Kumarathal v. Balasubramania Gounder and Others — 1995 DIGILAW 869 (MAD)

Judgment : This revision is against the concurrent. finding of the Courts below whereby the first respondent herein was adjudicated as insolvent. The legality of the said finding is challenged in this revision. 2. The material averments are, what the petitioner herein obtained a decree against the first respondent herein in O.S. No. 243 of 1978, on the file of the District Munsifs Court, Pollachi and on the date of the filing of the insolvency petition, a sum of Rs. 13,467.75 p. was due to her. 3. In the execution of the said decree, the petitioner herein attached the properties of the first respondent, and when the property was, brought for sale, the insolvency petition was filed by the first respondent herein, to adjudicate him as an insolvent. In that petition, he has stated that he is an agriculturist and that he has no source of income. He is the owner in possession of B Schedule property, owing an area of nearly ten acres, with a newly dug well and also a 5 H.P. Motor. It is said therein that he depends only on seasonal rains and that he is incurring loss every year due to failure of monsoon. It is also stated that due to failure of monsoon, he had to borrow heavily from outside. .A Schedule contains the debts. First Item in A Schedule is the decree debt obtained by the petitioner herein. The second item is said to be a debt due to the second. respondent in a sum of Rs. # 50,000/-under three promissory notes. # He has stated in that petition that the respondents therein are pressing for payment of their dues, but he is not in a position to discharge his debts. He has said that his assets are far less than the debts due by him to his creditors, and in such circumstances, he wanted himself to be adjudicated as an insolvent. 4. The petitioner herein filed a counter stating that the application is an abuse of process of Court and the same is liable to be dismissed in limine. It is said that he has got a source of income, and the income from the B .schedule property alone comes to more than Rs. 1lakh. 4. The petitioner herein filed a counter stating that the application is an abuse of process of Court and the same is liable to be dismissed in limine. It is said that he has got a source of income, and the income from the B .schedule property alone comes to more than Rs. 1lakh. It is also said that he has not disclosed his other assets, and that the debt alleged to be due to the second respondent is a fictitious debt, and in fact, the second respondent is a close relative of the petitioner and that the insolvency petition was a collusive one between the two, and the claim made by the petitioner is bogus. Ultimately, revision petitioner herein said that the petitioner was not entitled to be adjudicated as an insolvent. 5. During trial, the first respondent herein got himself examined as PW 1. No other witness was examined. In his deposition, the first respondent has stated that the petitioner herein had obtained a decree, and in so far as the second respondent is concerned, he has. borrowed a sum of Rs. 50,000/-on three occasions by executing three promissory notes, i.e., Rs. 15,000/- was borrowed twice and a sum of Rs. 20,000/-was borrowed under another promissory note. He said that the total value of the assets will be around Rs. 25,000/- and in the well, there is no water, and he is not in a position to pay the debts. He said that his annual income will be Rs. 1500/-. He also denied the suggestion that he has disclosed bogus debts. He has also said that he has no building of his own and that he has no asset anywhere. In his cross-examination, he has said that the land value per acre will be about Rs. 2,000/- to Rs. 3,000/-- and there is a well in his property. He has also said that there is a motor and there are about 400 coconut trees. So far as the second respondent is concerned, he said that it must be either in 1983 or 1984 that he borrowed the amounts and he made the borrowing even before the attachment. He admitted that the second respondent is his relative. In reexamination, he said that the 400 coconut trees are not yielding. 6. So far as the second respondent is concerned, he said that it must be either in 1983 or 1984 that he borrowed the amounts and he made the borrowing even before the attachment. He admitted that the second respondent is his relative. In reexamination, he said that the 400 coconut trees are not yielding. 6. It is on the basis of the above evidence, the courts below held that the first respondent herein is entitled to get himself adjudicated as an insolvent. 