Citation Codes

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Case Number

Civil Revision Petition No. 1687 of 1939

Advocates

V. Rangachari for petitioner.
B.V Ramanarasu (amicus curiae).
Respondents were not represented.

Judges

Somayya, J.

Acts

section 144, Civil Procedure Code, read with section 55 of the Provincial Insolvency Act.
section 50 of the Provincial Insolvency Act, says this:Under rule 73 of 1870,
SECTION 75 PROVINCIAL INSOLVENCY ACT
SECTION 144 CIVIL PROCEDURE CODE
SECTION 50 PROVINCIAL INSOLVENCY ACT
rule 73 of the Bankruptcy Rules, 1870,
SECTION 72 CONTRACT ACT
section 50 of Act V of 1920

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Smart Summary

Judgment Summary — Somayya, J.

Factual and Procedural Background

This revision petition was filed under section 75 of the Provincial Insolvency Act (V of 1920) challenging an order of the District Judge of West Godavari dated 8 March 1939. The District Judge had reversed an order of the Additional Subordinate Judge of Ellore that related to Interlocutory Application No. 4 of 1937 in Insolvency Petition No. 62 of 1934.

Interlocutory Application No. 4 of 1937 was brought under section 50 of the Provincial Insolvency Act to expunge the petitioner's entry as a creditor in the insolvency. The petitioner had been admitted as a creditor and had received a dividend paid by the Official Receiver. The application to expunge the creditor's name was resisted largely on the ground that there were no further assets to be realized by the Official Receiver and that the insolvency court had no power, even if it expunged a creditor's name, to require return of amounts already distributed; therefore, an inquiry on the merits was unnecessary.

The Additional Subordinate Judge (the lower court) heard this and other similar applications together, and—relying on authorities referenced in this opinion—dismissed Interlocutory Application No. 4 of 1937 and the related applications, effectively concluding that evidence on the merits need not be taken where there were no assets and where past dividends could not be recovered.

The District Judge of West Godavari reversed that order and remanded the applications for enquiry on the merits, taking the contrary view that the court had power to require a person who had received a dividend (and whose debt was later expunged) to bring back the money into court. The petitioner sought revision of the District Judge's order and contended that both English and Indian authorities establish that a creditor who has already been paid a dividend cannot be compelled to return it merely because the debt is subsequently expunged.

Legal Issues Presented

Whether, under section 50 of the Provincial Insolvency Act (corresponding to rule 73 of the Bankruptcy Rules, 1870), an order expunging a creditor's proof can be followed by a direction requiring the creditor to refund dividends already paid to him.
Whether an inquiry on the merits is necessary in cases where there are no further assets to be realized by the Official Receiver and past dividends cannot lawfully be recovered.
Whether the District Judge was correct in remanding the interlocutory applications for enquiry on the merits and in holding that the court has power to require repayment of dividends already distributed.

Arguments of the Parties

Petitioner's Arguments (seeking revision)

The petitioner argued that both English and Indian authorities establish that a creditor to whom a dividend has already been paid cannot be directed to return that amount merely because his debt is subsequently expunged from the list of creditors.
Implicitly, the petitioner maintained that an expunging order operates only to prevent participation in future dividends and does not affect dividends already received.

