Citation Codes

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Case Number

A.A.A.O No. 246 of 1946

Judges

Subba Rao, J.

Acts

SECTION 78 PROVINCIAL INSOLVENCY ACT
Section 78(2) of the Provincial Insolvency Act
SECTION 78 PROVINCIAL INSOLVENCY ACT
SECTION 37 PROVINCIAL INSOLVENCY ACT
SECTION 43 PROVINCIAL INSOLVENCY ACT
SECTION 33 PROVINCIAL INSOLVENCY ACT
Provincial Insolvency Act. Section 49

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Smart Summary

Structured Summary of the Judgment

Factual and Procedural Background

The appeal concerns a limitation question that depends on the construction of Section 78 of the Provincial Insolvency Act.

The appellants are the legal representatives of the decree-holder in O.S. No. 875 of 1926, District Munsif Court, Tiruvannamalai. A final decree in that suit was passed on 19 December 1929. The judgment-debtor was adjudged insolvent on 30 March 1930.

The adjudication was annulled by the Subordinate Judge of Vellore on 7 December 1942 under Section 43 of the Provincial Insolvency Act. After annulment, on 26 March 1943, a clerk of the appellants filed an affidavit in the Subordinate Judge's Court stating that the appellants' father had died on 8 August 1941 and that Rs. 1,600 was due to him under the decree in O.S. No. 875 of 1926.

The appellants appealed the annulment order to the District Court, North Arcot; by order dated 18 August 1943 the District Judge confirmed the annulment but directed vesting of the insolvent's properties in the Official Receiver, North Arcot, for one year from 9 December 1942 under Section 37 of the Act.

On 11 October 1943 the appellants filed an affidavit before the Official Receiver proving their claim; by order dated 25 November 1943 the Official Receiver admitted their claim. The appellants had earlier filed an execution petition (E.P. No. 469 of 1943) on 16 April 1943 (more than thirteen years after the final decree), which was dismissed as not pressed on 4 October 1943. The present execution application was filed on 6 December 1944.

Both lower Courts held that the period between the date of adjudication (30 March 1930) and the date of annulment (7 December 1942) could not be excluded when computing limitation; thus the earlier application of 16 April 1943 was time-barred unless that period were excludable under Section 78(2).

Legal Issues Presented

Whether the period from the date of adjudication to the date of annulment is to be excluded in computing the period of limitation for execution of a decree under Section 78(2) of the Provincial Insolvency Act.
Whether a creditor who proves a debt either (a) before the order of annulment or (b) after annulment (including proof by affidavit or before the Official Receiver) is entitled to the exclusion provided by Section 78(2).
Whether an affidavit filed on 26 March 1943 (Ex. P-7) in the insolvency Court — and an affidavit later filed before the Official Receiver (11 October 1943) — constituted "proof" of debt within the meaning of the Provincial Insolvency Act such that the period of adjudication-to-annulment could be excluded.

Arguments of the Parties

Appellants' Arguments

The appellants' counsel contended that they were entitled to the exclusion under Section 78(2) of the Provincial Insolvency Act whether they proved their debt before annulment or afterwards.
They relied on an affidavit (Ex. P-7) filed in the Subordinate Judge's Court on 26 March 1943 as proof of the debt within the meaning of the Act, pointing to statements that (i) Rs. 1,600 was due under the decree and (ii) the amount was shown in the insolvent's schedule of debts; the affidavit allegedly had been accepted by the Court and recognised the appellants as legal representatives.
It was argued that because the order annulling adjudication had not become final (an appeal was pending and disposed of only on 18 August 1943), the affidavit of 26 March 1943 should be deemed to have been filed before the termination of insolvency proceedings by annulment.
The appellants further argued that proof of the debt before the Official Receiver (in whom properties vested under Section 37) would also entitle them to the benefit of Section 78(2).

