1. This is an application by the Official Assignee in the insolvency of one A.F.C. Seehase under Section 36 of the Presidency Towns Insolvency Act for an enquiry to be held as to whether the sale to Mackertich John of the business property, furniture, stock and effects of the insolvent in the business known as the Continental Hotel is fraudulent and void as against the Official Assignee and it also asks that orders be passed by the Court as the result of such enquiry.
2. Before I come to deal with the facts of the case, there are three matters in connection with the insolvency jurisdiction to which I think I should refer. When this matter came before me, an objection was taken that it was a matter that could not be dealt with under Section 36 of the Presidency Towns Insolvency Act and I was referred in support of it to the judgment of Mr. Justice Chitty in In re J.M. Lucas 28 Ind. Cas. 469 : 42 C. 109 at pp. 113, 114, where Mr. Justice Chitty has expressed his opinion that matters like the present cannot be decided under Section 36 of the Insolvency Act but should be dealt with under Rule 5(d) of the Insolvency Rules. The opinion which Mr. Justice Chitty expressed in In re J.M. Lucas (1) he followed in Re Kali Dass Biswas No. 161 of 1913. Now if Mr. Justice Chitty had decided that where questions of title are involved such as arise in this case, the proper procedure to follow is by suit, rather than by an application under Section 36, I should have been bound by this decision but I have considerable difficulty in understanding what he has decided by In re Lucas (1) and In re Kali Dass Biswas No. 161 of 1913. The jurisdiction of the Insolvency Court is derived not under the Rules of the Insolvency Act but under Section 36, and, therefore, I do not think that I am in any way bound by any decision of this Court that Section 36, of the Insolvency Act is not the proper procedure for dealing with a matter of this kind. I have not been able to find any decision of this Court actually upon this question, but the matter has arisen once or twice before and the same question has arisen under the Provincial Insolvency Act and, therefore, I think that it is desirable that I should make some reference to the question of procedure. Now under the old Act of 1818, Section 26, it has never been questioned that the Insolvency Court had jurisdiction to decide questions of this nature under the Insolvency Act.
3. If authority for that is sought, it will be found in an unreported case to which I was referred, In re Upendra Chandra Sing No. 281 of 1909, where Mr. Justice Harington decided similar questions under the provisions of Section 26 of Act 1848. That matter went to the Appeal Court in Appeal No. 13 of 1911 and the question of jurisdiction was raised before Sir Lawrence Jenkins and Mr. Justice Woodroffe. They overruled the objections that had been taken to the jurisdiction of the Insolvency Court and Sir Lawrence Jenkins said in his judgment that there was jurisdiction for Mr. Justice Harington in the Insolvency jurisdiction to have made the order that he did. But he added that the lady against whom the order was sought, could, if she so desired, vindicate her title by regular suit; and a further authority for the proposition is Kalagurla Suryanarayana v. Yarlagadda Naidoo 6 C.W.N. 513 (P.C.). That case was decided under Section 26 of the Insolvency Act of 1848. Mr. Justice Jenkins, as he then was, framed issues such as have been in this case. The matter went to the Appeal Court and eventually went to the Privy Council, and no question was raised as to the jurisdiction of the Insolvency Court and I may add that if you look at the English cases, where the provisions of the English Bankruptcy Acts are very similar to our present Act, you find that the usual procedure is by motion in the Bankruptcy or by some form of application in the Bankruptcy. If authority is required for that, reference can be made of the case of Hirth, In re; Trustee, Ex parte (1899) 1 Q.B. 612 : 68 L.L.J.Q.B. 287 : 80 L.T. 63 : 47 W.R. 243 : 6 Manson 10 : 15 T.L.R. 153 end also to the case of Slobodinsky, In re; Moore, Ex parte (1903) 2 K.B. 517 : 72 L.J.K.B. 883 : 89 L.T. 190 : 52 W.R. 156 : 10 Manson 341 : 19 T.L.R. 616. Therefore, I think that the Court has ample jurisdiction, having regard to the terms and provisions of Section 36, to deal with questions of this kind in the insolvency, subject to the right of the party affected to bring a suit if so advised.
