C. Guruswami Pillai vs Shri Chitra Cardamom Co-operative Society Bank Ltd.

Subramania Iyer, J.—Guruswami Pillai who was adjudged insolvent by the District Judge of Parur on an application presented by the Respondent Sri Chitra Cardamom Co-operative Bank Ltd., No. 1998 Deviculam, by order dated 26-11-1951, challenges it by this appeal. The adjudication and the appeal are under the Travancore Insolvency Act, 8 of 1108. The marking of the appeal as a C.M.A. appeared to us to be not proper and we, therefore, asked the Advocate General the authority for it. He stated that there is a practice, though not uniform, of filing appeals, against orders passed under special statutes which provide for appeals, as Civil Miscellaneous Appeals. When an appeal is provided against an order passed under a special statute, it is to be marked "A.S. The term "C.M.A." is appropriate only to an appeal presented against an order under Order 43, CPC . This will, therefore, be remarked as an A.S. The Advocate General agrees that this is the proper procedure.

The Respondent is a co-operative society-registered under the Travancore Co-operative Societies'' Act, v. of 1112. The Appellant was its Secretary, one Kumaravelu Gounder its President, and Ram Das vice president, during the relevant period. The Appellant became the Secretary from 24-7-1943 and continued to be such until 27-7-1948.

Ex. I contains the Bye-laws of the Respondent Society. Bye-law No. 63 provides that

All cash balance exceeding Rs. 500/- shall be deposited in the Government Savings Bank -Treasury or Anchal. In default thereof interest at 24 per cent, per annum shall be realised from the responsible officer.

A treasurer as contemplated by the bye-laws is one who is entitled to be the custodian of the cash of the Society. During the relevant period there was no treasurer. His function was being performed by the President. The Secretary, however, appears to have been the actual recipient of the cash that came into the Society. On 27-7-1948 when the aforesaid three officers relinquished office, there was, as per the accounts, a cash(sic)(sic)-fas-f (sic) Zi case. This was in (sic) iox ninch circumstance was noted-1(sic). The Day Book on that corresponding 3-10-1123 and it was debited against the Appellant, The Society had to fix the responsibility for the missing cash and in that behalf an enquiry was conducted.

On 2-9-1948 the Managing Committee met in the presence of the Appellant and passed a resolution to the effect that as a result of enquiry, the plea raised by the Secretary, that he was not account able for the entire cash but only to a moiety of it, the other half being accountable by the President, was not proved and the conclusion reached | at the enquiry was that the Secretary was responsible for the whole amount. The President is also the Vice President were present at the meeting. This resolution is recorded at pp. 87 and 88 of the Minutes'' Book which is marked as Ex. R in the case. The Appellant has attested this resolution in token of his assent thereto.

In conformity with the resolution, the Appellant on its date, i.e., 2-9-1948 gave a letter Ex. P to the Respondent Society. This letter, though disputed by the Appellant at first, has afterwards been admitted by him. The letter says that the Appellant had come by an amount of S. Rs. 6027-6-14 cash as Secretary of the Society, that he is answerable, to the Society for the amount and that on account of his inability to immediately repay it, he wants a month''s time therefor. The letter states further that should he be unable to pay the said amount within that time, he agrees to secure his immovable property in favour of Society or make the amount good by assign in property sufficient to liquidate the liability. The Respondent granted the time asked for. The date on which either the payment, or in default security, or in default of both, assignment of proper should have been made was on 2-10-1948.

The Appellant not having done anything in that direction, the Managing Committee met again on 10-10-1948 and passed the resolution which is recorded at p. 89 of Ex. A. The resolution is to the effect that the Appellant not having complied with the undertaking given by him in Ex. P, steps should be taken, by resort to civil and criminal Courts, for recovery of the amount. This resolution was confirmed by the general body of the members of the Society at their meeting; on 19-2-1949. The resolution is recorded at page 91 of Ex. R.

