Uday Chand Maiti Petitioner, v. Ram Kumar Khara And Others Opposite Party,

We are invited in this appeal to set aside an order made by the Court below under sec. 15 of the Provincial Insolvency Act of 1907. The circumstances under which the order in question was made are not disputed. One Uday Chand Maiti, the appellant before us, applied under the Provincial Insolvency Act on the 30th of April 1909 to be declared an insolvent. He stated that his debts amounted to Rs. 1,010-6 as and that he had no means to liquidate them. He attached to his application the names of his creditors, and the particulars of his debts; he also described in detail the properties of which he was possessed. On the 21st June 1909, one of his creditors mentioned in the application, by name Ram Kumar Khara, who, it was alleged by the Petitioner, was entitled to receive from him a sum in excess of Rs. 500 under a decree, appeared in Court, and presented a petition, of objection. His case in substance was that some of the other creditors mentioned as such in the application were really not the creditors of the Petitioner: he also imputed to the Petitioner various acts of bad faith. On the 13th July 1909, the Petitioner was examined under sec. 14, sub-sec. (2) of the Provincial Insolvency Act as to his conduct, dealings and property and upon the close of his examination, the District Judge made the order now under appeal. He dismissed the petition with costs on the ground that the debt attributed to one of the creditors mentioned in the application named Nagendra Nath Ganguli was fictitious. He added that “the Petitioner had not produced his account books, and the manner in which he gave his evidence led me to believe that he was concealing the real facts.”

We are now invited to set aside this order on the ground that it could not have been made under sec. 15 of the Provincial Insolvency Act. In our opinion, this contention is well-founded and ought to prevail. In fact an examination of the record shows that the District Judge has really dealt with the application of the Petitioner under the provisions of Chap XX of Act XIV of 1882 which was repealed by the Provincial Insolvency Act of 1907. Under these circumstances it is desirable to explain clearly the fundamental difference in procedure between the provisions of Chap. XX of Act XIV of 1882 and Act III of 1907.

