Finality as a Precondition for Section 37 Savings: Supreme Court Clarifies That Receiver’s Transfers Based on Set-Aside Orders Are Not Protected; Insolvency Courts Cannot Adjudicate Specific Performance

Case: Singamasetty Bhagavath Guptha & Anr. v. Allam Karibasappa (D) by LRs./Allam Doddabasappa (D) by LRs. & Ors.

Citation: 2025 INSC 1159

Court: Supreme Court of India, Civil Appellate Jurisdiction

Date: 25 September 2025

Bench: Pamidighantam Sri Narasimha, J.; Atul S. Chandurkar, J.

Introduction

This decision addresses a recurring question in personal insolvency law under the Provincial Insolvency Act, 1920 (the Act): when does the “saving clause” in Section 37 protect acts and transfers carried out by the insolvency court or the official receiver, despite a subsequent annulment of adjudication? The Supreme Court clarifies that Section 37 saves only those sales, dispositions, payments and acts which are “duly made” and have attained finality. Transfers executed under an order later set aside, and where the underlying transaction itself is not proved or is tainted, are not protected.

The case arose from a decades-long dispute around a one-anna partnership share in M/s. Gavisiddheshwara & Co. originally held by the deceased partner, Sri Singamasetty Subbarayudu. Following the adjudication in insolvency of his heirs (the appellant and his mother), the official receiver executed a registered transfer in 1983 to a co-partner, Sri Allam Karibasappa, pursuant to a District Court order. Later, the adjudication was annulled and, crucially, the very order authorizing the transfer was set aside on appeal and remanded. On remand, the District Court found the foundational letters of offer and acceptance to be fabricated, dismissed the purchaser’s application, and ordered cancellation of the transfer deed.

The Karnataka High Court nevertheless reversed, applying Section 37 to “save” the 1983 transfer notwithstanding annulment, relying on Supreme Court precedents in Babu Ram and Arora Enterprises. The Supreme Court now restores the District Court’s order, holding that Section 37 cannot be invoked to salvage a transfer built on an order that was subsequently set aside and on evidence disbelieved on remand; nor can insolvency jurisdiction be used as a surrogate forum to decide issues tantamount to specific performance of a disputed contract.

Summary of the Judgment

The Supreme Court allowed the appellants’ appeals and dismissed the connected appeals by the respondents, restoring the District Court’s order dated 16.02.2004.
Key holding: Section 37 of the Act saves only those “sales and dispositions of property and payments duly made, and all acts theretofore done, by the Court or receiver” that are valid and have attained finality. Where the underlying order authorizing the transfer has been set aside and the matter remanded, a subsequent finding that the foundational documents are fabricated removes the transaction from Section 37’s protective ambit.
The High Court erred by assuming that the 1983 transfer deed had attained finality and by applying Babu Ram and Arora Enterprises mechanically without engaging with the District Court’s reasoned factual findings on remand.
Important procedural reaffirmation: As a first appellate court reversing a trial court, the High Court was bound to reappraise the evidence and assign reasons per Santosh Hazari v. Purushottam Tiwari. Its failure to do so amounted to a jurisdictional error.
Consequence: The interlocutory application (I.A. No. XV) seeking recognition of the purchaser’s title was dismissed; the receiver’s transfer deed dated 11.03.1983 stands cancelled in line with the District Court’s directions.

Factual Background

1963–1974: M/s. Gavisiddheshwara & Co. partnership constituted and reconstituted. By 1974, Allam Karibasappa held a significant share.
20.02.1975: Death of partner Sri Singamasetty Subbarayudu. His son (the appellant) inducted on 21.02.1975.
March 1975: Disputed correspondence allegedly offering the appellant’s inherited share to other partners (letters dated 20.03.1975, 22.03.1975, 25.03.1975). The purchaser claims a concluded contract.
1975–1977: Insolvency proceedings (I.C. No. 2/75 and 3/75) initiated by creditors; adjudication of insolvency on 25.06.1977 and appointment of official receiver.
09.08.1977: Purchaser files I.A. No. XV seeking direction to the receiver to accept Rs. 95,000 and transfer the one-anna share.
04.01.1983: District Court allows I.A. No. XV; receiver executes registered transfer deed on 11.03.1983.
10.06.1983: High Court stays operation of 04.01.1983 order in MFA 1048/1983.
20.04.1996: Adjudication annulled under Section 35 on satisfaction of debts (with a caveat that pending disputes would abide final outcome).
13.02.1997: High Court allows appeal; sets aside 04.01.1983 order; remands I.A. No. XV for fresh adjudication. The 1983 transfer deed loses its foundation.
16.02.2004 (on remand): District Court dismisses I.A. No. XV with costs; finds the alleged offer/acceptance documents fabricated; directs cancellation of the 11.03.1983 transfer deed and provides a mechanism for formal cancellation.
25.02.2011: High Court reverses, “saving” the 1983 transfer under Section 37, but limits its binding effect to only the appellant’s half-anna share (not the mother’s), for want of her consent.
25.09.2025: Supreme Court restores the District Court’s order; rejects the High Court’s Section 37 approach; dismisses respondents’ connected appeals.

