Source: https://www.legalindia.com/judgments/kamireddi-timmappa-vs-devasi-harpal-trading-as-ratilal-on-25-october-1928-2
Timestamp: 2019-04-22 22:00:17+00:00

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Posted On October 25, 1928 by &filed under High Court, Madras High Court.
1. This appeal is against the decision of the District Judge of Bellary in an insolvency matter. The facts necessary to be set out are: In I.P. No. 9 of 1921 one Karugodu Seenappa Chetti was adjudged insolvent on 26th October, 1921. On 22nd December, 1925 a composition scheme in which all creditors named in the I.P. were to be paid at four annas in the rupee was approved by the Court and the adjudication was annulled. The scheme was based on a surety bond given by the present appellant, the effect of which will be considered later. By that date 16 out of 36 creditors named in the I.P. had proved their debts and were included in the scheme schedule. The present respondent was one of those who had not then proved his debt. The surety undertook to pay the creditors named in the scheme schedule the four-anna dividend provided by the scheme, and also to pay into Court such sums as the Court ordered to be paid to such creditors as the Court hereafter brought on to the scheme schedule. In consideration of his surety bond the assets of the insolvent were handed over to the appellant. On 20th December, 1926 the present respondent, whose name appears in the original insolvency petition schedule, applied to be allowed to prove his debt on foot of the composition scheme to be included among the scheme schedule creditors and to be given a dividend thereon at four annas in the rupee. The District Judge found that notice of the scheme had not been served upon him, allowed him to prove his debt, ordered his name to be included in the scheme schedule, and directed the surety, the appellant, to pay him his four-anna dividend. The appellant appeals. His main contentions are that it is contrary to law for the Court to allow a creditor to prove his debt after the adjudication has been annulled in consequence of a composition scheme, that with the annulment the insolvency proceedings came to an end and therefore the Court is no longer functioning as an Insolvency Court and that the creditor’s only remedy is under the ordinary law, the insolvent being no longer entitled to the protection of the Insolvency Court. Each of these contentions is open to attack and will be dealt with in detail.
2. I will first however deal with a contention advanced on behalf of the respondent that, apart from these points of law the contract between the appellant and the Court embodied in his surety bond is an asolute answer to the appellant. Under that bond, which was executed on 30th November, 1925, the surety bound himself to pay to the District Judge a sum in all of Rs. 8,479-11-6 and undertook to pay or deposit into Court within two months the dividend amount in the scheme schedule allotted to the creditors named therein and further “to pay into Court when ordered such sums as may hereafter be ordered by the Court to be paid to such creditors as may be ordered to be included in the schedule.” The principal sum secured under the bond is exactly one-fourth, four annas in the rupee, of the sum total of the debts shown in the insolvency petition schedule. The total dividend which was due to the 16 creditors who had been already placed on the scheme schedule on 22nd December, 1925 at the rate of four annas in the rupee amounted to Rs. 3,741-1-2, so that the surety was making himself responsible beyond that sum for a further sum of about Rs. 4,700. It is clear therefore that the schedule approved by the Court provided for each creditor in the insolvency petition schedule being paid four annas in the rupee if his debt was proved to the satisfaction of the Court. Thus both the Court and the bond contemplated that creditors who had not yet come on the scheme schedule might be allowed to come on hereafter, that is, might be allowed to prove their debt for the purpose of being paid the approved dividend of four annas in the rupee.
3. Now it is contended for the respondent that inasmuch as the Court has now ordered the respondent’s name to be put on the schedule it is not open to the appellant to contest that order since under the terms of his bond he has to pay whatever sums the Court may order up to the limit of Rs. 8,479. I do not accept this contention so broadly stated. It is obvious, for example, that the bond implies, though it does not state, that the limit of the surety’s obligations was not so much the lump sum of Rs. 8,479 as the payment of a four-anna dividend to each of the creditors in the original insolvency petition schedule, and that if the Court had ordered him to pay to some creditor not on that schedule, the spirit if not the letter, of the bond would have been broken. In such a case it would be open in my opinion for the surety to plead that the action of the Court was contrary to the contract. It also appears to me implicit in the contract that the inclusion of other creditors in the scheme schedule by the Court shall be in accordance with law. It cannot be supposed that the parties contracted with the idea that one party or the other would not conform to the law. It appears to me therefore that it is open to the appellant to take up the position that the inclusion of this creditor in the scheme schedule and the consequent order of the Court that the appellant shall pay him a dividend are contrary to law and should be annulled. I therefore proceed to consider the legality of the Judge’s order.
