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Case Number

Second Appeal No. 869 of 1933

Attorney(S)

A.G Desai, for the appellant.
D.N Bahadurji, with K.N Dharap, for respondents Nos. 1 to 5.

Judges

Mr. Divatia, J.

Acts

section itself. Sub-section (2) of that Section Says:Subject to the provisions of this Act
section 9, sub-section (1), clause (a), of the Provincial Insolvency Act
sections 53 and 54 of the Provincial Insolvency Act,
SECTION 75 PROVINCIAL INSOLVENCY ACT
SECTION 4 PROVINCIAL INSOLVENCY ACT
sub-section (1), proviso (2), of that section
PROVINCIAL INSOLVENCY ACT
section 24 read with section 9,

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Smart Summary

Judgment Summary — Divatia, J.

Factual and Procedural Background

The original petitioner, Gopikabai, applied to the Insolvency Court under the Provincial Insolvency Act to have five opponents adjudicated insolvent. She claimed the opponents had passed in her favour a promissory note for Rs. 45,000, of which Rs. 10,000 had been paid and the balance remained due. The opponents contended that the petitioner had passed a receipt in full satisfaction of the alleged balance (Rs. 35,000) and thus was not a creditor on the date of the petition; they also relied on section 9(1)(a) of the Act, asserting a creditor cannot present an insolvency petition unless the debt owed amounts to at least Rs. 500.

Before evidence was led, the trial Court (on parties' request) framed the issue whether the receipt could be impeached in insolvency proceedings on grounds such as fraud. The trial Court held that the Insolvency Court could decide that question under sections 9 and 24 and relied on decisions from the Lahore and Rangoon High Courts.

The opponents appealed to the District Court, which framed the same question and held the receipt could not be impeached in the insolvency proceeding: the District Judge treated the receipt as embodying an agreement that, if voidable for fraud or coercion, required the petitioner to elect avoidance in a separate civil suit and held the Insolvency Court was not bound to try such a question (referring to section 4 power to refer to a suit). The District Judge set aside the trial Court's order.

The petitioner then preferred a second appeal to the High Court. The respondents raised a preliminary objection that a second appeal was not maintainable under section 75 because, they argued, a second appeal to the High Court lies only from decisions under section 4 and the present question did not fall under section 4. The High Court considered that objection and the parties' submissions and dismissed the appeal with costs.

Legal Issues Presented

Whether the receipt signed by the petitioner could be impeached in insolvency proceedings on the ground of fraud (i.e., whether the petitioner could prove the receipt was fraudulently obtained and thereby be treated as a creditor on the date of the petition).
Whether a second appeal to the High Court under section 75 of the Provincial Insolvency Act was maintainable in respect of the District Court's decision, particularly whether the question fell within the ambit of section 4 of the Act.
Whether the Insolvency Court is obliged under section 24 (read with section 9) to decide every incidental or collateral question relating to the petitioning creditor's right to present the petition, or whether the Court may in its discretion refer parties to a regular civil suit.

Arguments of the Parties

Petitioner's Arguments

The petitioner asserted she remained a creditor because the receipt alleged to discharge the debt had been obtained by fraud and misrepresentation and therefore could be impeached in the insolvency proceedings; she sought to prove that in the Insolvency Court.
On the preliminary point about maintainability of the second appeal, the petitioner argued that section 4 is very wide and covers “all questions whether of title or priority or of any nature whatsoever” that the Insolvency Court may deem expedient to decide, and thus the present question falls within section 4 so as to permit a second appeal.
Alternatively, the petitioner contended that section 24 read with section 9 obliges the Insolvency Court to consider the petitioner's right to present the petition and incidental questions arising in that adjudication; she asked that the appeal be converted into a revision petition if the Court found a second appeal not maintainable.

