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Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • For the Appellant: E.Subrahmanyam, P.Suryanarayana, Advocates.
Judges
  • Gopal Rao Ekbote, J.
Acts
  • section 47(3) of the Provincial Insolvency Act.
  • fact, sub-section (3) of section 47
  • Section 59 read with section 47
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • For the Appellant: E.Subrahmanyam, P.Suryanarayana, Advocates.
Judges
  • Gopal Rao Ekbote, J.
Acts
  • section 47(3) of the Provincial Insolvency Act.
  • fact, sub-section (3) of section 47
  • Section 59 read with section 47
See more information ...
Smart Summary

Legal Opinion Summary

Factual and Procedural Background

This revision petition challenges the judgment of the District Judge delivered on 10th December, 1962, which disallowed the petitioner's appeal and confirmed the decision of the Subordinate Judge, Kurnool.

The material facts set out in the opinion are:

  • Three persons — Medahal Pedda Rangappa, Lakshminarayana and Venkayya — were adjudged insolvent.
  • The petitioner, G. Syamala Bai, was a mortgagee in respect of certain properties of the insolvents.
  • The second respondent, Y. Panchaksharayya, was another mortgagee in respect of a different property.
  • The first respondent was the Official Receiver administering the insolvents' estate.
  • In I.P. No. 40 of 1955 the second respondent filed a memo (Exhibit B-1) on 10 April 1956 valuing his mortgaged property at Rs. 45,350 and stating he had no objection to the property being sold free of the mortgage provided a lien was retained on the sale price to secure payment of that amount.
  • The Official Receiver obtained the Sub-Court's permission and sold the mortgage property free of encumbrance; the property fetched a sale price.
  • The second respondent applied to be paid Rs. 45,350 (his assessed value) out of the sale proceeds. The petitioner resisted, contending that by consenting the mortgagee had relinquished his security and should rank only as an ordinary creditor.
  • The Official Receiver directed payment to the second respondent as a secured creditor; the petitioner appealed to the Subordinate Judge, who rejected the appeal, holding the mortgagee had not relinquished his security and was entitled to preferential payment under section 47(3) of the Provincial Insolvency Act. The District Judge confirmed that view. The present revision petition challenges those decisions.

Legal Issues Presented

  1. Whether the second respondent (the mortgagee) by stating he had no objection to the property being sold free of mortgage (subject to a lien on the sale price for his assessed value) must be treated as having relinquished his security and therefore rank only as an ordinary creditor.
  2. Whether the Official Receiver had the power to sell the mortgage property free of encumbrance, with the permission of the Court, and to direct preferential payment to the mortgagee out of the sale proceeds — in particular, the proper application of sections 28, 47 and 59 of the Provincial Insolvency Act to that course of action.
  3. How the precedents cited (notably Kanniappa Mudali v. Raju Chettiar and Gopal Gunaji v. Balaji) affect the construction of the mortgagee's consent and the validity of preferential payment out of sale proceeds.

Arguments of the Parties

Petitioner's Arguments (as presented in the opinion)

  • Mr. E. Subrahmanyam, counsel for the petitioner, argued that the second respondent must be considered to have relinquished his security by his conduct and memo; consequently he cannot be given any preference in payment out of the sale proceeds and must rank only as an ordinary creditor.
  • The petitioner further contended that the Official Receiver ought not to have accepted the second respondent's offer and sold the property free of encumbrances in a way that would enable the mortgagee to claim preferential payment.
  • The petitioner relied on the decision in Kanniappa Mudali v. Raju Chettiar (1924 47 M.L.J 16; I.L.R 1924 47 Mad. 605) in support of the relinquishment argument.

