1. We are invited in this appeal to set aside an order made by the Court below under Section 15 of the Provincial Insolvency Act of 1907. The circumstances under which the order in question was made are not disputed. One Udai Chand Maity, the appellant before us, applied under the Provincial Insolvency Act on the 30th April 1909 to be declared an insolvent. He stated that his debts amounted to Rs. 1,018-6-0 and that he had no means to liquidate them. He attached to his application the names of the creditors, and the particulars of his debts, described in detail the properties of which he was possessed. On the 21st June 1909, one of his creditors mentioned in the application by name of Ram Kumar Khara who, it was alleged by the petitioner, was entitled to receive from him a sum in excess of Rs. 500 under a decree appeared in Court and presented a petition of objection. His case in substance was that some of the other creditors mentioned as such in the application were really not the creditors of the petitioner. He also imputed to the petitioner various acts of bad faith. On the 13th July 1909, the petitioner was examined under Section 14 Sub-section (2) of the Provincial Insolvency Act as to his conduct, dealings and property, and upon the close of his examination, the District Judge made the order now under appeal. He dismissed the petition with costs on the ground that the debt attributed to one of the creditors mentioned in the application, named Nogendra Nath Gangooly, was fictitious. He added that the petitioner had not produced his account books and the manner in which he gave his evidence led him to believe that he was concealing the real facts.
2. We are now invited to set aside the order on the ground that it could not have been made under Section 15 of the Provincial Insolvency Act. In our opinion, this contention is well-founded and ought to prevail. In fact an examination of the record shows that the District Judge has really dealt with the application of the petitioner under the provisions of Chapter XX of Act XIV of 1882, which was repealed by the Provincial Insolvency Act of 1907. Under these circumstances it is desirable to explain clearly the fundamental difference in procedure between the provisions of Chapter XX of Act XIV of 1882 and Act III of 1907.
3. Under Chapter XX of the Code of 1882, a judgment-debtor arrested or imprisoned in execution of a decree for money or against whose property an order of attachment had been made in execution of such a decree might apply in writing to be declared an insolvent. Section 345 defined the contents' of such application. Section 350 described the procedure at the hearing of the application. This Section provided that the judgment-debtor was to be examined then as to his circumstances and as to his future means of payment and the decree-holder and the other; creditors mentioned in the application were to be heard in opposition to the discharge of the judgment-debtor. Section 351 then laid down the conditions to be satisfied before the Court should declare the petitioner an insolvent, and appoint a receiver of his property. This Section required the Court to be satisfied not merely that the statements in the application were substantially true, but also that the judgment-debtor had not committed any act of bad faith. The procedure laid down in the Provincial Insolvency Act which is taken substantially from the English Bankruptcy Act of 1883, however, is of an entirely different description. In the new Act Section 4 defines what acts constitute acts of insolvency. Many of the acts mentioned in this Section are undoubtedly acts of bad faith. It is not necessary for us, however, to deal with this part of the Section at the present stage. It is sufficient to point out that Clause (f) of Section 4 lays down that the judgment-debtor commits an act of insolvency if he petitions to be adjudged an insolvent under the provisions of the Act. Apart, therefore, from the other clauses of Section 4 some of which refer to fraudulent preference and other matters of a like nature, it is obvious that the Legislature contemplates that a debtor might commit an act of insolvency if he made an application under the Act, to be adjudged an insolvent. Section 5 then provides that subject to the conditions specified in the Act if a debtor commits an act of insolvency a petition maybe presented either by a creditor or by the debtor, and the Court may on such petition make an order (hereinafter called an order of adjudication) adjudging him an insolvent. To this Section is attached an explanation to the following effect:--The presentation of a petition by the debtor shall be deemed an act of insolvency within the meaning of this Section and on such petition the Court may make an order of adjudication. It is desirable to point out that here the Legislature has departed materially from the provisions of the English Bankruptcy Act where in the first instance a receiving order is made which is subsequently followed by an order of adjudication. The policy of the Indian Legislature apparently has been to amalgamate the two orders or to have only one order called the adjudication order. It is clear, therefore, that under Section 5 of the Provincial Insolvency Act, the Court may upon an application