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Case Number

A.A.A.O No. 257 of 1943 and C.R.P No. 1375 of 1943.

Attorney(S)

Mr. K.S Desikan for Appt.
Mr. S. Krishnamachari for Respt.

Judges

Horwill, J.

Acts

SECTION 54 A PROVINCIAL INSOLVENCY ACT

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Smart Summary

Concise Analytical Summary of the Opinion

Factual and Procedural Background

This Civil Miscellaneous Second Appeal and Civil Revision Petition challenge an order of the District Judge of West Tanjore arising from an application by the Official Receiver to set aside a usufructuary mortgage executed by three insolvents in favour of the respondent and to recover Rs. 2,800 paid to the respondent. The trial Court and the District Judge found the transactions to be fraudulent preferences and set them aside only as to the insolvents' shares; transfers as to certain family members not declared insolvents were not set aside. The District Judge granted mesne profits but limited them to run from the date of his order rather than from the date of the Official Receiver’s application. The Official Receiver appeals on two primary grounds: (1) refusal to set aside the mortgage insofar as it affected shares of persons who were not insolvents; and (2) refusal to award mesne profits from the date of the Official Receiver's application. The alienee (respondent) filed a memorandum of cross-objections contending that the finding of fraudulent preference was insufficiently justified and that the court erred in ordering repayment of the entire Rs. 2,800.

Legal Issues Presented

Whether a second appeal lies from the order made under Section 54 of the Provincial Insolvency Act, and whether the courts may nevertheless entertain the matters by civil revision where questions of jurisdiction arise.
Whether Sections 53 and 54 of the Provincial Insolvency Act permit the Insolvency Court to set aside a transfer only as to the shares of those adjudicated insolvent, or whether a transfer by a Hindu father can be set aside as to the whole property including undivided sons' shares.
Whether the Insolvency Court (or the District Judge) has jurisdiction to award mesne profits in insolvency proceedings.
From what date mesne profits may be awarded when a transaction is set aside as fraudulent — from the date of the court order annulling the transaction, the date of the execution of the deed, or the date of the petition by the Official Receiver.
Whether the respondent must repay the entire Rs. 2,800 or only the portion attributable to the insolvents' shares.

Arguments of the Parties

Official Receiver's Arguments

Applied to set aside the usufructuary mortgage executed by the three insolvents in favour of the respondent and to recover Rs. 2,800.
Contended that the mortgage and payment were fraudulent preferences and should be set aside as to all involved shares (including those of family members who had not been declared insolvents).
Claimed mesne profits from the date of his application to set aside the alienations (earlier than the date of the District Judge's order).

Alienee's (Respondent's) Arguments

Filed a memorandum of cross-objections asserting there was insufficient justification for the lower Courts' finding that the transactions amounted to fraudulent preference in favour of the transferee.
Contended the lower Court was wrong in ordering the respondent to repay the whole of Rs. 2,800 (i.e., argued that repayment of the full sum was not appropriate).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Jashi Parvalhavardhanamma v. Adusumalli Venkataramiah (1944) 1 M.L.J. 19	Sections 53 and 54 apply to transfers by an insolvent and, when the transfer is by an insolvent with others, the Insolvency Court's jurisdiction is limited to the insolvent's shares.	The Court cited this decision (Kuppuswami Ayyar, J.) as supporting the conclusion that only the insolvents' shares could be set aside under the Insolvency Act; used to justify affirming the limited scope of annulment in the present case.
Subramania Chettiar v. Subbaraya Goundan (1934) M.W.N. 801	Decision (Sundaram Chetti, J.) that Sections 53/54 limit the Insolvency Court's jurisdiction to the insolvent's share when transfers involve insolvent with others.	Referred to as a leading decision followed in Jashi Parvalhavardhanamma; Court regarded this line of authority as aligned with later decisions and used it to construe the limits of relief to insolvents' shares.
Palaniappa Chetli v. Official Receiver (Madura)	Pandrang Row, J.'s view that a Hindu father may have power to transfer his undivided sons' shares so a transfer by a father might be set aside wholly.	The Court distinguished this principle on the facts: where a document shows fathers acting as guardians (and minors being parties) or a son being a party in his own right, the father's act is not the exercise of the undivided-father power; thus the Pandrang Row principle did not control here.
Palanivelu Odayar v. The Official Receiver, West Tanjore (1931) 61 M.L.J. 763	Holds that the Insolvency Court has jurisdiction to grant mesne profits.	Used to support the conclusion that the Insolvency Court may exercise equitable powers analogous to ordinary Civil Courts and award mesne profits in insolvency proceedings.
Balakrishnan v. Digambardas A.I.R. 1936 Nag. 139	Support for the proposition that, because the transaction is voidable (not void), mesne profits could logically be confined to run only from the date of the order annulling the transaction.	The Court acknowledged this case as supporting the District Judge's logical position, but held that equitable considerations warranted awarding mesne profits from an earlier date in fraud cases.
Satagur Prasad v. Mahant Har Naraindas (1932) 62 M.L.J. 451	Privy Council: a plaintiff whose transaction is rescinded for fraud is entitled to mesne profits on general principles of equity; rescission aims at restitutio in integrum.	Quoted to support the equitable principle that rescission for fraud should, as far as possible, restore parties to their original positions and permit mesne profits from the relevant earlier date.
Queen v. Saddlers Co. (1863) 10 H.L.C. 404 at 420; 11 E.R.	Lord Blackburn: Fraud renders a transaction voidable at the election of the defrauded party, and when avoided the rights/remedies are the same as if the transaction had been void from the beginning.	Quoted to reinforce the equitable foundation for awarding mesne profits as though the fraudulent transaction had been void ab initio once avoided.
Mulhallan v. Marum (3 Dr. and War. 317)	Case where, due to very late application, mesne profits were awarded only from the date of the application to avoid the transaction.	Applied to justify limiting mesne profits to begin from the date of the petition/application in cases of delay; the Court awarded the appellant the share of mesne profits from 17 July 1933 attributable to the insolvents.