4. The appellant contends that after the adjudication has been annulled the Court cannot allow proof of debt by a creditor. He would therefore limit the word “hereafter” in the bond to “before the date of annulment of adjudication.” Now, is it a correct proposition of law that after the annulment of an adjudication no proof of debt can be allowed? The appellant argues generally that annulment of adjudication ipso facto puts an end to the insolvency. This proposition has to be examined. But before proceeding to do so I wish to enter a caveat against my ruling in Alamelu Ammal v. Venkatarama Aiyar (1927) I.L.R. 50 M. 977 : 53 M.L.J. 422 being regarded as laying down in broad terms that the annulment of an adjudication in all cases puts an end to insolvency proceedings within the meaning of Section 28 of the Act V of 1920. I have already dealt with that matter in my judgment in C.R.P. No. 170 of 1926.
5. There are four sections in the Insolvency Act under which annulment of adjudication may be ordered : Sections 35, 36, 39 and 43. An examination of these will show that in a case under Section 36, the state of insolvency is obviously not put an end to, nor do the insolvency proceedings cease, since these continue in another Court. In cases under Sections 35 and 39 the annulment is because the debts have been paid either in full or because creditors have accepted part payment in full satisfaction. In the case under Section 43 the adjudication is annulled as a punishment because the debtor has not prosecuted his application for discharge. It is clear that in cases under Sections 35 and 39 the state of insolvency ceases because the debts have been paid so far as the insolvent can ensure that result and in the case of Section 43 it ceases because the debts have not been paid and the debtor is to blame for not assisting payment. Section 43 (2) also clearly implies that the debtor’s protection has been taken away, that he is again put in the status quo ante the insolvency proceedings and he is again at the mercy of his creditors. Under Section 43 therefore the annulment of adjudication is evidently intended to put an end to the insolvency proceedings as a whole. Sections 35 and 39 do not contain any provision similar to Section 43 (2) and clearly the annulment of adjudication under those sections is not by way of punishment. Therefore when the adjudication is annulled because he has paid his debts so far as he can, it appears to me the intention of the Act is that he shall not be put again in status quo ante the insolvency at the mercy of his creditors, but that his creditors those of them at least who are willing to come in under the composition scheme shall be paid in the insolvency proceedings themselves, and that they shall not be left to collect their debts de hors the Insolvency Court.
6. This involves the corollary that under Section 39 a composition binds all creditors in the insolvency petition schedule and I think it is clear that this is so. No doubt Section 38 (2) does not have the word “all” between the words “accepted by” and “the creditors” but the meaning is clear. In the English Bankruptcy Acts of 1883 and 1914 and in the Presidency Towns Insolvency Act, Section 30, it is perfectly clear on the wording that the composition is binding on all creditors mentioned in the insolvency petition schedule. I think it is therefore clear that a composition approved by the Court shall be deemed to be accepted by all such creditors; that is, the Insolvency Court by accepting the composition has provided for the payment of all such creditors in the insolvency proceedings themselves, and no such creditor can after the Court’s approval of such a composition proceed independently against the insolvent. The appellant’s main contention necessarily involves that when an adjudication has been annulled under Section 39 the insolvent may be arrested at once by any creditor who is not already in the scheme schedule.