4. Then the second question that I should like to refer to is, as to whether the examination of the insolvent can be used as evidence against the person against whom an order is sought under Section 36, Counsel, who urged that it was admissible, admitted this morning that he was wrong and perhaps it will be well to distinctly state here that that question is governed by the authority so far as English Law is concerned, and it has been held that the examination of an insolvent is not admissible in evidence against persons against whom an order of the nature of the present is sought, and I think that the same principles as are laid down in the English cases are applicable here to this question.
5. The 3rd point is as to the question of the burden of proof. I felt some doubt at the time I heard this application and I still feel some doubt as to upon whom the burden of proof lies in a transaction of this nature, but it seems to me that a case of the nature such as is before me falls within the principles of Tate, Ex parte; Tate, In re (1877) 35 L.T. 531 : 25 W.R. 52 and that in a case of this nature, as I held, the burden of proof of supporting a purchase from the insolvent of the whole of his assets just prior to the insolvency falls upon the person claiming that that purchase can stand.
6. I now come to the facts of this case so far as they are material.
7. In February 1912 it appears that the insolvent Seehase purchased the Continental Hotel, for, I think, a sum of one lac and 85 thousand rupees, ten thousand rupees being paid on the execution of the agreement and 40 thousand being payable in instalments of 8 thousand, and there was a further provision that the insolvent should pay to the vendor a sum of one thousand a month during the continuance of the lease of the Hotel premises. On the 18th May 1916 a deed of partnership was entered into between the insolvent and Mr. John, By the provisions of that deed it was provided by Clause 1 that in consideration of a sum of Rs. 20,000 to be paid by Mr. John to Seehase, Seehase should admit John as a partner in the business carried on at the Continental Hotel and that they should be and remain partners in the business during the term or until sooner determination of the lease of the premises No. 12, Chowringhee, where the business was carried on. Clause 4 provides that the net profits of the business should be divided equally between the parties and that they should in like proportion bear all losses and Clause 5 provides for the capital of the partnership, and the clause provides that John should pay to Seehase a sum of Rs. 20,000 for his half share in the furniture and fittings and he should be debited in the account with the sum of Rs. 2,250 as his half share of the price of the stock of wines and stores then held by Seehase, and that he should be debited in the account with the sum of Rs. 5,000 which should be spent by the partners in improving the Hotel premises; the 6th clause provides for drawings, etc.; the 7th clause provides for the taking of the accounts and the next material clause is Clause 14, which provides that John should be entitled, at any time after 12 months from the date thereof, to purchase from Seehase and that Seehase would sell his remaining half share in the business and in the good will and assets thereof upon payment to Seehase of Rs. 15,000 in cash and upon entering into a covenant to pay the balance then due to Boscolo in terms of an indenture therein mentioned and a further covenant to pay to Seehase monthly a sum of Rs. 500 for the remainder of the term of the lease of the premises No; 12, Chowringhee. The partnership deed provides that the partnership was to commence as from the 1st April 1916.
8. On the 28tb of June 1916 Mr. John and the insolvent purported to enter into an agreement for sale of the half share of the insolvent in the partnership business, not under the terms of the partnership deed but, as I understand, apart therefrom. The agreement is said to have been as follows:
9. That John should pay to Boscolo a sum of Rs. 8,000 on account of the amount due to Boscolo from Seehase, that he should give the insolvent and his wife and family food during the continuation of the lease, that he should pay Rs. 1,000 a month to Boscolo in accordance with the insolvent's covenant with Boscolo and lastly that he should pay certain debts which are not exactly ascertainable.
10. This agreement was never reduced to writing, but a draft was prepared which is in evidence before me, and it is said that this agreement was in fact entered into and carried out verbally.
11. On the 11th of July 1916, 13 days after the sale by the insolvent of the whole of his property to John, he was adjudicated insolvent on his own petition, the unsecured debts amounting to Rs. 31,632 and the assets being, I understand, very small.
12. The issues that were settled in this case are as follows:
(1) Was the purchase, if any, by John of the Continental Hotel in June 1916 in good faith and for valuable consideration?
(2) At the date of the said alleged purchase was the insolvent unable to pay his
debts from his own money?
(3) Was the said alleged purchase in fraud of the creditor of the insolvent?
(4) Was the alleged partnership of the 1st of April 1916 a genuine transaction and for valuable consideration or was it in fraud of the creditors?
13. I allowed the parties before me to assure such evidence as they were advised upon these issues and I must now refer shortly to their evidence.
