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Case Number

Original Side Appeal No. 31 of 1910

Attorney(S)

T.R Ramachandra Ayyar and T.S Natesa Sastri for respondents Nos. 7 to 9.
P. Narayanamutti and T. Arumainatham Pillai for the respondents Nos. 2, 3, 5 and 6.
T. Prakasam and A.E Rencontre for appellants.
T. Ramachandra Rao for the fourth respondent.

Judges

Sir Charles Arnold White
Kt., C.J
Oldfield, J.

Acts

sections 107 to 111 of the Presidency Towns Insolvency Act, 1909. Section 108
section 10 of the Judicature Act of 1875. Before that Act the rule
Order XX, rule 13 of the Code of Civil Procedure,
SECTION 28 ADMINISTRATOR GENERAL S ACT
Insolvency Court. Section 111
Indian Succession Act,

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Smart Summary

Summary of Opinion — White, C.J.

Factual and Procedural Background

J.S. Peters died intestate. Letters of administration were granted to the Administrator-General, who thereby undertook administration of the estate pursuant to the Administrator-General's Act (section 28 and related provisions). The Administrator-General treated the estate as insolvent and recognised claims by defendants Nos. 2 to 6 as entitled to priority of payment, on the basis of documents they held which they contended created charges over certain funds payable to Mr. Peters. The plaintiff brought suit, naming the Administrator-General as first defendant and the creditors claiming priority as defendants Nos. 2 to 6. The estate was admitted to be insolvent. At first instance the learned Judge described the matter as “a suit for the administration of the estate of the late J.S Peters” and dealt with whether defendants Nos. 2 to 6 were entitled to priority payment.

Legal Issues Presented

Whether Order XX, rule 13 of the Code of Civil Procedure (the rule governing administration by the Court where the property proves insufficient for payment in full of debts) applied to this suit.
Whether the grant of letters of administration to the Administrator-General precluded administration of the insolvent estate under insolvency laws (in particular the effect of sections 107–111 of the Presidency Towns Insolvency Act, 1909).
Whether the instruments relied on by defendants Nos. 2 to 6 (notably Exhibits XI, XIV, V, VI and XXI) created valid charges or equitable assignments over cheques or monies payable to Mr. Peters, giving those defendants priority over other creditors.
Whether an assignment or charge could operate over debts or cheques that came into existence after execution of the relevant instruments (i.e., validity of assignment of future debts or future cheques).
Whether the wording of the instruments was sufficiently precise to create a charge (the distinction between promises to pay “when” versus promises to pay “out of” a specific fund).

Arguments of the Parties

Appellant's Arguments (Mr. Prakasam)

He emphasized that, under the Indian Succession Act, the estate became vested in the Administrator-General; the nature of that vesting was relied upon in support of various contentions (including possible inapplicability of insolvency procedures).
He contended that the cheques or debts in question did not exist at the time of the instrument (they came into existence later), and therefore could not be the subject of an assignment.
He argued that the words of the instruments were not sufficiently specific to constitute a charge (relying on authority distinguishing a promise to pay “when” from a charge to pay “out of” a particular fund).

Some Defendants' Arguments (Mr. Narayanamurthi)

He drew attention to Indian precedents (for example, Bansidhar v. Sant Lal) supporting the validity of hypothecation or charges over property to come into existence in the future.

