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The Official Receiver of Coimbatore Vs. Palaniswami Chetti Alias Ponnuswami Chettiar and anr. - Court Judgment

LegalCrystal Citation
SubjectCivil
CourtChennai
Decided On
Judge
Reported inAIR1925Mad1051; 88Ind.Cas.934; (1925)49MLJ203
AppellantThe Official Receiver of Coimbatore
RespondentPalaniswami Chetti Alias Ponnuswami Chettiar and anr.
Cases ReferredOfficial Receiver Tinnevely v. Sankaralingam Mudaliar
Excerpt:
provincial insolvency act (v of 1910), sections 2(a), 21, 28, 58 - 'creditor' in section 28(a), meaning of--'realise' in section 28(6), meaning of--insolvency court, power of, to stay proceedings pending against insolvent--mortgage suit, whether affected by order of adjudication--application under section 53 to avoid transfer, whether ousts jurisdiction of civil court to proceed with mortgage suit--jurisdiction. - securitisation & reconstruction of financial assets & enforcement of security interest act, 2002 [c.a. no. 54/2002]section 17; power of tribunal to impose condition relating to deposit for grant of stay of auction held, there is no specific provision made under section 17 of securitisation act or under any other provisions of the said act empowering the tribunal to pass any.....devadoss, j.1. this appeal is by the official receiver of coimbatore against the order of the district judge refusing to stay proceedings in o.s. no. 11 of 1924 on the file of the principal sub-court, coimbatore, pending the disposal of i.a. no. 161 of 1924. the respondents who are secured creditors filed o.s. no. 11 of 1924, in the principal sub-court of coimbatore against the insolvent. the official receiver was added as a party inasmuch as the defendant had been adjudicated an insolvent in i.p. no. 102 of 1921. the official receiver who had information that the mortgage in favour of the respondents was a voidable transaction under section 53 of the provincial insolvency act moved the district court for declaring that the mortgage was void against him. pending the disposal of his.....
Judgment:

Devadoss, J.

1. This appeal is by the Official Receiver of Coimbatore against the order of the District Judge refusing to stay proceedings in O.S. No. 11 of 1924 on the file of the Principal Sub-Court, Coimbatore, pending the disposal of I.A. No. 161 of 1924. The respondents who are secured creditors filed O.S. No. 11 of 1924, in the Principal Sub-Court of Coimbatore against the insolvent. The Official Receiver was added as a party inasmuch as the defendant had been adjudicated an insolvent in I.P. No. 102 of 1921. The Official Receiver who had information that the mortgage in favour of the respondents was a voidable transaction under Section 53 of the Provincial Insolvency Act moved the District Court for declaring that the mortgage was void against him. Pending the disposal of his application, he moved the District Court under Section 10 of the CPC for stay of the proceedings in O.S. No. 11 of 1921. The District Judge held that Section 10 did not apply to the application and dismissed it. The application was made in the insolvency petition and, therefore it was made to the District Court exercising insolvency jurisdiction. There is no provision in the Provincial Insolvency Act corresponding to s, 18 of the Presidency Towns Insolvency Act empowering the Insolvency Court to stay proceedings pending against the insolvency before that Court or any other Court subject to the superintendence of that Court. Section 29 of the Provincial Insolvency Act gives power to the Court before which a suit or other proceeding is pending against a debtor, to stay the proceeding or to continue it on such terms as the Court may impose on proof that an order 6f adjudication has been made against the debtor. It is open to the Sub-Court of Coimbatore to stay the proceedings in O.S. No. 11 of 1924 pending the disposal of the application to the District Court by the Official Receiver under Section 53 of the Act. The order of the District Judge, therefore, is right.

