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Judgment
King, J.—The following two questions have been referred to us:
(1)(i) Where the Insolvency Court annuls an adjudication u/s 43 of the Provincial Insolvency Act V of 1920 and chooses to pass an order u/s 37
vesting the properties of the quondam insolvent in an appointee (Official Receiver or any other person), is the administration in insolvency to
continue for the realisation and distribution of the assets of such a person despite the annulment of the adjudication itself? and
(ii) if not, what is the scope of his functions as a trustee by reason of the vesting order u/s 37?
The two sections referred to in these questions run as follows:
Section 43 (1) : If the debtor does not appear on the day fixed for hearing his application for discharge or on such subsequent day as the Court
may direct, or if the debtor does not apply for an order of discharge within the period specified by the Court, the order of adjudication shall be
annulled, and the provisions of Section 37 shall apply accordingly.
(2) Where a debtor has been released from custody under the provisions of this Act and the order of adjudication is annulled under Sub-section
(1), the Court may, if it thinks fit, recommit the debtor to his former custody, and the officer in charge of the prison to whose custody such debtor
is so recommitted shall receive such debtor into his custody according to such re-commitment, and thereupon all processes which were in force
against the person of such debtor at the time of such release as aforesaid shall be deemed to be still in force against him as if no order of
adjudication has been made.
Section 37 (1) : Where an adjudication is annulled, all sales and dispositions of property and payments duly made, and all acts theretofore done,
by the Court or receiver, shall be valid; but, subject as aforesaid, the property of the debtor who was adjudged insolvent shall vest in such person
as the Court may appoint, or, in default to any such appointment, shall revert to the debtor to the extent of his right or interest therein on such
conditions (if any) as the Court may, by order in writing, declare.
(2) Notice of every order annulling an adjudication shall be published in the local official Gazette and in such other manner as may be prescribed.
What then is the situation when an insolvency Court annuls an adjudication u/s 43 and also vests the insolvent''s property in an appointee u/s 37?
Three points of view are possible. The first is that with the annulment the insolvency proceedings come to an abrupt and final conclusion. The
Insolvency Court has no longer any power to pass any orders in regard to the insolvent''s property, its order vesting that property in the appointee
being its last expiring act. The appointee is a mere custodian of the insolvent''s property. No doubt he should carry on the ordinary work of
administering and preserving the property in his hands, but he has no further control over it, and must merely hold it subject to any orders as to
attachment and sale which he may receive from any Court entertaining an application in execution against the insolvent. The insolvent''s creditors,
subject to anything which may have been validated by Section 37, are restored to the position in which they found themselves before the
insolvency proceedings began, and all must pursue afresh their remedies by execution or by suit in the ordinary way, which will mean in practice
that the insolvent''s property will go to some and some only of his creditors. The second view is that if a vesting order is made the insolvency
proceedings are continued for all purposes. The third view is one intermediate between these two, and we think, is the view which must prevail. It
is this, that the appointee continues to be subject to the directions of the Insolvency Court which appointed him, that these directions relate to the
property of the insolvent, and that they should be given in accordance with the policy and provisions of the Insolvency Act. It will be found on our
further examination that this is not in all respects equivalent to the actual continuation of the insolvency proceedings.
For the first point of view authority is meagre. Only two cases can be cited in its support. The first, reported in Arunagiri Mudaliar v. Official
Receiver of North Arcot (1926) M.W.N. 950 goes, to the extreme length of saying that the insolvent''s property should remain in the hands of the
appointee for the insolvent''s own benefit. The second, reported in Panna Lal v. Official Receiver ILR (1930) 53 All. 313 lays it down that the
vesting order is ''only for the purpose apparently of making the property available to creditors to proceed through the Civil Court''. Neither of these
rulings makes the slightest reference to any authority in support of any different view. They seem to us to concentrate unduly upon the meaning of
the word ''annul'', and not to consider adequately those provisions in the Insolvency Act, including that u/s 37 itself, which indicate that annulment
cannot be equivalent to a complete cessation of all"" insolvency proceedings.
In the first place such an interpretation seems to us clearly against the principle underlying the provisions of Section 43 itself. It is obvious that the
only reason for the annulment under that section is the conduct of the insolvent himself, and from Sub-section (2) of that section that its primary
object is to punish the insolvent by depriving him of any protection which he may hitherto have been enjoying under the Insolvency Law. Why
should the negligence of the insolvent have the necessary effect of upsetting the rights of his creditors inter se, for if this first view is to be upheld
these creditors can no longer expect the fair and equal treatment which had been assured to them by the insolvency. Those who have got no
decree will be hopelessly handicapped as against those who may proceed immediately to execution, and those who are aware of the annulment will
have an advantage over those who are not.
Again, as has been pointed out by the learned Judges who decided Somasundaram Chettiar v. Periakaruppan Chettiar (1929) 58 M.L.J. 658
an insolvency can also be annulled u/s 39 of the Act when the Court has approved a proposal for composition, and yet in spite of that annulment
the Court still retains power u/s 40 to re-adjudge the debtor insolvent if certain facts are proved. Clearly then an annulment u/s 39 does not
terminate for all purposes the proceedings of the insolvency Court.
Then we come to Section 37 itself, and the first point to be noticed is the antithesis between the vesting order and the reversion of the debtor''s
property to himself. Now it is true that under the first view according to which the appointee is a trustee or custodian of the debtor''s property, the
debtor''s freedom to dispose of it as he wishes after the annulment is restricted, but in every other respect the legal effect of the vesting order will
be no different from the legal effect of the reversion of the property to the debtor. Surely this can never have been intended. The whole significance
of the Court''s action in vesting the insolvent''s property in some one else seems to us to be that the Court is intended to preserve its control over
that property, just as a similar control is always retained when a receiver is appointed to administer the property which is the subject-matter of a
suit. The truth of this proposition, it is interesting incidentally to find, was so self-evident when the case reported in Jethaji Peraji Firm Vs.