Plaintiff

The plaintiff challenged the priority claimed by defendants Nos. 2 to 6, instituting the suit against the Administrator-General and those defendants; the plaint followed broadly the administrative-suit form in the Code but noted that letters of administration had been granted to the Administrator-General.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Ex parte Nichols; In re James	Authority that an instrument may operate as a charge on cheques or monies payable for work done after the instrument was given (i.e., assignment/charge of future debts/receivables).	The court observed these judgments support the proposition that Exhibit XI might operate as a charge on future cheques or monies; the court accepted the relevance of the principle though ultimately treated the question of timing of payment as immaterial to its conclusion in this case (given other points about applicability of procedural rule).
Ex parte Moss; In re Toward	Same general principle as above: instruments can create charges on monies that become payable later.	Referred to alongside Ex parte Nichols/In re James to show that a charge over future payments can be effective; the court acknowledged the precedents but concluded the particular timing of payment did not defeat the charge in the present circumstances.
Collyar v. Isaacs	That a party cannot assign what has no existence, but can contract to assign future property; equity treats the contract as creating a complete assignment when the property comes into existence.	The court relied on this principle to reject the contention that a present assignment of future cheques is impossible; it supported construing Exhibit XI and similar instruments as contracts to assign future receivables which become effective when those receivables come into existence.
Tailby v. Official Receiver	House of Lords authority that an assignment of future book debts is good if the subject-matter can be identified.	The court cited this to support the proposition that assignments of future debts can be valid when identifiable; it formed part of the basis for construing the instruments in favour of creating equitable charges where the fund could be identified.
Bansidhar v. Sant Lal	Indian authority holding that hypothecation of produce to come into existence was valid.	The court cited this Indian case as supportive authority that hypothecations/charges over future property can be effective in India.
Ramsidh Pande v. Balgobind	Example where broadly worded instrument (“whatever property, etc., belonging to me”) was held to create a charge in the circumstances of that case.	The court referred to the case as an instance of a general form of wording being held sufficient; but noted the decision had later been doubted in another Allahabad case and the court did not express a definitive opinion on that prior decision's correctness.
Ryall v. Bowles	Principle that a promise to pay money “when the debtor receives a debt due to him from a third person” does not constitute an equitable assignment (contrast “when” vs. “out of”).	The court relied on this distinction to analyze the wording of the documents: it distinguished promises framed as payable “when” a debt comes in from promises or charges expressed to be payable “out of” a particular fund, treating the latter as capable of creating an equitable assignment/charge.
Field v. Megaw (noted in Ryall v. Bowles)	Illustrative note on the distinction between promises to pay “when” and promises to pay “out of” a fund.	Cited by the court as part of the authority explaining that a promise to pay “when” does not create an equitable assignment but a promise to pay “out of” a fund may do so; used to distinguish the instruments before the court.

Court's Reasoning and Analysis

The court proceeded through the following analytical steps, drawing strictly from the matters stated in the opinion:

