1. The appellants here sued the defendants upon a promissory note executed jointly by the first defendant and another by name- Lakshminarasa Reddi Lakshpinarasa Reddi became insolvent in 1931 and included this debt in his schedule of debts. In 1936 a scheme was put forward by Lakshminarasa Reddi for the settlement of his debts. In that scheme, the present plaintiffs were included as creditor No. 11 and the first defendant as creditor No. 9. Creditors Nos. 8 to 10 in the insolvency, as appears from the terms of the scheme, were in possession of certain mica over which they claimed a charge; and one of the terms of the scheme was that, in consideration of those creditors who had claims against creditors 8 to 10 as sureties for the insolvent giving up those claims, they would bring the mica into Court to be treated as part of the insolvent's estate. A further provision was made that those creditors who had claims against creditors 8, 9 and 10 should receive a larger dividend in pursuance of the settlement than the ordinary creditors as consideration for their giving up their claims against the sureties. It is contended by the appellants here that they did not consent to this scheme and that therefore the scheme does not bind them under Section 39 of the Provincial Insolvency Act. A number of issues were framed in the suit including the following preliminary issue--Is the suit liable to be dismissed by virtue of the provisions of the scheme in I.P. No. 54 of 19311 The learned District Judge has examined the terms of the scheme and has held that the scheme recites that the present plaintiffs had in fact agreed to give up their claim against the present respondents. He accordingly holds that the provisions of the scheme, 'proving in this way that the plaintiffs had ' actually agreed to give up their claim against the defendants, rendered this suit liable to be dismissed. There is no doubt that, if this finding were correct, the dismissal of the suit can be upheld; but, we are of opinion upon an examination of the terms of the scheme that the learned District Judge has misunderstood them. The scheme does not narrate any statement of fact. It is quite clear from the language used that it is proposed by the insolvent that, in consideration for the receipt of enhanced dividends, the plaintiffs and other creditors in a similar situation should give up their claims against the surety. We can find no justification for the view that before the insolvent presented the scheme to the Court' he had already in fact obtained the promise of the creditors to abide by these terms of the scheme. The reason therefore upon which the dismissal of the suit has been based by the learned District Judge fails and the dismissal, unless it can be otherwise supported, must be set aside.
2. It is argued on behalf of the respondents here that, even though the appellants had not agreed beforehand to the terms of the scheme, the fact that the majority of the creditors in number and three-fourth in value had approved of the composition as a whole renders that composition binding upon the appellants, whether or not they accepted it at any time. It is argued that, under Section 4 the powers of the Insolvency Court are very wide, that the rights of the appellants as against the respondents in this matter were intimately connected with the proposed administration of the insolvency and that the only remedy of the plaintiffs, if they were dissatisfied with the order passed approving of the scheme, was to have appealed against it. The terms of the Act itself furnish a complete answer to this argument. It is clear from the analysis which we have given of the proposed terms of the compromise that the Court is here imposing an obligation upon one creditor to give up his claim against another creditor. This is therefore essentially a matter which arises between two creditors inter se and not between either of them and the insolvent. Sub-section (2) of Section 4 shows that a decision under that section is binding only as against the debtor and the debtor's estate on the one hand and all claimants against him or it on the other; and Section 39, which deals with the effect of a scheme which has been assented to by the requisite number and value of the creditors, states that such a scheme shall be binding on all the creditors, but only so far as relates to any debt due to them from the debtor and provable under this Act. Section 39 therefore cannot possibly cover the case of debts due to one creditor by another, and therefore if, in fact the appellants here have not consented to the proposed scheme for composition under Section 38, it cannot under Section 39 be binding upon them.
3. The appeal is accordingly allowed and the suit remanded to the learned District Judge for disposal according to law. Costs will abide the result. Court-fee will be refunded to the appellants.