OFFICIAL ASSIGNEE OF MADRAS Vs. TBMEHTA AND SONS

JUDGEMENT

(1.) This is an appeal from an order of Coutts Trotter, J., dismissing the Official Assignee s application by notice of motion for a declaration that the sale of diamonds by the insolvent on and after the 19th May 1917 to the garnishees T.B. Mehta and Sons, was void as a fraudulent preference under Section 56 of the Presidency Towns Insolvency Act or in the alternative under Section 55 as the sale was not bona fide and for valuable consideration. In my opinion the decision of the learned Judge was right on both points. We are not now concerned with the propriety or morality of the insolvent s conduct in obtaining large quantities of diamonds on credit from various firms and pledging them for advances to Nattukottai Chetties and in persisting in this course when he was clearly in insolvent circumstances and had no prospect of paying for them. These are matters to be taken into consideration at another stage. In the middle of May 1917 the insolvent was in very embarassed circumstances and was unable to meet his obligations as they fell due. He was indebted to the garnishees Messrs. Mehta and Sons, a Madras firm with whom he had had large transactions, in Rs. 36,062 against which eight hundies were outstanding and also in Rs. 3000 on general account. Two hundies which fell due on the 19th were not presented at his request. (Ex. 10 dated, 14-5-1917) but a third hundi which fell due on the same day was not met and they began to press him. The insolvent then proposed that the garnishees who were diamond merchants should purchase from him diamonds which were under pledge to various Nattukottai Chetties and apply the surplus after discharging the pledges in satisfaction of the hundies. The diamond-market was then rising and Mehta accepted the offer and in the course of five transactions between the 25th May and 12th June, purchased diamonds to the extent of Rs. 2,87,000, and in this way obtained payment of the hundies. It is not now disputed that he paid a fair price for the diamonds. An examination of the pledgees account in the course of the case revealed the fact that the purchases by the garnishees from pledgees were larger than was necessary to pay them off out of the surpluses and that the insolvent was paid over Rs. 41,000 by the pledgees as a result of the transactions, The evidence is that this result was obtained by including in the sales, apparently without the garnishees knowledge, other diamonds which were not under pledge. Any adverse inference that might arise from this fact is negatived by the evidence that between the 25th May the date of the first of these sales and his arrest at the end of June, he made payments to the other creditors amounti ng to more than Rs. 71,000 to meet his more pressing obligations and at the same time put off other creditors. All this shows that he went on trading when in hopelessly insolvent circumstances, not that he entered into the transactions now impugned with a view to prefer these particular creditors, The learned Judge has rightly held that to bring a transaction within the scope of Section 56 it must have been entered into with the dominant view of preferring the particular creditor. That construction has recently been criticised in an unreported case in this Court as proceeding upon a consideration of cases decided before the section was enacted. Lord Justice Bowen deprecated this mode of construction in Ex parte Griffith (1883) 23 Ch. D. 69 : and Ex parte Hill (1883) 23 Ch. D. 695 and in the latter case expressed the opinion on a careful consideration of the various ways in which the language of the section could be construed, that the words "with a view of giving a creditor preference over other creditors" must be read as equivalent to "with the view" the real, effectual, substantial view of giving a preference to the creditor, the word a being equivalent to the. That construction was accepted and was approved by the House of Lords in Sharp v. Jackson (1899) A.C. 419 several years before that section was re-enacted in India in 1907 and again in 1909, and the Indian Legislature must in my opinion have contemplated that that construction would be followed here. In the present case the evidence in my opinion does not show that the insolvent entered into these transactions with the dominant view of preferring the garnishees because, as is suggested, they were Madras creditors whereas most of the other creditors were in Bombay. The evidence rather shows in my opinion that he was acting throughout exclusively in his own interests and with a view to keep his business going which he could not do without satisfying the garnishees, creditors on the spot who were pressing him to meet his obligations and were not to be put off with excuses. As regards Section 55, the sales now in question were for full consideration and did not amount to an act of insolvency by reason of aft intent to defeat or delay creditors or otherwise, and the purchaser, had no notice of an act of insolvency. In these circumstances they must be held to have been made in good faith and for valuable consideration and not to be avoided under Section 55. The appeal fails and is dismissed with costs. Costs on the Original Side scale. Napier, J.

(2.) This is an appeal from the judgment of Coutts Trotter, J., on a motion on behalf of the Official Assignee for a declaration that certain sales of jewels by the insolvent Muthiah Chetty to the firm of T. B. Mehta and Sons are void as not being bona fide transactions and further as constituting a fraudulent preference of that firm in that the proceeds were largely utilised for discharging certain promissory notes given by the insolvent to the firm, The insolvent was a diamond merchant in a large way of business in Madras, purchasing diamonds here to a certain extent and to a much larger extent in Bombay. At the time of the sales he was in fact hopelessly insolvent. The sales covered a period between 25th May and 12th June 1917 and were completed in five transactions, on 25th May, 2nd June, 7th June, 8th June and 12th June. Nearly all the diamonds sold were under pledge to various lenders and the sales purported to be, according to the evidence of the garnishee, of those diamonds only, the garnishee buying the diamonds at an agreed price, paying the amount due on the pledge and crediting the balance as against promissory notes, with the result that the whole of the promissory notes and an amount due on general account to the garnishee was discharged, while much heavier debt on promissory notes to other creditors were left undischarged. The learned Judge has found that the sales are not void nor fraudulent preference.

(3.) Mr. Devadoss has attacked these findings as being based on an erroneous view of the law and also contends that on the true view of the facts they cannot be upheld. His contention on the law was as follows, that every transaction by which a creditor is given a preference is presumably fraudulent and that there are only three conditions under which such transactions will be sustained, namely, where the transaction is to recoup a breach of a trust, where the transaction is compelled by threats of legal proceedings and where the insolvent bona-fide believed he could avoid bankruptcy and entered into the transaction for that purpose. In my opinion, there is no warrant for this contention. All that Mr. Devadoss has been able to do is to invite our attention to cases in which these conditions have been held sufficient to establish that there was no fraudulent preference in the particular case. I entirely agree with what fell from the learned Chief Justice at the beginning of the argument that what we have to do is to construe the act with the assistance of decisions of eminent Judges in England on similar words in the English Statute. The learned trial Judge, although he does not refer to the language of the section, starts with this proposition that he has to consider what was the dominant motive of the insolvent in carrying through this transaction. I agree that this is the real consideration in the case, but I think it advisable to state how this proposition is arrived at.