GANGA SAHAI Vs. MUKARRAM ALI KHAN

JUDGEMENT

(1.) This is a creditor's appeal from an order, dated the 30 July 1923, passed in an insolvency proceeding, which is the subject of much controversy. The respondent was adjudicated an insolvent on the 16 February 1917, and a large number of creditors were intered as schedule creditors. On the 19 April 1922, the insolvent put in an application, purporting to be under Section 38 of Act No. V of 1920, stating that the major part of the debts alleged to be due to the creditors were fictitious and were not really due. He expressed his readiness to pay the amounts actually due to the creditors in full, together with interest at a rate which the Court might consider reasonable. There was also a suggestion in paragraph 4 of the application that the Court had full power to hold an enquiry into the true accounts of the debts and to correct the schedule accordingly. The learned Judge, without passing any formal order as to whether he approved of the proposal or not, at once appointed a commissioner to go into the question of accounts of the creditors. When the report of the commissioner was received, objections were invited from the creditors and the insolvent, and they have been disposed of by the order under appeal.

(2.) I am bound to say that, the procedure adopted by the learned Judge was not in strict accordance with the provisions of the Act. The insolvent, so long as his insolvency lasted, could not be allowed to challenge the correctness of the debts entered in the schedule and therefore his application, so far as it purported to dispute the correctness of those debts and amounted to a request to the Court to enquire into the accounts of the creditors, could not properly be a proposal or a composition within the meaning of Section 38, On the other hand, his offer to pay all his just debts in full together with interest only at a reasonable rate and not at the contractual rates, could very well be called a proposal. In my judgment the proposal contemplated by Section 38 is a general proposal to satisfy the debts of the whole body of creditors, and not merely disputing the validity of the debts of particular creditors.

(3.) If a majority in number and 3/4the in value of all the creditors, whose debts were proved, resolve to accept the proposal, it is deemed to be duly accepted. It they do not then, unless the proposal contravenes She provisions of Sub-Sections 4, 5 or 6, the Court has power to approve of it. If the Court approves the proposal, then under Section 39 its terms ought to be embodied in an order of She Court which should frame a schedule and annul the adjudication. After the adjudication has been annulled on the ground that the proposal hag been accepted, the insolvent is at liberty to apply under Section 50, Sub-Cl. 2, to the Court to hold an enquiry and expunge an entry or reduce the amount of a scheduled debt. The scheme of the Act seems as be that an insolvent, after his adjudication, when the property vests, in the Court or the receiver, has no locus standi to challenge the validity of the debts entered in the schedule. If he were allowed to do so, he may be harassing his creditors, who cannot recover the costs incurred by them because they cannot prove debts incurred after the date of adjudication. On the other hand, when the insolvency has been annulled after the approval of a proposal or composition, and the time has arrived for actual payment of the debts of the debtor, he is given the right to challenge the correctness of the claims of his creditors. The property, which passes to him or to a trustee on annulment, does not pass free from all debts. It remains liable to debts which have not been proved or cannot be proved. Thus costs incurred by creditors in meeting the objections of the debtor could be properly recoverable from the property of the debtor which still exists. Further, as the debtor has had no opportunity to challenge the accuracy of the claims of his creditors, he is allowed to do so now, before they can follow the property in his hands. Messrs. Diwan Chand and Jai Gopal Sethi in their Commentaries on the Bankruptcy and Insolvency Laws (1st, edition, p. 459(c) paragraph 442), have stated that so long as insolvency exists, a debtor cannot apply for expunging or reducing a debt, but when insolvency is annulled as would be the case when composition or scheme is accepted, he can apply. I further find that in the English case, In re Bond (1881) 17 Ch D 447, it was held that in an ordinary case, no doubt, questions as Co the amount of the proof of a creditor ought to be left to be dealt with by the trustee; but when the composition has been accepted, the bankrupt has locus standi to apply to reduce the amount of this proof. These support my view.