PETITIONER:
THE STATE OF PUNJAB
Vs.
RESPONDENT:
S. RATTAN SINGH
DATE OF JUDGMENT:
16/12/1963
BENCH:
DAYAL, RAGHUBAR
BENCH:
DAYAL, RAGHUBAR
GAJENDRAGADKAR, P.B.
SUBBARAO, K.
WANCHOO, K.N.
SHAH, J.C.
CITATION:
1964 AIR 1223 1964 SCR (5)1098
ACT:
The Patiala Recovery of State Dues Act (Act IV of 2002 BK),
ss. 4 and 11-- Scope of-Civil Court-Jurisdiction to decide
if a person is defaulter.
HEADNOTE:
Provincial Insolvency Act (5 of 1920), s. 4--Whether
Insolvency Court can go behind decree.
1099
Jyoti Parshad was indebted to the Bank of Patiala. As he
could not pay the debt, he asked the Bank in 1952 to allow
him to pay the same in instalments and the Bank agreed.
Rattan Singh, Respondent stood surety to the extent of Rs. 2
lacs and entered into a contract of guarantee with the Bank
to discharge the liability of Jyoti Parshad to the extent of
Rs. 2 lacs in case of default by Jyoti Parshad. A deed of
guarantee was also executed. As Jyoti Parshad did not pay,
the Bank started proceedings against Rattan Singh under the
Act. The Managing Director of the Bank dismissed the
objections raised by Rattan Singh. The Board of Directors
dismissed the appeal. The appellant filed a petition in the
Court of the Insolvency Judge praying for adjudication of
Rattan Singh Respondent as insolvent on account of his
transfer of his houses and agricultural lands without
consideration to his wife and two sons within 3 months of
the petition with intent to defeat and delay his creditor
Bank having full knowledge of his liability towards the
State. The contention of the Respondent was that he did not
stand surety and that the impugned transfer of lands and
houses was made on account of natural love and affection for
his wife. The insolvency petition was dismissed by the
Insolvency Judge on the ground that the Respondent had not
executed a deed of guarantee. The appellant went in appeal
to the District Judge but the appeal was dismissed. The
revision was also dismissed by the High Court. The
appellant came to this court after obtaining special leave.
The contentions of the appellant before this court were that
the Civil Court had no jurisdiction to determine matters
which could be determined by the Head of the Department
under the provisions of the Act, that the Head of the
Department in the exercise of the powers conferred under s.
4 on him could not only determine the amount due from the
defaulter but also could determine whether the alleged
defaulter was really a defaulter or not and that in view of
s. 1 1 of the Act, a civil court could not determine the
question of the liability of the alleged defaulter to pay
the debt demanded from him. The contentions of the
Respondent were that the Head of the Department could only
determine the amount of debt due from a person alleged to be
a defaulter but could not determine whether that person was
defaulter or not and even if the Head of the Department
could determine the liability of the alleged defaulter to
pay the debt, the jurisdiction of the Insolvency Court
itself to decide whether the debt was due from the alleged
debtor sought to be declared insolvent was not ousted by the
provisions of s. II of the Act and that the Insolvency Court
was not a civil court. Dismissing the appeal,
Held : The provisions of s. 4 of the Act empower the Head of
department to determine not only the amount of State dues
recoverable but also the liability of the alleged defaulter
to pay those debts. In view of the provisions of s. 11 of
the Act, no civil court has jurisdiction to determine the
amount of State
1100
dues recoverable and the liability of the alleged defaulter
to pay that amount. Such powers were however possessed by
the Insolvency Court. In the present case, the Insolvency
Court had found that the Respondent had not executed the
surety bond and therefore, was not liable to make good any
payment under it. The order of the Insolvency Judge
dismissing the insolvency petition was correct. An
insolvency court can go behind a decree and probe into the
genuineness of the debt on which it is founded.
Lachhman Dass v. State of Punjab, [1963] 2 S.C.R. 353,
Kanshi Ram v. The State of Punjab, I.L.R. [1961] 2 Punjab
823, Ex parte Kibble. In re Onslow, (1875) 10 Ch. A.C.
