Appeal No 165 of 1953
Appeal by special leave from the judgment and order dated October 3 1950 of the former Travancore Cochin High Court in A section No 288 of 1120T arising out of the judgment and order dated the 3rd Thulum 1120 of the 2nd Judge District Court Quilon in CMP No 2391 dated 15 8 1103 in IP 31100
K section Krishnaswamy Iyengar Alladi Kuppuswami and M section K Sastri for the appellant
N C Chatterjee M R Krishna Pillai and Sardar Bahadur for respondent No 1 1957 May 24
The Judgment of the Court was delivered by SINHA J
This appeal by special leave is directed against the concurrent orders of the Courts below allowing the Official Receiver s application under section 35 of Travancore Regulation VIII of 1090  1915 to which we shall refer in the course of this judgment as the Insolvency Regulation for annulling the usufructuary mortgage exhibit I for Rs 75000 dated August 18 1924 executed by a number of persons who may now be conveniently described as the insolvents
The main question for determination in this appeal on behalf of the transferee is whether the transaction in his favour is within the third exception to section 35 aforesaid
In this judgment we shall use the dates with reference to the Gregorian Calendar equivalent to the dates maintained under the Malayalam Calendar
259 In order to appreciate the arguments in this appeal it is necessary to state the following facts
Koya Kunju was a flourishing merchant at Quilon carrying on trade in piece goods yarn provisions etc
He died in or about the year 1921 leaving him surviving his widow two sons and two daughters who jointly carried on the ancestral business through the eldest son under a power of attorney
They added to the family business a tile factory and an oil mill
In June July 1924 the sons approached the appellant s father who was a flourishing money lender living about fifty to sixty miles away from Quilon at a place called Mankompu
He agreed to advance the sum of Rs 75000 on the usufructuary mortgage of certain immovable properties in and near Quilon belonging to the family for the purpose of carrying on their trade and business after his two sons had made certain enquiries at Quilon about the status and means of the borrowers and whether the transaction would be worth their while
After a draft had been made at the instance of the creditor the mortgage bond and a lease deed granting a lease of the mortgaged properties to the mortgagors themselves bearing the same date namely August 18 1924 were executed and registered by the heirs aforesaidsaid of Koya Kunju
The purpose of the loan is stated in the document to be the family necessity namely carrying on trade etc
In lieu of interest on the Rs 75000 advanced at the rate of nine per cent
per annum for a period of three years the mortgaged properties namely buildings fields and coconut orchards etc were said to have been delivered to the mortgagee who in his turn granted a lease back to the mortgagors on payment of a stated sum by way of annual rents viz Rs 6750 equivalent to interest at nine per cent
on the principal sum advanced
It was also stipulated in the lease deed that if rent was in arrears for two years the lessees would surrender the properties to the lessor and accrued arrears of rent also would be a charge on those properties
It is common ground that the mortgaged properties were unencumbered at the date of the transaction but soon after a hypothecation deed in favour of a third party named Kadir Moideen 260 Rowther was executed on August 30 1924 for the sum of Rs 78859 15 0 hypothecating the equity of redemption in respect of the properties mortgaged to the appellant and certain other properties
The second bond which will hereinafter be called the hypothecation bond to distinguish it from the usufructuary mortgage bond in question was admittedly executed to liquidate the outstanding debts due to the hypothecatee himself in respect of dealings in cloth yarn and iron goods between the parties to that transaction
It appears that those two parties were having dealings in those commodities from about the year 1911
Hence they were very well known to each other on account of their business dealings whereas the mortgagee in respect of the usufructuary mortgage bond in question was a complete stranger to the family of the mortgagors
On September 15 1924 one of the business creditors of the family of the mortgagorsS M Sheikh Mohideen Rowther made an application in the District Court of Quilon for adjudicating them as insolvents
He implement the mortgagors the five heirs aforesaid of Koya Kunju
Amongst the acts of insolvency were mentioned the transactions between the insolvents and the appellant and the hypothecation bond aforesaid
In his affidavit in answer the first counter petitioner for himself and as agent of the other members of the family admitted their joint trading business and the debts incurred by his firm
He also admitted the debts due under the usufructuary mortgage bond in question and the hypothecation bond aforesaid and ended by saying that the debts of the counter petitioners including the debts covered by the said usufructuary mortgage bond and the hypothecation bond amounted to two and a half lakhs of rupees and that their assets were worth not less than seven lakhs of rupees
He denied that they had committed any acts of insolvency or had done anything to delay or defeat their creditors and expressed their readiness to pay the debts due to the petitioning creditor
A number of other creditors also made similar applications for adjudicating the mortgagors as insolvents
All those proceedings appear to have been 261 consolidated and the District Judge by his orders dated August 29 1927 adjudged the counter petitioners insolvents
About the contents and effect of this order of adjudication something more will have to be said in the course of this judgment while dealing with the most important question of law raised by the learned counsel for the Official Receiver
By his orders dated October 19 1924 the District Judge appointed the Official Receiver as the interim receiver in respect of the insolvent s properties to take immediate possession thereof
The interim receiver Sri V N Narayana Pillai made a report to the court on February 11 1925 stating inter alia that the total yield of the properties mortgaged to the appellant could be estimated at Rs 1600 per year and that the insolvents were not prepared to continue in possession of the mortgaged property at a rent of Rs 6750 as stipulated in the lease deed aforesaid and that therefore the mortgaged property was not expected to fetch an income equivalent to nine per cent
on the mortgage bond as stipulated
The rent having fallen in arrears over two years the mortgagee instituted a suit against the mortgagors impleading the Official Receiver also for recovery of arrears of rent with interest as also for recovery_ of possession of the mortgaged property  and the suit appears to have been decreed for the reliefs prayed for
