The State of Punjab Vs. S. Rattan
Singh  INSC 252 (16 December 1963)
16/12/1963 DAYAL, RAGHUBAR DAYAL, RAGHUBAR
CITATION: 1964 AIR 1223 1964 SCR (5)1098
The Patiala Recovery of State Dues Act (Act
IV of 2002 BK), ss. 4 and 11-Scope of-Civil Court-Jurisdiction to decide if a
person is defaulter.
Provincial Insolvency Act (5 of 1920), s.
4--Whether Insolvency Court can go behind decree.
1099 Jyoti Parshad was indebted to the Bank
of Patiala. As he could not pay the debt, he asked the Bank in 1952 to allow
him to pay the same in installments and the Bank agreed.
Rattan Singh, Respondent stood surety to the
extent of Rs. 2 lacs and entered into a contract of guarantee with the Bank to
discharge the liability of Jyoti Parshad to the extent of Rs. 2 lacs in case of
default by Jyoti Parshad. A deed of guarantee was also executed. As Jyoti
Parshad did not pay, the Bank started proceedings against Rattan Singh under
the Act. The Managing Director of the Bank dismissed the objections raised by
Rattan Singh. The Board of Directors dismissed the appeal. The appellant filed
a petition in the Court of the Insolvency Judge praying for adjudication of
Rattan Singh Respondent as insolvent on account of his transfer of his houses
and agricultural lands without consideration to his wife and two sons within 3
months of the petition with intent to defeat and delay his creditor Bank having
full knowledge of his liability towards the State. The contention of the
Respondent was that he did not stand surety and that the impugned transfer of
lands and houses was made on account of natural love and affection for his
wife. The insolvency petition was dismissed by the Insolvency Judge on the
ground that the Respondent had not executed a deed of guarantee. The appellant
went in appeal to the District Judge but the appeal was dismissed. The revision
was also dismissed by the High Court. The appellant came to this court after
obtaining special leave.
The contentions of the appellant before this
court were that the Civil Court had no jurisdiction to determine matters which
could be determined by the Head of the Department under the provisions of the
Act, that the Head of the Department in the exercise of the powers conferred
under s. 4 on him could not only determine the amount due from the defaulter
but also could determine whether the alleged defaulter was really a defaulter
or not and that in view of s. 1 1 of the Act, a civil court could not determine
the question of the liability of the alleged defaulter to pay the debt demanded
from him. The contentions of the Respondent were that the Head of the
Department could only determine the amount of debt due from a person alleged to
be a defaulter but could not determine whether that person was defaulter or not
and even if the Head of the Department could determine the liability of the
alleged defaulter to pay the debt, the jurisdiction of the Insolvency Court
itself to decide whether the debt was due from the alleged debtor sought to be
declared insolvent was not ousted by the provisions of s. II of the Act and
that the Insolvency Court was not a civil court. Dismissing the appeal, Held :
The provisions of s. 4 of the Act empower the Head of department to determine
not only the amount of State dues recoverable but also the liability of the
alleged defaulter to pay those debts. In view of the provisions of s. 11 of the
Act, no civil court has jurisdiction to determine the amount of State 1100 dues
recoverable and the liability of the alleged defaulter to pay that amount. Such
powers were however possessed by the Insolvency Court. In the present case, the
Insolvency Court had found that the Respondent had not executed the surety bond
and therefore, was not liable to make good any payment under it. The order of
the Insolvency Judge dismissing the insolvency petition was correct. An
insolvency court can go behind a decree and probe into the genuineness of the
debt on which it is founded.
Lachhman Dass v. State of Punjab,  2
S.C.R. 353, Kanshi Ram v. The State of Punjab, I.L.R.  2 Punjab 823, Ex
parte Kibble. In re Onslow, (1875) 10 Ch. A.C.
373, Ex parte Lennox. In re Lennox (1885), 16
Q.B.D 315, In re Freser, Ex parte Central Bank of London,  2 Q.B.D 633,
In re Van Laun, Ex parte Chatterton,  2 KB 23, In re Van Laun Ex parte
Pattullo,  1 KB 155, Narasimha Sastri v. Official Assignee, Madras,
A.I.R. 1930 Madras 751 and Sadhu Ram v. Kishori Lal A.I.R. 1938 Lah. 148,
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 6 of 1962.
