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TMI Blog1957 (5) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... his judgment we shall use the dates with reference to the Gregorian Calendar equivalent to the dates maintained under the Malayalam Calendar). In order to appreciate the arguments in this appeal it is necessary to state the following facts. Koya Kunju was a flourishing merchant at Quilon carrying on trade in piece goods, yarn, provisions etc. He died in or about the year 1921 leaving him surviving his widow, two sons and two daughters, who jointly carried on the ancestral business through the eldest son under a power of attorney. They added to the family business a tile factory and an oil mill. In June-July 1924 the sons approached the appellant s father, who was a flourishing money-lender living about fifty to sixty miles away from Quilon at a place called Mankompu. He agreed to advance the sum of ₹ 75,000 on the usufructuary mortgage of certain immovable properties in and near Quilon belonging to the family, for the purpose of carrying on their trade and business after his two sons had made certain enquiries at Quilon about the status and means http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 17 of the borrowers and whether the transaction would be worth their while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere mentioned the transactions between the insolvents and the appellant and the hypothecation bond aforesaid. In his affidavit in answer, the first counter petitioner for himself and as agent of the other members of the family admitted their joint trading business and the debts incurred by his firm. He also admitted the debts due under the usufructuary mortgage bond in question and the hypothecation bond aforesaid and ended by saying that the debts of the counter petitioners including the debts covered by the said usufructuary mortgage bond and the hypothecation bond amounted to two and a half lakhs of rupees and that their assets were worth not less than seven lakhs of rupees. He denied that they had committed any acts of insolvency or had done anything to delay or defeat their creditors and expressed their readiness to pay the debts due to the petitioning creditor. A number of other creditors also made similar applications for adjudicating the mortgagors as insolvents. All those proceedings appear to have been consolidated and the District Judge by his orders dated August 29, 1927, adjudged the counter petitioners insolvents. About the contents and effect of this order of adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst your petitioner under ss. 35 and 36 of the Insolvency Regulation. This petition of the Official Receiver was opposed by the mortgagee s son, N. Krishna Iyer, on his father s behalf, chiefly on the ground that the mortgage was a bona fide transaction for valuable consideration which was not affected by the Insolvency Regulation, that there was a misjoinder of parties and causes of action, apparently objecting to the Receiver filing a single petition in respect of the usufructuary mortgage deed arid. the hypothecation bond; and that it was barred by limitation and estoppel. A number of issues were raised on July 24, 1929, the most important of them being the first issue to the following effect : Whether the otti and lease deeds impeached by the Receiver were executed in good faith and for valuable consideration ? Other issues related to the formal issues in bar of the proceedings.. Before the learned District Judge (Mrs. Anna Chandy) a preliminary objection was raised on behalf of the Receiver to the effect that in view of the decision of the Judicial Committee of the Privy Council in Mahomed Siddique Yousuf v. Official Assignee of Calcutta (1), the matter was res j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w Cheow (2), that upon a true construction of the Bankruptcy Ordinance of the Straits Settlements, s. 50, sub-s. (3), which in terms is similar to the provisions of s. 35 of the Insolvency Regulation, the onus is upon the Official Assignee to prove that a conveyance which he was seeking to set aside was not made in good faith and for valuable consideration. In (1) (1943) L.R. 70 I.A. 93. (2) [1931] A. C. 67. that case the trial Judge had ruled that the onus of proof lay upon the transferee and had set aside the transaction upon failure of proof led by the transferee. On appeal it was held that the trial Judge had misdirected himself as to the onus and that as the result of the misdirection was very serious in that it had coloured the whole outlook as to the facts and had substantially prejudiced the appellant s case a retrial was necessary. The Privy Council affirmed the decision of the Appeal Court and dismissed the Official Assignee s appeal, the respondent-transferee not appearing before the Judicial Committee. In the same year the Judicial Committee followed the aforesaid precedent in the case of Official Receiver v. P.L.K.M.R.M. Chettyar Firm (1), which was a case under the Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the first time that it was alleged on behalf of the mortgagors that only ₹ 20,000 out of ₹ 75,000 secured under the mortgage in question had actually been paid and that the remaining ₹ 55,000 had so far remained unpaid. More will have to be said about this aspect of the case later. C. P. W. 10, one of the other mortgagors was examined on the same lines as his brother, C.P.W. 8. C.P.W. 12 is the younger brother of S.K. Kadir Moideen Rowther, the second mortgagee, who had taken the hypothecation bond. He was examined on October 9, 1935. Curiously enough, nothing appears to have happened until the first Official Receiver, V. N. Narayana Pillai, aged 64 years, was examined as C.P.W. 13 on November 29,1943. It was he who had started the annulment proceedings in respect of the mortgage bond in question. His evidence and conduct of the proceedings will have to be dealt with presently. We have pointed out the extremely dilatory way in which the proceedings in the Insolvency Court were conducted. The annulment proceedings commenced in 1928 and were determined by the Court of first instance by its orders dated October 19, 1944, For a period