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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

The central procedural posture: the plaintiff sued for recovery of an amount under a promissory note allegedly executed by the 1st defendant and her son. The 1st defendant filed a written statement denying execution of the promissory note on 7 February 1916. At the hearing the 1st defendant did not appear and the plaintiff obtained an ex parte decree in about June 1916.

A few days after the filing of that written statement but before the decree was passed, the 1st defendant executed a mortgage (Ex. 1), dated 26 February 1916, in favour of the 2nd defendant. The mortgage purported to cover all immovable property of the 1st defendant and stated a consideration of Rs. 10,000. The mortgage was a usufructuary mortgage for ten years and was registered at a private residence (Dharmalinga Pillai's house at Settiapuram) rather than at the Registrar's office or the parties' residences.

The question presented by the appeal was whether that mortgage (Ex. 1) was liable to be set aside at the instance of the plaintiff under Section 53 of the Transfer of Property Act.

Legal Issues Presented

  1. Whether the mortgage (Ex. 1) executed by the 1st defendant in favour of the 2nd defendant is liable to be set aside at the instance of the plaintiff under Section 53 of the Transfer of Property Act.

Arguments of the Parties

Plaintiff's Position

  • The plaintiff sought to recover under a promissory note allegedly executed by the 1st defendant and her son. The plaintiff obtained an ex parte decree after the 1st defendant failed to appear at the hearing.
  • Implicit in the proceedings is the contention that the mortgage (Ex. 1) was executed to defeat the plaintiff's claim and therefore should be set aside under Section 53 of the Transfer of Property Act.

Defendants' Position (as presented in the record)

  • The 1st defendant denied execution of the promissory note by filing a written statement.
  • The 2nd defendant contended that the mortgage consideration consisted of three parts: (1) Rs. 7,037-12-10 to discharge debts due by the 1st defendant to third parties (which he claimed to have discharged); (2) Rs. 1,873-8-0 alleged to be due to the 2nd defendant on a promissory note dated 20 May 1913; and (3) Rs. 1,088-11-2 said to have been paid at the time of registration (allegedly by the 2nd defendant's father, Aiyasami Udayar).
  • The 2nd defendant also made admissions about his financial capacity: he had not previously lent large sums (maximum about Rs.300–400 on any occasion) and he had only about Rs.2,000 with him on the date of Ex. 1, borrowing the major portion of the consideration from his maternal aunt's husband.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Palamalai Mudaliar v. The South Indian Export Company (5 Ind. Cas. 33 : 89 M. 884 : 7 M.L.T. 167 : 20 M.L.J. 211) The burden of proving that a sale/transfer appearing otherwise voidable is in fact not voidable rests on the defendant and must be established by satisfactory evidence; converting immovable property into cash is an effective method of defeating creditors. The court invoked this authority for two points: (a) to state that the onus lies on the defendant to prove the genuineness of debts and the reality of the transaction given the suspicious circumstances, and (b) to support the proposition that converting immovable property into cash can evidence an intent to defeat creditors. The court relied on it when rejecting some payment recitals and when discussing fraudulent intent.
Chidambaram Chettiar v. Sami Aiyar (3 O.M. 6 : 16 M.L.J. 427 : 1 M.L.T. 351) Where a transfer is partly for valuable consideration but in part is an arrangement to defeat creditors, it may be wholly void under Section 53 of the Transfer of Property Act (as held in that decision in its facts). The court explained this decision as illustrating that when a transaction is not merely a preference but an arrangement to defeat or delay creditors it may fall within Section 53. The court also noted that the Chidambaram Chettiar decision was not strictly an authority on Section 53 in that case (because the property there was not immovable), and therefore treated it as a statement of principle rather than as binding precedent on Section 53.
Mushar Sahu v. Lala Hakim Lal (82 Ind. Cas. 843 ... 44 I.A. 104 (P.C.)) Held by the Judicial Committee that a mere preference of one creditor to another is not ground for impeaching a deed even if the debtor intended to defeat an anticipated execution by another creditor. The court relied on this authority to conclude that a preference of one creditor over another does not, by itself, render a transfer wholly void under Section 53; accordingly, the transaction before the court could not be regarded as wholly void merely because it preferred the 2nd defendant.
Minakumari Bibi v. Bijoy Singh Dudhuria (40 Ind. Cas. 242 ... 44 I.A. 72 (P.C.)) Similar to Mushar Sahu: observations to the effect that preference of a creditor is not automatically a fraudulent transfer under the statute. The court used this authority together with Mushar Sahu to reinforce that preference alone does not stamp a transaction as fraudulent under Section 53, placing the matter beyond doubt for the proposition advanced.
Rajani Kuwar/Kumar Das v. Gour Kishore Saha (85 C. 1051 : 7 C.L.J. 586 : 12 C.W.N. 671) Recognized the proposition that where a transfer has some genuine consideration applied to discharge debts, effect may be given to the deed to that extent rather than holding the entire transaction wholly invalid. The court cited this case as one of the authorities supporting the approach of upholding the deed to the extent the consideration was actually applied to discharge the transferor's debts; it relied on it in holding part of the mortgage valid.
Ummaohalcutti v. Ummerkutti Haji (29 Ind. Cas. 588) Another authority where effect was given to a deed to the extent the consideration was applied to discharge debts rather than declaring the entire transaction void. Used along with Rajani Kumar Das and Palamalai Mudaliar to justify giving effect to the mortgage to the extent that genuine consideration could be shown (here, Rs. 7,037-12-10).
In Re Moroney (as quoted by Palles, C.B., cited in the judgment) Quoted for the general proposition discussed by the Judicial Committee about when a transaction may be fraudulent under the statute. The court reproduced an extract (via earlier authorities) to explain the Judicial Committee's view that preference of one creditor over another does not necessarily constitute fraud under the statute, and applied that reasoning to the present case.