7. Section 10 of the Provincial Insolvency Act, 1920 enables a debtor to file an application to get himself adjudicated as an insolvent. It says that if the debt due exceeds five hundred rupees, or if he is under arrest or imprisonment in execution of the decree of any court for the payment of money, or an order of attachment in execution of such a decree has been made, and is subsisting, against his property, he can present an application for insolvency. Section 13 of the said Act deals with the contents of the petition. There, it is said that there must be a statement that he is unable to pay his debts and also other particulars. Section 13(1)(e) of the Act further says that he must declare his willingness to place at the disposal of the Court all his property, say in so .far as it includes such particulars (not being his books of accounts) as are exempted by the Code of Civil Procedure, 1908, or by any other enactment for the time being in force from liability to attachment and sale in execution .of decree. Section 24 deals with the procedure at the time of hearing. Section 24 deals with the procedure at the time of hearing. It reads thus:- 1) On the day for the hearing of the petition, or on any subsequent day to which the hearing may be adjourned, the Court shall require proof of the following matters, namely:- a) that the creditor or the debtor, as the case may be, is entitled to present the petition: Provided that, where the debtor is the petitioner, he shall, for the purpose of proving his inability to pay his debts, be required to furnish only such proof as to satisfy the Court that there are prima facie grounds for believing the same and the court, if and when so satisfied, shall not be bound to hear any further evidence thereon; b) that the debtor, if he does not appear on a petition presented by a creditor, has been served with notice of the order admitting the petition; and c) that the debtor has committed the act of insolvency alleged against him. 2) The Court shall also examine the debtor, if he is present, as to his conduct, dealings and property in the presence of such creditors as appear at the hearing, and the creditors shall have the right to question the debtor thereon. 3) The court shall, if sufficient cause is shown, grant time to the debtor or to any creditor to produce any evidence which .appears to it to be necessary for the proper disposal of the petition. 4) A memorandum of the substance of the examination of the debtor and of any other oral evidence given shall be made by the Judge, and shall form part of the record of the case. "8. In 1928 AIR(Mad) 394 (Alameluman-gathayammal v. T.S. Balusami Chetti), a similar question came for consideration. Their Lordships said that unless the debtor proves before Court, he will not be entitled to present a petition. In that case, the learned counsel for the debtor or the alleged insolvent put forward a contention that by filing an application of insolvency, it amounts to an act of insolvency and nothing more need be proved. All the other matters have to be relegated when the insolvent wants himself to be discharged. This contention was not accepted by the Bench of this Court. All the other matters have to be relegated when the insolvent wants himself to be discharged. This contention was not accepted by the Bench of this Court. By separate, but concurring judgment, this Court" * held thus:-(In the main judgment, the officiating Chief Justice held) "Coming to the merits, it is urged that inasmuch as petitioner has committed an act of insolvency by filing her petition and as her debts exceed Rs. 500/-the Court is bound to make an order of adjudication and that order cannot be annulled and that any misconduct" of hers must be dealt with only at the time of discharge and reliance is placed on a case reported in Chhatrapati Singh Dugar v. Kharag Singh Lachmiram 1916 AIR(PC) 64). That decision only lays down that when a debtor applies for adjudication the Court has only to be satisfied that the debtor is entitled under the Act to an adjudication and any question of misconduct must be left to be dealt with at the time of discharge. That, however, does not dispose of the question before us which is whether the Court should have made an order of adjudication, for under S.21, Presidency Town Insolvency Act, where in the opinion of the Court a debtor ought not to have been adjudged insolvent the Court may annul the adjudication. In this case it has been held that the appellant has been guilty of an abuse of the process of Court in coming forward and saying falsely that she was unable to pay her debts. This is a question which goes to the root of the insolvency law for it is only in cases of inability to pay that the insolvency law is applicable. The argument for the appellant is that so long as she makes a statement that she is unable to pay her debts, whether it is true or false, she is entitled to an order provided that she is otherwise entitled to an adjudication order. Reliance is placed on two English cases Ex Pate Painter, in Re Painter ( 1895 (1) QB 85) and In Re Taylor (1901 (I) KB 744). Reliance is placed on two English cases Ex Pate Painter, in Re Painter ( 1895 (1) QB 85) and In Re Taylor (1901 (I) KB 744). The facts in In Re Taylor, are somewhat similar to these, for there the debtor had been adjudged insolvent and