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Case Number

A.A.A.O No. 34 of 1949.

Advocates

Mr. P.V Chelapathi Rao for Appt.
Mr. B.V Ramanarasu for Respt.

Judges

Panchapakesa Ayyar, J.

Acts

SECTION 50 PROVINCIAL INSOLVENCY ACT
Section 50, Insolvency Act,

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Smart Summary

Structured Summary of the Opinion (C.M.A. No. 23 of 1948)

Factual and Procedural Background

This civil miscellaneous second appeal challenged the judgment and decree of the District Judge, Guntur, dated 31-7-1948 in C.M.A. No. 23 of 1948. The appeal arose from an earlier order of the Subordinate Judge, Guntur, dated 19-1-1948, in I.A. No. 233 of 1947 within O.P. No. 54 of 1935. The respondent, Venugopala Rao, a creditor in I.P. No. 54 of 1935, applied for expunging two "whata" (khata) debts allegedly amounting to Rs. 9,135 in favour of the appellant, Subbamma, claimed from one Seetharamamma, from the schedule of proved debts.

The Subordinate Judge expunged the two debts and directed Subbamma to repay Rs. 2,689-4-0 that had been paid to her by the Official Receiver as dividend on those expunged debts, with interest up to realisation. The District Judge confirmed the Subordinate Judge's order, accepting the factual findings that the claimed debt was both time-barred and a fraudulent revival of a settled liability fixed at Rs. 4,426-6-0 by a settlement of accounts dated 12-2-1935 (which had a promissory note and had already been allowed in the insolvency petition).

The Official Receiver had admitted the later claim (the larger amount) and paid dividends on it; subsequently, the respondent, at the Official Receiver's direction, moved the Insolvency Court to have the debt expunged. The appellant did not object in the lower courts to the respondent filing such a petition and only raised the objection belatedly in this second appeal.

Legal Issues Presented

Whether the Insolvency Court can order dividends paid on time-barred debts, expunged from the schedule, to be put back into Court.
Whether the Official Receiver, like a full owner, can acknowledge and pay at his will and pleasure time-barred debts.
Whether a creditor, authorised and directed by the Official Receiver, can file a petition under Section 50, Provincial Insolvency Act, in the Insolvency Court to have debts incorrectly or improperly admitted expunged from the schedule and obtain a valid order.

Arguments of the Parties

Appellant's Arguments

The orders of the lower courts were illegal because the debt was expunged under Section 50 of the Provincial Insolvency Act on the application of a "creditor" (the respondent) and not on an application by the Official Receiver.
Once a dividend had been paid, it could not be directed to be refunded even though it had been paid in respect of a time-barred and expunged debt (relying on the decision of Somayya J. in Gangaraju v. Lakshminarayanamurthi).
The Official Receiver, as the full owner of the insolvent's property vested in him, could acknowledge and pay time-barred debts; consequently, the Court could not order refund of dividends knowingly paid by the Official Receiver.

Respondent's / Official Receiver's Position (as reflected in the opinion)

