1. This application has been taken out by the Official Assignee under Section 7, Presidency Towns Insolvency Act, for an order directing the Secretary, the M. & S.M. Railway Employees Co-operative Urban Bank, Ltd., to refund to him all sums recovered by the said Bank by way of deduction from the salary of the first insolvent towards refund of the loan taken by the said insolvent from, the bank. The facts are briefly as follows:
The first insolvent who was employed as a chargeman in the M. & S.M. Railway workshops, Perambur, was adjudicated on 29th April 1936. He was at that time drawing a salary of Rs. 202-8-0. Some time prior to his adjudication, i.e., on 19th October 1935 he obtained a loan of Rs. 1500 from the bank during the pendency of a prior insolvency proceeding. The insolvent undertook to repay the loan in 36 monthly instalments of Rs. 41-10-0 each out of his salary and authorized and requested the M. & S.M. Railway Co., to pay the said instalments to the bank out of his salary and the bank was so recovering the loan from the monthly salary of the insolvent until April 1939, when the loan account was closed and the sureties discharged.
2. The Official Assignee by his letter dated 8th October 1935, Ex. D-2, in the case, permitted the raising of the loan and by his letter dated 15th November 1937, Ex. D-1, addressed to the bank permitted it to recover the amount of the loan from the salary of the insolvent. The terms on which the loan was granted by the bank were, inter alia, that it should be guaranteed by two sureties and that the amount was recoverable from the borrower's salaries or any other money which might be due to him from the M. & S.M. Railway Co., who were authorized and requested to deduct the amount from out of his salary and to pay it over to the bank. Exhibit D-3, which is a form of Loans Passed Register, provides:
I...the borrower hereby authorize and request the M. & S.M. Railway Co. Ltd., to deduct from my monthly salary or any other money that may be payable to me by the M. & S.M. Railway Co. Ltd., such instalment or instalments of principal of the loan, or interest due on such loan, or, any other sum or sums which the M. & S.M. Railway Employees Co-operative Urban Bank, Ltd., Adam's Park, Madras, may claim as due from me to the said bank.
3. Exhibit D-5 which is the application for loan also contains a similar clause. The service agreement Ex. D-4 also contains a similar provision:
I also agree to deductions from my salary or any other moneys payable to me by the company being made on account of dues to the M. & S.M. Railway Co-operative Society and the M. & S.M. Railway Employees Co-operative Urban Bank for the use of railway schools and railway institutes for services rendered by railway medical officers and for diets supplied in railway hospitals.
4. Rule 44 of the bye-laws of the bank, Ex. D-6, provides:
It shall be competent for the board of directors to refuse to grant a loan unless the applicant shall agree in writing to permit the officer disbursing the pay to deduct instalments from his monthly pay to discharge the whole or part of the loan.
5. Rule 48 provides:
The amount of paid up share capital, deposit and any other money to the credit of a member or a past member shall be subject to a first charge in favour of the bank in respect of any moneys due to the bank from such member or past member.
6. The loan in question was not recovered as provided by this rule. On the above facts the questions that arise for consideration are : (1) What is the nature of the transaction between the insolvent and the M. & S.M. Railway Employees Co-operative Urban Bank Ltd.? Whether the transaction amounts to an equitable charge or assignment in favour of the said bank, in respect of so much of the future salary of the insolvent as is necessary for the payment of the monthly instalments? (2) What, if any, is the effect of the insolvency of the debtor on the said transaction? (3) Whether in any event the bank having recovered the loan in pursuance of the agreement such payments are protected and the bank cannot be ordered to refund the amount recovered
7. The contention of the bank is that the transaction amounted to an equitable charge or assignment in favour of the bank in respect of so much of the salary as was necessary to pay up the monthly instalments and interest thereon, and that the transaction was not in any way affected by the subsequent insolvency of the debtor. It was also contended that the salary of the insolvent did not vest in the Official Assignee in the absence of an order of Court made under Section 60, Presidency Towns Insolvency Act, that the insolvent was at liberty to deal with it in any manner he pleased and that in any case the Official Assignee having permitted the raising of the loan and the recovery thereof from out of the insolvent's salary and the recovery having been made with the full consent of the insolvent and the Official Assignee and in pursuance of an agreement with the insolvent authorizing such recovery, it was no longer open to the Official Assignee to claim a refund of the amount. It was stated that the bank had no notice of the insolvency till 12th September 1939 and that it acted perfectly bona fide.
