Vs. The Official Assignee High Court, Madras  INSC 4 (12
MAJMUDAR. & M JAGANNADHA RAO. M. JAGANNADHA RAO,J Leave granted.
Mansfield said, over two hundred years ago, that you cannot `let out the
bankrupt'. He is not a slave of the Assignee. The point in this appeal is as to
what extent the insolvent can be allowed to run his business to sustain himself
and his dependents and as to what rights the official Assignee and creditors
have, as against the insolvent? The modern concept appears to be rehabilitation
of an honest insolvent and a more humane treatment to be meted out to the
insolvent and his family. At the same time, it must be seen that a benevolent
view towards the honest insolvent is not abused by one who is dishonest.
has to be admitted that both in our past and also in our present insolvency
law, the punitive and deterrent aspects of legal policy have seemed hard to
reconcile with the rehabilitative philosophy with which they are supposed to
co- exist. It would certainly appear to be the case that it is not very widely
appreciated that bankruptcy law is also designed in part to protect the honest
but unfortunate debtor, as well to discipline and if necessary punish one who
has been incompetent or even dishonest." While those who are not aware of
the beneficial provisions of insolvency law may suffer oppression at the hands
of creditors, conversely, "there are certain opportunities for those who
are closely familiar with the insolvency law to exploit its provisions to their
advantage, and at the expense of their less knowledgeable creditors. In this
area of the law, the aphorism that knowledge is power has an especially
truthful ring in it. (The Law of Insolvency by Ian Fletcher, 1990, pp.33-34).
The law must, therefore, achieve a just balance.
appeal is preferred against the Judgment of the Madras High Court in O.S.A No.
17 of 1998 dated 18.02.98, rejecting the O.S.A. in limine.
that Judgment, the Division Bench affirmed the order of the learned Single
Judge dated 4.8.1997 in Application No. 89 of 1997 in Insolvency Petition No.
33 of 1996. The result of the dismissal of the interlocutory application was
that the appellant who was declared an insolvent on his own petition on
25.4.96, was not permitted to conduct his retail business of selling Kerosene
under Licence No. 173 of 1974 as an agent of the Civil Supplies Department of
the Tamil Nadu Government.
following are the facts in brief: The appellant filed a Petition I.P. No. 33 of
1996 for being adjudicated as an insolvent under Sections 14 & 15 of the
Presidency Town's Insolvency Act, 1909(Act 3 of 1909) (hereinafter called the
`Act'). The said application was allowed on 25.4.96 by the learned Single
the appellant filed I.A. No. 89 of 1997 on 10.5.97 seeking permission to
restart his Kerosene business under Licence No. 173 of 1974 as agent of the
Tamil Nadu Civil Supplies Department which, according to him, would fetch him Rs.
920/- per month and out of which the appellant would be willing to allocate Rs.
150/- p.m. towards his liability to the general body of creditors. He stated
that he was earlier supplying 5000 litres every month at the rate of 200 litres
per day for 25 days in a month. He had to supply 10 litres to each card holder
per month. The licence was renewable every two years. His first licence was
obtained in 1974 and the same was renewed upto 31.12.1998. The Insolvency
Petition was filed as he incurred loss in Cement business. Prior to the filing
of the Insolvency Petition, the supply was temporarily suspended and 500 card
holders were allotted to another shop. The appellant stated that due to
unavoidable circumstances, he could not reside in Madras and was forced to go back to his
native place. If he has to come back to Madras city either for continuing the education of his children or to attend
at the office of the Official Assignee, he must be allowed to do his Kerosene
business. The Official Assignee is now in charge of his immovable properties.
Unless the Court gives the insolvent permission, the Civil Supply Department
will not allow him to receive Kerosene supplies. He states that no capital is
involved in this business. Only a sum of Rs. 496/- is required to be paid to
the Civil Supplies Department to start with, for the supply of 200 litres. He
has rented a shop at No. 354, N.S.K.
Road, Madras -106, on a monthly rent of Rs.
states that there is no need for him to borrow any money for running this
business. The Civil Supplies Department has given him a commission of 0.32 paise
per litre and in a month for 500 litres, he will get a total commission of Rs.