7. No Court can reasonably accept such a position, namely, that the approval by the Court of a composition by the insolvent immediately lays him open to arrest at a time when he has put all his property at the disposal of his creditors since it has all been handed over to the trustee under the composition, and when he is therefore unable to satisfy any debt and must go to jail. Under this theory, by accepting a composition a debtor practically closes the jail doors upon himself. This cannot be the insolvency law and the fallacy in the argument is that any creditor mentioned in the insolvency petition has, when a composition has been approved, any remedy de hors the insolvency. His remedy is to come in on foot of the composition which is deemed to be duly accepted by all such creditors and to prove his Bright to the approved dividend. For that purpose the insolvency proceedings must obviously continue and they do continue. The Court is still bound to see that the composition is carried out–see for example Section 40–and may even annul it. The position therefore is that while the annulment under a composition puts an end to the insolvent’s state of insolvency, it does not put an end to the insolvency proceedings and the insolvent is thus protected from arrest by any creditor who is not in the insolvency petition list by force of Section 28 of the Act, which enacts that a creditor shall not have any remedy against the insolvent while the insolvency proceedings are pending without leave of the Court.
8. One case in the Lahore High Court, reported in Ram Sarup v. Khalil-ul-Rahman (1925) 87 I.C. 348 and confirmed on appeal in Khalil-ul-Rahman v. Ram Sarup (1926) 95 I.C. 204, has been cited for the contention that all creditors are not bound by the composition. In that case the creditor had taken no notice of the insolvency proceedings at all and had refused to prove his debt therein. It was held that he was not bound by the composition and could have his remedy de hors the insolvency. If that case is an authority for the position that the approval by the Court of a composition ipso facto puts the insolvent at the mercy of any creditor who refused to come in, I must express disagreement with it for reasons already given.
as long as assets remain unadministered, he is at liberty to come in and prove his claim, not disturbing any former dividend.
10. Reference may also be made to Sivasubramania Pillai v. Theethiappa Pillai (1923) I.L.R. 47 M. 120 : 45 M.L.J. 166,a ruling of this Court, and the cases cited therein. There it was held that even after discharge in some cases debts may be proved.
11. I think therefore the correct view of the position is that although the annulment of adjudication puts an end to the insolvent’s state of insolvency, it does not, in cases such as are contemplated by Section 37 where the Court still retains control of the insolvent’s assets, put an end to the insolvency proceedings within the meaning of Section 28, that all creditors named in the insolvency petition schedule are bound by a composition which has been approved by the Court-and must come in on foot of it and cannot have any remedy de hors the insolvency proceedings, and that any creditor is entitled, unless the Court thinks his application is unduly delayed, to prove his debt at any time before the final dividend has been paid, and will, when he proves his debt, be admitted on foot of the composition to have his name added to those already in the scheme schedule under Section 29 and get his dividend at the scheme rate so far as there are still assets available for distribution. Reference may be made in this connection to the ruling in Sivasubramania v. Theethiappa (1923) I.L.R. 47 M. 120 : 45 M.L.J. 166 and to the general principles enunciated in a decision of this Court in Govindas Ckaturbhujadas v. Ramadoss (1924) I.L.R. 48 M. 521 : 48 M.L.J. 252 on the analogous provisions in the Presidency Towns Insolvency Act (III of 1909).
12. Now in the present case as noted the creditor was in the insolvency petition schedule and his debt was taken into the reckoning of the amount for which the surety gave his bond. He was not given notice, as he ought to have been given notice of the proposed composition and therefore he did not come earlier to prove his debt. But he is willing to accept the composition rate, and he is, as I have shown reasons for holding, entitled to be paid at that rate and to recover from the surety according to the terms of his bond, since there is money still available for the purpose. I am therefore of opinion that the order of the learned District Judge is right and I would dismiss this appeal with costs.
No creditor has objected to the scheme which the Receiver reports is to the great advantage of the creditors in general. I therefore approve of the scheme. For framing schedule and for petitioner to issue notices by registered post to all creditors who have not yet proved to prove their debts on or before the 21st December, 1925. To 6th November, 192S for security bond of the proposed surety.
14. The said Timmappa filed his security bond in Court on the 30th November, 1925 and it was approved by the District Judge on the 1st December, 1925. Under the said bond he bound himself to the District Judge of Bellary in the sum of Rs. 8,479-11-6, subject to the conditions stated therein. Those conditions are (1) that the said Timmappa should within two months pay the creditors their respective dividend amounts noted in the schedule of creditors who have proved their debts attached to the order accepting the composition, and (2) pay in Court when ordered such sums as may hereafter be ordered by the Court to be paid to such creditors as may be ordered to be included in the schedule.