Pursuant to the aforesaid resolutions, the Registrar of Co-operative Societies granted his sanction to pursue the remedies as aforesaid. Suit No. 374/50 was accordingly filed before the Deputy Registrar of Co-operative Societies on 4-4-1950. The Appellant filed as many as three written statements on 22-5-1950, 28-4-1951 and 25-6-1952, in the last of which he took exception to the jurisdiction of the Deputy Registrar to proceed u/s 56 of the Travancore Act, V of 1112 as, according to him, the proper section was 54. The Appellant also pleaded non-liability on the merits.

(4-5) On 5-4-1950 the Respondent filed I. P. No. 4 of 1950 on the file of the Court below upon which the order challenged in this appeal was passed Two acts of insolvency were relied upon in that application. One was a deed of assignment dated 9-3-1950 marked in the case as Ex. H, and the other, an assignment granted by the Appellant the next day which is marked Ex. J. These alienations were impeached as fraudulent, brought about with a view to defeat and/or delay payment to the creditors including the Respondent Society who is the major creditor. On 5-11-1951, the Appellant filed written objections to the above application. The President of the Society on the date of the application was examined as a witness for die Petitioner and the Appellant as his witness. Various documents were filed on both, sides. The Court below on a consideration of the entire evidence reached the conclusion that Ex. F evidenced an unsecured debt due to the Society from the Appellant, that Exs. H and J constitute acts of insolvency on which the application could be founded and accordingly adjudged the Appellant insolvent.

The learned Advocate General appearing on behalf of the Appellant contended that neither Exs. H nor J would constitute an act of insolvency which is necessary to sustain the application. He contended further that the Society being a secured creditor in respect of Anr. debt and the security not having been either valued or given up, the Respondent cannot be a Petitioner in insolvency. It is also contended that the liability of the Appellant is not one on foot of which an application in insolvency could be made.

Taking the last contention first, we are clear that it cannot be accepted in view of Ex. F under which, as already stated, the Appellant owned and accepted liability and asked for time to discharge it which was granted. Whatever might be the origin of the obligation on account of the novation under Ex. F, which is not subject to any infirmity, it evidences a debt of the Appellant for a fixed amount due to the Respondent. There can be a novation between the parties to a prior contract or transaction and after the novation, if the subsequent contract is enforceable, that will govern the relationship of the parties and the obligor will stand relieved of his prior obligation. In this case even the original obligation was a debt because, it cannot be said that the obligation of the Appellant arises on account of any misappropriation or embezzlement as is seen to have been considered in some of the documents exhibited in the case.

Bye-law No. 63 which has been already read does not make retention of a sum belonging to the Society by its recipient wrongful, but only fastens liability upon him to interest at 24 per cent. If, therefore, the Appellant omitted to make over the aforesaid amount to the President or deposit it in a Bank, he would be answerable to make good the amount with the aforesaid rate of interest. How can this liability be characterised as amounting to an embezzlement we tail to see. It is on the basis that the original liability incurred by the Appellant was on account of the embezzlement, tire quantum of which could not; be ascertained, that it was contended that the obligation cannot form the foundation of an application to adjudicate the Appellant as insolvent. In our view there is no defect attaching to the original obligation and even if it had stood by itself independent of Ex. F, that obligation could be enforced as a debt and could form the foundation of an application to adjudge the debtor insolvent.

As regards the second objection namely that the Society is a secured creditor in respect of Anr. debt evidenced by Ex. D dated 5-7-1121, which is a deed of hypothecation executed by the Appellant in favour of the Society for an amount of Rs. 2000/- which he took as a loan, we are equally unable to accept the contention of the learned Advocate General. The only support invoked to his contention is the definition of the term "secured creditor" in Section 2(e), Provincial Insolvency Act, the language of which is the same as that of the corresponding section of the Travancore Act. Section 2(e) runs as follows:

(e) ''Secured creditor'' means a person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor; and

The argument is that if a debtor owes more than one debt to a creditor for any one of which there is security, the creditor will be a secured creditor as the definition would embrace not merely a creditor to whom is owing only a secured debt but Anr. or other debts whether secured or not. If the Respondent is a secured creditor as contended by the learned Advocate General then, there having been no valuation of the security nor its abandonment as contemplated by Clause (2) of Section 9, the application is unsustainable. The argument is that the Insolvency Act deals with the liabilities of the proposed insolvent creditor war and not debt-war. Reliance was placed upon the following words of Jessel M.R. in ''West Riding Union Banking Co., Ex Parte Turner in re'' (1882) 19 Ch D 105 at p. 112 (A):

The principles of the bankruptcy law are plain enough. A man is not allowed to prove against a bankrupt''s estate and to retain a security which if given up would go to augment the estate against which he proves.

