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Judgment
John Wallis, C.J.—This is an appeal from an order of Mr. Justice Coutts Trotter in the Insolvency of one Seethapathy Iyer who was
formerly a dubash of Messrs. Dymes and Co and afterwards of the Bombay Company who took over the business, directing the Bombay
Company to repay to the Official Assignee as representing the estate of the insolvent Rs. 27,243-13-0, which the Bombay Company had
appropriated out of monies belonging to him in reduction of the loss the above firms had sustained in ''transactions with one V. V. Somasundaram
Chetty, which Seethapathi had guaranteed under his dubash agreement. The ground upon which the refund was directed was that the effect of the
arrangement entered into by the Bombay company with Somasundaram Chetty was to release the dubash from his liability as surety. Assuming for
the moment that the effect of this agreement was to release the surety from all further liability, I am not satisfied, and no authority has been cited to
show that this surety also became entitled to recover the monies which he had already paid under his contract of suretyship, but before dealing
further with this point it will be as well to set out the facts as they appear in the evidence.
On 15th June 1915 as appears from Ex. 2, the Bombay Company terminated Seethapathy''s employment as dubash and about the same time,
as appears from the same Exhibit and their accounts Ex. C. (3) they realised the promissory notes deposited with them and appropriated the
proceeds and the other monies standing in their books to the dubash''s credit, some Rs. 33,940 in all, to the losses they had sustained on the
various transactions for which he was responsible.
There was no specific appropriation to the various heads of loss, but, assuming the other losses to have been met in full this balance of Rs. 27,
000 remained and must have been appropriated to the loss sustained in the transactions with Somasundaram.
Somasundaram and Seethapathy both became insolvents, and Mr. Roe on behalf of the Bomay Company, in January 1916 tendered proofs in
Somasundram''s insolvency for the full amount of his indebtedness to Dymes & Co., and the Bombay Company, which eventually came to some
Rs. 54,000 in all without making any reduction on account of the appropriation from the dubash''s account. This as will be seen, he was entitled in
law to do.
Somasundaram after his insolvency carried on business successfully, and on 14-9-1918 he filed an affidavit in support of an application to
dispense with his public examination on the ground that his creditors with the exception of the Bombay Company had accepted his friend''s offer to
pay six annas in the rupee and that the Bombay Company had also agreed to settle out of Court but Mr. Rae, the Managing Director, was away in
Calcutta and the real loss account had not been adjusted. The Official Assignee who as appears from his letters was fully alive to. the fact that the
money was coming not from the insolvent''s, friends but from his own earnings in the business which he had carried on after his insolvency and
which were at his disposal until the intervention of the Official Assignee opposed the application at the instance of the present insolvent, and applied
for the public examination of the insolvent Somasundaram with a view to seeing if better terms could not be arranged. Before this question came
before the Court the contemplated settlement with the Bombay Company had been arrived at with Mr. B. May, an assistant of the Company, and
on the 8th November, 1918 the Company gave Messrs. Moonuswami Chetty & Sons who were acting for Somasundaram two receipts for Rs.
12,545 and Rs. 6,580 or Rs. 19,125 in full settlement of two debts of Rs. 36,211-12-10 and 18,989-11-1 or Rs. 55,201-7-n in all.
Rs. 19,125 is 6 annas in the rupee on Rs. 51,000 and in reply affidavit of 28th August 1919 the present insolvent states that he was informed
and believed that it was agreed that Rs. 51,000 was to be taken as the total sum due to the two companies and a composition of six annas in the
rupee was acceptedthereon. What apparently happened--Mr. May''s evidence on the point is not very clear is that 6 annas on Rs. 51,000 was
tendered and that Mr. May refused to accept Rs. 19,125 on that basis as the debt in his books was considerably over Rs. 51,000, but agreed in
the circumstances to accept Rs. 19,125 in full settlement of the whole debt standing in the books and the receipts were made out on that basis.
On the 9th December 1918 the present insolvent Seetha-pathy wrote Exhibit D to the Bombay Company taking exception to their having
discharged Somasundaram without reference to him and without his knowledge.
