P.K. Veloo vs Official Receiver, District Court, Alleppey

T.S. Krishnamoorthy Iyer, J.—The counter-petitioner in C. M P. 362 pi 1959 in I. P 24 of 1958 filed by the Official Receiver, Alleppey. u/s 55 of the Travancore-Cochin Insolvency Act 1955 (Act II of 1936) is the appellant.

One Sarojini Amma has been adjudicated insolvent in I. P 24 of 1958 on the file of the Subordinate Judge''s Court, Alleppey at the instance of the creditor C. P. W. 1 The appellant before this court obtained a decree in O. S. 599 of 1955 on the file of the Munsiff''s Court Shertalai against Saroiini Amma and in execution of the said decree purchased the property scheduled to C. M P. 362 of 1959 in court auction on 31-7-1956 for a sum of Rs. 810-13-9. The sale was, confirmed on 30-8-1958. The court sale was relied on as an act of insolvency in I. P. 24 of 1958 The Official Receiver filed C. M. P. 362 of 1959 for annulment of the court sale in O. S. 599 of 1955 The application was allowed by the learned Subordinate Judge of Alleppey and the decision was confirmed in appeal by the learned District Judge of Alleppey. The second appeal is directed against the decision of the learned District Judge.

It is agreed on behalf of the Official Receiver that the relevant provision applicable is Section 55(1) of Travancore-Cochin insolency Act (Act II of 1956) which reads thus

"Section 55 Avoidance of Preference in certain cases:

(1) Every transfer of property, every payment made, every obligation incurred, and every judicial proceeding taken or suffered by any person unable to pay his debts as they become due from his own money in favour of any creditor, with a view of giving that creditor a preference over the other creditors, shall, if such person is adjudged insolvent on a petition presented within three months after the date thereof, be deemed fraudulent and void as against the receiver and shall be annulled by the court." Sub-section (2) of Section 55 is not relevant for the case on hand and is therefore not produced here. According to the Official Receiver the court sale in favour of the appellant is a ''judicial proceeding suffered'' by Sarojini Amma. ''with a view of giving the appellant preference over her other creditors. The question to be decided is how far the plea of the Official Receiver has been established.

It is necessary to state a few facts. O. S. 599 of 1955 was instituted on 11-10-1955 and the decree passed ex parte was on 23-2-1956. The court sale was on 31-7-1956 and the confirmation of the same was on 30-8-1956 and the property was delivered to the appellant on 7-9-1956. C P W 1 filed the petition for adjudication on 22-9-1956. Though Sarojini Amma filed a petition under Order 21 Rule 90 C P. C. to set aside the court sale in O. S. 599 of 1955 on 1-10-195 6 it is agreed that it was dismissed for non-prosecution. The property sold in court auction in O. S. 599 of 1955 is 45 cents of land and was purchased by Sarojini Amma under Ext D-3 dated 13-10-1951 for Rupees 24840. On the date of court sale the property was subject to prior encumbrances. A sum of Rs. 11000 and interest thereon was due from Sarojini Amma to the vendor under Ext D-3 towards balance of sale consideration. A sum of Rs. 4000 and interest thereon due to the Popular Bank Ltd under a mortgage executed by Sarojini Amma. Subject to these two encumbrancer the property was purchased by the appellant for Rs. 810.

The question is whether the court sale is liable to be annulled u/s 55 Travancore-Cochin Insolvency Act (Act II of 1956) In C. M. P. 362 of 1959 the debt and the decree in O. S. 599 of 1955 in favour of the appellant are not questioned. The only plea is that the court sale is a judicial proceeding suffered by the debtor to give preference to the appellant.

To establish his plea the Official Receiver has to prove (1). The court sale is a judicial proceeding suffered by Saroiini Amma within the meaning of Section 55(1), (2) Such suffering was done with a view of giving the appellant a preference over the other creditors of Sarojini Amma and (3) The Court sale did result in such a preference being given to the appellant.

The submission of the learned counsel for the appellant was that since the debt and the decree in O. R. 599 of 1955 in favour of the appellant are not impeached, the execution proceeding and the court sale based on such decree cannot be said to be a judicial proceeding suffered by the debtor and in support of his contention the learned counsel relied on the decision of the Judicial Commissioner''s Court. Sind, in Chainraj v. Dolaram. AIR 1932 Sind 3 The facts in that case were that there was a consent decree in favour of the appellants against the debtor who was subsequently adjudicated insolvent. The appellants applied for execution of their decrees and applied for rateable distribution over the proceed of the property of the insolvent which was sold in execution of a decree passed in favour of the Official Assignee Karachi The claim of the appellants for rateable distribution was resisted by the other creditors of the insolvents applying u/s 54 of the Provincial Insolvency Act on the ground that the consent decrees passed in favour of the appellants were by way of fraudulent preference.