Opposing Arguments / Positions Referred To in the Opinion

The application to expunge was resisted principally on the ground that there were no other assets to be realized; even if a creditor's name ought to be expunged, the insolvency court lacked power to make an order directing return of amounts already paid by way of dividend, so an enquiry on the merits was unnecessary.
The District Judge took the opposite view on appeal, holding that the court does have the power to require repayment of dividends already distributed to a creditor whose debt is later expunged; on that basis he remanded the interlocutory applications for an enquiry on the merits.
The Additional Subordinate Judge (lower court) had relied on certain authorities in deciding that evidence on the merits was unnecessary and dismissed the expunging applications where past dividends could not be reclaimed.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Ex parte Harper; In re Tait (Jessel M.R.)	Held that lapse of time is no bar to expunging a proof; an order expunging a proof prevents the creditor from participating in future dividends but does not permit the Court to require repayment of dividends already paid.	The Court relied on this authority as establishing the controlling principle that dividends already paid cannot be recovered and that expunging affects only future dividends; it formed the central authority for reversing the District Judge's decision.
In re Searle, Hoare & Co. (Lawrence, J.)	Approved the principle that dividends already paid cannot be recovered; emphasised equitable principle that a beneficiary overpaid cannot receive further payments until others are levelled up.	The Court cited this case to support the proposition that expunging or reduction of a proof does not entitle recovery of dividends already distributed and to explain the equitable limitation on future participation.
Williams on Bankruptcy (textbook, cited)	Explains rule corresponding to section 50: trustee may apply to expunge a proof at any time, and creditor may retain any dividend already received.	Used as supporting authority confirming the established practice and principle that past dividends are retained by the creditor.
Mulla on the Law of Insolvency (textbook, cited)	States that the creditor is entitled to retain dividends already received; reduction affects only right to future dividends.	Relied upon as doctrinal support for the Court's conclusion about the effect of expunging a proof.
A.K.R.M.M.C.T Chettiar Firm v. S.P Dayabhoy & Sons (Page, C.J.)	Held that expunging a proof would not affect dividends already paid; cited Ex parte Harper approvingly.	The Court treated this decision as binding and consistent with Ex parte Harper, reinforcing the rule that past dividends are not recoverable.
In re Ramachandra Ganuji Waikar (Bombay High Court)	Held that where dividends were paid in ignorance of another creditor's prior claim, the Court may have power to compel recipients to return enough to satisfy the overlooked prior creditor (decision invoked by the lower appellate court).	The Court distinguished this case as involving different facts (an overlooked prior claim and payments made in ignorance) and noted that Ex parte Harper was not referred to there; it held the decision inapplicable to the present facts.
Official Assignee v. S.P Dayabhoy (Leach, J.)	States that money paid out by way of dividend in insolvency proceedings is not recoverable (citing Ex parte Harper), notes a contrary Bombay decision based on section 72 Contract Act but declines to follow it where A.K... is binding.	The Court relied on this decision to show judicial recognition that dividends already paid are not recoverable and to reject reliance on conflicting Bombay authority.
Panna Lal v. Abdullah	Held that where an adjudication is set aside, provisions of section 144 CPC (read with section 55 of the Provincial Insolvency Act) could apply to distributions made under that adjudication.	The Court observed that this decision concerned distributions made under an adjudication later set aside and therefore did not address the present question; it was not applicable to the present facts where distributions were properly made.

Court's Reasoning and Analysis

The Court proceeded by examining the authorities detailed above and compared their principles with the facts of the case. The principal analytical steps in the Court's reasoning are:

Identification of the statutory framework: the petition was brought under section 75 (revision) challenging an interlocutory order concerning an application under section 50 of the Provincial Insolvency Act (which corresponds to rule 73 of the Bankruptcy Rules, 1870). Section 50/rule 73 allows a trustee (or equivalent) to apply to expunge a wrongly admitted proof.
Analysis of controlling authorities: the Court treated Ex parte Harper; In re Tait as the leading authority, which holds that expunging a proof only prevents future participation in dividends and does not permit recovery of dividends already paid. The judgment of Jessel M.R. was quoted and emphasised for that principle.
Reliance on additional supporting authorities: the Court cited In re Searle, Hoare & Co. (Lawrence, J.), and authoritative texts (Williams on Bankruptcy and Mulla on the Law of Insolvency) that uniformly state that dividends already paid are retained by the creditor and that reduction or expunging affects only entitlement to future dividends. The Court also noted Page, C.J.'s statement in A.K.R.M.M.C.T Chettiar Firm v. S.P Dayabhoy & Sons that dividends already paid would not be affected.
Distinguishing contrary authority: the Court examined the Bombay High Court decision in In re Ramachandra Ganuji Waikar relied upon by the lower appellate court, and explained that that case dealt with a materially different fact situation — payments made in ignorance of another creditor's prior claim — and did not cite Ex parte Harper; therefore it was inapplicable to the present facts.
Consideration of other cited authorities: the Court referred to Official Assignee v. S.P Dayabhoy (Leach, J.) which aligns with the non-recoverability principle, while acknowledging that the Bombay decision relying on section 72 Contract Act was contrary but not followed because other decisions were binding.
Evaluation of the District Judge's conduct and findings: the Court reviewed the District Judge's criticism of the Official Receiver and his factual findings based on records called for from the Official Receiver's office. After examination of those records, the Court found no justification for the District Judge's adverse remarks and rejected the suggestion of personal liability of the Official Receiver.
Conclusion drawn from authorities and facts: applying the controlling precedents and the factual record, the Court concluded that the District Judge was wrong to remand for an enquiry on the merits on the basis that the court could require repayment of dividends already paid. The proper legal position is that expunging a proof affects only future dividends; past dividends lawfully paid are not recoverable in these circumstances.

Holding and Implications

Holding: The Court reversed the decision of the lower appellate Court (the District Judge, West Godavari) and restored the decision of the Additional Subordinate Judge of Ellore. The costs of the revision and the lower appellate proceedings were ordered to be paid by the first respondent.

