Research › Search › Judgment

Andhra High Court · body

2024 DIGILAW 1308 (AP)

Chavana Rajendra Prasad v. Orchu Jagannadam

2024-09-17

B.S.BHANUMATHI

body2024
JUDGMENT : B.S. Bhanumathi, J. This appeal is filed under Section 75 (1) of Provincial Insolvency Act r/w Section 100 of C.P.C against the Decree and Judgment Dt. 22.12.2022 passed in A.S No. 5 of 2022 on the file of the court of III Addl. District Judge, Rajampet. 2. The appellant herein/ petitioner in I.P filed I.P.No.1 of 2013 on the file of Principal Senior Civil Judge, Rajampet under Sections 9 and 13(2) of Provincial Insolvency Act seeking the relief to declare the 2nd respondent herein/ 1st respondent in I.P. as insolvent and set aside the registered sale deed dated 04.06.2012 executed by the 2nd respondent herein in favour of the 1st respondent herein/ the 2nd respondent in I.P. and to vest the B schedule property with the official receiver for sale and discharge the debt under the promissory note to the petitioner. Hereafter, the parties are referred as before the trial Court. 3. The brief averments in the petition are as follows: It is the case of the petitioner that the 1st respondent borrowed a sum of Rs.2,00,000/- (Rupees two lakhs) from the petitioner to meet his legal necessities and executed a demand promissory note on the even date i.e., on 21.11.2009 agreeing to repay the same with subsequent interest @ 24 % per annum. Again on 23.11.2009, he borrowed Rs.2,00,000/- (Rupees two Lakhs) and executed two (02) promissory notes each for Rs.1,00,000/- (Rupees one lakh) in favour of the petitioner agreeing to repay the same with subsequent interest @ 24% per annum. Thereafter, inspite of repeated demands, the 1st respondent did not repay the debt and with a view to defeat the rights of the petitioner, the 1st respondent executed a nominal sale deed in respect of the B schedule property in favour of the 2nd respondent. The petitioner got issued legal notice dated 15.06.2012 demanding the respondents to discharge the debt. Having received the same, no response. To avoid the liability, and to defraud the creditor, the 1st respondent created a nominal registered sale deed dated 04.06.2012 in the name of the 2nd respondent in respect of the B Schedule sole property which he has. 4. The 1st respondent/ debtor filed his counter denying the petition averments and contended that he never borrowed any amount and did not execute any promissory notes in favour of the petitioner. 4. The 1st respondent/ debtor filed his counter denying the petition averments and contended that he never borrowed any amount and did not execute any promissory notes in favour of the petitioner. He sold the B schedule property to 2nd respondent for valuable consideration. The petitioner filed this application in collusion with the 2nd respondent and prayed to dismiss the petition. 5. The 2nd respondent/ purchaser reported no counter and remained ex parte. 6. On behalf of the petitioner, C.Rajendra Prasad was examined as PW.1 and G. Raghava Naidu is examined as PW.2 and got marked Ex.P.1-certified copy of registered sale deed dated 04.06.2012, Ex.P.2-original promissory note dated 21.11.2009, Ex.P.3-Original promissory note dated 23.11.2009, Ex.P.4-original promissory note dated 23.11.2009, Ex.P.5-office copy of legal notice dated 15.06.2012, Ex,P.6-unserved registered postal cover and Ex.P.7- letter from post master with postal receipts. 7. On behalf of the respondents, R.W.1-Orsu Jagannadham was examined and no documentary evidence was filed. 8. The trial Court allowed the petition by adjudicating the 1st respondent as an insolvent and vested the petition ‘B’ schedule property with the Official Receiver, Kadapa to administer the same for the benefit of the creditors of the first respondent, including the petitioner. The trail Court gave time for six (6) months to the 1st respondent to apply for discharge. 9. Aggrieved by the order and decree, the 2nd respondent preferred the appeal before the III Additional District Judge, Rajampet. 10. After hearing both parties, only on the ground that in the absence of any adjudication as to debts or unequivocal admission thereof by a person to be declared as insolvent, the Court is not competent to determine liability of that person to creditor under Section 9 of the Provincial Insolvency Act, 1920, (for short, the Act) as held in the decision of this High Court in Gunapati Radha Krishna Reddy Vs. Chemala Venkata Ramana & Others, 2010 (3) ALD 721 and in the present case the petitioner/ creditor did not initiate any proceedings against the 1st respondent/ debtor for such adjudication based on Ex.P.2 to P.4 prior to initiation of the proceedings herein. 