2. It is contended on behalf of the appellant that on the making of the application by the Official Receiver under Section 53 of the Provincial Insolvency Act, the Civil Court in which the suit is pending against the insolvent ceases to have jurisdiction over the suit, in other words, the jurisdiction of the Civil Court to try the suit is taken away the moment an application is made by the Official Receiver for a declaration under Section 53 of the Provincial Insolvency Act. The contention of the appellant is that Section 28 is subject to the provisions of Section 53 of the Act. Under Section 28, Clause 6, a secured creditor is exempted from the operation of Section 28. It is contended for the appellant that this must be read subject to the provisions of Section 53. This contention is on the face of it untenable. Under Section 28, Clause (2) 'on the making of an order of adjudication, the whole of the property of the insolvent shall vest in the Court or in a Receiver as hereinafter provided and,...no creditor to whom the insolvent is indebted in respect of any debt provable under this Act shall, during the pendency of the insolvency proceedings, have any remedy against the property of the insolvent in respect of the debt, or commence any suit or other legal proceeding except with the leave of the Court and on such terms as the Court may impose.' In the case of a creditor he cannot commence or prosecute in respect of his debt without the leave of the Court. But Clause (6) is clear in its terms 'Nothing in this section shall affect the power of any secured creditor to realise or otherwise deal with his security, in the same manner as he would have been entitled to realise or deal with it if this section had not been passed.' It would be imputing absurdity to the Legislature to hold that Clause 6 of Section 28, which is so clear in its terms should he read as meaning that the secured creditor could not file a suit for recovering the amount secured on the property of the insolvent. The word 'creditor' in Clause 2 means only creditor as defined in Section 2(a) of the Act and does not include secured creditor.

3. Mr. Sampath Iyengar's contention is that under Clause 6 of Section 28 a creditor can only realise his security by private sale or transfer of the security to some other person, and he cannot file a suit for recovering the amount secured. This contention is on the face of it untenable for under Section 69 of the Transfer of Property Act, the right of private sale can be given to mortgagee, where the mortgage is an English mortgage to which transaction neither a Hindu, Muhammadan, or Buddhist, or a member of any other race, sect, tribe 'or class from time to time specified in this behalf by the Local Government with the previous sanction of the Govern or-General in Council, in the Local Official Gazette is 2 party; where the mortgagee is the Secretary of State for India in Council' and where the mortgaged property or any portion thereof is situate within the towns of Calcutta, Madras, Bombay, Karachi and Rangoon, the power of private sale of the mortgage can be exercised by the mortgagee, and in no other case can the power of sale in a mortgage be exercised by the mortgagee; in other words, the provisions of Section 69, do not apply to mortgages in the mofussil except in the case of an English mortgage as above described and except in the case of a mortgage in favour of the Secretary of State for India in Council. It, therefore, follows that Section 28, Clause (6), which is applicable only to the mofussil, could not be said to refer to the right of a mortgagee to effect private sale of the property. The word 'realise' must be understood in the ordinary sense of a secured creditor realising his security by a suit. The right of a secured creditor to institute a suit or to proceed with the suit already commenced is not taken; away by Section 21 by reason of the adjudication of the mortgagor as an insolvent. Section 51 of the Act throws light upon this question. Section 51, Clause (1) is 'where execution of a decree has issued against the property of a debtor, no person shall be entitled to the benefit of the execution against the Receiver except in respect of assets realised in the course of the execution by sale or otherwise before the date of the admission of the petition.' Clause (2) says: 'Nothing in this section shall affect the rights of a secured creditor in respect of the property against which the decree is executed.' It, therefore, follows that in the case of an ordinary creditor, he will be entitled to the assets realist din execution of his decree if tire assets are realised before the admission of the insolvency petition. But, in the case of a secured creditor, he could proceed with the execution of his mortgage-decree even after the admission of the insolvency petition and will be entitled to the sale proceeds of the mortgaged property notwithstanding the pendency of the insolvency proceedings. It is not necessary that the executing creditor in order to get the fruits of the execution proceedings should have sold the property before the admission of the insolvency petition. His right to proceed with execution till he realises the amount due to him is not taken away by the admission of an insolvency petition. It is, therefore, clear that the right of a secured creditor either to commence a suit or to proceed with the suit and to proceed with the execution of his mortgage-decree is not taken away by the admission of an insolvency petition, or by the adjudication of the mortgagor, as an insolvent.