The passage does not support the contention of the learned Advocate General as it applies only to a debt for which there is security because it is only in the case of a secured debt that security can be given up and if given up it would augment the estate of the debtor. In respect of unsecured debts owing to the very same creditor no security can be given up nor can there be an augmentation of the estate of the debtor unless the debt itself is given up. Reliance was also placed upon "the decision of the Nagpur High Court reported in AIR 1940 252 (Nagpur) . Stone C. J. and Vivian Bose J. (as he then was) held in that case that:

If a secured creditor does not assess u/s 47 and does not even ask the Court to say that, under the powers conferred by Section 34, the debt is of such a nature that its valuation is incapable of being fairly estimated and allowed the insolvent to be discharged without any proof having been put in for the balance, then he (the secured creditor) must be content with his security. If a secured creditor ignores the Insolvency Court altogether he must be content with his security and will be debarred from claiming any dividend if his security should prove insufficient.

Their Lordships considered only a secured debt and their observations are confined to it. They say at p. 253 that even in the case of a secured debt, the creditor would be a secured creditor to the extent of the value of the security if it be valued and an unsecured creditor for the balance. We fail to see what help the learned Advocate General derives out of this case. A similar plea was repelled by Lawrence J. in ''Dutton Massey and Co. In re, Manchester and Liverpool District Banking Co.'' 1924 2 Ch 199 (C). Says the learned Judge at p. 205:

No doubt the general rule in bankruptcy is that when a creditor proves against the estate ho must; give up or value any securities which if not retained by him, would go to augment the estate against which he seeks to prove. But the rule pre-supposes that the security held by the creditor, is a security for the debt which he is seeking to prove. The rule has reference only to a proof by a secured creditor that is to say by a creditor who lodges a proof in respect of a debt which is secured on some property which subject to the security, would go to augment in the estate against which he seeks to prove. I have never heard it suggested, nor has Mr. Clayton been able to produce any case to show that a creditor is not entitled to prove for an unsecured debt without giving up a security which he holds on part of the debtor''s property for a different debt altogether.

The judgment in appeal from the judgment of Lawrence J. was in consonance with this view.

A reference to a few sections of the Act will make it clear that the definition of the term ''secured creditor'' is to be understood as confined to his capacity qua the secured debt and not comprehending his capacity as regards debts for which there is no security. Section 9 of the Insolvency Act which provides for petition by a creditor, enacts-

1. A creditor shall not be entitled to present an insolvency petition against a debtor unless-

(a) the debt owing by the debtor to the creditor or, if two or more creditors join in the petition, the aggregate amount of debts owing to such creditors, amounts to five hundred rupees, and

(b) the debt is a liquidated sum payable either immediately or at some certain future time, and

(c) the act of insolvency on which the petition is grounded has occurred within three months before the presentation of the petition.

Provided that where the said period of three months referred to in Clause (c) expires on a day when the Court is closed, the insolvency petition may be presented on the day on which the Court reopens.

If the petitioning creditor is a secured creditor, he shall in his petition either state that he is willing to relinquish his security for the benefit of the creditors in the event of the debtor being adjudged insolvent, or give an estimate of the value of the security. In the latter case, he may be admitted as petitioning creditor to the extent of the balance of ''the'' debt due to him after deducting the value as estimated, in the same way as if he were an unsecured creditor.

Mark the definite article ''the'' used in Clause (2) which clinches the question against the Appellant. Section 28 Clause (2) enacts that:

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 shall become divisible among the creditors, and thereafter, except as provided by this Act, no creditors 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 proceedings, except with the leave of the Court on such terms as the Court may impose.