1600/-. His expenses for the cart - charges will be Rs. 680/- p.m. for lifting
the kerosene, Rs. 30/- for electricity and Rs. 150/- for rent. Balance will be Rs.
920/- p.m. He is willing to pay Rs. 150/- to his creditors out of the said
income. He is prepared to abide by any other conditions that may be imposed by
the Court. This application is dated 10.3.97.
Official Assignee submitted a report to the Court on 17.4.97 stating that the
appellant had disclosed assets worth Rs. 34,000/- and liabilities of Rs. 39.21 lakhs,
Book liabilities were Rs.
but had not disclosed his Kerosene business nor did he submit accounts
regarding the said business. The creditors complained that the appellant had
omitted to refer to the kerosene business and that he had also suppressed
information regarding some other assets. If he were to be allowed to do this
business, he might incur further debts. The application was, therefore not bona
fide and should be dismissed.
learned Single Judge dismissed the application by order dated 4.8.97, accepting
the contentions of the Official Assignee. On appeal, the Division Bench
dismissed the appeal stating that in the light of what was stated in the report
of the Official Assignee, the discretion exercised by the learned Single Judge
was not liable to be interfered with.
contended in this appeal that the Act in sub-clause(1) of Section 75 gives a
statutory right to move the Official Assignee for permission to manage his
property or to carry on his trade for the benefit of his creditors, subject to
conditions and that under sub-clause (2) of Section 75 the Court may, from time
to time, make such allowance as it thinks just out of the property of the
insolvent, for the support of the insolvent and his family or in consideration
of his services. Such an allowance can also be varied from time to time.
counsel has also relied upon Article 19(1)(g) and Article 21 of the
Constitution of India. He has contended that inasmuch as the appellant has
stopped the kerosene business before the filing the insolvency petition, the
said business was not disclosed. The books of account in regard to this
business were produced before the Official Assignee at the time the inquiry of
the application seeking permission to renew the business was taken up. The
business does not involve any capital. The appellant has two children and they
are presently admitted into an orphanage. If the insolvent is allowed to
continue the kerosene business, he will be able to sustain himself and his
family members who are totally dependent on him.
spite of notice, the official Assignee has not chosen to appear before us. We,
therefore, requested learned senior counsel, Shri Arun Jaitley to help us in
the matter and he has made his submissions. We are grateful to him.
counsel for the appellant Sri P.B.Suresh relied upon Section 75 of the Act but,
in our view, three other sections, namely Sections 17, 52 and 60 are also
relevant. As already stated, learned counsel for the appellant had also
referred to Article 19(1)(g) and Article 21 of the Constitution of India.
appeal relates to release of income from Kerosene business to the appellant for
the purpose of the survival of the appellant and his family members. Such
income will be `after acquired property'. On that question, the points that
arise for consideration are as follows:
the context of section 17 and section 52(2) of the Presidency Towns Insolvency
Act, 1909, does the after-acquired property of the insolvent automatically vest
in the official Assignee? (2) In the context of section 60(2) of the Act, does
'salary or income' of the insolvent earned by him after adjudication automatically
vest in the official Assignee; and is the official Assignee's right to receive
these monies, even to the extent they would otherwise have been attachable,
subject to orders of the Court? (3) Is the word `income' in the expression
`salary or income' in section 60(2) to be construed ejusdem generis like salary
or can it be construed so as to include other types of income such as income
from trade or business of the insolvent conducted after adjudication? (4) Are
`personal earnings' of the insolvent earned after adjudication exempt from
vesting under the common law relating to insolvency? (5) In what manner the
provisions of section 75 of the Act are to be construed for allowing the
insolvent to run his business and for allowing him an allowance out of the
property, to support him and his family? (6) To what relief? Point 1:
point concerns the vesting of the `after acquired' property of the insolvent,
and the question is whether it vests automatically in the insolvent under the
Presidency Towns Insolvency Act, 1909.
section 17 of the Act, on the making of an order of adjudication, the
`property' of the insolvent, wherever situate, shall vest in the official
Assignee and shall become divisible among his creditors. Section 2(e) of the
Act states that `property' includes any property over which or the profits of
which any person has a disposing power which he may exercise for his benefit.