Having satisfied his creditors in this manner, which whatever may be thought of it, appears not to have been unusual in Madras, Somasundaram
next approached the official Assignee with a view to having his composition with his creditors approved and the insolvency annulled, and the
Official Assignee pursuant to Section 26 (2) of the Act sent out letters to the creditors on 16th December 1918 informing them of the position and
summoning a meeting of creditor as to consider the situation and state whether they agreed to the annulment of the insolvency. The meeting of
creditors was held on Sth January and there was no opposition except from the present insolvent Seethapathi who was not one of the creditors
who had proved in the insolvency. On the 6th March 1919 the Official Assignee presented to the Court a report Exhibit III-A in which he stated
Seethapathi''s objection to the Bombay Company having given a discharge for the full amount of the debt without taking into account the 27,000 of
his which had been appropriated in reduction of it, and also suggested a public examination of the insolvent. The learned Judge dealt with this
question in his order dated 23rd March 1919, Exhibit VIII, and came to the conclusion that a public examination was not necessary, that the
creditors, who included several of the leading firms in Madras, knew their own business best, and stated that when the question came before him
formally in that shape he should allow Somasundaram Chetty to effect the settlement and get himself discharged from his bankruptcy. A notice
pursuant to Section 29(1) of the Act on behalf of the insolvent, Exhibit VII supported by an affidavit Exhibit VI was then issued to creditors, of an
application for the annulment of the insolvency.
The Official Assignee presented a further report Exhibit III on the 15th April 1919 stating that he had summoned a meeting of creditors and that
no one appeared except himself on behalf of Seethapathi and agreeing to the annulment subject to security being given to meet any claim of
Seethapathi. On this the formal order of annulment was made on.22nd April 1919, and there can, in my opinion, be no doubt that in making this
order the learned Judge was acting under the powers given him by Section 30(1) of the Act, to approve the insolvent''s proposals and annul the
insolvency.
The section requires the terms if approved to be embodied in the order with a view of making it executable as a decree as provided in Sub-
section (2). Possibly because the payments under the composition had already been made, this provision of the section was not complied with as if:
should have been with, when the formal order was drawn up in the Insolvency Office. This, in my opinion, was a mere formal defect which might
be amended at any time and in no way affected by the Court''s approval of the terms of the composition and the consequent annulment of the
insolvency.
The learned Judge, whilst expressing some doubts on the last question preferred to rest his decision on the broader ground that the transaction
at the date when it was carried out was not a composition within the meaning of the material sections of the Act. Now the payment of Rs. 19,125
was tendered solely for the purpose of getting the consent of the company to the annulment of the insolvency and to arriving at terms of settlement
to be approved of by the Court with a view to annulment, Mr. May was admittedly informed that the other leading firms had accepted a
composition of six annas and was tendered a sum, which amounts to six annas on Rs. 51,000, and which must have been tendered as such, as
there is no other explanation as to how the figures of Rs. 19,125 was arrived at. As he did not accept Rs. 51,000 as representing the correct
amount of the insolvent''s indebtedness, whilst deciding in the interests of the company to accept the sum tendered, he insisted that it should be
received as a lump sum in respect of the debts mentioned in the receipts. These receipts were communicated to the Official Assignee at his request
and he did not, as representing the estate of the present insolvent Seethapathi, take any objection to the fact that the composition shown in the
receipts was less than six annas. His only objection as representing the estate of the present insolvent was that the Bombay Company in giving the
receipts had ignored the Rs. 27,000 received from the present insolvent. That was not a question which the Court was then called on to go into,
and the Court in my opinion, must be taken to have approved the terms arrived at and to have sanctioned the annulment of the insolvency as
suggested by the Official Assignee on behalf of Seethapathi''s estate, on Somasundaram giving security to the satisfaction of the Official Assignee
for Rs. 9,000 in respect of any dividend which the present insolvent Seethapathi might prove entitled toclaim in Somasundaram''s insolvency in
consequence of the Rs. 27,000 appropriated by the Bombay Company from his monies in payment of Somasundaram''s debt to them not havmg
been taken into account when the Bombay Company""accepted Rs, 19,125 in full discharge of the debts of Somasundaram shown in the receipts.
What he accepted was a composition which was intended to be and was submitted for the approval of the Court. In these circumstances, the Rs.
19,125 paid to the Bombay Company, must in my opinion, be taken to have been sanctioned by the Court.
