R. Subramaniam vs Canara Bank and Another

S. Rajeswaran, J.—Application No. 604 of 2005 has been filed to set aside and rescind the ex parte order dated June 12, 2000, made

against the applicant in the above matter declaring him as an insolvent.

Application No. 605 of 2005 has been filed to stay the operation of the ex parte order of adjudication dated June 12, 2000, passed in the

above matter pending final orders.

The applicant has filed a common affidavit in the above two applications. The case of the applicant is that he came to know that he has been

declared as an insolvent on June 12, 2005, by this court, in the news column of the Hindu on July 29, 2005, without giving any details of the case.

On verification it was found that he was declared as an insolvent on June 12, 2000, and not on June 12, 2005, as reported in the newspaper. The

applicant has stated that the first respondent-bank filed a civil suit O.S. No. 10497 of 1996 against the principal debtors and the guarantors

wherein the applicant was the third defendant as one of the guarantors. The suit was decreed ex parte on February 3, 1998, for a sum of Rs.

4,81,448. Based on the ex parte decree, the first respondent-bank issued Insolvency Notice No. 72 of 1998 to make a payment of Rs.

10,28,586.20 and the said notice was received by him on December 7, 1998. The applicant filed an application No. 64 of 1999 to set aside the

insolvency notice and the same was dismissed on June 28, 1999. However, in the above insolvency petition, he was not served and he was not

aware of the ex parte order until the newspaper report dated July 29, 2005. Immediately the applicant approached the first respondent-bank for

settlement of the suit claim and after negotiations he paid a sum of Rs. 15,42,325 towards the full and final settlement of the decree dated February

3, 1998. The first respondent-bank also issued a letter dated August 9, 2005, acknowledging the receipt of the above amount and thus the

petitioner fully satisfied the decree passed in O.S. No. 10497 of 1996. Therefore he filed the above A. No. 604 of 2005 to set aside the ex parte

order dated June 12, 2000, declaring him as an insolvent. There was a delay of 1894 days in preferring the above application and therefore A.

No. 451 of 2005 was filed to condone the delay. The said application was allowed by this Court on November 28, 2005, against which one

creditor by name Mrs. Prabha Rajarathinam of Coimbatore preferred an appeal in O.S.A. No. 14 of 2006 after obtaining the leave. By an order

dated February 13, 2006, the First Bench of this Court dismissed the said appeal by observing that it is open to the parties to put forth their

respective cases in the application to set aside the ex parte order of adjudication and all the contentions are left open to the parties. Therefore, the

said creditor opposed the above applications before this Court by filing a common affidavit.

It is the case of the said creditor that the applicant herein approached her for financial assistance and pursuant to the same, a sum of Rs. 50

lakhs was lent on June 13, 2000. To repay the abovesaid loan the applicant issued a cheque for Rs. 5,00,000 and that was encashed. Thereafter,

in full and final liquidation of the liability, the applicant issued a cheque for Rs. 95,25,000 dated August 10, 2005. But the said cheque was

returned and in the mean time, she came to know that the applicant was adjudged as an insolvent through a paper article. She further stated that

the applicant already filed an Application No. 421 of 2005 for annulment of the said adjudication and subsequently he withdrew the same. It is

further submitted that if the order of adjudication dated June 12, 2000, is set aside, it would be detrimental to the interest of all the creditors

including her. Therefore, she prayed for dismissal of the above two applications.

Heard earned Counsel for the applicant and also the learned senior counsel Mr. Vijayanarayanan appearing for the creditor/appellant in O.S.A.

No. 14 of 2006.

Earned Counsel for the applicant while reiterating the averments made in the common affidavit, submitted that it is a fit case wherein ex parte

order dated June 12, 2000, is to be set aside on two reasons, namely, (1) no notice was served on him and he was declared insolvent only after

substituted service ; and (2) the petitioning creditor bank was paid in full and final settlement of the decree passed in O.S. No. 10497 of 1996. In

support of his contention, earned Counsel has relied on the Division Bench judgment of this Court in C.A. Balu v. Joseph Raj 1990 2 LW 27,

wherein, this Court has held that the resort to substituted service is not a matter of course and there is a duty cast upon the court to record in

writing the fac-tum, of its own satisfaction that the defendant was evading service.

Per contra, learned senior counsel appearing for the objector/appellant in O.S.A. No. 14 of 2006 vehemently opposed the applications by

submitting that the applicant filed an Application No. 64 of 1999 seeking to set aside the insolvency notice in I.N. No. 72 of 1998, but the same

was dismissed by this Court on June 28, 1999. The applicant did not prefer an appeal against the dismissal of the said application. Therefore, the

applicant was very much aware of the insolvency proceedings and he cannot say that he came to know of the ex parte order only on July 29,

2005, through the newspaper.

Learned senior counsel further submitted that having filed Application No. 421 of 2005 for annulment of the said adjudication, the applicant

should have prosecuted the same and he cannot maintain these two applications. An order of adjudication is in rem and therefore by discharging

the debts of the bank, the applicant cannot be permitted to go scot free without discharging the debts of the other creditors including the objector

herein. Learned senior counsel further added that the applicant has been adjudged as an insolvent on several occasions and once a person has

been adjudicated as an insolvent the official assignee automatically steps into the shoes of the insolvent by law and the insolvent cannot settle with

one creditor and get an order of adjudication set aside leaving the other creditors in the lurch.