Since then the mortgagee appears to have been in direct possession of the property
It does not appear that in that suit any question as to the want of consideration or of bona fides of the mortgage bond was raised either by the mortgagors themselves or by the Official Receiver
It was on March 28 1928 that the Official Receiver made his application to the court praying that the court may be pleased to declare the transfers described in schedule A void as against your petitioner
Schedule A comprised the usufructuary mortgage bond aforesaid and the lease deed as also the hypothecation bond for Rs 78859 15 0
It is remarkable that no allegations of fact bearing on the bona fides of the transactions impeached are made in respect of the mortgage bond in question
After stating the insolvency 262 proceedings and the fact of the execution of the deeds in schedule A and that the insolvency petition on which the order of adjudication was passed had been filed in court within two years after the dates of transfer the only relevant statement made in the petition is para
4 to the following effect That the said transfers are void as against your petitioner under sections 35 and 36 of the Insolvency Regulation
 This petition of the Official Receiver was opposed by the mortgagee s son N Krishna Iyer on his father s behalf  chiefly on the ground that the mortgage was a bona fide transaction for valuable consideration which was not affected by the Insolvency Regulation that there was a misjoinder of parties and causes of action apparently objecting to the Receiver filing a single petition in respect of the usufructuary mortgage deed arid
the hypothecation bond and that it was barred by limitation and estoppel
A number of issues were raised on July 24 1929 the most important of them being the first issue to the following effect   Whether the otti and lease deeds impeached by the Receiver were executed in good faith and for valuable consideration  Other issues related to the formal issues in bar of the proceedings
Before the learned District Judge Mrs Anna Chandy a preliminary objection was raised on behalf of the Receiver to the effect that in view of the decision of the Judicial Committee of the Privy Council in Mahomed Siddique Yousuf vs Official Assignee of Calcutta 1 the matter was res judicata between the parties and the order of adjudication could be questioned only by an appeal against it which had not been done
The learned Judge gave effect to that objection and held that the transferee was precluded from agitating the matter and that his only remedy was by way of appeal against the order of adjudication
This point has been very prominently raised by the learned counsel for the respondent the Official Receiver at the forefront of his arguments and will 1 1943 L R 70 I A 93
263 have to be dealt with at the proper place
The learned Judge held on the merits that exhibit I the usufructuary mortgage bond was not for the full consideration stated in the deed but that only Rs 20000 had been paid to the mortgagors and that in any event the transaction did not represent a bona fide transfer
As the hypothecation bond is not the subject matter of this appeal it is no more necessary to follow the course of the proceedings in respect of that transaction
The Receiver s application was therefore allowed both on the ground of incompetency of the transferee to challenge the adjudication order and on the finding that it was a fraudulent transfer
On appeal by the mortgagee the learned Judges of the High Court dis agreed with the trial Judge and held that the decision in Mahomed Siddique YOUSUF s case 1 could not stand in the way of the appellant and that the entire consideration of Rs 75000 had been proved to have been paid to the mortgagors but agreed with the trial Judge in holding that the transaction was not made in good faith in the sense that it had not been entered into with due care and attention
In the result the appeal was dismissed
The transferee prayed for a certificate of fitness to appeal to this Court but the High Court refused that application
The appellant then moved this Court and obtained special leave to appeal
A number of points were raised on behalf of the appellant and at the threshold of the arguments it was contended and in our opinion rightly that the courts below had erred in throwing the burden on the transferee of proving affirmatively that the transaction impeached namely the usufructuary mortgage bond dated August 18 1924 was supported by good faith and valuable consideration
The Judicial Committee of the Privy Council laid it down in the case of Official Assignee vs Khoo Saw Cheow 2 that upon a true construction of the Bankruptcy Ordinance of the Straits Settlements section 50 sub section
3 which in terms is similar to the provisions of section 35 of the Insolvency Regulation the onus is upon the Official Assignee to prove that a conveyance which he was seeking to set aside was not made in good faith and for valuable consideration
In 1 1943 LR 70 IA 93
2 264 that case the trial Judge had ruled that the onus of proof lay upon the transferee and had set aside the transaction upon failure of proof led by the transferee
On appeal it was held that the trial Judge had misdirected himself as to the onus and that as the result of the misdirection was very serious in that it had coloured the whole outlook as to the facts and had substantially prejudiced the appellant s case a retrial was necessary
The Privy Council affirmed the decision of the Appeal Court and dismissed the Official Assignee s appeal the respondent transferee not appearing before the Judicial Committee
In the same year the Judicial Committee followed the aforesaid precedent in the case of Official Receiver vs PLKMRM Chettyar Firm 1 which was a case under the 
On a consideration of the provisions of section 53 of the Act their Lordships reaffirmed the proposition laid down in the earlier case of that very year reported in Official Assignee vs Khoo
Saw Cheow2
Their Lordships examined the terms of section 53 and section 50 of Ordinance No 44 of the Straits Settlements dealt with in that previous decision and came to the conclusion that they were in substance the same
The third decision of their Lordships of the Privy Council to the same effect is reported in Pope vs Official Assignee Rangoon 3
This case went up in appeal from a decision of the Rangoon High Court under the provisions of section 55 of the Presidency Towns Insolvency Act
In this case their Lordships observed further that if the transaction impeached was a real and not fictitious one the receiver could not be said to have brought the case within the section unless he proved that the transferee knew that the transferor was insolvent at the time the transfer was made even though the transfer was of the entire assets of the transferor