Opponents' (Respondents') Arguments

The opponents contended the petitioner had no right to present the petition because under section 9(1)(a) a creditor cannot present an insolvency petition unless the debt amounts to at least Rs. 500; they asserted the alleged debt had been discharged by a receipt given by the petitioner in full satisfaction and therefore she was not a creditor on the date of the petition.
They argued that the receipt, even if alleged to have been obtained by fraud or coercion, was at most voidable and the petitioner had not elected to avoid it; thus the proper remedy to impugn the receipt was a separate civil suit, not adjudication in the insolvency proceedings.
On the procedural point, the respondents asserted the High Court could not entertain a second appeal under section 75 unless the case involved a decision under section 4 of the Act; they therefore raised a preliminary objection to the admissibility of the second appeal.
It was also urged by respondents that the application was not bona fide and that no act of insolvency had been properly alleged; the petitioner countered she had alleged fraudulent sales in July 1931, leaving that issue open for determination by the trial Court.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Hukam Chand v. Ganga Ram	Authority (from the Lahore High Court) that questions as to the petitioning creditor's right may be gone into by the Insolvency Court under section 24.	The Court acknowledged and agreed with the general principle of this line of decisions to the extent that the Insolvency Court will ordinarily require proof and is entitled to go into the question of the creditor's right to present the petition, but distinguished the present case on its facts and declined to hold that the Insolvency Court must decide every incidental question.
Nur Mahommad v. Lalchand	Authority (from the Lahore High Court) supporting that the Insolvency Court may inquire under section 24 into the petitioning creditor's right to present the petition.	The Court accepted the principle that section 24 empowers the Insolvency Court to require proof of the creditor's right, but held that where the matter raises complicated issues suitable for a civil trial (for example, a signed receipt prima facie discharging the debt), the Insolvency Court retains discretion to refer the parties to a regular suit.
Chetty Firm v. Maung Aung Bwint	Authority (from the Rangoon High Court) for the proposition that such questions can be gone into by the Insolvency Court.	The Court again accepted the underlying principle from this authority but limited its application: the existence of a signed receipt admitting discharge made the issue prima facie one for a civil suit, and the Insolvency Court's discretion to refer the parties to a separate suit was not ousted by sections cited by the petitioner.

Court's Reasoning and Analysis

The High Court considered two linked legal problems: (a) whether the present question fell within section 4 of the Provincial Insolvency Act so as to permit a second appeal under section 75, and (b) whether the Insolvency Court was bound under section 24 (and section 9) to decide the question of the receipt's validity itself rather than referring the parties to a civil suit.

On section 4 and second-appeal jurisdiction: the Court held section 4 is wide in terms but must be read as referring to questions that arise in the course of bankruptcy (i.e., after adjudication) and which involve a contest between the debtor's estate (representing all claimants) and the general body of creditors — matters of title or priority that, when decided, would be final and binding on all claimants (res judicata). Because the present application had not proceeded to adjudication and did not involve a contest between the debtor's estate and the general body of creditors, the Court concluded section 4 did not apply and therefore a second appeal under section 75 was not maintainable on that basis.

On section 24 and the scope of the Insolvency Court's inquiry: the Court accepted that section 24 requires the Court to require proof that the creditor is entitled to present the petition — which can include inquiry into whether a subsisting debtor-creditor relationship exists and whether the amount meets the statutory minimum. The Court also agreed with cited authorities that ordinarily the Insolvency Court will require and consider such proof.

However, the Court drew a distinction: section 24 does not compel the Insolvency Court to decide every incidental or collateral question that may arise in relation to a creditor's asserted right to present a petition. In the present case, the petitioner had signed a receipt in which she admitted full discharge of the debt. That admission made her prima facie not a creditor at all on the date of the petition. Allegations that the receipt was obtained by fraud or coercion made the matter one that could properly involve complex questions of fact or law more suitable for determination in a regular civil suit. The Court held that the Insolvency Court therefore retained discretion to refer the parties to such a suit rather than decide every complicated collateral issue itself.

The Court emphasized that nothing in the relevant provisions of the Act removed that discretion. It noted the statutory language in section 4(3) (power not to decide a question of the type referred to in section 4(1) and to sell a saleable interest) and that no section in the Act requires the Insolvency Court alone to decide every question that may arise in proceedings before it.

Because the present dispute involved a signed receipt prima facie discharging the debt, the High Court agreed with the District Court's view that the question whether the receipt was fraudulently obtained ought to be tried in a regular suit. The High Court therefore found the second appeal not maintainable on the section 4 ground and declined to convert the appeal into a civil revision, since the Insolvency Court's decision under sections 9 and 24 to refer or not refer such matters is discretionary.

The Court also declined to decide whether the petition should be stayed or dismissed pending the outcome of any civil suit; it left that issue to the Insolvency Court, noting that the trial Court had not addressed whether the petition should be kept pending or dismissed and that the Insolvency Court must consider prejudice to the opponents and any prima facie case by the petitioner in making such an order.

Holding and Implications

Holding: The appeal is DISMISSED. The High Court held that (a) the question whether the receipt could be impeached on grounds of fraud did not fall within section 4 of the Provincial Insolvency Act for purposes of a second appeal under section 75, and (b) the Insolvency Court has discretion under section 24 (read with section 9) to require proof of the creditor's right but is not obliged to decide every incidental complex question — it may refer such questions to a regular civil suit.