The opinion does not set out a detailed record of any distinct arguments advanced by the respondent(s) opposing those contentions.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Ex parte Lancaster Banking Corporation; In re Westby, (1878) 10 Ch. D. 776	The principle that when bankruptcy/insolvency ensues, the ordinary operation of the statute of limitation does not apply to the relations governed by the insolvency; creditor and debtor rights are established in the bankruptcy and the statute of limitation has no application to such a case.	The Court cited this passage to support the view that the Legislature, by Section 78, recognised that period of suspended creditor remedies during insolvency can be excluded from limitation where the creditor adopted the relief under the Act during that period.
Manicka Nainar v. Murugesa Goundan, 1947-1 M.L.J. 60 (A.I.R. 1947 Mad. 331)	Madras High Court view that Section 78(2) is not confined to the narrow limits of Section 49; Section 78(2) can apply where there exists on the record of the insolvency Court sufficient evidence to establish the debt which the insolvency Court is bound to accept.	The Court acknowledged this decision as representing a conflict of authorities on the interpretation of Section 49 and Section 78(2), but did not decide whether the appellants' affidavit constituted sufficient evidence because the affidavit was held to have been filed after the annulment.
Veerayya v. Srinivasarao, 58 Mad. 908 : (A.I.R. 1935 Mad. 826) (Full Bench)	The holding that an order under Section 37 (vesting properties in Official Receiver or another person) does not continue insolvency proceedings for all purposes; the person in whom properties are vested has powers limited to carrying out the Court's directions for realisation and distribution and does not acquire full powers of an insolvency receiver to continue proofs for general insolvency purposes.	The Court relied on this Full Bench decision to conclude that proof before the Official Receiver after annulment does not amount to proof within the insolvency proceedings (and thus does not attract the exclusion under Section 78(2)); the vesting under Section 37 is for a definite purpose and does not revive the insolvency proceedings.

Court's Reasoning and Analysis

The Court began by reading Section 78(2) together with the related insolvency provisions (Sections 33, 34 and 49). It noted that Section 78(2) provides that, where an order of adjudication has been annulled, the period from adjudication to annulment shall be excluded in computing limitation for suits or applications for execution which might have been brought but for the adjudication — subject to the proviso that nothing in the section shall apply to a suit or application in respect of a debt "provable but not proved" under the Act.

The Court analysed Sections 33 and 34 (which prescribe the procedure and the class of debts provable under the Act) and Section 49 (which prescribes a mode of proof by affidavit). It concluded that these provisions are aimed at proof of debts during the pendency of insolvency proceedings (i.e., between the date of adjudication and the date of annulment) for the purpose of ascertaining creditors' claims and distributing the insolvent's property equitably.

The Court observed that the pendency of insolvency suspends the ordinary remedies of creditors; by enacting Section 78 the Legislature recognised that exclusion of the suspended period is appropriate where the creditor adopted the remedy under the Act during that period. The Court therefore interpreted the proviso to Section 78 as referring only to debts proved during the pendency of the insolvency proceedings.

Applying that statutory framework to the facts, the Court examined whether the appellants had proved their debt within the pendency (i.e., before annulment). The appellants relied on an affidavit (Ex. P-7) filed on 26 March 1943 in the Subordinate Judge's Court. The Court found it unnecessary to decide whether the affidavit would in general constitute "proof" under Section 49 (noting the conflict of decisions and the Madras High Court view in Manicka Nainar), because on the facts the affidavit was filed after the order of annulment and therefore could not constitute proof within the insolvency proceedings.

The Court rejected the appellants' submission that because the annulment order had not become final until the appeal was disposed of on 18 August 1943, the affidavit of 26 March 1943 should be treated as filed before termination of the insolvency proceedings. The appellate court had confirmed the order of annulment; the only modification was a vesting direction under Section 37. Consequently, the Court held that the affidavit filed after the order of annulment could not be relied upon as proof before annulment.

