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Dist. Official Receiver Vs. S.V. Nallaperumal Pillai and ors. - Court Judgment

LegalCrystal Citation
SubjectCivil
CourtChennai
Decided On
Reported inAIR1929Mad471
AppellantDist. Official Receiver
RespondentS.V. Nallaperumal Pillai and ors.
Cases ReferredSime Darby & Co. Ltd. v. Official Assignee and
Excerpt:
.....of the insolvents in granting the three mortgages by which they transferred all their immovable properties in favour of the respondents, while at the same time they were putting off their other creditors who were equally pressing them it needs scarcely be observed that their own evidence at the trial of this case is not only discrepant, but in my opinion entirely unreliable. and he shows this preference while all along he makes the other creditors believe that he is trying his best to meet their liabilities also, those facts are quite sufficient to make out that his dominant motive was to prefer the creditors in whose favour he has executed the mortgages. such a conclusion will be clearly opposed to the policy of the bankruptcy law, the object of which is to place all the creditors on..........preference of one creditor over another is not in the eye of law made ' with a view of giving that creditor a preference over other creditors,' unless the dominant intention of the insolvent in making the preference was to prefer that particular creditor over the rest to give him an undue advantage and thus defraud the other creditors of their lawful rights to share rateably in the assets. what the dominant intention was is always regarded as a pure question of fact, and the court has therefore to decide as a question of fact what was the dominant intention of these insolvents when they made these transfers. the learned trial judge has decided that in the present case the dominant view of the insolvents was to stave off those creditors, who were bringing most pressure to bear upon them,.....
Judgment:

Wallace, J.

1. This appeal is by the Official Receiver of Tinnevelly against the order of the District Judge in the matter of a motion of the Official Receiver under Section 54, Pro Ins. Act. The Official Receiver by a motion in I P No. 16 of 1921 sought to have declared fraudulent and void against him under Section 54 three mortgages by the insolvents in favour of the three respondents to this appeal. The District Judge dismissed the petition and the Official Receiver appeals.

2. The two insolvents, examined as P.Ws. 1 and 3, were from 1916 to 1920 carrying on an extensive trade, both local and export, in leather and hides in Tuticorin. On 20th April 1921, one of their creditors, whose clerk is examined here as P W. 4 put into the District Court I. P. No. 16 of 1921 praying that the insolvents may be declared insolvent. That petition was resisted by the insolvents, but after inquiry they were declared insolvent on 17th December 1921.

3. The three documents of mortgage, attacked by the Official Receiver as fraudulent preferences in favour of particular creditors, were executed, Ex. 2 on 26th January 1921, in favour of respondent 1, Ex. 3 on 31st January 1921 in favour of respondent 2 and Ex. 4 on 23rd February L921 in favour of respondent 3. It is not disputed that by these three mortgages all the immovable property of the insolvents was mortgaged. The principles of law applicable to matters of this kind are clear enough. A mere transfer of property or payment made to one creditor rather than another by an insolvent on the eve of the insolvency while it is no doubt in essence a preference of one creditor over another is not in the eye of law made ' with a view of giving that creditor a preference over other creditors,' unless the dominant intention of the insolvent in making the preference was to prefer that particular creditor over the rest to give him an undue advantage and thus defraud the other creditors of their lawful rights to share rateably in the assets. What the dominant intention was is always regarded as a pure question of fact, and the Court has therefore to decide as a question of fact what was the dominant intention of these insolvents when they made these transfers. The learned trial Judge has decided that in the present case the dominant view of the insolvents was to stave off those creditors, who were bringing most pressure to bear upon them, to tide over a difficult time and save their credit in order that they might still carry on their trade and avoid bankruptcy and that therefore there was no fraudulent preference. The argument before us centred on the point whether these preferences are due to pressure brought to bear on those insolvents by these three creditors.

4. After hearing the appeal fully argued on both sides I am not able to hold that the learned Judge's finding was wrong. A number of cases both in English and Indian Law Reports have been cited before us. I do not think it necessary to consider them in detail. Preference under the section imports voluntary act, that the transferrer was free to do one thing or another, whichever he preferred. Voluntary action is negatived by fear of legal process, whether that process be real or imagined. Desire to escape from criminal prosecution for a breach of trust, for example, may negative the contention that the preference was voluntary. The leading cases in which the general principles for decision of a case like the present are set out are : Tomkins v. Saffery [1877] 3 A.C. 213; In re, Eaton & Co. Ex parte Viney [1897] 2 Q.B. 16 affirmed on appeal in Sharp v. Jackson [1899] A.C. 419. The principles therein stated were adopted as the law in this country by the Privy Council in Sime Darby & Co. Ltd. v. Official Assignee of the Estate of Lee Paug Seng A.I.R. 1928 P.C. 77 and by this Court in Samu Pattar v. Appachi Chetty & Sows A.I.R. 1924 Mad. 180. In Tomkins v. Saffery at p. 235 Lord Blackburn lays down:

Supposing a bankrupt, although knowing that he is very likely to stop payment next week, struggles on and makes a payment without being particularly asked; supposing he pays his debts and sends his money to meet his bills on those days on which they become due, and does other things so as to keep himself alive and in good credit for the time; that would not have been undue preference, I think, because those payments were not made ' in favour ' of certain creditors as against others, but were made in the hope, a desperate hope perhaps, that if he were able to keep himself alive something might turn up in his favour. Nor do I think it would be an undue or a fraudulent preference if there was a demand upon him, and a yielding to that demand, by making a payment which might not otherwise have been made so soon.

5. And in Sharp v. Jackson at p. 425 Lord Mansfield, is quoted as saying:

A bankrupt when in contemplation of his bankruptcy cannot by any voluntary act favour any one creditor; but if, under fear of legal process he gives a preference, it is evidence that he does not do it voluntarily.

6. If real pressure therefore is brought to bear by the particular creditors who have obtained preferences and the preferences are the direct result of that pressure and that pressure is the dominant reason for granting them the act of the insolvent in giving these preferences would not be voluntary. Very similar cases to the present have been decided in Nripendranath Sahu v. Ashutosh Ghosh [1916] 43 Cal 640, Official Assignee of Madras v. T.B. Metha & Sons and Samu Pattar v. Appachi Chetti Sons A.I.R. 1924 Mad. 180. In the Official Assignee of Madras v. T.B. Metha & Sons [1919] 42 Mad. 510 it. is laid down at p. 516:

The evidence rather shows that the insolvent was acting throughout exclusively in his own interests and with a view to keep his business going, which he could not do with-out satisfying the garnishees, creditors on the spot who were pressing him to meet his obligations and were not to be put off with excuses. In these circumstances they must be held to have been made in good faith and not to be avoided.

7. Now there is no suggestion in this case that the preferred creditors are relatives or particular friends of the insolvents; nor is there any suggestion of corruption or fraud in the matter of the negotiations for the execution of these documents. It is also not a case where the insolvent parted with any cash or liquid assets or converted any property into cash or liquid assets in favour of these particular creditors to the deteriment of the rest, nor is it a case where the insolvents admitted that they were on the brink of insolvency by themselves putting in an insolvency petition within three months of the transfers. Had any factors of that sort appeared in the present case there would he a fairly strong ground for the contention that the actual preference of these particular creditors were made for ulterior motives and therefore fraudulent. But in this case no more appears on the surface than that the immediate motive for the transfers was that particular creditors were pressing and had to be persuaded to refrain from extreme steps either by promises in the case of those who are willing to be contented with promises or by other measures in the form of sureties or security to those creditors who would be content with nothing less. The respondent's main argument is that, the insolvent's dominant intention being to stave off the crash, they (the respondents) were able to secure the mortgages because they would be satisfied with nothing less, whether or not other creditors were content with less The appellant's main argument is that as all the creditors were pressing for payment the degree of pressure cannot have been a factor influencing the minds of the insolvents and therefore their dominant view was not to fend off pressure where it was most threatening but to choose from some ulterior or private motive to favour these particular creditors at the expense of the rest. In order to decide what probably was the dominant motive that was in the insolvents' minds when they gave these mortgages we have to decide on the evidence, first, whether they then believed themselves to have been in a hopelessly bankrupt state and second, what pressure was being brought to bear upon them and by whom and how did they deal with that pressure. The evidence is volumnions but I do not propose to go through it at any great detail and shall indicate merely my general reasons. (The judgment then discussed evidence and his Lordship came to the following conclusions.) It seems to me therefore clear on the evidence that the position was that the insolvents were hoping to save their business by realization in London and were strenuously endeavouring to keep all their creditors from extreme measures. Naturally to those who were content with promises they merely gave promises; to those who would be content with nothing less than security they were compelled by circumstances to give security. Their dominant intention was, therefore, as the District Judge has found, to save their business, and I can find no ground for holding that it was to favour these particular creditors. I can see no reason for holding that they had an absolutely free and open choice unfettered by pressure and deliberately looked round the circle of their creditors and elected to put these three in a more favourable position than the others. They do not say in effect to these three:

you are our particular friends. Come and get our money out of the wreck.