The trial Judge refused to give relief u/s 54 on the ground that the decrees, were passed more than three months before the presentation of the insolvency petition The learned District Judge took the view that though the decrees were passed more than three months before the date of the petition, the order for rateable distribution is a judicial proceeding suffered by the debtor and is void against the Receiver The Judicial Commissioners observed thus:

"In this case the preference if any given by the insolvents was given by them when they submitted to decrees being passed against themselves and not when in consequence of those decrees the appellants were able to claim payment of the amounts due to them under the said decrees The execution proceedings which give the appellants the advantage of claiming payment of money were no doubt judicial proceedings but they were neither taken not suffered by the debtors with a view to give preference to the decree-holders. These proceedings were taken by the creditors in consequence of the alleged preference already given to them and they were not suffered by the debtors because the debtors could legitimately do nothing in those proceedings to prevent payment. The fact that they remained absent would not render the payment which they could be compelled to make in execution proceedings a payment made by them with a view of giving a preference to the appellants. The execution proceedings taken against the insolvents or the ex parte orders for payment passed against them could not therefore afford a fresh starting point for computing the period of limitation of three months under this section."

The above decision is no doubt an authority for the proposition that the execution proceedings in execution of a valid decree against a debtor subsequently adjudicated insolvent cannot be considered to be a judicial proceeding suffered I agree with great-respect to the above statement of law. On this short ground the appeal has to be allowed.

But even assuming that the court sale is a judicial proceeding suffered by the debtor, the burden is heavy upon the Official Receiver to prove that the said judicial proceeding was suffered by the debtor with a view of giving the appellant a preference over her other creditors. In this connection it will be useful to refer to Section 44(1) of the English Bankruptcy Act 1914, which is almost identical with Section 55 of Act II of 1956 and certain English decisions based on the said provision. Section 44(1) of the English Bankruptcy Act 1914 is in these terms:

"Every conveyance or transfer of property, or charge thereon made every payment made, every obligation incurred, and every judicial proceeding taken or suffered by any person unable to pay his debts as they become due from his own money in favour of any creditor, or of any person in trust for any creditor, with a view of giving such creditor, or any surety or guarantor for the debt due to such creditor, a preference over the other creditors shall, if the person making, taking, paving or suffering the same is adjudged bankrupt on a bankruptcy petition presented within six months after the date of making taking, paving or suffering the same be deemed fraudulent and void as against the trustee in the bankruptcy."

In Sir William Henry Pest v Gresham Trust Ltd 1914 AC 252, a decision of the House of Lords, Lord Tomlin observed with reference to Section 44 of the English Bankruptcy Act, 1914, thus :

"It is contended on the appellant''s behalf that once given the withdrawal and the consequences of the withdrawal then in the absence of any other explanation the intent to prefer must be inferred, because a man is presumed to intend the natural consequences of his act. My Lords, I do not accept this contention. In my opinion in these cases the onus is on those who claim to avoid the transaction to establish what the debtor really intended, and that the real Intention was to prefer. The onus is only discharged when the court upon a review of all the circumstances is satisfied that the dominant intent to prefer was present. That may be a matter of direct evidence or of inference, but where there is not direct evidence and there is room for more than one explanation it is not enough to say there being no direct evidence the intent to prefer must be inferred "

Though the effect of Lord Tomlin''s speech was discussed in In Re. M. Kushler Ltd. 1943-Ch 248. the question was again elaborately considered in Re. Cutts 1956 1 WLR 728at pp. 733-734. Lord Evershed M. R dealt with three propositions:

"(1) The onus is upon the person alleging a ''fraudulent preference'' to prove to the satisfaction of the court that the payment impugned was made by the debtor ''with a view of preferring the payee over his other creditors; in other words, the onus is upon (that person) to prove the fact of the debtor''s requisite state of mind, his intention; (2) it is competent for the court to draw the inference of intention to prefer from all the facts of the case, particularly when there is no direct evidence of intention before it. But the inference should not be drawn, having regard to the situation of the onus of proof, unless such inference is true and proper inference from the facts proved. Thus it will not be drawn, if the inference from the facts is equivocal, and in particular, it will not be drawn from the mere circumstance that the creditor paid was in fact ''preferred'' in the sense that he was paid when other creditors were not paid and could not be paid; (3) the words used in the section are ''with a view of T have used the word ''intention'' as synonymous with the word ''view'' and other words, e.g. ''object'', have also been used as synonyms in the cases. But whether the word used be ''intention'' or some other word, since it is notorious that human beings are by no means always single-minded, the intention to prefer, which must be proved, is the principal or dominant intention There may also be a valid distinction for present purposes between an intention to prefer and the reason for forming and executing that intention"