Positions reflected for Respondents / Official Receiver (as recorded in the opinion)

  • The second respondent's memorandum (Exhibit B-1) expressed an assessed valuation (Rs. 45,350) and stated he had "no objection" to sale free of mortgage provided a lien on the sale price secured his assessed amount — i.e., the second respondent sought preferential payment out of the proceeds to the extent of his assessed value.
  • The Official Receiver acted on that memorandum, obtained court permission, sold the property free of encumbrance, and directed payment of Rs. 45,350 to the second respondent as a secured creditor. The Official Receiver rejected the petitioner's contention that the mortgagee had relinquished his security.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Kanniappa Mudali v. Raju Chettiar, 1924 47 M.L.J. 16; I.L.R. 1924 47 Mad. 605 Relied upon by the petitioner to argue that a mortgagee's consent (or conduct) to sale free of mortgage may amount to relinquishment of the security and hence loss of secured status. The court held that the facts of Kanniappa Mudali were materially different and that the quoted passage did not support the petitioner's construction. The court observed that the passage actually indicates that where there is an agreement by the mortgagee to accept proceeds in discharge of the debt, a sale free from encumbrance cannot be objected to. The court concluded Kanniappa Mudali does not mandate treating the mortgagee as having relinquished security in the present facts.
Gopal Gunaji v. Balaji Considered the effect of the Madras decision (Kanniappa Mudali) and commented on the significance of the mortgagee's consent; used in discussion of whether the Insolvency Court can comply with a mortgagee's request to sell free and recover mortgage debts from sale proceeds. The court cited observations from this case noting that the Madras decision's remarks were based mainly on the mortgagee not having given consent. The present court accepted the proposition (attributed in this context to a Nagpur decision referred to in the cited case) that where a mortgagee desires sale free of mortgage and recovery of mortgage debt from sale proceeds, the Insolvency Court is competent to comply. The court treated this authority as supportive of the result below.

Court's Reasoning and Analysis

The court's analysis proceeds by a textual reading of the relevant statutory provisions and application of those provisions to the undisputed facts (primarily Exhibit B-1 and the subsequent sale).

  1. Statutory framework:
    • Section 28(6) of the Provincial Insolvency Act preserves the power of any secured creditor to realise or otherwise deal with his security in the same manner as if the order of adjudication had not been passed.
    • Section 47 provides three indicated alternatives for secured creditors:
      • (a) realise the security and prove for the balance after deducting the net amount realised;
      • (b) relinquish the security for the general benefit of creditors and prove for the whole debt; or
      • (c) where the secured creditor neither realises nor relinquishes, state particulars and an assessed value of his security in his proof and receive a dividend only in respect of the balance after deducting that assessed value.
    • Section 47(4) allows the Court, before realisation, to redeem the security on payment to the creditor of the assessed value. Section 47(6) excludes a secured creditor from a dividend if he fails to comply with section 47's requirements.
    • Section 59 confers wide powers on the Official Receiver, including the power to sell any part of the insolvent's property and to mortgage or pledge property to raise money for payment of debts.
  2. Interpretive conclusions drawn by the court:
    • A secured creditor is not automatically affected by insolvency adjudication and retains the freedom to pursue common-law remedies or to participate in insolvency procedures under section 47.
    • Section 47 is designed to benefit the mortgagee by providing alternatives; it does not operate to the mortgagee's detriment.
    • Exhibit B-1 contained no language signifying relinquishment of the security; it expressed a qualified consent to sale free of encumbrance coupled with a claim for preferential payment to the assessed value. The court reads these words as not amounting to relinquishment.
    • There is no provision in the Act forbidding sale of a mortgaged property free of lien provided the mortgagee is preferentially paid out of the sale proceeds; indeed section 47(3) supports payment from sale proceeds where the security is valued.
    • Section 59, when read with section 47, authorises the Official Receiver, with the Court's permission, to sell the security free of encumbrance and secure preferential payment to the mortgagee up to the assessed value. The court found nothing illegal or excessive in the Official Receiver's conduct in this case.
  3. Consideration of authorities:
    • The court examined Kanniappa Mudali v. Raju Chettiar and rejected the petitioner's reliance on it as supporting the idea that consent to sale necessarily equates to relinquishment; the court considered the facts of that case materially different and read the quoted passage as permitting a sale free of encumbrance where there is an agreement to accept proceeds in discharge of the debt.
    • The court referred to Gopal Gunaji v. Balaji and related observations, accepting the proposition (as stated in the cited authority) that where a mortgagee desires a sale free from mortgage rights and recovery of the mortgage debt from sale proceeds, the Insolvency Court is competent to comply with that desire.
  4. Conclusion of analysis:
    • Given the statutory scheme and the content of Exhibit B-1, the mortgagee did not relinquish his security and was entitled to preferential payment up to the assessed value of Rs. 45,350 out of the sale proceeds.
    • Accordingly, the decisions of the Subordinate Judge and the District Judge upholding the Official Receiver's action were free of legal flaw, and the revision petition had to be dismissed.