Analysis

Statutory Framework: Section 37 and Related Provisions

Section 37 of the Provincial Insolvency Act deals with the legal consequences of an annulment of adjudication:

First limb (saving clause): All sales/dispositions/payments “duly made,” and all acts “theretofore done” by the Court or receiver shall be valid.
Second limb (revesting): Subject to the above, the property of the debtor shall vest in such person as the court appoints or, by default, revert to the debtor to the extent of his right or interest therein, on such conditions as the court may declare.

Section 35 (annulment) and Section 37 operate together: annulment wipes out the insolvency framework retrospectively, but does not retrospectively invalidate “duly made” judicial/receiver acts. The key question is when an act is “duly made” such that it qualifies for the saving clause despite annulment.

Precedents Cited and Their Correct Reach

Babu Ram alias Durga Prasad v. Indra Pal Singh, (1998) 6 SCC 358
The Supreme Court summarized that upon annulment, the insolvency is wiped out retrospectively; acts done by the undischarged insolvent in the interregnum get validated; and “all sales and dispositions of property and payments duly made and all acts therefore done by the court or Receiver, will remain valid.”
The present judgment reads Babu Ram as saving only those court/receiver acts that are “duly made,” i.e., valid and subsisting. Where the enabling order is set aside and the transaction fails on merits on remand, there is nothing left to “save.”
Arora Enterprises Ltd. v. Indubhushan Obhan, (1997) 5 SCC 366
Arora Enterprises stresses that annulment wipes out the insolvency but does not automatically wipe out independent suits or judicial orders passed therein. The current decision harmonizes this: the 1983 transfer did not stand on an independent judicial footing after the 04.01.1983 order was set aside on appeal and the case remanded; on remand, the District Court disbelieved the very contract. Thus, Arora does not assist the purchaser; there was no independent, surviving judicial order to protect.
Santosh Hazari v. Purushottam Tiwari, (2001) 3 SCC 179
Reaffirms the appellate duty to reappraise evidence and give reasons when reversing a trial court, particularly on factual findings based on oral and documentary evidence. The High Court’s reversal here, without engaging the District Court’s granular reasons, was held to be a jurisdictional error.
Madhusudan Das v. Narayanibai, (1983) 1 SCC 35 and Sarju Pershad Ramdeo Sahu v. Jwaleshwari Pratap Narain Singh, AIR 1951 SC 120
Cited in Santosh Hazari to underscore the caution appellate courts must exercise while disturbing trial-level factual findings, especially where credibility of evidence is central.

Key Legal Reasoning

Finality is embedded in “duly made” under Section 37.
The Supreme Court emphasizes that Section 37’s protection presupposes that the relevant sale, disposition, payment, or act by the court/receiver is valid, subsisting, and has attained finality. If the authorizing order is set aside, remanded, and on remand the underlying transaction is found unproven or tainted, the saving clause does not apply.
The 1983 transfer lacked a surviving foundation.
The transfer deed dated 11.03.1983 rested on the District Court’s order dated 04.01.1983. That order was later set aside by the High Court on 13.02.1997, with a remand. On remand, the District Court (16.02.2004) rejected I.A. No. XV after:
- Finding the alleged offer and acceptance letters (Exs. P4 and P6) to be “got up”/fabricated, supported by contradictions in dates and contents, and by the failure to produce originals despite notice;
- Noting inconsistencies with a contemporaneous general power of attorney (Ex. D30, April 1975) that would not sit with a concluded sale in March 1975;
- Rejecting reliance on Section 55 (protection of bona fide transactions prior to adjudication) because the alleged offer was not shown to exist as of 08.05.1975 (when insolvency proceedings commenced), and in any case was not bona fide.
The High Court’s later approach—treating the 1983 deed as “subsisting” for Section 37 purposes—overlooked that the foundational order had been set aside and, on remand, the factual basis for transfer collapsed.
Section 37 is not a backdoor for specific performance.
The Court states unequivocally that Section 37 proceedings cannot take on the character of a civil suit for specific performance. Whether there was a concluded contract between partners is a substantive civil question; insolvency jurisdiction under Sections 4–5 provides a summary forum for insolvency questions, not a platform to decree private title based on disputed contracts.
Appellate obligations were not met by the High Court.
In reversing the District Court, the High Court did not engage with the trial court’s detailed reasoning on Exs. P4–P7 and credibility findings. The Supreme Court characterizes this as a serious and jurisdictional error under the framework of Santosh Hazari.
Consequentially, the District Court’s directions revive.
The dismissal of I.A. No. XV and the order to cancel the 1983 deed, including the mechanism for cancellation via the official receiver (or, if necessary, through a court commissioner), stand restored.