373, Ex parte Lennox. In re Lennox (1885), 16 Q.B.D 315, In
re Freser, Ex parte Central Bank of London, [1892] 2 Q.B.D
633, In re Van Laun, Ex parte Chatterton, [1907] 2 KB 23, In
re Van Laun Ex parte Pattullo, [1907] 1 KB 155, Narasimha
Sastri v. Official Assignee, Madras, A.I.R. 1930 Madras 751
and Sadhu Ram v. Kishori Lal A.I.R. 1938 Lah. 148, referred
to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 6 of 1962.
Appeal by special leave from the judgment and order dated
May 14, 1959 of the Punjab High Court in Civil Revision No.
404 of 1957.
S. V. Gupte, Additional Solicitor-General of India, D.D.
Chaudhuri and B.R.G.K. Achar, for the appellant.
M.C. Setalvad, S.N. Andley, and Rameshwar Nath, for the
respondent.
December 16, 1963. The Judgment of the Court was delivered
by
RAGHUBAR DAYAL J.-This appeal, by special leave, raises
mainly the question whether the Insolvency Court can, at the
hearing of a petition by a creditor for declaring a debtor
insolvent, determine the liability of the alleged debtor for
the payment of the debt for the recovery of which the
creditor had obtained an order under the Patiala Recovery of
State Dues Act, 2002 BK (Act IV of 2002 BK), hereinafter
called the Act. To appreciate how the question arises on
the facts of the case, reference to the provisions of the
Act is necessary, and we set them out first.
The Act was enacted to consolidate and amend the law
relating to the recovery of State dues. According
1101
to cl. (1) of s. 3 'State dues' included debts due to the
Patiala State Bank. The expression 'department' includes
the Patiala State Bank, and the expression 'defaulter' means
a person from whom State dues are due and includes a person
who is responsible as surety for the payment of any such
dues. 'Head of department' means, among other things, the
Managing Director in the case of the Patiala State Bank.
Chapter 11 purported to deal with determination of State
dues and modes of recovery thereof. Section 4 which falls
in this Chapter provides that the head of department shall
determine in the prescribed manner the exact amount of State
dues recoverable by his department from the defaulter.
Section 5 lays down the modes for the recovery of State
dues. Section 6 provides for the transmission of a
certificate as to the amount of State dues recoverable from
the defaulter to the Nazim and to the Accountant-General and
its sub-s. (2) is:
"A certificate transmitted under the preceding
sub-section shall be conclusive proof of the
matters stated therein and the Nazim or the
Accountant-General shall not question the
validity of the certificate or hear any
objections of the defaulter as to the amount
of State dues mentioned in the certificate or
as to the liability of the defaulter to pay
such dues."
Section 10 provides that no action shall be
taken by the Nazim or the Accountant-General
on a certificate coming from the Managing
Director, unless it is sent to him within the
period of limitation specified in that
section. Section 11 reads:
"No Civil Court shall have jurisdiction in any
matter which the head of department, or any
authority or officer authorised by the head of
department is empowered by this Act or the
rules made thereunder to dispose of, or take
cognizance of the manner in which any such
head of department, or authority, or officer,
exercises any powers vested in him or it by or
under this Act or the rules made thereunder."
1102
Section 12 empowers the Government of the State to make
rules for the purpose of carrying out the provisions of the
Act. Sub-s. (2) thereof states that the rules may provide
the manner in which the amount of State dues shall be
determined by a head of department.
The Patiala Recovery of State Dues Rules, 2002 hereinafter
called the rules, lay down the mode of determination of
State dues in rr. 3 to 7. Rule 3 requires the head of
department to serve a notice on the defaulter specifying
therein the amount of State dues and from whom such dues
were recoverable and shall require the defaulter to pay such
dues on or before a specified date or to appear before the
authority specified therein (called the Inquiry Officer) and
present a written statement of his defence. If the
defaulter appears and pays the amount of State dues, the
head of department issues a receipt to him, under r. 4 and
the matter is closed. If he does not appear on the
specified date and the Inquiry Officer be satisfied that the
notice has been duly served, he may proceed ex parte and
determine by order in writing the amount of State dues
recoverable from him.' The order is to be subject to
confirmation by the head of department. If the Enquiry
Officer is not so satisfied another notice is issued to the
defaulter.
Rule 6 provides that where the defaulter appears on the date
fixed in the notice and presents his written statement, the
head of department, or the Inquiry Officer, as the case may
be, shall examine the objections of the defaulter stated in
written statement in the light of the relevant records of
the department and shall then, by order in writing,
determine finally the exact amount of State dues recoverable
from such defaulter. The Inquiry Officer is to submit his
report to the head of department before the latter shall
finally determine the State dues recoverable.
