Payments made by an insolvent to creditors without the knowledge of the Official Receiver are irregular and cannot form the basis of an application for sanctioning a scheme of composition under Section 38 of the Provincial Insolvency Act, 1920.

This civil revision petition at the instance of the insolvent against the order of the learned Second Additional District Judge, Tiruchirapalli, challenges the correctness of the dismissal of an application filed by the insolvent under S.38 of the Provincial Insolvency Act 1920 (hereinafter referred to as the Act).

2. The petitioner filed an application in I.P. No. 7 of 1982 Sub-Court Karur praying that he may be adjudged as an insolvent, and by an order dt. 14-10-1985, the petitioner was adjudged as insolvent and his properties vested with the Official Receiver for being administered in accordance with the provisions of Act. In the course of such administration, the Official Receiver brought to sale some immovable properties belonging to the insolvent and they were also sold. The sales were awaiting confirmation. There are about 13 creditors of the insolvent, who are respondents 1 to 13 herein. The 14th respondent is the Official Receiver, Tiruchirapalli. Claiming that the relatives of the insolvent had arranged for discharging the debts due by the insolvent to the several creditors and stating that payments had also been made to 12 of the creditors with the exception of the 1st respondent, between 10-10-1985 and 13-10-1985, the insolvent filed on 4-10-1985, I.A. 303 of 1985 in I.P. 7 of 1982, under S.38 of the Act for the consideration of a scheme to pay 50 per cent of the approved debts to the creditors viz, respondents 1 to 13, herein and for further appropriate orders in accordance with the provisions of the Act. This was opposed by the first respondent on the ground that the scheme submitted, if approved, would cause hardship, loss and prejudice to the creditors, apart from making out that the insolvent had secreted substantial amounts. The other creditors viz, respondents 2 to 13 in their counter stated that they had been paid more than 50 per cent of the debts due to them in full quit of their claims. The Official Receiver in his counter referred to the sale of some of the properties of the insolvent vested in him and stated that the proposal of the insolvent will cause hardship and loss to the creditors especially when some of the properties of the insolvent had been sold and the claim of the insolvent that his relatives had taken pity on him and arranged to pay the approved debts would establish that the insolvent had been able to secrete large amounts. It was also the further case of the Official Receiver that the insolvent after failing in his attempts to defraud creditors, had come forward with the application for consideration of the scheme of composition and therefore, it deserved to be rejected.

3. Before the Sub-Court, Karur, the receipts issued by the respondents 2 to 13 were marked as Exs. A.1 to A.12 and the insolvent was examined as P.W. 1, while on behalf of the first respondent, Exs. B1 and B2 were filed and he gave evidence as R.W. 1. On a consideration of the oral as well as the documentary evidence the learned Subordinate Judge Karur held that the production of Exs. A.1 to A.12, established the discharge of the debts due by the insolvent to respondents 2 to 13 and that the proposal submitted by the insolvent is reasonable and further that the insolvent had also shown the availability of sufficient security to pay 50 per cent of the debts due to the first respondent. On those conclusions, the learned Subordinate Judge allowed the application. Aggrieved by this, the first respondent herein preferred C.M.A. No. 65 of 1986 before the Second Additional District Judge, Tiruchirapalli. The learned District Judge found that the payments stated to have been made by the insolvent to the other creditor's behind the back of the Official Receiver and without informing the Court, showed that some kind of a private arrangement had been arrived at between the insolvent and the other creditors and such an arrangement would be invalid and therefore, the application filed by the insolvent for consideration of