8. Before proceeding to deal with the various points it will be useful to notice the provisions of the Presidency Towns Insolvency Act which have a bearing on the said points and the general scheme of the Act. The policy of the insolvency law is equal distribution of the assets of the insolvent among the creditors who are entitled to prove their debts in insolvency, and it expressly provides against preference of one creditor to another. Section 17 of the Act lays down that the property of the insolvent shall vest in the Official Assignee and shall become divisible among his creditors and that thereafter, no creditor to whom the insolvent is indebted in respect of any debt provable in insolvency, shall during the pendency of the insolvency proceedings have any remedy against the property of the insolvent, in respect of the debt. It saves the right of the secured creditor to realize or otherwise deal with his security in any manner.
9. Section 49 provides for the distribution of the property of the insolvent and lays down that all debts shall rank equally between themselves and shall be paid rateably 'and without any preference.' Section 52 defines the property of the insolvent and it comprises all such property as may belong to or be vested in the insolvent at the commencement of the insolvency or may be acquired by or devolve on him before his discharge. Section 57 protects bona fide transactions and saves any payment by the insolvent to any of his creditors and any contract or dealing by or with the insolvent for valuable consideration, provided that any such transaction takes place before the date of the order of adjudication and 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. Section CO deals with the pay or salary or other income of the insolvent and Clause 2 provides:
Where an insolvent is in receipt of a salary or Income other than aforesaid, the Court may at any time after adjudication and from time to time, make such order as it thinks just for the payment to the Official Assignee, for distribution among the creditors of so much of such salary or income as may be liable to attachment, the execution of a decree or of any portion thereof.
10. It will be apparent from the foregoing provisions that the insolvency law aims at equal and rateable distribution of the property of the insolvent among the creditors who are entitled to prove their debts in insolvency without any preference of one creditor over another, that the property of the insolvent comprises also what is known as the after-acquired property, and that payments made by the insolvent to any of his creditors will be protected provided they are made before his adjudication and the creditor has no notice of the insolvency. I shall now proceed to deal with the several questions that arise in the case in the order set out by me. First, as regards the nature of the transaction between the insolvent, the bank and the M. & S.M. Railway Co., the question is whether an equitable charge or assignment is created in respect of the insolvent's future salary. This depends upon the construction of Exs. D-3, D-4, D-5 and D-6. Exhibits D-3 and D-5 employ practically the same language and they contain an authorization and request to the M. & S.M. Railway Co., to deduct the instalments from out of the insolvent's salary every month. By the service agreement, Ex. D-6, the insolvent agrees generally to such deductions. The documents do not contain any promise to the bank to pay the loan...out of the future salary. They merely authorize and request the M. & S.M. Railway Co., to with hold the amount of the monthly instalments and to pay it over to the bank. Reference may be made to B. 48 of the bye-laws of the bank, Ex. D-5, which expressly provides for a charge on certain amounts standing to the credit of the insolvent, viz., share capital, deposit, etc. The language of Rule 44 is different and does not like Rule 48 provide in express terms that a charge is created. But apart from the contrast with the language of Rule 48, and taking Rule 44 by itself, it does not appear that the documents disclose anything more than a 'pay order.' Rule 44 speaks of an agreement in writing to permit the officer disbursing the pay to deduct the instalments from his monthly pay to discharge the whole or part of the loan. The expression 'to permit' is significant and that taken along with the expression 'authorize and request' in Exs. D-3 and D-5 lends support to the view that the transaction amounts to nothing more than a mere authority or request by the debtor to his employees to pay the bank.