11. Aggrieved by the order, this appeal is preferred by the creditor. 12. The notice sent to the 2nd respondent was returned unserved with the endorsement ‘Addressee continuously absent for 7 days’. Again notice was sent, but not returned. Service of notice to him is deemed to be sufficient. 13. 11. Aggrieved by the order, this appeal is preferred by the creditor. 12. The notice sent to the 2nd respondent was returned unserved with the endorsement ‘Addressee continuously absent for 7 days’. Again notice was sent, but not returned. Service of notice to him is deemed to be sufficient. 13. Apart from submitting oral arguments, the counsel for the 1st respondent filed written arguments. The learned counsel for the appellant vehemently contended that the process of establishing the debt is before the Official Liquidator after declaring the debtor as insolvent by the appropriate Court and, therefore, merely because there was no proceeding taken and decree obtained by the creditor against the debtor as on the date of filing of the petition, Section 9 of the Act does not prohibit a creditor from initiating the proceedings thereunder. She further stated that the decision in Gunapati Radha Krishna Reddy (1 supra) was not rendered basing on the provisions of law relating to the Act and the decision is only an obiter dicta since there is no point for consideration framed on that aspect in that decision, whereas this Court in the case of Tatiparthy Satyanarayana Vs. Palacherla Vijayalakshmi and Others, 2015 (6) ALD 15 categorically observed the procedure to be adopted for proving the debt after declaration of the debtor as insolvent by virtue of Sections 45 to 50 in part III of the Act of 1920 and further dealt with the procedure for seeking annulment of transfer under Section 54-A of the Act, 1920, and, therefore, the impugned decree and judgment are liable to be set aside. So, she contended that annulment of a transaction of act of insolvency requires prior adjudication of the debtor as insolvent as per the set procedure in the Act of 1920, but not by a separate adjudication before filing of the proceedings under Section 9 of the Act of 1920. In support thereof there is another decision of this High Court, referred by the 1st respondent in the case of Dara Mohan Muralidhar vs. B. Nirmala Devi, 2016 (6) ALT 762 wherein the ratio in the case of Tatiparthy (supra) was reiterated. 14. In support thereof there is another decision of this High Court, referred by the 1st respondent in the case of Dara Mohan Muralidhar vs. B. Nirmala Devi, 2016 (6) ALT 762 wherein the ratio in the case of Tatiparthy (supra) was reiterated. 14. The learned counsel for the 2nd respondent herein/debtor is in agreement with the procedure for adjudication of insolvency and subsequent annulment of transfer of property in as much as he placed reliance on the decisions in Tatiparthy Satyanarayana (supra), Dara Mohan Muralidhar (supra), Gounda Mohammed Yousuf & Others Vs. Shaik Saheb & Others, 2015 (6) ALD 166 . However, he argued that in the present case, even assuming that the debts are proved as per Section 49, the appellant herein/ creditor ought to have moved a separate application for annulment of transfer under Ex.P1, and further that without appreciating the legal proposition of law as held in the decisions cited by him, the trial Court erred in vesting the ‘B’ schedule property with the official receiver. He prayed to dismiss the present appeal. 15. At this juncture, it is pertinent to refer the relevant portions of the decision in Gunapati Radha Krishna Reddy (1 supra), wherein it is held at paras 5, 6, 8, 9 and 11 as follows : “5. The Act provides facility to a creditor as well as to debtor, to seek declaration that the debtor has become insolvent. Several legal consequences ensue, once an individual is declared as insolvent. essential conditions for institution of the proceedings under the Act are that (a) the individual, sought to be declared as insolvent must be a debtor and that (b) the properties held by him are insufficient in value, to liquidate the debts. A debtor can approach an insolvency Court, normally when he figures as judgment debtor, referred by the 1st respondent in various decrees; the value of which exceeds the value of the properties held by him. In a given situation, a debtor may even approach the insolvency Court to declare him as insolvent, though no decrees, as such, were passed against him. In such cases, an unequivocal declaration made by him, as to his indebtedness, can be taken on its face value. 