And Clause (6) provides:

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.

If the contention of the Advocate General If correct, Clause (6) would comprise all the debit due to a creditor if one of them is secured. How can his security be realised if Section had not been passed and what is the amount realisable. The security can be realised by sale, out of Court if there is a power of sale, or through Court. Only the sum secured can be so realised. What is to happen to the unsecured debt or debts? Is the creditor to lose them and if so for what default on his part? And default there is none for the Act allows the secured creditor to keep away from the insolvency Court without adversely affecting his rights in any way. If he should not lose his unsecured debts, how is he to realise them? If he is brought under the category of secured creditors, the only mode of recovery is by proceedings against his security and no security ''is given by the debtor. If the definition has the ambit contended for, then the security of the creditor for one of his debts has to be taken to cover the unsecured debt or debts as well, that is to say, an unsecured debt or debts would have to be taken as converted into secured - a contingency which would defeat the very purpose of proceedings in insolvency which is to secure an equal distribution of all available assets of the insolvent among his creditors to the extent possible, m liquidation of liabilities.

When security is given for a debt, it means in theory that a sufficient part of the property secured is parcelled out and given to the creditor and the remaining portion called the equity of redemption belongs to the debtor and forms part of his assets - the actual value of which can be ascertained only on sale - when it may turn out to be nil or if the proceeds be found insufficient to satisfy the creditor what was supposed to be a right would turn out to be illusory and there may be a liability to the extent of the deficit. But notionally the equity of redemption is a right and an asset though it may not yield a positive and material advantage. The equity of redemption would according to the Advocate General''s contention operate as security for the unsecured debts due to the secured creditor, i.e. a situation which is the very opposite of what is envisaged by the Insolvency Act. The object of proceedings in insolvency is to render the assets of the insolvent as at their inception available undiminished if not augmented, for liquidation of his liabilities.

It is not necessary to discuss the matter in greater detail. It is sufficient to say that this contention of the learned Advocate General is altogether unsound and cannot at all be accepted. Indeed one of us felt shocked and� said so when the argument was addressed.

We may now come to the first point which; relates to the question whether Exs. H or J constitutes an act of insolvency. Ex. H is a deed of assignment of immovable property for Rs. 5000 out of which Rs. 2300 is appropriated towards the amount due to the assignee under a mortgage of the year 1112 and Rs. 2700 is reserved to be paid to the Society under the deed of hypothecation. Ex. B. Before that deed of hypothecation was executed, on 25-4-1121 the Appellant lodged a statement before the Society which is marked as Ex. L to the effect that the property sought to he secured to the Society for the loan that was asked for was unencumbered. It is that property that had been mortgaged to the assignee under Ex. H in the year 1112. If that liability had been outstanding the property would have been subject to that encumbrance, and the statement Appellant in Ex. L that it was free from encumbrance would be untrue. The Appellant now says that he made a false statement to induce the Society to advance the loan as they would not have taken a puisne mortgage.

The Appellant''s statement that the property is free from encumbrance may not bind the mortgagee but so far as the Appellant is concerned, we cannot; accept the explanation under the circumstance. The Appellant had started proceedings under the Travancore Debt Relief Act for the discharge of the amount due under the mortgage of 1112. The evidence in the case shows that certain amounts had been paid into Court in three instalments by the Appellant to liquidate that liability, what the aggregate amount deposited was and whether it was withdrawn by the mortgagee, or is still in Court, is not made clear. That is a matter which admits of easy proof but left in doubt. It is quite possible that the entire liability under the mortgage of 1112 had been discharge; by the aforesaid deposit and the statement contained in Ex. L is perfectly true. If the liability had been discharged, then the execution of Ex. H and an appropriation of part of its consideration towards the very same mortgage cannot be justified and can only be attributed to an intention on. The part of the Appellant to defeat; his creditors. The amount of Rs. 2700 reserved in Ex. H was not given or tendered to the Respondent until after I.P. 4 of 1950 was filed which was about a month after the sale. The tender was refused as its acceptance might prevent reliance on the assignment as an act of insolvency.