of more than sixteen year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .O.R.S. Firm(1). Naturally very strong reliance was placed by the learned counsel for the respondent-Receiver on that case. It was argued that as the order of adjudication dated August 29, 1927, had with reference to the transaction in question, amongst others, held that the debtors had committed acts of insolvency by executing the deed (Ex. I) with a view to defeat or delay their creditors, it was no more an open controversy and the findings then recorded were conclusive in the present proceedings. There are, in our opinion, insurmountable difficulties in the way of the respondents on this aspect of the case. It was stated by the petitioning creditors that the counter petitioners (insolvents) had executed the usufructuary mortgage bond in question and the hypothecation deed in respect of almost all their properties with a view to defeat or delay the other creditors. Issue 5 was raised in these terms: Have the defendants committed acts of insolvency as alleged in the petition ? and the finding of the court was that those were acts of insolvency with intent to defeat or delay their creditors. It is said that these findings are resjudicata between the Receiver and the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e law to make it in consonance with local laws relating to devolution of family property, and secondly that the word void in the last clause of the section in the Insolvency Regulation and in s. 36 of the Provincial Insolvency Act of 1907 has been changed into voidable . Regulation VIII of 1915 aforesaid has been replaced by Travancore Regulation VIII of 1108 (1932). Section 53 of the latter has taken the place of s. 35 of the former and is exactly in the same terms except for the fact that the word void has been changed into voidable , thus bringing the Regulation of 1932 in line with the Act of 1920. It is not necessary for the purposes of this case to go into the question of whether any legal significance attaches to the change of the word void into voidable . The legislative history of the law relating to annulment of transfers or encumbrances made or created by a person who has since been declared insolvent, indicated above, shows that the law in the united State of Travancore and Cochin was the same as the law in what used to be called British India. The question now is, has the Receiver on whom the burden of proof lay, as shown above, been successful in discha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the benefit of the insolvent s creditors. Though the learned District Judge held that only ₹ 20,000 had been paid by the mortgagee to the insolvents and ₹ 55,000 out of ₹ 75,000, the stated amount of the mortgage money, had remained unpaid, the High Court has found that the entire consideration passed. If this finding is correct, then the fact that such a large amount had been paid by the mortgagee would take him a long way to success in proving the bona fides of the transaction. But it has been argued by the learned counsel for the respondent- Receiver that, finding is not correct. It has been strenuously argued on behalf of the respondent that the mortgage bond in question was without consideration. The Official Receiver had also filed a memorandum of objections in the High Court challenging the correctness of the finding by the learned District Judge that ₹ 20,000 had as a matter of fact been paid to the transferors. As on the question of consideration the two courts below have materially differed in their conclusions, the question is open before us. We have, therefore, to examine how far the transaction in question was for valuable consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd endorsed receipt of the same, Ex. LXIV(a) and is corroborated by his accountant, C.P.W. 9, who proves the ledger and day book, Exs. LXXX and LXXXI. Thus we have not only the evidence of the mortgagee and his relations but also of third parties, creditors of the insolvents, proving the passing of consideration. The case does not rest only upon oral testimony. It is amply corroborated by contemporaneous entries in books of account maintained by the lender himself and by third parties who have been paid by him on account of the mortgagors. This considerable body of oral and documentary evidence is supported by the admissions of the mortgagors, not in the mortgage bond itself which stand rebutted, but by a series of admissions of receipt of the entire consideration money in the several receipts and endorsements made by some of them. All this voluminous evidence has been very carefully considered by the learned Chief Justice at pages 31 to 34 of the judgment of the High Court. We need not repeat all that has been said by the High Court for recording the finding that it was coiistrained to differ from the conclusions of the learned District Judge and to hold that Ex. I is fully suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , ₹ 40,000. Either a portion or the whole of the dues of the Bank have been liquidated. The evidence is not specific. One of the mortgagors claims to have paid a portion of the Imperial Bank s dues by selling ornaments of the ladies of his family, thereby directly suggesting that no portion of the mortgagee s money was utilised for payment of the dues of the Imperial Bank. The High Court rightly refused to accept the mortgagors belated attempt to prove by their bare testimony that any amount out of the consideration of the mortgage bond in question had remained unpaid. The Receiver s evidence was directed mostly to making statements suggesting that the mortgagee had not made such enquiry about the financial position and status of the mortgagors as a reasonable man of business would do. He has not made any definite statement that the mortgage bond in question was without consideration. In cross-examination he has been constrained to admit that he did not remember to have examined the mortgagor who was in charge of the business (first counter petitioner). He admits that it is usual for an Official Receiver to examine the insolvent. He has said further that he did not consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y