presented by a debtor make an order adjudging him an insolvent. It does not follow, however, that every application made for the purpose by a debtor must be entertained by the Court, because Section 6 points out the limitation to which such an application is subject. Sub-section (3) of Section 5 provides that the debtor shall not be entitled to present an insolvency petition, unless one of three conditions is fulfilled--namely, 'either that his debts amount to Rs. 500 or that he has been arrested or imprisoned in execution of the decree of any Court for the payment of money or that an order of attachment in execution of such a decree has been made and is subsisting against his property.' If any one of these three elements is present, the application under Section 5 must be entertained by the Court. Procedure which has to be followed when an application which complies with the requirements of Section 6 has been presented is explained in Section 12. It is not necessary for our present purposes to refer in detail to the provisions of the preceding sections which describes the contents of the petition. Section 12 Sub-Section 1 prescribes that when an insolvency petition has been admitted, the Court shall make an order fixing a date for the hearing of the petition. The next Sub-section provides for the service of notices upon the creditors, and the debtor as the case may be. Section 13 then authorises the Court to take ad interim proceedings. Section 14 describes in detail the procedure at the hearing. Sub-section (1) of the Section lays down that on the day fixed for the hearing of the petition or any subsequent day to which the hearing may be adjourned, the Court shall require proof that the creditor or the debtor, as the case may be, is entitled to present the petition. In other words, after the requirements of Section 6 have been fulfilled, the Court shall further require proof that the debtor, if he does not appear on a petition presented by a creditor, has been served with notice and that the debtor has committed the act of insolvency alleged against him. It is obvious that the question of the fulfillment of this last requirement arises only when the application is made by the creditor who has to show that the act of insolvency imputed by him to the debtor has actually been committed. Sub-section (2) of Section 14 then provides for the examination of the debtor. Section 15 then deals with the question of the order to be passed upon the petition. The first Sub-section of Section 15 provides that where the Court is not satisfied with the proof of the right to present the petition or of the service of notice on the debtor as required by Section 12 Sub-section (3) or of the alleged act of insolvency or is satisfied by the debtor that he is able to pay his debts or that for any other sufficient cause no order ought to be made, the Court shall dismiss the petition. It is obvious from this Section that before the Court can make the order of adjudication upon the petition, the Court has to be satisfied with the proof of the right to present the petition, in other words, that the requirements of Sections 5 and 6 have been fulfilled. Now in the case before us, it is not disputed that the petitioner has applied to be adjudged an insolvent. The presentation of such an application by itself constitutes an act of insolvency. It is further not disputed that the petitioner is indebted to the extent of more than Rs. 500, because the amount alleged to be due to the opposing creditor is in excess of Rs. 500. It is clear, therefore, that there was ample proof of the right of the appellant to present the petition. The question now arises whether there was any valid ground for the dismissal of this application. The learned Judge has proceeded on the ground that the conduct of the petitioner has not been satisfactory and that he has made a false statement in his application inasmuch as he mentions the name of a certain person as creditor in whose favour he had created a fictitious debt. It is obvious, however, from Sub-section (1) of Section 15 that those are not circumstances which can be taken- into account by the Court at this stage to determine whether the application should be granted or refused. Reliance has been placed by the learned Vakil for the respondent upon the concluding words of Sub-section (1) of Section 15, which lay down the rule that where the Court is satisfied by the debtor that he is able to pay his debts or that for any other sufficient cause no order ought to be made, the Court shall dismiss the petition. But it is clear that this portion of Sub-section (1) of Section 15 refers only to cases in which the application has been made by the creditor and is opposed by the debtor. In such a contingency if the debtor can satisfy the Court that he is able to pay his debts or that for any other sufficient cause, [such as those mentioned in Ex-parte Dixon (1884) 13 Q.B.D. 118 : 50 L.J. Ch. 769 : 10 L.T. 414 : 32 W.R. 837 : 1 Morrell 98 and Ex-parte Oram (1885) 15 Q.B.D. 399 : 52 L.T. 785 : 33 W.R. 890 : 2 Morrell 199], no order ought to be made, it is the duty of the Court to dismiss the application. The grounds, upon which the learned Judge has dismissed the application, could not have been taken by him into account for the purpose