11. The decision in Ex parte Hall In re Whiting (1878) 10 Ch.D. 615 may be usefully referred to in this connexion. In that case a customer borrowed 200 from his bankers on an agreement that the loan should be paid out of the rent of a farm which would become due to him in Michaelmas and he gave a letter to the bank addressed to the tenant by which he authorized and requested the tenant to pay 200 to the bankers when the Michaelmas rent became due. The bankers forwarded the letter to the tenant. Meanwhile, the customer was adjudicated bankrupt. It was held in that case that the letter amounted only to a revocable authority to pay the rent to the bankers and that it was revoked by the bankruptcy. Jessel, M.R. says in that case:
The only thing we can look at is the letter itself which authorizes and requests the tenants to pay 200 to the bankers. It amounts to nothing more than a request to pay the bankers. On the face of it, it is simply an authority revocable at any time and of course it was revoked by the bankruptcy.
12. There is also another aspect of the matter which may be considered, viz., that the agreement in the case does not relate to a fund in existence but to a future contingent fund which may or may not come into existence oven at a future date. It has no doubt been held that a promise to pay a debt out of a specific fund in existence at the time, whether payable in presenti or in futuro, amounts to an equitable assignment of the fund so as to entitle the assignee of the fund to claim payment out of that fund. But that principle applies only to cases where the fund was in existence on the date of the assignment though payable on a future date and will not apply to a future contingent fund. 'A man cannot in equity, any more than at law, assign what has no existence :' Collyer v. Isaacs (1881) 19 Ch. D. 342. It has been held in Field v. Megaw (1869) 4 C.P. 660, that a promise to pay out of moneys when received, i.e., a promise to pay when the debtor receives a debt due to him from a third person, does not constitute an equitable assignment so as to charge the debt in the hands of such third person. I therefore hold there was no charge or completed assignment in this case. Though 'a man cannot in equity, any more than at law, assign what has no existence,' he
can contract to assign property which is to come into existence in the future, and when it has come into existence equity, treating as done that which ought to be done, fastens upon that property and the contract to assign thus becomes a complete assignment.
13. That is, in the case of future property, though the assignment' may not operate in presenti, it may operate as and when the property comes to existence. Until then the assignment constitutes only a contract in respect of the future property and equity attaches to it as soon as the property comes into existence, when the contract to assign becomes a completed assignment. As was observed by Jessel M.R. in Collyer v. Isaacs (1881) 19 Ch. D. 342:
The assignment in fact constituted only a contract to give him the after-acquired chattels and until the property comes into existence the contract remains only a contract by which the party entering into it will be bound, and when the property comes into existence it is a contract for the breach of which he will incur liability.
14. In that case there was a bill of sale by the debtor transferring for value to a creditor all the chattels at his place of business and all other chattels which may at any time be brought thereon. The creditor did not prove in bankruptcy but claimed certain chattels which were brought into the premises after the insolvent's adjudication. To the same effect are the following observations of Lindley L.J. in Ex parte Nichols In re Jones (1883) 22 Ch. D. 782, which was a case of an assignment by a trader of the future receipts of his business:
It is an agreement to assign to Younger & Co., not property of Jones and Barber, but money which would become due to them under the arrangement between them and the Railway Company. It is a mere agreement for the breach of which no doubt an action would lie.
15. If therefore a person agrees to pay his creditor out of his future salary or income which is contingent on his earning the same, the transaction amounts to a mere contract to assign until the salary or income comes into existence and will become complete only after the salary becomes due or after the income accrues and not before. Applying that principle to the present case, it will be seen that in respect of salary accruing subsequent to insolvency there was only a contract to assign as and when it was earned and that there was no completed assignment on the date of the adjudication. If that is so, the liability of the insolvent or his estate for breach of such contract will be only in damages and the creditor will not be entitled to enforce the transaction as against his subsequent salary, at any rate not against the assignee in bankruptcy.