Appeal by special leave from the judgment and
order dated May 14, 1959 of the Punjab High Court in Civil Revision No. 404 of
S. V. Gupte, Additional Solicitor-General of
India, D.D. Chaudhuri and B.R.G.K. Achar, for the appellant.
M.C. Setalvad, S.N. Andley, and Rameshwar
Nath, for the respondent.
December 16, 1963. The Judgment of the Court
was delivered by RAGHUBAR DAYAL J.-This appeal, by special leave, raises mainly
the question whether the Insolvency Court can, at the hearing of a petition by
a creditor for declaring a debtor insolvent, determine the liability of the
alleged debtor for the payment of the debt for the recovery of which the
creditor had obtained an order under the Patiala Recovery of State Dues Act,
2002 BK (Act IV of 2002 BK), hereinafter called the Act. To appreciate how the
question arises on the facts of the case, reference to the provisions of the
Act is necessary, and we set them out first.
The Act was enacted to consolidate and amend
the law relating to the recovery of State dues. According 1101 to cl. (1) of s.
3 'State dues' included debts due to the Patiala State Bank. The expression
'department' includes the Patiala State Bank, and the expression 'defaulter'
means a person from whom State dues are due and includes a person who is
responsible as surety for the payment of any such dues. 'Head of department'
means, among other things, the Managing Director in the case of the Patiala
Chapter 11 purported to deal with
determination of State dues and modes of recovery thereof. Section 4 which
falls in this Chapter provides that the head of department shall determine in
the prescribed manner the exact amount of State dues recoverable by his
department from the defaulter.
Section 5 lays down the modes for the
recovery of State dues. Section 6 provides for the transmission of a
certificate as to the amount of State dues recoverable from the defaulter to
the Nazim and to the Accountant-General and its sub-s. (2) is:
"A certificate transmitted under the
preceding sub-section shall be conclusive proof of the matters stated therein
and the Nazim or the Accountant-General shall not question the validity of the
certificate or hear any objections of the defaulter as to the amount of State
dues mentioned in the certificate or as to the liability of the defaulter to
pay such dues." Section 10 provides that no action shall be taken by the
Nazim or the Accountant-General on a certificate coming from the Managing
Director, unless it is sent to him within the period of limitation specified in
that section. Section 11 reads:
"No Civil Court shall have jurisdiction
in any matter which the head of department, or any authority or officer
authorised by the head of department is empowered by this Act or the rules made
there under to dispose of, or take cognizance of the manner in which any such
head of department, or authority, or officer, exercises any powers vested in
him or it by or under this Act or the rules made there under." 1102 Section
12 empowers the Government of the State to make rules for the purpose of
carrying out the provisions of the Act. Sub-s. (2) thereof states that the
rules may provide the manner in which the amount of State dues shall be
determined by a head of department.
The Patiala Recovery of State Dues Rules,
2002 hereinafter called the rules, lay down the mode of determination of State
dues in rr. 3 to 7. Rule 3 requires the head of department to serve a notice on
the defaulter specifying therein the amount of State dues and from whom such
dues were recoverable and shall require the defaulter to pay such dues on or
before a specified date or to appear before the authority specified therein
(called the Inquiry Officer) and present a written statement of his defence. If
the defaulter appears and pays the amount of State dues, the head of department
issues a receipt to him, under r. 4 and the matter is closed. If he does not
appear on the specified date and the Inquiry Officer be satisfied that the
notice has been duly served, he may proceed ex parte and determine by order in
writing the amount of State dues recoverable from him.' The order is to be
subject to confirmation by the head of department. If the Enquiry Officer is
not so satisfied another notice is issued to the defaulter.
Rule 6 provides that where the defaulter
appears on the date fixed in the notice and presents his written statement, the
head of department, or the Inquiry Officer, as the case may be, shall examine
the objections of the defaulter stated in written statement in the light of the
relevant records of the department and shall then, by order in writing,
determine finally the exact amount of State dues recoverable from such
defaulter. The Inquiry Officer is to submit his report to the head of department
before the latter shall finally determine the State dues recoverable.