it was subsequently found that he concealed his assets and that he was able to pay his debts; but in that case the application for annulment was made by the debtor himself and the Court held that he had committed such serious crimes in bankruptcy that no such order could be made, at any rate, until he had expiated them by continuing bankrupt for a considerable period. Here it is the creditor that seeks to set aside the adjudication and not the debtor. In the case in Ex Parte Painter in Re Painter, a debtor who had been ordered to pay his debts by instalments and who had no other means except an inalienable pension, applied for adjudication, and it was held although his object was to get rid of the oppression of his creditor that was not a sufficient ground for refusing him an adjudication order. That is distinguishable on the ground that in that case the debtor was unable to payoff his debts. It is also argued that both under the Provincial Insolvency Act of 1907 and under the Presidency Town Insolvency Act it is only necessary for a debtor to make a statement that he is unable to pay his debts and that the truth of the statement is not one of the facts essential for an order of adjudication. The two sections are not the same, for in the Provincial Act of 1907 the statement of inability to pay appears merely as one of the many particulars to be noted in on insolvency petition, whereas in the Presidency Towns Insolvency Act there is a separate sanction dealing with this point. The two sections are not the same, for in the Provincial Act of 1907 the statement of inability to pay appears merely as one of the many particulars to be noted in on insolvency petition, whereas in the Presidency Towns Insolvency Act there is a separate sanction dealing with this point. S.15(1) which says: "A debtors petition shall allege that the debtor is unable to pay his debts, and, if the debtor proves that he is entitled to present the petition, the Court may thereupon make an order of adjudication." * The wording of this section looks as if this allegation of inability to pay the debts was a substantial part of the debtors claim to be declared insolvent, and that, if that fact is not proved he would not be entitled to present a petition. This is certainly a possible interpretation of the section and that it is the correct interpretation supported by the fact that the Provincial Insolvency Act of 1920 so as to make it essential that the debtor shall prove that he is unable to pay his debts before he can present any application. This is only natural in view of the fact that the whole of the Insolvency Jurisdiction is provided for the case of persons who are unable to pay their debts and not of persons who are merely unwilling to pay their debts although able to do so. It, therefore, appears that the appellants petition was not one for any of the purposes for which the insolvency law was created and it is consequently an abuse of the process of the Court in that it obtained the jurisdiction of the Court by a false declaration. That being so, the Court certainly ought not to have made the order of adjudication and is consequently bound to annul that order on proof that the petitioner was not entitled to present the petition " In the concurring judgment, Reilly, J. held thus :- - " But, as I have said, there is one essential disqualification under which the appellant was in this case. The learned Judge in the Insolvency Court has found in effect that she was unable to pay her debts at the time when she presented her petition. Mr. Narayana Ayyangar, who appears for the appellant, has contended that is not a disqualification under the Act. The learned Judge in the Insolvency Court has found in effect that she was unable to pay her debts at the time when she presented her petition. Mr. Narayana Ayyangar, who appears for the appellant, has contended that is not a disqualification under the Act. His contention is that in S.14 of the Act certain conditions are set out. One of which a petitioning debtor must fulfill he must either have debts amounting to Rupees 500/- or he must have been arrested or imprisoned in execution, or his property must have been attached in execution. If one of these conditions is fulfilled, Mr. Narayana Ayyangar contends that a petitioning debtor is entitled to be adjudged insolvent. It is true, he admits. that under S.15 of the Act a petitioning debtor must state in his petition that he is unable to pay his debts. But that Mr. Narayana Ayyangar says, is neither here nor there; it does not matter whether it is true or not; it is not the concern of the court to ascertain either then or subsequently, when considering the question of annulment under S.21, whether the debtor was unable to pay his debts or not at the time of presenting the petition. The contention appears to me to rest upon an entire misconception of the scope of the Act. An insolvent is a person who cannot pay his debts. But it is not every insolvent who is entitled to the benefit of the Act. Something more is required for an insolvent to that benefit. Besides being unable to pay his debts, he must comply with one of the conditions set out in S.14: his debts must amount to Rs. 500/- or he must have been arrested in execution, or his property must have been attached in execution. But those are additional conditions. The essential condition, the heart of the whole matter is that he is unable to pay his debts. 