The respondent filed the petition in the Insolvency Court at the specific direction of the Official Receiver; the respondent must be taken to have acted as the Official Receiver's agent in bringing the petition under Section 50.
The Official Receiver initially admitted and paid the dividend on the later claim through oversight and lack of sufficient scrutiny of the accounts; upon objection, the Official Receiver sought that the debt be expunged and asked the respondent to move the Court for expunging it.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Gangaraju v. Lakshminarayanamurthi, ILR (1942) Mad 879; AIR (29) 1942 Mad 644	Authority relied upon for the proposition that a dividend paid cannot be recovered solely because the debt in respect of which it was paid has been expunged.	The Court considered and rejected the application of this ruling to the present facts because the present case involved a dividend paid in respect of a settled, non-existent and dishonestly revived debt, distinguishing the situation from the principle stated in Somayya J.'s ruling.
Chandrayya v. Chinnappareddi, 1941 MWN 489; AIR (28) 1941 Mad 753	Authority supporting the power of the insolvency court to order dividends paid on expunged or improper claims to be returned to court.	Cited by the Court as supporting the proposition that the insolvency court has the right and duty to order repayment into court of dividends improperly paid on claims that should not have been admitted.
Narahari Ramanamma v. Official Receiver, Kistna, 1946-2 M L J 105; AIR (33) 1946 Mad 500	Indian authority cited for the principle that dividends paid on improper or improperly admitted claims may be ordered to be restored to the estate.	Relied upon by the Court as further support (along with English authorities) for the position that the insolvency court can compel repayment of dividends paid on invalid or improperly admitted claims.
In re Ramachandra Ganujee, 104 IC 378; 29 Bom LR 1167	Bombay High Court authority cited in support of the insolvency court's power to require restoration of dividends paid on improper claims.	Used by the Court as additional persuasive authority corroborating the proposition that dividends paid on improper or non-existent claims can be ordered back into the Court.

Court's Reasoning and Analysis

The Court proceeded from two accepted factual findings: (1) the alleged debt of Rs. 9,135-6-0 was time-barred ('khata' debt) and (2) it represented a fraudulent revival by interpolations and insertions, given that a settlement dated 12-2-1935 fixed the liability at Rs. 4,426-6-0 (for which a promissory note existed and had already been allowed in the insolvency petition). The Court indicated no reason to differ from the District Judge's factual conclusions, which were reinforced by documentary signs of tampering and by the chronology of claims (the smaller lawful claim being proved years before the later larger claim).

The Court then addressed the three legal contentions raised by the appellant:

On the procedural argument that the petition under Section 50 should have been presented by the Official Receiver and not by a creditor: the Court acknowledged the substantive force of the contention (and the general legal point that the Official Receiver should not improperly delegate statutory powers), but refused to allow the belated challenge because the appellant had not raised this point in the lower courts. Moreover, the Court treated the respondent's filing as occurring at the Official Receiver's direction and as the respondent acting as the Official Receiver's agent. Because the objection was not taken earlier and the lower courts had permitted the respondent to proceed, the Court characterized the defect as an irregularity which did not vitiate the proceedings.
On the question whether a dividend once paid can be ordered to be refunded when it was paid in respect of a time-barred and expunged debt: the Court distinguished the present facts from the precedent relied upon by the appellant (Somayya J.'s decision in Gangaraju). The Court emphasized that while a genuinely time-barred debt is not extinguished in law (only the remedy is), a debt that has been settled or given up has effectively "no existence." Payment of a dividend in respect of such a settled and non-existent debt amounts to obtaining estate funds by wrongful means (comparable to cheating or false pretences). Thus, in such circumstances, the insolvency court has both the right and the duty to order that dividends paid on the invalid claim be restored to the estate. The Court supported this conclusion by reference to English and Indian authorities (cited in the table above).
On the argument that the Official Receiver was a "full owner" and therefore could acknowledge and pay time-barred debts at will: the Court rejected this position emphatically. It held that the Official Receiver is a trustee for the collective body of creditors and does not have the powers of an absolute owner to spend estate funds, make gifts, or admit and pay claims that are not binding on the estate (including those defeated by limitation or settled away). Allowing such powers would prejudice genuine creditors by permitting the inclusion of time-barred or invalid claims at the expense of valid creditors.

Applying these legal conclusions to the facts, the Court found that the lower appellate court's judgment and decree correctly expunged the bogus claim and ordered restoration of the dividends paid. The Court thus affirmed those courts' decisions.

Holding and Implications

Holding: The Court confirmed the judgment and decree of the lower appellate court and dismissed the civil miscellaneous second appeal, without costs. Leave to appeal was refused.

