Ganga Sahai And Others Objectors v. Mukarram Ali Khan Opposite Party .

Sulaiman, J.:— This is a creditor's appeal from an order, dated the 30th July 1923, passed in an insolvency proceeding, which is the subject of much controversy. The respondent was adjudicated an insolvent on the 16th February 1917, and a large number of creditors were entered as schedule creditors. On the 19th April 1922, the insolvent put in an application, purporting to be under S. 38 of Act No. V of 1920, stating that the major part of the debts alleged to be due to the creditors were fictitious and were not really due. He expressed his readiness to pay the amounts actually due to the creditors in full, together with interest at a rate which the Court might consider reasonable. There was also a suggestion in paragraph 4 of the application that the Court had full power to hold an enquiry into the true accounts of the debts and to correct the schedule accordingly. The learned Judge, without passing any formal order as to whether he approved of the proposal or not, at once appointed a commissioned to go into the question of accounts of the creditors. When the report of the commissioner was received, objections were invited from the creditors and the insolvent, and they have been disposed of by the order Tinder appeal.

2. I am bound to say that the procedure adopted by the learned Judge was not in strict accordance with the provisions of the Act. The insolvent, so long as his insolvency lasted could not he allowed to challenge the correctness of the debts entered in the schedule and, therefore, his application, so far as it purported to dispute the correctness of those debts and amounted to a request to the Court to enquire into the accounts of the creditors, could not properly be a proposal or a composition within the meaning of S. 38. On the other hand, his offer to pay all his just debts in full together with interest only at a reasonable rate, and not at the contractual rates, could very well be called a proposal. In my judgment the proposal contemplated by S. 38 is a general proposal to satisfy the debts of the whole body of creditors, and not merely disputing the validity of the debts of particular creditors.

3. If a majority in number and ¾ths in value of all the creditors, whose debts were proved, resolve to accept the proposal, it is deemed to be duly accepted. If they do not, then, unless the proposal contravenes the provisions of sub-Ss. 4, 5 or 6, the Court has power to approve of it. If the Court approves the proposal, then under S. 39 its terms ought to be embodied in an order of the Court which should frame a schedule and annul the adjudication. After the adjudication has been annulled on the ground that the proposal has been accepted, the insolvent is at liberty to apply under S. 50, Sub-Cl. 2, to the Court to hold an enquiry and expunge an entry or reduce the amount of a scheduled debt. The scheme of the Act seems to be that an insolvent, after his adjudication, when the property vests in the Court or the receiver, has no locus standi to challenge the validity of the debts entered in the schedule. If he were allowed to do so, he may be harassing his creditors, who cannot recover the costs incurred by them because they cannot prove debts incurred after the date of adjudication. On the other hand, when the insolvency has been annulled after the approval of a proposal or composition, and the time has arrived for actual payment of the debt of the debtor, he is given the right to challenge the correctness of the claims of his creditors. The property, which passes to him or to a trustee on annulment, does not pass free from all debts. It remains liable to debts which have not been proved or cannot be proved. Thus, costs incurred by creditors in meeting the objections of the debtor could be properly recoverable from the property of the debtor which still exists. Further, as the debtor has had no opportunity to challenge the accuracy of the claims of his creditors, he is allowed to do so now, before they can follow the property in his hands. Messrs Diwan Chand and Jai Gopal Sethi in their commentaries on the Bankruptcy and Insolvency Laws (1st edition, p. 459(c) paragraph 442), have stated that sp long as insolvency exists, a debtor cannot apply for expunging or reducing a debt, but when insolvency is annulled as would be the case when composition or scheme is accepted, he can apply. I further find that in the English case, In re Bond (1), it was held that in an ordinary case no doubt, questions as to the amount of the proof of a creditor ought to be left to be dealt with by the trustee; but when the composition has been accepted, the bankrupt has a locus standi to apply to reduce the amount of this proof. These support my view. The learned District Judge, however, did not expressly pass an order saying that he approved of the proposal, nor did he embody the terms of the proposal in an order of his own, as required by S. 39, nor did he proceed to frame a, schedule of debts, and lastly he had not order the adjudication to be annulled under S. 39. In fact, it appears that he overlooked the provisions of S. 39 altogether. But there can be no doubt that the creditors and the learned Judge by implication accepted the proposal that all the just debts, together with reasonable interest, should be paid by the debtor and the parties acquiesced in the enquiry by the Judge as to what amounts were actually due. The learned Judge has enquired into the claims of the creditors and, in substance, has either expunged some debts or reduced them; but unfortunately he had nowhere said that he is proceeding under S. 50 of the Act, nor he anywhere says that he is expunging or reducing any debt. The order passed by him, which is under appeal, simply says that he disallows the objections of the creditors and the insolvent to the commissioner's report.