That however, does not dispose of the question whether the fact of the Bombay Company having given receipts in full settlement of the debt
without waiting for the composition to be sanctioned by the Court did not thereby discharge the surety from liability by virtue of the provisions of
Section 135 of the Indian Contract Act as the learned Judge has held. If they had waited for the approval of the Court and the Court had
approved of the composition and annulled the insolvency, then it is clear on the authority of In re Jacobs (1875) L.R. 10 Ch. App. 211, that there
would have been a discharge by operation of law which would in no way have affected the creditors'' remedies against the surety, because in that
case it is the insolvency law and not the creditor that discharges the insolvent. It is unnecessary for the purposes of the present case to decide the
question whether a formal full discharge granted to the insolvent on receipt of a composition paid with a view of getting the approval of the Court
and the annulment of the insolvency before such approval and annulment has the effect of relieving the surety from further liability u/s 135 of the
Indian Contract Act, as to which see Cragoe v. Jones (1873) L.R. 8 Ex. 81 because whether it has that effect or not, it affords the surety, in my
opinion, no ground for claiming a refund of the monies already paid in performance of his contract of suretyship. Section 135 of the Indian
Contract Act merely provides that a contract between the creditors and the principal debtor, by which the creditor makes a composition with, or
promises to give time to or not to sue, the principal debtor, discharged the surety unless the surety assents to such contract; but it by no means
follows nor has any authority been cited to show that conduct of the creditor which releases the surety from all further liability makes the creditor
liable to return payments already made to him by the surety. Part-payment by the surety ""is part performance of the contract and a partial
discharge thereof; and a surety who has made such part payment has no further liability as to that part of the contract from which he could be
discharged. As regards such part payment he is no longer the surety but the principal creditor, as the effect of the part payment is to transfer to him
so much of the cause of action against the principal debtor. This cause of action against the principal debtor is not ordinarily affected by any
composition which the principal creditor may subsequently accept from the debtor, and it can therefore give him no cause of action for the return of
the money already paid. When however the debtor becomes insolvent, not only is the surety debarred from suing by the insolvency, but his right of
proof is restricted. If he is liable for the whole debt, he is not allowed to prove until he has paid the whole debt. If he is liable for any part of the
debt, he cannot prove until he has paid all that he is liable to pay, in which he is entitled to prove the amount of the debt which he has paid, and the
principal creditor''s proof must be reduced accordingly. These propositions, must, in my opinion, be considered settled by the judgment of
Vaughan Williams, J. a Judge of great experience in Bankruptcy Law, in In re Sass (1836) 2 Q.B. 12 , The result, it appears to me must be that in
such a case as regards his part payments the surety is of necessity represented in the insolvency by the principal creditor who proves for the whole
debt, just as a sub-partner is represented in the liquidation of a partnership by his principal partner with whose conduct of the liquidation he is not
entitled to interfere. If the principal creditor misconducts himself in the insolvency to the prejudice of the surety who has made payments in partial
discharge of the debt the latter may have a remedy of the same nature against him as a sub-partner would have against a partner, but there appears
to be no reason for holding and no authority has been cited in support of the proposition that the acceptance of a composition by the principal
creditor during the insolvency after part payments by the surety would entitle the surety to a refund of such part payments. On the other hand, as I
have already said, the part payments were a part performance of the contract of suretyship and so to put an end to the relation of principal creditor
and surety and to all the incidents arising from that relation. Any other view would involve great hardship as it has in the present case, where the
principal creditor has been ordered to refund in consequence of adopting a course which far from prejudicing his surety in any way had the effec of
seriously reducing the balance of the debt which he could be called upon to pay. Assumin that the acceptance of the composition freed the surety
from further liability u/s 135 of the Contract Act that is surely a sufficient, not to say excessive, remedy for the purely imaginary injury which he may
be deemed to have received by the acceptance of the composition.
For these reasons I would allow the appeal, reverse the order and dimiss the summouns with costs throughout on the Original Side scale.
Seshagiri Aiyar, J.
I agree. The facts and dates necessary for appreciating the arguments addressed to us may be thus shortly stated.
