Madras High Court
E.K.Gopal vs C.Manoharan ... R-1 / Debtor on 1 August, 2014
Author: S.Vimala
Bench: S.Vimala
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 01.08.2014 CORAM THE HONOURABLE Mrs. JUSTICE. S.VIMALA C.R.P. (NPD) No.2301 of 2008 E.K.Gopal ... Petitioner / Creditor Vs. 1. C.Manoharan ... R-1 / Debtor 2. P.Manjula 3. R.Samundieswari ... R-2 & R-3 / Purchasers Prayer :- Civil Revision Petition (NPD) filed under Section 115 of the Code of Civil Procedure against the judgment and decree, dated 18.03.2008, made in CMA No.10 of 2007 on the file of the Additional District Court / Fast Track Court No.1, Erode, reversing the judgment and decree, dated 18.04.2006 made in I.P.No.40 of 2002 on the file of the II Additional Sub Court, Erode. For Petitioner : Mr. N.Manokaran For Respondents : Mr. V.S.Kesavan, for R-1 M/s. P.Valliappan, for R-2 & R-3 - - - O R D E R
The creditor, E.K.Gopal / petitioner filed I.P.No.40 of 2002, seeking to adjudge the first respondent, C.Manoharan, as insolvent. That petition was allowed with costs. Challenging the judgment, CMA No.10 of 2007 was filed by respondents 2 and 3 in I.P.No.40 of 2002 and the appeal was allowed and I.P.No.40 of 2002 was dismissed. Challenging the dismissal, the petitioner in I.P.No.40 of 2002 has preferred this Civil Revision Petition.
Brief facts:-
2. The first respondent, Manoharan, borrowed a sum of Rs.1,50,000/- from the petitioner for his business expense on 23.05.1999 and executed a promissory note. As promised, he did not repay the amount. The first respondent, with an intention to cheat and defraud the petitioner as well as other creditors, placed his assets beyond the reach of the creditors and towards that end, executed two sale deeds, in favour of respondents 2 and 3, on 28.11.2001, with regard to his entire properties. Respondents 2 and 3 purchased the properties knowing fully well about the debts due to the petitioner from the first respondent. The act of the first respondent would amount to an act of insolvency as contemplated under Section 6 of The Provincial Insolvency Act, 1920 (hereinafter will be referred to as the Act). Therefore, for the acts of insolvency committed, the first respondent has to be adjudged as insolvent.
2.1. The first respondent, though initially appeared, remained exparte subsequently.
2.2. The case of respondents 2 and 3 is that the petition-mentioned property originally belonged to one Kandappa Gounder (the grand father of the first respondent and his two brothers, in whose favour there had been a Will, dated 07.02.1985); there had been a suit for partition in O.S.No.232 of 1993 in which properties were allotted to the share of the first respondent and his two brothers, Rangaswamy and Selvam; all the three of them executed a power of attorney in favour of one Selvaraj on 02.04.2001 and respondents 2 and 3 purchased the property for a valuable consideration from the holder of power of attorney; the purchase was made after ascertaining that there was no debts due from the first respondent and his two brothers; after the sale was over, the first respondent demanded a sum of Rs.10,000/- and on refusal, the first respondent has instigated the petitioner to file this petition; the petitioner's counsel, by name, Anbarasu, had filed a criminal complaint in C.C.No.473 of 2002 before the learned Judicial Magistrate No.III, Erode, on the basis of two cheques, dated 15.01.2002 and 14.03.2002 and those debts are not mentioned in the Insolvency Petition; in any event, respondents 2 and 3 are bona fide purchasers for value and this petition has been filed to get unlawful gain.
3. The trial court considered the issue as to whether the first respondent had committed an act of insolvency within the meaning of Section 6 (b) of the Act and came to the conclusion that the debt due under the promissory note, Ex.A-1, has been clearly proved and that the act of the first respondent would amount to act of insolvency. So finding, the first respondent was adjudged as insolvent.
3.1. With regard to the contention of respondents 2 and 3 that they were bona fide purchasers for value, that issue was relegated to the separate proceedings under Section 53 of the Act.
