VEMPATI VENKAYYA Vs. OFFICIAL RECEIVER

JUDGEMENT

(1.) This revision petition is directed against an order of the District Court of Guntur setting aside a sale in favour of the petitioner as a fraudulent preference under Section 54 of the Provincial Insolvency Act. One Ramachandrayya and another were adjudicated. insolvents on August 7, 1930. The sale deed in question (Ex. Ill) was executed by them in favour of the petitioner on July 11, 1930. The total liabilities of the insolvents amounted to about Rs. 4,000 of which about Rs. 3,000 was due to the petitioner. The sale deed comprised all the insolvents properties except their residential house in the village which, according to P.W. 4, was worth from Rs. 300 to Rs. 400 at the time of the sale. The sale was executed for Rs. 1,400 in pro tanto discharge of the debt due to the petitioner, a promissory note being given for the balance. The deed was registered in Guntur though the lands comprised therein are within the jurisdiction of the Sub-Registrar of Gurzala where it should ordinarily have been registered. The petitioner's case which was accepted by the trial Court was that he had been pressing the insolvents for payment of the debt due to him and had gone to Guntur with a view to file a suit against them when having come to know of his intention, they came there and executed the sale deed and got it registered in order to avert such suit. In those circumstances the sale was upheld as not being a fraudulent preference. On appeal, the learned District Judge disbelieved the petitioner's case and found that the finances of the insolvents were in a hopeless state at the time of the sale, that all their creditors were pressing them for payment, and that it was impossible to believe that the insolvents could have thought of protecting themselves from any threatened suit by a sale of their properties. The learned Judge also considered that the execution and registration of the sale deed at Guntur was suspicious, and that, as the petitioner and the insolvents belonged to the same village, it must have been executed with a view to prefer the petitioner.

(2.) Learned Counsel for petitioner contended that this decision is unsustainable as there is no evidence to show that the dominant intention of the insolvents in effecting the sale was to-prefer the petitioner. It was pointed out that all the creditors of the insolvents except P. W. 4 to whom a trifling sum was due were residents of the same village and that the learned Judge was wrong in inferring a motive to prefer from the petitioner's residence in the same village. It must be admitted that residence in the village of the insolvents can be no ground for inferring an intention to prefer when practically all the creditors of the insolvents also lived in the same village, nor can the execution and registration of the sale deed at Guntur instead of Gurzala be evidence by itself of such intent. Apart from these facts, there is no affirmative evidence to show that the sale was effected with a view to prefer the petitioner over other creditors. The position therefore reduces itself to this: the insolvents financial condition was so hopeless that any threat or pressure of the creditors could have had no influence on them. The petitioner as well as the other creditors knew of such condition and were demanding payment. For some reason which has not been affirmatively established, the insolvents sold most of their properties to the petitioner in partial discharge of the debt due to him, and this sale had the effect of giving him a preference over their other creditors. The question is whether, in these circumstances, the sale can be set aside as a fraudulent preference under Section 54 of the Act.

(3.) It is well settled that the burden of proving that the transaction impugned amounts to a fraudulent preference is on the Official Assignee or Receiver. Learned Counsel for respondent however, broadly contends that in seeking to establish the insolvent's intent to prefer, all that is necessary for the Official Receiver to show is that the transaction was voluntary in the sense that it was not induced by real or genuine pressure exerted upon the insolvent and that it resulted in the preference of one creditor over other creditors. If the creditor who is in fact preferred fails to give any other explanation for the transaction, it must be presumed to have been done with the view or intent of preferring that creditor. Several decisions were cited in support of this proposition but most of them are not helpful as they were concerned with their own peculiar facts-It must however be admitted that the decision of. the English Court of Appeal in In re Cohen (1924) 2 Ch. 515 and of the Division Court in Re Drage (John) and Sons V/s. Knight (1926) 134 L.T. 765, on which counsel particularly relied lend support for the proposition contended for. The relevant part of the head note of the former case runs thus: Held, further (Pollock M.R. dissenting), that where a bankrupt in imminent expectation of bankruptcy voluntarily pays a particular creditor with the result of giving him a preference in fact, and the reason for such payment is unexplained, a prima facie case of fraudulent preference is established.? This was apparently based upon what Sargant, L.J., observed at pages 543 and 544: And amongst all the cases referred to in the text-books we have not been referred to one in which an actual preference in view of imminent bankruptcy has been supported, except by showing affirmatively that the actual preference was caused by some other reason--such as pressure, threats, fear or the like, which the Court considered as constituting the dominant motive, and as showing an intention displacing the prima facie intention to be gathered from the mere fact of preference. No case has been cited to us nor do I think any case can be found where a debtor in imminent expectation of bankruptcy has given a preference in fact to a particular creditor, which is apparently voluntary and is wholly unexplained and where that preference in fact has been held good. To the same effect more or less are the observations to be found in the other decision referred to above. A decade later however the House of Lords had to consider this question in Sir William Henry Peat V/s. Gresham Trust, Ltd. (1934) A.C. 252. A director of an insolvent company caused the withdrawal of opposition to a judicial proceeding instituted by a creditor company to perfect their title to the security given by the former company for their debt. The said director was also the managing director of the creditor company. The Liquidator of the debtor company claimed that the withdrawal of the opposition was the suffering by it of a judicial proceeding with a view of giving the creditor company a preference. Apart from the dual position of the director referred to above, there was nothing to show that there was any intention to prefer. In upholding the transaction as not being a fraudulent preference, Lord Tomlin observed: In my opinion in these cases the onus is on those who claim to avoid the transaction to establish what the debtor really intended, and that the real intention was to prefer. The onus is only discharged when the Court upon a review of all the circumstances is satisfied that the dominant intent to prefer was present. That may be a matter of direct evidence or of inference, but where there is no direct evidence and there is room for more than one explanation it is not enough to say, there being no direct evidence the intent to prefer must be inferred. In my opinion there is nothing in the decision in In re Cohen (1924) 2 Ch. 515, to justify the doctrine for which the appellant contends, and I do not think that such a doctrine could be reconciled with the opinion expressed in your Lordships House in the case of Sharp V/s. Jackson (1899) A.C. 419 and in particular with the views indicated by Lord Halsbury at pages 421 and 422 of the report. I may add that I do not think that the headnote in the case of In re Cohen (1924) 2 Ch. 515, accurately expresses the result of the decision in the Court of Appeal. The majority of the Court held that upon the evidence the intent to prefer was made out, but it is only in the judgment of Sargant, L.J., that any support can be found for the headnote as expressed. Later on, he observed: It is improper to speculate what the reasons for his actions were, and in my opinion upon the material available the inference that the intent was to prefer cannot in law properly be drawn. It will be observed that Lord Warrington who was one of the majority Judges in the Court of Appeal in In re Cohen (1924) 2 Ch. 515, concurred in these observations. This decision appears to lay down that mere proof of a voluntary payment and a preference in fact of a particular creditor does not shift the onus from the Official Receiver to the creditor preferred. The onus still lies on the former to prove that the dominant or the real intention of the insolvent was to prefer and the Court must be satisfied upon the evidence before it that such intention was present. Inference of such intention cannot be justified by the mere unexplained fact of preference and ought not to be drawn as a matter of speculation where it is possible to attribute the payment by the insolvent to other reasons or motives than an intention to prefer. The Court is not bound to infer such intent if the creditor preferred fails to establish such reasons or motives.