Benares Bank, Ltd. v. Bhagwan Das

Braund, J.:— I have had the benefit of reading the judgment of my learned brother Mr. Justice Pathak and am reluctantly compelled to share his view, although, without intending any disrespect to his opinion, I could have wished to be able to do otherwise.

The U.P Encumbered Estates Act is no more nor less than a code for administration of the assets of the landlord. As I understand the principles of the administration of assets, it is common to most schemes of administration that the estate should be represented by a statutory guardian, so as to avoid creditors and other beneficiaries individually being ‘necessary’ parties in all proceedings, a course which, in cases where creditors are numerous, may well bring the administration to a standstill or make it so cumbersome as to be unworkable. That is the principle of the administration of assets in insolvency and in companies winding-up, and, in the case of the administration of trusts and the estates of deceased persons, under order XXXI, rule 1, of the First Schedule to the Civil Procedure Code. This principle is one of giving creditors and beneficiaries every reasonable opportunity to be heard, should they avail themselves of it, but otherwise to secure that they bound by the administration.

Under the U.P Encumbered Estates Act the machinery is set in motion by Section 4 at the instance of the landlord. For the purpose of administration a special officer is constituted under Section 3. His first duty under section 8 is to call on the landlord (inter alia) for a schedule of his proprietary rights in land and against this every creditor-claimant is given an opportunity of filing, and indeed is required to file, under section 10(1) of the Act a counter-version of what the landlord's proprietary interest in land really consist of, if he disagrees with the landlord's own schedule. Section 11(2) actually deals with quite another class of claim, namely, the claims of third parties to the property of the landlord. In terms this sub-section relates to nothing else, and it is only as to the property so claimed that the Special Judge appears to be required to determine whether it is liable to attachment, sale or mortgage. Moreover, under Section 14(1) of the Act it is noticeable and curious that the Special Judge is required to fix, and give notice of, only the date for enquiring into claims made in pursuance of the notice published in accordance with Section 9, that is to say the claims of the creditor-claimants. There is no parallel requirement in respect of the claims of third parties made under Section 11(2). It has been tempting to read this, coupled with the general principles of the administration of assets which I have mentioned above, as some indication that it was the intention of the legislature that the principles of representation should apply to the U.P Encumbered Estates Act in the case of claims made by third parties. It has, however, now become the universal practice on the part of Special Judge appointed under this Act to give notice to the creditor-claimants not only in respect of their claims made under Section 9, but also in respect of the claims of third parties made under Section 11(2). That was actually done in this case, and in response to that notice only the two creditors, Ratan Lal and Debi Prasad, took the trouble to appear before the Special Judge. Curiously enough, it is these men alone who now complain that the appeal is defective on the ground that other creditors are not parties to it. They have themselves nothing to complain of.

For myself I feel some diffidence in assuming that all creditors ought to be treated strictly as “parties” to the proceedings in the sense in which defendants are parties to a regularly constituted suit express this view with diffidence, however, as I am aware that there is the authority of learned Judges of this Court to the contrary. I have, nevertheless, been reluctant to apply in ill their technicalities the Rules of the First Schedule to the Civil Procedure Code to the proceedings before us under the Encumbered Estates Act and I should have much preferred to regard the creditors merely as persons interested or as beneficiaries as in the more usual forms of the administration of assets such as the administration of trusts, the administration of the estates of deceased persons and the administration of the assets of insolvents. I appreciate, however, that in all these cases representation has been expressly provided for.

There is a great weight of authority particularly in the Oudh Chief Court which takes the opposite and more technical view. It is to the effect that creditors are—and undoubtedly it is true—persons interested in all questions touching the assets under administration, and, as such are technically parties to the proceedings. In that view of the matter they say they are ‘necessary’ parties and not mere ‘proper’ parties to claims made under Section 11(2) of the Act, since those questions involve the determination of the quantum of the assets in which they are to be entitled to share. That undoubtedly is the strict position if they are to be treated as parties to a suit and governed by the technical Rules of the Civil Procedure Code. But beyond a general inclination to treat an administration under the Encumbered Estates Act on lines similar to other familiar forms of administration, I regret that I cannot find any solid ground for treating the Special fudge, the landlord himself or the creditors who actually appeared, as representatives of the estate in the sense in which a Receiver or an Official Liquidator represents an estate so as to bind all the creditors. In view, therefore, of the weight of authority against me and particularly of the fact that this very question is now pending in the Privy Council, I am constrained with reluctance to agree that the view of my learned brother Mr. Justice Pathak must be taken for me present to be the right one. I wish it were not so.