Rule 7 provides that if the defaulter does
not pay the State dues within the period specified in that rule, the head of
department may proceed to recover 1103 them through the Nazim or the
Accountant-General or both.
Rule 8 provides for appeal by the defaulter
against the orders passed under rr. 5 or 6. Rule 9 provides for a revision by
the defaulter in case his appeal is dismissed.
Rule 12 provides that the appellate or revisional
authority may pass such order in appeal or revision as it thinks fit.
The facts of the case may be briefly stated
One Jyoti Parshad, proprietor of M/s. Ralla
Ram Jai Gopal, a firm at Patiala, was indebted to the Bank of Patiala.
Being unable to pay the debt of rupees 5
lacs, Jyoti Parshad approached the Bank in 1952 with a request to forbear from
recovering the amount just then all at once and grant time and allow him to pay
the amount in installments. The Bank agreed. In pursuance of the agreement
between Jyoti Parshad and the Bank, Sardar Rattan Singh, respondent, stood
surety to the extent of Rs. 2 lacs and entered into a contract of guarantee
with the Bank to discharge the liability of Jyoti Parshad to the extent of
rupees 2 lacs in case of default.
He executed a deed of guarantee on July 1,
1952. When Jyoti Parshad made default in payment of the requisite amount, the
Bank started proceedings for the recovery of its dues under the Act against
Rattan Singh, the defaulter under its terms.
On May 26, 1955, the Managing Director of the
Bank dismissed the objections Rattan Singh had raised by his written statement
and held him liable for the amount he had undertaken to pay under the surety
bond. An appeal by him to the Board of Directors was dismissed on December 24,
Meanwhile, on May 10, 1955 during the
proceedings for the recovery of the debt under the Act, the State of Patiala
filed a petition in the Court of the Sab-Judge, 1st Class (Insolvency Court)
Patiala, praying for the adjudication of Rattan Singh, respondent, an insolvent
on account of his transferring all his houses at Patiala and agricultural lands
at Sunihal Heri and Patiala without consideration to his wife 1104 and two sons
within three months of the petition with intent to defeat and delay his
creditor-Bank having full knowledge of his liability towards the State.
By his written statement dated June 16, 1955
the respondent denied having stood surety or having signed the deed of
guarantees and stated that he was not liable to the State and that the impugned
transfers of land and houses were made on account of natural love and affection
for his wife. He also challenged the jurisdiction of the Insolvency Court to
entertain that application.
The learned Insolvency Judge rejected the
insolvency petition holding that the respondent had not executed the deed of
guarantee. It, however, held that the Insolvency Court was competent to
consider the question of the liability of the respondent to the State under the
deed of guarantee, its jurisdiction being not ousted by the provisions of S. 11
of the Act which excluded the jurisdiction of the Civil Court in any matter
which the head of the department was empowered by the Act or the rules made there
under to dispose of or take cognizance of, as the head of the department could,
under the Act, determine only the amount of the debt due from the alleged
defaulter and not the question whether the alleged defaulter was really a
defaulter in case this was disputed.
The State of Punjab, successor of the State
of Patiala, appealed against this order to the District Judge who agreed with
the findings of the trial Court and dismissed the appeal. The State then went
in revision to the High Court under s. 75 of the Provincial Insolvency Act. Two
contentions were raised there. One relating to the respondent's executing the
deed of guarantee was repelled as being concluded by the finding of fact by the
The other contention was that in view of the
provisions of the Act the Managing Director of the Bank had exclusive
jurisdiction to determine whether a certain person was or was not a surety or a
defaulter and what the extent of his liability to the bank, if any, was 1105
and that therefore the Insolvency Court had no jurisdiction to reconsider and
determine it. The High Court did not agree with this contention and dismissed
the revision. It is against this order that the State of Punjab has preferred
this appeal after obtaining special leave.
