Venkatarama Naicker vs Ramasami Naicker and Others

This is a revision petition u/s 75 of the Provincial insolvency Act, by one Venkatarama Naicker, hereinafter called the opposing creditor, against

the judgment & decree of the Dist. J. of Tirunelveli in C.M.A. No. 5 of 1945, dated 12-3-1946, allowing the respondents hereinafter called the

proving creditors, to prove certain debts of theirs holding them to be recoverable from the estate of the insolvent, Narayanappa Naicker, to the

extent held to be true & binding. The memorandum of cross-objections is against the debts not allowed to be proved as they were held to be not

true & binding on the insolvent.

The facts are briefly these: Narayanappa Naicker, the insolvent, was adjudged insolvent in I. P. No. 40 of 1923 on the file of the District Court,

Tirunelveli. He was the lather of one Venkatasami Naicker who predeceased him & was said to have been the manager of the Joint family.

Venkatasami Naicker had also several children who were minors at the time of the I. P. The I. P. had been filed by the opposing creditor & others

for adjudicating Venkatasami Naicker, Narayanappa Naicker & Venkatasami''s minor children, all insolvents on the ground that they had executed

a mortgage deed, Ex. A in 1923, in favour of the proving creditors, in fraudulent preference u/s 54 of the Provincial Insolvency Act, & also as

void, regarding part of the consideration recited therein, u/s 53, Provincial Insolvency Act. The opposing creditor had, in his I. P., relied on certain

debts due to him contracted by Narayanappa, Venkatasami and Venkatasami''s sons, for running a trade in cotton & a ginning factory. There were

two aspects of this trade, one being run by Venkatasami Naicker, Narayanappa Naicker & their family members alone, & the other by the family

members in partnership with one Appadurai Ayyappa Naicker. Venkatasami died during the pendency of the I. P. By his order dated 10-12-

1923, the Dist. J. Tirunelveli, adjudicated Narayanappa & Venkatasami''s minor sons as insolvents. Narayanappa & the minors filed an appeal to

this court. On 18-11-1927, Phillips & Madhavan Nair JJ. delivered their judgment (Ex. SS) in the appeal. As the wording of the judgment is

somewhat important for other purposes, & as the Judgment itself is short, it is extracted below:

The only question for decision is whether the trade carried on by the deceased second respt. was a family trade or his own private trade. It was

carried on under the ''vilasam'' of A.N.V. Venkatasami Naick, which is the name of the second respondent. The clerk who was employed in the

trade says that it was a family trade & that the first appellant used to assist in the business as well as looking after the family lands. It is also alleged

by P.W. 4, one of the creditors, that the trade was a family trade & the fact that it is in the deceased''s name is accounted for by the fact that he

was the managing member of the family. It is alleged that patta was transferred in his name by his father, &, although the father denies this, he has

not produced the patta in his own name. Finally, when the deceased incurred debts in his trade all the family property as well as the family house

were mortgaged to borrow money & the executants of the mortgage were the 1st appellant, the deceased & his minor sons. The Dist. J. has

believed the evidence of the witnesses & we see no reason to differ from his conclusions. He has however made a mistake in adjudicating the

minor respondents 3 to 7 insolvent & in that respect his order must be modified. The appeals are dismissed with costs"".

It will be seen that the learned Judges held on that order that the cotton trade & the ginning factory were carried on as a family trade by

Venkatasami, Narayanappa & other members of the family, & that Narayanappa, the first appellant, used to assist in the business as well as look

after the family lands, & that the debts of the creditors who filed the I. P. were incurred for such family trade, though they stood in the name of

Venkatasami, as he was the managing member of the family, all the family properties & the family house being mortgaged subsequently by all family

members to borrow money. Of course, the adjudication of the minor sons of Venkatasamt was set aside as they could not be held to be personally

liable for the debts, but only liable to pay them out of the joint family debts, for which they were, of course, not personally liable.

