1. This is a motion by the Official Assignee, in the Insolvency of V.M. Appachi Chetti and Sons, that a transaction of 9th December, 1918, under which security was given to the present appellant, Samu Pattar, called the Garnishee, for Rs. 43,668-5-11 should be set aside, as a fraudulent preference, or in the alternative, on the ground that it was not a bona fide transaction, in that it offends against the laws of bankruptcy.
2. The matter came before Phillips, J., and it was tried in the following manner. The Official Assignee's report was read and the affidavits filed on behalf of the Garnishee were presumably read and then the deponents thereto were put into the witness-box and cross-examined on behalf of the Official Assignee, then the bankrupt was called by the Official Assignee and nominally examined but really cross-examined on his behalf; then two further witnesses were called on behalf of the Official Assignee and a speech was made on behalf of the Garnishee and Counsel for the Official Assignee replied. In my judgment that procedure is not correct, and if it is the usual procedure it should be altered. The onus is originally on the Official Assignee. A motion of this kind, with witnesses against the bankrupt, should be tried practically, as if it were an action. The case should be opened on behalf of the Official Assignee, and his report read, at any rate as if it were a pleading. Whether it is admissible as prima facie evidence of the facts under Rule 117 of the Bankruptcy Rules is a matter, which I should wish to consider when the point arises. The evidence to be called on behalf of the Official Assignee must be called in its proper place. If it is evidence that can be properly reserved to be used to rebut the evidence given on behalf of the Garnishee, it can be so reserved. The Official Assignee can of course, if he so pleases, put in the respondent's affidavits and rely upon them. When he has closed his case, the case for the respondent should be opened, the affidavits, if not already read as the examination-in-chief of the deponents, supplemented with the leave of the Judge by oral evidence. If notice has been given for them to attend, they can then, and not till then, be cross-examined. Further evidence can with permission be given on the Garnishee's behalf, and evidence in proper cases in rebuttal may be then called and the closing speeches made. The insolvent can be called as a witness by either party; if called, although usually considerable latitude is given, he must be examined by the party calling him and not cross-examined, unless he has shown himself hostile and permission is given to cross-examine. The other side can of coure cross-examine him.
3. The procedure in the present case was, in my judgment, irregular in that the Garnishee and his witnesses were cross-examined, before the completion of the Official Assignee's case. The Garnishee like any other defendant is entitled to hear the case he has to meet, and the Official Assignee like any other plaintiff, has to make out his case before the Garnishee can be called upon to answer it. The Official Assignee has this advantage that he has the Garnishee's case before him on oath, and can, if he wishes, use the Garnishee's affidavit as evidence.
4. This matter is of considerable importance, as it is the practice--how far this practice is right I do not discuss now--to proceed by motion in practically all cases by the Official Assignee against strangers.
5. Turning to the questions in dispute in this case, it is co be observed, that! the Official Assignee's report was directed mainly to establishing the second point and not to establishing fraudulent preference; and though the two points were kept alive until the end the learned Judge decided both in favour of the Official Assignee, the second point being, as far as I can understand it, that the Garnishee obtained this security, by promising to advance money to the insolvent and then did not carry out that promise properly and that, therefore, the transaction is a fraud on the Bankruptcy Law. I have failed to discover on what principle of law the decree on this point was based and it is enough to say that although he had a decree in his favour on the point, the learned Advocate General refused even to argue in support of it.