15. On the 22nd December, 1925 the Court finally accepted the proposal and passed an order under Section 39 embodying the terms of the proposal and annexing thereto a schedule of the creditors who had proved their debts and also annulling the order of adjudication of the insolvent. The schedule to the said order comprised only 16 creditors who had proved their debts out of the total number of 36 creditors mentioned in the insolvent’s schedule. The 16 creditors were paid their dividend amounts aggregating to Us. 3,381-11-7 and the properties of the insolvent were thereafter handed over to the surety Timmappa as provided in the order accepting the composition.
16. On 20th December, 1926 one Devasi Harpal, who is the 29th creditor in the insolvent’s schedule, applied to the Court praying that he may be allowed to prove his debt and his name be included in the schedule of creditors attached to the order approving the composition. He stated that he had no notice of the proposal for composition and that he is prepared to accept a dividend for his decree debt under the composition. The learned District Judge being of opinion that this creditor had not been served with notice of the proposal for composition allowed him to prove his debt, but before passing final orders issued notice to the surety Timmappa to show cause why the application of this creditor should not be granted.
17. The surety Timmappa filed a counter in which he contended (1) that the only liability which he undertook under his security bond was to pay all the creditors who proved their debts before the annulment of adjudication of the insolvent, (2) that by the annulment of adjudication the insolvency proceedings came to a close and his security bond was fully discharged by his payment to all the creditors included in the schedule, the dividends payable to them, and (3) that the petitioning creditor not having been included in that schedule is not bound by the composition scheme and he may seek his remedy, if any, in the ordinary Courts of law.
18. The learned District Judge by his order, dated 19th August, 1927 overruled the surety’s objections. He held that the surety under the terms of his bond bound him self not only to pay the dividends noted in the schedule attached to the order approving the composition, but also such sums as he may thereafter be ordered by the Court to pay to such creditors as he may be ordered to be included in the said schedule. He therefore ordered the inclusion of this creditor’s name in the schedule and directed the surety to deposit within a month Us. 542-1-3 being the amount of the dividend payable to him under the composition scheme. Against this order the surety Timmappa has preferred this appeal.
(1) That the order passed under Section 39 annulling the adjudication of the insolvent puts an end to his insolvency and the Court cannot thereafter allow any creditor to prove his debt as if the insolvency proceedings are still pending before it.
(2) That under the terms of the surety bond, the appellant undertook to pay only those creditors whose debts are proved and whose names are included in the schedule attached to the order made under Section 39. He is not therefore liable to be called upon to pay the dividend to any creditor whose name is not then included in that schedule.
(3) Even if under the security bond he had undertaken to pay the dividend to the creditors not included in the said schedule but who may thereafter be allowed to prove their debts, such a condition will be inoperative in law, as the Court after annulling the adjudication under Section 39 has no jurisdiction to amend the schedule of creditors attached to the order passed under Section 39 and the surety can avail himself of that defence.
20. The questions we have to determine in this appeal are whether the above contentions of the appellant are to any and to what extent well founded.
21. First as regards the extent of the surety’s obligations under his bond, I have no doubt that the view taken by the District Judge is correct. It is quite clear from a perusal of the terms of the proposal for a composition which was submitted by the insolvent for the approval of the Court on 2nd March, 1925 that the surety Timmappa was put forward as willing to pay all the creditors of the insolvent the dividends they would be entitled to under the composition. On the date of that petition only some of the creditors had proved their debts. The Court in its order approving the composition ordered a further notice to issue to the creditors who had not proved their debts in order that the names of such of them as prove their debts may be included in the schedule to be prepared under Section 39. At the same time the Court, having regard evidently to the likelihood of some of the creditors not proving their debts within the time limited in the said order, wanted not to shut them out from the benefits of the composition on the ground merely that they had not proved their debts within the time fixed for the order to be passed under Section 39. It was in view of that consideration that the maximum amount of the surety’s liability was fixed in his bond at Rs. 8,479-11-6 which represents the dividends payable to all the creditors in the insolvent’s schedule at four annas in the rupee, and the conditions of the bond were not only the surety should pay the dividends to the creditors mentioned in the schedule to the order passed under Section 39 within two months’ time from the date of that order, but that he should also pay into Court when ordered the dividends which are payable to any other creditor whose name may thereafter be included in the schedule. In the face of this explicit undertaking by the surety it is futile to contend that he undertook to pay the dividend only to those creditors who prove their debts before the order accepting the composition and annulling the adjudication is passed under Section 39 and whose names are included in the schedule annexed to the said order.