Obviously, therefore, in the normal course, the `salary or income' accruing to
the insolvent, after adjudication, would vest in the Assignee unless there is
anything in the Act inconsistent with such vesting. It is here that section
52(2)(a) and section 60 gain importance. Under this point, we shall refer to
the effect of section 52(2)(a).
52(2)(a) deals with the `after- acquired' property of the insolvent which is
divisible among creditors. It reads as follows:
52(2)(a): Subject as aforesaid, the property of the insolvent shall comprise
the following particulars, namely;
all such property as may belong to or be vested in the insolvent at the
commencement of the insolvency or maybe acquired by or declare on him before
his discharge." This corresponds to section 38 of the English Bankruptcy
Act, 1914. The corresponding provision in the Provincial Insolvency Act, 1920 which is differently worded but which deals with
`after acquired property' is section 28(4) and that section uses the words
`forthwith vest' while such words are absent in section 52(2)(a) of the Act.
section 28(4) of the Provincial InsolvencyAct, 1920 reads as follows:
28(4): All property which is acquired by or devolves on the insolvent after the
date of an order of adjudication and before his discharge shall forthwith vest
in the Court or receive, and the provisions of sub- section (2) shall apply in
respect thereof." In the English law, according to the rule in Cohen vs.
Mitchell [(1890) 25 Q.B.O 262], the after acquired property of the insolvent
does not automatically vest in the trustee or Assignee unless the trustee
intervenes. But once he intervenes, the property vests in him absolutely as
stated in Hill vs. Settle [1917 (1) Ch 319]. As to what is intervention by the
Assignee in relation to insolvent's dealings with after-acquired property,
depends on the nature of the property, - immovable, movable etc.
In India, the above principle in Cohen vs.
has been followed by various High Courts in regard to bonafide transactions
entered into with the insolvent by strangers without notice of insolvency but
as stated in Mulla (p.431, Tagore Law Lectures) (Mulla Law of Insolvency, 1977,
3rd Ed.), the Madras High Court alone has taken the view that the rule in Cohen
vs. Mitchell does not apply to after-acquired immovable property.
are here not concerned with immovable property but with `income' that may be
received after adjudication by the insolvent from his business - and that
question is covered by a specific provision in Section 60(2) of the Act
conferring certain powers on the Court, - we do not think it necessary in the
present case to go into the question as to what extent the rule in Cohen vs.
Mitchell is applicable in India in relation to intervention by the Assignee.
We, therefore, do not think it necessary to answer Point No.1.
we shall again refer to section 52(2)(a) while dealing with `personal earnings'
of the insolvent under Point 4.
stated earlier, the question is whether `income' that may be received by the
insolvent after adjudication from his business will vest automatically in the
Assignee or whether the Court has power to pass orders in regard to the said
income. In this context, we have to refer to section 60(2) of the Act. It reads
60(2): Where an insolvent is in the receipt of a salary or income other than
aforesaid, the Court may, at any time after adjudication and from time to time,
make such orders as it thinks just for the payment to the official assignee,
for distribution among the creditors of so much of such salary or income as may
be liable to attachment in executing a decree or any portion thereof".
Section corresponds to Section 51 of the English Bankruptcy Act, 1914.
will be noticed from section 60(2) that the after-acquired `salary or income'
of the insolvent does not automatically vest in the Assignee as otherwise
permitted by Section 17 of the Act but it continues to be the property vested
in the insolvent and out of the said `salary or income', whatever is not
attachable if the same were to be proceeded against in execution of a decree,
that amount will not vest and cannot be directed, even by the Court, to be made
over to the Assignee. So far as the attachable part of such `salary or income'
is concerned, the same too does not automatically vest in the Assignee because
of Section 60(2) but only such part of it can be made over to the Assignee as
the Court may think just for payment to the assignee, for distribution among
creditors. In other words, the Court can allow the insolvent to retain not only
the non attachable part of the `salary or income' but also that part of the
attachable `salary or income' to the extent the Court thinks just.
provision like Section 60 requiring the Court to pass orders regarding after
acquired `salary or income' is not there in the Provincial Insolvency Act,
1920. (See Mulla Tagore Law Lectures, 1929 (Law of Insolvency, 1977 3rd Ed.)(p.439)
and sub-clauses (4) and (5) of Section 28 of that Act deal with automatic
vesting of after-acquired property under the Provincial Insolvency Act, 1920.
this context, Mulla also says (p.438) that under Section 60 of the Presidency
Towns Insolvency Act, 1909, the "official assignee cannot, without an
order of the Court, recover any portion of the salary or income. Until the
order is made, the whole of the salary or income belongs to the insolvent and
he is entitled to vary agreements entered into by him with the employers in
respect of his personal services. (Re Shine 1892 (1) Q.B.