6. This leaves the question of fraudulent preference, Section 56 of the Presidency Towns Insolvency Act avoids all transfers of property, or payments made, by any person unable to pay his debts, as they become due from his own money, in favour of any creditor, with a view of giving creditor a preference over the other creditor, if such person is adjudged insolvent, on a petition presented within three months after the date thereof. In this case, the insolvent was undoubtedly unable to pay his debts, as they became due, from his own money and in giving the security in question he preferred the Garnishee to the other creditors. But the question remains whether he did so, with a view of giving him that preference. This has been explained to mean, looking at the mind of the bankrupt at the time, was there dominant view to give a preference to a particular creditor--See Shrap v. Jackson  A.C. 419 and The Official Assignee, of Madras v. T.B. Mehta & Sons  42 Mad. 510. If his real object was to continue grading, or to save himself from serious consequences, or if he was really induced to make the payment, or give the Security, by the pressure of the creditor, and those were the dominant factors in his mind and the desire to prefer and the giving of the preference were incidental only the preference is not a fraudulent preference, within the meaning of the section. The insolvent, the Garnishee and his son, the Bills Manager of the Madras Bank, who negotiated the matter on his father's behalf, have all been called as witnesses and all treated by the trial Judge as unreliable. Two agents or managers of the insolvent also gave evidence and their evidence was accepted by him. Looking at all the evidence and treating it all, except that of the last two witnesses, as suspicious and to be carefully scrutinised, I think, the real relevant facts are that the insolvent was seriously involved, by reason of the fall in the market price of piece-goods in Madras in September, 1918, such fall being increased on the signing of the Armistice in November and Was being pressed by his creditors in Bombay and elsewhere. Two hundies, which he had given to the Garnishee had been dishonoured a very serious matter for a trader--and there were other pressing claims. He had large quantities of piece-goods, under mortgage to banks and other persons and unless the market recovered, he was hopelessly insolvent. But I am convinced that he believed that the market was going to recover. Whether he had reasonable grounds for that belief is to my mind immaterial. On December the 4th, his brother, who had a similar business, filed his petition. The Garnishee was getting very anxious as he was owed about Rs. 46,000 and was totally unsecured. About December the 3rd, there was an interview at Madras, at which he pressed for payment or security and promised that, if he was secured, he would render further assistance to the insolvent by making further loans. About that date, the insolvent left Madras on private affairs. The bankruptcy of his brother made the Garnishee still more anxious and he sent his son the Bills Manager of the Madras Bank on a night's journey to Velampalai-yam to interview the insolvent and try to get from him payment or security. I am satisfied at the ensuing interview the son pressed very hard for payment or security and probably also threatened to take action, which would have had the effect of bringing the insolvent down, if he was not satisfied. I have no doubt that the bankrupt was speaking the truth, when he said that the son would not have gone away without a promise of security. I am also satisfied that at that time the bankrupt was doing all that he could to avoid bankruptcy and to carry on his business, until the market righted itself. Further, the ton held out great inducement to the is-solvent by promises, perhaps somewhat vague, that if his father was satisfied, he would not only induce his father to make further advances, but would also use his influence with the Madras Bank to induce them to render financial assistance to the insolvent.
7. I agree with the argument of the learned Advocate General that if all this amounts to a request for a preference, and a promise that if a preference is given, help will be forthcoming, not to enable the insolvent to continue his business but either merely to stave off the bankruptcy for a short while, or to assist in reinstating him after the bankruptcy, it would be right to say that the dominant view was to prefer; and further, I think, that such a transaction might probably be set aside as a fraud on the Bankruptcy law. But if the real intention and hope was to avoid bankruptcy altogether, then, I think, that was the dominant view, and the preference merely incidental. That pressure also had a considerable bearing on the insolvent's action. I have little doubt, because he must have known that if he did not keep this particular creditor quiet, the fact of the bills being dishonoured had only got to be made public to bring about immediate bankruptcy. In my judgment, the true view in this case is that the dominant view was to keep this particular creditor quiet and to get assistance from him and his son, to enable the insolvent to keep going and so avoid bankruptcy altogether; and this is borne out by the fact that the insolvent proceeded to keep other pressing creditors quiet, by payment or security and to carry on business, as far as possible, in the ordinary way for a month, when he called his creditors together and tried to persuade them to allow him to goon still further, a proposal which would have been accepted but for the refusal of certain Bombay creditors. Within two months, the market had righted itself sufficiently, to have enabled the business to be carried on and possibly he would have become entirely solvent, but of course it was too late.
8. I think that on the evidence the Garnishee did not give a liberal interpretation to his promise of further help, and he got payment of Rs. 5,000, his debt, in a manner which does not commend itself to me. But as I find that the dominant motive was not to give a perference to the Garnishee, this motion ought to have been dismissed with costs. It follows that this appeal will be allowed with costs here and below.
9. I agree. In this case I consider the following facts as established by satisfactory evidence, and affording the only reasonable conclusions on that evidence.