After the adjudication by the Dist. J., the Official Receiver filed O.P. No. 30 of 1925, in the Sub Court, Tuticorin, for setting aside the mortgage

deed, Ex. A., under Sections 53 & 54, Provincial Insolvency Act. The proving creditors filed O.S. No. 28 of 1925 on the file of the Sub Court,

Tuticorin, for recovering the first instalment of Rs. 2500 due under the mortgage deed, Ex. A, which was for Rs. 46500 & consisted of seven

items, including the debts now allowed by the learned Dist. J. to be proved. The Subordinate Judge decreed O.S. No. 28 of 1925, & dismissed

O.P. No. 30 of 1925. The official Receiver did not prefer any appeal against the decree in O.S. No. 28 of 1925, but preferred an appeal against

the order in O.P. No. 30 Of 1925, namely, C.M.A. No. 4 of 1927, on the file of the District Court, Tirunelveli.

The Dist. Judge, Tirunelveli, allowed C.M.A. No. 4 of 1927 on 29-9-1928, & set aside the mortgage deed, Ex. A, under Sections 53 & 54,

Provincial Insolvency Act. The gist of his finding lies in the following sentence:

I declare the mortgage to be void as against the Official Receiver both because it is not fully supported by consideration, & also because it is &

was, intended to be a fraudulent preference & made with a view of removing the insolvent''s properties from the powers of his creditors"".

The proving creditors, who were thus affected by the cancellation of the mortgage deed, took the matter in appeal to this court. This court, by

its judgment, dated 12-12-1932, confirmed the order of the Dist. Judge setting aside the mortgage, and dismissed the appeal.

As the mortgage was thus set aside, the proving creditors the mortgagees, filed I. A. No. 45 of 1941 for proving the very debts included in the

mortgage deed after deducting the Rs. 2,500 for which they had got a decree in O.S. No. 28 of 1925, & adding a sum of Rs. 500 the unrealised

balance, i.e. in all for Rs. 44500. The Official Receiver found that out of the 7 items comprised in the mortgage deed, Ex. A, & sought to be

proved in the insolvency of Narayanappa, items 1, 2, 3, 4 and 7 were true, but that items 5 & 6 were not proved to be binding. He also found the

additional Rs. 500 claimed by the proving creditors to be true. But he thought that the proving creditors could not claim anything in the insolvency

proceedings of Narayanappa because the mortgage deed, Ex. A, had been declared by the Dist. J., Tirunelvely, to be void against the Official

Receiver, this order had been confirmed by the High Court on appeal, & further, that the proving creditors should exhaust all their remedies against

the assets of Venkeatasami Naickerand his sons before proceedings against the insolvent''s estate. His order, dated 14-12 1941, to that effect,

was carried in appeal to the Subordinate Judge, Tuticorin, by means of I.A. No. 45 of 1941. On 15-12-1943, the learned Subordinate Judge

pronounced an order holding that items 1, 2, 4 & 7, recited in Ex. A, were true, at also the additional Rs. 500, & that all these were recoverable in

the insolvency, & that items 5 & 6 were not true. In respect of item 3, he remanded the matter to the Official Receiver for a fresh finding after

taking all the facts into consideration. The Official Receiver gave a finding that only Rs. 8,186-5-10 out of the Rs. 10,000 & odd, covered by the

third item, was true. The first item covered a liability of Rs. 8,500, item 2 covered a liability of Rs. 11,500, item 3 to the extent found liable,

covered a liability of Rs. 8,186-8-10, item 4 covered a liability of Rs. 10,000 & item 7 a liability of Rs. 5000. Items 5 & 6, the disallowed items

covered liabilities of Rs. 3,300 & Rs. 2,700 respectively. Eventually, after some amendments of defective decrees etc., the learned Subordinate

Judge allowed proof of Items 1 & 2, the portion of item 3 found to be true, item 4, item 7 & the extra Rs. 500 claimed by the proving creditors, &

disallowed items 5 & 6.