Why Babu Ram and Arora Enterprises Do Not Save the 1983 Deed Here

Both cases recognize the saving of “duly made” court/receiver acts on annulment. In this case, the transfer was not “duly made” in the sense required: the enabling order was set aside; the facts underlying the transfer were found fabricated on remand; and the application seeking recognition of the purchaser’s right was dismissed.
Arora’s principle that annulment does not wipe out independent judicial orders does not help because there was no independent, surviving order left to protect after the set-aside and remand.

The High Court’s Half-Share Finding

The High Court had alternatively held that even if the 1983 transfer were protected, it could bind only the appellant’s half-anna share (not his mother’s) for want of her consent as a co-heir. Although that observation aligns with basic succession and partnership principles, the Supreme Court’s restoration of the District Court order renders the point academic: the deed itself is not saved and is to be cancelled. The broader caution remains sound—co-heir interests cannot be conveyed in their absence—but it is not the ratio of this judgment.

Impact and Significance

On Insolvency Practice (Provincial Insolvency Act Cases)

Finality requirement fortified: Parties invoking Section 37 must show that the court/receiver’s act was valid, subsisting, and unaffected by later appellate orders. Acts based on orders set aside do not qualify.
Receiver diligence heightened: Receivers and insolvency courts must ensure that transfers they effect rest on unimpeached and verifiable foundations; if the underlying adjudication is under appeal or the transaction documents are disputed, caution is imperative.
No short-circuiting civil adjudication: Insolvency jurisdiction cannot be used to obtain de facto specific performance of a disputed contract. Disputed private rights must be resolved in appropriate civil proceedings or within the insolvency court’s jurisdiction only where Section 4–5 legitimately permit and evidence is unimpeachable.
Annulment does not cure defects: Annulment wipes out insolvency but does not retroactively validate impugned, tainted, or non-final transactions purportedly done during insolvency.

On Appellate Standards

Reaffirmation of Santosh Hazari: First appellate courts must engage with trial-level reasoning, particularly on evidentiary credibility. Reversal without reappraisal and reasons invites correction in further appeal.

On Partnership and Succession Contexts

Where a deceased partner’s share devolves on multiple heirs, a transfer by some but not all co-heirs cannot bind the others unless the partnership deed or law provides otherwise. Although not decisive here, the High Court’s interim observation is a reminder to ensure proper parties and consents.

Complex Concepts Simplified

Adjudication of Insolvency: A court’s declaration that a debtor is insolvent, following which a receiver may take charge of the debtor’s property.
Annulment (Section 35): If debts are satisfied or for other reasons, the court can annul the adjudication. This generally “wipes out” the insolvency retrospectively.
Section 37 Saving Clause: Despite annulment, actions “duly made” by the court/receiver—such as sales or payments—remain valid. The word “duly” implies legality, propriety, and practical finality.
Revesting: After annulment, property typically reverts to the debtor unless the court appoints otherwise, subject to the carve-out for saved acts.
Specific Performance: A civil remedy compelling a party to perform a contract. Insolvency courts should not use summary jurisdiction to adjudicate whether a disputed private contract was concluded, except within strictly circumscribed statutory powers.

Practical Takeaways for Practitioners

Do not rely on provisional acts: Before invoking Section 37, verify that the act was made under a subsisting order not later set aside; if a remand occurs, the outcome on remand will be determinative.
Evidence integrity is critical: Maintain and produce original correspondence and documents; inability to do so, especially after notice from the receiver, may lead to adverse inferences and findings of fabrication.
Use proper forum for contract disputes: If offer/acceptance or the existence of a contract is seriously disputed, pursue appropriate civil proceedings rather than attempting to crystallize rights through insolvency applications.
Mind co-heir rights: When dealing with devolved partnership interests, ensure all heirs’ consents or appropriate legal authority; otherwise transfers risk partial or total invalidity.

Conclusion

This judgment recalibrates the application of Section 37 of the Provincial Insolvency Act by embedding a robust “finality” threshold into the phrase “duly made.” It holds that transfers executed by an official receiver under an order later set aside, and premised on evidence subsequently discredited, are not protected by the saving clause upon annulment of adjudication. Complementing this substantive holding is a strong procedural reminder: appellate courts reversing trial courts must reappraise the evidence and give cogent reasons, in line with Santosh Hazari.

In effect, the Supreme Court’s decision promotes evidentiary rigor, discourages the use of insolvency fora to short-circuit contested private rights, and ensures that the Section 37 saving clause operates as a shield for genuinely valid and final acts, not as a blanket amnesty for defective or non-final transactions. The ruling is likely to shape future insolvency litigation under the Provincial Insolvency Act by insisting on both procedural discipline and substantive integrity.