Holding and Implications

Holding: The revision petition is dismissed. The court upheld the view of the lower courts that the second respondent did not relinquish his mortgage and was entitled to preferential payment from the sale proceeds in the amount he had assessed (Rs. 45,350). The dismissal was made with costs as recorded in the opinion.

Implications:

  • Direct effect on the parties: The Official Receiver's sale (with the Sub-Court's permission) of the mortgaged property free of encumbrance and the preferential payment to the second respondent up to his assessed value were validated. The petitioner's challenge failed and the prior appellate decisions were confirmed.
  • Scope as precedent: The court's reasoning rests on statutory construction of sections 28, 47 and 59 of the Provincial Insolvency Act and on distinguishing the facts of the authorities relied upon by the petitioner. The opinion does not state that it establishes a new, broader rule beyond applying those provisions to the presented facts; instead it affirms that a mortgagee's expressed consent to a sale free of encumbrance coupled with a claim for preferential payment does not inevitably amount to relinquishment of security under the Act.

This summary reflects only the content and reasoning contained in the provided opinion and does not add information beyond that text.

Show full summary ...

    Smt. Syamala Bai Petitioner v. The Official Receiver, Kurnool And Another

    1. This Revision Petition is directed against, the judgment of the District Judge given on 10th December, 1962, whereby he disallowed the appeal filed by the petitioner before me and confirmed the judgment of the Subordinate Judge, Kurnool.

    2. The necessary facts are that Medahal Pedda Rangappa, Lakshminarayana and Venkayya were adjudged insolvents. The petitioner G. Syamala Bai is a mortgagee of the insolvents in respect of certain properties. The second respondent Y. Panchaksharayya is another mortgagee of the insolvents in respect of a different property. The first respondent is the Official Receiver who is administering the estate of the insolvents.

    3. In I.P No. 40 of 1955, the second respondent filed a memo on 10th April, 1956 (Exhibit B-1) stating therein that he valued the property at Rs. 45,350 and that he has no objection to the property being sold free of mortgage with a lien on the sale price. The Official Receiver was requested to obtain the necessary permission from the Sub-Court. The Official Receiver sought the permission of the Sub-Court, which permission was granted. In pursuance of this permission, the mortgage property was sold free of any encumbrance and it fetched a certain amount. The second respondent-mortgagee filed an application to pay the amount of Rs. 45,350 as assessed by him in his memo. Exhibit B-1. This application was resisted by the petitioner on the ground that the mortgagee has relinquished his security and therefore he ranks only as an ordinary creditor. He cannot be paid preferentially out of the sale proceeds of the property which was mortaged to him. The Official Receiver rejecting the contention of the petitioner directed the amount to be paid to the second respondent in pursuance of his mortgage is a secured creditor. The petitioner therefore took the matter in appeal before the Subordinate Judge, Kurnool. His appeal however was rejected. It was held by the Subordinate Judge that the mortgagee the second respondent had not relinquished his security, that the sale is valid and that he is entitled to be preferentially paid as a secured creditor under section 47(3) of the Provincial Insolvency Act. The same view was confirmed in appeal preferred by the petitioner by the District Judge, Kurnool.

    4. The principal contention of Mr. E. Subrahmanyam, the learned Counsel for the petitioner is that the second respondent must be considered to have relinquished his security; he cannot therefore be given any preference in payment out of the sale proceeds recovered by sale of the mortgage property. His contention is that the Official Receiver could not have accepted the offer made by the second respondent and sold the property free of any encumbrances. Although the sale by the Official Receiver is valid, his contention is that the second respondent can be ranked only as an ordinary creditor and not a secured creditor. Reliance in support of this contention was placed on Kanniappa Mudali v. Raju Chettiar . 1924 47 M.L.J 16; I.L.R 1924 47 Mad. 605..