8. But rather,

you will ruin us unless we give you security. We therefore reluctantly yield and give security in the hope that we shall thereby save our business and be able to pay in the long run all our creditors.

9. P.W. 1's present evidence that he preferred these creditors because of what he calls dakshinyam or because they would help him in a ' composition ' cannot be accepted. His original case in his counter to the insolvency petition was that they were not insolvents at all and there is no hint there that they were contemplating insolvency. They therefore strenuously denied being actuated at all by the idea of giving preference to any particular creditor. Even in the witness box P.W. 1 admits:

we had no intention of going bankrupt unless we were forced into it.

10. He proceeds to add that the three respondents promised to help him in a composition, but that is not consistent with his statement in chief examination that

we preferred them because respondent 1 promised to help us by advancing money for our trade.

11. It is unsafe to rely upon any statements made by them in the witness box now unless they are otherwise corroborated.

12. My finding of fact therefore in this case is as stated, namely that insolvents' dominant motive was to save themselves and their business in the hope that the business would recover for the mutual benefit of themselves and their creditors and that the present mortgages were the result of the greater pressure brought to bear on them by these three particular creditors, which compelled them, if they would save their business, to satisfy their demands first. I am therefore in agreement with the District Judge that this is not a case of fraudulent preference and I would dismiss this appeal with costs of respondents 1, 3 and 4 (separate sets).

Thiruvenkatachariar, J.

13. I have had the advantage of perusing the judgment of my learned brother. I concur in his conclusions, but on somewhat different grounds.

14. The questions raised in this appeal relate to three mortgages (Exs. 2, 3 and 4) of immovable properties which were executed by the insolvents in favour of the three respondents respectively, within three months immediately preceding the date of the petition on which they were adjudged insolvents. Those three mortgages comprised all the immovable properties of the insolvents and they were mortgaged for the aggregate amount of Rs. 19,231-4-6. At that time their total liabilities were about Rs. 55,000. Besides the immovable properties all of which were thus mortgaged to the three respondents, the only other properties which the insolvents then had were some leather goods which they had exported to London and which remained there unsold and some outstandings alleged to be due to them which according to their own estimate amounted to Rs. 5,000. The leather goods according to the insolvent's statement had cost them Rs. 21,000, but when they were sold later, they realized only Rs. 8,000. The outstandings claimed to be due to the insolvents were sold in auction by the Official Receiver and realized only Rs. 100. The petition on which they were adjudged insolvents was put in by a creditor to whom at the date of the aforesaid mortgages, they owed more than Rs. 6,000. The insolvents at first opposed the petition on the ground that their assets were sufficient to discharge all their debts. But in a subsequent statement filed by them on 17th December 1921, they withdrew their objections and prayed that they may be adjudicated insolvents; the grounds alleged being (1) that contrary to their expectations, the leather goods stocked in the London Market were sold for Rs. 8,000 only and their debts had in consequence risen to Rs. 68,000 and (ii) their properties are likely to be sold for much less price than the price estimated in their previous counter statement. They also refer to the infructuous negotiations which passed between them, the petitioning creditor and two other creditors to bring about a trust deed in their favour for adjusting the claims of all the creditors and providing a sum of Rs. 5,000 for the support of the insolvents. They were accordingly adjudicated insolvents on 17th December 1921.

15. The facts of the case leave little room for doubt that from the middle of 1920, the insolvents financial position became very much embarrassed, and that they were not able to meet their liabilities as they fell due. Prom that time onwards, we have evidence relating to three of their creditors including the petitioning creditor all of whom were pressing the insolvents hard for the repayment of the amounts due to them. The letters written by the insolvents to those creditors have been filed in the case: see M series, G series and Exs. B to F. And they show clearly that all those creditors were pressing the insolvents hard for the repayment of the amounts due to them. Those letters also show that the insolvents really apprehended serious consequences to them and to their business by the threats held out to them by those creditors. The letters addressed by those creditors to the insolvents are not in evidence. It may be that most of those demands were not made by letters but orally by sending their men to the insolvents. That may be inferred from the exhortation which appears in many of the insolvents' letters to them. 'Please do not send any of your men. I shall remit you the money soon.' But if what is really material is the state of the mind of the debtor when the demands were made. there can be little doubt that their repeated exhortations to those creditors,. 'Please do not do any harm to our business. Kindly wait a little and we shall. pay you,' clearly reveals that the insolvents felt much pressed by the demands and considered it necessary to pacify those creditors to prevent them from taking any steps which will ruin their business. It is also clear that from the beginning of 1921, the insolvents did practically no business, though they kept the doors of their business premises open, till December 1921. In this state of things, while on the one hand the insolvents were imploring the creditors above-referred to not to take any steps against them and were making repeated-promises-to them that they would pay off their debts with the money which they expected for their leather goods or to raise otherwise, they at the same time executed in favour of the three respondents,, who were also pressing them hard, the three instruments (Exs. 2 to 4) (each with very onerous terms as to interest and date of redemption) by which they transferred by way of mortgage all their immovable properties in favour of the said three creditors: with the result that except the leather goods stocked in London on which also, they had already raised substantial advances, they had practically no assets wherewith they could hope to fulfil the promise which they had lavished upon the three other creditors-aforesaid or to meet their liabilities to their other creditors.

