1964 (9) TMI 72 - SC - Indian Laws

Summary

Issues Involved:
1. Adjudication of insolvency.
2. Validity of promissory notes and consideration.
3. Application of statutory presumption under Section 118 of the Negotiable Instruments Act.
4. Role and duties of the Official Receiver in insolvency proceedings.
5. Jurisdiction and powers of the Insolvency Court.

Issue-wise Detailed Analysis:

1. Adjudication of Insolvency:
Respondents presented a petition before the Insolvency Judge, Kanpur, alleging that Kotwaleshwar Prasad had borrowed substantial amounts through promissory notes and failed to repay, thereby committing an act of insolvency. The Insolvency Judge adjudicated Kotwaleshwar insolvent and appointed the Official Receiver to manage his estate.

2. Validity of Promissory Notes and Consideration:
The Official Receiver initially included the claims of the respondents in the schedule of debts based on Kotwaleshwar's admission before the Insolvency Court. However, upon further enquiry, the Receiver rejected the claims, finding insufficient evidence of consideration for the promissory notes. The District Court supported this view, noting that the evidence presented by the respondents, including their books of account and oral testimonies, was unreliable. The District Judge also observed that the admission by Kotwaleshwar was procured under undue influence.

3. Application of Statutory Presumption under Section 118 of the Negotiable Instruments Act:
The High Court initially ruled that the presumption of consideration under Section 118 of the Negotiable Instruments Act applied in insolvency proceedings. However, the Supreme Court emphasized that this presumption does not necessarily prove the quantum of debt due by the insolvent at the date of insolvency. The Court held that the presumption under Section 118 is a special rule of evidence applicable between parties to the instrument or their privies and does not extend to insolvency proceedings where the rights of all creditors must be considered.

4. Role and Duties of the Official Receiver in Insolvency Proceedings:
The Official Receiver is tasked with framing a schedule of debts and must be satisfied about the existence, amount, and particulars of the debts. The Supreme Court highlighted that the Receiver is not bound by the statutory presumption under Section 118 of the Negotiable Instruments Act and must independently verify the reality and quantum of the debt.

5. Jurisdiction and Powers of the Insolvency Court:
The Insolvency Court has the jurisdiction to investigate the reality of debts, even if they are supported by judgments or negotiable instruments. The Court must ensure that the debts are real and provable under the Provincial Insolvency Act. The Supreme Court affirmed that the Insolvency Court is not bound by estoppel against the insolvent and can go behind judgments or instruments to ascertain the truth of the debts.

Conclusion:
The Supreme Court allowed the appeal, setting aside the High Court's order and restoring the District Court's decision. The Court emphasized that the presumption under Section 118 of the Negotiable Instruments Act does not apply in insolvency proceedings and that the Official Receiver must independently verify the debts. The Court reaffirmed the duty of the Insolvency Court to ensure that only real and provable debts are included in the schedule of creditors. The appeal was allowed with costs in the Supreme Court.