These three decisions of the Judicial Committee settled the law in this country contrary to what had been the consensus of judicial opinion previously that the initial burden of proving that the transaction impeached had not been made 1 1930 L R58 1
A 115
2 3 1933 LR 60 IA 362 265 in good faith and for valuable consideration lies on the party seeking to set aside the transaction
The learned counsel for the respondent was not able to adduce any reasons to the contrary and it must therefore be taken that it is settled law in insolvency proceedings that the burden of proof lies on the Official Assignee or Receiver who challenges the transaction
In this case as already pointed out the issue framed in terms laid the burden of proof on the transferee the appellant
He led the evidence recording of which began on November 21 1930 and the evidence of his witnesses C P Ws
1 to 7 was recorded between November 21 1930 and November 20 1932 on different dates
C P W 8 one of the insolvents appears to have been examined in the interest of the second mortgagee that is to say in support of the hypothecation bond
He was crossed on behalf of the petitioning creditor as also of the appellant
He was examined and crossexamined in February and March 1933
It was then for the first time that it was alleged on behalf of the mortgagors that only Rs 20000 out of Rs 75000 secured under the mortgage in question had actually been paid and that the remaining Rs 55000 had so far remained unpaid
More will have to be said about this aspect of the case later
C P W 10 one of the other mortgagors was examined on the same lines as his brother CPW 8
CPW 12 is the younger brother of SK Kadir Moideen Rowther the second mortgagee who had taken the hypothecation bond
He was examined on October 9 1935
Curiously enough nothing appears to have happened until the first Official Receiver V N Narayana Pillai aged 64 years was examined as CPW 13 on November 291943
It was he who had started the annulment proceedings in respect of the mortgage bond in question
His evidence and conduct of the proceedings will have to be dealt with presently
We have pointed out the extremely dilatory way in which the proceedings in the Insolvency Court were conducted
The annulment proceedings commenced in 1928 and were determined by the Court of first instance by its orders dated October 19 1944 34 For a period of more than sixteen years the annulment proceedings were kept hanging
For whose benefit it does not appear
We would fain believe that this extremely dilatory way of dealing with litigation involving the business community is not a habit in that part of the country and that the present case is only an exception
On appeal the High Court has noticed the delay but without any apparent disapproval
We have not been able to discover any reasons valid or otherwise for this callous disregard of public time and litigants  interest
Realising that the annulment proceedings had taken a dubious course on an issue wrongly throwing the onus of proof on the transferee the learned counsel for the Receiver sought to support the order annulling the encumbrance on the short ground that the matter was res judicata between the Receiver and the incumbrancer on the authority of the decision of the Privy Council in Mahomed Siddique Yousuf vs Official Assignee of Calcutta 1
That was an appeal from the Calcutta High Court in a case arising under the Presidency Towns Insolvency Act III of 1909
In that case the Judicial Committee following the well established rule in England as laid down in the leading case of Ex parte Learoyd In re Foulds 2 has held that the order of adjudication based on the allegation that one of the several acts of insolvency was the impugned transfer was conclusive against the transferee in subsequent proceedings taken by the Official Assignee to set aside the transfer by virtue of section 116 sub section
2 of the Presidency Towns Insolvency Act 1909
Their Lordships have pointed out in the course of their judgment that the provisions of the Presidency Towns Insolvency Act then before their Lordships were in terms similar to those of the Bankruptcy Act of 1869 which had been repeated in the subsequent Acts of 1883 and 1914
They also point out that it is rather anomalous that the decision should adversely affect a party who was not before the court when the adjudication order was made
But they held that the words of the statute and the requirements of public policy in relation to 1 1943 LR 70 IA 93
2 267 adjudication proceedings were enough to outweigh any considerations of hardship to individuals
On this view they affirmed the decision of the Calcutta High Court and overruled that of the Madras High Court in Official Assignee of Madras vs ORMORS Firm1
Naturally very strong reliance was placed by the learned counsel for the respondent Receiver on that case
It was argued that as the order of adjudication dated August 29 1927 had with reference to the transaction in question amongst others held that the debtors had committed acts of insolvency by executing the deed exhibit I with a view to defeat or delay their creditors it was no more an open controversy and the findings then recorded were conclusive in the present proceedings
There are in our opinion insurmountable difficulties in the way of the respondents on this aspect of the case
It was stated by the petitioning creditors that the counter petitioners insolvents had executed the usufructuary mortgage bond in question and the hypothecation deed in respect of almost all their properties with a view to defeat or delay the other creditors
Issue 5 was raised in these terms  Have the defendants committed acts of insolvency as alleged in the petition   and the finding of the court was that those were acts of insolvency  with intent to defeat or delay their creditors
 It is said that these findings are resjudicata between the Receiver and the appellant
Even so there is no finding that the transferee was privy to such acts
It was not necessary to find at that stage and it has not in terms been found that the transaction impugned in this case was not bonafide so far as the transferee is concerned or without consideration matters which directly arise for determination in the annulment proceedings leading up to this appeal
Hence even assuming that the rule laid down by their Lordships of the Judicial Committee in Mohomed Siddique Yousuf vs Official Assignee of Calculta2 in a case arising under the Presidency Towns Insolvency Act applies to a case like the present governed by the Insolvency Regulation which follows more closely the 1 Mad 541
2 1943 LR 70 IA 93
268 and not the Presidency Towns Insolvency Act the present controversy is not barred by any finding in the order of adjudication
In this appeal we are concerned with the bona fides of the transferee
Nor has it been found that there was no valuable consideration for the mortgage