Procedural-rule question: The court examined whether Order XX, rule 13 of the Code of Civil Procedure (which prescribes that, in court administration of a deceased person's property where assets are insufficient, the same rules as to secured and unsecured creditors as in insolvency proceedings shall be observed) applied. The wording of Order XX, rule 13 was noted to be almost identical to section 10 of the Judicature Act of 1875. The court initially thought the rule might apply but, after hearing full argument, concluded that it did not apply to this suit.
Relationship to insolvency machinery: The court considered the Presidency Towns Insolvency Act, 1909 (sections 107–111, and particularly section 108 and section 111). Section 108 allows a creditor to petition for administration in insolvency; section 111 excludes cases where probate or letters of administration have been granted to an Administrator-General from the section 108–110 machinery. The court observed that when letters of administration have been granted to the Administrator-General there is effectively no insolvency machinery available for administering the insolvent estate under those provisions, and that the practice in Bombay and Calcutta matched the court's local practice.
Nature of vesting: The court accepted the appellants' point that under the Indian Succession Act the estate vested in the Administrator-General, but held that this vesting is different in nature from vesting in a trustee or the Official Assignee under insolvency law. The Administrator-General's title gives him no higher title than the deceased had.
Character of the suit: The court examined whether the suit should be treated as an administration suit by the Court, to which Order XX, rule 13 might apply. It observed that although the learned Judge used general language calling it an administration suit and the plaint resembled the Code's administration form, the plaint also stated that letters of administration had been granted to the Administrator-General and the decree was not in the form of a typical administration decree. The learned Judge dealt only with the specific question whether defendants Nos. 2 to 6 were entitled to priority; he did not undertake a general administration decree. On these bases the court concluded Order XX, rule 13 did not apply.
Construction of instruments and factual background: Turning to the substantive dispute, the court examined the relationships and course of business between Mr. Peters, the plaintiff (who had earlier financed Peters), and the defendants (who later financed Peters and supplied labour/materials). The court accepted the first-instance finding that defendants Nos. 2 to 6 performed the work and supplied materials for which they claimed a charge on payments from the Madras Railway Company to Mr. Peters.
Specific documents and their construction:
- Exhibit XI (agreement dated 3rd September) contains language that the second defendant "should have a lien or charge over cheques or monies received for works done with your capital." The court considered Exhibit X (a prior letter of 2nd July 1906) and the subsequent course of business and concluded that Exhibit XI could be fairly construed as creating a charge on cheques or monies payable for work done after Exhibit XI was given.
- On the point that the cheques did not exist when Exhibit XI was executed, the court relied on Collyar v. Isaacs and Tailby v. Official Receiver to explain that a contract to assign future property is recognised in equity and becomes a complete assignment when the property comes into existence; thus an assignment of future book-debts or future receipts can be effective if identifiable.
- The court considered authorities and commentary (including Fisher on Mortgages) explaining the relevant test: whether the instrument indicates that the creditor is to be paid "out of" the fund (which can create an equitable assignment) rather than merely "when" the assignor gets the fund (which may not). The court applied this test and concluded Exhibit XI was of the "out of" kind and therefore could create a charge.
- Exhibit XIV ("I promise to pay ... from the commissions due to me on your works from coming cheques") was read as a promise to pay from commissions (i.e., from a specific fund) and not merely a promise to pay "when" cheques came in; the court concluded this created a charge.
- Exhibit XXI ("I will pay the amount for works you perform ... soon after cheques for the same are received deducting the usual commission...") was construed in light of the established course of business (Peters deducting commission and paying defendants the balance) as a promise to pay from a specific fund after deduction of agreed commission; the court treated this as capable of creating a charge.
- The court also found that Exhibits V and VI created charges.
Distinguishing negative authorities: The court considered Ryall v. Bowles and the example given in Field v. Megaw to highlight that promises framed as payable "when" the assignor receives funds do not create equitable assignments; but distinguished those cases from the present instruments which were construed as payable "out of" a specified fund.
Findings of fact and fraud: The court accepted the learned Judge's factual findings (including that defendants Nos. 2 to 6 did the work and that there was no sufficient basis to disturb the finding regarding an alleged fraud by Mr. Peters' agent).
Costs: Recognising the case was not free from difficulty, the court ordered that the parties may take their costs, taxed as between party and party, out of the estate of Mr. Peters, both in the appellate court and before the learned Judge.

Holding and Implications

Core Ruling: The Court agreed with the learned Judge's construction of the principal documents and his factual findings; it held that the instruments before the Court (notably Exhibits XI, XIV, V, VI and XXI, as construed in the judgment) were capable of creating charges or equitable assignments over specific funds (cheques or monies payable to Mr. Peters) and thus supported the priority claims made by defendants Nos. 2 to 6. The Court also held that Order XX, rule 13 of the Code of Civil Procedure did not apply to this suit.

Implications:

The documents relied on by defendants Nos. 2 to 6 were treated as creating charges over identifiable funds and so supported a claim to priority in payment from the insolvent estate.
The appointment of the Administrator-General and the vesting under the Indian Succession Act was held to differ in character from vesting under insolvency law; in particular, where letters of administration have been granted to the Administrator-General the specific insolvency procedures under the Presidency Towns Insolvency Act (sections 108–110) do not apply.
No broad new legal principle was announced; the Court applied established authorities on assignments of future property, and the decision is framed as an application of those principles to the instruments and facts before the Court. The decision's immediate practical effect was to uphold the priority of the defendants' claims as charged on specific funds and to direct costs to be paid from the estate.

Justice Oldfield agreed with the opinion of White, C.J., as recorded in the text.