The opposing creditor filed C.M.A. No. 5 of 1945 before the Dist. J. of Tirunelveli, against the order of the Subordinate Judge allowing proof

of the debts to the extent he did. The proving creditors filed a memorandum of cross objections regarding the items disallowed. Various points of

facts & law were raised by both sides before the learned Dist. J., but, after a thorough discussion, & an exhaustive judgment dealing with all the

points raised, the learned Dist. J. dismissed both the appeal & the memorandum of cross-objections, & directed both the parties to bear their own

costs. Hence this revision petition & memorandum of cross objections.

We have perused the entire records, & heard the learned counsel on both sides. It is obvious that the memorandum of cross objections must be

dismissed; as no memorandum of cross objections will lie in a revision petition, & as Mr. V. Ramaswami, for the proving creditors, was unable to

show how it will lie it is therefore dismissed with costs.

Now we come to the revision petition itself. Though there were numerous contentions raised in the revision petition, Mr. T.M. Krishnaswami,

Iyer, the learned counsel for the opposing creditor, who argued the petition, raised only three contentions before us.

The first was that the learned Dist. J. ought to have held that the mortgage deed, Ex. A, having been set aside under Sections 53 & 54,

Provincial Insolvency Act, as partially void & In fraudulent preference, the proving creditors could not be allowed to prove in insolvency the debts

covered by Ex. A as unsecured creditors even to the extent allowed by the lower court. It was urged that the lower court ought not to have

allowed the proving creditors to rely on their fraud in getting Ex. A, which had also been partly carried out by filing the suit, O.S. No, 28 of 1925,

& getting a decree therein for the first instalment, & to prove the very debts included in Ex. A, thus allowing them to continue their fraud & get

away with it. We cannot agree. As the learned Dist. J. has pointed out, after discussing, various rulings, & in particular, the Full Bench ruling in

''Venkataramayya v. Pullayya'', 59 Mad 998 in order to prevent a person who has been a party to a fraudulent transaction from pleading his own

fraud, the intended fraud must have been effected or there must have been a substantial part performance of the intention to defraud, & a mere

fraudulent intention evidenced by the transaction is not sufficient. In other words, if the fraud or the illegal transaction is not carried out, but comes

to an end, for whatever reason, & the parties are put back in the same situation as they were in before the illegal transaction was determined upon,

the intended fraudulent or illegal transaction will not prevent a party to it from claiming the remedy he will be entitled to. In the present case, it is

clear that despite the mortgage, Ex. A, which was set aside under Sections 53 & 54, Provincial Insolvency Act, & a suit, O.S. No. 28 of 1925, &

a decree therein for the first instalment due under the mortgage, there has been no substantial part performance of the fraudulent intention to prefer

some of the creditors to others, under Ex. A. (under Section 54, Provincial Insolvency Act), & that no harm has been actually done, & that the

parties have virtually been put back to their original position by the cancellation of Ex. ''A'', as by the compromise in the Full Bench case quoted

above. We cannot agree with Mr. Krishnaswami Aiyar''s argument that the Pull Bench judgment contains contradictory observations, & that in one

portion of it the principle laid down above was watered down to the extent of practically dissenting from it. A perusal of the entire Judgment with

the arguments of Mr. K. Subba Rao (as he then was) & the observations of the learned Judges, have convinced us of this. Thus, in reply to the

observation of Mr. Subbo Rao to the effect that the fraud was no doubt ultimately frustrated but the fraudulent object was in part carried out,

namely, the object of securing the property in question to the father himself, the learned Chief Justice, who delivered the judgment of the Full

Bench, remarked:

At the most there was a claim to the exclusion of the property in Question from the partition, but that claim was not persisted in, & nobody was

damaged. So no fraud has been effected"", & King J. remarked, ""the fraudulent object was abandoned, & nobody has been damaged"".

In this case too, the fraudulent object has been abandoned & nobody has been damaged, & so the ruling of the Full Bench will apply with full force

here.

