IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 03-07-2008 CORAM THE HONOURABLE MR.JUSTICE M.CHOCKALINGAM AND THE HONOURABLE MR.JUSTICE R.SUBBIAH O.S.A.No.15 of 2003 A.Paranjothi .. Appellant vs The Official Assignee High Court,Madras .. Respondent Original side appeal preferred under Sec.8(2)(b) of the P.T.I.read with Clause 15 of Letters Patent on appeal from the deceretal order dated 24.10.2002 and passed in Application No.68 of 2002 in I.P.NO.9 of 1983. For Appellant : Mr.M.Venkatachalapathy Senior Counsel for Mr.M.Sriram For Respondent : Mr.R.Krishnaswami Senior Counsel for Mr.C.Ramesh JUDGMENT (Judgment of the Court was delivered by M.CHOCKALINGAM, J.) This appeal challenges the common order of the learned Single Judge made in Application Nos.67 and 68 of 2002 in I.P.NO.9 of 1983 at the instance of the appellant/petitioner whereby the applications were dismissed. 2. The short facts which led the appellant/petitioner to file this appeal, as could be seen from the affidavit, can be stated as follows: a. The appellant/petitioner made a claim before the Official Assignee, the respondent herein claiming a charge over the personal property of Mr.V.Srinivasan, the Insolvent herein, situate in No.25, N.S.C. Bose Road, Chennai, as a personal creditor in the personal estate of the said Srinivasan. The said Srinivasan borrowed a sum of Rs.6,90,000/- from the appellant/petitioner by depositing the title deeds and executed an equitable mortgage. On a creditors petition filed against the firm Vummidiar bankers, in which the said Srinivasan was also a partner, the partners were adjudicated as https://hcservices.ecourts.gov.in/hcservices/ Insolvent in I.P.No.9 of 1983. Hence, the appellant/petitioner filed a claim petition before the Official Assisgnee stating that he had a charge over the mortgaged property and on rejection of his claim, the appellant/petitioner filed an application in Application No.364 of 1983 for a direction to the Official Assignee. b. Learned Single Judge disallowed his claim for charge over the said property, but directed the Official Assignee to admit his claim as an unsecured claim for dividend along with other creditors. Aggrieved over the same, he filed an appeal in O.S.A.No.147 of 1985 and the same was also dismissed. Thereafter, the appeal to the Apex Court in C.A.No.1739 of 1989, was also dismissed. While the matter stood thus, the Official Assignee admitted his claims as an unsecured creditor and sent a communication informing the same. Insofar as the claim of the appellant/petitioner is concerned, it was admitted to the extent of Rs.7,03,162/- along with interest at 6% per annum from the date of debt to the date of adjudication. c. With the permission of this Court, the Official Assignee sold the aforesaid property in public auction for Rs.13,55,000/- and the same was also deposited in a Fixed Deposit in view of the pending proceedings, at the instance of the appellant/petitioner. The said deposit matured on 4.11.1997 and the Official Assignee realised Rs.30,37,857/-. At that juncture, the petitioner put forth his claim stating that he is entitled to Rs.25,45,065/-, since it was a personal loan raised by the partner and it was also the property of the partner, by operation of law under Section 49(4) of the Presidency Towns Insolvency Act, 1909 (hereinafter referred to as the Act), it has to be paid in full as per the above calculation. Under such circumstances, he has made two applications viz., (1) to restrain the Official Assignee from making any further disbursement to the creditors and (2) to pay the amounts as per the calculation made above. 3. A counter affidavit has been filed by the respondent stating that even by operation of law, the appellant/petitioner is entitled only to a sum of Rs.7 lakhs and odd, as found in the communication and the claim for Rs.25,45,065/- as found in the application is unsustainable. It is true that though he was found to be a secured creditor, the consideration under the transaction was true from the date of debt to the date of adjudication with interest at 6% p.a., and hence he is entitled to get Rs.7 lakhs as per the communication and even by operation of law, he is not entitled to get Rs.25,45,065/- and hence the application must be dismissed. 4. The learned Single Judge after hearing both sides and on enquiry, rejected both the applications, which are the subject matter in this appeal. 5. Advancing his arguments on behalf of the appellant, learned Senior Counsel Mr.Venkatachalapathy, would submit that the appellant originally made an application in Application No.364 of 1983 that he should be treated as secured creditor and charge should be created under the mortgage and the learned single Judge while passing the order has though denied, has categorically found that the consideration was actually passed and therefore it has got to be https://hcservices.ecourts.gov.in/hcservices/ allowed to that extent. Though it was subsequently dismissed on appeal, the finding recorded was not disturbed. In the instant case, it is an admitted fact that the property transferred by way of equitable mortgage belonged to Srinivasan and the firm was only a partnership firm. Thus it is quite clear from the available materials that it was a personal debt. Under such circumstances, so long as it is not the property of the firm, it is an admitted position that it is the property of the individual partner and hence it was a personal debt. As could be seen from the materials, by operation of law, under Section 49(4) of the Act, first of all, out of the amount, the appellant has got to be paid first, and the amount which was borrowed, along with interest thereon would come to Rs.25,45,065/-. Learned counsel drawing the attention of the Court to Section 49(4) of the Act, submitted that in the case of partnership, in the first instance, the partnership property shall be subjected for payment of the partnership debts, and the separate property of each partners shall be subjected for payment of the separate debts. Learned counsel would also further took the Court to Section 49 of the Indian Partnership Act, 1932 which speaks about the payment of firm's debts and of separate debts and the said Section 49 of the Partnership Act is applicable for payment of the separate debts due from any partner, and the property of the firm shall be applied in the first instance in payment of the debts of the firm and if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him. Section 49 of the Partnership Act can be taken into service in the case ordinarily. In the instant case, it is the personal properties of the Insolvent Srinivasan and the property actually belonged to him separately and he has also borrowed personal loan and hence the property is applicable and by applying the provision, his separate debts has got to be paid, in the first instance and the matured amount has got to be paid from the total amount of Rs.25,65,045/- as calculated. In support of his contention, learned senior counsel would rely on the decision which are as follows: 1945 (2) MLJ 113 (Penumatsa Rangaraju Vs. Sait Devichabnd Bhootaji Firm partner Sait Seshmull Kasturji and another) 1969 MLJ (2) 115(N.S.M.Adaikappa Chettiar Vs. The Official Assignee, High Court, Madras) 6. Contrary to the above contention, learned Senior counsel for the respondent would submit that the order of the learned single Judge has got to be sustained for the reasons stated therein. First of all, the application itself is not maintainable, since the appellant/petitioner has taken two inconsistent stands. First of all, when there was a public examination made in the proceedings and in the instant case, when the debtor was called for, he has categorically spoken to the fact that the amount borrowed was for the discharge of the firm's debt and from that it is quite clear that there were debts by the firm. When this application was filed, he has made a statement that it was a personal debt by the said Srinivasan. At this juncture, when originally the applicant's claim was rejected by the Official Assignee, he took the matter by way of suit and it was also dismissed. Thereafter, he filed appeal and the same was also dismissed. In both the proceedings, the Court categorically held that there is no good faith at all and pointed out that the date of mortgage was precedent to the Act of Insolvency. It appears that https://hcservices.ecourts.gov.in/hcservices/ though the consideration under the mortgage was found to be true, but at the same time in the instant case, Section 49 of the Indian Partnership Act, as put forth by the learned counsel for the appellant cannot be applied. Learned counsel for the respondent also drew the attention of the Court to Section 49(4) of the Act and submitted that where there is surplus of the private property of the partners, it shall be dealt with as part of the partnership property and where there is surplus of the partnership property, then it shall be dealt with as part of the respective private property in proportion to the rights and interests of each partner in the partnership property. Relying that part of the provision, learned counsel would submit that if there is any surplus in the private property of the partners, it could be dealt with as part of the partnership property. In the instant case, there is no surplus. Even Section 49 of the Indian Partnership Act is neither in favour of the respondent nor in favour of the appellant. 7. Learned Senior counsel for the respondent would further add that the inconsistent stand taken by the appellant is quite clear from the arguments advanced by him before the Bench as found in the Judgment that "Equally we are unable to accept the argument that the loan advanced to the tune of Rs.6,90,000/- had gone towards the discharge of the fixed deposits, which had matured or towards the interest on fixed deposits, as it cannot in any manner help the appellant, because what we are concerned in this case is whether there was lack of good faith on the part of the appellant". The learned Senior counsel finally submitted that the application is thoroughly barred by time. As per Section 101 of the Presidency Towns Insolvency Act, 1909, whenever an order is passed by the Official Assignee, and if it is an appeal from any act or decision or order, the appeal should have been filed within 20 days from the date of such act, decision or order. But, in the instant case, in spite of a letter sent on 26.3.1998 to deliver the documents to the Official Assignee, the appellant failed to produce the documents and the Official Assignee directed on 17.2.1998 to issue cheque only after delivery of the title deeds relating to the property in question and hence the cheque drawn in favour of the claimant was cancelled by the Official Assignee. Under such circumstances, he should have filed appeal within 21 days, but as could be seen from the available materials, he has brought forth the appeal only in 2002 and hence the time is also barred. Therefore, the order of the learned single Judge has got to be sustained. 8. The Court paid its anxious consideration to the submissions made. 9. It is not in controversy that the appellant herein advanced a sum of Rs.6,90,000/- on the strength of equitable mortgage executed by Srinivasan in respect of the property in Door No.25, NSC Bose Road, Chennai. Vummidiar's Jewellers, in which the said Srinivasan was a partner,was adjudicated as Insolvent in I.P.No.9 of 1983. Claims were made at that juncture over this property, since it belongs to one of the partners. Since the appellant herein is vested with the insolvency proceedings, he made a claim before the Official Assignee that the debt should be treated as if it was mortgaged and there is a charge over the property, but the same was declined. The https://hcservices.ecourts.gov.in/hcservices/ appellant/ petitioner filed Application No.364 of 1983. On enquiry, the same was dismissed. The appellant preferred an appeal in OSA.No.147 of 1995 and the same was also dismissed. He preferred further appeal before the Apex Court and it was also dismissed. A perusal of the order thereon would clearly indicate that the transaction by way of equitable mortgage is entered into between the parties viz., the appellant herein and the said Srinivasan. A part of the order made by the learned Single Judge as to the consideration was not disputed by the appellate forum. Thus, it would be quite clear that the consideration of Rs.6,90,000/- along with interest was payable to the appellant. 10 . With the permission of the Court, the said property was brought for sale and the property was sold for the consideration of Rs.13,55,000/- in public auction and the sale proceeds was deposited, which matured to a sum of Rs.30,37,857/- and the same was actually realised by the Official Assignee. At that juncture, the amounts were to be paid to the creditors. As could be seen from the counter by the Official Assignee, the first priority is given to the Income- Tax and and Sales Tax claims. The balance available with the Official Assignee is also shown in the counter affidavit. At that juncture, the appellant made two applications, one to restrain the Official Assignee from making any further payment, the second one claiming a sum of Rs.25,45,065/- on the strength of equitable mortgage referred to above by way of interest accrued thereon. 11. The contention put forth by the learned counsel on either side along with the provisions are looked into. The only question that would arise for consideration would be whether the appellant/petitioner can be allowed to say that he got to be given preference in making payment out of the amount available with the Official Assignee, since it has got to be considered as personal loan raised by the individual partner on his own assets. 12. This Court after looking into the facts stated and circumstances attended thereto and also after applying the provisions of law, has to necessarily say in the negative for more reasons than one. It would be more apt and appropriate to re-produce Section 49(4) of the Act. "49(4): In the case of partners, the partnership property shall be applicable in the first instance in payment of the partnership debts, and the separate property of each partner shall be applicable in the first instance in payment of his separate debts. Where there is a surplus of the separate property of the partners, it shall be dealt with as part of the partnership property, and where there is a surplus of the partnership property, it shall be dealt with as part of the respective separate property in proportion to the rights and interests of each partner in the partnership property" From the very reading of the provision, it would be quite clear that the partnership property shall be applicable at the first instance in the payment of partnership debts and secondly the separate property https://hcservices.ecourts.gov.in/hcservices/ of each partner should be applied in the first instance in payments of his separate debts. It is true that in the instant case, the property is the separate property of Mr.Srinivasan. Further the contention put forth has got to be applied for payment of his separate debts. At this juncture, this contention cannot be countenanced for the reason that the stand already taken by him are inconsistent and the question as to whether it is a separate debt or not is highly doubtful. When the proceeding were pending, the respondent has not filed any counter. The best person who could speak about the fact as to whether those amounts are simply used by the firm or by the individual, is undoubtly the said Srinivasan. At the time of examination, he has categorically told that the loan raised by the appellant was spent by the respondent for the discharge of the debts of the firm and this was exactly what could be seen at the time of argument advanced by the appellant in this appeal. Therefore, it is incorporated in the judgment of the Bench where it reads ""Equally we are unable to accept the argument that the loan advanced to the tune of Rs.6,90,000/- had gone towards the discharge of the fixed deposits which had matured or towards the interest on fixed deposits, as it cannot in any manner help the appellant, because what we are concerned in this case is whether there was lack of good faith on the part of the appellant". 13. The argument advanced before the Bench in the above appeal will make it quite clear that the appellant has taken a stand that the amount was actually spent towards the discharge of the fixed deposit of the firm and now this part of the argument before the Bench, coupled with the statement made by the debtor at the time of examination would clearly indicate that though the recitals of the mortgage deed found to be as one borrowed by an individual, it was actually spent by the firm. Further, in order to apply the provisions of Section 49(4)of the Act, in the first part which is referred to above, two conditions have got to be satisfied. Firstly, the property in question should be a separate property of the partner and secondly the matured amount raised by the partnership firm should have been one as a separate debt. In the instant case, as for as the first condition is concerned, it is clear that it is the separate property of the said Srinivasan and with regard to the second part is concerned, the materials available would indicate that it cannot be treated as a separate debt. Hence, the contention raised by the learned counsel cannot be countenanced. It was further noticed that the second part of Section 49(4) has got to be applied. In the present case, where there is surplus of the separate property of the partners, it shall be dealt with as part of the partnership property and where there is surplus of the partnership property, it shall be dealt with as part of the respective separate property in proportion to the rights and interests of each partner in the partnership property. 14. From the very reading of the provision, it is clear that if the separate property of the partner is sold and there is any surplus, only then, the actual debt of the firm has got to be looked into. In the instant case, all the creditors have to be paid in full and only a meagre sum is available and hence it would be quite clear that there is no surplus found, even after the separate property of the individual is sold. The contention put forth by the learned https://hcservices.ecourts.gov.in/hcservices/ counsel for the appellant that only first part has got to be applied and the relief has got to be granted cannot be accepted. A conjoint reading of the provision would reveal that it would be an irresistible conclusion that in a case like this, the following conditions must be satisfied; (1) the property shall be applicable in the first instance in payment of firm's debt (2) Then it must be a separate debt raised by the partner and (3) there must be surplus available after the sale of the property, in order to enable him to make a claim by the individual creditor, for he should be paid in full. If these three conditions are satisfied, the contention raised by the appellant cannot be countenanced. In the instant case, in view of the inconsistent stand taken by the appellant and as it is not treated as separate debt and in the absence of surplus, it cannot be done. Apart from this, it is a case where both the earlier proceedings have been proved and it is not in good faith at all. Since the mortgage was executed in favour of the appellant, he is entitled to have the consideration and the consideration whether could be paid in full, would be considered by operation of law. The decisions relied on by the learned Senior counsel for the appellant are not applicable to the facts of the present case. This Court is of the considered opinion that it is not the fit case where he can make a claim as put forth in his applications. Hence, the learned single judge is perfectly correct in dismissing the applications. 16. Insofar as the question of limitation is concerned, materials are not available to hold that it was filed beyond time. Therefore, that need not be considered. 17. Hence, the Original Side appeal is dismissed. No costs. Sd/- Asst. Registrar. /true copy/ Sub Asst. Registrar. VJY To 1. The Sub Assistant Registrar Original Side, High Court, Madras 2. The Official Assignee, High Court of Madras + 1 CC To Mr.C.Ramesh, Advocate SR NO.34478 + 1 CC To Mr.M.Sriram, Advocate SR NO.34520 O.S.A.No.15 of 2003 KA(co) SRA(17/07/2008) https://hcservices.ecourts.gov.in/hcservices/