1. Creditors' petition for adjudication of debtor as insolvent based on acts of insolvency, including sale of property in execution of a money decree under Provincial Insolvency Act. (Para 1 , 2 )
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1965 Supreme(SC) 252
SUPREME COURT OF INDIA
P.B. GAJENDRAGADKAR, C.J.I., K.N. WANCHOO, M. HIDAYATULLAH AND V. RAMASWAMI, JJ.
Yenumula Malludora, Appellant
Versus
Peruri Seetharathnam and others, Respondents.
Civil Appeal No. 474 of 1964.
Advocates appeared
Mr. M. C. Setalvad, Senior Advocate, (Mr. T. V. R. Tatachari, Advocate with him) for Appellant; Mr. Kirpa Narain, Senior Advocate (Mr. T. Satyanarayana, Advocate with him), for Respondents Nos. 1 and 9.
Advocates:
KIRPA NARAIN, M.C.SETALVAD, T.SATYANARAYANA, T.V.R.TATACHARI
KIRPA NARAIN, M.C.SETALVAD, T.SATYANARAYANA, T.V.R.TATACHARI
An act of insolvency, once committed, cannot be purged by subsequent payments to some creditors. Furthermore, the court's discretion to dismiss an insolvency petition for 'sufficient cause' under Section 25 of the Provincial Insolvency Act cannot be exercised if the debtor remains unable to pay their debts.
Headnote:(A) Provincial Insolvency Act - Sections 6(e), 7, 9(1)(c) and 25 - Act of insolvency - Sale of property in execution of a money decree - Whether subsequent deposit of decretal amount and setting aside of sale purges the act of insolvency - An act of insolvency once committed cannot be explained or purged by subsequent events - Satisfying one creditor does not erase the act unless all creditors are satisfied, as the debtor must prove ability to meet all liabilities (Para 6).
(B) Provincial Insolvency Act - Section 25 - Dismissal of petition - Sufficient cause - Discretion of the Court - Jurisdiction to dismiss for "sufficient cause" cannot be exercised to ignore an act of insolvency where the debtor continues to be heavily indebted and is unable to pay debts - Examples of sufficient cause include malicious petitions, extortion, or cases where no assets exist (Para 7).
Facts of the case:
A debtor was adjudged insolvent based on the sale of his property in execution of a money decree. The debtor contended that since he had deposited the decretal amount and the sale was subsequently set aside, the act of insolvency was purged. It was further argued that this constituted sufficient cause for the dismissal of the creditors' petition. The debtor was indebted to the tune of two lakhs and had admitted inability to discharge the debts.
Findings of Court:
The adjudication and receiving order were properly made as the act of insolvency under Section 6(e) was established and the debtor was unable to pay his debts.
Issues: Whether the subsequent setting aside of a sale in execution of a money decree purges an act of insolvency and whether such an event constitutes "sufficient cause" for dismissal of an insolvency petition under Section 25 of the Provincial Insolvency Act.
Ratio Decidendi: An act of insolvency, once committed, is not erased by subsequent payment to a creditor unless all creditors are satisfied. The discretion under Section 25 to dismiss a petition for "sufficient cause" cannot be used to overlook an established act of insolvency when the debtor remains heavily indebted and unable to pay his debts.
Result: Appeal dismissed.
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2. Whether setting aside a court sale by depositing the decretal amount purges an act of insolvency or constitutes sufficient cause for dismissal under Section 25, Provincial Insolvency Act. (Para 3 )
3. Sale of property in execution of a money decree constitutes an act of insolvency; subsequent payment to one creditor does not erase this act if other debts remain. (Para 4 , 5 , 6 , 7 )
4. An act of insolvency once committed cannot be purged by subsequent events unless all creditors are satisfied, and inability to pay debts precludes dismissal for sufficient cause. (Para 6 , 7 )
5. Appeal dismissed; adjudication of insolvency and receiving order upheld. (Para 8 )
6. Does the subsequent setting aside of a court sale purge an act of insolvency?
No. An act of insolvency once committed cannot be explained or purged by subsequent events. Satisfying one creditor does not erase the act unless all creditors are satisfied, as the debtor must prove the ability to meet all liabilities. (Para 6 )
7. What constitutes an act of insolvency under Section 6(e) of the Provincial Insolvency Act?
An involuntary act of insolvency occurs when any of the debtor's property is sold in execution of a decree of any Court for payment of money. (Para 4 )
8. When can a court exercise discretion under Section 25 of the Provincial Insolvency Act to dismiss a creditor's petition for sufficient cause?