14. Mr. John stated that in March 1916 he approached Seehase and came to an agreement with him: he say that he paid on the 15th March a cheque for Rs. 3,000 and he says that in all he has paid a sum of Rs. 22 000 which was agreed for the par chase of the share in the partnership business: he says 'on the 21st March I paid Rs. 2,000, on the 7th April I paid Rs. 4,200 to Boscolo in respect of one instalment due from Seehase to Boscolo' and that on the 7th April he paid Rs. 1,000 and on the 11th of April he paid Seehase Rs. 4,000, and he says that the balance was paid by Seehase's drawings from the till of the Hotel and he says that these appear in the cash book. He states that he signed the partnership deed on the 18th of May and that the Hotel was not doing well at that time, business was getting worse due to the fact of Seehase's nationality.' Then he says soon after he had purchased the half share he negotiated with Seehase for the rest of his interest, he says: 'I eventually came to terms and I told Mr. Leslie to prepare an agreement, that was in the month of June, we agreed for Rs. 20,000 in cash and food for himself, his wife and children up to the expiry of the lease.' Then he says with regard to the second sum of rupees twenty or twenty-two thousand, 'I paid him in two lots in cash and by discharging certain bills: on the 21st of June I paid Rs. 1,000 by cheque, on the 24th of June I paid Rs. 1,000 by cheque, on the 23rd of June I paid Rs. 219 6 0 for Insurance premium due on his life, on the 23rd of June Rs. 969 and on the 27th of June Rs. 500 to Narain Chunder Mitter on his account.' Then he states that he has paid the following further sums, to Messrs. Sen Law and Co. Rs. 963, to Boscolo Rs. 8,260, to Messrs. Kellner and Co. Rs. 3,414-8-9, to Gora Chand Law Rs. 1,650, to Nahapiet and Co. Rs. 726, to Framjee Rs. 1,594-7-0 and to Patel Rs. 300: he says, 'I agreed to take these debts over before we made the 2nd agreement and I paid on the dates the receipts were given,' and then he says, on or about the 28th of June he got two receipts from Seehase for Rs. 22,000 each; these are Exhibit L and the bills to which I have referred are Contained in a bundle which is Exhibit K; then he repeats the terms of the agreement and says that Rs. 2,000 of the money was paid from the Hotel cash and he states that when 'I made the agreement I did not know that Seehase could not pay his debts; he became insolvent in July and I first knew that he was insolvent'; he says, when he filed his schedule, I had no idea before that he was an insolvent.' Then in cross-examination he stated that upto 11th July 1916, the bank account stood in the joint names of Seehase and himself and it was a paltry sum of about Rs. 300, then he says that during June Seehase only used to come for an hour in the evening and took no interest in the management of the Hotel but he remained a partner up to the 28th of June and entitled up to that date to a half share of the profits. Then he says, 'from the 29th of June I became the sole proprietor of the Hotel. I did not notify this, I had a full page advertisement in the Empire newspaper;' he says that up to 28th June he conversed as usual with Seehase and he denied that in April 1916 Seehase had deceived him as to his creditors and said that he did not know of Seehase's financial condition; he says 'about the beginning of April I did not know he could not pay his debts,' and the witness stated that he did not believe he went to Lucknow to evade his creditors but that in April he was away from Calcutta.
15. Then in further cross-examination he stated that he agreed to pay Rs. 22,000 in cash for the second part of the business apart from what was due to Boscolo. Then he says there was evidence in writing, namely, a letter which he produced, from Boscolo to Mr. Leslie saying that Boscolo would accept John as a tenant if he paid Rs. 1,000 a month until the expiry of the lease. He says, 'I did not look into the books before I agreed to buy, I did not look into Seehase's financial position, I had no idea of the financial condition of the Hotel and I did not ascertain the stock or furniture before the 15th of March.' He says that 'I was on business terms with Seehase and knew on the 6th or 7th of April that he had debts.' He says, 'it was about the 6th or 7th of April that I did to a certain extent believe that he was trying to evade his creditors ', and he goes on to say that 'bills came in but payment was not made and on the 6th or 7th of April I did believe that he was going away to evade his creditors. I knew he had bills although I do not know the extent, I should say it was about Rs. 20,000 in all, and I do not know if he had any source of income except the Hotel but I cannot say what other income he had,' he says, during the whole of April creditors of Seehase were calling for payment and the same happened in May or June. He said, 'the books were not audited and I cannot say if there was any profit between April and 18th May and I cannot say if the Hotel made any profits during those months'; and he stated that the months of April, May and June were slack months for the Hotel, then he states that at the end of May Seehase was not hopelessly insolvent but owed money to the public to the extent of about Rs. 20,000 worth bills and that he was not apprehensive that he was insolvent. I think that exhausts all the evidence that I need refer to given by John.
