L SRIRANGAMMA Vs. G NARAYANAMMA

JUDGEMENT

(1.) THE question in this Second Appeal is whether a person who in good faith purchased the property of a debtor under a sale held in execution after he was adjudged insolvent under Sec. 74 of the Provincial Insolvency Act would acquire good title to it against the Receiver. THEre are conflicting decisions on the question whether such a sale, after the adjudication of the debtor as insolvent, would confer a good title on the purchaser. Burn and Mockett JJ. in Mallikarjuna Rao v. Official Receiver Kistna held that a Court executing a decree has no power to sell a judgment-debtor's property after the judgment-debtor has been adjudicated insolvent because upon adjudication the judgment-debtor's property at once vests in the Official Receiver and the debtor has nothing to sell. On the other hand, Yenkata Subba Rao and Cornish JJ. observed in Muthan Chettiar v. Venkataswami Naicke that as a matter of construction, it would follow that, even in regard to a sale held after the date of adjudication, a bonafide purchaser would under subsection 3 of Section 51 of the Provincial Insolvency Act be protected. Lionel Leach C. J., and Kuppuswamy Ayyar J. in Guraviah v. Rangiah agreed with the view of Burn and Mockett J J. and held that Section 51 (3) applies only to sales held before the order of adjudication. As the observations of Venkata Subba Rao J. are mere obiter, I would have followed as I should have, the view expressed in the other two Bench decisions of the Madras High Court. But a further complication in this case is that the adjudication was made under section 74 of the Provincial Insolvency Act, whereunder on the admission of a petition by a debtor, the property of the debtor shall vest in the Court as Receiver. Wallace J. in Ramanatha Mudaliar v. Vijaya Raghavalu Naidu held that notwithstanding that fact, a purchaser who has bought the property in good faith in a Court sale after the admission of the petition is protected. As it is a judgment of a single Judge, it may be contended that if the principle behind the aforesaid two Bench decisions is that the sale after adjudication is void because the property vests in the Receiver, the same principle will apply with equal force to a case where it vests in the court even at the time of the admission of the insolvency petition. I think it is necessary to have an authoritative decision on the question of the applicability of Sec. 51 (3) to a case governed by Sec. 74 of the Provincial Insolvency Act. I therefore refer the matter to a Bench. THE Order of reference to a Full Bench was delivered by the Hon'ble THE Chief Justice. This Second Appeal was referred by one of us to a Division Bench on the ground that the principle accepted in Malliharjuna Rao v. Official Receiver Krishna and Guravaiah v. Rangaiah may apply to a case arising under Sec. 74 of the Provincial Insolvency Act. After hearing the arguments of learned counsel we find that not only was a different view expressed by another Division Bench of the Madras High Court in the form of obiter dicta but also that all the other High Courts have differed from the view expressed by the Madras High Court, As this question arises often, it is advisible to get an authoritative decision of a Full Bench on the following two questions : I, Whether section 51 (3) of the Provincial Insolvency Act saves the rights of a purchaser of a property in good faith after an order of adjudication is made ? a. Whether there would be any difference in the application of section 51 (3) to a sale held after a property vests in a Receiver under Section 74 (ii) of the Provincial Insolvency Act. Opinion. THE opinion of the Full Bench was delivered by THE Hon'ble Mr. Justice Viswanatha Sastry : THE questions referred to us are: I. Whether section 51 (3) of the Provincial Insolvency Act saves the rights of a purchaser of a property in good faith after an order of adjudication is made ? Whether there would be any difference in the application of section 51 (3) to a sale held after a property vests in a Receiver under Section 74 (ii) of the Provincial Insolvency Act THE first question was answered in the negative in two decisions of the Madras High Court in Mallikarjuna Rao v. Official Receiver, Krishna and Guruviah v. Rangiah the later merely following the former which gives the reasons for the conclusion reached. In order to appreciate the arguments advanced against the correctness of these decisions it is necessary to refer to the relevant provisions of the Provincial Insolvency Act (V of 1920) hereinafter referred to as "the Act". Under section 7 of the Act an insolvency proceeding commences with a petition by the debtor or creditor. THE petition has to be admitted by the Court, a date of hearing fixed and notice thereof given as provided in section 19. At the hearing of the petition the court may either dismiss it or make an order of adjudication under Section 27. On the making of an order of adjudication the whole of the property of the insolvent vests in the court or in a receiver under section 28 (2) and by virtue of section 28 (7) an order of adjudication relates back to and takes effect from the date of the presentation of the petition. THE rights and remedies available to a creditor against the debtor or his properties vary according to the different stages reached in the insolvency proceedings. Under section 28 (2) an order of adjudication takes away the right of a creditor to commence a suit or other proceeding except with the leave of the court and on such terms as it may impose. With regard to pendingproceedings, Section 29 provides that the Court in which the proceedings are pending shall, on proof of the adjudication of the debtor, either stay the proceedings or allow them to continue on such terms as it may impose. If after the issue of execution against the property of a debtor but before its sale, notice is given to the executing court that an insolvency petition has been admitted and an application is made for that purpose, the court should direct delivery of the property to the Receiver under section 52. What is to happen if the executing court sells the property of the debtor with or without knowledge of the insolvency proceedings ? In other words what are the rights of the decree-holder and the purchaser under a court sale held pending an insolvency proceeding? THE answer is given by section 51(1) which enacts that the decree-holder is not entitled to the benefit of the execution against the Receiver unless the assets are realised before the date of the admission of the insolvency petition, which is the crucial date for this purpose. Assets realised in the course of the execution against the debtor after the admission of the insolvency petition are available for payment of all the creditors, the execution creditor ranking part passu with the other creditors. Section 51 (3) protects the title of a purchaser of the debtor's property at a court sale and runs thus: