Case: Official Receiver, Kanpur And Another Vs. Abdul Shakur And Others

1. Respondents 1 to 3 in this appeal presented a petition before the Insolvency Judge, Kanpur for an order adjudicating the second appellant - Kotwaleshwar Prasad insolvent. In their petition they alleged that Kotwaleshwar had in the course of business dealing with them borrowed Rs.15,000/- on September 28, 1935 from respondents 1 and 3 and had executed a promissory note agreeing to repay the amount, and that he had borrowed Rs. 3,500/- on January. 9, 1936 and Rs. 4,000/- on April 7, 1936 from respondent 2, and executed similar promissory notes, that he had failed to repay the amounts due by him and with a view to defeat or delay his creditors secluded himself so as to deprive his creditors of the means of communicating with him and had thereby committed an act of insolvency. The Insolvancy Judge by order dated October 8, 1937 adjudicated Kotwaleshwar insolvent and appointed the first appellant the Official Receiver, Kanpur, as receiver of his estate with powers under S. 80 of the Provncial Insolvency Act, 1920 - hereinafter called the Act.2. The Receiver proceeded in exercise of the powers under S. 33 read with S. 80 of the Act to frame a schedule of debts. The claims set up by the respondents were challenged by Kotwaleshwar and a creditor named Abdul Sayed, but the Official Receiver included the claims of the respondents in the schedule of debts, for in his view Kotwaleshwar had admitted the claims on October 8, 1937 before the Insolvency Court.3. In appeal under S. 68 to the Insolvency Judge the matter was remanded that the promissory notes were executed by Kotwaleshwar under the debts due to the respondents. The Official Receiver then held a further enquiry and rejected the claims of the respondents 1 to 3. He held that it was not proved that Kotwaleshwar had received consideration for the three promissory notes. In the view of the Official Receiver the documentary evidence produced by Kotwaleshwar and the respondents established that the promissory notes were executed by Kotwaleshwar under the influence of respondents 1 to,3 and their servant Amir Hassan and that the evidence including the books of account of respondents 1 to 3 in support of the advance of consideration under the promissory notes was unreliable.4. In appeal against the order of the Official Receiver, the Insolvency Judge, Kanpur directed that the names of respondents 1 to 3 be included in the schedule of creditors. In the view of the Insolvency Judge the presumption of consideration arising under Section 118 of the Negotiable Instruments Act supported the rest of the evidence which was directed to establish the genuineness of the signatures and the endorsements of executional on the promissory notes by Kotwaleshwar and on the receipts executed by him and that the Kachi Rokar of the respondents were adequately corroborated by the evidence of the creditors, their witness Abdul Rashid and others and that Kotwaleshwar had failed to discharge the burden which lay heavily on him to establish want of consideration.5. Against the order of the Insolvency Judge an appeal was preferred to the District Court, Kanpur. During the pendency of the appeal respondents 1 and 3 were declared evacuees under the Administration of Evacuee Property Act and the Assistant custodian of Evacuee Property in whom their property had vested was impleaded as a party respondent. In the view of the District Court the testimony of witnesses of the respondents. in support of the plea of payment of consideration was unreliable and that the admission made by Kotwaleshwar before the Insolvency Judge on October 8, 1937 was procured by the exercise of undue influence and that the books of account relied upon by the respondents and the oral evidence in support thereof were unreliable. The District Judge observed that the presumption under S. l18 of the Negotiable Instruments Act in respect of the promissory notes did arise, but it stood in the circumstances of the case weakened and the burden shifted to respondents 1 to 3, to prove affirmatively that the sums covered by the three promissory notes were in fact paid to the insolvent and that they failed to discharge the burden.6. Against the order passed by the District Judge, a second appeal being No. 4 of 1952 was preferred under Section 75(1) proviso 2 of the Provincial Insolvency Act, 1920 to the High Court of Allahabad. The Division Bench hearnig the appeal referred the following two questions to a full bench. These questions were :(1) Whether the presumption mentioned in cl. (a) of S. 118, Negotiable Instruments Act, 1881 can be invoked in insolvency proceedings where an alleged debt against the insolvent is called in question by the official receiver or by a creditor or by the insolvent?(2) If it can be invoked, would circumstances tending to make it doubtful that consideration passed under the negotiable instrument even though coupled with a denial on the part of the maker of the instrument, suffice to deprive the creditor of the benefit of the presumption and require him to prove by evidence that consideration did actually pass?A full bench of the High Court by majority having recorded an affirmative answer on the first question, the second appeal was place for hearing before a Division Bench of the High Court. The Division Bench observed that the District Court had recorded certain findings and from those findings it had inferred as a matter of law that the statutory presumption under Section l18 of the Negotiable Instruments Act stood rebutted. The High Court then observedcorrectness, or otherwise, of the preliminary inference must needs be considered first Scrutiny of that inference should however be prefaced with the observation that it is open to question not only because the various findings, or at least the material ones, described as circumstances by the court below, whereon that inference was based suffer from one or the other of the legal defects pointed out above, but also because the inference drawn by that court as a result of its view that the statutory presumption stood rebutted was a finding on a question of law and not on a question of fact. That inference, or finding, of the court below was that the onus of proving consideration had shifted on to the creditori. * * * A finding which has to draw on a rule of law for the recording of it or for the ascertainment of its truth is a finding on a question of law, any other a finding on a question of law, any other a finding on a question of fact. The finding that onus has shifted has to draw on the rules of pleading and proof, of procedure and evidence, for the recording of it as well as for the ascertainment of its truth. It is therefore a finding on a question ofCourt then held that in the case before it "not only had the insolvent failed to displace, or even to weaken, the presumption in favour of the creditors under S. l18 of the Negotiable Instruments Act, but the consideration stood fully established, even if there was no initial presumption in favour of the creditors, by the evidences adduced by them and by the insolvents own admission." With special leave, this appeal is preferred by the Official Receiver and Kotwaleshwar.