4. The contention for the appellant is that the proper forum for the determination of the questions arising under Section 53 is the Insolvency Court, and, therefore, the Civil Court cannot proceed with the mortgagee's suit against the insolvent. For the determination of questions arising under Sections 53 and 54, no doubt the proper forum is the Insolvency Court. In a suit on a mortgage in the civil Court questions arising under Sections 53 and 54 would be out of place The ordinary civil Court is only concerned with the question whether the mortgage document was executed by the mortgagor and whether the whole or portion of the consideration passed; and if the Court finds that the mortgage-deed was executed by the mortgagor and the consideration passed, it will pass a decree in favour of the mortgagee for the amount of consideration which is proved to have passed; and the onus of proving want of consideration in such cases is upon the mortgagor. In the case of Section 53, it the mortgage is within two years of the adjudication of the mortgagor as an insolvent the onus of proving good faith and valuable consideration is on the mortgagee. The Insolvency Court, therefore, is the proper Court for considering whether the transaction is bad under Section 53 of the Act. Vide Mariappa Pillai v. Raman Chettiar 10 L.W. 59.

5. The question for determination is whether the jurisdiction of the Civil Court to try a mortgage suit is taken away on the presentation of an application to the Insolvency Court under Section 53 of the Act. There is nothing in the Insolvency Act itself to support the contention that the jurisdiction of the Civil Court to try the mortgage suit is taken away. The principal Sub-Court of Coimbatore being seized of O.S. No. 11 of 1924 has jurisdiction to try the suit. It is urged that if it passed a decree in favour of the plaintiffs, and if after wards the District Court lipids that the transaction in favour of the respondents is void under Section 53, there will be a conflict of decisions. The Principal Sub-Court could pass a decree in favour of the plaintiffs if the defendant fails to prove want of consideration. If it finds that the mortgage was executed by the defendant, it is not open to that Court to consider whether the transaction is bad under Section 53 of the Provincial Insolvency Act; and the Official Receiver would not be able to put forward such a contention in that Court. No doubt, the ordinary Civil Court would have power to declare a mortgage void under Section 53 of the Transfer of Property Act. But it cannot do so under Section 53 of the Provincial Insolvency Act. It is urged for the appellant that in order to avoid a conflict, it must be held that the ordinary Civil Court ceases to have jurisdiction to entertain a suit on a mortgage or to continue the suit the moment an application is made under Section 51 of the Provincial Insolvency Act for a declaration that the transaction is void against the Official Receiver. It does not follow that because a transaction is void under Section 53, therefore, the mortgagee has no remedy against the mortgagor. The transaction under Section 53 is only voidable and not void. It is well settled that till the transaction is set aside it is good against the mortgagor. It is only in the interests of the general body of creditors that a transaction which is good against the mortgagor is set aside under Section 53. The jurisdiction to set aside a transaction which is good against the mortgagor but not good against the general body of creditors is an exclusive jurisdiction of the Insolvency Court But that does not take away the jurisdiction of the Civil Court to proceed with the mortgagee's suit to decree. If the mortgaged property is, of considerable value and if the transaction is bad under Section 53, it is voidable only to the extent of the debts which the mortgagor has to pay. The mortgagee, will be entitled to proceed against the mortgaged property after it has satisfied ail the creditors of the insolvent; in other words, a mortgage which is voidable under Section 53 is only voidable to the extent to which the property transferred is necessary to satisfy the creditors of the insolvent. That being so, it is difficult to understand how the Civil Court is deprived of its jurisdiction by reason of an application under Section 53 of the Provincial Insolvency Act. If a declaration is given by the Insolvency Court in favour of the Official Receiver, the property would vest in the Official Receiver and he could dispose of it for the general body of creditors, and the mortgagee could not bring the property to sale on the strength of his mortgage, for the moment the transaction is declared void under Section 53, the property vests in the Official Receiver and he is entitled to deal with it for the general body of creditors. No Court has power to sell the property of an insolvent if it is vested in the Official Receiver excepting the Official Receiver himself. Vide Kochu Mahomed Asan Tharagan v. Sankaralinga Mudaliar (1921) M.W.N. 236 : 14 L.W. 505. But till such a declaration is made by the Insolvency Court under Section 53, the transaction is good and the mortgagee could proceed with the suit or with the execution of his decree against the insolvent's property The Official Receivers right to proceed under Section 53 is not taken away either by the institution of a suit by the mortgagee or the passing of a decree in his favour or even by his realising the amount due to him by the sale of the property, for the Official Receiver could apply to the Insolvency Court for a declaration that the transaction is void and if he succeeds, the property of the insolvent would vest in him before sale in execution of the mortgage decree. If the property is sold to a bona fide purchaser for value, before the Insolvency Court passes an order under Section 53, the Official Receiver would be entitled to proceed against the amount realised by the mortgagee in execution of his mortgage-decree.