Court's Reasoning and Analysis

The Court proceeded in a series of discrete analytical steps confined to the material and authorities cited in the opinion:

Jurisdiction and procedural posture:
The Court observed that an order under Section 54 ordinarily does not admit of a second appeal. Although the application had been filed also under Section 4, the lower Court did not need to rely on Section 4 for the orders made; therefore, strictly speaking, no second appeal lies. Because the Official Receiver had also filed a civil revision petition and the contested points involved jurisdiction, the Court treated the matters raised in both the second appeal, the civil revision petition, and the memorandum of cross-objections as properly examinable.
Scope of relief under Sections 53 and 54 when transfer involves insolvent and non-insolvent co-transferees:
The Court analyzed competing authorities: some decisions (e.g., Sundaram Chetti, J.; followed by Kuppuswami Ayyar, J.) hold that Sections 53 & 54 operate only in respect of the insolvent's share when transfers are by an insolvent together with others. Another view (Pandrang Row, J.) recognized that a Hindu father might bind undivided sons by exercising his paternal power and so a transfer could be wholly set aside. The Court resolved the apparent conflict by focusing on the documentary evidence: if the transfer instrument demonstrates the father is acting as guardian and the sons (or grandsons) are made parties or one son is a major and personally executed the instrument, then the father is not purporting to exercise the undivided-father power. Applying that test to Exhibit I (mortgage deed), the Court found fathers executed for themselves and as guardians of minors, and one grandson was a major and a party; therefore the insolvents were not exercising a father's right to transfer their sons' shares and the Insolvency Court's jurisdiction extended only to the insolvents' shares.
Power to award mesne profits in insolvency proceedings:
Although Section 54 does not explicitly grant power to award mesne profits, the Court accepted precedent (Palanivelu Odayar) and principle that the Insolvency Court possesses equitable powers analogous to ordinary Civil Courts and may order such relief as equity requires, including mesne profits.
Proper temporal scope of mesne profits where a transaction is set aside for fraud:
The Court considered whether mesne profits should run from the date of the court's annulling order (the District Judge's view, supported by logic and the Balakrishnan decision) or from an earlier date (execution of deed or date of petition). The Court concluded that equity and the doctrine of restitutio in integrum require that, where possession is wrongful by reason of fraud, mesne profits be awarded so as to place the parties as nearly as possible in their original position. Thus mesne profits can be awarded from the date of the transaction or at least from the date of the petition where the Official Receiver has exercised the option to avoid the document. The Court distinguished cases of non-fraudulent family alienations (where different balancing considerations arise) and noted Mulhallan v. Marum as authority for awarding mesne profits only from the date of the application where there has been undue delay. Applying these principles, the Court awarded the appellant that share of mesne profits from 17 July 1933 attributable to the insolvents' shares.
Repayment of Rs. 2,800:
On the available material the Court concluded that the Rs. 2,800 paid to the respondent was likely paid from joint family funds. Consequently the respondent should repay only that portion of Rs. 2,800 which can be attributed to the shares of the insolvents; interest is to run on the reduced amount.
Other factual questions and costs:
The Court declined to reconsider other questions of fact raised in the memorandum of cross-objections in revision. Because both parties succeeded and failed in part, the Court directed that there be no order as to costs in the Civil Revision Petition or in the memorandum of cross-objections.

Holding and Implications

Holding:

The Court modified the lower Court's order: the usufructuary mortgage is set aside only as regards the shares of the adjudicated insolvents; mesne profits are awarded to the Official Receiver for that share from 17 July 1933 (to the extent attributable to the insolvents' shares); and the respondent is ordered to repay only that portion of Rs. 2,800 attributable to the insolvents, with interest calculated on the reduced amount.