9. In 1933 AIR(Pat) 43 (Ganesh Lal Sarawgi v. Sanehi Ram and Aliar Ram), a Division Bench considered the scope of enquiry under Sections 13 and 24 of the Insolvency Act. Their Lordships held this:- The learned Judicial Commissioner apparently thought that the requirements of the law was that he must simply have the evidence of the petitioning debtors as it were merely to verify the statements of the petition. That however is not the case. Their Lordships held this:- The learned Judicial Commissioner apparently thought that the requirements of the law was that he must simply have the evidence of the petitioning debtors as it were merely to verify the statements of the petition. That however is not the case. S. 13, Provincial Insolvency Act, imposes upon the petitioning debtor the obligation to state. the amount and particulars of all his property and of all his debts and he is to make a statement that he is unable to pay his debts. The requirements of such a petition are set forth in S. 13 of the Act. S.24 of the Act imposes upon the Court the "duty of requiring proof of the following matters: "(a) that the creditor or the debtor, as the case may be, entitled to present the petitions. provided that where the debtor is the petitioner, he shall, for the purpose of providing his inability to pay his debts, he required to furnish only such proof as to satisfy the Court that there are prima facie grounds for believing the same."Under sub-section (2): " The Court shall also examine the debtor, if he is present, as to his conduct, dealings and property in the presence of such creditors as appear at the hearing, and the creditors shall have the right to question the debtor there- on.". The Court in this case does not seem to have proceeded to carry out that obligation imposed upon it by sub-section (2). Morever this procedure is to be adopted as preliminary to the decision as to whether to grant the petition or not and therefore the matters disclosed by that procedure are material to be taken into consideration. Otherwise sub-sec. (2) would have to be considered superfluous. By sub- sec. (3) The Court shall, if sufficient cause is shown, grant time to the debtor or to any creditor to produce any evidence which appear to it to be necessary for the proper disposal of the petition. It is further incumbent upon the petitioning debtor under S.22 of the Act when his petition is admitted to produce all books of account. The debtor has stated here that he has no books of account but necessarily in order to consider the debtors conduct of the business as directed by sub-sec. It is further incumbent upon the petitioning debtor under S.22 of the Act when his petition is admitted to produce all books of account. The debtor has stated here that he has no books of account but necessarily in order to consider the debtors conduct of the business as directed by sub-sec. (2) of S.24, the Court shall make an investigation as to whether the statement that he did not keep account books is to be believed or not. Indeed it is clear that the Court must treat the evidence produced by following the procedure prescribed in S. 24 as material to its decision as to whether or not to allow the petition and in deciding whether such evidence has satisfied the Court that there are prima facie grounds for believing the statements in the petition. The statements in the petition by themselves if merely repeated formally in the evidence, are not sufficient prima facie grounds for believing such statements. There has been the tendency for Courts administering the Insolvency Act to believe that the hearing of a petition is a more or less formal matter and that if the petition is as it were merely verified by the evidence of the debtor the Court is bound to accede to the petition. That is not the case. It is the duty of the Court to be satisfied prima facie and after following the necessary procedure and making the necessary investigation to come to a conclusion that the statements by the debtor are true. After all the procedure of insolvency is for the protection of the debtors. It is unfortunately more often needed by debtors than by creditors with the consequence that the interest of the creditor has a tendency to be forgotten." * The said decision was followed by the same High Court in the decision reported in 1958 AIR(Pat) 528. (Ram Narain Lal v. Abdul Kalam) paragraphs 9 and 10 read thus:- To answer this question, it is necessary to read Section 13(1)(4) provided that every insolvency petition presented by a debtor shall