16. Upon these facts the question arises, whether the three mortgages or any and which of them is void as fraudulent preference within the meaning of Section 54, Prov. Ins. Act. The law as to what constitutes* fraudulent preference of a creditor under Section 54, Prov. Ins. Act is now conclusively settled by the decision of their Lordships of the Privy Council in an appeal from the supreme Court of the Straits Settlements at Singapore and reported in Sime Darby & Co. Ltd. v. Official Assignee and it is therefore needless to consider the other cases on the point, English or Indian. That was a decision under Section 51 (i) of the Singapore Bankruptcy Ordinance, which is identical with Section 54, Prov. Ins. Act. Their Lordships observe that the question whether a transfer to a creditor is to be deemed fraudulent and void as against the Official Assignee in bankruptcy, depends on the answer to be given to the question, was the transfer to the creditor made 'with a view of giving him a preference over the other creditors'? With reference to the latter question they observe as follows:

There is no doubt about the law; this has long since been settled as regards the effect of the English statute, and it is common ground that the same principles are applicable to the Ordinance in Singapore.

The question to be determined is one of fact, was the dominant motive actuating the debtor in making the transfer a desire to prefer the particular creditor or was it of a different character? As the solution of this question involves an enquiry into the state of a man's mind and as it must very seldom be the case that there is direct evidence on the point, the decision generally depends on the inference properly to be drawn from the circumstances attending the transfer as established by the evidence.

A word or two must be said on the onus of proof. In their Lordship's opinion the onus is on the assignee; he has to show that the case is within the statute. A good deal was said in argument as to the shifting of the onus at particular points in the development of the case, but when all the circumstances have been ascertained so far as the parties have thought fit to ascertain them, discussion on this point becomes immaterial and the decision must be come to on the whole of the circumstances so ascertained and the question of onus only becomes important if the circumstances are so ambiguous that a satisfactory conclusion is impossible without resort to it.

17. As regards the state of mind of the insolvents in granting the three mortgages by which they transferred all their immovable properties in favour of the respondents, while at the same time they were putting off their other creditors who were equally pressing them it needs scarcely be observed that their own evidence at the trial of this case is not only discrepant, but in my opinion entirely unreliable. What their motive really was, has to be inferred from all the circumstances attending the transfers as proved by the evidence. The question of onus also is not very material in view of the fact that there is evidence on both sides on the questions at issue. It was argued for the appellants that when it is shown that the debtor while in a hopelessly embarrassed position and being pressed hard by a number of his creditors, actually prefers one or some of them and transfers to them practically all his properties to secure their debts, thereby seriously prejudicing the rights of the other creditors who can scarcely hope to realize anything from the remaining assets; and he shows this preference while all along he makes the other creditors believe that he is trying his best to meet their liabilities also, those facts are quite sufficient to make out that his dominant motive was to prefer the creditors in whose favour he has executed the mortgages. I think that this contention will appear to be of much force when the matter is looked at from the standpoint of an ordinary businessman. It is on the other hand contended for the respondents, that when several creditors are pressing the insolvent for the repayment of their respective debts and he pays off or grants a security to some of them, it may be inferred that they put greater pressure on him or that he apprehended more serious consequences to him if he did not satisfy the creditors whom he actually preferred. In this case I am unable upon the evidence to infer that the insolvents in the circumstances in which they were placed did really believe that by satisfying the demands of the respondents they could prevent the collapse of their business and that they had then no serious apprehension that such conduct on their part may precipitate a crisis by the other disappointed if not also defrauded creditors coming down upon them when they come to know of these transfers. The fact that the registration of these mortgage documents was put off for a considerable time and that one of the documents which comprised the bulk of the insolvents' properties (Ex. 2) was registered at Tinnevelly, tends to show that they did not want the transaction to become known to the other creditors whom they had been beguiling with false promises of payment and from whom naturally they apprehended immediate trouble if the transfers come to their knowledge.