As regards Ex. J it is a transfer of immovable property by the Appellant to his brother-in-law for 4000. Out of this Rs. 1150 is reserved for the discharge of a mortgage debt of the year 1111 and Rs. 2000 is stated to be due to a brother of the Appellant under a deed of partition in which Rs. 1000 is stated to have been directed to be paid by the Appellant. The remaining Rs. 1000 is accrued interest. The deed of partition under which the obligation is alleged to have been incurred was not produced by the Appellant though he undertook to produce it. In the absence of that document it is not possible to accept the version of the Appellant. The 3rd and the last item which constituted the consideration for Ex. J is Rs. 850 made up of Rs. 700 for principal and Rs. 150/- for interest stated to be due to one Karuppayya under a promissory note whose date is not mentioned. There is nothing to show that the transferee paid Karuppayya. The pronote is not produced. Neither Karuppayya nor the assignee was called as a witness or summoned to produce the document which, if real must be in the possession of either of them.

The non-mention of the date of the promissory note is a significant circumstance. There is also the fact that Exs. H and J were not registered at the Registry Office at Deviculam which is a busy centre and where the properties lay, but were registered at a far-off place i.e. at Peermade. The Appellant has sought to justify his execution of the documents by alleging that they were the outcome of pressure exerted on him by his creditors. This involves an admission that but for the pressure he would not have executed them. When a transaction is impeached as fraudulent u/s 53 or Section 54 of the Insolvency Act, one way of escape is to plead and prove that the alienations were effected on account of pressure exerted upon the alienor by the creditors. If the i debtor was not a free agent, but was forced to enter into a transaction, then that cannot be impeached on the ground of the debtor''s intention to prefer some, or defeat other, creditors.

The story of pressure exerted on the Appellant cannot be accepted because, so far as the assignee under Ex. H is concerned, his was a secured debt and the security was ample. As regards Ex. J a part of its consideration was for paying a debt which was sufficiently secured and Anr. part was for payment to a near relation of the Appellant and it is not likely that there would have been any pressure therefor. The third item of consideration i.e., the liability under a pronote stands unproved, It is not possible to peep into the mind of man and ascertain his intention. The subjective state of mind of the transferor is what is material and that has to be inferred from the attendant circumstances. The circumstances obtaining in this case leave no room for doubt that those two transactions, Exs. H and J, were resorted to by the Appellant with a view to defeat his creditors. That is the conclusion reached by the Court below, and we confirm it. Section 6 of the Provincial Insolvency Act enacts that a debtor commits an act of insolvency if-

(b) in India or elsewhere, he makes a transfer of his property or of any part thereof with intent to defeat or delay his creditors;

Exhibits H and J therefore constitute acts of insolvency. They were within three months of the application which stands sustained by them.

It might have been but was not contended that Ex. P having been accepted, the relief of the Society is to ask for security or assignment. Appellant having denied Ex. F in his written objection could not consistently raise the plea. At the time of evidence the Appellant changed front, admitted Ex. P, said that similar documents were taken from the President and Vice President and that the three letters were taken tentatively pending fixation of the proportion of the liability of each of them. Even then the contention first mentioned as regards giving security over or assignment of immovable property could not be raised, as it, if raised, would mean acceptance of liability for a part if not for the whole amount. Had the Appellant been prepared to implement Ex. P he would, as he could, have given security over or assignment of immovable property soon after 2-10-1948 and avoided the resolution of 10-10-1943. Instead of doing that he gave assignments to Ors. (Exs. H and J) whereupon the Society had necessarily to take the action that they did before the Deputy Registrar and the Civil Court.

