Madras High Court
Balasubramaniam vs Kannan on 6 March, 2015
Author: K.B.K. Vasuki
Bench: K.B.K.Vasuki
IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 06.03.2015 CORAM : THE HON'BLE MS. JUSTICE K.B.K.VASUKI Second Appeal No.1240 of 2005 1.Balasubramaniam 2.Sathyanarayanan 3.Govindarajalu .. Appellants V. 1.Kannan 2.Chandra Vanitha 3.The Official Receiver South Arcot Vallalar District V.R.P.District Cuddalore. 4.Deiveegan 5.Deivamsen 6.Vichitra 7.Sathiyanarayanan .. Respondents Second Appeal is filed under Section 100 of the Code of Civil Procedure against the judgment and decree dated 31.01.2005 made in A.S.No.94 of 2004 on the file of the Principal Sub Court, Tindivanam confirming the Judgment and Decree dated 22.06.2004 made in O.S.No.209 of 2004 on the file of the District Munsif, Tindivanam. For Appellants : M/s.M.Durairaj. For Respondents : M/s.S.Parthasarahty, Sr.Counsel for R1, R4 to R7. Mr.P.Mathivanan for R3. J U D G M E N T
The unsuccessful plaintiffs are the appellants herein.
2.The suit was filed by the plaintiffs for declaration of title of the plaintiffs 1 to 3 in respect of A to C schedule and common right in respect of D schedule and for permanent injunction restraining the defendants 1 and 2 from interfering with the plaintiffs possession and enjoyment in respect of suit A to D Schedule properties.
3.The few facts which are relevant for consideration herein are as follows :-
The suit A to D schedule properties measuring 2 acres and 6 cents originally belonged to one Nandagopal Chettiar who was heavily indebted to third parties. While so, he sold 15 cents, out of 2acres and 6 cents in favour of one Kamalammal on 20.07.1970. One of the creditors of Nandagopal Chettiar by name Ramakrishnan along with his wife filed IP.No.36 of 1970 on the file of Sub Court, Cuddalore alleging the sale transaction effected by Nandagopal Chettiar in favour of Kamalammal as constituted an act of insolvency. The petition was presented on 30.07.1970 and represented on 02.12.1970 and as per the particulars available in EX.A4 extract from the Register of insolvency petition, the respondent Nandagopal Chettiar was adjudged as insolvent in an exparte order dated 08.04.1974 and the property belonging to Nandagopal Chettiar was vested with the Official Receiver and the exparte order was set aside on 08.04.1974 and thereafter the petition was dismissed on 10.02.1976. Aggrieved by the same, the petitioner/creditor filed CMA.No.115 of 1976 and the appeal was also dismissed on 23.04.1980 and the same was again challenged before the High Court in CRP.No.1666 of 1981 and disposed of on 30.09.1982, thereby remanding the matter to the trial Court for denovo disposal, according to law. After remand, the case was again taken up on 19.02.1993 and was disposed of on 28.07.1994. During the pendency of the insolvency petition, the official receiver was appointed as Receiver by order dated 11.09.1984. The respondent Nandagopal Chettiar was after due contest adjudged as insolvent by holding that the sale transaction effected by him in favour of Kamalammal on 20.07.1979 was only to defeat and defraud the payment due to the creditor petitioner and the same amounted to an act of insolvency.
4.After adjudication, the property was `vested with the Official Receiver and the Official Receiver, after duly complied with all the formalities brought the property for sale and the property was sold to one Chandravanitha and the sale deed was executed in her favour on 27.02.1996. Thereafter, IA.No.9 of 1997 in IP.No.36 of 1970 came to be filed by one Lakshmi claiming herself to be the bonafide purchaser for valuable consideration of the property belonging to Nandagopal Chettiar on 25.10.1995. According to the petitioner, she purchased the property without noticing of any defect in title and she was also put in possession of the property in pursuance of the sale deed. The relief sought for in the IA is to declare the auction sale in favour of Chandra Vanitha as invalid and null and void and for permanent injunction restraining the defendants from interfering with her possession and enjoyment of the suit properties. The IA was after due contest dismissed holding that the order of adjudication related back to the date of presentation of insolvency petition and after the adjudication Nandagopal Chettiar ceased to have any right to represent the estate and the proper person to represent the same was only the Receiver and under Section 55(8) after adjudication, the entire property vested with the receiver and the insolvent was incompetent to effect any transfer or otherwise to deal with the property and the sale was invalid and the purchaser was conveyed no right and the sale by the official receiver was valid.