4. The first appellate court reversed the findings of the trial court and whether the reversal is justified or not is the issue to be considered in this Civil Revision Petition.
5. The first contention of the Revision Petitioner is that the first appellate court should have held that the appeal filed by the purchasers of property from the debtor / insolvent is not maintainable. It is his contention that when the debtor himself has not filed any appeal challenging his status as insolvent, it is not for the purchasers to file the appeal challenging the finding that the first respondent / debtor is an insolvent.
6. Whether the finding on the status of a person, as insolvent, would give a cause of action for the purchasers of property, for being considered as an aggrieved person, is the main issue.
7. Strictly speaking, the issue regarding maintainability of the appeal by the purchasers ought to have been raised before the first appellate court and it is not done so. However, as the issue has been raised before this Court, it has to be answered.
7.1. The following decisions relied upon by the learned counsel for the purchasers would clearly go to show that the transferee is an aggrieved person, not only as regards the factum of insolvency, but also as regards the transfer on which it is based. Therefore, the transferee being an aggrieved person can maintain the appeal.
(i) AIR 1961 MADHYA PRADESH 15 (Harilal and Others v. Firm Shriram Surrajbham Glass Bangle Merchants and Others).
Where the Court passes an adjudication order and holds that the transfer by the insolvent amounts to a fraudulent preference, the order affects the rights of the transferee. It declares the nature of the transaction and to that extent determines absolutely the rights and liabilities of the insolvent, receiver and the transferee. The order operates in rem and as such binds the transferee also, not only as regards the fact of insolvency but also as regards the transfer on which it is based. Hence the transferee being a person aggrieved can appeal against such order.
(ii) 1991 (I) MLJ 511 (Arumugham v. Velammal and Others).
Where the insolvency court has passed an order of adjudication holding a transfer by the insolvent to be by way of fraudulent preference, the transferee is an aggrieved party and so has a right to question the adjudication. 7.2. Therefore, this Court holds that the declaration of status of the debtor, as insolvent, affects the transactions effected by the transferee and therefore, the transferee from the debtor are aggrieved persons and they are entitled to maintain the appeal.
8. The next contention of the learned counsel for respondents 2 and 3 is that the act of insolvency, as alleged by the creditor, has not been proved and therefore, the first appellate court is right in holding that the petition for declaring the debtor, as insolvent, is to be dismissed is justified.
8.1. The insolvency law has two great objectives: (i) the distribution of assets of the debtor in the most expeditious, equal and economic way; (ii) the liberation of the debtor from the demands of his creditors so long as he has made a full surrender of his property.
8.2. Now, it is a case of the creditor that the debtor must be declared as insolvent, but it is not the debtor, though made as a party, has made a claim that he should be declared as an insolvent. Though he appeared through a lawyer initially, he remains exparte.
8.3. The word 'debtor' is not used in the Insolvency Act in its popular sense. It has a limited meaning and includes only persons who are subject to laws of India.
8.4. Under Section 6 of the Act, a debtor commits an act of insolvency in each of the following cases:-
6. Acts of insolvency.(1) A debtor commits an act of insolvency in each of the following cases, namely:
(a) if, in India or elsewhere, he makes a transfer of all or substantially all his property to a third person for the benefit of his creditors generally;
(b) if, in India or elsewhere, he makes a transfer of his property or of any part thereof with intent to defeat or delay his creditors;
(c)if in India or elsewhere, he makes any transfer of his property, or of any part thereof, which would, under this or any other enactment for the time being in force, be void as a fraudulent preference if he were adjudged an insolvent;
(d) if with intent to defeat or delay his creditors,
(i) he departs or remains out of the territories to which this Act extends;
(ii) he departs from his dwelling-house or usual place of business or otherwise absents himself;
(iii) he secludes himself so as to deprive his creditors of the means of communicating with him;
(e) if any of his property has been sold in execution of the decree of any Court for the payment of money;
(f) if he petitions to be adjudged an insolvent under the provisions of this Act;
(g) if he gives notice to any of his creditors that he has suspended, or that he is about to suspend, payment of his debts; or
(h) if he is imprisoned in execution of the decree of any Court for the payment of money.
