Sections 54 and 55 of the Act. will, as we said, be on the purchaser himself

20. As pointed out above, there is very little evidence here on the question whether the purchase at court auction was one made in good faith. What is more, it has been proved that the purchaser had knowledge, even at the time of the sale, about the pendency of a creditor's petition to adjudicate the judgment-debtor as an insolvent. It is argued on the appellant's behalf that such knowledge cannot mean that he was not acting in good faith. This contention leads us to the question raised in the present reference.

21. Before we take up that question, we would like to deal with two matters The first is that the good faith that has got to be proved under S 53(3) cannot be regarded as a matter of assumption or presumption It has got to be proved like any other question of fact, the onus being, as we have stated, on the purchaser It is true that the commencement of insolvency proceedings against a debtor does not by itself prohibit the court from proceeding with execution of a decree, unless the interim receiver appointed in insolvency takes possession of the properties, or the insolvency court stays the execution proceedings There is also an obligation on the part of the executing court it self, to stay further proceedings by way of sale when notice of the adjudication has been given to it; see Section 54 of the Act. Secondly, in interpreting S 53(3), which gives protection to a purchaser general considerations like safeguarding the rights of third party purchaser cannot obviously apply For, while one may concede, that for the efficacy of court sales, the title of the auction purchaser should not be allowed to be easily assailed, such considerations cannot exist where by the court sale the rights of the general body of creditors of the insolvent debtor were to be affected. To put it differently, there are two conflicting principles (1) the safeguarding of the rights of a third party purchaser in execution and (2) the safeguarding of the rights of the general body of creditors of the insolvent for whose benefit the title of the Official Assignee is to relate back, in respect of the assets owned by the insolvent, as on the date of commencement of the insolvency. Section 53(3) attempts to reconcile these two conflicting principles by protecting the title of a purchaser in execution, after the date of the admission of the insolvency petition, who acts in good faith; such good faith must therefore be consistent with the principle underlying the insolvency law

22. Where a Court auction purchaser pending insolvency proceedings against the debtor if. unaware of the said proceedings on the material date, the matter does not present much difficulties. As pointed out by Venkatasubba Rao. J., in AIR 59 Mad 928 : AIR 1936 Mad 819 what the section requires is good faith; the existence of or the want of it may be proved in diverse ways. But, where the sale has been a fair one, there would really be nothing to the prejudice of the general body of creditors, inasmuch as the asset's realised in the execution sale, by virtue of Section 53(1) will be available to the Official Assignee for the benefit of the general body of creditors

23. Where, however, the purchase is made with the knowledge of the insolvency proceedings, the burden of proving good faith on the part of the purchaser will be greater than in a case where he has no such knowledge. Knowledge of the filing of a creditor's petition to adjudicate a debtor as an insolvent will amount to notice that an act of bankruptcy has been committed Even if it were a debtor's petition, it will amount to notice that the debtor is in an embarrassed state of circumstances. In such cases, unless the purchaser is satisfied that the petition to adjudicate is a frivolous one, he must be deemed to have had knowledge, that the rights of the general body of creditors might supervene, and unless his purchase is made in good faith, consistent with the policy of the insolvency law. it would not avail against the Official Assignee

24. In ILR 59 Mad 928 : AIR 1930 Mad 819 the learned Judges expressed the view that mere knowledge on the part of the purchaser of the pendency of a debtor's petition to adjudicate him as an insolvent, would not be sufficient to negative good faith. In that case an interim receiver had been appointed prior to the date of sale. The interim receiver applied to the executing Court to stay the sale on that account, but the Court overruled the objection and allowed the sale to proceed. This act of the Court in overruling the objection was held to be improper Nevertheless, it was held that the purchaser, although aware of the pendency of the insolvency proceedings, must be regarded as one acting in good faith, because he made the purchase on the faith of he Court's order which allowed the sale to proceeded

25. Divergent views have been expressed by the several High Courts an the question whether knowledge simpliciter of the pendency of insolvency proceedings on the part of such purchaser would render his purchase any-the-less entitled to the protection given by Section 53(3). In Dinanath Shaligram Marvadi v. Maroti Totaram, : AIR1959Bom10 , referring to the different views expressed by the High Courts. Mudholkar, J., observed;

'It seems to me that considering the provisions or sub-sections (2) and (7) of Section 28 of the Provincial Insolvency Act, along with the provisions of Sections 51 and 52 thereof, the title of the receiver to the property of the insolvent would relate back from the date of adjudication to the dale of the petition and the auction purchaser at the sale held in execution of the decree against the insolvent would only get a title defeasible by the receiver unless he was a purchaser in good faith '