Tirupuramallu Krishnayya (dead) and Others, was being heard, that no argument was put forward against it (see p. 666). The learned Judges who
decided Somasundaram v. Periakaruppan (1929) 58 M.L.J. 658 also hold that the Insolvency Court has jurisdiction to direct that the debtor''s
property shall be sold by the appointee and the sale-proceeds distributed proportionately amongst all the creditors. Even in Jaing Bir Singh v. The
Official Receiver I.L.R.(1933) 11 Rang. 287 (F.B.) which is strongly relied upon by the Appellant''s learned Advocate it is not held that the
Insolvency Court has no power to give directions to the appointee u/s 37. We think therefore that the Insolvency Court retains full power to give
directions u/s 37 as to the realisation and disposal of the debtor''s assets. That power should not, of course, be used arbitrarily, but should be used
in the interests not of this or that individual creditor, but of the whole body of creditors, which means, in other words, that the only proper order for
the Court to pass is that the appointee should continue to realise and distribute the debtor''s property in accordance with the provisions of the
Insolvency Act.
This opinion, however, does not involve our acceptance of the second view, for that view clearly ignores altogether the meaning of the word
''annul''. The fact that not only the Official Receiver but any other person may be appointed u/s 37 is against the view that an order u/s 37 continues
the insolvency proceedings for all purposes. The person appointed tinder Section 37 has no longer by the mere fact of his appointment the powers
which a receiver has under the Act. He has only such powers as are necessarily implied by the vesting order which are, as we understand them, to
carry out the directions of the Court, and those directions, as we have said, should, so far as the realisation and distribution of the debtor''s
property are concerned, be in accordance with the provisions of the Insolvency Act. To this extent then we would answer the first question in the
affirmative.
A second matter, however falls, we think, to be decided by the terms of the reference to us, even though on the facts of this particular case it
does not directly arise. It might be argued that the ''assets'' of the debtor, and ''assets'' is the word used in question 1, include property which
though nominally alienated by him is property to which he is really entitled. The question then arises as to the powers of the person appointed u/s
37 in respect of applications under Sections 53 and 54. We must consider two separate situations (i) where such an application is already pending
when the order of annulment is passed u/s 43, and (ii) where it is sought to be made after that order is passed. And in considering these situations
we must presume that the person appointed u/s 37 is the Official Receiver who was receiver under the Act before the annulment.
On the first of these situations there are two important rulings in Jethaji Peraji Firm Vs. Tirupuramallu Krishnayya (dead) and Others, and Jaing
Bir Singh v. Official Receiver I.L.R.(1933) 11 Rang. 287 (F.B.). They approach the matter so far as Section 37 is concerned from two distinct
points of view. Jaing Bir Singh v. Official Receiver I.L.R.(1933) 11 Rang. 287 (F.B.) considers the terms of the vesting order and holds that it
cannot possibly apply to the property of a person other than the debtor. The property concerned in applications under Sections 53 and 54 is the
property of an alienee and therefore once the Court has annulled the adjudication it has no power to vest this property in any one. In Jethaji Peraji
Firm Vs. Tirupuramallu Krishnayya (dead) and Others, reference is made to that portion of Section 37 which validates all previous acts done by
the receiver, and includes his application under either of these sections among the acts which are validated. It is then said that if this Act remains
valid after the annulment it is unreasonable to suppose that the receiver cannot continue to pursue his remedy. We agree with this view. If once the
making of a claim by the Receiver to certain property as being in essence the property of the insolvent has been validated we can see no logic in
the view that would prevent the adjudication of that claim.
Finally there is the case of the initiation of proceedings u/s 53 or 54 after the annulment. No authority has laid it down specifically that the
appointee u/s 37 has any such power, and we think that under the terms of the vesting order he clearly could not have it. There is no question here
of the validation of any act and the property alienated by the insolvent cannot be his property within the meaning of Section 37.
We accordingly answer the first question in the affirmative subject to the qualifications which we have made. No answer is required to the
second question.
After the above expression of opinion the appeal and the Civil Revision Petition came on for final hearing before their Lordships Pakenham
Walsh and Varadachariar, JJ., and the Court delivered the following
JUDGMENT
Pakenham Walsh, J.
An objection has been raised before us that under Schedule I of the Act no appeal lay to the District Judge but Schedule I deals with appeals
u/s 75(2) and the Section which governs this appeal is Section 75, Clause (1) which says that an appeal is competent. As regards the merits, the
main argument was that the learned District Judge misconceived the discretion he had in the matter of passing an order, but the Full Bench ruling
since delivered shows that he could pass no other order than that which he did. The learned Judges say ""The only proper order for the Court to
pass is that the appointee should continue to realise and distribute the debtor''s property in accordance with the provisions of the Insolvency Act"".
They also say that ""the power should not of course be used arbitrarily but should be used in the interests not of this or that individual creditor, but
of the whole body of creditors"". They also repel, in another portion of the judgment, the view that the annulment of the Insolvency u/s 43 puts a
total end to the insolvency proceedings and say ""If this view is to be upheld those creditors can no longer expect the fair and equal treatment which
had been assured to them by the insolvency. Those who have got no decree will be hopelessly handicapped as against those who may proceed
immediately to execution and those who are aware of the annulment will have an advantage over those who are not."" In the light of those remarks,
it is clear that the learned District Judge could have passed no other order than the one he did. The appeal therefore fails and is dismissed with
costs.
The Civil Revision Petition is dismissed but without costs.
C.M.A. No. 456 of 1929 is not pressed and is therefore dismissed. No order as to costs.