Hence without pronouncing on the applicability of the decision aforesaid of the Judicial Committee it must be held that the question under section 35 is still open
Having disposed of the preliminary questions raised on behalf of the parties we have now to determine the main question in controversy namely whether it has been proved that the usufructuary mortgage bond dated August 181924 was not made in good faith and for valuable consideration
Section 35 of Travancore Regulation VIII of 1090  1915 is in these terms Any transfer of property not beingi a transfer made before or at and in consideration of marriage iior a transfer made to or for the wife or children of the transferor of property that has accrued to the transferor in consideration of the marriage or in right of his wife iiior a transfer made in favour of a purchaser or incumbrancer in good faith and for valuable consideration shall if the transferor is adjudged insolvent within two years after the date of the transfer be void against the receiver and may be annulled by the Court
 This section is equivalent to section 36 of the III of 1907 and to section 53 of the V of 1920 except for the addition of the second exception which was apparently added in the Travancore law to make it in consonance with local laws relating to devolution of family property and secondly that the word void in the last clause of the section in the Insolvency Regulation and in section 36 of the of 1907 has been changed into voidable
Regulation VIII of 1915 aforesaid has been replaced by Travancore 269 Regulation VIII of 1108 1932
Section 53 of the latter has taken the place of section 35 of the former and is exactly in the same terms except for the fact that the word void has been changed into voidable thus bringing the Regulation of 1932 in line with the Act of 1920
It is not necessary for the purposes of this case to go into the question of whether any legal significance attaches to the change of the word  void into  voidable 
The legislative history of the law relating to annulment of transfers or encumbrances made or created by a person who has since been declared insolvent indicated above shows that the law in the united State of Travancore and Cochin was the same as the law in what used to be called British India
The question now is has the Receiver on whom the burden of proof lay as shown above been successful in discharging that burden
It has not been argued before us by the learned counsel for the Receiver that the courts below were not in error in discussing the evidence and deciding this controversy on the basis that the burden Jay on the transferee to prove that the transfer in his favour was bona fide and for consideration
If the burden lay on the transferee he would have to show not only that he paid some consideration but that he paid valuable consideration and that consideration was paid bona fide
As to what is the legal import of  bona fide will be discussed presently
But we are in this case proceeding on the law so far settled in this country after the decisions aforesaid of the Privy Council that the burden lies on the Receiver
The contrary proposition has not been pressed upon us and we need not therefore pronounce upon that
If the burden lay on the Receiver in our opinion his application for annulment can be allowed on proof either that there was no consideration for the transaction or that the consideration was so inadequate as to raise the presumption of want of good faith
Alternatively the Receiver may also succeed on showing that though there was valuable consideration for the transaction impeached there was want of good faith in the sense 270 that the transferee knowing all the circumstances of the transferor who had since been adjudged an insolvent entered into the transaction with a view to screening the assets of the insolvent from the Receiver in whom the insolvent s property vests for the benefit of the creditors
Such will be mostly cases of benami transactions in favour of some relative of the insolvent or a person in whom he has full confidence that he will hold it ultimately for the benefit of the insolvent or persons in whom he may be interested
Or it may be that a person finding himself over head and ears in debts wishes to convert his assets into liquid assets with the collusion or connivance of the transferee
In both cases the intention clearly is to shield the assets against the claims of creditors and in such cases though the transfer may have been for consideration either adequate or otherwise but having been entered into with a view to defraud or delay the creditors the transferor and the transferee sharing the common intention the transaction must be annulled and the assets must be brought into the common hotchpotch for the benefit of the insolvent s creditors
Though the learned District Judge held that only Rs 20000 had been paid by the mortgagee to the insolvents and Rs 55000 out of Rs 75000 the stated amount of the mortgage money had remained unpaid the High Court has found that the entire consideration passed
If this finding is correct then the fact that such a large amount had been paid by the mortgagee would take him a long way to success in proving the bona fides of the transaction
But it has been argued by the learned counsel for the respondent Receiver that finding is not correct
It has been strenuously argued on behalf of the respondent that the mortgage bond in question was without consideration
The Official Receiver had also filed a memorandum of objections in the High Court challenging the correctness of the finding by the learned District Judge that Rs 20000 had as a matter of fact been paid to the transferors
As on the question of consideration the two courts below have materially differed in their conclusions the question is open 271 before us
We have therefore to examine how far the transaction in question was for valuable consideration
Before advancing this large sum of money the creditor had deputed his two advocate sons CP Ws 1 and 2 to make enquiries into the antecedents of the persons who had applied for the loan and as to whether they were financially sound and otherwise desirable persons to deal with
The two young men who had just entered upon their legal career went and stayed with a relation of theirs who has been examined as C P W 6 Venkitarama Iyer Ramakrishna Iyer who was at the relevant dates posted as Assistant Excise Commissioner at Quilon
This gentleman being interested in the welfare of the family of the intending lenders claims to have made confidential enquiries from respectable merchants at Quilon and told his two young guests that the borrowers were persons of position and good business reputation and that they had ample unencumbered properties on the security of which advance up to a lakh of rupees could be made