5.In the meanwhile, one Ramanathan filed a suit in OS.No.195 of 1972 on the file of the Sub Court, Cuddalore against Nandagopal Chettiar for recovery of money due to him and the suit was contested by Nandagopal Chettiar and the suit was after due contest decreed and money decree was passed in favour of Ramanathan/Plaintiff. Thereafter, the decree holder filed EP.No.31 of 1982 for bringing the property for sale for realisation of the decree amount and Court auction sale of extent of 1.91cents was held on 06.08.1986, in which, one Pethannan was the successful auction purchaser and sale certificate was issued in his favour on 14.10.1986 and he also took symbolical delivery of possession through Court. The plaintiffs have come into the picture only at this point of time.
6.According to the plaintiffs, the first defendant by name Kannan and one Govindarajan s/o.Singara Mudaliar had an agreement with Pethannan to purchase the property from Nandagopal based on one agreement dated 29.08.1986 and the first defendant and one Ramayan and Govindarajulu filed OS.No.7 of 1988 against the auction purchaser/Pethannan for partition and separate possession of their shares and the suit was compromised between the parties and the suit was decreed in terms of the compromise, thereby allotting A to C schedule to the plaintiffs 1 to 3 and the suit D schedule as common to the plaintiffs 1 to 3 and the suit D Schedule to the first defendant. It is the further case of the plaintiffs that in pursuance of the compromise decree, the parties to the compromise became absolute owners of the property allotted to them and they took delivery of specific portion alloted to them and as the suit filed by Ramanathan was long prior to the insolvency proceedings and as on the date of the decree in favour of Ramanathan and as on the date of Court auction sale in favour of Pethannan and as on the date of decree in OS.No.7 of 1988 in favour of plaintiffs, there was no vesting of the property on the Official Receiver and the vesting of the property on the Official Receiver was only on 28.07.1994 and the same is not binding on either the decree holder/Ramanathan or auction purchaser/Pethannan or the plaintiffs herein and the first defendant, who was party to the earlier suit in OS.No.7 of 1988 is estopped from denying the title of the plaintiffs on the strength of the sale in the name of the second defendant, who is none else than his wife in the Court auction sale in the IP proceedings.
7.The suit relief was seriously resisted by the second defendant Chandravanitha who was the auction purchaser in the IP Proceedings by denying the maintainability of the suit filed by Ramanathan and the money decree obtained by him and the suit filed by the others in OS.No.7 of 1988 and the compromise decree obtained therein during the pendency of the insolvency petition. According to the second defendant, the entire proceedings as mentioned above are illegal and non-est in the eye of law. It is also their case, that the claim made by the plaintiffs in the suit under Court auction purchaser/Pethannan is also hit by Sections 65 and 66 of CPC and the relevant provisions of law under Benami Transaction Act and no title enured to the benefit of parties to the compromise. As per the Provincial Insolvency Act, the date of adjudication relates back to the date of presentation of the petition in 1920 and any transaction effected by the insolvent in the interregnum period is illegal, null and void.
8.Both the parties have in support of their respective contention examined the first plaintiff and the second defendant and the then Official Receiver as PW1 and DW1 and DW2 and produced Exs.A1 to A9 and Exs.B1 to B10 documents. The trial Court after appreciating and analysing the entire facts and circumstances and evidence come to the conclusion that as the property vested with the Official Receiver from the date of presentation of IP.No.36 of 1970, all the dealings in respect of the property thereafter are null and void. The trial Court on the failure of the plaintiffs to plead and prove that they are bonafide purchasers for valuable consideration, without notice in the insolvency petition by or against the debtor found them disentitled to claim any protection under law to get the relief of declaration and injunction as sought for in the suit and accordingly dismissed the suit.
9.Aggrieved against the same, the plaintiffs preferred AS.No.94 of 2005 and the first appellate Court by Judgment and decree dated 31.01.2005 agreed with the findings of the trial Court and confirmed the judgment and decree of the trial court and dismissed the appeal. Hence, the present Second Appeal by the plaintiffs before this Court.
10.The Second Appeal is admitted on the following Substantial Questions of Law :
(i)Whether the Courts below have erred in law in having failed to consider that the Court auction sale had given vested right in respect of the property in favour of the appellants and that the appellants are bonafide purchasers for value and the only remedy available to the creditor of the insolvent is to attach the sale consideration paid in respect of the property by virtue of Court auction sale and the said act of attachment of sale consideration could be effected by the Official Receiver and that the Court auction sale in favour of the vendor of the appellants can not be dislodged in view of the provision of Section 28 and 55(8) of the Provincial Insolvency Act 5 of 1920?
