In Re: V. Purushothamdoss and Brothers

Venkatasubba Rao, J.—This application raises a point of some importance. It is made by the Official Assignee under the Presidency Towns

Insolvency Act. Previous to his presenting the insolvency petition, the insolvent had filed a suit on the Original Side for the recovery of nearly 7

lakhs of rupees. On the plaintiff''s insolvency, the Official Assignee intimated his willingness to continue the suit and was directed, under Order ,

Rule 8, 2. Civil Procedure Code, to furnish security for costs. The Official Assignee has not been able to raise the money in the usual way and has

now placed before me a scheme for my approval. If that scheme is approved, he will be in a position to raise Rs. 6,000, the amount to be

deposited in Court on the Original Side, as security. The scheme is shortly this. The liabilities of the insolvent amount to nearly 4 lakhs of rupees.

Four creditors to whom an aggregate amount of about Rs. 46,000 is due have come forward with a proposal to advance to the Official Assignee

Rs. 6,000 and as a condition of their lending the sum, they stipulate that if any amount is recovered by reason of the suit, they shall be paid their

debts in priority and that the other creditors shall be paid only from, and out of, any balance remaining after payment in full of their debts. This

scheme I am asked to approve. The application is opposed by several creditors on whose behalf it is contended that the proposed agreement is

inconsistent with the policy of the Insolvency Act and is unlawful u/s 23 of the Indian Contract Act. The Official Assignee puts his case thus:

The asset valued at nearly 7 lakhs becomes a worthless one if I fail to furnish security. By the agreement I propose to enter into, the position of the

dissenting creditors may become better and it can in no case become worse. If I lose the suit, they are in no worse position; if I win it, there is

every chance of their being paid their debts in full or in part. If I recover only a sum which represents the aggregate of the debt due to the four

assenting creditors, they alone will no doubt be benefited, but that does not in any manner injure the other creditors. In no event can the

arrangement be, therefore, prejudicial to the body of the creditors whom I represent.

Broadly speaking, this is true, but the question, however, remains, is this an agreement which the Court can approve? Section 49 of the

Insolvency Act deals with priority of certain debts, such as debts due to the Crown. The Section enacts that the debts to which priority applies

shall be paid in, full if possible. It is then provided in Sub-section (5):

Subject to the provisions of this Act, all debts proved in insolvency shall be paid rateably according to the amounts of such debts respectively and

without any preference.

The Indian Act is modelled on the English Bankruptcy Act and similar provisions are contained in Section 33 of that Act. The sub-section reads

thus - ""subject to the provisions of this Act, all debts proved in bankruptcy shall be paid pari passu.

The section of our Act is, if possible, stronger than the corresponding section of the English Act, although I have no doubt that the Legislature

intended merely to copy the English rule. The word pari passu connotes that the payment shall be rateable and the section of our Act would have

been complete even without the words ""without any preference"" added at the end. The presence of these words makes the matter perfectly clear

and it is impossible to hold that the Official Assignee, in the administration of the insolvent''s estate, can on any account prefer one creditor to

another. Can the Official Assignee ask the Court to approve what is prohibited to be done by him directly? The policy of the Bankruptcy Laws

seems to be to treat all creditors alike. It is based on grounds of public policy and the Official Assignee cannot contravene the rule in question,

much less can the Court aid him in contravening that rule. u/s 23 of the Contract Act, any agreement is unlawful which, if permitted, would defeat

the provisions of any law or which is opposed to public policy. There are decided cases which have held agreements invalid on the ground that

they are inconsistent with the policy of the Insolvency Act. The Official Assignee has frankly told me that this application is of a very novel kind,

and, as may be expected, there is very little case-law on the point. There is, however, one case decided under the English Act which is directly in

point.

A German national resident in England was adjudicated a bankrupt and the custodian of enemy assets agreed to release an asset of the

bankrupt, stipulating that such release should only operate in favour of creditors of British nationality and the trustee applied to the Court for

directions. Lawrence, J., expressed the view that the Court had no power to direct a distribution among a limited class of creditors only. Re

Wiske-mann (1923) 92 L.J. 349.

The Official Assignee has expressly said that he does not rely upon there having been proper meeting of creditors and upon the scheme having

been accepted at such a meeting. But it seems to me that the question is independent of the approval of creditors. There are several sections in the

Insolvency Act which show that the assent of those affected is disregarded on grounds of public policy or commercial morality, e.g., sections

dealing with an insolvent''s discharge and compositions with creditors. The fact that the Official Assignee himself has approved makes little

difference. See Williams on Bankruptcy, 13th Ed. p. 87. I have come to the conclusion that this is a scheme which I cannot sanction.

There is yet one observation I have to make. The Official Assignee asks me to regard the scheme as one providing for remuneration to the four

assenting creditors who have agreed to lend the money and not as embodying a method of preference. What he says is, that there is nothing to

prevent the lenders from stipulating that in return for the Rs. 6,000 they advance, they shall receive Rs. 48,000 in a certain event. This may, or may

not, be so, but I am not called upon at present to decide whether or not such an agreement is valid and can receive the approval of the Court. The

question I have to ask myself is, what does the transaction in substance and effect amount to? There can be no possible doubt that the arrangement

is one which is intended to, and which does in fact, give preference to these four creditors in the payment of their debts. The report of the Official

Assignee itself goes a long way to show what his own view of the transaction was. He says in clear and unmistakeable terms that the object aimed

at was to give priority to the debts of the creditors in question. Not only has he said this in his report, but he has argued the application only on that

footing, although he now suggests that it is possible to put a different construction upon the scheme. This argument is, therefore, clearly untenable

and I must refuse to accept the scheme. The application is rejected.

The application of the Official Assignee is bona, fide and I do not propose to direct him to pay costs personally, but the taxed costs of

Gokuldoss Jumnadoss and Company and Bala-krishna Sarma shall be paid by him from, and put of, the estate. I certify for counsel for

Balakrishna Sarma. These costs shall have priority over the claims of creditors.