P. Seethapathi Ayyar was employed as a dubash in the Bombay Company on the terms embodied in Exhibit I dated the 27th April 1915. He
was apparently similarly employed by Dymes and Company. He introduced customers to both these firms. Very soon a good number of them
made default in payment. Somasundaram, one of the principal customers was in embarrased circumstances. The Bombav Company sold the
Government Promissory Notes deposited by Seethapathi and realised about Rs. 17,000 in July 1915.To his credit with the Bank there was a sum
of Rs. 10,000 due to him for commission already earned. The total sum of Rs 27,000 and odd was originally held in deposit in the books of the
Company against losses which were sustained by the two firms by the non-payment in time of the customers introduced by Seethapathi. I am clear
that in July 1915. the money realised was not appropriated towards the debt due from any particular customer.
In August 1915, Somasundaram applied to be adjudicated an insolvent. Soon after, Seethapathi also applied for the benefit of the Act. Both
the estates vested in the Official Assignee. Exhibt II, dated the 28th January, 1916, a letter from Seethapathi shows that, on that date, he had
information to what particular debt the money realised by the sale of the promissory notes was appropriated, either by the. Bombay Co. or by
Dymes and Co. The statement of Mr. Rae of Dymes and Co., dated the 6th February 1916, also shows that no appropriation was made till then.
Then we come to the attempt made by Somasundaram to settle with creditors. It is common ground that in the beginning of 1918,
Somasundaram privately approached his creditors and offered to pay them six annas in the rupee. He apparently induced them to accept the
composition and obtained receipts. Then he approached the Bombay Company with a similar request. The two receipts filed in the case, dated the
8 th November, 1918 show that the Bombay Company received a sum Rs. 19,125 both for themselves and on behalf of Dymes Company.
There has been some controversy as to whether this represented six annas in the total debt. Mr. Grant contended that Mr. May who acted in
this matter did not accept the composition of six annas in the rupee, but received the money in full satisfaction of all that was due to the two
companies from Somasundaram. The evidence of Mr. May has two sides, if I may say so, the one side speaking to actual facts and the other
referring to impression and beliefs. He says in his evidence that as he had already appropriated Rs. 27,000 and odd towards the total indebtedness
of Rs. 54,000 he did not consider it necessary to acquaint himself regarding the exact proportion to which the sum covered by Exhibits A and B
bore to what was due. In another place he says that by the 31st July 1917, the company had appropriated the Rs. 27,000 towards the amount due
from Somasundaram. Reading his evidence as a whole, my opinion is that the sum of Rs. 27,000 and odd was appropriated by the Bombay
Company towards the debt due from Somasundaram, at least before granting the two receipts A and B. I do not accept the suggestion of Mr.
Chamier that this money was appropriated in July 1915. For the reasons already given and in view of the evidence given by Mr. May that
suggestion must be ruled out. But I see no reason for not accepting the evidence of Mr. May that before the date of Exhibits A and B, the
appropriation had been made.
I tried to understand why Somasundaram paid the Company the odd sum of Rs. 19,125. Some clue to its significance is gatherable from the
statement of Seethapathi that Somasundaram was indebted to the two companies only in the sum of Rs. 51,000. In paragraph 6 of the reply
affidavit dated the 28th August 1919, Seethapathi says : '' I am informed and believe that on the 8th November 1919, it was agreed that the sum of
Rs. 51,000 was to be taken as the total amount due to the two companies by Somasundaram Chetti & Company and Mr. ""Goffe accepted a
composition of six annas in the rupee thereon. Very likely Mr, May was led to think that the total indebtedness on which he was entitled to the
composition was Rs. 51,000, and without caring to look into the account, he accepted the suggestion made by Seethapathi or by some one else in
the office. Apparently Mr. May when he gave his deposition did not remember these facts.
After giving my full consideration to the evidence in the case, it seems to me that the only reasonable hypothesis for explaining the receipt of the
odd figure of Rs. 19,125 is to regard that as the equivalent of the six annas in the rupee for what was at that time regarded as the total
indebtedness of Somasundaram.