of determining whether the application ought to be allowed or refused. The language of Section 15 is clearly analogous to that used in the English Ban kruptcy Act of 1883, Section 7, Sub-section (3), under which the question of bad faith would not be taken into account by the Court at the preliminary stage for determining whether the application ought to be granted or refused. In fact the conduct of the petitioner in relation to his creditors can be taken into account only at a later stage of the proceeding, when the question of discharge of the petitioner arises for consideration. This is clear from the provisions of Sections 43 and 44 of the Provincial Insolvency Act. Section 43 defines the duties of the debtors and Sub-section (2) of that Section provides that if a debtor whether before or after the making of an order of adjudication commits acts of bad faith, the Court may sentence him to simple imprisonment. Section 41 provides that it is the duty of the Court to take into account certain circumstances when it is called upon to consider the application for discharge. Sub-section (3) of Section 44 provides that the Court shall refuse to grant an absolute order of discharge on proof of any of the various circumstances mentioned in the sub-section and the acts, of which the debtor might be guilty so as to deprive him of the ultimate benefit of the provisions of the Provincial Insolvency Act, may generally be described as acts of bad faith. It is clear from this Section that the question whether the debtor has or has not committed acts of bad faith is to be determined by the Court not at the preliminary stage when the order of adjudication has to be made but at the final stage when application is made, for an. order of discharge. The learned Vakil for the respondent, however, objected that if this interpretation were put upon the provisions of the law, an order for adjudication might be obtained almost as a matter of course. No doubt, that would be the result, but that is precisely the policy of the Legislature. As was pointed out by Mr. Justice Bigham in In re Button (1907) 1 K.B. 397 at p. 401 : 76 L.J.K.B. 319 : 96 L.T. 124 : 23 T.L.R. 256 : 14 Manson 17, when a man's affairs become so involved that he cannot properly carry on his business, it becomes his duty to himself and to his creditors to present his petition to the Court. He commits no tort against any one nor does he break any contract by discharging his duty; certain statutory consequences, no doubt, follow on the act so done. One of these consequences is that his property passes to his trustee and becomes divisible amongst his creditor which is clearly not a matter for regret. It may be pointed out that the interpretations which we put upon the provisions of the Provincial Insolvency Act are not likely to lead to fraud as suggested by the learned Vakil for the respondent. If an insolvent debtor had committed acts of bad faith and has nevertheless obtained an order of adjudication, he has not thereby obtained any opportunity to evade his liabilities. The effect of the order of adjudication is merely to rest his properties in the Court for the benefit of his creditors. But he cannot obtain the final order of discharge unless he can prove that he has not been guilty of any act of bad faith. This, in fact, is the fundamental distinction between the provisions of the Civil Procedure Code of 1882 and the Insolvency Act of 1907; where, as under the former law, before the petitioner could be adjudged an insolvent, his conduct in respect of his creditors and in relative to the disposal of his own properties had to be taken into account, under the latter Act the order of adjudication follows almost as a matter of course upon the presentation of the Insolvency application and the question of the conduct of the petitioner becomes material only when he asks for an order of discharge.
4. We may further point out in so far as the present case is concerned, that the question of the reality of the debt in favour of Nogendro Nath Gangooly must be determined under Section 21, and it is desirable that adjudication upon that point should take place in the presence of the creditor concerned. If the order made by the learned Judge is maintained, what is the position The petitioner does not obtain an order of adjudication. The opposing creditor succeeds in defeating the application on the ground that the debt created in favour of Nogendro is fictitious. But that order is, in no way, binding upon Nogendro because the point has not been determined in his presence, and it would be quite open to Nogendro to prove that his security is not fictitious in a suit brought to enforce it. On the other hand, if an order of adjudication is made and the true character of the alleged debt is determined as provided in the Provincial Insolvency Act, the whole matter would be finally adjudicated upon in one proceeding.
5. The result, therefore, is that this appeal is allowed, the order of the Court below is set aside and the order of adjudication is made. The case will be remitted to the District Judge in order that he may appoint a receiver and deal with the matter as provided in the Act. There will be no order for costs, as neither party is to blame for the erroneous order made by the Court below.