Implications:

The direct effect of the decision is to uphold the principle, as applied to these facts, that a creditor who has already received a lawfully distributed dividend in insolvency proceedings cannot be compelled to return that dividend merely because his proof is later expunged under section 50 of the Provincial Insolvency Act.
The Court distinguished and declined to apply the Bombay High Court's decision in In re Ramachandra Ganuji Waikar on its facts. The judgment reaffirms and follows earlier authorities (including Ex parte Harper; In re Tait and A.K.R.M.M.C.T Chettiar Firm v. S.P Dayabhoy & Sons) rather than creating a new rule expanding the court's power to recover past dividends in the circumstances before it.
Where the opinion does not discuss broader novel legal consequences, the practical consequence is confined to the reversal of the District Judge's remand and vindication of the Official Receiver's conduct; no new precedent beyond the application of established authorities was articulated.

Note: This summary is strictly confined to the matters expressly dealt with in the opinion and does not add or infer facts or law beyond those stated by the Court.

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Cherukuri Gangaraju (First ), v. Seemakurti Lakshminarayanamurti And Three Others (Petitioner, Second And Nil),

Somayya, J.:— This is a revision petition filed under section 75 of the Provincial Insolvency Act (V of 1920) and the petitioner seeks to revise the order of the District Judge of West Godavari, dated 8th March 1939, passed by him in Civil Miscellaneous Appeal No. 139 of 1937. By that order the District Judge reversed the order of the Additional Subordinate Judge of Ellore passed by him in Interlocutory Application No. 4 of 1937 in Insolvency Petition No. 62 of 1934.

Interlocutory Application No. 4 of 1937 which has given rise to this revision petition was one filed under section 50 of Act V of 1920 for expunging the entry of the petitioner as a creditor in the insolvency. The petitioner was admitted as a creditor and a dividend was paid to him by the Official Receiver. Subsequently Interlocutory Application No. 4 of 1937 was filed for action under section 50 of the Act. The application was resisted mainly on the ground that there were no other assets to be realised by the Official Receiver and the insolvency Court had no power, even if it found that a creditor's name ought to be expunged, to make an order that the amount already paid to him by way of a dividend should be brought back by him and that therefore an enquiry on the merits was not called for in this case. If, after an order expunging his name from the list of creditors, the Court could not follow it up by making an order directing him to bring back the amount that had already been distributed to him and there was no prospect of any future dividend, then it is clear that an enquiry on the merits would be wholly unnecessary. There were also other applications filed to expunge the names of other creditors from the list. These applications were all heard together by the Additional Subordinate Judge and he decided, relying upon certain authorities to be presently referred to, that the position stated above was the correct one and that therefore there was no need to take evidence on the question whether the various debts were really true debts. He therefore dismissed Interlocutory Application No. 4 of 1937 and also the other applications along with it. Appeals were filed in the District Court of West Godavari and the District Judge reversed the decision of the Subordinate Judge and remanded Interlocutory Application No. 4 of 1937 and other petitions for enquiry on the merits. The District Judge took the view that the Court has got the power to require a person to whom a dividend has been distributed, and whose debt is subsequently directed to be expunged from the list of creditors, to bring back the money into Court. The petitioner challenges the correctness of this order and contends that both in England and in India the position is well established that a creditor to whom a dividend has been paid cannot be directed to bring back that amount merely by reason of the fact that subsequently the debt is expunged from the list of creditors. On an examination of the authorities, I think the position advanced by the petitioner is correct and that the view taken by the District Judge is wrong.

In Ex parte Harper, In re Tait Jessel M.R, while holding that lapse of time is no bar to a petition for expunging a debt, pointed out that an order expunging the debt would only operate to prevent the creditor from participating in future dividends and that he cannot be called, upon to pay back what he had already received. That was a decision under rule 73 of the Bankruptcy Rules, 1870, under which a trustee in bankruptcy who has admitted a proof against the estate is entitled at any time afterwards to apply to the Court to expunge the proof on the ground that it was originally wrongly admitted. This rule corresponds to section 50 of the Provincial Insolvency Act. At page 541, Jessel M.R says this:

“There was no limit to the time within which a proof might be expunged. In the cases which I have already mentioned the proof was expunged on the ground that its original admission had been wrong. The new rule is in accordance with the old practice. And no injustice can be done, because any dividends which have been already paid are allowed to be retained by the creditor, and the expunging affects only the right to receive future dividends.”