The appellants' alternative argument — that proof before the Official Receiver (under the vesting order of Section 37) would suffice for Section 78(2) — was also considered and rejected. The Court, relying on the Full Bench decision in Veerayya v. Srinivasarao, explained that the vesting under Section 37 is for a limited purpose (realisation and distribution) and does not continue the insolvency proceedings for all purposes; the receiver (or other person) derives powers only from the court's vesting order and has no general power to accept proofs so as to revive the benefit of Section 78(2). The Court analogised such a vesting to an ordinary receiver's appointment and observed that such an officer would have no right to accept proofs of debts or pay creditors whose debts are already barred.

Having found there was no proof of the debt during the pendency of insolvency, the Court held that the debt was barred by limitation when the Official Receiver admitted the claim. On this reasoning the Court agreed with the conclusions reached by the lower Courts.

Holding and Implications

Holding: The Court dismissed the appeal and affirmed the conclusions of the lower Courts. The appeal was dismissed.

Implications:

The Court held that the exclusion in Section 78(2) applies only where the creditor's debt was proved during the pendency of the insolvency proceedings (i.e., between adjudication and annulment); a proof made after the order of annulment does not qualify for that exclusion.
Proof before an Official Receiver pursuant to a vesting under Section 37, after annulment, does not constitute proof within the insolvency proceedings so as to attract Section 78(2); the vesting under Section 37 is for a definite purpose and does not continue all insolvency proceedings or powers to receive proofs generally.
On the facts, there was no proof during the pendency and therefore the claim was time-barred; admitting the claim after that point did not revive the right to exclude the adjudication-annulment period from limitation.
The decision affirms existing statutory interpretation and prior authorities cited; the opinion does not purport to lay down a novel precedent beyond applying those principles to the facts of this case.

Judgment delivered by C.R.K (initials as in the original opinion). Appeal dismissed.

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Palaniyandi Mudaliar And Others v. Palanivel Mudali And Another

JUDGMENT

1. The question in this civil miscellaneous second appeal is one of limitation and it turns on the construction of Section 78 of the Provincial Insolvency Act.

2. The appellants are the legal representatives of the decree-holder in O.S No. 875 of 1926 on the file of the District Munsif Court, Tiruvannamalai. The final decree in the suit was passed on 19th December, 1929. The judgment-debtor was adjudged insolvent on 30th March, 1930. The adjudication was annulled under Section 43 of the Provincial Insolvency Act by an order of the Subordinate Judge of Vellore dated 7th December, 1942. Subsequent to the annulment on 26th March, 1943 an affidavit was filed by a clerk of the appellants in the Court of the Subordinate Judge of Vellore alleging that the appellants' father died on 8th August, 1941 and that an amount of Rs. 1600 was due to him by the insolvent under a decree in O.S No. 875 of 1926, Tiruvannamalai District Munsif Court. The appellants preferred an appeal against the order of annulment to the District Court, North Arcot and the learned District Judge by an order dated 18th August, 1943 confirmed the order of annulment, but he directed the vesting of the properties of the insolvent in the Official Receiver, North Arcot, for one year from 9th December, 1942 under Section 37 of the Provincial Insolvency Act. On 11th October, 1943, the appellants for the first time, filed an affidavit before the Official Receiver proving their claim and by an order dated 25th November, 1943, the Official Receiver admitted their claim. Tile legal representatives of the decree-holder filed E.P No. 469 of 1943 on 16th April, 1943 more than thirteen years after the final decree; but that execution petition was dismissed on 4th October, 1943 as not pressed. The present execution application was filed on 6th December, 1944. The application dated 16th April, 1943 is clearly barred by time unless the period between the date of adjudication and the date of annulment is excluded. Both the Courts held that in the circumstances of the case, the said period cannot be excluded in computing the period of limitation.