Court's Reasoning and Analysis

The court proceeded in two linked stages: first, it examined the evidence about the reality of the consideration recited in Ex. 1; second, it applied legal principles governing transfers alleged to be made to defeat creditors (including Section 53 of the Transfer of Property Act and relevant authorities).

Fact-finding on the consideration recitals

  1. The court treated the mortgage transaction as suspicious on several grounds: it was executed while a suit by the plaintiff was pending; the mortgage covered all immovable property of the 1st defendant; the mortgagee (2nd defendant) had, by his own admissions, no substantial history of lending large sums and had only about Rs. 2,000 with him on the date of Ex. 1; the major portion of the consideration was borrowed from the 2nd defendant's maternal aunt's husband (who was not examined); the mortgage was a usufructuary mortgage for ten years; and registration took place at a private house rather than at the Registrar's office.
  2. The court considered the three parts of the recited consideration separately:
    • Rs. 7,037-12-10 (alleged discharge of third-party debts): documents and witness evidence were produced and not effectively impugned by cross-examination, so the court concluded that this part of the consideration was proved and that the 2nd defendant did discharge those debts.
    • Rs. 1,873-8-0 (alleged debt due to the 2nd defendant from an earlier promissory note): the court found the 2nd defendant failed to prove this debt. The attesting witnesses to the promissory note were not examined, the 2nd defendant did not keep accounts, and other circumstantial omissions undermined the claim. The court therefore concluded the recital of this debt was false.
    • Rs. 1,088-11-2 (alleged payment at time of registration by the 2nd defendant's father): the alleged payer (Aiyasami Udayar) was not examined, and the court considered that payments before the Sub-Registrar may be used to give an appearance of reality. The court was not satisfied this sum was really paid and noted that even if it had been paid the object may have been to defraud creditors.
  3. Because the mortgage was executed in suspicious circumstances (including a probable intention to defeat the plaintiff), the onus lay heavily on the 2nd defendant to establish the genuineness of the debts recited as consideration.

Application of legal principles

  1. The court reviewed authorities concerning Section 53 and related principles. It noted that while one earlier decision (Chidambaram Chettiar v. Sami Aiyar) held that when an arrangement to defeat creditors exists the transfer may be wholly void, that decision was not strictly an authority on Section 53 in its facts and therefore was treated as a statement of principle rather than determinative.
  2. The court relied on decisions of the Judicial Committee (Mushar Sahu v. Lala Hakim Lal and Minakumari Bibi v. Bijoy Singh Dudhuria) which held that mere preference of one creditor over another, even if done to avoid an anticipated execution, is not by itself sufficient to impeach the deed under the statute. On that basis the court concluded the mortgage could not be regarded as wholly void simply because it preferred the 2nd defendant.
  3. The court also relied on authorities (including Rajani Kumar Das v. Gour Kishore Saha, Palamalai Mudaliar and Ummaohalcutti) that supported giving effect to the deed to the extent that genuine consideration was applied to discharge the transferor's debts.
  4. Applying these principles to the proved facts, the court held that the mortgage was valid to the extent of the portion of the consideration that was genuinely applied to discharge the 1st defendant's debts (Rs. 7,037-12-10), but not to the extent of amounts for which the 2nd defendant failed to prove a genuine debt or payment (the Rs. 1,873-8-0 and Rs. 1,088-11-2 components).