Learned senior counsel relied on the following judgments in support of his contentions:

(1) Sailendra Krishna Roy and Others Vs. Rashmohan Shaha and Others, ;

(2) Mohamed Zackeria, firm Vs. V. Srinivas and Co. and Another, ;

(3) C. Jabbarchand and Others Vs. C. Oliver and Another, ;

(4) In Re: C. Subramanian Chetty and Sons, ;

(5) Malludora v. Setharatnam 1966 1 MLJ 53;

(6) Raghava and Veera and Another Vs. Lachhmandas (died) and Others, ; and

(7) Re : Smt. Kanta Pravin Mehta, Insolvent., .

I have given my careful consideration to the submissions made by both earned Counsel and I have gone through the records also.

It is the main contention of earned Counsel for the applicant that he was not aware of the ex parte order and once he came to know about the

same, immediately he settled the entire amount to the first respondent-bank at whose instance he was declared as an insolvent.

I am afraid that this contention is not acceptable. As rightly pointed out by learned senior counsel for the objector, once the applicant was

declared as an insolvent, the second respondent, official assignee automatically steps into his shoes by operation of law, the official assignee alone

is entitled to represent the insolvent and his estate including his assets and liabilities in all aspects.

In Mohamed Zackeria, firm Vs. V. Srinivas and Co. and Another, , a Division Bench of this Court has categorically held in paras. 5 and 6 as

follows (page 405):

The last contention was that in fact the appellant firm has assets worth over a lakh of rupees and debts of only some Rs. 25,000 at the utmost and

that none of the creditors except the first respondent is anxious to recover his debt at once and that the appellant-firm is willing to pay off the first

respondent''s debts within 24 hours, and so the order of adjudication may be set aside. We are afraid we cannot accept this argument.

When a person is adjudicated insolvent, it is not a particular creditor alone whose interests are to be protected by the court but the entire body of

creditors, secured and unsecured. Otherwise a cunning insolvent would settle with one creditor and get an adjudication set aside, leaving other

creditors in the lurch. It is significant that the first respondent''s debt, like the other debt of Rs. 400, has remained unpaid for four long years despite

all the alleged riches of the appellant firm.

So too it is significant that the appellant has not given a schedule of creditors and the amount of debts due to them and there is no knowing whether

the statement that all the other creditors are willing to allow their debts to remain unpaid for any length of time is true or not. It is always open to the

appellant-firm to pay all the creditors and get free from this insolvency. It is also open to the appellant-firm to enter into a composition with all the

creditors and take the usual steps under the insolvency law to get free from the adjudication. There is, in our opinion, little merit in this contention

also.

(6) In the end, therefore, we confirm the order of adjudication passed by Balakrishna Ayyar J. and dismiss this appeal, with costs, one set.

The Division Bench of this Court has clearly held in the above case that when a person is adjudged as an insolvent he cannot settle with one

creditor and get an adjudication set aside leaving the other creditors in the lurch. Therefore, following the above judgment, the applicant cannot say

that by settling the amount with the first respondent-bank, he fully discharged his all other debts when other creditors like the objector herein are

still remaining unpaid.

In Raghava and Veera and Another Vs. Lachhmandas (died) and Others, , another Division Bench of this Court has held that there is no

individual lis between a petitioning creditor and a debtor and a judgment in relation to adjudication of status of insolvent is a judgment in rem. The

benefit of the order is not confined to the petitioning creditor alone but the benefit flows to the entire body of creditors.

In In Re: C. Subramanian Chetty and Sons, , this Court has held that any payments made by the insolvent or on behalf of the insolvent behind

the back of the official assignee are entirely irregular and no insolvent has any right whatsoever to make any payment at all to creditors. The

insolvent''s estate vest in the official assignee and the only person who can discharge the debts of the insolvent is the official assignee. This Court

has further held as follows:

This is an application for the sanction of a compromise approved at the meeting of the creditors held on the 26th April, 1926. Without going any

further into this application, it appears that the insolvent has made payments himself to the creditors before the meeting of the creditors at which the

composition was approved. I have said before and repeat it now that payments made by insolvents behind the back of the official assignee or

payments made by persons on behalf of the insolvent in this manner are entirely irregular and I have been caused a great deal of trouble in the past

in consequence of this irregular procedure. No insolvent or anybody on his behalf has any right whatever to make any payments at all to creditors.

The insolvent''s estate vests in the official assignee and the only person who can discharge debts of the insolvent is the official assignee. This fact

having come to my notice on this application I shall adjourn it and refuse to sanction the composition at this stage. The proper procedure must be

adopted in this case and in every other case and the money which is said to have been paid to the creditors must be returned to the official

assignee. Then he will deal with it as provided in the Presidency Towns Insolvency Act. After he has done that and taken proper discharge from

the creditors, I shall be prepared to consider whether this composition is to be sanctioned by the court or not. I think that what I have said ought to

be brought to the notice of the public in order that this entirely irregular procedure may be stopped as soon as possible. I do not propose to

sanction any composition with creditors in which any irregular procedure has been adopted or which is the result of an irregular practice. This

application will stand over.

Yet another fact that can be held against the applicant is that having filed an application in Application No. 421 of 2005 for annulment, the

applicant should have prosecuted the same by discharging the debts of all the creditors. But he has chosen to withdraw the same. There is force in

the submission made by the learned senior counsel appearing for the objector that for getting an annulment, all the creditors are to be settled and

therefore the applicant has chosen the easy way of settling the amount of just one creditor and has filed the above application to set aside the ex

parte order.

In view of the above, there is no merit in the above application filed to set aside the ex parte adjudication order dated June 12, 2000, and

accordingly the same is dismissed.

As I have already taken this view, I have not referred to the other judgments cited by the learned senior counsel appearing for the

objector/appellant in O.S.A. No. 14 of 2006. In view of the above, A. Nos. 604 and 605 of 2005 are dismissed. No costs.