16. The result of the foregoing discussion is that on the date of the insolvency there was only an authority or direction and request by the debtor to the M. & S.M. Railway Co., to pay a portion of his salary to the bank or at best a contract to assign the future salary as and when it was earned. There was no completed assignment or charge. What then is the effect of the insolvency on such direction to pay or contract to assign? Is it sufficient to give the creditor a right to the fund which will prevail over the rights of the Official Assignee? As was pointed out in Ex parte Hall In re Whiting (1878) 10 Ch.D. 615 already referred to 'it is simply an authority revocable at any time and of course it was revoked by the bankruptcy.' Treating it as a contract to assign, even then, as pointed out in Collyer v. Isaacs (1881) 19 Ch. D. 342, when the party who contracts becomes bankrupt the liability in respect of the contract is a liability provable in bankruptcy.
17. The observations of Lindley L.J. in Ex parte Nichols In re Jones (1883) 22 Ch. D. 782 may also be usefully referred to:
It is mere agreement for the breach of which no doubt an action would lie but which cannot prevail against the title of the trustee so far as regards payments received by the Railway Company under it after his title accrued.
18. To the same effect are the observations of Lopes L.J. in Wilmot v. Alton (1897) 1 Q.B. 17:
If the amount in question had been a debt which had accrued due at the date of the bankruptcy the case would have been different. But that was not so. In order to determine the right which was assigned to the plaintiff it is necessary to consider the terms of the contract. Having regard to those terms it appears to me dear that there was only a debt which might or might not become due to the assignor in future according as the conditions of the contract were or were not fulfilled. That being so the case appears to me to come directly within the decision in Ex parte Nichols In re Jones (1883) 22 Ch. D. 782.
19. The position is well summed up by Mulla in his book on the Law of Insolvency at p. 348, Section 520:
The effect of the subsequent insolvency of an assignor of future or after-acquired property may now be considered. If after-acquired property comes into existence prior to the insolvency of the assignor, the equitable assignment is complete and the Official Assignee will take the property subject to the assignment. If the property comes into existence subsequently to the insolvency and before the discharge of the insolvent, the Official Assignee will take the property subject to the assignment if the right of the assignor to recover that which is claimed by the assignee had become complete prior to the insolvency but not if the right had not become complete before then. In the latter case the assignee has no right to the property. Thus if a debt which is to fall due at a future time is assigned and the debt only falls due after insolvency the assignee has no right to it.
20. This takes me to the next point, viz., how far the insolvent was competent to deal with his subsequent salary in the absence of an assignment or charge in favour of the bank and how far can the bank claim protection in respect of the payments made to it from out of the subsequent salary. It was argued that the insolvent was absolutely entitled to his after-acquired properties and can deal with and dispose of them as he pleased unless and until the Official Assignee intervened and that all dealings and transactions had or entered into by the insolvent before such intervention were valid and cannot be questioned by the Official Assignee or by the creditors. It was further argued that so far as the salary was concerned, under the special provisions of Section 60, Presidency Towns Insolvency Act, it did not vest at all in the Official Assignee in the absence of an order of Court fixing such portion of the salary as it thinks fit for payment to the Official Assignee for distribution among his creditors, and that at any rate when an order has been made by the Court fixing what proportion of the salary should be paid to the Official Assignee month after month the balance of the salary was at the absolute disposal of the insolvent and that the Official Assignee cannot claim anything more. The law in regard to after-acquired properties is that any dealing by the insolvent with reference to such property will be protected if the assignee acts bona fide and pays value, no matter that he has knowledge of the insolvency. In the present case, it cannot be denied that the bank had paid value. It is also claimed by the bank that it had no notice of the insolvency until April 1939 and that it advanced the loan in the ordinary course of business prior to the insolvency. The averments are not controverted on behalf of the Official Assignee.