The contention for the appellant in this
Court is that the Civil Court had no jurisdiction to determine matters which
could be determined by the Head of the Department under the provisions of the
Act, that the head of the department in the exercise of the powers conferred
under s. 4 on him, can not only determine the amount due from the defaulter but
also whether the alleged defaulter is really a defaulter or not in case such an
objection be raised by that person and that therefore the Civil Court, in view
of s. 11 of the Act, cannot determine the question of the liability of the
alleged defaulter to pay the debt demanded from him. It is contended for the
respondent that (i) the head of department can only determine the amount of the
debt due from a person alleged to be a defaulter, but cannot determine whether
that person is a defaulter or not, i.e., the question whether the debt is due
from that person or not if the, person disputes his liability to pay the
alleged debt; (ii) that even if the bead of department can determine the
liability of the alleged defaulter to pay the debt, the jurisdiction of the
Insolvency Court itself to decide whether the debt was due from the alleged
debtor sought to be declared insolvent is not ousted by the provisions of s. 11
of the Act; and (iii) that the Insolvency Court is not a Civil Court.
The first question to determine then is
whether the head of a department can determine the objection of an alleged
defaulter that he is really not a defaulter, i.e., no State dues are due from
him as he is not liable for any dues to the State irrespective of the question
whether what amount is due if he is liable for that debt to the State. The
contentions for the respondent are based on these grounds:
(i) s. 4 empowers the head of the department
to 1106 determine the exact amount of State dues recoverable and does not
empower him to determine the liability of the alleged defaulter to pay those
dues in case the liability is disputed (ii) The question of liability may raise
complicated questions of fact and law for determination and to determine which
the head of department cannot be competent; (iii) The Managing Director of the
Patiala Bank cannot be taken to be an independent person to determine the
question of the alleged defaulter's liability to pay the amount as he is an
official of the bank and the dispute is between the bank and the alleged
The vires of the Act came up for
consideration before this Court in Lachhman Dass v. State of Punjab(1). This
Court held the Act to be valid and in considering the various contentions,
Venkatarama Aiyar J., delivering the majority judgment, said at p. 235.
"The Managing Director is a high-ranking
official on a salary of Rs. 1,600-100-2,500, with a free furnished residence.
He has no personal interest in the transaction and there is no question of
bias, or any conflict between his interest and duty. " The vesting of the
power to determine the matters covered by s. 4 in the Managing Director who has
no personal interest in the matter cannot therefore be a ground for holding
that the Act could not have provided and does not provide for the head of
department to determine the liability of an alleged defaulter in case he
In construing r. 6 it was said at the same
"It does not bar the parties from
examining witnesses or producing other documentary evidence. The Managing
Director, has, under this Rule, to examine the statement and the records of the
Bank in so far as they bear on the points in dispute and that normally, would
be all that is relevant. But he is not precluded by the Rule from examining
witnesses or taking into (1)  2 S.C.R. 353.
1107 account other documentary evidence, if
he considers that, is necessary for a proper determination of the
dispute." it follows that the Managing Director or the head of a
department can record evidence with respect to the objections raised before him
by the alleged defaulter about his liability to pay the dues.
Section 4 is really concerned with the
determination of the amount of State dues recoverable from a defaulter and
therefore the determination can take into account both the amount and also its
recoverability from the person said to be a defaulter. There is nothing in it
which directly makes the head of department incompetent to determine the
question of the liability of the alleged defaulter in case of dispute.
This appears more clearly from the provisions
of sub-s. (2) of s. 6 which provides for the certificate issued under subs. (1)
of s. 6 to be conclusive proof of the matters stated therein, the matters being
that such and such amount was recoverable from the person shown as defaulter.
This subsection further provides that the specified authorities will not bear
any objections of the defaulter as to the amount of State dues mentioned in the
certificate or as to the liability of the defaulter to pay such debt. The Act
therefore contemplated that there might be a dispute about the liability of the
alleged defaulter to pay the dues and therefore, directed the authorities to
whom the certificate is Submitted not to bear objections about it. When the
authorities were conscious of the possibility of such objections, it must be
presumed that they intended these objections to be decided by the authority
determining the amount of State dues recoverable from a defaulter under s. 4 of
the Act. If it was not so intended by the Act, the legislature would have
provided for the determination of such an objection either by an agency
specified in the Act or by the regular courts. The Act would have made some
mention about the agency and would not have left this matter without a definite
provision in the Act. What would be the consequence 1108 of so construing the
provisions of s. 4 as to exclude, the objection to liability of the alleged
defaulter from the purview of the head of department? It would be that the Bank
will have to go to the Civil Court for a declaration that the alleged person is
liable to pay its dues. The suit will have to be merely ,for a declaration, as,
the determination of the amount he has to 'pay, if liable, will inevitably have
to be made by the head of department and in accordance with s. 4 of the Act.