The two sons of the mortgagee having satisfied themselves that the proposed mortgagors were persons of good status in society and sound financial position reported to their father who on the strength of the reports by his sons agreed to lend Rs 75000 on a first mortgage of properties reportedly worth more than at least a lakh of rupees
The mortgagee also examined himself as CPW 7
The father and the two sons have given evidence in support of their case that out of the Rs 75000 agreed to be advanced on the mortgage when some of the mortgagors went with the registered document to the mortgagee s place Rs 55000 was paid in cash to them on the basis of the receipt exhibit LIV dated August 20 1924
The remaining Rs 20000 according to the evidence was paid later
Those payments were made in six instalments between September 1 and September 9 1924 as evidenced by receipts Exs LVII and LVIII and endorsements on letters Exs LIXa LXIa LXIVa and LXVa
All these payments are also supported by the corresponding entries in the books of account regularly kept by 272 the mortgagee and proved in court as Exs
LXVII to LXXII series
Of the six instalments paid as aforesaid some of them were paid to the mortgagors  creditors and some of those creditors have been examined
CPW 4 admits having received Rs 2500 and endorsed receipt of the same exhibit LIXa
CPW 3 similarly speaks of having received Rs 1500 and endorsed receipt of the same exhibit LXIVa and is corroborated by his accountant CPW 9 who proves the ledger and day book Exs
LXXX and LXXXI
Thus we have not only the evidence of the mortgagee and his relations but also of third parties creditors of the insolvents proving the passing of consideration
The case does not rest only upon oral testimony
It is amply corroborated by contemporaneous entries in books of account maintained by the lender himself and by third parties who have been paid by him on account of the mortgagors
This considerable body of oral and documentary evidence is supported by the admissions of the mortgagors not in the mortgage bond itself which stand rebutted but by a series of admissions of receipt of the entire consideration money in the several receipts and endorsements made by some of them
All this voluminous evidence has been very carefully considered by the learned Chief Justice at pages 31 to 34 of the judgment of the High Court
We need not repeat all that has been said by the High Court for recording the finding that it was coiistrained to differ from the conclusions of the learned District Judge and to hold that exhibit I is fully supported by consideration 
As already indicated neither the mortgagors themselves nor the Official Receiver in their pleadings made out a case that the transaction was unsupported by consideration or that the consideration paid was not full amount shown in the document as having been advanced or that a much smaller sum like only Rs 20000 had been actually paid
It has been shown above with reference to the dates of the examination of witnesses that CP Ws 1 to 7 had been examined and their evidence recorded between November 21 1930 and November 20 1932
Until that date it was not even suggested to those 273 witnesses in cross examination that only Rs 20000 had been paid and no more
For the first time on February 4 1933 when one of the mortgagors was examined as CPW 8 it was alleged that only Rs 20000 had been received by the mortgagors which amount they paid to their creditors
CPW 10 the second of the mortgagors was examined on June 12 1933
He does not in any way improve the Receiver s case that the transaction was without con sideration
He does not even say that only Rs 20000 out of the consideration stated in the mortgage bond had been received by the mortgagors
Lastly the then Receiver himself was examined as C P W 13 on November 29 1943
This gentleman who is described in the judgments below as one of the leading advocates does not appear to have taken his duty as a Receiver very seriously
He does not appear to have examined the insolvents themselves or their books of account carefully to find out the exact financial position of this trading family
He seems to suggest in his evidence that at the material dates the Quilon Bank was functioning and that the insolvents did not get additional accommodation in the said bank or the other hundi shops during 1099 1923 24
These statements to put it mildly are disingenuous
In the first instance they would suggest that the insolvents had borrowings from the Quilon Bank or other hundi shops and secondly that their financial position was so embarrassed that the said bank or other hundi shops had refused to give them any further advance of money
As a matter of fact it is nobody s case that the insolvents had at any time any dealings with the Quilon Bank
We know from the evidence that the insolvents owed to the Imperial Bank anything between Rs 30000 to Rs 40000
Either a portion or the whole of the dues of the Bank have been liquidated
The evidence is not specific
One of the mortgagors claims to have paid a portion of the Imperial Bank s dues by selling ornaments of the ladies of his family thereby directly suggesting that no portion of the mortgagee s money was utilised for payment of the dues of the Imperial 35 274 Bank
The High Court rightly refused to accept the mortgagors  belated attempt to prove by their bare testimony that any amount out of the consideration of the mortgage bond in question had remained unpaid
The Receiver s evidence was directed mostly to making statements suggesting that the mortgagee had not made such enquiry about the financial position and status of the mortgagors as a reasonable man of business would do
He has not made any definite statement that the mortgage bond in question was without consideration
In cross examination he has been constrained to admit that he did not remember to have examined the mortgagor who was in charge of the business first counter petitioner
He admits that it is usual for an Official Receiver to examine the insolvent
He has said further that he did not consider it necessary to examine the insolvents regarding the subject matter of the petition for annulment
He also admitted that he had not examined any of the accounts to see whether the insolvents had received the entire consideration of the mortgage in question and that the mortgagee Nilakanta Iyer is a very rich man
My information is that the insolvents had no dealings with him before the insolvency
 He was also questioned as to the insolvents  dealings with the Imperial Bank and he gave the very vague answer that he was not sure as to what amount was due to the bank
He also admitted that he had never seen the mortgagee under exhibit 1 nor bad he asked him anything in connection with the mortgage and that the mortgagee had obtained a decree and in execution of the said decree he took delivery of the property which was in his possession as Receiver