Sections 53 & 54, Provincial Insolvency Act, merely say that the transfer of the property under the deed so set aside is void, & not everything

connected with it. The judgment of the Dist. J. Tirunelveli, in C.M.A. No. 4 of 1927, also only declared the mortgage deed, Ex. A, to be void

against the Official Receiver, as It was not fully supported by consideration & was intended to be a fraudulent preference of some creditors over

others, & did not make the debts included in it void. So, that order made only the security offered under Ex. A. void, & did not purport to, &

could not, wipe out the debts comprised in that mortgage deed. The dissociation of the debts included in the mortgage deed from the security is a

familiar notion in law, from time immemorial, & has been forcibly brought out in the Privy Council decision in the ''Imperial Bank of India v. Bengal

National Bank'', 59 Cal 377. So, even though the mortgage deed, Ex. A, was cancelled, the debts comprised in it were not cancelled, & the

''status quo ante'', before the mortgage deed was executed, would automatically revive. Many cases have been relied on by the learned Dist. J. for

his view that though the mortgage deed is annulled under Sections 53 & 54, Provincial Insolvency Act, the mortgagee thereunder could, rely on the

debts included in the mortgage deed & prove those debts in insolvency as an unsecured creditor. We ""agree with this view which is obviously the

only sound one. The mortgagee need not, it is obvious, plead any fraud for proving these debts as for proving the mortgage. It is also not as if, this

view takes away the effect of cancelling the mortgage deed. The mortgagee, who was a secured creditor a could recover his dues in full under the

mortgage set aside, is, owing to the cancellation of the mortgage, relegated to the position of a mere unsecured creditor, entitled only to the

dividend (a mere fraction) of his dues, like the remaining unsecured creditors. That is a substantial difference, & it cannot be said that the

cancellation of the mortgage deed, Ex. ''A'', by the Dist. J. & High Court, is rendered illusory by the view taken by the learned Dist. J. that the ex-

mortgagees, the proving creditors, can prove the debts included in the mortgage as unsecured creditors in the insolvency.

The next contention of Mr. Krishnaswami Aiyar, pressed before us, was that the whole proceedings before the learned Dist. J., till the stage of

arguments, had gone on the footing that Narayanappa, the insolvent, was only liable for the debts of the proving creditors as a member of the Joint

family, liable to pay the joint family debts, & that only at the stage of arguments was it urged that he is liable ''personally'' to pay those debts, as a

partner in the trade along with his son, Venkatasami, taking an active part in the conduct of the business, & therefore liable personally for the debts

incurred along with Venkatasami & that, therefore, the debts allowed to be proved by the lower court should only be proved & allowed for in a

partition suit brought by the proving creditors who have bought the shares of Venkatasami''s minor sons. It was argued further that the High

Court''s judgment in Ex. SS, quoted above, only held the debts incurred by Venkatasami for the cotton & ginning business carried on by him In his

own name, & not in partnership ,to be debts binding on ''Narayanappa also personally'', & not also the debts incurred in the business conducted in

partnership with Appadurai Ayyappa Naicker, & that, in any event, only the debts of the creditors who filed the I. P. had been admitted by the

opposing creditor to have been contracted by Venkatasami for the cotton & ginning business carried on by the family, either by itself or in

partnership with Appadurai Ayyappa Naicker. Mr. Ramaswami lyer, for the proving creditors, urged that nobody can, under our law, be

adjudicated insolvent for a mere liability for joint family debts, & that a man can be adjudicated only for debts for which he is personally liable,

relying on the ruling in ''Purnayya y. Basava Kotayya'', 34 M.L. W. 761 & similar rulings. He, therefore, urged that the mere fact that

Narayanappa was adjudicated insolvent would prove that he was liable personally to pay the debts covered by the I. p. & all other debts

contracted for the cotton & ginning business run by the family, either by itself or in partnership with Appadurai Ayyappa Naicker. Mr.