Implications:

The direct effect on the parties: the order expunging the bogus/time-barred revived debt stands, and the appellant (Subbamma) is required to refund the dividends she had received on that claim (as previously ordered by the lower court), subject to the previously stated interest direction in the Subordinate Judge's order.
The Court treated the procedural irregularity of a creditor filing the petition at the Official Receiver's direction as not going to the root of the matter because the appellant failed to raise that point in the lower courts; accordingly, this belated procedural contention did not overturn the substantive decision.
Although the Court relied on existing English and Indian authorities to support its view that dividends paid on invalid or non-existent claims may be ordered restored, the opinion does not purport to announce a novel rule of law beyond applying those principles to the present facts.

This summary is drawn exclusively from the text of the provided opinion. No information has been added beyond what the opinion itself contains.

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Kakumanu Venkatasubbamma v. Kakumanu Venugopala Rao, (Died) And Others.

1. This civil misc. second appeal is against the judgment & decree of the Dist. J., Guntur, dated 31-7-1948, in C. M. A. No. 23 of 1948, & raises three important questions: (1) Whether the Insolvency Ct. can order dividends paid on time-barred debts, expunged from the schedule, to be put back into Ct.; (2) Whether the Official Receiver, like a full owner, can acknowledge & pay at his will & pleasure time-barred debts; & (3) whether a creditor, authorised & directed by the Official Receiver can file a petn. under Section 50, Provincial Insolvency Act, in the Insolvency Ct., to have debts incorrectly or improperly admitted expunged from the schedule & get a valid order.

2. C. M. A. No. 23 of 1948 was an appeal against the order of the Subordinate Judge, Guntur, dated 19-1-1948, in I. A. No. 233 of 1947, in O. P. NO. 54 of 1935, an appln. of the resp., Venugopala Rao, a creditor of the insolvent in I. P. No. 54 of 1935 on the file of the Subordinate Judge, Guntur, to expunge two 'whata' debts amounting to Rs. 9135 said to be due to the applt. Subbamma, from one Seetharamamma, from the schedule of proved debts. The learned Subordinate Judge expunged these two debts & directed the applt., Subbamma, to repay the sum of Rs. 2689-4-0, paid by the Official Receiver, Guntur, to her as dividend on these expunged debt, with interest thereon up to the date of realisation. The learned Dist. J. confirmed the order of the Subordinate Judge as he had no hesitation in agreeing that it was correct. He has given two reasons for supporting the expunging of the debts, firstly, that they are 'khata' debts which became barred on 9-4-1932, &, secondly, that there was obviously an interpolation & subsequent insertion in the accounts of the applt. in a desperate attempt to revive these debts which were given up for good by the applt. at the settlement of accounts, with Seetharamamma, on 12-2-1935 When the entire sum due by Seetharamamma to the applt. was fixed at Rs. 4426-6-0 for which a promissory note was executed, which promissory note had already been allowed for in the insolvency petn., & dividend paid therefor. In other words, the learned Dist. J. considered that this alleged debt of Rs. 9135-6-0 was not only time-barred, even if true, but it was also given up at the settlement of accounts on 12-2-1935 & was sought to be fraudulently revived & claimed by interpolations & subsequent insertions in the accounts, a conclusion which the Subordinate Judge too arrived at. I see no reason to differ from these two findings of fact by the learned Dist. J., & the question of law has to be considered with reference to these two facts.