Rule 7 provides that if the defaulter does not pay the State
dues within the period specified in that rule, the head of
department may proceed to recover
1103
them through the Nazim or the Accountant-General or both.
Rule 8 provides for appeal by the defaulter against the
orders passed under rr. 5 or 6. Rule 9 provides for a
revision by the defaulter in case his appeal is dismissed.
Rule 12 provides that the appellate or revisional authority
may pass such order in appeal or revision as it thinks fit.
The facts of the case may be briefly stated now.
One Jyoti Parshad, proprietor of M/s. Ralla Ram Jai Gopal,
a firm at Patiala, was indebted to the Bank of Patiala.
Being unable to pay the debt of rupees 5 lacs, Jyoti Parshad
approached the Bank in 1952 with a request to forbear from
recovering the amount just then all at once and grant time
and allow him to pay the amount in instalments. The Bank
agreed. In pursuance of the agreement between Jyoti Parshad
and the Bank, Sardar Rattan Singh, respondent, stood surety
to the extent of Rs. 2 lacs and entered into a contract of
guarantee with the Bank to discharge the liability of Jyoti
Parshad to the extent of rupees 2 lacs in case of default.
He executed a deed of guarantee on July 1, 1952. When Jyoti
Parshad made default in payment of the requisite amount, the
Bank started proceedings for the recovery of its dues under
the Act against Rattan Singh, the defaulter under its terms.
On May 26, 1955, the Managing Director of the Bank dismissed
the objections Rattan Singh had raised by his written
statement and held him liable for the amount he had
undertaken to pay under the surety bond. An appeal by him
to the Board of Directors was dismissed on December 24,
1955.
Meanwhile, on May 10, 1955 during the proceedings for the
recovery of the debt under the Act, the State of Patiala
filed a petition in the Court of the Sab-Judge, 1st Class
(Insolvency Court) Patiala, praying for the adjudication of
Rattan Singh, respondent, an insolvent on account of his
transferring all his houses at Patiala and agricultural
lands at Sunihal Heri and Patiala without consideration to
his wife
1104
and two sons within three months of the petition with intent
to defeat and delay his creditor-Bank having full knowledge
of his liability towards the State.
By his written statement dated June 16, 1955 the respondent
denied having stood surety or having signed the deed of
guarantees and stated that he was not liable to the State
and that the impugned transfers of land and houses were made
on account of natural love and affection for his wife. He
also challenged the jurisdiction of the Insolvency Court to
entertain that application.
The learned Insolvency Judge rejected the insolvency
petition holding that the respondent had not executed the
deed of guarantee. It, however, held that the Insolvency
Court was competent to consider the question of the
liability of the respondent to the State under the deed of
guarantee, its jurisdiction being not ousted by the
provisions of S. 11 of the Act which excluded the
jurisdiction of the Civil Court in any matter which the head
of the department was empowered by the Act or the rules made
thereunder to dispose of or take cognizance of, as the head
of the department could, under the Act, determine only the
amount of the debt due from the alleged defaulter and not
the question whether the alleged defaulter was really a
defaulter in case this was disputed.
The State of Punjab, successor of the State of Patiala,
appealed against this order to the District Judge who agreed
with the findings of the trial Court and dismissed the
appeal. The State then went in revision to the High Court
under s. 75 of the Provincial Insolvency Act. Two
contentions were raised there. One relating to the
respondent's executing the deed of guarantee was repelled as
being concluded by the finding of fact by the courts below.
The other contention was that in view of the provisions of
the Act the Managing Director of the Bank had exclusive
jurisdiction to determine whether a certain person was or
was not a surety or a defaulter and what the extent of his
liability to the bank, if any, was
1105
and that therefore the Insolvency Court had no jurisdiction
to reconsider and determine it. The High Court did not
agree with this contention and dismissed the revision. It
is against this order that the State of Punjab has preferred
this appeal after obtaining special leave.