According to him the properties covered by the usufructuary mortgage bond and the hypothecation bond would be worth about a lakh and a half rupees
It would thus appear from the statements of the Receiver himself as CPW 13 examined about 19 years after the insolvency proceedings began that he had not made such enquiries as he was bound to make as Official Receiver
From what has been said above there cannot be the least doubt that if the burden lay on the Receiver 275 to prove that the transaction in question was without consideration he has hopelessly failed to discharge that burden
We are prepared to go further and say that even if the burden were on the transferee to show affirmatively that he had paid the full consideration we would have no hesitation in confirming the findings of the High Court on this part of the case which have been arrived at after a very full and fair consideration of the evidence on the record pro and con though there is very little evidence adduced in support of the allegation that the mortgage bond in question was without consideration or full consideration
The finding on the question of consideration being entirely in favour of the appellant mortgagee the only other serious question which remains to be considered is whether the transaction was bona fide
We have already indicated that it is settled law not only of the Insolvency Acts in England but also in this country that it is not necessary in annulment proceedings to prove that the transferor who has been subsequently adjudged an insolvent should have been honest and straightforward in the matter of the transaction impeached
If lie was really so there would not be much difficulty in coming to the conclusion that the transaction as a whole was bona fide
Even if the mortgagors were wanting in bona fides and assuming that to be so in the present case the crucial question still remains to be answered
Unless it is found that the transferee was wanting in bona fides in respect of the transaction in question he cannot be affected by the dishonest course of conduct of the transferor
Has it been shown by the evidence on the record that the mortgagee was a party or privy to the dishonest intentions of the mortgagors in so far as they may have intended to defeat or delay their creditors by executing the mortgage bond The courts below and particularly the High Court have taken the view that the mortgagee had failed affirmatively to prove his bona fides
This conclusion is based upon the consideration that the General Clauses Act II of 10721897 in cl
6 of section 2 provides that Nothing is said to be done or believed in good faith which is done or believed 276 without due care and attention
 Applying this definition of good faith to the present case the High Court came to the conclusion that the mortgagee has not proved that the mortgage transaction was entered into with due care and attention
The United State of Travancore and Cochin Interpretation and General Clauses Act VII of 11251950 repeats the same definition which appears to have been taken from the definition of the term from the Madras General Clauses Act 1 of 1891
The definition of good faith in the Indian General Clauses Act X of 1897 is in these terms  A thing shall be deemed to be done in good faith where it is in fact done honestly whether it is done negligently or not The High Court was of the opinion that if the definition of good faith contained in the Indian General Clauses Act quoted above were to apply to the case different considerations might arise
But the definition of that term as quoted above in the Travancore Cochin Act is different
Applying that definition to the present case the High Court s conclusion was that the appellant mortgagee had not shown due care and attention while entering into the transaction
In this connection it is necessary to determine whether the High Court was right in applying the test aforesaid in determining the question of bona fides
We have to find which of the two tests the one laid down in the General Clauses Act of Travancore Cochin or the other laid down in the Indian Act is more appropriate to proceedings in insolvency
Act 11 of 1070 1897 even as Act VII of 1125 1950 contains the following saving clause Unless there be something repugnant in the subject or context
 As a matter of fact these words or words to similar effect are to be found in all General Clauses Acts
The question therefore naturally arises whether there is anything in the subject or context of the Insolvency Regulation which is repugnant to the idea of applying the test of due care and attention
The law of insolvency aims at a just and equal distribution of the assets of a person who has suffered loss 277 in trade or business or otherwise amongst his creditors whose debts are provable under the law and provides a machinery for expeditious disposal of his assets amongst those entitled
The law is calculated to advance the interest of the business community
On the one hand it protects the creditors by compelling the insolvent to place all his assets at the disposal of the court without concealing any of his assets
Similarly it protects the interests of an honest alienee or an honest secured creditor of the insolvent
On the other hand it protects an honest debtor from harassment by creditors who may take simultaneous proceedings for realization of their debts from their common debtor even by sending him to civil prison
It is necessary for the promotion of trade and commerce that an honest debtor should be released from his multifarious obligations as soon as his assets have been placed at the disposal of the court for the benefit of his creditors
It also lays down penal provisions for punishing a dishonest debtor
It also makes provisions for saving the debtor and his creditors from the unscrupulous conduct of persons who may have entered into unconscionable bargains with a person who is financially involved
The law of insolvency is aimed against a dishonest debtor but not necessarily against a debtor who has suffered loss in his trade or business as a result of transactions which may not have been done with due care and attention
Business sometimes is an adventure and very often involves risks which cannot be easily foreseen even by persons of common prudence
Annulment proceedings are aimed at transactions between a debtor who has become insolvent and a creditor who knowing the true state of the debtor s crashing business has taken undue advantage of the embarrassed financial position of the debtor
In view of these considerations in our opinion the test of honesty is more appropriate than the test of due care and attention
It may be added that a General Clauses Act is enacted in order to shorten language used in parliamentary legislation and to avoid repetition of the same words in the course of the same piece of legislation
Such an Act is not meant to give 278 a hide bound meaning to terms and phrases generally occurring in legislation