According to Williams'' Law and Practice in Bankrupts 17th edition the term "view" in Section 44 of the English Bankruptcy Act. 1914. means "intent" rather than "motive" The learned author says at page 360 thus:

"The word ''view'' though synonymous neither with ''intent'' nor with motive'' has a meaning nearer to the former than to the latter. The word ''object'' is of no great assistance in determining what ''view'' means, for an object may be either immediate or ulterior If a choice between creditors at such is made, the reason for choosing a particular creditor is immaterial; where the debtor returned goods in specie to their unpaid vendors because he thought it right to do so, the transaction was held nonetheless a voidable preference, Vaughan Williams J. intimating that it would be otherwise had the debtor believed he was legally bound to do what he did. In the latter case the dement of free selection would have been absent. But it will often happen that the motive, though not itself the thing to be ascertained, will go a long way to show what was the bankrupt''s view, it may for example, show that he was not selecting between creditors as such, but was choosing the lesser of two evils to himself Lord Halsbury L. C.. in his speech in Sharp v. Jackson (1899) AC 419, cites, apparently with approval, the judgment of Lord Esher M. R in the court below that the question is whether in fact the bankrupt had the intention to prefer, and that it does not much matter whether it is called ''intention'' or ''view'' or ''object'' "

In the case before me the courts below have found an intention to prefer mainly because the property has been sold in court auction for an inadequate price Exts. P-1 to P-4 the report and the mahazar of the Com-missioner P. W. 1 which estimate the value of the property at Rs. 13,125 15 were rejected by the courts below They have relied on Ext. P-5 of the year 1953 which if a sale deed in respect of 3 cents of land near about the disputed item for Rs. 3900. The courts below have also relied on the evidence of C. P. W. 1 the appellant to the effect that I cent of property in the locality wherein the disputed property is situate would fetch Rs. 1200 a cent. The evidence of C P W 1 only shows that he was speaking to the price of property on the date on which he gave evidence and not at the time of the court sale. That evidence does not therefore afford any indication as to the probable price for the property on the date of court sale, Ext P 5 is only for a small extent of 31 cents Further when a property is sold in court auction it is not possible always to expect that the property will be sold for every reasonable amount Even otherwise, an inference of an intent to prefer from the mere inadequacy of the sale price without anytime more is not justified.

The debtor who was subsequently adjudicated insolvent has not been examined, P. W 2 who is the creditor filed O. S. 167 of 1955 and obtained a decree on his debt. His evidence is absolutely insufficient to prove any circumstances to show that Sarojini Amma suffered the court sale with an intent to prefer. The cross-examination of P W 1 has brought out nothing to advance the plea of the Official Receiver No evidence of preference of other creditors shortly before the court sale has been adduced. On the other hand the execution proceedings and the compulsory court sale will only negative any view to prefer. There is absolutely nothing to show that when P. W. 2 was executing his decree, Sarojini Amma was resisting the execution proceedings there and brought about the impugned sale in favor of the appellant. In the light of what is stated above. I am of the view, that the decisions of the courts below cannot be sustained.

The learned counsel for the appellant submitted that about 43 cents out of the property sold in court auction have been acquired by the State and the compensation amount which is only Rs. 4.575 is sufficient only for paving off the vendor under Ext D-3 in satisfaction of his claim for the balance of purchase-money and 2 cents are now available for the appellant Nothing has been said on this matter by the courts below and there is not such of evidence to support this either. I am not therefore considering the same. The learned counsel for the Receiver prayed that he should be given an opportunity to summon Saroiini Amma and cross-examine her She was not included in the witness schedule filed by the Receiver. In these circumstances. I do not find any reason to allow the prayer.

In the result, I set aside the decisions of the courts below and allow the second appeal. C. M. P. 362 of 1959 in I. P. 24 of 1958 is dismissed, but in the circumstances. I direct the parties to bear their costs in this Court The Official Receiver will pay the costs of the appellant in the two courts below from out of the estate.