adjudged an insolvent should have been honest and straightforward in the matter of the transaction impeached. If lie was really so, there would not be much difficulty in coming to the conclusion that the transaction as a whole was bona fide. Even if the mortgagors were wanting in bona fides and assuming that to be so in the present case, the crucial question still remains to be answered. Unless it is found that the transferee was wanting in bona fides in respect of the transaction in question, he cannot be affected by the dishonest course of conduct of the transferor. Has it been shown by the evidence on the record that the mortgagee was a party or privy to the dishonest intentions of the mortgagors in so far as they may have intended to defeat or delay their creditors by executing the mortgage bond? The courts below, and particularly the High Court, have taken the view that the mortgagee had failed affirmatively to prove his bona fides. This conclusion is based upon the consideration that the General Clauses Act (II of 1072)=(1897), in cl. (6) of s. 2 provides that Nothing is said to be done or believed in good faith which is done or believed without due care and attention. Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solvent to place all his assets at the disposal of the court without concealing any of his assets. Similarly it protects the interests of an honest alienee or an honest secured creditor of the insolvent. On the other hand, it protects an honest debtor from harassment by creditors who may take simultaneous proceedings for realization of their debts from their common debtor even by sending him to civil prison. It is necessary for the promotion of trade and commerce that an honest debtor should be released from his multifarious obligations as soon as his assets have been placed at the disposal of the court for the benefit of his creditors. It also lays down penal provisions for punishing a dishonest debtor. It also makes provisions for saving the debtor and his creditors from the unscrupulous conduct of persons who may have entered into unconscionable bargains with a person who is financially involved. The law of insolvency is aimed against a dishonest debtor but not necessarily against a debtor who has suffered loss in his trade or business as a result of transactions which may not have been done with due care and attention. Business sometimes is an adventure and very often involves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irrespective of the subject or the context. The Insolvency Regulation is on the same lines as the Provincial Insolvency Act and therefore must be understood in the same sense. If that is the correct approach to the law of in-solvency, a secured creditor who has advanced money to a debtor honestly, even though he may not have taken all due precautions, would not come within the mischief of s. 35. It must, therefore, be held that the test of good faith as laid down in the law generally applicable to Indian Statutes is more appropriate to proceedings under the insolvency law. That being so it must also be held that the courts below have approached the question of bona fides from a wrong standpoint and have applied a wrong test. Having come to the conclusion that honesty is the test to be applied in judging the bona fides of the creditor, a secured creditor in this case, we have to see how far he has satisfied that test. In this connection it has to be remembered that it is common ground that the mortgagee had absolutely nothing to do with the mortgagors before the mortgage transaction was concluded. There is no blood relationship or any other kind of relationship which could be urged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e courts below were right in applying the test of due care and attention, what is there to show that the mortgagee was wanting in that respect ? Being a complete stranger to the family of the borrowers, he deputed his young lawyer sons to make such enquiries as they could from persons who were expected to know them and their business dealings and after satisfying themselves that the borrowers had a good reputation and had unencumbered properties of much greater value than the sum proposed to be advanced, the mortgage transaction was finalized. It must be remembered in this connection that even the test applied to a lender while lending money to the karta of a joint Hindu family does not insist upon the creditor seeing to the application of the funds advanced. In the instant case the borrowers represented to the creditor that they required funds in the way of their business. Their enquiry yielded the information that they had borrowings to the extent of ₹ 30,000 to ₹ 40,000 and outstanding claims against their debtors to a much larger extent. That is the state of affairs in a normal trading family. The fact that all their immovable properties worth, according to the Rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conclusion that the lender had not been careful and cautious and was therefore wanting in good faith. Those are very speculative arguments which cannot be the foundation for a finding that the Receiver had succeeded in disproving good faith. In this connection it was also pointed out that there was no satisfactory evidence as to how the lender raised ₹ 55,000 which he paid soon after the registered mortgage bond was delivered to him. There is evidence in the shape of an entry in the passbook in the name of the mortgagee issued by a respectable hundi shop in Alleppey, Ex. LXVI (a), showing that ₹ 40,000 was withdrawn by him on August 19, 1924, just the day previous to the date of payment of ₹ 55,000. It is the mortgagee s case that he paid the sum of ₹ 55,000 to the mortgagors with the amount of ₹ 40,000 thus withdrawn to which was added ₹ 15,000 which he had with him already. There is no reason to doubt the truth of this version which has been accepted by the High Court. It must, therefore, be held that the evidence adduced by the mortgagee apart from the question of burden of proof has affirmatively proved the passing of consideration for t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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