That is the reason why the definition section contains words like Unless there is anything repugnant in the subject or context
 Words and phrases have either a very narrow significance or a very wide significance according as the context and subject of the legislation requires the one or the other meaning to be attached to those words or phrases
The books contain many illustrations showing that the same words have been used in different senses in different contexts
The significance attaching to the expression  good faith  in the Travancore Cochin General Clauses Act is in terms of the definition of that phrase in the Indian Penal Code and in the Indian Limitation Act
The Indian General Clauses Act applies to all legislation after the coming into effect of that Act
The definition of good faith in the Indian General Clauses Act would have been applicable to the Indian Limitation Act also but the legislature in its wisdom has given a special definition of good faith  different from the one in the Indian General Clauses Act advisedly
The Indian Penal Code which came into existence earlier than the Indian General Clauses Act contains its own definitions to serve its own special purposes
The Travancore Cochin General Clauses Act 1950 of course applies by virtue of s2 to all enactments then in force or passed after the commencement of the Act unless there was anything repugnant in the subject or context
Hence it cannot be said that the definition of  good faith  as contained in the General Clauses Act of 1950 must apply in the same sense to every piece of legislation to which it may apply irrespective of the subject or the context
The Insolvency Regulation is on the same lines as the and therefore must be understood in the same sense
If that is the correct approach to the law of in solvency a secured creditor who has advanced money to a debtor honestly even though he may not have taken all due precautions would not come within the mischief of section 35
It must therefore be held that the test of good faith as laid down in the law generally applicable to Indian 279 Statutes is more appropriate to proceedings under the insolvency law
That being so it must also be held that the courts below have approached the question of bona fides from a wrong standpoint and have applied a wrong test
Having come to the conclusion that honesty is the test to be applied in judging the bona fides of the creditor a secured creditor in this case we have to see how far he has satisfied that test
In this connection it has to be remembered that it is common ground that the mortgagee had absolutely nothing to do with the mortgagors before the mortgage transaction was concluded
There is no blood relationship or any other kind of relationship which could be urged as the motive for entering into a dishonest transaction in the sense that the creditor had joined hands with the debtors in screening the property against the claims of the latters  creditors
It may be that the debtors were financially involved but there is no evidence on the record even to suggest that the mortgagee was aware or apprised of their true financial position
We have no doubt in our mind that if the mortgagee had the least suspicion that he would have to face a prolonged litigation to realise his money from the debtors he would have been the last person to enter into the transaction in question
He was certainly interested in earning good interest on his capital
But that is not the same thing as saying that he had entered into a dishonest deal with persons who were about to crash in their business
It is also noteworthy that the insolvent s ancestor had died only about three years before the transaction in question
During this period of three years they had added to their business by having a file factory and an oil mill
That is not the conduct of a family which was about to crash
It may be that they were much too ambitious to become rich quickly
But it has not been suggested or found that they had indulged in unscrupulous dealings in the way of their business
At least that was not their reputation at about the time the mortgage transaction was entered into
Otherwise CPW 6 the Assistant Commissioner of Excise the mortgagee s 280 relation would certainly not have advised them being their well wisher to enter into a hazardous transaction
We have not been shown any evidence which could lead us to believe that the insolvents  reputation at that time in the way of their trade and business was anything but sound notwithstanding the ipse dixits of the receiver the last witness examined 19 years after the proceedings had started
It is very easy to be wise after the event
But there were no indications until August 1924 so far as the mortgagee is concerned that he was dealing with a party who was about to crash
Whatever may have been the intentions or the course of conduct of the insolvents there is nothing to attribute that intention or course of conduct to the mortgagee
His evidence as also of his two sons who helped him in entering into this transaction has impressed us as truthful and straightforward
Assuming that the courts below were right in applying the test of due care and attention what is there to show that the mortgagee was wanting in that respect  Being a complete stranger to the family of the borrowers he deputed his young lawyer sons to make such enquiries as they could from persons who were expected to know them and their business dealings and after satisfying themselves that the borrowers had a good reputation and had unencumbered properties of much greater value than the sum proposed to be advanced the mortgage transaction was finalized
It must be remembered in this connection that even the test applied to a lender while lending money to the karta of a joint Hindu family does not insist upon the creditor seeing to the application of the funds advanced
In the instant case the borrowers represented to the creditor that they required funds in the way of their business
Their enquiry yielded the information that they had borrowings to the extent of Rs 30000 to Rs 40000 and outstanding claims against their debtors to a much larger extent
That is the state of affairs in a normal trading family
The fact that all their immovable properties worth according to the Receiver more than a lakh and a half rupees till then were unencumbered was another indication of the 281 apparent solvency of the family
But it has been argued on behalf of the respondent that the mortgagee was put on his enquiry by the very fact that the debtors  account books disclosed debts against them
Therefore it is said the mortgagee should have pursued his enquiry further
It was suggested that the business houses in the town of Quilon and the Quilon Bank itself should have been contacted in order to ascertain the financial position of the debtors