Implications and direct effects:

The District Court's conclusion (that the receipt could not be impeached in the insolvency proceedings and that the matter could be referred to a civil suit) stands because the High Court dismissed the second appeal.
The petitioner remains free to seek a civil suit to impeach or set aside the receipt on grounds such as fraud or coercion; if successful there, she may reassert her claim in insolvency proceedings as a subsisting creditor on the date of the petition.
The High Court expressly left to the Insolvency Court the procedural question whether the insolvency petition should be stayed or dismissed pending the outcome of any civil proceedings, noting that the trial Court had not considered that matter.
No sweeping new rule was laid down that compels the Insolvency Court to decide all incidental questions; instead the decision confirms the Court's discretion to refer complicated collateral issues to civil courts. The judgment therefore affirms a limited principle of procedure rather than establishing a broad new precedent beyond the reasoning articulated.

Result recorded in the opinion: Appeal dismissed with costs.

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Gopikabai v. Chapsi Purshottam Lohana

Divatia, J.:—

This appeal arises under the Provincial Insolvency Act and has been preferred by the original petitioner Gopikabai, who has applied to the Insolvency Court that the five opponents should be adjudicated insolvents. Her case was that the opponents had passed in her favour a promissory note for Rs. 45,000, that Rs. 10,000 were paid to her in part payment thereof and that the balance was still due by the opponents to her. The opponents contended, among other things, that the petitioner had no right to bring this application because under section 9, sub-section (1), clause (a), of the Provincial Insolvency Act it was provided that a creditor shall not be entitled to present an insolvency petition against a debtor unless the debt owing by the debtor to the creditor amounted to Rs. 500, and their contention was that the alleged debt of Rs. 35,000 had been discharged by an agreement between the parties and the petitioner had passed a receipt to them in full satisfaction of that debt, with the result that the opponents were not indebted to the petitioner for any sum on the date of the petition, and that, therefore, she had no right to present this-petition.

Before any evidence could be led in this petition, the question as to whether this receipt was impeachable in the insolvency proceedings was decided by the trial Court at the request of the parties, and it framed an issue as follows:—

“Whether the receipt can be impeached in this proceeding on the ground of fraud, etc., alleged by the petitioner?”

That issue became relevant because in reply to the opponents' contention the petitioner alleged that although the receipt had been passed by her, it was the result of fraud and misrepresentation, etc., practised upon her and that she was entitled to prove that in the insolvency proceedings, and claimed that she was a creditor on that date. The trial Court was of opinion that under section 9 of the Act a creditor was entitled to prove that he was a subsisting creditor on that date, and that under section 24 of the Act the Court was to be satisfied that the creditor was entitled to present the petition. It also relied upon certain decisions of the Lahore and Rangoon High Courts for the proposition that such a question can be decided by the Insolvency Court and that the parties should not be driven to a separate suit.

Against this order directing that this question could be tried in the insolvency proceedings the opponents appealed to the District Court, and the learned District Judge framed an issue as follows:—

“Whether the receipt passed by the respondent-petitioner can be impeached by her in the insolvency proceedings?”

The learned Judge was of opinion that the receipt could not be so challenged, and his principal reason was that the receipt embodied an agreement between the parties to the effect that there was a complete discharge of the debt owed by the opponents to the petitioner, that the agreement embodied in the receipt was alleged to be the result of fraud and coercion on the part of the opponents, and on that ground that receipt was at the most voidable by her, but so long as she had not elected to avoid that agreement, it stood and was binding between the parties, and the only way it could be avoided was by a regular suit, and the Insolvency Court was not bound to go into that question, but that under section 4 of the Provincial Insolvency Act the parties may be referred to a separate suit for that purpose. The learned District Judge, therefore, set aside the order of the Court of first instance and allowed the appeal.

Against this decision of the learned District Judge, the petitioner has preferred this second appeal. At the hearing a preliminary objection is taken by the learned counsel on behalf of the respondents that this second appeal is not maintainable under section 75 of the Provincial Insolvency Act, that under sub-section (1), proviso (2), of that section a second appeal would lie to the High Court from a decision of the District Court on appeal from a decision of a Subordinate Court only in a decision arrived at under section 4 of the Act, that the present question could not fall under that section, and there was no decision thereunder, with the result that no second appeal can lie. The answer given on behalf of the petitioner to the preliminary objection is that section 4 of the Act is very wide and general in its terms and includes all questions to be decided by the Insolvency Court whether before or after adjudication. Special reliance is placed on the words “all questions whether of title or priority or of any nature whatsoever,” and also on the words “which the Court may deem it expedient or necessary to decide for the purpose of doing complete justice or making a complete distribution of property in any such case,” and it is contended, relying on these expressions, that section 4 covers all questions whatsoever which the Insolvency Court has got to decide.

