Sec. 53 of Insolvency Act = Whether the Courts can order adjudicating the transferor as insolvent and ordering to administer schedule property by the official receiver and distribute the sale proceeds among the petitioners is sustainable?

 Whether the Courts can order adjudicating the transferor as insolvent and ordering to administer schedule property by the official receiver and distribute the sale proceeds among the petitioners is sustainable?

        On Insolvency petition of the creditors/petitioners under Sections 7 to 9 of the Provincial Insolvency Act, 1920 (for short ‘the Act’) to adjudicate the transferor/debtor as an insolvent.  

         The Court allowed the petition adjudicating the first respondent as an insolvent and ordered to administer the schedule property by official receiver and distribute the sale proceeds rateably among the Creditors.  

Now the question  was 

Whether the Courts can order adjudicating the transferor as insolvent and ordering to administer schedule property by the official receiver and distribute the sale proceeds among the petitioners is sustainable?

Before going through this question.

 Let us view the relevant sections

“6. Acts of insolvency:--

 (1) A debtor commits an act of insolvency in each of the following cases, namely:

(a)      If, in India or elsewhere, he makes a transfer of all or substantially all his property to a third person for the benefit of his creditors generally;

(b)      If, in India or elsewhere, he makes a transfer of his property or of any part thereof, with intent to defeat or delay his creditors;

(c)      If in India or elsewhere, he makes any transfer of his property or of any part thereof, which would, under this or any other enactment for the time being in force, be void as a fraudulent preference if he were adjudged an insolvent.”

This section mainly deals with 3 types of transfers of

Properties by a debtor.

“7. Petition and adjudication:--

Subject to the conditions specified in this Act, if a debtor commits an act of insolvency, an insolvency petition may be presented either by a creditor or by the debtor, and the Court may on such petition make an order (hereinafter called an order of adjudication) adjudging him as insolvent.

Explanation:--The presentation of a petition by the debtor shall be deemed an act of insolvency within the meaning of this section, and on such petition the Court may make an order of adjudication.”

This section deals with the power of court to adjudge transferor/debtor as insolvent.

“9. Conditions on which creditor may petition:--
(1) A creditor shall not be entitled to present an insolvency petition against a debtor unless,--

(a)      the debt owing by the debtor to the creditor, or, if two or more creditors join in the petition, the aggregate amount of debts owing to such creditors, amounts to five hundred rupees; and

(b)      the debt is a liquidated sum payable either immediately or at some certain future time, and

(c)      the act of insolvency on which the petition is grounded has occurred within three months before the presentation of the petition:

         

Provided that where the said period of three months referred to in Clause (c) expires on a day when the Court is closed, the insolvency petition may be presented on the day on which the Court re-open.

          (2)      if the petitioning creditor is a secured creditor, he shall in his petition either state that he is willing to relinquish his security for the benefit of the creditors in the even of the debtor being adjudged insolvent, or give an estimate of the value of the security.  In the latter case, he may be admitted as a petitioning creditor to the extent of the balance of the debt due to him after deducting the value so estimated in the same way as if he were an unsecured creditor.” 

 This section mainly deals with debt of more than Rs.500/- and stipulated time of 3 months from the date of act of insolvency as per sec. 6. 

 

Section 28. Effect of an order of adjudication

(1) On the making of an order of adjudication, the insolvent shall aid to the utmost of his power in the realization of his property and the distribution of the Proceeds among his creditors.

(2) On the making of an order of, adjudication, the whole of the Property of the insolvent shall vest in the Court or in a receiver as hereinafter provided, and shall divisible among the creditors, and thereafter, except as provided by this Act, no creditor to whom the insolvent is indebted in respect of any debt provable under this Act, shall during the pendency of the insolvency proceedings have any remedy against the property of the insolvent in respect of the debt, or commerce any suit or other legal proceedings, except with the leave of the Court and on such terms as the Court may impose.

(3) For the purposes of sub-section (2), all goods being at the date of the presentation of the petition on which the order is made, in the possession, order or disposition of the insolvent in his trade or business, by the consent and permission of the true owner, under such circumstances that he is the reputed owner thereof, shall be deemed to be the property of the insolvent.

(4) All property which is acquired by or devolves on the insolvent after the date of an order of adjudication and before his discharge shall forthwith vest in the Court of receiver, and the provisions of sub-section (2) shall apply in respect thereof.

(5) The property of the insolvent for the purposes of this section shall not include any property (not being books of account) which is exempted by the Code of Civil Procedure, 1908 (5 of 1908), or by any other enactment for the time being in force from liability to attachment and sale in execution of a decree.

(6) Nothing in this section shall affect the power of any secured creditor to realize or otherwise deal with his security, in the same manner as he would have been entitled to realize or deal with it if this section had not been passed.

(7) An order of adjudication shall relate back to, and take effect from the date of the presentation of the petition on which it is made.

This section deals with the property of transferor/debtor, on adjudication all properties automatically vests in the Official receiver / or court.

 “53. Avoidance of voluntary transfer:--

Any transfer of property not being a transfer made before and in consideration of marriage or made in favour of a purchaser or incumbrancer in good faith and for valuable consideration shall, if the transferor is adjudged insolvent on a petition presented within two years after the date of the transfer, be voidable as against the receiver and may be annulled by the Court.”

This section anatomy comprises with the following items

1.     Any transfer of property

2.     Except exempted

3.     Shall be voidable as against the receiver and

4.     May be annulled by the court

5.     If the transferor is adjudged insolvent

6.      on a petition presented within two years after the date of the transfer

The word “transfer of property” mentioned in sec. 6 and in this section is one and same and conveys same meaning.

The word “if transferor adjudged insolvent” and the word mentioned in sec.28 “on making of an order of adjudication” – conveys same meaning and same sense

The word “presentation of insolvency petition within 3 months  from the date of the act of insolvency” mentioned in sec. 7 , 9 and the word “on a petition presented within two years after the date of the transfer” in this section  conveys same meaning .

Because no court took the creditor petition on file after expiry of 3 months from the date of act of insolvency as per sec.6.

Likewise no court may annul the sale deed as void under sec.53 after the expiry of two years.

No court shall dispose the insolvency case within two years so as to enabling the creditor to file another petition after adjudication under sec.53 for annulling the transfer of property done by transferor. Hence the very purpose of enactment or incorporation of that section would be defeated.

It is settled law - no interpretation  should defeat the very purpose of the section.

In my opinion, a court can while adjudging the transferor /debtor as insolvent can directly annul the sale deed and authorise the official receiver to sale the same because it is voidable against him.

But that does not prohibit from making an application later also under sec.54 A

Section 54 A. By whom petitions for annulment may be made

A petition for the annulment of any transfer under Section 53, or of any transfer, payment, obligation or judicial proceeding under Section 54, may be made by the receiver or, with the leave of the Court, by any creditor who has proved his debt and who satisfies, the Court that the receiver has been requested and this refused to make such petition.

                                                                                                 .....................Advocatemmmohan