IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE THOMAS P.JOSEPH MONDAY, THE 11TH JANUARY 2010 / 21ST POUSHA 1931 MSA.No. 4 of 2002(A) -------------------- C.M.A.NO.442/2001 OF VI ADDITIONAL DISTRICT COURT, ERNAKULAM I.A.NO.5498/1999 IN I.P.NO.9/1975 OF I ADDITIONAL SUB COURT, ERNAKULAM APPELLANT(S): APPELLANT/PETITIONER ------------------------------------ DEVAKI D/O. LATE IKKORAN, THRIKKEPARAMBIL, KUTTAMANGALAM VILLAGE, MANIKKINAR P.O., KOTHAMANGALAM TALUK. BY ADV. SMT.P.V.KOCHUTHRESIA ADV. JIJI THOMAS RESPONDENT(S): RESPONDENTS/RESPONDENTS -------------------------------------- 1. DANIEL S/O. KURIAKOSE, AGRICULTURIST KUMULLUMKUNNEL HOUSE, KEERAMPARA VILLAGE, KOTHAMANGALAM TALUK, ERNAKULAM DISTRICT. 2. ABRAHAM, S/O.VARKEY, AGRICULTURIST, KAKKUZHIYIL HOUSE, KARIMKAZHAKARA, KOTHAMANGALAM VILLAGE DO TALUK AND DO. DISTRICT. 3. A.P.VARGHESE, MANAGING PARTNER, UNIVERSAL TRUST AND CHIT FUND, KOTHAMANGALAM. 4. N.C.ELIAS, NEDUMKUDIYIL HOUSE, PROPRIETOR, MAR BASIL BAKERS, KOTHAMANGALAM. 5. BABY THOMAS, ANJILIVELIL HOUSE, PROPRIETOR, ANJILIVELIL TRUST AND CHIT FUND, KOTHAMANGALAM. 6. P.S.MATHEW, PROPRIETOR, ORIENT BAKERS, KOTHAMANGALAM MSA NO.4/2002 2 (*)ADDL.RESPONDENT NO.7: 7. T.L.ANANDAN, S/O.ITTY MEKKOTHA, AGED 75 YEARS, GOVERNMENT SERVANT, THOTTIKKATTU HOUSE, NELLIMATTOM KARA, KUTTAMANGALAM VILLAGE, KOTHAMANGALAM TALUK, ERNAKULAM DISTRICT. (*)ADDL.RESPONDENT NO.7 IS IMPLEADED AS PER ORDER DATED 11.1.2010 IN IA NO.1826/2006. ADV. SRI.M.C.CHERIAN FOR R2 TO 6 SMT.SARAMMA CHERIAN FOR R2 TO R6 SMT.ASHA CHERIAN FOR R2 TO R6 SHRI E.D.GEORGE FOR R2 TO R6 SHRI SABU S FOR R2 TO R6 SHRI P.M.SAMEER FOR R2 TO R6 SHRI RAJAN JOSEPH FOR ADDL.R7 THIS MISC. SECOND APPEAL HAVING BEEN FINALLY HEARD ON 11/01/2010, ALONG WITH MSA NO.5/2002 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: THOMAS P. JOSEPH, J. -------------------------------------- M.S.A.Nos.4 & 5 of 2002 -------------------------------------- Dated this the 11th day of January, 2010. JUDGMENT The debtor has filed I.A.No.1826 of 2006 in M.S.A.No.4 of 2002 and I.A.No.1954 of 2002 in M.S.A.No.5 of 2002 for his impleadment in these appeals. Considering the circumstances stated in the affidavits the applications are allowed and the debtor is impleaded as additional respondent No.7 in these appeals. Registry shall carry out the impleadment in the cause title. 2. These appeals arise from the disposal of I.A.Nos.5498 of 1999 and 5499 of 1999 in I.P.No.9 of 1975 of the court of learned Additional Sub Judge-I, Ernakulam. The applications claiming right over two items of properties which originally belonged to the debtor [additional respondent No.7 herein and respondent No.1 in the Insolvency Petition (for short, “the IP”)] were dismissed since appellants/claim petitioners did not adduce evidence. They challenged that order in C.M.A.Nos.442 of 2001 and 439 of 2001 before learned District Judge, Ernakulam. The appeals were dismissed. M.S.A.No.4 of 2002 arises from C.M.A.No.442 of 2001 while M.S.A.No.5 of 2002 arises from C.M.A.No.439 of 2001. Following substantial questions of law are framed for a decision in these appeals: MSA Nos.4 & 5/2002 2 i. Whether the courts below are right in presuming fraud and lack of bonafides on the appellants in the absence of proof or evidence for the same? ii. Whether courts below ought not to have found that burden to prove a transfer as invalid lies on the Official Receiver and not on the appellants? Parties are referred to as in the claim petitions and in I.P.(No.9 of 1975) for convenience. 3. Facts necessary for consideration of the above questions are: The Insolvency Petition (IP) is filed by the creditors of respondent No.1 in the IP under Section 9(c) of the Insolvency Act (for short, “the Act”) alleging that on 5.6.1975, he transferred his property to respondent No.2 in the IP to defraud the creditors. Respondent Nos.1 and 2 in the IP, the debtor and his assignee resisted the petition on various grounds. Respondent No.2, assignee claimed that she is a bonafide purchaser for consideration. The IP was dismissed for default on 7.12.1979. On 10.12.1979, the creditor-petitioners filed application for its restoration. On 15.12.1979 Ikkoran, predecessor-in-interest of the claim petitioners in I.A.No.5499 of 1999 purchased 70 cents from respondent No.2 in the IP as per document No.4703 of 1979 for a consideration of Rs.8,000/-. The same day claim petitioner in I.A.No.5498 of 1999 purchased 80 cents from respondent No.2 in the IP for Rs.10,000/- as per sale deed No.4702 of 1979. MSA Nos.4 & 5/2002 3 The application for restoration of the IP was allowed on 8.1.1980. Creditor- petitioners in the IP filed application to appoint a Receiver for the properties of the debtor (respondent No.1 in the IP) in the year 1975. Respondent No.2 in the IP, assignee from the debtor filed objection to the application for appointment of Receiver. But that application was allowed and pursuant to that order, Receiver took possession of the properties including the one claimed by the claim petitioners in the month of February, 1980. IP was allowed on 25.2.1980. That order was challenged by the debtor in A.S.No.40 of 1980. His assignee, respondent No.2 in the IP along with some of the claim petitioners filed A.S.No.49 of 1980. The appeals were allowed, order on the IP was set aside and the matter was remitted to the trial court for fresh decision after giving the parties opportunity to adduce evidence. Thereafter IP was dismissed on merit on 22.9.1983. Then it was the turn of the creditors. They filed A.S.No.129 of 1983. By judgment dated 12.2.1986 appeal was allowed holding that the transfer made by the debtor in favour of respondent No.2 in the IP is in fraudulent preference of some of the creditors of the debtor (respondent No.1 in the IP) and is a void transfer under Section 6(c) of the Act. Receiver was directed to prepare the list of the creditors and possess the property for their benefit. I am told that the debtor challenged judgment in C.R.P.No.2482 of 1986 but, did not succeed. MSA Nos.4 & 5/2002 4 3. I.A.No.5498 of 1999 concerned 80 cents allegedly purchased by the claim petitioner therein for a sum of Rs.10,000/- from respondent No.2 in the IP (transferee of the debtor). I.A.No.5499 of 1999 concerned 70 cents purchased by one Ikkoran, predecessor-in-interest of the petitioners in I.A.No.5499 of 1999 from respondent No.2 for a consideration of Rs.8,000/-. In these applications claim petitioners claimed that they are bonafide purchasers for consideration from respondent No.2 in the IP, the assignee of the debtor and that their purchase cannot be affected by the proceeding. Now as it stands order of the Insolvency Court as confirmed by the learned District Judge states that the claim petitioners have not adduced evidence in support of their claim and accordingly claim petitions are dismissed. 4. Learned counsel for the appellants/claim petitioners has a contention that the purchases referred to in the claim petitions were effected at a time when the IP was not pending in that the same was dismissed for default on 7.12.1979, restored to file only on 8.1.1980 and the purchases were effected on 15.12.1979. Learned counsel for the contesting respondents/creditors would contend that Section 52 of the Transfer of Property Act is applicable to the purchases effected by the claim petitioners and their father, Ikkoran since subsequently the IP was restored to file and on such restoration it took effect from the date of dismissal for default. Learned counsel for the contesting respondents is correct in the submission that when subsequently the MSA Nos.4 & 5/2002 5 proceedings are restored to file it takes effect from the date of dismissal for default but the question whether Section 52 of the Transfer of Property Act applies to the transfers in this case is not relevant for decision in this case in view of the factual situation and in the way I propose to dispose of these appeals. 5. It is contended by learned counsel for appellants/claim petitioners that in so far as there is no adjudication made by the Insolvency Court on the transfers made by the debtor and later by his assignee at the instance of the Receiver or, at the instance of any of the creditors with the leave of the court; adjudication of the debtor (respondent No.1 in the IP) as insolvent by itself does not in any way affect right of claim petitioners in the properties referred to in the claim petitions. It is argued by learned counsel that the Receiver should have filed an application for annulment of the transfers in favour of respondent No.2 in the IP and the claim petitioners/their predecessor within three years from the date of adjudication of respondent No.1 as an insolvent since Article 137 of the Limitation Act applied. Learned counsel submits that the debtor (respondent No.1 in the IP) was adjudicated as insolvent by the learned District Judge as per judgment dated 12.2.1986, the C.R.P. at the instance of respondent No.1 in the IP was dismissed on 14.10.1991 and hence at any rate application for annulment of the transactions ought to have been filed within three years of the date of disposal of the C.R.P. Learned counsel for contesting MSA Nos.4 & 5/2002 6 respondents/creditors per contra contended that the creditors filed IP under Section 6(c) and 9(2) of the Act and going by Section 55 of the Act once the debtor has been adjudicated as insolvent, transfer made subsequent to the filing of the petition is fraudulent and void as against the Receiver and a further application for annulment at the instance of the Receiver or creditors is not necessary or contemplated. 6. Section 6 of the Act deals with acts of insolvency and Sub-section (c) of that Section states that if the debtor made a transfer of his property or of any part thereof, which would, under the Act or any other enactment for the time being in force be void as fraudulent preference if he were adjudged as insolvent that would amount to an act of insolvency entitling his creditors to move for adjudication of the debtor as insolvent. Section 6 of the Act only deals with various acts of the debtor which would be treated as acts of insolvency and does not say that a transfer made by the debtor in the circumstances stated therein would ipso facto be void or that on adjudication of the debtor as insolvent the transfers effected by him would stand annulled or deemed void. I am unable to read from Section 55 of the Act that when the debtor is adjudged insolvent, the transfers effected by him before or after the filing of IP would stand annulled or deemed void. The Section only declares that transfers will be deemed fraudulent and void as against the Receiver and shall be annulled by the court. For such annulment, the Receiver or a creditor who has proved his MSA Nos.4 & 5/2002 7 debt, with the leave of the court has to make an application as indicated in Section 56 of the Act. Section 54 of the Act deals with annulment of the transaction and states that any transfer of property not being a transfer made before and in consideration of marriage or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration shall, if the transferor is adjudged insolvent on a petition presented within two years after the date of the transfer, be voidable as against the Receiver and may be annulled by the court. Hence the mere adjudication of the debtor as insolvent cannot ipso facto result in annulment of the transfers he made. The above view gets support from the decisions in Mul Singh and another v. Mt. Lakshmi Devi and another (AIR 1927 Lahore 95) and Abdul Muwali v. Tahsildar of Kashipur (AIR 1930 Allahabad 511). In a petition for adjudication of the debtor as insolvent the court is concerned only with the question whether the debtor has committed any act of insolvency as stated in Section 6 of the Act and whether he is prima facie incapable of discharging his debts as is seen from Sections 6, 9 and 10 of the Act. 7. True in this case learned District Judge while disposing of the IP as per judgment dated 12.2.1986 held that the debtor (respondent No.1 in the IP) has effected fraudulent transfer of his properties in preference of some of the creditors, for that reason the debtor has been adjudged insolvent and it was MSA Nos.4 & 5/2002 8 directed that the properties shall vest in the Receiver who shall administer the estate for the benefit of creditors of the debtor (respondent No.1 in the IP). That does not mean that there is a finding either that respondent No.2 in the IP, the assignee from the debtor or, the claim petitioners or their predecessor (assignees from respondent No.2) lacked bonafides in the transactions in their favour or that those transfers were fraudulent so far as the respective assignees are concerned. The issue was considered by the Supreme Court in N.Subramania Iyer v. Official Receiver, Quilon (1958 KLT 1195). It was held that it was not necessary to decide at the stage of adjudication of the debtor as insolvent whether transaction entered into by him was not bonafide so far as the transferees are concerned or was without consideration. Those matters directly arose for determination in the proceedings for annulment. In that case a creditor filed IP on 15.9.1924 challenging a mortgage created by the debtor as an act of insolvency. On 19.9.1924 an interim Receiver was appointed for the property followed by adjudication of the debtor as insolvent on 25.8.1927. On 28.3.1928 there was a petition by the Receiver to annul the mortgagee. The mortgage was challenged under Sections 35 and 36 of the Insolvency Regulation. Courts below held that the transaction was not valid as there was no sufficient consideration for creation of the mortgage and hence it is not bonafide. Petition filed by the Receiver was allowed and the transaction was annulled. Order was confirmed by the High Court. The mortgagee took up the MSA Nos.4 & 5/2002 9 matter before the Supreme Court. It was held that act of the debtor in mortgaging the property amounted to an act of insolvency but, there was no finding that the mortgagee lacked bonafides. The appeal was allowed holding the mortgage in favour of the mortgagee was bonafide so far as he is concerned. A similar situation arises in Chacko v. Cherian (1959 KLJ 78 = 1959 KLT 93). That concerned Section 53 of the Provincial Insolvency Act (which corresponds to Section 54 of the present Act). That was a case where the debtors transferred property in favour of one Koshy on 31.9.1105. Petition to adjudicate the transferors/debtors as insolvents was filed on 4.5.1107. There was an order of adjudication on 30.11.1108. Later, on a petition filed by the debtors order of adjudication was annulled on 31.2.1111. Then there was a petition to review that order. In the meantime transferee from the debtors (Koshy) transferred the property to the appellants on 16.12.1111. Petition for review of the order annulling adjudication of the debtors as insolvents was allowed on 13.2.1113. The Receiver filed a petition on 20.4.1115 to annul the sale deed executed by the insolvents (debtors) to Koshy. The assignees from Koshy were not made parties to that petition. The application was allowed on 11.1.1116 and pursuant to that order, Receiver sold the property and executed the sale deed in favour of the purchaser on 14.6.1120. Pursuant to that sale the purchaser filed a suit for declaration of his title and for recovery of possession of the property from the appellant (assignee from Koshy, the assignee of the MSA Nos.4 & 5/2002 10 insolvents). It was ultimately held that though the transfer in favour of Koshy was fraudulent but since his assignees (appellants) were not made parties in the petition filed by the Receiver to annul the transfer in favour of Koshy, the transfer made by Koshy in favour of his assignee cannot be touched. These decisions inform me that it is not merely the adjudication of the insolvent that is relevant so far as his assignees are concerned, but the assignments itself must be annulled with all the assignees on the party array. In the present case no application has been filed by the Receiver or at the instance of the creditors to annul either the transfer in favour of respondent No.2 in the IP (assignee of the debtor) or the assignments referred to in the claim petitions. 8. Claim petitions were filed seeking an order that the purchases referred to in the claim petitions are protected. In fact there was no necessity for claim petitioners to file such a petition. In Vedamony v. Palai Central Bank Ltd. (AIR 1953 TRA-CO.266) it has been held that it is incorrect to say that prior to the adjudication the court has no jurisdiction at all to get at the properties of the insolvent. It was held that Insolvency Court has the jurisdiction to conduct a summary enquiry as to the sustainability of a claim petition even before adjudication but such decision will be subject to the final order to be passed on the petition filed by the Receiver (or the creditor as the case may be). A final and conclusive order may be passed when the Receiver seeks MSA Nos.4 & 5/2002 11 annulment of the transaction under Section 4 of the Provincial Insolvency Act (corresponding to Section 4 of the present Act) and that any order passed on such a petition will not be final or conclusive and will be subject to the final order to be passed in the petition for annulment to be moved by the Receiver or the creditor. That was a case where the property taken possession by the Receiver were vehicles and therefore, question as to the right of the claimants for immediate possession of the same arose for determination. 9. In this case, I am told that so far no petition has been filed by the Receiver or by any of the creditors as provided under the Act for annulment of the transfers in favour of respondent No.2 in the IP or the transactions referred to in the claim petitions. In my view having gone through the scheme of the Act the Receiver or any of the creditors as provided under the Act ought to have filed such a petition. It was not necessary for the appellants/claim petitioners to have preferred any claim petition and no final and conclusive order of annulment could also be passed on these claim petitions. At any rate, these claim petitions only concerned assignments referred to in the claim petitions and did not concern the assignment in favour of respondent No.2 (in the IP). Therefore, it is not necessary to proceed with these claim petitions. In that situation I do not find reason to interfere with the order of the courts below dismissing the claim petition though not for the reasons stated by the courts below. MSA Nos.4 & 5/2002 12 10. Then the next question whether a petition at the instance of the Receiver or by any of the creditors for annulment of the transactions is barred by limitation as contended by learned counsel for appellants/claimants. According to the learned counsel, Article 137 of the Limitation Act applied. But it is not necessary for this Court to pronounce verdict on that issue in this proceedings since that is a matter which the trial court has to decide in case any petition is filed by the Receiver or any of the creditors as provided under law seeking annulment of the impugned transactions. I make it clear that if any such petition for annulment is preferred the trial court shall dispose of the same as provided under law untrammelled by the orders impugned in these appeals to the extent it concerned the proceeding for annulment. With the above direction, these appeals are closed. C.M.P.No.2526 of 2002 in M.S.A.No.4 of 2002 and C.M.P.No.2529 of 2002 in M.S.A.No.5 of 2002 will stand dismissed. THOMAS P.JOSEPH, Judge. cks MSA Nos.4 & 5/2002 13 Thomas P. Joseph, J. M.S.A.Nos.4 & 5 of 2002 JUDGMENT 11th January, 2010.