1. The two insolvents are brothers and were adjudicated in February 1946. They are members of a family which carried on business on a large scale at Rajahmundry in the East Godavari district as timber dealers, money lenders etc. In the books of this family business amounts appear to have been deposited by close relatives of the insolvents. The earliest books available to the Official Assignee are those for the year 1917 and the latest those for the year 1929. I understand that the books for one or two years between 1917 and 1929 are missing The Official Assignee is satisfied that these deposits were made and that the entries in the books of account evidencing them are genuine. Accordingly he has accepted the entries of such deposits as sufficient evidence that moneys to that extent were deposited by the several depositor relatives on the dates and the amounts shown in the books of account. In some cases, the first books of account available those for 1917 show an amount carried forward from the previous year's. accounts. These entries the Official Assignee has disregarded, except in those cases where the depositor concered has been in a position to satisfy him by other evidence of the actual amount deposited and the date of deposit.
2. Subject to this last qualification the deposits evidenced by the accounts have been admitted by the Official Assignee for the amounts shown due by the books of the firm for the year 1929 with interest thereafter until the date of adjudication at the contract rate of 12 per cent. per annum. But, in so admitting these proofs, the Official Assignee has directed that, for the purposes of dividend, interest will be allowed at only 6 per cent. per annum on the amounts originally deposited from the date of deposit up to the date of adjudication. I understand that the books of account of the firm between 1917 and 1929 show that interest was calculated during that period at the rate of 12 per cent. per annum compound interest and the Official Assignee has allowed the proof with interest at that rate up to the date of adjudication after deducting the drawings. For payment of dividends, however, he claims that interest should be allowed throughout on these deposits at only 6 per cent. per annum.
3. Nine of the depositors have now appealed against his decision and one--the applicant in application No. 593 of 1947--complains in addition that the Official Assignee has unjustifiably disregarded the amount shown to his credit in the insolvent's accounts at the beginning of 1917. A credit in his favour is there shown as carried forward from the previous account and it is admitted that no earlier accounts were produced to the Official Assignee and indeed that no earlier accounts are now forthcoming. In these circumstances, I am not prepared to vary the Official Assignee's refusal to accept the proof for the amounts shown as carried forward. A second cause for complaint is, however, urged by this applicant. It is urged that deposits were made during the years for which the accounts are missing. The Official Assignee agrees that this may be so, inasmuch as there is a substantial amount shown as carried forward in the first year after the years for which the accounts are missing. Counsel for the applicant states that his client is now in a position to secure the production of the accounts for the missing years for inspection by the Official Assignee and asks that he may be given an opportunity to do this. The Official Assignee has no objection and, accordingly, application No. 593 of 1947 is on this point adjourned and the Official Assignee will have it put in the list again for orders when he has been able to examine the accounts for the missing years. I will now deal with that application and the other eight applications on the question common to all.
4. The objection taken is that the Official Assignee is not justified in his decision to allow interest for the purpose of dividend at only 6 per cent. instead of at the contract rate of 12 per cent. This decision of the Official Assignee is, of course, founded on Clause 23(2) of the second schedule to the Presidency Towns Insol-vency Act. That Clause reads as follows:
Where a debt which has been proved in insolvency includes interest or any pecuniary consi-deration in lieu of interest, the interest or consideration shall, for the purposes of dividend, be calculated at a rate not exceeding 6 per cent. per annum, without prejudice to the right of a creditor to receive out of the debtor's estate any higher rate of interest to which he may be entitled after all the debts proved have been paid in full.
Now the Deputy Official Assignee, who has argued this case most ably on behalf of the Official Assignee, puts his case as follows : He claims that the applicants have proved in respect of debts, which include interest. He claims that those debts are the amounts originally deposited and, accordingly, that Clause 23(2) of second schedule is directly applicable.
5. It is urged on behalf of the applicants that the view taken by the Official Assignee is unjustified on the grounds that the original deposits cannot be properly regarded as the debts provable. It is common ground that the books show interest at 12 per cent. per annum calculable at yearly rests and, accordingly, counsel for the applicants urges that the debts here provable must be the amounts shown in the last' available books of the insolvents, those for 1929. It is urged that the amounts there shown are the amounts settled after payment of interest for the year and after adding those amounts to the principal sums due at the commencement of that year.