The contention for the appellant in this Court is that the
Civil Court had no jurisdiction to determine matters which
could be determined by the Head of the Department under the
provisions of the Act, that the head of the department in
the exercise of the powers conferred under s. 4 on him, can
not only determine the amount due from the defaulter but
also whether the alleged defaulter is really a defaulter or
not in case such an objection be raised by that person and
that therefore the Civil Court, in view of s. 11 of the Act,
cannot determine the question of the liability of the
alleged defaulter to pay the debt demanded from him. It is
contended for the respondent that (i) the head of department
can only determine the amount of the debt due from a person
alleged to be a defaulter, but cannot determine whether that
person is a defaulter or not, i.e., the question whether the
debt is due from that person or not if the, person disputes
his liability to pay the alleged debt; (ii) that even if the
bead of department can determine the liability of the
alleged defaulter to pay the debt, the jurisdiction of the
Insolvency Court itself to decide whether the debt was due
from the alleged debtor sought to be declared insolvent is
not ousted by the provisions of s. 11 of the Act; and (iii)
that the Insolvency Court is not a Civil Court.
The first question to determine then is whether the head of
a department can determine the objection of an alleged
defaulter that he is really not a defaulter, i.e., no State
dues are due from him as he is not liable for any dues to
the State irrespective of the question whether what amount
is due if he is liable for that debt to the State. The
contentions for the respondent are based on these grounds:
(i) s. 4 empowers the head of the department to
1106
determine the exact amount of State dues recoverable and
does not empower him to determine the liability of the
alleged defaulter to pay those dues in case the liability is
disputed (ii) The question of liability may raise
complicated questions of fact and law for determination and
to determine which the head of department cannot be
competent; (iii) The Managing Director of the Patiala Bank
cannot be taken to be an independent person to determine the
question of the alleged defaulter's liability to pay the
amount as he is an official of the bank and the dispute is
between the bank and the alleged defaulter.
The vires of the Act came up for consideration before this
Court in Lachhman Dass v. State of Punjab(1). This Court
held the Act to be valid and in considering the various
contentions, Venkatarama Aiyar J., delivering the majority
judgment, said at p. 235.
"The Managing Director is a high-ranking
official on a salary of Rs. 1,600-100-2,500,
with a free furnished residence. He has no
personal interest in the transaction and there
is no question of bias, or any conflict
between his interest and duty. "
The vesting of the power to determine the
matters covered by s. 4 in the Managing
Director who has no personal interest in the
matter cannot therefore be a ground for
holding that the Act could not have provided
and does not provide for the head of depart-
ment to determine the liability of an alleged
defaulter in case he disputes it.
In construing r. 6 it was said at the same
page:
"It does not bar the parties from examining
witnesses or producing other documentary evi-
dence. The Managing Director, has, under this
Rule, to examine the statement and the records
of the Bank in so far as they bear on the
points in dispute and that normally, would be
all that is relevant. But he is not precluded
by the Rule from examining witnesses or taking
into
(1) [1963] 2 S.C.R. 353.
1107
account other documentary evidence, if he con-
siders that, is necessary for a proper deter-
mination of the dispute."
it follows that the Managing Director or the head of a
department can record evidence with respect to the
objections raised before him by the alleged defaulter about
his liability to pay the dues.
Section 4 is really concerned with the determination of the
amount of State dues recoverable from a defaulter and
therefore the determination can take into account both the
amount and also its recoverability from the person said to
be a defaulter. There is nothing in it which directly makes
the head of department incompetent to determine the question
of the liability of the alleged defaulter in case of
dispute.
This appears more clearly from the provisions of sub-s. (2)
of s. 6 which provides for the certificate issued under sub-
s. (1) of s. 6 to be conclusive proof of the matters stated
therein, the matters being that such and such amount was
recoverable from the person shown as defaulter. This sub-
section further provides that the specified authorities will
not bear any objections of the defaulter as to the amount of
State dues mentioned in the certificate or as to the
liability of the defaulter to pay such debt. The Act
therefore contemplated that there might be a dispute about
the liability of the alleged defaulter to pay the dues and
therefore, directed the authorities to whom the certificate
is Submitted not to bear objections about it. When the
authorities were conscious of the possibility of such
objections, it must be presumed that they intended these
objections to be decided by the authority determining the
amount of State dues recoverable from a defaulter under s. 4
of the Act. If it was not so intended by the Act, the
legislature would have provided for the determination of
such an objection either by an agency specified in the Act
or by the regular courts. The Act would have made some
mention about the agency and would not have left this matter
without a definite provision in the Act. What would be the
consequence
1108
of so construing the provisions of s. 4 as to exclude ,the
objection to liability of the alleged defaulter from the
purview of the head of department? It would be that the
Bank will have to go to the Civil Court for a declaration
that the alleged person is liable to pay its dues. The suit
will have to be merely ,for a declaration, as, the
determination of the amount he has to 'pay, if liable, will
inevitably have to be made by the head of department and in
accordance with s. 4 of the Act. Two proceedings for
achieving one object are neither desirable nor convenient
and if the Bank has to go to the Civil Court for the deter-
mination of the liability of the alleged defaulter, there
can be no good reason for enacting that the Civil Court
which ordinarily decides such disputes cannot determine the
amount, if any, the alleged defaulter has to pay to the
Bank.