(ii)Whether the Courts below have misdirected themselves based on misapplication of principle of Doctrine of Relation Back and have not taken into account the subsequent events after filing of the insolvency petition in the year 1970 and adjudication of insolvent and vesting of property in the hands of the Official Receiver as such the doctrine of relation back cannot be made applicable to transfer of involuntary sale much less sale by the Court auction to third party auction purchaser and the third party purchase from the Court auction purchaser cannot be annulled?
11.Heard the rival submission made on both sides and perused the records.
12.The particulars regarding the nature and pendency of the different proceedings initiated against Nandagopal Chettiar and the property belonging to him and the outcome of the proceedings as narrated above, are not disputed. The facts made available herein would reveal that the Insolvency proceedings initiated by two of the creditors of Nandagopal Chettiar was as early as in 1970 and the first in point of time. The said Nandagopal Chettiar was adjudged as insolvent at the earlier point of time on 08.04.1974 and IP was dismissed on 10.02.1976 and thereafter he was finally adjudged on 28.07.1994 and the Official Receiver was appointed as Receiver on 11.09.1984.
13.The relevant provisions of Section 28 of the Provincial Insolvency Act, explains the Effect of order of adjudication. For the purpose of appreciation of the issue involved herein, the relevant sub sections to be looked into are Section 28(1) (2) (3) (6) and (7). As per Section 28(1) after making of an order of adjudication the insolvent shall aid to the utmost of his power in the realisation of his property and the distribution of the proceeds among his creditors. Section 28(2)says on the making of order of adjudication, the whole of the property of the insolvent shall vest in the court or in a receiver as hereinafter provided and shall become divisible among the creditors, and except as provided under the Act, no creditor shall during the pendency of the insolvency proceedings have any remedy against the property of the insolvent in respect of the debt or commence any suit or other legal proceedings, except with the leave of the Court and such terms as the Court may impose. Section 28(3)provides all goods in the possession, order or disposition of the insolvent on the date of the presentation of the petition on which the order is made, shall be deemed to be the property of the insolvent. As per Section 28(6), secured creditors are empowered to realise or otherwise deal with the security, in the same manner as he would ave been entitled to realise or deal with it if this section had not been passed. Section 28(7)says an order of adjudication shall relate back to, and take effect from the date of presentation of the petition on which it is made and what is excluded from the operation of Section 28 is the secured debts.
14.As far as the Insolvency proceeding is concerned, the same was taken up on file and presented on 30.10.1970 and finally disposed on 28.07.1994 and the order of adjudication passed on 28.07.1994, thus relates back to the date of presentation of the petition on 30.10.1970. It is well settled that after the adjudication the insolvent ceased to have any right to represent the estate and is incompetent to deal with the property and it is only the Official Receiver upon whom right to deal with the property is vested. The other creditor by name Ramanathan admittedly filed the suit in OS.No.195 of 1972 only during the pendency of the Insolvency proceedings and the same was filed admittedly without obtaining any leave from the Insolvency Court. In that event, the very institution of the suit by the said creditor, as rightly found by the lower appellate Court is legally not maintainable and the money decree obtained therein and the outcome of the Court auction sale of the property belonging to Nandagopal Chettiar in execution proceedings for the realisation of the decree amount by the decree holder during the pendency of the insolvency petition is also null and void against the Official Receiver.
15.It is true that certain provisions are enacted to protect persons who bonafide deal with the insolvent before the date of actual adjudication. Sections 51(3) and 55 are two of the provisions enacted for the benefit of persons who purchase the property in execution in good faith and for granting protection to certain transactions or dealing by the insolvent. Under Section 51(3), any person on good faith purchase the property of a debtor under a sale in execution shall in all cases acquire a good title to it against the receiver. Section 55 (a)provides for any payment by the insolvent to any of his creditors (b)any payment or delivery to the insolvent (c)any transfer by the insolvent for valuable consideration; or (d)any contract or dealing by or with the insolvent for valuable consideration : Provided that any such transaction takes place before the date of the order of adjudication, and that such person with whom such transaction takes place has not at that time notice of the presentation of any insolvency petition by or against the debtor.
16.The Hon'ble Supreme Court and our High Court in the following two judgments reported in (i)2003 (3) MLJ 162 Sankar Ram and Co. V. Kasi Naicker and others and (ii)AIR 1964 MS 549 (vol.51, C.183) Full Bench - E.K.Raghava Reddy V. Official Assignee, Madras and others categorically laid down that in order to get protection to transactions effected after the date of presentation of insolvent petition but before passing order of adjudication three conditions to be satisfied are (1)that any such transactions takes place before the date of the order of adjudication (2)that the person with whom such transaction takes place has not at the time notice of the presentation of any insolvency petition and the burden is on the transferee to show that they were entitled to such protection and (3)the sale in the court auction is made in good faith.
