Cherukuri Gangaraju vs Seemakurti Lakshminarayanamurti (died) and Others

Somaya, J.—This is a revision petition filed u/s 75 of the Provincial Insolvency Act V of 1920 and the petitioner seeks to revise the order of

the District Court of West Godavari dated the 8th of March, 1939, passed by him in C.M.A. No. 139 of 1937. By that order the District Judge

reversed the order of the Additional Subordinate Judge of Ellore passed by him in I.A. No. 4 of 1937, in I.P. No. 62 of 1934.

I.A. No. 4 of 1937, which has given rise to this revision petition was one filed u/s 50 of Act, V of 1920, for expunging the entry of the petitioner

as a creditor in the insolvency. The petitioner was admitted as a creditor and a dividend was paid to him by the Official Receiver. Subsequently

I.A. No. 4 of 1937 was filed for action u/s 50 of the Act. The application was resisted mainly on the ground that there were no other assets to be

realised by the Official Receiver and no prospect of any further dividend, that the Insolvency Court has no power even if it finds that a creditor''s

name ought to be expunged to make an order that the amount already paid to him by way of a dividend should be brought back by him and that

therefore an enquiry on the merits was not called for in this case. If after an order expunging his name from the list of creditors, the Court could not

follow it up by making an order directing him to bring back the amount that had already been distributed to him and there was no prospect of any

future dividend, then it is clear that an enquiry on the merits would be wholly unnecessary. There were also other applications filed to expunge the

names of other creditors from the list. These applications were all heard together by the Additional Subordinate Judge and he decided relying upon

certain authorities to be presently referred to that the position stated above was the correct one and that therefore there was no need to take

evidence on the question whether the various debts were really true debts. He therefore dismissed I.A. No. 4 of 1937 and also the other

applications along with it. Appeals were filed in the District Court of West Godavari and the District Judge reversed the decision of the

Subordinate Judge and remanded I.A. No. 4 of 1937 and other petitions for enquiry on the merits. The Judge took the view that the Court has got

the power to require a person to whom a dividend has been distributed and whose debt is subsequently directed to be expunged from the list of

creditors to bring back the money into Court. The petitioner challenges the correctness of this order and contends that both in England and in India

the position is well established that a creditor to whom a dividend has been paid cannot be directed to bring back that amount merely by reason of

the fact that subsequently the debt is expunged from the list of creditors. On an examination of the authorities, I think the position advanced by the

petitioner is correct and that the view taken by the District Judge is wrong.

In Ex parte Harper: In re Tait (1882) L.R. 21 Ch.D. 537, Jessel, M.R., while holding that lapse of time is no bar to a petitioner for expunging a

debt pointed out that an order expunging the debt would only operate to prevent the creditor from participating in future dividends and that he

cannot be called upon to pay back what he had already received. That was a decision under Rule 73 of the Bankruptcy Rules, 1870, under which

a trustee in bankruptcy who has admitted a proof against the estate is entitled at any time afterwards to apply to the Court to expunge the proof, on

the ground that it was originally wrongly admitted. This rule corresponds to Section 50 of the Provincial Insolvency Act. At page 541 Jessel, M.R.,

says this:

There was no limit to the time within which a proof might be expunged. In the cases which I have already mentioned the proof was expunged on

the ground that its original admission had been wrong. The new rule is in accordance with the old practice. And no injustice can be done, because

any dividends which have been already paid are allowed to be retained by the creditor, and the expunging affects only the right to receive future

dividends.

In In re Searle, Hoare and Company (1924) L.R. 2 Ch. 325, Lawrence, J., approved of the principle that dividends paid already cannot be

recovered and held that while the debt of a creditor was reduced, he is not entitled to participate in the future dividends until and unless , the other

creditors were paid to the extent to which he was paid. On page 327 Lawrence, J., refers to the remarks of Jessel, M.R., in the earlier case with

approval and then proceeds to say this:

The mere fact that the trustee cannot recover either payments made to a person whose proof is subsequently expunged or overpayments made to

a creditor whose proof is subsequently reduced does not, in my opinion, prevent the operation of the well-known principle of equity that a

beneficiary who has been overpaid is not entitled to receive any further payment out of the trust fund until the payments to the other beneficiaries

are levelled up to the amount received by the overpaid beneficiary.