Further, the proceedings in the Civil Court may take a long
time for final disposal and that may affect the limitation
prescribed under s. 10 of the Act for the Nazim or the
Accountant-General to take action for the recovery of the
amount due. Section 10(.1) provides that no action shall be
taken by the Nazim or the Accountant-General on a certi-
ficate from the Managing Director of the Bank unless it is
sent to him within such period of limitation prescribed by
the Limitation Act for the time being in force in the State
within which the Bank would have instituted a suit in a
Civil Court for the recovery of its debts or dues
respectively, if such debts or dues were not declared as
State dues under the Act. This means that if the period of
limitation for the institution of a suit for the recovery of
a debt has elapsed, that debt could not be recovered as
State dues under the procedure laid down by the Act. The
usual period of limitation for filing a suit for recovery of
a debt is three years and the time taken in obtaining a
final decision from the Civil Courts for the declaration of
liability of a certain person may take longer time. So long
as the final decision about that person's liability is not
reached in those proceedings, the
1109
relevant authority under s. 4 of the Act cannot proceed to
determine the exact amount of debt due and even if it
determined the amount it cannot obviously issue any
certificate to the Nazim or Accountant-General for the
recovery of that amount.
In view of these considerations, it is reasonable to
conclude that the provisions of s. 4 of the Act empower the
head of department to determine not only the amount of State
dues recoverable but also the liability of the alleged
defaulter to pay those debts. It follows therefore that in
view of the provisions of s. 11 of the Act no Civil Court
can have jurisdiction to determine these two matters, viz.,
determining the amount of State dues recoverable and the
liability of the alleged defaulter to pay the amount.
We may mention that the Punjab High Court itself has, in
Kanshi Ram v. The State of Punjab(1) has taken the view we
have expressed and did not approve its earlier decision
under appeal.
The next question then to decide is whether the Insolvency
Court can, in spite of the provisions of s. II of the Act
and the jurisdiction which the head of the department has,
under s. 4 as construed by us, go into the question whether
the alleged debtor sought to be adjudicated insolvent really
owed the debt which has been determined or could be deter-
mined only by the head of department under s. 4 of the Act.
It is well-settled that the Insolvency Court can, both at
the time of hearing the petition for adjudication of a
person as an insolvent and subsequently at the stage of the
proof of debts, reopen the transaction on the basis of which
the creditor had secured the judgment of a court against the
debtor. This is based on the principle that it is for the
Insolvency Court to determine at the time of the hearing of
the petition for Insolvency whether the alleged debtor does
owe the debts mentioned by the creditor in the petition and
whether, if he owes them, what is the extent of those debts.
A debtor is not to be
(1) I.L.R. [1961] 2 Punj. 823.
1110
adjudged an insolvent unless he owes the debts equal to or
more than a certain amount and has also committed an act of
insolvency. It is the duty of the Insolvency Court
therefore to determine itself the alleged debts owed by the
debtor irrespective of whether those debts are based on a
contract or ,under a decree of Court. At the stage of the
proof of the debts, the debts to be proved by the creditor
are scrutinized by the Official Receiver or by the Court, in
order to determine the amount of all the debts which the
insolvent owes as his total assets will be utilised for the
payment of his total debts and if any debt is wrongly
included in his total debts that will adversely affect the
interests of the creditors other than the judgment creditor
in respect of that particular debt as they were not parties
to the suit in which the judgment debt was decreed. That
decree is not binding on them and it is right that they be
in a position to question the correctness of the judgment
debt. It is on their behalf that the Insolvency Court or
the Official Receiver is to scrutinize the proof of debts to
be proved and can even demand proof of the debts on which
the judgment debt has been decreed. The decree is binding
only on the parties. The debtor sought to be adjudged is
bound by it and so is the creditor. But this binding effect
of the decree is only to be respected by the Insolvency
Court in circumstances where nothing is reasonably alleged
against the correctness of the judgment debt. The
Insolvency Court has the jurisdiction to reopen such debts
and will do so ordinarily when such judgments have been
obtained by fraud, collusion or in circumstances indicating
that there might have been miscarriage of justice. On
similar grounds it must be held that the determination of
the amount of the debt and the liability of the defaulter to
pay it could be open for scrutiny by the Insolvency Court in
the aforesaid circumstances in spite of the provisions of s.