3. The learned counsel for the appellants contended that they are entitled to such exclusion under Section 78(2) of the Provincial Insolvency Act whether they proved their debt before annulment of the adjudication or after the annulment. The relevant provisions of Section 78 of the Provincial Insolvency Act read as follows:

“(2) Where an order of adjudication has been annulled under this Act, in computing the period of limitation prescribed for any suit or application for the execution of a decree (other than a suit or application in respect of which the leave of the Court was obtained under sub-s. (2) of S. 28) which might have been brought or made but for the making of an order of adjudication under this Act, the period from the date of the order of adjudication to the date of the order of annulment shall be excluded:

Provided that nothing in this section shall apply to a suit or application in respect of a debt provable but not proved under this Act.”

4. It will be seen that the decree-holder cannot rely on this section unless his claim is in regard to a debt provable but not proved under the Act. Section 33, Provincial Insolvency Act prescribes the procedure for proof of debts. Under that section when an order of adjudication has been made under the Act, all persons alleging themselves to be creditors of the insolvent in respect of debts provable under the Act shall tender proof of their respective debts by producing evidence of the amount and particulars thereof, and the Court shall, by order, determine the persons who have proved themselves to be creditors of the insolvent in respect of such debts, and the amount of such debts, respectively, and shall frame a schedule of such persons and debts. Section 34 gives the kind of debts provable under the Act. Under cl. (2) of the said section all debts and liabilities, present or future, certain or contingent, to which the debtor is subject when he is adjudged an insolvent, or to which he may become subject before his discharge by reason of any obligation incurred before the date of such adjudication, shall be deemed to be debts provable under this Act. Section 49 prescribes the mode of proof. It reads:

“(1) A debt may be proved under this Act by delivering, or sending by post in a registered letter, to the Court an affidavit verifying the debt.”

5. It has been held that S. 49 does not lay down the only method of proof of debt, but it only prescribes one of the modes in which a debt may be proved. A combined reading of these provisions makes it abundantly clear that these sections contemplate the proof of debts only between the date of adjudication and the date of the order of annulment. The scope of these provisions is limited to the pendency of the insolvency proceedings and the object is to facilitate the ascertainment of the amounts due to the various creditors for equitable distribution pursuant to the provisions of this Act. During the period, i.e, between the date of adjudication and the date of the annulment, the property of the insolvent vests in the Official Receiver for the benefit of the creditors and all personal remedies against the bankrupt are also thereafter stayed except as provided by S. 28(2). A very clear statement of the mutual rights of the creditors and the insolvent during that period is contained in the following passage in the judgment of Bacon C.J in Ex parte Lancaster Banking Corporation; In re Westby, (1878) 10 Ch. D. 776:

“When a bankruptcy ensues, there is an end to the operation of that statute, with reference to debtor and creditor. The debtor's rights are established and the creditor's rights are established in the bankruptcy, and, the statute of Limitation has no application at all to such a case, or to the principles by which it is governed.”

6. By enacting Section 78 of the Provincial Insolvency Act the Legislature recognised and adopted that principle. As the creditor's rights to proceed in the ordinary course are suspended, the period during which the rights are so suspended is excluded if the creditor adopted the relief given to him under the Act during that period. It is therefore clear that the proviso to S. 78 refers only to the debts proved during the pendency of the insolvency proceedings, i.e, from the date of the order of adjudication to the date of the order of annulment.