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Navajee v. Administrator-General Of Madras

White, C.J:— In this case one J.S Paters died intestate and letters of administration were granted to the Administrator-General, Thereupon it became his duty under section 28 of the Administrator-General's Act (II of 1874) to distribute the assets. Section 28 directs the Administrator-General to distribute the assets and contains a provision that nothing contained in the section shall prejudice the right of any creditor or other claimant to follow the assets or any part thereof in the hands of the persons who may have received the same, respectively. Sections 34 and 35 contemplate suits by and against the Administrator-General. Section 35 deals with suits by creditors against the Administrator-General. The Administrator-General proceeded to administer the estate and in so doing held that defendants Nos. 2 to 6 were entitled to priority of payment by virtue of documents which they held which they contended amounted to charges given to them by J.S Peters and entitled them to payment out of certain funds in priority to the general body of creditors. The plaintiff thereupon brought this suit making the Administrator-General the first defendant and the creditors whose claims to priority had been recognised by the Administrator-General, defendants Nos. 2 to 6.

It is admitted that Mr. Peters' estate was insolvent. The learned judge said in his judgment: “This is a suit for the administration of the estate of the late J.S Peters.” The learned Judge's attention was not called to Order XX, rule 13 of the Code of Civil Procedure, which provides that “in the administration by the Court of the property of any deceased person, if such property proves to be insufficient for the payment in full of his debts and liabilities, the same rules shall be observed as to the respective rights of secured and unsecured creditors and as to debts and liabilities proveable, and as to the valuation of annuities and future and contingent liabilities, respectively, as may be in force for the time being, within the local limits of the Court in which the administration suit is pending with reepect to the estates of persons adjudged or declared insolvent.” I thought at one time in the course of the argument that a difficulty might arise in connection with the judgment of the learned Judge by reason of the fact that his attention had not been called to this rule and that he had not considered the question whether the rule was applicable to this suit. I was at one time disposed to think that Order XX, rule 13 of the Code of Civil Procedure did apply, but after hearing a full argument on the point I have come to the conclusion that it does not.

The policy of the law in connection with insolvent estates of deceased persons is indicated by sections 107 to 111 of the Presidency Towns Insolvency Act, 1909. Section 108 enables a creditor of the deceased debtor whose debt would have been sufficient to support an insolvency petition against the debtor had he been alive, to present to the Court a petition asking for an order for the administration of the estate in insolvency. There is a further provision that a petition for administration under this section shall not be presented to the Court after proceedings have been commenced in any Court of Justice; but that, in that case, the Court may, on its own motion, transfer the proceedings to the Insolvency Court. Section 111 provides that sections 108, 109 and 110 shall not apply to a case in which probate or letters of administration have been granted to an Administrator-General. The result seems to be that when probate has been granted to the Administrator-General there is no machinery for the, administration of the insolvent estate under the law of insolvency. We consulted the Administrator-General with regard to the practice and he has ascertained that the practice in Bombay and Calcutta is the same as here. I confess I do not quite understand the principle of the thing but this appears to be the law.

The words of Order XX, rule 13 of the Code of Civil Procedure, are almost, word for word, the same as section 10 of the Judicature Act of 1875. Before that Act the rule in bankruptcy was that a secured creditor must realize his security and prove for the balance. The rule in Chancery was that he could prove for his whole debt, but if, on the realization of the security there was a surplus, he must refund the surplus. The effect of the rule is not to apply all the principles of bankruptcy to insolvent estates but only to establish a uniformity of administration in respect of the four heads specifically mentioned in the section.

As regards the vesting of the estate about which we had a good deal of argument the rule says nothing with regard to vesting but merely deals with the heads specifically mentioned therein.

Mr. Prakasam who appeared for the appellants laid stress on the fact that under the Indian Succession Act, as be contended, this estate became vested in the Administrator-General. The nature of that vesting, as it seems to me, is different from the vesting in a trustee or in the Official Assignee by virtue of the operation of the law of insolvency. It gives the Administrator-General no higher title than the deceased had.