Learned Advocate General contended that the Appellant has unassigned immovable property here and elsewhere worth Rs. 50,000/- and that therefore he should not have been adjudged insolvent. Assuming that he has enough property by the sale of which his debts could be liquidated, that circumstance would not render the petition unsustainable or make it liable to be dismissed. The cause of action of a creditor to whom is owing an unsecured, debt or a balance in a secured debt with insufficient security on its being valued or given up of Rs. 500 or more is complete on the commission of an act of insolvency by the debtor. The debtor may avoid his adjudication if u/s 25 he is able to pay the debts and pays them within a reasonable time. Except for this purpose the existence or extent of other assets has no relevance. Insolvency need not be and most often is not pauperism. If a person is not able to meet his liabilities as and when they became due, out of his funds, he is not solvent though he may have enough assets by converting which into cash he may be able to liquidate his liabilities. If a debt of the requisite description and quantum exists and there is an act of insolvency, the jurisdiction of the insolvency court can be invoked. But adjudication is not inevitable and can be averted as aforesaid because no creditor can as of right claim that the debtor must necessarily be adjudged insolvent. An" act of insolvency is not an offence or crime on proof of which a sentence in the shape of adjudication must follow. We therefore put it to the Advocate General whether he wants an opportunity to pay and avoid confirmation of his client''s adjudication. The answer was ''No''.

The result is that the order of adjudication made by the Court below is correct and is upheld. The appeal should therefore, be and is hereby dismissed with costs.

The appeal and O.P. 118/1952 were heard together as ordered by the Court on a request made by the Appellant who is the Petitioner in the O.P. The O.P. prays the court to bring up the records in connection with the said suit No. 374 of 1950 on the file of the Deputy Registrar of Co-operative Societies and quash the award passed by him which was confirmed by the Registrar on revision. The point raised in the O.P. is that on the facts of the case the proper section under which action should have been taken against the Petitioner is Section 54 because it was a claim to enforce the liability incurred by the Petitioner on account of alleged misappropriation of the Society''s funds while he was Secretary. The Petitioner took this objection before the Deputy Registrar who repelled it. His attempt to get redress before the Registrar also failed. If the proceedings started and conducted were proper they are not subject to attack.

There is however a complaint made that the Deputy Registrar did not permit the Petitioner''s Counsel to argue the case, which has to be considered. Section 54(1) of the Travancore Co-operative Societies Act runs thus:

Where in the course of an audit u/s 22 or an inquiry u/s 43 or an inspection u/s 44 or the winding up of a society, it appears that any person who has taken part in the organisation or management of the society or any past or present officer of the society has misappropriated or fraudulently retained any money or other property or been guilty of breach of trust in relation to the society, the Registrar may of his own motion or on the application of the Committee or liquidator or of any creditor or contributory, examine into the conduct of such person or officer and make an order requiring him to repay or restore the money or property or any part thereof with interest at such rate as the Registrar thinks just or to contribute such sum to the assets of the society by way of compensation in respect of the misappropriation, fraudulent retainer or breach of trust as the Registrar thinks just.

It appears to us clear that the present is not a case coming under that section. There has not been an audit u/s 22, nor an inquiry u/s 43 nor an inspection u/s 44 nor has there been winding up of the society u/s 51. We are clearly of the view that it is only where any one of the four classes of cases mentioned in Section 54(1) arises, that that section can be applied. As already stated it is a misnomer to call the liability of the Petitioner as arising on account of any misappropriation nor can it be said that the receipt of the money by the Petitioner was fraudulent as is clear from the provisions contained in bye-law No. 63 which has been already read. It follows that Section 56 under which action was taken is the appropriate section and the conclusions reached by the officers concerned are competent and this Court will not be justified in interfering, with, their decision.

As regards the complaint that counsel for the Petitioner was not permitted to argue the case the records show that as many as four advocates appeared at various stages before the Deputy Registrar. If there had been any refusal on the part of the Deputy Registrar to permit Counsel to argue the case, we would certainly have interfered and set matters right but in this case we need not enquire into the truth of that complaint because it appears to us that the ultimate order passed by the Deputy Registrar and the Registrar fastening liability upon the Petitioner for the amount due as aforesaid is the proper order to pass and that therefore there has been no failure of justice.

16 . The O.P. is therefore without merit and is dismissed with costs. Advocate''s fee Rs. 100/-.