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2014 DIGILAW 242 (AP)

Kota Sivarama Prasada Rao v. Shaik Mastanvali

2014-02-14

C.V.NAGARJUNA REDDY

body2014
JUDGMENT C.V. Nagarjuna Reddy, J. 1. This civil miscellaneous second appeal arises out of judgment and decree dated 13.04.2010 in A.S. No. 165 of 2006 on the file of the learned Principal District Judge, Ongole, whereby he has confirmed the order dated 28.08.2006 in I.P. No. 10 of 2001 on the file of the learned Senior Civil Judge, Parchur. The appellant herein filed I.P. No. 10 of 2001 under Section 10 of the Provincial Insolvency Act, 1920 (for short 'the Act'), for his adjudication as an insolvent and for vesting his properties with the official receiver, Prakasam District, Ongole, for distribution among the general body of creditors. In the petition, the appellant has inter alia pleaded that he is a resident of Inkollu village, that he has carried on cloth business till the year 1998 in the name and style M/s. Sivaram Textiles, that in the said business, he has sustained huge losses, and that for carrying on the said business, he has incurred A-schedule debts to the tune of Rs. 19,11,400/-. He further pleaded that he possesses only B-schedule properties worth Rs. 2,86,000/-, that C-schedule decree was obtained by him against one J. Bapanaiah in O.S. No. 62 of 1997 on the file of the Senior Civil Judge, Parchur, for Rs. 70,000/-, that the said amount has not been realized so far, that his total assets are to the tune of Rs. 3,56,000/-, while his liabilities far too exceed his assets and that, therefore, he is not in a position to discharge all his debts. The appellant further pleaded that respondents 1 to 4 obtained money decrees, that respondents 5 and 6 filed suits against him, which are pending, that in pursuance of the decrees, respondent No. 1 filed E.P. No. 82 of 2001 in O.S. No. 170 of 1999 on the file of the Junior Civil Judge, Parchur, for his arrest under Order 21 Rule 37 of C.P.C., and also filed E.P. No. 83 of 2001 in O.S. No. 172 of 1999 for sale of his properties, and that the said execution petitions are pending. 2. Respondent No. 1 contested the LP,, by filing a counter-affidavit, which was duly adopted by respondents 5 and 69. 2. Respondent No. 1 contested the LP,, by filing a counter-affidavit, which was duly adopted by respondents 5 and 69. It was pleaded that the appellant failed to render proper accounts with respect to the stock in business and disclose the details relating to his dealers, that he has a share in granite industry, which is not shown in the list of assets, besides having cash on hand suppressed by him, that he will be able to discharge the debts from out of his assets, whereas he has shown only 1/3rd share in the schedule properties, and that many of the debts shown by him are bogus and many others are time barred. 3. Respondent No. 6 filed a separate counter-affidavit, which was adopted by respondents 29, 65 and 66. The counter-affidavit has denied the plea of the appellant that he has suffered heavy losses in the business. It is also averred therein that the appellant has not shown all his properties in the B-schedule and that respondents 7 to 68 are fictitious creditors, who are close associates of the appellant. 4. Respondent No. 62 also filed a counter-affidavit denying the claim of the appellant that he has become insolvent. 5. Besides examining himself as P.W.1, the appellant has examined one China Ayyappa Chetty as P.W.2 and got Ex. A1-certified copy of final decree in O.S. No. 14 of 2000 dated 16.04.2004 marked. Respondent No. 1 examined himself as R.W.1 and no documents have been marked on behalf of the respondents. 6. On appreciation of the oral and documentary evidence, the trial Court has dismissed the I.P. The said order was confirmed in appeal by the lower appellate Court. Feeling aggrieved by these concurrent judgments, the appellant filed this civil miscellaneous second appeal. 7. Mr. Venkateswarlu Chakkilam, learned counsel for the appellant, has submitted that as per the undisputed facts, the appellant's total liability covered by items 1 to 6, 29, 62, 65, 66 and 69 would come to above Rs. 5,00,000/- as against the total value of assets of Rs. 7. Mr. Venkateswarlu Chakkilam, learned counsel for the appellant, has submitted that as per the undisputed facts, the appellant's total liability covered by items 1 to 6, 29, 62, 65, 66 and 69 would come to above Rs. 5,00,000/- as against the total value of assets of Rs. 3,56,000/- and that, therefore, both the Courts below have committed a serious error in dismissing the I.P. He has further submitted that all that the petitioner needs to do in an insolvency petition filed under Section 10 of the Act is to adduce prima facie evidence to show that he is unable to pay his debts and that this burden having been discharged by the appellant, he is entitled to be declared as an insolvent. In support of his submission, he has placed reliance on a Division Bench judgment of this court in Bonagiri Yellalu v. Nagulavaram Chenchu Subbaiah AIR (59) 1972 A.P. 221. 