11 of the Act which provisions really contemplate a decision
of the dispute about the matters covered by it between the
same parties, viz., the creditor Bank and the alleged
defaulter. The determination of the amount of State
1111
dues recoverable from the defaulter under S. 4 of the Act
can have no better status than the ordinary judgment and
decree of a civil court have. The head of the department
could not have decided a dispute about the amount of the
State dues recoverable from the defaulter between creditors
other than the Bank and the defaulter and therefore such a
dispute between the creditors in general and the defaulter
cannot be a dispute which comes within the mischief of s. II
of the Act.
Such a jurisdiction of the Insolvency Court is readily made
out by the provisions of the Provincial Insolvency Act, 1920
(Act 5 of 1920) hereinafter called the Insolvency Act.
According to s. 2, sub-s.(1), cl. (a), 'creditor' includes a
decree holder , 'debt' includes a judgment-debt, and
'debtor' includes a judgment-debtor. Section 3 confers
insolvency jurisdiction on the District Courts. Civil
Courts, as such, have not got this jurisdiction. Courts
subordinate to the District Courts can, however, be invested
with jurisdiction in any class of cases by the State
Government.
Section 4 deals with the power of the Insolvency Court with
respect to the questions it can decide. It reads :
"(1) Subject to the provisions of this Act,
the Court shall have full power to decide all
questions whether of title or priority or of
any nature whatsoever, and whether involving
matters of law or of fact, which may arise in
any case of insolvency coming within the
cognizance of the Court, or which the Court
may deem it expedient or necessary to decide
for the purpose of doing complete justice or
making a complete distribution of property in
any such case.
(2) Subject to the provisions of this Act
and notwithstanding anything contained in any
other law for the time being in force, every
such deciSion shall be final and binding for
all purposes as between, on the one hand, the
debtor and the debtor's estate and, on the
other hand, all
1112
claimants against him or it and all persons
claiming through or under them or any of them.
(3) Where the Court does not deem it
expedient or necessary to decide any question
of the nature referred to in sub-section (1),
but has reason to believe that the debtor has
a saleable interest in any property, the Court
may 'without further inquiry sell such
interest in such manner and subject to such
conditions as it may think fit."
It is to be noticed that the Insolvency Court has full power
to decide all questions of any nature whatsoever which arise
in any insolvency case before it. It can also decide all
questions which it may consider expedient or necessary to
decide for the purpose of doing complete justice or making a
complete distribution of property in any such case. Nothing
could be more expedient or necessary for exercising its
jurisdiction in adjudicating a person insolvent or in
distributing the assets of the insolvent than to probe into
the question of the genuineness of the debts said to be owed
by the debtor. The 'decisions of the Insolvency Court in
view of sub-s. (2) of s. 4 are final and binding for all
purposes despite what is contained in any other law for the
time being in force. This finality and binding nature of
the decisions for all purposes are between the debtor and
the debtor's estate on the one hand and all claimants
against him or it. The binding nature of such decisions is
clearly not just between the individual creditor and the
debtor but is between all the creditors on one side and the
debtor and his estate on the other. The jurisdiction of the
Insolvency Court is therefore much larger than that of an
ordinary civil court deciding a particular claim between the
claimants and the other party.
Section 7 provides for an Insolvency petition being
presented either by a creditor or by a debtor and for the
Court adjudicating the debtor insolvent, if the debtor
commits an act of insolvency. Section 9 lays down the
condition which a creditor must
1113
satisfy before presenting an insolvency petition. In view
of the definition of creditor, debtor and debt already
referred to, the judgment-creditor can present a petition
for the adjudication of the judgment debtor an insolvent on
the basis of the judgment debt. Section 10 lays down the
condition on which the debtor can present a petition.