6. The right of the Official Receiver to proceed against the property of the insolvent is not taken away by reason of any decree of Court. If he could prove that the transfer is without consideration, or is only benami for the insolvent, he could recover the property. In the case of Section 54, if payment is made to a creditor which payment is bad as being a fraudulent preference, or if a decree is passed, or if a transfer is made which comes within the mischief of Section 54, the Official Receiver is entitled to proceed against such person who has obtained the benefit, and his right is not taken away by the mere fact of a decree having been passed. In the case of a mortgage, therefore, there is no reason to hold that the passing of a decree would stand in the way of the Insolvency Court passing an order under Section 53. The order of the Insolvency Court under Section 53 would be binding upon the parties and the ordinary Civil Court would, therefore, not be able to execute the mortgage-decree passed by it. The proper course, in cases where a civil suit is pending on a mortgage and where the Official Receiver applied to the Insolvency Court for a declaration that the mortgage is bad under Section 53 would be to have the proceedings in the suit stayed till the disposal of his application by the Insolvency Court. It would save time and trouble if the proceedings in the civil suit are stayed pending the disposal of the application under Section 53. But the application must be made either to the Court in which the civil suit is pending or to a Court which has power to stay the proceedings in that suit. There is no warrant either in law or in practice for the contention that the presentation of an application to the Insolvency Court for an order under Section 53 takes away the jurisdiction of the Civil Court to proceed with the suit of a secured creditor.

7. Under Section 4 of the Provincial Insolvency Act, the Court is given wide powers to try all questions which the Court may deem expedient or necessary to decide for the purpose of doing complete justice or making a complete distribution of property. Though the Insolvency Court has such wide powers, neither Section 4 nor any other section of the Insolvency Act takes away the jurisdiction of the ordinary Civil-Court to try a suit instituted by a mortgagee against the insolvent. The scheme of the Act is to exempt the secured creditors from the operation of the Act unless they choose to come in under Section 47. This does not mean that a mortgage cannot beset aside as being void under Section 53. Similarly the jurisdiction given to an Insolvency Court raider Sections 53 and 54 cannot take away the jurisdiction of the ordinary Civil Court to entertain a suit at the instance of a mortgagee, or proceed with such a suit already instituted by reason of the pendency of the insolvency proceedings.

8. In the result the appeal fails and is dismissed with costs.

Wallace, J.

9. The point in this case is whether, when a mortgage has been attacked by the Official Receiver in insolvency proceedings under Section 53 of the Provincial Insolvency Act as a voidable transfer, the Civil Court in which the mortgagee is suing his insolvent mortgagor presented by the Official Receiver to enforce that mortgage must or should stay proceedings therein and hold that suit as subject to the decision which will be given in the insolvency enquiry. Before us the appellant went so far as to contend that the Civil Court lost jurisdiction to continue the civil suit whenever the Official Receiver had initiated proceedings in the Insolvency Court, which Would imply that the proper order is not so much a stay of trial as a dismissal of the suit since, if the Civil Court lost jurisdiction to go on with the trial, it equally lost jurisdiction to pronounce a judgment in the suit. On the other side it was contended that the scope of the two proceedings is so essentially different that the Civil Court does not lose jurisdiction and that there is no reasonable ground for staying its hand.