Two proceedings for achieving one object are neither desirable nor convenient
and if the Bank has to go to the Civil Court for the determination of the
liability of the alleged defaulter, there can be no good reason for enacting
that the Civil Court which ordinarily decides such disputes cannot determine
the amount, if any, the alleged defaulter has to pay to the Bank.
Further, the proceedings in the Civil Court
may take a long time for final disposal and that may affect the limitation
prescribed under s. 10 of the Act for the Nazim or the Accountant-General to
take action for the recovery of the amount due. Section 10(.1) provides that no
action shall be taken by the Nazim or the Accountant-General on a certificate
from the Managing Director of the Bank unless it is sent to him within such
period of limitation prescribed by the Limitation Act for the time being in
force in the State within which the Bank would have instituted a suit in a
Civil Court for the recovery of its debts or dues respectively, if such debts
or dues were not declared as State dues under the Act. This means that if the
period of limitation for the institution of a suit for the recovery of a debt
has elapsed, that debt could not be recovered as State dues under the procedure
laid down by the Act. The usual period of limitation for filing a suit for
recovery of a debt is three years and the time taken in obtaining a final
decision from the Civil Courts for the declaration of liability of a certain
person may take longer time. So long as the final decision about that person's
liability is not reached in those proceedings, the 1109 relevant authority
under s. 4 of the Act cannot proceed to determine the exact amount of debt due
and even if it determined the amount it cannot obviously issue any certificate
to the Nazim or Accountant-General for the recovery of that amount.
In view of these considerations, it is
reasonable to conclude that the provisions of s. 4 of the Act empower the head
of department to determine not only the amount of State dues recoverable but
also the liability of the alleged defaulter to pay those debts. It follows
therefore that in view of the provisions of s. 11 of the Act no Civil Court can
have jurisdiction to determine these two matters, viz., determining the amount
of State dues recoverable and the liability of the alleged defaulter to pay the
We may mention that the Punjab High Court
itself has, in Kanshi Ram v. The State of Punjab(1) has taken the view we have
expressed and did not approve its earlier decision under appeal.
The next question then to decide is whether
the Insolvency Court can, in spite of the provisions of s. II of the Act and
the jurisdiction which the head of the department has, under s. 4 as construed
by us, go into the question whether the alleged debtor sought to be adjudicated
insolvent really owed the debt which has been determined or could be determined
only by the head of department under s. 4 of the Act.
It is well-settled that the Insolvency Court
can, both at the time of hearing the petition for adjudication of a person as
an insolvent and subsequently at the stage of the proof of debts, reopen the
transaction on the basis of which the creditor had secured the judgment of a
court against the debtor. This is based on the principle that it is for the
Insolvency Court to determine at the time of the hearing of the petition for
Insolvency whether the alleged debtor does owe the debts mentioned by the
creditor in the petition and whether, if he owes them, what is the extent of
A debtor is not to be (1) I.L.R.  2
1110 adjudged an insolvent unless he owes the
debts equal to or more than a certain amount and has also committed an act of
insolvency. It is the duty of the Insolvency Court therefore to determine
itself the alleged debts owed by the debtor irrespective of whether those debts
are based on a contract or ,under a decree of Court. At the stage of the proof
of the debts, the debts to be proved by the creditor are scrutinized by the
Official Receiver or by the Court, in order to determine the amount of all the
debts which the insolvent owes as his total assets will be utilised for the
payment of his total debts and if any debt is wrongly included in his total
debts that will adversely affect the interests of the creditors other than the
judgment creditor in respect of that particular debt as they were not parties
to the suit in which the judgment debt was decreed. That decree is not binding
on them and it is right that they be in a position to question the correctness
of the judgment debt. It is on their behalf that the Insolvency Court or the
Official Receiver is to scrutinize the proof of debts to be proved and can even
demand proof of the debts on which the judgment debt has been decreed. The
decree is binding only on the parties. The debtor sought to be adjudged is
bound by it and so is the creditor. But this binding effect of the decree is only
to be respected by the Insolvency Court in circumstances where nothing is
reasonably alleged against the correctness of the judgment debt. The Insolvency
Court has the jurisdiction to reopen such debts and will do so ordinarily when
such judgments have been obtained by fraud, collusion or in circumstances
indicating that there might have been miscarriage of justice. On similar
grounds it must be held that the determination of the amount of the debt and
the liability of the defaulter to pay it could be open for scrutiny by the
Insolvency Court in the aforesaid circumstances in spite of the provisions of
11 of the Act which provisions really
contemplate a decision of the dispute about the matters covered by it between
the same parties, viz., the creditor Bank and the alleged defaulter. The
determination of the amount of State 1111 dues recoverable from the defaulter
under S. 4 of the Act can have no better status than the ordinary judgment and
decree of a civil court have. The head of the department could not have decided
a dispute about the amount of the State dues recoverable from the defaulter
between creditors other than the Bank and the defaulter and therefore such a
dispute between the creditors in general and the defaulter cannot be a dispute
which comes within the mischief of s. II of the Act.