The conflict of views noticed in that case is no less marked between the learned Judges of this Court itself. In Anantharama Iyer v. K Kovilama, 30 Mad LJ 611 : AIR 1917 Mad 924 it was observed that a purchaser in good faith meant, a person who did not know at the time of the sale that the judgment-debtor was an insolvent, and could not, by the exercise of due diligence, have discovered that an adjudication had been made. That was a case where the Court sale was after the adjudication. The view taken in that case that the protection afforded by Section 51(3) of the Provincial Insolvency Act, corresponding to Section 53(3) of the Presidency Towns Insolvency Act. will not be available to the purchaser once an adjudication had been made, was dissented from by Venkatasubba Rao, as obiter dictum in ILR 59 Mad 928 : AIR 1936 Mad 819. That view of Venkatasubba Rao, J., finds support in a recent Full Bench decision of the Andhra High Court in Lokanatham Srirangarnma v. Narayanamma, AIR 1956 AP 243. But it has not been accepted by this Court. In Mallikarjuna Rao v. Official Receiver, Kistna, ILR 1938 Mad 1063 : AIR 1938 Mad 449, Burn and Mockett, JJ., accepted the decision in 30 Mad LJ 611 : AIR 1917 Mad 924. In a still later case, Guruviah v. Rangiah, ILR 1942 Mad 614 : AIR 1942 Mad 415, Leach, C. J., and Kuppuswami Iyer, J., pointed out that the dissent expressed by Venkatasubba Rao, J., in ILR 59 Mad 928 : AIR 1936 Mad 819 by way of obiter was incorrect and that 30 MLJ 611 ; AIR 1917 Mad 924 has been correctly decided

26. It is, however, unnecessary for us now to consider, for the purpose of this case, whether a purchaser in good faith, can acquire good title to the property sold after an order of adjudication, as against the Official Assignee. For, in the present case, the purchase was made during the pendency of the insolvency proceedings

27. On that question, Sivasami v. Subramania Aiyar, ILR 55 Mad 316 : AIR 1932 Mad 95 will lend support to the argument that a sale held in contravention of the provisions of Section 52 of the Provincial Insolvency Act would be void. This view has not been accepted in : AIR1938Mad906 Venkataramana Rao, J. followed the view expressed in ILR 59 Mad 928 : AIR 1936 Mad 819. The same view has met with apparent approval in Firm Bhimaji Motiji v. Official Receiver, Bellarv : AIR1942Mad425 .

28. As we have pointed out earlier, knowledge of insolvency proceedings can only mean that a petition to adjudicate has been presented against the debtor, thereby implying that either there had been an act of bankruptcy committed by him or that he was in embarrassed circumstances. The utmost that can be imputed by reason of such knowledge will be that the purchaser is aware of the contents of the petition to adjudicate. If the petition were unsustainable on the face of it, knowledge of it cannot obviously affect the bona fides of the purchaser If, on the other hand, there was a prima facie case in the petition, e.g. as in the present case where an objective fact like the subsistence of the attachment for a period of three weeks has been alleged as the act of insolvency, then the purchaser must be held to be aware of the fact that the Official Assignee's rights will supervene as from the date of the completion of the act of insolvency If then he proceeds to purchase the properly for a fair price, and if there are no circumstances which would negative good faith on his part, there is no reason why, in spite of his knowledge, his purchase should not be protected . It must be realised that even if the property goes into the hands of the Official Assignee, he will have to sell it to discharge the claims of the creditors in insolvency If the Court sale is, therefore a fair one, the assets realised in such a sale going to the benefit of the general body of creditors, there could possibly be no objection, from the point of view of the creditors, to the validity of the sale. We have also noticed earlier that the Act itself makes a distinction between a case of knowledge on the part of the purchaser as Under Section 57. and good faith on the part of a Court auction purchaser, Under Section 53. We are, therefore, of opinion that knowledge of the insolvency proceedings against the debtor can co-exist with the bona fides of the purchase in an execution sale.

29. Mr V. Tyagarajan, appearing for the Official Assignee, contended that this view is really opposed to the principles of bankruptcy law, and in support of his contention he relied upon the decision in Wild v. Southwood, 1897 1 QB 317. That was a case where a charging order was made under the Partnership Act upon a judgment-debtor's interest in the partnership. The partners, in pursuance of the direction by the Court, paid into it a sum of money with a view to redeem the charge. It was held that there was no completed execution and that the rule of relation back of the title of the trustee in bankruptcy would prevail We are unable to see how this decision can at all be relevant for the due interpretation of a provision like that contained in sub-section (3) of Section 53 of the Act as that was a case of payment by the debtors.