Krishnaswaml Iyer retorted that, even if the debts of the creditors in the I.P. have been held to be payable personally by Narayanappa, it is not

proved that ''the debts of these proving creditors'' were contracted for the cotton & ginning business run by the family, by itself or in partnership

with Appadurai Ayyappa Naicker, fc that, without some formal proof to that effect, it would be preposterous to allow these debts to be proved by

the proving creditors in the insolvency of Narayanappa Naicker, relying on mere arguments & inferences. We agree. It is clear to us, from the

records, &, it is indeed mentioned by the learned Dist. J. also in his judgment, that there was no formal proof of Narayanappa''s ''personal liability''

for the debts contracted from the proving creditors & allowed to be proved in this insolvency, in the proofs submitted by these creditors. Nor was

It made clear in the Sub Court & the District Court till the stage of arguments. Narayanappa''s personal liability was evidently taken for granted by.

the proving creditors because of his joining in the mortgage deed, Ex. ''A''. But, the moment Ex. ''A'' was cancelled, that basis for his persona)

liability had to be formally proved by some evidence let in for that purpose.

Of course, we agree with Mr. Kamaswami Iyer that in view of the judgment of this court in Ex. SS, & of the Subordinate Judge & Dist. J., &

for the reasons given in all the three judgments all debts contracted by Venkatasami Naicker. the managing member of the family business, whether

carried on by the family itself or in partnership with Appadurai Ayyappa Naicker, would be debts for which Narayanappa, who had interfered in

the partnership & assisted in the management of the business, would be ''personally liable''. We cannot go behind this. The law undoubtedly is that

a person liable for debts merely on the ground that he is a member of a Joint family & that the debts are payable by the joint family cannot be

adjudicated, insolvent for those debts, & those debts cannot be proved in his insolvency & will have only to be allowed for preliminarily in a

partition suit brought by the purchasers of the other share or shares (as here, by the proving creditors who have bought the minors'' shares): see the

ruling of the Privy Council In ''Sat Narain v. Sri Kishendas'', 17 Lah 644 & Yagnavalkya''s specific directions in his ''Smriti'' & directions to that

effect in the ''Mitakshara''. But there are also undoubtedly circumstances which will make such a person ''personally liable'' for the debt, such as his

being a member of a trading firm and holding himself out as a partner ,& the debts being contracted for that trade. There is no need to wait then for

a partition suit for allowing such debts which can be proved in the insolvency of the person who had made himself personally liable for the debts in

addition to being liable for them from out of his share in the joint family properties, see the ruling in ''Kalagara Purnayya v. Chenurubi Basava

Kotayya'', 34 M.L.W. 761.

We are, therefore, of opinion that the matter must be remanded to the Subordinate Judge, Tuticorin, for proof by the proving creditors that the

debts held to be true by the Subordinate Judge & Dist. J., were incurred for the cotton & ginning trade carried on by Venkatasami & the family

members, either solely or in partnership with Appadurai Ayyappa Naicker. Once it is so proved, the proving creditors will be allowed to the debts

of items 1, 2, 3, (to the extent allowed already), 4 & 7, & the Rs. 500, without further ado. The findings of fact of both the courts below, regarding

the truth & validity of the above items & the non-proof of the truth & validity of items 5 & 6, -- matters within their jurisdiction & competence, --

cannot be interfered with or disturbed by us, in revision, & we see also no reason to do so.