Court's reasoning:
13. A debt to be entered in the schedule must therefore be a real debt. A judgment against a debtor which is sought to be relied upon in proving a debt does not necessarily establish the existence of a real debt or the judgment may have gone by default, it may have gone by consent or it may have been procured for any other reason. In a proceeding relating to proof of debts the question which arises being not one between the insolvent and the proving creditor alone, the rights of other creditors of the insolvent have of necessity to be considered. Even if for some reason the debtor himself is estoppel from denying the debt them will be no estoppel against the Insolvency Court.When a debt secured by a promissory note is sought to be proved, the Insolvency Court must enquire into the reality, and the quantum of consideration. What shape this enquiry may take will depend upon the circumstances of the case. In a given case the Insolvency Court may regard an affidavit setting out the particulars of the debt, and affirming execution of the promissory note by the insolvent, and asserting non-satisfaction of the debt, as sufficient. In other cases, the Court may enter upon a fuller enquiry which the circumstances of the case may demand. But in all cases of proof of debts under S. 33 the burden is upon the creditor. That burden may be discharged by the affidavit of the creditor viewed in the light of a presumption which the Court may raise under S. 114 of the Evidence Act, that a bill of exchange accepted or endorsed, was for good consideration. If that be the true effect of S. 33 of the Provincial Insolvency Act, and we think both on principle and authority that is the true effect, of necessity the presumption under S. 118 of the Negotiable Instruments Act that every negotiable instrument was made or drawn or consideration cannot avail against the Receiver of the estate of the insolvent. It is true that S. 118 of the Negotiable Instruments Act, unlike S. 119 to S. 122 which occur in Ch. XIII, does not refer to a proceeding in suit where the various presumptions directed have to be raised. The section is undoubtedly in terms general. But there is no reason to suppose that it was intended to apply to a proceeding which is not in the nature of a civil dispute between the parties to the negotiable instrument or their privies. The Negotiable Instruments Act is intended to codify the law merchant relating to dealings concerning negotiable instruments. The presumptions which are raised under S. 118 do undoubtedly set out special rules of evidence relating to negotiable instruments, but in our opinion, the nature of the presumptions from their very nature operate in faour of or against the parties to the negotiable instrument or their privies and cannot generally apply to persons who do not claim under the parties to . the instrument.Section 114 of the Indian Evidence Act authorises the Court to presume the existence of any fact which it thinks likely to have happened, regard being had to the common course of natural events, human conduct and public and private business in their relation to the facts of the particular case. Under the third illustration of S. 114 of the Court may presume that a bill of exchange accepted or endorsed was accepted for good consideration. But the section provides, that the Court shall also have regard to other material facts in considering whether the maxim does or does not apply in the particular case before it, it is therefore open to the Court to consider in its proper setting, the fact that the drawer of a bill of exchange was a man of business, and the acceptor was a young and ignorant person completely under the formers influence. This is one illustrative fact which the Court may consider in raising the presumption. There may be other circumstances which may also justify the Court in declining to raise theare unable to accept that contention. Undoubtedly S. 14 of the Evidence Act is a general provision which enables the Court to presume, though not obliged to do so, that a bill of exchange or a promissory note was founded on a good consideration. Section 118 of the Negotiable Instruments Act, however, enacts a special rule of evidence which operates between parties to the instrument of persons claiming under them in a suit or proceeding relating to the bill of exchange and does not affect the rule contained in S. l14 of the Evidence Act, in cases not falling within S. 118 of the Negotiable Instruments Act.17. In our view the High Court was in error in holding that a statutory presumption of consideration arose in favour of the respondents in the proceeding under S. 33 for settlement of the schedule of creditors, and the Receiver exercising power under S. 80 of the Act was bound to admit the debts in the schedule if the insolvent or the other creditors failed to displace that presumption.The Court therefore in each case has jurisdiction to investigate whether there is a real debt : whether production of a judgment or a negotiable instrument or other evidence may be regarded as sufficient to regard the debt as proved is a matter for the Insolvency Court to decide. The question is not to be adjudged in the light of any estoppel which may operate against the insolvent or of any presumption. The Court in a given case may rely merely upon a judgment or a negotiable or other instrument, and admit the debt to the schedule not because there is an estoppel against the Receiver or the other creditors, or presumption of law in favour of the evidence produced, but because in its view in the light of the circumstances no further enquiry beyond proof of the judgment or negotiable instrument or other document evidencing the debt and proof ofof the debt since the date thereof is sufficient. The Court has power, however to insist upon proof of the debt apart from the judgment or the negotiable or other instrument. The reason is that the Insolvency Court with a view to effectively distribute the estate of the insolvent among the creditors is entitled to go behind outward forms of transactions and to ascertain the truth of the debt sought to be proved, and the estoppel to which the insolvency may have subjected himself will not prevail against the Receiver. Whether the power should be exercised in the case of a judgment debt in a given case depends upon the discretion of the Court which has to be exercised on sound judicial principles. It is true that the Court ordinarily does not go behind a judgment against the debtor, on a bare suggestion by the debtor that the debt which is merged in the judgment did not exist or was bad. There must undoubtedly be circumstances prima facie justifying an enquiry. There must appear something that the judgment was procured by fraud or collusion, or that there has been miscarriage of justice. But a mere irregularity or error in form will not be a sufficient reason for going behind the judgment.