(1) That from October, 1918 onwards, the Garnishee Samu Pattar was nervous about his commitments with his debtor Muthukumara Chetty, and was becoming annoyed (see letter of 30th October, 1918) at his continual delay in meeting his obligations to him, amounting to about Rs. 43,000;
(2) that on 3rd December, 1918. he became so anxious that he left Palghat in search of his debtor, and when he did not find him at his place of business at Tirupur, followed him up to Madras, and interviewed him there for some days, probably pressing for payment, but not succeeding in getting any very definite arrangement made;
(3) that on4th December, 1918 his debtors' brother, partner in a separate but similar firm, went insolvent ;
(4) that the Garnishee probably then became more importunate, ana insisted, as he says, on cash payments, or, if that was not possible, on some security for his debt ;
(5) that when the debtor left on 7th December, 1918, for Tirupur, the Garnishee sent his son, Narayana Aiyar, to continue the pressure on him and that his son then, clearly, as stated by the debtor himself, got him to agree to give security for his father's debt, made him understand that unless he got a letter to the debtor's agent in Madras, arranging for the security, he would not let him, and himself made some promise that he would get his father, in consideration of his security, to advance the debtor some cash to enable him to stave off the more pressing of his creditors in Bombay;
(6) that while no definite figure of advance was then fixed upon, the debtor in his letter (now lost) to his Madras Agent, must have mentioned such a promise of advance and probably suggested to his agent to stand out for Rs. 25 000;
(7) that his agent Vijayaraghava-chari, when he received, his letter, accordingly did so, demanding from Samu Pattar an advance of Rs. 25,000 for the Bombay creditors, but was put off by Samu Pattar, who said, not that there was no undertaking by him to advance money, but that he would pay some advance, after the business of the pledge was carried through;
(8) that in order to get his security on 10th December, 1918, the Garnishee had to take over from the Indian Bank a loan of one lakh on pledged goods;
(9) that when Vijayaraghavachari found out that in Maya Nadar's deal on 9th December, 1918, the Garnishee, himself had benefitted to the extent of Rs. 5,000 by having a hundi to that amount, drawn by him on his debtor, honoured; he indignantly called on the Garnishee to make good his promised advance;
(10) that the Garnishee finally, in pursuance of the undertaking given by his son, on 13th December, 191$ did advance Rs. 15,000 on a promissory note, signed by the debtor and another, a substantial merchant, which money was remitted by the debtor to the Bombay creditors;
(11) that the debtor was able to carry on his business till 8th January, 1919, when his Bombay creditors put him into the Insolvency Court, though his; Madras creditors were willing to wait;
(12) that there is, until we come to the matter of this pledge, no suggestion that the debtor's methods of business were underhand or that his failure was due to any unscrupulous or fraudulent methods, but solely to the slump in piece goods prices at the time, and that the failure might have been avoided if prices had recovered;
(13) that it was then difficult for any one to decide whether prices would or would not recover, while the Madras creditors were willing to give the debtor time to allow them to recover; and it is apparent that the piece-goods were not considered valueless, or the Garnishee would not have incurred a further debt of one lakh on them.
10. On these facts, I have to decide whether the Official Assignee has established a proof that the security given by the debtor to the Garnishee, one month before his insolvency, was a fraudulent preference under Section 56 of the Presidency Towns Insolvency Act.
11. It appears to me clear on these facts that the debtor's firm on 10th December, 1918, was not hopelessly insolvent, that the debtor was genuinely endeavouring to carry on, was trying to raise money to satisfy the more importunate creditors in Bombay, and that the Madras creditors were willing that he should so carry on. It appears to me further that the security secured by the Garnishee was definitely in consideration of a promise by the Garnishee's son to persuade his father to advance the debtor money, not for himself, but for his Bombay creditors, i.e., to assist in tiding him over the crisis, and that as a matter of fact that promise was carried out later by the Garnishee.
12. I cannot accept the learned Advocate General's contention, that the advances of Rs. 15,000 had nothing to do with the security given to the Garnishee. The fact that he was amply secured for that advance cannot affect the view that the debtor already had a promise of an advance, when he agreed to the Garnishee's previous debt being secured; and I do not think that the Garnishee would have advanced a further sum even on adequate security, to a man ex hypothesi hopelessly insolvent, unless he had some previous consideration thereror.
13. Nor can I agree that the debtor was then hopelessly insolvent, and therefore the preference given to Samu Pattar must have been actuated by some ulterior motive to prefer him and oblige him, at the expense of other creditors, though no doubt be was unable to pay from his own money his debts as they fell due. I have shown that even a month later than the date of the giving of the security, the Madras creditor were willing to give the debtor a chance of recovery. This fact, viz., that the ebtor was trying to keep his feet, coupled with the following, that the propelling force towards this arrangement came from the Garnishee that the debtor had given the security in return for some definite promise of advance to enable him to stave off the Bombay creditors and that he used the advance for that very purpose, and not for himself, that no close connection or friendship or anything but a long business relationship is found as between the debtor and Garnishee, people of wholly different castes, lead me to conclude that the giving of the security was induced from the Garnishee, and by a promise that, if he gave it, he would obtain some money to enable him to stave off the threatened insolvency, These, to my mind, were the dominant motives in the debtor's mind, not any idea of conferring a favour on the Garnishee at the expense, of his other creditors, but rather a real and genuine hope that in the outcome the giving of the security to this Garnishee would result in the recovery of his business to the benefit of all his creditors.
14. The law on the point is clear; see Sharp v. Jackson  A.C. 419 and The Official Assignee, Madras v. T.B. Mehta and Sons  42 Mad. 510. Where the dominant motive is not to prefer one creditor at the expense of the rest, Section 56 has no application, and the obligation incurred by the debtor is lawful and must be upheld in a Court of law, since he had no intention to act in fraud of the law.
15. I, therefore, agree that the appeal must be allowed with costs here and below, costs in the Original Court to be on the higher scale.