4. Even if the insolvent can be allowed to challenge the validity of particular debts, while a proposal or scheme is under consideration and before it is accepted and the insolvency annulled, the order expunging or reducing the debt must be under S. 50 and not under S. 38. And, therefore, in spite of all the irregularities mentioned above, it seems to me that we should take the proceedings to be what they legally can be, and assume that the proceedings started under S. 38 of the Act and that the proposal of the insolvent to pay all his just debts, together with interest at a reasonable rate, was approved of by the Judge, and that, though the Judge omitted to pass any order under S. 39, he proceeded to enquire into the validity of the debts under S. 50 sub-Cl. 2. The application of the debtor was a composite one and the learned Judge seems to have-mixed up, the proceedings which ought to have been separately taken. However, as the final order must be deemed to be one under S. 50, sub-Cl. 2, an appeal lies therefrom. I am constrained to adopt this view, because the parties in the Court below apparently acquiesced in the procedure adopted by the Judge and the case has been tried on its merits. If I were not to follow this course, I would be compelled to get aside the order and send the case back for re-trial.

5. A further objection on behalf of the respondent has been taken that, in view of a subsequent order of annulment passed by the, Judge under S. 35 of the Act, this appeal is not competent. The contention is that it is no longer open to the creditors to appeal from the order inasmuch as they allowed a subsequent order of annulment to become final. With regard to this matter also, it is unfortunate that the learned District Judge did not adopt a course which would have been just to the creditors. On the 28th September 1923, the creditors filed a written application, informing the Court that the High Court was closed and they proposed to file an appeal from an order of the 30th July 1923, in which presumably they would challenge the correctness of the findings as regards the amounts of the various debts. In spite of this written objection and in spite of the fact that the High Court was closed owing to the long vacation, the learned; Judge disallowed the objection treating it as futile, and on the 12th October 1923, passed an order of annulment under S. 35, on the ground that the amounts found due by him previously were paid up by the debtor. Had the creditors been allowed to appeal and obtain a stay order, further difficulty might have been obviated. The mistake, which the creditors however did commit, was not to file any appeal from the order passed under S. 35 on the 12th October 1923, which was admittedly appealable, though they had full knowledge of the order as it had been passed in spite of their objection.