10. The theory that a Court may pendente lite be deprived of jurisdiction by some proceedings in some other Court, is somewhat startling and would require very strong reasons for support. The appellant appeals to Section 28, Sub-section (2) of the Provincial Insolvency Act, which says 'On the making, of an order of adjudication...no creditor to whom the insolvent is indebted in respect of any debt provable under this Act shall during the pendency of the insolvency proceedings have any remedy against the property of the insolvent in respect of the debt, or commence any suit or other legal proceeding, except with the leave of the Court and on such terms as the Court may impose.' To begin with, this does not in terms prohibit a continuation of a suit already begun, and if the sub-section is to be applied to such a case, then such a continuation must come under the general head of remedy, against the property of the insolvent. This I doubt very much. It has been held that the leave here contemplated must be obtained before the suit is filed and cannot be granted after the suit is filed. See In re Dwarkadoss Tejbhandas 31 Ind. Cas. 948 : 17 Bom. L.R. 925. If so, then leave cannot Lie given to continue a suit already filed. But assuming without deciding that the general policy of the Act will support such an interpretation, the creditor who is estoppted by the subsection is one whose debt is probable under the Act, and the sub-section is subject to Sub-section (6) 'Nothing in this section shall affect the power of any secured creditor to realise or otherwise deal with his security, in the same manner as he would have been entitled to realise or deal with, it if this section had not been passed.' Do these two clauses prohibit or permit the secured creditor to continue or commence a suit on his security during the pendency of the insolvency proceedings? As I have said, the point should not be found against the bona fide litigant unless it was obviously the intention of the Statute to deprive him of his ordinary civil remedies.

11. It will be noted first that the prohibition announced is not absolute but discretionary with the Court. Therefore, the leave' of the Court may be given to a mortgagee to commence or continue his mortgage suit pari passu with the proceedings under Section 53 of the Act, which clearly implies that there can be no inherent conflict of jurisdictions. It would be absurd to lay down that the Court may give leave to conduct a proceeding wholly without jurisdiction. The terms of Sub-section (6) are quite general and there is no reason to conclude that the section as a whale was intended to deprive a secured creditor from enforcing his security. The general policy of the Act does not deal with the secured creditor. He may or may not choose to come on the schedule of creditors. He has the option (see Section 47) of coming in or enforcing his security, and the Official Receiver is in the case of a bona fide mortgage bound by it, apart from the insolvency proceedings altogether, because none of the mortgagees's interest really vests in him, at all, and the Official Receiver is bound to discharge a bona fide mortgage debt even when the mortgagee has not come on the schedule. See Shridharnarayan v. Atmaram Govind 4 Ind. Dec. 306, Shridharnarayan v. Krishnaji Vitoji 6 Ind. Dec. 667, Sheoraj Singh v. GauriSahai 21 A. 227 : A.W.N. (1899) 45 : 9 Ind. Dec. 854 and Haro Pria Dabia v. Shams Charan Sen 8 Ind. Dec. 391. In the last case it was held that a judgment-creditor holding a decree for sale on a mortgage is entitled to enforce that decree whether or not his debt is on the schedule. This is wholly opposed to the appellant's theory that Section 28 would bar a secured creditor from such a remedy. The case in Gauri Datt v. Shankar Lal 14 A. 358 A.W.N. (1892) 36 : 7 Ind. Dec. 597 is not in point as it was not a case of a secured creditor. It is hardly likely that the Legislature would intend to prohibit a judgment-creditor from enforcing a, right which binds the insolvent and, therefore the Official Receiver and all the other creditors.

12. If, therefore, Section 28 does not prohibit a bona fide mortgagee enforcing his mortgage right during the pendency of the insolvency proceedings, it is difficult to see why the mere fact that the Official Receiver is attacking the bona fides of the mortgage should bring Section 28 into operation. Section 28 itself draws no such distinction. If in terms it does not apply to a bona fide mortgagee, it does not apply to any mortgagee. I hold, therefore, that Section 28(2) is subject to Sub-section (6) and that Sub-section (2) does not in any way affect the right of a secured creditor to proceed with his suit to enforce his security.

13. Section 4 of the Provincial Insolvency Act does not help the appellant. It is a section chiefly to settle questions of title to property between the debtor and a third party. Nor does Section 41 of the Indian Evidence Act assist in view of the limited nature of the enquiry under Section 53. The decision in Mariappa Pillai v. Raman Chettiar 52 Ind. Cas. 519 : 10 L.W. 59 also does not really help the appellant. I do not think that that decision laid down anything more than that the Civil Court has no jurisdiction to decide a matter which falls to be decided under Section 53 of. the Provincial Insolvency Act, 4 that is, it cannot annul in favour of creditors a transfer of the nature set out in that section The case in Official Receiver Tinnevely v. Sankaralingam Mudaliar 62 Ind. Cas. 495: 40 M.L.J. 219 : (1921) M.W.N. 236 : 14 L.W. 505 was not a case of secured creditor, as specifically found at page 530 Page of 44 M.--[Ed.] It was decided on the footing that the vesting order of the Insolvency Court placed the property of the insolvent at once in the hands of the Official Receiver and prohibited any other Court than the Insolvency Court from dealing with it in anyway. This has no application to the present case of a secured debt.