Implications:

The direct effect: relief under the Insolvency Act is confined, on these facts, to the shares of persons adjudicated insolvent; non-insolvent co-owners' shares were not set aside because the instrument evidenced fathers acting as guardians or because relevant co-owners were parties in their own right.
The Insolvency Court (and courts exercising revision) may award mesne profits in equity when fraudulent preference is found; such mesne profits may be dated back to the transaction date or, where appropriate (including considerations of delay), to the date of the petition—here fixed at 17 July 1933 for the insolvents' share.
No order as to costs was made because both parties succeeded and failed in part.
The opinion applies and interprets existing authorities rather than announcing a novel rule; it does not purport to establish a new precedent beyond its application of existing case law to the facts at hand.

End of summary — all statements above are drawn exclusively from the provided opinion text.

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The Official Receiver, West Tanjore v. Naminadha Mudaliar

1. This Civil Miscellaneous Second Appeal and the Civil Revision Petition have been filed against the order of the District Judge of West Tanjore on an application by the Official Receiver to set aside a usufructuary mortgage executed by three insolvents in favour of the respondent and also a payment to him of Rs. 2,800. The learned District Judge agreed with the trial Court that the transactions in question were fraudulent preferences. The transactions were therefore set aside as far as the insolvents' share in the property was concerned but not with regard to the shares of certain members of the insolvents' family who had not been declared insolvents. The Official Receiver also claimed mesne profits, which was granted by the District Judge from the date of order and not, as the Official Receiver claimed, from the date of his application to set aside the alienations. The appeal and civil revision petition have been filed by the Official Receiver because of the refusal of the District Judge to set aside the mortgage as far as the shares of those who were not insolvents were concerned, and also because of the disallowance of mesne profits from the date of application. A memorandum of cross objections has been filed by the alienee, contending that there was no sufficient justification for the finding of the Courts below that the transactions were in fraudulent preference of the transferee. It is also contended that the lower Court was wrong in ordering the respondent to repay the whole of the Rs. 2,800 paid to him.

2. Since the order of the first Court was under Section 54 of the Act no second appeal lies. The application was no doubt filed under Section 4 also; but it was not necessary for the lower Court to invoke the provisions of section 4 in passing the orders it did. No second appeal therefore lies. As however the Official Receiver has taken the precaution to file a civil revision petition also, and the questions raised are questions of jurisdiction, the matters raised both in the civil miscellaneous second appeal, civil revision petition, as well as in the memorandum of cross-objections, can be considered.

3. With regard to the main point in appeal, I am satisfied that the lower appellate Court was right, though there has been some difference of opinion in this Court as to the law to be applied. Kuppuswami Ayyar, J., in Jashi Parvalhavardhanamma v. Adusumalli Venkataramiah (1944) 1 M.L.J. 19, pointed out that Sections 53 and 54 applied to transfers of property by an insolvent and that if, therefore, the transfer was by an insolvent and others, the Insolvency Court would have jurisdiction only with regard to the shares of the insolvent. In this conclusion he followed the decision of Sundaram Chetti, J., in Subramania Chettiar v. Subbaraya Goundan (1934) M.W.N. 801. Pandrang Row, J., in Palaniappa Chetli v. Official Receiver, Maduraa,in considering the arguments of Sundaram Chetti, J., pointed out that although Section 53 dealt with transfers by insolvents, a Hindu father had power to transfer not only his own share but also the share of his undivided sons and that the transfer could therefore be wholly set aside. Kuppuswami Ayyar, J., considered that the decisions of Sundaram Chetti, J., and Pandrang Row, J., were necessarily inconsistent, and he preferred the decision of Sundaram Chetti, J., as being more in accord with the later decisions of this Court. There is, however, no necessary conflict between the law laid down by Sundaram Chetti, J., and that laid down by Pandrang Row, J. If it appears from the document of transfer that the insolvent was transferring the share of his son by virtue of his right as an undivided father, the principle of law enunciated by Pandrang Row, J., might perhaps be applied. If, on the other hand, the document showed that the son was himself a party to the transaction, then the father was not purporting to exercise his right as a father.

4. If we examine Ex. I, we find that the mortgage deed was executed by the three insolvents, who are a father and two sons, and by three grandsons who were not insolvents. Of these, one Subramania Chetti was a major and the other two were minors. The document indicates that the fathers were executing this document for themselves and as guardians of the minors. If they executed the document as guardians of the minors, they could not have been executing it merely as undivided fathers with a right to transfer their sons' shares, in which case it would not have been necessary to make the minors parties to the transaction. Moreover, as already pointed out, one of the grandsons was a major, and as he represented himself in this document his father could not have purported to transfer his share by virtue of his right as an undivided father. There is therefore no doubt that the insolvents in this case were not exercising their rights as Hindu fathers to sell their sons' shares. The Insolvency Court had jurisdiction to deal only with the shares of the insolvents.