6. I, however, think that it is impossible to dismiss the present appeal in consequence of the finality of a subsequent order. In the first place it is premature for us to consider whether the effect of our allowing the appeal would or would not be futile and, in the next place, an order of annulment does not free the debtor from liability to pay debts which were not proved when the order was passed in the insolvency Court. If we allowed the appeal and found that there was a further liability, in respect of an amount not proved before the annulment, it may be that the creditor's remedy is not at all barred. I would, therefore, not feel justified in dismissing, the present appeal, which purports to be from an order anterior in date to the order of annulment, on the mere ground that this subsequent order has been allowed to become final. (The judgment then discussed the evidence and contenued). We, however, find that it is not open to an insolvency Court to allow interest at a rate higher than 6 per cent, after the date of adjudication. No doubt for purposes of dividend the interest is calculated at 6 per cent, per annum under S. 48(2) without prejudice to the right of a creditor to receive out of the debtor's estate any higher rate of interest to which he may be entitled after all the debts proved have been paid in full. But this sub-section merely reserves the right of a creditor and is not an enabling section. On the other hand, S. 61 after providing for the distribution of property of the insolvent in a certain order of priority provides in its sub-section (5) that all debts entered in the schedule shall be paid rateably according to the amounts of such debts respectively and without any preference. Then in sub-S. (6) it says that where there is any surplus after payment of the foregoing debts, it hall be applied in payment of interest from the date on which the debtor is adjudged an insolvent at the rate of six per cent, per annum on all debts entered in the schedule. This last sub-section obviously and clearly refers to the interest payable after the date of adjudication. There is no other provision in the Act under which any interest at a higher rate is provided. We then come to S. 67 which says that the insolvent shall be entitled to any surplus remaining after payment in full of his creditors with interest as provided by this Act, and of the expenses of the proceedings taken thereunder. It is, therefore, apparent that after the payment of the scheduled debts and interest at 6 per cent, per annum subsequent to adjudication the surplus, if any, must go to the insolvent; for there is no other provision in the Act under which an interest at a higher rate can be paid.

7. As soon as the debtor is adjudged an insolvent, his entire estate vests in the Court or the receiver and his estate becomes liable to distribution at once. Ordinarily therefore interest ceases to run automatically, and for purposes of dividend the rate of interest for all creditors is a uniform rate of 6 per cent per annum. When however all the debts entered in the schedule have been paid off, the creditors are entitled to a further amount by way of interest at 6 per cent per annum. But after this amount also has been paid the surplus goes to the insolvent.

8. On both these grounds, therefore, it is impossible to interfere with the order of the District Judge fixing six per cent, as the rate of interest on which interest should be payable after the adjudication.

9. I would accordingly allow this appeal in part, and modifying the order of the District Judge direct that the creditors should be allowed interest at the contractual rate up to the 16th of February 1917, and thereafter at six per cent, per annum only till the date of realization.

Boys, J.:— In this case Mukarram Ali Khan, respondent to the present appeal, was on his own petition adjudicated an insolvent under Section 27 of the Provincial Insolvency Act (V of 1920), on the 11th of January 1917.

10. On the 16th of February he was examined, and in the course of his statement he alleged that he had really received only a small proportion of the amounts which the promissory notes, etc., which he had given, purported to show as having been received from his creditors. He had practically no assets and was, therefore, not interested in challenging any particular debt of any particular creditor; and, moreover, he had, at any rate at that stage, no locus standi to challenge effectually. There being no assets, the creditor, Jwala Prasad, who had been appointed receiver, was discharged from that duty on the 4th of September 1917, since which date there has been no receiver. On the 7th of June 1920 the debts of Ganga Sahai, the present appellant, were entered in full in the schedule which was in the course of preparation under S. 33 of the Act. Nothing further happened till the 26th of March, 1922, when the Nawab of Pahasu, grandfather of Mukarram Ali Khan, died and Mukarram Ali Khan succeeded to his large estate, his own father having already died.

11. On the 19th of April 1922 Mukarram Ali Khan, as I will continue to call him for the purposes of this case though he has now become the Nawab of Pahasu, filed an application stated to be under S. 38 of the Act. This application has been the subject of much argument. In it Mukarram Ali Khan declared his willingness to pay to his creditors the actual amounts which, after enquiry, they might be found to have advanced to him, and he further declared his willingness to pay any rate of interest on those actual advances which the Court might find reasonable.

12. The position seems to have been that Mukarram Ali Khan had recklessly incurred debts and at the same time had, recklessly signed documents for amounts which he had not received. At any rate that was his allegation. The amounts which he had received, and the amounts which he had signed for though he had not, as he alleged, received them, had all been entered in the schedule prepared under S. 33, without the debtor having had any opportunity of challenging the correctness of the amounts,; At what stage, in what manner, and under what provisions of the law, a debtor can challenge the accuracy of that schedule has been one of the matters which we have had to consider. Assuming the position to be accurately stated by Mukarram Ali Khan, it was perfectly natural and reasonable that being now in a position to pay off his debts, and being anxious to do so, he should at the same time be unwilling to pay up the amounts which he had never received or to pay an extortionate rate of interest. Hence the petition which he filed. Whether that petition was in a form suitable to the terms of S. 38 is one of the questions that has arisen in this case.