Is there anything to indicate that this suit is a suit for administration by the Court of the property of the deceased person to which the rule would apply except the fact that the learned Judge in general language describes it as “a suit for the administration of the estate of the late J.S Peters”? Mr. Prakasam has pointed out that the plaint follows more or less closely the form of plaint which we find in the schedule to the Code as the form for an administration suit by a creditor. There is this difference. In the present suit there is the statement that letters of administration were granted to the Administrator-General. No doubt one of the prayers is that the estate and effects of the deceased may be administered under the direction of this Court. But the decree is not in the form of a decree which is made in an administration suit. The learned Judge only purported to deal with the specific question as to whether defendants Nos. 2 to 6 were entitled to priority of payment and did not deal generally with the question of administration.

If Order XX, rule 13 of the Code of Civil Procedure, does not apply, the question whether we should, in dealing with this appeal, apply the principles of law upon which the decisions in Ex parte Nichols. In re James(1) and Ex parte Moss, In re Toward(2) are based, does not arise.

It remains for us to decide whether we agree with the learned Judge as to the construction of the documents which are relied upon by defendants Nos. 2 to 6 as giving them rights in priority in the administration of the estate. I think in construing the instruments we are entitled to take into consideration the course of business between the parties.

The plaintiff at one time—I am stating the facts quite generally—financed the late Mr. Peters for the purpose of enabling him to carry out his contracts with the Madras Railway Company. After a time they ceased to do business with Mr. Peters and closed their accounts. They were paid a small sum on account. Then the defendants undertook to finance the deceased and the course of business was—again I am, stating the facts generally— they did the work and provided the materials. Mr. Peters charged the Company for the work done and for the goods supplied according to his contracts with the Railway Company paying the defendants according to his agreements with them and retaining the difference between what he paid them and what the Company paid him as a commission for himself. The learned Judge finds, and we see no reason to differ from him, that defendants Nos. 2 to 6 did the work in respect of which they claimed a charge on payments received by Mr. Peters from the Railway Company.

The instrument about which there was most discussion is Exhibit XI. That is a document which is no doubt inartistically drawn. It is in these terms:

“Agreement written 3rd September, by J.S Peters, Government Pensioner, and 4th District, 10th section contractor of Madras Railway Company, now residing at Kovur, Kistna district, to Erra Govindiah Garu's son of Errah Jagiah Subadargar, Sudra, and Inamdar of Rajahmundry, under the following conditions:—

(1) I pay you soon after I receive cheques from the Madras Railway Company for works done by you investing money under me as a task work deducting my commissions as noted below for the following works—

(2) My late Bankers or other debtors have no claims on your invested capital for the works you are now doing and about to do as per my orders except to the comissions I have to receive from the cheques of your works under me. It is agreed that you should have a lien or charge over cheques or monies received for works done with your capital.

(3) In case if I fail to remit your monies soon after I receive from Madras Railway Company for works done by you as per my orders either verbal or written, I am liable for breach of contract liabilities.”

The learned Judge received this document with Exhibit X, which is a letter, dated 2nd July 1906, some two months earlier, written by Mr. Peters to the second defendant asking him to supply certain materials and carry out certain works and promising to pay him as soon as he gets the cheque from the Railway Company after deducting his commissions. Then, going back to Exhibit XI, we have this paragraph: “It is agreed that you (the second defendant) should have a lien or charge over cheques or monies received for works done with your capital.” It was, I think, conceded that the work in question was done after the date of Exhibit XI and it was not disputed that payment was not made by the Railway Company until after the death of Mr. Peters and the grant of letters of administration to the Administrator-General. But it seems to me clear from the judgments in Ex parte Nichols. In re James and Ex parte Moss. In re Toward that the instrument might operate as a charge on cheques or monies payable for work done after Exhibit XI was given by Mr. Peters to the second defendant. The fact that payment was not made by the Railway Company until, after letters of administration had been granted to the Administrator-General might be material if the principle of the decision in the two cases to which I have referred were applicable in this case. But, for the reasons I have stated, it seems to me that this fact is immaterial.