16. Mr. Leslie was called and he produced his Day Books showing entries of the interviews he had both with Seehase and with John and I need only refer to two entries, one of the 11th of May when Mr. Leslie says...' that the greater part of the 20,000 was paid in his presence and that he drafted some receipts.' There is another entry with regard to the 21st of June which is as follows:
Attending John and Seehase when they called and said that in supersession of all prior arrangements it had been agreed that John was to buy Seehase out of the business altogether for Rs. 22,000', and he states 'on the 24th of June I had the document prepared to carry out the arrangement', and in cross-examination be said that 'I first heard of Seehase being in debt two or three days before he filed his schedule from a Marwari who told me about this and which I did not believe.
17. Mr. Hinds gave evidence with regard to the preparation of the draft, which is before me. That exhausts the evidence I think J need refer,
18. The real question before me divides itself into two parts. Firstly, there is the partnership entered into on the 18th of May and I have got to consider whether that was a genuine transaction arid whether that can stand, and I have also got to consider the 2nd question as to whether the sale of the 28th of June was a bona fide transaction and can stand against the Official Assignee.
19. So far as the partnership is concerned, I think oh the evidence that I am bound to hold that this was a genuine transaction. There are some grounds of suspicion that arise in the case, and I can hardly believe that Mr. John went into the business, without enquiring as to the earnings and liabilities and so on and as to the value of the stock or furniture, but I am satisfied upon the evidence that Mr. John did in fact pay a sum of Rs. 14,000 in cash to Seehase for the purchase of the half share of the business. With regard to the balance of Rs. 8,000, different considerations arise and I shall have to direct an enquiry with regard to this. Mr. John's story is that this was paid out of the till of the Hotel and that there was no profit during this period; that is to say, it must have been paid out of the capital of the Hotel, half of which belonged to Seehase and if this is so, John must pay the Official Assignee half of this Rs. 8,000. Therefore, it seems to me that I must direct an enquiry to ascertain, first of all, whether there were any and, if so, what profits made by the Hotel during the continuancy of the partnership from the first of April to the 28th of May, and I also direct a second enquiry as to what sums out of the Hotel cash or out of the till were received by the insolvent in respect of the sum of Rs. 22000.
20. I now come to the 2nd transaction which presents more difficulty; and I should have been glad to have had an opportunity to put my judgment in writing which I should have done but for the imminence of the vacation.
21. On behalf of the Official Assignee, it is, I understand, urged that this transaction is bad as being a voluntary conveyance within the meaning of Section 55 of the Insolvency Act, but personally I think myself that the transaction does not fall within that section but falls within another principle. Section 9 of the Insolvency Act provides (b) that an insolvent commits an act of insolvency if he makes a transfer of his property or any part thereof with intent to defeat or delay his creditors, and then Section 17 provides that on the making of an order of adjudication the property of the insolvent vests in the Official Assignee and Section 51 provides that the title to the Official Assignee as trustee shall be deemed to have relation back and that (6) if the insolvent is proved to have committed more acts of insolvency than one, then it relates back to the time of the first of the acts of insolvency proved to have been committed by the insolvent within 3 months next preceding the date of the presentation of the insolvency petition.
22. I think, therefore, that Seehase committed an act of insolvency on the 28th of June 1916. He was adjudicated on his own petition; and, therefore, I think that the assignment of the 28th or 29th of June was an assignment by Seehase with intent to defeat or delay his creditors but if I am wrong in this, then I think that the trans action is also bad and liable to become under the well-known principles, which I think apply in this country, of 13 Eliz., C. 5. That Statute provides that grants, alienations, conveyances, bonds, suits, judgments and executions which have been and are devised and contrived of malice, fraud, coven, collusion or guile, to the end, purpose and intent to delay, hinder or defraud creditors and the operative part of the Statute provides for setting aside every conveyance made 'to or for any intent or purpose before declared and expressed.'