18. It has no doubt been held that payment to a creditor under pressure negatives the inference that the payment was made to him voluntarily by the insolvent. But when there is pressure by several creditors about the same time and when the insolvent is unable to pay his debts as they fall due, no such inference can be drawn if payment or transfer of property to secure the debts is made only to one or some of them. I am unable to accept the respondents' contention that we have not only to see if there was pressure on the part of the creditors, but have also to embark on the enquiry as to the degree of pressure exerted by each of the creditors to get an answer to the question whether the preference was voluntary or otherwise. I find the learned trial Judge has drawn no such distinction for, he says the pressure was equally distributed and I fully agree with him. I do not also think that if one of the creditors insists on having his money and another creditor is content to take a mortgage, the granting of the mortgage would not be showing him preference as he was content with less. Such a conclusion will be clearly opposed to the policy of the Bankruptcy law, the object of which is to place all the creditors on an equal footing. When two creditors equally press for repayment of their debts and one is granted a mortgage of property and the other is left with a mere promise, it could hardly be contended that there was no preference, any more than it could be contended if he had paid all his cash to one of them alone, leaving the other to pursue his remedies in the Bankruptcy Court. For these reasons I am unable to accept the respondents' contention based upon a supposed greater amount of pressure brought to bear upon the insolvents by the three respondents or on their being content, of course for the time being, to take a mortgage of the debtors' properties for their debts instead of insisting on cash payment.

19. If the case of the respondents had rested upon these circumstances alone, I should be inclined to take a different view from that taken by the learned trial Judge and to hold that the mortgages were fraudulent preferences. But in the case of two of them, respondents 1 and 3, their defence rests also upon a {different and I think a better ground. They are creditors who from the outset had bargained for their debtors (that is, (the insolvents) giving security for their debts. It is only on that footing that they lent moneys to the insolvents. The; evidence on this point has been referred to in the judgment of my learned brother and need not be re-stated here. So far as these two creditors are concerned, they had a right to insist on the performance by the insolvents of their promise to give security for their debts; and the act of the insolvents in executing the mortgages (Exs. 2 and 4) for their debts being only in fulfilment of their previous engagement with them, cannot be held to be fraudulent preferences within the meaning of Section 54, Provincial Insolvency Act : see Ex parte. Hodgkin In Re: Softley [1876] 20 E.Q. 746.

20. The case of respondent 2 stands on a different footing. There was no antecedent agreement in his case to give him any security for his debt. The insolvents became indebted to him on a hundi for Rs. 4,750 payable into the Madras Bank, Trichinopoly, on 25th November 1920. They did not pay on that day, but got the time for payment extended till 29th December 1920. On that day they paid Rs. 1,750 and respondent 2 paid through the insolvents Rs. 3,000 into the Bank, and that hundi was thus discharged. For the Rs. 3,000 respondent 2 took a fresh hundi from the insolvents which was payable on 17th January 1921, into the Tuticorin branch of the Imperial Bank. On that day it was again renewed by another hundi which fell due on 31st January 1921 (Ex. 13). On the same date the insolvents gave a letter Ex. 12, to respondent 2, assuring him that they would honour the hundi on 31st January 1921,, and that if they failed to do so he might take proceedings in civil or criminal Courts against them. They also under took not to encumber their properties until his dues are paid off. The hundi was, however, not honoured on the due date. Notwithstanding their undertaking not to encumber their properties, they executed a mortgage which comprised properties other than those already mortgaged to respondent 1 under Ex. 1 and was a distinct breach of the insolvents' undertaking given in Ex. 12 and probably they feared that it might expose them to a criminal prosecution. It may also be that they wanted to free themselves, from an undertaking which interfered with their disposing of their properties as they may like to do. These considerations probably explain the motive for the execution by them of the mortgage of 31st January 1921 in favour of respondent 2, and it cannot be said that it has been clearly made out that the dominant motive for granting this mortgage to respondent 2 was to give him preference over other creditors. I need scarcely add that, except in cases where all the facts are clearly proved and the inferences to be drawn therefrom are also clear, the answer to the question what motive actuated the insolvents in making a particular alienation which is impeached as a fraudulent preference is by no means easy and cannot but to some extent at any rate rest on speculation. The question being one of fact, the opinion of the trial Judge who had the advantage of seeing the witnesses, should not be lightly set aside. I, therefore, concur in dismissing this appeal with costs.


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