8. I have carefully considered the submissions of the learned counsel for the appellant with reference to the material on record. 9. Section 10 of the Act envisages conditions under which a debtor may file a petition for declaring him as an insolvent. Under this provision, a debtor shall not be entitled to present an insolvency petition, unless he is unable to pay his debts and such debts amount to Rs. 500/-; or 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. Section 24 of the Act envisages procedure at hearing. Under sub-section (1) thereof, on the day fixed for hearing of the petition or on any subsequent day to which the hearing may be adjourned, the Court shall require proof of the aspects mentioned in clauses (a) to (c) thereof. The proviso to clause (a) mandates that where the debtor is the petitioner, he shall, for the purpose of proving his inability to pay the debts, be required to furnish only such proof so as to satisfy 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. 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 a right to question the debtor thereon. Sub-section (3) envisages that 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 proper disposal of the petition. Under Section 25 of the Act, a creditor's petition is liable to be dismissed, where the Court is not satisfied with the proof of his right to present the petition or of the service on the debtor of notice of the order admitting the petition, or of the alleged act of insolvency, or is satisfied by the debtor that he is able to pay his debts or that for any other sufficient cause no order ought to be made. In case of debtor's petition, the Court shall dismiss the same, if it is not satisfied of his right to present the petition. Under Section 27 of the Act, if the Court does not dismiss the petition, it shall make an order of adjudication and shall specify in such order the period within which the debtor shall apply for his discharge. 10. From the scheme of the Act as reflected from the provisions of Sections 10, 24, 25and 27, it is evident that an insolvency petition is dealt with at three stages, namely; 1) the stage of presentation of the petition, 2) the stage of consideration of the petition and 3) the stage of adjudication. The sine qua non for presentation of the insolvency petition under Section 10 of the Act is the inability of the petitioner to pay his debts. At that stage, all that the petitioner needs to do is to raise proper pleadings and file necessary documentary evidence to prima facie substantiate his plea that he is unable to pay his debts. Then comes the next stage, which may be called the intermediate stage, where the Court will examine whether such prima facie material subsists for proceeding with the petition further. Section 24 of the Act deals with this stage. Then comes the next stage, which may be called the intermediate stage, where the Court will examine whether such prima facie material subsists for proceeding with the petition further. Section 24 of the Act deals with this stage. As per this provision, on the day fixed for the hearing of the petition, the debtor is required to furnish prima facie grounds for making the Court believe that it has to proceed further with the adjudication of the petition. In my opinion, the prima facie proof is not the be-all and end-all for declaring the debtor-petitioner as insolvent. If that were to be so, the provisions of Section 27 are wholly unnecessary. At the intermediate stage, if on the available evidence, the Court is satisfied that the debtor is able to pay his debts, it shall dismiss the petition without further enquiry. However, if the Court is satisfied, on prima facie evidence adduced by the petitioner, that he is unable to pay the debts, then the petition will reach the third and final stage, namely; the stage of adjudication under Section 27 of the Act. The words "it shall make an order of adjudication" in Section 27 of the Act would unequivocally show that where it has not dismissed the petition on the ground of lack of prima facie evidence, it needs to adjudicate the petition on merits. It is, thus, clear that the final adjudication should be based on the conclusive evidence adduced by the debtor-petitioner and not on mere prima facie evidence. If a debtor is declared as an insolvent on mere prima facie evidence, it leads to anomalous and incongruous situations where every debtor is likely to avoid payment of debts by committing fraud on the creditors. As adjudication of a debtor as an insolvent results in serious adverse consequences to the creditors, the legislature envisaged that such adjudication must be based on conclusive evidence and not on prima facie evidence. This view of mine stands fortified by the Division Bench judgment of this Court in Bonagiri Yellalu (supra). In paragraph 7 of the said judgment, their Lordships held as under: Whatever may have been the position under the old Act, Section 10makes it abundantly clear that a debtor shall not be entitled to present an insolvency petition unless it is proved that he is unable to pay his debts. In paragraph 7 of the said judgment, their Lordships held as under: Whatever may