13. On the 6th of May, 1922 notice of this application was issued to the creditors fixing the 14th of July 1922 for the hearing of any objection.

14. On the 14th of July the District Judge appointed a commissioner to enquire into the amounts actually received by the debtor from his creditors. It is important here to note that whether the application was such as properly fell within the terms of S. 38 or not, Ganga Sahai took no objection whatever and for that matter no other creditor took any objection to this order of the District Judge.

15. Evidence was taken and the commissioner reported to the District Judge. No complaint is made as to any lack of thoroughness in the inquiry held by the commissioner, and it is not suggested by any of the parties that they did not have unrestricted opportunity of proving their respective cages. The report of the commissioner, Mr. Chandar Mal, Government Pleader at Aligarh, it an admirably written document and he was clearly at great pains to arrive at a just and proper result. So far as the present appellants are concerned, his claim was allowed with the exception of one item of Rs. 11,330, The appeal before us is concerned with this item and with the question of interest.

16. On receipt of he report of the commissioner, the District Judge gave all the creditors an opportunity of filing objections thereto. Ganga Sabai filed an objection in which he urged that the insolvent could pay all his debts in full; that he, Ganga Sahai, wanted payment in full; and that the insolvent had no right to put in the application. It would seem then that by this objection Ganga Sahai took objection in vague general terms to the application of the insolvent, but there was no precise objection taken to the jurisdiction of the Judge to hear under S. 38 such a proposal as had been made; and there is nothing on the record whatever to show, nor have counsel urged before us, that any objection to the jurisdiction of the Court or the course which the proceedings have taken was seriously pressed before the District Court. The District Judge passed an order on the 30th of July 1923 in conformity with the report of the commissioner in so far as he disallowed the item of Rs. 11,330. He further gave certain directions as to the interest which I need not here Specify.

17. On October 12th, 1923 the District-Judge passed an order of annulment under S. 35. The order should have been passed under S. 39, but this has no material bearing; it was hardly more than a clerical error due to the fact that he did not pass the order as promptly as he should, and all debts (as reduced) having in fact been paid in full, he overlooked S. 39 and quoted S. 35.

18. Ganga Sahai filed the present application in this Court describing it as an appeal; but he did not ask for any leave to appeal. In this connexion we have had to consider the exact nature of the proceedings before the District Judge. If they were proceedings solely under Ss. 38 and 39, no appeal wold lie without the leave of the District Judge or of this Court. If they were proceedings solely under S. 59, an appeal would lie as of right. If they were proceedings under Ss. 38 and 39 read with S. 50, clause (2) an appeal would lie as of right against the order under S. 50, Cl. (2) reducing the debt of any particular creditor, but would not lie except by leave against the general order of approval and of annulment pissed under S. 39.

19. The questions calling, for determination are as follows:

1. Was the proposal made by the debt or on 19th of April 1922 a proposal within the meaning of S. 38?

2(a). In view of the fact that the debt or asked for an enquiry into the amount of the debts due to creditors and a reduction thereof and an enquiry into what was a reasonable rate of interest, had the District Judge jurisdiction to entertain such a proposal under S. 38?

(b) If he had, did lie exercise a proper discretion in entertaining such a proposal?

(3) If he had no jurisdiction to entertain such a proposal under S. 38:

(a) had he no jurisdiction under any mother section to hold an enquiry into the amount of debts suo motu or at the suggestion of the applicant?

(b) had the debtor any right to insist upon an enquiry into the amount of the debts?