Then after obtaining the two receipts from the Bombay Company, Somasundaram made endeavours to get his adjudi -cation annulled. He first
made an application to the Insolvency Commissioner for an order in that behalf. Apparently that application was adjourned pending a report from
the Official Assignee. Then, in December 1918, the Official Assignee informed the Bombay Company that he intended holding a meeting of the
creditors of Somasundaram Chetti to consider the situation and to state whether they agree to the annulment of adjudication. A meeting was held
on the Sth January 1919. Everybody agreed to the composition excepting Seethapathi. By this time the Official Assignee was acting for
Seethapathi. In Ex. G, the Official Assignee wrote to the solicitors of the Bombay Company asking them to produce a receipt as to whom they
appropriated the Rs. 27,000 realised on behalf of Seethapathi. A reply was sent on the 10th January stating that the Rs. 27,000 had been
appropriated to Somasundram''s account. On the 11th January, the Official Assignee disputed this right of the Bombay Company. After some
further correspondence, on the 6th March 1919, the Official Assignee submitted a report to the Court. In t hat he stated. "" The Bombay Company
subsequently settled with the insolvent at the rate of six annas in the rupee but not on the sum of Rs. 27,000 which was really due to them; but on
the full sum of Rs. 54,000 and they granted him a receipt in full satisfaction of their claim of Rs. 54,000."" Then he says, "" It would be well for me to
settle the question of whether the six annas was or was not a fair settlement, and in order to do this it is necessary for me to examine the insolvent
with a view to ascertaining what profits he has made."" This was really a report against dispensing with the public examination of Somasundaram as
requested by him. On the 23rd March 1919, Mr. Justice Coutts Trotter, after considering the report and the application, came to the conclusion
that Somasundaram need not be publicly examined. On the 31st March a formal application was presented hy Somasundaram for the annulment of
his insolvency. Notice went to all the creditors. A further report was submitted by the Official Assignee on the 15th April 1919. He said in that "" I :
called a meeting at which no one opposed except one P. Seethapathi Aiyar, or rather myself on his behalf. He was the guarantee broker of the
Bombay Co., Limited, and Rs. 27,343 of his money was taken by them to the credit of this insolvent''s account. In spite of this they again took six
annas in the rupee on the full account of this insolvent and this insolvent now refuses to recognise Seethapathi Iyer as a creditor or that the Bombay
Company have taken his Rs. 27,000."" Then at the end of his report, he said ""lam entitled for the benefit of Seethapathi Aiyar''s estate to six annas
in the rupee on Rs. 27,000 from this insolvent and I ask that the annulment be made conditional upon this."" Thereupon the learned Judge ordered
that on the insolvent''s giving security for Rs. 9,000 the order adjudicating Somasundram an insolvent be annulled. This was on the 22nd day of
April 1919. No appeal was preferred against this order.
The present application was filed on the 26th March 1919 by the Official Assignee for a declaration that the Bombay Company should pay to
him Rs. 27,000 and odd, which they had realised out of the deposit made by Seethapathi with them. The learned Judge has made the order and
this appeal is against it.
I give the learned Judge''s reasons for his conclusion in his own words; firstly "" my order (referring to the annulment) provided for annulment of
the adjudication and did not embody the terms of the proposal,"" secondly the arrangements, which led up to the annulment "" was not at the date on
which it was carried out a composition within the meaning of the material sections,"" and thirdly, "" that the Bombay Company after giving the
discharge which they did could never have been heard to say that their debt was not extinguished as between themselves and Somasundaram
Chetti, even though all the other creditors, had rejected his overtures and had declined to settle with them,
The fact that the order did not contain the particulars which u/s 30 of the Insolvency Act should be contained in it is not a ground for holding
that the order is infructuous It is true that the arrangement for the composition emanated from Somasundaram; it is also true that he dealt with the
creditors himself. No doubt the proper procedure was to have approached these creditors through the Official Assignee. That is what S: 2S of the
Act contemplates. But we have evidence to show that for a long time, it has been customary in Madras to allow insolvents to adjust matters with
the creditors and then to report the settlement to the Official Assignee to enable him to take action. It may be that the procedure is irregular, but I
am not satisfied that there is anything illegal in what had been done. Having regard to the fact that subsequently the Official Assignee summoned the
creditors and submitted a report on which the final order was passed by the learned Judge, I am of opinion that the action taken by Somasundaram
may be regarded as having been done by him as agent of the Official Assignee. Even though there was no authorisation at the outset, the
insolvent''s action was accepted and ratified by the Official Assignee by the subsequent steps he took in the matter.
The remarks of Lord Justice Rigby in Izod in re Official Receiver, Exparte (1898) 1 Q.B. 241 has been quoted by the learned Judge and has
been strongly relied on by Mr. Grant in this Court. In the first place that case relates to the rescinding of a receiving order. In the second place,
notwithstanding the adverse remarks of the learned Lord Justice, the decision of the Court was that the order should be rescinded although the
initial steps were taken by the insolvent himself. It is unnecessary to consider whether the strictures passed by the Lord Justice in allowing the
insolvent to deal with creditors behind the back of the Official Assignee are applicable in their entirety to circum stances in this country. As was
pointed out by the learned Chief Justice, in very many cases, even in England, settlement with creditors with a view to composition are begun by
persons interested in the insolvent. There is nothing immoral in such procedure; and especially as the Act makes provision for the public
examination of the insolvent if it is desired by any of the parties, I see no reason for holding that the procedure adopted vitiates the whole
proceeding.
It was open to Mr. Justice Coutts Trotter to have refused to annul the adjudication on the ground that the composition was not at the instance
of the Official Assignee; on the other hand, the learned Judge, after full consideration of all the circumstances dispensed with the public examination
of Somasundaram and directed the annulment. That order has not been appealed against and is binding upon all the parties who appeared before
the learned Judge.
The circumstance that the office did not embody the terms of the composition as required by Section 30 does not in my opinion make the
order a nullity. With great respect, I am unable to agree with the learned Judge that it was open either to him or to us to go behind the order.
Now this disposes of the first two reasons given by the learned Judge for reopening the annulment.
It was strenuously contended by Mr. Grant that there was no appropriation of the Rs. 27,000 towards the debt due from Somasundaram at
the date when Exhibits A and B were passed. I have already given reasons for holding that the evidence of Mr. May should be accepted. It is true
that Mr. May says that at the time he gave the receipt he had not made himself acquainted with the law which would enable him to claim a dividend
on the whole amount, notwithstanding that the surety had paid a portion of it. But that is no ground for not accepting his statement that he, as a
matter of fact, made the appropriation. Even if we take it that the Rs. 27,000 was not appropriated for the debt due from Somasundaram alone
but was retained by the Bombay Company as part payment towards the general indebtedness of their dubash, I fail to see how the Official
Assignee is entitled to a refund of Rs. 27,000. The suggestion of the learned Counsel that even after the passing of Exhibits A and B, the money
was held in suspense to the credit of Seethapathi is not borne out by any record before us. Either that money was appropriated to the debt of
Somasundaram or was debited to the general account of Seethapathi. In either case, on the date of the receipts A and B, there was no money to
the credit of Seethapathi.
On the general question whether a creditor is entitled to claim a dividend in a composition in respect of the whole amount, notwithstanding a
portion of the debt has been received from a surety the law is well settled. In In re Sass (1896) 2 Q.B. 12 Vaughan Williams, J. enunciated this
proposition very distinctly, and it has never since been questioned. In Ellis v. Emmanuel (1876) 1 Exh D. 157 the same view was taken. That was
a suit By the surety against the principal creditor for receiving a proportionate share of the dividend received by the latter in the insolvency of the
principal debtor. It was held that the creditor was entitled to retain not only the amount of the dividend but also the amount received from the
surety. That case goes even further than the decision in In re Sass (1896) 2 Q. B. 12 . It is clear that there is nothing in the Presidency Towns
Insolvency Act which in any way detracts from the principles enunciated in the cases already referred to.
Therefore I am of opinion that as the Rs. 27,000 was appropriated before the grant of receipts A and B and the two receipts did not operate
to extinguish the entire debt owed by Somasundaram to the two companies. Even otherwise, I agree with the learned Chief Justice that the Official
Assignee is not entitled to a refund of the amount appropriated by the Bombay Company for debts due. The learned Counsel for the respondent
contended that as the composition had been completed behind the back of the surety by the Bombay Company, the surety was discharged and
was entitled to a refund of the amount. It may be that if there was a private composition and the matter did not come before the Insolvency Court,
such a dealing with the principal debtor behind the back of the surety may have the effect of discharging the surety, but where after notice to the
surety, the composition was accepted by the Court, it becomes an act of the Court and the principle of Sections 134 and 135 can have no
application.
For all these reasons, I agree that the order of the learned Judge should be reversed and that the petition of the Official Assignee should be
dismissed with costs on the Original Side scale.