The annulment of adjudication of insolvency under Section 35 of the Provincial Insolvency Act, 1920, is permissible when the debts of the insolvent have been discharged by operation of law, including subsequent enactments like the Tamil Nadu Debt Relief Act, 1980.

The appellants are aggrieved by the order of the Courts below, by which adjudication of the respondents 1 and 2 as insolvents, was set aside invoking Section 35 of the Provincial Insolvency Act. It is not in dispute that the respondents 1 and 2 were adjudicated as insolvents by an order made on 18. 2. 1977. The courts below have ordered annulment of that order on the ground that the debts owed by the insolvents on the date of adjudicate on to the petitioning creditors were wiped out by reason of the enactment of Tamil Nadu Debt Relief Act (Act 13 of 1980) which came into force with effect from 2. 1980.

2. The argument advanced for the appellants is that once the order of adjudication is made, the state of the insolvent is vested with the Official Receiver and thereafter the insolvent cannot claim any right in respect of the estate and the insolvent is therefore, prevented from invoking the provision of subsequent enactment though it would have been applicable to such insolvent had he not been declared as insolvent. Learned Counsel for the appellants relied upon a decision of Allahabad High Court, in the case of Kripa Nath v. Ganga Prasad , A.I.R.1962 All. 256 in support of his submission. It was held in that case that, “vesting of a property in the court or the receiver not only gives the courts or the receiver the right to take possession of the property and deal with it in a certain manner, but amounts to a legal transfer of the right, title and interest of the insolvent to the court or to the receiver as the case may be”.

3. Learned counsel, appearing for the respondents, on the other hand, submitted that Sec.35 of the Provincial Insolvency Act enables the insolvent to obtain annulment of the order of adjudication not only when the order of adjudication, in the opinion of the court, ought not to have been made, but also when the debts of the insolvent have been paid in full. Such ‘payment’ it was submitted, need not be actual payment resulting in the discharge of the debts, but would also cover cases of discharge brought about without actual payment of the debt, by reason of the operation of law, and even if the enactment was subsequent to the debt, provided the debt continued to subsist at the time, the enactment come into force.

4. Section 35 of the Provincial Insolvency Act reads as follows:-

“Power to annual adjudication of insolvency; where, in the opinion of the court a debtor ought not to have been adjudged insolvent or where it is proved to the satisfaction of the court that the debts of the insolvent have been paid in full, the court shall on the application of the debtor or of any other person interested; by order in writing annul the adjudication and the court, may of its own motion or on application made by the receiver or any creditor, annul any adjudication made on the petition of a debtor who was, by reason of the provisions of sub-section (2) of Section 10 not entitled to present such petition.”

The legislative intention in enacting Sec.35 of the Act is to vest power in the court to annul an order adjudicating a person as insolvent, if the order of adjudication was made without jurisdiction or there was illegality in the procedure adopted or it was obtained fraudulently or for like reasons; and in cases where it is provided to the satisfaction of the court that the debts of the insolvent have been paid in full.

5. The reason for a person being declared an insolvent is the inability on his part to pay his debts. Where the debt ceases to exist by reason of payment in full or on account of statutory discharge without payment, there is no ‘inability’ to day, continuing to treat such a person as insolvent would be wholly opposed to the policy of the Act.

6. The words ‘paid in full’ used in S.35 emphasis the fact that at the time debtor seeks annulment, the applicant should no longer be in the position of ‘debtor’ viz’ that he is not a person who owes money to a creditor who in law is entitled