5 (2) Without prejudice to the provisions of sub-section (1) a debtor commits an act of insolvency if a creditor, who has obtained a decree or order against him for the payment of money (being a decree or order which has become final and the execution whereof has not been stayed), has served on him a notice (hereafter in this section referred to as the insolvency notice) as provided in sub-section (3) and the debtor does not comply with that notice within the period specified therein:
Provided that where a debtor makes an application under sub-section (5) for setting aside an insolvency notice
(a) in a case where such application is allowed by the District Court, he shall not be deemed to have committed an act of insolvency under this sub-section; and
(b) in a case where such application is rejected by the District Court, he shall be deemed to have committed an act of insolvency under this sub-section on the date of rejection of the application or the expiry of the period specified in the insolvency notice for its compliance, whichever is later:
Provided further that no insolvency notice shall be served on a debtor residing, whether permanently or temporarily, outside India, unless the creditor obtained the leave of the District Court therefor.
(3) An insolvency notice under sub-section (2) shall
(a) be in the prescribed form;
(b) be served in the prescribed manner;
(c) specify the amount due under the decree or order and require the debtor to pay the same or to furnish security for the payment of such amount to the satisfaction of the creditor or his agent;
(d) specify for its compliance a period of not less than one month after its service on the debtor or, if it is to be served on a debtor residing, whether permanently or temporarily, outside India, such period (being not less than one month) as may be specified by the order of the District Court granting leave for the service of such notice;
(e) state the consequences of non-compliance with the notice.
(4) No insolvency notice shall be deemed to be invalid by reason only that the sum specified therein as the amount due under the decree or order exceeds the amount actually due, unless the debtor, within the period specified in the insolvency notice for its compliance, gives notice to the creditor that the sum specified in the insolvency notice does not correctly represent the amount due under the decree or order:
Provided that if the debtor does not give any such notice as aforesaid, he shall be deemed to have complied with the insolvency notice if, within the period specified therein for its compliance, he takes such steps as would have constituted a compliance with the insolvency notice had the actual amount due been correctly specified therein.
(5) Any person served with an insolvency notice may, within the period specified therein for its compliance, apply to the District Court to set aside the insolvency notice on any of the following grounds, namely:
(a) that he has a counter-claim or set-off against the creditor which is equal to or is in excess of the amount due under the decree or order and which he could not, under any law for the time being in force, prefer in the suit or proceeding in which the decree or order was passed;
(b) that he is entitled to have the decree or order set aside under any law providing for the relief of indebtedness and that
(i) he has made an application before the competent authority under such law for the setting aside of the decree or order;
(ii) the time allowed for the making of such application has not expired;
(c) that the decree or order is not executable under the provisions of any law referred to in clause (b) on the date of application.
Explanation.For the purposes of this section the act of an agent may be the act of the principal.
9. It is the case of the petitioner / creditor that the debtor had transferred this property with an intention to defeat or delay his creditors. It is his specific case that the transfer of property in favour of respondents 2 and 3 were made with an intention to defeat or delay his claim in the promissory note.
10. Whether this could be true or correct, is the issue to be considered.
10.1. The mere sale of property by a debtor without proof of the intention to defeat or delay the creditors is not sufficient to constitute an act of insolvency. What is required to be proved is the proof of intention to defeat or delay the creditors.
10.2. Whether the proof of intention is available, in this case, is the issue to be considered.
11. Section 25 (1) of the Act lays down the imperative circumstances under which the Court can dismiss the creditor's petition to adjudicate his debtor as an insolvent.
11.1. In the case of K. Maranaicken vs R.S. Saradhambal, reported in AIR 1982 Mad 183, the circumstances under which the petition by the creditor to declare the debtor as an insolvent can be dismissed has been enumerated, based upon Section 25 (1) of the Act.