Such a jurisdiction of the Insolvency Court
is readily made out by the provisions of the Provincial Insolvency Act, 1920
(Act 5 of 1920) hereinafter called the Insolvency Act.
According to s. 2, sub-s.(1), cl. (a),
'creditor' includes a decree holder , 'debt' includes a judgment-debt, and
'debtor' includes a judgment-debtor. Section 3 confers insolvency jurisdiction
on the District Courts. Civil Courts, as such, have not got this jurisdiction.
Courts subordinate to the District Courts can, however, be invested with
jurisdiction in any class of cases by the State Government.
Section 4 deals with the power of the
Insolvency Court with respect to the questions it can decide. It reads :
"(1) Subject to the provisions of this
Act, the Court shall have full power to decide all questions whether of title
or priority or of any nature whatsoever, and whether involving matters of law
or of fact, which may arise in any case of insolvency coming within the
cognizance of the Court, or which the Court may deem it expedient or necessary
to decide for the purpose of doing complete justice or making a complete
distribution of property in any such case.
(2) Subject to the provisions of this Act and
notwithstanding anything contained in any other law for the time being in
force, every such decision shall be final and binding for all purposes as
between, on the one hand, the debtor and the debtor's estate and, on the other
hand, all 1112 claimants against him or it and all persons claiming through or
under them or any of them.
(3) Where the Court does not deem it
expedient or necessary to decide any question of the nature referred to in
sub-section (1), but has reason to believe that the debtor has a saleable
interest in any property, the Court may 'without further inquiry sell such
interest in such manner and subject to such conditions as it may think
fit." It is to be noticed that the Insolvency Court has full power to
decide all questions of any nature whatsoever which arise in any insolvency
case before it. It can also decide all questions which it may consider
expedient or necessary to decide for the purpose of doing complete justice or
making a complete distribution of property in any such case. Nothing could be
more expedient or necessary for exercising its jurisdiction in adjudicating a
person insolvent or in distributing the assets of the insolvent than to probe
into the question of the genuineness of the debts said to be owed by the
debtor. The 'decisions of the Insolvency Court in view of sub-s. (2) of s. 4
are final and binding for all purposes despite what is contained in any other
law for the time being in force. This finality and binding nature of the
decisions for all purposes are between the debtor and the debtor's estate on
the one hand and all claimants against him or it. The binding nature of such
decisions is clearly not just between the individual creditor and the debtor
but is between all the creditors on one side and the debtor and his estate on
the other. The jurisdiction of the Insolvency Court is therefore much larger
than that of an ordinary civil court deciding a particular claim between the
claimants and the other party.
Section 7 provides for an Insolvency petition
being presented either by a creditor or by a debtor and for the Court
adjudicating the debtor insolvent, if the debtor commits an act of insolvency.
Section 9 lays down the condition which a creditor must 1113 satisfy before
presenting an insolvency petition. In view of the definition of creditor,
debtor and debt already referred to, the judgment-creditor can present a
petition for the adjudication of the judgment debtor an insolvent on the basis
of the judgment debt. Section 10 lays down the condition on which the debtor
can present a petition.