Under Chap. XX of the Code a judgment-debtor arrested or imprisoned in execution of a decree for money or against whose property an order of attachment had been made in execution of such a decree, might apply in writing to be declared an insovent. Sec. 345 defined the contents of such application. Sec. 350 described the procedure at the hearing of the application. This section provided that the judgment-debtor was to be examined as to his then circumstances and as to his future means of payment and the decree-holder and the other Creditors mentioned in the application to be heard in opposition to the discharge of the judgment-debtor. Sec. 351 then laid down the conditions to be satisfied before the Court should declare the Petitioner an insolvent and appoint a Receiver of his property. This section required the Court to be satisfied not merely that the statements in the application were substantially true but also that the judgment-debtor had not committed any act of bad faith. The procedure laid down in the Provincial Insolvency Act, which is taken substantially from the English Bankruptcy Act of 1883, is however, of an entirely different description. In the new Act, sec. 4 defines what acts constitute acts of insolvency. Many of the acts mentioned in this section are undoubtedly acts of bad faith. It is not necessary for us however to deal with this aspect of the section at the present stage. It is sufficient to point out that cl. (f) of sec. 4 lays down that the judgment merit-debtor commits an act of insolvency if be petitions to be adjudged an insolvent under the provisions of the Act. Apart, therefore, from the other clauses of sec. 4 some of which refer to fraudulent preference and other matters of a like nature, it is obvious that the Legislature contemplated that a debtor might commit an act of insolvency if he made an application under the Act to be adjudged an insolvent. Sec. 5 then provides that subject to the conditions specified in the Act, if a debtor commits an act of insolvency, an insolvency petition may be presented either by a creditor or by the debtor, and the Court may, on such petition, make an order (hereinafter called an order of adjudication) adjudging him an insolvent. To this section is attached an explanation to the following effect: “The presentation of a petition by the debtor shall be deemed an act of insolvency within the meaning of the section, and on such petition the Court may make an order of adjudication.” It is desirable to point out that here the Legislature has departed materially from the provisions of the English Bankruptcy Act, where in the first instance a receiving order is made which is subsequently followed by an order of adjudication. The policy of the Indian Legislature apparently has been to amalgamate the two orders and to have only one order called the adjudication order. It is clear, therefore, that under sec. 5 of the Provincial Insolvency Act, the Court may, upon an application presented by a debtor, make an order adjudging him an insolvent. It does not follow, however, that every application made for this purpose by a debtor must be entertained by the Court, because sec. 6 points out the limitations to which such an application is subject. Sub-sec. (3) of sec. 6 provides that the debtor shall not be entitled to present an insolvency petition, unless one of three conditions is fulfilled, namely, either that his debts amount to Rs. 500, or that he has been arrested or imprisoned in execution of the decree of any Court for the payment of money, or that an order of attachment in execution of such a decree has been made and is subsisting against his property.” If any one of these three elements is present, the application under sec. 5 must be entertained by the Court. The procedure which has to be followed when an application which complies with the requirements of sec. 6 has been presented is explained in sec. 12. It is not necessary for our present purposes to refer in detail to the provisions of the preceding section which describes the contents of the petition. Sec. 12, sub-sec. 1 prescribes that when an insolvency petition has been admitted, the Court shall make an order fixing a date for the hearing of the petition. The next sub-section provides for the service of notices upon the creditors and the debtor as the case may be. Sec. 13 then authorises the Court to take ad interim proceedings. Sec. 14 describes in detail the procedure at the hearing. Sub-sec. (1) of this section lays down that on the day fixed for the hearing of the petition or on any subsequent day to which the hearing may be adjourned, the Court shall require proof that the creditor or the debtor, as the case may be, is entitled to present the petition. In other words, after the requirements of sec. 6 have been fulfilled the Court shall further require proof that the debtor, if he does not appear on a petition presented by a creditor, has been served with notice and that the debtor has committed the act of insolvency alleged against him. It is obvious that the question of the fulfilment of this last requirement arises only when the application is made by the creditor who has to show that the act of insolvency imputed by him to the debtor has actually been committed. Sub-sec. 2 of sec. 14 then provides for the examination of the debtor. Sec. 15 then deals with the question of the order to be passed upon the petition. The first sub-section of sec. 15 provides that where the Court is not satisfied with the proof of the right to present the petition or of the service of notice on the debtor as required by sec. 12, sub-sec. (3), or of the alleged act of insolvency or is satisfied by the debtor that he is able to pay his debts or that for any other sufficient cause, no order ought to be made the Court shall dismiss the petition. It is obvious from this section that before the Court can make the order of adjudication upon the petition, the Court has to be satisfied with the proof of the right to present the petition, in other words, that the requirements of secs. 5 and 6 have been fulfilled. Now in the case before us, it is not disputed that the Petitioner has applied to be adjudged an insolvent. The presentation of such an application by itself constitutes an act of insolvency. It is further not disputed that the Petitioner is indebted to the extent of more than Rs. 500 because the amount alleged to be due to the opposing creditor is in excess of Rs. 500. It is clear, therefore, that there was ample proof of the right of the Appellant to present the petition. The question now arises whether there was any valid