contain the amount and particulars of all pecuniary claims against him, together with the names and residences of his creditors so far as they are known to, or can by the exercise of reasonable care and diligence be ascertained by him. In the present case, the debtor simply mentioned names of two persons in whose favour the alleged handnotes had been executed by the debtor for different items. The debtor did not mention in his application the dates of two handnotes from which it could be inferred whether these were subsisting loans. The question, therefore is, if this mentioning only of the names of the creditors and amount of loans is sufficient compliance with Section 13(1)(4) of the Act. In my opinion, it is not. In order to determine whether the loans taken on the basis of the two hand notes were subsisting or not, or, when they would be barred by limitation, it was necessary to mention further the dates of the hand notes in order to enable the Court to find out whether these two hand notes really existed either in fact or in law. In my opinion, the insolvency petition presented by the debtor did not, therefore, comply with the provisions of Section 13(1)(d) of the Act." 10. In (1982) 1 Mad LJ 274 (P. Thangaraja Pillai v. Periaswamy Pillai) this Court had occasion to consider the scope of enquiry under Sections 10 and 24(1) of the Provincial Insolvency Act. A learned Judge of this Court has held thus:- The provisions of Section 10 of the Provincial Insolvency Act read in conjunction with the proviso to Section 24(1)(a) may be said to steer a middle course in the matter of enquiry into an insolvency petition. On the one hand, the clear intendment of the legislature is that the debtor cannot have an order of adjudication for the mere asking. On the other hand it is not within the contemplation of the Act that the Court should be engaged in a full-fledged or all out inquiry on the debtors petition before rendering its finding, one way or the other, whether the petition should be allowed or rejected. In between the two possible extremities of trial, what the Act provides for is the conduct of a prima facie inquiry so that the Court may be satisfied that the debtor is unable to pay his debt. The proviso, in terms, rules out any insistence by the Court on the debtor furnishing any proof beyond that which can be regarded as prima facie proof. The proviso, in terms, rules out any insistence by the Court on the debtor furnishing any proof beyond that which can be regarded as prima facie proof. The proviso further provides, in a negative fashion, that the Court shall not be bound to hear any further evidence if it is satisfied that there are prima facie grounds for believing the evidence of the petitioner. The Court should not embark on an elaborate trial procedure for the purpose of deciding the correctness or the probative value of the petition filed by the debtor for adjudicating himself as insolvent. Hence, if the Court exceeds the bounds of this limited prima facie inquiry, then it would be committing an excess of jurisdiction and the order is liable to be set aside on that ground." 11. Now let us consider how far the first respondent has proved a prima facie case. .12. In respect of the liability scheduled as A in the petition, as against the second respondent, it is only stated as three promissory notes for Rs. 50,000/ -. The details of the promissory notes are not given. The dates on which the liabilities were incurred are not stated, and whether, in fact, those liabilities are subsisting is also not clear. In the petition, there is also no statement or declaration as enjoined under Section 13(1)(e) that the first respondent is surrendering his properties. Of course, the said defect was cured by a subsequent declaration. But when we consider the maintainability of the petition that is also an added circumstance to be taken note of. The time at which the petition is filed, is also material. When the insolvents property was about to be sold, the present petition was filed, alleging that there is another creditor for Rs. 50,000/-and he is unable to pay the debts. the second respondent, who has been served, has not come before Court to give the details about the alleged debt. Even when P.W.1 was examined, he did not speak anything about the debt due to the second respondent, except for the statement that the debt due to the second respondent is on the basis of three promissory notes. Even in the chief examination, he did not say the date of borrowing and what is the exact amount due on the date of the application. Even in the chief examination, he did not say the date of borrowing and what is the exact amount due on the date of the application. In cross-examination also, he was not in a position to explain the details of those promissory notes. No attempt was also made by the first respondent herein to get them proved either through the second respondent or by taking steps for production of those documents. When the genuineness of the very transaction is disputed, there must be some evidence to show that the first respondent herein is a debtor to the second respondent. Even to prove the debt, there is no legal evidence before Court. Only if there is some legal evidence, the Court can come to the conclusion whether the first respondent herein has prima facie proved his right to get adjudicated as an insolvent. 