Section 14 provides that no petition
presented, whether by a creditor or by a debtor, shall be withdrawn without
leave of the Court. This fits in with the position that insolvency proceedings
are not proceedings between the petitioning creditor and the debtor alone.
Section 16 provides for the substitution of any other creditor in place of the
original creditor who had filed the petition in case he does not proceed with
due diligence with his petition. Even after the death of the debtor, insolvency
proceedings can continue for the realisation and distribution of the property
of the debtor in view of s. 17. Section 24 lays down the procedure at the
hearing of the insolvency petition, and provides that the Court shall require
proof of the fact that the creditor or the debtor as the case may be, is
entitled to present a petition. One of the conditions for the creditor to
present the petition is that the debt owing by the debtor to him amounts to Rs.
500 and one of the conditions for the debtor to apply for adjudication is that
his debts amount to Rs. 500. The Court, therefore, has to be provided with
proof about the existence of the debt and its amount, even though the debt be a
judgment debt. The judgment or decree can be prima facie evidence of the debt,
but in view of the Court's requiring proof of the debt, it is not bound to
treat the judgment or decree to be conclusive proof of the existence of the
debt for which the decree had been passed.
Subsequent to the adjudication of the debtor
as an insolvent, the next stage for the preparation of the schedule of
creditors under s. 33 of the Insolvency Act comes. All persons alleging
themselves to be creditors of the insolvent in respect of the debts provable
under the Act have to tender proof of the 1114 respective debts by producing
evidence of the amount and the particulars thereof and the Court has then to
determine the person who have proved themselves to be creditors of the
insolvent in respect of such debts and the amount of debts, respectively, and
then frame a schedule of such persons and debts. Creditors other than the
creditor who had applied for the adjudication of the insolvent may have
judgment debts against that insolvent and they will have to prove by evidence
the amount and particulars of the debts owed by the insolvent to them.
Judgments or decrees may be good evidence for proving of such debts, but it is
open to the Court to require independent roof of the debt which had merged in
the judgment debt.
It is clear from the above provisions of the
Insolvency Act that it is the duty of the Insolvency Court and therefore
clearly within its jurisdiction to require proof to its satisfaction of the
debts sought to be proved at the stage of the hearing of the insolvency
petition or subsequent to the adjudication.
There is plenty of case law in support of the
view that the Insolvency Court can go behind the decree of a court in order to
probe into the genuineness of the debt in connection with which the decree is
In Ex parte Kibble. In re Onslow(1) it was
said by Sir James, L.J., at p. 376:
"It is the settled rule of the Court of
Bankruptcy, on which we have always acted, that the Court of Bankruptcy can
inquire into the consideration for a judgment debt. There are obviously strong
reasons for this, because the object of the bankruptcy laws is to procure the
distribution of a debtor's goods among his just creditors. If a judgment were
conclusive, a man might allow any number of judgments to be obtained by default
against him by his friends or relations without any debt being due on them at
all; it is therefore necessary that the consideration of (1)  10. Ch.
1115 the judgment should be liable to
investigation." In this case the probe into the judgment debt was made at
the time of the adjudication proceedings.
In Ex parte Lennox, In re Lennox(1) Lord
Esher, M.R., said at p. 323:
" The authority, however, of Ex parte
Kibble(2) seems to me quite sufficient, and I think it was decided on right
principles. If that be so it is not true to say that the mere fact of a
judgment existing ought to prevent the Court at the instance of the debtor at
the first stage of the proceedings, viz., when a receiving order is applied
for, from inquiring whether there was any real debt as the foundation of the
judgment, and, although by consenting to a judgment the debtor is estopped
everywhere else from saying that there was no debt due-although the judgment is
binding upon him by reason of his consent, and of its being the judgment of the
Court, yet no such estopped is effectual as against the Court of Bankruptcy.
The Court is not estopped by the conduct of the parties, but it has a right to
inquire into the debt." Cotton, L.J., said at p. 325:
"It has been long established, as
regards the proof of a debt in bankruptcy, that the trustee, acting on behalf
of the creditors, can go behind a judgment, and that, although the judgment is
prima facie evidence of a debt due to the creditor who claims to prove for the
judgment debt, yet the trustee, on behalf of the creditors, may show that in
fact the judgment does not establish a debt. That rule is founded upon this
principle that, under whatever circumstances a judgment may have been obtained
against the bankrupt, yet no act of his-collusion, compromise improperly
entered into, or anything else-ought to prejudice the rights of the other
creditors, (2)  10 Ch. A.C. 373.