Pathak, J.:— This is an appeal from an order of the Special Judge, first grade, Benares, whereby an objection filed by the appellant under Section 11 of the Encumbered Estates Act was dismissed. The facts are very short and may be stated as follows:

On October 24, 1922. Ram Prasad (since deceased). Bhagwan Das and Radha Raman executed a mortgage in favour of the appellant for a sum of Rs. 100,000. In 1933 a contract was catered into between the appellant and the mortgagors to the effect that the mortgagors would transfer, by way of sale, certain properties in full satisfaction of the mortgage money. Upon the failure of the mortgagors to execute the sale-deed in accordance with the terms of the said contract, the appellant instituted suit No. 9 of 1934, for the specific performance thereof. The result was that on December 19, 1934 the claim for specific performance, was decreed and the mortgagors were directed to execute a sale-deed within three months from the date of the decree. Instead of executing the sale-deed in accordance with the terms of the aforesaid decree, Bhagwan Das and Choudhari Radha Raman, the two surviving mortgagors, on their own behalf and as representing their respective sons, made an application under Section 4 of the Encumbered Estates Act on August 31, 1935. It may be noted in passing that during the pendency of the proceedings under the Encumbered Estates Act, the decree for specific performance in the aforesaid suit was confirmed by this Court on January 8, 1942. In the course of those proceedings the appellant made a claim under Section 11 praying that it might be declared that the properties in respect of which the decree for specific performance had been passed did not belong to the landlords, and, therefore, should not have been showed in the schedule of properties appended to the written statement filed by the latter. It is this claim under Section 11 which has given rise to the present appeal.

It should be mentioned that the learned Special Judge issued notices of the aforesaid claim under Section 11 of the Encumbered Estates Act to the landlords and to all the creditors. In response to the notices, however, the landlords and only two of the creditors, namely, Ratan Lal and Debi Prasad appeared to oppose the claim under Section 11 and the decree framed in the court below mentioned the names only of these two creditors in addition to the names of the landlords and the claimant. In the memorandum of appeal filed in this Court, the appellant impleaded only the landlords and the aforesaid Ratan Lal and Debi Prasad, but omitted to implead the remaining creditors.

A preliminary objection has been taken to the hearing of this appeal upon the ground that the appeal was incompetent inasmuch as the creditors, whom the appellant omitted to implead in the appeal, were necessary parties and that without the presence, of the said creditors before the court, no effective decree could be passed in the appeal. The decision of this objection would depend upon the answer to the question as to whether the creditors omitted from the memorandum of appeal were necessary parties. Who is ‘a necessary party’ has not been defined in the Code of Civil Procedure. But as a result of decided cases it may be laid down that there are two tests by which this question must be determined. Firstly, there must be a right to some relief against such party in respect of the matter involved in the proceedings in question and secondly, it should not be possible to pass an effective decree in the absence of such a party. Applying these tests, I have no doubt that the creditors of a landlord who has claimed relief under the Encumbered Estates Act are necessary parties to the proceedings under that Act. The object of the Act is (1) to compel the landlord to surrender his entire property for the benefit of his creditors and (2) to liquidate the debts of all the creditors of such a landlord in accordance with, and to the extent permitted by, the Act. It is true that the landlord is also a party to the dispute raised by a claim under Section 11. But it is obvious that the main party who is vitally interested in that dispute is the entire body of creditors. The issue which arises out of such a claim is whether the property, which is the subject-matter of the claim, is liable to be availed of in accordance with the provisions of the Act for the satisfaction of the debts due to the entire body of creditors. Could it be suggested that in a suit under Order XXI, Rule 63, Code of Civil Procedure, the decree-holders who desire to seize the property belonging to the judgment-debtor are not necessary parties? The mere fact that the judgment-debtor is also impleaded in such a suit does not affect the question that the real dispute is between the claimant to the property, which is the subject-matter of the suit, and the decree-holder. It has been argued that the creditors are really no parties to the claim under Section 11 as there is no express provision in the Act for issue of notice of such a claim. I have given my anxious consideration to this argument but. I find myself unable to accept the same perusal of Section 9 of the Act would show that, in addition to the publication of notice in the gazette, and otherwise calling upon the creditors to present written statements of their claims, it is necessary that such notice should be issued to each of the creditors mentioned, in the written statement of the landlord. In my opinion, the creditors become parties to the proceedings under the Act after the notices are served upon them and, in any event, after they have filed the written statements of their claims. They continue to be parties to the proceedings until their debts are liquidated or proceedings are terminated in accordance with the provisions of the Act. It is worthy of note that this court has treated the creditors and the landlord on the same footing as if they were parties to a suit and in cases where the heirs of a deceased creditor have not been substituted, this Court has declared that the application under Section 4 of the Encumbered Estates Act abated as against the legal representatives of such deceased creditor. It is true that in general, the proceedings under the Encumbered Estates Act are in the nature of proceedings for the administration of debts under the Companies Acts or the Bankruptcy Acts. But the Legislature has not thought fit to assimilate the Encumbered Estates Act proceedings in all essential particulars to the proceedings under those Acts. No provision has been made in the Encumbered Estates Act for the representation of the creditors by another person and I am constrained to hold that in the proceedings under the Encumbered Estates Act, the creditors are parties not as beneficiaries, represented by some trustee but in their individual capacity. In my judgment, the omission in Section 11 of the provision for the issue of notice to the creditors and the landlords does not affect the matter. If from the nature of the case, the creditors are necessary parties to the proceeding in question, the Court is bound to issue notice to such parties under the ordinary law of procedure.

