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2024 Supreme(Online)(AP) 15101
HIGH COURT OF ANDHRA PRADESH
B S Bhanu Mathi, J
CHAVANA RAJENDRA PRASAD – Appellant
Versus
ORCHU JAGANNADAM – Respondent
CMSA 6/2023
Nimmagadda Revathi, N Sai Phanindra Kumar
A creditor must prove the debt before the Official Receiver before initiating insolvency proceedings and cannot seek annulment of a transfer without prior adjudication of the debt.
Headnote:(A) Provincial Insolvency Act, 1920 - Sections 9, 13(2), 53, 54, and 54-A - Appeal against decree declaring debtor as insolvent - The trial Court adjudicated the debtor as insolvent and vested property with the Official Receiver, but the appellate Court reversed this decision due to lack of prior adjudication of debt - The creditor must prove debt before the Official Receiver before seeking annulment of transfer. (Paras 10, 18)
(B) Insolvency Proceedings - The creditor cannot initiate proceedings under Section 9 without prior adjudication of debt or unequivocal admission of indebtedness by the debtor - The appellate Court emphasized the necessity of following the procedure laid out in the Act for proving debts and annulment of transfers. (Paras 10, 18)
Facts of the case:
The petitioner filed an insolvency petition against the debtor, claiming debts due from promissory notes, alleging fraudulent transfer of property to avoid repayment. The trial Court declared the debtor insolvent, but the appellate Court found the petition premature due to lack of debt adjudication.
Findings of Court:
The appellate Court found that the trial Court erred in declaring the debtor insolvent without prior adjudication of the debt, thus reversing the decision and remanding for fresh adjudication.
Issues: The main issues were whether the creditor could initiate insolvency proceedings without prior adjudication of debt and the validity of the annulment of the sale deed.
Ratio Decidendi: The court ruled that a creditor must first prove the debt before the Official Receiver and cannot seek annulment of a transfer without such proof, as per the provisions of the Act.
Result: Appeal allowed; decree and judgment set aside, matter remanded for fresh adjudication.
JUDGMENT:
This appeal is filed under Section 75 (1) of Provincial Insolvency Act r/w Section 100 of C.P.C against the Decree and Judgment Dt. 22.12.2022 passed in A.S No. 5 of 2022 on the file of the court of III Addl. District Judge, Rajampet.
2. The appellant herein/ petitioner in I.P filed I.P.No.1 of 2013 on the file of Principal Senior Civil Judge, Rajampet under Sections 9 and 13(2) of Provincial Insolvency Act seeking the relief to declare the 2nd respondent herein/ 1st respondent in I.P. as insolvent and set aside the registered sale deed dated 04.06.2012 executed by the 2nd respondent herein in favour of the 1st respondent herein/ the 2nd respondent in I.P. and to vest the B schedule property with the official receiver for sale and discharge the debt under the promissory note to the petitioner. Hereafter, the parties are referred as before the trial Court.
3. The brief averments in the petition are as follows:
It is the case of the petitioner that the 1st respondent borrowed a sum of Rs.2,00,000/- (Rupees two lakhs) from the petitioner to meet his legal necessities and executed a demand promissory note on the even date i.e., on 21.11.2009 agreeing to repay the same with subsequent interest @ 24 % per annum. Again on 23.11.2009, he borrowed Rs.2,00,000/- (Rupees two Lakhs) and executed two (02) promissory notes each for Rs.1,00,000/- (Rupees one lakh) in favour of the petitioner agreeing to repay the same with subsequent interest @ 24% per annum. Thereafter, inspite of repeated demands, the 1st respondent did not repay the debt and with a view to defeat the rights of the petitioner, the 1st respondent executed a nominal sale deed in respect of the B schedule property in favour of the 2nd respondent. The petitioner got issued legal notice dated 15.06.2012 demanding the respondents to discharge the debt. Having received the same, no response. To avoid the liability, and to defraud the creditor, the 1st respondent created a nominal registered sale deed dated 04.06.2012 in the name of the 2nd respondent in respect of the B Schedule sole property which he has.
4. The 1st respondent/ debtor filed his counter denying the petition averments and contended that he never borrowed any amount and did not execute any promissory notes in favour of the petitioner. He sold the B schedule property to 2nd respondent for valuable consideration. The petitioner filed this application in collusion with the 2nd respondent and prayed to dismiss the petition.
5. The 2nd respondent/ purchaser reported no counter and remained ex parte.
6. On behalf of the petitioner, C.Rajendra Prasad was examined as PW.1 and G.Raghava Naidu is examined as PW.2 and got marked Ex.P.1-certified copy of registered sale deed dated 04.06.2012, Ex.P.2-original promissory note dated 21.11.2009, Ex.P.3-Original promissory note dated 23.11.2009, Ex.P.4-original promissory note dated 23.11.2009, Ex.P.5-office copy of legal notice dated 15.06.2012, Ex,P.6-unserved registered postal cover and Ex.P.7- letter from post master with postal receipts.
7. On behalf of the respondents, R.W.1-Orsu Jagannadham was examined and no documentary evidence was filed.
8. The trial Court allowed the petition by adjudicating the 1st respondent as an insolvent and vested the petition ‘B’ schedule property with the Official Receiver, Kadapa to administer the same for the benefit of the creditors of the first respondent, including the petitioner. The trail Court gave time for six (6) months to the 1st respondent to apply for discharge.
9. Aggrieved by the order and decree, the 2nd respondent preferred the appeal before the III Additional District Judge, Rajampet.
10. After hearing both parties, only on the ground that in the absence of any adjudication as to debts or unequivocal admission thereof by a person to be declared as insolvent, the Court is not competent to determine liability of that person to creditor under Section 9 of the Provincial Insolvency Act, 1920 , (for short, the Act) as held in the dec