6. The I.P. filed by a creditor under Section 9 of the Act, however, stands on a different footing. In such cases, an unequivocal declaration made by him, as to his indebtedness, can be taken on its face value. 6. The I.P. filed by a creditor under Section 9 of the Act, however, stands on a different footing. Before he invokes the jurisdiction of the insolvency Court, there must exist the adjudication of the debt or the debts, vis-á-vis the proposed insolvent in his favour. That can be in the form of a decree passed by the competent Court of civil jurisdiction or an unequivocal declaration on the part of the proposed insolvent, before the proceedings are instituted. To put it differently, a creditor cannot institute proceedings under Section 9 of the Act, in the absence of any adjudication, as to the debts, or unequivocal admission thereof, by a person proposed to be declared as insolvent. 8. The jurisdiction of an insolvency Court is delineated under Section 4 of the Act. It empowers the Court to adjudicate the disputes, as to title in relation to the property, which is sought to be proceeded against. Section 4 of the Act reads as under: Power of Court to decide all questions arising in insolvency: (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 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. 9. 9. Nowhere from the text of the Section, it is evident that the insolvency Court is conferred with the power to determine the liability of a proposed insolvent towards the creditor. Such an adjudication is supposed to exist before the proceedings under the Act are initiated. 11. Secondly, the necessity for the petitioner to seek declaration that the 1st respondent is an insolvent would have arisen, if only he made an effort to recover the amount due to him and the properties available with the 1st respondent were found to be inadequate. In his counter, the 1st respondent stated that he holds several movable and immovable properties. Filing of an Insolvency Petition cannot be a maiden effort on the part of a proclaimed creditor. An individual would answer the definition of creditor, if only the person against whom he claims rights was declared as debtor. This naturally must take place in a different set of proceedings and not in the I.P. itself.” In case of Tatiparthy Satyanarayana (2 supra), it is held at paras 22 to 29 as follows : “22. In Re. Point No. 2: The trial Court annulled Exs. A3 and A4 simultaneously adjudging respondent Nos. 1 and 2 as insolvents but it is impermissible under law. The finding of the trial Court with regards to annulment of Exs. A3 and A4 sale deeds is erroneous ex facie for the reason that order of annulment of sale deeds cannot be passed simultaneously adjudging the debtors as insolvents. 23. To decide the real controversy between the parties, I feel that it is relevant to advert to the provisions of the Act of 1920, more particularly to the provisions of Sections 53, 54 and 54-A of the Act of 1920. According to Section 53 of the Act of 1920, any voluntary transfer made by a debtor, if the transferor is adjudged as insolvent, can be avoided. According to Section 53 of the Act of 1920, any voluntary transfer made by a debtor, if the transferor is adjudged as insolvent, can be avoided. Section 54 of the Act of 1920 says that every transfer of property, every payment made, every obligation incurred, and every judicial proceeding taken or suffered by any person unable to pay his debts as they become due from his own money in favour of any creditor, with a view of giving that creditor a preference over the other creditors, shall, if such person is adjudged insolvent on a petition prescribed within three months after the date thereof, be deemed fraudulent and void as against the Receiver, and shall be annulled by the Court saving transactions entered into in good faith and for valuable consideration. 