22. It is however contended that even if the surety’s contention on that point is wrong and it must be held that he had also undertaken to the Court to pay when ordered the dividends to other creditors of the insolvent who may prove their debts thereafter, that undertaking cannot be enforced because the Court has no jurisdiction to entertain proof of any debts after the insolvency is annulled, and the schedule of creditors prepared under Section 39 cannot thereafter be amended. It is argued that the annulment of the adjudication of an insolvent under Section 39 in consequence of the Court approving the composition has the same effect as his absolute discharge as by the annulment the debtor ceases to be an insolvent and is therefore in the same position as if he had been discharged.
Where an adjudication is annulled, all sales and dispositions of property and payments duly made, and all acts theretofore done, by the Court or Receiver, shall be valid; but, subject as aforesaid, the property of the debtor who was adjudged insolvent shall vest in such person as the Court may appoint, or, in default of any such appointment, shall revert to the debtor to the extent of his right or interest therein on such conditions (if any) as the Court may by order in writing declare.
24. Under the Act an annulment of adjudication may be made on various grounds. To all such cases the first part of the above section applies and all sales and dispositions of property which had been made prior to the annulment will stand good. The latter part of the section deals with the particular order which the Court may pass at the time of annulling the adjudication. The nature of that order will, of course, depend upon the ground on which the adjudication is annulled and on the circumstances of the particular case. When the annulment is ordered in consequence of the composition being accepted by the Court, it is empowered to pass such order as it may consider necessary for giving full effect to the composition approved by it. We have therefore to see what the conditions are which have been laid down by the Court in its order annulling the adjudication with regard to the vesting of the debtor’s property in this case. In order to ascertain those conditions we have to look not only at the terms of the order annulling the adjudication which was passed on 20th December, 1925, but we have also to consider the terms of the proposal as set out in the insolvent’s application put in under Section 38 which were approved by the Court by its previous order, dated 22nd October, 1925, pursuant to which the surety bond with the conditions already referred to was accepted and the final order annulling the adjudication was passed on 20th December, 1925. A perusal of the said orders and the bond executed by the surety clearly shows that on the surety paying within two months the dividends payable to the creditors entered in the schedule prepared under Section 39 all the properties of the insolvent which according to his schedule were worth Rs. 10,845 were to be handed over to the surety subject to the. further obligation expressly undertaken by him in his bond to pay when ordered by the Court the dividends which may be payable to any other creditors who may thereafter be allowed to prove their debts and to be entered in the said schedule. The surety is empowered to reimburse himself the payments made by him on account of the insolvent by the sale of the insolvent’s properties. It follows that if any residue is left after payment of dividends to all the creditors as ordered by the Court such residue will revert to the debtor. In other words, the surety is in the position of a trustee to whom all the properties of the insolvent are assigned on his undertaking to be personally responsible for the payment of dividends to all the creditors of the insolvent as ordered by the Court up to the total amount mentioned in his bond, namely Rs. 8,479-11-6 and with liberty to recoup himself out of the insolvent’s estate. Those are the conditions of the Court’s order subject to which the annulment was made and which are binding on the surety to whom the insolvent’s properties were handed over subject to the said conditions. The effect of the order is that though the annulment under Section 39 has put an end to the status of the debtor as an insolvent, the Court has still control over the insolvency proceedings for the purpose of giving effect to the composition approved by it. For that purpose it is competent to the Court to enforce all the conditions laid down by it subject to which the annulment was made. That by an annulment under Section 39 the Court does not cease to have jurisdiction over the insolvency proceedings is also clear from Section 40 under which it is open to the Court to annul the composition or scheme and re-adjudge the debtor-insolvent but without prejudice to the validity of any transfer or payment duly made or of anything duly done under or in pursuance of the composition or scheme.