14. The matter will be made clear by considering the nature of the proceedings under Section 53 which has been' ably put before us, by Mr T.M. Krishnaswami Iyer to whom I am much indebted. Section 53 implies an attack by the Official Receiver on behalf of the general body of creditors, and the remedy which he is entitled to get on proving his case is that the transfer is viodable against him and may be annulled by the Court; that is, in the case of a mortgage the property mortgaged will be available as the property of the insolvent for the general body of creditors, who are entitled to be re-paid their debts out of it. It does not really affect the relationship of the transferor and transferee as mortgagor and mortgagee. For example, if the property is sold by the Official Receiver and the creditors and costs are fully paid out of the proceeds and there is a surplus remaining, that surplus belongs prima facie to the transferee and not to the transferor, and is his unless the transferor has by appropriate proceedings established his right to it. The proceedings under Section 53 will not establish that right. Clearly in these proceedings the Official Receiver cannot represent the debtor. Otherwise he would have to admit the transfer unless the debtor could challenge it extraneously on some ground as fraud or undue unfluences. The relationship between the mortgagor and mortgagee remains unaffected by any; proceedings under Section 53, and the mortgagee is entitled therefore, to enforce his mortgage against the mortgagor except so far as proceedings under Section 53 may have held the property mortgaged as assets of the mortgagor at the disposal of the general body of creditors.

15. There is nothing, therefore, in these proceedings to interfere with the ordinary suit of the mortgagee to enforce his mortgage. Such a suit only declares and enables him to enforce his right against his mortgagor and has nothing to do with that mortgagor's creditors who are not and could not be proper parties to such a suit. It is in fact not open to the Official Receiver, in the mortgage suit; as the representative of the judgment-debtor, to challenge the validity of the mortgage on any ground which the judgment-debtor himself could not have put forward. He is not brought on in such a suit as representative of the creditors at all. Obviously, for example, he could not challenge the passing of the consideration as that is not a point relevant to that suit, and the frame and scope of the suit cannot have been altered merely because the Official Receiver has been brought on as representative of the judgment-debtor. The Official Receiver does not carry into that representation his character as representative of the creditors. The decree in the mortgage suit, if in favour of the mortgagee, will still be enforceable except so far as the proceedings under Section 53 have debarred him from recovering the whole of the proceeds for himself, and if, for example, in the proceedings under Section 53 the Court finds the alienation good to any extent, and upholds it to that extent, or rather does not challenge the mortgage right to that extent, then the mortgagee will become a creditor of the insolvent estate on the foot of his mortgagee to that extent. If the mortgagee's suit is dismissed, then the property vests in the 'Official Receiver who is on record in his suit as representative of the mortgagor. Similarly, if the proceedings under, Section 53 are dismissed, the mortgage suit is unaffected; if they are upheld, the mortgagee's rights against his mortgagor are subject to the result of the order against him under Section 53. The two Courts are in fact deciding different questions in relation to different parties and there is, therefore, no question of concurrent or conflicting jurisdiction on the same point. There is no reason, therefore, why the mortgagee's suit should be stayed because proceedings, under Section 53 are filed or pending. The result of such proceedings would affect; only the execution of the decree in the mortgage suit, since the mortgagee cannot be permitted to sell the property for himself if there is an adverse order to under Section 53. The real conflict in the two no proceedings does not materialise until the question arises, who is to sell the property? Then the decision in the proceedings under Section 53 will bind the mortgage by force of Section 4 of the Provincial Insolvency Act and the sale will be by the Official Receiver and the proceeds must be primarily held at the disposal of the Official Receiver. The Official Receiver is already a party ex hypothesi to the mortgage suit, there will be no trouble about that. A It would be the duty of the Court executing the mortgage-decree to give effect under Section 4 of the Provincial Insolvency Act to the decision in the insolvency enquiry. The principle that the interest of the particular creditor must give way to that of the general body of creditors is thus not in danger.

16. I agree, therefore, with my learned brother that there is no reason shown for stay of the civil suit and agree in the order proposed by him.


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