3. I may add that the learned Dist. J's finding regarding the bogus nature of the debt of Rs. 9135-6-0 sought to be dishonestly revived is supported not only by the tell-tale over-writings etc. in the accounts, but also by the curious fact that the debt of Rs. 4426-6-0 due really to the applt., Subbamma, as per the settlement of accounts dated 12-2-1935, was claimed by her 'nearly three years before this alleged additional debt of Rs. 9135-6-0 was claimed by her in the insolvency proceedings'. There can be no explanation at all for this except on the basis that she too was aware that only Rs. 4426-5-0 was the debt really due to her, & that she therefore proved that debt first & drew the dividend in respect of it, & waited for a sufficiently long time before coming forward with the subsequent fraudulent claim regarding the abandoned debt of Rs. 9135-6-0. The Official Receiver could have easily seen this subsequent claim to be fraudulent if he had looked into the accounts carefully & taken note of two significant facts, namely, that the settlement of accounts on 12-2-1935 settled the liability of Seetharamamma only at Rs. 4426-6-0, regarding which a promisory note was executed, & that that amount alone was claimed in the Insolvency Petition at first, the bogus claim regarding Rs. 9135-6-0 being made three years later, namely, on 6-10-1945. But, as usually happens, the Official Receiver was not careful enough, & admitted the subsequent claim in respect of this settled or abandoned debt of Rs. 9135-6-0, & paid the dividend in respect of it too. Later on, the resp. objected to the inclusion of this bogus debt, & the Official Receiver called upon the applt. to produce her accounts or sufficient evidence to show that the debt of Rs. 9135-6 was really due to her. In spite of eight or nine adjournments given to the applt she failed to produce the accounts or other evidence before the Official Receiver & convince him that her claim in respect of this Rs. 9135-6-0 was true. That, even if it was true, it was time-barred ages ago, is obvious.

4. The Official Receiver was now in a quandary. He had admitted this bogus debt as genuine, & had disbursed Rs. 2689-4-0 of the trust monies of the insolvent's estate in his hands in respect of this bogus claim. So, he did not himself file in the Insolvency Ct. an appln. under Section 50, Insolvency Act, for expunging this bogus debt, allowed by him to be entered in the schedule of creditors erroneously, but asked the present resp., by his order dated 23-12-1946, to move the Insolvency Ct. for such expunging. The resp. moved the Subordinate Ct., Guntur, the Insolvency Ct., by I. A. No. 233 of 1947. The Ct. allowed him to put in a petn. without the least objection by the present applt., & ultimately expunged the debt & ordered the applt. to refund the dividend already drawn by her. Even in the appeal before the Dist. J.,. the appellant did not raise any objection to the Official Receiver's not putting in a petn. himself under Section 50, Insolvency Act, and allowing the resp. to put in such a petn. It is only in this civil misc second appeal that this ground has been taken belatedly.

5. On the merits, I have absolutely no doubt that the learned Dist. J. was quite right in holding this claim for Rs. 9135-6-0 to be not only time-barred but also a fraudulent revival of a settled or abandoned debt. But Mr. Chalapathi Rao, for the applt., has raised three legal grounds before me against the lower appellate Ct's order. The first is that the orders of both the Cts. below were illegal because the debt was expugned under Section 50, Provincial Insolvency Act, on the appln. of a 'creditor', & not upon the appln. of the Official Receiver. This contention has considerable force in it, though I cannot agree with it & quash the orders of the lower Cts. in the circumstances of this case. Firstly, it was not raised in either of the Cts. below, & cannot be allowed to be raised for the first time in this civil misc. second appeal after the applt. has tried her luck on merits' in both the Cts. below & failed. Secondly, the resp. must, in the light of the Official Receiver's directions to him to file this petn., be taken to have filed the petn. in the Ct. only as an agent of the Official Receiver & on his specific directions. It was urged by Mr. Chalapathi Rao that the Official Receiver cannot be allowed to delegate his statutory power thus & that his permission or direction is of no avail. There is force in this. But, as the applt. did not raise this objection before the Sub-Judge or Dist. J., & those Cts. also allowed the resp. to proceed with the petn. & appeal, I consider this to be only an irregularity not going to the root of the matter & vitiating the entire proceedings & necessitating the allowance of such a belated legal contention taken for the first time in this civil misc. second, appeal.