7. If so, the question to be considered is whether the appellants proved their debt before the annulment of the adjudication. Mr. Venkatarama Ayyar relied on the affidavit, Ex. P-7, filed on behalf of his clients in the Court of the Subordinate Judge on 26th March, 1943 and contended that by filing the said affidavit, the appellants proved their debt within the meaning of the Act. In that affidavit, the clerk of the appellants states that the amount due by the insolvent to the appellant's father was Rs. 1600 under the decree in O.S No. 875 of 1926, Tiruvannamalai District Munsif's Court and the said amount was shown in the insolvent's schedule of debts. It is stated, although there is no evidence, that the Court accepted that affidavit and recognised the appellants as the legal representatives of the deceased decree-holder. It also appears that the legal representatives preferred an appeal to the District Court which, as aforesaid, was dismissed by the District Judge with a modification vesting the properties in the Official Receiver for one year under Section 37 of the Act. It is not necessary to go into the question whether this affidavit constitutes a valid proof within the meaning of the Provincial Insolvency Act. Section 49 provides the mode of proof. There is a conflict of decisions on the interpretation of that section and the Madras High Court held in Manicka Nainar v. Murugesa Goundan, 1947-1 M.L.J 60 : (A.I.R (34) 1947 Mad. 331), that the operation of Section 78(2) of the Provincial Insolvency Act is not confined to the narrow limits of Section 49 of the Act, but can be applied where there exists on the record of the insolvency Court sufficient evidence to establish the debt due which the insolvency Court is bound to accept. Whether the allegations in the affidavit are sufficient evidence to establish the debt due which the insolvency Court is bound to accept it is not necessary to decide in this case as, in my view, this affidavit was filed after the annulment of adjudication and, therefore, could not be proof within the meaning of the Act.

8. Mr. Venkatarama Aiyar argued that as the order annulling the adjudication had not become final and as an appeal was filed and disposed of only on 18th August, 1943, the said affidavit proving the debt must be deemed to have been filed only before the termination of the insolvency proceedings by annulment. This argument overlooks the obvious fact that the appellate Court confirmed the order of annulment and the only modification in it related to the vesting of the property in the Official Receiver under S. 37. This affidavit having been filed after the order of annulment cannot be relied upon as proof of the debt before annulment.

9. It was next argued by Mr. Venkatrama Aiyar that the proof of the debt before the Official Receiver in whom the properties vested under Section 37 of the Provincial Insolvency Act would also give him the benefit of S. 78(2). I have already stated, the proof of debts under the Act is confined to the pendency of the insolvency proceedings. The scope of the yesting order after the annulment of adjudication under Section 37 of the Provincial Insolvency Act was considered in the Full Bench decision in Veerayya v. Srinivasarao, 58 Mad. 908 : (A.I.R (22) 1935 Mad. 826 F.B). King J. who delivered the leading judgment has enunciated the legal position in clear terms in the following manner:

“The fact that not only the Official Receiver but any other person may be appointed under S. 37 is against the view that an order under S. 37 continues the insolvency proceedings for all purposes. The person appointed under S. 37 has no longer by the mere fact of his appointment ??? powers which a receiver has under the Act. He has only such powers as are necessarily implied by the vesting order which are, as we understand them, to carry out the directions of the Court, and those directions, as we have said, should, so far as the realisation and distribution of the debtor's property are concerned, be in accordance with the provisions of the Insolvency Act. To this extent then we would answer the first question in the affirmative.”

10. It is, therefore, clear that the powers of the receiver or for the matter of that any other person in whom the properties are vested under S. 37 are derived only from the express orders of the Court and they are intended only for a particular purpose, viz., for the realisation and distribution of the debtor's property. The insolvency proceedings come to an end with the annulment and the subsequent vesting is only for a definite purpose, to avoid injustice, inter se the various creditors. The receiver's powers or those of any other person in whom the properties are vested are analogous to those of an ordinary receiver appointed in a suit. He would have no right to accept proofs of debts or pay any creditor whose debt has already become barred.

11. If, as I have already stated, there was no proof of the debt during the pendency of the insolvency, the debt was clearly barred when the Official Receiver admitted the claim of the appellants.

12. I, therefore, agree with the conclusions of the lower Courts and dismiss the appeal.

C.R.K/D.H

13. Appeal dismissed.

Palaniyandi Mudaliar And Others v. Palanivel Mudali And Another

Structured Summary of the Judgment

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellants' Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Palaniyandi Mudaliar And Others v. Palanivel Mudali And Another

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