17.Regarding the plea of either want of notice of insolvency proceedings or purchase of the property in Court auction sale made in good faith, the plaintiffs are disentitled to raise any such plea and to claim any protection on that basis either under Sections 51(3) or 55 for the simple reason that it is either Ramanathan or Pethannan who was the auction purchaser of the property, who are entitled to claim such protection. There is absolutely no pleadings raised in the plaint or proof produced during trial that either Ramanathan instituted the suit in good faith or Pethannan purchased the property in good faith and for valuable consideration both without notice of Insolvency Petition. As a matter of fact, neither Ramanathan nor Pethannan were arrayed as the respondent in the present suit to ascertain the actual state of affairs as on the date of institution of suit by Ramanathan or Court auction purchase by Pethannan and on the failure of the plaintiffs to implead Ramanathan and Pethannan and in the absence of any specific pleadings for seeking protection under Sections 51(3) or 55 of the Act, the transaction effected in execution of the money decree cannot be excluded from the effect of order of adjudication.
18.It is held in the Full Bench judgment of our High Court reported in AIR 1964 Madras 549 (Vol.51, C.183) Full Bench - E.K.Raghava Reddy V. Official Assignee, Madras and others that knowledge of insolvency proceedings against a judgment debtor can co-exist with the bonafide of the purchaser in an execution sale and mere knowledge on the part of a purchaser in the execution sale, during the pendency of insolvency proceedings against the judgment debtor, about the admission of an insolvency petition to adjudicate the judgment debtor an insolvent will not render his purchase in the court auction as one not made in good faith and thereby deny him the protection afforded by the relevant provisions of law. However, it is categorically held by the Full Bench that the onus of proving good faith will, however, be on the purchaser, who must satisfy the Court that the purchase made by him is consistent with the general policy of the Insolvency law in that, at a fair sale, he paid the market value or very near the market value of the property. It is further held therein that the good faith that has got to be proved cannot be regarded as matter of assumption or presumption. It has got to be proved like any other question of fact, which gives protection to a purchaser and general considerations like safeguarding the rights of third party purchaser cannot apply. In the case decided by the Full Bench, as the purchaser has not even offered prima facie evidence as to his good faith, the Full Bench in the letter patents appeal confirmed the order of the learned single judge, that the sales held were not to be protected by the terms of the relevant provisions of law and therefore not binding on the official assignee.
19.As far as the plaintiffs herein are concerned they are neither the decree holders or auction purchaser and they come into the picture much later on the strength of an agreement dated 29.08.1996. As per the terms of the agreement it is pleaded in the suit that Pethannan purchased the property for the benefit of the plaintiffs, first defendant and one Govindarajan and after the purchase, Pethannan failed to effect a division of the property purchased in Court auction as agreed between them and by pleading so the plaintiffs come forward with the Suit in OS.No.7 of 1988. Such plea of the plaintiffs is liable to be rejected for the simple reason that the Court auction sale was on 06.08.1996 and the agreement was much after the sale on 29.08.1996, as such, the parties cannot claim any right under the Court auction sale effected much earlier.
20.Even otherwise, the nature of the claim made by the plaintiffs herein is as benami and as on the date of institution of the suit in OS.No.7 of 1988, the Benami Transaction (prohibition) Act came into effect and the claim of the plaintiffs is hence barred under the relevant provisions of the Act. As far as the partition decree made in OS.No.7 of 1988 is concerned, the same is not after due contest of the claim on merits but only in pursuance of compromise between the parties and is more of voluntary in nature and is not protected under the Act. Here again, the plaintiffs have not raised any pleading in the plaint that they entered into the agreement in good faith without any notice of insolvency proceedings. Even otherwise, the conduct of the parties in claiming share in the property purchased in the court auction sale is totally lacking in bonafide. As such, the plaintiffs are disentitled to claim any right in the property which was already sold to the second defendant by the Official Receiver in the insolvency proceedings. As a matter of fact, the Insolvency court has in yet another petition filed by another purchaser through voluntary sale, negatived the claim and held the sale in favour of the second defendant by the Official Receiver to be legally valid.
21.Both the courts below on proper appreciation of facts involved and properly applying the legal principles laid down in this regard rightly upheld the sale in favour of the second defendant and rightly held the plaintiff to be disentitled to get any relief and the judgment and decree of the Courts below hence warrant no interference and the substantial questions of law are accordingly answered against the plaintiffs.
22.In the result, the second appeal is dismissed. No costs.
06.03.2015 Internet : Yes/No Index : Yes/No tsh K.B.K. VASUKI, J.
tsh To
1.The Principal Sub Court, Tindivanam.
2.The District Munsif, Tindivanam.
SA.No.1240 of 200506.03.2015