Section 14 provides that no petition presented, whether by a
creditor or by a debtor, shall be withdrawn without leave of
the Court. This fits in with the position that insolvency
proceedings are not proceedings between the petitioning-
creditor and the debtor alone. Section 16 provides for the
substitution of any other creditor in place of the original
creditor who had filed the petition in case he does not
proceed with due diligence with his petition. Even after
the death of the debtor, insolvency proceedings can continue
for the realisation and distribution of the property of the
debtor in view of s. 17. Section 24 lays down the procedure
at the hearing of the insolvency petition, and provides that
the Court shall require proof of the fact that the creditor
or the debtor as the case may be, is entitled to present a
petition. One of the conditions for the creditor to present
the petition is that the debt owing by the debtor to him
amounts to Rs. 500 and one of the conditions for the debtor
to apply for adjudication is that his debts amount to Rs.
500. The Court, therefore, has to be provided with proof
about the existence of the debt and its amount, even though
the debt be a judgment debt. The judgment or decree can be
prima facie evidence of the debt, but in view of the Court's
requiring proof of the debt, it is not bound to treat the
judgment or decree to be conclusive proof of the existence
of the debt for which the decree had been passed.
Subsequent to the adjudication of the debtor as an
insolvent, the next stage for the preparation of the
schedule of creditors under s. 33 of the Insolvency Act
comes. All persons alleging themselves to be creditors of
the insolvent in respect of the debts provable under the Act
have to tender proof of the
1114
respective debts by producing evidence of the amount and the
particulars thereof and the Court has then to determine the
person who have proved themselves to be creditors of the
insolvent in respect of such debts and the amount of debts,
respectively, and then frame a schedule of such persons and
debts. Creditors other than the creditor who had applied
for the adjudication of the insolvent may have judgment
debts against that insolvent and they will have to prove by
evidence the amount and particulars of the debts owed by the
insolvent to them. Judgments or decrees may be good
evidence for proving of such debts, but it is open to the
Court to require independent roof of the debt which had
merged in the judgment debt.
It is clear from the above provisions of the Insolvency Act
that it is the duty of the Insolvency Court and therefore
clearly within its jurisdiction to require proof to its
satisfaction of the debts sought to be proved at the stage
of the hearing of the insolvency petition or subsequent to
the adjudication.
There is plenty of case law in support of the view that the
Insolvency Court can go behind the decree of a court in
order to probe into the genuineness of the debt in
connection with which the decree is passed.
In Ex parte Kibble. In re Onslow(1) it was said by Sir
James, L.J., at p. 376:
"It is the settled rule of the Court of
Bankruptcy, on which we have always acted,
that the Court of Bankruptcy can inquire into
the consideration for a judgment debt. There
are obviously strong reasons for this, because
the object of the bankruptcy laws is to
procure the distribution of a debtor's goods
among his just creditors. If a judgment were
conclusive, a man might allow any number of
judgments to be obtained by default against
him by his friends or relations without any
debt being due on them at all; it is therefore
necessary that the consideration of
(1) [1875] 10. Ch. A.C. 373.
1115
the judgment should be liable to investiga-
tion."
In this case the probe into the judgment debt
was made at the time of the adjudication
proceedings.
In Ex parte Lennox, In re Lennox(1) Lord
Esher, M.R., said at p. 323:
" The authority, however, of Ex parte
Kibble(2) seems to me quite sufficient, and I
think it was decided on right principles. If
that be so it is not true to say that the mere
fact of a judgment existing ought to prevent
the Court at the instance of the debtor at the
first stage of the proceedings, viz., when a
receiving order is applied for, from inquiring
whether there was any real debt as the
foundation of the judgment, and, although by
consenting to a judgment the debtor is
estopped everywhere else from saying that
there was no debt due-although the judgment is
binding upon him by reason of his consent, and
of its being the judgment of the Court, yet no
such estopped is effectual as against the
Court of Bankruptcy. The Court is not
estopped by the conduct of the parties, but it
has a right to inquire into the debt."
Cotton, L.J., said at p. 325:
"It has been long established, as regards the
proof of a debt in bankruptcy, that the
trustee, acting on behalf of the creditors,
can go behind a judgment, and that, although
the judgment is prima facie evidence of a debt
due to the creditor who claims to prove for
the judgment debt, yet the trustee, on behalf
of the creditors, may show that in fact the
judgment does not establish a debt. That rule
is founded upon this principle that, under
whatever circumstances a judgment may have
been obtained against the bankrupt, yet no act
of his-collusion, compromise improperly
entered into, or anything else-ought to
prejudice the rights of the other creditors,
(2) [1875] 10 Ch. A.C. 373.