Holding and Implications

APPEAL ALLOWED IN PART — the mortgage in favour of the 2nd defendant is upheld to the extent of Rs. 7,037-12-10.

Implications and direct effects:

  • The property charged by the mortgage is liable to be sold subject to the 2nd defendant's right to the proven sum of Rs. 7,037-12-10 arising from Ex. 1.
  • The court declined to hold the entire mortgage wholly void as against the plaintiff; instead it gave effect to the deed to the extent the consideration was proved to have been applied to discharge the transferor's debts.
  • The appeal was allowed only to the extent specified; the parties were directed to pay and receive proportionate costs throughout.
  • Phillips, J. delivered the primary judgment and another judge recorded agreement: "I agree."

No wider or additional precedent was laid down by this decision beyond the application of the authorities cited to the particular facts: that is, the case resolved the validity of a suspicious mortgage transaction by separating proved from unproved consideration and giving effect to the deed only to the extent supported by evidence.

Show full summary ...

    Loorthia Odayar v. Gopalasami And Anr.

    1. The question to be decided in this appeal is: Is the mortgage (Ex. 1) executed by the 1st defendant in favour of the 2nd defendant liable to be set aside at the instance of the plaintiff under Section 53 of the Transfer of Property Act?

    2. The 1st defendant and her son had executed in favour of the plaintiff a promissory note and the plaintiff tiled a suit for the recovery of the amount due under it. The first defendant filed a written statement in that suit denying the execution of the promissory note. This statement was filed on the 7th of February 1916. On the date of the hearing, the 1st defendant did not appear and an ex parte decree was obtained by the plaintiff in about June 1916.

    2. In the mean-time, that is, a few days after the filing of the written statement but before the decree aforesaid was passed, the 1st defendant mortgaged her properties to the 2nd defendant by Ex. 1, dated 26th February 1916. The 2nd defendant is the brother's son of the 1st defendant and it is admitted that the mortgage deed comprised every item of immoveable property possessed by the 1st defendant. At the time of the mortgage, the suit against the 1st defendant was pending and a false defence was presumably put in, in order to gain time. The mortgage purports to be for Rs. 10,000 but it is in evidence that the 2nd defendant was not himself possessed of much property but it is said that his father and mother were wealthy and that he was in management of his father's properties. The 2nd defendant also admits that before the date of this transaction, be had not lent any large sums of money and that the maximum amount lent by him on any single occasion was about Rs. 300 or Rs. 400. The admissions made by him dearly show that the mortgage was not taken in the usual course of business but that it was a transaction of an unusual kind from the point of view of the 2nd defendant, No explanation is forth-coming as to why he suddenly turned a money-lender and lent such a large sum of money. As a fact, he admits that he had only with him Rs. 2,000 on the date of Ex. I and that he had to borrow the major portion of the consideration from his maternal aunt's husband and it is remarkable that this man had not even been examined. It is also significant that the mortgage that was created was a usufructuary mortgage for a period of 10 years. It seems to me that the object of creating such a mortgage was to diminish the value of the equity of redemption even granting that it was worth anything at all. "What necessity was there to create a mortgage over the entire property of the 1st defendant, which was to subsist for such a long period of time? It is stated in Ex. 1 that the object of executing the mortgage was to raise money to pay off several creditors of the 1st defendant. There is nothing in the evidence to show that there was any pressure brought to bear by the creditors except in regard to one debt; whereas, so far as the plaintiff is concerned, he had actually filed a suit but it is curious that the mortgage deed makes no provision whatsoever for the payment of the debt due to the plaintiff. That the 1st and 2nd defendants intended to defeat the plaintiff's claim appears further from the circumstance that the mortgage deed was registered not in the Registrar's Office nor even at the residence of either the mortgagor or the mortgagee but at the house of one Dharmalinga Pillai in a place called Settiapuram. On a consideration of the probabilities of the case and of the evidence, I have come to the conclusion that the 1st defendant executed the mortgage with the intention of defrauding the plaintiff and that the 2nd defendant was aware of that intention.

