DESAMSETTI VENKANNA Vs. OFFICIAL RECEIVER

JUDGEMENT

(1.) The question that arises is, whether the mortgage impugned comes within the mischief of Section 53 of the Provincial Insolvency Act. To deal with the question properly, the distinction between Secs.53 and 54 must be borne in mind. The mortgage in the present case is in favour of a creditor of the insolvent (also a relation of his) and the bulk of the consideration is alleged to be a past debt due to him. It is well settled that apart from the law of bankruptcy, a creditor may take a transfer, although he is fully aware that the other creditors are thereby defeated and even when proceedings at their instance are pending. The principle is this: what the law contemplates is the defeating or the delaying of creditors, by which is meant the whole body of creditors and so long as there is even a single creditor who takes the benefit, it cannot be said that the transfer amounts to a fraud, all the creditors not having been defrauded Musahar Sahu V/s. Hakim Ali (1915) L.R. 43 I.A. 104 : I.L.R. 43 C. 521 : M.L.J. 116 (P.C.). In short, the preference of one creditor to another, even though fraudulent in the law of insolvency, cannot be impeached under the general law. That principle is recognised in Section 53 of the Transfer of Property Act. By the Amending Act of 1929, the section has been remodelled and the third paragraph of Sub-section (1), which runs thus, has been added: Nothing in the sub-section shall affect any law for the time being in force relating to insolvency.

(2.) Then the question arises, what are the respective spheres of Secs.53 and 54 of the Provincial Insolvency Act? It is the latter section that deals with fraudulent preferences. If therefore a transfer in favour of a creditor cannot be annulled under Section 54, the prescribed period of three months having elapsed, can that provision be circumvented by recourse being had to Section 53, which allows the longer period of 2 years? The answer must, in my opinion, be decidedly in the negative. It does not follow from this, that the fact that the transfer is in favour of a creditor, necessarily takes it out of the reach of Section 53. In addition to valuable consideration, that section insists upon good faith and where the creditor transferee is shown not to have acted bona fide, the transfer can be annulled. But in considering the question of good faith under Section 53, that element, which relates to fraudulent preference, must be eliminated, that is to say, the knowledge, for instance, on the part of the transferee-creditor that the other creditors are being defrauded, does not by itself constitute bad faith. To give proper effect to both the sections, without allowing Section 53, to practically wipe out Section 54, this is the only right construction to adopt. This principle, though not in terms so stated, I think, underlies the cases where the Courts have annulled the transfers in favour of creditors under Section 53 of this Act or under the corresponding section of the Presidency Towns Insolvency Act. The Official Assignee of Bengal V/s. Yokahama Specie Bank (1924) 29 C.W.N. 374, The Official Assignee of Madras V/s. Sheikh Mohideen Rowther (1927) I.L.R. 50 Mad. 948 : 53 M.L.J. 890, Bhagat Ram Brindaban V/s. Puran Chand A.I.R. 1933 Lah. 43 and also The Official Assignee of Madras V/s. Bangy Abdul Razaack Sahib (1915) 29 I.C. 204. The facts of The Official Assignee of Madras V/s. Bangy Abdul Razaack Sahib (1933) L.R. 60 I.A. 362 : 66 M.L.J. 1 (P.C.), one of the four cases cited above, bring out this point very clearly. Had the value of the property been equal or nearly equal to the amount of the debt, the transaction would have been upheld. Sadasiva Ayyar, J., says that in that event the creditor would be a vendee in good faith, but it was found that the property was worth much more than the debt and that the creditor intended to get a larger benefit than to which he was entitled; in those circumstances the sale was annulled. Other cases may be conceived where the transaction is not a real one (see the recent judgment of the Privy Council in Harry Pope V/s. The Official Assignee, High Court, Rangoon (1933) L.R. 60 I.A. 362 : 66 M.L.J. 1 (P.C.) as, where though the sale is ostensibly in favour of a creditor, there is some benefit reserved to the debtor, or again, where a third party, i.e., some person other than the transferee is really intended to take the benefit). Such cases of bad faith tainting the transfer, while being unconnected with the fraudulent preference which comes within the mischief of Section 54, are nevertheless within the ambit of Section 53 (see the observations of Krishnan Pandalai, J., in Narayana Iyer V/s. Official Receiver, South Malabar (1933) M.W.n. 1049 at 1057.

(3.) On the question of the existence of the alleged debts, the Appellate Court has not dealt with the case satisfactorily. As regards the trial Judge, the petitioner complains that he was not given sufficient opportunity to adduce all his evidence. I shall assume for the purpose of this judgment that the debts are genuine; even so, on the facts disclosed by the evidence, I must come to the conclusion that the transferee did not act in good faith in the sense just mentioned and that the mortgage has therefore been properly set aside.