In In re Searle, Hoare & Co.(2) Lawrence, J. approved of the principle that dividends paid already cannot be recovered and held that, while the debt of a creditor was reduced, he is not entitled to participate in the future dividends until and unless the other creditors were paid to the extent to which he was paid. On page 327, Lawrence, J., refers to the remarks of Jessel M.R in the earlier case with approval and then proceeds to say this:

“The mere fact that the trustee cannot recover either payments made to a person whose proof is subsequently expunged or over payments made to a creditor whose proof is subsequently reduced does not, in my opinion, prevent the operation of the well known principle of equity that a beneficiary who has been overpaid is not entitled to receive any further payment out of the trust fund until the payments to the other beneficiaries are levelled up to the amount received by the overpaid beneficiary.”

Williams in his work on Bankruptcy, Fifteenth Edition, at page 528, under rule 24, after setting out rule 24 which corresponds to section 50 of the Provincial Insolvency Act, says this:

“Under rule 73 of 1870, and the previous practice, the trustee was entitled at any time, afterwards to apply to expunge a proof which he had originally wrongly admitted, and mere lapse of time was no objection, though the creditor was entitled to retain any dividend already received.”

Mulla in his Law of Insolvency says on page 495:

“The creditor, however, is entitled to retain the dividends already received, the reduction affecting only the right to receive future dividends.”

Page, C.J:— Who delivered the leading judgment in A.K.R.M.M.C.T Chettiar Firm v. S.P Dayabhoy & Sons says on page 708:

“For the reasons that I have given, it is immaterial as between the first respondent and the appellant whether the proof by Musafer's representatives ought or ought not to be expunged, because even if it was ordered that the proof ought to be expunged dividends already paid would not be affected [Ex parte Harper. In re Tait].”

The decision of the Bombay High Court in In re Ramachandra Ganuji Waikar(3) referred to by the lower appellate Court has no application to the present case. There, in ignorance of the existence of the claim of another creditor who had lodged his, claim prior to the declaration of a dividend, certain dividends were paid out and the question was whether the Court had got the power to compel the creditors who had received the amount to bring back enough to pay the creditor whose claim had been overlooked. The decision in Ex parte Harper. In re Tait is not even referred to and the case itself relates to a different set of facts.

In Official Assignee v. S.P Dayabhoy Leach, J. (as he then was) says this on pages 236 and 237:

“The money which has been paid out to a creditor by way of dividend in insolvency proceedings is not recoverable in law, Ex parte Harper. In re Tait and A.K.B.M.M.C.T Chettiar Firm v. S.P Dayabhoy & Sons. The expunging of a proof only affects the right to receive future dividends, … Mr. Kalyanvalla has also relied on a decision of the Bombay High Court in In re Ramachandra Ganuji Waihar(4). It was there held by Marten, J. that, where creditors have been paid more than they were entitled to by way of dividend, the Official Assignee is entitled to recover the excess payment on the ground of mistake under section 72 of the Contract Act. This decision runs contrary to the decision in Ex parte Harper. In re Tait and the decision in A.K.R.M.M.G.T Chettiar Firm v. S.P Dayabhoy & Sons, but it is not necessary for me to discuss it as the last mentioned case is binding on me.”

The case reported as Panna Lal v. Abdullah(5) which has been referred to by the Court below decided that, where a distribution was made under an order of adjudication which was later on set aside, the provisions of section 144, Civil Procedure Code, could be applied. Where the adjudication itself was set aside later on, the whole ground for distributing the amounts was taken away and the case would be covered directly by section 144, Civil Procedure Code, read with section 55 of the Provincial Insolvency Act. This decision does not touch the question which calls for decision in this case. In the present case there was no question of any non-compliance with the rules. The Official Receiver acted quite properly in distributing the amounts in his hands. The District Judge has gone entirely off the track and has indulged in a good deal of criticism against the Official Receiver. For this purpose he called for the various records from the Official Receiver's office and has set out in paragraph 9 of his judgment what he considers the facts which were disclosed by those records and then says that certain irregularities committed by the Official Receiver came to light during the arguments of the appeals. I have been taken through the records and I hold that there is absolutely no justification for any of the District Judge's remarks against the Official Receiver. The District Judge went out of his way and remarked that the Official Receiver would even be personally liable but I see no justification for that remark as well.

I reverse the decision of the lower appellate Court and restore that of the Additional Subordinate Judge with costs here and in the lower appellate Court to be paid by the first respondent. It is regrettable that the respondents did not appear, but their case has not suffered as I requested Mr. B.V Ramanarasu to help the Court and represent what could be said on their behalf.

N.S

Cherukuri Gangaraju ... v. Seemakurti Lakshmina...