It has next been contended that only those creditors who contested the claim under Section 11 should be considered to be parties to the proceedings, while the creditors who did not care to intervene or appear in court should not be so treated. This contention again I am not prepared to accept. The question whether a certain person is a necessary party does not depend upon the inaction or the conduct of such a person, but depends necessarily upon the nature of the proceedings and the interest of the person in question in the subject-matter thereof. It is a matter of common knowledge that sometimes in cases where there is a large number of parties holding interest of a like nature in the same proceedings, only some of those parties raise the contest, while others do not take any active interest in the litigation. In a case of that kind, such parties, who do not enter appearance in court, do not lose their character as necessary parties by their inaction. I do not find any ground upon which it could be possible to differentiate the case of those creditors who appeared in court and raised the contest from that of those who did not choose to enter appearance in court. The interest, in the distribution of the property of such as did not raise any contest, would not lapse by their silence. If the decision goes in favour of the claimant each and every creditor has got a right of appeal. Equally if the decision goes against the claimant all the creditors must be impleaded in the appeal filed by the unsuccessful claimant. The appeal is a mere continuation of the original proceeding and if it is clear that all the creditors are necessary parties to the proceedings out of which the appeal has arisen, they must necessarily be so when the litigation reaches the appeal stage.

The question goes to the root of the matter and relates to the constitution of the appeal itself and, therefore, it is immaterial whether the objection is raised at the instance of one who constested the proceedings in the court below and not at the instance of those who were omitted from the memorandum of appeal. In my judgment, it is open to the respondents, in the present appeal to raise the preliminary objection which, in substance, is a plea that on the appeal, as constituted, no decree could be passed at all by this Court.

Learned counsel for the appellant has also contended that in view of the fact that the decree framed by the court below does not mention the names of the creditors omitted from the memorandum of appeal, it was not incumbent upon him to have impleaded those creditors. In my judgment, the mere fact that the decree-writer has committed a mistake would not affect the question as to who must, under the law, be impleaded in the appeal. The practice observed by the courts below in this respect is not uniform. While sometimes the names of only the contesting parties are mentioned, on other occasions, the names of those who have not raised the contest are also mentioned. In any event, the decision of the matter in issue, which is one of substance, cannot be allowed to be affected by the mode of preparation of the decree.

If the reasons given by me above are correct, it necessarily follows that the result of overruling the preliminary objection if the appeal be allowed will be to give rise to two conflicting decrees. On the one hand, there will be a decree passed by this Court which would give the right to the appellant to claim, the property and, on the other hand, the creditors who are not before this Court will be entitled to claim that the decree passed by the court below which they could avail of has remained unaffected by the result of the present appeal. In this sense, it is clear that this Court cannot pass an effective decree in the absence of the creditors who have not been impleaded in the appeal and I have no option but to give effect to the preliminary objection and to hold that the appeal; as framed, is not properly constituted.

It is worth mentioning that the view that I have taken is in consonance with the view taken by the Oudh Chief Court in a current of decisions, see Rameshwar v. Ajodhiya Prasad(1). Chaudhri Bishunath Prasad v. Sarju Saran Tewari(2) and Lakshmi Narain v. Satgurnath(3) and I have not found a discordant note struck either in this Court or in the Oudh Chief Court.

For the reasons stated above, I would uphold the preliminary objection and dismiss the appeal.

Sir Syed Wazir Hasan, on behalf of the appellant, has made an application praying that the creditors omitted from the memorandum of appeal might now be added thereto and the delay in taking this step might be condoned. I have given my anxious consideration to this aspect of the case but, in my opinion, it is not possible to accede to this request. The defect in the appeal was brought to the notice of the appellant a considerable time ago. The controversy upon this question is now sufficiently old and I see no justification for the appellant not taking the safer course to implead all the creditors in the appeal. Apart from the question whether Section 5 of the Indian Limitation Act applies to the application made by Sir Syed Wazir Hasan, I do not see any ground for extension of time and, to my mind, the delay remains unexplained by any valid reason. In the view that I have taken above, it is clear that the creditors, who are sought to be impleaded now, have acquired a valuable right which accrued to them by lapse of time and I do not see any justification for depriving them of that right. For this reason, I would dismiss the application made on behalf of the appellant.

The question of the costs of this appeal is a matter of some, importance. The preliminary objection which I have disposed of was taken before the Division Bench after the conclusion of the arguments by counsel for the appellant on the merits of the appeal. If the preliminary objection had been taken at the proper time, that is, before the arguments on the merits were commenced, much time of the Court would have been saved and possible reference to the Full Bench might have been unnecessary. As this position was brought about by the conduct of the respondents, the proper order, in my opinion, in this case is to deprive the respondents of the costs incurred by them on the hearing of this appeal, that is to say all costs with the exception of those incurred in translation and printing of the paper book.

Verma, J.:— I agree with my brother Pathak.

Per Curiam—The appeal is dismissed. The contesting respondents will get from the appellant the costs incurred by them in translation and printing. The rest of their costs will be borne by them. The appellant will bear his own costs.