25. It is argued for the appellant that under Section 39 the composition is binding only on the creditors whose names are entered in the schedule annexed to the order of annulment and that the other creditors have their ordinary remedies against him as he is no longer an insolvent and that therefore the composition is fully worked out when the schedule creditors are paid their dividends and thereupon the surety’s obligation with reference to the composition also comes to an end. It is no doubt correct to say that no creditor can claim the benefit of the composition unless and until his name is entered in the schedule, but Section 39 does not say that the schedule of creditors as it stood when the order of annulment was passed cannot be amended by the addition of the names of other creditors who may be allowed to prove their debt after that order is made.
a creditor who docs not choose to take advantage of the composition and to prove his debts for participation in the funds made available under the composition is not bound to do so. He may take his chance and recover what proportion of his debt he can in due course of law. The binding force of a composition is due to the law which is embodied in Section 39 and that law must be applied subject to all the restrictions set forth in the section. The composition cannot be held to be binding except on creditors who caused their debts to be entered in the schedule contemplated by the section.
27. Assuming this decision to be correct with reference to the wording of Section 39 it is no authority for the proposition that a creditor who desires to avail himself of the composition cannot apply to the Court to be permitted to prove his debt and to have his name entered in the schedule which is the case before us. The question whether a creditor who is not allowed to prove his debt after the order of annulment is made has any other and what remedy open to him does not arise in this case. We are therefore not called upon in the present case to say whether the interpretation of Section 39 in Khalil-ut-Rahman v. Ram Sarup (1926) 95 I.C. 204, which confirmed in appeal a decision to the same effect, passed by a single Judge of the same High Court is correct or not. If the effect of Section 39 is as stated in Khalil-ul-Rahman v. Ram Sarup (1926) 95 I.C. 204,then the annulment of the insolvency of the debtor results in giving a free hand to the creditors not included in the schedule prepared under that section who do not wish to accept the composition and they may at once proceed against him to enforce their debts. As all the properties possessed by the debtor at the date of the annulment are under the control of the Insolvency Court for payment of dividends due to the scheduled creditors, the other creditors will have in most cases nothing more than the future earnings of the debtor to look to for payment of their debts and any decree they may get can be enforced only against such earnings or any other after-acquired property of the debtor or by his arrest. The position of the insolvent is thus rendered even more precarious than it was when he was adjudged an insolvent and much more harassing if he is liable to be arrested for the debts which were provable in the insolvency notwithstanding that he has parted with all his properties for the benefit of his creditors. I therefore fully share the reluctance expressed by my learned brother during the course of the arguments that an interpretation of Section 39 which leads to such a result should not be accepted as correct unless we are forced to it by the clear language of the section.
A composition or scheme accepted and approved in pursuance of this section shall be binding on all the creditors so far as relates to any debts due to them from the debtor and provable in bankruptcy.
29. It will thus be seen that so far as the effect of an annulment of adjudication in consequence of the Court approving the proposal of a composition is concerned the Legislature in Section 39 of the Provincial Insolvency Act now in force merely re-enacted the old Section 27 of the repealed Provincial Insolvency Act in preference to the wording of Section 30 of the Presidency Towns Insolvency Act, 1909. Having regard to this difference in language between the two enactments relating to the same subject passed by the same legislature I am not prepared to say that Khalil-ul-Rahman v. Ram Sarup (1926) 95 I.C. 204 was wrongly decided, but at the same time I cannot help observing that there does not seem to be any sufficient reason for the order of annulment passed in consequence of the Insolvency Court approving the composition having different results under the two Acts or why the provision in the Presidency Towns Insolvency Act on that question which seems to me the more appropriate one and which follows the corresponding provision in the English Bankruptcy Act is less suitable to annulments of adjudications under Section 39 of the Provincial Insolvency Act.
30. For the reasons stated the contention of the appellant that the action of the Insolvency Court in this case in allowing the respondent to prove his debt and including his name in the schedule was ultra vires and that therefore the condition in his bond that he is liable when ordered by the Court to pay the dividends to the creditors who may thereafter be included in the schedule is unenforceable cannot be accepted as correct.
31. In the result this appeal fails and is dismissed with costs.

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