6. The second contention was that, once a dividend had been paid, it could not be, directed to be refunded even though it had been paid in respect of a time-barred & expunged debt, though no more dividend need be paid in respect of that expunged debt. Reliance was placed on the ruling of Somayya J, in 'Gangaraju v. Lakshminarayanamurthi', ILR (1942) Mad 879: (AIR (29) 1942 Mad 644). This ruling has been considered & rejected by the lower appellate Ct., &, in my view, rightly, because in this case it is not merely the payment of a dividend in respect of an expunged debt, but the payment df a dividend in respect of a 'settled and non-existent & time-barred' debt. Somayya J. simply said that a dividend paid could not be recovered on 'the sole ground' that the debt in respect of which it was paid had been expunged. No doubt, a time-barred debt is not 'extinguished' in law but only the remedy to recover it is extinguished. But a debt which has been settled or given up years ago, like this debt, has 'no existence', & any dividend claimed & taken away in respect of it by a person, like the applt. will be in the nature of taking by cheating or by false pretences, & in the nature of stolen property, & can be ordered to be put back into Ct., even if the law is that the dividend paid in respect of a genuine & subsisting time-barred debt cannot be. Indeed, the applt. ought to thank her stars that she was not ordered to be prosecuted in addition, for dishonestly passing off such a settled & nonexistent time-barred debt as a genuine & subsisting one. I have not the least doubt that the insolvency Ct. has got not only the right, but also the duty, to order dividends paid on time-barred debts expunged by it from the schedule to be put back into Ct. There is clear authority, English & Indian, for that position. The rulings of Venkataramana Rao J. (who has relied on English rulings also) in 'Chandrayya v. Chinnappareddi, 1941 MWN 489: (AIR (28) 1941 Mad 753), of Rajamannar J. (as he then was) in 'Narahari Ramanamma v. Official Receiver, Kistna', 1946-2 M L J 105: (AIR (33) 1946 Mad 500); & of the Bombay High Court in 'In re Ramachandra Ganujee', 104 IC 378: (29 Bom LR 1167) show this beyond the shadow of a doubt. The facts in those cases were a bit different from the facts in one case, but nothing turns on those facts regarding this point.

7. The third contention of Mr. Chalapathi Rao was that the Official Receiver was a full owner of the insolvent's property, which vested in him, &, so, like any other full owner, could, at his will & pleasure, acknowledge & pay time-barred debts, as he did, & the Ct. could not order a refund of the dividend he knowingly & willingly paid in respect of them. I cannot agree at all. The Official Receiver never paid the dividend in this case knowing the debt to be time-barred & settled. Besides, he is a 'trustee' in respect of the entire body of creditors & has no power at all, like 'ordinary full owners', to spend the money on himself, or to make a gift of it to others, however deserving, or to acknowledge or pay time-barred debts, or settled debts, or other debts not binding on the insolvent's estate under the law, including the law of limitation. Otherwise, the Official Receiver can include any number of time-barred debts in the schedule, & the insolvent's genuine creditors, whose debts are not time-barred, will get only a pittance along with persons whose worthless claims have been hopelessly barred years & years ago! Of course, in this case, it is not even a genuine time-barred debt, but a debt given up & 'extinguished long ago' & revived 'dishonestly'.

8. All the contentions of the learned counsel for the applt. have failed, & I am satisfied that the lower appellate Ct's judgment & decree are correct & proper, & so confirm the same & dismiss this civil misc. second appeal, taut without costs, as the legal point under Section 50, Provincial Insolvency Act, has not been raised in the lower Cts. & has not been considered by either of the Cts. below, & this must have been the main reason inducing the applt.

to file the civil Misc. Second Appeal. Leave re fused.

Kakumanu Venkatasubbamma v. Kakumanu Venugopala Rao, (Died) And Others.

Structured Summary of the Opinion (C.M.A. No. 23 of 1948)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments

Respondent's / Official Receiver's Position (as reflected in the opinion)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Kakumanu Venkatasubbamma v. Kakumanu Venugopala Rao, (Died) And Others.

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