30. Learned counsel then relied upon. In re, Gershon and Levy, 1915 2 KB 527, where a receiver appointed in an action for dissolution of partnership was directed to pay the taxed costs to the solicitors of the plaintiff out of partnership assets. When the order was made, all parties knew that a creditor's petition in bankruptcy was pending against each one of the partners. Before the receiving orders was made on those petitions, the solicitors applied for the costs being paid. It was held that under the doctrine of relation back of the title of the trustees in bankruptcy, the creditors, who were not secured creditors, would not be entitled to a preferential payment Horridge. J. observed

There is no evidence that either of the present applicants was in ignorance of the bankruptcy petitions, and the onus is on them to prove they had no knowledge of any available act of bankruptcy committed by the debtors before the order was made

But, it will be seen that the case was one that would, in this country, fall Under Section 57 of the Act, where what is material is that the person receiving the payment should not be aware of the insolvency proceedings That principle cannot apply to a case like the one before us, where there has been an execution sale which will be covered by the provisions of Section 53(3) of the Act.

31. We, therefore, accept the view taken in ILR 59 Mad 928 : AIR 1936 Mad 819 to this limited extent, namely that mere knowledge on the part of a Court auction purchaser of a debtor's property of pending proceedings against the latter for adjudication as an insolvent, cannot, by itself, show want of good faith But at the same time we would like to point out that it will be for the purchaser, in such a case, to prove that he was acting in good faith when he made the purchase

32. We have next to consider what is really implied by the term 'good faith' There is no definition of that term in the Act. But Section 3(22) of the General Clauses Act, 1897, says.

'A thing shall be deemed to be done in 'good faith' where it is in fact done honestly whether it is done negligently or not.'

In Tones v. Gordon, 1876 2 AC 616, Lord Black burn, speaking with reference to a person on whom the onus of proof lay to show that he was acting in good faith, says

'But if the facts and circumstances are such that the jury, or whoever has to try the question, came to the conclusion that he was not honestly blundering and careless, but that he must have had a suspicion that there was something wrong and that he refrained from asking questions, not be cause he was an honest blunderer or a stupid man but because he thought in his own secret mind - J suspect there is something wrong, and if I ask questions and make further enquiry, it will be no longer my suspecting it, but my knowing it, and then I shall not be able to recover - I think that is dishonesty '

The decision in the above case is of particular importance to the present one. as the statutory provision in that case, namely, Section 90 of the Bills of Exchange Act, 1882, defined 'good faith' in the same terms as Under Section 3(22) of the General Clauses Act. In that case a person became the assignee of a bill of exchange for less than its value being then aware of the pendency of a petition to adjudicate the owner of the bill as an in solvent Lord Blackburn held that though the fact of taking a bill at considerable undervalue would not, by itself, be sufficient to affect the title of the holder it would be an important element in considering whether the man who gave the undervalue in the circumstances where the debtor was financially embarrassed was acting bona fide or whether he avoided making enquiries because they might be injurious to him.

33. Applying that principle to a case Under Section 53(3) it will follow that if a person, aware of the pendency of insolvency proceedings against a debtor, makes an unfair purchase at an auction, he could not be said to be acting honestly so as to bring his case within Section 53(3) of the Act. The proper test in such a case will be to see whether, in spite of the knowledge of the purchaser, the sale subserves the general policy of the insolvency law, namely, securing for the benefit of the general body of creditors a fair price for the property which, but for the sale, would vest in the Official Assignee on the doctrine of relation back. In saying this we are not to be understood as laying down that the purchaser is occupying a position analogous to a fiduciary capacity towards the, creditor What all we mean is that when a purchaser bids at an execution sale with knowledge of the insolvency proceedings, he can be regarded as , acting in good faith only if the sale can be said to be a fair one in all the circumstances of the case.

34. While, therefore, we answer the question formulated at the beginning of this judgment in the negative. we must add a rider to it that the onus of proving good faith will be on the purchaser who must satisfy the Court that the purchase made by him is consistent with the general policy of the insolvency law in that, at a fair sale, he paid the market or very near market value of the property

35. On this view, we would normally have directed a remand to consider the question as to how the execution sale was conducted, whether a fair price had been obtained at such a sale and whether the purchaser could be said to have acted in good faith, notwithstanding his knowledge of the insolvency proceedings. But the purchaser in the present case did not even offer prima facie evidence as to his good faith before the learned Judge. Any remand, in the circumstances of the present case, will not subserve the real interests of justice, as it might tempt interested parties to come forward with false evidence We have come to the conclusion that the appellants in these two appeals must be held to have failed to discharge the onus that lay on them of showing that they were entitled to the protection Under Section 53(3) of the Act. We therefore affirm the judgment of the learned Judge though for different reasons, and dismiss these appeals. There will, however, be no order as to costs.


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