1963 Supreme(AP) 197

Andhra Pradesh High Court
Judges : ANANTA NARAYANA AYYAR, P.SATYANARAYANA RAJU
Kusampudi Sunadra Rama Raju - Appellant
Versus
Official Receiver, Guntur - Respondent
Decided On : 10-31-63

A contract entered into by an insolvent, after the insolvency proceedings have been initiated but before he is adjudged an insolvent, is not per se void. The best that can be said is that it is open to the Official Receiver to get the transaction set aside but until the transaction is impeached and set aside, the transaction would stand.

Headnote:

INSOLVENCY - CONTRACT - RESCISSION - VALIDITY - OFFICIAL RECEIVER - RIGHTS - PROVINCIAL INSOLVENCY ACT, 1920 (5 OF 1920), SECS. 20, 23, 28, 29, 37, 43, 53, 54, 56.

Fact of the Case:

The plaintiffs, who were the sons of one Peda Nagaraju, executed a mortgage deed in respect of their land in favor of Govada Ranganayakulu and two others. The first of them obtained a decree in O.S. No. 78 of 1943 on the foot of the mortgage. Before the hypotheca was brought to sale in execution of the mortgage decree, the plaintiffs and the 2nd defendant entered into a contract of sale on 12/04/1948, under which the 2nd defendant agreed to purchase the entire extent of Ac. 39.90 cents of land at Rs. 900.00 per acre. The 2nd defendant purchased an extent of Ac. 20-25 cents out of the Ac. 39-90 cents in the Court auction sale, with his own monies. Thereafter the plaintiffs filed a petition to set aside the Court sale, but it was dismissed. While the said appeal was pending, on 21/04/1956, a creditor of the 2nd defendant filed a petition for adjudicating him as an insolvent. During the pendency of the insolvency petition, the Official Receiver was appointed as interim Receiver by an order of the Court of the Subordinate Judge, Bapatla, dated 3/12/1956. The 2nd defendant was adjudged an insolvent by the order of the Court dated 29/03/1957.

Finding of the Court:

The Court held that the contract entered into by the 2nd defendant for the purchase of land under Ex. A-1 was not put an end to by reason of the insolvency of the 2nd defendant. It was well settled that insolvency does not determine a contract. Nor does insolvency per se operate as rescission of a contract. But conduct on the part of the insolvent or the Official Assignee, which practically amounts to notice to those with whom the insolvent had contracted, that he does not mean to perform any of his contracts, may amount to a refusal of performance entitling the other party to the contract to rescind. It was also true that a contract by the insolvent to buy property cannot be specifically enforced against the Official Receiver. Where, however, the Official Receiver, insists on the performance of the contract, he must be ready and willing to perform the insolvents part of the contract to the same extent to which the insolvent should have done had he remained solvent.

Issues: 1. Whether the contract dated 12-3-1957 is true, valid and binding on the 1st defendant? 2. Whether the 2nd defendant has committed default under contract dated 5-4-1948 as pleaded by the plaintiffs 3. Whether the suit is barred by res judicata by virtue of the decision in E. A. No. 705 of 1957 in I. P. No. 15 of 1955, Sub-court Bapatla? 4. Whether plaintiff is entitled to rendition of accounts? 5. Whether the 1st defendant is entitled to rely on the contract dated 5-4-1948 and resist the claim of the plaintiffs if necessary by paying any amount that may be found due? 6. Whether the 1st defendant cannot get any rights in the suit property unless he files a suit for specific performance? 7. To what relief?

Ratio Decidendi: The Court held that the agreement, Ex. A-7 entered into by the 2nd defendant before he was adjudged an insolvent, rescinding the contract entered into by him with the plaintiffs, is valid and binding. On this conclusion, it follows that the rescission of the contract of sale, Ex. A-1, is binding on the 1st defendant. The legal title not having passed to the Official Receiver, coupled with the facts that the possession still remains with the plaintiffs and the contract Ex. A-1 has been validly determined by the 2nd defendant, the plaintiffs are entitled to a declaration of their title to the plaint schedule, property and for a permanent injunction restraining the defendants from laying any claim or dealing with the property in any manner.

Final Decision: The appeal was allowed and the suit was decreed except with respect to the relief for rendition of accounts, with costs here and in the Court below. The plaintiffs will be entitled to recover their costs from the estate. The Official Receiver (1st defendant) will also be entitled to recover his costs from the estate.