In determining whether the whole of the attachable salary or income is to pass
to the official Assignee or only a portion thereof, the Court will have regard
to what is reasonably necessary for the maintenance of the insolvent, his wife
and family (Ex parte Official Receiver:
Q.B. 417]; Re Rogers 1894(1) Q.B.
of the new that the above statement of law in Mulla represents the correct
2 is decided accordingly.
as in the present case we are concerned not with `salary' but with the `income'
that may be derived by the insolvent from trade or business, it becomes
necessary to find out whether the word `income' in section 60(2) is restricted
in its meaning to income which is similar to `salary' or can mean other income
also, such as income from trade or business. In case, income from business or
trade can be brought within Section 60(2), then the advantage is that such
income will not automatically vest in the Assignee and even if it is entirely attachable,
no part of it can be received by the Assignee except by an order of the Court
and until the Court has considered what amount is to be treated just in the
circumstances of the case, to be distributed to the creditors.
is whether the income from `trade or business' can be brought within section
meaning of `salary or income' has not been defined in the Act but it has been
held in England, while dealing with the corresponding provision in Section 51
of the English Act, 1914 that the word `income' `is a larger word than salary'
(Per Lord Hanworth in Re Landau 1934 Ch.549 (554, 556).
Sir George Jessel, MR said in Ex parte Huggins (1882) 21 Ch. 85 that the said word `is as large a word as can be
even so, English Courts initially took the view that the word `income' was to
be construed `ejusdem generis' like salary. That was the view of Lord Esher in
Ex parte Benwell (1884) 14 Q.B. D 301 (307-308). That was also the view of the
Rangoon High Court in Official Assignee of Rangoon vs. Maung Nyun Maung (AIR
1931 Rangoon 79). A similar view was expressed by Mulla in his Tagore Law
Lectures of 1929 (see Mulla, Law of Insolvency, 3rd Ed., 1977 p.459) wherein he
stated that `income' means income in the nature of salary and it has reference
to a particular period such as a year or some part of a year. Obviously, in
1929 that was the state of the law.
in later years, a more humanistic and pragmatic view has been taken in England
in regard to `income' which is not of the nature as `salary' - for even if the
insolvent is to earn income from other sources such as from business, some
amount must be allowed to be retained by him for the support of himself and his
family. The insolvent has to live. In Re Landau 1934 Ch.549 (560), Romer LJ
therefore held that the earlier view in Benwell's case that the word `income'
had to be construed `ejusdem generis' was not correct in as much as it had not
been stated there as to what genus the salary payment belonged. In Landau's
case, maintenance ordered to be paid by the Divorce Division to a bankrupt-wife
during the joint-lives of herself and her former husband, was held to be
`income'. That view was followed in Re Tennant's Application 1956(2) All
E.R.753 (CA). In that case, it was held monthly sums paid by a husband to his
wife (who was adjudicated bankrupt) - under a covenant in a deed executed
during the pendency of the wife's application for an order for maintenance on
dissolution of their marriage, constituted `income' within Section 51(2) of the
English Bankruptcy Act, 1914.
fact, a wide definition appears to have now been incorporated statutorily in
Section 310 of the British Insolvency Act, 1986 which Act is the result of the
Cork Report. Section 310 of that Act deals with `Income payment orders' and
sub-clause (7) thereof which defines `income' reads as follows:
310 (7): For the purpose of this Section, the income of the bankrupt comprises
every payment in the nature of income which is from time to time made to him or
to which he, from time to time becomes entitled, including any payment in
respect of the carrying on of any business or in respect of any office or
employment" In Halsbury's Law of England (Vol.3(2), Bankruptcy &
Insolvency) (4th Ed., para 437 f.n 2) it is stated as follows, in regard to the
definition of `income' in the English statute of 1986 in section 310(7).