20. These questions will involve the consideration particularly of Ss. 27, 33, 38, 39 and 50.

21. To appreciate whether the proceedings have been properly conducted or not it is necessary to consider the position of the debtor from the outset. Having put in his petition and on that petition having been adjudicated an insolvent under S. 27, the result is that all his property is vested in the Court or in the receiver if a receiver has been appointed, and not only this but all the property which may come into his ownership in the future so long as he remains an undischarged insolvent, vide S. 28. The matter is now out of his hands.

22. The next step is the preparation of the schedule of creditors in terms of S. 33. The method of proof of the debts by the creditors is by affidavit, and here again the debtor (see S. 49) has no power of interference. If any of these debts are improperly inflated or if, for any reason, any of them ought, to be expunged or reduced, the receiver, the Court and the creditor are given certain powers to deal with the matter by S. 50. But as far as I am able to appreciate the scope of the Act, if the debtor can take steps to get the improper inflation of the debt expunged, it can only be under one or both of two sections, namely, S. 38 and 50(2). The relation inter se between these two sections is a matter which is not entirely unambiguous.

23. Certain general, considerations suggest themselves. Whatever be the true interpretation of S. 50(2), with which I will deal later, this at least is certain that a debtor cannot apply to have a debt expunged or reduced, unless at least a proposal for a composition or scheme has been started. If consideration of the subject were to lead to the conclusion that a debtor cannot challenge the debts entered in the schedule prepared under S. 33 by making a proposal under S. 38 asking for enquiry into the real amounts of the debts, the result would be that a debtor who was perfectly willing to discharge real debts, might in certain circumstances he actually prevented from doing so. Stated in other words, if inflated debts have been entered in a schedule under S. 33 and a debtor sees his way to settling his just claims provided the debts are reduced to the real amounts how is he to proceed? He cannot proceed, under S. 50(2) without making & proposal and he cannot make that proposal unless he is permitted to make as part, of that proposal a request for an enquiry into the true amount of the debts.

24. If he cannot challenge the debts by and in the course of the hearing of, his proposal, he might in many cases be in no position to put up a proposal, at all. For example he might be able to say

The debts proved in the S. 83 Schedule are Rs. 1,00,000. If they are enquired into and. Rs. 50,000 of false claims struck but, I can arise money to pay the other Rs. 50,000; but I can put up no proposal to pay, say 50% of all the debts because creditors whose whole debt is genning would never accept a general reduction of 50% and I can put up no proposal to pay more than Rs. 50,000 because may financial friends will not guarantee more than. Rs. 50,000. But if the Court will inquire into the debts, I can prove Rs. 50,000 fictitious and I can raise the money to pay the remaining Rs. 50,000.

25. I will consider first S. 38 and the question whether this proposal made by the debtor was a proposal within the terms of S. 38. The proposal is not of a nature such as might ordinarily be expected when a debtor desires to suggest a composition or some arrangement and it may be that generally a District Judge might do well not to approve a scheme in this form. But in my opinion what we have to consider at this stage, is not whether the District Judge exercised his discretion rightly in proceeding upon the scheme but whether he had or had not jurisdiction to proceed. It is admitted that Ganga Sahai never made any objection to the Judge proceeding and though he made a half-hearted objection upon the return of the commissioner's report, it had to be squally conceded that he did not seriously press it. This conduct of his could, of course, not give the Judge jurisdiction. But I am unable to find in the terms of S. 38 any limitation Whatsoever of the nature of the proposal which the Judge may entertain, subject only to this that he shall consider it reasonable and to the general benefit of the Creditors. The reason for this is not far to seek. The circumstances attending each insolvency may be infinitely varying in their details and an infinite variety of schemes; of arrangement may be called for according to the nature of those particular circumstances. Further, if a Judge does not consider a proposal fit to be approved he need not approve it. I am, therefore, unable to hold that there is anything, and counsel for Ganga Sahai was unable to indicate to me anything, to suggest that in entertaining this proposal the District Judge acted without jurisdiction. With an exercise of his discretion it is unlikely that: we would interfere under any circumstances, but most certainly not where no objection was seriously taken by the creditor him self. I would, therefore, hold that even under the terms of S. 38 the learned Judge had power to enquire into this proposal and if he found that any of that debts were not proved, to finally approve the proposal including the expunging of those debts. I have so far considered his powers under S. 38 alone.