21. We have next to consider whether the payments made to the bank are protected. No doubt a distinction has been made between the insolvent's after-acquired property in general and his pay, salary or other income, by reason of the provisions contained in Section 60 which corresponds to Section 51, English Bankruptcy Act of 1914 and Section 53, Bankruptcy Act of 1883. What then is the position of the Official Assignee and the creditors with reference to his subsequent salary? Does the whole of it vest in the Official Assignee subject to the insolvent's retaining a sufficient portion necessary for the maintenance of himself and his family or is it only so much of it as is liable to attachment in execution of a decree which vests in him or is it that no part of it vests in the Official Assignee until an order is made by the Court fixing so much of it as it considers proper? Judicial opinion on the subject is not uniform. It was held in Ex parts Huggins In re Huggins (1882) 21 Ch. D. 85 by the Court of appeal on a construction of the Bankruptcy Act of 1869 that, the effect of Sections 15 and 17 was to vest in the trustee all property including those dealt with by Sections 87 to 95 which relate to salaries, income, etc., (corresponding to Section 60, Presidency Towns Insolvency Act), but subject to the qualifications and exceptions introduced by those sections. But the decision in In re Shine; Ex parte Shine (1892) 1 Q.B. 522, seems to point in the other direction. That was a case in which an actor agreed to act in a theatre on a salary of 30 a week payable weekly and became bankrupt. He entered into an agreement with the theatre manager that he should retain 20 of his salary and discharge all his debts. The question was raised as to how far the arrangement was operative as against the trustee in bankruptcy. In upholding the arrangement, Esher, M.R. says:
With, regard to the particular salary or income which does not pass to the trustee the bankrupt had a right, notwithstanding the receiving order to make any bargain he chose.
22. Bowen L.J., remarks dealing with Section 53(2):
Until the sub-section was put in force against him by diverting to the use and advantage of the creditors that which was prima facie up to that moment his own, he had a perfect right, although he was bankrupt, to make any bargain he pleases with any person as to the remuneration which he was to receive for his personal services.
23. The only Indian decision directly bearing on the point is the decision of a single Judge in In the matter of C.M.J. Donaghue ('85) 19 Bom. 232, which turned on the construction of 11 and 12 vict., Chap. 21, Sections 7 and 27. It lays down that the Official Assignee is not entitled to the subsequent salary or income except by means of an order obtained under Section 27 (corresponding to Section (So). I am of opinion that only so much of the salary as is ordered by the Court under Section 60(2) to be paid to the Official Assignee vests in him. In this case an order having been made under Section 60(2) of the Act, only the amount ordered by the Court vests in the Official Assignee; at any rate the balance was at the absolute disposal of the insolvent. Assuming that the rest of the income did not vest in the Official Assignee, can the insolvent pay one creditor in full out of his subsequent salary? No doubt, the insolvency law aims at equal and rateable distribution of the assets of the insolvent among his creditors without any preference of one creditor over another. The bank in the absence of any assignment or charge is only in the position of an ordinary creditor entitled to prove in the insolvency for its debt. It is opposed to the very spirit of the insolvency law that a creditor who is entitled merely to share equally with the other creditors in the distribution of the assets of the insolvent should receive payment in full of his amount. He cannot be allowed to have any such advantage by any act of the insolvent. But the allocation under Section 60, Clause (2) of the Act, has been made and the rest of the salary is absolutely at the disposal of the insolvent. If he had spent the whole of it himself the Official Assignee cannot complain. On this ground, I think the Official Assignee cannot recover from the respondent the moneys in question.
24. There is one other aspect, viz., that the letter of the Official Assignee, Ex. D-1, may amount to a voluntary payment. By this letter the Official Assignee permitted the bank to collect the amount from the railway company and the bank did so. Suppose the Official Assignee had collected the whole amount and that he afterwards paid the sums to the bank they would be voluntary payments which the Official Assignee cannot recover. I am of opinion in this case the Official Assignee's conduct does bring the case within the rule that a voluntary payment cannot be recovered.
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25. The allocation was evidently fixed very low by the master on the representation that the payment to the respondent bank should be taken into account when fixing the allocation. I have held that the respondent had no preferential right to be paid these sums from the salary. The first one hundred rupees and a half of the excess over one hundred are exempt from attachment; and there is no reason why the balance at least should not be required to be paid for the benefit of the creditors. That should be the ordinary rule in fixing the amount under Section 60(2). In the result this application is dismissed but without costs as the respondent has failed in many of its contentions. The Official Assignee will have his costs out of the estate.