Williams in his work on Bankruptcy at page 528 under Rule 24 after setting out Rule 24 which corresponds to Section 50 of the Provincial

Insolvency Act says this:

Under B. 73 of 1870, and the previous practice, the trustee was entitled at any time afterwards to apply to expunge a proof which he had originally

wrongly admitted, and mere lapse of time was no objection, though the creditor was entitled to retain any dividend already received.

Mr. Mulla in his Law of Insolvency says on page 495:

The creditor, however, is entitled to retain the dividends already received, the reduction affecting only the right to receive future dividends.

Page, C.J., who delivered the leading judgment in A.K.R.M.M.C.T. Chettiar Firm v. S.P. Dayabhoy & Sons ILR (1935) Rang. 703, says on

page 708:

For the reasons that I have given it is immaterial as between the first respondent and the appellant whether the proof by Musafer''s representatives

ought or ought not to be expunged because even if it was ordered that the proof ought to be expunged dividends already paid would not be

affected (Ex parte Harper: In re Tait (1882) L.R. 21 Ch.D. 537).

The decision of the Bombay High Court in In re Ramchandra Ganuji Waikar (1922) 104 I.C. 378, referred to by the lower appellate Court has no

application to the present case. There in ignorance of the existence of the claim of another creditor who had lodged his claim prior to the

declaration of a dividend certain dividends were paid out and the question was whether the Court has got the power to compel the creditors who

had received the amount to bring back enough to pay the creditor whose claim had been overlooked. The decision in Ex parte Harper: In re Tait

(1882) L.R. 21 Ch.D. 537 is not even referred to and the case itself relates to a different set of facts.

In Official Assignee v. S.P. Dayabhoy AIR 1937 Rang. 234, Leach, J. (as he than was) says this on pages 236 and 237:

The money which has been paid out to a creditor by way of dividend in insolvency proceedings is not recoverable in law. Ex parte Harper: In re

Tait (1882) L.R. 21 Ch.D. 537, A.K.R.M.M.C.T. Chettiar Firm v. S. P. Dayabhoy & Sons ILR (1935) Bang. 703. The expunging of a proof

only affects the right to receive future dividends. . . . Mr. Kalyanvalla has also relied on a decision of the Bombay High Court in In re Ramachandra

Ganuji Waikar (1922) 104 I.C. 378. It was there held by Marten, J., that where creditors have been paid more than they were entitled to by way

of dividend the Official Assignee is entitled to recover the excess payment on the ground of mistake u/s 72 of the Contract Act. This decision runs

contrary to the decision in Ex parte Harper: In re Tait (1882) L.R. 21 Ch.D. 537 and the decision in A.K.R.M .M.C.T. Chettiar Firm v. S. P.

Dayabhoy & Sons ILR (1935) Bang. 703 but it is not necessary for me to discuss it as the last mentioned case is binding on me.

The case reported in Panna Lal-Sham Lal Vs. Abdullah Usman and Others, which has been referred to by the Court below decided that where a

distribution was made under an order of adjudication which was later on set aside, provisions of Section 144 of the CPC could be applied. Where

the adjudication itself was set aside later on, then the whole ground for distributing the amounts was taken away and the case would be covered

directly by Section 144, CPC read with Section 55 of the Provincial Insolvency Act. This decision does not touch the question which calls for

decision in this case. In the present case there was no question of any non-compliance with the rules. The Official Receiver acted quite properly in

distributing the amounts in his hands. The District Judge has gone entirely off the track and has indulged in a good deal of criticism against the

Official Receiver. For this purpose he called for the various records from the Official Receiver''s office and has set out in paragraph 9 of his

judgment what he considers the facts which were disclosed by those records and then says that certain irregularities committed by the Official

Receiver came to light during the arguments of the appeals. I have been taken through this record and I hold that there is absolutely no justification

for any of the District Judge''s remarks against the Official Receiver. The District Judge went out of his way and remarked that the Official Receiver

would even be personally liable but I see no justification for that remark as well.

I reverse the decision of the lower appellate Court arid restore that of the Additional Subordinate Judge with costs here and in the lower

appellate Court to be paid by the first respondent. It is regrettable that the respondents did not appear but their case has not suffered as I

requested Mr: B. V. Ramanarasu to help the Court and represent what could be said on their behalf.