It is, therefore, necessary in the first place to see whether the present question is one which can come within the ambit of section 4. Now, it is clear from what I have stated that the application has not proceeded beyond the initial stage of the petitioner's right to present this petition, and no order of adjudication has been made. Section 4 is, no doubt, wide and general, but the important words of the section are “all questions … which may arise in any case of insolvency coming within the cognizance of the Court”. In other words, section 4 comprises adjudication of those questions which, to speak in the language of English law, arise in bankruptcy and not outside bankruptcy. In my opinion, it covers questions such as disputes between the debtor's estate represented by a receiver on the one hand and the claims of one or all of his creditors on the other or other questions of priority or title. There is, no doubt, difference of opinion among the Indian High Courts as to whether section 4 is controlled by sections 53 and 54 of the Provincial Insolvency Act, under which certain questions as regards fraudulent alienations have to be decided by the Insolvency Court itself, and whether in such decisions a second appeal can lie to the High Court by virtue of the provisions of section 4. It is not necessary to discuss the difference of opinion on that point, but it is clear that in order that section 4 may apply, it is necessary that there must have been a contest between the debtor's estate and the general body of creditors, and that, I think, would be clear from the scheme of the section itself. Sub-section (2) of that Section Says:—

“Subject to the provisions of this Act and notwithstanding anything contained in any other law for the time being in force, every such decision [i.e a decision under sub-section (1)] shall be final and binding for all purposes as between, on the one hand, the debtor and the debtor's estate and, on the other hand, all claimants against him or it and all persons claiming through or under them or any of them.”

That means that any question decided by the Insolvency Court between the debtor's estate on the one hand and the general body of claimants on the other would have the effect of res judicata. It has been contended that this sub-section does not mean that the Insolvency Court cannot decide any question between the debtor on the one hand and the petitioning creditor on the other as to his right to present the petition. On this point a special provision has been made in the act in sections 9 and 24. section 24 enacts that at the hearing of the petition the Court shall require proof, among other things, that the creditor or the debtor is entitled to present the petition. Then, again, section 4 speaks of questions of title or priority, and although the subsequent words are “of any nature whatsoever”, I think this expression has to be read ejusdem generis with the first expression, viz., questions of title or priority, and such questions of title or priority can arise only after the adjudication is made. In any case, in the present case, no question of title or priority is involved at all, the question being one simply as to the right of the petitioning creditor to present this petition and the existence of his debt. I am, therefore, of opinion that this question is not included under section 4. No authority has been cited before me, nor do I know of any, to the effect that a question of the kind that we have got here is one that can come under section 4. That being so, the appeal as presented cannot lie because it is only in cases covered by section 4 that a second appeal would lie to this Court.

This by itself would dispose of the appeal, but the learned advocate on behalf of the petitioner has urged that even if this question does not fall under section 4, it does fall under section 24 read with section 9, and that the Insolvency Court is bound to go into this question, and the lower Court ought to have held that if not under section 4, at least under those two sections, the question as to the fraudulent nature of this receipt or otherwise should have been decided by it, and that, therefore, even if no second appeal lies, he should be allowed to convert this appeal into a revision petition, as it is permissible under section 75 to present such a petition against the decision of the appellate Court on any grounds of law, and his contention is that section 24 not only makes it obligatory on the Court to decide the question as to the petitioning creditor's right to present the petition, but that any question which may incidentally arise in the adjudication of that matter should also be gone into by the Insolvency Court, and that both the lower Courts had applied their mind only to the question of jurisdiction of the Court, and, therefore, it is open to him to raise this question at this stage.