    3. The consideration for the mortgage deed is said to consist of.

    (1) Rs. 7,037-12-10 which is the aggregate amount of the debts due by the 1st defendant to third parties and which the 2nd defendant claims to have discharged. The learned Subordinate Judge thinks that these debts were really not due and that the recital in the mortgage deed regarding their existence is false. I was first inclined to agree in this view but on further consideration I am not prepared to accept this finding. The transaction, as I pointed, is no doubt extremely suspicious but documents were produced to evidence the previous debts and witnesses were examined to prove those documents, and I find that there was no cross-examination directed to attack the genuineness of the documents. If they were seriously impugned it would have been open to the 2nd defendant to produce further evidence and I cannot draw any inference adverse to him from his omission to examine more witnesses on this point. As it is, he examined Ponnusami Pillai who proves not only the promissory note executed in his own favour but also Ex. 3 b executed in favour of Radhakrishna Pillai. Sadasiva Pillai proves Ex. 3-c and Narayanaswaray Iyer proves Ex. 3-a. In the circumstances, I am disposed to think that the evidence adduced is sufficient to prove the existence of the debts and I, therefore, find that the consideration to this extent did really pass for the mortgage document.

    (2) Rs. 1,873-8-0 said to be the amount which was due by the 1st defendant to the 2nd defendant on a promissory note of a prior date, namely, 20th May 1913. Has the 2nd defendant made out the existence of this debt to himself? I am satisfied that ho has not. He was cross-examined in regard to his capacity to advance money. He had also to admit that he did not keep any accounts. A specific question was put to him as to whether he had lent any monies before the date of Ex. I. In the plaint, it was expressly stated that the promissory notes mentioned in the deed of mortgage were not genuine. The 2nd defendant was, therefore, bound to give clear evidence of the debt alleged be be due be himself. Beyond his word, no evidence has been adduced. The promissory note in his favour Ex. II, bears the attestation of Samiah Udayar and Srinivasa Iyar. Neither of them has bean examined. I may note that this Samiah Udayar has also attested Exs. 1, 3-A and 5, and this shows that he is more or less intimately connected with the defendants. It is still more strange that the 1st defendant has not been examined at all. The 2nd defendant admits that the relations between him and the 1st defendant have continued to be friendly. There is another circumstance to which I may advert though I do not propose to base my finding upon that. From a comparison of the documents filed in the suit, Ex. II appears to have been written by D.W. 4 and although he was examined, with reference to the other documents with which he was connected, nob a single question was put to him bearing on Ex, II. The mortgage document having beau executed in circumstances which show that the object of the transaction was to defeat the plaintiff, the onus was heavily upon the 2nd defendant to prove the existence of the debts alleged be have been discharged from and out of the consideration for the mortgage. In Palamalai Mudaliar v. The South Indian, Export Company 5 Ind. Cas. 33 : 89 M. 884 : 7 M.L.T. 167 : 20 M.L.J. 211 Wallis J. as he then was states the law thus,

    "Now if the sale was effected with the object of preferring these two creditors to the plaintiffs and the other creditors it is clear and is admitted, that the sale would not be voidable under Section 53 of the Transfer of Property Act, but the burden of proving this where the sale appears otherwise be be voidable is on the defendant and should be established by satisfactory evidence."
    This principle was also accepted by Mitra and Cas-perss, JJ. in Rajani Kuwar Das v. Gour Kishore Saha 85 C. 1051 at p. 1058 : 7 C.L.J. 586 : 12 C.W.N. 671. I have come to the conclusion that there was no debt due by the 1st defendant to the 2nd defendant previous to Ex. I and that the recital in it to the contrary is false.

    (3) Rs. 1,088-11-2 alleged to have been paid by the 2nd defendant to the 1st defendant at the time of the registration of the document. Aiyasami Udayar the 2nd defendant's father is stated to have paid this amount before the Sub-Registrar. This man was not examined. According to the evidence adduced on behalf of the defendants the mortgage was taken for his benefit. He is not only alleged to have paid the amount at the time of the registration but he is said to be the person who was responsible for the recitals in Ex. I. Moreover, he attested Exs. 3, 3a and 3b. In the circumstances I think that the failure to examine him as a witness was deliberate. Once again I may advert to the fact that the 1st defendant was not examined and she also could have given material evidence on this point. Payment before the Sub-Registrar quite often signifies nothing, because to give the transaction an appearance of reality the parties not unusually resort to this device. I am, therefore, not satisfied that this sum was really paid to the 1st defendant. Even assuming that it was paid, I have not the least doubt that the object of the payment was to defraud the 1st defendant's creditors because as pointed out in Palamali Mudaliar v. The South Indian Export Co. (1), converting immoveable property into cash is the most obvious and effective method of defeating and delaying creditors;