13. This Court is well aware at the initial stage we are not concerned about the nature of the transaction, whether it is sham or nominal, and whether the debt is subsisting. But, initially, there must be at least evidence to prove that there is a debt due to the second respondent, by the first respondent. 14. Coupled with the absence of evidence, we have to take note of the fact that the second respondent is a relative of the first respondent. In the main petition, it is said that the petitioner has borrowed heavily from outside. If there are various debts, they would have been made mention of in the petition itself. But we find that apart from the petitioner herein, the second respondent alone is impleaded as creditor. So, the allegation that the first respondent herein had to borrow heavily from outside is also a statement without any basis. Mere repetition of the wordings of the section both in the petition and in the evidence of P.W. 1 is not sufficient. There must be something more for the satisfaction of the Court to arrive at a finding that there is a debt and the applicant is not in a position to discharge the same. It is for the first respondent to prove that he is entitled to present a petition under Section # 10(1) of the Act. # .15. There must be something more for the satisfaction of the Court to arrive at a finding that there is a debt and the applicant is not in a position to discharge the same. It is for the first respondent to prove that he is entitled to present a petition under Section # 10(1) of the Act. # .15. The learned counsel for the respondent No.1 submitted that both the Courts below have accepted the case of the first respondent that he is entitled to be adjudicated as insolvent and the same is purely a question of fact. I agree that there is such a finding by the Courts below. I also agree that this is a finding of fact entered on the basis of prima facie evidence, and if the same is appreciated in accordance with law, the same should not be lightly interfered in revisions. But in this case, the Courts below did not consider the scope of Sections 10(1), 13 and 24 of the Act in proper perspective. The trial Court did not consider the impact of the non-mentioning of the debt alleged to be due to the second respondent. When there is lack of details, the Court can only enter finding that there is no such debt. We have to assume that what the petitioner has stated is prima facie evidence. The burden of proof was also wrongly cast on the creditor. The trial Court assumed that it is for the creditor to prove the value of the property, and also the fact that there are no other debts and that the first respondent has got other properties. The entire burden was cast on the creditor mainly relying on the averments in the petition. As I stated earlier, apart from the repetition of the wordings in the .section, there must be some piece of acceptable evidence to arrive at a prima facie conclusion. That evidence is totally lacking in this case. It is not a question of believing or not believing the first respondent. # The question is, whether there is at least some material on the basis of which the Court can arrive at such a finding. # 16. When the matter was taken in appeal, this question was not considered. That evidence is totally lacking in this case. It is not a question of believing or not believing the first respondent. # The question is, whether there is at least some material on the basis of which the Court can arrive at such a finding. # 16. When the matter was taken in appeal, this question was not considered. The lower appellate Court assumed that mere presentation of the petition by a debtor amounts to an act of insolvency and the statement that he is prepared to place all his assets for management by Court, is sufficient. The assumption of the lower appellate Court that the alleged inability of the first respondent to pay debts is prima facie proof of insolvency is only a result of misreading of the Section. 17. I hold that the first respondent has not proved his eligibility to present a petition, and there is total lack of evidence to arrive at a prima facie conclusion that he is entitled to be adjudicated as insolvent. When there is total lack of evidence, this Court is entitled to invoke the powers under Section 115 of the Code of Civil Procedure, to hold that the decisions of the Courts below are tainted with illegality and without jurisdiction. 18. In the result, I set aside the orders of both the Courts below, and allow this Revision Petition with costs through out. The I.P. is dismissed. Petition allowed.