It has already been pointed out that they had no business dealings with that Bank
The mortgagee s sons have deposed that they made enquiries of respectable persons named as also of two leading hundi houses which may have been expected to know about the financial position of the borrowers  family
It was further argued that it was not specifically stated in the mortgage bond itself that the money was intended for payment to creditors specifically named
Ordinarily a trading firm has no fixed list of its creditors or its debtors
It is always a floating list
Hence when it was said that money was being borrowed with a view to carrying on the business of the trading family that was comprehensive enough to include the necessity of paying the outstanding debts of the firm
Unless the lender had reasons to suspect that the money was not intended for carrying on the business of the firm but was meant to corner the same with a view to defeating or delaying creditors it would not ordinarily be the look out of the lender dealing at arm s length to try to pry into the business secrets of the borrower
In our opinion therefore it was not necessary for the lender either to insist upon a list of the borrower s creditors to be specifically mentioned in the deed or upon paying the money directly to those creditors
That would be throwing too great a burden on a lender honestly dealing with a trading family and it would be equally an irksome thing for a trading family to be dealt with on those terms
It cannot therefore be said that the lender had not shown such care and attention as a reasonable person in those circumstances would do
The learned counsel for the respondent further pointed out certain discrepancies in the statements in the 36 282 mortgage deed and in the oral evidence adduced by the mortgagee as pointing to the conclusion that the lender had not been careful and cautious and was therefore wanting in good faith
Those are very speculative arguments which cannot be the foundation for a finding that the Receiver had succeeded in disproving good faith
In this connection it was also pointed out that there was no satisfactory evidence as to how the lender raised Rs 55000 which he paid soon after the registered mortgage bond was delivered to him
There is evidence in the shape of an entry in the passbook in the name of the mortgagee issued by a respectable hundi shop in Alleppey exhibit LXVI a showing that Rs 40000 was withdrawn by him on August 19 1924 just the day previous to the date of payment of Rs 55000
It is the mortgagee s case that he paid the sum of Rs 55000 to the mortgagors with the amount of Rs 40000 thus withdrawn to which was added Rs 15000 which he had with him already
There is no reason to doubt the truth of this version which has been accepted by the High Court
It must therefore be held that the evidence adduced by the mortgagee apart from the question of burden of proof has affirmatively proved the passing of consideration for the mortgage and that there are no circumstances which could throw any suspicion on the bona fides of the transaction
It had been argued on behalf of the appellant that his case had been seriously prejudiced by the joint trial so to say of the issue relating to his transaction with the one relating to the hypothecation bond dated August 30 1924
It was also argued that the mortgage bond in question had been executed and registered and given effect to beyond two years from the date of adjudication and that therefore this transaction could not be brought within the mischief of section 35 of the Insolvency Regulation
In view of our findings on the other and more direct and important issues it is not necessary to pronounce upon these additional grounds urged on behalf of the appellant
In view of our findings on the main issues in the case the appeal must be allowed the judgments and 283 orders of the courts below annulling the usufructuary mortgage bond in question set aside and the transaction held binding on the estate of the insolvents
It follows that the lease back to the mortgagors being a part of the same transaction is equally binding on the estate of the insolvents
The appellant is entitled to his costs throughout to come out of the estate in the hands of the Official Receiver who must pay his own costs
Appeal allowed


Summary:
An usufructuary mortgage in favour of the appellant s predecessor in interest was sought to be annulled by the Official Receiver as having been executed within two years of the adjudication of the mortgagors as insolvents under section 35iii of the Travancore Regulation VIII of 1090 1915 as not having been entered into in good faith and for valuable consideration
By an issue framed in the case the burden of proving affirmatively that the transfer was supported by good faith and valuable consideration was thrown on the transferee
There was also a preliminary objection by the Receiver that the usufructuary mortgage having been found to be an act of insolvency in the insolvency proceedings that finding was res judicata between him and the transferee
The trial judge found in favour of the Receiver
On appeal by the transferee the High Court affirmed the order of the trial judge allowing the Receiver s application for annulment solely on the ground that the appellant had failed to prove his bona fides in the sense that he had entered into the transaction without due care and attention within the meaning of section 26 of the Travancore and Cochin General Clauses Act
Held that the courts below had erred in placing the onus on the transferee and their orders must be set aside
It is the settled law in insolvency proceedings that the burden of proving that a particular transaction is not supported by good faith and valuable consideration lies on the Official Receiver who challenges the transaction
Official Assignee vs Khoo Saw Cheow  Official Receiver vs PLKMRM Chettyar Firm 1930 LR 58 IA 115 and Pope vs Official Assignee Rangoon 1933 LR 60 IA 362 relied on
Held further that there was no scope for the application of the principle of res judicata in the instant case as the matter that directly arose for determination in it was whether the impugned transaction was not bona fide or for valuable consideration so far as the transferee was concerned and that was not in issue in the 33 258 insolvency proceedings nor had he been found in such pro ceedings to be privy to any act of insolvency intended to defeat or delay the creditors
Mahomed Siddique Yousuf vs official Assignee of Calcutta 1943 LR 70 IA 93 considered
The crucial question for decision in such a case would be whether the transferee was wanting in bona fides in respect of the transfer sought to be annulled and the correct test would be the one of honesty as laid down by section 222 Of the Indian General Clauses Act and not that of due care and attention as contemplated by section 26 of the Travancore and Cochin General Clauses Act