    4. Having thus found on facts, I must now consider what the law on the subject is. In Chidambaram Chettiar v. Sami Aiyar 3 O.M. 6 : 16 M.L.J. 427 : 1 M.L.T. 351, it was held that where a transfer, though in part was for valuable consideration, was as regards the other part only, an arrangement to defeat creditors it was wholly void under Section 53 of the Transfer of Property Act. In that case, the assignment, that was impeached, was in favour of the creditor and the money obtained by the assignor was partially utilized for the payment of his debts. Nevertheless it was held that as the arrangement was to some extent a device, intended to defeat the assignor's other creditors, the transaction was entirely invalid and no effect could be given to it. The reason for this decision, as I understand it, appears to be this. A mere preference of one creditor to another does not render the transaction voidable under Section 53 of the Transfer of Property Act. But if it is shown that the object of the transaction is not merely to prefer a creditor but in addition is to defeat or to delay the other creditors, it then ceases to be a transaction by which merely a creditor is preferred but becomes a transaction to which Section 53 is directly applicable. The next step in the argument seems to be that the inclusion of a fictitious debt furnishes evidence of an intention to defeat the creditors and the transaction is thus wholly void against them. I may remark that this case is not an authority upon Section 53, because the learned Judges expressly state in their judgment that the question before them was to be decided with reference to general principles of justice and good conscience, the property with which they were dealing not being immoveable property and Section 53 not having therefore direct application. Apart altogether from this, the recent decisons of the Judicial Committee Mushar Sahu v. Lala Hakim Lal 82 Ind. Cas. 843 : 48 C. 521 : 80 M.L.J. 116 : 3 L.W. 107 : 20 C.W.N. 898 : 14 A.l.J. 198 : (1916) 1 M.W.N. 198 : 19 M.L.T. 208 : 28 C.L.J. 406 : 18 Bom. L.R. 878 : 43 I.A. 104 (P.C.) and Minakumari Bibi v. Bijoy Singh Dudhuria 40 Ind. Cas. 242 : 44 O. 662 : 1 P.L.W. 426 : 5 L.W. 711 : 32 M.L.J. 486 : 21 C.W.N. 586 : 21 M.L.T. 344 : 15 A.L.J. 382 : 25 C.L.J. 508 : 19 Bom. L.R. 424 : (1917) M.W.N. 473 : 44 I.A. 72 (P.C.) place the matter beyond doubt. In the former at page 525 an extract is given from the judgment of Palles, C.B, In Re Moroney where it is stated that although the effect of the transaction or even the interest of the debtor in making it may be to defeat another creditor, it is not a fraud within the statute. Their Lordships towards the close of their judgment say that a preference of one creditor to another is no ground for impeaching the deed even if the debtor was intending to defeat an anticipated execution by another creditor. In the latter case Minakumari Bibi v. Bijoy Singh Dudhuria 40 Ind. Cas. 242 : 44 O. 662 : 1 P.L.W. 426 : 5 L.W. 711 : 32 M.L.J. 486 : 21 C.W.N. 586 : 21 M.L.T. 344 : 15 A.L.J. 382 : 25 C.L.J. 508 : 19 Bom. L.R. 424 : (1917) M.W.N. 473 : 44 I.A. 72 (P.C.) equally strong observations were made. Their Lordships say at page 671

    "It may be that the judgment-debtor preferred the plaintiff... and that he did this of set purpose, yet this would not stamp the transaction as a fraudulent transfer."
    On these authorities it is perfectly dear that the transaction before us cannot be regarded as wholly void as against the plaintiff.

    5. I may add that in Rajani Kumar Das v. Gour Kishore Saha 85 C. 1051 at p. 1058 : 7 C.L.J. 586 : 12 C.W.N. 671; Palamalai Mudaliar v. South Indian Export Company 5 Ind. Cas. 33 : 89 M. 884 : 7 M.L.T. 167 : 20 M.L.J. 211 and Ummaohalcutti v. Ummerkutti Haji 29 Ind. Cas. 588 the transactions were not held to be wholly invalid and effect was given to the deed to the extent to which the consideration was applied for the discharge of the transferor's debts. I, therefore, hold that the mortgage in favour of the 2nd defendant is good to the extent of Rs. 7,037-12-10 and that the property is liable to be sold subject to this right of the 2nd defendant. The appeal will be allowed to that extent. The parties will pay and receive proportionate costs throughout.

    Phillips, J.

    6. I agree.

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    Comments

    Loorthia Odayar v. Gopalasami And Anr.
    (Sep 5, 1923)