24. A fraudulent transfer under Section 53 of the Act of 1920 and transaction to give fraudulent preference under Section 54 of the Act of 1920 are void against Receiver and they shall be annulled on a petition filed within the specified time. Section 54-A of the Act of 1920 specified procedure for annulment of any transfer under Section 53 or 54 of the Act of 1920. According to it, for annulment of any transfer under Section 53 or 54 of the Act of 1920, a petition may be presented by the Receiver or, with the leave of the Court, by any creditor who has proved his debt and who satisfied the Court that the Receiver has been requested and his refused to make such petition. 25. In view of the language used in Sections 53 and 54 of the Act of 1920, more particularly the words 'if the transferor is adjudged insolvent' under Section 53 of the Act of 1920 and 'if the person is adjudged insolvent' under Section 54 of the Act of 1920, indicates that for annulling transaction of transfer, the debtor must be an adjudged insolvent. So, to annul a transaction of transfer, the pre-condition is adjudging the debtor as insolvent but, here, the petition was filed by the creditor seeking two reliefs both under Sections 9 and 53 and 54 of the Act of 1920 avoiding a fraudulent preference and annul the transactions covered by sale deeds Exs. A3 and A4. So, to annul a transaction of transfer, the pre-condition is adjudging the debtor as insolvent but, here, the petition was filed by the creditor seeking two reliefs both under Sections 9 and 53 and 54 of the Act of 1920 avoiding a fraudulent preference and annul the transactions covered by sale deeds Exs. A3 and A4. Thus, the petitioner-creditor sought for two reliefs simultaneously but the relief claimed by the petitioner is against the spirit of language used under Sections 53, 54 and 54-A of the Act of 1920. 26. According to Section 54-A of the Act of 1920, it is clear that, before moving Court for annulment of transfer, more particularly covered by sale deeds dated 26.7.2001 and 1.8.2001, it is the duty of the petitioner to prove his debts before Official Receiver as required under Section 49 of the Act of 1920 and then move Court exercising insolvency jurisdiction for annulling transfer if Receiver refuses to make such petition for annulment on the request made by the creditor. So, even according to Section 54-A of the Act of 1920, it is the duty of the creditors to prove the debt before Official Receiver. 27. Section 49 of the Act of 1920 specified procedure to be followed for proof of debt. According to it, a debt may be proved under this Act by delivering, or sending by post in a registered letter, to the Court an affidavit verifying the debt. The affidavit shall contain or refer to a Statement of Account showing the particulars of the debt and shall specify the vouchers (if any) by which the same can be substantiated. The Court may at any time call for the production of the vouchers. Therefore, the debt shall be proved by following necessary procedure contemplated under Section 49 of the Act of 1920 after entrusting the matter to Official Receiver duly adjudging the debtor as insolvent. 28. Part-III of the Act of 1920 from Sections 45 to 50 of the Act of 1920 laid down procedure for proof of debts. Adherence of such procedure under Sections 45 to 50 of the Act of 1920 would arise only after adjudging the debtor as insolvent but here the relief under Sections 53 and 54 of the Act of 1920 was claimed simultaneously with the relief of adjudging the debtors as insolvents. Adherence of such procedure under Sections 45 to 50 of the Act of 1920 would arise only after adjudging the debtor as insolvent but here the relief under Sections 53 and 54 of the Act of 1920 was claimed simultaneously with the relief of adjudging the debtors as insolvents. The conditions lay down under Section 54-A of the Act of 1920 were not complied with by the petitioner to get the transactions covered by Exs. A3 and A4 annulled. A perusal of language used under Sections 53, 54 and 54-A of the Act of 1920 and the mode of proof of debt under Part-III of the Act of 1920 (from Sections 45 to 50), it is clear that before moving an insolvency Court to annul transfer of property, a creditor has to satisfy the following conditions: (1) The debtor must be adjudged as insolvent; (2) The creditor should prove his debt by following the procedure contemplated under Part-III of the Act; and (3) He should have made a request to Official Receiver for moving insolvency Court for annulling fraudulent transaction and that the Official Receiver refused to move such petition for annulment. 