6. In support of his contention, the Deputy Official Assignee relies upon the decision in Kanto Mohan Mullick v. J.C. Galstaun and the Official Assignee of Bengal1. The proof in insolvency under consideration in that case was a loan of a lakh of rupees on terms that two lakhs of rupees should be repayable. If the loan was not repaid within six months it was to bear interest at 12 per cent. per annum at monthly rests. Rankin, C.J., held that for the purposes of dividend, the debt must be regarded as one of a lakh of rupees carrying interest at 6 per cent. per annum. He arrived at this decision in reliance on the provision of the Bankruptcy law set out in Clause 23(2) of the second schedule.
7. Counsel for the applicants does not seek to question the correctness of this decision, but he claims that it can have no application to his clients' proof and, after careful consideration of the point, I agree with his contention. The point involved is one of considerable difficulty and I allowed an adjournment of one week to enable counsel to consider the authorities further. A number of cases have very properly been brought to my notice by the Deputy Official Assignee, which unfortunately for his case have satisfied me in the view which I have just expressed. I am however nonetheless indebted to the Deputy Official Assignee for his assis-tance in bringing these cases to my notice.
8. I am satisfied on the authorities, particularly on the decision of the House of Lords in Paton v. Inland Revenue Commissioners2 and the decision in Reddie v. William-son3, which was discussed at length in Paton's case2; that an arrangement by which money is deposited at compound interest calculable at periodic rests is properly to be regarded as an agreement between the parties that the interest as it accrues and at the end of each fixed periods shall become principal. Most of the cases to which I have been referred are banking cases, and, though the insol-vents were not bankers, it is found by the Official Assignee that in the present case, the applicants' moneys were deposited on the terms that were repayable on demand. In this connection it will be noted from his order that he accepted that all these claims were governed by Article 60 of the Limitation Act. Now the learned Judges who disposed of Paton's case2, considered at length the nature of the transaction between a banker and his customer in respect of moneys repayable on demand with compound interest. Lord Macmillan at page 357 observed:
Now it may well be that as between a bank and its customer this method of dealing may have the result that the accrued interest which the bank has with the customer's assent added to the principal loan thereby ceases to be due or recoverable as interest, but becomes merged in the prin-cipal loan.' and later at page 359 his Lordship added:
It may well be that in a question between a bank and its customer, and equally between a bank and its customer's cautioner, the interest accruing annually may by the sanctioned method of accounting cease to be interest when it is accumulated with the principal, so that the bank can thereafter no longer sue for the interest as interest.
From a perusal of Paton's case2 and from the judgments in other cases, which have been brought to my notice, it seems clear that it has long been accepted that the payment of compound interest on a loan with periodic rests is properly to be regarded as a payment by the debtor of the interest and a fresh redeposit of that amount with the creditor. It appears that this method of calculating interest arose in order to avoid the prohibition of the old usurious loans legislation. However that may be, I am satisfied that each of the amounts claimed by the applicants must be regarded as one debt, the amount due at the date when interest was last compounded before the commencement of the insolvency. Of course each those debts consists of, first, the debt arising from the original deposit, but to that are added a number of other debts arising from year to year and each being in respect of the annual interest. On this view of the matter, the amount shown in the insolvents' last available books of account, those for 1929, as due to any one of these depositors is not a sum including any interest, but is a number of capital sums added together.
9. Accordingly I am unable to regard the original debts as the debts which are now being proved in insolvency, nor can I regard the applicants as proving for any inte-rest in respect of the period between the dates of their deposits and 1929. As regards the amounts claimed as due in respect of that period, I consider that they must be regarded as proofs for a capital sum consisting of a number of debts. Accor-dingly, I vary the orders of the Official Assignee in each of these cases by directing that the amounts due to the applicants shall be calculated for the purposes of divi-dend by taking in each case the amounts shown due in the 1929 books (in those cases where he has accepted the proof of the origin of the loans) and adding thereto interest at the rate of 6 per cent. per annum until the date of adjudication.
10. The points involved in this case are of considerable difficulty and they have been argued on behalf of the nine applicants by one counsel. In the circumstances, I think it will be reasonable to allow costs for one advocate out of the insolvents' estate. I fix those costs at Rs. 100.