ground for the dismissal of the application. The learned Judge has proceeded on the ground that the conduct of the Petitioner has not been satisfactory and that he has made a false statement in his application inasmuch as he mentions the name of a certain person as creditor in whose favour he had created a fictitious debt. It is obvious, however, from sub-sec. (1) of sec. 15 that these are not circumstances which can be taken into account by the Court at this stage to determine whether the application should be granted or refused. Reliance has been placed by the learned Vakil for the Respondent upon the concluding words of sub-sec. (1) of sec. 15 which lay down the rule that where the Court is satisfied by the debtor that he is able to pay his debts or that for any other sufficient cause no order ought to be made, the Court shall dismiss the petition. But it is clear that this portion of sub-sec. (1) of sec. 15 refers only to cases in which the application has been made by the creditor and is opposed by the debtor. In such a contingency, if the debtor can satisfy the Court that he is able to pay his debts or that for any other sufficient cause [such as those mentioned in Exp. Dixon(1), and Exb. Oram(2)], no order ought to be made, it is the duty of the Court to dismiss the petition. It is clear, therefore, that the grounds upon which the learned Judge has dismissed the application, could not have been taken by him into account for the purpose of determining whether the application ought to be allowed or refused, The language of sec. 15 is closely analogous to that used in the English Bankruptcy Act of 1883, sec. 7, sub-sec. (3), under which the question of bad faith would not be taken into account by the Court at the preliminary stage for determining whether the application ought to be granted or refused. In fact, the conduct of the Petitioner in relation to his creditors can be taken into account only at a later stage of the proceeding, when the question of discharge of the Petitioner arises for consideration. This is clear from the provisions of secs. 43 and 44 of the Provincial Insolvency Act. Sec. 43 defines the duties of debtors and sub-sec. (2) of that section provides that if a debtor whether before or after the making of an order of adjudication commits acts of bad faith, the Court may sentence him to simple imprisonment. Sec. 44 provides that it is the duty of the Court to take into account certain circumstances when it is called upon to consider the application for discharge. Sub-sec. (3) of sec. 44 provides that the Court shall refuse to grant an absolute order of discharge on proof of any of the various circumstances mentioned in the sub-section, and the acts of which the debtor might be guilty so as to deprive him of the ultimate benefit of the provisions of the Provincial Insolvency Act may generally be described as acts of bad faith. It is clear from this section that the question whether the debtor has or has not committed acts of bad faith is to be determined by the Court not at the preliminary stage when the order of adjudication has to be made but at the final stage when application is made for an order of discharge. The learned Vakil for the Respondent however objected that if the interpretation were put upon the provisions of the law, an order for adjudication might be obtained almost as a matter of course. No doubt that would be the result, but that is precisely the policy of the Legislature. As was pointed out by Mr. Justice Bigham in In re Button when a man's affairs becomes so involved that he cannot properly carry on his business, it becomes his duty to himself and to his creditors to present his petition to the Court. He commits no tort against any one nor does he break any contract by discharging this duty. Certain statutory consequences no doubt follow on the act so done. One of these consequences is that his property passes to his trustee and becomes divisible amongst his creditors which is clearly not a matter for regret. It may be pointed out that the interpretation which we put upon the provisions of the Provincial Insolvency Act are not likely to lead to fraud as suggested by the learned Vakil for the Respondent. If an insolvent debtor has committed acts of bad faith and has nevertheless obtained an order of adjudication, he has not thereby obtained any opportunity to evade his liabilities. The effect of the order of adjudication is merely to vest his properties in the Court for the benefit of his creditors. But he cannot obtain the final order of discharge unless he can prove that he has not been guilty of any act of bad faith. This in fact is the fundamental distinction between the provisions of the Civil Procedure Code of 1882 and the Insolvency Act of 1907. Whereas under the former law, before the Petitioner could be adjudged an insolvent, his conduct in respect of his creditors and in relation to the disposal of his own properties had to be taken into account; under the latter Act, the order of adjudication follows almost as a matter of course upon the presentation of the insolvency application and the question of the conduct of the Petitioner becomes material only when he asks for an order of discharge. We may further point out in so far as the present case is concerned, that the question of the reality of the debt in favour of Nagendra Ganguli must be determined under sec. 24; and it is desirable that an adjudication upon that point should take place in the presence of the creditor concerned. If the order made by the learned Judge is maintained, what is the position? The Petitioner does not obtain an order of adjudication. The opposing creditor succeeds in defeating the application on the ground that the debt created in favour of Nagendra is fictitious. But that order is in no way binding upon Nagendra because the point has not been determined in his presence, and it would be quite open to Nagendra to prove that his security is not fictitious in a suit brought to enforce it. On the other hand, if an order of adjudication is made and the true character of the alleged debt is determined as provided in the Provincial Insolvency Act, the whole matter could be finally adjudicated upon in one proceeding.

The result therefore is that this appeal is allowed, the order of the Court below is set aside and the order of adjudication is made. The case will be remitted to the District Judge in order that he may appoint a Receiver and deal with the matter as provided in the Act. There will be no order for cost as neither party is to blame for the erroneous order made by the Court below.

Appeal allowed.