29. In the instant case, by the date of filing petition seeking annulment under Section 53 or 54 of the Act of 1920, respondent Nos. 1 and 2 were not even adjudged as insolvents. So, the first condition was not satisfied. The petitioner did not approach Official Receiver and proved his debt as contemplated under Part-III of the Act of 1920 and did not comply with Section 54-A of the Act of 1920. Therefore, the order of annulling Ex. A3 sale deed dated 26.7.2001 and Ex. A4 sale deed dated 1.8.2001 passed by the trial Court is erroneous ex facie and contrary to the provisions of the Act of 1920. Hence, the order of the trial Court annulling Exs. A3 and A4 is illegal and the same is liable to be set aside. Therefore, I find that the appellate Court did commit no error in reversing the finding of the trial Court. Hence, I find no ground to interfere with the finding recorded by the appellate Court. Accordingly, the finding of the appellate Court is hereby confirmed holding this point in favour of respondent Nos. 3 and 4 and against the petitioner.” 16. Therefore, I find that the appellate Court did commit no error in reversing the finding of the trial Court. Hence, I find no ground to interfere with the finding recorded by the appellate Court. Accordingly, the finding of the appellate Court is hereby confirmed holding this point in favour of respondent Nos. 3 and 4 and against the petitioner.” 16. Though the point for determination in Tatiparthy Satyanarayana (2 supra) is slightly different from the point for consideration in the present appeal, the detailed analysis of the provisions made in that decision clearly establish that the debt shall be proved as per the provisions under Part III of the Act and that would arise only after adjudicating the debtor as insolvent. Therefore, there is no possibility or occasion obtaining a decree for the alleged debt as on the date of filing of the petition under Section 9 of the Act. It is pertinent to mention that the proceedings under Section 9 of the Act shall be initiated within ninety (90) days from the date of the commission of the Act of Insolvency by transferring the property. By that time, in many cases, the limitation for initiating the proceedings for recovery of the debt due from the debtor may not expire and the creditor may also not have sufficient time to obtain a decree. Therefore, in this regard, the creditor has to establish prima facie the creditor debtor relationship for the purpose of matters by leading necessary evidence for the purpose of establishing the maintainability of the petition under Section 9 of the Act, whereas the debt is to be proved only under the provisions of Part III, subsequent to adjudication of the insolvency of a debtor. 17. In the decision in Gunapati Radha Krishna Reddy (1 supra), it is only Section 4 of the Act was dealt with for the purpose of examination of maintainability of proceedings under Section 9 of the said Act. The other relevant provisions and Part III were not discussed. Whereas, in the decision in Tatiparthy Satyanarayana (2 supra) it is only after considering all the relevant provisions, observations were made. That apart, there is no point for consideration was raised about maintainability of I.P. in the case of Gunapati Radha Krishna Reddy (1 supra). 18. For these reasons, the observations therein does not provide ratio to bind the decision in other cases. That apart, there is no point for consideration was raised about maintainability of I.P. in the case of Gunapati Radha Krishna Reddy (1 supra). 18. For these reasons, the observations therein does not provide ratio to bind the decision in other cases. As such, there is merit in the appeal. 19. In the result, the CMSA is allowed by setting aside the decree and judgment dated 22.12.2022 passed in A.S No. 5 of 2022 on the file of the court of III Addl. District Judge, Rajampet. Since the appeal was not decided on merits, the matter is remanded to the first appellate Court for fresh adjudication as per law, basing on the evidence already led since the matter is pending for a long time, the appellate Court is directed to dispose of the appeal within three (3) months from the date of receipt of the copy of the order. There shall be no order as to costs. Miscellaneous petitions, if any pending, in this appeal, shall stand closed.