...I have earlier pointed out that S. 25(1) lays down a number of compelling circumstances in which the court ought to pass an order dismissing a creditor's petition to adjudicate his debtor as an insolvent. I had earlier referred to two of the grounds, one being that the court is not satisfied with the proof adduced by the creditor as to the act of insolvency alleged by him against his debtor: and the other ground which I had earlier referred to is that which compels the court to dismiss a creditor's petition on some sufficient cause which enables the court to form the belief that an order of adjudication ought not to be made against a debtor. The learned Chief Justice of the Calcutta High Court was dealing with yet another ground on which a creditor's petition has got to be dismissed by the insolvency Court and that is where the debtor comes forward and satisfies that court that he is able to pay his debts. This ground is open to the debtor despite the fact that a creditor is in a position to adduce sufficient proof of the act of insolvency alleged by him. 11.2. There are innumerable circumstances available in this case which would go to show that the petition by the creditor to declare the debtor as insolvent cannot be entertained or allowed.
11.3. The suit in O.S.No.217 of 2002 is based upon the promissory note, dated 23.05.1999. The debtor herein had sold the property in favour of the brother of the petitioner on 04.04.2001. If really the creditor had an apprehension that this sale was with an intention to defeat or delay his claim, he ought to have filed the petition to declare the debtor as an insolvent. He has not done so. Only when the property is sold in favour of respondents 2 and 3, he has chosen to take such a step.
11.4. In respect of the properties covered under the sale deed executed by the first respondent, his brothers are also having share in the property. They have not been added as parties in the petition.
11.5. There is an evidence to show that the creditor / petitioner and the debtor / first respondent were friends and they had common friends also. There appears to be close knitted network towards creating transactions.
11.6. To prove the promissory note, the writer of the document, namely, one Anand, has been examined as P.W.2. He is the witness in the sale deed executed by the debtor in favour of the brother of the creditor. He is also the person, who identified the first respondent before the Registrar. There had been an earlier mortgage in respect of Ex.B-1-property in favour of brother-in-law of the creditor. Only in order to discharge that mortgage money, the property has been sold in favour of the brother of the creditor. Even though this transaction is prior to the filing of the petition, still it closely proves the nature of relationship between the creditor and the debtor.
11.7. The first appellate court, has detailed the following circumstances, from the material records available before it:-
1.The writer of the document P.W.2-Anandan, is the brother of Govindaraj and another brother-Advocate Anbarasu. This Advocate, along with his senior, has filed vakalat and entered appearance on behalf of the creditor.
2.The debtor had obtained loan from the said lawyer and after the complaint being filed under Section 138 of the Negotiable Instruments Act, the complaint has been withdrawn (Exs.B-2 to B-4) as the amount was paid out of Court. This would be a proof to show that the debtor had enough money to discharge the loan.
3.Even though the debtor had loans from Advocate Anbarasu and Sundaramurthy, those details are neither disclosed nor those persons have been added as parties.
4.Apart from the petitioner / creditor, one Dharmaraj has also filed an application for declaring the debtor as insolvent and later on, that petition has been withdrawn. The withdrawal has been on the basis that the loan amount has been repaid.
11.8. The first appellate court has considered all the material circumstances with care and caution and has critically analysed the same and has come to the right conclusion that the first respondent therein cannot be declared as insolvent. There has been a specific finding that the filing of the petition of the insolvency is not bona fide.
11.9. The first appellate court, not being satisfied with the proof adduced by the creditor as to the act of insolvency alleged by him against his debtor has rightly dismissed the petition filed by the creditor. It has also been proved before the Court that the debtor has means to pay off the debts. Therefore, there are no grounds to interfere in the Revision Petition.
12. In the result, this Civil Revision Petition is dismissed. No costs. Consequently, the connected MP is closed.
01.08.2014 Index : Yes / No Web : Yes / No srk S.VIMALA, J., srk To
1. The Additional District Judge / Principal District Judge, Erode
2. The Section Officer, V.R.Section, Madras High Court, Chennai - 104 C.R.P. (NPD) No.2301 of 2008 01.08.2014