26. I will now turn to S. 50. Apart from the earlier provisons of that section, by which it is clear that a debtor is given no power to apply, we have the final provision that a debtor may “in the case of a composition or scheme” apply to have a debt expunged or reduced. I am aware that it has been suggested that this final provision of S. 50(2) is intended to apply to the correction of the schedule framed: under S. 39; in other words it has; been suggested that the words “in the case of a composition or scheme” are to be amplifled as meaning not “in the case of a pending composition or scheme” but as meaning “in the case of the schedule prepared under S. 39 after composition or scheme has been finally approved”. The reason for not allowing a debtor exactly the same right (apart from any proposal for a composition or a scheme) as is allowed to the receiver or a creditor to challenge under S. 50 the schedule prepared under S. 33, is, of course, that, while he is still labouring under an adjudication of insolvency he has no property remaining vested in him which can be made liable for the costs to which he may have recklessly exposed his creditor. This reason loses its force where the challenge is made by a proposal under S. 33; for the proceeding is at every step under the control of the Court and the Judge can at any moment quash the proposal if he finds that it is frivolous and the allegations without substance. I can find no justification whatever in the section or in any other section of the Act for harrowing the scope of the words. I have to interpret this Act in the light of its own phraseology and arrangement, and where, that is clear and definite I cannot hold myself at liberty to go outside the Act either to English Acts or to the Acts which preceded debts Act in India in order to obtain an interpretation of the clear words of the section. The situation then is that under S. 38 a proposal has been made by the debtor for a scheme, and under S. 50(2) “in the, case of a scheme” the debtor may apply for expunging or reducing a debt. I hold, therefore, that the action of the learned Judge was entirely within his jurisdiction.

27. At the hearing we had to consider

1. Whether the creditor had a right of appeal;

2. Whether he could only appeal by the leave of the District Judge or of the High Court.

3. What would be the effect, if any, of or on the order of annulment, in view of the fact that the creditor had only professed to appeal against the order expunging one of his debts and had allowed the period of limitation to pass without appealing against the order of annulment.

28. At to the first and second questions I was at first of opinion that the case having been dealt with under S. 38 leave to appeal was necessary. But both Mr. Justice Sulaiman and myself were in agreement; that the appeal should be heard on the merits and we have so heard it. In view of she opinion that I have expressed above, in regard to Ss. 38 and 50, I may give my view shortly on all the three questions. I am of opinion that generally where proceedings have taken place under Ss. 38 and 39 there is no appeal as of right. Leave of the District Court or of the High Court must be obtained before any appeal can be admitted against the order generally approving the proposal or the order of annulment. But where, as part of the proceedings, an enquiry has been held under S. 50, anybody prejudiced by the expunging or reducing of a debt can in regard to that matter appeal as of right. There is, as it appears to me, nothing anomalous in this. It is quite consistent that an appeal should be allowed to a creditor as of right in regard to the matter which affects him individually, while an appeal against the order approving the scheme as a whole should not be allowed except by leave of the Court. The natural consequence follows that in appealing, and appealing successfully, against the order expunging one of his, claims, a creditor is not attacking the general approval of the scheme or the order of annulment under S. 39. In the event therefore of our allowing the appeal of a creditor in regard to his own particular claim, no effect whatever is produced by or on the order of annulment or by the fact that no appeal has been filed against the order of annulment. That order will stand untouched, while there would be in the general scheme as approved only the alteration of one item.

29. As to the questions of interest and the merits of the particular appeal before us I have had the advantage of seeing the judgment of Mr. Justice Sulaiman and I entirely concur in the order proposed.

30. Appeal partly allowed.