"This definition of `income suggests an intention of the legislature to
enact a wider definition of income than that which the Courts developed under the
Bankruptcy Act, 1914 Section 51 (repealed). In Section 51(2) (repealed),
`salary or income' was used and income was construed ejusdem generis: Ex P. Benwell
(1884) 14 Q.B.D.301 (CA); Re Cohen 1961 Ch. 246 (CA), but see Re Tenants
Application 1956 (2) All E.R. 753 (CA); Re Landau, 1934 Ch.549".
of the view that though our legislature has not defined `income' as widely as
in Section 310(7) of the English Act, 1986, the word `income' is not to be
construed ejusdem generis and that it includes income from business or trade
conducted by the insolvent after his adjudication.
construed, the said business income would then fall under Section 60(2) of the
Act and would not become receivable by the Assignee automatically but only upon
an order to be passed by the Court, to the extent the Court would deem it just
for payment to the official Assignee, for distribution among creditors. Till
such an order is passed by the Court, the business income will continue to vest
in the insolvent, even if the whole of it would otherwise have been attachable
in execution of a decree. We hold accordingly under Point 3.
point deals with the common law principle applicable to the `personal earnings'
of the insolvent earned by his personal labour, to be allowed to be retained by
him to the extent necessary for his support and support of his family.
to Williams and Muir Hunter on Bankruptcy (19th Ed.) (1979) (p.290), one of the
categories of property excluded from vesting in the assignee is the amount covered
by the `personal earnings' of the insolvent. This principle , the author says,
is based on the `common law of Bankruptcy'.
38 of the 1914 English Act is similar to Section 52 of the Presidency Towns
Insolvency Act, 1909 and deals with distribution of the property of the
insolvent. In the context of Section 38 as to whether `personal earnings' will
be distributable among creditors, the above authors say as follows:
virtue of this Section, the personal earnings of a bankrupt pass like any other
property to the trustee, except such part of them as is necessary for the
maintenance of the bankrupt and his family. In Re Roberts (1900) (1) Q.B. 122
(CA). The Court of Appeal, after reviewing previous decisions, which had
suggested that personal earnings did not vest in the trustee at all, stated
that there is `no authority for the proposition that property of a bankrupt
acquired by his personal exertions since his bankruptcy, and not wanted for his
present support, does not belong to his trustee. No such doctrine can be
maintained in the face of Section 44 "(now Section 38)." After
bankruptcy and before his discharge, whatever property a bankrupt acquires
belongs to his trustee, save only what is necessary for his support. He may sue
for his earnings if his trustee does not interfere (As he did in Affleck vs. Hammond 1912 (3) K.B.162". But,
"the language of (that Section)... must not be taken too literally as to
deprive those fruits of his personal exertions which are necessary to enable
him to live. On the other hand, the necessity is the limit of the
exception." As mentioned earlier, Lord Mansfield stated in Chippendale vs.
Tomlinson (1785) Doug 318 = 99 E.R.318) that `the assignee cannot let out the
bankrupt, they cannot contract for his labour'.
according to the notes of Mr.Douglas in that case Butler,J. and Mansfield,J.
both said that the bankrupt had an undoubted right to sue for such profits of
his labour but supposing a person in his situation should have a large sum of
money or considerable effects, then such money and effects would undoubtedly be
liable to be made over to his assignee. In Re Jones (1891) 2 Q.B. 213, it has
been stated that an insolvent cannot be compelled to work and earn for his
creditor. Lord Denman CJ in Williams vs. Chambers (1847) 10 Q.B. 337 and Lush
LJ in Eaden vs. Carte (1881) 17 Ch. D 768 stated that the earnings beyond what
is needed for the support of the insolvent and his family, are to be made over
to the assignee. These principles were laid down under the common law.
view, the above common law principles relating to earnings from personal labour
of the insolvent are equally applicable in our country and in spite of Section
52(2)(a), the said earnings of the insolvent from his labour to the extent
necessary for the support of the insolvent and his family, do not vest in the
assignee. There is a further rider to be added to the common law principles
namely that the balance of the personal earnings, - after deducting what is
necessary for the support of the insolvent and his family, does not
automatically vest in the assignee but is subject to the orders that may be
passed by the Court under Section 60(2). Point 4 is decided accordingly.
