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SUPREME COURT OF INDIA
24th May 1957.
JAGANNADHA DAS, SINHA AND GOVINDA MENON JJ.
Civil Appeal No. 165 of 1953.
N. Subramania Iyer, Appellant
Versus
Official Receiver, Quilon and another, Respondents.
(From: A. S. No. 288 of 1120 (T),
D/- 3-10-1950 Trav.Co.)
Advocates appeared
Mr. K. S. Krishnaswamy Iyengar, Senior Advocate, (M/s. Alladi, Kuppuswami and M. S. K. Sastri, Advocates, with him), for Appellant; Mr. N. C. Chatterjee, Senior Advocate, (M/s. M. R. Krishna Pillai and Sardar Bahadur, Advocates, with him), for Respondent No. 1.
INSOLVENCY - Transfer of property - Mortgage - Bona fide and for valuable consideration - Burden of proof - Onus lies on Official Receiver to prove that the transfer was not made in good faith and for valuable consideration - Definition of "good faith" in the Travancore-Cochin General Clauses Act, 1950, is not applicable to proceedings under the insolvency law - The test of honesty is more appropriate than the test of due care and attention - Mortgagee had no knowledge of the insolvent's financial position and had made reasonable enquiries before advancing the loan - Mortgagee had paid the full consideration for the mortgage - Mortgagee was not a party or privy to the dishonest intentions of the mortgagors - Mortgage transaction was bona fide and for valuable consideration - Mortgagee was entitled to his costs throughout.
Fact of the Case:
The appellant, a moneylender, advanced a sum of Rs. 75,000 to a family of merchants on the security of certain immovable properties belonging to the family. The loan was made for the purpose of carrying on the family business. The mortgage bond and a lease deed granting a lease of the mortgaged properties to the mortgagors themselves were executed and registered on the same date. Soon after, a hypothecation deed was executed in favour of a third party, hypothecating the equity of redemption in respect of the properties mortgaged to the appellant and certain other properties. The family of merchants was adjudicated insolvent about two years after the execution of the mortgage bond. The Official Receiver applied to the court for annulling the mortgage bond and the lease deed, alleging that the transactions were void as against him under Ss. 35 and 36 of the Travancore Regulation VIII of 1090 (=1915). The appellant opposed the application, contending that the mortgage was a bona fide transaction for valuable consideration which was not affected by the Insolvency Regulation.
Finding of the Court:
The court held that the burden of proof lay on the Official Receiver to prove that the mortgage transaction was not made in good faith and for valuable consideration. The court further held that the definition of "good faith" in the Travancore-Cochin General Clauses Act, 1950, was not applicable to proceedings under the insolvency law and that the test of honesty was more appropriate than the test of due care and attention. The court found that the mortgagee had no knowledge of the insolvent's financial position and had made reasonable enquiries before advancing the loan. The court also found that the mortgagee had paid the full consideration for the mortgage and that he was not a party or privy to the dishonest intentions of the mortgagors. The court therefore held that the mortgage transaction was bona fide and for valuable consideration and that the mortgagee was entitled to his costs throughout.
Issues: 1. Whether the onus of proof lies on the Official Receiver to prove that the transfer was not made in good faith and for valuable consideration? 2. Whether the definition of "good faith" in the Travancore-Cochin General Clauses Act, 1950, is applicable to proceedings under the insolvency law? 3. Whether the test of honesty is more appropriate than the test of due care and attention in determining the bona fides of a transaction under the insolvency law? 4. Whether the mortgagee had knowledge of the insolvent's financial position and had made reasonable enquiries before advancing the loan? 5. Whether the mortgagee had paid the full consideration for the mortgage? 6. Whether the mortgagee was a party or privy to the dishonest intentions of the mortgagors?
Ratio Decidendi: 1. The burden of proof lies on the Official Receiver to prove that the transfer was not made in good faith and for valuable consideration. 2. The definition of "good faith" in the Travancore-Cochin General Clauses Act, 1950, is not applicable to proceedings under the insolvency law. 3. The test of honesty is more appropriate than the test of due care and attention in determining the bona fides of a transaction under the insolvency law. 4. The mortgagee had no knowledge of the insolvent's financial position and had made reasonable enquiries before advancing the loan. 5. The mortgagee had paid the full consideration for the mortgage. 6. The mortgagee was not a party or privy to the dishonest intentions of the mortgagors.
Final Decision: Appeal allowed. Judgments and 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. Lease back to the mortgagors being a part of the same transaction is equally binding on the estate of the insolvents. 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.
Judgment
Sinha, J. - This appeal by special leave is directed against the concurrent orders of the Courts below allowing the Official Receiver s application under S. 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 (EX. I) for Rs. 75,000 dated 18-8-1924, executed by a number of persons who may not 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 S. 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).
2. 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 piecegoods, 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 moneylender living about fifty to sixty miles away from Quilon at a place called Mankompu. He agreed to advance the sum of Rs. 75,000 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, 18-8-1924, were executed and registered by the heirs aforesaid 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. 75,000 advanced at the rate of nine percent, per annum for a period of three years the mortgaged properties, namely, buildings, fields and cocoanut orchards etc., were said to have been delivered to the mortgagee who in his turn granted 3 a lease back to the mortgagors on payment of a stated sum by way of annual rents, viz., Rs. 6,750, 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 Rowther was executed on 30-8-1924, for the sum of Rs. 78,859-15-0, 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 out, standing 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 15-9-1924 one of the business creditors of the family of the mortgagors, S. M. Sheikh Mohideen Rowther, made an application in the District Court of Q
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