(1)  16 Q.B.D. 315.
1116 because the assets ought to be
distributed in the bankruptcy only amongst the honest bona fide creditors of the
bankrupt." Lindley, L.J., said at pp. 328, 329:
"Bankruptcy proceedings are not like
ordinary proceedings; they are a very serious matter, not only to the debtor
himself, but to all his other creditors; and, before the machinery of the Court
of Bankruptcy is put in motion, it appears to me that it is, not only the
right, but the duty of the Court to see at whose instance it is asked to act.
By the express language of sub-s. 3, of s. 7 the Court is enabled to look into
a judgment debt;" "It means, I think, that, although the judgment
debtor could not go behind the judgment, the Court of Bankruptcy will now allow
itself to be put in motion at the instance of a person who is not a real
creditor. The Court will not allow bankruptcy proceedings to be had recourse to
for the purpose of enforcing debts which are fictitious, and not real, even
although they are in the form of judgment debts." In re Fraser, Ex parte
Central Bank of London(1) Lord Esher, M.R. said at p. 635:
"As a matter of law the judgment, therefore
stands as a good judgment against John Fraser and it cannot be questioned by
him in any Court, except the Court of Bankruptcy. But, when it is sought to
obtain a receiving order against him in respect of the judgment debt, the Court
of Bankruptcy has to exercise its discretion, and for the exercise of that
discretion one rule of conduct is to be found in s. 7 of the Bankruptcy Act,
1883, which provides, by sub-s. 3, that 'if the Court is not satisfied with the
proof of the petitioning creditor's debt, or of the act of bankruptcy, or of
the service of the petition, or is satisfied by the debtor that is able to (1)
 2 Q.B.D. 633.
pay his debts, or that for other sufficient
cause no order ought to be made, the Court may dismiss the petition'." In
re Van Laun, Ex parte Chatterton(1) Cozens Hardy M.R. said at p. 30 what Bigham
J., had said in re Van Laun.
Ex parte Pattullo : (2) "The trustee's
right and duty when examining a proof for the purpose of admitting or rejecting
it is to require some satisfactory evidence that the debt on which the proof is
founded is a real debt. No judgment recovered against the bankrupt, no covenant
given by or account stated with him, can deprive the trustee of this right. He
is entitled to go behind such forms to get at the truth, and the estopped to
which the bankrupt may have subjected himself will not prevail against
him." The principles of these cases have been applied by the courts in
this country. Reference may be made to Narasimha Sastri v. Official Assignee,
Reference may also be made to Sadhu Ram v.
Kishori Lal(4) in which it was held in view of s. 4(2) of the Insolvency Act
that the decree founded on a debt held fictitious by an Insolvency Court could
not be executed. Bhide J said:
"In the present instance the finding of
the Insolvency Court had, I think, the effect of rendering the decree
inoperative, as it was tantamount to a declaration that the decree was
non-existent and the finding was binding on the decree-holder as well as the
judgmentdebtor." In view of our opinion that an Insolvency Court can go
behind a decree and probe into the genuineness of the debt on which it is
founded, it is not necessary to consider the contention as to whether the
Insolvency Court is a Civil Court or not for the purpose of s. 11 of the Act.
(1)  2 K.B. 23.
(3) A.I.R. 1930 Madras 751.
(2)  1 K.B. 155,162.
(4) A.I.R. 1938 Lah, 148.
1118 We therefore hold that the head of
department had the power to decide, under s. 4 of the Act, whether the alleged
defaulter was a defaulter or not, that no Civil Court can consider this matter
in view of s. 11 of the Act and that the Insolvency Court is however not
precluded from enquiring into the question whether the alleged debtor was
really a debtor and liable to "/pay sums said to be payable by him.
The Insolvency Court has found that the
respondent had not executed the surety bond and that therefore he could not be
liable to make good any payment under it. The order of the Court below in
dismissing the insolvency petition is, therefore, correct.
We accordingly dismiss this appeal with
costs, though for different reasons.