Lastly, Mr. T.M. Krishnaswami Aiyar urged that the lower court went wrong in holding that the debts allowed to be proved were not liable to

be scaled down under the Madras Agriculturist Relief Act. He contended that, u/s 21, Madras Agriculturists Relief Act, the debts ought to have

been scaled down as they were debts of an insolvent whose insolvency proceedings were stilt pending on 1-10-1937, 22-3-1938 of the date of

the application, the three crucial dates, & a dividend has not been declared out of his assets prior to the coming into force of the Act on 22-3-

1938 & he would have been an ""agriculturist"", within the meaning of the Act, ''but for his adjudication in insolvency, & that his death before 1-10-

1937 or the sale of all his properties before that day by the Official Receiver, in insolvency, would be totally irrelevant & immaterial. We cannot

agree. Section 31, Madras Agriculturists Relief Act, runs as follows:

Nothing contained in this Act shall apply to the debts payable by any person who has been adjudicated an insolvent, if prior to the coming into

force of this Act, a dividend has been declared out of his assets. If a dividend has not been so declared this Act shall apply to the debts payable by

such person if he would have been an agriculturist, within the meaning of this Act but for his adjudication in insolvency"".

In our opinion, it is essential for the application of that section, that the Insolvent should be an ""agriculturist"" on 1-10-1937, 22-3-1938, & the date

of the application for scaling down, the three crucial dates, but for the adjudication in insolvency. In other words, he should have all the

qualifications prescribed for an ""agriculturist"" entitled to scaling down by the Madras Agriculturists Relief Act on the three crucial dates, the only

concession given by Section 21 being the ignoring of the fact of adjudication & the consequent vesting of the properties in the Official Receiver. If

a man has no lands whatever on 1-10-1937, 22-3-1938, or the date of the application & could not, therefore, have been an ""agriculturist"" entitled

to scaling down even if there were no adjudication, there will be no question of his being entitled to any scaling down. No court can speculate on

what would have happened but for the insolvency, & whether the insolvent might have had some lands left after discharging his debts privately or

by evading his creditors & avoiding sales. In the present case, it was proved that all the lands of the insolvent were sold by the Official Receiver in

''1933'' itself, years before the Madras Agriculturists Relief Act was on the anvil. There was no proof of the allegation that he had some other lands

left. Indeed, we agree with the learned Dist. J. that nothing more was left after the sale in 1933. So, we are of opinion that Narayanappa even If he

had not been adjudicated In insolvency, would not have been an ""agriculturist"" entitled to scaling down, on 1-10-1937 or on 22-3-1938 & on the

date of the application, the three crucial dates. In our opinion, the question of the applicability of Section 21 can only be raked up at the time of the

application for scaling down. If on that date, but for the adjudication, the insolvent would have had lands, & would be an ""agriculturist"", Section 21

would apply. If on that date he had no lands at all, for whatever reason, there will be no question of applying Section 21. It is something, like a

provision removing the disqualification of imprisonment for a political crime regarding employment in Govt. service. It is only the disqualification

which is removed. The other qualifications which are necessary for Govt. service, like being a graduate, eligible S.S.L.C., etc., will still remain. No.

appointing authority can be allowed to speculate as to whether the person in question would have qualified himself educationally & got the requisite

qualification but for the imprisonment Intervening. All such speculations would be out of place in the matter-of-fact world of law. In this view there

is no need to consider whether the death of Narayanappa before 1-10-1937 would also have deprived him or his legal representatives or the

Official Receiver of the right to have the debts scaled down. We hold that the learned Dist. J. was right in holding that the debts allowed by him to

be proved by the proving creditors were not liable to be scaled down.

No other point was argued before us.

In the result, the petition (I.A. No. 45 of 1941) is sent down to the Subordinate Judge of Tuticorin for proof by the proving creditors that the

debts covered by items 1, 2, 3 (to the extent-allowed already 4 & 7, & the Rs. 500 allowed to be proved by the proving creditors, were debts

contracted for the cotton & ginning business of Venkatasami Naicker & his family, either run solely by the family members or in partnership with

Appadurai Ayyappa Naicker. On such proof, the above debts will all be held to be proved in the insolvency of Narayanappa Naicker, who would

be held personally liable for them. All the parties will be free to adduce all relevant oral & documentary evidence in connection with this. Costs of

this petition will be suitably provided for by the Subordinate Judge when disposing of the petition afresh.