5. Section 54 of the Provincial Insolvency Act does not in itself give power to th» Insolvency Court to award mesne profits; but I have no doubt that the Insolvency Court has the same jurisdiction as the ordinary Civil Courts to pass such orders as equity may require. In Palanivelu Odayar v. The Official Receiver, West Tanjore (1931) 61 M.L.J. 763, Madhavan Nair and Jackson, JJ., held that the Insolvency Court had jurisdiction to pass an order for payment of mesne profits. Other cases referred to in another connection show that the mesne profits have been awarded in insolvency cases, though their jurisdiction to do so was not specifically in question.

6. The question is whether, as the learned District Judge thought, the Court had no power to grant mesne profits for any period prior to its order annulling the transaction or whether the Court had power to award mesne profits from the date of the execution of the deed or the date of the filing of the petition by the Official Receiver to set aside the alienations. Section 54 says that on a petition presented by the Official Receiver within three months of the transfer, the transfer shall be deemed to be fraudulent and void against the Receiver and shall be annulled by the Court. The question has been considered in many cases whether the word " void " here really means void or it means voidable; but there is now no room to doubt that it means voidable. The mere fact that the Court has to annul the transaction is itself a sufficient indication that the transaction is only a voidable one. If it was void ab initio there would have been no necessity for the Court to annul it. The learned District Judge argues that since the transaction was only a voidable one and was not void until set aside, mesne profits could only be granted from the date when the Court passed the ordef annulling the transaction. There is some force in this argument, and it receives support from the decision in Balakrishnan v. Digambardas A.I.R. 1936 Nag. 139. But this logical argument overlooks the power of the Court to do equity. Mesne profits can be granted wherever the other party has been in wrongful possession; and possession obtained by fraud is wrongful possession. If a transaction is fraudulent and the transaction is set aside, the Court in its equitable juris diction attempts to put the parties in the same positioh as if the fraud had not been committed. That can only be done in this case by awarding mesne profits from the date of the transaction as if it were a void transaction--or at any rate from the date of the petition, when the Official Receiver exercised his option to avoid the document. There is no analogy between a case like this and the setting aside of an alienation by a manager of the family, where it has been found that the alienation was not for family necessity. In such a case, not only is the loss of mesne profits balanced by the profit arising from the use of the money which was the consideration for the sale, but there is no fraud, and therefore no necessity for the Court to attempt to put the parties in the position they would have occupied, had the alienation not been made. As to the right of a plaintiff, upon a transaction, being set aside on the ground of fraud, to mesne profits, their Lordships of the Privy Council in Satagur Prasad v. Mahant Har Naraindas (1932) 62 M.L.J. 451 at 455 : L.R. 59 1083. I.A. 147 : I.L.R. 7 Luck. 64 (P.C.), say:

.... their Lordships think that the plaintiff is entitled to succeed in his claim (to mesne profits) upon general principles of equity. So it is stated in Kerr on Fraud and Mistake (6th edition, page 469) dealing with the doctrine of'restitutio in integrum that 'a party exercising his option to rescind is entitled to be restored as far as possible to his former position.' For this proposition there is ample authority. In Queen v. Saddltirs Co. (1863) 10 H.L.C. 404 at 420 : 11 E.R., Lord Blackburn says, ' Fraud, as I think, renders any transaction voidable at the election of the party defrauded; and if, when it is avoided, nothing has occurred to alter the position of affairs, the rights and remedies of the parties are the; same as if it had been void from the beginning.

In Mulhallan v. Marum 3 Dr. and War. 317 a similar question was considered. There, since the application had been mads very late, mesne profits were granted only from the date of the application to avoid the transaction. The appellant in this case will be granted that«share of the mesne profits from 17th July, 1933, which can be attributed to the shares of the insolvents.

7. I have little doubt that the Rs. 2,800 paid to the respondent was paid from the joint family funds and that therefore this respondent would have to repay only the Shares of those who were adjudicated insolvents. The order of the lower Court will therefore be modified by ordering the respondent to repay only that share of Rs. 2,800 which can be attributed to the insolvents. The interest awarded will naturally be on the lesser amount.

8. The other questions raised in the memorandum of cross-objections are questions of fact which I am not prepared to reconsider in revision. As both parties have failed and succeeded in part there will be no order as to costs either in the Civil Revision Petition or in the memorandum of cross-objections.

The Official Receiver, West Tanjore v. Naminadha Mudaliar

Concise Analytical Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Official Receiver's Arguments

Alienee's (Respondent's) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

The Official Receiver, West Tanjore v. Naminadha Mudaliar

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