have been the position under the old Act, Section 10makes it abundantly clear that a debtor shall not be entitled to present an insolvency petition unless it is proved that he is unable to pay his debts. It is therefore an essential pre-requisite for debtor-petitioner to get an order of adjudication to satisfactorily establish that he is unable to pay his debts. That requirement of Section 10 therefore has to be necessarily satisfied by the debtor. (emphasis is mine) 11. From the above quoted passage, it is abundantly clear that the essential pre-requisite for a debtor to get an order of adjudication as an insolvent is to satisfactorily establish that he is unable to pay his debts. While dealing with proviso to Section24(1)(a) of the Act, the learned Division Bench held as under: What all the proviso to Section 24(1)(a) says is that the debtor-petitioner shall be required to furnish only such proof as to satisfy the Court that there are prima facie grounds for believing that he is unable to pay his debts. It vests discretion with the Court. Unless the Court is satisfied that there are prima facie grounds for believing that a debtor-petitioner, for the purpose of proving his inability to pay his debts, has furnished prima facie proof, the Court shall not be bound to hear any further evidence thereon. That proviso relates to the procedure at the hearing and does not absolve in any manner the debtor-petitioner from the obligation of proving that he is unable to pay his debts as is required under Section 10(1) of the Act. (emphasis supplied) 12. The highlighted portion of the passage reproduced above clearly supports the view of this Court that the prima facie evidence was required only for considering whether the Court should proceed further in considering the petition or not. Once the Court is prima facie satisfied that it needs to proceed further for adjudication of the petition, it has no option except to adjudicate the petition on merits, based on the evidence to be produced by both parties. Unless the Court is absolutely satisfied with such evidence that the debtor is unable to pay his debts, it cannot declare him as an insolvent. 13. Unless the Court is absolutely satisfied with such evidence that the debtor is unable to pay his debts, it cannot declare him as an insolvent. 13. Having explained the legal position as above, let me consider whether the appellant has produced satisfactory evidence to be adjudicated as an insolvent. In the first place, it needs to be observed that the appellant relied upon Ex. A1-decree, which was obtained by his two children (the learned counsel for the appellant fairly conceded that they were unmarried when the decree was obtained). This was a partition decree, whereunder the appellant was held entitled to 1/3rd share. Admittedly, items 1 to 3 of B-schedule properties, which are agricultural lands, and item No. 4, which is a house property comprised in 0.11 cents, were given on lease. These properties were not the subject matter of any suit nor were they sold in execution of any decree. Respondent No. 1 has only got these properties attached for recovery of debts under the decree obtained by him. The appellant failed to disclose what is the income he is deriving from out of the lease of these properties. He has, thus, approached the Court by suppressing the material facts relating to the income he is deriving from items 1 to 4 properties, even if the Court takes his plea on its face value that he is entitled to only 1/3rd share in those properties. Item No. 4 is undisputedly a non-agricultural, house property situated over 0.11 cents of land. Both the Courts below are, therefore, justified in holding that the plea of the appellant that his liabilities exceed his assets cannot be accepted. This concurrent finding of both the Courts below cannot be said to suffer from any illegality. On the contrary, by failing to disclose the material fact relating to the income on items 1 to 4 properties, the appellant failed to prove his plea that his liabilities exceed his assets. This ground by itself is enough for throwing out his insolvency petition. I have also perused various other grounds on which both the Courts below have disbelieved the plea of the appellant that he is an insolvent. While confirming the concurrent findings of the Courts below, it is not necessary to refer to all those grounds. This ground by itself is enough for throwing out his insolvency petition. I have also perused various other grounds on which both the Courts below have disbelieved the plea of the appellant that he is an insolvent. While confirming the concurrent findings of the Courts below, it is not necessary to refer to all those grounds. This Court is, therefore, fully convinced that the insolvency petition filed by the appellant is liable to be dismissed and it was rightly dismissed so by both the Courts below. 14. On the analysis as above, the civil miscellaneous second appeal fails and the same is accordingly dismissed. As a sequel to dismissal of the civil miscellaneous second appeal, C.M.S.A.M.P. No. 169 of 2013 shall stand disposed of as infructuous.