Mr. Prakasam contended that as the cheques did not come, into existence until after the giving of the document they could not be the subject of an assignment. He relied on the decision in Collyar v. Isaacs(3). We find in that case the answer to Mr. Prakasam's contention. The Master of Rolls says:—“A man cannot in equity, any more than at law, assign what has no existence. A man can contract to assign property which is to come into existence in the future, and when it has come into existence, equity, treating as done that which ought to be done, fastens upon that property, and the contract to assign thus becomes a complete assignment”. The question came before the House of Lords in Tailby v. Official Receiver(4), where the question, was whether a man could assign future book debts. It was held that the assignment of future book debts was good, if the subject-matter of the assignment could be identified.

Mr. Narayanamurthi who appeared for some of the defendants' has called our attention to certain Indian cases. I will only refer to Bansidhar v. Sant Lal(5). This was a case of hypothecation of indigo produce when it should come into existence. It was held that the hypothecation was good.

A further objection which was taken by Mr. Prakasam was that the words of the instrument were not sufficiently specific to constitute a charge. Some authorities have been cited in reference to the question. There is a case—Ramsidh Pande v. Balgobind—in which the words of the instrument were of a general character “Whatever property, etc., belonging to me.” It was held that the bond created a charge on the properties in the circumstances of the case. This decision was doubted in a later Allahabad case and I do not express any opinion about it. It seems to me that the words of the instrument in the present case are of a much more precise and specific character. We have a reference to specific funds out of which the claims of the creditor are to be satisfied they are to be satisfied out of cheques or monies received for work done by the defendants which was paid for in the first instance by the defendants. The rule is thus stated in Fisher on Mortgages, sixth edition, page 126, paragraph 230:—“If, however, there is a sufficient indication that the supposed assignee is to have the benefit of the fund or chose in action in question, in addition to relying on the credit of the assignor, or, as it is sometimes put, is to be paid ‘out of the fund’ as distinguished from ‘when the assignor gets the fund,’ a valid equitable assignment is created, provided that the transaction is for value. The intention must be that the property shall pass.” Applying that test bare, is it “when” or “out of.” It seems to me that Exhibit XI may be fairly construed as being an instrument where a man gives a charge to be met out of a specific fund.

Mr. Prakasam referred us to a passage in Ryall v. Bowles: “A promise to pay money when the debtor receives a debt due to him from a third person does not constitute an equitable assignment, so as to charge the debt in the hands of such third person.” In the notes, Field v. Megaw, is cited. The promise in that case was a promise to pay “when,” not a promise to pay “out of.”

Then as to the other documents which were relied on as creating a charge. Exhibit XIV is in these terms:—“I promise to pay the amounts you paid to my agent N. Subba Rao Garu for interest up to 14th October 1906 amounting to Rs. 118-8-10 and Rs. 15 of to-day's total one hundred and thirty-three from the commissions due to me on your works from coming cheques”.

That seems to me not a promise to pay “when I get cheques” but a promise to pay “from the commissions I should be entitled to retain out of the cheques I receive.” I also think a charge was created by Exhibits V and VI. Then we have Exhibit XXI. This particular letter no doubt gives rise to a certain amount of difficulty. The words are “I will pay the amount for works you perform for timber, etc., soon after cheques for the same are received deducting the usual commission as paid by others.” The course of business was, as I have said, that Mr. Peters should deduct a certain percentage for himself and pay the balance to the men who did the work, i.e, the defendants. I think we are warranted in construing this as a promise by Mr. Peters to pay from a specific fund after he had deducted the commission to which he was entitled as arranged between him and the defendants.

We see no reason to differ from the learned judge's findings of fact in this, case, nor from his finding with regard to the suggestion of fraud on the part of the late Mr. Peters agent.

There only remains the question of costs. The case is not free from difficulty and our order is the parties may take their costs, taxed as between party and party, out of the estate of Mr. Peters both here and before the learned Judge.

Oldfield, J.:— I agree.

Navajee v. Administrator-General Of Madras

Summary of Opinion — White, C.J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments (Mr. Prakasam)

Some Defendants' Arguments (Mr. Narayanamurthi)

Plaintiff

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Navajee v. Administrator-General Of Madras

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