23. Therefore, I think that the transaction was bad for the reasons that I have already stated and also that it falls within the principles to be found in 13 Eliz., C. 5.
24. I think there is no doubt that it is well settled in bankruptcy that an assignment by an insolvent on the verge of his insolvency can only stand if it can be shown that it was done for the purpose of helping him with funds to carry on the business and that the transaction is genuine. Reference to the authorities will show that transactions of this kind will stand good where the properties of the insolvent have been transferred to creditors to secure an existing debt, and also advances made to enable the insolvent to carry on his business. What to my mind makes this second transaction bad, is, I think, the fact that although John apparently agreed to pay certain creditors and had in fact paid certain creditors, this was in the nature of voluntary payments which the creditors could not enforce, (sic) this in itself makes the transaction bad for it takes the properties of the insolvent outside the insolvency jurisdiction of this Court; and secondly, this is clearly a fraud upon the creditors that whereas the terms of the purchase contemplated by the partnership deed provide for payment of Rs. 500 a month to the insolvent, that is given the go by in this transaction and instead there is a provision for food for the insolvent and his family, which must have been done solely and only for the purpose of defrauding the creditors of the insolvent and with intent to defeat and delay them. Reference can usefully be made to Chaplin, Ex parte, Sinclair, In re (1884) 26 Ch. D. 319 : 53 L.J. Ch. 732 : 51 L.T. 345 and to the principles there laid down. I do not think that I need refer to that case in detail but there was a transfer of an antecedent debt, the Assignee undertaking to pay certain creditors of the insolvent, and that transaction was held for the reasons stated by Lord Justice Cotton there to be a fraud upon the creditors which could not stand; as Lord Justice Cotton says at page 330: 'The effect of the transaction was to withdraw by a deed, which was kept secret, all the property of the debtor, as far as it could possibly be done, from the reach of his creditors, so as to prevent them from enforcing their legal rights and remedies by execution, and to protect it in the event of bankruptcy by taking it out of the hands of the debtor and assigning it to some one else. What did the debtor get in exchange? It is true that a certain sum of money was paid by Messrs. Chaplin to some of the creditors, but still the debtor obtained nothing which could be a substitute or equivalent to the creditors.'
25. At page 331 he says: 'I do not mean to say, indeed I do not think, that the creditors would not have been paid, and I cannot say that this would not have been a good way of paying them. Still, in my opinion, if persons will take from a man who is in difficulties a deed of this description, which has the effect of withdrawing and is intended to withdraw, all the property of the debtor from the legal process which his creditors have a right to enforce against him, and bankruptcy ensues, the deed is void under the bankruptcy law,' and Lord Justice Bowen, at page 334, says: 'The debtor gave up all his property; he got the payment of past debts to a certain extent, and besides that he got a promise a verbal promise made to himself, without any record of it in any paper or in any deed to the effect that the persons to whom he was assigning his property would, when occasion should arise, come forward and pay his debts.'
26. I now come to deal with the issues that arise in the case.
27. With regard to the first issue I hold that the purchase by John of the Continental Hotel in June 1916 was not in good faith and for valuable consideration.
28. So far as the second issue is concerned I hold that at the date of the alleged purchase, the insolvent was unable to pay his debts from his own money.
29. As regards the 3rd issue I hold that the purchase was in fraud of the creditors of the insolvent.
30. With regard to the 4th issue I hold that the alleged partnership of the 1st April 1916 was a genuine transaction and for valuable consideration and not in fraud of the creditors.
31. The result is that I set aside the alleged assignment of the 28th of June and John will hand over to the Official Assignee the half share in the business of the Continental Hotel but he will be entitled to prove in the insolvency, as was provided in Chaplin, Ex parte; Sinclair, In re (1884) 26 Ch. D. 319 : 53 L.J. Ch. 732 : 51 L.T. 345, for such sums as he satisfies the Official Assignee that he has paid in respect of the debts of the insolvent.
32. So far as costs are concerned 1 make no order as to costs except that the Official Assignee do retain his costs out of the assets.
33. I direct the enquiries to be taken by the Registrar in Insolvency.