finally come to Section 75 of the Act which is the statutory provision dealing
with the Assignee granting permission to the insolvent to carry on trade. That
Section also deals with the Court allowing the insolvent an allowance for the
support of himself and his family or in consideration of his services, if he is
engaged in winding up his estate. Section 75 reads as follows:
75(1) & (2):(1) Subject to such conditions and limitations as may be
prescribed, the official assignee may appoint the insolvent himself to
superintend the management of the property of the insolvent or of any part
thereof, or to carry on trade (if any) of the insolvent for the benefit of his
creditors, and in any other respect to aid in administering the property in
such manner and on such terms as the official assignee may direct.
Subject as aforesaid, the Court may, from time to time, make such allowance as
it thinks just to the insolvent out of his property, for the support of the
insolvent and his family, or in consideration of his services, if he is engaged
in winding up his estate, but any such allowance may at any time be varied or
determined by the Court." In our view, the above provision in Section 75
is based on a humane consideration of the condition of the insolvent and his
family. In the book, The Law of Insolvency by Ian Fletcher (1990), referred to
earlier, it is stated in the introductory chapter, (at p.3) that "After a
time, a position is reached in which some effort is made to treat individual
cases on their merits and to explore the possibilities for rehabilitation of
the debtor under a controlled and more humane legal process".
referring to the Cork Report which led to the passing of the English Act, 1986,
the author says (p.188) that the principle of releasing monies for the support
of the insolvent and his family is based on a policy "both as an aspect of
the device to preserve the dignity and self-respect of the bankrupt and his
dependents, and in the interests of avoiding the creation of a further burden
on the resources of the State if the bankrupt's family are rendered destitute.
A rule has therefore been adopted whereby the bankrupt is allowed to retain a
proportion of his income to the extent deemed necessary to maintain him and his
family in reasonable circumstances".
what is a reasonable provision for support of the insolvent and his family, the
author says (p.190) : "It will be a question of fact in each case to
establish what are to be considered as the reasonable domestic needs of the
bankrupt and his family and what proportion of his income he should be allowed
to meet them". After the Cork Report and Section 310 of the English Act,
1986, "the Court would be acting within a spirit expressed in the Cork
Report in advocating the adoption of a more humane and realistic attitude
towards the position of the debtor and his family, and the more imaginative utilisation
of the bankrupt's surplus future income" (Comnd & 558, paras 591-598,
1158- 1163). "In respect of that portion of his earnings or income which
he is allowed to retain in consequence of an order under Section 310, the
bankrupt enjoys full freedom and disposition." We may add that if over a
period, out of the amounts allowed by the Court for the support of the
insolvent and his family, there is a surplus or excess, then the creditors or
the Assignee can apply to the Court for a review of previous orders.
above procedure will, in our opinion, be clearly consistent with Article 19(1)(g)
and Article 21 of the Constitution of India.
parting with this aspect of the matter, we might add that while the Court has
to take a humanistic view towards honest insolvents, the Court must also guard
against undue exploitation of the above principles and provisions of law, by
unscrupulous persons who get adjudicated as insolvents. Point 5 is decided accordingly.
present case, the application filed by the appellant has been dismissed by the
learned Single Judge and by the Division Bench without noticing the above
provisions of law. We have already set out the plea of the insolvent in his
application and also his version of facts and that his two children have been
put in an orphanage.
light of the legal principles stated by us and the facts as may be proved, it
will be necessary for the Court to decide the application of the insolvent
afresh and determine whether the insolvent can be permitted to do business and
if so, subject to what conditions. The Court will also then have to determine
the extent of income he is likely to derive and the part he should be allowed
to retain for the support of himself, his wife and family and then as to what
amount, if any, could be made over to the Assignee.
none of these aspects have been gone into, we set aside the judgments passed by
the Division Bench and the learned Single Judge. We remit the matter to the
learned Single Judge for disposal in accordance with law, after hearing the
official Assignee or any other aggrieved person, and considering such evidence
as the parties may adduce. It is requested that the application may be disposed
of within a period of 2 months from the receipt of this order. The appeal is
accordingly allowed and matter is remitted to the learned Single Judge of the
High Court. There will be no order as to costs.