    5. In order to understand the implications of this contention, it is necessary to read sections 28, 47 and 59 of the Provincial Insolvency Act, hereinafter called the Act.

    6. Section 28 of the Act gives the effect of an order of adjudication. According to sub-section (6) of that section, nothing in that section affects the power of any secured creditor to realise or otherwise deal with his security in the same manner as he would have been entitled to realise or deal with it if that section had not been passed.

    7. Section 47 which relates to the secured creditors enjoins that where a secured creditor realises his security, he may prove for the balance due to him after deducting the net amount realised. Secondly, where a secured creditor relinquishes his security for the general benefit of the creditors, he may prove for his whole debt; and thirdly, where a secured creditor does not either realise or relinquish his security he shall before being entitled to have his debt entered in the schedule, state in his proof, the particulars of his security and the value at which he assesses it and shall be entitled to receive a dividend only in respect of the balance due to him after deducting the value so assessed.

    8. According to sub-section (4) of that section where a security is so valued, the Court may at any time before realisation redeem it on payment to the creditor of the assessed value. Sub-section (6) states that where a secured creditor does not comply with the provisions of this section, he shall be excluded from all share in any dividend.

    9. Section 59 of the Act concerns itself with the duties and powers of the Receiver. According to that provisions he has power to sell all or any part of the property of the insolvent, apart from other powers mentioned in the section. He can mortgage or pledge any part of the property of the insolvent for the purpose of raising money for the payment of his debts.

    10. A reading of these provisions would reveal that a secured creditor is not affected by any order of the Insolvency Court. He has the freedom either to subordinate himself to the jurisdiction of the Insolvency Court or keep himself aloof and follow the remedies which are available to him under the common law. Under section 47 however he has got three alternatives to take advantage of the insolvency proceedings. He can as stated earlier prove for the balance due to him after deducting the net amount realised or he can relinquish his security for the general benefit of the creditors and then he will be permitted to prove his whole debt; or he can assess his security and he shall be entitled to receive a dividend only in respect of the balance due to him after deducting the value so assessed. It is clear from section 47 that the Court before the security is realised can always redeem a mortgage on payment to the creditor of the assessed value as per sub-section (4).

    11. Under section 59, the powers of the Official Receiver are very wide. It is true that equity of redemption in such cases vests in him, but he has powers to redeem the mortgage or sell the equity of redemption.

    12. It will be thus plain that what section 47 provides is only for the benefit of the mortgagee and not to his detriment. He can follow any one of the three procedures suggested in the section. In this case, I dont think it can be validly argued that the mortgagee has relinquished his security. Exhibit B-1 makes it clear that he had no objection if the property is sold free of mortgage but a lien is kept in so far as the value he had assessed is concerned and is preferentially paid out of the sale proceeds. There are no words, in Exhibit B-1 which warrant any conclusion that the mortgagee had relinquished his security. There is no prohibition in section 47 or any other provision of the Act forbidding the sale of a mortgage property free of lien, providing at the same time preferential payment to the mortgagee out of the sale proceeds. In fact, sub-section (3) of section 47 lends support to this method of payment to the mortgagee. If the Official Receiver proceeds to sell the security, the Court first has to pay the amount at which, the security was valued to the secured creditor out of the sale proceeds. Whatever may be position in regard to the balance in so far as the value of his assessment is concerned, he can be preferentially paid out of the sale proceeds. Merely because section 47 gives three alternatives it cannot be inferred that the Official Receiver has no power to sell the security free of encumbrance with the permission of the Court and pay the mortgagee first out of the sale proceeds of the security. Section 59 read with section 47 authorises the Official Receiver to take such a step with the permission of the Court. I find nothing illegal in such an action on the part of the Official Receiver. The mortgagee cannot be said in such circumstances to have relinquished his mortgage; nor can it be argued that thereafter he ranks only as an ordinary creditor. He has to be therefore paid preferentially from the sale proceeds of the security. In this case, it is dear that he had assessed the value of his security at Rs. 45,350 and it is that amount which is preferentially paid to him.