It is true that under section 24 of the Act, the Insolvency Court has the power to require proof of the creditor's right to present the petition, and that may include also the question as to whether there is any subsisting relationship of debtor and creditor between the petitioning creditor and the opponent and that the amount of the creditor's claim is at least Rs. 500, and there are, no doubt, decisions, though in the unauthorised Series, of the Punjab High Court and the Rangoon High Court to the effect that such questions can be gone into by the Insolvency Court under section 24: Hukam Chand v. Ganga Ram, Nur Mahommad v. Lalchand, and Chetty Firm v. Maung Aung Bwint. I agree with the principle of these decisions to this extent that ordinarily where a creditor presents an application, and the debtor challenges the creditor's right to apply, the Insolvency Court will ask for proof from the creditor as to his right and is entitled to go into that question. But, to my mind, it does not follow therefrom that the Insolvency Court must decide every question connected with it or which may incidentally arise from it, and cannot refer the parties to a regular suit in any case if it is of opinion that a complicated question of fact or law arises therein. In the special circumstances of this case, I think it can be distinguished from those cases that have been relied upon, and that circumstance is this, that here we have got a receipt signed by the petitioner in which she has admitted that the debt is completely discharged. Therefore, prima facie, not only is she not a creditor for an amount of Rs. 500, but she is no creditor at all of the opponents on the date of the petition, and if she replies, in answer to the opponents' objection, that the receipt was fraudulently obtained, it is for her to establish that allegation, and if the Insolvency Court thinks that the question is of such a nature as can be properly adjudicated upon by a civil Court in a regular suit, I do not think that the discretion of the Insolvency Court to refer parties to a regular suit is taken away by any of the provisions cited above. All that section 24 says is that the Court shall require proof of the creditor's right. No doubt, here the Court has required proof from the creditor, and on the prima facie proof that is given the Court is of opinion-that as long as the receipt stands, the petitioning creditor has no right to apply. But it does not follow therefrom that the Court is bound to consider each and every question that might arise at the instance of the petitioner and not refer the parties to a separate suit.

Taking section 4 which, as I have observed, deals with questions of title or priority, it is provided in sub-section (3) thereof that—

“Where the Court does not deem it expedient or necessary to decide any question of the nature referred to in sub-section (1), but has reason to believe that the debtor has a saleable interest in any property, the Court may Without further inquiry sell such interest in such manner and subject to such conditions as it may think fit,”

In other words, when such questions arise, the Court has got power to decide the question or not, nor is there any section in Provincial Insolvency Act which states that the Insolvency Court alone must decide every question that arises in the proceedings before that Court.

[His Lordship then dealt with a question of res judicata not material for the purposes of this report and continued:]

Therefore, the only question is whether it was competent for the Insolvency Court to refer the parties to a regular suit in this case, and I think the appellate Court was right in holding that on the special facts of this case the question as to whether the receipt was fraudulently obtained or not is a question which ought to be tried in a regular suit, and the petitioner can derive her right to apply if the receipt is set aside on the ground of fraud or coercion with the result that the petitioner has a subsisting claim against the opponents at the date of the petition.

If, therefore, I had thought that such a question must be decided by the Insolvency Court itself under section 24, I would have granted leave to the petitioner to convert this appeal into a civil revision petition, but as it is, I do not think it is necessary to do so, as the decision by the Insolvency Court of this point under sections 9 and 24 is discretionary.

It has been urged on behalf of the petitioner that even though she may be referred to a regular suit, the petition should be stayed till the final decision of the civil Court and not dismissed. So far as I can see from the judgment, the only order made by the appeal Court is that the order of the lower Court to the effect that the receipt can be impeached in these proceedings was set aside, and I do not think the question as to whether the application itself should be dismissed or not arises in this appeal. Whether the petition should be kept pending till the decision of the civil Court or whether the application should be dismissed is a matter, I think, for the Insolvency Court to decide, and so far as I can see that Court has not applied its mind to this aspect of the matter, and I am reluctant to go into this question because the trial Court has not gone into the merits of the case at all.

The learned counsel on behalf of the opponents has urged that this application is not bona fide, and that even in the opinion of the learned District Judge no act of insolvency was alleged by the appellant. To that, however, the answer given by the appellant is that in the petition an act of insolvency has been alleged in the form of fraudulent sales in July 1931. The question whether that amounts to an act of insolvency or not is still to be gone into, and, therefore, I leave that question open. If the trial Court finds from the nature of the case that the opponents will be prejudiced if the petition against them is kept hanging till the final decision of the civil Court, then the Court will be well advised in dismissing the petition. If, however, it finds that the petitioner has got some prima facie case against the opponents, then it may pass any order it likes as to whether the petition is to be stayed or not.

The result is that the appeal fails and is dismissed with costs.

Appeal dismissed.

J.G.R

Gopikabai v. Chapsi Purshottam Lohana

Judgment Summary — Divatia, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioner's Arguments

Opponents' (Respondents') Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Gopikabai v. Chapsi Purshottam Lohana

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