(1) [1885] 16 Q.B.D. 315.
1116
because the assets ought to be distributed in
the bankruptcy only amongst the honest bona
fide creditors of the bankrupt."
Lindley, L.J., said at pp. 328, 329:
"Bankruptcy proceedings are not like ordinary
proceedings; they are a very serious matter,
not only to the debtor himself, but to all his
other creditors; and, before the machinery of
the Court of Bankruptcy is put in motion, it
appears to me that it is, not only the right,
but the duty of the Court to see at whose
instance it is asked to act. By the express
language of sub-s. 3, of s. 7 the Court is
enabled to look into a judgment debt;"
"It means, I think, that, although the
judgment debtor could not go behind the
judgment, the Court of Bankruptcy will now
allow itself to be put in motion at the
instance of a person who is not a real
creditor. The Court will not allow bankruptcy
proceedings to be had recourse to for the
purpose of enforcing debts which are
fictitious, and not real, even although they
are in the form of judgment debts."
In re Fraser, Ex parte Central Bank of
London(1) Lord Esher, M.R. said at p. 635:
"As a matter of law the judgment, therefore
stands as a good judgment against John Fraser
and it cannot be questioned by him in any
Court, except the Court of Bankruptcy. But,
when it is sought to obtain a receiving order
against him in respect of the judgment debt,
the Court of Bankruptcy has to exercise its
discretion, and for the exercise of that
discretion one rule of conduct is to be found
in s. 7 of the Bankruptcy Act, 1883, which
provides, by sub-s. 3, that 'if the Court is
not satisfied with the proof of the
petitioning creditor's debt, or of the act of
bankruptcy, or of the service of the petition,
or is satisfied by the debtor that is able to
(1) [1892] 2 Q.B.D. 633.
pay his debts, or that for other sufficient
cause no order ought to be made, the Court may
dismiss the petition'."
In In re Van Laun, Ex parte Chatterton(1) Cozens Hardy M.R.
said at p. 30 what Bigham J., had said in In re Van Laun.
Ex parte Pattullo : (2)
"The trustee's right and duty when examining a
proof for the purpose of admitting or
rejecting it is to require some satisfactory
evidence that the debt on which the proof is
founded is a real debt. No judgment recovered
against the bankrupt, no covenant given by or
account stated with him, can deprive the
trustee of this right. He is entitled to go
behind such forms to get at the truth, and the
estopped to which the bankrupt may have
subjected himself will not prevail against
him."
The principles of these cases have been applied by the
courts in this country. Reference may be made to Narasimha
Sastri v. Official Assignee, MadraS(3).
Reference may also be made to Sadhu Ram v. Kishori Lal(4) in
which it was held in view of s. 4(2) of the Insolvency Act
that the decree founded on a debt held fictitious by an
Insolvency Court could not be executed. Bhide J said:
"In the present instance the finding of the
Insolvency Court had, I think, the effect of
rendering the decree inoperative, as it was
tantamount to a declaration that the decree
was non-existent and the finding was binding
on the decree-holder as well as the judgment-
debtor."
In view of our opinion that an Insolvency Court can go
behind a decree and probe into the genuineness of the debt
on which it is founded, it is not necessary to consider the
contention as to whether the Insolvency Court is a Civil
Court or not for the purpose of s. 11 of the Act.
(1) [1907] 2 K.B. 23.
(3) A.I.R. 1930 Madras 751.
(2) [1907] 1 K.B. 155,162.
(4) A.I.R. 1938 Lah, 148.
1118
We therefore hold that the head of department had the power
to decide, under s. 4 of the Act, whether the alleged
defaulter was a defaulter or not, that no Civil Court can
consider this matter in view of s. 11 of the Act and that
the Insolvency Court is however not precluded from enquiring
into the question whether the alleged debtor was really a
debtor and liable to "/pay sums said to be payable by him.
The Insolvency Court has found that the respondent had not
executed the surety bond and that therefore he could not be
liable to make good any payment under it. The order of the
Court below in dismissing the insolvency petition is,
therefore, correct.
We accordingly dismiss this appeal with costs, though for
different reasons.
Appeal dismissed.
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