    13. I think that action is well supported by section 47(3) read with section 59 of the Act. The Official receiver cannot be accused of exercising any excessive power in following the procedure which he had followed in holding the sale of the property free of mortgage. It was not disputed that the sale was valid. If the sale was valid, I fail to see how could the mortgagee be deprived of his security, particularly when he had not relinquished. The property was sold with a clear understanding that the mortgagee will be paid first from the sale proceeds. This mode of realisation of security is not in my view derogatory either to section 47 or to section 59 of the Act.

    14. It is difficult to agree with the contention that Kanniappa Mudali v. Raju Chetliar, holds that in such circumstances the mortgagee would be deemed to have relinquished his security. The facts of that case are far removed from those of the present case. What had happened in that case was that the Official Receiver gave a notice to the mortgagee stating that he proposes to sell the properties free from the mortgage and called upon the mortgagee to give his consent. He added that if no consent is expressed within a specified time he would take it that the mortgagee had consented to his proposal. Since no consent was expressly conveyed the Official Receiver proceeded to sell the property. The mortgagee thereupon instituted a regular suit for recovery of his mortgage on the foot of the mortgage deed. Their Lordships held that the right of the mortgagee to institute the suit is not taken away merely because the Official Receiver gave a notice in a particular manner. Their Lordships also stated that it cannot be said that the mortgagee had relinquished his security. Reliance however was placed by the advocate for the petitioners on the following passage of the judgment:

    “But it seems to us that a sale by mortgagor without a relinquishment by the mortgagee, but merely with the consent of the mortgagee expressed in an unregistered document, cannot be valid unless the facts amount to an authorisation of the mortgagor to sell on the mortgagee's behalf or to an agreement by the mortgagee to accept such sum as may be realised in the sale in discharge of his debt.”

    15. I do not see how it can be said from the above said passage that the mortgagee would be deemed to have relinquished his security or that if he gives such permission he can be ranked only as an ordinary creditor. Far from any such thing, in fact this passage goes against the construction sought to be placed on the said decision by the learned Advocate for the petitioner. It clearly observes that if there is an agreement by the mortgagee to accept such sum as may be realised in the sale in discharge of his debt, a sale free from encumbrances cannot be objected to.

    16. This case was considered in Gopal Gunaji v. Balaji. His Lordship observed:

    “There are remarks in Kannappa Mudali v. Raju Chettiar . 1924 47 M.L.J 16; I.L.R 1924 47 Mad. 605. which support the view taken by the learned trial Judge. But the decision is mainly based on the fact that the mortgagee did not consent, and the remarks are not supported by detailed argument.”

    17. With due respect to the learned Judge, I do not think that the remarks referred to in any way support the view canvassed by the learned Advocate for the petitioner here as was held by the lower Court in that case. The above said observation in the Madras case as stated earlier supports the view that with the consent of the mortgagee a security can be sold by the Official Receiver, of course with the permission of the Court, free of encumbrances, and the mortgagee can be preferentially paid out of the sale proceeds. It is however true that the above said Madras decision is mainly based on the fact that the mortgagee did not give any consent. His Lordship in the above cited Nagpur case in a similar situation considering the provisions of the Insolvency Act held that:

    “where a mortgagee desires that the mortgage property of the insolvent mortgagor may be sold free from mortgage rights and the mortgage debts should be recovered from the sale proceeds the Insolvency Court is competent to comply with his request.”

    18. With due respect, I accept that proposition of law as correct, and I do not find that Kannappa Mudali v. Raju Chettiar goes in any way contrary to this Nagpur decision. For the aforesaid reasons I am satisfied that there is no flaw in the judgment of the Courts below. This revision petition therefore fails and is dismissed with costs.

    19. Revision dismissed.

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    Comments

    Smt. Syamala Bai Petitioner v. The Official Receiver, Kurnool And Another
    (Mar 21, 1966)