Discretion may be exercised if the petition is malicious, for collateral purposes, if the creditor refused a tender of money, or where no assets exist. It cannot be used to ignore an act of insolvency if the debtor remains heavily indebted and unable to pay. (Para 7 )
Judgment
HIDAYATULLAH, J. : On the application of two creditors the appellant Yenumula Mallu Dora has been adjudged insolvent by the Subordinate Judge Kakinada and a receiving order has been passed against him. The respondents before us are one of the petitioning creditors and the legal representatives of the other petitioning creditor who died during these proceedings. The first petitioning creditor held a decree for money which he had obtained in O. S. 67 of 1949. He also held another money decree in O. S. 473 of 1948. The second petitioning creditor held a decree which she had obtained in O. S. 17 of 1955. The application was based upon three acts of insolvency which the appellant was stated to have committed and on the general facts that he was indebted to the tune of Rs. two lakhs, and was unable to pay his debts. The three acts of insolvency alleged against him were (a) evasion of arrest in execution of the money decree in O. S. 67 of 1949; (b) sale of some of his properties on September 26, 1956 in execution arising from O. S. 73 of 1952; and (c) sale of some of his properties on September 19, 1956 in execution of money decree in O. S. 9 of 1950. It was also alleged that he was fraudulently transferring properties in the name of his wife and brother-in-law and had suffered a collusive charge decree for maintenance in favour of his wife, to delay and defeat his creditors.
2. The Subordinate Judge, Kakinada did not accept the first two acts of insolvency. The evidence regarding evasion of arrest was not found convincing and the second act of insolvency was rejected because the sale of the property was in execution of a mortgage decree. In respect of the third act of insolvency the Subordinate Judge held that it satisfied Section 6 (e) of the Provincial Insolvency Act and an adjudication and a receiving order were justified in the case. An appeal was taken to the District Court at Rajahmundry (C. A. 41 of 1958) which was dismissed on October 15, 1959. A Revision Application filed under S. 75 of the Provincial Insolvency Act was dismissed by the High Court of Andhra Pradesh on March 14, 1963. The appellant, however, obtained special leave of this Court and has filed the present appeal against the order of the High Court.
3. The contention of the appellant was, and still is, that the third act of insolvency was not established as he had deposited, within one month of the sale, the entire decretal amount together with poundage and commission and the sale was set aside on his petition under Order 21 Rule 89 of the Code of Civil procedure. He contended, therefore, that as none of the acts of insolvency remained, the petition ought to have been dismissed as incompetent or he was entitled to have the petition dismissed, in any event, under S. 25 of the Provincial Insolvency Act which allows a creditor s petition to be dismissed on sufficient cause. He submitted that as the sale was set aside before the order of adjudication was made there existed sufficient cause for the dismissal of the creditors petition. The Subordinate Judge relying upon Venkatakrishnayya v. Malakondayya , AIR 1942 Mad 306, and on decisions of the Lahore and the Calcutta High Courts rejected the submission and made the order against the appellant. The District Judge, Rajahmundry agreed with the conclusion of the Subordinate Judge and the High Court rejected the petition for revision. In this appeal the same points are urged again for our acceptance. In our judgment the view of the law taken in this case by the Subordinate Judge and approved by the District Court is right and does not warrant any interference.
4. The object of the law of insolvency is to seize the property of an insolvent before he can squander it and to distribute it amongst his creditors. It is, however, not every debtor, who has borrowed beyond his assets or even one whose property is attached in execution of his debts, who can be subjected to such control. The jurisdiction of the Court comme
